Tax Audit has become more onerous with each
passing year. Tax Audit u/s. 44AB is carried out by perhaps the largest number
of practitioners, even more than statutory audit of companies. This article
seeks to cover important new points relevant to Tax Audit for AY 2017-18.
There have been notable changes in clauses related to ICDS and Loans. This
article seeks to put those points in perspective and update the reader of
nuances and intricacies that require a professional’s attention either as a
preparer or as the tax auditor.
1. Clause 8
The relevant clause
of section 44AB under which the audit has been conducted is required to be
mentioned here. This aspect becomes important considering the fact that certain
deductions and exemptions may depend on the appropriate selection, and possibly
trigger action from CPC. A new category inserted in the utility pertains to S.
44ADA which is applicable from AY 1718:
Clause (d) For
claiming profits less than prescribed u/s. 44ADA
Eligible assessee [as
per section 44AA (1)] can select this clause in the utility if assessee chooses
to show taxable profit from specified profession less than 50% of total
turnover not exceeding Rs. 50 lakh.
2. CLAUSE 13 – Method of accounting – ICDS Aspects
Sub-clauses (d),
(e) and (f) have been inserted this year to cover the impact of the Income
Computation and Disclosure Standards (ICDS). The Tax Auditor is required to
identify whether any adjustment is required to be made to the profit or loss as
per books of accounts in order to comply with the ICDS and if so, quantify the
adjustment. Further, the various disclosures required by each ICDS are required
to be given in clause (f). The following paragraphs deal briefly with each ICDS
and identify probable areas which may warrant adjustment from the income in the
books to arrive at the taxable income and consequent reporting under these
clauses.
3. ICDS discussed
The Income
Computation and Disclosure Standards are applicable for computation of income
chargeable under the head “Profits and gains of business or
profession” or “Income from other sources” and not for the
purpose of maintenance of books of account. The Preamble to every ICDS provides
that in case of any conflict between the provisions of the Income-tax Act,
1961(‘the Act’) and the relevant ICDS, the provisions of the Act shall prevail
to that extent.
3.1 ICDS II – Inventories
3.1.1 ICDS II requires the
value of inventories to include duties and taxes (the “inclusive method”) in
line with the provisions of section 145A of the Act. This is in contrast with
Accounting Standard (“AS”) – 2 on Valuation of Inventories which mandates the
“exclusive method”. Under the exclusive method, inventories are to be valued
net of any duties or taxes that are subsequently recoverable from the taxing
authorities. The ICAI Guidance Note on Tax Audit provides detailed
reconciliation of the adjustments required u/s. 145A of the Act between both
the methods and concludes that the effect on the profit or loss due to these
adjustments would be ‘nil’. Looking at the requirements of ICDS II in isolation
one may conclude that the inclusion of recoverable duties and taxes in the
value of inventories would result in increase of profit for the year. However,
taking the effect of all the adjustments required as per the provisions of
section 145A, there would be no resulting increase or decrease of profit.
Accordingly, the Tax Auditor may report ‘nil’ under this head with a suitable
note detailing the Section 145A adjustments and the stand taken by her.
3.1.2 In respect of business
of service providers, AS 2 does not cover work in progress (WIP) arising in the
ordinary course of business. Therefore, if under Ind-AS, WIP of service
providers is recognised, that is to be ignored under the ICDS unless it falls
under ICDS III.
3.2 ICDS III – Construction
contracts
3.2.1 ICDS III requires
contract revenue to be recognised when there is a reasonable certainty of
ultimate collection while AS 7 and Indian Accounting Standard (“Ind- AS”) -11
mandate recognition when it is possible to reliably measure the outcome of the
contract. In cases where these two conditions are not simultaneously met, it
could result in an adjustment.
3.2.2 ICDS III provides for
adopting the percentage of completion method (‘POCM’) for recognising contract
revenue and contract costs at the reporting date. AS 7 and Ind-AS 11 also
provide similarly. The manner of determining the stage of completion for
recognition of contract revenue / contract costs is similarly provided.
