FOE AMENDMENTS IN DIRECT AND INDIRECT TAXES FOR CA FINAL/ PE II/PCC STUDENTS
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Friday, September 26, 2008
Saturday, September 20, 2008
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COMPANIES BILL 2008
PRESS RELEASE
Sub: The Companies Bill, 2008
The Ministry of Corporate Affairs took up a comprehensive
revision of the Companies Act, 1956 (the Act) in 2004 keeping in view
that not only had the number of companies in India expanded from
about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also
mobilizing resources at a scale unimaginable even a decade ago,
continuously entering into and bringing new activities into the fold of
the Indian economy. In doing so, they were emerging internationally as
efficient providers of a wide range of goods and services while
increasing employment opportunities at home. At the same time, the
increasing number of options and avenues for international business,
trade and capital flows had imposed a requirement not only for
harnessing entrepreneurial and economic resources efficiently but also
to be competitive in attracting investment for growth. These
developments necessitated modernization of the regulatory structure
for the corporate sector in a comprehensive manner.
2. Earlier, a Bill called Companies (Amendment) Bill, 2003 had been
introduced by M/o Corporate Affairs (MCA) (then Department of
Company Affairs) in the Rajya Sabha on 7.5.2003. Later on, a large
number of changes were found to be necessary in the Bill. A decision
was, therefore, taken to carry out a comprehensive review of the
Companies Act, 1956 and to introduce a new Companies Bill for the
consideration of the Parliament.
3. The review and redrafting of the Companies Act, 1956 was taken
up by the Ministry of Corporate Affairs on the basis of a detailed
consultative process. A `Concept Paper on new Company Law’ was
placed on the website of the Ministry on 4th August, 2004. The inputs
received were put to a detailed examination in the Ministry. The
Government also constituted an Expert Committee on Company Law
under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advise
on new Companies Bill. The Committee submitted its report to the
Government on 31st May 2005. Detailed consultations were also taken
up with various Ministries, Departments and Government Regulators.
The Bill was thereafter drafted in consultation with the Legislative
Department of the Central Government.
4. The Companies Bill, 2008 seeks to enable the corporate sector in
India to operate in a regulatory environment of best international
practices that fosters entrepreneurship, investment and growth and
provides for :-
1
(i) The basic principles for all aspects of internal governance
of corporate entities and a framework for their regulation,
irrespective of their area of operation, from incorporation to
liquidation and winding up, in a single, comprehensive, legal
framework administered by the Central Government. In doing
so, the Bill also harmonizes the Company law framework with
the imperative of specialized sectoral regulation
(ii) Articulation of shareholders democracy with
protection of the rights of minority stakeholders,
responsible self-regulation with disclosures and
accountability, substitution of government control over
internal corporate processes and decisions by
shareholder control. It also provides for shares with
differential voting rights to be done away with and valuation of
non-cash considerations for allotment of shares through
independent valuers.
(iii) Easy transition of companies operating under the
Companies Act, 1956, to the new framework as also from one
type of company to another.
(iv) A new entity in the form of One-Person Company
(OPC) while empowering Government to provide a simpler
compliance regime for small companies. Retains the concept of
Producer Companies, while providing a more stringent regime
for not-for–profit companies to check misuse. No restriction
proposed on the number of subsidiary companies that a
company may have, subject to disclosure in respect of their
relationship and transactions/dealings between them.
(v) Application of the successful e-Governance initiative of the
Ministry of Corporate Affairs (MCA-21) to all the processes
involved in meeting compliance obligations. Company processes,
also to be enabled to be carried out through electronic mode.
The proposed e-Governance regime is intended to provide for
ease of operation for filing and access to corporate data over the
internet to all stakeholders, on round the clock basis.
(vi) Speedy incorporation process, with detailed declarations/
disclosures about the promoters, directors etc. at the time of
incorporation itself. Every company director would be required to
acquire a unique Directors identification number.
(vii) Facilitates joint ventures and relaxes restrictions
limiting the number of partners in entities such as
partnership firms, banking companies etc. to a maximum 100
with no ceiling as to professions regulated by Special Acts.
2
(viii) Duties and liabilities of the directors and for every
company to have at least one director resident in India. The Bill
also provides for independent directors to be appointed on the
Boards of such companies as may be prescribed, along with
attributes determining independence. The requirement to
appoint independent directors, where applicable, is a minimum
of 33% of the total number of directors.
(ix) Statutory recognition to audit, remuneration and
stakeholders grievances committees of the Board and recognizes
the Chief Executive Officer (CEO), the Chief Financial Officer
(CFO) and the Company Secretary as Key Managerial Personnel
(KMP).
(x) Companies not to be allowed to raise deposits from the
public except on the basis of permission available to them
through other Special Acts. The Bill recognizes insider trading by
company directors/KMPs as an offence with criminal liability.
(xi) Recognition of both accounting and auditing
standards. The role, rights and duties of the auditors defined as
to maintain integrity and independence of the audit process.
Consolidation of financial statements of subsidiaries with those
of holding companies is proposed to be made mandatory.
(xii) A single forum for approval of mergers and
acquisitions, along with concept of deemed approval in certain
situations.
(xiii) A separate framework for enabling fair valuations in
companies for various purposes. Appointment of valuers is
proposed to be made by audit committees.
(xiv) Claim of an investor over a dividend or a security not
claimed for more than a period of seven years not being
extinguished, and Investor Education and Protection Fund (IEPF)
to be administered by a statutory Authority.
(xv) Shareholders Associations/Group of Shareholders to be
enabled to take legal action in case of any fraudulent action on
the part of company and to take part in investor protection
activities and ‘Class Action Suits’.
(xvi) A revised framework for regulation of insolvency,
including rehabilitation, winding up and liquidation of companies
with the process to be completed in a time bound manner.
Incorporates international best practices based on the models
3
suggested by the United Nations Commission on International
Trade Law (UNCITRAL).
(xvii) Consolidation of fora for dealing with rehabilitation of
companies, their liquidation and winding up in the single forum
of National Company Law Tribunal with appeal to National
Company Law Appellate Tribunal. The nature of the
Rehabilitation and Revival Fund proposed in the Companies
(Second Amendment) Act, 2002 to be replaced by Insolvency
Fund with voluntary contributions linked to entitlements to draw
money in a situation of insolvency.
(xviii) A more effective regime for inspections and
investigations of companies while laying down the maximum
as well as minimum quantum of penalty for each offence
with suitable deterrence for repeat offences. Company is
identified as a separate entity for imposition of monetary
penalties from the officers in default. In case of fraudulent
activities/actions, provisions for recovery and disgorgement have
been included.
(xix) Levy of additional fee in a non-discretionary manner for
procedural offences, such as late filing of statutory documents,
to be enabled through rules. Defaults of procedural nature to be
penalized by levy of monetary penalties by the Registrars of
Companies. The appeals against such orders of Registrars of
Companies to lie with suitably designated higher authorities.
(xx) Special Courts to deal with offences under the Bill.
Company matters such as mergers and amalgamations,
reduction of capital, insolvency including rehabilitation,
liquidations and winding up are proposed to be addressed by the
National Company Law Tribunal/ National Company Law
Appellate Tribunal.
* * * * * * * *
4
Sub: The Companies Bill, 2008
The Ministry of Corporate Affairs took up a comprehensive
revision of the Companies Act, 1956 (the Act) in 2004 keeping in view
that not only had the number of companies in India expanded from
about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also
mobilizing resources at a scale unimaginable even a decade ago,
continuously entering into and bringing new activities into the fold of
the Indian economy. In doing so, they were emerging internationally as
efficient providers of a wide range of goods and services while
increasing employment opportunities at home. At the same time, the
increasing number of options and avenues for international business,
trade and capital flows had imposed a requirement not only for
harnessing entrepreneurial and economic resources efficiently but also
to be competitive in attracting investment for growth. These
developments necessitated modernization of the regulatory structure
for the corporate sector in a comprehensive manner.
2. Earlier, a Bill called Companies (Amendment) Bill, 2003 had been
introduced by M/o Corporate Affairs (MCA) (then Department of
Company Affairs) in the Rajya Sabha on 7.5.2003. Later on, a large
number of changes were found to be necessary in the Bill. A decision
was, therefore, taken to carry out a comprehensive review of the
Companies Act, 1956 and to introduce a new Companies Bill for the
consideration of the Parliament.
3. The review and redrafting of the Companies Act, 1956 was taken
up by the Ministry of Corporate Affairs on the basis of a detailed
consultative process. A `Concept Paper on new Company Law’ was
placed on the website of the Ministry on 4th August, 2004. The inputs
received were put to a detailed examination in the Ministry. The
Government also constituted an Expert Committee on Company Law
under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advise
on new Companies Bill. The Committee submitted its report to the
Government on 31st May 2005. Detailed consultations were also taken
up with various Ministries, Departments and Government Regulators.
The Bill was thereafter drafted in consultation with the Legislative
Department of the Central Government.
4. The Companies Bill, 2008 seeks to enable the corporate sector in
India to operate in a regulatory environment of best international
practices that fosters entrepreneurship, investment and growth and
provides for :-
1
(i) The basic principles for all aspects of internal governance
of corporate entities and a framework for their regulation,
irrespective of their area of operation, from incorporation to
liquidation and winding up, in a single, comprehensive, legal
framework administered by the Central Government. In doing
so, the Bill also harmonizes the Company law framework with
the imperative of specialized sectoral regulation
(ii) Articulation of shareholders democracy with
protection of the rights of minority stakeholders,
responsible self-regulation with disclosures and
accountability, substitution of government control over
internal corporate processes and decisions by
shareholder control. It also provides for shares with
differential voting rights to be done away with and valuation of
non-cash considerations for allotment of shares through
independent valuers.
(iii) Easy transition of companies operating under the
Companies Act, 1956, to the new framework as also from one
type of company to another.
(iv) A new entity in the form of One-Person Company
(OPC) while empowering Government to provide a simpler
compliance regime for small companies. Retains the concept of
Producer Companies, while providing a more stringent regime
for not-for–profit companies to check misuse. No restriction
proposed on the number of subsidiary companies that a
company may have, subject to disclosure in respect of their
relationship and transactions/dealings between them.
(v) Application of the successful e-Governance initiative of the
Ministry of Corporate Affairs (MCA-21) to all the processes
involved in meeting compliance obligations. Company processes,
also to be enabled to be carried out through electronic mode.
The proposed e-Governance regime is intended to provide for
ease of operation for filing and access to corporate data over the
internet to all stakeholders, on round the clock basis.
(vi) Speedy incorporation process, with detailed declarations/
disclosures about the promoters, directors etc. at the time of
incorporation itself. Every company director would be required to
acquire a unique Directors identification number.
(vii) Facilitates joint ventures and relaxes restrictions
limiting the number of partners in entities such as
partnership firms, banking companies etc. to a maximum 100
with no ceiling as to professions regulated by Special Acts.
2
(viii) Duties and liabilities of the directors and for every
company to have at least one director resident in India. The Bill
also provides for independent directors to be appointed on the
Boards of such companies as may be prescribed, along with
attributes determining independence. The requirement to
appoint independent directors, where applicable, is a minimum
of 33% of the total number of directors.
