Income Tax Audit Handling 2
The following guidelines will help corporate taxpayers properly participate in the income tax return audit process and prepare the necessary documents and evidence. These guidelines are prepared in accordance with the provisions of the Income Tax Act, 2023 and are designed to ensure transparency and accuracy in the audit process. Please follow the points below carefully.
7.7. Verification of Claimed Expenses in Statement of Income and Expense
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Proof of Expenses:
Ensure that all expenses claimed in the Statement of Income and Expense are supported by bills, vouchers, and other evidence. All expenses should be paid through banking channels. Submit bills/vouchers covering at least three months, including the closing month of the income year, at the time of audit.
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Withholding Tax:
For expenses subject to withholding tax, ensure that tax has been deducted at the prescribed rate and deposited into the government treasury. As per section 177 of the Income Tax Act, keep reconciliation proof (TDS certificates, challans) ready for the audit.
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Unsupported Expenses:
For example, if Tk. 9,000,000 is claimed for repairs but only Tk. 7,000,000 is supported by bills/vouchers, the difference (Tk. 2,000,000) will be disallowed and added to business income. Keep all bills/vouchers and bank statements ready for audit.
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Expenses without Withholding Tax:
If withholding tax is not deducted on supported expenses (e.g., Tk. 7,000,000), the amount will be added as special income. Submit TDS certificates and payment details during the audit.
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Conditions under Section 54:
Claim expenses in accordance with the conditions of deduction allowed under Section 54 of the Income Tax Act. Keep supporting documents ready for audit.
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Application of Section 55:
Properly disclose expenses and benefits as per Section 55 and submit evidence at the time of audit.
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Special Business Income under Section 56:
Prepare details of special business income and tax calculations under Section 56 for audit.
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Excess Expenditure Found in On-Site Investigation:
If actual expenditure is found to be higher than claimed during an on-site investigation, provide explanations and supporting documents during the audit.
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Verification of Depreciation:
Avoid claiming depreciation on revalued assets. Keep supporting documents (bills, vouchers, bank statements) for depreciation claims ready for audit.
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Additions to Fixed Assets:
Ensure that claimed amounts for additions to fixed assets are supported by bills/vouchers and bank accounts, and that the assets were used in production/business during the year. Submit purchase deeds and usage evidence during the audit.
7.8. Analysis of Statement of Financial Position / Balance Sheet
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Analysis of Assets and Liabilities:
Properly present assets & properties and capital & liabilities in the Balance Sheet. Keep supporting documents (deeds, bank statements) ready for audit.
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Consistency with Previous Year:
Ensure that figures reported in the current year’s Balance Sheet are consistent with those of the previous year. Submit previous year’s Balance Sheet and financial statements during the audit.
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Additions to Fixed Assets:
Provide proof of payment through bills, vouchers, and bank accounts, as well as proof of withholding tax deduction (TDS certificates) for additions to fixed assets.
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Non-Business Investments:
If business loans are used for non-business investments, submit agreements, investment details, and evidence during the audit.
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Shareholders’ Investments:
Ensure that shareholders’ investments are made through banking channels. Submit investment documents and bank statements during the audit.
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Current/Short Term Liabilities:
Ensure the authenticity of liabilities such as Accounts Payable, Salary Payable, Trade Payable, Tax Payable, Notes Payable, Short Term Loan and Borrowings, Accrued Expenses, Dividend Payable, Unearned Revenue, etc. Avoid showing fictitious or false liabilities. Submit supporting documents (agreements, bills, vouchers) during the audit.
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Long Term Liabilities:
Submit proof (agreements, bank statements) for liabilities such as Long Term Loans, Bond Payable, Deferred Revenue, Pension Liabilities, Lease Liabilities, etc.
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Back-to-Back L/C and Cash Credit:
Ensure that assets like Inventories, Material in Transit, Receivables, etc. are correctly shown as contra against Back-to-Back L/C and Cash Credit (Hypothecation) loans. Keep asset details and supporting documents ready for audit.
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Retained Earnings:
Ensure that Retained Earnings are correctly reported and are consistent with income and tax payments of the year. Submit previous year’s financial statements and tax payment proofs during the audit.
8. Audit Case Settlement
8.1. General Compliance
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Avoid Assumptions:
Avoid the assumption that “being selected for audit automatically means extra tax liability.” Cooperate in the audit process by providing accurate documents and information.
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Responding to Notices:
As per Section 183(3)(a), appear in person or through a representative on the date and time mentioned in the Deputy Commissioner’s notice. Submit the requested documents and information at the time of audit.
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Submission of Evidence:
As per Section 183(3)(b), submit proper evidence (bills, vouchers, bank statements, TDS certificates) in support of income reported in the return.
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Opportunity for Hearing:
As per Section 183(5), follow the matters specified in the notice for hearing during audit and submit necessary witness evidence. Be aware of the consequences of failing to attend the hearing.
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Disallowance of Expenses:
As per Section 183(6), no expense will be disallowed without giving an opportunity of hearing. Present all evidence during the hearing. Be informed of the legal and factual basis of disallowed expenses in the audit report.
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Legal Consideration:
While issuing tax assessment orders, consider the likelihood of orders being upheld at Appeal, Tribunal, High Court, and Supreme Court. Prepare documents in line with correct legal provisions and reasoning.
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Reasonable Estimation:
When making sales estimates or disallowances, consider the financial capacity to pay tax. Keep evidence of estimates (previous records, industry data) ready for audit.
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Timely Settlement:
As per Section 197(1)(b), submit necessary documents and information as early as possible without waiting for the expiry date of limitation to settle the audit case.
8.2. Preparation of Tax Assessment Order
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Audit Selection Details:
In the tax assessment order (IT-88), mention the NBR’s audit selection approval number and date. Keep this information ready with the audit notice.
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DVS Verification:
Mention the DVC number obtained from ICAB’s Document Verification System (DVS) in the audit report. Submit proof of DVS verification during the audit.
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Reasons for Audit Selection:
Clearly state the grounds for audit selection in the tax assessment order. Prepare supporting documents for these reasons.
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Details of Hearing:
Submit evidence of providing sufficient opportunity for hearing, requisition of information, and communication of audit reports during the audit.
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Legal Procedure:
Clearly mention statutory procedures, legal grounds for acceptance/rejection of claims, and basis of applying Section 75 in the tax assessment order. Prepare supporting documents for this.
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Area-Wise Discussion:
Discuss each area of audit (such as purchase, sales, expenses, assets) separately and provide legal decisions with evidence during the audit.
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Mention of Sections:
Mention the relevant sections in the introduction, body, and conclusion of the tax assessment order. Keep details of the sections ready for audit.
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Income by Category:
Submit breakdown of income by category and total income details in the tax assessment order during audit.
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Minimum Tax and Surcharge:
Prepare details of minimum tax applicable income and surcharge for audit.
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Turnover Tax:
Prepare details of turnover tax, normal tax, and minimum tax computation for audit.
8.3. Collection from Raised Demand and Continuity
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Collection of Demand:
Prepare necessary documents (challans, bank statements) for collection of demand raised as a result of audit and cooperate in demand collection.
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Audit Register:
Submit necessary documents for recording audit case settlement (including demand raised) in the audit register during audit.
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Updated Information:
Keep evidence ready to update the audit register after full/partial collection of demand.
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Appeal/Tribunal:
If cases are pending at Appeal, Tribunal, or higher courts, prepare revised assessment order documents after receiving the judgment and submit them for audit. Cooperate in providing information for appeal and tribunal registers.