FORM NO.

3CD [See rule 6G (2)] Statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961

PART - A Particulars to be furnished 1 Name of the assessee : Checklist 3 Permanent Account Number : 4 Status : 5 6 Previous year ended Assessment year : : Documents to be checked and / or kept in records: PAN card, recent correspondence with IT department etc. If the tax audit is in relation to a branch, mention name of the branch. If it is sole proprietorship, mention the name of the proprietor alongwith name of the buiness in respect of which the audit is carried. For e.g. SHRI B . A. Shah (Proprietor of Eastwest Trading Co.) The address should be same as given by assessee to the IT Dept for Assessment purpose. In case the audit of a branch or a unit,mention the address of such branch/unit along with address of Registered Office of assesee. In case of new assessee mention the address of principal place of business. As per PAN card If applied for and not alloted till the date of signing, mention the fact. Mention status as per section 2(31) , viz. Individual, Firm, Company, etc. In case of dispute, mention the facts.

Address

For points 1 to 6.

PART - B 7 (a) If firm or Association of Persons, indicate names of partners/ members and their profit sharing ratios. (b) Mention the name of the partners and profit / loss sharing ratios. In case a partner is a partner in representative capacity, the name of the beneficial partner should be stated. This would not cover any specific ratio or understanding in relation to payment of remuneration or interest. If the Shares of the members are not precisely ascertainable, state the fact.

If there is any change in the partners or In case of change in the partners / member or their profit or loss sharing ratio since the last date of the preceding members or in their profit sharing ratio since year, state the particulars of such change. the last date of the preceding year, the Disclose all changes occuring during the entire previous year. particulars of such change. Documents to be checked and / or kept in records: Certified copy of latest Partnership deed, Supplementary documents, understanding, notice of changes submitted to Registrar Of Firms or any such authorities including acknowledgment of the same, minutes, etc.

(a)

Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business or profession).

State the principal line of business and mode of carrying on business, i.e. retail, manufacturing, and wholesale, etc. Give Reference to information given in Annexure I to form 3CD Mention only broad categories

(b)

If there is any change in the nature of Material changes, if any, should be precisely set out business or profession, the particulars of such Temporary suspension need not be reported change. Documents to be checked and / or kept in records: Nature of Income from the financial statements Object clause in Memorandum Of Association / Partnership deed etc. Minutes of meetings or business report, if any

Registration certificates under other laws, such as VAT registration, Excise, Service Tax, etc

(a)

Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.

Rule 6F of Income Tax Rules, 1962 prescribes books of accounts viz. Cash book, Jouranl (If following mercantile method of accounting) and Ledger to be maintained by specified professionals viz Legal, Medical, Engineering, Architects, Accountants, Technical Consultants, Film Artist whose gross recepits exceeds Rs.1,50,000 in immediately preceedings three years or in case of New setup,where total gross recipts is likely to exceed Rs.1,50,000 for the previous year. Apart form the above books, person in medical profession required to keep daily case register in prescribed form and inventory under broad heads.These do not constitute books of acconts and need not be mentioned in this clause. Books of accounts are not prescribed in respect of other assessee. Check the books of accounts maintained Obtain complete list of books of accounts and documents maintained by the assessee. Make appropriate identification marks on books and records produced. In case of computerised system of accounting mention only those books as fall within the scope of "books of account". Various reports that can be generated may not necessarily be books of account. Books do not include vouchers / bills.

(b) Books of account maintained. (In case books of account are maintained in a computer system, mention the books of account generated by such computer system.) (c) List of books of account examined.

Where no specific books of accounts are prescribed, mention the fact.

If all the books maintained are not examined, then list out books of account examined, else give reference to list mentioned in clause (b) above Mention only amount included in the Profit and Loss Account Indicate that the amount mentioned is not necessarily the actual amount of profits and gains chargeable to tax under the relevant section on presumptive basis In case seperate books are not maintained for the business assessable on presumptive basis then profit from such business may be ascertained by proper apportionment of expenses. Give suitable note indicating the method of apportionment and that the profit is a reasonable estimate only. If the assessee has some additional business covered under presumptive taxation and maintains no books of account for such business but net income therefrom is credited to Profit and Loss Account of main business of the assessee and if you are unable to staisfy yourself about net income from such presumptive business, state such amount credited to Profit and Loss Account with suitable notes, expressing inabilty to verify the same. If nescesary qualify report. In case audit is carried out in view of provisions of section 44AB(3) for assessee not opting for presumptive taxation sufficiently indicate the fact in Form No. 3CB also.

10

Whether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant section (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section).

Documents to be checked and / or kept in records: Profit & Loss A/c, relevant ledger accounts with supporting documents

Basis of calculation of profits from business assessable on presumptive basis 11 (a) Method of accounting previous year. employed in the As per section 145, income is to be computed in accordance with either mercantile or cash basis of accounting regularly employed. Either of the method can be adopted for different businesses or profession however choice once exercised is to be consitently followed. For accrual basis of accounting "Guidance Note on Accrual basis of accounting" Issued by the ICAI may be reffered to. Corporate assessees have to follow accrual basis of accounting in view of section 209 of the Companies Act unless exempted under Companies Act.

Check the Accounting method followed in recognising income / gains & expenses / losses and changes as compared to that followed in last year (b) Whether there has been any change in the method of accounting employed vis--vis the method employed in the immediately preceding previous year. Change in accounting policies do not amount to change in accounting method and are thus not required to be stated here. However, such changes may have to be considered in the main audit report viz. 3CA or 3CB if the same is not disclosed in the financial statements of the assessee as per Accounting Standard II notified u/.145(2) [AS - II (IT)]

Refer Para 9 of AS - II (IT) for changes in accounting policies.

