Timing of TDS u/s 194J & cost audit

This query is : Open

Lakshmi (Querist)
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11 September 2008 Background:
In 2007-08 X & Co appoints a cost auditor under S 233B of the companies act for audit of cost accounts maintained for FY 2007-08 under S 209 (1) (d) and gets the approval of the Govt.

As per cost audit report rules 2001, X & Co has to produce the cost accounts to the cost auditor within 135 days after the close of the Financial Year and Cost auditor has 45 days to audit and submit the cost audit report to the Govt.

Accordingly the company produces the cost accounts for year 2007-08 and the auditor completes the audit in FY 2008-09 within the prescribed time limits. Bill raised and paid after the completion of the audit report, in FY 2008-2009

The following questions arise for clarification:

1. When should the company credit the account of the auditor and deduct the TDS under S 194J? (FY 2007-08 or FY 2008-09)?

2. What period should be mentioned in the TDS certificate (sec 203 ) and Form No 26 AS (Sec 203 AA...)?

3. When does the audit fee become income of the auditor (whether under mercantile system or Cash basis accounting)? (and when can he successfully claim the TDS in the return ( AY 2008-09 or AY 2009-10)?

CA.PRAMOD KUMAR PANDA

CA.PRAMOD KUMAR PANDA (Expert)
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11 September 2008 Answers are as below:

1.Even though the Cost Audit Report is submitted after closure of the financial year 2007-08, the fee of the Cost Auditor must have taken into account on accural basis by the Company during the financial year 2007-08 and the Company must have deducted TDS during 2007-08 and paid to Government Account. Thus the TDS relates to financial year 2007-08 relevant to assessment year 2008-09.
2.The TDS Certificate should mention 2007-08 as the financial year and Form No:26AS submitted by the Company for the 4th. Quarter should mention the payment of Audit Fee.
3.If the Auditor follows Mercantile System of Accounting, the fees shall become income for the previous year 2007-08 relevant to assessment year 2008-09. If cash system followed, the income shall realte to assessment year 2009-10.He can claim in either of the assessment year.

Lakshmi

Lakshmi (Querist)
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11 September 2008 1. Yes, the company follows mercantile system. Even then, can an entry for a transaction (viz; the audit) be made BEFORE the transaction actually happens? First a transaction should happen and THEN an accounting entry should be passed for that transaction according to basic principle of book-keeping.

For example,If the company enters into a contract with a contractor to construct a building in 07-08, but the actual building work starts in 08-09, will the company account, based on mercantile system of accounting for this transaction in 07-08 and deduct the TDS from the contractor even before the work starts?

2A. As per this answer,The tax return (income and TDS) may not match with Form 26AS as the Assessment years will be different and it can cause problem of refund in the new annexureless regime. (Even otherwise).In fact this has actually happened in the past. Is there any case law/notification to allow this mismatch?

2B. If for some reason, the audit was not done by this auditor, who will claim the TDS deducted?

3. Now what is the basis for the auditor (who is following Mercantile system)for accounting an income for a job not done by him? Unless the audit is done in a year, how can one say that he has earned the income during that year?

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CA.PRAMOD KUMAR PANDA

CA.PRAMOD KUMAR PANDA (Expert)
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11 September 2008 1.Answer: No option, the Company has to follow Mercantile or accural System of Accounting as per Section 209 of the Companies Act. You have to create provision for tax Audit Fee like any other provision made as on 31st. March at the time of closure of accounts.
2.If actual payment is made to the contractor on account of the execution of contract work or as advance for mobilisation of materials, TDS should be deducted at source.
3.No question of mismatch as apprehended by you in paperless return form. You can refer ITR-4,SCHEDULE TDS-2 for TDS on other Income, Column-6, 7. Your query can be resolved.
4. This is a hypothetical question.
5.The auditor normally follows Cash System of Accounting. Further he can transfer the TDS in Schedule TDS-2 to subsequent assessment year on receipt of TDS certificate for 2007-08 financial year, since income is not recognised.

Lakshmi

Lakshmi (Querist)
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12 September 2008 1. Many thanks sri Panda for your patience and guidance.

2. I have referred to the 'contractor' case as a parallel to the main case in my original question. your para 2 does not, in my view, address the fact mentioned by me-I have NOT stated that ANY payment is made. The example refers to a case where apart from JUST entering into a contract there was no work; no payment in 07-08.
It is parallel to the original question where just an appointment of the auditor is done in 07-08 and No work begun or ended in FY 07-08. From the 'background' section, it is clear that even if the company and the auditor want to do the audit in 07-08 itself, it is JUST NOT possible, as the cost accounts for 07-08 will be ready and will be presented for audit ONLY in FY 08-09 as per the Report Rules
3. My Question in 2B cannot be just brushed aside as 'hypothetical'. In the 135 days time the law gives for presentation of cost accounts for audit, anything can happen.
4. Thanks for your points 3 & 5 which I will explore further.
5. Thanks again for your patience.