Guidance Note On Tax Audit Under Section 44 AB Of The Income - Tax Act

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

(i) Opening stock;

(ii) Purchases during the previous year;

(iii) Sales during the previous year;

(iv) Closing stock;

(v) shortage/excess, if any.

51. Clause 28(a)

51.1 This information was required by old Form 3CD, pursuant to a Note inserted below Clause 3 and the information requirement more or less corresponds to information to be submitted in case of a manufacturing concern.

51.2 Accordingly, a reference may be made to the subsequent paragraph - paragraph 52, for compliance, etc.

51.3 The tax auditor should obtain certificates from the assessee in respect of the principal items of goods traded, the balance of the opening stock, purchases, sales and closing stock and the extent of shortage/excess/damage and the reasons thereof.

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52. (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:

(i) opening stock;
(ii) purchases during the previous year;
(iii) consumption during the previous year;
(iv) sales during the previous year;
(v) closing stock;
(vi)* yield of finished products;
(vii)* percentage of yield;
(viii)* shortage/excess, if any.

B. Finished products/By-products:

(i) opening stock;
(ii) purchases during the previous year;
(iii) quantity manufactured during the previous year;
(iv) sales during the previous year;
(v) closing stock;
(vi) shortage/excess, if any.

* Information may be given to the extent available.

52. Clause 28(b)

52.1. This information should be given only in respect of those items where it is practicable to do so, having regard to the records maintained by the assessee. In other cases, the tax auditor may indicate in his report that the relevant records were either not maintained or were inadequate for
the purpose of furnishing the requisite information.

52.2. In a large concern it may be difficult for tax auditor to verify each and every item of purchase, consumption and production. In such cases, he may verify the figures on a sampling method and satisfy himself as to the correctness of the figures furnished. This clause requires that
quantitative details of “principal items” of raw materials and finished goods should be given. Therefore, information about petty items need not be given. What would constitute principal items will depend on the facts of each case. Normally, items which constitute more than 10% of the aggregate value of purchases, consumption or turnover may be classified as principal items. In this connection a reference may be made to the ICAI’s ‘Statement on Amendments to Schedule VI to the Companies Act, 1956.’

52.3. The information about ‘yield’, ‘percentage of yield’, and ‘shortages/excess’ is required to be given only to the extent such information is available in the records of the business.

52.4 In respect of assessees other than companies and those whose accounts have not been audited under any other law, the tax auditor should obtain the following certified documents for the principal items of raw materials, finished goods and by-products:

a) Certificate from the assessee certifying the balance of the opening stock, purchases, sales and closing stock.

b) Certificate to the extent of shortage/excess/damage and the reasons thereof.

52.5 By-products represent products whose manufacture results incidentally from the manufacture of the main product or where the waste arising in the manufacture of main product is further processed to create a byproduct. Where the by product so produced or is continuously generated it should be treated for the purpose of sale and disposal at par with at any other product produced by the company and similar records should be maintained.
The quantitative details on the above lines are to be given in respect of by-product also.

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53. In the case of a domestic company, details of tax on distributed profits under section 115-O in the following form:-

(a) total amount of distributed profits;
(b) total tax paid thereon;
(c) dates of payment with amounts.

[Clause 29]

53.1 Section 115-O provides for a special levy to the extent of 10% plus surcharge, if any, on the amount of dividend declared, distributed or paid by such company whether such dividend is out of current profit or accumulated profits. Vide this clause the tax auditor has to report on profit distributed during the financial year. and therefore, the amount of tax worked @ 10% on such distributed profit has to be reported against this clause.

53.2 It may be noted that for the purposes of chapter XII-D containing special provisions relating to tax on distributed profits of domestic companies the expression “dividends” shall have the same meaning as is given to “dividend” in clause (22) of section 2 but shall not include sub-clause (e)
thereof. However, the the tax auditor need not go into the question of how the total amount of distributed profits has been arrived at.

53.3 The next requirement is to report the tax paid thereon and the date of payment. The date of payment of tax can be ascertained by the tax auditor from the duly received challan and books of account etc.

53.4 In this clause, the total amount of profits distributed in the previous year , tax paid thereon and the date of payment is required to be given. Information about the date of declaration/distribution of dividend or

payment of dividend is not required to be given. However, it will be advisable to give the above information of distribution because the company is required to deposit the tax due under section 115-O within 14 days of the date of declaration/distribution or payment whichever is earlier.

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54. Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)].

