Audit under Fiscal Laws | FAQs

Ans.:

Audit Programme for conducting audit of a public trust:

1. Preliminary: Obtain the following from the trust:

• A copy of resolution from the trust so as to determine the scope of audit.
• A list of accounting records maintained by the trust.
• A certified true copy of trust deed.
• Trial Balance as at end of accounting period.
• Balance Sheet and Profit & Loss account of the trust authenticated by the trustee.

2. Compliance and Substantive Checking

(i) Examine the system of accounting and internal control.
(ii) Vouch the transactions of the trust so as to ensure the following:

(a) transaction falls within the ambit of the trust;
(b) transaction is properly authorized by the trustees or other delegated authority;
(c) Proper accounting of all incomes and expenses on the basis of the system of accounting followed by the trust;
(d) Amount applied towards the object of the trust are covered by the objects of trust as specified in the trust deed.

(iii) Check whether the financial statements agrees with the trial balance.

3. Issuing Audit Report

• Audit Report shall be furnished in Form No. 10B.
• Annexure to Form 10B requires certain information to be provided by the auditor, which need to be obtained from the trustees.

Ans.:

Applicability of Tax Audit:

(a) DB Pvt. Ltd. has to conduct the Audit of Books of Account u/s 44AB of the Act for the FY 2021-22 as the turnover exceeds ₹ 10 crores.

(b) Sec. 44AD would be applicable to Partnership Firm. Thus, ABC & Co. can declare the minimum profit @ 8% of the turnover as its turnover during the PY 2021-22 is not expected to exceed ₹ 2 crores. If the firm do not opt for presumptive income scheme under section 44AD, it has to get books of account audited u/s 44AB of the Act.

(c) Though Sec. 44AD is applicable to an Individual, it is not applicable to Commission income. In the given case, since, Mr. Anand earns the commission income, he cannot take the benefit of Sec. 44AD. His total turnover during the FY 2021-22 in respect of commission income is expected to exceed ₹ 1 crore, he would have to get his books of account audited u/s 44AB of the Act.

(d) Though Sec. 44AD is applicable to an Individual, it is not applicable to Commission income. In the given case, since, Mr. Vishal earns the commission income, he cannot take the benefit of Sec. 44AD. His total turnover during the FY 2021-22 in respect of commission income is not expected to exceed ₹ 1 crore, therefore, he need not get his books of account audited u/s 44AB of the Act.

Ans.:

Tax Audit Report in case of Co-operative society:

• Proviso to Section 44AB of Income-tax Act, 1961 lays down that where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient compliance with the provisions of this section, if such person get the accounts of such organisation audited under such other law before the specified date and furnishes by that date, the report of the audit as required under such other law and a further report by an Accountant in the form prescribed under this section.
• The term “accountant” as defined under section 288 under the Income-tax Act, 1961 means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, who holds a valid certificate of practice.
• Accordingly, the person who is not a Chartered Accountant as mentioned in the question, though is eligible to act as auditor of Cooperative Society under the Cooperative Societies Act, 1912, but is not eligible to carry out tax audit under Section 44AB of the Income-tax Act, 1961.

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Liability for Tax Audit in case of Speculative Transactions:

• Mr. X deals in commodity as a speculator. A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery.
• As such, in such transaction the difference amount is ‘turnover’. In the given case the difference of ₹ 104 lacs and ₹ 95 lakhs i.e., ₹ 9 Lakhs is the turnover.
• In such transactions though the contract notes are issued for full value of the purchases or sales, but the entries in the books of account are made only for the differences.

Ans.

As per section 44AB of the Income-tax Act, 1961, audit is required in case of every person carrying on business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any previous year.

However, in the case of a person whose aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment, the limit of ₹ 1 crore shall change to ₹ 10 crores.

As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the purpose of computing turnover:

(i) Discount allowed in the sales being in the nature of trade discount will be deducted from the turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and hence should not be deducted from the turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.
(iv) Price of goods returned should be deducted from the turnover even if the returns are from the sales made in the earlier year/s.
(v) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However, if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.

