Background

On 9th February, 2016 the Ministry of Corporate Affairs has proposed new Companies (Auditor's Report) Order (CARO), 2016. The Ministry had set-up a Committee on 16th September, 2015 to examine and recommend matter for inclusion in the statement to be attached with Auditor’s Report under Section 143(11) of the Companies Act, 2013 (2013 Act) for the financial year 2015-16 onwards.

Section 143(11) of the Companies Act, 2013requires that the auditor’s report of specified class of companies should include a statement on the prescribed matters. As per the section 143 of the Companies Act, 2013, every report of the auditor under this section should contain matters specified under applicable CARO.

The newly proposed CARO, 2016 contains 15 clauses, out of which some clauses have been carried forward from present CARO, 2015. MCA has issued exposure draft of CARO, 2016 for stakeholders’ comments. The draft, if approved, shall be applicable for FY 15-16 onwards.

In comparison to CARO (2015), CARO (2016) proposes few additional reporting requirements and eliminates some of the reporting requirements.

1. Applicability

Every report made by the auditor under Section 143 of the 2013 Act for Financial Year commencing on or after April 1st 2015 would include CARO 2016. There is no difference between CARO, 2016 and CARO, 2015 from the point of view of applicability, except that CARO, 2016 is not applicable on private limited company, not being a subsidiary or holding of a public company, when its:

• Paid up capital and reserves and surplus does not exceed Rs. 1 crore as at balance sheet date; and
• Total borrowings from banks or financial institution at any point of time during financial year does not exceed Rs. 1 crore; and
• Total revenue, including revenue from discontinuing operations, does not exceed Rs. 10 crore.

Other companies not covered under CARO 2016

• Banking company as defined under section 5(c) of the Banking Regulation Act, 1949.
• Insurance company as defined under the Insurance Act, 1938
• Companies incorporated with Charitable objects, that is companies licenses to operate under the Section 8 of 2013 Act.
• One Person Company as defined under section 2(85) of the 2013 Act
• Small company as defined under section 2(85) of the 2013 Act

CARO, 2016 shall not apply to the auditor's report on consolidated financial statements whereas CARO, 2015 is applicable in such case. CARO is applicable to a foreign company as defined under Section 2(42) of the 2013 Act.

2. REPORTING REQUIREMENTS

As compared to CARO 2015, the reporting requirements under the CARO 2016 (draft) have been increased.

.               Additional reporting requirements in CARO, 2016 Fixed Assets

Auditor should report whether title deeds of immovable properties are held in the name of the company. If not, provide details thereof.

Loans and investments

Auditor should report whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered by clause (76) of Section 2 of the Companies Act, 2013. If so whether the terms and conditions of the grant of such loans are not prejudicial to the company's interest.

Auditor should report in respect of loans, investment and guarantees, whether provisions of section 185 and 186 of the Companies Act, 2013have been complied with. If not, details should be provided

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Introduction:

Under the erstwhile positive based taxation scheme, service tax on road transport services was initially introduced in the year 1997 and the levy is on ‘Goods Transport Operators’. Considering the hue and cry from the truck operators across the nation, levy of service tax is withdrawn. Levy of service tax is re-introduced in year 2004 on ‘Goods Transport Agency Services’.Now under the Negative list regime effective from 01.07.2012, all goods transport services are covered under Negative list except the services of ‘Goods Transport Agency’ and Courier Agency

The above mentioned legal developments would certainly indicate that there is no service tax on services of ‘Goods Transport Operator’ services. However recent judicial decisions are contrary to this view on the reasoning that goods transport agency services includes services of truck operators. In this backdrop, an attempt is made to unleash various facets of this controversy.

Legislative Background in Levy of Service Tax on ‘Goods Transport Agency’ Service:

As discussed above, after the levy was withdrawn on the services of truck operators, Government has constituted a Committee(Bharadwaj Committee) to suggest the modalities to levy service tax on goods transport services. The key recommendations of this Committee are reproduced as under;

1. Recommended to levy service tax on services provided by any commercial concern which (is common carrier under the Carriers Act, 1865) books the goods for transportation by road, issues consignment note and provides value added services over and above the mere carriage of the goods be called the goods booking agency.
2. The committee recommended to make it mandatory to these agencies to issue a consignment note to the sender of goods against the receipt of goods for transportation. For this purpose, it is recommended to amend the Carrier Act, 1865. It is also suggested that till such time the said act is amended, the said requirement can be made mandatory under Service Tax laws or by notifications.
3. Any organization/person who possesses the vehicle by virtue of ownership under lease/hire agreement etc and is responsible only for affecting the carriage of goods and is not required to issue consignment note. The truck owner can alternatively be called as truck operator. Normal truck operators who hire their vehicles for transportation are not subject to service tax.
4. As transport sector is unorganized, the committee also recommended implementing reverse charge mechanism keeping the liability to pay service tax to Government either on the consignor or consignee responsible to pay freight.

