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 First Impression: July 2019

Techniques of Investigation for Assessment

Vol. 1

© Income-tax Department, New Delhi

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Vol 2
Foreword

[v]
 Preface
The Board had constituted a Committee on 27.11.2017 for review and update the departmental
publication of “Techniques of Investigation Manual” (Vol. I to V) 2002. The need for the same
had arisen from the fact that the earlier publication was more than 16 years old. The new series
of ‘Techniques of Investigation’ is an effort to sensitize and educate the officers to effectively equip
them with the requisite skill set. The Committee decided to bring the manual in seven volumes. The
Committee has great pleasure in bringing out the present Volume 1 of the Manual which contains
introductory and general chapters. The work involved re-writing the existing chapters incorporating
the refinements undergone in old methods of tax evasion and incorporating the changes in the
statute and the procedures.
The basic principles of taxation are as old as organised human society. Several ancient civilisations,
including the Greeks and Romans, levied taxes on their citizens to pay for military expenses and
other public services. Taxation in India is rooted from quiet early period. The celebrated poet Kalidas
in his epic poem Raghuvansa has said:
“It was only for the good of his subjects that he collected taxes from them, just as the sun draws
moisture from the Earth to give it back a thousand fold.”
However, the human tendency to avoid paying taxes was also known to exist from earlier times.
People had started using certain avenues to avoid payment of taxes. Thus the role of the tax
administrators became crucial in ensuring that every eligible person must pay tax correctly. So the
provision of investigation in the existing income-tax law is an important aspect. These investigative
powers coupled with information gathering tools form the backbone of any judicious assessment
order.
Nowadays businesses have witnessed significant technological advancements. They have adopted
technology, resulting in change in the methods and manner of doing business. As a result, the scope
and meaning of investigation has also changed. The internet, perhaps the most important achievement
of mankind, has made practically all information available with us in no time. Investigation today
has to match with the fast pace of technological developments and the technological infrastructure of
the income-tax department is playing a significant role. The Tax Authorities have to scale themselves
up to meet the newer challenges posed to them in the form of digital transactions of business affairs.
The Government has recently taken various initiatives to unearth the black money viz Demonetization,
Revamping the Benami Transactions Act, bringing in various amendments in respect of reporting
cash transaction and transactions over a particular threshold, mandatory quoting of PAN, etc. It
is now the responsibility of the Tax Officers to use the information and authority under the law to
enforce payment of correct taxes else the key steps undertaken by the Government to enhance the
tax compliance would be rendered futile.

[ vii ]
As the basic concepts of investigation has not changed, the bulk of the material for most of the general
chapters has also remained unchanged. At the same time there in value addition to them taking into
account the new modes of avoiding or evading the taxes. The chapter of “Examination book of
accounts” which was with relevance to manual book of account has been rewritten and replaced
with new topic of “Investigation of Computerized book of accounts”. This comprehensive write-up
includes Investigation of accounts in Tally ERP, Investigation of accounts in SAP ERP, techniques
of investigation of computerized accounts and application of forensic accounting for investigation.
It has laid out the broader contours of the investigative techniques especially in the wake of digital
accounting. The chapter on ‘Benami Transactions’ has been supplemented with the provisions of
PBPT Act and the provisions of GAAR has been included in on the topic of tax avoidance. The
recent judicial pronouncements on the relevant topics have also been incorporated.
The chapters are not an exhaustive list of techniques of investigation as the tax avoidance and
evasion practices are quite diverse and dynamic in nature. However, it intends to highlight and guide
the officers and make them aware about the existing provisions of law and techniques that they can
apply independently to tackle the tax evasion issue in the facts and circumstances of the particular
case. We attempted to utilize the earlier and newer investigation techniques to address the issue of
tax avoidance and evasion in the complex digital business space. It is hoped that officers in the field
find this book useful and make best use of the intended knowledge sharing while solving cases of tax
evasion effectively.
The Committee acknowledges the effort of all the officers who have contributed material and made
value addition for compilation of this Volume. We are also grateful to the Editorial Board for going
painstakingly through the write-ups and for their valuable inputs.

N.P. Sinha
Chairman of the Committee

[ viii ]
 Acknowledgments
CONTRIBUTORS TO VOLUME 1

Shri Manoj Dubey Chief Commissioner of Income-Tax (TDS), Bengaluru

Shri Nilimesh Barua Chief Commissioner of Income-Tax (Retd.), Delhi
Shri Ravindra Kumar Pr. Commissioner of Income-Tax, Mumbai
Shri Ravindra Sai Pr. Commissioner of Income-Tax, Mumbai
Shri H.N. Singh Commissioner of Income-Tax, Mumbai
Shri L.K.S. Dehiya Commissioner of Income-Tax, Mumbai
Shri Rajeshwar Yadav Commissioner of Income-Tax, Mumbai
Shri Sanjay Kumar Commissioner of Income-Tax, Bengaluru
Shri Sunil Jha Commissioner of Income-Tax, Mumbai
Ms Vandana Sagar Commissioner of Income-Tax, Bengaluru
Shri Abhinay Kumbhar Addl. Director of Income-Tax (Inv), Mumbai
Shri M. Salman Khan Addl. Commissioner of Income-Tax, Mumbai
Shri Manjeet Singh Addl. Commissioner of Income-Tax, Panaji
Shri Sambit Mishra Addl. Director of Income-Tax (Inv), Mumbai
Shri Raj Kumar Ghosh Addl. Director of Income-Tax (Inv), Baroda
Shri Sridhar Bhattacharya Addl. Director of Income-Tax (Inv), Kolkata
Shri Vivek Anand Perampurna Addl CIT, CR-7, Mumbai
Shri Ankur Alya Jt. Commissioner of Income-Tax, Chandigarh
Shri M.S. Nethrapal Jt. Commissioner of Income-Tax, Chennai
Shri Jairam Rajshekhar FCA–Expert IDEA
Shri Jigar Adhyaru CA
Ms Premlata Daga FCA–Expert Tally
Shri Ranjit Kumar Expert SAP
Shri Vishnu Bajaj CA, Mumbai

[ ix ]
 Committee for Review and Updating of Manual
of
Techniques of Investigation
for Assessment

Sr. No. Name Designation Station Position

1 Shri Vinodanand Jha Chief CIT (Since Retired) Mumbai Chairman

2 Shri N.P. Sinha Chief CIT Mumbai Chairman

3 Shri K.K. Vyawahare DGIT (Inv.) Mumbai Member

4 Shri A.D. Mehrotra Chief CIT Ahmadabad Member

5 Shri Harish Kumar DGIT (Inv.) New Delhi Member

6 Shri Nilimesh Baruah Chief CIT (Since Retired) New Delhi Member

7 Shri Pravin Kumar Pr. DIT (Inv.) Hyderabad Member

8 Shri Alok Johri Pr. DIT (Inv.) Raipur Member

9 Shri Yogendra PCIT Mumbai Member

Choudhary Secreatry

10 Shri Sunil Kumar Singh CIT (Inv.) CBDT Member

[x]
Editorial Board for Volume 1
Shri N.P. Sinha
CCIT(C)-2, Mumbai

Shri K.K. Vyawahare

DGIT(Inv.), Mumbai

Shri C.S. Gulati

CIT(A)-1, Mumbai

Shri Rajeshwar Yadav

CIT(A)-47, Mumbai

Shri L.K.S. Dehiya

CIT(DRP)-1, Mumbai

Shri Ajit K. Srivastava

CIT(A)-17, Mumbai

Shri Sunil K. Jha

CIT(DRP)-2, Mumbai

Shri Vivek Anand Perampurna

Addl CIT, CR-7, Mumbai

[ xi ]
 Committee for Selection of Key Phrases/
Key Words for Index of Volume 1

Shri Amal Garg CIT (A), Moradabad Chairman

Shri Santosh Kumar Addl. DIT, Unit-VI, Investigation, New Delhi Member

Shri Vipul Agarwal Addl. CIT (TP), New Delhi Member

[ xii ]
 C O N T E N T S

 Foreword v

 Preface vii

 Acknowledgments ix

 Committee x

 Editorial Board xi

 Committee for Selection of Key Phrases/ Key Words for Index xii

1. Investigation Cases: General Discussion 1

2. Clues and Their Follow-up 9

3. Investments-Statement of Total Wealth 17

4. Co-Ordination with Other Enforcement Agencies

and Sharing of Information 25

5. Investigation of Computerized Books of Accounts 33

6. Trading Account 125

7. Manufacturing Account 141

8. Consignment Account 151

9. Profit and Loss Account 157

10. Balance Sheet 163

11. Income Computation and Disclosure Standards 183

12. Director’s/ Auditor’s Reports 203

[ xiii ]
13. Cost Audit 213

14. Special Audits 217

15. Investigation of Bank Accounts 223

16. Defective, Duplicate, or No Accounts Cases 235

17. Cash Credits 247

18. Benami Transactions & PBPT ACT 267

19. Examination of Witnesses 283

20. Law on Tax Avoidance and GAAR 295

21. Making of Quality Assessments 307

22. Evasion of Tax Deduction at Source 327

Index 359

[ xiv ]
 Chapter

1
Investigation Cases:
General Discussion
1.
1. Taxes are the major sources of revenue
of Indian government. Tax evasion causes
economic inequality. Many reform measures
and initiatives of government have to be set
aside and welfare activities are getting affected.
Black money causes inflation and value erosion.
Tax evaders have been developing increasingly
sophisticated methods of concealing income.
The books of accounts produced before the
Department is so “prepared” that it is becoming
increasingly difficult to detect concealments from since the tax avoidance is planned having regard
these. Evasion of tax is more prevalent amongst to the loopholes within the legal framework,
persons having income from business and whereas evasion can be easily detected with the
profession. Essentially, tax is evaded either by help of digital recording of the transactions.
understating receipts or by inflating expenditure.
2. Where the evasion is large and continues over
In a case where accounts are correct in respect of
a certain period, the tax payer accumulates black
both income and expenditure, evasion is resorted
money, which manifests itself in various forms
to, by making false claims of depreciation,
like investment in properties (real estate, gold,
deductions or other benefits available under
ornaments, etc) lavish life style, unaccounted
the Act. Another common device is of inflating
stocks, unsecured loans in the form of cash
exempt incomes e.g. agricultural income, or
credits and unreported bank accounts, etc. The
diverting expenditure pertaining to exempt
real estate or other investments can be in India
incomes to taxable incomes, e.g. income from
or outside India.
export business and domestic business. Few
other examples are charging personal expenses 3. Investigation in a case of suspected tax
to revenue, submission of false certificates to evasion can be made either directly or indirectly.
claim exemption. With advent of technology, Investigation is direct when the AO collects
the core tax planning has shifted from evasion incriminating evidence against the assessee and
(being a raw method) to avoidance of tax establishes that the receipts are understated or
(being a sophisticated method). Detection of tax the expenditure is overstated. Where certain
evasion is easier than detection of tax avoidance receipts have been suppressed he would have

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Techniques of Investigation for Assessment Vol. 1

to collect evidence from third parties who have structures to avoid detection, so it’s important
shown payments to the assessee which are not to trace the maze of Companies involved in
recorded in his books of accounts. Similarly, the process. This would require identification
where abnormal/ false expenses have been of common linkages within the Companies
recorded in the books of accounts, the AO will (like Directors, Address, etc). Such process can
have to prove that these are not genuine or that the be completed with the help of seeking relevant
payees have not rendered any services/ supplied information from Ministry of Corporate Affairs.
any products/ fixed assets for which payments Also, every taxpayer is publicizing its business
have been shown. For this books of original on internet (supported by call centres) and has
entry will have to be examined, and records his own profile (may be Linkedin, etc). Surfing
of production, sale, stocks, wages, stores, fixed the internet and making few calls asking relevant
assets, etc. subjected to an intelligent scrutiny. questions would also provide certain clues
The records of major payees or payers will which can be investigated further. The sharing
have to be verified. Information will have to be of information within the Department is also
independently gathered to verify the assessee’s necessary on a real time basis–so any adverse
version. All these information will have to be material found with the third party by another
linked to arrive that a particular transaction in Assessing Officer should be immediately notified
genuine or not. While it seems to be a herculean to the jurisdictional Assessing Officer to initiate
task with limited availability of evasion related appropriate and timely action. On the basis
information, certain standard checks and of the information received, the Tax Authority
benchmarking of income/ expenditure with should determine the action to be undertaken–
industry standards would throw up preliminary Summons (u/s 131), Search (u/s 132), Survey
area of investigation. Use of digital means and (u/s 133A), Scrutiny proceedings (u/s 143), etc.
the information available with the other Revenue For example, the assessee engaged in a business
Departments’ and Ministry of Corporate Affairs activity has claimed certain expenditure.
will help. Goods and Service Tax (‘GST’) portal The Department received information from
can also provide for substantial information sales tax wing regarding a person providing
which should be used while detecting any accommodation entries (providing bills without
discrepancies in the turnover, expenses, etc. supplying/ rendering goods or services on a
4. The lines of investigation will vary according commission basis). When the list of creditors of
to the sources of income and information the assessee was examined, the name of such
available with the Tax Department before person was also appearing in such list. When
initiating any action. The Government has further investigated about the nature of services
tightened the reporting process and various rendered/ goods procured by/ from such person
agencies (like Banks, Mutual Fund Agencies, to the assessee, it was revealed and admitted by
Property Registrar, etc) are providing information the assessee that the claim of the expenditure
exceeding particular threshold to the Tax was bogus and the transaction was entered for
Department under Rule 114E of the Act–basis suppression of true income. Another example
which AIR information for a particular taxpayer could be of a case in which the assessee was
can be generated through system. Such receiving rent by letting out a very large building
information is a ready source of understanding to various tenants, and was showing rental
the economic activity of a particular taxpayer income under the head ‘business’ after claiming
and the deviation of such activity from books of depreciation. A survey u/s 133A was conducted
accounts/ return of income can be investigated in which statements of the tenants were recorded.
further. The taxpayers tend to create labrynthine They accepted that the payments allegedly made

2
 Investigation Cases: General Discussion

by them as “brokerage” and “commission” were relationship with each other clearly brought
actually rent, and that the assessee had rendered out by starting from the common ancestor.
no services. The assessee then admitted that the The trade names of various businesses
income was actually from house property. As should be linked up with these names
a result, the claim of depreciation running into and what business each member actually
crores was held to be inadmissible. This method conducts should be noted. In the case of
of investigation may also be called the “source Firms and Associations of Persons, similar
method”. What is required is to first ascertain details should be gathered.
the sources of income of the assessee and ii. Ascertaining the Companies
then visualise the possible methods of evasion Belonging to the Same Group: Similar
that can be resorted to for suppressing income goes with the corporate entities, i.e.,
from these sources. The line of investigation finding the details of all group companies.
should be developed for each source. In other These details should be readily available
words, the AO should try to get into the shoes on the Registrar of Companies website.
of assessee and figure out how income from a The details of transactions between these
particular source can be suppressed and then
entities should be analysed.
devise the line of investigation. For example,
in the case of a professional there is little scope iii. Names of Business Units: Important
of reducing income by inflating expenses. In all cases of tax evasion usually come to
probability a professional would try to evade light when the assessees have expanded
taxes by understating his receipts. Here it would their businesses. Such expansion may be
be worthwhile to investigate his receipts, life through one or different business units.
style and investments etc. Names of such units should be ascertained.
The following sources may be tapped:
5. The indirect method, on the other hand,
involves a reverse process whereby concealed Where all the business units belonging to
or unrecorded incomes, expenses or assets are the same group are situated in the same
traced out by a close scrutiny of the account premises, names of all such units can be
books, bank pass-books etc., in the light of gathered by personal inspection.
information collected from diverse sources. This The names of business units of a group
method is based on the net increase in wealth are usually given at the same place in the
after suitable adjustments for outgoings and may Telephone directory.
also be called “Investment method”. This has
been discussed in Chapter III. ●● Sometimes, advertisements in the
press or elsewhere display the names
6. Once a decision for detailed investigation
of various business units belonging to a
has been taken, the AO can start preliminary
particular group.
enquiries on the following lines:
●● Balance Sheets and accounts of
i. Ascertaining the names of members of the
the known business units should be
family, etc.-In the case of an Individual,
examined and concerns with whom
the names of the assessee’s wife, major
there are large transactions for a
or minor sons, married or unmarried
number of years may be checked.
daughters should be ascertained. In the
case of the H.U.F., a genealogical tree iv. Assessment Records: The AO should
showing the names and ages of male study assessment records of these
members should be drawn up and their concerns from the beginning and note

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Techniques of Investigation for Assessment Vol. 1

down important points. This may disclose large cash deposits & withdrawals should
contradictions in the stands taken by the be scrutized.
assessees at different stages. If required, x. List of major debtors and creditors, say
the AO should go to the places where over Rs. 100000/- along with complete
these units are being assessed and study addresses should be drawn.
their conduct during the assessment
proceedings. Unified scrutiny of all the xi. Comparative Charts of the expenditure
assessment records is essential as only incurred, say for last three years–trace
then relevant clues from various files can abnormal behaviour in the expenditure
be noted. details (key accounts to be looked at are
Commission, Professional Services, etc).
v. Scrutiny of Financial Statements: The
financial statements of the taxpayer should xii. Investments made in various sources,
be closely scrutinized to ascertain the areas along with proof and back-ups for cross
which requires further investigation (like verification.
heavy capitalization, increase in level of
expenditure as compared to the earlier xiii. Borrowings availed, along with
years, reduction/ increase in turnover identification of parties and basic details in
or profitability, etc). The Department terms of PAN, Address, etc.
in parallel also collates information xiv. Stock register, any spike or significant
electronically through various sources and reduction in activity should be traced–the
the same should also be matched with the same can be tallied also during the course
financial statements. of survey.
vi. List of Immovable Properties: A list
xv. Details available internally/ externally–
of immovable properties with detailed
collate all the details available within the
particulars should be prepared from
the assessment records of the persons Department (Project Insight, AIR, etc) and
belonging to the group. Again help of with other Government Agencies. Also,
information available with the department collate the information available in public
by way of AIR can be scrutinized to check sources through internet. Such information
these details. should be cross checked with the books of
accounts of the taxpayer.
vii. List of Main Employees: A list of
employees with salary above a certain While asking for the information from the
limit, depending upon the nature of the taxpayer, a tendency it is seen that citing
case, should be obtained. voluminous details, the taxpayer offers submitting
viii. List of Major Shareholders: In case information on a sample basis. Such samples
of companies, list of major shareholders should be selected by the Assessing Officer after
along with their addresses and their assessing the ledger accounts and not by the
shareholdings should be drawn up. As taxpayer himself to suit his own needs.
mentioned above, these details can easily In digital world, there is no dearth of information
be obtained from the website of Registrar available–it is important that the inquiry or
of Companies. investigation should be focused. The Assessing
ix. List of Banks: With which the assessees Officer should use his/ her acumen to track
have accounts and the list of persons in all sources of information, connect the dots
whose names large transactions have been and pen down the pain areas of the Taxpayer.
shown should be prepared. Additionally, Such information should not at any stage of

4
 Investigation Cases: General Discussion

preliminary inquiry be revealed to the assessee. AO was able to bring out 10 secret bank
At times, asking for certain irrelevant information accounts till the one he was aware of
along with necessary ones will help creating came out. Therefore, while the assessment
confusion in the mind of the assessee and his should not be completed without giving
consultants. Show Cause Notice should be given the assessee a fair opportunity to meet
only at the stage when adequate information is the entire evidence against him, all
available to fix the onus on the assessee. Some necessary information about the allegation
of the information can be left out from Show should as far as possible be gathered first,
Cause to be used at subsequent stage or while verified from independent sources before
framing counters to the assessee’s objection confronting the assessee with the same.
while drafting the assessment order. The order Accordingly, the AO should develop great
should clearly bring out all the information amount of probing skills to bring out the
collate and if necessary, the Assessing Officer required information from the assessee.
should copy paste the extracts of details relied Right questions should be posed before the
upon or make the same as a part of Annexure to assessee to bring out the answers required
the Assessment Order. by the AO.
7. Verification of allegations in tax evasion iv. If some of the allegations are vague, an
petitions etc.- For a proper utilization of effort should be made to contact the
information relating to tax evasion contained in informer and to gather specific information.
anonymous, pseudonymous and other petitions, In case this is not possible, much time need
following procedure is suggested: not be wasted on such allegations.

i. The petition should be kept in the custody v. The assessment records should be studied
of the AO. and specific information, e.g. information
relating to Bank accounts, deposits, cash
ii. A summary of all the allegations should be credits, property, shares etc. should be
placed in a confidential folder. verified from the records. Any discrepancies
iii. The allegations should not be revealed to or items requiring further enquiry, should
the assessee in the first instance. This has be noted
the disadvantage of letting the assessee vi. Before examining the assessee in regard
know exactly which of his secrets have to such items as are not appearing in the
come to the knowledge of the Department. copies or extracts of accounts available
By keeping the assessee guessing, there in income-tax records, evidence should
is a good chance of getting a complete be collected independently to verify their
admission. For instance, in a case where genuineness.
a number of properties were purchased
by the assessee in various names, the AO vii. While collecting independent evidence or
got a surprise when by not revealing to obtaining copies of accounts, it is preferable
the assessee the details of the information to get them demi-officially through the
he had, the AO found that a valuable AOs assessing the parties concerned so as
property not in his knowledge had also to avoid prior consultation by the parties
been purchased as later admitted by the with the assessee.
assessee. In another case, by keeping viii. After collecting independent evidence
back the knowledge about a bank account on the points in dispute, these should
of the assessee and by only indicating be formally put to the assessee for his
that he was aware of bank accounts, the explanation. In investigation cases, it is

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Techniques of Investigation for Assessment Vol. 1

advisable to first collect materials in the ●● Making requisite enquiries;

absence of the assessee. The information ●● Bringing on record sufficient evidence
collected can then be put to the assessee in support of the additions made;
and the parties formally examined and
cross-examined. The parties will normally ●● Confronting the assessee with the
tell the truth when they are approached by material collected by the AO; and
the AO as the assessee will have no occasion ●● Affording a reasonable opportunity to
to tutor them. Later on when they formally the assessee to rebut the said material
appear before the AO in the presence of and explain his case.
the assessee, it will be difficult to retract
8. Duplicate Set of Accounts: Before
from what they had stated originally. In one
commencing the scrutiny of books of account,
case, a jeweller who had made speculation
external characteristics of the set of books
profit of Rs. 1,20,000/-, also showed
produced should be observed. When the books
speculation losses of Rs. 1,50,000/- to
are completely re-written, they generally have
goldsmiths who prepared ornaments for
the appearance of a comparatively new set of
him. Most of the goldsmiths lived in the
accounts provided the examination is taken up
same locality. At first the AO examined all
the goldsmiths. All of them stated that they not too long after the close of the accounting
had never entered into speculation and year. In such cases, the AO should be on his
they did not know how speculation was guard if he finds that:
carried on. The information collected was i. The Books are Spotless: The books are
put to the assessee and he was asked to not likely to be spotless if written regularly
produce the goldsmiths in support of his from day to day.
claim. He produced them. They admitted
ii. The Entries are Throughout in One
having received speculation profit but
Hand: If the transactions have been
could not explain how speculation was
written throughout by one hand, it should
carried on. They could not also reconcile
be seen whether the person concerned
their statements with that given earlier.
was in assessee’s employment throughout
When asked as to how the profit was
the year. The names of the persons who
utilised, most of them stated that it had
have written the account books should
been spent on serious illness in the family
be ascertained first and then the assessee
but could not give the name of the doctor
who had treated the patients. The matter should be asked to show that the salaries
was followed up and it was found that the of those persons have been debited in
losses were not genuine. the books. Sometimes it happens that the
person who has written the accounts was
ix. After hearing the assessee, further enquiries not in assessee’s employment in the year
which may be found necessary, should be to which the books relate. It may also be
pursued. Thereafter, the assessee may be useful to compare handwritings of the
allowed a final opportunity of rebutting the entries in the different account books for
conclusions tentatively arrived at. different parts of the year. The pages of
x. The AOs should not make unrealistic or the cash book should be turned over to
over-pitched assessments. Additions to find out if the correct year has been given
disclosed income should not be made throughout. Very often, advance years are
without: given at places. For example, a person

6
 Investigation Cases: General Discussion

writing the books for 1998 in 1999 may by iv. It is important that the Assessing Officer
force of habit mention 1999 instead of 1998 should train himself or take the help of
at several places. This will be definitely a trained professional in understanding
suspicious feature and if followed up may how the accounting system/ software of
lead to the conclusion that the books were the taxpayer works–the same will help
written in 1999 and not in 1998 to which in identification of relevant information
they are alleged to relate. within minimal time.

iii. However, these days with increasing use If need be–the Department should seek
of digital record keeping information is help of Agencies like National Informatics
stored, transmitted or processed in digital Centre to find the digital footprint of the
form. Accordingly, records including details and restore the deleted files.
books of account are maintained in digital
9. In important cases of suspected tax evasion
form, most organisations use networks
the account books produced by the assessee
connecting different PCs spread across
geographical locations, etc. In such a should be carefully examined. The scrutiny
situation it is important to find a logical should not be confined merely to study of the
error since digital book keeping shall not statements furnished by the assessee in support
throw up any manual error in the books of the return of income. Unless a thorough
of accounts. For investigating data in examination of the account books is carried out,
digital form would require data integrity it may not be possible to arrive at the actual
and authenticity. Some of the grounds profits. A tendency is noticed among some
on which integrity of seized data can be AOs not to look into the account books at all
violated/ altered are as under: and to confine themselves only to the study
of particulars and information furnished by
a. When a system, seized on a particular
date, is switched on or booted at a later assessee either voluntarily or at the instance of
date to view its content, the date and the AO.
time of opening these files automatically
10. Scrutiny of Trading Account, Manufacturing
gets modified.
Account, P&L Account, and Balance Sheet
b. If a seized system is not booted on its generally forms the starting point of enquiry.
own and its hard disk is attached to However, in order to locate the chinks in the
another system, even then operating wall built by the tax evader, systematic and
system has an automatic functionality coordinated scrutiny of the various account
to write to all attached media. books, bank pass book and other subsidiary
c. Accessing a system or hard disk in any records should be undertaken. Sometimes, it
way without the use of write-protect may be necessary to apply all the checks while
devices causes change in the hash at times even a single check may suffice.
value or digital fingerprint of the disk.
This can render the evidence on such 11. Even in cases of major tax evasion, a
disks inadmissible. large percentage of entries in the books may be
d. Sometimes even valuable data may genuine. Out of tens of thousands of entries, the
be lost because of use of unsound key would probably be furnished by only a few.
methods. The various ways in which an AO can equip

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Techniques of Investigation for Assessment Vol. 1

himself to spot out such suspicious and vital iii. Development of Capacity for Detecting
entries include: Clues: Once, for good reasons, it is
suspected that a particular entry in
i. Obtaining Information from Outside the account books is spurious, the AO
Sources: An alert AO should always must follow it up from every angle. If he
make intelligent use of information or approaches the problem in a systematic
allegations which come into his possession manner, he may not have to waste much
time. The art of selecting entries for
either digitally or manually.
verification is the most important skill for
ii. Study of Various Techniques of any investigator. The AO has got to restrict
his enquiries to a select few. It is in the
Manipulations: Various techniques
selection of these that the skill of an AO lies.
of manipulation adopted by assessees
have been discussed in the subsequent iv. Tracking of Digital Footprint of the
chapters. It is necessary that the AO should Assessee: The AO should familiarize
himself with all possible sources on
be intimately acquainted with these. This
internet/ social media which will enable
knowledge coupled with experience
the AO to understand the scale and extent
enables him to develop the insight to read of the assessee’s wealth. This will also be
the accounts as an open book. helpful in case of tax recovery matters.

8
 Chapter

2
Clues and Their
Follow-up
1. CLUES
1.1 Detecting vital clues is the most important part
of investigation. An AO has to develop qualities
without which it may not be possible to pick up
clues which may even be lying on the surface:
i. Observations and Deduction: The AO
should ever be alert for detecting fraud and
for finding out methods of proving fraud.
For example, suppose one is examining
the expense vouchers, he need not merely iv. Intuition: There is a danger in investigation
look for fraudulent invoices. A printer’s work-the occupational hazard as it were of
bill is in itself an innocuous document but
investigation-the danger of not seeing the
it may also indicate a sales invoice book
wood for the trees. One cannot exhaust
supplied for a serial number which has not
every possibility because investigation
been produced before the officer.
would otherwise become interminable.
ii. Imagination: The officer should
constantly visualise what primary records v. Use of Technology: The officer should
a business man would require; to what constantly be updated with News Feeds,
methods of frauds it lends itself and how Twitter, Facebook, LinkedIn, etc. so
to establish these frauds by reconstructing as to understand the emerging trends
the modus operandi of the fraud. For and transaction deals. Regular visits on
example, a voucher for rent of some the regulatory websites viz. RBI, SEBI,
obscure premises is of no interest in itself NCLT etc. also reveal the action taken by
but it may start one thinking whether any regulatory body against companies. Also,
goods were stored there and whether these MCA website can be a good search tool
goods find a place in the stock sheets. for finding bogus companies and directors
linkage with other Companies, generally
iii. Tenacity: Tenacity in the face of reverses
and disappointments, and a refusal to be used to create a maze structure.
sidetracked from a promising lead are the 1.2 Clues can be in the books of account as
surest way to success. also outside the books of account. The types of

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clues that one is ordinarily likely to come across accounting system–in terms of cost variation,
while examining the books of account would be TDS reports, cash transaction beyond a particular
as follows: limit, etc which shall provide ready information to
Credits the AO to identify gaps for further inquiry.

i. Where cash actually comes in and is Regular agencies have sprung up issuing bogus
accounted for in the books of account. ‘sales vouchers’, for nominal commission, to
the intending “purchasers”. In the hands of the
ii. Where cash does not come in at all but alleged purchasers these amounts are debited as
credits in personal accounts appear to ‘purchases’ and profits to that extent are reduced.
balance the bogus debits in the various Since the alleged seller is an existing person,
accounts such as purchases, wages, often also assessed to income-tax, it becomes
expenses, etc. difficult to challenge the alleged purchase unless
Purchases elaborate enquiries are made. Without these the
Department may at best succeed in assessing a
i. Purchase may be bogus i.e. the goods may
certain percentage of these alleged sales in the
have not come in but debits for purchases hands of the ‘seller’. The result is that the profits
may have been made, in cash or credit. to the extent of the alleged purchase escape
ii. Purchases may be genuine so far as the taxation, while in the hands of the seller only a
incoming of material is concerned but the portion comes up for taxation. Very often the
price may be inflated by way of alleged sellers are small parties, and recovery of
even this tax becomes difficult. Statements can be
Expenses under various heads being either
recorded of the alleged partied and then a show
bogus or inflated or personal. cause can be issued to the assesse for proving the
There may be suppression and/ or understatement genuineness of the purchase transaction, which
of sales. in all practical circumstances would be difficult
and hence, the same will attract disallowance
Stocks might be undervalued or suppressed
u/s 37 of the Act and other penal consequences.
through omissions as obsolete or unsaleable.
The information of the accommodating parties
There may be payments of secret commission. can be sourced on real time basis by interacting
The clues may appear in the form of erasures with other Government Agencies (Revenue
or overwriting. When accounts are being Department (GST, Service Tax, Customs), RoC,
manipulated on a subsequent date, entries are etc) as well as by obtaining information from
known to have been erased and replaced by the informers. The sharing of such information
convenient entries. Notings of advance years within the Department is critical since one such
in the cash book may indicate the preparation parties would be providing accommodation
of cash book from some other record after the entries to various taxpayers across jurisdiction.
close of the previous year. In today’s digital The entries in respect of such transaction are not
era, even the smallest traders have started using only booked on the purchase or expense side of
accounting softwares to maintain their books of the Profit & Loss account but are also clubbed
accounts (generally Tally Software is used). The with inventory cost or plant & machinery cost to
officer should understand accounting system and create difficulties in identifying the same.
its constraints in terms of an accounting entry that Exemptions/ deductions claimed by the assesse
can be made on a back dated basis i.e. after days/ always require a deeper probe. For example,
months or repository of modified entries, etc. The deduction claimed under Section 10AA of the
Officer should also look at various management Act or any other Section requires an assesse to
reports which can readily pulled out from the furnish cost allocation between the eligible unit

10
 Clues and Their Follow-up

and non-eligible unit. Hence, the officer should deducted under Section 195 of the Act. However,
vigilantly check the basis of allocation of cost. if the transaction is seen in substance, interposed
Additionally, the Assessing Officer should also Company is nothing but a pass through entity
verify the transaction details with related parties and hence, on an end to end basis, the assessee
in case of entity claiming exemption/ deduction in fact was required to deduct tax at source.
since the transaction value could have been
manipulated. The officers should analyse the AIR information
very cautiously for a proper reconciliation of
Provision for various contingent liabilities should sales turnover reported by the assessee under
be checked as to whether the same has been other Acts vis-à-vis reported under the books
prepared based on some scientific basis or not. of accounts prepared for income-tax purposes.
For example, provision for warranties, etc. While Even, the information reported by the Banks viz.
the Hon’ble SC has settled the principle but it any outstanding loan and corresponding interest
is not necessary that the principle is squarely paid by the assesse, any investment in the form
applicable to each case since the facts and the of fixed deposit and corresponding interest
basis of making the provision varies. Important
earned on the same should be reconciled.
point is to ask for actual expenditure incurred in
subsequent years and understand the% variance Tax Deduction at Source remains a key source
vis-à-vis the provisioned amount and also to of Revenue for the Department – it is seen that
understand the basis for making the provisions in case the payer had to bear the TDS, he would
i.e., whether it’s on an ad hoc basis or based on generally find a reason to either not deduct
some industry benchmark. TDS or deduct it at a lower rate. The Assessing
It has been seen that many assesse nowadays Officer during the course of assessment or spot
make payment to the overseas holding company verification should essentially ask the taxpayer to
in the form of ‘Management Fees’/ ‘Royalty’, etc. furnish expenses-wise, party-wise TDS date for
The officer is required to probe into same and verification. If accounting system is a constraint
ask the assesse to establish the need-benefit test the same should be called for transaction basis
for making such payments since it could be a the Assessing Officers selection of sample. If any
modus operandi for routing the profits outside discrepancies are found and additions are made,
India. Such expenses should be disallowed under the information should also be passed on to the
Section 37 if the same are not incurred wholly TDS wing for appropriate action under Section
and exclusively for the purpose of business. 201 of the Act.

It is seen that in case of service contracts with The officers should call for documentary
the overseas parties, the assessee agrees that evidences to check whether the overseas group
TDS cost if any shall be borne by the assessee. company who is in receipt of the payment is
To avoid the requirement of deducting TDS, the beneficial owner and has substance in the
it is observed that the assessee interpose an Country where it resides since very often the
overseas company (within the Group) and such taxpayer indulges into treaty shopping to claim
Group Company shall make the payment to the advantage of lower tax rate under the Tax
actual beneficiary. Thus, the assessee first makes Treaties (for e.g Mauritius, Netherlands, Cyprus,
a payment to the overseas group company etc).
who remits the same amount to the actual General Anti Avoidance Rule (‘GAAR’) provisions
beneficiary. With this, the assessee takes shelter has been introduced from 1 April 2017 with the
of the argument that the amount remitted to the intent to tax transaction where the main motive is
Group Company is nothing but reimbursement to avoid payment of tax by adopting colourable
of expenses and hence, tax is not required to be devices or shame restructuring arrangements.

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Techniques of Investigation for Assessment Vol. 1

Hence, all Corporate restructurings viz. merger/ around satisfaction of the condition/ onus
amalgamation/ slump sale, etc should be closely casted on the taxpayer through MLI. It is seen
scrutinized to determine the drivers of such on ground that the Assessing Officer in case of
restructuring i.e., whether the restructuring was assessment of non-residents would not probe
for bona fide commercial purposes or the main into their presence through dedicated agents or
motive of such restructuring was to avail tax its employees in India. Such presence creates
advantage. The tax advantage may not be visible a tax incidence for non-residents which goes
for a standalone transaction but could be traced untaxed. Hence, the Assessing Officer should
if the entire arrangement/ transactions spreading study this subject carefully and ask the right
across years are looked at together. GAAR is questions to determine the taxability of non-
an important tool in the hands of the Assessing residents in India.
Officer to recharacterize the transaction and
Recently, Place of Effective Management
impute tax demand on the assessee. The same
(‘POEM’) provisions have been notified, followed
should be used only when the case merits basis
by CBDT guidelines on how the POEM for non-
the documentation collated during the course of
residents in India needs to be determined. For
scrutiny or survey.
a Multinational group (Especially Indian MNCs)
The officers should always examine the tax neutral/ having subsidiary outside India, the Assessing
exempt transaction in connection with merger/ Officer should assess compliance of CBDT
demerger/ holding to subsidiary transfer or vice- Guidelines with respect to such subsidiaries.
a-versa etc. from the perspective of satisfaction
of tax neutrality conditions which spans over a Till date, the Companies were required to
period upto 8 years – since if the conditions are follow Indian Acounting Standards. However,
not satisfied the benefit/ exemption claimed by the Companies are now required to align
the taxpayer can be taxed under the claw-back towards Ind-AS which is adoption of global
provisions. In certain cases of merger, it is observed accounting standards/ IFRS. Ind-AS is being
that the assessee uses it as a tool to claim set-off made mandatorily applicable to Companies by
of losses of the amalgamating companies without Company Law/ ICAI in gradual manner (with
satisfying the year on year condition prescribed FY 2016–17 being the start year). Accordingly,
under Section 72A of the Act. until the Tax Audit Report is modified to report
the details of any notional expense/ income
Base Erosion Profit Shifting (‘BEPS’) is the
entries required to be accounted for by the Ind-
project initiated by Organisation for Economic
AS, the Assessing Officer should closely examine
Co-operation and Development (‘OECD’).
this aspect in the course of assessment.
The reason this project was initiated was that
the global companies has been adopting treaty Travel expenses can be checked carefully with
shopping which helps the global companies to proper reasons as to such travel was genuinely
reduce the tax incidence. The said organisation needed considering the business model of the
has come-up with Multi-lateral Instrument assessee or some personal travel expenditure
(‘MLI’), to which India is also a signatory. The has been captured into travel expenses.
MLI when comes into force shall change the
Investments/ receivables/ payables to and from a
treaty interpretation substantially tightening the
company can be checked with the help of MCA
requirement of substance and plucking the loop-
website as to whether the directors are common
hole existing in current treaty provisions which
provides the taxpayer advantage of double or the company can also be a shell company
non-taxation. It is pertinent that the Assessing and the transactions entered into may be bogus.
Officer should keep himself/ herself abreast of There should be repository for all audit objections
the development in this area and ask questions raised by the internal revenue audit team so as to

12
 Clues and Their Follow-up

curb the practice of repetitive mistakes and avoid proceeds to reduce the profits by claiming bogus
any re-assessment/ rectification proceedings. losses in share transactions etc. All he needs is
The officers should get in touch with the officers to find an unscrupulous broker who will issue
in other locations handling similar taxpayers and bogus vouchers of purchase and sale over certain
understand the nature of scrutiny points and period of time resulting in the desired amount
additions made by them, being sustained by of losses. This method is separately discussed
the Appellate Authorities. The Assessing Officer in detail in a subsequent volume dealing with
should explore the strength of knowledge the transactions on stock exchanges. Suffice it to say
Department internally possess extensively. that such claims require detailed investigation.
Given that Now-a-days fewer cases are referred
to transfer pricing officers, the Assessing Officer 2. FOLLOW UP
should be in touch with the transfer pricing officers
2.1 Organisational Setup
to understand whether the assessee is actually
transacting at arm’s length with related entities. Before an AO starts investigation, study of
It is not possible to enumerate all the fraudulent assessee’s organisational setup is necessary.
practices because within a certain framework When dealing with a vast business, say a textile
they can be varied in a number of ways. mill, it is useful to ascertain the duties of each
person in-charge of a particular Department, the
1.3 The transactions which are altogether type of work that he does, the records that he
outside the books, would ordinarily be either in maintains etc. and to follow this up in a logical
the form of investments or expenses. manner from the point of inward entry of raw
Investments: These may be in shares, material to the outward dispatch of goods -
securities, national savings certificates, prize both from the point of view of production and
bonds, Post Offices deposits, gold bullion/ accounting. This may appear time-consuming
jeweller, investments in lands and buildings, in but it is not. Each organisation tries to develop
other companies etc. in own names or in the its characteristics depending upon its needs etc.
names of family members, nominees etc. Therefore, an officer examining two textile mills
Expenses: Secret wealth, if not invested, is may have to resort to two different approaches.
bound to be utilised for unrecorded personal In the case of a textile mill while studying its
expenses. Where accounts are maintained organisation setup it appeared that the mill was
personal expenses are usually written in lump paying on piece-work basis for packing of cloth
sum without details as to their exact nature. bales. There were regular fortnightly bills showing
Where no accounts are maintained, personal the number of bales packed every day, their serial
expenses are estimated at a ridiculously low numbers and the amounts paid. Each bill was of
figure. It is, therefore, necessary always to a very small amount and therefore unimportant
obtain a break-up of household expenses as by itself, as far as the expenditure aspect was
completely as possible, particularly when they concerned. But it had a different potentiality.
are unreasonably low. Expenses on education, If according to these bills it was found that 100
clubs, travelling-particularly air travel, foreign bales had been packed, the logical step would
trips, major ceremonies, credit card payments be to see if these 100 bales had been accounted
etc. are usually the items to be checked. for in the bale register and later in the sales. This
Losses: Many assessees depress the book was an important clue which was found as a
results by debiting “bogus losses”. The technique result of the study of the organisational setup.
is simple: say, a builder has earned profit of When these bills were cross-checked with the
Rs. 1 crore which he cannot conceal. He then bale register, it was noticed that for some years

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Techniques of Investigation for Assessment Vol. 1

the production as per the bills tallied exactly with The study of organisational setup includes the
the production as per the bales register, but after study of the office routine; the maintenance
some time the two figures started differing. Every of inward and outward registers, the manner
figure in the bale register was found less than in which the correspondence is filed, and
that shown in the piece-worker’s vouchers. This the manner of indexing the files etc. It would
continued for some time and again the figures in involve study of the various Sections, the list of
the register and the vouchers started agreeing. the members of the staff in important Sections
This established understatement of production such as accounting, purchase, sales, stores,
to the extent of the difference in bales as per gate-keepers etc., a study of the various family
vouchers and as per the bales register. Any clue, members and persons in-charge to see how and
howsoever, simple has got to be followed up to where and in what position they are employed.
its logical conclusion in all possible ways. How each aspect can have vital bearing on the
Study of organisational setup also enables investigation is illustrated by a case where the
the determination of line of investigation and assessee produced certain letters to show the
identification of the weaknesses of the assessee’s possession of wealth by him at the time when
possible defence. The AO should try to see he started business. This was a certificate given
whether the weak points have been exploited by by the Presidency Magistrate to the effect that
the management or these are only the outcome of he had verified the wealth of the assessee as
the management’s inefficiency. Say for example, stated therein. According to the assessee, this
it is found that the store-keeper is a person in certificate was forwarded by him to various
the absolute confidence of the management. military authorities. It would have certainly
The question would be: why? The answer by been a Herculean task to rebut this evidence.
the management would be that they would have However, the study of the inward and outward
necessarily to put a man in their confidence correspondence registers indicated that all the
to keep check over the disposal of stores. This letters before the date of receipt of the certificate
is one aspect of the situation; the other being from the Presidency Magistrate and thereafter
that the presence of a man in their confidence were entered in the inward register but this letter
could also be exploited by the management to was nowhere to be found. The same was the case
take away stores, dispose them of in the open in respect of the outward register. It, therefore,
market and yet debit the accounts for the same became easy to establish that the certificate was
as consumed. This would only be a clue, to the not issued on the date on which it was purported
investigator who would, therefore, switch on to have been issued. Of course it required skill
his energies to the examination of consumption to establish this, but at the material time a vital
of stores. If the management wants to resort to clue was picked up which helped establishing
manipulation they would take into confidence as a substantial fraud with little effort. It did need
few people as possible. The issue slips in such skill but not much of time or effort. Skill, because
cases could be traced possibly to the confidential the organisation was studied closely and it was
person. One may possibly trace his notes in the noticed that the assessee maintained a perfect
preparation of the slips. Probably the slip books system of inward and outward correspondence.
utilised by that man would be altogether separate
from those utilised by other clerks. These slips In another case, a study of the capital block
may not have gone through all the checks to namely machinery showed that the assessee
which a slip issued by an ordinary clerk, would had setup a welding generator sometime ago,
be subjected. Aspects such as these ultimately and six months later a debit was found for a lakh
lead to the establishment of bogus debits for of rupees in respect of welding charges paid to
consumption of stores. a firm with an impressive looking name. The

14
 Clues and Their Follow-up

organisational record showed that the assessee assessee. It was known to the bankers but in
was having a welder in his employment and the assessee’s books there was no mention of
apparently there was no need for paying labour the security. An enquiry about the whereabouts
charges of a lakh of rupees for welding work. of these persons made the bank authorities to
This point, therefore, required a probe. The admit that the overdraft was granted against the
matter was fully investigated and it was proved collateral securities lodged by the assessee with
that the debit of Rs. 1 lakh was fictitious. the bank.
In another case payments were received from
2.2 A Golden Rule a businessman by cheque from a person say
A golden rule for picking up clues is to look for “A”. Scrutiny showed that the cheques were of
the abnormal and the unusual. An enquiring running serial number though they were received
mind would certainly look for reasons for the on different dates, separated by months. This
deviation. Generally, this could be achieved appeared to be contrary to the normal behaviour
by doing a review of the financial statements of a genuine party, because he would be
of the assessee. The general principle is that a drawing a number of cheques in favour of other
businessmen as well. Therefore, the assessee
normal person behaves in a normal way unless
could never be receiving a cheques bearing
there is a motive force to drive him out of that
running serial numbers. Therefore, a probe was
course. When a person goes for overdraft to the
made. It emerged that A’s account was started
bank, the banker insists on security. When a
by the assessee himself. His modus operandi
person makes payment he wants receipt. When
was that he would make sales at a low rate to ‘A’
a loan is repaid the promissory note is returned
and thereafter show sales at substantially higher
or when a loan is advanced a promissory note
rates as if made by ‘A’ thus accounting for a part
is taken. Exceptions to any of these and similar
of the profits in his account books while taking
deviations from normal commercial practice,
away large amount of it through A’s account.
should always be enquired into. In a case where
So far as he was concerned the stock would
the bank had given substantial overdraft and
completely tally and payments, having been
the assessee claimed it to be a clean overdraft, a
made by cheques, create an impression that the
query was addressed to the bank. The skill lies in party was genuine. If the AO was not alert to
the manner of making enquiry. If the query was notice the continuity in serial numbers and draw
worded in a vague fashion as to whether there logical inferences he would have failed to locate
was any security against which the overdraft the dealings of the assessee.
had been granted, the banker would possibly
have given a vague answer and the nature and The abnormality or the departure from the
type of security would never have come to light. normal behaviour can appear in many ways. It is
However, it is not normal a behaviour for a bank, not possible to make a list of all such cases. What
and one can rightly presume that there must have is necessary is that a person should know what is
been a security against which the overdraft was common behaviour and anything that does not
granted. An attempt has, therefore, to be made fit into the course of the common behaviour is
to find out the truth. Sometimes a statement treated as not normal. And if it is not normal, an
on oath of the banker may serve the purpose. enquiring mind will look for the reasons for this
Sometimes one may have to go through the abnormality and very likely the officer will find a
security registers to know the collateral security. manipulation on the part of the assessee.
In the case referred to above, collateral security It is possible to focus on the abnormal and the
in the form of gold had been lodged with the deviant, only if the AO is acquainted with the
bank in different names other than of the normal commercial practices in a particular

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Techniques of Investigation for Assessment Vol. 1

trade. In this age of information technology of construction, by taking overdrafts against

and rapid changes in organisational methods collateral securities standing in different names.
and commercial practices every AO must keep In all these cases, by a sustained effort it may
himself abreast of them. not be difficult to establish the concealment.
2.3 Psychology of Assessees: In order to The question, however, that would straightaway
determine the line of investigation, it is useful to arise would be that of recovery. Where bogus
understand the assessee’s mental make up, his loans are added and total income is increased,
social standing and his approach to life, which in demand is raised. But there are no visible assets
for recovery. These monies once introduced
other words means, his complete psychological
are later taken out and are either reinvested in
make up. This analysis could be made with
benami names or are kept in cash, but at the
reference to the person’s background, his
time when recovery is pressed there are no assets
education, whether he is rich by birth or is a self-
on the surface. Thus in cases such as these,
made man. Some assessees not only conceal
determination of concealment is not a difficult
profits but are bold enough to utilise them for
job but recovery is difficult. In the case of other
investments. Such persons take chances and
category of people, detection of concealment
often get away with it. Some other assessees
itself would be a problem because here income
do not mind assessments or settlements of their
would be concealed in not too obvious a manner.
income ultimately, but resist actual payment
Thus persons with different mental make ups
of tax. Others, with high sense of reputation
have to be approached in different ways. In
and dignity, would resist the assessment itself,
cases of the second category, it would be better
because once an assessment is made the recovery
to ask for a genealogical tree of the assessee;
proceedings start and that would endanger their
wealth statements of these persons; a break-up
reputation and social standing.
of household expenses, club expenses, holiday
The first category of people may introduce their expenses and expenses on trips. It is likely
secreted wealth as bogus loans in their books of that these details will not be provided by the
account or may invest in shares in bogus names assessee easily, the Assessing Officer should try
and with these funds start new industries. They to indulge into informal talks with the assessee to
are taking risks in regard to these cash credits pull out these types of information. This would
which if disbelieved would be added back to their probably give information necessary for the
income. They would then have an opportunity assessment of total income. The next item would
of contesting before the various appellate bodies be determination of doubtful accounts from the
and ultimately of running up for a settlement. group of names Centreed round the assessee’s.
Even after the incomes are settled, they would If a person were to introduce his secreted profits
resist the payment of tax. In these case, one in bogus names, he would select names - even
is almost certain that the secreted income is unconsciously-which will revolve round the
ploughed back in one form or the other. The usual names of persons close to him. Therefore, it is
forms resorted to are loans, cash credits, sales of necessary to obtain a complete genealogical tree
gold and jewellery, investments in bogus names, of the assessee. Permutations and combinations
investments in properties wherein secreted of names found in this are likely to provide
profits are ploughed back by understating cost important clues to the benami accounts.

16
 Chapter

3
Investments—Statement
of Total Wealth
1.
1. In the ‘investment’ method an attempt is
made to find the net increase in wealth of an
assessee over several years and compare it with
the increase in wealth as disclosed by his books
of account and assessments records. Statements
of total wealth as on two specified dates are
obtained, and the growth in wealth is studied.
These statements serve to check whether the
assessee has been assessed properly over a
period of years. The statements also pin down
the assessee’s assets and liabilities on a particular the unaccounted outgoings of the assessee, are
date and comes handy on a future date. added. From the resultant figure, receipts of non-
taxable nature e.g., income from agriculture,
2. Suppose the increase in wealth as per wealth
etc., are deducted. The AO has then to examine
statements is ‘X’ during a given period and
whether the net increase so computed could be
increase in wealth reflected in assessee’s books
accounted for with reference to the disclosed
of account for the corresponding period is ‘Y’.
incomes.
The question arises as to how the assessee came
to possess the surplus wealth i.e., X - Y. Further, if 3. The statement of wealth can be obtained
the assessee is found to have incurred expenses under Section 142 of the income-tax Act,
say ‘Z’ not recorded in the books, he will have 1961 with the previous approval of the Joint
to explain the source of X-Y+Z. His explanation Commissioner. A performa (ITNS 20) has been
may be that the unaccounted receipts are capital prescribed for this purpose.
receipts or are receipts of non-taxable nature.
These items will be deducted if the explanation 4. GENERAL POINTS
is found correct and the balance only will have
4.1 Before undertaking an investigation, it is
to be considered.
preferable to obtain duly verified statements of
In other words, increase in wealth during the wealth from the assessee showing his net wealth
investigation period is determined by deducting as on the opening and the closing date of the
the wealth on the opening date from the wealth investigation period. Such wealth statements
on the closing date. To this net increase in wealth, should also be obtained from persons closely

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Techniques of Investigation for Assessment Vol. 1

related to him, and those of his associates, net wealth will be reflected in the capital account
relations, or business contacts suspected to be but all the same there may be fictitious credits
his nominees or benamidars. on the liabilities side. Similarly, although newly
4.2 While obtaining the wealth statements, it constructed or newly acquired immovable or
is essential to value the assets on cost and not other properties may have been reflected in the
market price. books, their cost may have been understated.
In cases requiring detailed investigation, these
4.3 While filing wealth statements, assessee assets and suspicious liabilities will themselves
may try to inflate the wealth as on the opening require proper scrutiny before accepting the
date. This may be particularly so where action capital shown in the books. In respect of assets
under Section 147 has become barred by time. and liabilities appearing outside the books such
The scrutiny of wealth on the opening date, a scrutiny is more indicated.
therefore, is of prime importance. The assessee
5.
will usually try to overstate his assets like cash,
6. ACQUISITION OF WEALTH IN THE
jewellery, and reduce loans payable etc., in this
INVESTIGATION PERIOD
statement.
4.4 There are various sources available today 6.1 Immovable Property
vis-à-vis past with the advent of internet and
A part of concealed income may have been
technology. The same should also be explored
used in construction of residential and other
and documented before pursuing any taxpayer.
immovable properties. A reduced value may
Such information can be collated from the
be shown in the account books or in the wealth
internal sources (like Project Insight, AIR, etc)
statement.
and from external sources (like News Article, You
Tube Videos showcasing Wealth of a Celebrity, 6.1.1 New Constructions
Twitter, etc).
In cases of new construction, it would be useful
5. In computing the net increase of wealth, to inspect the property to have an idea of the
certain pitfalls are to be avoided. It is necessary
cost of construction. Enquiries can be made from
to scrutinise these statements to check:
the Municipal Corporation regarding the date of
●● Overstatement of Assets and passing the plan, the dates of commencement and
understatement of Liabilities in the completion of construction, plan of the building,
statement as on the opening date. Municipal valuation etc. Thereafter the assessee
●● Understatement or omission of assets can be asked to furnish details of construction.
and overstated or bogus liabilities in the Cost incurred in different accounting years and
statement as on the closing date. on different items of construction e.g. bricks,
cement, timber, iron, labour, sanitary and electric
●● Any bogus and/ or overstated non-taxable
installations, lift, furniture etc should be classified.
receipts during the intervening period.
After ascertaining the total plinth area, the AO
●● Omission and/ or understatement of should find out the average disclosed cost of
expenses and outgoings during the construction per sq.ft. and compare this with
intervening period. the cost shown in comparable cases, as also the
The scrutiny can be made separately for the relevant CPWD rates. If need arises, the Assessing
assets and liabilities appearing in the account Officer should summon the construction service
books, if any; and those outside the books. So provider/ vendors engaged by the assessee for the
far as the books of account are concerned the work to cross check the details.

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 Investments—Statement of Total Wealth

Where persons concerned have control over a 6.1.2 Purchase of Property

company, there is the possibility of diverting a Where property is acquired by purchase, the
part of the construction expenses to the books conveyance is made by a registered document.
of the company. Therefore, in appropriate cases, The assessee will show the purchase price as
account books of the company should also be shown in the registered deed. But it is common
examined. In one case, a textile mill owner knowledge that sometime the buyer and the
had constructed a building worth Rs. 13 lakhs. seller in collusion agree to show in the deed a
The account books maintained by him showed reduced amount of consideration to save stamp
an investment of only Rs. 600,000. Reference duty and registration charges and also to save
to certain reputed suppliers of sanitary and the vendor from assessment to capital gains tax
electrical fittings showed that, in respect of two (or to income-tax where the vendor is a dealer
items alone, the firm had supplied services and in real estate). The purchaser may not show
materials worth Rs. 3 lakh to the assessee. In in his books the extra amount paid by him to
the firm’s books there was an account in the the seller. These aspects should be kept in view
name of the assessee in which these items had before accepting the purchase price of newly
been debited. It was, however, found that only a acquired house properties. This can be verified
fraction of the amount due to the firm was paid by the ready reckoner rates of that particular sub-
by the assessee from his personal funds. At the registrar. In case the reckoner rates are higher
instance of the assessee, the balance amount than the rate mentioned in the agreement, the
due from him was transferred to the account of Assessing Officer should investigate it further.
the company in the firm’s books. The company Additionally, Information can be collected
subsequently paid this. A glance at the firm’s from the Builder to understand at what rate
ledger folio in the company’s books did not the flats has been sold to others to understand
reveal any identical credit in favour of the firm but involvement of on-money.
on scrutiny it was found that, in the company’s
books, the firm was credited with smaller 6.1.3 Purchase of Property in Foreign Land
amounts on four or five occasions spread over If this information is not disclosed, finding this
three years towards alleged purchase of certain information would be challenging. The Assessing
stores and articles by the company. The total of Officer will need to analyse the financial
these amounts equalled the amount due from statements of the assessee minutely and probe
the assessee. There was no supply of stores at all the assessee to pull out such information, if any.
by the firm to the company nor did the registers The subsequent challenge would be to find out
maintained by the company’s storekeeper show the value of investment. The Assessing Officer
the receipt of such stores in the godown or their will need to act appropriately in such situation
issue to the manufacturing department. When to gather maximum information from the
the matter was pursued it was found that items assessee. Additionally, the Ministry of Finance
like masonry charges, carpentry charges etc has strengthened the Treaty with other Countries
which related to the house construction of the which also provides for Information exchange
assessee were debited to this account Ultimately, Clause under DTAA. The Assessing Officer
the assessee came forward and admitted the should certainly make use of the same (through
real cost of the house constructed by him. This proper channel) and collate the information
instance shows the way understatement of from other jurisdiction.
construction is resorted to by persons having It should also be seen whether there had been
control over companies. large scale renovations to an existing property.

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Techniques of Investigation for Assessment Vol. 1

This would be indicated by the increased From such companies the following information
income yield without any apparent increase in should be gathered:
investments. If the property was subjected to an ●● Names and addresses of the persons who
initial charge by way of mortgage, the manner applied for shares.
in which it was cleared should be looked into.
Similarly, insurance policies, if any, should ●● Names and addresses of the persons to
be scrutinised to have an idea of the value at whom the shares were allotted.
which the property has been insured to check ●● The date of payment of share capital on
the reasonableness of the value declared by the application and on calls.
assessee. In respect of house sites and agricultural
●● Mode of payment i.e. whether paid in cash
lands, apart from verifying the correctness of
or by cheque.
the purchase price, the extent of improvement
and development carried out should also be ●● If paid by cheque, the bank on which the
ascertained through local enquiry. cheque was issued and name of the person
who issued the cheque.
6.2 Movable Properties ●● Whether any change has been effected in
the shares from the first allotment. If so,
6.2.1 Shares and Securities names and addresses of the persons who
Where shares and securities are disclosed in the bought the share subsequently, should also
wealth statements as owned on two specified be obtained.
dates, a statement of the shares and securities Usually, application money is sent along with the
should be drawn up with reference to the applications for allotment of shares,. If the shares
assessment records, and dividend warrants are not allotted, these amounts are returned. If
received in the period between the two dates on the applicants are from places away from the
which the wealth statements have been called. registered office of the company, the amounts
These should be compared to see that the sources would usually be remitted through bank drafts.
of assets disclosed in the assessments have been On allotment of shares the company would
incorporated in the wealth statements, as shares send information to the applicants and would
and securities held for short periods in between subsequently receive call money through bank.
the investigating period would not find a place If the shares are not allotted, the money would
in the wealth statements and it is quite likely that be refunded by the company through bank.
the source of moneys invested in them is kept Bearing these broad features in mind, the AO
outside the wealth statements filed. should make enquiries about suspected parties.
With the dematerialisation of shares the relevant
Concealed income is usually invested in shares information can now be obtained from the
in the names of wife, minor children or even Depository Participants (DP) or preferably from
some benamidars. If the investment in shares the Depositories as all the transactions of transfer
has been made in those companies which do of demat shares are recorded by the Institutions.
not belong to the group of the assessee, it may
be difficult to find out such benami investments, In a group of cases investigations about share
unless some outside information is received. It capital showed the following results:
is quite probable that most of the investments ●● A number of new shareholders were all
in the share capital are made in the companies residing at stations away from registered
belonging to the group of assessee himself. office of the company.

20
 Investments—Statement of Total Wealth

●● All of them signed share applications on Companies. The Ministry of Corporate Affairs
the same date and these were received in have tracked and declared the Companies which
the registered office of the company on the falls under this Category. Shell Companies have
same date. been used by many Hawala Traders to convert
the illegal/ black money of affluent people into
●● The share applications showed that they
white by making investments at premium and
were written by the same person although
then selling such companies at a throw-away
signatures were in different names.
price. The investments are then sold at cost by
●● All persons who applied for shares were the purchaser and the entire sales proceeds is
allotted the exact number of shares for accounted without any tax incidence. The money
which they had applied. received on sale of investment is nothing but the
●● All the money on application and calls was cash of the purchaser which is unaccounted and
paid in cash. untaxed.

●● Dividends were also paid in cash by the 6.2.2 Movable Properties–Vehicles

company to the shareholders.
A statement of vehicles owned in the name of the
●● Letters sent by the investigating officer to assessee, spouse, children, parents or even some
the alleged shareholders, were returned benamidars should be drawn-up. Usually, when
by the post office with the remarks “not the assessee has concealed certain income, it
known”. is likely that he purchases vehicles to match-up
When the assessees were confronted with these with his status in the society. These vehicles may
facts, they accepted all the investment as their be correlated with his declared income.
own. Additionally, it is seen Now-a-days that some
In some other cases it was seen that shares of people also purchase their private aircraft or a
newly floated companies or even old shares yacht. The value of such aircraft/ yatch may be
were purchased through disclosed funds. found and correlated with his declared income.
Subsequently, these shares were shown to Although finding details of the ownership of
have been sold to some persons and usual vehicles is a difficult task, the Assessing Officer
transfer entries were made in the books of may try to connect with the regional transport
the company. The sale price realised from the offices to find out the number of vehicles owned
alleged purchasers was thus brought back in the by the assesse and the vehicles having registration
books. On enquiries, it was seen that the alleged details matching with the address of the assessee.
purchasers were benamidars of the assessee Similarly, the aircraft/ yacht are also required to
and the alleged sales were never made. The be registered with the Directorate General of
amounts introduced in the book in the garb of Civil Aviation/ Directorate General of shipping
sale of shares were mere introduction of secret respectively. Accordingly, these information may
accumulated profits. In one case, during a search be pulled-out from these government bodies
a large number of such share scripts were found including online sources.
in the house of the assessee with blank transfer
memos duly signed. All these shares were shown 6.3 Cash
by that assessee to have been sold earlier and
Opening Wealth statement may indicate large
sale proceeds were brought in the books.
cash to cover up the subsequent investments out
Special attention is required in respect of of concealed income. Therefore, cash shown
shareholders and investments made by Shell in the opening statement must be accepted

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Techniques of Investigation for Assessment Vol. 1

with great caution. For this purpose, it may be In important cases it may be necessary to get a
necessary to have an idea of the total income of detailed list of jewellery. The general status and
the assessee for the period prior to the opening background of the assessee should also be kept
date and also the investment and expenses of in view while judging the reasonableness of the
the assessee for that period. Circumstances such quantity of jewellery and bullion possessed or
as, the assessee borrowing heavily during that acquired.
period, or seeking time even for payment of
small taxes on ground of financial difficulties, or 7. LIABILITIES
drawing from his personal account or from his
bank account for household expenses, or making In the closing statement, the assessee may try to
periodical deposits in bank, or selling jewellery reduce the net wealth by showing bogus liabilities.
and other assets for discharging liabilities, may These may be for purchases and/ or expenses
indicate that the story of availability of large cash shown to have been incurred in business; or for
at the beginning is fake. loans taken from individuals or banks. Enquiries
have to be made to see whether these purchases
On the other hand in the closing wealth or expenses were actually made or not. If the
statement the assessee may not show any cash liabilities are continuing for a number of years,
at all or may show nominal amount. Generally, there is every chance that these are not genuine.
the period of investigation is considered up to
the end of last accounting year. A perusal of As regards bank loans, enquiries should be
the personal accounts of the assessee (and also made about the securities pledged. Only in rare
his bank accounts) may indicate large drawings cases banks allow clean overdrafts. The value of
towards the close of the period. If the assessee securities pledged with a bank is always more
is not able to explain how the drawings were than the amount of over-draft allowed. The AO
utilised, the point as to whether such drawings should see whether these securities find place in
remained with him as cash has to be considered. the list of assets filed by the assessee. In many
So also, if there have been sale or realisation of cases, it has been seen that fixed deposits made
investments not shown in the wealth statement, in names of ladies or relations or benamidars
the assessee should be asked to explain whether were pledged with the bank for obtaining over-
those remained as part of the cash not disclosed drafts. Therefore, whenever such assets are not
by him. included by the assessee in his list, investigation
regarding source and ownership must be made.
6.4 Investment in Gold, Jewellery etc. If an assessee has pledged raw materials or
stocks with a bank, the AO should see if the
Often concealed income is invested in gold, silver
pledged stocks are properly accounted for
or jewellery. Enquiry about such investment
in the books and included in the list of assets
may prove to be difficult when the assessee has
filed by the assessee. The value declared to the
persuaded the jewelers not to keep record of such
bank normally represents the cost incurred by
sales. Therefore, the investigator has to depend
the assessee and in case there is wide variation
upon information from other sources. It is usual
between the value declared to the bank and the
to show large quantity of jewellery and bullion
value shown in the wealth statement, suitable
in the opening wealth statement while in the
enquiries should be made.
closing statement it will be shown at a nominal
amount. In such cases an attempt should be The practice of introducing secret income as
made to find out when the jewellery and bullion cash credits in the names of third parties is quite
were purchased and whether the assessee was common. Whenever such loans are shown,
capable of purchasing or possessing so much. proper investigation should be made.

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 Investments—Statement of Total Wealth

8. OUTGOINGS performed in the investigation period should be

prepared and the assessee should be asked to
8.1 General facts such as the status and
state the expenses incurred in each events on
style of living, spending habits etc. should be
different items e.g. gifts, purchase of jewellery,
ascertained. For determining personal expenses,
entertainment, etc. This should be verified by
the following information may be of use:
local enquiries.
●● The location of the residential house and
the rent or municipal taxes paid. 9. CLAIMS OF NON-TAXABLE
●● Number of servants employed for INCOMES
household work.
9.1 Income from Agriculture
●● Names of the club of which the assessee
is a member and the amount of club bills. The assessee may show that he possesses
agricultural land and receives certain annual
●● The number and make of the cars owned
income from this source. Usually books of
by the assessee.
account are not maintained for agricultural
●● Number of dependent persons and general income and, therefore, such income can be
standard of living. easily inflated. At present only in some States,
●● Life insurance premium, P. F., donations, there is levy of Agricultural income-tax. The AO
taxes etc. paid. should ascertain the minimum amount liable
to Agricultural income-tax in the particular
●● Payments made to credit card companies State. The claim of agricultural income should,
●● Number of school-going children, the be judged with reference to the amount of
institutions to which they have been agricultural income-tax paid by him.
admitted, and the expenses incurred on Where detailed probe is required, it may be
their education. necessary to obtain particulars including survey
●● Special facts, such as foreign trips, amount numbers of the lands actually cultivated, the
spent on vacations, etc.. nature of cultivation done, the number of crops,
source of irrigation, particulars of land revenue,
●● Extraordinary expenses, such as marriages, the details of purchase of seeds, fertilizers etc.,
gifts, donations to charities etc. the facilities of storage of agricultural produce,
●● Expenses incurred towards purchase of the particulars of sale proceeds of the produce
Crypto-Currency (Bitcoin, etc). and the persons to whom it was sold. It is
usually possible to obtain from the land revenue
●● Spendings on luxury items, such as department ‘crop statement’ in which these
luxury portable electronic devices, luxury particulars are shown. The AO can then make a
timepieces, luxury writing instruments, fair estimate of the agricultural income.
super premium beauty and personal care
products.
9.2 Gifts, etc.
The above information will have to be discreetly
Often assessees claim that he or his wife or
collected without giving offence to the assessee. children have received large gifts from their
As the information is of personal nature, any relations. A list of such donors should be obtained
over-zealous approach should be avoided. along with the amounts of gifts and date of such
Where a detailed probe is called for, a list of gifts. Enquiries should be made from the donors
the marriages and other major ceremonies whether they have actually made such gifts.

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Techniques of Investigation for Assessment Vol. 1

Cash gifts and legacies should also be examined 9.4 Insurance, G.P.F., etc.
with reference to the payer’s ability to make
In cases of maturity of Insurance Policy, Provident
such gifts. Where the assessee is related to the
Fund etc., there should not be any difficulty
donor, an enquiry with his other relatives or
persons who are similarly placed with reference since these receipts are capable of complete
to the donor, may help to bring out the truth. For documentary verification.
instance, when an alleged donor picks up one
of his relatives to make a handsome gift other 9.5 Mutual Fund Units
similarly-placed relatives would be aware of it, The statement of the units purchase and sold
and if the gift is not true, they may come forward during a year should be called for and verified
to state the truth.
with the AIR report since Mutual Fund Companies
are also required to share the information under
9.3 Sale of Ornaments
Rule 114E.
Some of the investments may be claimed to
have been made from sale of family ornaments. 10. After the above enquiries, the income of
If the amount is substantial, details of acquisition the investigation period can be determined by
of ornaments, mode of sale and person to whom adding out-goings to the net increase in wealth
sold, should be obtained for verification of the and subtracting the non-taxable income from
sale as also the acquisition of ornaments. this figure.

24
 Chapter

4
Co-Ordination with Other
Enforcement Agencies
and Sharing of Information
1.
2.

1.1 Various departments & agencies are

working under the Central Government for
tackling fiscal offences. Most of these are under
the Ministry of Finance (Dept. of Revenue) like
income-tax Dept, Central Excise & Customs,
DRI, Enforcement Directorate, Central
Economic Intelligence Bureau (CEIB etc. may be involved at various stages of tackling
Similarly state govt. departments also deal with financial crimes, including the prevention,
economic offences under their statutes through detection, investigation and prosecution of
their enforcement/ intelligence outfits. However, offences and the recovery of the proceeds of
because of computerisation, faster means of crime. Tax offences are often intrinsically linked
transport & communication and ingenuity of the to other financial crimes as criminals fail to
tax evaders, economic crimes have increased. report their income from illicit activities for tax
Only a well-coordinated approach & sustained purposes. Conversely, criminals may over-report
effort can check their fraudulent activities which income in an attempt to launder the proceeds of
otherwise deprive the State of its legitimate dues crime. In its 2009 and 2010 recommendations,
besides causing irreparable damage to the moral the Organisation for Economic Co-operation
fabric of the Society. and Development (OECD) advocated greater
1.2 Financial crimes are growing in co-operation and better information sharing
sophistication and criminals accumulate between different government agencies
significant sums of money through offences such involved in the fight against financial crimes
as drug trafficking, investment fraud, extortion, both domestically and internationally.
corruption, embezzlement, tax evasion and 2. There are two main agencies/ forum which
tax fraud. The nature of financial crime means are responsible for coordination of information
that the same activity may violate a number of in respect of tax crime, which are discussed
different laws. Different government agencies as under:

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Techniques of Investigation for Assessment Vol. 1

2.1 The Central Economic Intelligence for intelligence and control of economic offences
Bureau (CEIB) such as smuggling, money laundering tax evasion
The CEIB is the nodal agency for economic and fraud. The Council also advises the Finance
intelligence mandated to ensure effective Minister and the Union Council of Ministers on
interaction and coordination among all the laws regulating the financial sector and fighting
concerned agencies in the area of economic economic crimes.
offences. It functions as the clearing house of all The chairperson of the Economic Intelligence
economic intelligence and provides a platform Council is the Finance Minister of India. Its chief
for such exchange between various agencies members include the Governor of the Reserve
within the Department of Revenue and other Bank of India (RBI), Chairman of the Securities
intelligence and enforcement agencies including and Exchange Board of India (SEBI) and the
IB, RAW, CBI etc. The main responsibilities of Directors of the Central Bureau of Investigation
CEIB are as under: (CBI), Narcotics Control Bureau (NCB) and the
●● To collect information on various illegal Directorate of Revenue Intelligence. Members
economic activities and monitor sensitive from the Finance Ministry include the Secretaries
and susceptible sectors of the Indian of Finance, Revenue, Company Affairs and
economy and financial sector. the Additional Secretary of Banking. The
Central Board of Indirect Taxes and Customs
●● To ensure the full implementation of is represented by its chairman and its Member
the Conservation of Foreign Exchange responsible for the Excise/ GST, Customs and
and Prevention of Smuggling Activities Anti-Smuggling departments, such as the
Act, 1974 (COFEPOSA). [1] It is also Directors Of Directorate of GST Intelligence
responsible for developing methods (DGGI) and Directorate of Revenue Intelligence
to counter such crimes and criminal (DRI). The Central Board of Direct Taxes is
organisations involved. [1] represented by its Chairman and the Member
●● It is the chief coordinator of other agencies in (Investigation). Other department heads include
the Ministry of Finance that are responsible the Directors of the Directorate General of
for fighting economic offences, as well as Economic Enforcement. The Deputy Director
the agencies of state governments. General of the Central Economic Intelligence
Bureau serves as the Council’s secretary. Special
●● The CEIB also cooperates at the invitees include the director of the Intelligence
international level with the agencies of Bureau (IB) and the Directorate General of
other countries responsible for customs, Foreign Trade.
drugs and economic law enforcement.
2.1 2.3 Regional Committees
2.2 Economic Intelligence Council Under the Economic Intelligence Council are
The Economic Intelligence Council is the Regional Economic Intelligence Committee
apex forum overseeing government agencies (Commonly known as REICs). The REIC,
responsible for economic intelligence and formed in 1990, is the apex forum overseeing
combating economic offences in India. The government agencies responsible for economic
Council is also the apex of 18 regional economic intelligence and combating economic offenses
intelligence committees, and is part of the in the respective states of India. The Committee
Union Ministry of Finance. Formed in 1990, the is under the Economic Intelligence Council. The
Economic Intelligence Council is responsible for head of the committee is usually the Directorate
coordination, strategy and information-sharing General of income-tax (Investigation). There
amongst the government agencies responsible are regular meetings of REIC from time to time.

26
 Co-Ordination with other Enforcement Agencies and Sharing of Information

It is the platform where the different agencies 3.4 Central Bureau of Investigation (CBI)
discuss/ share with each other.
The CBI is the premier investigating agency of
India. The agency has been known to investigate
3. OTHER ENFORCEMENT AGENCIES several economic crimes, special crimes, cases
3.1 As already discussed, various departments of corruption and other high-profile cases. From
& agencies are working under the Central 1965 onwards, the CBI has also been entrusted
Government for tackling fiscal offences. Most of with the investigation of Economic Offences and
these are under the Ministry of Finance (Dept. of important conventional crimes such as murders,
Revenue) like income-tax Dept, Central Excise kidnapping, terrorist crimes etc on a selective
& Customs, DRI, Enforcement Directorate, basis. The Economic Offences Wing of the CBI
Central Economic Intelligence Bureau (CEIB deals with cases of violation of various economic/
etc. Similarly, state govt. departments also deal fiscal laws. The investigation in such cases is
with economic offences under their statutes extremely important for the taxation aspect and
through their enforcement/ intelligence outfits. A thus coordinated investigation becomes very
brief outline of some of the agencies is as under: important. Similarly, State police are also having
3.1 Economic Offence wing for the investigation of
3.2 Directorate of Revenue Intelligence Financial/ economic frauds.
(DRI)
The Directorate of Revenue Intelligence (DRI) 3.5 Enforcement Directorate (ED)
is India’s chief anti-smuggling intelligence, The ED is responsible for enforcement of the
investigations and operations agency. The Foreign Exchange Management Act, 1999
Directorate is run by officers from the Central (FEMA) and certain provisions under the
Board of Indirect Taxes and Customs (CBIC) Prevention of Money Laundering Act (PMLA).
who are posted in its various Zonal Units as well Work relating to investigation and prosecution
as in Indian embassies abroad as part of the of cases under the PMLA has been entrusted to
Customs Overseas Intelligence Network. DRI is Enforcement Directorate. The policy aspects of
the major intelligence agency which enforces the the FEMA, its legislation and its amendments
prohibition of the smuggling of items including are within the purview of the Department of
drugs, gold, diamonds, electronics, foreign Economic Affairs; while policy issues pertaining
currency, and counterfeit Indian currency.
to PMLA, are the responsibility of the Department
of Revenue.
3.3 Narcotics Control Bureau (NCB)
NCB is the nodal drug law enforcement and 3.6 Serious Fraud Investigation Office
intelligence agency of India responsible for (SFIO)
fighting drug trafficking and the abuse of illegal
substances. The NCB was created in 1986 to The Serious Fraud Investigation Office (SFIO)
enable the full implementation of The Narcotic is a corporate fraud investigating agency
Drugs and Psychotropic Substances Act, 1985 in India. It is under the jurisdiction of the
and fight its violation through the Prevention Ministry of Corporate Affairs, Government
of Illicit Trafficking in Narcotic Drugs and of India. The SFIO is involved in major fraud
Psychotropic Substances Act, 1988. Officers probes and is the co-ordinating agency with
in this organisation are drawn from Indian the income-tax Department and the Central
Revenue Service, Indian Police Service and Bureau of Investigation. It is a multi-disciplinary
other Paramilitary forces. The Narcotics Control organisation having experts from financial sector,
Bureau is also represented on the Economic capital market, accountancy, forensic audit,
Intelligence Council. taxation, law, information technology, company

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Techniques of Investigation for Assessment Vol. 1

law, customs and investigation. These experts discrepancies and check whether there’s been
have been taken from various organisations any leakage in tax collected, raising the prospect
like banks, Securities and Exchange Board of of even greater scrutiny. It will be possible to
India, Comptroller and Auditor General and analyse and synchronise GST returns, income-
oncerned organisations and departments of the tax returns and transfer pricing submissions in
Government. a manner that hasn’t been possible before. The
GST taxation system has been divided into
two parts–Central GST (CGST) and State GST
3.7 Authority under Goods and (SGST). Therefore, for effective coordination the
Services Tax (GST) AO has to collect information both from CGST
3.7.1 GST (Goods and Services Tax) is a single and SGST authorities.
indirect tax aimed at making the country a unified
common market. It is imposed on the supply of 4. SHARING OF INFORMATION
goods and/ or services within India. Multiple
indirect taxes that the Central Government or 4.1.1 In the course of their activities, different
State Governments impose on suppliers and government agencies collect and hold
consumers are subsumed by GST. The tax information on individuals, corporations and
came into effect from July 1 2017 through the transactions which may be directly relevant to the
implementation of 101th Amendment of the activities of other agencies in combating financial
Constitution of India by the Indian government. crime. Mechanisms to enable this information to
The tax replaced existing multiple cascading taxes be shared improve the prevention and detection
levied by the central and state governments.
of financial offences, enable investigations to be
The tax rates, rules and regulations are governed conducted more effectively and efficiently, result
by the GST Council. GST Council is the in faster and more successful prosecutions, and
governing body of GST having 33 members. It
increase the likelihood of the proceeds of crime
is chaired by the Union Finance Minister.
being recovered. In order for information to be
3.7.2 “Goods and Services Tax” Network shared, legal gateways must exist between the
(GSTN) is a non-profit organisation formed
relevant agencies. Conditions and exceptions
for creating a sophisticated network for GST.
The portal is accessible to the GST authorities can be applied to different forms of arrangement
for tracking down every transaction, while and gateways may provide for different
taxpayers have the ability of connect for their arrangements to apply in different circumstances.
tax returns. GSTN is wholly owned government Under all types of co-operation with respect to
company having equal shares of state and central sharing information among different agencies,
government. As per GST Law, a registration it is important to protect the confidentiality of
number which will be issued by GSTN (Goods
information and the integrity of work carried out
and Service Tax Network), will be PAN based.
In other words, now all registrations under by other agencies.
GST, whether CGST or SGST, will be linked 4.1.2 Time is of the essence for effectively
with PAN. Even earlier, Excise and Service Tax co-coordinating the enquiries amongst various
registrations were being linked with PAN but
so far State VAT was concerned, they were not agencies. If the information is not passed on
connected with PAN. Though State commercial to the concerned agency on top-priority basis,
taxes department were asking PAN of taxpayer particularly if such information emanates during
but their TIN (Trader Identification Number) was the course of a search or survey, it may seriously
not linked with PAN. impair the other agencies’ chances of success
3.7.3 As the GSTN is PAN based, the as it will afford the taxpayer/ offender time to
government is planning to compare data filed by manipulate his books and fabricate the evidence.
companies with different departments to detect It would be expedient for an investigator to keep

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 Co-Ordination with other Enforcement Agencies and Sharing of Information

his superior informed in case he comes across ●● Bogus export claim in preferred for
any information having a Customs/ FEMA/ CBI/ claiming various incentives.
Police angle during the course of any operation, ●● Production of goods is suppressed to evade
so that the concerned officer can pass the same excise duty.
to his counterpart in other agencies immediately.
Similarly if during a Police/ CBl/ Customs/ FEMA ●● Turnover is not fully accounted to evade
sales tax.
actions any substantial unaccounted cash or
stock or incriminating document is discovered, ●● False certification by CAs/ Auditors etc. in
the same should be promptly verified by statutory audit reports.
the concerned IT authorities. There is thus ●● Bogus profit/ loss due to manipulation of
paramount need to have effective liaison with shares transactions.
the various enforcement agencies so that all the
●● Transfer pricing adjustments.
agencies are able to effectively implement the
law being administrated by them. In cases where proof exists of such malfeasance,
information needs to be communicated to the
4.1.3 Generally speaking co-ordination with
concerned authorities through appropriate
other departments (both Central & State) can
channels.
achieve twin objectives:
4.3
i. Dissemination of information by other 4.4 Dissemination of Information
agencies which may be beneficially utilised Collected during Searches etc.
by the income-tax Department,
During the course of searches if some information
ii. Dissemination of information by an AO/ is received or document found which shows
Investigator to other agencies. any offence under the Customs, GST, FEMA,
4.1 PMLA, Police or Anti-corruption laws, the
4.2 Dissemination of Information information needs to be quickly passed on to the
Collected during Assessments control room so that it could be expeditiously
transmitted further for enabling the concerned
During enquiry/ assessment proceedings an AO agency and its officers to verify the information
may come across some evidence/ information at a very early stage. CEIB is now the nodal
indicating a person’s involvement in some fraud or agency for co-ordinating and strengthening
commission of some economic offence. Though of intelligence-gathering activities by various
initial enquiry by the AO may not directly establish agencies concerned with enforcing economic
offence, but it may provide useful material to laws. Though CEIB has setup data banks but as
pursue the matter by other departments. Some collation and communication through CEIB may
of the common points which are noticed during take time, an immediate communication with
assessment proceedings are as under: other agencies during search or investigation
●● Bogus purchases booked from fictitious is of paramount importance to facilitate timely
entities. action by those agencies.

●● Bogus Balance Sheets are furnished to 4.5 Legal Aspect of Sharing of

banks with a view to get enhanced credit Information
limits.
4.5.1 Information by income-tax are held by
●● Turnover is inflated to hoodwink the credit the Department in a fiduciary capacity, hence
institutions. the Department owes a bounden duty to ensure

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Techniques of Investigation for Assessment Vol. 1

that personal and confidential information of details disclosed by a person in his income-
a tax payer was held in the safest and secure tax returns are “personal information” data,
manner. Thus, while sharing information legal which is held in “fiduciary capacity” and stands
aspect requires careful examination. Discloser of exempted from disclosure under Clause (j) of
information in respect of the assessee is governed Section 8(1) of the RTI Act, unless it involves
by Section 138 of the IT Act 1961. The CBDT a larger public interest. The Supreme Court
has issued various notifications under Section and various High Courts have often denied
138 from time to time. The AO should examine disclosure of IT returns. The Supreme Court
these notifications issued before sharing the in Girish Ramchandra Deshpande vs. Central
information. Information Commission & others held that the
details disclosed by a person in his income-tax
4.6 Sharing of Information under RTI returns are “personal information” which stand
exempted from disclosure under Clause (j) of
The information of the assessee routinely Section 1(8) of the RTI Act, unless it involves a
cannot be shared with anyone under RTI as larger public interest.

“14. The details disclosed by a person in his income-tax returns are “personal
information” which stand exempted from disclosure under Clause (j) of Section
8(1) of the RTI Act, unless involves a larger public interest and the Central Public
Information Officer or the State public Information Officer or the Appellate
Authority is satisfied that the larger public interest justifies the disclosure of such
information.”

As a matter of fact, the AOs routinely deny 5.1.2 During Recovery Proceedings
disclosure of IT returns citing the court judgments Well co-ordinate enquiries and assistance by other
and Sec 8(1)(j) of the RTI Act. They often cite agencies may facilitate recovery proceedings.
“privacy” and data held in “fiduciary capacity” as Banks, FIU, Customs and Central Excise, GST
the reasons for denying information. However, Police etc. could be of great assistance to AOs in
the facts of the case may be examined in detail suitable cases.
and the larger public interest examined before
5.1.3 During Assessment Proceedings
taking any final decision in this regard.
AOs can collect information from various
5. COLLECTION OF INFORMATION enforcement agencies which could be gainfully
used in selecting appropriate cases for scrutiny/
5.1
collection/ collation of relevant data & its proper
5.1.1 During Searches by other use. During the course of assessment proceedings
Enforcement Agencies such information is often of immense use.
Searches by other agencies sometimes result Similarly corroborative evidence collected by an
in detection of incriminating documents/ independent investigating agency helps the AO to
unaccounted assets. What is important is timely defend his case before the appellate authorities.
communication of information by each agency
to the Departmental Officers. Timely follow-up 5.2 Economic Agencies
and cross-examination of the concerned person 5.2.1 Co-ordination with following agencies
by I.T. Officers on vital points may help the will be of definite advantage in following types
department to build a strong case. of cases:

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 Co-Ordination with other Enforcement Agencies and Sharing of Information

Co-ordination with the above departments/ CEIB has prescribed formats, and data entry
agencies can help the department to have access software to all the agencies to ensure furnishing
to enormous data regarding various economic of information/ data in the standardised formats
activities in the country. It may serve twin Offence/ Modus Operandi by CEIB is as under:
purpose of widening the tax-base & unearthing
●● Misuse of banking channels
concealment of Income in existing cases.
●● Money laundering through banks
Types of
Cases
Enforcing Agencies ●● Money-laundering through hawala
(a) The Registrar of Companies (ROC) ●● Investment in real estate
Corporate Company Law Board (CLB) ●● Benami transactions
assesses National Company Law Tribunal
(NCLT) ●● A list of the offences/ modus operands
Reserve Bank of India identified
Security and Exchange Board of India ●● Use of hawala entries
Various Scheduled Banks.
The Serious Fraud Investigation Office ●● Misuse of lncentives under the income-tax
(SFIO) Act (e.g. Section 80 HHC)
(b) Good and service Tax Authority in ●● Smuggling of contraband
Service States as well in Centre.
Industry ●● Smuggling of explosive/ ammunition
(c) Commercial tax department of states. ●● Smuggling of gold through land, sea, or air
Traders (In old cases)
Good and service Tax Authority in States ●● Smuggling of silver through sea, air, or land
as well in Centre. ●● Misclassification of goods
Wings of Local Self-Government in-charge
of levy and collection of octroi duty. ●● Under-valuation of assessable value
(d) Director General Anti-Evasion (Central ●● Misuse of exemption notifications
Manufacturers Excise)
(In old cases)
●● Misuse of various performa credit/ set off/
Good and service Tax Authority in money credit schemes
States as well in Centre ●● Under-valuation of imports
(e) Directorate of Revenue Intelligence
Exporters and Commissioner of Customs (Preventive) ●● Over-valuation of exports
Importers Enforcement Directorate ●● Drawback frauds
Reserve Bank of India
Director General of Foreign Trade
●● Import license violation
●● Undisclosed investment in shares. FDRs,
5.3 Central Information Bank of other securities
Economic Offences/ Offenders ●● Introduction of black money through bogus
creditors/ debtors
On the direction of Economics Intelligence Council ●● Under-invoicing of sales
a data bank of economic offences has been setup
●● Over invoicing of purchases
in CEIB. All the field formations are required to
●● Claim of bogus expenses Capital build-up
furnish information related to offences booked/ cases
detected since 1991 -92. Cases to be reported
●● Introduction of black money in the books in
should have seizure of more than Rs. 50 lakhs or the form of squared-up loans
where the Income is more than Rs. 1 Crore.
●● Under valuation of fixed assets
For the purpose, a Performa has been prescribed. ●● Wrong claim of depreciation/ Investment
This data bank in CEIB is responsible for allowance
coordinating & strengthening intelligence- ●● Creation of capital through gifts in the
gathering activities by various agencies names of minors/ ladies
concerned with investigating economic offences. ●● Creation of number of entities to reduce tax

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Techniques of Investigation for Assessment Vol. 1

●● Misuse of MODVAT schemes 6. ROLE OF FINANCIAL

●● Suppression of production and unaccounted INTELLIGENCE UNIT–INDIA
manufacture (FIU-IND)
●● Clandestine removal of excisable goods FIU-IND was setup in 2004 as the central national
●● Wrong or fraudulent availment of rebate, agency responsible for receiving, processing,
drawback, refund and other export analyzing and disseminating information relating
incentives. to suspect financial transactions. FIU-IND is also
●● Technical offences under Central Excise & responsible for coordinating and strengthening
Salt Act not covered above efforts of national and international intelligence,
●● Illegal sale/ purchase of foreign exchange in investigation and enforcement agencies in
open market. pursuing the global efforts against money
●● Bogus import remittances through false i laundering and related crimes. FIU-IND is an
documents independent body reporting directly to the
●● Creating NRIs, obtaining power of attorney Economic Intelligence Council (EIC) headed by
of their NRI Accounts, selling cheques at the Finance Minister.
premium
FIU-IND is the designated authority under
●● Remittances of foreign exchange through
Prevention of Money laundering Act, 2002
hawala/ Bank TT
(PMLA) to receive information from different
●● Non-realisation of export proceeds and reporting entities. Accordingly, it has a database
retention of export proceeds abroad
of, inter alia, bank accounts and transactions
●● Bogus exports for availing VABAL and therein, transaction in securities, insurance
repatriation of black money as export premium paid on policies etc. FIU-IND shares
proceeds.
information spontaneously and on request basis.
●● Import of gold and silver purchased through The Central Board of Direct Taxes and FIU-IND
hawala have executed Memorandum of Understanding
●● Carrying of foreign exchange through (MOU) for exchange of information. Therefore,
“Diggi” income-tax Authorities under CBDT can seek
●● Foreign exchange transactions through information from FIU-IND for both domestic
Vostro or Escrow accounts bank accounts/ transactions as well as those
●● Cross-border smuggling of narcotics from foreign countries. Such information may be
●● Inland smuggling of narcotics extremely useful for recovery from bank accounts
hitherto unknown to income-tax Authorities or
●● Clandestine manufacture of narcotic and bringing to tax the transactions that might have
psychotropic substances been done through undisclosed bank account(s).
●● Smuggling of narcotics through carriers However, strict confidentiality is required to be
For overseeing co-ordination at the field level, maintained in handling such information. The
Regional Economic intelligence Committees are CBDT has issued Guidelines on the procedure
functioning. They meet periodically & discuss the to be followed for seeking information from
cases being handled by different agencies, which Financial Intelligence Unit-India (FIU-IND),
are of interest to others. CEIB not only updates which should be strictly adhered to while calling
the information on various facets of economic information from FIU-IND. These Guideline
offences and well-known offenders, but assists were issued by the CBDT vide letters dated
different departments in quick dissemination of 15.02.2016 and 29th September 2011. These
relevant information to other agencies and acts are available on the website of irsofficeronline
as a focal point for collection of Intelligence on with the link https://www.irsofficersonline.gov.in/
an all India level. OfficialCommuniqueItem.aspx?ID=6536.

32
 Chapter

5
Investigation of
Computerized Books
of Accounts

Investigation of accounts forms one of the core

aspects of any financial investigation undertaken
by the investigators of the income-tax
department. A proper investigation of accounts
provides a critical insight into the business
model and the income generating activity, which
otherwise is difficult to comprehend because of
the myriad of transactions. Investigation not only 1. INVESTIGATION OF ACCOUNTS IN
requires basic understanding of the accounts and TALLY ERP
financial statements but also requires specialized
skill sets to deal with the complete digitization 1.1 Tally and its Structure
of accounts. Thus, in this Chapter we will deal
with techniques of investigation of accounts 1.1.1 Tally.ERP 9
and also cover various aspects of popular ERPs/
digital platforms in which such financial data is Tally ERP 9 is a simplified solution that runs the
maintained and operated by the assessees. An complex parts of any business such as accounting,
overview of the analytical tools, which may help compliance and processes in the background.
the investigator in detecting the financial issues/ Tally is simple and can be implemented with
anomalies/ manipulations/ adjustments etc. for minimum resources. Some of its features which
the purpose of detection of tax evasion have also make it popular in the industry are, as under:
been provided below. Accordingly, this chapter
●● Simple accounting management
has been divided into four main parts:
●● Compliance management is inbuilt–GST
1. Investigation of accounts in Tally ERP and pre GST era
2. Investigation of accounts in SAP ERP ●● Generates business reports for various
3. Techniques of Investigation of accounts purposes

4. Application of forensic accounting for ●● Flexible inventory management

investigations. ●● Budget and controls

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Techniques of Investigation for Assessment Vol. 1

●● Sharing and remote access with data related issues, it is necessary that the investigators
synchronization features must be familiar with the various features and
It has been observed that currently most of the operations of this application.
small and medium level businesses use this ERP Tally–Company Information Screen-Company
application to manage their businesses. In order information is the first screen in tally.
to investigate the books of accounts and other

The Main Area is separated into two parts- details given here will become the header
Left-hand side area and Right-hand side area of all the reports generated through tally.
The left-hand side provides information of Right hand side is divided into two parts viz.
Current Period, Current Date and List of Company details and Security control. Since
Selected Companies (Name of the company tally is an ERP, the software is not restricted
and the date when last entry has been made).
only till financial transactions it can even be
The right-hand side displays the Company
Information menu such as Select a Company, used to maintain the quantitative data related
Create a Company, Backup a Company or to inventories. So if the user wants to maintain
Restore a Company and so on. the quantitative data then he must select
Left Hand side of the screen consists of the Accounts with Inventory otherwise Accounts
basic information about the company. All the Only.

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 Investigation of Computerized Books of Accounts

Important Things to Note from Security Controls in Tally

There are following two types of passwords in Company creation is a one page process in tally.
tally: The tally data created in Tally ERP 9 is a 5 digit
numeric folder (for ex. 10003, 12345) and if it’s
1. Tally Vault Password: Tally Vault is a
Tally 7.2 then a 4 digit numeric folder (for ex.
kind of advanced level security feature
1003, 1234). Tally ERP 9 and Tally 7.2 are the
built in Tally. It keeps up confidentiality of
two widely used versions. Other versions are
information by encrypting the data. If the
presently not in use.
company has used Tally Vault password
then in place of the name of the company It is a Frequently Asked Question that:
in (Select Company Option) the user only What if the assessee is maintaining records in
see asterisk marks. Tally 7.2, can we open the same in Tally ERP 9?
2. Login Password: Login user ID/ Password ●● In case the company is maintaining
restricts the unauthorized access to data. accounts in Tally 7.2, then the same can
In order to access the tally data, the user must be opened in Tally ERP 9 but only after
have the required password. However there are migration. Migration is a small process to
few techniques via which the password can be convert the data from a lower version to
cracked but it needs some technical knowledge. a higher version using freely available tool
called Tally Migration Tool. (Search for
Disallow opening in Educational Mode is a very Tally Migration tool in Google).
important field. If the assessee has turned this
option to yes then the tally data of that company 1.1.2 How to Open a Company in Tally
cannot be opened using Educational Version of
tally, hence the person trying to access the data Following are the various ways to open a tally
must have a licensed version of tally. data.
1. The tally data stored in by default path of
Precaution
tally (the path where the tally software has
At the time of taking the tally backup the option been installed) will open as soon as we
must be turned to NO. open the software.

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Techniques of Investigation for Assessment Vol. 1

2. If the tally data is stored in some other to the path Section under select
folder then there are two ways. company option.
a. The path of the folder, where the b. Drag and drop the folder containing
tally data is stored should be copied tally data on the tally software.
(Ctrl + C) and pasted (Alt+Ctrl+V)

1.1.3 Gateway of Tally

Gateway of Tally is the screen that appears on 1.2 Main Area

selecting a company. The Gateway of Tally
The left side of the Main Area gives information
menu differs based on the type of company
on:
selected. An Accounts Only Company has a
different Gateway of Tally menu from that of an
Accounts-with-Inventory Company. Accounts- 1.2.1 Current Period
with-Inventory Company will consist of some It is the currently loaded company’s accounting
additional items like Inventory Info and Stock period. (We must set it to the period for which
Summary. we need to do the audit).

36
 Investigation of Computerized Books of Accounts

1.2.2 Current Date Info. In order to pass any transactions

in tally the first step is to create a ledger
This is the date of the last Voucher Entry for the
and the same can be done only through
selected company.
Accounts Info- Create Ledger.
1.3 List of Selected Companies b. Inventory Info.
This displays the name of the loaded company. As the name suggests, it includes everything
(It can be even more than one) about stocks or in accounting terms, the
inventory. Similar to Accounting Info., you
Gateway of Tally is divided into four different
can create and alter Stock Items and Stock
components. Each component has its own
Groups. This is where you can create
function and contains several options for the user.
stock items and group them on the basis
of Stock Groups for further classification of
your goods.
For example, you have Mobiles and
Computers at your shop. You can create
a group called Mobiles and put the Stock
Item in that group known as Apple Iphone
X and Samsung Galaxy S8. In the same
way, you can create another Stock Group
called Computers and put in the Stock
Items like Samsung Laptop and HP
Laptop.

1.4 Transactions in Gateway of Tally

Transactions part is one the most used
components on the Gateway of Tally screen. It
is used for creating accounting entries as well
as inventory entries in Tally. Similar to Masters,
Transactions in Gateway of Tally also contains
two options. They are:
a. Accounting Vouchers
b. Inventory Vouchers
Masters in Gateway of Tally
a. Accounting Vouchers
Primarily, there are two options in Masters in
There are six basic accounting vouchers
Gateway of Tally. They are:
in Tally. They are Contra, Payment,
a. Accounts Info. Receipt, Journal, Sales and Purchases.
b. Inventory Info. Whenever you need to create or pass an
accounting entry, you have to go to the
a. Accounts Info. Accounting Vouchers in Tally. It is under
It includes everything about ledgers and Transactions because whenever you create
groups. If you want to create or alter a new an accounting voucher, it is a kind of a
ledger, you have to go through Accounts transaction.

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Techniques of Investigation for Assessment Vol. 1

b. Inventory Vouchers credited in this voucher. However the user

can change the configuration setting using
Inventory Vouchers are mainly used
F12–Configuration to surpass this control.
for entries pertaining to manufacturing
or assembling businesses. When you b. Introduction to Payment Voucher
have a number of components and you
Payment voucher is used to account all the
manufacture a finished product–inventory
payments made by the company by way
vouchers are used for recording that entry
of Cash/ Bank. Payment voucher can be
in Tally. For example, you manufacture a
passed using Single Entry or Double Entry
pen from ink, nib and a body. This kind
mode by configuring the setting Use Single
of entry can be recorded in Tally with the
help of Inventory Vouchers. Entry mode for Payment/ Receipt/ Contra
in F12 configuration. All payment entries
(whether capital/ revenue) are passed only
1.5 Inbuilt Controls in Accounting by using payment voucher.
Vouchers
By Default Setting
1.5.1 Common Points for All the Type No voucher can be passed unless the bank/
of Vouchers cash account is credited in this voucher
a. The debit and the credit side of the voucher and this voucher doesn’t allow bank/ cash
must tally if there is any difference then as a debit item. However the user can
tally will not accept the voucher. change the configuration setting using
F12–Configuration to surpass this control.
b. The transaction date must relate to same
financial year. c. Introduction to Receipt Entry
c. There cannot be two ledgers with exactly Any money received from debtors against
same name. Sales Invoices or on Account and for all
d. There is no restriction by default for back transactions where money is received are
dated entries and the voucher numbers accounted or entered using the Receipt
get automatically adjusted in case of back Voucher. All receipt entries (whether
dated entry is passed. capital/ revenue) are passed only by using
receipt voucher.
a. Introduction to Contra Voucher
As per the Accounting Principles, a Contra By Default Setting
entry is a transaction involving transfer of No voucher can be passed unless the bank/
cash between one Cash A/c to another or cash account is debited in this voucher and
one Cash A/c to another Bank A/c i.e., is this voucher doesn’t allow bank/ cash as a
a transaction indicating transfer of funds credit item. However the user can change
from: the configuration setting using F12–
●● Cash account to Cash account Configuration to surpass this control.
●● Cash account to Bank account d. Introduction to Purchase Voucher
●● Bank account to Cash account Purchase voucher is used to record the
●● Bank account to Bank account Purchase transactions of the company.
The entry can be passed using the Voucher
By Default Setting mode or the Invoice mode, where the
No voucher can be passed unless the calculations can be automated and the
bank/ cash account is debited as well as user can experience the ease of feeding the

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 Investigation of Computerized Books of Accounts

transactions into the system. Though there as adjustment entries. Journals are used for all
is a specific voucher to record purchase non- cash transactions. However with the help
transactions but all purchase entries may of Configuration the journal can be used to pass
not be passed only by using purchase cash transactions as well.
voucher. For recording cash purchases the
accountant can use purchase voucher as 1.6 Utilities in Gateway of Tally
well as payment voucher and for recording There are two options again in Utilities in
credit purchases the user may use purchase Gateway of Tally and they are–
as well as journal voucher. Important thing
to note here is that the entries passed a. Import Data
using purchase voucher will only reflect in b. Banking
purchase register. This is one of the reasons
a. Import Data
for the difference in total purchases as per
profit & loss account and purchase register. Import data option allows the import of
The purchase figure reflected in the Profit data (Masters as well as Vouchers) in tally
and loss account gives the gross figure and from external sources. The data can be
hence is the correct figure. imported only in XML format. There are
few macros which has been designed to
e. Introduction Sales Voucher import the information by converting
Sales Voucher is used to record the Sales excel into XML. This option is used when
transactions of the company. You can pass the company is in need of transferring data
an entry using the Voucher mode or the from one tally company to another or if
Invoice mode where the calculations can there is a need for any bulk entries.
be automated and the transactions can be b. Banking
fed into the system easily. Though there is a
specific voucher to record sales transactions Banking option allows the user to view all
but all sales entries may not be passed only the banking related options at one place.
by using sales voucher. For recording cash There are options like Cheque Printing,
sales the accountant can use sales voucher Cheque Register, Bank Reconciliation,
as well as receipt voucher and for recording Deposit Slip, Payment Advice and Post-
dated Summary. From audit point of view
credit sales the user may use sales as well
the Bank Reconciliation and Post-dated
as journal voucher. Important thing to note
summary is relevant.
here is that the entries passed using sales
voucher will only reflect in sales register.
This is one of the reasons for the difference 1.7 Reports Generated through Tally
in total sales as per profit & loss account A Report is an organized and formatted
and sales register. The sales figure reflected presentation of Data in the form of text graphics
in the Profit and loss account gives the and calculation. Tally allow user to collect
gross figure and hence is the correct figure. different type of data such as voucher and
invoices and display them in the form of reports.
f. Recording a Journal Entry
There are various categories of reports in tally
Journal Vouchers are used to adjust the debit such as Balance Sheet, profit and loss account,
and credit amounts without involving the cash stock summary and ratio analysis. The user
or bank accounts. Hence, they are referred to interface of tally allows to view all these reports.

