[FAQs] Disclosures & Reporting in Form 3CD | Tax Audit | A.Y. 2023-24

If the tax auditor and client have a difference of opinion with respect to the applicability of the TDS/TCS provision, such concern shall be reported in clause (3) of Form 3CA or clause (5) of Form 3CB, as the case may be.

Though the Income-tax Act does not define the term “indirect tax”, Clause 4 gives examples of the same as excise duty, service tax, sales tax, GST, and customs duty.

The levy 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. When the auditor is of the opinion that any indirect tax laws are applicable to the business or profession of the assessee, but he is not registered under the said law, he should report the same appropriately.

While reporting in Para 3(a) of Form No. 3CB, the tax auditor should report observations/comments/discrepancies/inconsistencies that are of a qualificatory nature which affect his reporting about obtaining all the information and explanations that 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 that are of a qualificatory nature should be mentioned in Para 3(a).

Para 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 auditor may have a difference of opinion about the particulars furnished by the assessee, and he has to bring these differences under various Clauses in Form No. 3CD. 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.

Hence, Para 3(a) in Form 3CB pertains to qualification about the true and fair view of the financial statements. In contrast, Para 5 specifically concerns the qualifications on true and correct reporting in any of the Clauses of Form 3CD.

When a partnership firm converts into a company, it is a case of change in the legal identity. The partners must relinquish the firm’s PAN and acquire a new PAN in the company’s name. This situation necessitates the submission of two audit reports: one for the partnership firm covering the period up to the conversion date and another for the company from the conversion date to March 31.

If shares of members are unknown during the previous year, the auditor needs to disclose this fact in Clause 9(a) of Form 3CD.

Clause 10 of Form 3CD mandates disclosure of the nature of every business or profession carried on by an assessee during the previous year. The codes for all main activities (principal line of each of the business or profession) shall be reported.

Any material change in the nature of business should be precisely disclosed. The change will include a change from manufacturer to trader and a change in the principal line of business. Any addition to or permanent discontinuance of a particular line of business may also amount to change requiring reporting. However, temporary suspension of the business may not amount to change and, therefore, need not be reported.

Clause 11(b) requires reporting the address at which the books so maintained are kept. As per the “Guidance Note on Tax Audit” issued by the ICAI, when the books of account are maintained and generated through a computer system, the auditor should obtain from the assessee the details of the address of the place where the server is located or the principal place of business/Head office or registered office by whatever name called and mention the same accordingly in clause 11(b). If the books of account are stored on the cloud or online, a unique IP address of the same may be reported. The auditor should also specify which books of account have been maintained in the computer system and which records have been maintained in hard copy form.

The Guidance does not provide any direction on reporting in Clause 11 if the IP Address is not unique but a dynamic IP address. In that situation, the name of the cloud should be mentioned.

In case the profit and loss account of the assessee includes any profit declared under the presumptive scheme (Section 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB), then it is mandatory to mention the amount of such profit and the section under which the same is declared in Clause No. 12 of Form 3CD. The tax auditor is not required to indicate if the amount of presumptive income has been correctly computed under the relevant section relating to presumptive taxation. The reporting requirement is satisfied if the amount as per profit and loss account is reported.

If the profit and loss account of the assessee also includes the presumptive income, the common business expenditure has to be apportioned to arrive at the correct amount of profit credited to the profit and loss account and assessable on a presumptive basis. The tax auditor, in such a situation, should 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 an 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.

The conversion by the owner of a capital 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 conversion of capital asset into stock-in-trade will be deemed 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 be taxable in the previous year when such converted asset is sold or otherwise transferred. The excess of the sale price over the fair market value as of the date of conversion would be treated as business income and taxed under the head ‘profits and gains of business or profession’.

The particulars in 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 in a vice-versa situation where the stock-in-trade is converted into capital assets. Thus, the conversion of stock-in-trade into capital assets is not reported in the tax audit report.

