TAX AUDIT- TAX ISSUES

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TAX AUDIT- TAX ISSUES
BY DR. RAKESH GUPTA
FCA, FCS, AICWA, LL.B, Ph.d Ex- Member, Income
Tax Appellate Tribunal
C-8, EAST OF KAILASH, NEW DELHI-110065 PHONE
011-41625000 (Multilines) E-mail
consult_at_taxindia.net
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PAYMENT OF ESI/ EPF OTHERS U/S 43B

• EMPLOYERS AND EMPLOYEES CONTRIBUTION-DIFFERENT
  TREATMENT
• DELAYED PAYMENT BUT ON OR BEFORE THE DUE DATE OF
  FILING OF RETURN- AMENDMENT BY FINANCE ACT 2003-
  WHETHER TO HAVE RETROSPECTIVE EFFECT-KWALITY MILK
  FOODS LTD 100 ITD 199(CHENNAI)(SB)

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• ON OR BEFORE THE DUE DATES- GRACE PERIOD-258
  ITR 360(MADRAS)
• DUE DATE TO BE RECKONED FROM WHICH DATE- KANOI
  PAPER AND INDUSTRIES LTD VS ACIT 75 TTJ 448(CAL)
• INTEREST ON SALES TAX IS PART OF SALES TAX AND
  COVERED BY SECTION 43B- 260 ITR 218

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• INTEREST ON OUTSTANDING LOANS CONVERTED INTO
  LOAN IS EQUIVALENT TO PAYMENT AND NO DISALLOWANCE
  IS CALLED FOR U/S 43B- 79 TTJ 158(DEL)- CONTRARY
  VIEW 175 CTR 549(Madras)-NOW RETROSPECTIVE
  AMENDMENT BY FINANCE ACT 2006

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• EXCISE DUTY COLLECTED BUT DISPUTED AND HENCE NOT
  PAID- AMOUNT KEPT IN FD AND BANK GUARNTEE
  FURNISHED. IT IS NOT EQUIVALENT TO PAYMENT OF
  DUTY. SECTION 43B DISALLOWANCE JUSTIFIED- 261 ITR
  69(AT) (AHEMDABAD)/ 125 TAMAN 819(RAJ)
• SECTION 43B HAS GOT NO APPLICATION WHEN NO
  DEDUCTION WAS CLAIMED CIT VS INDIA CARBON LTD
  262 ITR 327(GAUHATI)

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• TDS
• TDS OUT OF SPECIFIED PAYMENTS TO PERSONS
  RESIDENT OUTSIDE INDIA OR NON RESIDENTS AND
  FOREIGNE COMPANIES IN INDIA- SECTION 195 AND
  SECTION 40(a)(i)

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• TDS OUT OF SPECIFIED PAYMENTS TO RESIDENTS-
  AMENDMENT BY FINANCE ACT 2004 BY INSERTING
  SECTION 40(a)(ia)
• MULTIFARIOUS CONSEQUENCES OF NON DEDUCTION AND
  NON PAYMENT-SECTION 201, 201(1A),221,271C,276B

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• SECTION 40A(2)
• APPLICABLE TO REVENUE EXPENDITURE ALONE
• IN APPLICABLE TO INCOME - GOODS SOLD TO
  ASSOCIATES AT LOWER THAN THE MARKET PRICE-SECTION
  40A(2) NOT APPLICABLE-123 ITR 592(MAD),139 ITR
  827(MP)

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• BURDEN TO PROVE UPON REVENUE-CIRCULAR 6P DT
  6-7-1968-BUT INITIAL EVIDENCE MAY BE LED BY
  ASSESSEE
• DISALLOWANCE ONLY OF EXCESSIVE AND NOT WHOLE OF
  THE EXPENSE
• RELATIONSHIP MUST BE ONE OUT OF THE SPECIFIED
  RELATIONSHIPS ONLY

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• SPECIFIC FINDING AS TO EXCESSIVENESS NECESSARY-
  117 ITR 569(SC)
• REASONABLENESS OR LEGITIMATE NEEDS OF THE
  BUSINESS TO BE VIEWED FROM THE POINT OF VIEW OF
  THE BUSINESSMAN-265 ITR 77(ALL)

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• SECTION 40A(3)
• CONSTITUTIONAL VALIDITY UPHELD BY THE APEX COURT
  IN ATTAR SINGH GURMUKH SINGH 191 ITR 667 IN VIEW
  OF RULE 6DD(j)
• CLAUSE (j) OF RULE 6DD ABOLISHED YET
  CONSTITUTIONAL VALIDITY UPHELD -239 ITR 687(AP)