(ix) Statutory recognition to audit, remuneration and
stakeholders grievances committees of the Board and recognizes
the Chief Executive Officer (CEO), the Chief Financial Officer
(CFO) and the Company Secretary as Key Managerial Personnel
(KMP).
(x) Companies not to be allowed to raise deposits from the
public except on the basis of permission available to them
through other Special Acts. The Bill recognizes insider trading by
company directors/KMPs as an offence with criminal liability.
(xi) Recognition of both accounting and auditing
standards. The role, rights and duties of the auditors defined as
to maintain integrity and independence of the audit process.
Consolidation of financial statements of subsidiaries with those
of holding companies is proposed to be made mandatory.
(xii) A single forum for approval of mergers and
acquisitions, along with concept of deemed approval in certain
situations.
(xiii) A separate framework for enabling fair valuations in
companies for various purposes. Appointment of valuers is
proposed to be made by audit committees.
(xiv) Claim of an investor over a dividend or a security not
claimed for more than a period of seven years not being
extinguished, and Investor Education and Protection Fund (IEPF)
to be administered by a statutory Authority.
(xv) Shareholders Associations/Group of Shareholders to be
enabled to take legal action in case of any fraudulent action on
the part of company and to take part in investor protection
activities and ‘Class Action Suits’.
(xvi) A revised framework for regulation of insolvency,
including rehabilitation, winding up and liquidation of companies
with the process to be completed in a time bound manner.
Incorporates international best practices based on the models
3
suggested by the United Nations Commission on International
Trade Law (UNCITRAL).
(xvii) Consolidation of fora for dealing with rehabilitation of
companies, their liquidation and winding up in the single forum
of National Company Law Tribunal with appeal to National
Company Law Appellate Tribunal. The nature of the
Rehabilitation and Revival Fund proposed in the Companies
(Second Amendment) Act, 2002 to be replaced by Insolvency
Fund with voluntary contributions linked to entitlements to draw
money in a situation of insolvency.
(xviii) A more effective regime for inspections and
investigations of companies while laying down the maximum
as well as minimum quantum of penalty for each offence
with suitable deterrence for repeat offences. Company is
identified as a separate entity for imposition of monetary
penalties from the officers in default. In case of fraudulent
activities/actions, provisions for recovery and disgorgement have
been included.
(xix) Levy of additional fee in a non-discretionary manner for
procedural offences, such as late filing of statutory documents,
to be enabled through rules. Defaults of procedural nature to be
penalized by levy of monetary penalties by the Registrars of
Companies. The appeals against such orders of Registrars of
Companies to lie with suitably designated higher authorities.
(xx) Special Courts to deal with offences under the Bill.
Company matters such as mergers and amalgamations,
reduction of capital, insolvency including rehabilitation,
liquidations and winding up are proposed to be addressed by the
National Company Law Tribunal/ National Company Law
Appellate Tribunal.
* * * * * * * *
4
Thursday, September 11, 2008
AMENDMENTS IN EXCISE FOR CA FINAL
AMENDMENTS APPLICABLE FOR NOVEMBER 2007
EXCISE
Rule 8 of CER, 2002 (Pg. 34)
1 In case of non-SSI:-
Provided further that an assessee, who has paid duty of Rs. 50 lakh or more, other than by CENVAT credit, in the preceding financial year, shall thereafter, deposit the duty electronically through internet banking. [Inserted w.e.f. 1-4-2007]
Explanation For the purpose of this rule expression ‘duty’ or ‘duty of excise’ shall also include the amount payable in terms of the Cenvat Credit Rules, 2004. [w.e.f. 1-3-2007]
Rule 11 of CER, 2002(Pg. 36)
2. The invoice shall be serially numbered and shall now also contain
address of the concerned Central Excise Department [Inserted w.e.f. 1-4-2007]
Rule 12 of CER, 2002(Pg. 37)
1. Return:-
Provided that an assessee manufacturing Pan Masala, shall along with monthly return file a statement summarizing:-
à the purchase invoices for the month with the names and addresses of suppliers along with quantity purchased
à the sales invoices for the month with the names and addresses of buyers along with quantity, description and value of goods sold.
Rule 12 of CER, 2002
Indian Ordnance Factories, Department of Defence Production, Ministry of Defence have also been exempted from filing annual information financial statement.
Procedure and facilities for large tax payer
Rule 12BB [w.e.f.30-9-2006]
The provisions of rule 12BB of the Central Excise Rules, 2002 providing for procedures and facilities for the large taxpayer are:
(1) A large taxpayer may remove excisable goods (intermediate goods), without payment of excise duty
® except motor spirit, commonly known as petrol, high speed diesel and light diesel oil
® under the cover of a transfer challan or invoice from any of his registered premises (sender premises) where such goods are produced, manufactured or warehoused
® to his other registered premises (recipient premises) for further use in the manufacture or production of such other excisable goods (subject goods).
Such removal of intermediate goods without payment of duty from the sender premises to recipient premises shall be subject to the conditions that
(a) the subject goods are manufactured using the said intermediate goods and cleared on payment of appropriate duties of excise leviable thereon within 6 months, from the date of receipt of the intermediate goods in the recipient premises; or
(b) the subject goods are manufactured using the said intermediate goods and exported out of India, within 6 months, from the date of receipt of the intermediate goods in the recipient premises, and that any other conditions prescribed by the Commissioner are satisfied.
Explanation 1 The transfer challan or invoice shall be serially numbered and shall contain the registration number, name, address of the large taxpayer, description, classification, time and date of removal, mode of transport and vehicle registration number, quantity of the goods and registration number and name of the consignee.
Provided that, if the subject goods manufactured or produced using the said intermediate goods are not cleared on payment of appropriate duties of excise leviable thereon or are not exported within the said period of 6 months, duties payable on such intermediate goods shall be paid by the recipient premises with interest in the manner and rate specified under section 11 AB of the Act.
Illustration:- Excise duty is payable on intermediate goods, namely, electronics goods, manufactured by factory A which are removed without payment of duties of excise for use in the manufacture of subject goods, namely, machines, in factory B of the large tax payer. In case such machines are not exported or are removed without payment of excise duty, then factory B shall pay duty on the electronic goods so cleared alongwith interest.
Provided further, if any duty is payable on such intermediate goods and, if the said duty is not payable on such subject goods, the said duty of excise as equivalent to the total amount payable on such intermediate goods along with interest under section 11 AB of the Act shall be paid by the recipient premises.
Illustration:- NC duty is payable on intermediate goods namely, polyster yarn manufactured by factory A. Such yarn is removed without payment of duty for use in the manufacture of subject goods, namely, grey fabrics in factory B of LTU(on which NC duty is not payable), then factory B shall pay an amount equal to the NC duty that would have been payable on the polyster yarn alongwith interest.
Explanation 2 The duty payable shall be the duty payable on the date and time of removal of the intermediate goods from the sender's premises.
Explanation 3 If the large taxpayer fails to pay such amount, it shall be recovered along with interest in the same manner as provided under section 11 A and section 11 AB respectively of the Act.
(2) Where a registered premises of a large taxpayer has paid duty in excess of duty payable on account of arithmetical error, it may adjust the excess duty, against his liability for the subsequent period.
However, such adjustment shall be admissible only if the incidence has not been passed on.
(4) A large taxpayer shall submit the monthly returns, as prescribed under these rules, for each of the registered premises.
(5) A large taxpayer, on demand, may be required to make available the financial, production, stores and CENV AT credit records in electronic media, such as, compact disc for carrying out scrutiny.
(6) A large taxpayer may, with intimation of at least 30 days in advance, opt out to be a large taxpayer from the first day of the following financial year.
(7) The provisions of other rules of Central Excise Rules, 2002 in so far as they are not inconsistent with the provisions of this rule shall mutatis mutandis apply in case of a large taxpayer.
Large Tax Payer Unit
Rule 2(ea) “large tax payer unit” means a person who
(i) has one or more registered premises under central excise act or
(ii) has one or more registered premises under Finance Act 1994
and is an assessee under the Income Tax Act, who holds a permanent account number used under section 139A of the said Act and satisfies the conditions and observes the procedures notified by the central government in this regard.
Procedure for large tax payer
Rule 12A of CCR, 2004
A large tax payer may remove inputs or capital goods, except petrol, HSD and LSD, on which credit has been taken, without payment of amount referred in rule 3(5).
But if final product is not cleared on payment of duty or capital goods are used exclusively in the manufacture of exempted goods then amount equal to credit taken on input or capital goods has to be paid.
Other provisions of Rule 12BB shall be applicable here also.
Power to impose restriction
Rule 12CC
® Notwithstanding anything contained in these rules, where the central government,
® having regard to the extent of evasion of duty, nature and type of offences or such other factors as may be relevant,
® is of the opinion that in order to prevent evasion of and default in payment of, excise duty,
® it is necessary in the public interest to provide for certain measures including restrictions on a manufacturer, first stage and second stage dealer or an exporter,
may by a notification in the official gazette, specify nature of restrictions including suspension of registration in case of a dealer, types of facilities to be withdrawn and procedure for issue of such order by an officer authorized by the board. [Inserted w.e.f. 30-12-2006]
Special procedure for removal of excisable goods for carrying out certain processes
Rule 16C (Pg. 40)
® The Commissioner may, by special order and subject to conditions as may be specified by him,
® permit a manufacturer to remove excisable goods manufactured in his factory
for carrying out tests or any other process not amounting to manufacture [Inserted w.e.f. 28-12-2006]
® to some other premises whether registered or not and
® to bring back such goods to his factory, without payment of duty, or to some other registered premises and allow these goods to be removed on payment of duty, or without payment of duty for export from such other registered premises.
Rule 19 of CER, 2002 (Pg. 84)
Rate of interest, when goods are diverted for home consumption, has changed from 24% to the rate mentioned in Section 11AB.
REMAINING TO BE CONTINUED........................
EXCISE
Rule 8 of CER, 2002 (Pg. 34)
1 In case of non-SSI:-
Provided further that an assessee, who has paid duty of Rs. 50 lakh or more, other than by CENVAT credit, in the preceding financial year, shall thereafter, deposit the duty electronically through internet banking. [Inserted w.e.f. 1-4-2007]
Explanation For the purpose of this rule expression ‘duty’ or ‘duty of excise’ shall also include the amount payable in terms of the Cenvat Credit Rules, 2004. [w.e.f. 1-3-2007]
Rule 11 of CER, 2002(Pg. 36)
2. The invoice shall be serially numbered and shall now also contain
address of the concerned Central Excise Department [Inserted w.e.f. 1-4-2007]
Rule 12 of CER, 2002(Pg. 37)
1. Return:-
Provided that an assessee manufacturing Pan Masala, shall along with monthly return file a statement summarizing:-
à the purchase invoices for the month with the names and addresses of suppliers along with quantity purchased
à the sales invoices for the month with the names and addresses of buyers along with quantity, description and value of goods sold.
Rule 12 of CER, 2002
Indian Ordnance Factories, Department of Defence Production, Ministry of Defence have also been exempted from filing annual information financial statement.
