Overview of Tax Audit Organized and Hosted by: Calicut branch of SIRC of ICAI R Ramanujam August 26, 2016

Structure of the discussion Issues in tax audit Origin of tax audit and applicability Standards of Auditing and Tax audit

Applicability Profession – Gross receipts Business – Total sales/ turnover/gross receipts Presumptive income Penalty for failure General points

Business or profession Sampath Iyengar’s law of income tax – 9 th edition Section 2 (13) - Business 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 Satabdi Investments Pvt Ltd Vs Bang ITAT CBDT Circular 6/2016 – Income from sale of shares Portfolio management income Land sale gains

Business or profession Profession includes…. Section 2 (36) - Profession Notified Professionals

Turnover Turnover for consignment agents Sales or includes purchases Discounts Goods returned

Turnover Taxes whether to be included Scrap and by products Gross receipts – Receipts in kind whether included Business and profession – Limit to be applied Out of pocket expenses received by professional

Gross receipts Cash assistance or duty draw back Profit on sale of import license Exchange difference gain/loss on exports Liquidated damages Insurance claim – Revenue in nature Advance received from customer and forfeited

Section 40a disallowances Relevant income not taxable as DTAA - Deduction Can auditor rely on certificates issued u/s 195 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) Genuine payments made in excess of prescribed limit Rule 6 DD – Exceptions to be taken care of 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.) Additional Filing Fees paid to ROC – Compensatory in nature – Allowable – Cummins Turbo Technologies Ltd. Vs. DCIT 169 TTJ 358 (Pune) 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.)

Prior Period Items Differential payment made in current year Liability materialised during the 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 Exceptions carved out Clause 32 – Section 73 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 Audit report dated 30 th September – Violation ? Language of Section 44AB 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 – Non Corporate Applicability of accounting standards - 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