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FAQs on Tax Audit under Section 44AB

Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. As per these provisions, tax audit shall be conducted by a Practicing Chartered Accountant who ensures that the taxpayers has maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CD. In this article, we have attempted to resolve some Frequently Asked Questions (FAQs) about the tax audit.

  1. What is a tax audit?

A Tax audit is a process to verify whether the books of accounts prepared by the taxpayer are in compliance with the generally accepted accounting principles and the provisions of the Income-tax Act. A Tax audit can be conducted only by a Chartered Accountant in practice.

  1. In which form the tax audit report has to be obtained?

Category of Taxpayer Form for Audit Report Annexure to Audit Report
If books of accounts of assessee is required to be audited under any other law Form 3CA Form 3CD
In any other case Form 3CB Form 3CD
  1. Who is required to get books of accounts audited?

Section 44AB provides for the audit of books of accounts of an assessee engaged in business or profession. The table below demonstrates the requirement to get the books of accounts audited by different taxpayers:

Nature of Business or Profession Category of Taxpayer Threshold Limits for Gross Turnover or Receipts
Specified Professions Any Rs. 50 lakhs
Non-Specified Professions Any Rs. 50 lakhs
Business Any Rs. 1 Crore
Presumptive Tax Scheme under Sec. 44AD Resident Individual or HUF Taxpayer opted for this scheme in any of the last 5 previous years but do not opt for it in current year and his total income exceeds the maximum amount which is not chargeable to tax.
Presumptive Tax Scheme under Sec. 44AD Resident Partnership Firm Taxpayer opted for scheme in any of last 5 previous years but do not opt for in current year.
Presumptive Tax Scheme under Sec. 44ADA Resident Assessee Taxpayer claims that his profits from profession are lower than the profits deemed under Section 44ADAand total income exceeds the maximum amount which is not chargeable to tax.
Presumptive Tax Scheme under Sec. 44AE Any Assessee engaged in plying, hiring or leasing goods carriage Taxpayer claims that his profits are lower than the deemed profit under section 44AE.
Presumptive Tax Scheme under Sec. 44BB Non-resident assessee engaged in exploration of mineral oil Taxpayer claims that his profits are lower than the deemed profits under Section 44BB.
Presumptive Tax Scheme under Sec. 44BBB Foreign Co. engaged in civil construction Taxpayer claims that his profits are lower than the deemed profits under Section 44BBB.
  1. What is deemed as business and profession?

Income tax act provides an inclusive definition of business where “Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.” However, the term business does not necessarily mean trade or manufacture only.

Classification of business or profession will depend on the facts and circumstances of each case. The expression profession involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities. Further section 2(36) of income tax has defined that profession includes vocation also.

Deemed as Business

Deemed as Profession

 Advertising Agent

 Legal

 Courier Service

 Medical engineering

 Clearing, Forwarding and Shipping Agent

 Architectural

 Insurance Agents

 Consultancy

 Nursing Homes

 Interior Decoration

 Stock and Share Broking

 Film Artist

 Travel Agents

 Authorized Representative

 

 Accountancy Profession

 

 Company Secretary

 

 Information Technology

  1. How to calculate the gross receipt or turnover?

Applicability of tax audit under section 44AB depends upon gross receipts, sales or turnover of an assessee, so the first and foremost thing is their calculations.

As per ‘Guidance Note on Terms Used in Financial Statement’ published by the ICAI, the meaning of ‘Turnover’ shall be the aggregate amount for which sales are affected by an enterprise. The terms gross turnover and net turnover are sometimes used to differentiate the sales aggregate before and after deduction of returns and discounts.

In case of professionals “Gross receipts” includes all receipts arising from carrying on a profession. If a professional collects out of pocket expenses separately, they shall not form part of gross receipts. However if these expenses are recovered collectively by way of consolidated fees, the whole amount would form part of gross receipts. Where a professional received an advance for services which are yet to be rendered, it will not form part of the gross receipts till the services are rendered.

Where an assessee is carrying on more than one business activity, turnover of all the businesses will be clubbed together. However, where any business of assessee is covered by Section 44AD or 44AE and he has opted for the same, turnover of such business shall be excluded.

In case of sale by a commission agent or by a person on a consignment basis, if the property in goods or all significant risks and rewards of ownership of goods continue to belong to the principal the relevant sale price shall not be part of turnover of commission agent. In this case, the turnover shall be the amount of commission earned by the agent. However, if the property in the goods, significant risk and reward of ownership belongs to the commission agent, the sale price received/receivable shall form part of his turnover.

  1. Whether GST shall be included while calculating the gross turnover or receipt?

Income-tax Act contains section 145A which provides for inclusion of taxes, cess, etc. in the value of sale, purchase and inventory. However, the purpose of this provision is limited to calculation of income taxable under the head ‘Profits and Gains from Business or Profession’. Whether this provision can be applied for calculation of ‘Turnover’ (or sales) for the purpose of Section 44AA, 44AB, 44AD and 44ADA has been a matter of disagreement between the revenue and taxpayer.

In case of an assessee who has opted for Composition Scheme under GST Act, the tax is not to be recovered from the customer and it is debited to the Statement of profit & loss as an indirect expense. Thus, amount of GST paid by an assessee should not form part of his gross turnover. In case of other assessees, as GST is charged from the customer and it is recognized separately in the books of accounts, it is not clear whether the amount of GST shall be included in the turnover for the purpose of calculation of taxable income only (as provided by Section 145A) or for every other provision which has a reference to ‘turnover’. Unless the CBDT clarifies its stand on this matter, it would be appropriate to ignore the amount of GST while calculating the gross turnover or gross receipts because of following reasons:

(a)

 

Section 145A begins with “For the purpose of determining the income chargeable under the head “Profits and gains of business or profession” which makes this provision inapplicable for other purposes.

(b)

 

If GST recovered from customer is credited to Current Liability Accounts (Output CGST or Output IGST or Output SGST) and payments to the authority are also debited to the said separate account, these should not form part of turnover shown in profit and loss account.

(c)

 

Inclusion of GST in the turnover would have the cascading effect, i.e., presumptive income shall also be computed on the component of GST which is never treated as income of the assessee.

