BYLANES - Buffet's Toll Bridge
Imagine a river with a commercial district on one side and residential on the other. Now, imagine a bridge spanning the river, joining the two districts. And imagine that you own the bridge, and can charge a small fee for using the bridge. A few thousand cars pass over the bridge every day, and you charge each car a little something for using the bridge. I bet you have already started counting the money. Warren Buffet keeps this perspective in mind while choosing a stock. Some basic advantages of such a `toll bridge` should be understood. One is that the cash register keeps ticking without a stop. The other advantage is that there are no sundry debtors. Further, the maintenance and expenditure is low and the profits can grow at a predictable rate, and that too for a number of years. If you (that is. the owner) do not become irrationally greedy and maintain the fees for crossing at a reasonable level, the customers will continue to use your bridge, and you will make money for a number of years to come. Many businesses reach the status of a toll bridge because of the strong relationships their products build with the customers. The first sign of such a company is apparent when the customers demand the product by its brand name and don`t even know the name of the company that produces it. The second sign is that it has little, or no competition, and the third sign is that it is essential either as a necessity, or for its universal appeal, and, therefore, every store has to carry it.Let us consider some examples in the Indian context. `Cadbury`s` chocolate, `Cherry Blossom` shoe polish (how many know the name of the company? (Viz. Reckitt & Coleman), `Dettol` disinfectant, `Aspro` and `Anacyn`--the headache cures--and `Amul` butter easily come to mind. In pharmaceuticals, Glaxo is one such name, which has many products in demand. Can any store afford not to have these products on their shelves? If the store does not have it, the customer just walks over to the next store and gets it. Companies making such products are in a unique position. They have established the manufacturing process, people have accepted the quality and specifications, they do not have to invest large sums in the plant and machinery every year, and their supply chains and distribution network are well established. The net result is steadily growing profits. These companies have some more advantages. They do not need exceptional management, just an honest management capable of grabbing a good thing when they see it and not to make a mess of it. These companies do not require too much of research and development (R&D), as they invented the formula many years ago and their customers don`t want any change. Would you like Dettol to smell differently? A good friend of mine even used it as an after-shave for many years. The management may add a gift with the purchase of a bottle, or add a new flavor to the product range to grab a little extra of the market share, but a wise management will leave the main product untouched. In Dettol`s case, even the shape of the bottle is important. Such structurally sound and `in-demand` toll bridges are great businesses to own. They give rise to plenty of free cash, which can be invested in building or buying another such toll bridge. These businesses survive through economic downturns, and continue to give the same returns. This feature makes it easier to predict their profitability. Value investors love this.The return for the investor is on the one side the earnings per share (EPS) (or dividend) and on the other increase in the share price. If the annual EPS/dividend is predictable, and if the share is purchased at a low enough price, the investor is happy to get such a return year after year. Many times, we see such companies showing an increasing EPS trend. This is still better for the investor, because this increases the price of the share faster. Much has been said and written about the intrinsic value of the business and how it is to be arrived at, but with insufficient justice to the discipline involved. Value investors eye the company first, but their decision to buy is a function of the price. Everything else about the company may be perfect and the value investor may be itching to own a part of it, but a disciplined investor will wait for the right price. Once purchased, the stock is not sold for a long time. The argument is simple. Why give away something `good` till something `better` comes along? Remember that a good toll bridge has a minimum life of 25 years. If the EPS is in the region of 20% and above on the price you paid, calculate the compounded value at the end of those 25 years and see for yourself. Yet there is a sad side. Like everything else in this world, bridges also deteriorate. Weather and time take a heavy toll of steel, and the bridge becomes unsafe. Those car owners who drove to work over that bridge for a number of years realise that the bridge is no longer safe and avoid using it. Some competitor senses the unease and builds a new bridge, and the owner of the original bridge dies an unsung death. We know what happened to some automobile companies from the pre- liberalisation days. From the mid-50s to the mid-80s, Premier Padmini and Hindustan Motor`s Ambassador were the two cars ruling the market. For years, they continued to thrive without making any major changes in the models, and Indians had no choice but to buy those cars. Whatever was produced was sold, and that too against cash. Sub-standard goods were produced for years and dumped on the helpless customers. With little R&D and no improvement in the basic car, these plants were just waiting to receive a deathblow, and `Maruti` did just that. Customers had found another safer, newer, and cheaper bridge. Sometimes, some management decisions cause problems. Excess cash poses a problem. The management does not know what to do with it, and then instead of buying another toll bridge, or improving the existing one, it buys a pyramid, which is just a tourist attraction and a place for the dead. The pyramid bleeds the parent company, and finally both perish. Acquisitions and mergers are good, but only of the same kind. In the recent past, we have seen the merger of Times Bank with HDFC Bank. Synergy in operation was evident, and the balance sheet proved it. The market also appreciated it, and the shareholders have reaped the benefit.It is easy to say that one should invest in such `consumer monopolies`, as Warren Buffett calls them, but it is another thing to actually buy these shares. No one has monopoly over such a wisdom, and generally we find these shares selling at a high P/E multiple. Yet, occasionally, these shares sell at low prices. John Neff`s advice is worth following while waiting for a good price. He advices the investors to regularly scan the `New Lows` list in the financial newspapers. If you have earmarked a share, then this list alerts you when it starts coming down. Consider this example, In March 2000, Glaxo hit a new low of Rs 422. In August, it is trading at 480/490. Reckitt & Coleman hit a new low of Rs 192 in March. Now it is trading around 210/220. If someone had earmarked the share, then surely it was a good time to buy. Sometimes, a `consumer monopoly` company remains unnoticed for a long time. These are the companies engaged in manufacturing some product, without which the big guns cannot do. An example could be that of a company manufacturing some critical chemical required for steel making. This company may also own the patent for the product and, thus, the monopoly remains assured for a long time. Such companies spend very little on advertising and, hence, are not widely known. Some event of social or political nature makes it conspicuous, and suddenly the great value of the share gets unlocked, and the price starts climbing. Mario Gabelli, a well-known investor from the US calls the event a `catalyst`. Noticing such a company in advance and then waiting patiently for a long enough time is what is needed. The rewards are great. The best way to notice consumer monopolies is to visit various stores. If you find the same product on all the stores you visited, chances are that it is a consumer monopoly. Watch for the advertising campaigns. If there is a blitz, rest assured that the company is not confident about the demand. If the advertising is subdued and regular, just to tickle your memory cells, there is a good chance that the monopoly is operating. Some companies don`t advertise at all; for example, Amrutanjan, the headache balm. Many years ago in Pune, a man started stamping his name on all goods that entered the city. The stamp was inconspicuous, yet readily visible. He did not charge a farthing for stamping the goods. Traders let him stamp their goods thinking of him as some harmless eccentric person, and soon goods which did not have his stamp were overlooked by customers in the city. So the traders started coming to him for getting their goods stamped, and then he started charging a small fee. In due course, he became a rich man. He had created his own `Toll Bridge`.
Wednesday, July 16, 2008
MICRO ,SMALL AND MEDIUM ACT 2006
MICRO ,SMALL AND MEDIUM ENTERPRISE DEVELOPMENT ACT 2006
The micro, small and medium enterprises sector comprises 50% of India's total manufactured exports,45% of India's industrial employment, and 95% of all industrial units in the country. Despite its importance, the MSME sector has long faced extreme obstacles in accessing finance and markets. Therefore in order to facilitate promotion and development and enhancing the
competitiveness of the MSME sector the Micro, Small and Medium Enterprises Development Act 2006 was enacted which became operational from Oct 2006.The salient features of this Act are as follows:
1. Definition of MSMEs: It defines 'Enterprise' instead of 'Industry' to give due recognition to the service sector. The Category of an enterprise is dependent on the level of investment in Plant and Machinery/Equipment. (Sec.7)
Manufacturing Service Sector
Sector Investment in
Enterprise Investment in Equipment
Category P&M
Micro Upto 25 lacs Upto 10 lacs
Small More than 25 lacs More than 10 lacs
but less than but less than
5 crores 2 crores
Medium More than 5 crores More than 2 crores
but less than but less than
10 crores 5 crores
2. National Board for Micro, Small and Medium
Enterprises: A National Board has been constituted with its head office at Delhi for overseeing and regulating the development of MSMEs.
3. Filing of Memorandum: The earlier timeconsuming
registration process has been replaced by a simpler system of filing of memoranda by the enterprises. The enterprises just need to file a memorandum with the District Industry Centers (DICs) as follows: (Sec.8)
Type of enterprise Mfg/ Service Mandatory/optional
Micro and Small Both Mfg. and service Optional
Medium Service Optional
Medium Mfg. Mandatory
4. Credit facilities: The policies and practices for extending credit to MSME shall be progressive as per the guidelines issued by RBI. This will ensure timely and smooth flow of credit to such enterprises, minimize the incidence of sickness and enhance the competitiveness of such enterprises. (Sec.10)
5. Procurement Preference Policy: For facilitating promotion and development of micro and small enterprises the govt. will notify preference policy in respect of procurement of goods and services produced and provided by micro and small enterprises, by its Ministries, departments or its allied institutions and PSU.
6. Mechanism to check delayed payment: a. Where any micro or small enterprise (not the medium enterprise) supplies goods or services to any buyer, the buyer is required to make payment to the supplier on or before the agreed date between buyer and supplier. But in any case the credit period for payment agreed between the supplier and buyer shall not
exceed forty five days.(Sec.15)
b. If the buyer does not make payment as per the agreed terms of payment (maximum 45 days) he shall be liable to pay to the supplier compound interest with monthly rests at three times the bank rate notified by RBI. (Sec.16)
c. For recovery of the above amount due with interest, any party to dispute may make a reference to the Micro and Small Enterprises Facilitation Council who hall act as Arbitrator or Conciliator under Arbitration and Conciliation Act 1996.
d. The amount of interest payable or paid by any buyer in accordance with the provisions of this Act shall not be allowed as a deductible expenditure under the Income Tax Act 1961. (Sec.23)
7. Disclosure in audited accounts
a. Where any buyer is required to get his annual accounts audited under any law, such buyer is
required to furnish following additional information in annual statement of accounts:
i. Principal amount and interest due thereon remaining unpaid to any such supplier;
ii. The amount of interest paid by the buyer in terms of section 16, alongwith the amounts of
the payment made to supplier beyond the agreed day;
iii. The amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the agreed day during the year) but without adding interest specified
under the Act;
iv. The amount of interest accrued and remaining unpaid at the end of each accounting year;
v. The amount of further interest remaining due and payable even in succeeding years, until such date when the interest dues as above are actually paid to the small enterprise. (Sec.22)
b. The corresponding amendment to the Schedule VI of the Companies Act 1956 in line with e above has been made w.e.f. 29th Nov 2007 vide Notification no. G.S.R. 719(E) dated 16.11.07. The earlier requirement of giving names of SSIs to whom company owes any
sum together with interest outstanding for more than 30 days has been dispensed with
8. Penal provisions: Contravention of section 8 (filing of memoranda) or 26 (furnishing of information on requisition) would entail a fine upto Rs.1000 on first conviction and a fine of Rs.1000 to 10000 for any second or subsequent conviction. Where a buyer contravenes
provisions of section 22 he shall be punishable with a minimum fine of Rs.10000. (Sec.27)
9. Repeals: The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act 1993 is repealed on enactment of this Act. (Sec.32)
E-FILING OF RETURNS
e-filing for AY 2008-09 is now available for all ITRs.Following important points can be kept in mind while uploading returns
• Userid by default is the PAN number for all users now.Earlier some users (in 2006-07) had created their own userid but that has been substituted by PAN now. The Password, however, will continue to remain the same as earlier ,as chosen by the user.
