Critical issues in the tax audit report and the interplay of the form OI with the Tax audit report.

Of late many assesses are receiving the intimations from the tax department for the mismatches in the tax audit report and the income tax return filing, however when one looks into the matter it is quote ironical that the mismatch is only due to the lack of the transparency of the clauses between return and the tax audit report. In this article I will try to clarify the interplay between different clauses due to which many assesses are receiving the notices from the CPC. Apart form the above various issues in the tax audit report will also be discussed.

ISSUES IN THE TAX AUDIT REPORT.

1. CLAUSE 8: Reporting of the section under which the audit is being conducted.

Under the clause (8) of the tax audit report it is important that one should select the right section under which the tax audit is being conducted. For instance if the turnover the assesse is 1.5 crore and he declares the profit at the lower rate as mentioned in the section 44AD and he has never opted for the section 44AD in the past, then what has been seen that many CA professionals choose the section 44AB(5) for the tax audit but in my humble submission the section 44AB(1) will be applicable as for conducting the audit under section 44AB(5) the conditions mentioned in the section 44AD(4) is to be satisfied and the income shall be greater than the maximum amount not chargeable to tax, since the conditions mentioned in the clause 4 of the section 44AD is not satisfied the audit will be conducted under the section 44AB(1). It is only one issue of the bunch of the issues that still needs proper attention.

2. Clause 11: Reporting of the address under which the books of the accounts are being kept.

Under clause 11 the assesse is required to mention the address under which the books of the accounts are kept. It is highly advisable not to mention the residential address of the assesse as section 132 of the act lays that the Authorised Officer can enter any building and the place where the boos of the accounts are kept in case any search and survey is being conducted pursuant to the section 132 and the section 133A. These are the small precautions which should be followed.

Tax Audit

3. Clause 14; Reporting of the valuation of the raw materials

Sub Clause a of the clause 14 requires for the reporting of the closing stock valuation which includes the finished goods and raw materials valuation as per the section 145A which mandates that the valuation should be done as per the cost or the net realisable value whichever is lower. Clause b states that if there is any deviation from the prescribed method then its effect on the profit and loss should be evaluated.

 The main issue for the consideration is that as per the AS 2 the raw materials should be evaluated at the cost except in the circumstances as prescribed, but the section 145A mandates that the stock which includes the raw materials should be evaluated, so according to my submission if the value of the raw materials is below its cost then its effect on the profit and loss should be reported and if the same cannot be evaluated then it is advisable to qualify our report in the para 5 of the report. 

4. Clause 20(b): Reporting of the sums received from the employees.

  • Employees’ contribution received against ESIC & PF etc.: Section 36(1)(va) allowed as deduction if paid within the due date i.e. date specified under the relevant law. Only reporting to be done, not to show his view.
  • Payments which is not made within due dates but paid within grace period or before due date of filing of return of income are allowable. (319 ITR 306 – Alom Extrusions SC, 393 ITR 386, 101 Taxmann.com 192 , 321 ITR 508 etc.
  • Cases which are against the assesse on this ground (115 taxmann.com 340, 378 ITR 443, 409 ITR 225, 366 ITR 170) – mostly Gujarat and Kerala HCs.

5. Clause 21(a): Club Expenses

  • Not per se a disallowable expense. Business expenses to be allowed
  • CPC processes and adds it in the income.
  • It is advisable to add a note in the annexures.

6. Clause 21(a): Expenses for the penalty or the fine for the violation of the law.

  • Tax auditor while reporting under this clause is not required to express any opinion as to the allowability or otherwise of the amount of penalty or fine for violation of law.
  • This clause covers only penalty or fine for violation of law and not the payment for contractual breach or liquidator damages.
  • Details are to be given under this clause if the penalty, etc. are debited to profit & loss account, even if the assesee is contesting before the higher authorities.
  • If daily fine paid under TDS provisions, MCA late filing fees etc. will that have to be reported? No as it is not fine
  • GST late fees? No as compensatory payments.