  1. How to compute the value of purchase, sales and inventory for the purpose of Income-tax Act?

Generally, the ‘Exclusive’ approach is followed to record the sales, purchase and inventory in the books of accounts. While as the ‘Inclusive’ method has to be followed to disclose the similar information in Income-tax Return. In view of Section 145A, valuation of purchase, sale and inventory shall be made on the basis of the method of accounting regularly employed by the assessee. Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account. However, following adjustments shall be made while computing the income for the purpose of preparing the return of income:

(a)

 

Any tax, duty, cess or fees actually paid or incurred on inputs should be added to the cost of inputs, if not already added in the books of account;

(b)

 

Any tax, duty, cess or fees actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account;

(c)

 

Any tax, duty, cess or fees actually paid or incurred on the inventory should be added to the inventories, if not already added while valuing the inventory in the accounts.

  1. If a person has got his accounts audited under any other law, then is it compulsory for him to get his accounts audited again under Income-tax Act?

When an Act requires a person to get his accounts audited, it does so with an objective. The audit carried out under any Act (e.g., a statutory audit under Companies Act) does not provide the confirmation if provisions of the Income-tax Act have been properly complied with. The Income-tax Authorities need confirmation whether the tax provisions have been properly applied by an assessee, and it can be done only through a tax audit. However, to make a distinction between two persons – who are audited under any other Act from any other person, the auditors are required to issue the tax audit report in different forms. The Audit report shall be issued in Form 3CA if financial statements are already audited under any other Act. The report shall be in Form 3CB in any other case. The Annexure to the audit report, in Form 3CD, shall be the same in both the situations.

In a case where the tax auditor carrying out the audit under section 44AB is different from the statutory auditor, a reference should be made to the name of such statutory auditor. In case the statutory auditor is carrying out the audit under section 44AB, the fact that he has carried out the statutory audit under the relevant Act should be stated in the tax audit report.

  1. What are the due dates for filing Tax Audit Report?

It is mandatory to file the tax audit report by 30th September of the relevant assessment year, However, if an assessee is liable for transfer pricing audit then tax audit report has to be filed by 30th November of the relevant assessment year.

  1. How to furnish the tax audit report to Income-tax Dept.?

The audit report shall be filed electronically by the Chartered Accountant to the Income-tax Dept. The report shall be uploaded directly by the tax auditor at www.incometaxindiaefiling.gov.in. However, to furnish the report, the assessee has to authorize and appoint the Chartered Accountant from his e-filing account.

  1. What are the documents to be attached with the audit report?

Following documents have to be uploaded along with the tax audit report on the e-filing portal by the Chartered Accountant:

(a)

 

Balance Sheet

(b)

 

Profit & Loss Account/Income and Expenditure Statement

(c)

 

Cost Audit Report, if any

(d)

 

Excise Audit Report or Other Report, if any

  1. How many tax audit reports a Chartered accountant can Sign?

A Chartered Accountant in practice can conduct 60 tax audits relating to an assessment year.

The ICAI had clarified that audit prescribed under any statute which requires the assessee to furnish an audit report in the form as prescribed under section 44AB of the Income-tax Act, shall not be considered for the purpose of reckoning the specified number of tax audit assignments if the turnover of the auditee is below the turnover limit specified in section 44AB of the Income-tax Act. The ICAI has modified the guidelines on August 23, 2018 to provide that the audits conducted under Section 44AD, 44ADA and 44AE of the Income-tax Act(Presumptive Taxation Schemes) shall not be considered for the purpose of reckoning the ‘specified number of tax audit assignments’.

  1. Who cannot perform tax audit?

The following persons cannot perform tax audit:

(a)

 

Any person who is not a Chartered Accountant in full time practice

 

(b)

 

A Chartered Accountant who:

 
   

Is in part time practice i.e. a member holding a certificate of practice and also engaged in any other business and/or occupation

   

Indebted for more than Rs. 10,000 to the assessee, this limit should be considered in aggregate in case of firms.

   

An employee of the assessee or an employee of concern under the same management

   

Is responsible for maintenance of books of accounts (himself or his partner or firm in which he is a partner)

(c)

 

A Chartered Accountant cannot conduct an audit of a firm in which he is a partner or an employee.

 

(d)

 

An internal auditor

 
           
  1. What should be filed first – Tax audit report or Income-tax return?

Income-tax return (ITR) requires the assessee to furnish the ‘date of furnishing the audit report’. Thus, an auditor needs to file the tax audit report first.

  1. Is there any penalty on late filing of Audit report?

As per Section 271B, if any person fails to get his accounts audited or fails to furnish the report of the audit the Assessing Officer may direct such person to pay a penalty of a sum equal to lower of following:

(a)

 

0.5% of the total sale, turnover or gross receipts; or

(b)

 

Rs. 1,50,000

However, no penalty shall be imposed if such failure is due to a reasonable cause.

  1. Whether the reporting in form 3CD shall be made as per books of Account or after adjustment as per the Income Computation &Disclosure Standards (ICDS)?

In order to determine the basis for reporting in Form 3CD we should refer to the preamble of ICDS. The Preamble states that ICDS are applicable for computation of income chargeable under the head “Profit and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts.

Further, the CBDT vide Circular No. 10/2017, dated 23-03-2017, has clarified that the books of account are to be maintained in accordance with the accounting policies applicable to the assessee. Thus, it can be concluded that the reporting in Form 3CD shall be in accordance with the books of account maintained by the assessee. However, reporting is required if any adjustment has been made to profit or loss as per ICDS.

  1. Who is required to maintain books of accounts as per Section 44AA?

Section 44AA provides for maintenance of books of account by an assessee under the Income-tax Act. The table below demonstrates the requirement for maintaining books of accounts by different taxpayers:

Nature of Business or Profession Category of Taxpayer Threshold Limits for Income Threshold Limits for Gross Turnover or Receipts
Specified Professions* Any Mandatory in every case except when presumptive taxation scheme under Sec. 44ADA is opted by the assessee
Non-Specified Professions Individual or HUF Rs. 2,50,000 Rs. 25 lakhs in any of the 3 years immediately preceding the previous year
Non-Specified Professions Others Rs. 1,20,000 Rs. 10 lakhs in any of the 3 years immediately preceding the previous year
Business Individual or HUF Rs. 2,50,000 Rs. 25 lakhs in any of the 3 years immediately preceding the previous year
Business Others Rs. 1,20,000 Rs. 10 lakhs in any of the 3 years immediately preceding the previous year
Presumptive Tax Scheme under Sec. 44AD Resident Individual or HUF Rs. 2,50,000 Taxpayer opted for scheme in any of last 5 previous years but does not opt for in current year.
Presumptive Tax Scheme under Sec. 44AD Resident Partnership Firm Taxpayer opted for scheme in any of last 5 previous years but does not opt for in current year.
Presumptive Tax Scheme under Sec. 44AE Any Assessee engaged in plying, hiring or leasing goods carriage Taxpayer claims that his profits are lower than the deemed profits.
Presumptive Tax Scheme under Sec. 44BB Non-resident assessee engaged in exploration of mineral oil Taxpayer claims that his profits are lower than the deemed profits.
Presumptive Tax Scheme under Sec. 44BBB Foreign Co. engaged in civil construction Taxpayer claims that his profits are lower than the deemed profits.

