Guidance Note Sec 44AB Tax Audit
Guidance Note on Tax Audit
under Section 44AB of the Income-tax Act, 1961
under Section 44AB of the Income-tax Act, 1961
(Revised 2023)
Guidance Note on Tax Audit
(Revised 2023)
Guidance Note on Tax Audit under
Section 44AB of the Income-tax Act, 1961
(Revised 2023)
Direct Taxes Committee
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.
First Edition : 1985
Second Edition : 1989
Third Edition : 1998
Fourth Edition : 1999
Fifth Edition : 2005
Reprinted : 2012
Sixth Edition : 2013
Reprint, July : 2013
Seventh Edition : 2014
Eighth Edition : 2022
Ninth Edition : 2023
Committee/Department : Direct Taxes Committee
Email : dtc@icai.in
Website : www.icai.org
Price : ` 500/-
ISBN No. : 978-81-87080-65-7
Published by : The Publication Department on behalf of the
Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100, Indraprastha
Marg, New Delhi - 110 002.
Foreword to Ninth Edition
In an ever-evolving landscape of taxation, where accuracy, compliance, and
transparency are paramount, this Guidance Note stands as a beacon of
knowledge and insight for all Chartered Accountants engaged in the intricate
world of tax audit.
Tax audit, an essential tool in ensuring adherence to tax laws and
regulations, demands a profound understanding of intricate legal framework,
attention to detail and commitment towards ethical practice. To enable our
members to perform tax audits efficiently, the Direct Taxes Committee of the
Institute of Chartered Accountants of India (ICAI) has taken an initiative of
updating the ‘Guidance Note on Tax Audit under section 44AB of the
Income-tax Act, 1961’. This Guidance Note provides a comprehensive
roadmap to navigate the complexities of tax audit in a strategic and informed
manner and also delves into the intricacies of audit procedures.
I would like to commend the dedication and efforts of the experts who have
contributed their valuable inputs in the said Guidance Note. Their collective
wisdom and experiences are encapsulated within these pages, making this
an invaluable resource for Chartered Accountancy professionals in
completing their professional duty in an efficient and effective manner.
I appreciate the efforts of CA. Sanjay Kumar Agarwal, Chairman and CA.
Piyush S Chhajed, Vice-Chairman and all other members of Direct Tax
Committee for responsibly undertaking this revision and fulfilling this arduous
task within the limited time frame.
I am confident that the members and other stakeholders would find this
Guidance Note highly useful in their professional journey.
Place: New Delhi CA. Aniket S. Talati
Date: September 1, 2023 President, ICAI
Preface to Ninth Edition
The Direct Taxes Committee (DTC) of the Institute of Chartered Accountants
of India (ICAI) is one of the important Committees of the ICAI which is
engaged in the matters related to direct taxes and makes representations to
the Government, Central Board of Direct Taxes and at other appropriate
forums from time to time on various legislative amendments and issues
concerning direct taxes. One of the main activities of the Committee is to
disseminate knowledge and honing skills of the membership in direct
taxation.
Tax audit is one of the important areas of practice for Chartered Accountants.
Tax audit is a time-intensive task which involves the process of verification of
the accounts of a taxpayer to confirm their adherence to some specific
provisions of the Income tax law. The dynamic nature of income tax law often
gives rise to numerous queries and uncertainties in its adherence. In order to
guide the members of ICAI with respect to the recent changes in the
provisions w.r.t tax audit as also to provide clarity on various aspects, the
Direct Taxes Committee of ICAI has taken an initiative of updating the
“Guidance Note on Tax Audit under section 44AB of the Income-tax Act,1961
(Revised 2023)”.
This publication has been specifically revised keeping in view the
amendments made upto Finance Act, 2023 and tax audit forms applicable as
on date (Form No. 3CA/3CB/3CD). This Guidance Note aims to address the
situations faced by the Chartered Accountants while conducting audit by
offering clear explanations that will help in streamlining the tax audit process.
Additionally, it emphasizes the importance of maintaining accurate records
and the significance of a proactive approach in meeting statutory obligations.
As the regulatory environment evolves, it is imperative for our members to
stay updated and compliant with the ever-changing tax requirements. This
Guidance Note not only delves into the core concepts of tax audit but also
provides practical insights that will aid taxpayers in ensuring adherence to
the statutory norms.
We are extremely thankful to CA. Aniket Sunil Talati, President and CA.
Ranjeet Kumar Agarwal, Vice President of the Institute of Chartered
Accountants of India who have been the guiding force behind the revision of
the said Guidance Note.
Various study groups were formed with experts from all over India for the
purpose of reviewing the required up-dation. We extend our gratitude to all
the experts who contributed their insights and expertise in bringing the said
Guidance Note. Their dedication to promoting knowledge and enhancing tax
compliance is commendable.
Last but not the least, we appreciate the dedicated efforts of CA. Mukta
Kathuria Verma, Secretary, Direct Taxes Committee, CA. Ravi Gupta,
Assistant Secretary and the entire Secretariat of Direct Taxes Committee
mainly for their technical and administrative assistance in bringing out this
Guidance Note in limited available time.
In conclusion, we believe that this Guidance Note will serve as a valuable
tool in demystifying the intricate landscape of tax audits under Section 44AB
of the Income-tax Act, 1961. With the right knowledge and guidance,
taxpayers can navigate the complexities of tax regulations with confidence
and ensure a smooth and compliant tax audit process.
CA. Sanjay Kumar Agarwal CA. Piyush Chhajed
Chairman Vice-Chairman
Direct Taxes Committee Direct Taxes Committee
Place: New Delhi
Date: August 31, 2023
Acknowledgement
The Direct Taxes Committee (DTC) of ICAI acknowledges the contribution
made by the Committee Members, Co-opted Members and Special Invitees
and tax experts, in the capacity of study group member or otherwise in
revising the “Guidance Note on Tax Audit under Section 44AB of the Income-
tax Act,1961 (Revised 2023)”. DTC of ICAI places on record its gratitude for
their contribution in enrichment of knowledge of the members.
Committee Members:(2023-24)
Council Members: CA. Sanjay Kumar Agarwal, Chairman; CA. Piyush S
Chhajed, Vice-Chairman; CA. Chandrashekhar Vasant Chitale; CA. Dheeraj
Kumar Khandelwal; CA. Purushottamlal Khandelwal; CA. Mangesh
Pandurang Kinare; CA. Sridhar Muppala; CA. Prasanna Kumar D; CA.
Rajendra Kumar P; CA. Cotha S Srinivas; CA. Sushil Kumar Goyal’ CA.(Dr.)
Debashis Mitra; CA. Rohit Ruwatia; CA. (Dr.) Anuj Goyal; CA. Gyan Chandra
Misra; CA. Prakash Sharma; CA. Kemisha Soni; CA. (Dr.) Raj Chawla; CA.
Hans Raj Chugh; CA. Pramod Jain; CA. Charanjot Singh Nanda; Shri Ritvik
Ranjanam Pandey; Shri Sanjay Kumar
Co-opted Members: CA. Mahendra Kumar Modi; CA. Aseem Chawla; CA.
Sriram Ranganathan; CA. Manish Bansal; CA. Sushil Pransukhka; CA. Rajiv
Sahni; CA. N. C. Hegde; CA. Sudhir Kumar Agarwal
Special Invitees: CA. (Dr.) Rakesh Gupta; CA. Siddharth Jain; CA. Mithilesh
Sai Sannareddy; CA. Anubhav Goyal; CA. Aman Gupta; CA. R. S. Kalra;
CA. Suhas Bora; CA. Rajat Mengi; CA. Naveen Kumar Goyal; CA. Arun Jain;
CA. Sushil Kumar Lal; CA. Mithilesh Sai Sannareddy; CA. Jai Krishan
Aggarwal; CA. Yashpal Saini; CA. Pradeep Kumar Gaur; CA. Rajiv Kumar
Jain; CA. Vivek Jain; CA. Lakshay Gupta; CA. Anant N Sabadra; CA.
Nishant Gupta; CA. Suresh Wadhwa; CA. Pankaj Jain;
Special acknowledgement: CA. (Dr.) Girish Ahuja; CA. T. P. Ostwal; CA. Ved
Jain; CA. Raj Kumar Nahata; CA. Sanjiv Kumar Chaudhary; CA. Mukesh
Jain, CA. Vijay Kumar Gupta; CA. Sushil Agarwal, CA. Sachin Jain; CA.
Parul Jolly; CA. Vijay Kumar Gupta; CA. Paras Savla; CA. Pankaj Kumar
Mishra; CA. Krishan Kant Tulshan;
Contributors
CA. Abhishek Aneja; CA. Ajay Gupta; CA. Anish Thacker; CA. Ankit Singhal;
CA. Aseem Chawla; CA. Ashray Sarna; CA. Atul Suraiya; CA. Baldev Raj;
CA. Dhananjay M Paranjape; CA. Gaurav Goyal; CA. Hinesh Doshi; CA.
Jiger Saiya; CA. Kapil Diwan; CA. Maheema Bahl; CA. Maneesh Upneja;
CA. Manish Bansal; CA. Manish M; CA. Manoj Kumar; CA. Mihir Gandhi;
CA. Naman Shrimal; CA. Nidhi Goyal; CA. Nitin Bansal; CA. Nitin Bhuta; CA.
Parikshit Aggarwal; CA. Parul Jolly; CA. Pawan Kumar Agarwal; CA. Piyush
Kochar; CA. R. A. Sharma; CA. Rajesh Mehta; CA. Rajesh Vaishnav; CA.
Raman Seth; CA. Rohit Golecha; CA. Rohit Kapoor; CA. Sachin Sinha; CA.
Smita Patni; CA. Subhash Jain; CA. U. Rama Krishna; CA. Venu Gopal
Sanka; CA. Vyomesh Pathak; Mr. O P Yadav, CA. Umesh Chandra Pandey
Foreword to the First Edition
The introduction of the provisions regarding compulsory audit of accounts for
tax purposes under Section 44AB of the Income Tax Act, 1961, signified a
very healthy development in our tax laws. It fulfils a long felt need and seeks
to rectify a weakness which was diagnosed long ago. The requirements of
the provisions place a tremendous responsibility on the members of our
profession in carrying out the audit and in furnishing the audit report setting
forth the prescribed particulars.
I have no doubt that our profession would rise to the occasion, acquit itself
well in discharging this responsibility and justify the confidence reposed by
the Government in our profession.
I would like to compliment the Taxation Committee in bringing out this timely
publication. I am sure this guide would be of help to our members and ensure
their full contribution to the achievement of the objectives of this provision.
14-2-1985 A.C. Chakrabortti
New Delhi President
Preface to the First Edition
Section 44AB has been introduced in the Income-tax Act, 1961, by the
Finance Act, 1984. This section provides for audit of accounts of assessees
having total sales, turnover or gross receipts exceeding the specified limits of
Rs.40 lakhs for business and Rs.10 lakhs for profession. New Rule 6G,
inserted in the Income-tax Rules, prescribes the Forms of Audit report for the
above purpose. The requirements for the above audit will apply to accounts
relating to previous year relevant to assessment year 1985-86 and
subsequent years.
Audit of accounts in the corporate sector has been made compulsory by
legislation over a period of years. Realising the importance of audit, in recent
years, this requirement is being extended to non-corporate sector also.
The Income-tax Act already provides for audit of accounts of Public
Charitable Trusts and non-corporate assessee establishing new industrial
undertakings. Section 142(2A) gave wide powers to the tax authorities to get
the accounts in certain specified circumstances audited by a chartered
accountant. The new provision introduced by section 44AB has considerably
widened the scope of audit.
The Taxation Committee of the Institute has published (i) Guide for Audit of
Public Trusts under section 12A(b) and (ii) Guide to Special Audit under
section 142(2A). A monograph on compulsory maintenance of accounts has
also been published and the same has been updated.
Considering the fact that the scope of audit under the tax laws has
considerably widened after the introduction of section 44AB, the Taxation
Committee has prepared this Guidance Note on Tax Audit for the use of our
members. In this guidance note an attempt has been made to explain the
scope of Tax Audit requirements. It has been emphasised that in any audit
assignment the general principles of audit have to be followed. The members
accepting these assignments will have to use their professional skill and
expertise while expressing their opinion on the financial statements and other
particulars required to be stated.
I am happy that with the active co-operation of the members of the Taxation
Committee, it has been possible to finalise this Guidance Note soon after the
final publication of the audit report forms by CBDT. In particular, I must
express my gratitude to Shri P.N. Shah, our past President, Sarvashri N.K.
Poddar, M.G. Patel and A.H. Dalal, members of the Taxation Committee and
the Secretary of the Committee for the efforts put in by them in the
finalisation of the guidance note. I am confident that this guidance note will
be of great assistance to our members in industry or in public practice.
13th February, 1985 G. Narayanaswamy
Chairman
Taxation Committee
Terms, Abbreviations used in this
Guidance Note
In this Guidance Note, the following terms and abbreviations occur often in
the text. A brief explanation of such terms and abbreviations is given below.
Further, reference to a section without reference to the relevant Act means
that the section has reference to the Income-tax Act, 1961.
(a) Act The Income-tax Act, 1961.
(b) Accountant Accountant means a chartered accountant
within the meaning of the Chartered
Accountants Act, 1949, as referred to in
section 288 of the Income-tax Act, 1961.
(c) AS Accounting Standards notified vide the
Companies (Accounting Standards) Rules,
2021 for company assessees not following Ind
AS and Accounting Standards as prescribed
by the Institute of Chartered Accountants of
India for non company assessees.
(d) Assessee As defined in section 2(7) of the Act.
(e) AY Assessment Year as defined under section
2(9) of the Act.
(f) Audit report Any report submitted in Form No. 3CA/3CB
along with the statement of particulars in Form
No. 3CD.
(g) Board/CBDT The Central Board of Direct Taxes constituted
under the Central Boards of Revenue Act,
1963.
(h) Circular A circular or instructions issued by the Board
under section 119(1) of the Act.
(i) Form or Forms Collectively refer to Forms 3CA, 3CB and
3CD.
(j) HUF Hindu Undivided Family.
(k) ICAI/Institute The Institute of Chartered Accountants of
India.
(l) ICDS Income Computation and Disclosure
Standards issued by the Board u/s 145 of the
Act.
(m) Ind AS The Indian Accounting Standards (Ind AS), as
notified vide Companies (Indian Accounting
Standards) Rules, 2015 along with the
amendments notified from time to time.
(n) Limited Liability As defined in the Limited Liability Partnership
Partnership (LLP) Act, 2008.
(o) Person As defined in section 2(31) of the Act.
(p) Previous year As defined in section 3 of the Act.
(q) Rules The Income-tax Rules, 1962.
(r) SA Standards on Auditing issued, prescribed and
made mandatory by the Institute of Chartered
Accountants of India.
(s) STT Securities transactions tax leviable under
Chapter VII of the Finance (No.2) Act, 2004.
(t) Tax audit The audit carried out under the provisions of
section 44AB of the Act.
(u) Tax auditor Auditor appointed by an assessee to carry out
tax audit under section 44AB of the Act.
Contents
Sr. Particulars Page
No. No.
Foreword to the Ninth Edition
Preface to the Ninth Edition
Acknowledgement
Foreword to the First Edition
Preface to the First Edition
Terms, Abbreviations used in this Guidance Note
1. Introduction 1
2. Background 2
3. Provisions of section 44AB 5
4. ‘Profession’ and ‘business’ explained 10
5. Sales, turnover, gross receipts 11
6. Liability to tax audit - special cases 21
7. Specified date and tax audit 22
8. Penalty 22
9. Tax auditor 23
10. Form of Financial Statements 36
11. Accounting Standards 36
12. Accounts and Income-tax law 39
13. Audit procedures 40
14. Professional misconduct 46
15. Audit report 46
16. Issuing Audit Report 50
17. Form No. 3CA 51
18. Form No. 3CB 54
19. Form No. 3CD 57
20. Particulars to be furnished in Form No. 3CD 59
[clauses 1-8a]
21. Particulars of Members/Partners [clause 9] 63
22. Nature of business or profession [Clause 10] 64
Sr. Particulars Page
No. No.
23. Books of account and relevant documents [Clause 11] 65
24. Presumptive Income [clause 12] 69
25. Method of Accounting [clause 13] 73
26. Valuation of Closing Stock [clause 14] 79
27. Conversion of asset into stock-in-trade [clause 15] 84
28. Items of Income not credited [clause 16] 88
29. Valuation of property [Clause 17] 93
30. Particulars of Depreciation [clause 18] 95
31. Amounts admissible under section 32AC - 35E 102
[clause 19]
32. Bonus, Commission, PF recoveries, etc. [clause 20] 111
33. Amount debited to Profit & Loss Account being in the 117
nature of capital, personal and advertisement
expenditure [clause 21(a)]
34. Amounts inadmissible u/s 40(a) [clause 21(b)] 125
35. Interest, salary, bonus, etc. to partners [clause 21(c)] 132
36. Amounts inadmissible u/s 40A(3) [clause 21(d)] 134
37. Amounts inadmissible u/s 40A(7) [clause 21(e)] 139
38. Amounts inadmissible u/s 40A(9) [clause 21(f)] 139
39. Contingent liabilities [clause 21(g)] 140
40. Amount inadmissible in terms of section 14A [clause 141
21(h)]
41. Amount inadmissible under proviso to section 36(1)(iii) 145
[clause 21(i)]
42. Amount inadmissible u/s 23 of MSME Act, 2006 146
[clause 22]
43. Payments to specified persons under section 40A(2)(b) 149
[clause 23]
44. Deemed profits under section 152
32AC/32AD/33AB/33ABA/33AC [clause 24]
45. Profits chargeable under section 41 [clause 25] 153
46. Payments under section 43B [clause 26] 157
47. Central Value Added Tax credits [clause 27(a)] 165
Sr. Particulars Page
No. No.
48. Prior period expenditure [clause 27(b)] 166
49. Property received under section 56(2)(viia) [Clause 28] 168
50. Consideration for issue of shares under section 168
56(2)(viib) [Clause 29]
51. Amount includible under section 56(2)(ix) [Clause 29A] 171
52. Amount includible under section 56(2)(x) [Clause 29B] 173
53. Hundi loans [clause 30] 177
54. Primary adjustment to transfer price under section 178
92CE(1) [clause 30A]
55. Expenditure incurred exceeding limit under section 184
94B(1) [clause 30B]
56. Impermissible avoidance arrangement (GAAR) under 188
section 96 [clause 30C]
57. Loans/Deposits accepted [clause 31(a)/(b)] 195
58. Particulars of receipt/payment in an amount exceeding 202
the limit specified in section 269ST [clause
31((ba)/(bb)/(bc)/(bd))]
59. Loans/Deposits repaid – payee details [clause 31(c)] 210
60. Loans/Deposits repayment received – payer details 214
[clause 31((d)]
61. Loans/Deposits repayment received – payer details 216
[clause 31(e)]
62. Brought forward loss/depreciation [clause 32(a)] 218
63. Change in shareholding [clause 32(b)] 219
64. Speculation Loss [Clause 32(c)] 222
65. Loss incurred under section 73A [Clause 32(d)] 225
66. Deemed Speculation business [Clause 32(e)] 226
67. Deductions under Chapter VIA or Chapter III [clause 33] 227
68. Deduction or collection of tax – Chapter XVII-B or 231
XVII-BB [clause 34(a)]
69. Furnishing of tax deducted or collected statement 235
[Clause 34(b)]
70. Interest under section 201(1A) or 206C(7) [Clause 34(c)] 236
Sr. Particulars Page
No. No.
71. Quantitative details of a trading concern [clause 35(a)] 238
72. Quantitative details of a manufacturing concern [clause 238
35(b)]
73. Tax on distributed profits [clause 36] – Omitted 239
74. Receipt of dividend under section 2(22)(e) [clause 36A] 239
75. Cost Audit Report [clause 37] 242
76. Excise Audit Report [clause 38] 243
77. Service tax Audit [Clause 39] 243
78. Details of goods traded, manufactured or services 244
rendered [Clause 40]
79. Details of demand and refund [Clause 41] 246
80. Information pertaining to Form No. 61/61A/61B 247
[Clause 42]
81. Details of report under section 286(2) [Clause 43] 249
82. Goods and Services Tax (GST) compliance [Clause 44] 252
83. Signature 258
84. Furnishing of Tax Audit Report 258
85. Useful websites and Reference Material/Publications 260
APPENDICES
I. Form No. 3CA, 3CB and 3CD 263
II. Clarification regarding authority attached to the 290
documents Issued by the Institute
III Various certificates/reports by an Accountant (Para 2.2) 292
IV Circular No. 452 dated 17.3.1986 (Para 5.8) 305
V Circular No. 4/2007, dated 15 th June, 2007 (Para 5.11) 309
VI Mandatory Communication - Relevant Extracts from the 315
Code of Ethics (Para 9.8)
VII Council Guidelines No.1-CA(7)/02/2008, dated 8 th 323
August,2008 (Para 9.8, 9.17, 9.19 & 9.29)
VIII Form of tax audit particulars to be furnished by members/ 332
firm (Para 9.32)
IX Revised minimum recommended scale of fees 333
Sr. Particulars Page
No. No.
chargeable for the professional assignment done by
Chartered Accountants (Para 9.33)
X Criteria for classification of non-corporate entities as 339
decided by the Institute of Chartered Accountants of
India & Criteria for classification of companies under the
Companies (Accounting Standards) Rules, 2006 (Para
11.3 & 11.5))
XI Applicability of SA 700, Forming an Opinion (Para 13.12) 355
XII Circular No. 561, dated 22 nd May, 1990 (Para 15.15) 357
XIII Circular No. 739, dated 25-3-1996 (Para 21.1) 359
XIV The relevant extracts of the Micro, Small and Medium 361
Enterprises Development Act, 2006 (Para 42.9)
XV Circular No. 208, dated 15 th November, 1976 & Circular 363
No. 221, dated 6-6-1977 (Para 53.1)
XVI Useful websites 366
XVII Reference Material/Publications 367
Guidance Note on Tax Audit under
Section 44AB of the Income-tax Act,
1961 (Revised 2023)
1. Introduction
What is audit?
1.1 The dictionary meaning of the term "audit" is check, review, inspection,
etc. There are various types of audits prescribed under different laws; for
example, company law requires a company audit, cost accounting law
requires a cost audit, etc.
Tax Audit
1.2 The Income-tax Law requires the taxpayer to get the audit of the
accounts of his business/profession from the view point of Income-tax Law.
Section 44AB entails the provisions relating to the class of taxpayers who are
required to get their accounts audited from a chartered accountant. The audit
under section 44AB aims to ascertain the compliance of various provisions of
the Income-tax Law and the fulfillment of other requirements of the Income-
tax Law. The audit conducted by the chartered accountant of the accounts of
the taxpayer in pursuance of the requirement of section 44AB is called tax
audit.
1.3 The chartered accountant conducting the tax audit is required to give
his findings, observation, in form 3CA and 3CB, of audit report. The report of
tax audit is to be given by the chartered accountant in Form Nos. 3CA/3CB
and statement of particulars in Form 3CD.
What is the objective of tax audit?
1.4 One of the objectives of tax audit is to ascertain/derive the requirement
of Form No. 3CD and report in Form Nos. 3CA/3CB. Apart from reporting
requirements of Form Nos. 3CA/3CB, an audit for tax purposes would assure
that the books of account and other records are properly maintained, that
they reflect the true and correct particulars in Form No. 3CD. It can also
facilitate the administration of tax laws by a proper presentation of accounts
before the tax authorities and considerably save the time of Assessing
1
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Officers in carrying out routine verifications, like checking correctness of
totals and verifying whether purchases and sales are properly vouched for or
not. The time of the Assessing Officers saved could be utilised for attending
to more important and investigational aspects of a case.
Tax Audit Guidance Note
1.5 The law has entrusted onerous responsibility of conducting tax audit
under section 44AB on chartered accountants in practice. For compiling
particulars for tax audit, conduct of audit and issuing of audit report, inputs
are required by auditors and the other stakeholders. In order to address this
requirement, Direct Taxes Committee (DTC) of the ICAI, has issued Tax
Audit Guidance Note. Since the law and particulars for reporting keep on
changing, Guidance Note requires to be updated from time to time.
2. Background
2.1. The Finance Minister, while presenting the Union Budget for 1984-85,
has observed and as stated in the Memorandum explaining the provisions of
the Finance Bill, 1984, the compulsory audit is intended to ensure proper
maintenance of books of account and other records in order to reflect the
true income of the tax payer and to facilitate the administration of tax laws by
a proper presentation of the accounts before the tax authorities. This would
also save the time of the Assessing Officers considerably in carrying out the
verification. The scope of section 44AB was enlarged to provide that audit
under the section would be required in case of a person carrying on the
business of the nature referred to in section 44AD or 44AE or 44AF (by the
Finance Act 1997 w.e.f. assessment year 1998-99) or 44BB or 44BBB (by
the Finance Act 2003 w.e.f. assessment year 2004-05) or Section 44ADA (for
persons carrying on profession by the Finance Act 2016 w.e.f. assessment
year 2017-18), if such person claims that his income is lower than the
amount of income deemed under these sections as presumptive income.
Thereafter, Finance (No.2) Act, 2009 (w.e.f. AY 2011-12) enlarged the scope
of section 44AD to encompass within its ambit the assessees covered by the
provision of erstwhile section 44AF and hence, section 44AF has been
omitted. While section 44AF dealt with assessees carrying on retail trade, the
amended section 44AD covers all assessees carrying on eligible business
except professionals as referred to in section 44AA (1), a person earning
income in the nature of commission or brokerage, or a person carrying on
any agency business.
2
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
2.2. Besides tax audit, certain other sections in the Income-tax Act, 1961
also require audit/certifications by a chartered accountant. A table appearing
in the Appendix III provides information about such audits and reports.
2.3. The first edition of this Guidance Note was published in the year 1985
immediately after the introduction of tax audit provision to help members in
discharging their responsibility in an efficient manner. In order to incorporate
changes made by the amendments to the Finance Act, as well as judicial
pronouncements, circulars etc., the said Guidance Note has been revised in
the years 1989, 1998, 1999, 2005, 2013, 2014 and 2022. Further, a
publication titled ‘Implementation Guide w.r.t. Notification No. 33/2018 dated
20.07.2018 effective from 20.08.2018’ was also issued in the year 2018 (now
incorporated and merged in this revised edition). The sequence of certain
significant events is as follows:
(a) The Government had substituted revised Rule 6G and Forms 3CA,
3CB and 3CD in the Official Gazette on June 4, 1999, vide Notification
No 10950/F.No. 153/74/98/TPL and omitted Forms No.3CC and 3CE.
(b) These forms have been subsequently revised vide CBDT’s Notification
No. 280/2004 dated 16th November 2004.
(c) Significant changes in Form No.3CD were made in the year 2006
through Notification No. 208/2006 dated 10th August, 2006 which
notified the Income tax (Ninth Amendment) Rules, 2006.
(d) Significant changes in Form No.3CD were again made in the year
2014 through Notification No. 33/2014 dated 25.07.2014 which notified
the Income-tax (7th Amendment) Rules, 2014.
(e) Further changes were made to Form 3CD by inserting sub-clauses
(d),(e) and (f) in Clause 13 to incorporate changes relating to ICDS.
The insertion was made w.e.f. 01.04.2017 by Notification No. 88/2016
dated 29.09.2016 which notified the Income Tax (23rd Amendment)
Rules, 2016.
(f) Clause 31 of Form No. 3CD was substituted vide Notification No.
58/2017 dated 3rd July 2017, further corrected by corrigendum
Notification No. 60/2017 dated 6 th July 2017.
(g) Significant changes in the Form No. 3CD were again made in the year
2018 through Notification No. 33/2018 dated 20.07.2018 which notified
the Income-tax (8th Amendment) Rules, 2018.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(h) Certain amendments were made in Form No. 3CD by Notification No.
82/2020 dated 01.10.2020. However, the said Notification was
substituted by Notification No. 28/2021 dated 01.04.2021.
(i) Certain amendments were made in Form 3CD in clauses 8A, 17, 18,
32 and 36 through Notification No. 28/2021 dated 01.04.2021 which
notified the Income-tax (eighth Amendment) Rules, 2021.
(j) The Income-tax (8th Amendment) Rules, 2018 w.e.f. 20.08.2018, inter
alia, inserted Clause 30C and 44 in Form No. 3CD. Circular No.
05/2021 dated 25.03.2021 has kept clause no. 30C and 44 in
abeyance till 31.03.2022.
2.4. Form No. 3CD is quite comprehensive and covers generally all the
items included in Form No. 6B prescribed for reporting under section
142(2A), and hence this Guidance Note would meet almost all the reporting
requirements of audit under section 142(2A) also. However, if under section
142(2A), the Assessing Officer requires specific information, the same has to
be given separately along with Form No. 6B.
2.5. The audit of accounts was introduced by section 11 of the Finance Act,
1984, which inserted a new section 44AB with effect from 1st April, 1985
[Assessment Year 1985-86]. This audit is popularly known as tax audit. This
section makes it obligatory for a person carrying on business to get his
accounts audited by a chartered accountant, and to furnish, by the ‘specified
date’, the report in the prescribed form of such audit, if the total sales,
turnover or gross receipts in business in the relevant previous year exceed or
exceeds the prescribed limit. For a professional, the provisions of tax audit
become applicable if his gross receipts in profession exceed the prescribed
limit in the relevant previous year.
2.6. The vires of section 44AB has been upheld by Hon'ble Supreme Court
in T.D. Venkata Rao v. Union of India [1999] 237 ITR 315 (SC). The Apex
Court has made the following significant observations:
"Chartered Accountants, by reason of their training have special
aptitude in the matter of audits. It is reasonable that they, who
form a class by themselves, should be required to audit the
accounts of businesses whose income (sic: turnover) exceeds
Rs.40 lakhs* and professionals whose income (sic: gross
receipts) exceeds Rs.10 lakhs* in any given year. There is no
material on record and indeed in our view, there cannot be that
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
an income-tax practitioner has the same expertise as chartered
accountants in the matter of accounts. For the same reasons the
challenge under article 19 must fail, and it must be pointed out
that these income-tax practitioners are still entitled to be
authorised representatives of assessees.”
*(those were the then existing limit)
3. Provisions of section 44AB
3.1. Section 44AB reads as under:
“Audit of accounts of certain persons carrying on business or
profession”.
44AB. Every person, --
(a) carrying on business shall, if his total sales, turnover or gross
receipts, as the case may be, in business exceed or exceeds
one crore rupees in any previous year;
Provided that in the case of a person whose—
(a) aggregate of all amounts received including amount
received for sales, turnover or gross receipts during the
previous year, in cash, does not exceed five per cent of
the said amount; and
(b) aggregate of all payments made including amount
incurred for expenditure, in cash, during the previous year
does not exceed five per cent of the said payment:
this clause shall have effect as if for the words "one crore
rupees", the words "ten crore rupees" had been substituted;
Provided further that for the purposes of this clause, the
payment or receipt, as the case may be, by a cheque drawn on
a bank or by a bank draft, which is not account payee, shall be
deemed to be the payment or receipt, as the case may be, in
cash; or
(b) carrying on profession shall, if his gross receipts in profession
exceed fifty lakh rupees in any previous year; or
(c) carrying on the business shall, if the profits and gains from the
business are deemed to be the profits and gains of such person
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
under section 44AE or section 44BB or section 44BBB, as the
case may be, and he has claimed his income to be lower than
the profits or gains so deemed to be the profits and gains of his
business, as the case may be, in any previous year; or
(d) carrying on the profession shall, if the profits and gains from the
profession are deemed to be the profits and gains of such
person under section 44ADA and he has claimed such income
to be lower than the profits and gains so deemed to be the
profits and gains of his profession and his income exceeds the
maximum amount which is not chargeable to income-tax in any
previous year; or
(e) carrying on the business shall, if the provisions of sub-section
(4) of section 44AD are applicable in his case and his income
exceeds the maximum amount which is not chargeable to
income-tax in any previous year,
get his accounts of such previous year audited by an accountant
before the specified date and furnish by that date the report of such
audit in the prescribed form duly signed and verified by such
accountant and setting forth such particulars as may be prescribed:
Provided that this section shall not apply to the person, who declares
profits and gains for the previous year in accordance with the
provisions of sub-section (1) of section 44AD and his total sales,
turnover or gross receipts, as the case may be, in business does not
exceed two crore rupees in such previous year:
Following first proviso shall be substituted for the existing first
proviso to section 44AB by the Finance Act, 2023 w.e.f. AY 2024-
25:
Provided that this section shall not apply to a person, who declares
profits and gains for the previous year in accordance with the
provisions of sub-section (1) of section 44AD or sub-section (1) of
section 44ADA:
Provided further that this section shall not apply to the person, who
derives income of the nature referred to in section 44B or section
44BBA, on and from the 1st day of April, 1985 or, as the case may be,
the date on which the relevant section came into force, whichever is
later.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Provided also that in a case where such person is required by or
under any other law to get his accounts audited, it shall be sufficient
compliance with the provisions of this section if such person gets the
accounts of such business or profession audited under such law
before the specified date and furnishes by that date the report of the
audit as required under such other law and a further report by an
accountant in the form prescribed under this section.
Explanation - For the purposes of this section, -
(i) "accountant" shall have the same meaning as in the
Explanation below sub-section (2) of section 288;
(ii) "specified date", in relation to the accounts of the assessee of
the previous year relevant to an assessment year, means date
one month prior to the due date for furnishing the return of
income under sub-section (1) of section 139
3.2. The Explanation below section 288(2) defines “accountant”. Please
refer Para 9 of this Guidance Note for elucidation.
3.3. The above section stipulates that every person carrying on business or
profession is required to get his accounts audited by a chartered accountant
before the "specified date" and furnish by that date the report of such audit,
in the following circumstances:
(i) carrying on business shall, if his total sales, turnover or gross receipts,
as the case may be, in business exceed or exceeds one crore rupees
in any previous year:
Provided that in the case of a person whose—
(a) aggregate of all amounts received including amount received for
sales, turnover or gross receipts during the previous year, in
cash, does not exceed five per cent of the said amount; and
(b) aggregate of all payments made including amount incurred for
expenditure, in cash, during the previous year does not exceed
five per cent of the said payment,
this clause shall have effect as if for the words "one crore rupees", the
words “ten crore rupees" had been substituted;
Provided further that for the purposes of this clause, the payment or
receipt, as the case may be, by a cheque drawn on a bank or by a
bank draft, which is not account payee, shall be deemed to be the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
payment or receipt, as the case may be, in cash; (Section 44AB(a)) or
(ii) carrying on profession shall, if his gross receipts in profession exceed
fifty lakh rupees in any previous year; (Section 44AB(b)) or
(iii) carrying on the business shall, if the profits and gains from the
business are deemed to be the profits and gains of such person under
section 44AE or section 44BB or section 44BBB, as the case may be,
and he has claimed his income to be lower than the profits or gains so
deemed to be the profits and gains of his business, as the case may
be, in any previous year; (Section 44AB(c)) or
(iv) carrying on the profession shall, if the profits and gains from the
profession are deemed to be the profits and gains of such person
under section 44ADA and he has claimed such income to be lower
than the profits and gains so deemed to be the profits and gains of his
profession and his income exceeds the maximum amount which is not
chargeable to income-tax in any previous year; (Section 44AB(d)) or
(v) carrying on the business shall, if the provisions of sub-section (4) of
section 44AD are applicable in his case and his income exceeds the
maximum amount which is not chargeable to income-tax in any
previous year (Section 44AB(e)).
However, in the following circumstances, audit under section 44AB is not
applicable:
(a) This section shall not apply to the person, who declares profits and
gains for the previous year in accordance with the provisions of sub-
section (1) of section 44AD and his total sales, turnover or gross
receipts, as the case may be, in business does not exceed two crore
rupees in such previous year (First proviso to section 44AB –
applicable till AY 2023-24 and thereafter amended first proviso shall
be applicable as referred above).
(b) This section shall not apply to the person, who derives income of the
nature referred to in section 44B or section 44BBA, on and from the
1st day of April, 1985 or, as the case may be, the date on which the
relevant section came into force, whichever is later (Second proviso to
section 44AB).
Further, third proviso to section 44AB provides that in a case where such
person is required by or under any other law to get his accounts audited it
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
shall be sufficient compliance with the provisions of this section if such
person gets the accounts of such business or profession audited under such
law before the specified date and furnishes by that date the report of the
audit as required under such other law and a further report by an accountant
in the form prescribed under this section.
3.4. In a case where the tax audit is applicable, the assessee is required to
get his accounts audited and furnish report as prescribed under Rule 6G.
The said Rule 6G provides as follows:
(1) The report of audit of the accounts of a person required to be
furnished under section 44AB shall —
(a) in the case of a person who carries on business or profession
and who is required by or under any other law to get his
accounts audited, be in Form No. 3CA;
(b) in the case of a person who carries on business or profession,
but not being a person referred to in clause (a), be in Form No.
3CB.
(2) The particulars which are required to be furnished under section 44AB
shall be in Form No. 3CD.
3.5. In case of Company/LLP assessee, they should select third proviso to
section 44AB as the applicable section for tax audit instead of section
44AB(a) while filling up clause 8 of Form 3CD since their accounts are
audited under any other law. Similar precaution needs to be exercised in
case of co-operative societies/trusts assessee etc. where audit is applicable
under respective laws.
3.6. A question may arise in the case of an assessee who is eligible to
claim deductions under various sections like sections 80-IA, 80-IB or 80-IC
etc., as to whether it will be necessary for him to get separate audit
reports/certificates under these sections in addition to an audit report under
section 44AB. The requirement of section 44AB is a general requirement
covering the overall position of the accounts of the assessee. This applies to
the complete set of accounts of the assessee for the relevant previous year
covering the results of all the units owned by the assessee whether situated
at one place or at different places. Therefore, when the turnover of all the
units put together exceed the prescribed limits, the assessee will have to get
the audit report under section 44AB in the prescribed form. Separate audit
reports in the forms prescribed for different purposes like sections 80-IA, 80-
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
IB or 80-IC etc. will also have to be obtained by the assessee to meet the
specific requirements of the relevant sections.
4. ‘Profession’ and ‘business’ explained
4.1 The term "business" is defined in section 2(13) of the Act, as under:
"Business" includes any trade, commerce, or manufacture or any
adventure or concern in the nature of trade, commerce or
manufacture.
The word `business' is one of wide import and it means activity carried
on continuously and systematically by a person by the application of
his labour or skill with a view to earning an income. The expression
"business" does not necessarily mean trade or manufacture only -
Barendra Prasad Ray v ITO [1981] 129 ITR 295 (SC).
4.2 Section 2(36) of the Act defines profession to include vocation.
Profession is a word of wide import and includes "vocation" which is only a
way of living. – Additional CIT v. Ram Kripal Tripathi [1980] 125 ITR 408
(All).
4.3 Whether a particular activity can be classified as ‘business' or
‘profession’ will depend on the facts and circumstances of each case. The
expression "profession" involves the idea of an occupation requiring purely
intellectual skill or manual skill controlled by the intellectual skill of the
operator, as distinguished from an operation which is substantially the
production or sale or arrangement for the production or sale of commodities.
- CIT Vs. Manmohan Das (Deceased) [1966] 59 ITR 699 (SC), CIT v. Ram
Kripal Tripathi [1980] 125 ITR 408 (All).
4.4 The following have been listed out as professions in section 44AA of
the Act:
(i) legal, (ii) medical, (iii) engineering or (iv) architectural profession or
(v) the profession of accountancy or (vi) technical consultancy or
(vii) interior decoration.
Further under Rule 6F and other professions notified thereunder
(Notifications No. 1620 SO-18(E) dated 12.1.77, No. 9102SO 2675 dated
25.09.1992 and No.116 SO 385(E), dated 4.5.2001), the following can also
be considered as a profession:
(i) Authorised Representative,
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(ii) Company Secretary,
(iii) Film Artists/Actors, Cameraman, Director including an assistant
director; a music director, including an assistant music director, an art
director, including an assistant art director; a dance director, including
an assistant dance director; Singer, Story-writer, a screen-play writer,
a dialogue writer; editor, lyricist and dress designer,
(iv) Information Technology. (Attention is invited to Notification
No. 890(E)/2000 dated 26-9-2000)
4.5 The following activities have been held to be business:
(i) Advertising agent
(ii) Clearing, forwarding and shipping agents - CIT v. Jeevanlal Lalloobhai
& Co. [1994] 206 ITR 548 (Bom).
(iii) Couriers
(iv) Insurance agent
(v) Nursing home
(vi) Stock and share broking and dealing in shares and securities - CIT
v. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom)
(vii) Travel agent.
5. Sales, turnover, gross receipts
5.1 It may be noted that the provision relating to tax audit under section
44AB applies to every person carrying on business, if his total sales, turnover
or gross receipts in business exceed the prescribed limit (Rs.1 crore or Rs 10
crore in specified cases) and to a person carrying on a profession, if his
gross receipts from profession exceed the prescribed limit (Rs. 50 lakhs) in
previous year 2022-23. It is pertinent to note here that the turnover limits as
provided in section 44AD and 44ADA have been further revised upwards by
the Finance Act, 2023 applicable w.e.f. AY 2024-25. However, the terms
"sales", "turnover" or "gross receipts" are not defined in the Act, and
therefore the meaning of the aforesaid terms has to be considered for the
applicability of the section.
5.2 The Central Sales Tax Act, 1956 defines “Turnover” as follows:
“turnover” used in relation to any dealer liable to tax under this Act
means the aggregate of the sale prices received and receivable by him
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
in respect of sales of any goods in the course of inter-State trade or
commerce made during any prescribed period and determined in
accordance with the provisions of this Act and rules made there under.
Further, section 8A(1) of the said Act provides that in determining turnover,
deduction of sales tax should be made from the aggregate of sales price.
The Central Goods and Services Act, defines ‘Turnover’ as under:
Section 2(112)
‘turnover in State’ or ‘turnover in Union territory’ means the aggregate
value of all taxable supplies (excluding the value of inward
supplies on which tax is payable by a person on reverse charge
basis) and exempt supplies made within a State or Union territory by
a taxable person, exports of goods or services or both and inter-
State supplies of goods or services or both made from the State or
Union territory by the said taxable person but excludes central tax,
State tax, Union territory tax, integrated tax and cess.
5.3 The term "Turnover" has been defined under Section 2(91) of the
Companies Act, 2013 as follows:
"2(91) turnover means gross amount of revenue recognised in the
profit and loss account from the sale, supply, or distribution of goods
or on account of services rendered, or both, by a company during a
financial year;"
5.4 In the “Glossary of Terms used in Financial Statements” published by
the Institute, the expression “Sales Turnover” has been defined as under:
“The aggregate amount for which sales are effected or services
rendered by an enterprise. The term `gross turnover’ and `net turnover’
(or `gross sales’ and `net sales’) are sometimes used to distinguish the
sales aggregate before and after deduction of returns and trade
discounts”.
The term "turnover" is a commercial term and it should be construed in
accordance with the method of accounting regularly employed by the
company.
5.5 The term ‘turnover’ for the purposes of this clause may be interpreted
to mean the aggregate amount for which sales are effected or services
rendered by an enterprise. If GST or any other tax is included in the sale
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
price, no adjustment in respect thereof should be made for considering the
quantum of turnover. Trade discounts can be deducted from sales but not the
commission allowed to third parties. If, however, GST or any other indirect
tax recovered are credited separately to GST or other tax account (being
separate accounts) and payments to the authority are debited in the same
account, they would not be included in the turnover. However, sales of scrap
shown separately under the heading ‘miscellaneous income’ will have to be
included in turnover.
5.6 Considering that the words "Sales", "Turnover" and "Gross receipts"
are commercial terms, they should be construed in accordance with the
method of accounting regularly employed by the assessee. Section 145(1)
provides that income chargeable under the head "Profits and gains of
business or profession" or "Income from other sources" should be computed
in accordance with either cash or mercantile system of accounting regularly
employed by the assessee. The method of accounting followed by the
assessee is also relevant for the determination of sales, turnover or gross
receipts in the light of the above discussion.
5.7 Applying the above generally accepted accounting principles, a few
typical cases may be considered:
(i) Discount allowed in the sales invoice will reduce the sale price and,
therefore, the same can be deducted from the turnover.
(ii) Cash discount other than that allowed in a cash memo/sales invoice is
in the nature of a financing charge and is not related to turnover. The
same should not be deducted from the figure of turnover.
(iii) Turnover discount is normally allowed to a customer if the sales made
to him exceed a particular quantity. This being dependent on the
turnover, as per trade practice, it is in the nature of trade discount and
should be deducted from the figure of turnover even if the same is
allowed at periodical intervals by separate credit notes.
(iv) Special rebate allowed to a customer can be deducted from the sales
if it is in the nature of trade discount. If it is in the nature of
commission on sales, the same cannot be deducted from the figure of
turnover.
(v) Price of goods returned should be deducted from the figure of turnover
even if the returns are from the sales made in the earlier year/s.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(vi) Sale proceeds of fixed assets would not form part of turnover since
these are not held for resale.
(vii) Sale proceeds of property held as investment property will not form
part of turnover.
(viii) Sale proceeds of any shares, securities, debentures, etc., held as
investment will not form part of turnover. However, if the shares,
securities, debentures etc., are held as stock-in-trade, the sale
proceeds thereof will form part of turnover.
5.8 (a) A question may also arise as to whether the sales by a
commission agent or by a person on consignment basis forms part of the
turnover of the commission agent and/or consignee as the case may be. In
such cases, it will be necessary to find out, whether the property in the goods
or all significant risks, reward of ownership of goods belongs to the
commission agent or the consignee immediately before the transfer by him to
third person. If the property in the goods or all significant risks and rewards
of ownership of goods continue to belong to the principal, the relevant sale
price shall not form part of the sales/turnover of the commission agent and/or
the consignee as the case may be. If, however, the property in the goods,
significant risks and reward of ownership belongs to the commission agent
and/or the consignee, as the case may be, the sale price received/receivable
by him shall form part of his sales/turnover.
(b) In this context, it would be useful to refer to the CBDT Circular No.452
dated 17 th March, 1986, where the Board has clarified the question of
applicability of section 44AB in the cases of Commission Agents, Arhatias,
etc. The Circular is published in Appendix IV.
5.9 Share brokers, on purchasing securities on behalf of their customers,
do not get them transferred in their names but deliver them to the customers
who get them transferred in their names. The same is true in case of sales
also. The share broker holds the delivery merely on behalf of his customer.
The property in goods does not get transferred to the share brokers. Only
brokerage which is being accounted for in the books of account of share
brokers should be taken into account for considering the limits for the
purpose of section 44AB. However, in case of transactions entered into by
share broker on his personal account, the sale value should also be taken
into account for considering the limit for the purpose of section 44AB. The
case of a sub-broker is not different from that of a share broker.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
5.10 The turnover or gross receipts in respect of transactions in shares,
securities and derivatives may be determined in the following manne r:
(a) Speculative transaction: A speculative transaction means a
transaction in which a contract for the purchase or sale of any
commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the
commodity or scrips. Thus, in a speculative transaction, the contract
for sale or purchase which is entered into is not completed by giving or
receiving delivery so as to result in the sale as per value of contract
note. The contract is settled otherwise and squared up by paying out
the difference which may be positive or negative. As such, in such a
transaction, the difference amount is 'turnover'. In the case of an
assessee undertaking speculative transactions, there can be both
positive and negative differences arising from settlement of various
such contracts during the year. Each transaction resulting into whether
a positive or negative difference is an independent transaction.
Further, amount paid on account of negative difference is not related
to the amount received on account of positive difference. In such
transactions, though the contract notes are issued for full value of the
purchased or sold asset, the entries in the books of account are made
only for the differences. Accordingly, the aggregate of both positive
and negative differences is to be considered as the turnover of such
transactions for determining the liability to audit vide section 44AB.
(b) Derivatives, futures and options: Such transactions are completed
without actual delivery of shares or securities or commodities etc.
These are squared up by receipts/payments of differences. The
contract notes are issued for the full value of the underlined shares or
securities or commodities etc. purchased or sold but entries in the
books of account are made only for the differences. The transactions
may be squared up any time on or before the striking date. The buyer
of the option pays the premia. The turnover in such types of
transactions is to be determined as follows (This is only and only for
the purpose of computing ‘turnover’ for tax audit):
(i) The total of favourable and unfavourable differences in case of
squared off transactions shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in
turnover. However, where the premium received is included for
determining net profit for transactions, then such net profit
should not be separately included.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(iii) In respect of any reverse trades entered, the difference thereon,
should also form part of the turnover.
(iv) In case of an open position as at the end of the financial year
(i.e., trades which are not squared off during the same financial
year), the turnover arising from the said transaction should be
considered in the financial year when the transaction has been
actually squared off.
(v) In case of delivery based settlement in a derivatives transaction,
the difference between the trade price and the settlement price
shall be considered as turnover. Further, in the hands of the
transferor of underlying asset, the entire sale value shall also be
considered as business turnover where the underlying asset is
held as stock in trade.
(c) Delivery based transactions: Where the transaction for the purchase
or sale of any commodity including stocks and shares is delivery-
based, whether intended or by default, the total value of the sales is to
be considered as turnover.
5.11 (a) Further, an issue may arise whether such transactions of purchase
or sale of stocks and shares undertaken by the assessee are in the course of
business or as investment. The answer to this issue will depend on the facts
and circumstances of each case taking into consideration the nature of the
transaction, frequency and volume of transactions etc. For this, attention is
invited to the following judgments where this issue has been considered.
(i) CIT v. P.K.N. and Co Ltd (1966) 60 ITR 65 (SC)
(ii) Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242 (SC)
(iii) CIT v. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC)
(iv) G. Venkataswami Naidu & Co. v. CIT (1959) 351TR 594 (SC)
Further, CBDT Circular No.4/2007 dated 15.06.2007, Circular No. 6/2016
dated 29.02.2016 and Letter F.No. 225/12/2016/ITA.II dated 02.05.2016 -
Appendix V may also be referred to.
(b) In case such transactions are for the purposes of investment and
income/loss arising therefrom is to be computed under the head 'Capital
Gains', then the value of such transaction is not to be included in sales or
turnover for deciding the applicability of audit under section 44AB. How ever,
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
in case such transactions are in the course of business, then the total of such
sales is to be included in the sale, turnover or gross receipts as the case may
be, of the assessee for determining the applicability of audit under section
44AB.
5.12 The term "gross receipts" is also not defined in the Act. It will include
all receipts whether in cash or in kind arising from carrying on of the business
which will normally be assessable as business income under the Act. Broadly
speaking, the following items of income and/or receipts would be covered by
the term "gross receipts in business":
(i) Cash assistance (by whatever name called) received or receivable by
any person against exports under any scheme of the Government of
India;
(ii) Any indirect tax re-paid or repayable as drawback to any person
against exports under the Customs and Central Excise Duties and
Service Tax Drawback Rules, 1995;
(iii) The aggregate of gross income by way of interest received by the
money lender;
(iv) Commission, brokerage, service and other incidental charges received
in the business of chit funds;
(v) Reimbursement of expenses incurred (e.g. packing, forwarding,
freight, insurance, travelling etc.), and if the same is credited to a
separate account in the books, only the net surplus on this account
should be added to the turnover for the purposes of Section 44AB;
(vi) The net exchange rate difference on export sales during the year on
the basis of the principle explained in (v) above will have to be added;
(vii) Hire charges of cold storage;
(viii) Liquidated damages;
(ix) Insurance claims - except for fixed assets;
(x) Sale proceeds of scrap, wastage etc. unless treated as part of sale or
turnover, whether or not credited to miscellaneous income account;
(xi) Gross receipts including lease rent in the business of operating lease;
(xii) Finance income to reimburse and reward the lessor for his investment
and services;
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(xiii) Hire charges and instalments received in the course of hire purchase;
(xiv) Advance received and forfeited from customers.
(xv) The value of any benefit or perquisite, whether convertible into money
or not, arising from business or the exercise of a profession.
5.13 The following items would not form part of "gross receipts in business"
for purposes of section 44AB:
(i) Sale proceeds of fixed assets including advance forfeited, if any;
(ii) Sale proceeds of assets held as investments;
(iii) Rental income unless the same is assessable as business income;
(iv) Dividends on shares except in the case of an assessee dealing in
shares;
(v) Income by way of interest unless assessable as business income;
(vi) Reimbursement of customs duty and other charges collected by a
clearing agent;
(vii) In the case of a recruiting agent, the advertisement charges received
by him by way of reimbursement of expenses incurred by him;
(viii) In the case of a travelling agent, the amount received from the clients
for payment to the airlines, railways etc. where such amounts are
received by way of reimbursement of expenses incurred on behalf of
the client. If, however, the travel agent is conducting a package tour
and charges a consolidated sum for transportation, boarding and
lodging and other facilities, then the amount received from the
members of group tour should form part of gross receipts;
(ix) In the case of an advertising agent, the amount of advertising charges
recovered by him from his clients provided these are by way of
reimbursement. But if the advertising agent books the advertisement
space in bulk and recovers the charges from different clients, the
amount received by him from the clients will not be the same as the
charges paid by him and in such a case the amount recovered by him
will form part of his gross receipts;
(x) Share of profit of a partner of a firm in the total income of the firm
excluded from his total income under section 10(2A) of the Income-tax
Act;
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(xi) Interest, remuneration received by Partner from partnership firm
(Perizad Zorabian Irani v PCIT, Mumbai – WP No. 1333/2021- Bombay
High Court – dated 09.03.2022)
(xi) Agriculture receipts {as defined in section 2(1A) r.w.s.10(1)}
(xii) Write back of amounts payable to creditors and/or provisions for
expenses or taxes no longer required.
5.14 Thus, the principle to be applied is that if the assessee is merely
reimbursed for certain expenses incurred, the same will not form part of his
gross receipts. But in the case of charges recovered, which are not by way of
reimbursement of the actual expenses incurred, they will form part of his
gross receipts.
5.15 In the case of a professional, the expression "gross receipts" in
profession would include all receipts arising from carrying on of the
profession. A question may, however, arise as to whether the out of pocket
expenses received by him should form part of his gross receipts for purposes
of this section. Normally, in the case of solicitors, advocates or chartered
accountants, such out of pocket expenses received in advance are credited
in a separate client's account and utilised for making payments for stamp
duties, registration fees, counsel's fees, travelling expenses etc. on behalf of
the clients. These amounts, if collected separately either in advance or
otherwise, should not form part of the "gross receipts". If, however, such out
of pocket expenses are not specifically collected but are included/collected
by way of a consolidated fee, the whole of the amount so collected shall form
part of gross receipts and no adjustment should be made in respect of actual
expenses paid by the professional person for and/or on behalf o f his clients
out of the gross fees so collected. However, the amount received by way of
advance for which services are yet to be rendered will not form part of the
receipts, as such advances are the liabilities of the assessee and cannot be
treated as his receipts till the services are rendered.
5.16 A question may arise in the case of an assessee carrying on business
and at the same time engaged in a profession as to what are the limits
applicable to him under section 44AB for getting the accounts audited. In
such a case, if his professional receipts are, say, rupees fifty- four lakhs but
his total sales, turnover or gross receipts in business are, say, rupees
seventy two lakhs, it will be necessary for him to get his accounts of the
profession and also the accounts of the business audited because the gross
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
receipts from the profession exceed the limit of rupees fifty lakhs. If,
however, the professional receipts are, say, rupees forty two lakhs and total
sales turnover or gross receipts from business are, say, rupees eighty-six
lakhs, in these circumstances, gross receipts, turnover etc. from profession
or business is not in excess of the limits specified in section 44AB for
mandate of audit.
5.17 It may, however, be noted that in cases where the assessee carries on
more than one business activity, the results of all business activities should
be clubbed together. In other words, the aggregate sales, turnover and/or
gross receipts of all businesses carried on by an assessee would be taken
into consideration in determining whether the prescribed limit (Presently Rs.
1 crore & Rs 10 crore for certain specified cases) as laid down in section
44AB has been exceeded or not. However, where the business is covered by
section 44B or 44BBA, turnover of such business shall be excluded.
Similarly, where the business or profession is covered by section 44AD or
44ADA or 44AE or 44BB or 44BBB and the assessee opts to be assessed
under the respective sections on presumptive basis, the turnover thereof
shall be excluded. So far as a partnership firm is concerned, each firm is an
independent assessee for purposes of Income-tax Act. Therefore, the figures
of sales of each firm will have to be considered separately for purposes of
determining whether or not the accounts of such firm are required to be
audited for purposes of section 44AB.
5.18 It must also be understood that the issue whether the turnover
exceeds the prescribed limit (Presently Rs. 1 crore & Rs 10 crore for certain
specified cases) in the case of business or the gross receipts exceed the
prescribed limit of Rs. 50 lakhs (Rs 75 lakhs in certain cases for AY 2024-25
and onwards) in the case of profession is to be determined in each year
independent of the results obtained in the preceding year or years. Further,
this section applies only if the turnover exceeds the prescribed limit
according to the accounts maintained by the assessee.
5.19 Under section 28(v), any interest, salary, bonus, commission or
remuneration, by whatever name called, due to or received by, a partner of a
firm from such firm shall be chargeable under the head profits and gains of
business and profession. However, if partner does not do any business
independently but the firm was carrying on business in which assessee is
only a partner, remuneration received by assessee from partnership firm
cannot be treated as gross receipt/turnover as held in Perizad Zorabian Irani
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
v PCIT, Mumbai – WP No. 1333/2021- Bombay High Court – dated
09.03.2022.
6. Liability to tax audit - Special cases
6.1. A question may arise in the case of an assessee whose income is not
chargeable to income-tax by reason of a specific exemption contained in the
law or otherwise, as to whether he is required to get his accounts audited
and to furnish such report under section 44AB. Such cases may cover those
assessees who are wholly outside the purview of income-tax law as well as
those whose income is otherwise exempt under the Act. It appears that
neither section 44AB nor any other provisions of the Act stipulate exemption
from the compulsory tax audit to any person whose income is exempt from
tax. This section makes it mandatory for every person carrying on any
business or profession to get his accounts audited where conditions laid
down in the section are satisfied and to furnish the report of such audit in the
prescribed form. A trust/association/institution carrying on business may
enjoy exemptions as the case may be under sections 10(21) or 10(23A) or
10(23B) or section 10(23BB) or section 10(23C) or section 11. A co-operative
society carrying on business may enjoy deduction under section 80P. Such
institutions/associations of persons will have to get their accounts audited
and to furnish such audit report for purposes of section 44AB if their turnover
in business exceeds the prescribed limit (Presently Rs. 1 crore and Rs 10
crore in certain specified cases).
6.2. It may be appreciated that the object of audit under section 44AB is
only to assist the Assessing Officer in computing the total income of an
assessee in accordance with different provisions of the Act. Therefore, even
if the total income of a person is below the taxable limit laid down in the
relevant Finance Act of a particular year, he will have to get his accounts
audited and to furnish such report under section 44AB, if any condition
prescribed under section 44AB requires to get the accounts audited under
that section. These conditions have been stated earlier in this Guidance Note
above.
6.3. The case of non-residents may be considered separately. Section
44AB does not make any distinction between a resident or non-resident.
Therefore, a non-resident assessee is also required to get his accounts
audited and to furnish such report under section 44AB if his
turnover/sales/gross receipts exceed the prescribed limits. This audit,
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
however, would be confined only to the Indian operations carried out by the
non-resident assessee since he is chargeable to income-tax in India only in
respect of income accruing or arising or received in India.
7. Specified date and tax audit
7.1. The tax audit report is required to be uploaded using digital signature
of the tax auditor. In other words, as per the prevailing practice, furnishing of
the tax audit report involves following steps:
(a) The tax auditor is required to upload Form No. 3CA/CB and Particulars
in Form No. 3CD in specified format using his digital signature. These
forms should be accompanied by the audited financial statements.
(b) The assessee needs to login and approve these Forms from his
worklist on e-fling website.
8. Penalty
8.1 In order to ensure proper compliance with section 44AB, section 271B
has been enacted which reads as under:
"Failure to get accounts audited
271B. If any person fails to get his accounts audited in respect of any
previous year or years relevant to an assessment year or furnish a
report of such audit as required under section 44AB, the Assessing
Officer may direct that such person shall pay, by way of penalty, a sum
equal to one-half per cent of the total sales, turnover or gross receipts,
as the case may be, in business, or of the gross receipts in profession,
in such previous year or years or a sum of one hundred fifty thousand
rupees, whichever is less."
8.2 As such, the failure of a person, to get his accounts audited in respect
of any previous year or furnish a copy of such report as required under
section 44AB may attract a penalty equal to 0.5% of the total sales, turnover
or gross receipts, or Rs.1.5 lakh whichever is less. However, in view of the
specific provisions contained in section 273B, no penalty is imposable under
section 271B on the assessee for the above failure if he proves that there
was reasonable cause for the said failure. The onus of proving reasonable
cause is on the assessee.
8.3 Some of the instances where Tribunals/Courts have accepted as
"reasonable cause" are as follows:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(a) Resignation of the tax auditor and consequent delay;
(b) Bona fide interpretation of the term `turnover' based on expert advice;
(c) Death or physical inability of the partner in charge of the accounts;
(d) Labour problems such as strike, lock out for a long period, etc.;
(e) Loss of accounts because of fire, theft, etc. beyond the control of the
assessee;
(f) Non-availability of accounts on account of seizure;
(g) Natural calamities, commotion, etc.
(i) Resignation of the accountant and his consequent non-cooperation.
(j) Official E filing portal (of the Income-tax department) failure
9. Tax auditor
9.1 The tax audit is to be carried out by an “accountant”. The term
"accountant" has been defined in sub-clause (i) of Explanation to section
44AB as under:
“For the purposes of this section, -
(i) "accountant" shall have the same meaning as in the Explanation
below sub-section (2) of section 288;".
The above-mentioned Explanation reads as under:
“In this section, "accountant" means a chartered accountant as defined
in clause (b) of sub-section (1) of section 2 of the Chartered
Accountants Act, 1949 (38 of 1949) who holds a valid certificate of
practice under sub-section (1) of section 6 of that Act, but does not
include [except for the purposes of representing the assessee under
sub-section (1)]—
(a) in case of an assessee, being a company, the person who is not
eligible for appointment as an auditor of the said company in
accordance with the provisions of sub-section (3) of section 141
of the Companies Act, 2013 (18 of 2013); or
(b) in any other case,
(i) the assessee himself or in case of the assessee, being a
firm or association of persons or Hindu undivided family,
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
any partner of the firm, or member of the association or
the family;
(ii) in case of the assessee, being a trust or institution, any
person referred to in clauses (a), (b), (c) and (cc) of sub-
section (3) of section 13;
(iii) in case of any person other than persons referred to in
sub-clauses (i) and (ii), the person who is competent to
verify the return under section 139 in accordance with the
provisions of section 140;
(iv) any relative of any of the persons referred to in sub-
clauses (i), (ii) and (iii);
(v) an officer or employee of the assessee;
(vi) an individual who is a partner, or who is in the
employment, of an officer or employee of the assessee;
(vii) an individual who, or his relative or partner—
(I) is holding any security of, or interest in, the
assessee:
Provided that the relative may hold security or
interest in the assessee of the face value not
exceeding one hundred thousand rupees;
(II) is indebted to the assessee:
Provided that the relative may be indebted to the
assessee for an amount not exceeding one hundred
thousand rupees;
(III) has given a guarantee or provided any security in
connection with the indebtedness of any third
person to the assessee:
Provided that the relative may give guarantee or provide
any security in connection with the indebtedness of any
third person to the assessee for an amount not exceeding
one hundred thousand rupees;
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(viii) a person who, whether directly or indirectly, has business
relationship with the assessee of such nature as may be
prescribed;
(ix) a person who has been convicted by a court of an offence
involving fraud and a period of ten years has not elapsed
from the date of such conviction.
For the purposes of aforesaid provisions, "relative" in relation to an
individual, means—
(a) spouse of the individual;
(b) brother or sister of the individual;
(c) brother or sister of the spouse of the individual;
(d) any lineal ascendant or descendant of the individual;
(e) any lineal ascendant or descendant of the spouse of the individual;
(f) spouse of a person referred to in clause (b), clause (c), clause (d) or
clause (e);
(g) any lineal descendant of a brother or sister of either the individual or
the spouse of the individual.
Rule 51A is also relevant to understand the meaning of ‘business
relationship’ which reads as under:
Nature of business relationship.
51A. For the purposes of sub-clause (viii) of Explanation below sub-
section (2) of section 288, the term "business relationship" shall be
construed as any transaction entered into for a commercial purpose,
other than,
(i) commercial transactions which are in the nature of professional
services permitted to be rendered by an auditor or audit firm
under the Act and the Chartered Accountants Act, 1949 (38 of
1949) and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of
business of the company at arm's length price - like sale of
products or services to the auditor, as customer, in the ordinary
course of business, by companies engaged in the business of
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
telecommunications, airlines, hospitals, hotels and such other
similar businesses.
Thus, wide ranging changes have been brought in the definition of
‘accountant’ with restrictions on carrying out the audit /certification as
required under the Income-tax Act, 1961 by chartered accountant having
relationship with the auditee as specified in the aforesaid Explanation. One
needs to be, therefore, more cautious while accepting the tax audit
assignment and ensure that he/she does not fall into the prohibited
categories given in Explanation to Section 288(2) read with Rule 51A.
9.2 The third proviso to section 44AB lays down that where the accounts
of an assessee are required to be audited by or under any other law, it shall
be sufficient compliance with the provisions of this section, if such person
gets the accounts of such business or profession audited under such other
law before the specified date and furnishes by that date the report by an
‘accountant’ as required under section 44AB. It may be noted that after
amendment by the Finance Act, 2001, tax audit can be carried out by an
accountant only. Accordingly, in case of any assessee like a cooperative
society where the accounts under the relevant law have been audited by a
person other than a chartered accountant, the tax audit will have to be
conducted by the ‘accountant’ as defined under section 44AB.
9.3 Though the section refers to the accounts being audited by an
accountant which means a chartered accountant as defined above, the audit
can also be done by a firm of chartered accountants. This has been a
recognised practice under the Act. In such a case, it would be necessary to
state the name of the partner who has signed the audit report on behalf of
the firm. The member signing the report as a partner of a firm or in his
individual capacity should give his membership number while registering
himself on the e-filing portal.
9.4 Section 44AB stipulates that only Chartered Accountants should
perform the tax audit. This section does not stipulate that only the statutory
auditor appointed under the Companies Act or other similar Statute should
perform the tax audit. As such the tax audit can be conducted either by the
statutory auditor or by any other chartered accountant in full time practice.
9.5 It may be noted that the Council at its 242 nd meeting has passed a
resolution effective from 1st April 2005, that any member in part-time practice
26
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(namely, holding a certificate of practice and also engaging himself in any
other business and/or occupation) is not entitled to perform attest functions
including tax audit.
9.6 A question may arise in the case of a public sector company or any
other company where the statutory auditor has not been appointed by the
authorities concerned as to whether the tax auditor appointed under section
44AB can complete his audit without waiting for statutory audit report on the
accounts audited by the statutory auditors. It may be noted that Form No.
3CA requires the tax auditor to enclose a copy of the audit report conducted
by the statutory auditor or the auditor of the financial statements as the case
may be. Where a statutory auditor has not been appointed by the authorities
concerned or where the report of the statutory auditor is not available for
whatever reasons, it will be possible for the tax auditor to give his report in
Form No. 3CB and to certify the relevant particulars in Form No. 3CD. This is
particularly important in those cases where the assessee concerned has
suffered losses in the relevant accounting year or in the cases where
deduction or exemption under a particular section is dependent on filing the
return in time given under section 139(1). It may, however, be noted that the
tax auditor in such cases will have to conduct the financial audit as well in
order to enable him to certify whether or not the accounts reported upon by
him give a true and fair view of the state of affairs of the assessee whose
accounts are audited by him under section 44AB.
9.7 Tax audit under section 44AB being a recurring audit assignment, for
expressing professional opinion on the financial statements and the
particulars, the member accepting the assignment should communicate with
the member who had done tax audit in the earlier year as provided in the
Chartered Accountants Act. When making the enquiry from the retiring
auditor, the member accepting the assignment should find out whether there
is any professional or other reasons why he should not accept the
appointment. The professional reasons for not accepting the appointment
include:
Non-compliance of the provisions of sections 139 and 140 of the
Companies Act 2013 as mentioned in Code of Ethics issued by ICAI
under Clause (9) of Part I of First Schedule to Chartered Accountants
Act, 1949.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Non-payment of undisputed audit fees by auditees other than in case
of sick units for carrying out the statutory audit under the Companies
Act, 2013 or various other statutes.
Issuance of qualified report
9.8 In the case of a person whose accounts of the business or profession
have been audited under any other law (i.e. a company, a co-operative
society, etc. which is required to get the accounts audited under a Statute), it
is not necessary to communicate with the statutory auditor if he had not done
tax audit in the earlier year. Attention of the members is invited to the
detailed discussion in the publication of ICAI, "Code of Ethics" – Appendix
VI. Further, attention of members is invited to the Chapter- VII “Appointment
of an Auditor in case of non-payment of undisputed fees” of the Council
Guidelines No.1-CA(7)/02/2008, dated 8 th August, 2008 - Appendix VII or
any other guidelines issued by the Council from time to time.
9.9 Some of the issues which are commonly raised in regard to different
aspects of tax audit vis-à-vis the liability/ obligations of the tax auditor are
discussed hereunder.
9.10 The liability of the tax auditor in respect of tax audit will be the same
as in any other audit assignment. It may be noted that when any question
relating to the audit conducted by a tax auditor arises, he is answerable to
the Council of the Institute under the Chartered Accountants Act, 1949. In all
matters concerning tax audit, ICAI’s disciplinary jurisdiction will prevail.
9.11 In case the assessee is found guilty of having concealed the
particulars of his income, it would not ipso facto mean that the tax auditor is
also responsible. If the Assessing Officer comes to the conclusion that the
tax auditor was grossly negligent in the performance of his duties, he can
refer the matter to the ICAI so that appropriate action can be taken against
the tax auditor under the Chartered Accountants Act, 1949.
9.12 If the actual work relating to examination of books and records is done
by a qualified assistant in a firm of chartered accountants and the partner of
the firm signing the audit report has relied upon this work; action, if any, for
professional negligence may be initiated against the member who has signed
the report and in such an event, it would be open for the member concerned
to prove that he has taken due care and diligence in the performance of his
duties and is not aware of any reason to believe that he should not have so
relied.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
9.13 If the qualified assistant (whether or not holding the certificate of
practice) is found to be grossly negligent in the performance of his duties, the
Council of the Institute can take disciplinary action against him.
9.14 A tax auditor can accept the assignment of tax representation. The
provisions of Volume-I of Code of Ethics should be referred to in this regard.
9.15 Under the Code of Ethics, no tax auditor shall charge or offer to
charge, accept or offer to accept, professional fees by way of percentage of
profits or which are contingent upon findings, or results of such employment,
except as permitted under any regulation made under the Chartered
Accountants Act. In this connection, reference is invited to Clause (10) of
Part I of the First Schedule to the Chartered Accountants Act and the
commentary on the subject at page 183 of the Code of Ethics (Volume II -
2020 Edition). Certain exceptions are made in Regulation 192. As per
Regulation 192 (b), in the case of an auditor of a cooperative society, the
fees may be based on a percentage of the paid up capital or the working
capital or the gross or net income or profits.
