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Tax Audit & Penalty of Rs. 10,000/- on chartered Accountants for error in the audit report

The Tax Audit due date is on peak. In an attempt to complete the audit to save client from penalty, CA’s make commit error.

All the Chartered Accountants are busy completing their works. Note carefully that any mistake by the Chartered Accountant in the Tax Audit Report will cost him Rs. 10,000/- as per Section 271J of the Income Tax Act, 1961. Needless to say, clients will not come forward to pay this penalty or share the burden of CA.

Section 271J of the Income Tax Act, 1961 reads as under:

271J. Without prejudice to the provisions of this Act, where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an accountant or a merchant banker or a registered valuer has furnished incorrect information in any report or certificate furnished under any provision of this Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct that such accountant or merchant banker or registered valuer, as the case may be, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate.

Explanation.—For the purposes of this section,—

(a) “accountant” means an accountant referred to in the Explanation below sub-section (2) of section 288;

(b) “merchant banker” means Category I merchant banker registered with the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c) “registered valuer” means a person defined in clause (oaa) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).]

In this article we will discuss the most serious mistakes which Chartered Accountants may commit or may be held for professional negligence. One must take following observation, points, information while finalizing the tax audit report:

Interest, Late fees, Penalties under GST:

Since the Goods and Services Tax (GST) regime is a new one, tax payers have committed mistakes in the same. Either they have delayed their registrations or have uploaded the returns lately. The GST Act levies penalties/ fines on the contraventions to the provisions of the act. In few circumstances waiver have been given by the Government. But yes the contraventions are still chargeable in many cases. The Income Tax Act, 1961 does not permit the deduction of penalties, fees, fines from the turnover for calculation of Profit as per section 37. Section 37 disallows the expenditure incurred for any purpose that is an offence or which is prohibited by any law.

But many Chartered Accountants are permitting the Debit of Late Fees/ Interest to Profit and Loss and are not even reporting it in the Tax Audit Report.

Another mistake is ignoring Section 145A of the Income Tax Act, 1961 as substituted by Finance Act 2018 with retrospective effect. Clause (ii) of Section 145A reads as under:

145A. For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,

(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation;

As per this clause, while doing stock valuation of inventory the value shall include the amount of any tax, duty, cess or fees. The amount of taxes on the goods shall be included in cost. Taxes included Goods and Service Tax. Also this is a retrospective amendment and shall be applicable from FY 2016-17. The amount of both opening and closing stock shall be including the amount of tax. The difference in the opening balances may be showed as tax difference.

Over and above this there may be various small mistakes that can be ruled off by applying full care and due diligence.

3.The receipts and TDS as shown in 26AS may be checked with the receipts and TDS in the books of accounts. The same should be shown in ITR. If there is any mismatch in details furnished in ITR and 26AS, then one may receive notice for such mismatch.

4.CA should not forget to take care of sec 14A of Income Tax Act, 1961 which provides for disallowance of expenses incurred for earning tax exempt income as read with Rule 6D.

5.In ITR form now, reporting of GST turnover is required and in case GST turnover and turnover as per books do not match, one may have to reply to notice. CA’s should keep the reconciliation of differences in turnover and may ascertain that there is explainable error and nothing like a sort of professional negligence.

6.In ITR, there is a new reporting requirement. Trading and manufacturing account are required to be furnished separately. Verify with above perspective if there are vast variation.

7.Non compliance or non reporting of ICDS will tantamount to professional negligence and will be a fit case for levy of penalty u/s 271J

8.Payment of interest to NBFC also attracts TDS and is not exempt like payment of interest to Bank. Needless to say, just casualness in incorporate it in the TAR will result in adverse consequences. Similarly, acceptance & repayment of loan from NBFC will also form the part of section 269SS & 269T reporting.

9.While furnishing amount of other expenses in ITR, if substantial amount is reported in other expense, CA should check if anything is of personal or political nature and ensure to report it in Tax Audit Report