Instances of Non-compliance With Reporting Requirements Observed in Tax Audit Report

II.

Address Clause

The tax auditor is required to report the following under the said clause:

The address to be mentioned under clause (II) should be the same as has been communicated by the assessee to the Income-tax Department for assessment purposes as on the date of signing of the audit report.

Few instances of misreporting observed under this clause:

In various instances, it is observed that the address reported under this clause is different from the one mentioned in the “Annual Report” or as registered with the “Ministry of Corporate Affairs”.

IV.

Details as to Indirect Tax Registration

Whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, goods & services tax, custom duty, etc., if yes, furnish the registration number or any identification number allotted for the same.

a) The details of registration under indirect tax laws mentioned in the report issued under the Companies (Auditor’s Report) Order (CARO) are not reported under this clause.

b) Where the registration number under the Indirect Tax laws is based on the assessee’s PAN, the same does not match with the PAN reported under clause III of Form No. 3CD.

VIII.

Clause of section 44AB under which audit is conducted

The auditor is required to mention the relevant clause of section 44AB under which the audit has been conducted.

Where companies that are required to get their accounts audited under the Companies Act, 2013 select option (a) (Clause 44AB(a) – Total sales/turnover/gross receipts in business exceeding specified limits”) instead of option “Third Proviso to section 44AB: Audited under any other law”

X.

Nature of Business or Profession

a) Nature of business or profession (if more than one business or profession is carried on during the previous year, the nature of every business or profession)

b) If there is any change in the nature of business or profession, the particulars of such change.

The codes for business or profession for all main activities (principal line of each of the business) are not reported.

(Note- The auditor can identify this misreporting by examining the annual report)

XI.

Books of Accounts

a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.

b) List of books of account maintained and the address at which the books of account are kept.

c) List of books of account and nature of relevant documents examined.

a) The tax auditor may fail to report the location of maintenance of books of account.

b) The maintenance of books of accounts in the computer system along with its address is not reported in many cases.

c) In various instances, it is seen that the tax auditor fails to report the details of relevant documents examined such as bills, vouchers, receipts, debit note, credit note, inventory register, bank statements etc.

XIII.

Income Computation and Disclosure Standard

…

d) Whether any adjustments is required to be made to the profits or loss complying with the provisions of income computation and disclosure standards notified u/s 145(2)

e) If the answer to above question is “Yes”, furnish the following details of such adjustments in columnar form:

i. ICDS Standard

ii. Increase in Profit/Decrease in Profit

iii. Net Effect of ICDS

a) Tax auditor has reported the details of adjustments due to ICDS under clause 13(f), however in order to report such details, clause (d) shall be reported “Yes”. In many instances, the tax auditor reported the details under clause 13(f) even selecting “No” under clause 13(e).

b) In many instances, the tax auditor reported under clause 13(f) only when there is a deviation from the notified ICDS was encountered.

XIV.

Method of valuation of closing stock

The tax auditor is required to report the following under the said clause:

a) Method of valuation of closing stock employed in the previous year.

b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.

Some instances of misreporting observed under the clause XIV are discussed below:

a) The method of valuation for each item of inventories is not separately reported under clause 14(a).

b) The details of deviations encountered between the accounting method of valuation (i.e. as per AS 2 or Ind AS 2) and method of valuation as prescribed under section 145A remain unreported.

c) The reporting as prescribed for valuation of inventories under Revised AS-2 (or IND AS-2 wherever applicable) is not done in various instances. Instead, reporting as per ICDS is done.

XVII.

Transfer of Land or Building

Where any land or building or both is transferred during the previous year for a consideration less than the value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C, then the tax auditor shall furnish the following details in prescribed format:

i. Details of property

ii. Consideration received or accrued

iii. Value adopted or assessed or assessable

iv. Whether provisions of second proviso to sub-section (1) of section 43CA or fourth proviso to clause (x) of sub-section (2) of section 56 applicable?

In various instances it is seen that the reporting under this clause is done when consideration received on transfer of an asset (capital or otherwise) being land, or building, or both and the value adopted u/s 43CA or 50C is same, which is not required.

XVIII.

