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TAX AUDIT U/S 44AB

          -COMPILED BY CA P.D.SHAH

          DATE-13/07/2014

17	Amount debited to the profit and loss account , being :-
(a)	Expenditure of capital nature	Section 30,31,32 Action Points: a)     Find details of capital expenditure debited to Profit and Loss Account fully or partly like scientific Research expenditure (except u/s 35), technical know-how fees, 100% depreciation on capital assets, fees & expenditure connected with increase in authorized capital (deductible u/s 35D), issue of bonus shares, travelling & other expenditure connected with purchase of capital asset. b)     Scrutinize accounts like stores & spare parts consumed, repairs & maintenance, misc. expenditure, legal, professional & consultancy Fees. Remarks: a)     The term capital asset is not defined under I.T. Act. b)     Criteria- Enduring benefit relation with basic framework of Assesssee’s business, Expenditure to acquire an Intangible Asset. Goodwill. See whether life of the asset is enhanced or restored. c)      Expenditure incurred for replacement of certain parts of existing assets is a revenue expenditure (Mahalaxmi Textile Mills Ltd 66 ITR 710 SC) d)     Total Renovation is a capital expenditure.
(b)	Expenditure of personal nature (Section 37)	Action Points: a)  Expenditures in respect of certain persons on the basis of contractual obligation or in accordance with generally accepted business practice are not personal nature. b)  Expenses incurred at club to be reported under clause 117 (d).       Personal element therein to be listed here. c)    Reporting under CARO clause xix, section 227(1A) (c) also to be reconciled. Remarks: a)     The word personal is confined to & attached with assessee only. So related party transaction are not to be reported here.
(c)	Expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party Section 37 (2B)	Remarks: a)     Payment made towards advertisement in magazines, Journals, Newspaper run by political parties is allowable but not in their Souvenir, Brochure, Tract, Pamphlets. b)     Trade union if promoted or formed by political Party if is having a separate legal entity, such payments are allowable.

(d)	Expenditure incurred at club,- (i) As entrance fees and subscriptions (ii) As cost for club services and facilities used;	Remarks: a)     Payment made to the following will not be included under this clause- Service Organizations like Lions Club, Rotary Club, Giants, Jaycees, Diners Club etc. b)     Payments to club would include social entertainment club like Residency Club, Gymkhana Club. c)      Assessing Officer will decide personal element, perquisites on the basis of information provided.
(e)	(i) Expenditure by way of penalty or fine for violation of any law for the time being in force (ii) Any other penalty or fine. (iii) Expenditure incurred for any purpose which is an offence or which is prohibited by law	Remarks: a)     Interest paid which is compensatory in nature is allowable. [ Malwa Vanaspati & Chemical Co. 225 ITR 383, Swadeshi Cotton Mills Ltd. 233 ITR 199 (SC), Std. Batteries Ltd. 211 ITR 444 (SC) ] b)     Compounding of Offenses is in the nature of penalty. c)      Expenses in the nature of penalty & not allowable 1)                 Penalty in lieu of confiscation of goods by Customs 2)                 Penalty for delayed payment of cess tax & purchase tax. 3)                 Penalty for evading FERA or FEMA 4)                 Compounding fee paid to Municipal Corporation for condoning the violation of law relating to construction of property. 5)                 Damages paid for late payment of Provident Fund. 6)                 Fine paid for traffic offences 7)                 Freebies paid by Pharma Companies to Medical Practitioners which is in contravention of law. 8)                 Payment made to Police, Goondas to avoid disturbances in business premises is illegal. [Note- Security Charges in normal course are allowable.]
(f)	Amounts inadmissible under section 40(a)	Action Points: a)     Covers cases of payments made to Non Residents or outside India on which tax is not deducted including salary. b)     Amounts payable to Resident where tax has not been deducted or deducted but not paid before the due date of return. c)      Income Tax, Wealth tax debited to Profit & Loss A/c will also be covered under this clause. d)     Similarly any tax of the Employee paid by the Employer u/s 10(10CC) is covered.
(g)	Interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba)	Inadmissible payment to partners Action Points: a)    Verify the clauses pertaining to interest and salary to partner(Authorization) b)    Verify the working of interest and salary paid to partners. Remarks: a)     Interest given on Current Account of a partner will not be allowed as deduction [ Novel Distributing Enterprises Vs. Deputy CIT 251 ITR 704 (ker)] b)     Interest / salary should be after the date of the Partnership Deed. c)      The Partnership Deed need not specify the remmuneration payable to each individual working partner. It should lay down the manner of fixing the remmuneration [ CIT Vs Anil Hardware Store 323 ITR 368 (Circular No. 739/25/3/96)] d)     Sales commission  paid to a partner or to his propritory concern is also covered by section 40 (b) (Angadi Bros 157 ITR 426)