Clause 16 of the tax audit report requires reporting of the amount not credited to the profit and loss account.

The disclosure in item (d) of clause 16 is titled “any other item of income”. Whether certain incomes taxable under any other head need not be reported in this column?

One view is that income from house property or other sources (like bank interest, dividends, etc.) should not be reported in clause 16(d). Thus, no addition or adjustment shall be made by the CPC while processing the return under Section 143(1).

The other view is that such other income should be reported. The arguments in favour of such a conclusion are that Section 44AB starts with the expression “every person” carrying on business or profession shall get his accounts of such previous year audited. The audit under Section 44AB is not only for the books of account relating to business or profession but for the taxpayer. Thus, income chargeable to tax under the head house property, capital gains, and other sources are also disclosed in clause 16(d).

If the second view is followed, one may receive the tax demand as a result of adding the amount disclosed in 16(d) to business/professional income without taking note of the fact that those incomes are taxable under other heads.

Disclosure in clause 16 by the tax auditor by taking the view that the tax audit report is meant for the taxpayer and not explicitly limited to business or profession needs to be appreciated in the overall context of tax compliance. Such disclosure provides wholesome information to the department about the taxpayer. However, when such information is captured in the ‘Other Information Schedule’ of ITR, the CPC may compare it with incomes offered under other heads. If they are equivalent to or more than the amount disclosed in clause 16 of Form 3CD, no adjustment may be made under Section 143(1). However, clarity is needed from Dept. in this regard.

If a claim for a refund of SAD has been admitted as due and accepted during the relevant financial year, it shall be reported under Clause 16. If the claim has been lodged during the previous year but has been admitted as due after the relevant previous year, it 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 a fact should be brought out.

Clause 17 requires the reporting of the transfer of any land or building or both during the previous year for a consideration less than the value adopted or assessed or assessable by any authority of a State Government referred to in Section 43CA or Section 50C.

The reporting obligation under Clause 17 arises when the following conditions are satisfied:

• There is a transfer of land or building or both by the assessee during the previous year. It does not matter whether such land or building or both is held as a capital asset or stock in trade, as Clause 17 refers to both Section 50C and Section 43CA; and
• The transfer is for consideration, and such consideration is less than the stamp duty value.

If all the conditions are satisfied, it becomes necessary for the tax auditor to report the transaction under Clause 17. It is important to note that neither Section 43CA nor Section 50C excludes properties located outside India from their ambit. Consequently, if a property situated outside India is transferred, it must be reported in Clause 17. The Form 3CA-3CB/3CD utility also allows reporting of property details outside India.

Clause 22 of Form 3CD seeks the disclosure of the amount of interest inadmissible under Section 23 of the Micro, Small, and Medium Enterprises Development Act, 2006. The tax auditor needs to report the amount of interest inadmissible under Section 23 of the MSMED Act, 2006, irrespective of whether the amount of such interest has been debited to the profit and loss account or not.

The auditor should verify that the client has disclosed the information as required under Section 22 of the MSMED Act, 2006 in the financial. If there is no disclosure in the financial statements, the tax auditor should appropriately qualify his report in Form No. 3CB and also report the fact of non-disclosure in Clause 22 of Form No. 3CD.

No, the auditor is not required to quantify whether the payment is unreasonable or excessive. Only the Assessing Officer can make the disallowance if, in his opinion, the expenditure is unreasonable.

Section 40(A)(2) provides that expenditure for which payment has been or is to be made to certain specified persons listed in the section may be disallowed if, in the opinion of the Assessing Officer, such expenditure is excessive or unreasonable. The section enjoins the Assessing Officer’s power to fix the quantum of disallowance.

It may be advisable for the tax auditor to clarify that what has been reported are the actual payments made to specified persons during the previous year. These are not necessarily the amounts claimed in/debited to the profit and loss account.

