Precautions to be Taken by Tax Auditors in Certifying Clauses 14 to 20 of Form 3CD for Companies

In case of furnishing incorrect information in a tax audit report under section 44AB under the Income Tax Act, 1961 may result in a penalty under section 271J of the Act on the auditor. Furnishing of incorrect information in a tax audit report might result in a penalty of Rs. 10,000 per such report or certificate being imposed on the tax auditor. The following paragraphs provide the detailed precautions to be taken by the tax auditor of a company assessee in filling up, verifying, and cross-checking details stated against clauses 14 to 20 of Form 3CD:

Clause 14(a): Method of valuation of closing stock employed in the previous year

• Report against clause 14(a) the valuation method adopted in accounts in accordance with Revised AS-2 (or Ind AS-2 wherever applicable), not the valuation as per ICDS-II or section 145A.
• Report method of valuation for each class of inventories separately – raw materials, work-in-progress, materials, maintenance supplies, consumables and loose tools.

Clause 14(b): Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss

• If the Independent Auditor’s report on Standalone Financial Statements indicates in CARO remarks that cost records are not maintained by Company as required under section 148 of the Companies Act, 2013, the tax auditor should consider adding a disclaimer in Clause(3) of Form 3CA in respect of clauses 14(b), 13(d), and 13(e) of Form 3CD that

“Since proper cost records are not maintained as required under Section 148 of the Companies Act, 2013, exact cost is not ascertainable, and therefore the impact if any, on account of valuation of inventories on basis of actual cost is not quantifiable and we are unable to comment on effects on profit or loss of deviation of method of valuation from the method of valuation prescribed under section 145A and adjustments required for deviation from ICDS II Valuation of Inventories”

Clause 15: Give the following particulars of the capital asset converted into stock-in-trade:

(a) Description of capital asset:

(b) Date of acquisition

(c) Cost of acquisition

(d) Amount at which the asset is converted into stock-in-trade

• Verify the resolution passed by the Board of Directors for conversion of capital asset into stock-in-trade. Obtain a certified true copy of resolution for audit documentation
• If CARO applies to the Company, verify and report the date of acquisition as per the PPE Register/Investment Property Register.
• Whether the necessary accounting entries have been passed in the books of account at the time of conversion or treatment of capital asset into stock-in-trade?
• Whether the amount is determined as per principles prescribed by the Accounting Standards Board (ASB)? If not, mention the fact in Clause 3 of Form 3CA.

Clause 16: 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

• Case law relied upon for reporting items in sub-clauses (a) to (e) of Clause 16 should be clearly mentioned in clause (3) of Form 3CA.
• Cross check reporting under clause 16(b) with indirect taxes refunds reported against clause 41 of Form 3CD.
• Check statutory audit report (Independent Auditors’ Report on Standalone Financial Statements) for modifications as regards income that should have been recognized but not duly recognized. Report such income under Clause 16(a)/Clause 16(d) as applicable unless these have already been reported in Clause 13(e) as part of adjustments required under ICDSs.
• Check the CARO Report by statutory auditor.
• Section 186(7) of the Companies Act, 2013 provides that no loan shall be given under this section at a rate of interest lower than the yield of one-year, three-year, five-year or ten-year Government security closet to the tenor of the loan.
• CARO remarks under clause 3(iv) on non-charging of interest or charging of interest at a lower rate will have to be factored in by the tax auditor while reporting on clause 16(d) of Form No. 3CD requiring him to report any other income not credited to profit and loss account.
• Clause 3(viii) of CARO 2020 requires statutory auditor to report whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income-tax Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has been properly recorded in the books of account during the year.
• If the CARO report of the statutory auditor mentions transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments, the Tax auditor would need to report this in clause 16(d) of Form No.3CD as other income not credited to Profit and loss account with a note that this has been disclosed in tax assessment during the year. The auditor would need to do so if the amounts disclosed in the tax assessment have not been recorded by the Company in the books of account.
• Give a note in clause (3) of Form 3CA that the amounts reported against sub-clauses (a) to (e) of Clause 16 are those that are not covered in adjustments required by ICDS and reported under clause 13(e).
• Give a note in clause (3) of Form 3CA regarding the items of income not credited to the P&L account but requiring reporting under other clauses [e.g. Clause 24, Clause 25, Clause 29, Clause 29B, Clause 36A] of Form 3CD are reported against such clauses and are not reported against sub-clauses (a) to (e) of clause 16.