9.16 The opinion expressed by the tax auditor is not binding on the
assessee. If the tax auditor has qualified his report and expressed an opinion
on a particular item, the assessee may take a different view while preparing
his return of income. In such cases, it is advisable for the assessee to state
his viewpoint and support the same by any judicial pronouncements on which
he wants to rely.
9.17 In terms of Council Guidelines No.1 CA(&)/02/2008, dated 8th August,
2008 – Appendix VII, in Chapter-X regarding “Appointment of an auditor
when he is indebted to a concern”, a chartered accountant should not accept
the tax audit of a person to whom he is indebted for more than rupees one
lakh. A member of the Institute shall be deemed to be guilty of professional
misconduct if he accepts appointment as an auditor of a concern while he is
indebted to the concern or has given any guarantee or provided any security
in connection with the indebtedness of any third person to the concern, for
limits fixed in the statute and in other cases for amount exceeding rupees
one lakh. However, Explanation to Section 288(2) does not provide for any
such threshold and hence irrespective of the quantum of indebtedness, a
chartered accountant should not accept the assignment of tax audit as the
same is prohibited by the said Explanation to Section 288(2).
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
9.18 The relaxation provided in the said Explanation is only with respect to
the relatives of the individual and not for the individual so appointed as tax
auditor. This must be carefully noted by the member before accepting the
assignment of tax audit. A member of the Institute in practice or a partner of
a firm in practice or a firm, or a relative of such member or partner shall not
accept appointment as auditor of a concern while indebted to the concern or
given any guarantee or provided any security in connection with the
indebtedness of any third person to the concern, for limits fixed in the statute
and in other cases for amount exceeding Rs. 1,00,000/-.
9.19 The Council has issued a Guideline No.1-CA(7)/02/2008, dated 8 th
August, 2008 given in Appendix VII wherein Chapter- IX “Appointment as
Statutory auditor” states that a member of the Institute in practice shall be
deemed to be guilty of professional misconduct, if he accepts the
appointment as statutory auditor of Public Sector Undertaking/ Government
Company /Listed Company and other Public Company having turnover of Rs.
50 crores or more in a year and accepts any other work or assignment or
service in regard to the same undertaking/company on a remuneration which
in total exceeds the fee payable for carrying out the statutory audit of t he
same undertaking/company.
9.20 The above restrictions shall apply in respect of fees for other work or
service or assignment payable to the statutory auditors and their associate
concerns put together.
9.21 As per the said Guideline, the term “other work(s)” or “service(s)” or
“assignment(s)” shall include Management Consultancy and all other
professional services permitted by the Council pursuant to Section 2(2)(iv) of
the Chartered Accountants Act, 1949 but shall not include: -
(i) audit under any other statute;
(ii) certification work required to be done by the statutory auditors; and
(iii) any representation before an authority.
9.22 Since the obligation for tax audit has been specified in section 44AB of
the Income-tax Act, 1961, it will be considered as an audit under any other
statute for the purpose of this Guideline and thus the above restriction shall
not apply in respect of tax audit fees.
9.23 The tax auditor should obtain from the assessee a letter of
appointment for conducting the audit as mentioned in section 44AB. It is
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
advisable that such an appointment letter should be signed by the person
competent to sign the return of income in terms of the provisions of section
140 of the Act. It would also be useful if the letter affirms that no other
auditor was appointed to conduct the tax audit for the year for which the
appointment is being made. The letter may also give the name and address
of the tax auditor for the previous year, wherever relevant. This would give
the necessary information to the incoming tax auditor to enable him to
communicate with the previous auditor. The letter of appointment should also
specify the remuneration of the tax auditor. SA-210, Agreeing the Terms of
Audit Engagement issued by the ICAI requires the auditor to agree with the
terms of audit engagement with management or those charged with
governance as appropriate. The agreed terms would need to be recorded in
an audit engagement letter or other suitable form of written agreement and
shall include: (a) The objective and scope of the audit of the financial
statements; It should be specifically mentioned that the scope of audit is
restricted to the provisions contained in section 44AB of the Income-tax
Act,1961 and the Income-tax Rules, 1962. (b) The responsibilities of the
auditor; (c) The responsibilities of management; (d) Identification of the
applicable financial reporting framework for the preparation of the financial
statements; and (e) Reference to the expected form and content of any
reports to be issued by the auditor as per the provisions of Income-tax Act,
1961 and Income-tax Rules, 1962 along with a statement that there may be
circumstances in which a report may differ from its expected form and
content. In the interest of both client and auditor, the auditor should send an
engagement letter, preferably before the commencement of the engagement,
to help avoid any misunderstanding with respect to the engagement. The
engagement letter documents and confirms the auditor’s acceptance of the
appointment, the objective and scope of the audit and the extent of the
auditor’s responsibilities to the client. However, it may be noted that
wherever an audit is to be conducted under a Statute, acknowledgement of
the letter of the auditor by the client is considered to be sufficient compliance
of SA-210. The tax auditor should get the statement of particulars, as
required in the annexure to the audit report, authenticated by the assessee
before he does the same. The tax auditor is required to upload the tax audit
report directly in the e-filing portal.
9.24 The appointment of the auditor for tax audit in the case of a company
need not be made at the general meeting of the members. It can be made by
the Board of Directors or even by any officer, if so authorised by the Board in
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
this behalf. The appointment in the case of a firm or a proprietary concern
can be made by a partner or the proprietor or a person authorised by the
assessee. It is possible for the assessee to appoint two or more chartered
accountants as joint auditors for carrying out the tax audit, in which case, the
audit report will have to be signed by all the chartered accountants. In case
of disagreement, they can give their reports separately. In this regard,
attention is invited to Para 17 of the SA 299 (Revised), Joint Audit of
Financial Statements issued by ICAI reproduced below:
" The joint auditors are required to issue common audit report,
however, where the joint auditors are in disagreement with regard to
the opinion or any matters to be covered by the audit report, they shall
express their opinion in a separate audit report. A joint auditor is not
bound by the views of the majority of the joint auditors regarding the
opinion or matters to be covered in the audit report and shall express
opinion formed by the said joint auditor in separate audit report in case
of disagreement. In such circumstances, the audit report(s) issued by
the joint auditor(s) shall make reference to the separate audit report(s)
issued by the other joint auditor(s)
The responsibility of joint tax auditors will be the same as in the case of other
audits e.g. audit under the Companies Act, 2013. For details relating to such
responsibility, in the case of joint tax audit, reference may be made to SA
299 (Revised), Joint Auditors of Financial Statements.
9.25 A chartered accountant who is responsible for writing or maintenance
of the books of account of the assessee should not audit such accounts. This
principle will apply to the partner of such a member as well as to the firm in
which he is a partner. In view of this, a chartered accountant who is
responsible for writing or maintenance of the books of account or his partner
or the firm in which he is a partner should not accept tax audit assignment
under section 44AB in the case of such an assessee.
9.26 The audit of accounts of a professional firm of chartered accountants
under section 44AB cannot be conducted by any partner or employee of such
firm.
9.27 A chartered accountant/firm of chartered accountants, that is
appointed as tax consultant of the assessee, can conduct tax audit under
section 44AB. The Council of ICAI in its 281st meeting held from 3rd to 5th
October, 2008 decided that an internal auditor of an assessee, whether
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
working with the organisation or independently practicing chartered
accountant or a firm of chartered accountants, cannot be appointed as his
tax auditor. The decision was made effective from 12-12-2008.
9.28 A question may arise whether an assessee can remove a tax auditor
appointed under section 44AB. The answer depends upon the facts and
circumstances of the case. It is, however, possible for the management to
remove a tax auditor where there are valid grounds for such removal. This
may arise where the tax auditor has delayed the submission of audit report
under section 44AB for an unreasonable period and if it is found that there is
no possibility of getting the audit report uploaded before the specified date.
In such cases, the management may be justified in removing the tax auditor.
However, the tax auditor cannot be removed on the ground that he has given
an adverse audit report or the assessee has an apprehension that the tax
auditor is likely to give an adverse audit report. If there is any unjustified
removal of tax auditors, the Ethical Standards Board constituted by the
Institute can intervene in such cases. No other chartered accountant should
accept the audit assignment if the removal of his predecessor is not on valid
grounds.
9.29 Before accepting a tax audit, the chartered accountant should take into
consideration the ceiling on tax audit assignments fixed under the Chapter
VI-Tax Audit assignments under Section 44AB of the Income-tax Act, 1961 of
the Council Guidelines No.1-CA(7)/02/2008, dated 8 th August, 2008 as
amended by a decision of the Council taken in its 331 st meeting held from
10.02.2014 to 12.02.2014, its 333rd meeting held from 14.05.2014 to
16.05.2014 and its 368th meeting held in August, 2017 - Appendix VII.
9.30 In view of the said Guidelines a member of the Institute in practice,
shall be deemed to be guilty of professional misconduct if, he accepts more
than 60 tax audit assignments relating to an assessment year or such other
limit as may be prescribed by ICAI from time to time under section 44AB,
whether in respect of a person whose accounts have been audited under any
other law or a person who carries on business or profession but who is not
required by or under any other law to get his accounts audited.
9.31 (a) As per the Council Guidelines No.1-CA(7)/02/2008, dated 8 th
August, 2008 (as amended from time to time), audit of books of account of
persons carrying on businesses/professions covered by sections 44AD,
44ADA and 44AE, is not included in the aforesaid limit. The auditor is
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
advised to maintain the details of the audits conducted by virtue of the
provisions of section 44AD, 44ADA and 44AE separately.
(b) Furthermore, a clarification was issued for reckoning the “specified
number of tax audit assignments” conducted under section 44AB of the
Income-tax Act, 1961, the text of the clarification is reproduced below:
“Various statutes prevailing in India like DVAT, 2004 requires the
assessee to furnish an audit report in a form duly signed and verified
by such particulars as may be prescribed under section 44AB of the
Income-tax Act, 1961 i.e. Form 3CB/3CD. This had lead to the doubts
as to whether such audits would be included in the ceiling of
“specified number of tax audit assignments”.
Considering the same, the Council at its 311th meeting held on 8 th and
9th November, 2011 clarified that audit prescribed under any statute
which requires the audit report in the form as prescribed under section
44AB of the Income-tax Act, shall not be considered for the purpose of
reckoning the specified number of tax audit assignments if the
turnover of the auditee is below the turnover limit specified in section
44AB of the Income-tax Act, 1961. For instance audit under section
44AD, audit under DVAT, 2004 (for turnover between 40 to 60 Lakhs)
etc. will not be considered for inclusion in the present limit of 60*
audits”
*w.e.f. 1.04.2014
9.32 In case the member is a partner of a firm of chartered accountants in
practice, the ceiling of 60 tax audit assignments shall be computed with
reference to each of the partner in the said firm. Where any partner of the
firm of chartered accountants in practice is also a partner of any other firm or
firms of chartered accountants in practice, the ceiling limit of 60 shall apply
with reference to all the firms together in relation to such partner. Similarly,
where any partner accepts one or more tax audit assignments in his
individual capacity, the total number of such assignments under section
44AB which may be accepted by him whether directly in his individual
capacity or as partner of the firm of chartered accountants in practice shall
not exceed 60 tax audit assignments. If two members or firms of chartered
accountants are appointed as joint tax auditors, then the assignment will
have to be included in the case of both the members or firms separately. It
has, however, been clarified that the audit of the head office an d branch
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
offices concerned shall be regarded as one tax audit assignment. Similarly,
the audit of one or more branches of the same concern by one chartered
accountant in practice shall be construed as only one tax audit assignment.
In computing the specified number of tax audit assignments, each year's
audit would be taken as a separate assignment. Every chartered accountant
in practice shall maintain a record of the tax audit assignments accepted by
him in each financial year in the format prescribed by the Council. This
format is reproduced in Appendix VIII.
9.33 The Institute has recommended fees for professional services on the
basis of time devoted by a chartered accountant and his assistants. The fees
for tax audit assignment can be charged by a chartered accountant on the
basis of the work involved in the assignment. It may be appreciated that no
uniform fees can be recommended on the basis of turnover because an
assessee having turnover of Rs.1 crore in a trading activity may have less
transactions as compared to an assessee having the same turnover in a
manufacturing activity. Similarly, the transactions in a wholesale business will
be less than the transactions in a retail business. The revised minimum
recommended scale of fees recommended by the Committee for Members in
Practice as on date is given in Appendix IX.
9.34 The chartered accountants should charge reasonable fees depending
upon the responsibility involved under the revised forms and taking into
consideration the work involved in tax audit assignment which has increased
considerably consequent to the revision of the forms. It is necessary that
members of the profession should also maintain reasonable standards of
professional fees.
9.35 As mentioned above, the audit of the head office and branch offices o f
an assessee shall be regarded as one tax audit assignment. However, if tax
audit of any branch is conducted, it shall be considered as one separate tax
audit for considering limit.
9.36 It may also be noted that a chartered accountant is required to
generate and mention UDIN (Unique Documentation Identification Number)
on each attestation/audit reports issued by him. The Institute of Chartered
Accountants of India, through the Gazette notification dated 2nd August,
2019, has declared mandatory generation of UDIN for all kind of
Certifications, GST and Tax Audit Reports and other Audit, Assurance and
Attestation functions performed by practicing members as required by
various regulators. Further, the CBDT has made quoting of UDIN mandatory
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
for uploading any certification/audit report on income tax e-filing portal with
effect from 27.04.2020. The UDIN so mentioned for the tax audit
reports/certificates by the Chartered Accountants on the e-filing portal, is
validated online with the ICAI system-level integration. This validation of
UDIN help in weeding out fake or incorrect tax audit reports not duly
authenticated with the ICAI. If, for any reason, a Chartered Accountant is
unable to generate UDIN before submission of audit report/certificate, the
income tax e-filing portal allows such submission. However, the said
Chartered Accountant has to generate and update the UDIN within 60
calendar days from the date of form submission on the income tax e-filing
portal.
10. Form of Financial Statements
10.1 In case of certain category of assesses e.g., company, society,
charitable trusts etc., respective law governing the assessee prescribe form
in which financial statements should be prepared and presented. In such a
case, relevant provisions of law should be complied with for preparation and
presentation of the financial statements. It should be noted that the
responsibility for maintenance of books and records and that for preparation
of financial statements is that of the assessee.
10.2 In case of certain assessees, law does not prescribe any specific
format or requirements for preparation and presentation of financial
statements. In such a case, the Accounting Standards Board of ICAI has
issued guidelines for Form and related preparation and presentation
guidelines. These are contained in Publication titled ‘Technical Guide on
Financial Statements of Non-Corporate Entities’. Tax auditors may consider
inviting attention of assesses towards guidelines appearing in the said
publication. Further, it may be mentioned that ‘Guidance Note on Financial
Statements of Non-corporate Entities’ has been issued by the ICAI. This
Guidance Note is effective for financial statements covering periods
beginning on or after April 1, 2024, and from that date the Technical Guide
on Financial Statements of Non-Corporate Entities will stand superseded.
11. Accounting Standards
11.1 Recognizing the need to harmonize the diverse accounting policies
and practices in use in India and keeping in view the International
developments in the field of accounting, the Council of the ICAI has issued
Accounting Standards.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
11.2 The legal recognition to the Accounting Standards formulated by the
ICAI was granted in October 1998 with insertion of Section 211(3A), (3B),
and (3C) in the Companies Act, 1956. The Companies Act, 2013 has
replaced Companies Act, 1956. Section 211(3C) of the erstwhile Companies
Act had provided that Accounting Standards issued by the ICAI may be
prescribed by the Central Government in consultation with the National
Advisory Committee on Accounting Standards (NACAS). As per the proviso
to the section, till the notification of the Accounting Standards by the
Government, the Accounting Standards issued by the ICAI were required to
be followed by companies. In the year 2006, Accounting Standards 1 to 7
and 9 to 29 were notified by the Ministry of Corporate Affairs, Government of
India, under the Companies (Accounting Standards) Rules, 2006 vide its
notification dated December 7, 2006 in the Gazette of India. These were
made effective in respect of accounting periods commencing on or after the
publication of these Accounting Standards (i.e., December 7, 2006). As per
the Companies (Accounting Standards) Rules, 2006, Companies are
classified into two categories, i.e., Small and Medium Companies (SMCs)
and Non-SMCs. Under the Companies Act, 2013, Section 129 provides for
compliance to Accounting Standards. In accordance with section 133, the
Central Government prescribes the standards of accounting as
recommended by the ICAI in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority. It was
prescribed that the standards of accounting as specified under the
Companies Act, 1956, shall be deemed to be the Accounting Standards until
Accounting Standards are specified by the Central Government under
section 133 of the Companies Act 2013. Accordingly, Accounting Standards
notified under Companies (Accounting Standards) Rules, 2006 would
continue to be followed under the Companies Act, 2013 also. In 2021, AS
Rules 2006 were mirrored under the Companies Act 2013 and notified as
Companies (Accounting Standards) Rules, 2021 applicable in respect of
accounting periods commencing on or after April 01, 2021. Another set of
Accounting Standards, i.e., Indian Accounting Standards (Ind AS) that are
converged with globally accepted International Financial Reporting
Standards have been notified under Companies (Indian Accounting
Standards) Rules 2015 and already been implemented as per the Roadmap
issued by the MCA by all the listed companies and Non-banking financial
companies (NBFCs) and unlisted companies and NBFCs with net worth of
INR 250 crores or more.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
11.3 ICAI also issues Accounting Standards for non-company entities which
are harmonised with Accounting Standards Rules notified by the Ministry of
Corporate Affairs. The ICAI also announced the scheme for applicability of
accounting standards issued by ICAI to non-company entities. The criteria for
classification of non-company entities as decided by ICAI and companies
under the Companies (Accounting Standards) Rules, 2021 is given in
Appendix X.
11.4 The Accounting Standards, issued by ICAI are for use in the
presentation of general purpose financial statements which are issued to the
public by such commercial, industrial or business enterprises as may be
specified by the Institute from time to time and subject to the attest function
of its members. The term `General Purpose Financial Statements' includes
balance sheet, statement of profit and loss, a cash flow statement (wherever
applicable) and other statements and explanatory notes which form part
thereof, issued for the use of various stakeholders, Governments and their
agencies and the public at large.
11.5 Information about the Accounting Standards can be seen from the
publications of the Institute. Important publications in the matter are:
(a) Compendium of Accounting Standards – ‘Accounting Standards as on
February 1, 2022’
(b) Compendium of Indian Accounting Standards – ‘Indian Accounting
Standards as on April 1, 2023’
(c) Quick Referencer on Accounting Standards
(d) Indian Accounting Standards: An Overview (Revised 2021)
(e) Quick Referencer on Indian Accounting Standards
It may be noted that certain exemptions/relaxations from the applicability of
Accounting Standards have been given to Micro, Small and Medium Sized
Non-company Entities (MSMEs). Accordingly, the Council at its 400th
meeting, held on 18-19 March, 2021 has decided upon the following scheme
which has come into effect in respect of accounting periods commencing on
or after 1.4.2020:
(1) For the purpose of applicability of Accounting Standards, enterprises
are classified into four categories, viz., Level I, Level II, Level III and
Level IV. Level II and Level III enterprises are considered as SMEs.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(2) Level I entities are large size entities, Level II entities are medium size
entities, Level III entities are small size entities and Level IV entities
are micro entities.
(3) Level IV, Level III and Level II entities are referred to as Micro, Small
and Medium size entities (MSMEs). The criteria for classification of
Non-company entities into different levels are given in Annexure 1 to
the Scheme. The terms ‘Small and Medium Enterprise’ and ‘SME’
used in Accounting Standards are to be read as ‘Micro, Small and
Medium size entity’ and ‘MSME’ respectively.
(4) Level I entities are required to comply in full with all the Accounting
Standards.
(5) Certain exemptions/relaxations have been provided to Level II, Level
III and Level IV Non-company entities. For the updated status of
applicability of Accounting Standards to Various Entities (including
criteria for classification of entities) please refer to Appendix X.
11.6 AS also apply in respect of financial statements audited under section
44AB of the Income-tax Act, 1961. Accordingly, members should examine
compliance with the mandatory Accounting Standards when conducting such
audit.
12. Accounts and Income-tax law
12.1 Accounts are basis for ascertainment of income. The Income-tax Act,
1961 has made prescription for maintenance of accounts. Section 145 of the
Act deals with provisions relating to method of accounting for ascertainment
of income. Section 145 deals with method of accounting and is reproduced
below:
"Method of accounting. 145. (1) Income chargeable under the head
"Profits and gains of business or profession" or "Income from other
sources" shall, subject to the provisions of sub-section (2), be
computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from
time to time income computation and disclosure standards to be
followed by any class of assessees or in respect of any class of
income.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(3) Where the Assessing Officer is not satisfied about the correctn ess
or completeness of the accounts of the assessee, or where the method
of accounting provided in sub-section (1) has not been regularly
followed by the assessee, or income has not been computed in
accordance with the standards notified under sub-section (2), the
Assessing Officer may make an assessment in the manner provided in
section 144."
12.2 Income Computation and Disclosure Standards (ICDSs): In
exercise of powers contained in sub-section (2) of section 145 of the Act, the
Central Government has issued ‘Income Computation and Disclosure
Standards’. ICDS are applicable for computation of income under the head
‘profits and gains from business and profession’ or ‘income from other
sources’. There are 10 ICDSs issued till date.
12.3 ICDSs are applicable only for computation of income under the above
two referred heads of income. ICDS are not applicable for maintenance of
the books of accounts.
12.4 ICDSs have been elucidated in publication titled ‘Technical Guide on
Income Computation and Disclosure Standards’ of the Direct Taxes
Committee of the Institute.
13. Audit Procedures
13.1 In the case of an audit, the tax auditor is required to express his
opinion as to whether the financial statements give a true and fair view of the
state of affairs of the assessee in the case of the balance sheet and in the
case of the profit and loss account/ income and expenditure account, of the
profit/loss or surplus/deficit for the Income tax purposes. As regards the
statement of particulars (i.e. Form 3CD) to be annexed to the audit report
(i.e. Form 3CA or 3CB), the tax auditor is required to give the opinion as to
whether the particulars are true and correct. In giving the report, the tax
auditor will have to use his professional skill and expertise and apply such
audit tests/procedures as the circumstances of the case may require,
considering the contents of the audit report. The auditor will have to conduct
the tax audit by applying the generally accepted auditing procedures which
are applicable for any other audit. The auditor should use professional
judgment to apply the technique of audit sampling in accordance with the
principles enunciated in SA 530 “Audit Sampling” depending on the nature
and volume of transactions, the materiality involved and the internal control
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
procedures followed by the assessee. The tax auditor should also refer to the
other Standards on Auditing (SAs) as may be relevant, issued by ICAI, as
well as the "Guidance Note on Audit Reports and Certificates for Special
Purposes". If the statutory auditor is also appointed to undertake tax audit, it
is advisable to carry out both the audits concurrently.
13.2 Section 143 of the Companies Act, 2013 gives certain powers to the
auditors to call for the books of account, information, documents,
explanations, etc. and to have access to all books and records. Attention is
invited to SA 210, Agreeing the Terms of Audit Engagements. The Standard
requires an auditor to establish whether the pre-conditions for an audit are
present so as to accept or continue an audit engagement. As per p ara 6(b)
(iii) of SA 210, the auditor is required to obtain agreement of management
that it acknowledges and understands its responsibilities to provide the
auditor with (a) access to all information of which the management is aware
that is relevant to the preparation of the financial statements such as records,
documentation and other matters, (b) additional information that the auditor
may request from management for the purpose of the audit and (c)
unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence. Moreover, since the
appointment of the tax auditor is made by assessee, it will be in the interest
of the assessee to furnish all the information and explanations and produce
books of account and records required by the tax auditor. If, however, after
agreeing to the terms of the engagement, the assessee subsequently refuses
to produce any particular record or to give any specific information or
explanation in relation to the reporting requirement under section 44AB, the
tax auditor should see the impact thereof from the perspective of
“management integrity” vis-a-vis overall assessment of risk of misstatements
in accordance with SA 315, Identifying and Assessing the risks of material
misstatement through understanding the entity and its environment and,
consequently on his/her opinion for reporting in clause (3) of Form No. 3CA
or Clause (5) of Form No. 3CB as the case may be.
13.3 The audit report given under section 44AB is to assist the income-tax
department to assess the correct income of the assessee. The auditor should
keep necessary working papers about the evidence on which he has relied
upon while conducting the audit and also maintain all the necessary working
papers. Such working papers should include the auditor’s notes on the
following, amongst other matters:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(a) work done while conducting the audit and by whom;
(b) explanations and information given to him during the course of the
audit and by whom;
(c) decision on the various points taken;
(d) the judicial pronouncements relied upon by him while making the audit
report; and
(e) certificates issued by the client/management letters.
13.4 The requirements of documentation are applicable in respect of tax
audit conducted by chartered accountants. For this purpose, attention is also
invited to SA 230, “Audit Documentation”, which provides that the tax auditor
should prepare documentation that provides a sufficient and appropriate
record of the basis for the auditor’s report and evidence that the audit was
planned and performed in accordance with SA’s and applicable legal and
regulatory requirements.
13.5 Tax audit report in Form 3CD requires reporting on certain items like
payments to persons covered under section 40A(2)(b), ICDS etc. for which
full information may not be available in books of account. In respect of
percentage of work in progress, good, doubtful or bad debts, MSME
enterprises appearing as creditors etc. will require inputs from the
management. Tax auditor may raise certain issues for soliciting views of
Those Charged with Governance. Therefore, the tax auditor should consider
SA 580 – Written Representations and consider obtaining representation
from management in appropriate circumstances and at appropriate time i.e.
before commencement of audit or after conclusion of audit process.
13.6 If the accounts of the business or profession of a person have been
audited under any other law by the statutory auditor(s), it is not necessary for
the tax auditor appointed under section 44AB to conduct the audit once again
in the matter of expression of "true and fair view" of the state of affairs of the
entity and of its profit/loss for the period covered by the audit. However, the
said section envisages the certification of the particulars in the prescribed
form on which the tax auditor has to express his opinion as to whether these
are `true and correct'. In other words, where an audit has already been
conducted and the opinion of the auditor has been expressed on the
accounts, it would not be necessary to repeat the entire exercise to express
similar opinion all over again. The tax auditor has only to annex a copy of the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
audited accounts and the auditor's report and other documents forming part
of these accounts to his report and verify the particulars in the prescribed
form for expressing his opinion as to whether these are true and correct.
13.7 In case of the conduct of a statutory audit for the purpose of
expression of the auditor's opinion as to whether the financial statements
depict a ‘true and fair’ view, the statutory auditor applies audit sampling.
Similarly, in case of tax audits also the tax auditor may apply audit sampling
techniques as prescribed in SA 530, Audit Sampling on the information
provided by the assessee to obtain sufficient appropriate audit evidence to
be able to draw reasonable conclusions on which to base the audit opinion.
The extent of checks undertaken would have to be indicated by the tax
auditor in the working papers and audit notes. The tax auditor would be
advised to so design the tax audit programme as would reveal the extent of
checking and to ensure adequate documentation in support of the
information being certified.
13.8 Where the assessee has been subjected to an internal audit and the
tax auditor decides to use the work of the internal auditor for the purpose of
the tax audit under section 44AB, the latter’s procedures would be guided by
the principles laid down in Standard on Auditing (SA) 610 (Revised), Using
the Work of Internal Auditors.
13.9 Audit procedures applicable to a person whose accounts of the
business or profession have been audited under any other law will apply as
well to a person who carries on business or profession but who is not
required by or under any other law to get the accounts audited. In order to
express the opinion on the accounts of a person belonging to the latter
category, the tax auditor should apply the same procedures as he would
have applied in the conduct of audit of the former category. In case the
relevant vouchers for the expenditure and payments made by a non-
corporate entity are not available, it will be necessary for the tax auditor to
call for any other evidence in support of such expenditure and payments. The
entity should be advised to maintain vouchers/records in evidence of
transactions to avoid a qualification/ observation* in the matter by the tax
auditors. The qualification in respect of this matter would, in the normal
course, be necessary in case the vouchers or other evidence required to be
maintained are not produced in evidence of the income/expenditure or
assets/liabilities. The entity should be encouraged to maintain office
vouchers with the recipient's signatures for the amounts reimbursed on
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
account of expenditure like local conveyance etc., for which other supporting
evidence is not possible to obtain. It would also be advisable to give
appropriate notes on accounts in the case of a person who carries on
business or profession but who is not required by or under any other law to
get his accounts audited. These may include disclosures regarding method of
accounting and practices consistently and regularly followed, and whether a
change in such methods or practice has been made during the year,
notwithstanding the fact that such disclosures are required to be made in
Form No. 3CD. Attention of the members is invited to the principles laid out
in SA 705 (Revised), Modifications to the Opinion in the Independent
Auditor’s Report.
13.10 The ICAI had, pursuant to the issuance of the Revised SA 700,
Forming an Opinion and Reporting on Financial Statements, prescribed a
revised format of the auditor’s report on financial statements, which has been
made effective in respect of audits of financial statements for periods
beginning on or after 1st April 2018. Since Form No. 3CA and Form No. 3CB
are required to be filed online in a preset form and the same are not in line
with the requirements of SA 700 (Revised), there is no specifically allocated
field for providing information relating to the respective responsibilities of the
assessee and the tax auditor as required in terms of the principles laid out in
SA 700 (Revised). However, having regard to the importance of these
respective responsibility paragraphs from the perspective of the readers of
the tax audit report, it is suggested that these respective responsibility
paragraphs can be given in the space, provided for giving observations, etc.,
under clause (3) of Form No. 3CA or Clause (5) of Form No. 3CB as the case
may be.
13.11 The illustrative Assessee’s responsibility paragraph and Tax Auditor’s
responsibility paragraphs in respect of Form No. 3CB are given hereunder.
The same may be suitably reworded to meet the situation envisaged in Form
No. 3CA.
“Assessee’s Responsibility for the Financial Statements and the
Statement of Particulars in Form 3CD
1. The assessee is responsible for the preparation of the aforesaid
financial statements that give a true and fair view of the financial
position and financial performance (if applicable) in accordance with
the applicable financial reporting framework. This responsibility
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
includes the design, implementation and maintenance of internal
control relevant to the preparation and presentation of the financial
statements that give a true and fair view and are free from material
misstatement, whether due to fraud or error.
2. The assessee is also responsible for the preparation of the statement
of particulars required to be furnished under section 44AB of the
Income-tax Act, 1961 annexed herewith in Form No. 3CD read with
Rule 6G(1)(b) of Income-tax Rules, 1962 that give true and correct
particulars as per the provisions of the Income-tax Act, 1961 read with
Rules, Notifications, Circulars etc that are to be included in the
Statement.
Tax Auditor’s Responsibility
3. My/ Our responsibility is to express an opinion on these financial
statements based on my/our audit. I/We have conducted this audit in
accordance with the Standards on Auditing issued by the Institute of
Chartered Accountants of India. Those Standards require that we
comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free from material misstatement .
4. An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances but
not for the purposes of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness
of the accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
5. I/We believe that the audit evidence I/we have obtained is sufficient
and appropriate to provide a basis for my/our audit opinion.
6. I/We are also responsible for verifying the statement of particulars
required to be furnished under section 44AB of the Income-tax Act,
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
1961 annexed herewith in Form No. 3CD read with Rule 6G(1)(b) of
Income-tax Rules, 1962. I/ We have conducted my/our verification of
the statement in accordance with Guidance Note on Tax Audit under
section 44AB of the Income-tax Act, 1961, issued by the Institute of
Chartered Accountants of India.”
13.12 In this regard, attention of the members is also invited to the
Announcement regarding “Applicability of SA 700 (Revised), forming an
opinion and reporting on financial statements, to formats of auditor's reports
prescribed under various laws and/ or regulations” (01.04.2018), issued by
ICAI, given in Appendix XI.
14. Professional misconduct
14.1 It may be noted that when any question relating to professional
misconduct in connection with tax audit arises, the tax auditor would be liable
under the Chartered Accountants Act, 1949 and the ICAI's disciplinary
jurisdiction will prevail in this regard. ICAI has constituted the Taxation Audits
Quality Review Board (TAQRB) with a sole aim to review any report
prescribed under the Income-tax Act, 1961 and Rules framed thereunder and
any report prescribed under the Indirect Tax Laws including GST Law which
are certified by a Chartered Accountant with a view to determine, to the
extent possible, compliance with the reporting requirements prescribed under
the respective Acts and related Rules and pronouncements, guidance notes
issued, if any, by ICAI in respect of the same. TAQRB, when finds any error
or mistake or limitation in tax audit report, appropriate action, including
referring case for disciplinary proceedings, is initiated.
15. Audit Report
15.1 Section 44AB requires the tax auditor to submit the audit report in the
prescribed form and setting forth the prescribed particulars. Sub-rule (1) of
Rule 6G provides that the report of audit of the accounts of a person required
to be furnished under section 44AB shall -
(a) in the case of a person who carries on business or profession and who
is required by or under any other law to get his accounts audited, be in
Form No. 3CA;
(b) in the case of a person who carries on business or profession, but not
being a person referred to in clause (a), be in Form No. 3CB.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
15.2 Sub-rule (2) of Rule 6G further provides that the particulars which are
required to be furnished under section 44AB shall be in Form No. 3CD.
15.3 It may be noted that the audit report in Form No. 3CB is in two parts.
The first part requires the tax auditor to give his opinion as to whether or not
the accounts audited by him give a true and fair view:
(i) in the case of the balance sheet, of the state of affairs as at the last
date of the accounting year.
(ii) in the case of the profit and loss account/income and expenditure, of
the profit or loss/surplus or deficit of the assessee for the relevant
accounting year.
15.4 The second part of the report states that the statement of particulars
required to be furnished under section 44AB is annexed to the audit report in
Form No. 3CD. The tax auditor is required to give his opinion whether the
prescribed particulars furnished by the assessee are true and correct , subject
to observations and qualifications, if any.
15.5 In paragraph 3 of Form No. 3CB, the auditor has to report that the
financial statements audited by him give a `true and fair' view. With regard to
the term “true and fair view”, the auditor is advised to consider the
Framework for Preparation and Presentation of Financial Statements as also
paragraph 12, 13, 14 and 27 of SA 700 (Revised), Forming an opinion and
reporting on Financial Statements. Attention of the members is drawn to Para
5 of SA 200, “Overall Objectives of the Independent Auditor and the Conduct
of An Audit in Accordance with Standards on Auditing” reproduced below:
“5. As the basis for the auditor’s opinion, SAs require the auditor to
obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud
or error. Reasonable assurance is a high level of assurance. It is
obtained when the auditor has obtained sufficient appropriate audit
evidence to reduce audit risk (i.e., the risk that the auditor expresses
an inappropriate opinion when the financial statements are materially
misstated) to an acceptably low level. However, reasonable assurance
is not an absolute level of assurance, because there are inherent
limitations of an audit which result in most of the audit evidence on
which the auditor draws conclusions and bases the auditor’s opinion
being persuasive rather than conclusive.”
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
15.6 The requirement in paragraph 3 of Form No. 3CA and paragraph 5 of
Form No. 3CB relating to particulars in Form No. 3CD is that the auditor
should report that these particulars in Form No. 3CD are "true and correct".
The terminology "true and fair" is widely understood though not defined even
under the Companies Act, 2013. On the other hand, the words "true and
correct" lay emphasis on factual accuracy of the information. In this context,
reference is invited to AS-1 relating to Disclosure of Accounting Policies.
These standards recognise that the major considerations governing the
selection and application of accounting policies are (i) prudence, (ii)
substance over form and (iii) materiality. Therefore, while giving particulars in
Form No. 3CD, these aspects should be kept in view. In particular,
considering the nature of particulars to be given in Form No. 3CD, the aspect
of materiality should be considered. In other words, particulars should be
given in respect of material items and the auditors should assess factual
correctness relating to these particulars. Attention of the members, in this
context is, however, also drawn to Para 51 of “Framework for Assurance
Engagements” reproduced below:
“51. “Reasonable assurance” is less than absolute assurance.
Reducing assurance engagement risk to zero is very rarely attainable
or cost beneficial as a result of factors such as the following:
The use of selective testing.
The inherent limitations of internal control.
The fact that much of the evidence available to the practitioner is
persuasive rather than conclusive.
The use of judgment in gathering and evaluating evidence and
forming conclusions based on that evidence.
In some cases, the characteristics of the subject matter when
evaluated or measured against the identified criteria.”
15.7 In the case of a person whose accounts of the business or profession
have been audited under any other law, it is not required for the tax auditor
appointed under section 44AB to give his opinion, as to whether or not the
accounts give a true and fair view as indicated herein above. It would only be
necessary for him to annex a copy of the audited accounts as well as a copy
of the audit report given by the statutory auditor with his report in Form No.
3CA along with Form No. 3CD.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
15.8 In the case of a person who carries on business and also renders
professional services but who is not required by or under any other law to get
his accounts audited, report should be given in Form No. 3CB. The statement
of particulars should be given in Form No. 3CD.
15.9 In the case of a person who carries on business or profession but who
is not required by or under any other law to get his accounts audited, the
expression "proper books of account" should mean, the books of original
entry and other books of account required to be maintained to record all the
transactions of the assessee in the same manner, as in the case of a person
whose accounts of the business or profession have been audited under any
other law.
15.10 In case, the accounts of a person who carries on business or
profession are being audited for the first time, the tax auditor should ensure
compliance with SA 510 (Revised), Initial Audit Engagements-Opening
Balance.
15.11 In certain cases, members are called upon to report on the accounts
reopened and revised by the board of directors. The accounts of a company
once adopted at its annual general meeting should not normally be re-
opened and revised. The Institute and the Ministry of Corporate Affairs have
affirmed this position. In case of revision, the audit report should be given in
the manner as required by the Institute in SA-560 (Revised), Subsequent
Events. The Ministry of Corporate Affairs had also clarified that accounts can
be revised to comply with technical requirements. It may be pointed out that
report under section 44AB should not normally be revised. However,
sometimes a member may be required to revise his tax audit report on
grounds such as:
(i) revision of accounts of a company after its adoption in annual general
meeting.
(ii) change of law e.g. retrospective amendment.
(iii) change in interpretation, e.g., CBDT Circulars, judgements, etc.
15.12 In case where a member is called upon to report on the revised
accounts, then he must mention in the revised report that the said report is a
revised report and a reference should be made to the earlier report also. In
the revised report, reasons for revising the report should also be mentioned.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
15.13 Under Sub-rule (3) in Rule 6G, the auditor is expressly allowed to
revise the Audit Report in Form 3CA/3CB/3CD in certain circumstances. Sub-
Rule (3) reads as under:
(3) The report of audit furnished under this rule may be revised by the
person by getting revised report of audit from an accountant, duly
signed and verified by such accountant, and furnish it before the end
of the relevant assessment year for which the report pertains, if there
is payment by such person after furnishing of report under sub-rule (1)
and (2) which necessitates recalculation of disallowance under section
40 or section 43B.
15.14 Thus, a situation might arise where after issuing the audit report, but
before the due date for filing the return u/s 139(1), the assessee makes
payment of tax deducted at source or of tax, duty, cess, fee or other
payments referred to in section 43B deduction of which is allowed only on
actual payment basis.
15.15 In the case of companies having their accounting year which is
different from the financial year, accounts of the financial year are required to
be prepared and audited. The audit report shall be in Form No. 3CB. The
above position has also been clarified by the CBDT in its Circular No. 561
dated 22.5.1990. The Circular is reproduced in Appendix XII.
16. Issuing Audit Report
16.1 Tax Auditor should obtain a hard copy or soft copy of the financial
statements for the previous year under audit duly signed by the signatories
eligible to sign the financial statements on behalf of the assessee. For
example, a proprietor in case of a proprietary concern, working partner or
partners for the Firm, Managing Director and other directors for a company
as prescribed under the Companies Act, 2013 etc.
16.2 Where the accounts are audited under any other law for the time being
in force, usually accounts contain signature of auditors for the purpose of
identification of financial statements upon which report has been issued.
16.3 If the accounts are not audited under any other law for the time being
in force, it is recommended that the tax auditor should sign such financial
statements for the purpose of identification.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
16.4 A tax audit report should be issued by the tax auditor in Form No. 3CA
or 3CB as may be applicable along with particulars in Form No. 3CD. These
should be in hard copy form physically signed or soft copy digitally signed by
the tax auditor. All the three forms, at the end require signature and
stamp/seal of the signatory.
16.5 Tax audit report is required to be submitted electronically on the
income-tax e-filing portal. It requires the auditor to upload Form No. 3CA or
3CB and Form No. 3CD. The same are required to be digitally signed. UDIN
is required to be updated. This is the prescribed procedure for filing of tax
audit report.
17. Form No. 3CA
17.1 This form is to be used in a case where the accounts of the business
or profession of a person have been audited under any other law like
Companies Act or Limited Liability Partnership Act. Particulars of address
and PAN or Aadhaar Number wherever applicable is required to be given in
report. The first part of the report refers to the fact that the statutory audit of
the assessee was conducted by a chartered accountant or any other auditor
in pursuance of the provisions of the relevant Act, and the copy of the audit
report along with the audited profit and loss account and balance sheet and
the documents declared by the relevant Act to be part of or annexed to the
profit and loss account and balance sheet, are annexed to the report in Form
No. 3CA. In a case where the tax auditor carrying out the audit under section
44AB is different from the statutory auditor, a reference should be made to
the name of such statutory auditor. In case the statutory auditor is carrying
out the audit under section 44AB, the fact that he has carried out the
statutory audit under the relevant Act should be stated. Attention of the
members in this context is invited to SA 600 Using the work of Another
Auditor.
17.2 The next paragraph states that the statement of particulars required to
be furnished under section 44AB is annexed with the particulars in Form No.
3CD. The tax auditor has to further state that, in his opinion and to the best
of his information and according to examination of books of account including
other relevant documents and explanations given to him, the particulars
given in the said Form No. 3CD and the annexure thereto are true and
correct subject to the observations/qualifications, if any.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
17.3 The auditor is required to examine not only the books of account but
also other relevant documents directly related to transactions relevant to
clauses in Form No. 3CD like copy of bank statements, various agreements/
contracts, challans for payment of government dues, TDS returns, GST
returns or any other relevant document. Tax auditor can place reliance on
electronic record provided its authenticity is confirmed.
17.4 Attention is also drawn to the definition of ‘document’ as per section
2(22AA) of the Act which is as under:
"document" includes an electronic record as defined in clause (t) of
sub-section (1) of section 2 of the Information Technology Act, 2000
(21 of 2000).
Section 2(1)(t) of the Information Technology Act, 2000 as referred above is
reproduced below:
"electronic record" means data, record or data generated, image or
sound stored, received or sent in an electronic form or micro film or
computer generated micro fiche.
The definition of term “document” is an inclusive definition and includes
within its ambit documents other than those considered as electronic record
as per section 2(1)(t) of the Information Technology Act, 2000. The above
definition can also be relied when reporting under clause 11(c) of Form No.
3CD discussed later in this Guidance Note.
17.5 Where any of the requirements in this form is answered in negative or
with qualification, the report shall state the reasons thereof. The tax auditor
should state this qualification in the audit report so that the same becomes a
comprehensive report and the user of the audited statement of particulars
can realize the impact of such qualifications.
17.6 It is possible that in the case of a person whose accounts of the
business or profession have been audited under any other law, which has
branches at various places, the branch accounts might have been audited by
branch auditors under the relevant Statute. If the audit under section 44AB is
also carried out by the same branch auditors or other chartered accountants,
they should submit the report in Form No. 3CA to the management or the
principal tax auditor appointed for the head office under Section 44AB.
Attention in this regard is drawn to SA 600, Using the Work of Another
Auditor which discusses the procedures in this regard as well as the principal
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
tax auditor's responsibility in relation to his use of the work of the branch
auditor. The principal tax auditor should submit his consolidated report on the
registered office/head office and branch accounts and report in his tax audit
report as his observation in paragraph 3 of Form No. 3CA as under:
"I/We have taken into consideration the audit report and the audited
statements of accounts, and particulars received from the auditors,
duly appointed under the relevant Act, of the branches not audited by
me/us".
17.7 It is recommended that the auditor should also refer to reporting
requirements as per SA 700 as discussed in Para above. Further, the Tax
Auditor in Para 3 of Form 3CA should give his observations/comments/
adverse remarks/disclaimers found during their audit on any of the clauses of
Form 3CD, wherever required. In Form 3CD, while reporting under any
clause, tax auditor may be of the view that any elucidation, qualification,
disclaimer, etc. is required to be stated. These aspects may also be stated in
the said paragraph. All these aspects should also refer number of the clause
(of Form No. 3CD) to which it relates.
17.8 Item No. 4 of the notes to Form No. 3CA requires that the person, who
signs this audit report, shall indicate reference of his membership
No./certificate of practice number/authority under which he is entitled to sign
this report. No separate certificate of practice number is allotted by ICAI. As
such, where a chartered accountant acts as a tax auditor, he should give his
membership number with ICAI while registering himself in the e-filing portal.
In case, the e-filing utility of Form No. 3CA requires the mention of the Firm
Registration number and the name of the firm on whose behalf the member
has conducted audit, the same should invariably be provided by the tax
auditor. The tax auditor should also mention the Unique Document
Identification Number (UDIN) for issuing the audit report, if available at the
time of signing.
17.9 An assessee may have one or more branches outside India. The
accounts of such branches are normally audited by the professional
accountants overseas. The results of such branches are also incorporated in
the consolidated accounts prepared in this country. In the case of foreign
branches, the relevant information in respect of such branches as is required
by Form No. 3CD, may be obtained by the tax auditor in India from the
assessee who should obtain the same from the overseas auditor who had
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
audited the accounts of such foreign branches. The tax auditor in India, while
certifying the information in Form No. 3CD, may rely upon the information
obtained by him from the overseas auditor, and while submitting his
consolidated report in Form No. 3CD, he should specifically point out the
following in his audit report in paragraph 3 of Form No.3CA as his
observation:
“I/We have taken into consideration the audit report and the audited
statements of accounts, and particulars received from the auditors,
appointed under the relevant law, of the overseas branches not
audited by me/us”.
If the assessee is unable to obtain relevant information in respect of t he
overseas branches duly certified by the overseas auditor, the relevant facts
should be suitably disclosed and reported upon.
17.10 Where the tax auditor is unable to obtain the required information in
respect of branches situated in India or outside India, then the fact should be
suitably disclosed along with its impact on the Auditor’s opinion on the
particulars furnished in Form No. 3CD, as an observation in para (3) of Form
No, 3CA. Reference is drawn to SA 705 (Revised), Modifications to the
opinion in the Independent Auditor’s report.
18. Form No. 3CB
18.1 In the case of a person who carries on business or profession but who
is not required by or under any other law to get his accounts audited, the
audit report has to be given in Form No. 3CB. Form No. 3CB consists of five
paragraphs.
18.2 The tax auditor has to state whether he has examined the balance
sheet as on a particular relevant date and the profit and loss account/income
and expenditure account for that period. Further, such a balance sheet and
the profit and loss account must be attached with the audit report.
18.3 The tax auditor has to certify that the balance sheet and the profit and
loss account/income and expenditure account are in agreement with the
books of account maintained at the head office and branches. Also, he has to
mention the total number of branches.
18.4 He has to report his observations, comments, discrepancies or
inconsistencies, if any. Subject to the above observations, comments,
discrepancies, inconsistencies; he has to state whether:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(a) he has obtained all the information and explanations which, to the best
of his knowledge and belief, were necessary for the purposes of the
audit;
(b) in his opinion proper books of account have been kept by the head
office and branches of the assessee so far as appears from his
examination of the books;
(c) in his opinion and to the best of his information and according to the
explanations given to him, the said accounts, read with notes thereon,
if any, give a true and fair view;
(i) in the case of the balance sheet of the state of the affairs of the
assessee as at 31st March, ______ and
(ii) in the case of the profit and loss account/income and
expenditure account of the profit/loss or surplus/deficit of the
assessee for the year ended on that date.
18.5 Under clause (a) of paragraph 3 of Form No. 3CB, the tax auditor has
to report his “observations/comments/ discrepancies/inconsistencies,” if any.
The expression “Subject to above” appearing in clause (b) makes it clear that
such observations/comments/ discrepancies/ inconsistencies which are of
qualificatory nature relate to necessary information and explanations for the
purposes of the audit or the keeping of proper books of account or the true
and fair view of the financial statements, respectively to be reported on in
paragraphs (A), (B) and (C) under clause (b) of paragraph 3. While reporting
on clause (a) of paragraph 3 of Form No. 3CB, the tax auditor besides
mandatory requirements of SA 700 should report observations/comments/
discrepancies/ inconsistencies which are of qualificatory nature which affect
his reporting about obtaining all the information and explanations which were
necessary for the purposes of the audit, about the keeping of proper books of
account by the head office and branches of the assessee and about the true
and fair view of the financial statements. Further, only such observations/
comments/discrepancies/inconsistencies which are of a qualificatory nature
should be mentioned under clause (a). In Form 3CD, while reporting under
any clause, tax auditor may be of the view that any elucidation, qualification,
disclaimer, etc. is required to be stated. These aspects may also be stated in
the said paragraph. All these aspects should also refer number of the clause
(of Form No. 3CD) to which it relates. In case the tax auditor has no
observations/comments/ discrepancies/inconsistencies to report which are of
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
qualificatory nature, “NIL” should be reported in this part of paragraph 3. The
tax auditor may then give his report as required by sub-paragraphs (A), (B),
and (C) of paragraph 3. The tax auditor should comply with the Standards of
Auditing (SA) issued by the ICAI while giving his opinion on the financial
statements in para 3 of Form 3CB.
18.6 Paragraph 4 of Form No. 3CB provides that the prescribed particulars
are furnished in Form No. 3CD annexed to the report. Paragraph 5 of Form
No. 3CB requires the auditor to report whether in his opinion and to the best
of his information and according to the explanations given to him, the
particulars given in Form No. 3CD are true and correct subject to
observations/qualifications, if any. The tax auditor may have a difference of
opinion with regard to the particulars furnished by the assessee. These
differences are to be reported in paragraph 5 of Form 3CB.
18.7 Further, the Tax Auditor in Para 5 of Form 3CB should give his
observations/comments/adverse remarks/disclaimers found during their audit
on any of the clauses of Form 3CD, wherever required. The tax auditor
should also refer to reporting requirements as per SA 700 as discussed in
the Para above.
18.8 If a person who carries on business or profession but who is not
required by or under any other law to get his accounts audited, has branches
and separate accounts are maintained at the branches, the assessee can
request the tax auditor appointed under section 44AB to audit the head office
and branch accounts. In the alternative, the assessee can appoint separate
tax auditors for branches. The branch tax auditor in such a case will have to
give an audit report in Form No. 3CB to the management or the tax auditor
appointed for the audit of head office accounts. The tax auditor appointed for
the audit of head office can rely on the report of branch tax auditors subject
to such checks and verifications as he may choose to make and shall submit
his consolidated report on the head office and branch accounts. He should
make suitable reference to the audit conducted by separate branch tax
auditors in the same manner as stated earlier in para above. The tax auditor
should also mention the Unique Document Identification Number (UDIN) for
issuing the audit report, if available at the time of signing the report.
18.9 In case of amalgamation, merger, demerger of companies; courts/
authorities approve it from a date specified in the application/petition. At
times, there is lapse of number of years between the date of
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
merger/demerger and the date of order. Return of income of earlier period of
the merged/demerged entities is required to be furnished. Financial
Statement of the merged/demerged entities are not required to be audited
under the Companies Act, 2013 or any other law for the time being in force.
Therefore, in such cases, Form No. 3CB should be issued, certifying the
Financial Statements.
18.10 If the tax auditor is called upon to give his report only in respect of one
or more businesses carried on by the assessee and the books of account of
the other businesses are not produced as the same are not required to be
audited under the Act, the tax auditor should mention the fact that audi t has
not been conducted of those businesses whose books of account had not
been produced. However, if the financial statements include, inter alia, the
results of such business for which books of account have not been produced,
the auditor should qualify his report in Form No. 3CB.
19. Form No. 3CD
19.1 The statement of particulars given in Form No. 3CD as annexure to
the audit report contains a number of clauses. The tax auditor has to report
whether the particulars are true and correct. This Form is a statement of
particulars required to be furnished under section 44AB. The same is to be
annexed to the reports in Form No. 3CA and 3CB in respect of a person who
carries on business or profession and whose accounts have been audited
under any other law and in respect of person who carries on business or
profession but who is not required by or under any other law to get his
accounts audited respectively.
19.2 As stated earlier, the tax auditor should obtain from the assessee, the
statement of particulars in Form No. 3CD duly authenticated by him. It would
be advisable for the assessee to take into consideration the following general
principles while preparing the statement of particulars:
(a) He can rely upon the judicial pronouncements while taking any
particular view about inclusion or exclusion of any items in the
particulars to be furnished under any of the clauses specified in Form
No. 3CD.
(b) If there is a conflict of judicial opinion on any particular issue, he may
refer to the view which has been followed while giving the particulars
under any specified clause.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(c) The AS, Ind AS, Guidance Notes, SA issued by the Institute from time
to time should be followed.
19.3 While furnishing the particulars in Form No. 3CD, it would be advisable
for the tax auditor to consider the following:
(a) If a particular item of income/expenditure is covered in more than one
of the specified clauses in the statement of particulars, care should be
taken to make a suitable cross reference to such items at the
appropriate places.
(b) If there is any difference in the opinion of the tax auditor and that of
the assessee in respect of any information furnished in Form No. 3CD
by the assessee, the tax auditor may consider stating both the view
points and also the relevant information related to matter in order to
enable the tax authority to take a decision in the matter.
(c) If any particular clause in Form No. 3CD is not applicable, he should
state that the same is not applicable.
(d) In computing the allowance or disallowance, he should keep in view
the law applicable in the relevant year, even though the form of audit
report may not have been amended to bring it in conformity with the
amended law.
(e) In case the assessee has furnished prescribed particulars in part or
piecemeal or relevant form is incomplete or the assessee does not
give the information against all or any of the clauses, the auditor
should not withhold the audit report. In such a case, he should qualify
his report in para 3 of Form 3CA or para 5 of Form 3CB as applicable
on matters in respect of which information is not furnished or if
furnished, is inadequate/insufficient.
(f) The information in Form No. 3CD should be based on the books of
account, records, documents, information and explanations made
available to the tax auditor for his examination.
(g) In case the auditor relies on a judicial pronouncement, he may mention
the fact as his observations in para (3) of Form No. 3CA or para (5)
provided in Form No. 3CB, as the case may be.
(h) Where in respect of any particular aspect, reporting is required at more
than one clause, in that case, information may be furnished at any one
of the clause and reference may be given at other clause.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
20. Particulars to be furnished in Form No. 3CD.
PART – A
1. Name of the assessee : _______________________
2. Address : _______________________
3. Permanent Account Number or
Aadhaar Number : _______________________
4. Whether the assessee is liable to pay indirect tax like excise duty,
service tax, sales tax, goods and service tax, customs duty, etc. If
yes, please furnish the registration number or GST number or any
other identification number allotted for the same
: _______________________
5. Status : _______________________
6. Previous year : from ________ to ________
7. Assessment year : _______________________
8. Indicate the relevant clause of section 44AB under which the
audit has been conducted
8a. Whether the assessee has opted for taxation under section
115BA/115BAA/115BAB/115BAC/115BAD?
: _______________________
[Clauses 1 to 8a]
The requirements of clauses 1 to 8a of Part-A are discussed below:
20.1 Under clause 1, the name of the assessee whose accounts are being
audited under section 44AB should be given as specified in PAN, and in case
there is a different Trade name, the same should be reported. However, if the
tax audit is in respect of a branch, name of such branch should be mentioned
along with the name of the assessee. In case of change in the name of the
assessee, if the change has taken place during the financial year, name at
the end of the financial year should be stated. However, if the change in
name has taken place after the close of the financial year but before signing
of tax audit report, name as at the year ending date should be mentioned. In
either case, fact of name change should be suitably clarified as an
observation in audit report.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
20.2 The address to be mentioned under clause 2 should be the same as
has been communicated by the assessee to the Income-tax Department as
on the date of signing of the audit report. If the tax audit is in respect of a
branch or a unit, the address of the branch or the unit should be given. In the
case of a company, the address of the registered office should be stated. In
the case of a new assessee, the address should be that of the principal place
of business. The auditor should verify the relevant details of the assessee
from the available income tax records or from the profile of the assessee on
Income Tax portal. In case of difference, the same should be given as an
observation in the audit report.
20.3 Under clause 3, the permanent account number (PAN) allotted to the
assessee should be indicated. Clause further asks to mention Aadhaar
number (in case of Individuals) as an alternative. It may be noted that in the
e-filing format, PAN is a mandatory field and Aadhaar is an optional field.
20.4 Under clause 4, the auditor is required to examine from appropriate
evidence, the registration number or any other identification number, if any,
allotted, in case the assessee is liable to pay indirect taxes like customs
duty, excise duty, VAT, sales tax, goods and services tax, etc. Moreover, for
any indirect tax, if multiple registration numbers are available, all such
registration numbers should be examined by the tax auditor and duly
reported.
20.5 Part A of Form No. 3CD generally requires the auditor to give the
factual details of the assessee. Thus, the auditor is primarily required to
furnish the details of registration numbers as provided to him by the
assessee. The reporting is however, to be done in the manner or format
specified by the e-filing utility in this context.
20.6 The term “Indirect taxes” is neither defined in the Income-tax Act, 1961
nor under any other law. The levy of different types of indirect taxes on
various transactions may differ from State to State. Thus, it is recommended
that the auditor should obtain from the assessee the list of indirect taxes
applicable to him. Once the auditor obtains this management representation,
he is required to obtain a copy of the registration certificate clearly
mentioning the registration number under that relevant law. For example,
GSTIN, State Excise, State VAT etc. The assessee may have multiple
registrations for various manufacturing units, service units, branches,
godowns etc. under the same law. In such circumstances also, a copy of all
registration certificates is to be obtained from the assessee for appropriate
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
disclosure under this clause. Where the indirect tax law does not require any
registration, appropriate identification number may be reported in this clause.
For example, in Customs Act, 1962, since there is no registration number, a
copy of Importer Exporter Code (IEC) may be obtained and information be
accordingly furnished.
20.7 The information may be obtained and maintained in the following
format:
Sr. Relevant Place of Business/ Registration/
No Indirect tax Law profession/service unit for Identification
which requires which registration is in place/ number
registration or has been applied for
1 2 3 4
20.8 The auditor has to keep in mind the provisions of Standard on Auditing
580 “Written Representation”. In case the auditor prima facie is of the opinion
that any indirect taxes laws is applicable on the business or profession of the
assessee but the assessee is not registered under the said law, he should
report the same appropriately.
20.9 Under clause 5, the status of the assessee is to be mentioned. This
refers to the different classes of assessees included in the definition of
“person” in section 2(31) of the Act, namely, individual, Hindu undivided
family, company, firm, an association of persons or a body of individuals
whether incorporated or not, a local authority or artificial juridical person.
20.10 Under clause 6, the period of the previous year has to be stated. Since
the previous year under the Act now uniformly begins on 1st April and ends
on 31st March, the relevant previous year should be mentioned. In case of
amalgamations, demergers, reconstitution, new business, closure of existing
business etc. the date of beginning/ ending of the previous year may be
different, the auditor may accordingly, mention the relevant date of beginning
and ending of the previous year in this clause. Hence, the tax auditor has to
apply his professional judgement depending on the facts and circumstances
of the case.
20.11 Under clause 7, the assessment year relevant to the previous year for
which the accounts are being audited should be mentioned.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
20.12 Under clause 8, the auditor is required to mention the relevant clause
of section 44AB under which the audit has been conducted. In case the
assessee is carrying on business and his total sales, turnover or gross
receipts as the case may be, exceed one crore rupees in the relevant
previous year, the auditor is required to mention clause (a) under this head. If
the assessee is carrying on profession and his gross receipts exceed fifty
lakh rupees in the relevant previous year, the auditor is required to mention
clause (b) under this head. Likewise, if the audit under section 44AB is being
conducted by virtue of provisions of section 44AE, 44BB and 44BBB, the
auditor is required to mention clause (c). For audit being conducted by virtue
of provisions of section 44ADA, clause (d) is to be mentioned under this
head. Where a person is required by or under any other law to get his
accounts audited, say a company, a society etc., then audit under section
44AB is conducted under proviso to section 44AB and not under clause (a) or
(b) of that section.
20.13 Assessee is required to pay income-tax at the rates specified in the
annual Finance Act. However, Section 115BA, 115BAA, 115BAB, 115BAC
and 115BAD provide option to the assessee to pay tax at special rates and
forego certain deductions, exemptions etc. The assessee can opt to pay tax
under the rates prescribed in the Finance Act or the one made available by
any of the aforesaid sections. The tax auditor has to mention whether the
assessee has opted for taxation under any of the aforesaid sections and in
case answer is yes, then he has to select the appropriate section. Further,
the Tax auditor is advised to examine the previous year Income Tax return to
verify the option which has been exercised by the assessee. However, as
the assessee has to file the return, he may opt for different alternative rates
than reported by the auditor. Hence, the auditor should mention the selection
or the choice of the assessee as on the date of signing of the Report. For the
purpose of reporting under clause 8a, the tax auditor should verify whether
the relevant form being 10-IB, 10-IC, 10-ID, 10-IE and 10-IF furnished under
section 115BA, 115BAA, 115BAB, 115BAC and 115BAD respectively for
availing new tax regime is already filed by the assessee. In case, the
assessee has not filed the relevant form, written representation from the
assessee should be obtained whether he will be availing the new regime or
otherwise and based on written representation, the reporting under this
clause should be made. Where reporting is made solely on the basis of
assessee’s representation, the fact should be stated in paragraph (3) of Form
3CA or paragraph (5) of Form 3CB.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
21. (a) If firm or Association of Persons, indicate names of
partners/members and their profit sharing ratios.
(b) If there is any change in the partners or members or in their
profit sharing ratio since the last date of the preceding year,
the particulars of such change
[Clause 9(a) and (b)]
21.1 Where the assessee is a firm or association of persons (AOP) or body
of individuals, the names of partners of the firm or members of the
association of persons or body of individuals and their profit sharing ratios
(%) have to be stated. In case the partner of a firm or the member of AOP/
BOI acts in a representative capacity, the name of the beneficial
partner/member should be stated. Thus, the details of partners or members
during the entire previous year will have to be furnished. The term “profit
sharing ratios” would include loss-sharing ratio also since loss is nothing but
negative profits. This would not cover any specific ratio or understanding in
relation to payment of remuneration or interest to partners or members. In
this connection, reference may be made to Circular No. 739 dated 25.3.1996
issued by the Board reproduced in Appendix XIII.
21.2 If there is any change in the partners of the firm or members of the
association of persons/ body of individuals or their profit or loss sharing ratio
since the last date of the preceding year, the particulars of such change must
be stated. All the changes occurring during the entire previous year must be
stated.
21.3 The particulars in this clause should be verified from the instrument or
agreement or any other document evidencing partnership or association of
persons including any supplementary documents or other documents
effecting such changes. For this purpose, the tax auditor may also verify:
(i) in case of registered firms (including Indian LLPs), whether the
relevant documents have been filed with the concerned authorities,
(ii) whether notice of changes, if required, has been given to the registrar
of firms, and
(iii) any minutes or any other understanding recording any changes in the
partners/members or their profit sharing ratios.
21.4 The tax auditor should obtain certified copies of the deeds,
documents, understanding, notice of changes etc. including certified copies
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
of the acknowledgment, if any, evidencing filing of documents with the
concerned authorities, if registered.
21.5 In certain cases of association of persons or body of individuals, it may
be possible that the shares of the members are not precisely ascertainable
during the previous year resulting in a situation whereby the shares of the
members are indeterminate or unknown. In such circumstances, the relevant
fact should be stated.
21.6 As per section 2(23) of the Income-tax Act, 1961; the term “Firm” shall
have the meaning assigned to it in the Indian Partnership Act, 1932, and
shall include a Limited Liability partnership firm as defined in Limited Liability
Partnership Act, 2008.
22. (a) Nature of business or profession (if more than one
business or profession is carried on during the previous
year, nature of every business or profession)
(b) If there is any change in the nature of business or
profession, the particulars of such change.
[Clause 10 (a) and (b)]
22.1 In regard to the nature of business, the principal line of each business
is to be determined and stated in this clause, i.e. the sector in which the
business or profession falls such as manufacturing, trading, commission
agent, builder, contractor, professionals, service sector, financial service
sector or entertainment industry. In case a person belongs to service sector,
the nature of each type of service should be broadly stated. Thereafter, the
auditor is required to mention the sub-sector pertaining to the sector
selected.
22.2 Information has to be furnished in respect of each business. The code
to be mentioned against the nature of business pertains to the main area of
business activity.
22.3 Any material change in the nature of business should be precisely set
out. The change will include change from manufacturer to trader as well as
change in the principal line of business. For example, an assessee switching
over from wholesale business to retail business or an assessee switching
over from manufacturing his own commodities to manufacturing goods on job
basis for others. Likewise, any addition to or other than temporary
discontinuance of, a particular line of business may also amount to change
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
requiring reporting. However, temporary suspension of the business may not
amount to change and therefore need not be reported.
22.4 A review of business report or the minutes of meetings would enable
the tax auditor to note the changes, if any. Based thereon, he may make
necessary enquiries and seek information and determine whether any
change has occurred or not. If need be, the tax auditor should get a
declaration from the assessee regarding change in the nature of business, if
any.
22.5 In the case of business reorganization/ reconstruction, if there is a
similar line of activity, no reference needs to be made. However, if a new line
of activity emerges because of business reorganization/ reconstruction, the
same may be stated. In the case of restructuring, if any line of activity is
being hived off, the same may also be reported.
22.6 The auditor should keep in mind the above guidance while furnishing
information under this clause in the format provided for in the e-filing utility.
23. (a) Whether books of account are prescribed under section
44AA, if yes, list of books so prescribed.
(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 accounts are not kept at
one location, please furnish the addresses of locations
along with the details of books of accounts maintained at
each location.)
(c) List of books of account and nature of relevant documents
examined.
[Clause 11 (a) to (c)]
23.1 Clause 12(A) of section 2 defines books of account as "books or books
of account" includes ledgers, day-books, cash books, account-books and
other books, whether kept in the written form or in electronic form or in digital
form or as print-outs of data stored in such electronic form or in digital form
or in a floppy, disc, tape or any other form of electro-magnetic data storage
device.
23.2 The list of books of accounts prescribed, maintained and examined
has to be stated under this clause. There may be difference between the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
three lists. For example, books of account may have been prescribed but all
the prescribed books might not have been maintained or the entire books of
account maintained might not have been produced for examination. The tax
auditor should exercise his professional judgment in order to arrive at the
conclusion whether such a situation warrants any disclosure or qualifications
while forming his opinion on the matters covered by reporting requirements in
Form No. 3CB.
23.3 The CBDT under Rule 6F has prescribed the books of account and
other documents to be kept and maintained by a person carrying on certain
professions specified in sub-section (1) of section 44AA. As such, every
person carrying on legal, medical, engineering or architectural profession or
the profession of accountancy or technical consultancy or interior decoration
or authorised representative or film artist and whose total gross receipts
exceed one lakh fifty thousand rupees in all the three years immediately
preceding the previous year, or where the profession has been newly set up
in the previous year, his total gross receipts in the profession for that year
are likely to exceed the said amount, is required to maintain the following
books of account:
1. Cash book.
2. Journal, if the accounts are maintained according to the mercantile
system of accounting.
3. Ledger.
Apart from the aforesaid books of account, a person carrying on medical
profession is required to keep the following:
(a) daily case register in Form No. 3C showing data, patient's name,
nature of professional services rendered, fees received and date of
receipt; and
(b) an inventory under broad heads, as on the first and the last days of the
previous year, of the stock of drugs, medicines and other consumable
accessories used for the purpose of his profession.
23.4 In the case of a person for whom the books of account have been
prescribed under rule 6F, the list of books so prescribed have to be stated
under clause 11(a). It may be noted that the daily case register and the
inventory under broad heads do not constitute books of account and hence
the same need not be mentioned under clause 11(a). Sometimes an
assessee may carry on multiple activities. Books of account might have been
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
prescribed for one of the activities. In that case, mention may be made of the
activity for which books have been prescribed.
23.5 The tax auditor should obtain from the assessee a complete list of
books of account and other documents maintained by him (both financial and
non-financial records) and make appropriate marks of identification to ensure
the identification of the books and records produced before him for audit. The
list of books of account maintained by the assessee should be given under
clause 11(b).
23.6 Section 44AA(2) provides that persons carrying on business or
profession, other than those specified in sub-section (1), shall keep and
maintain such books of account and other documents as may enable the
Assessing Officer to compute his total income in accordance with the
provisions of the Income-tax Act, if his income from business or profession
exceeds the monetary limits prescribed under section 44AA(2) or his total
sales, turnover or gross receipts in business or profession exceed the
monetary limits prescribed under section 44AA(2) in any one of the three
years immediately preceding the previous year. The tax auditor will,
therefore, have to verify that the assessee has maintained such books of
account and documents as may enable the Assessing Officer to compute the
total income of the assessee in accordance with the provisions of the Act. It
may be noted that though the Central Board of Direct Taxes has been
empowered under sub-section (3) of section 44AA to prescribe books of
account to be maintained under sub-section (2), so far no books of account
have been prescribed.
23.7 For a person whose accounts of the business or profession have been
audited under any other law, the requirement for maintenance of books of
account is contained in the relevant statutes. In the case of other assessees,
normal books of account to be maintained will be cash book/bank book,
sales/purchase journal or register and ledger. Assessees engaged in
trading/manufacturing activities should also maintain quantitative details of
principal items of stores, raw materials and finished goods. While giving his
report in Form No. 3CB about maintenance of proper books of account, the
tax auditor should ensure that they are maintained in accordance with the
above requirements. In case stock records are not properly maintained by
the assessee due to the nature, level, volume and variety of items/
transactions, the tax auditor will have to consider the concept of materiality
and practicality while giving particulars in Form No. 3CD.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
23.8 (a) As per section 2(12A) of the Income-tax Act, 1961, “books or books
of account” include ledgers, day-books, cash books, account-books and
other books, whether kept in the written form or as print-outs of data stored in
a floppy, disc, tape or any other form of electro-magnetic data storage
device. As to the requirement regarding the mentioning of the books of
account generated by the computer system, the tax auditor should obtain a
list of books of account which are generated by the computer system. The list
given by the assessee can be verified from the printout of such books
obtained from the assessee. Only such books of account and other records
which properly come within the scope of the expression “proper books of
account” should be mentioned.
(b) It may be noted that section 4 of the Information Technology Act, 2000
states that “Where any law provides that information or any other matter shall
be in writing or in the typewritten or printed form, then, notwithstanding
anything contained in such law, such requirement shall be deemed to have
been satisfied if such information or matter is-
(i) rendered or made available in an electronic form; and
(ii) accessible so as to be usable for a subsequent reference.”
