Northern India Regional Council�Institute of Chartered Accountants of India�Seminar on Tax Audit�Clause 1-25 of Form 3CD

By

CA Sachin Sinha

Name of the assessee

• What if there is change in 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.
• What if there is change in name after the end of the financial year but before the tax audit: 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.

Address of the assessee

• The address should be same as 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.

Permanent Account Number

• 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.

Case study

• Mr. Ram Kumar an Individual contractor having turnover of 20 Cr. He has two PAN card with different PAN number. Some payer has deducted the TDS on one PAN and some has deducted on another PAN. Mr. Ram realized the mistake and wanted to surrender one PAN?
• How to report the PAN in Form 3CD.

Registration number

• 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.
• Therefore, the question of whether the assessee is liable to pay any of the aforesaid indirect taxes should be considered, needs to be answered.
• The term “Indirect taxes” is neither defined in the Income-tax Act, 1961 nor under any other law

Registration number

​

​

Written Representation

• 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.

Previous year

• 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.

Select applicable clause

• In case the assessee is carrying on business and his total sales exceeds one crore in the relevant previous year, mention clause (a).
• If the assessee is carrying on profession and his gross receipts exceed fifty lakh rupees in the relevant previous year, (b).
• If the audit u/s 44AB is being conducted by virtue of provisions of sec 44AE, 44BB and 44BBB, mention clause (c).
• For audit being conducted by virtue of provisions of sec 44ADA, mention clause (d).

Case study

• Mr. A, carrying on profession and his receipts is more than Rs. 50 Lakhs in the PY 2022-23 and he also carrying on business and his turnover is more than Rs. 10 Cr. in the same PY.
• What if the turnover from business is only Rs. 1.5 Cr.

Specified rates of income Tax.

• Assessee is required to pay income-tax at the rates specified in the 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, 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.

​

• Do I need to examine the previous year Income Tax return to verify the option which has been exercised by the assessee.

If firm or AOP, indicate names of partners / members and their profit-sharing ratios. Clause 9(a)

• In case where 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.
• The details of partners or members during the entire previous year will have to be furnished.

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(b)]

• 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.

​

• As per section 2(23) of the Income-tax Act, 1961 the term “Firm” shall include a Limited Liability partnership firm as defined in Limited Liability Partnership Act, 2008.
• Do I need to test the applicability of Sec 9B and/or 45(4) of the Income Tax Act.?

​

Case study

• M/s ABC (partnership firm) having three partners Mr. A, B and C. on 1^st October 2022, the firm converted into Private Limited Company. On 1^st April 2023, the PAN of the partnership firm returned to the department.
• How to report the same in tax audit report.

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) [Clause 10 (a)]

• 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.
• The code to be mentioned against the nature of business pertains to the main area of business activity.
• The change will include change from manufacturer to trader as well as change in the principal line of business.

If there is any change in the nature of business or profession, the particulars of such change. [Clause 10 (b)]

• In the case of business reorganization/ reconstruction if there is a similar line of activity, no reference needs to be made.
• 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.

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

• The list of books of accounts prescribed, maintained and examined has to be stated under this clause.
• There may be difference between the three lists.
• The reporting is required if all the listed books of accounts are not maintained by the assessee.
• Another situation may also arise where the books are maintained by the assessee but not examined by the auditor.
• Stock register.
• Daily patient register.

List of books of account maintained and the address at which the books of account are kept. Clause 11

• 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.

​

List of books of account maintained and the address at which the books of account are kept. Clause 11

• Where the books of account are stored on cloud or online, IP address (unique) of the same may be reported.

List of books of account and nature of relevant documents examined.

1. Cash book.

2. Journal, if the accounts are maintained according to the mercantile system of accounting.

3. Ledger.

4. Daily case register in Form No.3C showing data, patient's name, nature of professional services rendered, fees received and date of receipt; and

5 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.

Any profits and gains assessable on presumptive basis [Clause 12]

• 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).

​

• 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.

Profits and gains assessable by virtue of provisions of section 44AE.

Method of accounting employed in the previous year.

• 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.

​

• The assessee may adopt cash system of accounting for one business and mercantile system of accounting for other Business.

​

• Section 128 of the Companies Act, 2013, provides that every company is required to keep books of account on accrual basis.

Whether there had been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year.

• If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss.

​

​

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.

ICDS disclosure

• 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).

ICDS disclosure

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

​

ICDS disclosure

Method of valuation of closing stock employed in the previous year.

• 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:

It is not necessary to indicate any change in the method of valuation of closing stock under this clause

Capital asset converted into stock-in-trade [Clause 15]

• Description of capital asset;
• Date of acquisition;
• Cost of acquisition;
• Amount at which the asset is converted into stock-in-trade.

​

• The fair market value of the asset, as on the date of such conversion or treatment as stock-in trade, shall be deemed to be the full value of the consideration of the asset.
• What if the assets was acquired prior to 1^st April 2001.