(h)	Expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be.	Payments exceeding Rs. 20000.00 in cash - Section 40A(3)/Rule 6 DD Action Points: a)      Verify the payments exceeding Rs. 20,000 in a day to any person            (Rs. 35,000 in case of Transport Payments) made otherwise than by A/C payee cheque. b)      If covered under exceptions under Rule 6 DD clause (a) to (i) state them separately. c)      Payment to creditors for current as well as earlier liabilities will also be covered. Remarks: a)      The clause is not applicable in respect of an expenditure not claimed as a deduction u/s 30 to 37 or for purchase of capital asset not meant for resale.
(i)	Provision for payment of gratuity not allowable under section 40A(7)	Action Point: a)     Provision is not allowable except made for any contribution towards an approved gratuity fund subject to its subsequent payment before the due date of filing the return.
(j)	Any sum paid by the assessee as an employer not allowable under section 40 A (9)	Remarks: a)     Payments to recognized Provident Fund or Approved Superannuation Fund or Notified Pension Scheme are allowable. b)     Instruction No. 1799 dt. 03/10/1988 – Any contribution made to Employee’s Welfare Co-operative Society will not be allowed as a deduction unless required to be paid statutorily.
(k)	Particulars of any liability of Contingent nature	Action Points: 1.      Find out the claims against the concern not acknowledged as debt but provided for 2.      Other liabilities for which the company is contingently liable Remarks: 1.      Provision of Excise Duty liability on the basis of forecast notice not allowable as deduction 2.      AS – 29 requires the disclosure of Contingent Liability by way of Notes on Accounts to the Financial Statements
(l)	Amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income.	Action Point: 1.      Find out expenditure incurred for earning Agricultural Income, Dividend Income, Share of profit of firm and debited to Profit and Loss Account Remarks: 1.      Where it is found that for earning exempt income, no expenditure has been incurred, disallowance under section 14A cannot stand [CIT v/s Hero Cycles Ltd. 2009 (Punjab & Haryana H.C)] 2.      `Loss’ on sale of security is not an ‘expenditure’.[CIT v/s Walfort Share and Stock Brokers Pvt. Ltd. 326 ITR1 (S.C)] 3.      Provisions os sec 14A shall not apply if shares are purchased with the intention of carrying out business. Sec 14A shall not apply even if dividend is received on those shares. [CCI Ltd. v/s CIT (Kerala)]

(m)	Amount inadmissible under the proviso to section 36(1)(iii);	Action Point: 1.      Find out interest on capital borrowed for the purchase of asset. For extension of existing business or profession. Out of this, Interest paid from the date on which the capital was borrowed upto the date such asset was first put to use shall not be allowed as deduction.
17 (A)	Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006	Action Points: a)     Find out interest paid due to operation of Section 16 of MSMED Act, 2006, for any goods or services from any Micro or Small Enterprise for delay of payment under section 15 of that act. b)     Interest is calculated at three times the bank rate notified by RBI. Remarks: a)     In case of want of information, Auditor can make following comment   “The information regarding the suppliers, whether they are registered or not registered with the authority specified under the MSMED Act, 2006 is not available with the assessee. Hence, we are unable to calculate the amount of interest paid or payable to them u/s 23 of that act”.
18	Particulars of any payment made to persons specified under Section 40 A (2) (b).	Action Points: a)     Obtain a list of persons /declaration regarding the relatives as specified in Sec 40 A(2)(B) b)     List out the expenditure in respect of payment made /provided for goods, services and facilities (including remuneration and interest to partners) to the above mentioned categories of persons c)      Information obtained should cover Name, Relationship, Amount, Nature of payment, Account head under which debited, Date, Ref. with remarks if any. Remarks: a)     Concerns in which the individual, partners, directors or any of the relative has substantial interest also are included (sub Sec vi) b)     For firms, companies, AOP & HUF, separate list per partner/ director/member is to be given (sub Sec ii) c)      ‘Reasonableness of payment is not expected to be commented or certified’
19	Amounts deemed to be profits and gains under Section 33AB or 33AC or 33ABA.	Deemed Profits: a)     33AB – Improper withdrawal or under utilization of amount standing to the credit of the special account of Tea, Coffee & Rubber Development account. b)     33ABA – As above of Site Restoration Fund Account. c)      33AC – Non utilization of improper utilization standing to the credit of the Reserve Account for shipping Business. Action Point: a)     The Auditors has to certify the amount to be taken as profits.