23.9 The address at which the books so maintained are kept is also
required to be mentioned under clause (b). In case the books of account are
kept at more than one location, the auditor is required to mention the details
of address of each such location along with the details of books of account
maintained thereof. The auditor is advised to obtain from the assessee a list
in the following format and accordingly report the same in clause 11(b). In
case of a company assessee, auditor should also verify as to whether any
forms are filed under the Companies Act for maintenance of books of
account at a place other than the registered office:
Sr Principal place of maintenance of Details of books
No. books of account maintained
1 2 3
23.10 In case, books of account are maintained and generated through
computer system, the auditor should obtain from the assessee the details of
address of the place where the server is located or the principal plac e of
business/Head office or registered office by whatever name called and
mention the same accordingly in clause 11(b). Where the books of account
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
are stored on cloud or online, IP address (unique) of the same may be
reported. The auditor should also specify which books of account have been
maintained in computer system and which of the records have been
maintained in hard copy form.
23.11 Books of account examined would constitute the books of original
entry and the other books of account. In addition to the list of books of
account examined, the auditor is required to mention the nature of relevant
documents examined also. The assessee is required to maintain evidence
such as bills, vouchers, receipts, debit note, credit note, inventory register,
agreements, orders etc. as the auditor generally examines these documents
while conducting audit. The underlying documents would differ from
assessee to assessee depending on the nature of activity carried on by the
assessee. Reference to such supporting evidence/ relevant documents is
also required to be made under this clause.
23.12 Whereas sub-clause 11(b) requires furnishing list of books of account
maintained by the assessee and address of the place where books of
account are kept, sub-clause (c) requires tax auditor to state a list of books
of account that has been examined and the nature of relevant documents he
has examined.
24. Whether the profit and loss account includes any profits and
gains assessable on presumptive basis, if yes, indicate the
amount and the relevant sections (44AD, 44AE, 44AF, 44B, 44BB,
44BBA, 44BBB Chapter XII-G, First Schedule or any other relevant
section).
[Clause 12]
24.1 Where the profits and gains of the business are assessable to tax
under presumptive basis under any of the sections mentioned below, the
amount of such profits and gains credited/debited to the profit and loss
account should be indicated under this clause:
S. No. Section Business covered
1 44AD Eligible business
2 44AE Transport business
3 44B Shipping business of a non-resident
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Section Business covered
4 44BB Providing service or facilities in connection with,
or supplying plant and machinery on hire used,
or to be used, in the prospecting for, or
extraction or production of, mineral oils
5 44BBA Operation of aircraft by non-resident
6 44BBB Civil construction etc. in certain turnkey power
project by non-residents
7 Chapter XII-G Special provisions relating to Shipping
Companies (Section 115V to 115VT)
8 First Schedule Insurance Business
9 Any other This refers to the sections not listed above
relevant section under which income may be assessable on
presumptive basis like section 44D and section
115A(1)(b) and will include any other section
that may be enacted in future for presumptive
taxation
Express mention of section 44ADA is not made in Form No. 3CD. However,
there is a residuary clause requiring reporting under ‘any other relevant
section’. Therefore, profits and gains assessable under section 44ADA
should also be reported under this clause. If the profit and loss account does
not include profit assessable on presumptive basis, then, there is no
requirement to furnish the particulars under this clause.
24.2 The amount to be mentioned under this clause means the amount
included in the profit and loss account. The tax auditor is not required to
indicate as to whether such amount corresponds to the amount assessable
under the relevant section relating to presumptive taxation. As such, the
reporting requirement gets satisfied if the amount as per profit and loss
account is reported.
24.3 The tax auditor may come across three different situations as follows:
(a) Where the assessee, maintaining regular books of account has more
than one business which include business of the nature assessable on
presumptive basis under any of the said sections and the profit and
loss account prepared from such books of account, inter alia, includes
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
the income of the business assessable under the scheme of
presumptive taxation.
(b) Where the assessee has more than one business including some
business(es) falling under any of the aforesaid sections but maintains
separate sets of accounts for each such business and opts for getting
the accounts of all such businesses audited under section 44AB.
(c) Where the assessee, having regular books of account for his main
business, has some additional business of the nature described in any
of the aforesaid sections and no books of account whatsoever is
maintained for such additional business but the net income is credited
to the main profit & loss account of the assessee.
24.4 Under each of the aforesaid three situations, the tax auditor may
proceed as follows:
(a) This situation may give rise to the problem of apportionment of
common expenditure in order to check the correct amount of profit
credited to profit and loss account and assessable on a presumptive
basis. In such a situation, the endeavour of the tax auditor should be
to arrive at a fair and reasonable estimate of such expenditure on the
basis of evidence in possession of the assessee or by asking the
assessee to prepare such estimate which should be checked by him.
It is also necessary to mention the basis of apportionment of common
expenditure. However, if the tax auditor is not satisfied with the
reasonableness of such apportionment, he should indicate such fact
under this clause by a suitable note.
(b) In this case, since a separate set of accounts are maintained for
respective businesses, the tax auditor should check the amount of
profit to be disclosed from such books.
(c) Here, the tax auditor is unable to satisfy himself about the correctness
of the net income from the presumptive business credited to the profit
and loss account. He should, therefore, state the amount of income as
appearing in the profit and loss account, with a suitable note
expressing his inability to verify the said figure. In the absence of
books of account, the tax auditor would be unable to form an opinion
about the true and fair view of the profit and loss account or balance
sheet of the assessee and therefore, it would become necessary for
him to appropriately qualify his report in Form No. 3CB.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
24.5 In the case of an assessee not opting for presumptive taxation, the
provisions of section 44AB(c) require such an assessee to get his accounts
audited irrespective of the fact that his turnover has not exceeded the
prescribed limit. There may be another circumstance where an assessee has
mixed nature of business amenable to taxation on presumptive basis and
under normal provisions of law – turnover of which does not exceed the
prescribed limit. In such a case, the tax auditor auditing the books of account
etc. relating to business covered by the provisions relating to presumptive
taxation should sufficiently indicate in his report that his audit report in Form
No. 3CB and particulars in Form No. 3 CD only relate to the business
covered by the provisions relating to presumptive taxation and his audit
report does not relate to business assessable under the normal provisions of
the Act.
24.6 Even where the assessee opts for presumptive taxation, the tax
auditor should consider to impress upon the assessee that it would be
advisable to maintain some basic records to support the turnover/gross
receipts declared for presumptive taxation.
24.7 Where the profit and loss account includes any profits and gains
assessable by virtue of provisions of section 44AE, the auditor should obtain
and verify the following information from the assessee:
Sr Nature No. of Month of Presumptive Number Nature of Presumptive
No. of Vehicles acquisition income per of months Vehicle/Gros income for
vehicle in case of month Owned s Vehicle the previous
vehicle during the weight year
purchased previous
during the year (Part
relevant of the
previous month
year to be
rounded
off)
1 2 3 4 5 6 7
The above information will enable the auditor to determine whether profits
and gains from business are assessable under section 44AE of the Act.
24.8 In respect of provisions relating to Chapter XII-G, the auditor should
obtain and verify the following information from the assessee being a
qualifying shipping company:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Sr Name Net Net Tonnage No of days Tonnage
No. of the tonnage tonnage income operated income
Ship capacity capacity per day during the per year
as per rounded previous
DGS off to year as per
certificate nearest DGS
100 Certificate
1 2 3 4 5 6 7
24.9 The auditor should keep in mind the above guidance while furnishing
information under this clause in the format provided in the e-filing utility.
25. (a) Method of accounting employed in the previous year.
(b) Whether there had been any change in the method of
accounting employed vis-a-vis the method employed in the
immediately preceding previous year.
(c) If answer to (b) above is in the affirmative, give details of
such change, and the effect thereof on the profit or loss.
Serial Particulars Increase in Decrease in
number profit (Rs.) profit (Rs.)
(d) Whether any adjustment is required to be made to the
profits or loss for complying with the provisions of income
computation and disclosure standards notified under
section 145(2).
(e) If answer to (d) above is in the affirmative, give details of
such adjustments:
Increase Decrease Net
in profit in profit Effect
(Rs.) (Rs.) (Rs.)
ICDS I Accounting
Policies
ICDS II Valuation of
Inventories
ICDS III Construction
Contracts
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Increase Decrease Net
in profit in profit Effect
(Rs.) (Rs.) (Rs.)
ICDS IV Revenue
Recognition
ICDS V Tangible Fixed
Assets
ICDS VI Changes in
Foreign
Exchange Rates
ICDS VII Governments
Grants
ICDS VIII Securities
ICDS IX Borrowing Costs
ICDS X Provisions,
Contingent
Liabilities and
Contingent
Assets
Total
(f) Disclosure as per ICDS:
(i) ICDS I-Accounting Policies
(ii) ICDS II-Valuation of Inventories
(iii) ICDS III-Construction Contracts
(iv) ICDS IV-Revenue Recognition
(v) ICDS V-Tangible Fixed Assets
(vi) ICDS VII-Governments Grants
(vii) ICDS IX Borrowing Costs
(viii) ICDS X-Provisions, Contingent
Liabilities and Contingent Assets".
[Clause 13 (a) to (f)]
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
25.1 Section 145 provides that the income chargeable under the head
“Profits and gains of business or profession” or “Income from other sources”
must be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee. Effective from 01.04.2015, it
has been provided that the Central Government may notify in the Official
Gazette from time to time the income computation and disclosure standards
to be followed by any class of assessees or in respect of any class of
income. The hybrid system of accounting viz. mixture of cash and mercantile
is not permitted. However, the assessee may adopt cash system of
accounting for one business and mercantile system of accounting for other
business. Once the choice of method of accounting is decided, the assessee
must follow consistently the method of accounting employed. If he employs
different methods for different businesses regularly and consistently, the
profits would have to be computed in accordance with the respective
methods, provided the result is a proper determination of profits. As regards
the accrual system of accounting, the Institute has published a “Guidance
Note on Accrual Basis of Accounting” which may be referred to.
25.2 It may be noted that in view of Section 128 of the Companies Act,
2013, every company is required to keep books of account on accrual basis.
The provisions of the Companies Act, 2013 are, however, not applicable to
entities other than companies.
25.3 Under sub-clause (b), whether there has been any change in the
method of accounting employed vis-à-vis the method employed in the
immediately preceding previous year is to be stated. As already noted, an
assessee can follow either cash or mercantile system of accounting.
25.4 If there is any change, the effect thereof i.e. increase or decrease in
profits has to be stated under this clause. So far as the question of effect of
such change on the profit or loss is concerned, the concept of materiality is
the basic governing factor. If it is not possible to quantify the effect of the
change in the method of accounting, appropriate disclosure should be made
under this clause.
25.5 A change in an accounting policy will not amount to a change in the
method of accounting and hence such change in the accounting policy need
not be mentioned under sub-clause (b). It may be noted that a change in the
method of valuation of stock will amount only to a change in an accounting
policy and hence such a change need not be mentioned under sub-clause
13(b) but should be mentioned in the financial statements.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
25.6 The tax auditor should apply reasonable checks to the earlier year’s
accounts to ascertain whether there is any change in the method of
accounting as compared to that of the year under audit, after obtaining a
written confirmation from the assessee as to the method of accounting
followed. In case there is any change in the method of accounting employed
vis-à-vis the method employed in the immediately preceding previous year,
the details of the same along with the impact on the profit for the year need
to be mentioned in clause 13(c) of Form no. 3CD.
25.7 Clause (d) requires the tax auditor to assist and state whether any
adjustment is required to be made to profits or loss for complying with the
provisions of income computation and disclosure standards (ICDS) notified
under section 145(2). Such adjustments are required to be stated separately
in respect of each ICDS.
25.8 In exercise of the powers conferred by sub-section (2) of section 145
of the Income-tax Act, 1961, the Central Government has notified the Income
Computation and Disclosure Standards (“ICDS”) to be followed by all
assessees following the mercantile system of accounting, for the purposes of
computation of income chargeable to income-tax under the head “Profits and
gains of business or profession” or “Income from other sources”.
25.9 ICDS does not apply to assessees following cash method of
Accounting. So far, 10 ICDS have been issued by the Government. Each of
the ICDS, in preamble, states that ‘this Income Computation and Disclosure
Standard is applicable for computation of income chargeable under the head
“Profits and gains of business or profession” or “Income from other sources”
and not for the purpose of maintenance of books of accounts’. Thus,
prescription of ICDSs is not applicable for maintenance of books of account
even under mercantile system of accounting. As the provisions of ICDS are
applicable for computation of income under the regular provisions of the Act,
the provisions of ICDS shall not apply for computation of book profit under
section 115JB of the Act. However, as AMT under section 115 JC of the Act
is computed on adjusted total income derived by making specified
adjustment to total income computed under regular provisions of the Act, the
provisions of ICDS will apply for computation of AMT. The general provisions
of ICDS shall apply to all persons (e.g., Banks, Non-banking financial
institutions, Insurance companies, Power sector etc.) unless there are sector
specific provisions contained in the ICDS or the Act. The provisions of ICDS
shall also be applicable for computation of income on gross basis (e.g.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
interest, royalty, fees for technical services under section 115A of the Act) for
arriving at the amount chargeable to tax. The CBDT has issued ten ICDS as
follows:
(a) ICDS I relating to Accounting Policies - This ICDS deals with
application of significant accounting assumptions and policies in
computation of income for the purposes of the Act. Financial
statements of an assessee reflect his state of financial affairs. They
form the base for computation of taxable income under the Act.
(b) ICDS II relating to Valuation of Inventories - The concept of inventory
as well as the term `inventory’ as defined in para 2(1) of this ICDS
contemplates business. Although sub-clause (iii) of clause (a) of the
para 2(1) dealing with materials and supplies to be consumed in the
production process or in rendering of services does not specifically
refer to business, even in that sub-clause the existence of business is
contemplated.
(c) ICDS III relating to Construction Contracts - A construction contract is
a contract negotiated for the construction of an asset or a combination
of assets. A construction contract, by nature entails time and
resources. In cases where the activity continues for more than a year,
the question is whether the contractor is to be taxed in the year in
which the work is completed or proportionately over all the years?
(d) ICDS IV relating to Revenue Recognition - This Income Computation
and Disclosure Standard is based on Accounting Standard 9–Revenue
Recognition. While some of the principles contained in AS 9 have
been adopted in this ICDS, there are also certain significant
differences between the ICDS and AS 9.
(e) ICDS V relating to Tangible Fixed Assets - This ICDS covers assets
being land, building, machinery, plant or furniture held with the
intention of being used for the purpose of producing or providing
goods or services and not held for sale in the normal course of
business.
(f) ICDS VI relating to Effects of Changes in Foreign Exchange Rates -
This ICDS corresponds to Accounting Standard (AS) 11 – The Effects
of Changes in Foreign Exchange Rates issued/notified by ICAI/MCA
and Indian Accounting Standard (Ind AS) 21 – The Effects of changes
in foreign exchange rates, notified vide the Companies (Indian
Accounting Standards) Rules, 2015.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(g) ICDS VII relating to Government Grants - This ICDS deals with the
meaning, scope, forms, point of taxation and disclosure aspects of
government grants. Although the Finance Act, 2015 expanded the
definition of ‘income’ to include all kinds of government grants save
asset specific grants, there are many aspects such as the year of
taxation or capitalization, refund mechanism, point of recognizing
grants, treatment of grants in relation to group of assets etc., the
guidance for which is available in this ICDS.
(h) ICDS VIII relating to Securities - ICDS VIII is divided into two parts.
Part A deals with securities held as stock-in-trade by taxpayers but
does not apply to securities held by taxpayers engaged in the business
of insurance, securities held by mutual funds, venture capital funds.
Securities held by banks and public financial institutions are also
excluded from the purview of Part A. Specific provisions have been
incorporated in Part B of this ICDS for scheduled banks and public
financial institutions.
(i) ICDS IX relating to Borrowing Costs - This ICDS would need to be
considered for the purposes of section 36(1)(iii) of the Act regarding
deduction of interest paid in respect of capital borrowed for the
purposes of the business or profession, and explanation 8 to section
43(1) of the Act, regarding interest which cannot be capitalised. It will
also apply for the purposes of clause (iii) of section 57 of the Act, for
deductibility of interest under the head “Income from Other Sources”.
(j) ICDS X relating to Provisions, Contingent Liabilities & Contingent
Assets - This ICDS specifically excludes provisions, contingent
liabilities and contingent assets resulting from financial instruments,
executory contracts and insurance business from contracts with
policyholders. It also excludes such transactions from financial
instruments, irrespective of whether the financial instruments are held
as investments or as stock-in-trade.
25.10 The Central Board of Direct Taxes has issued certain clarifications on
ICDS through Circular No. 10/2017 dated 23rd March, 2017.
25.11 For the purpose of replying clause (d), the tax auditor should obtain
draft computation of total income and disclosures required under ICDS.
Based on information and books of account, the tax auditor should consider
whether any adjustment is required to be made to the profit or loss and if the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
answer is in affirmative, to state ‘yes’ otherwise to state ‘no’. While reporting,
auditor has to consider draft of income computation provided by the
assessee, this fact should be mentioned in Audit report in paragraph 3 of
Form No. 3CA and paragraph 5 of Form No. 3CB.
25.12 In case answer to clause 13(d) is affirmative, i.e. in case an
adjustment is required for complying with ICDS, tax auditor has to give
details of such adjustments in clause 13(e) i.e., amount of increase or
decrease in profit relating to each ICDS and total. Tax auditor may refer to
technical guide on ICDS issued by the Institute of Chartered Accountants of
India in July, 2017. In working paper file, ICDS checklist should be prepared
and maintained along with computation working for any increase/decrease in
income as per ICDS. Also, last year tax audit report should be reviewed to
ascertain any effect in current year.
25.13 If answer to ‘d’ above is in affirmative, the tax auditor is required to
quantify the amount of adjustment against each ICDS in clause ‘e’. For the
purpose, the table is prescribed in the clause.
25.14 Clause (f) requires disclosure of significant income computation and
disclosure policies adopted by a person for computation of income
chargeable under the head ‘profits and gains from Business or Profession’ or
‘income from other sources’. In this clause, if information furnished is based
on income computation furnished by the assessee, appropriate disclosure of
this fact should be mentioned in Form No. 3CA or 3CB as the case may be.
26. (a) Method of valuation of closing stock employed in the
previous year.
(b) Details of deviation, if any, from the method of valuation
prescribed under section 145A, and the effect thereof on
the profit or loss, please furnish:
Serial Particulars Increase in Decrease in
number profit (Rs.) profit (Rs.)
[Clause 14 (a) and (b)]
26.1 The method of valuation of closing stock is to be stated under this
clause. AS-2 “Valuation of Inventories” issued/notified by ICAI/MCA requires
disclosure of significant accounting policies. Similarly, Ind AS 2 "Inventories”
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
notified vide the Companies (Indian Accounting Standards) Rules, 2015 also
requires the similar treatment. Accordingly, a reference may be invited to the
same or the method of valuation may be again described in Form No. 3CD.
26.2 The method of valuation followed by the assessee having regard to the
articles or goods dealt in or manufactured by the assessee, should be clearly
indicated. Some examples are given below:
(i) raw material at cost or net realisable value whichever is lower,
(ii) finished goods at cost or net realizable value whichever is lower.
(iii) Work in Progress - at cost or net realizable value whichever is lower
(iv) Consumables - at cost
(v) Stock in trade being Goods held for Sale at cost or net realizable value
whichever is lower
(vi) Loose Tools - at cost or net realizable value whichever is lower
In each case where reference is to 'cost’, Accounting Standards require
statement as to how cost is determined.
26.3 In sub-clause (a) of clause 14 of Form No. 3CD, the reference is made
to "closing stock". The expression "stock-in-trade" means finished goods and
raw materials. Since sub-clause (b) refers to section 145A where the term
"inventory" is used, the term "closing stock" will include all items of
inventories. AS-2 and Ind AS-2 define the term "inventories" to include
finished goods, raw materials, work-in-progress, materials, maintenance
supplies, consumables and loose tools. Therefore, method of valuation of all
items of inventories will have to be given under sub-clause (a).
26.4 The tax auditor should study the procedure followed by the assessee
in taking the inventory of closing stock at the end of the year and the
valuation thereof. He should obtain the inventory of closing stock, indicating
the basis of valuation thereof, for reporting on the method of valuation of
closing stock under this clause.
26.5 The method of stock valuation must be consistently followed from year
to year and the method followed must be brought out clearly. The tax auditor
should examine the basis adopted for ascertaining the cost and this basis
should be consistently followed. It is necessary to ensure that the method
followed for valuation of stock results in disclosure of correct profit and gains.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
The Supreme Court in case of CIT v. British Paints Ltd. [1991] 188 ITR 44
(SC) has held that the method of valuation of stock at actual cost of raw
materials and not taking into account overhead charges was not the correct
method of valuation even though the said method has been consistently
followed. As per AS-2 - Valuation of inventories (Revised), cost of inventories
also include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished goods and
the allocation of fixed production overheads should be based on the normal
level of production only for inclusion in the cost of inventories. It is further
provided that overheads should be included as part of the inventory cost only
to the extent that they clearly relate to brining the inventories to their present
location and condition.
26.6 It is not necessary to indicate any change in the method of valuation of
closing stock under this clause. However, as stated earlier in paragraph
above, any such change in the method of valuation of closing stock would
amount to change in an accounting policy and needs to be disclosed in the
financial statements as required by AS-1/Ind AS-1.
26.7 The details of deviation, if any, from the method of valuation
prescribed under section 145A, and the effect thereof on the profit or loss
have to be stated under clause 14(b). Section 145A has been amended to
give effect to ICDS. Section 145A covers not only goods but services &
securities also.
26.8 Section 145A provides that the valuation of purchase and sale of
goods and inventory for the purpose of computation of income from business
or profession shall be made on the basis of the method of accounting
regularly employed by the assessee but this shall be subject to certain
adjustments. Therefore, it is not necessary to change the method of valuation
of purchase, sale and inventory regularly employed in the books of account.
The adjustments provided in this section can be made while computing the
income for the purpose of preparing the return of income. These adjustments
are prescribed for valuation of inventory, inventory of unlisted/not regularly
quoted securities and listed & quoted securities and should be as per
provisions of ICDSs notified under section 145(2). ICDS II relating to
valuation of inventories prescribes that cost of inventory shall consist of
purchase price including duties and taxes, freight inwards and other
expenditure directly attributable to the acquisition. Trade discounts, rebates
and other similar items shall be deducted in determining the costs of
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
purchase. ICDS VIII relating to securities in respect of assessees other than
Scheduled Banks or Public Financial Institutions (PFI) formed under Central
or State Act or so declared under the Companies Act 1956/2013 provides
that where unpaid interest has accrued before the acquisition of an interest-
bearing security and is included in the price paid for the security, the
subsequent receipt of interest is allocated between pre-acquisition and post-
acquisition periods; the pre-acquisition portion of the interest is deducted
from the actual cost. In respect of above referred Banks and PFI,
measurement shall be in accordance with Guidelines issued by the Reserve
Bank of India.
26.9 In case the assessee is covered under GST, eligible input tax credit
(ITC) claimed on inputs, input services and capital goods in accordance with
the provisions of section 16 of the CGST Act, 2017 can be set-off against
output tax payable on outward supplies. The two methods that are generally
followed for accounting of ITC are illustrated below:
I. Tax paid on inputs, input services and capital goods which are eligible
for ITC, may be debited to a separate account, e.g. ITC credit
receivable account. As and when the ITC is actually utilised against
payment of GST on outward supplies of goods or services or both,
appropriate accounting entries will be required to adjust the GST paid
out of "ITC receivable account" against the account maintained for
payment/ provision for GST on outward supplies of goods or services
or both. In this case, the purchase cost of the inputs would be net of
input tax. Therefore, the inputs consumed and the inventory of inputs
would be valued on the basis of purchase cost net of input tax. This
method is hereinafter referred to as “exclusive method”.
II. In the second alternative, the cost of inputs may be recorded at the
total amount paid to the supplier inclusive of input tax. To the extent
the ITC is utilised for payment of GST on outward supplies of goods or
services or both, the amount could be credited to a separate account,
i.e. ITC availed account. Out of the ITC availed account, the amount of
ITC availed in respect of consumption of inputs would be reduced from
the total cost of inputs consumed. This method is hereinafter referred
to as “inclusive method”.
The effect of section 145A is to reflect the figures on “inclusive method”.
26.10 It may be pointed out that the "inclusive method" is not permitted by
AS-2/ INDAS-2 (AS-2 made mandatory from accounting year beginning on or
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
after 01.04.1999). In view of the above, the adjustments under section 145A
will have to be made in all cases where 'exclusive method' is followed.
26.11 In this connection, it is worthwhile to note that the Memorandum
explaining the provisions of section 145A inserted by the Finance (No.2) Bill,
1998 states as follows:
“Computation of value of inventory.
The issue relating to whether the value of closing stock of the inputs,
work-in-progress and finished goods must necessarily include the
element for which MODVAT* credit is available has been the matter of
considerable litigation.
In order to ensure that the value of opening and closing stock (bold for
emphasis) reflect the correct value, it is proposed to insert a new
section to clarify that while computing the value of the inventory as per
the method of accounting regularly employed by the assessee, the
same shall include the amount of any tax, duty, cess or fees paid or
liability incurred for the same under any law in force.
The proposed amendment which is clarificatory in nature shall take
effect retrospectively from the 1st day of April, 1986 and will
accordingly apply in relation to assessment year 1986-87 and
subsequent years.
[Clause 45]”
26.12 It may be noted that while making the adjustments stated in
paragraphs above, the tax auditor should ensure that if any deduction is
claimed for any tax, duty, cess or fee on the items covered by aforesaid
paragraphs by way of debit in the profit and loss account, either in the earlier
year or in the year under report, adjustment for the same should be made in
such a manner that no double deduction is claimed for the same expenditure.
Similarly, adjustment should be made for any item of income to ensure that
the same item is not treated as income twice.
26.13 Where common inputs, input services and capital goods are used for
effecting both taxable including zero rated supplies and exempt supplies,
proportionate ITC of inputs, input services and of capital goods attributable to
exempt supplies should be calculated in terms of section 17 of the CGST
Act, 2017 read with rule 42 and rule 43 of the CGST Rules, 2017 and be
added to the cost of inputs, input services and capital goods as applicable.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Further, where input tax credit is blocked/not available, in terms of section 17
of the CGST Act, 2017, the same should also be added to the cost of the
inputs / input services / capital goods, as the case may be.
26.14 GST is collected from the customers on behalf of the GST authorities
and, therefore, its collection from the customers is not an economic benefit
for the enterprise. It does not result in any increase in the equity of the
enterprise. Accordingly, it should not be recognized as an income of the
enterprise. Similarly, the payment of GST should not be treated as an
expense in the financial statements of the enterprise. Therefore, it should be
credited to an appropriate account, say. ‘GST Payable Account’. The amount
of GST payable adjusted against the GST Credit Receivable Account and
amounts paid in cash will be debited to GST Payable account. The credit
balance in GST Payable Account at the year-end should be shown on the
‘Liabilities’ side of the balance sheet under the head ‘Current Liabilities’. In
case GST has not been charged separately but as a composite charge (such
as in the case of composition levy), the amount of GST paid needs to be
transferred to Indirect Expenses.
26.15 Section 145A of the Income-tax Act provides that the valuation of
purchase and sales of goods and inventory for the purpose of computation of
income from business or profession shall be made on the basis of method of
accounting regularly employed by the assessee but this shall be subject to
certain adjustments. Therefore, it is not necessary to change the method of
valuation of purchase, sale and inventory regularly employed in the books of
account. The adjustment provided for in this section should be made while
computing the income for the purpose of preparing the return of income.
Therefore, the recommended method for accounting of GST will not result in
non-compliance of section 145A of the Income-tax Act.
26.16 The adjustments envisaged by section 145A will not have any impact
on the trading account of the assessee. In other words, both under exclusive
method of accounting and inclusive method of accounting, the gross profit in
the trading account will remain the same.
27. 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;
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(d) Amount at which the asset is converted into stock-in-trade.
[Clause 15]
27.1 For furnishing the particulars required by clause 15, the provisions of
section 2(47), 45(2), 47(iv), 47(v) and 47A have to be kept in mind.
27.2 The conversion by the owner of an asset into or treatment of such
asset as stock-in-trade of a business carried on by him is treated as a
‘transfer’ within the meaning of section 2(47). Under section 45(2), such a
conversion or treatment of capital asset into stock-in-trade will be deemed to
be a transfer of the previous year in which the asset is so converted or
treated as stock-in-trade. However, the capital gains arising from such a
transfer will become chargeable in the previous year in which such converted
asset is sold or otherwise transferred. In the case of long-term capital asset,
indexation of cost of acquisition and cost of improvement, if any, will be with
respect to the previous year in which such conversion took place. The fair
market value of the asset, as on the date of such conversion or treatme nt as
stock-in trade, shall be deemed to be the full value of the consideration of the
asset. The excess of the sale price over the fair market value as on the date
of conversion would be treated as business income and taxed under the
head ‘profits and gains of business or profession’. The capital gains being
the difference between the cost of acquisition and the fair market value on
the date of the conversion or treatment as stock-in-trade will be chargeable
to tax in the year in which the asset is sold.
27.3 The particulars to be stated under clause 15 should be furnished with
respect to the previous year in which the asset has been converted into
stock-in-trade. The clause does not require details regarding the taxability of
capital gains or business income arising from such deemed transfer.
27.4 Under clause (a), description of the capital asset is required to be
mentioned, for example, shares, security, land, building, plant, machinery
etc.
27.5 Under Clause (b), the date of acquisition is to be reported. For
ascertaining the correct date, the tax auditor will have to refer the accounts
of the financial year in which such capital asset is acquired. The date
assumes importance for the purpose of determining whether the asset is
long-term or short-term in nature.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
27.6 Under clause (c), the cost of acquisition is required to be reported.
Here the cost of acquisition as per the books of account is to be mentioned.
In case of depreciable assets, the carrying cost appearing in the books will
be the written down value. But the value to be reported will be the original
cost of acquisition. Even in case of an asset acquired prior to the 1 st day of
April, 2001; the value to be reported will be the original cost of acquisition.
The assessee may exercise the option of considering the fair market value of
the asset as on 1 st April, 2001 for assets acquired prior to that date for the
purpose of computation of capital gains as provided under section 55(2)(b)(i)
read with proviso thereto. Further, in case of block of assets, a particular
asset loses its identity and therefore to report the original cost of acquisition
may not be possible in all cases. In case of corporate entities where the
requirements of CARO are applicable, the cost may be available from the
fixed asset register. However, in case of companies where CARO is not
applicable and other partnership concerns, the reporting requirements as to
the original cost of acquisition may not be practically possible.
27.7 Under clause (d), the amount recorded in the books of account at
which the asset is converted into stock-in-trade should be stated. Such an
amount may not be the fair market value as on the date of conversion or
treatment as stock-in-trade. If a value other than carrying cost is recorded,
then the auditor has to examine the basis of arriving at such a value. The
valuation of stock-in-trade is to be examined with reference to AS-2 –
Valuation of Inventories or Ind AS-2 – Inventories, as applicable. Non-
compliance with AS-2/IND AS-2 is to be suitably qualified in the main audit
report.
27.8 It is desirable that necessary accounting entry be passed in the books
of account at the time of conversion of the asset into or treatment of the
same as stock-in-trade.
27.9 In case of corporate assessee, any resolution passed in this behalf
can substantiate the fact of conversion of capital asset into stock- in- trade.
In the case of assessees like a proprietorship concern, prior to the
conversion of the asset into stock-in-trade, the details regarding the date of
acquisition and cost of acquisition may not be recorded in the books of
account. It is also possible that the year in which the capital asset is
acquired, the accounts of the assessee may not have been subjected to
audit. Also, an assessee can acquire a capital asset through various modes
such as discussed under section 49 of the Act. Under such circumstances,
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
the auditor may have to verify the cost and the date of acquisition. The
following broad principles need to be kept in mind.
27.10 While verifying the cost of acquisition of an item of property, plant and
equipment, the auditor should bear in mind the principles enunciated in
Accounting Standard (AS) 10, Property, Plant and Equipment/Ind AS 16 -
Property, Plant and Equipment. As per AS 10/Ind AS 16, the cost of
Property, Plant and Equipment comprises of its purchase price and any
attributable cost of bringing the asset to its working condition for its intended
use. Thus, in case of capital assets purchased by the assessee, it would
relatively be easy for the auditor to verify the cost of acquisition, the evidence
being provided by the supporting purchase invoices from the supplier, entries
appearing in the bank statements in respect of payment to the supplier,
entries appearing in the cash book/ bank statement for payment of cartage,
instalment etc. In case of self-constructed capital assets, the cost would
comprise those costs that relate directly to the specific capital asset and
those that are attributable to the construction activity in general and can be
allocated to the specific asset. The cost of the asset acquired in exchange of
other asset is either the fair value or the net book value of the asset given
up, whichever is more clearly evident, adjusted for any balancing payment or
receipt of cash or other consideration. In case the capital asset is recorded at
the net book value of the asset, the fixed asset register would provide the
prime evidence of the value. If, however the capital asset so acquired is
recorded at the fair value, the auditor would need to examine the basis for
arriving at the fair market value, for example, the valuer’s report, market
quotes (in case of listed securities). Where the valuer is internal/ external,
the tax auditor should have regard to the principles laid down in SA 620,
Using the Work of An Auditor’s Expert. In any case, the auditor would also
need to look into how the assessee has decided the value at which the asset
is recorded in the books of account is more clearly evident than the other
value. In case of a capital asset acquired by way of inheritance, the auditor
may find it difficult to verify the cost of acquisition to the original owner. In
case there does not exist any documentary evidence as to the cost of
acquisition of the asset to the original owner, say the sale/purchase
agreement, the auditor may need to rely upon the reports of the experts such
as valuers. In addition to the above, the auditor should also refer to the
guidance contained in the Guidance Note on Audit of Property, Plant and
Equipment issued by the Institute.
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28. 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.
[Clause 16 (a) to (e)]
28.1 Under this clause, various amounts falling within the scope of section
28 which are not credited to the profit and loss account are to be stated. The
information under sub-clauses (a), (d) and (e) of clause (16) is to be given
with reference to the entries in the books of account and records made
available to the tax auditor for the purpose of tax audit under section 44AB.
Sub-clauses 16 (b), (c) & (d) require information in respect of items which
may also be covered under section 28 and as such will also fall in clause 16
(a). However, those items which are reported in clauses 16(b), (c) and (d)
need not be reported in clause 16 (a). The tax auditor may obtain a
management representation in writing from the assessee in respect of all
items falling under this clause.
28.2 It may be possible that an item of income may be taxable under
certain specific section yet not credited to profit and loss account e.g. benefit
u/s 28(iv) tax on which is deducted u/s 194R. Such income should be
reported under clause 16(c).
28.3 Section 28 refers to:
(i) the profits and gains of any business or profession,
(ii) any compensation received on termination of employment,
agency etc.
(iii) income derived by a trade, professional or similar association
from specific services performed for its members,
(iiia) profits on sale of a licence granted under the Imports Control
Order, 1955,
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(iiib) cash assistance against exports,
(iiic) customs duty or excise repaid or repayable as drawback against
exports,
(iiid) profit on the transfer of DEPB Scheme being the Duty
Remission Scheme,
(iiie) profit on the transfer of DFRC being the Duty Remission
Scheme,
(iv) the value of any benefit or perquisite arising from business or
the exercise of a profession, whether—
(a) convertible into money or not; or
(b) in cash or in kind or partly in cash and partly in kind;
(clause (a)/(b) inserted w.e.f. AY 2024-25)
(v) any interest, salary, bonus, commission or remuneration, by
whatever name called, received by a partner of the firm from
such firm,
(va) any sum, whether received for (a) not carrying out any activity in
relation to any business or professions (b) not sharing any know
how, patent, copyright, trade mark, licence, franchise or any
other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or
processing of goods or provision for services,
(vi) any sum received under a Keyman insurance policy including
the sum allocated by way of bonus on such policy,
(via) the fair market value of inventory as on the date on which it is
converted into, or treated as, a capital asset,
(vii) any sum received on account of any capital assets (other than
land or goodwill or financial instrument) being demolished,
destroyed, discarded or transferred if the whole of the
expenditure on such capital assets has been allowed under
Section 35AD.
28.4 As per Explanation 2, where speculative transactions constitute a
business, such speculation business is deemed to be distinct and separate
business from any other business.
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28.5 The details of the following claims, if admitted as due by the
concerned authorities but not credited to the profit and loss account, are to
be stated under sub-clause (b).
(i) Pro forma credits
(ii) Drawback
(iii) Refund of duty of customs
(iv) Refund of excise duty
(v) Refund of service tax
(vi) Refund of sales tax or value added tax
(vii) Refund of Goods and Services Tax
(viii) Others
In respect of items falling under sub-clause (b), the tax auditor should
examine all relevant correspondence, records, assessee’s particulars on
portal of the concerned departments and evidence in order to determine
whether any particular refund/claim has been admitted as due and accepted
during the relevant financial year.
28.6 There may be practical difficulties in verifying the information in regard
to such refunds and credits. It may, therefore, be necessary for the tax
auditor to scrutinise the relevant files or subsequent records relating to such
refunds while verifying the particulars and also obtain an appropriate
management representation.
28.7 The words ‘admitted by the concerned authorities’ would mean
‘admitted by the authorities within the relevant previous year’.
28.8 The system of accounting followed in respect of these particular items
may also be brought out in appropriate cases. If the assessee is following
cash basis of accounting, it should be clearly brought out, since the
admittance of claims during the relevant previous year without actual receipt
has no significance in cases where cash method of accounting is followed.
Credits/claims which have been admitted as due after the relevant previous
year need not be reported here. Where such amounts have not been credited
in the profit and loss account but netted against the relevant expenditure/
income heads, such fact should be clearly brought out.
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28.9 Under sub-clause (c) of clause 16, the escalation claims accepted
during the previous year but not credited to the profit and loss account are to
be stated. The escalation claims accepted during the year would normally
mean “accepted during the relevant previous year”. If such amount has not
been credited to the profit and loss account, the fact should be brought out.
The system of accounting followed in respect of this particular item may also
be brought out in appropriate cases. If the assessee is following cash basis
of accounting with reference to this item, it should be clearly brought out
since acceptance of claims during the relevant previous year without actual
receipt has no significance in cases where cash method of accounting is
followed.
28.10 Escalation claims would normally arise pursuant to a contract
(including contracts entered into in earlier years), if so permitted by the
contract. Only those claims to which the other party has signified
unconditional acceptance could constitute accepted claims. Mere making of
claims by the assessee or claims under negotiations or claims which are sub-
judice [CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161
ITR 524 (SC)] cannot constitute claims accepted. The Auditor should take a
professional judgment about acceptance of claim based on facts and
circumstances of each case.
28.11 Sub-clause (d) covers any other items which the tax auditor considers
as an income of the assessee based on his verification of records and other
documents and information gathered, but which has not been credited to the
profit and loss account. In giving the details under sub-clauses (c) and (d),
due regard should be given to AS-9 - Revenue Recognition/ Ind AS 115
Revenue from Contracts with Customers, as applicable.
28.12 It may be noted that under clause (x) of section 2(24) of the Act; any
sum received by the assessee from his employees as contributions to any
provident fund or superannuation fund or any fund set up under the
provisions of the Employees' State Insurance Act, 1948, or any other fund for
the welfare of such employees, is considered as income. Further, as per
section 36(1)(va), any such contribution is allowed as a deduction if the sum
is credited by the assessee to the employees account in the relevant fund/s
on or before the due date as defined under Explanation 1 to section
36(1)(va). Therefore, if any such contribution is not paid on or before the due
date under the respective Act, then it becomes income of the assessee.
Similar information is also furnished in clause 20(b), therefore cross
referencing may be required.
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28.13 In case of dealer in immovable property, being land or building or both,
if such property is transferred at a price lower than value adopted or
assessable for payment of stamp duty, the difference if exceeds 110% of
consideration- is considered as income under provisions of section 43CA of
the Act. Of course, if stamp duty value exceeds fair market value, then
calculation is made with reference to FMV.
28.14 Information as stated in aforesaid paras is required to be furnished
under clause 16(d) as well as clause 17. Therefore, there should be cross-
referencing in these clauses.
28.15 The tax auditor should scrutinise all the items including casual and
nonrecurring items appearing in the books of account, particularly the credit
items, and ensure himself whether any such credit which is in the nature of
income has been credited to the profit and loss account or not.
28.16 Under sub-clause (e), capital receipt, if any which are of income
nature, which has not been credited to the profit and loss account has to be
stated. The tax auditor should use his professional expertise and judgement
in determining whether the receipt is capital or revenue. The tax auditor may
record various judicial pronouncements on which he has relied in his working
papers.
28.17 The following is an illustrative list of capital receipts which, if not
credited to the profit and loss account, are to be stated under this sub -
clause:
(a) Capital subsidy received in the form of Government grants which are
in the nature of promoters’ contribution i.e., they are given with
reference to the total investment of the undertaking or by way of
contribution to its total capital outlay. e.g. Capital Investment Subsidy
Scheme.
(b) Compensation for surrendering certain rights.
(c) Profit on sale of fixed assets/investments to the extent not credited to
the profit and loss account.
(d) Receipt of non-refundable deposits or forfeiture of any deposits not
credited to P&L.
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(e) Government grant in relation to a specific fixed asset where such grant
is shown as a deduction from the gross value of the asset by the
concern in arriving at its book value.
28.18 Equity, Loans and borrowings are not required to be stated under sub-
clause (e). The tax auditor may use his professional expertise and judgement
in determining whether the receipt is taxable or not for the purpose of
reporting under sub-clauses (a) to (d) of clause 16 of TAR and may report in
the observation para of audit report, disclosing the basis of the same.
28.19 If during the course of audit, auditor finds that certain income (e.g.
income referred to in section 41(1)) are not credited to profit and loss
account, the particulars of the same along with the amount is required to be
reported under this clause.
29. 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, please furnish:
Details of Consideration Value Whether provisions of
property received or adopted or second proviso to
accrued assessed or sub-section (1) of
assessable section 43CA or fourth
proviso to clause (x)
of sub-section (2) of
section 56 applicable?
[Yes/No]
(Clause 17)
29.1 Section 43CA is applicable where the assessee has transferred an
asset (other than a capital asset) being land or building or both and the value
of such an asset is less than the value adopted or assessed or assessable
by any State Government authority for the purpose of payment of stamp duty.
In such a case, for purpose of computing profit & gains from such transfer,
the value so adopted or assessed or assessable shall be deemed to be the
full value of consideration. However, if the value so adopted or assessed or
assessable does not exceed 110% of the consideration received or accruing
as a result of the transfer, then the consideration received or accruing as a
result of the transfer would be deemed to be the full value of consideration. It
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appears that reference to fourth proviso to section 56(2)(x) may not be
relevant here in the fourth column of the table as in clause 17.
29.2 Section 50C is applicable where the assessee has transferred a
capital asset being land or building or both and the value of such an asset is
less than the value adopted or assessed or assessable by any State
Government authority for the purpose of payment of stamp duty. In such a
case, for purpose of section 48, the value so adopted or assessed or
assessable by stamp duty authority shall be deemed to be the full value of
consideration. However, if the value so adopted or assessed or assessable
does not exceed 110% of the consideration received or accruing as a result
of the transfer, then the consideration received or accruing as a result of the
transfer would be deemed to be the full value of consideration.
29.3 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,
the auditor is required to furnish the following details:
(a) Details of property
(b) Consideration received or accrued
(c) Value adopted or assessed or assessable
29.4 In the column requiring the details of property, the auditor has to
furnish the details about the nature of property i.e. whether the property
transferred by him is land or a building along with the address of such
property. If the assessee has transferred more than one property, the details
of all such properties are required to be mentioned. The auditor should
obtain a list of all properties transferred by the assessee during the previous
year. He may also verify the same from the statement of profit and loss or
balance sheet, as the case may be. Attention is invited to the meaning of the
term “transfer” as defined in section 2(47) of the Act.
29.5 Under the heading “consideration received or accrued”, the auditor has
to furnish the amount of consideration received or accrued, during the
relevant previous year of audit, in respect of land/building transferred during
the year as disclosed in the books of account of the assessee.
29.6 For reporting the value adopted or assessed or assessable, the auditor
should obtain from the assessee relevant information with regard to sale of
Land or Building or both during the previous year. In case the property is not
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registered, the auditor may verify relevant documents from relevant
authorities or obtain third party expert like lawyer, solicitor representation to
satisfy the compliance of section 43CA/ section 50C of the Act. In
exceptional cases where the auditor is not able to obtain relevant documents,
he may state the same through an observation in his report in form 3CA/CB.
29.7 The auditor would have to apply professional judgment as to what
constitutes land or building e.g. whether leasehold right / development rights
/ TDR / FSI etc. would fall under these provisions or not, would require to be
evaluated based on facts & circumstances of transactions.
29.8 Auditor is also required to answer whether provisions of second
proviso to sub-section (1) of section 43CA or fourth proviso to clause (x) of
sub-section (2) of section 56 is applicable. Since the second proviso is not
applicable for the audit of AY 2023-24 and onwards, so ideally in all cases,
the reporting shall be 'No’ in this column.
29.9 If the value adopted for stamp duty exceeds the fair market value, then
calculation of difference between transaction value and fair market value is
considered for the purpose of ascertaining income under section 43CA or
section 50C, as the case may be. However, information to this effect is not
asked in the clause. Therefore, reporting should be made notwithstanding
this provision. Similar information is also furnished in clause 16(d), therefore
cross- referencing may be required.
30. 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
115BAC/115BAD (for assessment year 2021-2022 only).
(cb) Adjustment made to written down value of Intangible asset
due to excluding 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
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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, and
(iii) subsidy or grant or reimbursement, by whatever name
called.
(e) Depreciation allowable.
(f) Written down value at the end of the year.
[Clause 18 (a) to (f)]
30.1 Having regard to the nature of requirements prescribed, it may be
necessary for the tax auditor to examine:
(a) Classification of the asset
(b) Classification thereof to a block
(c) The working of actual cost or written down value
(d) The date of acquisition and the date on which it is put to use
(e) The applicable rate of depreciation
(f) The additions / deductions and dates thereof
(g) Adjustments required – specified as well as on account of sale, etc.
30.2 The word “allowable” implies that depreciation should be permissible
as a deduction, as per the provisions of the Act and the Rules. This would
require exercise of judgement having regard to the facts and circumstances
of the case, developments in law from time to time, etc.
30.3 For the purpose of determining the rate of depreciation, the tax auditor
has to examine the classification of the assets into various blocks. For
example, a particular asset may be classified as plant or machinery from the
viewpoint of one class of assessees, yet it may not be plant or machinery
from the viewpoint of another class of assessees. The purpose for which the
asset is used is also very material in this regard. Hence, the tax auditor
should ensure that the classification as made by the assessee is in
consonance with legal principles. In this connection, he should traverse
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through judicial pronouncements as well as through the past assessment
history of the assessee, and upon an analysis thereof, if he comes to the
conclusion that the matter is not free from doubt or controversy, he has to
indicate the fact in his report by way of suitable qualification. It may also be
necessary to rely upon technical data for determining the proper
classification of the block. Since the tax auditor is not a technical expert, he
has to obtain suitable certificate from concerned experts.
30.4 Once the classification has been ascertained and checked properly,
the rates applicable as per the Income-tax Rules, 1962 follow as a natural
corollary. The tax auditor must have due regard to the Income-tax Rules,
1962, relevant clarifications from the Department and judicial decisions.
30.5 Under sub-clauses (a) and (b), information in respect of description of
assets, block of assets under which the concerned asset is classifiable and
the rate of depreciation are to be stated. This will include information about
the existing assets. In respect of the existing assets, the computation of
depreciation would involve stating the opening written down value of the
block of assets which should be taken from the relevant income-tax records.
The auditor should ensure the opening block of assets matches with the
Income Tax Return filed for the immediately preceding previous year. The tax
auditor will be conducting the audit in the current year only. As such the tax
auditor can rely upon the classification of assets and written down value
stated in the income tax records available with the assessee. The tax audit or
should mention the fact that he has relied upon the income tax records of the
assessee in respect of the information regarding the classification of assets
and written down value of the existing assets.
30.6 If there is any dispute with regard to the classification of an asset in a
particular block or the rate of depreciation applied, the tax auditor must give
his working with suitable reasons. Further, there may be disputes in the
earlier years between the assessee and the Income-tax Department
regarding classification, rate of depreciation etc. in respect of which the tax
auditor should give suitable disclosure depending upon the facts and
circumstances of the case. Alternatively, where the tax auditor adopts a
system of classification different from the one adopted by the assessee,
suitable disclosure should be made regarding the effect thereof.
30.7 It will, therefore, be advisable to put a suitable note, at appropriate
place in Form No. 3CA or 3CB with regard to those items in respect of which
disputes for the earlier years are not resolved up to the date of giving the
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audit report and it should be clarified that the amount of depreciation
allowable may change as a result of any decision which may be received
after the audit report is given. This note can be in the following manner:
“NOTE: Certain disputes about
(a) the rate of depreciation on ________
(b) determination of WDV of block of assets relating to ___________ and
(c) ownership of ____________ have arisen in the assessment years
___________ for which assessments are pending/appeals are
pending. The figures of WDV and/or rate of depreciation mentioned in
the above statement may require modification when these disputes are
resolved. Therefore, the amount of depreciation allowable as stated in
the above statement will have to be accordingly modified.”
30.8 For the purpose of determination of actual cost, the tax auditor has to
be guided by the relevant legal provisions. Since determination of actual cost
has got accounting implications, he can rely on the relevant Accounting
Standards and Guidance Notes. Depreciation is also allowable on intangible
assets like know-how, patents, copyrights, trademarks, licenses, franchises
or any other business or commercial rights of similar nature. There may be
intangible assets like know-how, patents, copyrights, trade marks, licences,
franchises or any other business or commercial rights of similar nature for
which the assessee might have incurred costs. From 01.04.2021, intangible
asset being goodwill does not qualify for depreciation. The tax auditor should
examine this and the basis on which the cost of such intangible assets has
been arrived at.
30.9 The additions/deductions during the year have to be reported, with
dates. The tax auditor is advised to get the details of each asset or block of
asset added during the year or disposed off during the year with the dates of
acquisition/disposal. Where any addition was made, the date on which the
asset was put to use is to be reported. In respect of deductions, the sale
value of the assets disposed of along with dates should be mentioned. The
provisions of Section 36(1)(iii) and Explanation 8 to section 43(1) of the Act,
should be kept in mind for capitalization of interest to the cost of assets. The
tax auditor should check the working regarding the calculation of
depreciation allowable under the Act. To ascertain when the asset has been
put to use, the tax auditor could call for basic records like production
records/installation details/excise records/service tax records/ goods and
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service tax records/records relating to power connection for operating the
machine, title deeds or building completion certificate etc. in case of
immovable assets and any other relevant evidence. In the absence of any
specific documentation with regard to the effective date from which the asset
is put to use, he could get a representation letter from the management, in
respect of the assets acquired. He should examine whether the
apportionment of depreciation in cases like succession, amalgamation,
demerger etc. has been properly made. The auditor should reconcile the
additions made in books of account matches with that of additions made for
computation of depreciation for Income Tax purpose.
30.10 Section 43(1) of the Act defines actual cost as under:
“Actual Cost” means the actual cost of the assets to the assessee,
reduced by that portion of the cost thereof, if any, as has been met
directly or indirectly by any other person or authority.
Second proviso to section 43(1) provides that any expenditure for acquisition
of any asset etc. exceeding Rs 10,000 otherwise than account payee
cheque/draft drawn on a bank or use of electronic clearing system, then such
expenditure shall be ignored for determining actual cost. Further, section
43(1) has Explanations from 1 to 13 which provides for different situations for
the purpose of calculating the actual cost. Section 43(2) defines the word
“Paid” and Section 43(3) defines the word “Plant”. Section 2(11) defines
“Block of assets” and section 43(6) read with Explanations 1 to 7 defines
“Written Down Value”.
30.11 The tax auditor should also verify that the amount of GST input credit
deducted from cost of capital goods tallies with the credit availed on this
account.
30.12 The second adjustment relates to the change in the rate of exchange
of currency. Section 43A provides as follows:
(i) where an assessee has acquired any asset in any previous year from
a country outside India for the purposes of his business or profession
and,
(ii) in consequence of a change in the rate of exchange during any
previous year after the acquisition of such asset,
(iii) there is an increase or reduction in the liability of the assessee as
expressed in Indian currency (as compared to the liability existing at
the time of acquisition of the asset) at the time of making the payment
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towards the whole or part of the cost of the asset or towards
repayment of the whole or a part of the monies borrowed by him from
any person,
(iv) directly, or indirectly in any foreign currency specifically for the
purpose of acquiring the asset along with the interest, if any,
(v) the increase or reduction in the liability during the previous year which
is taken into account at the time of making the payment,
(vi) irrespective of the method of accounting followed by the assessee, is
to be added to, or as the case may be, deducted from the cost of the
asset as defined in clause (1) of section 43.
30.13 In other words, the extent of addition or reduction will be limited to the
exchange difference actually paid during the previous year. The tax auditor is
required to verify that the adjustments in the cost of fixed assets on account
of changes in the rate of exchange of currency in the schedule of fixed
assets prepared for computation of depreciation as per Income-tax Rules are
in accordance with the provisions of section 43A and information about such
adjustment is provided under sub-clause (ii) of clause 18(d). The Tax Auditor
may also prepare a reconciliation statement for his own records for any
different treatment followed for the purpose of books of account as per
applicable accounting treatment under Accounting Standards. The auditor
should also refer to the Explanations to section 43A.
30.14 The third adjustment relates to the subsidy or grant or reimbursement,
by whatever name called. Explanation 10 to section 43(1) provides that
where a portion of the cost of an asset acquired by the assessee has been
met directly or indirectly by the Central Government or a State Government
or any authority established under any law or by any other person, in the
form of a subsidy or grant or reimbursement (by whatever name called), , so
much of the cost as is relatable to such subsidy or grant or reimbursement
shall not be included in the actual cost of the asset to the assessee. As per
the proviso to the above Explanation, where such subsidy or grant or
reimbursement is of such nature that it cannot be directly relatable to the
asset acquired, such of the amount which bears to the total subsidy or
reimbursement or grant, the same proportion as such asset bears to all the
assets in respect of or with reference to which the subsidy or grant or
reimbursement is so received, shall not be included in the actual cost of the
asset to the assessee. Subsidy coming within the scope of Explanation 10 to
section 43(1) in respect of asset acquired in any earlier year(s) and received
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during the year has to be deducted from the written down value of such
assets in the year of receipt. Intangible assets being goodwill of a business
or profession does not qualify for depreciation from 01.04.2021 i.e. AY 2021-
22 (The Finance Act 2021). Goodwill was eligible for depreciation till AY
2020-21. For the purpose of working of depreciation, WDV as per sub-clause
(c) above as reduced by amounts reported in sub-clause (ca) and (cb) should
be considered. This amount is required to be reported in sub-clause (cc).
30.15 Finally, the amount of depreciation allowable and the WDV at the year
end have to be stated. Wherever a claim for depreciation involves any
reliance on any judgement or opinion or other contentions (as to its
classification, rate applicable, cost, date on which put to use etc.), it may be
advisable for tax auditor to disclose full particulars thereof and the basis on
which the depreciation allowable has been determined and vouched by him.
30.16 Explanation 5 inserted below sub-section (1) of section 32, to the
effect that the provisions of section 32(1) regarding allowing of depreciation
shall apply whether or not the assessee has claimed the deduction in respect
of depreciation in computing his total income. Thus, the claim for
depreciation is now mandatory and the written down value of each asset
every year has to be reduced by the amount of depreciation allowable under
the Income-tax Rules and the details required under the relevant sub-clauses
need to be stated.
30.17 Section 32(1)(iia) provides for additional depreciation to a concern
engaged in the business of manufacturing or production of an article or thing
or installation of a new machinery on fulfillment of the prescribed conditions
like specified percentage of increase in installed capacity. Additional
depreciation shall be allowable in respect of new machinery or plant installed
on or after 31st day of March, 2005, which is
(i) engaged in the business of manufacture or production of any article or
thing or
(ii) In the business of generation or generation or distribution of power
except those machinery or plant which before installation by the assessee
was used by any other person, machinery or plant installed in office premises
or residential accommodation, office appliances, road transport vehicles and
that machinery or plant the actual cost of which is allowed in computing the
income. Where assessee is opting for payment of income-tax under section
115BA, 115BAA, 115BAB, 115BAC, 115BAD or 115BAE (applicable to
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specified co-operative society assessee w.e.f. AY 2024-25 onwards), claim
for depreciation under section 32(1)(iia) cannot be made. The tax auditor will
need to verify the claim of additional depreciation under this clause as well.
The tax auditor has to examine whether the assessee has opted for payment
of income tax under section 115BA, 115BAA, 115BAB, 115BAC or 115BAD;
he may refer to clause 8a in this regard.
30.18 Wherever the full deduction of the cost of capital goods is allowed (e.g.
expenditure on Scientific Research u/s. 35), the auditor should verify that the
cost of such asset is not included in the block of assets for the purpose of
depreciation. The Auditor should also ensure that the Income Computation
and Disclosure Standard (ICDS) V relating to tangible fixed assets is duly
considered for working out the amounts.
30.19 The tax auditor has to keep in mind the above guidance while
furnishing details in respect of this clause in the format provided in the e -
filing utility.
30.20 Attention is invited to sub-section (2) of section 32 which provides that
where, in the assessment of the assessee, full effect cannot be given to any
allowance under section 32(1) in any previous year, the allowance or the part
of the allowance to which effect has not been given, as the case may be,
shall be added to the amount of the allowance for depreciation for the
following previous year and deemed to be part of that allowance, or if there is
no such allowance for that previous year, be deemed to be the allowance for
that previous year, and so on for the succeeding previous years. Clause 32
deals with unabsorbed depreciation. Therefore, this information is not
expected in reporting under this clause.
31. Amounts admissible under sections
Section Amount Amounts admissible as per the provisions of
debited the Income-tax Act, 1961 and also fulfills the
to profit conditions. If any specified under the relevant
and provisions of Income-tax Act, 1961 or Income-
loss tax Rules, 1962 or any other guidelines,
account circular, etc., issued in this behalf.
32AC
32AD
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33AB
33ABA
35(1)(i)
35(1)(ii)
35(1)(iia)
35(1)(iii)
35(1)(iv)
35(2AA)
35(2AB)
35ABB
35AC
35AD
35CCA
35CCB
35CCC
35CCD
35D
35DD
35DDA
35E
[Clause 19]
31.1 The assessee can claim deduction under the sections 32AC, 32AD,
33AB, 33ABA, 35, 35ABB, 35AC, 35AD, 35CCA, 35CCB, 35CCC, 35CCD,
35D, 35DD, 35DDA and 35E subject to the terms and conditions mentioned
in these Sections. Where assessee has opted to pay income-tax under
provisions of section 115BA, 115BAA, 115BAB, 115BAC or 115BAD; the
assessee is not entitled to claim deductions under certain sections like
section 32AD, 33AB, 33ABA etc.
31.2 In case the assessee has obtained a separate Audit Report for
claiming deductions under any of these sections, he must make a reference
to that report while giving the details under this clause.
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31.3 The Tax Auditor should indicate the amount debited to the Profit &
Loss Account and the amount actually admissible in accordance with the
applicable provisions of law.
31.4 The amount not debited to the Profit & Loss Account but admissible
under any of the Sections mentioned in the clause has to be stated. For
example, sections 33AB and 33ABA allow deduction in respect of amount
deposited in designated account for specified purposes which, as per
accounting principles, are not to be debited to the Profit & Loss Account. In
this connection, the Tax Auditor has to work out, on the basis of the
conditions prescribed in the concerned Section, the amount admissible there
under and report the same.
31.5 An assessee may be eligible for deduction under one or more sub-
sections of section 35. In such a case, the Tax Auditor should state the
deduction allowable under each sub-section separately under applicable
part, i.e. the amount deductible in respect of the amount debited in Profit &
Loss Account and the amount not debited to the Profit & Loss Account.
31.6 The Tax Auditor should also ensure the eligibility of the expenditure/
payment for deduction and compliance of the conditions prescribed in the
sub-section including approval from the relevant/prescribed authority,
notification issued by the Central Government, any other guideline, Circular
etc. issued in this behalf. Tax auditor should also refer Rule 6 of Income-tax
Rules, 1962.
31.7 In case the auditor relies on a judicial pronouncement, he may mention
the fact in his observations para provided in Form No. 3CA or Form No. 3CB,
as the case may be.
31.8 The following Table summarizes Sub-section wise eligibility,
requirement of compliance of the conditions and the amount of deductions
required to be mentioned under this clause (The summary is only illustrative
and Tax Auditor is advised to refer actual provision of the Act at the time of
signing of the audit report):
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Table showing deductions applicable from A.Y. 2023-24 onwards (as per
law prevailing on 1-4-2023)
Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
33AB Amount deposited in Deduction is allowed for the
Tea/Coffee/Rubber least of the following:
Development Account (a) Sum equal to the amount or
the aggregate of the amounts
so deposited.(b) Sum equal to
40% of the profits of such
business.
33ABA Where an amount is being Deduction is allowed for the
deposited by an assessee least of the following:
in a scheme approved by (a) Sum equal to the amount or
the Government of India in the aggregate of the amounts
the Ministry of Petroleum so deposited.
and Natural Gas for the (b) Sum equal to 20% of the
purpose of prospecting or profits of such business
extraction etc. of petroleum
or natural gas.
35(1)(i) Any Expenditure other than 100% of the expenditure
Capital Expenditure
incurred by the assessee
for scientific research
related to its own business.
35(1)(ii) Amount paid to Research 100% of amount
association which has as paid/contributed from A.Y.
its object the undertaking 2021-22 and onwards
of scientific research
Or
amount paid to a
University, college or other
institutions to be used for
scientific research.
Provided that, such
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Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
association, university,
college or other institution
is approved and is
specified as such, by
notification in the official
gazette, by Central
Government.
35(1)(iia) Amount paid to a Company 100% of amount paid from A.Y.
which is registered in India, 2018-19
having its main object of
carrying out of scientific
research and development
and is approved by the
jurisdictional Chief
Commissioner of Income
Tax in the prescribed
manner.
35(1)(iii) Amount paid to a research 100% of amount paid from AY
association which has as 2018-19.
its main object the
undertaking of research in
social science or statistical
research
Or
Amount paid to a
university, college or other
institutions to be used for
research in social science
or statistical research.
Provided that, such
association, university,
college or other institution
is approved and is
specified as such, by
notification in the official
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Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
gazette, by Central
Government.
35(1)(iv) Expenditure of capital 100% of the capital expenditure
nature on scientific incurred
research, other than
expenditure on acquisition
of any land, incurred
related to the business
carried on by the assessee.
35(2AA) Any amount paid to 100% of amount paid from A.Y.
National Laboratory; or a 21-22 and onwards.
University; or Indian
Institute of Technology or
specified person as defined
in the Explanation 2 to the
section with a specific
direction that the said sum
shall be used for scientific
research undertaken under
a programme approved by
the prescribed authority.
35(2AB) Deduction is available only 100% of Expenditure incurred
to company engaged in from A.Y. 2021-22 and onwards.
business of biotechnology
or in any business of
manufacture or production
of any article or thing, not
being an article or thing
specified in the list of the
Eleventh Schedule incurs
any expenditure on
scientific research (not
being expenditure in the
nature of cost of any land
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Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
or building) on in-house
research and development
facility as approved by the
prescribed authority
35ABB Any expenditure, being in Deduction equal to the
the nature of capital appropriate fraction of the
expenditure incurred for amount of such expenditure.
acquiring any right to Where “appropriate fraction”
operate telecommunication means the fraction the
services [either before the numerator of which is one and
commencement of the the denominator of which is the
business to operate total number of the relevant
telecommunication services previous years;
or thereafter at any time
during any previous year]
35AC Expenditure by way of 100% of such expenditure
payment of any sum to a (No deduction available after AY
public sector company or a 2018-19)
local authority or to an
association or institution
approved by the National
Committee for carrying out
any eligible project or
scheme
35AD Deduction in respect of any Setting up and Operating cold
expenditure of capital chain facility-100% of
nature incurred wholly & expenditure
exclusively for any Setting up and Operating
specified business. warehousing facility for storage
of Agriculture produce-100% of
expenditure
Laying and operating a cross
country natural gas pipeline
network for distribution-100% of
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
expenditure
Building and operating a new
Hotel in India, of two star or
above category- 100% of such
expenditure
Building and operating a new
Hospital in India, with at least
one hundred beds for patients-
100% of expenditure
Developing and building a
housing project under a scheme
for slum rehabilitation-100% of
expenditure
Developing and building a
housing project under a scheme
for affordable housing-100% of
expenditure
Production of fertilizer in India-
100% of expenditure
Setting up and operating an
inland container depot or a
container freight station-100%
of expenditure
Bee-keeping and production of
honey and beeswax-100% of
expenditure
Setting up and operating a
warehousing facility for storage
of sugar-100% of expenditure
Laying and operating a slurry
pipeline for the transportation of
iron ore – 100% of expenditure
w.e.f AY 2015-16
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
Setting and operating a semi-
conductor wafer fabrication
manufacturing unit – 100% of
expenditure wef AY 2015-16
35CCA Expenditure by way of 100% of expenditure
payment to association and
institutions for carrying out
rural development
programmes
35CCB Expenditure by way of 100% of expenditure
payment to associations
and institutions for carrying
out programmes of
conservation of natural
resources
35CCC Expenditure on agricultural 100% of expenditure from AY
extension project notified 2021-22
by the Board
35CCD Expenditure incurred by a 100% of expenditure from AY
company on any skill 2021-22
development project
notified by the Board
35D Expenditure incurred by an One fifth of such expenditure for
Indian Company or a each of the five successive
person who is resident in previous years beginning with
India on amortization of the previous year in which
certain preliminary business commences or as the
expenses. case may be.
35DD Amortisation of One fifth of such expenditure for
Expenditure incurred by an each of the five successive
Indian Company for the previous years beginning with
purpose of amalgamation the previous year in which
or demerger amalgamation or demerger
takes place.
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Section Eligible Amount/Quantum of
& Sub- expenditure/payment Deduction
section
35DDA Expenditure incurred by One-fifth of the amount so paid
way of payment of any sum shall be deducted in computing
to an employee in the profits and gains of the
connection with his business for that previous year,
voluntary retirement, in and the balance shall be
accordance with any deducted in equal installments
scheme or scheme of for each of the four immediately
voluntary retirement. succeeding previous years.
35E Deduction for expenditure One tenth of amount of such
on prospecting or expenditure for each of ten
extraction or production of successive previous years.
certain minerals.
31.9 Where under any section, an assessee is eligible for deduction under
one or more of the sub-sections of the said section, the Tax Auditor should
certify the amount of deduction available under each sub-section separately
in the applicable part, i.e. the amount deductible in respect of the amount
debited to Profit & Loss Account and the amount not debited to the Profit &
Loss Account.
32. (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)]
(b) Details of contributions received from employees for
various funds as referred to in section 36(1)(va):
Serial Nature Sum Due The The actual
number of received date for actual date of
fund from payment amount payment
employees paid to the
concerned
authorities
[Clause 20 (a) and (b)]
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32.1 Section 36(1)(ii) provides for deduction of any sum paid to an
employee as bonus or commission for services rendered where such sum
would not have been payable to him as profit or dividend, if it had not been
paid as bonus or commission. In other words, if bonus or commission is in
the nature of profit or dividend, it may not be normally allowable as a
deduction unless such payment is wholly and exclusively made to the
employee [Shahzada Nand & Sons v. CIT [1977)] 108 ITR 358 (SC).
32.2 Under Clause 20(b), the requirement is only in respect of the
disclosure of the amount and the tax auditor is not expected to express his
opinion about its allowability or otherwise. The tax auditor should verify the
employment/ contract details of the employees so as to ascertain the nature
of payments.
32.3 Section 36(1)(va) of the Act permits deduction of any sum received by
the assessee from any of his employees to which the provisions of section
2(24)(x) are applicable, if it is credited by the assessee to the account of the
employees in the relevant statutory fund on or before the due date.
32.4 Section 2(24)(x) includes within the scope of income any sum received
by the assessee from his employees as contributions to any provident fund
or superannuation fund or ESI Fund or any other Fund for employees’
welfare (hereafter referred to as “Welfare Fund”). The Finance Act 2021 by
inserting Explanation 5 to section 43B has clarified that the provisions of
section 43B are not applicable to a sum received by the assessee from any
of his employees to which the provisions of section 2(24)(x) applies.
32.5 As per the explanation provided in section 36(1)(va), “due date” means
the date by which the assessee is required as an employer to credit an
employee’s contribution to the employee’s account in the relevant fund under
any Act., rule, order or notification issued there under or under any standing
order, award, contract of service or otherwise, i.e., the date by which it is
required to be credited as per the provisions of the applicable law etc. In
respect of such sum, if any extension is granted by respective authorities, it
shall be considered. This can be taken into consideration for determining the
due date of payment.
32.6 The tax auditor should get a list of various contributions recovered
from the employees which come within the scope of this clause and the date
on which they are deposited. He should also verify the documents relating to
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provident funds and other welfare funds. He should verify the agreement
under which employees have to make contributions to provident fund and
other welfare funds. The ledger account of contributions from employees
should be reviewed; the due dates of payments and the actual dates of
payment should be verified with the evidence available. In view of the
voluminous nature of the information, the tax auditor can apply test checks
and compliance tests to satisfy himself that the system of recovery and
remittance is proper. Under this clause, details regarding the nature of fund,
details of the amount deducted, due date for payment, actual amount paid
and actual date of payment to the concerned authorities in respect of
provident fund, ESI fund or other staff welfare fund have to be stated.
32.7 The tax auditor should maintain the following information in his
working papers for the purpose of reporting in the following format:
(a)
Description Amount
1 2
(b)
Serial Nature Sum Due The The actual
number of received date for actual date of
fund from payment amount payment
employees paid to the
concerned
authorities
1 2 3 4 5 6
33. (a) Please furnish the details of amounts debited to the profit
and loss account, being in the nature of Capital, personal,
advertisement expenditure etc.
[Clause 21(a)]
Nature Serial Particulars Amount in
number Rs.
Capital Expenditure
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Nature Serial Particulars Amount in
number Rs.
Personal Expenditure
Advertisement
expenditure in any
souvenir, brochure,
tract, pamphlet or the
like published by a
political party
Expenditure incurred at
clubs being entrance
fees and subscriptions
Expenditure incurred at
clubs being cost for
club services and
facilities used.
Expenditure by way of
penalty or fine for
violation of any law for
the time being force
Expenditure by way of
any other penalty or
fine not covered above
Expenditure incurred
for any purpose which
is an offence or which
is prohibited by law
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
34. (b) Amounts inadmissible under section 40(a):
(i) as payment to non-resident referred to in sub-clause (i)
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(B) Details of payment on which tax has been deducted
but has not been paid during the previous year or in
the subsequent year before the expiry of time
prescribed under section 200(1)
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(V) amount of tax deducted
(ii) as payment referred to in sub-clause (ia)
(A) Details of payment on which tax is not deducted:
(I) Date of payment
(II) Amount of payment
(III) Nature of payment
(IV) Name and address of the payee
(B) Details of payment on which tax has been deducted
but has not been paid on or before the due date
specified in sub-section (1) of section 139.