3.2.3 Under ICDS III, as in AS
7 and Ind-AS 11, during the early stage of contract where the outcome of the
construction contract cannot be estimated reliably, contract revenue is
recognised only to the extent of costs incurred. However, early stage of a
contract shall not extend beyond 25% of the stage of completion as per ICDS
III. There is no such requirement under AS-7 or Ind-AS 11. The difference in
treatment will result in an adjustment.
3.2.4 Retention monies are
part of contract revenue as defined in ICDS III. AS 7 is silent on their
treatment. If the retention monies are not recognised in books till they are
due, there will be an adjustment required to taxable income.
3.2.5 Both AS 7 and Ind-AS 11
require recognition of expected losses, that is, when it is probable that total
contract costs will exceed total contract revenue, as an expense immediately.
There is no such provision under ICDS III and such expected loss would be
recognised like any other loss from the contract on the basis of Percentage of
Completion Method followed. This difference in treatment would require an
adjustment while computing the taxable income.
3.2.6 CBDT has ‘clarified’
that there is no specific ICDS applicable to real estate developers, BOT
projects and leases.1 However, in the later part of the
clarification, CBDT has stated, “Therefore, relevant provisions of the Act
and ICDS shall apply to these transactions as may be applicable”. It
appears that since there is no special treatment given for these businesses,
all the ICDS would be relevant. However, the draft ICDS on Real Estate
Transactions issued in May 2017, would be notified in due course. In case
of Builder-Developer, applicability of
ICDS III and ICDS IV is questionable,
considering that such Developer is constructing on his own account and not as a
contractor, and further, is not selling goods or rendering servicces. However,
ICDS IV may apply for other income of Real Estate Developers.
3.2.7 ICDS IV applies to sale
of goods and rendering of services. In cases where, in substance, the
transactions are not in nature of construction contracts, with the developer
not passing on the risk and rewards of ownership, the developer is selling
immovable property which are not goods and he is not rendering any services as
he develops the property on his own account and subsequently sells or leases
them. Hence, arguably, ICDS IV should also not apply to him.
3.3 ICDS
IV – Revenue Recognition
3.3.1 Revenue is measured
under Ind AS 18 at fair value of consideration received or receivable. If there
is an element of deferred payment terms in the consideration, then the fair
value of consideration may be less than the nominal amount of cash receivable.
In such a case, the difference is to be recognised as interest revenue. ICDS IV
does not require such treatment and the resulting difference in the amount of
revenue will require an adjustment.
3.3.2 In cases where the
transaction price is composite, for instance, where the selling price of a
product includes consideration for after-sales service, Ind AS 18 requires the
consideration for such after-sales service to be deferred and recognised as
revenue over the period during which the service is performed. There is no such
requirement in
ICDS IV.
3.3.3 Services contracts-
AS 9 gives the option
of completed service contract method for services contracts in certain
situations. In contrast, under ICDS IV, services contract revenue is to be
recognised as per the percentage of completion method (POCM) in accordance with
ICDS III. The resulting difference would require an adjustment. Further, ICDS
IV permits completed services contract method in cases of services contracts
with duration of not more than ninety days. Similar relaxation is not available
under AS 9 and could result in an adjustment.
3.3.4 Interest, royalty and
dividends-
a. Interest received on
compensation or enhanced compensation is taxable when received [section
145A(2)] and ICDS IV is not applicable.
b. ICDS requires interest on
any refund of tax, duty or cess to be recognised when received. This treatment
may be at variance with that in the books when such interest is recorded
earlier on accrual..
c. Under ICDS IV, interest is
to be recognised on time basis while royalty on the basis of contractual terms.
The condition of reasonable certainty of ultimate collection contained in AS 9
or Ind-AS 18 is absent. The difference in treatment could result in an
adjustment.
