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The section 44AB of the income tax act 1961 requires the assessed to file their tax audit report if their turnover exceeds 1 crore.
Further, there is also a presumptive income section under income tax act 1961 (mentioned below) where the assets require filing their tax audit where he claims his income below such percentage. The tax audit shall be conducted by a Chartered Accountant in Practice.
Further, the tax audit report is to be filed online through the following website:
Now we will discuss clause by clause detail of Tax audit
The First page of the Tax audit (3CA-3CD) provide the instruction that we need to follow before filling the Tax audit Report These instruction are
Table of Contents
The CA in practice must indicate there MEMBERSHIP NUMBER/CERTIFICATE OF PRACTICE NUMBER/ FRN NUMBER.
Caluse1:- In clause 1 we file the following details:-
Clause 2:- The Statement of particulars required to furnished u/s 44AB is annexed herewith in FORM 3CD
-Observation /Qualification (17 Qualifications Type)
Clause 1:- Name of the Assessee (e.g. XYZ Private Limited). In case change in name, both names should be stated like XYZ Private Limited (Formerly Known as ABC Private Limited)
Clause 2:-Address of the Assess i.e. that Address which assess want to use for the communication purpose with Income Tax Department.
Further in case of a change in address after the completion of the financial year but before the tax audit report, the fact must be stated in the form 3CD
Further provided that if there is the principal place of business which is other than registered office then the fact must be stated.
Clause 3:- PAN Number of the Assesse ( It is advisable that in case of New Firm/AOP etc. the must be taken as soon as possible before the tax audit report because it is a mandatory filed that need to be entered)
Further for the new company incorporation, you can easily find the PAN Number on Certificate of incorporation. You need not file the separate application of PAN.
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Clause 4:-If assessee is liable to pay indirect Tax (Custom, GSTIN Etc.) then Registration number all Authorities other than Direct Tax shall be mentioned there.
Clause 5:- Status of the Assesse as per section 2(31) of the Income Tax act 1961.
There may be a dispute regarding the Status of the assesse then facts must be stated e.g. Partnership firm may be treated “as such” or AOP. Co-operative societies and co-operative banks are the artificial judicial person
HUF:- HUF is not defined under the income tax act 1961. It is defined under the Hindu Law as a family that consists of all person lineally descended from a common ancestor, including wives and unmarried daughters.
FIRM:- If two or more person is registered as a partner in a firm as per partnership Act 1932 then this shall be known as partnership Firm.
In General practice, the Proprietorship firm is also registered as Firm.
LLP:- LLP means Limited liability partnership which is registered under Limited liability Partnership Act 2008
Company: – Company is an artificial person which registered under the Companies Act 2013 or any previous law.
Trust:- Trust is an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner “Trivia :
AOP/BOI:- The AOP under the Income Tax Act is an entity or unit of assessment. It means two or more person who joins for a common purpose with a view to earning an income. The AOP is formed intentionally, however, the BOI is not formed intentionally but due to certain compulsion eg. Sharing the income from a common undivided ancestral.
The term person includes company, association or body of individuals, whether incorporated or not.
Local Authority:- Means Panchayat, Municipality, Municipal Committee and District board, Cantonment Board, any other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund.
Artificial judicial person:- A public corporation established under the special act of the legislature and a body having the juristic personality of its own are known to be Artificial Judicial persons Eg university
Co-operative Society:- it is basically like an AOP but it is registered under the co-operative society Act.
Co-operative Bank:- It is a bank which is only for the Benefits for their members. It provides its financial service to its members only.
ii.State Bank of India ( “ Company”)
iii. Delhi University ( “ Artificial Judicial Person”)
v Partnership Firm (“Firm”)
vii. Reserve Bank of India ( “ Artificial Judicial Person”)
vii. Narendra Modi ( “Individual”)
viii.Gramin Panchayat ( “ A Local Authority”)
ix.Marked housed ( “AOP”)
x Adarsh Charitable Trust ( “Trust”)
xi Kangra Co-operative Bank ( “Co-operative Bank”)
Clause 6:- Previous Year details ( i.e 01/04/XXXX to 31/03/XXXX)
Clause 7:- Assessment Year (if previous year is 2016-17 then Assessment year will be 2017-18).
Clause 8:- Relevant clause under which audit has been conducted:-
(for each vehicle 7,500/- per month or part of the month
Amount actually claimed)
(Whichever is higher)
Read our article:A Complete Overview of Section 45 of the Income Tax Act
Clause 9:- Particulars of firm/Association of persons indicate the name of the partner/members and their profit sharing ratio (In case of AOP, whether shares of members are indeterminate or unknown), change in PSR.
Clause 10:- Nature of business or profession (If more than one business is carried [each business or profession to be mentioned]).
