[Opinion] Controversy surrounding disclosure in Clause 16 of Form 3CD

V. K. SUBRAMANI – [2022] 140 taxmann.com 546 (Article)

Section 44AB mandating tax audit of accounts of business or profession was inserted by the Finance Act, 1984 and the tax audit reports were furnished from the assessment year 1985-86 onwards. The benefits of getting the accounts audited was availed by all the stakeholders over the years. However, considering the compliance cost and ease of compliance, presumptive provisions were introduced from time to time. The benefit of presumptive provision could be availed only by declaring the presumptive income on mandatory basis when in reality the taxpayer may have incurred loss or earned income less than the presumptive income, deemed by the statute.

Tax audit disclosure has undergone changes over the years and the audit report helps the tax administration to have a view of the taxpayers and with automated selection of cases for scrutiny, the disclosures in tax audit reports assume have paramount importance. An innocent disclosure with good intentions can land the taxpayer and tax counsel in a dicey terrain. This is what has happened with regard to disclosure made in clause 16 of Form 3CD with specific reference to the assessment year 2021-22. It remains to be seen whether the CPC, Bengaluru would look into the grievances of the taxpayers who got a shocker by way of tax demand for the assessment year 2021-22 or the trend would continue for the current assessment year and in future as well.

This write up based on the author’s experience with regard to the disclosure in clause 16 landing taxpayers with demand and subsequently how a possible solution /relief was obtained within the four corners of law.

1.1 Disclosure under clause 16

Clause 16 of the tax audit report i.e. Form 3CD is as under:

Amounts not credited to the profit and loss account, being,

(a) the items falling within the scope of section 28;
(b) the proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax where such credits, drawbacks or refunds are admitted as due by the authorities concerned;
(c) escalation claims accepted during the previous year;
(d) any other item of income;
(e) capital receipt, if any;

Of the 5 items (a) to (e) given above, the controversy is with regard to item (d) where the tax auditor has reported any other item of income.

1.2 Debatable view

The disclosure in item (d) of clause 16 is titled “any other item of income”. There is a controversy whether the tax audit report since it is attracted to business or profession when the sales, turnover or gross receipt exceeds certain limit, certain incomes which are chargeable to tax under any other head need not be reported in this column. Such of those reports where income from house property or other sources (like bank interest, dividend etc) do not get reported in clause 16(d) and thus there is no addition or adjustment while processing the return under section 143(1) by the CPC.

The other school of thought is that section 44AB starts with expression “every person” carrying on business or profession shall get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit. Taking a view that the audit under section 44AB is not only for the books of account relating to business or profession and it is for the taxpayer, income chargeable to tax under the head ‘house property’, capital gains and other sources are also disclosed in clause 16(d).
The proponents of the second view have received tax demand as a result of adding the amount disclosed in 16(d) to business/professional income without taking note of the fact that those incomes have been admitted under other heads.

1.3 Exposure Draft of Revised Guidance Note of ICAI on Tax Audit under Section 44AB of the Income-tax Act, 1961

With regard to disclosure for clause 16 of Form 3CD it is stated as under:

“28.1 Under this clause various amounts falling within the scope of section 28 which are not credited to the profit and loss account are to be stated. The information under sub-clauses (a), (d) and (e) of clause (16) is to be given with reference to the entries in the books of account and records made available to the tax auditor for the purpose of tax audit under section 44AB. Sub-clauses 16 (b), (c) & (d) require information in respect of items which may also be covered under section 28 and as such will also fall in clause 16 (a). However, those items which are reported in clauses 16(b), (c) and (d) need not be reported in clause 16 (a). The tax auditor may obtain a management representation in writing from the assessee in respect of all items falling under this clause.”

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