CA Dharmen Shah

Effect of Purchases Made From Suspicious Dealers as Per List Published By Vat Department on Audit Report

Much has been discussed on recent issue about Suspicious Dealers, but rarely has someone analysed Whether Purchases made from such Suspicious Dealers should actually form part of Purchases while preparing Financials. The last updated List of 1277 Suspicious Dealers who has issued false bills without delivery of goods is displayed on Website of Government of Maharashtra – VAT Department since July-12.

RESPONSIBILITY OF AUDITOR :-

The Primary responsibility of Auditor is to certify as to reliability of the books of accounts and other records are properly maintained, with the assertion that Profit & Loss Account and Balance sheet give a true and fair view of state of Affairs of the Assessee.

Clause (xxi) of Paragraph 4 of the Companies (Auditor’s Report) Order, 2003 further requires the auditor to specifically report “whether any fraud on or by the entity has been noticed or reported during the year; if yes, the nature and amount involved is to be indicated”

Extracts from Revised Standards on Auditing:-

Para 11 of SA 200 (Revised) : Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing states ‘In conducting an audit of financial statements, the overall objectives of the auditor are (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework’

Extracts from SA 240 (Revised): The Auditor’s Responsibilities Relating To Fraud In An Audit Of Financial Statements:

Para A5:- identifies Fraud to include ‘Causing an entity to pay for goods and services not received (for example, payments to fictitious vendors, kickbacks paid by vendors to the entity’s purchasing agents in return for inflating prices, payments to fictitious employees).’

Para A18:- Professional skepticism includes being alert to, for example:

♦ Audit evidence that contradicts other audit evidence obtained.

♦ Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.

♦ Conditions that may indicate possible fraud.

♦ Circumstances that suggest the need for audit procedures in addition to those required by the SAs.

Para A21 :- The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary. Nevertheless, the auditor is required to consider the reliability of information to be used as audit evidence. In cases of doubt about the reliability of information or indications of possible fraud (for example, if conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document may have been falsified), the SAs require that the auditor investigate further and determine what modifications or additions to audit procedures are necessary to resolve the matter.

Thus, Such Frauds are already known and expected to be known to Auditors and hence he is expected to exercise Professional Skepticism while using the information available publically relating to Suspicious Dealers on Vat Website.

Following cases are required to be examined regarding such Dealers

1.       Some Dealers have actually issued 100% false sales invoices without delivery of goods.
2.       Certain dealers have partly issued false sales invoice without delivery of goods and partly Genuine Sales to his Customers.
3.       Certain Dealers have actually made genuine Sales to other Dealers but have not deposited taxes into the government Treasury.

So there are cases where in a Dealer has made genuine purchases but still his set-off may have been dis-allowed.

Question is Whether all dealers are considered as Suspicious Dealers as per Website list are Hawala Dealers?

 The Maharashtra Vat Department has displayed Suspicious Dealers list on website saying List of Suspicious Dealers and not HAWALA DEALERS. Further, A Disclaimer has been put in to say if any dealer whose name is published has any grievances should contact DC Office Vigilance, Mazgaon. Further, In course of updating list by Vat Department 2 dealers has been removed from Suspicious dealers till July,12. Thus, Solely based on Suspicious Dealer List one cannot claim any purchase to be bill purchase and qualify the Audit Report.

What will be the plight of Customers who have purchased from such dealers and claimed set-off on such purchases?

The plight of Bonafide dealers who have made genuine purchases from above dealers are denied of set-off by issuing Notice in Form 603 u/s 64 of MVAT Act, 2002 with reference to Sec 48(5).

Extract from Sec 48(5) reads as under ‘For removal of doubts it is hereby declared that, in no case the amount of set-off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods , actually paid, if any under this act or any earlier law into Government Treasury.’

It means that Set-off or refund shall be allowed to Purchasing Dealer to the extent his corresponding Selling Dealer has deposited taxes in respect of such sales affected to him in to the Government Treasury.

As Per Para 51 of Judgement of Hon’ble High court in case of M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur ITC claim should not be allowed if the purchases are not genuine. However, it should not prevent dealers from adopting such remedies as are available under law.

Intention of Maharashtra Vat Department in disallowing Input Tax Credit as per Circular 8T of 2012:-

Extract from Cir 8T of 2012 was issued after Judgement of Hon’ble High court in case of M/s. Mahalaxmi Cotton Ginning Pressing and oil Industries, Kolhapur on 21.06.2012 states that :-

  1. No Input tax credit claim shall be allowed unless the corresponding tax is paid by the selling dealer into the government treasury.
  2. In case of mis-match in sales and purchases in electronic matching, then to the extent of unmatched amount ITC will be disallowed.
  3. ITC claim shall not be allowed if the purchases are effected from hawala dealer and even though such hawala dealer has paid taxes partially or fully as these are not genuine transactions.

