Form 10B Audit Reporting – Key Observations | Disclaimers | Compliance Guide

Form 10B audit reporting is a process where auditors review the financial statements and compliance of a charitable or religious trust or institution, as required under section 12A(b) of the Income-tax Act, 1961. The auditor’s role is to ensure that the organization has maintained proper books of accounts and that its financial statements are in agreement with those records. The audit report includes observations, qualifications, or disclaimers regarding the institution’s income application, benefits to specified persons under section 13(3), compliance with legal provisions, and reporting of any violations, as required in the annexure to Form 10B. This ensures transparency and adherence to tax regulations.

Table of Contents

1. Introduction
2. Reporting the Details of Persons Specified in Section 13(3)
3. Reporting of Benefit to Specified Persons
4. Reporting of Specified Violation
5. For Reporting Specified Violations as to Whether the Auditee Has Complied With Other Relevant Laws
6. Requirement of Reporting of Maintenance of Books of Account
7. Reporting of Non-filing of the Income Tax Return and Non-furnishing of the Audit Report Under Section 13(10) and 13(11)
8. Reporting the Amount of Application Based on Income and Expenditure Account
9. Suggested Remarks in Guidance Note on Reports of Audit Under Section 12A/10(23C) of the Income-Tax Act, 1961 Issued by ICAI

Checkout Taxmann's Trusts & NGOs – Your Queries on Audit Reports (Form Nos. 10B & 10BB) & Income-tax Return (ITR-7) which is a comprehensive and practical guide for filing audit reports using Forms 10B, 10BB, and ITR-7, fully updated with amendments from the Finance (No. 2) Act, 2024. It features over 100 FAQs that clarify common audit challenges, detailed analyses of the latest changes, and in-depth guidance on compliance requirements under Sections 12A and 10(23C). The book provides practical reporting tips, sample observations and qualifications, and user-friendly, step-by-step e-filing tutorials.

1. Introduction

In this article, we have discussed sample comments, observations, and disclaimers that can be used by an auditor based on the audit process they have followed. It is essential to customise the comments, observations, and disclaimers outlined below to align with the specific circumstances of the assessee’s records and the explanations provided in writing. The auditor should formulate additional comments, observations, or disclaimers to the unique requirements of each individual audit case.

Form No. 10BB/10B requires the Auditor to give his opinion as to whether proper books of account have been maintained as per the Income-tax Act’s requirements and whether the financial statements are in agreement with the books of account maintained by the institution. The auditor is required to give his opinion on whether the prescribed particulars furnished by the assessee are true and correct, subject to observations or qualifications, if any. The auditor may have a difference of opinion with regard to the particulars furnished by the auditee. These differences may pertain to various clauses in the annexure which are to be reported in this paragraph as observations/qualifications.

Any observations/qualifications/adverse remarks/disclaimers found during their audit on any of the clauses of Annexure to Form No. 10BB or Form No. 10B, wherever required are to be reported in Form 10B/10BB as observations/qualifications.

2. Reporting the Details of Persons Specified in Section 13(3)

Clause 41 of Form 10B and Clause 28 of Form 10BB mandate that the auditor must provide information regarding the individuals mentioned in section 13(3). These clauses require reporting their Name, PAN, Aadhaar Number, and address.

The specified persons to be reported in these clauses include the following:

• Author of the trust or the founder of the institution;
• Any person who has made a substantial contribution to the trust or institution (contribution exceeding Rs. 50,000 up to the end of the relevant previous year);
• Where such author, founder or person is a HUF, a member of the family;
• Any trustee of the trust or manager of the institution;
• Any relative of any such author, founder, person, member, trustee or manager as aforesaid;
• Any concern in which any of the persons referred above have a substantial interest.

The CBDT’s Circular No. 143, dated 20-8-1974, states that an auditor can accept a list of persons covered under section 13(3) and consider it correct while certifying Form No. 10B along with its annexure. Hence, the auditor can accept the list of persons covered by section 13(3) as given by the chief functionary, the managing trustees of the organisation, or the trust as correct.

Further, on the requirement of list of any person who has made a substantial contribution to the trust or institution (contribution exceeding ` 50,000 up to the end of the relevant previous year) and any concern in which any of the persons referred above have a substantial interest, the CBDT vide Circular No. 17/2023 dated 9th October 2023, has clarified that for the purposes of providing details in (i) Form No. 10B in the Annexure, in row 41; and (ii) Form No. 10BB in the Annexure, in row 28, for the assessment year 2023-24:

(a) The aforesaid details (that is, of persons making substantial contribution) may be given with respect to those persons whose total contribution during the previous year exceeds fifty thousand rupees;

(b) Details of relatives of such person, as referred to in (a) above may be provided, if available.

