Tax audit-Issues related to taxation

Programme on 6th September, 2014

Narendra Hindocha

Clause 17-Reference: Section 43CA or 50C• New requirement

• Transfer of land or building or both

• Consideration less than value assessed or assessable by authority of State Government

• Details of property, amount of consideration and value assessed or assessable

Section 50C

• Applies to transfer of Capital Asset as opposed to Stock-in-trade

• Issue:

Assessee is individual. Asset, being not connected with business, not recorded in books of account. Whether need to report.

Section 50C: How ascertain assessed/assessable value

• Certificate of value as per Jantri or ready reckoner.

• Certificate of stamp duty paid.

• Work back from stamp actually used

• Work from the ready reckoner available in public domain.

Section 50C

• Issue:

• Value of immovable assessed separately for land and building.

• Value of land and building written separately in the sale deed.

• Capital gains computed separately for land and building.Whether comparison to be done in aggregate.

Section 43CA

• Applies to stock in trade as opposed to capital asset

• Date of agreement fixing consideration different from date of registration for transfer, allowed to take value on date of agreement-

Condition: some consideration other than cash received before date of agreement for transfer.

43CA

• Issue:

• Builder-enters into development agreement-constructs over 3 years-transfers land or partly constructed building and enters into agreement to construct at different points of time. Accounts for revenue progressively.

• Amount to be reported-year in which to be reported –property to be reported

Clause 19-Amounts admissible under various sections• Corresponds to old clause 15.

• Additional sections 32AC, 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD

• Requirement is tabulated to show sectionwise debit in accounts and allowable.

• To confirm fulfilment of conditions in Act, Rules, Guideline, Circular

Section 32AC

• Conditions:

Manufacturing company-New machinery exceeding 100 cr.-acquired and installed Between 1-4-13 and 31-3-15.

Deduction at 15% of cost. Need to hold the asset for 5 years from date of installation.

Exclude ships, aircraft, office appliances, computers, vehicles, assets installed in office/residential premises and assets getting 100% deduction in one year.

• From A.Y. 15-16, 25 Cr. in relevant year replaces 100 cr. Over 2 years

35 (2AA) and 35 (2AB)

• 35(2AA) : 200% for donations to Laboratory/IIT/University/ specified person for research under programme approved.

Whether we need to go beyond the approval. What if the data given in application is incorrect.

• 35(2AB): Biotechnology/Manufacturing company (Not for Eleventh Schedule product)-cost of inhouse research excluding land and building-200%-need agreement with prescribed authority for cooperation and audit.

35AD

• Allowable in case of new businesses of 13 categories including warehousing facility, hotels, hospitals, project under affordable housing scheme, fertilizer production etc.

• Deduction equal to 100% /150% ,depending on business, of capital expenditure

• Expenditure to be before commencement of business.

35CCC and 35CCD

• 35CCC : Expenditure on Agricultural Extension Project- 150% of expenditure on project notified based on guidelines. Rule 6AAD.

• 35CCD: Expenditure incurred by company on skill development project notified based on guidelines.

Clause 21 (a)

• Corresponds to old 17 (a) to (e)

• Details of debits in nature of capital, personal, advertisement expenditure etc.

• Effect of `etc.’

• Effect of omission of `in any souvenir, brochure……. Published by a political party’ after `advertisement’

• Substitution of the word `Amount’ in place of `details’

Payments to Club, penalty, etc.

• Earlier entrance fees to clubs to be reported. Now only cost of club services and facilities to report.

• Whether only disallowable amount to be reported.

• Penalty for violation of law. • Other penalties • Expenditure for purpose prohibited by law

Clause 21 (b):Disallowance -Section 40(a) (i) • Earlier only amount required. Now to give:

-Date of payment-Amount-Nature of payment-Name and address of payee.

• Separately for cases in which tax not deducted as for cases in which tax deducted but not paid to Government before due date.

Disallowance section 40(a)(ia)

• Disallowance for payment to residents without complying with requirements of TDS

• Requirement similar to 40(a)(i) in case of nonresidents.

• Here payment of TDS upto due date for filing return not to report.