With these recommendations, service tax is reintroduced in the FY 2004-05 on the services of ‘Goods transport agency’ i.e. those providing services in relation to transport of goods by road and are required to issue consignment note.

Accordingly, the term ‘Goods Transport Agency’ was defined under the erstwhile section 65(50b)— “means any person who provides service in relation to transport of goods and issues consignment note by whatever name called .”

With these legal developments and committee recommendations, it is very clear that the legislative intent is not to tax the services of truck owners whether it is individual truck owners or organizations owning trucks. Otherwise there is no requirement to re-draft/rephrase the legal provisions when the levy is re-introduced in the FY 2004-05. Further, this legislative intent is clearly evident by budget speech of Finance Minister. The relevant extract is reproduced as under;

“149. 58 services have been brought under the net so far. I propose to add some more this year. These are business exhibition services; airport services; services provided by transport booking agents, transport of goods by air; survey and exploration services; opinion poll services; intellectual property services other than copyright; brokers of forward contracts; pandal and shamiana contractors; outdoor caterers; independent TV/radio programme producers; construction services in respect of commercial or industrial constructions; and life insurance services to the extent of risk premium. I may clarify that there is no intention to levy service tax on truck owners or truck operators........................................................ ” (emphasis supplied)

Now under the Negative List regime, Section 66D provides for negative list of services. Entry(P) of this list provides that all services provided by way of transportation of goods by road except the services of a ‘goods transport agency’ or ‘courier agency’. Further the term ‘Goods Transport Agencny’ has been defined under Section 65B(26) by reproducing the same definition as prevailing under section 65(50b) as stated above.

Thus the legal provisions both under erstwhile regime as well as under the negative list regime are same and moot the intention to levy service tax only on services of goods transport agency alone. However, the revenue went on to stretch the meaning of the word ‘goods transport agency’ to include services of truck operators also and accordingly the matter landed before the judicial forums.

Position upheld by Judicial Forums in the initial years of levy:

The judicial forums in the initial years of levy have resorted to the same interpretation considering the committee report and finance minister speech, concluded that services provided by truck owners are not subject to service tax. The following decisions are for reference.

1. Lakshminarayana Mining Co vs. CST, 2009(16)STR691(Tri-Bang)
2. CCE vs. Kanakadurga Agro Oil Products Private Limited, 2009(15)STR399(Tri-Bang)
3. KMB Granites Private Limited vs. CCE,2010(19)STR437(Tri-Bang)

Subsequent Regulatory Legislation ‘The Carriage By Road Act, 2007’ in congruence with above position:

Subsequently, a regulatory legislation ‘The Carriage by Road Act, 2007 was passed by Parliament which

repealed the earlier Carriers Act, 1865. As stated above, the committee recommended to levy service tax

on services of common carriers alone excluding the truck operators. Accordingly, ‘Common Carrier’ is

defined under section 2(a) of the Act as follows;

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

1. Introduction:

Internal audit provides effectiveness of organisation’s internal control system, risk management, governance. Internal audit looks beyond the financial transactions and extends to advisory services, organisation growth, policy matters, work environment and relevant recommendations to the management etc.

Global regulations such as FCPA in US, UK Bribery Act, SOX Act, COSO, Fraud Risk Management (FRM) by RBI and introduction of IFC (Internal Financial Controls) in companies Act,2013 are the few witness stating the seriousness for requirement of Fraud detection mechanism.

There are instances where organisations extricated from frauds and financial hardship due to early detection and corrective measures by the internal audit team. Internal audit facilitates the organisation to take timely decisions and emphasize on proactive environment than reactive, which is vital in the dynamic economy.

2. Objective:

This article aims at illustrating few significant aspects explaining the benefits of internal audit.

3. What is Internal Audit?

According to the Institute of Chartered Accountants of India (ICAI), “Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal cont rol system.”

According to the Institute of Internal Auditors (IIA), “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.

Accordingly, Internal Audit can be broadly understand as management’s independent activity to facilitate the management to -

?         Improve and add value in governance mechanism.

?         Strengthen the strategic risk management and internal control system.

4. Why Internal Audit?

Considering the objectivity of internal audit, it can be viewed as amanagement independent activity to strengthen its own organisation than a statutory requirement. Internal auditors provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization.