(I) Date of payment
(II) Amount of payment
(III) Nature of payment
(IV) Name and address of the payer*
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(V) Amount of tax deducted
(VI) Amount out of (V) deposited, if any
(iii) Under sub-clause (ic) [wherever applicable]
(iv) Under sub-clause (iia)
(v) Under sub-clause (iib)
(vi) Under sub-clause (iii)
(A) Date of payment
(B) Amount of payment
(C) Name and address of the payee
(vii) Under sub-clause (iv)
(viii) Under sub-clause (v)
* should be read as “payee” for proper reporting
[Clause 21(b)]
35. (c) Amounts debited to profit and loss account being, interest,
salary, bonus, commission or remuneration inadmissible
under section 40(b)/40(ba) and computation thereof;
[Clause 21(c)]
36. (d) Disallowance/deemed income under section 40A(3):
(A) On the basis of the examination of books of account
and other relevant documents/evidence, whether the
expenditure covered under section 40A(3) read with
rule 6DD were made by account payee cheque drawn
on a bank or account payee bank draft. If not, please
furnish the details:
Serial Date of Nature of Amount Name and
number payment payment Permanent
Account
Number or
Aadhaar
Number of
the payee, if
available
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(B) On the basis of the examination of books of account
and other relevant documents/evidence, whether the
payment referred to in section 40A(3A) read with rule
6DD were made by account payee cheque drawn on a
bank or account payee bank draft If not, please
furnish the details of amount deemed to be the profits
and gains of business or profession under section
40A(3A);
Serial Date of Nature of Amount Name and
number payment payment Permanent
Account
Number or
Aadhaar
Number of
the payee, if
available
[Clause 21(d)]
37. (e) provision for payment of gratuity not allowable under
section 40A(7);
[Clause 21(e)]
38. (f) any sum paid by the assessee as an employer not allowable
under section 40A(9);
[Clause 21(f)]
39. (g) particulars of any liability of a contingent nature;
[Clause 21(g)]
40. (h) amount of deduction inadmissible in terms of section 14A
in respect of the expenditure incurred in relation to income
which does not form part of the total income
[Clause 21(h)]
41. (i) amount inadmissible under the proviso to section 36(1)(iii)
[Clause 21(i)]
33. Clause 21
This clause requires the tax auditor to state the amount of expenditure
incurred by the assessee in respect of various items listed above. These
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
expenses may be allowable or may not be allowable or may be allowable
subject to certain limits. It is important to note that the amount of expenditure
in respect of each of the items is required to be stated. Accordingly, tax
auditor will have to obtain the information and make necessary enquiries in
that behalf. It will necessitate verification of books of account and other
relevant documents, basis of classification, groups under which such
expenses have been debited, and so on.
Clause 21(a) - Expenditure in the nature of capital, personal,
advertisement expenditure etc.
Expenditure of Capital nature:
33.1 Capital expenditure is not allowable in computing business income
unless specifically provided in any sections of the Act. The word “capital
expenditure” is not defined in the Act and no conclusive test or rules can be
laid down to determine whether a particular expenditure is capital or revenue
in nature. Different tests have been applied by the courts in different cases
depending upon the facts and circumstances of each case and the case law
on the subject as evolved over a period of years gives guidance for
determining the nature of expenditure.
33.2 Some tests which, however, are generally applied to determine
whether a particular item of expenditure is of capital nature, are set out
hereunder:
(i) Whether it brings into existence an asset or advantage of enduring
benefit. The question whether a particular benefit is of an enduring or
permanent nature will depend upon the facts and circumstances of
each case, the concept of permanency being relative.
(ii) Whether it is referable to fixed capital or fixed assets in contrast to
circulating capital or current assets.
(iii) Whether it relates to the basic framework of the assessee’s business.
(iv) Whether it is an expenditure to acquire an intangible asset.
33.3 The above factors are not exhaustive and the tax auditor is required to
verify the expenditure based on facts of the case after considering the
applicable provisions of the Act.
33.4 The nature of receipt in the hands of the recipient is not a determining
factor to decide the nature of payment in the hands of payer. If the amount is
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
in the nature of capital receipt in the hands of the payee, it does not
necessarily imply that it is a capital expenditure for the payer and vice versa.
The case of the payer has to be considered independently based on the facts
concerning him.
33.5 Under the Act, capital expenditure of certain types e.g., on scientific
research referred to in section 35, is deductible in computing the income.
Ordinarily, the capital expenditure should not be debited to profit and loss
account. The tax auditor needs to keep in mind that the accounting standards
also apply in respect of financial statements audited under section 44AB of
the Act. Therefore, besides disclosing the amount of such capital expenditure
debited to profit and loss account under this clause, the tax auditor should
give suitable disclosure/ qualifications in para 3(a) of Form No. 3CB,
depending on the facts of the case.
33.6 The details of capital expenditure, if any, debited to the profit and loss
account should be maintained in a classified manner stating the amount
under various heads separately. Since part of this capital expenditure may be
allowable as deduction in the computation of total income, it is advisable to
maintain particulars regarding the nature of expenditure, the amount of
expenditure incurred, and the relevant provision under which the expenditure
is admissible. Preliminary expenses incurred by the assessee which is
capital expenditure is debited to profit and loss account and therefore should
be reported. However, the total amount of capital expenditure debited to the
profit and loss account is to be reported under this clause in the e-filing
portal.
Expenditure of personal nature:
33.7 Personal expenses debited to the profit and loss account are to be
specified under this sub-clause as they are not deductible in the computation
of total income under section 37. It may be noted that the word “personal” is
confined to and attached with the “assessee” and not necessarily to and with
persons other than the assessee.
33.8 Section 143(1)(e) of the Companies Act 2013 specifically requires the
auditor to inquire whether personal expenses have been charged to revenue
account. In the case of a person whose accounts of the business or
profession have been audited under any other law, the tax auditor will have
to report in respect of personal expenses debited in the profit and loss
account. In the case of a person who carries on business or profession but
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
who is not required by or under any other law to get his accounts audited, the
tax auditor will have to verify the personal expenses. if debited in the
expenses account while conducting the audit and verify the amount of
expenses mentioned under this clause.
33.9 The tax auditor is advised to maintain the following details as part of
his working papers for the purpose of reporting in the format provided in the
e-filing utility:
Sl. No. Nature and Account Amount of Remarks
particulars head under expenditure
of which
expenditure debited
1 2 3 4 5
Expenditure on advertisement in any souvenir, brochure, tract,
pamphlet or the like, published by a political party:
33.10 Section 37(2B) provides that no allowance shall be made in respect of
expenditure incurred by an assessee on advertisement in any souvenir,
brochure, tract, pamphlet or the like published by a political party. Therefore,
the expenditure of this nature should be segregated and reported under this
clause.
33.11 The tax auditor may come across advertising expenditure incurred on
advertising in a souvenir, brochure, tract, pamphlet or journal published by a
trade union or a labour union formed by a political party. The trade union or
labour union though promoted or formed by a political party may have a
distinct legal entity. In that event, expenditure incurred by the assessee by
way of advertisement given in the souvenir, brochure, tract, pamphlet or
journal published by the trade union or the labour union is not required to be
indicated against clause 21(a) in Form No. 3CD. If the trade union or labour
union formed by the political party does not have a separate and distinct
legal entity, then the expenditure incurred on such an advertisement will
have to be indicated against this clause.
33.12 The auditor may also keep in mind the provisions of section 80GGB
and 80GGC which allow deduction in respect of contribution made by
corporate and non-corporate assessees respectively to political parties and
electoral trust, as required to be reported by him in clause 33 of Form no.
3CD.
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Expenditure incurred at clubs being cost for club services and facilities
used, entrance fees and subscriptions:
33.13 The amount of payments made to clubs by the assessee during the
year being cost for club services and facilities used should be indicated
under this clause. The payments may be for entrance fees as well as
membership subscription and for catering and other services by the club,
both in respect of directors and other employees in case of companies and
for partners or proprietors in other cases. The fact whether such expenses
are incurred in the course of business or whether they are of personal nature
should be ascertained. If they are personal in nature, they are to be shown
separately under Clause 21(a) referred to earlier.
33.14 Details of payments made to clubs are also required by tax authorities
for the purpose of determining whether any portion of club expenses could
be treated as perquisite in the hands of the person concerned. All payments
made to credit card agencies should be carefully scrutinised. Credit card
agency is nothing but credit/collecting agency. In order to determine whether
the payments have been made to a club, one has to look into the substantive
activity of the institution concerned.
33.15 This clause requires reporting of particulars and the amount of such
expenses incurred in the respective fields. However, the following particulars
may be maintained as working papers by the auditor for the purpose of
reporting in the format provided in the e-filing utility:
Sr. Name of Nature of Amount paid
No. the Club
Entrance/ Subscription Cost of Remarks
admission expenses Club
Fees Services
and
facilities
used
(1) (2) (3) (4) (5) (6)
Expenditure by way of penalty or fine for violation of any law for the
time being in force; Expenditure by way of penalty or fine not covered
above; Expenditure incurred for any other purpose which is an offence
or is prohibited by law:
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33.16 This clause requires separate reporting of penalty or fine for violation
of any law for the time being in force, and any other penalty or fine. The tax
auditor should obtain in writing from the assessee the details of all payments
by way of penalty or fine for violation of any laws have been made and paid
or incurred during the relevant previous year and how such amounts have
been dealt with in the books of accounts produced for audit. It has been
stated in Explanation 3 to section 37 that the expression "expenditure
incurred by an assessee for any purpose which is an offence or which is
prohibited by law" under Explanation 1, shall include and shall be deemed to
have always included the expenditure incurred by an assessee, —
(i) for any purpose which is an offence under, or which is prohibited by,
any law for the time being in force, in India or outside India; or
(ii) to provide any benefit or perquisite, in whatever form, to a person,
whether or not carrying on a business or exercising a profession, and
acceptance of such benefit or perquisite by such person is in violation
of any law or rule or regulation or guideline, as the case may be, for
the time being in force, governing the conduct of such person; or
(iii) to compound an offence under any law for the time being in force, in
India or outside India.
33.17 The tax auditor may not be an expert to decide the nature of payment
as to whether it is prohibited by law or not and may not be aware of the
intricacies of all the laws of the land. He can rely on the expert opinion. It
must be borne in mind that the tax auditor while reporting under this clause is
not required to express any opinion as to the allowability or otherwis e of the
amount of penalty or fine for violation of law. He is only required to give the
details of such items as have been charged in the books of account. This
clause covers only penalty or fine for violation of law and not the payment for
contractual breach or liquidator damages. The tax auditor should keep in
mind the difference between the amount prohibited by law and the amount
paid which is compensatory in nature under the relevant Statue. Supreme
Court in Mahalakshmi Sugar Mills Co. Ltd. vs CIT (123 ITR 429) and CIT vs
Hyderabad Allwyn Metal Works Ltd (172 ITR 113 SC) wherein it was held
that there is a distinction between amount paid by the assessee as
compensatory in nature or penal in nature and only amounts paid in penal
nature were not allowable. While stating the particulars under this clause, the
tax auditor should also take into consideration the concept of materiality.
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33.18 In order to ascertain the facts whether the sum debited in the profit
and loss account is by way of penalty or fine for any violation of law, the tax
auditor will have to refer to the relevant law under which the amount has
been paid or incurred and ascertain whether such amount is in the nature of
penalty or fine. He should also ascertain all the facts by having recourse to
the order of the jurisdictional authority which has levied the penalty or fine.
Even if the assessee is contesting such an order before higher authorities,
the same will not be relevant and the mere point for ascertaining is whether
such sum is debited to the profit and loss account and if yes, the same has to
be disclosed.
33.19 The courts have laid down that any penalty or fine for violation of law
is not admissible as expenditure. It is in this context that the requirement
stipulated by clause 21(a) is to be answered.
33.20 The following Explanation to section 37(1) of the Act has been inserted
by Finance Act (No.2) Act, 1998 with effect from assessment year 1962 -63.
"For the removal of doubts, it is hereby declared that any expenditure
incurred by an assessee for any purpose which is offence or which is
prohibited by law shall not be deemed to have been incurred for the
purpose of business or profession and no deduction or allowance shall
be made in respect of such expenditure".
33.21 Under this sub-clause, any expenditure incurred by an assessee for
any purpose which is an offence or which is prohibited by law is to be stated.
33.22 Any expenditure in consequence of violation of law like penalty or fine
levied for evading provisions of the Act, FEMA, Excise and Customs law etc.,
cannot be claimed as deduction under the Act. A penalty imposed for
violation of any law during the course of trade cannot be described as a
commercial loss. Even if the need for making payments has arisen out of
trading operations, the payments are not wholly and exclusively for the
purpose of the trade. Violation of law is not a normal incidence of business.
This principle was laid down by Hon'ble Supreme Court in case of CIT v.
Maddi Venkataratnam & Co. (P) Ltd [1998] 96 Taxman 643 and in the case
of Hazi Aziz Shekoor Bros v. CIT [1961] 41 ITR 350. In both the cases it was
held that one can carry business or his trade without violating the law.
33.23 In Prakash Cotton Mills (P) Ltd. v CIT [1993] 201 ITR 684 (SC), it has
been held that whenever any statutory impost paid by an assessee by way of
damages or penalty or interest is claimed as an allowable expenditure under
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section 37(1) of the Act, the assessing authority is required to examine the
scheme of the provisions of the relevant Statute providing for payment of
such impost notwithstanding the nomenclature of the impost as given by the
Statute, to find whether it is compensatory or penal in nature.
33.24 The authority has to allow deduction under section 37(1) wherever
such examination reveals the concerned impost to be purely compensatory in
nature. Wherever such impost is found to be of a composite nature, that is,
partly of compensatory nature and partly of penal nature, the authority would
have to bifurcate the two components of the impost and give deduction of
that component which is compensatory in nature and refuse to give
deduction of that component which is penal in nature. The above principle
was reiterated in the case of Swadeshi Cotton Mills (1998) 233 ITR 199.
33.25 Further, in CIT v Ahmedabad Cotton Mfg. Co. Ltd. [1993] 205 ITR
163(SC), the Supreme Court held that what needs to be done by an
Assessing Authority under the Act, in examining the claim of an assessee
that the payment made by such assessee was a deductible expenditure
under section 37 although called a penalty, is to see whether the law or
scheme under which the amount was paid, required such payment to be
made, as penalty or as something akin to penalty, that is, imposed by way of
punishment for breach for infraction of the law or the statutory scheme. If the
amount so paid is found to be not a penalty or something akin to penalty due
to the fact that the amount paid by the assessee was in exercise of the
option conferred upon him under the levy, law or scheme concerned, then
one has to regard such payment as business expenditure of the assessee,
allowable under section 37 as incidental to business laid out and expended
wholly and exclusively for the purposes of the business.
33.26 In case of Malwa Vanaspati & Chemical Co. v. CIT [1997] 225 ITR
383(SC), it was held that where the assessee is required to pay an amount
comprising both the elements of compensation and penalty, the
compensation is allowable as business expenditure, but not the penalty.
33.27 Further, the CBDT clarified this position vide Circular 722 dated
23.12.1998 whose operative part reads as follows: Section 37 of the Income-
tax Act is amended to provide that any expenditure incurred by an assessee
for any purpose which is an offence or which is prohibited by law shall not be
deemed to have been incurred for the purposes of business or profession
and no deduction or allowance shall be made in respect of such expenditure.
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This amendment will result in disallowance of the claims made by certain
assessees in respect of payments on account of protection money, extortion,
hafta, bribes etc. as business expenditure. It is well decided that unlawful
expenditure is not an allowable deduction in computation of income. This
amendment will take effect retrospectively from 1st April, 1962 and will,
accordingly, apply in relation to the assessment year 1962-63 and
subsequent years.
33.28 Where the penalty or fine is in the nature of penalty or fine only, the
entire amount thereof will have to be stated. As discussed above, with
reference to certain penalty/penal interest, courts have held that it is partially
compensatory payment and partially in the nature of penalty. In such a case,
on the basis of appropriate criteria, the amount charged will have to be
bifurcated and only the amount relating to penalty may be stated.
34. Clause 21(b) - amounts inadmissible under section
40(a)
34.1 This clause has been substantially expanded to furnish detailed
information for deduction and deposit of TDS. Section 40(a) specifies certain
amounts which shall not be deducted in computing the income chargeable
under the head “Profits and gains of business or profession”. The relevant
provisions for A.Y. 2023-24 are as under:
(i) Non-Resident Payments: Any interest, royalty, fees for technical
services or other sum chargeable under the Income-tax Act which is
payable outside India or in India to a non-resident or a foreign
company on which tax is deductible at source under Chapter XVII-B
and such tax has not been deducted or after deduction has not been
paid during the previous year on or before the expiry of the time
prescribed u/s139(1) {seems inadvertently shown as “section 200(1)”
in notified form 3CD}.
Provided that where in respect of any such sum, tax has been
deducted in any subsequent year or, has been deducted in the
previous year but paid in any subsequent year after the expiry of the
time prescribed u/s 139(1), such sum shall be allowed as a deduction
in computing the income of the previous year in which such tax has
been paid.
Further, the second proviso to section 40(a)(i) read with Section 201
provides that where an assessee fails to deduct the whole or any part
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
of the tax in accordance with the provisions of Chapter XVII-B on any
such sum but is not deemed to be an assessee in default under the
first proviso to sub-section (1) of section 201, then, for the purpose of
clause (i) of section 40(a), it shall be deemed that the assessee has
deducted and paid the tax on such sum on the date of furnishing of
return of income by the payee referred to in the said proviso.
(ii) Resident Payments: 30% of any sum is disallowed where sum is
payable to a resident on which tax is deductible at source under
chapter XVII-B and such tax has not been deducted or after deduction
has not been paid on or before the due date specified in section
139(1).
As per first proviso to Section 40(a)(ia), where tax is deducted in any
subsequent year, or has been deducted during the previous year but
paid after the due date specified in section 139(1), disallowed
component of the expenditure is allowable as a deduction in the year
in which such tax has been paid. Further, the second proviso to
section 40(a)(ia) read with Section 201 provides that where an
assessee fails to deduct the whole or any part of the tax in accordance
with the provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso to sub-
section (1) of section 201, then, for the purpose of clause (ia) of
section 40(a), it shall be deemed that the assessee has deducted and
paid the tax on such sum on the date of furnishing of return of income
by the payee referred to in the said proviso.
A certificate is to be obtained in Form 26A by the person who has not
deducted tax and obtain the form that the deductee is not responsible
for deduction of tax and hence the lack of tax deduction does not
attract the provisions of Section 201. Auditor is advised to check the
certificate vide Form 26A and how it has been reflected in the
statement of TDS filed vide Form 24Q / Form 26Q / Form 27Q.
(iii) Any sum paid on account of wealth tax.
(iv) Under sub-clause (iib) in section 40(a), any amount paid by way of a
Royalty, License Fees, Service Fees, Privilege Fees, Service Charges
or any other fees or charge by whatever name called, which is levied
exclusively on or which is appropriated directly or indirectly from a
State Government undertaking by the State Government shall not be
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allowed as a deduction from the income under the head “profit and
gains from business or profession”.
(v) Any payment which is chargeable under the head “salaries”, if it is
payable outside India or to a non-resident and if the tax has not been
paid thereon nor deducted therefrom under Chapter XVII-B.
(vi) Any payment to a provident or other fund established for the benefit of
employees of the assessee, unless the assessee has made effective
arrangement to secure that tax shall be deducted at source from any
payment made from the fund which are chargeable to tax under the
head “Salaries”.
(vii) Any tax actually paid by an employer referred to in clause (10CC) of
section 10.
34.2 The provisions of section 40(a)(ia) disallow only 30% of any sum
payable to a resident on which tax is deductible at source under Chapter
XVII-B and such tax has not been deducted or after deduction has not been
paid on or before the due date specified under section 139(1). The first
proviso to section 40(a)(ia) provides that where any sum on which tax has
been deducted in any subsequent year or has been deducted during the
previous year but paid after the due date specified in sub-section (1) of
section 139, thirty percent of such sum shall be allowed as a deduction in
computing the income of the previous year in which such tax has been paid.
34.3 In respect of item (i) and (vi) above, the tax auditor should obtain in
writing from the assessee the details of all payments debited to the profit and
loss account. Where an actual remittance to overseas has been made by the
assessee during the relevant previous year without deducting any tax at
source, the tax auditor may rely upon the legal opinion and/or certificates
from chartered accountants based upon which remittances have been made
without deduction of tax at source. The tax auditor may refer SA 620, Using
the work of an auditor’s expert issued by ICAI for reliance on certificates /
legal opinion. In this connection the tax auditor is advised to refer the
applicable Double Taxation Avoidance Agreement (DTAA). Where no
remittances have been made during the relevant year, the tax auditor may
examine the relevant provisions vis-à-vis the agreement or correspondence
in pursuant to which the liability is provided by the assessee in the books of
account in order to determine whether any amount so provided is at all
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chargeable to tax under the Act. The tax auditor may use his professional
judgement in these matters based upon decided cases and he may rely upon
legal opinion obtained by the assessee where no tax is required to be
deducted in respect of the amount so provided. In case he disagrees with the
stand taken by the assessee, he should give both the views in his report.
34.4 Under clause 21(b)(i)(A), the auditor is required to report payments to
non residents on which tax is required to be deducted but not deducted in
respect of interest, royalty, fees for technical services and other such
chargeable amount under the Income-tax Act. The Auditor is advised to give
details under this clause for each individual payee.
34.5 Similarly, under clause 21(b)(i)(B), the auditor is required to report
payments on which tax is deducted but is not deposited within the time
prescribed during the previous year or in subsequent year. Such details are
also required to be given for each individual payee prescribed under Section
40(a)(i).
34.6 Under this sub-clause, the tax auditor is required to report the details
of payment on which tax is not deducted at source and also the details of
payment on which tax has been deducted but not paid during the previous
year or in the subsequent year before the expiry of time prescribed u/s
139(1). The tax auditor should maintain the following data in his working
papers for the purpose of reporting under this sub-clause:
(a) Details of payment on which tax was not deducted :
Sr. Date of Amount of Nature of Name PAN of
No payment payment payment and the
address payee, if
of the available
payee
1 2 3 4 5 6
(b) Details of payment on which tax has been deducted but has not been
paid during the previous year or in the subsequent year before the
expiry of time prescribed u/s 139(1):
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Sr. Date of Amount Nature Name PAN of Amount
No. payment of of and the of tax
payment payment address payee, if deducted
of the available
payee
1 2 3 4 5 6 7
34.7 Under section 40(a)(ia), any payment of the expenses, specified
therein on which tax is deductible under Chapter XVIIB and such tax has not
been deducted or after deduction has not been paid on or before the date of
filing of return specified under section 139(1), 30% of the expenditure is not
eligible for deduction while computing income chargeable under the head
“profits and gains of business or profession”. Accordingly, such amount will
be inadmissible and will be required to be disclosed under this clause. For
this purpose, the tax auditor will be required to examine whether the
provisions relating to tax deduction at source have been complied with in
respect of payments specified under the clause. For this purpose, the tax
auditor may examine the books of account and tax deduction
returns/statements pertaining to these payments.
34.8 Where the auditee claims deduction under the second proviso to sub-
section (ia), it is deemed that he has deducted and paid the tax and hence
such sum on which tax is so deemed to be deducted and paid is not
inadmissible, the tax auditor should verify compliance with the requirements
of section 201. He should also obtain and keep in his record a copy of
certificate in Form 26A as required by section 201 read with section 40(a)(ia).
34.9 Under clause 21(b)(ii)(A), auditor is required to report any payments to
residents on which tax is required to be deducted but not deducted under
Chapter XVII-B of the Income-tax Act. The auditor is advised to give details
under this clause for each individual payee.
34.10 Similarly, under clause 21(b)(ii)(B), the auditor is required to report
payments on which tax is deducted but is not deposited within the time
prescribed during the previous year or in subsequent year. Such details are
also required to be given for each individual payee prescribed under section
40(a)(ia).
34.11 Tax auditor should also verify that the particulars given under this
clause do not differ from the particulars given under clause 34 of Form no.
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3CD to the extent applicable. Under this sub-clause, the tax auditor is
required to report the details of payment on which tax is not deducted at
source and also the details of payment on which tax has been deducted but
not paid on or before the due date specified in section 139(1). The tax
auditor should maintain the following data in his working papers for the
purpose of reporting under this sub-clause:
(a) Details of payment on which tax was not deducted:
Sr. Date of Amount of Nature of Name PAN of
No payment payment payment and the
address payee, if
of the available
payee
1 2 3 4 5 6
(b) Details of payment on which tax has been deducted but has not been
paid on or before the due date specified under section 139(1):
Sr. Date of Amount Nature of Name PAN of Amount of Amount
No. payment of payment and the payee, tax out of (7)
payment address if deducted deposited
of the available , if any
payee
1 2 3 4 5 6 7 8
34.12 The amount of Wealth Tax paid is not allowed as a deduction u/s.
40(a)(iia) and thus is required to be reported under clause 21(b)(iv). It is
pertinent to note that Wealth-tax Act, 1957 is abolished w.e.f. 01.04.2016
vide the Finance Act, 2016.
34.13 Sub clause 40(a)(iib) provides that (a) any amount paid by way of a
royalty, license fees, service fees, privilege fees, service charge or any other
fees or charge by whatever name called, which is levied exclusively on; or (b)
which is appropriated, directly or indirectly from, a State Government
undertaking by the State Government is inadmissible expenditure. The
explanation to this sub clause (iib) also defines a State Government
undertaking. The Tax auditor should verify any such payment made by State
Government undertaking to the State Government and should report under
clause 21(b)(v).
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34.14 The amount of salary which is paid outside India or to a non-resident
in respect of which tax has not been deducted but which is required to be
deducted under the applicable provisions of the Income-tax Act or tax has
not been paid after deduction, the same is not allowed as a deduction u/s.
40(a)(iii) and the same is required to be reported under clause 21(b)(vi). This
information is required to be given for each individual payee. The tax auditor
should also furnish the date of payment along with the name and address of
the payee. The tax auditor should maintain the following information in his
working papers for the purpose of reporting in the format provided in the e -
filing utility:
Sr No. Date of Amount Name of PAN of Address
payment of payee the
payment payee, if
available
1 2 3 4 5 6
34.15 Section 40(a)(iv) provides that any payment to a provident or other
fund established for the benefit of employees of the assessee shall be
disallowed, unless the assessee has made effective arrangements to secure
that tax shall be deducted at source from any payments made from the fund
which are chargeable to tax under the head “Salaries”. The auditor is
required to report the same under item (vii) of this sub-clause.
34.16 Any tax paid by an employer on non-monetary perquisites is exempt in
the hands of the employee as per section 10(10CC). Further, as per section
40(a)(v), the tax paid by the employer on non-monetary perquisites provided
to employees shall not be deductible in computing profits and gains from
business or profession. The tax auditor is required to report the amount of
such tax paid by the employer, in case it is debited to the profit and loss
account under clause 21(b)(viii).
34.17 In case where the assessee submits that any sum debited to profit and
loss account is not inadmissible under the provisions of sub-section (a) of
section 40, the tax auditor may exercise his judgement in the light of the
applicable laws and report accordingly about the compliance of this
provision. The tax auditor may rely upon the judicial pronouncements while
taking any particular view. In case of difference of opinion between the tax
auditor and the assessee, the tax auditor should state both the viewpoints. In
case of voluminous nature of the information, the tax auditor can apply
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materiality principles, tests-checks and compliance tests for verifying the
information required to be provided under this clause.
35. Clause 21(c)- Amount debited to profit and loss
account being, interest, salary, bonus, commission
or remuneration inadmissible under section
40(b)/40(ba) and computation thereof;
35.1 The tax auditor is required to state the inadmissible amount under
section 40(b)/40(ba) and such information is also required to be given in
respect of interest/ remuneration paid to a member of an Asso ciation of
persons (AOP)/Body of individuals (BOI). By Finance Act (No. 2) 2009, w.e.f.
1.4.2010, the term firm includes LLP (as registered under the provisions of
LLP Act, 2008) The word "inadmissible" implies that the tax auditor will have
to examine the facts, apply the conditions for allowance or disallowance and
accordingly determine the prima facie inadmissibility of the deduction and
also quantify the same.
35.2 Salary, bonus, commission or remuneration or interest are not
admissible, unless the following conditions are satisfied:
(a) Remuneration is paid to working partner(s).
(b) Remuneration or interest is authorised by the partnership deed and is
in accordance with the partnership deed.
(c) Remuneration or interest does not pertain to a period prior to the date
of partnership deed.
35.3 The inadmissible remuneration, salary, bonus or commission under
section 40(b) has to be determined on the basis of the provisions of sub --
clause (v) thereof read with the limits laid down therein. Such limits are laid
down as a percentage of book profits. Explanation 3 to section 40(b)
provides that “book profits” means the net profit, as shown in the profit and
loss account for the relevant previous year, computed in the manner laid
down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to all the partners of the firm if such amount
has been deducted while computing the net profit. The inadmissible amount
of salary, bonus, commission or remuneration is to be worked out after
deducting interest allowable to partners as per the provisions of section
40(b). According to Explanation 4, “working partner” means an individual who
is actively engaged in conducting the affairs of the business or profession of
the firm of which he is a partner. It is advisable for the auditor to obtain from
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the assessee a detailed working of the inadmissible remuneration, salary,
bonus or commission under section 40(b). He has to verify the computation
from the instrument or agreement or any other document evidencing
partnership including any supplementary documents or other documents
effecting changes which would affect the computation of the inadmissible
amounts under section 40(b).
35.4 Under section 40(b)(iv), any payment of interest to any partner which
is authorised by, and is in accordance with, the terms of the partners hip deed
and relates to any period falling after the date of such partnership deed in so
far as such amount exceeds the amount calculated at the rate specified
under the Income-tax Act from time to time will not be admissible as a
deduction.
35.5 Section 40(ba) lays down that any interest or remuneration paid by an
AOP to its member shall not be allowed as a deduction to the AOP. It may
also be noted that in computing such disallowance:
(a) where interest is paid by AOP / BOI to a member who has also paid
interest to AOP/ BOI, only net amount of interest, if any, shall be
disallowed;
(b) where a member is in a representative capacity, the disallowance of
net interest paid by AOP/BOI shall be the amount of net interest
received by the member in a representative capacity or by the person
who is so represented by the member;
(c) where a person who is a member in his individual capacity receives
the interest for the benefit of or on behalf of any other person, then,
interest so paid by AOP/ BOI shall not be disallowed;
35.6 In order to determine the amounts inadmissible under section 40(b),
the tax auditor should obtain the computation of total income from the
assessee.
35.7 In working out the inadmissible amount, the tax auditor must have due
regard to the Circular No. 739 dated 25.3.1996 issued by the CBDT
reproduced in Appendix XIII.
35.8 The tax auditor should maintain the information in the following format
as a part of his working papers and report appropriately in the format
provided in the e-filing utility:
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Sr. Nature of Section Amount Amount Amount Remarks,
No payments 40(b)/ debited to admissi inadmissible if any
. made to 40 (ba) profit and ble u/s u/s 40(b)/
partner/me loss 40(b)/ 40(ba)
mber account 40(ba) [difference
between (d)
and (e)
(a) (b) (c) (d) (e) (f) (g)
35.9 The tax auditor may note that the information required to be reported
is the amount of inadmissible expenditure as per section 40(b) or 40(ba) and
not the total amount debited to profit and loss account.
36. Clause 21(d) – Disallowance/deemed income under
section 40A(3):
(A) On the basis of the examination of books of account and other
relevant documents/evidence, whether the expenditure covered under
section 40A(3) read with rule 6DD were made by account payee cheque
drawn on a bank or account payee bank draft. If not, please furnish the
details:
Serial Date of Nature of Amount Name and
Number Payment Payment Permanent
Account Number
or Aadhaar
Number of the
payee, if
available
(B) On the basis of the examination of books of account and other
relevant documents/evidence, whether the payment referred to in
section 40A(3A) read with rule 6DD were made by account payee
cheque drawn on a bank or account payee bank draft If not, please
furnish the details of amount deemed to be the profits and gains of
business or profession under section 40A(3A);
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Serial Date of Nature of Amount Name and
Number Payment Payment Permanent
Account Number
or Aadhaar
Number of the
payee, if
available
[Clause 21(d)]
36.1 (a) As per the provisions of sub-section (3) of section 40A where
the assessee incurs any expenditure in respect of which a
payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or
account payee bank draft or use of electronic clearing system
through a bank account or through such other electronic mode
as may be prescribed, exceeding rupees ten thousand, no
deduction would be allowed in respect of such expenditure. In
case of payment made for plying, hiring or leasing of goods
carriage, limit is Rs. 35,000/- instead of Rs. 10,000/-.
(b) Further, as per the provisions of section 40A(3A) where any
allowance has been made in the assessment for any year in
respect of any liability incurred by the assessee for any
expenditure and subsequently during any previous year the
assessee makes payment in respect thereof, otherwise than by
an account payee cheque drawn on a bank or account payee
bank draft or use of electronic clearing system through a bank
account or through such other electronic mode as may be
prescribed exceeding Rs. 10,000, the payment so made shall be
deemed to be the profits and gains of business or profession
and accordingly chargeable to income tax with respect to that
previous year. In case of payment made for plying, hiring or
leasing of goods carriage, limit is Rs. 35,000/- in place of Rs.
10,000/-.
(c) Further, no disallowance would be made if the payment or
aggregate of payments, exceeding Rs. 10,000 (Rs. 35000 in
case of plying, hiring or leasing of goods carriage) is made to a
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
person in a day otherwise than by an account payee cheque
drawn on a bank or account payee bank draft or use of
electronic clearing system through a bank account or through
such other electronic mode as may be prescribed in respect of
cases and circumstances prescribed under Rule 6DD having
regard to the nature and extent of banking facilities available,
considerations of business expediency and other relevant
factors.
Rule 6DD provides that the disallowance/ addition under sub-
section (3) and (3A) of section 40A shall not be made in certain
cases or circumstances. In very brief, these are enumerated
below:
─ Payment to specified entities engaged in banking and
insurance activities,
─ Payment to Government when required to be made in legal
tender,
─ Payments through banking channels with use of bill of
exchange, book adjustment, transfers,
─ Payments to specified growers, cultivators etc.,
─ Payment to cottage industry,
─ Payment in village not served by a bank to resident of such
place,
─ Payments of specified terminal benefits to employees up to
Rs. 50,000/-,
─ Payment to agent who is required to make payment in cash,
─ Payment by authorised dealer for purchase of foreign
currency etc.,
Auditors are advised to consider Rule 6DD and relative
Circulars for complete details of above. Auditors will also need
to verify that the conditions laid down for the mitigating
circumstances are strictly complied with.
(d) Other electronic modes of payment referred to in section 40A(3)
and section 40A(3A) have been prescribed in Rule 6ABBA. For
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the purpose of sub-sections (3) and (3A), the Electronic modes
are prescribed by Rule 6ABBA and such modes include:
(a) Credit Card;
(b) Debit Card;
(c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer); and
(h) BHIM (Bharat Interface for Money) Aadhaar Pay;
36.2 For the purpose of furnishing the above particulars, the tax auditor
should obtain a list of all cash payments in respect of expenditure exceeding
Rs. 10,000 (Rs.35000/- in case of plying, hiring or leasing goods carriages
w.e.f. 1.10.2009) made by the assessee during the relevant year which
should include the list of payments exempted in terms of Rule 6DD with
reasons. This list should be verified by the tax auditor with the books of
account in order to ascertain whether the conditions for specific exemption
granted under clauses (a) to (l) of Rule 6DD are satisfied. Details of
payments which do not satisfy the above conditions should be stated under
this clause. Certain audit tools are available to find out such payments
expeditiously and accurately. These tools may be employed in case data is
voluminous.
36.3 Practically, it may not be possible to verify each payment, reflected in
the bank statement, as to whether the payment has been made through
account payee cheque, demand draft or use of electronic clearing system
through a bank account or through such other electronic mode as may be
prescribed, it is thus desirable that the tax auditor should obtain suitable
certificate from the assessee to the effect that the payments for expenditure
referred to in section 40A(3) and section 40A(3A) were made by account
payee cheque drawn on a bank or account payee bank draft or use of
electronic clearing system through a bank account or through such other
electronic mode as may be prescribed, as the case may be. Where the
reporting has been done on the basis of the certificate of the assessee, the
fact shall be reported as an observation in clause (3) of Form No. 3CA and
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
clause (5) of Form No.3CB, as the case may be. The tax auditor, in his report
may comment as suggested below while reporting under this sub-clause:
“It is not possible for me/us to verify whether the receipts/payments
have been accepted/made otherwise than by an account payee
cheque or an account payee bank draft, as necessary evidence is not
in the possession of the assessee”.
36.4 The tax auditor should maintain the following particulars in his audit
working papers file for the purpose of reporting in the format provided in the
e-filing utility:
Sl. Nature and Date of Payment or Total Name and Remarks
No. particulars payment aggregate amount of Permanent
of payments expenditure Account
expenditure made to a number of
person in a the payee,
day, if
otherwise available
than by an
account
payee
cheque
drawn on a
bank or
account
payee bank
draft
1 2 3 4 5 6 7
36.5 Wherever possible, individual items of inadmissible expenses may be
given. However, where, in view of the large volume of transactions it is not
possible to give individual items of inadmissible amounts, the tax auditor may
furnish such details under broad heads of account.
36.6 Items of expenditure in respect of which specific exemption has been
given under Clauses (a) to (l) of Rule 6DD are not required to be stated
under this clause.
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37. Clause 21(e) - provision for payment of gratuity not
allowable under section 40A(7);
37.1 As per section 40A(7), the deduction shall be allowed in relation to any
provision made by the assessee for the purpose of payment of a sum by way
of any contribution towards an approved gratuity fund, or for the purpose of
payment of any gratuity, that has become payable during the previous year.
37.2 The tax auditor should call for the order of the Principal Commissioner
of Income-tax/Commissioner of Income-tax granting approval to the gratuity
fund, verify the date from which it is effective and also verify whether the
provision has been made as provided in the trust deed, rules and regulations
governing such trust deed and PCIT/CIT Approval Order stipulations.
37.3 In case the provision made for payment of gratuity is not allowable
under section 40A(7), the same is to be stated under this sub-clause.
38. Clause 21(f) - any sum paid by the assessee as an
employer not allowable under section 40A(9);
38.1 Under section 40A(9), any payment made by an employer towards the
setting up or formation of or as contribution to any fund, trust, company,
association of persons, body of individuals, society registered under the
Societies Registration Act, 1860, or other institutions (other than
contributions to recognised provident fund or approved superannuation fund
or notified pension scheme or approved gratuity fund) is not allowable. The
tax auditor should furnish the details of payments which are not allowable
under this section.
38.2 Tax Auditor shall maintain detailed working papers documenting the
factual nature of such expenses incurred and debited to the Profit and Loss
for the previous year under consideration which are considered disallowable
u/s 40A(9) of the Income-tax Act, 1961. Tax Auditor should get the relevant
content in working papers prepared for such disallowance duly confirmed by
the Assessee as a necessary safeguard.
38.3 If any such contribution is made by the assessee in a capacity other
than that of an employer, then such contribution is not to be considered as
disallowable u/s 40A(9) of the Income-tax Act, 1961. Thus, Tax Auditor
should carefully examine the capacity of Assessee while making such
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
contribution before reaching any conclusion for allowing or disallowing such
contribution.
38.4 It may be noted that section 40A(9) allows deduction of any
contributions made as an employer towards recognized provident fund or
approved superannuation fund or notified pension scheme or approved
gratuity fund or as required by or under any other law for the time being in
force. Thus, any contribution made to Employees’ Welfare Co-op Society will
not be allowed as a deduction in the case of the employer company under
section 40A(9), unless such contribution is required by or under any other
law for the time being in force. Instruction: No. 1799, dated 3-10-1988.
39. Clause 21(g) - particulars of any liability of a
contingent nature;
39.1 The assessee is required to furnish only particulars of any contingent
liability debited to the profit and loss account.
39.2 The tax auditor, for verifying the details of contingent liability debited to
the profit and loss account, may conduct a detailed scrutiny of various
account heads e.g. outstanding liabilities, provision etc., if required.
Accounting policy followed and disclosed would be helpful in ascertaining
and verifying details. The tax auditor may also verify reporting under CARO
and disclosure in the Notes on accounts. The expenses relating to disputed
claims will be revealed only on the basis of the scrutiny of records relating to
contingent liabilities. The tax auditor may look into particular items of
contingent liabilities of the earlier year in order to determine whether or not
any items have been charged to the profit and loss account of the current
year and if so, whether the liability continues to be contingent in nature.
Wherever necessary, a suitable note should be given by the tax auditor as to
the non-availability of such particulars relating to the contingent liabilities.
39.3 Reference may be made to AS-29, ‘Provisions, Contingent Liabilities
and Contingent Assets’/ Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets, to determine what should normally be treated as a
contingent liability. Contingent Liability as defined in Income Computation
and Disclosure Standards (ICDS) X means Contingent liability is a possible
obligation (as opposed to ‘present obligation’) existence of which will be
confirmed only on occurrence or non-occurrence of an event beyond the
control of the assessee.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
39.4 Under this clause, the tax auditor should report only contingent
liabilities which are debited to the Profit and Loss account of the previous
year under consideration and not value of contingent liabilities reported in the
notes to the accounts forming part of the audited financial statements of the
corporates.
39.5 The tax auditor should maintain the following information in his
working papers for the purpose of reporting in the format provided in the e-
filing utility:
Nature of liability Amount Remarks
1 2 3
ICDS X, Para 10 provides that Contingent liability shall not be deductible.
Auditors should note that the Contingent liability shown in Notes to Accounts
is not required to be reported, as the amounts debited to Profit and Loss
account are required to be reported in this sub-clause.
40. Clause 21(h) - Amount of deduction inadmissible in
terms of section 14A in respect of the expenditure
incurred in relation to income which does not form
part of the total income;
40.1 For the purposes of computing the total income under Chapter IV of
the Act, no deduction shall be allowed in respect of expenditure incurred by
the assessee in relation to income which does not form part of the total
income under the Act. It is clarified that Section 14A will apply
notwithstanding anything to the contrary contained in this Act and
irrespective of the income not forming part of the total income having not
accrued, arisen or received during the particular previous year.
40.2 As per sub-section (2), the Assessing Officer shall determine the
amount of expenditure incurred in relation to such income, which does not
form part of the total income under the Act. Such determination should be in
accordance with the method as may be prescribed. Such power of the
Assessing Officer can be exercised only when he, having regard to the
accounts of the assessee, is not satisfied with the correctness of the claim of
the assessee.
40.3 Sub-section (3) provides that the provisions of sub-section (2) shall
also apply in relation to a case where an assessee claims that no
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
expenditure has been incurred by him in relation to income which does not
form part of the total income under this Act.
40.4 The expenditure which is relatable to the income which does not form
part of the total income is not allowed as a deduction in terms of section 14A
of the Act. Such income is dealt with in Chapter III - Incomes Which Do Not
Form Part Of Total Income. Section 10 deals with Incomes not included in
total income. Sections 10A to 10C deals with the special provisions in
respect of the specified undertakings. In general, an assessee may have
besides his business income, income from agriculture which is exempt under
sub-section (1), share of profit in a partnership firm which is exempt under
sub-section (2A) etc. In all such cases, the expenditure relating to the income
which is not included in total income is inadmissible under section 14A. In
case of an investment in a partnership firm, while the interest and the salary
received by the partner are taxable, the share of profit is exempt. The
amount of inadmissible expenditure depends on the facts and circumstances
of each case. The disallowance relates to expenditure incurred in relation to
income which does not form part of the total income. Hence, the
disallowance does not apply to income which is forming part of gross total
income and thereafter deductions under Chapter VIA are claimed.
40.5 Rule 8D lays down the method for determining the amount of
expenditure in relation to income not includible in total income. Sub-rule (1)
of Rule 8D provides that having regard to the accounts of the assessee of a
previous year, if the Assessing Officer is not satisfied with the correctness of
the claim of expenditure made by the assessee or with the claim made by the
assessee that no expenditure has been incurred, in relation to income which
does not form part of the total income under the Act for such previous year,
he shall determine the amount of such inadmissible expenditure in
accordance with the method of computation laid down in sub-rule (2) of Rule
8D.
40.6 Sub-rule (2) of Rule 8D provides for the method of computation of the
expenditure in relation to income not forming part of the total income. The
disallowance shall be the aggregate of the following:
(i) the amount of expenditure directly relating to income which does not
form part of total income; and
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(ii) an amount equal to 1% of the annual average of the monthly averages
of the opening and closing balances of the value of investment,
income from which does not or shall not form part of total income
provided that the amount referred to in clause (i) and clause (ii) shall not
exceed the total expenditure claimed by the assessee.
40.7 The method prescribed under sub-rule (2) of Rule 8D is applicable
when the Assessing Officer is not satisfied with the correctness of the claim
of expenditure made by the assessee or with the claim made by the
assessee that no expenditure has been incurred. Normally this situation
would arise at the time of assessment i.e. after the tax audit has been
completed and the return has been filed. Therefore, at the time of tax audit ,
the tax auditor will have to verify the amount of inadmissible ex penditure as
determined by the assessee. The method under sub-rule (2) of Rule 8D is to
be adopted by the Assessing Officer when he is not satisfied with the amount
as determined by the assessee. Rule 8D does not mandate that the
assessee should necessarily compute the disallowance as per the method
prescribed under sub-rule (2). Therefore, the assessee may or may not adopt
the same considering facts and circumstances of his case.
40.8 It is primarily the responsibility of the assessee to furnish the details of
amount of deduction inadmissible in terms of section 14A i.e. in respect of
the expenditure incurred in relation to income, which does not form part of
the total income. The tax auditor shall examine the details of amount of
inadmissible expenditure as furnished by the assessee. While carrying out
such examination, the tax auditor is entitled to rely on the management
representation. However, Standard on Auditing (SA) 580, “Written
representations” may be referred to.
40.9 The tax auditor will verify the amount of inadmissible expenditure as
estimated by the assessee with reference to established principles of
allocation of expenditure based on logical parameters like proportion of
exempt and taxable income recorded, turnover, man hours spent to earn the
relevant income etc. For allocation of interest between taxable and non-
taxable income, the quantum of investment, the period and the rate of
interest are generally the relevant factors to be considered. This requires
proper estimates to be made by the assessee. The tax auditor is required to
audit such estimates. Attention is invited to Standard on Auditing - 540
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
“Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures”.
40.10 An assessee may claim that no expenditure has been incurred by him
in relation to income which does not form part of the total income under the
Act. Even in such a case, the provisions of section 14A will apply.
Accordingly, the tax auditor is required to verify such contention of the
assessee.
40.11 It is explained that notwithstanding anything to the contrary contained
in this Act, the provisions of section 14A shall apply and shall be deemed to
have always applied in a case where the income not forming part of the total
income under this Act has not accrued or arisen or has not been received
during the previous year relevant to an assessment year and the expenditure
has been incurred during the said previous year in relation to such income
not forming part of the total income.
40.12 The broad principles as enunciated in aforesaid paras may be kept in
mind while verifying the amount of inadmissible expenditure. After verifying
the amount of inadmissible expenditure, if the tax auditor:
(a) is in agreement with the assessee, he should report the amount with
suitable disclosures of material assumptions, if any.
(b) is not in agreement with the assessee with regard to the amount of
expenditure determined, the tax auditor may give,
A qualified opinion:
A qualified opinion can be given when the auditor is of the opinion that
the effect of any disagreement with the assessee is material but not
pervasive as to require an adverse opinion or limitation on scope to
require a disclaimer of opinion.
An adverse opinion:
The auditor, in rare circumstances, may come across a situation where
the impact of his disagreement about the computation of such
inadmissible expenditure is so material and pervasive that it affects the
overall opinion. In such a case the tax auditor may give an adverse
opinion.
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The disclaimer of opinion:
When the assessee has neither provided the basis nor the supporting
documents, for the claim of such inadmissible expenditure, then due to
limitation on the scope of auditors work, and the auditor concludes that
the possible effects of such disagreement could be both material and
pervasive, the auditor can give disclaimer of opinion.
41. Clause 21(i)- amount inadmissible under the proviso
to section 36(1)(iii).
41.1 The provisions of section 36(1)(iii) provide that the amount of the
interest paid in respect of capital borrowed for the purposes of the business
or profession would be allowed as a deduction in computing the income
referred to in section 28 of the Act.
41.2 The proviso thereunder provides that any amount of the interest paid,
in respect of capital borrowed for acquisition of an asset (whether capitalized
in the books of account or not) for any period beginning from the date on
which the capital was borrowed for acquisition of the asset till the date on
which such asset was put to use, shall not be allowed as a deduction.
Interest as defined under section 2(28A) means interest payable in any
manner in respect of any moneys borrowed or debt incurred (including a
deposit, claim or other similar right or obligation) and includes any service
fee or other charge in respect of the moneys borrowed or debt incurred or in
respect of any credit facility which has not been utilized.
41.3 The tax auditor is also advised to verify the treatment given for such
asset under other provision of the Act like ‘Chapter VI A’ deductions or under
other statutes. The requirements of sub-clause 21(i) are applicable in respect
of capital borrowed for acquisition of an asset. The assessee has to furnish
the details of amount inadmissible under the proviso to section 36(1)(iii). The
tax auditor has to verify the correctness of the particulars furnished by the
assessee with the documentary evidence in accordance with the relevant
auditing standards and other issuances of the ICAI from time to time.
41.4 The tax auditor while determining the admissible/inadmissible amount
under section 36(1)(iii) should also keep in mind the requirements of ICDS IX
relating to Borrowing Cost.
41.5 The Explanation to this proviso provides that recurring subscription
paid periodically by shareholders or subscribers in Mutual Benefit Society
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
which fulfills such conditions as may be prescribed, shall be deemed to be
capital borrowed within the meaning of section 36(1)(iii). This Explanation
becomes applicable only where the computation of the income of such
mutual benefit society is to be made under section 28 read with section 44A.
42. Amount of Interest inadmissible under section 23 of
the Micro, Small and Medium Enterprises
Development Act, 2006
[Clause 22]
42.1 The tax auditor is required to state the amount of interest inadmissible
under section 23 of the Micro, Small and Medium Enterprises Development
Act, 2006. The Micro, Small and Medium Enterprises Development Act, 2006
(MSMED Act) is an Act to provide for facilitating the promotion and
development and enhancing the competitiveness of micro, small and medium
enterprises and for matters connected therewith or incidental thereto.
42.2 Section 23 of the MSMED Act lays down that an interest payable or
paid by the buyer, under or in accordance with the provisions of this Act,
shall not for the purposes of the computation of income under the Income-tax
Act,1961 be allowed as a deduction.
42.3 The inadmissible interest has to be determined on the basis of the
provisions of the MSMED Act. Section 16 of the MSMED Act provides for the
date from which and the rate at which the interest is payable. Accordingly,
where a buyer fails to make payment of the amount to the supplier, as
required under section 15, the buyer shall, notwithstanding anything
contained in any agreement between the buyer and the supplier or any law
for the time being in force, be liable to pay compound interest with monthly
rests to the supplier on that amount from the appointed date or, as the case
may be, from the date immediately following the date agreed upon, at three
times of the bank rate notified by the Reserve Bank.
42.4 Section 15 of the MSMED Act, requires the buyer to make payment on
or before the date agreed upon in writing, or where there is no agreement in
this behalf, before the appointed day. It also provides that the period agreed
upon in writing shall not exceed forty- five days from the day of acceptance
or the day of deemed acceptance .
42.5 Section 22 of the MSMED Act provides that where any buyer is
required to get his annual accounts audited under any law for the time being
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
in force, such buyer shall furnish the following additional information in his
annual statement of accounts, namely:-
(i) The principal amount and interest due thereon (to be shown
separately) remaining unpaid to any supplier as at the end of each
accounting year;
(ii) The amount of interest paid by the buyer in terms of Section 16, along
with the amount of payment made to supplier beyond the appointed
date during each accounting year;
(iii) The amount of interest due and payable for the delay in making
payment (which have been paid but beyond the appointed day during
the year) but without adding the interest specified under this Act;
(iv) The amount of interest accrued and remaining unpaid at the end of
each accounting year; and
(v) The amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues as above are
actually paid to the small enterprise, for the purpose of disallowance
as a deductible expenditure under section 23.
42.6 Where the tax auditor is issuing his report in Form No. 3CB, he should
verify that the financial statements audited by him contain the information as
prescribed under section 22 of the MSMED Act. If no disclosure is made by
the auditee in the financial statements, he should give an appropriate
qualification in Form No. 3CB, in addition to the reporting requirement in
clause 22 of Form No. 3CD.
42.7 The tax auditor while reporting in respect of clause 22 should take the
following steps:
(a) The auditor should seek information regarding status of the enterprise
i.e. whether the same is covered under the Micro, Small and Medium
Enterprises Development Act, 2006. Where the information is available
and has been disclosed, the same should be reported as such in Form
No. 3CD. Where the information is not available, the auditor should
also mention the same in the Form No. 3CD.
(b) Since Section 22 of the Micro, Small and Medium Enterprises
Development Act, 2006 requires disclosure of information, the tax
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
auditor should cross check the disclosure made in the financial
statements.
(c) Obtain a full list of suppliers of the assessee which fall within the
purview of the definition of “Supplier” under section 2(n) of the Micro,
Small and Medium Enterprises Development Act, 2006. It is the
responsibility of the auditee to classify and identify those suppliers
who are covered by this Act.
(d) Review the list so obtained.
(e) Verify from the books of account whether any interest payable or paid
to the buyer in terms of section 16 of the MSMED Act has been
debited or provided for in the books of account.
(f) Verify the interest payable or paid as mentioned above on test check
basis.
(g) Verify the additional information provided by the auditee relating to
interest under section 16 in his financial statement.
(h) If on test- check basis, the auditor is satisfied, then the amount so
debited to the profit and loss account should be reported under clause
22.
42.8 Where the tax auditor, upon due verification, finds that the auditee has
neither provided for nor paid any interest payable under the MSMED Act,
then no amount is inadmissible under section 23 of MSMED Act. In such a
case, appropriate reporting should be made against this clause in the format
provided in the e-filing utility. However, auditor should consider impact of
such non-recognition of interest on true and fair view of profit or loss and the
liability.
42.9 A question may come up, as to what would be disallowance, in case
the auditee is liable to pay any interest under MSMED Act, but he has not
provided the interest in his accounts. In such a case, there can be no
disallowance, as he has not claimed the same in his accounts. But whenever
he pays and claim such interest, the same will be disallowable in year of
payment. In case the auditee has adopted mercantile system of accounting,
the non-provision may affect true and fair view and the auditor should give
suitable qualification. The relevant extracts of the MSMED Act are given in
Appendix XIV.
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43. Particulars of payments made to persons specified
under section 40A(2)(b).
[Clause 23]
43.1 Section 40A (2)(b) covers the following persons:
(i) where the assessee is an individual - any relative of the assessee; as
defined u/s 2(41) of the Income-tax Act 1961;
(ii) where the assessee is a company, firm, association of persons or
Hindu un-divided family - any director of the company, partner of the
firm, or member of the association or family, or any relative of such
director, partner or member;
(iii) any individual who has a substantial interest in the business or
profession of the assessee, or any relative of such individual;
(iv) a company, firm, association of persons or Hindu undivided family
having a substantial interest in the business or profession of the
assessee or any director, partner or member of such company, firm,
association or family, or any relative of such director, partner or
member or any other company carrying on business or profession in
which the first mentioned company has substantial interest;
(v) a company, firm, association of persons or Hindu undivided family of
which a director, partner or member, as the case may be, has a
substantial interest in the business or profession of the assessee; or
any director, partner or member of such company, firm, association or
family or any relative of such director, partner or member;
(vi) any person who carries on a business or profession
(A) where the assessee being an individual, or any relative of such
assessee, has a substantial interest in the business or
profession of that person; or
(B) where the assessee being a company, firm, association of
persons or Hindu undivided family, or any director of such
company, partner of such firm or member of the association or
family, or any relative of such director, partner or member, has a
substantial interest in the business or profession of that person.
Explanation to Section 40A(2)(b) - For the purposes of this sub-
section, a person shall be deemed to have a substantial interest
in a business or profession, if,
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(a) in a case where the business or profession is carried on by a
company, such person is, at any time during the previous year,
the beneficial owner of shares (not being shares entitled to a
fixed rate of dividend whether with or without a right to
participate in profits) carrying not less than twenty per cent of
the voting power; and
(b) in any other case, such person is, at any time during the
previous year, beneficially entitled to not less than twenty per
cent of the profits of such business or profession.
43.2 The section enjoins on the Assessing Officer the power to fix the
quantum of disallowance. Under this clause, the particulars of payments
stated to be made to persons covered under section 40A(2)(b) should be
examined. The following steps may be taken by the tax auditor in this
connection:
(a) Obtain full list of specified persons as contemplated in this section.
Information furnished by the assessee about specified persons should
be cross verified from other data available with the assessee e.g.
members register, list of directors, register of concerns in which
directors are interested in case of companies or list of members,
directors, trustees in case of cooperative societies, trusts etc.
(b) Obtain details of payments made to the specified persons.
(c) Scrutinise all items of payments to the above persons.
(d) It may be difficult to locate all such payments and it may also involve a
time consuming effort. It is, however, possible to localise the area of
enquiry by ascertaining the following:
(i) Call for all contracts or agreements entered into by the
assessee and list out the contracts or agreements entered into
with the specified persons and segregate the items of payments
made to them under these agreements.
(ii) In case of payments for purchases and expenses on credit
basis, the appropriate ledger accounts can be scrutinised to
identify the dealings with the specified persons.
(iii) In case of cash purchases and expenses, the purchase or
expense account should be scrutinised. It may be difficult to
identify such payments in each and every case where the
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volume of transactions is rather huge and voluminous.
Therefore, it may be necessary to restrict the scrutiny only to
such payments in excess of certain monetary limits depending
upon the size of the concern and the volume of business of the
assessee.
(iv) In case of a large company, it may not be possible to verify the
list of all persons covered by this section and, therefore, the
information supplied by the assessee can be relied upon. In this
context, a reference may be made to Circular No. 143 dated
20.8.1974, issued by the Board, in which it is clarified that a tax
auditor can rely upon the list of persons covered under Section
13(3) as given by the managing trustee of a Public Trust. Where
the tax auditor relies upon the information in this regard
furnished to him by the assessee, it would be advisable to make
an appropriate disclosure.
(v) The auditor may refer to the details given in the annual accounts
for related party transactions as per AS-18, if available, for
examining and reporting under this clause. The auditor while
using the information as referred above should consider the
difference in the definitions of ‘related party’ as per AS-18 and
‘persons specified' in section 40A(2)(b) of the Act.
43.3 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting in the format provided in
the e-filing utility:
Name of PAN of Aadhaar Relation Date Nature of Payment
the related Number transaction made
related person of the (Amount)
person related
person,
if
available
1 2 3 4 5 6 7
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44. Amounts deemed to be profits and gains under
section 32AC or 32AD or 33AB or 33ABA or 33AC.
[Clause 24]
44.1 Section 32AC allowed deduction @ 15% in respect of Investment in
new Plant & Machinery to a company who is engaged in the business of
manufacture or production of any article or thing, etc. and who acquires and
installs new asset after the 31 st day of March,2013 but before the 1 st day of
April,2015 and the aggregate actual cost of such new assets exceeds on e
hundred crore rupees. The auditor is required to report the deemed income
chargeable as profits and gains of business under the circumstances
specified in sub sections (2) of section 32AC. Only because section 32AC(2)
provides for chargeability of deemed income under the head “profit and gains
from business or profession” in addition to taxability of capital gains, the
auditor is not required to report any capital gains/losses arising on transfer
on the said asset. The tax auditor will be required to verify the compliance to
the conditions of the provisions of section 32AC and report the deemed
income accordingly. No deduction under section 32AC(1A) shall be allowed
for any AY commencing on or after 01.04.2018.
44.2 Section 32AD allowed deduction for investment in new plant or
machinery in notified backward areas in States of Andhra Pradesh or Bihar
or Telangana or West Bengal in case an assessee, sets up an undertaking or
enterprise for manufacture or production of any article or thing, on or after
01.04.2015 and acquires and installs any new asset for the purposes of the
said undertaking or enterprise during the period beginning on 01.04.2015
and ending before 01.04.2020 in the notified backward area. Deduction
allowed was of a sum equal to 15% of the actual cost of such new asset for
the assessment year relevant to the previous year in which such new asset is
installed. The auditor is required to report the deemed income chargeable as
profits and gains of business under the circumstances specified in sub-
section (2) of section 32AD.
44.3 Section 33AB allowed deduction in respect of Tea Development
Account, Coffee Development Account and Rubber Development Account.
The auditor is required to report the deemed income chargeable as profits
and gains of business under the circumstances specified in sub sections [4],
[5], [7] and [8] of section 33AB.
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44.4 Section 33ABA allowed deduction in respect of Site Restoration Fund.
The auditor is required to report the deemed income chargeable as profits
and gains of business under the circumstances specified in sub sections [5],
[7] and [8] of section 33ABA. Where deduction has been claimed with respect
to interest credited in Special Account or the Site Restoration Account,
utilization of withdrawal thereof for purposes other than those specified shall
be deemed to be income from business.
44.5 Likewise, section 33AC allowed deduction in respect of reserve
created out of the profit of the assessee engaged in shipping business to be
utilized in accordance with the provision of sub section (2) of section 33AC.
The tax auditor is required to report the deemed income chargeable as
profits and gains of business under the circumstances specified in sub -
sections (3) and (4) of section 33AC for the amount of reserves created on or
before 31st March, 2004. Clause 24 requires disclosure of amounts deemed
to be profits and gains under section 32AC, or 32AD, or 33AB, or 33ABA or
33AC.
44.6 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting in the format provided in
the e-filing utility:
Section Description Amount Remarks
1 2 3 4
Remarks column can mention reference of the transaction(s) resulting into
income.
45. Any amount of profit chargeable to tax under
section 41 and computation thereof.
[Clause 25]
45.1 (i) Section 41(1) provides that where any allowance or deduction has
been made in the assessment for any year in respect of loss, expenditure or
trading liability incurred by the assessee and subsequently during any
previous year the assessee obtains any amount, whether in cash or in any
other manner whatsoever, in respect of such loss or expenditure or some
benefits in respect of trading liability by way of remission or cessation
thereof, the amount obtained by him or the value of benefit accruing to him is
chargeable to tax as business income. In respect of loss, expenditure or
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trading liability incurred by the assessee, if no allowance or deduction has
been made, then provisions of section 41 are inapplicable.
(ii) Where the assessee who has suffered loss or has incurred expenditure
for which deduction has been allowed or by whom the trading liability has
been incurred is succeeded in his business either because of amalgamation
of companies or demerger or on account of the constitution of new firm or the
business if continued by some other person when the assessee ceases to
carry on the business, then the successor in the business will be chargeable
to tax on any amount received in respect of such loss, expenditure or trading
liability.
(iii) Explanation (1) to section 41(1) provides that the expression “loss or
expenditure or some benefit in respect of any such trading liability by way of
remission or cession thereof” shall include the remission or cession of any
liability by the creditor by a unilateral act of the assessee or successor in the
business by way of writing off such liability in his accounts.
(iv)(a) Liability of assessee does not cease merely because liability has
become barred by limitation. Liability ceases when it has become barred by
limitation and the assessee has unequivocally expressed its intention not to
honour the liability, when demanded. This is a question of fact whether or not
assessee has expressed unequivocally his intentions {CIT Vs Chase Bright
Steel Ltd 177 ITR 128 (BOM)}. When a liability is shown outstanding for more
than 4 years, in case of an assessee company, this amounted to
acknowledging the debt in favour of creditors for the purposes of section 18
of the Limitation Act, 1963. The assessee’s liability to the creditors thus
subsisted and did not cease nor was it remitted by the creditors. The liability
was enforceable in the court of Law. The amount was not assessable under
section 41(1). This was so held by Delhi High Court in the case of CIT V/s
Shri Vardhman Overseas Ltd(2012) 343 ITR 408(Del). [SLP has been
dismissed by the Supreme Court against this decision.].
(iv)(b) In the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR
518/102 Taxman 713 (SC), Hon'ble Supreme court came to the conclusion
that after expiry of limitation period, a debt does not stand extinguished, but it
only bars the creditors from taking recourse to a legal remedy for
enforcement of the debt. Hence, barring by limitation would not tantamount to
cessation of liability u/s 41(1).
45.2 Section 41(2) provides for chargeability to income-tax as income of the
business of the previous year in which the moneys payable for the building,
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machinery, plant or furniture of an undertaking engaged in generation or
generation and distribution of power is sold, discarded, demolished or
destroyed. Such undertakings are allowed depreciation on such percentage
on the actual cost as are prescribed. The depreciation rate is prescribed vide
Rule 5(1A) in Appendix IA. Depreciation is to be calculated on Straight Line
Method (SLM) on individual asset and not on block of assets, under clause (i)
of sub-section (1) of section 32. Where the moneys payable in respect of
such building, machinery, plant or furniture, as the case may be, together
with the amount of scrap value, if any, exceeds the written down value, so
much of the excess as does not exceed the difference between the actual
cost and the written down value shall be chargeable to income-tax as income
of the business of the previous year in which the moneys payable for the
building, machinery, plant or furniture become due. Where the moneys
payable in respect of the building, machinery, plant or furniture become due
in a previous year in which the business, for the purpose of which the
building, machinery, plant or furniture was being used, is no longer in
existence, the above provision shall apply as if the business is in existence in
that previous year. To ascertain capital gain, if any, provisions of section 50A
are relevant. On debt becoming time barred, the liability of the assessee
does not cease. Section 41(1) is not attracted in such a case (Liquidator,
Mysore Agencies (P.) Ltd v CIT [1978] 114 ITR 853 (Kar.).
45.3 Section 41(3) provides that where any capital asset used in scientific
research is sold without having been used for other purposes and the sale
proceeds together with the amount of deduction allowed under section 35
exceeds the amount of capital expenditure, such surplus or the amount of
deduction allowed, whichever is less, is chargeable to tax as business
income in the year in which the sale took place. This is irrespective of
whether the business of the assessee was in existence or not during the
previous year in which the capital asset was sold.
45.4 It may be noted that section 41(3) is applicable only if an asset is sold
without having been used for other purposes. In other words, if an asset
which is initially purchased for the purpose of scientific research is utilised for
business purposes on completion of scientific research and later on is sold or
transferred, then section 41(3) is not applicable but in such case section 50
would apply.
45.5 Section 41(4) provides that where any bad debt has been allowed as
deduction under section 36(1)(vii) and the amount subsequently recovered
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on such debt is greater than the difference between the debt and the
deduction so allowed, the excess realisation is chargeable to tax as business
income of the year in which debt is recovered. For this purpose, it is
immaterial whether the business of the assessee was in existence or not
during the previous year in which recovery was made.
45.6 Section 41(4A) provides that if any amount is withdrawn from the
special reserve created under section 36(1)(viii), then it will be chargeable to
tax in the year in which the amount is withdrawn, regardless of the fact
whether the business was in existence in that year or not.
45.7 Section 41(5) provides that where the business or profession referred
to in section 41 is no longer in existence and there is income chargeable to
tax under sub-section (1), sub-section (3), sub-section (4) or sub-section (4A)
in respect of that business or profession, any loss, not being a loss sustained
in speculation business which arose in that business or profession during the
previous year in which it ceased to exist and which could not be set off
against any other income of that previous year shall, so far as may be, be set
off against the income chargeable to tax under the sub-sections aforesaid.
This is irrespective of the number of years that may have elapsed from the
year in which the loss has been suffered. In case of Mahindra and Mahindra
93 taxmann.com 32 (SC), it was held that “To sum up, we are not inclined to
interfere with the judgment and order passed by the High court in view of the
following reasons: (a) Section 28(iv) of the IT Act does not apply on the
present case since the receipts of Rs 57,74,064/- are in the nature of cash or
money. (b) Section 41(1) of the IT Act does not apply since waiver of loan
does not amount to cessation of trading liability. It is a matter of record that
the Respondent has not claimed any deduction under Section 36(1)(iii) of the
IT Act qua the payment of interest in any previous year.” There are decisions
where interest on loan was not claimed as expense, in such case waiver of
such loan is treated as capital receipt.
45.8 The tax auditor should obtain a list containing all the amounts
chargeable under section 41 with the accompanying evidence,
correspondence, etc. He should in all relevant cases examine the past
records to satisfy himself about the correctness of the information provided
by the assessee. The tax auditor has to state the profit chargeable to tax
under this section. This information has to be given irrespective of the fact
whether the relevant amount has been credited to the profit and loss account
or not. The computation of the profit chargeable under this clause is also to
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be stated. The tax auditor should check whether amounts which have been
written back in respect of trading liability by way of remission or cessation
thereof or otherwise, is credited to Profit & Loss account. If any such liability
credited to profit and loss account is already offered to tax in any prior
period, the same shall not, once again, be considered as income in the year
in which it is so credited .
45.9 In case the amount given in this clause regarding section 41 of the Act
is not routed through profit and loss account or income and expenditure
account, the auditor may include the said fact in the observation para of the
audit report.
45.10 The tax auditor should maintain the following in his working papers for
the purpose of furnishing details required in the format provided in the e -filing
utility:
Sr. No. Name of Amount of Section Description Computation
person income of if any
transaction
1 2 3 4 5 6
46. In respect of any 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.
(State whether sales tax, customs duty, excise duty or any other
indirect tax, levy, cess, impost etc. is passed through the profit
and loss account.)
[Clause 26]
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46.1 In the case of an assessee maintaining its accounts on the mercantile
system, the tax auditor should verify the aforesaid particulars of section 43B
from the books of account for the year under audit as well as from the books
of account, vouchers and documents of the immediately succeeding
assessment year as well as return of income for the earlier assessment
years so that the information about the aforesaid payments made in the
subsequent year can be furnished.
46.2 Section 43B provides that notwithstanding anything contained in any
other provisions of the Act, the following amounts shall be allowed as
deduction in computing the business income of an assessee in the previous
year in which such amounts are actually paid:
(a) any tax, (GST, sales tax, value added tax, service tax, excise duty,
municipal/property tax, etc.), duty, cess or fee, by whatever name
called, payable by the assessee under any law for the time being in
force.
(b) any sum payable as an employer by way of contribution to any
provident fund or superannuation fund or gratuity fund or any other
fund for the welfare of employees.
(c) any bonus or commission payable by the assessee to its employees
for services rendered, where such sum would not have been payable
to him as profits or dividend, if it had not been paid as bonus or
commission.
(d) interest on any loan or borrowing from any public financial institution, a
state financial corporation or a state industrial investment corporation
payable in accordance with the terms and conditions of the agreement
governing such loan or borrowing.
(e) any sum payable by the assessee as interest on any loan or advances
from a scheduled bank or a co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural and
rural development bank in accordance with the terms and conditions of
the agreement governing such loan or advances.
(f) any sum payable by the assessee as an employer in lieu of any leave
at the credit of his employee.
