Most important, specific and critical issues need special attention of the tax auditors

[Answer]

Most important, specific and critical issues need special attention of the Tax Auditors

When tax audit is carried out first time, the auditor has to give previous year figures in the annexure. The auditors must write below the previous year figures that these are unaudited if the previous year figures are unaudited.

[GJAFCA]

Though form 3CB has been prescribed by Income Tax Rules but it is advisable to state the paragraphs suggested by ICAI in form 3CB itself as it clarifies the position of the auditors and restrict the responsibility in the eyes of law.

The format is attached herewith.

[Tax Audit Report]

The Calcutta High Court in Snow White Food Products v CIT [1983] 141 ITR 861, and Madras High Court in CIT v Carborandum Universal Limited [1966] 149 ITR 759 and several other decisions like CIT v. Mopeds India Ltd. [1998] 173 ITR 347, Triveni Engg. Works Ltd. v. CIT [1987] 167 ITR 742 (All), CIT v. Ganga Trust Fund [1986] 162 ITR 612 (Guj) have held that it is open to an assessee to change the method of accounting provided the changed method is the regular method of accounting and the assessee has not merely abandoned or changed it for a casual period to suit his own purposes. Any such change which is followed consistently has to be accepted by the Department, even if it results in reduction of tax liability

[GJAFCA]

It is being practically observed that tax auditors are either ignorant or no taking care of the failure on the part of the assessee for reporting the non deduction of TDS on interest payment made to Non banking finance companies as these are not covered under the exceptions as provided by virtue of section 194A(3)(iii). The examples of such NBFC are like countrywide, Kotak Finance Limited, SRF Finance Limited etc.

Hence it is strongly suggested to take care of these defaults to avoid the disallowance u/s 40(ia) and interest as well as penalty for non deduction and non deposit of TDS.

[GJAFCA]

Kindly take care that if your Indian or foreign client has taken any loan whether CAR LOAN,CC, TERM LOAN from any of the banks mentioned below than your client is liable to deduct TDS u/s195 for interest payments made by it. An illustrative list is as under
.

• Abu Dhabi Commercial Bank Ltd
• ABN AMRO Bank N.V
• American Express Bank
• Antwerp Diamond Bank
• Arab Bangladesh Bank
• Bank International Indonesia
• Bank of America
• Bank of Bahrain & Kuwait
• Bank of Ceylon
• Bank of Nova Scotia
• Bank of Tokyo Mitsubishi UFJ
• Barclays Bank
• BNP Paribas
• Calyon Bank
• ChinaTrust Commercial Bank
• Citibank
• DBS Bank
• Deutsche Bank
• HSBC (Hongkong & Shanghai Banking Corporation)
• JPMorgan Chase Bank
• Krung Thai Bank
• Mashreq Bank
• Mizuho Corporate Bank
• Oman International Bank
• Shinhan Bank
• Société Générale
• Sonali Bank
• Standard Chartered Bank
• State Bank of Mauritius

[GJAFCA]

Clause 12 (b) of Form 3CD requires an assessee to report the deviation in the valuation of stock, sale and purchase as per section 145A of the Income Tax Act, 1961.

Most of the assessee are following exclusive method of accounting which is also acceptable as per accounting norms and accounting standards but section 145A itself carries a variation in itself so the assessee has no option except to report the details in respect of each of the following items with regard to excise duty, vat etc:

Opening Stock
Closing Stock
Purchases
Sales

[GJAFCA]

It is the normal practice of the individual assessee who carry on the business under proprietorship in a trade name that the personal saving account of the proprietor is not accounted for in the books of the account of the proprietorship concern. It leaves a scope of omission of income by way of interest on saving account, income from house property, income from capital gain and income from other sources. Normally all these incomes are seperately declared in the return of income but these transactions are not passed through books of account and hence not audited in true sense.

So if the auditor writes in his report that he/she has examined the balance sheet and profit and loss account of the assessee (Mr X) instead the name of the proprietorship concern (XYZ), the auditor put himself in an onerous responsibility of the transactions which have not been recorded in the books of account because it would be deemed once the books of an individual have been audited, all the incomes of that individual would have been recorded in the books of account of the individual.

So it is always advisable to curtail the responsibility by putting the report in the name of the proprietorship concern first followed by the name of the proprietor. Like wise in form 3CD, the same pattern must be followed.

One can see the difference by plain reading of these clauses:

We have examined the balance sheet as at ___________ and Profit & Loss Account for the year ended on that date of Mr. Ram Krishna.


Or

We have examined the balance sheet as at ___________ and Profit & Loss Account for the year ended on that date of M/s RK Enterprises Prop.Mr. Ram Krishna.

So the auditor may limit the responsibility of examination of the books of account of the business concern only.

[gopalji]

If an assessee maintains the books of account for the period other than the period of April to March. Since as per Section 3 of the Income Tax Act, 1961 financial year is recognised so what is the procedure?

In such situations, tax payer is required to prepare a seperate profit & loss account and Balance sheet as at March 31 and get it audited from the tax auditor who is required to issue the report in form 3CB only.

[gopalji]

Since the provisions of Section 44AB are applicable to non residents also but in respect of income arising, accruing or deemed to accrue in India.Since No seperate books of accounts are maintianed in India, the tax auditor has to obtain the relevant information from the overseas auditors preferably duly signed by him. But the tax auditors has to issue the audit report in Form 3CB even if the accounts are audited by the overseas auditors for the same period.

The tax auditor should also make a suitable remarks in form 3CB itself that the books are not maintained for India Operations.

[gopalji]

Signature on Auditors' report
The auditors report must state the following information ath the place of signature of each report signed on or after April 1, 2010 keeping in view the requirement of SA 700 "The Auditor's report on Financial Statements" as well as the decision of the council taken on January 13, 2010 in its council meeting:

Name of the Firm
Registration Number of the firm
Chartered Accountants



Name of the member signing the report)
Designation of the member
Membership Number

Place of Signature (The place where auditors have signed the report not the HO or BO of the Auditors)
Date