[Clause 30]

54.1 The tax auditor should ascertain from the management whether cost audit was carried out and if yes enclose the copy of the report of such audit. Even though the tax auditor is not required to make any detailed study of such report, he has to take note of any material observation made in such cost audit report which may have relevance to the tax audit conducted by him. The tax auditor need not express any opinion in a case where such audit has been ordered but the same has not been carried out.

54.2 In cases where cost audit which might have been ordered is not completed by the time the tax auditor gives his report, he has to state the same in this report.

54.3 The tax auditor should examine the time period for which the cost audit if any has been required to be carried out. Information is required to be given only in respect of such cost audit report the time period of which falls within the relevant previous year.

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55. Whether any audit was conducted under the Central Excise Act,1944, if yes, enclose a copy of the report of such audit.

[Clause 31]

55.1 The tax auditor should ascertain from the management whether any audit was conducted under the Central Excise Act, 1944 and if such audit was carried out, obtain the report, if available and enclose the copy of the report of such audit. Even though the tax auditor is not required to make any detailed study of such report, he has to take note of any material observation made in such excise audit report which may have relevance to the tax audit conducted by him. The tax auditor need not express any opinion in a case where such audit has been ordered but the same has not been carried out.

55.2 In cases where excise audit which might have been ordered is not completed by the time the tax auditor gives his report, he has to state the same in this report.

55.3 The tax auditor should examine the time period for which the excise audit, if any, has been required to be carried out. Information is required to be given only in respect of such excise audit report the time period of which falls within the relevant previous year.

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56. Accounting ratios with calculations as follows:-

(a) Gross profit /Turnover;
(b) Net profit/Turnover;
(c) Stock-in-trade /Turnover;
(d) Material consumed /Finished goods produced.

[Clause 32]

56.1 These ratios have to be calculated only for assessees who are engaged in manufacturing or trading activities. This clause is not applicable to assessees carrying on profession. Moreover, the ratios have to be given for the business as a whole and need not be given product wise.
Further, the ratio mentioned in sub-clause (d) need not be given for trading concern.

56.2 While calculating these ratios, the tax auditor should assign a meaning to the terms used in the above ratios having due regard to the generally accepted accounting principles. All the ratios mentioned in the this clause are to be calculated in terms of value only.

56.3 The following definitions given by the ICAI in its Guidance Note on the Terms Used in Financial Statements may be noted.
(a)

Gross Profit: The excess of the proceeds of goods sold and services rendered during a period over their cost, before taking into account administration, selling, distribution and financing expenses. When the result of this computation is negative it is
referred to as gross loss.

(b) Turnover:

The aggregate amount for which sales are effected or services rendered by an enterprise. The terms gross turnover and net turnover (or gross sales and net sales) are
sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts.

(c) Net Profit:

The excess of revenue over expenses during a particular accounting period. When the result of this computation is negative, it is referred to as net loss. The net profit may be
shown before or after tax.

56.4 For the purpose of calculating the ratio mentioned in sub-clause (c), only closing stock is to be considered. The term `stock-in-trade' used therein does not include stores and spare parts or loose tools. The term 'stock-in-trade' would include only finished goods and would not include
the stock of raw material and work-in-progress since the objective here is to compute the stock-turnover ratio.

56.5 Material consumed would, apart from raw material consumed, include stores, spare parts and loose tools.

56.6 The value of finished goods produced may be arrived at by using the following formula :

(a) Raw material consumpation -
(b) Stores and spare parts consumption -
(c) Wages -
(d) Other manufacturing expenses - excluding depreciation.

Sub total -

Add : Opening stock in process -
Deduct : Closing stocks in process -
Value of finished goods produced -

56.7 Under this clause, calculation of the ratios are also to be stated. As such, computation of various components based upon which these ratios have been worked out is required to be stated under this clause.
However, if any of the above component is stated in the financial statements themselves, a reference to the same may be made.

56.8 There should be consistency between the numerator and the denominator while calculating the above ratios. Any significant deviation thereof should be pointed out.

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57. Signature

Form 3CD has to be signed by the person competent to sign Form No. 3CA or Form No.3CB as the case may be. He has also to give his full name, address, membership number, place and date. It may be noted

that in the earlier Form No. 3CD there was no requirement of signature by the person competent to sign the audit report.

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58. Code of Conduct and other matters

58.1 Some of the issues which are commonly raised in regard to different aspects of tax audit vis à vis the liability/obligations of the tax auditor are considered hereunder.