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Techniques of Investigation for Assessment Vol. 1

1.7.1 Balance Sheet account between any two given dates. Perform
Balance Sheet is a financial reporting tool that the following steps to find out your balance
allows you to perform a quantitative analysis of between any two dates. Auto Column Option
company’s asset, liabilities and net worth at a (Alt + N) for standard options and New Column
particular date, such as at the end of financial (Alt + C) for customized options.
year. In other words, it reflects the quantitative Schedule III Format: In order to view the
and summarized form of financial position of a Balance Sheet in standard Schedule III format of
company in a particular period. Balance Sheet Companies Act, then tally allows you the option
displays the owner’s funds of a company and its under Alt + S
net worth in business. This information helps to
analyze the capacity of business to take risk as
1.7.2 Profit & Loss
well as future planning.
The Profit and loss Account report displays the
How to Configure Balance Sheet in Tally
net profit and loss of company along with the
Go to gateway of tally > under reports go to opening and closing stock. To view the profit
Balance Sheet. Click F 12 Configure screen and loss account report click the profit and loss
to set the configuration for displaying the a/c option under report in the gateway of tally.
Balance Sheet according to your requirement.
The configuration screen of Balance Sheet has Configure Profit and Loss A/c
number of option and setting these options is It is configured by clicking the F12 configure
important so that the Balance-Sheet is generated button.
in the desired format. It is therefore important to
understand the meaning and purpose of those a. Show Vertical Profit & Loss: Display
options. The following are the options displayed information of profit and loss in a Balance
in the configuration screen: Sheet form vertically or horizontally.
However you can change by choosing the
a. Show Vertical Balance Sheet: Generate YES options.
your Balance Sheet in the vertical format if
you set this option then no Balance Sheet b. Show Percentage: Display each line as
will appear in the horizontal format. percentage of sale account.
b. Show Percentage: Display Balance c. Show with Gross Profit: This split profit
Sheet with percentage column and loss a/c into two Sections. The Trading
c. Show Working Capital Figures: Allow Account and the Profit & Loss account.
you to show the value of working Capital, Detailed/ Condensed View: Tally allows you
which is the value obtained by subtracting to view the Profit & Loss in a detailed and the
current Assets and Current Liabilities condensed view and the same can be set with
Detailed/ Condensed View: Tally allows you the Detail/ Condense option under Alt + F1
to view the Balance Sheet in a detailed and the Changing the Period: Tally allows you to view
condensed view and the same can be set with the Balance Sheet for any period and the same
the Detail/ Condense option under Alt + F1 can be set with the Period option under F2
Changing the Period: Tally allows you to view Comparing Profit & Loss: Tally allows you
the Balance Sheet for any period and the same to compare and know the profit & loss account
can be set with the Period option under F2 between any two given dates. Perform the
Comparing Balance Sheet: Tally allows following steps to find out your P&L between
you to compare and know the balance of your any two dates. Auto Column Option (Alt + N)

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 Investigation of Computerized Books of Accounts

for standard options and New Column (Alt + C) methods menu appears. Select stock
for customized options. valuation method from these options
Schedule III Format: In order to view the according to your requirement. Press esc
Profit & Loss in standard Schedule III format of key or click the close button of the stock
Companies Act then tally allows you the option summary screen to go back to the gateway
under Alt + S of Tally.

1.7.3 Stock Summary b. Opening Stock Summary

The Stock summary report displays the statement In order to view the opening stock
of stocks which are in hand on a particular date. summary screen you need to enable the
Whenever any transaction takes place, the stock integrate accounts and inventory option
summary is automatically updated. The stock by selecting inventory features option
summary report also gives the current stock from the company features menu. You
position. can access inventory features by clicking
To view the sock summary report select the F11 features button in the button bar.
Click the profit and loss account option
Go to gateway of Tally > Under Report Stock under report in the gateway of Tally menu.
Summary > press f12 > The profit and loss a/c screen appears.
a. Selecting Stock Valuation for Stock The report displays the opening stock and
Summary closing stock. Double click the opening
Click on Method of Stock valuation option stock or closing stock in the profit and loss
in the column details. The all valuation a/c screen to see the item wise details.

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Techniques of Investigation for Assessment Vol. 1

DETAILED STOCK SUMMARY

1.7.4 Ratio Analysis and balanced. Considering that the journal

entries are error-free and posted correctly to
The ratio report is a single sheet performance
the general ledger, the total of all debit balances
report for a specific period. This report is used
should equal the total of all the credit balances.
by the top management to analyze the financial
In Tally.ERP 9, the matching of the Trial Balance
health of a company and where it is going to
is a foregone conclusion since all voucher entries
stand after a certain period of time. This report is
are in Debit - Credit format and must balance at
useful because it allows an individual to instantly
the entry point.
assess a company or industry by making two
basic comparisons. The top management To view the Trial Balance, Go to Gateway of
compare the company’s present with the past Tally > Display >Trial Balance
ratio to determine, as to whether there has Tally.ERP 9 shows group wise Trial Balance.
been any improvement in the efficiency of the Details of all groups can also be obtained through
business or not. From audit point of view we can configuration, except for groups behaving like
quickly get the important ratio for comparison to sub-ledgers.
identify major deviation. It helps inter and intra
firm comparisons. Follow the following steps to view the trail
balance in detailed format.
Note: In order to rely on the ratio analysis report
generated through tally one must ensure correct 1. Press Alt+ F1 (to have detailed view)
grouping of accounts. 2. Press F12 (for configuration) select
a. Show Opening balance: Yes
1.7.5 Trial Balance
b. Show Closing balance: Yes
A Trial Balance is a summary of all ledger
balances to check whether the figures are correct c. Show Transactions: Yes

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 Investigation of Computerized Books of Accounts

d. Show Net Transactions: No 3. Expand Sundry Creditors and Sundry

Debtors (Press Shift+ Enter)
e. Expand All levels: Yes

CONFIGURATION

DETAILED TRIAL BALANCE

1.7.6 Day Book voucher entry date of a regular voucher. It could

also be setup to list all the transactions made
The Day Book lists all transactions made in a over a certain period. Transactions include all
particular day and by default displays the last types of vouchers financial vouchers.

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Techniques of Investigation for Assessment Vol. 1

1.7.7 To View the Day Book

1. Go to Gateway of Tally > Display >Day book. The Day Book will appear as shown below:

2. Click F2: Period to change the period for Select a month and press [enter] to display all
which the Day Book is displayed. transactions for the month. Then press F2 to
3. Click F4: Change Vouch to view Day Book change the period for which the transactions are
for a particular voucher type. to be viewed.
Following are the different types of account books
1.8 Account Books depending upon the category of transactions:
Books of account record the individual 1. Cash Book: Will show all the transactions
transaction details you have entered. Although
affecting cash.
you may post items to many different ledgers,
Tally brings all the transactions of one category 2. Bank Book: Will show all the transactions
together into a book of account for viewing affecting bank
and printing. All books are displayed first as a
monthly summary with opening and closing 3. Ledger: Will show all the transactions
balances. entered with any specific ledger account.

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 Investigation of Computerized Books of Accounts

4. Group Summary: The group summary taxes) whereas the profit and loss will show net
statement shows the closing balances of the figure. Hence there will always be a difference
accounts of a selected group for a specified between the figures reflected in profit & loss
period up to the current date. The default account and registers.
view is that of sub-groups within a group.
7. Journal Register: Journal register report
To view group summary: Go to Gateway displays all the journal vouchers that have
of Tally > Display > Account Books > been passed. To view journal register
Group Summary> Select a group. details Go to Gateway of Tally > Display
5. Group Vouchers: It is a list of all vouchers > Account Books > Journal Register.
having at least one ledger account entry
8. Statistics: The Statistics report displays
belonging to the selected group. This
the Masters created and the number of
statement is useful when you want to list all vouchers types entered. You can drill down
transactions for a particular group. to the transaction level from this report. To
To View the Group Vouchers: Go to view the Statistics report Go to Gateway of
Gateway of Tally- Display-Account Books- Tally > Display > Statement of Accounts
Group Vouchers. > Statistics
6. Sales/ Purchase Register: Sales/
Purchase Register displays the monthly 1.9 Tally Shortcuts
summary of Sales/ Purchase transactions Tally is a software which must be operated
and closing balances. The list of through key board shortcuts. The short cuts are
transactions pertaining to each month can created using function keys given on the top of
be viewed by selecting that month and the key board. On every screen the right hand
viewing its details. The period of the report panel and the top screen have some shortcuts
can be modified by F2.Tally.ERP 9 permits that is relevant for the active screen. Following is
you to change the display according to the a small logic behind those shortcuts.
information required. Columnar periodic
reports can be generated using Alt+N: a. If the function key is with a single line (Ex:
Auto Column button for different periods F1) Then use ALT+ Function key
as shown by the columnar details list. b. If the function key is with a double line (Ex:
To view Sales/ Purchase Register, Go to F2) Then use CTRL+ Function key and
Gateway of Tally-Display-Account books
-Sales/ Purchase Register. c. If the function key is with a no line (Ex: F1)
Then simply use that Function key
Note: Sales/ Purchase Register will show only
those entries which have been passed using Around 80% of the work can be done with the
sales/ purchase vouchers. The entries passed above mentioned logic. Besides that there are
using journal, receipt & payment vouchers will few more shortcuts which are created using
not be reflected here. Further Sales/ Purchase some special key combinations. Following is the
Register shows gross figure (inclusive of indirect list of the Special Key Combination.

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Windows Functionality Availability

At List of Vouchers–creates a voucher similar to the
ALT + 2 To Duplicate a voucher one where you positioned the cursor and used this key
combination
At List of Vouchers–adds a voucher after the one
To Add a voucher
where you positioned the cursor and used this key
ALT + A combination.
To Alter the column in columnar Alters the column in all the reports which can be viewed
report in columnar format
To create a master at a voucher screen At voucher entry and alteration screens, at a field where
(if it has not been already assigned you have to select a master from a list. If the necessary
a different function, as in reports like account has not been created already, use this key
ALT + C Balance Sheet, where it adds a new combination to create the master without quitting from
column to the report) the voucher screen.
To access Auto Value Calculator in the
At all voucher entry screens in the Amount field
amount field during voucher entry
At Voucher and Master (Single) alteration screens.
Masters can be deleted subject to conditions, as
ALT + D To delete a voucher/ master explained in the manual.
All the reports screen which can be viewed in columnar
format
To export the report in ASCII, Excel,
ALT + E At all reports screens in TALLY.ERP 9
HTML OR XML format
At List of Vouchers–inserts a voucher before the one
To insert a voucher where you positioned the cursor and used this key
ALT + I combination.
To toggle between Item and
At creation of sales and purchase invoice
Accounting invoice
ALT + G To select the Language Configuration At almost all screens in TALLY.ERP 9
ALT + K To select the Keyboard Configuration At almost all screens in TALLY.ERP 9
ALT + O To upload the report at your website At all reports screens in TALLY.ERP 9
To select language for TALLY.ERP 9
ALT + G At almost all screens of TALLY.ERP 9
Interface
ALT + M To Email the report At all reports screens in TALLY.ERP 9
To view the report in automatic
ALT + N At all the reports where columns can be added
columns
ALT + P To print the report At all reports screens in TALLY.ERP 9
To repeat the narration in different
ALT + R At all Vouchers in TALLY.ERP 9
voucher type
To bring back a line you removed
ALT + S At all reports screens in TALLY.ERP 9
using ALT + R
To retrieve the last line which is
ALT + U At all reports screens in TALLY.ERP 9
deleted using Alt + R
From Invoice screen to bring Stock At Invoice screen > Quantity Field > Press Alt + V to
ALT+ V
Journal screen select the Stock Journal.

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 Investigation of Computerized Books of Accounts

Windows Functionality Availability

To cancel a voucher in Day Book/ List
ALT + X At all voucher screens in TALLY.ERP 9
of Vouchers
To repeat the narration in different
ALT + R At almost all screens in TALLY.ERP 9.
voucher type
To accept a form–wherever you use
At almost all screens in TALLY.ERP 9, except where a
CTRL + A this key combination, that screen or
specific detail has to be given before accepting
report gets accepted as it is
At Groups/ Ledgers/ Cost Centres/ Budgets/ Scenarios/
CTRL + B To select the Budget Voucher Types/ Currencies (Accounts Info) creation and
alteration screen
To check the Company Statutory
CTRL + ALT + B At all the menu screens
details
At Groups/ Ledgers/ Cost Centres/ Budgets/ Scenarios/
CTRL + C To select the Cost Centre Voucher Types/ Currencies (Accounts Info) creation and
alteration screen
At Stock Groups/ Stock Categories/ Stock Items/ Reorder
To select the Cost Category Levels/ Godowns/ Voucher Types/ Units of Measure
(Inventory Info) creation/ alteration screen
At Groups/ Ledgers/ Cost Centres/ Budgets/ Scenarios/
CTRL+ E To select the Currencies Voucher Types/ Currencies (Accounts Info) creation and
alteration screen
At Groups/ Ledgers/ Cost Centres/ Budgets/ Scenarios/
CTRL + G To select the Group Voucher Types/ Currencies (Accounts Info) creation and
alteration screen
CTRL + H To view the Support Centre At Almost all screens in TALLY.ERP 9
At Stock Group/ Stock Categories/ Stock Items/ Reorder
CTRL + I To select the Stock Items Levels/ Godowns/ Voucher Types/ Units of Measure
(Inventory Info) creation/ alteration screen

2. INVESTIGATION OF ACCOUNTS the company states that its goal is “to offer the
IN SAP-SYSTEMS APPLICATIONS industry’s most comprehensive portfolio of
AND PRODUCTS IN DATA business performance and optimization solutions
PROCESSING for companies of all sizes.”
(German: Systeme, Anwendungen, Produkte in SAP’s first software application was a financial
der Datenverarbeitung) accounting software suite that ran on a mainframe
and was known for its stability. It eventually
SAP, started in 1972 by five former IBM became known as the R/ 1 system. The “R” stands
employees in Mannheim, Germany, it is claimed for real-time. During the 1980s, the company
to be the world’s third-largest independent went international, and the second iteration of
software vendor. The full form of SAP is “Systems the R system (R/ 2) accommodated different
Applications and Products in Data Processing.” languages and currencies. In the 1990s, the third
The goal of the company was to provide large iteration (R/ 3) moved from the mainframe to
enterprise customers with the ability to interact a client/ server three-tier architecture composed
with a corporate database in real-time. Today, of a database, software applications and a

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Techniques of Investigation for Assessment Vol. 1

common graphical user interface (GUI). SAP οο Application Server

used the name R/ 3 until the 5.0 release. At that οο Database Server
time the name was changed from R/version to
ERP Central Component (ECC) version starting ●● Dedicated Servers are linked by
from 6.0 to 7.0. Communication Networks
●● Perform tasks without sacrificing data
2.1 SAP R/ 3 Architecture integration and processes within the
system, as a whole
●● The SAP R/ 3 architecture is based on a
3-tier client/ server principle
οο Presentation Server

During investigation, in the worst case scenario, οο At workstation

if we need to take the entire copy of the data, οο Very light
only copying the data would not be sufficient to
οο Sends requests to application server
read the data with the application. Therefore, it
is required to take the database copy along with οο Obtains screens from application server
the application and proper access to the system. and displays
Database server contains the entire data of the ●● The Database Server
enterprise, however Application Server contains οο Interface between application server
the application environment to read and access and RDBMS
the data.
οο Also holds the vendor specific DB driver
2.1.1 Overview of Presentation Server
and Database Server
●● The Presentation Server
οο GUI only

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 Investigation of Computerized Books of Accounts

2.2 SAP R/ 3 Modules

SD – Sales and
Distribution FI – Financial
Accounting
SD FI
MM – Materials CO – Controlling
Management
MM CO

PP – Production AM – Asset Management

Planning
PP AM

SAP R/3
QM HCM
QM – Quality
Management HCM – Human Capital
PM WF
Management

PM – Plant Maintenance WM PS WF – Workflow

WM – Warehouse PS – Project System

Management

The various modules in R/ 3 are given below: delivery processing, billing and sales
●● Financial Accounting information system.
●● Materials Management
Financial Accounting is designed for
automated management and external Materials Management supports the
reporting of general ledger, accounts procurement and inventory functions
receivable, accounts payable and other sub- occurring in day-to-day business operations
ledger accounts with a user defined chart of such as purchasing, inventory management,
accounts. As entries are made relating to sales reorder point processing, etc.
production and payments journal entries ●● Production Planning
are automatically posted. This connection Production Planning is used to plan and
means that the “books” are designed to control the manufacturing activities of a
reflect the real situation. company. This module includes; bills of
●● Controlling material, routings, work Centres, sales and
operations planning, master production
Controlling represents the company’s flow
scheduling, material requirements planning,
of cost and revenue. It is a management
shop floor control, production orders,
instrument for organisational decisions. It is
product costing etc
also automatically updated as events occur.
●● Quality Management
●● Assets Management
Quality Management is a quality control
Asset Management is designed to manage and information system supporting quality
and supervise individual aspects of fixed planning, inspection, and control for
assets including purchase and sale of assets, manufacturing and procurement.
depreciation and investment management.
●● Plant Maintenance
●● Sales and Distribution
In a complex manufacturing process,
Sales and Distribution helps to optimize all maintenance means more than sweeping
the tasks and activities carried out in sales, the floors. Equipment must be services and
delivery and billing. The key elements rebuilt. These tasks affect the production
are; pre-sales support, inquiry processing, plans. Plant Maintenance module supports
quotation processing, sales order processing, and supervises these maintenance.

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Techniques of Investigation for Assessment Vol. 1

●● Warehouse Management Balance Sheet preparation, production, personnel

Warehouse Management provides flexible, administration, and so on.
automated support to assist in processing 1. Organisation Units
all goods movements and in maintaining 2. Master Data
current stock inventories in the warehousing
3. Transactions
complex.
4. Documents
●● Human Resources
5. Reports
Human Resources is a complete integrated
system for supporting the planning and 1. Organisational Unit: Organisational
control of personnel activities. grouping of enterprise areas which, for legal
reasons or for other specific business-related
●● Workflow reasons or purposes, are grouped together.
Workflow is a solution which has been Organisational units include legal company
integrated fully in the R/ 3 System and which entities, sales offices, and profit Centres.
enables customer-specific business process 2. Master Data: Data which is used long-
flows to be coordinated and controlled on a term in the R/ 3 System for several business
cross-application and cross-workplace basis. processes.
●● Project System Examples include customers, materials, and
vendors.
Project System is designed to support the
planning, control and monitoring of long-term, 3. Transactions: Application programs which
highly complex projects with defined goals. execute business processes in the R/ 3
System such as creating a customer order,
2.2.1 Business Scenario–Main Elements posting an incoming payment, or approving
of SAP a leave request.
Business Scenario: Business-related grouping 4. Document: A data record that is generated
of business processes localized in a specific when a transaction is carried out.
organisational area that share some similar goals 5. Reports: Program which reads certain data
in an enterprise, such as purchasing, services, elements and displays them in a list.

2.2.2 Organisation Units

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 Investigation of Computerized Books of Accounts

1. Client create the legally required Balance

●● The highest-level element of all Sheets and profit and loss statements.
organisational units is the client. The ●● A company code designation is
client can be an enterprise group required for every financially based
with several subsidiaries. All of the transaction entered into R/ 3. This is
enterprise data in an R/ 3 System done either manually or automatically
implementation is split into at least by deriving the company code from
the client area, and usually into other data elements.
lower level organisational structures
3. Controlling Area
as well.
●● Clients are used to divide data in a ●● The Controlling Area is the business
SAP System into various data areas unit where Cost Accounting is
for various purposes. If a company, carried out. Usually there is a 1:1
for example, wants to use its SAP relationship between the controlling
System for both test and training area and the company code. For
purposes, a client is created for each the purpose of companywide cost
purpose. accounting, one controlling area can
handle cost accounting for several
●● A client is identified via a three company codes in one enterprise.
character code starting from 000
to 999. Data can be moved via 4. Sales Organisation
transports and corrections from one ●● In the context of Sales and
client to another. Distribution, the Sales Organisation
●● When logging on to the system, the is central organisational element
user has to select a client in which that controls the terms of sale to the
he/ she wants to work. The user can customer. Distribution Channel is the
then only access data in this client. element that describes through what
channel goods and/ or services will
●● During the investigation we should be distributed to the customer.
know that we are accessing the right
client. We should never investigate 5. Distribution Channel
client 000, 001 and 066 as these three ●● Distribution Channel—defines different
clients will never be a Production ways of reaching customer
Client (Live Servers Data)
6. Division
2. Company Code
●● Division–Segment responsibility of
●● A company code is an independent
products or product line
accounting entity (the smallest
organisational element for which 7. Plant
a complete self-contained set of ●● In the context of Production Planning
accounts can be drawn up). An and Control, the Plant is the central
example is a company within a organisational unit. A plant is the
corporate group. It has a unique, place of production or simply a
four to six character key. collection of several locations of
●● The general ledger is kept at the material stocks in close physical
company code level and is used to proximity.

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8. Storage Location 2.2.3 SAP Data Types

●● A Storage Location is a storage ●● Master Data
area comprising warehouses in οο Data that is relatively stable
close proximity. Material stocks –Materials, Customers, Vendors
can be differentiated within one ●● Transaction Data
plant according to storage location
οο Data that is relatively temporary/
(inventory management).
progressive
9. Purchasing Organisation οο Stored at various stages of a business
●● Unit responsible for procurement of process
materials and services and negotiates οο Customer orders, purchase orders,
with vendors production orders, customer payments
10. Purchase Groups ●● Process of Data Analysis in SAP ERP
Environment
●● Buyers responsible for purchases who
handles specific group of materials or οο One Step Process
vendors οο Two Steps Process

Advantages and Disadvantages of One Step Process and Two Steps Process

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 Investigation of Computerized Books of Accounts

2.3 Navigation

Logging On

A new window appears

Enter your user-ID
Enter your Password
The first time you use SAP you need to
reset your password.
The client number as well as language are
entered by your administrator and
defaulted
Press Enter on your keyboard

Main Menu Screen

The main menu screen is displayed (standard SAP)

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Techniques of Investigation for Assessment Vol. 1

SAP Menus

The default screen is called the SAP Easy Access Screen.

 You can switch from one menu to the other by selecting the appropriate
icon
 When you log on, you will see either your user menu (specific to your role),
or the SAP standard menu (lists all transactions)

SAP
Standard
Menu
SAP User Menu

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 Investigation of Computerized Books of Accounts

SAP Easy Access Screen

Title Bar

Navigation
Area

Status Bar

SAP Screen Elements

Command Menu
Standard
Field Bar Checkboxes
Toolbar

Title
Bar

Pushbutton

Application
Toolbar

Tabs

Input
Fields

Status Bar

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Transaction in SAP: Transactions let users to nature and having same functionality across all
create, change, or display data or run a report in enterprise.
SAP. Any activity in SAP is termed as Transaction
Transaction Code starting from Y or Z are
and every Transaction in SAP is having a code
customized transaction code, specific to the
that is known as Transaction Code, in short
enterprise and not standard in nature. All sort of
T-Code.
customization can be done with these transaction
All the T-Code in SAP starts with an alphabet. code. Therefore, during the investigation we
All the Standard T-Codes start with A to X. should know which transaction report we are
Transaction starting from A to X are standard in getting the data.

Getting Around

There are three ways to access transactions in SAP:

1. Command Field
2. User or SAP menus
3. Favorites

1.

3.

2.

System Messages

•Train your eye to look at the bottom of the screen for system messages.
• You must correct an error message to proceed.
• You must hit Enter to proceed past a warning message.
• An information message usually appears when you complete a transaction,
such as giving you the number of a purchase requisition you just created.

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 Investigation of Computerized Books of Accounts

Screen Elements – Status Bar

• The Status Bar displays different types of system-

generated messages:

– Information:

– Warning:

– Error:

• Double-click on the message to display further information

Transaction in SAP: Transactions let users to in nature and having same functionality across
create, change, or display data or run a report in all enterprise.
SAP. Any activity in SAP is termed as Transaction Transaction Code starting from Y or Z are
and every Transaction in SAP is having a code customized transaction code, specific to the
enterprise and not standard in nature. All sort of
that is known as Transaction Code, in short
customization can be done with these transaction
T-Code. All the T-Code in SAP starts with an codes. Therefore, during the investigation we
alphabet. All the Standard T-Codes start with A to should know which transaction report we are
X. Transaction starting from A to X are standard getting the data.

Important Function Key

Important Function Key

Example of
Field Help

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2.4 Standard Reports and may be modified according to the business

All the transaction code starting from A-X are guidelines.
standard T-codes. All the standard reports start
Following are few standard reports and their
from A to X, however any report starting from
Y or Z are customized reports for the enterprise output along with the screen shots:

2.4.1 Sales and Distribution

VA05N–List of Sales Order

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 Investigation of Computerized Books of Accounts

VF05N–List of Billing Document

VA45N–List of Contract

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2.4.2 Finance and Controlling

S_ALR_87012277–GL Account Balance

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 Investigation of Computerized Books of Accounts

S_ALR_87012177–Customer Payment History

S_ALR_87012249–Balance Sheet/ Profit and Loss Statement/ Cash Flow (Classical Drill
Down Report)

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 Investigation of Computerized Books of Accounts

S_ALR_87012172–Customer Balance in Local Currency

S_ALR_87013611 - Cost centre accounting - Plan/ Actual comparison

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2.4.3 Project System

S_ALR_87013531 - Project cost/ revenue/ expenditure

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2.4.4 Material Management–Inventory Management

MB51–Material Document List–Movement of Material Report
MB52–Plant Stock Availability

MB5B–Stock on Posting Date

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MB5T–Stock in Transit

ME2L–Purchase Order Display

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2.5 Production
COOIS–Production Order Information System

2.6 Chart of Account for Financial Audit provides a complete listing of every account in
an accounting system.
2.6.1 Chart of Account
An account is a unique record for each type of
2.6.2 Definition asset, liability, equity, revenue and expense.

The Chart of Account in SAP (COA) is a list of

2.6.3 Types of Chart of Accounts
GL Accounts master records that are used by
the organisation. The master chart of accounts 1. Operating Chart of Accounts
must be assigned to each company code. Chart
2. Group Chart of Accounts
of account is defined at client level. A chart of
accounts is a financial organisation tool that 3. Country Specific Chart of Accounts

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The three different Charts of Accounts have need to meet the country’s legal
three different functions in the system requirements. This allows us to
1. Operating Chart of Accounts provide statements for the country’s
legal requirements.
●● The operating chart of accounts
contains G/L accounts that we use ●● The assigning of the country-specific
for posting in the company code chart of accounts to a company
during daily activities. Financial code is optional
Accounting and Controlling both
use this chart of Accounts.
2.7 Audit Trail and Fraud Finding
●● We have to assign an operating chart
of accounts to a company code. SAP is having the most robust database and
excellent software for Auditors. During the
2. Group Chart of Accounts
investigation there are two ways to do the audit.
●● The Group Chart of Accounts
contains the G/L accounts that are 1. Auditing individual Document for the
used by the entire corporate group. amendments done in any document.
This allows the company to provide
In order to do this we need to login into the
reports for the entire corporate group.
document and follow the following steps:
●● The assigning of a corporate group
chart of accounts to a company E.g. –Suppose there is some changes being done
code is optional. in the Sales Order and during the investigation
3. Country-specific Chart of Accounts we would like to know the amendment done
in the sales order, we run the T-Code–VA03
●● The country-specific chart of
(Display Sales Order)
accounts contains the G/L accounts

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 Investigation of Computerized Books of Accounts

Input the Sales Order number in the order field, in this example it is 6234 and press enter.
Then go to environment and changes

Then click at execute button in the application tool bar.

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It will show all the changes in the Sales Order specific to the order

This gives all the details of the changes in the order, if we double click in any line, it will further give
the details of changes, e.g if we double click at Order Quantity field, it will give the following details:

It even gives the details of previous value as well.

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2. Audit Trail is the transaction to see all the amendments, if we don’t have the specific
document.
Transaction Code–AUT10 (Complete Audit Trail for any amendment)

We need at least 2 parameters to run AUT10 i.e. Date and Changes Done in any document,
example here is changes in Sales Order. Click at execute button.

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In the above report the old value and new value have been in display. AUT10 gives you all the detail
changes again any transaction.
How to access the data from the database of SAP
We can even extract the data from database directly with the help of Table Name by T-Code SE16N.
Run the T-Code SE16N and define the Table Name (Important Table Names are being listed below
in Important Information Section.

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For example if we want to see the extract the data of the Sales Orders, the table name is VBAK, then
press enter:

Remove the maximum number of hits 500 and make it blank to get the complete data of the Table.
Select the fields relevant to us. It is recommended that we should only extract the data relevant to us.
Rather than taking entire data.
Click at execute will give the entire records in that table with total no of records available:

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To export the data in local file or excel, click the below button, select Local File and follow the
following processes:

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 Investigation of Computerized Books of Accounts

Define the file name and location where we want to save the data and click at generate:

The above indicates that the data has been exported in Excel.

2.7.1 Important Informations

Important Tables (T-Code–SE16N)
Sales Orders Customer Data
Name Description
LIKP Shipped Lines header KNA1 Customer Master
LIPS Shipped Lines detail KNVV Sales information
VBAK Order header KNVP Partners (ship-to, etc)
VBAP Table fields
VBBE Open sales order line items System tables
VBEP Schedule line item USR02 Valid user names
VBFA Document flow
VBUK Order status Config tables
VBUP Line item detail status T000 Clients
VBRK Billing Header T001 Company Codes
VBRP Billing Line Item T001B Permitted Posting Period
Material Management T001W Plants
MARA Inventory Master T002 Languages
MARC Plant Data T005 Region (Country)
MARD Current Inventory TCURR Currency and exchange rates
MAKT Descriptions TGSB Business Area
MBEW Material Valuation TVAK Order type

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Sales Orders Customer Data

T179 Product Hierarchy TVSB Shipping condition
MVKE Sales data (materials) TVAGT Rejected reason for order line
MKPF Material document
Purchasing
EINA Purchasing inforecord
EINE Purchasing inforecord detail
EKKO Purchase Orders Header
EKPO Purchase orders items
EKET Scheduled lines
EKES Vendor confirmed lines

Important T-Codes
Finance &
Procurement–Supply Chain
Controlling
ME23 Display Purchase Order FBV3 Display Parked Document
FBL1 Display Vendor Line Items FB03 Display Document
XK03 Display vendor (centrally) KSB1 Cost Line Items
FK10 Vendor Account Balance KE5Z Profit Centre Actual Line Items
MK03 Display vendor (Purchasing) FS10 Balance GL
VL03 Display Delivery KCH3 Display profit Centre hierarchy
KO03 Display Internal Order FBL3 Display G/L Account Line Items
Display Payment Document
FCH2 KS03 Display Master Cost Centre
Checks
FBU3 Display Intercompany Document
Sales–Order Fulfilment
FD10 Customer Account Balance Inventories
FBL5 Display Customer Line Items MB03 Display Material Document
VF03 Display Billing Document MM03 Display Material
VA03 Sales Orders MB51 Material Doc. List
Display Material Ledger
VA05 List of Sales Orders CKMB
Document
Display Stock/ Requirements
VF05 List of Billing Documents MD04
Situation
KSB1 Cost Line Items for CoCe MC.9 Material Analysis/ Stock
VD03 Display Customer (Sales) MMBE Stock Overview
VT03N Display Shipment
ME2L Purchase Orders by Vendor System
ME2M Purchase Orders by Material VL03N Display Outbound Delivery
SP01 Spool Request

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Finance &
Procurement–Supply Chain
Controlling
Spool - Output Device LOCL
Asset Management SP02
Wide Report
IE03 Display Equipment SE16 Data Browser
Display Physical Inventory
MI03
Document
AS03 Display Asset Master Record
AR01 Call Asset List
IH10 Display Equipment

Important T-codes for Report

Report Area Reports Name Description
Controlling S_ALR_87013611 Cost Centre accounting - Plan/ Actual comparison
Controlling S_ALR_87013640 Cost Centre accounting - Actual/ Actual comparison
Controlling KSBL Cost Centre plan
Controlling S_P99_41000111 Analyse/ compare product cost estmates
Controlling KE30 Profitability report
Controlling S_ALR_87010777 Profit Centre report
S_ALR_8701249/
Actual comparison of financial results by period with
Finance 87012250/ 87012251/
previous period
87012252
Finance S_ALR_870122284 Balance Sheet/ P&L statement
Finance S_ALR_87012253 Plan/ actual comparison on periodic basis
Finance S_ALR_87012271 Cash flow report
Finance S_ALR_87012277 GL Balances
Finance S_ALR_87012287 Document Journal at summary level
Finance S_ALR_87012332 Statement of customer/ vendor/ GL Accounts
Finance S_ALR_87012177 Customer payment history
Finance S_ALR_87012168 Due date analysis for customer open items
Finance S_ALR_87012167 Account receivable information system
Finance S_ALR_87012172 Customer balances
Finance S_ALR_87012176 Customer evaluation with open item sorted list
Finance S_ALR_87012077 Vendor information system
Finance S_ALR_87012093 Vendor business
Finance S_ALR_87012078 Due date analysis for supplier open items
Finance S_ALR_87012085 Vendor payment history
Finance S_P99_41000101 Check register
Finance S_ALR_87012075 Asset History
Finance S_ALR_87012936 Depreciation simulation/ forecast
Finance S_P99_41000192 Posted depreciation
Finance J1IQ Year end income-tax depreciation report
Finance S_ALR_87011981 Asset Inventory list

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Report Area Reports Name Description

Finance S_ALR_87012291 Document Journal at line item level
Inventory MB51 Material document listing
Inventory MR51 Account document listing
Inventory MMBE Stock Overview
Inventory MD04 Stock requirement list
Inventory MB52 Plant Stock availability
Inventory MB5M Expiration date list
Inventory MB5B Stock on posting date
Inventory MB5T Stock in transit
Inventory MBLB Stock with subcontractor
Inventory MB5S List of GR/ IR balances
Inventory MCBG MRP Controller analysis
Inventory MC40 Material usage based ABC Analysis
Inventory MC42 Range of coverage
Inventory MC44 Inventory turnover
Inventory MC46 Slow moving items
Inventory MC50 Dead Stock items
Inventory MC45 Usage value
Inventory CO09 Availability overview
Inventory MI24 Physical inventory listing
Logistics MM60 Commodity listing
Logistics MC$G Purchase value
Logistics S_ALR_87012972 Batch where used list
Logistics S_ALR_87012975 Engineering change management
Logistics SAP1 All Standard SAP Reports -- Module wise
Maintenance IH08 Display machine list
Maintenance MCJB MTTR/ MTBR for machine
Maintenance MCI5 Damage analysis
Maintenance MCI7 Breakdown analysis
Maintenance MCI8 Maintenance cost analysis
Maintenance MCIA Customer notification analysis
Production CS03 Bill of Materials
Production CR60 Work Centre information system
Production MCPB Work cener analysis
Production MCPW Material analysis
Production MCP1 Operation analysis
Production MCRP In repetitive manufacturing setup:
Production MF60 Pull list
Production MCP5 For process industry:
Production MCQ. Kanban analysis
Production PK13 Kanban analysis

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Report Area Reports Name Description

Production MCRE Material usage analysis
Production MCRI Product cost analysis
Production KKBC_HOE Product cost analysis - Summarised
Production S_ALR_8701348 Cost Variance Target/ Actual
Production CO46 Order progress report
Production COOIS Production order information system
Production KKBC_Ord Production order cost analysis
Production MCPY Operation analysis
Production MCP3 Material analysis
Production MCP5 Work Centre analysis
Production MCPB Production order analysis
Production MCRK Production analysis
Production MCP6 Material consumption analysis
Shop floor information system related to material
Production MCRU
analysis,
operation analysis, process order analysis, material
Production MCRV
usage analysis, product cost analysis
Production CO24 Missing parts checklist
Project System S_ALR_87013531 Project cost/ revenue/ expenditure
Purchase ME80FN Purhase order analysis
Purchase ME2L Purchase order display
Purchase ME81N Anlysis of order values
Purchase ME2V Goods receipt forecast
Purchase ME2O Stock lying with subcontractors
Purchase ME2A Monitor supplier confirmation
Purchase MCE1 Purchase analysis
Purchase MCEA Long term planning analysis
Purchase MKVZ Vendoe master list
Purchase ME5A Status of indents
Purchase ME4L Quotations listing
Purchase ME1L Commodity price
Purchase MEQM Planned share of business
Purchase ME64 Vendor rating
Quality Magt QGP1 History of inspection characteristics
Quality Magt QGC1 Control Chart
Quality Magt QM11 Quality Notification analysis
Quality Magt MCXX Defect analysis report
Quality Magt IP24 Calliberation inspection
Sales MCTA Sales analysis
Sales MC(A Sales analysis by Material
Sales MC+2 Sale report with option like

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Report Area Reports Name Description

Sales & Distribution VA15N Inquiries List
Sales & Distribution VA25N Quotations List
Sales & Distribution SDQ1 Expiring Quotations
Sales & Distribution SDQ2 Expired Quotations
Sales & Distribution SDQ3 Completed Quotations
Sales & Distribution VA05N List of Sales Orders
Sales & Distribution SDO1 Orders Within Time Period
Sales & Distribution V.02 Incomplete Orders
Sales & Distribution VA35N List of Scheduling Agreements
Sales & Distribution VA45N List of Contracts
Sales & Distribution SDV1 Expiring Contracts
Sales & Distribution SDV2 Expired Contracts
Sales & Distribution SDV3 Completed Contracts
Sales & Distribution VA14L Sales Documents Blocked for Delivery
Sales & Distribution V.23 Sales Documents Blocked for Billing
Sales & Distribution VL06O Outbound Delivery Monitor
Sales & Distribution VF05N List of Billing Documents
Sales & Distribution VB(8 List Rebate Agreements
Sales & Distribution S_ALR_87012218 Credit master sheet
Sales & Distribution F.31 Credit Management Overview
Sales & Distribution FCV3 Credit Management Early warning list
Sales & Distribution MCTA SIS: Customer Analysis
Sales & Distribution MCTC SIS: Material Analysis
Sales & Distribution MCTE SIS: Sales organisation
Sales & Distribution MCTK SIS: Shipping point
Sales & Distribution MCTI SIS: Sales employee
Sales & Distribution MCTG SIS: Sales office
Sales & Distribution MC(A SIS: Incoming orders
Sales & Distribution MC+A SIS: Returns
Sales & Distribution MC+E SIS: Customer Analysis: Invoiced Sales
Sales & Distribution MC+I SIS: Customer Analysis: Credit memos
Sales & Distribution F.35 SIS: Credit master sheet
Sales & Distribution MC(E SIS: Material Analysis: Incoming orders
Sales & Distribution MC+M SIS: Material Analysis: Returns
Sales & Distribution MC+Q SIS: Material Analysis: Invoiced Sales
Sales & Distribution MC+U SIS: Material Analysis: Credit memos
Sales & Distribution MC(I SIS: Sales Organisation Analysis: Incoming orders
Sales & Distribution MC+Y SIS: Sales Organisation Analysis: Returns
Sales & Distribution MC+2 SIS: Sales Organisation Analysis: Sales
Sales & Distribution MC+6 SIS: Sales Organisation Analysis: Credit memos
Sales & Distribution MC(M SIS: Sales Office Analysis: Incoming orders

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Report Area Reports Name Description

Sales & Distribution MC-A SIS: Sales Office Analysis: Returns
Sales & Distribution MC-E SIS: Sales Office Analysis: Sales
Sales & Distribution MC-I SIS: Sales Office Analysis: Credit memos
Sales & Distribution MC(Q SIS: Sales Employee Analysis: Incoming orders
Sales & Distribution MC-M SIS: Sales Employee Analysis: Returns
Sales & Distribution MC-Q SIS: Sales Employee Analysis: Sales
Sales & Distribution MC-U SIS: Sales Employee Analysis: Credit memos
Sales & Distribution VC/ 2 Sales Summary (Customer Fact Sheet)
Sales & Distribution V/ LD Pricing Reports
Sales & Distribution VD59 List Customer Material Info
Sales & Distribution VB35 Promotion List
Sales & Distribution VB25 List of Sales Deals
Sales & Distribution VC05 List of Sales Activities
Sales & Distribution VB25 List of Sales Deals
Sales & Distribution VCUST Customer List
Sales & Distribution MC+A Incoming orders
Sales & Distribution MC+E Invoiced sales
Sales & Distribution MC+I Credit Memo
Sales & Distribution MC+U Sales return
Sales & Distribution MC+6 Area wise
Sales & Distribution MCSI State-wise

3. TECHNIQUES OF INVESTIGATION OF ACCOUNTS

Manipulation of books of accounts is a common phenomenon to evade income-taxes. Generally
speaking, income is concealed by resorting to following methods:
In the Books of Accounts Outside the Books of Accounts
●● Bogus purchases/ expenses - Unaccounted business transactions.
●● Inflated purchases/ expenses - Unaccounted investment
●● Suppressed sales/ receipts
●● Suppression of production
●● Understatement of stock
●● Artificial loss.
●● Diversion/ division of income
●● Giving the receipt a non-taxable character.

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3.1 Manifestation of Concealed Income/ 3.2 Selecting the Case for Scrutiny and
Unaccounted Funds Identifying the Area of Investigation
●● Cash credit As per the provisions of income-tax Act, the
●● Bogus sales/ receipts assessee, who is maintaining regular books
of accounts has to enclose copies of the
●● Financing purchase of assets Manufacturing Account, Trading Account, Profit
●● Financing secret/ personal expenses & Loss Account, Balance Sheet and Audit Report
to the return of income, wherever accounts are
●● Remittance/ Gifts
audited. A study of these statements is the first
●● Introduction of cash at shortage time step in the process of identifying the areas of
As far as the transactions which are totally investigation.
outside the books of accounts are concerned, Ratio analysis is an effective tool for the purpose
they can be unearthed through direct actions
of identifying the areas of investigation. The term
such as Survey, Search and Seizure etc. Income
‘Ratio’ refers to the numerical or quantitative
concealed through recorded entries can however
relationship between two items/ variables.
be detected through investigation of accounts.
A number of ratios are used for financial
Such investigation, therefore, assumes great
significance. management. Different types of ratios can be
used by the Investigators to identify the area of
The investigator is required to possess certain investigation. These ratios are discussed below:
qualities in order to achieve the best results.
These qualities are: 3.2.1 The Ratio of Current Tax as Against
1. Knowledge of accountancy: It is necessary the Net Profit before Taxation (PBT)
that the investigator should have This ratio is important because in general the
knowledge of Double entry book-keeping current tax against PBT may range from 20% to
as well as the Indian system.
30%. If it goes below the rate specified u/s 115
2. Knowledge of trade: In case, investigating JB then the assesee would be made liable to pay
officer does not have knowledge of a the difference in the form of MAT.
particular trade, he can acquire the same
from his peers/ colleagues or even from the Step 1
experts in the field. The investigator can export the details of all the
3. Experience: In case, the investigating assesee from the ITBA software to an excel file.
officer has no experience, he can draw the Once the data is in excel format then by using
experience of his peers/ colleagues. the formula (Current Tax/ Profit before Tax) a
ratio of the two figures can be worked out. The
4. Diligence and tenacity: The investigator
formula can be copied for all the assessees.
has to make persistent efforts and he
should be tenacious in the face of reverses Step 2
and disappointments and refuses to be
After applying the formula the data can be
side tracked from a promising lead.
arranged in ascending order (using Sort Data
5. Intuition and an eye for unusual: Locating function in excel). With this we get the name
something unusual often leads to detection of the assessee who has paid the lowest tax as
of concealment. against the profits earned.

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Step 3 Trade Creditors + Bills

Select the assessee with high profits and low tax Payable + Bank Credit +
ratio. Copy the top 20 cases (or any number as Current Liabilities = Provisions for taxation +
required) with the lowest ratio to a different excel Dividends Payable +
sheet and rearrange it in descending order but Outstanding Expenses
this time on the basis of total profits.
It measures the ability of an entity to use its quick
Step 4 or current assets to extinguish or retire its current
Then do a detail scrutiny of the computation liabilities immediately by converting them into
of income filed by the assessee to understand cash immediately or at a short notice, without
the reasons behind the difference between the diminution of their value.
Net profit as per Profit & Loss account and the
An acid test ratio of 1 is considered satisfactory
taxable profit as per computation.
as the businessman can meet all its current
claims. If it is less than 1 say 0.5 and remains
3.3 Major Reasons of Deviations
around that level for a few years without default
1. Depreciation as per income-tax may be in payment of the current liabilities, then unless
higher than the depreciation computed as the industry average is similar (e.g. seasonal
per accounting standards. industries), most likely, the firm is using its own
2. Assessee may be having large income, secret funds in the form of cash credit during the
which is exempt from taxation year, which is withdrawn before the end of the
year. The area of investigation in such case will
3. There might be standard deductions (like
be the squared up cash credit accounts.
30% in case of house property income)
4. Capital gain from sale of fixed asset. This Ratio can be viewed easily in Tally Software
through following steps.
Depending upon the reasons of deviations the
Investigator can decide the further course of
action.
There are a number of ratios that are generally
used for financial management. Nine different
types of ratios can be used by the investigators
to identify the area of investigation. These ratios
are discussed below:
1. Acid Test or Quick Ratio:
Quick Assets
Acid Test Ratio =
Current Liabilities

Cash/ Bank balance +

Quick Assets = Short term securities + Sundry
Debtors + Bills Receivable etc.

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(Tally screen–showing various ratios on the right hand side)

2. Stock Turnover Ratio:

Cost of goods sold

Stock turnover ratio =
Average Stock

Cost of goods sold = Sales - Gross Profit

Opening Stock + Closing Stock

Average Stock =
2

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 Investigation of Computerized Books of Accounts

The ratio indicates how fast the inventory is If the ratio is below normal, it indicated possibility
sold. A high ratio is good from the point of view of unaccounted sales or hawala sales. If the ratio
of liquidity and vice-versa. is below normal but the gross profit and net profit
are normal, then in such cases, the Investigator
Over a period of time, the ratio generally remains
should verify whether the assessee has borrowed
stable year after year in the case of a particular
heavy loans quite disproportionate to his own
assessee, unless there is a change in the nature of
capital and if so, the investigator should verify
business. Wide fluctuations suggest manipulation
the genuineness of these loans. In most of the
of stock. A sudden increase in the ratio in the
cases of low ratio, a physical verification of stock
year indicates the possibility of understatement
will reveal that the stock physically available with
of closing stock. If the ratio is more than 10 or
the assessee is much less than the stock as per
more than that in the past years, then besides
the books of accounts.
unaccounted stock, there is also a possibility of
bogus or inflated purchases. In such cases, the The Ratio can be viewed in Tally Software
Assessing Officer should concentrate more on through following steps.
purchase and stock.

3. Debtor’s Turnover Ratio:

Net Credit Sales

Debtor’s turnover ratio =
Average Trade Debtors

Opening Debtors + Closing Debtors

Average Trade Debtors =
2

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A high ratio indicates shorter debt collection particularly be true in the case of traders. An
period and low ratio indicates longer debt independent verification of the accounts of the
collection period. A sudden increase in debt debtors in such cases may yield result.
collection period indicates that the assessee may
be realising the debtors but not showing the The Ratio can be viewed in Tally Software
realisation in the books of accounts. This may through following steps.

4. Creditor’s Turnover Ratio:

Net Credit Purchases
Creditor’s turnover ratio =
Average Creditors

Opening Creditors + Closing Creditors

Average Creditors =
2

A low ratio indicates liberal credit terms allowed

by suppliers, while a high ratio shows that the
accounts are being settled rapidly. A low ratio
indicates possibility of inflation of purchases
requiring scrutiny of the credit purchases,
especially during the last two months of the
financial years.
The Ratio can be viewed in Tally Software
through following steps

5. Debt Capital Ratio:

Long Term Debt

Debt Capital Ratio =
Capital contributed by owners

The capital contributed by owners includes

capital introduced by proprietor or partners or
shareholders equity in a company. This ratio is
normally 2. A high ratio (unless there are heavy
losses or other satisfactory reasons) indicates
possibility of borrowed funds being utilised for
non-business purpose including purchase of
non-business assets. The utilization of borrowed
funds would need to be critically examined for
possible disallowance of interest on the funds
Utilised for non-business purposes.
The Ratio can be viewed in Tally Software
through following steps.

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 Investigation of Computerized Books of Accounts

6. Gross Profit Ratio:

Gross Profit x 100

Gross Profit Ratio =
Sales

This ratio is frequently used for financial It should however, be remembered that low gross
investigation in the income-tax Department. profit or fall in gross profit is only the starting
Gross profit is a result of the interaction between point of enquiry and not an end in itself. The
sales price and cost price. The ratio is usually general explanations like competition, wastage,
known by comparison with the past record of pilferage etc. should not be accepted but the
the assessee and/ or other assessee engaged in assessee should be asked to substantiate and
the same line of business. A relatively low ratio
quantify their impact on the gross profit rate.
is definitely a signal for thorough investigation
For example, the effect of competition can be
for the possible understatement of income. In
computing the gross profit ratio, only those items ascertained by finding out the prices currently
of prime cost should be included, which vary charged by the assessee in comparison to others
directly with the sales and have direct bearing in the similar trade. In suitable cases, the assessee
on the trading operations only. If any trading may be asked to sort out purchases and sales
account or manufacturing account is found to in term of quantity and value and work out the
deviate from this principal, the ratio should be average purchase rate and sales for a specified
recomputed after excluding the following: period, say a few weeks. The Investigator can
a. Capital receipts or expenditure and receipt then analyse the reasons and see if there is
of casual and non-recurring nature inflation of purchase or understatement of sales.
b. Speculative profits or losses or profits and This Ratio can be viewed in Tally Software
losses of other business through following steps.
c. Any expenses which are not to be
included in the prime cost such as interest,
advertisement expenses etc..
However, the on account of prime cost such as
freight inward, customs day, loading and clearing
expenses, toll charges and cartage expenses for
goods purchased needs to be included.
The important point for examining the gross
profit ratio is that the comparison should be
on the principle of “like to like”. To illustrate
this point, it may be mentioned that the case
of an assessee with modest turnover cannot be
compared with the assessee with huge turnover.

7. Net Profit Ratio:

Net Operative Profit X 100

Net Profit Ratio =
Sales
Net Operative Profit = Net Profit + Interest + Depreciation + Partner’s/ Director’s remuneration

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This ratio indicates the managements’ ability to profit ratio is artificially inflated to escape scrutiny,
operate the business with sufficient success to but net profit is reduced because the net profit
meet all the expenses and still leave a margin of to sales ratio is generally not compared with the
reasonable compensation including remuneration preceding years’ ratio.
to the owners for their capital contribution. This
ratio should be carefully scrutinized for possible The Ratio can be viewed in Tally Software through
inflation of indirect expenses. Sometimes the gross following steps.

8. Expenses Ratio: Quite often, production, is suppressed while

Expenses ratio is useful in indicating the manufacturing expenses are fully accounted
the lines of investigation particularly in for. The examination of expenses ratio would
manufacturing concerns. Expenses ratio is indicate the areas requiring further investigation
divided in three sub-categories: with a view to detect suppression of production
a. Yield ratio or cost ratio. or inflation of manufacturing expenses.
b. Factory wages to cost of goods
manufactured. This ratio cannot be viewed directly in Tally in
c. Cost and quantity of fuel or electricity the present version. However, this ratio could be
consumed to cost and quantity of obtained manually.
goods manufactured.

9. Return on Investment Ratio:

Profit
Return of investment ratio =
Capital Employed

Any prudent businessman will invest in business The study of ratio analysis has its own limitations.
only if the return on investment is more than the It should be used with great care. The Investigator
interest offered on bank fixed deposits. The fall should remember that ratio analysis is only a
mean to an end and not an end in itself. It helps
in the ratio will indicate concealment of income the investigator in planning the investigation by
by way of inflation of purchases/ expenses or indicating areas where the possibility of detecting
suppression of sales and understatement of stock. concealment is high.

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The Ratio can be viewed in Tally Software through following steps.

3.3.1 Funds Flow Statement have other long-term funds been secured and
“Funds” for a “funds flow statement” means what is the extent of use of these funds, for long
resources which cause all external transactions term purposes? This tells as to what happens to
of a business entity. Such transactions might net working capital, which is long term funds’
involve exchange of cash or credit or any other contribution towards acquisition of current assets
asset. Funds flows can change their form with and which affects current ratio.
every transaction. Each transaction results in Thirdly, specific movements in major items of
some change in assets and/ or liabilities. long-term funds, long-term assets, current assets
For preparing a funds flow statement, the and current liabilities become apparent. By
liabilities side of a balance-Sheet is treated as the concentrating on them, major shifts in resources
financing side, reflecting sources of funds, and and their financing can be highlighted.
the assets side as the investment side, reflecting
uses of funds. When some liabilities are repaid, 3.3.3 Cash Flow Statement
uses of funds are involved; similarly, when some The cash flows are the inflows and outflows of
disinvestments take place, it becomes a source cash of a concern. A cash flow statement is a
of funds. Changes in assets and liabilities over statement of cash flows during the period to which
any period can thus be identified, to prepare a it pertains. Cash flow statements are prepared on
funds flow statement. historical as well as projected basis. Prepared on
projected basis, it becomes a cash budget.
3.3.2 Uses of Funds Flow Statement
It projects cash inflows and cash outflows for an
Firstly, it enables to clearly identify the amount of ensuing period, usually divided into sub-periods,
funds generated or lost in operations, and how to bring out the likely cash position at various
the funds generated have been utilised for - taxes, intervals. On the basis of these projections, a
dividends and amount retained in the business? business could plan additional sources of cash
Secondly, aside from retained earnings which including bank borrowings to fill projected short-
become a part of long-term funds, from where falls as also investment of projected surpluses.

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A cash flow statement on historical basis is simply 4. Are subsidiary books maintained by the
a summary of the cash book of a business, all items assessee and are they maintained in
being classified into broad heads. It thus shows sufficient details?
sources and uses of cash during a given period.
Cash inflows of a business are its most significant 5. Are the documents and vouchers to
events upon which accounting measurements are support the entries in the books of accounts
based and upon which, investors and creditors available and if available, are they reliable?
base their decisions. For the management, the 6. Has the income of the year been postponed
projected cash flow statement is an instrument by the assessee by credit to suspense
of liquidity management, while a historical cash
account, creditors account or otherwise
flow statement provides the basis for reviewing
totally omitted from the accounts of the
the performance.
year under considration?
3.3.4 Uses of Cash Flow Statement 7. Does the Auditor’s Report or Notes on
Cash Flow statements become significant in Accounts refer to any issue which affects
following situations: the taxable income of the year?
a. For highly seasonal industrial and trading 8. What is the scope of the audit? Has the
units, working capital needs fluctuate fast auditor submitted separate report to the
and cannot be estimated on a yearly basis. owners of the business and, if so, does it
A yearly cash credit limit may not thus contain any reference to the correctness
serve the purpose. and completeness of the accounts?
b. For weak and sick units, close monitoring
of cash receipts and payments, sometimes 9. Had any other type of audit, such as
even on a day-to-day basis, is called for. cost audit, financial audit, special audit,
The purpose is served by looking at cash etc. been conducted in the case of the
flow statements prepared on a required assessee? If so, is the copy of such audit
interval basis. report available on record?
c. In cases where diversion or misuse of funds 10. Does the test check of accounts confirm
is suspected, it might be useful to examine that the assessee has not manipulated the
frequent cash flow statements. arithmetical accuracy of the accounts?

3.4 Examination of Accounts After the preliminary examination of books of

accounts is complete, the specific areas need to
The following points should be examined, while
conducting a preliminary examination of the be looked into. There is no mathematical formula
books of accounts: for detection of concealment, as the assessees
regularly changes the methods of tax evasion
1. Are the accounts maintained as per the to suit their own requirement. Ratio analysis
notified accounting standards?
discussed earlier will be helpful in selecting the
2. Is there any unusual or uncommon feature area for investigation. However, there are certain
in the books of accounts? techniques, which may prove to be effective for
3. Are the account books written in sufficient detection of concealment. These are discussed
detail to facilitate the ascertaining the with reference to different items appearing in the
nature and character of the transactions? books of accounts.

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3.5 Inflation of Cost/ Purchases and the scope of the assessee to choose the method
Suppression of Production/ Sale of manipulation.
Inflation of cost/ purchase and suppression Normally, the inflation of purchase is done in
of production/ sale are the most commonly following situations (illustrative):
used methods for concealment of income. The 1. Sale price is pre-determined.
intention is to over debit or under credits the
2. Purchase price is low and margin of profit
trading or manufacturing account resulting in is high.
reduction of gross profit and consequently the
net profit. It is done by manipulating quantity 3. The sale price is received by cheque.
and value of the goods purchased and goods 4. Bill has to be issued for each item sold.
sold. The transaction is recorded in the books 5. Premium is required to be paid, while
of accounts but the correct quantity and/ or purchasing the material.
cost is not entered. Sometimes, it is possible
that the transaction may not be entered in the 6. Gratuitous purchases.
books of accounts at all, e.g. a cash sale may Normally the suppression of sale is done in the
not be recorded in the books of accounts. The following situations (illustrative):
production is basically manipulated in quantity 1. A number of sales transactions are in cash.
in the first place and consequently the value will
also be suppressed. Such suppressed production 2. The item being sold is a fast selling item.
will be sold in cash and no entry for the same will 3. The purchase price is regulated or
be made in the books of accounts. The cost of predetermined.
goods is generally manipulated in value alone. 4. Production suppression.
However, there are certain limitations on inflation 5. Gratuitous sales.
of purchase or suppression of sale. To clarify this
Thus the investigator after taking into
point, it may be mentioned that if the purchaser
consideration, the different aspects of the
is insisting for a bill, it will be difficult for the assessee’s business may select the area, which
seller to keep the transaction outside the books requires detailed investigation.
of accounts. Similarly, if the customer is making
full payment by cheque, it will be difficult for the
3.6 Methods of Manipulating the
seller to keep the transaction outside the books
Accounts
of accounts. Even though inflation of purchase
and suppression of sale achieve the same result, The methods of manipulating the accounts and
certain situations prevailing in the market limit its effects are discussed below in brief:
a. Inflation of Purchases
S. No. Description Quantity Amount
1. Bogus Purchases Not recorded. Value recorded
2. Over invoicing Recorded correctly. Value is enhanced
3. Earlier/ later purchases are included Recorded, but manipu-lated Record, but manipulated
Purchase of inferior goods shown as
4. Recorded correctly Value is enhanced
superior goods.
5. Purchases recorded at high price zone. Recorded correctly Value is enhanced
Purchasing non saleable goods and
6. subsequently writing off of stock as Recorded correctly Recorded correctly
bad/ unsaleable, etc.
7. Not recording purchase return. Not accounted Not accounted

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b. Suppression of Sale
S. No. Description Quantity Amount
1. Sale outside the books Not recorded Not recorded
2. Under invoicing Recorded correctly Value is reduced
Excluding the sales at the beginning/ end of
3. Recorded correctly Value is reduced
the year.
Sale of quality goods shown as sale of sub-
4. Recorded correctly Value is reduced
standard goods.
5. Sales are pushed to low price zone. Recorded correctly Value is reduced
6. Sales return Recorded correctly Value is enhanced

c. Inflation Cost of Production: Cost of and excel we can make a list of high value sales
production is inflated by showing excess vouchers, which will add upto 70% of total sales.
consumption of (1) raw material (especially STEPS TO SELECT HIGH VALUE SALES
costlier components), (2) power, oil etc. (3) INVOICES
stores and spares and (4) getting the job
work done from outside on higher cost.
d. Suppression of Production: The
production is suppressed by showing the
yield of finished product at a lesser ratio
than the correct ratio. The suppressed
production is kept totally outside the books
of accounted and is not recorded in the
production register or the stock register.
Similarly, the by-product is kept totally
outside the books of accounts or recorded
at lower quantity in the relevant registers.

3.7 Examination of Transactions of

Purchase and Sale
In order to get more insights into the transactions
related to sales and purchase, it will be very
helpful if certain preliminary steps are taken.
Let us take an example, where data is maintained
in Tally.
a. High Value Sale/ Purchase Invoices
There are thousands of sales invoices and
practically it is not possible to check all the
vouchers. If we want to verify the maximum
turnover in minimum possible time, then we
must follow ABC Analysis approach. In general,
there are 20 to 30% of vouchers that can add
upto 70–80% of total sales. With the use of tally

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b. List of Cash Sales/ Purchase Transactions

A list of cash sales transactions can be extracted through tally. Follow the steps given below.
STEPS TO SELECT TOP 10 DEBTORS

This report can be exported to excel. A ratio of makes attempt to reduce the profit. As against
cash sales to total sales can also be calculated to this, suppression of production is normally
understand the nature of business. practised throughout the year.
Note: Whatever reports we have generated The costlier components which form substantial
for Sales the same can also be generated for part of the cost/ production/ purchase/ sale are
purchase transactions. more likely to be manipulated, as it enables the
assessee to achieve higher results by manipulating
In medium and small scale cases, inflation of
small quantity. The U.R.D. (Unregistered Dealer)
purchase and suppression of sale generally takes
purchases/ sales are exception to this general rule.
place in the last few months of the financial year.
This is because that the assessee comes to know The Investigator will benefit by resorting to three
about higher income in the said period and then types of verification viz.

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1. Verification of flow of goods and material or by cheque (2) whether payment/ receipts
2. Verification of the physical aspect of are in full, in part or not made at all and (3)
transaction and whether incidental charges, such as commission,
brokerage, transport charges etc. were actually
3. Verification of financial aspect of the paid or are shown as outstanding.
transaction.
Verification of flow of goods and material will 3.8 Examination of Purchases
require preparation of a flow chart of incoming
Purchases should be test checked with reference
goods and material, outgoing goods and material
to the vouchers. Purchases in cash and on
and stock available with the assessee at end of the
credit of near about the same date should be
period. The chart should preferably be prepared
compared to find out inflation in cash purchases.
for 26 fortnights of the year. But if preparing
Purchases in the rising market should be seen
fortnightly chart is difficult, then at least monthly
chart should be prepared. This will reveal the with suspicion. Similarly, purchases in the last
availability of goods and material as against the two months of the year should be examined with
position of sale. Any substantial deviation from the reference to sales and closing stock.
normal flow should be viewed with suspicion and Examination of purchase bill is very important for
a detailed examination of the transactions in this detecting inflation of purchases. It is a common
period of substantial deviation should be made. knowledge that certain hawala dealers earn
Such examination of flow of goods and material their daily bread by giving bogus receipts and
have yielded good result in some cases as sales invoices. As discussed earlier attempts to inflate
were recorded at such time when the assessee sale are mostly made in the last few months of
was not having sufficient stock or even ‘nil’ stock. the year. The invoices/ receipts are acquired
Such examination of flow and material will also much later and in several cases, months later.
enable the investigator to view the transactions As the Bard has said, “To err is human”. It is,
in a proper perspective vis-á-vis the prevalent therefore, necessary to examine carefully, the
market conditions at the relevant time. invoices and receipts. The invoices with same
Verification of physical aspect of transaction pattern of printing but giving different addresses
involves ascertaining of the following: should be marked for detailed examination.
1. Mode and date of order. Similarly, invoices which appear to be new as
compared to the other invoices of the same
2. Quantity and price agreed. period and invoices which are not torn or
3. Mode of transport (Railway/ Lorry receipt). mutilated at the concern or the invoices which
4. Delivery challan with octroi marking. do not carry a mark of having been folded in the
past or having been stapled or pinned in the past
5. Sales/ purchase invoice. should also be marked for detailed examination.
6. Inward and outward registers (Factory/ The date of the bill is also likely to give a good
Godown). clue, as the bills are actually prepared much
7. Subsidiary books (Sales/ Purchase/ Sales later than the date on which the transaction is
Return/ Purchase Return Registers). supposed to have taken place. The whole-sellers
of a particular commodity are normally located
8. Stock Ledger.
in a particular area. The invoice having address
Verification of financial aspect is to ascertain of a locality other than the locality in which the
how the receipts/ payments are accounted for. whole-sellers are located should also be viewed
The investigator should ascertain (1) whether with suspicion. In suitable case, information
the payments/ receipts are effected in cash from the bank should be called to find out the

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 Investigation of Computerized Books of Accounts

names of the payees to whom the payments find it difficult to produce the documents
have ultimately been made. Purchases related to required for physical verification or the
Sundry Debtors which are outstanding for a long assessee may produce bogus documents.
time should also be examined in detail. Detailed Verification of financial aspect such as
examination should also be made in respect of following up of cheque to find out the end
goods and material imported, especially in view receiver will be useful in this method.
of the fact that cases have been found where the
purchasers have either sold the import licences The above query could be verified in data
or have sold the material imported in market for maintained in Tally Software through following
cash consideration. In such, cases the import steps.
documents should be scrutinised and the reverse
side of import license should be verified for any
endorsement there on.
Different methods of inflation of purchases have
been discussed earlier. The verification of such
purchases is discussed below:
1. Bogus Purchases: In this method, the
quantity of goods is not recorded but
the value is recorded. In this method the
purchase consideration paid is normally
received back in cash. Since the goods
have not been received, the assessee will

The following screen appears on following the above path in Tally software:

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2. Over Invoicing: Since the manipulation in the books of accounts to the period in
will be in terms of the value, the verification which prices were high. The verification of
of quantity is not necessary. Purchase invoice flow of goods will be useful in such cases.
should be compared with invoices of other Fortnightly or monthly stock tally will be
purchases around the same time. Since the necessary to verify the flow of goods.
higher amount paid is received back by the Similarly co-relating the purchases with
assessee in cash, following up of cheque will payments will also be useful.
also be useful.
6. Purchasing Non-Saleable Goods as
3. Earlier/ Later Purchases Recorded In Standard Goods and Subsequently
Current Year: This method is resorted Writing Off of Stock as Bad/
to when the gross profit manipulation is Unsaleable etc.: The quantity and value
required in a particular year. The purchases are both correctly recorded. The purchase
in the last month and consequently consideration paid is subsequently
the closing stock will be high. Sundry recovered in cash. Sometimes the goods
debtors and sundry creditors will be sold without bills are adjusted in this
disproportionate. Since the purchases method by regularly writing off certain
of earlier/ later year are to be recorded, percentage of goods as bad/ unsaleable.
quantity as well as value is manipulated. The Investigator should verify the method
Financial test will not be relevant in this of disposing of the goods written off as
method but physical verification will bad/ unsaleable. Certain exciseable goods
be necessary to prove that though the written off as bad/ unsaleable are to be
assessee has recorded the purchase, the disposed off in the presence of excise
goods have not been physically received authorities. Enquiries may, therefore, be
by the assessee. made with excise authorities in suitable
4. Purchase of Inferior Quality cases. Follow up of cheque payment may
Recording Superior Goods: In this also be useful.
method, sub-standard goods are purchased 7. Not Accounting Purchase Return:
at the price of quality goods. To give an Purchase return reduces the total purchases.
example the dealer of ready-made dresses Hence sometimes the assessees do not
may purchase goods termed as ‘seconds’ record purchase return to avoid reduction
and will record the value at normal price. in the amount of purchases. This results in
The goods will however be sold at lower certain quantity of goods going out without
rate as ‘seconds’ thus reducing the profit. any consequential reduction in the value
The purchase documents will have to be of purchases. This is subsequently adjusted
verified in this case and rates will have as shortage of stock as a result of weight
to be compared. The following up of the loss or loss in transportation. Normally,
cheque will also be useful. the purchase consideration, though paid,
5. Purchases Recorded at High Price is not received back by the assessee on
Zone: To give an example, the edible oil purchase return as it is normally adjusted
dealer will purchase goods soon after the in running account. The verification of
new groundnut crop comes to the market, running account of purchases and detailed
since the edible oil will be cheaper at that verification of goods written off will be
time, but the date of purchase is shifted useful in such cases.

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 Investigation of Computerized Books of Accounts

For point no. 2 to 7, though Tally does not purchase register wherein, the quantitative and
provide an analysis directly, but to review each value part are reflected. The Purchase register
and every purchase, one can take support of can be viewed through following path.

e.g.

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3.9 Examination of Sales of large amount of cash. It is likely that he may

Suppressing or under-stating the sale is another introduce cash available with him on these days
common method for concealment of income. by showing fictitious sales. The Investigator
Many a times, the sales are also manipulated should, therefore, study the cash flow and cash
by introducing intermediaries in between or sales just prior to large requirement of cash
by fabricating bogus forward contracts. Such in detail. Consignment sales should also be
cases should therefore be examined in detail. examined.
The Investigator should examine the sales near Cash Flow can be viewed through following
about the date of change in excise structure for path in Tally -
possible manipulation. Similarly, sale of large
stock in falling market or before abnormal price
rise should also be examined. If an item is a
controlled item, it should be ascertained whether
there was any increase in price announced by the
Government. In such cases, there is a possibility
of huge profit on existing stock and the assessee
may conceal such profit through fictitious sales
at lower price. Also the large cash sales made
at the end of the year should be viewed with
suspicion. Sometimes sales proceed may be
directly credited to the personal accounts and
are subsequently squared up. The Investigator
should examine such transactions. Sale of waste/
scrap and by-product should also be examined.
On certain dates, the assessee may be in need

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 Investigation of Computerized Books of Accounts

Further, to investigate in respect of “Cash Sales”, we can also view “Cash Account” by following path:

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Above screenshot of “Cash Book” shows that been discussed earlier. The verification of such
there is cash receipt of Rs. 42,020/- in the name of sales is discussed below:
“ABC” personal account, as mentioned in above 1. Sales Outside the Books: Since the sale
para, which may be squared up subsequently. is totally outside the books of accounts, it
The investigator should compare the rates of sale makes the work of Investigator, difficult.
However, the study of flow of goods,
made in cash and on credit. He may also call for
verification of item wise quantitative tally
relevant information from other authorities such
and calling for accounts of old sundry
as excise, customs, sales tax, octroi, bank etc. for creditors may yield results.
cross verification.
For the purpose of investigating into the
In the business establishments having large movement of the stock, “Stock Summary” can
number of cash sales during the day, such as be viewed through following steps:
expensive restaurants and cloth shops, which
are selling expensive sarees and garments, it
was noticed in some survey and search actions
that the computers were programmed to exclude
certain sales transactions from the statement of
sale. The Investigator should therefore, take care
to verify this aspect during the course of survey
or search by running a dummy programme.
Different methods of suppression of sale have e.g.

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 Investigation of Computerized Books of Accounts

Further, to view the ‘ageing’ (Old Sundry Creditors) of the creditors, below mentioned path can be
followed.

e.g.

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2. Under Invoicing: In the cases of under different transactions and co-ordination

invoicing, the quantity is recorded with other authorities may be useful in this
correctly but the sales price is suppressed. regard.
Unrecorded portion of sales price is
recovered from the purchaser in cash or The comparison of sale prices can be viewed by
in kind. A comparison of sales price in observing ‘movement of stock’ as below:

Further, to view the difference in the rates of same products is different (i.e. price per Kg is
sale price, following illustrative vouchers can be Rs. 425 & Rs. 468) which clearly points towards
taken into consideration. It could be seen here Under Invoicing.
that sales price charged on a given date for the

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3. Excluding the Sales at the Beginning/ To have a look into the month-wise comparison
End of the Year: Comparatively low of sales, sales register can be viewed through
sales at the beginning or end of the year following path:
may be an indication of the shifting of
sales to different period. In such cases,
the assessee may temporarily change the
method of accounting for recording the
sales at the time of despatch of goods to
recording the same on receipt of order
or vice-versa. The quantitative records
are then manipulated, as they cannot be
written in orderly fashion. The Assessing
Officer may examine the quantitative tally
which will show that goods have physically
gone out but the value is not recorded. e.g.

4. Sale of Quality Goods Shown as to prove that good quality material was
Sale of Sub-Standard Goods: The sold as sub-standard goods. The same
sales value is manipulated by lowering the can be identified by viewing sales register
same but the quantity remains the same. as mentioned in Serial No. 2 ‘Under
Since the Investigator is investigating the Invoicing’.
matter after a gap of time, it will be difficult

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5. Sales Pushed to Low Price Zone: the quantity of product manufactured generally
Taking earlier example of edible oil bears a more or less definite proportion to the
dealer, the goods sold when the prices quantity of raw material/ power consumed. Any
were high may be shifted in the books major deviation from the yield ratio should be
of accounts to the period when the price viewed with suspicion. The assessee may try to
was low immediately after the new crop say that yield was low due to lower quality of raw
of groundnuts. The verification of flow material. In such case, the Investigator should
of goods will be useful in such cases. verify whether the question of lower quality of
Fortnightly or monthly stock tally will be raw material was taken up by the assessee with
necessary to verify the flow of goods. the supplier of the material and should also
Similarly co-relating sales with receipts will verify the rate at which the raw material was
also be useful. The same can be identified purchased and whether lower rate was paid to
by viewing sales register as mentioned in lower quality material.
Serial No. 2 ‘Under Invoicing’. The same can be identified by examining the
6. Sales Return: Sales return reduces the ‘Yield Ratio’, in ‘Ratio’ Section, as mentioned
total sales. The quantity of sales return above.
is recorded correctly but the sales are By-product and wastage also generally bears a
reduced by inflating the figure of value. more or less definite proportion to the quantity
The Investigator should, therefore, relate of raw material consumed. It is therefore,
the sales return to its sale to ensure that necessary that these two items are also verified in
the value is not reduced. Cash sales and the same manner as the yield of finished product
subsequent sales return are sometimes to raw material. The same can be identified by
used to temporarily bring in unaccounted examining the ‘Yield Ratio’, in ‘Ratio’ Section, as
cash at the time of need. If accounted mentioned above.
cash is not available when required, the
The units of electricity consumed or the quantity
assessee may introduce unaccounted
of other types of fuels consumed should also
cash available with him by showing cash
be taken into consideration for estimating the
sale and withdraw this cash from business
manufacturing result. It will also prove to be
whenever sufficient accounted cash is
helpful when the assessee is accounting for
available by showing sales result. The
production but is in fact not manufacturing
Investigator should, therefore, examine the
anything, such as a case where the assessee has
cases of sales return, whenever the related
shown manufacturing of stainless steel utensils
sale was a cash sales. but has sold the imported stainless steel sheets
The same can be identified by viewing Sales in black market, was confronted with meagre
register and cash book, as mentioned in consumption of electricity by the factory. The
“Examination of Sales”. same can be identified in Tally accounts by
referring and comparing respective expense
3.10 Manufacturing Expenses and account in Statement of Profit & Loss.
Direct Expenses The investigator should verify the production
Apart from the gross profit rate, percentage of register and other relevant registers maintained
yield from raw material consumed should be in the factory. He should verify that the
compared with the ratio of yield in the earlier production in terms of quantities shown from
years and also with the yield in the other stage to stage commensurate with the quantity
comparable cases. In any manufacturing activity, of raw material and power/ fuel. Central excise

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specifications can be taken as standard for the statement of stock filed and verified by the
the consumption of raw material, wherever Officer of the bank from which the assessee
applicable. Production machine manuals can has obtained loan on hypothecation of stock.
also be taken as basis for consumption of raw The stock register maintained by the assessee
material. Job-work standards can be applied to should be test checked and flow of stock should
ascertain the raw material consumption. The be examined. It should also be ascertained
Investigator may consult an expert in the field, that the assessee has not changed the method
if necessary. In suitable cases, the Investigator of valuation of stock. It should be verified that
may visit the factory with the permission of stock in respect of (a) raw material (b) goods in
higher authorities to gain firsthand knowledge process (c) consignment goods in transit (d) stock
of the manufacturing process. The cost audit with the branches and (e) finished goods have
reports prescribed for certain manufacturing been separately and correctly shown. Purchases
activity may be obtained for critical appraisal made in the closing period of the months should
of the cost incurred under several heads such be examined with reference to the sales of those
as raw material, stores, wages, power/ fuel etc. items to verify the balance stock and to tally it
so that it may be possible to compare similar with the closing stock inventory. The valuation
percentage shown by other assessees and to pin- of the stock should also be checked.
point the aspect which requires further scrutiny.
The consumption of costlier components should 3.12 Gross Profit
be thoroughly checked as least manipulation
As mentioned earlier, like should be compared
thereof gives maximum results.
with like for analyzing the gross profit ratio. The
In a pen manufacturer’s case, gold was purchased fall in gross profit is only a starting point for
for manufacturing of nibs and consumption was enquiry and not an end in itself. The Investigator
shown at higher rate than the actual consumption. should give specific findings about the area
It resulted in higher cost inflation with least of manipulation made by the assessee. The
manipulation. Substantial quantity of gold was area of manipulation may be sales, purchase,
found during the course of search and seizure opening stock or closing stock. After recording
in this case. Stock written off as damaged or specific findings, the Assessing Officer during
spoiled, should also be checked. If abnormal rise the assessment proceedings should reject the
in any particularly expenditure is shown, detailed book results by invoking the provisions of Sec.
scrutiny regarding the claim should be made. 145(3) of income-tax Act. The correct value of
the item in the manufacturing or trading account
3.11 Opening and Closing Stock which is not accepted by the Assessing Officer,
should thereafter be found out by adopting the
The figures of quantity and value of the closing
following formula by taking the item of which the
stock should be checked with the last year’s
value is to be found out at ‘X’.
closing stock. The Investigator should also check

100 x (Purchase + Opening Stock - Closing Stock)

Sales =
(100 - Desired rate of gross profit)

After ascertaining the value of ‘X’, the Assessing concludes that the direct expenses have been
Officer should recast the manufacturing or inflated, then addition should be made in respect
trading account and arrive at the correct amount of such inflation.
of gross profit. If, however, the Assessing Officer

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3.13 Profit and Loss Account assets and liabilities side should tally. If there is
The debit side of the profit and loss account excess of assets over liabilities, the difference
should be examined for possibility of the assessee should be taxed as income, but the vice-versa
having inflated the expenditure. Any new item of should be ignored. Normally, the difference
expenditure or new item of income like interest, in the two sides is transferred to a “Suspense
commission, profit on sale of assets etc. should Account”. Entries in the suspense account should
also be examined in detail. be carefully examined. In the cases of limited
companies, the share capital raised through
Claims of various expenses should be compared public issue, especially in the cases of companies
with the claims in the previous years. Large owned by business families, should be subjected
payments to allied/ connected concerns should to scrutiny, as introduction of unaccounted funds
be scrutinised. Debts on account of trading through share applications in bogus names has
losses should be carefully examined to verify been detected in a number of cases, recently.
the correctness and genuineness of the same.
Provisions made as distinguished from actual The balance in the capital account of proprietor/
expenditure should be examined. The Investigator partners should be examined with reference
should also examine whether the personal to the previous years balance. Fresh credits
expenses of proprietor/ partners are passed on should be probed. Details of drawings should be
as business expenses. Generally the expenses obtained to find out its purpose and adequacy
claimed in profit and loss account should be of household expenses. Whether the claims for
tested for reasonableness. Disallowance should insurance premium, payment of taxes etc. are
be made on specific ground. properly reflected in the capital account is also a
point to be checked.
3.14 Balance Sheet Origin of reserves should be examined. Since the
reserves debited in the profit and loss account
Balance Sheet is not an account as such but it
are to be added to the income of the assessee,
is a statement indicating the financial position
it is necessary to find out those reserves which
of the assessee. Concealment of income results
are not debited to the profit and loss account.
in accumulation of unaccounted funds with the
It is likely that the reserves might have been
assessee. The businessman is always in need
created by debiting certain accounts like sales,
of funds for running the business and hence
interest etc., directly. In respect of certain specific
he would not like to keep such unaccounted
reserves such as investment allowance reserve,
accumulated funds idle. Though, he may spend
it should be seen whether any such reserve has
part of such funds on personal expenses, the
been drawn during the specific period of 8 years
major portion of such funds will be brought
for an object which is not permissible.
back in the business. Such funds will manifest
in Balance-Sheet in different forms such as cash Details of security and collateral security given to
credit, introduction of capital by proprietor/ the banks and financial institutions for obtaining
partner, undervalued stock, bogus liabilities etc. loans should be collected and verified to check
The examination of Balance-Sheet is therefore, whether such securities have been accounted
important for detecting concealed income. for. If stock is hypothecated with bank, then the
inventory of stock filed by the assessee with the
More attention should be paid to the accounts
bank should be compared with the stock register.
appearing in the Balance-Sheet for the first time,
accounts disappearing from Balance-Sheet and All new cash credits should be examined by calling
accounts remaining untouched for a long period for the evidence of the source and verification
of time. The basic principle is that the totals of of the credit-worthiness of the creditor. The

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existence of the creditor may be verified from creditors and sundry creditors appearing for
the mailing address, GIR/ PAN number and several years should be examined.
confirmation by the creditors. It is also necessary
The other liabilities and provisions should be
to verify the squared up accounts, as the
scrutinised for remission of liability attracting
assessees generally keeps the bogus loans out
provisions of sec. 41 and the contingent liabilities.
of Balance-Sheet and in the process, square up
the account before the end of the year. Squared The asset side reflects the application of funds.
up accounts can be found out from ledger and Details of new assets should be obtained from
cash book. Instances of un-ledgerised squared the assessee and verified by comparing the
up accounts have also been found, particularly balances from the previous year. The calculation
on the dates when large purchases have been of depreciation as per income-tax is different
affected. It is also likely that on such dates the from the method followed in books of accounts.
assessee might have overstated the total of credit As per the provision of income-tax Act, full year
side of the cash book or understated the debit depreciation is provided on the assets which are
side of the cash book in order to introduce the put to use for a period of more than 180 days and
required cash. It is also possible that the assessee half year depreciation on the remaining additions.
may shift the name of the cash creditor to the Hence, it becomes extremely important to check
list of sundry creditors. The details of the sundry the dates of additions from books as against the
creditors should be called for. Balances of cash dates mentioned in the return.

STEPS TO LOCATE ADDITIONS IN FIXED ASSETS

Source of funds utilised for acquiring new use on the date claimed by the assessee. The log
asset should be verified. Claim of depreciation books maintained in the factory and technical
is often used by the assessee for reducing the manuals may be useful for this purpose.
taxable income. It is therefore, necessary, for the Reduction in the value of fixed assets through
investigator to verify the claim of depreciation sale or otherwise can be traced in the shortest
and to verify whether the asset was ready for possible manner using the following steps.

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STEPS TO LOCATE REDUCTION IN FIXED ASSETS sale of investment is only a ruse to introduce
cash credit. The income from investment should
be reconciled with the investment appearing in
the Balance-Sheet.
Analysing the various types and number of
debtors is very important. For ascertaining the
nature, we can do the following in a tally data:
a. Top 10 Debtors/ Creditors
Many times there is a need to call for balance
confirmation. A third party confirmation is always
considered as the best evidence, but practically
it’s not possible to call for balance confirmation
from every party and then check the same with
the corresponding ledger account in the books
If a particular investment has been sold by the of the assessee. In case we are short of time then
assessee during the relevant previous year, it a balance confirmation can be called from top
should be ascertained whether the assessee has 10 parties, which in aggregate may add up to
physically parted with the assets or whether the 70–80% of total sales.

STEPS TO SELECT TOP 10 DEBTORS

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By default the report in tally is arranged in verify whether the cheques issued but not
alphabetic order and presently there is no option cleared in the last few days of the financial year
for configuration of the report, hence the amount have actually been cleared in the next year, and
wise sorting is required to be done in excel. the cheques received but not deposited have
actually been deposited in the bank and credited
b. Non-Moving Debtors/ Creditors
to the assessee account in next year. Some of the
Generally the credit period of debtors ranges analysis that can be done in accounts maintained
from 15 days to 3 months depending upon the in Tally are as under:
nature of business. If the debtor is outstanding
a. Bank Reconciliation
for a period of more than 1 year then there are
chances that it’s not a genuine sale but just an Tally has an inbuilt facility to create Bank
entry or its loan party grouped under sundry Reconciliation. There are couple of ways to get
debtors. The assessing officer must scrutinize the Bank Reconciliation but the best place where
such non moving debtors account. one can find all the reconciliation is banking
STEPS TO LOCATE NON MOVING DEBTORS
utility. Follow the steps given below to get all the
reconciliation at one place.
STEPS TO LOCATE BANK RECONCILIATION

b. Contra Entries
It is important to check the dates of all the contra
entries with the corresponding date in the bank
statement. The best way to get all the contra
entries at one place in the best possible time is
through statistics. Follow the steps given below
to get the list of all the contra entries.
STEPS TO LOCATE CONTRA ENTRIES

Note: Whatever reports we have generated for Debtors

the same can also be generated for scrutiny of creditors
account.

Further, the details of sundry debtors should be

called for and a test check should be made to
ascertain the nature of debt. The connection of
debtors with business should also be verified.
The investigator should invariably call for the
bank reconciliation statement. He should also

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The investigator should examine the cash flow This report can be exported to excel using export
and the cash deposits at the time of cash crunch. utility in tally
The examination of cash flow, which can be
b. Cash Payments Exceeding 10,000/-
done on accounts in Tally data is as follows:
Cash payment exceeding 10,000/- needs to be
a. Negative Cash
disallowed as per income-tax Act. The list of
Negative cash balance is a situation that such payments can be extracted using range
generally arises when the payment in cash function in tally. If there are more than one cash
exceeds the balance of cash reflected in books. accounts then the best way to get the required
Practically the cash balance as per books is not data is through Group Vouchers.
same as the cash actually held by the assessee. If
the assessee deposits cash in bank exceeding the STEPS TO TRACE CASH PAYMENTS
EXCEEDING 10,000/-
balance as reflected in the books then the same
will result into negative cash. A negative balance
of cash can be interpreted as undisclosed cash
and a suitable action can be taken under Section
68 of the income-tax Act.
The cash balance at the end of the year may
reflect Dr balance, but there can be instances of
Cr balance during the year. The negative cash
balance is a ready-made report in tally. The same
can be extracted following the steps given below:
STEPS TO TRACE INSTANCES OF NEGATIVE
CASH BALANCE

Note: In tally greater than is to be read as “Greater than

and Equal to” hence the limit is to be set as 10,001 instead
of 10,000/-

This report can be exported to excel using export

utility in tally

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c. Minimum, Maximum and Average know which are the top expenses or top parties
Cash Balance to whom the maximum cash payments are being
Cash analysis is a very important area. Since, made. If there are more than one cash accounts
the volume is big there has to be a systematic then the best way to get the required data is
approach to start the cash investigation. The through Group Vouchers.
first thing that we can do is to check the average STEPS TO TRACE CASH PAYMENTS
cash balance held by the entity throughout the EXCEEDING 10,000/-
year and then understand the requirement of the
same corresponding to the nature of business.
The highest, lowest and the average cash balance
during the year is directly available in tally.
STEPS TO KNOW AVERAGE, MINIMUM AND
MAXIMUM CASH BALANCE

This will give the list of all the payments made in cash.
In order to make the summary of the same the data is
required to be exported in excel and with the use of pivot
table option a summary can be prepared.

The general principles of investigation of

accounts have been discussed in the preceding
This report can be exported to excel using export paragraphs. However, the investigator may
utility in tally come across a modus-operandi peculiar to the
case under investigation by him. In such case,
d. Summary of all the Cash Payments the investigation will have to be planned taking
If there are lot of cash transactions then a into consideration the facts and circumstances of
summary of cash payments can be made to that particular case.

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3.15 Other Issues and that in the books of accounts maintained

1. Separate/ Customised Software: in other software is to be done. The thumb rule
Apart from the Tally and SAP accounting that may be followed is that when the operations
systems, each business has also developed are happening close to or in the premise where
its own software for accounts and the controlling persons are there, the possibility
operations. These have been developed of the customised and decentralised software
keeping the need of the industry in mind. is more likely than otherwise. The investigator
However, some of them are customer needs to collate the data from the operations
specific as well and have features which are software with the accounts software. Instances
unique to the assessee. The investigation have been noticed where the stock data is not
into these accounts would be a more case entered in the books of accounts till the month
to case basis. For instance, the diamond end or quarter end and further, some of the
industry, the activity involves the import of stock data is added at the end of the year only.
the raw diamonds, polishing of the same The investigator needs to examine whether the
and then the manufacture of the jewellery values, quantities and the wastage have been
from the same. The software (Lemon etc.) mentioned in the correct form in the system.
that tracks the raw diamond procurement
to the polished diamond is different from 2. Data Recovery and Data Storage:
the one that tracks the polished diamond In the case of digital evidence, the two
to the diamond jewellery manufacturing. crucial aspects as in the case of non-digital
The requirement of the industry is that the evidence, are the recovery and storage of
polished diamond recovery from the raw the evidence. The recovery of the digital
diamond source is tracked so that the best evidence involves the recovery of the same
yielding source is known. The assessee as contained in the mobile phones, ipads,
wants to know whether the diamond from laptops as well as the desktop systems.
one mine yields more or he should go for Further, some of the data is nowadays stored
some other source. in the cloud and therefore, is not system
The second software is tracking the cost and sale specific. Recovery would involve getting
part for the accounting purposes. So if the actual access to the data and then obtaining it in a
profitability has to be worked out, then the data readable form. A large number of software
from both have to be merged, and the same may tools are now available which can help the
also be done internally by the assessee, though recovery of data from these devices and
not readily available to the investigator. many of them also help in recovery of
deleted data as well. As regards the data
Another case where separate software is
which is stored in the cloud, it is important
usually maintained is cases where stock is
to obtain the passwords before the same
involved- jewellers and manufacturers. Again
can be accessed. The recovery of the data
the purpose is quantitative tallying and recovery
measurement but the same does give rise to is usually done using forensic tools for
the possibility of stock adjustment as the data imaging by experts who are certified for the
is maintained in standalone systems with no purpose. There are vendors existing who
linkage with the entry in the normal accounts. have been used by the Department for the
The data of stock is exported in a manual form recovery of data from these digital sources.
to the main accounts. Immediate reconciliation It is important to note that imaging of the
of the stock as available in the stock software data is different from the copying of the data

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as the deleted files do not get recovered disable remote access option whenever
in the copying process. Furthermore, the the books of accounts are found to be
certified forensic experts give the hash maintained in the tally system. In case
value of the system at the time of recovery of SAP system, it is important to have
of the data and the same is the evidence the audit trail obtained during the course
of data integrity. The hash value that is of the search or subsequent to it as any
used is either in MD5 format containing 32 alteration of the original entries are noted
characters or SHA-1 format containing 40 in the audit trail. These aspects have to be
characters, the second being the preferable kept in mind by the investigator.
option. Subsequently when the data or the
4. Data Scanning: The entire purpose of
device is examined or opened, the hash
search and seizure operation is to gather
value should tally exactly and that is the
useful evidence and in case of digital
proof that no alteration has happened
evidence, it is important to segregate what
subsequently. The recovered data is stored
is useful from what is not. The digital data
as a seized item with clear identification
nowadays is voluminous and to scan the
mark and data from several systems can
same for useful evidence is the primary
be combined and stored in one external
exercise that an investigator has to do.
hard drive as well. This external hard drive
The first step is to have a general look at
will be marked and identified for seizure
the type of files which are contained in
purposes in the panchanama recorded and
the system. It is possible to note whether
it is important to mention the data with the
there are a large number of excel files or
hash value specified in the panchnama. A
document files or emails in the specific
working copy of the data is prepared and
device. A cursory look is important to
the same is used for analysis during the
find out the general terminology that is
post search investigations. It is to be noted
used and the most common conversations
that the imaged data has to be converted
or people interacted with. This helps in
into a readable form through extraction
providing a lead to the possible keywords
by the forensic experts before they can be
that are used by the assessee or the user
used by the Investigator. As regards the
and also indicates the persons with whom
seized disk, the same has to be maintained
the conversations or transactions have
for evidentiary purposes in case the data
happened. The next step in the same is
integrity is challenged subsequently in
the keyword search wherein the keywords
judicial or other forums.
are typed in and the files which contain
3. Preventing/ Tracking Data Manipulation those data are segregated. The keywords
during the Search: Even in the could be general in nature like “cash”,
normal software used for maintaining “cheque”, etc. as well as specific entities/
books of accounts, there is possibility of persons/ transactions. This is a case to
manipulation of the same during the course case search and it is important to mention/
of the search. In case of tally accounting, cull out the same from the prior analysis
remote access is possible and therefore, of the transactions. The files which are
anybody having the access codes can alter identified from this keyword search need
the relevant data even though he is not in to be examined in greater detail and
the premises. It is important therefore to if possible, completely covered. These

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 Investigation of Computerized Books of Accounts

files could be copied to a usable device designed to maximize the investigation coverage
before the system is put to imaging so that and revamp traditional techniques for a more
relevant investigations can be carried out sophisticated and forward-looking approach.
simultaneously.
Key Feature Groups in Data Analytics
The main purpose of study of accounts is to
locate an unusual area. Examination of accounts 4.2 Import
is the weapon in the hands of the investigator to
Effortlessly helps you capture data from any
pierce the coating of the books entries hiding the
database and/ or application in any format
concealed income.
like spreadsheets, access databases, flat files,
delimited data dumps, XML extracts, SAP
4. APPLICATION OF FORENSIC exports, Print formats and Adobe PDF based
ACCOUNTING FOR System Generated Reports.
INVESTIGATION PURPOSE
Over a period of time, the scrutiny of assessment 4.3 Extract
is becoming an exercise, where the assessing
Extract tasks helps you narrow down your analysis
officer is hardly able to find time or able to
and retrieve data that satisfies specific criteria. It
investigate the accounts and business data of the
helps reveal risky events and transactions that
assessee. The reason is due to the compatibility
occurred after the year end cut-off date.
issues of digital formats in which the data exists,
lack of tools/ resources, paucity of time and
4.4 Explore
also lack of ability of the officers to use various
analytical tools to investigate the accounts. As Explore tasks help you dwell into your data
a department, we have a case to use computer and spot oddities and outliers. Forecast and
aided investigation tool or forensic accounting extrapolate with predictive analytic tasks.
tool to carry out investigation of accounts and
business data at the time of scrutiny of cases 4.5 Categorize
for assessment and other investigations at the
Categorize tasks help you uncover meaning in
time of searches and survey actions. These
seemingly disparate data elements. Discover
tools also have good speed, high flexibility to
commonalities and anomalies by Aging. Stratify
operate, drill down facility to be able to view the
your data to create profiles and investigate
underlying transactions, have compatibility with
deviations from expected trends.
other databases and uses of apt graphics to draw
inferences.
4.6 Sample
4.1 About Data Analytics When testing an entire population it is impractical
or uneconomical to conduct tests of details and
Data Analytics (DA) provides a structured
balances on the entire population. Sample tasks
framework for performing organized, efficient
helps you estimate characteristics of the whole
and reliable investigations that meet or
population based on incidence of errors on the
exceed professional standards. It’s simple yet
statistically selected sample.
comprehensive methodology accommodating
every aspect of data analysis from importing
raw data to reporting actionable results. Delays 4.7 Export
can cost money, so finding cost-efficient ways to The findings emerging from the use of Data
conduct Forensic investigations is critical. DA is Analytic Tools can be exported to commonly

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 Techniques of Investigation for Assessment Vol. 1

collaborative formats like spreadsheet, text, PDF 4.13 Review and Report
and access databases for further validation,
Reporting and presenting your findings is one
review, investigation and action by the concerned
of the most important steps in the workflow.
stakeholders.
Flawless analytics are of little use if one
can’t communicate the results. Review and
4.8 Benefits of using Data Analytics
communicated actionable results with reports,
By simplifying the workflow, Data Analytics charts, pivot tables and graphical audit trails.
increases the economy, efficiency and
effectiveness of the investigation process 4.14 Validate your Activity
and makes sense of it all for consistent, high-
performance reviews. Investigation steps are automatically validated
with the graphical project overview. In a highly-
4.9 Universal file Import regulated and data intensive environment, good
record keeping is critical. But with so much to
When the data comes from different assessee do and little time to do it, validating your review
sources and in a variety of formats, data activity can be a daunting task. The interactive
conversion can sometimes be a challenge. It
project trail, provides a graphical or tabular
effortlessly imports an infinite number of records
history of every action you performed on any
from virtually any source with step-by-step
database within an assessee environment. The
assistance.
process of validation is automatic, so there’s
no laborious reconstruction of chain of steps
4.10 Organized Work
required. Simply export or print the overviews
Keeps the investigation review working papers to make your review process more visible.
organized and easy to locate in an intuitive
folder management system. 4.14.1 Case Studies Explained with
Forensic Accounting Tool
4.11 Analyse
There are some important data analytics
When your job is to identify and analyse risk, tools which can be used by an investigator
100% data coverage makes all the difference. like IDEA, ACL or Activedata. In this write up
Whether one is assessing abnormal transactions IDEA Caseware u/s 10 version from CaseWare
in the books of accounts, conducting revenue Analytics, Canada has been used to illustrate
reviews or spotting potential fraud, it ensures these case studies (Copyright - www.caseware.
complete visibility of and timely access to every com and www.samaaudit.com).
transaction that affects the business. With a
holistic view of data sets, one can quickly see the Data to be obtained in an Electronic Format–
big picture, identify relationships and patterns, Balance Sheet, Profit & Loss Statement, Notes
and explore transactional data in depth. to Accounts, Grouping Annexures, Trial Balance
and Ledger Accounts in digital format. The data
4.12 Automation of Tasks can be in a variety of formats like spreadsheets,
access databases, flat files, delimited data dumps,
Seamless automation of review tasks for enhanced
XML extracts, SAP exports, Print formats and
project productivity. The graphical project trail is a
Adobe PDF based System Generated Reports.
time-saving automation engine that lets you save
ad hoc tasks and complex repetitions as Macros The findings emerging from the use of Data
that you can tweak and use. Analytic Tools can be exported to commonly

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 Investigation of Computerized Books of Accounts

collaborative formats like spreadsheet, text, Getting business insights by investigating

PDF and access databases for further validation, accounts from transactional level:
review, investigation and action by the concerned Field statistics function give details of the overall
stakeholders. transactions, anomalies, Maximum, average and
The following key investigative tests can be used– minimum values of transactions etc.

Accounting function tests helps in ascertaining nature and completeness of data–

Gap detection analysis–to know missing vouchers and may point to certain omission or manipulation

Duplicate entry tests–to know multiple entries on same date/ amount/ head of account and location–
can be seen in sales or expenses related transactions

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De-duplication–it helps in detecting transactions with same name of party with multiple accounts or
same account in multiple names–concerns credibility of the account.

Fuzzy duplicate entry–to know entries with similar sounds or patterns in free text fields.

Pattern analysis–Using stratification function Relative size factor tests–this tests helps in
(layer) the transactions of vouchers can be ascertaining the ratio between the transactions
arranged in terms of values and the overall of same party and same product during a year
pattern can be seen. It helps us to concentrate
and the deviations can be seen which indicate
our efforts on high value transactions, which are
chances of accommodation or related party
limited in number but contribute to majority of
transactions. IDEA has the feature of graphic abnormal entries. This can be used for payments,
depiction of such patterns, which is quite helpful purchases, receipts and payrolls etc.
to investigators.

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Benford’s law–This test also helps in pointing generated transactions in any business. The
towards deviations, manipulations, concealment, deviation from the normal Benford pattern
omissions, and artificial alterations in randomly indicates this.

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Search for related party details in the Notes to of Companies, SEBI, Stock Exchanges Listing
Accounts and check completeness and accuracy details etc. –the SEARCH function in IDEA is
of Related Party details in the Notes to Accounts a powerful unstructured text based querying
vis-à-vis declarations made by the assessee feature, which allows the user to look for specific
and other intelligence gathered from Registrar Related Party name/s in the Notes to Accounts.

Check for the integrity of information provided Schedules to identify mismatches in amounts as
in the Balance Sheet and Profit & Loss Account well as incorrect inclusions or exclusions from the
(Financial Statements) by reconciling the same Financial Statements and Grouping Schedules.
with the Trial Balance–the COMPARE function Similarly inconsistencies between Trial balance
in IDEA facilitates the user to summarize and and vouchers can be made out, if transactional
match ledger accounts listed in the Trial Balance data is available.
with Financial Statements and Grouping

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Ascertain the accuracy of revenue represented in or significant variations between correlated

the Profit & Loss Account like Service Revenue ledger accounts like an increase in service
vis-à-vis revenue reflected in the Form 26 AS revenue but reduction in Goods Service Tax
PDF file online to check for short reporting– (GST) levied across the two periods or increase
the JOIN function in IDEA enables the user to in sales across two periods with an increase in
identify discrepancies in revenue reported in the stock on hand–the VISUAL CONNECTOR and
Profit & Loss Account versus the Form 26 AS FIELD MANIPULATION feature combination in
PDF file online. IDEA helps the user graphically link the Financial
Trend analysis of financial values reported in the Statements for the two periods and arrive at
Financial Statement for the previous year versus differences in key Income, Expenditure, Asset
the current year to capture inconsistencies and/ and Liability heads.

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Some other areas which can be investigated using IDEA Software

S.
Area for Review Data to be Obtained Brief Steps in IDEA
No.
1 Nexus between buyer and • Customer Master File Join the Customer Master File and Vendor Master
seller (same bank account, • Vendor Master File File on matching key field ~ Bank Account or GST
pin code, landline number Number or PAN Number to establish a nexus which
etc.) can then be validated for possible collusion.
2 Purchase of items at a rate • Purchase Ledger Visual Connect the Purchase Ledger with the
different than the market • Market Rate Product Market Rate List File on the basis of matching key
price for the items. Master List field ~ Material Code to get the Actual Rate vs.
Market Rate together and then extract for significant
plus variances to be validated for possible artificial
price inflation.
3 Non deduction of TDS • TDS Ledgers Perform a Key Value Extraction on the TDS
on Interest, Commission, Ledger to identify and extract blank TDS Deducted
Brokerage, Rent, Royalty Amount for each Head of Account like Brokerage,
etc. –disallowable business Rent & Consulting Charges into separate files for
expense. validation for omission in deductions.
4 Cash payments above the • Cash Book First carry out a Summarization on the Cash
threshold limit–disallow Book to identify total Cash Payments per Head
ability test. of Account per Date. Then extract Sum of such
Payments about the threshold limit which qualify
for disallow ability.
5 Assets capitalized within 180 • Fixed Assets Register At the outset using Field Manipulation identify the
days of financial year end but Capitalization Days by arriving at the difference in
depreciation charged at more Year End Date and Capitalization Date. Then look
than 50% for Depreciation erroneously applied at more than
50% using Direct Extraction.
6 Depreciation allowed on • Fixed Assets Register Join the Fixed Assets Register with the Current
assets not put to use. • Current Physical Physical Verification Listing of Fixed Assets on the
Verification Listing of matching key field ‘Unique Asset Identification
Fixed Asset Number’ to identify Assets physically available but
not put to use on which Depreciation has been
levied in the Fixed Assets Register.
7 Loan given in cash above the • Unsecured Loans Perform an Indexed Extraction to identify
threshold specified limit. Ledger Unsecured Loans given above a particular value
threshold in contravention of the income-tax Act
and Rules.
8 Expenses of capital nature • General Ledger/ Day Apply the ‘Wild-Card’ Search function in IDEA to
allowed as revenue expenses– Book look for Narration or Head of Account Description
search on key words in the or any other Character Text Field in the General
narration according to the Ledger containing words like ‘Machine’, ‘Hardware’
business of the assessee. etc., which are Capital in nature and should not
be expensed out as Revenue in violation of the
income-tax Act and Rules.

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S.
Area for Review Data to be Obtained Brief Steps in IDEA
No.
9 Expenses of personal nature • General Ledger/ Day Apply the ‘Wild-Card’ Search function in IDEA to
allowed as revenue expenses– Book look for Narration or Head of Account Description
search on key words in the or any other Character Text Field in the General
narration according to the Ledger containing words resembling spends of
business of the assesse. a personal nature like ‘Jewellery’, ‘Holiday’ etc.,
which are Personal in nature and should not be
expensed out as Allowable Business Expenses in
violation of the income-tax Act and Rules.
10 Ante-dating loans from banks • Bank Book Using the Direct Extraction and suitable criteria with
to cover cash deficits filters within IDEA to extract loans from banks–ante-
dated where balances just before receipt of Loans
were in negative in the Bank Book.
11 Delay in payment of statutory • Statutory Dues Join the individual Statutory Dues Ledgers with
dues Ledgers the Due Date for each compliance cycle using the
matching key field ‘Month’ to get Actual Date of
Payment with Due Date side by side for comparison
to look for delays and subsequent non-compliances.
12 Capture details of any • General Ledger/ Day Apply the ‘Wild-Card’ Search function in IDEA to
penalties or fines incurred in Book look for Narration or Head of Account Description
the books of accounts–search or any other Character Text Field in the General
on narration field–disallow Ledger containing words resembling Penalties
ability test. & Fines like ‘Penal’, ‘Fine’ etc., which are non-
Allowable Business Expenses in violation of the
income-tax Act and Rules.
13 Variation in production • Production–Actual Link the Actual Production File with the Bill of
expenses vis-à-vis production. File Materials Standard Master Listing on the unique
• Production Bill of key field - Material Code or Batch Code or Process
Material Code. This will get the Actual Input by the side of
the Standard Input to Output Ratio. By appending
a new field the Standard Output for the Actual
Input can be computed through the Equation
Editor in IDEA to identify excess or shortfalls in
Standard vs. Actual for validation and investigation
for bogus receipt or consumption entries inserted
into the process.
14 Bad Debts written off against • Bad Debts Write Off Match the Bad Debts Write Off Ledger for the
a specified Debtors, but not for Current Year Current Year with the Active Debtors Listing for the
taken to income against the • Debtor Listing for Previous Year on the basis of the matching key field
same Debtor in the last year. Previous Year ‘Debtor Number’ to look for Bad Debt adjustments
done in the Current Year which are not part of the
Debtors Listing for the Previous Year.