3.4 ICDS
V – Tangible assets
3.4.1 Under Ind-AS 16, the
components of costs of property, plant and equipment (PPE) include estimated
costs of dismantling and removing the item and restoring the site. Also
included in the costs are costs of major inspections. These costs are not
included under ICDS V and such expenditure cannot be considered as expenditure
directly attributable in making the asset ready for its intended use.
3.4.2 Ind-AS 16 provides that
in case the payment for PPE is beyond the normal credit terms, the difference
between the cash price equivalent and the total payment is to be recognised as
interest over the period of credit unless such interest relates to a period
before such asset is ready for intended use and is capitalised in accordance
with Ind- AS 23. However, ICDS V is silent in this regard, and therefore, the
total payment would be treated as the cost.
3.4.3 Under both AS 10 and
Ind-AS 16, cost of a fixed asset/PPE should be recognised as an asset only if
it is probable that future economic benefits associated with the item will flow
to the enterprise and such costs can be measured reliably. Under ICDSV, this
condition is absent. As a result, under ICDS V, the initial recognition of the
asset and subsequent addition to the cost would be made whether or not economic
benefits will flow to the enterprise.
3.4.4 Though AS 10 recognises
that the cost of fixed asset may undergo changes subsequent to its acquisition
and construction due to exchange fluctuations, exchange losses or gains cannot
be capitalised after the asset is ready for its intended use. However, ICDS VI
provides for recognition of exchange difference as per section 43A of the Act.
Section 43A provides that, in case of an asset acquired from a country outside
India, the increase or reduction in liability while making payment towards the
cost of the asset or repayment of the moneys borrowed for acquiring the asset
due to change in the rate of exchange, shall be added to or deducted from the
actual cost of such asset. Section 43A has no application in case of asset
acquired from within India by availing a foreign currency loan. These
differences in treatment could result in an adjustment while computing the
taxable income.
3.5 ICDS
VI – Effect of changes in Forex Rates
3.5.1 ICDS VI requires
non-monetary items to be translated at the rate on the date of the transaction,
except in case of inventory which is carried at net realisable value
denominated in foreign currency, where it shall be reported at the closing
rate. This treatment is in accordance with AS 11 dealing with effects of
foreign exchange rates. However, ICDS [in para 5(ii)] provides that any
exchange difference arising on conversion of non-monetary items on the
reporting date shall not be recognised as income or expense of the year. There
is an apparent contradiction within ICDS VI itself in the treatment provided in
this respect.
3.5.2 Foreign operations
AS 11 and Ind-AS require that all assets and
liabilities of a non-integral foreign operation to be converted at closing rate
and resulting exchange differences to be taken to a Foreign Currency
Translation Reserve (FCTR). ICDS VI requires the transactions of a foreign
operation, integral or non-integral, to be treated as the transactions of the
assessee itself. Accordingly, the difference in treatment will give rise to
adjustment to the taxable income. Further, the transitional provisions require
any balance in FCTR as on 1st April, 2016 to be recognised in AY
2017-18 to the extent not recognized in the computation of income in the past
[FAQ 16 Circular No. 10/2017, dated 23rd March, 2017]. These
differences in treatment will result in adjustments while computing the taxable
income.
3.5.3 Forward exchange
contracts
AS 11 requires
mark-to-market (MTM) losses/gains to be recognised at the reporting date in
respect of trading or speculation contracts. In contrast, ICDS requires
premium/discount on such contracts to be recognised only on settlement.
3.6 ICDS
VII – Government grants
3.6.1 ICDS VII provides that
the recognition of government grants should not be postponed beyond the date of
receipt. In a case where the grant is received pending compliance of some
conditions and the accrual of the grant has not taken place, the grant would be
disclosed as a liability in the books of accounts. This difference in treatment
could result in an adjustment in the computation of income, though it can be
argued that where income has not accrued, ICDS VII should yield to section 5 of
the Act.