• Last line requires stating `amount (out of tax deducted) deposited, if any.

Section40(a)-Other clauses

• New requirement to report disallowables on account of :

• Fringe benefit tax• Tax In/outside India, on/computed with reference to profits of business• Wealth tax in/outside India• Taxes/fees etc levied exclusively in State Government undertaking• Payment to PF/Other fund unless arrangement made for TDS where

applicable.• Tax paid on behalf of employee under section 10(10CC)

Disallowance under section 40A(3)

• Corresponds to old clause 17(h).

• Omission of requirement to state if certificate obtained

• New Reporting requirement in case payment made in year following the year of incurring expenditure.

• New requirement to report details including date, nature of payment, name and PA No. of payee where available. Address not required.

Clause 23- section 40A(2)

• Rule requires particulars of payments to persons specified in Section 40A(2). Utility on website gives form of particulars.

• Apart from names, relation, nature of transaction and amount, new utility calls for PA NO.

• Disallowance not to be computed.

• No disallowance for transaction at arm’s length as per 92BA

Clause 28 Receipt of shares in closely held company• New requirement -Reference: Section 56 (2)(viia)

• Receipt of Shares of a company other than one in which public are substantially interested

• Report if consideration inadequate. Reference Rule 11U/UA

• Details: Name and PA No., Name and CIN of company, No. of shares, Consideration and fair market value.

Clause 29-Shares issued

• Applies only to closely held company. Report name, PA No., consideration and market value.

• Reporting if shares issued to a resident at more than face value and also more than market rate.

• Reference Rule 11U/UA. Different from earlier clause-here valuation based on discounted free cash flow allowed.

• Not applicable to receipt by venture capital undertaking or other notified companies.

Clause 32:Losses and allowances

• Same details as earlier regarding brought forward losses and depreciation plus change in shareholding-section 79

• Additional relating to losses for the year:

-Speculation loss-section 73-Company deemed to be in speculation business and other cases. -Losses of business referred to in section 35AD

Clause 33 Deductions

• Earlier reporting restricted to Chapter VIA, now extended to Chapter III

• Reporting covers assertion that conditions in Act, Rules, Guidelines, Circular etc are satisfied.

Clause 34-TDS and TCS

• Earlier reporting of only defaults. Now total reporting of all tax deductible.

• Reporting extended to Tax collectible at source also.

• Reporting although data available with Department.

Details to be reported

• TAN

• Section

• Nature of payment

• Total payment/receipt of that nature.

Payments to contractors

• Possible heads in which debited-

-Freight-Advertisement -Staff welfare-Jobwork charges-Labour charges-Fixed assets -Security charges-Recruitment-Effluent disposal-Repairs and maintenance

Other columns

• Amount on which tax was required to be deducted

• Breakup of above-deductible at prescribed rate and deductible at lower rate

• Tax on two components

• Tax not deposited

Other reporting for TDS

• If statement not furnished within prescribed time, report TAN, type of form, due date, date of report.

• Also report whether statement contains information about all transactions required to be reported.

• Details of interest payable under sections 201(1A) and 206C(7)

Dividend Distribution Tax and other audit reports• Dividend distributed, reduction for dividend from subsidiary and

dividend paid to New Pension System Trust, tax paid and date.

• If cost audit/audit under Central Excise Act or audit under Finance Act 1994(Service-tax) carried out:

Details of disqualification or disagreement

Ratios

• Gross profit/Net profit/Stock in trade compared to turnover.

• Material consumed/finished goods produced.

• Now preceding year data to be given

• Calculations not required to be reported.

Clause 41

• Details of demands raised or refund issued

• During the previous year

• Under tax laws

• With details of proceedings

Other changes

• 3CA-adds the words `according to examination of books including documents’ after the words `according to explanations given to us’. However such addition not seen in 3CB.

• In place of `year ended ….’ the words `period beginning from …….to ending on…….

• Stamp and seal required.

• Whether liable to pay indirect taxes. If yes, give registration No.

Other changes

• 3CB allows stating of observations/qualifications. Need to select qualifications from a drop down manu.