(c)

(d)

If answer to (b) above is in the affirmative, If the effect cannot be quantified then appropriate disclosure of the same should be made. give details of such change, and the effect thereof on the profit or loss. Details of deviation, if any, in the method of Refer to the two Accounting standards notified by Central Govenment u/s 145(2) (Page 34 of Guidance Note) accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit - Accounting Standard (IT) - I - "Relating to disclosure of accounting policies" or loss. - Accounting Standard (IT) - II - "Relating to disclosure of Prior period and Extra ordinary items and changes in accounting policies"

Check that all Significant accounting policies followed in preparation of financial statements are stated at one place in the Financial Statements. If not report under this clause Check that all Changes in accounting policies are disclosed in the Financial statements as per AS - II (IT). If not report here. Inventory includes work in progress, maintenance supplies, consumables,loose tools .

12

(a)

Method of valuation of closing stock employed in the previous year.

Check the procedure followed in taking the inventory of closing stock at year end and the basis of valuation thereof. Method of valuation of stock is normally disclosed as a part of significant accounting policies.

Refer to AS 2 Valuation of Inventory.

Overhead charges relating to putting the inventories in their present location and condition are to be added.

The method of valuation could be "At Cost" or "Cost or net realizable value whichever is lower". It is important to note here that many a times the terms "market value" and "net realizable value" are interchangeably used. However there is a fundamental difference between the two terms and "net realizable value" would be the appropriate term to be followed and used with respect to valuation of stock (b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss. Check whether the purchases, sales and inventory of goods and raw material are valued in accordance with the method of accounting regularly followed Check whether purchases, sales and inventory of goods and raw material are valued inclusive of all taxes, cess, duty etc. irrespective of whether they are refundable or credit is available against it (such as CENVAT / VAT credit claims, refunds etc) (herein after called as Inclusive Method) In all cases where Exclusive method is followed in accounting for purchase and sales of goods and inventory, report on deviation from Inclusive method in the Format as suggested in the Revised Guidance Notes.

Documents to be checked and / or kept in records: Inventory verification sheet Basis of Stock Valuation Excise, CENVAT credit, VAT, Sales Tax records including returns, challans etc

12A

Give the following particulars of the capital asset converted in to stock-in-trade (a) Description of Capital Asset

(b)

Date of acquisition

Check the accounts, fixed asset register and relevant documents of year in which such capital asset is acquired.

(c)

Cost of acquisition

Mention the original cost of acquisition as per the books of account.

In case of capital asset acquired prior to the 1st day of April, 1981, report the original cost of acquisition.

The assessee may exercise the option of considering the fair market value of the asset as on 1st April, 1981 for assets acquired prior to that date for the purpose of computation of capital gains as provided under section 55(2)(b)(i) Refer Accounting Standard (AS) 10, Accounting for Fixed Assets.

Check Supporting purchase invoices from the supplier, entries appearing in the bank statements in respect of payment to the supplier, entries appearing in the cash book/ bank statement for payment of cartage installment, the fixed asset register etc In case of self-constructed capital assets, obtain documents such as board resolutions and minutes, engineer's certificate on stages of completion, communication with the regulating agency, if any, payment made to the contractor, payments made for purchase of raw materials etc. and verify entries recorded in the fixed assets register In the case of Capital assets acquired in exchange for another asset, examine the basis for arriving at the fair market value, for example, the valuer's report, market quotes (in case of listed securities). Bear in mind the principles of Standards On Auditing SA 620 - Using the Work of an Expert. In case of capital asset acquired through inheritance or any other mode mentioned in Section 47, the original cost of capital asset can verified with supporting documents, valuers reports etc. and the fact should be stated in this clause. (d) Amount at which the asset is converted into Such an amount may not be the fair market value on the date of conversion or treatment as stock-in-trade. stock-intrade. If a value other than carrying cost is recorded then examine the basis of arriving at such a value. Examine the valuation of stock-in-trade with reference to AS-2 Valuation of Inventories. Non-compliance of AS-2 is to be properly qualified in the main audit report.

13

Amounts not credited to the profit and loss account, being, (a) the items falling within the scope of section 28 Refer to Section 28. Check if all items have been credited to Profit and Loss Account Refer AS-9 - Revenue Recognition and Guidance Note on Accrual Basis of Accounting Refer to the entries in the books of accounts and records made available. the proforma credits, drawbacks, refund of Report only claims admitted in the previous year duty of customs or excise or service tax, or refund of sales tax or value added tax, where such credits, drawbacks or refunds are Check status and relevant records, files and subsequent events relating to such refunds, credits and drawbacks. admitted as due by the authorities concerned; In case of assessees following cash system mention that admittance of claims during the previous year without actual reecipt has no significance in such cases. Escalation claims accepted during the Check status and supporting documents of claims arising pursuant to a contract (including claims arising out of previous year; contracts entered into earlier years) Mere making of claims or claims under negotiation or claims which are sub-judice cannot constitute claims accepted.

(b)

(c)

14

In case of assessees following cash system mention that admittance of claims during the previous year without actual reecipt has no significance in such cases. (d) any other item of income; Scrutinise all the items, non-recurring entries, appearing in the books of accounts, particularly credit items which are credited to Non Profit and Loss Accounts like those credited to General Reserves or Fixed Asset account or Capital Work In Progress. (e) Capital receipt, if any. Use professional expertise / judegments to decide whether receipt is capital or revenue in nature. Indicate judicial deceision relied on. Illustrative list of capital receipts: Capital subsidy received in the form of government grants which are in the nature of promoters contribution e.g Capital Investment Subsidy Scheme Government grant in relation to a specific fixed asset. Compensation for surrendering certain rights. Profit on sale of fixed assets / Investmentss to the extent not credited to the Profit and Loss Account. Loans and borrowings are not required to be stated under this sub-clause. Particulars of depreciation allowable as per the Documents to be checked and / or kept in records: Income-tax Act, 1961 in respect of each asset or block Fixed assets register of assets, as the case may be, in the following form:- Supporting evidences like Bills, Installation Reports, Production Records, Engineers certificate etc. Certificate for put to use date Technical expert certificate for classification, if required. Depreciation Working Refer to Depreciation Table contained in Appendix- I to the Income Tax Rules, 1962.The Broad classification & description of all assets should be as per this Depreciation Table. Verify the classification of all assets under the various head.

