TAX AUDIT UNDER SECTION 44ABSALIENT FEATURES AND PRACTICAL ISSUESC.A M. Subbiah Introduction: Audit U/S.

44 AB is compulsory when the turnover exceeds Rs.60Lakhs in the case of Business and Rs.15Lakhs in the case of profession till the Assessment year 2012-2013. From Assessment year 2013-2014. It is Rs.1crore and Rs. 25Lakhs respectively. The prescribed forms to be filed as audit report is form 3CA for Companies, 3CB for others along with form 3CD. Particulars given in the audit report in Form 3CD should be true and correct whereas, report under form 3CB is true and fair in certifying the Profit & Loss account and Balance Sheet of the Concern. In order to comply the provisions under peer review it is necessary to be maintained in the file, the appointment letter the date of commencement of audit, notes forming part of the conduct of Audit, Certificates received from the management or Assessee regarding 40A(3) Payment, 269 SS Borrowal, 269T Repayment, Physical verification of stock as on the year end date and other necessary certificates for the conduct of audit. Annexure 01 should also be filed along with form 3CD otherwise it will be invalid. Form 3CA, 3CB, 3CD and annexure should be signed by the chartered accountant with his membership number. Business or profession: A Notification has been issued vide Notification No.SO17 (E) and No.SO 2675, Dated 25.09.1992, Demarking the profession or business. The following activities are only business. 1. Advertising agent 2. Clearing, forwarding and shipping agents [Cit V Jeevanlal Lallubhai & co (1994) 206 ITR 548 (BOM)]. 3. Couriers 4. Insurance agent 08.08.2012

5. Nursing home 6. Stock and share broking and dealing in shares and securities [CIT V Lallubhai Nagardas & Sons (1993) 204 ITR 93 (BOM)] 7. Travel agent. For the above, the turnover limit is Rs.60,00,000/Sales, Turnover, Gross Receipts Includes sales Tax, Customs duty, etc., 1. Incase of speculative transaction the aggregate of positive and negative differences should be added back for determining the turnover. 2. Incase of money lending business, only the interest receipts and other revenue receipts, should be taken in to consideration for determining the turnover. 3. Incase of chit funds business also chit commission receipts and other revenue receipts should be taken into account for determining the turnover of Rs.60,00,000/and not chit payments and receipts. Accounting Standards: As the tax auditor is auditing the accounts of assessee and not computing the taxable income, he has to follow all the accounting standards applicable to that assessee, AS(1) to As(29) of ICAI. These are applicable accounting standards and in Income Tax IAS(1) and IAS(2) are almost similar to the accounting standards of ICAI AS(1) and AS(5). Audit Procedures: As per the guidance note issued by ICAI the following procedures should be adopted. 1. As he has to certify the true and fair view of the affairs of the assessee in Form No.3CB has to verify the financial statement to that extent. 2. Regarding the Particulars given in Form No.3CD, he has to certify the particulars given in the form should be true and correct. So he has to meticulously verify the facts. As per the guidelines of the ICAI 100% of audit is impracticable and hence the ICAI has permitted the use test check. 3. The audit should be conducted by applying the generally accepted auditing Procedures.

4. The assessee has to furnish and produce all the books and records necessary for conducting the Audit if the assessee is a non corporate assessee, But under the companies Act it has stipulated books and records for Company Audit. 5. If the assessee does not able to furnish the required records for conducting the Audit, It can be qualified in the report itself. 6. Working papers should also be maintained by the tax auditor about the evidence On which he has relied upon while conducting the tax audit. These should include the matters such as work done during audit, the person who did the said work, explanations and informations received during audit, decision taken on various points, reliance placed on any judicial pronouncement management representation letters etc., 7. If a particular item of income/expenditure is covered in more than one of the Specified clauses in the statement of particulars, care should be taken to make a suitable cross reference to such items at appropriate places. 8. If there is any difference in the opinion of the tax auditor and that of asssessee in respect of any information furnished in Form 3CD, the tax auditor should state both the view points and also the relevant information in order to enable the tax authority to take a decision in the matter. 9. If any particular clause of Form 3CD is not applicable, the tax auditor should state the same as not applicable. 10. In computing the allowance or disallowance, the law applicable to the relevant Year should be kept in mind, even though the form of audit report may not have been amended. Issues on Tax Audit 1. An investor is doing trading in shares and securities and also speculation trading in shares and securities and also doing Arbitage Derivatives Consider the applicability of section 44AB in the following cases if separately under taken: a) b) c) d) e) 2. Shares Trading Turnover Rs.60,00,000/- Profit Rs.10,00,000/Speculation turnover Rs.25,00,00,000/- Profit Rs.8,00,000/Arbitage turnover Rs.22,00,000/- Profit Rs.4,00,000/- or Derivatives Rs.1,00,00,000/- Profit Rs.5,00,000/If all the activities are concurrently under taken.