* Meaning of Specified Profession:

(a)

 

Legal

(b)

 

Medical engineering

(c)

 

Architectural

(d)

 

Consultancy

(e)

 

Interior decoration

(f)

 

Film artist

(g)

 

Authorised representative

(h)

 

Accountancy profession

(i)

 

Company secretary

(j)

 

Information Technology

  1. What documents should be maintained by the taxpayers to comply with requirement of maintenance of books of accounts as per Section 44AA?

Nature of Business or Profession Threshold Limits Books of Accounts to be maintained
Specified Professions Gross receipt exceeding Rs. 1,50,000 in all 3 years immediately preceding the previous year 1. Cash book
    2. Journal, if books of accounts are maintained according to mercantile system of accounting
    3. Ledgers
    4. Carbon copies of bills and receipts issued by the assessee of value exceeding Rs. 25, these bills and receipts may be numbered by machine or otherwise.
    5. Original copy of bills issued to the assessee and receipts in respect of the expenditures incurred by him.
    6. Signed vouchers, if bills and receipts are not issued and amount of expenditure does not exceed Rs. 50 if cash book does not contain adequate particulars in respect of these expenditures.
Medical Professions Gross receipt exceeding Rs. 1,50,000 in all 3 years immediately preceding the previous year 1. As specified above for specified professions
    2. Daily case register
    3. Inventory under broad heads of stock of drugs, medicines and other consumable accessories used for the purpose of profession, as on the first and last day of previous year.
Specified Professions Gross receipt not exceeding Rs. 1,50,000 in any of the 3 years immediately preceding the previous year Such books of accounts which may enable the Assessing Officer to compute the taxable income.
Non-Specified Professions Income does not exceed Rs 2,50,000 (This limit is for individuals or HUF only, for others limit is Rs. 1,20,000) Not required to maintain books of accounts
Business Income does not exceed Rs 2,50,000 (This limit is for individuals or HUF only, for others limit is Rs. 1,20,000) Not required to maintain books of accounts
Non-Specified Professions Income exceeds Rs 2,50,000 (This limit is for individuals or HUF only, for others limit is Rs. 1,20,000) Such books of accounts which may enable the Assessing Officer to compute the taxable income.
Business Income exceeds Rs 2,50,000 (This limit is for individuals or HUF only, for others limit is Rs. 1,20,000) Such books of accounts which may enable the Assessing Officer to compute the taxable income.
  1. Mr. A is maintaining books of accounts at more than one location. Whether address of all the locations is to be mentioned in Audit report?

Clause 11 of Form 3CD requires a list of books maintained and address at which such books of accounts are kept. If such books of accounts are kept at multiples locations then the auditor is required to mention the address of all the locations along with the details of books of accounts maintained at each location. In case of a company assessee, the auditor should verify as to whether form AOC-5 has been filed with MCA under the Companies Act for maintenance of books of accounts at a place other than the registered office.

  1. An assessee has changed method of accounting from mercantile to cash basis. What disclosure is required in Form 3CD?

Clause 13 of Form 3CD requires every assessee to report method of accounting employed in the previous year. Further, if there was a change in method of accounting employed in the immediately preceding previous year then same is to be reported. The assessee is also required to disclose the effect of a change in method of accounting on the profit and loss. If it is not possible to quantify the effect of a change in method of accounting, appropriate disclosure should be made under this clause.

A change in an accounting policy will not amount to a change in the method of accounting and hence any change in the accounting policies need not be mentioned under clause 13(b).

  1. Whether adoption of Ind AS for the first time could be considered as ‘Change in Method of Accounting’ for the purpose of disclosure in Form 3CD?

Method of Accounting refers to the basic rules and guidelines under which businesses keep their financial records and prepare their financial statements. There are two main accounting methods used for record-keeping: the cash basis and the accrual basis. Whereas the Accounting Standards or Ind AS, pre-requisite the accrual basis of accounting, provide the common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards are authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP).

Method of Accounting should not be confused with GAAP. Method of Accounting can be either cash basis or accrual basis. The GAAP provides the principles and procedures for calculation and recognition of a financial transaction within the framework of Accrual basis of accounting. When an entity switches from Accounting Standards to Ind AS, it does not change its method of accounting. Thus, the transition to Ind AS should not be treated as a change in method of accounting.

  1. Whether GST registration no. of the assessee has to be furnished in Form 3CD if assessee is liable to pay tax under reverse charge?

The ICAI, vide Implementation Guide dated August 22, 2018, has clarified that even if liability to pay GST is only under the reverse charge mechanism, the fact of being liable to GST needs to be answered in the affirmative, with the clarification that such liability is only under the reverse charge mechanism.

  1. If an assessee has multiple GSTIN, which registration no. needs to be furnished in Form 3CD?

In case the assessee has multiple GSTIN numbers, being registered under different states, all the GSTIN numbers allotted to him shall be mentioned in Form 3CD.

  1. Clause 27 requires the details of Cenvat Credit availed and utilized. As GST has been implemented from July 1, 2017, whether details of Input Tax Credit under GST has to be disclosed in this clause or it shall be restricted to Cenvat Credit?

The concept of Cenvat Credit was relevant under erstwhile Central Acts, i.e., Excise Act, 1944 and Finance Act, 1994 (Service-tax Act). The purpose of seeking the information of Cenvat Credit in Form 3CD was to verify and reconcile the credit availed of and utilized by the taxpayer.

The concept of Cenvat Credit has been replaced with Input Tax Credit in new regime of GST. Though the concept remains same, yet the scope of Input Tax Credit is a bit larger than Cenvat Credit. Credits are allowed in respect of more inputs even if they are not directly attributable to outputs and Credit of State GST can be used against Integrated GST and vice-versa. As the CBDT has not yet clarified on the inclusion of GST details in Form 3CD, considering the objective as stated above, the auditors are advised to disclose the information of ITC in Clause 27.