• Email id is now mandatory in the I-T return as well as at the time of registration since the ITR-V or Acknowledgement will be sent via email to the taxpayer after the taxpayer has submitted the return. Userid / password shall also be emailed to taxpayer after registration.
• Returns can be filed for AY 2007-08 and AY 2008-09 using the same 'Submit Return' button.
• Since the time limit for return filing for AY 2006-07 has expired, returns for AY 2006-07 can be filed only if notice under section 148 or 153A have been issued. Taxpayers will have to choose Return Filed under Section code corresponding to Return filed in response to notice u/s 148 (Code 14) or u/s 153A (Code 15) before uploading the xml for AY 2006-07.
• If you wish to file an I-T return for AY 2006-07 in response to a notice under Section 148 or under Section 153A,Please contact ITD call center to obtain the Return Preparation Software.
BENEFITS OF DESKTOP SEARCH ENGINE
What do you do when you don't have information on a particular subject? You refer to search engines offered by Yahoo!, MSN, Google etc…. After all, with the gaining popularity of the Internet, it has become easier for people to locate information on the Web. You can locate anything over the web including your own street, house, images that gels you, information about anything etc… Each of them is now known to offer desktop search engines for your PCs.
Does word find space in your vocabulary? If not then read on.
What are Desktop Search Engines?
Desktop search engines are tools that help in locating your entire hard drive in less than a second to pinpoint the right file, email, music or pictures. Be it Outlook Express, Word, Firefox, Excel, PDF, Powerpoint, Images, Instant Messenger or, Video, you'll take only a few seconds to run a search on them
How are desktop search tools different from search
engines?
A 'search engine' in a website helps you search the Web.Search engines take the information gathered by its bots and use it to create a searchable index on the Net. You can use keywords to seek information on any subject required. A desktop search tool, on the other hand, utilizes CPU,
memory, and disk space efficiently to ensure continued high levels of system performance. For instance, if, during a course of one year, your search index has grown to 50000 documents, you don't have to spend the whole morning to find out what you are looking for. With the
help of desktop search tools, your entire PC will be searchable whenever you want it to be.
One of the main advantages of desktop search programs is that search results come up in a few seconds; Windows search companion can be some help, but it searches through Windows files and folders only, not e-mail or contact databases, and unless you enable the Indexing Service (in Windows 2000 or XP), the Windows search tool is extremely slow. A variety of desktop search
programs are now available.
Which websites offer desktop search engines?
Google, Yahoo! and MSN have well deserved reputation as the top choice for desktop search engines. Apart from these, there are others like the Copernic Desktop Search and T-Online, HotBot and Ask Jeeves that also offer downloadable search engines.
Which desktop search engine should you download?
Be it Google, MSN or Yahoo!, there are pros and cons to all of them as far as desktop search application is concerned. Yahoo! on the surface appears superior in features and performance to those of Google and MSN. But, unlike other desktop search applications, Web search isn't still well integrated into Yahoo! Desk Search tools. Also missing from YDS is one of the most useful
features of Google's desktop search the automatic indexing and caching of web pages you've viewed with Internet Explorer. Even though Google Desktop's searches go through sites
you've visited in Firefox/Nestcape/Mozilla, it suffers from a fatal flaw: It treats your PC as if it was a Web, and so doesn't let you fine-tune your searches. So when it comes to the daily work of searching, MSN Desktop Search often comes out on top.Google Desktop Search is unique in the way that it presents your desktop search results in your web browser, in the same way as regular web search results. It will Index files in Microsoft Word, Excel, Power Point, as
well as plain text and PDF Files. It will also include your website history in internet explorer, your chat messages in AOL, the MS Outlook or any other email client etc…..The local Google database is updated continuously. Unlike Google, Yahoo! Desktop Search does not display
results in search engine results like manner in your web browser. This program has its own interface and its own windows. Yahoo! Desktop Search will try to guess your intentions as you type. Hence the program will start displaying results even before you have typed the whole
query. Moreover, this program will, like the Copernic desktop search program, give you a preview of most files in a separate window pane. Among other interesting options are the possibility to save searches, and set indexing options by file type, email client, and contacts.
This means that you can exclude certain files based on size, name or content. You can also limit searches to certain filenames, file types, file size, dates or directories/paths
How safe is it to download desktop searching tools?
Security experts say one should be careful while downloading search engines. Virus writers could actually use new desktop search tools to make their malicious software more efficient.
Since they are free, virus writers can use their brand names to get into your PCs and make their malicious software more efficient. Most industry watchers agree the products aid
productivity: From a single interface, users can quickly search the text of their e-mail, contacts, application documents, data files, multimedia files and more. The problem is the information these programs can find and potentially expose, such as documents on a shared file drive that are not properly secured or were supposed to have been deleted. Other potential problems with Desktop search applications are : conflict with other applications and performance issues.
There are various tools available, so you need to be very careful while downloading search tools. In IT nothing comes without problems. The faster you try to get (to increase your productivity) using IT, the more problems you would face. This goes by default, but you also need
to pace up with the growing needs of business, right?
Liquidation to soon get transparent
The way assets of sick companies are auctioned in India is likely to undergo a major change. In a bid to usher in transparency in the process of corporate liquidation, the government will soon give wide publicity to details of distressed assets that are put on the block. These are assets of companies which the official liquidators attached to various high courts auction, the proceeds of which are given to various stake holders in the company as per the sequence of priority.
TO READ MORE CLICK...............
Where’s the windfall profit for a tax?
A windfall profit tax on oil companies now would be illogical and an unwise economic measure. The rationale for such a tax is suspect and can be challenged in the Courts. Those arguing in favour should look at the experience of other countries that have imposed such a tax , specifically the US, where it did more harm than good to the economy, says Raghuvir Srinivasan.
What is a windfall profit?
According to Wikipedia, the term “windfall profit” was first used in the colonial era. Subjects were prohibited from using lumber that was more than a foot in width except where due to an act of God, such as a storm, trees fell down in their own property. In such a case, they could use the wood or sell it. Needless to say, there were several such instances of acts of God and subjects reaped windfall profits by selling such wood. So, a windfall profit presupposes an act of God. It is profit earned through other than the ordinary course of business. Does this definition fit our oil companies? It appears not.
to read more CLICK............
TAX AUDIT CHECKLIST
FORM 3CD
Download Guidance Note on Tax Audit -2014 Edition by ICAI
P A R T - A
1 Name of the Assessee:
2 Address:· Check the address as per Income Tax record and obtain any evidence available in this regard.
· If there is any change in the address till the date of signing of the report, check that new address is mentioned in Form 3CD.
3 Permanent Account Number: Verify from the PA Card or any other document.
4 Status: Company/Firm/AOP etc.
5 Previous Year Ended:31st March 2008
6 Assessment Year:2008-09
P A R T – B 7(a) If firm or Association of Persons, indicate names of partners/ members and their profit sharing ratios. :Verify from the Partnership Deed/AOP agreement.
(b) If there is any change in the partners or members or in their profit sharing ratio since the last date of the preceding year, the particulars of such change.: - do -
Note: In case of any change attach copy of partnership deed with the Income-tax return if required.
8(a) Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business of profession).:· In respect of each class of business, it is necessary to mention whether assessee is manufacturer, dealer, service provider, etc.
(b) If there is any change in the nature of business or profession, the particulars of such change.:· Review audited Balance Sheet and other relevant records to ascertain whether there is any apparent change in the business carried out by the assessee, which may need to be highlighted under this clause. In particular, examine whether any business or activity has been discontinued, any new activity has been commenced or whether there has been any expansion of the existing business.
· Additional activity started with in the same business carried on by the assessee does not mean change in nature of business or profession e.g. if the assessee is in the business of manufacturing shirts also starts manufacture of trousers.
· Obtain management representation.
· For change in business besides LOR go through the following :
· Any notes given in Notes to Accounts.
· Any notes given by Board of Directors in their report.
· Compare the Segment Reporting of this year with last year.
· Compare quantitative details of this year with last year.
9(a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.:Applicable for assessee carrying profession for the time being.
(b) Books of account maintained.:· Check complete list of all primary books of accounts maintained by the assessee.
(In case books of account are maintained in a computer system, mention the books of account generated by such computer system)· Check whether books of accounts have been generated from computer system or not.
· Obtain management representation.
(c) List of books of account examined.:Disclose the list of books of account examined.
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).:Generally Not applicable.
However go through the consolidated Profit & Loss account to see whether it includes any such profit.
11(a) Method of accounting employed in the previous year.:· Review Accounting policies from audited accounts. Check whether assessee is following Mercantile or Cash method of accounting.
· While following Mercantile basis of accounting, check whether any item of income or expense is accounted for on cash basis. Since Hybrid method of accounting is not allowed, state the nature and amounts of such items.
(b) Whether there has been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year.:· Scrutinize the last week of last month’s journal vouchers thoroughly to see provisions for expenses made & whether they are on same basis as in earlier year. Payment vouchers for first two months of subsequent year should be scrutinized to verify the correctness thereof.
· Ensure that following heads of accounts are scrutinized thoroughly and compared with earlier year to check whether accounting is on same basis as in earlier years.;
- Refund for income-tax, sales tax, etc.
- Export incentives
- Claims for loss or damage
- Grants/Subsidies
- Interest on delayed payments
· Determine whether there has been any change in the method of accounting employed vis-Ã -vis the method employed in the immediately preceding year.
(c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss.:· Ensure that any change in the method of accounting employed is appropriately disclosed and the effect thereof on the profit/loss is also disclosed.
· Obtain management representation.
(d) Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss.:· Check whether there is any deviation from the Accounting Standard (IT) – I & Accounting Standard (IT) – II notified under section 145(2) of IT Act regarding;
a) Fundamental accounting assumption of Accrual, Consistency & Going Concern.
b) Prudence, Substance over form & Materiality in accounting policies.
c) Disclosure of significant accounting policies and changes in such policies with the resultant impact, if material on accounts of year of change or subsequent year.
d) Disclosure of prior period and extraordinary items or change in accounting estimate in Profit & Loss Account and report the effect thereof on profit & loss.
· Ensure that deviation from such standards is appropriately disclosed and the effect thereof on the profit/loss is also indicated.
12(a) Method of valuation of closing stock employed in the previous year.:· Closing stock would include raw material, finished goods, work in progress, stores, spare and loose tools and shares/units in case of investment companies..
· Change in the method of valuation of opening and closing stock, including effect of change, is now covered under clause 11.
· Agree the method of valuation with audited working papers and audited financial statements.
(b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.:Deviation normally occurs in case of stock of Raw Material, Stores, WIP etc. only and in case of finished goods to the extent of cost of raw material etc. comprised therein which are valued net of VAT. Although there may not be any impact due of Cenvat and VAT. Give appropriate note/working (existing note if any needs amendment).
12A Give the following particulars of the capital asset converted into stock-in-trade:-Verify any fixed asset converted into stock in trade. Give the necessary details.
(a) Description of capital asset;
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade
13 Amounts not credited to the profit and loss account, being -:
(a) The items falling within the scope of section 28;:· Enquire whether any item of income chargeable under `Profit and Gains of Business of Profession’ has not been credited to the profit and loss account. Section 28 covers :
- Profits and gains of business or profession
- Compensation received on termination of employment, agency, etc.
- Income of trade or professional or similar association from specific services to members
- Export incentives
- Perquisites received during the course of business
- Interest, salary, bonus, remuneration, etc. received by a partner from firm, which is allowable under section 40B.
- Amount received under key man’s insurance policy
· Thus, if any such item is taken to any account directly in the Balance Sheet, it will be covered under this clause.
· Review the audited schedules and financial statements to determine whether such income has been credited directly to reserves or retained as a credit under the head `current liabilities and provisions’ or any other head.