Depreciation allowable as per Income Tax Act

a) Description of asset/block of assets.

b) Rate of depreciation.

c) Actual cost or written down value, as the case may be.

ca) Adjustment made to the written down value under section 115BAC/115BAD (for assessment year 2021-2022 only).

cb) Adjustment made to written down value of Intangible asset due to excluding value of goodwill of a business or profession.

cc) Adjusted written down value.

d) Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of –

(i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994,

(ii) change in rate of exchange of currency, and

(iii) subsidy or grant or reimbursement, by whatever name called.

e) Depreciation allowable

f) Written down value at the end of the year.

a) The details of additions or deletions reported in “Tax Audit Report” are not in agreement with the figures of additions or deletions disclosed in the Audited financial statements.

b) It is observed in various instances that the exchange differential amount is not reported separately in the “additions” column annexure instead an annexure for the same is attached and uploaded with the Tax audit report.

c) With respect of “additions” to the block of assets, “date of purchase” and “date of put to use” is reported as same in respect of each item under each block of asset purchased, which is practically not possible in all the cases

d) In certain instances, it is seen that the single consolidated amount is disclosed at the end of each half part of the financial year as date of addition, instead of actual date of addition of each asset of the block.

XIX.

Amounts admissible under section 32AC to 35AE

a) The auditor shall report the amount admissible under section 32AC to 35E by furnishing following details in columnar form:

(i) Section

(ii) Amount debited to profit and loss account

(iii) Amounts admissible as per the provisions of the Income-tax Act, 1961 and also fulfills the conditions. If any specified under the relevant provisions of Income-tax Act, 1961 or Income-tax Rules, 1962 or any other guidelines, circular, etc., issued in this behalf.

Where the assessee has obtained a separate “Audit Report”, reference to that separate “Audit Report” for claiming deductions is not made in Form No. 3CA as per the requirement of the Guidance Note.

XX.

Amount paid in the nature of Bonus or Commission

a) Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend.

b) Details of contributions received from employees for various funds as referred to in section 36(1)(va) with the following details in columnar form:

(i) Serial number

(ii) Nature of fund

(iii) Sum received from employees

(iv) Due date for payment

(v) The actual amount paid

(vi) The actual date of payment to the concerned authorities

a) The details pertaining to the provident fund are reported under clause 20(b) but nothing for the same is reported for ESI Fund, while regular contribution to the same is clearly reflecting in the “Annual Report” of the company.

b) In many cases, the due date mentioned for the relevant fund is not correct.

XXII.

Interest inadmissible under MSME Act, 2006

The tax auditor is required to state the amount of interest inadmissible under section 23 of the Micro, Small, and Medium Enterprises Development Act, 2006.

The interest payable under the MSME Act, as per audited financial statements, the same was not reported under this clause as an amount so inadmissible under section 23 of the MSME Act.

XXIII.

Payments specified under section 40A(2)(b)

The tax auditor shall furnish the details of payment made to persons specified under section 40A(2)(b)

a) The Name and PAN of person specified under section 40A (2) (b) are not reported.

b) The amount reported under this clause does not match with the amount mentioned in the Annual Report.

c) In various instances, the consolidated figures are reported instead of respective transactions with respective persons as specified under section 40A (2) (b).

XXV.

Amount of Profit Chargeable to Tax u/s 41.

The tax auditor should obtain a list containing all the amounts chargeable under section 41 with the accompanying evidence. He shall state the profit chargeable to tax under this section. Further, the computation of the profit chargeable under this clause is also to be stated.

(Note: The information relating to profit has to be given irrespective of the fact whether the relevant amount has been credited to the profit and loss account or not.)

The amount mentioned in the Annual report, which was chargeable to tax under section 41 and is required to be reported under this clause, is not reported in many cases.

XXVI.

Reporting of sum referred under section 43B.

In respect of any sum referred to in clause (a), (b), (c), (d), (e), (f) or (g) of section 43B, the liability for which:-

A. pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

a) paid during the previous year

b) not paid during the previous year

B. was incurred in the previous year and was

a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1)

b) not paid on or before the aforesaid date.

a) In various instances it is observed that when excise duty was passed through profit and loss account, instead of reporting the fact as “YES”, “NO” is reported under this clause.

