Auditors Role - The Companies Act, 2013

 Auditors Role

 

Introduction

        There has been a lot of changes as far as provisions relating to auditors are concerned, in the new Companies Act, 2013. Additional duties have been entrusted with the auditors and more procedural steps introduced. More stringent penal provisions has also been introduced to ensure the quality of professional services.  Here I have tried to bring together all those important points that highlights the auditors role according to The Companies Act, 2013

Appointment

1.     Appointment of first auditor shall be made by the board within 30 days of registration of the Company. If board fails to do so then the members shall appoint the first auditor at an EGM within 90 days from when they are informed.

2.     In case of govt. company or company owned and controlled by govt., CAG shall make the appointment within 60 days of registration of the company. If CAG fails to make the appointment within the prescribed time then, board may appoint within 30 days. If the board also fails to make the appointment in time, then the members shall at an EGM make the appointment within 60 days from when they are informed.

3.     The first auditor shall hold office till the conclusion of the first AGM.

4.     Subsequent appointment of auditors has to be made at the first AGM for a period of 5 years. i.e. the auditor shall hold office till the conclusion of that AGM till the conclusion of the 6^th Meeting.

5.     In case of govt. company or company owned and controlled by govt., subsequent auditor shall be appointed by the CAG within 180 days from the commencement of financial year.

6.     An individual auditor cannot be appointed for more than one term of 5 years and an audit firm for not more than 2 terms of 5 years in the case of listed companies and such other class of companies as may be prescribed.                                                                                                               * A transition period of 3 years  from the commencement of this Act has been prescribed for an already existing company to comply with these provisions.

7.     Though appointment is done for 5 years, the appointment should be ratified at every AGM

8.     No auditor/ audit firm/ audit firms having common partners shall take audit for a consecutive term of 5 years after a five year term has been completed.

9.     Casual vacancy arising due to resignation of an auditor shall be filled by the company in its meeting within 3 months from the date of recommendation of the board.

10.                        Whereas casual vacancy arising due to any reason other than resignation, then the board shall fill such vacancy within 30 days.

11.                        In case of govt. company or company owned and controlled by govt., casual vacancy shall be filled by the CAG within 30 days . If CAG fails to do so in the prescribed time, then the Board may make the appointment within 30 days.

12.                        Any auditor who is holding office as auditor for twenty companies shall not be eligible for appointment.(Ceiling on number of company audits for an auditor.)

13.                        The members may require rotation of audit partner every year.

14.                        Audit can be conducted by one or more auditor.

15.                        In case an LLP is appointed as an auditor, only a chartered accountant shall be allowed to act and sign on behalf of the firm.

16.                        Multi disciplinary partnerships are allowed.

Duty of auditor on resignation

17.                        Auditor is required to file a statement specifying the reasons and fact of resignation within 30 days of resignation with the ROC and company or CAG in case of Govt. Companies.

18.                        If auditor fails to comply with this provision, then he shall be punishable with a fee of Rs.50,000 to Rs.5,00,000

Duty of company in case of representation from auditor.

19.                        The company is required to send a copy of the representation to every member and if copy of representation is not sent, then a copy shall be filed with the registrar.

Duties

20.                        An additional duty of fraud reporting has been casted on the auditor, accordingly the auditor shall immediately report to the Central Government, any offence involving fraud which has been committed against the company by officers or employees of the company, if he has reason to believe that such fraud has been committed while exercising his duties as an auditor.

21.                        The auditor shall comply with the auditing standards. The central government shall prescribe the standards on auditing as recommended by ICAI in consultation with and after considering the recommendations of NFRA.

22.                        All notices of and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall attend either by himself or through his authorised representative (who shall also be qualified to be an auditor) at all such general meetings and shall have the right to be heard at such meeting on any part of the business which concerns him as the auditor.

23.                        An auditor shall not provide the following non-audit services to the company, its holding company or subsidiary company directly or indirectly:- (as given in section 144)

              (a) accounting and book keeping services;

             (b) internal audit;

             (c) design and implementation of any financial information system;

             (d) actuarial services;

             (e) investment advisory services;

             (f) investment banking services;

            (g) rendering of outsourced financial services;

            (h) management services; and

            (i) any other kind of services as may be prescribed:

* indirectly includes through relative, connected or associated person, or other entity over which individual has significant influence or control, or whose name or trademark or brand is used by the individual.