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• GENUINE AND BONAFIDE TRANSACTIONS ARE ALSO HIT
  AFTER AMENDMENT
• REVENUE EXPENDITURE ALONE HIT AND NOT THE
  CAPITAL EXPENDITURE- PURCHASES ALSO COVERED-191
  ITR 667(SC)

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• ADVANCE PAYMENT FOR REVENUE EXPENDITURE ALSO
  COVERED-169 ITR 12 (RAJ)
• PAYMENT EXCEEDING RS 20000/- ALONE COVERED
• PAYMENT TO EMPLOYEES FOR SALARIES ALSO COVERED

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• SECTION NEGATIVELY WORDED SO TECHNICALLY IT
  COVERS BOOK ADJUSTMENTS AND TRANSFER ENTRIES
  ALSO-BUT EXCLUDED THROUGH NOTIFICATION NO. 624
  DATED 14.2.1969 71 ITR 93(st)

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• INDIVIDUAL PAYMENTS LESS THAN 20K BUT IN
  AGGREGATE EXCEED 20K-ALOO SUPPLY COMPANY 121 ITR
  680(ORISSA)
• DISALLOWANCE OF EXPENSE TO BE IN THE YEAR OF
  INCURRENCE OF EXPENDITURE
• WHEN INCOME IS ESTIMATED ON THE BASIS OF G.P.
  RATE, NO DISALLOWANCE U/S 40A(3) POSSIBLE-229 ITR
  229(ALL)

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• SECTION 269SS/269T
• (CORRESPONDING PENALTIES U/S 271D AND 271E)
• BACKGROUND OF INTRODUCTION
• CBDT CIRCULAR 387 DT 6.7.1984 AND 345 DT
  28.6.1982 EXPLAINING OBJECTIVES OF TAX EVASION

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• APPLICABLE TO LOANS AND DEPOSITS AND NOT ON
  CAPITAL
• RECENT DECISION OF JHARKHAND HIGH COURT IN THE
  CASE OF BHALOTIA ENGG WORKS LTD 275 ITR 399-SHARE
  APPLICATION MONEY RECEIVED IN CASH PARTAKES
  CHARACTER OF DEPOSIT
• CONTRA DECISIONS-52 ITD 504(Jp)-NO OBLIGATION TO
  REFUND SHARE APPLICATION MONEY-ESSENTIAL OF
  DEPOSIT NOT EXISTING

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• NEGATIVELY WORDED- TRANSFER ENTRIES AND BOOK
  ADJUSTMENTS LIABLE TO BE HIT BUT 88 TTJ 85
  (DELHI) LAYS THAT LOANS THROUGH BOOK ADJUSTMENTS
  ARE NOT IN MONEY AND HENCE SECTION 269SS NOT
  APPLICABLE-ALSO 89 TTJ 324(AHEMDABAD)
• GENUINENNESS OF LOANS AND DEPOSITS- WHETHER A
  CONSIDERATION-283 ITR 329 (MADRAS)-276 ITR
  638(PH)-263 ITR 487(GAUHATI)

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• DEFENCE UNDER SECTION 273B
• INTIATION WHETHER DURING THE COURSE OF
  ASSESSMENT
• INITIATION OF PENALTY RECOGNISED FROM WHICH
  DATE- RELEVANT ASPECT FOR LIMITATION-98 ITD
  200(CHD)(SB)

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• QUANTUM OF PENALTY-SEVERAL INTERPRETATIONS
  POSSIBLE
• TECHNICALITY OR VENIALITY WHETHER A GROUND OF
  DEFENCE

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• CONTINGENT LIABILITY
• PROVISION IN RESPECT OF A CLAIM DISPUTED BY
  ASSESSEE e.g. WAGE REVISION DEMANDS, CLAIMS BY
  CUSTOMERS ETC.
• LEAVE ENCASHMENT EXPENSE BASED ON LEAVE STANDING
  TO THE CREDIT OF THE EMPLOYEEWHETHER CONTINGENT
  OR FIRM- BHARAT EARTH MOVERS CASE IN 245 ITR
  428(SC)

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• WARRANTY BASED ON PAST FIGURES ALLOWABLE-VINITEC
  CORPORATION 278 ITR 337(DELHI)

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• SECTION 41
• ALLOWANCE OR DEDUCTION MADE AND ALLOWED
• BENEFIT OBTAINED IN CASH OR IN ANY OTHER MANNER
  OR BY WAY REMISSION OR CESSATION IN SUBSEQUENT
  YEAR