Procedure and facilities for large tax payer
Rule 12BB [w.e.f.30-9-2006]
The provisions of rule 12BB of the Central Excise Rules, 2002 providing for procedures and facilities for the large taxpayer are:
(1) A large taxpayer may remove excisable goods (intermediate goods), without payment of excise duty
® except motor spirit, commonly known as petrol, high speed diesel and light diesel oil
® under the cover of a transfer challan or invoice from any of his registered premises (sender premises) where such goods are produced, manufactured or warehoused
® to his other registered premises (recipient premises) for further use in the manufacture or production of such other excisable goods (subject goods).
Such removal of intermediate goods without payment of duty from the sender premises to recipient premises shall be subject to the conditions that
(a) the subject goods are manufactured using the said intermediate goods and cleared on payment of appropriate duties of excise leviable thereon within 6 months, from the date of receipt of the intermediate goods in the recipient premises; or
(b) the subject goods are manufactured using the said intermediate goods and exported out of India, within 6 months, from the date of receipt of the intermediate goods in the recipient premises, and that any other conditions prescribed by the Commissioner are satisfied.
Explanation 1 The transfer challan or invoice shall be serially numbered and shall contain the registration number, name, address of the large taxpayer, description, classification, time and date of removal, mode of transport and vehicle registration number, quantity of the goods and registration number and name of the consignee.
Provided that, if the subject goods manufactured or produced using the said intermediate goods are not cleared on payment of appropriate duties of excise leviable thereon or are not exported within the said period of 6 months, duties payable on such intermediate goods shall be paid by the recipient premises with interest in the manner and rate specified under section 11 AB of the Act.
Illustration:- Excise duty is payable on intermediate goods, namely, electronics goods, manufactured by factory A which are removed without payment of duties of excise for use in the manufacture of subject goods, namely, machines, in factory B of the large tax payer. In case such machines are not exported or are removed without payment of excise duty, then factory B shall pay duty on the electronic goods so cleared alongwith interest.
Provided further, if any duty is payable on such intermediate goods and, if the said duty is not payable on such subject goods, the said duty of excise as equivalent to the total amount payable on such intermediate goods along with interest under section 11 AB of the Act shall be paid by the recipient premises.
Illustration:- NC duty is payable on intermediate goods namely, polyster yarn manufactured by factory A. Such yarn is removed without payment of duty for use in the manufacture of subject goods, namely, grey fabrics in factory B of LTU(on which NC duty is not payable), then factory B shall pay an amount equal to the NC duty that would have been payable on the polyster yarn alongwith interest.
Explanation 2 The duty payable shall be the duty payable on the date and time of removal of the intermediate goods from the sender's premises.
Explanation 3 If the large taxpayer fails to pay such amount, it shall be recovered along with interest in the same manner as provided under section 11 A and section 11 AB respectively of the Act.
(2) Where a registered premises of a large taxpayer has paid duty in excess of duty payable on account of arithmetical error, it may adjust the excess duty, against his liability for the subsequent period.
However, such adjustment shall be admissible only if the incidence has not been passed on.
(4) A large taxpayer shall submit the monthly returns, as prescribed under these rules, for each of the registered premises.
(5) A large taxpayer, on demand, may be required to make available the financial, production, stores and CENV AT credit records in electronic media, such as, compact disc for carrying out scrutiny.
(6) A large taxpayer may, with intimation of at least 30 days in advance, opt out to be a large taxpayer from the first day of the following financial year.
(7) The provisions of other rules of Central Excise Rules, 2002 in so far as they are not inconsistent with the provisions of this rule shall mutatis mutandis apply in case of a large taxpayer.
Large Tax Payer Unit
Rule 2(ea) “large tax payer unit” means a person who
(i) has one or more registered premises under central excise act or
(ii) has one or more registered premises under Finance Act 1994
and is an assessee under the Income Tax Act, who holds a permanent account number used under section 139A of the said Act and satisfies the conditions and observes the procedures notified by the central government in this regard.
Procedure for large tax payer
Rule 12A of CCR, 2004
A large tax payer may remove inputs or capital goods, except petrol, HSD and LSD, on which credit has been taken, without payment of amount referred in rule 3(5).
But if final product is not cleared on payment of duty or capital goods are used exclusively in the manufacture of exempted goods then amount equal to credit taken on input or capital goods has to be paid.
Other provisions of Rule 12BB shall be applicable here also.
Power to impose restriction
Rule 12CC
® Notwithstanding anything contained in these rules, where the central government,
® having regard to the extent of evasion of duty, nature and type of offences or such other factors as may be relevant,
® is of the opinion that in order to prevent evasion of and default in payment of, excise duty,
® it is necessary in the public interest to provide for certain measures including restrictions on a manufacturer, first stage and second stage dealer or an exporter,
may by a notification in the official gazette, specify nature of restrictions including suspension of registration in case of a dealer, types of facilities to be withdrawn and procedure for issue of such order by an officer authorized by the board. [Inserted w.e.f. 30-12-2006]
Special procedure for removal of excisable goods for carrying out certain processes
Rule 16C (Pg. 40)
® The Commissioner may, by special order and subject to conditions as may be specified by him,
® permit a manufacturer to remove excisable goods manufactured in his factory
for carrying out tests or any other process not amounting to manufacture [Inserted w.e.f. 28-12-2006]
® to some other premises whether registered or not and
® to bring back such goods to his factory, without payment of duty, or to some other registered premises and allow these goods to be removed on payment of duty, or without payment of duty for export from such other registered premises.
Rule 19 of CER, 2002 (Pg. 84)
Rate of interest, when goods are diverted for home consumption, has changed from 24% to the rate mentioned in Section 11AB.
REMAINING TO BE CONTINUED........................
Sunday, September 07, 2008
REVISION OF GUIDANCE NOTE UNDER SECTION 44AB OF THE INCOME TAX ACT 1961
Revision of Guidance Note on Tax audit under section
44AB of the Income-tax Act, 1961
The Guidance Note on Tax audit under section 44AB of the
Income-tax Act, 1961 was revised in the year 2005 taking into
consideration the amendments made by the Finance Act, 2005.
Thereafter, a Supplementary Guidance Note was issued in the
year 2006, which was a part of Guidance Note on audit of
fringe benefits under the Income-tax Act, 1961. This
Supplementary Guidance Note took into consideration the
amendments made in Form No.3CD by Circular No.208/2006
dated 10th August 2006. Further Guidance in regard to reporting
requirement in Form No.3CD in respect of changes brought about
by State-Level VAT Acts in the context of section 145A was
placed on the website on 12.10.2007.
To enable the members to efficiently discharge their onerous
responsibility, the Council in its 280th meeting held from 7th
to 9th August 2008, considered the integration of the
Supplementary Guidance Note on tax audit with the main
Guidance Note on tax audit under section 44AB of the Incometax
Act, 1961 and further revision thereof.
Apart from the changes, which are required to be made due to
change in law, the Council considered the appropriate guidance
to be given to the members in regard to clause 17(l) of Form
No.3CD.
Notification No.208/2006 dated 10th August 2006 inserted a
new clause 17(l) in Form No. 3CD wherein the amount of
deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not
form part of the total income is required to be mentioned. The
Finance Act, 2006 inserted sub-section (2) and sub-section
(3) in the section 14A to the effect that having regard to the
books of account of the assessee the Assessing Officer shall
determine the amount of expenditure incurred in relation to
such income which does not form part of the total income
under the Act in accordance with the method as may be
prescribed. Recently, the CBDT has through Income-tax (Fifth
2
Amendment) Rules, 2008 inserted a new Rule 8D which lays
down the method for determining the amount of expenditure in
relation to income not includible in total income.
The appropriate guidance approved by the Council in regard
to clause 17(l) of the Form No.3CD is as under:-
“40. Clause 17(l) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form part of
the total income;
40.1 This clause was inserted by the notification number
208/2006 dated 10th August 2006. Section 14A was inserted
in Chapter IV – Computation of total income by the Finance
Act, 2001 with retrospective effect from 1.4.1962 i.e. A.Y.
1962-63. Accordingly, for the purposes of computing the
total income under Chapter IV of the Act, no deduction shall
be allowed in respect of expenditure incurred by the assessee
in relation to income which does not form part of the total
income under the Act. The Finance Act, 2002 added a
proviso to section 14A to the effect that nothing contained in
the section shall empower the Assessing Officer either to
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the first day of
April, 2001.
40.2 The Finance Act, 2006 has inserted sub-sections (2) and
(3) w.e.f. A.Y. 2007-08. Under sub-section (2) the Assessing
Officer shall determine the amount of expenditure incurred in
relation to such income, which does not form part of the total
income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such
power of the Assessing Officer can be exercised only when
he, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
40.3 Sub-section (3) provides that the provisions of subsection
(2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him
3
in relation to income which does not form part of the total
income under this Act.
40.4 The expenditure which is relatable to the income which
does not form part of the total income is not allowed as a
deduction in terms of section 14A of the Act. Such income
are dealt with in Part III- Incomes Which Do Not Form Part
Of Total Income. Section 10 deals with Incomes not include
in total income. Sections 10A to 10C deals with the special
provisions in respect of the specified undertakings. In
general an assessee may have besides his business income,
income from agriculture which is exempt under sub-section
(1), share of profit in a partnership firm which is exempt
under sub-section (2A), income from dividends referred to in
section 115-O which is exempt under sub-section (34), long
term capital gains on the transfer of equity shares which is
exempt under sub-section (38) etc. In all such cases the
expenditure relating to the income which is not included in
total income is inadmissible under section 14A. In case of an
investment in a partnership firm, while the interest and the
salary received by the partner are taxable, the share of profit
is exempt. The amount of inadmissible expenditure depends
on the facts and circumstances of each case.
40.5 The Central Board of Direct Taxes, has through Income-tax
(Fifth Amendment) Rules, 2008 inserted a new Rule 8D which
lays down the method for determining the amount of expenditure
in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the
assessee of a previous year, if the Assessing Officer is not
satisfied with the correctness of the claim of expenditure made by
the assessee or with the claim made by the assessee that no
expenditure has been incurred, in relation to income which does
not form part of the total income under the Act for such previous
year, he shall determine the amount of such inadmissible
expenditure in accordance with the method of computation laid
down in sub-rule (2) of Rule 8D.
Sub-rule (2) of Rule 8D provides for the method of computation
of the expenditure in relation to income not forming part of the
total income. The disallowance shall be the aggregate of the
following:
4
i) the amount of expenditure directly relating to income
which does not form part of total income;
ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not
directly attributable to any particular income or receipt, an
amount computed in accordance with the following
formula, namely :
A X B
C
Where A = amount of expenditure by way of interest other
than the amount of interest included in clause (i)
incurred during the previous year;
B = the average of value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year;
C = the average of total assets as appearing in the
balance sheet of the assessee, on the first day and
the last day of the previous year;
iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the
balance sheet of the assessee, on the first day and the last
day of the previous year.
“Total Assets” for the purpose of Rule 8D shall mean, total assets
as appearing in the balance sheet excluding the increase on
account of revaluation of assets but including the decrease on
account of revaluation of assets.
40.6 The method prescribed under sub-rule (2) of Rule 8D is
applicable when the Assessing Officer is not satisfied with
the correctness of the claim of expenditure made by the
assessee or with the claim made by the assessee that no
expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of
5
tax audit the tax auditor will have to verify the amount of
inadmissible expenditure as determined by the assessee. The
method under sub-rule (2) of Rule 8D is to be adopted by the
Assessing Officer when he is not satisfied with the amount as
determined by the assessee. Rule 8D does not mandate that
the assessee should necessarily compute the disallowance as
per the method prescribed under sub rule (2). Therefore, the
assessee may or may not adopt the same.