Clause 17: Where any land or building or both is transferred during the previous year for a consideration less than value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C

• Reporting particulars under this clause is not required in cases where the consideration received on transfer of an asset (capital or otherwise) being land, or building, or both and the value adopted u/s 43CA or 50C were the same.
• Tax auditors can save time and effort in not reporting cases where the consideration received on transfer and value adopted u/s 43CA or 50C are the same.

Clause 18: Particulars of depreciation allowable as per the Income-tax Act, 1961 in respect of each asset or block of assets, as the case may be, in the following form:

(a) Description of asset/block of assets.

(b) Rate of depreciation.

(c) Actual cost or written down value, as the case may be

(ca) Adjustment made to the written down value under section 115BAA (for assessment year 2020-21 only)*

(cb) Adjustment made to written down value of Intangible assets due to excluding the value of goodwill of a business or profession.

(cc) Adjusted written down value*

(d) Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of –

(i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994

(ii) change in rate of exchange of currency

(iii) subsidy or grant or reimbursement, by whatever name called

(e) Depreciation allowable.

(f) Written down the value at the end of the year.

• Cross-check data reported against clause 18 in respect of tangible assets (buildings, machinery, plant, and furniture) with disclosures made in respect of ICDS-V Tangible Fixed Assets under clause 13(f).
• Cross-check details of additions/deletions reported against Clause 18 with figures of additions/deletions disclosed in audited financial statements. If details/amounts do not tally, obtain a statement of reconciliation from the client and verify it. Verified reconciliation statement be retained as part of audit documentation.
• For reporting actual cost against clause 18(c), consider requirements of various ICDSs like ICDS-V, ICDS-VII, and ICDS-IX have been considered for determining the actual cost.
• Depreciation allowable under clause 18(e) would consist of depreciation and additional depreciation (if any) calculated as per the depreciation rates under the Income-tax Act, 1961. If Company has opted for section 115BAA/section 115BAA [clause 8A of Form 3CD], depreciation allowable would not include additional depreciation].
• ICAI has observed that, in some tax audit reports, in respect of ‘additions’ to the block of assets, ‘date of purchase’ and ‘date of put to use’ were reported as the same in respect of each item under each block of asset purchased. This is not practically possible in all the cases.
• If the CARO report of statutory auditors mentions that material discrepancies were observed on physical verification of PPE assets, consider whether any adjustment to depreciation allowable is required in respect of such material discrepancies.
• Verify leasing arrangements entered into by the Company. Ascertain if the lease is a finance lease or an operating lease. Ensure depreciation allowable under clause 18(e) includes depreciation on assets acquired under finance lease only.
• Compute depreciation allowable under clause 18(e) without considering depreciation on assets acquired under an operating lease.
• If the CARO report of statutory auditors contains any adverse remarks on title deeds of immovable properties not available for verification, consider whether any adjustment to depreciation allowable figures in clause 18(f) is required.

Clause 19: Amounts admissible under sections 32AD, 33AB, 33ABA, 35(1)(i), 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(1)(iv), 35(2AA), 35(2AB), 35ABA, 35ABB, 35AC, 35AD, 35CCA, 35CCC, 35CCD, 35D, 35DD, 35DDA and 35E

• Report amount admissible under sections 32AD, 33AB, 33ABA, 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA), 35(2AB), 35AD, 35CCC and 35CCD as “NIL” if assessee has opted for taxation under section 115BAA/section 115BAB as reported in clause 8A of Form 3CD.
• Where assessee has obtained separate audit report as above, tax auditor should mention the fact on reliance on the same in clause (3) of Form 3CA.
• Claim for deductions under some of these sections require the assessee to obtain separate audit report from CA as under

Clause 20(a): Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend. (Section 36 (1)(ii))

Some judicial decisions dealing with disallowance under section 36(1)(ii) are as under:

• SRC Aviation (P.) Ltd. v. Assistant Commissioner of Income-tax [2022] 140 taxmann.com 193 (Delhi)] SLP dismissed by Supreme Court against above judgment in SRC Aviation (P.) Ltd. v. Assistant Commissioner of Income-tax [2022] 145 taxmann.com 34 (SC).
• CIT v. Career Launcher India Ltd. [2012] 20 taxmann.com 637/207 Taxman 28 (Delhi)
• AMD Metplast Pvt. Ltd. v. DCIT [2012] 20 taxmann.com 647 (Delhi)
• Dalal Broacha Stock Broking (P.) Ltd. v. Addl. CIT [2011] 11 taxmann.com 426 (Mumbai) (SB)
• Karam Singh Malik v. Income-tax Officer [2022] 144 taxmann.com 5 (Delhi – Trib.)

Tax auditor should state in clause (3) of Form No.3CD the judicial decisions relied on him for reporting under Clause 20(a).