· Obtain management representation.
(b) The proforma credits, drawbacks, refunds of duty of customs or excise, or service tax, or refund of sales tax or value added tax where such credits, drawbacks or refunds are admitted as due by the authorities concerned;:· Obtain a schedule indicating the details of the following claims admitted as due by the concerned authorities but not credited to the profit and loss account. The schedule should also indicate the year in which it was admitted as due.
- Proforma credits
- Duty drawbacks
- Excise/Custom duty refunds
- Sales tax refunds
- Service tax refunds
- VAT refunds
· Obtain an understanding of the relevant accounting policies [refer clause 11(a)].
· Agree the schedule with the claim papers and relevant correspondence files. Further ensure that the claims have been admitted as due by the concerned authorities.
· Review the relevant assessment orders to determine whether any such claims are due.
· Obtain management representation.
(c) Escalation claims accepted during the previous year;:· Obtain a schedule indicating details of escalation claims accepted during the year but not credited to the profit and loss account. The schedule should also indicate the year in which it was accepted as due. Certain instances of escalation claims may be in relation of contract with government customers and other sales to customers having escalation clause in contracts.
· Obtain an understanding of the relevant accounting policies [refer clause 11(a)].
· Agree the claims accepted with contracts and other relevant documents and ensure that claims have been accepted by the concerned authorities.
· Obtain management representation.
(d) Any other item of income;:· Enquire whether any item of income chargeable to tax under heads of income other than `Profits and Gains of Business or Profession’ has not been credited to profit and loss account.
· Report all items of income which are credited to expense heads with a note that this has no impact on the net profit.
· Review the audited schedules and financial statements to determine whether such income has been credited directly to reserves or retained as a credit under the head `current liabilities and provisions’ or any other head.
· Obtain management representation.
(e) capital receipt, if any.:· Enquire whether any capital receipt ha s not been credited to profit and loss account. For instance, capital receipts may be in the nature of grants/subsidies,
Note: In case of non-compete fees directly taken to reserves or capital account report the same in clause 13(a) also.
· Furnish details of gifts received during the year.
· Share premium account.
· Share forfeiture.
· Capital reserve arising on merger and demerger.
· Furnish details of the amount of capital nature received or receivable on transfer of technology, knowhow, and patent during the financial year and treatment thereof in accounts.
· Obtain an understanding of the relevant accounting policies [refer clause 11(a)].
· Review the audited schedules and financial statements to determine whether such capital receipt has been credited directly to reserves or retained as a credit under the head `current liabilities and provisions’ or any other hand.
· Obtain management representation.
14 Particulars of depreciation allowable as per the Income-tax Act,1961 in respect of each asset or block of assets, as the case may be, in the following form :-:· Obtain a schedule providing the relevant details indicated in the aforesaid clause in respect of each asset or block of assets. In particular, ensure that the following have been included :
Description of asset/block of assets- Written down value at the beginning of the year.
Rate of depreciation.- Assets acquired during the year have been segregated between the assets put to use for less than 180 days and those used for more than 180 days
Actual cost or written down value, as the case may be.- Deductions during the year represent the sale proceeds of assets sold
Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of-- Rates of depreciation.
(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,(i) Refer Appendix 1 and Appendix 1A as the case may be.
(a) (ii) Change in rate of exchange of currency, and(ii) Appendix 1A is applicable in respect of Power Generation companies.
(iii) Subsidy or grant or reimbursement, by whatever name called.- Even in a case where the auditee has decided not to claim depreciation in part or full, give full details of depreciation allowable.
(b) Depreciation allowable.· Review assessments completed/ prior year tax returns to examine the basis adopted in earlier years for determination of depreciation allowable. Also ascertain whether any aggressive positions have been adopted by the clinet and examine implications thereof.
(c) Written down value at the end of the year.· For additions during the year ensure that the classification of assets or block of assets and the rates of depreciation is in accordance with the requirements of the Income Tax Act, 1961.
· Agree the written down value at the beginning of the year to the return of income of the immediately proceding year.
(d) · Agree the additions with the audited schedules and ensure that adequate tests have been carried out for `actual cost’ capitalized and the dates the assets were `put to use’. Obtain a reconciliation to the additions as per the audited schedules, where necessary. Certain instances of such reconciling items may be capital expenditure on scientific research, leasehold improvements, etc.
· Ensure that the policies followed are consistent with the requirements of the Income Tax Act, 1961.
· For assets acquired during the year, obtain an understanding of the accounting policy for the following :
- Modvat credit
- Exchange fluctuation including in respect of realized gains/ losses, unrealized gain/losses and treatment of forward exchange contracts.
- Subsidy or grant or reimbursement.
· Depreciation capitalized.
· Any expenditure which does not relate to acquisition of P&M but capitalized as part of preoperative expense.
· Ensure capitalisation of interest in respect of borrowed capital as per Section 36(1)(iii).
· Agree the amounts included as adjustments on account of modvat, change in exchange rates and subsidy/grant with the audited schedules and other relevant supporting documents.
· Check the implications of section 43A of Income Tax Act.
· Agree the deductions during the year with audited schedules and ensure that such amount reconciles with the amount considered for determining the profit/loss on assets sold, discarded etc.
· Review the depreciation computation and ensure the arithmetical accuracy of the depreciation allowable and the written down value at the end of the year.
· Ensure that additional depreciation u/s 32(ii)(a) is compiled and reduced from WDV.
15 Amounts admissible under sections-:· Obtain a schedule giving details of deduction admissible under the relevant sections, indicating separately, the amounts debited to profit and loss account and not debited to profit and loss account. The relevant sections are as follows:
(a) 33AB - 35 Expenditure on scientific
(b) 33ABA research
(c) 33AC (wherever applicable) - 35CCA Expenditure by way of payment to associations and institutions for carrying out rural development programmes.
(d) 35 :- 35CCB Expenditure by way of payment to associations and institutions carrying out programmes of conversa-tion of nature resources.
(e) 35ABB- 35D Amotisation of certain preliminary expenses.
(f) 35AC- 35DD
(g) 35CCA- 35DDA
(h) 35CCB· Review the computation of the amounts admissible under the aforesaid sections and agree the same with the audited schedules, financial statements and other relevant supporting documents.
(i) 35D:· Obtain management representation.
(j) 35DD
(k) 35DDA
(l) 35E”
(a) Debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately);
(b) not debited to the profit and loss account.
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)].:· Furnish details of bonus or commission, if any, to an employee for services rendered which otherwise was payable as profits or dividend.
· Normal bonus or commission to employees including directors even as percentage of profits is not covered under this sub-clause unless the same was otherwise payable as profits or dividend.
(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).:· Furnish details of any sum received from the employees towards the contribution to:
a) Provident Fund
b) ESI Fund
c) Superannuation Fund
d) Any other fund for the welfare of employees.
· Furnish details of due date of payment and actual dates of payment for the amount received from employees towards various funds stated in above para.
· The due date of PF Contribution is 15 days and in case of ESI Contribution is 21 days from the end of the month to which salary relates.
· Refer to Circular No. E128(I) 60- III dated 19.03.1964 as modified by circular E11/128/73 dated 24.10.73 issued by the concerned authorities granting 5 days of grace period for payment for payment of PF Contribution . The due date will be determined accordingly.
17 Amounts debited to the profit and loss account, being :-:
(a) expenditure of capital nature;:· Furnish detail of following expenditure debited to Profit & Loss Account:
a) Capital Expenditure;
b) Capital Items which are fully or partly written off in P&L Account;
c) Scientific Research Expenses & Technical Know How Fees;
d) Write of advance paid for capital expenditure/ capital project.
e) Fees or Expenditure connected with increase in authorised capital, issue of bonus shares, travelling & other expenses connected with purchase of capital assets etc.
f) Amount debited on account of preliminary expenses (35D), VRS expenses (35DDA), Merger/Demerger expenses (35DD).
· Check the following head of accounts minutely:
a) Store & spare parts consumed
b) Repair & Maintenance
c) Misc. Expenses
d) Legal & Professional
· If in your opinion, any item of expenditure debited to the P&L Account is not of capital nature but there is possibility of holding such a view, furnish details with your views on the same.
· Obtain an understanding of the capitalization policy followed by the client.
· If any amount reported as capital expenditure is in the nature of fixed asset item include the same in clause No.14.
· Obtain management representation letter.
(b) expenditure of personal nature;:· Under section 227(1A)(c) of the Companies Act, 1956, the auditor is required to enquire whether personal expenses have been charged to the revenue account. If there is any such comment in the auditor’s statutory report then obtain a schedule of personal expenses debited to the profit and loss account.
· In case of expenditure incurred at club the same are to be reported under clause 17(d). However to the extent of personal element in the said expenditure, the same should be reported here also.
· Expenses of personal nature paid under a contractual obligation need not be disclosed.
· Agree with the audited schedules supporting the comments in the auditor’s statutory report.
· Review the relevant accounts to ensure that no other expenditure of personal nature has been charged to the profit and loss account.
· Obtain management representation.
(c) expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party;:· Furnish details of the expenses incurred on advertisement if any published for a political party
· Furnish details of expenditure incurred on advertisement in souvenir, brochure, tract, pamphlet or journal published by trade union, labour union or any other body formed by political party.
· Agree the schedule with the relevant supporting documents.
Note : Political parties would include both national and regional parties, which are approved by the Election Commission.
· Review the advertisement, sales promotion and other relevant accounts to ensure that all such expenditure has been appropriately disclosed.
· Obtain management representation.
(d) expenditure incurred at clubs -:
(i) as entrance fees and subscriptions;· Furnish the detail of expenses made to clubs under following heads:
- Entrance fees
- Subscriptions
(ii) as cost for club services and facilities used;- Catering Bills
- Residential Accommodation Charges
- Expenditure towards use of club services and facilities i.e. health club. Bar. Conference & entertainment expenses etc.
· Reimbursement of club payments to directors/employees should be included in the above statement.
· Subscriptions and other payments made to service organizations like Lions Club, Rotary Club, Giants, Jaycees etc. would not be included under this clause.
· Payments made to credit agencies like Diners Club would not be included under this clause.
· Payments to clubs would include payments to Gymkhanas.
· Review the relevant accounts and ensure that all expenditure incurred at clubs has been appropriately disclosed.
· Obtain management representation.
(e) (i) expenditure by way of penalty or fine for violation of any law for the time being in force;:· Furnish the detail of expenditure by way of penalty or fine debited during the financial year.
(ii) any other penalty or fine;· Furnish detail of compensation debited for breach of contract during the financial year.
(iii) expenditure incurred for any purpose which is an offence or which is prohibited by law;· Furnish copies of penalty orders passed during the financial year under relevant laws, which are applicable to assessee.
· Furnish detail of gifts given to government officials.
· Furnish details of expenditure incurred such as protection money, extortion money, regular hafta, bribe etc.
· Furnish detail of penalty debited which are in the nature of interest under any statue.
· Review the legal and professional fees, rates and taxes, sales tax paid or any other taxes paid, general charges account and other relevant accounts and ensure that all such expenditure has been appropriately disclosed.
· Obtain management representation.
· Unsupported expenditure may need to be reviewed to determine whether it needs to be included under `expenditure, which is an offence or prohibited by law’.
(f) amounts inadmissible under section 40(a);:· Furnish detail of Interest, royalty, fees for technical know how, services and other sums, which are payable outside India, on which tax has not been paid or deducted or deducted and paid at rate less than the prescribed rate.
· Furnish detail of expenses payable as reimbursement of expenses outside India on which tax has not been deducted or paid at source.
· Furnish details of payment, which is chargeable under the head salaries payable outside India and on which Tax has not been deducted.
