TAX AUDIT – CHANGES IN FORM 3CD August, 2014

• TAX AUDIT – CHANGES IN FORM 3CD August, 2014 
• Due Date has been extended On 20th August, 2014, The CBDT has extended the due date for tax audits to 30th November by issuing a notification u/s. 119 Question mark over due date for filing return of income u/s. 139(1) Notification refers only to 44AB and not 139(1)
• In the past, the notification was as under Due date for filing return extended in case of Pune, Sangli and Kolhapur Press Note No. 402/92/2006-MC (20 of 2009), dated 25-9-2009 Order under Section 119 of the Income Tax Act, 1961 On consideration of the reports of local disturbances caused due to Swine Flue and riots of the Pune, Satara, Kolhapur and Sangli Districts of Maharashtra, the Central Board of Direct Taxes, in exercise of powers of conferred under section 119 of the Income Tax Act, 1961, hereby extends the due date of obtaining tax audit reports u/s 44AB of the I.T. Act as well as for filling of returns of income required to be furnished by 30th September 2009 to 31st October 2009 in the cases of income tax assesses in Pune, Satara, Kolhapur and Sangli districts of Maharashtra. F.No. 225/163/2009 – ITA. II
• In the latest notification, there is no reference to 139(1) Therefore For CAs Achche Din are yet to come! So, going ahead with this meeting is justified 
• 3CD - History • Introduced for the first time w.e.f. 1st April, 1985 • Prior to latest amendment, there were 34 clauses and 2 annexures • Now, after the amendment, there are 41 clauses and no annexures
• EXPLANATORY NOTES ON FINANCE ACT 1984: “A proper audit for tax purposes would ensure that the books of account and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax law laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilised for attending to more important investigational aspects of a case.” 3CD – WHY WAS IT INTRODUCED?
• Do the Assessing Officers place reliance on the information certified by a Chartered Accountant? If not, what is the point in making the reporting requirements greater? Does the Report as it stands today consist of only routine information ? Notwithstanding the above, let us consider such audits as an opportunity instead of as a threat 3CD – HAS IT SERVED ITS PURPOSE?
• • The changes have been notified on 25th July, 2014 • Several tax audits have already been completed before this date (only uploading remained pending) • The new format also applies to earlier years if the audit is not yet completed / return is not yet filed • In case of bank audits as also other large entities, it is difficult to again go to the auditee and verify the newly notified details • The Income-tax department’s website still shows the old form • The Income-tax department’s e-filing portal has got the new utility only on 20th August 3CD – AMENDMENTS – IMPORTANT ISSUES
• CHANGES IN FORM 3CA o “Profit and Loss Account / Income and expenditure account for the period beginning from ___________ to ending on __________” instead of for the year ended __________. (What can be the rationale? Will previous year be again made flexible?) o In case of newly set up business / profession, the date of set up has to be mentioned. This is very important and is also litigative. Auditors will have to be very careful
• CHANGES IN FORM 3CA o The words “according to examination of books of account including other relevant documents” added o Qualifications and Observations to be mentioned in 3CA itself o Stamp of the auditor also specifically to be affixed (earlier, only signature was required) o In the Notes to the Form, the definition of signing authority is removed and reference is made to the ITA
• CHANGES IN FORM 3CB o Balance sheet as on instead of as at o Profit and Loss Account / Income and expenditure account for the period beginning from __________ to ending on _________ instead of for the year ended _________. o Qualifications and Observations to be mentioned in 3CB itself o Stamp of the auditor also specifically to be affixed (earlier, only signature was required) o In the Notes to the Form, the definition of signing authority is removed and reference is made to the ITA
• Changes in Form 3CA In the new Utility, for qualifications, the following format is prescribed: Sr. No. Qualification Type (to select from a drop down list) Observations/ qualifications Proper books of account, to enable reporting in form 3CD, have not been maintained by the assessee All the information and explanations which to the best of my/our knowledge and belief were necessary for the purpose of my/our audit has not provided by the assessee Documents necessary to verify the reportable transaction were not made available. Proper stock records are not maintained by the assessee Valuation of closing stock is not possible Yield/Percentage of wastage is not ascertainable