  1. Whether an auditor need to mention the clause under which he has conducted the audit?

Clause 8 of the Form 3CD requires the auditor to provide the relevant clause under which the tax audit has been conducted, which are as under:

(a)

 

Clause 44AB(a) – If total sales/turnover/gross receipts in business exceeds Rs. 1 Crore

(b)

 

Clause 44AB(b) – If gross receipts in profession exceed Rs. 50 lakhs

(c)

 

Clause 44AB(c) – If profits of a business are claimed to be lower than the presumptive income computed under Sections 44AE, 44BB or 44BBB

(d)

 

Clause 44AB(d) – If profits of the profession are claimed to be lower than the presumptive income computed under 44ADA

(e)

 

Clause 44AB(e) – If profits of a business are claimed to be lower than the presumptive income under Section 44AD.The description in the utility is not appropriate as clause (e) is applicable if taxpayers opts out of the presumptive tax scheme under section 44AD and his income exceeds the maximum exemption limit.

(f)

 

Third proviso to Section 44AB – Audit under any other law

  1. If shares of members of AOP are unknown during the previous year, whether it is required to be reported in Form 3CD?

If shares of members are unknown during the previous year, the auditor needs to disclose this fact in the Clause 9(a) of Form 3CD.

  1. Whether it is mandatory to disclose nature of all the businesses carried on by the assessee and any change therein?

Clause 10 of Form 3CD mandates disclosure of nature of every business or profession carried on by an assessee during the previous year.

Any material change in the nature of business should be precisely disclosed. The change will include a change from manufacturer to the trader as well as a change in the principal line of business. Any addition to or permanent discontinuance of, a particular line of business may also amount to change requiring reporting. However, temporary suspension of the business may not amount to change and therefore need not be reported.

  1. Mr. A has opted for presumptive scheme under Section 44AD in respect of one of his business. Whether auditor is required to mention details of such business in Audit report?

In case profit and loss account of the assessee includes any profit declared under presumptive scheme (Section 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB) then it is mandatory to mention the amount of such profit and the section under which the same is declared in Clause no. 12 of Form 3CD.

The tax auditor is not required to indicate as to whether the amount of presumptive income has been correctly computed under the relevant section relating to presumptive taxation. The reporting requirement gets satisfied if the amount as per profit and loss account is reported.

  1. How to ensure that the profit has been computed correctly if profit & loss account also includes the profit computed on presumptive basis?

If profit and loss account of assessee also includes the presumptive income, the common business expenditure has to be apportioned in order to arrive at the correct amount of profit credited to profit and loss account and assessable on a presumptive basis. The tax auditor, in such situation, should arrive at a fair and reasonable estimate of such expenditure on basis of evidence in possession of the assessee or by asking the assessee to prepare such estimate which should be checked by him.

It is also necessary to mention the basis of apportionment of common expenditure. However, if the tax auditor is not satisfied with the reasonableness of such apportionment, he should indicate such fact under this clause by a suitable note.

  1. How to compute the amount of increase or decrease in profit due to compliance with ICDSII?

ICDS II – Valuation of Inventories. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS II shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Add: Expenses Disallowed  
u Finance Costs component on consumption of inventory purchased on deferred credit terms xxx
Less:  Expenses Allowed  
u Finance cost component on inventory purchase at deferred credit terms xxx
Net Profit/Loss before tax as per ICDS xxx
  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS III?

ICDS III – Construction Contracts. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS III shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Add: Expenses disallowed  
 Expected loss booked as total contract cost likely to exceed the total contract revenue. xxx
Less:  Expenses allowed  
 Proportionate loss as per POCM [Percentage of completion method] as total contract costs is likely to exceed total contract revenue (xxx)
Net Profit/Loss before tax as per ICDS xxx
  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS IV?

ICDS IV–Revenue Recognition. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS IV shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Less: Income not taxable  
 Dividend Income (xxx)
Net Profit/Loss before tax as per ICDS xxx
  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS V?

ICDS V – Tangible Fixed Assets. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS V shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Add: Expenses disallowed/Income taxable  
(a) Amount of Stand-by equipments and servicing equipments (which are expensed off) xxx
(b) Amount of expensed off machinery spares which can be used only in connection with an item of tangible fixed asset whose use is expected to be irregular xxx
(c) Amount of interest expense recognised in statement of profit and loss due to deferral in payment of fixed assets beyond normal credit terms xxx
(d) Amount of impairment loss provision xxx
(e) Amount of reduction from the capitalised amount of self-constructed assets (i.e., reduction on account of sale proceeds of goods produced during experimental stage) xxx
(f) Amount of abnormal cost of wasted material, labour, or other resources incurred in self-constructing an asset which are excluded from cost of asset xxx
(g) Loss on sale of fixed assets xxx
(h) Depreciation as per books of accounts xxx
Less:  Expenses Allowable  
(a) Amount capitalised on account of dismantling and removing the item and restoring the site (xxx)
(b) Reversal of impairment loss provision (xxx)
(c) Amount of foreign exchange fluctuation gain pertaining to fixed assets (xxx)
(d) Gain on sale of fixed assets (xxx)
(e) Depreciation as per Income tax Act (xxx)
Net Profit/Loss before tax as per ICDS xxx
  1. How to compute the block of asset after compliance with ICDS V?

ICDS V – Tangible Fixed Assets. The block of assets as per Income-tax Act shall be computed after making adjustments provided under ICDS V. It shall be computed in the following manner:

Particulars Block 1 Block 2 Block 3 Total
Opening Gross block as per Income-tax return xxx xxx xxx xxx
Add: Additions as per AS Financials xxx xxx xxx xxx
(a) Amount of Stand-by equipment and servicing equipment xxx xxx xxx xxx
(b) Amount of machinery spares which can be used only in connection with an item of tangible fixed asset whose use is expected to be irregular xxx xxx xxx xxx
(c) Amount of interest expense recognised in statement of profit and loss due to deferral in payment of fixed assets beyond normal credit terms xxx xxx xxx xxx
(d) Amount of reduction in capitalised amount of self-constructed assets (i.e., reduction on account of sale proceeds of goods produced during experimental stage) xxx xxx xxx xxx
(e) Amount of abnormal cost of wasted xxx xxx xxx xxx
(f) material, labour, or other resources incurred in self-constructing an asset excluded from the cost of the asset xxx xxx xxx xxx
Less:        
(a) Amount capitalised on account of dismantling and removing the item and restoring the site (xxx) (xxx) (xxx) (xxx)
(b) Amount of foreign exchange fluctuation gain pertaining to fixed assets (xxx) (xxx) (xxx) (xxx)
(c) Sale proceeds of assets (to the extent of net block) (xxx) (xxx) (xxx) (xxx)
Closing Block of Assets xxx xxx xxx xxx
  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS VII?

