CBR issues new guidelines for processing SAS 'total audit' cases

ISLAMABAD (February 06 2003) : The Central Board of Revenue (CBR) has issued new instructions to all Regional Commissioners of Income Tax (RCITs) for processing of cases selected for 'total audit' under Self-Assessment Scheme (SAS).

Sources told Business Recorder on Wednesday that new parameters have been added to the existing audit procedure for prompt disposal of total audit cases.

The new procedure would be applicable in addition to the already applicable methodology laid down for the assessing officials.

Under the new guidelines, the sales shown to the Sales Tax Department must be compared with those declared in the income tax returns.

If the sale declared in the income tax return is less, then this discrepancy must be confronted to the taxpayer for reconciliation and, in case of non-compliance, adverse inference be drawn.

Sources said that the above-mentioned provision would apply to selected cases which are also registered with the sales tax department.

It is understood that sales shown to income tax department should match with the sales declared to the sales tax authorities.

The turnover of any person could not show huge variation and department has the authority to question reason for this disparity.

The CBR has asked the RCITs that information obtained through survey be placed on relevant files.

In the absence of such information, taxpayer be provided a copy of survey form for filling-in the required data.

In case of non-compliance, the department should issue statutory notice to the taxpayers for obtaining such information.

The CBR has also revised specific audit checklist meant for cases selected through random ballot for total audit under SAS.

In case a taxpayer reconciles his personal expenditure with reference to his living in a joint family, it must be ensured that all family members exist on the National Tax Roll, and expenses declared on their behalf are duly covered by the income declared in their tax returns.

The sources of expenses incurred by family members, not existing on Tax Roll, must be closely scrutinised.

In case expenses incurred on utility bills are jointly paid by the family members, it must be ensured that the residential address declared by the members is the same as is appearing on the utility bills.

In case of any mismatch, adverse inference may be drawn after confronting the taxpayer.

As per existing rules, the following are the general audit instructions for assessing officials for SAS audit. These instructions are already applicable all over the RCITs:

Where an assessee is Sales Tax Registered/enrolled/enlisted, obtain Sales Tax Registration Number and information as per sales tax record available with the PRAL/local Sales Tax Collectorate.

Invariably, wealth statement and its reconciliation be obtained and examined.

The assessing officials would obtain information from the assessee including name of the spouse, number of children and dependants-gender/age, complete residential address, residential property self-owned or rented, if self-owned, the amount of property tax paid and incurred on repair of the said property; if on rent, annual rent paid and evidence thereof, living independently or with joint family, number of servants (driver, security guards/chowkidars, cook), details of motor vehicles/scooter/motorcycle maintained along with their make, model, registration number (if self -owned, copy of registration; if on lease, evidence thereof), amount of utility bills paid ie electricity, gas, telephone/mobile phone, water etc, credit card numbers and their statements, number of passports of self and dependants along with details of foreign travel expenses, detail of children education along with names of institution and fees paid for the year, extraordinary expenses like medical/marriage etc and income tax paid during the year.

Similarly, the estimate of personal expenditure would be made through the following data;

Amount of expenses incurred on children/dependants education, amount of property tax paid and the amount of expenses incurred on repair of the self-owned property, amount of rent paid if not living in self-owned property, total amount of salaries paid to the servants, amount of expenses incurred on the day to day running and maintenance of motor vehicles/scooter/ motorcycle, amount of registration fee and lease rentals paid for the motor vehicles/scooter/motorcycles, head-wise amount of utility bills, amount of interest paid on credit card transactions, amount of air tickets purchased for foreign travels of self and dependants, amount of other expenses like boarding/lodging on foreign tour, amount of extraordinary expenses (medical/marriage), minimum yearly amount of living expenses; if living independently @ of Rs 4000 per month, minimum yearly amount of living expenses, if living in a joint family @ Rs 3000 per month, and amount of income tax paid during the year.

The above-mentioned expenses and accretion in wealth are to be compared with the amount of income (taxable/exempt) declared.

In case the above expenses/accretion are in excess of the amount of income declared, the assessee is to be confronted for his explanation and necessary addition made accordingly.

The CBR has not changed the checklist in cases of manufacturers. The checklist includes location of factories/warehouses with covered area of the buildings/sheds, number of workers employed in the factories and the amount of old age benefits/social security paid during the year, details of machinery with production capacity and manufacturers certified consumption of energy for per unit production, qualitative and quantitative details of opening and closing stocks, unit-wise details of energy/electricity, gas, furnace oil) consumption, computation of production on the basis of energy consumption, estimate of sales and computation of gross profit on the basis of gross profit rate usually applied in this specific industry.

After computation of the gross profit, add backs are to be made out of the profit and loss account expenses on the basis of unverifiability and excessive claim vis-a-vis comparative business activity.

The following is the checklist in case of professional ie doctors, accountants, lawyers and engineer: Information about the market reputation of the professional and the usual amount of fee charged by him, consider paying a visit to the professionals office. If possible and evaluate the decore, compare the fees declared in the return of income vis-a-vis office decore and estimate of the professionals' annual fee.

If the declared fee is less than estimate, confront the assessee for his explanation and estimate the fees accordingly.

Furthermore, necessary add backs are to be made out of expenses claimed in the income and expenditure statement on the basis of unverifiability and excessive claimed vis-a-vis business activity.

The RCITs are already engaged in the processing of total audit cases under the following mechanism.

The assessee may be intimated about the selection of case for total audit. Notice u/s 61 may be issued along with the requirements, as indicated in the relevant checklist, and allow at least 15 days for compliance.

In case of non-compliance or request for further extension, seven days' time period may be allowed further.

In case of further non-compliance or request for further extension, allow yet another seven days, with specific notice that no further adjournment will be allowed.

The case be examined in the manner as indicated in the relevant checklist in case of compliance.

In case of non-compliance, proceed with ex parte assessment on the basis of information available as per survey/sales tax data sales may be estimated keeping in view the past history and the appropriate competitors of the assessee and GP rate may be applied on the basis of history and parallel cases.

It may be noted that the sources of information may be elaborated and opportunities allowed to the taxpayer be mentioned in the ex parte order.

In general, the assessing officers must perform audit in a judicious and transparent manner.

Courtesy, politeness and promptness must be exercised while dealing with assessees under audit.

The expenses claimed by the assessees may be generally looked into but detailed work must be performed only when the claims of expenses are totally out of line viz-a-viz business activity, history of the case and parallel cases.

In case where a large disparity/under-reporting is unearthed, the assessing officer must try to arrive at an agreed assessment.

Addition in case of agreed assessment, as a general guideline, should not be less than 80 percent of the above-mentioned under-reporting.

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