a) Regarding money lending business the assesssee is lending loan of Rs.5crores in a year and Rs.4crores gave been repaid by the borrower. He is having interest receipts of Rs.55,00,000 and incidental charges receipts of

Rs.5,00,000/-. He is having eight heavy vehicle trucks and he is offering income U/S.44AE for heavy vehicle trucks. If so, whether he is liable for tax audit U/S.44AB. b) If the assessee has shown more profit U/S.44AE what will be the position regarding Audit U/S.44AB. c) When he is shown less profit and is not offering income U/S.44AE whether he is liable for Audit the accounts for both trucks and money lending business. 3. a) An hospital is being run by a doctor in his own name and he is having gross receipt of Rs.21,00,000/- as fees & income whether he is liable for Audit U/s.44AB. b) A nursing home is run by doctors wife and the doctor husband is an employee of that nursing home and hospital having a collection of Rs.35,00,000/- whether audit U/s.44AB is compulsory. 4. A Building contractor has taken a contract for construction of commercial Complex at a total cost of Rs.65Lakhs. Materials to the extent of Rs.30Lakhs is to be supplied by the contractee. For the year ended 31.03.2008, the contractor has completed the construction work and received cement & Steel worth Rs.30Lakhs from the contractee. In the final bill, the contractor has given credit for the above supply to the extent of Rs.30Lakhs and received Rs.35Lakhs. The contractor has not done any other work in the year. Whether the contractor is liable for 44AB audit? Whether the following persons are liable for audit under which circumstances on Exceeding Rs.25Lakhs or Rs.60Lakhs. a) Repair work done by motor car work shop. b) Stock broker dealing in shares both having dealer and investor in shares and securities. c) Man power recruitment agent. d) Travel agents. e) Cleaning and forwarding agent. f) Advertisement agent. g) Interior decorators. h) Management and technical consultants. i) Persons engaged in processing of diamonds. j) Persons engaged in preparing computer software program and selling the same to others who are operating computers. k) Chartered Accountant engaged in running coaching classes gross receipts exceeds 10Lakhs. l) Any other person owning educational institution with gross receipts Rs.38Lakhs.

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m) Person engaged in processing of cloth. n) A limited company engaged in professional and technical services. 6. In some large cities there is a system of forming polyclinic where 6 or 7 medical Practitioners render professional services in different branches of medicines. The fees collected are credited to the accounts of each of the doctors. The common expenses are shared in an agreed proportion. Some of the staff members are common and assist the doctors in rendering such common services. Accounts are maintained by one accountant in one set of books for the sake of convenience. If the total receipts of the polyclinic exceeds Rs.25Lakhs, will tax audit under section 44AB have to be conducted? 7. The assessee has purchased on credit Rs.1,00,000/- whether 40A(3) is applicable in the following cases: a) He has paid Rs.20,000/- by cash in the morning, the receipt number is 601 and again Rs.20,000/- by cash by receipt number is 603 on the same day (for the Assessment year 2012-2013) b) When the assessee has purchased cotton seeds from farmers and paid Rs.50,000/- in a single day and in a single payment. 8. An assessee has paid to the credit of the creditor Rs.1,00,000/- in his bank Account for the purchases made. Whether 40A(3) is applicable. 9. a) The assessee has borrowed Rs.1,00,000/- through an account payee cheque and again he has borrowed from the same asessee Rs.10,000/- on two occasins by cash. Whether 269SS is applicable? b) An Assessee has borrowed Rs.10,000/- through bank draft on first occasion and again Rs.15,000/- by cash on the second occasion whether 269SS is applicable? c) An Assessee has borrowed Rs.10,000/- on 01.01.2004, Rs. 9,500/- on 10.01.2004, Rs.5,000/- on 20.01.2004 Rs.21,000/- on 25.01.2004 all by cash. d) The Assessee has already borrowed in the proceeding previous year Rs.10,000/- interest has been credited Rs.2,000/-. He has again borrowed this year Rs.8,000/- by cash. Whether the above case falls under 269SS. 10. a) An assessee has repaid the following loans by cash. There is an outstanding of Rs.1,00,000/- on an account. Rs.80,000/- has been paid by account payee draft, then Rs.20,000/- by cash. Whether 269T is violated.