The tax auditor is only required to give particulars of payments to persons specified under section 40A(2)(b) under this clause. He is not required to give his opinion on the unreasonably/excessiveness of the payments, and that is the Assessing Officer’s prerogative.

As the clause requires an auditor to report all the payments made to the specified persons, the payments made for capital purchases should also be considered for reporting under this clause.

Clause 26 of Form 3CD seeks details of liability incurred in respect of any sum referred to in clause (a), (b), (c), (d), (e), or (f) of Section 43B in the previous year and was paid or not paid on or before the due date for furnishing the Return of Income of the previous year.

Since the due date of filing of the tax audit report is one month before the due date of filing of return of income, it is practically not possible for the auditor to report if any payment is made after the filing of the tax audit report but before the due date of return of income.

To address this difficulty, the CBDT has inserted sub-rule (3) in Rule 6G to provide that the tax audit report may be revised by the person by getting a 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 the report which necessitates a recalculation of disallowance under Section 40 or Section 43B.

Circular No. 7/2006 dated 17^th July 2006 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, the nomenclature of the sum of converted interest will make no difference as the payment of converted interest will not represent the 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, however, can ask for a certificate from the assessee to be obtained from the lender bank or financial institution, etc., as evidence of ‘actual payment’ of interest to banks or financial institutions.

If the payment is being made by an advertising agency to the railways for putting up hoardings or display panels on railway premises, such payment will amount to the payment for the use of railway assets, as the payment is for the use of space on the premises. However, where an advertiser is making payment to the railways for the display of advertisements on hoardings or displays on railway premises, such a payment is in the nature of payment for the services of advertisement, and not for the use of railway assets.

Any sum payable to Indian Railways for the use of railways assets shall be allowed on a payment basis. Any sum payable to Indian Railways for its services shall be allowed as per the method of accounting regularly employed by the assessee.

It may be noted that there is a difference between the expenditure of any earlier year debited to the profit and loss account and the expenditure relating to an earlier year, which has crystallised during the relevant year. An expense, though related to previous periods, which has been determined in the current period, would not be considered a prior period item.

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.

In case of any conflict in the opinion of the statutory auditor and tax auditor, the opinion of the tax auditor shall prevail, and the information thereof shall be reported in Form 3CD.

Section 56(2)(ix) of the Income-tax Act provides for taxability of any sum received as an advance in the course of negotiations for the transfer of a capital asset, and such sum was forfeited due to non-transfer of such capital asset. A new Clause 29A to Form 3CD has been inserted to report any advance received from the buyer but forfeited due to the non-materialisation of a deal to the sale of the capital asset.

The auditor is not required to report any such forfeited amount in respect of a personal capital asset or stock-in-trade. Any advances received and forfeited towards the 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 the profit & loss account.

The requirement of reporting arises only on forfeiture of advance. If an advance has been received and has been outstanding for a considerable time, there is no requirement to report such amount unless and until it is forfeited by an act of the assessee.

Reporting obligation under Clause 29 is triggered if a closely held company issues unquoted shares at a premium. In such case, the excess of the premium over the fair market value of the shares shall be taxable as income from other sources in the hands of the company.

The DPIIT’s recognised start-ups are exempted from the applicability of Section 56(2)(viib) subject to the satisfaction of various conditions prescribed under the notification issued by the DPIIT¹. Therefore, Clause 29 shall apply only to closely held companies except DPIIT-recognised start-ups that satisfy the condition for exemption. If the private limited company in question is a DPIIT-recognised start-up eligible for exemption under section 56(2)(viib), the e-mail received from CBDT regarding eligibility for exemption must be verified by the tax auditor, and suitable remarks should be made regarding the applicability of the exemption and the non-applicability of Clause 29.