(a)

Description of asset/block of assets.

 Refer to Appendix 1 of Income Tax rules for relevant clarifications from department and also refer to Judicial precedents for debatable matters like Plant & Machinery V/s. Building etc. It may be necessary to rely on technical experts reports or certificates for classification of highly technical assets within the blocks specified in the Depreciation table. Opening WDV should generally be as per last Years Tax Audit Report, if any. If there is any deviation refer IT records available with the assessee and fact of reliance thereon should be stated. In case of difference with assessee regarding classification or rate, separate working and disclosure should be made. In case there are unresolved disputes with Department the same should be suitably disclosed. Rate of depreciation. Refer above Actual cost or written down value, as the case Refer to Section 43(1) and 43(6) and relevant judicial pronouncement. may be. Check that actual cost includes actual purchase cost and other incidental cost, which are an integral part. It should be as per GAAP except where specifically provided under the Income Tax Act like Interest expenses, Foreign Exchange Loss / Profit etc. Check the amounts of addition in cases like succession, amalgamantion, demerger, transfer from holding to subsidiary with reference to section 43(1) and 43(6) In case of intangibles developed by the assessee examine the basis on which cost is arrived at. Refer to AS 10 Accounting for Fixed assets Additions / Deductions during the year with Check date of put to use with documents like Installation Report, Engineers Report, Records relating to power dates; in the case of any addition of an asset, connection for operating machines, Productions records, etc date put to use; including adjustments on In case of deductions, the amount of sale consideration received / receivable on sale, discarding, demolishment or account ofdestruction of the depreciable asset during the previous year together with scrap value received or receivable shall be reduced from the WDV

(b) (c)

(d)

(i) Modified Value Added Tax credit claimed and allowed under the Central Excise rules, 1944, in respect of assets acquired on or after 1st March, 1994,

Verify CENVAT ( formerly known as MODVAT) credit claimed in respect of capital goods with Excise Records

In case there is dispute regarding the CENVAT claim, adjustment may be made in the year in which the claim is settled. (ii) change in rate of exchange of currency, and If any depreciable asset is acquired from outside India and there is any change in the Foreign Exchange Liabilty of the assessee towards the cost of the asset or the moneys borrowed for acquiring such asset along with interest, if any, check that such foreign exchange loss or gain arsing therefrom is adjusted to cost of acquisition only on payment basis.

Verify the adjustments in the cost of acqustion on account of such foreign exchange fluctuation in light of AS-11 on Accounting for the Effects of Changes in Foreign Exchange Rates and Section 43A.

(iii) subsidy or grant or reimbursement, by whatever name called.

As per section 43A, Where part of cost of depreciable asset is met directly or indirectly by Central or state Government or any authority established under any law or by any other person, in the form of a subsidy or reimbursement or grant or reimbursement, such amout which is directly or indirectly relatable to any depreciable asset is not to be included in the cost of assets. If such subsidy is not directly related to the asset acquired, the same shoul be apportioned towards such asset on proportionate basis. Subsidy in respect of asset acquired during any earlier year and received during the year has to be deducted from the WDV of such asset in the year of Receipt.

(e)

Depreciation allowable.

Where a claim of depreciation is based on judicial pronouncement or on opinion or other contentions, it may be advisable to disclose such particulars. Claiming of Depreciation, if any allowable U/s 32, is compulsory. Verify the claim of additional depreciation claimed U/s 32(iia), if any. Check that the conditions mentioned in the relevant sections are fulfilled Check the Calculations of deductions under the applicable sections In case of deductions available over more than one year, ensure that the same has not expired In case reliance is placed on any report or certificate for claim of deduction, give reference to that report / certificate

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(f) Written down value at the end of the year Amounts admissible under sections(a)33AB (b)33ABA (c)33AC (Wherever Applicable) (d)35 (e)35ABB (f) 35AC

From A.Y 2006-07 onwards, no deduction shall be allowed under section 33AC From A.Y 2003-04 onwards, no deduction shall be allowed under section 35CCB Some of the payments can also be claimed as deduction under chapter VIA, if the same are claimed here they cannot be claimed under chapter VIA and vice-versa. Where deduction is available under one or more of the sections covered in this clause, mention deduction claimed under each section seperately Documents to be checked and / or kept in records: Workings / Past assessment records Other Chartered Accountants Report or Certificate, if any, obtained for each of the claims

(g)35CCA (h)35CCB (i)35D (j)35DD (k)35DDA (l)35E:(a) debited to the profit and loss account Indicate the amount debited to Profit and Loss account and deduction actually allowable. (showing the amount debited and deduction allowable under each section separately); (b) not debited to the profit and loss account. Disclose amounts which may be allowable as deduction but capitalised and shown as fixed assets in the books or transferred to the reserves. 16 (a) Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend. [Section 36(1)(ii)].

Obtain a List of Employees who are also Shareholders / Partners in the Assessee Company or firm. Verify the terms of engagement, increment and promotion terms with such employees. Examine whether Bonus or commission paid to them are commensurate to the services rendered. Disclose amounts which are paid as bonus or commission to employees which otherwise would have been payable as profit or dividend

(b)

Expression of opinion about allowability or inadmissibility is not expected. Any sum received from employees towards Verify Employees contribution to PF or ESI Fund or other employees welfare funds with the payroll records, relevant contributions to any provident fund ledger accounts and statements of calculation of contributions to various funds or superannuation fund or any other fund mentioned in section 2(24)(x); and due date Verify the dates on which such sum is credited by the assessee to the account of the employees in the relevant fund for payment and the actual date of payment to / concerned authorities with the supporting documents like challans, Bank Book, receipts from the various fund / the concerned authorities under section authorities etc. 36(1)(va).