(c) details of concerns in which such person, as referred to in (a) above, has substantial interest may be provided, if available.

Furthermore, the records of the persons specified must be kept in the prescribed format as per Rule 17AA of the Income-tax (24th Amendment) Rules, 2022.

Considering that precise information about these specified persons and their relatives may not always be accessible, and factual verification of the list provided by management may not always be practically feasible, it is recommended that the auditor include the following comment:

The list of specified persons in terms of section 13(3) of the Income-tax Act, 1961 is reported as provided by the management in terms of CBDT Circular No. 143, dated 20-8-1974, and the CBDT Circular No. 17/2023 dated 9-10-2023 and the record of specified persons as maintained in the format specified under rule 17AA of the Income-tax Rules, 1962.

3. Reporting of Benefit to Specified Persons

The exemption shall not be allowed to a charitable or religious trust to the extent of the income applied for the benefit of an interested person. An interested person is deemed to be benefited if the loan is given without adequate interest or security, allowing the use of property without adequate rent, excess payment of salary, excess payment for purchases, inadequate consideration for sales, etc.

Any income of a trust or institution is applied for the benefit of the interested party; the following consequences shall arise:

• No exemption shall be allowed under section 11 or section 12;
• The income in respect of which an exemption is not available shall be taxed under section 115BBI;
• The amount of benefit which does not enjoy exemption shall be liable to penalty under section 271AAE; and
• The amount of benefit shall be taxable in the hands of the interested party under section 56(2)(x).

It should be noted that as per the newly inserted rule 17AA, there is a requirement to maintain records and documents of transactions involving specified persons as referred to in section 13(3). These records should include details such as the date and amount of the transaction, the nature of the transaction, and documents confirming that the transaction is not, directly or indirectly, for the benefit of the specified person.

Hence, this document becomes crucial for auditing payments made to specified persons. The organisation should review and provide a rationale explaining why a particular payment to a specified person should not be considered a benefit to them.

The auditor is required to assess the transactions conducted with specified persons during the year. They must exercise their professional judgment to determine whether these transactions have led to direct and/or indirect benefits for the specified individuals, in line with the criteria stipulated in section 13(2).

Generally, auditors base their opinions on standard audit practices, which may not entail a 100% verification of financial transactions. Therefore, it is recommended that the auditor include the following comment:

“During the course of our audit which has been conducted in accordance with the applicable Auditing Standards for Special Purpose Report and on the basis of the record of transactions being maintained by the auditee under rule 17AA of the Income-tax Rules, 1962, no instance of any benefit for unreasonable payment to persons as specified under section 13(2) was noticed.”

4. Reporting of Specified Violation

Clause 43 of Form 10B and Clause 30 of Form 10BB impose a responsibility on auditors to report specific violations as outlined in Explanation 2 to the fifteenth proviso to section 10(23C) or the Explanation to section 12AB(4), along with quantifying the monetary aspects of these violations. Hence, the auditors are required to identify these specified violations and provide the quantum of such violations.

The following are the specified violations that auditors are obligated to report:

(a) The income of the auditee has been applied other than for the objects of the trust or institution;

(b) Whether the auditee has income from profits and gains of business which is not incidental to the attainment of its objectives;

(c) Whether separate books of account are not maintained by the auditee in respect of the business which is incidental to the attainment of its objectives;

(d) Whether the auditee has applied any part of its income from the property held under a trust for private religious purposes, which does not enure for the benefit of the public;

(e) Whether the auditee has applied any part of its income for the benefit of any particular religious community or caste;

(f) Whether any activity carried out by the auditee is not genuine or is not being carried out in accordance with all or any of the conditions subject to which it was registered;

(g) Whether the auditee has not complied with the requirement of any other law, for the time being in force, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

Generally, auditors base their opinions on standard audit practices, which may not entail a 100% verification of financial transactions. Therefore, it is recommended that the auditor include the following comment:

“During the course of our audit, which has been conducted in accordance with the applicable Auditing Standards for Special Purpose Report, we did not come across any instance of any specified violation as listed in Explanation to section 12AB(4).”

