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Microlesson · 5-min read

CARO 2020 – Clauses (viii), (ix) & (x): Unrecorded Income, Loan Defaults, and IPO/FPO Funds

## CARO 2020 – Clause (viii): Disclosure of Unrecorded Transactions (Surrendered Income)

Two-part reporting:

1. Whether any transactions not recorded in the books were surrendered or disclosed as income during the year under the Income Tax Act, 1961 (e.g., during a tax survey, search, or assessment)

2. If yes → Whether the previously unrecorded income has been properly recorded in the books of accounts during the year

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## CARO 2020 – Clause (ix): Default in Repayment of Loans or Other Borrowings

Sub-clauseWhat to Report
(a)Whether the company defaulted in repayment to any lender. If yes: report nature of borrowing, name of lender, amount unpaid, whether principal or interest, number of days delay/unpaid, and any remarks
(b)Whether the company has been declared a willful defaulter by any bank, FI, or lender
(c)Whether term loans were applied for the purpose for which obtained. If diverted: report amount and actual purpose
(d)Whether short-term funds have been used for long-term purposes. If yes: report nature and amount
(e)Whether funds raised by the company are used to meet obligations of subsidiaries, associates, or JVs. If yes: report nature, details, and amount per transaction
(f)Whether loans were raised on pledge of securities held in subsidiaries/JVs/associates. If yes: report details and any defaults

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## CARO 2020 – Clause (x): Money Raised by IPO/FPO and Preferential Allotment

Sub-clauseWhat to Report
(a)Whether money raised by IPO or FPO was applied for the stated purpose. If not: report details of delays/defaults and any subsequent rectification
(b)Whether the company made preferential allotment or private placement of shares or convertible debentures. If yes: whether Sections 42 and 62 of the Companies Act were complied with. If not: report amount involved and nature of non-compliance

Worked example

### Example 1

Example 1 – Unrecorded income

During an Income Tax survey of Nova Traders Ltd, unrecorded cash sales of ₹25 lakh were discovered. The company surrendered this as income in its tax return. However, the accountant did not pass any journal entry for these sales in the books.

What must the CARO report state?

Answer: Under Clause (viii): (1) Yes, ₹25 lakh was surrendered as income under the Income Tax Act. (2) The previously unrecorded income has not been properly recorded in the books of accounts. Both facts must be reported.

### Example 2

Example 2 – Diversion of term loan

Star Hotels Ltd took a term loan of ₹10 crore from a bank specifically for construction of a hotel. Instead, it used ₹4 crore of the loan to pay off working capital dues and invested ₹1 crore in mutual funds.

What must the auditor report?

Answer: Under Clause (ix)(c): Term loans were not fully applied for the stated purpose. The auditor must report that ₹5 crore was diverted — ₹4 crore used for working capital repayment and ₹1 crore invested in mutual funds (which are long-term/other purposes, not the hotel construction).

### Example 3

Example 3 – Short-term funds for long-term use

Alpha Corp raised ₹8 crore through short-term commercial paper (3-month maturity) and used ₹6 crore of it to purchase machinery (a long-term asset).

What is reported under Clause (ix)(d)?

Answer: The auditor must report under Clause (ix)(d) that short-term funds of ₹6 crore (raised through commercial paper) have been utilized for long-term purposes (purchase of machinery). The nature of the borrowing and the amount must be specifically stated.

⚠️ Common exam mistakes

  • Reporting only that income was surrendered without checking and reporting whether it was subsequently recorded in the books — Clause (viii) has two mandatory parts.
  • Forgetting sub-clause (b) on willful defaulter — students focus on loan repayment defaults but miss the separate requirement to check if the company has been officially declared a willful defaulter.
  • Confusing sub-clause (c) (term loan diversion) with sub-clause (d) (short-term for long-term) — both are distinct, and a transaction could trigger reporting under both.
  • Missing Sections 42 and 62 in Clause (x)(b) — preferential allotment triggers Section 42 compliance; rights/further issues trigger Section 62. The auditor must check both.
  • Not reporting sub-clause (e) because the parent company 'chose' to support the subsidiary — the choice is irrelevant; if group funds are used to meet subsidiary obligations, it must be reported.
Reference: Sections 42 & 62 – Companies Act, 2013; Clauses (viii), (ix), (x) of CARO 2020 — Companies Act, 2013; Income Tax Act, 1961; Companies (Auditor's Report) Order, 2020
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