Power of Auditor

24.                         The auditor of an holding company shall have the right of access to the records of all subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

Disqualifications of an auditor.

25.                        If any partner is holding interest or security in the company or its subsidiary, or of its holding or associate company or its subsidiary, or a subsidiary of such holding company.

26.                        If any relative of such person holds interest or security whose face value exceeds Rs.1,000 or such sum as may be prescribed, in the company or its subsidiary or holding company or associate company etc.                      * relative includes member of HUF, husband and wife, or related in such other manner as may be prescribed.

27.                        If any relative of such person is a director or employee of director or key managerial personnel.

28.                        If person or firm has any business relationship with the company or its subsidiary, or of its holding or associate company or its subsidiary, or a subsidiary of such holding company.

29.                        Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services

30.                        Consulting and specialized services means-

1.     Accounting and book keeping services

2.     Internal audit

3.     Design and implementation of any financial information system

4.     Actuarial services

5.     Investment advisory services

6.     Investment banking services

7.     Rendering of outsourced financial services

8.     Management services

9.     Any other kind of services as may be prescribed

10.            Any person convicted by court of offence involving fraud and 10 years hasn’t elapsed from the date of such conviction

11.            Person holding appointment as auditor in 20 or more companies

12.            Person in full time employment

Remuneration of Auditors

31.                        Remuneration of auditors shall be decided by the members at a general meeting. For first auditor it shall be fixed by the board.

Audit committee

32.                        Every listed company shall form audit committee with at least three directors, of which majority shall be independent directors and shall have the ability to read and understand financial statements.

33.                        Appointment, terms of appointment and remuneration of auditor shall be made only after considering the recommendations of the audit committee.

34.                        The committee existing before constitution of the Act shall be reconstituted within 1 year of commencement, ensuring compliance  with these provisions of the Act.

Actions against the Auditor

35.                        NFRA(National Financial Reporting Authority) shall have the power to investigate (either suo moto or on a reference made to it by the Central government) into the matters of professional  or other misconduct committed by any member or a firm of chartered accountants, registered under The Chartered Accountants Act, 1949                                                                                                                 * provided that, no other institute or body shall initiate or continue any proceedings in such matters of misconduct where NFRA has initiated an investigation under this section.

36.                        It shall have the powers of a civil court under the code of civil procedure, 1908 while trying a suit.

37.                        Where professional or other misconduct is proved, It shall have the power to

(i)                Impose a penalty of Rs 1, 00,000 to five times the fee received in case of an individual  and Rs 10,00,000 to 10 times the fee received in the case of a firm.

(ii)              Debar the member or the firm from engaging himself or itself from practice as a member of the institute for a minimum period of 6 months or for such higher period not exceeding 10 years as may be decided by NFRA.                                                                                              *The appellate authority constituted under the respective Acts shall be the appellate authority against any order by NFRA and the aggrieved shall have the right to appeal before the appellate authority.

38.                        In case the auditor contravenes the provisions related to his powers & duties, provide services given under section 144, then in addition to punishment provided in the section, he shall be required to refund the remuneration received from the company & shall be liable to pay the damages to the company or to any person for the loss arising out of misleading or incorrect information.

39.                        It is specifically provided that the partner or partners of the firm and the firm shall all be jointly and severally responsible for the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force.

40.                        If it is proved that the auditor has acted in a fraudulent manner or abetted or colluded in any fraud, they shall also be punishable in the manner provided in section 447.

DT Amendments Part-2

IMPORTANT DIRECT TAX AMMENDMENTS BY FINANCE BILL 2013 PART-II

1.       Definition of the term ‘Capital Asset’

The new definition states that agricultural land will be exempt from the definition of the term capital asset ,if the land is not within the specified distance measured aerially (shortest aerial distance(.

The specified distance will be;

(i)                  2 km, if the population of the municipality or cantonment board is less than 1 lakh but more than 10000

(ii)                6 km, if the population of the municipality or cantonment board is 1lakh to 10 lakh.