Accordingly, the turnover of concession limited may be computed as under:

Recorded turnover during the year                          ₹ 10,13,00,000

Less: Discount allowed in the Sales Invoice         (8,20,000)

Trade discount                                                                  (2,90,000)

Sales Return                                                                       (1,60,000)

Effective turnover                                                            ₹ 10,00,30,000

Ans.:

As per section 44AB of the Income-tax Act, 1961, audit is required in case of every person carrying on business, if his total sales, turnover or gross receipts in business exceed ₹ 1 crore and in case of every person carrying on a profession, if his gross receipts from profession exceed ₹ 50 lakhs in any previous year.

However, in the case of a person whose aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment, the limit of ₹ 1 crore shall change to ₹ 10 crores.

As per Guidance Note on Tax Audit issued by the ICAI, the following points merit consideration for the purpose of computing turnover:

(i) Discount allowed in the sales being in the nature of trade discount will be deducted from the turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and hence should not be deducted from the turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount.
(iv) Price of goods returned should be deducted from the turnover even if the returns are from the sales made in the earlier year/s.

Ans.:

Computation of Total Sales:
(i) Discount allowed in the sales invoice: Deducted from turnover as it reduces the sale price.
(ii) Cash discount: Not to be deducted being in the nature of financing charge.
(iii) Price of goods returned related to earlier year: Deducted from turnover.
(iv) Sale proceeds of fixed assets: Will not form part of turnover as these are not held for resale.

Ans.:

• Proviso to Sec. 44AB of Income-tax Act, 1961 lays down that where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient compliance with the provisions of this section, if such person get the accounts of such organisation audited under such other law before the specified date and furnishes by that date, the report of the audit as required under such other law and a further report by an Accountant in the form prescribed under this section.
• There is no statutory requirement of audit of a firm under the provisions of Partnership Act, 1932. So, appointment of two auditors one as tax auditor and another as statutory auditor does not appears to be correct.
• It is also provided u/s 44AB that the tax auditor should report whether in his opinion the particulars in respect of Form 3CD are true and correct. The audit report is in the form of 3CA if accounts are being examined under the requirements of provisions of any other Act, otherwise report should be in Form 3CB.

Conclusion: Form No. 3CA requires the tax auditor to enclose a copy of the audit report conducted by the statutory auditor. Where the report of the statutory auditor is not available for whatever reasons, it will be possible for the tax auditor to give his report in Form No. 3CB and to certify the relevant particulars in Form No. 3CD.

Ans.:

While furnishing the particulars in Form No. 3CD it would be advisable for the tax auditor to consider the following:

1. If a particular item of income/expenditure is covered in more than one of the specified clauses, care should be taken to make a suitable cross reference to such items at the appropriate places.
2. If there is any difference in the opinion of the tax auditor and that of the assessee in respect of any information furnished in Form No. 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.
3. If any particular clause in Form No. 3CD is not applicable, he should state that the same is not applicable.
4. In computing the allowance or disallowance, he should keep in view the law applicable in the relevant year, even though the form of audit report may not have been amended to bring it in conformity with the amended law.
5. In case the prescribed particulars are given in part to the tax auditor or relevant form is incomplete and the assessee does not give the information against all or any of the clauses, the auditor should not withhold the entire audit report. In such a case, he can qualify his report on matters in respect of which information is not furnished to him.
6. The information in Form No. 3CD should be based on the books of account, records, documents, information and explanations made available to the tax auditor for his examination.
7. In case the auditor relies on a judicial pronouncement, he may mention the fact as his observations in Form No. 3CA or Form No. 3CB, as the case may be.

Ans.:

The following points merit consideration as stated in the Guidance note on Tax Audit issued by the ICAI:

(i) Price of goods returned should be deducted from the figure of turnover even if the return are from the sales made in the earlier years.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount.

The aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, should not exceed 5% of the said amount and aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year should not exceed 5% of the said payment, limit for tax audit is ₹ 10 crores.