(b)

Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x); and due date for payment and the actual date of payment to the concerned authorities under section 36(1)(va). Check the due dates of payment under the respective statute. Grace period if available in relevant statute may be taken into consideration for calculating due date. Only the amount of employees contributions along with due date for payment and the actual date of payment to the concerned authorities are required to be disclosed and expression of opinion about allowability or inadmissibility is not expected. Amounts debited to the profit and loss Documents to be checked and / or kept in records: account, being: Relevant Ledger accounts along with relevant supporting documents Relevant provisions of Income-tax Act, Rules, notifications, circulars, if any issued there under Relevant judicial pronouncements Past assessment orders expenditure of capital nature; Capital expenditure is allowable in computing Business Income only if there is specific provision granting the deduction under The Income Tax Act. Capital expenditure is not defined in the Act. There are no conclusive rules to decide on the same. Different tests applied by courts in various judicial precedents, depending on facts and circumstances of the case. Some General tests are specified in para.28.3 of the guidance notes. Nature of receipt in the hands of the recipient is not determining factor to determine the nature of payment in the hands of payer. Capital expenditure fully deductible in computing the total income under any specific section should be separately shown

17

(a)

(b)

expenditure of personal nature;

It is to be noted that the word personal is confined to and attached to the assessee and not necessarily with persons other than assessee.

(c)

Decide on whether an expenditure is personal in natures based on the judicial proceedings on the subject & past assessment or appellate or ITAT or Court decisioins in the assessees own case expenditure on advertisement in any souvenir, Such expenditure is not allowable u/s.37(2B) brochure, tract, pamphlet or the like, If amount of such nature is paid to a trade union or labour union formed by the political party which is a distinct legal published by a political party; entity than such expenditure is not covered u/s.37(2B) . However if such trade union or labour union does not have a separate and distinct legal entity, then such payments will have to be indicated under this clause.

(d)

expenditure incurred at clubs,-

The fact whether such expenditure is of personal nature or incurred in normal course of business should be ascertained. If they are of personal nature, mention it under clause 17(b) also. Check whether such expenses have been treated as perquisite in the hand of employee, in case it is for the personal benefit of the employees. If no, report under clause 27(a) Scrutinize all credit card payments Payments made to service organizations such as Rotary Club or Lions Club or Jaycees club or Giants would not necessarily be covered by this clause.

(i) as entrance fees and subscriptions;

(e)

(ii) as cost for club services and faciliies used; (i) expenditure by way of penalty or fine for violation of any law for the time being in force; (ii) any other penalty or fine;

Examine the order of Judicial Authority levying penalty or fine. Refer to the provisions of relevant law under which such payments are required to be made to find whether it is compensatory or penal in nature. Supreme court and various high courts have held that where the impost is purely compensatory in nature deduction u/s.37(1) is allowable. If the amount paid is not penalty but is paid in exercise of an option conferred upon under the levy ,Law or scheme concerned, the same is allowable U/s 37(1).

Where an impost is partly compensatory and partly penal then deduction of compensatory portion of payment is allowable expenditure. Obtain in writing from assessee the details of all payments by way of penalty or fine paid or incurred by the assessee during the relevant previous year and how such amounts are dealt with in the books of account. Do not express opinion on allowability. Expenditure incurred for illegal purposes such as protection money is not a deductible expenditure.

(iii) expenditure incurred for any purpose which is an offence or which is prohibited by law; (f) amounts inadmissible under section 40(a);

Report on following amounts debited to the Profit & Loss A/c: Any sum payable outside India or in India to non-resident or to a foreign company without deducting or paying applicable Tax at source [TDS] under chapter XVII-B during the previous year or subsequent year, within the due date prescribed U/s 200(1) In case of actual remittance, refer to TDS returns, refer to declaration [Form 15CA] and CA certificate [Form 15CB] filed by the assessee U/s 195(6). Refer CA remittance certificates, legal opinion etc. Refer to applicable provision, relevant double tax avoidance agreement [DTAA], circulars and relevant judicial decision. In case of difference of opinion state both the view points. Any interest, commission or brokerage, fees for professional or technical services, rent, royalty, amounts payable to contractors or sub-contractors [covered under 194C] without deducting or paying applicable Tax at source [TDS] under chapter XVII-B within due date prescribed for filing Income Tax Return U/s 139(1) for that previous year. This clause can be dealt with along with clause 27 which requires reporting on compliance with provision of chapter XVIIB regarding deduction of TDS and payment thereof to the Central Government. Prepare a list of payments covered under various sections relating to deduction of TDS under chapter XVII- B including sections 193 / 194A / 194C / 194D / 194G / 194H / 194I / 194J and the applicable TDS rates along with applicable surcharge if any, and education cess thereon and due dates of payments to Central Government. Take specific note of cut off dates from which amendments have been made to the aforesaid Sections or Rates or Dates.

As per Section 206AA , w.e.f from 01-04-2010, where any payment is subject to TDS under chapter XVII-B , TDS shall be deducted there from at higher of specified rate or rate in force or 20%, in case the payee does not furnish his valid PAN to the payer. Refer to applicable provision, Income tax Rules, notifications, circulars and relevant judicial decision. Refer legal opinion etc. in case of difference of opinion state both the view points.

Check the Internal controls and systems of the assessee in respect of TDS. Verify the Ledger accounts to check whether TDS has been properly deducted on all payments covered aforesaid sections. Verify with TDS returns, payment challans, valid certificate of lower or no deductions, etc. In case of volumes transactions, apply test check and compliance test to verify the data depending upon the internal controls and systems. FBT

FBT has been abolished from A.Y 2010-11.If any short fall on account of provision of FBT for past years is debited to the Profit & Loss A/c, the same needs to be reported under this clause. Any rate or Tax Levied on profits of gains of any business or profession of the assessee. Wealth Tax Any payment chargeable under the head Salaries payable outside India or to a non resident in India without deducting or paying applicable Tax at source [TDS] under chapter XVII-B during the previous year or subsequent year, within the due date prescribed U/s 200(1) Obtain a list of Non-resident employees and employees in foreign countries along with their pay roll records, employment agreements.

Refer to checklist under point (a) of this clause. Any payment to provident fund or any welfare fund, unless the assessee has made effective arrangement to secure that TDS shall be deducted from any payment made from fund which are chargeable to tax under the head Salaries.