XXVII.

a) Amount of Central Value Added Tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding Central Value Added Tax credits in the accounts.

b) Particulars of income or expenditure of the prior period credited or debited to the profit and loss account.

a) A few instances of non-reporting of CENVAT utilized by tax auditor and non-reporting of the treatment of the same in profit and loss account” are noticed.

b) Where treatment in profit and loss account is reported, reporting of treatment in the accounts for opening and closing balance of CENVAT remains missing.

XXXIV(c)

Interest Payable u/s 201(1A) or 206C(7)

Whether the assessee is liable to pay interest under section 201(1A) or section 206C (7). If yes, the following details should be furnished in columnar form:

a) Tax deduction and collection Account Number (TAN)

b) Amount of interest under section 201(1A)/206C(7) is payable

c) Amount paid out of point (b) along with date of payment.

The “date of payment” of interest with respective amount is not reported under the relevant columns of this sub-clause.

XXXV(a)

In the case of a trading concern, give quantitative details of the principal items of goods traded:

a) Opening Stock

b) Purchases during the previous year

c) Sales during the previous year

d) Closing Stock

e) Shortage/Excess, if any

a) Even when “Trading” is reported as one of the businesses of an assessee under clause 10a, the quantitative details of principal items of goods traded are not reported under this clause.

b) Where closing stock of goods acquired for trading is reported as “Nil” the quantitative details of opening, purchases & sales made during the year is not reported under this clause.

XXXV(b)

In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products:

A. Raw Materials

a) Opening Stock

b) Purchases during the previous year

c) Consumption during the previous year

d) Sales during the previous year

e) Closing stock

f) Yield of finished products

g) Percentage of yield

h) Shortage/Excess if any

B. Finished Products/By-Products

a) Opening stock

b) Purchases during the previous year

c) Quantity manufactured during the previous year

d) Sales during the previous year

e) Closing Stock

f) Shortage/Excess, if any

a) Where the assessee is engaged in “manufacturing”, the ‘percentage of yield’ or ‘shortage/excess’ are not reported.

b) The details of “Finished Products” is erroneously reported as “raw materials” under clause 35b(A) instead of clause 35b(B). Also, raw materials, which are clearly traceable from the financial statements, are not reported at all.

XXXVII

Whether any cost audit was carried out, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor.

a) In many instances, the representation from the management is relied upon to report as to whether or not there is a disqualification or disagreement on any matter.

(Note – Copy of the audit report should be obtained from the management and note of the details of disqualification or disagreement on any matter reported under this clause should be taken.)

b) It is mentioned under clause (3) of Form No.3CA or Clause (5) of Form No.3CB, as the case may be, that the cost audit report is attached herewith while under this clause “No” is reported.

XXXVIII

Whether any audit was conducted under the Central Excise Act, 1944, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the auditor

a) The representation from the management is relied upon to report as to whether or not there is a disqualification or disagreement on any matter.

(Note – Copy of the audit report should be obtained from the management and note of the details of disqualification or disagreement on any matter reported under this clause should be taken.)

b) It is mentioned under clause (3) of Form No.3CA or Clause (5) of Form No.3CB, as the case may be, that the cost audit report is attached herewith while under this clause “No” is reported.

XXXX

The following details regarding the turnover, gross profit for the previous year and preceding previous year is to be stated in columnar form:

a) Total Turnover of the assessee

b) Gross Profit/Turnover

c) Net Profit/Turnover

d) Stock in Trade/Turnover

e) Material consumed/Finished Goods produced

a) The company engaged in the service sector generally leaves this option blank rather than selecting “Not Applicable”.

b) The scrap sale is not considered for arriving at the figure of “turnover” for Tax Audit Report.

c) The Net Profit after Tax is reported under this clause.

d) In certain cases, it is observed that for calculating “stock in trade/turnover ratio”, average stock is taken instead of calculating the stock as per the method prescribed in Guidance Note.

e) The “amount of material consumed” reported under this clause does not include stores, spare parts and loose tools.