· Furnish any interest, commission, brokerage, fees for professional services or for technical services, amount paid/payable to contractor and rent, royalty on which tax has not deducted or deducted at rate less than the prescribed rate or after deduction of TDS is not deposited within the due date (Ignore late deposit of TDS cases if the same is deposited by the end of financial year). [Section 194C, 194A, 194H, 194I, 194J and section 9(1)(vii) & 9(1)(vi)].
· Furnish any payment made towards a provident fund or other fund established for the benefit of employees for which tax has not been deducted at source.
· Furnish any tax actually paid u/s 10(CC).
· Furnish Fringe benefit tax (below the line or above the line).
· Furnish Securities transaction tax if debited to Profit & Loss account or if not debited to Profit & Loss Account.
· In case STT component is adjusted in the cost of investment/sale price then appropriate amount shall also be disclosed as amount not debited to Profit & Loss Account.
· Furnish any amount paid on account of rate or tax levied on profits (including any tax paid on profit outside India).
· Review all expenses payable and provision for expenses for 43B & TDS default.
· Furnish details of Income Tax & Wealth Tax debited to P&L Account during the year.
· Agree the details with audited schedules and other relevant supporting documents.
· Obtain management representation.
(g) interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/ 40(ba) and computation thereof; :Applicable only for partnership firms.
(h) (A) whether a certificate has been obtained from the assessee regarding payments relating to any expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be, (Yes/No):· Obtain a schedule of all payments made in excess of Rs.20,000 made in cash. If such payments are exempt under any of the clauses (a) to (l) of Rule 6DD, indicate in the schedule. Ensure that the conditions for specific exemption under any of the clauses (a) to (l) of Rule 6DD are satisfied. Ensure that the schedule indicates the computation of disallowance as per section 40A(3).
· Payments exceeding Rs.20,000 otherwise than by Account payee cheque or draft will attract 100% disallowance.
(B) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts] · Furnish details of Outstanding Expenses of the financial year for which payments are made in subsequent year at the time in excess of Rs. 20,000/- otherwise than by a Account payee cheque/draft.
· This should include payments to staff by way of salary, travel allowance etc.
· Only revenue payments would be covered. Purchase of fixed assets for which cash payments are made in excess of Rs.20,000 would not be covered.
· Payment for purchase of raw materials and stocks would be covered.
· As per the ICAI, in case no proper evidence for verification of the payments by Account payee cheque or draft is available the report should comment that it is not possible for us to verify whether the payments in excesss of Rs.20,000 have been made otherwise than by Account payee cheque or bank draft as the necessary evidence is not in the possession of the assessee.
· Review the payments in the cash book and adjustments to advances/deposits to ensure that all cash payments exceeding Rs.20,000 have been included in the schedule.
· Obtain certificate from auditee that all payments exceeding 20,000/- for expenses if made by cheque/ draft are made by Account payee cheque or Account payee draft.
(i) provision for payment of gratuity not allowable under section 40A(7);:· Furnish a copy of the order of the Commissioner of Income Tax granting recognition to the gratuity fund.
· Furnish certificate that the contribution made does not exceed permissible limit as per rules 103 & 104 of Income Tax Rules.
· Obtain a schedule indicating the provision for payment of gratuity not allowable under section 40A(7)..
· Agree the amounts provided with the audited schedules, financial statements and other relevant supporting documents and ensure that all such expenditure hs been appropriately disclosed.
· Whether contributions have been made to approved gratuity fund, review the copy of the trust deed and rules.
· Obtain management representation.
· Enquire whether CIT or RPFC has withdrawn the exemption during the year.
· Verify that the PF Trust recognized by CIT is also recognized by PF authorities.
(j) any sum paid by the assessee as an employer not allowable under section 40A(9); :· Obtain a schedule indicating the sum paid by the assessee as an employer, not allowable under section 40A(9) i.e. towards setting up or formation or contribution to any fund, trust, company, etc. other than ;
- Recognised provident fund
- Any PF for exemption is withdrawn by CIT.
- Recognised gratuity fund
- Recognised superannuation fund
- As required by or under any other law.
· Agree the details with audited schedules and other relevant supporting documents.
· Review the staff welfare and other relevant accounts to ensure that all such sums not allowable under section 40A(9) have been appropriately disclosed.
· Obtain management representation.
(k) particulars of any liability of a contingent nature. :· Furnish the detail of contingent liabilities debited to the profit and loss account indicating the nature of the demand and the reasons for making provisions in the accounts.
· Review the audited accounts, in particular the notes to the accounts to ensure that all liabilities of a disputed nature have been identified for further discussion.
Note : As per the ICAI these are normally expenses connected with disputed claims which will be revealed only on the basis of the scrutiny of correspondence relating to cases pending in a court of law.
(l) amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income. i) Go through the return filed and assessment order for last 2 to 3 year to verify details and categories of exempt income.
ii) Obtain management representation as to income which it is going to claim as exempt in this year.
iii) Go through the expenses disallowed in the earlier year.
iv) Obtain details of expenses pertaining to exempt income such as interest on funds borrowed, personal cost, rent, traveling and other administrative cost.
v) In case there are no direct expenses then disallowance has to be worked out as per Rule 8D.
vi) If adhoc expenses are stated then give note/disclaimer.
vii) In case of company having undertaking of the nature of 10A/10B/10C then the appropriate note be given disclosing both income and expenditure as per the Audit Report issued u/s 10A/10B.
(m) amount inadmissible under the proviso to section 36(1)(iii).(a) Obtain details of fixed asset which are acquired by borrowing loans.
(b) In case of funds of C/C account used and which cannot be correlated determine interest cost as per AS-16.
18 Particulars of payments made to persons specified under section 40A(2)(b).:· Obtain a schedule from the client indicating the following:
- List of persons specified under section 40A(2)(b)
- Details of payments made to persons specified in above list.
· Agree the schedule with ;
- Relevant contracts/ agreements with specified persons.
- Relevant supports for payments made to such specified persons.
· Review the relevant accounts to identify any payments made to persons specified under section 40A(2)(b).
· Compare the detail shown under Tax Audit with the Related Party Schedule of IGAAP.
· Obtain management representation.
Notes :
(i) Salaries and perquisites etc paid to directors or persons having substantial interest in the company should be included in the list referred to above.
(ii) Since disallowance in this case is at the discretion of the Income Tax Officer the total amount paid to such persons should be indicated in the schedule.
(iii) As per the ICAI, in the case of a large company, it may not be possible to verify the list of all persons covered by this section therefore the information supplied by the assessee can be relied upon. It has further stated that it may be difficult to identify all payments in each and every case where the volume of transactions is rather huge and voluminous, and therefore, it may be necessary to restrict the scrutiny only to such payments in excess of certain monetary limits depending upon the size of the concern and volume of the business of the assessee.
(iv) Suggested disclosure where the information is not available with client is as follows :
The company does not have necessary information in respect of the following :
(a) directors and their relatives of companies having a substantial interest in the company; and
(b) any person, in whose business or profession, the directors or their relatives have a substantial interest as defined in the explanation to Section 40A(2)(b).
19 Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC.:Go through the relevant sections.
20 Any amount of profit chargeable to tax under section 41 and computation thereof.:· Obtain a schedule indicating amount of profit chargeable to tax under the aforesaid clause and the computation thereof.
· Agree the details with audited schedules and other relevant support documents.
· Review the relevant accounts to ensure that all such sums have been appropriately disclosed.
· Obtain management representation.
21*(i) In respect of any sum referred to in clause (a),(b),(c),(d),(e) or (f) of section 43B, the liability for which;:
(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was
(a) paid during the previous year;
(b) not paid during the previous year;
· Obtain a schedule indicating the following information in respect of the items referred to in clause (a), (b), (c), (d), (e) and (f) of section 43B :
- Liability at the beginning of the year
- Amount paid during the year including the date of payment
- Amount not paid during the year
· Agree the amounts and dates with audited schedules and relevant supporting documents.
· Obtain a schedule in respect of the items mentioned above, specifically indicating the following :
(B) was incurred in the previous year and was- Liability incurred during the year
(a) paid on or before the due date for furnishing the return of income or the previous year under section 139(1);- Amount paid on or before the due date for furnishing the return of income under section 139(1) along with date of payment.
(b) not paid on or before the aforesaid date.- Amount not paid on or before the aforesaid date.
· The expenses, which are capitalized, would also be covered under this clause.
· Check that all the figure shown in annexure are in agreement with IGAAP.
· In case there is any mismatch of figures with books of accounts, prepare reconciliation for the same.
· Take the copies of challan to verify that amounts payable as on last day of the financial year are paid in subsequent year.
· To verify if any conversion of interest into loan or funded interest has taken place during the year.
· Agree the amounts and dates with audited schedules and relevant supporting documents.
* 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.
22(a) Amount of Modified Value Added Tax credits availed of or utilised during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Value Added Tax credits in the accounts.:(i) State the treatment given in the books to Modvat/ Cenvat. Give details w.r.t. opening balance/ credit availed/credit used/ closing balance of all Cenvat account as per Account books and Excise record with reconciliation.
(ii) Go through the reconciliation and report the difference under the respective clause of 3CD.
(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.:· Furnish a detail of income/expenditure relating to prior period credited/ debited to the profit and loss account during the year.
· Agree the details with audited schedules and relevant supporting documents.
· Review the items under the head prior period adjustment and the notes to the accounts to ensure all such expenditure/income has been disclosed in the above schedule.
· In order to ascertain the correct meaning of term “Prior Period Item” refer to the text of Accounting Standard- 5 issued by ICAI.
· Obtain management representation.
23 Details of any amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed) repaid, otherwise than through an account payee cheque [Section 69D].:· Obtain a schedule of borrowing and repayments (including interest) of hundi loans otherwise than by account payee cheques.
· Agree the details with the audited schedules and relevant supporting documents.
· Obtain management representation.
· Obtain a schedule of borrowing and repayments (including interest) of hundi loans otherwise than by account payee cheques.
· Agree the details with the audited schedules and relevant supporting documents.
· Obtain management representation.
Note : As per the ICAI in the absence of conclusive or satisfactory evidence a suitable comment in the report as suggested in clause 17(h) shou0ld be made. : As per the ICAI in the absence of conclusive or satisfactory evidence a suitable comment in the report should be made.
24(a)* Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year:-:
(i) name, address and permanent account number (if available with the assessee) of the lender or depositor;:· Obtain a schedule of loans and deposits of Rs.20,000 or more taken or accepted during the year giving the relevant details as per the aforesaid clause.
(ii) amount of loan or deposit taken or accepted;:· The amount of Rs. 20,000/- or more is to be computed inclusive of opening Balance in the party account and for the purpose of prepayment also, amount credited as interest.
· For the purpose of this clause, loan/deposit would include, among others, the following:
a) Security Deposits from staff, agents, customers with or without interest
b) Loans from financial institutions.
c) Advance in the nature of loan deposit.
d) Fixed deposit from public.
· Agree the details with the audited schedules and other relevant supporting documents.
(iii) whether the loan or deposit was squared up during the previous year;:· Review the loan, deposit and other relevant accounts to ensure all such particulars have been appropriately disclosed.
(iv) maximum amount outstanding in the account at any time during the previous year;:· Obtain certificate from management that loans accepted during the year and their repayment has been through an account payee cheques/draft.
Note :
(v) whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft.:(i) As per the ICAI information of each loan or deposit of Rs.20,000 or more alone would be required by this clause and where each such loan or deposit is less than Rs.20,000 and aggregate alone exceeds Rs.20,000, the particulars need not be furnished.
* (These particulars need not be given in the case of a Government Company, a banking company or a corporation established by a Central, State or Provincial Act).(ii) Advance received against agreement of sale of goods is not a loan/deposit.