Any tax on monetary perquisites of employee actually paid by an employer referred to in clause (10CC) of the section 10 Check pay roll records, employment agreements, Ledger Accounts etc.

(g)

interest, salary, bonus, commission or Partnership firms refer Section 40(b) remuneration inadmissible under section Check that the Remuneration is payable only to working partner. 40(b) / 40(ba) and computation thereof; Check the amount of interest, remuneration is authorized by and is in accordance with the partnership deed. Check whether the interest, remuneration, etc. relate to the period after date of execution of deed of partnership or any other instrument authorizing such payments. Examine whether the same is within the limits specified in section 40(b). Maximum Limits laid down in section 40(b) w.e.f 1/4/2010 for payment of remuneration to working partners are as under

On First 3,00,000 of Book Profit Rs. 1,50,000 or 90% of Book profits(whichever is higher) On Balance 60% of Book profits Maximum limits laid down in section 40(b) for payment of interest u/s. 40(b) is 12% p.a. Obtain detailed working of amount inadmissible U/s 40(b), computation of Total Income, Book Profits. Reference may be made to Cir. 739 dated 25.3.1996 issued by the CBDT. Verify agreement or other documents effecting changes which would effect amount. AOP/BOI refer section 40(ba) Disallow remuneration or interest paid by AOP / BOI to its members. Disallow interest received from and paid to member. Disallow Interest received by members on behalf of a third party.

(h)

(A) whether a certificate has been obtained Scrutinize Cash book from the assessee regarding payments relating to any expenditure covered under section 40A(3) that the payments were made Verify all payments to a party for expenses over Rs.20,000/- which are otherwise then by an account payee cheque by account payee cheques drawn on a bank or account payee bank draft. or account payee bank draft, as the case may be;

(B) amount inadmissible under section 40A(3) Limit of Rs.20,000 to be verified for a payment or aggregate of payments made to a person in a day, otherwise than read with rule 6DD [with break-up of by an account payee cheque drawn on a bank or account payee bank draft. inadmissible amounts]; If an expenditure is incurred in a particular year which is allowed as deduction in computing Taxable Business Income of that year and the payment of the same is made in any subsequent year in a sum exceeding Rs. 20,000/otherwise then by an account payee cheque or draft, such payment shall be deemed to be the Profit and Gains from Business or Profession of the previous year in which such payment is made.

Cover only revenue payments. Examine whether such payments, if any, fall within the exceptions provided within Rule 6DD. - In case of payments by bank draft or cheque it may be difficult to verify whether the same are account payee or not. Suitable note may be given in such cases. (i) provision for payment of gratuity not allowable Deduction of provision for gratuity is allowable only if an approved gratuity fund is created and provision is made under section 40A(7); for contribution due to such fund or the provision relates to the amount of gratuity which has become payable during the previous year. Check the order of the commissioner of Income-Tax granting approval to the gratuity fund, verify the date from which it is effective and also verify whether the provision has been made as provided in the trust deed. (j) any sum paid by the assessee as an employer Payments made by an employer towards the setting up or formation of or as contrbution to any not allowable under section 40A(9); fund,trsut,company,AOP,BOI,society registered under the Societies Registration Act,1860, or other institutions (other than contributions to recognised provident fund or approved superannuation fund or approved gratuity fund) is not allowable. Particulars of any liability of a contingent nature. Take the particulars of any liability of a contingent nature debited to the Profit and Loss Account from assessee Scrutinize expenses under each head in detail, especially outstanding liability and provisions,. Verify records relating to disputed claim. Verify how the Contingent Liability of earlier years debited to Profit & Loss A/c during the current year has been dealt with.

(k)

(k)

Particulars of any liability of a contingent nature.

(l)

Reference may be made to AS 29 - Provisions, Contingent Liabilities and Contingent Assets. Amount of deduction inadmissible in terms of Refer to the Section 14A and Rule 8D of the Income Tax Rules. section 14A in respect of the expenditure Refer to the guidance note of the ICAI on this clause. incurred in relation to income does not form part of the total income Refer to the various Judicial Pronouncements on Section 14A and state about the reliance upon the same, wherever necessary. As per Section 14A no deduction would be allowed for expenditure incurred in relation to income which does not form part of the total income (herein after referred to as Exempt Income). In case the Assessing Officer is not satisfied with the correctness of the claim of expenditure, method prescribed in Rule 8D(2) should be applied by the Assessing Officer. Sub rule (2) to Rule 8D specifies that aggregate of following shall be disallowed the amount of expenditure directly relating to income which does not form part of total income expenditure incurred by way of interest, which is not directly attributable to any particular income or receipt by the specified formula [Amount of Interest expenditure other than that mentioned in (a)] [Average of total assets as per Balance Sheet] 1/2 % of Avg. value of Investment on which Exempt Income is earned. 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. Amount u/s.14A may be estimated with reference to established principles of allocation of expenditure based on logical parameters like proportion of exempt and taxable income recorded, turnover, man hours spent to earn the relevant income etc. Analyse the Fund flows / cash flows of the assessee to check whether the investments yielding exempt income are funded out of owned funds or interest bearing funds. 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. Obtain Amount of disallowance U/s 14A from the assessee along with details, working, supporting, etc. Check whether the assessee has any exempt income like dividend on shares covered U/s 10(34), dividend on Mutual funds covered U/s 10(35), Long term capital gain covered U/s 10(38), Profit share in Partnership firm, Other exemption covered under chapter III Incomes which do not form part of Total Income. Such income could be earned in the current year or would be earned in future years.

 Verify how the assessee has worked out disallowance u/s.14A. If as per Rule 8D(2) then check with Rule 8D(2). Else, understand the working of the business of the assessee along with the manner of earning the exempt income. Examine the details of earnings and expenses of the assessee. Check whether he has considered all direct expenses incurred towards exempt income in 14A Working. Check whether he has allocated / apportioned the indirect expenses in relation to such exempt income on reasonable basis Refer Standard on Auditing-540 Audit of Accounting Estimates. Adopt one or a combination of the following approaches: 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. Obtain Management Representation (MR). Refer to Standard on Auditing -580, Representation by Management Seek corroborative audit evidence from sources inside or outside the entity; Evaluate whether the representations made by management appear reasonable and consistent with Other audit evidence obtained, including other representations; and

Consider whether the individuals making the representation can be expected to be well informed on the matter.

