Tax audit under income tax and cost audit: Correlation & new amendments

Ensure the review of Cost Audit Reports (CAR) for the year 2013-14 before filing of Tax Audit Reports

Any organization has to undergo many audits like Financial Audit, Tax Audit, VAT Audit, Excise Audit, Service Tax Audit & Cost Audit. Cost Audit was made applicable to most of the companies since the year 2011 and in the year 2014 again many of the industries  were apparently excluded from applicability of Cost Audit by way of issue of notification on 30th June 2014.

As a professional, one has to keep a tab at the happenings in the regulatory sector so that one’s unawareness do not hamper the functioning of the organization or put the organization in an embarrassing position. The present article is an attempt to make the readers aware of the few incorporated provisions in the New Tax Audit Reports and Cost Audit is an audit where presently, the organisations do not lay too much of importance and consider it as only a compliance matter.  No doubt, it is a compliance matter but the companies need to understand the importance of the cost audit not only from the efficiency parameters for management decision making but also from the revenue regulators’ perspective.

A bird’s eyeview of the various paras of the cost audit report depicts that the CAR has co-relation with Excise, Service Tax, VAT, Transfer Pricing, SVB cases, Inventory valuation and Income Tax.

The Cost Audit Report to be submitted for the year 2013-14 needs to be looked from various aspects because of the new notification issued by the CBDT.

CBDT vide  Notification No. 33/2014, Dated: July 25, 2014 has released revised Forms 3CA, 3CB and 3CD.

In the new form 3CD, income tax authorities has inserted point number 37 which states as under:

“Whether any cost audit was carried out, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor”

There is clear departure from the earlier practice of attaching the cost audit report only. In the earlier form the direction was to attach the cost audit report if the cost audit was carried.

“Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)]”

Now it seems that the requirement of the attaching the cost audit report has been done away with but the company is required to give the details of the disqualifications or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor. The management needs to take care of the undervaluation or overvaluation of the inventory being reported in the costing reconciliation statement. It is well known fact that the authorities use the data to their own convenience and if any under valuation of inventory in the financial records is reported in the Cost Audit Report which has been signed by the directors, cost auditors and company secretary, the income tax authorities may go for addition in the income.

Not only this, the authorities can easily correlate the various quantitative figures related to the inventory mentioned in the point no 35 of the Cost Audit Report and other various paras in the Cost Audit Report.

Paras 4 & 5 of the Cost Audit Report Rules 2011 and Paras 5 and 6 of the Companies (Cost Records and Audit) Rules 2014 mentions the details with regard to the Raw materials and production and sales of finished goods the same need to be matched with the details being reported in the Tax Audit Report.

One can recall the days when all the quantitative figures used to be reported in the notes annexed to the Financial Audit Reports, now the same have been discontinued and the quantitative figures are required to be reported in the Cost Audit Reports from where these can be mapped by any revenue authorities and mismatching may invite un-necessary troubles. The quantitative figures to be reported in the Tax audit Report are given below.

35. (b) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products:

Not only this, since 2011-12 and also for the year 2013-14, the companies are required to report the related party transactions and mention the  following information. While reporting this information one must ensure that irrespective of the method adopted for determination of Normal price , it should be ensured that the products covered under these are not under transacted under losses or abnormal profits. This may invite the attention of the transfer pricing officers (TPO). The TPO may ask for the costing of the products and the same should be taken from the audited cost records to avoid any disputes with taxation authorities at the later stages.

Even in the Companies Cost (Records and Audit) Rules 2014, the related party transaction are required to be reported in Para 21 and the companies must analyze and cross verify the Transfer Pricing Audit Reports with  the Cost Audit Reports.

In the last, I would like to draw your attention to the Income Tax notice on its web site stating that the Tax Audit Reports for the earlier years (other than previous year 13-14) also will be submitted in the new format. So, the companies under cost audit will be required to provide the details of undervaluation or over valuation of Inventory & other areas of disagreement even for the earlier years i.e for the Previous years 12-13 and before in the Tax Audit Report at Point no. 35 along with quantity & value.

Regards,

CMA Navneet Kumar Jain

FCMA, MBA., LL.B., M.COM., PGDTL, AIIISLA., LIII

For Jitender, Navneet & Co.

navneetic@yahoo.com, cmanavneetjain@gmail.com