Issues in Tax Audit u/s 44 AB

1
Issues in Tax Audit u/s 44 AB
NIRC of ICAI On 19th September 2009 At Hotel
Crown Plaza New Delhi

• CA Rajiv Jain

2
Section 44 AB

• Every person--
• carrying on business shall, if his total sales,
  turnover or gross receipts, as the case may be,
  in business exceed or exceeds forty lakh rupees
  in any previous year or
• carrying on profession shall, if his gross
  receipts in profession exceed ten lakh rupees in
  any previous year or
• carrying on the business shall, if the profits
  and gains from the business are deemed to be the
  profits and gains of such person under section
  44AD or section 44AE or section 44AF or section
  44BB or section 44BBB , as the case may be, and
  he has claimed his income to be lower than the
  profits or gains so deemed to be the profits and
  gains of his business, as the case may be, in any
  previous year,
• . report by an accountant in the form
  prescribed under this section.

3
Business

• S 2(13) Business includes any trade, commerce,
  or manufacture or any adventure or concern in the
  nature of trade, commerce or manufacture.
• The word business is one of wide import and it
  means activity carried on continuously and
  systematically by a person by the application of
  his labour or skill with a view to earn income.
  The expression business does not necessarily mean
  trade or manufacture only- Barendra Prasad Roy
  v ITO 1981129 ITR 295 (SC).

4
Profession

• Section 2 (36)Profession to include vocation.
• Profession is a word of wide import and includes
  vocation which is only a way of living.-CIT v.
  Ram Kripal Tripathi 1980125 ITR 408 (All).
• Whether a particular activity can be classified
  as business or profession will depend on the
  facts and circumstances of each case. The
  expression profession involves the idea of an
  occupation requiring purely intellectual skill or
  manual skill controlled by the intellectual skill
  of the operator, as distinguished from an
  operation which is substantially the production
  or sale or arrangement for the production or
  sale of commodities.- CIT vs. Manmohan Das
  (Deceased) 1966 59 ITR 699 (SC).
• The following have been listed out as profession
  in section 44AA (rule 6F) and notified there
  under (Notifications No. SO-17 (E) dated 12.1.77,
  No. SO 2675 dated 25.9.1992 and No. So 385(E)
  ,dated 4.5.2001)
• Accountancy, Architectural, Authorised
  Representative, Company Secretary, Engineering,
  Film Artists/Actors, Camera man, Director,
  Singer, Story Writer, Etc., Interior Decoration,
  Legal, Medical, Technical Consultancy,
  Information Technology

5
Whether Business or Profession

• Advertising Agent.
• Clearing, Forwarding and Shipping agents CIT V.
  Jeevanlal Lallubhai Co, 1994 206 ITR 548
  (Bom).
• Couriers.
• Insurance agent.
• Nursing Home. 135 ITR 146, 90 ITD 235
• Stock and share broking and dealing in shares and
  securities-CIT v. Lallubhai Nagardas Sons
  1993 204 ITR 93 (Bom).
• Travel agent.

6
Sales - Turnover

• Computation of Specified Limit of Rs 40 Lacs
• Excise Duty/ Sales tax
• Cash Discount
• Rebate and Discount
• Sale return.
• Sale of Fixed Assets
• Sale of Investment.
• Sales by Consignment Agent-(Circular 452,
  17-3-86).
• Speculative (Share Commodity).
• Derivatives-Future/Option transactions.
• Delivery Based Share Transactions.

7
Speculation Transaction 43(5)

• It means a transaction, in which a contract for
  the purchase or sale of any commodity, including
  stocks and shares, is periodically or ultimately
  settled otherwise than by the actual delivery or
  transfer of the commodity or scrips.

8
Derivatives Exempted from Speculative Transaction
Definition

• Trading carried electronically on screen based
  system
• Through stock broker registered with SEBI
• by banks or MF on a recongised stock exchange
• Supported by time stamped contract note
  indicating Unique Client Identity No and PAN

9
Determination of Turnover Speculative vs
Derivatives

• Speculative
• The total of favorable and unfavorable
  differences shall be taken as turnover.
• Derivatives
• The total of favorable and unfavorable
  differences shall be taken as turnover.
• Premium received on sale of options is also to be
  included in turnover.
• In respect of any reverse trades entered, the
  difference thereon, form part of the turnover.

