C&AG Report about deficiencies in Tax Audit Reports
In its Report No. 32 of 2014 presented to the Parliament by the C & AG, it is stated that there was a short levy of Income tax of Rs. 2,813.11 crore in 367 Cases in the financial years 2010 – 11 to 2012 – 13, as a result of wrong Tax Audit Reports issued by members of ICAI. The C & AG has classified the deficiencies in Tax Audit Reports as under:
(i) Correct information relating to allowance of depreciation not given in 66 cases involving short levy of Rs. 457.79 crore.
(ii) Correct information regarding brought forward losses /depreciation not given in 46 cases which resulted in loss of tax revenue of Rs. 557.79 crore.
(iii) In 42 cases, personal/capital expenditure not reported resulting in loss of tax revenue of Rs. 477.89 crore.
(iv) Certified wrong information/claims in 74 cases for various exemptions having a tax effect of Rs.259.72 crore.
(v) Incorrect/incomplete information given in Tax Audit Reports of 132 cases, which had resulted in loss of tax revenue of Rs. 1037.61 crore.
(vi) Wrong information given in 7 cases for allowance of provisions in Form 3CD, resulting in loss of tax revenue of Rs. 22.31 crore.
(vii) In 27 cases, the tax auditors did not calculate the Book Profit u/s. 115JB.
(viii) In 153 cases, the tax auditors gave incorrect/incomplete information about Transfer pricing transactions.
(ix) In 308 cases, the tax auditor failed to point out the disallowance to be made u/s 40A (3).
(x) In 78 cases, special Audit u/s. 142(2A) was ordered. Income of 16 assessees was increased by Rs.197.79. on the basis of these reports. This indicates that the original Auditor did not perform the task properly.
It appears that the C&AG has taken the view that tax audit u/s. 44AB is to be conducted by an “Accountant” as defined in section 288. If we refer to section 288, such audit can be conducted by a ‘Chartered Accountant’ only and not by a Firm of Chartered Accounts. On this basis, he has pointed out 22 cases where some Chartered Accountants have signed more than 45 tax audit reports for A.Y. 2013-14. The C&AG has given the names of these Chartered Accountants in Para 3.6 of his report. This list shows that one member has signed 2,471 tax audit reports. There are others in the list, who have signed 401 to 990 tax audit reports.
The C&AG has pointed out that according to the guidelines of the ICAI, there is a limit of 45 (now 60) tax audits per member. Therefore, these 22 members have violated the above guidelines.
The C&AG has recommended that the ICAI and the tax department should take disciplinary action against the various members for their negligence in giving tax audit reports. The Report of C&AG contains names and membership numbers of all these members.
It may be noted that earlier, in the case of Vijay V. Meghani vs. DC17, the Mumbai ITA Tribunal had passed serious remarks about deficiencies in the professional services rendered by our members. Recently, the Delhi Tribunal has made similar remarks in the case of Wrigley India Pvt. Ltd vs. ACIT. In this case, the Tribunal has observed that Transfer Pricing Study and certification by a CA does not inspire any confidence. It is also observed that the level of professionalism is “Pathetic”. No purpose is served by relying on such reports.
The above observations by the C&AG and the ITA Tribunal are of a serious nature. It is reported that the ICAI council has decided to take steps against the members in whose cases professional misconduct is observed. Cases of Members who have signed Tax Audit Reports in excess of the limit prescribed by the ICAI will be referred to Disciplinary Directorate. The ICAI will develop an IT based system in co-ordination with the tax authorities, to ensure that members comply with the limit for tax audit prescribed by the ICAI. Issues raised by the C&AG will be studied and discussed with the C&AG. A special cell with proper staff will be created, to deal with such matters in an urgent manner.
2. Swachha Bharat
Prime Minister, Shri Narendra Modi has announced on 25.12.2014 names of nine persons, who will assist the Government in the Swachh Bharat Abhiyan. The name of the ICAI is included in this list. We, as members of the ICAI, have to put in efforts in assisting the Government in its efforts for Swachh Bharat. It appears that the ICAI is drawing up a plan for this purpose.
3. Some Ethical Issues
The Ethical Standards Board has clarified some Ethical issues on Pages 908 and 910 of CA Journal for January, 2015. Some of these issues are as under.