Section 56(2)(viib) and Notification issued by the DPIIT prescribe various conditions for a start-up to claim exemption from payment of tax under this provision. In case of failure to comply with these conditions, the consideration received from the issue of shares, as exceeding the fair market value of such shares, shall be deemed to be the income of the company chargeable to tax for the previous year in which such failure takes place. When the exemption is withdrawn, it shall be deemed that the company has underreported the income in consequence of the misreporting, and consequently, a penalty of an amount equal to 200% of tax payable on the underreported income shall be levied as per Section 270A.²

Clause 30C of Form 3CD requires the Tax Auditor to report “Impermissible Avoidance Arrangements” (IAA) 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.

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. If any arrangement has been declared to be an IAA, the tax auditor should further examine whether any transaction pertaining to or in connection with such declared IAA has taken place during the previous year under the audit. If yes, the tax auditor is expected to report this fact in the audit report. The tax auditor should also report tax benefits in the previous year arising from such transactions to all the parties to the arrangement. If he is unable to ascertain the tax benefit arising in the previous year, in the aggregate, to all the parties to the arrangement, he should indicate the same in Form 3CA or Form 3CB, as the case may be.

The auditor should examine if any reference has been made for declaring an arrangement as an impermissible avoidance arrangement in any earlier previous year. If such references have been made, the auditor should report the fact in Form 3CA or Form 3CB, as the case may be.

As per Clause 30A of Form 3CD, if any primary adjustment to the transfer price has been made as per Section 92CE(1), then the following details need to be given in Clause 30A of the form.

• Clause of Section 92CE(1) in which primary adjustment is made
• Amount of primary adjustment
• Is the excess money available with the associated enterprise required to be repatriated to India as per the provisions of Section 92CE(2)?
• If yes, whether the excess money has been repatriated within the prescribed time.
• If no, the amount of imputed interest income on such excess money has not been repatriated within the prescribed time.

Rule 10CB provides the rate of interest at which interest has to be calculated on excess money or part thereof that is not repatriated within the 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 the State Bank of India as of 1^st April of the relevant previous year, plus 325 basis points (plus 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 of 30^th September of the relevant previous year plus 300 basis points (plus 3%).

It is possible that the 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 but may also relate to the primary adjustment made in the earlier years.

As per Section 94B, if an Indian company or PE of a foreign company pays interest in excess of Rs. 1 crore to the associated enterprise, the deduction for interest shall be restricted to lower of the following:

• 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
• Interest paid or payable to AEs for that previous year.

The excess interest, which is disallowed, can be carried forward for 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 provision.

A new Clause 30B has been inserted in Form 3CD, which requires details of such interest payment with the following disclosures:

• Amount of expenditure by way of interest or of similar nature incurred.
• EBITDA during the previous year.
• Amount of expenditure by way of interest or of similar nature as per (a) above, which exceeds 30% of EBITDA as per (b) above.
• Details of interest expenditure brought forward as per Section 94B(4).
• Details of interest expenditure carried forward as per Section 94B(4).

This clause shall not be applicable in the case of a company that is engaged in the business of banking or insurance.

While computing the EBITDA, the figures as per the final audited stand-alone accounts of the company should be considered, not the figures adjusted for the income tax computation after various allowances and disallowances.

Loans or deposits are generally squared off by repayment of the sum to the lender. As in the case of advance for the sale of goods, the party’s ledger is squared off by the delivery of goods or services. Thus, an advance received against the agreement of sale of goods could not be deemed a loan or deposit. Accordingly, details of advances shall not be reported in Clause 31. Further, the ICAI, in the guidance note, has clarified that the advance received against the agreement of sale of goods is not a loan or deposit.

A loan can be with interest or without interest because no condition exists in the law of contract that a loan can be with interest only [Chandrakant H. Shah v. ITO [2009] 28 SOT 315 (Mum. – Trib.)]. Hence, even if the loans are taken free of interest, the information will be reported in Clause 31

Practically, it may not be possible to verify each receipt or repayment, reflected in the bank statement, as to whether the deposits or loans or specified advance has been received or repaid through cheque, bank draft, which is not an account payee cheque or account payee bank draft.

