Overview of Tax Audit
Organized and Hosted by:
Calicut branch of SIRC of ICAI
R Ramanujam
August 26, 2016
Structure of the discussion
Origin of tax audit and applicability
Issues in tax audit
Standards of Auditing and Tax audit
Applicability
Business – Total sales/ turnover/gross receipts
Profession – Gross receipts
Presumptive income
Penalty for failure
General points
Business or profession
Section 2 (13) - Business
Sampath Iyengar’s law of income tax – 9th edition
SC – CST Vs Sai Publication Fund 258 ITR 70
Chennai Properties case 373 ITR 673
Mumbai ITAT in M/s Shreeji Exhibitors case
Business or profession
CBDT Circular 6/2016 – Income from sale of shares
Satabdi Investments Pvt Ltd Vs Bang ITAT
Portfolio management income
Land sale gains
Business or profession
Section 2 (36) - Profession
Profession includes….
Notified Professionals
Turnover
Sales or includes purchases
Turnover for consignment agents
Discounts
Goods returned
Turnover
Scrap and by products
Taxes whether to be included
Gross receipts – Receipts in kind whether included
Business and profession – Limit to be applied
Out of pocket expenses received by professional
Gross receipts
Profit on sale of import license
Cash assistance or duty draw back
Exchange difference gain/loss on exports
Liquidated damages
Insurance claim – Revenue in nature
Advance received from customer and forfeited
Section 40a disallowances
Can auditor rely on certificates issued u/s 195
Relevant income not taxable as DTAA - Deduction
Deduction of TDS at lesser rate
Tax deducted and paid but return not filed
Amount of disallowance – Restricted to 30%
Paid Vs Payable
Section 40A(3)
Rule 6 DD – Exceptions to be taken care of
Genuine payments made in excess of prescribed limit
Honey Enterprises Vs. CIT 381 ITR 258
Section 43B disallowances
Tax paid after completion of audit before filing report
Taxes paid in advances – Allowable as deduction
Capital or revenue expenses
Creation of New Asset or Enduring Benefit
Fixed Capital or Fixed Asset Vs. Working Capital or
Current Asset
Whether it relates to basic framework of business
Acquisition of an Intangible Asset
Capital or revenue - Decisions
Expense incurred for carrying on existing business in a
more efficient manner incidentally resulting in
enhancement of capacity - Revenue in nature – No
enduring benefit or creation of income generating
apparatus – CIT Vs. Television Eighteen India Ltd. 364 ITR
605 (Del.)
Expenses on upgradation of application software –
Revenue – ACIT Vs. Sanghvi Savla Stock Brokers Ltd. 152
ITD 820 (Mum.)
Capital or revenue - Decisions
Construction Expenditure incurred on an abandoned
project is allowable as revenue expenditure – No asset is
created – Binani Cement Ltd. Vs. ACIT 380 ITR 116 (Cal.)
Assessee engaged in production of audio cassettes and
CDs – payment made for purchase of copyrights of sound
tracks of films – Revenue Expenditure – ITO Vs. Five Star
Audio 143 ITD 288 (Chennai).
Capital or revenue - Decisions
Rent Income assessed as Business Income – Payment of
compensation to existing tenant to obtain vacant
possession of building so as to earn higher rent –
Revenue Expenditure – Shyam Burlap Co. Ltd. Vs. CIT 380
ITR 151 (Cal.)
Expenses on Medical treatment of Eyes in the case of an
advocate – Personal in nature – Dhimant Hiralal Thakkar
Vs. CIT 380 ITR 275 (Bom.)
Expenses to perfect the title of the land is capital
expenditure – No Depreciation is allowable since do not
pertain to Building – Sandvik Asia Ltd. Vs. DCIT 378 ITR
114 (Bom.)
Allowable expenses – Sec 37
Compromise payment made to landlord to protect the
Leasehold right – not an offence – allowable – CIT Vs.
Sports Field Amusement 231 Taxman 252 (Bom.)
Assessee guaranteed payment by third party – Third
party failed – Decree executed against assessee –
Payment made to avoid defamation of name – Held
allowable – CIT Vs. Hitachi Koki India Ltd. 230 Taxman
643 (Karn.)
Additional Filing Fees paid to ROC – Compensatory in
nature – Allowable – Cummins Turbo Technologies
Ltd. Vs. DCIT 169 TTJ 358 (Pune)
Prior Period Items
Liability materialised during the year
Differential payment made in current year
Expenses left out to be booked due to error
Liability under dispute in earlier year
VAT paid of earlier year during the current year
Speculative transactions
Clause 32 – Section 73
Exceptions carved out
Whether company’s of principal business is trading
included ?
Set off losses of past in similar transactions
Fiduciary Share and Stock P Ltd Vs ACIT
Date of report
Language of Section 44AB
Audit report dated 30th September – Violation ?
Chandra Kumar Seth Vs ITO 62 ITD 106
Chopra Properties Vs ACIT ITA No. 6199/Del/2015
Accounting and Auditing Standards
Applicability of accounting standards - Corporate
Applicability of accounting standards – Non Corporate
Usage of auditing standards
Important Auditing Standards
SA 200 – FS free from material misstatement
SA 210 – Agreeing terms of audit engagements
SA 220 – Quality control – Remain alert,
independence
SA 230 – Audit documentation – Timely preparation
Important Auditing Standards
SA 250 – Consideration of laws and regulations
SA 260 – Communication with those charged govern.
SA 500 – Audit evidence
SA 505 – External Confirmations
SA 550 – Related parties
Important Auditing Standards
SA 570 – Going concern
SA 580 – Written representations
SA 600 – Using the work of another auditor
SA 620 – Using the work of expert
SA 700 series – Audit conclusion
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