3.6.2 As per AS 12, grants
that relate to non-depreciable assets are to be credited to a capital reserve.
Such an option is not available under ICDS VII and has to be recognised as
income. This will require an adjustment to the computation of total income.
3.6.3 As per AS 12,
non-monetary assets given at concessional rates are to be accounted in the
books at their acquisition cost or if given free, such assets are to be
accounted at a nominal value. ICDS VII also requires similar treatment.
However, Ind-AS 20 requires such assets to be accounted at fair value,
warranting an adjustment in computation.
3.7 ICDS
VIII – Securities
3.7.1 Under ICDS VIII, where a
security is acquired in exchange for other security, the fair value of security
so acquired shall be its actual cost. This is in contrast to the treatment
under AS 13 wherein the acquisition cost should be the fair value of the
securities issued. This difference in treatment would result in different costs
of securities for accounting and tax purposes and will affect the resulting
gain or loss on their disposal.
3.7.2 The treatment of
pre-acquisition interest is same in ICDS VIII and AS 13.
3.7.3 ICDS VIII requires the
securities held as stock-in-trade to be valued at year-end at actual cost or
net realisable value, whichever is lower. However, the comparison of actual
cost and net realisable value is required to be done category-wise and not
item-wise as is done under AS 13. The categories for the purpose of
comparison under ICDS VIII are shares, debt securities, convertible securities
and any other securities not covered above. Therefore, adjustments would need
to be made for the difference in valuation of closing stock.
3.7.4 ICDS VIII requires
unlisted and thinly-traded securities held as stock in trade to be valued at
actual cost regardless of their realisable value. AS 13 does not deal with
unlisted and thinly-traded securities specifically.
3.8 ICDS
IX – Borrowing Costs
3.8.1 Borrowing costs defined-
Section 36(1)(iii)
and Explanation 8 to section 43(1) of the Act cover only interest to be
considered for capitalisation to the cost of the asset. ICDS IX extends
capitalisation requirement to other components of borrowing costs [vide para
2(1)(a)]. Borrowing costs are defined in ICDS IX on the same lines as under AS
16 and Ind-AS 23, except that the exchange differences arising from foreign
currency borrowings to the extent they are regarded as an adjustment to
interest costs are not dealt with by ICDS IX.
3.8.2 In case of inventories,
as per AS 2, interest and other borrowing costs are usually considered as not
relating to bringing the inventories to their present location and condition
and as a result not included in the cost of inventories. On the other hand,
inventories which require a substantial period of time to bring them to a
saleable condition are qualifying assets and borrowing costs that are directly
attributable to the acquisition, construction or production of such assets are
to be capitalised as part of the cost of such asset as laid down in AS 16.
However, Proviso to section 36(1)(iii) read with Explanation 8 to section 43(1)
require that interest paid on amount borrowed for the acquisition of new assets
for the period before such assets are first put to use is to be capitalised and
not allowable as revenue expenditure. Arguably, inventories are not for
extension of business or profession and are not ‘put to use’ and the proviso
ought not apply to inventories. Contrarily, ICDS IX requires capitalisation of borrowing
costs related to inventories which take more than twelve months to bring them
to saleable condition. This will result in an adjustment.
3.8.3 Under AS 16 and Ind-AS
23, qualifying assets requiring capitalisation of borrowing costs are assets
requiring substantial period of time to get ready for their intended use. There
is no such requirement under ICDS IX. Thus, any delay, however short, in
putting to use any asset, being tangible or intangible assets listed in the
definition would require capitalisation of borrowing costs directly related to
their acquisition. The treatment mandated by ICDS IX is in accordance with
provisions of section 36(1)(iii) and Explanation 8 to section 43(1) of the Act.
3.8.4 Further, there is no
provision in ICDS IX for suspension of capitalisation during extended periods
when active development in construction of a qualifying asset is interrupted as
is mandated by AS 16 and Ind-AS 23. This treatment is in accordance with the
provisions of section 36(1)(iii) and Explanation 8 to section 43(1) of the Act.