Further the as per section 2(13) of the income tax act 1961 the term business means:-
-Trade – The term trade means which a person carries for procuring subsistence or profit, occupation or employment.
-Manufacturer- As defined in the Excise Act
However, if there is an existing business is discontinued due to any reason then such change in business needs to be stated however if there is temporary cessation/change in business then there is no need to report the same in form.
Further, as per section 2(36) of the income tax act 1961, the term profession includes vocations.
The word vocation has not been defined under the income tax act 1961.
However the word profession involves the idea of an occupation requiring purely intellectual skills or manual skill controlled by the intellectual skills of the operator, as distinguished from an occupation or business which is substantially the production or sale, or arrangement for the production or sale of commodities (Addl. CIT vs. Ram Kripal Tripathi(1980) 125 ITR 408(All)).
Further, the profession is also defined under the section 44AA of the income tax act 1961
Clause 11:- a. Whether Books of accounts are prescribed u/s 44AA, if yes, List of Books so prescribed.
As per section 44AA of the Income Tax Act, 1961 the following person required maintaining books of accounts
Shall keep and maintain such books of account and other documents as may enable the AO to compute his total income accordance with the provision of the act.
His TOTAL sales, turnover or gross receipt (as the case may be) in business or profession is likely to exceed or exceeds 10 LAKH (In INR) in any one of the three years immediately preceding the previous year: or
Following first proviso and second proviso shall be inserted to subsection (2) of section 44AA by the Finance Act, 2017, w.e.f. 01-04-2018:
Provided that in case of a person being an individual or HUF, the provision of clause (1) and clause (ii) shall have an effect, as if for the words “1,20,000” the words “2,50,000” had been substituted :
Provided that in case of a person being an individual or HUF, the provision of clause (1) and clause (ii) shall have an effect, as if for the words “10,00,000” the words “25,00,000” had been substituted :
Clause 12:- Whether the profit and loss includes any profit and gain assessable on a presumptive basis, If yes indicate the amount and the relevant section (44AD, 44ADA,44AE,44AF,44B,44BB,44BBA,44BBB, Chapter XIII, First Schedule or any other relevant section )
Further where the assessee has maintained composite books of accounts for both business then the business income and presumptive income shall be separated on the basis of the evidence available with the assessee.
Further, it will be the duty of the auditor to verify the substance and report accordingly.
Clause 13:- Method of Accounting
In point (a) the method of accounting employed during the previous year must be stated however different business or profession may have different methods.
However, section 128 of the companies act 2013 the books of accounts shall be kept on an accrual basis and according to the double-entry system of accounting.
The assessee may have different methods according to their business nature however if there is a change in the method during the previous year then such change need to be reported in point (b) and further adjustment of income/loss of such shall be reported in point (d)
Section 145(1) of the income tax act 1961, deals with the method of accounting. The income chargeable under the head of “Profit and gains of business or profession” or “Income from other sources” shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee.
Section 145(2) empowers the Central Government to notify in official Gazette from time to time to time, income computation and disclosure standards ( commonly known as “ICDS”) to be followed by any class of assesse or in respect of any class of income.
Further now the government has notified the 10 ICDS till now to be followed by all assesse other than individual or a HUF who is not required to get his account of one previous years audited according to section 44AB, following the mercantile system of accounting, for the purposes of computation of income chargeable to income tax under the head “Profit and gain of business or profession” or Income from other source from the A.Y. 2017-18
The notified “ICDS” is only applicable for the computation of income under the head of “Profit and gains of business or profession” OR “Income from other sources “. However, these ICDS shall not be used for the purpose of maintenance of books.
Further, if there are conflicts between the provisions of the act and ICDS then the provision of the act shall be prevail
The notified “ICDS” are:-
10 ICDS-X relating to provisions, Contingent Liabilities, and contingent assets.
In point (d) we have to report that whether any adjustment required to be made to the profit or loss for complying with the provisions of income computation and disclosure standards notified u/s 145(2) (YES/NO)
If the answer of the point (d) is affirmative then adjustment of such shall be given in point (e) in this way:-
Further, in point (f), we have to make disclosure of the ICDS.
Clause 14:- Closing Stock
(a) Method of valuation of closing stock employed in a previous year.
(b) In case of deviation from the method of valuation prescribed u/s 145A, and the effect thereof on the profit and loss, please furnish
For point (a) the stock can be subcategorized under three head
The valuation of above-mentioned goods shall be as follow:-
Section 145A of the income tax act 1961 deals with valuation of closing stock. This section provides the inclusive method of valuation of closing stock which means the stock shall include any tax, duty, fee actually paid by assesse to bring the goods to the place of its location as on date of valuation even if such tax, duty is refundable.
However, the AS-2 follow the exclusive method which means it only includes the all cost of purchase, cost of conversion and other costs incurred in bringing the inventories to present location and conditions.
