Precautions to be Taken by Tax Auditor in Certifying Clauses 34 to 44 of Form 3CD for Companies

Failure to provide accurate information in a tax audit report under Section 44AB of the Income Tax Act, 1961 can lead to penalties under Section 271J of the Act. For each erroneous report or certificate issued by the tax auditor, a penalty of Rs. 10,000 may be imposed. The following paragraphs outline essential precautions that tax auditors of corporate assesses should observe when completing, verifying, and cross-referencing details in relation to clauses 34 and 44 of Form 3CD:

Clause 34(a): Whether the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB, if yes please furnish:

• Check whether statutory auditor has modified his opinion for non-provisioning of liabilities. Check whether TDS is deductible on such amounts and, if so, consider suitably reporting in Para 3 of Form No. 3CA.
• Check whether CARO report of statutory auditor refers to undisputed/disputed TDS dues not deposited.
• In the case of pharmaceutical companies, check whether any amount is reportable against eighth item 21(a) in respect of expenditure on freebies to doctors.
• Verify whether TDS deducted under section 194R in respect of these freebies since these can be regarded as providing benefit or perquisite to a resident exercising a profession. Disallowability of this amount u/s 37(1) is no bar to applicability of TDS.
• Cross check with reporting in clause 21(b) as regards amounts inadmissible due to non-deduction/non-deposit of TDS.
• Check whether any admissible amounts reported in clause 19 as deductible u/s 35D are liable for TDS and whether TDS on them have been deducted and deposited?
• Para 68.12 of GN on tax audit (edition 2023) clarifies that the tax auditor may take the status of the demand payable as per the TDS CPC (popularly known as TRACES) for the purpose of reporting in clause 34.
• Whether the assessee has obtained CA certificate in Form No. 26A from the deductee/payee where there is default in deducting TDS/collecting TCS? Whether tax auditor has performed the following procedures required by Para 59 of Guidance Note on Audit Reports or Certificates for Special Purposes before relying on these Form 26A certificates.
• When the work of another practitioner (CA) is to be used, the practitioner (tax auditor) should evaluate whether that work is adequate for the practitioner’s (tax auditor’s) purposes.

Clause 34(c): Whether the assessee is liable to pay interest under section 201(1A) or section 206C(7). If yes, please furnish:

• The reporting as to whether the assessee is liable to pay such interest, should be consistent with the reporting of details of non-deduction under clause 34(a).
• Verify the amount of interest payable under section 201(1A) or section 206C(7) with the books of account as on 31st March of the relevant previous year and also from the statement generated by the Department in Form No. 26AS/AIS/TIS of the assessee.
• In case, the assessee had disputed the levy or calculation of interest under TRACES, or in Form No. 26AS, re-calculate the amount of interest under section 201(1A) or section 206C(7) up to the date of the audit report for reporting under this clause and also mention the fact in Para 3 of Form No. 3CA.

Clause 35(a): In the case of a trading concern, give quantitative details of the principal items of goods traded:

Clause 35(b): In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products:

• Cross-check with the nature of business details reported in clause 10(a).
• If Trading is reported as one of the businesses of the assessee-company under clause 10(a), non-reporting of quantitative details of principal items of goods traded under clause 35(a) is an audit lapse. Where trading business is reported in clause 10(a), either report details in clause 35(a) or give a suitable disclaimer in clause 3 of Form 3CA if details are not available.
• If Manufacturing is reported as one of the businesses of the assessee-company under clause 10(a), either report details in clause 35(b) or give a suitable disclaimer in clause 3 of Form 3CA if details are not available.
• If both Manufacturing and Trading are reported in clause 10(a), details in both clauses 35(a) and 35(b) need to be reported.
• Cross-check details reported from the annual report of the company.

Clause 36(a): Whether the assessee has received any amount in the nature of dividend as referred to in sub-clause (e) of clause (22) of section 2? (Yes/No)

(b) If yes, please furnish the following details:-

(i) Amount received (in Rs.)

(ii) Date of receipt

• It would appear that if the assessee-Company is a ‘concern’, then the loan received by concern is not to be reported against clause 36A. The loan received by ‘concern’ is to be reported in clause 36A of Form No. 3CD of the substantial shareholder.
• The Tax Auditor would need to take a call on (1) above keeping in mind judicial decisions. Some judicial decisions in this regard are:

a. CIT v. Ankitech (P.) Ltd. [2011] 11 taxmann.com 100 (Delhi) Affirmed by the Supreme Court in CIT. v. Madhur Housing & Development Co. [2018] 93 taxmann.com (502)

b. CIT v. Universal Medicare Pvt. Ltd. [2010] 190 Taxman 144 (Bom.)

