Hello, This is our 2nd post in the tax audit series. In this blog, We are going to have a discussion about the contents of the tax audit report.
Click here to read our post about “Tax Audit Series FY 21-22 – Due Dates, Forms and Applicability”
The tax Auditor will give the following information in Form 3CA/ Form 3CB-
- Name of the assessee, Trade name and Branches, if any.
- Period for which audit is covered.
- PAN and Address of the assessee.
- Tax Auditor’s opinion on whether the particulars given in Form 3CD are true and correct.
- Observations/ Qualifications, if any.
- Date, Place and Signature.
Form 3CD is divided into 2 parts (Part A and Part B) which comprises of a total number of 50 clauses (Clause 1 to Clause 44) which contain certain particulars required to be checked/ audited by the Tax Auditor.
PART A of Form 3CD contains 9 fillable clauses (Clause 1 to Clause 8a)
PART B of Form 3CD contains 41 fillable clauses (Clause 9 to Clause 44)
Clause 1 to 3,6 and 7 of Form 3CD are auto-populated from Form 3CA/ Form 3CB-
Clause 1 – Name of the assessee (As per PAN)
Clause 2 – Address (As per Income-tax database)
Clause 3 – PAN (Mandatory) or Aadhaar Number (Optional)
Clause 4 – Whether the assessee is liable to pay indirect tax? If yes, furnish the registration number, GST number or any other identification number.
Clause 5 – Status (Constitution of business like Individual, Company, Firm etc.)
Clause 6 – Previous Year <From> and <To>
The beginning Date shall either be 01.04.2021 or else, the date of incorporation (in case of new business) or the date of demerger (for resultant Company).
The ending Date shall either be 31.03.2022 or else, the date of closure of the business (in case the business is closed during the year).
Clause 7 – Assessment Year (AY 2022-23 for FY 2021-22)
Clause 8 – Indicate the relevant clause of section 44AB under which the audit has been conducted.
In case of filing Form 3CA – We should always choose the third proviso to section 44AB (Audited under any other Law).
In case of filing Form 3CB – Choose from 44AB(a) to 44AB(e), whichever is applicable.
Clause 8a – Whether the assessee has opted for taxation under section 115BA/115BAA/115BAB/115BAC/115BAD?
In cases where the relevant form to opt for such reduced tax rate schemes have not been filed upto the date of filing of audit report, obtain MRL that whether the assessee will opt for such schemes before the due date of filing of ITR which will be 1 month after the tax audit report due date.
Relevant Forms:
115BA (Domestic Manufacturing Companies): 25% Tax Rate; Form 10-IB
115BAA (Domestic Companies): 22% Tax Rate; Form 10-IC
115BAB (New Domestic Manufacturing Companies formed between 01.10.2019 to 31.03.2024): 15% Tax Rate; Form 10-ID
115BAC (New Taxation Scheme for Individuals or HUFS): Form 10-IE
115BAD (New Taxation Scheme for Cooperative Societies): 22% Tax Rate; Form 10-IF
Clause 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.
Clause 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.
We should make sure that the nature of the business opting for in Form 3CD, is the same nature of the business that needs to be opted for in Income-tax Return (ITR).
Any business added during the year or permanently discontinued during the year needs to be taken in the change in nature of business.
Clause 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 account are kept. (In case books of account are maintained in a computer system, mention the books of account generated by such computer system. If the books of account are not kept at one location, please furnish the addresses of locations along with the details of books of account maintained at each location)
(c) List of books of account and nature of relevant documents examined.
In case “Yes” is opted in sub-clause (a), then the list of books of account prescribed in Section 44AA needs to be written. The list is given in Rule 6F.
Persons liable to maintain books as per Section 44AA of Income-tax Act, 1961:
- Notified Professionals.
- Individual/ HUF with income > INR 2.5 lakhs or turnover > INR 25 lakhs.
- Firms/ Companies with income > INR 1.2 lakhs or turnover > INR 10 lakhs.
Clause 12 – Whether the profit and loss account includes any profits and gains assessable on a 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)
Suppose, an assessee is carrying out two businesses, for one business, it is getting Tax Audit done and for another business, it has opted for Section 44AD Scheme.
In such case, the profits of Section 44AD scheme credited in the Profit and loss account needs to be mentioned under this clause.
Expenses are apportioned between normal and presumptive business on the basis of estimation and by applying professional judgement.
Clause 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.
(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 (ICDS) notified under section 145(2).
(e) if answer to (d) above is in the affirmative, give details of such adjustments.
Method of accounting employed:
- For Companies and LLPs – Only accrual method is permitted.
- For Individuals, HUFs, Firms etc. – Cash or accrual any method can be chosen and shall be followed consistently. Hybrid method is not allowed.
Clause 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.
Method of stock valuation needs to be reported here (either cost or market value or lower of these two).
Section 145A talks about the ‘Inclusive method’. Due to the loading of taxes in Profit and loss, there will not be any impact on Gross Profit and hence, taxes will be the same.
Clause 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.
As per Income-tax Act, the conversion of capital asset into stock-in-trade is treated as ‘TRANSFER’ in the year of conversion. However, Capital Gains will be charged to tax in the year in which such converted asset is sold or transferred.
Clause 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;
(e) capital receipt, if any.
The items which will be taken in this clause will be directly taken as an addition to the income of the assessee.
If the auditor comes across any item of income chargeable to tax not credited to the Profit and Loss account, the same needs to be reported here.
A detailed explanation of the remaining clauses (i.e., Clause 17 to Clause 44) will be out very soon.
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Hemanth Uppala
Chartered Accountant
Content Writer | TAX DESTINATION