(m)

Amount inadmissible under the proviso to U/s section 36(1)(iii) , interest paid in respect of capital borrowed for the purpose of the business or profession would section 36(1)(iii) be allowed as a deduction. Provison to section 36(1)(iii) provides that any interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was put to use, shall not be allowed as a deduction. Check whether any borrowing has been made for extension of existing business or profession. Check the date of put to use of such asset with supporting documents installation reports, production reports, engineers certificates, etc. Verify that interest paid on such borrowings with supporting documents like Loan agreements, debenture documents etc. Check that such interest upto the date of put to use of such asset is not debited to Profit & Loss Account. If so debited, disclose under this clause.

17A.

Amount of interest inadmissible under section Refer to the guidance note of the ICAI on this clause. 23 of the Micro, Small and Medium As per MSME act where a buyer fails to make payment to the eligible supplier [Registered under MSME Act], as per Enterprises Development Act, 2006 section 15 read with section 16, the buyer shall be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed date or, as the case may be, from the date immediately following the date agreed upon, at 3 times of the bank rate notified by the Reserve Bank.

Interest payable or paid to the eligible suppliers under the Micro, Small and Medium Enterprises Development Act, 2006 [MSME Act] is not allowed as deduction under the Income Tax act. Obtain status of all the suppliers of the assessee whether the same are covered under MSME Act. Check whether any interest payable to such eligible supplier under the MSME Act and whether the same has been provided for in the books of the assessee. If no, than appropriate qualifications may be given in Form 3CB. If yes, than disclose such interest amounts debited to Profit & Loss Account Verify that information as prescribed under section 22 of MSME Act are disclosed in the financial statements. If no disclosure is given, give appropriate qualification in form 3CB. Advise the assessee to: Maintain a separate register or details of eligible suppliers. A separate classification of such suppliers can be maintained in ledger. A separate interest account in ledger can be maintained in relation to such suppliers

18

Particulars of payments made to persons U/s. 40A(2)(b), an Assessing Officer may disallow certain expenditure, payment whereof is made to certain specified specified under section 40A(2)(b). related persons, if he is of the opinion that such expenditure is unreasonable or excessive. Obtain full list of specified persons and make appropriate disclosure about reliance thereon. Obtain details of payments made to such persons; Scrutinize the Ledger Accounts to identify such payments. Verify such items of expenditure/payments with supporting documents like Bill, agreements, contracts, etc .ledger accounts of the specified persons to verify the nature of dealings with such persons. In case of Volumes transactions, apply reasonable test checks and compliance test. Do not express any opinion of allowability or vice-versa. Documents to be checked and / or kept in records List of relatives certified by the management / assessee. Register u/s 301 of the companies Act. In case of companies, register maintained u/s.301 and Related Party disclosure made in the Financial Statements as per AS 18.

19

Amounts deemed to be profits and gains Refer to section 33AB or 33ABA. [note that section 33AC has been omitted by Finance (No.2) Act, 2004] under section 33AB or 33ABA or 33AC. Verify amounts withdrawn from deposit account covered u/s.33AB and 33ABA for purposes other than specified purpose Documents to be checked and / or kept in records Relevant documents in support of withdrawals from the said deposit accounts Any amount of profit chargeable to tax under Check whether following items chargeable u/s.41 are disclosedsection 41 and computation thereof. Sec 41(1) - Where allowance or deduction has been made in any earlier year in respect of loss, expenditure or trading liability and subsequently during the previous year the assessee receives any amount in respect of loss or expenditure or some benefit in respect of trading liability by remission or cessation thereof.

20

Successor to business is also chargeable in respect of remission or cessation of liability. Sec 41(2) - Balancing charge (so much of excess of money received over WDV as does not exceed the difference between actual cost and WDV) on sale / discard / demolishment / destruction of depreciable assets in respect of depreciation claimed U/s 32(1)(i), belonging to power generation / distribution undertaking Sec 41(3) - Balancing charge (so much of excess of {sales proceeds + deduction u/s 35} over CAPEX as does not exceed the deduction u/s 35) on sale of scientific research assets covered u/s 35(1)(iv) or 35(2B)(c) without using for any other purpose.

Sec 41(4) - Recovery of debt written off earlier and allowed as bad debt will be chargeable as profit in the year of recovery.

Sec 41(4A) withdrawal from special reserves maintained u/s 36(1) (viii). Disclose information irrespective of the fact whether the relevant amount is credited to profit and loss account; and if the amount is credited to profit and loss account mention the same. Examine past tax and assessment records. 21 *(i) In respect of any sum referred to in clause (a), Furnish Particulars irrespective of the fact whether there is debit of the items covered in the Profit and loss account or (b), (c), (d), (e) or (f) of section 43B, the not. liability for which; (A) pre-existed on the first day of the Section 43B Items incurred during the previous year are allowed as deduction if paid within the due date of filing of previous year but was not allowed in the return U/s 139(1). Pre-existing items will be allowed only if payment / set off made during previous year. Limit upto assessment of any preceding previous due date of filing return of Income not available to those items. year and was (a) paid during the previous year; (b) not paid during the previous year; (B) was incurred in the previous year and was (a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1); (b) not paid on or before the aforesaid date. [***] Check Last year Tax Audit report and Income-tax returns Report if any item has been written back during the previous year Reconcile the outstanding position as on last date of previous year with the relevant ledger accounts Verify details with Books of accounts, vouchers, challans, supporting documents of current year and subsequent year. Give appropriate note that payments made after signing of report but before due date of filing return of income and otherwise allowable shall be claimed in the Return of Income. Ensure to verify and reconcile such claims of earlier years with past years Tax Audit Report and Return of Income. Verify Excise duty paid on finished goods in bonded warehouse with excise records and CENVAT records. 43B (f) Leave encashment liability is allowed as deduction on payment basis with effect from A.Y 2002-03. Check whether the leave encashment accrued before F.Y 2001-02 have been claimed by the assessee in the earlier years on accrual basis. Distinguish the payments made during current year relating to leave encashment accrued before F.Y 2001-02 that were allowed in the earlier years. Ensure that only those payments that were not allowed in the past are claimed during the current year.

ii)

* State whether sales tax, customs duty, excise duty Check earlier years assessment records. In case of items in dispute, state the facts or any other indirect tax, levy, cess, impost etc. is If cash basis of accounting is followed, sums referred to in clause (a), (b), (c), (d), (e), and (f) of section 43B which passed through the profit and loss account. are debited to the Profit & Loss Account will be allowable as they would have been actually paid during the year.