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6
Trading Account
1.
1. The trading account in the simplest form
reflects the results of the trading activity for a
given period. It is prepared by following either
of the two methods of accountancy, recognised
u/s 145 of the Act, namely, “Cash system” or
“Mercantile system”. In the cash system of
accountancy, entries are made only when
cash is actually received or disbursed. Profits
and losses under such a system are generally
worked out on comparing the actual receipts
with actual disbursements. Credit sales and
purchases will not be reflected in the Trading 3. PURCHASES
account maintained on cash basis. In Mercantile 3.1 Large concerns generally maintain records
system of accountancy, entries are made as of purchases in separate “Purchase Book”, “Jama
soon as right to receive or liability to pay an Nondh” or “Jama Bahi”. This is a subsidiary book
amount arises, irrespective of the point of time and entries are made from this in the Ledger,
when actual receipts/ disbursements take place. debiting goods account and crediting the suppliers’
After the amendment to Section 145 of the Act, accounts. Any over-statement or inflation of
hybrid system of accountancy is no more an purchases directly goes to reduce the gross profits.
acceptable system. Therefore, in any serious investigation, purchases
need to be thoroughly verified.
2. OPENING STOCK
3.2 Verification of Purchase Vouchers:
2.1 Closing stock of the preceding year becomes Entries of purchases debited in the books of
the opening stock of the current year. The quantity account should be checked with reference
and value of the closing stock of preceding year to the purchase vouchers. Unvouched or
should be compared with the corresponding unsatisfactorily vouched purchases should be
figures in opening stock of the year. In case of identified. In general, the purchases made in the
any difference, necessary correction shall be black market would not be supported by proper
made to the Trading account of the current vouchers. Instances are not uncommon, where
year, if no plausible explanation is available with unscrupulous assessees themselves get fictitious
the assessee. purchase vouchers printed, and present them

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as genuine. It is not necessary that purchase were bogus and had been written up by the
vouchers written neatly on printed stationery, assessee’s own employees. Clues such as these
with letter heads, telephone numbers and Sales are results of close observation and would strike
Tax registration numbers, would be genuine. to the AO if and only if he is vigilant.
More often they are, but this very presumption 3.3 Verification with Suppliers: Names
is sometimes utilised by such assessees to and addresses of all the persons from whom
camouflage their bogus purchases. Doubtful purchases exceeding a certain monetary limit,
purchase vouchers should be carefully scrutinized say Rs. 10,00,000/- have been made, should
so as to find indications of spuriousness. The AO be called for. These can then be short-listed for
should have an eye for the odd or unfamiliar, detailed cross-verification and investigation.
e.g. unusual names of suppliers or an unusual 3.4 Verification of Mode of Payment:
area for supply of a particular commodity, large Normally, major purchases are paid by cheques.
cash purchases, substantial purchases made in Therefore, at times, the assessees show payment
rising markets, etc. Sometimes, the usual details by cheques even in respect of bogus purchases,
like telephone number, telegraphic address, to give them a colour of genuineness. In such
cases, it becomes necessary to follow up such
code used, full addresses etc. may be lacking
cheque payments, to see whether they are
on such vouchers; or vouchers allegedly issued genuine or not. Some cases have come to notice,
by different suppliers, may have the same style where, after the AO obtained counter-foils of
of printing, fresh appearance, etc. In cases of the discharged cheques from the banks, it was
fabricated vouchers, sometimes the assessee seen that the ‘payees’ endorsements on all the
may commit a slip,by putting a back date. The cheques were in the same handwriting, or the
date(s) mentioned in such purchase voucher(s) cheques were got encashed by some front-man
should be carefully checked. Once there is of the assessee itself.
reasons to suspect a particular purchase, the AO 3.5 Bogus Purchase: Bogus purchases are
must follow it up from every angle. those where no transaction has taken place, and
In one case, a full-fledged press was found to fictitious amount has been debited as purchase.
have been maintained by a group of assessees The quantity of goods mentioned in such bogus
for printing bogus vouchers. In another case, it purchases debited in the accounts but not made
was seen that a voucher was purported to have in reality, would not be reflected in the quantity
been received from an outstation assessee. This of sales. There would, therefore, be difficulty in
voucher in usual course, ought to have been sent preparing a quantitative tally. Besides, Gross
by post. The voucher, however, did not bear any profit percentage would also get affected. If any
impression of folding. The AO noticed this and purchase is not at all accounted for in the sales
retained the voucher in his custody. Later he and the closing stock, the presumption will be that
examined the assessee and got his statement to it is fictitious. It would require to be totally added
the effect that the voucher was sent by post in an back to the profit. Some common methods of
envelope. When asked to explain as to why the introducing bogus purchases are as under:
voucher did not bear impression of folding, the ●● It has been pointed out above that the
assessee had no alternative but to accept that the quantitative account would not tally where
voucher was a bogus one. In yet another case, there are bogus purchases. An intelligent
the assessee who was a manufacturer of dyes manipulation to overcome this drawback
and starch, claimed to have purchased tapioca was noticed in a case where there were
from numerous villages in a particular district. As bogus purchases and yet the quantity
the AO knew that this district was not a tapioca- account tallied, because, there were bogus
growing area, he carried out local inquiries and sales to the same extent, the assessee
was able to establish that the purchase vouchers remaining content with the difference

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debited ultimately to the trading account. ●● There may be instances of purchases in

The modus operandi was somewhat as transit being debited to the account without
follows: The assessee would be debiting being shown in the closing stock.
purchases at the rate of Rs. 150 in a ●● An assessee firm was deriving income
systematic manner and would be crediting from manufacture and sale of artificial silk
his sales at the rate of Rs. 100 also in a shawls, scarves and chadars on retail basis.
systematic manner. The net effect of Preliminary investigations of the trading
these transactions would be to understate account revealed that the gross profit rate
his profits by Rs. 50. He would be in a disclosed was considerably lower than that
position to emphasize the fact that he has disclosed in the past. Purchases made by
a complete quantitative account in respect the assessee during the relevant account
of his purchases and sales. However, if year were scrutinized and it was found
the AO. were to work upon the trading that, towards the end of the accounting
account assiduously and systematically, year, the assessee has debited a sum of
he would be in a position to dissect the Rs. 61,000/- to the goods account
account into two and establish the pattern representing the purchase of raw shawls
of manipulation. from an outstation party. A copy of account
●● Purchase account can be manipulated of the said party in the assessee’s books was
from the beginning of the accounting year obtained and it was found that the entire
by debiting bogus items. In large concerns payment had been made by the assessee
practicing tax-evasion, such manipulations in cash and at short intervals and a sum
are resorted to in the main accounts of Rs. 51,000/- was paid within four days.
maintained on day-to-day basis, as keeping Further scrutiny revealed that there was
no valid receipt for the alleged payment
a duplicate set of accounts, is fraught with
of these amounts. The assessee did not
grave risks to the management. Although
even pay any interest for holding over the
final accounts are prepared at the end
sum of Rs. 51,000/- for six months. These
of the year, yet in order to keep effective
factors led the AO to suspect the alleged
control, businessmen work out profits purchase as not genuine. A reference
at the end of fixed intervals, say, 3 to 6 was made to the AO of the seller. It was
months. Inflation in purchases is resorted found that, the party was non-existent.
to when the trend of profits is more than Inquiries from the Sales Tax authorities
the expected results. revealed that the Sales Tax registration
●● Sometimes, bogus purchases are debited number granted to the party had been
towards the end of the day more or less cancelled. The assessee was asked to state
in a systematic manner. Thus, in the case the mode of transportation of the goods,
of a sugar factory it was found that there and produce any octroi or freight receipt to
were two or three doubtful entries of establish the actual receipt of goods in his
purchases every day. On investigation, it city. In response, the assessee produced
was noticed that these fictitious purchases two receipts issued by a local transport
were supposed to have been brought by company. On verification of the receipts
the same lorry, the number whereof had with the Goods Inward Register of the
appeared once earlier also on the same transport company, it was found that the
day, though it was physically impossible entries had been interpolated in the books
for the lorry to make two trips on the same of the transport company. On reference to
day according to the distance involved. the octroi department, it was found that no
Thus, purchases made towards the end of such payment had been made to the octroi
the year would require a greater scrutiny. department. The trucks whose registration

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numbers were mentioned in these receipts should be made where facts are more or
were found not to have passed through the less similar and comparable. Reports of
octroi barrier on the relevant dates. Further market committees established by the
investigations revealed that the alleged Government to safeguard the interests of
goods were neither booked at the station agriculturists would also go a long way in
of dispatch nor received at the destination, helping the AO to judge the genuineness
and the assessee had fabricated evidence of such purchases.
in connivance with the transport company ●● The assessee firms were dealers in betel
to substantiate its claim. nuts. Large purchases of betel-nuts were
found recorded in their account books.
3.6 Inflation of Purchases: Over-statement Most of these purchases were shown to
of purchases can also be resorted by inflating the have been made from certain Calcutta
rate or value of purchases made from genuine parties. When the AO perused the invoices
parties. For identifying such items, the suspected produced, his suspicion was aroused by
purchase transactions should be compared with the fact that several of these invoices did
other purchases on credit on or about the same not bear the full address of the seller, such
date. If these purchases are duly accounted as door number, telephone no., telegraphic
for in the sales and closing stock but the rates address etc., and by the further fact that
of such purchases are not at par with the credit the invoices revealed a striking similarity
purchases made at the same point of time, the of typing. He therefore made detailed
purchase prices may have been inflated. Scrutiny enquiries at Calcutta, which showed
of purchase journals may be made to find out that, one of the alleged suppliers was
whether the purchases have been inflated. If nonexistent; some of the alleged suppliers
purchase prices are found to be inflated, the had not sold any goods to the assessee
estimated inflation will have to be added to the firms; even those who had actually sold
book result. Proper facts should, however, be betel nuts to the assessee firms, had
ascertained to enable one to draw definite and done so at a price far less than recorded
logical inferences as to inflation in price. Some of in the assessee’s books, and the invoices
the methods employed for inflating purchases, produced in the names of these Calcutta
are as under: parties were fabricated by the assessee.
●● Purchases from agriculturists are easy to 3.7 Over-Invoicing of Imports: Very often,
be inflated because there is no practice importers resort to over-invoicing of imports
of giving bills. Even if bills are given, they from foreign countries against licences granted
would only serve the assessee’s case for to them by the Government, with the following
creating evidence in his favour. For the two motives:
agriculturist, it does not matter, as he is ●● To accumulate foreign exchange outside
not liable to income-tax. Of late, there has India, and to utilise the same either for
been refinement of this old practice of not personal expenditure or for illegal business
producing vouchers. Registers of purchases transactions including smuggling or to sell
are maintained by the assessees, on which the same against rupees at black market
thumb impression of agriculturists are taken rates in India to persons going abroad for
in evidence of their sales. Evidence such as their use outside India.
this cannot easily be rejected by an AO.
●● To reduce their profits and tax liability in
Such problems, however, can be tackled by
India by inflating the cost of their purchases.
a systematic and simultaneous study of the
cases of a similar nature. Useful inferences The AOs dealing with cases of importers are
can be drawn by comparing purchase advised to keep these factors in view, and make
rates of different assessees. Comparison detailed inquiries in suitable cases. The approach

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of inquiry will differ from case to case but the expenses are debited to the Trading account, the
following general hints may be kept in mind: corresponding purchases are not recorded in the
●● Inquiries may be made from the account books at all to bring down the profits.
Enforcement Directorate and other
agencies monitoring economic intelligence. 4. DIRECT EXPENSES
●● In the cases of large/ suspicious imports, 4.1 Only expenses of a direct nature can be
statements on oath/ affidavits of the debited to the Trading account. Most of these
Proprietor or Directors can be obtained expenses can be verified from the bills/ vouchers/
to the effect that they have no account notes maintained by the assessees. If purchases
in any foreign banks either in their own are from distant places, expenses on railway
names or in names of their wives, children, freight are likely to be considerable. On the
relatives or employees. This will facilitate other hand, if purchases are from nearby places,
their prosecution in case their statements expenses on truck hire are likely to be more. If the
are found incorrect, subsequently. purchases are local, more expenses on cartage and
●● For detecting whether there is any wages may be found. Unvouched, unexplained
over-invoicing, the officers may make and unsatisfactorily vouched trading expenses
comparison of the cost of similar purchases may be singled out for further verification. The
made by other importers. assessee should be asked to substantiate these by
other evidence and if he is not able to do so, the
●● In such cases, the assessee or the members suspected items can be disallowed. However, their
of his family may be visiting foreign reasonableness compared to volume of business
countries frequently, for pleasure, medical done should be seen. The expenses should also
treatment, education etc. in the guise of be compared with the volume of business and
business trips. A detailed probe should be if any sudden increase is noted, the reasons for
made about their expenses on travel, stay the same should be inquired into. In some cases,
education etc. Since the Reserve Bank there can be valid reasons for increase of expenses
issues only a limited foreign exchange, the viz., increase in railway freight, octroi duties etc.
balance of the foreign exchange required The explanations given by the assessee should be
for such trips is often met from undisclosed carefully scrutinized to see that there is no attempt
sources. to bring down profits by claiming bogus expenses.
3.8 Trade/ Cash Discounts: It is customary
in most businesses to allow trade discounts and 5. SALES
cash discounts. Trade discounts are generally
5.1 Entries regarding sales are generally made
allowed on catalogue prices. Cash discounts
are allowed to give an incentive for prompt in the Sales Book, “Nam Bahi” or “Nam Nondh”.
payments. These discounts vary from trade to Normally, sales are supported by duplicates of
trade and from place to place. It should be seen cash memos or credit memos, and documents
that such discounts are duly accounted for by showing transport/ delivery of goods. If the
the assessee. In case of trade discounts, it should turnover shows a substantial fall as compared to
be ensured that the price entered in the accounts the preceding year, the assessee should be asked
is “net” and not “gross”. Similarly it may also be to explain this, and to establish the correctness
seen that full credit for cash discount received of the explanation by appropriate evidence. The
has been given by the assessee. explanation and the evidence furnished in its
3.9 Miscellaneous Matters: Purchases support can be then put to proper examination.
should also be checked with reference to direct The bifurcation of sales, with reference to specific
expenses e.g. Cartage, Octroi and Railway freight types of goods/ commodities, parties and periodic
etc. There can be cases where, though such intervals (month wise, fortnight wise, etc), giving

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quantities, rates and values, can be called and establish the identity and whereabouts of
examined. Corresponding information given to the real purchasers. Some of the ultimate
other government departments, e.g. Sales tax, purchasers of the nylon yarn, when
Excise, Imports Control authorities (for seeking contacted by the AO, admitted that the
import of raw material), can also be called for nylon yarn was in good condition and
and compared with. that the price paid by them was between
Rs. 103/- to Rs. 104/- per kg.
5.2 Understatement of Sales: Apart from
the understatement of sales by suppression, ●● The rates of cash sales should be verified
sales are also understated by recording them at with those of credit sales. If large quantities
figures substantially lower than what they really are sold in cash to one individual on the
fetch to the assessee. same day or from time to time, and the rates
of such cash sales are unduly lower than
●● Such suppression is often resorted to those of credit sales effected concurrently,
through the nominees or benamidars, an understatement of sale proceeds may
sometimes a chain of them, so that the be suspected.
difference between the price accounted for
in the books of the assessee and the price ●● In some commodities there may sometimes
charged to the ultimate purchaser comes be volatile fluctuations in price and an
back to the assessee. An intelligent study assessee having substantial stocks of the
of the customer’s list may reveal names, particular commodity at that point of time
the sales to whom would call for thorough will have substantial profit or loss on this
probe both in regard to the bona fide of account. If there is a loss this will of course
the sales as also the independent standing be left undisturbed. If there is a profit
of the parties concerned. there may be a tendency to manipulate.
For instance, when there is a substantial
●● In one instance, a certain mill imported increase in the excise duty of sugar, the
51,082 kgs. of nylon yarn known as market price of sugar will correspondingly
‘Bayer Parlon’, for the specific purpose of increase and any dealer having large
manufacture of mixed fabrics meant for quantity of sugar on hand will have an
export. The assessee, in contravention extra profit to that extent. If the assessee
of the conditions for the grant of license, wants to suppress this profit, attempt may
sold the imported yarn at a flat rate of be made to show fictitious sales at a prior
Rs. 54/- per kg. against the market value of date at the previous deflated prices. Even
Rs. 100/- per kg. When questioned about the sugar in transit may be shown as
the low sale price as compared to the sold. On such occasions if there are any
market value, the assessee explained that abnormal sales on the few days preceding
the yarn was deteriorating day by day, and the price increase, the genuineness of the
that, since the bank was pressing hard for sales will require critical examination.
the repayment of the loan, the yarn was
sold at a low price. The AO, after enquiry, ●● Sometimes assessee may show disposal of
found that either the purchasers were large stocks when the market is falling. If the
not traceable, or the purchasers admitted AO. has a clear idea of the condition of the
that they were only intermediaries whose business during the previous year, he may
names were brought in by paying them a be able to locate bulk sales made at lower
nominal commission. Some of them even rates in a falling market. In such cases, he
admitted that they did not have the means may select some of such sales for proper
to make purchases, and that the delivery scrutiny to see whether the assessee has not
of goods was taken directly by the real suppressed sales by taking advantage of the
purchasers. The assessee was not able to fluctuating condition of the market during

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the previous year. Where particular trades have made two remittances instead of one, the
have shown sharp fluctuations during the second one representing the on-money. Here
previous year, this approach may help the also, a similar check should be exercised.
AO to locate manipulated entries. 5.4 Sales at Lower Rates to Nominees:
●● In seasonal businesses, which flourish at Sometimes there is diversion of sale by showing
a particular time of the year, the volume the sale to a nominee at a lower rate. The nominee
of business shown at those times may then sells the goods to bona fide customers either
be usefully compared with the business directly or through a chain of other nominees.
reflected in the account books at other The total profits are thus distributed between
times. For instance, sales of woolen cloth the assessee and the various nominees in order
would rise in winter and cotton goods in to reduce the incidence of taxation. In large
summer; the receipts of a goldsmith would number of cases, voluntary returns are also filed
go up in marriage and festival seasons. to get these nominees assessed in order to show
At such times, sales of those particular that they are genuine traders.
commodities ought to be more than at 5.5 Sales to a Fictitious and Non-Existent
other parts of the year. Similarly, purchases Concern: In one case, the assessee company
of grains and tobacco which may be ‘X’ floated a benami concern ‘Y’ to whom all
seasonal may be more at that particular its cotton waste was shown as being sold. On
time of the year. What is required to be scrutiny it was found that the sale to ‘Y’ were
broadly noticed is whether the rise and fall made at rates much below the market price.
in the volume of business during the year is The firm had been assessed to income-tax and
such as may be regarded as ‘normal’ with registration had been granted. On a reference
the business. If not, the account should be to that file it was noticed that the signatures on
carefully investigated. the partnership deed were different from the
●● Payments for sales made to bona fide parties signatures on the application for registration and
are usually received through cheques. It the return was purported to have been submitted
is possible that such cheques may not be by a partner ‘Z’. Local enquiries, however,
credited to the sales account but to some revealed that such a person never existed. It was
personal accounts. Subsequently such also seen that ‘Y’ had no finances of its own
accounts may be squared up by showing and the assessee company itself had advanced
cash withdrawals. In case the drawer of the substantial amounts to ‘Y’ and all the sales
cheque is a person other than the person were made on credit without receiving either
in whose name the account stands, the a deposit or an advance - contrary to normal
credit appearing in the account should be market practice. ‘X’ had also advanced moneys
subjected to scrutiny. in the name of the non-existent partner ‘Z’
5.3 Mode of Payment: If the sales are without any security or without any interest. The
suspected to have been under-billed, apart examination of the books of account of this firm
from checking the books of account of the revealed that the purchases from the assessee
other party, the mode of payment should also company and sales to the other parties had
be checked. If it is by bank drafts or telegraphic generally been made on the same dates. This
transfers, enquiries should be made whether the showed that this firm had never taken delivery
purchaser made any further transfers of funds of cotton waste and the goods were delivered to
on that date. It is possible that on-money might the other parties only. But the bills were made by
have been remitted by a separate demand draft the company first in the name of the firm who
or telegraphic transfer. The destination of the made the bills in the name of the other parties
remittances on the same day should, therefore, so that profits could be transferred to ‘Y’. On a
be carefully checked. Similarly, if a railway detailed scrutiny of the books of ‘Y’ it was found
receipt is sent through a bank, the assessee might that there were omissions of certain purchases

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in the purchase journal, and yet the totals tallied c. Where the sale has been effected by the
with purchases from ‘X’ (assessee company). Managing agents of the company at below
Similarly, some goods were shown as sold, even market price for improperly benefiting
before these were purchased. This indicated that themselves or their friends, the act would
the books had been written on a later date. As a no doubt be a gross fraud on the part
result of investigation, substantial amounts were of the Managing agents and even the
added in this assessment. company might have a right to proceed
against its directors or Managing Agents for
5.6 Suppression of Sales by Companies: reimbursement of the losses caused to it;
Where the assessee is a company, a question however, there is a real sale to the purchaser
may arise as to whether the profits shown as and the benefit which the purchaser derives
having been made by the benamidar really in the shape of concessional sale cannot
belong to the company itself, or to persons in be regarded as a profit of the Company on
control of the company’s affairs. In one case, the which it can be taxed.
assessee company was engaged in the business
of manufacture and sale of yarn. It was found The Board have issued instructions to the effect
that, out of total sales for Rs. 41,50,209/-, that when an AO comes across any sales at
sales to the extent of Rs. 17,19,624/- had been grossly inadequate values, he should pursue
made to three parties closely connected with the transaction in the books of the purchaser
the managing agents, at prices considerably and come to a definite finding in the light of all
below the market rates prevailing on the dates available material as to which of the situations
of the transactions. An explanation was offered in (a), (b) or (c) above, describes the case. It has
before the AO that the sales were effected in to be noted that only in cases covered by (a)
pursuance of oral contracts entered into earlier or (b) above, an addition to the income of the
and that the prices fixed were in accordance company can be sustained. In an exceptional
with those prevailing on the date of contract. case where there is reasonable doubt as to
The AO rejected the explanation as false and the whether the case is governed by (c) or by
finding was confirmed by the Tribunal - and not either (a) or (b), assessments should be made
disturbed by the High Court. At the same the in the hands of the company as well as of the
addition of Rs. 1,46,000/- to the total income purchaser, one assessment being regarded as a
of the Company on the basis of the difference protective assessment.
between the sale price and the market values was 5.7 Verification with Contract Notes: In
not upheld by the High Court. The Hon’ble Court large income cases, the AO would do well to
pointed out that, the rejection of the assessee’s verify the purchases and sales transactions with
explanation gave rise to three different positions the contracts entered into for those transactions.
with different legal consequences as below: There have been cases where deliberate attempts
a. Where the sales to the alleged intermediary were made to alter the rates in the sale contracts
are bogus, with the result that no title was when the prices were soaring.
intended to pass from the company to the In one case, the assessee, a member of the
intermediary, i.e. the alleged purchaser;
East India Jute and Hessian Exchange Limited,
the addition could be made on the basis of
carried on business in Hessian and gunny, and
the prices realised by this intermediary on
speculation in gunny brokerage. Scrutiny of the
sale to the real customer;
documents seized during a search operation
b. Where the actual sale price realised has revealed that the assessee was entering into
been understated by a false entry of bogus transactions in its account books in
lower figures in the Company’s books, an order to under-state its assessable income and
addition could be made to bring the value in the process had fabricated various contract
of sales to the correct figure; documents as under:

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*There was a transferable specific delivery nominees. A number of persons were brought in
contract of sale by the assessee to M/s “XY”, a to give the transactions a colour of genuineness.
close ally of the assessee firm. This was found 5.8 Fictitious Sales: Sometimes entirely
to be fake because there was no registration fictitious sales may be entered in the books, to
mark on the back of the contract documents as obtain various benefits in an illegal manner, e.g.;
required by the bye-laws and forward contract ●● Where the assessee gets import licences,
regulations of the East India Jute and Hessian which fetch high premium and are
Exchange Limited. sold outright in the market, it may be
*The signature on the contract document, advantageous to record entries showing
ostensibly of a licenced broker appeared to be that as if he had imported the goods and
of one of the partners of the assessee firm itself. In sold them. Therefore, in cases where the
the buyer’s copy of the contract impounded form assessee is suspected to have misused
M/s “XY”, the adhesive stamp appeared to be his import licences, the destination of the
distorted, and on the reverse of the document, in goods, as stated to have been sold by the
place of the usual rubber stamp of East India Jute assessee, should be checked up. The AO
could find several small clues here and
and Hessian Exchange Ltd., there was insertion of
there. He should see whether transport
a registration number in ink, which was unusual
charges claimed were really paid or not,
and abnormal. On checking with the books of the
and whether the goods supposed to have
Exchange, the registration number was found to
been brought into the godown and then
belong to a different contract between two entirely sent out to some other person, were really
different parties. transported or not. Enquiries can be made
*Two other contracts were also found to be fake. with the Railway or the transport company
In both the contracts, ‘A’ had been originally that is supposed to have carried the goods,
shown as the buyer, but by means of an entry and also with the octroi authorities on the
interpolated under the signature of one of the way. The books of account of the so-called
partners of the assessee firm, the latter’s name purchaser should also be checked.
was inserted. On examination of the books of ●● Fictitious entries of sales may also be made
the Exchange it was found that these contracts when, the assessee is in immediate need of
were between entirely different parties. cash to discharge his recorded obligations
*A number of blank letter-heads of certain but the cash recorded in the cash book
collaborators were found in the assessee’s is insufficient for that purpose. On such
possession. The assessee used to insert therein occasions, he will show fictitious cash
settlements by way of differences as and when sales in his books to make it appear that
necessary. he had sufficient cash. Needless to add,
he is thereby introducing his unaccounted
An assessee having large profits was found to money in the books in the guise of sales
have wiped off a considerable portion of such proceeds. In appropriate cases, therefore,
profits from the books through ante-dated all the aspects of the sales such as the
false transactions shown as entered into by the movement of goods, payment of sales
assessee with some selected brokers. The brokers tax, and the movement of money must be
first received from the assessee the profits arising examined critically.
out of the fictitious transactions. Thereafter, by 5.9 Miscellaneous: Sales of miscellaneous by-
similar bogus transactions and ‘difference’ bills, products of the business eg., wastages, spillages,
they took out the profits from their books and rejections, packing materials, gunny bags, etc.,
returned the same in cash to the assessee or his are often either omitted or understated.

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6. CLOSING STOCK and debited to purchase which are still in transit,

6.1 Manipulation of closing stock, both in terms of and have not reached the assessee’s business
quantity, and value, is the most common method premises. By scrutinising the purchases account
of understating profit. It is therefore necessary to such items should be located.
ascertain the method of valuation of closing stock, 6.4.2 Goods Sent to Customers for
i.e., cost or market price, or the lower of the two, Approval: It may be verified that goods sent to
being followed by the assessee, and to obtain a customers on approval have been included in
complete commodity-wise, item-wise and quantity- the closing stock.
wise inventory of closing stock, duly certified by
partners/ Directors. It can then be checked whether 6.4.3 Closing Stock at Branches: It should
the assessee has shown sales of any particular be checked whether closing stock at the branches
item in the beginning of the next year which does have been properly included.
not appear in the closing stock for the year under 6.5 Under-valuation of Closing Stock:
consideration, and for which no purchases have Some of the common method for understating
been made up to the date of sale in the next year. It the value of closing stock are as under:
can also be checked whether the purchases of the
last few days of the accounting period are reflected Under-valuing closing stock by showing GP rate
in the closing stock or are covered by sales before at pre-determined rate, and showing closing stock
the closing date. as balancing figure. Where GP rate is exactly
identical over several years, this mode of under
6.2 Conversely, sales of first month of the valuing stock should be strongly suspected.
next year should be studied with reference to
the purchase of first month of the next year. It Under-valuing closing stocks of higher quality,
may happen that sale in first month of the next by applying to these, the rate for inferior quality
year may be more than the opening stock + stocks. This is very common in cases where
purchase of the New Year. This technique is quality-wise stock details are not maintained.
especially useful for examining the adequacy of e.g. in cotton business where quality of cotton
the work-in-progress in the hands of a contractor. is very important, or in bullion business where
Contractors often receive contract payments in purity of gold is very important.
the first two/ three months of the following year, Under-valuing closing stock by mis-referring the
without incurring corresponding expenditure on purchase bill where the stock is valued at cost, or
contract in those months. The surplus invariably obtaining make-believe purchase bills to lower
represents receipts in respect of opening work- the valuation.
in-progress (WIP) of the new year which ought
to be in the closing WIP of the year under Under-valuing closing stock by mis-referring the
examination. sale bill where stock is valued at market rate or
obtaining make-believe sale bills to lower market
6.3 The closing stock can also be checked with
value.
reference to availability of storage space. If the
assessee hires new godown, the stock should Under-valuing closing stock on the basis of
normally be higher. Similarly, closing stock can purchase bills without adding some or all the
also be examined with reference to fire/ theft direct expenses and/ or taxes, e.g. excise, custom,
insurance policy for loss of stock. octroi etc, to such purchases.
Under-valuing closing stock by taking average
6.4 Suppression of Closing Stock purchase cost or by valuing it on the basis of
6.4.1 Goods in Transit and Paid for: The Last In First Out method (LIFO).
physical inventory of stocks as well as the stock Under-valuation of closing work-in-progress, by
register, if any, may not record the goods paid for excluding various direct expenses.

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●● Omitting to include the stocks sent on wholesale basis or even in case of big retailers,
consignment, or lying in transport depot, quantitative details should be insisted upon
or sent for approval of customers. to check the accuracy of purchases and sales.
Such businessmen generally keep regular stock
●● Omitting to include the stock purchased
tallies or registers and these should be checked
under bogus consignment arrangement
to ensure that all purchases have been duly
e.g., stock received with builty/ Railway
accounted for. If such a tally is not forthcoming
receipt in the name of self.
and the gross profit shown is not in sync with the
Under-statement of closing stock of bardan, normal trends of the year, there will be reasons
gunny bags etc. to presume that the result of the Trading account
Under-statement of closing stock by showing is not reliable, and a more thorough examination
weight loss. will be necessary.
7.2 Quantitative accounts are sometimes
●● Under-statement of stock by applying
available in the trading account itself, the
wholesale rates by a retailer valuing stock
quantities being specified against opening
at market rate. If the assessee is a retailer,
and closing stock, purchases and sales; but
then only retail rates should be applied to
mostly, trading accounts contain the values, the
get the market value of closing stock.
quantities being recorded in a separate stock
6.6 Overstatement of Closing Stock: In register. The importance of stock register for
certain situations, it may be advantageous for establishing reliability of the disclosed trading
the assessee to overstate its closing stock, e.g.- results, has been accepted in various judicial
In the last year of eligibility for deduction u/s 80IA pronouncements. Whether the absence of a
of the Act, it may be in the assessee’s interest to stock register is material or not for concluding
overstate its closing stock and profits; that income, profits and gains cannot be properly
deduced from the account books, depends upon
In cases where the assessee is getting deduction the circumstances of the case and the material
u/s 80 HHC, but has only a few export orders for gathered by the AO.
the next year;
7.3 Where a stock register is available, the
In cases where the assessee has large brought correctness of the entries therein should be test-
forward loss/ depreciation etc, which is likely to checked by picking up some purchases and sales
lapse. and seeing whether these are entered correctly
In such circumstances, the duty of the AO is to in terms of quantity, quality and date. There
ensure that the value of closing stock is correctly have been cases where on periodical stock-
worked out, in accordance with the method of taking, sales have been found to exceed opening
valuation of stock regularly followed, and the stocks and purchases up to the period when
quantity tally of the closing stock. This may sales were being checked. If the stocks are not
also require re-computation of gross profit, and entered on correct dates, this will be a matter for
admissible deductions u/s 80IA, 80 HHC, etc. investigation. Ordinarily, the dates of entry in the
register should be the actual dates of physical
receipts and delivery of the goods and not dates
7. QUANTITATIVE DETAILS–STOCK
of purchases or sales invoices. Sometimes the
REGISTER transaction may be found entered on the dates
7.1 In analysing the gross profit rates, one of the purchase or sale bills; this by itself is not a
is concerned with the values of the goods defect. But if there is any reason to suspect the
dealt with in a trading account. At the same availability of goods for delivery on any date,
time, trading account should be examined to the purchases should be examined critically to
see if it is supported by a quantitative tally. In see what were the physical stocks on that
the cases of large concerns doing business on particular date.

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7.4 A comparison of stock shown in the compared to last year. Somehow, doubt
books, with the particulars of stock pledged/ arose and the accounts were minutely
hypothecated with the bank, should always be examined. It was found that purchases
made. The Supreme Court has, in the case of were mostly unvouched and were effected
Dhansiram Agarwal (201 ITR 192, SC), held at very economical rates at a special place.
that, it is legally correct to make addition to the Sales were in cash without mentioning the
stocks on the basis of sworn statement of quantity addresses of purchasers, even for large
of stock given by the assessee to the bank, and sales. This led to further enquiries which
it is not permissible for the assessee to say that disclosed extensive business done by the
the statement given to bank was incorrect. Such assessee outside the books in the name of
comparisons should be made not only for the the employees and relations.
stock shown at the end of the year, but the stock ●● In some cases, all the customers’ accounts
shown to the bank at the end of every month, by are duly recorded in the Ledger and the
obtaining month wise closing stock as per stock closing balances are made to tally with
register. In suitable cases, the project reports those in the customers’ books, but the
submitted by the assessee to the bank/ financial volume of transactions is surreptitiously
institutions can help understand the nature of reduced. It is, therefore, advisable to obtain
business and the earning potential correctly. In in selected cases certified true copy of the
the project report, the borrower has to show assessee’s account from the customers’
the various sources of purchase of raw material, books and to verify the accuracy of the
likely prices of purchases/ sales and estimated transactions inter-se.
earning capacity. Therefore, financial viability
studies made by financial institutions should be ●● Wrong totals are sometimes given for the
examined by the AO. debit side of the Trading account. Some
invoices may be entered twice. Debiting
speculation losses as loss in ready-trading
8. OTHER MANIPULATIONS IN
is another practice. Giving wrong totals
TRADING ACCOUNTS to weight etc. and making them tally
8.1 Some other modes of concealment with somehow by the close of the year is also
illustrations are given below: practiced. The inventories may be cooked
up by making all manner of adjustments to
●● An assessee may reduce the totals of both or omissions from the original sheets. The
the purchases and sales by an equal amount original sheets of valuation of inventories
to disclose a higher Gross profit rate. In a should, therefore, be called for. In such
case the trading account showed sales at cases insistence on the production of the
Rs. 2,77,786/- purchases at Rs. 2,48,999/- books of original entry and other original
and gross profit at Rs. 33,568- i.e. 12.09%. data and record of purchase, sales, stocks,
The correct totals of sales and purchases weights, stores etc. is necessary.
turned out to be Rs. 3,77,786/- (instead ●● In one case, the credit sales were not debited
of Rs. 2,77,786/-) and Rs. 3,48,999/- to customers’ accounts and therefore these
(instead Rs. 2,48,999/-) respectively. The accounts did not appear on the assets side
correct Gross profit rate was thus 8.88% of the Balance Sheet as sundry debtors.
only, but by reducing totals of both, sales To balance this omission, the total of the
and purchases by Rs. 1,00,000/-, the GP debit side of the Trading account was
rate was shown as 12.09%. inflated by putting wrong excess total, so
●● An assessee running a leather store disclosed that though sales were included in the
a high rate of profit compared to other Trading account, the same amount was
similar dealers, and double the income as omitted by inflating the total of the debit

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side of the Trading account. On enquiry, it records quantities in the Trading accounts,
was said that the Accountant who left the the quantity of stocks in hand on a few
service did not post the credit sales to the dates chosen at random may be worked
customers’ accounts and in order to make out with reference to opening stock,
the accounts tally he put the wrong excess purchases and sales, and the same may be
total of the Trading account. On reference compared with the quantities in the bank
to the customers, it was found that they records. In the case of the assessees who
had already paid the amounts, which the do not maintain any quantitative details,
assessee had appropriated. stock values computed as per books may
be compared with the stock as per the
●● Instances have come to notice where bank and the assessees should be asked to
the assessees systematically inflate the explain any wide disparity.
purchase price by debiting the purchase
●● An assessee had stocked his goods with
account with an enhanced price and raising the State Warehousing Corporation and
a corresponding credit in the account of took Warehouse receipts, containing
the seller. This continues over a period of details of quantities of stocks kept in the
time and when the assessee is in need of warehouse. Warehouse receipts are signed
funds, he makes out a cheque ostensibly by the warehouse superintendent and are
in favour of the seller whose account is negotiable instruments. These warehouse
debited by the corresponding sum, while receipts were handed over by the assessee
actually the cheque is either a self-cheque to two banks as security for loans given by
or in favour of a benamidar. In the latter these banks. Substantial suppression of
case, the cheque is collected through stock was discovered when a comparison
the benamidar’s account or through the was made of the figures in the assessee’s
assessee’s own concealed bank account. accounts with the figures as per bank
A careful scrutiny of the seller’s ledger records. The suppression was clearly
account coupled with the time lag between proved with the help of the discharged
introduction of fresh funds into the business warehouse receipts obtained from the
and payments through cheque, can bring warehousing corporation.
out the real nature of the transactions.
●● It sometimes happen that if an assessee
Alternatively, if the seller’s account in the
has substantial unabsorbed depreciation/
assessee’s books is cross-checked with
loss, he uses this opportunity to convert
the assessee’s account in the books of the
his unaccounted money by showing bogus
seller, the irregularity may come to notice.
profits. For this purpose, the assessee shows
●● It is common for large concerns to obtain high profits from the same or a new activity.
loans or advances from banks against Since the assessee itself shows good profit,
stocks available with them. In the case there may not be any investigation by the
of an assessee who maintains day to department, yet it may be a pointer for
day stock tally, the stock position existing investigation because in effect, the assessee
in his books can be compared with the is not paying any tax despite showing
position existing in the bank records and good profit.
the assessee can be asked to explain the
difference in the two figures. The position at 9. VERIFICATION OF G.P. RATES
the close of the year should be specifically
seen to find out that closing stocks have 9.1 The first step in the examination of a trading
been correctly recorded by the assessee. account is the determination of the rate of gross
Where the assessee does not maintain day profit with reference to sales and comparing it
to day stock registers or stock tally, but with similar percentages in the past years, as

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also in the cases of other assessees carrying on ●● Landing and clearing C\charges
similar businesses. While making comparisons, ●● Toll charges, octroi.
like should be compared with like. It may,
however, be pointed out that two persons in 9.4 Following further adjustments will be
the same trade may show varying results even necessary wherever they occur in the accounts:
though both may be presenting their accounts ●● Any sales to the assessee’s own branches
correctly. A person who is trading on borrowed at cost price included in the sales should
capital would like to have quick turnover and be excluded. An equivalent amount should
he might be satisfied with a low percentage of also be excluded from the purchases.
profit, while another person who is having his
own capital may wait for his chance for higher ●● Any totaling mistakes etc. in the goods
profits. It is, therefore, necessary that the rate of account should be adjusted before working
Gross Profit shown by the assessee is compared out the gross profit rate.
with rates shown by other assessees carrying on ●● If a joint manufacturing and trading
business in circumstances which are reasonably account is kept, an attempt should be
similar. For calculating gross profit rate, it is made to bifurcate it and determine
essential that only those items of prime cost separately the manufacturing and trading
should be included which vary directly with the profits. Only the latter should be taken into
turnover, and which have a direct bearing on consideration for comparison purposes.
the trading operations only. If the accounts of
assessees deviate from this principle, necessary ●● Sometimes assessees doing business on
adjustments should be made to the Trading a/c, their own account also have transactions
for ascertaining correct GP rate. on commission basis. In such cases, the
transactions on commission basis should
9.2 The under-mentioned items, if included in be excluded.
trading or goods account should be excluded:
●● If stocks are valued at market price,
●● Any item in the nature of a capital receipt
calculation should be made on total sales
or expenditure.
plus the closing stock. If, however, stocks
●● Speculative profits or losses. are valued at cost price, then the closing
●● Any receipt of expenditure of a casual and stock should not be included in sales, but
non-recurring nature. the value of the closing stock should be
deducted from purchases. The opening
●● All items which are inadmissible for the stock should be taken into account in
purpose of computation of profits for purchases under both the methods.
income-tax purposes, such as charities,
Puja expenses, personal expenses, income- 9.5 Where an AO finds that gross profit rate
tax and super-tax etc. shown by the assessee is significantly lower than
the rates shown in the past or the rates shown
●● Bad debts, interest on book debts, by other similar traders, an attempt should be
commission or discount received or made to find out the reasons. Looking to the
allowed for prompt payment. type of trade and business conditions, he should
9.3 Similarly the under-mentioned expenses, investigate the causes for any abnormal results.
ought to be included in purchases: Investigation may also be called for, in cases
where books have been disclosing more or less
●● Freight, cartage, loading/ unloading constant turnover and almost identical Gross
●● Customs duty profit rates, year after year. The AO has to see

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whether the accounts produced were maintained whether they are either bogus or inflated should
in the normal course of business. be examined. Similarly, if it is found that in a
particular fortnight the average selling rate has
9.6 Another method of locating manipulation
declined as compared to the earlier fortnight
of trading a/c for adjusting rate of gross profit
or fortnights, and if one finds that sales in such
is by working out month wise trading accounts.
fortnights are unduly large as compared to the
In this, the assessee is asked to furnish monthly
sales in the earlier fortnights, there is reason
details of purchase, sale and rate of gross profit.
to suspect that the sales in this fortnight have
The sales are readjusted by deducting there from
been understated in the books. If it is possible
the G.P. shown and thus determining the cost of
to pinpoint manipulation by examining the
sales. Thereafter, opening stock should be taken.
transactions of a few fortnights, then a detailed
Monthly purchase should be added to it and cost
examination and analysis should be made by
of sales should be deducted . Thus, monthly
the AO.
closing stock balances can be obtained. These
stock balances may give useful clues about
manipulation in books, as there may be negative 10. COMMON DEFECTS IN BOOKS
stock in some months. A note of caution here is 10.1 It must be borne in mind that, mere fall in
that this is an approximate method of working GP rate cannot be sufficient ground for rejecting
out the monthly closing stock, as the average the books of account u/s 145, and for substituting
GP rate for the entire year used in the above the AO’s estimate of GP in place of the disclosed
calculations may itself vary considerably during gross profit. This is possible only when books of
the year under consideration. account suffer from defects of such a nature of
9.7 Periodical Analysis of Purchase/ Sales: omission or commission, that it is not possible
Where the gross profit rate is low as compared to ascertain the true and correct picture from
to normal expectations, it is not always possible the same. Some common defects noticed in the
books of accounts are:
for the AO to verify purchases/ sales, and find
out bogus or inflated purchases or under-stated ●● Some purchase are not recorded in books
or omitted sales. However, a rough and ready of accounts, or are inflated,
method can be devised. The assessee can ●● Sales are suppressed or understated,
be asked to sort out purchases in quantities
and value and the average purchase rate for ●● Production is found to be suppressed,
specified periods, say some fortnights. Likewise, ●● Books of accounts are found to be not
particulars of sales in quantities and value as also written regularly on day-to-day basis, but
the average selling rate for the same periods or appear to have been written recently in a
fortnights, can be obtained. The AO will thus few sittings.
have data to form a quick judgment of the ●● In the cases of manufacturing concerns,
accounts in so far as they relate to purchase and day-to-day production registers are not
sales transactions. If for a particular fortnight, maintained.
the average purchase rate is much higher than ●● Production register shows over-writing of
the average selling rate, the reasons can then be figures of production and insertions for
examined in detail. There may be either inflation quantity of shortages or process losses etc.
in purchases or understatement in sales. The AO
can concentrate his inquiry on a detailed scrutiny ●● There is an abnormal gap in the production,
in the case of a running unit.
of the transactions limited to such fortnights.
For example, if it is found that the purchases for ●● In the cases of contractors, stock registers,
this fortnight are largely in cash, the question labour registers, etc are not maintained.

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●● Some bank entries is missing either in bank profits, which can then be adjusted. A sample
book or journal or cash book. size of 5% i.e., every 20th sale transaction of the
●● Gross under-valuation of stock is found. whole field is usually considered very reliable.
The results produced by a given sample can be
●● Difference between stock shown in books tested for their accuracy through other statistical
and stock statement submitted to banks. techniques of finding out standard deviation
●● Some expenses incurred are not recorded and standard errors of the given sample. The
in books, or are over-stated, etc. Gross profit rates estimated by following these
scientific/ statistical methods, would be more
11. ESTIMATING FAIR G.P. RATE reliable, if based on a reasonable sample size
and selection method. Thereafter, it will be for
11.1 Where books of account and disclosed
the assessee to disprove the same.
trading results are rejected for lawful and valid
reasons, the AO has to estimate a reasonable and 11.3 In cases of difficulty in estimating
fair rate of gross profit. This can be done either reasonable GP rate, complexity of the case
on the basis of the past record of the assessee, or and the quantum of work involved, provisions
of some comparable cases. of Section 142(2A) can be used, and the work
11.2 Alternatively, some statistical tools can be can be entrusted to an Auditor for special audit,
used, ensuring that the results satisfy the twin with specific directions to work out estimates
criteria of fairness and reasonableness. Statistics of fair gross profit rates, applying statistical
has well-settled principles of random sampling principles, on sufficiently large random samples
from which over-all results can be predicted. For of sales/ purchases, and to establish the statistical
this purpose, a reasonable sample size can be accuracy of such samples. This method is very
selected out of purchase and sale transactions useful in cases where stocks cannot be physically
of the assessee, from which average rate of counted because of practical difficulty of sizes,
gross profit can be worked out and applied to variety, etc of stock, e.g. auto-spare parts, mill
the disclosed sales. Statistics also has methods machinery stores, large departmental stores,
for ascertaining the reliability of results of etc. It is however, not possible to apply this in
such samples. There are different formulae for cases where the items mentioned in sale bills
different levels of accuracy. A confidence level cannot be correlated with those in the purchase
of 90% would generally be a good indication bills for want of proper description of items in
of the reliability of the estimates. The sample the bill. This method is also not appropriate for
should be selected on a deliberate random basis. cases where the assessee is evading income by
For example, first five or ten sale transactions of understating the value in sale bill while keeping
every month can be selected and the assessee the quantity intact. This generally happens in
can be asked to give details of purchase of cases where rate of Central Excise or Sales Tax
corresponding items. The total of such purchases are very high and the assessee evades these by
and sales can be used for ascertaining gross understating the value.

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 Chapter

7
Manufacturing Account

1. A Manufacturing account, though similar to

Trading account in many respects, is materially
different from it. Manufacturing account is
prepared by concerns engaged in production,
manufacturing or processing of goods. While
examining the Manufacturing account, and its
supporting records, it is necessary that an AO
has a first-hand knowledge of the manufacturing
process, the raw materials being used, the variety
and quality of items being manufactured, their
input & output ratios, and the by-products and
wastages, etc. of the process. waste items. It is only with this knowledge that the
2. Manufacturing Activity can comprise of records and expenses relating to manufacturing
one or more of the following: activities can be examined or evaluated by an AO.
●● Production of goods or articles, which are 3. A common format of manufacturing account
entirely different from the raw material. is as under:
●● Making of articles or goods which are Manufacturing Account
essentially a changed form of the raw
To Opening Stock By Goods Manufactured
material.
Manufactured goods (transferred to trading a/c)
●● Processing of semi-manufactured goods Work-in-process By wastages
into finished goods. Semi finished goods By damage of goods
●● Activities of changing shape of articles or Raw material By process shortages
goods. Packing material By work-in-process
●● Assembling of finished or semi-finished By closing stock
parts and articles into new products. To Purchases (less returns)
It is important to know the exact production To direct expenses
process starting from raw materials/ consumables,
to the actual operations on these, and up to the ●● Carriage inward
production of finished goods, by-products and ●● Loading and unloading expenses

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●● Factory lighting and electricity x. Whether purchase of main raw material is

from a local area or from outside state.
●● Sundry manufacturing expenses
xi. The level of technology being utilised, age
To Gross profit
of the main plant/ machinery, and extent
The above format represents a general approach of automation.
and may vary from assessee to assessee. In most xii. Nature of records and registers maintained,
of the cases, a common Manufacturing/ Trading including those prescribed under other laws
account is prepared by the assessees. e.g. GST, Labour laws etc.
Details relating to opening stock, purchases, sales
and closing stock, have already been discussed 5. OPENING STOCK
in the preceding chapter relating to Trading Normally, closing stock of the preceding
account, and would be discussed here only to year becomes opening stock of current year.
the extent there are additional features relating Quantitative tally of the opening stock can
to manufacturing concerns. be made with figures of closing stock of the
preceding year. It is possible that though the value
4. GENERAL PARTICULARS OF of opening stock is not changed, but quantity of
MANUFACTURING ACTIVITY opening stock is generalized and intermixed in
such a way, so as to take advantage of a larger
4.1 It is advisable for an AO to know the quantity of raw material for production in the
following facts of the case, so as to enable him current year. In case there has been a revaluation
to form a proper opinion about the results of the of opening stock, the matter may need a deeper
manufacturing activities: examination.
i. Installed capacity of the unit.
6. PURCHASES
ii. Capacity shown to be Utilised by the
assessee. 6.1 A major part of expenditure in manufacturing
process is on account of purchase of raw
iii. Reasons for gap between above two. material. Therefore, due attention needs to be
iv. Unit cost of main raw materials. given to verification of purchases. The purchase
account of raw materials may need investigation
v. Monthly production of different finished in cases of abnormal production or input: output
goods in terms of quantity and percentage. ratios. This may involve verification of following
vi. Monthly quantity consumption of main records:
raw materials, and utilities like electricity, i. Purchase invoices, purchase bills, performa
water, etc. invoices.
vii. Whether quantitative co-relation is possible ii. Delivery challans
in respect of consumption of main raw
iii. Bills of transportation/E-way bill as per
materials and production of main finished
GST Act
goods.
iv. Slips of measurement, weighments
viii. Extent and areas of shortages, burning
losses and wastage. v. Octroi bills or municipal corporation cess
charging bills
ix. Comparative data of yields and input &
output ratios of past years. vi. Loading & unloading vouchers

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vii. Gate pass slips accounts in the books of the assessee, calls for
viii. Inward register further scrutiny. Where a manufacturing concern
is suspected of entering spurious purchases, the
ix. Purchase register entries may be required to be traced right from the
x. Stock register time the raw material was received at the place
of arrival, its entry into the assessee’s premises,
xi. Store register
its stacking in the godown, and its issue to the
While going through the documents relating to first stage of manufacturing. For this purpose,
purchases, one has to co-relate these with the railway and carting records, gate inward register,
corresponding entries of consumption of raw bills of loading, and stacking records, etc., may
materials. have to be scrutinised.
6.2 Details relating to major purchases of main ●● In the case of a textile mill, it was found
raw material showing dates, quantity, price that laga charges were customarily paid to
and direct expenses on these purchases, may certain trade associations for all cotton bales
be obtained before proceeding for detailed purchased by the Mills. Analysis of these
examination, as average purchase price of main charges provided a check on the quantity
raw material is a main factor in cost of production. and number of cotton bales purchased
6.3 Average Input: Output Ratio of main by the textile mill. Business customs vary,
raw materials and finished goods of a given but knowledge of such customs provides
industry generally remains constant. These checks that can be applied for verification
ratios represent number of units (or weight) of of accounts. Similarly, transportation of
raw material(s) consumed to produce one unit of cotton bales from railway station to the
finished good. There, may however, be variation premises of the manufacturing concern is
in this on account of quality of raw material, often made through carts, which are paid
age of plant/ machinery, level of technology/ on trip/ quantity basis, i.e. the expenditure
automation, etc. Normally the input: output is relatable to physical quantities.
ratio of a given industry in a given year should
be comparable with the historical data of earlier ●● In the case of an oil mill, it was found
years, data of other comparable industries of the that bogus purchases of groundnut and
area, and over-all industry norms. The data on groundnut cake were shown from local
input: output ratios is maintained by the GST farmers, and solvent extraction plants. In
department, trade associations, CMIE (Centre order to justify these purchases, fictitious
for Monitoring Indian Economy), Industries intermediaries were introduced, who used
department, DGTD (Directorate General of to issue bogus sale bills, and receive sale
Trade and Disposals), etc. price through cheques. The cheques were
deposited in a bank account setup through
6.4 It may be useful to isolate/ identify the
a benamidar, and the proceeds of such
purchases of doubtful nature, for detailed
cheques were withdrawn in cash by such
verification. The AO can obtain list of purchases
benamidar of the assessee.
exceeding a certain amount along with full
addresses of suppliers, quantity, rates, particulars 6.5 Purchase registers, normally, have various
of direct expenses etc. These may be verified with columns showing date of purchase, quantity,
the records of the suppliers. Any discrepancy in value, date of arrival, date of issue for production,
the copies of accounts obtained, vis-á-vis the etc. This information, together with transport

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bills, gate passes, excise/ GST records, can weaving mill had used the cotton as such
provide very valuable clues for verification of for weaving of yarn. The other company
genuineness of purchases, as also correctness of in turn had sold the same stock of cotton
the quantity produced from such raw materials. to another company which used it as such
for production of yarn without subjecting it
6.6 Usually consumable stores or raw materials
to any special process. The percentage of
are not purchased for sale. Therefore, whenever
production of yarn from so-called damaged
any amount is credited in the stores or raw
cotton was also normal. The evidence
materials account on account of sale, these
thus pieced together established that
should be properly verified. The possibilities in
the assessee company had manipulated
such cases are that-the stores might have been
accounts to divert part of its profits to other
sold without full sale price being credited in the
concerns.
relevant accounts, or sale might be made at a
nominal price to another connected person, who 6.7 While verifying the purchase account,
in turn might sell the goods at a higher profit, or cash purchases should be compared with
the goods might be repurchased by the assessee credit purchases of same date. If purchases are
at higher prices. accounted for in manufacturing or sales account
and closing stock but the rates of such purchases
●● In the case of a limited company, a large
are not at par with the credit purchases made
stock of cotton had been shown as sold
around the same time, there would be a
to a charitable trust and another concern possibility of inflation of purchase price.
at a nominal cost. The company used to
close its accounts on six-monthly basis. 6.8 Purchases from agriculturist, hawkers,
Accounts for the first half-year revealed petty scrap dealers, etc., can be inflated easily
that stock worth Rs. 10 lacs were shown by preparing necessary self-vouchers. Over-
as “damaged” and valued at Rs. 2 lacs invoicing of imports of raw material is also a
only. Accounts pertaining to the second common method to reduce profit by inflating the
half-year disclosed that these very stocks cost of purchases. In cases, where products are
were sold to two parties-a charitable trust sold to government organisations, co-operative
societies and reputed company, etc., and the
and a private limited company of the same
sale proceeds cannot be suppressed, there is
group, for a sum of Rs. 3 lacs. A nominal
a greater possibility of inflation of purchases
profit of Rs. 1 lakh was shown in the second
of raw material by raising bogus purchase bills
half-year although on the whole there was
either by getting these printed or through self-
a loss of Rs. 7 lacs. On being questioned,
created vouchers.
the company replied that the stocks had
been damaged in transit due to excessive
heat. The AO was not satisfied with the 7. MANUFACTURING EXPENSES
explanation. He found that, there were 7.1 The next major head of expenditure is direct
meetings of the Board of Directors every expenses incurred on various items in the course
second month for examining the financial of manufacturing process. These expenses may
affairs of the Company. The examination be on account of the following:
of the minute book did not reveal any 1. Consumption of electricity and fuel
reference to the loss on account of damage
of goods in transit. It was also found that 2. Carriage inward
the charitable trust which was running a 3. Direct factory labour/ wages

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4. Consumption of stores and spares at the consumption. Large concerns generally

follow the former method. The manipulation
5. Maintenance and repair charges
in stores accounts are generally in the nature of
6. Purchase of miscellaneous items showing stores as consumed without actually
7. Sundry manufacturing expenses. doing so; these items might have been sold and
the money pocketed. The daily consumption of
7.2 Since manufacturing expenses are directly stores may therefore, be test-checked, and if on
relatable to the quantity of raw material a particular day, any particular item of stores
consumed, and/ or quantity of finished goods shows a heavy consumption, it should be looked
produced, any manipulation of these expenses into. A check regarding the physical receipt of
can mean either that the expenditure is inflated, stores is available by way of entries in the Gate
or conversely that the production is suppressed. pass book.
Month wise details of the main manufacturing
expenses, e.g., electricity, fuel, labour, etc., and 7.5 The other major items of manufacturing
their comparison with production particulars of expenses like wages, fuel etc., should be co-
the corresponding month provides valuable data related with the production at important
regarding veracity of the records maintained by intermediate stages. If the ratio of such expenses
the assessee. is unusually high, explanation for this should be
obtained. If the explanation is not reasonable or
●● In case of an oil mill, it was found that in not supported by evidence, a suitable proportion
the month of May, electricity consumption of such expenses can be disallowed. If the ratio
was of 1300 units, but production was of manufacturing expenses shows an abnormal
“NIL”, whereas in the month of June, on increase, there can be a possibility that the
a consumption of 1300 units of electricity, production is being suppressed from the account
production of 70,600 kg of groundnut oil books, though the full expenses incurred are being
was shown.
debited in these books. Careful enquiries should
7.3 Miscellaneous Expenses, repair be made to locate this suppressed production.
expenses etc., can also be easily inflated by A reference can be usefully made to the records
preparing self-serving documents or vouchers, of transporters/ Railway, to test-check the sales
which have to be scrutinized properly. and dispatch of the finished goods. Production
7.4 Stores represent a variety of different items records can be analysed on periodical basis, say
consumed in the process of manufacture, and monthly or fortnightly, to isolate periods when
sometimes their consumption is very substantial. the input: output ratios are abnormally skewed.
The AO has to be cautious that the stores claimed 7.6 In large manufacturing concerns, repair
as consumed are reasonable in quantity and expenses also can be very high. Here it needs
value. The purchase of stores should be verified to be verified whether any substantial parts
with other purchases. The closing stock of stores of the plant/ machinery have been replaced,
is generally valued at cost and this valuation and such expenditure has been claimed as
also needs to be checked. In so far as quantities revenue expenditure, whereas such substantial
are concerned, sometimes the incomings and replacement may be capital in nature.
consumption are shown on day-to-day basis,
and then the balance is shown as closing stock, 7.7 Expenses on labour charges can be
writing off the shortages, if any. Such shortages verified with the statutory records, required
should normally be negligible. Some assessee to be maintained under labour laws. Details
total up the opening stock and the incomings, and in this regard may be seen in the Chapter on
the closing stock is then deducted, thus arriving “Engineering Industry”.

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8. PRODUCTION RECORDS are not satisfactory, detailed verification of

periodical production data, i.e. monthly, weekly,
8.1 Any suppression of profit through
etc may be called and examined. Similar checks
understatement of production, inflation of
can be made to verify the declared shortages/
purchases/ consumption, under valuation of
losses, and also the output of by-products.
closing stock, suppression of production of
by-products, etc., is possible only through 8.5 In most manufacturing concerns, by-
manipulation of production records. Therefore, products of the production process are also
an AO must verify production records with an important source of revenue e.g. molasses/
great care. The first issue requiring verification is bagasse in sugar mill; cotton waste, yarn waste,
whether there is any difference between installed willow dust in cotton industry; saw dust in saw
capacity, the capacity utilised, and the actual mills; sweepings in jewellery manufacturing
production during the year. Any substantial concerns. The normal industry input: output
difference or a decline in production compared ratios can be applied to test check the production
to earlier year may be a starting point for a of by-products also.
detailed inquiry. 8.6 A correlation of sales (quantity and value)
8.2 It is important to ascertain whether the with month wise production may be necessary
production unit is of continuous production in circumstances of sudden or violent fluctuation
type, or batch production type, and what is in prices, as it is possible to understate sales by
showing them in periods of lower market prices.
the average time lapse for completion of one
The problem may require careful scrutiny in
production cycle.
industries where forward contracts are in vogue
8.3 Most of the manufacturing concerns come for purchases of raw materials and sales of
under the purview of Central Excise/ GST Act, finished goods. The contracts in such cases must
which require maintenance of certain statutory be examined against other contemporaneous
records relating to production and removal evidence available, and preferably cross-checked
of excisable finished goods. Details of these with brokers’ records.
requirements are given in the Chapter relating
●● In case of a ground nut oil mill, normal
to Engineering Industry. Certain manufacturing
yield was 31% to 33%, but the assessee
concerns also come under the purview of Cost had shown an average annual yield of
Audit Rules, under the Companies Act. Details 29%. When day-to-day production data
in this regard may be referred to in the Chapter was analysed, it was found that on 6-11-
relating to Cost Audit. 15, yield was 33.33%, on 7-11-15, it
8.4 While verifying the production account, had come to 30%, and on 11-11-15, it
an AO may examine entries in the inward had declined to 26.80%. The purchases
registers, and stock registers relating to issue were made in bulk in preceding months,
of raw material, and the corresponding entries and there was no evidence to show any
relating to production of the finished goods. The change in the quality of raw material
over-all input: output ratio of main raw materials within 3–4 days, which could justify low
and main finished goods can be worked out yield. Therefore, the assessee was unable
and compared with similar historical data of the to explain the reason of low yield.
same concern, as also with other comparable ●● In another case costing for the manufacture
cases, and general industry norms. In case of of 3 HP/ 1440 rpm electric motors was
abnormal variations, reasons for the same may done. This worked out to Rs. 30,525 per
be ascertained and verified. Where the reasons motor. The sale price was Rs. 50,200/- to

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Rs. 50,700/-. However, the GP disclosed 10. ANALYSIS OF INPUT-OUTPUT

in the books of account was much lower RATIOS AND STOCK ACCOUNT
than that worked out from the above-
10.1 Where production records are manipulated,
mentioned figures of manufactured cost
situations may arise that in the books there is no
and sale price.
stock of raw materials to support the manufacture
of goods, because either the quantity of goods
9. CLOSING STOCK
available is suppressed in the opening stock; or
9.1 General discussions regarding valuation of some quantity of stock is held outside the books;
closing stock made in the Chapter on “Trading or part of the goods accounted for in the books
account”, apply to Manufacturing account also. are not available for manufacture as these are
Reference in this regard may also be made to the kept by the banks under the key-loan account.
Chapter on “Balance-Sheet”.
10.2 Even in cases where disclosed yield is
9.2 In CIT u/s British Paints India Ltd. (1991) satisfactory, analysis of input-output ratio for
188 ITR 44 (SC), the assessee followed cost a part of the year may prove beneficial. The
basis for valuing stock. However, while valuing month-wise break-up of receipt of the raw
the stock of raw materials, it included only the
materials and the production details can be
actual cost of raw materials and did not take
obtained. The extract of month-wise purchases
into account the direct overhead charges. The
from the purchase account may not truly reflect
Supreme Court held that direct expenses incurred
for bringing raw material to the premises of the the quantity of goods available in each month,
assessee, formed part of cost of raw material, as actual date(s) of arrival of goods may not tally
and ought to have been included in the value with the date(s) of entry in the purchase account.
of closing stock of raw material. The Court In case production details are not available,
observed that, it was not only the right of the the quantity of goods sold month-wise can be
AO to take the correct value of stock but it was taken. There could be some confusion in a case
also his duty to do so for ascertaining the correct where production registers are not maintained
income of the assessee. and where the assessee is engaged both in
9.3 The issues relating to under-valuation trading and in manufacturing, similar types of
of closing stock by a trading concern are also goods. In such cases, there would be difficulty
relevant for a manufacturing concern. In in carrying out the input: output analysis. It may
addition, manufacturing concerns are also also happen that different standards of units
required to value their closing work-in-progress are used to measure the raw materials and the
(WIP) as on the last day. The AO needs to verify finished goods. For example, yarn is accounted
whether valuation of closing WIP has been done in kilograms, while the cloth manufactured from
properly. Valuation of closing WIP is usually yarn is measured in meters. In such cases, the
done at cost, by taking the estimated quantity AO has to examine in detail the manufacturing
of raw materials in various stages of production process and arrive at a fair conversion factor
process as on the closing date, applying the unit from raw materials to finished goods. A thorough
cost of raw materials, and includes the estimated grasp of the manufacturing process is necessary
direct expenses depending upon the stage of for an effective analysis of input-output ratio.
manufacturing process at which the WIP was
lying on the last date. By its very nature, this 10.3 After listing out month-wise receipt of
provides an ample scope of understatement, goods and month-wise production, the period
and therefore, needs proper verification. up to which maximum production has taken

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place, should be found out. The input & output 10.4 The minimum holding of raw materials
analysis can be done for the period from the would vary from case to case. Where raw
beginning of the accounting year to the month materials are scarce, or are to be imported, or
(or the date) of maximum production. Having procured from distant places, assessees usually
ascertained the quantity of goods produced, the keep a substantial amount of buffer stock. There
next step would be to examine the quantity of could also be cases where raw materials are to
raw materials necessary to produce such goods. be cured or processed before they become fit for
Manufacturing processes are time-consuming consumption. Such assessees also keep sufficient
and hence, it may take several days or weeks quantity of raw materials in hand. The AO can
to reach the finished product stage. Therefore, draw a stock statement of the following type:
at any point of time, some quantity of the raw
Opening stock of raw
material would always be stock in process. Quantity of goods produced
materials
Therefore, while arriving at the quantity of raw Add – receipts of raw
material needed for production up to a certain Closing stock of raw
materials up to the check
materials
date, the raw materials-in-process should also period
be taken into account. It can then be seen Opening stock of stock- (estimate of minimum stock
whether the quantity of raw material consumed, in-process holding)
is correctly reflected in the books of accounts or Closing stock of stock-in-
process
not. While ascertaining the quantity of goods
Wastage and by products
available as per the books, the opening stock of
Stock pledged in key-loan
goods, relating to raw materials, finished, and
account.
semi-finished goods, should all be taken into
consideration. If the assessee is having a key- Normally, both sides of the above statement
loan account, then the goods lying with the bank should tally. If sufficient goods are not available
should also be taken into account to arrive at the as per books for producing the required quantity,
availability of raw material for production. Where then it would indicate investment in procuring
the assessee is maintaining key-loan account raw materials outside the books. Where the AO
with the bank, it is advisable to analyse records proves the existence of raw materials outside
from the beginning of the accounting year to the the books, it would be better to recast the
date on which maximum goods are pledged with manufacturing account.
the bank, because pledged goods, would not be
available for production, and unaccounted stock 10.5 Examination of Stock Account
available with the assessee might have been used where Driage is Claimed
for production. If the quantity of production is 10.5.1 Many agricultural products get
taken from sales bills in the absence of details dehydrated over a period of time. This loss of
of production, then this figure will have to be water is known as “driage”. Driage occurs when
reduced by the opening stock of finished goods, produce such as copra, pepper, ginger, turmeric,
as part of the sales would have come out of the etc., are stored. In these businesses, generally the
opening stock. The assessee would not have assessee maintains day to day stock book. The
sold all the goods produced and some stock of driage is accounted for on weekly basis, monthly
finished goods would be available on the last day basis or yearly basis. In a case where driage is
of the check period. Thus, the AO can estimate accounted on monthly basis entries in the stock
this closing stock at the end of the check period. register for driage would be as follows:

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 Manufacturing Account  

Opening stock 530 Sales 160 assessee quantifies the driage on yearly basis at
the end of the year, the stock account would be
Driage for the
Receipts 40 20 as under-
month
Total 570 Closing stock 390 Stock Tally Given by the Assessee
Usually driage is not verified physically,as it is Op. Stock 335 Sales 10150
inconvenient to actually weigh the goods from Purchases 10360 Closing stock 220
time to time. But, where the assessee writes off Driage 325
driage in the stock account on weekly basis or Total 10695 Total 10695
some other periodical basis, it would be difficult
If the lowest stock balance occurs on, say the
for the AO to disprove the claim where the 15th February 2018 as under:
percentage or driage claimed is, as per the trade
standards. However, where driage is claimed on Opening Receipts Total Issues Closing
Stock Stock
yearly basis, it may be possible for the AO to
restrict the claim of driage. 240 15 255 75 180

10.5.2 When driage is claimed on yearly basis, The closing balance of 180 quintals on 15th
the entry in the stock register as on 31st March February will represent the actual stock in hand
would be as follows: after the driage that has taken place from the
beginning of the year till 15th February 2018. It
Opening stock 40 Sales 960
may be noted that here the driage is written off
Closing Stock (actual in the stock register only once in a year i.e. on
Receipts 1020 70
weighment)
the last day of the accounting year, and therefore
Driage 30 on 15th February, no driage would have been
Total 1060 Total 1060 written off. This would also mean that the trader
The driage, in the above mentioned case, works has purchased 1670 quintals from 15th February
out to around 3%. 2018 to 31st March 2018, while the sales
during this period are 1305 quintals. The stock
10.5.3 Assessees often purchase goods from
statement would be as under-
farmers, and adjust a certain percentage from
the weighment on account of moisture content. Stock Tally of 15-2-18 to 31-3-18
Payment is made to the farmers only on the (Figures in Quintals)
net weight. Thus, part of the driage is already Op. Stock 180 Sales 1305
recovered from farmers. Where goods are Purchases 1670 Closing stock 220
purchased directly from farmers, the driage would Driage 325
be more as the goods are recently harvested/ 1850
processed. However, where the purchases are
made from dealers, the driage percentage would The opening stock of 180 quintals has two
be somewhat low as the dealers might have held components - the actual stock in hand and the
the stock for some time. The AO can examine driage up to 15.02.2018. The driage up to 15.
the percentage of driage claimed vis-à-vis the 02.2018 cannot exceed the opening balance of
180 quintal. If we assume that the physical stock
trade standard.
of goods as on 16.02.2018 to be NIL, it would
10.5.4 The AO can locate the lowest stock- mean the driage for the period 16.02.2018 to
holding close to the end of the year. Where the 31.03.2018 would be 325 (-) 180 = 145 quintals,

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on purchase of 1670 quintals. Then the percentage anomalies. This type of examination would
of driage would be 8.5% against a normal of be successful only if the stock is low on a date
3 - 4%. This anomaly will be extremely difficult proximate to the close of the accounting year,
to explain by the assessee. Therefore, even if the and the assessee records the driage only at the
over-all driage claimed is reasonable, analysis
end of the year.
for a particular period may bring out serious

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8
Consignment Account

1. GENERAL BACKGROUND
1.1 Any business entity has complete freedom
to manage its own business affairs and this also
includes organising its sales activity. The business
entity always strives to distribute its products
efficiently and effectively to all its customers who
may be spread over a large geographical area
or territory. In case of direct selling, the business
entity has to setup branches or depots where
stocks are transferred and sales are made from
them. Such branches, depots, showrooms and
offices involve incurring of huge expenses with goods are sent for sale. The consignment is
attendant problems of maintaining the same outward consignment for the person who sends
on a permanent basis. This is usually avoided the goods and an inward consignment for the
by indirect selling through agents. The business person who receives the goods for sale. The
entity can appoint agents to whom stocks are relationship between consignor and consignee
transferred and these agents distribute the is that of Principal-Agent. The ownership of the
products to the ultimate customers and receive goods is retained by the consignor while the
commission for the services rendered. One possession of the goods is transferred to the
such way of indirect selling is selling through consignee. The ownership of the goods does
consignment agents. not transfer to the consignee because of the
agency relationship. An important feature of
1.2 To ‘consign’ means to send. The term
consignment sales is that the determination of
‘Consignment’ means the transfer of goods by
sales price of the goods transferred is with the
one party (the Consignor) to the agent (the
transferor. Similarly, the right of termination of
Consignee) and the goods are sold by the latter
the agreement is also with the consignor. The
on behalf of and at the risk of the former. There
consignment sales can be made across State
is no contract of sale in case of consignment. The
boundaries or even within the same State.
Consignor is the party who sends the goods to
agents for sale, e.g., a manufacturer or a whole 1.3 The consignee is entitled to a commission
seller. The Consignee is the party to whom the for selling the goods. Usually, the consignee

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recovers all expenses incurred by him on the 1.5 Another type of commission is the
goods sent on consignment by the consignor. Overriding commission, which is allowed to
This feature is subject to agreement between the the consignee as an additional incentive for the
two parties. It is also normal for a consignee to purpose of developing market for new products.
give an advance payment to the consignor in the
form of security, cash or a bill of exchange etc.
2. ACCOUNTING OF
which is adjusted against the final sale proceeds
CONSIGNMENT SALE
of the goods. If any goods remain unsold then
they are generally returned to the consignor. 2.1 The Consignor seeks to record the
The consignee is treated as a debtor only to consignment sales in such a way that the profit
the extent of the sale proceeds retained by him or loss of each consignment can be ascertained
when the goods or a part of them have been separately. It requires the preparation of a special
sold by him. Consignment is a fairly common account known as consignment account, which is
commercial transaction in international trade a nominal account prepared to find out the profit
also especially in respect of those goods which or loss of a consignment. The account is debited
cannot be standardized in respect of quality such with the cost of goods sent, expenses incurred
as tea, coffee, wool or even heavy machinery by the consignor/ consignee and the commission
and equipment etc.
due to the consignee. The account is credited
1.4 For his efforts, the consignee receives a with the amount of sales affected, the advance
commission which is calculated on the basis of payments received and also with closing stock, if
gross sale and it is usually a fixed rate on the any. The balance of this account is either profit
proceeds of the goods sold. In addition to this or loss. Since the despatch of the consignment
commission, the consignee is to be reimbursed does not result in sale for the consignor but is
for all expenses incurred by him in connection only a transfer of physical possession over the
with the consignment sales as agreed upon. The
goods, the personal account of the consignee is
reimbursement of expenses is dependent on
not debited and the sales account also does not
the exact terms of the consignment agreement.
get credited. These entries are made only after
In normal cases the consignor advises the
consignee to sell the goods consigned to him receiving Account Sales from the consignee.
for cash only because if such goods are sold 2.2 In addition to the consignment account, the
on credit by the consignee and if any amount consignor also prepares the personal account of
becomes irrecoverable from the debtors, the the consignee to ascertain the amount due to/
loss will fall upon the consignor as the consignee from the consignee. This account is debited with
can claim to have acted only as an agent in the amount of sales affected by the consignee
effecting the sales. The consignee does not and credited with the amount of any advance
become responsible for any bad debts. However,
received from him, expenses incurred by the
sometimes an arrangement is made between
consignee and the commission payable on sales.
the consignor and the consignee whereby the
The balance in this account is the amount due
latter guarantees payment and undertakes
responsibility for bad debts also. For this the from the consignee. The consignment account
consignee receives an additional commission in the books of consignor will ultimately show
known as del credere commission on the total the net profit or losson account of consignment
sales. When del-credere commission is given to business. At this stage, the necessary entries are
the consignee, the consignee will make payment passed in the Trading and Profit & Loss Account
to the consignor, whether he himself receives the and the consignment account is closed. It is
payment or not from the purchaser(s). also noted that a separate consignment account

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is opened for different agents. This enables was used to prove that the goods are sent out
the consignor to know profit or loss on each to other states on ‘stock transfer basis’ and not
consignment. on ‘sale basis’. The consignment agent receiving
such stock transfer consignment would issue ‘F
2.3 The accounting of Unsold Consignment
Form’ to the consignor. The payment of sales
Stock is also crucial in determining the profit/ loss
tax would come into the picture only when the
of the business. The relevant details are obtained consignee sold the goods to the end customer.
by the consignor from the consignee at the close
of the financial year. The unsold stock is valued 3.2 After the consignee makes the sale and if a
to ascertain the profit on the consignment as Form F was issued by him, the consignee would
at the Balance Sheet date. The consignment pass on the amount collected from the customer
(including VAT/ CST) to the consignor after
stock balance is a Current Asset (it appears
deducting his commission and minus the service
in the asset side of the Balance Sheet). At the
tax charged on the commission. While filing
commencement of the next financial period,
their respective Sales Tax Returns, the consignor
consignment stock will again get transferred to
would then pay the VAT/ CST component to the
the consignment account as a debit to enable respective State government and the consignee
the determination of the profit or loss on the sale would pay the service tax component to the
of the remainder of the consignment. Central Government. If no Form F was issued,
2.4 An ‘Account Sale’ is prepared by the the consignee would pass the amount collected
consignee setting out the sales made by the from the customer on to the consignor after
consignee, the expenses incurred on behalf reducing the VAT/ CST charged, his commission
of the consignor, the commission due to the and the service tax charged on the commission.
consignee and the balance due to the consignor. While filing Sales Tax Returns, the consignee
would then pay both, the VAT component to the
respective state government as well as the Service
3. CONSIGNMENT SALE IN
Tax component to the Central Government.
PRE-GST PERIOD
3.1 In the pre-GST era, the consignor would not 4. CONSIGNMENT SALE
send an invoice to the consignee. The consignor UNDER GST REGIME
only sends a performa invoice, a statement
4.1 The key difference now is that as per
that looks like an invoice but is really not one.
the CGST Rules, both the consignor and the
The object of the performa invoice was only to
consignee are considered as distinct persons as
convey information to the consignee regarding
far as taxation is concerned. Thus, if there is a
particulars of the goods sent, giving indication
transfer of goods between the two, GST will be
of the price of the goods at which the consignee applicable even if there is no consideration paid.
ought to sell the goods etc. The performa invoice However, the agent/ consignee can avail input
does not make the consignee responsible to pay credit of the GST charged by the consignor.
the amount named therein. The consignor would Similarly, while selling the goods to the end
send the goods to the consignee without any customer, the consignee should charge GST
payment of VAT as there was no sale involved from the customer, which he directly pays to
at this stage and no CST was required to be paid the Government. In addition, the Consignee
if the ‘F Form’ was issued. The ‘F form’ was a has to charge GST at 18% on the commission
requirement for stock transfer to consignment receivable from the consignor and pass that on
agents or vice-versa from one state to another, to the government as well. While paying GST
without attracting charge of CST. The ‘F Form’ to the government, both the consignor and the

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consignee can adjust the same against their In the case of Hafiz Din Mohd. Haji Abdullah vs.
input tax credit. State of Maharashtra (1962) 13 STC 292 (SC)
the Supreme Court had held that the terms in
4.2 In case the goods are not sold, and are
returned, GST will be payable by the consignee the agreement that goods were to be sold at
even when returning the goods. The consignee prices fixed by the supplier, that prices of the
can offset the GST which was earlier paid by goods were liable to be altered at the instance
the consignor while sending the goods. Further, of the supplier and that the person to whom
the consignor can offset the GST paid by the the goods would be supplied would receive a
consignee the next time he supplies those goods. fixed remuneration for exertion and would be
liable to remit the price soon after the sale was
4.3 This above situation may lead to a misuse effected clearly indicated that the relationship
of a variant of consignment sales i.e. the sale created was that of principal and agent. In this
on approval basis under GST. Unlike the case the Supreme Court held that though as per
consignment sales, sales on approval basis are the agreement the risk in the goods was on the
not deemed as supplies under GST. Hence, the agents, both during transit or when the goods
consignor may send the goods to the consignee were in the agents’ place, the title in the goods
by issuing a delivery challan instead of a tax was not affected thereby. It was held that such
invoice and without charging GST on the
transactions did not amount to sale.
same. However, once the goods are sold by the
consignee to the end customer, it implies that 5.2 The intention of the parties to the
the agent has accepted the goods received on consignment agreement is also crucial. For a
approval. Once this sale has been ratified by consignment to be termed a sale, there must be
the consignee, the consignor has to issue the two parties to the contract who are competent
tax invoice and charge GST. The consignee can to contract, there should be mutual assent, there
collect the purchase invoice and avail the input should be a transfer of property and valuable
tax credit on the GST paid. The CBEC has itself consideration must exist. If the agent is only
issued a Circular on 18th October 2017 clarifying facilitating a direct sale between the consignor
that the goods which are taken for supply on and the customer, it is a sale. The Supreme
approval basis can be moved from the place Court in the case of Bhopal Sugars Industries
of business of the registered supplier to another Ltd vs. STO (1977) 40 STC 42 (SC) has held
place within the same State or to a place outside that the terms of the agreement, the intention
the State on a delivery challan along with the of the parties and the dealings between them
e-way bill, wherever applicable, and the invoice will determine the nature of transaction as to
may be issued at the time of delivery of goods.
whether the transaction is asaleor transfer to an
For this purpose, the person carrying the goods
agent.
for such supply can carry the invoice book with
him so that he can issue the invoice once the 5.3 The assessing officer should also examine
supply is fructified. the accounting of the sale proceeds of the
consigned goods and the valuation of the stock
with the consignee at the end of the year. The
5. POINTS FOR VERIFICATION assessee can suppress the income earned in the
5.1 The first stage of investigation in consignment business by manipulating its sales
consignment sale is to examine whether the account or by suppression of value of stock with
same is actually a consignment sale or a sale the consignees or both. The AO can also verify
as such. The transaction has to be evaluated the reasonableness of the expenditure claimed
against the pre-conditions of a consignment sale. by the consignor.

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5.4 Since earlier the consignment sales were cases would be that the method of accounting
exempted from payment of CST/ VAT, many regularly employed by him is to account the
businesses would show consignment transfers sales on receipt of the account statements from
to avoid payment of higher sales tax and this the consignee. This can be rebutted by making
could also impact the time of accrual of sale filed enquiries.
consideration shown in the books. In such cases 5.6 Where the likely tax effect is large, the AO
the agreement may exist only on paper. Therefore, may conduct a survey under Section 133A
scrutiny of the agreement assumes significance. and ascertain the date on which the account
The AO should examine the transaction and the
statements were actually received. If it can be
work done by the consignee. The AO should also proved that the assessee had indeed received
check the sale prices claimed and see whether the account statements from the consignee
these were at market rates or not. before the close of the accounting year but he
5.5 The consignees are required to send the chose to postpone the recording of the income,
account statements containing the details of the penal provisions can also be invoked.
goods sold and the rate at which the goods are 5.7 Suppression of closing stock with the
sold. The usual practice is to account for sales consignees is commonly resorted to by the
only on receipt of the account statements. By consignors. Some businesses omit to include the
manipulating the date of receipt of the account stocks sent on consignment or lying in transport
statements, a trader may seek to postpone the depot or sent for approval of customers. The
income by not crediting the sales account. The AO should call for the account statements and
consignee may also act in collusion with the ascertain the goods actually held by the consignee
consignor and purposely delay the dispatch at the end of the year. If there is omission in
of the account statements. While examining disclosing the stock with the consignee at the
the consignment sales account, the AO should end of the year, an addition can be made to
invariably ascertain the period up to which the the closing stock. Similarly, the assessee might
goods sent on consignment are reflected in the not have accounted for the goods in transit i.e.
sales account. Normally, the assessee should the goods dispatched by the consignor but not
have no difficulty in accounting the sales of received by the consignee till the close of the
goods sent on consignment up to the month of previous year. Here, the AO can call for the
February. The sales relating to goods sent on account statements of the subsequent period
consignment in the month of March may be and examine the date of arrival of the goods in
reflected in the subsequent year as the account the beginning of the subsequent year i.e. in the
statements may have been received after the first fortnight of April. He can then find out when
close of the accounting year. By not accounting these goods were dispatched to the consignee
the sales in the year of sale itself, an assessee and examine whether the goods in transit are
can postpone payment of tax. The market reflected in the closing stock declared. There
trend of prices of the goods can also give a could be a time lag between accounting for the
clue. If there was a boom in one financial year sales in view of the delay in receiving the account
and a slump thereafter, the trader may find it statements from the consignees. Often the sales
advantageous to postpone recording higher made in the month of March are reflected in
realisation in the year of sale and record such the sales account of the subsequent year. The
sales only in the subsequent year. Thus, the issue to be examined is whether the assessee has
assessee can manipulate the sales account and included the goods covered by these statements
suppress the income in a year when the trade of accounts in the closing stock of the previous
has done well. The plea of the assessee in such year or not.

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5.8 Some assessees may declare themselves is not debited. The debit entries are made only
as consignees in order to avoid disclosing the when the Account Sale statement is received
stocks purchased by them. A careful inspection from the consignee. The assessee can suppress
of the documents required to be maintained can the income simply by choosing not to reconcile
unravel the bogus consignment arrangement. the advances with the supplies made. Therefore,
examination of the correctness of the credit
5.9 Examination of Balance Sheet and the balances, especially the balances carried forward
ledger accounts of the consignor is also helpful. from year to year, in the consignee’s account
The consignee often sends money in advance is called for. A critical study of the consignee’s
and his accounts are credited on receipt of the account may help the AO to establish suppression
money. When the goods are dispatched on of sales. The AO may also cross-verify from the
consignment, normally the consignee’s account consignee’s end, wherever necessary.

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9
Profit and Loss Account
1.
1. Profit and Loss Account, is the final account
drawn by an enterprise to work out the profits
and loss from its trading/ manufacturing activities.
Conventionally, all the expenses and receipts
directly related to goods traded or manufactured
are taken to the Trading or Manufacturing
account, while all other revenue expenses i.e.
overhead charges, indirect expenses, interest
etc. are debited to P/L account.
2. The format of P/L account may vary from
business to business, and the accounting system/
method followed by a particular enterprise. This
flexibility provides an opportunity to a clever examined with reference to Sections 30 to 44D
assessee to include some expenses which ought of the Act. The common issues involved while
to be included in Trading account, in the P/L examining the P/L account are:
account, and vice-versa, to present a desirable i. Whether any capital expenditure has
picture to the AO. If direct expenses, which been debited to P/L account, as revenue
ought to be debited to Trading or Manufacturing expenditure.
account, are debited to P/L account, this may
present a higher G P rate than the actual, and ii. Whether any personal expenditure of
may on cursory examination, lead an AO to proprietor, partners, directors, shareholders
accept the same. The key question, however, (of private limited companies), or of their
is that for ascertaining the reasonableness of relatives, has been debited to P/L account,
disclosed GP rate, like must be compared with in the garb of business expenditure.
like. In other words, if some direct expenses iii. Whether any expenditure of prior or
which till the preceding year were being debited subsequent accounting period has been
to Trading account, are shifted to P/L account in debited to P/L account.
current year, the comparison will not remain fair.
iv. Whether any bogus expenditure, i.e.
3. The nature of expenses debited to P/L expenditure not supported by proof, or
account will vary depending upon the nature supported by false/ fabricated records has
of the business. The P/L account has to be been debited to P/L account.

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i. Whether any expenditure of the nature 4.1 Personal Expenses: Sometimes, personal
prohibited in the Act, e.g., expenditure on expenses of proprietors/ partners, etc., which
unlawful activities (Explanation to Section should have been rightly debited to their accounts
37), payments to Non-residents without are debited under some expense account
TDS u/s 195(1) (Section 40(a)(i)), has appearing in the P/L account. Investigation to
been claimed. find out the extent of such expenses can be
usefully carried out by scrutinising vouchers as
ii. Whether any expenditure which, as per
the Act , is allowable only on Fulfilment well as the extent of personal expenses debited
by the proprietors in their own accounts. Such
of certain statutory conditions, or which
examination is also necessary to find out what
is allowable up to a certain limit, has
perquisites should be assessed in the hands of
been claimed without Fulfilment of those
the directors, partners etc.
conditions, or in excess of those limits. For
example, depreciation at a prescribed rate 4.2 Illegal Expenses: Under Explanation to
is admissible only on fixed assets owned Section 37(1), any expenditure for any purpose,
by the assessee, and used for business which is prohibited by any law, cannot be
purposes during the year. allowed as a deduction u/s 37(1).
iii. Whether any expenditure has been 4.3 Interest Expenses: The main points
incurred for earning exempt income like requiring verification before allowing interest
dividend, profits from partnership firm, expenses, are whether the borrowings were for
agriculture income, etc. (Section 14A r w business purposes [Section 36(1)(iii)] and for
rule 8D) and claimed as deduction. meeting revenue/ working expenses, as distinct
from borrowings for acquiring a capital asset. The
4. Some of the following expenses, which may genuineness of payment and reasonableness of
be debited to P/L account may require detailed interest rates may also need verification on facts
verification on the facts and circumstances of a of a given case. It may also be necessary to verify
given case: whether any of the interest expenses are hit by
i. Interest the provisions of Section 43B of the Act.
ii. Depreciation 4.4 Depreciation: Depreciation is admissible
iii. Advertisement and publicity only on the assets owned by the assessee and
used for the purpose of business during the year.
iv. Repairs Therefore, it may become necessary to verify the
v. Travelling - local and foreign actual date from which an asset came in assessee’s
ownership, and the date from which it was put
vi. Sales promotion/ commission
to business use. Certain assets are eligible for
vii. Technical know-how depreciation at a higher rate e.g. energy-saving
viii. Royalty devices, etc. Where such higher depreciation
is claimed, it may become necessary to verify
ix. Financial consultancy services
whether the conditions specified for the same are
x. GST fulfilled or not. Details relating to manipulation
xi. Insurance for claiming higher depreciation, are discussed
in the Chapter relating to “Balance-Sheet”-
xii. Rent, rates, etc.
Fixed assets.
xiii. Legal fees
4.5 Advertisement and Publicity: These
xiv. Bad debts expenses may become significant in the year

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 Profit and Loss Account  

when a new product is launched, or when a new with salaries of those employees, in some cases
issue of share capital is brought out. At times even 5 to 10 times of annual salaries. Major
payments of the nature of donation may be portion of the commission was not withdrawn
given the colour of advertisement expenses. by the employees but was allowed to be
retained by the employer, interest being credited
4.6 Travelling Expenses: If these include
against the undrawn balances. The outstanding
expenditure on foreign tour for acquiring
amounts of commission were subsequently
fixed assets, then such expenditure has to
invested in shares of group companies and also
be capitalised or has to be considered as pre-
given as loans to new companies floated and
operative expenditure. Therefore, the allowable
controlled by the employer, or were transferred
depreciation u/s 32 or amortisation of expenditure
as donations to charitable trusts created by the
u/s 35D has also to be taken into account.
employer assessee.
One has also to see whether any personal tour
expenditure of the director/ partner/ proprietor 4.7.2 In another case, in spite of a steady
is debited or not. Also, an examination of the increase in turnover, there was a decline in the
travelling expenses may throw clues in relation profits because large sums had been debited
unaccounted transaction of sales, purchases as commission and bonus. When examined,
etc., as these may include expenses on travelling some of the employees denied the receipt of
in connection with transactions or matters not commission and stated that they were asked
disclosed to the Department. Such clues might to sign blank vouchers and that the amounts
also throw up names of persons or of commercial alleged to have been paid to them were actually
contacts, etc., which may, then be pursued. appropriated by the management.

4.7 Sales Promotion/ Commission 4.7.3 While examining claims of abnormally

Expenses: Often false/ inflated claims of large payments of commission or bonus,
payments of commission are made to reduce following line of inquiry is suggested:
taxable profits. In appropriate cases, it may be i. Full information relating to the previous
necessary to examine claims of commission experience of the employee, his educational
payments, in details especially in cases where no qualifications, relationship, if any, with the
GST has been charged by the payee. If the entire employer should be obtained.
commission is outstanding at the end of the
ii. The nature of duties of the employee and
year, then there are reasons to suspect
total remuneration earned by a similarly
and therefore, detailed examination of the placed employee in another comparable
genuineness of commission expenditure is concern should be ascertained.
required in such cases.
iii. It should be examined whether the
4.7.1 In one case, while examining the payment of commission besides salary,
commission payments, the AO found that large was one of the conditions of service of the
amounts of commission were claimed to have employee concerned at the time he was
been paid to some selected employees who initially appointed. If not, the reasons for
were different in different years. The terms of paying commission from a subsequent
payment were fixed under written agreements date should be carefully looked into. Even
and the rates of commission varied with the where there was an initial agreement,
quantum of net profits. income-tax was duly it would also be necessary to examine
deducted from such payments by the employer whether there has been any variation in
and paid to the credit of the Government. The the rates of commission, or in the manner
commission payments were disproportionate of computing the amount payable, with a

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view to finding out if the real motive for the his employees. On inquiry, the AO found that
change was to reduce the taxable profit. the assessee obtained from these employees,
iv. The final or eventual destination of the written requests that they wanted to retire from
commission or bonus alleged to have been service and so gratuity due to them should be
paid to an employee is of vital importance. paid. A scrutiny of these letters revealed identical
It should, therefore, be seen whether the language, and only the names, years of service
entire commission credited to the employee and amount of gratuity were different. The books
was withdrawn by him in the year of of account for the following years showed that
account itself or soon afterwards and, if these very persons, who were supposed to have
not, how it was ultimately adjusted. If it retired, were in the employment of the firm. A
is found that the commission is shown as close examination showed that, after their alleged
having been fully or largely withdrawn by retirement, these employee had, in identically
the employee, his account books and bank worded letters, sought re-employment for the
pass books, if any, should be scrutinised same vacancies, and had been re-employed
and, if necessary, he should be examined by the assessee. Similar position was detected
as to how the amounts were spent or regarding thpayment of notice salary.
invested by him and whether his standard
of living, savings and investments were 4.8 Technical Know How Fees: Under
commensurate with his alleged income. Section 35AB of the Act, where the assessee has
paid in any assessment year commencing on
v. In case the withdrawals are shown as
or before 1-4-98, any lump sum consideration
invested, investments should be followed
up to ascertain whether they have for acquiring any know-how for the use of the
ultimately gone back to the employer or business, then only 1/ 6th of the amount so paid
his nominees. shall be deducted and balance amount shall be
allowable in equal installments for each of the
4.7.4 In a variation of the same theme, the five immediately succeeding previous years.
assessee may claim to have paid purchases/ sales If such technical know-how expenditure is on
commission to third parties. Here, two types of
know-how developed in laboratory, university
manipulation are possible. One type is that the
or specified institutions, referred to in Section
transactions with the third parties are genuine,
32A (2B), 1/ 3rd of the lump sum consideration
i.e. the fact of payment of commission is not in
shall be allowed in the first year, and the balance
doubt; only the quantum of commission paid is
amount shall be deducted in equal installments
inflated in the assessee’s books of account. In
for each of the two immediately succeeding
such cases, a cross-verification of the books of
previous years.
account of the assessee with those of the third
parties will bring to light the manipulations 4.9 Insurance Expenses: Even a seemingly
made by the assessee. The other type is where innocuous account like Bima Khata (account for
the assessee sets up a totally fictitious entity and insurance premia), sometimes contain significant
makes a claim for deduction in respect of the clues of tax evasion. In some cases, these entries
commission allegedly paid to such an entity. have led to the discovery of transit insurance
In such cases, investigation must be directed policies, Bag and Baggage policies, etc., which
towards proving that the ostensible is not real. provided evidence about the unrecorded
4.7.5 In one case, M/s. ‘A’, an assessee dealing consignment of silver or gold, etc., and/ or
in oil, claimed deduction for payments of ornaments, jewellery and other precious assets
gratuity, bonus and notice saelary to some of carried by air, rail, etc.

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4.10 Legal Fees: An intelligent examination may refer the case to TPO for examination u/s
of the litigation expenses can throw up clues 92BA of the Act.
about the loans, investments, etc., which are
4.15.1 In a case, M/s. X, a printing press
missing from the books produced before the
and M/s. Y a publishing firm, were two sister
Department. These clues can then be pursued
concerns. Printing charges paid by M/s Y, which
to their logical end by reference to the records of
were trade receipts in the hands of M/s X. M/s.
courts, banks, etc.
X maintained regular books of account and was
4.11 Bad Debts: Under the present provisions assessed on the results disclosed. M/s. Y did not
of Section 36(1)(vii), if any bad debt or part produce books of accounts, and their profit was
thereof is written off as irrecoverable in the estimated by applying an estimated rate of GP
accounts then it has to be allowed. Many of the on turnover. In order to reduce the overall tax
assessees claim such deductions in P&L a/c, but liability, the printing press, viz. M/s X began to
show the same in the Balance Sheet as a provision allow heavy rebates to the publishing firm, M/s
for bad debt. This is wrong, because if in the Y on the printing charges payable by the latter.
Balance Sheet, the item is shown as provision, While this went to reduce the taxable income
then the assessee cannot take plea that the debt of the printing firm, it did not effect tax liability
has been actually written off as irrecoverable. In of the publishing firm Y, as it was showing its
these cases, it is important to obtain full details income and also getting its assessments made
of names and address of the debtor(s) from the on estimate basis. It was hoped that the same
assessee and thereafter, to find out whether the rate which was being applied would be repeated
debtors have shown the items as income by way in the pending assessments as well, irrespective
of remission of their liability. of the quantum of rebate received. This method
4.12 Printing/ Stationery Expenses: These of reducing the tax liability came to light when
items may become important, if questions of the printing press X claimed payment of rebate
authenticity of bill books, gate pass books, cash of substantial amount to M/s Y.
memo books, and similar records or; the time 4.15.2 A number of companies often claim
from which these became available to assessee payment of high salaries to close relatives
or; the number of such books printed, etc., crop of the persons controlling the companies. In
up as part of investigation into genuineness of some cases, the salaries are paid even though
records, expenses, etc. the relatives had not rendered any service,
4.13 Telephone Expenses: These whatsoever. In other cases, the recipients were
become useful when particulars of outstation/ not found to possess any academic or technical
international calls are to be analysed for qualification for the jobs assigned to them. In
verifying any undeclared business connections. some other cases, they were found to be staying
The scrutiny of these expenses is of importance at places different from places where they were
in cases of speculation or commission agents in expected to render services.
forward market. 4.16 Deferred Revenue Expenditure: This
4.14 Large Payments to Connected refers to expenditure in respect of which payment
Persons: Large payments to connected persons has been made or liability has been incurred, but
may need examination, if such payments are benefits of which will accrue over subsequent
used to reduce due tax liability. The AO should accounting periods. Such expenses should
examine the applicability of the provisions of normally be of a capital nature or allowable as
Section 40A(2)(b) and in deserving cases he a revenue expenditure in a subsequent year.

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However, the Act provides for some of these 4.18 Advances Written Off: Many of the
expenses to be deducted as business expenses assessees debit this amount in the P/L account.
up to certain limit. For example, amortisation of The AO should examine the nature of advances
preliminary expenses u/s 35 D. This has been i.e. whether they are on revenue account
discussed in the Chapter relating to “Balance- or capital account; whether the recipient of
Sheet”.
advances has shown the same as its income or
4.17 GST: With the implementation of GST, not and accordingly may disallow this amount.
most of the payments are subjected to GST
and therefore, assessee will mostly inflate 4.19 Expenditure on Scientific Research:
those expenditure which are subjected to nil or Under Section 35 of the Act, deductions are
minimum rate of GST. The AO should examine allowed in respect of expenditure on scientific
the genuineness of all such expenditure. The research. In some cases it is observed that the
second possibility is that the assessee will show assessees have claimed bogus expenditure
purchases from unregistered dealers. The AO
under this Section for the reason that either
should examine the genuineness of not only
these expenditure but should also examine the the association or university, etc. exist simply
genuineness of such unregistered dealers. The on paper and the payment made by cheque is
AO should have some basic idea of the GST received back in cash by the payer. The claim of
information furnished by the assessee to the such deductions needs thorough examination
GST department, etc. including third party verification.

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 Chapter

10
Balance Sheet

1. ANALYSIS OF
BALANCE SHEET
Balance Sheet is a financial statement that lists
the assets, liabilities and owners’ equity of an
entity at any given date, normally 31st March
or 31st December of the year. When a business
entity needs money it borrows either from the
owners of the business or from outside. The
money borrowed from the owners of the business
is called Capital, whereas money borrowed from
outside is known as Loan. Both owner’s as well
as lender’s contributions are reflected on the 1.2 The assessee and its agents have direct
liabilities’ side of the Balance-Sheet. The other and indirect incentives to prepare Balance
liabilities are Current Liabilities which include Sheet in a manner most suited to their needs
creditors, the amount payable to suppliers and and requirements. Several stakeholders (such
vendors, and bank overdraft. There are modern as share holders, creditors, lenders including
instruments as well appearing as liability such Banks, borrowers, pressure groups, Government
as Perpetual Non-Convertible Debentures in general and Tax Departments in particular,
(“PNCDs”) or Hybrid Bonds, which are often insurers, employees, agents in supply-chain
called as equity in disguise because of their management, acquirers and take-over holders
nature and character. Assets, on the other hand, etc.) are the users of the data in the balance-sheet.
represent what the entity owns, or the things it Government restrictions on funds and capital
has purchased by spending the money that it mobility, the lender’s prescription for lending
had borrowed. Typical assets include Investment money, tax sops etc., could be the reasons for
in Land and Building, Plant and machinery, the assessee to show its Balance Sheet, in the
vehicles, Computer systems etc., which appear manner it suits best. Since there is dichotomy
as Fixed Assets. The other category of assets between owners and employees, flowing from
includes items such as debtors, cash and bank different provisions of the Companies Act,
balances and inventory, which are known as 1956, income-tax Act, 1961, the management
Current Assets. may adopt such accounting policies as to give a

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flattering opinion of its efficiency, effectiveness, giving statement of assets & liabilities only
etc. of the business enterprise. Such accounting as on a given date. Therefore, Balance
policies are more appropriately described Sheet & Profit and Loss account have
as “creative accounting” or “window dressing to be studied along with other financial
of Balance Sheet”, either to “evade taxes” or statements.
to “defer taxes” or to “shift taxes” or “smurf ii. Historical in Nature: It imparts financial
taxes” etc. data recorded at historical costs. It involves
1.3 It is very necessary for an Investigator to blend of valuation methods known as
read between the lines and look beyond what Historical cost, Replacement Cost, Current
is reflected in the financial statements. In other Costs, etc.
words, evaluation of the off Balance Sheet iii. Can Hide More than it has to Reveal:
items, as also hidden costs & values is also, to be There are numerous hidden values which
carried out to ascertain correct facts and logical are not reflected in the Balance Sheet, such
conclusions.
as organisational culture, human assets,
1.4 It is also necessary for an Investigator to use environmental costs, intangible assets,
various quantitative and qualitative tools, such as future earning capacity, etc.
cash flow statement. The cash flow statement is
iv. No Consideration for Time Value of
one of the least manipulated financial statements. Money: It does not take into consideration,
The other two financial statements viz. the Profit
the time value of money, inflation/ deflation,
& Loss and Balance Sheet, are often subjected
non-monetary items etc., Therefore due
to many manipulations. However, while the cash
and necessary adjustments are required to
flow statement does render more transparency, it be made to Balance Sheet.
too can be manipulated to a certain degree. With
the analysts considering a sustainable cash-flow v. Share Holder’s Statement: Balance
stream as the primary factor in determining the Sheet of Companies is mainly reported
value of a company, the incentive to manipulate to suit needs of the shareholders.
cash flows is greater. Hence, it is necessary to Requirements of other stakeholders,
examine other tools such as narratives to financial including taxman, may not be reflected
statements, ratio analysis, inter-firm comparisons, “on” or “off” the Balance Sheet.
management performance evaluation techniques, vi. Window Dressing: Appearance of
management control systems, etc to achieve Balance Sheet can be altered to present a
the avowed objective. It is also necessary to rosy picture by using different accounting
verify compliance with applicable Accounting policies, or by pre-dating or post-dating
Standards, and ascertain the Economic Substance transactions, the substance of which will
over Legal Form. For this reason, the AO has to emerge after the date of balance-sheet.
keep in mind the motives, regulatory provisions, As per SSAP-17 (Statement of Standard
and such other reasons, which may prompt an Accounting Practices–UK), Window
enterprise to resort to Creative accounting and Dressing is a situation, where:
Window Dressing of Balance Sheet and other ●● There is a fraudulent falsification of
financial statements. accounts to make things appear to be
more favourable than they actually are
2. LIMITATIONS OF BALANCE SHEET ●● The legal arrangement of affairs over
i. Static Statement: Balance Sheet per se the year-end to make things, look
is a static statement of Assets and Liabilities, different from the way, they are.

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vii. Not Reflecting EVA/ CVA: Balance the Directors will naturally give reasons for it,
Sheet may not reflect, whether the and the AO should then scrutinize how far these
economic entity has created wealth for reasons are reflected in the accounts. The report
its stakeholders or not. In other words, may make a mention about the future plans of
it may not be useful for performance the company and collaboration arrangements
measurement and strategic valuation entered into, about which the AO will have to
concepts of Economic Value Addition keep a watch.
[EVA], Cash Value Addition [CVA], Value
Drivers etc. 3.3 Comparison with Last Year’s
Balances: The AO should note down against
3. PRELIMINARIES OF ENQUIRY each account, the balances of the earlier
year, particularly in non-company cases. The
3.1 In cases requiring detailed investigation, object of placing the figures as at the end of
the AO should prepare a list of persons closely the last year along with the figures as at the
and proximately related or connected with the end of the accounting year is to get a glance
assessee along with the names of their close
at one go the fluctuations in the balances. He
relatives. Information about their places of
should also be cautious about new accounts
residence or places with which they have close
that have appeared and old accounts that have
contacts should also be obtained. Names of
disappeared and mark out those accounts
the business concerns with which such persons
are connected should also be ascertained. for appropriate scrutiny. He should also take
Accounts appearing in names of such persons note of those accounts in which balances
or businesses should be selected for thorough have remained constant. Moreover, cash flow
investigation. It may also be useful to prepare statement can be prepared for investigating
a list of employees/ nominee directors/ key movement in assets and liabilities.
persons who have been paid salary above
certain limits depending upon the nature of 4. BALANCE SHEET FOR
the case and to examine accounts appearing in THE FIRST YEAR
their names.
4.1 In case of new Companies, the AO should
3.2 In the case of companies, firms or other obtain following documents:
assessees who require getting their accounts
audited, Auditor’s report should be carefully i. Memorandum, Articles of Association,
looked into. Section 216 of the Companies Act Foreign collaboration agreement.
provides that profit and loss account shall be ii. The date of incorporation and certificate
annexed to the Balance Sheet and the auditor’s of commencement of business, whether
report including the auditor’s separate, special it is “Part-IX” company or a normal new
or supplementary reports, if any. If there is any company.
qualifying report, it should always be called for.
The AO should carefully examine the qualifying iii. Particulars of Directors, Managing
observations of the Auditors, and should satisfy directors, Managing agents, secretaries
himself about their implications for assessment and treasures, manager and Secretary/
purposes. The printed accounts always contain nominee directors, and any incidence of
copy of the annual accounts and the report of PHOENIXISM (unscrupulous directors
the Directors. This report should be carefully liquidating a limited liability business one
studied for useful bits of information. Thus, if day and starting an identical business the
the profits have gone down for a particular year, next day).

