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Tax Audit Query

CA Alok Modak (CA in Practice) (595 Points)

12 February 2010

Could someone tell me if Tax Audit is necessary if

The Assessee is a partnership firm in construction business.

It has been formed 2 years before and has no receipts form any source whatsoever.(no building is complete)

however it has a work-in-progress (plot of land, etc) worth 3 crores( > 40 lacs) at he end on second year.

Thanks in advance

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9 Replies

Amir (Learner) (4016 Points)
Replied 12 February 2010

Dear KZN,

Recognition of revenue as per AS-7 on Construction Contracts is acceptable in Income Tax also...

Therefore if as per AS-7, the receipts of a firm are less then 40 Lacs, then Tax Audit is not required...

Since u have mentioned that Firm has not recognized any revenue, I hope the same has been done as per AS-7, then Tax Audit is not at all required..

CA Pranjal Joshi (CA) (331 Points)
Replied 12 February 2010

Hi,

Yes, I perfectly agree with what Amir Sir said.

Mere booking of the expenditure to the debit side of P&L and carrying it forward as WIP will not require any tax audit irrepective of the amoun of WIP, as 44AB is applicable for Gross Turnover or receipts over Rs. 40 Lacs

Generally, such method is adopted when the project is covered by 80 IB as disclosing the profits in one year lump sum and claiming it exempt becomes easier, however in other cases it may be advisable to book reasonable profits each year as burden of profit will not be there in one year.

Further,it may be interesting to note that sometimes amount from flatowners is booked as Advance in the Balance sheet as and when recd & transfered to P&L A./c in the year in which project is complete. Now the question is whether tax audit should be made in the year when such advance recd is over 40 lacs as project is ongoing and some exp may result in disallowance through Tax Audit Report or tax audit should be done in the year when it is actually booked as sale (but in such case very purpose of tax audit gets lost, as expenses have been incurred in the past & now represented merely by Op WIP)

I am raising these issues merely because different tribunals are taking different view & hence penalty provisions are getting attracted.

So in my opinion, as a matter of abundant caution tax audit should be done in both the years -

year when advances exceed Rs 40 Lacs & year when advnace is trans as Sale

Chintan Shah (-) (534 Points)
Replied 13 February 2010

Dear Amir sir and pranjal sir, I wanna ask whether AS 7 is applicable to construction business? The title states AS 7 Construction contracts. Hence it does not apply to construction business as such. It applies only to accounting for construction contracts. The accounting of revenue in respect of a firm carrying on construction business would be done as per AS 9 Revenue Recognition which states that when the risks and rewards from the assets is transferred to the buyer by the seller. Hence revenue in case of a firm carrying on construction business will be recognised when the compeleted property is ultimately sold to the buyer. Please tell me if this is correct or not??

Chintan Shah (-) (534 Points)
Replied 13 February 2010

Hi KZN Please refer the GN on Real estate developers which is applicable in case of builders or persons carrying construction business. If the accounting is done as per that and than also turnover does not exceed Rs. 40 Lacs, Tax audit wont be applicable.. following is the link for GN i am talking about...

https://www.icai.org/resource_file/100751764-1774.pdf

sahana Murthy (Student) (123 Points)
Replied 13 February 2010

Hello,

The presice words are "Gross receipts", hence how you account does not come into picture. Once the gross receipts exceeds Rs 40 lakhs the assesee is liable to tax audit. IT Act does not recognise AS. It has its own set of AS.

Where construction projects are corncerned, if the assesee is in a position to segregate receipts for purchase of materials and labour, then receipts of materials can be excluded for this purpose.

Regards

Sahana Murthy.

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Friends,

Please Go through this judjement - AS-7 is very well accepted under Income Tax Act...

https://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2008ITAct/%5B2008%5D167TAXMAN0256(GAU).HTM

Chintan Shah (-) (534 Points)
Replied 13 February 2010

Amir sir,

The judgement states as below:

The assessee-company was engaged in the business of execution of works contract. Hence if assessee is engaged in construction business on independent basis AS 7 won't apply... please do reply to my doubt.......

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Chintanshah,

Brother don't get confused in two terms "Construction Contracts" & "Works Contracts"...

AS-7 defines the manner of recognition of revenue & costs in case of construction contracts... The judgement taks about acceptability of AS-7 under Income Tax..

I know the term used in the judgement is "works contract" - it simply means where transfer of property is involved in execution of the contract..

Now construction contracts are in the nature of works contracts only...

Ajit Kumar Chhatoi (Prop) (21 Points)
Replied 23 March 2010

Dear Sir(s),

Pl. note for the query that, there are "NO RECEIPTS FROM ANY SOURCE WHATSOEVER". If this will be taken into consideration, then no need to go for 44AB / Tax Audit.

However, it is also to be noted that wherefrom 3 crores come, whether capital introduction or loan or simple creditors.

It is also to be kept in mind that, we almost all may go for 44AB in the subsequent year where the Gross Rcpt or turnover will exeed the prescribed limit and on that year the amount spent over the previous 2 years carried over as WIP will also required to be audited, as part of the total expenditure against the turnover.