Thus, the intention of the Vat Department is to dis-allow set-off on those transactions :-

(a)     which are not genuine transactions

(b)     Genuine Purchases made from Selling Dealer but he has not paid taxes.

In above situations, It is for Auditor to analyse that Taxes paid by Dealer in respond to Notice from Vat Authority during the year is in respect of such purchases falls under which category (a) or (b).

To examine whether a Purchase Transaction is genuine any of the following audit procedures may be adopted:-

  1. Auditor may inquire with Management and also evaluate internal controls relating to purchases cycle.
  2. Auditor may consider verifying Purchase Invoice, Delivery Challan/ Transporters Copy, Mode of Payment to such Vendor.
  3. If Stock Register is maintained, Auditor may consider verifying whether such goods are reflected as Purchase in such Stock Register.
  4. If Stock Register is maintained, Auditor may consider verifying the consumption of such Raw material in course of manufacturing activity or Sold/ issued to whom in course of business.
  5. If such purchase forms part of Inventory, Then Auditor can be present at Inventory physical counting.
  6. The Auditor may also resort to method of obtaining External Confirmations Procedures as per SA 505 (Revised).
  7. The Auditor should also consider to obtain a Representation from Management with respect to such Purchases.

If after performing above Audit procedures, Auditor is of opinion that the Purchases made are genuine then he should not consider placing an emphasis or qualifying the Audit Report as there is no intention of fraud.

Case I : – Dealer has received notice in Form 603 during the F.Y. 2011-12 issued u/s 64 of MVAT Act, 2002 directing them to pay Vat along with Interest u/s 30(2) and 30(4) pertaining to Dealers from whom they have made purchases during the Year 2005-06 to 2010-11. What should be remarks of Auditor in respect of Such Notice? Whether such expense qualifies as Prior Period Expense ?

As Per AS-5 “Prior period items” are income or expenses which arise in the current year as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

Since the above liability is not due to any error or omission the same cannot be treated as prior period expense for the purpose of Clause (b) of Pt. 22 of Tax Audit Report.

Since the liability to pay has arised in Current Year and paid, the same should be allowed u/s 43B of Income Tax Act, 1961.

Qualification with respect to such cases should be done after verifying whether purchases are genuine by adopting methods available to Auditor.

Case 2 :- If in course of Audit for F.Y. 2011-12, Auditor comes across Purchases made by his client from Suspicious Dealer.

If after performing Audit procedures, Auditor is of opinion that the Purchases made are not genuine then he should consider placing an emphasis or qualify the Audit Report.

Click Here to Read More Case Laws/ Articles on Bogus purchases

More Under Goods and Services Tax

Posted Under

Category : Goods and Services Tax (4246)
Type : Articles (13966) Featured (4135)
Tags : Bogus purchases (60) MVAT (630)

0 responses to “Effect of Purchases Made From Suspicious Dealers on Audit Report”

  1. abhay dagli says:

    1) What is meaning of ” corresponding tax paid by the selling dealer”, as such in practical situation the selling dealer may result in refund due to INPUT TAX CREDIT claimed by him or the dealer is mainly sales to OMS then return may result in refund so such situation what will happen?
    2) ITC shall be disallowed if the purchases are from HAWALA DEALERS, as such as pler list published by the dept it shows SUSPICIOUS DEALERS & NOT HAWALA DEALERS. In some situation a dealer is included in such list due to misuse of his Name & TIN no. by some hawala dealer, in such situation what is the remedy.
    As Per Para 51 of Judgement of Hon’ble High court in case of M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur ITC claim should not be allowed if the purchases are not genuine. However, it should not prevent dealers from adopting such remedies as are available under law.

    Intention of Maharashtra Vat Department in disallowing Input Tax Credit as per Circular 8T of 2012:-

    Extract from Cir 8T of 2012 was issued after Judgement of Hon’ble High court in case of M/s. Mahalaxmi Cotton Ginning Pressing and oil Industries, Kolhapur on 21.06.2012 states that :-

    No Input tax credit claim shall be allowed unless the corresponding tax is paid by the

    selling dealer into the government treasury.
    In case of mis-match in sales and purchases in electronic matching, then to the extent of unmatched amount ITC will be disallowed.
    ITC claim shall not be allowed if the purchases are effected from hawala dealer and even though such hawala dealer has paid taxes partially or fully as these are not genuine transactions.

  2. Abhishek says:

    Great information and good insight! Thanks for the post.

Leave a Reply

Your email address will not be published. Required fields are marked *