10
Capital Gains Vs. Business

• Depends on facts and circumstances of each case
  taking into consideration nature, frequency and
  volume of transaction.
• Landmark Judgments
• CIT v. P.K.N. and Co. Ltd. (1966) 60 ITR 65 (SC).
• Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242
  (SC).
• CIT v. Sutlej Cotton Mills Supply Agency (1975)
  100 ITR 706 (SC).
• Venkataswami Naidu Co.(G) v. CIT (1959) 35 ITR
  594 (SC).

11
Board Circular No. 4/2007, dated 15-6-2007

• It is possible for tax payer to have two
  portfolios, i.e., an investment portfolio
  comprising of securities which are to be treated
  as capital assets and a trading portfolio
  comprising of stock in trade which are to be
  treated as trading assets. Where an assessee has
  two portfolios, the assessee may have income
  under both heads i.e., capital gains as well as
  business income.

12
Gross receipts

• Instances of Receipts forming part of Gross
  Receipts
• Duty Draw Back
• Commission - Brokerage
• Job Work
• Sale of License
• Foreign Exchange surplus/ difference on Export
  Sales
• Surplus on reimbursement e.g. packing forwarding,
  freight etc.
• Advance receipt from customer forfeited
• Interest Income if assessable as business income
• Income of a partner from a partnership firm such
  as remuneration and interest on capital account.

13
Gross receipts

• Instances of receipts not forming part of Gross
  Receipts
• Rental Income.
• Reimbursement of expenses and other charges to a
  clearing / consignment agent.
• Amount received by a traveling agent for
  reimbursement of expenses. Except a travel agent
  engaged in Package Tour.
• Write Back of Provisions Recoveries from Bad
  Debts.
• Principle for ascertaining whether reimbursement
  is part of gross receipt or not.
• Limits of Business and profession- independent or
  interdependent.

14
Assessee having Exempt income whether required to
get its accounts audited u/s 44 AB

• Trust / Association Exempt u/s 10(21), 10(23A),
  10(23B), 10(23BB), 10(23C) and Section 11
• Agriculturist

15
Section 11.

• Section 11 (4) For the purposes of this section
  "property held under trust includes a business
  undertaking so held, and where a claim is made
  that the income of any such undertaking shall not
  be included in the total income of the persons in
  receipt thereof, the Assessing Officer shall have
  power to determine the income of such undertaking
  in accordance with the provisions of this Act
  relating to assessment and where any income so
  determined is in excess of the income as shown in
  the accounts of the undertaking, such excess
  shall be deemed to be applied to purposes other
  than charitable or religious purposes.
• Section 11 (4A) Sub-section (1) or sub-section
  (2) or sub-section (3) or sub-section (3A) shall
  not apply in relation to any income of a trust or
  an Institution, being profits and gains of
  business, unless the business is incidental to
  the attainment of the objectives of the trust or,
  as the case may be, institution, and separate
  books of account are maintained by such trust or
  institution in respect of such business.

16
Trust Engaged in business

• A business whose income is utilised by the trust
  or the institution for the purposes of achieving
  the objectives of the trust or the institution
  is, surely, a business which is incidental to the
  attainment of the objectives of the trust.
• (247 ITR 785 THANTI TRUST SC, 107 ITD 403 CIT V.
  Beer Shiva Educational Social Welfare Society,
  Haldwani, 105 ITD 29 Samaj Kalyan Parishad,
  Modinagar v. ITO.)
• Section 2(15) defining Charitable Purpose
  amended w.e.f. 1-4-2009
• Provided that the advancement of any other object
  of general public utility shall not be a
  charitable purpose, if it involves the carrying
  on of any activity in the nature of trade,
  commerce or business, or any activity of
  rendering any service in relation to any trade,
  commerce or business, for a cess or fee or any
  other consideration, irrespective of the nature
  of use or application, or retention, of the
  income from such activity