7. Clause 21(h): Reporting of the section 14A disallowance.

  • Rule 8D is not automatic and recording satisfaction and finding incurrence of expenditure is necessary. (Maxopp Investments (402 ITR 640, Godrej & Boyce – 328 ITR 81, H.T.Media – 399 ITR 576).
  • Suo motu disallowance should have an objective basis with the proper reasoning.
  • No disallowance can be made if no exempt income. (Cheminvest 378 ITR 33, IL&FS 399 ITR 483, 372 ITR 694) – Circular no.5/2014 goes against the assesse

8. Clause 29B: Reporting of the section 56(2) (x).

  • Compensation received to settle a property dispute or the amount received for not contesting the probate of the will not be covered since the said amount is received for the consideration and will not be covered under the section 56(2) (x) (a) as discussed in the (Parvez Poonawala V ITO in 138 TTJ 673).
  • Whether right issues shares received at a discount to FMV price, can be considered as inadequate consideration? (Khoday Distilleries SC 307 ITR 312, Sudhir Menon HUF 148 ITD 260)
  • Whether the waiver of the loan can be covered in the clause of the section 5692)(x)(Mahindra and Mahindra Judgement in 404 ITR 1 (SC).

INTERPLAY OF THE SCHEDULE OI AND THE TAX AUDIT REPORT.

It needs to be taken care into consideration that the part OI schedule of the tax audit report needs to be filed cautiously since any mismatch in the same can lead to the additions done by the CPC and notices may be issued under the section 143(1)(a) for the proposed additions. In this article I will try to cover the proposed mismatches that should be filed cautiously which can lead to the smooth processing of the returns.

1. Part K of the clause 6 of the OI schedule.

This part coincides with the clause 20(b) of the tax audit report. Although in the tax audit report there is no reporting about the proposed disallowances but while filing the OI schedule it is important that the information coincides with the tax audit report since in the past it has been seen that many assesse are receiving the notices for the proposed disallowance under the section 36(1)(va), although one can take the view that in the audit report there is no intention to disallow the same by the accountant but the reporting is being only done but it is still highly debatable issue and there are various case laws on the same which has been mentioned above.

2. Part c of the clause 6 of the OI schedule

This part coincides with the clause 20(a) of the tax audit report and any disallowances made in the report needs to be mentioned in the OI schedule as well.

It needs to be taken care that all the other clauses in the part 6 of the schedule OI has to be filed form the financial statements of the assesse and for the IND AS assesse it is important to note that there may many disallowances as specified in section40(a)(13)  relating to the marked to the marked losses as mentioned in the section 36(1) (xviii) as IND-AS 109 requires all the investments to measure at the Fair Value Through P/l account which requires to be measured at every balance sheet date. 

3. Clause 7 of the OI schedule.

Tis schedule correlates with the clause 21(a) of the TAR relating to the expenses disallowable under the section 37. It needs to be taken care that all the expenses which is not reported in the TAR but otherwise not allowable under the section 37 like the CSR expenses needs to be reported from the information available in the financial statements in the part I of the clause 7 of the OI schedule.

4. Clause 8 of the OI schedule

This schedule correlates with the clause 21(b) and 21(c)(relating to the disallowance of the interest, commission etc.) of the TAR. Tax auditor needs to be mentioned the contraventions in the compliance of the provisions of the chapter VII-B, chapter VIII, sections 40(a) (iia) etc. The same reporting is done in the income tax return however ir needs to be mentioned Part B of the clause 8 which provides for the expenses which is disallowable in the previous year but otherwise allowable in the current is nowhere reported in the tax audit report. So the tax return preparer needs to carefully analyse the previous year tax audit report and ascertain that whether the contraventions in the previous year has been rectified in the current year or not. 

5. Part 9 of the OI schedule

This clause is directly related with the clause 21(d), 21(e), 21(f) and clause 23 of the TAR. All the disallowances under the section 40A needs to be reported from the tax audit report except the disallowances mentioned in the 40(A)(13) related to the excepted marked to marked losses. 

6. Part 11 of the OI schedule

This whole of the column needs to be filled from the clause 26 of the TAR. 

7. Clause 14, 15, 16 of the OI schedule

Clause 14: This clause deals with the amount of the tax chargeable under the section 41 of the act and needs to take the relevant figure from the clause 25 of the TAR. The recent judgement of the Mahindra and Mahindra in SC 404 ITR 1 clearly squares the issues relating to the taxability of the section 41(1) (a) of the act.

Clause 15: This relates to the disallowance to the prior period expenses and income and needs to be reported in the clause 27(b) of the TAR.

Clause 16: This relates to the disallowance under the section 14A of the income tax act and reported in the clause 21(h) of the TAR. Various issues and judicial proceedings related thereto has been discussed below.

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