Further, as per AS-2 all the duties and taxes (Other than which are recoverable from the tax authorities) shall include in the closing stock.
Further in point (b) if there is a deviation in the method of valuation prescribed u/s 145A then the following adjustment shall be made.
Clause 15:- Details of the following particulars of the capital assets converted into stock in trade.
Under clause (a) The description of the capital assets is required to be given e.g. Shares, Security, land & building, etc.
Under clause (b) the date of acquisition shall be determined. For the Determination of acquisition of capital assets the Tax auditor shall advise seeing the financials of the Assesse
Further, the date of acquisition is important to determine the nature of asset whether the asset is long term or short term in nature.
Under Clause (c) the cost of acquisition shall be reported. The cost of Acquisition means the Actual cost of the Assets, not WDV.
Further, if the Assets acquired prior to the 1st April 1981 then the value to be reported will be the actual cost of the assets. However, the assesse shall have the option to value the assets at market value or cost if the assets have purchased prior to the 1st April 1981.
Further, if the assesse consider the market value then the market value of 1st April 1981 shall be considered.
Under Clause (d) The FMV at the time of conversion shall be reported. However, the Tax auditor shall examine how the FMV has arrived.
Clause 16:- Amount not credited to the profit and loss account, being:-
Section 28 of the income tax act 1961 contain the inclusive list not exhaustive.
In order to verify credits, drawbacks, refund of duty the Tax auditor is advised to review the relevant return of the Assesse.
Further, the term “admitted due to the authorities” means admitted during the relevant previous year. However, the unilateral claims not admitted by the relevant authority does not amount to claim admitted.
The Escalation claims pursuant to the contract need to state here. However, the auditor needs to verify the contract whether the claim has been received as per the terms of the contract.
Further, where the claim made unilaterally or is sub- judice shall not be stated here.
Any other income means that income which is entered in the books of accounts but not has been credited in the profit and loss accounts and in respect to such income the Tax auditor on the basis of his professional judgment on the view that such income must be credited in the profit and loss account.
The capital receipt does not define under the income tax act however through various court judgment it has been defined as a receipt that is not taxable under the income tax act unless specified by the act E.g. Government Grant
Clause 17:- where any land or building or both is transferred during the previous year for considerably less than the value adopted or assessed or assessable by any authority of a state government referred to section 43CA or 50C, please furnish:-
Under clause 17 the reporting is only required where the consideration is less than Stamp duty value for land or building or both.
Section 43CA is applicable only for the land or building or both where the land or building or both is held as stock in trade, however, the 50C shall be applicable only in the case where the land or building or both is held as Capital Assets.
Clause 18:-Particulars of depreciation allowable as per income tax act 1961 in respect of each asset, as the case may be, in the following the form:-
Clause 19- Amounts admissible under section:
– Section 32 AC:- Investment in new plant or machinery
– Section 33AB:- Tea Development account, coffee development account, and rubber development account.
– Section 33 ABA:- Site restoration fund
– Section 35(1)(i):- Expenditure on scientific research
– Section 35(1)(ii) :- Expenditure on scientific research
– Section 35(1)(ii):- Expenditure on scientific research
– Section 35(1) (iii):- Expenditure on scientific research
– Section 35(1)(iv):- Expenditure on scientific research
-Section 35 (2AA) :- Expenditure on scientific research
– Section 35(2AB) :- Expenditure on scientific research
– Section 35 ABA:- Expenditure for obtaining the right to use the spectrum for telecommunication services.
– Section 35 ABB:- Expenditure for obtaining a license to operate telecommunication services.
– Section 35 AC:- Expenditure on eligible projects or schemes.
– Section 35 AD:- Deduction in respect of expenditure on specified business
– Section 35 CCA:- Expenditure by way of payment to associations and institutions for carrying out rural developments programmes.
– Section 35 CCB:- Expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources.
– Section 35 CCC:- Expenditure on agriculture extension project.
– Section 35 CCD:- Expenditure on skills development project.
– Section 35D:- Amortization of certain preliminary expenses.
– Section 35 DD:- Amortization of expenditure in case of amalgamation or demerger.
– Section 35 DDA:- Amortization of expenditure in case of amalgamation or demerger.
-Section 35E:- Amortization of expenditure incurred under voluntary retirement scheme.
Therefore auditor should ensure that if there is any such amount paid by the company then such amount shall not be considered as expenses to the company. The reporting under this clause applicable to the company and partnership firm only.
In the Given case the company has paid the bonus amount in excess of the amount allowable as payment of Bonus Act 1965. Hence the excess of allowable as per the Act has been disallowed by the DCIT.(Currently allowable )
Clause 21 to 41 shall be uploaded soon. To be continued……………
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