17
6G.Report of audit of accounts to be furnished
under section 44AB.
Rule 6G

• (1) The report of audit of the accounts of a
  person required to
• be furnished under section 44AB shall,-
• (a) in the case of a person who carries on
  business or profession and who is required by or
  under any other law to get his accounts audited,
  be in Form No.3CA
• (b) in the case of a person who carries on
  business or profession, but not being a person
  referred to in clause (a), be in Form No.3CB.
• (2)The particulars which are required to be
  furnished under section 44AB shall be in Form
  No.3CD.

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Audit Report Form 3CB

• We have examined the BS PL of XXXX. .
• We certify that the BS PL are in agreement with
  books maintained at the head office and
  .branches.
• We report the following observations/comments/disc
  repancies/ inconsistencies We have taken into
  consideration the audit report and the audited
  statement of accounts, and particulars received
  from auditors of the branches not audited by us
• Subject to above
• We have obtained all the information and
  explanations which to the best of our knowledge
  and belief were necessary for the purpose of the
  audit.
• In our opinion proper books of accounts have been
  kept by the assessee so far as appears from our
  examination of the books.
• 3CB..Contd..

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3CB Contd..

• In our opinion and to the best of our information
  and according to the explanations given to us,
  the said accounts, read with notes thereon, give
  a true and fair view
• in the case of balance sheet, of the state of
  affairs 31st March.. And
• in the case of profit and loss account, of the
  profit that date.
• The statement of particulars required to be
  furnished under section 44AB is annexed herewith
  in Form No 3CD.
• In our opinion and to the best of our information
  and according to the explanations given to us,
  the particulars given in Form No. 3CD and the
  Annexure thereto are true and correct.

20
True and Fair view

• Framework for Preparation and Presentation of
  financial statements issued by ICAI.
• Financial Statements are frequently described as
  showing a true and fair view of the financial
  position, performance and cash flows of an
  enterprises. Although this framework does not
  deal directly with such concepts, the application
  of the principal qualitative characteristics and
  of appropriate accounting standards normally
  result in financial statements that convey what
  is generally understood as true and fair view of
  such information.

21
AAS-28 The Auditors Report on Financial
Statements
22
Applicability of Accounting Standards

• Issued by the ICAI
• It is hereby clarified that the mandatory
  accounting standards also apply in respect of
  financial statements audited u/s 44AB of the
  Income Tax Act, 1961. Accordingly, the members
  should examine compliance with the mandatory
  accounting standards when conducting such audit.
• (Published in The Chartered Accountant Journal,
  August 1994.)
• Audit Procedures - AAS SAP - Peer Review - ASI
• Issued u/s 145 of the I.T.Act

23
Particulars of form 3CD
Practical Issues

• CA Rajiv Jain

24

Clause 12A- Conversion of Capital Asset into
Stock in Trade at fair market value Section 45(2)

• Give the following particulars of the capital
  asset converted into stock-in-trade -
• (a) Description of capital asset,
• (b) Date of acquisition
• (c) Cost of acquisition
• (d) Amount at which the asset is converted into
  stock-in-trade
• The particulars to be stated are required to be
  furnished with reference to the previous year in
  which the conversion has taken place.
• The taxability of capital gains or business
  income arising from such deemed transfer is not
  required to be reported.
• The legislation has not visualized the situation
  where stock in trade is to be converted into
  capital asset. In the absence of a specific
  provision, the formula which is favorable to
  assessee should be accepted. (ITA 6374/MUM/2004,
  ACIT v Bright Star Inv P Ltd)

25
Reporting of treatment of Excise Duty, VAT etc

• Clause 12
• 12(a) Method of valuation of closing stock
  employed in the previous year
• (b) Details of deviation, if any, from the
  method of valuation prescribed under section
  145A, and the effect thereof on the profit or
  loss.
• Clause 21 Residuary note
• State whether sales tax, customs duty, excise
  duty or any other indirect tax, levy, cess,
  impost etc. is passed through the profit and loss
  account.
• Clause 22(a)
• 22. (a) Amount of Modified Value Added Tax
  credits availed of or utilised during the
  previous year and its treatment in the profit and
  loss account and treatment of outstanding
  Modified Value Added Tax credits in the accounts.