Ans.:

Applicability of Tax Audit:

Ans.:

Compliance of Section 145:

• Sec. 145(1) of Income-tax Act, 1961 requires that the income chargeable under the head ‘PGBP’ or ‘Other sources’ shall, be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
• Sec. 145(2) provides that the C.G. may notify in the Official Gazette from time to time Income Computation and Disclosure Standards to be followed by any class of assessee or in respect of any class of income.
• Sec. 145(3) provides that where the A.O. is not satisfied about the correctness or completeness of the accounts of the assessee, or where method of accounting provided u/s 145(1) have not been regularly followed by the assessee or income has not been computed in accordance with the Standards notified u/s 145(2), the A.O. may make an assessment in a manner provided in Sec. 144 of the Income-tax Act.
• Auditor has to therefore ensure the following:

(a) That the entity follows either the cash or accrual method of accounting and same is to be reported in clause 13(a) of form 3CD.
(b) Accounting policies has been disclosed separately.
(c) Provisions as stated in Income Computation and Disclosure Standards (ICDS) notified by Central Government u/s 145(2) has been complied with.

Ans.:

• Clause (4) of Form 3CD, requires tax auditor to mention the registration number or any other identification number, if any, allotted, in case the assessee is liable to pay indirect taxes like excise duty, service tax, sales tax, GST, customs duty, GST etc. Auditor is required to furnish the details of registration numbers as provided to him by the assessee.
• The reporting is however, to be done in the manner or format specified by the e-filing utility in this context. The information may be obtained and maintained in the following format:

Ans:

Clause 4 of Form No. 3CD requires the tax auditor to ensure whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, GST tax, custom duty, etc. If yes, the registration number or GST number or any other identification number allotted for the same need to be furnished.

Therefore, the auditor is primarily required to furnish the details of registration numbers as provided to him by the assessee. The reporting is required to be done in the manner or format specified by the e-filing utility in this context.

Tax auditor should verify the registration number for the locations for which registration certificates have not been received from online portal of the relevant authority.

The auditor should also ensure that the details furnished while checking the registration number pertains to the company only. If the company has filed any returns for these locations, the auditor should enquire for the same from the management and should check those returns to verify the correctness of the registration numbers. In addition, the auditor should also obtain specific representation in respect of this point from the management.

Ans:

• Clause (8) of Form 3CD, requires tax auditor to mention the relevant clause of section 44AB under which the audit has been conducted. Accordingly, auditor is required to mention clause (c) of Sec. 44AB which requires tax audit.

• Further, as per Clause (12) of Form 3CD, if the profit and loss account of the assessee includes any profits and gains assessable on presumptive basis, the tax auditor has to indicate the amount and the relevant sections.

•Under Clause 8, auditor is required to indicate the relevant clause of section 44AB under which audit is to be conducted and in addition under clause 12, auditor is required to indicate the amount of profits of business covered u/s 44BB and the relevant section.

Ans:

• Central Government has, in exercise of the powers conferred u/s 145(2) of Income-tax Act, 1961, notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees (other than an individual or a HUF who is not required to get his accounts of one previous year audited in accordance with the provisions of Sec. 44AB), following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “Income from other sources”.

• Clause 13(d) of Form No. 3CD of the tax audit report requires the tax auditor to state whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2) of the Income-tax Act, 1961.

• Further, the tax auditor is also required to report under Clause 13(e), if answer to Clause 13(d) above is in the affirmative i.e. the auditor is required to give details of such adjustments as follows:

Ans:

• As per Clause 16(b) of form 3CD, the details of custom duty refund, if admitted as due but not reported in Profit and Loss account, are to be stated. But the claim which have been admitted as due after the relevant previous year need not be reported.
• Hence non-reporting of claim of refund of custom duty in Form 3CD is in order.
• Clause 13(b) of Form 3CD required reporting in case of change in method of accounting employed. Change in Accounting policy cannot be treated as change in method of accounting, hence does not require any reporting under clause 13(b) in Form 3CD.