(g) any sum payable by the assessee to the Indian Railways for the use of
railway assets.
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46.3 Section 43B is applicable 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, there is no need of reporting such expenditure under
this clause.
46.4 Provisions of section 43B are also applicable to interest on any loan or
borrowing from such class of non-banking financial companies as may be
notified by the Central Government in the Official Gazette in this behalf
(applicable w.e.f. AY 2024-25) or a deposit taking non-banking financial
company or systemically important non-deposit taking non-banking financial
company under clause (da) or any sum payable by the assessee to a micro
or small enterprise beyond the time-limit specified in section 15 of the Micro,
Small and Medium Enterprises Development Act, 2006 under clause (h)
(applicable w.e.f. AY 2024-25). However, clause 26 does not require
reporting in respect of clause (da) or (h) of section 43B. All the payments
referred in clause (a) to (g) above whether pre-existed on the first day of
previous year but not allowed in assessment of any preceding previous years
or incurred in the previous year are to be reckoned. In respect of the liability
which pre-existed on the first day of the previous year is allowable as
deduction if paid during the previous year. This is required to be reported in
clause 26(A)(a). In respect of the liability which is incurred in the previous
year is allowable to the extent it is paid on or before the due date for
furnishing the return of the income under section 139(1). Such items are to
be disclosed in clause 26(B)(a).
46.5 It should be kindly noted that the liability which pre-existed on the first
day of the previous year but not allowed in assessment of any preceding
previous years is paid after the end of the previous year then the amount will
be allowed as a deduction in the previous year in which it is paid. Proviso
allowing payment till due date of furnishing of return is not applicable to such
a liability. In respect of reporting made under clause (A), amount of pre-
existing liability i.e. from previous year should be adopted/verified from
previous/ last/immediate year ITR Form.
46.6 The Tax Auditor, in his Tax Audit report, should, therefore, clearly
distinguish the liability incurred during the previous year in respect of all the
specified sums referred to in clauses (a) to (g) from the liability that pre-
existed on the first day of the relevant previous year.
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46.7 If the assessee is following the cash basis of accounting, sums
referred to in clause (a), (b), (c), (d), (e), (f) and (g) of section 43B which are
debited to the profit and loss account will be allowable as they would have
been actually paid during the year. The Tax Auditor may consider the
following judgements and/or explanations:
46.8 If under the sales tax legislation applicable, sales tax so deferred is
treated as actually paid, then statutory liability shall be treated to have been
discharged for the purpose of Section 43B – Circular No 496 dated 25.09.87.
The Apex Court in case of CIT V. Gujarat Polycrete Pvt Ltd (2000) 246 ITR
463 has held that the State Government may amend its Sales Tax Act to
provide that the sales tax (deferred under an incentive scheme framed by it)
will be treated as actually paid so as to meet the requirements of Section
43B.
46.9 Some State Governments, instead of amending the Sales Tax Act,
have notified schemes under which sales tax is deemed to have been
actually collected and disbursed as loans. The amount of such sales tax
liability deemed to be converted into loan may be allowed as deduction in the
assessment for the previous year in which such conversion has been
permitted – Circular No 674 dated 29.12.93 and also held in Gujarat HC in
case of CIT v. Goodluck Silicate Industries (P) Ltd (2002) 178 CTR 92 held
that ‘ where sales tax due to the Government is converted as loan to be
repaid by the assessee, subsequently by instalments, it would amount to
actual payment of sales-tax.
46.10 If Tax Auditor is faced with similar scenario under the GST Law, then
after careful consideration of the facts, the treatment of GST dues may be
considered on lines similar to those under erstwhile Sales Tax Regime as
underlying principles and inferences drawn may apply to certain cases under
both the Statutes.
46.11 The Apex Court in case of CIT V. McDowell & Co Ltd (2009) 180
Taxman 514 has held that “Furnishing of a bank guarantee in respect of any
sum payable by an assessee cannot be equated with actual payment as
required under section 43B”. It was further held that “ Bottling fees payable
for acquiring a right of bottling of IMFL, which is determined under Excise Act
and Rules, is neither fee nor tax, but is consideration for grant of approval by
Government in respect of exclusive right to deal in bottling of liquor in all its
manifestation and, consequently bottling fee payable under Excise Law for
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acquiring a right of bottling IMFL does not fall within the purview of section
43B”. Tax Auditor can correlate with information disclosed as contingent
liabilities in the audited financial statements for the previous year under
consideration.
46.12 The Apex Court (9-member Constitution Bench) in case of Mineral
Area Development Authority and Others V. Steel Authority of India and
Others (2011) 4 SCC 450 has held that “Royalty is tax”. Thus, Royalty
payment outstanding as on balance sheet date shall be considered relevant
for the purpose of Section 43B.
46.13 The Apex Court in case of CIT V. Modipon Ltd (2017) 87 taxmann.com
275 has held that “Even advance deposit of duty within the meaning of
section 43B and it is entitled for the benefit of deduction” on the similar
grounds, Delhi High Court in case of CIT V. Maruti Suzuki India Ltd (2013)
212 Taxman 603 has held that “advance deposits in Excise Personal Ledger
Account cannot be disallowed under section 43B”.
46.14 The Apex Court in case of Berger Paints India Ltd v. CIT (2004) 135
Taxman 586 ( SC) has held that “ The entire amount of excise duty/customs
duty paid by the assessee in a particular accounting year is an allowable
deduction in respect of that year, irrespective of the amount of excise
duty/customs duty which is included in the valuation of the assessee’s
closing stock at the end of the accounting year”.
46.15 The MP HC in case of CIT V. Mohanlal Mishrilal & Sons (1996) 87
Taxman 194 & CIT V. Mohansingh & sons (1995) 216 ITR 432 has held that
“Mandi tax is not a tax as it is paid by a trader who enjoys the facility of
mandi because some services are provided by the mandi and, therefore, th at
cannot be taken as tax as the same is collected for the services rendered”.
46.16 Section 43B starts with non-obstante clause viz. “Notwithstanding
contained in any other section ………….” which means irrespective of the
accounting treatment in the profit and loss account drawn for the previous
year under consideration following mercantile or cash basis of accounting as
permissible u/s 145 of the Income-tax Act, 1961, deduction under section
43B is allowable only on payment basis.
46.17 Under the first proviso to section 43B, deduction is available in respect
of any sum which is actually paid by the assessee on or before the due date
applicable in his case for furnishing the return of income under sub-section
(1) of section 139. Since the due date of filing of the return would usually be
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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. Where due date for filing of return of income is extended, payments
made up to the extended due date also qualify for deduction.
46.18 Under section 43B(a), Central sales-tax/VAT/excise duty/GST when
paid is allowed as a deduction. Although under clause (a) of section 43B,
items that have been debited to the profit and loss account but not paid
during the previous year, are to be specified, where it is the practice of the
company to maintain a separate central sales-tax/ VAT/excise duty/GST
account and treat the central sales tax/excise duty/VAT/GST collected as a
liability, it would be necessary to show by way of note under this clause, the
amount of central sales tax/excise duty/VAT/GST etc. collected but not paid.
In case, any sum has been paid before the due date of filing the return, the
date and the amount of payment along with the amount paid should also be
disclosed.
46.19 The Finance Act, 2021 added Explanation 5 to Section 43B to clarify
that the provisions of this section shall not apply to a sum received by the
assessee from any of his employees to which the provisions of sub-clause
(x) of clause (24) of section 2 applies. Similarly, Explanation 1 and 2 have
been added to section 36(1)(va). In view of the above Explanations, if there
is a delay in payment of these sums to the concerned authority after the
relevant due date specified under the respective Act, then such sum even
though paid at any time beyond the due date will be disallowable
permanently.
46.20 It may be noted that emoluments in the nature of good work reward,
incentives or ex-gratia are not bonus or commission as contemplated under
section 36(1)(ii) but are deductible under section 37 of the Act as held by
Delhi High Court in Shri Ram Pistons and Rings Ltd. 307 ITR 363 and
Autopins (India) Ltd. 192 ITR 161.
46.21 The Explanations 3C, 3CA and 3D to section 43B clarify that a
deduction of any sum being interest payable under clause (d) and clause (e)
of section 43B shall be allowed, if such interest has been actually paid and
any interest referred to in that clause which has been converted into a loan
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or advance or debenture or any other instrument by which liability to pay is
deferred to a future date shall not be deemed to have been actually paid.
46.22 The Circular No. 7/2006 dated 17 th July, 2006 observes that the
clarificatory Explanations only reiterate the rationale that conversion of
interest into a loan or borrowing or advance does not amount to “actual
payment”. The Circular clarifies that the unpaid interest whenever actually
paid to the bank or financial institution will be in the nature of revenue
expenditure deserving deduction in the computation of income. Therefore,
the converted interest, by whatever name called, in the wake of its
conversion into a loan or borrowing or advance, will be eligible for deduction
in the computation of income of the previous year in which the converted
interest is ‘actually paid’. In other words, nomenclature of the sum of
converted interest will make no difference as the sum of converted interest
whenever is actually paid will not represent repayment of the principal. The
Circular clarifies that the fundamental principle remains that once an amount
has been determined as interest payable to the banks or financial
institutions, any subsequent change of nomenclature of interest will not affect
its allowability and deduction in terms of section 43B will have to be allowed
on its actual payment. The Assessing Officer would therefore be justified in
seeking a certificate from the assessee to be obtained by the assessee from
the lender bank or financial institution etc. as evidence of “actual payment” of
interest to banks or financial institutions.
46.23 As per clause (f), sum payable by the assessee as an employer in lieu
of any leave at the credit of his employees will be disallowed if not paid
before the due date of filling of the return under section 139(1).
46.24 The above particulars are required to be given irrespective of the fact
whether they have been debited to profit and loss account or not and such a
fact should be stated under this clause. For example, where GST etc.
collected could be accounted for as a Balance Sheet item in cases where
assessee is following the exclusive method of accounting for reporting of the
taxes.
46.25 In some cases, the Tax Auditor may find amounts of the nature
referred to in section 43B being credited to the profit and loss account
although the relevant provisions for such liability had not been allowed as a
deduction in any previous year in view of the specific provisions of section
43B requiring actual payment as a condition precedent to allowance. The
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amounts so credited to the profit and loss account are not chargeable to tax
since the conditions referred to in section 41(1) have not been satisfied. The
tax auditor should identify such items and maintain the same in his working
papers. Clause (g) refers to any sum payable by the assessee to the Indian
Railways for the use of railway assets. Payments for the use of railway
assets would not include basic rail freight, as such freight is for the service of
transport and not for use of railway assets. The distinction between contracts
of transportation and contracts for user (hire) of assets has been brought out,
in the context of tax deduction at source, by the High Courts in the following
cases:
CIT v Reliance Engineering Associates (P) Ltd [2012] 209 Taxman 351 (Guj)
CIT v Bharat Electronics Ltd [2015] 230 Taxman 651 (All)
CIT(TDS) v Indian Oil Corporation Ltd. [2018] 92 taxmann.com 281
(Uttarakhand)
46.26 Sums payable for use of railway assets would, however, include
amounts payable for hire of railway wagons, or for hire of rail sidings, or
lease rent payable for use of railway land or buildings. In case of payments
for use of hoardings/display panels put up on railway premises, whether the
payment is for use of railway assets would depend upon the terms of the
contract and parties to the contract.
46.27 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting in the format provided in
the e-filing utility;
S.No. Section Nature of Amount
liability
1 2 3 4
47. (a) Amount of Central Value Added Tax credits 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 in the
accounts.
48. (b) Particulars of income or expenditure of prior period
credited or debited to the profit and loss account.
[Clause 27 (a) and (b)]
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47. Clause 27(a)
47.1 Sub-clause (a) requires the factual reporting about the amount of
CENVAT credits availed of or utilized during the year as well as its treatment
in profit and loss account and treatment of outstanding CENVAT credits in
the accounts. CENVAT Credit Rules, 2002 were first introduced in place of
MODVAT credit and thereafter, effective 10 September 2004, CENVAT
Credit Rules, 2004 have now become applicable. CENVAT credit is available
on eligible inputs, input services and capital goods. Such credits are utilize d
for the payment of the excise duty liability. Accordingly, the tax auditor
should check relevant statutory records maintained under the Central Excise
Rules,2002 and the records maintained under CENVAT Credit Rules, 2004
and ascertain therefrom the amount of credit on eligible inputs, input services
and the capital goods and the amount utilized during the previous year.
Records maintained in RG-23, wherever available should also be verified.
47.2 The tax auditor should verify that there is a proper reconciliation
between balance of CENVAT credit in the accounts and relevant excise
records. The tax auditor should report the amount of CENVAT availed and
utilized under this sub-clause. In a given case, CENVAT availed may be
lesser than the CENVAT credit utilized during the year on account of opening
balance in CENVAT account or vice-versa and as such it would be advisable,
in order to avoid any misleading conclusion and inferences, to report the
opening and closing balances of CENVAT. Further, the sub-clause requires
reporting of the credits availed of or utilized during the previous year, it is
desirable to report both the credits availed and the credits utilized.
47.3 In so far as the reporting of accounting treatment of CENVAT credit is
concerned, the clause requires that its treatment in profit and loss account
and the treatment of outstanding CENVAT credit in the account have to be
reported upon.
47.4 Where the assessee follows exclusive method of accounting, the
excise duty paid on purchase of raw material is debited to the CENVAT
Credit Receivable Account and not as part of the purchase cost of raw
material. The credit utilized is debited to the Excise Duty A/c and credited to
CENVAT Credit Receivable Account. Thus, the credit availed and utilized will
not have any impact on the profit and loss account.
47.5 The reporting requirement under clause 14(b) of Form No. 3CD is a
requirement distinct and separate from the reporting requirement under this
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clause. The tax auditor should verify that information furnished under this
sub-clause is compatible with the information furnished under clause 14(b).
47.6 The tax auditor should consider the above guidance while reporting in
the format provided in the e-filing utility with respect to this clause.
47.7 With regard to reporting of the amount of CENVAT credits availed or
utilized during the previous year and its treatment in the profit and loss
account, wherever possible, it is advisable to give the details of the credit
availed and utilized as separate line items.
47.8 With regard to reporting of the treatment of outstanding CENVAT
Credits in the account, it is desirable to mention the opening and the closing
outstanding balances in the CENVAT Credits accounts as separate line
items. The account in which the outstanding amount is appearing, should
also be mentioned appropriately.
47.9 It is pertinent to note that since implementation of GST from July 1,
2017, central excise duty has been subsumed in GST and is leviable only on
six products viz. petroleum crude, diesel, petrol, aviation turbine fuel, natural
gas and tobacco. Hence, reporting under this clause is restricted for only
those assessees who deal in these products.
47.10 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting in the format provided in
the e-filing utility:
CENVAT Amount Treatment in Profit
& Loss /Accounts
Opening balance
CENVAT Availed
CENVAT utilized
Closing/outstanding
Balance
48. Clause 27(b) - Particulars of income or expenditure of prior period
credited or debited to the profit and loss account.
48.1 It may be noted that information under this clause would be relevant
only in those cases where the assessee follows mercantile system of
accounting. Under cash system of accounting, expenses debited/ income
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credited to the profit and loss account would be current year’s expenses/
income even though they may relate to earlier years. The tax auditor should
obtain the particulars of expenditure or income of any earlier year debited or
credited to the profit and loss account of the relevant previous year when
mercantile system of accounting is followed. In the case of a person whose
accounts of the business or profession have been audited under any other
law, the information may be available from annual accounts. In the case of a
person who carries on business or profession but who is not required by or
under any other law to get his accounts audited, however, a close scrutiny of
the ledger in regard to the period for which expenditure or income is entered
in the account books may be necessary.
48.2 It may be noted that there is a difference between expenditure of any
earlier year debited to the profit and loss account and the expenditure
relating to any earlier year, which has crystallised during the relevant year.
Material adjustments necessitated by circumstances which though related to
previous periods but determined in the current period, will not be considered
as prior period items.
48.3 In such cases, though the expenditure may relate to the earlier year, it
can be considered as arising during the year on the basis that the liability
materialised or crystallised during the year and such cases will not be
reported under this clause. Similar consideration will apply in relation to
income also.
48.4 In AS – 5/ Ind AS 8, it has been explained that material charges
(expenses) or credits (income) which arise in the current year as a result of
errors or omissions in the accounts of the earlier years will be considered as
prior period items/prior period errors. In view of this, the statutory auditor
would normally take into consideration all items of prior period income and
expenditure while giving his report on the financial statements. It would,
therefore, be advisable for the tax auditor to ascertain the circumstances
under which a particular expenditure has not been considered as a prior
period expenditure. If, on making the enquiries, he comes to the conclusion
that a particular item has to be treated as prior period expenditure, he should
disclose the same against this sub-clause. In the circumstances, auditor is of
the view that it is not a prior period item, the same may be disclosed in the
observation para of the audit report.
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48.5 The tax auditor should consider maintaining the following information
in his working papers file for the purpose of reporting in the following format:
Sr. No. Type Particulars Amount
Prior Period
to which it
relates (Year
in yyyy-yy
format)
1 2 3 4 5
49. Whether during the previous year the assessee has received any
property, being share of a company not being a company in which
the public are substantially interested, without consideration or
for inadequate consideration as referred to in section 56(2)(viia),
if yes, please furnish the details of the same.
[Clause 28]
49.1 Section 56(2)(viia) provides that where a firm or a company not being
a company in which the public are substantially interested, receives, in any
previous year from any person/s on or after 01.06.2010 but before
01.04.2017 any property being shares of a company (not being a company in
which the public is substantially interested,
(i) without consideration, the aggregate fair value of which exceeds
rupees fifty thousand, the whole of the aggregate fair market value of
such property
(ii) for a consideration which is less than the aggregate fair market value
of the property by an amount exceeding fifty thousand rupees, the
aggregate fair market value of such property as exceeds such
consideration
shall be chargeable to income-tax under the head “Income from other
sources”. Thus, section 56(2)(viia) is not applicable for AY 2022-23 and
onwards.
50. Whether during the previous year the assessee received any
consideration for 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]
50.1 Section 56(2)(viib) provides that where a company, not being a
company in which the public are substantially interested, receives, in any
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previous year, from any person being a resident (‘being a resident’ omitted
vide the Finance Act, 2023 w.e.f. AY 2024-25), any consideration for issue of
shares that exceeds the face value of such shares, the aggregate
consideration received for such shares as exceeds the fair market value of
the shares shall be chargeable to income-tax under the head “Income from
other sources”.
50.2 The provisions of this clause are not applicable where the
consideration is received
(a) by a venture capital undertaking from a venture capital company or a
venture capital fund or a specified fund.
(b) by a company from a class or classes of persons as may be notified by
the Central Government in this behalf. Please refer Notification No.
13/2019 dated 05.03.2019 issued under this provision.
50.3 (c) from a non-resident (till AY 2023-24).Proviso to section
56(2)(viib) states that where in terms of provisions of above referred
notification under clause (viib) of section 56(2) is not applied to a company
on account of fulfilment of conditions specified in the said notification, and if
such company fails to comply with any of those conditions, then, any
consideration received for issue of share that exceeds the fair market value
of such share shall be deemed to be the income of that company chargeable
to income-tax for the previous year in which such failure has taken place and,
it shall also be deemed that the company has under-reported the said income
in consequence of the misreporting referred to in sub-section (8) and sub-
section (9) of section 270A for the said previous year.
50.4 As per the Explanation to section 56(2)(viib), the fair market value
shall be the value as may be determined in accordance with such method as
prescribed under Rule 11UA or as may be substantiated by the company to
the satisfaction of the Assessing Officer, based on the value, on the date of
issue of shares, of its assets, including intangible assets being goodwill,
know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, whichever is higher.
50.5 Since section 56(2)(viib) is applicable to companies in which public is
not substantially interested, reporting under this clause is to be done only for
such companies. The auditor should obtain from the auditee, a list containing
the details of shares issued, if any, by it to any person and verify the same
from the books of account and other relevant documents. Attention is invited
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to the provisions of section 2(18) which defines the company in which public
are substantially interested.
50.6 For reporting under this clause with respect to unquoted equity shares,
the auditor has to consider the provisions of Rule 11UA(2) which provides for
manner of determining the fair market value of unquoted equity shares.
50.7 Where the fair market value of unquoted shares for the purpose of its
issue is determined under:
─ the Discounted Cash Flow Method for issue of equity shares -
valuation report obtained by the assessee from a merchant banker,
─ Rule 11UA(2)(a) for issue of equity shares - a valuation report
obtained by the assesee from an Accountant or Management,
─ Rule 11UA(1)(c)(c) for issue of shares other than equity shares –
valuation report obtained from a merchant banker or an accountant
─ Explanation (a)(ii) to Section 56(2)(viib) based on the value, on the
date of issue of shares, of its assets, including intangible assets being
goodwill, know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of similar nature
– valuation report obtained from an expert.
─ The auditor should obtain a copy of the valuation report. Here,
attention is invited to the Standard on Auditing-620 “Using the work of
an Auditor’s expert”.
50.8 The auditor should consider maintaining the following information in
his working paper file:-
Sr Name PAN of Whether No. of Consid Fair Market Face Amount
No and person, if the Shares eration value as value taxable
status available company issued receive per Rule of under
of the is a d 11UA(1) shares section
person company (c)/11UA (2) issued 56(2)(viib)
to in which (Report the
whom public are difference
shares substantia (f)-(g),
have lly ONLY if (f)
been interested is greater
issued than (g),
else report
“Not
Applicable”
*)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
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* If status of person to whom shares are issued is a non-resident (till AY
2023-24) or a venture capital or specified unit, then there is no tax under
section 56(2)(viib).
51. (a) 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)
(b) If yes, please furnish the following details:
(i) Nature of income:
(ii) Amount thereof:
[Clause 29A]
51.1 This clause requires disclosure of whether any amount is chargeable
to tax under section 56(2)(ix), and if so, to furnish prescribed details of such
income. Section 56(2)(ix) provides for taxability as Income from Other
Sources of any sum of money received as an advance or otherwise in the
course of negotiations for transfer of a capital asset, if such sum is forfeited
and the negotiations do not result in transfer of such capital asset.
51.2 The auditor is not required to report any such forfeited amount if it is in
respect of a personal capital asset, where such asset or the advance or the
forfeiture is not recorded in the books of account relating to the business or
profession. If an advance has been received and has been outstanding for a
considerable period of time or has become time barred, there is no
requirement to report such amount unless and until it is forfeited by an act of
the assessee.
51.3 Forfeiture of amounts received as advance towards transfer of a
capital asset is required to be reported under this clause. Any advances
received and forfeited towards sale of stock-in-trade would be taxable under
section 28(i) and would not be required to be reported since the amount
would be credited to profit & loss account. The tax auditor should verify with
the auditee as to whether the amount has been forfeited. If the assessee
contends that the amount has not been forfeited, the tax auditor may look at
totality of developments and may obtain a management representation that
even though the contract permits forfeiture on some conditions and even
though such conditions have occurred, the assessee has not yet forfeited the
advance and other sums received. Without right to forfeit, the amount so
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forfeited may become income under sub- clause (ix) and the tax auditor
should report such forfeiture with appropriate note.
51.4 Mere unilateral writing back of an advance by credit to the profit and
loss account, asset account or capital account may not by itself amount to an
act of forfeiture by the assessee. Such a write back is, however, an indication
of a possible act of forfeiture, which needs further verification by the tax
auditor. It is advisable for the tax auditor to disclose all such acts of unilateral
write backs as well, out of abundant precaution, with appropriate note
regarding the stand taken by the assessee. The Supreme Court, in the case
of Bankura Municipality v. Lalji Raja and Sons AIR 1953 SC 248, 250 has
observed:
"According to the dictionary meaning of the word 'forfeiture', the loss or
the deprivation of goods has got to be in consequence of a crime,
offence or breach of engagement or has to be by way of penalty of the
transgression or a punishment for an offence. Unless the loss or
deprivation of the goods is by way of a penalty or punishment for a
crime, offence or breach of engagement, it would not come within the
definition of forfeiture."
51.5 The tax auditor should therefore obtain representation from the
assessee regarding advances received at any point of time towards transfer
of capital assets which have been forfeited during the year. The advances
might have been received during the previous year. For the purpose of this
clause, the previous year in which forfeiture takes place is relevant. He
should also examine whether any amount of such advances has been written
back during the year, and examine the basis of such write back to determine
whether such write back was on account of an act of forfeiture. The reporting
requirement is to state whether any amount is to be included as income
chargeable under the head “Income from Other Sources”. If the answer to
this is yes, then details are required to be furnished as under:
(i) Nature of Income
(ii) Amount thereof
51.6 As regards nature of income, the tax auditor should specify that the
amount is forfeiture of advance received in the course of negotiation of
transfer of capital asset.
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52. (a) Whether any amount is to be included as income
chargeable under the head ‘income from other sources’ as referred to in
clause (x) of sub-section (2) of section 56? (Yes/No)
(b) If yes, please furnish the following details:
(i) Nature of income:
(ii) Amount (in Rs.) thereof:
[Clause 29B]
52.1 Sub-clause (a) requires reporting as to whether any amount is to be
included as income chargeable under the head ‘income from other sources’
as referred to in section 56(2)(x). If the answer is in affirmative, tax auditor
should state ‘yes’, in other cases, he should state ‘no’.
52.2 Section 56(2)(x) provides that the following shall be income
chargeable to income-tax under the head income from other sources, unless
chargeable under any other head, being: Where any person receives in any
previous year, from any person or persons money, immovable property, or
other property and conditions stated in the clause are satisfied, then, it is
treated as income of the recipient. The conditions for any such receipt for
being treated as income are as follows: --
(a) any sum of money, without consideration, the aggregate value of
which exceeds fifty thousand rupees, the whole of the aggregate value
of such sum;
(b) any immovable property,
(A) without consideration, the stamp duty value of which exceeds
fifty thousand rupees, the stamp duty value of such property;
(B) for a consideration, the stamp duty value of such property as
exceeds such consideration, if the amount of such excess is
more than the higher of the following amounts, namely:
(i) the amount of fifty thousand rupees; and
(ii) the amount equal to ten per cent. of the consideration:
Provided that where the date of agreement fixing the amount of
consideration for the transfer of immovable property and the date of
registration are not the same, the stamp duty value on the date of
agreement may be taken for the purposes of this sub-clause:
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Provided further that the provisions of the first proviso shall apply only
in a case where the amount of consideration referred to therein, or a
part thereof, has been paid by way of an account payee cheque or an
account payee bank draft or by use of electronic clearing system
through a bank account or through such other electronic mode as may
be prescribed, on or before the date of agreement for transfer of such
immovable property:
Provided also that where the stamp duty value of immovable property
is disputed by the assessee on grounds mentioned in sub-section (2)
of section 50C, the Assessing Officer may refer the valuation of such
property to a Valuation Officer, and the provisions of section 50C and
sub-section (15) of section 155 shall, as far as may be, apply in
relation to the stamp duty value of such property for the purpose of this
sub-clause as they apply for valuation of capital asset under those
sections;
(c) any property, other than immovable property,
(A) without consideration, the aggregate fair market value of which
exceeds fifty thousand rupees, the whole of the aggregate fair
market value of such property;
(B) for a consideration which is less than the aggregate fair market
value of the property by an amount exceeding fifty thousand
rupees, the aggregate fair market value of such property as
exceeds such consideration:
Provided that this clause shall not apply to any sum of money or any
property received --
(I) from any relative; or
(II) on the occasion of the marriage of the individual; or
(III) under a will or by way of inheritance; or
(IV) in contemplation of death of the payer or donor, as the case
may be; or
(V) from any local authority as defined in the Explanation to clause
(20) of section 10; or
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(VI) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in clause (23C) of section 10; or
(VII) from or by any trust or institution registered under section 12A
or section 12AA or section 12AB; or
(VIII) by any fund or trust or institution or any university or other
educational institution or any hospital or other medical institution
referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi)
or sub-clause (via) of clause (23C) of section 10; or
(IX) by way of transaction not regarded as transfer under clause (i)
or clause (iv) or clause (v) or clause (vi) or clause (via) or
clause (viaa) or clause (vib) or clause (vic) or clause (vica) or
clause (vicb) or clause (vid) or clause (vii) or clause (viiac) or
clause (viiad) or clause (viiae) or clause (viiaf) of section 47; or
(X) from an individual by a trust created or established solely for the
benefit of relative of the individual.
(XI) from such class of persons and subject to such conditions, as
may be prescribed.
(XII) by an individual, from any person, in respect of any expenditure
actually incurred by him on his medical treatment or treatment
of any member of his family, for any illness related to COVID-19
subject to such conditions, as the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(XIII) by a member of the family of a deceased person ,
(A) from the employer of the deceased person; or
(B) from any other person or persons to the extent that such
sum or aggregate of such sums does not exceed ten lakh
rupees,
where the cause of death of such person is illness related to
COVID-19 and the payment is,
(i) received within twelve months from the date of death of
such person; and,
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(ii) subject to such other conditions, as the Central
Government may, by notification in the Official Gazette,
specify in this behalf.
It has been explained that for the purposes of clauses (XII) and
(XIII) of this proviso, “family”, in relation to an individual means
(i) the spouse and children of the individual; and
(ii) the parents, brothers and sisters of the individual or any
of them, wholly or mainly dependent on the individual;
Provided further that clauses (VI) and (VII) of the first proviso shall not apply
where any sum of money or any property has been received by any person
referred to in sub-section (3) of section 13.
For the purposes of this clause,
(a) the expressions “assessable”, “fair market value”, “jewellery”, “relative”
and “stamp duty value” shall have the same meanings as respectively
assigned to them in the Explanation to section 56(2)(vii); and
(b) the expression “property” shall have the same meaning as assigned to
it in clause (d) of the Explanation to section 56(2)(vii) and shall include
virtual digital asset.
The term “property” has been defined to include only specific types of assets.
It has been defined to mean the following capital asset of the assessee,
namely:—
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures;
(viii) any work of art; or
(ix) bullion
52.3 Receipt of assets, other than these, would not be covered by the
provisions of this section, and would therefore not be required to be reported.
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Stock-in-trade, not being a capital asset, is also not covered by this
provision.
52.4 Fair Market Value as per Explanation to section 56(2)(vii) of property
other than immovable property means the value determined in accordance
with method prescribed under Rule 11U and 11UA. Such receipts which are
exempt, cannot be charged as income under section 56(2)(x) and are
therefore not required to be reported under this clause. The tax auditor
should obtain a representation from the assessee regarding any such
receipts during the year, either received in his business or profession and
recorded in the books of account of such business or profession. He should
also scrutinise the books of account to verify whether receipt of any such
amount or asset has been recorded therein. Based on such verification, tax
auditor has to consider whether the question is to be answered in affirmative
or otherwise.
52.5 In case answer to clause 29B(a) is yes, then the tax auditor has to
furnish the following details, namely, nature of income and amount. In case
of nature of income, tax auditor should state whether the income is by way of
receipt of any sum of money or from acquisition of any immovable property
like land, building etc. or other than immovable property like shares and
securities, jewellery, drawings, paintings etc. Value of income should be
determined as provided in sub-clause (x) of section 56(2) which has been
discussed hereinabove.
53. Details of any amount borrowed on hundi or any
amount due thereon (including interest on the
amount borrowed) repaid, otherwise than through
an account payee cheque. [Section 69D].
[Clause 30]
53.1 Details of the amount borrowed on hundi (including interest on such
amount borrowed) and details of repayment of such borrowings otherwise
than by an account payee cheque, are required to be indicated under this
clause. In this context, a reference may also be made to Circular No. 208
dated 15th November, 1976 and Circular No. 221 dated 6 th June, 1977
issued by Board explaining the provisions of section 69D - refer Appendix
XV.
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53.2 For this purpose, the tax auditor should obtain a complete list of
borrowings and repayments of hundi loans otherwise than by account payee
cheques and verify the same with the books of account.
53.3 There will be practical difficulties in verifying the loan taken or repaid
on hundi by account payee cheque. In such cases, the tax auditor should
verify the borrowing/repayments with reference to such evidence which may
be available and in the absence of conclusive or satisfactory evidence, or the
auditor may obtain suitable certificate/ management representation in this
regard. Attention is invited to difference in wordings employed in section 69D
and section 40A(3)/(3A). In later sections, payment through use of electronic
clearing system through a bank account or through such other electronic
mode as may be prescribed is permitted whereas in section 69D, accept ance
and payment through these measures is not mentioned and accordingly not
permitted.
53.4 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting against the said clause in
the format provided in the e-filing utility:
Sr. Name of PAN of Addres Amount Date of Amount Amount Date of
No the (b), if s of (b) borrowe borrowin due repaid repaymen
. person availabl with d during g includin (includin t
from e city, the g g
whom state previous interest interest)
the and PIN year during
amount code. the
borrowe previous
d or year
repaid
on hundi
(a) (b) (c) (d) (e) (f) (g) (h) (i)
54. (a) Whether primary adjustment to transfer price, as referred to
in sub-section (1) of section 92CE, has been made during
the previous year? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Under which clause of sub-section (1) of section
92CE primary adjustment is made?
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(ii) Amount (in Rs.) of primary adjustment:
(iii) Whether the excess money available with the
associated enterprise is required to be repatriated to
India as per the provisions of sub-section (2) of
section 92CE? (Yes/No)
(iv) If yes, whether the excess money has been
repatriated within the prescribed time (Yes/No)
(v) If no, the amount (in Rs.) of imputed interest income
on such excess money which has not been
repatriated within the prescribed time.
[Clause 30A]
54.1 Clause 30A requires reporting of primary adjustments to the taxable
income and various other details, for the purpose of making secondary
adjustments under section 92CE. Section 92CE, providing for secondary
transfer pricing adjustments, requires making of a secondary adjustment in
certain cases where primary transfer pricing adjustments have been made.
As per sub-section (1) of section 92CE, the secondary adjustment is required
in the following cases where primary transfer pricing adjustment has been:
i. made by the assessee of his own accord in his return of income;
ii. made by the assessing officer and accepted by the assessee;
iii. determined under an Advance Pricing Agreement entered into by the
assessee under section 92CC on or after 1st day of April 2017;
iv. made as per Safe Harbour Rules framed under section 92CB; or
v. arising as a result of a resolution of an assessment under Mutual
Agreement Procedure under a double taxation avoidance agreement
(DTAA) entered into under section 90 or 90A.
54.2 No secondary adjustment is required if the primary adjustment relates
to assessment year 2016-17, or an earlier assessment year. No secondary
adjustment is required if the amount of primary adjustment made in any
previous year does not exceed Rs. 1 crore. Sub-section (2) of section 92CE
provides that where due to the primary adjustment, there is an increase in
the total income or a reduction in the loss of the assessee, the adjustment
(difference between the arm’s length price and the actual transaction price) is
regarded as excess money available with the associated enterprise, and is to
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be repatriated to India within the prescribed time. Where the excess money
or part thereof is not repatriated to India within the prescribed time, it is
deemed as an advance to the associated enterprise and interest is to be
computed on such advance in the prescribed manner, (as per Rule 10CB) as
a secondary adjustment. Vide Finance Act 2019, an Explanation was
inserted in the said sub-section to provide that excess money or part thereof
may be repatriated from any of the non-resident AE.
54.3 Sub-section (2A) however, provides that where the excess money or
part thereof has not been repatriated within the prescribed time, the
assessee may, at his option, pay additional income-tax at the rate of 18% on
such excess money or part thereof, as the case may be. Sub-section (2B)
further provides that the tax on the excess money or part thereof so paid by
the assessee under sub-section (2A) shall be treated as the final payment of
tax in respect of the excess money or part thereof not repatriated and no
further credit therefor shall be claimed by the assessee or by any other
person in respect of the amount of tax so paid. The provisions also state that
where the additional income-tax referred to in sub-section (2A) is paid by the
assessee, he shall not be required to make secondary adjustment under sub-
section (1) and compute interest under sub-section (2) from the date of
payment of such tax. Sub-section (2C) further provides that no deduction
shall be allowed under the Act for the taxes paid under sub-section (2A).
54.4 Rule 10CB(1) provides for a time limit of 90 days for repatriation of the
excess money or part thereof. This period of 90 days is to be computed from
the following dates, in respect of each type of primary adjustment:
(i) Where primary adjustments are made in the return of income, from the
due date of filing of the return of income under section 139(1);
(ii) Where primary adjustments made by the Assessing Officer have been
accepted by the assessee, from the date of order of the Assessing
Officer or the appellate authority, as the case may be;
(iii) Where an Advance Pricing Agreement has been entered into by the
assessee before the due date of filing of Income-tax Return, from the
date of filing of the return of income under section 139(1);
(iiia) Where an Advance Pricing Agreement has been entered into by the
assessee after the due date of filing of Income-tax Return, from the
end of the month in which the Advance Pricing Agreement has been
entered.
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(iv) Where the adjustment is as per Safe Harbour Rules, from the due date
of filing of the return of income under section 139(1);
(v) Where the adjustment is on account of an agreement made under the
Mutual Agreement Procedure under a DTAA, from the date of giving
effect by the assessing officer under Rule 44H.
54.5 Rule 10CB(2) further provides the manner of computation of interest
on excess money or part thereof which is not repatriated in India within the
prescribed time limit. Where the international transaction is denominated in
Indian rupees, the rate of interest will be the one-year marginal cost of fund
lending rate of State Bank of India as on 1st April of the relevant previous
year, plus 325 basis points (i.e. 3.25%). Where the international transaction
is denominated in foreign currency, the rate of interest shall be the six -month
London Interbank Offered Rate (LIBOR) as on 30th September of the
relevant previous year plus 300 basis points (i.e. 3%). It may, however, be
noted here that effective December 31, 2021, LIBOR was no longer to be
used in the case of all Pound sterling, Euro, Swiss franc, and Japanese yen
settings, and the 1-week and 2-month US dollar settings, and effective June
30, 2023, in the case of the remaining US dollar settings, and was to be
replaced by new risk-free interest rates by adopting Alternative Reference
Rates (ARR). Thus, the present rules would warrant a change to this effect .
Secondary adjustments are applicable only in respect of transfer pricing
adjustments relating to international transactions.
54.6 Clause 30A requires reporting of whether primary adjustment to
transfer price, as referred to in section 92CE(1), has been made during the
previous year. Thus, the tax auditor is required to verify whether any primary
adjustment is ‘made’ in terms of Section 92CE(1) during the previous year
under consideration. The primary adjustment made may not necessarily
relate to previous year under consideration. To illustrate, consider a case
where taxpayer makes a voluntary adjustment in his return of income filed in
November 2022 (pertaining to FY 2021-22). Such primary adjustment is to be
reported in the tax audit report of FY 2022-23 to be filed on or before
October 2023, for the reason that the primary adjustment has taken place in
November 2022 (i.e. during FY 2022-23). In the said example, if the excess
money or part thereof with the AE is not repatriated to India within 90 days
from the due-date of filing of ROI i.e. by 28th February 2023, interest on such
excess money computed as per the prescribed rules will also need to be
reported in the tax audit report to be filed in October 2023. Amendments by
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the Finance Act, 2019 - Amendments were made by the Finance Act, 2019
wherein it was provided that excess money or part thereof may be
repatriated from any other non-resident AE avoiding additional tax. Further, if
the excess money or part thereof was not repatriated within the prescribed
time, option is granted to the assessee to pay additional tax on such excess
money at the rates as prescribed. The applicable additional tax was
prescribed at 18% plus applicable surcharge & cess. The auditor should take
care of the same.
54.7 It is also necessary that the disclosure under Clause 30A may need to
be done in respect of each and every type of primary adjustment made in the
relevant financial year, irrespective of the previous year to which this
adjustment pertains to. For instance, an assessment order in relation to say,
FY 2019 may be passed during FY 2022-23 wherein AO/TPO has made a
primary TP adjustment and the same has been accepted by the taxpayer.
Similarly, an APA may be signed by the taxpayer in FY 2022-23, which may
provide for primary adjustment for the four roll- back years from FY2018-19
to FY 2021-22. All these primary adjustments may need to be reported in the
tax audit report of FY 2022-23.
54.8 For this purpose, the tax auditor should obtain a certificate from the
assessee, as to what transfer pricing adjustments have been made in the
return(s) of income filed during the previous year: whether any advance
pricing agreement was entered into during the previous year, whether any
transfer pricing adjustment was made/confirmed in an assessment
order/appellate authority order passed during the previous year, or whether
any agreement has been arrived at under a Mutual Agreement Procedure
during the previous year. The tax auditor should also verify tax record s to
check whether there is any such occurrence.
54.9 If there is any such occurrence relating to assessment years 2017-18
or later years, and the amount of primary adjustment exceeds Rs. 1 crore,
the tax auditor is required to report the fact that there has been a primary
adjustment made during the previous year. Primary adjustments for earlier
years prior to assessment year 2017-18, or primary adjustments totaling less
than Rs. 1 crore for a previous year, which do not warrant a secondary
adjustment, should also be reported under clause 30A(a)(i).
54.10 The tax auditor then needs to report the relevant clause of section
92CE(1) under which the relevant adjustment falls, and the amount of
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adjustment. In this regard, the auditor should also obtain a prior management
representation on the information obtained to be true and accurate , basis
which he should make the disclosure in the tax audit report. Hence the
primary onus should be with the management.
54.11 Under clause 30A(b)(iii), the requirement is to report whether the
excess money available with the associated enterprise is required to be
repatriated to India as per the provisions of section 92CE(2). If the
adjustment relates to an assessment year prior to assessment year 2017 -18,
or the primary adjustment is of less than Rs. 1 crore, the excess money is not
required to be repatriated to India, and the answer to this question may be
given as “No”. The answer to this question should be given as “Yes” only if
the adjustment relates to assessment year 2017-18 or later assessment
years, and if the adjustment exceeds Rs. 1 crore.
54.12 In case any such primary adjustment has taken place, which requires
repatriation of the excess money or part thereof, the tax auditor should verify
whether the excess money has been received, and whether it has been
received within the prescribed time. He should report accordingly. In case the
excess money or part thereof has not been repatriated within the prescribed
time, the imputed interest income, which would be the secondary adjustment,
needs to be computed. For this purpose, the tax auditor should ask the
taxpayer to obtain certificates of the relevant SBI/LIBOR (Effective 31st
December 2021/ 30th June 2023, LIBOR discontinued) interest rates, and
provide the computation of the imputed interest income. The tax auditor
should verify the correctness of such calculation of interest, on the basis of
the certificates regarding the SBI/LIBOR rates plus the incremental interest,
as per Rule 10CB.
54.13 At times the question has been posed with respect to the date up to
which the imputed interest income is to be reported i.e. whether interest
income imputed till the end of the previous year is to be reported or whether
interest income imputed up to the date of furnishing of Tax Audit Report is to
be reported. Since the reporting is for the previous year, it is advisable for
the tax auditor to ensure that the amount of interest imputed till the end of
the previous year is furnished. In case the interest up to the date of filing of
the tax audit report is given, it is advisable for the tax auditor to provide a
break-up of the amount of interest imputed till end of the relevant previous
year and for the period post the end of the relevant previous year ending with
the date of filing tax audit report. It is possible that interest income may be
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imputed during the relevant previous year in connection with primary
adjustment made during the earlier previous years.
54.14 It is possible that amount of imputed interest income on the excess
money not repatriated to India may relate to more than one year. Having
regard to Rule 10CB, the interest liability extends till the date of repatriation.
Accordingly, for the relevant year under audit, such liability in respect of
imputed interest may extend not only to the primary adjustment referred to in
clause 30A(a) above but may also relate to primary adjustment made in the
earlier years. Prima-facie, it appears that reporting of such interest is not
required under clause 30A(b)(v) since clause 30A requires reporting only in
relation to primary adjustment made during the relevant previous year.
However, on the other hand, such interest income arising from primary
adjustment made in earlier year is also taxable during the previous year
under consideration and will be included in the return of income of the
concerned previous year. Thus, it may be advisable for the taxpayer to
furnish and tax auditor to verify and report the information pertaining to such
primary adjustments in respect of interest income which is chargeable u/s.
92CE(2).
55. (a) Whether the assessee has incurred expenditure during the
previous year by way of interest or of similar nature
exceeding one crore rupees as referred to in sub-section (1)
of section 94B? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Amount (in Rs.) of expenditure by way of interest or of
similar nature incurred:
(ii) Earnings before interest, tax, depreciation and amortization
(EBITDA) during the previous year (in Rs.):
(iii) Amount (in Rs.) of expenditure by way of interest or of
similar nature as per (i) above which exceeds 30% of
EBITDA as per (ii) above:
(iv) Details of interest expenditure brought forward as per sub-
section (4) of section 94B:
A.Y. Amount (in Rs.)
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(v) Details of interest expenditure carried forward as per sub-
section (4) of section 94B:
A.Y. Amount (in Rs.)
[Clause 30B]
55.1 Clause 30B requires reporting for the purposes of examining
allowability of expenditure by way of interest or of similar nature in respect of
debt issued by a non-resident associated enterprise (“AE”) under section
94B, while computing income under the head “Profits and Gains of Business
or Profession”. Section 94B provides that, where an Indian company or a
permanent establishment of a foreign company in India, incurs any
expenditure by way of interest or of similar nature exceeding Rs. 1 crore
which is deductible in computation of income under the head “Profits & Gains
of Business or Profession” in respect of a debt issued by a non-resident AE,
such interest, to the extent of excess interest, shall not be deductible.
Further, if the debt is issued by a lender who is not associated, but an AE
provides either an implicit or explicit guarantee to such lender, or deposits a
corresponding and matching amount of funds with the lender, such debt is
also regarded as having been issued by an AE.
55.2 The excess interest is to be computed as the lower of:
(i) Total interest paid or payable in excess of 30% of earnings before
interest, taxes, depreciation and amortisation (“EBITDA”) of the
borrower in the previous year; or
(ii) Interest paid or payable to AEs for that previous year.
The excess interest, which is disallowed, can be carried forward for a period
of 8 assessment years following the year of disallowance, to be allowed as a
deduction against profits and gains of any business in the subsequent years,
to the extent of maximum allowable interest expenditure under this section.
55.3 The term “debt” is widely defined to mean any loan, financial
instrument, finance lease, financial derivative, or any arrangement that gives
rise to interest, discounts or other finance charges that are deductible in
computation of income chargeable under the head “Profits and Gains of
Business or Profession”. Section 94B(3) excludes an Indian company or a
PE of a foreign company engaged in the business of banking or insurance
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from applicability of the Section. With effect from and FY 2023-24 (i.e., from
AY 2024-25) onwards, class of non-banking financial companies (NBFC)
(being a NBFC as per section 45-I (f) of Reserve Bank of India Act, 1934 (2
of 1934) as notified, are also excluded from the purview of section 94(1).
Section 94B(1A) also excludes interest paid in respect of a debt issued by a
lender which is a permanent establishment in India of a non-resident, being a
person engaged in the business of banking.
55.4 Also, if the assessee is not a company or the PE of a foreign company,
the provisions of section 94B do not apply, and details under this clause are
not required to be provided. In such cases, the answer to question ( a) may
be given as “No”. Similarly, the section would apply only where interest (or
expenditure of similar nature) paid or payable to non-resident AE(s) (or in
respect of a debt where an AE – resident or non-resident – has provided an
implicit or explicit guarantee or matching deposit) exceeds Rs. 1 crore during
the year. In case the interest and similar expenditure paid or payable to non-
resident AE(s) (or non-resident lender of such debt) does not exceed Rs. 1
crore, the section is not applicable. Hence, the answer to question (a) should
be given as “No”.
55.5 Expenditure of similar nature should be read in the context of “debt” as
defined in section 94B(5)(ii). “Debt” is defined to mean loan, financial
instrument, finance lease, financial derivative, or any arrangement that gives
rise to interest, discount or finance charges. “Expenditure of similar nature”
for the purposes of this section would therefore include discount or premium
on securities, finance cost component of lease rentals in respect of finance
leases, guarantee commission, commitment fees or any other finance
charges. In computing the limit of Rs. 1 crore, only interest and expenditure
of similar nature which is deductible while computing income under the head
“Profits and Gains of Business or Profession” should be considered, and not
interest deductible under any other head of income or interest which is
otherwise not deductible. Therefore, any interest disallowable under section
14A, under the proviso to section 36(1)(iii), under section 40A(i) o r section
40A(2) should not be considered as interest for the purposes of section
92B(1). Similarly, interest disallowed on account of transfer pricing under
section 92, should also not be considered, since such interest is not
allowable in computing income under the head “Profits and Gains of
Business or Profession”.
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55.6 In case such interest paid to AEs exceeds Rs. 1 crore, details in part
(b) of the clause need to be given. In item (i) of sub-clause (b), details of
expenditure incurred by way of interest or of similar nature need to be
provided. However, in view of the requirement of clause (a) where a specific
question has been asked only with respect to section 94B(1), the subsequent
clauses seem to be consequential and flowing from clause (a). Section
94B(1) confines itself to interest paid to Non-resident AE and section 94B(2)
can be regarded as controlled by section 94B(1) since section 94B(2)
operates “for the purposes of sub-section (1)”. The computation of “excess
interest” as per section 94B(2) should be within the boundaries of interest
referred to in section 94B(1), which is NR AE interest paid. The language of
para 46.3 of CBDT’s Circular No. 2 of 2018 containing Explanatory Notes to
Provisions of Finance Act, 2017 (dated 15 February 2018) is similar to the
format of reporting prescribed by CBDT in clause 30B of Form No. 3CD. The
tax auditor has to obtain and report the expenditure incurred by way of
interest or of similar nature paid to its non-resident AE or to the lender to
whom the AE has provided an implicit or explicit guarantee or has deposited
a matching amount of funds, out of the total interest and similar expenditure
claimed as deduction. It should be kept in mind that word ‘paid’ in terms of
section 43(2) means actually paid or incurred according to the method of
accounting employed.
55.7 In item (ii) of sub-clause (b), the amount of EBITDA needs to be
disclosed. Collins English Dictionary defines EBITDA as “the amount of profit
that a person or company receives before interest, taxes, deprecia tion, and
amortisation have been deducted”. Section 94B(2) uses similar terminology.
While computing the EBITDA, the figures as per the final audited stand -alone
accounts of the company should be considered, and not the figures as
adjusted for the income tax computation after various allowances and
disallowances. In item (iii) of sub-clause (b), the amount by which the interest
incurred as per item (i) exceeds 30% of EBITDA as per item (ii), needs to be
given. In case the EBITDA is negative, the entire interest and other similar
expenditure incurred as per item (i) need to be given here, without any
adjustment for the negative figure, the negative figure being taken as nil.
55.8 In item (iv) of sub-clause (b), the details of brought forward excess
interest disallowed in earlier years, which has not been allowed as a
deduction, and which is available for deduction during the year under audit
(without considering the limitation during the year under audit), is required to
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be given. For this purpose, the tax auditor should verify the computation of
income as per the return of income filed or the relevant earlier years. In item
(v) of sub-clause (b), the details of carried forward excess interest are to be
given. This figure is to be computed after reducing the brought forward
excess interest allowable as a deduction during the year under audit, or
adding the excess interest of the year, as the case may be. The tax auditor
should verify the draft computation of income certified by the management,
or the tax advisor, as the case may be.
56. (a) Whether the assessee has entered into an impermissible
avoidance arrangement, as referred to in section 96, during
the previous year? (Yes/No)
(b) If yes, please specify:-
(i) Nature of the impermissible avoidance arrangement:
(ii) Amount (in Rs.) of tax benefit in the previous year
arising, in aggregate, to all the parties to the
arrangement
[Clause 30C]
56.1 Clause 30C of Form 3CD requires the Tax Auditor to report
“Impermissible Avoidance Arrangements” (as referred to in Secti on 96)
entered into by the assessee during the previous year and to quantify the tax
benefit arising in the aggregate in the previous year to all the parties to such
arrangement.
56.2 Chapter X-A provides for General Anti Avoidance Rules. This Chapter
deals with impermissible avoidance agreement. The key features of the
GAAR provisions are as follows:
The provisions of General Ant-Avoidance Rule (GAAR) are contained
in Chapter X-A comprising of section 95 to section 102 and the
procedural provisions relating to mechanism for invocation of GAAR
and passing of the assessment order in consequence thereof are
contained in section 144BA. Rules 10U to 10UF have been prescribed
by the Central Government in respect of GAAR.
The objective of GAAR is to target abusive transactions entered into
with the main object of avoiding taxes with the use of sophisticated
structures and codify the doctrine of “substance over form” where the
real intention of the parties and effect of transactions and purpose of
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an arrangement is taken into account for determining the tax
consequences, irrespective of the legal structure that has been
superimposed to camouflage the real intent and purpose. (Refer
Explanatory Memorandum to Finance Bill 2012 which originally
introduced GAAR.)
Arrangements entered into prior to 1st April 2017 are excluded from
the application of GAAR provisions.
The provisions of GAAR are triggered when an arrangement is
declared by the Principal Commissioner or the Commissioner or by an
Approving Panel as an Impermissible Avoidance Arrangement (“IAA”)
in pursuance of provisions of section 144BA.
An arrangement is to be treated as an IAA, if its main purpose is to
obtain tax benefit (“Main Purpose” Test) and it satisfies any one or
more of the four tests (“Additional Tests”) specified in Section 96.
The four tests (“Additional Tests”) specified in Section 96 are:
(i) Arrangement creates rights/ obligations which are not ordinarily
created between persons dealing at arm’s length, (which may
also be referred to as “Abnormal Rights/Obligations”);
(ii) Arrangement results, directly or indirectly, in misuse or abuse of
the provisions of the Act, (which may also be referred to as
“Misuse Test”);
(iii) Arrangement lacks commercial substance or is deemed to lack
commercial substance, by virtue of fiction created by section
97(which may also be referred to as “Lack of Commercial
Substance’ Test”), or
(iv) Arrangement entered into or is carried out, by means, or in a
manner, which not ordinarily employed for bonafide purposes
(which may also be referred to as “Abnormal Manner’ Test”).
Moreover, it is clear from the provisions contained in the Act that twin
conditions will have to be satisfied to treat any arrangement as an IAA.
Firstly, there has to be an arrangement entered into by the assessee in
respect to which “Main Purpose” test should be satisfied and secondly, any
one of the aforesaid “Additional Tests” has to be satisfied.
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56.3 Section 96(2) provides that if the main purpose of a step in or a part of
the arrangement is to obtain a tax benefit, then, unless proved to the contrary
by the assessee, the arrangement shall be presumed to have been entered
into or carried out for the main purpose of obtaining a tax benefit, though the
main purpose of the arrangement may not have been to obtain a tax benefit.
Furthermore, detailed provisions have also been made to deem an
arrangement to lack commercial substance whereby the scope of the “Lack
of Commercial Substance Test” has been amplified under Section 97 As a
result, to avoid application of “lack of Commercial Substance Test”, it would
also be necessary to pass through certain further tests, such as: the test of
substance/effect of the arrangement over the form of its individual steps,
whether there is a significant effect upon the business risks or net cash flows
of any party to the arrangement or whether the arrangement involves 'round
trip financing' (which is also very widely defined): any 'accommodating party'
(which is also very widely defined); any element having the effect of off-
setting each other and so on. It is also clarified that the factors like the period
or time of arrangement, the fact of payment of taxes directly or indirectly
under the arrangement, the fact that an exit route is provided by the
arrangement may be relevant but not sufficient for determining whether an
arrangement lacks commercial substance or not.
56.4 Section 144BA prescribes an elaborate procedure for declaration of
the arrangement as impermissible avoidance arrangement in accordance
with the provisions of Chapter X-A. Accordingly, if the Assessing Officer, at
any stage of the assessment or reassessment proceedings, considers that it
is necessary to declare an arrangement as IAA and to determine the
consequences of such arrangement, he may make reference to the Principal
Commissioner of Income Tax (PCIT) or Commissioner of Income tax (CIT). If
PCIT or CIT, as the case may be, is of the opinion that the provisions of
Chapter X-A are required to be invoked, he has to issue a notice to the
assessee. If the assessee does not furnish any objection to the notice within
the time specified in the notice, the PCIT or the CIT shall issue such
directions as he deems fit in respect of declaration of the arrangement to be
an IAA. In case the assessee objects to the proposed action, the PCIT or the
CIT if after hearing the assessee in the matter is not satisfied with the
explanation of the assessee, shall make a reference to the Approving Panel
for purpose of declaration of the arrangement as an IAA.
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56.5 Rule 10UB provides that the Assessing Officer shall, before making a
reference to the PCIT or CIT, issue a notice to the assessee. This notice
shall contain various details including the details of the arrangement to which
the provisions of Chapter X-A are proposed to be applied, the tax benefit
arising under the arrangement, basis for considering that the main purpose of
the arrangement is to obtain tax benefit, basis and reason why the
arrangement satisfies the condition provided in clause (a), (b), (c) or (d) of
section 196(1). (that is, twin conditions of the “Main Purpose” test and one of
the additional tests). Onus on the Revenue: Considering this, the primary
onus to establish that an arrangement is an IAA is on the revenue. The
Approving Panel is required to give opportunity to the assessee and the
Assessing Officer of hearing before issuing directions. Thereafter, the
Approving Panel shall issue such directions, as it deems fit, in respect of the
declaration of the arrangement as an IAA. Directions issued by the Approving
Panel are binding on the taxpayer and the tax department, and no appeal
under the Act will lie against these directions. On the Other hand, the
taxpayer would be required to prove that tax benefit is not the main purpose
of its arrangement which is in question by the Revenue .
56.6 The Assessing Officer, on receipt of the directions of the PCIT or CIT
or the Approving Panel, as the case may be, shall proceed to complete the
assessment proceedings in accordance with such directions and the
provisions of Chapter X-A. Section 98(1) outlines the consequences in
relation to tax when an arrangement is declared to be an IAA. The
consequences include among others, the denial of tax benefit or a benefit
under a tax treaty. The consequences have to be determined in such manner
as is deemed appropriate in the circumstances of the case.
56.7 Section 99 provides that while determining whether there is a tax
benefit in the arrangement, parties who are connected persons in relation to
each other may be treated as one person, accommodating party in the
arrangement may be disregarded, and accommodating party and any other
party may be treated as one and the same person or an arrangement may be
considered or adopt ‘look through’ approach disregarding any corporate
structure. Section 100 provides that provisions of Chapter X-A shall apply in
addition to or in lieu of any other basis for determination of tax liability.
56.8 Section 102 defines various terms used in the Chapter. Under this
section, ‘arrangement’ means any step in, or a part or whole of, any
transaction, operation, scheme, agreement or understanding, whether
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enforceable or not, and includes the alienation of any property in such
transaction, operation, scheme, agreement or understanding. The section
also defines the term ‘connected person’ in a wide manner.
56.9 Section 102 defines the term ‘tax benefit’ to include reduction or
avoidance or deferral of tax or other amount payable under the Act,
increasing refund or other amount under the Act, reduction or avoidance or
deferral of tax or other amount that would be payable under the Act as a
result of a tax treaty. It also includes increasing refund of tax or other amount
under the Act or reduction of total income or increasing loss in any previous
year.
56.10 Under Rule 10U, the GAAR provisions are not applicable in the
following cases:
(i) an arrangement where the tax benefit in the relevant assessment year
does not exceed three crore rupees in aggregate to all the parties to
the arrangement in the relevant assessment year. (In computing such
tax benefit, interest and penalty are not to be considered);
(ii) in case of a foreign institutional investor (FII) who has not availed of
any tax treaty benefits and has invested in securities (listed/ unlisted)
with the prior permission of the competent authority in accordance with
the Securities and Exchange Board of India (Foreign Institutional
Investor) Regulations, 1995 and such other regulations as may be
applicable; and
(iii) person being a Non-resident, in relation to investment made by him by
way of offshore derivative instruments or otherwise in FIIs,
(iv) income accruing or arising to any person from transfer of investments
made prior to 1st April 2017. Rule 10U(2) provides that the GAAR
provisions shall apply in respect of tax benefit obtained from the
arrangement after 1st April 2017, irrespective of when the
arrangement was entered into.
56.11 Section 96 dealing with impermissible avoidance arrangement is
included in Chapter X-A. Section 101 from this Chapter provides that the
provisions of this Chapter shall be applied in accordance with such
guidelines and subject to such conditions, as may be prescribed. Rule 10U of
the Income-tax Rules, 1962 provides certain conditions in this behalf. Sub-
rule (1) of Rule 10U provides that the provisions of Chapter X-A shall not
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apply to an arrangement where the tax benefit in the relevant assessment
year arising, in aggregate, to all the parties to the arrangement does not
exceed a sum of Rs 3 crore. Therefore, provisions of Chapter X-A, including
section 96 are not applicable unless the tax benefit in the relevant
assessment year arising, in aggregate, to all the parties to the arrangement
is Rs 3 crores or more.
56.12 The CBDT vide Circular 7 dated 27th January 2017 has clarified in a
question answer format various issues regarding application of these
provisions. A reference may be made to the same.
56.13 From the discussion above, salient features of the GAAR, it will be
noted that the provisions are complex and before an arrangement can be
considered to be an IAA, various conditions have to be satisfied. While
concluding whether an arrangement is an IAA, it is necessary that tax benefit
arising, in aggregate, to all the parties should be Rs 3 crore or more. The
main purpose of the impermissible avoidance agreement itself is an opinion
and calls for examination of the tax benefits arising to the assessee and to all
the parties to the arrangement. Similarly, all the elements or conditions
specified in section 96(1), satisfaction of which at least one is required to be
fulfilled to make an arrangement an IAA. If one considers the provisions of
section 99, for determining whether there is a tax benefit, various connected
parties may be treated as one and the same person or any accommodating
party may be disregarded or accommodating party and any other party may
be treated as one and the same person or corporate structure may be
disregarded. Apart from the above, the tax benefit is to be calculated in
aggregate taking into account effect on all the parties to the arrangement.
For the reasons, the Act also has laid down elaborate procedure and
authority is entrusted to higher authorities and not to the Assessing Officer.
Where the Tax Auditor has been provided access to the books of account
and records of the other parties to the arrangement, he may be able to
decide on IAA and report accordingly.
56.14 In the light of the above, the Tax Auditor should consider these
aspects while reporting under this clause. Further, Form 3CA, as well as
Form 3CB require the Tax Auditor to certify that the particulars given in Form
3CD are true and correct. If due to want of following elaborate investigation
process not consonant within confines of audit and due to lack of access to
the books of account and other records of other parties to the arrangement, if
the Tax auditor is unable to come to a conclusion on the basis of which he
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can certify any arrangement to be ‘true and correct’, he should make an
appropriate disclaimer in respect of reporting under this clause in Form 3CA
or Form 3CB, as the case may be. Tax auditor in his report may comment as
suggested below while reporting under sub-clause (a):
“In the absence of access to the books of account and other records of
various parties to arrangement and want of elaborate investigations beyond
ordinary process of audit involved in determining whether the arrangement is
an impermissible avoidance arrangement, and in determining the tax benefit
in the assessment year relevant to the previous year under audit arising, in
aggregate, to all the parties to the arrangement, we are unable to determine
the view of the assessee regarding its/his entrance into any impermissible
avoidance agreement as contemplated under section 96 of the Act , during
the previous year”.
56.15 In the light of the above discussion, the auditor should examine the
following:
(i) The tax auditor should examine whether the Principal Commissioner or
the Commissioner or the Approving Panel has, in any earlier previous
year, declared any arrangement as IAA. In case, if any arrangement
has been declared to be an IAA in any earlier previous year, the tax
auditor should further examine if any transaction pertaining to or in
connection with such declared IAA has taken place during the previous
year under the audit. If any transaction pertaining to or in connection
with such declared IAA has taken place during the previous year under
the audit, the tax auditor is expected to report this fact. The Tax
Auditor should also report tax benefit in the previous year arising from
such transaction(s) to all the parties to the arrangement. If, however,
due to the factors mentioned in the earlier paragraphs he is unable to
ascertain the tax benefit in the previous year arising, in aggregate, to
all the parties to the arrangement, he should indicate the same in
Form 3CA or Form 3CB, as the case may be.
(ii) The Auditor should examine if, in any earlier previous year, whether
any reference has been made for declaring an arrangement as an
impermissible avoidance arrangement, If such references been made,
the auditor should report the fact in form 3CA or form 3CB, as the case
may be. The auditor should further examine if any transaction
pertaining to or in connection with such arrangement in respect of
which reference has been made or has taken place during the
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previous year under the audit. If any transaction pertaining to or in
connection with such arrangement has taken place during the previous
year under the audit, the tax auditor should report this fact. The Tax
Auditor should also report tax benefit in the previous year arising from
such transaction(s) to all the parties to the arrangement. If however,
due to the factors mentioned in the earlier paragraphs he is unable to
ascertain the tax benefit in the previous year arising, in aggregate, to
all the parties to the arrangement, he should indicate the same in
Form 3CA or Form 3CB, as the case may be. Even if tax auditor is
able to identify any impermissible avoidance agreement and amount of
tax benefit in aggregate to all the parties in the arrangement, he will
not be able to ascertain the same, as record of all the other parties to
arrangement will not be available to him. Suitable disclaimer should be
stated in such circumstances.
(iii) In either case, where the assessee has given response to any show
cause notice or has preferred an appeal, along with outcome thereof, it
should be taken into consideration while reporting.
57. (a) Particulars of each loan or deposit in an amount exceeding
the limit specified in section 269SS taken or accepted
during the previous year :
(i) name, address and permanent account number or
Aadhaar Number (if available with the assessee) of
the lender or depositor;
(ii) amount of loan or deposit taken or accepted;
(iii) whether the loan or deposit was squared up during
the previous year;
(iv) maximum amount outstanding in the account at any
time during the previous year;
(v) whether the loan or deposit was taken or accepted by
cheque or bank draft or use of electronic clearing
system through a bank account;
(vi) in case the loan or deposit was taken or accepted by
cheque or bank draft, whether the same was taken or
accepted by an account payee cheque or an account
payee bank draft.
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(b) Particulars of each specified sum in an amount exceeding
the limit specified in section 269SS taken or accepted
during the previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the person from whom specified sum is received;
(ii) amount of specified sum taken or accepted;
(iii) whether the specified sum was taken or accepted by
cheque or bank draft or use of electronic clearing
system through a bank account;
(iv) in case the specified sum was taken or accepted by
cheque or bank draft, whether the same was taken or
accepted by an account payee cheque or an account
payee bank draft.
(Particulars at (a) and (b) need not be given in the
case of a Government company, a banking company
or a corporation established by the Central, State or
Provincial Act.)
[Clause 31 (a), (b)]
Section 269SS
57.1 Section 269SS prescribes the mode of taking or accepting certain
loans or deposits or specified sums. As per this section, no person shall take
or accept from any other person any loan or deposit or specified sums
otherwise than by an account payee cheque or account payee bank draft or
use of electronic clearing system through a bank account or through such
other electronic mode as may be prescribed (hereinafter referred to as
approved banking channels) if,
(a) the amount of such loan or deposit or specified sum or the aggregate
amount of such loan and deposit and specified sum; or
(b) on the date of taking or accepting such loan or deposit or specified
sum, any loan or deposit or specified sum taken or accepted earlier by
such person from the depositor is remaining unpaid (whether
repayment has fallen due or not), the amount or the aggregate amount
remaining unpaid; or
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(c) the amount or the aggregate amount referred to in clause (a) together
with the amount or the aggregate amount referred to in clause (b)
is twenty thousand rupees or more. An exception is provided for Primary
Agricultural Credit Societies (“PACS”) and Primary Co-Operative Agricultural
and Rural Development Bank (“PCARD”) by raising the amount to Rs
2,00,000 applicable w.e.f. AY 2023-24.
The CBDT, vide notification no. 8/2020/F. No. 370142/14/2019-TPL dated
29th January 2020, has prescribed the other electronic modes under Rule
6ABBA with effect from 1 st September 2019. Under the said Rule, the
following shall be the other electronic modes for the purposes of Section
269SS:
(a) Credit Card;
(b) Debit Card;
(c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer), and
(h) BHIM (Bharat Interface for Money) Aadhar Pay.
57.2 As per the first proviso to section 269SS, the provisions of section
269SS shall not apply to any loan or deposit taken or accepted from, or any
loan or deposit taken or accepted by,-
(a) Government;
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in section 2(45) of the
Companies Act, 2013;
(e) such other institution, association or body or class of institutions,
associations or bodies which the Central Government may, for reasons
to be recorded in writing, notify in this behalf in the Official Gazette.
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57.3 Sub-clause (a) and (b) of clause 31 are relating to section 269SS
wherein sub-clause (a) seeks details of loan or deposit, whereas sub-clause
(b) requires reporting on receipt of 'the specified sum’. Explanation below
clause 31(b) states that particulars at (a) and (b) need not be given in the
case of a Government company, a banking company or a corporation
established by the Central, State or Provincial Act.
Clause 31(a)
57.4 This clause seeks certain particulars of each loan or deposit in an
amount exceeding the limit specified in section 269SS taken or accepted
during the previous year. For the purposes of this section, "loan or deposit"
means loan or deposit of money (Explanation (iii) to section 269SS).
57.5 While reporting under this clause, the tax auditor may keep in mind the
following typical situations:
(i) Sale proceeds collected by the selling agent will not be considered as
loan or deposit.
(ii) CIT vs. Idhayam Publications Ltd. (2006) 285 ITR 221 (Madras) may
also be referred.
(iii) When there is a mixed account, the transactions relating to loans and
deposits should be segregated from other accounts and the
transactions relating to loans and deposits should be stated under this
clause.
(iv) The money receivable in relation to transfer of immovable property is
also specified sum. Further, "specified sum" means any sum of money
receivable, whether as advance or otherwise, in relation to transfer of
an immovable property, whether or not the transfer takes place. This
clause (31(b)) would be applicable whether kept as immovable
property. Booking advance to be reported.
(v) Opening credit balance of loan taken in earlier years is not specifically
required to be disclosed. However, while giving figures of maximum
amount outstanding at any time during the year or while giving
information about acceptance and repayment of loan/deposit, the
opening balances in the loan accounts will have to be taken into
consideration.
(vi) Even if the loans are taken free of interest, the information will still
have to be given.
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(vii) Security deposits against contracts, etc. will be covered by the
definition of ‘deposit’ and therefore, such information will have to be
given. However, the amount retained by the contractee against
performance of contract will not be covered as loans/deposits for
reporting as amount is not received.
(viii) Loans and deposits taken or accepted by means of transfer entries in
the books of account constitute acceptance of deposits or loans
otherwise than by account payee cheques. Hence, such entries have
to be reported under this clause. The entries that relate to transactions
with a supplier and customer on account of purchase or sale of
goods/services will not be treated as loans or deposits accepted.
(ix) Share application money advance supported by appropriate
documentation is neither deposit nor loan and subsequent allotment of
shares or repayment of application money as a part of allotment
process does not alter the character of application money and
provision of Section 269SS and section 269T are not attracted in such
a case. Rugmini Ram Ragav Spinners P. Ltd. 304 ITR 417 Madras
High Court and IP India P. Ltd. 343 ITR 353 and Numero Uno
Financial Services P. Ltd. 345 ITR 84 Delhi High Court However,
contrary view has been taken in Bhalotia Engineering Works (P) Ltd.