(iii)               8 km, if the population of the municipality or cantonment board is more than 10 lakh.

Also, definition of the term population has been amended to mean population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

Similar amendment is proposed for the definition of the term 'urban land' in Wealth Tax.

2.       Return filed without self assessment tax

This amendment will take effect from 1^st of June 2013. According to the amendment, any return of income shall be treated as defective unless the tax together with interest, if any, payable in accordance with the provisions of sec.140A has been paid on or before the date of furnishing of the return.

3.       Keyman Insurance

The amendment states that a keyman insurance policy which has been assigned to any person during its term with or without any consideration shall continue to be treated as a keyman insurance policy.

This amendment will be effective from 1^st April 2014 and accordingly apply in relation to AY 2014-15 & subsequent assessment years.

4.       Taxability of immovable property received for inadequate consideration.

If an immovable property is received for a value less than the stamp duty by Rs.50,000 or more, then such difference in value shall be chargeable in the hands of the individual or HUF as income from other sources.

If there is a difference in the date of agreement and date of registration, stamp duty value as on the date of agreement may be adopted , provided that, the amount of consideration, or a part thereof has been paid by any mode other than cash on or before the date of agreement fixing the amount of consideration for the transfer of such immovable property.

5.       Direction for special audit.

The relevant section has been amended to include; if at any stage of the proceedings before him, the assessing officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the chief commissioner, direct the assessee to get his accounts audited by an accountant & to furnish a report of such audit.

By this amendment, the scope of the section has increased. The amendment will be effective from 1^st June 2013.

6.       Application of seized assets u/s 132B.

The section is proposed to be amended so as to clarify that the existing liability, against which the seized assets can be adjusted, does not include advance tax liability of the assessee, payable in accordance with the provisions of part C of chapter XVII of the Act.

7.       Tax residency certificate.

The amendment is proposed to clarify that the tax residency certificate is a necessary but not sufficient condition for claiming benefits under the DTAA as referred to in sec 90&90A of the Act.

This amendment will take effect retrospectively from 1^st April 2013, and hence apply in relation to AY 2013-14 & subsequent assessment years.

8.       Contributions for claiming deductions u/s 80GGB and 80GGC

To discourage cash payments bi the contributors, it is proposed to amend the provisions of sec 80GGB&80GGC so as to provide that no deduction will be available in the said sections if such sum is contributed by way of cash.

9.       Clarification of the phrase ‘Tax Due’ for the purpose of recovery in certain cases.

In view of the interpretations of some courts that tax due does not include interest, penalty etc., it is clarified that , for the purposes of sec.179 tax due includes penalty, interest or any other sum payable under the Act.

Indirect Tax Amendments.

IMPORTANT INDIRECT TAX AMENDMENTS BY FINANCE BILL 2013

CUSTOMS

1.       Period of concession available for specific parts of electric and hybrid vehicles extended up to 31-3-2015

2.       The duty on specified machinery used for manufacture of leather and leather goods reduced from 7.5% to 5%

3.       The duty on pre-forms of precious and semi-precious stones reduced from 10% to 2%.

4.       Export duty on de-oiled rice bran oil cake is withdrawn.

5.       Export duty is imposed on ilmenite @ 10% on unprocessed ilmenite & 5% on upgraded ilmenite.

6.       Duty on set top boxes increased from 5% to 10%.

7.       Duty on raw silk increased from 5% to 15%.

8.       Duty on steam coal and bituminous coal equalised at 2% customs duty & 2% CVD.

9.       Import duty on motor vehicles increased from 75% to 100%, that on motorcycles above 800cc or more from 60% to 75% and on yachts & similar vessels from 10% to 25%.

10.   Duty free limit for jewellery increased to Rs 50000 per male and Rs 100000 per female passenger.

EXCISE

1.       ‘Zero excise duty route’ for cotton and manmade sector(spun yarn) at the yarn, fabric and garment stages proposed. ie. For cotton, zero duty at fibre stage also and for spun yarn 12% at fibre stage.

