Chapter - Tax Audit & Ethical Compliances

CHAPTER 20
7
TAX AUDIT AND ETHICAL
COMPLIANCES
LEARNING OUTCOMES
After studying this chapter, you would be able to -

 appreciate the provisions relating to tax audit and other audit reports and
certificates under the Income-tax Act, 1961;
 examine the cases where the assessee is mandatorily required to get the
books of accounts audited;
 comprehend and apply the provisions of section 44AD read with Rule
6G to identify the Form No. under which tax audit report is to be furnished;
 comprehend the clause-by-clause reporting requirements in Form 3CD;
 analyse the ethical implications in case of failure to comply with the
reporting requirements.
© The Institute of Chartered Accountants of India

20.2 DIRECT TAX LAWS
CHAPTER OVERVIEW
Reports and Certificates
Tax Audit report u/s 44AB Other Reports and Certificates
Form 3CA Form 3CB
Examples
Form 3CD [to be Form 3CD [to be

furnished along with Form furnished along with Report in
Form Certificate in
3CA] Form 3CB] Audit report in Form 15CB
Form 10CCB for 10DA
certifying for
deductions u/s remittances
80-IA to 80-IE deduction
u/s abroad
80JJAA
20.1 INTRODUCTION
The provisions relating to tax audit were inserted by the
Finance Act, 1984 applicable w.e.f. 01.04.1985, marking a
milestone in the history of chartered accountancy profession
in the realm of professional opportunity in direct taxes. Since
tax audit was introduced to ensure the accuracy of books of
accounts maintained, which forms the basis of computation
of income, this significant responsibility was entrusted by the
Government to chartered accountants.
Time and again changes were made in the reporting requirements of tax audit report widening the
scope of tax audit. Considering the significant responsibility entrusted by the Government to
chartered accountants, the ICAI has issued Guidance Note on Tax Audit u/s 44AB of the Income-

TAX AUDIT AND ETHICAL COMPLIANCES 20.3
tax Act, 1961” offering guidance to members for conduct of tax audit, making of report and related
matters.
Audit Reports & Reports and Certificates under the provisions of the Income-tax Act, 1961
In addition to section 44AB, there are other provisions in the Income-tax Act, 1961 which require
furnishing of report by a chartered accountant. Section 12A(1)(b) requires audit of accounts of a
trust or institution and furnishing of audit report in Form 10B/10BB before the specified date for
claiming the benefit of exemption under section 11 or section 12. Also, the provisions permitting
deductions in respect of certain incomes under sections 80-IA to 80-IE of Chapter VI-A of the
Income-tax Act, 1961 require audit of accounts and furnishing of audit report in Form 10CCB before
the specified date, declaring that the undertaking or enterprise has satisfied the conditions stipulated
under the respective sections for claim of deduction and the amount of deduction claimed is as per
the provisions of the Income-tax Act, 1961.
For claiming deduction under section 80JJAA, report of a chartered accountant in Form 10DA has
to be furnished before the specified date certifying the deduction to be claimed. Further, every
company to which the provisions of minimum alternate tax under section 115JB applies has to furnish
a report in Form 29B from a chartered accountant certifying the correctness of computation of book
profit. There is a similar requirement for every person to whom the provisions of alternate minimum
tax under section 115JC are applicable. The report in this case would be in Form 29C certifying that
the adjusted total income and alternate minimum tax have been computed in accordance with the
provisions of the Act. In case of slump sale under section 50B, the assessee has to furnish in Form
3CEA, a report of a chartered accountant certifying the correctness computation of the net worth of
the undertaking or division.
Also, there are certain provisions under the Income-tax Act, 1961 which require certification by a
chartered accountant. For instance, certificate from a chartered accountant in Form 15CB is required
in case of remittances to non-residents where the remittance or aggregate of such remittances
exceed ` 5 lakh during the financial year and the remittances are chargeable under the provisions
of the Income-tax Act, 1961.
Government’s trust on competence and integrity of Chartered Accountants
The requirement of audit of accounts and furnishing of report of chartered accountant certifying the
correctness of computations under different provisions of the Income-tax Act, 1961 indicate the trust
reposed by the Government on a chartered accountant. Also, Revenue Authorities rely upon the
integrity of the chartered accountant to assist tax authorities. The decision rendered by the Delhi

High Court in the case of Additional CIT v. Jay Engineering Works Ltd. (1978) 113 ITR 389 indicates
the extent to which the income-tax authorities place reliance on the audit reports -
“It is quite competent for the income-tax authorities not only to accept the auditor’s report but also
to draw proper inference from the same. The income-tax authorities can, therefore, come to the
conclusion that, since the auditors were required by the statute to find out if the deductions claimed
by the assessees were supported by the relevant entries in their account books, the auditors must
have done so and must have found that the account books supported the claims for deductions.
Where the original account books of the assessee had been destroyed in a fire, it was held that the
Appellate Tribunal, in allowing a deduction, could rely upon other material mainly consisting of the
auditor’s reports from which it could be inferred that the deductions were properly supported by the
relevant entries in the account books”.
This clearly demonstrates the faith which the Government and the Revenue Authorities have in the
competency and integrity of a chartered accountant due to which various statutory duties and
responsibilities have been cast upon them under the provisions of the Act. It is in this context that
the conduct of the chartered accountant has to be appreciated. Chartered accountants cannot be
oblivious to their professional duties and sign audit reports and certificates in a mechanical manner.
Paras 13.3 and 13.4 of the Guidance Note on Tax Audit under section 44AB read as follows -
“The audit report given under section 44AB is to assist the income-tax department to assess the
correct income of the assessee. The tax auditor should keep necessary working papers about the
evidence on which he has relied upon while conducting the audit. Such working papers should
include the auditor’s notes on the following, amongst other matters:
(a) work done while conducting the audit and by whom;
(b) explanations and information given to him during the course of the audit and by whom;
(c) decision on the various points taken;
(d) the judicial pronouncements relied upon by him while making the audit report; and
(e) certificates issued by the client/management letters
The requirements of documentation are applicable in respect of tax audit conducted by chartered
accountants. For this purpose, attention is also invited to SA 230, Audit Documentation, which
provides that the tax auditor should prepare documentation that provides a sufficient and appropriate
record of the basis for the auditor’s report and evidence that the audit was planned and performed
in accordance with SA’s and applicable legal and regulatory requirements.”

