New Guidance Note on Tax Audit. Sec. 40 A

TRUE EXTRACT ON IMPORTANT SECTIONS 40A OF Guidance Note on Tax Audit under Section 44AB of the Income – tax Act, 1961. (Revised 2005 Edition)     By

Fiscal Laws committee.

                 

33.clause 17 (f)-amounts inadmissible under section 40 (a)

33.1     Section 40 (a) specifies certain amounts, which shall not be deducted in computing the income chargeable under the head “ profits and gains of business or profession”. They are as follows :

(i)                Any interest, royalty, fees for technical services or other sum chargeable under the income tax act which is payable outside India or inside India to a non-resident or foreign company on which tax has been deductible at source under chapter XVII-B and such tax has not been deducted or after deduction has not been paid during previous year or in subsequent year before the expiry of the time prescribed under the sub section (1) of section 200.

(ii)             Any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident or amount payable to a contractor or sub-contractor, being resident, for caring out any work  (including supply or labor for carrying out any work) on which tax is deductible under chapter XVII-B and such tax has not been deducted or after deduction has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed under the sub-section (1) of section 200.

(iii)            Any sum paid on the account of securities transaction tax.

(iv)          Any sum paid on the account of fringe benefit tax.

(v)            Any sum paid on account of any rate of tax levied on the profits or gains of any business or profession or assessed of or otherwise on the basis of, any such profits or gains.

(vi)          Any sum paid on account of wealth tax.

(vii)        Any payment which is chargeable under the head “salaries”, if it is payable outside India or to a non-resident and if the tax has not been paid thereon nor deducted there from under chapter XVII-B.

(viii)       Any payment to provident or other fund established for the benefit of employees of the assessed, unless the assessed has made effective arrangement to secure that the tax shall be deducted at source from any payment made from the fund which are chargeable to tax under the had “salaries”.

(ix)          Any tax actually paid by an employer referred to in clause (10CC) of section 10.

33.2        In respect of items (I), (ii) and (vii) the tax auditor should obtain in writing from the assessed the details of all payments of the nature referred to in paragraph 33.1 and debited to the profit and loss account. Where an actual remittance overseas has been made by the assessed during the relevant previous year without deducting any tax at source, the tax auditor may rely upon the legal opinion and/or certificates from chartered accountant based upon which remittance have been made without deduction of tax at source.

The tax auditor need to report under this clause only if he has a different opinion on the issue. In this connection the tax auditor is advised to refer the application Double Taxation Avoidance Agreement (DTAA). Where no remittances have been made during the relevant year, the tax auditor may examine the relevant provisions vis-vis the agreement or correspondence in pursuant to which the liability is provided by the assessed in his books of accounts in order to determine whether any amount so provided is at all chargeable to tax under the Act. The tax auditor may use his professional judgment in these matter based upon decides cases and and he may rely upon a legal opinion obtain by the assessed where no tax is required to be deducted in respect of the amount so provided. In case he discharge with the stand taken by the assessed, he should give both the view in his report.

33.3     With the introduction of clause (ia), in the section 40 (a), the scope of disallowance of the expenditure has been widened to include interest, commission, brokerage, fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or sub-contractor, being resident for carrying out any work including supply of labor for carrying out any work. Under this sub-clause any payment of expenses, specified therein on which tax is deductible under chapter XVII-B

and such tax has not been deducted or after deduction has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed under the sub-section (1) of section 200, is not eligible for the deduction while computing income chargeable under the head “profits and gains of business or profession”. Accordingly, such amount will be inadmissible and will be required to disclose under this clause. For this purpose the tax auditor will be required to examine whether the provisions relating to tax deduction  at a source have been complied with in respect of the payments specified under the clause. For this purpose the tax auditor may examine the accounts and tax deduction returns pertaining to these payments.

33.4    In case where the  assessed submits that the tax is not required to be

deducted on any payment covered under clause (ia) , the tax auditor may

exercise his judgment  in the light of the applicable laws and repot

accordingly about the compliance of this provision. The tax  auditor may rely

upon the judicial pronouncements while taking any particular view. In case of difference of opinion between the tax auditor and the assessed, the tax auditor should state both the view points.

33.5             As suggested under clause 16(b), here also, in  view of the voluminous  nature of the information, the tax auditor can apply tests checks and compliance test for verifying the information required to be provided under this clause.

33.6             The securities transaction tax (STT) has been levied by Finance (No.2) Act,2004 on transaction of sale / purchase of securities through stock exchange. Sub-clause (ib) of section 40 (a) provides that any amount paid as STT shall not be allowed as deduction. There is possibility that STT paid on purchase or sale is either included in the cost of purchases or reduced from the amount of sale. In both the situations it will have effect on the profit and loss account. The tax auditor should verify this aspect as well and report such amount and the amount of STT debited in the profit and loss account under this clause.

33.7             The finance act,2005 has introduced  a new tax known as Fringe Benefits Tax (FBT) which is levied on an employer at prescribed rate on the amount of fringe benefits or deemed fringe provided to its employees. The Finance Act has also introduced  sub clause (ic) in section 40 (a), which provides that FBT shall not be deductible in computing profits and gains from business and profession. The tax auditor is required to report the amount of fringe benefit tax paid by the employer during the year ended this clause, if the same has been debited to the profit and loss account. The tax auditor should also verify the FBT has not been included under any other head of expenditure.

33.8             The Finance Act, 2002 had increased a clause (10CC) in section 10 to provide that any tax had paid by an employer on non-monetary perquisites is exempt in the hands of employees. Consequently, a new sub-clause (v) was inserted in section 40 (a) to provide that any tax referred in section 10(10CC) paid by the employer on non-monetary perquisites provided to employees shall not be deductible in computing profits and gains from business or profession. The tax auditor is required to report the amount of such tax paid by the employer, in case it is debited to the profits and loss account.

Ashwin Nagar

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In Mumbai (+91) 09833015352

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