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• BURDEN TO PROVE IS ON REVENUE
• UNILATERAL WRITE BACK OF LIABILITY WHETHER
  AMOUNTS TO CESSATION OR REMISSION- SUGAULI SUGAR
  WORKS 236 ITR 518(SC) AND AMENDMENT FINANCE ACT
  1996
• ENLARGEMENT OF MEANING OF INCOME- T.V.SUNDERAM
  IYENGAR VS CIT 222 ITR 344(SC)

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• CREDITORS BALANCES LYING SINCE LAST SO MANY
  YEARS IMPLICATIONS-IN THE ABSENCE OF CONTRARY
  EVIDENCE, ADDITION NOT POSSIBLE-99 TTJ
  718(DELHI)-90 TTJ 776(CHANDIGARH)-125 TAXMAN
  179(AHD-TRIB)
• BAD DEBTS RECOVERED

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• SECTION 32
• COMPOSITE VALUE OF LAND AND BUILDING-VALUE TO BE
  BIFURCATED
• PUT TO USE-IMPLICATIONS
• ALLOWANCE- WHETHER MANDATORY OR DISCRETIONARY

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SECTION 37 CAPITAL EXPENDITURE PERSONAL
EXPENSES ADVERTISMENT CLUB EXPENSES PENALTY
FOR INFRACTION OF LAW OR OTHERWISE
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• DEDUCTION UNDER CHAPTER VIA
• MEANING OF THE WORD DERIVED- PANDIAN CHEMICAL
  262 ITR 278(SC)
• RESULTS OF TRADING AND MANUFACTURING TO BE
  AGGREGATED FOR DEDUCTION U/S 80HHC- IPCA
  LABORATORIES-BOMBAY HIGH COURT DECISION AFFIRMED
  BY APEX COURT

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• NETTING OF INTEREST RECIVED AND PAID BY AN
  EXPORTER- LALSONS ENTERPRISES 82 TTJ 1048
  (DEL)(SB)
• TWO DISTINCT BUSINESSES- SEPARATE BOOKS OF
  ACCOUNTS MAINTAINED- LOSS IN ONE AND PROFIT IN
  OTHER- WHETHER TO BE SET OFF FOR DEDUCTION U/S
  80HHC- CONTROVERSIAL ISSUE- DECISIONS BOTHWAYS

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• EXCISE AND SALES TAX NOT TO BE PART OF
  TURNOVER-SUDERSHAN CHEMICALS DECISION OF BOMBAY
  HIGH COURT
• AUDIT REPORT TO BE ENCLOSED WITH THE
  RETURN-WHETHER MANDATORY OR DIRECTORY
• DEDUCTION U/S 80-O- WHETHER ON GROSS OR NET

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• SECTION 40(b)
• METHOD OF VALUATION OF STOCKS- BRITISH PAINTS
  188 ITR 44

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• IMPLICATION FOR DEFAULT- PENALTY U/S 271B
• QUASI CRIMINAL PROCEEDINGS
• STRICT INTERPRETATION
• IN CASE OF AMBIGUITY, IT TO BE RESOLVED IN
  FAVOUR OF TAX PAYER
• SUSPICION CAN NOT BE GOOD PROOF

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• PRIOR TO 01.07.95 OBTAINING WITHIN SPECIFIED
  TIME- CONTROVERSY MORE OR LESS RESOLVED
  246ITR489(PH), 245ITR563(ALL),245ITR857(ALL)
• AFTER 01.07.95 FURNISHING BEFORE
  SPECIFIED DATE
• OBTAIN BEFORE SUBSTITUTED BY FURNISH BY
  WHETHER REPORT OBTAINED ON 31ST OCTOBER COULD BE
  SAID THAT IT WAS OBTAINED BEFORE. 62ITD106(ALL)

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• (B) REASONABLE CAUSE- A DEFENCE- SECTION 273B
• PLEADING TO BE MADE COMPREHENSIVELY ON FACTS
• BURDEN OF PROOF

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• BONAFIDE BELIEF-PLAUSIBILITY OF EXPLANATION AND
  NOT ANY FANTASTIC EXPLANATION
• IGNORANCE OF LEGAL PROVISION

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• TECHNICAL OR VENIAL BREACH THEORY
• ONLY 3CA/3CB/3CD FILED W/O BALANCE SHEET, PROFIT
  AND LOSS ACCOUNT-NATURE OF DEFAULT
• SOME INSTANCES OF REASONABLE CAUSE

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• DELAY IN OBTAINING STATUTORY REPORT
• NEGLIGENCE OF COUNSEL
• SICKNESS/DISPUTE/STAFF TURNOVER
• 271A VIS-À-VIS 271B- 77ITD 210 (PUNE),
  222ITR691(GAU)

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Thank You !