Background Material

Seminar on

eXtensible Business Reporting

Language ( XBRL)
&
Tax Audit

September 11, 2010

Hotel Le Meridien, Janpath
Windsor Place, New Delhi

Organised by
Northern India Regional Council of
The Institute of Chartered Accountants of India
 XBRL – An Overview
Introduction to XBRL and the basic concepts of XBRL

Compiled by:

Shri S. Swaminathan
CA. Indrajit Shah

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 XBRL – An Overview

Understanding XBRL
Introduction

X BRL stands for eXtensible Business Reporting Language. It is an open standard, and being
developed by XBRL International, a non-profit organization. XBRL is a revolutionary concept in the
world of business and financial information and will have a far reaching impact across the entire
financial reporting chain. Worldwide adoption of XBRL as the information standard for business and
financial reporting has gathered substantial pace in past two years with regulators in US, Japan,
European Union, China and now in India successfully implementing XBRL based reporting systems.

XBRL means bar-coding business information with tags. The business information no longer remains a
block of text but each information element is tagged which makes it computer-readable.

Traditional business reporting is done in various formats viz. printed financials, spreadsheets, PDF
documents, html and so on. All these are human readable and can be interpreted by human beings or
by systems with human intervention. The structure of XBRL makes handling and processing of business
data platform independent. It supports all the standard tasks involved in compiling, storing and using
business data.

All types of entities can experience cost benefits and process efficiencies with the use XBRL.
Extensibility being one of the underlying principles of XBRL, it can be easily adapted to a wide variety of
different requirements. All the stakeholders of the financial information supply chain can benefit.

Need for XBRL

XBRL is rapidly being adopted worldwide as a de facto financial and business reporting standard. XBRL
facilitates convergence of accounting standards by the ability to align financial concepts among public
taxonomies. Stock Exchanges, Supervisory and Regulatory bodies across globe are looking forward for
XBRL adoption. Few reasons why should XBRL be adopted-

1.Accurate and Quality Data – XBRL validates the data based on the rules and relationships defined
amongst the data elements, which results in obtaining clean and valid.

2. Automation – With XBRL, the intelligence of understanding and interpreting the data is transferred
to the system and this facilitates automation in data processing and management. By using XBRL,
companies and other producers of financial data and business reports can automate the processes of
data collection.

3. Reduce cost of ownership of data – The XBRL data is interoperable and thus created once can be
used by multiple agencies seamlessly. And as a result of interoperability the overall cost of creating
data and meeting the compliance requirements is reduced dramatically. Moreover, XBRL is a open and
royalty free standard

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 XBRL – An Overview

4. Reduce reporting burden – Many of the information requirements of the different agencies is similar
and companies have to submit the same multiple times. As the data is interoperable, the redundant
information elements can be done away with and thus reducing the reporting burden on enterprises

5. Seamless Integration – The XBRL data carries along with it, the additional attributes and facts,
which makes the data self-explanatory. And thus the data remains no longer dependent on any
application or platform for interpretation and processing. The XBRL data can be easily integrated into
any system

6. Efficient Business Processing – As XBRL cuts down the time spent on less efficient process like re-
keying and re-arranging data, the entire business process now becomes more efficient and productive.
XBRL will streamline the preparation of business and financial reports for internal and external decision
making.

7. Easy location of data – All the information is identified with a unique XBRL tag and this makes
locating the data from a vast information repository or from a voluminous report very easy and quick.
Since related information is linked (like facts and relevant footnotes), retrieving information is done in
no time.

8. Consumer oriented reporting - Consumers can collaborate and share the analytical concepts and
are no longer dependent on the reporting concepts embedded in specific software. And consumers can
now dynamically design and share their own business reports.

9. Social Analytics - The existing social media like Wikipedia, Facebook, etc, facilitates collaboration
of a wide range of participants. XBRL enables a similar social collaboration of analytical and modeling
concepts.

10. Real-time data – Because of automation and creation of accurate and valid data, the processing of
data becomes much faster and so does its dissemination. Thus the information seekers can access the
data in real-time.

11. Better Coverage by Analyst community – The time required for analysis is quite high because the
data is first rekeyed, validated and arranged according to the needs. Since all these activities are no
longer required in XBRL based framework and hence the analyst have time to focus on small companies

12. Comparative Analysis – XBRL, being a universal standard, facilitates comparison between
companies across globe

13. Transparent Data – XBRL facilitates better and faster access to information; transparency in the
whole information supply chain is increased.

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 XBRL – An Overview

Beneficiaries of XBRL data

Regulators
• Greater transparency through ease of analysis of the regulated entities filings
• Increase data accuracy
• Dramatically reduced the time to process filings from weeks to days
• Rise in analyst productivity
• Validate and review data much more efficiently and usefully than they have hitherto been able
to do.

Corporate Community
• Cost savings in preparation, report creation, analysis. High flexibility through the use of
dashboard based business rules. This leads to significant savings in man hours and lead time in
compliance and consolidation
• Faster availability of data into standard reports
• Extracts data from accounting packages and makes it standardized and portable
• Provides a common framework of definitions
• Easy data handling due to standardization and automation, centralization of delivery
• A pioneering status among enterprises in the use of XBRL in India. Image enhancement in the
marketplace through Increase of quality and consistency of data

Auditors
• Automate financial statements handling, cutting out time-consuming and costly collation and
re-entry of information.
• Accurate and Quality Data
• Facilitates audit trail

Equity Analyst/Investment Banker/Credit Analyst/Investors

• Easier access to financial data
• Easier analysis and comparison of financial data
• Utilizing a publicly available XBRL database of Risk Return filings or prospectuses, could easily,
in a matter of minutes, identify funds for review based upon fund type, return history and
expense information
• Simplify the selection and comparison of data, and deepen their company analysis
• Time required for analysis, validation and arranging financial information according to the
needs is greatly reduced.

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 XBRL – An Overview

How XBRL works

XBRL has evolved from XML (extensible mark-up language) which is based on the concept of meta-
data. This meta-data provides context to the information which makes the data almost self-
explanatory. Wherever the XBRL data moves, it carries along with it the context, which makes it
intelligent and thus any software application can interpret and process the data. Information attributes
like the period of the information, data structure it will hold (monetary, percentage, text etc) are
attached to the data. In addition, labels in any language can be applied to information and also
references to the legal or authoritative literature can be added.

Data with tags,

Data with tags
Data Hierarchy &
hierarchy
Relationships

Primitive Data
XML Data Formats XBRL Data Formats
Formats

 XBRL combines hierarchical xml data with relationships and references between the data
points
 It links the data xml files with various other files containing definitions, presentation,
calculation, references relationships
 XBRL data files are a set of XML and XSD files.

XBRL documents

An XBRL document comprises of

taxonomy and instance document.
Taxonomy contains description and
classification of business & financial
terms, while the instance document
is made up of the actual facts and
figures. Taxonomy and Instance
document together make up the
XBRL documents.

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 XBRL – An Overview
Taxonomy
Taxonomy can be referred as electronic dictionary of the reporting concepts. Taxonomy consists of all
the data definitions, the basic XBRL properties and the interrelationships amongst the concepts. It
includes terms such as net income, EPS, cash, etc. Each term has specific attributes that help define it
including label and definition and potentially references. Taxonomies may represent hundreds or even
thousands of individual business reporting concepts, mathematical and definitional relationships
among them, along with text labels in multiple languages, references to authoritative literature, and
information about how to display each concept to a user.

Schema
XBRL Schemas together with linkbases define XBRL taxonomy. The purpose of XBRL schemas is to
define taxonomy elements (concepts) and give each concept a name and define its characteristics. It
can be regarded as a container where elements and references to “linkbase” files are defined.

Element Name: It specifies the name of the concept which is defined. A style guide has to be followed
to define the element name. There are many rules to be followed while defining the element name
which is given the LC3 convention.

Element ID: This attribute makes the concept defined unique. To make it unique, a prefix is attached to
the element name which creates a reference point for the accounting concept, for example, ‘in-
gaap_CashAndCashEquivalents’, which shows that the item ‘CashAndCashEquivalents’ is from the
Indian GAAP.

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 XBRL – An Overview

Data Type: This attribute defines the type of the fact that will be reported against the specified
element. The most common data types that appear in financial statements are Monetary Items, String
Items, and Decimal Items.

