CLAUSE 12A to 21, 25 to 27 - Bombay Chartered · PDF file · 2017-10-17Clause 12A...

CLAUSE – 12A to 21, 25 to 27

KALYANIWALLA & MISTRY

Clause 12A

Give particulars of the capital asset converted intostock-in-trade:- Profits or gains arising on conversion of a capital asset into, stock-

in-trade are chargeable to tax as capital gains.

Verify the resolution passed by the Directors, in case the assesseeit is a company, or any other supporting document and theaccounting entry passed in books to reflect the asset into stock,instead of as a fixed asset.

Verify the valuation report/any other supporting document basedon which the conversion is recorded in the books of accounts.


Clause 13

Amounts not credited to the profit and loss account,being –(a) The items falling within the scope of section 28 Verify the reserves account, or any other account to identify I

any item is directly credited to the same .

(b) the proforma credits, drawbacks, refund of duty ofcustoms or excise or service tax, or refund of sales tax orvalue added tax, where such credits, drawbacks orrefunds are admitted as due by the authoritiesconcerned

Only the claims lodged and admitted by authorities bereported. If such claims are not admitted, the same need not bereported.


Clause 13

(c) escalation claims accepted during the previous year

Only those escalation claims which are accepted by the party bereported. Even partial claims admitted be reported.

It assessess disputes any item based on legal decision – tomention the same

General disclaimer may be given that the auditor has not gonebeyond the books of accounts produced to him during auditand has not conducted an investigation to find out if theassessee has not credited any amounts in the book.


Clause 13

(d) any other item of income

all instances of income which come to the notice of the auditor,while examining the accounts but which are not credited to theProfit and Loss account be reported .

Verify credits in capital accounts of the proprietor/partner,credits in the other balance sheet items.

(e) capital receipt, if any

where the amounts are treated as capital receipts in the booksand the auditor agrees - Such items be reported. e.g. premiumreceived on issue of shares, profit on sale of assets not passedthrough profit and loss account.


Clause 14

Particulars of depreciation allowable as per the Income-tax Act,1961 in respect of each asset or block of assets :

When an asset is purchased – cost of the asset including theexpenses incurred to complete the purchase i.e. customs duty,installation cost, etc is added to the block

In the year of purchase – deprecation for full year/half year basedon the date when asset is put to use. Verify relevant documents,i.e. technical experts report, etc to determine the date when asset isput to use.

In the subsequent years, if the asset is used for the purpose ofbusiness even for part of the year, depreciation is allowable at fullapplicable rates

Verify the excise records - modvat credit claimed to be reducedfrom the value of the asset.

Incase of disputes regarding depreciation claim in earlier years, toclearly mention the same.


Clause 14 Any interest paid on money borrowed for purchase/construction

of asset, upto the date on which asset is put to use, be capitalizedto the cost of asset.

Any subsidy received for acquiring the asset –be reduced from thecost of acquisition.

Section 43A – Any asset purchased from outside India – out ofborrowing in foreign currency – the foreign exchange fluctuation (only to the extent of amount actually repaid) be considered aspart of the cost of the asset.

New plant and machinery acquired and installed after 1.4.2005 bythe assessee engaged in the business of manufacture or productionor any article or in the business of generation and distribution ofpower, additional dep of 20% of the cost of plant and machinery isallowed for the first year.

Lease agreement to be verified to ascertain whether the asset is ona finance lease or operating lease. Operating lease – dep availableto lessor, Finance lease – dep available to lessee.


Clause 15

Amounts admissible under sections 33AB, 33ABA, 33AC , 35,35ABB, 35AC, 35CCA, 35CCB, 35D, 35DD, 35DDA and 35E.(a) debited to the profit and loss account (showing the amount

debited and deduction allowable under each sectionseparately)

Accounts to be scrutinized to identify the amount which is debitedto profit and loss account

(b) not debited to the profit and loss account Where deduction is available for consecutive years, deduction

available in subsequent years, though the amount is not debited toprofit and loss account. Deduction claimed in the first year of claimbe verified.