5. For Reporting Specified Violations as to Whether the Auditee Has Complied With Other Relevant Laws

Violations of laws mentioned in (a) to (f) are those violations which auditor can come across in the normal course of audit. Violation of any other law mentioned in (g) above relates to any other law. Violation of any other law cannot be detected in ordinary course of audit. Moreover, auditor is not a legal expert and cannot say whether such a violation has taken place. That is why clause (f) of Explanation to section 12AB(4) as well as clause 30/43 of Annexure to Form No. 10BB/10B respectively limit the auditor’s responsibility to report on such violations based on whether order, direction or decree, by whatever name called, holding that such non-compliance has occurred has been made and the same has either not been disputed or has attained finality. Where such order, direction or decree has been made but disputed, the auditor may furnish suitable note referring to clause 30/43 Annexure to Form No. 10BB/10B respectively in the fourth para of Form 10BB/Form 10B respectively.

In order to detect violations of “any other law”, auditor will have to rely on management representations and procedures outlined in Standard of Auditing, SA 501, as regards Litigations and Claims.

Paras 9 and 10 of SA 501 require that the auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:

• Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;
• Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and
• Reviewing legal expense accounts;
• Seek direct communication with assessee-trust’s legal counsel

The auditor should remember that the scope and ambit of the enquiry under the Act in this matter is limited.

For example, a charitable institution is running a school. It requires registration for the same under the State Law, and if it is not obtained, the institution can be wound up under the said law. Accordingly, it may not be able to achieve its objective of education. In such circumstances, the auditor shall consider it a fit case of specified violation.

Therefore, if the auditor is of the opinion that approval/permission is required from competent authorities, then he should specify the relevant laws, the reasons why such other laws are material and the authorities from which permissions/approval are required.

In view of the foregoing, the auditor should limit his liability/responsibility in respect of detection of specified laws covered by clause (f) of section 12AB(4) by adding suitable remarks in the 4th Paragraph/5th Paragraph of main audit report in Form 10B/Form 10BB. The remarks can be along the following lines:

“Based on audit procedures required to be followed by Standards of Auditing SA 250 and SA 501 and based on management representations obtained, we have not come across any order, direction or decree, by whatever name called, holding that such non-compliance has occurred which has not been disputed or attained finality.”

6. Requirement of Reporting of Maintenance of Books of Account

The question that arises pertains to the auditor’s responsibility when the organisation has diligently adhered to the requirements for maintaining books of account to a degree sufficient for the auditor to form an opinion on the true and fair view, and the absence of these documents does not result in any material misstatement.

In instances where there exists comprehensive and substantive compliance with the provisions of a rule, it is deemed satisfactory, as affirmed in the case of CIT v. Leroy Somer and Controls India (P.) Ltd. [2013] 37 taxmann.com 407/218 Taxman 216/[2014] 360 ITR 532 (Delhi), cited in Worlds Window Impex (India) (P.) Ltd. v. ACIT [2016] 69 taxmann.com 406 (Del.-Trib.).

In such a situation, the auditor can include the following observation in Form 10B:

‘The requirements concerning books of account and the documents stipulated under rule 17AA have been substantially complied with, as detailed in Clause 14 of Form 10B.’

7. Reporting of Non-filing of the Income Tax Return and Non-furnishing of the Audit Report Under Section 13(10) and 13(11)

Clause 39 of Form 10B mandates the auditor to report whether section 13(10) is applicable in the auditee’s case. However, it is important to note that during the signing of the Audit Report, the auditor may not be able to verify non-compliance with the submission of the Income-tax return. This limitation arises because the audit report is submitted one month before the filing deadline for the Income Tax return.

Consequently, the auditor can make note of this situation as an observation in Form 10B/10BB as under:

‘As of the date of the signing of the Audit Report in Form 10B, since the time limit for furnishing the Audit Report and filing the Income Tax Return in Form ITR 7 has not yet expired, we are not able to comment on the violation of the applicability of the section 13(10) or the twenty second proviso to clause (23C) of section 10.’

8. Reporting the Amount of Application Based on Income and Expenditure Account

In Form 10B and Form 10BB, the financial statement is referred to as the Income and Expenditure Account. However, the auditor has been asked to ascertain and report the Income and Application’s true and fair view. Typically, most NGOs prepare a standard Income and Expenditure Account rather than a special purpose Income and Application statement.

If the Income and Expenditure account is drawn considering the provisions of the Income-tax Act, the auditor may provide the following suggested comment:

‘The Income and Expenditure Account, based upon which the amount of application is certified is prepared based on the provisions of section 11/section 10(23C) and the Income and applications have been recognised and certified accordingly.’