40.7 It is primarily the responsibility of the assessee to
furnish the details of amount of deduction inadmissible in
terms of section 14A i.e. in respect of the expenditure
incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax auditor
is entitled to rely on the management representation.
However, attention is invited to para 5 of Standard on
Auditing -580, “Representation by Management” (earlier
known as Auditing and Assurance Standard-11) which is as
under:-
“During the course of an audit, management makes many
representations to the auditor, either unsolicited or in
response to specific enquires. When such representations
relate to matters which are material to the financial
information, the auditor should;
(a) seek corroborative audit evidence from sources inside
or outside the entity;
(b) evaluate whether the representations made by
management appear reasonable and consistent with
other audit evidence obtained, including other
representations; and
(c) consider whether the individuals making the
representation can be expected to be well informed on
the matter.”
40.8 The tax auditor will verify the amount of inadmissible
expenditure as estimated by the assessee with reference to
established principles of allocation of expenditure based on
6
logical parameters like proportion of exempt and taxable
income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between
taxable and non-taxable income, the quantum of investment,
the period and the rate of interest are generally the relevant
factors to be considered. This requires proper estimates to be
made by the assessee. The tax auditor is required to audit
such estimates. Attention is invited to Standard on Auditing-
540 (earlier known as AAS-18)“ “Audit of Accounting
Estimates”. In accordance with this Standard the auditor
should adopt one or a combination of the following
approaches in the audit of such accounting estimates:
- review and test the process used by the assessee to
develop the estimate;
- use an independent estimate for comparison with that
prepared by the assessee; or
- review subsequent events which confirm the estimate
made.
40.9 An assessee may claim that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Even in such a case the
provisions of section 14A will apply. Accordingly, the tax
auditor is required to verify such contention of the assessee.
40.10 As stated before the method prescribed under subrule
(2) of Rule 8D is to be adopted by the Assessing Officer
when he is not satisfied with the correctness of claim made
by the assessee. As per clause (i) of sub-rule (2) the
expenditure which is directly relatable to income which does
not form part of total income is inadmissible expenditure.
Besides such expenditure there may be expenditure such as
interest, which is relatable to both taxable and non-taxable
income which needs to be properly allocated while
calculating the inadmissible amount. Interest which, can be
directly attributable to any particular income or receipt
chargeable to tax needs to be excluded while determining the
inadmissible amount. Clause (ii) of sub-rule (2) of rule 8D
deals with allocation of interest which, is not directly
7
attributable to any particular income or receipt. However the
variable A used in the formula in clause (ii) of sub- rule (2) is
said to be equal to the amount of expenditure by way of interest
other than the amount of interest included in clause (i) incurred
during the previous year. It may be seen that what is proposed to
be allocated as per clause (ii) is interest which is not directly
attributable to any particular income or receipt. Therefore,
variable A is the amount of expenditure by way of interest other
than the amount of interest directly attributable to any non
taxable income as per clause (i) and also interest which may be
directly attributable to any taxable income. Interest on term loan
may be an example of such interest which is generally related
to taxable income and is therefore excluded.
40.11 The broad principles enunciated in para 16.3 may
be kept in mind while verifying the amount of inadmissible
expenditure. After verifying the amount of inadmissible
expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the
amount with suitable disclosures of material assumptions, if
any.
(b) is not in agreement with the assessee with regard to the
amount of expenditure determined, he may give:
- A qualified opinion:
A qualified opinion can be given when the auditor
is of the opinion that the effect of any
disagreement with the assessee is not so material
and pervasive as to require an adverse opinion or
limitation on scope is not so material and
pervasive as to require a disclaimer of opinion.
- An adverse opinion:
The auditor in rare circumstances may come
across a situation where the impact of his
disagreement about the computation of such
inadmissible expenditure is so material and
pervasive that it affects the overall opinion. In
such a case the tax auditor may give an adverse
opinion.
8
- The disclaimer of opinion:
When the assessee has neither provided the basis
nor the supporting documents, for the claim of
such inadmissible expenditure, then due to
limitation on the scope of auditors work, the
auditor can give disclaimer of opinion.”
44AB of the Income-tax Act, 1961
The Guidance Note on Tax audit under section 44AB of the
Income-tax Act, 1961 was revised in the year 2005 taking into
consideration the amendments made by the Finance Act, 2005.
Thereafter, a Supplementary Guidance Note was issued in the
year 2006, which was a part of Guidance Note on audit of
fringe benefits under the Income-tax Act, 1961. This
Supplementary Guidance Note took into consideration the
amendments made in Form No.3CD by Circular No.208/2006
dated 10th August 2006. Further Guidance in regard to reporting
requirement in Form No.3CD in respect of changes brought about
by State-Level VAT Acts in the context of section 145A was
placed on the website on 12.10.2007.
To enable the members to efficiently discharge their onerous
responsibility, the Council in its 280th meeting held from 7th
to 9th August 2008, considered the integration of the
Supplementary Guidance Note on tax audit with the main
Guidance Note on tax audit under section 44AB of the Incometax
Act, 1961 and further revision thereof.
Apart from the changes, which are required to be made due to
change in law, the Council considered the appropriate guidance
to be given to the members in regard to clause 17(l) of Form
No.3CD.
Notification No.208/2006 dated 10th August 2006 inserted a
new clause 17(l) in Form No. 3CD wherein the amount of
deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not
form part of the total income is required to be mentioned. The
Finance Act, 2006 inserted sub-section (2) and sub-section
(3) in the section 14A to the effect that having regard to the
books of account of the assessee the Assessing Officer shall
determine the amount of expenditure incurred in relation to
such income which does not form part of the total income
under the Act in accordance with the method as may be
prescribed. Recently, the CBDT has through Income-tax (Fifth
2
Amendment) Rules, 2008 inserted a new Rule 8D which lays
down the method for determining the amount of expenditure in
relation to income not includible in total income.
The appropriate guidance approved by the Council in regard
to clause 17(l) of the Form No.3CD is as under:-
“40. Clause 17(l) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form part of
the total income;
40.1 This clause was inserted by the notification number
208/2006 dated 10th August 2006. Section 14A was inserted
in Chapter IV – Computation of total income by the Finance
Act, 2001 with retrospective effect from 1.4.1962 i.e. A.Y.
1962-63. Accordingly, for the purposes of computing the
total income under Chapter IV of the Act, no deduction shall
be allowed in respect of expenditure incurred by the assessee
in relation to income which does not form part of the total
income under the Act. The Finance Act, 2002 added a
proviso to section 14A to the effect that nothing contained in
the section shall empower the Assessing Officer either to
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the first day of
April, 2001.
40.2 The Finance Act, 2006 has inserted sub-sections (2) and
(3) w.e.f. A.Y. 2007-08. Under sub-section (2) the Assessing
Officer shall determine the amount of expenditure incurred in
relation to such income, which does not form part of the total
income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such
power of the Assessing Officer can be exercised only when
he, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
40.3 Sub-section (3) provides that the provisions of subsection
(2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him
3
in relation to income which does not form part of the total
income under this Act.
40.4 The expenditure which is relatable to the income which
does not form part of the total income is not allowed as a
deduction in terms of section 14A of the Act. Such income
are dealt with in Part III- Incomes Which Do Not Form Part
Of Total Income. Section 10 deals with Incomes not include
in total income. Sections 10A to 10C deals with the special
provisions in respect of the specified undertakings. In
general an assessee may have besides his business income,
income from agriculture which is exempt under sub-section
(1), share of profit in a partnership firm which is exempt
under sub-section (2A), income from dividends referred to in
section 115-O which is exempt under sub-section (34), long
term capital gains on the transfer of equity shares which is
exempt under sub-section (38) etc. In all such cases the
expenditure relating to the income which is not included in
total income is inadmissible under section 14A. In case of an
investment in a partnership firm, while the interest and the
salary received by the partner are taxable, the share of profit
is exempt. The amount of inadmissible expenditure depends
on the facts and circumstances of each case.
40.5 The Central Board of Direct Taxes, has through Income-tax
(Fifth Amendment) Rules, 2008 inserted a new Rule 8D which
lays down the method for determining the amount of expenditure
in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the
assessee of a previous year, if the Assessing Officer is not
satisfied with the correctness of the claim of expenditure made by
the assessee or with the claim made by the assessee that no
expenditure has been incurred, in relation to income which does
not form part of the total income under the Act for such previous
year, he shall determine the amount of such inadmissible
expenditure in accordance with the method of computation laid
down in sub-rule (2) of Rule 8D.
Sub-rule (2) of Rule 8D provides for the method of computation
of the expenditure in relation to income not forming part of the
total income. The disallowance shall be the aggregate of the
following:
4
i) the amount of expenditure directly relating to income
which does not form part of total income;
ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not
directly attributable to any particular income or receipt, an
amount computed in accordance with the following
formula, namely :
A X B
C
Where A = amount of expenditure by way of interest other
than the amount of interest included in clause (i)
incurred during the previous year;
B = the average of value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year;
C = the average of total assets as appearing in the
balance sheet of the assessee, on the first day and
the last day of the previous year;
iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the
balance sheet of the assessee, on the first day and the last
day of the previous year.
“Total Assets” for the purpose of Rule 8D shall mean, total assets
as appearing in the balance sheet excluding the increase on
account of revaluation of assets but including the decrease on
account of revaluation of assets.
40.6 The method prescribed under sub-rule (2) of Rule 8D is
applicable when the Assessing Officer is not satisfied with
the correctness of the claim of expenditure made by the
assessee or with the claim made by the assessee that no
expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of
5
tax audit the tax auditor will have to verify the amount of
inadmissible expenditure as determined by the assessee. The
method under sub-rule (2) of Rule 8D is to be adopted by the
Assessing Officer when he is not satisfied with the amount as
determined by the assessee. Rule 8D does not mandate that
the assessee should necessarily compute the disallowance as
per the method prescribed under sub rule (2). Therefore, the
assessee may or may not adopt the same.
40.7 It is primarily the responsibility of the assessee to
furnish the details of amount of deduction inadmissible in
terms of section 14A i.e. in respect of the expenditure
incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax auditor
is entitled to rely on the management representation.
However, attention is invited to para 5 of Standard on
Auditing -580, “Representation by Management” (earlier
known as Auditing and Assurance Standard-11) which is as
under:-
“During the course of an audit, management makes many
representations to the auditor, either unsolicited or in
response to specific enquires. When such representations
relate to matters which are material to the financial
information, the auditor should;
(a) seek corroborative audit evidence from sources inside
or outside the entity;
(b) evaluate whether the representations made by
management appear reasonable and consistent with
other audit evidence obtained, including other
representations; and
(c) consider whether the individuals making the
representation can be expected to be well informed on
the matter.”
