Tax Audit u/s 44AB A study on the application of Relevant Accounting Standards Chinnsamy Ganesan FCA DISA(ICA) Presentation at National Conference on Direct.

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

Accounting Standards

Chinnsamy Ganesan FCA DISA(ICA)

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

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-à-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 1Statutory Accounts

year ended March 31, 2010

Case 2Statutory 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 ofCompanies (Accounting Standards) Rules 2006?

Any impact with the introduction ofRoadmap to IFRS?

The Notified standards by

and large follow the ICAI

standards except for

certain differences

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

ICAI standards would

remain applicable for non-

corporate entities

AS of ICAI Vs AS under CAR 2006

Relaxation mainly for disclosures and not for recognition and

measurement

Applicable Only to

NCEs

ApplicableOnly to

Companies

Three Levels

prescribed

Two Levels

prescribed

AS of ICAI CAR 2006

Applicability – an overview (CAR 2006)

Accounting Standards Non SMCs To SMCs

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

Care for applicability of AS

18

Applicability – an overview (NCEs)

Accounting Standards Level I Level II Level III

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

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 Company’s 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-à-vis Tax Audit

AS 1 “Disclosure of Accounting Policies”

Concept of prudence is not fully considered

Certain provisions/ write off not allowed as expenditure

AS 2 vis-à-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-à-vis Tax Audit

AS 7 “Accounting for Construction Contracts”

% completion method Vs completed contract method

Accounting for foreseeable future loss

Presumptive taxation u/s 44AD Present limit Vs limit proposed by DTC

AS 10 vis-à-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 criteria for Subsequent expenditure

AS 11 vis-à-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-à-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-à-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 Long-Term Investments to be provided for

If so provided not allowable under IT ActOnly on disposal

AS 15 vis-à-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-à-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-à-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-à-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-à-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-à-vis Tax Audit

AS 26 “Intangible Assets”

Amortisation over useful economic life

Retirement of intangibles to be fully charged off

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

Computer Software

AS 28 vis-à-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-à-vis Tax Audit

AS 29 “Provisions, Contingent Liabilities and Contingent Assets”

Legal Vs Constructive obligation

Provision towards Asset Retirement Obligation

AS 30,31 and 32 vis-à-vis Tax Audit

Financial Instruments Standards

Fair valuation

Mark to Market Losses

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

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

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

Common pitfalls in reporting

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