3.8.5 Capitalisation –
Borrowing costs directly attributable borrowings
Where funds are
borrowed specifically for acquisition, construction or production of a
qualifying asset, ICDS IX provides that the amount of borrowing costs to be
capitalised on that asset shall be the actual borrowing costs incurred during
the period on the funds so borrowed. In cases where funds borrowed are not
utilised for the qualifying asset or where funds are borrowed for other
purposes but are utilised for acquisition, construction or production of
qualifying asset, ICDS IX would have no application. However, such a literal
reading of ICDS IX could lead to an anomalous interpretation and the
consequences may be unintended. Utilisation of the funds borrowed for the
purposes of acquisition, construction or production of qualifying asset alone
should qualify for capitalisation.
3.8.6 Capitalisation –
Borrowing costs of general borrowings
ICDX IX gives detailed
calculations to determine borrowing costs to be capitalised in case of use of
general borrowings to acquire qualifying assets. The calculations given do not
envisage situations where funds are utilised out of general borrowings on
different dates. Both AS 16 and Ind-AS 23 provide for weighted average cost of
borrowing to be capitalised. The difference in determining the borrowing costs
for general borrowings could result in adjustment in computation of income.
3.8.7 Income from temporary
investments out of borrowed funds
Both AS 16 and Ind-AS
23 provide that where borrowed amounts are temporarily invested pending their
expenditure on the qualifying asset, the borrowing costs to be capitalised
should be determined as the actual borrowing costs incurred on that borrowing
during the period less any income on the temporary investment of those
borrowings. ICDS IX is silent in this respect and could result in an
adjustment. The Supreme Court has held that such interest cannot be set off
against interest paid and has to be offered to tax under the head ‘Income from
other Sources’.2 On the other hand, it was held in another case that
where the investment is inextricably linked with the process of setting up of
the plant, such interest should be set-off against the interest paid and the
net interest is to be capitalised3. The Tax Auditor may form her
opinion on the basis of specific facts of the auditee and apply these rulings.
3.9 ICDS
X – Provisions and contingencies
3.9.1 As in AS 29 and Ind AS
37, ICDS X does not require recognition of a contingent asset. However, for
subsequent recognition of a contingent asset as an asset, ICDS X requires
‘reasonable certainty’ of inflow of economic benefits, as against the need for
‘virtual certainty’ of inflow of economic benefits under AS 29 and Ind AS 37.
This difference in treatment could result in an adjustment.
3.9.2 In respect to
recognising reimbursements of expenditure to be provided for, both AS 29 and
Ind AS 37 require a ‘virtual certainty’ of the receipt of reimbursement. In
contrast, ICDS X requires only ‘reasonable certainty’ to recognise the
reimbursements.
3.9.3 Under ICDS X, provisions
are to be reviewed at every year-end and if it is no longer reasonably certain
that an outflow of resources will be required to settle the obligation, the
provision should be reversed. AS 29 and Ind AS 37 both require reversal of the
provisions if it is no longer probable that there will be an outflow of
resources. This difference in the trigger for reversal of provisions could lead
to an adjustment in computing taxable income.
3.9.4 Transitional
provisions in ICDS X require that at the end of the financial year 2016-17, a
review of all past events is needed to be carried out to see whether any
provision is to be recognised or derecognised, and whether any asset is to be
recognised or derecognised, in relation to such past events, as per the
provisions of ICDS X.
3.10 One will have to
carefully consider the transitional provisions given in each ICDS to ascertain
exact applicability of the respective ICDS for previous year ended 31st
March 2017 being the first transitional year.
