Chartered Accountants Association, Surat has made a representation on recent Inapt amendments in Income Tax Audit Report / From CD for AY 2018-19 vide CBDT Notification No. 33/2018 dated 20th July 2018 which are to come into effect from 20th August 2018. It highlighted following points- 1. Timely Availability of Forms and Utilities 2. Impermissible Avoidance Arrangements (GAAR) 3. GST Reconciliation of Total Expenditure 4. Demands Refunds under other Laws (Existing Clause), 5. Freedom of Auditors and 6. Hardships to Stakeholders.
Text of representation from Chartered Accountants Association, Surat on Inapt amendments in Tax Audit Report for AY 2018-19 is as follows:-
Greetings from Chartered Accountants Association, Surat…! As a part of its objectives, Chartered Accountant’s Association, Surat, a non-profit organization, works for the betterment of Chartered Accountancy profession, more specifically with respect to softer issues like better working conditions and standards for members of Chartered Accountancy profession, through representation like this. The present representation concerns around the ambiguous amendments which either need more clarification or need to be kept in abeyance until next assessment year.
Income Tax Forms, Schemas and utilities (either for returns or for Audit Reports) should be made available by the department at the beginning of the year. Needless to mention that it has to be an implied and assumed action by your department to provide the stakeholders the necessary documentation like forms, its schemas and utilities at the start of the assessment year. Also, needless to remind your department, the various instances in past, wherein various courts had to intervene into the matter for directing extension of time limits and the subsequent apologies from the top officials of the Finance Ministry, promising to ensure timely release of forms, schemas and utilities. One such Tweet is reproduced below for refreshing the memoirs of 2015-16:
However, presently the issue is not of extension of time Limit, but rather allowing the biggest stakeholders i.e. the Chartered Accountants to complete work on time and to be free on time.
Chartered Accountants should be provided with the most necessary document i.e Tax Audit Report for relevant assessment year on time, since the Audit Planning and part execution starts in the financial year itself. CAs, if provided with forms on timely manner, can complete the audits comfortably and in a proper manner. Several amendments at the middle of the year are always undesirable, when a period of almost 111 days out of 180 days (comprising almost 62%) of the allowable statutory time has elapsed.
Point No.30C of the revised Form 3CB states as follows:
(a) Whether the assessee has entered into an impermissible avoidance arrangement, as referred to in section 96, during the previous year? (Yes/No)
(b) If yes, please specify:‑
(ii) Nature of the impermissible avoidance arrangement:
(iii) Amount (in Rs.) of tax benefit in the previous year arising, in aggregate, to all the parties to the arrangement:”;
Sec.96 of the Act states as follows:
(1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide
(2) An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.
The above clause requires an auditor to report the impermissible avoidance arrangements as is referred to in section 96. The provisions of section 96 are also reproduced above.
The above clause requires an auditor to report the impermissible avoidance arrangements as is referred to in section 96. The provisions of section 96 are also reproduced above. From the provisions it may be noticed that the “IMPERMISSIBLE AVOIDANCE ARRANGMENT” cannot be decided on the basis of a mechanical formula, it would require subjective judgment of an Income Tax Authority. A Chartered Accountant can report any transaction from the books of account, which may or may not be an impermissible avoidance arrangement, but to ask the assessment or decision in a categorical manner on the permissibility or impermissibility on a transaction; is out of the purview of an auditor’s scope of work. Thus it would be desirable that this clause may be suitably amended keeping in view the above or this clause may be altogether deleted.
Point No.44 relating to breakup of Total Expenditure according to applicability of GST needs to be revisited on the following grounds:
(i) This clause is ambiguous and its purpose is not clear. The auditors ought to be knowing the purpose of the intended reporting. Apparently, it seems open-ended and vague.
