Clause 1 to 13 | Precautions to be Taken by Tax Auditors in Certifying Various Clauses of Form No. 3CD of Companies

Section 271J of the Income-tax Act, 1961 provides for a penalty for furnishing incorrect information in reports or certificates. Section 271J provides that where the Assessing Officer or the Commissioner (Appeals) or [Joint Commissioner (Appeals) w.e.f. 1-4-2023], in the course of any proceedings under the Income-tax Act, 1961, finds that an accountant has furnished incorrect information in any report or certificate furnished under any provision of the Income-tax Act or the rules made there under, the Assessing Officer or the Commissioner (Appeals) [or Joint Commissioner (Appeals) w.e.f. 1-4- 2023] may direct that such accountant shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate. Thus, furnishing of incorrect information in a tax audit report under section 44AB or any other report or certificate under the Act or the Rules may result in a penalty of Rs10,000 per such report or certificate being imposed on the tax auditor.

It is important that details in Form No. 3CD are correctly stated by the tax auditor to avoid penalty u/s 271J. 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 various clauses of Form 3CD:

Clause 2: Address

• Registered Office should be mentioned along with the address communicated by the assessee to the Income-Tax Department.
• Cross-check Registered Office with Annual Report, filings with RoC and MCA website.

Clause 4: Whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, goods and services tax, customs duty, etc. If yes, please furnish the registration number or GST number or any other identification number allotted for the same.

• It is not sufficient to report only the GST Registration number of the Company against this clause.
• Care should be taken to report against clause 4 the registration numbers under all indirect tax laws mentioned in the CARO report and also in notes to Financial Statements (FS).
• Cross-check with CARO report and notes to FS regarding Contingent liabilities before reporting against this clause.

Clause 8: Indicate the relevant clause of section 44AB under which the audit has been conducted

• In the case of Companies, the option to be selected in the drop-down in the e-filing utility is “Third Proviso to section 44AB”-Audited under any other law”.
• In many cases, Tax Audit Quality Review Board has observed that tax auditors erroneously select the option “Clause 44AB(a) – Total sales/turnover/gross receipts in business exceeding specified limits” instead of option “Third Proviso to section 44AB: Audited under any other law”.

Clause 8A: Whether the assessee has opted for taxation under section 115BA/115BAA/115BAB/115BAC/115BAD?

• Where the Company has opted for taxation under section 115BA/115BAA/115BAB in the preceding financial year, obtain a Management Representation Letter (MRL) from the Company regarding the exercise of an option in preceding previous years and regarding the intention of the assessee to continue availing the option in the current year.
• Obtain MRL from the Company regarding the intention to exercise the option for the first time if the option has not been exercised in past years and the option has not been exercised to date of the Tax audit report.
• In Clause (3) of Form No. 3CA, mention the fact of reliance on the assessee’s MRL as to whether the assessee intends to continue under the regime or whether he intends to opt from the current year.
• Where the Company assessee has opted for section 115BAA/Section 115BAB as of the date of signing the tax audit report, the tax auditor should in Clause (3) of Form No. 3CA the details of exercise of an option by e-filing Form 10-IC/Form 10-ID by the Company and also add a disclaimer that

“We are not required and hence have not verified the compliance by the assessee of conditions for availing the taxation regime of section 115BAA/section 115BAB except to the extent of e-filing of Form 10-IC/Form 10-ID as required by this clause”.

Where the assessee has opted for taxation under section 115BAA/115BAB and the answer “yes” is selected against clause 8A, the auditor should take care to report as under against other clauses of Form No. 3CD.

• While reporting admissible depreciation against clause 18(e) of Form No. 3CD, additional depreciation under section 32(1)(iia) is not to be considered and Note may be given to that effect in Clause (3) of Form 3CA.
• 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” against clause 19 of Form No. 3CD;
• Report amount admissible under section 10AA or under Chapter VIA (except Section 80JJAA and 80M) as “NIL” against clause 33 of Form No. 3CD.
• Make necessary adjustments required by Column (5) and Column (6) of New tabular format in sub-clause (a) of clause 32 of Form No. 3CD.

Clause 10(a): Nature of business or profession (if more than one business or profession is carried on during the previous year, the nature of every business or profession) needs to be furnished.

• Check that the details reported against this clause tally with the details given in the annual report.
• Cross-check with the company’s annual report as to whether all main activities (principal line of each of the businesses) have been reported against Clause 10(a) where they could be clearly located from the annual report.
• Verify from the CARO report whether the Company is an NBFC/HFC/CIC/Nidhi Company.

Clause 11(a): Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.

• Report “No”(not “Yes”) against clause 11(a) as NO books of account have been specifically prescribed for companies under section 44AA of the Act and/or under Rule 6F.

Clause 11(b): List of books of account maintained and the address at which the books of account are kept (In case books of account are maintained in a computer system, mention the books of account generated by such computer system. If the books of account are not kept at one location, please furnish the addresses of locations along with the details of books of account maintained at each location.)

• Tax auditor should use the statutory audit report in case of a company-assessee before commenting on this clause. If the statutory audit report contains a comment on the accounting software used by the company as required by Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014, the tax auditor should be careful to report the fact that books of account are maintained in a computer system and also the list of books generated by such computer system should be reported against clause 11(b) of Form No. 3CD.
• Addresses of Locations where books of account are maintained should be mentioned against Clause 11(b). Check filings by the company to verify the addresses of these locations.

Clause 13(d): Whether any adjustment is required to profit or loss to comply with the ICDSs notified u/s 145(2)

• Obtain draft computation of income duly certified by management with details of adjustments and disclosures required by ICDSs. Adjustments and disclosures must be reflected in draft computation ICDS-wise.
• In Clause (3) of Form No. 3CA, mention the fact of reliance on the draft computation of income provided by the assessee for clauses 13(d) and 13(e).
• Where adjustments were required to be made to the profits or loss to comply with the provisions of income computation and disclosure standards, select the option “Yes” against clause 13(d) so that such adjustments can be reported against clause 13(e).
• It has come to ICAI’s notice that some tax auditors selected “No” in e-filing utility from the dropdown instead of “Yes”. This disabled reporting of details of such adjustments under clause 13(e) and so tax auditors ended up reporting such adjustments against clause 13(f) (i.e., reporting disclosures as per ICDS).

Clause 13 (e): If answer to (d) above is in the affirmative, give details of such adjustments:

• Verify that such adjustments are made separately with respect to each ICDS.
• Clause 13(e) requires the tax auditor to give details of adjustments required in respect of various ICDSs including ICDS-II on Valuation of Inventories. Check the CARO Report in this regard. 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 Companies Act,2013, 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, the 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 the method of valuation from the method of valuation prescribed under section 145A and adjustments required for deviation from ICDS II Valuation of Inventories”

Clause 13 (f) Disclosures as required by ICDSs

• What is required to be given is disclosures as required by ICDS and not as required as per AS/IND AS.
• It has come to ICAI’s notice that, in a few cases, the accounting policies reported were as per the language prescribed in Para 5 of the Revised AS-2 (or IND AS-2 wherever applicable) and not as per Para 3 of ICDS-II. The reporting under clause 13(f) is required to be done as prescribed by the ICDS, which was not done. There could be a limitation in the form uploaded on the IT Portal, which provides certain wordings in the dropdown list. However, the tax auditor should ensure that the correct valuation method is mentioned in the hard copy issued to the auditee.