Whether considered in DTA/DTL calculation , depreciation notavailable on exp written off.


Clause 16

(a) Any sum paid to an employee as bonus or commission forservices rendered, where such sum was otherwise payableto him as profits or dividend. [Section 36(1)(ii)].

This provision is intended to check private companies fromavoiding tax by distributing its profits to the shareholders in theguise of salary or to other remuneration by merely showingthem as employees

Bonafide payment to a shareholder for services actuallyrendered would be allowed

When any shareholder is paid any salary, his employmentcontract, nature of services actually rendered be verified


Clause 16

(b) Any sum received from employees towardscontributions to any provident fund orsuperannuation fund or any other fund mentioned insection 2(24)(x); and due date for payment and theactual date of payment to the concerned authoritiesunder section 36(1)(va). Amount deducted from employees salary is income u/s 2(24).

Contributed within due date (including grace days) deductionavailable u/s 36(1)(va) .

Obtain list of contribution to employees to PF/ESIC, etc anddates of their payments

Verify Challans evidening contribution to various fund

If data voluminous, test checks can be done and so mentioned.


Clause 17

Amounts debited to the profit and loss account, being:-

(a) expenditure of capital nature

Verify bills/vouchers of certain specific accounts e.g.Advertisement expenses, software expenses etc. to ensure thatamount of capital nature are not claimed as revenue.

In cases of controversy, auditor should report by way ofabundant caution,

(b) expenditure of personal nature

Scrutinize ledger accounts like telephone, motor car,entertainment expenses – whether personal expenses of anydirector/employee are debited to Profit and Loss a/c

Expenses incurred for directors/employees are perquisites intheir hands. Company can not have personal expenses.


Clause 17

(c) expenditure on advertisement in any souvenir,brochure, tract, pamphlet or the like, published by apolitical party

expenditure incurred on advertisment in any souvenir, brochure,tract, pamphlet published by a political party not allowed as adeduction.

Any amount paid as a contribution to a political party is notsubject to disallowance under this section. Deduction availableu/s 80GGB, 80GGC

Trade Union, Labour Union formed by political party, havingdistinct legal entity – no reporting required.

Verify the receipts to ascertain nature of payment.


Clause 17

(d) expenditure incurred at clubs,— as entrance fees and subscriptions as cost for club services and facilities used Expenses incurred at social clubs like Lions club, rotary club - no

reporting required. Only expenses at recreational clubs need to mentioned Incurred for employee – to be treated as a perquisite.

(e)

expenditure by way of penalty or fine for violation ofany law for the time being in force

any other penalty or fine expenditure incurred for any purpose which is an

offence or which is prohibited by law


Clause 17 Expenditure incurred for any purpose which is an offence e.g

hafta or which is prohibited by law not allowed as a deduction. Payment made for breach of contractual obligation- no disclosure

required. Payment made for violation of law – examine whether

compensatory or penal. Interest paid which is compensatory in nature- not hit by this

disallowance.

(f) amounts inadmissible under section 40(a) Section 40(a)(i) interest, royalty, fees for technical services or

any other sum chargeable to tax, payable outside India or inIndia to a non-resident not allowed as a deduction - if tax is notdeducted at source and deposited into the Government treasuryduring the previous year or in the subsequent year within thespecified time limit.


Clause 17If the tax is deducted and deposited in any subsequent year,deduction for such expenditure available in the year in which thetax is deducted and paid

Section 40(a)(ia) interest, commission or brokerage, fees fortechnical services, fees for professional services, payment tocontractors/ sub-contractors, rent, payment of royalty payable to aresident not allowed as a deduction if tax not deducted at sourceor after deduction not deposited into the Government treasurybefore the due date of filing of the return of income.If the tax deducted and deposited in any subsequent year ordeducted during the previous year but deposited after the duedate of filing of the return, deduction for such expenditureavailable in the year in which the tax is deducted and paid.

Verify agreements/invoices to determine nature of payment andliability to deduct tax.

Peruse opinion of expert/certificate in Form 15CB

TDS on reimbursement – is it pure reimbursement?