The tax auditor should obtain a suitable certificate from the assessee to the effect that the receipts or repayment referred to in Clause 31 were by the account payee cheque or account payee bank draft. If the reporting has been done based on the certificate of the assessee, the same shall be reported as an observation in clause 3 of Form No. 3CA and clause 5 of Form No.3CB, and the tax auditor should make a suggested comment in his report.

The ICAI Guidance Note on tax audit suggests the following comments in such case:

“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”.

The ICAI guidance note provides that the loans and deposits taken or accepted by 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 the purchase or sale of goods/services will not be treated as loans or deposits accepted.

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. The reporting in clause 34(c) should be in consonance with the reporting under clause 34(a) where the details of non-deduction are required to be reported.

Where the assessee is liable to pay interest u/s 201(1A) or 206C(7), the tax auditor should verify such amount from the books of account as of 31st March of the relevant previous year and also from PART G of the statement generated by the Department in Form No. 26AS. In case the assessee had disputed the levy or calculation of interest under TRACES, in Form No. 26AS, the tax auditor may re-calculate the amount of interest under section 201(1A) or section 206C(7) up to the audit report date for reporting under this clause and mention the fact in his observations paragraph provided in Form No. 3CA or Form No. 3CB, as the case may be.

Clause 35 requires quantitative details of ‘principal items’ of raw materials and finished goods. Therefore, information about petty items need not be given. Normally, items that constitute more than 10% of the aggregate value of purchases, consumption, or turnover may be classified as principal items.

If the assessee is engaged in the manufacture of goods, the yield and shortage cannot be ascertained if the input of raw materials and the output of finished goods are recorded in different units of measurement.

If the end product is a standard item and can be converted back and related to the input of the raw material in the same unit of measurement, it should be done to ascertain the shortage, yield, etc. If it is not possible, the tax auditor should state the fact under this clause.

Up to Assessment Year 2017-18, an assessee is required to report details regarding furnishing of statement of tax deducted or tax collected under clause 34(b) if such statements weren’t submitted within the prescribed time limits. However, w.e.f. the assessment year 2018-19, Form 3CD requires such details even if the assessee has submitted the statements within prescribed time limits.

Further, if the assessee failed to report all transactions in statements of TDS/TCS, then unreported transactions have to be disclosed in clause 34(b) of Form 3CD.

As per section 40(a)(ia), 30% of an expense is disallowed if tax is not deducted or after deduction is not paid to the government. Whether this provision shall be applicable only in the case of revenue expenditure or capital expenditure has been a matter of dispute between taxpayers and revenue. The revenue always argues for reducing the actual cost of a fixed asset if the tax has not been deducted for an expense that is capitalised as per provisions of section 43(1). In the cases of CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650 (Bom.) and Sumilon Industries Ltd. v. ITO [2010] 3 taxmann.com 187 (Ahmedabad-ITAT), it was held that disallowance under this section could be made only from an expense that is claimed in Profit and Loss Account. Since, in the case of capital expenditure, no deduction is claimed under the P/L account, there should not be any disallowance under section 40(a)(ia) in respect of such payment.

Clause 40 seeks the following details ratios for the previous year and the preceding previous year.

The ratios have to be given for the business as a whole and not product-wise. The relevant previous year’s figures are to be taken from the last previous year’s audit report. If the previous year is not subject to audit, nothing should be mentioned in the relevant column.

The tax auditor is not to sit in judgment over whether ratios calculated under clause 40 are fair for tax assessment purposes. He should simply comply with clause 40 to calculate and report the ratios with calculations.

Clause 32(b) applies only to closely held companies (companies in which the public is not substantially interested). It seeks information on the change in shareholding of the company in the previous year, due to which the losses incurred before the previous year cannot be allowed to be carried forward in terms of section 79.