26
Section 145A v/s AS-2 (ICAI)

• S-145 A Notwithstanding anything to the contrary
  contained in section 145, the valuation of
  purchase and sale of goods and inventory for the
  purposes of determining the income chargeable
  under the head "Profits and gains of business or
  profession" shall be
• (a) in accordance with the method of accounting
  regularly employed by the assessee and
• (b) further adjusted to include the amount of
  any tax, duty, cess or fee (by whatever name
  called) actually paid or incurred by the assessee
  to bring the goods to the place of its location
  and condition as on the date of valuation.
• Explanation.--For the purposes of this section,
  any tax, duty, cess or fee (by whatever name
  called) under any law for the time being in
  force, shall include all such payment
  notwithstanding any right arising as a
  consequence to such payment.
• AS-2 ICAI Valuation of Inventory
• Cost of Purchase
• 7. The costs of purchase consist of the purchase
  price including duties and taxes (other than
  those subsequently recoverable by the enterprise
  from the taxing authorities), freight inwards and
  other expenditure directly attributable to the
  acquisition. Trade discounts, rebates, duty
  drawbacks and other similar items are deducted in
  determining the costs of purchase.
• Cost of Inventories
• 6. The cost of inventories should comprise all
  costs of purchase, costs of conversion and other
  costs incurred in bringing the inventories to
  their present location and condition.
• Exclusive Method for valuation of Purchases
  resulting in exclusive method for valuation of
  inventory.

27
Section 145A/ Service Tax/ 43B

• Service Tax Charged in bills.
• Payment not received till the date of filing of
  ITR as such no liability to pay service tax.
• Mercantile System of accounting followed
• Disallowance u/s 43B ?
• ACIT V Real Image Media Tech P Ltd (Chennai) 114
  ITD 573
• 145A does not apply to service tax.
• If Service Tax not credited to P L no
  expenditure is claimed.
• If no expenditure is claimed - No disallowance
  u/s 43B

28
ASI-14 wrt AS-9-Revenue Recognition- Published
Aug-06

• ASI-14
• 2. The amount of turnover should be disclosed in
  the following manner on the face of the statement
  of profit and loss
• Amount
• Turnover (Gross) XXXX
• Less Excise Duty XXXX
• Turnover (Net) XXXX
• 3. The amount of excise duty to be shown as
  deduction from turnover as per paragraph 2 above
  should be the total excise duty for the year
  except the excise duty related to the difference
  between the closing stock and opening stock. The
  excise duty related to the difference between the
  closing stock and opening stock should be
  recognised separately in the statement of profit
  and loss, with an explanatory note in the notes
  to accounts to explain the nature of the two
  amounts of excise duty.

29
Presentation of excise duty and sales in Profit
Loss Account as per ASI-14/AS-9 ICAI
Sales Basic Rs 1200/- Excise Duty Rs 192/-
Gross Sales Rs 1392/-
30
Exclusive Method v Inclusive Method vis a vis Raw
Material
Opening Stock Basic Rs 200 Excise
Rs 32 Total Rs 232 Purchases Basic
Rs 1000 Excise Cenvat Rs 160 Total
Rs1160 Closing Stock Basic Rs 400 Excise
Rs 64 Total Rs 464

• Valuation of Raw Material (purchases, consumption
  and stock)

31
Valuation of Finished Goods lying in bonded house

• Finished Goods in bonded House
• Opening Stock Basic Rs 100 Excise
  Rs 16 Total Rs 116
• Closing Stock Basic Rs 250 Excise
  Rs 40 Total Rs 290