4.1 Major Benefits:

4.1.1 Facilitates strong system to compliance with law:“Ignorantia juris non excusat” means ignorance of law excuses no one. In the present world of business there are so many stringent norms mandated by regulators, further law is being revised continuously, which demands continuous updation. However it might be the difficult for organisational staff, who majorly concentrate on execution of day to day operations. Further, sometimes organisations may not afford as many professionals.

An effective internal audit team with versatile experts can provide organisation a strong system to compliance with the law.

4.1.2 Facilitates informed decisions by the management: in-time quality information helps in quality decisions; internal audit will provide the requisite analysed data to make effective decisions by the management. Instances are there where analysis done by the internal audit team helped management to take vital decisions wrt business expansion such as manufacture of profitable by product, optimisation of ideal resources etc.

4.1.3 Facilitates implementation of effective internal control system: Internal audit examines the policies and procedures of an organisation on a regular basis and ensures the effectiveness of internal control system in force. For instance finding the absence of maker checker control in bills processing will curb processing of fake bills by implementing maker checker control.

4.1.4 Facilitates to strengthen the risk assessment process: Due to increase of complexity in business process new risk factors are emerging. Internal audit plays vital role in evaluating inherent and non inherent risks exist in the business and thereby to mitigate the risk.

4.1.5      Facilitates dedicated review of operations and Fraud detection: with the expansion of business, management oversight dilutes in review of operations which gives ample of opportunities for fraudulent operations. Internal audit with dedicated review of operations will put check to the emerging frauds. Artificial entries in pay roll detected during internal audit will put an end to the fraud in salary payments.

4.1.6_ Facilitates pro activeness than reactive nature: Internal audit facilitates the regular review of operations and through its timely review and information it enables the management to be a proactive than a reactive.

4.1.7 Protect interest of the investors: All investors can’t be a part of management; they may not have insight into all the operations and process. Internal audit plays a vital role in protecting the interest of the investors. An effective audit system will boost up the confidence in the investors about the effective performance of their organisation.

4.2 Requirement under Indian Companies Act 2013 applicable to Companies only:

As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for the following nature of companies.

5. Conclusion:

Effective internal audit is one of the major pillars in the growth of an organisation. Internal Audit is a prerequisite for every emerging organisation in the dynamic business environment. However unless the Internal auditor treated as admonitor and backed by management, effectiveness will be mere fancy. Hence, pervasive perception towards internal auditor is required to be changed and to achieve its objectivity internal audit should be recognised as intramural mechanism of the organisation.

Establishing a professional internal audit activity should be a governance requirement for all organisations. This is not only important for larger and medium sized organisations but also may be equally important for smaller entities , as they may face equally complex environments with a less formal, robust organisational structure to ensure the effectiveness of its governance and risk management process.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

• Meaning: It is an allowance provided by the employer to his employee as a part of salary to meet the cost of rented house taken by the employee for his stay.

• Governing section: Sec 10(13A) of the Income tax act, 1961.

• Taxability provisions:

1. Conditions:

1. HRA exemption can be claimed only if employee stays in a rented house and pays rent for the house.

1. The rented premises must not be owned by him otherwise the whole amount which he has received as HRA will be fully taxable.

• The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.

1. Taxability: The amount of exemption of HRA is to be considered minimum of the following three.

1. Actual HRA received from Employer
2. Rent paid (minus) 10% of salary*

• 50 % of salary* if employee lives in metro city** or 40 % salary if employee lives in non-metro city

Here,

• Salary means (Basic Pay + DA + Fixed percentage of commission on turnover). **Metropolitan cities are Mumbai, Delhi, Chennai, and Calcutta.

• Other points:

1. Exemption is available even if the house is owned by close relative (Wife or husband or father or mother) and for which rent is paid by employee through bank transfer.
2. To avail exemption there is no requirement that the employee should not own a house.

• Examples:

1. X resides in Mumbai and he gets Rs.7,00,000 as basic salary. He receives Rs. 2,00,000 as HRA. Rent paid by him is Rs. 1,50,000.Then HRA exemption will be calculated as follows.

Solution: As per the above formula minimum of 3 is the amount of exemption. so, (i)Actual HRA received = 2,00,000

• Rent paid minus 10% of salary = 1,50,000-70,000 = 80,000
• 50% of salary = 7,00,000*50% = 3,50,000

Minimum of the above is 80,000.

So taxable HRA = Actual HRA received – Exemption = 2,00,000-80,000 = 1,20,000.

