Income Tax audit means audit done with the guidance of provisions laid down under Income Tax Act, 1961 to verify that all the compliances are being done by the person as required by Income tax law. There are certain sections under Income tax act which apply in day to day transactions and the tax auditor must ensure that the entity has complied. Following are some of the points to be taken note to avoid disallowance of any expense or income.
1. Payment in cash to single person in a single day exceeding Rs. 10,000 (Rs. 35000 in case of Transporter)
In case of any expenditure for which any payment is being made to a single person in a single day, above Rs. 10,000/ 35,000, then it should be done through Account payee cheque/draft or Electronic clearing system (ECS). It means that any such payment in cash or even bearer cheque would lead to disallowance of such expense. However, there are some relaxations defined under rule 6DD where payments in cash would be allowed in some exceptional circumstances.
Read Also: Cash Transaction Limit in India – cash payment and cash receipt
2. Excessive payments to Related parties during the year
Any transactions that we are doing with related parties should be in line with the current market rate of similar transaction. If such payments to related parties are in excess of market rates then it would get disallowed to such excess amount and such disallowed amount would become taxable directly.
3. Outstanding Expense allowed on payment basis under section 43B of Income tax act.
There are certain outstanding expense which are allowed only on payment basis under section 43B of Income tax act. Outstanding expenses are bifurcated into 2 categories.
First being expense which was incurred in earlier years and is outstanding on first day of previous year and was paid during the year or not paid during the year; and second being the expense that was incurred during the previous year and was paid on or before due date of return filing for current year or was not paid during the year.
The expense covered under section 43B includes:
- Any tax, duty, cess or any fee paid under any law for the time being in force.
- Bonus or commission to employees
- Contribution to recognized employee benefit fund
- Interest on loans from Banks
- Leave Encashment provided to employees
- Payment to Indian Railways, etc.
Read Also: Important Income Tax Penalties under Income Tax Act, 1961
4. Adjustments and Disclosure of ICDS must be done properly.
ICDS (Income computation and Disclosure Standards) were issued to bring uniformity in accounting policies governing computation of Income in accordance with tax related provisions and to also reduce irregularities among them. There are 10 ICDS notified at present :
- ICDS-I Accounting policies
- ICDS-II Valuation of Inventories
- ICDS-III Construction contracts
- ICDS-IV Revenue Recognition
- ICDS-V Tangible Fixed assets
- ICDS-VI Effects of changes in Foreign Exchange rates
- ICDS-VII Government Grants
- ICDS-VIII Securities
- ICDS-IX Borrowing Costs
- ICDS-X Provisions, Contingent Liability & Contingent Assets.
Adjustment amount on differences in AS/Ind AS from ICDS are to be disclosed in form 3CD which would increase or reduce the tax amount. Non-compliances with these ICDS could result in Best Judgement Assessment by tax authorities which may lead to litigations.
Read Also: Income Tax Audit limit for AY 2023-24
5. Adjustment in Depreciation to be allowable under Income tax act
Generally, under Income tax, depreciation is calculated separately for tax purpose. Under Income tax act, SLM method of depreciation is not allowed except for Power & generation business and it is calculated based on block of asset for which rates has also been prescribed there under.
Read Also: Depreciation – How to calculate depreciation under Income Tax?
6. Booking some expenditure in Profit and Loss account being Capital or Personal in nature or such other expense, etc.
Now, everyone wants to pay lesser tax or want to claim all the capital expense in a year so as to reduce their taxable profits by recording personal expense, capital expenditure in Profit and Loss account, etc. which results in lesser tax would become payable. This list also includes any advertisement expense in publication of political party, expense at Clubs, expense incurred for an offence or the one prohibited by law, penalty or fine for violation of any law.
7. Any loan or deposit exceeded the amount as specified under section 269SS, section 269T or section 269ST.
This section requires assessee to take care that no deposit/ loan is accepted or repaid except through account payee cheque/ draft or ECS, if the amount is Rs. 20,000 or more and most importantly the earlier outstanding balance is also considered to check this limit. In case of section 269ST, no person/ individual should receive an amount except through account payee cheque/ draft or ECS, if the amount is Rs. 2,00,000 or more and if it relates to single event or single transaction or received in aggregate from a single person in a day.
Read Also: Cash Receipt Rs 2 lakh or more? Know Income tax penalty
8. Details of Tax deducted/ collected
As per section 40(a), expense/payment would get disallowed to the extent of 100% in case of Non-resident or 30% in case of Resident, if TDS has not been deducted on such expense or while making payment or TDS has been deducted but has not been deposited to the department.
Read Also: TDS and TCS Rates Chart – Examples of how to calculate TDS
9. Quantitative details of Raw material, Finished goods, By-products, etc.
In form 3CD, quantitative details are to be provided in respect of Raw materials, finished goods and by- products, if any. Thus, assessee should properly maintain these details and such details must not be manipulated or randomly provided. Also, these details are carefully examined by Income Tax officers.
10. Break up of total expenditure of entities whether or not registered under GST.
There might be a situation where one business of assessee is registered in GST whereas other business is not registered in GST. In such cases, assessee has to provide details of total expense incurred during the year which is bifurcated into such business category including sub classification of business under Composition scheme, etc.
Read Also: Clause 44 of Form 3CD of Income Tax Audit Report
The author of the above article is CA Rahul Gaur.
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