(iii) Loan taken from financial institutions are covered under this clause.
(iv) Security deposits against contracts etc. will be covered by the definition of `deposit’ and the information for the same will have to be provided.
(b) Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year :-:
(i) name, address and permanent account number (if available with the assessee) of the payee;:· Obtain a schedule of loans and deposits of Rs.20,000 or more repaid during the year giving the relevant details as per the aforesaid clause.
(ii) amount of the repayment;:· Agree the details with the audited schedules and other relevant supporting documents.
(iii) maximum amount outstanding in the account at any time during the previous year.:· Review the loan, deposit and other relevant accounts to ensure all such particulars have been appropriately disclosed.
(iv) whether the repayment was made otherwise than by account payee cheque or account payee bank draft.:· Obtain management representation.
Note :
i) Refer note (i) to (v) above.
ii) Obtain a certificate from the assessee as prescribed in above clause.
iii) This clause is not applicable in respect of loan taken and repaid from/to Bank, Govt., Govt. company.
(c) Whether a certificate has been obtained from the assessee regarding taking or accepting loan or deposit, ore repayment of the same through an account payee cheques or an account payee bank draft (Yes/No)
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 allowance, in the following manner, to the extent available :· Obtain a schedule indicating the details as per the aforesaid clause. The clause will cover the following :
- Serial Number- Business loss (Section 72)
- Assessment Year- Unabsorbed depreciation
- Nature of loss/allowance (in rupees)- Speculation loss (Section 73)
- Amount as returned (in rupees)- Loss under the head capital gains.(Section 74)
- Amount as assessed (give reference to relevant order)· Furnish the information as to when returns of income for which the above brought forward loss/depreciation arises were filed and whether they were filed in time as provided under section 139(1) or late (any extension granted by CBDT to be indicated).
- Remarks· Agree the basis and details with the return of income, assessment orders etc. and other relevant supporting documents.
· If there are differences in figures as per returns filed and as assessed, also furnish separately reconciliation’s and whether matters are pending in appeals and/or rectification or under revision proceedings, etc. if appeal is decided but order giving effect thereof is not received, indicate the same.
· Take the copies of all relevant orders.
(b) Whether a change in share-holding 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.· In case of all unlisted company to see whether there was any change in shareholding affecting the benefit of C/F loss (Section 79).
· Details of shareholding be obtained at the end of 31st March of all the years upto 31st March 2006 to verify whether 49% or more shareholding has changed during the period from the year for which loss is carried forward and upto 31st March 2006.
· Any change in shareholding on account of death of a shareholder or gift by the shareholder to the relative and as per second proviso (applicable in case shareholder is a foreign holding company) be ignored.
26 Section-wise details of deductions, if any, admissible under Chapter VIA.:· This is an exhaustive clause to cover all eligible deductions available under chapter VI-A of Income Tax Act, 1961.
· Obtain a schedule indicating the section-wise details of deductions claimed under Chapter VIA.
· Ensure that deductions claimed by the client are admissible under Chapter VIA.
· Agree the details with the audited schedules and other relevant supporting documents.
· If the assessee is claiming deduction under a particular section for the first time, furnish a note giving reasons as to how the assessee is qualified for such a deduction with due evidence and that the assessee has compiled with all the conditions laid down in the relevant section. (with the necessary documentary evidence).
· Review assessments completed/ prior year tax returns to examine the basis adopted in earlier years.
· Verify the basis and computation of deductions.
· Obtain management representation.
Important
In case any report u/s 80IA/ 80IB or any other section of chapter VIA is issued by any other Chartered Accountant then go through the same to verify whether the amount arrived is in accordance with the Provisions of the relevant Section.
27(a) 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 (Yes/No):· Obtain a schedule indicating the details as per the aforesaid clause.
· Agree the details with the relevant supporting documents and returns submitted for the purpose.
· Go through the quarterly TDS returns filed.
(b) If the provisions of Chapter XVII-B have not been complied with, please give the following details*, namely:-· Review the relevant accounts to ensure that tax has been deducted as per XVII-B e.g. salaries, interest on securities, other interest, dividends, royalties, payments to non-residents, payments to contractors and sub-contractors etc.
(i) Tax deductible and not deducted at all· Above detail should also include particulars of tax deducted in the financial year but paid to the Govt. in subsequent year.
(ii) Shortfall on account of lesser deduction than required to be deducted· Report cases where TDS has not been deducted or deducted at lesser rates than applicable.
(iii) Tax deducted late· TDS is required to be deducted on the component of service tax also.
(iv) Tax deducted but not paid to the credit of the Central Government Important note regarding Tax Audit
“Please give the details of cases covered in (i) to (vi) above.”
Scrutinize balances appearing at the end of the period of the following account heads carefully:
1) Provision for expenses.
2) Outstanding liabilities.
3) Bill adjustables.
4) Other liabilities or any other account opened in books which is similar in nature to above.
The above accounts normally comprise of credit entries pertaining to provision for expenses made. Such expenses may fall into following categories:
a) Government taxes and statutory dues.
b) Staff payments.
c) Expenses liable to TDS deduction.
d) Other items.
i) Government taxes and statutory dues have to be reported u/s 43B. This clause will also include bonus and incentive to staff by various name called.
ii) The expenses which are liable to TDS are to be reported in the TDS clause (in case of defaults) and also simultaneously in clause 17(l) of tax audit report to the extent applicable.
iii) Further sometime the interest payable to parties is also included in the above head which is liable to TDS.
iv) For CARO purposes one must go through the tax audit report of last year and if items which were liable to TDS are reported but the TDS has not been deducted and paid till 31st March then the same will have to be reported in CARO also.
28(a) In the case of a trading concern, give quantitative details of principal items of goods traded::· Obtain a schedule indicating the details as per the aforesaid clause.
(i) Opening stock;· Agree the details with audited schedules and the stock records maintained by the company.
(ii) Purchases during the previous years;:· Review the relevant accounts to ensure all such particulars have been appropriately disclosed.
(iii) Sales during the previous year;· Furnish the reasons for short/excess with proper explanation and state whether it is normal or abnormal as per industry standards.
(iv) Closing stock;:· Obtain management representation.
(v) Shortage/excess, if any
(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products::
A. Raw Material :
(i) Opening Stock;Furnish details as required.
(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;Furnish details as required.
(ii) Purchases during the previous year;
(iii) 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:-:· Furnish the date of payment of tax on dividend with the copies of receipted Challans, showing the date, amount and name of the bank.
(a) Total amount of distributed profits;· Agree the details referred to the audited schedules and relevant supporting documents.
(b) total tax paid thereon;
(c) dates of payment with amounts.
30 Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)].:· Check if cost audit is applicable; check whether the audit has been carried out during the year.
· If the Cost audit is not carried by the time Tax Auditor gives the report, state the fact accordingly.
· Obtain a copy of the report if any cost audit was carried out during the year.
· Obtain management representation.
31 Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit.:Enquire & obtain LOR and copy of report of audit conducted by Excise department.
32 Accounting ratios with calculations as follows :-:· Obtain a schedule indicating the aforesaid ratios.
(a) Gross Profit/Turnover;· Verify the schedule for arithmetical accuracy and calculations.
(b) Net Profit/Turnover;· Give details of any change on the basis of calculations of ratio as compared to the preceding year.
(c) Stock-in-trade/Turnover;· Agree the values used for calculating the ratios to the audited schedules and relevant supporting documents.
(d) Material consumed/Finished goods produced.· As different interpretations are possible of the items like gross profit, net profit etc., it is recommended that a note explaining the basis adopted by the company be provided.
Download Guidance Note on Tax Audit -2014 Edition by ICAI
P A R T - A
1 Name of the Assessee:
2 Address:· Check the address as per Income Tax record and obtain any evidence available in this regard.
· If there is any change in the address till the date of signing of the report, check that new address is mentioned in Form 3CD.
3 Permanent Account Number: Verify from the PA Card or any other document.
4 Status: Company/Firm/AOP etc.
5 Previous Year Ended:31st March 2008
6 Assessment Year:2008-09
P A R T – B 7(a) If firm or Association of Persons, indicate names of partners/ members and their profit sharing ratios. :Verify from the Partnership Deed/AOP agreement.
(b) If there is any change in the partners or members or in their profit sharing ratio since the last date of the preceding year, the particulars of such change.: - do -
Note: In case of any change attach copy of partnership deed with the Income-tax return if required.
8(a) Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business of profession).:· In respect of each class of business, it is necessary to mention whether assessee is manufacturer, dealer, service provider, etc.
(b) If there is any change in the nature of business or profession, the particulars of such change.:· Review audited Balance Sheet and other relevant records to ascertain whether there is any apparent change in the business carried out by the assessee, which may need to be highlighted under this clause. In particular, examine whether any business or activity has been discontinued, any new activity has been commenced or whether there has been any expansion of the existing business.
· Additional activity started with in the same business carried on by the assessee does not mean change in nature of business or profession e.g. if the assessee is in the business of manufacturing shirts also starts manufacture of trousers.
· Obtain management representation.
· For change in business besides LOR go through the following :
· Any notes given in Notes to Accounts.
· Any notes given by Board of Directors in their report.
· Compare the Segment Reporting of this year with last year.
· Compare quantitative details of this year with last year.
9(a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.:Applicable for assessee carrying profession for the time being.
(b) Books of account maintained.:· Check complete list of all primary books of accounts maintained by the assessee.
(In case books of account are maintained in a computer system, mention the books of account generated by such computer system)· Check whether books of accounts have been generated from computer system or not.
· Obtain management representation.
(c) List of books of account examined.:Disclose the list of books of account examined.
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).:Generally Not applicable.
However go through the consolidated Profit & Loss account to see whether it includes any such profit.
11(a) Method of accounting employed in the previous year.:· Review Accounting policies from audited accounts. Check whether assessee is following Mercantile or Cash method of accounting.
· While following Mercantile basis of accounting, check whether any item of income or expense is accounted for on cash basis. Since Hybrid method of accounting is not allowed, state the nature and amounts of such items.
(b) Whether there has been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year.:· Scrutinize the last week of last month’s journal vouchers thoroughly to see provisions for expenses made & whether they are on same basis as in earlier year. Payment vouchers for first two months of subsequent year should be scrutinized to verify the correctness thereof.
· Ensure that following heads of accounts are scrutinized thoroughly and compared with earlier year to check whether accounting is on same basis as in earlier years.;
- Refund for income-tax, sales tax, etc.
- Export incentives
- Claims for loss or damage
- Grants/Subsidies
- Interest on delayed payments
· Determine whether there has been any change in the method of accounting employed vis-Ã -vis the method employed in the immediately preceding year.
(c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss.:· Ensure that any change in the method of accounting employed is appropriately disclosed and the effect thereof on the profit/loss is also disclosed.
· Obtain management representation.
(d) Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss.:· Check whether there is any deviation from the Accounting Standard (IT) – I & Accounting Standard (IT) – II notified under section 145(2) of IT Act regarding;
a) Fundamental accounting assumption of Accrual, Consistency & Going Concern.
b) Prudence, Substance over form & Materiality in accounting policies.
c) Disclosure of significant accounting policies and changes in such policies with the resultant impact, if material on accounts of year of change or subsequent year.
d) Disclosure of prior period and extraordinary items or change in accounting estimate in Profit & Loss Account and report the effect thereof on profit & loss.
· Ensure that deviation from such standards is appropriately disclosed and the effect thereof on the profit/loss is also indicated.
12(a) Method of valuation of closing stock employed in the previous year.:· Closing stock would include raw material, finished goods, work in progress, stores, spare and loose tools and shares/units in case of investment companies..
