Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards

Presentation at

National Conference on Direct Taxes and Allied Laws

organised by the

Direct Taxes Committee of ICAI and hosted by Mangalore Branch of SIRC of ICAI on 21.08.2010

Chinnsamy Ganesan FCA DISA(ICA)

Structure of the discussion

Peer Review Stage III Vs Tax Audit

Tax Audit latest ICAI announcements Accounting Standards issued by CBDT

Accounting Standards applicability to Tax Audit AS Vis--vis Income Tax Act AS of ICAI Vs AS of Income Tax Act Implication of AS of ICAI on Taxation Common pitfalls in reporting

Peer Review stage III

Covers tax audit assignments Statement of Peer Review issued by ICAI Quality of audit report Compliance with Technical Standards Compliance with Technical Standards Accounting Standards Compliance of Guidance Notes Auditing and Assurance Standards

AS and Tax Audit

Case 1 Statutory Accounts year ended March 31, 2010 Case 2 Statutory Accounts year ended Dec 31, 2009

Accounting Standards under IT ACT

NAS1 Significant Accounting Policies NAS2 Net Profit or Loss and Changes in accounting policies If an enterprise complies with NAS1 and NAS2 but does not comply with AS issued by ICAI What to do?

Accounting Standards not applicable to Tax Audit A myth or reality?

General purpose financial statements To be subjected to audit what about compilation? Subject to audit but not carrying on any Business or Industrial or Commercial activity Concept of Materiality

Accounting Standards not applicable to Tax Audit A myth or reality?

What about Not for Profit Organisations? Management or Auditors who is responsible for compliance? What is the impact of Companies (Accounting Standards) Rules 2006? Any impact with the introduction of Roadmap to IFRS?

Companies (Accounting Standards) Rules 2006

Central Government, in consultation with NACAS, has issued the Companies (Accounting Standards) Rules, 2006 notifying accounting standards 1-7 and 9-29, effective for COMPANIES for accounting periods commencing on or after 7 December 2006

The Notified standards by and large follow the ICAI standards except for certain differences

ICAI standards would remain applicable for noncorporate entities

AS of ICAI Vs AS under CAR 2006

AS of ICAI
Applicable Only to NCEs

CAR 2006
Applicable Only to Companies

Three Levels prescribed

Two Levels prescribed

Relaxation mainly for disclosures and not for recognition and measurement

Applicability an overview (CAR 2006)

Accounting Standards
AS 1 to 14 (except AS 3), 15, 16, 18, 19, 20, 22, 24, 25, 26, 28 and 29 AS 3, 17 AS 21, 23 and 27 (Only if regulator requires consolidation or entity prepares consolidated financial statements) Some relaxation on disclosures

Non SMCs

To SMCs

Care for applicability of AS 18

Applicability an overview (NCEs)

Accounting Standards
AS 1 to 14 (except AS 3), 15, 16, 19, 20, 22, 25, 26, 28 and 29 AS 3 and 17 AS 18 and 24 AS 21, 23 and 27 (Only if entity prepares consolidated financial statements) Some relaxation on disclosures

Level I

Level II

Level III

AS 15 relaxation for entities with less than 50 employees

Form 3CA & 3CB Suggested reporting on Form 3CD

Materiality Concept Responsibility and Scope Para

Particulars given in Form No. 3CD and the Annexures thereto are furnished by the Companys management. In accordance with the Guidance Note on Tax Audit under Section 44 AB of the Income Tax Act, 1961 issued by the Institute of Chartered Accountants of India our examination is carried out on a test basis to obtain reasonable assurance that the particulars as disclosed in Form No. 3CD and the Annexures thereto together with the notes thereon are free of material misstatement.