Abstract: It helps to determine if the element carries any value against it. Abstract = True or False. It is
used as a place holder to bind the elements. Abstract, where Abstract = True, it will not have a value but
will be recognized as the heading for all the elements that fall under the head of ‘CashAndCash
Equivalents’.

Period Type: This helps in determining the nature of the element and defines the flow and stock
concept of accounting with regard to every element in the taxonomy. Here the elements are
distinguished into ‘Instant’ & ‘Duration’ where ‘Instant’ refers to the stock concept (E.g.: Assets &
Liabilities as on a particular date) and ‘Duration’ refers to the flow concept (E.g.: Sales, costs, profits,
etc from reporting period start date to reporting period end date).

Substitution Group: It defines the association of elements with other elements in the schema. For
substitution group set to item, it means that the element is not associated to any other item in the
schema and neither is it grouped with other elements in any way

Balance Type: This attribute states the balance type of the concept that is being defined in the schema.
The elements which are monetary item types are given a balance type of debit or credit depending on
the nature of the concept.

Linkbases

XBRL linkbases and XBRL Schemas define together XBRL taxonomy. Taxonomies with only the core
elements (concepts) defined in an XBRL Schema would be useless. The purpose of XBRL linkbases is to
combine labels and references to the concepts as well as define relationships between those concepts.
There are five different kinds of linkbases. Each has a special purpose.

The label linkbase: The goal of the XBRL Consortium is to create and develop a world-wide standard
for electronic business reporting. This requires the taxonomies to represent business data in multiple
languages. Therefore it is possible to create an element (concept) in the taxonomy with labels in
different languages and or for different purposes e.g. a short label PPE compared to its long label
Property, plant and equipment. Those labels are stored and linked to their respective elements in a
label linkbase.

The reference linkbase: Most of the elements appearing in taxonomies refer to particular concepts
defined by authoritative literature. The reference linkbase stores the relationships between elements
and the references e.g. IAS, Para 68. The layer does not store the regulations themselves but the source
identification names and paragraphs.

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 XBRL – An Overview

The presentation linkbase: Business reports are in general organized into identifiable data structures
e.g. a Balance Sheet. The presentation linkbase stores information about relationships between
elements in order to properly organize the taxonomy content. This enables a taxonomy user to view a
one dimensional representation of the elements.

The calculation linkbase: The idea of a calculation linkbase is to improve quality of an XBRL report
(XBRL instance). The calculation linkbase defines basic calculation validation rules
(addition/subtraction), which must apply for all instances of the taxonomy.

The definition linkbase: The definition linkbase stores other pre-defined or self-defined relationships
between elements. For example a relationship can be defined that the occurrence of one concept
within an XBRL instance mandates the occurrence of other concepts.

The formula linkbase: Advanced and user defined mathematical and logical relationships between
concepts

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 XBRL – An Overview
Instance Documents
An XBRL instance document is a business report in an electronic format created according to the rules
of XBRL. It contains facts that are defined by the elements in the taxonomy it refers to, together with
their values and an explanation of the context in which they are placed. XBRL Instances contain the
reported data with their values and “contexts”. Instances must be linked to at least one taxonomy
which defines their contexts, labels or references.

An instance document contains the "code" for the tags and the structure that belongs to the tagged
data. Instance documents are built from a combination of XML specs and XBRL, structured to produce
financial statements. The document provides data plus structure for machine recognition, and human
readability.

The XBRL instance holds the following information:

 Business Facts
 Contexts define the entity (e.g. company or individual) to which the fact applies, the period of
time the fact is relevant. Date and time information appearing in the period element must
conform to ISO.
 Units define the units used by numeric or fractional facts within the document, such as USD,
shares. XBRL allows more complex units to be defined if necessary. Facts of a monetary nature
must use a unit from the ISO namespace.
 Footnotes use link to associate one or more facts with some content.
 References to XBRL taxonomies

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 XBRL – An Overview

To create an XBRL file one need to have Software/Tools, using which each piece of business data is
matched with the XBRL concept describing that data in the Taxonomy. The instance documents
created should be valid as per XBRL specifications. While validating the instance documents following
are considered –

• Checking the instance document with the taxonomy it refers to

o The values reported are as per the data properties as defined in taxonomy
o The data in reported conforms to the relationships defined in the taxonomy
o Mandatory items are necessarily reported etc.
• Checking the instance as per FRIS (Financial Reporting Instance Standard)

Dimensions in XBRL
Dimensions are each of the different aspects by which a fact may be characterized. The dimensions
specifications released in 2008 enable storing additional attributes about facts.

Need for dimensions:

 Makes the taxonomies Modular

 Increases flexibility
 Enhanced validations
 Easier to maintain
 Easy Usability and extensibility

Taxonomy extensions
The national taxonomies, like Indian GAAP, IFRS Taxonomy, US-GAAP taxonomy etc define elements
and the relationships between them according to particular legislation or standards. However, if
companies need to include in their business reports additional concepts (usually related to the area of
their activity or the reporting purpose), XBRL, as its name indicates, allows for such extensions.

One can create taxonomy extensions by:

 Adding one’s own data elements

 Creating one’s own relationships
 Or both

There are several rules to be followed while extending taxonomy, the most important being the
extensions should be as per the base taxonomy style and architecture. Taxonomy is extended to
accommodate items/relationship specific to the owner of the information.

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 XBRL – An Overview

XBRL around the world

XBRL is quickly spreading across the world, by way of increasing participation from individual countries
and international organizations. It is now preferred as a standard for business and financial reporting
worldwide. XBRL is managed and promoted by XBRL International, a not-for-profit consortium. XBRL
International is comprised of jurisdictions, which represent countries, regions or international bodies
and which focus on the progress of XBRL in their area. There are about 28 jurisdictions representing
different countries and regions.

The US Securities and Exchange Commission has played a vital role in accelerating adoption of XBRL in
the US. In December 2008, SEC made it mandatory for companies in a phased manner to file the
returns in XBRL format, starting with companies having above USD 5 billion as global float, to file their
returns from June 2009 quarter onwards in XBRL format. All companies would come under this
mandate by 2011. Japan also is one of the early adopters of XBRL and had started voluntary XBRL
reporting program for financial services institutions gradually expanding the range of reports since
2005. Netherlands Taxonomy Project (NTP) and Standard Business Reporting (SBR) are large scale
projects for developing a single national taxonomy with the aim of decreasing the regulatory reporting
burden on the entities. The IFRS and XBRL also go hand-in-hand.

Many countries around the world are slowly and steadily implementing XBRL in their reporting
frameworks. Taxonomy projects, designing XBRL compliant filing platforms and systems are usually
the initial steps for implementing the XBRL standard in countries.

XBRL in India

The Institute of Chartered Accounts of India (ICAI) is spearheading the XBRL initiative in the country
and India is now a provisional jurisdiction of XBRL International. Members of XBRL India are Reserve
Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA), Securities and Exchange
Board of India (SEBI), Ministry of Corporate Affairs (MCA), stock exchanges like Bombay Stock
Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) and a few private
companies.

The ICAI has developed the taxonomy based on Indian GAAP for general purpose financial statements
for manufacturing and services sector and banking sector. Both the taxonomies are accredited by XBRL
international. The taxonomy for NBFC is under development.

In order to enhance the quality and reusability of data and to build the flexibility to easily accommodate
future regulatory data needs, the monetary authority of India, RBI, was keen to implement the use of
XBRL services in their reporting framework. IRIS’ XBRL enabled workflow solution, IRIS iFile, was
implemented as the solution for the requirements of the RBI in October 2008, for the capital adequacy
returns. All the scheduled commercial banks which fall under the purview of Basel II use this platform.

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 XBRL – An Overview

Returns for fortnightly liquidity position, foreign exchange balances, Form X, and the annual financial
statements are in pipeline

The Securities Exchange Board of India (SEBI) has mandated the top 100 companies listed on the two
major exchanges viz. the Bombay Stock Exchange and the National Stock Exchange, to file their
disclosures through XBRL-based Corpfiling. In addition to the mandated companies, many companies
are filing voluntarily their financial in XBRL.

The Ministry of Company Affairs (MCA) is also looking at mandating XBRL filings for all registered
companies from 2011.

There is no wonder that the XBRL data standard is setting its foothold around the world since XBRL
address the problem of data integrity, timeliness and reusability.