40.8 The tax auditor will verify the amount of inadmissible
expenditure as estimated by the assessee with reference to
established principles of allocation of expenditure based on
6
logical parameters like proportion of exempt and taxable
income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between
taxable and non-taxable income, the quantum of investment,
the period and the rate of interest are generally the relevant
factors to be considered. This requires proper estimates to be
made by the assessee. The tax auditor is required to audit
such estimates. Attention is invited to Standard on Auditing-
540 (earlier known as AAS-18)“ “Audit of Accounting
Estimates”. In accordance with this Standard the auditor
should adopt one or a combination of the following
approaches in the audit of such accounting estimates:
- review and test the process used by the assessee to
develop the estimate;
- use an independent estimate for comparison with that
prepared by the assessee; or
- review subsequent events which confirm the estimate
made.
40.9 An assessee may claim that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Even in such a case the
provisions of section 14A will apply. Accordingly, the tax
auditor is required to verify such contention of the assessee.
40.10 As stated before the method prescribed under subrule
(2) of Rule 8D is to be adopted by the Assessing Officer
when he is not satisfied with the correctness of claim made
by the assessee. As per clause (i) of sub-rule (2) the
expenditure which is directly relatable to income which does
not form part of total income is inadmissible expenditure.
Besides such expenditure there may be expenditure such as
interest, which is relatable to both taxable and non-taxable
income which needs to be properly allocated while
calculating the inadmissible amount. Interest which, can be
directly attributable to any particular income or receipt
chargeable to tax needs to be excluded while determining the
inadmissible amount. Clause (ii) of sub-rule (2) of rule 8D
deals with allocation of interest which, is not directly
7
attributable to any particular income or receipt. However the
variable A used in the formula in clause (ii) of sub- rule (2) is
said to be equal to the amount of expenditure by way of interest
other than the amount of interest included in clause (i) incurred
during the previous year. It may be seen that what is proposed to
be allocated as per clause (ii) is interest which is not directly
attributable to any particular income or receipt. Therefore,
variable A is the amount of expenditure by way of interest other
than the amount of interest directly attributable to any non
taxable income as per clause (i) and also interest which may be
directly attributable to any taxable income. Interest on term loan
may be an example of such interest which is generally related
to taxable income and is therefore excluded.
40.11 The broad principles enunciated in para 16.3 may
be kept in mind while verifying the amount of inadmissible
expenditure. After verifying the amount of inadmissible
expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the
amount with suitable disclosures of material assumptions, if
any.
(b) is not in agreement with the assessee with regard to the
amount of expenditure determined, he may give:
- A qualified opinion:
A qualified opinion can be given when the auditor
is of the opinion that the effect of any
disagreement with the assessee is not so material
and pervasive as to require an adverse opinion or
limitation on scope is not so material and
pervasive as to require a disclaimer of opinion.
- An adverse opinion:
The auditor in rare circumstances may come
across a situation where the impact of his
disagreement about the computation of such
inadmissible expenditure is so material and
pervasive that it affects the overall opinion. In
such a case the tax auditor may give an adverse
opinion.
8
- The disclaimer of opinion:
When the assessee has neither provided the basis
nor the supporting documents, for the claim of
such inadmissible expenditure, then due to
limitation on the scope of auditors work, the
auditor can give disclaimer of opinion.”
REVISION OF GUIDANCE NOTE UNDERS ECTION 44AB OF THE INCOM ETAX ACT 1961
Revision of Guidance Note on Tax audit under section
44AB of the Income-tax Act, 1961
The Guidance Note on Tax audit under section 44AB of the
Income-tax Act, 1961 was revised in the year 2005 taking into
consideration the amendments made by the Finance Act, 2005.
Thereafter, a Supplementary Guidance Note was issued in the
year 2006, which was a part of Guidance Note on audit of
fringe benefits under the Income-tax Act, 1961. This
Supplementary Guidance Note took into consideration the
amendments made in Form No.3CD by Circular No.208/2006
dated 10th August 2006. Further Guidance in regard to reporting
requirement in Form No.3CD in respect of changes brought about
by State-Level VAT Acts in the context of section 145A was
placed on the website on 12.10.2007.
To enable the members to efficiently discharge their onerous
responsibility, the Council in its 280th meeting held from 7th
to 9th August 2008, considered the integration of the
Supplementary Guidance Note on tax audit with the main
Guidance Note on tax audit under section 44AB of the Incometax
Act, 1961 and further revision thereof.
Apart from the changes, which are required to be made due to
change in law, the Council considered the appropriate guidance
to be given to the members in regard to clause 17(l) of Form
No.3CD.
Notification No.208/2006 dated 10th August 2006 inserted a
new clause 17(l) in Form No. 3CD wherein the amount of
deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not
form part of the total income is required to be mentioned. The
Finance Act, 2006 inserted sub-section (2) and sub-section
(3) in the section 14A to the effect that having regard to the
books of account of the assessee the Assessing Officer shall
determine the amount of expenditure incurred in relation to
such income which does not form part of the total income
under the Act in accordance with the method as may be
prescribed. Recently, the CBDT has through Income-tax (Fifth
2
Amendment) Rules, 2008 inserted a new Rule 8D which lays
down the method for determining the amount of expenditure in
relation to income not includible in total income.
The appropriate guidance approved by the Council in regard
to clause 17(l) of the Form No.3CD is as under:-
“40. Clause 17(l) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form part of
the total income;
40.1 This clause was inserted by the notification number
208/2006 dated 10th August 2006. Section 14A was inserted
in Chapter IV – Computation of total income by the Finance
Act, 2001 with retrospective effect from 1.4.1962 i.e. A.Y.
1962-63. Accordingly, for the purposes of computing the
total income under Chapter IV of the Act, no deduction shall
be allowed in respect of expenditure incurred by the assessee
in relation to income which does not form part of the total
income under the Act. The Finance Act, 2002 added a
proviso to section 14A to the effect that nothing contained in
the section shall empower the Assessing Officer either to
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the first day of
April, 2001.
40.2 The Finance Act, 2006 has inserted sub-sections (2) and
(3) w.e.f. A.Y. 2007-08. Under sub-section (2) the Assessing
Officer shall determine the amount of expenditure incurred in
relation to such income, which does not form part of the total
income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such
power of the Assessing Officer can be exercised only when
he, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
40.3 Sub-section (3) provides that the provisions of subsection
(2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him
3
in relation to income which does not form part of the total
income under this Act.
40.4 The expenditure which is relatable to the income which
does not form part of the total income is not allowed as a
deduction in terms of section 14A of the Act. Such income
are dealt with in Part III- Incomes Which Do Not Form Part
Of Total Income. Section 10 deals with Incomes not include
in total income. Sections 10A to 10C deals with the special
provisions in respect of the specified undertakings. In
general an assessee may have besides his business income,
income from agriculture which is exempt under sub-section
(1), share of profit in a partnership firm which is exempt
under sub-section (2A), income from dividends referred to in
section 115-O which is exempt under sub-section (34), long
term capital gains on the transfer of equity shares which is
exempt under sub-section (38) etc. In all such cases the
expenditure relating to the income which is not included in
total income is inadmissible under section 14A. In case of an
investment in a partnership firm, while the interest and the
salary received by the partner are taxable, the share of profit
is exempt. The amount of inadmissible expenditure depends
on the facts and circumstances of each case.
40.5 The Central Board of Direct Taxes, has through Income-tax
(Fifth Amendment) Rules, 2008 inserted a new Rule 8D which
lays down the method for determining the amount of expenditure
in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the
assessee of a previous year, if the Assessing Officer is not
satisfied with the correctness of the claim of expenditure made by
the assessee or with the claim made by the assessee that no
expenditure has been incurred, in relation to income which does
not form part of the total income under the Act for such previous
year, he shall determine the amount of such inadmissible
expenditure in accordance with the method of computation laid
down in sub-rule (2) of Rule 8D.
Sub-rule (2) of Rule 8D provides for the method of computation
of the expenditure in relation to income not forming part of the
total income. The disallowance shall be the aggregate of the
following:
4
i) the amount of expenditure directly relating to income
which does not form part of total income;
ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not
directly attributable to any particular income or receipt, an
amount computed in accordance with the following
formula, namely :
A X B
C
Where A = amount of expenditure by way of interest other
than the amount of interest included in clause (i)
incurred during the previous year;
B = the average of value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year;
C = the average of total assets as appearing in the
balance sheet of the assessee, on the first day and
the last day of the previous year;
iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the
balance sheet of the assessee, on the first day and the last
day of the previous year.
“Total Assets” for the purpose of Rule 8D shall mean, total assets
as appearing in the balance sheet excluding the increase on
account of revaluation of assets but including the decrease on
account of revaluation of assets.
40.6 The method prescribed under sub-rule (2) of Rule 8D is
applicable when the Assessing Officer is not satisfied with
the correctness of the claim of expenditure made by the
assessee or with the claim made by the assessee that no
expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of
5
tax audit the tax auditor will have to verify the amount of
inadmissible expenditure as determined by the assessee. The
method under sub-rule (2) of Rule 8D is to be adopted by the
Assessing Officer when he is not satisfied with the amount as
determined by the assessee. Rule 8D does not mandate that
the assessee should necessarily compute the disallowance as
per the method prescribed under sub rule (2). Therefore, the
assessee may or may not adopt the same.
40.7 It is primarily the responsibility of the assessee to
furnish the details of amount of deduction inadmissible in
terms of section 14A i.e. in respect of the expenditure
incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax auditor
is entitled to rely on the management representation.
However, attention is invited to para 5 of Standard on
Auditing -580, “Representation by Management” (earlier
known as Auditing and Assurance Standard-11) which is as
under:-
“During the course of an audit, management makes many
representations to the auditor, either unsolicited or in
response to specific enquires. When such representations
relate to matters which are material to the financial
information, the auditor should;
(a) seek corroborative audit evidence from sources inside
or outside the entity;
(b) evaluate whether the representations made by
management appear reasonable and consistent with
other audit evidence obtained, including other
representations; and
(c) consider whether the individuals making the
representation can be expected to be well informed on
the matter.”
40.8 The tax auditor will verify the amount of inadmissible
expenditure as estimated by the assessee with reference to
established principles of allocation of expenditure based on
6
logical parameters like proportion of exempt and taxable
income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between
taxable and non-taxable income, the quantum of investment,
the period and the rate of interest are generally the relevant
factors to be considered. This requires proper estimates to be
made by the assessee. The tax auditor is required to audit
such estimates. Attention is invited to Standard on Auditing-
540 (earlier known as AAS-18)“ “Audit of Accounting
Estimates”. In accordance with this Standard the auditor
should adopt one or a combination of the following
approaches in the audit of such accounting estimates:
- review and test the process used by the assessee to
develop the estimate;
- use an independent estimate for comparison with that
prepared by the assessee; or
- review subsequent events which confirm the estimate
made.
40.9 An assessee may claim that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Even in such a case the
provisions of section 14A will apply. Accordingly, the tax
auditor is required to verify such contention of the assessee.
40.10 As stated before the method prescribed under subrule
(2) of Rule 8D is to be adopted by the Assessing Officer
when he is not satisfied with the correctness of claim made
by the assessee. As per clause (i) of sub-rule (2) the
expenditure which is directly relatable to income which does
not form part of total income is inadmissible expenditure.