2.       Handmade carpets and textile floor coverings of coir and jute totally exempt.

3.       Ships and vessels exempt from excise duty, consequently no CVD

4.       Specific excise duty on cigarettes, cigars, cheroots and cigarillos increased by about 18%.

5.       Excise duty on SUVs increased from 27% to 30%. The provision is not applicable to taxis.

6.       Excise duty on marble increased from Rs.30/sq.m to Rs.60/sq.m .

7.       Excise duty on silver manufactured by smelting zinc or lead increased to 4%.

8.       For mobile phones priced above Rs.2000, excise duty increased to 6%.

9.       An MRP based assessment on branded medicaments of Ayurveda, Siddha, Unani, and  Homeopathy introduced. Abatement @ 35% will be available.

SERVICE TAX

1.       Two services included in the negative list, First, Vocational courses offered by institutions affiliated to state council of vocational training and the second, training and testing activities in relation to agriculture and agricultural produce.

2.       Exemption of service tax granted on copyright on cinematography now limited to films exhibited in cinema halls.

3.       Service tax imposed on all A/C Restaurants.

4.       Abatement on high end constructions or flats with carpet area of more than 2000 sq.ft or value of more than Rs.1 crore is reduced from 75% to 70%. Other exemptions and provisions remain unaltered.

5.       A voluntary compliance encouragement scheme introduced. Details of which are available in Chapter VI of The Finance Bill, 2013.

Important direct tax amendments for AY :2014-15

IMPORTANT DIRECT TAX AMMENDMENTS BY FINANCE BILL 2013

1.       For every person with a total income of Rs.2,00,000 to Rs.5,00,000 , a tax credit of Rs.2000 will be provided.

2.       For every person (individual, HUF, firms and entities with similar status) with a total income of more than Rs.1 crore a surcharge of 10 % is introduced.

3.       Surcharge on domestic companies with income more than 10 crore increased from  5% to 10%

4.       Surcharge on foreign companies with income more than 10 crore increased from 2% to 5%

5.       In all other cases including dividend distribution tax or tax on distributed income, surcharge increased from 5% to 10%. For companies (both domestic and foreign) with income 1 crore to less than 10 crore the existing surcharge rates applicable.

6.       Additional deduction of Rs.1,00,000 for interest paid on housing loan if used for purchase of first house and if loan not exceeding 25 lakhs. This seduction will be available u/s 80EE subject to other conditions specified in the section.

7.       For persons suffering from disability or certain ailments, the permissible premium rates for life insurance has been increased from 10% to 15%.

8.       Donations made to national children’s fund will be eligible for 100% deduction under chapter VI A

9.       Investment allowance at the rate of 15% to a manufacturing company that invests more than 100 crores in plant and machinery during the period 1-4-2013 to 31-3-2015

10.   TDS @ 1% to be deducted by the buyer of an immovable property where consideration is more than 50 lakhs. Agricultural land will be exempt from this provision.

11.   Withholding tax @ 20% on profits distributed by unlisted companies to shareholders through buyback of shares.

12.   Rate of tax on payments by way of royalty & fee for technical services to non-residents have been increased from 10% to 25%.If DTAA exists , the rate prescribed therein will be applicable.

13.   Reduction in securities transaction tax.

(i)                  Equity futures:                                                from 0.017% to 0.01%

(ii)                MF/ETF redemptions at fund counters:    from  0.25% to 0.001%

(iii)               MF/ETF purchase or sale on exchange:     from 0.1% to 0.001%, only on the seller.

14.   Commodities transaction tax (CTT) has been introduces on non-agricultural commodities futures contracts @ 0.01%. Trading in such commodities derivatives will no longer be speculative transaction but business & CTT will be an allowable business deduction.

Search and Survey

A Note On Search & Surveys

The search and survey operations conducted by the Income Tax Department are one of the worst nightmares of businessmen & individuals who have high income. Main reasons being the fear of huge    demands ,penalty  mental harassment etc.

Here I am trying to bring to your attention the powers of the department  , rights and duties of assessee etc. In a summarized form so that one can face the search and survey procedure confidently. Thus the assessee can ensure that the department is not misusing its powers & that you have rights.  