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1. Suppose in the above problem rent paid is 80,000 and basic salary is 10,00,000 then (i)Actual HRA received = 2,00,000

(ii) Rent paid (minus) 10% of salary = 80,000-1,00,000 = (20,000) (iii) 50% of salary = 10,00,000*50% = 5,00,000

Minimum of the above is (20,000)by which it can be understood that no HRA exemption is available.

The entire amount received as HRA from employer is taxable.

Deduction in respect of Rent paid, If HRA is not received (U/S 80GG)

• Chargeability: Sec 80GG of the Income tax act, 1961.

• Applicability: Individuals & HUF

• Conditions: Upon satisfaction of the following conditions an assessee is allowed deduction under Sec 80GG.

1. Assessee shall be self-employed and/or a salaried person who is not in receipt of HRA at any time during the previous year.
2. He or his spouse or minor child or HUF of which he is member should not own any residential accommodation at the place where he ordinarily resides or performs duties of his office or employment or carries on his business or profession or

1. Owned by the assessee at any other place, but the value of which is not determined under sec 23(2)(a) or Sec 23(4)(a) as the case may be [i.e. Annual Value as Nil].

If all the above conditions were satisfied the employee should give declaration in form 10BA to claim deduction u/s 80GG

• Amount of deduction:The lower of the 3 is the amount eligible for deduction under Sec 80GG.

1. Rent paid (minus) 10 percent of Adjusted total income

1. 2000 per month(Limit has been increased to Rs 5000/- per month from AY 2017-18 as per proposed Budget 2016)

1. 25 percent of the Adjusted total income

1. i) “Adjusted Total income” Means

Gross total Income (minus) Long term capital Gain (minus) Short term Capital Gain u/s 111A (minus) Deductions u/s 80C to 80U (Except 80GG) (minus)anyForeign Income u/s 115A or 115D.

• Sec 111A:If an assessee has a short term capital gain arising from transfer of equity shares of a company or unit of an equity oriented fund and such transaction had occurred on or after the date on which Chapter VII of the Finance Act, 2004 comes into force and such transaction is chargeable to Securities transaction tax under that chapter then the amount of Income tax calculated on Short term capital gain is 15 Percent.

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• Sec 115D:This section says that in case of assessee being Non-resident Indian, no deductions of chapter VI-A should be allowed if his gross total income consist of only income from investment or income from long term capital gains or both.

This section also says that if Gross total income includes any income referred above then the gross total income shall be reduced by the amount of such income and deductions under chapter VI-A are allowed as if the gross total income so reduced were the gross total income of the assessee.

Examples:

1. Let Mr X is a salaried employee of PQR Ltd in Hyderabad having income from salary as 8,00,000 (HRA is not provided by the employer).He pays Rs 10,000 as rent per month. He also had a Long term capital gain of Rs 2,00,000. Deduction under section 80C is 1,00,000. He owns a residential house in Vizag which is being let out. Can Mr X claim deduction under Sec 80GG?

Solution:Mr X is a salaried employee and he does not own any residential accommodation in place of his employment but he owns at other place i.e. Vizag which is being let-out so Mr X can claim deduction under 80GG.

Amount of deduction as per above provisions is calculated as follows:

Gross total income = 8,00,000+2,00,000 = 10,00,000.

1. 1,20,000 – (10,00,000-2,00,000-1,00,000)*10% = 50,000
2. 2000*12 = 24,000

• 7,00,000*25% = 1,75,000

Lower of the above three is 24,000. So amount of deduction under Sec 80GG is 24,000.

1. Suppose in the example (a) if Mr X does not Let out the property at Vizag and showing GAV of his house as Nil?

Solution:Mr X cannot claim exemption under sec 80GG since he shows his GAV at Nil i.e. the house is shown as self occupied property.

1. f) Suppose in the example (a) HRA is provided by the employer to Mr X then?

Solution: Mr X cannot claim deduction under Sec 80GG since he is receiving HRA from the employer.

Let Mr X is a salaried employee who had worked for PQR Ltd in Hyderabad for 11 months having income from salary as 8,00,000 (HRA is not provided by the employer) and remaining months for XYZ Ltd for a salary of 20,000 per month (Including HRA). He pays Rs 10,000 as rent per month. He also had a Long term capital gain of Rs 2,00,000. Deduction under section 80C is 1,00,000. He owns a residential house in Vizag which is being let out. Can Mr X claim deduction under Sec 80GG?

Solution:Mr X cannot claim deduction under Sec 80GG since he received HRA for the previous year from the 2nd Employer.