32
Shortcoming of inclusive method u/s145A

• - Cumbersome calculations
• - Guidance Note CENVAT inclusive method
  
• withdrawn w.e.f 1-4-1999.
• - Contradictory to mandatory AS-2
• - Disallowance u/s 43B
• Point at which excise duty is incurred in
  respect of Finished Goods lying in bonded house
  2007 14 SOT 475 (All) Shyam Biri Works Ltd. V.
  Asst. Commissioner of income tax, Allahabad

33
Suggested reporting - Exclusive method under
respective clauses

• Clause 12(b)
• The excise duty and VAT in respect of inventory
  consisting of finished goods lying in bonded
  house is neither debited to the profit and loss
  account nor considered for valuation of
  inventory.
• The value of excise duty in respect of Inventory
  consisting of raw material is neither debited to
  the profit and loss account nor considered for
  valuation of inventory.
• The entries of excise duty are accounted in the
  books through separate account which is passed
  through the profit and loss account read with
  Clause 21 Residuary Note.
• The entries of VAT are accounted in the books
  through separate account which is not passed
  through the profit and loss account read with
  Clause 21 Residuary Note.
• The above accounting treatment has no impact on
  current years profit or loss.
• Clause 21 Residuary note
• Refer para 12(b). Further Rs 192/- the amount
  of excise duty on sales is debited to Excise
  Duty on sales which is reduced from gross sales
  turnover in the Profit Loss account.

34
Excise Duty

• Clause 22(a)
• Modified Value Added Tax credits (cenvat credits)
• Rs Nil- Opening Balance
• Rs 160/- Credit availed is reduced from the cost
  of purchases.
• Rs Nil Credit availed is reduced from cost of
  capital asset.
• Rs 160/- credit utilized for payment of excise
  duty on sales is debited to Excise Duty A/c which
  is ultimately reduced from sales in the Profit
  Loss account.
• Rs Nil Closing Balance recognized as Balance
  Recoverable
• PLA
• Rs32/-, the excise duty on sales paid through PLA
  is debited to Excise Duty A/c which is ultimately
  reduced from sales in the Profit Loss account
• Excise Paid Finished Goods- Sales through depot
• Ratios of special bench 107 ITD 343 (CHD) DCIT V
  GLAXO SMITHCLINE

35
Clause 17 (e)

• Clause 17 (e) Penalty
• Explanation to s 37 -For the removal of doubts,
  it is hereby declared that any expenditure
  incurred by an assessee for any purpose which is
  an offence or which is prohibited by law shall
  not be deemed to have been incurred for the
  purpose of business or profession and no
  deduction or allowance shall be made in respect
  of such expenditure.
• 201 ITR 684 Prakash Cotton SC, 205 ITR 163
  Ahemadabad Cotton.
• Penalty is required to be examined as per the
  provisions of the relevant statue notwithstanding
  the nomenclature. If the impost is compensatory
  in nature, it is to be allowed, however, if it is
  penal in nature it is to be disallowed.

36
Clause 17 (f)

• Clause 17 (f) 40(a)
• Deduction of TDS at lower rates or non deduction
• STT up to AY 2008-09
• FBT if shown above the line for MAT
• Wealth Tax

37
Clause 17 (f) Section 40(a)(ia)

• Interest u/s 193 or 194A, Payment to
  Contractors/sub-contractors u/s 194C, Commission
  or brokerage u/s 194H, Rent u/s 194-I, Fees for
  technical/ professional services u/s 194J,
  Royalty (Expl 2 s 9(1)(vi).
• In case where the assessee submits that the tax
  is not required to be deducted on any payment
  under clause (ia), the tax auditor may exercise
  his judgment in the light of applicable laws and
  report accordingly about the compliance of this
  provision.
• Inadmissible if -
• Tax is not deducted at all.
• Tax was deductible and was so deducted during the
  month March but not paid on or before the due
  date of filing of return.
• Tax was deductible (and was so deducted) during
  the month March but not paid on or before the
  due date of filing of return.
• In any other case i.e (Tax deducted from April to
  Feb) TDS is not paid up to 31st March.
• Query Tax deductible in April to Feb but
  deducted in March and paid after 31st March
  before due date of filing of return of income.

