Precautions to be Taken by Tax Auditor in Certifying Clauses 21 to 30 of Form 3CD for Companies

Furnishing inaccurate information in a tax audit report under section 44AB of the Income Tax Act, 1961 can lead to a penalty of Rs. 10,000 under section 271J of the Act for each such report or certificate issued by the tax auditor. The subsequent paragraphs outline the specific precautions that should be observed by the tax auditor when completing, verifying and cross-referencing details in clauses 21 to 30 of Form 3CD for a company assessee.

Clause 21(e): Provision for payment of gratuity not allowable under section 40A(7)

• Verify whether any provision for payment to the gratuity fund has been made.
• Verify whether the gratuity fund is approved gratuity fund. Verify the order of CIT granting approval to the gratuity fund. Obtain a copy of approval for records.
• If gratuity fund is not approved gratuity fund, a provision made for payment to the gratuity fund is to be reported here.

Clause 21(g): Particulars of any liability of a contingent nature

• Contingent liabilities disclosed in notes to accounts are not to be reported under clause 21(g).
• Contingent liabilities provided for in accounts are to be reported.
• Provisions created in books are not to be reported here. What is to be reported is contingent liability debited to the profit and loss account.
• ‘Contingent liability’ is to be understood as defined in ICDS-X.

Clause 21(i): Amount inadmissible under the proviso to section 36(1)(iii)

• Question of the amount inadmissible arises only when the amount is debited to P&L.
• Verify that the amount inadmissible is worked out in accordance with ICDS-IX.

Clause 22: Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006

• Consider the following important statutory provisions of the “Micro, Small and Medium Enterprises Development Act, 2006”

(i) Chapter V of MSMED Act, 2006 comprising sections 15 to 23 dealing with Delayed Payments to Micro and Small Enterprises

(ii) Section 15 – Liability of buyers to make payment

(iii) Section 16 – Date from which and rate at which interest is payable

(iv) Section 22 – Requirement to specify unpaid amount with interest in the annual statement of accounts of the buyer entity

(v) Section 23 – Interest not to be allowed as deduction from income

(vi) Section 2(b) – Definition of “appointed day”

(vii) Section 2(d) – Definition of “buyer”

(viii) Section 2(h) read with section 7 – Definition of Micro Enterprise

(ix) Section 2(m) read with Section 7 – Definition of Small Enterprise

(x) Notification S.O. 2119 (E), dated 26-6-2020 issued under section 7 defining “Micro-Enterprise”, “Small Enterprise” and “Medium Enterprise”

(xi) Section 2(n) – Definition of “Supplier”