· Change in the method of valuation of opening and closing stock, including effect of change, is now covered under clause 11.
· Agree the method of valuation with audited working papers and audited financial statements.
(b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.:Deviation normally occurs in case of stock of Raw Material, Stores, WIP etc. only and in case of finished goods to the extent of cost of raw material etc. comprised therein which are valued net of VAT. Although there may not be any impact due of Cenvat and VAT. Give appropriate note/working (existing note if any needs amendment).
12A Give the following particulars of the capital asset converted into stock-in-trade:-Verify any fixed asset converted into stock in trade. Give the necessary details.
(a) Description of capital asset;
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade
13 Amounts not credited to the profit and loss account, being -:
(a) The items falling within the scope of section 28;:· Enquire whether any item of income chargeable under `Profit and Gains of Business of Profession’ has not been credited to the profit and loss account. Section 28 covers :
- Profits and gains of business or profession
- Compensation received on termination of employment, agency, etc.
- Income of trade or professional or similar association from specific services to members
- Export incentives
- Perquisites received during the course of business
- Interest, salary, bonus, remuneration, etc. received by a partner from firm, which is allowable under section 40B.
- Amount received under key man’s insurance policy
· Thus, if any such item is taken to any account directly in the Balance Sheet, it will be covered under this clause.
· Review the audited schedules and financial statements to determine whether such income has been credited directly to reserves or retained as a credit under the head `current liabilities and provisions’ or any other head.
· Obtain management representation.
(b) The proforma credits, drawbacks, refunds of duty of customs or excise, or service tax, or refund of sales tax or value added tax where such credits, drawbacks or refunds are admitted as due by the authorities concerned;:· Obtain a schedule indicating the details of the following claims admitted as due by the concerned authorities but not credited to the profit and loss account. The schedule should also indicate the year in which it was admitted as due.
- Proforma credits
- Duty drawbacks
- Excise/Custom duty refunds
- Sales tax refunds
- Service tax refunds
- VAT refunds
· Obtain an understanding of the relevant accounting policies [refer clause 11(a)].
· Agree the schedule with the claim papers and relevant correspondence files. Further ensure that the claims have been admitted as due by the concerned authorities.
· Review the relevant assessment orders to determine whether any such claims are due.
· Obtain management representation.
(c) Escalation claims accepted during the previous year;:· Obtain a schedule indicating details of escalation claims accepted during the year but not credited to the profit and loss account. The schedule should also indicate the year in which it was accepted as due. Certain instances of escalation claims may be in relation of contract with government customers and other sales to customers having escalation clause in contracts.
· Obtain an understanding of the relevant accounting policies [refer clause 11(a)].
· Agree the claims accepted with contracts and other relevant documents and ensure that claims have been accepted by the concerned authorities.
· Obtain management representation.
(d) Any other item of income;:· Enquire whether any item of income chargeable to tax under heads of income other than `Profits and Gains of Business or Profession’ has not been credited to profit and loss account.
· Report all items of income which are credited to expense heads with a note that this has no impact on the net profit.
· Review the audited schedules and financial statements to determine whether such income has been credited directly to reserves or retained as a credit under the head `current liabilities and provisions’ or any other head.
· Obtain management representation.
(e) capital receipt, if any.:· Enquire whether any capital receipt ha s not been credited to profit and loss account. For instance, capital receipts may be in the nature of grants/subsidies,
Note: In case of non-compete fees directly taken to reserves or capital account report the same in clause 13(a) also.
· Furnish details of gifts received during the year.
· Share premium account.
· Share forfeiture.
· Capital reserve arising on merger and demerger.
· Furnish details of the amount of capital nature received or receivable on transfer of technology, knowhow, and patent during the financial year and treatment thereof in accounts.
· Obtain an understanding of the relevant accounting policies [refer clause 11(a)].
· Review the audited schedules and financial statements to determine whether such capital receipt has been credited directly to reserves or retained as a credit under the head `current liabilities and provisions’ or any other hand.
· Obtain management representation.
14 Particulars of depreciation allowable as per the Income-tax Act,1961 in respect of each asset or block of assets, as the case may be, in the following form :-:· Obtain a schedule providing the relevant details indicated in the aforesaid clause in respect of each asset or block of assets. In particular, ensure that the following have been included :
Description of asset/block of assets- Written down value at the beginning of the year.
Rate of depreciation.- Assets acquired during the year have been segregated between the assets put to use for less than 180 days and those used for more than 180 days
Actual cost or written down value, as the case may be.- Deductions during the year represent the sale proceeds of assets sold
Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of-- Rates of depreciation.
(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,(i) Refer Appendix 1 and Appendix 1A as the case may be.
(a) (ii) Change in rate of exchange of currency, and(ii) Appendix 1A is applicable in respect of Power Generation companies.
(iii) Subsidy or grant or reimbursement, by whatever name called.- Even in a case where the auditee has decided not to claim depreciation in part or full, give full details of depreciation allowable.
(b) Depreciation allowable.· Review assessments completed/ prior year tax returns to examine the basis adopted in earlier years for determination of depreciation allowable. Also ascertain whether any aggressive positions have been adopted by the clinet and examine implications thereof.
(c) Written down value at the end of the year.· For additions during the year ensure that the classification of assets or block of assets and the rates of depreciation is in accordance with the requirements of the Income Tax Act, 1961.
· Agree the written down value at the beginning of the year to the return of income of the immediately proceding year.
(d) · Agree the additions with the audited schedules and ensure that adequate tests have been carried out for `actual cost’ capitalized and the dates the assets were `put to use’. Obtain a reconciliation to the additions as per the audited schedules, where necessary. Certain instances of such reconciling items may be capital expenditure on scientific research, leasehold improvements, etc.
· Ensure that the policies followed are consistent with the requirements of the Income Tax Act, 1961.
· For assets acquired during the year, obtain an understanding of the accounting policy for the following :
- Modvat credit
- Exchange fluctuation including in respect of realized gains/ losses, unrealized gain/losses and treatment of forward exchange contracts.
- Subsidy or grant or reimbursement.
· Depreciation capitalized.
· Any expenditure which does not relate to acquisition of P&M but capitalized as part of preoperative expense.
· Ensure capitalisation of interest in respect of borrowed capital as per Section 36(1)(iii).
· Agree the amounts included as adjustments on account of modvat, change in exchange rates and subsidy/grant with the audited schedules and other relevant supporting documents.
· Check the implications of section 43A of Income Tax Act.
· Agree the deductions during the year with audited schedules and ensure that such amount reconciles with the amount considered for determining the profit/loss on assets sold, discarded etc.
· Review the depreciation computation and ensure the arithmetical accuracy of the depreciation allowable and the written down value at the end of the year.
· Ensure that additional depreciation u/s 32(ii)(a) is compiled and reduced from WDV.
15 Amounts admissible under sections-:· Obtain a schedule giving details of deduction admissible under the relevant sections, indicating separately, the amounts debited to profit and loss account and not debited to profit and loss account. The relevant sections are as follows:
(a) 33AB - 35 Expenditure on scientific
(b) 33ABA research
(c) 33AC (wherever applicable) - 35CCA Expenditure by way of payment to associations and institutions for carrying out rural development programmes.
(d) 35 :- 35CCB Expenditure by way of payment to associations and institutions carrying out programmes of conversa-tion of nature resources.
(e) 35ABB- 35D Amotisation of certain preliminary expenses.
(f) 35AC- 35DD
(g) 35CCA- 35DDA
(h) 35CCB· Review the computation of the amounts admissible under the aforesaid sections and agree the same with the audited schedules, financial statements and other relevant supporting documents.
(i) 35D:· Obtain management representation.
(j) 35DD
(k) 35DDA
(l) 35E”
(a) Debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately);
(b) not debited to the profit and loss account.
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)].:· Furnish details of bonus or commission, if any, to an employee for services rendered which otherwise was payable as profits or dividend.
· Normal bonus or commission to employees including directors even as percentage of profits is not covered under this sub-clause unless the same was otherwise payable as profits or dividend.
(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).:· Furnish details of any sum received from the employees towards the contribution to:
a) Provident Fund
b) ESI Fund
c) Superannuation Fund
d) Any other fund for the welfare of employees.
· Furnish details of due date of payment and actual dates of payment for the amount received from employees towards various funds stated in above para.
· The due date of PF Contribution is 15 days and in case of ESI Contribution is 21 days from the end of the month to which salary relates.
· Refer to Circular No. E128(I) 60- III dated 19.03.1964 as modified by circular E11/128/73 dated 24.10.73 issued by the concerned authorities granting 5 days of grace period for payment for payment of PF Contribution . The due date will be determined accordingly.
17 Amounts debited to the profit and loss account, being :-:
(a) expenditure of capital nature;:· Furnish detail of following expenditure debited to Profit & Loss Account:
a) Capital Expenditure;
b) Capital Items which are fully or partly written off in P&L Account;
c) Scientific Research Expenses & Technical Know How Fees;
d) Write of advance paid for capital expenditure/ capital project.
e) Fees or Expenditure connected with increase in authorised capital, issue of bonus shares, travelling & other expenses connected with purchase of capital assets etc.
f) Amount debited on account of preliminary expenses (35D), VRS expenses (35DDA), Merger/Demerger expenses (35DD).
· Check the following head of accounts minutely:
a) Store & spare parts consumed
b) Repair & Maintenance
c) Misc. Expenses
d) Legal & Professional
· If in your opinion, any item of expenditure debited to the P&L Account is not of capital nature but there is possibility of holding such a view, furnish details with your views on the same.
· Obtain an understanding of the capitalization policy followed by the client.
· If any amount reported as capital expenditure is in the nature of fixed asset item include the same in clause No.14.
· Obtain management representation letter.
(b) expenditure of personal nature;:· Under section 227(1A)(c) of the Companies Act, 1956, the auditor is required to enquire whether personal expenses have been charged to the revenue account. If there is any such comment in the auditor’s statutory report then obtain a schedule of personal expenses debited to the profit and loss account.
· In case of expenditure incurred at club the same are to be reported under clause 17(d). However to the extent of personal element in the said expenditure, the same should be reported here also.
· Expenses of personal nature paid under a contractual obligation need not be disclosed.
· Agree with the audited schedules supporting the comments in the auditor’s statutory report.
· Review the relevant accounts to ensure that no other expenditure of personal nature has been charged to the profit and loss account.
· Obtain management representation.
(c) expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party;:· Furnish details of the expenses incurred on advertisement if any published for a political party
· Furnish details of expenditure incurred on advertisement in souvenir, brochure, tract, pamphlet or journal published by trade union, labour union or any other body formed by political party.
· Agree the schedule with the relevant supporting documents.
Note : Political parties would include both national and regional parties, which are approved by the Election Commission.
· Review the advertisement, sales promotion and other relevant accounts to ensure that all such expenditure has been appropriately disclosed.
· Obtain management representation.
(d) expenditure incurred at clubs -:
(i) as entrance fees and subscriptions;· Furnish the detail of expenses made to clubs under following heads:
- Entrance fees
- Subscriptions
(ii) as cost for club services and facilities used;- Catering Bills
- Residential Accommodation Charges
- Expenditure towards use of club services and facilities i.e. health club. Bar. Conference & entertainment expenses etc.
· Reimbursement of club payments to directors/employees should be included in the above statement.
· Subscriptions and other payments made to service organizations like Lions Club, Rotary Club, Giants, Jaycees etc. would not be included under this clause.
· Payments made to credit agencies like Diners Club would not be included under this clause.
· Payments to clubs would include payments to Gymkhanas.
· Review the relevant accounts and ensure that all expenditure incurred at clubs has been appropriately disclosed.
· Obtain management representation.