20	Any amounts of profits chargeable to tax under Section 41	Profits chargeable to tax: a)     41(1) – Any amount or benefit received in respect of allowance or deduction allowed in any earlier assessment year(s). e.g : Remission or cessation of a liability, waiver of loans, refund of excise duty. b)     41(2)  – Any excess amount received over the written down value on disposal of any building, plant & machinery or furniture. c)      41(3) – Excess of sale value over the capital expenditure on ‘Scientific Research’ where the asset is sold without having been used for other purposes. d)     41(4) – Bad debts recovered in cash or even in kind & even after discontinuation of business e)     41(4A) - Special reserves withdrawn where deduction has been allowed in respect of such reserve. f)       41(5) – Notional profit as above chargeable to tax in the case of discontinued business to be set off in the circumstances stated in section 41(5) Action Point: a)     Bad debts recovered will have to be scrutinized carefully if the parties are still dealing with the concern and the amounts in dispute have been written off as bad debts in earlier years but recovered in current year. Remarks: a)     The above deeming profit is chargeable even where business has been succeeded by way of amalgamation, succession by individual or firm, demerger of a company. b)     Predecessors Debt recovered by the successor shall not be treated as the income of the successor. c)      Amount chargeable to tax is to be computed and certified although not credited to Profit & Loss Account.
21	In respect of any sum referred to in clause (a),(b),(c),(d),(e) or (f) of Section 43B ( Statutory Liabilities )	Action Points: a)     Verify the statutory Liabilities appearing in the liabilities side and track their payments till the date of audit / due date of filing audited return. b)     Refer earlier Tax Audit Report for proper reporting under different sub-clauses Remarks: a)     If such taxes are debited through profit and loss account (i.e. inclusive method) the same is to be reported separately. b)     Verify the copies of the orders passed by the taxation authorities to confirm the liability. c)      Interest on Term Loan, Cash Credit Account which is unpaid on the date of Balance Sheet should also to be verified and reported if unpaid.

22 (a)	Amount of Modified Value Added Tax Credits availed of or utilized during the previous year and its treatment in profit and loss account .	Action Point: 1)     Balance of MODVAT Credit at the beginning of the year 2)     Add: MODVAT Credit Available during the year 3)     Less: Amount of MODVAT Credit availed / utilized during the year 4)     Balance amount at the end of the year. Remarks: a)     Item No.4 should tally with balance of “Excise Credit” as appearing in the current assets of the asset side. b)     Ensure that nothing is debited to Trading and Profit and Loss Account of Excise Duty (In Exclusive Method). c)      Figures are to be given separately for capital goods and inputs i.e : Raw Material.
22 (b)	Particulars of income or expenditure of prior period credited or debited to the profit and loss account:-	Action Point: 1)     Scrutinize month wise expenses like telephone, salary, Motive power, Etc. to find out prior period expenses. Remarks: 1)     Short Provisions/ Errors  in estimation can’t be called as prior period expenditure 2)     While reporting the prior period expenditure or income, mention the year to which it relates. 3)     Crystallization of pending liability during the year under audit is not a prior period expenditure. 4)     Not applicable for accounts maintained under cash basis.
23	Details of any amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed) repaid, otherwise than through an account payee cheque, Section 69D	Hundi Loans:    Accepted/ Repaid Otherwise than by account payee cheque. Action Points:   Report such instances separately for principal and interest with mode of receipt/ Repayment. Remarks:  Applicable only for Hundi Transaction affected otherwise than through account payee cheque.