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 XBRL – An Overview

Glossary
1. Abstract Elements – Elements with attribute “abstract = TRUE” are called as Abstract
Elements and are used to group a set of elements together.
2. Arc role – The function of the arc which is joining the two locators
3. Dimensions – Structure that allow data to be organized and presented according to different
criteria (such as in a pivot table).
4. Domain – The set of different components or criteria of a dimension.
5. Element – The financial concepts that are defined in the Schema. Elements and concepts can
be used interchangeably
6. Extended link – Logical grouping of elements within a linkbase.
7. Extension taxonomy – Is Addition to the base taxonomy by creating new elements or
customizing content.
8. FRTA – Financial Reporting Taxonomies Architecture
9. FRIS – Financial Reporting Taxonomies Architecture
10. Fact – Usually a value or other information of a financial or a business report, which is mapped
to a taxonomy element
11. Hierarchy – Tree like structure used to express relationships and make navigation within the
taxonomy easier.
12. Hypercube – Header and place holder in the case of dimensions
13. Instance document – XML file containing business reporting information.
14. Label – Human-readable name for an element
15. Linkbase – Relationship defining taxonomy elements which are defined in the schema
16. Locator – Used to point the elements which are to be related.
17. Primary item – A measure which can be broken down into dimensions
18. Schema – Part of the taxonomy that consists of set of XBRL elements and their attributes.
19. Specification – Detailed description of XML syntax, semantics, and structures, etc. that
prescribe how XBRL is constructed.
20. The specifications referred over here are:
a) XBRL 2.1 Specification
b) XBRL Dimensions 1.0
c) Financial Reporting Taxonomy Architecture
d) Financial Reporting Instance Standards
21. Tag – Markup information describing a unit of data i.e. Individual elements within taxonomy,
e.g., net income.
22. Taxonomy – Electronic dictionary of business reporting concepts and is composed of an XML
schema (.xsd file) and linkbase files.
23. Validation – Process of checking and ensuring consistency in the taxonomy documents based
on the XBRL Specifications

Source: Www. Xbrl.org

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Judicial decisions relating to clauses covered in Tax Audit

Dr. Rakesh Gupta, FCA

CA. Annapurna Gupta, FCA

Judicial decisions at times throw very interesting propositions of law which are helpful for
assessees and tax professionals alike while dealing with tax matters. Below is an attempt to list
certain propositions of law expounded by the courts’ decisions which may be found useful.

Section 40A (2)

BURDEN OF PROOF ON REVENUE-

- Assessment year 1998-1999 – Whether for invoking provision of section 40A(2) onus
lies upon Assessing Officer to prove that payment is excessive or unreasonable having
regard to fair market value of goods or legitimate needs of business, there is no
presumption of unreasonableness – Held, Yes – S.K. ENGG V. JT CIT 103 ITD 97
(BANG).

- Business expenditure----Disallowance under s. 40A(2)—Payment of commission to

sister concern---Department not being able to show as to how 0.5 per cent higher
commission paid by assessee company to its sister concern, which was also being
assessed at higher rate, resulted in tax evasion, Tribunal was justified in deleting the
addition.---CIT vs. Indo Saudi Services (Travel) (P) Ltd. 12 DTR 304(Bom)

- ---Payment of salary to director----AO having made no enquiry to ascertain whether the

payment of remuneration by the assessee company to the director in the relevant year was
excessive or unreasonable having regard to the fair market value of the services, no
disallowance could be made u/s. 40A(2) on the basis that the remuneration paid in the
relevant year was substantially more than that paid in the earlier year.----Jagdamba
Rollers Flour Mill Ltd. vs. Asstt. CIT 20 DTR 370 (Nag)(TM)(Tribunal).

- ---Disallowance under s. 40A(2)----Excessive Interest payment to relatives of directors--

-AO having no information as to what should be the fair market rate of interest, he could
not have treated interest paid by assessee to relatives of directors @ 24 per cent per
annum as excessive or unreasonable so as to invoke provisions of s. 40A(2)(b) and
disallow part of it by reopening the assessment---Satya Narain Kesho Ra, (P) Ltd. vs.
Dy. CIT 21 DTR 1(Lucknow)

- --Disallowance under s. 40A(2)—Trade discount—Ad hoc disallowance of trade

discount to sister concern was not justified especially when bulk sales were made to sister
concern and similar discount was allowed in earlier year on lower sales—That apart,
trade discount is not any expenditure and therefore s. 40A(2) was not attracted at all.—
United Exports vs. CIT 28 DTR 315(Del.)25 Aug., 2009

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 - --Payment of interest at excessive rate—In view of difficulties involved in obtaining loan
from bank or financial institution, the interest paid by the assessee on unsecured loans
taken from relatives at a rate little higher than the market rate cannot be disallowed under
s. 40A(2).—Som Dutt Goel & Sons vs. ITO 27 DTR 263(Del.)
-

Section 41(1)

Business income---Profits chargeable to tax under s. 41(1)----Remission or cessation of

liability---AO having not brought anything on record to prove that the liabilities ceased to exist
as on last date of relevant previous year, same could not be taxed as income under s. 41(1).----
Wilson & Co. Ltd. vs. Asstt. CIT 16 DTR 428(Chennai)

Business income---Cessation of liability---Unilateral writing off of unclaimed liability---Not

statutory but contractual liability---Taxable as income---Income-tax Act, 1961, s. 41(1)---JAY
ENGINEERING WORKS LTD. 167 Taxman 130 (Delhi)

Income----Business----Waiver of loan taken by assessee for business purposes---Amount

transferred to profit and loss account---Amount assessable as business income---Income-tax Act,
1961, s. 41(1)---SOLID CONTAINERS LTD. V. DEPUTY CIT 308 ITR 417(Bom.)

S. 41(1) – Income – Business income – Remission of liability – Amount shown as liability in

balance sheet – No evidence of cessation of liability – Amount not assessable under section 41 –
CIT VS. TAMILNADU WAREHOUSING CORPORATION 292 ITR 310 (MAD.)

Business income – Profits chargeable to tax under section 41(1) – Amounts carried forward
for years – In the absence of any evidence of cessation of liability amount which has been merely
carried forward to years in the books of accounts is not assessable under section 41(1) – CIT VS.
SOUTHERN ROADWAYS LIMITED 202 CTR 279 (MAD).

Business income—Profit chargeable to tax under s. 41(1)—Advance against goods to be

supplied—In the absence of any material being brought on record to show that the liability
shown in the balance sheet has actually ceased, the amount of such liability cannot be added
when the assessee has not written off the liability in the books of account.—Asstt. CIT vs.
Nirmala Overseas 37 DTR 321 (Del. ‘F’)

Deemed profit—Amount received credited in profit and loss account and adjusted in book
profits—Findings by Tribunal that loan liability never claimed or allowed as deduction by way
of loss, expenditure or trading liability—Not to be included as profit chargeable to tax—
Assessment Order not erroneous or prejudicial to interests of Revenue—Proceedings under
section 263 not proper—CIT vs. Goyal M G Gases Ltd. 321 ITR 437 (Delhi)

Liability outstanding for last six years—Assessee having shown the impugned liabilities in its
balance sheet and filed copies of accounts sundry creditors signed by the concerned creditor,
such liabilities cannot be treated to have ceased merely because they are outstanding for six years
and, therefore, the addition made by invoking s. 41(1) cannot be sustained, more so when the AO

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has failed to show that deduction has be allowed in respect of any trading liability or that the
assessee has obtained any benefit concerning such liabilities by way of remission or cessation
thereof in the relevant year.—CIT vs. Smt. Sita Devi Juneja 33 DTR 201(P&H)

Profits chargeable tax under s. 41(1)—Amount payable to creditor—Assessee having shown

the amount payable by it to another company as an existing liability in its books and not written
back the same, it cannot be said that the aforesaid liability has ceased to exist and, therefore, it
cannot be treated as income by invoking the provisions of s. 41(1).—CIT vs. GP International
Ltd. 33 DTR 163(P&H)

SECTION 40(a)(i)/(ia)

Rejection of books vis-à-vis amount paid without TDS—Once estimation of income is made,
further disallowance under s. 40(a)(ia) for non-deduction of TDS is not warranted—That apart, if
the assessee has paid the impugned amount and the amount is not payable at the end of the year
on the date of balance sheet, then the provisions of s. 40(a)(ia) are not applicable—Teja
Constructions vs. Asstt. CIT 129 TTJ 57 (Hyd. ‘A’)(UO)

Disallowance under s.40(a)(i) – Applicability of proviso to s.40(a)(i) vis-à-vis absence of claim

for deduction in earlier year – Where the tax deducted in respect of any payment has been paid in
a subsequent year, the payment has to be allowed as a deduction in that year by virtue of
proviso to s.40(a)(i) whether or not the same was claimed as deduction in the earlier year – ABN
AMRO BANK NV VS. JT.CIT 96 TTJ 1041 (CAL `E’) (TM).