58.2 The liability of the tax auditor in respect of tax audit will be the same as in any other audit assignment. It may be noted that when any question relating to the audit conducted by a tax auditor arises, he is answerable to the Council of the Institute under the Chartered Accountants Act. In all matters concerning tax audit, ICAI’s disciplinary jurisdiction will
prevail.
In case the assessee is found guilty of having concealed the particulars of his income it would not

ipso facto mean that the tax auditor is also responsible. If the Assessing Officer comes to the conclusion that the tax auditor was grossly negligent in the performance of his duties, he can refer the matter to the ICAI so that appropriate action can be taken against the tax auditor under the Chartered Accountants Act.
The Assessing Officer or any other authority who is authorised to issue summons and to call for evidence or documents, can call upon the tax auditor who has audited the accounts to give any evidence or produce documents. For this purpose notice under section 131 can be issued by
the Assessing Officer or other tax authority mentioned in the said section.

58.3 If the actual work relating to examination of books and records is done by a qualified assistant in a firm of chartered accountants and the partner of the firm signing the audit report has relied upon this work, action, if any, for professional negligence can be initiated against the
member who has signed the report and in such an event, it would be open for the member concerned to prove that he has taken due care and diligence in the performance of his duties and is not aware of any reason to believe that he should not have so relied. If the qualified assistant (whether or not holding the certificate of practice) is found to be grossly negligent in the performance of his duties, the Council of the Institute can take disciplinary action against
him.

58.4 A tax auditor can accept the assignment of tax representation.

58.5 Under the Code of Conduct, no tax auditor can charge professional fees by way of percentage of turnover or percentage of profits. In this connection, reference is invited to Clause (10) of Part I of the First Schedule to the Chartered Accountants Act and the commentary on the
subject at page 43 of the Code of Conduct (1988 Edition). Certain exceptions are made in Regulation 168, but these exceptions do not apply for charging of fees for tax audit.

58.6 Since the figures in Form No. 3CD are duly verified by a chartered accountant, they should normally be accepted by tax authorities. If, however, there is a specific reason for differing from the view taken by tax auditor, the Assessing Officer may compute the income of the assessee by adopting different figures.

58.7 The opinion expressed by the tax auditor is not binding on the assessee. If the tax auditor has qualified his report and expressed an opinion on a particular item, the assessee may take a different view while preparing his return of income. In such cases, it is advisable for the assessee to state his viewpoint and support the same by any judicial pronouncements on which he wants to rely.

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59. Format of Financial Statements

59.1 The tax auditor of a person who carries on business or profession but who is not required by or under any other law to get his accounts audited has to give his report in Forms No. 3CB/3CD and will have to ensure that the financial statements i.e. balance sheet and profit and loss account/ income and expenditure statement, are prepared in such a manner that adequate information which is necessary to convey a true and fair view of the state of affairs of the assessee is given. So far as a person whose accounts of the business or profession have been audited under any other law is concerned, the information to be given in the financial statements is normally provided in the particular statute by which the assessee is governed. Since there is no such legislation in respect of a person who carries on business or profession but who is not required by or under any
other law to get his accounts audited, it is necessary to achieve some uniformity in respect of information to be provided in the financial statements.

59.2 It should be noted that the responsibility for maintenance of books and records and that for preparation of financial statements is that of the assessee. It is, therefore, desirable that guidance is given to a person who carries on business or profession but who is not required by or
under any other law to get his accounts audited about the maintenance of books of accounts and records as well as about the requirements of auditing. Similarly, guidance is also required to be given about the preparation of financial statements and the information to be provided in such statements. (See 'Monograph on Compulsory Maintenance of Accounts' published by ICAI.)

59.3 Two separate sets of forms of balance sheet and profit and loss account have, therefore, been prepared and given as Appendices to this Guidance Note. Appendix XI gives the recommended format of the balance sheet and also the information to be provided in the profit and loss account, in case of an assessee engaged in trading business. This format can be used in the case of an assessee, who is engaged in profession and other service activities, by making such changes as may be considered to suit the circumstances. Appendix X gives the recommended format of the balance sheet and the requirements of the profit & loss account in the case of an assessee engaged in the manufacturing activities. . It is suggested that the balance sheet and the
profit and loss account can be prepared either in the vertical or in the horizontal form according to the circumstances of each case. If the information required to be given in any item or sub-item of the financial statements cannot conveniently be given on the face of the financial statements, the same may be given by way of footnotes/ annexures to and forming part of such financial statements. Since the formats are designed also for accounts of non-corporate borrowers form banks, they may be modified so as to exclude the information, which may not be relevant for accounts for tax audit. For presentation and disclosure requirements, applicable AS and AS(IT) should be kept in mind.

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