b) Rs.20,000/- has been paid by account payee draft, another Rs.20,000/- has been paid by cash, another Rs.51,000/- paid by account payee draft then Rs.19,000/- paid by cash. Whether 269T is violated. 11. An assessee has got exactly Rs.20,000/- by cash as loan from a person to Clear a bill in the bank. Whether he is liable for penalty U/s271D for violation of section 269SS. 12. Cash loan of Rs.20,000/- has been received on a Sunday? Is penalty leviable U/s.271D. 13. If the lender and the borrower are agriculturists and the lender is having income Of Rs.2,50,000/- in the particular year. But when deducting rebate U/s.80C, he has to pay a tax of Rs.1,000/- during that year. In this case if the borrower borrows Rs.25,000/- in the year by cash, whether he is liable for penalty U/s.271D for violation of section 269SS. 14. If a borrower has accepted a cheque for Rs.1,00,000/- which is crossed but not Account payee crossed but not account payee crossed. Whether he is liable for penalty. 15. Wherever the assesee company was in requirement of funds one of its directors Brought in the funds from his personal account above Rs.20,000/- and withdraw this fund as and when he required the same. Consider the 269SS violation. 16. Gift has been received from non relatives from foreign country to the tune of Rs.50,600/- on 01.12.2004 and another diwali presents of Rs.6,000/- has been received from father of the assessee. Whether the above should be reported under para 13(e) of from 3CD and what is the tax effect on the Income. Whether 56,600/- or 56,600 50,600=6,000 or 56,600-6,000=50,600 or 56,60050,000=600 should be includible for tax purpose U/s.56. 17. A director of a private limited company withdraws money from the company as Overdrawings in his account over and above the credit. Whether that fact should be reported in form 3CA or 3CD what will be the tax treatment for the above withdrawal in the hands of the director and in the case of the private limited company. 18. Assessee is a firm and is celebrating its silver jubilee celebration. On that day It has received 200 soverign of gold coin and Rs.10,00,000/- in cash as presents from customers. It has been credited in the capital account of the firm. Whether that fact should be reported by the Tax Auditor and what is the impact on Income Tax, whether that should be added as Income under other sources U/s. 56.

19. What is the impact if the above assessee is an Individual and out of Rs.10,00,00/Rs.9,00,000/- are from relatives specified U/s.56, in addition to the receipt of 200 gold coin also from non relatives. 20. a) An assessee is a firm and salary on 31st March has not been paid on that day. But it has been credited in the employees account and paid on 2nd April. TDS has been remitted on 30th April. Whether that fact is to be reported and what is the Tax effect of salary payment which is not made on 31st March. b) If salary has been paid on 31st March and TDS has been remitted on 10th April. What is the impact on salary payment from income of the employer. 21. Payment has been made as commission to various persons during the month April 2011. Tax has been omitted to be deducted. TDS account has been credited during the month of March 2012 debiting creditors account which has no credit balance. TDS has been deposited before filing return of income u/s.139(1) in the year 2012. Whether these lapses should be reported in form 3CD clause 27(B) Whether it is allowable expenditure and no disallowance can be made U/s.40(a)(i)(a). 22. Some of the partners of the firm have taken over some Assets at book value and Debited to the account of the partners during the continuance of the partnership. The market value of the properties are higher. Whether this fact is to be reported and what is the impact on the capital gains tax of the firm 23. An Individual assessee, who is a transport undertaking, having not filed the Return of loss in time, which includes depreciation on purchase of bus. Whether that fact is to be reported in para number 25 of form 3CD. What is the impact on set off of successive years Income, That too having huge income under other sources. 24. a) A partnership firm is following mercantile system of accounting and salary is credited to partners account Rs.1,00,000/- Partners are following cash system of accounting. b)The firm and the partners are following cash system of accounting. At the end of the year firm has debited remuneration account Rs.1,00,000/- and credited partners account Rs.1,00,000/In the Subsequent year also the firm has done the above again.