Disallowance under s. 40(a)(ia) –Payment of hire charges for trucks—Revenue having no

brought any material on record to establish that the hiring of vehicles by the assessee transporter
from the truck owners and payments therefore where in consequence of any written or oral
agreement, provisions of s. 194C were not applicable to the payments of freight or hiring charges
made by the assessee to the trucks owners and the same could not be disallowed under s.
40(a)(ia).—Chandrakant Thackar Vs. Asstt. CIT 129 TTJ 1 (Ctk)(UO)

Disallowance under s. 40(a)(iii)—Overseas maintenance allowance—Overseas maintenance

allowance paid to employees, being reimbursement of expenses, did not call for disallowance
under s. 40(a)(iii) on account of failure to deduct tax.—CIT vs. Information Architects 40 DTR
85 (Bom)

Disallowance under s. 40(a)(i)—Payment to German parent company for the purchase of

asset.—Provisions of s. 40(a)(i) are not applicable for claim of deduction of depreciation under s.
32—Payment for purchase of capital asset (software) without deduction of tax will not be subject
to the provisions of s. 40(a)(i).—SMS Demag (P) Ltd. Vs. Dy. CIT 37 DTR 78(Del. ‘G’)

Reimbursement of expenses to clearing agent—Assessee was not obliged to deduct tax at source
from the payment made by it to the clearing agent towards customs duty and other expenses paid
by the latter while clearing the imported goods on behalf of the assessee as no element of income

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is embedded in reimbursement of expenses and therefore, impugned payments could not be
disallowed under s. 40(a)(ia).—Asstt. CIT vs. Grandprix Fab. (P) Ltd. 34 DTR 248(Del. ‘D’)

Disallowance under s. 40(a)(ia)—Payment to contractor for civil job vis-à-vis supply of

material—Assessee having made payments to the contractor for the civil work under a composite
contract for repairs and maintenance of building, it was required to deduct tax at source in
respect of the entire amount relating to the labour charges as well as material and, therefore,
payment made by assessee towards cost of material without deducting tax at source is to be
disallowed under s. 40(a)(ia).—Asstt. CIT vs. Grandprix Fab. (P) Ltd. 34 DTR 248(Del. ‘D’)

Disallowance under s. 40(a)(ia)—Payment of hire charges of trucks—In the absence of any

thing on record to suggest existence of any contract between the assessee and other transporters
whose vehicles were engaged by assessee for executing various contracts, there was no
contractor and sub-contractor relationship between the assessee and said other transporters and
therefore assessee was not liable to deduct tax under s. 194C from the payments made to other
transporters and therefore, same could not be disallowed under the provisions of s. 40(a)(ia).—
R.R. Caryying Corporation vs. Asstt. CIT 30 DTR 569(Ctk)

Disallowance under s. 40(a)(i)—Reimbursement of expenditure to parent non-resident

company—No income accrued or arose to the payee from the payments made by the assessee to
its non-resident parent company in respect of the expenditure incurred by the latter in connection
with the business activity carried on by assessee in India and thus provisions of s. 195 were not
applicable and assessee was not required to deduct tax at source and therefore, the payments
could not be disallowed by invoking the provisions of s. 40(a)(i)—Disallowance could not be
made also for the reason that the income of the assessee is to be computed as per the special
provisions of s. 42 which override the general provisions of computation of income.—Cairn
Energy India Pty. Ltd. vs. Asstt. CIT 30 DTR 258(Chennai ‘D’)

Payments for hiring trucks—Assessee utilizing trucks for own use—No agreement for carrying
out any work—Not amounting to a contract for carrying out any work under section 194C—Tax
need no be deducted on amount paid as hire charges—Income-tax Act, 1961, ss. 40(a)(ia),
194C—Deputy CIT vs. Satish Aggarwal And Co. 317 ITR 196(Amritsar)

Disallowance under s. 40(a)(ia)—Payments made to lorry owners for hiring lorries vis-à-vis
sub-contract—Assessee, a transport contractor, having itself executed the whole of the contract
for transportation of bitumen by hiring lorries from other lorry owners who simply placed the
vehicles at the disposal of the assessee without involving themselves in carrying out any part of
the work undertaken by the assessee, it cannot be said that the payments made for hiring of
vehicles fell in the category of payments towards sub-contracts and, therefore, assessee was not
liable to deduct tax at source as per the provisions of s. 194C(2) from the payments made to the
lorry owners and consequently, provisions of s. 194C(2) from the payments made to the lorry
owners and consequently, provisions of s. 40(a)(ia) were not applicable to such payments.—
Mythir Transport Corporation vs. Asstt. CIT 28 DTR 129(Visakha) 9th January, 2009

18
Disallowance under s. 40(a)(ia)—Payment of consultation fees and rent by hospital—Income
derived by assessee doctor from the running of a multi-facility hospital is to be treated as
business income and not professional income and since the total receipts of the assessee did not
exceed Rs.40 lacs in the relevant assessment year, he is not liable to get his accounts audited
under s. 44AB and, therefore, the provisions of s. 40(a)(ia) are not applicable to the consultation
fees paid to the visiting doctors and the rent paid for the hospital premises.—Dr. Deepak
Assudant vs. ITO 26 DTR 454(Del.’E’)

Business expenditure----Disallowance under s. 40(a)(ia)---Purchase of goods vis-à-vis

contract for works---Supply of outsourced manufactured goods by contract manufactures
constituted outright sale and not contract of work within the scope of s. 194C, hence assessee
was not liable to deduct tax at source from the purchase price of goods paid by assessee to
contract manufacturers, therefore, such payment could not be disallowed by invoking s.
40(a)(ia)---Tuareg Marketing (P) Ltd. vs. Asstt. CIT 21 DTR 178(Del.)

Section 43B/2(24)(x)/36(1)(va)

- Business expenditure---Disallowance under s. 43B---Contribution to provident fund----

Payment of PF contribution made by the assessee after the due date prescribed under the
Employees Provident Fund Act and The Rules made thereunder but before the due date
of filing of return could not be disallowed under s. 43B--- ---CIT vs. P.M. Electronics
Ltd. 15 DTR 258(Del)

Disallowance under s. 43B—Employees’ contribution towards PF and ESI—Deduction

of payment of employees’ contribution towards PF and ESI cannot be disallowed under s.
43B if the actual payment is made before the due date of filing of return though beyond
the due dated prescribed under the relevant Acts.—CIT vs. Aimil Ltd. & Ors. 321 ITR
508 (Del.)

Deduction only on actual payment—Contribution to provident fund—Existing provision

creating difficulties—Amendment to remove difficulty—Has retrospective effect—
Finance Act, 2003, making amendment but as if with effect from April 1, 2004—To be
read as having retrospective effect from April 1, 1988—Income-tax Act, 1961, s. 43B—
CIT vs. Alom Extrusions Ltd. 319 ITR 306(SC)

- Certain deduction to be only on actual payment – Assessment year 1999-2000 –

Assessee was following mercantile system of accounting – Assessee did not deposit part
of service tax collections with concerned authorities – Assessee neither claimed any
deduction in this regard nor did it debit said amount as an expenditure in profit and loss
account – Assessing Officer after disallowing said amount made addition to assessee’s
income – Whether in view of facts any question of disallowing deduction not claimed
would arise – Held, yes – CIT VS. IDEAL SHEET METAL STAMPINGS &
PRESSING PVT.LTD. 166 TAXMAN 48 (DEL).