• Changes in Form 3CA In the new Utility, for qualifications, the following format is prescribed: Sr. No. Qualification Type (to select from a drop down list) Observations/ qualifications Records necessary to verify personal nature of expenses not maintained by the assessee TDS returns could not be verified with the books of account Records produced for verification of payments through account payee cheque were not sufficient Amount of expense related to exempt income u/s. 14A of Income-tax Act, 1961 could not be ascertained Creditors under Micro, Small and Medium Enterprises Development Act, 2006 are not ascertainable Prior period expenses are not ascertainable from books of account
• Changes in Form 3CA In the new Utility, for qualifications, the following format is prescribed: Sr. No. Qualification Type (to select from a drop down list) Observations/ qualifications Fair market value of shares u/s. 56(2)(viia)/(viib) is not ascertainable Reports of audits carried by Excise/Service tax Department were not made available GP ratio is not ascertainable from the financial statements prepared by the assessee. Information regarding demand raised / refund issued during the previous year under any tax laws other than Income-tax Act, 1961 and Wealth-tax Act, 1957 was not made available Others One can add further rows as per requirement – no idea of limitation, if any In all cases, the last column has to be filled up mandatorily
• Changes in Form 3CD
• Clauses of 3CD that remain unchanged New Clause No. Description 1 Name of the Assessee 2 Address 3 PAN 5 Status 7 Assessment Year 9 Partnership firm related general information 10 Business related general information 11(a) Whether books of account are prescribed & if yes, list 11(c ) List of books examined
• Clauses of 3CD that remain unchanged New Clause No. Description 13(a) Method of accounting employed 13(b) Change in method of accounting 13(d) Details of deviation from AS prescribed under IT Act 14(a) Method of valuation of closing stock 15 Details of capital asset converted into stock in trade 16(a) Amounts not credit to P&L – items falling within scope of S. 28 16(b) Amounts not credit to P&L – proforma credits, duty drawbacks etc 16(c) Amounts not credit to P&L – Escalation claims 16(d) Amounts not credit to P&L – Any other income 16(e) Amounts not credit to P&L – Capital Receipt
• Clauses of 3CD that remain unchanged New Clause No. Description 18(a)(b)(c)(e)(f) Depreciation 20(a) Bonus / Commission paid to employees – S. 36(1)(ii) 23 40A(2)(b) 25 Profit chargeable u/s. 41 26 43B 30 Details of amount borrowed on Hundi 31 269SS / 269T 35 Ratios
• Changes in Form 3CD CLAUSE NO. 4 Registration Number in case of Indirect-tax liability to be given: “Whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, customs duty, etc. If yes, please furnish the registration number or any other identification number allotted for the same” o “liable to pay tax” – does it refer to a outstanding liability or to general coverage of the law? If former, then as at which date? As at year end or at any time during the year? What if registration taken but not liable? o Location wise details to be given? o Even registration number under other indirect taxes to be reported
• Changes in Form 3CD CLAUSE NO. 4 - In the new Utility, for qualifications, the following format is prescribed: Sr. No. Type Registration / Identification Number Central Excise Duty Central Custom Duty Service Tax Sales Tax/VAT State Excise Duty Other Indirect Tax/duty One can add further rows as per requirement – no idea of limitation, if any
• CLAUSE NO. 8 :  The four clauses of section 44AB under which tax audit can be carried out are- a. If the person is carrying on business whose total sales, turnover or gross receipts, as the case may be exceeds Rs 1 crore. b. If the person is carrying on profession whose gross receipts in profession exceed Rs 25 lakhs. c. If the person is carrying business, provisions of sections 44AE or 44BB or 44BBB are applicable to him and he claims that his income is lower than the amount deemed by sections 44AE or 44BB or 44BBB to his profits and gains d. If the person is carrying business, provisions of sections 44AD are applicable to him and he claims that his income is lower than the amount deemed by section 44AD to be his profits and gains & his income exceeds the maximum amount which is not chargeable to income-tax Changes in Form 3CD