• Clause 22 will apply to assessee-Company even if the assessee-Company itself is a “Supplier” i.e. Micro or Small Enterprise that has filed Udyam Registration since sections 15 and 22 of the MSMED Act use the words “any buyer”
• Liability for payment of interest under section 16 of the MSMED Act, 2006 arises on delayed payment for goods and services purchased from a ‘Supplier’ within the meaning of section 2(n) of the MSMED Act, 2006. It is this interest payable on delayed payment that is inadmissible under section 23 of the MSMED Act, 2006. [See Chapter V of MSMED Act, 2006 comprising sections 15 to 23]
• In terms of section 2(n), ‘Supplier’ is a ‘Micro enterprise’ or ‘Small Enterprise’ (MSE) that has filed a memorandum under section 8 of the MSMED Act, 2006. The Memorandum to be filed is Udyam Registration with effect from 1-7-2020.
• To qualify as a Micro or Small enterprise (MSE) and as a ‘Supplier’ within the meaning of the MSMED Act, 2006, it is not sufficient to satisfy composite criteria of limits on investment in plant and machinery or equipment and turnover in as defined in Notification S.O. 2119(E), dated 26-6-2020. The Micro or Small Enterprise should have filed Udyam Registration.
• With effect from 1-7-2022, registration of MSE supplier under UAM (Udyog Aadhaar Memorandum) or under EM Part-II is not valid.
• An MSE Supplier of assessee who is registered under UAM or under EM Part-II ceases to be MSE or “Supplier” with effect from 1-7-2022 if he has not filed Udyam Registration. No interest is payable under section 16 of the MSMED Act on delayed payments to such “Supplier” and there is no question of reporting any inadmissible interest under clause 22 in respect of delayed payments to such “Supplier”.
• In respect of goods or services supplied by MSE till 30-6-2022, interest liability for delayed payment to MSE under section 16 of the MSMED Act will be attracted if the MSE holds UAM (Udyog Aadhaar Memorandum) or EM Part-II or Udyam Registration and the same will be inadmissible under section 23 of the MSMED Act.
• In respect of goods or services supplied by MSE on or after 1-7-2022, interest liability for delayed payment to MSE under section 16 of the MSMED Act will be attracted only if the MSE holds Udyam Registration. UAM and EM Part-II have no validity with effect from 1-7-2022.
• In Silpi Industries etc. v Kerala State Road Transport Corporation & Anr. etc. [Civil Appeal Nos. 1570-1578 of 2021, dated 29-06-2021], the Supreme Court held that in the context of Chapter V of the MSMED Act the registration under the MSMED Act is not retrospective. By taking recourse to file a memorandum under sub-section (1) of Section 8 of the Act, subsequent to entering into a contract and supply of goods and services, one cannot assume the legal status of being classified under the MSMED Act, as an enterprise, to claim the benefit retrospectively from the date on which appellant entered into a contract with the respondent. The appellant cannot become a micro or small enterprise or a supplier to claim the benefits within the meaning of the MSMED Act by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services. If any registration is obtained, the same will be prospective and applies to the supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.
• In view of the above, if a Micro Enterprise or Small Enterprise files Udyam Registration after the date of supply of goods/services and payment outstanding is delayed beyond the time-limit stipulated by Section 15 of the MSMED Act, no interest on delayed payment is payable under section 16 of the MSMED Act and question of reporting any inadmissible interest will not arise.
• If Udyam Registration date is after the supply of goods or services, no interest is payable for delayed payment to Micro or Small enterprise. No reporting of inadmissible amount of interest arises in such a case.
• Verify whether the purchase invoices/bills of ‘Supplier’ (micro/small enterprise supplying goods or services) mention Udyam Registration Number of the ‘Supplier’. If so, verify whether payment is made to the Supplier within due date agreed in writing which shall not exceed 45 days from the “day of acceptance ” or “the day of deemed acceptance” as defined in section 2(1)(b) of the MSMED Act, 2006. If no due date agreed in writing, verify whether payment is made within 15 days of “day of acceptance” or “the day of deemed acceptance”. If not paid within time agreed in writing not exceeding 45 days as aforesaid or within 15 days where no time-limit is agreed in writing, interest is payable to supplier under section 16 of the MSMED Act, and same is inadmissible under section 23 of the MSMED Act.
• Send out external confirmation to Trade Creditors/ suppliers of the Company in accordance with SA 505 requesting for:

(i) Confirmation of balance.

(ii) Confirmation as to whether the Supplier is a Micro or Small Enterprise, and if so, whether the Supplier is holding Udyam Registration.

(iii) Attaching a copy of Udyam Registration e-certificate if he is registered as Micro or Small Enterprise.

(iv) Confirmation as to the date the cheque was handed over by the Company to the MSE supplier to ascertain whether payment was made within 45 days/15 days as aforesaid.

