BASICS OF TAX AUDIT

Tax audit is applicable to Every person, --

a) carrying on business shall, if his total sales, turnover or
gross receipts, as the case may be, in business exceed or
exceeds one crore rupees* in any previous year; or
b) carrying on profession shall, if his gross receipts in
profession exceed twenty-five lakhs rupees* in any previous
year.
Chartered Accountant has to furnish tax audit report before tax authority in
prescribed form as follows -

FORM 3CA-
 If a person carrying business or profession and their book of account
are required to audited any law, Form 3CA should be chosen

FORM 3CB –
 If a person carrying business or profession and their book of account
are not required to audited any law, Form 3CB should be chosen.

FORM 3CD-
 Form 3CA/3CB shall be accompanied with Form 3CD where Prescribed
particulars.
 The tax auditor is required to give his opinion whether the
prescribed particulars furnished by the assesse are true and correct,
subject to observations and qualifications, if any.
 This Form is a statement of particulars required to be furnished under
section 44AB. It comprises of 41 clauses.
 IMPORTANT CLAUSES OF FORM-3CD

CLAUSE 18 –
Particulars of depreciation allowable as per the Income-tax Act,
1961 in respect of each asset or block of assets

 Auditor shall check whether asset is appropriately classified under

concerned block of asset, its rate of depreciation and WDV respectively.

 If auditor is working for current year, then auditor should give disclosure
regarding reliability on client’s documents respect to previous year i.e.
opening WDV.

 It is useful to give note regarding different opinion on classification of

asset, rate as client may adopt different system of classification.

 The tax auditor is advised to get the details of each asset or block of
asset added during the year or disposed of during the year with the
dates of acquisition/disposal.

 Auditor should examine whether the apportionment of depreciation in

cases of succession, demerger, amalgamation etc. has been properly
made.

 Examination of major areas while determining cost of asset viz.

CENVAT Credit – If Credit is available, then do not form part of asset.
Grant/subsidy - If the cost is relatable to subsidy shall not be included
in actual cost of asset.

 The full deduction of the cost of capital goods is allowed (e.g.

expenditure on Scientific Research u/s. 35) the auditor should verify that
the cost of such asset is not included in the block of assets for the
purpose of depreciation.
CLAUSE 20 –
a) Any sum paid to an employee as bonus or
commission for services rendered, where such
sum was otherwise payable to him as profits or
dividend. [Section 36(1)(ii)].
b) Details of contributions received from employees for various
Funds

 Employee benefits are all forms of consideration given by an entity in

exchange for service rendered by employees or for the termination of
employment.

LONG TERM BENEFITS

SHORT TERM EMPLOYEE BENEFITS (long-term disability benefits,
(e.g-wages ,salaries) jubilee or other long-service
benefits)

EMPLOYEE
BENEFITS

POST EMPLOYMENT BENEFITS

TERMINATION BENEFITS
(pensions and lump sum payments
on retirement)

 The tax auditor should verify the employment/ contract details of the
employees so as to ascertain the nature of payments.

 Auditor should verify the agreement under which employees have to make
contributions to provident fund and other welfare funds.

 Auditor should check whether bonus/commission is paid in form of

profit/dividend, if yes then disallow it.

 In case of voluminous nature of transaction, Auditor shall use test checks

or compliance tests.

 Auditor should examine rules and regulation of employee benefits given

by respective governing act and its implementation by assesse.
CLAUSE 26 –
In respect of any sum referred to in section 43B

 Deduction in respect of the following sum is allowed only on payment

basis even though books are maintained on the mercantile system of
accounting –
1.sum payable by way of tax, duty, cess or fees under any law.
2. sum payable as bonus or commission to employees.
3. sum payable as leave encashment to employees.
4. sum payable by way of contribution to PF or superannuation fund.
5.sum payable as interest on loan or advances from scheduled bank.
6.sum payable by the assesse to Indian Railways for the use of railway
assets.

 Sec 43B is not applicable if the assesse opts for cash system of
accounting.

 Deduction of above said expenses is allowed in current year if payment

is made during relevant previous year or on before the due date of
furnishing return of income under sec 139(1).

 If the payment is made subsequent to due date, it shall be allowed as a

deduction in the year in which it is paid.

SITUATION DEDUCTIBILITY
Payment for expenditure is made in Deductible in the current year.
same previous year
Payment is made next year but on or Deductible in the current year.
before the due date of filling return.
Payment is not made by the due date Expenditure disallowed in current year
of filling tax return. but allowed in year of actual payment.
Expenditure of last year paid in Allowed last year itself and hence no
current year before due date of last adjustment in current year.
year’s return.
Expenditure of last year paid in Disallowed last year and allowed in
current year after due date of last current year
year’s return.
Clause 34 –
Whether the assesse has furnished the statement of tax
deducted or tax collected within the prescribed time.

34(a)-
 Tax auditor should check the applicability of chapter XVII B and XVII BB
for assesse.
 The tax auditor should refer to the relevant provisions, rules, circulars,
notifications and such certificates obtained from the auditee to verify the
cases where tax has been short deducted at source.

34(b)-
 the tax auditor has to ascertain and report as to whether the assesse
has furnished the statement of tax deducted or tax collected at source
within the prescribed time.

 the tax auditor should verify the cases where the tax has been deducted
at source but not paid to the credit of the Central Government till the
date of the audit. It may be seen that tax deducted but deposited late
will not be required to be reported in this clause.

 The tax auditor should consider the applicability of the different

provisions relating to tax deduction at source taking into consideration
the status of the assesse and the applicability of the relevant provision.

34(c)-
 Under this clause, the auditor is required to furnish detailed information
in case the assesse is liable to pay interest under section 201(1A) or
section 206C (7) of the Act.
CLAUSE 40 -
Details regarding turnover, gross profit, etc., for the
previous year and preceding previous year
 It includes following matter-
1. Total turnover of the Assesse
2. Gross profit/turnover
3. Net profit/turnover
4. Stock-in-trade/turnover
5. Material consumed/finished goods produced (applicable for
Manufacturer).

 These ratios have to be calculated only for assesses who are

engaged in manufacturing or trading activities. This clause is not
applicable to assesses carrying on profession.

 Moreover, the ratios have to be given for the business as a whole and
need not be given product wise.

 There should be consistency between the numerator and the

denominator while calculating the above ratios. Any significant deviation
thereof should be pointed out.

 The relevant previous year figures are to be taken from last previous
year audit report. In case the preceding previous year is not subject to
audit, nothing should be mentioned in the relevant column.

 It helps to analyses business more appropriately by checking its

uniformity over the year or any significant deviation.