If the Income and Expenditure Account is not prepared based on the provisions of the Income-tax Act, the auditor may include the following comment:

‘The Income and Expenditure Account, based on which application amount needs to be certified, is prepared on the conventional method as applicable for the General-Purpose Report; we have certified the application figure after considering the Balance Sheet and Books of Account of the organisation.’

9. Suggested Remarks in Guidance Note on Reports of Audit Under Section 12A/10(23C) of the Income-Tax Act, 1961 Issued by ICAI

Furthermore, in addition to the above, the Guidance Note on Reports of Audit under section 12A/10(23C) of the Income-tax Act, 1961, issued by ICAI, provides the following suggested draft remarks and observations for auditors to include in specific circumstances:

9.1 Assessee’s and Auditor’s Responsibility Paragraph

The ICAI had pursuant to the issuance of the Revised SA 700, Forming an Opinion and Reporting on Financial Statements, prescribed a revised format of the auditor’s report on financial statements, which has been made effective in respect of audits of financial statements for periods beginning on or after 1st April, 2018. Since Form No. 10BB/10B are required to be furnished online in a preset form and the same are not in line with the requirements of SA 700 (Revised), there is no specifically allocated field for providing information relating to the respective responsibilities of the assessee and the auditor as required in terms of the principles laid out in SA 700 (Revised). However, having regard to the importance of these respective responsibility paragraphs from the perspective of the readers of the audit report, it is suggested that these respective responsibility paragraphs can be given in the space, provided for giving observations/Qualification in Form No. 10BB/10B, as the case may be.

The illustrative Assessee’s responsibility paragraph and Auditor’s responsibility paragraphs in respect of Form No. 10BB/10B are given hereunder. The same may be suitably re-worded to meet the situation envisaged in Form No. 10BB/10B.

9.1.1 Management’s Responsibility for the Financial Statements and the Statement of Particulars in Form no.10bb/10B

• The Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position and financial performance of the assessee (if applicable) in accordance with the applicable financial reporting framework. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
• In preparing the financial statements, management is responsible for assessing the assessee’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the assessee or to cease operations, or has no realistic alternative but to do so.
• Those charged with governance are responsible for overseeing the assessee’s financial reporting process.
• The Management is also responsible for the preparation of the ‘Annexure-Statement of particulars’ required to be furnished along with Form No.10BB/10B that give true and correct particulars as per the provisions of the Income-tax Act, 1961 read with Rules, Notifications, Circulars that are to be included in the Statement.

9.1.2 Auditor’s Responsibility for audit of the Financial Statements and the Statement of Particulars in Form No.10BB/10B

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the assessee’s ability to continue as a going If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

We are also responsible for verifying the statement of particulars required to be furnished/annexed herewith in Form No. 10BB/10B read with rule 17B/16CC of Income-tax Rules, 1962.

9.2 Verification of Payment Through Permissible Modes

In most cases even though the auditor is convinced that the payments have been made through account pay cheque or electronic mode, but practically, it may not be possible to verify each payment, reflected in the bank statement, as to whether the payment has been made through account payee cheque, demand draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, it is thus desirable that the auditor should obtain suitable certificate from the assessee to the effect that the payments for expenditure referred to in section 40A(3) and section 40A(3A) were made by account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, as the case may be. Where the reporting has been done on the basis of the certificate of the assessee, the fact shall be reported as an observation/qualification paragraph of the audit report in Form No. 10BB/10B, as the case may be.

The auditor, in his report may comment as suggested below while reporting under this sub-clause:

“It is not possible for me/us to verify whether the receipts/payments have been accepted/made otherwise than by an account payee cheque or an account payee bank draft, as necessary evidence is not in the possession of the assessee”.

9.3 Verification of Loan or Deposit or Specified Sum Taken or Accepted by Permissible Modes

In most cases even though the auditor is convinced that the payments have been made through account pay cheque or electronic mode, but practically there are difficulties in verifying the loan or deposit or specified sum taken or accepted by account payee cheque or an account payee bank draft. In such cases, the auditor should verify the transactions with reference to such evidence which may be available. In the absence of satisfactory evidence, for answering, as to whether bank cheque or bank draft was ‘account payee’, the auditors should make a suggested comment in his report.

The suggested comment is as follows:

“It is not possible for me/us to verify whether loans or deposits or specified sum have been taken or accepted otherwise than by an account payee cheque or account payee bank draft, as the necessary evidence is not in the possession of the assessee”.