Clause 23: Particulars of payments made to persons specified under section 40A (2)(b)

• Tax auditor can rely on the list of persons covered under section 13(3) as given by the Managing Trustee of a Public trust [CBDT Circular No. 143, dated 20-8-1974]
• Applying the same analogy, tax auditors can rely on a Management Representation Letter on the list of persons covered under section 40A(2)(b). Where the auditor relies on MRL in this regard, he should state the fact of such reliance in Clause (3) of Form 3CA.
• It may be advisable for Tax auditor to also give a note in Clause (3) of Form 3CA that actual payments to parties covered under section 40A(2)(b) have been reported under Clause 23 of Form No. 3CD and these are not necessarily the amounts debited to profit and loss account. [See Film Shoppe (India) Pvt. Ltd. v. ITO [ITA No. 2019/Mum/2003 assessment year 1997-98] (17-1-2007)]
• Obtain copies of the ledger accounts related to such parties and examine the same with transactions as reported in audited financial statements in accordance with AS-18/Ind AS-24.
• ‘Name’ and ‘PAN’ of persons specified under section 40A(2)(b) should be reported in clause 23.
• Reporting should be of respective transaction with respective persons as specified under section 40A(2)(b). Reporting of consolidated figures is not sufficient compliance with clause 23.
• Amount reported in this clause should match with amounts reported in annual report. If not, suitable documentation be retained in working papers recording good reasons why the amounts reported against this cause do not match with figures reported in annual report.

Clause 24: Amounts deemed to be profits and gains under sections 32AC, 32AD, 33AB or 33ABA or 33AC

• Prepare a statement to reconcile the list of sale of assets with the deletion of assets reported in clause 18 of Form No. 3CD.

Clause 25: Any amount of profit chargeable to tax under section 41 and computation thereof

• Check the annual report as to whether there are any amounts mentioned in Annual report which are chargeable to tax under section 41 and are reportable under this clause. Verify that all such amounts are reported under this clause.
• Profits chargeable to tax under section 41 is required to be reported irrespective of the fact whether the relevant same has been credited to the profit and loss account or not.

Clause 26: In respect of sum referred to in clause (a), (b), (c), (d), (e), (f) or (g) of section 43B, the liability for which:

(A) Pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

(a) Paid during the previous year

(b) Not paid during the previous year

(B) Was incurred in the previous year and was

(a) Paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

(b) Not paid on or before the aforesaid date.

• Particulars required by this clause are to be furnished irrespective of the fact whether the sums referred to in clauses (a) to (g) of section 43B have been debited to the profit and loss account or not.
• For example: where GST collected is accounted as liability, payments are debited to the liability account and the balance, if any, appears in the balance sheet. In such a case, payments are not routed through the P&L Account. Even in such a case, particulars are to be reported.
• Disallowance provisions of section 43B are applicable only in respect of expenditure for which a deduction is otherwise allowable under the Act. Therefore, where any expenditure is reported under any other clause indicating that deduction is otherwise not allowable, such expenditure need not be reported under this clause.
• Since the due date of filing of the return would usually be subsequent to the signing of the tax audit report the tax auditor would be able to give information in respect of matters only up to the date of signing of the tax audit report. The payment made subsequent to that date but before the date of filing of the return, will still be eligible for deduction under section 43B. Therefore, the tax auditor should mention in clause (3) of Form No. 3CA/clause (5) of Form No. 3CB that the status of outstanding and payments reported in clause 26 is as of the date of signing of the tax audit report.
• Sub-rule (3) of Rule 6G provides that the assessee may obtain a revised tax audit report from CA and furnish the same before the end of the relevant assessment year if he has made payments covered by section 40(a)/section 43B after e-filing of tax audit report but on or before ITR due date of 31st October/extended ITR due date.
• Where the due date for filing of return of income under section 139(1) is extended, payments made up to the extended due date shall also qualify for deduction.
• Where the company follows the practice of crediting GST collected to a separate account and treats the amounts collected as a liability, the tax/duty collected but not paid should be indicated against this clause by way of a note.