• Assessee, engaged in the business of manufacturing engineering goods, had a beneficial shareholding in the company. It had taken an inter-corporate deposit from said company and claimed that since said deposit was to be repaid before the end of the relevant year, it could not be treated as a loan. Held that: Even though the assessee claimed it as an inter-corporate deposit, it was a short-term loan enjoyed by the assessee and, hence, provision of section 2(22)(e) was clearly attracted. Any credit or advantage taken by persons having substantial interest will attract the provision of section 2(22)(e); it does not matter whether it is repaid within the same year. [Assistant Commissioner of Income-tax, Mumbai v. Jasubhai Engineering (P.) Ltd. [2020] 118 taxmann.com 430 (Mumbai – Trib.)]
• Trade advances received as part of regular business transactions cannot be treated as loans or advances, hence, would not fall within the ambit of provisions of section 2(22)(e). Where amounts were being received by assessee, a publishing company, from its subsidiary company engaged in distributing assessee’s publications in Gulf region, only as part of regular business transactions, which were being accounted properly, payments effected by subsidiary Company and received by assessee, were as part of regular business transactions and could not have been treated as loan or advances, so as to make disputed amounts a deemed dividend, as defined under section 2(22)(e) [CIT v. Malayala Manorama Co. Ltd. [2018] 89 taxmann.com 252 (Kerala)]
• If amount of loan received which qualifies as deemed dividend u/s 2(22)(e), verify that same is reported against clause 31(a)/(b).
• Verify that the amount is reported in clause 16(d) as any other income not credited to the profit and loss account with suitable cross reference. Alternatively, mention in Para 3 of Form 3CA that amounts of incomes not specifically reported against other clauses are only reported against Clause 16(d).

Clause 37: Whether any cost audit was carried out, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor

• Reporting on “the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor” should be based on a copy of the cost audit report obtained from the Company and not on the basis of MRL

Clause 38: Whether any audit was conducted under the Central Excise Act, 1944, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the auditor.

• This clause is not applicable now as the Central Excise Act, 1944 has been replaced by Goods and Service Tax for all products except petroleum products. Only in the case of petroleum companies, this clause will apply.

Clause 39: Whether any audit was conducted under section 72A of the Finance Act, 1994 in relation to the valuation of taxable services, if yes, give the details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the auditor

• This clause is not applicable now as service tax has been replaced by Goods and Service Tax.

Clause 40: Details regarding turnover, gross profit, etc., for the previous year and preceding previous year:

• In respect of service sector assessees, the clause should not be left blank. State “Not Applicable” against the clause.
• Clause asks for “details”. So manner of working out ratios and figures should be given
• The ratios to be calculated for clause 40 are to be based on figures as per the books of account. The statutory adjustments under section 145A are to be made outside the books (in the statement of computation of total income) for determination of total income for the purpose of Income-tax Act. Therefore, it is not correct to take the figures of sales, purchases, and inventory after section 145A adjustments for calculation of ratios.
• Scrap sale should be included in turnover.
• It is not necessary to give the Gross Profit ratio (Gross Profit/Turnover) product-wise. It is sufficient if the overall G.P. ratio is given.
• Cross-check the ratios with ratios reported in notes to accounts of the Company pursuant to Schedule III
• Whether there is consistency between numerator and denominator? – If not, report any significant deviation.

Clause 41: Please furnish the details of demand raised or refund issued during the previous year under any tax laws other than the Income Tax Act, 1961 and Wealth Tax Act, 1957 along with details of relevant proceedings.

• 2023 GN omits the sentence “Hence, the cess or duty like Marketing Cess, Cess on Royalty, Octroi Duty, Entry Tax, etc. would not be covered as other tax laws.” which was there in Para 79.1 of 2022 GN.
• It appears that any demands raised or refunds issued in respect of Marketing Cess, Cess on Royalty, Octroi Duty, Entry Tax, etc. would have to be reported under Clause 41.
• Obtain a Management Representation Letter (MRL) giving details of demand raised or refund issued during the previous year under any tax laws other than the Income Tax Act, 1961 and Wealth Tax Act, 1957 along with details of relevant proceedings.
• Obtain a copy of all the demand/refund orders issued by the governmental authorities during the previous year under any tax laws other than the Income-tax Act and Wealth-tax Act.
• Obtain user credentials of assessee-company for government tax portals like GST portal etc. If the assessee refuses, a suitable disclaimer is to be given in Para 3 of Form No. 3CA.
• Verify demands from the relevant online tax portal.
• The tax auditor should cross-check the details in MRL obtained from client with:

i) details reported in annual accounts in notes to accounts as contingent liabilities

ii) details given in statutory auditor’s CARO report in respect of undisputed statutory dues in arrears/disputed statutory dues not deposited

iii) details reported in clause 21(a) (fifth and sixth items regarding penalties)

iv) details reported in clause 21(g) regarding contingent liabilities debited to P&L

v) details reported in clause 26 in the context of section 43B

vi) details reported in clause 16(b) regarding refunds received of indirect taxes not credited to P&L