(e) (i) expenditure by way of penalty or fine for violation of any law for the time being in force;:· Furnish the detail of expenditure by way of penalty or fine debited during the financial year.
(ii) any other penalty or fine;· Furnish detail of compensation debited for breach of contract during the financial year.
(iii) expenditure incurred for any purpose which is an offence or which is prohibited by law;· Furnish copies of penalty orders passed during the financial year under relevant laws, which are applicable to assessee.
· Furnish detail of gifts given to government officials.
· Furnish details of expenditure incurred such as protection money, extortion money, regular hafta, bribe etc.
· Furnish detail of penalty debited which are in the nature of interest under any statue.
· Review the legal and professional fees, rates and taxes, sales tax paid or any other taxes paid, general charges account and other relevant accounts and ensure that all such expenditure has been appropriately disclosed.
· Obtain management representation.
· Unsupported expenditure may need to be reviewed to determine whether it needs to be included under `expenditure, which is an offence or prohibited by law’.
(f) amounts inadmissible under section 40(a);:· Furnish detail of Interest, royalty, fees for technical know how, services and other sums, which are payable outside India, on which tax has not been paid or deducted or deducted and paid at rate less than the prescribed rate.
· Furnish detail of expenses payable as reimbursement of expenses outside India on which tax has not been deducted or paid at source.
· Furnish details of payment, which is chargeable under the head salaries payable outside India and on which Tax has not been deducted.
· Furnish any interest, commission, brokerage, fees for professional services or for technical services, amount paid/payable to contractor and rent, royalty on which tax has not deducted or deducted at rate less than the prescribed rate or after deduction of TDS is not deposited within the due date (Ignore late deposit of TDS cases if the same is deposited by the end of financial year). [Section 194C, 194A, 194H, 194I, 194J and section 9(1)(vii) & 9(1)(vi)].
· Furnish any payment made towards a provident fund or other fund established for the benefit of employees for which tax has not been deducted at source.
· Furnish any tax actually paid u/s 10(CC).
· Furnish Fringe benefit tax (below the line or above the line).
· Furnish Securities transaction tax if debited to Profit & Loss account or if not debited to Profit & Loss Account.
· In case STT component is adjusted in the cost of investment/sale price then appropriate amount shall also be disclosed as amount not debited to Profit & Loss Account.
· Furnish any amount paid on account of rate or tax levied on profits (including any tax paid on profit outside India).
· Review all expenses payable and provision for expenses for 43B & TDS default.
· Furnish details of Income Tax & Wealth Tax debited to P&L Account during the year.
· Agree the details with audited schedules and other relevant supporting documents.
· Obtain management representation.
(g) interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/ 40(ba) and computation thereof; :Applicable only for partnership firms.
(h) (A) whether a certificate has been obtained from the assessee regarding payments relating to any expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be, (Yes/No):· Obtain a schedule of all payments made in excess of Rs.20,000 made in cash. If such payments are exempt under any of the clauses (a) to (l) of Rule 6DD, indicate in the schedule. Ensure that the conditions for specific exemption under any of the clauses (a) to (l) of Rule 6DD are satisfied. Ensure that the schedule indicates the computation of disallowance as per section 40A(3).
· Payments exceeding Rs.20,000 otherwise than by Account payee cheque or draft will attract 100% disallowance.
(B) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts] · Furnish details of Outstanding Expenses of the financial year for which payments are made in subsequent year at the time in excess of Rs. 20,000/- otherwise than by a Account payee cheque/draft.
· This should include payments to staff by way of salary, travel allowance etc.
· Only revenue payments would be covered. Purchase of fixed assets for which cash payments are made in excess of Rs.20,000 would not be covered.
· Payment for purchase of raw materials and stocks would be covered.
· As per the ICAI, in case no proper evidence for verification of the payments by Account payee cheque or draft is available the report should comment that it is not possible for us to verify whether the payments in excesss of Rs.20,000 have been made otherwise than by Account payee cheque or bank draft as the necessary evidence is not in the possession of the assessee.
· Review the payments in the cash book and adjustments to advances/deposits to ensure that all cash payments exceeding Rs.20,000 have been included in the schedule.
· Obtain certificate from auditee that all payments exceeding 20,000/- for expenses if made by cheque/ draft are made by Account payee cheque or Account payee draft.
(i) provision for payment of gratuity not allowable under section 40A(7);:· Furnish a copy of the order of the Commissioner of Income Tax granting recognition to the gratuity fund.
· Furnish certificate that the contribution made does not exceed permissible limit as per rules 103 & 104 of Income Tax Rules.
· Obtain a schedule indicating the provision for payment of gratuity not allowable under section 40A(7)..
· Agree the amounts provided with the audited schedules, financial statements and other relevant supporting documents and ensure that all such expenditure hs been appropriately disclosed.
· Whether contributions have been made to approved gratuity fund, review the copy of the trust deed and rules.
· Obtain management representation.
· Enquire whether CIT or RPFC has withdrawn the exemption during the year.
· Verify that the PF Trust recognized by CIT is also recognized by PF authorities.
(j) any sum paid by the assessee as an employer not allowable under section 40A(9); :· Obtain a schedule indicating the sum paid by the assessee as an employer, not allowable under section 40A(9) i.e. towards setting up or formation or contribution to any fund, trust, company, etc. other than ;
- Recognised provident fund
- Any PF for exemption is withdrawn by CIT.
- Recognised gratuity fund
- Recognised superannuation fund
- As required by or under any other law.
· Agree the details with audited schedules and other relevant supporting documents.
· Review the staff welfare and other relevant accounts to ensure that all such sums not allowable under section 40A(9) have been appropriately disclosed.
· Obtain management representation.
(k) particulars of any liability of a contingent nature. :· Furnish the detail of contingent liabilities debited to the profit and loss account indicating the nature of the demand and the reasons for making provisions in the accounts.
· Review the audited accounts, in particular the notes to the accounts to ensure that all liabilities of a disputed nature have been identified for further discussion.
Note : As per the ICAI these are normally expenses connected with disputed claims which will be revealed only on the basis of the scrutiny of correspondence relating to cases pending in a court of law.
(l) amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income. i) Go through the return filed and assessment order for last 2 to 3 year to verify details and categories of exempt income.
ii) Obtain management representation as to income which it is going to claim as exempt in this year.
iii) Go through the expenses disallowed in the earlier year.
iv) Obtain details of expenses pertaining to exempt income such as interest on funds borrowed, personal cost, rent, traveling and other administrative cost.
v) In case there are no direct expenses then disallowance has to be worked out as per Rule 8D.
vi) If adhoc expenses are stated then give note/disclaimer.
vii) In case of company having undertaking of the nature of 10A/10B/10C then the appropriate note be given disclosing both income and expenditure as per the Audit Report issued u/s 10A/10B.
(m) amount inadmissible under the proviso to section 36(1)(iii).(a) Obtain details of fixed asset which are acquired by borrowing loans.
(b) In case of funds of C/C account used and which cannot be correlated determine interest cost as per AS-16.
18 Particulars of payments made to persons specified under section 40A(2)(b).:· Obtain a schedule from the client indicating the following:
- List of persons specified under section 40A(2)(b)
- Details of payments made to persons specified in above list.
· Agree the schedule with ;
- Relevant contracts/ agreements with specified persons.
- Relevant supports for payments made to such specified persons.
· Review the relevant accounts to identify any payments made to persons specified under section 40A(2)(b).
· Compare the detail shown under Tax Audit with the Related Party Schedule of IGAAP.
· Obtain management representation.
Notes :
(i) Salaries and perquisites etc paid to directors or persons having substantial interest in the company should be included in the list referred to above.
(ii) Since disallowance in this case is at the discretion of the Income Tax Officer the total amount paid to such persons should be indicated in the schedule.
(iii) As per the ICAI, in the case of a large company, it may not be possible to verify the list of all persons covered by this section therefore the information supplied by the assessee can be relied upon. It has further stated that it may be difficult to identify all payments in each and every case where the volume of transactions is rather huge and voluminous, and therefore, it may be necessary to restrict the scrutiny only to such payments in excess of certain monetary limits depending upon the size of the concern and volume of the business of the assessee.
(iv) Suggested disclosure where the information is not available with client is as follows :
The company does not have necessary information in respect of the following :
(a) directors and their relatives of companies having a substantial interest in the company; and
(b) any person, in whose business or profession, the directors or their relatives have a substantial interest as defined in the explanation to Section 40A(2)(b).
19 Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC.:Go through the relevant sections.
20 Any amount of profit chargeable to tax under section 41 and computation thereof.:· Obtain a schedule indicating amount of profit chargeable to tax under the aforesaid clause and the computation thereof.
· Agree the details with audited schedules and other relevant support documents.
· Review the relevant accounts to ensure that all such sums have been appropriately disclosed.
· Obtain management representation.
21*(i) In respect of any sum referred to in clause (a),(b),(c),(d),(e) or (f) of section 43B, the liability for which;:
(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was
(a) paid during the previous year;
(b) not paid during the previous year;
· Obtain a schedule indicating the following information in respect of the items referred to in clause (a), (b), (c), (d), (e) and (f) of section 43B :
- Liability at the beginning of the year
- Amount paid during the year including the date of payment
- Amount not paid during the year
· Agree the amounts and dates with audited schedules and relevant supporting documents.
· Obtain a schedule in respect of the items mentioned above, specifically indicating the following :
(B) was incurred in the previous year and was- Liability incurred during the year
(a) paid on or before the due date for furnishing the return of income or the previous year under section 139(1);- Amount paid on or before the due date for furnishing the return of income under section 139(1) along with date of payment.
(b) not paid on or before the aforesaid date.- Amount not paid on or before the aforesaid date.
· The expenses, which are capitalized, would also be covered under this clause.
· Check that all the figure shown in annexure are in agreement with IGAAP.
· In case there is any mismatch of figures with books of accounts, prepare reconciliation for the same.
· Take the copies of challan to verify that amounts payable as on last day of the financial year are paid in subsequent year.
· To verify if any conversion of interest into loan or funded interest has taken place during the year.
· Agree the amounts and dates with audited schedules and relevant supporting documents.
* 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.
22(a) Amount of Modified Value Added Tax credits availed of or utilised during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Value Added Tax credits in the accounts.:(i) State the treatment given in the books to Modvat/ Cenvat. Give details w.r.t. opening balance/ credit availed/credit used/ closing balance of all Cenvat account as per Account books and Excise record with reconciliation.
(ii) Go through the reconciliation and report the difference under the respective clause of 3CD.
(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.:· Furnish a detail of income/expenditure relating to prior period credited/ debited to the profit and loss account during the year.
· Agree the details with audited schedules and relevant supporting documents.
· Review the items under the head prior period adjustment and the notes to the accounts to ensure all such expenditure/income has been disclosed in the above schedule.
· In order to ascertain the correct meaning of term “Prior Period Item” refer to the text of Accounting Standard- 5 issued by ICAI.
· Obtain management representation.
23 Details of any amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed) repaid, otherwise than through an account payee cheque [Section 69D].:· Obtain a schedule of borrowing and repayments (including interest) of hundi loans otherwise than by account payee cheques.
· Agree the details with the audited schedules and relevant supporting documents.
· Obtain management representation.
· Obtain a schedule of borrowing and repayments (including interest) of hundi loans otherwise than by account payee cheques.
· Agree the details with the audited schedules and relevant supporting documents.
· Obtain management representation.
Note : As per the ICAI in the absence of conclusive or satisfactory evidence a suitable comment in the report as suggested in clause 17(h) shou0ld be made. : As per the ICAI in the absence of conclusive or satisfactory evidence a suitable comment in the report should be made.