• CLAUSE NO. 8 : • This might create problems in cases where the distinction between business and profession is not clear – could they link this to the Code in ITR form for the main business / profession?) • What if more than one clause is applicable? • In the utility, a drop down list is provided and we have to select the appropriate one • In the utility, it is possible to select more than one clause Changes in Form 3CD
• CLAUSE NO. 8 – Relevance of distinction between Business & Profession: • Section 2(13) defines business : “Business” includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. • Section 2(36) defines Profession : “Profession” includes vocation • Whether a particular activity can be classified as ‘business’ or ‘Profession’ will depend on the facts and circumstances of the each case – CIT v. Manmohan Das (Deceased) (1966) 59 ITR 699 (SC) • All professions are businesses, but all businesses are not professions. Only those businesses are professions the profit of which are dependent mainly upon the personal qualification and in which no capital expenditure is required or only capital expenditure of comparatively small amount – P. Stanwill & Co. v/s. CIT (1952) 22 ITR 316, 320-21 (All) Changes in Form 3CD
• CLAUSE NO. 11: Books of Account o To provide address at which books of accounts are maintained o If more than one location, address of each location and books maintained o No format prescribed o Lis of books of account & nature of documents examined o Intention may be to ease search / survey procedures o What if accounts are maintained on servers at other places / in the cloud? o How to report SAP modules? Changes in Form 3CD
• CLAUSE NO. 11: o What does “nature of documents” mean? o List of documents is not required – only nature o Can we categorise on broad basis – say as under: o Bills / Invoices / Receipts issued / received by assessee o Credit / Debit Notes issued / received by assessee o Statutory registers maintained under various laws o Contracts / agreements entered into by the assessee o Correspondence between the assessee and others o Third party confirmations / statements of account Changes in Form 3CD
• CLAUSE NO. 11: o In the utility, there is no separate section or drop down list for “nature of documents” o For location, there is a provision for showing a non Indian location Changes in Form 3CD
• CLAUSE NO. 13 Effect of change in method of accounting on P&L to be given : o Gross impact to be disclosed o Net effect cannot be given o Following format prescribed: • What if the impact cannot be quantified? Can we write NIL? • Distinction between method of accounting & accounting policy remains relevant Changes in Form 3CD Sr. No. Particulars Increase in profit Decrease in profit
• CLAUSE NO. 14 Effect of Change in method of valuation of stock on P&L o Gross impact to be disclosed o Net effect cannot be given o Following format prescribed: Changes in Form 3CD Sr. No. Particulars Increase in profits Decrease in profits
• CLAUSE NO. 17 Value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C to be reported Reporting will be required under this clause if the following conditions are cumulatively satisfied – • the assessee has transferred land or building or both; • the transfer is during the previous year; • consideration for transfer is less than the value adopted or assessed or assesable by any authority of a State Government Changes in Form 3CD
• CLAUSE NO. 17 o Following format prescribed: o In the utility, complete postal address has to be provided o In case of individuals, whether transactions of capital assets forming / not forming part of audited accounts to be reported? o In case of unregistered documents, ready reckoner value to be adopted? o Whether sale of under construction flats would be covered? o Whether sale of TDR would be covered? Changes in Form 3CD Details of property Consideration received or accrued Value adopted or assessed or assessable
• CLAUSE NO. 17 o Controversy on whether transfer has taken place in the FY concerned: o Auditor’s liability in this case. o To what extent will it hold good if the assessee’s stand in the ROI differs from the auditor’s stand? o Controversy on applicability in case of land/building forming part of the block of asset & upon sale, the block does not become negative (& thus, section 50 is not applicable) – what stand should the auditor take? Changes in Form 3CD