Documents to be checked and / or kept in records 43B (a) - Excise, VAT, Sales tax, Cenvat records including returns and records. documents relating to other taxes

* State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost etc. is passed through the profit and loss account.

43B (b) - Employers contribution to Provident fund or superannuation fund, gratuity fund or any other fund for the welfare of employees refer to checklist under clause 17(b) above 43B (c) -Check bonus or commission payable by the assessee to its employees from salary register and Relevant Ledger Accounts. 43B (d) Check Interest on any loan or borrowing from any public financial institution, State financial corporation and state industrial investment corporation from Relevant Ledger Accounts, Loan statement and Bank Book. 43B (e) Check Interest on any loan or borrowing from scheduled bank from Relevant Ledger Accounts, Loan statement and Bank Book. 43B (f) Check leave encashment from salary register and Relevant Ledger Accounts. Necessary receipt and challans

22

(a)

Amount of Modified Value Added Tax credits Cenvat Credit Rules, 2004 have replaced MODVAT. availed of or utilized during the previous year and its treatment in the profit and loss account Verify with excise records - RG-23 (both parts) and CENVAT records and treatment of outstanding Modified Value Verify that there is a proper reconciliation between balance of CENVAT credit in the accounts and relevant excise Added Tax credits in the accounts. records. Give full account of unavailed CENVAT credit, including opening and closing balances, if any. Ensure that the information is compatible with information furnished in clause 12(b). Particulars of income or expenditure of prior Material charges or credits which arise in the current year as a result of errors or omissions in the accounts of earlier period credited or debited to the profit and years will be considered as prior period items. loss account. Scrutinize and verify particulars of expenditure or income of any earlier year debited or credited to the Profit & Loss Account. Expenditure pertaining to earlier period but crystallized during the year may not be prior period items.

(b)

23

Refer to Accounting Standard -5 and AS(IT) II issued U/s 145. This clause is not applicable if cash basis of accounting is followed. Details of any amount borrowed on hundi or any Refer Circular No.208 dated 15th November, 1976 issued by CBDT. amount due thereon (including interest on the amount Verify from available evidence. In the absence of which make suitable comments. borrowed) repaid, otherwise than through an account Documents to be checked and / or kept in records: payee cheque. [Section 69D] Bank Statement List of borrowings and repayments

24

(a)

*Particulars of each loan or deposit in an No person can accept any loan or deposit from any person otherwise than by account payee cheque or draft if such amount exceeding the limit specified in loan or deposit or aggregate thereof along with amount of earlier loan or deposit outstanding, if any, taken from such section 269SS taken or accepted during the person exceeds Rs.20,000 previous year:(i) name, address and permanent account number (if available with the assessee) of the lender or depositor; This clause is not applicable to loans or deposits taken from / by the Government, any banking company, government company, corporation established under central, state or Provincial Act , any institution notified by the government etc

(ii) amount of loan or deposit taken or accepted; (iii) whether the loan or deposit was squared up during the previous year; (iv) maximum amount outstanding in the account at any time during the previous year;

Report Loans /deposits taken or accepted where balance has reached Rs.20,000 or more Scrutinize current account, mixed account, security deposit, etc

An advance against agreements of sale is not Loans or deposit.

(v) whether the loan or deposit was taken or Report Loans or deposit taken, accepted by way of transfer entries. accepted otherwise than by an account payee cheque or an account payee bank draft. *(These particulars needs not be given in the case of No particulars need to be given in case of loans exceeding Rs.20,000 brought forward from earlier year in which there a Government company, a banking company or a are no transactions / movement during the year. corporation established by a Central, State or Do not report E-payments through internet or telegraphic transfer or through mail transfer as otherwise than through Provincial Act.) account payee cheque. In case of payments by bank draft or cheque it may be difficult to verify whether the same are account payee or not. Give suitable note in such cases.

(b)

Particulars of each repayment of loan or Report all repayments of any loan or deposit along with interest, where the aggregate of such loans or deposits along deposit in an amount exceeding the limit with interest exceeds Rs.20,000. specified in section 269T made during the previous year:(i) name, address and permanent account Report Loans or deposit repaid by way of transfer entry. number (if available with the assessee) of the payee; (ii) amount of the repayment; Repayment of loan or deposit to Government or banking companies, otherwise than by account payee cheque or draft, will also have to be reported, i.e. repayment by cash to banks (c.c. and term loan accounts) are also covered. Repayment should be by way of account payee cheque or account payee draft and it should be drawn in the name of person who has made the Loan / deposit. This clause is not applicable to repayment of loans or deposits to Government, any banking company, government company, corporation established under central, state or Provincial Act , any institution notified by the government etc

(iii) maximum amounts outstanding in the account at any time during the previous year; (iv) whether the repayment was made otherwise than by account payee cheque or account payee bank draft.

(C)

In case of assessee company, loan or deposit repayable on demand will not be considered as deposit. In case of assessee company, loan or deposit repayable on demand will not be considered as deposit. Whether a certificate has been obtained from the assessee regarding taking or accepting loan or deposit, or repayment of the same through an account payee cheque or an account payee bank draft.