24(a)* Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year:-:
(i) name, address and permanent account number (if available with the assessee) of the lender or depositor;:· Obtain a schedule of loans and deposits of Rs.20,000 or more taken or accepted during the year giving the relevant details as per the aforesaid clause.
(ii) amount of loan or deposit taken or accepted;:· The amount of Rs. 20,000/- or more is to be computed inclusive of opening Balance in the party account and for the purpose of prepayment also, amount credited as interest.
· For the purpose of this clause, loan/deposit would include, among others, the following:
a) Security Deposits from staff, agents, customers with or without interest
b) Loans from financial institutions.
c) Advance in the nature of loan deposit.
d) Fixed deposit from public.
· Agree the details with the audited schedules and other relevant supporting documents.
(iii) whether the loan or deposit was squared up during the previous year;:· Review the loan, deposit and other relevant accounts to ensure all such particulars have been appropriately disclosed.
(iv) maximum amount outstanding in the account at any time during the previous year;:· Obtain certificate from management that loans accepted during the year and their repayment has been through an account payee cheques/draft.
Note :
(v) whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft.:(i) As per the ICAI information of each loan or deposit of Rs.20,000 or more alone would be required by this clause and where each such loan or deposit is less than Rs.20,000 and aggregate alone exceeds Rs.20,000, the particulars need not be furnished.
* (These particulars need not be given in the case of a Government Company, a banking company or a corporation established by a Central, State or Provincial Act).(ii) Advance received against agreement of sale of goods is not a loan/deposit.
(iii) Loan taken from financial institutions are covered under this clause.
(iv) Security deposits against contracts etc. will be covered by the definition of `deposit’ and the information for the same will have to be provided.
(b) Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year :-:
(i) name, address and permanent account number (if available with the assessee) of the payee;:· Obtain a schedule of loans and deposits of Rs.20,000 or more repaid during the year giving the relevant details as per the aforesaid clause.
(ii) amount of the repayment;:· Agree the details with the audited schedules and other relevant supporting documents.
(iii) maximum amount outstanding in the account at any time during the previous year.:· Review the loan, deposit and other relevant accounts to ensure all such particulars have been appropriately disclosed.
(iv) whether the repayment was made otherwise than by account payee cheque or account payee bank draft.:· Obtain management representation.
Note :
i) Refer note (i) to (v) above.
ii) Obtain a certificate from the assessee as prescribed in above clause.
iii) This clause is not applicable in respect of loan taken and repaid from/to Bank, Govt., Govt. company.
(c) Whether a certificate has been obtained from the assessee regarding taking or accepting loan or deposit, ore repayment of the same through an account payee cheques or an account payee bank draft (Yes/No)
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 allowance, in the following manner, to the extent available :· Obtain a schedule indicating the details as per the aforesaid clause. The clause will cover the following :
- Serial Number- Business loss (Section 72)
- Assessment Year- Unabsorbed depreciation
- Nature of loss/allowance (in rupees)- Speculation loss (Section 73)
- Amount as returned (in rupees)- Loss under the head capital gains.(Section 74)
- Amount as assessed (give reference to relevant order)· Furnish the information as to when returns of income for which the above brought forward loss/depreciation arises were filed and whether they were filed in time as provided under section 139(1) or late (any extension granted by CBDT to be indicated).
- Remarks· Agree the basis and details with the return of income, assessment orders etc. and other relevant supporting documents.
· If there are differences in figures as per returns filed and as assessed, also furnish separately reconciliation’s and whether matters are pending in appeals and/or rectification or under revision proceedings, etc. if appeal is decided but order giving effect thereof is not received, indicate the same.
· Take the copies of all relevant orders.
(b) Whether a change in share-holding 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.· In case of all unlisted company to see whether there was any change in shareholding affecting the benefit of C/F loss (Section 79).
· Details of shareholding be obtained at the end of 31st March of all the years upto 31st March 2006 to verify whether 49% or more shareholding has changed during the period from the year for which loss is carried forward and upto 31st March 2006.
· Any change in shareholding on account of death of a shareholder or gift by the shareholder to the relative and as per second proviso (applicable in case shareholder is a foreign holding company) be ignored.
26 Section-wise details of deductions, if any, admissible under Chapter VIA.:· This is an exhaustive clause to cover all eligible deductions available under chapter VI-A of Income Tax Act, 1961.
· Obtain a schedule indicating the section-wise details of deductions claimed under Chapter VIA.
· Ensure that deductions claimed by the client are admissible under Chapter VIA.
· Agree the details with the audited schedules and other relevant supporting documents.
· If the assessee is claiming deduction under a particular section for the first time, furnish a note giving reasons as to how the assessee is qualified for such a deduction with due evidence and that the assessee has compiled with all the conditions laid down in the relevant section. (with the necessary documentary evidence).
· Review assessments completed/ prior year tax returns to examine the basis adopted in earlier years.
· Verify the basis and computation of deductions.
· Obtain management representation.
Important
In case any report u/s 80IA/ 80IB or any other section of chapter VIA is issued by any other Chartered Accountant then go through the same to verify whether the amount arrived is in accordance with the Provisions of the relevant Section.
27(a) 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 (Yes/No):· Obtain a schedule indicating the details as per the aforesaid clause.
· Agree the details with the relevant supporting documents and returns submitted for the purpose.
· Go through the quarterly TDS returns filed.
(b) If the provisions of Chapter XVII-B have not been complied with, please give the following details*, namely:-· Review the relevant accounts to ensure that tax has been deducted as per XVII-B e.g. salaries, interest on securities, other interest, dividends, royalties, payments to non-residents, payments to contractors and sub-contractors etc.
(i) Tax deductible and not deducted at all· Above detail should also include particulars of tax deducted in the financial year but paid to the Govt. in subsequent year.
(ii) Shortfall on account of lesser deduction than required to be deducted· Report cases where TDS has not been deducted or deducted at lesser rates than applicable.
(iii) Tax deducted late· TDS is required to be deducted on the component of service tax also.
(iv) Tax deducted but not paid to the credit of the Central Government Important note regarding Tax Audit
“Please give the details of cases covered in (i) to (vi) above.”
Scrutinize balances appearing at the end of the period of the following account heads carefully:
1) Provision for expenses.
2) Outstanding liabilities.
3) Bill adjustables.
4) Other liabilities or any other account opened in books which is similar in nature to above.
The above accounts normally comprise of credit entries pertaining to provision for expenses made. Such expenses may fall into following categories:
a) Government taxes and statutory dues.
b) Staff payments.
c) Expenses liable to TDS deduction.
d) Other items.
i) Government taxes and statutory dues have to be reported u/s 43B. This clause will also include bonus and incentive to staff by various name called.
ii) The expenses which are liable to TDS are to be reported in the TDS clause (in case of defaults) and also simultaneously in clause 17(l) of tax audit report to the extent applicable.
iii) Further sometime the interest payable to parties is also included in the above head which is liable to TDS.
iv) For CARO purposes one must go through the tax audit report of last year and if items which were liable to TDS are reported but the TDS has not been deducted and paid till 31st March then the same will have to be reported in CARO also.
28(a) In the case of a trading concern, give quantitative details of principal items of goods traded::· Obtain a schedule indicating the details as per the aforesaid clause.
(i) Opening stock;· Agree the details with audited schedules and the stock records maintained by the company.
(ii) Purchases during the previous years;:· Review the relevant accounts to ensure all such particulars have been appropriately disclosed.
(iii) Sales during the previous year;· Furnish the reasons for short/excess with proper explanation and state whether it is normal or abnormal as per industry standards.
(iv) Closing stock;:· Obtain management representation.
(v) Shortage/excess, if any
(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products::
A. Raw Material :
(i) Opening Stock;Furnish details as required.
(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;Furnish details as required.
(ii) Purchases during the previous year;
(iii) 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:-:· Furnish the date of payment of tax on dividend with the copies of receipted Challans, showing the date, amount and name of the bank.
(a) Total amount of distributed profits;· Agree the details referred to the audited schedules and relevant supporting documents.
(b) total tax paid thereon;
(c) dates of payment with amounts.
30 Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)].:· Check if cost audit is applicable; check whether the audit has been carried out during the year.
· If the Cost audit is not carried by the time Tax Auditor gives the report, state the fact accordingly.
· Obtain a copy of the report if any cost audit was carried out during the year.
· Obtain management representation.
31 Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit.:Enquire & obtain LOR and copy of report of audit conducted by Excise department.
32 Accounting ratios with calculations as follows :-:· Obtain a schedule indicating the aforesaid ratios.
(a) Gross Profit/Turnover;· Verify the schedule for arithmetical accuracy and calculations.
(b) Net Profit/Turnover;· Give details of any change on the basis of calculations of ratio as compared to the preceding year.
(c) Stock-in-trade/Turnover;· Agree the values used for calculating the ratios to the audited schedules and relevant supporting documents.
(d) Material consumed/Finished goods produced.· As different interpretations are possible of the items like gross profit, net profit etc., it is recommended that a note explaining the basis adopted by the company be provided.
INFLATION
...........................CONTINURD FROM YESTARDAY
Issues in measuring inflation
Measuring inflation requires finding objective ways of separating out changes in nominal prices from other influences related to real activity. In the simplest possible case, if the price of a 10 oz. can of corn changes from $0.90 to $1.00 over the course of a year, with no change in quality, then this price change represents inflation. But we are usually more interested in knowing how the overall cost of living changes, and therefore instead of looking at the change in price of one good, we want to know how the price of a large 'basket' of goods and services changes. This is the purpose of looking at a price index, which is a weighted average of many prices. The weights in the Consumer Price Index, for example, represent the fraction of spending that typical consumers spend on each type of goods (using data collected by surveying households).
Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods from the present are compared with goods from the past. This includes hedonic adjustments and “reweighing” as well as using chained measures of inflation. As with many economic numbers, inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. Finally, when looking at inflation, economic institutions sometimes only look at subsets or special indices. One common set is inflation excluding food and energy, which is often called “core inflation”.
Effects of inflation
A small amount of inflation can be viewed as having a beneficial effect on the economy.[3] One reason for this is that it can be difficult to renegotiate prices and wages. With generally increasing prices it is easier for relative prices to adjust.
Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative by Keynesians because of the downward adjustments in wages and output that are associated with it.
With inflation, the price of any given good is likely to increase over time, therefore both consumers and businesses may choose to make purchases sooner rather than later. This effect tends to keep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging investments. But inflation can also reduce incentives to save, so the effect on gross capital formation in the long run is ambiguous.
Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation. In investing, inflation risks often cause investors to take on more systematic risk, in order to gain returns that will stay ahead of expected inflation.[citation needed]
Inflation also gives central banks room to maneuver, since their primary tool for controlling the money supply and velocity of money is by setting the lowest interest rate in an economy - the discount rate at which banks can borrow from the central bank. Since borrowing at negative interest is generally ineffective, a positive inflation rate gives central bankers "ammunition", as it is sometimes called, to stimulate the economy. As central banks are controlled by governments, there is also often political pressure to increase the money supply to pay government services, this has the added effect of creating inflation and decreasing the net money owed by the government in previously negotiated contractual agreements and in debt.
For these reasons, many economists see moderate inflation as a benefit; some business executives see mild inflation as "greasing the wheels of commerce." But other economists have advocated reducing inflation to zero as a monetary policy goal - particularly in the late 1990s at the end of a long disinflationary period, when the policy seemed within reach; and some have even advocated deflation instead of inflation.
In general, high or unpredictable inflation rates are regarded as bad:
Uncertainty about future inflation may discourage investment and saving.
CONTIUNED TOMORROW..............................
Golden Quotes
The duck looks smooth & calm on top of the water but underneath there is restless peddling………In life nothing worthwhile comes without struggle.
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