Section 79 provides that the losses incurred by a closely held company in any year before the previous year shall not be carried forward and set off against the income of the previous year unless the shares of the company carrying at least 51% of the voting power are beneficially held by the same persons on the following two dates:

• On the last day of the previous year in which loss was incurred;
• On the last day of the previous year in which, such brought forward loss has to be set off.

The losses incurred by an eligible start-up shall be allowed to be carried forward and set off against the income of the previous year on the satisfaction of any of the two conditions specified below:

Condition 1: Continued 51% shareholding

In the year of set-off of losses, at least 51% of voting power is beneficially held by the same persons who held them as on the last day of the year in which loss was incurred; or

Condition 2: Continued 100% shareholders with the same voting rights

100% of shareholders, on the last day of the previous year in which loss was incurred, should continue to hold the same shares on the last day of the previous year in which loss is to be set off. Further, such losses should have been incurred for 10³ years beginning from the year of incorporation of the company.

Hence, the tax auditor should check whether a change in shareholding as envisaged by Section 79 of the Act has taken place, and the composition of shareholding as of the last day of the current previous year should be compared with the composition of shareholding as at the last day of each previous year in which loss was incurred. The comparison should be made by reference to the Register of Members. The carry-forward of loss incurred in respect of different previous years should be determined the previous year-wise.

Net profit represents the excess of revenue over expenses during a particular accounting period. When the result of this computation is negative, it is referred to as a net loss. It may be noted that the net profit to be shown in Clause 40 is net profit before tax. There should be consistency between the numerator and the denominator while calculating the ratios. Any significant deviation thereof should be pointed out in Para 3 of Form 3CA or Para 5 of Form 3CB.

Clause 41 seeks details of demand raised or refund issued during the previous year under any tax laws other than the Income-tax Act, 1961 and Wealth-tax Act, 1957 along with details of relevant proceedings.

As per Para 79.1 of the ICAI’s Guidance Note on tax audit, 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.

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. Further, if there is any adjustment of refund against any demand, the same should be reported.

Clause 25 of Form 3CD seeks reporting of any amount of profit chargeable to tax under section 41 and computation thereof.

New Para 45(1)(iv)(b) in GN 2023 draws the attention of tax auditors to the Supreme Court’s ruling in CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 102 Taxman 713 (SC), wherein it was held that expiry of the limitation period does not extinguish a debt. The only remedy is it bars the creditors from taking recourse to a legal remedy for enforcement of the debt. Hence, barring by limitation would not be tantamount to cessation of liability under section 41(1).

New Para 45.9 in GN 2023 requires that if any amount reported against section 41 is not routed through a profit and loss account or income and expenditure account, the tax auditor may include the said fact in the observation para [Para 3 of Form No.3CA/Para 5 of Form No. 3CB] of the audit report.

2023 GN inserted new Paras 46.8 to 46.11 and 46.13 to clarify what amounts to “actual payment” for section 43B and clause 26 purposes as under:

(a) Deferral of GST under incentive schemes may amount to actual payment

New Paras, 46.8 to 46.10 of the 2023 GN, clarify regarding deferment of GST under incentive scheme where the tax may be regarded as paid by virtue of legislation or schemes notified under the legislation. The 2023 GN recommends that where the tax auditor faces such situations under GST law, he may, after careful consideration of the facts, consider the treatment of GST dues based on principles laid down by following Circulars/judicial decisions under erstwhile Sales Tax Regime:

• 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 – CBDT’s Circular No 496 dated 25-09-87.
• The Apex Court, in the 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.
• 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 a loan may be allowed as a deduction in the assessment for the previous year in which such conversion has been permitted – CBDT’s Circular No 674 dated 29-12-93
• It was held by Gujarat HC in the case of CIT v. Goodluck Silicate Industries (P) Ltd [2004] 134 Taxman 715 that where sales tax due to the Government is converted as a loan to be repaid by the assessee, subsequently by instalments, it would amount to actual payment of sales tax.