275 ITR 399.
57.6 Particulars of each loan or deposit falling within the scope of this
section as mentioned above taken or accepted during the previous year have
to be stated under this sub-clause. Reporting is required only where each
loan or deposit in an amount of Rs. 20,000 or more severally or in aggregate
of the three sums, as specified in the section. This sub-clause requires six
specific particulars in respect of each loan or deposit including the
permanent account number or Aadhaar number of the lender or depositor, if
available.
57.7 The tax auditor should obtain the above details from the assessee in
respect of each reportable loan or deposit and verify the same from the
records and evidence available with the assessee.
57.8 If the total of all loans/deposits/specified sum either severally or in
aggregate from a person is Rs. 20,000/- or more but each individual item is
less than Rs. 20,000/-, the information will still be required to be given in
respect of all such entries starting from the entry when the balance reaches
Rs. 20,000/- or more and until the balance goes down below Rs. 20,000/. As
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such the tax auditor should verify all loans/deposits taken or accepted where
balance has reached Rs. 20,000 or more during the year for the purpose of
reporting under this clause.
57.9 There will be practical difficulties in verifying the loan or deposit taken
or accepted by account payee cheque or an account payee bank draft. In
such cases, the tax auditor should verify the transactions with reference to
such evidence which may be available. In the absence of satisfactory
evidence, for answering, as to whether bank cheque or bank draft was
‘account payee’, the tax auditor should make a suggested comment in his
report. The suggested comment is as follows:
“It is not possible for me/us to verify whether loans or deposits have
been taken or accepted otherwise than by an account payee cheque
or account payee bank draft, as the necessary evidence is not in the
possession of the assessee”.
57.10 A reference may be made to Circular No. 22 of 2017
(F.No.370142/10/2017–TPL) dated 3rd July 2017. The CBDT, by the Circular,
has clarified that ‘in respect of receipt in the nature of repayment of loan by
NBFCs or HFCs, the receipt of one instalment of loan repayment in respect
of a loan shall constitute a ‘single transaction’ as specified in clause (b) of
section 269ST of the Act and all the instalments paid for the loan shall not be
aggregated for the purposes of determining applicability of the provisions of
section 269ST.’
57.11 The auditor should consider maintaining the following information in
his working papers for the purpose of reporting against this clause in the
format provided in the e-filing utility:
Sr. Name of Address PAN/Aadhaa Amount Whether Maximum Whether
No the of the r No. of the of loan the amount the loan/
. lender or lender or lender or or loan/deposi outstandin deposit
deposito deposito depositor, if deposit t was g in the was
r r available taken or squared up account at taken or
accepte during the any time accepted
d previous during the otherwis
year Previous e than by
year an
account
payee
bank
cheque
or
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account
payee
bank
draft
1 2 3 4 5 6 7 8
Clause 31(b)
57.12 Under this sub-clause, particulars of any “specified sum” taken or
accepted in relation to transfer of an immovable property, whether or not the
transfer takes place has been dealt with. Such specified sum may be any
sum of money receivable whether by way of advance or otherwise.
Explanation (iv) to Section 269SS defines "specified sum" as any sum of
money receivable, whether as advance or otherwise, in relation to transfer of
an immovable property, whether or not the transfer takes place. Reporting of
specified sum taken or accepted is required under the circumstances
specified above.
57.13 The tax auditor should ascertain whether the assessee has any
immovable property which has been transferred or was proposed to be
transferred during the year and review the relevant agreements, documents
etc. in this regard. The auditor should satisfy himself that the proceeds
arising from such transfer, based on the review of documents, has been duly
credited to the bank account by an account payee cheque or account payee
bank draft or use of electronic clearing system through a bank account or
through such other electronic mode as may be prescribed.
57.14 The auditor should consider maintaining the following information in
his working papers for the purpose of reporting against this clause in the
following format:
Sr. Name of Address PAN/ Amount of Whether the In case the
No. the lender of the Aadhaar specified specified sum specified
or lender or number sum taken was taken or sum was
depositor depositor of the or accepted taken or
person accepted otherwise accepted by
from than by an cheque or
whom account bank draft,
specified payee bank whether the
sum is cheque or same was
received, account bank taken or
if draft or use accepted by
available of electronic an account
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clearing payee bank
system cheque or an
through a account
bank account payee bank
draft
1 2 3 4 5 6 7
58. (ba) Particulars of each receipt in an amount exceeding the limit
specified in section 269ST, in aggregate from a person in a
day or in respect of a single transaction or in respect of
transactions relating to one event or occasion from a
person, during the previous year, where such receipt is
otherwise than by a cheque or bank draft or use of
electronic clearing system through a bank account:-
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in Rs.);
(iv) Date of receipt;
(bb) Particulars of each receipt in an amount exceeding the limit
specified in section 269ST, in aggregate from a person in a
day or in respect of a single transaction or in respect of
transactions relating to one event or occasion from a
person, received by a cheque or bank draft, not being an
account payee cheque or an account payee bank draft,
during the previous year:—
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payer;
(ii) Amount of receipt (in Rs.);
(bc) Particulars of each payment made in an amount exceeding
the limit specified in section 269ST, in aggregate to a
person in a day or in respect of a single transaction or in
respect of transactions relating to one event or occasion to
a person, otherwise than by a cheque or bank draft or use
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of electronic clearing system through a bank account
during the previous year:-
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payee;
(ii) Nature of transaction;
(iii) Amount of payment (in Rs.);
(iv) Date of payment;
(bd) Particulars of each payment in an amount exceeding the
limit specified in section 269ST, in aggregate to a person in
a day or in respect of a single transaction or in respect of
transactions relating to one event or occasion to a person,
made by a cheque or bank draft, not being an account
payee cheque or an account payee bank draft, during the
previous year:—
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payee;
(ii) Amount of payment (in Rs.);
(Particulars at (ba), (bb), (bc) and (bd) need not be given in
the case of receipt by or payment to a Government
company, a banking Company, a post office savings bank, a
cooperative bank or in the case of transactions referred to
in section 269SS or in the case of persons referred to in
Notification No. S.O. 2065(E) dated 3rd July, 2017)
[Clause 31 (ba), (bb), (bc), (bd)]
Section 269ST
58.1 Section 269ST provides that no person shall receive sum of Rs. 2 lakh
or more
a) in aggregate from a person in a day; or
b) in respect of a single transaction; or
c) in respect of transactions relating to one event or occasion from a
person
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otherwise than by an account payee cheque or an account payee demand
draft or by use of electronic clearing system through a bank account, or
through such other electronic mode as may be prescribed. Contravention of
section 269ST attracts penalty under section 271DA.
58.2 Provisions of section 269ST do not apply to receipt by Government,
any banking company, post office savings bank or a co-operative bank or
transactions of loan or deposit or `specified sum’ referred to in section
269SS. ‘Specified sum’ means any sum of money receivable, whether as an
advance or otherwise, in relation to transfer of an immovable property,
whether not the transfer takes place. (Refer clause (iv) of the Explanation
below section 269SS.)
58.3 It also does not apply to such persons or class of persons or receipts,
which have been notified by the Central Government. The Central
Government has issued two notifications in this respect. Under Notification
No. S.O. 1057(E) [Notification No. 28/2017, F.No.370142/10/2017-TPL]
dated 5 th April, 2017, provisions of section 269ST do not apply to receipt by
any person from an entity referred to in sub-clause (b) of clause (i) of the
proviso to section 269ST i.e. any banking company, post office savings bank
and co-operative bank.
58.4 Under Notification No. S.O. 2065(E) [No. 57 /2017,
F.No.370142/10/2017-TPL] dated 3 July 2017, the Central Government has
specified that the provisions of section 269ST shall not apply to the following
receipts:
a) receipt by a business correspondent on behalf of a banking company
or co-operative bank, in accordance with the guidelines issued by the
Reserve Bank of India;
b) receipt by a white label automated teller machine operator from retail
outlet sources on behalf of a banking company or co-operative bank,
in accordance with the authorisation issued by the Reserve Bank of
India under the Payment and Settlement Systems Act, 2007 (51 of
2007);
c) receipt from an agent by an issuer of pre-paid payment instruments, in
accordance with the authorisation issued by the Reserve Bank of India
under the Payment and Settlement Systems Act, 2007 (51 of 2007);
d) receipt by a company or institution issuing credit cards against bills
raised in respect of one or more credit cards;
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e) receipt which is not includible in the total income under clause (17A) of
section 10 of the Income-tax Act, 1961.
58.5 The CBDT has vide notification no. 8/2020/F. No. 370142/14/2019-
TPL dated 29th January 2020 prescribed the other electronic modes under
Rule 6ABBA with effect from 1 st September 2019.
58.6 The sub-clauses 31(ba), (bb), (bc) and (bd) deal with reporting of
transactions of receipts and payments in excess of the specified limit made
otherwise than by the modes specified in section 269ST.
58.7 Section 269ST does not distinguish between receipt on capital account
and revenue account. Similarly, sub-clauses 31(ba), (bb), (bc) and (bd) do
not distinguish between receipts and payments on capital account and
revenue account. Once the receipt or the payment, as the case may be,
exceeds the limit specified in section 269ST, the particulars of such
transactions will have to be reported under these clauses.
58.8 Sub-clauses 31(ba), (bb), (bc) and (bd) require particulars to be
furnished of receipts or payments, as the case may be, in an amount
exceeding the limits specified in section 269ST, in aggregate from a person
in a day or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person. Thus, particulars are
required to be given if receipts or payments, even though individually are
lower than Rs. 2 lakh but in aggregate amount to Rs. 2 lakh or mo re if such
receipts or payments are to or from one person in a day (whether related to a
single transaction or otherwise) or relate to a single transaction (even if the
receipts or the payments, as the case may be, are on different dates and
individual receipts or payments are less than Rs. 2 lakh) or are in respect of
more than one transaction but relate to a single event or occasion (even if
the receipts or the payments, as the case may be, are on different dates and
individual receipts or payments are less than Rs. 2 lakh).
58.9 Sub-clause 31(ba) and (bb) requires particulars to be furnished in
respect of transactions exceeding Rs 2 lakh where assessee has received
the amount from a person, whereas sub-clause 31(bc) and (bd) requires
information about the transactions exceeding Rs 2 lakh where the payment
has been made by the assessee to a person.
58.10 While it is comparatively simple to work out receipts or payments to or
from a single person in a day, the tax auditor will have to exercise care and
caution while arriving at the particulars of receipts or payments pertaining to
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a single transaction or relating to a single event or occasion. The tax auditor
will need to link all receipts or payments, as the case may be, otherwise than
by the modes specified in this section received/made in respect of a single
transaction and verify if the aggregate amount exceeds the limits specified in
section 269ST. Whether the receipts or payments, as the case may be, are
pertaining to a single transaction or different transaction will depend on facts
of the case. A single invoice may relate to multiple transactions and vice-
versa, multiple bills may relate to a single transaction. The tax auditor will
have to exercise his judgement to decide whether the receipts/payments are
pertaining to a single transaction.
58.11 Similarly, the tax auditor will have to exercise judgement in deciding
whether receipts/payments though pertaining to more than one transaction,
pertain to a single event or occasion. For example, for a function organised
by a person, assessee contractor may have been given catering contract as
well as contract for flower decoration. In such a case, while the transactions
may be different, the occasion or event would be the same and provisions of
section 269ST will be attracted if the receipts exceeding the limits specified
under section 269ST are by mode other than those specified in the section.
58.12 A reference may be made to Circular No. 22 of 2017
(F.No.370142/10/2017–TPL) dated 3rd July 2017. The CBDT, by the Circular,
has clarified that ‘in respect of receipt in the nature of repayment of loan by
NBFCs or HFCs, the receipt of one instalment of loan repayment in respect
of a loan shall constitute a ‘single transaction’ as specified in clause (b) of
section 269ST of the Act and all the instalments paid for the loan shall not be
aggregated for the purposes of determining applicability of the provisions of
section 269ST.’ The same analogy can be applied to instalment of insurance
premium received by insurance companies etc.
58.13 It is possible that the assessee may have purchased goods or services
while simultaneously he may have sold goods or services to the same party
consideration for which exceeds Rs. 2 lakh. In such a case, if the amount of
consideration for purchase is set off against the amount receivable for the
sale of goods or services, such set off is not a receipt as contemplated under
section 269ST. If the amount of such set- off exceeds Rs. 2 lakh, the tax
auditor may give appropriate note to the effect that such set - off not being a
receipt or payment has not been included in the particulars given and the
relevant sub-clause.
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58.14 If such receipts or payments are otherwise than by account payee
cheque or an account payee draft or by use of electronic clearing system
through a bank account, then the tax auditor will have to verify the mode of
the receipt or payment, as the case may be. He will have to classify the
receipt or the payment, as the case may be, as under:
(i) otherwise than by the cheque or bank draft or use of electronic
clearing system through a bank account, into receipt or payment;
(ii) by cheque or bank draft not being an account payee cheque or an
account payee bank draft.
While section 269ST deals only with receipts exceeding Rs. 2 lakh or more
otherwise than by the specified modes, sub-clauses 31(ba), (bb), (bc) and
(bd) require details to be furnished of both receipts and payments.
Clause 31(ba)
58.15 Sub-clause 31(ba) deals with receipts by the assessee of an amount
of Rs 2 lakh or more as stated in section 269ST otherwise than by way of a
cheque or bank draft or use of electronic clearing system through a bank
account. The details required to be furnished are:
(i) Name, address and PAN or Aadhaar Number (if available with the
assessee) of the payer;
(ii) Nature of transaction;
(iii) Amount of receipt;
(iv) Date of receipt.
Clause 31(bb)
58.16 Sub-clause 31(bb) deals with receipts by the assessee of an amount
of Rs 2 lakh or more as stated in section 269ST by way of a cheque or bank
draft not being an account payee cheque or account payee bank draft. The
details required to be furnished are:
(i) Name, address and PAN or Aadhaar Number (if available with the
assessee) of the payer;
(ii) Amount of receipt.
Clause 31(bc)
58.17 Sub-clause 31(bc) deals with payments made by the assessee of an
amount of Rs 2 lakh or more as stated in section 269ST otherwise than by
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way of a cheque or bank draft or use of electronic clearing system through a
bank account. The details required to be furnished are:
(i) Name, address and PAN or Aadhaar Number (if available with the
assessee) of the payee;
(ii) Nature of transaction;
(iii) Amount of payment;
(iv) Date of payment.
Clause 31(bd)
58.18 Sub-clause 31(bd) deals with payments made by the assessee of an
amount of Rs 2 lakh or more as stated in section 269ST by way of a cheque
or bank draft not being an account payee cheque or account payee bank
draft. The details required to be furnished are:
(i) Name, address and PAN or Aadhaar Number (if available with the
assessee) of the payee;
(ii) Amount of payment.
58.19 In each of the above cases, as discussed earlier, the particulars have
to be given of receipts or payments, as the case may be, in an amount
exceeding the limits specified in section 269ST, in aggregate from a person
in a day or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person.
58.20 Where the receipts or the payments, as the case may be, pertain to a
single transaction or transactions relating to one event or occasion, such
receipts/payments may be grouped together while reporting. The tax auditor
may also keep in his record date of the receipts and date of the payments
reported under sub-clauses 31(bb) and 31(bd), although not required to be
reported under the said sub-clauses.
58.21 Where payment is made or received by cheque or demand draft, there
will be practical difficulties in verifying whether the relevant payment or
receipt is by account payee cheque or account payee draft. In such cases,
the tax auditor should verify the transactions with reference to such evidence
which may be available. In the absence of satisfactory evidence, the
guidance given by the Council of the Institute of Chartered Accountants of
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India in similar cases to the tax auditors has been to make a suitable
comment. The tax auditor, in his report may make comment as suggested
below while reporting under sub-clauses 31(bb) and 31(bd):
“It is not possible for me/us to verify whether the receipts/payments
have been accepted/made otherwise than by an account payee
cheque or an account payee bank draft, as necessary evidence is not
in the possession of the assessee”.
58.22 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting of receipts under the sub -
clauses 31(ba) and (bb):
S. Nam Address PAN/ Nature Date of Amoun Mode of receipt Transactio
N. e of of the Aadhaar of receipt t of n/Documen
the payer number transac receipt t/ Event
pay of the tion reference
er payer, if
available
Whether Whether
otherwise otherwise
than by than by
cheque, account
bank draft payee
or use of cheque,
electronic account
clearing payee
system bank draft
through a
bank
account
1 2 3 4 5 6 7 8 9
58.23 The tax auditor should maintain the following information in his
working papers for the purpose of reporting of payments under the sub-
clauses 31(bc) and (bd)
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S. Name Addres PAN/ Nature Date of Amoun Mode of payment Transactio
N. of the s of the Aadhaar of payme t of n/Documen
payee payee number transac nt payme t/ Event
of the tion nt reference
payee, if
available
Whether Whether
otherwise otherwise
than by than by
cheque, account
bank payee
draft or cheque,
use of account
electronic payee
clearing bank draft
system
through a
bank
account
1 2 3 4 5 6 7 8 9
59. (c) Particulars of each repayment of loan or deposit or any
specified advance in an amount exceeding the limit
specified in section 269T made during the previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payee;
(ii) amount of the repayment;
(iii) maximum amount outstanding in the account at any
time during the previous year;
(iv) whether the repayment was made by cheque or bank
draft or use of electronic clearing system through a
bank account;
(v) in case the repayment was made by cheque or bank
draft, whether the same was repaid by an account
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payee cheque or an account payee bank draft.
[Clause 31 (c)]
60. (d) Particulars of repayment of loan or deposit or any
specified advance in an amount exceeding the limit
specified in section 269T received otherwise than by a
cheque or bank draft or use of electronic clearing system
through a bank account during the previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payer;
(ii) repayment of loan or deposit or any specified
advance received otherwise than by a cheque or
bank draft or use of electronic clearing system
through a bank account during the previous year.
[Clause 31 (d)]
61. (e) Particulars of repayment of loan or deposit or any
specified advance in an amount exceeding the limit
specified in section 269T received by a cheque or bank
draft which is not an account payee cheque or account
payee bank draft during the previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of
the payer;
(ii) repayment of loan or deposit or any specified
advance received by a cheque or a bank draft which
is not an account payee cheque or account payee
bank draft during the previous year.
(Particulars at (c), (d) and (e) need not be given in the case of a
repayment of any loan or deposit or any specified advance taken
or accepted from the Government, Government company, banking
company or a corporation established by the Central, State or
Provincial Act)
[Clause 31 (e)]
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Section 269T
59.1 Section 269T provides that no branch of a banking company or a co-
operative bank and no other company or co-operative society and no firm or
other person shall repay any loan or deposit made with it or any specified
advance received by it otherwise than by an account payee cheque or
account payee bank draft drawn in the name of the person who has made
the loan or deposit or paid the specified advance, or by use of electronic
clearing system through a bank account or through such other electronic
mode as may be prescribed if—
(a) the amount of the loan or deposit or specified advance together with
the interest, if any, payable thereon, or
(b) the aggregate amount of the loans or deposits held by such person
with the branch of the banking company or co-operative bank or, as
the case may be, the other company or co-operative society or the
firm, or other person either in his own name or jointly with any other
person on the date of such repayment together with the interest, if any,
payable on such loans or deposits, or
(c) the aggregate amount of the specified advances received by such
person either in his own name or jointly with any other person on the
date of such repayment together with the interest, if any, payable on
such specified advances,
is twenty thousand rupees or more. An exception is provided for Primary
Agricultural Credit Societies (“PACS”) and Primary Co-Operative Agricultural
and Rural Development Bank (“PCARD”) by raising the amount to Rs
2,00,000 applicable w.e.f. AY 2023-24.
Clause 31(c)
59.2 Sub clause 31(c) seeks information in respect of all the repayments
made by the assessee of loan or deposit or any specified advance in an
amount exceeding the limit specified in section 269T made during the
previous year. Section 269T is attracted upon repayment of the loan or
deposit or specified advance made by a person, where the aggregate
amount of such loans or deposits held by such person or specified advances
received by such person either in his own name or jointly with any other
person on the date of such repayment together with interest, if any, payabl e
on such loan or deposit or specified advance is Rs. 20,000 or more and is
made otherwise than by an account payee cheque or account payee bank
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draft drawn in the name of the person who has made the loan or deposit or
paid the specified advance, or by use of electronic clearing system through a
bank account or through such other electronic mode as may be prescribed.
59.3 The CBDT has vide notification no. 8/2020/F. No. 370142/14/2019-
TPL dated 29th January 2020 prescribed the other electronic modes under
Rule 6ABBA with effect from 1st September 2019.
59.4 Explanation (iii) to Section 269T contains definition of the term “loan or
deposit” for the purposes of section 269T. Accordingly, “loan or deposit”
means any deposit of money which is repayable after notice or repayable
after a period and, in the case of a person other than a company, includes
loan or deposit of any nature. Further, explanation (iv) defines "specified
advance" means any sum of money in the nature of advance, by whatever
name called, in relation to transfer of an immovable property, whether or not
the transfer takes place. As such, all repayments made to any person where
the loan or deposit or specified advance received along with interest payable
thereon is Rs. 20,000 or more are to be reported under this sub-clause, even
though the amount of repayment may be less than Rs. 20,000. The tax
auditor should verify such repayments and report accordingly.
59.5 The second proviso to section 269T inserted by the Finance Act, 2003
w.e.f. 1.6.2002 excludes repayments of loans taken from Government,
Government company, banking company, Corporation established by a
Central, State or Provincial Act etc. from the scope of the above section, and
therefore the tax auditor need not report such repayments in his report.
However, section 269T does not exclude Government companies, banking
companies from the scope of its applicability. As such, details of repayment
are to be shown in the case of these entities also.
59.6 In the case of company assessee, loan or deposit is defined to mean
deposit repayable after notice or loan or deposit repayable after a period.
Therefore, in case of a company, loan or deposit repayable on demand will
not be considered for the purpose of this section as loan or deposit.
However, in the case of non-company assessee, loan or deposit is defined to
mean loan or deposit of any nature. This distinction will have to be kept in
mind while giving information under this sub-clause.
59.7 Loan or deposits discharged by means of transfer entries in the books
of account constitute repayment of loan or deposits otherwise than by
account payee cheque or account payee bank draft. Hence, such entries
have to be reported under this clause. The tax auditor has to take into
account the technological advancements in the field of banking and
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information technology where loans have been repaid other than through an
account payee cheque of bank draft which are capable of being tracked such
as bank transactions made electronically through the internet or through mail
transfer or telegraphic transfer. These types of payments, though not made
by account payee cheques in the conventional manner, are capable of being
tracked. In order to judicially apply the provisions of section 269T, the tax
auditor need not report such cases under this clause. The Finance (No. 2)
Act, 2014 has acknowledged the fact and allowed the “use of electronic
clearing system through a bank account” as a permissible mode for the
purposes of section 269T. The entries that relate to transactions with a
supplier and customer on account of purchase or sale of goods /services will
not be treated as loans or deposits repaid.
59.8 The monetary limit of Rs. 20,000 or more is applicable in respect of a
banking company or a cooperative bank with reference to each branch and in
all other cases, assessee as a whole. The auditor should maintain the
following information in his working papers for the purpose of reporting
against this clause in the format provided in the e-filing utility:
Sr. Name Address PAN or Amount of Maximum Whether In case the
No. of the of the Aadhaar the amount the repayment
payee payee Number repayment outstanding repayment was made
of the in the was made by cheque
payee, if account at by cheque or bank
available any time or bank draft,
during the draft or whether
previous use of the same
year electronic was repaid
clearing by an
system account
through a payee
bank cheque or
account an
account
payee
bank draft
1 2 3 4 5 6 7 8
Clause 31(d)
60.1 Under this sub-clause, the tax auditor has to provide details of
repayment received by the assessee from a person in respect of loan or
deposit or specified advance exceeding the limit specified in section 269T
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received otherwise than by a cheque or bank draft or use of electronic
clearing system through a bank account during the previous year based on
the examination of books of account & other relevant documents. In the case
of a repayment of any loan or deposit or any specified advance taken or
accepted from Government, Government company, banking company or a
corporation established by a Central, State or Provincial Act, the particulars
under this sub-clause need not be given.
60.2 However, section 269T does not exclude loans repaid by Government
companies, banking companies, corporation established by a Central, State
or Provincial Act from the scope of its applicability. As such, details of
repayment made by such entities are to be shown. It may be noted that the
requirement under this sub-clause is applicable for the repayment of loans or
deposits or specified advances together with interest which are in excess of
Rs 20,000/-.
60.3 Practically, especially in case the repayments are voluminous, it may
not be possible to verify each repayment, reflected in the bank statement, as
to whether the acceptance of deposits or loans or specified advance has
been made through cheque, bank draft or not. It is thus desirable that the tax
auditor should obtain suitable certificate from the assessee to the effect that
the repayments referred to in this sub-clause were originally received by
cheque or bank draft or electronic clearing system through a bank account as
the case may be. Where the reporting has been done on the basis of the
certificate of the assessee, the same shall be reported as an observation in
clause (3) of Form No. 3CA or clause (5) of Form No. 3CB, as the case may
be.
The tax auditor has to consider the above guidance while reporting against
this sub-clause in the format provided in the e-filing utility.
Sr. Name Address PAN or Aadhaar Amount of repayment of loan or deposit or
No. of the of the Number of the any specified advance received otherwise
payer payer payer, if than by a cheque or bank draft or use of
available electronic clearing system through a bank
account during the previous year
1 2 3 4 5
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Clause 31(e)
61.1 Under this sub-clause, the tax auditor has to provide details of
repayment received by the assessee from a person in respect of loan or
deposit or specified advance exceeding the limit specified in section 269T
received by a cheque or bank draft which is not an account payee cheque or
account payee bank draft during the previous year based on the examination
of books of account & other relevant documents. In the case of a repayment
of any loan or deposit or any specified advance taken or accepted from
Government, Government company, banking company or a corporation
established by a Central, State or Provincial Act, the particulars under this
sub-clause need not be given.
61.2 However, section 269T does not exclude loans repaid by Government
companies, banking companies, corporation established by a Central, State
or Provincial Act from the scope of its applicability. As such, details of
repayment made by such entities are to be shown. It may be noted th at the
requirement under this sub-clause is applicable for the repayment of loans or
deposits or specified advances together with interest which are in excess of
Rs 20,000/-.
61.3 Practically, it may not be possible to verify each repayment, reflected
in the bank statement, as to whether the acceptance of deposits or loans or
specified advance has been made through cheque, bank draft which is not
an account payee cheque or account payee bank draft. It is, thus, desirable
that the tax auditor should obtain suitable certificate from the assessee to the
effect that the repayments referred to in this sub-clause were originally
received by account payee cheque or account payee bank draft as the case
may be. Where the reporting has been done on the basis of the certifi cate of
the assessee, the same shall be reported as an observation in clause (3) of
Form No. 3CA or clause (5) of Form No. 3CB. The tax auditor should make
a suggested comment in his report. The suggested comment is as follows:
“It is not possible for me/us to verify whether loans or deposits or
specified advance repaid have been taken or accepted otherwise than
by an account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account, as the necessary
evidence is not in the possession of the assessee”.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
The tax auditor has to consider the above guidance while reporting against
this sub-clause in the format provided in the e-filing utility.
Sr. Name Address PAN or Aadhaar Amount of repayment of loan or deposit or
No. of the of the Number of the any specified advance received by a cheque
payer payer payer, if or bank draft which is not an account payee
available cheque or account payee bank draft during
the previous year
1 2 3 4 5
62. (a) Details of brought forward loss or depreciation allowance,
in the following manner, to the extent available:
Sr. Assess Nature of Amount as All losses/ Amount as Amount as Remarks
No. ment loss / returned* (in allowances adjusted by assessed
year allowance rupees) not allowed withdrawal of (give
(in rupees) under section additional reference
115BAA/ depreciation to relevant
on account of order)
115BAC/
115BAD opting
for taxation
under
section
115BAC/
115BAD^
(1) (2) (3) (4) (5) (6) (7) (8)
*If the assessed depreciation is less and no appeal pending than take assessed. ^ To
be filled in for assessment year 2021-22 only
63. (b) whether a change in shareholding of the company has
taken place in the previous year due to which the losses
incurred prior to the previous year cannot be allowed to be
carried forward in terms of section 79.
64. (c) whether the assessee has incurred any speculation loss
referred to in section 73 during the previous year, If yes,
please furnish the details of the same.
65. (d) whether the assessee has incurred any loss referred to in
section 73A in respect of any specified business during the
previous year, if yes, please furnish details of the same.
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66. (e) In case of a company, please state that whether the
company is deemed to be carrying on a speculation
business as referred in explanation to section 73, if yes,
please furnish the details of speculation loss if any incurred
during the previous year.
[Clause 32(a) to (e)]
62. Clause 32(a)- Details of brought forward loss or
depreciation allowance
62.1 The amount of brought forward loss or depreciation allowance is
required to be quantified as per return and assessment orders read with
appellate orders, if any. Depreciation on goodwill will not be available from
AY 2021-22.
62.2 At times, while the particular claim for loss/allowance pertains to a
particular assessment year as per the return of income, the same may relate
to another assessment year as per the assessment order, e.g., Depreciation
claim in respect of assets capitalized at the end of the financial year . In those
cases, once the assessment order is received, the particulars have to be re-
stated with reference to the assessment year to which they relate as per the
assessment order. This should be accompanied by suitable explanation in
the remarks column.
62.3 Brought forward losses may relate to different heads of income such
as property income, profits and gains of business or profession, speculation
business or capital gains. Different provisions are contained in sections 32
and 70 to 79A of the Income-tax Act with regard to loss/depreciation under
different heads. In the remarks column information about the pending
assessment or appellate proceedings or about delay in filing loss returns
should be given. For giving the above information, the auditors should s tudy
the assessment records i.e. income-tax returns filed, assessment orders,
appellate orders, orders giving effect to appellate order and rectification/
revisional orders for the earlier years and ascertain if the figures given in the
above clause are correct. Attention of the members is invited to provisions of
section 80 read with section 139(3) of the Income-tax Act, 1961. Section 80
provides that notwithstanding anything contained in Chapter VI of the Act, no
loss which has not been determined in pursuance of a return filed in
accordance with the provisions of sub-section (3) of section 139 shall be
carried forward and set off under sub-section (1) of section 72 or sub-section
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(2) of section 73 or sub-section (2) of section 73A or sub-sections (1) or (3)
of section 74 or sub-section (3) of section 74A. Besides these, the tax auditor
should keep in mind the provisions of section 71B regarding Carry Forward
and Set Off of Loss from House Property, section 73A regarding Carry
Forward and Set Off of Losses by Specified Business and also section 78
regarding Carry Forward and Set Off of Losses in case of Change in
Constitution of Firm or on Succession.
62.4 It means in case of any undisclosed income determined in case of an
assessee during any proceedings of search, requisition or survey, then no
adjustment or set- off shall be allowed against such undisclosed income. The
set- off shall not be available in case of both brought forward losses as well
as the unabsorbed depreciation. From Assessment Year beginning from
2022-23 onwards, the Tax Auditor, has to confirm and verify whether any
search or survey has taken place or undergoing based on the records of
assessment proceedings of the assessee, and accordingly shall check if any
undisclosed income has been determined in case of the assessee. The
eligibility of brought forward losses and unabsorbed depreciation against
such undisclosed income as computed by the assessee should be checked
and, based on that, the necessary adjustments should be made to losses to
be carried forward by the assessee.
62.5 The tax auditor should make appropriate disclosure in the “Remarks”
column of the annexure provided for clause 32(a) of Form 3CD. In case, if
the website utility of Form 3CD does not have specific column for such
reporting, the tax auditor if deem fit can provide a note/qualification in Form
3CA / Form 3CB, in this regard.
62.6 Any assessment, rectification, revision or appeal proceedings pending
at the time of tax audit have to be disclosed in the remarks column by way of
information. If consequential orders for any revision/appellate order is y et to
be passed, the same can be disclosed along with the impact thereof if
material. In case, order of appeal/revision is passed, the same shall be
considered for reporting.
63. Clause 32(b)- Details of change in shareholding, if
any
63.1 Section 79 of the Act provides that, notwithstanding anything
contained in Chapter VI of the Act, in the case of a company, not being a
company in which the public are substantially interested, where a change in
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
shareholding has taken place in a previous year, then no loss incurred in any
year prior to the previous year shall be carried forward and set off against the
income of the previous year, unless on the last day of that previous year and
on the last day of the previous year in which the loss was incurred, the
shares of the company carrying not less than 51% of the voting power were
beneficially held by the same persons.
63.2 The above condition shall not be applicable to eligible startups referred
to in Section 80-IAC, if the shareholders of such a company who held shares
carrying voting power on the last date of the year or years in which the loss
was incurred, continue to hold those shares on the last date of such previous
year and such loss has been incurred during the period of ten years
beginning for the year in which such company is incorporated
63.3 The words used in section 79 are ‘beneficial’ ownership of shares and
not ‘registered’ ownership. Here, Delhi High Court judgement in case of Yum
Restaurants (India) Pvt. Ltd. v. ITO 380 ITR 637 needs to be kept in mind
which has a different viewpoint. Also, this section applies when change in
shareholding pattern takes place in a previous year relevant to an
assessment year but not prior to said previous year.
63.4 This provision shall not apply to a change in the shareholding
consequent upon:
(a) the death of a shareholder, or
(b) on account of transfer of shares by way of gifts to any relative of the
shareholder making such gift.
(c) A resolution plan approved under the Insolvency and Bankruptcy
Code, 2016, after affording a reasonable opportunity of being heard to
the jurisdictional Principal Commissioner or Commissioner.
(d) The Tribunal, on an application moved by the Central Government
under section 241 of the Companies Act, 2013 has suspended the
Board of Directors of such company and has appointed new directors
nominated by the Central Government, under section 242 of the said
Act and a change in shareholding of such company, and its subsidiary
and the subsidiary of such subsidiary, has taken place in a previous
year pursuant to a resolution plan approved by the Tribunal under
section 242 of the Companies Act, 2013 after affording a reasonable
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opportunity of being heard to the jurisdictional Principal Commissioner
or Commissioner.
(e) to a company to the extent that a change in shareholding has taken
place during previous year on account of relocation referred to in
Explanation to clauses (viiac) & (viiad) of section 47.
(f) to an erstwhile public sector company subject to the condition that the
ultimate holding company of such company, immediately after the
completion of strategic disinvestment, continues to hold 51% voting
power in aggregate, directly or indirectly through its subsidiary or
subsidiaries
63.5 Above clauses (e) & (f) has been introduced by the Finance Act, 2022
and are effective from assessment year commencing from 1st April 2022. A
new sub-section (3) has been also introduced to section 79 by the Finance
Act 2022, with effect from 1st April 2022. The new sub-section provides that:
“Notwithstanding anything contained in sub-section (2), if the condition
specified in above clause (f) of the said subsection is not complied with in
any previous year after the completion of the strategic disinvestment, the
provisions of sub-section (1) shall apply for such previous year and
subsequent years”.
63.6 Therefore, the Tax Auditor has to additionally check the compliances
under the above newly inserted clauses and sub-section while reporting. The
Tax Auditor should obtain the details of changes in voting power pattern
year-on-year and verify the reasons for any such changes before determining
the allowability of losses eligible to be carried forward. The Tax Auditor
should obtain necessary representation to this effect wherever it is not
feasible to verify or cross-check the shareholding pattern and changes
therein.
63.7 However, the overriding provisions of section 79 do not affect the set-
off of unabsorbed depreciation which is governed by section 32(2) [CIT v
Concord Industries Ltd. (1979) 119 ITR 458 (Mad)], CIT v. Shri Subbulaxmi
Mills Ltd. 249 ITR 795 (SC). Also, unabsorbed capital expenditure on
scientific research and unabsorbed capital expenditure on promoting family
planning amongst the employees is not affected by this provision. Although,
the provisions of section 79 are overriding in case of unabsorbed
depreciation, the tax auditor should check the provisions of section 79A
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w.e.f. Assessment Year 2022-23 onwards as regards to undisclosed income
during the course of survey or search proceedings.
63.8 Sub-clause 32(b) requires a statement whether a change in
shareholding of the company has taken place in the previous year due to
which the losses incurred prior to the previous year cannot be allowed to be
carried forward in terms of section 79. In this regard, now with effect from 1st
April 2022 i.e. from Assessment Year 2022-23 onwards, the tax auditor
should check the compliance of newly inserted clauses & sub-section as
explained in above paras regarding changes in shareholding and allowability
of losses.
63.9 The comparison of the composition of the shareholding is to be done
with reference to the last day of the current previous year and the last day of
every previous year in which the loss was incurred. The carry forward of the
loss incurred in respect of different previous years is to be determined with
respect to the individual previous years. Such comparison of the
shareholding can be done by referring to the Register of Members.
64. Clause 32(c) – Speculation Loss under section 73 of
the Income Tax Act
64.1 Section 73 of the Act provides for the treatment of losses in
speculation business. Section 73(1) provides that any loss, computed in
respect of a speculation business carried on by the assessee shall not be set
off except against profits and gains, if any, of another speculation business.
64.2 Section 73(2) further provides that where for any assessment year,
any loss computed in respect of a speculation business has not been wholly
set off under section 73(1), so much of the loss as is not so set off or the
whole loss where the assessee had no income from any other speculation
business, shall, subject to the other provisions of Chapter VI, be carried
forward to the following assessment year, and:
(i) it shall be set off against the profits and gains, if any, of any
speculation business carried on by him assessable for that
assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off
shall be carried forward to the following assessment year and so on.
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64.3 Section 73(3) provides that in respect of allowance on account of
depreciation or capital expenditure on scientific research, the provisions of
sub-section (2) of section 72 shall apply in relation to speculation business
as they apply in relation to any other business.
64.4 Furthermore, section 73(4) provides that no loss shall be carried
forward under this section for more than four assessment years immediately
succeeding the assessment year for which the loss was first computed.
64.5 As per Explanation 2 to section 28, where speculative transactions
carried on by an assessee are of such a nature as to constitute a business,
the business (hereinafter referred to as "speculation business") shall be
deemed to be distinct and separate from any other business. It is to be seen
whether a single speculative transaction can be termed as speculation
business or not since it is not an organised activity to constitute a ‘business’.
64.6 As per section 43(5), “speculative transaction" means a transaction in
which a contract for the purchase or sale of any commodity, including stocks
and shares, is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause—
(a) a contract in respect of raw materials or merchandise entered into by a
person in the course of his manufacturing or merchanting business to
guard against loss through future price fluctuations in respect of his
contracts for actual delivery of goods manufactured by him or
merchandise sold by him also known as hedging transactions; or
(b) a contract in respect of stocks and shares entered into by a dealer or
investor therein to guard against loss in his holdings of stocks and
shares through price fluctuations also known as hedging; or
(c) a contract entered into by a member of a forward market or a stock
exchange in the course of any transaction in the nature of jobbing or
arbitrage to guard against loss which may arise in the ordinary course
of his business as such member; or
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(d) an eligible transaction in respect of trading in derivatives referred to in
clause (ac) of section 2 of the Securities Contracts (Regulation) Act,
1956 (42 of 1956) carried out in a recognised stock exchange; or
(e) an eligible transaction in respect of trading in commodity derivatives
carried out in a recognised association, which is chargeable to
commodities transaction tax under Chapter VII of the Finance Act,
2013,
shall not be deemed to be a speculative transaction.
64.7 Having regard to the definition of “speculative Business”, the tax
auditor has to verify from the books of account and other relevant documents
as to whether the assessee is carrying on any speculation business. On
verification, if the auditor is of the opinion that the auditee is carrying on
speculation business, under this clause, the tax auditor has to furnish the
details regarding speculation loss referred to in section 73, if any incurred by
the assessee during the previous year. It may be noted that it is not
necessary that same speculation business needs to be continued to se t off
its loss of earlier year(s) against profit of same speculation business. It can
be ‘any’ speculation business i.e., a different speculation business.
64.8 The tax auditor should maintain the following information in his
working papers for the purpose of reporting against this clause in the format
provided in the e-filing utility:
S. Nature Amount Brought Total loss Break- up Whether the
No. of loss of loss forward to of the speculation
for the loss of be carried speculation loss has
current the loss in been set off
forward to terms of the against any
year earlier the
year(s) number of other
subsequent years for income
year which it has other than
been profit &
carried loss, if any,
forward of
speculation
business
1 2 3 4 5 6 7
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65. Clause 32(d) – Details of Losses incurred in respect
of a Specified business as referred to under section
73A
65.1 Section 73A provides for provisions relating to carry forward and set
off of losses by specified business. It provides that any loss, computed in
respect of any specified business referred to in section 35AD shall not be set
off except against profits and gains, if any, of any other specified business. It
is not necessary that the nature of specified business in which loss is set off
should be the same as that of the specified business in which loss was
incurred.
65.2 Section 73A(2) provides that where for any assessment year, any loss
computed in respect of the specified business referred to in sub-section (1)
has not been wholly set off under sub-section (1), so much of the loss as is
not so set off or the whole loss where the assessee has no income from any
other specified business, shall, subject to the other provisions of this
Chapter, be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any specified
business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off
shall be carried forward to the following assessment year and so on.]
65.3 Under clause 32(d), the tax auditor has to verify from the books of
account and other relevant documents as to whether the assessee is
carrying on specified business as referred to under section 35AD. In case the
auditor is of the opinion that the assessee is carrying on such specified
business, he has to furnish the details of the loss incurred, if any, in respect
of any specified business during the previous year. In case the assessee
carries on more than one specified businesses, and loss has been incurred
in more than one such business, the details of the loss incurred with respect
of each business is to be specified separately.
65.4 The tax auditor should consider maintaining the following information
in his working papers for the purpose of reporting against this clause in the
format provided in the e-filing utility:
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Sr. Nature of Amount of Loss from Amount Year Amount Whether
No. specified loss specified of loss of of loss loss set
business incurred, if business being set loss being off
any, during brought off carried against
the forward against forward any other
previous from the other to the income
year, with earlier specified next other
regard to year business assessme than from
the nt year specified
specified business
business as per
mentioned sec. 35AD
in (b) of the Act
(a) (b) (c) (d) (e) (f) (g) (h)
66. Clause 32(e) – Details of speculation loss, if any,
incurred from deemed Speculation business as
referred to in Explanation to section 73:
66.1 The Explanation to section 73 provides that where any part of the
business of a company ( other than a company whose gross total income
consists mainly of income which is chargeable under the heads "Interest on
securities"', "Income from house property", "Capital gains" and" Income from
other sources" or a company the principal business of which is the business
of trading in shares or banking or the granting of loans and advances)
consists in the purchase and sale of shares of other companies, such
company shall, for the purposes of this section, be deemed to be carrying on
a speculation business to the extent to which the business consists of the
purchase and sale of such shares.
66.2 Under this clause, the tax auditor has to furnish the details regarding
the speculation losses incurred, if any, as referred in explanation to section
73. The auditor may obtain information in the following format from the
assessee and verify the same from the books of account, income tax returns
of earlier years and other relevant documents:
Sr Applicable Nature AY of Amount Amount Amount
No section of loss incurring of Loss set off to be
loss during carried
current forward
AY
1 2 3 4 5 6 7
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66.3 The above information so maintained may be used by the tax auditor
for the purpose of reporting against this clause in the format provided in the
e-filing utility. This explanation applies to losses considered as speculation
loss for the purpose of this explanation. Conversely, loss of other business
(other than speculation business under this explanation) can be set off
against profit of said speculation business.
67. Section-wise details of deductions, if any,
admissible under Chapter VIA or Chapter III (Section
10A, Section 10AA).
Section under which deduction is Amounts admissible as per the
claimed provision of the Income Tax Act,
1961 and fulfils the conditions, if
any, specified under the relevant
provisions of Income Tax Act,
1961 or Income Tax Rules,1962 or
any other guidelines, circular, etc,
issued in this behalf.
[Clause 33]
67.1 Chapter VIA of the Act deals with various deductions which have to be
given effect to by way of allowance from gross total Income of the assessee
and they have been categorised under the Act as follows:
A. Deduction in respect of certain payments.
B. Deduction in respect of certain incomes.
C. Other Deductions.
While Chapter III relates to Income which do not form part of total income,
the reporting under this clause is required only with respect to exemptions
that can be claimed under section 10A (Special provisions in respect of
newly established undertakings in free trade Zone etc) and section 10AA
(Special provisions in respect of newly established units in Special Economic
Zones). Attention is also invited to provisions of section 80AC which states
that no deduction under Chapter VIA under the heading "C.—Deductions in
respect of certain incomes" shall be allowed unless return of income is
furnished on or before the due date prescribed under section 139(1). This is
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to note that at present return of income is furnished after submission of tax
audit report.
67.2 As stated earlier, the tax audit report in Form No. 3CA/3CB relates to
business or professional activity of the assessee of which the tax auditor is
doing audit under section 44AB. Form No. 3CD is an annexure to this Form
giving particulars relating to the business/profession covered by the tax audit
report. Therefore, the requirement under clause 33 relating to the deductions
admissible under Chapter VIA, section 10A and section 10AA will have to be
with reference to the items appearing in the books of account audited by the
tax auditor. If the tax auditor is issuing tax audit report in respect of the
accounts of a specific branch or a specific unit, he will have to examine the
particulars relating to deduction admissible under Chapter VIA and
exemption relating to section 10A/10AA, as the case may be, with reference
to the books of account of that branch or that unit which is audited by him.
However, in such circumstances, appropriate remarks towards exclusion of
data relating to HO and other branches/units of the assessee, is necessary.
Similarly, when the tax auditor is issuing report regarding tax audit of the
head office, he will have to take into consideration the tax audit reports of the
branches as well as other units of the assessee which may have been
audited by the other tax auditors and comply with SA-600 - ”Using the work
of another auditor” issued by ICAI. He will have to consider the particulars of
deductions admissible under Chapter VIA and exemption relating to section
10A/10AA, as the case may be with reference to the particulars given by the
tax auditor of other branches/units and also particulars of such deductions
from books of the head office.
67.3 In the case of a sole proprietor being an individual or HUF, it may so
happen that the tax auditor is auditing the accounts of the business/
profession and the sole proprietor is having other activities and other sources
of income in respect of which tax audit is not mandatory. In such cases, the
particulars of deductions admissible under Chapter VIA will have to be given
with reference to the items appearing in the books of account of the
business/profession which is subject to audit under section 44AB.
67.4 The admissibility of the aforesaid deductions/exemptions is dependent
upon various conditions laid down in the section under which deduction/
exemption is admissible. It is, therefore, advised that while working out the
amount of admissible deduction, the tax auditor has to ascertain that those
condition(s) stand fulfilled or not. For ascertaining this, the tax auditor has to
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obtain all necessary evidence which would enable him to express the opinion
regarding the admissibility of deductions. In order to ascertain th e fulfillment
of this condition, the tax auditor may have to check all documentary
evidence. Likewise, if there is any condition which qualifies the admissibility
of the amount of deduction, the tax auditor has to see and ascertain that
those qualifying conditions are fulfilled on the basis of documentary evidence
available with the assessee. There may be cases where there is difference
between the amount claimed by the assessee and the amount computed by
the tax auditor. In such cases, it is quite possible that the assessee's claim is
based on some judicial pronouncement on the subject. In such cases, it may
be advisable for the tax auditor to report the amount admissible. The amount
claimed and the background behind and the basis of the claim of the
assessee may form part of the working papers. If the claim of the assessee is
well-founded and settled by judicial pronouncement, the tax auditor may
accept the claim but he has to record in his working papers that admissible
amount has been reported on the basis of such judicial pronouncement. In
appropriate circumstances, such judicial pronouncements etc. should be
mentioned in the report.
67.5 It may be noted that there are certain sections under Chapter VIA like
section 80-IA, 80-IB, 80-IC, 80JJAA etc. where separate audit report or
certificate is required to be issued. Under the said sections, an assessee who
has income from industrial undertaking covered under the above sections
has also to obtain audit report with reference to the accounts of these
undertakings. While giving information with regard to the deduction allowable
under such sections, the tax auditor should refer to separate audit reports/
certificates obtained by the assessee. These audit reports/ certificates may
have been given by the tax auditor or by any other auditor. The figures given
in such separate audit reports/certificates should be taken into consideration
while giving information with regard to income covered by these sections. It
is hereby mentioned that if certificate has been obtained from other auditor,
then the tax auditor should comply with SA-600, Using the work of another
auditor.
67.6 Since the details of exemptions admissible under sections 10A and
10AA are also to be reported in the desired format, the said information can
be verified from the certificate issued by the chartered accountant in this
regard. In case, a report under section 10A and 10AA has been issued by
any other chartered accountant, then the same may be taken into
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consideration while reporting under this clause. Here, attention is invited to
SA-600, Using the work of another auditor.
67.7 Some sections in Chapter VIA such as section 80G (donations),
Section 80GGB/80GGC (contributions to political parties), section 80JJAA
(wages of new workmen) etc. relate to the expenditure incurred by an
assessee. There are other sections such as section 80P (income of co-
operative societies), 80JJA (certain specified business relating to treatment
of biodegradable waste) etc. which relate to income of the assessee. In
respect of all these sections, the tax auditor should ascertain whether there
is any expenditure or income covered by the above sections recorded in the
books of account audited by him. Information with regard to such
expenditure/ income in respect of deduction allowable under Chapter VIA
should be given on the basis of the examination of the books of account and
other records under clause 33.
67.8 Section 115BA, 115BAA, 115BAB, 115BAC, 115BAD and 115BAE
provide that no deductions under Chapter VIA or Chapter III can be claimed
by the assessee opting for taxation under any of these sections except
certain deductions as specified in the relevant sections, reply to clause 8a
shall be considered and accordingly, admissibility of deductions should be
examined.
68. (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:
Tax Section Nature Total Total Total Amount Total Amount Amount of
deduction of amount amount amount of tax amount of tax tax
and payment of on which on which deducted on which deducted deducted or
collection payment tax was tax was or tax was or collected
Account or required deducted collected deducted collected not
Number receipt of to be or out of (6) or on (8) deposited to
(TAN) the deducted collected collected the credit of
nature or at at less the Central
specified collected specified than Government
in out of (4) rate out specified out of (6)
column of (5) rate out and *(8)
(3) of (7)*
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
*Should be read as (5) for proper reporting
Should be read as (7) for proper reporting
* Should be read as (9) for proper reporting
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69. (b) whether the assessee is required to furnish the statement
of tax deducted or tax collected. If yes, please furnish the
details:
Tax Type of Due date Date of Whether the
deduction Form for furnishing, statement of tax
and furnishing if furnished deducted or
collection collected contains
Account information about
Number all transactions
(TAN) which are required
to be reported. If
not, please furnish
list of
details/transactions
which are not
reported
70. (c) whether the assessee is liable to pay interest under section
201(1A) or section 206C(7). If yes, please furnish:
Tax deduction and Amount of interest Amount paid out of
collection Account under section column (2) along with
Number (TAN) 201(1A)/206C(7) is date of payment.
payable
[Clause 34(a), (b) and (c)]
68. Clause 34(a)
68.1 While reporting under this clause, the tax auditor may exercise his
judgement in the light of the applicable laws and report accordingly about the
applicability of the provisions of Chapter XVII-B or XVII-BB with regard to the
auditee. The tax auditor may rely upon the judicial pronouncements while
taking any particular view. While answering the issue of applicability of the
provisions of Chapter XVII-B and/or XVII-BB, a number of debatable issues
may arise before the assessee as well as the tax auditor. Where it is not
possible to say yes/no, the answer to the question may have to be qualified
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depending upon the facts and circumstances of each case. Having verified
the applicability of the provisions of Chapter XVII-B and Chapter XVII-BB, the
tax auditor should answer the question as “Yes” and thereafter provide
further details. Where the tax auditor is of the opinion that provisions of
Chapter XVII-B and Chapter XVII-BB are not applicable, he should answer
the question as “No”. In case, answer is predominantly based on any judicial
pronouncements, mentioning it in appropriate circumstances may be
considered.
68.2 Once the tax auditor gives his affirmation with regard to applicability of
the provisions of Chapter XVII-B and/ or Chapter XVII-BB, he is required to
furnish further details in Clause 34(a). The auditor should obtain a copy of
the TDS/TCS returns filed by the assessee which shall form the basis of
reporting under this clause, to the extent possible. Further, in view of the
voluminous nature of the transactions, the tax auditor can apply test checks
and compliance tests on the transactions reported in the TDS/TCS return by
the assessee for verifying the information required to be provided under this
clause. Further, under section 194Q, the transaction of purchase of goods
requires deduction of tax at source from 01.07.2021 in specified
circumstances. On this subject, the CBDT has issued a Circular No. 13/2021
dated 30.06.2021 which may be referred to. Under Section 206C(1H), tax is
required to be collected on receipt of amount as consideration for sale of any
goods in specified circumstances. Also, it may not always be possible for the
tax auditor to decide which expenditure or any amount thereof results into
benefit or perquisite (referring to applicability of section 194R w.e.f.
01.07.2022) and it is advisable to seek management representation in this
case. Reporting any limitation on such ascertaining amount may also be
considered. Further, with regard to applicability of section 194BA, (w.e.f
01.04.2023), the auditor should examine rule 133 and circular issued in this
regard. It may be noted that while determining the amount to be reported in
Clause 34(a), the tax Auditor has to check and verify the payments made by
the assessee and should not only restrict to verification of expenses debited
to Profit & Loss or the TDS/TCS returns filed and provided by the assessee.
For instance. an advance payment made to any contractor may also be liable
for deduction of tax.
68.3 Column (1) of Clause 34(a) requires reporting of each Tax deduction
and collection account number with regard to which tax has been deducted
or collected at source.
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68.4 Column (2) requires various sections under which tax is required to be
deducted or collected at source.
68.5 Column (3) requires furnishing the details regarding the nature of
payment.
68.6 Column (4) requires furnishing the details of the total amount of
payment or receipt of the nature specified in column (3). The details in the
said column may be drawn from the books of account and other relevant
documents which include aggregate of payments/receipts on which tax is
liable to be deducted as well as not liable to be deducted/collected. Auditor
may maintain working papers giving reconciliation of amount as per books of
account and amount on which TDS/TCS is required to be deducted/collected.
68.7 Column (5) casts an onerous responsibility on the auditor, wherein he
is required to furnish the details of total amount on which the tax was
required to be deducted or collected out of the amount mentioned in column
(4) having regard to the nature of payments/ receipts under the relevant
sections of Chapter XVII-B / XVII-BB. Since the reporting under column (4) is
required to be made with regard to the nature of payments made or amount
received, there may be a difference in the amounts reported under column
(4) and column (5). The reasons for difference may be applicability of
certificates issued under section 195/197 or threshold limits provided in
specific sections or difference of opinion with regard to applicability of a
particular section and the like. The auditor may maintain relevant working
papers to this effect.
68.8 While answering the issue of applicability of the provisions of Chapter
XVII-B and/or XVII-BB, a number of debatable issues may arise before the
assessee as well as the tax auditor. The auditor may have a difference of
opinion with regard to the applicability of the provisions of TDS/TCS on a
particular payment. In such a case, the tax auditor has to report the
difference of opinion appropriately as an observation in the clause (3) of
Form No. 3CA or clause (5) of Form No. 3CB as the case may be.
68.9 It is essential to note that it is the primary responsibility of the
assessee to prepare the information in such a manner that the tax auditor
can verify the compliance as required in the clause. The tax auditor is
required to verify that no items have been omitted in the information
furnished to him and reasonable test checks would reveal whether or not the
information furnished is correct. The extent of check undertaken would have
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to be indicated by the tax auditor in his working papers and audit notes. The
tax auditor would be well advised to so design his tax audit programme as
would reveal the extent of checking and to ensure adequate documentation
in support of the information being certified.
68.10 In column (6), the tax auditor is required to furnish the total amount out
of the amount deductible or collectible as mentioned in column (5) at which
the tax was deducted or collected at the specified rate. The auditor has to
consider the rates of deduction as per the law relevant to the previous year.
Further, as per the provisions of sections 195/ 197, certificate can be issued
for no deduction or lower deduction of tax at source. The tax auditor should
refer to the relevant provisions, rules, circulars, notifications and such
certificates obtained from the auditee to verify the cases where tax has been
short deducted at source. In case the payer deducts/recipient collects tax at
source at a rate lower than the specified rate on the basis of certificate
issued under section 195 or 197, the lower rate or nil rate, as the ca se may
be, will be considered as the specified rate for the purpose of reporting under
this clause. In the case of payment to non-residents, the applicable rate of
tax deduction at source is to be read along with the Double Taxation
Avoidance Agreement. Column (7) requires furnishing of total amount of tax
deducted/collected out of the amount furnished in column (6).
68.11 Similarly, column (8) requires the tax auditor to furnish the total
amount out of the amount deductible or collectible as mentioned in column
(5) at which the tax was deducted or collected at the rate less than the
specified rate out of Column (7). The lesser deduction is required to be
reported in this clause. This will include deduction at a lower rate than what
is prescribed, application of wrong section for deduction of tax at source, etc.
For example, the assessee deducts tax u/s 194C @ 2%, however, there is
another view that tax is required to be deducted @ 10% u/s 194I, the same
has to be reported under this clause/column. In case, there is difference of
opinion with regard to rate of deduction or applicability of a particular section,
the auditor may appropriately report the difference of opinion in the clause
(3) of Form No. 3CA or clause (5) of Form No. 3CB as the case may be
giving both the views. Further, column (9) requires furnishing of total amount
of tax deducted/collected out of the amount furnished in column (8). The tax
auditor should also consider applicability of higher rate of TDS/TCS under
certain circumstances like non-furnishing of PAN, non-filers of return as
provided in section(s) 206AA/206AB/206CC/206CCA.
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68.12 Column (10) requires the auditor to furnish the details of the amount of
tax deducted or collected but not deposited to the credit of the Central
Government. As such, the tax auditor should verify the cases where the tax
has been deducted at source but not paid to the credit of the Central
Government till the date of the audit. It may be seen that tax dedu cted but
deposited late and before the date of Audit will not be required to be reported
in this column (10).
68.13 The details in the column(s) (6), (7), (8), (9) and (10) may be examined
from the TDS/TCS returns/statements furnished by the assessee to the
Income-tax Department and be cross- verified from the books of account and
other relevant documents. The 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.
69. Clause 34(b)
69.1 Under clause 34(b), the tax auditor has to ascertain and report as to
whether the assessee is required to furnish the statement of tax deducted or
tax collected at source within the prescribed time and answer 'yes’ or ‘no’
depending on his examination. If the answer is ‘yes’, the tax auditor shall
provide further details in a table contained in Clause 34(b) only with regard to
the statement required to be furnished by the assessee.
69.2 The information given in clause 34(a) and (b) should be reconciled
with the disallowances reported under section 40(a) in clause 21(b) to the
extent applicable for cross checking appropriateness of reporting under both
the clauses.
69.3 Under sub-clause (b), the scope of the reporting requirements is to
furnish information about the statement of tax deducted at source and tax
collected at source required to be furnished by the assessee. Under the sub-
clause, the tax auditor is required to furnish a list of details/transactions
which are not reported in the statement of tax deducted at source and
statement of tax collected at source under column (5). Depending upon
transactions that require tax deduction or collection, tax auditor should
ascertain which statements, the assessee was required to furnish for the
financial year under audit. He should check which statements have been
furnished by the assessee for tax deducted as well as collected. The
reporting requirement is notwithstanding the fact that the assessee has
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furnished the statements of tax deducted at source and tax collected a t
source or not.
69.4 In first column, TAN should be stated. Based on examination of
transactions requiring tax deduction or collection, a list of type of each form
the assessee was required to furnish should be stated in second column.
Third column shall state due date for furnishing statement listed in the
second column. Fourth column shall state date of furnishing the statement, if
furnished. This information should be filled in, on the basis of
acknowledgements for furnishing of statements. Fifth column requires tax
auditor to examine all the statements of tax deducted or collected and report
whether all details/transactions required to be reported are furnished. If there
is any deficiency in contents, the same is required to be reported against the
relevant statement. If the information is voluminous, then the tax auditor
should consider reporting significant deficiencies with appropriate remarks in
paragraph (3) of Form 3CA or paragraph (5) of Form 3CB.
70. Clause 34(c)
70.1 Under this clause, the auditor is required to furnish detailed
information in case the assessee is liable to pay interest under section
201(1A) or section 206C(7) of the Act. Section 201(1A) provides for payment
of interest at a specified rate in case the tax has not been deducted wholly or
partly or after deduction has not been paid to the credit of Central
Government as required by the Act. Similarly, section 206C(7) provides for
payment of interest at a specified rate in case the tax is not collected wholly
or partly or if collected not paid to the credit of the Central Government as
required by the Act. The reporting as to whether the assessee is liable to pay
such interest, should be in consonance with the reporting under clause 34(a)
where the details of non-deduction are required to be reported.
70.2 Where the assessee is liable to pay interest u/s 201(1A) or 206C(7),
the auditor should verify such amount from 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, the auditor may re-calculate the amount of interest under
section 201(1A) or section 206C(7) up to the date of audit report for reporting
under this clause and also mention the fact in his observations paragraph
provided in Form No. 3CA or Form No. 3CB, as the case may be.
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70.3 Under mercantile system of accounting, interest if not paid till 31 st
March and provision is also not made, its impact on true and fair view should
be considered.
71. (a) In the case of a trading concern, give quantitative details
of the principal items of goods traded:
(i) Opening stock;
(ii) Purchases during the previous year;
(iii) Sales during the previous year;
(iv) Closing stock;
(v) shortage / excess, if any.
72. (b) In the case of a manufacturing concern, give quantitative
details of the principal items of raw materials, finished
products and by-products :
A. Raw materials:
(i) opening stock;
(ii) purchases during the previous year;
(iii) consumption during the previous year;
(iv) sales during the previous year;
(v) closing stock;
(vi) yield of finished products;
(vii) percentage of yield;
(viii) shortage/excess, if any.
B. Finished products/By-products:
(i) opening stock;
(ii) purchases during the previous year;
(iii) quantity manufactured during the previous
year;
(iv) sales during the previous year;
(v) closing stock;
(vi) shortage/excess, if any.
[Clause 35 (a) and (b)]
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71. Clause 35(a)
71.1 The tax auditor should examine whether the enterprise is a trading
concern or not and it is accordingly reported in clause 10(a). If yes, the
auditor should obtain certificates from the assessee in respect of the
principal items of goods traded, the balance of the opening stock, purchases,
sales and closing stock and the extent of shortage/ excess/damage and the
reasons thereof. The entire quantitative information should be examined by
the auditor from the records.
72. Clause 35(b)
72.1 The tax auditor should ascertain whether the enterprise is a
manufacturing concern and accordingly report it in clause 10(a). If yes, this
sub-clause is applicable. The tax auditor should obtain certificate(s) from
assessee in respect of principal items of raw materials, finished goods and
by-products and quantitative information required to be reported in clause
35(b). This information should be given only in respect of those items where
it is practicable to do so, having regard to the records maintained by the
assessee.
72.2 The information about ‘yield’, ‘percentage of yield’, and ‘shortages/
excess’ is also required to be given.
72.3 ‘By-products’ represent products whose manufacture results
incidentally from the manufacture of the main product or where the waste
arising in the manufacture of main product is further processed to crea te a
by-product. Where the by-product is so produced or is continuously
generated, it should be treated for the purpose of sale and disposal at par
with any other product produced by the company and similar records should
be maintained. The quantitative details on the above lines are to be given in
respect of by-product also.
72.4 In a large concern, for both the sub-clauses (a) and (b), it may be
difficult for tax auditor to verify each and every item of purchase,
consumption, sales and production. In such cases, he may verify the figures
using sampling method and satisfy himself as to the correctness of the
figures furnished. This clause requires that quantitative details of “principal
items” of raw materials and finished goods should be given. Therefore,
information about petty items need not be given. What would constitute
principal items will depend on the facts of each case. Normally, items which
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constitute more than 10% of the aggregate value of purchases, consumption
or turnover, as the case may be, be classified as principal items.
73. [Clause 36]
Omitted by the Income-tax (Eighth Amendment) Rules, 2021, w.e.f. 1-4-
2021.
74. (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:
[Clause 36A]
74.1 Clause 22 of section 2 defines the term ‘dividend’ in an inclusive
manner. Sub-clause (e) deems certain payments to be dividend. Conditions
for attracting the provisions of the sub-clause (e) are as under:
(i) Payment should be by a company in which public are not substantially
interested (referred here as `closely held company’);
(ii) Payment should be by way of advance or loan or the payment by such
company on behalf, or for the benefit, of any specified shareholder;
(iii) Specified shareholder means a person who is the beneficial owner of
shares holding not less than 10% of the voting power. It may be noted
that for considering the 10% of the voting power, what is relevant is
the shareholding of the assessee alone and shareholding of his
relatives is not required to be considered;
(iv) Payment by way of advance or loan should be to the shareholder or
any concern in which the shareholder is a member or a partner and in
which he has substantial interest;
(v) The company making the payment should have accumulated profits, at
least to the extent of loan or advance or payment, as the case may be.
The amount of dividend is restricted to the extent to which the
company possesses accumulated profits.
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74.2 Sub-clause (e) of clause 2(22) deems such loan or advance or
payment in the aforementioned circumstances to be ‘dividend’ for the person
being a recipient. The accumulated profits are to be computed up to the date
of payment after considering provisions of Explanation 1, Explanation 2 and
Explanation 2A below section 2(22). Explanation 3 defines the term ‘concern’
to include a Hindu undivided family, or a firm or an association of persons or
a body of individuals or a company. A person is deemed to have a
substantial interest in a concern (other than a company) if he is, at any time
during the previous year, beneficially entitled to not less than 20% of the
income of such concern. Section 2(32) defines the term ‘person who has
substantial interest in the company’ to mean a person who is the beneficial
owner of shares (not being shares entitled to fixed rate of divide nd) carrying
not less than 20% of the voting power.
74.3 It may be noted that even if the loan or advance is made by the closely
held company to the concern, it is chargeable to tax in the hands of the
shareholder and not in the hands of the concern. In this respect, a reference
may be made to the decision of the Supreme Court in the case of CIT v
Madhur Housing & Development Co. (340 ITR 14) confirming decision of
Delhi High Court in the case of CIT v Ankitech (P) Ltd. 340 ITR 14 (Delhi). A
reference may also be made to the decision of the Bombay Court in the case
of CIT v Universal Medicare Pvt. Ltd. 324 ITR 263 (Bom). In order to enable
reporting under this clause, the tax auditor should obtain from the assessee
a certificate containing list of closely held companies in which he is beneficial
owner of shares carrying not less than 10% of the voting power and list of
concerns in which he has substantial interest. The tax auditor should also
obtain a certificate from the assessee giving particulars of any loans o r
advances received by any concern in which he has substantial inte rest from
any closely- held company in which he is beneficial owner of shares carrying
not less than 10% voting power. These certificates are necessary since the
tax auditor may not be able to verify the above from the books of account of
the assessee. The tax auditor should include appropriate remarks of his
inability to independently verify the information and reliance on the
certificates obtained from the assessee. These remarks may be included in
clause (3) of Form No. 3CA or clause (5) of Form No. 3CB, as the case may
be.
74.4 The tax auditor should also verify Form No. 26AS/AIS/TIS in the case
of the assessee to know if the closely held company has deducted tax at
source from any payment made by it to the assessee or the concern under
section 194. This will indicate the view taken by the closely- held company
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making the payment. The tax auditor may consider the same before coming
to a conclusion.
74.5 So far as any payment by the closely- held company made on behalf
of or for the individual benefit of the assessee is concerned, there may not be
any record available for the auditor to verify the same. In such a case ,
auditor may make appropriate remarks in clause (3) of Form No. 3CA or
clause (5) of Form No. 3CB, as the case may be. It may be noted that if the
closely- held company has made payment on behalf of or for the individual
benefit of the assessee in his capacity, say, as the managing director of the
closely- held company and if such payment has been considered as part of
the remuneration, the same payment is not again chargeable to tax under
section 2(22)(e) and is not required to be reported under this clause. For
attracting section 2(22)(e), it is necessary that the assessee receiving a loan
or advance should be a shareholder.
74.6 In the light of the above position, wherever the beneficial shareholder
is not the registered shareholder and the closely- held company has given
loan or advance to the beneficial shareholder or to a concern, the tax auditor
should make appropriate remark about the basis of reporting in clause (3) of
Form No. 3CA or clause (5) of Form No. 3CB, as the case may be. Under the
provisions of section 2(22), dividend does not include any advance or loan
made to a shareholder or the concern by a company in the ordinary course of
its business, where the lending of money is a substantial part of the business
of the company. As mentioned earlier, the dividend taxable under section
2(22)(e) is restricted to accumulated profits on the date of payment. Thus,
the accumulated profits have to be determined as on the date of the
payment. Further, if at any time earlier, any amount has been considered as
income under any of the clauses of section 2(22), the accumulated profits will
have to be reduced by such an amount. The tax auditor may not be able to
determine the accumulated profits such as on the date of payment of the
closely- held company making the payment for various reasons. The tax
auditor in such a case may arrive at the accumulated profits by appropriating
the profit for the year on a time basis. In such a case, the auditor should
include appropriate remarks in clause (3) of Form No. 3CA or clause (5) of
Form No. 3CB, as the case may be, about the methodology adopted by him.
74.7 There may be business transactions between the closely- held
company and the concerns in which the assessee has substantial interest.
Trade advances in the nature of commercial transactions would not fall within
the ambit of the provisions of section 2(22)(e). In this regard, the Central
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Board of Direct Taxes has issued Circular No. 19/2017 (F.No.279/Misc.
/140/2015/ITJ) dated 12 June 2017. Considering the Circular, business
advance or trade advances from closely held companies to the assessee or
concerns in which the assessee has substantial interest are out of the
purview of 2(22)(e) and need not be reported as dividend under this clause of
Form No. 3CD.
74.8 The assessee or the concern may have current account of the closely
-held company in its books of account. In such a case, there could be various
transactions accounted for in such current account. The tax auditor will have
to consider if all the transactions in such a current account are on account of
normal business transactions or the transactions are in the nature of loans or
advances received by the assessee or the concern. Considering various
judicial decisions and the CBDT Circulars, the tax auditor will have to take a
considered view while reporting under this clause. If reliance has been
placed on any judicial decision, a reference of the same may be given by the
tax auditor as observations in clause (3) of Form No. 3CA or clause (5) of
Form No. 3CB, as the case may be.
74.9 Under sub-clause (a) of clause 36A, the tax auditor has to report
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. If the answer is in
affirmative, to state ‘Yes’, otherwise ‘No’. If the answer is ‘yes’, the tax
auditor has to report under sub-clause (b) of clause 36A. Under this sub-
clause, each such amount received that is considered as dividend under
section 2(22)(e) and the date of receipt thereof should be stated. In respect
of this sub-clause, preserving appropriate working paper is recommended.
75. 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
[Clause 37]
75.1 The tax auditor should ascertain from the management whether cost
audit was carried out and if yes, a copy of the same should be obtained from
the assessee. Even though the tax auditor is not required to make any
detailed study of such report, he has to take note of the details of
disqualification or disagreement on any matter/item/value/quantity as may be
reported/identified by the cost auditor. The tax auditor need not express any
opinion in a case where such audit has been ordered but the same has not
been carried out.
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75.2 In cases where cost audit, which might have been ordered, but has not
been completed by the time the tax auditor issues his report, he has to report
appropriately in this report stating that since cost audit has not been
completed, the cost audit report is not available with the assessee.