19
- Disallowance under s. 43B—Service-tax billed but not received- Service-tax though
billed but not received not having become payable to the credit of the Central
Government by virtue of s. 68 of the Finance Act, 1994, r/w.r. 6 of the Service-tax Rules,
1994, same could not be disallowed under s. 43B-Further, assessee service provider is
merely acting as an agent of the Government and is not entitled to claim deduction on
account of service-tax and therefore no disallowance can be made on the analogy of
sales-tax, excise duty, ect. ----Asstt. CIT vs. Real Image Media Technologies (P) Ltd.
116 TTJ, 964(Chennai)

Section 269 SS and 269 T/271D/271E

Penalty under ss. 271D and 271E---Contravention of ss. 269SS and 269T-----Reasonable
cause----Family transaction between two independent assessees, based on an act of
casualness, specially in a case where the disclosure thereof is contained in the compilation of
accounts, and which has no tax effect, establishes “reasonable cause” under s. 273B for not
invoking the penal provisions of ss. 271D and 271E.---CIT vs. Sunil Kumar Goel 21 DTR
43(P&H)

--------Deposits and loans in cash in excess of prescribed limit---Finding that amounts were
mere book entries and transactions on behalf of family members---No violation of sections
269SS and 269T------Penalty could not be imposed---Income-tax Act, 1961, ss. 269SS,
269T,271D, 271E----CIT v. NATVARLAL PURSHOTTAMDAS PAREKH 303 ITR
5(Guj)

- Validity-Limitation-Penalty under s.271D was invalid as, it was not initiated during any
proceedings under the Act and was also initiated after a lapse of 7years.—SHARDA
EDUCATIONAL TRUST V/S ASSTT. CIT-VOL.99-TTJ-212(AGRA).

- Penalty Under s. 271 D – Leviability – Deposit treated as undisclosed income- Revenue

having taken the stand that the alleged deposit was undisclosed income of the assessee,it
could not resort to penalty proceedings under s. 271D - CIT VS. Standard BRANDS LTD.
204 CTR 48 (DEL).

- S.271D – Penalty – Deposit or loan in cash exceeding prescribed limit – Amount received by
private company from director – Not a deposit or loan – Penalty cannot be imposed – CIT
VS. IDHAYAM PUBLICATIONS LTD. 285 ITR 221 (MAD)

- Section 271D—Penalty—Acceptance of loans in cash exceeding specified limit—Finding

that transactions entered in books of account and amount involved was not very high—
Penalty cannot be imposed—CIT VS RATNA AGENCIES 284 ITR 609 (MAD)

Penalty under s. 271D and 271E—Contravention of ss. 269SS and 269T—Capital

contribution towards proposed partnership—Assessee having received amount in cash from one
P as his capital contribution towards the proposed partnership between them which is
corroborated by an MoU and confirmed by P in his statement recorded under s. 131 , and later
returned the amount by cheques when the said proposed partnership failed to materialize, it could

20
not be regarded as a loan or deposit within the meaning of ss. 269SS and 269T more so in view
of the fact that there was no provision for payment of any interest on the said amount and,
therefore penalty levied under ss. 271D and 271E was not sustainable.—Bhikabhai Dhanjibhai
Patel vs. Asstt. CIT 127 TTJ 479 (Ahd ‘A’)

Penalty under s. 271D—Contravention of s. 269SS—Acceptance of trade advances—Sec.

269SS is applicable only in case of loan or deposit and does not cover cash advance received
from the purpose of supply of goods—Assessee having received the amount of Rs.1 lakh in cash
from a party as an advance against sale of goods and later supplied goods to it against the said
advance, provisions of s. 269SS are not applicable and therefore, penalty under s. 271D is not
leviable.—CIT & Anr. Vs. Kailash Chandra Deepak Kumar 32 DTR 336(All)

Penalty under s. 271E—Contravention of s. 269T—Current account transactions vis-à-vis

reasonable cause—Receipts and payments on behalf of sister concern being in the nature of
current account, there was no violation of s. 269T attracting penalty under s. 271E—Further,
assessee’s bona fide belief that transactions with sister concern involving cash were not hit by s.
269T r/w. s. 273B—Canara Housing Development Co. Vs. Addl. CIT 30 DTR 232(Bang ‘B’)

Penalty—Acceptance and return of loans exceeding specified limit in cash—Penalty under

section 271D and 271E not mandatory—Cash transactions with sister concern—Finding that
there was not attempt to evade tax—Deletion of penalty—Valid—Income-tax Act, 1961, ss.
269SS, 271D, 271E, 273B—CIT v. Sunil Kumar Goel 315 ITR 163 (P&H)

Deposits and loans in cash in excess of prescribed limit---Finding that amounts were mere
book entries and transactions on behalf of family members---No violation of sections 269SS
and 269T------Penalty could not be imposed---Income-tax Act, 1961, ss. 269SS, 269T,271D,
271E----CIT v. NATVARLAL PURSHOTTAMDAS PAREKH 303 ITR 5(Guj)

SECTION 40A (3)

Disallowance—Payment otherwise than by crossed cheque or crossed demand draft of

sum exceeding prescribed limit—Payment by banker’s cheques, pay order and call
deposit receipts issued in favour of public sector undertaking—Instruments within
definition of bill of exchange—Payments found to be genuine—Payments could not be
disallowed—Negotiable Instruments Act, 1981, ss. 5, 6—Income-tax Rules 1962, r .
6DD(d)(iv)—Income-tax Act, 1961, s. 40A(3)—CIT vs. Vijay Kumar Goel 324 ITR 376
(Chhattisgarh)

- Disallowance under s. 40A(3)—Cash payment vis-à-vis genuineness of purchases—

When the Government has chosen to liberalise the operation of s. 40A(3) to augment
trade by providing exception under r. 6DD, the Department cannot insist the assessee to
get the suppliers confirm to the Department about the supplies made to the assessee and
the payments received by them—The assessee should be taken to have discharged burden
by furnishing the copies of purchase bills or vouchers issued containing the names and

21
 addresses of the suppliers with date, value, quantity etc, and where the purchases are not
found bogus, they cannot be disallowed.—CIT v. Interseas 40 DTR 143 (Ker.)

- Disallowance under s. 40A(3)—Burden of proof—Three parties having denied the

purchases ostensibly made by assessee from them, there is a clear presumption that such
purchases were made from other parties against cash payments—However onus is on the
Revenue to show cash payment exceeding Rs. 20,000/- and as there is nothing on record
to show, either directly or indirectly that the relevant payments were made in sums
exceeding Rs.20,000 each, s. 40A(3) could not be invoked.—Sai Construction vs. ITO
127 TTJ 15 (Ctk)(UO)

S. 40A(3) – Business expenditure – Disallowance – Payments in cash exceeding

prescribed limit – Exceptions provided in rule 6DD – List given in rule 6DD not
exhaustive – Rule 6DD must be interpreted liberally – Genuineness of transaction and
identity of receivers established – Payments could not be disallowed – CBDT Circular
No. 220, dated May 31, 1977 – SMT. HARSHILA CHORDIA V. ITO 298 ITR 349
(RAJ).

- Whether when income of assessee was computed nu applying gross profit rate, provisions
of section 40A(3) could not be invoked – Held, yes – CIT VS. SMT. SANTOSH JAIN
159 TAXMAN 392 (PUNJ. & HAR)

- Business expenditure – Disallowance under section 40A(3) – Direct payment into bank
account of payee – payment made by depositing cash directly into the bank account of
the payee is not in violation of provisions of section 40A(3) and, therefore, cannot be
disallowed – There was no violation of section 40A(3) also for the reason that the
payment was made for purchase of agricultural produce to the agent operating in the
market yard set up under the State RMC Act, and accordingly fell within the scope of
exclusionary cls.(f) and (1) of 6DD – SRI RENUKESWARA RICE MILLS VS. ITO
93 TTJ 912 (BANG `B’).

CONTINGENT LIABILITY

Business expenditure – Contingent or ascertained liability – Provision for future liability

under warranty – Warranty clause part of sale document – Committed liability – Can
be construed as arising in definite terms in accounting year – Though actual
quantification deferred to future date – Provision for future warranty expenses made
on basis of figures for past years – Allowable in year of sale – Income tax Act, 1961, s.37
– CIT VS. VINITEC CORPORATION PVT.LTD. 278 ITR 337 (DEL).