Besides such expenditure there may be expenditure such as
interest, which is relatable to both taxable and non-taxable
income which needs to be properly allocated while
calculating the inadmissible amount. Interest which, can be
directly attributable to any particular income or receipt
chargeable to tax needs to be excluded while determining the
inadmissible amount. Clause (ii) of sub-rule (2) of rule 8D
deals with allocation of interest which, is not directly
7
attributable to any particular income or receipt. However the
variable A used in the formula in clause (ii) of sub- rule (2) is
said to be equal to the amount of expenditure by way of interest
other than the amount of interest included in clause (i) incurred
during the previous year. It may be seen that what is proposed to
be allocated as per clause (ii) is interest which is not directly
attributable to any particular income or receipt. Therefore,
variable A is the amount of expenditure by way of interest other
than the amount of interest directly attributable to any non
taxable income as per clause (i) and also interest which may be
directly attributable to any taxable income. Interest on term loan
may be an example of such interest which is generally related
to taxable income and is therefore excluded.
40.11 The broad principles enunciated in para 16.3 may
be kept in mind while verifying the amount of inadmissible
expenditure. After verifying the amount of inadmissible
expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the
amount with suitable disclosures of material assumptions, if
any.
(b) is not in agreement with the assessee with regard to the
amount of expenditure determined, he may give:
- A qualified opinion:
A qualified opinion can be given when the auditor
is of the opinion that the effect of any
disagreement with the assessee is not so material
and pervasive as to require an adverse opinion or
limitation on scope is not so material and
pervasive as to require a disclaimer of opinion.
- An adverse opinion:
The auditor in rare circumstances may come
across a situation where the impact of his
disagreement about the computation of such
inadmissible expenditure is so material and
pervasive that it affects the overall opinion. In
such a case the tax auditor may give an adverse
opinion.
8
- The disclaimer of opinion:
When the assessee has neither provided the basis
nor the supporting documents, for the claim of
such inadmissible expenditure, then due to
limitation on the scope of auditors work, the
auditor can give disclaimer of opinion.”
44AB of the Income-tax Act, 1961
The Guidance Note on Tax audit under section 44AB of the
Income-tax Act, 1961 was revised in the year 2005 taking into
consideration the amendments made by the Finance Act, 2005.
Thereafter, a Supplementary Guidance Note was issued in the
year 2006, which was a part of Guidance Note on audit of
fringe benefits under the Income-tax Act, 1961. This
Supplementary Guidance Note took into consideration the
amendments made in Form No.3CD by Circular No.208/2006
dated 10th August 2006. Further Guidance in regard to reporting
requirement in Form No.3CD in respect of changes brought about
by State-Level VAT Acts in the context of section 145A was
placed on the website on 12.10.2007.
To enable the members to efficiently discharge their onerous
responsibility, the Council in its 280th meeting held from 7th
to 9th August 2008, considered the integration of the
Supplementary Guidance Note on tax audit with the main
Guidance Note on tax audit under section 44AB of the Incometax
Act, 1961 and further revision thereof.
Apart from the changes, which are required to be made due to
change in law, the Council considered the appropriate guidance
to be given to the members in regard to clause 17(l) of Form
No.3CD.
Notification No.208/2006 dated 10th August 2006 inserted a
new clause 17(l) in Form No. 3CD wherein the amount of
deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not
form part of the total income is required to be mentioned. The
Finance Act, 2006 inserted sub-section (2) and sub-section
(3) in the section 14A to the effect that having regard to the
books of account of the assessee the Assessing Officer shall
determine the amount of expenditure incurred in relation to
such income which does not form part of the total income
under the Act in accordance with the method as may be
prescribed. Recently, the CBDT has through Income-tax (Fifth
2
Amendment) Rules, 2008 inserted a new Rule 8D which lays
down the method for determining the amount of expenditure in
relation to income not includible in total income.
The appropriate guidance approved by the Council in regard
to clause 17(l) of the Form No.3CD is as under:-
“40. Clause 17(l) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form part of
the total income;
40.1 This clause was inserted by the notification number
208/2006 dated 10th August 2006. Section 14A was inserted
in Chapter IV – Computation of total income by the Finance
Act, 2001 with retrospective effect from 1.4.1962 i.e. A.Y.
1962-63. Accordingly, for the purposes of computing the
total income under Chapter IV of the Act, no deduction shall
be allowed in respect of expenditure incurred by the assessee
in relation to income which does not form part of the total
income under the Act. The Finance Act, 2002 added a
proviso to section 14A to the effect that nothing contained in
the section shall empower the Assessing Officer either to
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the first day of
April, 2001.
40.2 The Finance Act, 2006 has inserted sub-sections (2) and
(3) w.e.f. A.Y. 2007-08. Under sub-section (2) the Assessing
Officer shall determine the amount of expenditure incurred in
relation to such income, which does not form part of the total
income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such
power of the Assessing Officer can be exercised only when
he, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
40.3 Sub-section (3) provides that the provisions of subsection
(2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him
3
in relation to income which does not form part of the total
income under this Act.
40.4 The expenditure which is relatable to the income which
does not form part of the total income is not allowed as a
deduction in terms of section 14A of the Act. Such income
are dealt with in Part III- Incomes Which Do Not Form Part
Of Total Income. Section 10 deals with Incomes not include
in total income. Sections 10A to 10C deals with the special
provisions in respect of the specified undertakings. In
general an assessee may have besides his business income,
income from agriculture which is exempt under sub-section
(1), share of profit in a partnership firm which is exempt
under sub-section (2A), income from dividends referred to in
section 115-O which is exempt under sub-section (34), long
term capital gains on the transfer of equity shares which is
exempt under sub-section (38) etc. In all such cases the
expenditure relating to the income which is not included in
total income is inadmissible under section 14A. In case of an
investment in a partnership firm, while the interest and the
salary received by the partner are taxable, the share of profit
is exempt. The amount of inadmissible expenditure depends
on the facts and circumstances of each case.
40.5 The Central Board of Direct Taxes, has through Income-tax
(Fifth Amendment) Rules, 2008 inserted a new Rule 8D which
lays down the method for determining the amount of expenditure
in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the
assessee of a previous year, if the Assessing Officer is not
satisfied with the correctness of the claim of expenditure made by
the assessee or with the claim made by the assessee that no
expenditure has been incurred, in relation to income which does
not form part of the total income under the Act for such previous
year, he shall determine the amount of such inadmissible
expenditure in accordance with the method of computation laid
down in sub-rule (2) of Rule 8D.
Sub-rule (2) of Rule 8D provides for the method of computation
of the expenditure in relation to income not forming part of the
total income. The disallowance shall be the aggregate of the
following:
4
i) the amount of expenditure directly relating to income
which does not form part of total income;
ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not
directly attributable to any particular income or receipt, an
amount computed in accordance with the following
formula, namely :
A X B
C
Where A = amount of expenditure by way of interest other
than the amount of interest included in clause (i)
incurred during the previous year;
B = the average of value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year;
C = the average of total assets as appearing in the
balance sheet of the assessee, on the first day and
the last day of the previous year;
iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the
balance sheet of the assessee, on the first day and the last
day of the previous year.
“Total Assets” for the purpose of Rule 8D shall mean, total assets
as appearing in the balance sheet excluding the increase on
account of revaluation of assets but including the decrease on
account of revaluation of assets.
40.6 The method prescribed under sub-rule (2) of Rule 8D is
applicable when the Assessing Officer is not satisfied with
the correctness of the claim of expenditure made by the
assessee or with the claim made by the assessee that no
expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of
5
tax audit the tax auditor will have to verify the amount of
inadmissible expenditure as determined by the assessee. The
method under sub-rule (2) of Rule 8D is to be adopted by the
Assessing Officer when he is not satisfied with the amount as
determined by the assessee. Rule 8D does not mandate that
the assessee should necessarily compute the disallowance as
per the method prescribed under sub rule (2). Therefore, the
assessee may or may not adopt the same.
40.7 It is primarily the responsibility of the assessee to
furnish the details of amount of deduction inadmissible in
terms of section 14A i.e. in respect of the expenditure
incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax auditor
is entitled to rely on the management representation.
However, attention is invited to para 5 of Standard on
Auditing -580, “Representation by Management” (earlier
known as Auditing and Assurance Standard-11) which is as
under:-
“During the course of an audit, management makes many
representations to the auditor, either unsolicited or in
response to specific enquires. When such representations
relate to matters which are material to the financial
information, the auditor should;
(a) seek corroborative audit evidence from sources inside
or outside the entity;
(b) evaluate whether the representations made by
management appear reasonable and consistent with
other audit evidence obtained, including other
representations; and
(c) consider whether the individuals making the
representation can be expected to be well informed on
the matter.”
40.8 The tax auditor will verify the amount of inadmissible
expenditure as estimated by the assessee with reference to
established principles of allocation of expenditure based on
6
logical parameters like proportion of exempt and taxable
income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between
taxable and non-taxable income, the quantum of investment,
the period and the rate of interest are generally the relevant
factors to be considered. This requires proper estimates to be
made by the assessee. The tax auditor is required to audit
such estimates. Attention is invited to Standard on Auditing-
540 (earlier known as AAS-18)“ “Audit of Accounting
Estimates”. In accordance with this Standard the auditor
should adopt one or a combination of the following
approaches in the audit of such accounting estimates:
- review and test the process used by the assessee to
develop the estimate;
- use an independent estimate for comparison with that
prepared by the assessee; or
- review subsequent events which confirm the estimate
made.
40.9 An assessee may claim that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Even in such a case the
provisions of section 14A will apply. Accordingly, the tax
auditor is required to verify such contention of the assessee.
40.10 As stated before the method prescribed under subrule
(2) of Rule 8D is to be adopted by the Assessing Officer
when he is not satisfied with the correctness of claim made
by the assessee. As per clause (i) of sub-rule (2) the
expenditure which is directly relatable to income which does
not form part of total income is inadmissible expenditure.
Besides such expenditure there may be expenditure such as
interest, which is relatable to both taxable and non-taxable
income which needs to be properly allocated while
calculating the inadmissible amount. Interest which, can be
directly attributable to any particular income or receipt
chargeable to tax needs to be excluded while determining the
inadmissible amount. Clause (ii) of sub-rule (2) of rule 8D
deals with allocation of interest which, is not directly
7
attributable to any particular income or receipt. However the
variable A used in the formula in clause (ii) of sub- rule (2) is
said to be equal to the amount of expenditure by way of interest
other than the amount of interest included in clause (i) incurred
during the previous year. It may be seen that what is proposed to
be allocated as per clause (ii) is interest which is not directly
attributable to any particular income or receipt. Therefore,
variable A is the amount of expenditure by way of interest other
than the amount of interest directly attributable to any non
taxable income as per clause (i) and also interest which may be
directly attributable to any taxable income. Interest on term loan
may be an example of such interest which is generally related
to taxable income and is therefore excluded.
40.11 The broad principles enunciated in para 16.3 may
be kept in mind while verifying the amount of inadmissible
expenditure. After verifying the amount of inadmissible
expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the
amount with suitable disclosures of material assumptions, if
any.
(b) is not in agreement with the assessee with regard to the
amount of expenditure determined, he may give:
- A qualified opinion:
A qualified opinion can be given when the auditor
is of the opinion that the effect of any
disagreement with the assessee is not so material
and pervasive as to require an adverse opinion or
limitation on scope is not so material and
pervasive as to require a disclaimer of opinion.