38
Clause 17 (i) Section 14A

• Deduction inadmissible u/s14A in respect of the
  expenditure incurred in relation to income which
  does not form part of the total income(
  Subsection 1).
• The AO, if he is not satisfied with the claim of
  the assessee, shall determine the amount of
  expenditure incurred, in relation to income which
  does not form part of the total income in
  accordance with method prescribed under rule 8D
  (w.e.f. 24-3-2008), ( Subsection 2).
• the expenditure which the AO seeks to disallow
  under s. 14A should be actually incurred and so
  incurred with a view to producing non-taxable
  income (101 TTJ 369, ACIT vs Eicher Limited.)
• Rule 8D w.e.f. 24-3-2008 Method for determining
  amount of expenditure in relation to income not
  includible in total income.
• 8D. (1) Where the Assessing Officer, having
  regard to the accounts of the assessee of a
  previous year, is not satisfied with
• (a) the correctness of the claim of expenditure
  made by the assessee or
• (b) the claim made by the assessee that no
  expenditure has been incurred in relation to
  income which does not form part of the total
  income under the Act for such previous year,he
  shall determine the amount of expenditure in
  relation to such income in accordance with the
  provisions of sub-rule (2).

39
Clause 17 (i) Rule 8D Determination

• (2) The expenditure in relation to income which
  does not form part of the total income shall be
  the aggregate of following amounts, namely
• (i) the amount of expenditure directly relating
  to income which does not form part of total
  income
• (ii) in a case where the assessee has incurred
  expenditure by way of interest during the
  previous year which is not directly attributable
  to any particular income or receipt, an amount
  computed in accordance with the following
  formula, namely
• A x B/C
• A amount of expenditure by way of interest
  other than the amount of interest included in
  clause (i) incurred during the previous year
• B the average of value of investment, income
  from which does not or shall not form part of
  the total income, as appearing in the balance
  sheet of the assessee, on the first day and the
  last day of the previous year
• C the average of total assets as appearing in
  the balance sheet of the assessee, on the
  first day and the last day of the previous year
• (iii) an amount equal to one-half per cent of
  the average of the value of investment, income
  from which does not or shall not form part of the
  total income, as appearing in the balance sheet
  of the assessee, on the first day and the last
  day of the previous year.
• 3. For the purposes of this rule, the 'total
  assets' shall mean, total assets as appearing in
  the balance sheet excluding the increase on
  account of revaluation of assets but including
  the decrease on account of revaluation of assets.
•  

40
Clause 17(m)

• The auditor to compute the amount inadmissible
  under the proviso to section 36(1)(iii).
• Interest paid, in respect of capital borrowed
  for acquisition of an asset or extension of
  existing business or profession (whether
  capitalized in the books of account or not) for
  any period beginning from the date on which the
  capital was borrowed for acquisition of the asset
  till the date on which such asset was put to use,
  shall not be allowed as a deduction.

41
Clause 17 (A)

• 17A. Amount of interest inadmissible under
  section 23 of the Micro, Small and
  Medium Enterprises development Act, 2006
  (NOTIFICATION NO. 36/2009, DATED 13-4-2009)
• THE MICRO, SMALL AND MEDIUM ENTERPRISES
• DEVELOPMENT ACT, 2006
• 23. Interest not to be allowed as deduction from
  income.- Notwithstanding anything contained in
  the Income-tax Act, 1961, the amount of interest
  payable or paid by any buyer, under or in
  accordance with the provisions of this Act, shall
  not, for the purposes of computation of income
  under the Income-tax Act, 1961, be allowed as
  deduction.