(i) Issue No.1
Whether a Chartered Accountant who is appointed as tax auditor for conducting special audit under the Income-tax Act by the IT Authorities is required to communicate with statutory auditor?
Response
Council direction under Clause (8) of Part I of First Schedule to the C.A. Act, prescribes that it would be a healthy practice if a tax auditor appointed for conducting special audit under the Income-tax Act, communicates with the member who has conducted the statutory audit. (
ii) Issue No.2
Whether a Chartered Accountant in practice can use the designation ‘Corporate Lawyer’?
Response
A Chartered Accountant in practice is not permitted to use the designation ‘Corporate Lawyer’.
(iii) Issue No.3
Whether the office of a Chartered Accountant is permitted to go in for ISO 9001: 2000 certification or other similar certifications?
Response
There is no bar for a member to go in for ISO 9001:2000 certification or other similar certifications. However, the member cannot use the expression like “ISO Certified” on his professional documents, visiting cards, letter heads or sign boards etc.
(iv) Issue No.4
Whether an auditor is required to provide to the client or to main auditor of the Head Office of the same enterprise access to his audit working papers?
Response:
Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors except in case it is required by the Regulatory norms.
(v) Issue No.5
Can a Chartered Accountant in Service accept or agree to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer of such company firm or person by way of commission or gratification?
Response:
Clause (2) of Part II of First Schedule to the C.A. Act, prohibits a member in service from accepting or agreeing to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer or such company, firm or person by way of commission or gratification.
4. EAC Opinion:
Accounting Treatment of Contribution to a Cluster Project
Facts
A company is an unlisted public limited company and an auto-ancillary engaged in the business of manufacture of Cast Iron (C.I.), castings and machining of castings automobile parts. The foundry and the machining facilities are located at Kolhapur in the state of Maharashtra.
The company requires to use substantial quantity of silica sand in the foundry for making moulds. The sand once used cannot be used again and it becomes waste sand.
The disposal of waste sand is becoming difficult due to non – availability of proper place for dumping and on account of environmental issues and stringent restrictions from pollution control department. The problem of disposal of the waste sand is becoming expensive and severe day by day.
The availability of fresh sand is also diminishing owing to measures being taken by the State Government to protect the environment for silica and mining, which in turn, has increased the costs of procurement of silica sand.
To overcome this problem all the foundries from Kolhapur came together through their association and decided to undertake a cluster project mainly to set up a sand reclamation plant. A limited company registered u/s. 25 of the Companies Act, 1956 is formed as Special Purpose Vehicle (SPV). The objectives of the cluster company (i.e. SPV) are not to make profit. The Central and the State Governments have declared incentives and benefits in the form of subsidies for formation of such cluster projects which provide common utilities and services to its members. In the cluster project each member of the cluster has to contribute non refundable amounts calculated based on its requirement of sand reclamation. The com-pany is required to pay a non-refundable one-time contribution on the basis of formula for contribution decided by the cluster.
The company has clarified that it is a general member under ‘Sand Reclamation Category’. The contribution for sand reclamation category is one time at Rs. 6,000/- per metric tonne/ per month of sand reclamation requirement. At this rate, the company desires to make one time contribution of Rs. 42/- lakh with a view of book the capacity of 700 tons. According to the company, the sand reclamation benefits are permanent and it is not envisaged that the entitlement would exhaust any time. The company has paid an advance against its contribution and the balance is required to be paid in five equal installments. The advance paid is shown as advance under long term loans and advances. The company has clarified that it has not received any ownership rights over the SPV and neither the membership nor the benefits can be transferred.
Query:
The company has sought the opinion of the Expert Advisory Committee as to what is the appropriate accounting treatment?
EAC Opinion:
The committee notes that a SPV has been set up by the industrialists in the Kolhapur region in the form of a not-for-profit section 25 company under the Companies Act, 1956, to undertake a cluster project to set project to set up a sand reclamation plant for the benefit of its members including the company. Each member of the SPV Company is required to contribute a non-refundable amount towards the cost of setting up the sand reclamation plant based on its monthly requirement of sand reclamation. The question now arises is whether such contribution can be capitalised as an asset or should be expensed.