(b) Furnishing of a bank guarantee is not “actual payment”

New Para 46.11 of GN 2023 clarifies 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 [CIT v. McDowell & Co Ltd (2009) 180 Taxman 514 (SC)]

(c) Advance deposit of duty is actual payment and qualifies for section 43B deduction

In the case of Modipon Ltd (2017) 87 taxmann.com 275, the Supreme Court has held that

“Even advance deposit of duty consistutes actual payment of duty within the meaning of section 43B and it is entitled to the benefit of deduction”.

Similarly, in the case of CIT v. Maruti Suzuki India Ltd (2013) 212 Taxman 603, the Delhi High Court held that

“advance deposits in Excise Personal Ledger Account cannot be disallowed under section 43B”.

New Paras 46.11, 46.12,46.14 and 46.15 of GN2023 clarify what kind of statutory dues fall within the ambit of section 43B, as under:

• In CIT v. Mc Dowell & Co Ltd (2009) 180 Taxman 514, the Apex Court has 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 acquiring a right of bottling IMFL does not fall within the purview of section 43B.
• The Apex Court in 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 the balance sheet date shall be considered relevant for the purpose of Section 43B.
• The Apex Court in 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”.

• The MP HC in the 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, that cannot be taken as tax as the same is collected for the services rendered”.

Paras 63.7 and 63.8 of 2022 GN pertained to clause 32(a) but were misprinted under clause 32(b). The 2023 GN deletes Paras 63.7 and 63.8 from under clause 32(b) and inserts them under clause 32(a) as New Paras 62.4 to 62.6. New Paras 62.4 to 62.6 of 2023 GN require as under:

(a) In case any undisclosed income is 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.

(b) The set-off shall not be available in case of both brought forward losses as well as unabsorbed depreciation.

(c) The Tax Auditor has to confirm and verify whether any search or survey has taken place or is undergoing based on the records of assessment proceedings of the assessee and accordingly check if any undisclosed income has been determined in the case of the assessee.

(d) 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.

(e) The tax auditor should make appropriate disclosure in the “Remarks” column of the annexure provided for clause 32(a) of Form 3CD. In case the utility of Form 3CD does not have a specific column for such reporting, the tax auditor, if deemed fit, can provide a note/qualification in Para 3 of Form 3CA/Para 5 of Form 3CB in this regard.

(f) 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.

Para 82.3 of 2023 GN clarifies as under:

(a) Headings of columns 3-6 and column 7 of Tabular format in clause 44 require reporting of “Expenditure in respect of entities registered under GST” and “Expenditure relating to entities not registered under GST”, respectively.

(b) Thus, the expenses within the scope of GST, i.e., which are tantamount to ‘supply’ in section 7 of the CGST Act, 2017, are only required to be reported in clause 44 in any of the columns from 3 to 7.

New Para 82.4 of 2023 GN requires the tax auditor to maintain a working paper of reconciliation of total expenditure as per P&L with the value of expenditure reported in clause 44 in the following manner:

* Details of all deductions & additions must be maintained for each sub-entity (GSTIN-wise) of the legal entity.

New para 82.16 of GN 2023 clarifies as follows:

(a) It is important to differentiate the ‘current status’ of a supplier’s registration from its status as it was at the time of supply.

(b) 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.

(c) Events occurring after the balance sheet date that alter the data relating to the year under audit do not alter the nature of the expenditure, that it is from registered suppliers.

(d) Tax Auditors may elect to extend their review up to a certain cut-off date or not at all. In either case, disclosure should be made of notes of the position with regard to

(i) known cancellations and

(ii) treatment in the disclosure considering the possibility of such cancellations.

Para 82.18 of GN 2023 clarifies that in case of multiple GST registrations of an entity, there is a likelihood of inter-branch supply, which is eliminated in the consolidated financials. Proper reconciliation for such types of transactions may be kept on record.