(ii) As the GST was implemented from 1st of July 2017; the period of GST regime in the FY 2017-18 is of only 9 months. In the light of this fact, the reporting requirement in the column (2), which require reporting of expenditure “DURING THE YEAR” raises further issues like:
(a) Total Expenditure incurred during the year includes expenditure for 12 months (including Pre-GST Expenditure i.e. under VAT, Excise and Service Tax regime), whereas information pertaining to expenditure with entities registered under GST (columns (3) to (6)), if compiled would only be from a sub-set of 9 months. What exactly is needed to be reported in the said table is not clear.
(b) Column (2) of Table given in Point No.44 of Form 3CD states “Total amount of Expenditure incurred during the year’, which is unclear in terms of what items are to be included or excluded. A similar table can also be found in Schedule GST, after recently amended IT Return – ITR6 was The said Schedule states “Total amount of Expenditure during the year (aggregate of expenditure reported at items 6, 8 to 35, 37 & 38 of Part -A-P&L / P&L – Ind AS)”. However, the said table is only to be filed by Companies not required to be audited u/s 44AB.
(c) The term Total Expenditure is not clear. Whether it includes capital goods or not.? At the time of reconciliation of total expenditure with category-wise breakup of GST registered entities, with whom the assessee has transacted, it would generate an absurd data.
Hence a Clarification on the aforesaid matters is required at the earliest.
(iii) Accounting Systems (Whether of any large, medium or small organisations), are presently not equipped to generate necessary details required by the said table of GST Reconciliation. As a result, details required to be compiled for Tax Audit Report are not available to the auditors.
(iv) Format of the said table is faulty, as it would require items like salary, electricity, fuel to be reported under “Other Unregistered entities”, whereas they are Non-GST Supplies and should be reported under a separate column of Non-GST Supplies, which requires suitable modification of the tabular format.
Considering the above, it seems, that Point No.44, would create undue hardship for the stakeholders to adapt in, and hence should be postponed till next assessment year i.e. AY 2019-20.
In the existing Form No. 3CD, Point No.41 requires reporting of demands / refunds under other laws. However, such information is very privy to the assessee ad is not openly available to the Auditor. In our opinion, such task is open ended and vast to cover various laws. Hence, we represent and recommend that such task be removed from Tax Audit Report, but instead should be inserted in the IT Return being verified and confirmed by the assessee.
The existing reporting requirements of Java Utility of the Tax Audit Report Form 3CD, enforces an unwritten law by offering only “Yes” or “No” thereby restricting freedom of auditors to report items needed to be reported in an elaborated manner or in a conditional manner. Hence, an open text field should be allowed for auditor to write the details, besides simple “Yes” or “No”.
We appreciate and welcome the various amendments especially related to reporting of deemed transactions u/s 56(2)(ix), 56(2)(x) and 2(22)(e), which are an appropriate means to align the Tax Audit procedures with the denture of existing law. However, on account of amendments made vide Notification No. 33/2018/F.No. 370142/9/2018-TPL the following issues would arise for the stakeholders:
(i) Data to be compiled and presented in the various tables of the revised 3CD requires adaptation at the basic level of accounting. Since, the assessees are yet to cope up from the recently adapted GST Accounting Standards, an immediate change after the end of the financial year is not only undesirable but also impracticable.
(ii) Auditors have to plan their audit (including training of staff, preparation of audit plan and programme) before execution of the audit. The Audit plan for AY 2018-19 starts well before in 2017-18. For an effective audit, even the auditees are required to be intimated for submission of data which are further compiled in the Tax Audit report. However, due to implementation of revised format at the middle of the year,
(a) efficacy of audit is reduced;
(b) chances of incorrect information being compiled in the tax audit report is increased;
(c) confusion arises amongst auditees and auditors, who have already issued and relied upon management representation letters, respectively;
(d) liability of the auditors increase on account of the above.
(iii) many assessees have already submitted and filed their Tax Audit reports in existing formats. Hence, at this juncture, statistical data compiled from their filing would not yield appropriate and relevant results for the government. Thus, to keep uniformity in analysis, TAR amendments should be postponed and made applicable from next assessment year i.e. AY 2019-20.
We hope, our representation would have appraised you in light of various hardships faced by the stakeholders, and are also hopeful, that you would do justice to our grievances.