Today we discuss on the guidance note on TAX Audit 2016 , in this blog we will discuss the important provision of income tax that is applicable to all the concern to be checked for conducting Tax audit and what are the audit procedure to be followed for conducting the tax audit.
Steps to conduct the tax audit –
First read the previous year tax audit report
Download the current year tax audit report
Read the current year and previous year tax audit report properly and start the tax audit
Check the below provision of tax audit
Section 43B of Income tax Act,1961
Tax Audit Procedure –
Examine the statutory liability outstanding as on the balance sheet date and cross check the challan of the liability. In challan verify the amount, date of payment etc.
Income Tax Provision –
This section relate to the payment of statutory liability, if the statutory liability is not paid on or before the due date of filing the return than expense will be disallowed in income tax, Due date for filing the Income tax return is 30th September 2015 for the financial year 2014-15.
Statutory payment will cover
Service tax, vat, TDS, CST, Excise duty, Municipal tax, Professional tax, Water tax etc. any other tax, duty, cess
Section 40(A)(3) of Income Tax Act,1961
Tax Audit Procedure –
Critically examine the cash ledger accounts whether any payment made to any person in a single day exceeds Rs 20,000 and payment made to transporter exceeds Rs 35,000.
Select the above limit cross cases and then check the provision of Rule 6DD
Income Tax Provision –
If any cash payment made to any person in a single day exceeding Rs 20,000 it will be disallowed in income tax act, 1961. If any cash payment made to any transporter is in a single day exceeding Rs 35,000 it will be disallowed in income tax act, 1961.
Rule 6DD (Exception of cash payment)
1 Cash deposit in bank accounts
2 Cash payment of duty and taxes to the government
Section 2699SS and 269T of Income tax Act,1961
Tax Audit Procedure for section 269SS–
Critically examine the loan account whether any loan taken at any time during the previous year of more than Rs 20,000 by other than account payee cheque.
Example – In this provision if loan taken of Rs 20,000 from ram on day 1 and repayment made on day 2 to the ram Rs 10,000 and on day 3 loan taken of Rs 10,000. In this case section 269SS will not attract as maximum amount of loan taken at any time during the previous year will not exceed Rs 20,000
| Day | Amount of loan taken | Repayment | Maximum Outstanding balance |
| Day 1 | 20,000 | 20,000 | |
| Day 2 | 10,000 | 10,000 | |
| Day 3 | 10,000 | 20,000 |
Tax Audit Procedure for section 269T-
Critically examine the loan account whether any loan given at any time during the previous year of more than Rs 20,000 by other than account payee cheque.
Example – In this provision if loan given of Rs 20,000 to ram on day 1 and taken back on day 2 from the ram Rs 10,000 and on day 3 loan given of Rs 10,000. In this case section 269T will not attract as maximum amount of loan given at any time during the previous year will not exceed Rs 20,000
| Day | Amount of loan given | Received back | Maximum Outstanding balance |
| Day 1 | 20,000 | 20,000 | |
| Day 2 | 10,000 | 10,000 | |
| Day 3 | 10,000 | 20,000 |
Note – While conducting the tax audit examine if any entity has taken the loan from the one party and given to the party. Check the interest rate on loan given and taken; If assessee has paid the interest on loan taken and not taken the interest received than add the deemed interest income.
Except – If loan has been given from the capital account than interest income will not been added up to the balance of loan given from the capital account. Loan given above capital account balance will be added to the income.
Income Tax Provision –
Section 269SS relate to the loan and advances given and 269T relate to the repayment of loan and advances.
40(A)(2)(b) of Income Tax Act,1961
Basically section 40(A)(2)(b) relates to transaction with relative party. It is basically a disclosure section. If transaction with related party seems to be an unfair than such transaction will be disallowed & income added back.
Tax Audit Procedure for section 40(A)(2)(b) –
First collect the list of related parties from the management & you can also examine the previous year tax audit report to view related party list.
Critically examine all the transaction like purchase, sale, any income & expenses made with related party & then report the same in tax audit report
TDS Provision
Tax Audit Procedure:
Critically examine all the expense made in a financial year whether TDS is applicable or not.
If TDS is applicable further verify the TDS limit & if expenses exceeds the TDS limit whether assessee deduct the TDS or not.
If TDS is not deducted disallow the expenses & report the same.
If TDS is deducted then verify whether the same has been deposited to the government or not & if the same has not been deposited then report the same & disallow the same.
We can also examine the creditor ledger for verification TDS deduction or not.
Income tax Provision:
According to this section TDS need to be deducted on certain payment at specified rate.
Critically examine the Loan given and taken accounts.
If assessee has given a loan on interest while accepting a loan interest free it will disallow the interest expenses. but if the assessee has given loan from his capital it will not been disallowed.
Check TDS Return
While conducting tax audit check all the 4 quarter return of TDS is filled or not on due date.
check any interest payment is made on tds or not.