3.11 An important point that
demands mention here relates to keeping track of ICDS related changes in the
following years. Since ICDS effect is given directly in the computation of
income, and not in books of account, one will have to keep a track on a
memorandum basis. In the subsequent year/s, this effect will have to be
considered at the time of computation of income since the same might be getting
reflected in the books of account and double inclusion of income and its
elimination will be required. For example, an item of revenue was considered in
FY 2017-18. Due to ICDS revenue standard, it was already added to taxable
profits in FY 2016-17 (AY 2017-18). In such a scenario, this item needs to be
removed at the time of computing the income for AY 2018-19.
3.12 A welcome measure
introduced by way of a proviso to section 36 (1)(vii) which has considered the
possible implications of an item being considered as income even though not in
the books and its subsequent irrecoverability not being written off in the
books of account. This provision was introduced by Finance Act 2015 w.e.f.
1.4.2016 and accordingly applies from AY 2017-18 onwards.
3.13 Disclosure required by
clause 13(f) is a new challenge. The online utility already contains a field
for standard wise disclosures. However, in the utility, no tables are getting
accepted thus necessitating description. It is suggested that the practitioner may
compile a list of ICDS disclosures required each ICDS wise, and insert them in
these fields. Alternatively, an annexure may be prepared of all such
disclosures ICDS wise, and uploaded as an annexure to the tax audit report.
4. CLAUSE 18: Depreciation
Recently, the CBDT
has made changes in the Income Tax Rules to restrict the rate of
depreciation maximum up to 40% for block of assets which are currently eligible
for depreciation at a higher rate (50%, 60%, 80%, 100%). This amendment is
applicable from current financial year itself (i.e. FY 2016-17) in case of new
manufacturing companies (incorporated on or after 1.3.2016) which will opt for
lower corporate tax rate of 25% u/s. 115BA of the Income Tax Act, 1961.
For all other
assessees, the Notification states the effective date is 01.04.2017. However,
ITRs for A.Y. 2017-18 have not been modified and they still mention rates of
depreciation higher than 40%. Hence, it can be inferred that the above
amendment is applicable from next year (i.e. FY 2017-18) for assesses not
opting for section 115BA benefit.
5. CLAUSE 26 – Section 43B – Any tax, duty or other sum
Section 43B has been
amended vide Finance Act (FA) 2016 to include any sum payable by the assessee
to the Indian Railways for the use of railway assets [Clause (g)]. For
instance, this clause will include amounts charged by Indian Railways to hire
out wagons. The disallowance under this clause does not include railway freight
payable as the same is towards service of transportation and not for use of
railway assets.
6. CLAUSE 31: ACCEPTANCE OR REPAYMENT OF LOAN OR DEPOSIT OR SPECIFIED
SUMS (SECTION 269SS/SECTION 269T)
Substantial changes
have been made in clause 31 of Form 3CD dealing with above transactions.
Earlier there were
three sub clauses in clause 31. In the amended form, there are five sub
clauses. Sub-clause (a) deals with particulars of each loan or deposit
in an amount exceeding the limit specified in section 269SS taken or accepted
during the previous year. Sub-clause (b) deals with particulars of each specified
sum in an amount exceeding the limit specified in section 269SS taken or
accepted during the previous year.
In both the above
clauses, following details to be reported additionally:
– Whether the loan or deposit or specified sum
was taken or accepted by cheque or bank draft or use of electronic clearing
system through a bank account;
– in case the loan or deposit or specified sum
was taken or accepted by cheque or bank draft, whether the same was taken or
accepted by an account payee cheque or an account payee bank draft.
In this regard,
reference may be made to amendment to sections 269SS and 269T by the Finance
Act 2015, whereby the scope of these sections was extended to transactions in
immovable property. Explanation to section 269SS defines the term specified sum
as money receivable as advance or otherwise in relation to transfer of an
immovable property, whether or not transfer has taken place. Explanation to
section 269T defines the term specified sum as money in the nature of advance
or otherwise in relation to transfer of an immovable property, whether or not
transfer has taken place. This definition does not distinguish between capital
asset or stock in trade. So the scope of this section is very wide. All
transactions in immovable property exceeding the threshold will have to be
reported in this clause.