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iv. The share capital and rights of various 4.3 A specific statement to the effect that
types of shareholders (voting powers etc.) nothing has been paid for goodwill is not
Exchange ratio in cases of merger/ de- conclusive evidence that the price of the assets
merger/ amalgamation etc.. has not been inflated to include a payment for
v. The AO should obtain details as to how goodwill. Where there is any reason to suspect
the share capital has been subscribed. The that an unreasonably high price has been fixed
share holdings of the Directors including on assets which are subject to depreciation
promoters’ contributions, should also be allowance, the AO is entitled to question the
price and to compare it with its written down
ascertained.
value in the books of the predecessor and with
vi. The agreement, if any, appointing the current market value.
Managing agents, or secretaries and
treasurers. 4.4 Sometimes, a study of the assets and
liabilities taken over, and those not taken over
vii. The AO should thoroughly verify the
by the new concern may be revealing. Thus a
identity and capabilities of the shareholding
business run by an individual may be converted
companies and lenders so as to ascertain
into a firm but the firm may not take over liabilities
the genuineness of the contributions
in certain accounts. Such liabilities may be bogus
received from such sources and whether
credits belonging to the vendor. Transactions of
any contribution has come through Name
taking over of liabilities by discounting the future
lending Paper Companies or Name lending
stream of income, by loss-making entities need
firms or individuals.
to be examined. For example, in the case of a
viii. The AO should ascertain whether the proprietary business taken over by a limited
public are substantially interested or not; company, analysis of the assets and liabilities
and whether it is a subsidiary company. taken over by the limited company revealed
4.2 In case, there is a change in constitution of that certain liabilities of the individual were not
business for example, if a proprietary concern taken over by the company. On investigation it
or a firm has been converted into a limited was found that suppressed sale proceeds were
company or is de-merged company, etc., the introduced in the form of credits in the names of
AO should call for the agreement between the these parties.
predecessor and successor and examine if there
are discrepancies vis-á-vis the laid down law. It is 5. ASSETS SIDE
not infrequently found that when a person takes The assets of a business entity would usually be
over the business of another person or purchases classified as under:
the assets of another person without taking over
his business, the successor or the purchaser, as * FIXED ASSETS
the case may be, pays a lump sum for various
●● Tangible Fixed Assets
kinds of assets taken over or purchased, some
of which may not be eligible for depreciation. ●● Intangible Fixed Assets
An assessee wanting to avoid proper tax may
●● Capital Work -in- Process (CWIP)
manipulate the allocation of the lump sum
payment so as to get an excessive allowance ●● Investments
for depreciation. In such case the lump sum
οο Current Assets
payment should be allocated among the various
assets according to their relative commercial οο Miscellaneous Expenses Not Written
value at the time of purchase. Off/ Deferred Revenue Expenditure

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6. FIXED ASSETS borrowed for acquisition of an asset for extension

of existing business or profession (whether
Fixed assets include land, building (both
capitalised in the books of account or not); for
own & leasehold), plant and machineries,
any period beginning from the date on which
stores & spares, moulds, motor cars, electrical
the capital was borrowed for acquisition of the
installation, furniture & fixtures, intangible assets
asset till the date on which such asset was first
such as know-how, patents, trade marks, copy
put to use, shall not be allowed as deduction.”
right, licenses, franchises, other business or
The phrase for extension of existing business
commercial rights of similar nature etc.
or profession has been omitted with effect from
1.4.2016.
6.1 Initial Measurement of Fixed Assets
Further, in case, the asset is financed by loan
6.1.1 Tangible Fixed Assets: Normally, in foreign exchange (FOREX), any increase in
fixed assets are measured at cost. In the initial liability, on account of depreciation of Indian
cost, other costs & expenses are also included Rupee for acquisition of fixed assets, has to be
by way of Capitalization of Expenses till the included in the actual cost as capital expenditure.
date of commencement of commercial business. Correspondingly, where costs have been met
These expenses include, land and other cost directly or indirectly by the Central or State
of the assets, interest on money borrowed Government or any authority established under
for its purchase, bank charges, expenses any law or by any other person in the form of
necessary to bring the asset to site, install it subsidy or grant or reimbursement, pro-tanto
and make it fit for use, etc. The business entity amount of subsidy is required to be reduced
has therefore to choose whether to capitalize from actual costs [Explanation-10 to S.43(1)].
these pre-commencement expenses or to treat Likewise, MODVAT (now GST) on capital assets
these as revenue expenditure. Moreover, pre- allowed under Central Excise Act (GST Act) is to
commencement income of the business can be excluded from actual cost in view of restriction
also be netted out with pre-commencement imposed on claiming depreciation on the value
expenses, inter-alia to avoid taxes. of MODVAT. Instances have been discovered
where the assessee has availed double benefit
However, the above financial practices are not
on fixed assets viz. MODVAT on capital goods
in accordance with the income-tax Act. The
and depreciation on value of MODVAT.
AO should ensure that the measurement and
quantification of fixed assets is in accordance
6.1.2 Intangible Assets: Depreciation
with Section 43(1) of the Act, which defines
is also admissible on intangible assets viz.,
“Actual Cost”. Actual cost includes cost price of
know-how, patents, copy-rights, trade marks,
the assets and all expenses directly relatable to
licenses, franchises, brand or any other business
acquisition of asset, and the expenses necessary
or commercial rights of similar nature being
to bring the asset in to use by the assessee. Pre-
intangible assets, acquired after 1-4-1999.
commencement interest on borrowed capital,
We have Income Computation & Disclosure
has to be capitalized. For tax purposes, interest
Standard for tangible fixed assets as ICDS-V.
is treated as an allowable business deduction,
However, difference of opinion is bound to
as long as it is incurred in respect of capital
arise. The intangible assets are included in
borrowed and used for business.
the Balance Sheet, to obtain higher finance,
The proviso to Section 36(1)(iii) of the income- and avoid take-over through an under-valued
tax Act stipulates that: “Provided that any Balance Sheet. Therefore the intangible asset is
amount of the interest paid, in respect of capital recognised at cost when purchased individually,

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and at fair value when purchased as part of the 6.5 De-merger: De-merger in respect of
acquisition of a business separate from goodwill. Companies has been defined in Sub-Section 19
Since recognition of intangible assets affects AA of Section 2 of the Act, and means the transfer
liability side of Balance Sheet as well, the AO of one or more undertaking pursuant to scheme
should ensure proper valuation of intangible of arrangements u/s 391 to 394 of the Companies
assets. This has also a bearing on depreciation Act 1956. The cumulative conditions stipulated
and computation of taxable income. in Section 2(19AA) with other related provisions
6.2 Addition to Fixed Assets: Addition to of the Act require detailed examination by the
fixed assets is also reflected in schedule of fixed AO. It is also stipulated that cost of capital asset
to the resulting company shall not exceed the
assets to Balance Sheet. The AO should examine
WDV of such assets in the hands of demerged
whether addition to fixed assets are in the
Company. Therefore book value as per Balance
nature & character of current repairs as covered
Sheet, and WDV as per IT Act needs to be
by Section 31 of the income-tax Act,1961 or
examined in depth, for correct computation of
alternatively is of a capital nature, eligible for
taxable income.
depreciation u/s 32 of the Act.
6.6 Depreciation: Tax-planning through
6.3 Reduction in Fixed Assets: Fixed
“depreciation” is a common practice, because
assets, can be classified into depreciable assets
of favourable treatment of depreciation in the
and non-depreciable assets. Land and motor
IT Act vis-á-vis the Companies Act. Under the
cars manufactured outside India (except for
Companies Act, depreciation is provided on
specified purposes) are non-depreciable assets,
days basis. Therefore, book depreciation is
as per Section 32 of the I.T. Act. For depreciable
always less than depreciation under the IT Act.
fixed assets reduction in value has, twin effects
Many assessees use “depreciation devices”
viz. - (i) reduction in block of assets by sales
as their tax-planning tool. Again, higher
consideration and thereby resultant reduction
depreciation than strictly permissible under the
in depreciation; and (ii) working of short term
I.T. Act may be charged during profitable years
capital gain, u/s 50 of the Act. Moreover, w.e.f.
and such excess may be written back during lean
1.4.2000, by amendment in Section 45 (1A), any
years to “smoothen out” the profits. A shift in
profits or gains arising from insurance money on
the depreciation policy from WDV method to
account of destruction or damage of any asset
straight line method (SLM) is also used to adjust
due to either convulsion of nature or action of
book profits, to defeat provisions of Sections
men, is now taxable.
115 JA/ 115 JB of the Act.
6.4 Amalgamation/ Merger/ De-merger:
6.6.1 There are two methods of depreciation in
Fixed Assets, acquired in amalgamation/ merger
the IT Act.
require detailed examination, as to whether
the provisions of lock-in period of 8 years in i. Straight line method (SLM)–for power
the scheme of merger/ amalgamation have units: Depreciation can be claimed by
been complied with. After the effective date of power units on SLM at the rates prescribed
amalgamation/ merger, the depreciation is to be in Appendix 1A to I.T. Rules. The aggregate
allowed to amalgamating company. Moreover, depreciation cannot exceed the actual
provisions of Section 45 (Capital gains) are cost. Alternatively, power units can also
also attracted in case of violation of restrictive claim depreciation on WDV basis, after
conditions of Sections 45, 47A, 49, 50 & 50 A & exercising option before the due date of
50 B of the Act. furnishing return of Income.

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ii. Written Down Value (WDV)-for other 6.7 Mis-use of Depreciation Provisions:
units: For all other assets, the only method While investigating the Balance Sheet in general
available for claiming depreciation is and fixed assets in particular, the AO should
written down value and not SLM [Section examine the following devices, resorted to by
32 (1) (ii) of the Act]. assessees.
6.6.2 The depreciable assets have been 6.7.1 Multiple Financing: The source of
classified as “block of assets” u/s 2(11) of the finance for acquisition of fixed assets, may
Act. As per Section 2(11) of income -tax Act, be own funds, loan funds, lease finance or
1961 block of assets means a group of assets hire purchase finance or any other mode of
falling within the same class of assets it contains; financing. Instances exist, in which the assessee
uses the same asset as security for obtaining
a. Tangible assets, being buildings, machinery
multiple finances, i.e. the asset purchased
and plant or furniture
through term loan, may also be got financed
b. Intangible assets, being know how, by a Leasing Company, and even through Hire
patent, copyrights, trademark, license and purchase transaction. This is done to finance
franchise or any other business. other activities for which funds are not available
The rate of percentage of depreciation is from Bank. AO should therefore, examine allow
prescribed in the I.T. Rules. A block of assets ability of depreciation to the right assessee, and
includes assets of all units of assessee having the allow ability of interest expenses as revenue
same rate of depreciation. The AO must classify expenditure.
the schedule of fixed assets into various blocks 6.7.2 Existence/ Genuineness of
as required u/s 2(11) of the Act. Depreciable Assets on which Higher
6.6.3 Instead of providing depreciation on the Rate of Depreciation is Allowed: As per
basis of days (as under the Companies Act 1956), provisions of IT Act , there are many assets on
depreciation under the IT Act is admissible at full which depreciation is allowed at higher rate
rate, if the asset has been used for 180 days or such @50% or @ 100% such as, Windmills,
more, and half rate if it has been used for less gas cylinders, pollution control equipments,
than 180 days. Therefore, AO should examine temporary wooden structures, etc. Therefore,
the correct date when a depreciable fixed asset investigation regarding existence of such assets
was first put to use. becomes necessary. In cases of large claims of
such depreciation, survey on the limited point
6.6.4 The Written Down Value of block of
for verification of fixed assets may be carried out
assets is to be worked out as per Section 43(6)
by AO. Usually, in the years of high profitability,
of the Act, for each year.
assessees may plan acquisition of assets eligible
6.6.5 The assessee may be a beneficial for 50% or 100% depreciation. In leasing
owner of the asset, used for the purpose of transactions, instances have been noticed,
business and need not be legal owner. In such where entirely false depreciation claims was
circumstances, a lessor is allowed depreciation made, though no physical asset existed, or was
though the leased assets may not be used by put to use.
the lessor. The AO should also examine the
transactions of SALE & LEASE BACK, to check 6.7.3 Excess Claim of Depreciation:
the misuse of depreciation provisions. Likewise, Instances also exist, where the assessees, having
in Hire-purchase transaction, the hire purchaser taken MODVAT on capital goods, also claimed
is allowed depreciation. depreciation on total cost including MODVAT.

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6.7.4 Multiple Dip: This means claiming cost price shown. Some assessees debit to their
depreciation by more than one assessee on revenue accounts, the salary and expenses of
the same asset, inter-alia by misuse of various staff engaged in construction work over new
provisions of laws. To illustrate, an asset obtained units, because in that manner the assessee gets
through Lease financing can be used by the an immediate deduction for that part of the
Lessor to claim depreciation, and by the Lessee cost, rather than getting it as depreciation over a
treating it as acquired through hire-purchase number of years. This aspect may be looked into
finance. AO should therefore examine the legal/ when a new unit is being setup. Some assessees
contractual documents and cross – verify the recover the cost of fixed assets from customers
transactions with each party. Moreover in cross- in one manner or the other. For example, in the
border transactions multiple-depreciation in case of electricity undertakings, bulk of the cost
the form of “multiple dip” can be structured to of the service line is recovered from the consumer
generate super profits, in tax-haven countries. and this aspect should be kept in mind, while
6.7.5 Off-Balance Sheet Fixed Assets: examining the claim of depreciation.
In a typical lease transaction, the Lessee is not 6.8 Capital Work-in-progress (CWIP):
required to show leased asset on it’s Balance Capital work-in-progress (CWIP) is considered part
Sheet, which is shown “on Balance Sheet” by of the fixed assets, and is required to be presented
the Lessor. Therefore, in the Balance Sheet of in the Balance Sheet under the head fixed assets
Lessee, the lease transactions are declared in as a sub-head. The CWIP includes, specific
notes to the account. The AO should therefore fixed assets under construction, and unallocated
examine the notes to Accounts, for allowing expenditure during the construction period. CWIP
lease rentals, as revenue expenditure. In case of also includes, advances on capital account.
purchases of windmills and cylinders, instances
have been noticed that the same asset has been 6.8.1 Usually, no detailed investigation of CWIP
given on multiple-leases, sub-leases, etc and is carried out at the time of first assessment of a
eventually, the aggregate depreciation claimed new undertaking/ enhancement of capacity of
by different assessees exceeded the cost of asset. an undertaking. For the purpose of Sections 68,
The common practice is to take an asset on lease 69, 69A to 68D, proper investigation of CWIP
in years of super profits from group companies is essential, as many a times, promoters invest
and pay high lease rentals to loss-making group their unaccounted money in the project at the
company or associate company, to smoothen outset and thereafter, the same is given a colour
out the group taxable income. of loan/ debentures/ bridge finance/ subsidy,
etc. Normally no loan is available unless margin
6.7.6 Tax Deferment: A limitation of eight money from 10% to 25% of cost of project is
years has been stipulated for carrying forward brought in by the promoters, which gets reflected
of depreciation as per Section 32 (2) of the Act. in CWIP. Moreover, compliance of provisions of
Since, the introduction of Section 115JA/ JB TDS on CWIP expenditure should be examined.
(minimum alternative tax), many corporate are Further, by analyzing the CWIP, the date of setup
changing their book depreciation policy, inter- of business and the date of commencement of
alia to get around these provisions. commercial production can be conclusively
6.7.7 Capital Expenditure vs. Revenue established for examining claims of depreciation,
Expenditure: Cost of fixed assets can be as also deductions under chapter VI-A. Since
inflated for higher depreciation claims. If there other fiscal incentives, eg. subsidy, sales tax
are reasons to suspect that assets have been exemptions/ deferment, etc. are also available
over-valued, the assessee should be asked to to industries, co-relating conversion of CWIP to
produce satisfactory evidence in support of the Fixed Assets, is of importance.

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7. INVESTMENT 7.4 Income from Investments: The AO

should see that income from various investments
7.1 Part I of Sch.VI to the Companies Act, 1956
requires that investments should be distinguished has been properly accounted for. It may be
as: pointed out that the profit realized on sale of
shares and securities would be capital gain, if
i. Investment in Govt. or trust securities
the seller is an ordinary investor realizing his
ii. Investment in shares, debentures or bonds holding, but it would be revenue receipt, if he is
in subsidiary Companies. carrying on a business in shares and securities.
iii. Immovable properties 7.4.1 At times, in order to introduce cash
iv. Investment in capital of Partnership firms. in books, an assessee may show sale of a few
It is necessary to indicate the nature of investments, even though such sales may
investment, the mode of valuation viz. cost not have actually taken place. It is, therefore,
or market value, the break-up of quoted and necessary to check the genuineness of sales,
unquoted investments, and whether these are where doubts arise. Some assessees acquire
held as stock-in-trade. shares in large companies at rates higher than
the market rate, to gain effective control over the
7.2 Disclosure Requirements: Accounting
Standard-13 (AS-13) defines investments as management of such company. In such cases,
assets held for earning dividend, interest and inquiry should be made as to whether there
rentals, or for capital appreciation, or other was any agreement with the persons presently
benefits to the enterprise. Assets held as stock in in control, for acquisition of managing, selling
trade are not investmentsAS-13 defines current or purchasing agencies of the companies whose
investment as an investment which is readily shares have been purchased. If so, the AO
realisable and is intended to be held for not more should make a proper allocation of the total
than one year. Other investments are defined as consideration and treat only the amount equal
long term investment. to the market value of the shares as their cost,
7.3 Revaluation of Long Term Investments: and the balance as capital payment for the rights
When investments are classified as long- of control etc.
term investments and current investments,
it is appropriate to revalue the long-term 8. RECEIVABLES
investments like other fixed assets. Surplus 8.1 Sundry debtors” includes the amounts due
arising out of revaluation is credited to owners’ in respect of goods sold or services rendered
equity as revaluation surplus. If there is any and other contractual obligations but does not
subsequent decrease in the value of long term include loans and advances.
investments which were previously revalued
8.2 Basic classification of sundry debtors is
upward, such decrease is required to be offset
on age-wise analysis, i.e. whether they are
against revaluation reserve. In all other cases,
outstanding for six months or more than six
revaluation loss is directly charged to profit and
months. In cases of Companies, disclosure is
loss account. AO should verify the transactions,
based on security and recoverability. Separate
directly credited to Balance Sheet and not to
particulars of Sundry debtors need to be given,
Profit & Loss Account. If the earlier revaluation
classifying:
loss was charged to profit and loss account, the
subsequent revaluation profit will also have to ●● Debts considered good in respect of which
be credited to the profit and loss account. the company is fully secured.

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●● Debts considered good for which the head “Sundry Debtors”. The AO should obtain
company holds no security other than the detailed lists of sundry debtors and advances.
debtor’s personal security. Sometimes the balances with the creditors are
●● Debts considered doubtful or bad. adjusted from the total of debtors’ lists. Where
balance in creditors account is deducted it should
In cases of Companies, details of related-party be seen whether there are accounts of fresh credits
debts and the maximum amount outstanding during the year. In such cases, the nature of the
during the year, are also required to be disclosed. credits would require scrutiny. Where the debit
8.3 The provision for bad and doubtful debts is balances are particularly heavy, they may give
required to be reduced from the sundry debtors. clue to the existence of side or branch business
The provision should not exceed the amount and sustained enquiries may be necessary.
considered doubtful or bad. The AO should The AO should also verify that interest realized
examine the claim of bad-debts, and also find if from debtors has been properly adjusted to the
there are any recoveries out of bad/ good debts, Interest account.
in cash/ otherwise, outside the books, while 9.2.1 Where the capital is shown as invested,
debtors continue appearing in Balance Sheet. almost wholly or substantially, with one single
AO should also take note of the observations of
party, enquiries should be made to find out
auditors that balances out-standings of debtors/
assessee’s connection with the said party.
creditors are subject to confirmations by parties,
Sometimes the assets side of the Balance Sheet
and if necessary, invoke Section 68/ 69 of the Act.
may be found to include a large debit balance
shown as due from one debtor. The amount
9. LOANS AND ADVANCE shown as outstanding may be almost the
9.1 Although loans and advances may not be same as the capital employed in the business.
in the nature of current assets, yet Part I of the Normally, a trader is not likely to take such risk
Schedule VI of the Companies Act, includes by parting with his capital and keeping it with
“Current Assets, Loans and Advances”. Loans one single outsider. The possibility that the
and advances in the case of Companies, are alleged debtor may just be a benami concern
classified as: or a branch business or otherwise connected
i. Advances and loans to subsidiaries; with the assessee, should not be lost sight of.
ii. Advances and loans to partnership firms 9.2.2 Many times, when assessees experience
in which the company or its subsidiary is shortage of cash balance in cash book, they
a partner. show cash sales/ cash payment from debtors,
to overcome provisions of Section 269SS/T of
iii. Bills of exchange
the Act.
iv. Advances recoverable in cash or kind or
9.2.3 Many a times income are not shown
for value to be received i.e. rates, taxes,
in P& L account but are directly credited as
insurance etc.
receivables to the Balance Sheet such as
v. Balances with customers, port trust, etc. MODVAT receivables, insurance claims etc.
(where payable on demand). Netting of creditors with debtors are resorted
to with a sole purpose to thwart investigation
9.2 Investigations of Sundry Debtors, of sources of funds/ bogus creditors by the
Loans and Advances department.
The balances in the accounts of various debtors 9.3.4 The transactions of “FACTORING’
may be shown as a consolidated item under the (selling of debtors by the assessee for cash)

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and “FORFAITING” (selling of medium 10.2 Important Points Regarding

term receivables for cash) , also need to be Valuation of Stocks
analysed, to find out whether they are genuine 10.2.1 The question of valuation of stock-
transactions or not. in-process arises in the cases of manufacturing
9.3.5 The AO may work out total debtors concerns. Stock-in-process includes the material
account and check the total cash received used in the process of manufacture, and semi-
from debtors to see whether any cash credit is finished material, lying on the machines. In the
introduced in the garb of realisation of debts. case of textile mills it would include the cotton
in the blower room, the cotton or yarn on the
10. INVENTORIES spindles, the yarn and cloth on the looms and
so on. Since the stock-in-process is converted
Inventories comprise of following items - into a finished product, its value is more than
●● Stocks of raw materials the value of the raw material because some
money has been spent on its processing. The
●● Stocks of work-in-process AO should examine the list of stock-in-process
●● Stocks of Finished goods/ stock-in-trade and see whether the rate adopted from stage to
stage is commensurate with the value of the raw
●● Spares & Stores, loose tools materials and the processing expenditure.
●● Goods-in-transit. 10.2.2 Some concerns write-off a percentage of
the value of finished goods, if the goods are not
Disclosure Norms require that, the basis of
sold for a certain length of time. This percentage
valuation of inventories, as also quantitative
is progressively increased if the goods have been
details of licenced capacity, installed capacity, in stock for a longer period. This is a rough
opening stocks, purchases, production of and ready method of determining the market
finished goods/ by-products, sales and closing value of goods which are not fast-moving, and
stock, are disclosed. Valuation of inventories is provides scope for manipulating the value of
covered by ICDS-2. closing stock.
10.1 Valuation of Inventories: The valuation 10.2.3 Section 145A of the Act, requires
of closing stock has a direct bearing on profits. In inclusion of any tax, duty, cess, excise etc. in
the case of a trader, the closing stock will be of the valuation of stock and sales & purchase
of goods. The AO may also examine whether
the commodity or item that is dealt in. In the
ICDS-2 is complied with. Any change in method
case of a Manufacturing concern, the closing
of valuation of inventory has to be examined
stock will comprise of raw materials, stock in
in detail by AO to determine the true taxable
progress, finished goods and by-products. In income of the assessee. The Supreme Court, in
case of concerns engaged in construction work, CIT vs. British Paints India Ltd. (1991) 188 ITR
there will be “Work-in-progress.” The stocks can 44 (SC), has held that, any system of accounting
be valued either–at cost; or at market rate; or at which, for valuation of the stock, excludes costs
cost or market rate whichever is lower. Market other than the cost of raw materials for the
value means the price at which the goods goods in process and finished goods, is likely to
could be purchased by the trader in the market. result in a distorted picture of the true state of the
Where, however, stock-in-hand has become business.
damaged, such stock can be valued at the figure 10.2.4 Valuation of a capital asset when
representing the price at which it can be sold. converted into stock-in-trade, is to be done at

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market price. In the event of dissolution of a of certain transactions/ events as “deferred

firm, valuation of stocks is to be carried out at expenditure” are given below:
“market price” only, as held in the case of ALA
i. Compensation agreed upon to terminate
firm vs. CIT, 189 ITR 285 (SC).
the services of employees under voluntary
11. CASH & BANK BALANCES retirement scheme can be treated as
deferred expenses and written off over
In the Balance Sheets of a Company, cash in a period of 5 years or earlier. But,
hand as also cash with scheduled bank and gratuity, pension, and other retirement
non scheduled bank and post office, is to be benefits, which constitute the termination
shown separately. This is mainly to indicate expenditure payable otherwise than on
safety of funds, and any related-party interest, in premature termination, should not be
maintaining such balances with a non-scheduled
treated as deferred expenditure.
bank.
ii. Para 10.1 of the statement of Auditing
12. MISCELLANEOUS EXPENDITURE Practices explains that “If a future period
Miscellaneous expenditure is shown in Balance will receive benefit from the outlay, the
Sheet to the extent not written off or adjusted. It proper portion of the deferred charge
is classified as under - should appear on the Balance Sheet….”

●● Preliminary expenses; iii. Debenture discount or debenture issue

expenses should be written off over the
●● Expenses including commission or
maximum period for which the debentures
brokerage on underwriting or subscription
remain outstanding. In general deferred
of shares and debentures.
expenditure should be written off over a
●● Discount allowed on the issue of shares or period of 3–5 years.
debentures;
iv. Preliminary expenses normally include
●● Interest paid out of capital during legal costs in drafting the Memorandum
construction (also stating rate of interest) and Articles of Association, Capital duty
●● Development expenditure not adjusted and other fees on registration of the
company. Cost of printing, Memorandum
●● Other items (specifying nature)
etc, and any other expenses incurred to
bring into existence the corporate structure
13. DEFERRED REVENUE
of the company.
EXPENDITURE
Deferred Revenue expenses are shown under v. Indirect expenses incurred during the
this head separately and written off over a construction period, which do not have
period of 3–5 years. ICAI “Guidance Notes any connection with the construction,
on terms used in the Financial Statements” cannot be capitalized. These expenditure
defines “deferred revenue expenditure”, as the can, however, be treated as “deferred
expenditure for which payment has been made revenue expenditure” and written off over
or a liability incurred but which is carried forward a period of 3–5 years after the commercial
on the assumption that it will be of benefit over a production commenced.
subsequent period or periods. vi. Special advertisement expenses for
13.1 Some important indications (as contained launching a new product can be treated as
in various documents of ICAI) for identification deferred expenditure.

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Normally, above expenses are capital in nature, 14.3 Bonus Shares: In case of issuance
but income-tax Act treats some of these expenses of bonus shares, details of shares held (i) by
as revenue expenditure to be allowed as directors, and (ii) by others, is to be disclosed.
deduction by way of amortisation of preliminary Besides, the source from which bonus shares
expenses u/s 35 D of the Act. are issued is to be indicated. It may be from
free reserves, realized capital profit (excluding
14. LIABILITY SIDE revaluation reserve, which is not realised as
capital profit) or from share premium account
Liability side of a Balance Sheet has following balance.
groupings:
14.4 Particulars of ‘options’, if any, on unissued
●● Capital share capital are to be given, Para 8.11 of the
●● Reserves & Surplus statement on Auditing Practices (Third Edition,
ICAI) explains that an option on shares arises
●● Secured Loans
when a person has acquired a right under an
●● Unsecured Loans agreement with the company to subscribe for
●● Current Liabilities & Provisions. shares in the company, if he so chooses.

Capital Structure of Companies 14.5 Share Application Moneys: Until

allotment is made any amount received by
14.1 Types of Shares: Companies can issue the company against issue of shares should
two types of shares, namely, equity shares and not be shown as “Subscribed Capital”. Share
preference shares. Preference share capital of a application moneys and call money received
company means the share capital that carries in advance, require to be transferred to Share
preferential right as regards dividend as well Capital account in due course , except in two
as repayment of capital including premium, situations, should be shown between “Share
if any, on winding up. It will be deemed to be Capital” and “Reserves and Surplus”. Two
preference share capital although there is a right exceptions are (a) invalid or revoked applications
to participate in surplus as regards dividends or and (b) excess application moneys received due
repayment of capital on winding up in addition to over- subscriptions which should be shown
to the preferential right as regards dividend/ under “Current Liabilities”. Any refunds due
repayment of capital on winding up (Section against the rejected share applications should be
85 of the Companies Act). Equity share capital shown under the head “Current Liabilities and
means all share capital which is not preference Provisions “
share capital.
14.6 Redemption of Redeemable
14.2 Altering Share Capital: A company Preference Shares: A company can issue
can alter its share capital by (a) Issuing new redeemable preference shares which are
shares, (b) Consolidating and dividing all or any redeemable within a period of ten years from
of its share capital into shares of larger amount, the date of issue. Only fully paid-up preference
(c) Converting all or any of the fully paid up shares can be redeemed. A Capital Redemption
shares into stock and reconverting stock into Reserve is to be created if the redeemable
fully paid up shares of any denomination, (d) preference shares are redeemed out of balance
Cancelling shares (Section 94 of the Companies of Profit and Loss account or balance of free
Act), (e) Buy-back of shares, (f) Call-option/ put- reserve. The capital Redemption Reserve can
option rights. be utilised for issuing fully paid-up bonus shares

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to the extent of unissued share capital of the 14.10 Shares-in-kind: Shares are sometimes
company. allotted by companies for consideration other
than cash. The break-up of Paid up Capital
14.7 Conversions: Presently, many new
and the number of shares issued as fully paid to
innovative Debt instruments have emerged in
vendors and others for consideration other than
the capital market. Many such debt instruments
cash, pursuant to contract, will show persons
include convertible Clauses. If a company
who are interested in the company and may
issues fully/ partly convertible debt instruments, reveal controlling interest. Foreign companies
it is necessary to disclose by way of notes, the are sometimes allotted shares in consideration
particulars of the conversion and effect of the of supplying technical know-how, plant and
conversions on the future capital structure of the machinery etc. The question of taxing the profit
company for transparency. element on the sale of such plant and machinery
14.8 Conversion of Partnerships into and supply of the technical know-how should
Companies: In case of non-corporate entities, be carefully considered. When the company has
detailed analysis of movements in capital raised capital, it should be seen that expenses
accounts is necessary. Often, with a view of connected therewith are disallowed.
avoid stamp duty, capital gain etc., partnership 14.11 New Financial Instruments-
firms are converted into Part IX Companies (Part Deferred Capital: In the era of liberalization,
IX of the Companies Act) and large amounts are new financial instruments for financing business
credited in partners’ capital account, as issue of operations have been introduced such as -
shares for non-cash items, through revaluation ●● Warrants
of assets.
●● Convertibles
14.9 New Share Capital: In the case of
●● Stock Option to Employees/ Directors
companies, the AO should carefully examine
the total amount of ‘paid up’ capital and shares ●● Derivatives
issued for consideration other than cash. For ●● Buy-Back of Shares
the first assessment year (and subsequently
when there is accretion to capital), the AO ●● Stock – Splits
should obtain details about the subscription of ●● Global Depository Receipts [Gdr/ Adr]
capital with names, addresses and amounts, ●● Stock – Dividends
and pass the same to the AO having jurisdiction,
for enquiries whether the persons in whose ●● Optionally Convertible Debentures
names shares have been allotted are genuine ●● Perpetual Non-Convertible Debentures
shareholders or benamidars for somebody else. (“PNCDs”) or Hybrid Bonds,
A list of shareholders thus obtained, will give an
At the time of issue of some of the above
idea as to the real persons controlling the affairs
instruments, no cash in-flow is received by the
of the company. If there is a suspicion about
company, but cash (conversion in to share
introduction of nominees, the AO may study the
capital) is received at later date. The question as
applications made by such shareholders, and also
to whether the expenditure incurred for issuing/
examine the manner of payments made by the converting these instruments is CAPITAL OR
subscribers. Sometimes a uniform handwriting REVENUE is also to be examined by AO.
on all application forms may provide some clue,
after which a detailed probe may be necessary 14.12 Capital introduction-Section 68:
to show that the shareholders are not genuine. The increase in capital is normally invested

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by investors/ promoters. Instances have been 14.14 Introduction of Share Capital

noticed, where promoters used following devices through Bogus/ Paper Companies: Routing
for introducing unaccounted income in the guise the unaccounted income back to the books of
of share capital, and where provisions of Section account disguised as loan or share capital is
68 were applied - widely used by the tax evaders. The process to
bring the money back in this manner is commonly
●● Bogus NRI gifts
known in business parlance as Jamakharchi
●● Global Depository Receipts/ American entries or accommodation entries. This is a well
Depository Receipts organized racket controlled and conducted by
●● Under-invoicing/ valuation of import persons known as entry providers. Investigation
and over-invoicing of exports to misuse wings of Kolkata, Mumbai, Delhi, Ahmedabad
VABA L (Value-Based Advance license) and of other cities as well have, from time to
& QABAL (Quantity-Based Advance time, conducted search and seizure operations
license) against such entry operators. There are data
base of such entry operators and companies
●● Introduction of Share Capital through operated by them with these Investigation
Bogus/ Paper companies Wings. The AO may also get assistance of the
The AO should in case of need take help from respective Investigation Wings, if the volume
the Foreign Taxes Division (FTD), of CBDT to or amount of such transactions is found to be
investigate the genuineness and veracity of substantially high.
NRI/ NRE Gifts, and “Hawala” transactions. 14.15 Perpetual Non-Convertible
Moreover, GDR/ ADR issues are also used as Debentures (“PNCDs”) OR Hybrid Bonds:
money-laundering devices. Generally, there is Of late, a number of large companies and
a scramble to buy new issues of GDRs, as they banks are issuing “Perpetual Bonds”. These
are quoted below par. They are largely bought bonds are also listed on NSE/ BSE under
by the foreign nominees of the same company. the debt segment. The AO needs to carefully
In this manner, black money is converted into examine the issue of allowability of interest
white. Later, such deposits are converted into payment of these bonds in view of typical
shares. By examining the trend of share prices nature of the perpetual bonds which is akin
in the share market, the AO may investigate the to equity.
company as also the promoters in detail because
instances have been noticed where promoters Perpetual bonds are the bonds with no maturity
have used their unaccounted money for “PRICE date. Which means the investor (bondholder)
–RIGGING” in the share markets. do not get the right to redeem the bonds at
any point of time. Only the issuing company
14.13 Building Capital through Circular can take back i.e. buy back the bonds from the
Transactions: In an era of booming capital investors. Thus the call option is with issuer and
market and control of public issues by SEBI, not the investor which makes it different than the
corporate assessees often resort to the device debt or borrowing because in the case debt or
of building share capital through circular borrowing the authority and right to call vests
transactions of shares and corresponding amount (even if it is dependent on certain conditions)
of paper transactions of loans & advances. It is with the payer. To indemnify the fact that the
necessary to examine the genuineness of such bond holder can normally not redeem their
circular transactions, so as to find out correct investment – the issuer company pays higher
capital, and to disallow interest claims. returns to the investors. Once the bond is sold,

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the rights of future profit and benefits passes to appropriated by the management for a general
the new bond owner. or specific purpose other than a provision for
The main purpose of issuing perpetual bond depreciation or diminution in the value of fixed
is to show a healthy Balance Sheet with better assets or for a known liability. “Capital reserve” is
debt to equity ratio and better profit. Normally, reserve, which is not available for distribution of
the accounting treatment of perpetual bond and dividend. Revenue reserve is any reserve other
interest pay out on the same is as under: than capital reserve. Profit on sale of fixed assets
and investments are considered as revenue
i. The amount of perpetual Bonds is not
reserve since such profit is credited to profit and
shown in the Balance-Sheet of the assessee
loss account, as per provisions of Companies
as debt or borrowing. It is shown below
Act and prevailing practices.
share capital and above non-current &
current liabilities. 15.2 Types of Reserves and Surplus:
Reserves/ surplus are classified as follows:
ii. The returns (interest) on Perpetual Bonds
is not charged to Profit & Loss account i. Capital Reserve
under Financial cost. ii. Capital Redemption Reserve.
iii. The return is taken as post-profit iii. Share Premium Account.
distributions in the financials that prima
facie signifies that it is application of profit iv. Other Reserves specifying the nature of
or income. each reserve and the amount in respect
thereof.
Hence, from the accounting treatment given to
this transaction prima facie its appears that the v. Surplus, i.e. balance in profit and loss
Perpetual Bonds are in fact equity in disguise. account after providing for proposed
Moreover, the interest pay out or return on allocations, namely , Dividend, Bonus or
perpetual bonds can therefore be claimed only reserves
in the computation of income separately. Since vi. Proposed additions to reserve
this pay out is reduced after post tax profit like
dividends, this itself prima facie shows that the vii. Sinking Funds
characterization of the perpetual Bonds in the 15.2.1 Share Premium Account: Details
books of assessee is akin to equity. of the utilisation of the balance of the share
Thus, prima facie the interest payment on such premium account are to be given. The manner
perpetual bond should not be allowable as in which this is to be utilised, is specified in
expenditure. The AO should study the terms Section 78 of the Companies Act. This balance
and conditions for issuing such bonds to arrive can be used for - (i) paying up unissued shares
at conclusion as to allowability of interest on the of the company as fully paid up bonus shares,
same as business expenditure. (ii) writing-off the preliminary expenses, (iii)
writing-off the balance of commission/ discount
15. RESERVE & SURPLUS allowed/ paid on issue of shares/ debentures,
(iv) providing for the premium payable on the
15.1 Reserves are classified into (i) Revenue
redemption of preference shares. AO should
reserve, and (ii) Capital reserve. ‘Guidance
therefore examine the utilization especially, for
note on terms used in Financial Statements’
ascertaining liability u/s 41 of the Act.
issued by the ICAI defines “Reserve” as the
“portion of earnings, receipts or other surplus 15.2.2 Sinking Fund: The word “fund” can
of an enterprise (whether capital or revenue) be used after a reserve only if there is a specific

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investments against such reserve. Therefore, an admissible deduction. The various accounts
there must be specific investments against the for reserves should be checked to see what
sinking fund. amounts have been added or withdrawn during
15.2.3 Taxation Reserves: Reserves like the year. Sometimes the reserves might be
investment allowance reserve, development directly credited by debiting certain accounts like
allowance reserve (for tea companies), foreign sales, interest etc. Copies of Reserve accounts
project reserve/ export incentive reserve, foreign should, therefore, be obtained and the credits
exchange earning reserve, etc., created as per and debits should be carefully scrutinized. Debits
income-tax Act, are required to be maintained to the reserves should be studied with reference
for a specified period. So long the specified to their purpose.
period is not over, such reserve cannot be treated Sometimes the value of the assets may be written
as free reserve for the purpose of distribution of down and decrease adjusted against reserve
dividend without additional tax liability. If any account. Similar will be the position with regard
transfer is made from such reserves without to appreciation. Sometimes this adjustment
complying with the requirement of the income- is directly done through reserve account and
tax Act, the AO should invoke requisite income- will appear in the Balance Sheet without being
tax provision. reflected in the Profit & Loss account.
15.2.4 Subsidy Reserve: If Government
It is in relation to current assets that the dangers
grants are received against capital assets, it is
of secret reserves are greater. Matters such as
possible to follow gross approach for accounting
over-provision for doubtful debts, excessive
purpose. Under the gross approach, the fixed
writing-down of stocks, over-provision for
assets are shown at cost and the related grants/
liabilities and writing off of stores, present a
subsidy is transferred to Subsidy Reserve.
difficult problem because these manipulations
15.2.4 Revaluation Reserve: In case of will materially distort the statement of profit
revaluation of fixed assets if there is a net gain, without any disclosure of what has been done. It
such gain is transferred to Revaluation Reserve. should be seen whether the provision in respect
It is not permissible to issue bonus shares out of of liabilities, writing-down of stocks etc. has been
revaluation reserve. It is a common practice to done in a reasonable manner.
take transfer from the Revaluation Reserve for
The AO should also examine the transactions in
the additional depreciation charge arising out of
Share forfeited a/c and consequent creation of
revaluation.
reserve in view of the decision of the Hon’ble
15.2.5 Debenture Redemption Reserve Supreme Court in the cases of CIT vs. T.V.
(DRR): It is a reserve created for redemption of Sundaran Iyengar & Sons Ltd. 222 ITR 344 (SC)
debentures at a future date. It is necessary create and CIT vs. Karamchand, Thapur, 222 ITR 112
DRR in terms of Section N of the SEBI Guidelines (SC) that - “The principal amount initially not
for Disclosure and Investors Protection (issued received as trading receipt can become trading
on 11.06.1992). receipt subsequently”. Further any profit/ reserve
15.3 Examining Reserves: The Reserve related for pre-incorporation period of Company
account should be examined to see how it is not assessable as income in the hands of the
was created and whether there has been any Company as Company doesn’t exists before its
appropriation out of the reserve. Reserves created incorporation (CIT vs. City Mills Distributors
out of Profits & Loss Account are obviously not Pvt. Ltd. 219 ITR-1 (SC).

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16. SECURED & UNSECURED LOANS iii. Short term loans and advances - from
banks; and from others
16.1 SECURED LOANS: Loans secured
wholly or partly against an asset is secured
loan. Where the value of the security falls 17. CASH CREDITS/ BENAMI
below the amount of loan, the loan becomes TRANSACTIONS
partly secured. Unsecured portion of that loan 17.1 It is obligatory for a Company to specify
should be classified under the head “ Unsecured the nature of the security offered for obtaining
Creditors”. Secured loans are classified as
a secured loan. Quite often overdrafts from
follows:
banks and other loans are secured by Directors
i. Debentures of the company or by partners of firms. In
ii. Loans and Advances from banks. such cases, the AO having jurisdiction over
the Director(s) or Partner(s) must be informed
iii. Loans and Advances from Subsidiaries
so that he may make appropriate enquiries at
iv. Other Loans and Advances his end. Often the assessees take an overdraft
16.1.1 Loans and Advances from Banks: from Bank or genuine loans from other parties
Secured overdraft from banks (like overdrafts on the security of investments, stocks or other
secured by hypothecation of stores, stock- assets not stated at all or under-stated on the
in-trade and book debts and guaranteed by Assets side of the Balance Sheet. The AO has
another company) is classified under the sub- to find out the security for the loan and whether
head “Loans and Advances from Bank”. the same is adequately explained with reference
16.1.2 Loans from Directors and managers to the books of account. Undisclosed income of
should be shown separately. AO may apply an assessee may be brought into the books in
provision of Section 2 (22) (e) of the IT Act in the names of fictitious persons by way of loans.
appropriate cases. If the Loans are guaranteed Often these accounts are squared up before the
by the directors or managers, it is required to end of the accounting year and may not figure
mention the guarantee and the amount of loan in the Balance Sheet. Copies of these accounts
under each head. Nature of Security also needs
should be obtained and forwarded to the AO
to be specified.
assessing the lenders. If there is any doubt or
16.1.3 If the assets are mortgaged in favour of suspicion, the AO should summon the lenders
a third party who guaranteed the loan, such loan and examine them before accepting the loans as
should be classified as Secured Loan. The fact genuine.
of mortgaging the assets in favour of guarantor
(instead of favouring the lender) should be 17.2 Disallowance of Interest/ taxes/
disclosed. duties: On examination of P&L and Balance
Sheet along with cash flow statement, AO may
16.2 Unsecured Loans: Unsecured loans are
those loans which are not secured by mortgage examine the applicability of Section 43B, in
of assets. Unsecured portion of the partly secured respect of borrowings from financial institutions
loan should be classified as unsecured loans. and banks, etc. Interests on borrowed funds
Unsecured loans are classified as follows: diverted for non-business purposes, will also
have to be disallowed. Repayments of loans also
i. Fixed Deposits
requires examinations regarding compliance
ii. Loans and Advances from subsidiaries with Section 269SS & 269T of the Act.

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18. CURRENT LIABILITIES & respect whereof has been dispatched but has not
PROVISIONS been encashed by the shareholder concerned”.
18.1 Current liability includes loans, deposits
and bank overdraft which falls due for payment 19. PROVISIONS
in a relatively short period, not more than twelve 19.1 The term “Provision” is defined as
months. However, short term secured and “an amount written off or retained by way of
unsecured loans are not considered as current providing for depreciation or diminution in value
liability. Current liabilities are classified as under: of assets or retained by way of providing for any
18.2 Acceptance: ICAI Guidance Note on known liability the amount of which cannot be
terms used in Financial Statements (Para 1.02) determined with substantial accuracy”
defines ‘Acceptances’ as “the drawee’s signed 19.2 Provision for Taxation: Some
assent on bill of exchange, to the order of the companies adjust advance tax paid against
drawer”. provision for taxation. Others present total
18.3 Sundry Creditors: Sundry creditors provision for taxation under the sub-head
are represented by the amount owed by an “Provision” and the advance tax under the head
enterprise on account of goods purchased or “Current Assets, Loans and Advances.”
services received or in respect of contractual
19.3 Provision for Provident Fund and
obligations . Sundry Creditors are also called
other Retirement Benefits: Employees
‘accounts payable’ or ‘trade creditors’. In the
common parlance, creditors are classified as contribution for provident funds, gratuity,
trade creditors and expense creditors. So all pension and other retirement benefit schemes
the outstanding payments on account of goods should be provided for on accrual basis.
and services including those are commonly 19.4 Provision for Contingencies: Para 4.1
understood, as expense creditors are classified of AS-4 (Revised) “Contingencies and events
as trade creditors. occurring after the Balance Sheet date” issued
18.4 Subsidiary Companies: Any by the ICAI has defined the term “contingency”
outstanding to a subsidiary company on current as “a condition or situation, the ultimate
account for purchase of goods or services, any outcome of which, gain or loss, will be known
advance received from a subsidiary for supply or determined only on the occurrence, or non-
of goods and services, and any other short term occurrence of one or more future events” . Paras
due to subsidiaries, which are not in the nature 10 and 11 of AS-4 (Revised) suggests to provide
of loans, are classified under this sub-head. a reasonable amount for the contingencies by
18.5 Advance Payments and Unexplored way of charge to Profit and Loss Account if, it is
Discount: Any payments received in advance probable that future events will confirm that, an
against which goods are to be supplied or services asset has been impaired or a liability has been
are to be rendered in short run (i.e. within 12 incurred. Otherwise, the existence of contingent
months), eg., advances from customers, dealers liabilities should only be disclosed.
etc. 19.5 Provision for Loss in the Value of
18.6 Unclaimed Dividend: Para 17.02 of the Investments: Sometimes market value of
ICAI Guidance Note on Terms used in Financial investments of a permanent nature declines. If
Statements, defines “unclaimed dividend” such decline in the market value is not of the
as “Dividend which has been declared by a temporary nature, there is a need for providing
corporate enterprise and a warrant or a cheque in for such loss.

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20. SOME ISSUES RELATING TO of years on account of unpaid purchase

INVESTIGATION OF LIABILITIES price, verification should be made.
SIDE iii. Another assessee used to deposit surplus
20.1 Sundry Creditors and Loans money in short-term deposits with banks.
Detailed examination of the cash book
i. The Liabilities side of the Balance Sheet
showed that the assessee had allegedly
should be examined to see whether
encashed on a certain date a short-term
incomes from undisclosed sources have
deposit of Rs. 50,000. A comparison of the
been directly credited to Personal Accounts
books of account with the bank statements
(in known names or in the names of
revealed that the deposit was still lying
benamidars). The AO should be watchful
with the bank and had not actually been
for credit balances in uncommon and
encashed. This indicated that the assessee
unusual names. If a balance is appearing
was keeping monies outside the books of
on the Liabilities side of the Balance Sheet
account, which he was bringing into the
in the name of any party for several years
books as and when necessary.
an enquiry is called for to ascertain if that
balance is genuine or fictitious. 20.2 Provisions: A break-up of these items
ii. Sometimes fictitious purchases can be should be obtained. If the assessee has got
detected by examining a Balance Sheet remission of liability, applicability of Section
carefully. The inflation in purchases is 41(1) of the Act should be examined. Care should
resorted to by passing credit entries in be taken to see that contingent liabilities or any
the personal accounts of some persons, over-provision in respect of existing liabilities is
with corresponding debits to the Purchase not made by debit to P&L Account. If there are
account. As the credit is fictitious, no any reserve account, Uchanti account, Suspense
payment has to be made against it. As Account and other accounts of like nature, a
a result such credit balances are carried proper scrutiny of the real sources of important
forward. Therefore, whenever any liability receipts and destination of important payments
appears in Balance Sheet for a number should be made.

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 Chapter

11
Income Computation and
Disclosure Standards
1.
An Accounting Standard (AS) is a common set of
principles, standards and procedures that define
the basis of financial accounting policies and
practices. They are the written policy documents
issued by the Government or a regulatory
body covering the aspects of preparation and
presentation of a financial statement. They are
the framework and guidelines for maintaining
books of accounts for an organisation.

2. OBJECTIVES OF ACCOUNTING
STANDARDS the recommendations made by the National
The primary objective of AS is to harmonize Financial Reporting Authority. Till the National
different accounting policies which are used in the Financial Reporting Authority is formed, the
preparation of financial reports. The accounting Central Government, in consultation with
standards are issued to put an end to the non- National Advisory Committee on accounting
comparability of financial statements and to standards, has made Companies (Indian
increase their reliability. In India, AS are issued Accounting standard) Rules, 2015. As per the
under the supervision and control of Accounting said Rules, Indian Accounting Standards (Ind-
Standards Board (ASB). It is a committee formed AS) shall be applicable to certain classes of
under the Institute of Chartered Accountants Companies specified in rule 4.
of India (ICAI) consisting representatives from 2.2 For organisations other than those registered
Government department, academicians and under the Companies Act, 2013, AS issued by
professional bodies like ICSI, CII, FICCI etc. the ICAI will be applicable.
2.1 For Companies incorporated under the
Companies Act, 2013, Section 133 of the 3. ACCOUNTING STANDARDS
Companies Act, 2013 has given the powers UNDER THE INCOME-TAX ACT,
to the Central Government to prescribe the 1961 (THE ACT)
accounting standards as recommended by ICAI Section 145 of the Act, provides that taxable
in consultation with and after examination of income of an assessee falling under the heads

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“Profits and gains of business or profession” or be based on ‘book profit’ determined in

“Income from other sources”, shall be computed accordance with currently applicable AS.
in accordance with either cash or mercantile ●● ICDS is applicable to all taxpayers
system of accounting which is regularly employed (corporates/ non-corporate or resident/
by the assessee. It further provides that the non-resident) irrespective of turnover or
Central Government (CG) may notify, from quantum of income.
time-to-time, Income Computation & Disclosure
Standards (ICDS) to be followed by any class of ●● The preamble of each ICDS clarifies that
taxpayers or in respect of any class of income. (a) ICDS is applicable for computation
of income and not for the purposes of
3.1 The Central Government vide notification 2
maintenance of books of account; and (b)
dated 31st March, 2015 has notified 10 ICDS for
In case of conflict between the provisions
compliance by all assessees following mercantile
of the Act and ICDS, the provisions of the
system of accounting w.e.f. 1st April, 2015. Act shall prevail to that extent.
These ICDS supersede following two standards
earlier notified in 1996: ●● All ICDS (except ICDS VIII relating to
Securities) contain transitional provisions
Tax Standard I – Disclosure of accounting policies
which, in general, provide for recognition
Tax Standard II – Disclosure of prior period and of outstanding contracts and transactions
extraordinary items and changes in accounting as on 1st April, 2015 in accordance with
policies. ICDS after taking into account income/
expenditure/ loss already recognised
3.2 Certain key highlights of ICDS, amendments
in the past periods. Thus, there is no
carried out in Finance Act, 2015 at enactment
‘grandfathering’ for outstanding contracts
stage and differences between ICDS and existing
or transactions as on 31st March, 2015.
Accounting Standards (AS) are discussed
hereunder: ●● Non-compliance of ICDS empowers
. DSD Tax Authority to assess income on ‘best
●● ICDS shall apply for computation of
judgment’ basis. Any additions to income
income chargeable to income-tax under
declared in return of income may also
the head “Profits and gains of business
have potential penalty implications.
or profession” or “Income from other
sources”. Accordingly, ICDS has no impact 4. A comparative list of ICDS notified with effect
on minimum alternate tax computation for from 01 April 2015 and comparable AS issued
corporate assessees which will continue to by ICAI is as under:

Sl. No. ICDS Comparable AS

Disclosure of Accounting Policies (AS 1)
1. Accounting policies (ICDS I) Net profit or loss for the period, prior period items and
changes in accounting policies (AS 5)
2. Valuation of inventories (ICDS II) Valuation of Inventories (AS 2)
3. Construction contracts (ICDS III) Construction Contracts (AS 7)
4. Revenue recognition (ICDS IV) Revenue Recognition (AS 9)
Accounting for Fixed Assets (AS 10)
5. Tangible fixed assets (ICDS V)
Depreciation Accounting (AS 6)
Effects of changes in foreign exchange
6. The Effects of Changes in Foreign Exchange Rates (AS 11)
rates (ICDS VI)

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7. Government grants (ICDS VII) Accounting for Government Grants (AS 12)

8. Securities (ICDS VIII) Accounting for Investments (AS 13)

9. Borrowing costs (ICDS IX) Borrowing Costs (AS 16)

Provisions, contingent liabilities and Provisions, Contingent Liabilities and Contingent Assets
10.
contingent assets (ICDS X) (AS 29)

5. COMPARISON BETWEEN ICDS AND AS

ICDS –I ‘’Accounting Policies”
AS -1 “Disclosure of Accounting policies”
Scope: Deals with Significant Accounting Policies and in Line
Scope:Deals with Significant Accounting Policies
with AS
Fundamental Accounting Assumption:
Fundamental Accounting Assumption: same as in Consistency
Accounting Standard -1 Accrual
Going Concern
Consideration in Selection of Accounting
Consideration in Selection of Accounting policies: True
policies:True & Fair view in preparation &
& Fair view in preparation & Presentation of Financial Statement.
Presentation of Financial Statement. For the purpose
For this purpose
a. Treatment of transaction by substance not
a. Treatment of transaction by substance not merely by
merely by substance legal form
substance legal form
b. Expected loss shall be recognised as per
b. Marked to market loss or expected loss shall not be
prudence concept
recognised unless provided by other ICDS
c. Expected gain shall be ignored unless
c. Market to market or expected profit shall not be recognised
specifically provided by other Accounting
unless provided by other ICDS
Standard
Change in Accounting Policies:
Accounting policies shall not be changed unless:
a. Change is required as per statute
Change in Accounting Policies:
Accounting policies shall not be changed without reasonable b. In compliance of AS
cause. c. Better presentation of Financial Statement
If Accounting policies changed:Require
If Accounting policies changed:Require
a. Any material effect shall be disclosed w.r.t to items in
a. Any material effect shall be disclosed w.r.t
financial statements to the extent ascertainable
to items in financial statements to the extent
b. If the Above Change is not ascertainable the fact should ascertainable
be disclosed
b. If the Above Change is not ascertainable the
c. If any change is expected to occur in Future due to change fact should be disclosed
the fact should be disclosed in Current FY as well as in FY
c. If any change is expected to occur in Future
when first time change occurred
due to change, the fact should be disclosed
in Current FY as well as in FY when first time
change occurred

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Disclosures: Disclosures:
All the significant Accounting policies All the significant Accounting policies
Change in Accounting policies Change in Accounting policies
Note: Any incorrect & inappropriate treatment of item cannot Note: Any incorrect & inappropriate treatment of item
be remedied by Disclosure cannot be remedied by Disclosure
ICDS-II “Valuation of Inventories”
Scope: Deals With Valuation of inventories
Inventory: Are Assets
a. Held for sale in ordinary course of Business
b. In process of production of such sale
AS-2 “Valuation of Inventories”
c. In form of raw material & Supplies to be consumed in
Scope: Deals With Valuation of inventories
process of production & rendering services
Inventory: Are Assets
Measurement of inventories – Cost or net realisable value,
a. Held for sale in ordinary course of Business
whichever is less
b. In process of production of such sale
Methods to Valuation:
c. In form of raw material & Supplies to be
a. Standard cost consumed in process of production &
b. Weighted average rendering services
c. FIFO Measurement of inventories – Cost or net realisable
d. Retail cost method value, whichever is less
Cost of Purchase of: Methods to valuation:
a. Includes purchase price a. Standard cost
b. All the duties & taxes b. Weighted average
c. Freight & other attributable expenses other than borrowing c. FIFO
cost (unless meet recognition criteria under ICDSIX) d. Retail cost method
Duties & taxes recoverable shall form part of the cost as per Cost of Purchase of:
Section 145A of income-tax Act 1961 a. Includes purchase price
Applicability of ICDS-II: Applied for Valuation of inventory
except b. Freight, other attributable expenses which is
a. WIP arising under construction contract including directly necessary to bring inventory to existing place
related service contract Applicability of AS-2: Applied for Valuation of
b. WIP dealt with other ICDS inventory except
c. Producers inventories of livestock agriculture & Forest WIP arising under construction contract including
products, mineral oils, ores & Gases to the extent they are directly service contract
measures at NRV WIP arising in ordinary course of business for service
d. Machinery spares, which can be used only in connection providers
with a tangible fixed asset and their use is expected to
Financial instruments held as stock in trade
be irregular, shall be dealt with in accordance with the
Producers inventories of livestock agriculture &
income computation and disclosure standard on tangible
fixed assets Forest products mineral oils, ores & Gases to the
extent they are measured at NRV
e. Financial instruments held as stock in trade
Note: Inventory of service provider is also cover under ICDS-II (Not
in AS2-). Cost of services shall include the Labor cost and other
cost of personnel directly engaged in providing services including
supervisory personnel & other attributable overhead

Valuation of Inventory in Case of Certain Dissolutions: Valuation of Inventory in Case of Certain

Dissolution of Partnership firm, AOP, BOI, notwithstanding Dissolutions: No such provision in AS2-
business continues or not, inventory shall be valued at Net Disclosures:
realizable Value Accounting policies adopted & Formula used
Disclosures: Accounting policies adopted & Formula used Actual Carrying amount of inventory
Actual Carrying amount of inventory

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ICDS-III “Construction Contracts” AS-7 “Construction Contracts”

Scope: This ICDS should be applied in determination of Scope: Applied in accounting of construction contract of
income on construction contract of a contractor contractor
⇒ A group of contracts whether with a single customer or ⇒ A group of contracts whether with a single customer or
several customers, should be treated as a single contract several customers, should be treated as a single contract if:
if: a) The group of contracts is negotiated for a single package
a) The group of contracts is negotiated for a single b) The contracts are closely related that they are in effect
package part of single project with an overall profit margin;
b) The contracts are closely related that they are in effect c) The contracts are performed concurrently or in
part of single project with an overall profit margin; continuous sequence
c) The contracts are performed concurrently or in Contract revenue:
continuous sequence a) Initial amount contracted
Contract Revenue: b) Variation in contract works, claim, incentive payments
a) Initial amount contracted including retention To the extent probable that they will result in revenue
b) Variation in contract works, claim, incentive payments They are capable of reliably measured
To the extent probable that they will result in revenue Note: AS 7 does not say anything about the inclusion of
They are capable of reliably measured Cost of Contract: retention
Directly attributable costs Cost of Contract:
Cost attributable to contract activity in general & can be a) Directly attributable costs
allocated to contract b) Cost attributable to contact activity in general & can be
Other cost specifically chargeable to customer as per allocated to contract
agreement c) Other costs specifically chargeable to customer as per
Allocated borrowing cost to the extent in accordance with agreement
ICDS-IX d) Allocated borrowing cost to the extent in accordance
Note: Those Costs shall be reduced by any incidental with ICDS-IX
income (other than not included in revenue) Recognition of Contract revenue:
Recognition of Contract revenue: Contract Revenue shall be recognised on the basis of
Contract Revenue shall be recognised on the basis of percentage completion method
percentage completion method i.e.% completion=
i.e.% completion= Cost incurred up to reporting date/ Total Estimated cost
Cost incurred up to reporting date/ Total Estimated cost Current year revenue= Total revenue*POC – cost incurred
Current year revenue= Total revenue*POC – cost up to reporting date
incurred up to reporting date According to AS-7: Any estimated loss on contract shall
Note: Early stage of contract shall not extend beyond be recognised immediately as an expense.
%25 of the stage of completion If it is probable that total expense will exceed the revenue
Determination of Completion of contract: Determination of Completion of contract:
The portion of cost incurred on contract up to the The portion of cost incurred on contract up to the reporting date
reporting date Surveys of work performed
Surveys of work performed Completion of physical portion of the contract
Completion of physical portion of the contract Disclosures:
Disclosures: The amount of contract revenue recognised The amount of contract revenue recognised
The method used to determine the stage of completion The method used to determine the stage of completion
Amount of cost incurred & recognised profit Amount of cost incurred & recognised profit
Amount of advance received Amount of advance received
Amount of retention Amount of retention

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ICDS-IV “Revenue recognition” AS-9 “Revenue Recognition”

Scope: Scope:
This ICDS deals with the basis for revenue recognition
arising in ordinary course of activities of a person from This AS deals with the basis for revenue recognition aris-
a) The sale of goods ing in ordinary course of activities of a person from

b) Rendering of services a) The sale of goods

c) The use by the other of person’s resources yielding
interest, Royalties or Dividends b) Rendering of services
Meaning of revenue: Revenue is gross inflow of cash,
receivables & other consideration arising in ordinary c) The use by the other of person’s resources yielding
course of business from the sale of goods, rendering interest, Royalties or Dividends
services, or form the use by the other person’s resources
yielding interest ,royalties& dividends Meaning of revenue: Revenue is gross inflow of cash,
receivables & other consideration arising in ordinary
Note: In agency relationship, commission is revenue not course of business from the sale of goods, rendering
a gross inflow of cash & Receivable or other consideration services, or from the use by the other person’s resources
Sale of goods: The revenue from the sales shall be yielding interest, royalties & dividends
recognised only when the control & Ownership incidental
risk & rewards has been transferred with sale Note: In agency relationship, commission is revenue not
Revenue shall be recognised if: a gross inflow of cash & Receivable or other consideration
There is reasonable certainty of its collection If reasonable
certainty of its collection cannot be determined recognition, Sale of goods: The revenue from the sales shall be
shall be postponed. recognised only when the control & Ownership incidental
Rendering of services: All the requirements of ICDS-
risk & rewards has been transferred with sale
III “Construction Contracts” shall mutatis mutandis apply
to service contract. Revenue under the service contract Revenue shall be recognised if:
shall be completed on the basis of percentage completion
method. There is reasonable certainty of its collection If reasonable
The revenue under service contract with duration of not certainty of its collection cannot be determined, recogni-
more than 90 days could be recognised when the service tion shall be postponed.
is completed or substantially completed.
When the services provided by an indeterminate number Rendering of Services:
acts over a specific period of time revenue may be rec-
The revenue under the service contract can be recorded
ognised on the basis of straight-line method.
on the basis of proportionate completion method or by the
Interest:
completed service contract method.
Interest shall accrue on time basis determined by amount
outstanding and the rate applicable. Interest: Interest Accrues in most of the circumstances on
Interest on refund of any tax, duty or cess shall be deemed the basis of time.
to be income of the previous year in which such interest is
received as per Section 145A (b) of income-tax act 1961
Discount on debt securities held is treated as though it is
accruing over the period to maturity

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Royalties: Shall Accrue in accordance with the terms of Determined by the amount outstanding and the rate appli-
relevant agreement & shall be recognised on that basis cable. Usually the premium & Discount on debt securities
unless having regard to the substance of transaction ,it is held is treated as though it is accruing over the period to
more appropriate to recognise the revenue on some other maturity.
systematic basis
Royalties: Shall Accrue in accordance with the terms of
Dividends: relevant agreement & shall be recognised on that basis
Dividends are recognised with the provision of sec. 2(22) unless having regard to the substance of transaction ,it is
of income-tax act 1961 more appropriate to recognise the revenue on some other
systematic basis
Disclosures: Following disclosures shall be made:
a) In transaction of sale amount not recognised as reve- Dividends:
nue along with the nature of uncertainty Dividends are not recognised in statements of profit & loss
b) Amount of revenue from service transactions rec- unless the right to receive the payments is established.
ognised
c) Method used to determine the stage of completion Disclosures:
d) Service transaction in process at the end of previous Amount of revenue in course of sale transaction not rec-
year ognised due to lack of certainty with nature of uncertainty.
• Amount of cost incurred & recognised profits
up to the end of previous year
• The amount of advances received
• The amount of retention

ICDS-V “Tangible Fixed Assets” AS-10 “Property Plant & Equipment’s”

Scope: This ICDS deals with the treatment of tangible fixed Scope: This AS should be applied in accounting for
Assets Property, Plant& Equipments except when other AS
Tangible Fixed Assets: Is assets being Land ,Building requires or permits different Accounting treatments.
,machinery, plant & furniture This standard doES not apply to:
Held for the use for the purpose of producing goods or a) Biological Assets related to agricultural activity
providing services other than bearer plants but it does not apply to
Not held for sale in ordinary course of business the produce on bearer plants and
Identification of Tangible Fixed Assets: b) Wasting assets including of mineral rights, Expenses
on Exploration for and extraction of mineral oils,
a) The definition of tangible fixed assets given above natural gas and similar non regenerative resources.
provides the criteria for determining whether an item is However this standard apply to property, plant and
to classify a tangible fixed assets equipment used to develop or maintain the assets
b) Standby Equipment’s and servicing parts are to be described in (a) and (b) above
capitalized machinery spares shall be charged to the Property, plants and Equipment: Are tangible
revenue as when consumed. When spares can be used assets
only in connection with the item of tangible fixed assets • Held for use in the production process or supply
and their use is expected to be irregular, they shall be of goods or services, for rental to others or for
capitalize administrative purposes; and
• Are expected to use for period of more than 12
months

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Cost of Assets: It shall Comprise of Cost of Assets:

a) Purchase price It shall comprise of

b) Import duties & other taxes (Excluding those subsequently a) Purchase price including import duties & Purchase
recoverable) taxes (Non-refundable)

c) Directly attributable expenses making assets ready to use b) Any cost directly attributable to bring assets to the
location and necessary condition to bring it to for
d) Any trade discount and rebate shall be deducted) Start- it to operate
up & Commissioning costs shall be capitalized
c) Initial estimate of the cost of dismantling, removing
e) Expenses on test run before starting actual production
the item and the restoring site on which it is located
shall be capitalized
referred as decommissioning, Restoration and
Self-Constructed Assets: similar liabilities.

In arriving the cost above principals shall be applied. Any Self-Constructed Assets:
Internal profits if any shall be ignored while arriving at the cost
In arriving the cost above principals shall be applied.
Disclosures: Following Disclosures shall be made in respect Any Internal profits if any shall be ignored while
of tangible Fixed Assets arriving at the cost

a. Description of assets or block of assets. Disclosures: An enterprise encouraged to disclose

the following
b. Rate of depreciation
a. The carrying amount of temporarily held property,
c. Actual cost or WDV as the case may be plant & equipment

d. Addition deletion during the year or any adjustment b. The gross carrying Amount of any fully depreciated
made due to property, plant and equipment’s that is still in use
• Central Value Added tax credit claimed and Allowed c. For each revalued class of property plant and
under CENVAT Credit rules 2004 equipment’s, the carrying amount that would have
been recognised had the assets been carried under
• Change in rate of exchange in currency the cost model

• Subsidy or grant or reimbursement by what so ever d. The carrying amount of property, Plant and
name called equipment’s Retired from active use and not held
for disposal.

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ICDS- VI “Effects of changes in foreign exchange” AS-11”Effects of changes in foreign exchange”

Scope: This ICDS deals with: Scope: This AS deals with:

a. Treatment of transactions in foreign currencies a. Treatment of transactions in foreign currencies

b. Translating the financial statements of foreign b. Translating the financial statements of foreign
operations operations
c. Treatment of foreign currency transactions in nature Treatment of foreign currency transactions in nature of
of forward contracts. forward contracts.
Foreign Operation: Foreign operation of person is branch
Foreign Operation:
by whatever name called of that person, the activities of
which are based or conducted in country other than India.
Foreign operation is subsidiary, associates, joint
ventures or branch of reporting enterprise, The activity
Forward Exchange Contract: Forward Exchange
of which are based or conducted in country other than
contract means an agreement to exchange different
country of reporting enterprise.
currencies at forward rate and includes a foreign currency
option contract or another financial instrument of a similar
Forward exchange contract means an agreement to
nature.
exchange different currencies at the forward rate.
Note: Notwithstanding anything contained in AS11-
Translation of foreign Operation: Accumulate all the
initial recognition conversion and recognition of exchange
resulting exchange difference in foreign currency
difference shall be subject to provision of Section 43A of
translation reserve until the disposal of net investments.
the ACT or the rule 115 of income-tax rules 1962. Section
43A deals with the provision of consequential to changes
Forward Exchange Contracts: No such
in rate of exchange of currency and rule 115 deals with
categorization
rate of exchange for conversion into rupees of income
expressed in foreign currency.
Disclosure:
Translation of Foreign Operation: financial statements
a. Amount of exchange difference included in profit
of foreign operation shall be translated using the principles
& Loss
and procedures as if transactions of the foreign operation
had been those of person himself. b. Net accumulated difference in foreign translation
reserve
Forward Exchange Contracts: ICDS has Categorized
the forward contracts in three types:

a. For the trading or speculation purposes

b. Hedge the foreign currency risk commitments of
firm
c. Other than these two categories.
Disclosures: No disclosure required

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ICDS-VII “Government Grants” AS-12 “Government Grants”

Scope: Scope:

This ICDS deals with the treatment of Government Grants. 1. This AS deals with accounting for government grants.
The government grants, are sometime called by names Government grants are sometime called by other names
such as subsidies, cash incentive duty drawbacks, waiver, such as subsidies, cash incentive, Duty drawback etc.
concessions, reimbursements, etc 2. This standard deals with the special problems
Recognition in Book of Accounts: arising in accounting for government grants in financial
Recognition of government grant shall not be postponed statements reflecting the effects of changing prices or in
beyond the actual date of receipt .It means it shall be recognised supplementary information of similar nature;
on actual receipt basis even in case where there is not any Recognition in Books of Accounts:
reasonable assurance that the enterprise will not comprise with
the condition attached to grants Government grants available to the enterprise shall be
recognised in books only if:
Accounting treatment for Grants for Fixed Assets:
●● Where there is reasonable assurance that the
This ICDS says that where the government grant relates to
enterprise will comply with the condition attached
depreciable fixed assets or the assets of a person, the grant shall
to them and
be deducted from the cost of assets or the WDV of block of
assets to which the concerned assets belongs, Thus this does ●● Where such benefits have been earned by the
not take into consideration the second method prescribed by enterprise and it is reasonably certain that the
AS-12 to Recognise as deferred revenue & Charge to The Profit ultimate collection will be made.
& loss on systematic or rational basis.
Note: Mere receipt of grant is not conclusive evidence
Note: No any effect on tax treatment refer sec 43(1) of that the condition attached will be fulfilled
income-tax act 1961(Actual cost of Assets)-Explanation
10 Recognition in Book of Accounts:
Treatment of grants not relatable to Assets Acquired: There are two method of recognition
This ICDS lays that if government grant is of such nature that it Net assets Method
cannot be directly relatable with the assets acquired, so much
Deferred Revenue Method (not
amount which bears to the total government grant, the same
proportion as such assets bears to all the assets in respect of Considered in ICDS)
or with reference to which the government grant is received,
shall be deducted from the actual cost of assets or shall be Treatment of grants not relatable to Assets
reduced from the WDV of assets to class it belong (in line with Acquired:
explanation 43(1) explanation 10) As per AS-12 “government grants” such grants are
Residual Grants (other than above): This ICDS says that considered as promoter’s contribution & transferred to
grants other than covered above shall be recognised as capital Reserve. Such grants can neither be distributed
income over the periods necessary to match them to as dividend nor considered as deferred income
related cost which they are intended to compensate. Revenue Grants: It is credited in profit & Loss
Disclosure: Following Disclosure is required in respect of statement & can be used to mitigate the loss incurred or
Government grant, namely to distribute dividend. There are no conditions regarding
Nature & extent of government grants recognised during the to use of grant otherwise specifically provided in terms
previous year by way of deduction from the actual cost of assets of grants.
or from the WDV of block of Assets during the previous year;
Disclosure: Following Disclosure is required respect of
Nature & extent of Government grants recognised during the Government grant, namely
previous year; The accounting policy adopted for the government
Nature & Extent of government grants not recognised during grants, including the method of presentation in financial
the previous year by way of deduction from the actual cost of statements;
asset or assets or from the written down value of block of assets
The nature and extent of government grants recognised
and reasons thereof; and income
in the financial statements, including grants of
Nature and extent of government grants not recognised during nonmonetary assets given at concessional rate or free
the previous year as income and reason thereof. of cost.

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ICDS-VIII “Securities” Note:

No corresponding Accounting Standard. However, for
Scope: This ICDS deals with securities held as
securities held as investment, AS- 13 Accounting of
“Stock in trade”
investment is applicable
It does not deal with
The basis for recognition of interest & dividend on securities
which are covered by ICDS on revenue recognition;
Securities held by person engaged in the business of
insurance
Securities held by mutual funds, Venture capital fund, banks
& Public Financial Institutions formed under the company’s
act 2013.
Note:
Meaning of securities shall be the meaning assigned to it
in sec 2(h) of securities contract (regulation) act, 1956 and
also include the shares of company in which public are not
substantially interested.
This standard deal with securities stock held as stock in
trade, so it is of utmost importance to classify the security
held as stock in trade & Investment
Recognition and valuation of Security:
There is a concept of two level valuation in ICDS
• Initial Recognition:
a. A security on acquisition shall be recognised at actual
cost
b. The cost of security shall be comprised of acquisition
charges such as STT paid, brokerage & fees etc.
c. Where Security is acquired in exchange for another
assets fair value of security so acquired shall be cost
d. Where unpaid interest has accrued before acquisition
& charged in Purchase price when such interest
realized shall be distributed in pre & post acquisition
& Pre acquisition shall be adjusted with Cost price.
Subsequent Recognition:
●● At the end of the previous year’s securities held
as stock in trade shall be valued at cost initially
recognised or net realizable value at the end of that
previous year, whichever is lower (In line with ICDS-II)
●● For the purpose of preceding para, the Comparison of
actual cost initially recognised and the net realizable
value shall be done category wise and not for each
individual security. For this purpose security shall be
classified into following category wise namely:

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a. Shares
b. Debt securities
c. Convertible Securities and
d. Any other securities not covered above.
Note: Where the actual cost initially recognised cannot be
ascertained by reference to specific identification ,the cost
of such security shall be determined on the basis of first-in-
first out method or weighted Average method.
Disclosure: No disclosure required in point no, 13 (f) of
form 3CD.

ICDS-IX “Borrowing costs” AS-16 “Borrowing Cost”

Scope: This ICDS deals with treatment of borrowing costs. Scope: This AS deals with treatment of borrowing costs.
This income computation & Disclosure doesn’t deal with This income computation & Disclosure doesn’t deal with
actual or imputed cost of owners’ equity and preference actual or imputed cost of owners’ equity and preference
capital. capital.
Meaning of borrowing cost:
Commitment charges on borrowing; Meaning of borrowing cost:
Amortized amount of discounts or premiums relating to Commitment charges on borrowing;
borrowings; Amortized amount of discounts or premiums relating to
Amortized amount of ancillary costs incurred in connection borrowings;
with the arrangement borrowings.
Amortized amount of ancillary costs incurred in connection
Finance charges in respect assets acquired under the finance with the arrangement borrowings.
leases or under other similar arrangements.
Qualifying Assets: Finance charges in respect assets acquired under the
finance leases or under other similar arrangements.
Mean Land, building, machinery, plant or furniture being
tangible assets; Exchange difference arising in foreign exchange borrowing
Knowhow, patents, copyrights, Trademarks, or any other to the extent regarded as adjustment of interest.(Not
business or commercial rights being intangible assets considered in ICDS)
Inventories that require 12 months or more to bring them in Qualifying Assets:
saleable condition. Mean Qualifying assets is an asset that necessarily takes a
Capitalization of Specific borrowing costs: substantial period of time to get ready for its intended use
Borrowing cost specifically incurred in acquisition, or sale. Further it explains the what constitute substantial
construction and Production of a qualifying asset shall be period depends upon circumstances of each case
capitalized as part of the cost of those assets. The amount
borrowing costs eligible for capitalization shall be the amount Capitalization of Specific borrowing costs:
computed under this ICDS other borrowing costs shall be The capitalization of borrowing costs as part of the cost
recognised in accordance with the provision of the Act. of a qualifying asset should commence when all the
following conditions are satisfied:
Expenditure for the acquisition, construction or production
ICDS do not allow to deduct such income. of a qualifying asset is being incurred;
But to credit in Profit & Loss Account Borrowing costs are being incurred; and
Activities that are necessary to prepare the asset for its
intended use or sale are in progress.
Capitalisation of general Borrowing costs: Income on temporary investments of borrowing Amount:
This ICDS has provided the formula for finding the Deduct any income from the short term investment of
capitalization amount. borrowing also form the borrowing cost.

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Borrowing cost=A*B/C Capitalisation of general Borrowing costs:

Where A= amount of borrowing cost aggregate To the extent that funds borrowed generally and used
for the purpose of obtaining a qualifying assets, the
B= Amount incurred in respect of
amount of borrowing cost eligible for capitalization
Qualifying Assets should be determined by applying a capitalization rate
C= Total Amount of borrowing to the expenditure on that assets. The capitalization rate
Commencement of Capitalization: should be the weighted average of the borrowing costs
The capitalization of borrowing costs shall commence: applicable to the borrowings of the enterprise that, other
In case of specific borrowing the date on which funds were than borrowings made specifically for the purpose of
borrowed; obtaining a qualifying asset. The amount of borrowing
In case of general borrowing the date when funds were costs capitalized during a period should not exceed the
Utilised amount of borrowing costs incurred during that period
Suspension of capitalization: Commencement of Capitalization: The capitalization
No such provision in ICDS-IX shall.
Cessation of Capitalization: commence:
Capitalization of borrowing cost ceases if: Expenditure for the acquisition, construction or production
• In case of qualifying assets (other than inventory) when of qualifying assets is being incurred;
such assets first put to use Borrowing costs are being incurred
• In case of inventory when substantially all the activities Activities that are necessary to prepare the assets for its
necessary to prepare such inventory of its intended use intended use or sale are in progress.
or sale. Suspension of capitalization:
Note: when the construction completes in parts and a Capitalization of borrowing cost shall be suspended
completed part is capable of being used while the construction during the extended period in which active development
continue for the other parts, Capitalization ceases in respect is interrupted
of such completed part. Disclosure: The following disclosure shall be made in
Disclosure: The following disclosure shall be made in respect of borrowing costs namely:
respect of borrowing costs namely: • The accounting policy adopted for the borrowing
• The accounting policy adopted for the borrowing costs; costs; and
and • The amount of borrowing costs capitalized during the
• The amount of borrowing costs capitalized during the previous year
previous year.

ICDS-X “Provisions, Contingent liabilities and AS-29 “Provisions, Contingent liabilities and
Contingent Assets” Contingent Assets”
Scope: Scope: same as ICDS
This ICDS deals with provisions, contingent Recognition of Provision: A provision should be
Assets, contingent liabilities except those: recognised when:
a. Resulting from financial instruments;
b. Resulting from executory contracts; An enterprise has present obligation as result of past
c. Arising in insurance business from the contracts with event
policy holders It is probable (means more likely than not) that an
d. Covered by any other ICDS outflow of resources embodying economic benefits will
Recognition of Provision: A provision should be be required to settle such obligation
recognised when: A reliable estimate can be made of amount of the
When a person has present obligation a result of a past obligation
event; If these conditions are not met no provisions should be
It is reasonably certain that outflow of resources embodying recognised
economic benefits will be required to settle such obligation Disclosures: Following disclosures shall be required to
A reliable estimate can be made of amount of obligation be made
If these conditions are not met, no provision shall be The carrying amount at the beginning and end of the
recognised period
The additional provision made in the
period including increase to existing provision
Amount used
Unused amounts reversed during the period.

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Disclosures: Following disclosures shall be made in

respect of each class of provisions, namely
As brief description of the nature of obligation
The carrying amount at the beginning and end of the
previous year;
Additional provisions made during the previous year,
including increase to existing provisions
Amount used that is incurred and charged against the
provisions during the previous year
Unused amounts reversed during the previous year and
The amount of expected reimbursement stating that amount
of any assets that has been recognised for that expected
reimbursement.

6. APPLICABILITY OF IND AS
As per Section 133 of the Companies Act, 2013 Ind AS shall be applicable to Companies registered
under Companies Act, 2013 as follows:
Ind AS were notified on 16 February 2015 by the Ministry of Corporate Affairs (“MCA”). MCA notified
the Companies (Indian Accounting Standards) Rules, 2015 which specify the Ind AS applicable to
certain class of Companies and set out the dates of applicability.
6.1 Voluntary adoption
Companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning
on or after 1 April 2015, with the comparatives for the periods ending 31 March 2015 or thereafter.
Once a company opts to follow the Ind AS, it will be required to follow the same for all the subsequent
financial statements.
6.2 Mandatory adoption
For the accounting periods beginning on or after 1 For the accounting periods beginning on or after 1
April 2016 April 2017
Companies whose equity and/ or debt securities are listed Companies whose equity and/ or debt securities are listed
or are in the process of listing on any stock exchange in or are in the process of listing on any stock exchange in
India or outside India (listed companies) and having net India or outside India (listed companies) and having net
worth of Rs. 500 crores or more. worth of Rs. 500 crores or more.
Unlisted companies having a net worth of Rs. 500 crores Unlisted companies having a net worth of Rs. 500 crores
or more. - Holding, subsidiary, joint venture or associate or more. - Holding, subsidiary, joint venture or associate
companies of the listed and unlisted companies covered companies of the listed and unlisted companies covered
above. above.

6.3 The roadmap will not be applicable to

●● Companies whose securities are listed or in the process of listing on SME exchanges.
●● Companies not covered by the roadmap in the “Mandatory adoption” categories above.
●● Insurance companies, banking companies and non-banking finance companies.
These companies should continue to apply existing Accounting Standards prescribed in the Annexure
to the Companies (Accounting Standards) Rules, 2006, unless they opt for voluntary adoption.
Insurance companies, banking companies and non-banking finance companies cannot voluntarily
adopt the Ind AS.

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7. LIST OF ICDS AND COMPARABLE IND AS ISSUED BY MCA

Sl. No. ICDS Comparable Ind AS
1. Accounting policies (ICDS I) Presentation of financial statements (Ind AS 1)
2. Valuation of inventories (ICDS II) Inventories (Ind AS 2)
3. Construction contracts (ICDS III) Revenue from contracts with customers (Ind AS 115)
4. Revenue recognition (ICDS IV) Revenue from contracts with customers (Ind AS 115)

5. Tangible fixed assets (ICDS V) Property, plant and equipment (Ind AS 16)

Effects of changes in foreign The effects of changes in foreign

6.
exchange rates (ICDS VI) exchange rates (Ind AS 21)

Accounting for government grants and disclosure of

7. Government grants (ICDS VII)
government assistance (Ind AS 20)
8. Securities (ICDS VIII) Financial instruments (Ind AS 109)
9. Borrowing costs (ICDS IX) Borrowing costs (Ind AS 23)
Provisions, contingent liabilities and contingent Provisions, contingent liabilities and contingent assets
10.
assets (ICDS X) (Ind AS 37)

8. COMPARISON BETWEEN ICDS AND IND AS

ICDS –I “Accounting Policies” Ind AS – 1“Presentation of financial statements”
It is similar to AS-1 except with applicability prospective
application. As per the Ind AS, application should
be retrospective by adjusting the opening equity and
comparatives unless impracticable.

ICDS–II “Valuation of Inventories” Ind AS–2“Inventories”

There is no specific provision in relation to reversal of Similar to AS except that difference between the purchase
write-down of inventory price for normal credit terms and the amount paid, is
recognised as interest expense over the period of the
financing.
Reversal of write-down of inventory is permitted. The
amount of reversal is limited to the original write down.

ICDS-III “Construction Contracts” Ind AS–115 “Revenue from contracts with customers”
Applies to contract with a customer and establishes principles
on reporting the nature, amount, timing and uncertainty
of revenue and cash flows arising from a contract with
customer.
●● A contract is an agreement between two or
more parties that creates enforceable rights and
obligations, and can be either written, oral or implied
by an entity’s customary business practices.
●● Revenue is defined as income arising in the course
of an entity’s ordinary activities.

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●● Income is defined as increases in economic benefits

during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities
that result in an increase in equity, other than those
relating to contributions from equity participants.

●● The core principle under Ind AS 115 is that an entity

should recognise revenue to depict the transfer
of promised goods or services to customers in an
amount that reflects the consideration to which the
entity expects to be entitled in exchange for those
goods or services.

●● To achieve that core principle, the following steps are

applied:

a. Identify the contract(s) with a customer.

b. Identify the performance obligations in the contract
(account for a ‘distinct’ good or service).
c. Determine the transaction price.
d. Allocate the transaction price to the performance
obligations in the contract.
e. Recognise revenue when (or as) the entity satisfies a
performance obligation.
A contract falls within the scope of Ind AS 115, when all the
following conditions are met:
a. The contract has commercial substance (that is,
the risk, timing, or amount of future cash flows is
expected to change as a result of the contract)
b. The parties to the contract have approved the
contract
c. Each party’s rights regarding the goods or services to
be transferred can be identified
d. Payment terms can be identified for the goods or
services to be transferred
e. The parties are committed to perform their
respective obligations and they intend to enforce
their respective contractual rights
f. It is probable that the entity will collect the
consideration to which it expects to be entitled.
Guidance provided as part of the standard for combining the
contract entered into, at or around the same time with the
same customer (negotiated as a package, consideration to be
paid in one contract depends on the price and performance
of the other contract, the goods or services promised in the
contracts are a single performance obligation).

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Contract modification is treated as a separate contract if

the modification results in
8. Addition of ‘distinct goods or services’ and
9. A change in consideration that reflects the entity’s
stand-alone selling price for such additional
promised goods or services. If modification does
not meet the criteria to be accounted for as a
separate contract, determination needs to be
made on whether to account for modification as
a. Termination of the original contract and creation
of a new contract (i.e. allocate the amount of
consideration not yet recognised to the remaining
performance obligation) or
b. As if it were part of the original contract (i.e.
update the transaction price, measure progress
toward complete satisfaction of the performance
obligation, and record a cumulative catch-up
adjustment to revenue).
Accordingly, change orders and claims (price adjustments,
or changes in scope) need to be assessed if
a. The customer has approved any change in scope
or price, or
b. it has enforceable rights to considerations, and
accordingly apply contract modification guidance
●● A contract does not exist if the contract provides for
a unilateral enforceable right to terminate a wholly
unperformed contract without compensating the
other party (or parties).
●● Any considerations received on such arrangements
from the customer are recorded as a liability and
recognised as revenue only when there is no
remaining obligation to the customer and the
amount is not refundable or the contract has been
terminated and the consideration received from
the customer is non-refundable.

ICDS–IV “Revenue Recognition” Ind AS–115 “Revenue from contracts with

customers”
Unlike ICDS and AS, Entity recognises revenue when (or
as) it satisfies a performance obligation by transferring
control of a good or service to a customer. Control may
be transferred either at a point in time or over time. Entity
that recognises revenue over time should select the method
that depicts the performance. This may be either an output
method (example: units produced) or an input method
(example: costs incurred or labour hours).
Ind AS 115 requires evaluation of performance obligations
– to account for ‘distinct’ goods or services (or a bundle
of distinct goods or services, or a series of distinct goods
or services – i.e. a separate unit of account) based on the
following criteria:

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a. The customer can benefit from the goods or

services either on its own or together with other
resources that are readily available to the customer,
b. Promise to transfer the good or services to the
customer is separately identifiable from other
promises in the contract (that is, the goods or
services is distinct within the context of the contract).
●● A good or service that does not meet these criteria
would be combined with other goods or services
in the contract until the criteria are met.
●● Variable considerations (including potentially
contingent considerations) are only included in the
transaction price to the extent that it is probable
that the amount of cumulative revenue recognised
would not be subject to a significant future revenue
reversal when such estimates are revised.
●● Penalties should be accounted for as per the
substance of the contract. Where the penalty is
inherent in the determination of transaction price,
it should form part of variable consideration,
otherwise the same should not be considered for
determining the consideration and the transaction
price should be considered as fixed.
●● Revenue is recognised as ‘control’ of the goods
or services underlying the performance obligation
are transferred to the customer.
●● Ind AS 109 applies to dividend income recognised
in profit or loss. Dividends are recognised in profit
or loss only when:
a. The entity’s right to receive payment of the
dividend is established;
b. it is probable that the economic benefits associated
with the dividend will flow to the entity; and
c. The amount of the dividend can be measured
reliably
ICDS–V “Tangible Fixed Assets” Ind AS–16“Property, plant and equipment”
Similar to AS except for the following:
Spare parts, stand-by equipment and servicing equipment
should be capitalised only when they meet definition of
Property, Plant and Equipment (PPE).
Costs incurred on an item of PPE, when an item is capable
of operating in the manner intended by management but
is not yet brought into use or is operating at less than full
capacity, should not be included in the carrying amount of
such item.
Difference between the purchase price under normal credit
terms and the amount paid, is recognised as interest expense
over the period of the financing.
The cost of an item of PPE includes such costs
Depreciation is based on the ‘component’ approach;
depreciation is charged over the estimated useful life of the
asset.

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ICDS–VI “The effects of changes in foreign exchange Ind–AS 21 “The effects of changes in foreign
rates” exchange rates”
Similar to AS except for the following:
Functional currency is defined as the currency of the primary
economic environment in which an entity operates. Entities
should give priority to number of primary indicators before
considering secondary indicators when the indicators are
mixed and the functional currency is not obvious.
Derivatives are measured at fair value with change in
fair value recognised in profit or loss unless they qualify
as hedging instruments in a cash flow hedge or in a net
investment hedge.
ICDS–VII“Government grants” Ind AS – 20 “Accounting for government grants and
disclosure of government assistance”
Similar to AS except for the following:
Government grants related to assets shall be presented in the
Balance Sheet by setting up the grant as deferred income,
which is recognised in profit or loss on a systematic basis over
the useful life of the asset.
Recognition of grants in capital reserve is not permitted.
Government loans with below market rate of interest are
initially recognised at fair value in accordance with Ind AS
109 and the difference between proceeds received and the
initial fair value is accounted as government grant.
Refund of a grant related to an asset shall be recognised
by reducing the deferred income balance by the amount
refundable.
ICDS–VIII Securities Ind AS–109 “Financial instruments”
Similar to AS except for the following:
Actual costs comprises of purchase price and acquisition
charges such as brokerage, fees, tax, duty or cess.
Securities are recorded at their fair value on the date of
acquisition. Transaction costs that are directly attributable
to the acquisition of financial assets are included in amount
recognised on initial recognition, in case of financial asset
not designated at fair value through profit or loss.
Depending upon the entity’s business model for managing
the financial assets and the contractual cash flow
characteristics of the securities, securities are measured at
a. amortised cost; or
b. fair value through other comprehensive income; or
c. fair value through profit or loss. d. Measured on
standalone basis.
Further, if certain conditions are met, an entity can measure
the group of assets with offsetting risk positions on the basis
of its net exposure instead of individual positions within the
group (portfolio measurement exception).
ICDS–XI Borrowing Costs Ind AS–23 “Borrowing costs” Similar to AS

ICDS–X Provisions, contingent liabilities and Ind AS–37 “Provisions, contingent liabilities and
contingent assets contingent assets”
Similar to ICDS and AS. However, where the effect of the
time value of money is material, the provision shall be
discounted at a pre-tax discount rate that reflects current
market assessments of the time value of money and the
risks specific to the liability.

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9. AMENDMENTS IN RELATION TO b. The valuation of purchase and sale of

NOTIFIED INCOME COMPUTATION goods or services and of inventory shall
AND DISCLOSURE STANDARDS be adjusted to include the amount of
any tax, duty, cess or fee actually paid or
In order to bring certainty in the wake of incurred by the assessee to bring the goods
recent judicial pronouncements on the issue of or services to the place of its location and
applicability of ICDS, the following amendments condition as on the date of valuation.
have been made vide Finance Act, 2018 with
retrospective effect from 1st April, 2017:
c. Inventory being securities not listed, or
listed but not quoted, on a recognised stock
i. Section 36 of the Act has been amended exchange, shall be valued at actual cost
to provide that marked to market loss or initially recognised in the manner provided
other expected loss as computed in the in ICDS notified under (2) of Section 145.
manner provided in ICDS notified under
d. Inventory being listed securities, shall
sub-Section (2) of Section 145, shall be
be valued at lower of actual cost or net
allowed as deduction.
realisable value in the manner provided
ii. Section 40A of the Act has been amended in income computation and disclosure
to provide that no deduction or allowance standards notified under (2) of Section 145
in respect of marked to market loss or and for this purpose the comparison of
other expected loss shall be allowed except actual cost and net realisable value shall be
as allowable under newly inserted Clause done category-wise.
(xviii) of sub-Section(1) of Section 36. e. A new Section 145B has been inserted in
iii. A new Section 43AA in the Act has been the Act to provide that interest received
inserted to provide that, subject to the by an assessee on compensation or on
provisions of Section 43A, any gain or loss enhanced compensation, shall be deemed
arising on account of effects of changes in to be the income of the year in which it is
foreign exchange rates in respect of specified received.
foreign currency transactions shall be treated f. The claim for escalation of price in a contract
as income or loss, which shall be computed or export incentives shall be deemed to be
in the manner provided in ICDS as notified the income of the previous year in which
under sub-Section (2) of Section 145. reasonable certainty of its realisation is
iv. A new Section 43CB has been inserted achieved.
to provide that profits arising from a g. Income referred to in sub-Clause (xviii) of
construction contract or a contract for Clause 24) of Section 2 shall be deemed
providing services shall be determined to be the income of the previous year
on the basis of percentage of completion in which it is received, if not charged to
method except for certain service contracts, income-tax for any earlier previous year.
and that the contract revenue shall include
retention money, and contract cost shall 10. The AO is bound to give effect to
not be reduced by incidental interest, provisions of Section 145(1) r.w.s. 145(2) where
dividend and capital gains. ICDS notified by Central Government from time
to time are not complied with. Such accounts
v. Section 145A of the Act has been amended will have to be rejected and best judgment,
to provide that, for the purpose of assessment will have to be made u/s 145(3) read
determining the income chargeable under with Section 144. An AO has to take note of
the head “Profits and gains of business or all deviations from the ICDS, reasons for such
profession,— deviations and their implications in taxable
a. The valuation of inventory shall be made income. In case of gross deviation, the AO will,
at lower of actual cost or net realizable depending upon the significance of the item in
value computed in the manner provided computation of total income, have to consider
in ICDS notified under (2) of Section 145. whether the accounts require to be rejected.

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12
Director’s/ Auditor’s
Reports
1.

1. The Financial statements normally submitted

are:
1. Annual statements of accounts, namely,
Trading/ Manufacturing account, Profit &
Loss a/c, and balance-sheet.
2. Capital account of proprietor/ partners.
3. Tax Audit Reports in cases where Section
44AB of the Act is attracted.
4. Auditor’s report and Director’s report *Changes in Accounting Policies in respect of:
prescribed under Companies Act, in
●● method of charging depreciation on fixed
respect of Limited Companies.
assets;
5. Special audit reports applicable to special
class of assessees, eg. Trusts, Exporters, ●● valuation of inventory, investments and
etc. fixed assets;
●● treatment of liability towards gratuity
2. LIMITATIONS OF FINANCIAL payable to the employees;
STATEMENTS
●● treatment of contingent liabilities.
2.1 These statements contain information
which is historical in nature and are based on *Revaluation of Fixed Assets of the Firm:
certain accounting concepts, standards and Though all the cases of revaluation may not be
conventions. Therefore, they may, or may not for ulterior reasons, yet a firm with weak financial
reveal the information that a tax investigator position, due to continuous losses, may revalue
needs. At times, taxpayers resort to manipulation its fixed assets upwards, with an intention of
of data, or “window dressing”, for tax or financial showing better financial position. The converse
purposes. Some of the approaches adopted in of this can also be resorted to, for lowering tax
this regard are: liabilities.

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*Capitalisation of interest on term loans its subsidiaries. Director’s report also reflects the
and deferred payment liabilities. standard of corporate governance and efficiency
*Provision of higher depreciation, etc. of directors in conducting the business.

Therefore, these statements need close scrutiny, 4. CONTENTS OF DIRECTOR’S

to see whether any of the above manipulations REPORT
have taken place. The auditor’s report and notes
4.1 Section 134(3) states that Board’s report
to the balance-sheet may give vital clues in this
shall be attached to financial statements laid
regard. Analysis of financial statements may
before the shareholders for adoption. It also
have to be again undertaken, after the areas of
mandates that such Board’s report shall disclose
manipulation have been identified.
or deal with the following:

3. DIRECTOR’S REPORT a. The extract of the annual return as provided

under sub-Section (3) of Section 92
3.1 The Board of Directors is an important
body elected by the shareholders, which acts (New requirement).
as an agent of shareholders. The Board is
b. Number of meetings of the Board.
collectively responsible for making policies
for good governance and efficient running of c. Directors’ Responsibility Statement.
the company. The Companies Act, 2013 has
enhanced the accountability and responsibilities d. A statement on declaration given by
of directors by clearly defining their duties and independent directors under sub-Section
responsibilities, qualification of independent (6) of Section 149.(New requirement)
directors and mandating certain disclosures, e. Listed companies and such class of
such as evaluation of performance of Board, companies as may be prescribed Section
CSR policy, whistle blower mechanism, risk (Section178(1)) must disclose company’s
policies etc in the Directors report. policy on directors’ appointment and
3.2 Director’s report together with complete remuneration including criteria for
financial statements and auditors report are sent determining qualifications, positive
along with notice of Annual General Meeting attributes, independence of a director
(AGM) to members of the company. As per and other matters provided under Section
Section 134 of the Companies Act, 2013, it is 178(3)
applicable for financial year commencing on or
after 01 April 2014. The Director’s report shall f. Explanations or comments by the Board
be prepared based on the “stand alone financial on every qualification, reservation or
statements of the Company”. These reports as a adverse remark or disclaimer made by
bunch are popularly known as Annual Reports the statutory auditor in his report; and by
and are considered to be one of the best means the company secretary in practice in his
used for apprising the shareholders about the Secretarial audit report {Section 204(3)}
performance of the company, market scenario, (New requirement)

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g. Particulars of loans, guarantees or capital of 25 crores or more, a statement

investments under Section 186 (New indicating the manner in which formal
requirement). annual evaluation has been made by the
Board of its own performance and that
h. Particulars of contracts or arrangements
of its committees and individual directors
with related parties referred to in sub-
(Rule No. 9.10(4). (New requirement)
Section (1) of Section 188 in the prescribed
form. The prescribed Rule states that q. Such other matters as may be prescribed.
such related party transactions must be The Rule No. 9.10(5) gives an indication
reported in the prescribed Form No. 9.5 of these matters.
(New requirement). ●● financial summary/ highlights; change in
i. The state of the company’s affairs. the nature of business, if any,
j. The amounts, if any, which it proposes to ●● Details of directors or key managerial
carry to any reserves. personnel who were appointed or have
resigned during the year. (New requirement)
k. The amount, if any, which it recommends
Names of companies which have become
should be paid by way of dividend.
or ceased to be its Subsidiaries, joint
l. Material changes and commitments, if ventures or associate companies during
any, affecting the financial position of the the year along with reasons thereof. Details
company which have occurred between the relating to Deposits covered under Chapter
end of the financial year of the company to V of the Act namely a) Accepted during the
which the financial statements relate and year (b) remained unpaid or unclaimed as
the date of the report. at the end of the year(c) whether there has
m. The conservation of energy, technology been any default in repayment of deposits
absorption, foreign exchange earnings and or payment of interest thereon during the
outgo. Rules 9.10 (3) specifies the manner year and if so, number of such cases and
in which these are to be reported. the total amount involved, orders passed
by Regulators or Courts or Tribunal, which
n. A statement indicating development and impact the company’s operations in future.
implementation of a risk management
4.2 Directors Responsibility Statement
policy for the company including
(DRS): It is necessary to make a specific mention
identification therein of elements of risk, if
about significance of this statement. DRS
any, which in the opinion of the Board may
basically gives assurance to the shareholders
threaten the existence of the Company.
of the company. However, it thrusts huge
(New requirement)
responsibility on the Board not only to frame
o. The details about the policy developed correct policies, internal financial controls but
and implemented by the company on also to ensure their proper implementation. The
corporate social responsibility initiatives Directors have to confirm the following:
taken during the year.(New requirement)
a. Applicable accounting standards have
p. In case of a listed company and every other been followed with explanation for any
public company having paid-up share material departures.