• CLAUSE NO. 20 Contribution received from employees towards a fund – as per section 36(1)(va) o To be given in the below format: o Additional column for actual amount paid Changes in Form 3CD Sr. No. Nature of fund Sum received from employees Due date for payment The actual amount paid Actual date of payment to the concerned authorities
• CLAUSE NO. 21 o Earlier the heading of clause 17 – “amounts debited to the profit and loss account, being :-” applied to all sub clauses – now the wording is different o Now, reference to “debited to the profit and loss account” is only in some of the sub clauses. o Does it mean that in the other sub clauses, the amounts inadmissible are to be mentioned even if not debited to the P&L A/c? Changes in Form 3CD
• CLAUSE NO. 21(b) o Amounts inadmissible u/s 40(a). o Details of payments to NR for interest, royalty, FTS or any other sum chargeable to tax on which: o Tax is not deducted o Tax has been deducted but has not been paid before expiry of time u/s 200(1) o Details of all* payments to residents on which: o Tax is not deducted o Tax has been deducted but has not been paid before expiry of time u/s 139(1) (* refer to amendment vide Finance (No. 2) Act, 2014 Changes in Form 3CD
• CLAUSE NO. 21(b) o New format of reporting: o Date of payment o Amount of payment o Nature of payment o Name and address of the payee o Amount of TDS if any For all the items of TDS, .csv templates can be downloaded and then filled up in excel and later imported into the utility Changes in Form 3CD
• CLAUSE NO. 21(d) – Section 40A(3) / 40A(3A) o Requirement of certificate from the assessee done away with o Deemed income u/s 40A(3A) also required to be reported now o Format prescribed for reporting: o Both reports to be based on examination of books of account & other relevant documents/evidence. Auditor cannot merely rely on the assessee’s certificate. Should we reinstate earlier disclaimer? Changes in Form 3CD Sr. No. Date of Payment Nature of payment Amount Name and PAN, if available
• CLAUSE NO. 28 – INCOME U/S. 56(2)(viia) – applicable to firms and closely held companies • Whether during the previous year the assessee has received any property, being share of a company other than 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 • Valuation to be done as per Rules 11U & 11UA • How much can the auditor rely on valuation reports provided by the company / third party valuer? Changes in Form 3CD
• CLAUSE NO. 28 – INCOME U/S. 56(2)(viia) – applicable to firms and closely held companies Controversy where the assessee has received shares by way of rights issue, bonus shares, allotment of shares by a company, conversion of debentures, buy back of shares, on amalgamation, demerger, on dissolution of a firm, etc Changes in Form 3CD
• CLAUSE NO. 28 – INCOME U/S. 56(2)(viia) – applicable to firms and closely held companies No format prescribed in the 3CD itself. But, in utility, following details are called for: • Name of the person from which shares are received • PAN of the person, if available • Name of the company whose shares are received • CIN of the company • No. of Shares Received • Amount of consideration paid • Fair Market Value of the shares Changes in Form 3CD
• CLAUSE NO. 29 – INCOME U/S. 56(2)(viib) - applicable to companies • 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. • Valuation to be done as per Rules 11U & 11UA • How much can the auditor rely on valuation reports provided by the company / third party valuer? Changes in Form 3CD
• CLAUSE NO. 29 – INCOME U/S. 56(2)(viib) - applicable to companies • Remember – VCUs receiving consideration from VCF/VCT are not covered by this provision • Only money received from Residents is covered. Auditor will have to verify the residential status of the shareholder? Changes in Form 3CD
• CLAUSE NO. 29 – INCOME U/S. 56(2)(viib) - applicable to companies No format prescribed in the 3CD itself. But, in utility, following details are called for: • Name of the person from whom consideration received for issue of shares • PAN of the person, if available • No. of Shares issued • Amount of consideration paid • Fair Market Value of the shares Changes in Form 3CD
• CLAUSE NO. 31 – 269SS & 269T Sub clause (c) replaced : Whether the taking or accepting of loan or deposit, or repayment of the same were made by account payee cheque drawn on a bank or account payee bank draft based on the examination of books of account and other relevant documents Reference to certificate from assessee has been done away with In the utility, a drop down list off answers is provided: YES NO NA Changes in Form 3CD