• If there is any adjustment of refund against any demand, the tax auditor shall also report the same under this clause and also against clause 16(b).
• Demand/refund order to be reported against this clause even if it does not pertain to the year under audit.
• Demands to be reported whether or not they have been contested in appeal.
• Demand to be reported even if stayed. Stay of demand does not wipe out the demand.
• If demand is annulled/set aside by appellate authority/court, it ceases to be a demand even if the department goes into appeal.
• Show Cause Notices are not to be regarded as demands. If assessee responds to SCN and authority is satisfied, proceedings will be dropped and no demand will result.
• Clause 41 requires details of demands/refunds along with details of proceedings. Therefore, reporting lumpsum amounts of demands and refunds will not suffice.
• Details of each demand raised or refund issued during the previous year under any tax laws other than the Income Tax Act, 1961 and Wealth Tax Act, 1957, will have to be reported. Details will cover matters such as the Act under which issued, Assessment Order No./Refund order No., Date of demand raised/refund order issued, financial year to which it relates, amount, adjustment of demand against refund, and details of proceedings such as assessment, reassessment, revision, etc.

Clause 42(a): Whether the assessee required to furnish a statement in Form No. 61 or Form No. 61A or Form No. 61B? (Yes/No)

(b) If yes, please furnish details in the specified Tabular format:

• Cross check with details reportable under clause 31(ba) regarding cash receipts exceeding the limit of ₹ 2,00,000.
• Check whether any of them is a single cash receipt of ₹ 2,00,000 in respect of the sale of goods or services. If so, whether Form No.61A has been filed.
• Tax auditor will have to report details of cash receipts exceeding the limit of ₹ 2,00,000 in Clause 31(ba) even if Form No. 61A has been filed in respect of the same. However, the tax auditor may report the fact that Form No. 61A has been filed in Para 3 of Form No. 3CA referring to item no. reported under clause 31(ba).
• If tax auditor has reported details of shares issued in clause 29 and receipt from any person (including share application money) aggregates to Rs. 10,00,000 or more during the financial year, the tax auditor should verify whether SFT has been filed in Form No. 61A.

Clause 44: Break-up of the total expenditure of entities registered or not registered under the GST

The words used are ‘total expenditure’ in the heading and ‘expenditure in respect of’ in the heading of columns (3) to (6) of the Tabular format. Therefore, the following points should be kept in mind while reporting ‘expenditure’ and ‘total expenditure’ in clause 44:

• Guidance Note clarifies that the total expenditure including purchases needs to be given in the prescribed Tabular format. Head-wise/nature-wise expenditure details are not required by this clause. [Para 82.1 of the Guidance Note]
• There is no need to report break-up of expenditure in respect of each and every head of expenditure.
• In Nectar Beverages (P) Ltd v. Dy. CIT [2009] 182 Taxman 319 (Bom.), it was held that depreciation in its very nature is not an expenditure. The Guidance Note opines that Depreciation under section 32, deduction for bad debts u/s 36(1)(vii) etc. are allowances/deductions and not expenditure and should not be reported in any of the Columns (3) to (7) in the Tabular format in clause 44 [Para 82.2 of the Guidance Note]
• The words ‘total expenditure’ and ‘expenditure’ will cover both capital expenditure and revenue expenditure. Separate reporting of capital expenditure will provide ease in reconciliation. [Para 82.17 of Guidance Note]
• Only Business expenditure needs to be reported, not personal expenditure.
• Business expenditure should be reported whether deductible or liable to be disallowed under the Act.
• Headings of columns 3-6 and column 7 of Tabular format in clause 44 require reporting of “Expenditure in respect of entities registered under GST” and “Expenditure relating to entities not registered under GST” respectively.
• Thus, the expenses which are within the scope of GST i.e., which tantamount to ‘supply’ in terms of section 7 of the CGST Act, 2017 are only required to be reported in clause 44 in any of the columns from 3 to 7.
• Schedule III to the CGST Act, 2017 lists out activities or transactions that are treated neither as a supply of goods nor a supply of services, and thus expenditure incurred in respect of such activities need not be reported under this clause in any of the columns from (3) to (7) in the Tabular format. For example, Para (1) of Schedule III covers “Services by an employee to the employer in the course of or in relation to his employment” and thus, remuneration to employees need not be reported.
• Reconciliation of total expenditure reported in clause 44 with expenditure debited to P&L to be retained by tax auditor in his working papers
• New Para 82.4 of 2023 GN requires the tax auditor to maintain working paper of reconciliation of total expenditure as per P&L with value of expenditure reported in clause 44 in the following manner:

* Details of all deductions & additions must be maintained for each sub-entity (GSTIN-wise) of the legal entity.

Whether registration status of supplier at the time of supply should be taken or status at the time of reporting?

New para 82.16 of GN 2023 clarifies as follows:

i) ‘Current status’ of supplier’s registration needs to be differentiated from their status as it was at the time of supply.

ii) Events occurring after balance sheet date may result in Registration being cancelled with effect from an earlier date which may be prior to the date of supply to assessee. Such events that alter the data relating to year under audit does not alter the nature of the expenditure that it is from registered suppliers.

iii) Tax Auditors may elect to extend their review up to a certain cut-off date or not at all. In either case, disclosure should be made of notes of the position with regard to

(i) known cancellations and

(ii) treatment in the disclosure considering possibility of such cancellations