ICDS VII– Government Grants. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS VII shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Add: Income taxable  
 Government grant received but not recognised as income xxx
Less: Income not taxable  
 Government grant income on account of depreciable asset (xxx)
Net Profit/Loss before tax as per ICDS xxx

The amount of Government grant shall be reduced from the block of assets, if it has been taxed as revenue income under this ICDS.

  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS VIII?

ICDS VIII – Securities. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS VIII shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Net Profit/ Loss as per AS Financials xxx
Add: Income taxable  
 Sale proceeds of right shares when shares acquired on cum right basis and there is fall in value of shares immediately after becoming ex-right xxx
Net Profit/Loss before tax as per ICDS xxx
  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS IX?

ICDS IX –Borrowing Costs. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS IX shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Add: Expenses disallowed/Income taxable  
(a) Borrowings costs incurred between the date of loan and date of utilization of loan xxx
(b) Borrowing costs incurred between the date on which asset was ready to use and the date on which asset was put to use xxx
(c) Income earned on temporary investment of borrowed funds which was adjusted from the amount of capitalisation xxx
(d) Borrowing costs incurred during the suspended period xxx
Less:  Expenses Allowable xxx
(a) Forex differences capitalised under AS (xxx)
Net Profit/Loss before tax as per ICDS xxx
  1. How to compute the block of asset after compliance with ICDS IX?

ICDS IX –Borrowing Costs. The block of assets as per Income-tax Act shall be computed after making adjustments provided under ICDS IX. It shall be computed in the following manner:

Particulars Block 1 Block 2 Block 3 Total
Opening Gross block as per Income-tax return        
Add: Additions as per AS Financials        
(a) Borrowings costs incurred between the date of loan and date of utilisation of loan xxx xxx xxx xxx
(b) Borrowing costs incurred between the date on which asset was ready to use and date on which asset was put to use xxx xxx xxx xxx
(c) Income earned on temporary investment of borrowed funds xxx xxx xxx xxx
(d) Borrowing costs incurred during the suspended period xxx xxx xxx xxx
Less:        
(a) Forex differences capitalised under AS (xxx) (xxx) (xxx) (xxx)
Closing Block of Assets xxx xxx xxx xxx
  1. How to compute the amount of increase or decrease in profit due to compliance with ICDS X?

ICDS X – Provisions, Contingent Liabilities and Contingent Assets. In Clause 13(e) of Form 3CD, the disclosure shall be made about the profits increased or decreased after applying ICDS. The revised profits after taking into consideration the ICDS X shall be calculated in the following manner. The net result of the table shall be reported in the said clause:

Particulars Amount
Profit before tax as per AS Financials xxx
Add: Expenses disallowed/Income taxable  
(a) Provision at discounted value xxx
(b) Contingent assets and related income which are reasonably certain but not virtually certain xxx
Less:  Expenses Allowable  
 Provision at undiscounted value~xxx (XXX)
Net Profit/Loss before tax as per ICDS xxx
  1. An assessee has applied for refund of Special Additional Duty (SAD) but same wasn’t credited in profit & loss account. Whether disclosure is required in Form 3CD?

If a claim for refund of SAD has been admitted as due and accepted during the relevant financial year, it shall be reported under Clause 16. If claims has been lodged during the previous year but it have been admitted as due after the relevant previous year, it need not be reported here.

Where such amounts have not been credited in the profit and loss account but netted against the relevant expenditure/income heads, such fact should be clearly brought out.

  1. Whether employees’ contribution to provident fund, Superannuation fund etc. after the due dates are deductible?

This matter has witnessed substantial litigation and the Courts have given conflicting rulings – some in favor of the employers stating that employees share even if paid before the due date of filing of return of income can be claimed a deduction, while some rulings have held that deposit of employee’s share of contribution beyond the dates prescribed under the respective legislation would not be allowed as a deduction.

The Supreme Court of India in the case of Rajasthan State Beverages Corporation decided the underlying case in favor of the employers by dismissing the SLP filed against the order of Rajasthan High Court by the Department. However, recently, the Kerala High Court in the case of M/s Popular Vehicles and Services Private Limited have rejected the employer’s claim for deduction, if paid beyond the due date on the ground that the intent of introduction of section 36(1)(va) was to ensure that employers should not sit on the contributions collected from the employees’ salary and deprive the workmen of the rightful benefits under the social welfare legislations, by delaying payment of contributions to the welfare funds.

  1. How much remuneration or salary payable to a partner of firm is admissible?

The salary, bonus, commission or remuneration or interest payable to the partners of the Partnership firm are not admissible, unless the following conditions are satisfied:

(a)

 

Remuneration is paid to working partners only.

 

(b)

 

Remuneration or interest is authorised by the partnership deed and is in accordance with the partnership deed.

 

(c)

 

Remuneration or interest does not pertain to a period prior to the date of partnership deed.

 

Taxability of Partnership Firm

Deduction for remuneration

Under Normal Provisions

On the first Rs. 3,00,000 of the book-profit or in case of a loss: Rs. 1,50,000 or @90% of book profit, whichever is more On the balance of the book-profit: @60%

Under Section 44AD

No deduction

Under Section 44ADA

No deduction

Under Section 44AE

On the first Rs. 3,00,000 of the book-profit or in case of a loss: Rs. 1,50,000 or @90% of book profit, whichever is more On the balance of the book-profit: @60%

         

The amount of salary, remuneration, etc. which isn’t admissible by virtue of Section 44(b) shall be disclosed in Clause 21(c).

  1. Whether remuneration payable to a partner by the firm shall be disallowed if partnership deed doesn’t quantify the remuneration but lays down the formula to compute it?

The CBDT, vide Circular No. 739 dated March 25, 1996, has clarified that where neither the amount has been quantified nor the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of the firm’s income.

It is clarified that no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.