Clause 27(a): Amount of Central Value Added Tax credits/Input Tax Credit (ITC)¹ availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding Central Value Added Tax credits/Input Tax Credit (ITC)² in the accounts

• Though no reference of Input Tax Credit (ITC) is notified in Form 3CD, the same is maintained in the e-filing utility format. Hence, relevant details in respect of ITC is required to be given in clause 27(a) in case of a company-assessee registered under GST.
• Obtain a statement from Company reconciling details of ITC as per books with details as per GST portal
• As clause 27(a) does not stipulate whether details as per books or details as per GST portal is to be reported, it appears either basis of reporting is acceptable provided it is followed consistently.
• It would be advisable for Tax auditor to give a note in Clause (3) of Form 3CA stating whether details have been provided as per books or as per GST portal.

Clause 27(b): Particulars of income or expenditure of prior period credited or debited to the profit and loss account

• Check the data to be reported under clause 27(b) with the disclosures in audited financial statements of the Company.
• Expenditure or income of prior periods that have crystallized during the current period and credited/debited to P&L should not be reported as prior period items under this clause.
• If a particular item has not been considered as prior-period item by the statutory auditor, the tax auditor considers the circumstances in which the statutory auditor has not done so and whether in his opinion such item is a prior-period item. If the tax auditor is of the opinion that it is a prior period item, he should report the same against clause 27(b).
• Since clause 27(b) requires ‘particulars’, it appears that it is not sufficient to give totals of debits and credits of prior period items or their net impact. It appears that a detailed list of such prior period items debited or credited to profit and loss account should be given. If the information is voluminous, these details may be given expense-head-wise/income-head-wise.
• Material adjustments related to prior periods but determined in current periods – e.g. retrospective wage revision agreement signed in current years should not be regarded as prior period item.
• Sales returns received in the previous year under audit (even though pertaining to sales of prior previous year/s) not to be regarded as income or expenditure of prior period.

Clause 29: Whether during the previous year the assessee received any consideration for the issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib), if yes, please furnish the details of the same

• Clause 29 would apply to any closely held company other than a DPIIT-recognised start-up.
• Section 56(2)(viib) of the Act is applicable to companies in which the public are not substantially interested (closely held companies). Therefore, reporting under this clause is to be done only for such companies.
• Section 2(18) defines the company in which the public are substantially interested.
• Any company not satisfying the criteria of section 2(18) is a company in which the public is not substantially interested (closely held company).
• Obtain from the auditee-company, a list containing the details of shares issued, if any, by him to any person being a resident and verify the same from the books of account and other relevant documents.
• Verify from books of account and balance sheet as to whether there is any increase in share capital. Obtain a management representation letter in this regard.
• Ascertain whether the assessee-company has received, in the previous year under audit, from any person being a resident, any consideration for the issue of shares.
• Ascertain whether the consideration exceeds the face value of such shares.
• Obtain and verify share capital schedule and ROC records such as Forms PAS-3, MGT-14 and MGT-01.
• If assessee-company is a DPIIT-recognised start-up, obtain a management representation stating the DPIIT recognition number and applicability of exemption and compliance with conditions for exemption.
• If management representation obtained that the company is exempt from clause (viib) of section 56(2) and conditions for exemption are complied with, verify compliance with the same.
• Verify the email received from CBDT regarding eligibility for exemption/exemption notification issued under section 56(2)(viib) read with DPIIT startup-notification. If satisfied, no need to report any details against clause 29. Select “no” from the dropdown in the select button in e-filing utility. However, it is advisable to make suitable remarks regarding exemption in clause (3) of Form No. 3CA.
• Obtain management representation from the company justifying the issue price and verify fair market value of shares.
• Where management of the assessee-company justified FMV of equity shares issued as per Discounted free Cash Flow Method, whether the Valuation report from the Merchant Banker as per 11UA(2)(b) has been obtained by the management?
• Where preference shares have been issued by the company, has the company obtained a valuation report from a Merchant Banker or Accountant as required by Rule 11UA(1)(c)?
• Where for determining the fair market value of unquoted equity shares, a valuation report has been obtained by the assessee from a merchant banker, obtain a copy of the same. Comply with Para 8 and Paras A35 to A43 of SA 500. These paras deal with using the work of management’s expert.
• Where for determining the fair market value of unquoted preference shares, a valuation report has been obtained by the assessee from a merchant banker or an accountant, obtain a copy of the same. Comply with Standard on Auditing SA 500 dealing with using the work of management’s expert. Note that Para 8 of SA 500 does not apply to CA’s report in the accounting or auditing field. However, valuation of shares is a field other than accounting or auditing and Para 8 of SA 500 will have to be complied with as regards CA report on the valuation of preference shares.
• If Fair market value justified and issue price (including premium) is less than FMV, Select “no” from the dropdown in select button in the e-filing utility.
• Company issuing shares is required to file Form No. 61A under Rule 114E if there is a receipt from any person of an amount aggregating to Rs.10 lakhs or more in a financial year for acquiring shares (including share application money) issued by the company. Verify that the company has filed Form 61A and report as required in clause 42(a)/(b).