Sub-clause (c) deals
with particulars of each repayment of loan or deposit or any specified sum in
an amount exceeding the limit specified in section 269T made during the
previous year. In addition to the existing details, the following details are
to be reported additionally:
– whether the repayment
was made by cheque or bank draft or use of electronic clearing system through a
bank account;
– in case the repayment
was made by cheque or bank draft, whether the same was taken or accepted by an
account payee cheque or an account payee bank draft
In addition to the
above changes, two new sub- clauses (d) and (e) are inserted:
Sub-clause (d) deals
with particulars of repayment of loan or deposit or any specified sum in
an amount exceeding the limit specified in section 269T received otherwise
than by a cheque or bank draft or use of electronic clearing system through a
bank account during the previous year. Sub-clause (e) deals with
particulars of repayment of loan or deposit or any specified sum in an
amount exceeding the limit specified in section 269T received by a cheque or
bank draft which is not an account payee cheque or account payee bank draft during the previous year.
Following details are
required to be given in these clauses:
(i) name, address and
Permanent Account Number (if available with the assessee) of the payer;
(ii) amount of loan or deposit or any specified advance received
otherwise than by a cheque or bank draft or use of electronic clearing system
through a bank account during the previous year / received by a cheque or bank
draft which is not an account payee cheque or account payee bank draft during
the previous year.
The reporting
requirement in respect of section 269T was earlier applicable only in case of
the person making the repayment of loan or deposit or any specified advance.
Under the new clause 31, reporting is also to be done by the recipient. So the
person who receives any repayment of loan or deposit or any specified sum
in an amount exceeding the limit specified in section 269T, will have to
scrutinize the mode of repayment and report whether any repayment is received
by him otherwise than by a cheque or bank draft or use of electronic
clearing system through a bank account during the previous year or received by
a cheque or bank draft which is not an account payee cheque or account payee
bank draft during the previous year. This information will enable the
department to initiate penalty proceedings u/s. 271E against the person who has
made the repayment in contravention of section 269T.
7. Cash
deposits during demonetisation period – Impact on Clause 16 (a) & 16(d)
Cash deposits in the
bank accounts due to demonetisation would be very common. This needs to be
dealt with diligently as it might have consequences on taxable income of the
assessee. Clause 16 of the tax audit report requires reporting of certain
amounts not credited to the Profit & Loss A/c. It has several sub-clauses
out of which the followings may be relevant:
(a) the items falling within
the scope of section 28
(d) any other item of income
It might be possible
that cash has been deposited in personal bank account of the assessee (who has
a proprietary concern) and it does not form part of the books of account
related to his business which have been audited. In such case, the auditor
should not be concerned about its source and evidences in that regard as the
scope of audit is restricted only to the books of account related to the
business or profession of the assessee.
However, when cash
has been deposited in the regular bank account of the business and has also
been recorded in the books of account which are subject to audit, the auditor
needs to consider the following aspects:
– Whether
it is out of the balance available in the cash book as on that particular date?
– Are
there any irregular / unusual receipts which are recorded in the cash book
which have increased the cash balance matching with deposit into bank account?
– What
is the source of such receipts and are there sufficient audit evidences
available to justify it?
In case of companies,
the disclosure made in the financial statements pursuant to MCA Notification GSR
308(E) dated 31-3-2017 should also be taken into account while reviewing the
above aspects. One may need to ascertain, especially in case of non corporate
assessees, that the available cash balance shown as on 31st March
consist of permitted / non SBN currency to ensure accuracy and validity of cash
balance.
The
reporting under the specific clause as mentioned above or reporting of
qualification at the appropriate place in Form No. 3CA/3CB may be considered
depending upon outcome of the inquiry made in this regard. Where sufficient and
reliable audit evidences are not available justify the source of cash deposits,
the auditor may qualify his report by incorporating suitable qualification in
Form No. 3CA/3CB.