Clause 17

Section 40(a)(ii) – Income tax paid and the interest paidthereon not allowed as a deduction

Section 40(a)(iia) – Wealth tax paid is not allowed as adeduction

Section 40(a)(iii) Salary payable outside India or in India to anon-resident not allowed as a deduction if tax has not beendeducted and paid.

Section 40(a)(v) - Tax on non-monetary perquisites paid by theemployer, not allowed as a deduction, since such tax does notconstitute a taxable perquisite in the hands of the employee.

Verify employment contract to understand TDS liability.


Clause 17

(g) interest, salary, bonus, commission orremuneration inadmissible under section40(b)/40(ba) and computation thereof

The remuneration payable by a firm to the partner isgoverned by the partnership deed. Under Income-TaxAct, remuneration and interest payable by the firm to thepartner allowable only if certain conditions are fulfilled.

Verify the partnership deed, to ascertain the salarypayable to partners as mandated by the deed

In this clause computation of disallowance amount has tobe given.


Clause 17

(h) Payments made othehrwise than by A/c Payee cheque

Aggregate payment in a day - in cash or by bearer cheque -in excess of Rs. 20,000 - entire amount disallowed.

Examine on test check basis- report with appropriatecomments if no proper evidence for verification of paymentis available.

Obtain a list of payment made in cash from client.

Quantify amount of disallowance - transaction wise

Exceptions provided in rule 6DD – where nodisallowance is attracted.


Clause 17

(i) provision for payment of gratuity not allowable undersection 40A(7)

Provision made for gratuity shall be allowed only if contributionis to an approved gratuity fund or it is towards gratuity paidduring the year

Approval granted to the fund by the commissioner ofincome tax should be verified

(j) any sum paid by the assessee as an employer notallowable under section 40A(9)

Verify whether contribution is to recognized PF/approvedsuperannuation fund/prescribed pension fund or approvedgratuity fund.


Clause 17

(k) particulars of any liability of a contingent nature

Liability crystallized, though the valuation thereof depends on afuture event or quantification cannot be done with certaindegree of accuracy - is not a contingent liability. e.g leaveencashment, provision for warranty etc.

Liability not crystallized. Provision made based on the relevantAccounting Standard or the Accounting Policy adopted -it iscontingent liability- e.g. provision for diminution in value ofinvestment.

Understand the basis of making provision.

Verify the provision relating to disputed claims

Scrutinize various account heads such as of outstandingliabilities, provisions, etc.


Clause 17

(l) amount of deduction inadmissible in terms of section14A in respect of the expenditure incurred in relation toincome which does not form part of the total income

Any expenditure incurred for earning income which is exemptfrom tax shall not allowed as a deduction.

Having regard to the accounts of the assessee, if the auditor canidentify the expenses incurred – the same be stated in this clause.

When there is no direct nexus or it is not possible to identifyexpenditure incurred for earning exempt income by applying anyreasonable method – mix bag of funds – then disallowance becomputed by applying Rule 8D


Clause 17

If the assessee’s contention is – no expenses are incurred ora specific amount of expenditure is incurred, which cannotbe verified by the auditor, then the put an appropriate note.

Always advisable to attribute a certain amount ofexpenditure as disallowable u/s 14A on some reasonablebasis.

(m) amount inadmissible under the proviso to section36(1)(iii)

Verify the purpose of borrowing and interest paid

Examine the date when asset is put to use.

This disallowance is irrespective of the treatment given inthe books of accounts.


Clause 17A

Amount of interest inadmissible under section 23 of theMicro Small and Medium Enterprises DevelopmentAct, 2006

Section 23 of the Micro Small and Medium EnterprisesDevelopment Act, 2006 (MSMEDA) overrides the provisions ofthe Income Tax Act, 1961

Section 23 of the MSMEDA provides that if a buyer pays interestto a supplier being, a micro or small enterprise, such interest,, forthe purposes of computation of Income – Tax Act, not allowed as adeduction

Obtain a full list of suppliers, who fall within the purview of thedefinition of MSME Act.

Verify whether the payments made to such suppliers with interest.