The particulars (i) to (iv) at (b) and the certificate at (c) above need not be given in the case of a repayment of any loan or deposit taken or accepted from Government, Government Company, banking company or a corporation established by a Central, State or Provincial Act; 25 (a) Details of brought forward loss or depreciation Check the amount of brought forward loss under various sections from 70 to 79 or unabsorbed depreciation as per allowance, in the following manner, to the return and assessment records. extent available (i) Assessment year Check the Returns, assessment orders, rectification / revision orders, appellate orders, Court orders, orders giving effect to such orders. (ii) Nature of loss/ allowance (in rupees) (iii) Amount as returned (in rupees) (iv) Amount as assessed (give reference to relevant order) (v) Remarks

Check details about the pending assessment or appellate proceedings or about delay in filing loss returns. If consequential orders giving effect to such orders are yet to be passed, disclose the same along with impact thereof if material.

(b)

26

Whether a change in shareholding of the company has taken place in the previous year due to which the losses incurred prior to the previous year cannot be allowed to be carried forward in terms of section 79. Section-wise details of deductions, if any, admissible Refer to general provision of Part A of Chapter VIA and the provisions of the specific section applicable to the under Chapter VIA. assessee. Ensure that all the conditions for claiming for the deduction have been fulfilled. Verify the quantum of deduction being claimed with the books of accounts and supporting documents. In case only one or more units of the assessee are eligible for deduction, verify the computation of profits derived by each of the division to ensure that all the direct and indirect costs have been properly allocated and all relevant overheads of the assessee have been reasonably apportioned to the eligible units. Keep in mind the principles laid down in the chapter VIA like eligible unit standalone calculation, arms length transfer pricing between the eligible and non eligible units of the assessee. Refer to relevant judicial precedents.

 Where deductions are available subject to certain certificates, reports (eg. sec. 80IA deductions), refer to such reports. Mention that the quantum of deduction is subject to computation of gross total income as per provisions of section 80A(2) . In the case of sole proprietor it may so happen that tax auditor is auditing the Accounts of his business and sole proprietor is having other activities also in respect to which tax audit is not mandatory. In such case the Information under this clause will have to be restricted to items appearing in the books of account subjected to audit. In case of dispute about amount admissible and amount claimed by the assessee; mention the details of the same.

27

(a)

(b)

Whether the assessee has complied with the provisions of Chapter XVII-B regarding deduction of tax at source and regarding the payment thereof to the credit of the Central Government. If the provisions of chapter XVII-B have not been complied with, please give the following details, namely. (i) Tax deductible and not deducted at all (ii) Shortfall on account of lesser deduction than required to be deducted (iii) Tax deducted late (iv) Tax deducted but not paid to the credit of central government

Refer to guidance notes for the tabular format under which details are to be given.

Ensure that reporting in clause (B) sub clause (i),(ii) and (iv) relating to sections 193 / 194A / 194C / 194D / 194G / 194H / 194I / 194J matches with details given in clause 17(f) above. In sub clause (iv) only report cases where TDS is not paid before 31 st March of the previous year.

Documents to be checked and / or kept in records: Refer to relevant points of checklist under clause 17(f).

*Please give the details of cases covered in (i) to (iv) above. 28 (a) In the case of a trading concern, give Not applicable for service companies quantitative details of principal items of goods traded: (i) Opening Stock; Verify Stock register, excise records, stock statements submitted to banks, quantitative details given in the financial statements of the company. (ii) Purchases during the previous year; Information about principal items only [more than 10% of aggregate value purchase, consumption or turnover] and where it is practicable to do so.

(b)

(iii) Sales during the previous year; (iv) Closing Stock; (v) Shortage/excess, if any. In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and byproducts. A. Raw Materials: (i) opening stock; (ii) purchases during the previous year; (iii) consumption during the previous year; (iv) sales during the previous year; (v) closing stock; (vi) * yield of finished products; (vii) * percentage of yield; (viii) * shortage/excess, if any. (B) Finished products/By-products: (i) opening stock; (ii) purchases during the previous year;

Verify the figure on sampling method. Refer to ICAI statement on amendments to Schedule VI of Companies Act, 1956. Byproduct if produced or continuously generated, be treated as at par with other products. Obtain Certificate from the assessee

quantity manufactured during the previous year; (iv) sales during the previous year; (v) closing stock; (vi) shortage/excess, if any. * Information may be given to the extent available. 29 In the case of a domestic company, details of tax on distributed profits under section 115O in the following form:(a) total amount of distributed profits; (b) total tax paid thereon; Verify amount of dividend distributed by the company u/s 115O, Tax paid thereon and date of deposit.

(iii)

Dividend has same meaning as defined in section 2(22) except 2(22)(e). Advisable to give date of declaration / distribution / payment of dividend since the company is required to deposit tax within 14days of date of such declaration / distribution / payment of dividend, whichever is earlier. Verify the date of payment of dividend with Challans and Bank statements.

(c) dates of payment with amounts.

30

Whether any cost audit was carried out, if yes, Reconcile the information in the Cost / Excise audit report with the financial records where cost audit is carried out. enclose a copy of the report of such audit [See section 139(9)]. Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit. In case Cost / Excise audit is ordered but same is not carried out, mention the same.

31

32

Accounting ratios with calculations as follows:-

Check whether period under tax audit is covered under Cost / Excise audit report. All ratios are to be calculated in value only. This clause is applicable to assessee engaged in manufacturing or trading activity. Explain substantial variances. Show workings Extra ordinary items are normally excluded. Documents to be checked and / or kept in records: Financial statements, Trial Balance It is to be calculated on overall basis and not separately each item wise Where company prepares only a P&L a/c, it is sufficient to calculate only Net Profit Ratio. Deduct depreciation on Plant & Machinery, if any, from Valuation of finished goods In the case of a partnership firms, ratio has to be calculated after charging such interest and remuneration. Stock in trade here means Closing stock of finished goods only.Does not include stores,spare parts and loose tools Raw material includes stores, spares and loose tools

(a) Gross profit / Turnover;

(b) Net profit / Turnover; (c) Stock-in-trade / Turnover; (d) Material consumed / Finished goods produced.