- An adverse opinion:
The auditor in rare circumstances may come
across a situation where the impact of his
disagreement about the computation of such
inadmissible expenditure is so material and
pervasive that it affects the overall opinion. In
such a case the tax auditor may give an adverse
opinion.
8
- The disclaimer of opinion:
When the assessee has neither provided the basis
nor the supporting documents, for the claim of
such inadmissible expenditure, then due to
limitation on the scope of auditors work, the
auditor can give disclaimer of opinion.”
TIPS FOR INTERVIEW PREPARATION
ANY PERSON WHO IS DESIROUS OF HAVING SOME TIPS FOR THE PREPARATION OF GROUP DISCUSSION/INTERVIEW CAN CONTACT ME AT
VIKAS KAPAHI
MOB: 09914441557
vikaskapahi@gmail.com
vikaskapahi@hotmail.com
VIKAS KAPAHI
MOB: 09914441557
vikaskapahi@gmail.com
vikaskapahi@hotmail.com
JOBS FOR CHARTERED ACCOUNTANTS
JOBS FOR FRESHER / EXPERIENCED CHARTERED ACCOUNTANTS IN RAJASTHAN, DEHRADUN, MUMBAI AND NEW DELHI
VISIT THE BELOW LINK
http://www.placements-icai.org/career_opp/jobs05092008.DOC
VISIT THE BELOW LINK
http://www.placements-icai.org/career_opp/jobs05092008.DOC
Tuesday, September 02, 2008
What is Excellence ?
A great example of excellence in execution & commitment to quality :
A gentleman was once visiting a temple under construction. In the templepremises, he saw a sculptor making an idol of God. Suddenly he saw, just a few meters away, another identical idol was lying. Surprised he asked the sculptor, do you need two statutes of the same idol. No said the sculptor. We need only one, but the first one got damaged at the last stage. The gentleman examined the sculptor. No apparent damage was visible. Where the damage is asked the gentleman. There is a scratch on the nose of the idol.
Where are you going to keep the idol? The sculptor replied that it will be installed on a pillar 20 feet high.
When the idol will be 20 feet away from the eyes of the beholder, who is going to know that there is scratch on the nose? The gentleman asked. The sculptor looked at the gentleman, smiled and said ' God knows it and I know it '.
The desire to excel should be exclusive of the fact whether someone appreciates it or not. Excellence is a drive from 'Inside 'not 'Outside'.
--
CA. VIKAS KAPAHI
TREASURER
JAB WE MET CA
REDEFINING PROFESSIONALISM
Monday, September 01, 2008
Revision of Guidance Note on Tax audit under section 44AB
The Guidance Note on Tax audit under section 44AB of the
Income-tax Act, 1961 was revised in the year 2005 taking into
consideration the amendments made by the Finance Act, 2005.
Thereafter, a Supplementary Guidance Note was issued in the
year 2006, which was a part of Guidance Note on audit of
fringe benefits under the Income-tax Act, 1961. This
Supplementary Guidance Note took into consideration the
amendments made in Form No.3CD by Circular No.208/2006
dated 10th August 2006. Further Guidance in regard to reporting
requirement in Form No.3CD in respect of changes brought about
by State-Level VAT Acts in the context of section 145A was
placed on the website on 12.10.2007.
To enable the members to efficiently discharge their onerous
responsibility, the Council in its 280th meeting held from 7th
to 9th August 2008, considered the integration of the
Supplementary Guidance Note on tax audit with the main
Guidance Note on tax audit under section 44AB of the Incometax
Act, 1961 and further revision thereof.
Apart from the changes, which are required to be made due to
change in law, the Council considered the appropriate guidance
to be given to the members in regard to clause 17(l) of Form
No.3CD.
Notification No.208/2006 dated 10th August 2006 inserted a
new clause 17(l) in Form No. 3CD wherein the amount of
deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not
form part of the total income is required to be mentioned. The
Finance Act, 2006 inserted sub-section (2) and sub-section
(3) in the section 14A to the effect that having regard to the
books of account of the assessee the Assessing Officer shall
determine the amount of expenditure incurred in relation to
such income which does not form part of the total income
under the Act in accordance with the method as may be
prescribed. Recently, the CBDT has through Income-tax (Fifth
2
Amendment) Rules, 2008 inserted a new Rule 8D which lays
down the method for determining the amount of expenditure in
relation to income not includible in total income.
The appropriate guidance approved by the Council in regard
to clause 17(l) of the Form No.3CD is as under:-
“40. Clause 17(l) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form part of
the total income;
40.1 This clause was inserted by the notification number
208/2006 dated 10th August 2006. Section 14A was inserted
in Chapter IV – Computation of total income by the Finance
Act, 2001 with retrospective effect from 1.4.1962 i.e. A.Y.
1962-63. Accordingly, for the purposes of computing the
total income under Chapter IV of the Act, no deduction shall
be allowed in respect of expenditure incurred by the assessee
in relation to income which does not form part of the total
income under the Act. The Finance Act, 2002 added a
proviso to section 14A to the effect that nothing contained in
the section shall empower the Assessing Officer either to
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the first day of
April, 2001.
40.2 The Finance Act, 2006 has inserted sub-sections (2) and
(3) w.e.f. A.Y. 2007-08. Under sub-section (2) the Assessing
Officer shall determine the amount of expenditure incurred in
relation to such income, which does not form part of the total
income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such
power of the Assessing Officer can be exercised only when
he, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
40.3 Sub-section (3) provides that the provisions of subsection
(2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him
3
in relation to income which does not form part of the total
income under this Act.
40.4 The expenditure which is relatable to the income which
does not form part of the total income is not allowed as a
deduction in terms of section 14A of the Act. Such income
are dealt with in Part III- Incomes Which Do Not Form Part
Of Total Income. Section 10 deals with Incomes not include
in total income. Sections 10A to 10C deals with the special
provisions in respect of the specified undertakings. In
general an assessee may have besides his business income,
income from agriculture which is exempt under sub-section
(1), share of profit in a partnership firm which is exempt
under sub-section (2A), income from dividends referred to in
section 115-O which is exempt under sub-section (34), long
term capital gains on the transfer of equity shares which is
exempt under sub-section (38) etc. In all such cases the
expenditure relating to the income which is not included in
total income is inadmissible under section 14A. In case of an
investment in a partnership firm, while the interest and the
salary received by the partner are taxable, the share of profit
is exempt. The amount of inadmissible expenditure depends
on the facts and circumstances of each case.
40.5 The Central Board of Direct Taxes, has through Income-tax
(Fifth Amendment) Rules, 2008 inserted a new Rule 8D which
lays down the method for determining the amount of expenditure
in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the
assessee of a previous year, if the Assessing Officer is not
satisfied with the correctness of the claim of expenditure made by
the assessee or with the claim made by the assessee that no
expenditure has been incurred, in relation to income which does
not form part of the total income under the Act for such previous
year, he shall determine the amount of such inadmissible
expenditure in accordance with the method of computation laid
down in sub-rule (2) of Rule 8D.
Sub-rule (2) of Rule 8D provides for the method of computation
of the expenditure in relation to income not forming part of the
total income. The disallowance shall be the aggregate of the
following:
4
i) the amount of expenditure directly relating to income
which does not form part of total income;
ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not
directly attributable to any particular income or receipt, an
amount computed in accordance with the following
formula, namely :
A X B
C
Where A = amount of expenditure by way of interest other
than the amount of interest included in clause (i)
incurred during the previous year;
B = the average of value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year;
C = the average of total assets as appearing in the
balance sheet of the assessee, on the first day and
the last day of the previous year;
iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the
balance sheet of the assessee, on the first day and the last
day of the previous year.
“Total Assets” for the purpose of Rule 8D shall mean, total assets
as appearing in the balance sheet excluding the increase on
account of revaluation of assets but including the decrease on
account of revaluation of assets.
40.6 The method prescribed under sub-rule (2) of Rule 8D is
applicable when the Assessing Officer is not satisfied with
the correctness of the claim of expenditure made by the
assessee or with the claim made by the assessee that no
expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of
5
tax audit the tax auditor will have to verify the amount of
inadmissible expenditure as determined by the assessee. The
method under sub-rule (2) of Rule 8D is to be adopted by the
Assessing Officer when he is not satisfied with the amount as
determined by the assessee. Rule 8D does not mandate that
the assessee should necessarily compute the disallowance as
per the method prescribed under sub rule (2). Therefore, the
assessee may or may not adopt the same.
40.7 It is primarily the responsibility of the assessee to
furnish the details of amount of deduction inadmissible in
terms of section 14A i.e. in respect of the expenditure
incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax auditor
is entitled to rely on the management representation.
However, attention is invited to para 5 of Standard on
Auditing -580, “Representation by Management” (earlier
known as Auditing and Assurance Standard-11) which is as
under:-
“During the course of an audit, management makes many
representations to the auditor, either unsolicited or in
response to specific enquires. When such representations
relate to matters which are material to the financial
information, the auditor should;
(a) seek corroborative audit evidence from sources inside
or outside the entity;
(b) evaluate whether the representations made by
management appear reasonable and consistent with
other audit evidence obtained, including other
representations; and
(c) consider whether the individuals making the
representation can be expected to be well informed on
the matter.”
40.8 The tax auditor will verify the amount of inadmissible
expenditure as estimated by the assessee with reference to
established principles of allocation of expenditure based on
6
logical parameters like proportion of exempt and taxable
income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between
taxable and non-taxable income, the quantum of investment,
the period and the rate of interest are generally the relevant
factors to be considered. This requires proper estimates to be
made by the assessee. The tax auditor is required to audit
such estimates. Attention is invited to Standard on Auditing-
540 (earlier known as AAS-18)“ “Audit of Accounting
Estimates”. In accordance with this Standard the auditor
should adopt one or a combination of the following
approaches in the audit of such accounting estimates:
- review and test the process used by the assessee to
develop the estimate;
- use an independent estimate for comparison with that
prepared by the assessee; or
- review subsequent events which confirm the estimate
made.
40.9 An assessee may claim that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Even in such a case the
provisions of section 14A will apply. Accordingly, the tax
auditor is required to verify such contention of the assessee.
40.10 As stated before the method prescribed under subrule
(2) of Rule 8D is to be adopted by the Assessing Officer
when he is not satisfied with the correctness of claim made
by the assessee. As per clause (i) of sub-rule (2) the
expenditure which is directly relatable to income which does
not form part of total income is inadmissible expenditure.
Besides such expenditure there may be expenditure such as
interest, which is relatable to both taxable and non-taxable
income which needs to be properly allocated while
calculating the inadmissible amount. Interest which, can be
directly attributable to any particular income or receipt
chargeable to tax needs to be excluded while determining the
inadmissible amount. Clause (ii) of sub-rule (2) of rule 8D
deals with allocation of interest which, is not directly
7
attributable to any particular income or receipt. However the
variable A used in the formula in clause (ii) of sub- rule (2) is
said to be equal to the amount of expenditure by way of interest
other than the amount of interest included in clause (i) incurred
during the previous year. It may be seen that what is proposed to
be allocated as per clause (ii) is interest which is not directly
attributable to any particular income or receipt. Therefore,
variable A is the amount of expenditure by way of interest other
than the amount of interest directly attributable to any non
taxable income as per clause (i) and also interest which may be
directly attributable to any taxable income. Interest on term loan
may be an example of such interest which is generally related
to taxable income and is therefore excluded.