In the subsequent year the partners withdraw Rs.2,00,000/- as remuneration of earlier year and remuneration of current year. Whether they should offer RS.2,00,000/- as income in the current year or Rs.1,00,000/- in every year. Whether these facts should be reported by the firms tax auditor in form 3CD. 25) A private Ltd company is carrying on management consultancy profession. It receipts are about Rs.26,00,000/- per annum. Whether tax audit it necessary? 26) An individual is doing investment business, carrying on investment in Shares during the year he has done only one business, that is purchase and sale of shares to the tune of Rs.2 crores and has not taken delivery. Whether it is liable for audit under section 44AB. a) If he is not doing it as business and only as investment whether audit is necessary. b) If it is Company, what is the position for same transaction. Section 72 Explanation. 27) A person is carrying on business and profession and is having a Turnover or Gross receipts, of Rs.60,00,000/- and Rs.15,00,000/- respectively whether he is liable for Audit. 28) A person is carrying on 5 Business and each business is having a Turn over of Rs.14,00,000/- each aggregating a total turnover off Rs.70,00,000/- whether he is liable for Tax Audit. Separate audit report is necessary in 3CB and particulars in 3CD should be given separately. 29) a) A water treatment plant and fume extraction plant has been installed In a factory Whether it is capital expenditure and to be reported in Clause 17(a) b)Expenditure incurred in providing carpets and screen in a cinema Theatre. Whether it is capital or revenue expenditure. c)Expenditure incurred for developing a garden in front of the Factory. Whether it is capital expenditure or revenue expenditure 30) Some goods have been transported by a seller from Punjab through Lorry and the seller instructed the lorry driver to receive a freight of Rs.34,000 and cost of value of goods of Rs.2,00,000 in cash from the buyer.

Whether 40A(3) is applicable in this case. 31) A cotton processing trader purchased cotton from the market, that is at Chandhai from agriculturists. Whether it is exempt under rule (e). But it is a purchase from a raw cotton trader, whether it is exempt or not? 32) A contractor has given subcontract to a person and TDS has not been Deducted and remitted. Whether payment for the contract amount can be disallowed U/S 40(a)(i)(a). 33) At the time of retirement a retrenchment compensation along with Gratuity of RS.50,000 have been paid to employee in cash. Whether 40A(3) is attracted. 34) An Individual is having the following account copy of a barrower. Whether each entry is a violation or not U/S 269Ss or 269T. ACCOUNT OF X DEBIT Date 15.04.2010 05.05.2010 05.06.2010 To cash To Cash To Cash Rs. 2,500 17,500 25,000 Date 01.04.2010 By opening Balance 05.04.2010 By cash 10.04.2010 By cash 01.05.2010 By cash 01.06.2010 By cash 02.06.2010 By cash CREDIT Rs. 18,000 2,000 10 35,000 19,000 460

35) A money lender is running his business with his own capital of Rs.5,00,000 And has barrowed form outsiders deposits of less then Rs.20,000 each from various persons to the tune of Rs.2 crores. Source have been proved by the lenders. Whether there is any violation under the IT Act or under any other Act. 36) Assessee has accepted deposits of Rs.1,00,000 from April 1,2010 to March 31st 2011 on various occasion from a person. But each credit does not exceeded Rs.20,000. Whether there is a violation. 37) A lender has transferred money from his bank account to the borrowers bank Account by bank voucher and not by account payee cheque/draft whether it is a violation U/S 269SS.

38) Cash deposit received by an assessee over Rs.20,000. The assessing officer Has assessesd it as undisclosed income and also levied penalty U/S 271D whether both are tenable. 39) An individual assessee is having a turnover of Rs.62,00,000 for the Assessment year 2012-2013 and liable for tax audit whether TDS provision is applicable in the following cases. 1. The assessee is having Rs.39,00,000 turnover for the Assessment year 2011-2012. 2. The assessee is having Rs.65,00,000 turnover for the Assessment year 2011-2012. 3. In the above case what about the TDS position for the Assessment year 20122013.

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