Clause 29A: Whether any amount is to be included as income chargeable under the head ‘income from other sources’ as referred to in clause (ix) of sub-section (2) of section 56? (Yes/No) [Clause 29A (a)]

If yes, please furnish the following details:

(i) Nature of income

(ii) Amount (in Rs.) thereof [Clause 29A(b)]

• The reporting requirement is whether any amount is to be included as income chargeable under the head “income from other sources”. This requirement requires the tax auditor to act as Assessing Officer and sit in judgement on taxability of income. If answer is ‘yes’, details to be furnished are (i) Nature of income and (ii) Amount thereof.
• Clause 29A requires tax auditor to specify the ‘nature of income’. In this regard, tax auditor should specify that the amount is forfeiture of advance received in the course of negotiation for the transfer of a particular capital asset.
• Requirement to report arises only where the assessee-company has forfeited the amount received.
• Tax auditor is not required to report any advance received in relation to a capital asset that is long outstanding unless and until it is forfeited by assessee.
• Tax auditor is required to report under this clause the amount forfeited in respect of capital asset. If advance received in relation to stock-in-trade is forfeited, the same would not be reported under this clause as it is taxable u/s 28(i) and hence would be reported under clause 16(a) only if not credited to profit and loss account.
• If amount received is not forfeited, there is no need to report under clause 29A merely because notice of forfeiture has been issued. If the amount is written back, then same should be reported under this clause stating the stand of the assessee.
• In respect of advances received for the transfer of capital asset and recorded in books/accounts of business, tax auditor should verify whether capital asset has been transferred. If not, then tax auditor should check the terms of contract whether it entitles assessee to forfeit the advance on the occurrence of some conditions and whether the conditions have occurred. If so, the tax auditor should verify with the auditee whether amounts have been forfeited.
• If the assessee contends that there has been no forfeiture, the tax auditor may look at the totality of the facts and circumstances and obtain a management representation from the assessee stating that assessee has not yet forfeited the advance even though contract permits forfeiture on certain conditions and those conditions have occurred.
• If assessee has forfeited the amount even without any right to forfeit, the forfeited amount may become income under clause (ix) of section 56(2) if there is no action by the other party. In such cases, such forfeiture will have to be reported by tax auditor with a suitable note in clause (3) of Form No. 3CA/clause (5) of Form No. 3CB.
• Mere unilateral write-back of advance by credit to profit and loss account, asset account or capital account may not by itself amount to forfeiture. It may be an indication of forfeiture necessitating further verification by tax auditor.
• The tax auditor should preferably disclose all such unilateral writebacks also with an appropriate note in clause (3) of Form No. 3CA/clause (5) of Form No. 3CB setting out the assessee’s stand.
• If an advance is forfeited during the previous year under audit, reporting is required irrespective of whether the advance was received during the previous year under audit or during any earlier previous year.

1. Though no reference of Input Tax Credit (ITC) in notified Form 3CD, the same is mentioned in e-filing utility format
2. Though no reference of Input Tax Credit (ITC) in notified Form 3CD, the same is mentioned in e-filing utility format