40.11 The broad principles enunciated in para 16.3 may
be kept in mind while verifying the amount of inadmissible
expenditure. After verifying the amount of inadmissible
expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the
amount with suitable disclosures of material assumptions, if
any.
(b) is not in agreement with the assessee with regard to the
amount of expenditure determined, he may give:
- A qualified opinion:
A qualified opinion can be given when the auditor
is of the opinion that the effect of any
disagreement with the assessee is not so material
and pervasive as to require an adverse opinion or
limitation on scope is not so material and
pervasive as to require a disclaimer of opinion.
- An adverse opinion:
The auditor in rare circumstances may come
across a situation where the impact of his
disagreement about the computation of such
inadmissible expenditure is so material and
pervasive that it affects the overall opinion. In
such a case the tax auditor may give an adverse
opinion.
8
- The disclaimer of opinion:
When the assessee has neither provided the basis
nor the supporting documents, for the claim of
such inadmissible expenditure, then due to
limitation on the scope of auditors work, the
auditor can give disclaimer of opinion.”
Income-tax Act, 1961 was revised in the year 2005 taking into
consideration the amendments made by the Finance Act, 2005.
Thereafter, a Supplementary Guidance Note was issued in the
year 2006, which was a part of Guidance Note on audit of
fringe benefits under the Income-tax Act, 1961. This
Supplementary Guidance Note took into consideration the
amendments made in Form No.3CD by Circular No.208/2006
dated 10th August 2006. Further Guidance in regard to reporting
requirement in Form No.3CD in respect of changes brought about
by State-Level VAT Acts in the context of section 145A was
placed on the website on 12.10.2007.
To enable the members to efficiently discharge their onerous
responsibility, the Council in its 280th meeting held from 7th
to 9th August 2008, considered the integration of the
Supplementary Guidance Note on tax audit with the main
Guidance Note on tax audit under section 44AB of the Incometax
Act, 1961 and further revision thereof.
Apart from the changes, which are required to be made due to
change in law, the Council considered the appropriate guidance
to be given to the members in regard to clause 17(l) of Form
No.3CD.
Notification No.208/2006 dated 10th August 2006 inserted a
new clause 17(l) in Form No. 3CD wherein the amount of
deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not
form part of the total income is required to be mentioned. The
Finance Act, 2006 inserted sub-section (2) and sub-section
(3) in the section 14A to the effect that having regard to the
books of account of the assessee the Assessing Officer shall
determine the amount of expenditure incurred in relation to
such income which does not form part of the total income
under the Act in accordance with the method as may be
prescribed. Recently, the CBDT has through Income-tax (Fifth
2
Amendment) Rules, 2008 inserted a new Rule 8D which lays
down the method for determining the amount of expenditure in
relation to income not includible in total income.
The appropriate guidance approved by the Council in regard
to clause 17(l) of the Form No.3CD is as under:-
“40. Clause 17(l) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form part of
the total income;
40.1 This clause was inserted by the notification number
208/2006 dated 10th August 2006. Section 14A was inserted
in Chapter IV – Computation of total income by the Finance
Act, 2001 with retrospective effect from 1.4.1962 i.e. A.Y.
1962-63. Accordingly, for the purposes of computing the
total income under Chapter IV of the Act, no deduction shall
be allowed in respect of expenditure incurred by the assessee
in relation to income which does not form part of the total
income under the Act. The Finance Act, 2002 added a
proviso to section 14A to the effect that nothing contained in
the section shall empower the Assessing Officer either to
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for
any assessment year beginning on or before the first day of
April, 2001.
40.2 The Finance Act, 2006 has inserted sub-sections (2) and
(3) w.e.f. A.Y. 2007-08. Under sub-section (2) the Assessing
Officer shall determine the amount of expenditure incurred in
relation to such income, which does not form part of the total
income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such
power of the Assessing Officer can be exercised only when
he, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
40.3 Sub-section (3) provides that the provisions of subsection
(2) shall also apply in relation to a case where an
assessee claims that no expenditure has been incurred by him
3
in relation to income which does not form part of the total
income under this Act.
40.4 The expenditure which is relatable to the income which
does not form part of the total income is not allowed as a
deduction in terms of section 14A of the Act. Such income
are dealt with in Part III- Incomes Which Do Not Form Part
Of Total Income. Section 10 deals with Incomes not include
in total income. Sections 10A to 10C deals with the special
provisions in respect of the specified undertakings. In
general an assessee may have besides his business income,
income from agriculture which is exempt under sub-section
(1), share of profit in a partnership firm which is exempt
under sub-section (2A), income from dividends referred to in
section 115-O which is exempt under sub-section (34), long
term capital gains on the transfer of equity shares which is
exempt under sub-section (38) etc. In all such cases the
expenditure relating to the income which is not included in
total income is inadmissible under section 14A. In case of an
investment in a partnership firm, while the interest and the
salary received by the partner are taxable, the share of profit
is exempt. The amount of inadmissible expenditure depends
on the facts and circumstances of each case.
40.5 The Central Board of Direct Taxes, has through Income-tax
(Fifth Amendment) Rules, 2008 inserted a new Rule 8D which
lays down the method for determining the amount of expenditure
in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the
assessee of a previous year, if the Assessing Officer is not
satisfied with the correctness of the claim of expenditure made by
the assessee or with the claim made by the assessee that no
expenditure has been incurred, in relation to income which does
not form part of the total income under the Act for such previous
year, he shall determine the amount of such inadmissible
expenditure in accordance with the method of computation laid
down in sub-rule (2) of Rule 8D.
Sub-rule (2) of Rule 8D provides for the method of computation
of the expenditure in relation to income not forming part of the
total income. The disallowance shall be the aggregate of the
following:
4
i) the amount of expenditure directly relating to income
which does not form part of total income;
ii) in a case where the assessee has incurred expenditure by
way of interest during the previous year which is not
directly attributable to any particular income or receipt, an
amount computed in accordance with the following
formula, namely :
A X B
C
Where A = amount of expenditure by way of interest other
than the amount of interest included in clause (i)
incurred during the previous year;
B = the average of value of investment, income from
which does not or shall not form part of the total
income, as appearing in the balance sheet of the
assessee, on the first day and the last day of the
previous year;
C = the average of total assets as appearing in the
balance sheet of the assessee, on the first day and
the last day of the previous year;
iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the
balance sheet of the assessee, on the first day and the last
day of the previous year.
“Total Assets” for the purpose of Rule 8D shall mean, total assets
as appearing in the balance sheet excluding the increase on
account of revaluation of assets but including the decrease on
account of revaluation of assets.
40.6 The method prescribed under sub-rule (2) of Rule 8D is
applicable when the Assessing Officer is not satisfied with
the correctness of the claim of expenditure made by the
assessee or with the claim made by the assessee that no
expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of
5
tax audit the tax auditor will have to verify the amount of
inadmissible expenditure as determined by the assessee. The
method under sub-rule (2) of Rule 8D is to be adopted by the
Assessing Officer when he is not satisfied with the amount as
determined by the assessee. Rule 8D does not mandate that
the assessee should necessarily compute the disallowance as
per the method prescribed under sub rule (2). Therefore, the
assessee may or may not adopt the same.
40.7 It is primarily the responsibility of the assessee to
furnish the details of amount of deduction inadmissible in
terms of section 14A i.e. in respect of the expenditure
incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax auditor
is entitled to rely on the management representation.
However, attention is invited to para 5 of Standard on
Auditing -580, “Representation by Management” (earlier
known as Auditing and Assurance Standard-11) which is as
under:-
“During the course of an audit, management makes many
representations to the auditor, either unsolicited or in
response to specific enquires. When such representations
relate to matters which are material to the financial
information, the auditor should;
(a) seek corroborative audit evidence from sources inside
or outside the entity;
(b) evaluate whether the representations made by
management appear reasonable and consistent with
other audit evidence obtained, including other
representations; and
(c) consider whether the individuals making the
representation can be expected to be well informed on
the matter.”
40.8 The tax auditor will verify the amount of inadmissible
expenditure as estimated by the assessee with reference to
established principles of allocation of expenditure based on
6
logical parameters like proportion of exempt and taxable
income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between
taxable and non-taxable income, the quantum of investment,
the period and the rate of interest are generally the relevant
factors to be considered. This requires proper estimates to be
made by the assessee. The tax auditor is required to audit
such estimates. Attention is invited to Standard on Auditing-
540 (earlier known as AAS-18)“ “Audit of Accounting
Estimates”. In accordance with this Standard the auditor
should adopt one or a combination of the following
approaches in the audit of such accounting estimates:
- review and test the process used by the assessee to
develop the estimate;
- use an independent estimate for comparison with that
prepared by the assessee; or
- review subsequent events which confirm the estimate
made.
40.9 An assessee may claim that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Even in such a case the
provisions of section 14A will apply. Accordingly, the tax
auditor is required to verify such contention of the assessee.
40.10 As stated before the method prescribed under subrule
(2) of Rule 8D is to be adopted by the Assessing Officer
when he is not satisfied with the correctness of claim made
by the assessee. As per clause (i) of sub-rule (2) the
expenditure which is directly relatable to income which does
not form part of total income is inadmissible expenditure.
Besides such expenditure there may be expenditure such as
interest, which is relatable to both taxable and non-taxable
income which needs to be properly allocated while
calculating the inadmissible amount. Interest which, can be
directly attributable to any particular income or receipt
chargeable to tax needs to be excluded while determining the
inadmissible amount. Clause (ii) of sub-rule (2) of rule 8D
deals with allocation of interest which, is not directly
7
attributable to any particular income or receipt. However the
variable A used in the formula in clause (ii) of sub- rule (2) is
said to be equal to the amount of expenditure by way of interest
other than the amount of interest included in clause (i) incurred
during the previous year. It may be seen that what is proposed to
be allocated as per clause (ii) is interest which is not directly
attributable to any particular income or receipt. Therefore,
variable A is the amount of expenditure by way of interest other
than the amount of interest directly attributable to any non
taxable income as per clause (i) and also interest which may be
directly attributable to any taxable income. Interest on term loan
may be an example of such interest which is generally related
to taxable income and is therefore excluded.
40.11 The broad principles enunciated in para 16.3 may
be kept in mind while verifying the amount of inadmissible
expenditure. After verifying the amount of inadmissible
expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the
amount with suitable disclosures of material assumptions, if
any.
(b) is not in agreement with the assessee with regard to the
amount of expenditure determined, he may give:
- A qualified opinion:
A qualified opinion can be given when the auditor
is of the opinion that the effect of any
disagreement with the assessee is not so material
and pervasive as to require an adverse opinion or
limitation on scope is not so material and
pervasive as to require a disclaimer of opinion.
- An adverse opinion:
The auditor in rare circumstances may come
across a situation where the impact of his
disagreement about the computation of such
inadmissible expenditure is so material and
pervasive that it affects the overall opinion. In
such a case the tax auditor may give an adverse
opinion.
8
- The disclaimer of opinion:
When the assessee has neither provided the basis
nor the supporting documents, for the claim of
such inadmissible expenditure, then due to
limitation on the scope of auditors work, the
auditor can give disclaimer of opinion.”
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