24 (a) (b)	Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year:- Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year	Action Points: 1)     Reporting in prescribed format. 2)     Certificate from assessee to be obtained and reported Remarks: 1)     Such Certificate is a comfort letter and does not reduce the scope and responsibility of the auditor.       This Clause is not applicable if loan is obtained from government, Banking Co.
25 (a)	Details of brought forward loss or depreciation allowance, in the following manner, to extent available:-	Action Points: 1)     Verify the assessment order along with the return of income filed and computation of income. 2)     In the remark column: Furnish Details of setoff obtained against any amount under column 4 or 5 in any earlier assessment year. Remarks:  Amount assessed includes amount as per intimation u/s 143(1)(a)
25 (b)	Change in shareholding of a closely held company	Section 79 Action points: a)     Report if change in the share holding of the company has taken place in the previous year due to which losses incurred prior to the previous year can’t be allowed to be carried forward in terms of sec 79 (more than 51% on the last date of the previous year) Remarks: Sec 79 does not affect the set off of unabsorbed depreciation which is governed by sec 32(2) a)     CIT vs Concord Ind. Ltd (1979) 119 ITR 458 Mad b)     CIT vs Shri Subbulaxmi Mills Ltd 249 ITR 795 (SC)
26	Details of deductions admissible under chapter VI, if any	Section 80 Action Point: a)     Report deductions admissible like 80 C, 80 D, 80 G, 80 P, 80 U, etc Remarks: a)     Amount ‘admissible’ to be reported and not amount ‘eligible’ b)     Deduction 80 GGA would be applicable only when there is no business income hence not applicable & not to be reported. (Donation for scientific research or rural development) c)      Furnish details to cover how the amount is arrived at d)     Mention the appropriate section.

27	Details of Tax Deducted At Source	Chapter XVII-B Action points: a)     Tax Deductible but not deducted at all – Verify various payments like interest, contract commission, professional fees etc. b)     Shortfall of TDS – This will include- i)                    Deduction at lower rate than what is prescribed. ii)                   Application of wrong rate of TDS iii)                  Surcharge & Education Cess now removed for the purpose of TDS. c)      Tax Deducted Late – Compare the date of actual deduction with reference to the due date and report if there is any delay d)     Tax Deducted But Not Deposited – Before the last date of the audit e.g. In respect of previous year ending 31st March 2014, details of tax deducted but not remitted to the Government before the last date of audit should be furnished.
28 (a)	In the case  of a trading concern, give quantitative details of principal items of goods traded	Action points:    Information to be given to the extent available. Remarks:   If no details are available, Remarks may be given like” The day to day quantitative details/calculation are not maintained.
b(A)	In the case of manufacturing concern, give quantitative details of the principal items of raw materials.
b(B)	In the case of manufacturing concern, give quantitative details of the principal items finished products any by-products:-
29	In the case of Domestic Company, details of tax on distributed profits under section 115-O	Action Point:       Information to be given in the prescribed format. Remark: 1)  Present rate of Dividend Distribution Tax (w.e.f 01/04/2013 – Tax 15% + Surcharge 10% + Edu.Cess 2% + Sec. Higher Edu. Cess 1%) 2)  Time of payment – Within 14 days from the date of declaration or distribution or payment of dividend, whichever date falls earlier. 3)  Dividend includes all dividend except u/s 2(22)(e).

30	Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See Section 139(9)].	Action point:       Enclose a copy if such report is available.
31	Audit conducted under the Central Excise Act, 1944,	Action point:       Enclose a copy if such Audit report is available.
32	Accounting ratios with calculations as follows :- a)     Gross profit/Turnover (%): b)     Net profit/Turnover (%): c)      Stock-in-Trade/Turnover (%): d)     Material consumed/ Finished Goods Produced:	Action points: 1)     Give calculations along with percentage 2)     Stock Turnover Ratio can be given in time i.e. Turnover/Stock = 4 Times, etc 3)     For a trader, normal stock turnover ratio is minimum 4. 4)     Consumption Ratio Material Consumed     Opening Stock of Raw material+                                                  Raw material purchased – Closing                                              stock of raw material   Finished Goods           Material Consumed(as above    Produced                  +Direct Manufacturing Expense                                +Direct Labor+ Opening WIP                                 - Closing WIP                                 Remarks: 1)     There can be different interpretations as to items involved like ‘Turnover’ ‘Stock in Trade’, etc. Give a suitable note for basis adopted. 2)     Formula adopted to be used consistently. 3)     Ratios need not be calculated product wise. 4)     Consumption ratio not applicable in respect of trading concern.