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Techniques of Investigation for Assessment Vol. 1

b. Selected accounting policies have been committee, if any {Section 177(8)}. Report
applied consistently to give a true and fair on establishment of vigil mechanism{Section
view of the state of affairs of the company 177(10)} & Secretarial audit report in prescribed
at the end of the financial year and of the form shall be annexed to Board’s report as per
profit and loss of the company for that Section 204.
period. 4.3.1 As a good practice certain disclosures
c. Proper and sufficient care has been taken for have been appearing as common in all directors’
the maintenance of adequate accounting reports. Some of these are:
records for safeguarding the assets of the 1. Directors liable to retire
company and for preventing and detecting
fraud and other irregularities. 2. Appointment or cessation of directors

d. The Annual Accounts are prepared on a 3. Reappointment of auditors and

going concern basis. remuneration.

e. In the case of a listed company, internal 4.4 Authentication of Board’s Report:

financial controls laid have been followed The Board’s report and annexures forming part
by the company and that such controls are of it shall be signed by the Chairperson of the
adequate and are operating effectively. company, if he is authorised by the Board. But
The Explanation clarifies that such controls if the Chairperson is not authorized, it shall be
means policies and procedures adopted signed by at least two directors, one of whom
and adherence by the company for orderly shall be a Managing Director.
and efficient conduct of the business
for safeguarding assets, prevention 5. AUDITOR’S REPORT
and detection of frauds and errors and
maintenance of accounting records and A tax audit, is to be compulsorily performed
timely preparation of financial statements by a practising full time CA and as per rule 6G,
and review its efficacy.(New requirement) he has to report the same in Form 3CA/ 3CB
f. The directors had devised proper systems and 3CD. These reports are not to be given,
to ensure compliance with the provisions when the audit u/s 44AB is not performed and
of all applicable laws and that such systems in case of presumptive taxation Sections. If the
were adequate and operating effectively. assessee wants to avail any deduction u/s 80-IA,
(New requirement) 80-IB etc.., the auditor needs to give additional
4.3 Other Disclosures/ Requirements: audit reports. The contents of the various Audit
In case of revision or re-opening of financial Reports, the forms used and how to interpret
statements or Board report, detailed reasons must them are discussed below.
be stated in the director’s report for such revision
of statements or directors report{Section 131(1)- 5.1 Form 3CA: It is used when the assessee is
Third Proviso}. Board’s report shall disclose the required to be audited under the provisions of
composition of audit committee and reasons other Acts/ legislations. A brief of the contents of
for not accepting recommendations of audit this form is as follows:

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 Director’ S/ Auditor’s Reports  

●● he first Para of the report refers to the fact statements. These differences are to be
that the statutory audit was conducted by a pointed out individually under various
CA or auditor as defined, in the Companies heads of 3CD report. This form contains
Act. If the audit was conducted by some 32 Clauses and the auditor has to report
other person other than the tax auditor his extensively on various points. It needs to
name is required to be mentioned. be annexed with the either Form 3CA or
3CB, whichever is appropriate. The various
●● The second Para talks about the opinion of official pronouncement’s, case laws, SA,
the tax auditor. AS and AS (IT) are also required to be
●● The third Para discusses about the reasons considered in the Report. The information
for negative opinion if any, expressed. in form 3CD shall be based purely on the
books of accounts, records, information
●● The fourth paragraph talks about the and explanation made available to the
branch auditors (if audited by any other auditor for his examination.
person). ●● In the case of a firm or Association
●● The report ends with the seal and signature of Persons the names of the partners/
of the person who conducts the audit, his members and their profit sharing ratios,
membership no., place and date along any change in the partners or members
with seal. These days Firm Registration or in their profit sharing ratio since the last
number is also mandatory. date of the preceding year.
5.2 Form 3CB: It is used when the person ●● The nature of business or profession, books
is required to get himself audited due to the of account maintained & examined {The
applicable turnover limits of Section 44AB of the Auditor needs to check the compliance
I.T. Act 1961. Form 3CD is issued only for the with Rule 6F here, in case he has given
year ending 31st March. If an assessee doesn’t Form 3CB and if he is given Form 3CA,
follow this type of year end then the auditor has the compliance from the relevant statues
to make specific changes in financial statements for the books has to be checked.}
to bring them in line with these provisions. He
●● Whether the profit and loss account
has to certify that the financial statements are in
agreement to the books of accounts maintained includes any profits and gains assessable
at various offices and branches. The salient on presumptive basis?
points of this report are as follows: ●● Method of accounting employed and
●● That the Balance Sheet and Profit and whether there has been any change in the
Loss account were in agreement with the method of accounting employed vis-á-vis
books, the books are properly maintained the method employed in the immediately
and according to the information and preceding previous year. If yes, then details
explanation given to the auditor the of such change and the effect thereof on
particulars in Form 3CD give a true and the profit or loss.
correct view. ●● Details of deviation, if any, in the method
●● The auditor may have various differences of of accounting employed in the previous
opinion with regards to auditee’s financial year from the Accounting Standards/

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ICDS prescribed under Section 145 and used. The implication of capital gains are
the effect thereof on the profit or loss. not considered in reporting here}
The details of deviation observed after
●● Amounts not Credited to the Profit
adopting the new method of accounting and Loss Account, Being the items
shall be disclosed, if it is contradictory to falling within the scope of Section 28, the
the methods as prescribed by Section– performa credits, drawbacks, refund of
145. If the deviation is not ascertained, its duty of customs or excise or service tax,
impact on current and future profits needs or refund of sales tax or value added tax,
to be reported here. {The Auditor needs to where such credits, drawbacks or refunds
take a written confirmation from the client are admitted as due by the authorities
about the method of accounting followed concerned, escalation claims accepted
as per ICDS-1. Apart from this, he also has during the previous year, any claims not
to check for the compliance with respect to credited to profit and loss account, any
AS (IT)-1} other item of income & capital receipt, if
any. This is one of the most vulnerable area
●● Method of valuation of closing stock
where a client can push away the claim
employed in the previous year for each
received in the next year and understate his
class of inventory over here i.e. raw
profit. If doubtful, Auditor should obtain a
materials, WIP, Finished goods, Stock and
cross confirmation letter.
spares, etc., details of deviation, if any,
from the method of valuation prescribed ●● Particulars of Depreciation Allowable
under Section 145A, and the effect thereof as per the Income-tax Act, 1961 in
on the profit or loss. Any deviations found, respect of each asset or block of assets, with
when compared to Section 145 against description of asset/ block of assets, rate of
the change in method of valuing the stock depreciation, actual cost or written down
shall be reported. Its impact on profit also value, additions/ deductions during the
needs to be disclosed. {The Auditor needs year with dates; in the case of any addition
to study the procedure of valuing the stock of an asset, date put to use; depreciation
which needs to be followed every year allowable and WDV at the end of the
consistently along with the basis adopted in year. The cost of asset derived and the
valuing it. In accordance to Section 145A, treatment for the special transactions like
he needs to verify that all taxes applicable the subsidy received, foreign currency
have been added to cost valuation or not.} translation gain losses and the tax paid
●● Particulars of the Capital Asset are to be shown. {The Auditor is bound
Converted into Stock-in-trade: to check the asset classification, its block
the description of the asset, its date of wise classification, the WDV worked out
acquisition (to know whether it is long at the end and the rate of depreciation
term or short term), the cost of acquisition applicable. The arrival of the cost of asset
(the historical cost/ purchase cost) and the needs to be checked. Most important item
conversion amount needs to be disclosed is the use of CENVAT credit. As per the
separately. {The Auditor needs to check guidance note on CENVAT Credit Rules,
out the nature of asset, its reason for the inclusive method is to be followed and
conversion and the method of conversion a credit of 50% is allowed.}

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●● Amounts Admissible Under Sections which is an offence or which is prohibited

33AB, 33ABA, 33AC, 35, 35ABB, by law: Thus, all the penalties and fines
35AC, 35CCA, 35CCB, 35D, 35DD, have to be reported but the auditor has to
35DDA, 35E debited to the P&L state just the facts and not to check about
account (showing the amount debited and its disallow ability. It covers only penalty
deduction allowable under each Section and fines and not interest on late payments,
separately) and also not debited to the penalty on breach of contracts, foreclosure
profit and loss account. of any term loans etc. The tax auditor
should obtain a written confirmation for
●● The sum paid to an employee as bonus or the client for the type of penalty, its nature
commission for services rendered, where and effect, the payment mode and the
such sum was otherwise payable to him procedure for recording the same in books
as profits or dividend. [Section 36(1) (ii)], of accounts.
the sum received from employees towards
contributions to any provident fund or ●● Amounts inadmissible under Section 40(a),
superannuation fund or any other fund interest, salary, bonus, commission or
mentioned in Section 2(24) (x) with due remuneration inadmissible under Section
date for payment and the actual date of 40(b)/ 40(ba) and computation thereof.
payment to the concerned authorities All the amounts in excess of the limits
under Section 36(1) (va). {An auditor has specified, paid to partners or members has
to scrutinise all the ledger of employees and to be reported here.
their contribution towards various funds/ ●● Amount inadmissible under Section
schemes. He has to check the payment 40A(3), read with rule 6DD [with break-
challans for the timely deposits and go up of inadmissible amounts], Provision
through the returns. For any additions of for payment of gratuity not allowable
employees made during the year, their under Section 40A(7), any sum paid by
agreement and the communication made the assesse as an employer not allowable
to respective departments need to be under Section 40A(9).
checked.}
●● Particulars of any liability of a contingent
●● Amounts Debited to the Profit and nature: The Auditor has to check for the
Loss Account, being expenditure of contingencies report at the beginning of
capital nature, expenditure of personal the year and evaluate its status.
nature, expenditure on advertisement in
●● Amount of deduction inadmissible in terms
any souvenir, brochure, tract, pamphlet
of Section 14A in respect of the expenditure
or the like, published by a political party,
incurred in relation to income, which does
expenditure incurred at clubs as entrance
not form part of the total income.
fees and subscriptions and as cost for club
services and facilities used. ●● Amount inadmissible under the proviso
●● Expenditure by way of penalty or fine to Section 36(1)(iii), amount of interest
for violation of any law for the time inadmissible under Section 23 of the
being in force, any other penalty or fine, Micro Small and Medium Enterprises
expenditure incurred for any purpose Development Act, 2006 {The tax auditor

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has a varied amount of duties to be ●● Amount Disallowable/ Allowable

performed here too. (i) He shall check Section 43B: the disallowances made
for the status of the enterprise and its during the preceding previous year, which
coverage. (ii) Schedule VI and Sec – 22 is eligible for deduction in the current
of MSME requires disclosures in Financial previous year on payment basis and the
Statements, so the same needs to be details of the amount debited in current
checked, (iii) Obtain list of suppliers and year’s account but not paid during the
current previous year and also before the
verify them, (iv) Verify the interest payable
due date of filing of the return.
to parties thoroughly.}
●● Particulars of income or expenditure of
●● Particulars of Payments Made to
prior period credited or debited to the
Persons Specified Under Section profit and loss account.
40A(2)(b): {The auditor has to obtain a
list of all the persons who are related to ●● Details of any amount borrowed on hundi
the assessee and scrutinise their ledger or any amount due thereon (including
accounts.} interest on the amount borrowed) repaid,
otherwise than through an account payee
●● Amounts Deemed to be Profits and cheque [Section 69D].
Gains Under Section 33AB or 33ABA
or 33AC: This Clause relate to the ●● Particulars of each loan or deposit in an
provisions for the specified businesses. The amount exceeding the limit specified in
assesse has to deposit some amount every Section 269SS taken or accepted and
year and whenever he withdraws it, he shall also particulars of each repayment of
use the same for the business and utilise it loan or deposit in an amount exceeding
the limit specified in Section 269T made
completely in that year of withdrawal itself.
during the previous year and whether the
If the amount is not utilised in that year then
loan or deposit was taken or accepted or
the same is treated as income and reported
repayment was made otherwise than by
under this Clause. {The auditor has to
an account payee cheque or an account
check out the amount of drawings made payee bank draft.
during the year. He shall check out for all
the vouchers and supporting`s which help ●● Details of brought forward loss or
the auditor in knowing the genuineness of depreciation allowance in a prescribed
the expenditure.} format and whether a change in
shareholding of the company has taken
●● Any Amount of Profit Chargeable place in the previous year due to which the
to Tax Under Section 41 and losses incurred prior to the previous year
Computation Thereof. {The Auditor cannot be allowed to be carried forward
has to obtain a list of all the amounts in terms of Section 79. The auditor has
chargeable to tax under this Section along to check all the previous years return of
with relevant evidences, which needs to be income, their assessment orders, revisional
checked with the relevant ledger accounts or rectification orders to find out the above
starting from the beginning till date.} amounts. The auditor has to verify the

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register of members and their shareholding report. A report stating that sundry debtors and
records to confirm if there are any changes creditors are subject to confirmation, should give
in ownership. a clue to the AO that sundry debtors and creditors
●● Section-wise details of deductions may have to be further scrutinized during the
admissible under Chapter VIA. assessment proceedings. Qualifications of the
Auditors’ report should be thoroughly pursued
●● Default in compliance to the provisions
to see their implication on the computation of
of Chapter XVII-B regarding deduction of
tax at source and regarding the payment income. In this regard, the specific check points
thereof to the credit of the Central are as under:
Government. ●● Importantly, for an Assessing Officer who
●● The quantitative details of principal items is introduced to the case file for the first
of goods traded in trading concern and time, the auditor’s report provides a first-
quantitative details of the principal items hand view on the nature, type, size and
of raw materials, finished products and state of the business.
by-products in respect of manufacturing ●● The AO must verify if the deficiencies
concern along with percentage of yield of pointed out in the audit report have been
finished products and shortage/ excess, if reflected in the Computation of Income
any. of the assessee. Else, the AO must add/
●● Details of tax on distributed profits under disallow the amount mentioned in the
Section 115-O in the case of a domestic Audit Report and initiate penal action, if
company. The date of declaration and required.
payment of tax has also to be given too. ●● The AO should also examine the
●● Whether any cost audit or any audit was depreciation chart in Form 3CD and
make sure that the assessee has claimed
conducted under the Central Excise Act,
depreciation only as per the provisions
and to enclose a copy of the report of such
of the income-tax Act and not as per the
audit.
Companies Act. Excess of depreciation as
●● Accounting Ratios: GP, NP, Stock per Companies Act over income-tax Act
Turnover, Material consumed/ Finished must be added back by the assessee in the
goods ratios with calculations thereof. Computation of Income.
●● The year on year comparison of profit
6. USE OF AUDITOR’S QUALIFICATIONS ratios provide an insight into changing
IN ASSESSMENT PROCEEDINGS nature of the assessee’s business, if there is
6.1 Qualifications in the Auditors’ report a substantial drop or sudden rise, the same
provide relevant information for the assessee’s may be examined critically.
assessment. All material facts affecting the ●● AO should also check for any loan taken
fairness and truthfulness of the Balance Sheet or repaid, which violates the provisions of
and the profit & loss accounts are supposed to Section 269SS or 269T. Overlooking the
be contained in the qualifications in the Auditors’ same is very common and must be avoided.

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●● Change in shareholding pattern, issuing of to comment on the method of valuation/

shares at a premium and other issues may re-valuation of any such asset and the
be examined in line with the provisions of allowability of the depreciation on the same.
Section 56(2)(viib) read with Rule 11UA.
6.2 If any material discrepancy is found in
●● In case of amalgamation, merger, de-
the books of account during the course of
merger, the assessee’s depreciation
the assessment proceedings, and this is not
schedule maybe examined, to check for
mentioned in the Auditors’ report, it may be
any new asset, in the form of good will
or otherwise, that the assessee has shown necessary to examine whether the matter needs
to have arisen as a result of such scheme, to be reported to the Institute of Chartered
and the claim of depreciation on the same Accountants of India, for a possible inquiry
under the provisions of the Act needs to into professional misconduct by the concerned
be checked. The audit report is supposed Auditor.

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13
Cost Audit

A new Companies Act, 2013 replaced the

old Companies Act, 1956 and has made
comprehensive provisions to govern all listed and
unlisted companies in the country. The significant
changes inter-alia includes the provisions related
to governance, e-management, compliance and
enforcement, disclosure norms, auditors and
mergers & acquisitions. By virtue of Section 148
of the 2013 Act [Section 209 under 1956 Act],
the Cost Audit has been mandated for certain
Companies. Further details about the Cost Audit
in the 2013 Act are as under:
maintenance of such records provides a
1. Under Section 148(1) of the Companies continuous check on effective utilisation of the
Act, 2013, Central Government is empowered resources represented by raw materials, labour
to notify compulsory maintenance of prescribed and semi-finished raw materials, etc.
cost accounting records by companies engaged
in manufacture of certain specified items. 3. Costing and preparing cost sheets and the
relevant records for proper cost accounting,
2. Cost accounting is materially different from involves following steps:
financial accounting, because, in cost accounting,
special emphasis is placed on collecting and ●● Understanding the layout of Plant and
studying data relating to accumulation of cost at machinery and the systems flow chart in
every stage of the production process. Therefore, the factory.
the subject of cost accounting also includes ●● Understanding the various stages of
areas like work organisation, management, manufacturing process from procurement
workmanship, engineering technique/ process, of raw materials to packing of finished
besides the cost of raw materials, consumable goods.
goods, utilities, and labour costs. In a
manufacturing concern, cost accounting helps in ●● Listing the ingredients of raw materials
finding out cost of production at every stage of and consumable stores that go to make
production process, as the raw material passes the finished goods, as also the utilities,
through various stages of production. Therefore, like electricity, steam and water, for the
cost accounting records have a direct relevance manufacturing process.
in assessing the utility of an input, or of labour, ●● Understanding the levels of efficiency and
maintenance of stock inventory levels, and quality of work force involved, and their full
position of goods in production. Systematic utilisation at each stage of production process.

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Techniques of Investigation for Assessment Vol. 1

●● If the final product can be made by more 4.2 Rule 6 of the Companies (Cost Records and
than one method, or more than one Audit) Rules, 2014: provides that a Cost Auditor
formula, enlisting all such formulae and shall submit a certificate as per Rule 6(1A). The
methods. other provisions are:
●● Calculating the process loss that can be 1. The company shall within 180 days of the
foreseen at each stage, identifying the commencement of every financial year,
normal or unavoidable loss and abnormal appoint cost auditor.
or unforeseen loss.
2. The auditor shall be informed about
●● Correlating the manufacturing process
his appointment and notice of his
with the industrial parameters and finding
if any alternations are required in the steps appointment shall be filed within 30 days
mentioned above. of his appointment in Form CRA-2.
3. Tenure of Cost Auditor: Every auditor
4. COST AUDIT RULES shall continue his office till the expiry of
4.1 The Central Government issued Companies 180 days from the closure of the financial
(Cost Records and Audit) Rules, 2014 on June year or till he submits his cost audit report.
30, 2014. Subsequently, it issued Companies 4. Removal of Cost Auditor: Cost Auditor
(Cost Records and Audit) Amendment Rules, may be removed before expiry of his term,
2014 on December 31, 2014. The Amendment through a board resolution after giving him
Rules has introduced certain changes to the
reasonable opportunity of being heard.
original Rules issued on June 30, 2014. The
Companies (Cost Records and Audit) Rules, 2014 5. Casual Vacancy: Any casual vacancy of
read with the Amendment Rules 2014 are now cost auditor whether due to resignation,
applicable and governs the maintenance of cost death or removal, shall be filled by board of
accounting records and cost audit as per Section directors within 30 days of such occurrence
148 of the Companies Act, 2013.These provide and company shall inform CG in E-Form
that, every Cost Auditor appointed in a company CRA-2 within 30 days of appointment of
to which Section 148 of the Companies Act cost auditor.
applies, will submit Cost Audit Report, in Form
CRA-3, to the Central Government, within 180 6. Signing of Cost Statements: Cost
days from the close of the company’s financial Statements to be annexed to the cost audit
year. Rule 6 of these rules, requires maintenance report, shall be approved by the Board of
of specified Cost Accounting records by such directors before signing on behalf of the
companies, and their submission to the Cost board by any director, for submission to
Auditor. These records must be such, as are the cost auditor to report thereon.
adequate to determine the cost of production 7. Cost Audit Report: Cost Audit Report
of the specified product/ goods. The various shall be made in form CRA-3 and shall be
components of cost of production are analysed
forwarded to Board of Directors within a
from costing accounting records relating to: period of 180 days from the closure of the
●● Raw Materials financial year.
●● Labour 8. Filing with ROC: Cost Audit Report shall
●● Depreciation be filed in XBRL format within 30 days of
receipt of report in E-Form CRA-4.
●● Overheads
9. Applicability of Section 143 (12)
●● By-products
(Fraud Reporting): The provisions
●● Scrap, waste materials regarding disclosure of fraud by auditor in
●● Others e.g. royalty, technical know-how its Audit report under Section 143(12) shall
fees, other abnormal or non-recurring costs. be applicable to Cost Auditor.

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5. INFORMATION IN COST 6.3.2 The Auditor is also required to work out

ACCOUNTING RECORDS Financial ratios in respect of profit, net sales,
5.1 The Cost accounting records and Cost current assets to current liabilities, net worth
to capital employed, net worth to long term
Audit report contain information relating to the
borrowing.
following:
6.3.3 The Auditor has to furnish following
●● The date of commencement of commercial
production; information in respect of the production capacity.
●● Licensed/ registered capacity
●● The exact process of manufacture, with
details of raw materials, finished goods, ●● Installed capacity
by-products and waste materials; ●● Production capacity enhanced by leasing
etc., with details of added capacities and
●● Details of foreign collaborations, etc.;
other utilisations.
●● Details of activities other than the ●● Actual production.
manufacture of the main product(s).
●● Percentage of production to installed
●● Actual production of each item of finished capacity.
goods, bye products and waste materials;
●● The various components of the cost of 7. NOTES IN COST AUDIT REPORTS
production. 7.1 Details of installed capacity are on single
shift or multiple shift basis.
6. INFORMATION GIVEN IN COST 7.2 Production and installed capacity expressed
ACCOUNTING REPORTS in appropriate units, e.g., standard hours or
6.1 General: Information regarding name equipment/ plant/ vessel, occupancy hours,
and addresses of the company, location of crushing hours, spindle/ loom shifts, etc. If there
factory, date of commencement of commercial is any shortfall in production compared to the
production and other activities of the company, installed capacity, comments are required to be
is given. given on the reasons for the shortfall, bringing out
clearly the extent to which they are controllable
6.2 Cost Accounting System: This in short-term as well as long term.
describes the cost accounting system followed,
7.3 Process of manufacture is to be described
and the correctness of cost of production of the
along with a flow chart.
product. The Auditor is required to give specific
comments on the adequacy of the cost records, 7.4 Details of raw materials used are to be
the inventory valuation system of raw material, given, indicating any significant cost of transport.
work-in-progress, and finished products. In case of imported raw material, FOB value,
ocean freight, insurance, custom duty and inland
6.3 Financial Position: Under this head, the freight charges are to be indicated. In case of
Auditor has to certify the average of fixed assets consumption of both indigenous and imported
at net book values, and current assets minus materials, Auditor has to report the percentage
current liabilities, existing at the beginning and mix of the same.
close of the financial year, for the company as a
7.5 Quantity-wise consumption of major raw
whole, and for the product under reference.
materials, standard requirement, as well as
6.3.1 Net worth of the company has to be theoretical norm per unit of production in terms
highlighted. The Profit of the enterprise as a of quantity, has to be reported.
whole, and Profit for each of the product under 7.6 The Auditor is required to give particulars of
reference, has to be reported separately. The consumption of power and fuel, and comment
Auditor has to certify the Net sales, Operating on any variation from standard/ budgeted
Profit and Value additions. norms.

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7.7 Explanation for any variations in the 7.13 The Auditor has to clarify whether gross
quantity of major raw materials consumed as sales realisation includes cost of packing, freight
compared to standard consumption has to be and delivery charges, are recoverable from the
obtained and commented upon. customers.
7.8 Auditor has also to indicate the value of 7.14 Any abnormal, and non-recurring costs
raw materials, finished goods and semi-finished e.g. strikes, lockouts, power cuts and serious
goods, which have not moved for over 12 accidents, etc. are to be reported.
months, and also their proportion to the value 7.15 Final observations and conclusions of the
of closing stock.
Auditor are to be given in respect of any negligent
7.9 Particulars of wages and salaries are to be use of funds, carelessness resulting in increase
classified as under- in cost of production, the effectiveness of the
budgetary control system, etc. The Auditor is also
●● Direct labour costs on production;
required to give suggestions for full utilisation of
●● Indirect employee costs of production; the installed capacity, cost reduction, increase
●● Employee costs on administration; in productivity, and improvement of inventory
policy.
●● Employee costs on selling and distribution;
7.16 After examining the books of accounts,
●● Other employee costs, if any (specifying statements of reconciliation and financial
purpose); statements, etc., the Auditor has to certify the
●● Total employee costs; overall results of the company.
●● Total man-days of direct labour available
and actually worked during the year. 8. THE RELEVANT FORMS UNDER
COST AUDIT RULES FOR FILING
●● Average number of workers employed
WITH THE ROC ARE AS UNDER
during the year.
●● Direct labour cost per unit of output of S. Form
Description
No. No.
each of the products.
Form in which Cost records shall be
1 CRA-1
●● Brief explanation for variation if any, as maintained
compared to the previous two years. E-Form for intimation of appointment
2 CRA-2
of Cost Auditor by the Company
●● Comments on the incentive schemes, if any,
3 CRA-3 Form of Cost Audit Report
with particular reference to its contribution
towards increasing productivity and its E-Form for filing Cost Audit Report
4 CRA-4
with Central Government
effect on cost of production.
7.10 As regards repairs and maintenance, 9. The assessing officers dealing with
the Auditor has to report stores, spares, labour manufacturing assesse, or in cases where
charges and outside contract repair charges and they receive information from excise or GST
their proportion to closing inventories. authorities, or in cases where the results of the
7.11 Depreciation has to be calculated as per Company is at variance with other concerns in
Companies Act. same line of manufacture and lower incomes are
7.12 The Auditor has to report cost of factory offered to tax, OR where lot of subsidy payments
overheads, administration overheads, selling like in fertilizer industry are involved, should
overheads and distribution overheads, and has enquire about applicability of cost accounting
to indicate reasons for any significant variations. norms and get the reports.

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14
Special Audits
1.
The Income-tax Act, 1961 requires the assessees
to file various types of audit reports/ certificates in
specified forms. The various reports/ certificates
and the corresponding forms prescribed for filing
are as under:

Section Rule of the

Particulars Type of the Income-tax Form
Act Rules, 1962
Public Charitable Trusts or Institutions Audit 12A 17B 10B
Fund or trust or institution or any university or other
educational institution or any hospital or other medical Audit 10(23C) 16CC 10BB
institution
Electoral Trust Audit 13B 17CA 10BC
Assessee claiming deduction in respect of profits
and gains from newly established small-scale Audit 80HHA 18BB 10CC
industrial undertakings in certain areas
Assessee claiming deduction in respect of profits
Report 80HHC 18BBA(2) 10CCAB
retained for export business
Assessee claiming deduction in respect of profits
Report 80HHC 18BBA(3) 10CCAC
retained for export business
Assessee claiming deduction in respect of earnings in
Report 80HHD 18BBA(4) 10CCAD
convertible foreign exchange
Assessee claiming deduction in respect of profit & gain
Certificate 80HHF 18BBA(9) 10CCAI
from export or transfer of film software
Assessee claiming deduction in respect of profits and
gains from industrial undertakings or enterprises Audit 80-IA 18BBB 10CCB
engaged in infrastructure development
Assessee claiming deduction in respect of profits and
gains from certain industrial undertakings other than
Audit 80-IB 18DB 10CCBA
infrastructure development undertakings.
MULTIPLEX THEATRE

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Techniques of Investigation for Assessment Vol. 1

Section Rule of the

Particulars Type of the Income-tax Form
Act Rules, 1962
Assessee claiming deduction in respect of profits and
gains from certain industrial undertakings other than
Audit 80-IB 18DC 10CCBB
infrastructure development undertakings.
CONVENTION CENTRE
Assessee claiming deduction in respect of profits and
gains from business of hotels and convention centres in Audit 80-ID 18DE 10CCBBA
specified area
Assessee claiming deduction in respect of profits and
gains from certain industrial undertakings other than
infrastructure development undertakings Audit 80-IB 18DDA 10CCBD
HOSPITAL
April 2008-March 2013
Assessee claiming deduction in respect of certain
incomes of Offshore Banking Units and Report 80LA 19AE 10CCF
International Financial Services Centre
Deduction in respect of employment of new
Report 80JJAA 19AB 10DA
employees
Foreign Remittances Certificate 195 37BB 15CB
Any assessee who has short deducted tax or failed to
Certificate 201 31ACB 26A
pay such tax
Any assessee who has collected short tax or failed to
Certificate 206C 37J 27BA
pay collected tax
Assessee being a company to whom “Minimum
Report 115JB 40B 29B
Alternate Tax” provisions are applicable
Assessee being a non-company assessee to whom
Report 115JC 40BA 29C
“Alternate Minimum Tax” provisions are applicable
Investment Deposit Account Audit 32AB 5AB 3AAA
Assessee carrying on business of growing and
Audit 33AB 5AC 3AC
manufacturing tea or coffee or rubber in India
Assessee carrying on business consisting of the
prospecting for, or extraction or production of Audit 33ABA 5AD 3AD
petroleum or natural gas or both in India
Amortisation of certain preliminary expenses Audit 35D 6AB 3AE
Deduction for expenditure on prospecting, etc., for
Audit 35E 6AB 3AE
certain minerals
Audit of accounts of certain persons carrying on 3CA/ 3CB/
Audit 44AB 6G
business or profession 3CD
Assessee being a non-resident and having income by
way of royalty or fees for technical services received Audit 44DA 6GA 3CE
from Government or an Indian concern
Assessee undergoing slump sale transaction for the
Report 50B 6H 3CEA
purpose of computation of capital gains
Assessee entered into international transaction or
Audit 92E 10E 3CEB
specified domestic transactions (Transfer Pricing)

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Section Rule of the

Particulars Type of the Income-tax Form
Act Rules, 1962
For determination of arm’s length price in respect of
the remuneration paid by an eligible investment fund Report 9A 10V 3CEJ
to the fund manager.
Assessee, being a company engaged in the business of
bio-technology or in any business of manufacture or Report 35(2AB) 6(7A) 3CLA
production of any article or thing
Certifying income attributable to assets located in India Certificate 9(1)(i) 11UC(2) 3CT
Assessee, being newly established undertaking in free
trade zone; to certify that the deduction has been Report 10A 16D 56F
correctly claimed
Assessee, being newly established 100% Export
Oriented Units, to certify that the deduction has been Report 10B 16E 56G
correctly claimed
Assessee, being an undertaking exporting eligible
Report 10BA 16F 56H
products outside India
For payment/ expenditure directly incurred by
company qua eligible projects/ schemes from chartered Certificate 35AC 11-O(2) 58B
accountant
In case of amalgamated company, certificate relating to
achievement of the prescribed level of production and Certificate/
72A(2) 9C 62
continuance of such level of production in subsequent Verification
years
Statement of income paid or credited by Venture Certificate/
115U 12C 64
Capital Company or Venture Capital Fund Verification
Statement of Income Distributed by a business trust Report 115UA 12CA(2) 64A
Tonnage tax Company Report 115VW 11T 66
Special Audit Audit 142(2A) 14A 6B

2. PENALTY FOR FURNISHING 3. TAX AUDIT REPORT U/S 44AB

INCORRECT INFORMATION IN OF THE ACT
REPORTS OR CERTIFICATES 3.1 The most common and important audit
The Finance Act, 2017 has inserted Section report which needs to be filed by various assessees
271J in the Act which empowers the AO and the is the tax audit report under Section 44AB of the
Act. This Section makes it obligatory for person
Commissioner (Appeals) to impose a penalty
carrying on a business or profession and having a
of a sum of Rs. 10,000/- upon an account or turnover exceeding the specified amount, to get
a merchant banker or a registered valuer for his accounts audited by Chartered Accountant
furnishing incorrect information in any report or and to furnish by specified date, a report of such
certificate furnished under any provision of the audit, in a prescribed Performa .
Act or the rules made hereunder for each such 3.2 The objective of this Section, as clarified in
report or certificate. Circular No. 387 dated July 6, 1984, is to ensure

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Techniques of Investigation for Assessment Vol. 1

that the books of accounts and other records are 3.6 Working Papers: Section 143 of the
properly maintained by the assessee’s so that they Companies Act, 2013 gives certain powers
correctly reflect their true income. The tax audit to Auditors to call for the books of account,
facilitates the AOs by ensuring the presentation information, documents, explanations, etc.
of the accounts in a proper format and saving and to have access to all books and records.
time in carrying out routine verifications. However, no such powers are given to the
3.3 The tax audit report under Section 44AB of Auditors appointed u/s 44AB. Even then, since
the Act is applicable for the following persons: the appointment of the Auditor is made by the
assessee himself, it is in the interest of both that
1. Every person who carries on business and
the assessee furnishes all the information and
whose annual gross receipts exceeded
Rs. 1 crore; explanation and produces the various books of
account and records called for by the Auditors.
2. Every person carrying on profession if However, if the assessee refuses to produce
the annual gross receipts exceeded Rs. 50 any particular record, or to give any specific
lakhs. information or to explain any issues, then as per
Apart from the above, Section 44AB also the guidance note on tax audit published by the
provides for certain other situations falling under Institute of Chartered Accountants of India, the
the presumptive scheme of taxation where the Auditor should report the same and qualify his
assessee is required to get a tax audit report. report accordingly. The working papers are the
With effect from AY 2017–18, tax audit under most important evidence of the work done by
Section 44AB shall not apply to an assessee the Auditors. Various publications of the Institute
whose annual gross receipts from the business of Chartered Accountants have repeatedly
exceed Rs 1 crore but do not exceed Rs 2 crores,
emphasized upon the need to preserve the
if he declares profits as per the presumptive
working papers. In the “Guidance Note on Tax
taxation scheme under Section 44AD.
Audit” it has been emphasized that in order to
3.4 Submission of Information by the be in a position to explain any question which
Assessee: The Auditor is required to obtain may arise later on, the Auditor should keep and
and include various particulars in the audit maintain detailed notes about the evidences on
report, in the prescribed Form No. 3CD. The
which he has relied upon while conducting the
information obtained by the Auditor is normally
audit. The Auditors have also been advised to
more comprehensive and exhaustive, than what
is included in the Audit. This enables the Auditor maintain all their working papers which should
to make proper verification and ensure that include notes on the following, amongst other
true and correct information is submitted to the matters:
Department in the Audit report. ●● What work was done while conducting the
3.5 Test Checks: While test checks may audit and by whom?
normally suffice to certify whether the accounts ●● What explanation and information were
depict a true and fair view, even then the given to him during the audit and by
Auditor may be required to apply reasonable whom?
tests for checking the information submitted by
●● What decision on various points were
the assessee, as the Auditor has to ensure that
taken, and
no items have been omitted in the information
furnished. The extent of checking needed has ●● Which of the judicial pronouncements
to be indicated by the Auditor in his working were relied upon by him before giving the
papers and audit notes. audit report.

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 Special Audits  

The certificates obtained from the management direct the assessee to get his accounts audited
are supposed to be kept by the Auditor. by an “accountant”. Such “accountant”
3.6.1 It is necessary for the Auditor to ensure shall be nominated by the Principal Chief
that before expressing his opinion he should Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner.
have adequately satisfied himself as to the
authenticity of the information being certified 4.2 The scope of the power of the AO to direct a
by him and to ensure that his working papers special audit was enhanced by the Finance Act,
and documents are adequate and enable him 2013 by inserting following additional grounds
to certify such particulars. The liability of the on which a special audit can be directed:
Auditors in respect of tax audit is the same as in ●● Volume of the accounts;
the case of any other audit assignments. Where
any question relating to the audit conducted by ●● Doubts about the correctness of the
accounts;
the Auditor arises, he is answerable to the Council
of the Institute under the Chartered Accountants ●● Multiplicity of transactions in the accounts;
Act and in all matters pertaining to tax audit, its or
disciplinary jurisdiction prevails. In cases where ●● Specialized nature of business activity of
the AO comes to the conclusion that the Auditor the assessee.
was grossly negligent in the performance of his
duties, then action can be taken against the tax The constitutional validity of these amendments
auditor under the Chartered Accountant’s Act. was upheld by the Hon’ble Delhi High Court in
The AO or any other authority who is authorised the case of Sahara India Financial Corporation
Limited vs. CIT (2017) 84 taxmann.com 225.
to issue summons and to call for evidence or
This judgement has discussed in detail the relevant
document can call the Auditor, who had audited
aspects in connection with the circumstances
the accounts, to give any evidence or to produce
in which the AO can direct a special audit u/s
the documents called for.
142(2A) of the Act.

4. SPECIAL AUDIT U/S 142(2A) 4.3 The assessee has to furnish a report of such
OF THE ACT audit in Form No. 6B duly signed and verified by
such “accountant” setting-out such particulars as
4.1 As per the provisions of Section 142(2A), may be prescribed or as to the AO may require.
the AO may, The AO can call for such a report even though
●● At any stage of proceedings before him, the accounts might have been audited under
having regard to the nature and complexity any other law. The report has to be furnished
of the accounts, volume of the accounts, by the assessee to the AO within such period as
doubts about the correctness of the may be specified by the AO.
accounts, multiplicity of transactions in the 4.4 The CBDT has issued Instruction No.
accounts or specialized nature of business 1076 dated 12.7.1977 setting out following
activity of the assessee, and in the interests guidelines for selection of cases for special audit
of the revenue, u/s 142(2A).
●● And with the previous approval of the ●● There are reports of misfeasance, gross
Principal Chief Commissioner or Chief neglect or breach of duty on the part of
Commissioner or Principal Commissioner the principal officer or director in relation
or Commissioner of income-tax, to the affairs of the company; or

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●● The company’s affairs have been the to the Accountant who is empanelled for this
subject of search or seizure under the purpose by the Chief Commissioner.
income-tax Act or been the subject of 4.6 The expense for Special Audit is now
a probe under FEMA/ PMLA/ other required to be paid by the Department. Rule
enforcement agencies; or 14B of the I.T. Rules prescribes the guidelines
●● The company has foreign collaboration for determining the expenses for Audit. The
arrangements; or remuneration payable to the Accountant &
the qualified assistant, semi qualified and
●● The company principal is a foreign other Assistants engaged by the Accountant as
company and deduction of Head office prescribed varies in the range of minimum of
expenses etc. have been claimed; or Rs. 3750/- to maximum of Rs. 7500/- per hour.
●● The company has import/ export business The remuneration claimed by the Special Audit
with a yearly turnover of more than a crore is often subject to dispute and the matter has
of rupees; or also travelled to Courts. The Accountant is also
required to maintain a time sheet which is to be
●● There are allegations of substantial tax
submitted along with the bill. While allowing the
evasion; or
claim for remuneration of the Special Auditor,
●● Cases involving large ramifications - due one has to ensure that the number of hours
to inter-branch transfers; or as a result of claimed for billing purpose is commensurate with
setting up of several intermediaries such as the size and quality of the report submitted by the
purchasing agents, distributing and selling Accountant. In order to avoid any litigation at a
organisations, advertising agents etc; or later stage, the Assessing Officer may prescribe
the rate of remuneration in the order of Special
●● The AO has any other information Audit itself. Further, the work of Special Audit
necessitating a special audit. needs to be periodically reviewed to ensure that
4.5 It is mandatory for the Assessing Officer to the time as spent is commensurate with the work
allow a reasonable opportunity to being heard carried on.
before the matter is referred for Special Audit. 4.7 The power of Special audit u/s 142(2A) is
The Courts have often quashed the order of a very important and potent tool of investigation
Special Audit where no prior opportunity was in the hands of the AO for a professional
given to the assessee. It is, therefore, desirable examination of accounts and records, in
that the Assessing Officer should first identify the complicated cases. This should be Utilised in
‘Terms of References’ on which the Special Audit serious investigation cases. It is always advisable
is proposed and issue a show cause notice to the to frame specific issues arising in a given case,
assessee with specific reference to those Terms. on which the opinion of the Auditor may be
The work for Special Audit has to be assigned called, in addition to the Performa audit report.

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15
Investigation of
Bank Accounts

1. A common fallacy among many investigators

and judicial authorities is that amounts in bank
accounts are accounted and it does not represent
any “black money”. It is a misconception as
money in bank account does not necessarily
mean money on which due taxes were paid.
Therefore, investigation of bank accounts is
to verify whether all the deposits made in that
account were considered for arriving at total
income and on which due taxes were paid.
2. Many assessees use banking channels to Know Your Customer (KYC) norms and relevant
conceal their income, or to introduce their documentation is bedrock of the customer ID.
unaccounted income in the books of accounts in The customer ID is generated after the account
the form of unsecured loans, share application opening form as per mandated KYC norms is
money, share capital, and for inflating their received. The customer ID is unique and banks
liabilities/ expense. use this as a common link key. So all accounts
3. A proper investigation of transactions of that person, wherever they are, all credit cards
routed through bank accounts, requires certain and debit cards and even all loan accts get linked
basic knowledge of the practices followed and by this customer ID. The AO can, therefore,
procedures followed by banks. These are now access all these with the customer ID.
described below. As part of efforts to unearth other related accounts,
The AO should also look for other customer
4. RECORDS KEPT BY BANKS IDs bearing same address as the “a”. Generally
different customers IDs are generated for same
4.1 Today the Most Important linkage number is
person if different document of identification is
CUSTOMER ID. All bank customers are assigned given along with KYC. For example, if at one
an unique number to which all accounts, credit place passport is given then one customer ID will
cards, debit cards are linked. Even net banking be generated and if next time some other identity
is enabled through this number only as one proof is given new customer ID will be generated.
of the inputs apart from the password. The Therefore, detail inquiry is required to be
following records are maintained by banks. The carried over.

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4.2 Account Opening Forms- All constituents maintained by the assessee in places other than
of banks, whether opening a Saving Bank (S/B) the principal place of business.
account, or a Current Account (C/B), or Fixed 4.7 Slip Bundles: Every bank branch keeps a
deposit Account, have to fill an account opening slip bundle containing the slips/ cheques relating
form, which has following details: to each day’s transactions. This is arranged in a
●● Name & Address of the customer with particular order such as SB, CD, OD, DD, etc.
supporting address proof and in many These bundles are to be kept by the bank for a
cases the Aadhar number. minimum period of 8 years. The verification of
●● The account number and name of the slip bundles can provide key information about
introducer. the date/ nature of transaction and the parties
involved.
●● Details of other accounts of the same
assessee kept with the same branch.
5. TYPES OF BANK ACCOUNTS
●● Nature of bank account, i.e. S/B, Current,
Single name, Joint Name, etc. 5.1 Saving Bank Accounts: These bank
●● Name of persons authorised to operate it. accounts are generally opened by individuals for
depositing their savings. Withdrawals from these
4.3 Locker Register: This gives particulars of accounts can be made through withdrawals slips
the lockers maintained in that bank, with details or through cheques.
of dates on which it was operated.
5.2 Current Accounts: These accounts are
4.4 Fixed Deposit Register: All banks keep generally opened for the transactions of the
a separate register of FDRs. A verification of business. The withdrawals from these accounts
the FDRs and its closure entries in the register
can be made by issuing cheques. Overdraft
would reveal how the FDRs have been opened
facility can also be allowed by the bank against
and how the funds have been transferred after
certain securities.
closing the accounts. Any FD over Rs. 50,000/-
can be closed only by crediting SB Account. This Details of securities may also be examined to
register is now digitally maintained. find out assets and there source to.
4.5 Clearing Register: This register gives 5.3 Cash Credit Accounts: These are loan
details of cheques received from other banks accounts, from which withdrawals upto the limit
in the same city (inward clearing) and cheques sanctioned by the bank, against some security,
going from particular bank to all the other banks are allowed.
in the same city (outward clearing). This register
is very important in tracing the origin of credits Basis for
Cash Credit Overdraft
as well as tracing the last point of debits. Now Comparison
the cheque is not presented physically but only Cash credit Overdraft is a facility
magnetic image is sent for clearing. RBI, SBI or is a type of given by the bank
a designated branch of a bank is entrusted with short term to companies, to
loan provided withdraw money
the clearing work. So tracking of clearing cheques Meaning
to companies “more” than the
can be done from the office which is conducting to fulfil their balance available
clearing. working capital in their respective
4.6 OBC Register: This register contains requirement. accounts.
details of cheques sent and received for collection Pledge or Assets like financial
from other towns to this branch. A careful Security hypothecation of instrument and
inventory. property.
examination of cheques received and collected
through outside branches, to the assessee’s Cash Credit
Account Current Account
Account
account may throw light on the accounts

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It is advisable to find out the securities, The details of the pay-in-slips through which
margin against which Cash Credit (CC) limit is cheques and demand drafts are received are
sanctioned. then entered in the subsidiary books of the bank,
according to the nature of cheques/ drafts. The
5.4 Fixed Deposit Accounts: These accounts
cheques issued from another account of the
are opened for depositing an amount for a
same bank or the drafts drawn on the same bank
fixed period. Different names are given to such
are recorded on the transfer scroll. Similarly, the
accounts in different banks, such as FDR, TDR, cheques drawn on other banks are written in
STDR, Deposits receipts etc. These accounts are the scroll maintained for the clearing, and these
used by the individuals and also by the business are then presented for clearing at the clearing
houses. houses. All these registers are now computerised.
By examining pay-in-slips, one can also ascertain
6. DEPOSITS IN BANK ACCOUNTS
the branch of cash deposit which can be used
Though the procedure is well known, it is to counter the assessee’s argument viz. cash
important to know the entries made by the received by sale in Mumbai on same day cannot
dealing clerks/ bank officials for any detailed be deposited in Delhi.
examination tomorrow.
The standard pay-in-slip forms are issued by 7. WITHDRAWALS FROM
banks in booklets, for depositing money in the BANK ACCOUNTS
bank accounts. Some banks use a single type 7.1 Any withdrawals from bank accounts can
of form for depositing both cash and cheques. be made by cheques; or by withdrawals slips; or
The description of the cheque and denomination by standing instructions. The method generally
of the cash deposited has to be given on the pay- adopted for making payments or withdrawing
in-slip itself. The pay-in-slip has two parts, the the money is by issuing cheques. The identity of
deposit slip and its counter foil. person withdrawing cash from the bank can be
found from the signature on the back side of the
The cashier after verification of the cash discharged cheque.
deposited, enters the full particulars of the
account and the denomination of the cash In many cases, where a cheque is issued to a
received, in the cash receipt scroll maintained by benami concern, the signature of the recipient
on the back side of the cheque, will be that of
him, in chronological order. Thereafter, he signs
the assessee, or his employee. This form of cash
the counter foil of the pay-in-slip and returns it
withdrawal is very common, when expenditure
to the person depositing the money as a token of
is being inflated or bogus payments are being
having received the cash. The cashier also writes
entered in books.
the serial number of the scroll on the pay-in-slip
and places a rubber stamp of “cash received” on A withdrawal slip is used for withdrawing money
the pay-in-slip and signs it. The details are then from the savings bank accounts. The rubber
entered into the banking accounting system that stamp on the withdrawal slip indicates the nature
is computerised in most of the branches. of transactions such as cash/ transfer/ clearing,
etc. The account holder can also give standing
A careful analysis of pay-in-slips can also reveal instruction to transfer certain sum of money
the identity of the person who visited the bank regularly to some other bank account(s). He
for making the deposits. Any cheques/ drafts can also request for transfer of money by mail
received by the account holder can also be transfer or telegraphic transfer or even through
deposited through pay-in-slips for collection. phone banking or the internet banking facility. At

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any rate, in all such transactions, the narration in If the crossing on the order cheque is “& Co.”
the account copy is the only indicator about the then the amount can be credited to the account
transaction and the recipient. of the person, in whose favour it is drawn or in
the account of the person, in whose favour it has
7.2 Types of Cheques: In most of the cases,
been endorsed.
the withdrawal from the bank accounts are made
through cheques. Therefore, it is necessary to If the order cheque is having the crossing of
understand the various types of the cheques “Account Payee” or “Payees Account only”
and the crossings made on such cheques. The then the cheque can be deposited only in the
cheque leaflets are got printed by banks on account of the payee in whose favour it has
security paper, which are then issued to their been originally issued.
customers in booklet forms of 10, 20, 50, etc.
Payments by cheques lead to a normal
●● Bearer Cheques: The “bearer” cheques presumption that the transactions are genuine
can be encashed at the bank counter by and bona fide. Taking advantage of this
any person presenting the cheque. presumption assessees sometimes issue cheques
●● Order Cheques: If the word “bearer” even in respect of bogus payments to give them
printed on the cheque, is cancelled, or even a colour of genuineness.
if any name is written, then it becomes an
When a payment is made by a bearer cheque,
‘order cheque’. It can be encashed by the
it may well happen that the assessee’s own
person in whose name it has been drawn.
employee goes to the counter, encashes the
However, an order cheque can also be
cheque and brings back the money. A scrutiny
endorsed in favour of any other person, by
of the endorsements, particularly the last of the
the person in whose favour it was originally
endorsements in respect of cheques which are
issued. Therefore, bank can make payment
suspected to be for bogus purchases, expenses
in cash against order cheques, only after
ascertaining the identity of the person to etc. might reveal that amounts which are shown
whom the payment is to be made. as having been paid to a certain person had
actually been received (across the counter) by
●● Crossed Cheques: Both types of cheques the assessee himself or a trusted employee.
can be “crossed”, in which event payment
against such cheques cannot be given
8. ILLUSTRATION
in cash across the counter. The crossed
cheques are to be deposited in the Bank In order to give a colour of reality, an assessee
accounts only. Following types of crossing had credited the account of ‘X’ for various
are generally made on crossed cheques: payments due to be made to him for work done.
* & Co.
‘X’s account was debited for payments made
* Account Payee and these were made by cheques. There was
* Payees’ account only thus very little reason to doubt the genuineness
of this account. However, other circumstances
The crossing can be made on the cheque by indicated that the so-called work could not have
drawing two parallel lines on the left hand corner been done and if this inference was correct,
of the cheque and by placing the appropriate the account could not be genuine. Therefore,
words, out of the above three. to establish correct facts, all cheque-foils for
If the above crossings are made on a bearer payments debited to this account were called
cheque then it can be credited to the account of from the bank and examined. The first payment
any person presenting the cheque. was for a small sum of Rs. 200 and was made by

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crossed order cheque. This cheque had, therefore, The account copy narration is the only source
gone to the credit, of ‘X’s account. Other cheques of details/ information in such cases. It would be
were found to be bearer cheques and encashed illustrative to examine the backside of any ATM
by an employee of the assessee. Therefore X’s slip to see various abbreviations and meaning
account with the bank and his current account of such terms which all are various banking
opening form were called for from the bank. A transactions possible on the ATM machine.
summons was issued to ‘X’, but it was found i. “To Cash” and “By Cash” respectively
that no person by the name ‘X’ existed at the indicate withdrawal in cash, and deposit
address given. This indicated that the account in by cash.
the name of ‘X’ was a pseudonymous account.
ii. “To Transfer” indicate that the amounts
The account opening form was examined and have been withdrawn for transfer of that
the person who had introduced this account was amount to another bank account with the
summoned. He stated that he did not know ‘X’ same branch or for the purchase of fixed
at all. However, he admitted that he knew the deposit, demand drafts, banker cheques or
assessee, and stated that, to his knowledge he for transfer of money through telegraphic
had not signed any current account opening transfer or mail transfer.
form for him, nor had he introduced any account
iii. “by Transfer” appearing in a pass book
in his name as the assessee was a big party. may provide a clue to concealed bank
Specimen signature of the witness was obtained accounts and/ or secret business activity.
and compared with the signature on the account Bank Accounts at times are closed either
opening form. They were found to be absolutely by transfer or by drawing a cheque in
dissimilar. It transpired that the signatures on the favour of another bank, and the account
current account opening form, were forged to in the latter may not have been disclosed
comply with the requirements of the Bank. This by the assessee.
established that the whole account was bogus
iv. “To Clearing” indicates that the cheque
and the inference arrived at from circumstantial drawn from the account has been cleared
evidence that the work was not done was correct. through another bank normally in the
Further, one can also verify the genuineness of same city, and has been deposited in the
transaction by inquiring date of issue of cheque account with that other bank.
book by the bank to customer, viz. if assessee v. OBC: Outward bills for clearing, indicating
claims that he made certain expenditure on credit received from banks which are
particular date and furnish copy of cheque then outside the city/ town where the branch is
it can be inquired whether the same cheque was located.
issued to the assessee by bank before that date vi. FIBC: Foreign inward bills for collection,
or not. indicating export proceeds credited.
vii. CP: Cheque purchased, indicates instant
9. TYPES OF ENTRIES IN A credit to the party even before sending it
BANK ACCOUNT for clearing or collection.
9.1 With ATMs everywhere and with viii. FD: Fixed Deposit, maturing for amounts
introduction of credit and debit cards and on above Rs. 50,000/- has to be credited to
line (net banking) as well as telephone banking an account and cannot be paid in cash.
transaction facilities, deposit and withdrawal of ix. CC: Cash credit, indicates amounts
cash has become easy and one may not even received from loan account which are in
know the identity of depositor or withdrawer. the nature of cash credits.

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x. OD: Overdraft, indicates amount credited 10.2 The advantage of investigation of

on transfer from overdraft account. bank accounts lies in the fact that they offer
xi. MV: Motor vehicle, indicates amount documentary evidence by way of bank slips,
transferred from motor vehicle loan account. registers, computer entries, etc., which are
preserved for a minimum period of 8 years.
xii. Y/S: Yourself, indicates amounts These documentary evidences once gathered
transferred from the account for purchase will stand the test of every appeal.
of DD, Pay Order or making fixed deposits
in the same branch. In cases of serious investigations of bank records,
it may be advisable to visit the bank rather than
xiii. MT/ TT: Mail transfer and telephonic issuing letters calling for information. A discussion
transfer, indicate transfer of funds through
with the bank manager about the assessee may
mail or telephone from outstation branch
bring forth valuable information, and provide an
to this branch or from this branch to
opportunity to verify the records available with
outstation branch of the same bank.
the bank, such as slips, registers, loan files, etc.
However, the nature of relationship between the
10. NEED FOR INVESTIGATION OF bank and its customer, i.e. the assessee should
BANK TRANSACTIONS also be borne in mind.
10.1 The income-tax Act has made it mandatory
that payments exceeding a specified amount
11. FOLLOW-UP OF CHEQUES
cannot be made otherwise than by crossed
cheques or bank drafts. Similarly repayment of 11.1 When during an investigation, it becomes
loans also cannot be made otherwise then by necessary to scrutinise a cheque drawn by an
account payee cheque. Which type of crossing assessee, the cheque-foil is obtained from the
needs to be made on the cheques is also given drawee bank. It will show whether it was a
in some of the Sections. For example, Section bearer or crossed or order. In other words, the
40A(3) specifies that the cheque should be a cheque will show whether it has been cashed
“Crossed Cheque”. Similarly Sections 69D, on the bank’s counter or whether it has been
269SS and 269T specify the crossing to be as credited to some other bank account or to the
“Account Payee”. Thus, to fulfill the requirements payee’s own account. When it is cashed on the
of the Act, specified type of crossing has to be counter, the endorsement on its back-side will
made by the assessees on the cheques/ drafts. show the person to whom payment was made by
It is not specified in the Act as to whether the the bank. In serious investigation cases, the AO
cheque has to be bearer or order. By making will ordinarily have a list of persons in absolute
payments through cheques and giving the confidence of the assessee/ management. If it
specific crossing, the assessees feel that they is found that the assessee’s own accountant or
have fulfilled the legal requirements. In many cashier had encashed the cheque at the bank’s
cases the AOs also feel that the payments have counter, the presumption that the transaction
been made or the amount have been received was bogus would become very strong, the
through cheque with the specified crossing, and assessee having withdrawn this cash through
therefore, the transactions are genuine. This his employee. A transaction such as this has,
presumption is not always correct. In many therefore, to be explored in all its bearings
cases, a proper investigation of the transactions from the financial as well as trading aspects to
apparently routed through bank accounts, brings establish its real nature. Repeated transactions
out a different picture. where payments made by bearer cheques are

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encashed by assessee’s own employees would payment to the assessee by cheque and which
help the AO to make out a convincing case that is accounted for by him in his bank account,
the transactions are bogus. the AO can pursue his enquiries to find out the
details of the transactions in respect of which this
11.2 Delinquent assessees often employ more
payment was made. Detailed enquiry regarding
complicated and involved methods to hoodwink
selected credits may lead to useful information
the Department. If an assessee has shown
indicating sale proceeds of investments or
payments in respect of bogus transactions by
assets, sources of which may have hitherto been
crossed order cheques, the onus to prove the
suppressed; or speculation or similar profits; or
transactions to be bogus shifts to the AO He will
sales not accounted for, etc.
have to collect clinching evidence for the purpose.
Suppose an assessee has shown payment to ‘X’ 11.4 Illustration: An assessee engaged in
for certain purchases, by crossed order cheque. manufacturing activities, was suspected of
The reverse of the cheque-foil would show the suppressing its production. Scrutiny of accounts
name of the bank which has been given credit by indicated that it had transactions with a non-
the drawee bank and the date of clearance. The resident Company, ‘Y’. Letters addressed to ‘Y’
AO should then inquire from the receiving bank were returned because it had ceased to exist by
(i.e. Payee) the account to which this amount has the time investigations were carried out. ‘Y’s
been credited, by giving them the particulars of bank account was obtained from the Bank, which
the drawee bank, cheque number, amount and showed various credits and debits. Debits were
the date of payment or clearance. The receiving for payments made to the assessee from whom
bank should also be asked to supply the name cloth bales were purchased by ‘Y’. Credits were
and full address of the person to whom credit is for sales made by ‘Y’. Some of the credits were,
given, and if it is a firm, name and address of the therefore, selected and traced to their source. This
person who is operating that account should be scrutiny led to traders in the northern part of India
asked. It is not very unusual to find cases where removed far away from the assessee’s place of
the assessees open accounts in benami names, business. Letters were addressed to these traders
and operate the same through their nominees, asking them to furnish complete and detailed
immediate relations or employees. Unless this copies of ‘Y’s account and assessee’s account.
information is obtained from the receiving bank, Their purchase bills were also called for. These
the mere fact that the credit has gone to a bank bills contained information regarding bale No. S,
account, would be meaningless. The attempt and the name of the manufacturing Mill was of
should be to pierce through the complicated the assessee itself. Goods were found dispatched
fabric woven round these transactions and to from the assessee’s place of business and not
see if it is linked with the assessee. of ‘Y’. All bills were printed by the assessee’s
own printers. The serial nos. of the cloth bales
11.3 In a case, where the AO notices a credit in appearing in these vouchers and representing
the bank account requiring scrutiny, he can call goods produced by the assessee were found
information from the bank regarding the cheque missing from the assessee’s production registers.
number, and the name of the bank on which The circumstantial inference that production
the same is drawn. The date of encashment is was suppressed was established in view of the
already known to him from the pass book. With exact bale numbers that were not accounted
this information he can inquire from drawer’s for by the assessee company in its books of
bank the name and address of the person who account. Cheques in respect of sale proceeds of
had drawn the cheque. Once the AO has in suppressed production were all realised through
his possession information regarding the name this non-resident’s account. It transpired that,
and address of the person who had made this the non-resident ‘Y’ had no activity whatsoever

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except for realising sale proceeds received by on the very next day, after which the accounts
cheques. The fraud was conclusively established were closed. On verification of the cheque foils
only as result of tracing some of the well selected by which the amounts were withdrawn from the
credit entries in Y’s bank account. accounts, it was found that these amounts were
again transferred through clearing to another
12. INFLATION OF EXPENSES bank account. Verification of these bank account
revealed that these accounts were also opened
12.1 Many assessees inflate the expenses in just two days before the depositing of these
Trading and Manufacturing account by claiming cheques and that the amounts credited were
bogus purchases or by over-invoicing of immediately withdrawn in cash. The account
purchases. Similarly, expenses in the profit & loss opening forms of the intermediate accounts
account are inflated by claiming bogus expenses obtained from the various banks revealed that all
like commission, payments to contractors, the bank accounts were introduced by the family
payments for advertisement, etc. members of the assessee. The pay-in-slips of the
12.2 Illustration (Bogus Purchases): The amounts deposited in the various bank accounts
case for F. Y. 2014–15 of a unit engaged in the were obtained, and it was found that these were
manufacturing of the gray cloth was selected for written in the hand writing of one person only.
scrutiny. It was noticed that the assessee had Same hand writing was noticed on the various
shown purchases of yarn from three concerns cheques drawn from the different banks also.
in September,2014, but the amounts of the
purchases were shown as outstanding at the 13. INTRODUCTION OF
close of the accounting year i.e. on 31-3-15. The UNACCOUNTED CASH AS
AO called for the purchase bills for verification CASH CREDIT
and conducted inquiries on the addresses given
13.1 At times unaccounted cash is brought
on the purchase invoices. No such parties were
in the books by the assessee through bogus
found on the given addresses. The assessee
submitted that the parties supplied the goods at transactions which are routed through bank to
the factory as per the purchase bills and that the make them look genuine.
payments had subsequently been made through 13.2 Illustration: During scrutiny of the
crossed cheques in July, 2015. The AO obtained Balance Sheet of a private limited company,
the bank account statement, which showed that it was noticed that, unsecured loan and share
the payments were made through cheques and application money of approximately Rs. 50
withdrawn from the account. From this, the lacs had been introduced during the year. The
cheque numbers and dates of the withdrawal assessee produced the acknowledgments of
from the bank account were ascertained. It was returns of income, Balance Sheets, profit &
noticed that these cheques were withdrawn loss accounts of the persons, in whose names
through clearing from the bank. Xerox copies of such amounts had been introduced. In most of
both sides of these cheques were obtained from these, incomes ranging between Rs. 25,000/-
the bank, and from these, the bank in which to Rs. 35,000/- had been shown, from tuition,
these cheques were deposited, was identified. sewing, trading of cut piece cloth etc. In the
On verification of the details produced by the capital account, there was opening capital. The
clearing bank, it was noticed that all the three AO was not satisfied about the genuineness of
bank accounts, where these cheques were the unsecured loan and share application. He
deposited, were opened only two days before requested the assessee to produce the parties
the depositing of the above cheques, and the for examination but the assessee said that he
amounts deposited were withdrawn by cheques had furnished sufficient evidence to prove

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the identity, capacity and genuineness of the be need for tracing this remittance through the
transaction. On inquiries at the addresses given bank because it should find place in assessee’s
on the acknowledgements of return of income, it accounts and the AO would be in a position to
was found that the parties were not in existence judge its relevance to the investigation. Scrutiny
at the addresses given. The AO requested the of these entries may likewise bring to light safe
assessee to produce the bank account number, deposit accounts wherein are lodged undeclared
bank branch and the details of the cheques shares and securities or may lead to unearthing
through which the money was received. The of secret investments.
assessee submitted that the bank accounts were 14.2 Illustration: An assessee had deposited
in the custody of the respective persons and they amounts with up-country branches out of his
will not give such financial statements to it. But it secreted profits. For this purpose he had remitted
furnished the details of the cheque number, date sums through head office. Remittances did not
and amount received with the date of clearing find place in the assessee’s bank account, as
in his account. On the basis of the cheque the amounts were paid in cash on the bank’s
numbers and dates, the bank accounts were counter. However, bank charges for making
identified in the various banks and the bank these remittances were not paid in cash and
account statements along with pay-in-slips and were, therefore, found debited in the bank
cheques exceeding Rs. 50,000/- were obtained. account of the assessee. The amount of charges
From these, it was found that the accounts were were too paltry for the assessee or for the
opened in different banks only one day before the banker to bother about, but they provided an
cheques were cleared and in all these accounts, important clue. While scrutinising the bank pass
cash equivalent to the amount of the cheques book, the commission could not be co-related
issued had been deposited. The pay-in-slips for to a definite transaction. Enquiry with the bank
the cash deposited in different bank accounts led to discovery of the assessee’s deposits with
and the cheques issued from them were found the Bank’s upcountry branches. A substantial
written in one hand writing. concealment, was unearthed because of a small
slip on the assessee’s part.
14. DEBIT ON ACCOUNT OF 14.3 Other Similar Clues
BANK CHARGES i. Interest on secret accounts may have been
14.1 Bank charges are collected by banks credited to the current or savings account
for various services, e.g. for encashment of and withdrawn subsequently.
upcountry cheques or collection of dividends ii. Commission paid for D.D. or T.T. (not
or for maintenance of safe custody account or disclosed) may have been debited to (the
for remittances made on behalf of the account current) account.
holder (the assessee). Therefore, debits for bank
charges can be easily co-related to the transaction iii. Interest charged on an overdraft
which should also appear in the bank account. If arrangement utilised for secret activity may
any entries are found not to relate to transactions have been debited to the current account.
in the bank account, the matter should be iv. Banks occasionally also undertake
pursued with the bank to ascertain the exact transactions in shares and securities on
nature of transactions. For example, if a bank behalf of their constituents. Entries for
pass book shows remittances, and immediately transactions in shares undertaken by the
after or before there is an entry in respect of bank on behalf of the assessee may bring
commission charges for the same, there may not to light undisclosed business.

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14.4 Illustration: During a search, no may have to be made on the basis of percentage
worthwhile assets were found. A bank pass book, of profit applied to the total credits assuming
having very few entries was found. However, them to be sales.
there was a debit entry, with narration, yourself
15.2 Illustration: In one case, accounts were
(y/s). On verification with the bank, it was
maintained in a thorough manner. The assessee
noticed that the assessee had purchased a Pay
was an importer of cloth. He showed as if he
Order, favouring another business concern. The
had entered into agreements long back with a
books of accounts of the recipient of this Pay
number of well-established existing and genuine
Order were examined, which showed receipts
firms to whom he was selling at fixed rates. The
of Rs. 9,30,000/- including this Rs. 1 lakh from
agreements were suspected to have been entered
the assessee. Further inquiries were conducted
into later, but were given the appearance of old
to trace the origin of the balance amount of
agreements so that documentary evidence could
Rs. 8.30 lacs. These turned out to be pay orders
not be challenged. The market had risen very
purchased by debiting several other benami
high, but the assessee was accounting for his
accounts. An analysis of these benami accounts,
sales only at contracted rates with the result that
led to the discovery of 3 flats, and fixed deposits
his incidence of tax was substantially reduced.
of Rs. 45 lacs owned by the assessee in benami
The business was located at ‘B’. A study of the
names.
correspondence files indicated that the assessee
From analysis of bank a/c statement, many a was closely connected with a place ‘C’. He used
times debit entry of locker charge is found. On to go frequently to this place as per the details
the basis of the entry bank locker maintained by of his travelling expenses. His accounts showed
the assessee can be traced. his contacts with the Bank of India and the
Central Bank. Letters were, therefore, addressed
15. TRACING OF SECRET to these two banks located at ‘C’ after obtaining
BANK ACCOUNTS the genealogical tree of the assessee and his
sons and making out a comprehensive list of
15.1 As said earlier, tracing all accounts with persons in whose names bank accounts could be
same customer ID and calling for all customer expected. Information from the banks revealed
Ids with same address is basic step. It also accounts with substantial deposits in the names
helps to know the family members names, of the assessee and his family members.
the associates and top management persons
or trusted persons/ accountants names. After
16. REMITTANCES OF SECRET T.T./
getting this information, enquiries are required
D.D. IN BENAMI NAMES
to be made with selected bank branches. Where
secret bank accounts are found, it is necessary to 16.1 Remittances out of secret accumulations
trace important debits and credits. The assessee by T.T. or D.D. in benami names could sometimes
may be crediting sales suppressed altogether so be traced to the beneficial owner by following up
that the credits may well be wholly his profits. applications signed by trusted employees or by
These may have been withdrawn in cash or by the assessee himself. TT transfer is always bank to
bearer cheques encashed by the assessee or bank and cannot be encashed over the counter.
someone closely connected with him. However, After core banking it is almost discontinued.
the presence of credits and debits in the aforesaid 16.2 Illustration: In one case, the assessee
manner is likely to give this an appearance of was a firm dealing in manufacture and sale of
a trading account and if the AO is not vigilant coconut oil. Owing to the high incidence of Sales
enough to analyse the credits, the assessment tax in the State during the relevant accounting

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 Investigation of Bank Accounts

year there was a general impression that there transaction relating to foreign currency purchase
had been huge suppression of sales by the may reveal accounts outside the books of
producers. The suppression could not easily by account.
detected because even the purchases of Copra
18.2 Illustration: In a search in the case of
were suppressed, due to which the quantitative
a dealer in wood products, no bank accounts
accounts filed by producers did not show any
or fixed deposits were found, even though
abnormal shortage or wastage. One particular
line of investigation yielded very valuable there was evidence of suppression in sales. The
information. Since the transactions outside the endorsement on the passport showed purchase
books must have been on a considerable scale, of USD 5500 on 3-4-07. The amount debited in
it was anticipated that at least a portion of these the book was Rs. 1,08,750/-, which appeared to
would have passed through banks. The party be low. The endorsement was done by M/s. TT
in question would of course never pass these Travels. A letter was sent to TT Travels, requesting
moneys through a current account, but there for details of foreign currency purchased.
was the possibility that he might have recovered This revealed that the actual amount was
uncrossed DDs and TTs and cashed them across Rs. 2,47,375/-, out of which Rs. 1,38,625/- was
the counter without any entry in any books paid by cheque from an unknown account. From
except the bank’s D.D. And T.T. register. These the bank account of TT travels, the details of
registers were therefore verified. It was then seen cheque issued for the above amount was traced.
that large amounts sent and received by the This revealed a bank account with Central Bank
assessee firm through various banks had been of India. This account showed huge remittances
completely omitted from the books. Substantial which were analysed in detail by obtaining credit
turnover was thus found to be concealed. slips and tracing their origin. These inquiries
revealed 47 different bank accounts opened by
the assessee, where he had show-rooms across
17. DISCOUNTING OF BILLS the country.
One of the functions of the bank is to discount
bills, it is the bill-brokers who generally arrange 19. VERIFICATION OF CREDIT
for big credit facility by getting in touch with CARD SLIPS
persons desirous of borrowing money for short
periods. The banks maintain complete record of Payments of expenses through credit cards
bills discounted, names of the drawers and the is becoming popular on account of their
drawees, amounts of bills, due dates, and names convenience. Often payments towards credit
of bill-brokers etc. Therefore, if proper particulars card balance may be made from undisclosed
are obtained from the banks regarding relevant bank accounts. An analysis of the credit card
transactions, there may be useful for testing the payments may also reveal undisclosed accounts
correctness of the books of account of the assessee. of the assessee.

18. ANALYSIS OF FOREIGN 20. TAX EVASION USING NETWORKED

EXCHANGE TRANSACTIONS SYSTEMS OF BANKING
18.1 Verification of last page of the passport 20.1 The investigation of bank account has
would show the foreign currency purchased become difficult as real time transfer of funds
by the holder. Payments above Rs. 50,000 for and withdrawals of funds has become easy
purchase of foreign currency has to be made among all the branches of a particular bank,
by account payee cheque. An analysis of the after computerisation and networking.

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20.2 Illustration: In the case of an assessee the entries in all the accounts were tabulated
(Jacob Thomas) there was a suspicion that he into a single ledger and this was accepted by the
had an account with IndusInd Bank, as an ATM assessee as his undisclosed income.
card of the bank was found with him. Therefore,
a letter was sent asking for copy of his account. 22. REAL TIME GROSS SETTLEMENT
The bank replied that there was no such account. (RTGS)/ NATIONAL ELECTRONIC
When the ATM card was mentioned, the bank FUNDS TRANSFER (NEFT)
replied that the name of the account holder is J RTGS and NEFT are electronic payment systems
Thomas. In this account, there was only a credit that allow individuals to transfer funds between
entry of Rs. 70,000/-. The bank confessed that banks. Both these systems are maintained by the
Reserve Bank of India. It is applicable only for
the assessee did not have any other account with money transfer within the country. These mode
the branch. Thereafter, the source of this credit of payments are becoming more and more
of Rs. 70,000 was traced, and it was found that, popular than the cheque based transfers.
the amount that came to the branch by clearing Under RTGS, the funds transfer takes place on
was Rs. 7,00,000/-, which left the balance of a real time basis i.e. at the time the request is
Rs. 6,30,000/- as a mystery. When, the branch received. It is one of the fastest interbank money
manager was questioned, it was revealed that the transfer facility available through banking
channels in India. The beneficiary bank has to
balance amount of Rs. 6.30 lacs was transferred credit the recipient’s account within 30 minutes
as fixed deposits of Rs. 70,000/- in 9 accounts, at of receiving the funds transfer message. On
9 different branches of IndusInd Bank located at the other hand, NEFT operates on a deferred
Bombay, Delhi, Calcutta, etc. This transfer was settlement basis. Fund transfer under NEFT is
settled in batches as opposed to the real-time
possible using the network system of the branch.
settlement process in RTGS. The batches are
21. Enquiry of STRs: In one case Suspicious settled in hourly time slots.
Transaction Reports (STR) were received Each RTGS/ NEFT transaction is assigned
from FIU. The DDIT found 17 bank accounts a UTR number. The UTR Number is unique
of different individuals and linked them to for a transaction in the RTGS system. The
Unique Transactions Reference (UTR) number
2 addresses pertaining to a big garment is 22 characters length, which can be used for
manufacturer. A survey was done and the MD further reference. The structure of the unique
admitted that they all are his accounts in the number is “XXXXRCYYYYMMDDnnnnnnnn”
name of his employees. Post survey, the bank where XXXX is IFSC (first 4 character) of
sending participant, R represents RTGS system,
statements of all the suspicious accounts were
C represents channel of the transaction,
obtained, all the entries in the accounts were YYYYMMDD represents year, month and
tabulated date-wise and matched with the cash date of the transaction, nnnnnnnn denotes the
book ledger of the company. When this analysis sequence number. To verify the money trail, one
was done, the assesee was not able to explain can use the UTR number to identify source bank
account from where such transaction was made.
the entries in respect of cash deposits and
These transactions are also time stamped which
withdrawals from those accounts. Peak credit in can help in identifying the coordinated transfers
this case was worked out to Rs. 12 crores when without actual sale-purchase basis.

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 Chapter

16
Defective, Duplicate,
or No Accounts Cases
1. WHERE DOES ONE FIND
SUCH CASES?
1.1 There are assessees who do not maintain
regular account books but estimate their profits
as a percentage of their turnover/ sales. e.g.
contractors, professionals like doctors and
lawyers. But most often we find cases of informal
accounts, incomplete accounts or duplicate
accounts during the course of searches/ surveys.
One may find:
●● Details of unaccounted investments.
●● Unaccounted sales/ turnover. on conventional lines. For such cases, the
assessments generally have to be based on
●● Unaccounted purchases of raw materials, indirect methods. Indirect methods are founded
production of goods and sales of the same on an investigation of the taxpayer’s personal
●● Unaccounted money-lending business. affairs. There is no single “best” indirect method
●● Statement of physical verification of of quantification; the method used depends on
stocks which on comparison with books of the circumstances of the case.
account shows excess stock/ deficit stock.
●● Duplicate set of books which on comparison
2. COMPUTATION OF PROFIT IN
with the regular books of account shows
that sales/ revenue are suppressed or NO ACCOUNT CASES
expenses are inflated. In cases where accounts are maintained on the
The list burgeons as the ingenuity of the tax basis of double entry book keeping, the profit
evader is bountiful. Generally the information for an accounting period can be ascertained by
made available as a result of search/ survey in the the preparation of a trial balance, P&L a/c. and
form of seized materials would be a combination a Balance Sheet.
of two or more of the items mentioned above. Where there are no accounts or accounts are
Where books and records are incomplete incomplete, it is not possible to prepare trial
or unreliable, because of the inadequacy or balance, P&L a/c. and Balance Sheet. In such
even complete absence of records, it is often cases the profit can be arrived at by one of the
not possible to construct revised accounts following methods:

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Techniques of Investigation for Assessment Vol. 1

●● Increase in capital or investment method of assets and liabilities prepared in cases where
books of accounts are not maintained under the
●● Estimation of profit or income method
double entry system is called a ‹statement of
●● Cash flow and investment method affairs›.
●● Peak credit method 3.3 Prepare a statement of affairs as at the
beginning of the accounting period. List out all
3. INVESTMENT METHOD OR the assets and liabilities as at the beginning of
INCREASE IN CAPITAL METHOD the accounting period. By utilising the formula,
Capital = Assets (-) Liabilities, the capital as at
3.1 In a case where proper books of account the beginning of the accounting period, can be
are not maintained, profit can be ascertained by ascertained. Similarly, a statement of affairs as at
comparing the capital at the end of accounting the end of the accounting period is prepared and
period with that at the beginning of the accounting the capital at the end of the accounting period,
period. Capital at any time = Assets (-) Liabilities. is ascertained.
3.2 It is possible to find out the capital by Closing Capital (-) Opening Capital = Increase
preparing a «statement of affairs». A statement in capital

3.4 Illustration
Statement of Affairs of Mr. ABC as at 31.3.2017
Liabilities Assets
Loans from A 2,00,000 Advance Tax 17,750
Loan from B 1,25,193 LIP 3,308
Security deposit from employees 52,000 PPF 1,000
Capital Furniture and Fixtures 24,000
(being the difference between assets Investment in shares 59,288
3,99,519
and liabilities) Closing stock 80,000
Sundry debtors 3,12,327
Remittance to chit funds 52,122
Purchase of land 1,96,477
Cash in hand 6,000
Closing balance in bank accounts 24,440
7,76,712 7,76,712
Statement of Affairs of Mr. A.B.C. as at 31.3.2018
Liabilities Assets
Loans from A 2,00,000 Advance Tax 22,955
Sundry trade creditors 1,25,193 LIP 6,616
Security deposit from employees 72,000 PPF 3,000
HDFC Loan 3,76,000 Furniture and Fixtures 24,000
Capital (being balancing figure) 11,59,043 Investment in shares 1,59,288
Closing stock 80,000
Sundry debtors 2,41,792
Investment in flat 4,90,000
Investment in residential bldg. & land 8,50,000
Closing balance of bank accounts 49,585
Cash in hand 5,000
19,32,236 19,32,236

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 Defective, Duplicate, or No Accounts Cases  

Capital as on 31.3.18 Rs. 11,59,043 ●● Depository account statements;

Capital as on 31.3.17 Rs. 3,99,519 ●● Investment in immovable and movable
Increase in capital Rs. 7,59,524 properties–land/ plots, farm house, flats/
buildings, shares, bonds, mutual funds,
The following adjustments to the increase in cars, jewellery, life insurance policies, FDs,
capital are required to arrive at the profit from PPF etc. in the name of assessee or family
the business:
members or benamidar, if any;
●● Add drawings for personal/ household
●● Expenditure in maintaining opulent
expenses.
lifestyle - club memberships, mall/ shop
●● Deduct fresh capital introduced from other membership card and their reward
sources e.g. Agricultural income/ sale of programs, foreign tours (information can
shares/ investments. be obtained from passport/ credit card
●● Add interest paid for loans taken for payment);
purposes other than business purposes, e. ●● GST/ VAT returns;
g. where, an assessee purchases a house-
plot out of loans taken from bank, the ●● TDS certificates;
interest paid on such loan is to be added. ●● Details of loans, gifts taken and given;
Therefore, following adjustments may be made ●● Confirmations from sundry creditors and
to the increase in capital worked out above - persons who have given loans or gifts;
Increase in Capital Rs. 7,59,524 ●● Information from Public Sources and
Add: Drawings @ Rs. 10,000 p.m. Other Government Agencies.##
Rs. 1,20,000
(10,000 x 12)
##One may refer to http://pubdocs.worldbank.
Add: Interest on loans taken for org/en/ 220301427730119930/AML-Module-4.
Rs. 20,000
purchase of house plot
pdf–an article on investigation techniques and
Rs. 8,99,524 Information from Public Sources and Other
Less: Agricultural income from Government Agencies.
ancestral land.
●● Bank account statement includes not only
The assessee’s claim considered as
Rs. 40,000 account details and transaction details, but
genuine and reasonable
also identifying physical locations where
Income from Business Rs. 8,59,524
transactions took place, such as at an
3.5 To sum up, for determination of income automated teller machine (ATM) where a
when no books maintained or books are deposit/ withdrawal was made.
incomplete, then the AO must call for the ●● All the credits in bank accounts to be treated
following documents: as income other than loans, if genuineness,
●● Bank accounts in the name of assessee/ identity and source of income of creditors
family members/ joint accounts operated is explained.
by the assessee–in India and in foreign ●● Unexplained investments/ expenditures to
countries, KYC for such accounts - along with be treated as income.
explanations for all debit and credit entries;
●● Sales/ income reflected in GST/ VAT
●● Credit card statements and source of returns, TDS certificates to be added to
payment thereof; income if not reflected in bank statements.

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Techniques of Investigation for Assessment Vol. 1

●● It’s a common practice to invest in the result of search or survey. Obviously, the source
name of spouse or children. Any money for making such investment is the unaccounted
received from a spouse is tax-free, but if it is business income of the assessee. Quite often the
invested, the income from that investment evidence relating to such unaccounted business
is added to the income of the giver and transactions would be patchy or too thin, i.e.
taxed accordingly. So, if assessee bought a evidence may be available for a part of the
house in spouse’s name, any income from accounting year or evidence available may not
that house, whether as capital gains when give a clear picture of the entire unaccounted
he/ she sells it, or as rent, will be treated business transactions. If the evidence available
as his/ her income. If spouse did not regarding suppression of income is weak or
contribute any funds for buying the house, relates to only a part of the accounting period,
he/ she will be taxed for the entire income. estimating the business income for the entire
If assessee has invested in fixed deposits accounting period on the basis of such weak
in the name of his/ her spouse, the interest evidence is not advisable. It would be better to
earned will be treated as his/ her income. complete the assessment on investment method
●● In case of income from business, if cash sale taking into consideration the unaccounted
memos/ bills were found for a particular investments made by the assessee. However, the
period, cash sale for the entire period may AO may mention whatever evidence is available
be estimated. regarding the suppression of business income
in the assessment order and point out that
●● Details such as ledger accounts may be though the evidence available strongly indicate
called from debtors/ creditors to ascertain suppression of business income, such income is
the amount of income and expenses and not estimated since the evidence for the entire
if any discrepancy is found, the difference accounting period is not available and that the
may be added as unexplained income or concealed income is assessed on investment
investment method.
Documents and other leads will need to be For example, in the case of a jewellery firm,
gathered from a range of sources, including the the search revealed that most of the sales and
Internet and other publicly available sources; purchases were not recorded in the books of
government agencies; financial institutions account. Each sale was effected by preparation
including e-banking; money service providers; of an “estimate” in a sheet of paper and at the
law and accounting firms; trust and company end of the day, such pieces of paper were fed
service providers; real estate agents; art dealers; into the paper shredder. The search party could
business competitors; travel and other reward get hold of a few pieces of such paper. Estimating
programs; businesses, relatives, employees the total suppressed sales and the G.P. thereon
and associates of the targets; and the targets on the basis of such thin evidence would not
themselves. be reasonable. Hence the assessment had to be
completed taking into account the unaccounted
4. CASH FLOW AND INVESTMENT investments.
4.1 The method of arriving at the profit from 4.2 Even in cases where regular books of
business by following the ‘increase in capital account are maintained, when unaccounted
method’ is suitable for cases where no accounts investments are found out, the assessees make
are maintained. But it also becomes relevant in valiant efforts to give explanation regarding
cases where though accounts are maintained, the sources for making such unaccounted
unaccounted investments are found out as a investments. Quite often, they prepare a cash

238
 Defective, Duplicate, or No Accounts Cases  

flow statement for the unaccounted transaction. agency. The entire unaccounted sales cannot be
A cash flow statement has an outflow side and treated as the income of the assessee because
an inflow side. On the outflow side are depicted verification revealed that the corresponding
the unaccounted investments and unaccounted purchases of raw materials and manufacturing
expenses. The sources (unaccounted) for making expenses were also unrecorded. The entire
such investments are written on the inflow side. unaccounted purchases during the accounting
The deficit i.e. the difference between the total year cannot be treated as the unaccounted/
of the outflow side and the total of the sources unexplained investment of the applicant as the
written on the inflow side is offered as income. applicant would not buy the total quantity of raw
materials at a time and then process it and sell it.
5. ESTIMATION OF PROFIT METHOD He needs to make unaccounted investments (in
the purchase of raw materials and manufacturing
5.1 In cases where the accounts are incomplete
expenses) for one or two or three months›
and information is available regarding sources
unaccounted production. He would be able
of income, i.e. sales/ amount lent on interest/
to sell such unaccounted production and the
receipt by way of professional income/ contract
unaccounted sale proceeds could be utilised
receipts but information regarding investments
for further unaccounted production and sales.
are very little, the method of estimating the
Therefore, in cases such as these, the G.P. on the
income as a percentage of the turnover may be
adopted. The method of estimating the profit unaccounted sales and unaccounted circulating
would vary depending on the facts of the case capital have to be assessed as the income. The
and information available. G.P percentage. may be determined on the basis
of the G.P percentage on the accounted sales as
5.2 Where Entire Unaccounted Sales well as in comparable cases.
are Treated as Income: Where the entire
purchases and other expenses are accounted but 5.2.2 There is no fixed formula for working
a certain portion of sales alone are unaccounted, out the circulating capital required to effect the
the entire amount of such unaccounted sales are unaccounted sales. Depending on the nature
to be treated as the income of the applicant as of the commodity dealt with, the demand for
the corresponding expenses have already been the commodity at the relevant time, one has to
debited to the P&L Account. make a reasonable estimate of the unaccounted
circulating capital. One factor which can
5.2.1 Where Gross Profit is Estimated: be taken into account while estimating the
Very often a part of the business transactions are unaccounted circulating capital is the ratio of
not recorded in the regular books of account. ‘stock to turnover’. The turnover divided by the
For example, it was found in the case of a beedi closing stock gives a rough idea of how many
manufacturer that though he maintained regular times the stock-at-hand is rolled over. Take, for
books of account, a certain portion of the example, that the accounts of an assessee show
purchases of raw materials such as, beedi leaves, the following figures:
production of beedi out of such purchases and
Turnover Rs. 4,00,00,000
sale of such beedis were not recorded in the
regular books. Investigations revealed that such Closing Stock Rs. 80,00,000
unaccounted beedis were sent to the distributors Stock turnover Rs. 4,00,00,000 = 5times
for sale not through the regular transporter, 80,00,000.
but through a different transporting agency. The stock is rolled over five times. It is only a
Therefore, the quantum of unaccounted sales rough estimate in the sense that the figure of
could be ascertained from the transporting closing stock need not be the figure of stock-at-

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Techniques of Investigation for Assessment Vol. 1

hand at any point of time. Now suppose in this showed that bigger quantities were purchased.
case, unaccounted purchases and sales were It was apparent that with the small quantity of
found out and the unaccounted sales amounted sulphuric acid and other raw materials purchased,
to Rs. 90,00,000. Applying the same “stock turn the assessee could not have manufactured the
over ratio”, it could be presumed that to achieve quantity of chloroform as shown in the records.
a turn over of Rs. 90,00,000, the assessee Therefore, a doubt arose whether the assessee
required stock-in-hand of Rs. 90,00,000/ 5= actually produced the quantity of chloroform
Rs. 18,00,000. This could be considered as an as recorded in the books. On verification of the
indicator of the circulating capital required. The sales, it was found that most of the sales were
AO should also take into consideration other bogus. On scrutiny of the bank account of the
factors (such as whether goods are available assessee, it was found that the demand drafts
on credit, and also the fact that the “stock-turn credited into the bank account which were
over ratio” as per the accounts itself gives a supposed to have been received from far away
rough picture) while estimating the unaccounted places of the country were not actually demand
circulating capital. drafts, but bankers cheques issued locally. On
further verification, it was found that the bankers
5.3.1 Where Net Profit is Estimated: Where
cheques were purchased by remitting cash.
no books of account are maintained, but sales
Therefore, the conclusion was that the assessee
figures are available or where books are rejected,
did not actually manufacture chloroform, but
the net profit may be estimated. In some cases,
sold the rectified spirit in the black market and
the AO may find it extremely difficult to estimate
made huge profits. On the basis of the above
the net profit as in the following example.
findings, the books of the assessee were rejected
Illustration: In the case of a private limited as incomplete and unreliable. However, the
company engaged in the manufacture of difficult task was to estimate the net profit on
chloroform from alcohol, the seized record the sale of alcohol in the black market. There
showed that everything was apparently all right. was no evidence regarding the black market
The company purchased rectified spirit from price of rectified spirit. Therefore, the net profit
distilleries. The purchase of rectified spirit was was estimated in an indirect way. From the
regulated by the state excise department and government owned blending unit (units where
the assessee could buy rectified spirit as per the rectified spirit was converted into arrack by
quota allotted to it by the state government. The adding water), the quantity of arrack that could
purchase price of rectified spirit was also fixed by be produced from one litre of rectified spirit was
the state excise department. The assessee was found out. The sale price of one litre of arrack
required by law to maintain a stock register of could be found out from the assessment records
rectified spirit purchased and a stock book for of arrack dealers. Thus, the quantity of arrack
the chloroform manufactured out of the rectified that could be manufactured out of the quantity
spirit so purchased. Both the stock registers of rectified spirit was found out. The sale price of
were regularly inspected by the officials of the so much quantity of arrack could be also worked
state excise department and their stamps were out. The difference between the purchase price
affixed. However, in order to verify whether of rectified spirit and the sale price of the arrack
there was inflation in the purchase of other raw that could have been manufactured out of the
materials, enquiries were conducted regarding rectified spirit was worked out. Since the assessee
the purchase of other raw materials such as, was not himself converting the rectified spirit into
sulphuric acid, coal etc. Surprisingly, it was found arrack and selling it, the entire profit could not
that very little quantity of other raw materials be attributed to him. Taking into consideration
were actually purchased though account books the expenditure involved in doing such an illegal

240
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business and also the profit of the blender and accounts such as, whether they relate to cash
dealer who purchased the rectified spirit, the Net introduced, refunds received, sale proceeds
Profit of the assessee was estimated. On appeal, received, etc. In an ideal situation, the following
though the CIT(A) and Tribunal reduced the should be considered in the assessment:
percentage of net profit, the method adopted ●● Unaccounted cash introduced to purchase
was upheld.
shares in the primary market.

6. PEAK CREDIT AS AN ALTERNATIVE ●● Profit on the sale of shares allotted.

TO ESTIMATION OF INCOME ●● Unaccounted cash introduced in the
6.1 Sometimes, an assessee may conduct his purchase of shares in the secondary
unaccounted transactions through one or more market.
bank accounts or may record such transactions ●● Profit on the sale of shares purchased in
in a vague manner in one or more books. The the secondary market.
deposits in such bank accounts may reflect:
●● Dividends received from the shares.
●● Unaccounted sales.
In this case, since no primary records were
●● Unaccounted cash introduced. maintained regarding each and every
●● Unaccounted loan received from others. transactions, it was practically impossible to
analyse the bank transactions into the above
●● Unaccounted loans returned by others.
mentioned headings. It may be noted that in this
●● Unaccounted sale proceeds of investments case, estimation of profit on the total turn over is
such as shares, properties. not possible, because, the deposits in the bank
Details may not be available to segregate the accounts consist of cash deposited (unaccounted
deposits into the above heads and quantify the money introduced), refunds received when the
total amount under each of the above heads. shares were not allotted, sale proceeds of the
Estimating the profit as a percentage of the total shares and dividends. The computation of profit
on the purchase and sale of shares requires
of the deposits would be incorrect. In such cases,
definite information regarding the shares
working out the peak credits (receipts) or the
purchased and their cost of acquisition, and
debits (Payment) may give an indication of the
information regarding the sale of each and every
total unaccounted money in the possession of the
share. Getting such information was practically
assessee which may be assessed as his income.
impossible. Estimation of profit on the total
6.2 Illustration: It was found that an assessee sale proceeds is not applicable in this case, as
opened 8 bank accounts in the name of non- the profit earned from the sale of shares from
existing persons in a Co-operative bank and different companies would vary widely. Hence,
unaccounted transactions in shares were the only practical way of ascertaining the total
done through these bank accounts. There income was to follow the peak credit method. It
were innumerable transactions in these bank was thought that the peak amount in the 8 bank
accounts. On examination, it was found that accounts would give an indication of the total
the assessee applied for shares in the names of money invested and income earned thereon.
different non-existing benami persons. Similarly, An attempt was made to prepare a peak credit
he also purchased shares in the secondary statement of the 8 bank accounts combined. The
market and sold them. Since no regular books peak amount was found out at Rs. 69,45,995.
of account were maintained, it was very difficult The assessee also had to agree to the above
to understand each and every entry in the bank mentioned figure.

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7. PREPARATION OF PEAK ●● if peak credit statement is prepared for

CREDIT STATEMENTS more than one accounting year, the
7.1 Peak credit statement can be prepared only “incremental peak credit only should be
if records for the receipt and payment of money assessed” for the relevant asst. year.
for the entire accounting period are kept. The
records need not be regular books of account 7.3 Illustration
maintained under double entry system. Even Peak of the Amount to be
a rough account where dates of receipt and Accounting
Accounting Assessed Sincremental
year
payment of money are recorded would suffice. Year Peak Credit
For example: where an assessee maintained 2013–14 12 lakhs 12 lakhs
undisclosed bank accounts, from the bank 2014–15 15 lakhs 3 lakhs (15–12)
account statements, peak credit or the peak of 2015–16 14 lakhs Nil
the amounts deposited can be worked out. But 2016–17 22 lakhs 7 lakhs (22–15)
if the records are incomplete or if the records Total 22 lakhs
available only show total amount received on a
particular date, a peak credit statement cannot The peak credit of Rs. 22 lakhs appears in
be prepared. For example, in the case of an accounting year 2016–17 but the incremental
assessee who was engaged in the business of peak credit should be assessed as shown above.
processing of sea food, a document was seized in
7.4 ‘Peak credit’ may not always indicate the
which the amounts advanced to boat-owners as
on a particular date (say 61, 291) was recorded. total unaccounted money of an assessee in
The amount advanced as recorded in the seized circulation. In the case of an assessee engaged
material was Rs. 28,72,392. It was quite possible in the business of illicit trade in arrack, the arrack
that the assessee had been advancing money to was sold to a party at a distant place and the sale
the boat owners periodically and adjusting the proceeds were remitted by TT into a fictitious
purchases from them against such advances. bank account. The bank account was found out
It was also quite possible that the peak of the during the course of search. The bank account
amount advanced might have been more than revealed that the total amount remitted into this
Rs. 28,72,392. But in the absence of the running
bank account was about Rs. 1.5 crores. The
accounts of the boat owners, it was not possible
to prepare a statement of peak advances. Since amounts remitted into the bank account were
the assessee did not maintain regular books of immediately withdrawn by cash. Therefore, the
account, the assessment could be completed peak credit in this bank account was only about
only under the investment method taking into Rs. 5 lakhs. It may be seen that assessing the
account investments including the advances. peak credit as the income in such a case is totally
7.2 The following aspects should be borne in unrealistic. The net profit on the turnover is to
mind while preparing a peak credit statement - be estimated and assessed. In addition to that,
the circulating capital (or initial unaccounted
●● it should be chronological
investment) is also to be estimated and assessed.
●● only one statement should be prepared
even when credits appear in more than
8. ESTIMATE OF INCOME
one book. e.g. If 5 unaccounted bank
OR PEAK CREDIT
accounts of an assessee are found out, one
consolidated peak credit statement should 8.1 There are cases where it would be possible
be prepared chronologically. to arrive at the income by both the methods i.e.

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by estimating the G.P. or N.P. or arriving at the suppression of sale proceeds as there is no
income by way of peak credit method. The AO standard sale price for scrap. An analysis of the
should study the facts and circumstances of the accounts gave the following figures:
case and select the method which is most suited From the above analysis, it may be seen that
to the facts and circumstances of the case. the disclosed gross profit rates ranged from
1.3 per cent to 9.6 per cent. But the net result
8.2 Illustration: The assessee, a dealer of was loss for all the assessment years except the
industrial scrap maintained accounts regularly. last one. It was obvious that the assessee had
Losses were disclosed as follows: suppressed its income. The unaccounted profit
was introduced in the form of bogus credits in
Assessment Year Income/ Loss Returned the books. The AO had the option to arrive at
2009–10 (-) Rs. 7,10,556 the concealed income by estimating the G.P. at
2010–11 (-) Rs. 92,994 a higher percentage. But such an action would
2011–12 (-) Rs. 4,88,249 not stand test of appeal for the simple reason
2012–13 (-) Rs. 1,33,140 that there were no comparable cases which
2013–14 (-) Rs. 64,330 showed a better G.P. It is quite possible that the
2014–15 (-) Rs. 1,58,080 assessee might have suppressed his sales. In the
2015–16 (-) Rs. 1,140 absence of any evidence regarding suppression
2016–17 (-) Rs. 66,900 of sales, it was not possible to estimate the sales
2017–18 (-) Rs. 94,511 suppressed and the G.P. thereon. On the other
2018–19 (-) Rs. 90,000 hand, enquiries regarding the creditors proved
that they were bogus. Therefore, arriving at
On the other hand, it was found that the assessee the peak credit was considered to be the best
purchased a plot of land in a prime location in method of arriving at the concealed income.
the city and constructed a very big hotel. In Peak credit was worked out by preparation of
the business of purchase and sale of scrap, the an elaborate statement. Actually, there were 163
purchase price and the quantity purchased are creditors. The results of the working of the peak
mostly accounted as the purchases are from credit and the incremental credit to be assessed
big companies. However, there could be much each year were as under:

Asst. Year Scrap Sales Gross Profit % of G.P. Interest Debited in Net Profit/ Loss
P/L Account
2009–10 11,104,250 985,269 8.87 1,557,848 (-) 7,93,436
2010–11 10,194,816 986,848 9.68 961,472 (-) 1,15,894
2011–12 6,580,826 516,666 7.85 918,706 (-) 5,35,950
2012–13 2,690,902 168,783 6.27 236,699 (-) 1,43,902
2013–14 3,824,967 323,129 8.39 254,467 (-) 75,219
2014–15 13,257,281 385,808 2.91 324,248 (-) 1,69,823
2015–16 30,343,863 395,271 1.3 404,708 (-) 34,545
2016–17 29,716,918 713,360 2.4 379,173 (-) 1,31,235
2017–18 12,965,996 632,788 4.88 357,560 (-) 2,19,313
2018–19 19,088,364 1,670,026 8.75 269,074 (+) 4,36,182

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Assessment Peak Credit Incremental Peak 9. REPAYMENT OF PEAK

Year Credit CREDIT-SET OFF AGAINST
2009–10 Rs. 4,29,253 Rs. 4,29,253 OTHER INVESTMENTS
2010–11 Rs. 3,14,080 -- 9.1 Whether repayment of credits after the date
2011–12 Rs. 2,84,636 -- of peak credit would be available as source to
2012–13 Rs. 4,74,268 Rs. 45,015 make other investments? Peak credit is always
2013–14 Rs. 12,65,579 Rs. 7,91,311 referable to a date. Consider the following example
2014–15 Rs. 19,71,079 Rs. 7,05,500 where there were l creditors whose accounts
2015–16 Rs. 48,10,101 Rs. 28,39,022 showed both receipts (Cr.) and repayments (Dr.)
2016–17 Rs. 1,24,89,785 Rs. 76,79,684
of various amounts. The accounts were found
to be bogus and the assessee agreed to offer
2017–18 Rs. 1,30,81,750 Rs. 5,91,965
the peak credit as income. The peak credit was
2018–19 Rs. 1,36,04,731 Rs. 5,22,981
worked out as below:

Date A/c. No. I A/c. No. 2 A/c. No. 3 A/c. No. 4 Net Credits
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
O.B.
1.4.15 25,000 - - - 30,000 - 50,000 1,05,000
30.4.15 20,000 5,000 1,20,000
5.5.15 10,000 - - - - - - - 1,10,000
8.5.15 - - - 35,000 - - - 1,45,000
6.6.15 - - - - 15,000 - - - 1,30,000
12.8.15 - 20,000 - - - - - - 1,50,000
14.8.15 - - 10,000 - - - - - 1,40,000
30.9.15 - - - - - 50,000 - - 1,90,000
15.10.15 - 20,000 - - - - - - 2,10,000
28.10.15 - - - 15,000 - - - - 2,25,000
6.11.15 - - - - - 18,000 - - 2,43,000
30.11.15 - - - - - - - 15,000 2,58,000
1.12.15 - - - - - - - 12,000 2,70,000
6.12.15 - 30,000 - - - - - - 3,00,000
14.12.15 - - - 20,000 - - - - 3,20,000
16.12.15 - - - - - 30,000 - - 3,50,000
17.12.15 - - - 40,000 - - - - 3,90,000
19.12.15 - - - - - - - 40,000 4,30,000
Peak Credit
30.12.15 10,000 - - - - - - - 4,20,000
3.1.16 - - - - 40,000 - - - 3,80,000
15.1.16 - - - - - - 30,000 - 3,50,000
30.1.16 - - - - - - - 10,000 3,60,000
20.2.16 - - - 20,000 - - - - 3,80,000
31.3.16 - - 20,000 - - - 30,000 - 3,30,000
Balance 75,000 1,20,000 73,000 62,000

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The peak credit of Rs. 4,30,000 as on 19.12.15 subsequent assessment years. For example,
was assessed to tax. The assessee made suppose in a case the search or enquiries
unaccounted purchase of a car for Rs. 5 lakhs revealed that there were bogus credits in the
on 31.3.16. He claimed that since he had books of the assessee for the assessment years,
offered additional income of Rs. 4,30,000 say, 1994–95, 1995–96 and 1996–97. The
(being the peak credit), this amount should peak credits were assessed in the assessment
be set off against the cost of the unaccounted order for these assessment years completed,
car and that the addition towards unexplained say, on 30.3.99. Assume that the assessee
investment in the car should be only agreed to such addition of peak credit. In
Rs. 70,000 (5,00,000 - 4,30,000). Can the the meantime, the returns for the assessment
claim of the assessee be accepted? The answer years 1997–98 and 1998–99 also would have
is No. Though the peak credit (Rs. 4,30,000) been furnished. In the books of the assessee,
has been assessed, the money is still in the the assessee also would have continued these
books of account to the extent of the balance credits and in the Balance Sheets as on 31.3.97
in the account as on 31.3.16 (Rs. 3,30,000). and 31.3.98, at least some of these credits
The peak is as on 17.12.15. It is quite possible would appear. It is not advisable to ignore such
that the withdrawals subsequent to 17.12.15 credits for the subsequent assessment years on
could have been utilised for the purchase of the assumption that the peak of such credits
car. But there are also deposits subsequent to has already been assessed. It is necessary to re-
17.12.15. It is to be presumed that the deposits work the peak credits by taking into account
subsequent to 17.12.15 were made out of the the transactions in the subsequent years also.
withdrawals. In other words, the money that If there is an increase in the peak credits in the
could be considered as available to the assessee subsequent years, the same could be brought
out of the peak credit, to purchase the car is: to tax.
Total withdrawals subsequent to the date of peak
(-) deposits subsequent to the date of peak. 11. DOUBLE ADDITIONS TO BE
In effect, this would work out to - amount of AVOIDED: THE INVESTMENT
peak credit (-) the balances in the accounts AND THE SOURCE
of the creditors as on the last day of the 11.1 In a case of incomplete account, the AO
accounting year, i.e., Rs. 4,30,000–3,30,000 = decides to estimate the income. The AO has also
Rs. 1,00,000. information regarding unaccounted investments
Therefore, the assessee can be given the made by the assessee during the same accounting
benefit of Rs. 1,00,000 while considering year. Before completing the assessment, the AO
the unexplained investment in the car and should compute the income by ‘the method of
Rs. 4,00,000 (5,00,000–1,00,000) should be estimating the income’. He should thereafter find
assessed as unexplained investment in the out the total of the unaccounted investments and
car. Needless to say that the peak credit of unaccounted expenditures made by the assessee
Rs. 4,30,000 should also be assessed. during the same accounting year. If the income
estimated is more than the total of the unaccounted
investment and unaccounted expenditures, there
10. CAUTION is no need to make a separate addition towards
An important point to be borne in mind the unexplained investments and expenditures.
while assessing peak credit is, its effect on the If on the other hand, the total of unaccounted

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investments and expenditures exceed the income and expenses are determined at only Rs. 25
estimated, the assessment should be completed lakhs. Do not say that unless the assessee
on the investment method without making any proves that the source for the investment is the
addition by estimating the income. income from unaccounted sales, set off can not
be given. Remember both the transactions are
11.2 Illustration: Suppose in a case the unaccounted. Being reasonable is the surest way
profit from unaccounted sales is estimated at to succeed in appeals.
Rs. 35 lakhs and the unaccounted investment

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 Chapter

17
Cash Credits
1. INTRODUCTION
1.1 Any sum found credited in the books of
the taxpayer, for which he offers no explanation
about the nature and source thereof or the tax
authorities are not satisfied by the explanation
offered by the taxpayer, is termed as cash credit.
1.2 No businessman likes to keep his money
idle. He desires to invest the money in the
disclosed business or in other productive ways
and earn more profits. Therefore, the concealed
income earned from the sources not disclosed
to the revenue is introduced in the books of
account of disclosed business as cash credits. “Cash Credits
1.3 Unaccounted cash and income of the 68. Where any sum is found credited in the
businessman is generally brought back in his books of an assessee maintained for any
real business concern in the form of loan, share previous year, and the assessee offers no
application, deposits or advance. In addition
explanation about the nature and source thereof
to above, receipt of gifts may be claimed in the
individual capacity. Sometimes, other innovative or the explanation offered by him is not, in the
methods may be adopted. The methods adopted opinion of the Assessing Officer, satisfactory, the
to bring back the unaccounted income secretly sum so credited maybe charged to income-tax as
into the business have become more complex the income of the assessee of that previous year:
over times. Hence, the Assessing Officer should
conduct in-depth investigation and enquiries Provided that where the assessee is a company
before making any addition on account of (not being a company in which the public are
unexplained cash credit. substantially interested), and the sum so credited
consists of share application money, share
2. BASIC PROVISIONS capital, share premium or any such amount by
whatever name called, any explanation offered
2.1 Section 68 of the income-tax Act, 1961
contains provisions relating to tax treatment of by such assessee-company shall be deemed to
cash credit which is as under: be not satisfactory, unless:

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the person, being a resident in whose name such c. The taxpayer offers no explanation about
credit is recorded in the books of such company the nature and source of such credit found
(a)
also offers an explanation about the nature and in the books or the explanation offered by
source of such sum so credited; and the taxpayer in the opinion of the Assessing
such explanation in the opinion of the Assessing Officer is not satisfactory.
(b) Officer aforesaid has been found to be
satisfactory: If all the above conditions exist, sum so credited
may be charged to tax as income of the taxpayer
Provided Further that nothing contained in the of that year.
first proviso shall apply if the person, in whose
name the sum referred to therein is recorded,
is a venture capital fund or a venture capital 4. TAX RATES APPLICABLE TO
company as referred to in Clause (23FB) of AMOUNT CHARGED TO TAX BY
Section 10.” VIRTUE OF SECTION 68

2.2 Section 68 has been introduced in the 4.1 As per Section 115BBE, income-tax shall
income-tax Act, 1961 w.e.f. 1.4.1962. In the be calculated at 60% where total income of
1922 Act, there was no provision corresponding assessee includes following income:
to Section 68. The principle of Section 68 is
a. Income referred to in Section 68, Section
a statutory recognition of what was always
69, Section 69A, Section 69B, Section
understood to be the law based upon the rules
of evidence that it is for the taxpayer to prove 69C or Section 69D and reflected in the
the genuineness of the borrowings or other return of income furnished under Section
credits in his books, since the relevant facts are 139; or
exclusively within his knowledge. To conclude,
b. Which is determined by the Assessing Officer
Section 68 incorporates only a rule of evidence,
placing the onus of proof on the assessee. The and includes income referred to in Section
onus is on the assessee to prove that the ‘credit’ 68, Section 69, Section 69A, Section 69B,
in his account is a genuine transaction. Section 69C or Section 69D, if such income
2.3 There have been hardly any amendments is not covered under Clause (a).
in this Section since its introduction. The major 4.2 Such tax rate of 60% will be further
amendment was by the Finance Act, 2012 which increased by 25% surcharge, 6% penalty, i.e. the
introduced the two provisos to this Section. final tax rate comes out to be 83.25% (including
cess). Provided that such 6% penalty shall not
3. CONDITIONS TO BE SATISFIED FOR be levied when the income under Section 68 has
APPLICABILITY OF SECTION 68
been included in the return of income and tax
3.1 From the reading of Section 68, following has been paid on or before the end of relevant
conditions can be stated to attract the applicability previous year.
of Section 68:
4.3 As per Section 115BBE, the taxpayer is not
a. Assessee has maintained ‘books’ entitled to claim any deduction, set -off any loss
b. There has to be credit of amounts in the or to adjust the basic exemption limit against the
books maintained by the taxpayer of a income referred to in Clause (a) of sub-Section
sum during the year. (1) of Section 115BBE.