• CLAUSE NO. 32 – Losses • New sub clause added : o Reporting of details of losses from speculation business as referred to u/s 73 o Reporting of details of losses from specified business (S. 35AD) as referred to u/s 73A • Additional reporting – auditor will have to deal with the Explanation to S. 73 Changes in Form 3CD
• CLAUSE NO. 33 – Deductions Admissible • Deductions admissible under following Chapters to be reported: o Chapter VI-A o Chapter III (Section 10A, 10AA) (newly included) • To verify whether conditions in the Act / Rules or any other Guidelines, Circular etc fulfilled • No space provided for auditor to report the assumptions, case laws etc. • “admissible” was there earlier also but now, for 10A/10AA it will pose problems • Tax audit and computation of income have now become cross linked – which comes first ? Changes in Form 3CD
• CLAUSE NO. 34(a) - TDS and TCS TCS reporting incorporated along with TDS in foll format Changes in Form 3CD TAN Section Nature of payment Total amount of payment or receipt of the nature specified in column (3) Total amount on which tax was required to be deducted Or collected out of (4) Total amount on which tax was deducted or collected at specified rate out of (5) Amount of tax deducted or collected out of (6) Total amount on which tax was deducted or collected at less than specified rate out of (7) Amount of tax deducted or collected on (8) Amount of tax deducted or collected not deposited to the credit of the Central Governme nt out of (6) and (8) 1 2 3 4 5 6 7 8 9 10 Note: The above format is being used by TDS officers for collecting information either during a scrutiny or for S. 197 purposes The entire data dump of TDS to be uploaded? No import facility!
• CLAUSE NO. 34(a) - TDS and TCS Example : Let us consider that the amount of Legal and Professional fees debited to the P&L is Rs 2,00,000. Column 1 : TAN under which tax is deducted Column 2 : Section = 194J Column 3 : Legal and Professional fees Column 4 : Rs 2,00,000 (Should accrual be considered? – Yes Column 5 : If Rs 2,00,000 contains payment to X and Y of Rs. 9,000 each, amount on which tax was required to be deducted = Rs 1,82,000 Column 6 : Out of Rs 1,82,000, Rs 1,00,000 is paid to Z & Co which has provided a lower deduction certificate/default done by assessee on Rs 1,00,000 – Report Rs 82,000 in Column 6 Changes in Form 3CD
• Example (continued) • Column 7: Amount of tax deducted or collected out of 6 in our example has to be Rs. 8,200 or 10% of Column 6 • Column 8 : Typo in the form • “Total amount on which tax was deducted or collected at less than specified rate out of (7)” • Total amount on which tax is deducted cannot be out of tax amount as reported in “column 7” It should be column 5 • Rs 1,00,00 to be reported here • Column 9 : Tax deducted on Rs. 1,00,000 which shall be less than Rs 10,000 <<or more than Rs 10,000 ??>> shall be reported, say Rs 7,000 Changes in Form 3CD
• Example (continued) • Column 10 : Typo in the form • “Amount of tax deducted or collected not deposited to the credit of the Central Government out of (6) and (8)” • Column 6 and 8 are total amount on which tax is to be deducted/collected and not amount of tax deducted/collected • Should be column 7 and 9 • Amount to be reported = Rs 8,200 + Rs 7,000 = Rs 15,200 Total P&L items to be reported (having same deduction/collection section to be one line item) are not party- wise and hence perhaps import facility not given as line items considerably reduced in data in P&L item-wise Changes in Form 3CD
• CLAUSE NO. 34 (b) - TDS and TCS If TDS/TCS statements are not furnished within time prescribed, the details thereof are to be furnished in the following format: Changes in Form 3CD Tax deduction and collection account number Type of Form Due Date for furnishing Date of furnishing , if furnished Whether the statement of tax deducted or collected contains information about all transactions which are required to be reported What kind of checking to ensure all transactions required to be reported are reported? The report is silent on such requirement if TDS return filed on time
• CLAUSE NO. 34(c) - TDS and TCS Whether assessee liable to pay interest u/s 201(1A) 206C(7) ? If yes, the details thereof are to be furnished in the following format: Changes in Form 3CD Tax deduction and collection Account Number (TAN) Amount of interest under section 201(1A)/206C(7) is payable Amount paid out of column (2) along with date of payment Invariably, there is a difference in number of months as computed by Traces & by the assessee. Should auditor take cognizance of default notices? To take demand as per rectification application or as per CPC?