75.3 The tax auditor should examine the time period for which the cost
audit, if any, was required to be carried out. Information is required to be
given only in respect of such cost audit report, the time period of which falls
within the relevant previous year. In effect, the information is required to be
given in respect of that cost audit report which is received up to the date of
tax audit report.
76. 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
[Clause 38]
76.1 The tax auditor should ascertain from the management whether any
audit was conducted under the Central Excise Act, 1944 and if such audit
was carried out, obtain a copy of the report. Even though the tax auditor is
not required to make any detailed study of such report, he has to take note of
the details if any, of disqualification or disagreement on any matter/item/
value/quantity as may be reported/identified by the auditor. The tax auditor
need not express any opinion in a case where such audit has been ordered
but the same has not been carried out.
76.2 In cases where excise audit which might have been ordered is not
completed by the time the tax auditor gives his report, he has to report
appropriately in this report stating that since excise audit is not completed,
the excise audit report is not available with the assessee.
76.3 The tax auditor should examine the time period for which the excise
audit, if any, has been required to be carried out. Information is required to
be given only in respect of such excise audit report the time period of which
falls within the relevant previous year. In effect, the information is required to
be given in respect of that excise audit report which is received up to the
date of tax audit report.
77. Whether any audit was conducted under section 72A of the
Finance Act, 1994 in relation to valuation of taxable services, if
yes, give the details, if any, of disqualification or disagreement on
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
any matter/item/value/quantity as may be reported/ identified by
the auditor.
[Clause 39]
77.1 At present, no service tax is applicable, and as such no reporting is to
be done under this clause unless where any service tax demand is due for
the period April 1 to 30 June 2017 in the year 2022-23 (AY 2023-24) or a
demand has been raised or a demand has been confirmed in the year 2022 -
23, the impact of the said demand or provisions or refund involved has to be
reported in the Audit Report.
78. Details regarding turnover, gross profit, etc., for the previous year
and preceding previous year:
Serial Particulars Previous Preceding
number year previous year
1. Total turnover of the
assessee
2. Gross profit/turnover
3. Net profit/turnover
4. Stock-in-trade/turnover
5. Material
consumed/finished
goods produced
(The details required to be furnished for principal items of goods traded
or manufactured or services rendered)
[Clause 40]
78.1 These ratios have to be calculated for assessees who are engaged in
manufacturing or trading activities, except ratio No. 5 which need not be
required to be furnished for trading concern. In respect of service provider,
only information at S. No. (1) and (3) need to be furnished.
78.2 While calculating these ratios, the tax auditor should assign a meaning
to the terms used in the above ratios having due regard to the generally
accepted accounting principles. All the ratios mentioned in this clause are to
be calculated in terms of value only.
78.3 The following definitions given by the ICAI in its Guidance Note on the
Terms Used in Financial Statements may be noted.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(a) Gross Profit: The excess of the proceeds of goods sold and services
rendered during a period over their cost, before taking into account
administration, selling, distribution and financing expenses. When the
result of this computation is negative, it is referred to as gross loss.
(b) Turnover: The aggregate amount for which sales are effected or
services rendered by an enterprise. The terms gross turnover and net
turnover (or gross sales and net sales) are sometimes used to
distinguish the sales aggregate before and after deduction of returns
and trade discounts. Attention is also invited to (Sales, Turnover,
Gross receipts) in this Guidance Note.
(c) Net Profit: The excess of revenue over expenses during a particular
accounting period. When the result of this computation is negative, it
is referred to as net loss. The net profit may be shown before or after
tax. It may be noted that the net profit to be shown here in this clause
is net profit before tax.
78.4 For the purpose of calculating the ratio mentioned in S. No. (4), only
closing stock is to be considered. The term `stock-in-trade' used therein does
not include stores and spare parts or loose tools. The term “stock-in-trade”
would include only finished goods and would not include the stock of raw
material and work-in-progress since the objective here is to compute the
stock-turnover ratio.
78.5 Material consumed would, apart from raw material consumed, include
stores, spare parts and loose tools.
78.6 The value of finished goods produced may be arrived at by using the
following formula:
(a) Raw material consumption -
(b) Stores and spare parts consumption -
(c) Wages -
(d) Other manufacturing expenses -
excluding depreciation.
Sub total -
Add : Opening stock in process -
Deduct : Closing stocks in process -
Value of finished goods produced -
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78.7 Under this clause, calculation of the ratios is also to be stated. As
such, computation of various components based upon which these ratios
have been worked out is required to be stated under this clause. However, if
any of the above components is stated in the financial statements
themselves, a reference to the same may be made, to the extent possible.
78.8 There should be consistency between the numerator and the
denominator while calculating the above ratios. Any significant deviation
thereof should be pointed out in para 3 of Form 3CA or para 5 of Form 3CB.
78.9 The relevant previous year figures are to be taken from last previous
year audit report or the reinstated figures to make the ratios comparable with
current year. In case, the preceding previous year is not subject to audit,
nothing should be mentioned in the relevant column.
79. Please furnish the details of demand raised or refund issued
during the previous year under any tax laws other than Income
Tax Act, 1961 and Wealth tax Act, 1957 along with details of
relevant proceedings.
[Clause 41]
79.1 The auditee may be assessed under various tax laws other than
Income-tax Act, 1961 and Wealth-tax Act, 1957 resulting into a demand order
or a refund order. The tax auditor should obtain a copy of all the demand/
refund orders issued by the governmental authorities during the previous
year and received by the assessee up to the date of audit under any tax laws
other than Income Tax Act and Wealth Tax Act. Normally, the tax laws such
as Goods and Service Tax (GST), Central Excise Duty, Service Tax,
Customs Duty, Value Added Tax, Central Sales Tax, Professional Tax etc.
would be covered under as tax laws. However, the auditor should exercise
his professional judgment in determining the applicability to relevant tax laws
for reporting under this clause.
79.2 It may be noted that even though the demand/refund order is issued
during the previous year, it may pertain to a period other than the relevant
previous year. In such cases also, reporting has to be done under this
clause. The tax auditor should verify the books of account and the orders
passed by the respective Department(s) for ascertaining whether any such
demand has been raised or refund order has been issued under any other
tax law and accordingly report the same. It is advisable to cross verify the
demands from online portal of the respective Department. If there is any
adjustment of refund against any demand, the auditor shall also report the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
same under this clause. Appropriate representation should be obtained from
the assessee. In case of corporate assessee, the auditor may check the said
details with the disclosures of contingent liabilities in the audited financials,
and disclosures in statutory auditor’s report pursuant to CARO, if applicable.
79.3 The tax auditor should maintain the following information in his
working papers for the purpose of reporting against this clause in the form at
provided in the e-filing utility.
S. Financial Name of the Demand/ Date of Amount of Remarks
No. Year to applicable Refund Demand demand
which the Act Order No., raised/ raised/
Demand / if any refund refund
refund issued issued
relates
1 2 3 4 5 6 7
79.4 The tax auditor also requires details of relevant proceedings. This
information should be furnished in remarks column by stating the authority
before which the matter is pending.
80. (a) Whether the assessee is required to furnish statement in
Form No.61 or Form No. 61A or Form No. 61B? (Yes/No)
(b) If yes, please furnish:
S. Income-tax Type Due date Date of Whether If not,
No. Department of for furnishin the Form please
Reporting Form furnishin g, if contains furnish list
Entity g furnished information of the
Identification about all details/tran
Number details/ sactions
transaction which are
s which are not
required to reported.
be
reported.
[Clause 42]
80.1 Sub-clause (a) of clause 42 asks tax auditor to state whether the
assessee is required to furnish Form No. 61, Form No. 61A or Form No. 61B.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
The following contain provisions requiring the assessee to furnish these
forms:
Form Section & Particulars & Conditions
No. Rule
61 Section Form No. 61 is to be filed by certain persons who
139A(5)(c), have received any declaration in Form No. 60.
Rule 114B, Persons who have to file Form No. 61 are persons
114C and referred to in:
114D (i) Rule 114C(1)(a) to (k), and
(ii) Following persons who are required to get their
accounts audited under section 44AB of the Act:
- persons raising bill in respect of payment made
in cash for amount exceeding Rs. 50,000 to a
hotel or restaurant,
- persons raising bill in connection with foreign
travel or purchase of foreign currency payment
for which payment is made in cash for an
amount exceeding Rs. 50,000, and
- person raising bill in respect of transactions of
sale or purchase of goods or services other than
those specified at serial numbers 1 to 17 of the
Table in Rule 114B where value of the
transaction exceeds Rs. 2 lakhs per transaction.
61A Section Rule 114E(2) provides for the nature and value of
285BA, transaction in respect of which the statement is
Rule 114E required to be filed and persons who are required to
file the statement.
61B Rule 114F, Rule 114F defines various terms, Rule 114G
114G and prescribes the information to be maintained and
114H reported and Rule 114H prescribes the due diligence
requirements.
80.2 On the basis of conditions stated in the relevant section and rule, the
tax auditor should ascertain whether the assessee was required to furnish
any of these three forms. If the answer is in affirmative, he should state ‘yes’,
otherwise should state ‘no’. Due dates for furnishing the forms are as under:
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Form Due date
No.
61 31st October where declarations in Form No. 60 have been
received before 30th September; and by 30th April where
declarations in Form No. 60 have been received by 31st March of
the immediately preceding financial year.
61A 31st May of the immediately following financial year
61B 31st May of the immediately following financial year
80.3 In case, answer to sub-clause (a) is in affirmative, tax auditor should
report requisite information in sub-clause (b). Every reporting financial
institution has to communicate to the Principal Director General of Income-
tax (Systems), the name, designation and communication details of the
Designated Director and the Principal Officer and obtain a registration
number. This registration number is to be quoted in Form 61B. Form 61B
also requires ITDREIN (Income-tax Department Reporting Entity
Identification Number) which is a Unique ID issued by the Department which
is communicated by the Department after the registration of the reporting
entity. Thereafter, type of Form i.e. Form no. 61, 61A or 61B is to be reported
along with due dates of furnishing such Forms. Date of actual furnishing is
also to be reported, in case furnished by the assessee and such date can be
obtained from assessee’s e-filing acknowledgement number of the said
Forms.
80.4 The tax auditor is further required to state whether the Form contains
information about all details or furnished transactions which are required to
be reported. In case it is not, the tax auditor is required to furnish list of the
details of transactions which are not reported. If the volume of deficiencies is
large, the tax auditor may state certain deficiencies by way of an illustration
and make appropriate remark in clause 3 of Form 3CA or clause 5 of Form
3CB.
80.5 Form No. 61, 61A and 61B uploaded on the income tax portal should
be examined by the tax auditor for the purpose of reporting under this clause.
81. (a) Whether the assessee or its parent entity or alternate
reporting entity is liable to furnish the report as referred to
in sub-section (2) of section 286 (Yes/No)
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(b) if yes, please furnish the following details:
(i) Whether report has been furnished by the assessee
or its parent entity or an alternate reporting entity
(ii) Name of parent entity
(iii) Name of alternate reporting entity (if applicable)
(iv) Date of furnishing of report
[Clause 43]
81.1 Clause 43 seeks information about applicability to furnish the report as
referred to in sub-section (2) of section 286. Section 286 deals with filing of
Country by Country Report by `international group’.
81.2 Under section 286(1), every constituent entity resident in India, if it is a
constituent of an international group and the parent entity of which is not
resident in India, has to notify the prescribed income tax authority in Form
No. 3CEAC whether it is the alternate reporting entity of the international
group; or the details of the parent entity or the alternate reporting entity, if
any, of the international group, and the country or territory of which the said
entities are resident.
81.3 Section 286(9)(g) defines the term ‘international group’ to mean any
group that includes, (i) two or more enterprises which are resident of different
countries or territories; or (ii) an enterprise, being a resident of one country or
territory, which carries on any business through a permanent establishment
in other countries or territories. Alternate Reporting Entity has been defined
in clause (c) of section 286(9) to mean any constituent entity of the
international group that has been designated by such a group, in place of the
parent entity, to furnish the report of the nature referred to in sub-section (2)
in the country or territory in which the said constituent entity is resident on
behalf of such group.
81.4 Section 286(2) casts an obligation on the parent entity if it is resident
in India or the alternate reporting entity if it is resident in India to furnish for
every `reporting accounting year’, in respect of the international group of
which it is a constituent, a report for the accounting year, which term is
defined in section 286(9)(a), to the prescribed authority. The reporting
requirement under section 286 shall not apply in respect of an international
group for an accounting year, if the total consolidated group revenue, as
reflected in the consolidated financial statement for the accounting year
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
preceding such accounting year does not exceed Rs. 6,400 crores (Rule
10DB).
81.5 Clause 43(a) requires the auditor to state whether the assessee or its
parent entity or alternate reporting entity is liable to furnish the report
referred to in section 286(2). Thus, the obligation to furnish the report
referred to in section 286(2) arises under following situations requiring reply
in affirmative to clause 43(a):
(i) If the assessee itself is the parent entity of the international group and
is resident in India, it will have the obligation to furnish the report
under section 286(2);
(ii) If the assessee is resident in India and has been designated as the
alternate reporting entity of the international group, it will have
obligation to furnish the report under section 286(2);
(iii) If the assessee is a constituent of the international group with its
parent entity resident in India and the group has not designated any
other resident constituent entity as the alternate reporting entity, the
parent entity will have the obligation to file the report under section
286(2);
(iv) If the assessee is neither the parent entity nor has it been designated
as the alternate reporting entity, but other constituent entity resident in
India of the international group has been designated as the alternate
reporting entity by the group, such other constituent entity resident in
India will have obligation to file the report under section 286(2).
81.6 The tax auditor should verify in the case of the assessee if any of the
above four situations exist. The tax auditor should verify if the assessee
whose parent is a non-resident has filed Form No. 3CEAC. It will indicate if
the assessee or another constituent entity resident in India has been
designated as the reporting entity for the international group. The tax auditor
may obtain necessary certificate from the assessee in respect of constitution
of the international group, entities that are resident in India and not resident
in India and entity if appointed as the alternate reporting entity. If none of the
above four situations described above exists, the reply to clause 43(a) will be
negative.
81.7 If the reply to clause 43(a) is in affirmative, following information has to
be furnished:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(i) Whether report has been furnished by the assessee or its parent entity
or an alternate reporting entity.
(ii) Name of parent entity
(iii) Name of alternate reporting entity (if applicable)
(iv) Date of furnishing of report
If the assessee has filed a report, the tax auditor should verify
acknowledgement for furnishing the same. If the report has been filed either
by the parent of the assessee or another constituent entity of the
international group, the tax auditor should ask for a copy of the report and
acknowledgement for filing the report.
81.8 The term parent entity is defined in section 286(9)(h). The tax auditor
should examine which is the parent entity and report the name thereof. The
term ‘alternate reporting entity’ is defined in section 286(9)(c). The tax
auditor should examine whether any such alternate reporting entity exists
and if yes, name of the alternate reporting entity should be stated. From
acknowledgement for furnishing report as referred to in sub-section (2) of
section 286, the date of furnishing of the said report should be stated.
82. Break-up of total expenditure of entities registered or not
registered under GST:
Sl. Total Expenditure in respect of entities registered
Expenditure
No. amount of under GST
relating to
Expenditure
entities not
incurred
registered
during the
under GST
year
Relating Relating Relatin Total
to goods to entities g to paymen
or falling other t
services under register to
exempt compositi ed register
from GST on entities ed
scheme entities
1 2 3 4 5 6 7
[Clause 44]
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
82.1 A question may arise whether the above information is to be given in
respect of each and every head of expenditure or only the total expenditure
is to be given. Here, guidance may be taken from the heading of the table
which starts with the words “Breakup of total expenditure” and hence the total
expenditure including purchases as per the above format may be given. It
appears that head-wise / nature- wise expenditure details are not envisaged
in this clause.
82.2 Depreciation under section 32, deduction for bad debts u/s 36(1)(vii)
etc. which are accounting expenses in the nature of non-cash charges on the
Profit and Loss account should not be reported under this clause in any of
the Columns from 3 to 7.
82.3 Headings of columns 3-6 and column 7 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 under this clause in any of the columns from 3 to 7. For example ,
Schedule III to the CGST Act, 2017 lists out activities or transactions which
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. For example, Para (1) of the
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.
82.4 It would be beneficial to maintain working paper of total expenditure in
the following manner:
Description * Amount
(Rs.)
Total value of expenditure in P&L for the year XXXX
Add: Total value capital expenditure not included in P&L for XXXX
the year
Less: Total value of non-cash charges considered as XXXX
expenditure
Less: Total value of expenditure excluded for being XXXX
transactions in securities and transactions in money
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Less: Total value of expenditure excluded by virtue of XXXX
Schedule III to the CGST Act, 2017
Balance being value of expenditure for clause 44 XXXX
* Details of all deductions & additions must be maintained for each sub -entity
(GSTIN-wise) of the legal entity.
82.5 It may be noted that any expenditure that is incurred, wholly and
exclusively for business or profession of the assessee qualifies for the
deduction under the Act. Registration or otherwise of the payee under the
GST Act has no relevance in considering allowability of expenditure.
82.6 The format as per clause 44 of form 3CD requires that the information
is to be given as per the following details:
A. Total amount of expenditure incurred during the year
B. Expenditure in respect of entities registered under GST
C. Expenditure related to entities not registered under GST
82.7 The reporting in respect of B above, i.e. the expenditure in respect of
entities registered under GST is further sub-classified into four categories as
follows:
a) Expenditure relating to goods or services exempt from GST
b) Expenditure relating to entities falling under composition scheme
c) Expenditure relating to other registered entities
d) Total payment to registered entities
82.8 Expenditure relating to goods or service exempt from GST
(Column 3): Here, the value of all inward supply of goods or services which
are exempt from GST is to be given. Section 2(47) of the Central Goods and
Service Tax Act, 2017 (hereinafter referred to as CGST Act, 2017) defines
exempt supply as follows:
“exempt supply means supply of any goods or services or both which
attracts nil rate of tax or which may be wholly exempt from tax under
section 11, or under section 6 of the Integrated Goods and Services
Tax Act, and includes non-taxable supply;”
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
To ascertain what are exempt supplies, the following notifications is sued
under the CGST Act, 2017 and the Integrated Goods and Services Tax Act,
2017 (hereinafter referred to as IGST Act, 2017) are relevant:
(A) Notification No. 1/2017 CT (R), which prescribes rates for intra-State
supply of goods
(B) Notification No. 2/2017 CT (R), which prescribes intra-State supply of
goods which are exempt
(C) Notification No. 11/2017 CT (R), which prescribes rate for intra-State
supply of services
(D) Notification No. 12/2017 CT (R), which prescribes intra-State supply of
services which are exempt
(E) Notification No. 1/2017 IT (R), which prescribes rates for inter-State
supply of goods
(F) Notification No. 2/2017 IT (R), which prescribes rates for inter-State
supply of goods which are exempt
(G) Notification No. 8/2017 IT (R), which prescribes rates for inter-State
supply of services
(H) Notification No. 9/2017 IT (R), which prescribes rates for inter-State
supply of services which are exempt
82.9 Further, the definition of exempt supply also includes non-taxable
supply. The term “non-taxable supply” has been defined in section 2(78) of
the CGST Act, 2017 as follows:
“non-taxable supply" means a supply of goods or services or both
which is not leviable to tax under this Act or under the Integrated
Goods and Services Tax Act”
As per the above definition, “non-taxable supply” includes supply of goods or
services which are not leviable to tax under the CGST Act, 2017 or under the
IGST Act, 2017.
82.10 As per section 9 of the CGST Act, 2017 / section 5 of the IGST Act,
2017, the following supplies are not leviable to GST:
(i) supply of alcoholic liquor for human consumption
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(ii) supply of petroleum crude, high speed diesel oil, motor spirit, natural
gas and aviation turbine fuel
Hence, the above supplies, being not leviable to GST, are exempt supplies.
82.11 Expenditure relating to entities falling under composition scheme
(Column 4): Levy of tax under composition scheme is governed by section
10 of the CGST Act, 2017. While reporting the expenditure under this head,
the following should be considered:
a) A composition dealer cannot charge GST in the invoices.
b) A composition dealer cannot make inter-State supply.
c) A composition dealer can issue only bill of supply and not a tax
invoice.
d) The composition dealer should have mentioned the specified words at
the top of the bill of supply issued by them.
“Composition taxable person, not eligible to collect tax on supplies”
82.12 In case of ineligible input tax credits which are blocked under section
17(5) of the CGST Act, 2017 or in case of purchases from persons registered
under composition levy, it is a normal practice of the small and medium
taxpayers not to mention the GSTIN of the said suppliers in their accounting
software. Hence, a suitable remark / reference in this regard by the tax
auditor may be included in the report.
82.13 Expenditure relating to other registered entities (Column 5). Value
of all inward supplies from registered dealers, other than supplies from
composition dealers and exempt supply from registered dealers, are to b e
mentioned here.
82.14 Total payment to registered entities (Column 6): The language
used in sub-heading of Column 6 is total ‘payment’ to registered entities.
The word ‘payment’ should harmoniously be interpreted as ‘expenditure’ as
the combined heading of columns (3), (4), (5) is ‘Expenditure in respect of
entities registered under GST’. Hence, the total expenditure in respect of
registered entities i.e., sum total of values reported in columns (3), (4) and
(5) should be reported in Column 6.
82.15 Expenditure relating to entities not registered under GST (Column
7): The value of inward supply of goods and/or services received from
unregistered persons should be reported here. It should be ensured that the
total of columns 6 and 7, tallies with the amount mentioned in column (2)
except to the extent of expenditure/ allowance mentioned in above paras.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
The auditor may retain the reconciliation prepared by the assessee for
verification.
82.16 It is important to differentiate the ‘current status’ of supplier’s
registration from their status as it was at the time of supply. There are
several instances where registration may be cancelled with effect from an
earlier date which may be prior to the date of supply to assessee. Events
occurring after balance sheet date that alter the data relating to year under
audit does not alter the nature of the expenditure, that it is from registered
suppliers. Auditors may elect to extend their review up to a certain cut-off
date or not at all. In either case, disclosure of notes of the position with
regard to (i) known cancellations and (ii) treatment in the disclosure
considering possibility of such cancellations would go a long way in making
the report meaningful and unambiguous.
82.17 In the table under clause 44, the language used is “expenditure in
respect of”. Since, the word used is ‘expenditure’, it is necessary that the
capital expenditure should also be reported in the format prescribed.
Separate reporting of capital expenditure will provide ease in reconciliation.
82.18 In case of multiple GST registrations of an entity, there is likelihood of
inter-branch supply, which is eliminated at the consolidated financials.
Proper reconciliation for such type of transactions may be kept on record.
This report may be prepared for an entity as a whole or for a branch thereof,
as may be audited and accordingly the information in these columns may
have to be filled up consolidating the expenditure incurred under various
GST registrations.
82.19 In order to verify the details filled in, the tax auditor needs to obtain
from the assessee, the required details in the below tabular format (an
illustrative format which may be modified by the Tax auditor according to the
facts and circumstances). The Tax auditor should verify the details furnished
with the underlying document on a test- check basis and retain the same as
part of his working papers.
Expenditure Name of GSTIN Value Value Total Reason General
head the of the debited to for amount for NIL Remarks,
entity to entity expenditure which paid to GST if any
whom account input the
payment tax vendor
is made credit
is
taken
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
82.20 An appropriate disclosure should be made by the Tax auditor in Form
3CA/3CB, as the case may be, for the view taken by the assessee in relation
to the meaning of “Total expenditure” and the method of filling up the
appropriate columns. If the assessee is not in a position to give the details as
required in clause 44, an appropriate disclosure/disclaimer may be made by
the auditor in Form 3CA/3CB. Where the assessee has provided reason for
not being able to provide details, the same may be reported, if found
appropriate.
83. Signature and Stamp/Seal of the signatory
83.1 Form No. 3CD has to be signed by the person competent to sign Form
No. 3CA or Form No. 3CB as the case may be. He has also to give his full
name, address, membership number, firm registration number, wherever
applicable, place and date. Where audit report is issued in soft copy, the tax
auditor is to affix his Digital Signature.
83.2 The Tax Auditor should issue such signed copy of tax audit report in
Form No. 3CA or 3CB and particulars in Form No. 3CD to the assessee.
84. Furnishing of Tax Audit Report
84.1 Section 44AB provides that every person, who is required to get his
accounts audited for any previous year by an Accountant before the specified
date should furnish by that date the report of such audit in the prescribed
form duly signed and verified by such accountant setting forth such
particulars as may be prescribed.
84.2 Form No 3CA or Form No 3CB as the case may be and Form No 3CD
are required to be uploaded on the website of the Income tax department and
should be digitally signed by the Auditors. The assessee is required to
accept the tax audit report under his digital signature. The provisions of
Information Technology Act, 2000 assume importance in this regard. It is
important to note that these forms do not state that they have to be signed
digitally or electronically. It is only proviso to Rule 12(2) of Income-tax Rules,
1962 which prescribes that where an assessee is required to furnish a report
of audit specified under Section 44AB, he shall furnish the same
electronically. Thus, the primary responsibility of furnishing the report
electronically lies with the assessee. In this regard, Section 5 and 6 of the
Information Technology Act, 2000 gives legal recognition to the electronic or
digital signature. It is also relevant to note that electronic signature is a wider
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
term defined in section 2(1)(ta) of the Information Technology Act, 2000 and
includes digital signature which is separately defined in Section 2(1)(p) of the
said Act. The forms are required to be uploaded with digital signature. It
should be kept in mind by the Tax Auditor that the time and date of signature
is automatically captured whenever the electronic signature is affixed and
this date should tally with the manual date, if any, written in the hard copy of
the Form No 3CA, 3CB and 3CD, as the case may be.
84.3 As stated earlier, particulars of Form 3CD as per law i.e. under the
Income-tax Rules, 1962 are different from those available at the Income Tax
Department website. Thus, the form available at the website is not as per
provisions of law. The procedure laid down in Rule 12 requires furnishing of
tax audit report by the Assessee on the Income-tax e-filing website. These
forms are required to be uploaded on the website of the Income-tax
Department by the Tax Auditor, which are later on approved by the
assessee.
84.4 There are certain variations in the contents of Form No. 3CD
prescribed under the Rules and are available on the e-filing web site. Where
Tax Audit Report has been furnished in accordance with the forms available
in the Income-tax Rules, 1962, answers to certain clauses may not be exact
response to the clause as stated in the Schema. However, this variation
cannot be held against the Tax Auditor, as development of schema is not
within his control and there is no specific option to issue the Tax Audit Report
by the auditor as per the notified Form 3CD. Moreover, this fact has been
brought to the notice of the CBDT by the DTC. Thus, where there is variation
in any clause, it would be impossible to respond as per Form prescribed in
the Rules.
84.5 In case of Joint Auditor(s), the present Income-tax filing options do not
provide for modalities of uploading of report by all the joint auditors and in
such a situation, it will be appropriate that the hard copy of the report duly
signed in the manner above is given to the assessee client and a
consolidated report is uploaded by one of the Auditors with a disclosure in
this regard from the Joint Auditor(s).
84.6 At present, there is no specific place to mention paragraphs expected
of SA 700, no mechanism to compulsory insert UDIN prior to uploading the
forms on the Income-tax website, and thus UDIN should be written in the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
hard copy of Form 3CA/3CB and thereafter the copy as stated above should
be given to the auditee.
84.7 It may be noted that the Apex Court in case of Life Insurance
Corporation of India v. CIT (219 ITR 410) has held that the law does not
contemplate or require the performance of an impossible act - lex non cogit
ad impossibilia. Similar view has been taken by the Supreme Court in State
of Rajasthan v. Shamsher Singh [(1985) AIR 1082], State of MP v. Narmada
Bachao Andolan [(2011) 7 SCC 1019] or in tax matter by the Allahabad High
Court in CIT v. Prem Kumar [(2008) 214 CTR All 452].
85. Useful websites and Reference Material/Publications
Some of the useful websites and Reference Material/Publications may be
referred from Appendix XVI and XVII.
260
APPENDICES
NOTE
The appendices published hereinafter do not form part of the Statement.
These are intended for the ease of reference to the readers.
These appendices, among other things, also contain reproduction of
texts of various sections of relevant statutes and notifications issued by
the Government of India. While every effort has been made to avoid
errors or omissions in reproduction, some errors are likely to creep in. It
is, therefore, suggested that to avoid any doubt, the reader should cross-
check all the facts, law and contents of the publication with original
Government publication or notifications.
262
Appendix I
FORM NO.3CA
[See rule 6G(1)(a)]
Audit report under section 44AB of the Income-tax Act, 1961,
in a case where the accounts of the business or profession of a person
have been audited under any other law
*I / we report that the statutory audit of M/s. _________________ ( Name
and address of the assessee with Permanent Account Number or Aadhaar
Number) was conducted by *me / us / M/s.
____________________________________________________ in
pursuance of the provisions of the___________________________Act,
and*I/we annex hereto a copy of *my / our / their audit report dated
_______________________along with a copy of each of :-
(a) the audited *profit and loss account / income and expenditure account
for the period beginning from ----------------------to ending on --------------
---------------.
(b) the audited balance sheet as at, _____; and
(c) documents declared by the said Act to be part of, or annexed to, the
*profit and loss account / income and expenditure account and
balance sheet.
2. The statement of particulars required to be furnished under section
44AB is annexed herewith in Form No. 3CD.
3. In *my / our opinion and to the best of *my / our information and
according to examination of books of account including other relevant
documents and explanations given to *me / us, the particulars given in the
said Form No. 3CD are true and correct subject to the following
observations/qualifications, if any:
a.
b.
c.
…………….................................................
**(Signature and stamp/Seal of the signatory)
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Place : ______________ Name of the signatory ………………………
Date : ______________ Full address ………………………………….
Notes :
1. *Delete whichever is not applicable
2. **This report has to be signed by a person eligible to sign the report as
per the provisions of section 44AB of the Income Tax Act, 1961.
3. Where any of the requirements in this Form is answered in the
negative or with qualification, give reasons therefore.
4. The person who signs this audit report shall indicate reference of his
membership number / certificate of practice / authority under which he
is entitled to sign this report.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
FORM NO.3CB
[See rule 6G(1)(b)]
Audit report under section 44AB of the Income-tax Act, 1961,
in the case of a person referred to in clause (b) of sub-rule (1) of rule 6G
1. *I / we have examined the balance sheet as on, ____, and the *profit
and loss account / income and expenditure account for the period beginning
from ----------------------to ending on -----------------., attached herewith, of
______________________________( Name ), _______________(Address),
____________(Permanent Account Number).
2. *I / we certify that the balance sheet and the *profit and loss / income
and expenditure account are in agreement with the books of account
maintained at the head office at _____________ and ** ___________
branches.
3.(a) *I / we report the following observations / comments / discrepancies /
inconsistencies; if any:
(b) Subject to above, -
(A) *I / we have obtained all the information and explanations which,
to the best of *my / our knowledge and belief, were necessary for the
purpose of the audit.
(B) In *my / our opinion, proper books of account have been kept by
the head office and branches of the assessee so far as appears
from*my / our examination of the books.
(C) In *my / our opinion and to the best of *my / our information and
according to the explanations given to *me / us, the said accounts,
read with notes thereon, if any, give a true and fair view :-
(i) in the case of the balance sheet, of the state of the affairs of the
assessee as at 31st March, ;and
(ii) in the case of the *profit and loss account / income and
expenditure account of the *profit / loss or *surplus / deficit of
the assessee for the year ended on that date.
4. The statement of particulars required to be furnished under section
44AB is annexed herewith in Form No.3CD.
5. In *my/our opinion and to the best of *my / our information and
according to explanations given to *me / us, the particulars given in the said
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Form No.3 CD are true and correct subject to following
observations/qualifications, if any:
a.
b.
c.
…………….................................................
***(Signature and stamp/seal of the signatory)
Place : ______________ Name of the signatory ………………………
Date : ______________ Full address ………………………………….
Notes :
1. *Delete whichever is not applicable.
2. Mention the total number of branches.
3. *This report has to be signed by person eligible to sign the report as
per the provisions of section 44AB of the Income Tax Act, 1961.
4. The person, who signs this audit report, shall indicate reference of his
membership number / certificate of practice number / authority under
which he is entitled to sign this report.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
FORM NO. 3CD
[See rule 6G(2)]
Statement of particulars required to be furnished under
section 44AB of the Income-tax Act, 1961
PART – A
1. Name of the assessee : _______________________
2. Address : _______________________
3. Permanent Account Number or Aadhaar Number :
_______________________
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 any
other identification number allotted for the same
: _______________________
5. Status : _______________________
6. Previous year : from ________ to ________
7. Assessment year : _______________________
8. Indicate the relevant clause of section 44AB under which
the audit has been Conducted
8a. Whether the assessee has opted for taxation under section
115BA/115BAA/115BAB/115BAC/115BAD?
: _______________________
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
PART - B
9.(a) If firm or association of persons, indicate names of partners/members
and their profit sharing ratios.
(b) If there is any change in the partners or members or in their profit
sharing ratio since the last date of the preceding year, the particulars
of such change
10.(a) Nature of business or profession (if more than one business or
profession is carried on during the previous year, nature of every
business or profession)
(b) If there is any change in the nature of business or profession, the
particulars of such change.
11(a) Whether books of account are prescribed under section 44AA, if yes,
list of books so prescribed.
(b) List of books of account maintained and the address at which the
books of accounts 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 accounts are not kept at one location, please furnish the
addresses of locations along with the details of books of accounts
maintained at each location.)
(c) List of books of account and nature of relevant documents examined.
12. Whether the profit and loss account includes any profits and gains
assessable on presumptive basis, if yes, indicate the amount and the
relevant section (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB,
Chapter XII-G, First Schedule or any other relevant section.)
13.(a) Method of accounting employed in the previous year
(b) Whether there had been any change in the method of accounting
employed vis-a-vis the method employed in the immediately preceding
previous year.
(c) If answer to (b) above is in the affirmative, give details of such change,
and the effect thereof on the profit or loss.
Serial Particulars Increase in profit Decrease in profit
number (Rs.) (Rs.)
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(d) Whether any adjustment is required to be made to the profits or loss
for complying with the provisions of income computation and
disclosure standards notified under section 145(2).
(e) If answer to (d) above is in the affirmative, give details of such
adjustments:
Increase in Decrease Net
profit (Rs.) in profit Effect
(Rs.) (Rs.)
ICDS I Accounting
Policies
ICDS II Valuation of
Inventories
ICDS III Construction
Contracts
ICDS IV Revenue
Recognition
ICDS V Tangible Fixed
Assets
ICDS VI Changes in
Foreign
Exchange
Rates
ICDS VII Governments
Grants
ICDS VIII Securities
ICDS IX Borrowing
Costs
ICDS X Provisions,
Contingent
Liabilities and
Contingent
Assets
Total
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(f) Disclosure as per ICDS:
(i) ICDS I-Accounting Policies
(ii) ICDS II-Valuation of Inventories
(iii) ICDS III-Construction Contracts
(iv) ICDS IV-Revenue Recognition
(v) ICDS V-Tangible Fixed Assets
(vi) ICDS VII-Governments Grants
(vii) ICDS IX Borrowing Costs
(viii) ICDS X-Provisions, Contingent Liabilities
and Contingent Assets".
14.(a) Method of valuation of closing stock employed in the previous year.
(b) In case of deviation from the method of valuation prescribed under
section 145A, and the effect thereof on the profit or loss, please
furnish:
Serial Particulars Increase in Decrease in profit
number profit (Rs.) (Rs.)
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.
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;
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(e) capital receipt, if any.
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, please furnish:
Details Consideration Value Whether provisions of
of received or adopted or second proviso to sub-
property accrued assessed or section (1) of section 43CA
assessable or fourth proviso to clause
(x) of sub-section (2) of
section 56
applicable?[Yes/No]
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 of written down value, as the case may be.
(ca) Adjustment made to the written down value under section
115BAC/115BAD(for assessment year 2021-2022 only) .............
(cb) Adjustment made to written down value of Intangible asset due
to excluding 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, and
(iii) subsidy or grant or reimbursement, by whatever name called.
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(e) Depreciation allowable.
(f) Written down value at the end of the year
19. Amounts admissible under sections:
Section Amount Amounts admissible as per the
debited to provisions of the Income Tax Act,
profit and loss 1961 and also fulfils the conditions, if
account any specified under the the
conditions, if any specified under the
relevant provisions of Income Tax
Act, 1961 or Income Tax Rules,1962
or any other guidelines, circular, etc.,
issued in this behalf.
32AC
32AD
33AB
33ABA
35(1)(i)
35(1)(ii)
35(1)(iia)
35(1)(iii)
35(1)(iv)
35(2AA)
35(2AB)
35ABB
35AC
35AD
35CCA
35CCB
35CCC
35CCD
35D
35DD
35DDA
35E
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
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)]
(b) Details of contributions received from employees for various funds as
referred to in section 36(1)(va):
Serial Nature Sum Due The The actual
number of received date for actual date of
fund from payment amount payment to
employees paid the
concerned
authorities
21.(a) Please furnish the details of amounts debited to the profit and loss
account, being in the nature of capital, personal, advertisement
expenditure etc
Nature Serial Particulars Amount
number in Rs.
Capital expenditure
Personal expenditure
Advertisement expenditure in
any souvenir, brochure, tract,
pamphlet or the like published
by a political party
Expenditure incurred at clubs
being entrance fees and
subscriptions
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Nature Serial Particulars Amount
number in Rs.
Expenditure incurred at clubs
being cost for club services
and facilities used.
Expenditure by way of penalty
or fine for violation of any law
for the time being force
Expenditure by way of any
other penalty or fine not
covered above
Expenditure incurred for any
purpose which is an offence or
which is prohibited by law
(b) Amounts inadmissible under section 40(a):-
(i) As payment to non-resident referred to in sub-clause (i)
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(B) Details of payment on which tax has been deducted but has not
been paid during the previous year or in the subsequent year
before the expiry of time prescribed under section 200(1)
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(V) amount of tax deducted
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(ii) as payment referred to in sub-clause (ia)
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(B) Details of payment on which tax has been deducted but has not
been paid on or before the due date specified in sub- section (1)
of section 139.
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payer
(V) amount of tax deducted
(VI) amount out of (V) deposited, if any
(iii) under sub-clause (ic) [Wherever applicable]
(iv) under sub-clause (iia)
(v) under sub-clause (iib)
(vi) under sub-clause (iii)
(A) date of payment
(B) amount of payment
(C) name and address of the payee
(vii) under sub-clause (iv)
(viiii) under sub-clause (v)
(c) Amounts debited to profit and loss account being, interest, salary,
bonus, commission or remuneration inadmissible under section
40(b)/40(ba) and computation thereof;
(d) Disallowance/deemed income under section 40A(3):
(A) On the basis of the examination of books of account and other
relevant documents/evidence, whether the expenditure covered
under section 40A(3) read with rule 6DD were made by account
payee cheque drawn on a bank or account payee bank draft. If
not, please furnish the details:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Serial Date of Nature of Amount Name and
number payment payment Permanent
Account Number or
Aadhaar Number of
the payee, if
available
(B) On the basis of the examination of books of account and other
relevant documents/evidence, whether the payment referred to
in section 40A(3A) read with rule 6DD were made by account
payee cheque drawn on a bank or account payee bank draft If
not, please furnish the details of amount deemed to be the
profits and gains of business or profession under section
40A(3A);
Serial Date of Nature of Amount Name and
number payment payment Permanent
Account Number or
Aadhaar Number of
the payee, if
available
(e) provision for payment of gratuity not allowable under section 40A(7);
(f) any sum paid by the assessee as an employer not allowable under
section 40A(9);
(g) particulars of any liability of a contingent nature;
(h) amount of deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not form part
of the total income;
(i) amount inadmissible under the proviso to section 36(1)(iii).
22. Amount of interest inadmissible under section 23 of the Micro, Small
and Medium Enterprises Development Act, 2006.
23. Particulars of payments made to persons specified under section
40A(2)(b).
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
24. Amounts deemed to be profits and gains under section 32AC or 32AD
or 33AB or 33ABA or 33AC.
25. Any amount of profit chargeable to tax under section 41 and
computation thereof.
26. In respect of any 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.
(State whether sales tax, customs duty, excise duty or any other
indirect tax, levy, cess, impost, etc., is passed through the profit and
loss account.)
27.(a) Amount of Central Value Added Tax credits availed of or utilised
during the previous year and its treatment in the profit and loss
account and treatment of outstanding Central Value Added Tax credits
in the accounts.
(b) Particulars of income or expenditure of prior period credited or debited
to the profit and loss account.
28. Whether during the previous year the assessee has received any
property, being share of a company not being a company in which the
public are substantially interested, without consideration or for
inadequate consideration as referred to in section 56(2)(viia), if yes,
please furnish the details of the same.
29. Whether during the previous year the assessee received any
consideration for 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.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
29A. (a) 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)
(b) If yes, please furnish the following details:
(i) Nature of income
(ii) Amount thereof:
29B. (a) Whether any amount is to be included as income chargeable
under the head 'income from other sources' as referred to in
clause (x) of sub-section (2) of section 56? (Yes/No)
(b) If yes, please furnish the following details:
(i) Nature of income :
(ii) Amount (in Rs.) thereof
30. Details of any amount borrowed on hundi or any amount due thereon
(including interest on the amount borrowed) repaid, otherwise than
through an account payee cheque. [Section 69D]
30A. (a) Whether primary adjustment to transfer price, as referred to in sub-
section 1) of section 92CE, has been made during the previous year?
(Yes/No)
(b) If yes, please furnish the following details:—
(i) Under which clause of sub-section (1) of section 92CE primary
adjustment is made?
(ii) Amount (in Rs.) of primary adjustment:
(iii) Whether the excess money available with the associated
enterprise is required to be repatriated to India as per the
provisions of sub-section (2) of section 92CE? (Yes/No)
(iv) If yes, whether the excess money has been repatriated within
the prescribed time (Yes/No)
(v) If no, the amount (in Rs.) of imputed interest income on such
excess money which has not been repatriated within the
prescribed time:
30B. (a) Whether the assessee has incurred expenditure during the
previous year by way of interest or of similar nature exceeding
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
one crore rupees as referred to in sub-section (1) of section
94B? (Yes/No.)
(b) If yes, please furnish the following details:—
(i) Amount (in Rs.) of expenditure by way of interest or of similar
nature incurred:
(ii) Earnings before interest, tax, depreciation and amortization
(EBITDA) during the previous year (in Rs.):
(iii) Amount (in Rs.) of expenditure by way interest or of similar
nature as per (i) above which exceeds 30% of EBITDA as per
(ii) above :
(iv) Details of interest expenditure brought forward as per sub-
section (4) of section 94B:
A.Y. Amount (in Rs.)
(v) Details of interest expenditure carried forward as per sub-
section (4) of section 94B:
A.Y. Amount (in Rs.)
30C. (a) Whether the assessee has entered into an impermissible
avoidance arrangement, as referred to in section 96, during the
previous year? (Yes/No.)
(b) If yes, please specify:—
(i) Nature of impermissible avoidance arrangement:
(ii) Amount (in Rs.) of tax benefit in the previous year arising,
in aggregate, to all the parties to the arrangement
31. (a) Particulars of each loan or deposit in an amount exceeding the
limit specified in section 269SS taken or accepted during the
previous year:-
(i) name, address and permanent account number or
Aadhaar Number (if available with the assessee) of the
lender or depositor;
(ii) amount of loan or deposit taken or accepted;
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(iii) whether the loan or deposit was squared up during the
previous year;
(iv) maximum amount outstanding in the account at any time
during the previous year;
(v) whether the loan or deposit was taken or accepted by
cheque or bank draft or use of electronic clearing system
through a bank account;
(vi) in case the loan or deposit was taken or accepted by
cheque or bank draft, whether the same was taken or
accepted by an account payee cheque or an account
payee bank draft.
(b) Particulars of each specified sum in an amount exceeding the
limit specified in section 269SS taken or accepted during the
previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
person from whom specified sum is received;
(ii) amount of specified sum taken or accepted;
(iii) whether the specified sum was taken or accepted by
cheque or bank draft or use of electronic clearing system
through a bank account;
(iv) in case the specified sum was taken or accepted by
cheque or bank draft, whether the same was taken or
accepted by an account payee cheque or an account
payee bank draft.
(Particulars at (a) and (b) need not be given in the case of a
Government company, a banking company or a corporation
established by the Central, State or Provincial Act.)
(ba) Particulars of each receipt in an amount exceeding the limit
specified in section 269ST, in aggregate from a person in a day
or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person, during the
previous year, where such receipt is otherwise than by a cheque
or bank draft or use of electronic clearing system through a
bank account:-
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in Rs.);
(iv) Date of receipt;
(bb) Particulars of each receipt in an amount exceeding the limit
specified in section 269ST, in aggregate from a person in a day
or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person, received by a
cheque or bank draft, not being an account payee cheque or an
account payee bank draft, during the previous year:—
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payer;
(ii) Amount of receipt (in Rs.);
(bc) Particulars of each payment made in an amount exceeding the
limit specified in section 269ST, in aggregate to a person in a
day or in respect of a single transaction or in respect of
transactions relating to one event or occasion to a person,
otherwise than by a cheque or bank draft or use of electronic
clearing system through a bank account during the previous
year:-
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payee;
(ii) Nature of transaction;
(iii) Amount of payment (in Rs.);
(iv) Date of payment;
(bd) Particulars of each payment in an amount exceeding the limit
specified in section 269ST, in aggregate to a person in a day or
in respect of a single transaction or in respect of transactions
relating to one event or occasion to a person, made by a cheque
or bank draft, not being an account payee cheque or an account
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
payee bank draft, during the previous year:—
(i) Name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payee;
(ii) Amount of payment (in Rs.);
(Particulars at (ba), (bb), (bc) and (bd) need not be given in the
case of receipt by or payment to a Government company, a
banking Company, a post office savings bank, a cooperative
bank or in the case of transactions referred to in section 269SS
or in the case of persons referred to in Notification No. S.O.
2065(E) dated 3 rd July, 2017)
(c) Particulars of each repayment of loan or deposit or any
specified advance in an amount exceeding the limit specified in
section 269T made during the previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payee;
(ii) amount of the repayment;
(iii) maximum amount outstanding in the account at any time
during the previous year;
(iv) whether the repayment was made by cheque or bank
draft or use of electronic clearing system through a bank
account;
(v) in case the repayment was made by cheque or bank
draft, whether the same was repaid by an account payee
cheque or an account payee bank draft.
(d) Particulars of repayment of loan or deposit or any specified
advance in an amount exceeding the limit specified in section
269T received otherwise than by a cheque or bank draft or use
of electronic clearing system through a bank account during the
previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payer;
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(ii) repayment of loan or deposit or any specified advance
received otherwise than by a cheque or bank draft or use
of electronic clearing system through a bank account
during the previous year.
(e) Particulars of repayment of loan or deposit or any specified
advance in an amount exceeding the limit specified in section
269T received by a cheque or bank draft which is not an
account payee cheque or account payee bank draft during the
previous year:—
(i) name, address and Permanent Account Number or
Aadhaar Number (if available with the assessee) of the
payer;
(ii) repayment of loan or deposit or any specified advance
received by a cheque or a bank draft which is not an
account payee cheque or account payee bank draft
during the previous year.
(Particulars at (c), (d) and (e) need not be given in the case of a
repayment of any loan or deposit or any specified advance taken or
accepted from the Government, Government company, banking
company or a corporation established by the Central, State or
Provincial Act)
32.(a) Details of brought forward loss or depreciation allowance, in the
following manner, to the extent available:
Seri Assess Nature Amount All losses/ Amount Amounts Remarks
al ment of loss as Allowances as as
Num Year /allowan returne not allowed adjusted assessed
ber ce (in d* (in under by (give
rupees) rupees) section withdrawa reference
115BAA/11 l of to
5BAC/115B additional relevant
AD depreciati order)
on on
account of
opting for
taxation
under
section
115BAC/1
15BAD^
(1) (2) (3) (4) (5) (6) (7) (8)
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
*If the assessed depreciation is less and no appeal pending than take
assessed. ^ To be filled in for assessment year 2021-22 only
(b) Whether a change in shareholding of the company has taken place in
the previous year due to which the losses incurred prior to the
previous year cannot be allowed to be carried forward in terms of
section 79.
(c) Whether the assessee has incurred any speculation loss referred to in
section 73 during the previous year, If yes, please furnish the details of
the same.
(d) whether the assessee has incurred any loss referred to in section 73A
in respect of any specified business during the previous year, if yes,
please furnish details of the same.
(e) In case of a company, please state that whether the company is
deemed to be carrying on a speculation business as referred in
explanation to section 73, if yes, please furnish the details of
speculation loss if any incurred during the previous year.
33. Section-wise details of deductions, if any, admissible under Chapter
VIA or Chapter III (Section 10A, Section 10AA).
Section under Amounts admissible as per the provision of the
which Income Tax Act, 1961 and fulfils the conditions, if
deduction is any, specified under the relevant provisions of
claimed Income Tax Act, 1961 or Income Tax Rules,1962 or
any other guidelines, circular, etc, issued in this
behalf.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
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:
Tax Secti Nature Total Total Total Amount Total Amount Amount
deductio on of amount amount amount of tax amount of tax of tax
n and paymen of on which on which deducte on which deducted deducte
collectio t payment tax was tax was d or tax was or d or
n or required deducted collecte deducted collected collected
Account receipt to be or d out of or on (8) not
Number of the deducted collected (6) collected deposite
(TAN) nature or at at less d to the
specified collected specified than credit of
in out of (4) rate out specified the
column of (5) rate out Central
(3) of (7) Governm
ent out
of (6)
and (8)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
(b) whether the assessee is required to furnish the statement of tax
deducted or tax collected. If yes, please furnish the details:
Tax Type Due date Date of Whether the
deduction of for furnishing, statement of tax
and Form furnishing if deducted or
collection furnished collected contains
Account information about
Number all transactions
(TAN) which are required
to be reported. If
not, please furnish
list of
details/transactions
which are not
reported
(c) whether the assessee is liable to pay interest under section 201(1A) or
section 206C(7). If yes, please furnish:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Tax deduction Amount of interest Amount paid out
and collection under section of column (2)
Account Number 201(1A)/206C(7) is along with date of
(TAN) payable payment.
35.(a) In the case of a trading concern, give quantitative details of principal
items of goods traded :
(i) Opening Stock;
(ii) purchases during the previous year;
(iii) sales during the previous year;
(iv) closing stock;
(v) shortage/excess, if any
(b) In the case of a manufacturing concern, give quantitative details of the
principal items of raw materials, finished products and by-products :
A. Raw Materials :
(i) opening stock;
(ii) purchases during the previous year;
(iii) consumption during the previous year;
(iv) sales during the previous year;
(v) closing stock;
(vi) yield of finished products;
(vii) percentage of yield;
(viii) shortage/excess, if any.
B. Finished products/by- products :
(i) opening stock;
(ii) purchases during the previous year;
(iii) quantity manufactured during the previous year;
(iv) sales during the previous year;
(v) closing stock;
(vi) shortage/excess, if any.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
36. Omitted by the Income-tax (Eighth Amendment) Rules, 2021, w.e.f. 1-
4-2021
36A. (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:
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.
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.
39. Whether any audit was conducted under section 72A of the Finance
Act,1994 in relation to 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.
40. Details regarding turnover, gross profit, etc., for the previous year and
preceding previous year:
S. Particulars Previous Preceding
No year previous
year
1. Total turnover of the assessee
2. Gross profit/turnover
3. Net profit/turnover
4. Stock-in-trade/turnover
5. Material consumed/finished goods
produced
(The details required to be furnished for principal items of goods
traded or manufactured or services rendered)
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
41. Please furnish the details of demand raised or refund issued during
the previous year under any tax laws other than Income Tax Act, 1961
and Wealth tax Act, 1957 alongwith details of relevant proceedings.
42. (a) Whether the assessee is required to furnish statement in Form
No.61 or Form No. 61A or Form No. 61B? (Yes/No)
(b) If yes, please furnish:
S. Income-tax Type Due date Date of Whether If not,
No. Department of for furnishin the Form please
Reporting Form furnishin g, if contains furnish list
Entity g furnished information of the
Identification about all details/tran
Number details/ sactions
transaction which are
s which are not
required to reported.
be
reported.
43. (a) Whether the assessee or its parent entity or alternate reporting
entity is liable to furnish the report as referred to in sub-section
(2) of section 286 (Yes/No)
(b) if yes, please furnish the following details:
(i) Whether report has been furnished by the assessee or its
parent entity or an alternate reporting entity
(ii) Name of parent entity
(iii) Name of alternate reporting entity (if applicable)
(iv) Date of furnishing of report
288
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
44. Break-up of total expenditure of entities registered or not registered
under GST:
Sl. Total Expenditure in respect of entities registered Expendit
No amount of under GST ure
. Expenditur relating
e incurred to
during the entities
year not
registere
d under
GST
Relating Relating Relating Total
to to to payment
goods or entities other to
services falling registere registered
exempt under d entities
from composi entities
GST tion
scheme
1 2 3 4 5 6 7
……………...................................................
*(Signature and stamp/Seal of the signatory)
Place:______________ Name of the signatory ……………………
Date:______________ Full address………………………………
Notes:
1. *This Form has to be signed by the person competent to sign Form
No. 3CA or Form No. 3CB, as the case may be.
289
Appendix II
Clarification Regarding Authority Attached to
Documents Issued by the Institute1
1. The Institute has, from time to time, issued ‘Guidance Notes’ on a
number of matters. With the formation of the Accounting Standards Board
and the Auditing and Assurance Standards Board, ‘Accounting Standards’
and ‘Standards on Auditing’ are also being issued.
2. Members have sought guidance regarding the level of authority
attached to the various documents issued by the Institute and the degree of
compliance required in respect thereof. This note is being issued to provide
this guidance.
3. Guidance Notes, though recommendatory in nature, are issued to
assist professional accountants in implementing the Engagement Standards
and the Standards on Quality Control issued under the authority of the
Council. Guidance Notes are also issued to provide guidance on other
generic or industry specific audit issues, not necessarily arising out of a
Standard. Professional accountants should be aware of and consider
Guidance Notes applicable to the engagement. A professional accountant
who does not consider and apply the guidance included in a relevant
Guidance Note should take reasonable and adequate care in performing the
alternate procedures adopted by him to deal with the objectives and basic
principles set out in the Guidance Note. In such situations, a professional
accountant should also document the rationale in performing the alternate
procedures. Similarly, while discharging his attest function, a member should
examine whether the recommendations in a Guidance Note relating to an
accounting matter have been followed or not. If the same have not been
followed, the member should consider whether keeping in view the
1 Published in the December,1985 issue of the ‘The Chartered Accountant’. Revised in February,
2022. The revised (the announcement has been revised primarily from auditing perspective)
clarification was considered and approved by the Council of ICAI at its 408th meeting held on 3rd &
4th February, 2022. Further revised in terms of the decision taken by the Council of ICAI at its 422nd
meeting held on 30th June & 1st July, 2023.
290
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
circumstances of the case, a disclosure in his report is necessary in
accordance with Engagement Standards.
4. The ‘Accounting Standards’ and ‘Standards on Auditing’ issued by the
Accounting Standards Board and the Auditing and Assurance Standards
Board, respectively, establish standards which have to be complied with to
ensure that financial statements are prepared in accordance with generally
accepted accounting standards and that auditors carry out their audits in
accordance with the generally accepted auditing practices. They become
mandatory on the dates specified either in the respective document or by
notification issued by the Council.
291
Appendix III
[Para 2.2]
Various certificates/reports by an Accountant
Besides tax audit, certain other sections in the Income-tax Act, 1961 also require audit/certifications by a chartered
accountant as below:
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
1. Assessees carrying on the business of 33AB(2) 5AC 3AC
growing and manufacturing
tea/coffee/rubber claiming deduction
under section 33AB.
2. Assessees carrying on business 33ABA(2) 5AD 3AD
consisting of the prospecting for, or
extraction or production of, petroleum
or natural gas or both in India and in
relation to which the Central
Government has entered into an
agreement for the purpose of deposit
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
in Special Account/ Site Restoration
Account under section 33ABA.
3. Assessees other than companies or 35D(4) and 35E(6) 6AB 3AE
co-operative societies claiming
amortisation of certain preliminary
expenses under section 35D and
assessee being Indian company or a
non-corporate resident claiming
293
deduction for expenditure on
prospecting etc. for certain minerals
under section 35E.
4. Assessees carrying on business or 44AB 6G 3CA/ 3CB/ and 3CD
profession whose sales, turnover or
gross receipts exceed Rs.1 Crore
(Rs.50 lakhs in the case of profession)
as per the provisions of section 44AB,
and assessees who claim their income
to be lower than the profits or gains
deemed to be the profits and gains of
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
their business under sections 44AD,
44AE, 44BB or 44BBB.
5. Assessee being a non-resident (not 44DA(2) 6GA 3CE
being a company) or a foreign
company receiving income by way of
royalty or fees for technical services
from Government or India concern as
294
per the provisions of section 44DA.
6. Every assessee who has effected 50B(3) 6H 3CEA
slump sale in the previous year as per
the provisions of section 50B.
7. Every person who has entered into an 92E 10E 3CEB
‘International transaction or specified
domestic transaction’ as per the
requirement of section 92E of the Act.
8. Report from an accountant to be 9A 10V(13) 3CEJA
furnished for purpose of section 9A
regarding fulfilment of certain
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
conditions by an eligible investment
fund
9. Company assessee engaged in the 35(2AB) 6(7A)(c) 3CLA
business of bio-technology or
manufacturing of specified article or
thing incurring expenditure on
scientific research (other than land
and building) on an approved in-house
295
research and development facility.
10. The transferor of the share of, or 9(1)(i) 11UC(2) 3CT
interest in, a company or an entity that
derives its value substantially from
assets located in India to furnish Form
No 3CT providing the basis of the
apportionment in accordance with the
formula and certifying that the income
attributable to assets located in India
has been correctly computed.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
11. Certificate of an accountant under 2(48) 8B(6) 5BA
sub-rule (6) of rule 8B
12. Assessees who have been ordered by 142(2A) 14A 6B
the Assessing Officer with the
previous approval of the Principal
Chief Commissioner or Chief
Commissioner or Principal
296
Commissioner or Commissioner under
section 142(2A) to get their books of
account audited having regard to the
nature and complexity of the accounts,
volume of accounts, doubts about the
correctness of the accounts,
multiplicity of transactions in the
accounts or specialized nature of
business activity of the assessee and
the interests of the revenue.
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
13. Assessee being a trust or institution 12A(1)(b)(ii) 17B 10B/10BB
claiming deduction u/s 11 & 12 as per
the requirement of section 12A(1)(b).
14. Assessee being any fund or trust or Clause (b) of Tenth 16CC 10B/10BB
institution or any university or other proviso to
educational institution or any hospital 10(23C)(iv)/(v)/(vi)/
or other medical institution referred to (via)
in sub-clause (iv) or sub-clause (v) or
297
sub-clause (vi) or sub-clause (via) of
section 10(23C) claiming exemption
under section 10(23C).
15. Assessees being electoral trust 13B 17CA(12) 10BC
receiving voluntary contributions
16. Certificate of accountant in respect of 10(23FE) 2DB 10BBC
compliance to the provisions of clause
(23FE) of section 10 of the Income-tax
Act, 1961 by the notified Pension Fund
17. Audit report to be filed by the 10(23FE) - -
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
Sovereign Wealth Fund claiming
exemption under clause (23FE) of
section 10 of the Income-tax Act, 1961
18. Assessees claiming deduction in 80-IA (7)/80-IB/ 80-IC 18BBB(1) 10CCB
respect of eligible businesses under and 80-IE
sections 80 – IA or 80 – IB (except
Multiplex Theatres/ Convention
298
Centres/ hospitals in rural areas) and
eligible undertakings/enterprises
claiming deduction under section 80 –
IC.
19. Assessees claiming deduction under 80-ID(3)(iv) 18DE(3) 10CCBBA
section 80-ID in respect of the profits
and gains derived from the business of
hotels and convention centres in
specified areas.
20. Assessees claiming deduction under 80-IB(11C) 18DDA 10CCBD
section 80-IB (11C) in respect of the
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
profits and gains from the business of
operating and maintaining a hospital
located anywhere in India other than
the excluded area.
21. Assessees claiming deduction under 80-IA(6) 18BBE(3) 10CCC
section 80-IA (6) in respect of profits
and gains of business of housing or
299
other activities which are an integral
part of a highway project.
22. Assessees, being scheduled banks 80LA(3)(i) 19AE 10CCF
owning an offshore banking unit in a
Special Economic Zone and
International financial services centre,
for claiming deduction under Section
80LA in respect of specified incomes.
23. Assessees, being Indian companies, 80JJAA(2)(c) 19AB 10DA
claiming deduction under section
80JJAA, in respect of employment of
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
new workmen.
24 Certificate to be issued by accountant 10(23FF) 2DD(3) 10-IJ
under clause (23FF) of section 10 of
the Income-tax Act, 1961
25 Verification by an Accountant under 10(4D) 21AJA(3) 10-IL
sub-rule (3) of rule 21AJA Verification
26. Assessee responsible for making the 195(6) 37BB(1)(ii)(b) 15CB
300
payment to a non-resident
27. Assessee who has failed to deduct tax First Proviso to 31ACB(1) 26A
at source in accordance with the section 201(1)
provisions of the Act, not be deemed
as an assessee in default provided
certain conditions are fulfilled and a
certificate from an accountant to this
effect is furnished in the format
prescribed under section 201(1) of the
Act.
28. Assessee who has failed to collect tax First Proviso to 37J(1) 27BA
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
at source in accordance with the section 206C(6A)
provisions of the Act, not be deemed
as an assessee in default provided
certain conditions are fulfilled and a
certificate from an accountant to this
effect is furnished in the format
prescribed under section 206C(6A) of
the Act.
301
29. Corporate assessees liable to pay 115JB(4) 40B 29B
Minimum Alternate tax under section
115JB of the Act, to furnish a report
from an accountant certifying the
computation of book profits.
30. Non-corporate assessees liable to pay 115JC(3) 40BA 29C
Alternate Minimum tax under section
115JC of the Act, to furnish a report
from an accountant certifying the
computation of adjusted book profits.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
31. Assessee being a non-resident having 285 114DA 49C
a liaison office in India prepare and
deliver a statement containing such
particulars as may be prescribed.
32. Manufacturer assessee deriving 10A(5) 16D 56F
Profits and gains from an undertaking
by the export of articles or things or
computer software
302
33. Corporate assessee being an 72A(2)(b)(iii) 9C(b) 62
amalgamated company to furnish
certificate from the principal officer,
duly verified by an accountant
regarding achievement of the
prescribed level of production and
continuance of such level of
production in subsequent years.
34. Assessee being a venture capital 115U(2) 12C(2) 64
company or a venture capital fund to
furnish a statement giving details of
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
the nature of income paid or credited
during the previous year and other
relevant details to be verified by an
accountant as per section 115U.
35. Assessee being a business trust 115UA(4) 12CA(2)(i) 64A
distributing income to its unit holders
to furnish a statement giving the
details of the nature of the income
303
paid during the previous year and
other relevant details to be verified by
an Accountant as per section 115UA.
36. Assessee being an investment fund 115UB(7) 12CB(1)(ii) 64D
making payment of income to unit
holder of the said fund to furnish a
statement giving details of the nature
of the income paid or credited during
the previous year and such other
relevant details to be verified by an
Accountant as per section 115UB.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
S. No. Particulars of Report/ statement/ Applicable Section Applicable Rule of Form No.
Certificates of the Income-tax Income-tax Rules,
Act, 1961 1962
37. Assessee being securitisation trust 115TCA(4) 12CC(2)(i) 64E
making payment of income to its
investor to furnish a statement giving
details of the nature of the income
paid or credited during the previous
year and such other relevant details to
be verified by an Accountant as per
section 115TCA.
304
38. Assessees engaged in the business of 115VW(ii) 11T 66
operating qualifying ships having
opted for computation of income from
such business under the tonnage tax
scheme contained in chapter XII G of
the Act to furnish a report under
section 115VW of the Act.
Appendix IV
[Para 5.8]
CIRCULAR NO. 452, DATED 17.3.1986
Subject: Section 44AB of the Income-tax Act, 1961- Clarification
regarding applicability in the cases of Commission Agents,
arahtias etc.
1. Section 44AB of the Income-tax Act, 1961, as inserted by the Finance
Act, 1984, casts an obligation on every person carrying on business to
get his accounts audited, if his total sales, turnover or gross receipts,
as the case may be, exceed Rs.40 lakhs (substituted by Rs. 1 crore
by Finance Act, 2012 w.e.f. A.Y. 2013-14) in any previous year
relevant to the assessment year commencing on 1.4.1985 or any
subsequent assessment year.
2. The Board have received representations from various persons, trade
associations, etc., to clarify whether in cases where an agent effects
sales/turnover on behalf of his principal, such sales/turnover have to
be treated as the sales/turnover of the agent for the purpose of
Section 44AB of the Income-tax Act, 1961.
3. The matter was examined in consultation with the Ministry of Law.
There are various trade practices prevalent in the country in regard to
agency business and no uniform pattern is followed by the
commission agents, consignment agents, brokers, kachha arhatias
and pacca arhatias dealing in different commodities in different parts
of the country. The primary necessity in each instance is to ascertain
with precision what are the express terms of the particular contract
under consideration. Each transaction, therefore, requires to be
examined with reference to its terms and conditions and no hard and
fast rule can be laid down as to whether an agent is acting only as an
agent or also as a principal.
4. Board are advised that so far as kachha arhatias are concerned, the
turnover does not include the sales effected on behalf of the principals
and only the gross commission has to be considered for the purpose
of Section 44AB. But the position is different with regard to pacca
305
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
arhatia. A pacca arhatia is not, in the proper sense of the word, an
agent or even del credre agent. The relation between him and his
constituent is substantially that between the two principals. On the
basis of various Court pronouncements, following principles of
distinction can be laid down between a kachha arhatia and a pacca
arhatia:
(1) A kachha arhatia acts only as an agent of his constituent and
never acts as a principal. A pacca arhatia, on the other hand, is
entitled to substitute his own goods towards the contract made
for the constituent and buy the constituent's goods on his
personal account and thus he acts as a principal as regards his
constituent.
(2) A kachha arhatia brings a privity of contract between his
constituent and the third party so that each becomes liable to
the other. The pacca arhatia, on the other hand, makes himself
liable upon the contract not only to the third party but also to
his constituent.
(3) Though the kachha arhatia does not communicate the name of
his constituent to the third party, he does communicate the
name of the third party to the constituent. In other words, he is
an agent for an unnamed principal. The pacca arhatia, on the
other hand, does not inform his constituent as to the third party
with whom he has entered into a contract on his behalf.
(4) The remuneration of kachha arhatia consists solely of
commission and he is not interested in the profits and losses
made by his constituent as is not the case with the pacca
arhatia.
(5) The kaccha arhatia, unlike the pacca arhatia does not have any
dominion over the goods.
(6) The kaccha arhatia has no personal interest of his own when
he enters into a transaction and his interest is limited to the
commission agent's charges and certain out of pocket
expenses whereas a pacca arhatia has a personal interest of
his own when he enters into a transaction.
306
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(7) In the event of any loss, the kachha arhatia is entitled to be
indemnified by his principal as is not the case with pacca
arhatia.
5. The above distinction between a kachha arhatia and pacca arhatia
may also be relevant for determining the applicability of Section 44AB
in cases of other type of agents. In the case of agents whose position
is similar to that of kachha arhatia, the turnover is only the commission
and does not include the sales on behalf of the principals. In the case
of agents of the type of pacca arahtia, on the other hand, the total
sales/turnover of the business should be taken into consideration for
determining the applicability of the provisions of Section 44AB of the
Income-tax Act.
Circular No. 452 [F.No.201/3/85-IT(A-II) dated 17th March 1986.
JUDICIAL ANALYSIS
EXPLAINED IN - In Jeyar Consultant & Investment (P.) Ltd. v. Assistant
Commissioner [1993] 46 ITD 71 (Mad.-Trib.), it was observed that it is ex
facie clear from the CBDT Circular No. 452 of 17-3-1986 which came to be
issued in relation to kacha and pacca arhatias, who are an integral part of the
trading sector, that instructions issued by the Board as
respects kacha and pacca arhatias could not be applied to the case of the
assessee who has arranged finances for other for a fee. The assessee may
choose to label the fee as brokerage or even as commission. But the fee or
to use a generic expression ‘receipt’ could not be regarded as turnover
proper.
RELIED ON IN - The above circular was relied on in ITO v. Shantilal Chunilal
& Co. [1993] 45 ITD 581 (Pune - Trib.), with the following observations:
“. . . Further, reference was made by assessee to pages 52 to 54 which
contains Board’s Circular No. 452, dated 17-3-1986 which has been
issued in connection with section 44AB of the Income-tax Act, 1961.
Reliance was placed on para 4 of the said circular according to which
the Board were advised that so far as kachha arahatias were
concerned, the turnover did not include sales effected on behalf of the
principals and only gross commission has to be considered for the
purpose of section 44AB. The submission of the learned counsel for the
assessee was that the case of the assessee is one of kachha
arahatia and not a pucca arahatia and, therefore, only gross
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
commission has to be considered for the purpose of section 44AB of
the Income-tax Act, 1961. . . The CIT (Appeals) has excluded the adat
receipt as well as interest receipt from the purview of turnover for the
purpose of section 44AB. Relying on the clarifications given by the
Board in its Circular No. 452, dated 17-3-1986, he has categorised the
assessee as kachha arahatia and he has charged expenses incurred
on such business which resulted in gross profit rate of 1.09 per cent.
Therefore, it is very much relevant to clinch the issue whether the
assessee is a kachha arahatia or not. Going by the clarification issued
by the Board in the aforesaid Circular No. 452, dated 17-3-1986 the
case of the assessee fits in with the kachha arahatia vis-a-vis case
of pucca arahatia. . . .” (pp. 585-586).
REFERRED TO IN - Manish Textiles v. ACIT [1991] 38 ITD 365 (Bom.)
308
APPENDIX V
[PARA 5.11]
Circular No. 4/2007, dated 15 th June, 2007
F.No.149/287/2005-TPL
Distinction between shares held as stock-in-trade and shares held as
investment - tests for such a distinction
1. The Income-tax Act, 1961 makes a distinction between a “capital
asset” and a “trading asset”.
2. Capital asset is defined in Section 2(14) of the Act. Long-term capital
assets and gains are dealt with under Section 2(29A) and Section
2(29B). Short-term capital assets and gains are dealt with under
Section 2(42A) and Section 2(42B).
3. Trading asset is dealt with under Section 28 of the Act.
4. The Central Board of Direct Taxes (CBDT) through Instruction
No.1827 dated August 31, 1989 had brought to the notice of the
assessing officers that there is a distinction between shares held as
investment (capital asset) and shares held as stock-in-trade (trading
asset). In the light of a number of judicial decisions pronounced after
the issue of the above instructions, it is proposed to update the above
instructions for the information of assessees as well as for guidance of
the assessing officers.