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5. CASH CREDITS: DEVICE TO Meanwhile, secret funds are used under cover of
INTRODUCE UNACCOUNTED the ante-dated sales. These funds are withdrawn
CASH FOR SHORT PERIOD by suppressing the later and real cash sales.
Several types of manipulations are resorted to 5.5 Post-dated Purchases and Expenses:
by the assessees to introduce the concealed Urgent expenditure is met from secret funds but
income in the books temporarily. Some of them the debit is entered in the books on a later date
are as under: when the cash balance makes it possible. The
5.1 Squaring up the Account During the secret funds are replenished on the date of the
Year: Some of the assessees credit the cash in debit in the books.
ingeniously assumed names and square up the
5.6 Showing Cash Purchases as Credit
personal accounts in question before the close of
the accounting year, so that no suspicious of tell- Purchases: Purchase of raw material or stock-in-
tale credit balance was reflected in the Balance trade is made with secret cash but the purchases
Sheet. The AO had to turn over the pages of the are recorded on later dates when disclosed cash
ledger to get at them. As only the balances at the balance is adequate.
year end are generally compared, the chances of 5.7 Post-dating Withdrawals and Ante-
tracing the cash credits become meagre.
Dating Receipts in Bank Account: A
5.2 Without Ledgerisation: Some of the cheque is prepared on the bank and the account
assessees enter the credits in bogus names of the bank in the assessee’s books is credited
in the cash book to meet urgent business when there is pressing need for cash. The money
requirements, but avoid their ledgerisation. The is not, however, actually drawn from the bank
cash is withdrawn, without ledgerisation again,
as the balance in the bank may be required for
when sufficient cash balance is available. The
meeting other obligations. It may be drawn, say,
AO cannot find out these credits by turning over
the pages of the ledger. He has to scrutinize the a few days later when bank balance is at a safe
Cash book to dig them out. A trained eye may level. During the period intervening between the
succeed in spotting the credits in the Cash Book date of the cheque and the date of its collection,
which do not bear the ledger page-number or concealed money is used under the screen of
the varying marks used by the assessee to the credit to the bank’s account in the assessee’s
distinguish them from the other normal entries ledger. The money goes back to the secret cash
in the Cash Book. when the cheque is presented to the bank and
5.3 In the Name of Existing Parties: Some the bank pays the cash. The concealed money
of the tougher assessees attempt to create will not be caught unless that dates of the credits
an ocular illusion by inserting the credit in a in the bank’s account in the assessee’s ledger are
personal account which is otherwise true; it may verified with the dates of the debits in the pass-
be a Bank account, if it has a large volume of book issued by the bank.
transactions: it may be the account of some
other well-known party. 5.8 Postponing Entry of Cash Deposited
in the Bank: The assessee may deposit his
5.4 Ante-dating Sales and Other Receipts secret cash in bank but debit the bank’s account
or, Alternatively, Showing Secreted Income later when sufficient cash becomes available in
as Advances Received Against Later Sales:
the books.
When cash is needed immediately, fictitious cash
sales of the stock-in-hand are shown. The sales 5.9 Omitting Entry of Cash Deposited
may actually take place from time to time later. in Bank: The assessee may deposit his secret

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cash in bank and later withdraw the amount book and no journal, may credit the vendor
when bank balance becomes adequate without today and debit the goods account, say after two
entering the deposit as well as withdrawal in the months, meanwhile using the hidden cash under
bank’s account in the books. cover of artificial, inflated cash balance.
5.10 Treating Drafts, Cheques as Cash 5.14 Showing Fictitious Cash Sales or
Even if their Collection is Likely to Take Speculation Profits: The assessee may show
Some Time: When a draft or a cheque is fictitious cash sales or speculation profits when
cash is required and subsequently showing
received from a third party, the proper entries
fictitious cash purchases or speculation losses
are a credit to the party and simultaneous when cash is not longer required. The services of
debit of the same amount to the bank through some brokers or other parties similarly interested
which the draft or cheque is collected. If some in such manipulations are likely to be utilised in
days elapse before the draft or cheque is sent to this connection.
the bank and the bank is debited, the amount
of the draft or cheque is shown as part of the 6. CASH CREDITS-DEVICE TO
‘cash balance’ in the cash book. It is obvious INTRODUCE UNACCOUNTED
that in such cases, the ‘cash balance’ should not CASH FOR LONG PERIOD
fall below the amount of uncollected cheque or
When large sums of money are needed for a
draft. Cases have been found in which expenses long period, following are some of the methods
are met out of undisclosed cash and the closing adopted by the taxpayers:
‘cash balance’ is shown at a figure less than the
6.1 Bank Loans: Opening secret fixed or call
amount of uncollected draft or cheque.
deposit account with banks in different names
5.11 Striking Cash Balance Periodically, and obtaining loans on collateral security of
say Fortnightly or Monthly: It will be found those deposits.
that payments exceed money available if daily 6.2 Agricultural Income: Claiming large
cash balances are struck. agricultural income, taking advantage of some
landholding, the exact income from which is not
5.12 Inflating Receipt Side Total and easily ascertainable.
Deflating Payment Side Total in Cash
6.3 Sale Proceeds of Shares or Other
Book: This is a method subtler than the method
Assets: Showing fictitious sales of shares or
of unledgerised cash credit. Where receipt side other assets through recognised brokers, the
total is inflated there will be corresponding assets being acquired by the assessee himself
inflation of payment side total on a later date with undisclosed income, and the undisclosed
when cash is available. By this way cash secretly funds coming into the books in the form of sale
introduced earlier is withdrawn. If cash is proceeds.
introduced secretly by deflating the total of the 6.4 Inflating Sale Price and Reducing
payment side, there will be a corresponding Purchase Price: While selling share or other
deflation of the receipt side total later. assets genuinely, the sale price is collusively
arranged at an inflated figure. This enables
5.13 Artificially Splitting Entries: Every
the cash to the extent of the inflation in price
transaction involves a credit and a debit in the
to be introduced secretly. Similarly, while the
double-entry system of accounting. When, for shares or other assets are purchased genuinely,
instance, a credit purchase is made the vendor is it is collusively arranged that the purchase price
credited and the goods account is simultaneously should be shown at a reduced figure. Here
debited. An assessee, who maintains only a cash again secret funds to the extent of the difference

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is brought into use, incidentally avoiding Finance (No. 2) Act, 2004 comes into force; and
appropriate stamp duty. (b) such transaction is chargeable to securities
6.5 Claiming Inheritance of Wealth: transaction tax under that chapter. Obviously,
Claiming inheritance of wealth from father or the above exemption was available if the shares
other relatives where directly disproving the were acquired in any manner.
existence of such wealth is not possible or easy. 6.11.3 As per 3rd proviso of Section 10(38)
6.6 Claiming Accumulated Savings: inserted by Finance Act 2017, nothing contained
Claiming accumulated savings over a period of in this Clause i.e. Clause 38 of Section 10 shall
time in the past out of declared drawings in that apply to any income arising from the transfer of
period. a long-term capital asset, being an equity share
in a company, if the transaction of acquisition,
6.7 By Taking Loan Entry: Advancing
other than the acquisition notified by the Central
unaccounted money to a well-known party or
an entry-operator and introducing the money Government in this behalf, of such equity share
in the books by way of a simultaneous loan is entered into on or after the 1st day of October,
from him. The unaccounted income may also 2004 and such transaction is not chargeable
be introduced in books by showing bogus hundi to securities transaction tax under Chapter VII
loans. of the Finance (No. 2) Act, 2004 (23 of 2004).
As on 05/ 06/ 2017, the Government issued a
6.8 Floating a Company: Floating a limited
notification no. 43/ 2017. So, after aforesaid
company, holding its share or debenture capital
amendment, to claim the exemption u/s 10(38),
with secret income in different names and taking
it is now also mandatory that the transaction of
loans from it subsequently.
acquisition is carried through recognised stock
6.9 Creating a Trust: Creating a charitable exchange and STT should have been paid on
trust, making anonymous donations to it with such acquisition.
secret income and taking loans from it.
6.11.4 Following fourth proviso shall be inserted
6.10 Transferring Money Abroad: By after the third proviso to Clause (38) of Section 10
transferring unaccounted money from India to by the Finance Act, 2018, w.e.f. 1-4-2019:
foreign countries and later showing borrowals,
gifts or investment from entities of those Provided also that nothing contained in this
countries. Clause shall apply to any income arising from
the transfer of long-term capital asset, being an
6.11 By Taking Entry of Long-Term Capital equity share in a company or a unit of an equity
Gain on Sale of Penny Stock
oriented fund or a unit of a business trust, made
6.11.1 Exemption provided under Section on or after the 1st day of April, 2018.”
10(38) of the income-tax Act,1961 has been
6.11.5 The aforesaid provisions of Section
often misused for declaring the unaccounted
10(38) have been misused by the taxpayers
income as exempt long-term capital gains by
by taking accommodation entry of Long Term
entering into sham transactions.
Capital Gain [LTCG]. Shares are purchased at
6.11.2 As per Section 10(38), any abnormally low price. Thereafter, operators
income arising from the transfer of a long-term artificially increase the price of the share several
capital asset, being an equity share in a company times in a pre-determined collusive plan. The
or a unit of an equity oriented fund or a unit of a shares are sold subsequently through stock
business trust is exempt where (a) the transaction exchange after holding for 1 year. As these shares
of sale of such equity share or unit is entered into are not having any real value, the inflated sale
on or after the date on which Chapter VII of the proceeds are arranged by giving unaccounted

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cash in lieu of sale proceeds to entry- operators nominees are directors of the Penny Stock
who charge some undisclosed commission. The companies which is indirectly controlled
LTCG shown in the books have been exempt for by them through such dummy directors.
a long period of time. The whole operation is managed by
them. They get the net commission
6.11.6 Now, it is pertinent to discuss how the
income from the transactions. Their
aforesaid provisions have been misused by some
name however, seldom appears in the
of the taxpayers. Before the actual transaction actual transactions.
start taking place there are brokers in different
towns who contact prospective clients and take ii. The Brokers: They are registered
paper booking for entries. The commission to brokers through whom shares are traded
be paid to the operators is decided at this stage, both online and off-line. They are fully
however, no money is paid. Once the booking is aware of the nature of transactions
complete, the operators have a reasonably good and get paid a commission over and
idea of how much LTCG is to be provided along above their normal brokerage. Some of
with the break-up of individual beneficiaries. the big broking houses also indulge in
This data is essential to decide which penny such transactions, mostly through sub-
brokers. The brokers often compromise
stock or companies to use for the job and which
on KYC norms of the clients to help the
beneficiary to buy how many shares.
Syndicate Members.
6.11.7 Broadly speaking there are two types of
iii. The Entry Operators: They are
companies.
individuals who control a large number
i. An old Already Listed Company: of paper/ shell companies which are
The entire shareholding of which is used for routing cash for the transactions
bought by the syndicate to provide as well as buying and selling shares
LTCG entries. These are generally during the process of price rigging. They
dormant company with no business and work for the commission paid by the
with accumulated losses Syndicate Members.
ii. A New Company: Which is floated 6.11.9 The transaction involves three legs.
just for the purpose giving LTCG entries.
Such new companies are often floated i. Purchase of Share by the
after the initial booking is complete and Beneficiary: The beneficiary is sold
the capital base is decided keeping in a fixed number of shares at a nominal
mind the entries to be provided. rate. The price and the number of shares
to be purchased are decided on the basis
6.11.8 There are three categories of individuals of the booking taken and the value up to
who are involved in the transactions- which price would be rigged. This leg of
i. Syndicate Members: They are the the transaction mostly is off-line. This is
promoters of the Penny Stock companies done to save on STT using the loophole
who own the initial shareholding mostly in Section 10(38) of the IT Act which
in the name of paper companies either places restriction of trading by payment
in a fresh IPO or purchased from the of STT on sale of shares and not on
shareholders of a dormant company. purchase.
They are usually a group of 4–5 ii. Price Rigging: After the shares have
individuals who are also referred to as been purchased by the beneficiaries,
Syndicate Members and are sometimes the syndicate members start rigging the
also referred to as Operators. Their price gradually through the brokers. In

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these transactions the volume is almost small its market capitalisation is many times its
negligible. Two fixed brokers who are in capital base. This is managed again through small
league with the Syndicate buy shares at volume predetermined transaction amongst
a fixed time and at a fixed price. These members of the syndicate. The prices of shares
low volume transactions are managed are thus manipulated at 20 to 25 times the face
through paper companies of entry value. The investors hold the shares of the penny
operators. stock listed company which it got as a result of
iii. Final Sale by the Beneficiary: This merger for one year (statutory lock-in period
is done after the beneficiary has already for exemption under IT Act) and then sell it to
held the share for one year. The period one of the shell companies of the operator. The
of holding may be a little more to match investor thus makes a LTCG of 20–25 times its
the amount of booking with the final original investment. The purchase consideration
rate. The beneficiary is contacted either is again provided in cash by the investor which is
by the Syndicate member or the Broker laundered to the buyers account through a maze
(Middle man) through whom the initial of shell companies as mentioned in the previous
booking was done. The beneficiary method.
provides the required amount of cash
which is routed through some of the
paper companies of the entry operator 7. EXAMINING CASH CREDITS
and is finally parked in one company 7.1 Cash credit may simply appear as a single
which will buy the share from the credit entry in an account. The account may
beneficiary. The paper company issues appear as a closed account in which case the
cheque to the beneficiary. cash credit may be followed by a corresponding
6.11.10 The abovementioned methodology debit entry. Or, it may be preceded by a
is referred to as Conventional Method. Another corresponding debit entry made either in that
method which was also used quite often is year or in an earlier year. Besides these types,
called Merger Method. In Merger method, the there may be accounts showing numerous credit
operators first form a Private Limited Company and debit transactions in which case the account
and the shares at par are allotted to beneficiary may be called cash credit-cum-drawing account.
individuals. This private limited company In such cases it may be a fruitful to find out if such
is then amalgamated/ merged with a listed accounts represent current banking accounts
penny stock company by a High court order. of some concealed business. If it is established
Depending on the capital of the amalgamating that the account represents banking account of
and amalgamated companies, the investors are some undisclosed business, it would be more
allotted stock of the listed companies in the same appropriate to consider only the net credit as
proportion. The capital of the Penny stock listed income, but even in such cases the assessee
company and the private limited company are so should establish that such is in fact the case.
arranged that the beneficiaries post- merger, get 7.2 Except under special circumstances, it
shares of listed company in the ratio 1:1, thus the is the gross cash credits that are relevant. Any
investor gets equal number stocks of the listed drawings should not be accepted automatically
company. The promoters of the listed penny or necessarily to be the genuine source of the
stock companies run the syndicate, the brokers later credits. When an assessee urges that the
and the entry-operators through whose paper/ drawings are the source of credits, the position
shell companies cash are routed are merely is exactly the same as when he urges that the
commission agents. The penny stock listed credits coming out of cash savings at home
company is such that though its capital base is or cash received from legacies etc. The only

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difference when drawings are offered as the discharge this onus, the AO is free to draw his
source of later credits is that the existence of own inference from the inability of the assessee
the drawings cannot be denied. But that does to explain what was within his knowledge and
necessarily prove that the later credits should from the other circumstances of the case.
be deemed in fact to have come out of such
7.4 The following provisions of the Indian
drawings as the assessee could have spent them
Evidence Act should be kept in mind -
in hundreds of other ways. A realistic approach
would base itself on three propositions: S.106: When any fact is especially within the
knowledge of any person, the burden of proving
i. That, the only basis on which the net
that fact is upon him.
credits theory could be validly founded
would be on the assumption that the S.114: The Court may presume the existence of
drawings were not for investing them any fact which it thinks likely to have happened,
but for keeping the money at home. regard being had to the common course of
ii. That, the assumption required for this natural events, human conduct and public and
proposition is so contrary to normal private business, in their relation to the facts of
expectations that it cannot be accepted the particular case.
without proof that the money was in fact
kept at home. 8. DEALING WITH VARIOUS TYPES
OF EXPLANATIONS
iii. That, in absence of such proof the
gross credit theory must remain as it is 8.1 In tackling cash credits, it is necessary for
based on the relatively more secured the AO to observe closely the various aspects
foundation that the surplus funds, when connected with them and subject the assessee
not allowed to remain in business must and the depositors in whose names cash credits
have been drawn out for only two appear to a searching cross-examination.
reasons, viz.,(a) expenses, and, or, (b)
investment, and so it is for the assessee 8.2 Given below is an outline as to how an AO
to prove that the money had been kept may proceed to collect adequate materials to
intact and was available when needed. deal with explanations furnished by the assessees
in support of cash credits. The appropriate
7.3 When an assessee produces his books of
enquiries will naturally depend on the facts of
account before an AO in support of a return,
there is an initial presumption in his favour the case under consideration.
that the books have not been fabricated. This 8.3 Entry of Long-Term Capital Gain on
presumption is an application of the general Sale of Penny Stock
presumption which the law raises against
8.3.1 In the recent past, the Investigation Wings
misconduct of every kind including crime, fraud,
forgery, dishonesty and fabrication. But when of the Department have conducted investigation
an AO issues a notice under Section 143(2) of in case of the accommodation entry of Long
the income-tax Act, the principle of Section 106 Term Capital Gain (LTCG) on a much larger
of the Evidence Act commences to operate. The scale. They have been able to identify a very
transaction recorded in the books being a fact large number of beneficiaries who have taken
particularly within the knowledge of the assessee, bogus entries of LTCG. First, the ‹Penny Stocks’
the onus of proving the correctness of the entry, were identified by them and then the individuals
the truth of which is called in question by the who dealt in them were identified by collecting
AO, shifts to the assessee. If the assessee fails to data of transactions from stock exchange.

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8.3.2 The share brokers, the promoters the assessee; the AO should conduct survey
of the penny stock companies, the entry actions and examination u/s 131 or enquiry u/s
-operators providing fund for purchase of shares 133(6) against the assessee and the operators.
through paper companies in lieu of accepting
unaccounted money from different taxpayers 8.4 Cash Credits Representing Sale
were covered by the Investigation Wing and Proceeds of Gold or Ornaments: It is a
their statements along with other incriminating common practice to explain cash credits as
documents were recovered. Cash trails right representing sale proceeds of family ornaments.
from cash deposit accounts to the accounts of When asked to produce evidence in support of
beneficiaries were also drawn in many cases. this, a letter from some reputed firm or bullion
Some of the beneficiaries have also been covered merchant, which hardly shows any details of
who admitted to have taken accommodation the transaction, is produced. Secret profits
entries. are sometimes first converted into gold and
jewels and later on disposed of through bullion
8.3.3 SEBI has also taken actions against some
merchants. Often these merchants collaborate
of the companies and their promoters, whose
with such assessees and help them by furnishing
shares have been manipulated to provide LTCG
back-dated vouchers and by making ante-dated
which would be available on their website.
entries in their account books. For this purpose,
8.3.4 Before the AO, the assessee generally these merchants generally leave sufficient space
submits various documentary evidences to in their account books so that at a later date,
prove the genuineness of the transaction of sale entries could be easily interpolated. If such
and purchase of shares which include a copy of transactions are properly investigated, it may
purchase and sale bill, a copy of share transfer not be difficult to establish that these entries in
form, copy of bank statements, Demat account the books are distinctly different from the other
etc. The AO can reject the claim made by the normal entries in that the hand-writing is not the
assessee by doing some investigation at his same or there is slight variation in the colour of
own end in addition to relying on the report of the ink used. However, in computerised books,
the Investigation Wing. By examining the past it is difficult to find out such entries inserted
history and assessment records of the assessee, subsequently. Wherever necessary it would be
it may be highlighted that the assessee does not better to call for accounts of the purchasers. It
indulge in purchase and sale of shares regularly should be borne in mind that it is not the general
except the few manipulated ones. Recording practice to sell family ornaments unless the owner
proper and detailed statement of the assessee is driven to the extreme. In times of difficulty the
will be a very useful tool. When and how the
ornaments may be pledged but out-right sale is
purchase consideration was paid and entered in
not generally resorted to.
the books will be a relevant factor to prove that
the purchase shown was an afterthought. Thus 8.5 Cash Credits Alleged to have Come
the assessee’s own conduct has to be brought out of Agricultural Income: In those states
on record to prove that the transactions are not where agricultural income-tax is levied, there
normal in addition to referring and relying on may not be much difficulty in scrutinising the
the report of the Investigation wings and SEBI. explanation. But where such tax is not levied
Reliance is to be placed on those reports without and the assessee does not keep any record of his
losing focus on highlighting inconsistencies or agricultural income and expenditure, or even if
abnormalities in transactions conducted by the he keeps a record but does not produce it, the AO
assesssee. In case it is found that specific evidence should inquire about the extent of the agricultural
or specific statement are not adequate against holding, extent of land cultivated, nature of crops

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cultivated, the extent of yield, purchase of seeds as genuine. Besides in each instance of cash
and other inputs, extent of irrigation, facilities of credit, the assessee has necessarily to establish
storage, the maximum possible sale proceeds of the following:
the yield, and particulars of the purchasers.
i. The identity of the creditor or the donor,
8.6 Cash Credits Alleged to have Come ii. The capacity of the creditor or the donor
out of Foreign Gifts: Money brought into to advance or gift the money, and
India by non-residents for investment or other iii. The genuineness of the transaction.
purposes is not liable to Indian income-tax. The
8.7 Cash Credits Alleged to have Come
question of assessment to tax arises only when
out of Previous Withdrawals: The AO should
there is no evidence to show, that the amount
scrutinise the withdrawals made in earlier years.
in question in fact represents such remittance.
The narration in the Cash Book in respect of
Certain instances have come to notice, wherein
withdrawals should be seen. It should be borne
gifts were purported to have been received from in mind that normally no one withdraws large
non-residents who were totally strangers to the sums of money to keep it idle at home. The
donors. The modus-operandi in such cases AO should see whether withdrawals could be
was to purchase foreign currency in India and properly correlated to expenses for marriages in
later on depositing the same in the non-resident the family, gifts, properties purchased etc. In the
external accounts maintained in certain banks absence of positive proof to the contrary, one
by the non-residents from where the gifts were should infer that cash credits should be treated
alleged to have been given to these assessees. as income and the withdrawals as money taken
On detailed investigation, it was discovered either for expenses or for investment elsewhere.
that the assessees in connivance with the bank
8.8 Cash Credits in the Name of a Third
officers and the non-residents arranged to Party: The AO should note down briefly the
purchase foreign currency from the local market, assessee’s family history, the age and sources of
depositing the same in the NRE accounts and income of each of the members of the family,
then receiving cheques of identical amounts in what births and deaths occurred in the previous
the guise of gifts. While examining such credits, year under consideration, how many marriages
all factors in totality have to be considered by the were celebrated in the year, what were the names
AO. The truthfulness of statements advanced by of the principal employees and so on. He will
the assessee can also be tested against the human thus be familiar with the assessee’s background,
probabilities. If there is sufficient indication and will be in a position to know whether the
based on the probabilities of an occurrence to alleged creditor is merely a member of the family
disbelieve the statements made by the assessee, or an employee. Then the cash credits and debits
may be examined individually item by item.
even when advanced with prima-facie evidence,
How was the money brought and how returned?
the AO may be justified in disbelieving the
If cash was brought, who brought it and how is
statements. [Sumati Dayal vs. CIT 214 ITR 801 he connected with the assessee? If a cheque was
(SC)]. The ratio of the Supreme Court judgment brought, the number of the cheque or the draft,
has far more implication now when the Gift Tax its date and amount and the name and address
Act is not in operation, and when gifts are freely of the Bank on which it was drawn should be
made. The relationship between the parties and noted. It should be found out from the Bank who
other related aspects may have to be examined exactly drew the cheque or purchased the draft,
by the AO before he accepts the claim of gifts and, in the case of the cheque, who operated the

256
 Cash Credits

Bank account relating to it and who introduced was it contributed? Where was it kept earlier?
the owner of the account to the Bank. He will The decision must obviously vary with the facts
also have to see whether the money was urgently of each case.
needed by the assessee and why it was needed
8.10 Credits Appearing in the Name
at all, whether any interest was paid, whether
of Declarants of Voluntary Disclosure
interest if paid is reasonable or only nominal,
Income Scheme/ IDS: The general principle
and whether the assessee had any transaction
of all VDIS is that the immunity is granted to
with the alleged creditor earlier or later. Then
the declarant and the declarant also gets such
he can get local enquiries made at the address immunity provided it is an honest and truthful
furnished for the creditor by the assessee. Is he a disclosure. However, when the moneys declared
genuine person or is he merely imaginary? Is he by a declarant are credited in the books of a
a man of straw or a person capable of possessing third party, the AO assessing the third party must
or advancing the amount of credit without enquire into the source of the deposit. In case,
damage to his own livelihood. Does he pay he is not satisfied with the explanation offered by
income-tax himself? What are his antecedents? the assessee, the amount so credited has to be
Does he maintain books of account? Is he either included in the total income of the assessee. The
closely or remotely connected with the assessee? immunity under VDIS will not be available to
How did the assessee come into contact with the third party. This is the ratio of the Supreme
him, if he is professed to be a stranger? Did the Court judgment in the case of Jamna Prasad
creditor ever advance any cash to any other Kanhaiya Lal vs. CIT 130 ITR 244.
person at any time? If he did, the other debtors
8.11 Credits Appearing as Share
concerned can be asked to give particulars of Application Money: Generally it is believed
their transactions with him. What happened to that credits appearing as share application money
the money after it was withdrawn by the creditor need not be enquired into, as the Company
from the assessee? Where and how has it been cannot be called upon to discharge the onus cast
kept? upon it under Sec. 68 of the I.T. Act. However,
8.9 Cash Credits in the Name of Assessee’s nothing precludes the AO from making an
Wife or in the Name of Coparcener of an enquiry as to the true nature and source thereof
H.U.F.: The proper approach to cash credits of even if the same is credited as receipt of share
this type is the one adopted in respect of credits application money. The AO is entitled to enquire
in the name of a third party. It is necessary whether the alleged shareholders do in fact exist
to bring some material on record to suggest at all and if he finds that the alleged shareholders
that the amounts in question belonged to the do not exist, then he would be justified in treating
husband or the joint family as the case may be. the share capital or part thereof as income of the
It is possible that the cash credited to the wife company. This issue is now by and large settled
or the coparceners belonged to the husband or by the Delhi High Court in the case of CIT vs.
the family; but that possibility will not become Sophia Finance Ltd. 205 ITR 98(F.B.).
a probability if further enquiries are not made.
Are there any circumstances suggesting that the
family is withholding information bearing on its 9. SOP REGARDING CASH CREDIT
income? Do the members who are supposed ISSUED BY CBDT DATED
to have cash have any ostensible source of 10.01.2018
income? Do they have a reasonable explanation 9.1 The Standard Operating Procedure for
for the source of the money otherwise? What is applying provisions of Section 68 of income-
the history or background of the money? How tax Act, 1961 was issued on 10.01.2018 and

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the same should be followed by the Assessing portion from following case laws are extracted
Officers. It has been emphasized in the aforesaid below:
SOP that the AO should give a detailed reasoning
iii. CIT vs. P. Mohanakala [2007] 161 Taxmann
in the assessment order for not accepting the
169 (SC)
explanation of the assessee. The reasons for
not accepting the explanation of the assessee “The expression “the assessees offers no
should be communicated to the assessee. The explanation” means where the assessees
order passed by the AO should be speaking offer no proper, reasonable and acceptable
one. Relevant case laws should be relied upon explanation as regards the sums found
wherever possible. credited in the books maintained by the
assessees. It is true that the opinion of
9.2 Some of the legal positions clarified in the
the Assessing Officer for not accepting
said SOP are as under:
the explanation offered by the assessees
9.2.1 Meaning of the Term “Books” as not satisfactory is required to be based
on proper appreciation of material and
i. The term ‘books’ of the assessee maintained
other attending circumstances available
for any previous year has invited judicial
on record. The opinion of the Assessing
scrutiny by various courts with reference
Officer is required to be formed objectively
to what constitutes “books”. The Hon’ble
with reference to the material available on
Supreme Court in Shri V.C. Shukla vs.
record. Application of mind is the sine qua
CBI [1998] 3 SCC 410 has discussed the
non for forming the opinion”.
meaning of the term “books”:
iv. Kale Khan Mohammad Hanif vs. CIT
“‘Book’ ordinarily means a collection of
[1963] 50 ITR 1 (SC)
sheets of paper or other material, blank
written, or printed, fastened or bound “It is well established that the onus of
together so as to form a material whole. proving the source of a sum of money found
Loose sheets or scraps of paper cannot to have been received by the assessee is
be termed as ‘book’ for they can be easily on him. If he disputes liability for tax, it is
detached and replaced.” for him to show either that the receipt was
not income or that if it was, it was exempt
ii. The term “books of Account” was inserted
from taxation under the provisions of the
by the Finance Act, 2001, w.e.f. 1-6-2001
Act. In the absence of such proof, the
u/s 2(12A) of the Act which is as under:
income-tax Officer is entitled to treat it as
“books or books of account” includes taxable income”.
ledgers, day-books, cash books, account
v. Sumati Dayal vs. CIT [1995] 80 Taxmann
books and other books, whether kept in the
89 (SC)/ 214 ITR 801 (S.C).
written form or as print-outs of data stored
in a floppy, disc, tape or any other form of Assessee had shown certain amounts in
electro-magnetic data storage device;” capital accounts in books claiming same
to be winnings from horse races. She filed
9.2.2 Burden of Proof-Explanation of sworn statement to effect that she started
the Assessee going for races only towards end of year
The expression “the assessees offers no 1969 and had no experience in races but she
explanation” has been analysed by Hon’ble purchased jackpot tickets on combination
Supreme Court in various cases. Relevant worked out by her on basis of advice

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given by her husband. She had allegedly to hold that it was income. lf, however, the
won 16 jackpots besides trebles. Assessing explanation is unconvincing and one which
Officer disbelieved her version and taxed deserves to be rejected, the Department
amount as income from undisclosed can reject it and draw the inference that the
sources. Settlement Commission by its amount represents income either from the
majority order upheld assessment order sources already disclosed by the assessee
holding that it was reasonable to infer, on or from some undisclosed source. The
facts, that assessee did not participate in Department does not-then proceed on
races but purchased winning tickets after no evidence, because the fact that there
events with unaccounted money. It was was receipt of money, is itself evidence
held by the Apex Court that the matter against the assessee. There is thus prima
in question had to be considered in light facie evidence, against the assessee which
of human probabilities and surrounding he fails to rebut, and being unrebutted,
circumstances. Having regard to conduct that evidence can be used against him by
of assessee as disclosed by her in sworn holding that it was a receipt of an income
affidavit as well as other material on nature. The very words “an undisclosed
record, an inference could reasonably be source” show that the disclosure must
drawn that winning tickets were purchased come from the assessee and not from the
by her after race event and therefore the Department”.
amount in question was not winnings from vii. Vijay Kumar Talwar vs. CIT (2011) 330
horse races but income from undisclosed ITR 1 (SC)
sources.
“22. Examined on the touch-stone of the
vi. Sreelekha Banerjee vs. CIT (1963) 49 afore-noted legal principles, we are of the
1TR 112 (SC) opinion that in the instant case the High
“It seems to us that the correct approach Court has correctly concluded that no
to questions of this kind is this. If there substantial question of law arises from the
is an entry in the account books of the order of the Tribunal. All the authorities
assessee which shows the receipt of a sum below, in particular the Tribunal, have
or conversion of high denomination notes observed in unison that the assessee did
tendered for conversion by the assessee not produce any evidence to rebut the
himself, it is necessary for the assessee to presumption drawn against him under
establish, if asked, what the source of that Section 68 of the Act, by producing the
money is and to prove that it does not bear parties in whose name the amounts in
the nature of income. The Department question had been credited by the assessee
is not at this stage required to prove in his books of account. In the absence of
anything. It can ask the assessee to bring any cogent evidence, a bald explanation
any books of account or other documents furnished by the assessee about the source
or evidence pertinent to the explanation if of the credits in question viz., realisation
one is furnished, and examine the evidence from the debtors of the erstwhile firm, in
and the explanation. If the explanation the opinion of the Assessing Officer, was
shows that the receipt was not of an not satisfactory. It is well settled that in
income nature, the Department cannet act view of Section 68 of the Act, where any
unreasonably and reject that explanation sum is found credited in the books of the

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assessee for any previous year, the same the aforesaid, the onus shifts on the
may be charged to income-tax as the Department
income of the assessee of that previous year, From a careful perusal of the above
if the explanation offered by the assessee decisions, it is established that primary
about the nature and source thereof is, in onus to prove identity of creditors, capacity
the opinion of the Assessing Officer, not of such creditor to advance the money and
satisfactory. See: Sumati Dayal vs. CIT the genuineness of the transaction is on
[1995] 80 Taxmann 89 (SC) and CIT vs. the assessee. The Hon’ble Supreme Court
P. Mohanakala [2007] 161 Taxmann 169 has also held that explanation offered by
(SC). We are of the opinion that on a the assessee should be carefully examined
conspectus of the factual scenario, noted by the AO to ascertain whether all the
above, the conclusion of the Tribunal to ingredients of the onus are proved by the
the effect that the assessee has failed to assessee or not.
prove the source of the cash credits cannot
be said to be perverse, giving rise to a 9.2.4 Applicability of Section 68 in Cases
substantial question of law. The Tribunal of “Accommodation Entry” in Respect of
being a final fact finding authority, in the Share Application Money/ Share Premium
absence of demonstrated perversity in The earlier view of Hon’ble Delhi High Court
its finding, interference therewith by this in the case of Stellar Investment Ltd. [192 ITR
Court is not warranted.” 287] and Lovely Exports Pvt Ltd. [299 ITR
9.2.3 Ingredients of the Assessee’s Onus 268 ]was that share capital cannot be added
in the hands of the assessee company once
Hon’ble Kerala High Court in case of M.A.
the assessee furnishes PAN, addresses of the
Unneeri Kutty vs. CIT (1992) 198 ITR 147,
creditor/subscriber along with copies of the
150 (Ker.), SLP dismissed by Hon’ble Supreme
shareholders register, share application forms,
Court: (1993) 201 ITR (st.) 23] while examining
share transfer register, etc. This would constitute
ingredients of assessee’s onus has held as under:
sufficient explanation by the assessee. The
It cannot be doubted that it is for the assessee Hon’ble Supreme Court was in agreement with
to prove the identity of the creditor as also above decisions of Delhi High Court, however,
the creditworthiness. The genuineness of the on conclusion of facts only without answering
transactions should be proved. In view of the the ratio laid down as sought to be pronounced
above decisions, the explanation offered by the by Delhi High Court [Ref: Hindustan Tea Trading
assessee must have the above 3 ingredients: Co. Ltd. vs. CIT 263 ITR 289 (Cal)].
i. Identity of the creditor However, subsequently, the above decisions
ii. Creditworthiness of the creditor i.e. of the Hon’ble Supreme Court and Delhi High
capacity of the creditor to advance the Court have been considered by various Courts
money including Delhi High Court itself. Based on the
findings of facts and detailed investigations, these
iii. Genuineness of the transactions courts have distinguished the observations of the
Once the assessee has proved the above Hon’ble Supreme Court in Stellar Investment Ltd
three ingredients simultaneously and and Lovely Exports Pvt. Ltd. and have upheld
adduce evidence to establish prima facie the invoking of Section 68.

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iv. CIT vs. Nova Promoters and Finlease (P.) to the question. It was purely a question of
Ltd. [2012] 342 ITR 169 (Delhi) fact with which the apex court had dealt
with and was in agreement with the High
The decision in the case of Lovely Exports
Court on conclusion of facts. Therefore,
Ltd. was considered in Nova Promoters
it cannot be said that the Supreme Court
and Finlease (P) Ltd. and it was held as
answered the ratio laid down as sought to
under-
be propounded by the Delhi High Court in
“38. -----We are afraid that we cannot Stellar Investment Ltd.’s case [1991] 192
apply the ratio to a case, such as the ITR 287. A decision becomes binding as
present one, where the Assessing Officer a precedent only when the court decides a
is in possession of material that discredits particular question of law or lays down the
and impeaches the particulars furnished by ratio through conscious adjudication”
the assessee and also establishes the link
vi. CIT vs. Nipun Builders and Developers P.
between self-confessed “accommodation
Ltd. [2013] 350 ITR 407 (Delhi)
entry providers”, whose business it is to
help assessees bring into their books of Share application money was received in
account their unaccounted monies through Assessment year 2004–05 from different
the medium of share subscription, and the companies. Assessing Officer issued
assessee.------” summons to subscriber companies which
Finally, in Nova Promoters & Finlease, it were returned unserved with remarks
was held that in view of the link between ‘no such company’. Inspector sent to
the entry providers and incriminating addresses for verification confirmed said
evidence, mere filing of PAN number, fact. Moreover, assessee failed to produce
acknowledgement of income-tax returns of principal officers of subscriber companies
the entry provider, bank account statements who could explain sources from which
etc. was not sufficient to discharge the onus. share subscription was made. In aforesaid
circumstances, Assessing Officer was
v. Hindusthan Tea Trading Co. Ltd. vs. CIT
justified in adding share subscription
263 ITR 289 (Cal)
money to assessee’s taxable income as
“In Steller Investment Ltd.’s case [2001] unexplained deposits.
251 ITR 263, the apex court had passed the
vii. CIT vs. N. R. Portfolio Pvt. Ltd. [2014]42
following order: “We have read the question
taxmann.com 339 (Delhi)
which the High Court answered against the
Revenue. We are in agreement with the “30. What we perceive and regard as
High Court. Plainly, the Tribunal came to correct position of law is that the court or
a conclusion on facts and no interference tribunal should be convinced about the
is called for. The appeal is dismissed. identity, creditworthiness and genuineness
No order as to costs.” From the above of the transaction. The onus to prove the
observation, it appears that the Supreme three factum is on the assessee as the
Court has not entered into the question facts are within the assessee’s knowledge.
involved or has not decided the ratio laid Mere production of incorporation details,
down. It had plainly held that it was a PAN Nos. or the fact that third persons or
question of fact. The Supreme Court has company had filed income-tax details in
not laid down any proposition with regard case of a private limited company may

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not be sufficient when surrounding and which did not suit the interest of the
attending facts predicate a cover up. These assessee.”
facts indicate and reflect proper paper ix. CIT vs. Navodaya Castles (P.) Ltd. [2014]
work or documentation but genuineness, 367 ITR 306 (Delhi)
creditworthiness, identity are deeper and
obtrusive. Companies no doubt are artificial “13. As we perceive, there are two sets of
or juristic persons but they are soulless judgments and cases, but these judgments
and are dependent upon the individuals and cases proceed on their own facts. In
behind them who run and manage the said one set of cases, the assessee produced
companies. It is the persons behind the necessary documents/ evidence to show
company who take the decisions, controls and establish identity of the shareholders,
and manage them.” bank account from which payment
was made, the fact that payments were
viii. CIT vs. Gold Leaf Capital Corporation received thorough banking channels, filed
Ltd. [2013] 353 ITR 163 (Delhi) necessary affidavits of the shareholders
The Hon’ble Court concurred with the view or confirmations of the directors of the
of the Hon’ble Tribunal and observed that: shareholder companies, but thereafter
no further inquiries were conducted. The
The conduct of the assessee has been second set of cases are those where there
beautifully summarized by the Tribunal was evidence and material to show that the
itself in the following manner: shareholder company was only a paper
“All this is again indicative of the fact company having no source of income, but
that in fact the assessee from day one of had made substantial and huge investments
initiation of initial assessment proceedings in the form of share application money. The
assessing officer has referred to the bank
was in a position to exercise control on the
statement, financial position of the recipient
investing companies and still it withheld all
and beneficiary assessee and surrounding
the necessary information called for by the
circumstances. The primary requirements,
Assessing Officer, which could enable the
which should be satisfied in such cases is
Assessing Officer to test the genuineness
identification of the creditors/ shareholder,
of the transaction and creditworthiness of
creditworthiness of creditors/ shareholder
the investing companies by verifying the
and genuineness of the transaction. These
genuineness of the claims made by the three requirements have to be tested not
assessee before the CIT (A) on the basis superficially but in- depth having regard to
of those documents which the assessee the human probabilities and normal course
filed for the first time before the CIT (A) of human conduct.
during the 2nd inning or the appellate
proceedings. 14. Certificate of incorporation, PAN etc.
are relevant for purpose of identification,
Thus, it stands established that in fact the but have their limitation when there is
assessee produced only the information/ evidence and material to show that the
documents/ person for recording statement subscriber was a paper company and not
called for by the Assessing Officer which a genuine investor. It is in this context, the
suited the interest of the assessee and Supreme Court in CIT Durga Prasad More
intentionally withheld that information [1971] 82 ITR 540 (SG) had observed:

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 Cash Credits

“Now we shall proceed to examine the the Revenue and affirms the view of the
validity of those grounds that appealed income-tax Appellate Tribunal. The appeal
to the learned judges. It is true that the is, therefore, dismissed, with no order as to
apparent must be considered real until it costs.”
is shown that there are reasons to believe xi. Commissioner of Income-tax-II vs. Jan
that the apparent is not real. The taxing Sampark Advertisement & Marketing Pvt.
authorities were not required to put the Ltd. [2015] 375 ITR 373 (Delhi)
blinkers while looking at the documents
produced before them. They were entitled When Assessing Officer sets about seeking
to look into the surrounding circumstances explanation for unaccounted credit entries
to find out the recitals made in those in books of account of assessee in terms
documents” of Section 68, it is legitimately expected
that exercise would be taken to logical
The Hon’ble Supreme Court rejected the end, in all fairness taking into account
SLP filed in the above case Navodaya material submitted by assessee in support
Castle (P.) Ltd. vs. CIT [2015] 56 taxmann. of his assertion that person making
com 18 (SC) with the observation: payment is real, and not non-existent,
“We do not see any merit in this special and that such other person has actually
leave petition, which is hereby dismissed”. source of money forming subject matter
x. Onassis Axles P. Ltd. vs. CIF [2014] 364 of transaction and that transaction is real
ITR 53 (Delhi) and genuine. Whether however as two
appellate authorities, viz., Commissioner
“14. Lovely Exports Pvt. Ltd. (supra) is (Appeals) and Tribunal, are also forums for
an authority for the proposition that the fact-finding, in event of Assessing Officer
assessee is under an obligation to dispel failing to discharge his functions properly,
any doubts regarding the genuineness of obligation to conduct proper inquiry on
an investor and the genuineness of the facts would naturally shift to door of said
transaction. Here, though the assessee appellate authorities and they having
furnished particulars relating to three share noticed want of proper inquiry, cannot
applicants, the further inquiry made by the close chapter simply by allowing appeal
Assessing Officer raised more questions and deleting additions made.
than answers. The share applicants’ lack of
resources, the assessee’s position vis-á-vis 10. OTHER RELEVANT DECISIONS
share amounts received and its commercial
10.1 It is for assessee to prove the identity
condition all pointed to the amount
of creditors, their creditworthiness and the
received by it falling within the mischief
genuineness of the transaction; mere furnishing
of Section 68 as unexplained amounts. of the particulars is not enough; mere payment by
That the Assessing Officer or the income- account-payee cheque is not sacrosanct nor can
tax Appellate Tribunal chose to treat the it make a non-genuine transaction genuine. CIT
amount, as bogus share capital, is a matter vs. Precision Finance (P) Ltd. [208 ITR 465(Cal.)]
of inference which the court would be loath
to interfere with. 10.2 Even where, with regard to third party
cash credits in the assessee’s books, the assessee
15. For the above reasons, this court produces the party who owns the cash credit,
answers the question framed, in favour of the assessee has not discharged onus of proving

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the genuineness of the credit unless it is also M. Sanghvi vs. ITO [2018] 90 taxmann.com 386
established that the third party is not a man of straw (Gujarat)]
but a person capable of possessing the amount
10.6 Mere confirmation alone is not sufficient.
represented by the cash credit. Nanakchand
The confirmation is required to be decided
Laxmandas vs. CIT [140 ITR 151 (Alld.)]
and/ or considered along with the financial
10.3 Use of the words ‘ any sum found credited capacity of the person who alleged to have
in the books’ in Section 68 indicates that the said given the unsecured loan and/ or gift. [Sitaram
Section is very widely worded and the AO is not Ramchanddas Patel vs. ITO [2018] 95 taxmann.
precluded from making an enquiry as to the true com 290 (Gujarat)]
nature and sources thereof, even if the same is
credited as receipt of share application money. 10.7 Where AO made addition under Section 68
CIT vs. Sophia Finance Ltd. 205 ITR 98 (Delhi) in respect of increase in share capital of assessee-
(FB) CIT vs. Pratik Finance & Invt. Co. Ltd. 215 company, in view of fact that addresses of most of
ITR 272(Delhi) purported shareholders were identical and they
could not be traced out despite notice issued under
10.4 The assessee received certain amount
Section 131, Tribunal was justified in confirming
as share capital from different parties. It was
impugned addition. [DRB Exports (P.) Ltd. vs.
noted from records that summons served to
CIT [2018] 93 taxmann.com 490 (Calcutta)]
shareholders under Section 131 were unserved
with remark that addressees were not available. 10.8 Assessee-company had received
It was also found that shareholders were first share application money from UAE based
time assessees and were not earning enough NRI. Assessee had only submitted a copy of
income to make deposits in question. The acknowledgment of filing return of income of
assessee did not offer to procure presence of NRI wherein she had shown a meagre income
shareholders. In view of above mentioned facts, which was not in proportion to money advanced
the assessee failed to prove genuineness of by way of share application. Copies of her
share transactions and, thus, impugned addition capital a/c, Balance Sheet, bank statement, etc.,
under Section 68 was to be confirmed. [Konark were not submitted. Besides this, assessee had
Structural Engineering (P.) Ltd. vs. DCIT [2018] not filed any details/evidence as to her activities
90 taxmann.com 56 (Bombay)] in Dubai and her source of income in Dubai to
SLP filed by the assessee against the aforesaid substantiate her financial capacity. There was no
decision of Bombay High Court in case of Konark evidence as to permanent address of residence/
Structural Engineering (P.) Ltd. was dismissed. office of NRI in Dubai. In view of aforesaid facts,
[Konark Structural Engineering (P.) Ltd. vs. DCIT the assessee had not discharged onus of proving
[2018] 96 taxmann.com 255 (SC)] creditworthiness and, thus, addition had to be
10.5 Where assessee received loan from two made under Section 68. [ITO vs. Spartacus
companies, in view of fact that on date assessee Farms (P.) Ltd. [2018] 91 taxmann.com 15
was given loan there were credit entries of (Mumbai - Trib.)]
almost similar amounts and balance after these 10.9 Where AO made addition to assessee’s
transactions was a small amount and moreover income in respect of loan availed, in view of
assessee failed to produce these lenders for fact that lender company did not have tangible
verification, impugned amount was rightly or intangible fixed assets and, moreover, it had
brought to tax under Section 68. [Pavankumar declared a meagre income of few thousand

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rupees and, thus, it was not in a position to 10.13 The assessee received loan from various
give such a huge loan to assessee, impugned parties but did not furnish confirmations in
addition was to be confirmed [Seema Jain vs. respect of those amounts. Assessee raised an
ACIT [2018] 96 taxmann.com 307 (Delhi)] objection that he had not maintained books
of account and, therefore, amount in question
10.10 Even though shares had been issued at
could not be added to his income under Section
a very high premium to new shareholders, yet
68. It was held that when assessee was doing
assessee could not even give correct addresses
business, then it was incumbent on him to
of three applicant companies where they were
maintain proper books of account and since he
located. Further, assessee did not file any cogent
failed to do so, he could not be allowed to take
material/ evidences to justify chargeability of
advantage of his own wrong. Therefore, having
such a huge share premium from three new
regard to assessee’s failure to produce relevant
shareholders vis-á-vis issuing shares at par to
documents and explain nature and source of
original promoters within same relevant year
amount received by him, impugned addition
under consideration. It was also undisputed
u/s 68 was to be confirmed. [Arunkumar J.
that three companies paying huge amount
Muchhala vs. CIT [2017] 85 taxmann.com 306
to assessee, had miniscule paid up capital
(Bombay)]
and earned very small profits and, thus, they
were not in a financial condition to subscribe 10.14 Section 68 is applicable where cheques
to assessee’s shares at such a high premium. received by assessee from various creditors
In aforesaid circumstances, Assessing Officer were not presented for collection in banks, still
rightly concluded that assessee failed to prove amount mentioned in those cheques were found
identity of parties and genuineness of share credited in assessee’s books of account. [Vimal
transactions and, thus, impugned addition was Organics Ltd. vs. CIT [2017] 82 taxmann.com
to be confirmed [Pratik Syntex (P.) Ltd. [2018] 427 (Allahabad)]
94 taxmann.com 12 (Mumbai - Trib.)]. (This 10.15 The heading ‘Cash credits’ is attached to
case was related to AY 2012–13]. Section 68. The headings prefixed to a Section
10.11 Where assessee claimed to have received cannot control clear and unambiguous words
advances towards booking of plots but could not of the provision. Only in the case of ambiguity
produce details of all applicants who paid said or doubt the heading or sub-heading may be
sum, Tribunal was justified in making additions referred to as an aid in construing the provision.
under Section 68 to extent where details of What is referred to in Section 68 is where
applicants were not produced. [Om Land Realty any sum is found credited in the books of an
(P.) Ltd. [2017] 86 taxmann.com 226 (Gujarat)] assessee and in the ends what is mentioned is
the sum so credited may be charged to income-
10.12 Where AO made addition to assessee’s
tax. Therefore, in the body of the Section, the
income under Section 68 in respect of loan
word used is either found credited or so credited,
taken from various parties, since assessee failed
there is no indication in the Section that such
to prove that any of those creditors had financial
a credit should be a cash credit. It may be a
strength to lend such huge sums of money to
cash credit or it may be a credit representing the
assessee, that too without any collateral security,
value of the supplies made by the suppliers on
without interest and without a loan agreement,
credit. The essence is that the credit should be
impugned addition deserved to be confirmed.
shown in the account and that would satisfy the
[PCIT vs. Bikram Singh [2017] 85 taxmann.
requirement of Section 68 of the Act. Once the
com 104 (Delhi)]

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credit so mentioned in the Section is found to be noted that contributors to share capital were
not supported by any acceptable evidence, then persons of insignificant means and their
the sum so credited may be charged to income- creditworthiness to have made contributions had
tax as the income of the assessee of that previous not been established. Since the assessee failed
year. [Smt. Rekha Krishnaraj vs. ITO [2013] 33 to establish genuineness of cash contributions
taxmann.com 64 (Karnataka)] as well as capacity of persons to have made
such contributions, addition under Section 68
SLP against aforesaid order was dismissed on is justified. [B.R. Petrochem (P.) Ltd. vs. ITO
ground of delay in filing appeal [Smt. Rekha [2017] 81 taxmann.com 424 (Madras)
Krishnaraj vs. ITO [2017] 85 taxmann.com 256
(SC) 10.17 It is the settled legal position that peak
credit is not applicable where deposits remain
10.16 The assessee received share capital from unexplained under Section 68 of the Act. The
various contributors. In course of assessment, premise underlying the concept of peak credit
Assessing Officer found various discrepancies is the squaring up of the deposits in the account
in dates and amounts of contributions vis-à- with the corresponding payments out of the
vis statements recorded from contributors and account to the same person. [CIT vs. D.K. Garg
details furnished by assessee. It was further [2017] 84 taxmann.com 257 (Delhi).

266
 Chapter

18
Benami Transactions
& PBPT ACT

1. INTRODUCTION

1.1 What is a Benami Transaction

The Persian word ‘Banām’ (literally ‘in the
name of’) is the etymological source of the term
‘Benami’, which itself means ‘without name’.
In common parlance, a benami transaction is
one which is entered into by a person either
under a fictitious name or in the name of a
third party. In a benami transaction there is no
an appropriate declaration and relief. Various
intention of transferring any beneficial interest
Courts in India have entertained and decreed
to the ostensible owner, who merely represents
such suits for nearly a century.
the real owner and holds the property or even
business in trust for him. The real owner is the The Supreme Court of India, under the old law,
‘beneficial owner’ and the ostensible owner is a in the case of ‘Thakur Bhim Singh (Dead) by
‘benamidar’. LRs and Anr. vs. Thakur Kan Singh’ (1980) 3
Benami transactions were a recognised specie SCC 72 had noted as under:
of legal transactions in India especially in cases Two kinds of ‘benami’ transactions were generally
involving immovable properties. The erstwhile recognised in India:
Section 82 of the Indian Trusts Act, 1882 is a
●● One where a person buys a property with
case in point. In earlier days, it was legal right of
his own money but in the name of another
the real owner to contend that even though the
person without any intention to benefit
transfer of the property had been undertaken
such other person. This transaction is
in the name of benamidar, the consideration
called benami. In such case, the transferee
has come from the real owner and, therefore,
holds the property for the benefit of the
the benamidar was bound to restore such
person who has contributed the purchase
property to the real owner, as the case maybe.
money, and he is the real owner.
If the benamidar took a defiant attitude then the
law used to provide a substantive right to the ●● The second case which is loosely termed
real owner to approach the Courts for getting as a benami transaction is a case where a

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person who is the owner of the property 422–424 of Indian Penal Code, 1860 etc. but
executes a conveyance in favour of another they were not deterrent enough. Since many
without the intention of transferring the title benami transactions were found to stem from a
to the property thereunder. In this case, the desire to evade taxes, the Select Committee of
transferor continues to be the real owner. the Parliament, while considering the Taxation
The difference between the two kinds of benami Laws (Amendment) Bill, 1969, made specific
transactions referred to above lies in the fact that observations in this regard. As a result, the
whereas in the former case, there is an operative Government made a reference to the Law
transfer from the transferor to the transferee Commission in 1969 to examine the possibility of
though the transferee holds the property for the prohibiting the practice of benami transactions.
benefit of the person who has contributed the
purchase money, in the latter case, there is no 2. STATUTORY MEASURES TO
operative transfer at all and the title rests with CONTROL BENAMI
the transferor notwithstanding the execution In order to appreciate the present law, it is
of the conveyance. One common feature, necessary for the officers to be fully aware of the
however, in both these cases is that the real title past legislative efforts in this field as this shall
is divorced from the ostensible title and they enable them to have a clearer perspective and
are vested in different persons. The question also help in conducting proper inquiries. The 57th
whether a transaction is a benami transaction or Report of the Law Commission dated August 7th
not mainly depends upon the intention of the 1973 is the first detailed study in this context. The
person who has contributed the purchase money
Law Commission had recommended drafting of
in the former case and upon the intention of the
a separate law. This led to the promulgation of
person who has executed the conveyance in the
the Benami Transaction (Prohibition of Right to
latter case.
Recover Property) Ordinance, 1988 on May 19th
1988, which barred giving of any recognition to
1.2 Why Benami Transactions were benami transactions as well as provided a bar to
Required to be Prohibited
raising of any defence on the grounds of benami.
Over time, the Legislature recognised the fact This Ordinance was followed by the Benami
that benami transactions are often resorted for Transaction (Prohibition) Act, 1988, which
unlawful purposes and questionable objectives prohibits benami transactions and bars any right
e.g.: to recover property held benami and for matters
connected therewith or incidental thereto.
●● To commit fraud on Creditors,
●● To evade taxes, 2.1 Benami Transactions (Prohibition)
●● To evade the restrictions of the various Act, 1988
agricultural and urban Land Ceiling Acts, Initially and after the promulgation of the Benami
●● To avoid certain political and social risks, Transaction (Prohibition of Right to Recover
Property) Ordinance, 1988, the Government
●● To conceal black money obtained through had again referred the matter to the Law
corrupt practices etc. Commission for a detailed examination and for
Several attempts were made in the past to its considered views. The 130th Law Commission
restrict the unlawful usage of such transactions Report noted that with removal of Article 19(1)(f)
e.g. Section 66 of Civil Procedure Code, 1908; & 31 of the Constitution, the right to property is
Section 281A of Income-tax Act, 1961; Section no longer a fundamental right but is only a legal

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 Benami Transactions & PBPT ACT

right under Article 300A. The Law Commission b. The relevant Rules for carrying out the
Report mentions that India is a socialist state and purposes of the Act were never notified.
observed that Benami transactions in all forms of c. The Implementing Authorities were not
properties like immovable, movable, intangibles specified.
etc. have contributed to thwarting of the tax laws,
violation of social morality and concentration d. It did not contain any specific provision
of wealth in few hands. The Commission for vesting of confiscated property with the
accordingly made its recommendations Central Government.
and, after various deliberations, the Benami e. It did not have any provision for an
Transactions (Prohibition) Act, 1988 was passed Appellate Mechanism against an action
on September 5, 1988 (The Act deems that taken by the authorities under the Act,
Sections 3,5 & 8 have come into force with the while barring the jurisdiction of a Civil
passing of the Act and the remaining Sections Court.
were deemed to have come into force on May
19th 1988 itself). f. It did not confer the powers of the
Civil Court upon the authorities for its
The Benami Transactions (Prohibition) Act, 1988 implementation.
defined Benami transaction as “any transaction
in which the property is transferred to one person 2.2 The Benami Transactions
for a consideration paid or provided by another (Prohibition) Bill, 2011
person”. It also defined ‘property’ to mean
property of every kind, whether movable or The shortcomings of the earlier statute led to
immovable, tangible or intangible, and includes the drafting of a new legislation in place of the
any right or interest in such property. The Benami Benami Transaction (Prohibition) Act, 1988 in
order to prohibit holding of property as benami,
Transactions (Prohibition) Act, 1988 prohibited
to restrict right to recover or transfer property
entering into any benami transaction in general
held as benami and also to provide a mechanism
and made it a non-cognizable and bailable
and procedure for confiscation of property held
offence. It also prescribed imprisonment and
benami. The Benami Transactions (Prohibition)
fines. The purchase of property by any person
Bill, 2011 was accordingly introduced in the Lok
in the name of his wife or unmarried daughter
Sabha in July 2011 but the same could not be
for their benefit was, however, excluded from
passed and it lapsed with the dissolution of the
the definition of benami transaction. The Act
15th Lok Sabha.
of 1988 mandated that no suit, claim or action
to enforce any right in respect of the benami
2.3 Benami Transactions (Prohibition)
property shall lie against the benamidar or
Amendment Bill, 2015
any other person by or on behalf of the person
claiming to be the real owner. Likewise, it also The infirmities and lacunae in the previous Act led
prohibited any defence based on any right in to work on a comprehensive legislation and, as
respect of the benami property. The Act also a result, the Benami Transactions (Amendment)
permitted acquisition of the benami properties Bill 2015, was introduced in the Parliament to
by the prescribed authority. amend the Act of 1988. By introducing only
an amendment bill, the Legislature has taken a
However, the Act had some shortcomings, as
conscious decision to amend the old statute itself
mentioned below: instead of bringing in a new statute. The reason
a. The definition of ‘benami transactions’ behind amending the Act instead of repealing it,
was quite narrow and not very clear. was to include all the benami transactions under

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its ambit on which no action was taken under for such property has been provided, or
the 1988 Act, so that consequential action could paid by, another person; and
follow. The amended Act has 72 Sections instead
b. The property is held for the immediate
of the 9 Sections earlier. There are separate
or future benefit, direct or indirect, of the
provisions identifying the authority to implement
person who has provided the consideration.
the Act specifying their functions and powers.
The amendment has introduced the concepts However, the above definition excludes cases
of adjudication, attachment and confiscation where the property is held by:
of the benami properties. The amendment has
i. A Karta, or a member of a Hindu undivided
introduced prosecution provisions and where any
family, as the case may be, and the
person enters into a benami transaction in order
property is held for his benefit or benefit
to defeat the provisions of any law or to avoid
of other members in the family and the
payment of statutory dues or to avoid payment
consideration for such property has been
to creditors, the beneficial owner, benamidar
and any other person who abets or induces any provided or paid out of the known sources
person to enter into the benami transaction, shall of the Hindu undivided family;
henceforth be guilty of the offence of benami ii. A person standing in a fiduciary capacity
transaction. The amendment has also renamed for the benefit of another person towards
the old statute as the Prohibition of Benami whom he stands in such capacity and
Property Transactions Act, 1988. includes a trustee, executor, partner,
director of a company, a depository or a
2.4 Prohibition of Benami Property participant as an agent of a depository
Transactions Act, 1988 under the Depositories Act, 1996 and any
The Benami Transactions (Prohibition) other person as may be notified by the
Central Government for this purpose;
Amendment Bill, 2015 received the Presidential
assent on 10th August 2016. The Rules and all the iii. Any person being an individual in the name
provisions of the renamed Prohibition of Benami of his spouse or in the name of any child of
Property Transactions Act, 1988 (hereinafter such individual and the consideration for
referred to as PBPT Act, 1988) have come into such property has been provided or paid
force on 1stNovember, 2016. The Central Board out of the known sources of the individual;
of Direct Taxes has been entrusted to administer iv. Any person in the name of his brother or
the Act. sister or lineal ascendant or descendant,
where the names of brother or sister or
2.5 Present Definition of Benami lineal ascendant or descendant and the
Transaction individual appear as joint-owners in any
In the PBPT Act, 1988, four types of benami document, and the consideration for such
transactions have been specified. These are property has been provided or paid out of
explained in para 2.5.1 and 2.5.2 below. the known sources of the individual; or
It is apparent that for any property to be held as
2.5.1 As Per Section 2(9)(A) of PBPT, a
benami both the above conditions at (a) and (b)
Benami Transaction Means
are to be satisfied. While the first condition of the
(A) A transaction or an arrangement: above definition is relatively easy to investigate,
a. Where a property is transferred to, or is the second condition concerning benefit is
held by, a person, and the consideration bound to be contentious. Many judicial decisions

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have laid down certain directions for the same. (B) a transaction or an arrangement in respect
The ‘accruing of benefit’ has to be gauged from of a property carried out or made in a fictitious
various parameters and case laws. In the case of name; or
Jaydalal Poddar (Deceased) vs. Mst Bibi Hazra (C) a transaction or an arrangement in respect
AIR 1974 SC 171, it had been held that though of a property where the owner of the property
the question, whether a particular sale is Benami is not aware of, or, denies knowledge of, such
or not, is largely one of fact, and for determining ownership;
this question no absolute formulae or acid tests
uniformly applicable in all situations can be laid (D) a transaction or an arrangement in respect
down, yet in weighing the probabilities and for of a property where the person providing the
gathering the relevant indicia the courts are consideration is not traceable or is fictitious.
usually guided by these circumstances: 2.5.3 The Explanation given below the
i. The source from which ‘the purchase definition under Section 2(9) of PBPT excludes
money came; the transactions covered under Section 53A
of the Transfer of Property Act,1882 from the
ii. The nature and possession of the property, purview of PBPT Act, 1988. It has been clarified
after the purchase; that the benami transaction shall not include any
iii. Motive, if any, for giving the transaction a transaction involving the allowing of possession
benami color; of any property to be taken or retained in part
performance of a contract referred to in Section
iv. The position of the parties and the
53A of the Transfer of Property Act, 1882, if,
relationship, if any between the parties;
under any law for the time being in force:
v. The custody of the title-deeds after the
i. Consideration for such property has
sale, and
been provided by the person to whom
vi. The conduct of the parties concerned in possession of property has been allowed
dealing with the property after the sale. but the person who has granted possession
The above decision has been cited with approval thereof continues to hold ownership of
by the Supreme Court in a recent decision in such property;
the case of Om Prakash Sharma vs. Rajendra ii. Stamp duty on such transaction or
Prasad Shewda in Civil Appeal No. 8609–8610 arrangement has been paid; and
OF 2009 decided on 9th October, 2015.
iii. The contract has been registered.
It is also to be noted that the parameters above
are not exhaustive and all these surrounding An important aspect to be kept in mind would be
circumstances would require to be taken into that even in above exceptions, the consideration
consideration for determining the nature of a paid has to come from known sources. In
transaction. fact, at the time of its introduction the Benami
Transactions (Prohibition) Amendment Bill,
It is also necessary to note that the terms 2015 the relevant phrase read as “known sources
‘transaction or an arrangement’ would also of income”. However, the words “of income”
include a concerted action or a device. were removed since the Government felt that
2.5.2 As per subsequent provisions of Section the consideration may come from any source
2(9)(B), 2(9)(C) and 2(9)(D) of PBPT, a benami e.g. loans from banks, contribution by family
transaction also means: members etc. which may not necessarily be the

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income of the person paying the consideration. comprehensive. As per Section 2(26) of PBPT
This is another point to be kept in mind while Act, 1988, ‘property’ means “assets of any
investigating the source of the consideration kind, whether movable or immovable, tangible
paid. or intangible, corporeal or incorporeal and
includes any right or interest or legal documents
2.6 Examples of Benami Transactions or instruments evidencing title to or interest in
Some of the likely examples of Benami the property and where the property is capable
Transactions in light of the new definition could of conversion into some other form, then the
be as under: property in the converted form and also includes
a. Transactions carried out in fictitious names: the proceeds from the property”.
Purchasing a property using fake Aadhar, Section 2(8) of the Act defines Benami Property.
Passport, PAN etc. As per this “benami property means any
b. Cases where the ostensible Owner of the property which is the subject matter of a benami
property is not aware of or denies knowledge Transaction and also includes the proceeds from
of such ownership: The Government has such property”.
introduced the ‘Jan Dhan Account Scheme’
The last Clauses in both the above definitions
to bring the unorganized sector under the
are pertinent. The PBPT Act, 1988 can now
ambit of banking. However, the same was
misused by some unscrupulous persons legally pursue the proceeds from the Benami
during ‘demonetization’ process to deposit Property. Though the term ‘proceeds’ has not
cash into such accounts. Here, the owner been defined, the officers can take guidance
of these accounts may not be aware of from the definition of the term ‘proceeds of
such transactions or they may accept that crime’ given in Section 2(u) of the Prevention of
they are not real owners of these moneys. Money Laundering Act, 2002.
These are simple benami transactions.
The definition of property has been made very
Similarly, assets found or seized in Search
wide and the term includes assets of every kind.
& Seizure operations, where the same is
The officers are required to acquaint themselves
declared to be pertaining to third persons,
may be a case of Benami transaction if the with the various definitions of the term ‘property’
third person denies the same. (movable or immovable) contained in the
General Clauses Act 1897; Transfer of Property
c. Where person providing the consideration
Act 1882; Registration Act 1908; Indian Penal
is not traceable or is fictitious. For example,
Code 1860; Sale of Goods Act 1930 etc. A
cash is found in the hands of a person,
few examples of ‘Property’ from the point of
who denies ownership of such cash, while
at the same time, is not in a position to investigation of benami transactions would
explain the source of the cash. This can be include:
a case of benami transaction. ●● FDRs, Cash, Financial Instruments,
Vehicles, Machinery, Jewellery, Loans,
2.7 Definition of the Term ‘Property’ and Debts, Bank deposits, Bank lockers and
‘Benami Property’ as per PBPT Act, Private lockers, Investment in Mutual
1988 funds, Demat accounts, Savings in Co-
The amended PBPT Act, 1988 has made op Banks and Co-op societies, crypto
the definition of the term ‘property’ very currencies etc.

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●● Right of worship, royalty, patent, copyright, PBPT Act, 1988 i.e. the Initiating Officer, the
trademarks, design, benefit arising out of Approving Authority, the Administrator and
land, right of way, fisheries etc. the Adjudicating authority. The Act also defines
their respective jurisdiction and powers. They
●● Assets/ properties held in the name of
have also been given the same powers as are
persons having no or meager income and
vested in a Civil Court under the Code of Civil
no PAN cases.
Procedure, 1908, while trying a suit in respect of
●● House, Flat, Land or Other Immoveable certain matters, similar to what an Income-tax
Property acquired or transferred in the Authority possesses u/s 131 of the Income-tax
names of drivers/ servants/ poor relatives. Act. The PBPT Act, 1988 also mentions that the
●● Stock-in-trade or other goods kept in authorities appointed under Section 117 of the
warehouses/ cold storage under fictitious Income-tax Act, 1961 shall assist the authorities
names etc. under PBPT Act, 1988. It also mentions other
Governmental authorities who are also required
2.8 Other Important Definitions under to render assistance to the officers implementing
the PBPT ACT, 1988 the PBPT Act, 1988. The PBPT Act, 1988 has
provisions for attachment, adjudication and
a. Person: Section 2(24) of the Act defines confiscation of the benami property. It also has
that “person” shall include: provisions for setting up Appellate Tribunals and
i. An individual; Special Courts to settle disputes.

ii. A Hindu undivided family; The following ‘authorities’ are specified in the
PBPT Act, 1988:
iii. A company;
i. Initiating Officer: means an Assistant
iv. A firm; Commissioner or a Deputy Commissioner
v. An association of persons or a body of as defined in Clauses (9A) and (19A)
individuals, whether incorporated or not; respectively of Section 2 of the Income-tax
Act, 1961 (hereinafter referred to as the
vi. Every artificial juridical person, not falling
‘IO’)
under sub-Clauses (i) to (v)
ii. Approving Authority: means an
b. Benamidar: Section 2(10) of the Act
Additional Commissioner or a Joint
defines that “Benamidar” means a person
Commissioner as defined in Clauses (1C)
or a fictitious person, as the case may be,
and (28C) respectively of Section 2 of the
in whose name the benami property is
Income-tax Act, 1961 (hereinafter referred
transferred or held and includes a person
to as the ‘AA’)
who lends his name.
iii. Administrator: means an Income-tax
c. Beneficial Owner: Section 2(12) of the Act
Officer as defined in Clause (25) of Section
defines that “beneficial owner” means a
2 of the Income-tax Act, 1961
person, whether his identity is known or
not, for whose benefit the Benami property iv. Adjudicating Authority: means the
is held by a benamidar. Adjudicating Authority appointed under
Section 7 of the PBPT Act, 1988.
2.9 Other Provisions of PBPT Act, 1988 v. Appellate Authority: means the
Other relevant features of PBPT include the Appellate Tribunal established under
provisions declaring the Authorities under the Section 30 of the PBPT Act, 1988.

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As per CBDT Notification No. 97/ 2016-Income- ●● The offences under the PBPT Act are now
tax New Delhi, dated 25th October, 2016, it has liable to prosecution with prior approval of
been mentioned that with effect from the 1st day CBDT. Along with the beneficial owner, the
of November, 2016, the Adjudicating Authority benamidar and any other abettor can also
appointed under sub-Section (1) of Section 6 be prosecuted and sentenced to rigorous
of the Prevention of Money-Laundering Act, imprisonment ranging from one to seven
2002 (15 of 2003) and the Appellate Tribunal years, besides being liable for paying a
established under Section 25 of that Act shall fine.
discharge the functions of the Adjudicating
Authority and Appellate Tribunal, respectively, 3. INCOME-TAX AUTHORITIES AND
under the Prohibition of Benami Property RELEVANT NOTIFICATIONS
Transactions Act, 1988 (45 of 1988) until the UNDER PBPT
Adjudicating Authorities are appointed and
the Appellate Tribunal is established under the The Department of Revenue has notified the
Prohibition of Benami Property Transactions Prohibition of Benami Property Transactions
Act, 1988. Rules, 2016 vide its Notification No. 99/ 2016/
F. No. 149/ 144/ 2015-TPL (Part-II) dated 25th
2.10 Other Legal Implications October, 2016. Certain functions have been
assigned to CBDT as per Section 48 (Educational
The PBPT Act also has few other implications,
Qualification of Representatives) and u/s 55
having a far-reaching effect, as under:
(Giving approval for prosecution as provided u/s
●● No benamidar can re-transfer the benami 3, 53 and 54).
property to the beneficial owner or to any
The CBDT has issued Instructions vide F. No.
other person acting on his behalf. Such
transfer shall be null and void. 414/ 21/ 2017-IT (Inv. I) dated April 5th 2017
regarding creation of dedicated setup for
●● No suit, claim or action to enforce any implementation of the PBPT Act 1988 and has
right in respect of any property held directed setting up of ‘Benami Prohibition Units’
benami against the person in whose name (BPU) across the country.
the property is held or against any other
person shall lie by or on behalf of a person The CBDT vide Notification No. S.O. 1621(E)
claiming to be the real owner of such dated 18th May 2017 has specified the Income-
property. tax Authorities across the country who are
authorised to exercise the powers and perform
●● No defence based on any right in respect of the functions under PBPT Act, 1988 and has
any property held benami, whether against also specified their Headquarters and Territorial
the person in whose name the property is Area.
held or against any other person, shall be
The CBDT has also issued a Standard Operating
allowed in any suit, claim or action by or
Procedure with regard to the implementation of
on behalf of a person claiming to be the
Prohibition of Benami Property Transactions
real owner of such property.
Act, 1988 vide F. No. 414/ 63/ 2016-IT (Inv. I)
●● Any property, which is subjectmatter of dated 10th August 2017.A total of 24 ‘Benami
benamitransaction, shall be liable to be Prohibition Units’ are setup in the administrative
confiscated by the Central Government charge of a Pr. DIT (Inv.)/ DIT(Inv.). This SOP
and no compensation shall be payable in explains the duties and functions of the BPU. It
respect of such confiscation. is to be noted that though the Initiating Officers

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and Approving Authorities have been placed b. The benami unit may get information from
under the administrative control of respective different Government agencies including
DIT (Investigation)/ DGIT (Investigation), the Income-tax Department officers about
DIT (Inv)/ DGIT (Inv) are not the authorities suspected benami transactions/ property.
under PBPT Act. They do not have any statutory Also, the information may flow from
role in the administration of this Act. private persons or private organisations.
The CBDT has also issued an Order issued in As an authority implementing one of
S.O. 5194(E) dated 9th October 2018 titled the the stringent laws of the country, the IO
‘Prohibition of Benami Property Transactions should demonstrate a flair for gathering
(Removal of Difficulties) Order, 2018’,which information. He should be alert to the
seeks to amend the PBPT Act, 1988 to permit market information, ongoing/ past
the Initiating Officer to take the assistance of an investigations done by various agencies,
authorised representative. newspaper articles, to name a few. Further
The Department of Revenue has vide its he would do better if he is able to garner
Notification No. S.O. 5323(E) dated 16th October information from the vernacular press. The
2018 has designated various Courts of Session IO can also obtain credible information
in the country for the purposes of the trial of from ‘informants’ and, in any case, he is
offences punishable under the PBPT Act, 1988. empowered under Section 20 of PBPT
The CBDT has also initiated the ‘Benami Act 1988 to obtain necessary assistance
Transactions Informants Reward Scheme, 2018’ from various authorities viz. Income-tax,
vide F. NO. 299/ 31/ 2017-Dir (Inv. III) 22 dated FIU, Customs& Central Excise, NCB,
23rd April 2018. The CBDT has also issued Stock Exchanges, Police, RBI, SEBI etc.
Guidelines for Departmental Officers for dealing concerning information which may be
with information received under this reward useful in deciding whether a transaction is
scheme vide F. No. 299/ 31/ 2017/ Dir (Inv. III) Benami or not. The IO can also take the
21 dated 23rd April 2018. assistance from an officer of any other body
The above notifications, guidelines, instructions corporate constituted or established under
and letters should be carefully gone through. a Central or State Act. The IO can also
take assistance of such other officers of the
Central Government, State Government,
4. RESPONSIBILITIES AND DUTIES
Local Authorities, or Banking Companies
OF OFFICERS OF BPU
as may be notified in this behalf. A few
a. It is important to understand that the work instances of the assistance required can be:
of the benami unit is entirely different from
the normal assessment/ investigation work οο Obtaining incriminating documents
in the Income-tax department. The benami including title deeds and details of
unit (Approving Authority, Initiating assets found during Search and Seizure
Officer and Administrator) do not have a Action.
basic document like Income-tax return and οο Obtaining details of seizure of Gold,
there is no concept of issuing a notice like Foreign currencies and other items by
143(2) of Income-tax Act. The manner of Customs.
functioning of Benami unit is described in
following paragraphs in order to provide οο Obtaining details of seizure of drugs
an insight. and other items by NCB/ Police

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οο Obtaining details of Fictitious from the reasons recorded. A copy of

Transactions emerging from the the showcause notice is to be served on
investigation carried out by various the beneficial owner also, if his identity
government agencies. is known. In view of the extant law on
reopening of assessments and recording
οο Obtaining relevant F.I.R and other of satisfaction, it would be proper that the
crime reports from Police/ ED showcause notice should contain proper
οο Obtaining relevant Revenue records of reasons and complete available with the
the State Government IO for treating the transaction as benami
transaction. Further it would be better if
c. After the receipt of information, the IO is the showcause notice encloses the copies
personally required to evaluate the same of documents/ copies of statements etc.
in order to form a preliminary view as to relied on by the IO. For the purposes of
whether the information relates to benami natural justice, the showcause may also
property transaction or not. In essence indicate the following, as the case may be:
the processing of information entails that i. The relevant Clause of Section 2(9) of
whenever an information is received the Act under which the satisfaction is
from any source, the IO shall examine it drawn.
to ascertain whether there is a prima facie
ii. Reasons available with the IO for
ground to initiate any inquiry. If he is not
considering the person as a benamidar,
satisfied with the material, he can call for
if relevant.
more information from the source(s). Once
the IO is satisfied that the available material iii. Alleged relationship between
is prima facie substantial and significant to benamidar and Benami property.
initiate an inquiry/ investigation in respect iv. The identity of the Beneficial Owner, if
of any person, place, property, assets, any.
books of accounts, documents etc. he shall
v. The relevant documents and copies of
obtain the approval from the Adjudicating
the statements recorded and proposed
Authority (the AA) u/s 23 of the Act for to be Utilised against the person.
conducting the necessary inquiry or
investigation. The IO can issue summons e. The showcause should give a reasonable
for discovery and inspection; enforce period for making proper representation,
attendance of any person and record preferably 15 days from the date of notice
statements on oath; issued. It must also be kept in mind that the
proceedings u/s 24 of the PBPT Act, 1988
d. If on the basis of the material in his has an outer time limit of 90 days only. The
possession, the IO has reasons to believe officers should be careful in preparing the
that any person is a benamidar in respect showcause notice. For issuing this notice,
of a property, he is first required to no approval of AA is legally required. If
record reasons in writing before issuing the IO is of opinion that the impugned
a showcause notice to the benamidar(s) property is likely to be alienated by the
u/s 24(1) of PBPT Act, 1988. This action person having possession of the same,
is akin to recording of reasons u/s 148 of an interim provisional attachment may
Income-tax Act, 1961. The independent be made by the IO with the approval of
satisfaction of the IO has to discernible AA by way of passing an order u/s 24(3)

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at any time after the issue of show-cause independent application of mind of the
notice. This interim provisional attachment Approving Authority is required with
can be made for the period upto the date appropriate recording of reasons so
of passing of the order by the Adjudicating that the order passes the test of judicial
Authority. The service of the notice and scrutiny. The Approving Authority shall
attachment order is of crucial importance. pass a speaking order clearly spelling out
The Section 25 of the PBPT Act 1988 as to why he is approving the proposal of
mandates that the notice may be served IO, either to proceed further or to close the
on the person named therein either by matter.
post or as if it were a summons issued by a
Court under the Code of Civil Procedure, i. Unlike an assessment/ penalty order under
1908 only. The notice has to be addressed Income-tax Act, the order u/s 24(4) does
correctly as specified. not create any demand on the benamidar,
beneficiary and/ or any person who might
f. With the issue of show cause notice, the be having control of the property. Also,
clock starts ticking as the final order u/s unlike the Income-tax proceedings, there
24(4) has to be passed with the prior is no regular appeal provided against the
approval of AA within 90 days. The final order u/s 24(4). Instead, the IO is required
order of the IO can culminate into either to draw a statement of the case and refer
a continual of the earlier provisional it to the Adjudicating Authority within 15
attachment or a provisional attachment of days from the date of order u/s 24(4). This
the property. The provisional attachment statement must have copies of documents
of the property has to be done in the relied upon by the IO while passing
manner provided in the Second Schedule the order u/s 24(4). On receipt of the
of the Income-tax Act, 1961.
reference, the Adjudicating Authority shall
g. In the showcause notice issued and served issue notices to the specified benamidar,
on the benamidar and beneficiary, the the beneficial owner, any interested party,
IO should indicate the date and time any person making a claim in respect of
for hearing to the benamidar and to the the property and shall direct them to
beneficiary. The benamidar/ beneficiary furnish such documents, particulars or
may choose to avail of opportunity of evidence as is necessary. A copy of the
being heard and or may file their replies to Statement of the case along with the relied
the show cause notice. After hearing and upon documents may be served on each
or after going through the replies filed, if benamidar and each beneficiary as per
any, the IO may make further inquiries/ the directions of Adjudicating Authority.
investigation if required and then pass Therefore, the IO should make sufficient
the order u/s 24(4). The order should be copies of the reference and relied upon
served on the benamidar and beneficiary. documents.
The copy of order should also be served
j. The Adjudicating Authority is required to
on the person who might be having control
provide an opportunity of being heard to
of the property attached.
the concerned parties as well as to the IO.
h. The proceedings under Section 24 can The Adjudicating Authority is also required
be closed only with the approval of to give opportunity of being heard to any
the Approving Authority. Therefore, an other person/ organisation who might

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have interest in the attached property. authority of the Central Government or a

Fresh documents can be filed at this stage. State Government, as case may be, having
After hearing the different parties and after jurisdiction for the purposes of registration
examining the documents, the Adjudicating of such immovable property, intimating
Authority has to pass an order within one about the confiscation of the property. He
year of the end of the month in which the is also required to arrange to place a copy
statement of the case was received by it. In its of the notice at some conspicuous part of
order the Adjudicating Authority can either the immovable property for the benefit of
confirm the attachment order or revoking general public mentioning clearly therein,
the same. In the course of the proceedings in English and in vernacular language,
before it, the Adjudicating Authority can that the property has been confiscated
provisionally attach any other benami under the Act and vests absolutely in the
property also even if the same was not Central Government. He is also required
referred to it. The Adjudicating Authority to arrange to make a proclamation for
can amend the names of the parties to the the confiscation of immovable property at
dispute, as the case may be. If any property some place on or near such property by
is held to be benami, the Adjudicating beat of drum or other customary mode. He
Authority shall, after giving an opportunity is also required to forthwith issue a notice to
of being heard to the other person, make the authority or person having the custody
an order to confiscate the property. of such movable property informing him
k. After the Adjudicating Authority passes about the confiscation of such property.
an order of confiscation of the property, He is also required to sell the property, if
the Administrator shall have the power the property is liable to speedy and natural
to receive and manage the property. The decay or the expenses for maintenance is
Administrator shall give a notice in writing likely to exceed its value, with the leave of
of seven days to any person, who may be the concerned Adjudicating Authority, and
in possession of the benami property, to deposit the sale proceeds in the nearest
surrender or deliver possession thereof to Government Treasury or branch of the
the Administrator or any other personduly State Bank of India or its subsidiaries or
authorised in writing by him in this behalf. in any nationalised bank in fixed deposit
In the event of non-compliance of the and retain the receipt thereof. The relevant
order or for the purpose of forcibly taking rules in this behalf are required to be kept
over the property, the Administrator can in mind.
requisition the service of any police officer
l. The Adjudicating Authority can also issue
to assist him and it shall be the duty of
notice and attach any other property
the officer to comply with the requisition.
although the IO may not have attached
The Administrator shall also take such
the same.
measures, as the Central Government may
direct, to dispose of the property which is m. Any party aggrieved by the order of
vested in the Central Government under Adjudicating Authority can file appeal
sub-Section (3) of Section 27, in such before Appellate Tribunal. Further appeal
manner and subject to such conditions against the order of Appellate Tribunal is
as may be prescribed. The Authorised provided before the respective High Court.
officer shall forthwith issue notice to the No appeal to Supreme Court is provided.

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n. Prosecutions can be launched only in being camouflaged and hidden under layers,
designated Special Courts. The Central with money getting transferred through various
Government, in consultation with the Chief accounts. The IO has to make all possible
Justice of the High Court, shall, designate inquiries to get to the ultimate source of the
one or more Courts of Session as Special money. Mere suspicion is not enough.
Court or Special Courts in this regard. Further in addition to source, the IO has to
look at the overall circumstances surrounding
4.1 Role of Investigation the transactions also. If the transaction is one
It should also be kept in mind that the concept which is exempted by the PBPT Act, then also
of holding a property as benami is a conscious it would be necessary to ascertain the source of
decision. While any decision to declare or conceal the consideration.
income is generally taken after the transactions The IO has to establish the benami nature of the
have been completed, the decision to enter transaction with strong evidences. It has to be
into a benami transaction is taken after careful proved that some person, other than owner, is
deliberations and is taken much before entering enjoying the benefits of the property. If say, a
into a benami transaction. Therefore, the wealthy businessman, out of his unaccounted
Inquiries and investigations required have to be money, buys a property in the name of some
thorough and much deeper in order to establish other person. In reality, he is using the property.
benami nature of such transactions. The BPU Here, the IO should inquire into the financial
should note that entire spectrum of attachment capacity of the other person-the benamidar.
proceedings, confiscation proceedings, On further inquiry into his financials, it will
prosecution proceedings etc. depend on the certainly be found out that the businessman has
inquiries and investigations carried out by the introduced money into this other person’s books
benami unit. The inquiries/ investigations do not to purchase the said property. After establishing
the source, the IO should do field inquiries, such
mean merely issuing notices to the benamidar
as who is actually using the property. The IO may
and beneficiary or just recording their statements.
ask the neighbors, take statements of servants
It involves a much larger area of investigation
working at the property, ask local vendors/
and lots of facts have to be ascertained to pass
service providers about the beneficiaries etc.
the tests laid down by Hon’ble Supreme Court The IO may also go into details of house tax,
and in order to survive the litigation at different electricity, phone bills etc. to find out who is
levels. A point to be kept in mind is that the right paying for the same. All these facts shall help
to property is still a legal right and no person can establish the beneficial owner of the property.
be divorced from his property except with the
due process of law. In cases of introduction of bogus share capital,
a likely query can arise as to whether the assets
acquired by such Company can constitute
5. INVESTIGATION BY INITIATING
benami property under the Act. Typically, the
OFFICER
taking of an accommodation entry involves
The IO should note the new definition of benami bringing one’s unaccounted income into books
transactions and the broadened scope of the term as loans, advances, introduction of share capital
‘property’. The IO has to first get into the source etc. If an individual, having unaccounted
of the consideration paid and has to establish income, routes this money into one of the
whether the same is out of known sources or not. companies owned/ controlled by him/ her in
There is a likelihood of the relevant transaction the form of share capital, the money can also

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be used to buy assets in the name of company. ●● Identifying the property clearly as to its
In this situation, if upon an inquiry it is found location, title and all the papers related
out that the ultimate source of share capital is to it.
the unaccounted income of a third person, then
●● Identifying the real intention of the
the assets purchased by the company out of
beneficial owner to own the property
the bogus share capital will represent a Benami
through someone else.
Property. Theostensible shareholders/ company
are the benamidars while the real owner of the ●● Identifying the persons who helped in
money is the beneficial owner. carrying out the benamitransaction. As per
However, without prejudice to above, it new amendments to the PBPT Act,1988
is expected that the IO should be able to even these persons are guilty for abetting
differentiate between a Sham transaction and the crime.
Benami transaction. For example, ‘A’ transfers ●● If it is an immovable property- identify
his property on paper to ‘B’, though for all who is maintaining it and paying for the
practical purposes, the real ownership of the utilities like rent, electricity, water bills,
property remains with ‘A’. Here one has to look property tax payments, telephone bill and
at the consideration angle. Usually this is done such other statutory payments. Even if it is
in case of family disputes, to relieve oneself of all done by the benamidar, what is ultimate
properties so that they need not be shared with source of these payments?
the other litigants. In such cases, normally there
may be no actual consideration paid by ‘B’ to ‘A’. ●● Another important point to be noted by
This is a sham transaction and technically this IO is that the burden of proof in case of
may not be considered as a Benami Transaction. Benami transactions always lies on the
person who alleges a transaction to be
5.1 To sum up, broadly the following points
a Benami Transaction. Hence, here it is
should be kept in mind while investigating a case
the duty of the IO to prove with enough
of benami property:
evidence that the particular transaction is
●● The first point of suspicion: Person in a Benami Transaction.
possession of the property does not
have the financial capability to own/ 5.2 Case Studies of Recent Inquiries in
hold it. Though at times, even a person Field
with sufficient means can also act as
a benamidar. Hence, this step is the i. One assessee’s farm house was actually
beginning of the investigation and is not attached under Prohibition of Benami
the final conclusion. Transaction Act, 1988 recently. The
assessee wanted to construct a farm house
●● Identifying the source from where the in a rural area. However, the law permits
money for purchase was received and only a farmer to buy agricultural land in that
analysing the movement of funds. This area. Since the assessee was not a farmer,
may involve ignoring the facade of the he formed a company whose purpose
transaction and sifting through the layers was declared to be farming. The father in
of transactions/ entities to ascertain the law and the mother in law of the assessee
true source of money. were made Directors of the Company and
●● Collecting PAN of benamidar and land was purchased in the name of the
beneficial owner, if possible. Company and subsequently a farm house

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was constructed. The assessee, in the form confirmed that it was only the assessee
of unsecured loans, provided the money who would send the cars for servicing. The
to the company to buy the land and to local building watchman also confirmed
build the farm house. As per the PBPT Act, that cars were used by the assessee. These
exemption is only for a property purchased facts were confronted to the assessee and
in the name of one’s wife or child and no he accepted the same. All such cars were
other relative. This was definitely not the attached and treated as benami.
case here. In fact, the Company was not
declaring any income from farming also.
6. BASIC FUNDAMENTALS OF
It was also found that the farm house was
ADMINISTERING THE PBPT
actually been used by the assessee only on
ACT, 1988
a regular basis. Hence, after following the
due process, the farm house was attached
by the Benami Unit of the department. 6.1 Burden of Proof
In legal jurisprudence and also as per the Indian
ii. During one inquiry into the affairs of a
Evidence Act, 1872, the burden of proof as
Cooperative society/ Bank, many benami
to any particular fact lies on that person who
FDs were found. To avoid suspicion, these
wishes the Court to believe in its existence. In
FDs had been deliberately kept in small
the proceedings under the PBPT Act 1988, the
denominations, i.e. below Rs. 50,000.
burden of proof is on the State i.e. an authority
However, when further inquiries were
who administers the Act. The basis of placing
conducted and the statements of persons,
the burden of proof on the authority does not
in whose names these FDs were opened,
emanate from the PBPT Act,1988; rather it
were recorded it was found that the
originates from a number of court decisions.
ostensible owners were not aware of such
In the case of Thakur Bhim Singh (Dead) by
accounts being opened in their name in
LRs and Anr. vs. Thakur Kan Singh (Supra) the
the cooperative bank. It was also seen that
Supreme Court has observed as under:
the due process of KYC documentation
was also not completed by Bank in such “It is well settled that the burden of proving that
cases. Thus, all these FDs were found to be a particular sale is benami and the apparent
benami properties. purchaser is not the real owner, always rests on
the person asserting it to be so. This burden has to
iii. In one Search & Seizure Operation, the
be strictly discharged by adducing legal evidence
assessee was found to be in possession of of a definite character which would either
certain vehicles. The keys of the vehicles directly prove the fact of benami or establish
and the original documents of the vehicles circumstances unerringly and reasonably raising
were also in possession of the assessee. an inference of that fact. The essence of a benami
However, the names mentioned on these is the intention of the party or parties concerned;
documents were different. The persons, in and not often such intention is shrouded in
whose names cars were purchased, were a thick veil which cannot be easily pierced
summoned and their statements were through. But such difficulties do not relieve the
recorded. They denied any knowledge person asserting the transaction to be benami of
of such cars being purchased. Further, any part of the serious onus that rests on him;
they did not have any financial capacity nor justify the acceptance of mere conjectures or
to purchase these cars. Inquiries were surmises, as a substitute for proof. The reason is
also made from the service Centres, who that a deed is a solemn document prepared and

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executed after considerable deliberation and 6.3 Principle of Natural Justice

the person expressly shown as the purchaser As the burden of proof lies with the enforcing
or transferee in the deed, starts with the initial authority, proper opportunity of hearing and
presumption in his favour that the apparent state action without any bias have to be ensured
of affairs is the real state of affairs.” both in letter and spirit and in accordance
with procedures established by law. While
6.2 Standard of Proof
implementing the provisions of the Act the
As the burden of proof is on the authority who authorities shall not be bounded by the Code of
administers the PBPT Act, it is imperative that Procedure 1908, but by the principle of natural
standard of proof in the form of evidence has to justice. Therefore, a notice or order should clearly
be credible and cogent and such evidence should spell out the facts and be in the nature of a well
pass the test of admissibility under the Indian defined speaking order. It should also contain
Evidence Act, 1872. There is no place for any reference to all the relied upon documents,
presumption and inference while discharging the which should be open to scrutiny of the alleged
duty of proving the allegation that transaction is person. This will ensure that the Act is not only
in the nature of Benami. bona fide but also fair in procedure.