• CLAUSE NO. 36 - Tax on distributed profits of domestic companies • In addition to the total amount of distributed profits, total tax paid thereon and dates of payment, following are additionally required to be reported: o Amount of reduction as referred u/s 115 – O(1A)(i) i.e. dividend received by domestic companies from its subsidiary o Amount of reduction as referred u/s 115 – O(1A)(ii) i.e. dividend paid to any person for or on behalf of the New Pension System Trust referred to in section 10(44) Changes in Form 3CD
• CLAUSES 37, 38, 39 - Cost Audit / Excise Audit / Service-tax Audit • No need to attach the Audit Reports (however, we need to wait for e-filing utility) • Tax Auditor needs to report disqualifications and disagreement on any matter, item, value, quantity reported / identified in the respective audit reports • What if audit done but report not issued? Or what if audit is in progress? Changes in Form 3CD
• CLAUSE 40 - Ratios • Earlier year’s ratios are also to be given • Will make it easier for the AO to compare • Whether to recompute or just copy from earlier year’s 3CD (in case of regrouping) • If earlier year’s 3CD was signed by some one else, a suitable note to be given • In the utility, turnover figure is to be entered first but it is not picked up in the computation of the ratios Changes in Form 3CD
• CLAUSE NO. 41 - Demand raised/Refund Issued • Demands raised / refunds issued under any other tax law to be reported • Details of proceedings to be mentioned • Service Tax / Profession Tax / Sales-tax / VAT / LBT / Excise Duty / Octroi / Customs Duty / Entertainment Tax / Stamp Duty / Anti Dumping Duty – what else? Changes in Form 3CD
• CLAUSE NO. 41 - Demand raised/Refund Issued • Auditor will have to obtain list of external consultants and then get confirmations from them • Will the CPC / AO match this with contingent liabilities reported in the accounts? Changes in Form 3CD
• CLAUSE NO. 41 - Demand raised/Refund Issued • In the utility: o drop down list for financial years (to which demand / refund pertains) is provided – 1980-1981 to 2020-21 o For date of demand /refund – drop down calendar is provided – from 1914 to 2019!!! o The last column of “REMARKS” appears to be mandatory Changes in Form 3CD
• Other Changes: o Acronym of Permanent Account Number added (PAN) o MODVAT is replaced by CENVAT in the report o Clause No. 12 - If income from shipping companies (Chapter XII-G) and Insurance Business (First Schedule) is included in P&L, mention the amount (along with other provisions of presumptive income) Changes in Form 3CD
• Other Changes: o Deduction allowable u/s 32AC, 35 (with separate clause variations), 35AD, 35CCC, 35CCD, 35D (Clause 19) o Amounts deemed to be profit u/s 32AC to be reported (Clause 24) o Annexures I & II have been done away with (Finally, FBT is dead and buried) o Certain details of annexure i.e ratios incorporated in the report itself with ratios of the previous FY as well Changes in Form 3CD
• • Lots of changes in the 3CD • Made at a late hour • ICAI Guidance Note keenly awaited • ICAI has already represented to CBDT • FM’s intervention would be required and he needs to be reminded about “taxtortion” CONCLUSION