  1. Whether Auditor has to quantify whether payment to related person is unreasonable or excessive under clause 23?

No, Auditor isn’t required to quantify whether the payment is unreasonable or excessive. Only the Assessing Officer can make the disallowance if in his opinion the expenditure is unreasonable.

  1. As section 43B specifically disallows the interest expense which is converted into loan, whether such disallowance shall be of permanent in nature?

The Circular No.7/2006 dated July 17, 2006 clarifies that the unpaid interest, whenever actually paid to the bank or financial institution, will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, the converted interest, by whatever name called, in the wake of its conversion into a loan or borrowing or advance, will be eligible for deduction in the computation of income of the previous year in which the converted interest is ‘actually paid’.

In other words, nomenclature of the sum of converted interest will make no difference as the sum of converted interest whenever is actually paid will not represent repayment of the principal. The circular clarifies that the fundamental principle remains that once an amount has been determined as interest payable to the banks or financial institutions, any subsequent change of nomenclature of interest will not affect its allowability and deduction in terms of section 43B will have to be allowed on its actual payment. The Assessing Officer, however, can ask for a certificate from the assessee to be obtained from the lender bank or financial institution etc. as evidence of “actual payment” of interest to banks or financial institutions.

  1. Whether sum payable to Indian Railways for advertisement at railway stations would be disallowed under Section 43B?

If the payment is being made by an advertising agency to the railways for putting up hoardings or display panels on railway premises, such payment would amount to the payment for use of railway assets, as the payment is for the use of space on the premises. However, where an advertiser is making payment to the railways for display of advertisements on hoardings or displays in railway premises, such a payment is in the nature of payment for the services of advertisement, and not for the use of railway assets.

Any sum payable to Indian Railways for use of railways assets shall be allowed on payment basis. Any sum payable to Indian Railways for its services shall be allowed as per the method of accounting regularly employed by the assessee.

  1. If the statutory auditor does not consider an item as a prior period expense, whereas tax auditor feels that such item should be considered as a prior period, should that expense be disclosed in Clause 27(b) of Form 3CD?

It may be noted that there is a difference between the expenditure of any earlier year debited to the profit and loss account and the expenditure relating to an earlier year, which has crystallized during the relevant year. An expense, though related to previous periods, which has been determined in the current period, would not be considered as prior period items.

In such cases, though the expenditure may relate to the earlier year, it can be considered as arising during the year on the basis that the liability materialized or crystallized during the year and such cases will not be reported under this clause.

In case of any conflict in the opinion of the statutory auditor and tax auditor, the opinion of tax auditor shall prevail and the information thereof shall be reported in Form 3CD.

  1. There is a difference in opinion between the tax auditor and the client with respect to applicability of a TDS provision on a particular payment. How to report such difference in tax audit report?

If the tax auditor and client have a difference of opinion with respect to the applicability of TDS/TCS provision, such concern shall be reported in Clause (3) of Form 3CA or Clause (5) of Form 3CB, as the case may be.

  1. Mr. A, a sole proprietor, agreed to transfer his personal property to Mr. X and received some non-refundable advance against such deal. The sale could not materialize as Mr. X could not pay the whole amount and the advance money was forfeited by Mr. A. What are the disclosure requirements?

Section 56(2)(ix) of the Income-tax Act, 1961, provides for taxability of any sum received as an advance in course of negotiations for the transfer of capital asset and such sum was forfeited due to non-transfer of such capital asset. A new clause 29A to Form 3CD has been inserted to report any advance received from the buyer but forfeited due to non-materialization of a deal to the sale of the capital asset.

The auditor is not required to report any such forfeited amount if it is in respect of a personal capital asset or stock-in-trade. Any advances received and forfeited towards the sale of stock-in-trade would be taxable under section 28(i), and would not be required to be reported since the amount would be credited to profit & loss account.

  1. When an advance shall be deemed to be forfeited for the purpose of disclosure in Clause 29A?

The requirement of reporting arises only on forfeiture of advance. If an advance has been received and has been outstanding for a considerable period of time, there is no requirement to report such amount unless and until it is forfeited by an act of the assessee.

Mere unilateral writing back of an advance by credit to the profit and loss account, asset account or capital account may not by itself amount to an act of forfeiture by the assessee. Such a write back is, however, an indication of a possible act of forfeiture, which needs further verification by the tax auditor. It is advisable for the tax auditor to disclose all such acts of unilateral write backs as well, out of abundant precaution, with an appropriate note regarding the stand taken by the assessee

  1. Whether advance received from a person for sale of goods shall also be disclosed under Clause 31?

Loans or deposits are generally squared off by repayment of the sum to the lender. While as in case of advance for sale of goods, the party’s ledger is squared off by delivery of goods or services. Thus, advance received against agreement of sale of goods could not be deemed as loan or deposit. Accordingly, details of advances shall not be reported in Clause 21. Further, the ICAI, in the guidance note, has clarified that Advance received against agreement of sale of goods is not a loan or deposit.

  1. ABC Ltd. has rendered services to its Associate Enterprise resulting a net profit of 15% on cost. Transfer Pricing Officer (TPO) calculated ALP of this transaction at 20% of cost and accordingly made adjustment. Is it required to report this transaction in Form 3CD?

As per the newly inserted Clause 30A to Form 3CD, if any primary adjustment to the transfer price has been made as per section 92CE(1), then the following details need to be given in Clause 30A of the Form.

(a)

 

Clause of section 92CE(1)in which primary adjustment is made?

(b)

 

Amount of primary adjustment.

(c)

 

Whether the excess money available with the associated enterprise is required to be repatriated to India as per the provisions of section 92CE(2)?

(d)

 

If yes, whether the excess money has been repatriated within the prescribed time.

(e)

 

If no, the amount of imputed interest income on such excess money which has not been repatriated within the prescribed time.

  1. How to calculate the interest on excess money that need to be repatriated after primary adjustment?

Rule 10CB provides the rate of interest at which interest has to be calculated on excess money which is not repatriated within the time limit. Where the international transaction is denominated in Indian rupees, the rate of interest will be the one-year marginal cost of fund lending rate of State Bank of India as on 1st April of the relevant previous year, plus 325 basis points (plus 3.25%). Where the international transaction is denominated in foreign currency, the rate of interest shall be the six-month London Interbank Offered Rate (LIBOR) as on 30th September of the relevant previous year plus 300 basis points (plus 3%).