After considering the definitions of the terms ‘intangible asset’ and ‘asset’ given in paragraph 6 of AS 26 and meaning of ‘control’ in paragraph 14, the Committee is of the view that an item can be classified as an intangible asset only if it fulfills all the three conditions (a) it is identifiable, (b) the enterprise has control over the resource, and (c) it is expected that future economic benefits will flow to the enterprise. The Committee notes that in the Company’s case, the contribution entitles the company the services of reclamation of sand upto 700 M.T. per month and various other services, utilities and facilities provided by the SPV at a reasonable cost. Thus, contribution made by the company gives rise to a membership right in the SPV for the company, which is identifiable and from which future economic benefits are expected to flow to the company. Further, with regard to control, the Committee notes that to the extent of its entitlement for sand reclamation of 700 M.T. per month, the company enjoys unrestricted services. Thus, although the company does not get any ownership right over the SPV, the company has the control over the reclamation entitlement and other benefits attached with the membership rights. Accordingly, the Committee is of the view that the membership right received as a consideration of the total contribution of Rs. 42 lakh made by the company to the cluster project should be recognised as an intangible asset.
With regard to the amortisation of the intangible asset, after considering the paragraph 63 of AS 26, the Committee is of the view that as the future economic benefits embodied in an intangible asset are consumed over time, the cost of the asset should be systematically allocated over the asset’s useful life. The Committee is of the view that for determining the useful life of an intangible asset, various factors, such as, the expected usage of the asset, the period of control over the asset and legal or similar limits on the use of the asset etc., as indicated in paragraph 64 of AS 26, need to be considered. Accordingly, the Contribution made by the company to the cluster project should be amortised over its useful life rather than the pay-back period or a period of 3-5 years, considered reasonable by the company.
With regard to the company’s contention that the sand reclamation benefits are permanent and it is not envisaged that the entitlement would exhaust any time. The Committee, after considering paragraphs 67 and 68 of AS 26, is of the view that an intangible asset may have a useful life longer than ten years but it is always finite. The company should disclose the reasons if the presumption of useful life of 10 years is rebutted and the factor(s) that played a significant role in determining the useful life of the asset. Thus, keeping in view the facts and circumstances of each case, the useful life of an intangible asset has to be determined. [Page Nos. 940 to 944 of C. A. Journal – January, 2015]
5. New Accounting Standards (IND – AS):
The Ministry of Corporate Affairs has prescribed the road map for the implementation of the new Accounting Stan-dards (IND-AS) for certain specified Companies. Notifica-tion for this will be issued by the Government very soon. IND-AS are close to the International Financial Reporting standards (IFRs). The companies to which these stan-dards will apply are as under.
Companies with a Net worth of Rs. 500 crore or more, can follow IND-AS on voluntary basis in F.Y. 2015-16. IND – AS will be mandatory for such companies from F.Y. 2016-17. This requirement will apply to Holding, Subsidiaries, Joint Venture and Associates of such companies.
Listed Companies with Net Worth of less than Rs. 500 crore and other Companies with Net worth between Rs. 250 crore and Rs. 500 crore can follow IND-AS on voluntary basis in F.Y. 2015-16 and 2016-17. From F.Y. 2017-18, this will be mandatory for such companies.
6. ICAI News:
(Note: Page Nos. given below are from CA. Journal of January 2015)
(i) Revised Format of Auditor’s Report:
ICAI has revised the format of Auditor’s Report as well as the Engagement Letter for statutory Audit of the Financial Statements under the Companies Act, 2013. This is available on the website of the Institute. (P.895)
(ii) Pre-Budget Memorandum:
ICAI has submitted to the Government Pre-Budget Memorandum. Full text is available on ICAI website. (P.895)
(iii) New Overseas Chapter:
ICAI has opened its 24th Chapter in Vancouver in British Columbia in Canada. (P 895)
(iv) ICAI New Publications:
Following new publications are issued by ICAI (P.1026)
Background Material on GST
Technical Guide on Gujarat VAT
Technical Guide on Rajasthan VAT
Technical Guide on Jharkhand VAT
Extension of Last Date for CPE Hours Requirement:
ICAI has extended the last date for compliance with re-quirement for CPE Hours for 2014 from 31/12/2014 to 31/3/2015.