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19
Examination of Witnesses
1.
1.1 Under the provisions of Section 131 of the
Income-tax Act, 1961; the Assessing Officer and
other specified authorities have the powers of
the Civil Court vested in them under the Code
of the Civil Procedure, 1908 in respect of the
matters enumerated in that Section. Enforcing
the attendance of any person and examining
him on oath is one of them. Sections 132 and
133A also give powers of recording statements
to the authorities specified therein.
1.2 Relevant portion of Section 131 is as under:
Director or Assistant Director or Deputy Director,
“131. (1) The Assessing Officer, Deputy
or the authorised officer referred to in sub-Section
Commissioner (Appeals), Joint Commissioner,
(1) of Section 132 before he takes action under
Commissioner (Appeals), Principal Chief
Clauses (i) to (v) of that sub-Section, has reason
Commissioner or Chief Commissioner or
to suspect that any income has been concealed,
Principal Commissioner or Commissioner and
or is likely to be concealed, by any person or class
the Dispute Resolution Panel referred to in Clause
of persons, within his jurisdiction, then, for the
(a) of sub-Section (15) of Section 144C shall, for
purposes of making any enquiry or investigation
the purposes of this Act, have the same powers
relating thereto, it shall be competent for him to
as are vested in a court under the Code of Civil exercise the powers conferred under sub-Section
Procedure, 1908 (5 of 1908), when trying a suit (1) on the income-tax authorities referred to
in respect of the following matters, namely: in that sub-Section, notwithstanding that no
(a) discovery and inspection; proceedings with respect to such person or class
enforcing the attendance of any person, including of persons are pending before him or any other
(b) any officer of a banking company and examining income-tax authority.”
him on oath;
1.3 There are two distinct sub-Sections in
compelling the production of books of account
(c)
and other documents; and
Section 131, each with its precondition, under
which the Income-tax Authorities have been
(d) issuing commissions.
given the power to issue summons. Section 131
(1A) If the Principal Director General or Director of the Income-tax Act has been in operation since
General or Principal Director or Director or Joint the introduction of the Income-tax Act. Under

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Section 131(1), the power to issue summons 1.8 In Income-tax proceedings, the person
has been given to the officers engaged in giving statement could be either an assessee or
assessment/ appellate/ revision related functions a witness produced by assessee or requisitioned
during the pendency of Income-tax Proceedings. by the department. Persons interrogated could
The words “for the purposes of this Act” in be the assessee or his employees or relatives or
Section 131(1) are to be construed to mean that other people like creditors, debtors, contractors,
some proceedings must be pending before the agents, brokers and government or bank officials.
aforesaid officers who can invoke these powers. It could as well as involve experts like engineers,
architects, hand-writing expert etc. Examination
1.4 The limitations of issuing summons during
the pendency of Income-tax proceedings were should be a purposeful questioning of the person
recognised and sub Section (1A) to Section having knowledge of the transaction under
131 was introduced by the Taxations Laws investigation, so as to elicit true facts.
(Amendment) Act, 1975 w.e.f. 01-10-1975. 1.9 The examination is normally, in the form
Section 131(1A) gives similar powers to the of questions and answers put to the deponent
offers of the Investigation wing to summon witness orally. The questions and its answers
without any proceedings pending before them, are taken down verbatim. In the end of the
if they have reasons to suspect that the person deposition, it is read out to the deponent and
concerned has concealed or likely to conceal the signed by him and the presiding officer.
income.
1.10 As per Section 136 in the Income- tax
1.5 The procedure for examination of witnesses, Act,1961; any proceeding under the Income-
as far as possible, should be in accordance with tax Act before an income-tax authority shall be
the provisions of Order XVIII & Order XIX of deemed to be a judicial proceeding within the
the Civil Procedure Code, relevant extracts from meaning of Sections 193 and 228 and for the
which, are appended to this Chapter. purposes of Section 196 of the Indian Penal
1.6 The relevant portion of Section 132(4) is Code, 1860 (45 of 1860) and every income-tax
as under: authority shall be deemed to be a Civil Court
for the purposes of Section 195, but not for
“132(4) The authorised officer may, during the
course of the search or seizure, examine on oath the purposes of Chapter XXVI of the Code of
any person who is found to be in possession or Criminal Procedure, 1973 (2 of 1974)].
control of any books of account, documents,
money, bullion, jewellery or other valuable 2. RELEVANT PROVISIONS OF THE
article or thing and any statement made by such INDIAN EVIDENCE ACT, 1872
person during such examination may thereafter 2.1 The law relating to examination of witness
be used in evidence in any proceeding under the is contained in Section 135 to 166 of the Indian
Indian Income-tax Act, 1922 (11 of 1922), or Evidence Act, 1872. These provisions may be
under this Act.” referred to by the AOs before taking up cases of
1.7 The relevant portion of Section 133A is as serious investigation.
under: 2.2 As per Section 3 of the Indian Evidence
“ 133A (3) An income-tax authority acting under Act, 1872; “Evidence” means and includes
this Section may,: 1. All statements which the Court permits or
record the statement of any person which requires to be made before it by witnesses,
(iii) may be useful for, or relevant to, any in relation to matters of fact under inquiry;
proceeding under this Act” such statements are called oral evidence;

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2. All document including electronic records 1. To test his veracity.

produced for the inspection of the Court, 2. To discover who he is and what is his
such statements are called documentary position in life, or
evidence.
3. To shake his credit, by injuring his
2.3 As per Section 137 of the Indian Evidence character, although the answer to such
Act, the examination of a witness by the party questions might tend directly or indirectly
who calls him shall be called his examination in
to criminate him or might expose or tend
chief. The examination of a witness by the adverse directly or indirectly to expose him to a
party shall be called his cross-examination and penalty or forfeiture.
the examination of a witness, subsequent to the
cross-examination by the party who called him,
shall be called his re-examination. 3. STAGES OF EXAMINATION

2.4 As per Section 138 of the Indian Evidence Based on provisions of the Indian Evidence Act
Act, witnesses shall be first examined-in-chief, mentioned above and provisions of the Income-
then (if the adverse party so desires) cross- tax Act, the three stages of examination can be
examined, then (if the party calling him so recapitulated as under:
desires) re-examined. The examination and 3.1 Examination in Chief: The examination
cross–examination must relate to relevant facts of a witness by a party who calls him is
but the cross–examination need not be confined called examination in chief. The object of this
to the facts to which the witness testified on his examination is to elicit from the witness all the
examination–in-chief. The re-examination shall material facts to prove the case of the party
be directed to the explanation of matters referred calling him. The examiner must not put leading
to in cross-examination; and, if new matter is, questions to the witness. As per sec. 141 of the
by permission of the Court, introduced in-re- Indian Evidence Act, any question suggesting
examination, the adverse party may further the answer which the person putting it wishes or
cross-examine upon that matter. Therefore, no expects to receive is called a leading question.
examination of witness can be complete if the Any hearsay evidence, i.e., evidence which is
adverse party is illegally refused permission to not based on the own experience of the witness
cross-examine him or the party calling him is should not be allowed.
refused permission to re-examine him.
3.1.1 In Income-tax proceedings, the assessee
2.5 As per Section 141 of the Indian Evidence normally introduces evidence either by
Act 141, any question suggesting the answer making a written or oral statement or submits
which the person putting it wishes or expects a statement/ confirmation from another party
to receive is called a leading question. As per to the transaction. Most of the time this gets
Section 142, leading questions must not, if substituted as a record of Examination in chief
objected to by the adverse party be asked in an e.g. in case of a cash credit, if the AO insists on
examination-in-chief, or in a re-examination, examination of the creditor, the confirmation
except with the permission of the Court. As per letter is the record of examination-in-chief
Section 143, leading questions may be asked in which is to be subjected to cross examination.
cross- examination. Similarly, when an assessee submits an affidavit
2.6 As per Section 146 of the Indian Evidence about loss of books in floods or fire, this becomes
Act, when a witness is cross-examined, he his statement in examination-in-chief. If the
may, in addition to the questions herein before assessee so wants he can once again go through
referred to be asked any questions which tend- the process of recording examination-in chief. In

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case he is to be further examined, it shall be his account, it became clear that his testimony was
cross-examination by the AO to verify the truth not reliable.
in his submission.
3.2.2 Mention may also be made of a witness
3.1.2 The statements recorded u/s 131, 132 who turns hostile, meaning thereby that he
or u/s 133A of the IT Act are in the nature of conducts himself in such a manner that his
examination-in-chief. As far as such statements testimony in examination-in-chief goes against
of the assessee are concerned, there cannot be the party who has called him. If the court declares
a situation of cross-examination by the assessee. him hostile, the party who had called him, gets
But in case of statements of employees, valuers the right to cross-examine him.
etc., the assessee shall be entitled for a cross-
3.3 Re-examination: The object of re-
examination of such persons.
examination is to afford the party calling the
3.2 Cross-examination: This is the stage witness an opportunity of filling in the lacunae or
when the party opposite to the party who has explaining the inconsistencies which the cross-
produced or requisitioned the witness examines examination has discovered in the examination-
him. The purpose of cross-examination is two- in-chief of the witness. It is accordingly limited
fold, first to weaken, qualify or destroy the case to the explanation of matters referred to in
of the opponent; and secondly to establish the cross-examination. It partakes the nature of
party’s (in this case department) case by means examination-in-chief in as much as no leading
of the opponent’s witnesses. The objects are to questions can be asked. It may be used for
impeach the accuracy, credibility and general the purpose of removing or diminishing any
value of the evidence given in examination- suspicion that the cross-examination may have
in-chief; to sift the facts already stated by the cast on the examination-in-chief or to enable
witness, to detect and expose discrepancies, the witness to state the whole truth as to matters
or to elicit suppressed facts which will support which have only been partially dealt with in
the case of the cross-examining party. Cross- cross-examination. Questions may be asked
examination differs from examination-in-chief for explanation of the expressions used by the
and re-examination in that leading questions witness cross-examination. But the party has
can be asked in cross examination. no right to introduce new matters not suited to
3.2.1 Cross-examination is not limited to explain either the expressions or the motives of
matters to which the witness has testified in his the witness. If a question has been omitted in
examination-in-chief. But like the examination- the examination-in-chief, it is usual to request
in-chief, cross-examination must relate to the Court to make an inquiry and such a request
relevant facts. Cross-examination is an important is generally granted. If the cross-examination is
weapon for destroying the credibility of a witness. ineffective, no re-examination, as a rule, should
If a witness has given testimony in favour of the be made.
assessee, the cross-examination may bring to
surface his bias owing to his relationship with the 4. ART OF CROSS–EXAMINATION
assessee. Where a person who testified to having
given a large loan to the assessee which has 4.1 The exercise of the right of cross-
not been returned to date, had to admit in the examination is regarded as one of the most
course of cross-examination that he was for past important procedure for discovery of truth. Yet
two years unemployed and that only an year it has been usually described as “art” because
earlier he had sold land to manage household it is as much about the law and facts of the case
expenses and that he had no money in his bank as the skill of extracting the truth in a particular

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situation. While there cannot be any standard The effort should be to accumulate as
way of going about this job, the skill, can be many inconsistencies as are possible.
developed and improved upon by keeping in These become the circumstantial evidence,
mind the following: whose utility is best when there exists a
sequence of events.
a. The officer must know the case in all its
details, and putting himself in the state of f. The officer should try to identify the weak
assessee, must be mentally clear of the points in the armour of the witness after
modus operandi adopted by the assessee. few initial probes.
Reference to files again and again gives g. The officer must have patience. The
an undue advantage to the assessee, witness is likely to put off the investigation
to mentally go over his deposition and by giving vague or evasive replies. The
change it suitably. examiner’s skill is in persisting with his
b. Ask innocent questions first, and get the line of interrogation by framing questions
witness to commit himself. The underlying differently, more than once.
idea in asking innocent questions first h. The replies of the witness should be
is to cut off all possible escapes against reduced in writing, in his exact words.
incriminating material when the same Examiner need not substitute technical
is presented to the assessee. The best words to sum up or better explain the idea
course is to put oneself in the position of a of the witness.
credulous third party.
i. The officer should retain the initiative,
c. The object of questioning must be kept and must keep control of the questioning.
as disguised as possible. The assessee He should hear the witness but not allow
or witness should not be in a position to him to digress. The witness should not be
guess the underlying import of the various allowed to be the examiner himself. He
questions. should not be allowed to attack which is
often the best form of defence.
d. The language for recording the statement
should be carefully chosen. If the witness j. The officer must be clever but he should
does not or barely understand English, not try to show off his cleverness. He
there is no point conducting his cross- should be subtle. Many cross-examiners fail
examination in English. In all likelihood because they cannot contain themselves.
at a later stage he is going to retract, It would be better the impression given is
any adverse inference on the plea that of an aimless conversation rather than a
he did not understand language and searching cross-examination.
the translation does not convey what he k. Aggressive approach normally does not
wanted to say. help. The officer must keep the whole
e. The objective should always be kept clear exercise at an even keel neither making
in mind. All questions in cross-examination the atmosphere absolutely casual nor
must lead to that objective. By experience absolutely tense. Effort should be to
an examiner is able to develop a sequence discredit the testimony and not to discredit
of questions to lead the witness towards the witness. Remember, ultimately the
his ultimate questions. But if one has no information has to come from the witness
clear objective in mind, he will miss the only. Wherever appropriate, leading
relevance of many answers for the case. questions may be put to the witness as

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leading questions are permissible in cross- On the other hand, in Income-tax proceedings
examination. Patience is the greatest virtue the person carrying out the cross examination is
of the cross-examiner. If the witness is lying himself the presiding officer and there is no jury.
sooner or later he will trip and contradict Since the real worth of the entire examination
himself. Do not shout at witness or try shall be known only at the appellate stage, it
bullying him into admission. is imperative to bring out on record, in black
and white, all the aspects of the matter, so that
l. Time your questions. It is very difficult to
a correct appreciation can be made by a third
say as to when certain questions are to be
person after a gap of time. The AO can also
put. The cross-examiner has himself to go
record the physical reaction of a witness if it has
on mentally assessing the witness and put
a bearing on the veracity of his testimony.
vital questions at a time when the witness
is least likely to realise the significance of
the answer himself. 5. ROLE OF OATH

m. Incriminating material and other 5.1 While Section 131(1) and 132(4) of the Act
documentary evidence in possession of authorise the specified officers to examine any
the officer, contradicting the testimony of person on oath, Section 133A does not mention
the witness, must be confronted to him so. However, Section 4(a) of the Oath Act 1969
during the process itself. provides that oaths or affirmations shall be made
by all witnesses, that is to say all persons who may
4.2 While examining an expert, it may not
lawfully be examined or give, or be required to
serve any purpose to have a lengthy cross-
give, evidence by or before any court or person
examination in the area of his expertise. Attempt
having by law or consent of parties authority to
should be made to sift the scientific facts from
examine such persons or to receive evidences.
personal opinion and then show how the expert
has been supporting the assessee’s case on his Hence those proceedings under Section 133A
personal opinion. could as well be conducted under oath-taking
shelter of The Oath Act 1969 but it is better to
4.3 Similarly where an officer feels that the take statement without oath during general
witness is wilfully and intentionally giving a false survey under Section 133A as there isno express
testimony, (technically called perjured witness), provision under the Income-tax Act, 1961 in
he should be made to recall a sequence of events. the Section 133A(iii) while the same is there in
He should try to make him repeat his story by Section 131, 132(4). Further Section 7 of the
frequent jumping in the sequence. Distracting Oaths Act provides that failure to take oath or
and taking him to some other related topic for affirmation or any irregularity in administering
a short while and then returning could upset his it, shall neither invalidate the proceedings nor
rhythm. render the evidence inadmissible.
4.4 It must be remembered that the procedure 5.2 If oath is not administered, prosecution for
of examination of witnesses has evolved in the
perjury u/s 181 and 193 of IPC will not stand.
course of proceedings before trial court with
Section 181 & Section 191 in The Indian Penal
a jury. Cross-examination was almost like a
Code stipulates as under:
drama where the presiding officer and the jury
besides listening to the oral statement could also “181. False statement on oath or affirmation to
absorb physical reactions of the witnesses. In a public servant or person authorised to administer
live trial ‘body language’ of a witness indirectly an oath or affirmation- Whoever, being legally
influences the evaluation of his oral testimony. bound by an oath or affirmation to state the

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truth on any subject to any public servant or for several years and has instructed generations
other person authorized by law to administer of budding lawyers. Some of the tips given by
such oath or affirmation, makes, to such public him are reproduced below in quotes:
servant or other person as aforesaid, touching 6.2 The Matter of Cross-examination:
the subject, any statement which is false, and “If, perchance, you obtain a really favourable
which he either knows or believes to be false or answer, leave it and pass quietly to some other
does not believe to be true, shall be punished inquiry. The inexperienced examiner in all
with imprisonment of either description for a probability will repeat the question with the idea
term which may extend to three years, and shall of impressing the admission upon his hearers,
also be liable to fine.” instead of reserving it for the summing up,
and will attribute it to bad luck that the witness
“191. Giving false evidence.-Whoever, being
corrects his answer or modifies it in some way, so
legally bound by an oath or by an express that the point is lost. He is indeed a poor judge
provision of law to state the truth, or being of human nature who supposes that if he exults
bound by law to make a declaration upon any over his success during the cross examination,
subject, makes any statement which is false, and he will not quickly put the witness on his guard
which he either knows or believes to be false or to avoid all future favourable disclosures.”
does not believe to be true, is said to give false “Often times the main point in litigation depends
evidence.” upon the correct version given of a conversation
5.3 The Section 193 of the Indian Penal Code where only two persons are present, usually the
stipulates for punishment for false evidence as opposing parties themselves. In a case of that
kind the direct testimony of either is often of such
under:
a character that there is no hope of obtaining
“193. Punishment for false evidence.—Whoever a contradiction out of the mouth of the witness
intentionally gives false evidence in any stage of himself. Here, the skilful cross-examiner would
a judicial proceeding, or fabricates false evidence ignore the testimony given by the witness in
for the purpose of being used in any stage of chief and confine his efforts almost exclusively to
a judicial proceeding, shall be punished with destroying the witness, if possible, by attacking
imprisonment of either description for a term his integrity in connection with entirely collateral
matters.”
which may extend to seven years, and shall also
be liable to fine, and whoever intentionally gives 6.3 Cross-examination of Experts: “It has
or fabricates false evidence in any other case, become a matter of common observation that
shall be punished with imprisonment of either not only the honest opinions of different experts
be obtained upon opposite sides of the same
description for a term which may extend to three
question, but also that dishonest opinions may
years, and shall also be liable to fine.”
be obtained upon different sides of the same
question.
6. REFERENCE MATERIAL ON
CROSS-EXAMINATION Attention is also called to the distinction between
matters of scientific fact and mere matters of
6.1 The classic work on the art of cross opinion. For example: medical experts may be
examination is by Francis C. Wellman, one of the called to establish certain medical facts which
greatest trial lawyers of U.S.A. named “The Art are not mere matters of opinion. On such facts
of Cross Examination,” published by Macmillan the experts could hardly disagree; but in the
Co. This monumental work has reigned supreme province of opinion it is well known that the

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experts differ so widely among themselves that his thoughts and getting ready his explanations
but little credit is given to mere expert opinions in anticipation of the question that is to follow,
as such. and the effect of the damaging letter will be lost.
As a general thing, it is unwise for the cross- The correct method of using such a letter is
examiner to attempt to cope with a specialist in his to lead the witness quietly into repeating the
own field of inquiry. Lengthy cross-examinations statements he has made in his direct testimony,
along the lines of the expert’s theory are usually and which his letter contradicts, “I have you
disastrous and should rarely be attempted.” down as saying so and so; will you please repeat
“On the other hand, some careful and judicious it? I want to be accurate.” The witness will repeat
questions, seeking to bring out separate facts his statement. Then write it down and read it
and separate points from the knowledge and off to him. “Is that correct? Is there any doubt
experience of the expert, which will tend to about it? For if you have any explanation or
support the theory of the attorney’s own side of qualification to make, I think you owe it to us,
the case, are usually productive of good results. in justice, to make it before I leave the subject.”
In other words, the art of the cross-examiner The witness has none. He has stated the fact;
should be directed to bring out such scientific there is nothing to qualify; note it and make him
facts from the knowledge of the expert as will sign it. Then let your whole manner toward him
help his own case, and thus tend to destroy the suddenly change, and spring the letter upon
weight of the opinion of the expert given against him. “Do you recognise your own handwriting,
him. sir? Let me read you from your own letter, in
which you say,” - and afterward - “Now, what
Another suggestion which should always be
have you to say to that?”
borne in mind is that no question should be put
to an expert which is in any way so broad as 6.5 Silent Cross-examination: “Nothing
to give the expert an opportunity to expatiate could be more absurd or a greater waste of time
upon his own views, and thus afford him an than to cross-examine a witness who has testified
opportunity in his answer to give his reasons, to no material fact against you. It not infrequently
in his own way, for his opinions, which counsel happens that such unnecessary examinations
calling him as an expert might not otherwise result in the development of new theories of the
have fully brought out in his examination.” case for the other side; and a witness who might
have been disposed of as harmless by mere
6.4 The Sequence of Cross-examination:
silence, develops into a formidable obstacle in
“Much depends upon the sequence in which one
the case.”
conducts the cross-examination of a dishonest
witness. You should never hazard the important 6.6 Two “Lurking, if not Great, Dangers”,
question until you have laid the foundation for that Confront a Cross-examiner: ‘Cross-
it in such a way that, when confronted with the examination is usually regarded as the means
fact, the witness can neither deny nor explain it.” by which adverse witnesses are discredited, and
“If you have in your possession a letter written it is for that purpose that it is usually employed
by the witness, in which he takes an opposite by the Bar. The importance of it in that regard
position on some part of the case to the one he is self-evident. If through the instrumentality of
has just sworn to, avoid the common error of the cross-examination the integrity of the witness
showing the witness the letter for identification, is destroyed, even though it be not with respect
and then reading it to him with the inquiry, to the particular testimony given at the trial, if
“What have you to say to that?” During the his general reputation for truth and veracity is
reading of his letter the witness will be collecting shown to be bad by his own utterances, clearly

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the examiner has very greatly helped his case. In statement without oath, if the said statement is
this effort, however, there are two lurking, if not not the sole evidence but one of the evidences
great, dangers. One is to cross-examine when it justifying addition. The decision in the matter of
is quite unnecessary, and the other to overdo the CIT vs. S. Khader Khan Son [2013] 352 ITR 480/
cross-examination. [2012] 210 Taxmann 248/ 25 taxmann.com 413
(SC) arising from the decision of Madras High
7. LEGAL POSITION Court in CIT vs. S. Khader Khan Son [2008]
300 ITR 157 proceeded on the fact that the sole
7.1 The authorized officer can go to the house evidence against the assessee in that case was
of the assessee and open his camp office and the statement made on oath during the survey
serve notice on him to depose at his camp proceedings. [Dr. Dinesh Jain vs. ITO [2014] 45
office in residence of assessee. [DDIT (Inv.) vs. taxmann.com 442 (Bombay)]
Prakash V. Sanghvi* [2015] 64 taxmann.com
221 (Karnataka)]. 7.4 Statement recorded under Section 133A(3)
(iii) though cannot be treated as independent
7.2 The powers under Section 131(1A) are not evidence like evidence recorded under Section
hindered by the conduct of the search. It can be 4(132), but it has corroboratory value in
invoked both before and after the conduct of the assessment and statement recorded under the
search. Arti Gases vs. DIT [2001] 248 ITR 55 said provision can be even relied on by the
(Gujarat), Neesa Leisure Ltd. vs. Union of India assessee. The decision of the Kerala High Court
[2011]338 ITR 460 [Gujarat], Emaar Alloys in Paul Mathews & Sons vs. CIT [2003] 263
(P.) Ltd. vs. DGIT [2015] 64 taxmann.com 67 ITR 101 that the statement recorded under the
(Jharkhand) above provision does not have evidentiary value,
7.3 A statement under Section 133A does not does not lay down the correct law. [CIT vs. Hotel
loose its evidentiary value merely because it was Samrat [2010] 323 ITR 353 (Kerala)].

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APPENDIX - I presence and under the personal direction and

superintendence of the Judge.
Order XVIII, CIVIL PROCEDURE CODE
5. In cases in which an appeal is allowed the
Hearing of the Suit and Examination of
witnesses: evidence of each witness shall be taken down in
writing, in the language of the Court, by or in the
1. The Plaintiff has the right to begin unless the presence and under the personal direction and
defendant admits the facts alleged by the plaintiff superintendence of the Judge, not ordinarily in
and contends that either in point of law or on the form of question and answer, but in that of the
some additional facts alleged by the defendant, Judge and of the witness, and the Judge shall, if
the plaintiff is not entitled to any part of the relief necessary, correct the same, and shall sign it.
which he seeks, in which case the defendant has
6. Where the evidence is taken down in a
the right to begin.
language different from that in which it is
2. (1) On the day fixed for the hearing of the given, and the witness does not understand the
suit or on any other day to which the hearing is language in which it is taken down, the evidence
adjourned, the party having the right to begin as taken down in writing shall be interpreted to
shall state his case and produce his evidence him in the language in which it is given.
in support of the issues which he is bound to
7. Evidence taken down under Section 138
prove. (2) The other party shall then state his
shall be in the form prescribed by rule 5 and
case and produce his evidence (if any) and may
shall be read over and signed and, as occasion
then address the Court generally on the whole
may require, interpreted and corrected as if it
case.(3) The party beginning may then reply
were evidence taken down under that rule.
generally on the whole case.
8. Where the evidence is not taken down in
3. Where there are several issues, the burden of
writing by the Judge, he shall be bound, as the
proving some of which lies on the other party,
examination of each witness proceeds, to make
the party beginning may, at his option, either
a memorandum of the substance of what each
produce his evidence on those issues or reserve
witness deposes, and such memorandum shall
it by way of answer to the evidence produced
be written and signed by the Judge and shall
by the other party; and in the latter case, the
form part of the record.
party beginning may produce evidence on those
issues after the other party has produced all his 9. Where English is not the language of the
evidence, and the other party may then reply Court, but all the parties of the suit who appear
specially on the evidence so produced by the in person, and the pleaders of such as appear by
party beginning; but the party beginning will pleaders, do not object to have such evidence
then be entitled to reply generally on the whole as is given in English taken down in English, the
case. Judge may so take it down.
4. The evidence of the witnesses in attendance 10. The Court may, of its own motion or on
shall be taken orally in open Court in the the application of any party or his pleader, taken

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down any particular question and answer, or be deemed to apply to evidence taken in a suit
any objection to any question, if there appears transferred under Section 24.
to be any special reason for so doing. 16. (1) Where a witness is about to leave the
11. Where any question put to a witness is jurisdiction of the Court, or other sufficient cause
objected to by a party or his pleader, and the is shown to the satisfaction of the Court why
Court allows the same to be put the Judge his evidence should be taken immediately, the
shall taken down the question, the answer, the Court may, upon the application of any party
objection and the name of the person making it, or of the witness, at any time after the institution
together with the decision of the Court thereon. of the suit, take the evidence of such witness
in manner hereinbefore provided. (2) Where
12. The Court may record such remarks as it
such evidence is not taken forthwith and in
thinks material respecting the demeanour of any
the presence of the parties, such notice as the
witness while under examination.
Court thinks sufficient, of the day fixed for the
13. In cases in which an appeal is not allowed, examination, shall be given to the parties. (3)
it shall not be necessary to take down the The evidence so taken shall be read over to the
evidence of the witnesses in writing at length; witness, and, if he admits it to be correct, shall be
but the Judge, as the examination of each signed by him, and the Judge shall, if necessary,
witness proceeds, shall make a memorandum correct the same, and shall sign it, and it may be
of the substance of what he deposes, and such read at any hearing of the suit.
memorandum shall be written and signed by the
17. The Court may at any stage of a suit recall
Judge and shall form part of the record.
any witness who has been examined and may
14. (1) Where the Judge is unable to make a (subject to the law of evidence for the time being
memorandum as required by this Order, he shall in force) put such questions to him as the Court
cause the reason of such inability to be recorded, thinks fit.
and shall cause the memorandum to be made
18. The Court may at any stage of a suit inspect
in writing from his dictation in open court.
any property or thing concerning which any
(2) Every memorandum so made shall form part
question may arise.
of the record.
15. (1) Where a Judge is prevented by death,
transfer or other cause from concluding the APPENDIX - II
trial of suit, is successor may deal with any Order XIX, CIVIL PROCEDURE CODE
evidence or memorandum taken down or made
under the foregoing rules as if such evidence or Affidavits
memorandum had been taken down or made by 1. Any Court may at any time for sufficient
him or under his direction under the said rules reason order that any particular fact or facts may
and may proceed with the suit from the stage at be proved by affidavit, or that the affidavit of
which his predecessor left it. (2) The provisions any witness may be read at the hearing, on such
of sub-rule (1) shall, so far as they are applicable, conditions as the Court thinks reasonable:

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Provided that where it appears to the Court that is exempted from personal appearance in Court,
either party bona fide desires the production of or the Court otherwise directs.
a witness for cross-examination, and that such 3. (1) Affidavits shall be confined to such facts
witness can be produced, an order shall not be as the deponent is able of his own knowledge to
made authorising the evidence of such witness prove, except on interlocutory application, on
to be given by affidavit. which statements of his belief may be admitted:
provided that the grounds thereof are stated.
2. (1) Upon any application evidence may be (2) The costs of every affidavit which shall
given by affidavit, but the Court may, at the unnecessarily set forth matters of hearsay or
instance of either party, order the attendance argumentative matter, or copies of or extracts
for cross-examination of the deponent. (2) Such from documents, shall (unless the Court otherwise
attendance shall be in Court, unless the deponent directs) be paid by the party filing the same.

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 Chapter

20
Law on Tax Avoidance
and GAAR

1. TAX AVOIDANCE—
AN INTRODUCTION
1.1 In order to ensure an efficient and effective
tax administration it is imperative to understand
the ways and means in which taxation provisions
are applied by the tax payers, and whether the
said application adheres to the letter and spirit
of the law. The most rudimentary manner of
applying tax laws is pure compliance in which
taxes are paid as per the provisions of the law at the other end of the compliance spectrum. Tax
and as per the legislative intent. This is the evasion is deliberate under-reporting of income
simplest and most passive style of applying tax by either suppressing the receipts or inflating the
laws. A slightly more complex manner is tax expenses and involves active non-disclosure of
mitigation in which more complex provisions of facts and fabrication of incorrect information. It
law are resorted to in order to reduce taxation. is, therefore, both illegal and illegitimate.
The same is also done in accordance with law. 1.3 Tax avoidance is an arrangement of
These are the most basic forms of application of financial affairs in a manner that yields results
tax laws and do not give rise to any disputes i.e. that are not in consonance with the intention
the position of stated income and tax payable of the legislature. In principle it sits in between
and paid as per the taxpayer, are accepted by tax planning and tax evasion and there are no
the income-tax authorities. precise, easily identifiable boundaries between
1.2 However, the more situations arise the three terms. Tax avoidance is the attempt
where there is tax planning, tax avoidance or to avoid payment of taxes or payment of less
tax evasion. Tax planning is arranging one’s tax, without apparently violating the legislative
financial affairs, one’s transactions in such a mandate, but by defeating the legislative intent.
manner that tax reduction is achieved and which Tax avoidance may not be illegal, but it is certainly
is in accordance with law. It is both legal and illegitimate. It is important for an assessing officer
legitimate and is perhaps more systematic and to identify such cases of tax avoidance, to ensure
planned tax mitigation. Tax evasion, however, is that taxpayers pay their legitimate tax dues.

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1.4 Thus in the case of tax avoidance, the or inflexible they may be. Therefore, whether
taxpayer circumvents the law without giving rise a particular case qualifies as a case of tax
to a criminal offence (as would occur in cases of avoidance will essentially involve a fact-finding
tax evasion) by using a scheme, arrangement or exercise.
device, often of a complex nature but where the
1.7 It is important to understand that any bona
main purpose is to defer, reduce or completely fide commercial transaction, though it may
avoid the tax payable under law. Arrangement result in tax reduction, should not ordinarily be
of affairs that reduce a taxpayer’s tax liabilities construed as an avoidance measure. There are
that was not intended as per tax law would fall no clear objective parameters or tests to identify
under tax avoidance. whether a transaction or financial arrangement
1.5 The Australian Income-tax Act describes is one of tax avoidance. Therefore, whether an
avoidance as ‘defeating, evading or avoiding arrangement has been carried out for bona fide
any duty or liability imposed on any person by commercial reasons or for avoidance purposes,
this Act’. This definition gave rise to a dispute is a question of fact.
regarding what is ‘avoidance of any liability
imposed’. An argument was raised that the 2. SHAM, FICTITIOUS AND
provision would cover only a liability that had ARTIFICIAL TRANSACTIONS
already arisen. This was judicially clarified by
Lord Denning in the following words: 2.1 Certain terms have been traditionally used
in the context of tax avoidance and tax evasion.
Their Lordships ….. are clearly of opinion that Though sometimes their meanings overlap,
the word ‘avoid’ is used in its ordinary sense -
the courts have attempted to give them precise
in the sense in which a person is said to avoid
meanings. They have, however, cautioned that
something which is about to happen to him.
the exact meaning of any such term should
He takes steps to get out of the way of it. It is
be construed in the context of the particular
this meaning of ‘avoid’ which gives the clue to
facts of the case. It is important to understand
the meaning of ‘liability imposed’. To ‘avoid a
liability imposed’ on you means to take steps to that these terms or transactions may not be
get out of the reach of a liability which is about to exclusive to cases of tax avoidance, and may
fall on you. If the submission of (the counsel for easily be cases of tax evasion depending upon
the taxpayer) were accepted, it would deprive whether the same involves a misrepresentation
the words of any effect; for no one can displace of facts, suppression of information etc. But an
the liability to tax which has already accrued understanding of these terms is crucial to both
due, or in respect of income which has already cases of tax avoidance and tax evasion.
been derived. 2.2 A ‘sham’ is defined in the Oxford English
1.6 As stated earlier, the concept of tax Dictionary as ‘something that is intended to
avoidance lies in between tax planning and tax be taken for something else, or that is not
evasion, and therefore as such it is an imprecise what it purports to be; a spurious imitation, a
concept. The financial environment is constantly counterfeit...something not genuine or true’.
changing and the same affects tax laws. Due The judicial meaning of a ‘sham’ transaction is
to the inherent dynamic nature of tax systems to be found in Snook vs. London and West Riding
which are affected by the prevailing economic Investment Ltd (1967) 1 All ER 518, a case on
and financial scenario and vice versa, designing the Hire Purchase Act:
a tax system where there is no possibility of tax
avoidance is not a practically achievable goal, .....if it has any meaning in law, it means
and so there are tax avoidance possibilities act done or documents executed by the
inherent in all tax systems- however flexible parties to the ‘sham’ which are intended

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by them to give to third parties or to the 3. PURPOSE OF TAX AVOIDANCE

court the appearance of creating between In the context of ‘tax avoidance purpose’, Lord
the parties legal rights and obligations Denning observed in Newton v. CIT (1958)
different from the actual rights and AC 450:
obligations (if any) which the parties
...... The word ‘purpose’ means, not
intend to create.
motive, but the effect which it is sought
Thus a sham transaction is a function of tax to achieve - the end in view. The word
evasion. ‘effect’ means the end accomplished or
achieved. The whole set of words denotes
2.3 The dictionary meaning of ‘fictitious’ is
concerted action to an end - the end of
‘artificial; counterfeit; sham, not genuine’. avoiding tax.
In considering the meaning of a ‘fictitious’
transaction in CEC vs. CIR (1971) 2 MLJ 43, Lord Upjohn in CIR v. Brebner 43 TC 705
the Board of Review said: observed:

“As the Section (i.e. Section 33) draws a ...when the question of carrying on
a genuine commercial transaction is
distinction between artificial and fictitious,
considered, the fact that there are two
fictitious in the context of the Section
ways of carrying it out-one by paying the
must mean sham, not genuine.” maximum amount of tax, the other by
A fictitious transaction, when well clothed by paying no or much less tax-it would be
legal documentation is normally employed as a quite wrong as a necessary consequence
tool for tax evasion. to draw the inference that in adopting the
latter course one of the main objects is
2.4 An artificial transaction is always used for avoidance of tax. No commercial man in
devising a scheme for tax avoidance. It would his senses is going to carry out bona fide
normally have no other function except lowering commercial transactions except upon the
or transferring of the incidence of tax. It can easily footing of paying the smallest amount of
be identified by absence of any commercial or tax involved.
economic significance. In the Privy Council case
of Sermaco Ltd. Superannuation Fund Trustees 4. FORM VS. SUBSTANCE–THE
vs. ITC (1977) AC 287, their Lordships drew INTERNATIONAL CONTEXT
a distinction between the terms ‘artificial’ and
‘fictitious’: 4.1 The dispute relating to the ‘substance over
form doctrine’ is at the core of the subject of tax
A fictitious transaction is one, which those avoidance. The substance over form doctrine
who are ostensibly the parties to it never maintains that the ‘substance’ rather than the
intended should be carried out. ‘Artificial’ ‘form’, of a transaction is what governs the tax
as descriptive of a transaction is, in consequences of a transaction. Central to this
their Lordships’ view a word of wider
doctrine of substance over form is the question
import......where the arrangements in
as to whether the court can bring a transaction
question go beyond more than one would
within the taxing provisions by taking a broad
expect to find between independent
view of the facts, not limited to the apparent
parties engaging in normal commercial
transactions, especially where there are structure of financial transaction or the manner in
terms which suggest that the only real which the financial affairs have been presented,
purpose for the arrangements is a tax and conclude that they represent a situation
advantage, then those arrangements may which is substantially within the contemplation
properly be regarded as artificial. of the tax laws.

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4.2 ‘Form’ means the legal rights and under the appropriate Acts is less than
obligations created by one or more transactions. it otherwise would be. If he succeeds
‘Substance’ refers to the overall financial and in ordering them so as to secure this
economic realities, rather than only the legal result, then, however, unappreciative
form of transactions. the Commissioners of Inland Revenue
4.3 The great controversy of ‘form and or his fellow taxpayers may be of his
substance’ was settled in 1936 by the House of ingenuity, he cannot be compelled to pay
Lords decision in CIR v. Duke of Westminster 19 an increased tax. This so-called doctrine
TC 490. In this case, the Duke, with the object of of ‘the substance’ seems to me to be
reducing his liability to surtax, had prevailed upon nothing more than an attempt to make a
a number of his employees who were in receipt man pay notwithstanding that he has so
of wages to enter into agreements whereby they ordered his affairs that the amount of tax
agreed to accept annuity payments made under sought from his is not legally claimable.
deeds of covenant. The deeds provided that the The following extract from the judgment of Lord
payments were to be without prejudice to any Russell of Killowen in the same case is equally
claim for remuneration to which the employee illustrative:
might thereafter be entitled. It was represented to
The subject is not taxable by inference or
all employees, except one, that each employee
by analogy, but only by the plain words
was not expected to make any such claim so
of a statute applicable to the facts and
long as the amount received under the covenant
circumstances of his case. As Lord Cairns
and any other payments he received equaled his
said many years ago in Partington v. AG
current salary.
(1869) LR 4 ES App HII 100, at page
4.4 The Revenue contended that although the 122): “As I understand the principle of all
transaction was in the form of a grant of an annuity, fiscal legislation, it is this.. If the person
the substance of the matter was that the annuity sought to be taxed comes within the letter
payments were in reality wages. This contention of the law he must be taxed, however
was rejected by both the Court of Appeal and the great the hardship may appear to the
House of Lords. Lord Tomlin observed: judicial mind to be. On the other hand,
....it is said that in revenue cases there if the Crown seeking to recover the tax,
is a doctrine that the court may ignore cannot bring the subject within the letter
the legal position and regard what is of the law, the subject is free, however
called ‘the substance of the matter’, and apparently within the spirit of the law the
that here the substance of the matter is case might otherwise appear to be’.
that annuitant was serving the Duke for This principle of form over substance is commonly
something equal to his former salary or referred to as the Westminster principle and
wages, and that therefore, while he is is generally regarded as applicable to all
so serving, the annuity must be treated transactions, except where such transactions are
as salary or wages. This supposed sham transactions or, where the application of
doctrine..... seems to rest for its support the principle is statutorily restricted or negated.
upon a misunderstanding of language
used in some earlier cases. The sooner
5. EVOLUTION OF LEGAL POSITION
this misunderstanding is dispelled and
ON TAX AVOIDANCE
the supposed doctrine given its quietus,
the better it will be for all concerned.... 5.1 The English law on tax avoidance further
Every man is entitled if he can to order evolved over the years in three cases. The first
his affairs so as that the tax attaching of these cases is the landmark decision in WT

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Ramsay vs. CIR [1981] STC 174. The facts of “Given that a document or transaction
the case are as below: is genuine, the court cannot go behind it
to some supposed underlying substance.
The taxpayer company (R) entered into a tax
This is the well-known principle of Inland
avoidance scheme to create an allowable capital
Revenue Commissioners v. Duke of
loss for set-off against a taxable capital gain. If the
Westminster [1936] AC1. This is a cardinal
scheme had withstood the scrutiny of the courts, principle but it must not be overstated or
liability to capital gains tax would have been overextended. While obliging the court
fully avoided. Under the scheme, R bought the to accept documents or transactions,
whole of the issued share capital in a company found to be genuine, as such, it does not
(C). It also made two loans to C of $ 218750 compel the court to look at a document
each. These loans carried interest at the rate of or a transaction in blinkers, isolated from
11%. The funds for these loans were provided any context to which it properly belongs.
by the vendors of the scheme. R was given the If it can be seen that a document or
right to decrease the interest rate on one loan transaction was intended to have effect as
and to increase correspondingly the interest part of a nexus or series of transactions,
rate on the other. This right was exercised. As or as an ingredient of a wider transaction
a result, the interest rate on one loan dropped intended as a whole, there is nothing in the
to nil and it rose to 22% on the other loan. The doctrine to prevent it being so regarded.:
latter loan was sold for $391481, thus giving to do so is not to prefer form to substance,
rise to a gain of $172731. The second loan was or substance to form. It is the task of the
subsequently repaid at par. The shares in C were court to ascertain the legal nature of any
originally acquired by R for $185034. These transaction to which it is sought to attach
were subsequently sold for P.S. 9387, hence a tax or a tax consequence and if that
resulting in a loss of $175,647. emerges from a series or combination of
transactions, intended to operate as such,
5.2 The essence of the scheme was to include it is that series or combination which may
a transaction designed to produce a loss to be be regarded.”
offset against a gain previously made by R.
5.4 Thus the House of Lords cautioned against
Without this loss, the gain would otherwise be a series of transactions which are pre-ordained,
chargeable to capital gain tax. At the same time, inserted into, which are steps that have no
another transaction was designed to produce a commercial purpose apart from tax avoidance.
matching gain, which was not chargeable to tax.
These separate transactions were not shams, but 5.5 The second case is the case of IRC vs.
Burma Oil Co Ltd. (1982) STC 30. In this case
they were self-canceling.
a block of shares was transferred by B to one of
5.3 Lord Wilberforce thought that it would be its subsidiaries, C, but the purchase price was
wrong to pick out and stop at the one step in left outstanding and the amount placed in a loan
the combination which produced the loss, since account in B’s books was $379,924,999. Some
the loss was dependent on and was merely a three years letter, the same block of shares was
reflection of the gain. The true view, he said, sold by C to B for $220625000. This reduced
regarding the scheme as a whole, was to find that the loan due to B to $159,299,999. Since C was
there was no gain or loss. The loss of $175647 at that time insolvent, this debt was obviously
worthless to B.
was accordingly held not to amount an allowable
loss for capital gains tax purposes. The following 5.6 Under UK’s capital gains tax legislation, the
observation was made in this case: loss on a simple debt was not recognised as an

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allowable loss. To obtain an allowable loss, B to confine itself to a step-by-step examination,

embarked upon a scheme to convert the simple even if the separate steps are genuine rather
debt to equity. B advanced $159,299,999 to than sham.
another of its subsidiaries, D. The same amount
5.9 Originally, it was considered that the Ramsay
was lent by D to C which repaid its debt to B. All
doctrine was counter to the Westminster doctrine.
these transactions took place on the same day.
However, as subsequently, held by the Hon’ble
Six days later, another series of transactions took
Supreme Court of India, both the Westminster
place. A rights issue was made by C.B. applied
Doctrine and Ramsay Doctrine need to be read
for and was allotted all the unissued shares in C.
harmoniously. The conclusion of both cases is
For these, it paid C $159,600,000. Out of the
that tax mitigation which is within the confines
subscription money received, C repaid its debt
of law should not be viewed adversely unless
($159,299,999) to D which in turn repaid its
dubious means and transactions, colorable
debt ($159,299,999) to B. All these transactions
devices etc. have been resorted to. The following
also took place on the same day.
major principles emerged which were indicative
Shortly afterwards, C was voluntarily wound of a tax mitigation scheme, possibly being a case
up. B claimed that it was entitled to deduct of tax avoidance:
the payments made under the rights issue in
●● Where steps having no commercial
computing the allowable loss on the disposal of
(business) purpose apart from the
its entire share holdings in C (on C’s liquidation).
avoidance of a liability to tax are inserted
Applying the Ramsay doctrine, B was denied in a composite transaction (made up of
deduction for the payments made under the a pre-ordained series of transactions),
rights issue. the inserted steps are to be disregarded
5.7 The third case important case regarding for fiscal purposes. This is regardless
this issue is Furniss v. Dawson [1984] STC 153. of whether the composite transaction
includes the achievement of a legitimate
In this case, the taxpayer, D, wished to sell to
commercial (i.e. business) end.
W his shares in two companies (Cs). In order
to defer the capital gains tax on the chargeable ●● It is not confined to circular and self-
gain which would arise on a direct sale to W, D canceling transactions.
embarked upon a scheme. Under this scheme, ●● It is not confined to steps inserted for
an investment company, G, was incorporated tax avoidance purposes which have no
and all its issued shares were held by D. D’s enduring legal consequences.
shareholdings in Cs were sold to G in exchange
●● It is not confined to a composite transaction
for shares in G. In turn, G sold these shares to W.
which entails the creation of an artificial loss.
Both transactions took place on the same day.
5.8 Applying the ratio of decisions in Ramsay 6. FORM VS. SUBSTANCE IN THE
and Burmah Oil, the transactions inserted INDIAN SCENARIO
between D and G were disregarded. D was
accordingly held to have disposed of the shares 6.1 In India, the Westminster doctrine held the
in Cs in favour of W in consideration of a sum sway till mid-80s and it was held that “avoidance
of money paid with D’s concurrence to G. In of tax is not tax evasion and it carries no ignominy
Ramsay, it was therefore decided that the court is with it, for it is sound law and, certainly not bad
entitled to consider the separate steps comprised morality, for anybody to so arrange its affairs as
in a composite transaction or scheme in the to reduce the brunt of taxation to a minimum”
context of the scheme as a whole. The court (Per Jagadisan J.) This position was affirmed by
is not compelled by the Westminster doctrine the Supreme Court in the case of Jiyaji Rao vs.

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CIT [34 ITR 888] and in many other decisions honourable to avoid payment of tax by resorting
subsequently. to dubious methods’.
6.2 The following observations of the Supreme 6.4 This concept of ‘Substance vs. Form’ was
Court in CIT vs. Raman & Co. [1986] 67 ITR once again revisited in the case of Union of India
11 (SC) and CIT v. Kharwar [1969] 72 ITR 603 v. Azadi Bachao Andolan [Appeal (C) 8161–8162
(SC) respectively, bring out clearly the prevalent of 2003]. While upholding Board’s Circular
thinking on the subject: No. 789 dated April 13, 2000 that recognised
“Avoidance of tax liability by so arranging residency certificate for obtaining benefits under
commercial affairs that charge of tax is treaty, the Hon’ble Supreme Court also analyzed
distributed is not prohibited. A taxpayer its judgement in the case of McDowell and made
may resort to a device to divert the the following observation:
income before it accrues or arises to him.
Interestingly, even in McDowell, though
Effectiveness of the device depends not
upon considerations of morality, but on Chinnappa Reddy J., dismissed the
the operation of the Income-tax Act. observation of J.C. Shah J. in CIT v.
Legislative injunction in taxing statutes A. Raman and Company based on
may not, except on peril of penalty, Westminster and Fisher’s Executors, by
be violated, but it may lawfully be saying “we think that the time has come
circumvented. for us to depart from the Westminster
principle as emphatically as the British
The taxing authority is entitled and is
courts have done and to dissociate
indeed bound to determine the true legal
ourselves from the observations of
relation resulting from a transaction. If
Shah J., and similar observations made
the parties have chosen to conceal by a
device the legal relation, it is open to the elsewhere”, it does not appear that
taxing authorities to unravel the device the rest of the learned Judges of the
and to determine the true character of Constitutional Bench contributed to this
the relationship. But the legal effect of a radical thinking. Speaking for the majority,
transaction cannot be displaced by probing Ranganath Mishra J., (as he then was)
into the ‘substance of the transaction.” says in McDowell: “Tax planning may
be legitimate provided it is within the
6.3 This doctrine again came under scrutiny
framework of law. Colourable devices
of the Full Bench of the Supreme Court again
cannot be part of tax planning and it is
in the case of McDowell and Co Ltd. vs. CTO
wrong to encourage or entertain the
[154 ITR 148]. The judgement in the case of
McDowell was considered to have taken new belief that it is honourable to avoid the
look in fiscal jurisprudence which was in tune payment of tax by resorting to dubious
with the thinking in case of W.T. Ramsay Ltd. vs. methods. It is the obligation of every
IRC, Inland Revenue Commissioners v. Burmah citizen to pay the taxes honestly without
Oil Company Ltd and Furniss v. Dawson. In the resorting to subterfuges.
McDowell case, the majority decision delivered —Emphasis Added
by Justice Mishra held that ‘tax planning may be
legitimate, provided it is within the framework of 6.5 The Hon’ble Supreme Court after further
the law’. However, it also held that ‘colourable analyzing various decisions observed that the
devices cannot be a part of tax planning and principles in Duke of Westminister is not departed
it is wrong to encourage the belief that it is from subsequently and every attempt at tax

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planning should not be viewed with disfavour. It 6.6 Thus it is clear that while the Hon’ble
observed as under: Supreme Court upholds legitimate tax panning,
We may in this connection usefully refer to and cautions revenue from viewing every tax
the judgment of the Madras High Court in mitigation step with disfavour, any attempt
M.V. Vallipappan and others v. ITO, which to avoid payment of legitimate tax dues by
has rightly concluded that the decision in dubious means cannot be exempt from further
McDowell cannot be read as laying down examination. The Court further reproduced
that every attempt at tax planning is passage from American Jurisprudence which
illegitimate and must be ignored, or that reemphasized this view:
every transaction or arrangement which The situation in the United State is
is perfectly permissible under law, which reflected in the following passage from
has the effect of reducing the tax burden American Jurisprudence: “The legal right
of the assessee, must be looked upon of a taxpayer to decrease the amount of
with disfavour
what otherwise would be his taxes, or
We may also refer to the judgment of altogether to avoid them, by means which
Gujarat High Court in Banyan and the law permits, cannot be doubted. A
Berry v. Commissioner of Income-tax tax-saving motivation does not justify
where referring to McDowell, the Court the taxing authorities or the courts in
observed: “The court nowhere said that nullifying or disregarding a taxpayer’s
every action or inaction on the part of otherwise proper and bona fide choice
the taxpayer which results in reduction of among courses of action, and the state
tax liability to which he may be subjected
cannot complain, when a taxpayer
in future, is to be viewed with suspicion
resorts to a legal method available to
and be treated as a device for avoidance
him to compute his tax liability, that the
of tax irrespective of legitimacy or
genuineness of the act; an inference which result is more beneficial to the taxpayer
unfortunately, in our opinion, the Tribunal than was intended. It has even been said
apparently appears to have drawn from that it is common knowledge that not
the enunciation made in McDowell case infrequently changes in the basic facts
(1985) 154 ITR 148 (SC). The ratio of affecting liability to taxation are made
any decision has to be understood in the for the purpose of avoiding taxation, but
context it has been made. The facts and that where such changes are actual and
circumstances which lead to McDowell’s not merely simulated, although made for
decision leave us in no doubt that the the purpose of avoiding taxation, they
principle enunciated in the above case do not constitute evasion of taxation.
has not affected the freedom of the Thus, a man may change his residence
citizen to act in a manner according to his to avoid taxation, or change the form of
requirements, his wishes in the manner his property by putting his money into
of doing any trade, activity or planning nontaxable securities, or in the form of
his affairs with circumspection, within the property which would be taxed less, and
framework of law, unless the same fall in not be guilty of fraud. On the other hand,
the category of colourable device which if a taxpayer at assessment time converts
may properly be called a device or a taxable property into non-taxable
dubious method or a subterfuge clothed property for the purpose of avoiding
with apparent dignity.” taxation, without intending a permanent
—Emphasis Added change, and shortly after the time for

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assessment has passed, reconverts which may be indicative of tax avoidance are
the property to its original form, it is a as below:
discreditable evasion of the taxing laws, a ●● Mischaracterization: where income
fraud, and will not be sustained.” and deductions are given different form
—Emphasis Added to qualify for a more generous treatment
e.g. business income may be characterized
6.7 The above principles were reemphasized
as capital gain to benefit from a more
in the case of Vodafone International Holdings
favourable tax rate.
BV Netherlands vs. Union of India (Civil Appeal
No. 733 of 2012), where it was held that there ●● Deferral of recognition of gains e.g.
was no conflict between the decisions in the case avoiding gains on sale of assets by using
of McDowell and Azadi Bachao. The Supreme reorganisation rules.
Court observed that Ramsay did not discard ●● Transfer Pricing: Entering in related
Westminster but read it in the proper context party transactions at other than fair market
by which “device” which was colourable in value to increase deductible costs or reduce
nature had to be ignored as fiscal nullity. Thus, assessable income.
the Supreme Court observed that Ramsay lays
down the principle of statutory interpretation ●● Loss Transfer: Shifting of losses from
rather than an over-arching anti-avoidance non-taxable to taxable companies by
doctrine imposed upon tax laws. reducing their profits or shifting income in
the opposite direction
7. IDENTIFICATION OF TAX ●● Cross Border Arbitrage: Exploitation
AVOIDANCE IN ASSESSMENT of different treatments of the same receipt/
payment in different countries. Treaty
7.1 In view of the above judicial precedents,
shopping is a specific manner of cross
it is important to understand that every tax
border arbitrage in which transactions are
mitigation effort cannot be viewed adversely if
designed to take undue advantage of treaty
it is in accordance with the legal framework. For
between source country and another third
instance, where a claim is supported by perfectly country not being the resident country of
legal documentation and provisions, it would the taxpayer which do not provide for anti-
not be correct to reject the claim by way of treaty shopping provisions to avoid taxes.
reference to ‘McDowell’ on a mere surmise that
the exercise is that of tax avoidance. The AO has ●● Establishing business in an exempt sector
with main object not being business but
to bring out the surrounding circumstances and
taking advantage of exemption. In this
corroborating evidence to show that a formally
case they also misuse by transferring the
legal facade has been created with a view to
profits of non-exempt business to exempt
camouflage the real state of affairs with the only
business and claim loss in former business.
object of avoiding tax and that there was no
commercial purpose for the same, other than ●● Shifting of Tax Base: Shifting tax liability
minimizing the tax incidence. from high tax base to low tax base. For ex.
Transferring assets from husband’s name
7.2 Thus what needs to be done in each case is
to wife’s name which is widely prevalent
to establish that the case is not that of tax planning
in India.
but tax avoidance by bringing out all relevant
facts on record. Some of the most commonly ●● Tax Havens: there is no precise definition
deployed methods of reducing tax incidence, of tax haven. OECD initially defined as

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region with less tax or no tax or with less ●● Use of known tax havens, loss making
transparency, less effective management. companies, exempt bodies without any
But the list of tax havens is given by apparent commercial rationale
OECD from time to time. These havens
7.6 It can be seen that tax avoidance will cover
are misused by corporate by incorporating
cases of not paying taxes, paying less taxes or
their company there. In many havens tax
deferment of taxes. The relationship between
is exempt. For ex. Cayman island.
the form and substance and how it has evolved
7.3 Once again, as the line between tax planning in tax legislation and litigation becomes crucial
and tax avoidance is imprecise, one needs to in this regards. As already discussed, UK courts
understand the context in which financial affairs only recognise ‘substance over form’ in limited
are arranged. For instance, tax arbitrage may circumstances, e.g. must be intermediate step in
be a part of government policy for instance the complex transaction, inserted only for avoidance
government may be providing favourable rates purposes and whole transaction must be partly
of taxation for encouraging high investment in a motivated by tax avoidance. The Apex Court in
particular sector. In such a scenario what needs India has also held that tax planning is legitimate
to be seen is whether a particular arrangement is means of arranging financial affairs, provided
actually resulting in high investment in the sector
dubious means are not being employed for
or is providing a limited benefit of favourable tax
avoidance of payment of taxes. Therefore it is
rates to the taxpayer. In essence, tax arbitrage
important to take a rational view in determining
that is contrary to the legislative purpose or
cases of tax avoidance. Marshaling of facts
intent becomes tax avoidance.
relating to all aspects of a transaction or a
7.4 Further there is a greater possibility of tax particular state of financial affairs is imperative
avoidance when there is no conflict of interest to establish that the purpose of the same is tax
between parties involved e.g. related party avoidance.
transaction, for which it is easier to arrange
affairs in a manner that they adhere to legal
8. TAX AVOIDANCE IN
requirements at the same time exploit mutually
INTERNATIONAL TAXATION
beneficial provisions.
7.5 Some common indicators that a tax 8.1 Globalization has affected the economic
mitigation effort may be one of tax avoidance are: scenario, business activities and taxation
environment all over the world. The increasing
●● Complex arrangement with no commercial participation of multinational groups in economic
rationale activities of the country has given rise to many
●● Circularity with no commercial nature new and complex issues emerging from cross
border transactions. When a taxpayer e.g. a non-
●● Steps inserted or intermediaries introduced resident Indian or a multinational company has
in a series of transactions to attempt to its interests or businesses spread across multiple
break links in a chain and hide essentially jurisdictions, then at times separate and specific
the circular nature of arrangements provisions, as against the case of taxpayers who
●● Technically correct transaction, however are resident in India, may be required to prevent
which in effect is defeating the substance tax avoidance due to multiple tax jurisdictions
and purpose of the tax legislation. However, coming into play. Due to the involvement of
decisions of the Apex Court must be kept multiple tax jurisdictions, multiple tax structures
in mind in such cases to bring out how an and transactions and wider scope and span
arrangement is of tax avoidance and not of business and corresponding complexities,
tax planning the manner and nature of tax avoidance may

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also be different than as in the case of resident 9.4 Another means by which tax avoidance
taxpayers. issues are addressed in the Indian Income-tax Act,
at the preliminary stage is by pre-determination
8.2 As in domestic taxation, the dividing line
between a transaction with a commercial purpose of taxation issues by tax authorities (e.g. by
and one with no such purpose in cases of multi- Authority for Advance Ruling). In fact a condition
national entities is not precise. While, like in for an application to be admitted under Section
245R (2) is that, the transaction should not be
cases of domestic tax avoidance, fact finding on
the lines discussed above is also critical in cases prima facie designed for tax avoidance.
of international taxation, specific provisions 9.5 Disclosure requirements that are mandatory
are often brought in to addresses cases of tax also have a purpose to provide tax authorities
avoidance that span multiple tax jurisdictions. with information about complex financial
arrangements with tax avoidance implications.
9. ANTI-AVOIDANCE PROVISIONS 9.6 However, often such measures do not
9.1 Tax avoidance in general may be controlled provide a comprehensive mechanism to deal
by General Anti-Avoidance Rules (‘GAAR’) or with tax avoidance. To bring in the same major
Specific Anti Avoidance Rules (‘SAAR’). Both legislative provisions in terms of General Anti
the methods have their strengths and limitations. Avoidance Rules (‘GAAR’) have been brought
Specific Anti Avoidance Rules are provided for, in, in the Income-tax Act, 1961
by specific provisions of tax legislations–domestic
tax laws or tax treaties. 10. GENERAL ANTI AVOIDANCE
RULES (‘GAAR’)
9.2 Specific Anti-Avoidance Rules means the
enactment of specific provisions in the domestic 10.1 From 1.4.2017, the provisions of General
law of any country or treaty, which target precise Anti-Avoidance Rule (‘GAAR’) embodied
tax abuses or unintended tax benefits. Specific in Chapter X-A (Section 95 to Section 102)
anti-avoidance rules “SAAR” is applied to close of the Act are applicable. GAAR is a wide-
domestic tax loopholes and indirect violations of ranging legislative measure intended to combat
tax laws. For example sec 14A was inserted in aggressive tax avoidance. As already discussed,
judicial authorities while upholding legitimate tax
Income-tax act 1961 by the finance Act 2001
planning have targeted sham transactions and
with retrospective effect from 1-04-1962 to
use of colourable devices to obtain illegitimate
disallow the deduction of expense in respect to
tax benefits. However, these decisions were
earn the income that is exempt from income-
rendered in the particular factual context of the
tax. Certain aspects of tax avoidance have also
case and no broad principles were laid down.
been controlled legislatively by the provisions of GAAR is on the other hand a comprehensive
Section 40A(2) of the Act. legislative measure that empowers tax authorities
9.3 Further, Sections 92 and 93 of the Act to not only target clearly sham transactions
provide special provisions relating to avoidance and use of dubious means such as colourable
of tax in transactions with non-residents and devices, but also counter the abusive elements of
specific anti-avoidance measures are brought in arrangements that otherwise appear to be legally
by various means, for instance Transfer Pricing valid. Under GARR the focus is on purpose (i.e.
provisions are incorporated in the Act to ensure whether the arrangement was entered into with
that profits between related parties/ associated the main purpose of obtaining a tax benefit?).
enterprises in different jurisdictions are shared 10.2 Largely seen in the context of cross-
on equal lines. border arrangements, GAAR can also apply

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to routine day-to-day transaction such as consequence in relation to tax arising therefrom

corporate restructuring. Under the law, GAAR may be determined subject to the provisions of
can be invoked only if the tax authorities can the Chapter X-A of the Act. The consequences
demonstrate that: of an arrangement being declared impermissible
avoidance agreement are discussed in Section
●● The taxpayer has entered into an
98 of the Act. The consequences can include
arrangement
denial of tax benefit or a benefit under a tax
●● A tax benefit arises from the arrangement treaty and shall be determined in a manner that
●● The main purpose of the arrangement is to is deemed appropriate. Section 98 further lists
obtain the tax benefit down some ways in which the consequences are
determined. It clearly specifies that the same is an
●● One or more tainted elements (set out in illustrative list (i.e. the manner of determining the
the law) are present in the arrangement consequences is not limited to what is mentioned
10.3 While the above elements are broadly specifically in Section 98). For instance, some
worded, they nonetheless carry very specific of the consequences listed in Section 98 are as
meanings and are also subject to rules of statutory below:
interpretation. Thus a step-by-step and precise ●● Disregarding, combining or recharacterising
analysis of each of the above stages needs to any step in, or a part or whole of, the
be undertaken, in light of the business and impermissible avoidance agreement
commercial implications of the arrangements,
●● Treating the impermissible avoidance
to identify cases where GAAR can apply. The
agreement as if it had not been entered
primary motive is to address arrangements
into or carried out;
that are only ‘tax driven’ and have little or no
commercial rationale. 10.6 GAAR checks unacceptable loss of
tax revenues through methods perceived to
10.4 Rule 10U of the Income-tax Rules provides be improper or against the spirit of the law.
for certain exclusions from the provisions They assume that transactions entered for
of GAAR. For instance, there is a monetary reducing tax, contrary to the intention of
threshold of Rs. 3 crores for the applicability the legislative body or Parliament should be
of GAAR. The threshold is applicable for each discouraged. A statutory GAAR is not a revenue-
assessment year. In general Foreign Institutional raising measure, but an attempt to protect the
Investors (FII) and Foreign Portfolio Investors tax base established by parliament without
(FPI) are exempt from the applicability of GAAR. expanding it. It allows a purely tax-driven
transaction to be disregarded or reconstructed
10.5 Section 95 of the Act dealing with the
by the tax authorities.
applicability of GAAR contains a non-obstinate
Clause and therefore these provisions can be
applied irrespective of any other provision REFERENCES
of the Act. On applying the tests listed under [1] https://klasing-associates.com/question/substance-form-
doctrine/
this Chapter if an arrangement is declared an [2] https://www.thehindubusinessline.com/news/education/
impermissible avoidance arrangement, the From-McDowell-to-Vodafone/article20407537.ece

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 Chapter

21
Making of Quality
Assessments

1. INTRODUCTION
1.1 Assessment of income is the most important
function of Income-tax Department and the most
crucial role performed by Assessing Officers.
All subsequent activities such as collection and
recovery of taxes, penal measures start from
assessment proceedings. Assessment order is,
thus, the foundation stone for all future litigations,
penal action and ultimate collection of taxes.
The process of assessment commences with the proceedings is by itself legally justified, in
issue of preliminary notice calling for return or accordance with the prescribed procedure and
other details or with the filing of the return and law and adheres to the highest quality standards.
culminates with the final determination of tax
liability. The scope of the expression ‘assessment’ 2. NATURAL JUSTICE AND
may further include post-assessment actions, ASSESSMENT PROCEDURE
which have a direct bearing on final determination
2.1 The principles of natural justice are
of tax liability, or an action which may arise as a
enshrined in two Latin maxims - nemo judex in
logical consequence of the assessment.
causa sua and audi alteram partem. Translated
1.2 As an assessment order is the first stage on literally, these maxims mean respectively that -
which all subsequent tax collection, penal action (i) no one can be a judge in his own cause, and
depends, it is imperative that the same is made (ii) let the other side be heard. In other words,
with utmost care, is error free and properly the first is to the effect that no one should have
justifies the views of the Department regarding personal interest in a case before him, and the
the leviability of taxes. However, an assessment second that no one should be condemned
order is merely an end product and though it is unheard. Thus, not only the assessment order,
important that the order is drafted very carefully, but also every action taken by the AO in the
it is equally important that each and every step course of assessment should stand the test
taken by the AO in the course of the assessment of appeal on the grounds of impartiality and

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fairness. Negatively, these two rules may also be heard in respect of any material
called rules against bias and arbitrariness. gathered on the basis of any inquiry
2.2 The assessment proceedings are quasi- under sub-Section (2) (or any audit
judicial proceedings and, therefore, every action under sub-Section (2A) and proposed
of the AO is tested on the touchstone of natural to be Utilised for the purposes of the
justice. The making of an assessment involves assessment.”
two parts, viz. procedural and substantive. Similarly Sections 142(2A), 144A, 154, 158,
The AO owes his jurisdiction and his powers 163, 170, 171, 263 and 275 etc., also specifically
to the provisions of the Act and therefore his provide for hearing. The courts have, however,
every action must conform to the procedure held that even where the statute does not
laid down in the Act read with the Rules and provide for hearing, the principles of natural
the CBDT Circulars. All his actions undertaken justice demand that opportunity of being heard
during the course of assessment must pass the should ordinarily be given unless it is implicitly
test of procedural fairness. The non-observance or expressly excluded. However, ‘hearing’
of principals of natural justice or the prescribed means reasonable hearing and ‘fairness’ does
procedure is itself a prejudice to the assessee. not require plurality of hearings. The Supreme
Therefore, any act or a decision in the course Court observed as under in the celebrated
of an assessment on any particular point, which Kraipak case:
is adverse to the assessee, must be made only
after bringing that point duly to the notice of the ‘Rules of natural justice are to secure
assessee and hearing him on it. The assessee justice and to prevent miscarriage of
must be given reasonable opportunity of being justice. They supplement the law and
heard. He should be given reasonable time for do not supplant it.’
answering the queries raised and for rebutting 2.4 Prima facie indications of ‘fairness’ on
the negative inferences drawn by the Assessing the part of the AO are: i) adequate notice, ii)
Officer from the submission made by the opportunity of hearing, and iii) speaking order.
assessee. This is critical because a large number The assessment order must be a speaking order.
of assessments where good investigation has A speaking order is one in which each and
been done do not stand the test of appeal, every point of dispute has been properly dealt
because the appellate authorities set aside or with. The order itself bears evidence to ‘due
annul the assessment orders on ‘grounds of application of mind’ on the part of the authority.
failure to meet the principles of natural justice’. Due application of mind has been judicially
2.3 The principle of audi alteram partem has defined to mean that there is something in the
been well recognised by the legislature and a order that shows that the point or the issue has
large number of procedural provisions in the Act been duly considered by the AO after taking into
have expressly incorporated this principle. For account the objections of the assessee.
example, Chapter XVI of the Act dealing with
the procedure for assessment incorporates this 3. THE STATE BANK OF PATIALA CASE
principle in sub-Section 3 of Section 142 which
reads as: 3.1 In the landmark case of State Bank of Patiala
and Ors. vs. S.K. Sharma (1996 3 SCC (364)) the
“(3) The assessee shall, except where Supreme Court has reviewed the entire gamut of
the assessment is made under s.144, case law on natural justice starting with the classic
be given an opportunity of being case of Ridge vs. Baldwin and culminating with

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the decision of Constitution Bench in the case ●● Except in cases falling under- ‘no notice’,
of Managing Director ECIL vs. B. Karunakar ‘no opportunity’ and ‘no hearing’
(1993) 4 SCC 727. The court observed: categories, the complaint of violation of
procedural provision should be examined
“Justice means justice between the
from the point of view of prejudice, viz.
parties. The interest of justice equally
whether such violation has prejudiced the
demand that the guilty should be
person in defending himself properly and
punished and that technicalities and
effectively. If it is found that he has been so
irregularities which do not occasion
prejudiced, appropriate orders have to be
failure of justice are not allowed to
made to repair and remedy the prejudice
defeat the ends of justice. Principles
including setting aside the enquiry and/ or
of natural justice are but the means to
the order of punishment. If no prejudice is
achieve the ends of justice. They can
established to have resulted there from, it
not be perverted to achieve the very
is obvious, no interference is called for.
opposite end”.
●● There may be certain procedural
Jeevan Reddy J, quoted the following
provisions, which are fundamental in
observation of the Supreme Court of Canada:
character whose violation is by itself proof
“Principles of fundamental justice of prejudice. The Court may not insist on
guarantee fair procedure but do proof of prejudice in such cases.
not guarantee the most favourable
●● In the case of a procedural provision
procedure that can be possibly
that is not of a mandatory character, the
imagined.”
complaint of violation has to be examined
3.2 In this decision the court gave precise from the standpoint of substantial
guidelines, as under: compliance. Be that as it may, the order
passed in violation of such a provision can
●● It should be ascertained whether the be set aside only where such violation has
provision violated is of a substantive nature occasioned prejudice to the person. In the
or procedural in character. A substantive case of violation of procedural provision,
provision is normally to be complied which is of a mandatory character, it has
with in full and the theory of substantial to be ascertained whether the provision
compliance or the test of prejudice would is conceived in the interest of the person
not be applicable in such a case. proceeded against or in public interest. If it
●● In the case of violation of procedural is found to be the former, then it must be
provisions, the position is this: procedural seen whether the person has waived the
provisions are generally meant for affording said requirement, either expressly or by his
a reasonable and adequate opportunity conduct. If he is found to have waived it,
to the person proceeded against. They then the order cannot be set-aside on the
are, generally speaking, conceived in ground of the said violation.
his interest. Violation of any and every ●● If on the other hand, it is found that
procedural provision cannot be said to the person has not waived it or that the
automatically vitiate the enquiry held or provision could not be waived by him,
order passed. then the court or tribunal should make

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appropriate directions (including the and served on the assessee. The notice
setting aside of the order), keeping in mind must provide for sufficient time so that the
the approval adopted by the Constitution opportunity granted can be said to be a
Bench in B. Karunakar. The ultimate test is reasonable opportunity of hearing.
always the same, viz. the test of prejudice
3. Any evidence, be it a statement, document
or the test of fair hearing, as it may be
or a report from any officer or agency or
called.
any private inquiry, should be used in
●● While applying the rule of audi alteram making the assessment after its contents
partem (the primary principle of natural are duly intimated to the assessee and he
justice) the court/ tribunal/ authority must is given an opportunity to rebut the same.
always bear in mind the ultimate and
4. Opportunity for hearing should not be
overriding objective underlying the said
a mere formality. It should be adequate,
rule, viz. to ensure a fair hearing and to
real and substantive. For instance, where
ensure that there is no failure of justice. It is
an assessee is required to explain certain
this objective which should guide them in
entries in a seized or impounded diary,
applying the rule to varying situations that
he should be given copy of the relevant
arise before them.
pages of the diary and then should be
●● There may be situations where the granted sufficient time for furnishing his
interests of state or public interest may call explanation.
for a curtailing of the rule of audi alteram 5. Where the AO proposes to use an oral
partem. In such situations, the court may testimony of a witness, he should provide
have to balance public/ state interest with a copy of the testimony to the assessee
the requirement of natural justice and and also give him an opportunity to cross-
arrive at an appropriate decision. examine the witness if requested by the
assessee.
4. THE PRINCIPLES OF NATURAL
6. Where, however, an assessee asks a
JUSTICE IN THE CONTEXT OF
PROCEEDINGS UNDER THE IT ACT particular witness to be produced, the AO
must issue summons on the said witness
4.1 In the context of Income-tax proceedings, and allow the assessee to examine the
the principles of natural justice can be stated as witness and thereafter himself cross-
follows: examine the witness.
1. The AO must not have any interest in a 7. The written or oral submission/ explanation
case over which he has the jurisdiction. of the assessee should not be ignored and
If the assessee is somehow related to the if the explanation call for further inquiry to
assessing officer, he should duly bring it be made, further evidence to be collected,
to the notice of the superior authorities the same should be done.
and have the case transferred from his
8. Where the assessee gives oral explanation,
jurisdiction. This upholds the maxim that,
it should be duly recorded in the order-
‘Justice must not only be done but it must
sheet and the assessee’s signature may be
be seen to be done.’
obtained for record. Where the Section
2. It is not sufficient to ensure that the provides for reasonable opportunity of
prescribed statutory notices are duly issued being heard; the AO must give the assessee

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an option of oral and personal hearing. It is This is even more crucial in cases of
for the assessee to avail of the opportunity reopening where the assessee’s challenge
either to appear personally or through his the reassessment on jurisdictional grounds
authorized representative. or allege that the reasons recorded do
9. Where the assessee does not comply with not lead to a belief that there has been
the statutory notice and the AO proposes an escapement of income. In such cases
to make an ex-parte assessment, and the as held by many Courts, such objections
AO is in possession of evidence relating should be specifically dealt with, preferably
to fraud, manipulation of accounts or any by a separate speaking order. Disposal of
other finding which will be used against such objections by a separate speaking
the assessee in concluding the assessment, order has been made mandatory by
the AO should not pass the assessment several High Courts notably the Bombay
order without giving the assessee a specific High Court.
opportunity of rebutting the evidence. 12. Lastly, where an assessee makes an
Despite the specific provisions of Sec application for inspection of case records or
142(3), the courts have not accepted the for making copies of seized or impounded
plea that since the assessee did not comply documents etc. it should be allowed in
with the statutory notices and the exparte accordance with Board’s instructions in
order had to be made, there was no need to this regard, and then be given sufficient
give an opportunity to explain the material time to file his explanation.
available with the Department. The courts
have held that where a statutory notice was 5. ASSESSMENT PROCEDURE
not accompanied by a show cause notice
enumerating the evidence to be used 5.1 Notices: An assessment proceeding starts
against the assessee, the AO should, in the with valid service of notice calling for the return
event of non-compliance, give a further or with the filing of the return by the assessee.
opportunity and communicate the content Until this event occurs there is no proceeding
of the incriminating evidence. Thus a final pending for that particular assessment year.
show cause notice even in cases of ex parte Thus, it should be ensured that where no return
assessments must be given to the assessee. has been filed by the assessee, a notice under
Sections 142(1) or 147 is validly served within
10. Any decision of the Tribunal or Court the limitation prescribed under the Act. The
or a circular of the CBDT which the AO acknowledgment of service should be pasted on
proposes to use against the assessee should the back of the notice or placed on record, and this
also be communicated to the assessee for fact should be duly recorded on the order-sheet.
his comments. Subsequently when the assessment is taken up
11. Any decision relied on by the assessee a notice under Sections 143(2) or 142(1), as the
should be discussed and properly case may be, should be served giving adequate
examined in the order - and, if necessary time to the assessee. Any case which is picked up
distinguished. Likewise, where the assessee for scrutiny should be fixed at the very earliest so
challenges the jurisdiction on any count or that there is sufficient time available for collecting
raises the question of limitation, it should evidence, giving assessee adequate opportunity
not be ignored, but should be properly and drafting the assessment order. Assessments
dealt with reference to the facts on records. where proceedings begin belatedly suffer from

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lack of time as the limitation date approaches. manner. It may also be emphasized that the
This results in a ‘hurried assessments’ where basic object of investigation is to unearth facts,
additions are made on the basis of incomplete and not surmises or opinions unless the opinion
or insufficient investigation. It is difficult for such is an expert opinion that establishes facts.
additions to stand the test of appeal. 5.5 As already emphasized, cases should be
5.2 Processing of Returns: The AO must fixed at the very earliest. The initial fixation of
ensure that the return is not defective u/s 139(9) cases is by way of service of Section 143(2)
or invalid u/s 140. He should there after process notice. A questionnaire should either accompany
it as per the existing provisions and procedures the same or be sent at the earliest posing specific
under Section 143(1) of the Act. queries based on the information given in the
return and other documents filed along with
5.3 A number of reports and certificates from it. Queries must be focused and not be in the
the auditors/ accountants are required to be filed nature of vague or roving enquiries.
under the various provisions of the Act. The AO
should ensure that these are filed along with the 5.6 Though the assessee does not have a vested
return in the submissions, and should carefully right to get adjournment, it has been held that
scrutinize them, along with similar reports/ where an application for adjournment is made
records of earlier years. In a case selected for well in advance, the AO should consider it, and
scrutiny, the AO should note any abnormalities if the reasons are sound it should be allowed.
or discrepancies and include specific questions However, where the assessee seeks adjournment
in regard to them in the questionnaire to for frivolous reasons or repetitively, the AO will be
be issued along with the notices u/s 143(2)/ well within the law in rejecting the same. While
142(1). Most significant preliminary clues for granting adjournment on an application by the
investigation for assessment are contained in the assessee or where the matter is partly heard
return and documents required to be filed by and the AO adjourns the same for another date
for further hearing, appropriate noting must be
the assessee. For instance increase in turnover
made on the order sheet and the signatures of the
with a disproportionately large increase in
representatives of the assessee should be taken.
expense e.g. commission payments could
indicate a possible line of enquiry. Similarly a
sharp increase in unsecured loans, decline in 5.7 Procedure for Assessments under
gross profit or net profit or introduction of fresh Section 143(3)
capital in the case of the company would clearly Some of the key procedural aspects of the
call for investigation in the course of assessment. manual assessment proceedings are as below:
The list of such abnormalities/ discrepancies is
1. The AO must hear the assessee and consider
endless. The AO should familiarize himself with
the evidence produced by him and record
the nuances of the nature of business carried out
the gist of the same in the order sheet.
by the assessee, and then examine the Trading
and Profit & Loss accounts and audit reports 2. The AO may adjourn the hearing to
carefully for any items that call for investigation. another date and take up the proceedings
on the subsequent date to which the case
5.4 The Act has given specific powers to the is adjourned.
AO to enable him to carry out investigation
effectively. These powers are not unfettered and 3. The AO may require the assessee to
must not be exercised arbitrarily or in a biased produce further evidence on specific issues

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on the specified date to which the hearing AO must indicate the particular Section
is adjourned. under which the interest is charged.
4. The AO can take into account all or any of 9. While making an assessment, the AO
the material that he has gathered and use should not only be guided by the provisions
it for the purpose of making assessment of law and the facts of the case but also
provided he has given a reasonable give due regard to:
opportunity to the assessee, for furnishing
οο CBDT Circulars
his explanation wr.t. each such item of the
material being so used. οο Ratio of any direct decision of the
jurisdictional High Court and of
5. The AO should pass a speaking assessment Supreme Court
order and determine income as also the
tax payable in the body of the assessment οο Directions issued by the Joint/ Addl
order itself. The assessment order should Commissioner under Section 144A of
be passed within a reasonable time after the Act
conclusion of hearing. οο Directions of Authority for Advance
6. Where the AO is transferred, the new Ruling, Settlement Commission
incumbent must give an opportunity for if applicable and the Competent
hearing to the assessee, even where his Authority under the DTAA
predecessor had fully heard the matter. οο Directions issued by the Commissioner
7. Assessment order together with ITNS 150 or Chief Commissioner under Sections
and the demand notice should be issued 263, 264, 273A of the Act if any
immediately either through the Notice οο Giving effect to the orders of CIT
Server or by R.P.A.D. The date of service (Appeals) or the ITAT, for the assessment
of the demand notice should be recorded year if any (especially w.r.t. issues that
in the order sheet and acknowledgement have a cascading effect)
should be pasted on the office copy of
the demand notice. With the shift towards 6. USE OF POWERS U/S 131
e-assessment, it must be ensured that the
order is passed through system timely 6.1 Summons u/s 131 can be issued by the AO
and sent to the correct email address as only during the pendency of any proceeding
submitted by the assessee. including assessment proceedings. Where it is
urgently required to issue summons to a witness
8. Often, AOs do not mention the specific and no proceedings are pending, the AO should
Sections under which interest for late filing take the help of the Directorate of Investigation.
of return or of advance tax or for deferral The ADIT/ DDIT (Investigation) has the powers
of installments for payment of Advance- to issue summons (by virtue of sub-section 1 of
tax, is charged. Even though the charge Section 131 of the Act) notwithstanding that no
of interest under Sections 234A, 234B proceedings are pending before them.
and 234C is mandatory and the AO has
no discretion to waive or reduce it, the 6.2 Reasons must be recorded in the order
quantification of interest could still be made sheet before issuing summons. In other words,
a subject matter of appeal. Therefore, the there should be evidence on record to satisfy

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the courts that there was due application of officer has the powers of the court as prescribed
mind by the AO. It has been held by the courts under Rule 19 of Order XVI of the Civil Procedure
that application of judicial mind is essential for Code. The procedure for examination of
invoking the extra-ordinary powers u/s 131. witnesses etc. under the commission is given in
‘Application of judicial mind’ can be evidenced Rules 1 to 8 of Order XXVI of CPC. The officer
only from the notings of the AO. issuing commissions and the officer discharging
the commission should strictly abide by these
6.3 Though Section 13 of the Indian Oaths Act rules. The report of the exercise should also be
1873 provides that any omission to take an oath
given to the assessee.
would not invalidate the evidence, it would still
be proper if an oath is administered and it is duly 6.6 The purposes for which a commission can
noted before the narration of the statement of be issued are enumerated in Section 75 of CPC.
a person begins. It would also be better if the One of the purposes for which the commission
main statement is written out not in the hand can be issued is ‘to hold a scientific, technical
of the AO but in the hand of the person giving or expert investigation’. Relying upon this, in
the statement. This is to ensure that the person CIT v. Basana Rani Saha (2000) 243 ITR 780,
giving the statement does not say at a later stage, the Gauhati High Court has held that the AO
that the statement recorded by the AO was not can seek expert opinion of the Valuation Officer
true. As far as possible, the statement should be about the cost of construction of a building by
recorded in the language in which the assessee issuing commission u/s 131. The assessee is
or the witness gave his deposition. If it is recorded entitled to be represented through a registered
in English, the person giving the statement must valuer in connection with any matter relating
state in his own hand that he or she understands to valuation of any asset (Section287A). If the
English language and also give his educational AO is not satisfied with the valuation by the
qualifications. The person giving the statement registered valuer, he should refer the matter to
must then sign each page of the statement. the government valuer for his opinion. An expert
opinion should not be rejected without obtaining
6.4 In case any documents are impounded in
the course of the proceedings u/s 131, the AO another expert opinion contradicting it. As
must record detailed reasons before impounding above, Sec 131 commission can be employed
the documents. If no such reasons are recorded, for this purpose.
the impounding is invalid. Likewise, all requests
seeking extension for retention of impounded 7. POWER TO CALL FOR
documents must give specific reasons for INFORMATION U/S 133
extension so that the Commissioner may apply Section 133 empowers the AO to call for specific
his mind. Though the reasons need not be information from the assessee. Information can
communicated to the assessee, the fact of approval be also sought in a case where no proceeding
by the Commissioner must be communicated is pending provided prior approval of the
immediately on receipt of such approval. Commissioner is taken. Under this Section,
6.5 Section 131 also empowers the AO to issue the AO can call upon any assessee to furnish
commissions. This power can also be Utilised to details such as a statement of the names and
obtain a report relating to any vital fact - be it addresses of all persons to whom he has paid in
the site report or examination of witnesses etc- any previous year - rent, interest, commissions,
from the officer under whose jurisdiction the site royalty, brokerage etc. together with particulars
or witnesses are situated. For this purpose, the of all such payments. The AO can also require

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any person including the bank to furnish relating to computation of income of the assessee.
specific information including the statement of Moreover, in many cases the auditors also give
accounts etc. qualifying remarks regarding non-compliances
to provisions etc. that can be starting point of
8. POWER OF SURVEY U/S 133A specific enquiries.

Survey u/s 133A is another important tool of 9.3 Although forms 3CA/ 3CB relate to
investigation. By an amendment of the Section audit report to be given in respect of financial
vide Direct Taxes Laws (Amendment) Act 1987, statements of the entity audited by them/ other
certain lacunae have been removed and the statutory auditors, statement of particulars
powers have been further expanded. This has annexed to such report in Form 3CD contains
been spelt out in the Board’s Circular No. 551 many Clauses such as (i) any other income note
dated 23.1.90. credited in the Profit & Loss Account (ii) brought
forward losses/ depreciation (iii) Chapter VI-A
deduction under Income-tax Act, etc. The
9. TAX AUDIT REPORT U/S 44AB auditors are also required to report about (i)
penalty or fine paid for violation of any law for
9.1 Section 44AB was inserted in the Income-
the time being in force, (ii) any other penalty or
tax Act by the Finance Act 1984. Under
fine, (iii) expenditure incurred for any purpose
this Section every assessee engaged in any
which is an offense or which is prohibited by law
business and having turnover or gross receipts
and such other matters concerning other laws.
exceeding Rs. 40 lacs (now enhanced to Rs. 1
Crore, except in cases of assessees opting for 9.4 All this information gives significant
presumptive taxation u/s 44AD where the limit preliminary details relevant to the AO. The
is Rs. 2 Crores) is required to get the accounts computation of income submitted by the
audited by a chartered accountant and submit assessee must be cross verified with the allowable
the tax audit report (TAR, for short) before the deductions, disallowances specified in the TAR.
due date for filing the return of income under Sec 9.5 Particulars relating to some of the items,
139(1). In the case of a professional similar report viz. (i) amount inadmissible u/s 40 (b), (ii)
is required if the gross receipts from the profession amounts admissible under Chapter VI-A (iii)
exceed Rs. 10 lacs (now enhanced to Rs. 50 Lacs) amount admissible u/s 40B etc. cannot be given
9.2 The audit report in form 3CD/ 3CE gives unless the assessee has prepared his return of
information about certain items of income/ income for the relevant year. Therefore, if the
expenses appearing in the financial statements. return of income is not ready before the date of
Moreover, the auditors are also required to giving tax audit report, the auditors will have to
express opinion on certain items of income/ clearly state that the relevant information is not
expenditure. For instance, the auditors need to given. Further, if the auditors have relied upon
express such opinion on items viz. (i) inadmissible the working made by the assessee which they
amount of salary or interest to partners under have not been able to verify fully, the auditors
sec 40(b), (ii) inadmissible expenditure under give a qualifying remark stating that the same
sec 40A(3), (iii) depreciation allowable under the has not been fully verified.
Act, (iv) deduction admissible under Chapter VI- 9.6 The auditors are expected to study past
A, (v) profits chargeable to tax under sec 41,etc. assessment/ appellate orders in order to report
Thus TAR places responsibilities on auditors and on some of the Clauses relating to (i) working
will requiring them to report on almost all items of allowable depreciation, (ii) profit chargeable

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to tax u/s 41, (iii) brought forward losses and cases and cases of companies must familiarize
unabsorbed depreciation, etc. The report may themselves with the contents of the TAR.
qualify that the figures are likely to be revised
on final decision in assessment, rectification, 10. QUALIFICATIONS IN
revision or appellate proceedings which may AUDIT REPORTS
be pending for earlier years. In all such cases all
10.1 While giving audit report the auditors
pending rectifications, appeal effects etc. should
have to ensure compliance with accounting
be carried out before finalizing the assessment.
standards issued by the ICAI & ICDSs issued
9.7 Notes to accounts and significant by the Govt. ICDS-1 notified u/s 145 of the Act
accounting policies usually bring out exceptional (disclosure of accounting policies) recognises
circumstances such as claim for deduction or that the major consideration governing the
claim any exemption in respect of any income by selection and the application of accounting
placing reliance on any judicial pronouncement policies are (i) prudence, (ii) substance over form
while finalizing the return of income. Therefore, and (iii) materiality. Therefore, while examining
notes in Form 3CB/ 3CD are carefully worded particulars in Form 3CD, these aspects should be
and must be perused thoroughly to identify such kept in mind. In particular, the Auditors consider
typical items for further investigation as to the the aspect of materiality while giving notes in the
validity of such a claim. audit report. As already discussed, the auditors
9.8 In respect of some items viz. (i) payment also rely upon judicial pronouncements while
made otherwise than through account payee giving the particulars in the report, and can make
cheques, (ii) salary to working partner, whether specific mention of cases relied upon. Such cases
allowable or not, (iii) date on which any asset may have been accepted by the Revenue or
is put to use, etc. sufficient evidence may not further appeal might have been preferred. Such
be available. In such cases, the auditors may cases may not be binding on assessee in a specific
state that such information cannot be given in jurisdiction or the facts in the assessee’s case may
the absence of the required evidence. Where be distinguishable which should be examined
two views are possible, the auditors may express and established during the course of assessment.
their opinion and support the same by citing 10.2 Needless to say that the TAR read with
a judicial pronouncement. On controversial statutory audit report and the return would throw
issues, however, the auditors are not bound to up various lines of enquiry for investigation
cite judicial decisions to the contrary. All these for making assessment. As already stated, it is
are matters fit for further enquiry. The AO should crucial that the Assessing Officer takes note of
exercise due care and bring out the correct the qualifications made by the auditors. These
legal as well as factual position. For instance qualifications can be pointers to the defects in
regarding the date of put to use is not clear, then accounts, e.g. maintenance of basic registers or
additional supporting evidence can be called for stock valuation or non-compliance of statutory
especially in cases where additional depreciation requirements e.g. filing of report in Form 3CEB.
or depreciation at a higher rate is being claimed. Every qualification must be carefully examined
9.9 It is amply clear that the TAR and in to identify areas of shortcomings in the assessee’s
particular Form 3CD have been designed to elicit financial affairs and possible tax implication. As
vital information relevant for assessment in case per the statutory provisions in the Companies Act
of business or profession falling in higher income relating to qualifications in the auditors report; if
brackets. The AOs dealing with high income the auditors are required to answer any of the

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statutory affirmation in the negative or with the or tax and it report is also filed. The AO must
qualifications, their report shall state the reasons ensure that the return and all other documents
for such answer. It is, therefore, necessary for the and statements filed along with it or subsequently
auditors to give reasons for any qualifications in in the course of assessment proceedings are duly
his note. Such qualifications may be contained authenticated by the assessee or by his power of
not only in the tax audit report but also in the attorney holder.
statutory audit report prepared by the statutory
auditors under the Companies Act and, therefore, 11.2.2 As already discussed, the return and its
it is imperative for an AO to examine both. main enclosures, namely the Annual Accounts,
the statutory Auditor’s Report, the TAR, the
Directors’ Report to the shareholders, the
11. COLLECTION AND USE OF
Annexures and Schedules attached to these
EVIDENCE
reports contain crucial information which
11.1 In the course of assessment several kinds should be carefully studied beforehand. Many
of evidence may surface. Broadly speaking, hints and clues, no matter how understated or
evidence would fall in any of these categories: downplayed, are available in these, which are
●● Evidence produced by the assessee. indicative of further lines of enquiries.

●● Evidence collected by the AO through 11.2.3 Apart from evidence statutorily required
open or closed inquiries. to be maintained and tendered by the assessee,
●● Evidence, which is available in the public the assessee may produce additional evidence
domain. in the course of the assessment. Such evidence
should be investigated by the AO with a view
●● Evidence collected from other agencies, to check its veracity, relevance and adequacy. If
departments of the Government, etc. the AO has material to refute such evidence he
●● Evidence found through third party’s must confront the assessee with such material
accounts, returns, assessments etc. and discuss his findings in the assessment order.
●● Evidence received from a tax department
of a foreign country under the DTAA. 11.3 Evidence Collected by the AO
Every AO, in the course of assessment, would 11.3.1 The most commonly used provision
come across evidence collected or received from for information collection during the course of
these sources. After the collection of evidence, its assessment is by calling for information directly
appraisal and procedure for using the evidence from the assessee under Section 142(1) of the
forms the core of assessment work. Act. Section 142(1)(ii) of the Act enables the AO
to require the assessee:
11.2 Evidence Produced by the Assessee ●● ‘To produce, or cause to be produced,
11.2.1 The most basic and preliminary evidence such accounts or documents as the AO
tendered by the assessee under due verification may require’, or
and affirmation is the return of income and its ●● ‘To furnish in writing and verified in
enclosures. These form the starting point of any the prescribed manner information in
enquiry. Therefore, all the columns of the return such form and on such point or matters
and its various enclosures should be carefully (including a statement of all assets and
scrutinized. Wherever required, statutory audit liabilities of the assessee, whether included

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in the accounts or not) as the AO may 2. Where the AO proposes to make an estimate
require. in disregard of the evidence led by the
assessee, whether oral or documentary, he
The scope of this Section is different from that of
should in fairness disclose to the assessee
Section 143(2), which speaks of ‘any evidence
the material on which he is going to base
which the assessee may rely in support of the
that estimate.
return’. The AO should make full use of this
provision for gathering evidence that he requires 3. The AO is not debarred from relying on
as distinct from what the assessee may choose to private sources of information which he
produce in support of the return. may not disclose to the assessee at all.
11.3.2 Section142 (2) enables the AO to make 4. In case the AO proposes to use the
such enquiries as he considers necessary ‘for the evidence from private sources, he must
purpose of obtaining full information in respect communicate the substance of such
of the income or loss of any person’. The sweep information to the assessee to such an
of this provision is wide. It is not confined to extent as to put the assessee in possession
the assessment proceedings or to the particular of full particulars of the case he is expected
assessee before the AO. to meet and give him ample opportunity
11.3.3 Section 143(3) states that the AO to meet it.
may pass the assessment order after ‘taking
into account all relevant material which he has 11.4 Evidence that is of Public Nature
gathered’. In other words, the AO must have There are certain evidences, which are
some material on which to base his judgment available in the public domain. These could be
or estimate. Even in a case where the account government public orders, gazette notifications,
books are rejected, the assessment must have Board’s Circulars and public circulars, by other
nexus to the material on record. Records, in this Departments of the government. Normally the
context, include past records also which should assessee can be presumed to be in the knowledge
be referred to for deciding assessment for any of such evidence of public nature. However,
year especially w.r.t. recurring issues of addition/ where the AO proposes to use any such order or
disallowance. a reported decision of a court, he should ideally
11.3.4 The law on the powers of the AO communicate to the assessee the substance of
in collecting evidence and relying on such such order, notification etc. and give him an
evidence was settled as early as in 1944 in Seth opportunity to put forward his case.
Gurumkh Singh v. CIT (12 ITR 393 at 427). The 11.5 Evidence Collected from Other
principles laid down in it were duly approved by Agencies/ Departments
the Supreme Court in the case of Dhakeswari
Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 at Evidence may be gathered from other agencies
782. These judgments lay down the following or departments of Government, u/s 133, or 132
principles: A etc. Section 132A, provides for requisition of
the material from the custody of other authorities.
1. The AO is not bound to rely on such The scope and effect of the provisions have been
evidence produced by the assessee which explained in the departmental Circular No. 179
he finds to be false or irrelevant. However, dated 30.9.1975. It has been judicially held in
he must give detailed reasons why such several cases that ‘there must be some material
evidence is false. on file which could be recorded as information

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on the basis of which the Authorizing Officer can and circumstances of a given case. It is always a
have reason to believe that action u/s 132A is goods approach to identify and frame clear issues
called for and this material must have nexus with for consideration, on the basis of the reply to the
any of the reasons mentioned in Clauses (a), (b) initial questionnaire, and preliminary hearings.
and (c) of the aforesaid Section. The proceedings thereafter can be narrowed
11.6. Evidence Found in Third Party’s down to the examination of such issues. Even
Accounts, Returns, Assessments while considering each of the issues so framed,
it is advisable to first segregate admitted facts
Where some evidence disclosed by a person and disputed facts relevant to that issue.
other than the assessee in his books of accounts Thereafter, evidence relating to the disputed
or the return etc. is proposed to be used against facts (documentary, oral, circumstantial) can
the assessee in his assessment, the AO must be gathered by the AO either directly or
confront the assessee with such evidence and from the assessee for a proper appraisal and
give him an opportunity of being heard. He may determination. It must be borne in mind that
also summon the third party, record his statement principles of law can be correctly applied only
and give the assessee an opportunity of cross- when facts are properly established.
examination. In other words, any evidence
furnished or sourced from a third party can be
13. APPRAISAL OF EVIDENCE OR
used against the assessee only after the assessee
MATERIAL
has been duly confronted with the same and
given a specific opportunity to rebut the same. 13.1 The entire exercise of carrying out
investigation and collecting evidence for making
11.7. Evidence Received from Tax an assessment is an exercise of establishing
Department of a Foreign Country facts as distinguished from opinions. Thus, the
The Double Taxation Avoidance Agreements relevance or the value of the evidence should
normally provide for a Clause for exchange of be judged from only one point of view - whether
information between the tax authorities of the such evidence goes to establish a fact or at least
two countries. Where the AO seeks information goes to increase the probability of such a fact.
from the tax authorities of a foreign country, he The AO should first establish facts and only then
must make a specific proposal in this regard and draw logical inferences and search for the correct
forward the same through his Commissioner to law applicable to such primary facts or the
the Foreign Tax Division of the CBDT who alone inferred facts. As observed by the Lahore High
can correspond with the foreign tax authorities. Court in the case of Seth Gurmukh Singh vs.
On receipt of information from the foreign tax CIT: “But though the AO has very wide powers
authorities which the AO proposes to use in the and is not fettered by technical rules of evidence
assessment, he should once again communicate and pleadings, there is one overriding restriction
to the assessee the contents of such information on his judgment and that is that he must act
and give him a reasonable opportunity for honestly on the material, however inadequate,
rebutting the same. before him, and not vindictively, capriciously or
arbitrarily.”
12. FRAMING OF ISSUES 13.2 Affidavits: If an affidavit is filed by an
Any scrutiny assessment would involve assessee and he is neither cross-examined on its
determination of a number of issues of disputed content nor called upon by the AO to produce
facts, or law or both, depending upon the facts any corroboratory evidence, the rejection of

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the affidavit will not be justified. If the AO has registrable may not by itself constitute sufficient
any evidence which contradicts the affidavit, proof, but it can be admitted and made use of
the assessee must be duly confronted with the as collateral evidence. In the case of Narsingdas
same. The evidentiary value of an affidavit has Surajmal Properties (P). Ltd. V. CIT (1981)
been discussed by the Supreme Court in the 127 ITR 221, 225 (Gauh) it was held that an
case of Mehta Parikh & Co. (1956) 30 ITR 181 unregistered lease deed which was compulsorily
(SC). This decision lays down, that if there is no registrable was admissible to prove the nature
material whatsoever on record for doubting the and character of lessee’s possession as well as
veracity of the statements made in the affidavit, to show that he was a tenant in occupation of
and if the deponent has also not been subjected the demised land on payment of rent. It needs
to cross-examination for bringing out the falsity to be mentioned that sham deeds are of no
of his statements, then doubting the correctness evidentiary value even though they may have
of the statements made in the affidavit is not been registered.
justified.
13.6 Evidentiary Value of Official Records:
13.3 Books of Account: Books of account According to illustration (e) to s.114 of the
maintained in the regular course of business are Indian Evidence Act, the Court may presume
relevant and prima facie proof of the entries and that judicial and official acts have been regularly
the correctness thereof. However, where entries performed. This presumption attached to the
made in the books of accounts go against any correctness of official records cannot be taken
averment made by the assessee, it is for the away merely by assumptions or suggestions
assessee to show that the entries are incorrect. raising doubts.[Capital Talkies v. CIT (1981) Tax
The burden of the proof lies on the assessee to LR 1029 Orissa]. In this case, their Lordships
prove that the entries in seized books of accounts have deprecated ‘the practice prevailing in the
showing receipt of on-money in cash are not Income-tax Department of issuing orders to the
real receipts [Debi Burman vs. CIT (1994) Tax assessee without the signature of the Officer or
LR 452,456 (Cal)]. In another interesting case even bearing the official seal’. It was observed that
of Vazhakala Estate vs. State of Kerala (1994) ‘the order sheets should be properly maintained,
210 ITR 451,461-62(Ker), in the context of orders should be duly sealed and signed by the
Agricultural Income-tax Act, estimate of income Officer’.
made on the basis of a slip of paper found in the
books of account produced by the assessee was
held to be justified. 13.7 Following Evidence can also be Used
by the AO
13.4 Loose-leaf Account Books: In general,
accounts consisting of loose sheaf of paper do not 1. Findings given by a criminal or civil court
have the same probative force as bound account on the same facts. The AO, however, is
books, which are kept in the regular course of not bound to follow the court decision
business. However, this proposition may not in a case where he has found additional
now hold good in a case where the accounts are evidence not considered by the court.
kept on the computer and hard copies by way of 2. Photostat copies have little evidentiary
loose sheets of printouts are produced. value but if the original is produced along
13.5 Unregistered Document that is with it, the same may be admitted after duly
Compulsorily Registrable: Normally an comparing it with the original document
unregistered document that is compulsorily and obtaining due certification.

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3. A photocopy of a foreign document can side bears the burden of proof. When a party
be admitted as evidence provided it is bearing the burden of proof meets their burden,
authenticated in the manner prescribed the burden of proof switches to the other side.
by the Diplomatic and Consular Officers
14.2. Sections 101 to 114 of Indian Evidence
(Oaths and Fees) Act 1948.
Act 1872 deal with burden of proof. Section 102
4. Tape-recorded conversation can only be of the Evidence Act provides that the burden
relied upon as corroborative evidence of proof lies on that party who would fail if no
of conversation deposed by any of the evidence at all were given on either side. Thus, if
parties to the conversation. In the case an assessee claims that money or bullion found
of Ziyauddin Burhanuddin Bukhari v. in his possession at the time of the search or
Brijmohan Ramdass Mehra, AIR 1975 SC survey does not belong to him but some one
1788, 1795, the Supreme Court has laid else, the onus is on him to establish it, because
down the rule in regard to tapes, cassettes, the ordinary presumption is that he is the owner
compact discs, etc. produced as evidence, as the money etc., was found in his possession.
that these are ‘documents’, as defined by Similarly, in all cases where a particular receipt
s. 3 of the Evidence Act, and stand on no is sought to be taxed as income, the initial
different footing than photographs. These onus is on the AO to prove that it is taxable.
are admissible in evidence on satisfying Where, however, the assessee claims exemption,
the following conditions: the burden is on the assessee to prove it to
a. The voice of the person alleged to be exempt. Similar is the position in case of
be speaking must be duly identified allowances, deductions, claims of loss, etc.
by the maker of the record or by Similarly, where there is a statutory rebuttable
others who know it. presumption against the assessee, as in case of
cash credits etc., under sec 68 or unexplained
b. Accuracy of what was actually investment u/s 69, the initial burden of proof is
recorded had to be proved by the on the assessee to show that the cash credit is
maker of the record and satisfactory genuine or the investment is not unexplained.
evidence, direct or circumstantial, The AO should, therefore, always examine as to
had to be there so as to rule out who has to discharge the burden of proof. It may
possibilities of tampering with the also be noted that in the course of assessment,
record. the burden of proof may shift from one to the
c. The subject matter recorded has to other. For instance, if the assessee discharges
be shown to the relevant according his initial burden of proof, the onus shifts to the
to rules of relevancy under the AO who must bring out facts to refute assessee’s
Evidence Act. version.
14.3 The proceedings under the Income-tax
14. BURDEN OF PROOF/ ONUS Act are civil proceedings. The degree of proof
14.1 The burden of proof is the obligation required in assessment proceedings is the
of a party in a trial or dispute to produce the preponderance of probability, unlike in criminal
evidence that will prove the claims they have proceedings where proof beyond reasonable
made against the other party. In a legal dispute, doubt is insisted upon. It is open to the AO to
one party is initially presumed to be correct and show that there is a greater probability of his
gets the benefit of the doubt, while the other stand being the correct one as against the stand

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of the assessee and show the preponderance The above observations of the Apex Court fit in
of the same, where conclusive proof is not neatly in our context. They oblige the appellate
forthcoming. authorities and the courts to keep the limitations
14.4 The observations of the Supreme Court in of the AO in mind and see that the revenue
State of West Bengal vs. Mir Mohammad Omar is not affected by at times inevitable defects
and Others JT 2000(9) SC 467 made in the in investigation due to the time and resource
context of a criminal case are relevant for our constraints under which the investigating
purpose: authorities operate.

“The pristine rule that the burden of

proof in on the prosecution to prove 15. INSPECTION OF RECORDS
the guilt of the accused should not An assessee has a right to inspect the records
be taken as a fossilized doctrine as and all relevant documents before he is called to
though it admits of no process of deal with the evidence in rebuttal. He also has a
intelligent reasoning. The doctrine of right to inspect the statement recorded or order
presumption is not alien to the above passed by the assessing officer. Under Sec 74 to
rule, nor would it impair the temper 77 of the Indian Evidence Act, the assessee has a
of the rule. On the other hand, if the right to obtain certified copies of any statement,
traditional rule relating to burden of documents or orders forming part of income-tax
proof of the prosecution is allowed to records if these fall within the meaning of ‘public
be wrapped in pedantic coverage, the documents’. The following documents forming
offenders in serious offences would part of record have been held to be public
be the major beneficiaries, and the documents:
society would be the casualty......
1. Statement made on oath before an AO
......The function of the criminal courts
should not be wasted in picking out 2. Assessment order
the lapses in investigation and by 3. Documents filed by the assessee in support
expressing unsavory criticism against of his return of income
the investigating officer. If offenders
are acquitted only on account of flaws 4. Income-tax returns
or defects in investigation, the cause 5. Statements recorded and order passed by
of criminal justice becomes the victim. the AO.
Efforts should be made by the courts
to see that criminal justice is salvaged 6. Any other material which the AO proposes
despite such defects in investigation. to rely or has relied on in the assessment
Courts should bear in mind the time order.
constraints of the police officers in
the present system, the ill-equipped 16. DRAFTING OF ASSESSMENT
machinery they have to cope with and ORDER
the traditional apathy of respectable
16.1 Points to Remember
persons to come forward for giving
evidence in criminal cases which 16.1.1 The assessment order should be
are realities the police force have passed as early as possible after the completion
to confront with while conducting of the hearing. It is the final product that is a
investigation in almost every case.” culmination of the entire investigation, enquiry

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etc. carried out in the course of assessment. It including Income-tax proceeding, the standard
should therefore be a speaking order. As already of proof is by preponderance of probabilities,
discussed, a speaking order means that on and not by proof beyond reasonable doubt as in
the face of it the order shows ‘due application criminal cases.
of mind’ by the AO. In a speaking order all
explanations and evidence tendered by the 16.2 Treatment of Evidence
assessee and those collected by the AO are duly
16.2.1 It should be ensured that all evidence,
discussed and cogent reasons are given for every
statements and other documents filed by the
finding. Any finding, conclusion or direction
assessee are duly signed and authenticated by
without supporting reasons is likely to be held as
the assessee or by the holder of his power of
arbitrary and struck down.
attorney. Evidences proposed to be relied on
16.1.2 The order should be brief and to the should be marshalled in an orderly manner and
point. Repetitiveness should be avoided. Issues then discussed. Language employed in the order
should be framed point-wise and dealt with should be clear and concise. Flowery language
accordingly. Merits of each issue should be and adjectives should be avoided. The focus
discussed by first bringing out the undisputed must remain on facts and facts alone and not
facts, followed by the rival evidence in respect of on opinions. Personal comments, derogatory
disputed facts, and the finding of fact in respect words, or sarcastic remarks should be avoided.
of the same. Subsequently the legal principles 16.2.2 Whenever the assessee fails to give
applicable to the facts should be discussed. explanation in response to any query or adverse
Conclusion should be based on clear reasons evidences with which he is confronted, this fact
that have a nexus with the factual position of the should be specifically mentioned. The details of
case and the law applicable to the facts. opportunities given to the assessee should be
16.1.3 Evidence on disputed facts requires specifically discussed with reference to notings in
greater discussion. The assessee’s version the order sheet and any other correspondence.
and the evidence furnished by him should be No explanation or submissions of the assessee
discussed. Evidence collected by the AO should should be ignored. This is a sure way of getting
then be highlighted and reasons should be the assessment set aside. Submissions on
given as to why the factual position given by every issue should be discussed and properly
the assessee is incorrect or false, and how the distinguished.
assessee has failed to counter the evidence 16.2.3 The AO should remember that law
collected by the AO when he was duly confronted follows facts. Therefore, he should apply legal
with it. In other words, in every case where the principle and case law only after detailing and
AO is rejecting the assessee’s version, he must establishing the facts. Before applying ratio of
give reasons as to why the explanation of the any particular decision he should first establish
assessee is unsatisfactory or false. He should whether the facts of the case are in ‘pari materia’
bring out how the surrounding circumstances with the facts of the case being relied upon.
and preponderance of probabilities are against Many a time, reliance is placed on particular
the assessee’s version. The AO should highlight entries in books of account or documents seized
the points on which the assessee’s explanation is or impounded from the assessee or third party.
inconsistent with the facts on record. Inference Not only should the assessee’s explanation in
should be logically deduced from the established respect of these entries be discussed but also
facts. It should be borne in mind that in civil cases, the attested photocopies must be annexed

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to the assessment order. Similarly, any other and complex sentences should be avoided.
documentary evidence, no matter how bulky, Ornamentation and embellishments impede the
which is material for deciding a particular issue flow of the narrative. However, that is not to say
should be annexed. List of annexures must be that the order should be dull and prosaic. It can
given in the body of the assessment order. It be elegant even when simple, but focus should
should be ensured that all the annexures are sent be on clarity and coherence.
to the assessee along with the order.
16.5 The tenor of the order should be even
and matter of fact. The order should not be
16.3 Other key Points in Drafting of partisan. There should not be any irrelevant or
Assessment Orders tangential discussion. In the order AO should
16.3.1 The first page of assessment order is not pay encomiums or give certificates to the
under a performa ITNS 65. Often the columns assessee. They may prove embarrassing later or
of the form are not fully filled in. The AO should impede initiation of subsequent remedial action
ensure that the form is fully filled in. if required.
16.3.2 Sometimes the complete name and 16.6 Long tables and long quotations/
designation of the AO is not given at the end reproductions in the body of the order impede
of the assessment order. Such details should be its smooth flow. If they should come at all, they
typed out and the order must be signed. Every should appear as separate annexures.
page of the order must be initialed and it should 16.7 Whenever any penalty proceedings are
bear the office seal of the office. initiated, it should be ensured that the same
16.3.3 It is advisable that for each issue a is also duly noted in the order sheet. The fact
separate paragraph is used. If the paragraph of initiation of penalty proceedings should be
is likely to be long, it can be divided into sub- clearly mentioned in the assessment order.
paragraphs. It is necessary that the paragraphs
and sub-paragraphs be numbered, for easy 17. DETERMINATION OF TOTAL INCOME
reference. This facilitates easy reference. The
17.1 The object of making an assessment is
first paragraph should briefly introduce the case
to determine total income and the final tax
and contain such basic particulars as description
payable by the assessee. Before arriving at total
of the assessee, nature of the business (es) and
income, what is required to be determined is
the returned income. If it is a reassessment or
the ‘gross total income’. ‘Gross total income’ is
a fresh assessment (consequent on setting
aggregation of income determined under ‘each
aside of the earlier order), a brief history of the
head of income’. Hence, in respect of each item
assessment should be given in the beginning of
of income its ‘head’ should first be determined
the order itself. In the subsequent paragraphs
and then only the income under that head should
discussions on the contentious issues should
be computed in accordance with the provisions
follow. The discussion on each issue should first
dealing with that head of income. The AO must
give the facts, then the assessee’s version, after
also bear in mind the clear distinction between
those AO’s reasons, and finally the conclusion.
‘source of income’ and ‘head of income’ as there
The conclusion should logically flow from the
can be a number of sources of income falling
arguments.
under the same head of income.
16.4 Simple sentences are more coherent
and make for better communication. Therefore 17.2 It is only after having quantified ‘gross
in drafting assessment orders compound total income’ the deductions under Chapter

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VIA should be allowed. It is possible that of specific books or documents or for

where total income is positive, there may still giving specific information or total wealth
be certain unabsorbed losses. These should be statement or for furnishing a return of
mentioned at the end of the order and it should income, etc.
be specifically stated whether such losses, say,
c. Failure to comply with a direction u/s
from speculation or the capital gain are allowed
142(2A) to get accounts audited by
to be carried forward. In case the total income
is zero or a negative figure all brought forward an auditor nominated by the Chief
losses, depreciation etc. should be mentioned Commissioner or Commissioner and to
year-wise together with current year’s loss etc. furnish the audit report thereof; and

17.3 In the assessment order the income should d. Failure to comply with all the terms of a
be computed independently of the returned notice u/s 143(2) by personally attending
income. Making mere adjustments to the returned the hearing or, as the requirement may be,
income is fraught with danger. In this approach by production of evidence, in support of
there is a likelihood of the mistakes committed the return.
by the assessee in his computation recurring 19.2 It may, however, be mentioned that the first
in the AO’s computation. After computing the proviso to Section144 (1) enjoins upon the AO a
income, the AO should strike a reconciliation of strict condition that before passing the order he
the assessed income with the returned income. must serve a notice calling upon the assessee to
17.4 The AO should be careful while allowing show cause, on a date and time to be specified
depreciation. The corrections made in the earlier in the notice, why the assessment should not
assessments on depreciation should be noted be completed to the best of his judgment. This
and depreciation should be allowed only on the condition is mandatory. However, the second
correct wdv. This fact should be spelt out clearly proviso to Section 144(1) dispenses with the
in the assessment order and the computation requirement of giving such opportunity where a
with relevant details. notice u/s 142(1) has already been served.
19.3 Even a best judgment issued framed u/s
18. DETERMINATION OF TAX
144 has to be based on a fair and reasonable
Assessment does not mean determination of estimate. For this purpose the AO must indicate
income only but also means determination the consideration that forms the basis for his
of tax and interest payable by the assessee. A estimate. Whatever material is available on
duly signed ITNS 150 form with step-by-step record and is used for the purpose of making
computation clearly given should be served estimate must be highlighted. The observation
along with the assessment order. of the Supreme Court in the case of State of
Orissa vs. Maharaja Shri B.P. Singh Deo [1970)
19. EX-PARTE ASSESSMENTS 76 ITR 690,691] should be kept in mind:
19.1 Ex-parte assessments u/s 144 of the Act “Apart from coming to the conclusion
can be made where any of the following defaults that the material placed before him
on the part of the assessee takes place: by the assessee were not reliable,
the Assistant Collector has given no
a. Failure to make a return u/s 139;
reasons for enhancing the assessment.
b. Failure to comply with all the terms of a His order does not disclose the basis on
notice u/s 142(1) calling for production which he has enhanced the assessment.