Business expenditure—Allowability---Increase in revenue liability on account of foreign

exchange rate fluctuation---Increase in revenue liability on account of foreign exchange rate
fluctuation is not notional or contingent, hence allowable as deduction.---CIT vs. Hughes
Escorts Communications Ltd. 14 DTR 346(Del)

22
Business expenditure – Allowability – Provision for warranty claims – Liability towards
future warranty claim based on past experience not an unascertained liability, deduction of
adhoc provision could not be disallowed –ROTORK CONTROLS INDIA LTD vs CIT
314 ITR 62 (SC)

SECTION 32

- Goodwill—Goodwill is not an intangible asset within the meaning of s. 32(1)(ii) hence

not entitled to depreciation.—Modular Infotech (P) Ltd. vs. Dy. CIT 40 DTR 172 (Pune
‘B’)

New industrial undertaking—Special deduction—Commencement of trial production

does not amount to commercial production—Period of exemption starts from year of
commencement of commercial production—Income-tax Act, 1961 ss. 80-IA, 80IB—CIT
v. Nestor Pharmaceuticals Ltd. 322 ITR 631 (Delhi)

- Tetra pack machine—Condition precedent—Tetra Pack machine neither sold, discarded

nor demolished but lying idle covered with a paper and kept locked in a room—To be
assumed as kept in readiness for use—Entitled to depreciation—CIT vs. Premier
Industries (India) Ltd. 323 ITR 672 (MP)

- Depreciation—Rate—Office equipments and electric installations—Transformer,

control panels, fax machine and CCTV systems which are being used in the business of
the assessee are to be treated a part and parcel of plant and machinery and not as office
furniture and therefore, same are entitled to depreciation @ 25 per cent.—CIT vs.
Subrata Dutta Choudhary 33 DTR 259 (P&H)

- User for business—Active or passive use—For claiming depreciation, it is sufficient if

the machinery is kept ready for use during the relevant pervious year, though not actually
used due to circumstances beyond the assessee’s control—Gas sweetening plant kept
ready for use, though could not be actually used due to lack of raw material, was eligible
for depreciation.—Asstt. CIT vs. Chennai Petroleum Corporation Ltd. 32 DTR
184(Chennai ‘A’)(TM)

- Non-furnishing of audit report—Non-furnishing of Form No. 3AA i.e. audit report along
with original return cannot be a ground for disallowing the claim of additional
depreciation under s. 32(1)(iia) made by assessee in the revised return.—CIT vs. Sharda
Motor Industrial Ltd. 30 DTR 260(Del.)

- Assessment year 2002-03 – Whether, goodwill does not all in category of intangible
assets as prescribed by section 32(1)(ii) and, therefore, acquisition cost of goodwill is not
entitled for depreciation – Held, yes – R.G. Keswani v. Asstt. CIT 116 ITD 133(Mum.)

- Rate---Computer peripherals----Peripherals such as printers, scanners, NT server. Etc.

form integral part of the computer and the same, therefore, are eligible for depreciation @

23
 60 per cent as applicable to a computer.----Expeditors International (India)(P) Ltd. vs.
Addl. CIT 13 DTR 435(Del)

- Depreciation----User for business---No business carried out in particular division---

Vehicles, furnitures, fixtures and building forming part of block of assets and used by
employees were eligible for depreciation, notwithstanding the fact that no business was
carried on in a particular division of assessee.----Goetze (India) Ltd. vs. Dy. CIT 14 DTR
195(Del)

- Depreciation – Additional depreciation - Computers – Computer installed by assessee

engineering company used for processing raw materials, data, wages and salary payment
and for monitoring the details of production was entitled to additional depreciation –
TRF LIMITED VS. CIT 213 CTR 557 (JHARKHAND).

- Depreciation – Allowability – Disallowance on land component of building – considering

the agreement as a whole assessee had purchased building and proportionate undivided
portion of land and A.O. was justified in the absence of valuation of land submitted by
assessee to take 1/3rd of total consideration as cost of land and disallowing depreciation
thereon – Issue whether assessee has used the land and building for less than 180 days
having not been raised before A.O. or CIT(A) could not be raised before the Tribunal –
DY. CIT VS. CAPITAL CARS PVT.LTD. 113 TAXMAN 1120 (DEL `D’).

- Proof of installation of machinery – Assessee having produced evidence of installation of

the new machinery and also carried out trial production of the machinery in the relevant
year, it has to be presumed that the machinery was utilized for the purpose of the business
and, therefore, depreciation is allowable – B.R. INDUSTRIES VS. ITO 114 TTJ 103
(JP `A’).

S. 32 – Depreciation – Land and building – Purchase of part of commercial complex –

Claim to depreciation on entire consideration – Agreement clearly providing for sale of
land and building – That consideration was calculated per square foot of constructed area
including common areas, service areas and facilities – Does not mean assessee acquired
no right in undivided proportionate share of land beneath building – Failing to produce
separate valuation for land and building – Disallowance of one-third consideration
estimated to be for land – Proper – DEPUTY CIT V. CAPITAL CARS P. LTD. 295 ITR
224 (DELHI).

- Depreciation – Use for business – Active or passive user – Where the machinery is kept
ready for use but could not be put to use for non-receipt of orders, the assessee would be
entitled to depreciation – CIT VS. NAHAR EXPORTS LTD. 213 CTR 20 (P&H)

- Higher depreciation—Colour Xerox machine run with help of computer—Printer and

scanner are integral part of computer system—Colour Xerox machine to be treated as
computer—Entitled to higher rate of depreciation—Income-tax Act, 19671, s.36(1)(xi),
Expln.(a)—ITO V/S SAMIRAN MAJUMDAR—280-ITR-74 (AT)(KOLKATA).

10

24
 SECTION 37

- Capital or revenue expenditure—Payment for using logo in trade fairs—NO

enduring benefit was received by the assessee by using the logo of its parent company
in trade fairs and, therefore, the payment made by the assessee fro using the logo is
allowable as revenue expenditure.---Dy. CIT vs. Messee Dusseldorf India (P) Ltd.
129 TTJ 81 (Del. ‘F’)(UO)

- —Overload charges for transportation of goods—Penalty paid by the assessee

transporter for carrying excess load under the Gold Card Scheme of the Government
of Gujarat was not for infringement of law but in the nature of compensation and an
expenditure incurred in the course of business of transportation of goods, hence same
is allowable as deduction.—Agrawal Roadlines (P) Ltd. 129 TTJ 49 (Ahd ‘C’)(UO)

- Penalty, fine etc.—Interest paid on late deposit of service-tax in Government

account—Interest paid for delayed payment of service-tax is compensatory and has
the same character as service-tax and, therefore, it is allowable as deduction.—Dy.
CIT vs. Messee Dusseldorf India (P) Ltd. 129 TTJ 81 (Del. ‘F’)(UO)

- Technical know-how fees—Assessee did not acquire an asset of a capital nature by

obtaining a non-exclusive licence for five years restricted to the territory of India to
manufacture and use tube-making machines as the proprietary rights in the patents
continued to vest in the licensor and, therefore the technical know-how fees paid by
the assessee under the terms of the agreement is allowable as revenue expenditure.—
CIT vs. Essel Propack Ltd. 40 DTR 26 (Bom.)

- Firm—Insurance premium of Keyman insurance policy to insure life of partner—

Effect of section 10(10D) and Circular No. 762 dated 18-02-1998—Finding that
insurance was for benefit of firm benefit of firm—Insurance premium deductible—
Income-tax Act, 1961 ss. 10(10D), 37—CIT vs. B.N. Exports 323 ITR 178 (Bom.)

- Commission paid to directors—Directors giving guarantee for loan taken by

company—Commission deductible—Royalty payment for use of trade mark—
Revenue expenditure—Income-tax Act, 1961, s. 37—CIT vs. Khemchand and
Motilal Jain Tobacco Products P. Ltd. 323 ITR 498 (MP)

- Capital or revenue expenditure—Expenditure on expansion of business vis-à-vis

new business—New project set up by the assessee company is a part of the existing
business as there is unity of control, common management ad funds as well as
interlacing of two businesses and, therefore, expenditure incurred on salaries, rent,
traveling, etc. in relation to the new project is allowable as revenue expenditure.—
CIT vs. Honda Siel Power Products Ltd. 36 DTR 456 (Del.)

11

25
- Capital or revenue expenditure—Expenditure on upgrading computers—Revenue
expenditure—Income-tax Act, 1961—CIT v. Sundaram Clayton Ltd. 321 ITR
69(Mad.)