AS 1 vis--vis Tax Audit

AS 1 Disclosure of Accounting Policies

Concept

of considered

prudence

is

not

fully

Certain

provisions/ write off not allowed as expenditure

AS 2 vis--vis Tax Audit

AS 2 Valuation of Inventories

Market value Vs Net realisable value AS 2 does not prescribe valuation method for inventory of shares, debenture etc Section 145 A of the IT Act Inclusive method under the IT Act Exclusive method under AS 2

AS 7 vis--vis Tax Audit

AS 7 Accounting for Construction Contracts

% completion method contract method

Vs

completed

Accounting for foreseeable future loss Presumptive taxation u/s 44AD Present limit Vs limit proposed by DTC

AS 10 vis--vis Tax Audit

AS 10 (Revised) Property, Plant and Equipment

Ready for the intended use Vs put to use Whether depreciation claim is optional? Idle machinery under AS 10 Recognition expenditure criteria for Subsequent

AS 11 vis--vis Tax Audit

AS 11 The effect of changes in foreign exchange rates

AS 11 controversy still continues even after the introduction of Companies Accounting Standards Rule 2006 Treatment of unrealised forex loss adjusted in the carrying value for Income Tax Depreciation

AS 12 vis--vis Tax Audit

AS 12 Accounting for Government Grants

If condition attached subsidy can not be fully reduced from the cost as per AS 12 To be reduced from Cost of asset for IT depreciation computation

AS 13 vis--vis Tax Audit

AS 13 Accounting for Investments

Current Investments to be written down to market value if it is lower Permanent diminution in value of LongTerm Investments to be provided for If so provided not allowable under IT Act Only on disposal

AS 15 vis--vis Tax Audit

AS 15 Accounting for Retirement Benefits

Provision for Gratuity Sec 40 A (7)/ 43B Provision for Compensated Absence 43B Bonus Vs performance incentives

AS 16 vis--vis Tax Audit

AS 16 Borrowing Costs

Concept of Qualifying Assets Suspension of borrowing cost whether admissible under the Income Tax Act Capitalisation of borrowing Costs Vs 36 (1) (iii)

AS 18 vis--vis Tax Audit

AS 18 Related Party Transactions

Divided position of definition of related party Reconciling and considering the impact of disclosures

AS 18 Vs 40 (A) (2)(b)

Loans to Directors and their relatives

AS 19 vis--vis Tax Audit

AS 19 Accounting for Leases

Depreciation allowability on finance leases

Lessor under the Income Tax Act Lessee under AS 19

AS 22 vis--vis Tax Audit

AS 22 Taxes on Income

No concept of deferred tax under the IT Act Reversal of DTA for MAT computation recent judicial pronouncement

AS 26 vis--vis Tax Audit

AS 26 Intangible Assets

Amortisation over useful economic life Retirement of charged off intangibles to be fully

Depreciation rate specifically mentioned under IT Act Distinction between Intangible Asset and Computer Software

AS 28 vis--vis Tax Audit

AS 28 Impairment of Assets

Impairment to be tested at every balance sheet date and loss to be accounted as an expense Not allowable till the asset is disposed Reversal of Impairment Loss will not have any impact in IT Computation Impact on MAT Computation a grey area

AS 29 vis--vis Tax Audit

AS 29 Provisions, Contingent Liabilities and Contingent Assets

Legal Vs Constructive obligation Provision Obligation towards Asset Retirement

AS 30,31 and 32 vis--vis Tax Audit

Financial Instruments Standards Fair valuation Mark to Market Losses

Common pitfalls in reporting

Changes in Accounting Policy

Whether necessary to be mentioned in the Auditors Report even if not material

Forex differences adjusted in carrying value of fixed assets not removed for IT depreciation, if unrealised Related party transactions not reconciled with 40A (2) (b) disclosures 43B opening and closing unpaid position Vs Current Liabilities

Common pitfalls in reporting

Interest accrued on Loans Vs disclosure under 43B Funded interest of term loans Vs 43B Reconciling the excise duty records with financial statement figures (CENVAT/ VAT Disclosures) Reconciliation of movement in loan accounts with disclosure under 269 SS and 269 T Share Application money Vs Loan IFST whether to be disclosed Security Deposits received

Common pitfalls in reporting

TDS payable account analysis Vs Chapter XVII-B disclosures Year end provisions Vs during the year payments Non-deduction of TDS on outstanding expenses Liabilities outstanding under current liabilities Year end provisions on estimated basis Reconciliation of quantitative details Raw Materials Finished goods

Thank you

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