Search & Seizure Proceedings

In a search ,the department usually covers all the business premises of the assessee (in India) and the residential premises of the important & key persons of the assessee like the directors of the company etc. It can be extended up to   2-3 days. It may also cover the residential premises of the relatives, friends, business associates etc.

The Powers Of The Officer Authorized To Conduct Search Includes

       I.            Enter and search anywhere he suspects that the books of account, jewellery, documents, money, bullion etc are kept.

    II.            He or she can break open any door, locker, box, safe etc (If the key is not available.)

 III.            Search anyone who got out or about to get into or anyone inside the building or place.

IV.            Require any person who is found in possession or control of any books of accounts or other documents maintained in the form of electric record to provide the authorised officer the necessary facility to inspect such document/books.

   V.             Seize any such books of accounts , other documents, money, bullion , jewellery or other valuable article or thing found as a result of such search. (Provided that stock in trade, properly explained cash, assets disclosed in wealth tax return etc cannot be seized but a note can be made of the same.)

VI.            Place marks of identification on any books of accounts or other documents or make extracts or copies there from.

VII.            To make a note on inventory of any such money, bullion, jewellery or other valuable article or thing.

VIII.            The authorised officer may seek the help of police to perform his duties .

  

Rights of The Person Being Searched         

     I.            To see the warrant of authorisation duly signed and sealed by the issuing authority.

 II.            To verify the identity of each member on the search party.

III.            To make personal search of all members of the search party before the start of the search and on the conclusion of the search.

IV.            To have at least two respectable and independent residents of the locality as witness.

 V.            To insist on personal search of ladies being taken only by a lady with strict regard to decency.

VI.            A lady occupying an apartment being searched has a right to withdraw before the search party enters, if, according to custom, she does not appear in public.

VII.             To call a medical practitioner in case of emergency.

VIII.            To allow the children to go to school , after checking their bags.

IX.            To have the facility of having meals at the normal time.

 X.            To inspect the seals placed on various receptacles, sealed in course of search and subsequently at the time of reopening of seals.

XI.            Every person who is examined u/s 132(4) has a right to ensure that the facts so stated by him have been recorded correctly.

XII.            To have a copy of the panchanama together with all the annexures.

XIII.            To have a copy of any statement that is used against him by the department.

XIV.            To have inspection of the seized books of account, etc., or to take extracts therefrom in the presence of any of the authorised officers or any other person empowered by him.

XV.            To make an application objecting to the approval given by the CIT for retention of books and documents beyond 180 days from the date of seizure.

XVI.            To make an application under section 132(11) to the CIT against an order under section 132(5)

XVII.            To get back the assets found to be in excess of the liability determined in the order under section 132(5).

Duties of the Person Searched

I.                   To allow free and unhindered ingress into the premises.

II.                To see the warrant of authorisation and put signature on the same.

III.             To identify all receptacles in which assets or books of account and documents are kept and to hand over keys to such receptacles to the authorised officer.

IV.            To identify and explain the ownership of the assets or books of account and documents found in the premises.

V.               To identify every individual in the premises and to explain their relationship to the person being searched. He should not mislead by impersonation  If he cheats, it is an offence punishable under section 416 of the Indian Penal Code.

VI.            Not to allow or encourage the entry of any unauthorised person into the premises.

VII.         Not to remove any article from its place without notice or knowledge of the authorised officer. If he secretes or destroys any document with the intention of preventing the same from being produced or used as evidence before the court or public servant, he shall be punishable according to section 204 of the Indian Penal Code.

VIII.      To answer all queries truthfully and to the best of his knowledge. He should not allow ant third party to either interfere or prompt while his statement is recorded by the authorised officer.

IX.            To affix his signature on the recorded statement, inventories and the panchanama.

X.               To ensure that peace is maintained throughout the duration of the search and to co-operate with the search party in all respects so that the search action is concluded at the earliest and in a peaceful manner.

XI.            Similar co-operation is expected even after the search is over, so as to enable the authorised officer to complete necessary follow-up actions at the earliest.