Clause 18

Particulars of payments made to persons specifiedunder section 40A(2)(b)

The list of persons covered by the section is quite wide andidentification of such relationship can be difficult for theauditor.-Obtain a certificate to that effect from themanagement

For cross verification, compare the list with related partydisclosure in the audited accounts and entries in registermaintained u/s 301 of the Companies Act

The reporting is only for payments made and not foramount received.

The auditor to only report the amounts paid and notrequired to give his opinion on reasonability thereof.


Clause 19

Amounts deemed to be profits and gains under section33AB or 33ABA or 33AC

Amounts withdrawn from the reserves or utilized for non-specified purposes be verified and disclosed.


Clause 20

Any amount of profit chargeable to tax under section 41and computation thereof

Earlier years records to be verified to ascertain deductionclaimed and allowed in respect of loss, expenditure, tradingliability or bad debts written off, which are recovered.


Clause 21

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

(a) Amount pre-existing on the first day of the previousyear not allowed in any preceding previous year andpaid during the year - this amount will not be debitedto current years account but will be allowed as adeduction on payment basis

(b) was incurred in the previous year and not paid beforethe due date of filing of the return is to be disallowed.

Deduction of certain expenses only on payment basisirrespective of the method of accounting followed


Clause 21

Arithmetically reconcile the details with previousyears tax audit and current years accounts.

Verify the challan, receipts and entries in the books toascertain the amounts paid and remained unpaidduring the year.

State whether sales tax, customs duty, excise duty orany other indirect tax, levy, cess, impost, etc., is passedthrough the profit and loss account - if not routedthrough the Profit and Loss Account – not paid duringthe year – whether disallowed u/s 43B ?


Clause 25

Details of brought forward loss or depreciationallowance

Losses in the nature of business loss, speculation loss, unabsorbeddepreciation, capital loss be shown separately. – as per return andas per assessment/appeal order.

To check whether the return of income of each year, where the losshas occurred was filed within the due date.

Carry forward of loss is permissible for specific no. of years.

If any appeal/rectification application is filed, which has bearingon the amount of loss assessed , the same should be mentioned


Clause 25

(b) whether a change in shareholding of the company hastaken place in the previous year due to which the lossesincurred prior to the previous year cannot be allowed tobe carried forward in terms of section 79.

Applicable only to closely held companies Brought forward loss can be set off during the year only if 51%

of the voting power is beneficially held on the last day of theyear by the same set of shareholders who beneficially held 51%of voting power on the last day of the year, in which lossoccurred

Exceptions provided in the section Carry forward and set off Unabsorbed Depreciation is not hit by

change in shareholding Verify shareholders register to ascertain any change in the

shareholding.


Clause 26

Section-wise details of deductions, if any, admissibleunder Chapter VIA

Chapter VI-A covers section 80A to 80U.

The auditor has to satisfy himself that all the necessary conditionsfor claiming a deduction are fulfilled before he certifies that aparticular deduction is available to the assessee.

To state if the auditor relies on the certificate issued by any otherconsultant quantifying the deduction.


Clause 27

(a) Whether the assessee has complied with theprovisions of Chapter XVII-B regardingdeduction of tax at source and regarding thepayment thereof to the credit of the CentralGovernment. Yes No

(b) If the provisions of Chapter XVII-B have not beencomplied with, furnish details of –


Clause 27

Tax not deducted at all – Disallowed – details same asdisclosed in clause 17(f)

Shortfall on account of lesser deduction than required to bededucted – Whether disallowed?

Tax deducted late – during the year - give details of alldelays – though not disallowed

Tax deducted but not paid to the govt. – paid before the duedate of filing the return – disallowed?

To scrutinize ledger accounts of expenses and TDS challansto verify the date when tax deductible –tax dedcuted – taxpaid


CLAUSE 12A to 21, 25 to 27 - Bombay Chartered · PDF file · 2017-10-17Clause 12A...

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Transcript of CLAUSE 12A to 21, 25 to 27 - Bombay Chartered · PDF file · 2017-10-17Clause 12A...