It is possible that the amount of imputed interest income on the excess money not repatriated to India may relate to more than one year. Having regard to Rule 10CB, the interest liability extends till the date of repatriation. Accordingly, for the relevant year under audit, such liability in respect of imputed interest may extend not only to the primary adjustment but may also relate to the primary adjustment made in the earlier years.

  1. My client has borrowed money from its foreign holding company and interest paid on such loan was Rs. 1.05 crore during the previous year. Whether this transaction is reportable in Form 3CD?

The Finance Act, 2017 has inserted a new section 94B to the Income-tax Act, 1961 which provides that if an Indian company or PE of a foreign company pays interest in excess of Rs. 1 crore to the associated enterprise, the deduction for interest shall be restricted to lower of following:

(a)

 

Total interest paid or payable in excess of 30% of earnings before interest, taxes, depreciation and amortization (“EBITDA”)of the borrower in the previous year; or

(b)

 

Interest paid or payable to AEs for that previous year.

The excess interest, which is disallowed, can be carried forward for a period of 8 assessment years following the year of disallowance, to be allowed as a deduction against profits and gains of any business in the subsequent years, to the extent of maximum allowable interest expenditure under this section.

A new clause 30B has been inserted in Form 3CD which requires details of such interest payment with the following disclosures:

(a)

 

Amount of expenditure by way of interest or of similar nature incurred.

(b)

 

EBITDA during the previous year.

(c)

 

Amount of expenditure by way of interest or of similar nature as per (a) above which exceeds 30% of EBITDA as per (b) above.

(d)

 

Details of interest expenditure brought forward as per section 94B(4).

(e)

 

Details of interest expenditure carried forward as per section 94B(4)

This clause shall not be applicable in case of a company which is engaged in the business of banking or insurance.

  1. Whether the figure of EBITDA shall be as per books of accounts or as per provisions of Income-tax?

While computing the EBITDA, the figures as per the final audited stand-alone accounts of the company should be considered, and not the figures as adjusted for the income tax computation after various allowances and disallowances.

  1. How the details of loans accepted and repayment thereof shall be reported in Clause 31 of Form 3CD?

Nature of Transaction during the year Mode To be reported in
Loan or Deposit Accepted A/c Payee cheque Clause 31(a)
Loan or Deposit Accepted Others Clause 31(a)
Receipt of advance for transfer of Immovable Property A/c Payee cheque Clause 31(b)
Receipt of advance for transfer of Immovable Property Others Clause 31(b)
Other Receipt of Rs. 2 lakhs or more Cheque or Draft (not being A/c Payee) Clause 31(ba)
Other Receipt of Rs. 2 lakhs or more Other Mode (not being Cheque or Draft) Clause 31(bb)
Payment in excess of Rs. 2 lakhs Cheque or Draft (not being A/c Payee) Clause 31(bd)
Payment in excess of Rs. 2 lakhs Other Mode (not being Cheque or Draft) Clause 31(bc)
Repayment of Loan or Deposit or advance for transfer of Immovable Property A/c Payee cheque Clause 31(c)
Repayment of Loan or Deposit or advance for transfer of Immovable Property Others Clause 31(c)
Repayment of loan or deposit or advance for transfer of Immovable Property (originally accepted other than through cheque) Any Clause 31(d)
Repayment of loan or deposit or advance for transfer of Immovable Property (originally accepted through cheque or draft not being A/c payee cheque/draft) Any Clause 31(e)
  1. Mr. X appointed Mr. A for consultancy work. He failed to deduct TDS from payment made to him but Mr. A has paid tax on his total income. Whether payment made to Mr. A will be disallowed in hands of Mr. X?

As per section 40(a)(ia), where any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical service is payable to a resident on which tax is deductible at source but such tax has not been deducted or after deduction has not been paid to the credit of central government by due date specified under section 139(1), 30% of such amount shall be disallowed.

However, where an assessee fails to deduct tax but the deductee has paid tax on such income by including the same in the return of income furnished by him, then assessee shall not be deemed as an assessee in default for the purpose of section 40(a)(ia).

Thus, when payee files his return, the amount which was disallowed in the hands of payer shall be allowed as a deduction in the financial year in which payee furnish his return of income.

Example, if payee furnishes his return of income on July 27, 2019, it shall be deemed that the assessee has deducted and deposited the tax on July 27, 2019 and he shall be allowed deduction in the Financial Year 2018-19. A tax auditor is required to report the particulars of such disallowance in the tax audit report for FY 2018-19.

  1. How Section 40(a)(ia) operates to allow or disallow an expense?

As per section 40(a)(ia) where an assessee fails to deduct TDS or after deduction fails to deposit the same to the account of the central government on or before the due date specified under section 139(1), 30% of such amount shall be disallowed. However where such tax is deducted in subsequent year or has been deducted during the current year but paid after the due date, then such proportion which has been disallowed shall be allowed as a deduction in the year in which such tax is paid. Let us understand this with the help of table below (assuming assessee is a company):

Date of Payment/ Credit to the account of assessee

Date of Deduction of tax

Time of Payment of TDS to the credit of government

Year in which deduction will be allowed

June 4, 2017

June 4, 2017

July 7, 2017

FY 2017-18

July 5, 2017

July 5, 2017

May 31, 2018

FY 2017-18

April 15, 2015

April 15, 2015

December 31, 2016

FY 2016-17

August 11, 2017

May 31, 2018

December 31, 2018

FY 2018-19

August 11, 2017

May 31, 2018

May 31, 2018

FY 2018-19

May 20, 2015

June 25, 2017

July 31, 2018

FY 2018-19

  1. My client has furnished the statement of tax deducted or tax collected within the prescribed time limit. Do I have to report the details of such returns in form 3CD?

Upto Assessment Year 2017-18, an assessee is required to report details regarding furnishing of statement of tax deducted or tax collected under clause 34(b) if such statements weren’t submitted within the prescribed time limits. However, the newly notified Form 3CD which is applicable for AY 2019-20 ask such details even if the assessee has submitted the statements within prescribed time limits.

Further, if assessee failed to report all transactions in statements of TDS/TCS then unreported transactions have to be disclosed in clause 34(b) of Form 3CD.

  1. Whether any exp. would be treated as inadmissible under section 40(a)(ia) even if such exp. isn’t payable as on March 31, 2019?

Clause 21(b) requires reporting of expenses which are not admissible as per the various sub-clauses to section 40(a). Section 40(a)(ia) deals with the disallowance of 30% of any sum payable to a resident on which TDS hasn’t been deducted or after deduction, not paid to Govt. on or before the due date of filing of ITR.