- Expenditure on repairs—Expenses incurred on granite, tiles hardware, pipe

replacement of existing water pump, colour, aluminium sliding, carpentry work,
water-proofing and sun control films etc. on repairs of office and the consultancy
charges of the architect are allowable as revenue expenditure.—Power Build Ltd. vs.
Asstt. CIT 126 TTJ 551 (Ahd. ‘D’)

- Premium paid by firm in respect of Keyman insurance policies on the lives of

working partners—Premium paid by firm in respect of Keyman insurance policies on
the lives of working partners is allowable as business expenditure—Employer-
employee relationship is not essential for allowing deduction of premium paid on
Keyman insurance policy.—ITO vs. Modi Motors 126 TTJ 495 (Mumabi ‘B’)

- Business expenditure—Allowability—Donation made on appeal of the State

Government—Payment made by assessee on the direction of the State Government to
suppliers who supplied fodder to various cattle camps in the wake of severe drought
conditions, for maintaining smooth relations with the Government, satisfies the test of
commercial expediency and, therefore, it is allowable as deduction under s. 37(1)—
Surat Electricity Co. Ltd. vs. Asstt. CIT 35 DTR 272 (Ahd ‘D’)

- Penalty, fine, etc.—Payment for non-compliance of SEBI Regulations—Payment

made under SEBI Regulation Scheme, 2002 for failure to make disclosure as required
under SEBI (Substantial Acquisition of Share and Takeovers) Regulations, 1997
could not be treated as penalty as it is a payment for regularizing the default
committed under the provisions of the said Regulations and, therefore, such payment
cannot be disallowed by invoking Explanation to s. 37(1).—Kaira Can Co. Ltd. vs.
Dy. CIT 32 DTR 485(Mumbai ‘B’)

- Payment for consultation services—Payment for consultation services made by the

assessee being in connection with expansion of the existing project, same was
allowable as revenue expenditure.—Jyoti Ltd. Vs. CIT 224 CTR 399(Guj.)

- Advertisement expenditure—Assessee displaying neon sign and glow sign

boards—Not of enduring nature—To be treated as revenue expenditure—CIT v.
Liberty Group Marketing Division 315 ITR 125(P&H)

12

26
FROM:
CA RASHMI KHETRAPAL
NICASA CHAIRPERSON
1291-92, C BLOCK
SUSHANT LOK-1, GURGAON
carashmmi@gmail.com
9810101449

VERIFICATION OF VAT :
y 1. First of all, it must be necessary to understand relevant VAT Act
applicable in the state .
y 2. It should verify list of goods mentioned in the Registration
Certificate.
y 3. Examine Registration certificate for liability of assessee under State
VAT Act and CST Act.
y 4. Goods on which input credit is taken is covered under the definition
of Input under VAT Act.
y 5. VAT input is availed only if assessee has bill showing ownership in
property of goods. There is proper record of Purchase which specify
the name of dealer, TIN of dealer, rate of Vat, Taxable amount and Vat
input. Input credit can be availed only on Tax invoice and purchase
from registered dealer within the state.
6. Vat Output should be calculated on rate wise. Vat should be
calculated inclusive of Excise Duty and exclusive of trade discount
normally in practice of business.
7. Net vat amount should be examined and it vat output over vat input.
Treasury challan should be verified for payment VAT.
8. There is proper record for Central Sales Tax. There is different
treasury challan for Vat payment and CST payment.
9. Sales and purchases records need to be reconciled with books of
accounts and VAT Returns.
10. There is proper record for C-Form, E-Form, F-Form, H-Form, I-Form
issued under CST Act and Local Form issued under VAT Act.
11. Periodic returns to be verified with books of accounts and annual
return submitted under VAT Act.

27
 12. Generally assessee covered under Work Contract Scheme then
input is not allowed to assessee because assessee has the benefit of lower
tax payment under WCT Scheme. Therefore it is important to examine
that work contractor has not taken input credit.
13. Some VAT Act has provision of entry tax (eg. Karnataka and
Tamilnadu etc.) on central purchase from outside the state and
this entry tax is allowed as input credit and adjusted against vat payable.
Therefore in such case treasury challan for entry tax payment need to be
verified.
14. Each state VAT act has its own interest and penalty provisions for
late deposit of taxes and returns but it is important that assessee should
comply all statutory provisions within time limit prescribed under VAT
Act
y This clause requires the auditor to report upon the regularity of the
company in depositing undisputed statutory dues.
y The intention of the Government, in this clause is to ascertain how
regular the company is in depositing statutory dues with the
appropriate authorities.
y Since the emphasis of the clause is one the regularity, the scope of
auditor’s inquiry is restricted to only those statutory dues which the
company is required to deposit regularly to an authority.
y For the purpose of this clause, the auditor should consider a matter as
“disputed” where there is positive evidence or action on the part of the
company to show that it has not accepted the demand for payment of
tax or duty, e.g., where it has gone into appeal.
y It may be noted that penalty and/or interest levied under respective
laws would be covered within the term “amounts payable”.
28
REPORTING UNDER COMPANIES
(AUDITOR’S REPORT) ORDER, 2003
AS PER PARA 4 (ix) (a)
y Is the company regular in depositing undisputed
statutory dues including Provident fund, Investor
Education and Protection Fund, Employees’ State
Insurance, Income-Tax, Sales Tax, VAT, Service Tax,
Wealth Tax, Custom Duty, Excise Duty, Cess and any
other statutory dues with appropriate authorities and
if not, the extent of the arrears of outstanding
statutory dues as at the last day of the financial year
concerned for a period of more than six months from
the date they became payable, shall be indicated by
the auditor :
VERIFICATION OF TDS :
1. If TDS is not deducted by client then it is necessary to check first that
payment to a person is within threshold limit prescribed under relevant
section.
2. It should be examine that rate used for deduction of TDS is as per
relevant section and covered under the definition of relevant section.
3. TDS should be deducted against a valid PAN and TDS is credited to Valid
PAN.
4. TDS should be deducted as per latest amendments, rules, notification
and circulars.
5. If TDS is not deducted or short deposited then it must be reported in
Audit Report by Auditor as per CARO, 2003. But before reporting it is
necessary to check that client has valid certificate of non-deduction or short
deduction of TDS under section 197 of Income Tax Act.
 6. All foreign remittances are made under CA Certificate in
Some Specific points needs to given due
prescribed form 15CB. Relevant provisions of DTAA is given due consideration :
consideration in case of Foreign Remittances.
1. TDS deducted in time, but not deposited on time – Interest
for late deposit of TDS will be Applicable.
7. Client should furnish the return of TDS within due date
prescribed under Income Tax Act otherwise penalty will be levied @
2. TDS not deducted, but deposited – TDS become expenditure
Rs.100 per day from next to due date till the date of return filed.
under Companies Act, but it is disallowed under Income Tax Act.

8. There is penalty of Rs.10000 if wrong TAN mentioned in TDS

3. TDS not deducted and not deposited – Expenditure on
return.
which TDS not deducted is totally disallowed.

4. TDS short deducted – Expenditure proportionately

disallowed to the extent of short deduction of TDS.

Disqualifications of an employee to claim bonus(sec.9).

Every employee of an establishment covered under the Act is entitled to
bonus from his employer if he has worked in that establishment for not less
than thirty working days in the year on a salary less than Rs. 10,000 per
month.
An employee who has been dismissed from service for :

If an employee is prevented from working and subsequently reinstated in 1) Fraud

service, employee’s statutory liability for bonus arises.
2) Riotous or violent behavior.
3) Theft, misappropriation or sabotage of any property.

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 An employee in the following cases is entitled to bonus:
(i) Temporary workman
(ii) Part time employee as a sweeper engaged on a regular basis
Bonus which shall be
(iii) Retrenched employee
⇒ 8.33% of the salary or wage or
(iv) Probationer
⇒Rs. 100, whichever is higher.
(v) Dismissed employee reinstated with back wages
(vi) Piece-rated worker
PAYMENT OF MAXIMUM BONUS (SEC.11)
Maximum 20% of such salary or wages.
An employee in the following cases is not entitled to bonus:
1. An apprentice is not entitled to bonus.
2. An employee employed through contractors on building operation

THE EMPLOYEES’ PROVIDENT

FUNDS AND
Bonus expenses will be allowed only on cash basis. However if it is paid till the MISCELLANEOUS PROVISIONS ACT,
due date of filling of return i.e. 31st July or 30th September it will be allowed as
expenses. 1952
If it is not paid till the due date of filling of return, and paid after that, then this
bonus will be allowed in the financial year in which it is actually paid.