Some Important Facts to be known by the Assessee

I.                   Business premises cannot be sealed by the search team. This idea has been confirmed by the honorable high court in Shyam Jewellers Vs Chief Commissioner (1992) 196 ITR 243(All)

II.                A blank warrant of authorisation makes the search illegal. This idea has been confirmed in Sibal(HL) Vs CIT (1976) 103 ITR 606 (P&H)

III.             The competent authority to issue the search authorisation shall at least be of the commissioner rank.

IV.            The department has no power to convert or realize the seized assets.

V.               Statement of anyone in control or possession of documents books etc., may be recorded and be used against the assessee at the time of assessment.

Survey

A survey is considered to be milder than search proceedings as it does not involve confiscation of cash, jewellery or other assets, taking statements on oath, or searching residential premises etc. Survey usually takes place at the place of business or profession during business hours.

Powers of Income Tax Authorities while conducting Survey.

I.                   To enter the place of business during business hours and an other places, only after sunrise and before sunset.

II.                To enter the place other than the business premises, if the assessee states that cash, stock, records and books of accounts relating to the business are lying there.

III.             To place marks of identification on the books of accounts, to take extracts from such books of accounts and documents or records and to impound books of accounts noticed during survey, after recording reasons.

IV.            To make an inventory of any cash, stock and other valuables checked by him.

V.               To record statements of any person.

VI.            To collect information regarding nature and quantum of expenditure incurred in connection with personal functions and events like a wedding ceremony etc..

VII.         A survey can lead to search only on the basis of information collected in survey, subject to fulfillment of certain conditions of section 132(1).

VIII.      Normally survey is concluded on the same day, however where situation warrants it can be continued on the next day also.

IX.            Authority can take a statement of anyone available at the place on survey.(not on oath) also the tax officer cannot force the assessee to make any statement about his income.

X.               Only an authority having jurisdiction over the assessee can do survey.

Rights and Obligations of an assessee being Surveyed.

I.                   To permit entry to the IT officers after satisfying their identity.

II.                To afford facility to the income tax authority to conduct survey, to co-operate during survey, to maintain equilibrium, to maintain peaceful atmosphere.

III.             To assist in preparing inventory of books of account or documents or cash or stock in trade or any other article or thing which may be found in the course of survey and to see that such inventories are detailed, exhaustive and authentic.

IV.            To furnish the requisite classification so as to let the income tax authority satisfy as to the assets found duly accounted for.

V.               To give statements truthfully and completely and avoid giving false or incorrect or vague answers.

VI.            To sign the inventories and statements after carefully reading and vouching its correctness and obtaining its copies.

VII.         To extend facility so as to complete survey as expeditiously as possible.

VIII.       To let the survey continue after business hours and to see that it is concluded on the same day and is not required to be resumed on the next date.

IX.            To keep the place in an orderly manner so as to let the authorities perform their duties expeditiously.

X.               To keep and preserve copies of the inventories, statements, etc. and to contact the tax consultant immediately on completion of survey.

XI.            To truthfully disclose all material facts and to be guided by the sound advice of his CA/Tax consultant.

XII.         To do any other act or steps or retract or whatever is deemed desirable by the CA/Tax consultant on the facts and in totality of the circumstances.

XIII.       Not to hide or conceal such material aspects, which stand detected from the material, found in the survey.

Important Facts to be known by the Assessee.

I.                   Department has no power to impound stock-in-trade, cash or jewellery.

II.                The department may impound books of accounts and other documents but cannot keep it for more than 10 days without obtaining the permission of the Chief Commissioner of Income Tax.

III.             Department cannot go to the residential premises of the assessee or its related parties unless cash or stock or books of accounts are maintained there, according to the statement of assessee.

IV.            The competent authority to issue an authorisation for survey shall atleast be of the joint-commissioner rank.

Some Do’s and Don’ts during Raids.

I.                   Ensure that all your rights are availed.

II.                Ensure that the department is not exceeding its power.

III.             Maintain proper books of accounts.

IV.            Properly account all investments.

V.               Statements recorded on oath are very crucial hence be very careful & cautious while making them.

VI.            Properly co-operate with the search and survey teams.

VII.         Inform your CA/Tax consultant immediately after the raid so as to discuss the facts and take appropriate actions.

***THE END***

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