5. In the case of Commissioner of Income Tax (Central), Calcutta Vs
Associated Industrial Development Company (P) Ltd (82 ITR 586), the
Supreme Court observed that:
“Whether a particular holding of shares is by way of investment
or forms part of the stock-in-trade is a matter which is within the
knowledge of the assessee who holds the shares and it should,
in normal circumstances, be in a position to produce evidence
from its records as to whether it has maintained any distinction
between those shares which are its stock-in-trade and those
which are held by way of investment.”
309
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
6. In the case of Commissioner of Income Tax, Bombay Vs H. Holck
Larsen (160 ITR 67), the Supreme Court observed :
“The High Court, in our opinion, made a mistake in observing
whether transactions of sale and purchase of shares were
trading transactions or whether these were in the nature of
investment was a question of law. This was a mixed question of
law and fact.”
7. The principles laid down by the Supreme Court in the above two cases
afford adequate guidance to the assessing officers.
8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to
the decisions of the Supreme Court in several cases, has culled out
the following principles:
“(i) Where a company purchases and sells shares, it must be
shown that they were held as stock-in-trade and that existence
of the power to purchase and sell shares in the memorandum of
association is not decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of
maintaining books of accounts, the magnitude of purchases and
sales and the ratio between purchases and sales and the
holding would furnish a good guide to determine the nature of
transactions;
(iii) ordinarily the purchase and sale of shares with the motive of
earning a profit, would result in the transaction being in the
nature of trade/adventure in the nature of trade; but where the
object of the investment in shares of a company is to derive
income by way of dividend etc. then the profits accruing by
change in such investment (by sale of shares) will yield capital
gain and not revenue receipt”.
9. Dealing with the above three principles, the AAR has observed in the
case of Fidelity group as under:-
“We shall revert to the aforementioned principles. The first
principle requires us to ascertain whether the purchase of
shares by a FII in exercise of the power in the memorandum of
association/trust deed was as stock-in-trade as the mere
existence of the power to purchase and sell shares will not by
310
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
itself be decisive of the nature of transaction. We have to verify
as to how the shares were valued/held in the books of account
i.e. whether they were valued as stock-in-trade at the end of the
financial year for the purpose of arriving at business income or
held as investment in capital assets. The second principle
furnishes a guide for determining the nature of transaction by
verifying whether there are substantial transactions, their
magnitude, etc., maintenance of books of account and finding
the ratio between purchases and sales. It will not be out of place
to mention that regulation 18 of the SEBI Regulations enjoins
upon every FII to keep and maintain books of account
containing true and fair accounts relating to remittance of initial
corpus of buying and selling and realizing capital gains on
investments and accounts of remittance to India for investment
in India and realizing capital gains on investment from such
remittances. The third principle suggests that ordinarily
purchases and sales of shares with the motive of realizing profit
would lead to inference of trade/adventure in the nature of
trade; where the object of the investment in shares of
companies is to derive income by way of dividends etc., the
transactions of purchases and sales of shares would yield
capital gains and not business profits.”
10. CBDT also wishes to emphasise that it is possible for a tax payer to
have two portfolios, i.e., an investment portfolio comprising of
securities which are to be treated as capital assets and a trading
portfolio comprising of stock-in-trade which are to be treated as trading
assets. Where an assessee has two portfolios, the assessee may have
income under both heads i.e., capital gains as well as business
income.
11. Assessing officers are advised that the above principles should guide
them in determining whether, in a given case, the shares are held by
the assessee as investment (and therefore giving rise to capital gains)
or as stock-in-trade (and therefore giving rise to business profits). The
assessing officers are further advised that no single principle would be
decisive and the total effect of all the principles should be considered
to determine whether, in a given case, the shares are held by the
assessee as investment or stock-in-trade.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
12. These instructions shall supplement the earlier Instruction no. 1827
dated August 31, 1989.
Circular No. 6/2016, dated 29.02.2016
Issue of taxability of surplus on sale of shares and securities - Capital
Gains or Business Income - Instructions in order to reduce litigation
Sub-section (14) of section 2 of the Income-tax Act, 1961 ('Act') defines the
term "capital asset" to include property of any kind held by an assessee,
whether or not connected with his business or profession, but does not
include any stock-in-trade or personal assets subject to certain exceptions.
As regards shares and other securities, the same can be held either as
capital assets or stock-in-trade/trading assets or both. Determination of the
character of a particular investment in shares or other securities, whether the
same is in the nature of a capital asset or stock-in-trade, is essentially a fact-
specific determination and has led to a lot of uncertainty and litigati on in the
past.
2. Over the years, the courts have laid down different parameters to
distinguish the shares held as investments from the shares held as stock -in-
trade. The Central Board of Direct Taxes ('CBDT') has also, through
Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007
dated June 15, 2007, summarized the said principles for guidance of the field
formations.
3. Disputes, however, continue to exist on the application of these
principles to the facts of an individual case since the taxpayers find it difficult
to prove the intention in acquiring such shares/securities. In this background,
while recognizing that no universal principal in absolute terms can be laid
down to decide the character of income from sale of shares and securities
(i.e. whether the same is in the nature of capital gain or business inc ome),
CBDT realizing that major part of shares/securities transactions takes place
in respect of the listed ones and with a view to reduce litigation and
uncertainty in the matter, in partial modification to the aforesaid Circulars,
further instructs that the Assessing Officers in holding whether the surplus
generated from sale of listed shares or other securities would be treated as
Capital Gain or Business Income, shall take into account the following—
(a) Where the assessee itself, irrespective of the period of holding the
listed shares and securities, opts to treat them as stock-in-trade, the
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income arising from transfer of such shares/securities would be treated
as its business income,
(b) In respect of listed shares and securities held for a period of more than
12 months immediately preceding the date of its transfer, if the
assessee desires to treat the income arising from the transfer thereof
as Capital Gain, the same shall not be put to dispute by the Assessing
Officer. However, this stand, once taken by the assessee in a
particular Assessment Year, shall remain applicable in subsequent
Assessment Years also and the taxpayers shall not be allowed to
adopt a different/contrary stand in this regard in subsequent years;
(c) In all other cases, the nature of transaction (i.e. whether the same is in
the nature of capital gain or business income) shall continue to be
decided keeping in view the aforesaid Circulars issued by the CBDT.
4. It is, however, clarified that the above shall not apply in respect of
such transactions in shares/securities where the genuineness of the
transaction itself is questionable, such as bogus claims of Long Term Capital
Gain/Short Term Capital Loss or any other sham transactions.
5. It is reiterated that the above principles have been formulated with the
sole objective of reducing litigation and maintaining consistency in approach
on the issue of treatment of income derived from transfer of shares and
securities. All the relevant provisions of the Act shall continue to apply on the
transactions involving transfer of shares and securities.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Letter F.No. 225/12/2016/ITA.II dated 02.05.2016
Consistency in taxability of income/loss arising from transfer of
unlisted shares under Income-tax Act, 1961
Regarding characterisation of income from transactions in listed shares and
securities, Central Board of Direct Taxes ('CBDT') had issued a clarificatory
Circular no. 6/2016 dated 29th February, 2016, wherein with a view to reduce
litigation and maintain consistency in approach in assessments, it was
instructed that income arising from transfer of listed shares and securities,
which are held for more than twelve months would be taxed under the head
'Capital Gain' unless the taxpayer itself treats these as its stock- in-trade and
transfer thereof as its business income. It was further stated that in other
situations, the issue was to be decided on the basis of existing Circulars
issued by the CBDT on this subject.
2. Similarly, for determining the tax-treatment of income arising from
transfer of unlisted shares for which no formal market exists for trading, a
need has been felt to have a consistent view in assessments pertaining to
such income. It has, accordingly, been decided that the income arising from
transfer of unlisted shares would be considered under the head 'Capital
Gain', irrespective of period of holding, with a view to avoid disputes/litigation
and to maintain uniform approach.
3. It is, however, clarified that the above would not be necessarily applied
in the situations where:
i. the genuineness of transactions in unlisted shares itself is
questionable; or
ii. the transfer of unlisted shares is related to an issue pertaining to lifting
of corporate veil; or
iii. the transfer of unlisted shares is made along with the control and
management of underlying business and the Assessing Officer would
take appropriate view in such situations.
4. The above may be brought to the notice of all for necessary
compliance.
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Appendix VI
[Para 9.8]
Mandatory Communication - Relevant Extracts of provisions from the
Volume-II of Code of Ethics (Revised 2020)
(12th Edition, Volume-II of Code of Ethics, 2020; Pages 64 to 71)
2.14.1.8 A Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct, if he :-
Clause (8): accepts a position as auditor previously held by another
chartered accountant or a certified auditor who has
been issued certificate under the Restricted Certificate
Rules, 1932 without first communicating with him in
writing;
2.14.1.8 (i) It must be pointed out that professional courtesy alone is not the
major reason for requiring a member to communicate with the
existing accountant who is a member of the Institute or a
certified auditor. The underlying objective is that the member
may have an opportunity to know the reasons for the change in
order to be able to safeguard his own interest, the legitimate
interest of the public and the independence of the existing
accountant. It is not intended, in any way, to prevent or obstruct
the change. When making the enquiry from the retiring auditor,
the one proposed to be appointed or already appointed should
primarily find out whether there are any professional or other
reasons why he should not accept the appointment.
2.14.1.8 (ii) It is important to remember that every client has an inherent
right to choose his accountant; also that he may, subject to
compliance with the statutory requirements in the case of limited
Companies, make a change whenever he chooses, whether or
not the reasons which had impelled him to do so are good and
valid. The change normally occurs where there has been a
change of venue of business and a local accountant is preferred
or where the partner who has been dealing with the clients
affairs retires or dies; or where temperaments clash or the client
has some good reasons to feel dissatisfied. In such cases, the
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
retiring auditor should always accept the situation with good
grace.
Grounds for non-Acceptance of Audit
2.14.1.8 (iii) The existence of a dispute as regards the fees may be root
cause of an auditor being changed. This would not constitute
valid professional reasons on account of which an audit should
not be accepted by the member to whom it is offered. However,
in the case of an undisputed audit fees for carrying out the
statutory audit under the Companies Act, 2013 or various other
statutes having not been paid, the incoming auditor should not
accept the appointment unless such fees are paid. In respect of
other dues, the incoming auditor should in appropriate
circumstances use his influence in favour of his predecessor to
have the dispute as regards the fees settled. The professional
reasons for not accepting an audit would be:
(a) Non-compliance of the provisions of Sections 139 and
140 of the Companies Act, 2013 as mentioned in Clause
(9) of the Part - I of First Schedule to The Chartered
Accountants Act, 1949 ; and
(b) Non-payment of undisputed Audit Fees by auditees other
than in case of Sick Units for carrying out the Statutory
Audit under the Companies Act, 2013 or various other
statutes; and
(c) Issuance of a qualified report.
2.14.1.8 (iv) In the first two cases, an auditor who accepts the audit would be
guilty of professional misconduct. In this connection, attention of
members is invited to the Council General Guidelines, 2008
appearing in Chapter-4. In the said Guidelines, Council has
explained that the provision for audit fee in accounts signed by
both the auditee and the auditor along with other expenses, if
any, incurred by the auditor in connection with the audit, shall
be considered as “undisputed audit fee” and “sick unit” shall
mean a unit registered for not less than five years, which has at
the end of any financial year accumulated losses equal to or
exceeding its entire net worth.
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Recourse in case of Qualified Audit Report
2.14.1.8 (v) In the last case, however, he may accept the audit if he is
satisfied that the attitude of the retiring auditor was not proper
and justified. If, on the other hand, he feels that the retiring
auditor had qualified the report for good and valid reasons, he
should refuse to accept the audit. There is no rule, written or
unwritten, which would prevent an auditor from accepting the
appointment offered to him in these circumstances. However,
before accepting the audit, he should ascertain the full facts of
the case. For nothing will bring the profession to disrepute so
much as the knowledge amongst the public that if an auditor is
found to be “inconvenient” by the client, he could readily be
replaced by another who would not displease the client and this
point cannot be too over-emphasised.
Fees pending due to non-availability of Previous Auditor
2.14.1.8 (vi) Where the Previous Auditor is not available for accepting
payment of undisputed audit fees, and it is not otherwise
possible to transfer the payment to him electronically, the
Incoming Auditor may advise the client to purchase Demand
Draft of the amount equivalent to undisputed Audit Fees of
retiring auditor, and may accept the Audit assignment after
verifying the same. It will be the duty of the Incoming auditor to
ensure the payment of undisputed Audit Fees of the retiring
auditor at the earliest possibility.
Course of action in case of change of Auditorship
2.14.1.8 (vii) What should be the correct procedure to adopt when a
prospective client tells you that he wants to change his auditor
and wants you to take up his work? There being two persons
involved, the Company and the old auditor, the former should be
asked whether the retiring auditor had been informed of the
intention to change. If the answer is in the affirmative, then a
communication should be addressed to the retiring auditor. If,
however, it is learnt that the old auditor has not been informed,
and the client is not willing to make the first move, it would be
necessary to ask him the reason for the proposed change. If
there is no valid reason for a change, it would be healthy
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
practice not to accept the audit. If he decides to accept the audit
he should address a communication to the retiring auditor.
As stated earlier, the object of the incoming auditor, in
communicating with the retiring auditor is to ascertain from him
whether there are any circumstances which warrant him not to
accept the appointment. For example, whether the previous
auditor has been changed on account of having qualified his
report or he had expressed a wish not to continue on account of
something inherently wrong with the administration of the
business. The retiring auditor may even give out information
regarding the condition of the accounts of the client or the
reason that impelled him to qualify his report. In all these cases
it would be essential for the incoming auditor to carefully
consider the facts before deciding whether or not he should
accept the audit, and should he do so, he must also take into
account the information while discharging his duties and
responsibilities.
Duty of Retiring Auditor
2.14.1.8(viii) On the request of the Incoming Auditor to the retiring auditor for
providing known information regarding any facts or other
information of which, in the opinion of the retiring auditor, the
Incoming auditor needs to be aware before deciding whether to
accept the engagement, the retiring auditor shall provide the
information diligently.
Sometimes, the retiring auditor fails without justifiable cause
except a feeling of hurt because of the change , to respond to
the communication of the Incoming auditor. So that it may not
create a deadlock, the incoming auditor appointed can act, after
waiting for a reasonable time for a reply.
Certificate of Posting not a conclusive proof of communication
2.14.1.8 (ix) The Council has taken the view that a mere posting of a letter
under certificate of posting is not sufficient to establish
communication with the retiring auditor unless there is some
evidence to show that the letter has in fact reached the person
communicated with. A Chartered Accountant who relies solely
upon a letter posted under certificate of posting therefore does
so at his own risk.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
The view taken by the Council has been confirmed in a decision
by the Rajasthan High Court in J.S. Bhati vs. The Council of the
Institute of the Chartered Accountants of India and another.
(Pages 72-79 of Vol. V of Disciplinary Cases published by the
Institute - Judgement delivered on 29th August, 1975). The
following observations of the Court are relevant in this context:-
“Mere obtaining a certificate of posting in my opinion does not
fulfill the requirements of clause (8) of Schedule I as the
presumption under Section 114 of the Evidence Act that the
letter in due course reached the addressee cannot replace that
positive degree of proof of the delivery of the letter to the
addressee which the letters of the law in this case require. The
expression ‘in communication with’ when read in the light of the
instructions contained in the booklet ‘Code of Conduct’ cannot
be interpreted in any other manner but to mean that there
should be positive evidence of the fact that the communication
addressed to the outgoing auditor by the incoming auditor
reached his hands. Certificate of posting of a letter cannot, in
the circumstances, be taken as positive evidence of its delivery
to the addressee.”
Positive Evidence of Delivery required
2.14.1.8 (x) Members should therefore communicate with a retiring auditor in
such a manner as to retain in their hands positive evidence of
the delivery of the communication to the addressee. In the
opinion of the Council, the following would in the normal course
provide such evidence:-
(a) Communication by a letter sent through “Registered
Acknowledgement due”, or
(b) By hand against a written acknowledgement, or
(c) Acknowledgement of the communication from retiring
auditor’s vide email address registered with the Institute
or his last known official email address , or
(d) Unique Identification Number (UDIN) generated on UDIN
portal (subject to separate guidelines to be issued by the
Council in this regard)
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Premises found Locked
2.14.1.8 (xi) The communication received back by the Incoming Auditor with
“Office found Locked” written on the Acknowledgement Due
shall be deemed as having been delivered to the retiring auditor.
Firm not found at the given Registered address
2.14.1.8 (xii) If the Communication sent by the Incoming auditor is received
back with remarks “No such office exists at this address”, and
the address of communication is the same as registered with the
Institute on the date of dispatch, the letter will be deemed to be
delivered, unless the retiring auditor proves that it was not really
served and that he was not responsible for such non-service.
As a matter of professional courtesy and professional obligation
it is necessary for the new auditor appointed to act jointly with
the earlier auditor and to communicate with such earlier auditor.
Special Audit under Income Tax Act, 1961
2.14.1.8(xiii) It would be a healthy practice if a Tax Auditor appointed for
conducting special audit under the Income Tax Act,1961
communicates with the member who has conducted the
Statutory Audit.
The Council has also laid down the detailed guidelines on the subject
as under:-
Communication required for all kinds of audit
2.14.1.8(xiv) The requirement for communicating with the previous auditor
being a Chartered Accountant in practice would apply to all
types of Audit viz., Statutory Audit, Tax Audit, GST Audit,
Internal Audit, Concurrent Audit or any other kind of audit.
Communication in case of Assignments done by other professionals
2.14.1.8(xv) A Communication is mandatorily required for all types of
Audit/Report where the previous auditor is a Chartered
Accountant. In case of assignments done by other professionals
not being Chartered Accountants, it would also be a healthy
practice to communicate.
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Lack of time in acceptance of Government Audits
2.14.1.8(xvi) Although the mandatory requirement of communication with
previous auditor being Chartered Accountant applies, in uniform
manner, to audits of both government and Non-Government
entities, yet in the case of audit of government Companies/
banks or their branches, if the appointment is made well in time
to enable the obligation cast under this clause to be fulfilled,
such obligation must be complied with before accepting the
audit. However, in case the time schedule given for the
assignment is such that there is no time to wait for the reply
from the outgoing auditor, the incoming auditor may give a
conditional acceptance of the appointment and commence the
work which needs to be attended to immediately after he has
sent the communication to the previous auditor in accordance
with this clause. In his acceptance letter, he should make clear
to the client that his acceptance of appointment is subject to
professional objections, if any, from the previous auditors and
that he will decide about his final acceptance after taking into
account the information received from the previous auditor.
Meaning of Terms
2.14.1.8(xvii) Various doubts have been raised by the members about the
terms “audit”, “previous auditor”, “Certificate” and “report”,
normally while interpreting the aforesaid Clause (8). These
terms need to be clarified.
The definition of “Audit” is given in the Framework for
Assurance Engagements (the Framework) issued by the
Institute which is as under:
“For assurance engagements relating to historical financial
information in particular, such engagements which provide
reasonable assurance are called audits”.
The Framework also describes the objective of reasonable
assurance engagements which is as under:
The objective of a reasonable assurance engagement is a
reduction in assurance engagement risk to an acceptably
low level in the circumstances of the engagement as the
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
basis for a positive form of expression of the practitioner’s
conclusion.
The term “previous auditor” means the immediately
preceding auditor who held same or similar assignment
comprising same/similar scope of work. For example, a
Chartered Accountant in practice appointed for an
assignment of physical verification of inventory of raw
materials, spares, stores and finished goods, before
acceptance of appointment, must communicate with the
previous auditor being a Chartered Accountant in practice
who was holding the appointment of physical verification of
inventory of raw materials, stores, finished goods and fixed
assets. The mandatory communication with the previous
auditor being a Chartered Accountant is required even in a
case where the previous auditor happens to be an auditor
for a year other than the immediately preceding year.
“Auditor’s Report” mentioned in SA 700 states the objective of the
Report as forming an opinion on the financial statements based on an
evaluation of the conclusions drawn from the audit evidence obtained.
As explained in the Institute’s publication viz., ‘Guidance Note on
Reports and Certificates for Special Purposes’ (which governs reports
other than those which are issued in audits or reviews) states that the
word ‘certificate’ as described in the laws and regulations or even in
the contracts that an entity might have entered into can normally be
associated with reasonable assurance. A practitioner is expected to
provide either a reasonable assurance (about whether the subject
matter of examination is materially misstated) or a limited assurance
(stating that nothing has come to the practitioner’s attention that
causes the practitioner to believe that the subject matter is materially
misstated). A practitioner is not expected to reduce the engagement
risk to zero. Therefore, whenever a practitioner is required to give a
“certificate” or a “report” for special purpose, the practitioner needs to
undertake a careful evaluation of the scope of the engagement, i.e.,
whether the practitioner would be able to provide reasonable
assurance or limited assurance on the subject matter.
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Appendix VII
[Para 9.8, 9.17, 9.19 & 9.29]
Council Guidelines No.1-CA(7)/02/2008, dated 8 th August,2008
GUIDELINES FOR THE MEMBERS OF ICAI
(Issued under the provisions of The Chartered Accountants Act, 1949)
Chapter I
Preliminary
1.0 Short title, commencement, etc.
(a) These Guidelines have been issued by the Council of the Institute of
Chartered Accountants of India under the provisions of The Chartered
Accountants Act, 1949, as amended by The Chartered Accountants
(Amendment) Act 2006, in supersession of the Notifications issued by
the Council under erstwhile Clause (ii) of Part II of the Second
Schedule to the Chartered Accountants Act, 1949.
(b) These Guidelines be called the ‘Council General Guidelines, 2008’.
1.1 Definitions.
1.1.1 For the purpose of these Guidelines:
(a) ‘Act’ means the Chartered Accountants Act, 1949.
(b) “Chartered accountant” means a person who is a
member of the Institute.
(c) “Council” means the Council of the Institute constituted
under section 9 of the Act.
(d) “Institute” means the Institute of Chartered Accountants
of India constituted under the Act.
1.1.2 All other words and expressions used but not defined herein
have the same meaning as assigned to them within the
Chartered Accountants Act, 1949 and the Rules, Regulations
and Guidelines made there under.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
1.2 Applicability of the Guidelines
These guidelines shall be applicable to all the Members of the Institute
whether in practice or not wherever the context so requires.
Chapter II
Conduct of a Member being an employee
2.0 A member of the Institute who is an employee shall exercise due
diligence and shall not be grossly negligent in the conduct of his
duties.
Chapter V
Maintenance of books of accounts
5.0 A member of the Institute in practice or the firm of Chartered
Accountants of which he is a partner, shall maintain and keep in
respect of his / its professional practice, proper books of account
including the following:-
(i) a Cash Book;
(ii) a Ledger.
Chapter VI
Tax Audit assignments under Section 44 AB of the Income-tax Act, 1961
6.0 A member of the Institute in practice shall not accept, relating to an
assessment year, more than the “specified number of tax audit
assignments” under Section 44AB of the Income-tax Act, 1961.
Provided that in the case of a firm of Chartered Accountants in
practice, the “specified number of tax audit assignments” shall be
construed as the specified number of tax audit assignments for every
partner of the firm.
Provided further that where any partner of the firm is also a partner of
any other firm or firms of Chartered Accountants in practice, the
number of tax audit assignments which may be taken for all the firms
together in relation to such partner shall not exceed the “specified
number of tax audit assignments” in the aggregate.
Provided further that where any partner of a firm of Chartered
Accountants in practice accepts one or more tax audit assignments in
his individual capacity, the total number of such assignments which
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
may be accepted by him shall not exceed the “specified number of tax
audit assignments” in the aggregate.
Provided also that the audits conducted under Section 44AD, 44ADA
and 44AE of the Income-tax Act, 1961 shall not be taken into account
for the purpose of reckoning the “specified number of tax audit
assignments”.
6.1 Explanation:
For the above purpose, “the specified number of tax audit
assignments” means -
(a) in the case of a Chartered Accountant in practice or a
proprietary firm of Chartered Accountant, 60 tax audit
assignments, relating to an assessment year, whether in
respect of corporate or non-corporate assesses.
(b) in the case of firm of Chartered Accountants in practice, 60 tax
audit assignments per partner in the firm, relating to an
assessment year, whether in respect of corporate or non-
corporate assesses.
6.1.1 In computing the “specified number of tax audit assignments” each
year’s audit would be taken as a separate assignment.
6.1.2 In computing the “specified number of tax audit assignments”, the
number of such assignments, which he or any partner of his firm has
accepted whether singly or in combination with any other Chartered
Accountant in practice or firm of such Chartered Accountants, shall be
taken into account.
6.1.3 The audit of the head office and branch offices of a concern shall be
regarded as one tax audit assignment.
6.1.4 The audit of one or more branches of the same concern by one
Chartered Accountant in practice shall be construed as only one tax
audit assignment.
6.1.5 A Chartered Accountant being a part time practicing partner of a firm
shall not be taken into account for the purpose of reckoning the tax
audit assignments of the firm.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
6.1.6 A Chartered Accountant in practice shall maintain a record of the tax
audit assignments accepted by him relating to each assessment year
in the format as may be prescribed by the Council.
6.1.7 The limit on number of tax audit assignments per partner in a CA Firm
may be distributed between the partners in any manner whatsoever.
However, it should be in accordance with the Standard on Quality
Control (SQC) 1: Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other Assurance and
Related Services Engagements.
Chapter VII
Relevant Extracts from the Chapter VII “Appointment of
an Auditor in case of non-payment of undisputed fees”
of Council General Guidelines, 2008 of Volume-II of Code
of Ethics (Revised 2020) (Page 154)
7.0 A member of the Institute in practice shall not accept the
appointment as auditor of an entity in case the undisputed audit fee
of another Chartered Accountant for carrying out the statutory audit
under the Companies Act, 2013 or various other statutes has not
been paid:
Provided that in the case of sick unit, the above prohibition of
acceptance shall not apply.
7.1 Explanation 1:
For this purpose, the provision for audit fee in accounts signed by
both - the auditee and the auditor along with other expenses, if any,
incurred by the auditor in connection with the audit, shall be
considered as “undisputed audit fees”
7.2 Explanation 2:
For this purpose, “sick unit” shall mean a unit registered for not less
than five years, which has at the end of any financial year
accumulated losses equal to or exceeding its entire net worth.
Chapter VIII
Specified number of audit assignments
8.0 A member of the Institute in practice shall not hold at any time
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appointment of more than the “specified number of audit
assignments” of Companies under Section 141 of the Companies
Act 2013.
Provided that in the case of a firm of Chartered Accountants in
practice, the “specified number of audit assignments” shall be
construed as the specific number of audit assignments for every
partner of the firm.
Provided further that where any partner of the firm of Chartered
Accountants in practice is also a partner of any other firm or firms of
Chartered Accountants in practice, the number of audit assignments
which may be taken for all the firms together in relation to such
partner shall not exceed the “specified number of audit assignments”
in the aggregate.
Provided further where any partner of a firm or firms of Chartered
Accountants in practice accepts one or more audit of Companies in
his individual capacity, or in the name of his proprietary firm, the
total number of such assignments which may be accepted by all
firms in relation to such Chartered Accountant and by him shall not
exceed the “specified number of audit assignments” in the
aggregate.
8.1 Explanation:
For the above purpose, the “specified number of audit assignments”
means –
(a) in the case of a Chartered Accountant in practice or a
proprietary firm of Chartered Accountant, 30 audit
assignments whether in respect of private Companies or other
Companies, with the exception of one person Companies and
dormant companies.
(b) in the case of Chartered Accountants in practice, 30 audit
assignments per partner in the firm, whether in respect of
private Companies or other Companies, with the exception of
One person Companies and dormant companies2.
2 As incorporated pursuant to decision of Council at its 388th Meeting held on 6th and 7th Feb.,
2020.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
8.2 In computing the “specified number of audit assignments”-
(a) the number of audit of such Companies, which he or any
partner of his firm has accepted whether singly or in
combination with any other Chartered Accountant in practice
or firm of such Chartered Accountants, shall be taken into
account.
(b) the audit of the head office and branch offices of a Company
by one Chartered Accountant or firm of such Chartered
Accountants in practice shall be regarded as one audit
assignment.
(c) the audit of one or more branches of the same Company by
one Chartered Accountant in practice or by firm of Chartered
Accountants in practice in which he is a partner shall be
construed as one audit assignment only.
(d) the number of partners of a firm on the date of acceptance of
audit assignment shall be taken into account.
8.3 A Chartered Accountant in practice, whether in full-time or part-time
employment elsewhere, shall not be counted for the purpose of
determination of “specified number of audit of Companies” by firms
of Chartered Accountants.
8.4 A Chartered Accountant being a part time practicing partner of a firm
shall not be taken into account for the purpose of reckoning the audit
assignments of the firm.
8.5 A Chartered Accountant in practice as well as firm of Chartered
Accountants in practice shall maintain a record of the audit
assignments accepted by him or by the firm of Chartered
Accountants, or by any of the partners of the firm in his individual
name or as a partner of any other firm, as far as possible, in the
following format:
S. Name of Registration Date of Date of
No. the Number Appointment Acceptance
Company
1 2 3 4 5
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Chapter IX
Appointment as Statutory auditor
9.0 A member of the Institute in practice shall not accept the appointment
as statutory auditor of Public Sector Undertaking(s)/ Government
Company(ies)/ Listed Company(ies) and other Public Company(ies)
having turnover of Rs. 50 crores or more in a year where he accepts
any other work(s) or assignment(s) or service(s) in regard to the same
Undertaking(s)/ Company(ies) on a remuneration which in total
exceeds the fee payable for carrying out the statutory audit of the
same Undertaking/company.
Provided that in case appointing authority(ies)/regulatory body(ies)
specify(ies) more stringent condition(s)/ restriction(s), the same shall
apply instead of the conditions/ restrictions specified under these
Guidelines.
9.1 The above restrictions shall apply in respect of fees for other work(s)
or service(s) or assignment(s) payable to the statutory auditors and
their associate concern(s) put together.
9.2 For the above purpose,
(i) the term “other work(s)” or “service(s)” or “assignment(s)” shall
include Management Consultancy and all other professional
services permitted by the Council pursuant to Section 2(2)(iv) of
the Chartered Accountants Act, 1949 but shall not include: -
(a) audit under any other statute;
(b) certification work required to be done by the statutory auditors;
and
(c) any representation before an authority;
(ii) the term “associate concern” means any corporate body or
partnership firm which renders the Management Consultancy
and all other professional services permitted by the Council
wherein the proprietor and/or partner(s) of the statutory auditor
firm and/or their “relative(s)” is/are Director/s or partner/s and/or
jointly or severally hold “substantial interest” in the said
corporate body or partnership;
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(iii) the terms “relative” and “substantial interest” shall have the
same meaning as are assigned thereto under Appendix (9) to
the Chartered Accountants Regulations, 1988.
9.3 In regard to taking up other work(s) or service(s) or assignment(s) of
the undertaking/company referred to above, it shall be open to such
associate concern or corporate body to render such work(s) or
service(s) or assignment(s) so long as aggregate remuneration for
such other work(s) or service(s) or assignment(s) payable to the
statutory auditor/s together with fees payable to its associate
concern(s) or corporate body(ies) do/does not exceed the aggregate of
fee payable for carrying out the statutory audit.
Chapter X
Appointment of an auditor when he is indebted to a concern
10.0 A member of the Institute in practice or a partner of a firm in practice
or a firm, or a relative of such member or partner shall not accept
appointment as auditor of a concern while indebted to the concern or
given any guarantee or provided any security in connection with the
indebtedness of any third person to the concern, for limits fixed in the
statute and in other cases for amount exceeding Rs. 1,00,000/-
Chapter XI
Directions in case of unjustified removal of auditors
11.0 A member of the Institute in practice shall follow the direction given, by
the Council or an appropriate Committee or on behalf of any of them,
to him being the incoming auditor(s) not to accept the appointment as
auditor(s), in the case of unjustified removal of the earlier auditor(s).
Chapter XIII3
Guidelines on Tenders
Refer to Appendix ‘J’ of the Code .
3 Guideline No. 1-CA(7)/03/2016 issued vide Notification dt. 7.4.2016 published in Part-III Section 4
of the Gazette of India , Extraordinary, Dated 7 th April, 2016. – Included under Council General
Guidelines pursuant to decision of Council at its 388th Meeting held on 6th and 7th Feb., 2020
330
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Chapter XIV4
Unique Document Identification Number (UDIN) Guidelines
Refer to Appendix ‘I’ of the Code.
Chapter XV5
Guidelines for Networking
Refer to Appendix ‘K’ of the Code.
Chapter XVI6
Logo Guidelines
Refer to Appendix ‘L’ of the Code.
Chapter XVII7
Guidelines for Corporate Form of Practice
Refer to Appendix ‘D’ of the Code.
4 Guideline No.1-CA(7)/192/2019 issued vide Notification dt. 2.8.2019 – Included under Council
General Guidelines pursuant to decision of Council at its 388th Meeting held on 6th and 7th Feb.,
,2020
5 As iissued on 27.9.2011 - Included under Council General Guidelines pursuant to decision of
Council at its 388th Meeting held on 6th and 7th Feb., ,2020
6 As issued by Council at its 367th Meeting held on 12th to 14th March, 2007 and continued on
10th and 11th April, 2007 - – Included under Council General Guidelines pursuant to decision of
Council at its 388th Meeting held on 6th and 7th Feb., ,2020
7 As iissued by Council at its 261st Meeting held on 1st to 3rd August, 2006- – Included under
Council General Guidelines pursuant to decision of Council at its 388th Meeting held on 6th and 7th
Feb., ,2020
Appendix VIII
[Para 9.32]
FORM OF TAX AUDIT PARTICULARS TO BE FURNISHED BY
MEMBERS/FIRM
Record of Tax Audit Assignments
1. Name of the Member accepting the assignment
2. Membership No.
3. Financial year of audit acceptance
4. Name and Registration No. of the firm/ firms of which the member is a
proprietor or partner.
Sl. Name of Assessmen Date of Date of Name of the Date of
No. the t year of appointme acceptanc firm on communicatio
auditee the auditee nt e whose n with the
behalf the previous
member has auditor
accepted (applicable)
the
assignment
1 2 3 4 5 6 7
332
Appendix IX
[Para 9.33]
Revised Minimum recommended scale of fees chargeable for the
professional assignments done by Chartered Accountants - An
announcement hosted by Committee for Members in Practice -Last updated
on 11th February,2020:
333
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
334
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
https://cmpbenefits.icai.org/wp-content/uploads/2020/02/Details-
download.pdf
338
Appendix X
[Para 11.3 & 11.5]
Applicability of Accounting Standards to Various Entities
(including criteria for classification of entities) (as on April 1, 2023)
Applicability of Accounting Standards to Companies other than those
following Indian Accounting Standards (Ind AS) 8
(I) Accounting Standards applicable in their entirety to companies
AS 1 Disclosures of Accounting Policies
AS 2 Valuation of Inventories (revised 2016)
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring After the Balance Sheet Date
(revised 2016)
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
AS 7 Construction Contracts (revised 2002)
AS 9 Revenue Recognition
AS 10 Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments (revised 2016)
AS 14 Accounting for Amalgamations (revised 2016)
AS 16 Borrowing Costs
AS 18 Related Party Disclosures
AS 21 Consolidated Financial Statements (revised 2016)
8 For applicability of Ind AS to companies, refer Notification dated 16th February, 2015, issued
by the Ministry of Corporate Affairs, Government of India.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial
Staements
AS 24 Discontinuing Operations
AS 26 Intangible Assets
AS 27 Financial Reporting of Interest in Joint Ventures
(II) Exemptions or Relaxations for Small and Medium Sized
Companies (SMCs) as defined in the Notification dated June
23, 2021, issued by the Ministry of Corporate Affairs,
Government of India
(1) Accounting Standards not applicable to SMCs in their entirety: AS 17
Segment Reporting
(2) Accounting Standards in respect of which relaxations from certain
requirements have been given to SMCs:
(i) Accounting Standard (AS) 15, Employee Benefits (revised 2005)
(a) paragraphs 11 to 16 of the standard to the extent they deal with
recognition and measurement of short-term accumulating
compensated absences which are non-vesting (i.e., short-term
accumulating compensated absences in respect of which
employees are not entitled to cash payment for unused
entitlement on leaving);
(b) paragraphs 46 and 139 of the Standard which deal with
discounting of amounts that fall due more than 12 months after
the balance sheet date;
(c) recognition and measurement principles laid down in
paragraphs 50 to 116 and presentation and disclosure
requirements laid down in paragraphs 117 to 123 of the
Standard in respect of accounting for defined benefit plans.
However, such companies should actuarially determine and
provide for the accrued liability in respect of defined benefit
plans by using the Projected Unit Credit Method and the
discount rate used should be determined by reference to market
yields at the balance sheet date on government bonds as per
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
paragraph 78 of the Standard. Such companies should disclose
actuarial assumptions as per paragraph 120(l) of the Standard;
and
(d) recognition and measurement principles laid down in
paragraphs 129 to 131 of the Standard in respect of accounting
for other long-term employee benefits. However, such
companies should actuarially determine and provide for the
accrued liability in respect of other long-term employee benefits
by using the Projected Unit Credit Method and the discount rate
used should be determined by reference to market yields at the
balance sheet date on government bonds as per paragraph 78
of the Standard.
(ii) AS 19, Leases
Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a) and (f); and 46
(b) and (d) relating to disclosures are not applicable to SMCs.
(iii) AS 20, Earnings Per Share
Disclosure of diluted earnings per share (both including and excluding
extraordinary items) is exempted for SMCs.
(iv) AS 28, Impairment of Assets
SMCs are allowed to measure the ‘value in use’ on the basis of
reasonable estimate thereof instead of computing the value in use by
present value technique. Consequently, if an SMC chooses to
measure the ‘value in use’ by not using the present value technique,
the relevant provisions of AS 28, such as discount rate etc., would not
be applicable to such an SMC. Further, such an SMC need not
disclose the information required by paragraph 121(g) of the Standard.
(v) AS 29, Provisions, Contingent Liabilities and Contingent Assets
(revised)
Paragraphs 66 and 67 relating to disclosures are not applicable to
SMCs.
(3) AS 25, Interim Financial Reporting, does not require a company to
present interim financial report. It is applicable only if a company is
required or elects to prepare and present an interim financial report.
Only certain Non-SMCs are required by the concerned regulators to
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
present interim financial results, e.g., quarterly financial results
required by the SEBI. Therefore, the recognition and measurement
requirements contained in this Standard are applicable to those Non-
SMCs for preparation of interim financial results.
Applicability of Accounting Standards to Non-company Entities
The Accounting Standards issued by the ICAI are:
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring After the Balance Sheet
Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS 7 Construction Contracts
AS 9 Revenue Recognition
AS 10 Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
AS 23 Accounting for Investments in Associates in Consolidated
Financial Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
(1) Applicability of the Accounting Standards to Level 1 Non-
company entities.
Level I entities are required to comply in full with all the Accounting
Standards.
(2) Applicability of the Accounting Standards and
exemptions/relaxations for Level II, Level III and Level IV Non-
company entities
(A) Accounting Standards applicable to Non-company entities
AS Level II Entities Level III Entities Level IV Entities
S1 Applicable Applicable Applicable
AS 2 Applicable Applicable Applicable
AS 3 Not Applicable Not Applicable Not Applicable
AS 4 Applicable Applicable Applicable
AS 5 Applicable Applicable Applicable
AS 7 Applicable Applicable Applicable
AS 9 Applicable Applicable Applicable
AS 10 Applicable Applicable with Applicable with
disclosures disclosures
exemption exemption
AS 11 Applicable Applicable with Applicable with
disclosures disclosures
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
AS Level II Entities Level III Entities Level IV Entities
exemption exemption
AS 12 Applicable Applicable Applicable
AS 13 Applicable Applicable Applicable with
disclosures
exemption
AS 14 Applicable Applicable Not Applicable
(Refer note 2(C))
AS 15 Applicable with Applicable with Applicable with
exemptions exemptions exemptions
AS 16 Applicable Applicable Applicable
AS 17 Not Applicable Not Applicable Not Applicable
AS 18 Applicable Not Applicable Not Applicable
AS 19 Applicable with Applicable with Applicable with
disclosures disclosures disclosures
exemption exemption exemption
AS 20 Not Applicable Not Applicable Not Applicable
AS 21 Not Applicable Not Applicable Not Applicable
(Refer note 2(D)) (Refer note 2(D)) (Refer note 2(D))
AS 22 Applicable Applicable Applicable only for
current tax related
provisions
(Refer note 2(B)(vi))
AS 23 Not Applicable Not Applicable Not Applicable
(Refer note 2(D)) (Refer note 2(D)) (Refer note 2(D))
AS 24 Applicable Not Applicable Not Applicable
AS 25 Not Applicable Not Applicable Not Applicable
(Refer note 2(D)) (Refer note 2(D)) (Refer note 2(D))
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
AS Level II Entities Level III Entities Level IV Entities
AS 26 Applicable Applicable Applicable with
disclosures
exemption
AS 27 Not Applicable Not Applicable Not Applicable
(Refer notes 2(C) (Refer notes 2(C) (Refer notes 2(C)
and 2(D)) and 2(D)) and 2(D))
AS 28 Applicable with Applicable with Not Applicable
disclosures disclosures
exemption exemption
AS 29 Applicable with Applicable with Applicable with
disclosures disclosures disclosures
exemption exemption exemption
(B) Accounting Standards in respect of which relaxations/exemptions
from certain requirements have been given to Level II, Level III
and Level IV Non-company entities:
(i) Accounting Standard (AS) 10, Property, Plant and Equipments
Paragraph 87 relating to encouraged disclosures is not
applicable to Level III and Level IV Non-company entities.
(ii) AS 11, The Effects of Changes in Foreign Exchange Rates
(revised 2018)
Paragraph 44 relating to encouraged disclosures is not
applicable to Level III and Level IV Non-company entities.
(iii) AS 13, Accounting for Investments
Paragraph 35(f) relating to disclosures is not applicable to Level
IV Non-company entities.
(iv) Accounting Standard (AS) 15, Employee Benefits (revised 2005)
(1) Level II and Level III Non-company entities whose average
number of persons employed during the year is 50 or more
are exempted from the applicability of the following
paragraphs:
(a) paragraphs 11 to 16 of the standard to the extent
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
they deal with recognition and measurement of short-
term accumulating compensated absences which are
non-vesting (i.e., short-term accumulating
compensated absences in respect of which
employees are not entitled to cash payment for
unused entitlement on leaving);
(b) paragraphs 46 and 139 of the Standard which deal
with discounting of amounts that fall due more than
12 months after the balance sheet date;
(c) recognition and measurement principles laid down in
paragraphs 50 to 116 and presentation and
disclosure requirements laid down in paragraphs 117
to 123 of the Standard in respect of accounting for
defined benefit plans. However, such entities should
actuarially determine and provide for the accrued
liability in respect of defined benefit plans by using
the Projected Unit Credit Method and the discount
rate used should be determined by reference to
market yields at the balance sheet date on
government bonds as per paragraph 78 of the
Standard. Such entities should disclose actuarial
assumptions as per paragraph 120(l) of the Standard;
and
(d) recognition and measurement principles laid down in
paragraphs 129 to 131 of the Standard in respect of
accounting for other long-term employee benefits.
However, such entities should actuarially determine
and provide for the accrued liability in respect of
other long-term employee benefits by using the
Projected Unit Credit Method and the discount rate
used should be determined by reference to market
yields at the balance sheet date on government
bonds as per paragraph 78 of the Standard.
(2) Level II and Level III Non-company entities whose average
number of persons employed during the year is less than
50 and Level IV Non-company entities irrespective of
number of employees are exempted from the applicability
of the following paragraphs:
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(a) paragraphs 11 to 16 of the standard to the extent
they deal with recognition and measurement of short-
term accumulating compensated absences which are
non-vesting (i.e., short-term accumulating
compensated absences in respect of which
employees are not entitled to cash payment for
unused entitlement on leaving);
(b) paragraphs 46 and 139 of the Standard which deal
with discounting of amounts that fall due more than
12 months after the balance sheet date;
(c) recognition and measurement principles laid down in
paragraphs 50 to 116 and presentation and
disclosure requirements laid down in paragraphs 117
to 123 of the Standard in respect of accounting for
defined benefit plans. However, such entities may
calculate and account for the accrued liability under
the defined benefit plans by reference to some other
rational method, e.g., a method based on the
assumption that such benefits are payable to all
employees at the end of the accounting year; and
(d) recognition and measurement principles laid down in
paragraphs 129 to 131 of the Standard in respect of
accounting for other long-term employee benefits.
Such entities may calculate and account for the
accrued liability under the other long-term employee
benefits by reference to some other rational method,
e.g., a method based on the assumption that such
benefits are payable to all employees at the end of
the accounting year.
(v) AS 19, Leases
(a) Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a)
and (f); and 46 (b) and (d) relating to disclosures are not
applicable to Level II Non-company entities.
(b) Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f)
and (g); and 46 (b), (d) and (e) relating to disclosures are
not applicable to Level III Non-company entities.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(c) Paragraphs 22 (c),(e) and (f); 25 (a), (b) and (e); 37 (a), (f)
and (g); 38; and 46 (b), (d) and (e) relating to disclosures
are not applicable to Level IV Non-company entities.
(vi) AS 22, Accounting for Taxes on Income
(a) Level IV Non-company entities shall apply the
requirements of AS 22, Accounting for Taxes on Income,
for Current tax defined in paragraph 4.4 of AS 22, with
recognition as per paragraph 9, measurement as per
paragraph 20 of AS 22, and presentation and disclosure
as per paragraphs 27-28 of AS 22.
(b) Transitional requirements
On the first occasion when a Non-company entity gets
classified as Level IV entity, the accumulated deferred tax
asset/liability appearing in the financial statements of
immediate previous accounting period, shall be adjusted
against the opening revenue reserves.
(vii) AS 26, Intangible Assets
Paragraphs 90(d)(iii); 90(d)(iv) and 98 relating to disclosures
are not applicable to Level IV Non-company entities.
(viii) AS 28, Impairment of Assets
Level II and Level III Non-company entities are allowed to
measure the ‘value in use’ on the basis of reasonable estimate
thereof instead of computing the value in use by present value
technique. Consequently, if Level II or Level III Non-company
entity chooses to measure the ‘value in use’ by not using the
present value technique, the relevant provisions of AS 28, such
as discount rate etc., would not be applicable to such an entity.
Further, such an entity need not disclose the information
required by paragraph 121(g) of the Standard.
(a) Also, paragraphs 121(c)(ii); 121(d)(i); 121(d)(ii) and 123
relating to disclosures are not applicable to Level III Non-
company entities.
(ix) AS 29, Provisions, Contingent Liabilities and Contingent Assets
(revised 2016)
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Paragraphs 66 and 67 relating to disclosures are not applicable
to Level II, Level III and Level IV Non-company entities.
(C) In case of Level IV Non-company entities, generally there are no such
transactions that are covered under AS 14, Accounting for
Amalgamations, or jointly controlled operations or jointly controlled
assets covered under AS 27, Financial Reporting of Interests in Joint
Ventures. Therefore, these standards are not applicable to Level IV
Non-company entities. However, if there are any such transactions,
these entities shall apply the requirements of the relevant standard.
(D) AS 21, Consolidated Financial Statements, AS 23, Accounting for
Investments in Associates in Consolidated Financial Statements AS
27, Financial Reporting of Interests in Joint Ventures (to the extent of
requirements relating to Consolidated Financial Statements), and AS
25, Interim Financial Reporting, do not require a Non-company entity
to present consolidated financial statements and interim financial
report, respectively. Relevant AS is applicable only if a Non-company
entity is required or elects to prepare and present consolidated
financial statements or interim financial report.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Annexure 1
Criteria for classification of entities
Criteria for classification of companies under the Companies
(Accounting Standards) Rules, 2021
Small and Medium-Sized Company (SMC) as defined in Clause 2(e) of the
Companies (Accounting Standards) Rules, 2021:
(e) “Small and Medium Sized Company” (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the
process of listing on any stock exchange, whether in India or
outside India;
(ii) which is not a bank, financial institution or an insurance
company;
(iii) whose turnover (excluding other income) does not exceed two
hundred and fifty crore rupees in the immediately preceding
accounting year;
(iv) which does not have borrowings (including public deposits) in
excess of fifty crore rupees at any time during the immediately
preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which
is not a small and medium-sized company.
Explanation: For the purposes of this clause, a company shall qualify
as a Small and Medium Sized Company, if the conditions mentioned
therein are satisfied as at the end of the relevant accounting period.
Non-SMCs
Companies not falling within the definition of SMC are considered as
Non-SMCs.
Instructions
A. General Instructions
1. SMCs shall follow the following instructions while complying with
Accounting Standards under these Rules:-
1.1 the SMC which does not disclose certain information pursuant to
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
the exemptions or relaxations given to it shall disclose (by way of
a note to its financial statements) the fact that it is an SMC and
has complied with the Accounting Standards insofar as they are
applicable to an SMC on the following lines:
“The Company is a Small and Medium Sized Company (SMC) as
defined in the Companies (Accounting Standards) Rules, 2021
notified under the Companies Act, 2013. Accordingly, the
Company has complied with the Accounting Standards as
applicable to a Small and Medium Sized Company.”
1.2 Where a company, being an SMC, has qualified for any
exemption or relaxation previously but no longer qualifies for the
relevant exemption or relaxation in the current accounting period,
the relevant standards or requirements become applicable from
the current period and the figures for the corresponding period of
the previous accounting period need not be revised merely by
reason of its having ceased to be an SMC. The fact that the
company was an SMC in the previous period and it had availed
of the exemptions or relaxations available to SMCs shall be
disclosed in the notes to the financial statements.
1.3 If an SMC opts not to avail of the exemptions or relaxations
available to an SMC in respect of any but not all of the
Accounting Standards, it shall disclose the standard(s) in respect
of which it has availed the exemption or relaxation.
1.4 If an SMC desires to disclose the information not required to be
disclosed pursuant to the exemptions or relaxations available to
the SMCs, it shall disclose that information in compliance with
the relevant accounting standard.
1.5 The SMC may opt for availing certain exemptions or relaxations
from compliance with the requirements prescribed in an
Accounting Standard:
Provided that such a partial exemption or relaxation and disclosure
shall not be permitted to mislead any person or public.
B. Other Instructions
Rule 5 of the Companies (Accounting Standards) Rules, 2021, provides as
below:
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
“5. Qualification for exemption or relaxation in respect of SMC. - An
existing company, which was previously not a Small and Medium
Sized Company (SMC) and subsequently becomes a SMC, shall not
be qualified for exemption or relaxation in respect of Accounting
Standards available to a SMC until the company remains a SMC for
two consecutive accounting periods.”
Criteria for classification of Non-company Entities as decided by the
Institute of Chartered Accountants of India
Level I Entities
Non-company entities which fall in any one or more of the following
categories, at the end of the relevant accounting period, are classified as
Level I entities:
(i) Entities whose securities are listed or are in the process of listing on
any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities
carrying on insurance business.
(iii) All entities engaged in commercial, industrial or business activities,
whose turnover (excluding other income) exceeds rupees two-fifty
crore in the immediately preceding accounting year.
(iv) All entities engaged in commercial, industrial or business activities
having borrowings (including public deposits) in excess of rupees fifty
crore at any time during the immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.
Level II Entities
Non-company entities which are not Level I entities but fall in any one or
more of the following categories are classified as Level II entities:
(i) All entities engaged in commercial, industrial or business activities,
whose turnover (excluding other income) exceeds rupees fifty crore
but does not exceed rupees two-fifty crore in the immediately
preceding accounting year.
(ii) All entities engaged in commercial, industrial or business activities
having borrowings (including public deposits) in excess of rupees ten
crore but not in excess of rupees fifty crore at any time during the
immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Level III Entities
Non-company entities which are not covered under Level I and Level II but
fall in any one or more of the following categories are classified as Level III
entities:
(i) All entities engaged in commercial, industrial or business activities,
whose turnover (excluding other income) exceeds rupees ten crore but
does not exceed rupees fifty crore in the immediately preceding
accounting year.
(ii) All entities engaged in commercial, industrial or business activities
having borrowings (including public deposits) in excess of rupees two
crore but does not exceed rupees ten crore at any time during the
immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
Level IV Entities
Non-company entities which are not covered under Level I, Level II and Level
III are considered as Level IV entities.
Additional requirements
(1) An MSME which avails the exemptions or relaxations given to it shall
disclose (by way of a note to its financial statements) the fact that it is
an MSME, the Level of MSME and that it has complied with the
Accounting Standards insofar as they are applicable to entities falling
in Level II or Level III or Level IV, as the case may be.
(2) Where an entity, being covered in Level II or Level III or Level IV, had
qualified for any exemption or relaxation previously but no longer
qualifies for the relevant exemption or relaxation in the current
accounting period, the relevant standards or requirements become
applicable from the current period and the figures for the
corresponding period of the previous accounting period need not be
revised merely by reason of its having ceased to be covered in Level II
or Level III or Level IV, as the case may be. The fact that the entity
was covered in Level II or Level III or Level IV, as the case may be, in
the previous period and it had availed of the exemptions or relaxations
available to that Level of entities shall be disclosed in the notes to th e
financial statements. The fact that previous period figures have not
been revised shall also be disclosed in the notes to the financial
statements.
Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(3) Where an entity has been covered in Level I and subsequently, ceases
to be so covered and gets covered in Level II or Level III or Level IV,
the entity will not qualify for exemption/relaxation available to that
Level, until the entity ceases to be covered in Level I for two
consecutive years. Similar is the case in respect of an entity, which
has been covered in Level II or Level III and subsequently, gets
covered under Level III or Level IV.
(4) If an entity covered in Level II or Level III or Level IV opts not to avail
of the exemptions or relaxations available to that Level of entities in
respect of any but not all of the Accounting Standards, it shall disclose
the Standard(s) in respect of which it has availed the exemption or
relaxation.
(5) If an entity covered in Level II or Level III or Level IV opts not to avail
any one or more of the exemptions or relaxations available to that
Level of entities, it shall comply with the relevant requirements of the
Accounting Standard.
(6) An entity covered in Level II or Level III or Level IV may opt for availing
certain exemptions or relaxations from compliance with the
requirements prescribed in an Accounting Standard:
Provided that such a partial exemption or relaxation and disclosure
shall not be permitted to mislead any person or public.
(7) In respect of Accounting Standard (AS) 15, Employee Benefits,
exemptions/ relaxations are available to Level II and Level III entities,
under two sub-classifications, viz., (i) entities whose average number
of persons employed during the year is 50 or more, and (ii) entities
whose average number of persons employed during the year is less
than 50. The requirements stated in paragraphs (1) to (6) above,
mutatis mutandis, apply to these sub-classifications.
354
Appendix XI
[Para 13.12]
APPLICABILITY OF SA 700 (REVISED), FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS, TO FORMATS OF
AUDITOR'S REPORTS PRESCRIBED UNDER VARIOUS LAWS AND/ OR
REGULATIONS
(Issued in August 2013 and revised in February, 2022. The revised
announcement was considered and approved by the Council of ICAI at its
408th meeting held on 3rd & 4th February, 2022)
1. The Council of ICAI, at its 326th meeting held from 27th to 29th July
2013 considered the issue relating to application of Standard on Auditing
(SA) 700¸ Forming An Opinion And Reporting on Financial Statements to
such cases where the format of the auditor's report is prescribed under the
relevant law or the regulation thereunder and are per se not in line with the
requirements of SA 700. The Council further considered the aforesaid matter
at its 408th meeting held from 3rd to 4th February 2022 in light of SA 7 00
(Revised), “Forming an Opinion and Reporting on Financial Statements”. The
Council noted that in many cases such prescribed auditor's report were
required to be filed online in a preset form and, hence, it was not possible for
the auditors to make necessary changes in these reports to bring them in
line with the SA 700 (Revised). Similarly, many a times, even where the
auditor's report were to be submitted in a physical form and not filed online,
the concerned regulatory/ government agencies may not accept such audit
reports which contained any changes made by the auditors to the prescribed
formats to bring them in line with SA 700 (Revised).
2. In view of the above, the Council decided that while the matter was
being taken up by the Institute with the relevant regulatory authorities/
Government agencies, etc., to change the prescribed formats for bringing the
same in line with the requirements of SA 700 (Revised), the members may,
in the situations described in paragraph 1 above, submit the auditor's rep ort
in the format/s prescribed under the relevant law or regulation until
announcement of necessary change is made by the appropriate authority. In
such cases the members would not be viewed as having not complied with
the provisions of SA 700 (Revised).
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3. In this context, it may also be noted that paragraph A56 of the SA
200, Overall Objectives of the Independent Auditor and the Conduct of An
Audit in Accordance With Standards on Auditing clearly states as follows:
"A56. In performing an audit, the auditor may be required to comply
with legal or regulatory requirements in addition to the SAs. The SAs
do not override laws and regulations that govern an audit of financial
statements…………………."
4. Further, paragraph 49 of SA 700 (Revised) requires that if the auditor
is required by law or regulation applicable to the entity to use a s pecific
layout or wording of the auditor's report, the auditor’s report shall refer to
Standards on Auditing only if the auditor's report includes, at minimum, each
of the elements as prescribed in the said paragraph.
5. On a perusal of a cross section of the formats of the auditor's report
prescribed under various laws, specially, the Income-tax Act, 1961 and the
Value Added Tax Acts of various States, it is clear that these pres cribed
formats do not contain all the elements of the auditor's report as required in
paragraph 49 of SA 700 (Revised). In the background of the difficulties
mentioned in paragraph 1 above, it may also not be possible for the auditors
to suitably modify the prescribed format. Accordingly, it would not per se be
possible for the auditors to state in their audit reports that the audit has been
carried out in accordance with the Standards on Auditing. However, the
auditors would be required to carry out the audits in accordance with the
Standards on Auditing issued by the Institute of Chartered Accountants of
India.
The same can also be downloaded from ICAI website.
356
Appendix XII
[Para 15.15]
Circular No.561, dated 22nd May, 1990
Subject: Tax audit under section 44AB of the Income-tax Act, 1961, in
the case of companies having accounting year other than
financial year - Regarding
1. The Board have received representations regarding difficulties faced
in complying with the provisions of section 44AB of the Income-tax Act, 1961,
in the case of companies which follow an accounting period other than
financial year.
2. Section 3 of the Income-tax Act, inter alia, provides that with effect
from 1st April, 1989, “previous year” for the purposes of that Act means
financial year immediately preceding the assessment year. In spite of the
introduction of a uniform previous year for purposes of income-tax, some
companies may adopt an accounting period other than the financial year, say
the calendar year, under the Companies Act for other purposes.
3. In such cases, a question has arisen as to whether, under section
44AB of the Income-tax Act, the tax auditor can audit and certify the
accounts for the period for which accounts have been maintained under the
Companies Act (i.e., in this case the calendar year) or whether the tax
auditor will have to certify the accounts for the relevant financial year which
is the uniform accounting year for tax purposes.
4. The Board have considered the matter and are of opinion that as the
income of the previous year is chargeable to tax and, for the purposes of
Income-tax Act, the previous year is the financial year, the tax auditor would
have to carry out the audit under section 44AB in respect of the period
covered by the previous year, i.e., the relevant financial year. The proviso to
the aforesaid section 44AB, therefore, covers only the cases where the
accounts are audited under any other law in respect of the financial year.
Where the accounting year is different from the financial year, the proviso to
section 44AB will not apply. Consequently, the tax auditors would have to
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
carry out the tax audit in respect of the period covered by the relevant
financial year and submit his report in Form 3CB as required in rule 6G(1)(b)
of the Income-tax Rules.
Sd/-
Nishi Nair
Under Secretary to the Government of India.
[F.No.205/4/90-ITA-II]
358
Appendix XIII
[Para 21.1 & 35.7]
Circular No.739 dated 25-3-1996
Whether for assessment years subsequent to assessment year 1996-97,
no deduction under section 40(b)(v) will be admissible unless
partnership deed either specifies amount of remuneration payable to
each individual working partner or lays down manner of quantifying
such remuneration
1. The Board have received representations seeking clarification
regarding disallowance of remuneration paid to the working partners as
provided under section 40(b)(v) of the Income-tax Act. In particular, the
representations have referred to two types of clauses which are generally
incorporated in the partnership deeds.
These are:
(i) The partners have agreed that the remuneration to a working partner
will be the amount of remuneration allowable under the provisions of
section 40(b)(v) of the Income-tax Act; and
(ii) The amount of remuneration to working partner will be as may be
mutually agreed upon between partners at the end of the year.
It has been represented that the Assessing Officers are not allowing
deduction on the basis of these and similar clauses in the course of scrutiny
assessments for the reason that they neither specify the amount of
remuneration to each individual nor lay down the manner of quantifying such
remuneration.
2. The Board have considered the representations. Since the amended
provisions of section 40(b) have been introduced only with effect from the
assessment year 1993-94 and these may not have been understood
correctly, the Board are of the view that a liberal approach may be taken for
the initial years. It has been decided that for the assessment years 1993-94
to 1996-97 deduction for remuneration to a working partner may be allowed
on the basis of the clauses of the type mentioned at 1(i) above.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
3. In cases where neither the amount has been quantified nor even the
limit of total remuneration has been specified but the same has been left to
be determined by the partners at the end of the accounting period, in such
cases payment of remuneration to partners cannot be allowed as deduction
in the computation of firm’s income.
4. It is clarified that for the assessment years subsequent to the
assessment year 1996-97, no deduction under section 40(b)(v) will be
admissible unless the partnership deed either specifies the amount of
remuneration payable to each individual working partner or lays down the
manner of quantifying such remuneration.
360
Appendix XIV
[Para 42.9]
THE RELEVANT EXTRACTS OF THE MICRO, SMALL AND MEDIUM
ENTERPRISES DEVELOPMENT ACT, 2006
“Appointed day” means the day following immediately after the expiry of the
period of fifteen days from the day of acceptance or the day of deemed
acceptance of any goods or any services by a buyer from a supplier.
“Day of acceptance” means the day of actual delivery of the goods or the
rendering of service or where any objection is made in writing by the buyer
regarding the acceptance of goods or services within 15 days from the day of
delivery of goods or rendering of services, the day on which the objection is
removed by the supplier.
“Day of deemed acceptance” means , where no objection is made in writing
by the buyer regarding acceptance of goods or services within fifteen days
from the day of deliver of the goods or rendering of services, the day of the
actual delivery of goods or the rendering of services.
“Buyer” means who so ever buys any goods or receives any services from
the supplier for a consideration.
“Supplier” means a micro or small enterprise, which has filed a memorandum
with the authority referred to in section 7(1)(a).
“Micro Enterprise” means:
(a) In case of enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the
Industries (Development and Regulation) Act, 1951 an enterprise,
where the investment in plant and machinery does not exceed twenty
five lakh rupees;
(b) In case of enterprises engaged in providing or rendering services, an
enterprise, where the investment in equipment does not exceed ten
lakh rupees.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
“Small enterprise” means:
(a) In case of enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the
Industries (Development and Regulation) Act, 1951 an enterprise,
where the investment in plant and machinery is more than twenty five
lakh rupees but does not exceed five crore rupees;
(b) In case of enterprises engaged in providing or rendering services, an
enterprise, where the investment in equipment is more than ten lakh
rupees but does not exceed two crore rupees.
“Medium enterprise” means
(a) In case of enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the
Industries(Development and Regulation) Act, 1951 an enterprise,
where the investment in plant and machinery is more than five crore
rupees but does not exceed ten crore rupees;
(b) In case of enterprises engaged in providing or rendering services, an
enterprise, where the investment in equipment is more than two crore
rupees but does not exceed five crore rupees.
362
Appendix XV
[Para 53.1]
Circular No. 208, dated 15th November, 1976
F.No. 208/7/76-ITA-II
Section 69D of the Income-tax Act, 1961 - Clarification Regarding
Whether payment on or after April 1, 1977 of amount borrowed on hundi
is to comply with the section regardless of whether hundi was executed
prior to the said date or on or after that date
1. The Taxation Laws (Amendment) Act, 1975, has added a new section
69D in Income-tax Act, 1961, with effect from 1st April, 1977, which provides
that if any amount is borrowed from any person on a hundi or any amount
due on it is repaid to any person, otherwise than through an account-payee
cheque drawn on a bank, the amount so borrowed or repaid shall be
assessed as the income of the tax-payer borrowing or repaying the said
amount, for the previous year in which the amount is borrowed or repaid.
This will also apply to the amount of interest paid on the amount borrowed on
hundies. This provision is applicable only in respect of hundies and does not
cover other types of loans, such as, repayment of loan by employees to
employers, repayment of loan to banks, co-operative societies etc.
2. The term "hundi" has not been defined in the Income-tax Act, 1961. In
common commercial parlance, it denotes an indigenous instrument in
vernacular language which can be used by the holder thereof to collect
money due thereon without using the medium of currency. It may also be
regarded as an indigenous form of a bill of exchange expressed in
vernacular language which has been in use in the mercantile community in
India for the purpose of collecting dues. There are numerous varieties of
hundies, for example Darshani Hundi, Muddati Hundi, Shaha Jogi Hundi,
Jokhmi Hundi, Nam Jog Hundi, Dhani Jog Hundi, Jawabi Hundi and Zickri
chit. The characteristics of hundies differ according to the varieties of the
same. The following characteristics are found in most of the hundie s:
1. A hundi is payable to a specified person or order or negotiable without
endorsement by the payee.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
2. A holder is entitled to sue on a hundi without an endorsement in his
favour.
3. A hundi accepted by the drawee could be negotiated without
endorsement.
4. If a hundi is lost, the owner could claim a duplicate or triplicate from
the drawer and present it to the drawee for payment. Interest can be
charged where usage is established.
3. This provision will come into force with effect from 1st April, 1977.
Accordingly, any payment on or after 1st April, 1977, in respect of an amoun t
borrowed on a hundi will have to comply with the requirements of this
provision regardless of whether the hundi was executed prior to the said date
or on or after that date.
Circular No. 221, dated 6-6-1977
[F. No. 208/25/76-IT(A-II)],
Whether provisions of the section are applicable to darshani hundi
transactions
1. Reference is invited to Board’s Circular No. 208 [F. No. 208/7/76-IT(A-
II)], dated 15-11-1976 [printed at Sl. No. 478 ] in which the provisions of
section 69D were explained.
2. A “hundi” in common commercial parlance denotes an indigenous form
of bill of exchange, by and large in vernacular language, which is being used
by the mercantile community in India. The hundis can be broadly classified
as (i) darshani hundis (sight or demand hundis), and (ii) muddati hundis
(usance hundis payable after a stipulated period of time mentioned therein).
Darshani hundis are of different varieties, viz, (i) shahjog hundis, (ii) dhanijog
hundis, (iii) namjog hundis, (iv) dekharanarjog hundis, (v) farmanijog hundis,
and (vi) jokhmi hundis.
3. It has been represented to the Board that a darshani hundi created
solely for the purpose of remittances of funds or financing inland trade or for
operating accounts through indigenous banking channels does not involve
borrowal of amounts and as such does not fall within the scope of sect ion
69D. There are more than two parties in a darshani hundi. Normally four
parties are involved in the case of a darshani hundi, viz, (i) the rakhya (the
holder or purchaser), (ii) the drawer (an indigenous banker or a vyapari), (iii)
the drawee (normally an indigenous banker but can also be a vyapari), and
(iv) the payee. If the payee is also the rakhya, the parties will be three.
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Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
Darshani hundi is payable at sight, i.e, immediately on presentation. A
muddati (usance) hundi generally involving two parties, is payable after a
stipulated period of time mentioned in the hundi.
4. The matter has been considered by the Board. We have been advised
that the provisions of section 69D are not applicable to darshani hundi
transactions mentioned hereinafter :
1.(a) A, who is the rakhya obtains on payment from B, the drawer, a
hundi drawn on C, the drawee, in favour of D, the payee.
(b) A, the rakhya having a running account or an overdraft account
with B, obtains from him a hundi drawn on C, the drawee, in
favour of D, the payee.
2.(a) A, a purchaser of goods from B, draws a hundi on C, the
drawee, in favour of B or a third party D for the purpose of
payment of the price of goods purchased or for settling the
account.
(b) For such purposes B can also draw a hundi on A either in his
own avour or in favour of a third party D.
3. A has an account with an indigenous banker C, who has
granted a credit facility to A and handed over a hundi book to
him. A draws amounts through such hundis payable either to
self, or bearer or third party. Such an arrangement arises out of
the credit facility already granted and, therefore, no debtor
creditor relationship has arisen between the parties because of
the drawal of a hundi.
5. Normally, borrowal on hundi arises when a person gets money by
execution of a hundi but in the instances cited above the hundi is given in the
nature of a security and there is no borrowal on such hundis. Thus in cases
of transactions referred to at (1), (2) and (3) of para 4, section 69D is not
applicable. The settlement of account between any of the parties to such a
darshani hundi can, thus, be otherwise than through an account payee
cheque within the meaning of section 69D.
6. This circular covers darshani hundi transactions of the types referred
to at (1), (2) and (3) of para 4 above. However, it could not be said that there
could be no borrowal on darshani hundi. The transactions not of the type
referred to above, on darshani hundis have to be examined with reference to
the facts and circumstances of such cases so as to determine whether or not
there is a borrowal on such hundis.
Appendix XVI
Useful websites
S. Particulars Webpage link
No
1. Direct Taxes https://www.icai.org/post/direct-taxes-
Committee of ICAI committee
2. Central Board of https://incometaxindia.gov.in/Pages/default.a
Direct Taxes spx
3. Institute of Chartered https://www.icai.org/
Accountant of India
4. Accounting https://www.icai.org/post/accounting-
Standards Board standards-board
5. Auditing & Assurance https://www.icai.org/post/auditing-assurance-
Standards Board standards-board
6. Ethical Standards https://www.icai.org/post/ethical-standards-
Board board
7. Ministry of Corporate https://www.mca.gov.in/content/mca/global/e
Affairs n/home.html
366
Appendix XVII
Reference Material/Publications
S. Particulars Webpage link
No
1. Income-tax Act, 1961 https://www.incometaxindia.gov.in/pages/acts/
income-tax-act.aspx
2. Information Technology https://www.incometaxindia.gov.in/pages/acts/
Act, 2000 information-technology-act.aspx
3. Income-tax Rules https://www.incometaxindia.gov.in/pages/rules
/income-tax-rules-1962.aspx
4. Income-tax Forms https://incometaxindia.gov.in/Pages/download
s/most-used-forms.aspx
5. FAQs on Tax audit https://www.incometaxindia.gov.in/Pages/faqs
.aspx?k=FAQs+on+Tax+Audit
6. Approach to Tax Audit https://resource.cdn.icai.org/61602dtc-
under section 44AB of taqrb50133a.pdf
the Income tax Act,
1961 (Checklist)
7. Study on Compliance https://resource.cdn.icai.org/70872taqrb-
in reporting Tax Audit scrtar.pdf
Report
8. Accounting Standards https://www.mca.gov.in/content/mca/global/en
/acts-rules/ebooks/accounting-standards.html
9. Code of Ethics https://www.icai.org/post/applicability-revised-
edition-code-of-ethics
10. IND -AS https://www.mca.gov.in/content/mca/global/en
/acts-rules/ebooks/accounting-standards.html
11. ICDS https://www.incometaxindia.gov.in/communica
tions/notification/notification872016.pdf
367