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y SCOPE:
y It extends to the whole of India except the State of Jammu &
Kashmir. RATE OF CONTRIBUTION
y APPLICABILITY: SCHEME EMPLOYEE’S EMPLOYER’S CENTRAL
GOVT.
PROVIDENT 12% AMOUNT>8.33% (IN NIL
y Establishment which is factory engaged in any industry FUND SCHEME CASE WHERE
specified in Schedule 1 and in which 20 or more persons are CONTRIBUTION IS 12%
employed. OF 10%)
INSURANCE NIL 0.5% NIL
y Any other establishment employing 20 or more persons SCHEME
which Central Government may, by notification, specify in
this behalf. PENSION NIL 8.33% (DIVERTED OUT 1.16%
SCHEME OF PROVIDENT FUND)

y Any establishment employing even less than 20 persons can

be covered voluntarily under section 1(4) of the Act.

DUE DATES REPORTING

y Last date for deposit PF challan is 15th of every month y Reporting is to be made by the auditor under CARO,
but grace period is 5. 2003 of:
y Non payment of undisputed PF and ESI dues, only if more than 6
months old
y Last date for deposit monthly PF return (Form 12-A)
is 25th of every month. y Reporting under Tax Audit Report:
y Statutory Auditor needs to disclose amount in Form
y Last date for deposit PF yearly return is 25th April of 3CD in point 16 (b).
every year.

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THE EMPLOYEES' STATE y Applicability of the Act & Scheme:
y Is extended in area-wise to factories using power and

INSURANCE ACT, 1948 employing 10 or more persons and to non-power using

y It provides to workers not only accident benefit but
also other benefits such as sickness benefit, maternity
benefit and medical benefit.
manufacturing units and establishments employing 20
or more person upto Rs.15,000/- per month with effect
from 01-May-2010. It has also been extend-ed upon
shops, hotels, restaurants, roads motor transport
undertakings, equipment maintenance staff in the
hospitals.

WAGES FOR ESI CONTRIBUTIONS

Registers / Files to be maintained
To be deemed as wages Not tobybe
thedeemed
employersas Wages

Basic pay Contribution paid by the employer to any

Dearness Allowance
y Coverage of Employees: House Rent Allowance
y Drawing wages upto Rs. 15000.00 per month engaged City Compensatory Allowance
Overtime Wages (but not to be taken into
either directly or through contractor. account for determining the coverage of
employee)
Payment for day of rest
Production Incentive
y Rate of contribution of the wages Bonus other than statutory bonus
Night shift Allowance
y Employer's 4.75%
Heat, Gas & Dust Allowance
y Employee's 1.75% Payment for unsubstituted holidays
y Meal / Food Allowance
Suspension Allowance
Lay off Allowance
Children Education Allowance
pension / provident of under ESI Act.
Sum paid to defray special expenses entailed
by the nature of employment – Daily
allowance paid for the period spent on tour.
Gratuity payable on discharge
Pay in lieu of notice of retrenchment
compensation
Benefits paid under the ESI Scheme
Encashment of leave
Payment of Inam which does not form part
of the term of employment
Washing Allowances for livery
Conveyance amount towards
reimbursement for duty related journey

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DUE DATES
FOR DEPOSIT :
Due date is 21st of each month for cheque deposit.
48 hrs grace time for collection.
FOR RETURN:
ESIC Half Yearly Return due date : Within 42 days
from the end of the half year. i.e. 12th November for
April to September and 12th May for October to
March.
FACTORIES ACT 1948
It applies to EVERY industries in which ten or more than
ten workers are employed on any day of the preceding
twelve months and are engaged in manufacturing process
being carried out with the aid of power or twenty or more
than twenty workers are employed in manufacturing
process being carried out without the aid of power, are
covered under the provisions of this Act.
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REPORTING
y Reporting is to be made by the auditor under CARO,
2003 of:
y Non payment of undisputed PF and ESI dues, only if more than 6
months old
y Reporting under Tax Audit Report:
y Statutory Auditor needs to disclose amount in Form
3CD in point 16 (b).
General penalty for offences.-
in respect of any factory there is any contravention of any of the
provisions of this Act or of any rules made there under or of any order in
writing given there under, the occupier and manager of the factory shall
each be guilty of an offence and punishable with imprisonment for a term
which may extend to two years or with fine which may extend to one lakh
rupees or with both, and if the contravention is continued after conviction,
with a further fine which may extend to one thousand rupees for each day
on which the contravention is so continued Provided that where
contravention of any of the provisions of Chapter IV or any rule made
there under or under section 87 has resulted in an accident causing death
or serious bodily injury, the fine shall not be less than 25 thousand rupees
in the case of an accident causing death, and 5 thousand rupees in the
case of an accident causing serious bodily injury.
 LABOUR WELFARE FUND
Shop & commercial Establishment Act 1961
Applicability:
Applicability & Coverage:
Every employee, including employee through
It applies to all contractor, but not a managerial capacity or
supervisor capacity.

Employee means a person wholly or principally employed whether directly Payable:

or through any agency, whether for wages or other considerations in
For the month of June and December, every year
connection with any establishment.

Rates:
Every employee contributes Re 1/- per month and employer
makes a contribution of Rs 2/- per month

GRATUITY ACT, 1972

Documents required for LWF inspection:

EXTENT & APPLICABILITY:

a. Paid Challans
b. LWF Statement in respect of paid challans It extends to the whole of India except Jammu & Kashmir.

The Act applies to:

♦ every factory, mine, oilfield, plantation, port and railway
company.
♦ every shop or establishment, in which 10 or more
persons are employed, or were employed, on any day of
the preceding twelve months

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WAGES: Means all emoluments which are earned by an
employee while on duty or on leave in accordance with the
terms and conditions of his employments and which are paid
CALCULATION OF GRATUITY AMOUNT: (SEC. 4(2))
or are payable to him in cash and includes D.A.
but does not include any bonus, commission, HRA, overtime
wages and any other allowances.
As prescribed under Accounting Standard 15 ,”
EMPLOYEE: means any person (other than an apprentice)
PAYMENT OF GRATUITY”
employed on wages, in any establishment, factory, mine,
oilfield, plantation, port railway company or shop to do any
skilled, semi-skilled or u skilled, manual, supervisory,
technical or clerical work.
but does not include any such person who holds a post
under the Central Government or a State Government and is
governed by any other Act or by any rules providing for
payment of gratuity

INCOME TAX COMPLIANCE(SEC.43B)

Gratuity expenses will be allowed only on cash basis. However if it is paid till
the due date of filling of return i.e. 31st July or 30th September it will be
allowed as expenses.

If it is not paid till the due date of filling of return, and paid after that, then
this Gratuity will be allowed in the financial year in which it is actually paid.

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WHAT IS THE CEILING?
y In case the auditor is an individual – the ceiling is MEANING OF ‘SPECIFIED NUMBER’
‘specified number’
y ‘Specified number’ means –
y In case of a firm of auditors – the ceiling is ‘specified
number’ for every partner of the firm. y Not more than 20 companies (public)

y Where any partner of the firm is also a partner of any

other firm of auditors – the ceiling is ‘specified number’ for y Of which not more than 10 should be companies having
such person in all the firms taken together. a paid up capital of Rs. 25 lakhs or more.

y Where any partner of a firm of auditors is also practicing

in his individual capacity – the ceiling is ‘specified number’
for such person in the partnership firm and in his
individual capacity taken together.

AUDITS EXCLUDED:
y Following audits shall not be included while AUDITS INCLUDED:
computing ‘specified number’: y Following audits shall be included while computing
y Audit of a private company ‘specified number’:
y An audit of a guarantee company having no share
capital y A joint audit
y An audit of a foreign company
y Audit of cooperative societies, trusts and corporations
y An audit of a company licensed u/s 25
y An internal audit
y Tax audits under Income tax act, 1961
y A branch audit
y Special audit and investigations

MAXIMUM NUMBER OF AUDITS

y An auditor can accept a maximum of 30 audits
including the audits of private companies
(notification issued by ICAI).

y Non-observance of this ceiling would amount to

professional misconduct.

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