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The mere fact that the material placed and if any guidelines have been given in the
by the assessee before the assessing appellate order, to follow those. However, where
authorities is unreliable does not an assessment is set aside to be made ‘de novo’,
empower those authorities to make an the entire assessment is thrown wide open and
arbitrary estimate, it is an assessment the scope of re-assessment is unfettered. Where
on the basis of best judgment. In other the matter is remanded to the AO on a particular
words, that assessment must be based issue, the AO should carry out the enquiry
on some relevant material. It is not a bearing in mind any other instruction which may
power that can be exercised under be contained in the Remand Order and after
the sweet will and pleasure of the giving the assessee due opportunity send the
concerned authorities.” remand report through his supervising officer
19.4 The AO must clearly spell out the default within the time allowed to him by the appellate
committed by the assessee, giving the AO to authority.
power to make best judgment assessment.
21. MISCELLANEOUS
20. APPEAL EFFECTS Though recovery of demand is a separate
The AO is bound by to give effect to the orders subject, there is one aspect on which the
of higher appellate bodies/ courts like the AO may have to take action in the course of
Commissioner (Appeals), ITAT, High Court or assessment proceedings. Section 281B lays
Supreme Court. He must give full effect to the down that where, during the pendency of any
order and where certain detailed computation of proceeding for the assessment of any income,
income or allowance is required to be made on the AO is of the opinion that for the purpose
the basis of directions of the appellate authority, of protecting the interest of the revenue it is
he should give due opportunity to the assessee necessary to attach provisionally any property
before passing the order. The order giving effect belonging to the assessee, he may do so with the
to the appellate order is itself appealable and, previous approval of the Commissioner or Chief
therefore, such an order should be a speaking Commissioner. Such an order of attachment has
order. Often, for technical reasons, the appellate to be passed in writing. It may be noted that the
authority restores an issue with the AO for re- action u/s 281B can be taken only during the
adjudication. In such circumstances the AO is pendency of assessment proceedings (which
restricted to decide only that particular issue includes reassessment proceedings).

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 Chapter

Evasion of Tax
22
Deduction at Source

1. INTRODUCTION
1.1 The Income-tax Act contains provisions
requiring persons responsible for making certain
payments, to deduct income-tax before the
payment is made to the payee. This mode of
collection of income-tax is called tax deducted
at source (TDS). Tax is deducted at source from
various types of payments like salary, interest,
commission, rent, contract payments, winnings
from lotteries, winnings from horse races, payment
for acquisition of land, payment as fees for
Beside the above, the Department also comes
technical and professional services, etc. Employers
across various instances of tax frauds indulged
have to deduct tax from salary payments to their
in by the unscrupulous tax deductors.
employees. Banks, financial institutions and other,
while making payment of interest to depositors or 1.3 Sources of Credible information for
crediting interest in their accounts, have to deduct TDS Investigations:
tax at source. The income-tax Act also stipulates (I) Major source of information for TDS
the monetary limits and rates at which tax is to be investigation is available on TRACES portal:
deducted. The persons responsible for deducting
(i) Top defaulters report available in AO
tax at source, have to deposit the tax deducted by
report under MIS reports menu
them in the Government account within the time
limits laid down for this purpose. TDS provisions, in (ii) Data relating to deductors with demand
brief, have been enumerated in Annexure-1. on account of Late Payment Interest
(LPI) available in AO Reports under
1.2 Major types of TDS defaults and TDS MIS Reports Menu.
frauds:
(iii) Information of deductors who have not
1. Non-deduction of tax filed Quarterly TDS Returns available
as non-filers data in AO Reports under
2. Short deduction of tax
MIS Reports Menu.
3. Non-remittances of taxes
(iv) TDS/ TCS Profile Report available in
4. Non-filing of quarterly TDS returns AO Reports under MIS Reports Menu.

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(v) Data relating to top deductors of the scrutiny assessments, assessing

previous year where there is a officers disallow expenses where tax
significant drop in remittances of TDS was not deducted or deducted but not
remitted.
in the current year.
(x) Form 3CD filed by the assessee: This
(vi) Details of prosecution cases selected by data may be obtained from CPC
TRACES. (ITR) on specific request.
(vii) Various other useful reports are made (xi) Newspaper and other media reports.
available by CPC (TDS) on the (xii) Information shared on the platform
homepage of TRACES from time to time of Regional Economic Intelligence
(viii)   Grievance Petitions: Complaints/ Council (REIC) meetings.
grievances filed by the deductees for (xiii) Searches/ surveys conducted by
non-availability of credit of TDS in investigation wing.
Form 26AS etc. serve as a good source
of information about defaulting tax (xiv) Information received from I&CI
deductors. Several complaints contain directorate.
details of non-deduction and non- (xv) Form 15CA.
remittance of TDS.
(xvi) Form 15G and 15H.
(ix) Disallowances u/s 40(a)(ia) made
by the Assessing Officer: During (xvii) Surveys u/s 133A(2A).

1.4 Steps in TDS investigation: Investigation in a serious case of TDS evasion may involves
following steps:

1 Studying the statutory provisions to establish the jurisdiction and validity of the TDS proceedings.

2 Conducting a survey on-site or on the premises of the assessee to collect primary evidence.

Studying and analyzing the data collected in Survey, Post survey, Search, post-search investigations,
3 assessment proceedings and in proceedings u/s 201(1), to cull out the relevant evidence.

4 Establishing the factual position based on evidence, and relevant case laws.

Determining the nature & quantum of the default. Confronting this to the Deductor and allowing him
5
adequate opportunity.

Giving notice under Sec. 2(35) to the Principal Officer of intention to treat him as principal officer in
6 proceedings u/s 201 read with relevant Section for non-deduction of TDS. {83 ITR 362, MD cannot be
prosecuted u/s 276 B unless served with notice u/s 2(35)(b)}

Drafting an order marshalling all the evidence collected, meeting the arguments and objections raised by the
7
Deductor in its written submission, and giving specific findings, and raising demand of Tax/ interest.

8 Specific direction needs to be given in the order u/s 201 for initiation of penalty.

9 Examining the matter for possible prosecution

TDS proceedings are independent of assessment proceedings and assessment order need not be relied
10 upon if it is weak. A finding then needs to be given in the order u/s 201 that the proceedings have been
independently initiated and the facts of the case appraised de novo.

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 Evasion of Tax Deduction at Source

1.5 General Guidelines for TDS Officers: Principal Officer to be held to be in default
For the AO of TDS charge conducting surveys u/s 201(1) should also be gathered.
to detect default in TDS provisions is one of the g. Audited financial statements and report in
major tasks. They may take action as per the Form 3CD of previous five financial years
following norm while conducting such surveys: are to be obtained, and if there is any short/
a. After identification of a case for survey, non-deduction, delayed/ non-remittance
necessary information with regard to the as per the report in Form 3CD is noticed,
premises, directors and sister concerns has the same has to be verified and copies of
to be obtained from the Internet, Income- relevant documents are to be obtained.
tax Returns and other available sources. h. Unaudited financial statements of current
b. If default in sister concerns or concerns and/ or previous year with details of all the
operating from the same premises is expenses are to be verified with regard to
noticed prior to survey, permission for correct deduction/ collection of tax and
conducting of survey in those cases also provisions, if any, made and whether
should be taken. the same have been subjected to TDS.
Relevant copies are to be collected in case
c. On reaching the premises of the assessee,
of any default.
the business model and modus operandi
should be understood by the officer i. Copy of TDS ledger with regard to TDS
conducting survey. made, remitted and payable as on the
date of the survey has to be obtained and
d. Instead of depending on the assessee’s
placed on record.
employees for making available various
data required from the computer systems, j. Copies of Quarterly TDS Returns filed may
the AO should be able to get access to the be collected.
system and get all the relevant information k. Sworn statement u/s 131 has to be recorded
including payments and examine the from the Director/ Partner/ Principal
same thoroughly for finding out any non- Officer. The details of default under each
deduction, deduction at a lower rate or Section are to be clearly brought out in
under a different Section, misclassification the statement. Also, complete details of
of expenditure, etc. the person responsible for complying with
e. Details of all sister-concerns, bank accounts, the provisions relating to TDS are to be
TDS deduction/ remittance, directors/ partners incorporated in the statement.
(name, designation, date of birth, PAN, l. A copy of Annual Report, in case of a
address, e-mail ID, contact numbers, etc.) company, may be obtained.
along with details of person(s) responsible
for complying with TDS provisions and all m. If any requisite information/ document could
the information/ statements/ documents not be made available during the survey,
required for processing the case for the same may be called for submission by
launching of prosecution should be issuing summons to the Principal Officer/
obtained and placed on record. responsible person of the concern.
f. Examine whether TDS is deducted at the
proper rate, within time, and deposited 2. SECTION 192: TDS ON SALARIES
within time. Details required for interest Any person responsible for paying any income
u/s 201(1A), Penalty u/s 271C and DDO/ chargeable under the head “salaries” is required

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Techniques of Investigation for Assessment Vol. 1

to deduct tax at source on the amount payable ●● Whether deductions claimed by the
at the rates prescribed for the Financial Year in employee under Chapter VI-A have been
which the payment to employees is made. allowed by the DDO after examination of
supporting documents for the claim?
2.1 Checklist for Verification of Returns ●● Whether gross tax liability is correctly
of TDS from Salaries worked out?
●● Whether tax has been deducted at the ●● Details of investment made vis-à-vis the
average rate of income-tax and deposited rebate allowed u/s 88.
within time?
●● Net tax liability; whether surcharge has
●● Whether particulars of gross salary are been calculated at the stipulated rates?
attached?
●● Total amount of the TDS made and
●● Whether exemption claimed u/s 10, if any, deposited along with dates.
is correct? Check the nature of allowances,
their extent and the necessary documentary Reference may be made to CBDT Circular
evidence for the same. No. 275/ 192/ 2012-IT(B) dated 5th October, 2012
for calculating IT deductions from salaries u/s 192.
●● Whether there is any arrangement between
employer and employee whereby tax-free 2.2 TDS from Salary: Some Target Areas
income is paid to the employees and the for Working Out Perquisites”
tax payment is borne by the employer?
Amount of tax payable has also to be ●● Car(s), conveyance allowance
treated as part of salary and TDS to be ●● Payment of club membership, gym, health
made out of that [British Airways vs. CIT club membership
(Cal) 193 ITR 439, Asian Dev. Service vs.
CIT (Ker) 239 ITR 713]. ●● Credit card membership
●● Whether perquisites have been correctly ●● Soft furnishings (curtains, crockery, carpets,
valued and offered for taxation? Many lines, cutlery, furniture replacements,
employers (especially private companies, ●● magazines, other utilities)
multi-nationals and foreign companies)
structure salary packages to include various ●● Entertainment allowance
types of payments to their employees ●● Servant allowance
which do not figure in the salary certificates
given to the Department. These payments ●● Guest allowance
are mostly made in cash towards various ●● House maintenance allowance
allowances claimed to be exempt or to
●● Washing allowance, uniform allowance/
defray actual expenses incurred by the
personal attire
employee.
●● Professional development allowance
●● Whether any perquisites have been
paid to the employees in the garb of ●● Utility reimbursements
“reimbursement of expenses”? ●● Assets sold below market price
●● Whether standard deduction is correctly
●● Sign-on bonus
claimed?
●● Foreign trips/ holidays
●● Whether any other income was reported
by the employee to the DDO? ●● Relocation allowance

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 Evasion of Tax Deduction at Source

●● Stock options (ESOP) belief has also been rejected. [67 taxmann.
●● Guaranteed school admission for children com 81(Kanpur), 80 Taxmannn.com 179
(Bang)]
●● Personal computers for home
b. LTC Claim by Shortest Route:
●● Milk allowance
Exemption u/s 10(5) will also not apply
●● Responsibility allowance where LTC claim for travel within India
●● Housing loans is also not by the shortest route. In this
●● Cruise holidays connection relevant portion of Circular
No. 8/ 2012 [F.NO. 275/ 192/ 2012-IT(B)],
●● Sweat Equity dated 5-10-2012 of CBDT which is a
●● Performance linked payments Guidance Note for calculating Income-tax
●● Remuneration paid to doctors by private Deduction from Salaries Under Section
hospitals 192is highlighted:
●● Genuiness of LTC Claims (i) Foreign travel: As per the provision of
the rules exemption is not allowed in
●● Interest on education loan
case of travel abroad.
2.3 Case Studies (ii) The exemption is limited to the actual
expenses.
a. The Case of a Large Public Sector
Bank: Survey in a nationalised bank (iii) Where the journey is performed in
revealed that exemption u/s 10(5) was a circuitous route, the exemption is
being given towards reimbursement of limited to what is admissible by the
LTC claim of the employees when foreign shortest route likewise where in the
destination was included in the itinerary of journey is performed in a circular
their journey. It was noted that employees form touching different places,
used to submit a quotation from a travel the exemption is limited to what is
agent about the expected expenditure admissible for the journey from the
to be incurred towards the travel. This place of origin to the farthest point
quotation included both the India travel reached in India by the shortest route.
and foreign travel. The employees would (iv) Obligation of the employer: The
travel on flexi/ low-fare tickets but claim of employer has to satisfy the obligation
LTC would be significantly higher. Money that LTC/ FTC is not taxable in view
saved by employees was being used to of Section 10(5), the employer is not
cover the trip to the foreign destination. The only required to be satisfied about
employer would consider and reimburse the ingredients of the said Clause but
national carrier prices to the declared also to keep and preserve evidence in
destination in India based on the price list
support thereof.
given by the travel agent. This was being
done despite the bills of actual expenditure In the case of a large Public-Sector Bank,
incurred for travel within India were the AO disallowed the LTC/ LFC where
available on record. The Department’s foreign travel component was included.
view that such reimbursement is not The CIT (A) further made an enhancement
eligible for exemption u/s 10(5) read with by disallowing the claim regarding
rule 2B, has been upheld by several courts/ domestic travel too where a circuitous
tribunals. The assessee’s plea of bona fide route was taken.

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Techniques of Investigation for Assessment Vol. 1

c. TDS on Earned Leave Encashement employees. Table-1 of Rule-3 of Income-

Received by Employees of PSUs/ tax Rules 1962 refers to two circumstances
Statutory Corporation: Section for computing the value of perquisite by
10(10AA) specifies the limit of exemption way of rent free accomodation: Where the
relating to payment received by employees accommodation is provided by the Central
as cash equivalent of Leave Salary at the Government or any State Government
time of retirement. In case of employees of to the employees and where it is by
State/ Central Government “any payment “Other employer”. According to rates
received” is exempt [sec. 10(10AA)(i)], mentioned in the table, value of perquisite
while in case of other employees it is and accordingly, deduction at source
limited to average salary of ten months would be higher in the latter case. But
immediately preceding the retirement/ by treating themselves as ‘Government”,
superannuation, subject to further limit as such organisations compute value of the
may be notified [Sec. 10(10AA)(i)]. Under perquisites at a lower level. Various Courts
the belief that the organisation surveyed have repeatedly affirmed the position that
(Bangalore Electricity Supply Company, statutory corporations cannot be regarded
BESCOM) falls under the classification as State or Central Government nor can
“State”, no tax was being deducted at their employees be considered to be holding
source on payments pertaining to “Earned office or post in connection with the affairs
Leave Surrender” (ELS) in excess of of the Union or State. [Andhra Pradesh
Rs. 3,00,000/- [in terms of Section State Civil Supplies (148 ITR 497)]. Even if
10(10AA)(i) of the Act]. However, such there is control, supervision of the state and
organisations are not state Government, audit by a Govt. appointed auditor, it does
(and accordingly the employees are not not become State itself [Gujarat Industrial
State Government employees).The tax Development Corporation21 Taxmann
treatment of ELS has to be according to the 250 (GUJ)] KPTCL (ITA No.2223-2300/
provisions of sec. 10(10AA)(ii). The survey Bang/ 2017, Order dated 02.05.2018),
also revealed that there was a BESCOM Central Food Technological Research
Circular for internal circulation which Institute vs. ITO in ITA No. 1607 to 1611/
admitted that the employees of Bescom Bang/ 2013, CSIR National Aerospace
are not Government employees and the Laboratories [ITA Nos. 453 to 456 (Bang)
provisions of Income-tax Act and Rules 014; order dated 27.8.2014].
made thereunder for Non-Government e. Payment to Consultant Doctors:
employees are applicable to Bescom Hospitals are found to be deducting
employees. The Bangalore Tribunal tax u/s 194J on the remuneration paid
(KPTCL ITA No. 2223/ Bang/ 2017 order to consultant doctors by treating it as
dated 2.5.2018) upheld the position professional income. However, TDS should
that employees of statutory corporations be made u/s 192 since in most cases there
cannot be regarded as employees of State exists an employer-employee relationship.
or Central Government. In one case, the survey revealed that
d. Rent free Accommodation in the besides the on-roll doctors, retainer
Case of PSUs, Registered Societies, doctors and consultant doctors were
Statutory Corporations: Many times deployed by the hospitals. Huge amounts
Central and State Corporations and were paid under the head consultancy fee
Societies provide accommodation to its and retainership fee whereas they were on

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 Evasion of Tax Deduction at Source

similar terms with the company as the on- for fixed remuneration, ‘termination of
roll doctors. In cases of consultant doctors, employment’ Clause, leave Clause, the
the AO may verify the service rules, facts and the evidences established that
working hours, conditions for increment, there existed an employer-employee
system of supervision, percentage of fee relationship. Even though no PF, ESI,
collected that is retained by the hospitals, gratuity, bonus, etc, were paid, payment of
contents of the appointment letter, terms these incentives was not conclusive. Red
of agreement/ appointment etc. It should Chillies Entertainment Pvt. Ltd. [TS-86-
be verified whether the fee is linked to the ITAT-2017(Mum)]
number of patients. The objective of such
enquiries should be to see whether there 3. SECTION 193: TDS ON INTEREST
is “contract for service” (Sec. 194J) or ON SECURITIES
“contract of service” (Sec. 192). Essence
of establishing contract of service lies in Section 193 deals with the provisions relating
evidence of control and supervision by the to TDS on interest on securities. Tax is to be
hospitals over the consultant doctors. deducted under Section 193 if any person pays
any income by way of interest on securities to a
f. Payment to Honorary Part-time
Teachers: An Institute proposed to resident.
engage honorary part-time teachers on
contract basis to take classes in German 3.1 Checklist for Verification
language. Terms of proposed agreement ●● Whether the assessee has any securities on
between Institute and part-time teachers which any interest is payable?
clearly indicated fact of control of teachers
by Institute both in regard to work to be ●● Whether amount is exceeding Rs. 5000/-
done and manner in which it should be payable to Individual and HUF?
done. However, mere fact that agreement ●● Total TDS deducted under this Section
gave liberty to teachers to work for along with interest debited in financials.
any place, institute or company during
tenure of agreement and clarified that ●● Whether TDS deducted has been paid within
teacher would have neither the status of due date and TDS return filed in time?
employee nor would be entitled to avail
benefits of regular employees, would not 3.2 Case Studies
militate against relationship of master and Where the assessee made a provision of ‘interest
servant between the Institute and teacher. accrued but not due’ in its books of accounts
Therefore, Institute is obliged to deduct tax but the identity of payee could not have been
at source from payment of honorarium ascertained at the time of making the provision
to honorary part-time teachers u/s 192. since the bonds were freely transferable, the
[2004] 138 Taxmann 113 (AAR-New Tribunal held that no tax was required to be
Delhi) Max Muller Bhavan.
deducted at source. However, the Tribunal also
g. Payment of Retaintership Fee: observed that if the assessee knows the identity
‘Retainership fees’ payment by assessee of lenders, whether the assessee credits the
(a film production company) under the ‘interest accrued but not due’ in the account of
service contract, constitutes ‘salary’, hence the assessee or in some other suspense account,
TDS u/s 192 is applicable not Sec 194J. The tax would continue to be deductible u/s 193
service contract covenants which provide by the virtue of deeming fiction set out in the

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Techniques of Investigation for Assessment Vol. 1

Explanation to Section 193. But the Explanation c. Post office (on deposit under scheme
to Section 193 cannot be invoked in a case framed and notified by Central
where the person who is to receive the interest Government).
cannot be identified at the stage at which the
b. 5,000 in any other case
provision for interest accrued but not due is
made.” IDBI u/s ITO (2006) 10 SOT 497, 104
5.1 Checklist for Verification
TTJ 230 (Mum.)
●● Whether the deductor has deducted tax
on the interest payment exceeding the
4. SECTION 194: TDS ON DIVIDEND
prescribed limit?
PAYMENT
●● Whether any interest payment is credited
Tax is required to be deducted at source by to suspense account or provisions?
resident companies at the rates in force from
dividends before making any payment in cash ●● Whether the co-operative society is correctly
or before issuing any cheque or warrant or claiming itself to be a co-operative bank?
before making any distribution or payment to ●● Whether the co-operative society or a
a share-holder. However, no such deduction is co-operative bank is making payment of
to be made in respect of any dividends referred interest to a non-member which is not
to in Section 115-O. It must, however, be noted exempt from TDS?
that deemed dividend u/s 2(22)(e) still remains ●● Whether interest is being paid to a director
subject to TDS u/s 194. which is not exempt from TDS?
●● Whether TDS has not been made for the
5. SECTION 194A: TDS ON INTEREST reasons of the income of resident payee
OTHER THAN “INTEREST ON being exempt despite the fact that payee
SECURITIES” has not obtained nil deduction certificate
Section 194A deals with provision relating to u/s 197 or is not specifically exempt from
TDS on interest other than interest on securities TDS under the Act?
like interest on Fixed Deposits, interest on Loans
5.2 Target Areas
and Advances paid to residents. However, this
Section does not apply to interest paid to Banks. a. Companies, firm and LLPs who have made
[Refer to Section 194A(3)(iii)] huge borrowings from NBFCs/ private
parties, Co-operative societies/ banks
The Payer/ Deductor shall deduct TDS if the
amount of such interest paid or credited or is b. Payment of interest in respect of loans
likely to be paid or credited in a financial year, and funds taken from sister concerns by
exceeds: companies/ firms/ Individuals and also
from Private finance companies as well as
a. 10,000 where the payer is from Co-operative credit societies which
are not engaged in the business of banking.
a. Banking company or any bank or a
banking institution c. Payment of interest by builders on advance
amount taken from buyers of flat which
b. Co-operative society engaged in the are subsequently adjusted against sale
business of banking consideration.

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 Evasion of Tax Deduction at Source

d. Payment of interest by Electricity interest paid to TFCI is not exempt u/s 196
companies on deposits by its subscribers. and u/s 194A (3), provisions of TDS u/s
e. Non-deduction of tax on accrued interest 194A would be attracted.
on term deposits/ cumulative deposits d. Enhanced Compensation: Under
which are not maturing during the year. Section 194A, TDS can be deducted
f. Payment of interest by Chit Fund from interest realised from enhanced
Companies to their members/ Subscribers. compensation.[2010] 328 ITR 77 (Punjab
& Haryana)].
5.3 Case Studies e. Non-availing Compensation: The
assessee’s primary business involved
a. Interest Payment to NBFCs: In many
selling of hotel room nights to its members
cases, it was observed that there was non-
deduction of tax on the interest paid to i.e. the members who subscribed to the
membership of the assessee company
the NBFCs. The argument of the deductor
were entitled to utilize the room nights,
in such cases is that an escrow account
as per the terms of entitlement of their
with a bank is opened wherein entire sale
proceed is deposited. As per the mandate, respective schemes, at any of the hotels
owned by the assessee or its subsidiaries
the bank where the escrow account is
maintained, makes the payment directly or at other affiliated destinations. The
members were also given option to encash
to the lending NBFC. Thus, the borrower
their entitlements for non-availing the
(deductor) does not have any control over
eligible holidays by way of surrendering
the payment to the NBFC and hence TDS
their room nights or renting out their
is not made. The argument is not correct.
It is the duty of deductor to make payment holidays to others. In addition to that,
the members, at their absolute discretion,
towards TDS. Subsequently, he may claim
reimbursement from the NBFC. could exercise another option to go for
premature encashment/ termination of their
b. Corporation as a Government Body: membership right. (i.e. the non-availing
In the case of a large corporation which compensation accrued to them). On
had huge fixed deposits in various banks, termination, they were given the deposited
some of the banks were not deducting TDS amount along with compensation for not
on the interest paid to such corporation availing their rights. If members did not
against these deposits considering the avail entitlements fully or partially during
corporation as a Govt body, which was not the membership tenure, then they were
correct. All these payments attracted TDS reimbursed for non-Utilised portion of the
194A. However, before taking any action entitlements, which was called as NON-
in this regard it must be ensured that the AVAILING COMPENSASTION (NAC)
deductee corporation is not notified by and was charged under profit and loss
the Central Government for the purposes account head. The payment of so called
of Section 194A(3)(iii)(f) [S.O. 3489[No. compensation fee (in cases of termination
17(F. No. 12/ 164/ 68-ITCC/ ITJ)-] amount over principal amount deposited)
c. Institutions not Exempt u/s 194A(3): for non-availing of the facility by the
Many leading star hotels have availed of assessee being a payment made in respect
bridge loans/ terms loans from Tourism of an obligation incurred in relation to
Finance Corporation of India (TFCI) and money deposited by the members, was
make substantial interest payment. Since held to be interest, falling within the scope

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of Section 2(28A) and the assessee was ●● Extraction, transportation, & supply of
required to comply with Section 194A. stones, sand etc.
●● Printing contracts including supply of
6. SECTION 194C: TDS ON printed material
CONTRACT
●● Transport contracts
TDS is to be deducted on payments for ‘work’
made to contractors. Where payment is being ●● Hiring of vehicles
made to an individual or HUF the rate of ●● Courier agencies
deduction is 1% and in other cases it is @2%.
The rate of TDS on payments by contractors to ●● Bus-body building
sub-contractors is 1%. The term ‘Work’ has been ●● Advertising contracts, including hoardings
given wide meaning, and includes advertising,
●● Clearing and forwarding agents
broadcasting, telecasting, transport and catering
contract. But, it does not include contracts ●● Advertisements in souvenirs
of mere supply of goods or purchase/ sale of ●● Contracts for sponsorship of events
merchandise. Tax is to be deducted on the whole
of the invoice value if the value of material is not ●● Repairs of vehicles including supply of
mentioned separately in the invoice. spares
●● Loading & unloading contracts, particularly
6.1 Checklist for Verification at ports, & mines etc.
●● Whether the contract is a ‘contract for ●● Contracts for house keeping, plumbing,
work’ or a ‘contract for sale’? and electrical work etc.
●● Whether the contractual payment is ●● Catering contracts
covered u/s 194C or 194J. In the case of
●● Security contracts
latter, the rate of deduction is higher.
●● Warehousing charges
●● Whether the contractual payment has been
given the colour of ‘sale and purchase’ ●● Timeshare resorts, holiday homes
transaction? ●● Leasing of hotel-management contract
●● Whether the product is manufactured ●● Use of airport facilities by airlines
as per the specifications provided by
the client but the material is supplied by ●● Rent for hiring of exhibition grounds,
another concern. In such a case, the terms exhibition halls
of all relevant agreements and relation ●● Payments by airlines for landing, parking,
between client and material supplier must and cargo handling services to Airports
be examined to see if the client can be held Authority of India (AAI)
to be the real supplier of material?
●● Annual Maintenance Charges paid by
Govt. Offices/ Government Departments
6.2 Target Areas for TDS u/s 194C to the service providers for maintenance of
●● Works contracts including fabrication, computer systems, which include hardware
construction, manufacture as well as software maintenance, supply of

336
 Evasion of Tax Deduction at Source

labour for various works like data entry, This argument was busted by referring to
housekeeping services etc. various Clauses of the agreements between
these three parties, by bringing on record the
●● Job contract given for carrying out works
ownership structure of the assessee company
as per specification disguised as purchases.
and its relationship with NNAS. The risk analysis
●● Non-deduction of tax on contract was done. All these documents were discussed
payments made to persons for harvesting threadbare. The sum and substance of the
of sugarcane by companies/ societies arrangement was that supply of material was by
disguised as payment made for purchase NNIPL only [“such customer”]. The transaction
of sugarcane from farmers. between the assessee and TPL was therefore ‘a
contract for work’, and ‘not a contract for sale’.
●● Payment made by banks for taking
professional services for recovery of bad TDS on Year-end Provisions: In large number
debts, loan processing, credit verification, of cases, surveys and examination of books have
etc. shown that companies make provisions in the
books on 31st March but no taxes are deducted
●● Payment to transporters.
at source on such provisions. The assessees
●● Payments made camouflaged as contend that the provision is necessitated by
‘reimbursement of expenses’. accounting principles. Other arguments pertain
to the claim that entries have been reversed in
6.3 Case Studies the subsequent year, that there is no accrual
a. Supply of Material by a Closely of income and that suo-moto disallowance u/s
Related Party: Under explanation 40(a)(ia) has been made. Such an argument
(iv) to Section 194C of the Act, ‘work’ that there is no liability to deduct tax at source
includes ‘manufacturing or supplying a on the year end provisions is tenuous. Provisions
product according to the requirement of TDS in the Income-tax Act create a liability
or specification of a customer by using to deduct tax at source even when amounts in
material purchased from such customer’. question are credited to a Suspense Account or
In the case of NNIPL, 3 parties were any other account by whatever name called,
involved: including provision created in books of accounts.
(i) NNIPL the Indian entity that entered This position has been upheld by Courts. (ITAT
into an agreement with TPL for Bangalore Toyota Kirloskar ITA No.1185/
supply of insulin crystals Bang/ 2014, dt of order 31-10-2017) “It is not
possible for the assessee to argue that there was
(ii) TPL that supplied insulin to NNIPL no accrual of expenditure in accordance with
but purchased material from NNAS, the mercantile system of account and therefore
Denmark
the TDS obligations do not get triggered”
(iii) NNAS Denmark, the parent [ITAT, Bengaluru in the case of IBM India Pvt Ltd
company of NNIPL [59 Taxmannn.com 107]. The situation may be
The assessee NNIPL’s argument rested on the different if the provisions made at the end of the
claim that though insulin was manufactured accounting year are reversed in the beginning of
by TPL as per specification of the customer the next year and where no payees are identified
(NNIPL), but material was not purchased from or where provision is made in respect of
such customer (NNIPL) but from NNAS, an contingent liability for which no deduction was
independent supplier. claimed for computation of income [Karnataka

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Techniques of Investigation for Assessment Vol. 1

Power Transmission Corporation Limited ITA d. Real Estate Sector: It is common

No. 1185/ Bang/ 2014 KHC]. knowledge that investments in most of
the construction projects are under-stated.
b. Non-deduction of Tax on Payments
During the construction of projects, many
to Contractors by State Electricity
expenses are made which are accounted
Boards: As per Section 194-C, tax has to when the construction project is ultimately
be deducted from the gross amount paid or completed. Therefore, surveys in a on-
credited to the account of the contractors. going construction project, often brings to
In one case, a State Electricity Board had light several cash transactions as well as
awarded contracts for transportation of coal contracts and sub-contracts on which taxes
from the various collieries in Orissa, Bihar, are required to be deducted.
West Bengal etc. to various thermal power
e. Transporters are exempted from
stations in the state. These contracts were
deduction of tax if PAN of the transporter
comprehensive in nature involving loading
to whom payment is made, is obtained
of coal at the collieries, transportation
along with declaration from the transporter
of the same to the nearest sea ports, that he does not own more than 10 trucks.
unloading it at the sea ports, again loading Often deductions are not made nor PAN
it into the ships, unloading the coal from and declaration is taken. Apart from this,
the ships at Chennai or Tuticorin ports and the transporter is under obligation to
again loading and transporting of the same mention the detail of payment with PAN in
to the thermal power stations. The State the quarterly returns which is not complied
Electricity Board, which was supposed to with. In one case, the survey revealed
deduct tax on the gross amounts paid to that the company had made payment of
the contractors, was deducting tax only Rs. 70 crores approximately to various
on a portion of the payments made to the transporters but TDS was not deducted
contractor. On scrutiny of the agreements on the ground of declaration filed by the
between the SEB and the contractors it was transporters u/s 194C(6). Considering
found that tax was liable to be deducted the amount of payment made to each
on the gross amounts paid. The SEB filed transporters the declaration was found to
a petition before the CBDT against the be wrong. The DDO had failed to deduct
orders. The CBDT after calling for reports taxes on the payments after examining
from the AO etc., held that the orders were the relevant documents such as invoices
legally and factually correct. raised by the transporters (mentioning
the registered numbers of the trucks). The
c. State Irrigation and PWD Departments exemption from TDS u/s 194C(6) is not
and Municipal Corporations: Many available to the payments made in respect
Government and semi-government of transportation done using hired trucks.
bodies award contracts for construction f. Transportation from Farmers’ Fields:
and other activities. However, because of The assessee, a co-operative sugar
lack of awareness about TDS provisions, factory, entered into agreement with
no deduction of TDS is generally taking harvester/transporter for harvesting and
place. There is, therefore, a necessity for transportation of sugarcane from farmers’
the department to interact actively with fields with their consent to assessee’s
these bodies to ensure deduction of tax. factory. Even though farmer was not a

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 Evasion of Tax Deduction at Source

party to the contract, TDS is to be deducted c. However, the payments made to the
on payment to harvester/ transporter for Umpires or Match Referees do not come
the said activity [2016] 67 taxmann.com within the purview of Section 115BBA
283 (Karnataka) Ryatar Sahakari Sakkare because the Umpires and Match Referee
Karkhane Niyamit. are neither sportsmen nor are they non-
resident sports association or institution
g. Oral Contracts also Exigible to TDS: so as to attract the provisions contained in
Law does not stipulate existence of a
Section 115BBA, although the payments
written contract as a condition precedent
made to them are “income” which have
for payment of TDS. Contract may be in
accrued in India, yet, those are not taxable
writing or it may be oral, but liability to pay
under the aforesaid provision and thus, the
tax arises when recipient of said amount
liability to deduct tax under Section 194E
receives payment in excess of Rs. 20,000/-
would never accrue.
[2010] 194 Taxmann 37 (Karnataka)

7. SECTION 194E: TDS FROM 8. SECTION 194H: TDS FROM

PAYMENTS TO NON-RESIDENT COMMISSION OR BROKERAGE
SPORTSMEN OR SPORTS Every person except Individual/ HUF who
ASSOCIATIONS is responsible to pay any income by way of
a. Where any income referred to in Section commission/ brokerage exceeding Rs. 15,000/-
115BBA is payable to a non-resident to any resident payee, is required to deduct tax
sportsman (including an athlete) [or an @5%.
entertainer,] who is not a citizen of India
or a non-resident sports association or 8.1 Case Studies
institution, the person responsible for
making the payment shall, at the time of a. Constructive Payment: At times, the
credit of such income to the account of the two parties involved in the transaction
payee or at the time of payment thereof may enter into an agreement whereby
in cash or by issue of a cheque or draft or charges or the commission are retained
by any other mode, whichever is earlier, by the payee. The assessee’ scontention
deduct income-tax thereon at the rate of in such cases is that tax can be deducted
[twenty] per cent.] at source only when the assessee makes
b. Income of a foreign cricket team for a payment of commission, not where
participating in a cricket match in India is the commission is retained. However,
taxable u/s 115BBA and therefore, Section the Board’s Circular No. 619 dated
194E is attracted. The amount paid to the 04.12.1991 has to be pressed into service
foreign team for participation in the match in such situations where it is clarified that
in India in any form, either as prize money retention of commission by the consignee/
or as the administrative expenses, is the agent amounts to constructive payment of
income deemed to have accrued in India the same to him by the consigner/ principal.
and is taxable under Section 115BBA
8.1.1 A TDS survey in the case of travel
and thus, Section 194E is attracted. With
agencies, who used to do travel bookings either
growing popularity of IPL matches in
through E-platforms (such as Redbus) and/ or
India, TDS on huge payments being made
to the non-resident cricketers, coaches u/s regular bookings revealed that the payments
194E must be examined. collected by Redbus from the passengers were

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Techniques of Investigation for Assessment Vol. 1

being passed on to the bus owners after retaining 9. SECTION 194I: TDS FROM RENT
its commission. This was a case of constructive Under this Section, any person not being an
payment of commission. However, on such individual or HUF (other than those individual/
commission tax was not being deducted as per HUF whose income exceeds the monetary
provisions of Income-tax Act. limits specified u/s 44AB) who is responsible
for paying to a resident any income by way of
8.1.2 It was found that the Airline operators
rent, should at the time of credit of such income
were collecting charges from passengers and
to the account of the payee or at the time of
making payment to DIAL after retaining their
payment whichever is earlier, deduct TDS at the
collection charges. The ITAT Bangalore (ITA No.
rate of 2% for use of any machinery or plant
581/ Bang/ 2017 order dated 19.4.2018) has
or equipment and at 10% for use of any land
confirmed the liability to deduct tax at source in or building, if the amount payable/ paid exceeds
such cases. Rs. 1,80,000/- during the Financial Year.
8.2 Applicability of Section 194H on 9.1 Checklist for Verification
Payments in the Nature of Discount:
●● Whether the payments made as rent or any
Section 194H defines Commission or Brokerage.
connected activity which is part of rent and
This explanation does not include any payment also forms part of the rental agreement, is
in the nature of discount. A survey actions in attracting TDS?
pharmaceutical companies revealed that they
●● Whether the TDS made on CAM (Common
did not deduct TDS on various discounts offered
Area Maintenance) charges as part of rent,
to their stockists on the ground that discount is being made at the applicable rate of
was in not in the nature of commission or 10%?
brokerage and that the transaction happened
●● Whether the deductor (Individual/ HUF)
between Principal to Principal (P2P). However,
is covered by provisions of Section 44AB
the edifice of arguments of principal to principal and is adhering to the provisions of TDS?
transaction got negated when various Clauses of
the agreement between the pharma companies 9.2 Target Areas for TDS u/s 194I
and the stockists were examined. The pharma
●● Deductor companies having multiple show
companies were supposed to take back all the rooms in malls.
expired drugs from the stockist for which it issued
●● Real Estate Companies.
credit notes. Some of the Clauses also bound
the stockists to take specified quantity of various ●● Individuals/ HUFs covered u/s 44AB.
drugs decided by the pharma companies. Apart ●● All companies paying rent for land,
from this there were other Clauses also which building, plant, machinery and equipment.
defied the principle of principal to principal ●● Contractors paying rent for plant,
transaction (P2P Transaction). Business entities machinery or equipment.
in order to avoid applicability of Section 194H ●● Renting of space for hoardings.
arrange their affairs in such a way that they give
●● Hiring of rooms in hotels.
discounts instead of commission. In essence
it is commission payment only in the guise of ●● Rent for hiring of exhibition grounds,
discount. exhibition halls.

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 Evasion of Tax Deduction at Source

●● Payment of hire charges for machinery and from various angles, it was found that this
equipments especially in the construction payment was covered within the definition
sector. of rent u/s 194-I.
d. Payment for Use of Lounge at the
9.3 Case Studies Airport: Royalty payment made to the
a. Common Area Maintenance Charges: Airport Authority of India (‘AAI’) for use of
In one case it was found during the survey lounge premises, constitutes ‘rent’ u/s 194-
that the company had made agreement with I. The assessee was awarded a contract
various mall owners for payment of rent. for running an Executive Lounge at the
However, the rental agreements had two IGI Airport, New Delhi by AAI pursuant
to which assessee was to pay (i) royalty,
Clauses, first being rent for the show-room
and (ii) license fee for the space allotted
in the mall and the other being Common
for operating lounge based on the area of
Area Maintenance (CAM) charges. On
lounge premises. The Delhi HC rejected
verification of the rental agreement, it is assessee’s stand that fees for use of space
noticed that the deductor compay was alone could be categorized as rent u/s 194-
paying both rent and CAM charges to the I, and observed that even though payment
mall owner. While some amount was being was split into two distinct parts, it is in
shown as rent on which TDS was made effect payment for use of lounge for the
at 10%, the balance amount was shown purpose of operating it. The HC held that
as having paid under CAM charges by “The question of being able to operate
making TDS at 2% u/s 194C. It was held the lounge without the actual use of the
that CAM charges are also payment for the space simply does not arise. The payment
use of building, hence it also forms part of for the use of space is inseparable from the
rent attracting deduction @ 10% u/s 194-I. payment of royalty for the right to operate
b. Hiring of Oil Tanks: In the case of an the lounge”. I.T.C. Limited TS-274-HC-
oil company, the assessee had hired oil 2017(DEL)]
tanks to store its oil to be distributed later. e. Room Charges Paid by Tour Operators
It deducted tax u/s 194C on the ground to Hotels: Delhi High Court held that the
that this is a contract. It was also argued word ‘rent’ u/s 194I has to be interpreted
that the contract was for use of ‘Plant’, and widely and not confined to payments
no TDS has to be deducted. As this was received towards a ‘lease, sub-lease or
rent towards hiring of storage tanks, the tenancy’ or transactions of such like nature.
provision of Section 194-I was found to be HC remarked that “given the context of the
applicable. said provision which is intended to cover
c. Payment Linked to Turnover: In the a wide range of transactions as is evident
case of a company engaged in hotel from the words “any other agreement
business, an earmarked place was allotted or arrangement” it is evident that the
to assessee to carry on a hotel business principles of ejusdem generis or noscitur
by an Entertainment Park. The terms of a sociis cannot be invoked to narrow the
payments were linked to the turnover and scope of those words.” It clarified that
not to the period of hire. The reason for this “Even where the room charges collected by
appeared to be to avoid the provisions of a hotel from its customer is not confined to
Section 194-I. After analysing the contract the use of the space but to a host of facilities

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Techniques of Investigation for Assessment Vol. 1

and amenities such payment would still 10.1 Checklist for Verification
fall within the ambit of ‘rent’ under Section ●● Terms of sale agreement.
194-I”. HC also ruled that “Where the
payment on behalf of the foreigner is ●● Whether the land in question is agricultural
made by a tour operator, such payment or not?
would fall within the ambit of Section 194- ●● Applicability of this provision may be
I and that is a reasonable classification examined incases where the payer buys
based on an intelligible differentia as to the more than one adjacent property/ flat
entity making payment”. HC concluded under separate sale agreements having
that payment received by hoteliers from cumulative consideration of Rs. 50 lakhs
persons other than individuals and HUFs or more.
constitutes ‘rent’ [Apeejay Surrendera Park
Hotels Ltd. and Federation of Hotel and 10.2 Target Areas for TDS u/s 194-IA
Restaurant Associations of India 383 ITR ●● Builders and Developers of immovable
697 (DEL)]. properties.
f. Composite Contract: TDS u/s 194I @ ●● Individuals making transactions of
10% is attracted on composite contract of immovable properties to be collected from
hiring of vehicles for loading, unloading jurisdictional Registrar’s office.
and transportation of products; TDS u/s
194C not applicable as contractee did 11. SECTION 194-IB: TDS FROM RENT
not carry out any work on behalf of the PAID BY CERTAIN INDIVIDUALS/
contractor. [Three Star Granites Pvt. Ltd. HUF (Applicable W.E.F.
[TS-194-ITAT-2012(COCH)]. 1ST June 2017)
g. Parking Charges: During the course of Under this Section, any person being an
survey of an airlines, it was found that the Individual/ HUF (excluding individual/ HUF
company was paying parking charges and whose income exceeds the monetary limits
deducting taxes @ 2% u/s 194C. It was specified u/s 44AB) responsible for payment to a
found that the deduction was to be made resident any income by way of rent* exceeding
@ 10% u/s 194I of the Income-tax Act, Rs. 50,000/- for a month/ part of the month shall
1961 as the same was in the nature of rent. deduct tax at 5% of such income.
* Rent means any payment by whatever name
10. SECTION 194-IA: TDS FROM SALE called under any lease, sub-lease, tenancy or any
OF IMMOVABLE PROPERTY other agreement for use of any land or building
or both.
Under this Section, any person being a transferee
responsible for paying to a resident transferor
11.1 Checklist for Verification
any sum by way of consideration for transfer of
any immovable property other than agricultural ●● Rental agreement.
land, is required to deduct an amount equal to ●● Form 26AS.
1% of such sum, if the amount of consideration
exceeds Rs. 50 lakhs. The TDS officer may
11.2 Target Areas for TDS u/s 194IB
collect information in this regard from the office
of I&CI, which regularly collects this type of ●● Apartments/ villas located in the heart of
information. cities/ towns.

342
 Evasion of Tax Deduction at Source

●● Residents paying rent to Owners of costly deduct an amount equal to ten per cent of such
Apartments/ villas. sum as TDS, if the amount paid is more than
●● Collection of information from CPC (ITR) Rs. 30,000/- during the year.
regarding entities receiving huge rent * The amount of TDS will be 2% if the payee is
engaged only in the business of operation of call
12. SECTION 194-IC TDS FROM centres. This is applicable w.e.f. 01.06.2017.
CONSIDERATION PAID UNDER
AGREEMENT U/S 45(5A) BY
13.1 Check List
CERTAIN INDIVIDUALS/ HUF
(Applicable W.E.F. 1ST June 2017) ●● Terms of agreement and nature of work
being executed.
Any person responsible for paying to a resident
any sum by way of consideration, not being ●● Payment of Royalty
consideration in kind, under the agreement ●● Remuneration to Director other than those
referred to in sub-Section (5A) of Section 45,
covered by Section 192.
shall at the time of credit of such sum to the
account of the payee or at the time of payment
13.2 Target Areas for TDS from Fees for
thereof in cash or by issue of a cheque or draft or
Professional and Technical Services
by any other mode, whichever is earlier, deduct
an amount equal to ten per cent of such sum as a. Legal, medical, engineering, architectural,
income-tax. accountancy, technical consultancy,
interior decoration, advertising, film, I.T.Ps
12.1 Checklist for Verification b. Technical services- rendering any
●● The payments made by the developer managerial, technical, consultancy services
(including supply of services of technical
to the land owners under Development
or other personnel)
Agreement may be obtained from the
Registrar and examined. c. Advocates, lawyers, retainers, legal
consultants C.As., ITPs, ICW Asengineers,
12.2 Target Areas for TDS u/s 194IC- chartered engineers, architects
●● Builders and Developers. d. Surveyors, approved valuers
e. Interior decorators, decoration consultants
13. SECTION 194J: TDS FROM FEES f. Film artistes, models, technicians, free
FOR PROFESSIONAL SERVICES lancers
Any person not being an individual or a HUF g. Gross payments to hospitals & nursing
(including individual/ HUF whose income homes-
exceeds the monetary limits specified u/s 44AB),
h. ESI, defence insurance, GIC
who is responsible for paying to a resident any
sum by way of fees for professional services/ i. Merchant bankers, registrars, credit rating
agencies
technical services, remuneration or fees or
commission by whatever name called, shall at j. Pagers, internet, database/ data mail
the time of credit of such sum to the account services
to the payee or at the time of payment thereof, k. Consultants (tqm, ISO-9002 etc.)

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Techniques of Investigation for Assessment Vol. 1

l. Event management, marketing research, to make the programmes in a particular

celebrity endorsement software format or persons working for the
programmes were subject to control of the
m. Landscape consultants
assessee. Thus, there was no programmes
n. Pest control consultation services specific specifications given by the assessee
o. Payments made by big builders to township to the production houses and, therefore,
planners, land scrapers, architects and the benefit of Circular No 4/ 2016 was
technical consultants which fall under the denied.
ambit of deduction under various Sections. c. Payments for Maintenance of
Operation Theatres: Contract for
13.3 Case Studies maintenance of operation theatre and
a. During a survey conducted in the case of a various hospital equipment is not ‘routine/
Medical College it was found that the trust normal’ maintenance contract but technical
had not deducted tax on payments made personnel are required for maintenance
for clinical charges which was technical in of such equipment and, therefore, TDS
nature. u/s 194J and not 194C is applicable
on payment under such contracts.
b. TDS u/s 194C as Against u/s 194J
Provision of anti-termite treatment for
on Payments to Producers of
Medical college requires professional
Tele-programmes: Board’s Circular No
skills, TDS is deductible u/s 194J. [Govt.
4/ 2016 clarifies that when a payment for
Medical College, Jammu [TS-318-ITAT-
production of content/ program as per the
2012(ASR)].
specification of broadcaster/ telecaster is
made, TDS on such payment is required to d. Payments for Customer Support
be made u/s 194C. However, if in a case, Services etc.: Payment by a telecom
where broadcaster/ telecaster acquires company for support services like
only the telecasting/ broadcasting rights activations, vendor payment queries, field
of the content already produced by the verification and customer support services
production house, TDS u/s 194J will apply such as tele-calling for bill payments, new
on payments made by the assessee on activations are liable for TDS u/s 194J,
account of such contract. In a case of a being in the nature of fees for technical
telecaster/ channel operator, it was found services (‘FTS’). It is not possible to provide
that the assessee had done TDS mostly such support services without technical
u/s 194C on payments made for various expertise, skilled manpower and up to
programmes which were stated to have date technology of the service provider.
been got produced as per its specifications The Supreme Court in the case of Bharti
provided to producers. This was done in Cellular had held that ‘technical services’
view of Circular No. 4/ 2016. The scrutiny must necessarily involve ‘human element’.
of the agreements, however, revealed However, housekeeping services being
that there was no programme specific non-technical in nature will be subject
technical specification & all agreements to TDS u/s 194C, not TDS u/s 194J.
contained similar 4 to 5 general Clauses [Vodafone Cellular Limited [TS-577-ITAT-
which mandated the production house 2015(CHNY)]

344
 Evasion of Tax Deduction at Source

14. SECTION 194LA: TDS FROM Section 194LB/ 194LC, Salary payment and
PAYMENT OF COMPENSATION dividend payment u/s 115-O of the Income-
ON ACQUISITION OF CERTAIN tax Act that are covered under the relevant
IMMOVABLE PROPERTY Sections). In the regular TDS provisions, TDS is
Any person responsible for paying to a resident applicable for specific payments whether income
any sum, being in nature of compensation, on is chargeable to tax or not, however, under
account of compulsory acquisition, under any Section 195 only if income is chargeable under
law for the time being in force, of any immovable the Income-tax Act, TDS is applicable. Usually in
property (other than agricultural land), shall at the domestic TDS provisions, there is an upper
the time of payment of such sum, deduct an threshold prescribed, however, in Section 195
amount equal to ten per cent of such sum as it is applicable for any sum. Remittance under
income-tax, if the payment exceeds Rupees two Section 195 requires mandatory certification
lakhs fifty thousand during the Financial Year. in the nature of 15CA/ 15CB filing which is not
required for other TDS provisions. Unlike the
14.1 Check List regular TDS provisions, there is a interplay of Act
and the Double Taxation Avoidance Agreements
●● Details of compensation paid. (DTAA) in interpreting whether any sum is
●● Terms of agreement between purchaser chargeable to tax or not. At a broad level, the
and seller. Sections applicable under the Act and Treaties
for various natures of income are listed below:
14.2 Target Areas for TDS u/s 194LA Nature of
Act Treaty
●● Agreements entered into by the office of Income
Special Land Acquisition Officer. Section 9(1)(i): Article 5,7,14:
Business/
Concept of Business Concept of PE or
●● Government Authorities/ bodies responsible Profession
Connection Fixed Base
for infrastructure developments, viz., roads,
power, rail, economic zones, etc. Salary Section 9(1)(ii) Article 15
Section 9(1)(iv) and
14.3 The meaning of “compulsory acquisition” Dividend Article 10
Section 115A
under the land acquisition Act 1894 has been Section 9(1)(v) and
explained by the Hon’ble Supreme Court in Interest Article 11
Section 115A
the case of Balakrishnan vs. UOI [391 ITR Section 9(1)(vi) and
Royalties Article 12
178]. The fact that land owners entered into a Section 115A
settlement with the Collector for the amount of Fee for
Section 9(1)(vii) and
compensation does not mean that the acquisition Technical Article 12
Section 115A
Services
was not “compulsory”.
Capital Section 9(1)(i) and
Article 13
Gains Section 45
15. SECTION 195: TDS FROM
PAYMENTS TO NON-RESIDENTS 15.2 Whether any sum is chargeable to tax,
requires detailed verification by marshalling
15.1 Section 195 is applicable to all persons of all facts and seeing whether the same is
who are responsible for paying to a non-resident applicable under both - IT Act and the Treaty. As
or a foreign company. It is applicable for any mentioned above, mandatory certification under
income chargeable under the provisions of the 15CA/ 15CB is a must for any foreign remittance
Income-tax Act, except few (interest referred in and 15CA data contains crucial facts like the

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Techniques of Investigation for Assessment Vol. 1

nature of remittance such as Management Fees, connection within the meaning of Section 9(1)(i)
Royalty, Reimbursement, buyback, long term of the Income-tax Act 1961. It is also required to
capital gains, other income, Fee for technical be verified whether India is a place of effective
services, amount of remittance, withholding tax management under the POEM guidelines. It also
deducted, country where amount is remitted needs verification whether exemption claimed
etc. The AO should undertake detailed data by the remittee is available under the DTAA.
analytics of the 15CA data and look for probable Some of the details that can be looked into are:
cases for TDS survey/ inspection. Some of the
common scenarios that can be looked into are (i) Relevant DTAA provisions and analysis
listed below: of judicial pronouncements, if any,
relied upon by the taxpayer
(i) Preliminary Points in Case of TDS
Verification: Some of the aspects that (ii) Country of the Remittee with the Tax
the AO may look into are: Residency Certificate.
a. Income-tax returns, TDS filings, Form (iii) Analysis of relevant Clauses of the
3CEB, Form 3CD for last two years. Agreement/ MOU, if any, in pursuance
b. Estimated TDS payments for the to which the transaction took place
current year in comparison to last two (iv) Analysis of functions, assets, risks to
years. check whether the activities are done
c. Withholding tax remittances (including in India or an arrangement has been
15CA/ 15CB) along with the rate carried out just to shift profits out of the
applicable at an aggregate level for last country.
year and the current year as on date.
15.3.1 Important Case Laws
d. Withholding tax deducted but not
a. Furnishing of consultancy services by the
remitted to the government. TDS
assessee (a UAE based group company)
ledger in the accounts may be looked through its employees would fall within
into. the ambit of service PE under Article
e. Lower withholding tax remittances 5(2)(i) of India-UAE DTAA. The Tribunal
and any lower deduction certificates rejected assessee’s stand that since the
taken. employees remained in India only for
25 days, service PE Clause was not
f. Remittances to low tax jurisdiction triggered. It held that in the present age
(Singapore, Mauritius, Cayman Island, of technology, services could be rendered
British Virgin Islands, Ireland) along even without the physical presence of
with the Country by Country Report employees of the assessee as the services,
to understand the functions, assets information, consultancy, etc., could be
and risks of the MNE. provided with various virtual modes.
g. Earlier assessment proceedings where It further held that for triggering PE,
any disallowances have happened services or activities should have been
because of non-deduction of TDS and rendered for more than 9 months; stay
of the employees was not required for
disallowances as per Form 3CD.
more than 9 months. Assessee’s reliance
15.3 Business Income: The AO may look on co-ordinate bench ruling in assessee’s
into whether the remittee has a PE or a business own case for AY 2012–13 wherein it was

346
 Evasion of Tax Deduction at Source

held that FTS was not taxable in India in in India was roughly 1/ 4th of the total
absence of assessee’s PE in India, was marketing effort. [GE Energy Parts Inc vs.
rejected since coordinate bench had not ADIT [2017] 78 taxmann.com 2 (Delhi -
examined with regard to the nature of Trib.)].
activities of assessee as to under which c. The assessee Formula One World
Clause of DTAA such activities would Championship (‘FOWC’), a UK based
fall. [ABB FZ-LLC [83 Taxmannn.com86 company, had entered into an agreement
(Bang)]]. with FIA and Formula One Asset
b. Assessee, a US company and part of GE Management Ltd (‘FOAM’) (an associate
Group had setup a Liaison Office (LO) in company of FOWC) by way of which it
India with permission of RBI for undertaking was licensed all the commercial rights in
purely liaison activities. However, survey the Championships for a period of 100
conducted at LO premises in India revealed years. For conducting the Formula one
that LO premises was permanently used by Grand Prix in India, FOWC entered into
expats who were working in India for GE a Race Promotion Contract with Japyee
overseas entities carrying out sales activites. Sports International Ltd (‘Jaypee’) granting
The activities carried on from fixed place it the right to host, stage and promote the
of LO were not confined only to those of a Formula One event in Buddh International
communication channel. The AO treated Circuit in India for a consideration of USD
the LO as a fixed place PE. This was 40 million for a period of 5 years. The High
confirmed by the Tribunal. The Tribunal Court had held that the consideration paid
also noted that the GE group entities in to FOWC was not royalty under Article 13
India along with expatriates deputed by of the DTAA and that Buddh International
the assessee were undertaking marketing Circuit constituted FOWC’s fixed place
activities and sales functions of the entire PE India since FOWC and its employees
GE group and that GE India along with the had full access to the Buddh International
deputed employees had the authority to Circuit and FOWC was granted access for
conclude contracts on behalf of the group. a period of 6 weeks at a time during each
Accordingly, the Tribunal also stated that season/ each race and that the access was
Indian entities of the GE Group as well for a period of 5 years i.e. the duration of
as the expatriates/ employees of overseas the Race Promotion Contract and Japyee’s
GE entities constituted dependent agency capacity to act was extremely limited.
PE. Regarding attribution of income to the Accordingly, it held that FOWC carried on
PEs, the Tribunal noted that AO carried business in India within the meaning of
the exercise of attribution in two parts, viz., expression under Article 5(1) of the DTAA.
calculation of total profit from the sales The Supreme Court, however, referred to
[worked out at 10% applying Rule 10(iii)] the arrangement between the assessee and
and attribution of such profit to marketing its affiliates on one hand and Jaypee Sports
activities [35% of 10% relying on Delhi on the other hand and observed that the
ITAT ruling in Rolls Royce]. The Tribunal arrangement clearly demonstrated that the
upheld the 10% total profit on sales entire event was taken over and controlled
arrived at by the AO but directed the AO by FOWC and its affiliates. The Supreme
to attribute only 26% towards marketing Court rejected the assessee’s stand that
activities noting that the extent of activities since the duration of the event was only
of the overseas entity in making sales 3 days, there was limited access granted

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which was not sufficient to constitute assets, liabilities, liquidated damages arising
the degree of permanence necessary to out of the total contracts cannot be spilt. When
establish a fixed place PE since for the the risks cannot be dissected, it is clear that the
entire period of race, the control was with offshore-onshore spilt was done only with the
FOWC. Accordingly, it upheld the findings instance of minimizing taxes in the countries. AO
of the High Court and held that the tests should collect copy of contract documents in full
laid down for constitution of a PE viz. with all annexures and appendices and obtain a
stability, productivity and dependence categorical reply that there are no overarching/
were satisfied. It concluded that the Buddh umbrella agreements on top of the main contract
International Circuit was the fixed place document defining the risks and rewards.
of business at the disposal of FOWC, that
15.4.2 Tender Documents: The AO should
the taxable event (earnings from the grand
look into the tendering and bid estimation
prix) took place in India. [Formula One
World Championship Ltd. [394 ITR 80 documents. Usually the quotations and the
(SC)]]. tender intent would be one single contract
without any split. All the activities of price
15.4 Contract Splitting for Avoidance estimation for the bids are carried out in India.
of PE: The most important tax avoidance The initial acceptance is also one single contracts
planning scheme carried out by the MNE’s is and usually only after this, the contracts are split
the avoidance of PE status in India. MNE’s have to minimize the tax liability. AO should look into
structures/ arrangements which avoid the PE all communications at the initial tendering stage
status in India. The most important aggressive and see whether the contract was split right from
tax planning scheme is the contract splitting the tendering stage itself.
that is very rampant especially in the EPC
(Engineering, Procurement, Construction). Many 15.4.3 Project Organisation Chart: AO
foreign companies with huge EPC execution can look into the substance on the ground.
capabilities undertake complete turnkey projects Some of the aspects that can be seen are
providing end to end services. However, for tax the project management plan, organisation
purposes, they artificially bifurcate the contracts chart, responsibility matrix. Analysis of project
into offshore component (done outside India) organisation chart could lead to a conclusion
and onshore components (done inside India) that it is one integrated organisation right from
to minimize tax payments in India. In many tendering stage to commission stage. The day
cases of EPC contract, the contractor resorts to to day functioning of the project managers and
a locational spilt, that is offshore and onshore profitability reports maintained by the project
mainly for the purposes of minimizing tax managers can give insightful evidences on the
payments in India. The AO should look into functioning of the contract.
the substance on the ground and see whether 15.4.4 Contract Man Hours Report: Many
the same is in consonance with the form as per a times, man hours are tracked to understand
the contracts. The following issues/ inquiries/ how much work happens in India. This would
documents may be relevant: give a reasonable estimate of how much work
15.4.1 Umbrella Agreement: Usually in all the actually happens from India. Contract Man
spilt contracts, there is a wraparound guarantee Hours Report can be looked into in this case.
agreement or the umbrella agreement linking It can also be seen, whether the fabrication/
both offshore and onshore components. The manufacturing setup has been undertaken
agreement links both the offshore and onshore in India or not. It is noticed that a detailed
components and ensures that the functions, verification of various stages may clearly indicate

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 Evasion of Tax Deduction at Source

to the AO that the entire contract is one single and the contracts are in the name of the non-
contract. resident or for the transfer of the ownership of,
The AO can also look into whether the risks passe or for the granting of the right to use, property
over for the offshore supply to the party before owned by that non-resident or that the non-
the consignments lands in India. AO may also resident has the right to use or for the provision
do a detailed verification of project management of services by that non-resident.
and in deserving cases, examination on oath of 15.5.1 In regard to Commissionaire arrange-
the personnel/ executive to scrutinize taxpayer’s ment, the AO may analyse the functions, assets
stand may be undertaken. and risks of the foreign entity and see whether it
15.5 Commissionaire Arrangements for is the principal or the agent who is responsible
Avoidance of PE: Commissionaire agent for most of the activities. AO can resort to
represents a principal but concludes contracts Exchange of Information to gather information
in its own name and generally does not legally from the country of Principal and also analyse
bind its principal. OECD has explained the the various activities carried out by the agent
commissionaire approach as an arrangement in the country. Organisational structure of the
where in a person sells products in a given agent and email communications between the
state in its own name but on behalf of a foreign principal and agent can be looked into to see
enterprise which is the owner of these products. whether the arrangement has been carried
Through such an arrangement, a foreign out with the intention of avoiding taxes in the
enterprise is able to sell its products in a state country. Examination of personnel/ executive
without creating a PE. The person selling (the to scrutinize the taxpayer’s stand may be
commissionaire) in the state would typically undertaken.
be taxed on the remuneration he receives
for his services (often a commission) rather 15.6 Verification of Fee for Technical
than on the profits derived from such sales. Services: It is noticed that numerous
Commissionaire approach shifts high turnover remittances are made for Technical services
and profits to low tax jurisdiction like Singapore. without any deduction of withholding tax. As per
Usually the principal is likely to be located in a explanation 2 to Section 9(1)(vii), FTS means
Nil/ lower tax jurisdiction. Principal buys goods any consideration for rendering any managerial,
from various ground contract manufacturing technical and consultancy services. Although the
companies and sells to customers in India using same is taxable under the Act, under some of the
commissionaires. Incomes due to activities DTAAs, the make available Clause needs to be
of dependent agent are deemed to accrue in satisfied for the income to be chargeable in India.
India. Income to the extent attributable to In this regard, AO should obtain all agreements
operations carried out in India is deemed to and other supplementary agreements. If it is a
accrue in India. In order to align the scope of related party transaction, see whether any earlier
“business connection” with modified PE Rule year transfer pricing audits have been done in
as per Multilateral Instrument, explanation regard to the treatment of FTS. AO should seek
2 of Clause (i) of Section 9(1) has now been documentary evidences (emails/ requests for
amended to provide that “business connection” proposal) if any in respect of each service. Details
shall also include any business activities carried of professionals rendering services viz. names of
through a person who, acting on behalf of the professionals, their qualification, specific dates
non-resident, habitually concludes contracts on which services were rendered etc can be
or habitually plays the principal role leading also be looked into. In specific to management
to conclusion of contracts by that non-resident fees, details of services rendered along with

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board resolutions can be looked into. AO can participation, training and maintenance
also see whether there are specific Clauses in the services of air injection equipment
agreement where there are binding Clauses on (used for increasing the recovery of oil)
confidentially and transfer of IPR. It is to be seen constituted FTS under Article 12 of India-
whether as part of the management services, Canada DTAA for AYs 2010–11 and
there is an access to centralized knowledge 2011–12. It rejected the NR’s stand that
repository where key management strategies know-how/ technology was not made
can be accessed to by the senior management available to ONGC and observed that the
personnel. service agreement not only contemplated
participation but also provided for training
15.6.1 Important Case Law and collaborative research between the
a. The Tribunal held that where the assessee- personnel of NR and ONGC, pursuant
company made payment to U.K. based to which know-how was shared with
company for rendering designing ONGC personnel; Further, it rejected NR’s
services, the said payment was nothing alternate stand that even if the receipts were
but FTS as defined in article 13 of DTAA taxable, the same were to be taxed under
and accordingly upheld the 40(a)(i) Section 44BB (special provision for oil
disallowance made by the AO. [DCIT vs. exploration companies) since the services
Mira Exim Ltd [2017] 81 taxmann.com were directly associated with extraction
303 (Delhi - Trib.) - IT APPEAL NO. 125 and production of mineral oil by holding
(DELHI) OF 2014 dated 24.04.2017]. that Section 44BB was applicable only in
b. The Tribunal held that the payment cases where consideration was received
received by the assessee (Swiss company for services relating to exploration activity
engaged in providing operations and which were not in the nature of technical
management services to airports) from services. Also, it accepted Revenue’s plea
Bangalore International Airport Authority that since the NR itself was not involved
Ltd. (‘BIAL’) for secondment of skilled in extraction or production of mineral
personnel constituted FTS under the Act oil, Section 44BB was not applicable.
as well as under India-Swiss DTAA as all ONGC as representative assessee for M/s
the secondees had expertise in the field University of Calgary, Alberta, Canada
of management and were holding very [TS-175ITAT-2017(DEL)] - ITA No.4877/
high managerial position. It observed that Del/ 2013 and 1327/ Del/ 2016 dated 28/
secondees were under the employment 04/ 2017.
of the assessee and not with BIAL and d. The Tribunal held that payment received
accordingly, it rejected assessee’s contention by the assessee (US software company)
that payments were salary reimbursements for rendering implementation, consultancy
as the seconded personnel worked under and maintenance services in connection
the direct control and supervision of BIAL, with ‘customized’ software licensed to
satisfying the employer-employee test. Indian customers, amounted to Fees for
[Flughafen Zurich AG[79 Taxmannn.com Included Services (‘FIS’) under Article
199 (Bang)]]. 12(4) (a) of India-US DTAA (which
c. The Tribunal held that payment made provides that FIS includes payments for the
by ONGC (as representative assessee) rendering of any technical or consultancy
to a Canadian university (‘Non-resident’ services if such services are ancillary and
or ‘NR’) for collaborative research, subsidiary to the application or enjoyment

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 Evasion of Tax Deduction at Source

of the right, property or information for within the intention of arriving at a pre-meditated
which a payment described in paragraph 3 valuation. AO can examine on oath the valuer
(i.e. ‘royalties’) is received). It rejected the of share and gather more details like whether
assessee’s stand that since no knowledge due diligence and reasonable estimates were
was made available to the Indian customers, undertaken for the purposes of valuations. AO
the amount could not have been taxed as should see reasons for abnormal increase/drop in
FIS u/s 12(4)(b) and held that for article the free cash flow growth. Usually it is noticed that
12(4) the fee for included services may fall if the capital gains is not exempt under DTAA,
in Clause (a) or Clause (b) and compliance there is usually a substantial under-valuation that
of both Clauses wasn’t necessary. Further, is undertaken to minimize taxability.
relying on the Karnataka High Court ruling
15.7.1 Important Case Law: Cairn UK
in the case of Samsung Electronics Ltd, it
Holdings had sold its shareholding in Cairn
held that payment from software supply
India Holdings Ltd. (resident of USA) to Cairn
amounted to royalty. On going through
India Ltd. The tribunal confirmed capital gain
the technical services contract it noted
tax holding that shares of Cairn India Holdings
that the services provided by the assessee
Ltd. derived their value solely from the assets
were for the effective use of the customized
located in India as per Section 9(1)(i) of the
software licensed to Indian customers.
Act. It observed that the assessee on account of
Accordingly, it held that the contract was
being holding company of Cairn India Holdings
for rendering services complimentary and
Ltd. had held rights in control and management
supplementary to the license which would
of shares of nine Indian subsidiary companies
be taxable as per Article 12(4)(a). [i2
of Cairn India Holdings Ltd. which controlled
Technologies US Inc. [83 Taxmannn.com
Oil & Gas sector in India and accordingly, it
143 (Bang)]].
categorized these rights as ‘property’ as defined
15.7 Verification of Sale of Shares: Long under Explanation to Section 2(14) of the Act.
Term Capital Gains or Short Term Capital Accordingly, it rejected assessee’s arguments that
Gains arises on sale of shares. However, as per the transaction was genuine group restructuring
DTAAs like with Mauritius, Income from Long as a result of which management and control
Term capital gains is exempt. As a result of this, remained in the same hands and accordingly,
there is an increasing tendency of MNE’s to re- conditions stipulated in the definition of the term
characterise other income received in the regular ‘property’ were not satisfied. It further rejected
course as long-term capital gains. AO should assessee’s contention that no real income had
examine whether the sale of shares is between accrued to the assessee on the ground that the
associated parties and whether the same is financial statements of the assessee reflected that
subject to transfer pricing audits. Documentary the assessee had earned substantial gain on sale
evidence for full value of consideration, cost of of shares and on account of taxes not paid by
acquisition and any other costs claimed in the it due to exemption claimed on capital gains.
computation should be looked into. In case of It also rejected assessee’s contention that this
Discounted Cash Flow (DCF) valuation, the was transfer by way of exchange and not sale
basis for estimation of free cash flows, discount and accordingly, FMV of the asset received in
rate, growth rate and valuation of terminal consideration for the assets transferred should be
value should be verified. If available, AO should taken as full value of consideration and cost of
compare the estimated values of free cash flows acquisition should be stepped up to the fair value
with the actual free cash flows for examining of the shares of Cairn India Holding Ltd. on the
whether the DCF carried out was genuine or was date of acquisition and upheld AO’s computation

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of capital gain by deducting from full value of remitted as per Section 115-O of the Income-
consideration, the actual cost of acquisition tax Act, dividend needs to be taxed in the
incurred by the assessee for acquisition of the hands of the nonresident as per Section 115A
property i.e. original cost of shares. The Tribunal of the Income-tax Act. AO should see whether
rejected the assessee’s contention that since Indo- the recharacterization is a colorable device and
UK DTAA notified in the year 1994 provided for bring in more factual evidences to prove the
taxation of capital gains tax as per domestic tax recharacterization.
laws of the contracting state, the domestic law
prevailing in 1994 should be applied and held 15.9 Verification of Place of Effective
that provision in the DTAA cannot make the Management: In many cases it is noticed that
domestic law static and such article in DTAA also dual residency is used for shifting the place of
cannot limit the boundaries of domestic tax laws. effective management to a place where there is
[Cairn UK Holdings Limited [79 Taxmannn.com low tax incidence. In this scenario, many DTAAs
128 (Del)]]. have prescribed tie breaker rules and also brought
in suitable amendments in the Act. AO should
15.8 Re-characterization of Dividend as look into whether puppet/ shell companies are
Long-term Capital Gains: Many MNE’s have used to shift the taxes to low tax countries where
tax benefits and have huge accumulated reserves the capital gain is exempt. The following points
in India. Distribution of any accumulated profits may be looked into by the AO while verifying
in any form is taxable under Section 115-O or the Place of Effective Management:
Section 115A. However, these transactions are
re-characterised as buyback of shares under a. Place where majority of the Board of
Section 77A of the Companies Act or through Directors or equivalent body usually meets.
scheme of arrangements under Section 391 to The place of implementation of the entity’s
394 of the Companies Act, where the dividend overall group vision and objectives.
payments are re-characterised as capital gains. b. The place where company’s financial
In case the shareholder is in Mauritius or other decisions (e.g. borrowing, lending, raising
low tax jurisdiction countries, the payments capital and financial risk control, etc.) are
of the capital gains taxes are exempt. In this made
case AO should see whether Section 115QA
c. Location of and functions performed at
is applicable or not on the buyback of shares.
headquarters of the company.
Copy of valuation report (along with annexures)
may be looked into to see how value of shares d. Where controlling shareholders/ parties
was arrived at. Copy of resolution of the board other than Board of Directors make key
approving the buyback scheme, High Court management decisions.
order, if any, may be looked into. Comparison e. The place where the chief executive officer
of the current valuation with the prior year and other senior executives usually carry
valuation and comparison of projected free on their activities
cash flows may be looked into. AO should look
into the genuineness of the assumptions behind f. Location of senior managers residence
the estimation of free cash flows, discount rate, g. Place where the members of the managing
growth rate and valuation of terminal value. bodies are residents
In Pre June 2016-cases, it should be seen
whether the same is chargeable to tax under h. Place where minutes of board meetings
Section 2(22)(d) or 2(22)(a) of the Income-tax. and shareholders meetings are located
In all these cases since dividend has not been i. Place where Company’s Books are Located

352
 Evasion of Tax Deduction at Source

j. Place where company’s records and other communication with software vendor, details of
administrative documents are managed visit of the software vendor to the assessee site
may be looked into. AO can verified whether the
k. The place where Balance Sheet, P/L and
Annual accounts are drawn assessee would be liable to be sued for exploiting
the software without permission, nature of
l. Location where the official seals of the rights transferred and whether assessee has
company are located right to make copies of the copyright protected
m. Place where Company’s major properties/ software. In case of a hardware is bundled with
assets are located software, details of value of the software vis-á-vis
the value of the equipment as a whole and the
The AO may also look into the POEM guidelines detail of extent of right to reproduce, modify and
of the CBDT along with the above crucial points.
commercially distribute the software embedded
15.10 Equipment Hire: AO can see whether in the equipment for operating the equipment
there is a hire of equipment since the same may be looked into. In the Indian context, the
would be taxable as royalty under the provisions High Courts have had divergent views, drawing
of various DTAAs. In this regard AO can look a distinction between payment for the use of a
into the details of nature of equipment, technical copyright and that for a copyrighted article. On
specification, nature of usage and situs of the the one hand, it has been held that “license is
equipment. The details of extent of control over granted to make copy of the software (contained
the equipment vested with the assessee along in shrink-wrapped/ off-the-shelf software) and to
with proof can be looked into. Details of the risks store it in the hard disk and to take a copy and
involved in the usage of the equipment and terms right to make a copy itself is a part of copyright.”
for bearing of such risk may be verified. AO may Accordingly, what is transferred is right to use the
also examine Clauses of agreement for provision software (Karnataka HC in Samsung Electronics
of equipment which contains the duration and Company Ltd.) On the other hand, several
the terms of usage along with all annexures and Courts have held that no right is transferred in
further supplementary agreements or any other the case of sale of software [Delhi High Court
amendments. AO can also see whether the in Ericsson]. As on date, the matter is pending
equipment is manually operated or automatic before Hon’ble Supreme Court.
and the extent of human intervention involved.
15.12 Verification of Cost Allocation
If automatic, the address of the location of the
Agreements: Usually these payments are made
equipment, number of employees located at that
as reimbursements stating that there is no income
location, their designation, qualification, work
element in this. However, the AO has to verify
profile may be looked into. If the equipment is a
the nature of services provided and see whether
ship or container, verify the detailed day to day
the same can be brought under Fee for technical
movement chart of the container/ ship for the
last 3 years. services or provisions of royalty are applicable.
In this regard, Copies of agreements, documents,
15.11 Purchase of Software License: AO licenses etc entered into with thirdparty suppliers/
can look into whether the software is off the licensors/ developers by the AE, reflecting the
shelf or customized. In most of the cases the cost to the AE under such agreements may be
provisions of royalty would be applicable. AO verified. Detailed documentation for costing of
can verify whether the software is customized any software and third-party confirmations may
by looking into the details of third party vendors be looked into. Rights in respect of such software
and the contracts signed with them. Nature retained by the AEs and not shared with the
of usage of software, proof for all details of assessee and the cost in respect of the same may

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be verified. In case of software applications, did the DTAA have a specific FTS article nor
global users and head counts may be verified. was Article 22 (‘other income’) applicable
In cases of support services, total number of as assessee did not have a PE in India.
instances of such support may be looked into. It observed that the service agreement
All the email correspondences relating to the gave opportunity to ABB Ltd of using
technical support may be looked into. The basis the information pertaining to industrial/
of charging of the support services may also be commercial/ scientific experience belonging
looked into. to the assessee which would fall within the
15.13 Verification of Secondment of ambit of ‘royalty’ definition underArticle
Employees: In case of secondment of employees 12(3) of India-UAE DTAA. [ABB FZ-LLC
to Indian subsidiaries by the parent company, list [83 taxmann.com 86(Bang)]].
of employees, designation, role played, period b. Where the assessee made payments to a
of stay in India may be called. The basic need German based company for sharing its
for the secondment of such employees may be standard operating procedures (SOPs)
looked into. Copy of employment agreements access to database, email server, hardware
of the seconded employees may be verified and software etc, the Tribunal held that
in detail. Sometimes it is also better to look at since it was consideration for sharing of
termination agreement which gives valuable scientific, or for that purpose industrial and
insights. Details of reporting structure of such commercial experiences, same was taxable
seconded employees and copy of appraisal in India as royalty under article 13(3)
reports of such employees may be looked into. of India-Germany DTAA. Accordingly,
Based on this, AO may treat this as Fee for
it upheld the AO’s order issued under
Technical Services. Further information about
Section 201 of the Act. [Oncology Services
the seconded employees may also be gathered
India (P.) Ltd [82 Taxmannn.com 42
from their LinkedIn profiles.
(Ahmedabad)]].
15.14 Verification of House Property
c. The assessee, a Singapore based ship
Income: In this case proof of ownership/ title of
company engaged in the business of
the immovable property let out may be looked
into. Rental agreement between the remitter operation of ships in the international traffic
and the remittee may be verified. In case of sale claimed exemption under Article 8 of the
of immovable property where capital gains is India-Singapore DTAA but the AO denied
arising, genuineness of the deduction may be the deduction on the ground that there
looked into by looking into various documentary was no evidence that the money had been
evidences for full value of consideration, cost of actually remitted to Singapore and had
acquisition etc. suffered tax in Singapore. Accordingly, the
AO denied treaty benefits under Article 24.
15.14.1 Important Case Laws The assessee during the Tribunal hearing
a. The Tribunal held that consideration filed a certification from the Singapore
received by the assessee (a UAE based Authorities stating that the income
group company) from ABB Ltd. (assessee’s had been brought to tax in Singapore.
Indian counterpart) pursuant to rendering However, during the hearing, the Tribunal
technical services, constituted ‘royalty’ observed that as per the Singapore tax
under Article 12 of India-UAE DTAA. laws, the income of the assessee did not
It rejected assessee’ sargument that the seem to be taxable in Singapore itself and
amount was not taxable in India as neither therefore as per Article 24 if income has

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 Evasion of Tax Deduction at Source

not suffered tax in Singapore, no benefit existence with TRACES system. CPC-TDS was
under the DTAA could be granted. It thus conceived with the purpose of eliminating
held that there was a difference between attempted frauds by unscrupulous elements,
‘subject to tax’ and ‘liable to tax’. In light who during the earlier ‘paper TDS Certificate’
of the new developments in the case, the regime, used to forge fictitious TDS Certificate
Tribunal remitted the matter to the file and file bogus or false Income-tax Returns
of the CIT(A) for fresh adjudication. [BP to claim Refunds that were not legally due to
Singapore Pte Ltd vs. ITO [88 Taxmannn. them. However, unscrupulous elements have
com 226(Rajkot)]]. still found innovative ways of making fraudulent
d. The reimbursement of expenses for intranet refund claims
and SAP charges made by the assessee to ●● by stealing identities and access codes;
its German holding company were held
●● by using historical data and flexibility to
to constitute royalty under the Act as well modify claims of the past to claim refunds
as DTAA. The Tribunal held that the SAP fraudulently.
software was customized and the payment
was made for the use of licensed software Some of the typical modus operandi adopted by
and therefore the payment made by the them are summarized below for reference:
assessee constituted payment for use of 16.1 TDS Fraud by Revising TDS Statements:
scientific equipment under the Act as well Quarterly statements u/s 206 are filed for tax
as DTAA. It rejected the contention of the deducted at source by the respective deductors.
assessee that since the payment was only a Deductor files quarterly TDS statements for
reimbursement of expenses, no tax was to all quarters with correct details of deductees.
be deducted, noting that the assessee failed Thereafter, the deductor files revised TDS
to produce any agreements, contracts or statements by replacing original deductee
working to substantiate its claim. It held details with PANs of other deductees who are
that if the contention of the assessee was not connected with the deductor. The bogus
to be accepted then all payments to a third deductees so introduced in the revised quarterly
party routed through a holding company statements get credit in their form 26AS and
would be considered as reimbursement become eligible for refund. The bank accounts
of expenses, rendering the provisions of of these new/ bogus deductees are managed
the Act and DTAA redundant.[SMS Iron by scamsters who are generally chartered
Technology Pvt Ltd [88 Taxmannn.com accountants/ representatives of the deductors.
277(Del)]. Therefore, the refund amount is credited to the
account of the bogus deductees mentioned in
16. TDS FRAUDS the revised statements filed by the chartered
accountants/ representatives of the deductor. The
Earlier TDS functions were handled manually
genuine deductees do not have any information
and the AOs used to get these TDS certificates
about all this happening behind their back and
verified from the respective deductors and the
thus become future complainants with regard to
process used to take a lot of time resulting into
non-grant of Tax credit by the deductor.
delay in issue of refunds. There also used to be
a lot many cases of TDS fraud as people could 16.2 Non-deposit/ short Deposit of TDS
get such TDS certificates printed and issued and by Deductor while Assigning much Higher
could skip the verification process. To overcome TDS Credits to its Deductees: Deductor first
this, computerization of TDS functions happened reports tax deductions in the TDS statements
a few years back and CPC-TDS came into after depositing only a marginal TDS amount.

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Techniques of Investigation for Assessment Vol. 1

Deductor deposits a part of TDS and he may working for such deductors also indulge in such
have claimed the same challan in different fraudulent activities, as they have access to such
quarters and the claimed amount in TDS deductors’ User-Ids and passwords.
statement against the underlying deductees
16.4 Incorporation of Unrelated PAN in
is more than the total amount deposited. This
Genuine TDS Statement that too with No
results in overbooking. Deductor does not
Tax Deposit: Some firms/ Govt. organisation/
deposit any TDS and he enters bogus challan
Financial institutions hire CAs or Accountant
particulars in TDS statements with the intent
for filing their TDS Statement. If such a CA
of fraud. The defrauding entity then makes
is a fraudster, he would file the transactions
the underlying deductees (taxpayer) claim the
and TDS details of TDS statements of the
above TDS credit in their Income-tax Returns.
organisation containing all such transactions
On receipt of refund by taxpayer, deductor
but add some fictitious deductee rows showing
updates TDS statements for some of such
taxpayers by reducing the transaction and TDS false TDS deductees without making any TDS
amount to zero or some other reduced value. payment. The same CA or Accountant would
This correction/ update of TDS statements may then claim fraudulent refund in the ITR of the
have been made with the intent to reduce/ clean fictitious person whose details he enters in the
up short payment TDS default without paying TDS statement of the organisation. On receipts
any tax. This cleans up deductor’s record, while of the refund by the taxpayer, the CA updates
the corresponding demand created against the TDS statements of the organisation by reducing
deductee remains unpaid because the deductee the TDS deductions of fictious persons to zero.
is either fictitious or non-traceable. This way, the deductor would never notice the
fraud committed by its CA.
16.3 Substitution of Unrelated Person’s
PAN with the NON-PAN Entries: Banks 16.5 Filing of Regular TDS Statement of
and other Financial Institutions, in the cases of an Organisation Knowingly Followed by
persons who do not supply their PANs, deduct Adding Unrelated Deductees in Correction
TDS at the higher rate of 20%. The deductors of the Previous Statements: In some cases,
other than financial institutions also, if duductees some person gets the user ID and password of
do not provide their PAN deduct the TDS at the firms/ organisation. So for making correction
20% and report the same in the TDS statement. in the previous statements, they file the regular
Consequent to processing of such TDS return of the firm/ organisation for getting the
statements, all such TDS credits (at a very high latest KYC details. Then they make correction in
rate of 20%) remain unclaimed as there is no previous statements by adding some unrelated
PAN against these deductors. Such TDS credits deductee by mentioning bogus challan or adding
are very lucrative targets for fraudsters, as by deductee against ‘PAN not available’ entries to
simply gaining access to such TDS statements, get the refund. Underlying deductee claim the
they can enter any PAN details and get a Tax above TDS credit in their Income-tax Return-V.
Refund in the ITR of such PAN. The fraudsters This causes Short payment to the genuine
maintain a set of such PANs, which they keep deductor and then the deductor comes to know
using for claiming fraudulent Refunds. Fraudsters about default through the intimation. Now the
target hapless and innocent Banks & Financial deductor is not able to file the regular statement
Institutions and corporates and steal their access and will not even be able to file the correction
codes to manipulate their TDS Statements. as well. Then they need to cancel the statement
Sometimes the intermediaries and accountants through CPC TDS.

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 Evasion of Tax Deduction at Source

16.6 Fraud by Changing the Date of Deduction/ deductees. Thereafter, he used to revise the TDS
Quarter of Deduction statements by replacing original deductees with
bogus deductees, whose PANs were obtained
16.7 Manipulation of 15G and 15H Forms
by X fraudulently. In case of one Deductor
16.8 Case Study 1: In the case of X X Company, X had replaced original PANs by as
Fashion Processors Ltd., the CPC-TDS noticed many as 15 bogus PANs. These bogus PANs
frequent revision of quarterly TDS returns, as were obtained by him from a person doing the
many as 19 times and 13 times in A.Y. 2015–16 work of obtaining PAN cards. All such bogus
& 2016–17 and therefore asked the field TDS to PAN cards were obtained by X without giving
cause enquiries. On verification it was noticed any proof or KYC. The 15 bogus deductees get
that there were manipulations in quarterly TDS credit for TDS payments by deductor in place
returns in cases of as many as nine companies of original deductees and got refunds in their
by a single intermediary, and huge refunds respective returns processed by CPC Bangalore.
were claimed out of which seven companies Later he again filed correction statements
related to Mumbai charge. Thereafter, further replacing bogus deductees with the original
investigations were done by Mumbai and Thane deductees and thus cleaning the manipulation.
TDS. It was noticed that this TDS fraud was The irony is that these deductors do not have any
being done by one M/s ABC and associates, a knowledge about the manipulation of deductee
Mumbai based intermediary firm engaged in details in their TDS statements.
filing TDS and tax returns and main culprit was
16.9 Case Study 2: In case of a well-known
one X, Sr. Accountant working with M/s ABC and
telecom company, an expenditure of Rs. 4.6
Associates. During the investigation, M/s ABC
Cr was debited in the P&L account, but tax
Associates filed a letter dated 21/ 08/ 17 along-
with an affidavit alleging that this entire TDS was not deducted on the above sum in quarter
fraud and refund scam has been done by X, his ending March 2013. This was reflected as such
employee who was entrusted with the work of in the Q4 TDS statement of 2013 also. The
TDS filing, without his knowledge. Thereafter the deductor later revised its Q4 return deleting the
main culprit X was summoned and interrogated above expense and hence TDS liability also
wherein he confessed in a statement on oath u/s extinguished. The assessee later filed Q4 return
131 that he has done this TDS fraud in respect of 2014 showing above expense payment and
of nine companies and obtained refunds of TDS payment as well over it. However, assessee
Rs. 57.10 lacs fraudulently by filing revised TDS had not revised ITR return and 3CD audit
statements and manipulating deductee details. report for FY 2012–13 reducing above claim of
During investigation carried out by Thane expense from P&L account and 3CD report still
Charge & later on by Mumbai TDS charge, it read as ‘Tax paid on above amount before due
was found that X had revised TDS statements date of filing return i.e. on 31/ 10/ 2013. Thus,
in respect to 9 deductor companies by revising assessee made double claim for same expense in
quarterly statements and introducing bogus two years and also tried to avoid interest liability
deductees, thus getting TDS credits in their u/s 201(1A) for one year on delayed payments.
AS-26 and claiming refunds. The login ID & In prosecution proceeding before the CIT-
passwords of all these 9 deductors were with X TDS, Delhi, the assessee claimed that he never
who used to file TDS statements and correction incurred the expenditure during the FY 2012–13
statements on behalf of these entities. He had and therefore no TDS was done in that year and
confessed in a statement given under Oath that that the expenditure was actually incurred in FY
TDS statements were first filed on behalf of all 2013–14 in Q4, wherein TDS was deducted and
the deductors by mentioning correct PANs of the paid. However, the fact remains that in audit

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Techniques of Investigation for Assessment Vol. 1

report for FY12–13 they showed as TDS amount unmatched challan of Rs. 100,000/- in name of
outstanding as paid at the time of filing of return, Satguru Export and Import. It was further found
with a view to avoid addition u/s 40a (ia). By that same fraudulent PANs were used in the case
doing this the assessee tried to reduce the liability of different deductor whose return was filed from
of interest u/a 201(1A) by 12 months and also same Centre.
tried to escape from prosecution. However, the
vigilant CIT caught the assessee and not only 16.12 Case Study 5: In a TDS survey in case
Sectioned the prosecutions but also inform the of a well-known Builder in Mumbai, it was noticed
jurisdiction PCIT to initiate proceedings u/s 263/ that it devised a very innovative strategy to
148 for disallowance u/s 40 (a)(ia). dupe the Department. Though it had significant
interest expenditure of about Rs. 734 cr, majority
16.10 Case Study 3: In CCIT (TDS), Delhi
of expenditure to its sister concerns, but it was
charge an attempt was made to claim refund
not making any TDS on the interest payment
fraudulently of TDS amounting to Rs. 2 crores
to sister concerns, even though the expenditure
pertaining to Hon’ble Supreme Court of India,
under ‘no PAN available’ category. It was noticed was covered by TDS provisions. In fact in F.Y.
that TDS credit in name of Supreme Court of 2016–17 it did not make any TDS on interest of
India was claimed fraudulently in name of a Rs. 554.40 cr and in F.Y. 2017–18, on payment
PAN ABAPE2520L (in name of xx) and in this of Rs. 345.82 crores; the total of which works out
regard TDS statement of Union Bank of India, to 900 cr and non-deduction of TDS at the rate
Daryaganj, New Delhi was revised, with a view of 10% works out to Rs. 90 crores. When it was
to claim refund of above Rs. 2 crores. The matter confronted about non-deduction it gave a very
was accordingly handed over to CBI. evasive reply that in view of amended provisions
and addition of proviso to Section 201, he may
16.11 Case Study 4: ITO TDS Madanapalle,
not be treated as an assesse/ deductor in default,
Andhra region, received certain complaints of
as the deductees have already filed their tax
malpractices against TIN facilitation centre there.
returns and have cleared their tax liabilities.
He carried out a survey on one Shri Srinath
As the interest was being paid to the group
running a TIN Facilitation Centre. The outcome
of survey operations shows a peculiar modus companies it could manipulate the date of credit
operandi adopted by TIN Facilitation Centre of interest easily at its will and avoiding payment
of manipulating the tax deduction particulars of due TDS. Nonetheless there has to be interest
furnished by several government tax deductors liability of about 3.5 crores u/s 201(1A), which
and thereby making bogus claim of refunds. One it had to pay. Further, in F.Y. 2017–18 there was
particular PAN was being used by three different interest payment/ credit of 410 crores, out of
TANs statement data was analyzed by the CPC- which on 345.82 crores TDS was not made, so
TDS. It was observed that the fraudulent PANs it was asked as to why no TDS was made on the
were used where no PAN available data was filed current year’s interest expenditure, selectively.
by the deductors. The above Centre introduced The assesse responded that it has actually not
PAN of their relatives against those data and claim credited this interest and the accounts referred to
refund. It was also noticed that these PANs were were tentative accounts, even though the same
getting credit from 8 different TANs. It was also were produced by the assesse itself. However,
noticed that all these TANs were quoting same this explanation of the assessee was rejected.

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INDEX
Accommodation Entry, 251, 254, 260–61, 279
45(5A) by Certain Individuals/ HUF, 343
Account,
Creative, 164
Current, 224
Duplicate Set of, 6, 127
Profit and Loss, 39–41, 107, 157, 164–165, 171,
175, 178, 181, 207–10, 335
Saving Bank, 224
Secret Bank, 5, 232
Authority under Goods and Services Tax (GST), 2,
Share Premium, 175, 178
10, 26, 28–30, 33, 122–23, 142–44, 146, 153–54,
Trading, 7, 40, 82, 87, 106, 125, 127, 129, 135–
158–59, 162, 167, 216, 237
38, 141–42, 147, 157, 232
Acid Test or Quick Ratio, 83 Bad Debts, 124, 138, 152, 158, 161, 337
Advances Written Off, 162 Balance Sheet, 7, 39, 46, 50, 61, 77, 82, 107, 116,
Advertisement and Publicity, 158 121, 136, 153, 156, 161, 163–65, 167–69, 171–
Affidavits, 129, 262, 293–94, 319 72, 174–75, 178–82, 201, 207, 211, 230, 235,
Amalgamation/ Merger/ De-merger, 168 249, 264, 353
Application Money, 20, 223, 230, 247, 257, 260–62, Window Dressing of, 164
264 Bank Reconciliation, 39, 110
Assessee, Base Erosion Profit Shifting (BEPS), 12
Digital Footprint of the, 8 Benami Transactions (Prohibition) Act, 1988, 269
Psychology of, 16 Benamidars, 18, 20–22, 130, 182, 175
Assessment, Bills, Discounting of, 233
Ex-parte, 324 Book(s), 1–4, 6–7, 9–11, 13–19, 21–23, 28, 31,
Order, Drafting of, 322 33–34, 44, 49, 81–82, 85–86, 90–92, 94, 96,
Procedure, 3, 4, 5, 20, 240, 255, 307, 311 100, 105, 108–09, 111, 113–15, 124, 127–28,
Quality, 307 130–33, 136–40, 143, 145, 147–48, 152, 155,
Records, 3–5, 20, 240, 255 160–61, 166–67, 171–72, 177–78, 180, 182–83,
Assets, 192, 207, 209, 212, 216, 220, 223, 225, 229–30,
Intangible, 164, 168–69, 194 232–33, 235–43, 245, 247–52, 254–55, 257–59,
Tangible Fixed, 166–67, 184, 186, 189–90, 197, 261, 263–65, 276, 279, 283–85, 299, 319–20,
200 323–24, 333, 337, 352
Audi Alteram Partem, 307–08, 310 Account, 3, 6–8, 15, 18–19, 44–45, 90, 128–29,
Audit, 131–32, 135, 145, 160, 235, 240, 255, 259,
Special, 217 318, 320
U/S. 142(2A) of the Act, 221 Bank, 44, 124, 140,

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 Cash, 6, 10, 44, 90, 100, 105, 108, 123, 133, Data,
140, 172, 182, 249, 250, 256 Analytics, 115–16, 346
Common Defects in, 139 Recovery and Data Storage, 113
Day, 43–44, 47 Debenture Redemption Reserve (DRR), 179
Borrowing Costs, 185, 194–95, 197, 201 Debt Capital Ratio, 86
BPU, 274–75, 279 Debtor’s Turnover Ratio, 85
Brokers, 133, 146, 233, 250, 252–53, 255, 284 Debtors, Sundry, 43, 95–96, 110, 136, 172, 211, 236
Burden of Proof/ Onus, 321 Depository Participants (DP), 20
Depreciation, 1–3, 31, 49, 77, 83, 87, 108, 123, 135,
Capital Expenditure vs. Revenue Expenditure, 170 137, 158–59, 166–70, 178, 179, 181, 184, 190,
Capital Work-in-Progress (CWIP), 170
200, 203–04, 208, 210–12, 216, 315–16, 324
Cash, Director’s/ Auditor’s Reports, 203
Credit, 82–83, 90, 107, 109, 173, 224–25, 227, Directorate General of Civil Aviation, 21
230, 247, 250, 253, 256–57, 263–65, 285, 321 Directorate General of Shipping, 21
Negative, 111 Directorate of Revenue Intelligence (DRI), 25–27
Central Bureau of Investigation (CBI), 26–27, 29, 258 Directors Responsibility Statement (DRS), 205
Central Economic Intelligence Bureau (CEIB), 25– Dividend, Re-characterization of, as Long-term Capital,
27, 29, 31–32 352
Central GST (CGST), 28, 153 Data Entry Operators, 177, 252–253
Cheque(s),
Bearer, 226–28, 232 Economic Intelligence Council, 26–27, 32, 328
Crossed, 226, 228, 230 Enforcement Directorate (ED) 27, 276
Order, 226, 229 Enquiries, Preliminary, 3
Civil Procedure Code, 268, 284, 292–93, 314 Equipment Hire, 353
Erasures or Overwriting, 10
Clues, 2, 4, 8–10, 15–16, 126, 133, 139, 144, 159–
Evidentiary Value of Official Records, 320
61, 204, 231, 312, 317
Exemptions/ Deductions, 10
Conservation of Foreign Exchange and Prevention of
Expenditure,
Smuggling Activities Act, 1974 (COFEPOSA), 26
Deferred Revenue, 161, 166, 174
Consignment, on Scientific Research, 162
Account, 151–53 Expense(s),
Inward, 151 Direct, 88, 105–06, 129, 134, 141, 143–44, 147,
Outward, 151 157, 174
Sale, 152–54 Illegal, 158
Consignor, 151–54 Insurance, 160
Construction Contracts, 184, 187–88, 197 Interest, 158, 169
Contra Entries, 110 Personal, 1, 13, 23, 82, 107, 138, 158
Contract Splitting for Avoidance of PE, 348 Printing/ Stationery, 161
Cost Audit, 90, 106, 146, 211, 213–16 Ratio, 88
Rules, 146, 214, 216 Sales Promotion/ Commission, 159
Creditor’s Turnover Ratio, 86 Telephone, 161
Credits, 10, 18, 91, 107, 166, 172, 179, 208, 224, Travelling, 159
229, 232, 237, 241–45, 248–49, 253–54, 256–
57, 259, 333, 355–57 Factoring, 172
Cash, 1, 5, 22, 82–83, 90, 107, 109, 173, 224–25, Fair G.P. Rate, 140
227, 230, 247, 249–50, 253–57, 260, 263–65, Fee(s),
285, 321 Legal, 158, 161
Peak, 234, 236, 241–45, 266 Technical Know How, 160
Cross-examination, 30, 254, 285–91, 294, 319–20 for Technical Services, 345–46, 349, 353–54
Fictitious and Non-Existent Concern, 131

360
Financial Intelligence Unit-India (FIU-IND), 32 Merger/ Demerger/ Holding to Subsidiary Transfer,
Financing, Multiple, 169 12
Foreign Exchange, 27, 32, 128–29, 167, 179, 184, Method,
191, 194, 201–02, 205, 217 Conventional, 253
Transactions, 32, 233 Estimation of Profit, 239
Foreign Land, 19 Indirect, 3
Forensic Accounting Tool, 115 Merger, 253
Form 3CA, 206–07 Source, 3
Form 3CB, 207, 316 Straight Line, 168
Form vs. Substance, 300 Multi-lateral Instrument (MLI), 12

General Anti Avoidance Rule (‘GAAR’), 11, 295,

Narcotics Control Bureau (NCB), 26– 27, 275
National Electronic Funds Transfer (NEFT), 234
305–06
Natural Justice, 276, 282, 307–10
Golden Rule, 15
Nemo Judex in Causa Sua, 307
Grants, 179, 192, 201
Net Profit,
Government, 179, 185, 192, 197, 201
Ratio, 87
Gross Profit Ratio, 87–88, 106
before Taxation, 82
Group
Notices, 229, 277, 279, 310–12
Summary, 45
Vouchers, 45, 111–12 Organisational Setup 13
Overdraft, 15, 163, 180–81, 224, 228, 231
IFRS, 12
Income PBPT, Income-tax Authorities and Relevant
from Agriculture, 17, 23 Notifications under, 274
Computation and Disclosure Standards, 183, 202 Place of Effective Management (POEM), 12, 346,
Income-tax, Agricultural, 23, 255, 320 352, 353
IND AS, 196–201 Power,
Indian Accounting Standards, 12 to Call for Information U/S 133, 314
Indian Evidence Act, 1872, 281, 284 U/S 131, 313
Investment, of Survey U/S 133A, 315
Cash Flow and, 236, 238 Procedure for Assessments under Section 143(3),
Long Term, Revaluation of, 171 312
Method, 17 Profit & Loss, 10, 39–41, 45, 82–83, 105, 116, 121–
or Increase in Capital Method, 236 122, 152, 164, 171, 178–179, 189, 191–92, 203,
Journal Register, 45 211, 230, 312, 315
Project Insight, 18
Ledger, 4, 19, 37, 42, 44–45, 49, 51, 76, 94,108–09, Provision,
116, 121–25, 136–37, 156, 209–10, 234, 238,
Anti-Avoidance, 305
249, 329, 346,
Loans, Contingent Liabilities and Contingent Assets, 185,
Bogus, 16, 108 195, 197, 201
Secured, 175, 180 for Various Contingent Liabilities, 11
Unsecured, 1, 123, 175, 180–81, 223, 281, 312 Purchases, 10, 21–22, 29, 31, 37, 39, 52, 81, 85–88,
91, 93–96, 149, 106, 108, 118, 125–32, 134–47,
Manipulation, 159–60, 162, 166, 170, 173, 182, 226, 229–30,
of 15G and 15H forms, 357 233, 235, 237–40, 242–43, 249–50, 337
of Accounts, 91 Cost, Inflation of, 91
Techniques of, 8
Manufacturing,
Qualifications in Audit Reports, 316
Account, 7, 87, 91, 141, 147–48, 157, 203, 230 Ratio Analysis, 39, 42, 82, 88, 90, 164
Expenses, 88, 142, 144–45, 239 Real Time Gross Settlement (RTGS)/ National
and Direct Expenses, 105 Electronic Funds Transfer (NEFT), 234

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Records, Stock,
Inspection of, 322 Penny, 251–255
Production, 145–47 Summary, 36, 39, 41–42, 100
Re-examination, 285–86 Turnover Ratio, 84
Regional Committees, 26 Valuation of, 173–74
Register, Suspicious Transaction Reports (STR), 234
Quantitative Details–stock, 135 Syndicate Members, 252
Sales/ Purchase, 45
Registration Charges, 19 Tally.ERP 9, 33, 42, 45–47
Report, Tax Audit Report U/S 44AB, 315
Auditor’s, 90, 165, 203–04, 206, 211, 317 Tax,
Director’s, 203–04, 206 Avoidance, 295–300, 303–05
Return Evasion Petitions, 5
on Investment Ratio, 88 in International Taxation, 304
Processing of, 312 Smurf, 164
Revenue, Recognition, 184, 188, 193, 197, 199 TDS (Tax Deduction at Source), 10–11, 123, 158,
Role of Oath, 288 170, 237, 327, 330, 332–46, 355–58
RTI, 30 on Contract, 336
from Commission or Brokerage, 339
Sales, from Fees for Professional Services, 343
Bogus, Vouchers’, 10 Fraud, 355, 357
Fictitious, 97, 130, 133, 25 on Interest Other than Interest on Securities, 334
Understatement of, 10, 87, 130 from Payment
Suppression of, 91 — of Compensation on Acquisition of Certain
SAP-Systems Applications and Products, 47 Immovable Property, 345
Securities, 13, 15–16, 20, 22, 26, 28, 31–32, 83, — to Non-Residents, 345
107, 171, 185, 188–89, 193–94, 196–97, 201– — to Non-Resident Sportsmen or Sports
02, 224–25, 231, 251, 302, 333–34 Associations, 339
Serious Fraud Investigation Office (SFIO), 27, 31 from Rent, 340
Share, — Paid by Certain Individuals/ HUF, 342
Application Moneys, 175 from Sale of Immovable Property, 342
Bonus, 175, 178–79 Test Checks, 220
Redeemable Preference, Redemption of, 175 The Benami Transactions (Prohibition) Bill, 2011,
Shares-in-kind, 176 269
Sinking Fund, 178–79 Transactions,
Software, Benami, 31, 267–72, 275, 279–80
Idea, 123 Sham, Fictitious and Artificial, 296
License, Purchase of, 353 Trial Balance, 42–43, 116, 121, 235
Specific Anti Avoidance Rules (‘SAAR’), 305 Valuation, Municipal, 18
Stamp Duty, 19, 175, 251, 271
Statement, Witnesses, Examination of, 283–84, 288, 292, 314
Cash Flow, 89–90, 164–65, 180, 239 Working Papers, 116, 220–21
Financial, Scrutiny of 4 Written Down Value (WDV), 166, 168–69, 190, 192,
Funds Flow, 89 208, 325
Statistics, 45, 110, 117, 140

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