42
Employer Contribution towards E.S.I. P.F.

• Clause 21(B)
• In respect of any sum referred to in clauses (a),
  (b), (c), (d), (e) or (f) of section 43B, the
  liability for which was incurred in the previous
  year and was
• (a) paid on or before the due date for furnishing
  the return of income of the previous year under
  section 139(1)
• (b) not paid on or before the aforesaid date.
• Second proviso to clause 43B deleted w.e.f. AY
  2004-05

43
Employee Contribution towards E.S.I. P.F.

• Clause 16 (b)
• Any sum received from employees towards
  contributions to any provident fund or
  superannuation fund or any other fund mentioned
  in section 2(24)(x) and due date for payment and
  the actual date of payment to the concerned
  authorities under section 36(1) (va).
• Provisions of Section 43B which is applicable in
  respect of the Employers Contribution, is quite
  different than the provisions of section
  36(1)(va) which is applicable in case of the
  employees contribution. JCIT v ITC Ltd. (2008)
  299 ITR(AT) 341 (Kol) dated 7-9-2007
• Contrary Prevailing View
• Now as per the present provisions of section 43B
  the payment made by the employer towards
  contribution of PF, ESI, and other welfare funds
  are allowable if the same are paid before filing
  the return of income. Now no disallowance of such
  payment would be made even if the same are made
  beyond the due dates prescribed in section
  36(1)(va) ADD CIT v Vistas RRB (India) Ltd ,92
  ITD 1 (Delhi)
• The view of the Tribunal deserves to be sustained
  as it is no longer res integra in view of the
  decision of the SC in the case of CIT v Vinay
  Cement 213 ITR 268 which was followed by DHC in
  CIT v Dharmender Sharma 297 ITR 320.CIT v P M
  Electronics Ltd (313 ITR 121 Delhi dated
  3-11-2008)
• Also See C IT v M. N. Chari. 310 ITR 445 (Kar),
  CIT v. Sabari Enterprises 298 ITR 141 (KOL)

44
Clause 20-22(b)

• Clause 20 Profit u/s 41
• Remission or cessation of trading liability.
• Recovery from Bad Debts
• Clause 22(b) Prior Period items.
• Income/expenditure to be put to tax as per the
  accounting method regularly followed.
• (Sanghi Motors 187 ITR 703)

45
Clause 25(b) - Change in shareholding of the
company and carry forward of the losses u/s 79 of
the Act.

• Business loss cannot be carried forward and set
  off in the previous year in which a change in
  shareholding takes place in case of a company in
  which public are not substantially interested ,
  if on the last day of the previous year in which
  the change in shareholding took place and on the
  last day of the previous year in which the loss
  was incurred, the shares of the company carrying
  not less than 51 of the voting power were not
  beneficially held by the same persons.

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Clause 26-Section wise detail of deduction
admissible under Chapter VIA

• This requirement restricted to the items
  appearing in the books of A/c audited by the
  assessee e.g. only for a branch in case of branch
  audit.
• Where tax auditor is not aware of the gross total
  income of the assessee (due to return not
  prepared before tax audit/ audit only of a unit
  or branch ), suitable note for the same is also
  required as deduction can not exceed gross total
  income.

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Clause 27 TDS

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Unresolved Issues 40 A(3)- Third Party Payments
- Transfer of Balances. w.e.f 13-7-2006 after
Amendment Act, 2006

• Reporting under Clause 17(h)
• 40A (3) .Second Proviso
• Provided further that no disallowance
  under this sub-section shall be made where any
  payment in a sum exceeding twenty thousand rupees
  is made otherwise than by an account payee cheque
  drawn on a bank or account payee bank draft , in
  such cases and under such circumstances as may be
  prescribed, having regard to the nature and
  extent of banking facilities available,
  considerations of business expediency and other
  relevant factors.
• Rule 6DD
• d) where the payment is made by way of
  adjustment against the amount of any liability
  incurred by the payee for any goods supplied or
  services rendered by the assessee to such payee.
• 269T.Mode of repayment of certain deposits.
• No branch of a banking company or a co-operative
  bank and no other company or co-operative society
  and no firm or other person shall repay any loan
  or deposit made with it otherwise than by an
  account payee cheque or account payee bank draft
  drawn in the name of the person who has made the
  loan or deposit if- .

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Thanks

• CA Rajiv Jain