Amounts not credited to the profit and loss account, being [Clause 16 (a) to (e)]

(a) the items falling within the scope of section 28;

(b) the proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned;

(c) escalation claims accepted during the previous year;

(d) any other item of income;

(e) capital receipt, if any.

Case study

• Mr. A, an Individual, carrying on business having turnover of more than Rs. 10 Cr. He has a big residential house in his name which he let out and the rental income during the FY 2022-23 is Rs. 24 lakhs.
• Whether such rental income is also required to be reported in Form 3CD.
• What if the property is in the joint name of Mr. and Mrs. A and Mrs. A report 12 lakhs in her ITR u/h Income for house property.

Case study

• M/s ABC Pvt Ltd, an MSME registered entity having turnover of RS. 20 Cr. The company also received Rs. 1 Cr as interest paid by the buyers for delay in making payment to MSME entity.
• How to report such interest in Form 3CD.

Land or building or both is transferred during the previous year (Clause 17)

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

Case study

• Mr. A, an individual, carrying on trading business of grains and turnover during the FY 2022-23 is more than 10 Cr.
• In the FY Mr. A owns house property acquired by him in the FY 2010.
• His sale consideration is Rs. 100 lakhs and long-term capital gain is Rs. 50 lakhs.
• The stamp duty value of such property on the date of transfer is Rs. 150 lakhs.

​

Details of contributions received from employees for various funds as referred to in section 36(1)(va): [Clause 20 (a) and (b)]

• 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.

Details of contributions received from employees for various funds as referred to in section 36(1)(va): [Clause 20 (a) and (b)]

• 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.

Details of contributions received from employees for various funds as referred to in section 36(1)(va): [Clause 20 (a) and (b)]

• 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.

​

• The Finance Act 2021 by 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.

Amounts debited to the profit and loss account [Clause 21(a)]

Case study

• M/s ABC Pvt Ltd having turnover of more than 10 Cr in the FY 2022-23. During the year the company paid following amount which is debited to the PL A/c.
• 1. Penalty paid to other company for non delivery of goods on time.
• 2. Penalty paid to income tax for not maintaining books of accounts.
• 3. Fees paid to MCA for late filing of Annual return.
• 4. Challan paid for violation of traffic rules.

Amounts inadmissible under section 40(a) �[Clause 21(b)]

• ABL Pvt Ltd having turnover of Rs 20 Cr and income from other sources is Rs. 5 Cr. The company incurred various expenditure which wholly and exclusively for the for the purposes of business and deducted tax properly.
• The company incurred some expenses for earning income from other sources but failed to deduct tax as per 40(a).

Amounts inadmissible u/s 40(b)/40(ba) �[Clause 21(c)]

• 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.

​

• Salary, bonus, commission or remuneration or interest are not admissible, unless the following conditions are satisfied:
• Remuneration is paid to working partner(s).
• Remuneration or interest is authorized by the partnership deed and is in accordance with the partnership deed.
• Remuneration or interest does not pertain to a period prior to the date of partnership deed.

Disallowance/deemed income under section 40A(3):

• 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:

​

Disallowance/deemed income under section 40A(3):

• 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);

​

Case study

• M/s ABC Pvt Ltd incurred an expenditure of 25,000 in the FY 2022-23 in the month of March 2023 and paid in cash in the month of May 2023.
• Whether it is reported in the TAR of FY 2022-23 or FY 2023-24.
• In which column it is to be reported.

Particulars of any liability of a contingent nature; [Clause 21(g)]

• The assessee is required to furnish particulars of any liability of a contingent nature debited to the profit and loss account.
• The expenses relating to disputed claims will be revealed only on the basis of the scrutiny of records relating to contingent liabilities.

​

• 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.

Amount inadmissible under the proviso to section 36(1)(iii) Clause 21(i)

• 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.

​

• u/s 2(28A), 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.

Amount of Interest inadmissible u/s 23 of the MSMED Act, 2006 [Clause 22]

• The auditor should seek information regarding status of the enterprise i.e. whether the same is covered under the MSMED 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.3CA/CB.

Amount of Interest inadmissible u/s 23 of the MSMED Act, 2006 [Clause 22]

• M/s ABC Pvt Ltd purchased goods for M/s XYZ(MSME) for Rs. 3 Cr during the FY 2022-23. The buyer could not make the payment within 45 days and made provision for interest of Rs. 10 Lakhs.
• Whether M/s ABC Pvt Ltd is liable to deduct TDS u/s 194A?
• Whether it is to be reported under clause 21(i) or 22.

Particulars of payments made to persons specified under section 40A(2)(b). [Clause 23]

Any amount of profit chargeable to tax u/s 41 and computation thereof. [Clause 25]

• The tax auditor should obtain a list containing all the amounts chargeable u/s 41 with the accompanying evidence, correspondence, etc.
• The tax auditor should in all relevant cases examine the past records to satisfy himself about the correctness of the information provided by the assessee.
• 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 be stated.

Thank you

CA Sachin Sinha

Prakash Sachin & Co

+ 91 11 42173536

+ 91 9891315840

sachin@psc.co.in

www.psc.co.in

​