Since the section 40(a)(ia) uses the word ‘Payable’, assessee often argued that the provision is applicable only on such sums which are payable as on March 31 and no disallowance could be made for any sum which has been paid during the year.

The Supreme Court has settled this ‘paid’ vs ‘payable’ controversy in the case of Palam Gas Service v. CIT. It was held that the disallowance for TDS default shouldn’t be restricted to only those expenses which are outstanding as on the last day of the financial year.

Therefore, exp. would be treated as inadmissible under section 40(a)(ia) even if it is paid during the year.

  1. Whether capital expenditure shall be reduced from Actual Cost of capital asset if tax was not deducted from such expenditure?

As per section 40(a)(ia), 30% of an expense is disallowed if tax is not deducted or after deduction not paid to the government. Whether this provision shall be applicable only in case of revenue expenditure or in respect of a capital expenditure as well has been a matter of dispute between taxpayer and revenue. The revenue always argues to reduce the actual cost of a fixed asset if the tax has not been deducted for an expense which is capitalized as per provisions of section 43(1). In the cases of CIT v. Plasmac Machine Mfg. Co. Ltd. and Sumilon Industries Ltd. v. ITO (Ahmedabad-ITAT), it was held that disallowance under this section can be made only from an expense which is claimed in Profit and Loss Account. Since in case of capital expenditure no deduction is claimed under the P/L account, there should not be any disallowance under section 40(a)(ia) in respect of such payment.

  1. Whether quantitative details of each and every stock is to be mentioned in clause 35?

Clause 35 requires quantitative details of “principal items” of raw materials and finished goods. Therefore, information about petty items need not be given. Normally, items which constitute more than 10% of the aggregate value of purchases, consumption or turnover may be classified as principal items.

  1. In case of a manufacturing concern, the auditor had failed to ascertain yield of finished goods because of different measurement unit of raw material and that of finished product. How to report this in Form 3CD?

If the assessee is engaged in the manufacture of goods, the yield and shortage cannot be ascertained if the input of raw materials and the output of finished goods are recorded in different units of measurement.

If the end product is a standard item and can be converted back and related to the input of the raw material in the same unit of measurement, it should be done to ascertain the shortage, yield etc. If it is not possible, the tax auditor should state the fact under this clause.

  1. In case of first Ind AS financial statements, whether the details regarding turnover, gross profit, ratios, etc., for the previous year and preceding previous year shall be as per Ind AS financial statements.

As per Ind AS 101 – First Time Adoption of Indian Accounting Standards, in case of transition from AS to Ind AS, the opening balances as well as comparative figures have to be calculated and presented as per Ind AS.

The Income-tax Act does not provide any mechanism for calculation of gross profit, turnover or ratios for the purpose of disclosure in Form 3CD. Thus, such disclosures have to be made as per the financial statements prepared in accordance with AS or Ind AS. As the entity has to present the comparative figures in Ind AS financial statements, the same information can be used to disclose the desired information in Form 3CD.

  1. Can an assessee claim deduction of interest and penalties paid under Income-tax Act?

Clause 21 of Form 3CD requires details of amount debited to Profit and Loss account which is not allowable as deduction such as capital exp., personal exp., penalties etc.

As per Section 37(1), any expenditure incurred wholly and exclusively for the purpose of business shall be allowed as deduction while computing income chargeable under ‘Income from business or profession’. Explanation to Section 37(1) further provides that any expense, which is paid for any purpose which is an offence or which is prohibited by law, cannot be said to be incurred wholly and exclusively for the purpose of the business. Thus no deduction shall be allowed in respect of such expense.

The Supreme Court in the case of Malwa Vanaspati & Chemical Co. v. CIT [1997] 225 ITR 383(SC) held that where the assessee is required to pay an amount comprising both the elements of compensation and penalty, the compensation was allowable as business expenditure, but not the penalty. Accordingly, if the amount so paid by the assessee, is found to be compensatory in nature, then such amount could be treated as business expenditure and allowable under section 37.

The Supreme Court in the case of Pratibha Processors v. Union of India AIR 1997 SC 138 has held that penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provision of the particular statute, which is penal in nature and not compensatory. Therefore, an assessee can’t claim a deduction for the penalty paid under Income-tax Act or any other Act. However, interest paid for delay in payment of tax or deposit of TDS shall be deemed as compensatory in nature and the deduction thereof shall be allowed to the assessee.

  1. In case of Ind AS financial statements, if liability increases due to change in Actuarial assumptions for calculation of provision for gratuity, which is debited to OCI, whether the entity can claim the deduction for such additional liability?

Various Courts have held that if provision for gratuity is computed on a scientific basis (i.e., actuarial valuation), the deduction thereof shall not be denied. If any liability increases due to change in the actuarial assumptions, the resultant expense is recognized in OCI by virtue of Ind AS 19 – Employee Benefits. Thus, if provision for gratuity increases due to change in the assumptions, such as, discount rate, mortality rate, etc. the additional expenses recognized in OCI should be allowed as deduction while computing the taxable business income. If increase in provision for gratuity is attributable to such change in actuarial assumption, it shall not be disclosed as disallowable under Clause 21(e).

  1. How the deduction of interest charged to Statement of Profit & Loss due to “effective interest rate method” of Ind AS should be allowed under Income-tax Act?

In view of Ind AS, the processing fees paid to the banks or financial institution in respect of borrowings have to be amortized over the tenure of the loan. In other words, the amount of borrowing cost recognized during the year shall be deemed as the sum of actual interest paid or payable to the bank and the amortized amount of processing fees.

The deduction for such borrowing cost under the Income-tax Act shall be subject to Section 43B. The deduction for interest and processing fees shall be allowed on payment basis. Thus, if the processing fees has been paid to the bank, the deduction for the entire fees shall be allowed in the year of payment itself. Irrespective of the amount of borrowing cost recognized in the books of account, the Income-tax Act shall allow deduction for entire amount of interest or process fees paid to the bank during the year. The disclosure shall be made in Clause 26.

  1. A demand was raised with respect to Custom duties on my client and the same was adjusted against the refund due in his name. So no amount was paid by him to the department. As an auditor, do I need to disclose the same in form 3CD?

Yes, an auditor is required to report the details of demand raised or refund issued to assessee during the previous year irrespective of the fact that it was adjusted against any pending demand or refund. Details are to be shown under Clause 41 of Form 3CD.

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