A chartered accountant in practice would be deemed to be guilty of professional misconduct under

clauses (7) of Part I of the Second Schedule to the Chartered Accountant Act, 1949, if he does not
exercise due diligence, or is grossly negligent in the conduct of his professional duties. Further, as
per clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, a chartered
accountant in practice shall be deemed to be guilty of professional misconduct, if he fails to obtain
sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently
material to negate the expression of an opinion.
In this chapter, we would be first discussing the reporting requirements under different clauses of
Form 3CD. Thereafter, with the aid of case studies, the ethical aspects to be considered by a
chartered accountant while undertaking tax audit and issuing reports and certificates under the
different provisions of the Income-tax Act, 1961 and the Rules made thereunder have been
explained.
It may be noted that in certain clauses the tax auditor, in addition to the reporting requirements under
the said clauses, has to qualify his report in para 3 of Form 3CA or para 5 of Form 3B, as the case
may be.
It may also be noted that penalty under section 271J would be attracted in the hands of, inter alia,
an accountant for furnishing incorrect information in any report or certificate furnished under any
provision of the Income-tax Act, 1961 or Income-tax Rules, 1962. The quantum of penalty is
` 10,000 for each such report or certificate.
20.2 TAX AUDIT UNDER SECTION 44AB

Under section 44AB, it is obligatory in the following cases for a person carrying on business or
profession to get his accounts audited before the “specified date” by a Chartered Accountant:
(i) if the total sales, turnover or gross receipts in business exceeds ` 1 crore in any previous
year.
However, tax audit is not required in case of such person carrying on business whose total
sales, turnover or gross receipts in business < ` 10 crore in the relevant previous year (P.Y.),
if:-
- aggregate cash receipts including amount received for sales, turnover, gross receipts
in the relevant previous year ≤ 5% of such receipts; and

- aggregate cash payments including amount incurred for expenditure in the relevant
P.Y. ≤ 5% of such payments.
Payment or receipt by a cheque or by a bank draft which is not account payee, would be
deemed to be made in cash.
The twin conditions of paragraph with respect to cash receipts and cash payments is to be
satisfied together. Further, if the sales, turnover or gross receipts is > 10 crores, the person
is required to get his accounts audited even if these conditions are fulfilled.
(ii) if the gross receipts in profession exceed ` 50 lakhs in any previous year.
(iii) where the assessee is covered under section 44AE, 44BB or 44BBB and claims that the
profits and gains from business are lower than the profits and gains computed on a
presumptive basis in any previous year.
(iv) where the assessee is carrying on a notified profession under section 44AA, and he claims
that the profits and gains from such profession are lower than the profits and gains computed
on a presumptive basis under section 44ADA and his income exceeds the basic exemption
limit in any previous year.
(v) where the assessee is covered under section 44AD(4) and his income exceeds the basic
exemption limit in any previous year.
The persons mentioned above has to get his accounts audited by an accountant before one
month prior to the due date of filing return of income specified under section 139(1) and
furnish by that date, the report of such audit in the prescribed form duly signed and verified
by such accountant and setting forth such particulars as may be prescribed.
Section 44AB is not applicable in case of a person who declares profits or gains for
the previous year in accordance with the provisions of section 44AD(1) or 44ADA(1).
This section shall also not apply to an assessee, being a non-resident who derives income of
the nature referred to in section 44B i.e., from operation of ships or section 44BBA i.e., from
operation of aircraft.
For this purpose, the CBDT has prescribed under Rule 6G, Forms 3CA/3CB/3CD containing
forms of audit report and particulars to be furnished therewith. In the case of a person who
carries on business or profession and who is required by or under any other law to get his
accounts audited, Form 3CA has to be furnished. In the case of a person who carries on
business or profession whose accounts are not required to be audited under any other law,
Form 3CB has to be furnished. The particulars required to be furnished under section 44AB

is to be furnished in Form 3CD. In a case where the accounts of a person are required to be
audited by or under any other law before the specified date, it will be sufficient compliance if
the person gets his accounts audited under such other law before the specified date and also
furnishes by the said date, the report of audit required under such other law and a further
report by an accountant in Form 3CA.
Sales, Turnover and Gross Receipts
The provisions relating to tax audit under section 44AB apply to every person carrying on business,
if his total sales, turnover or gross receipts in business exceed the prescribed limit (` 1 crore or, in
certain specified cases, ` 10 crore) and to a person carrying on a profession, if his gross receipts
from profession exceed the prescribed limit (` 50 lakhs) in the previous year 2023-24. However, the
terms "sales", "turnover" or "gross receipts" are not defined in the Act, and therefore, the meaning
of the aforesaid terms has to be considered for the applicability of the section.
The words "Sales", "Turnover" and "Gross receipts" are commercial terms, they should be construed
in accordance with the method of accounting regularly employed by the assessee. Section 145(1)
provides that income chargeable under the head "Profits and gains of business or profession" or
"Income from other sources" should be computed in accordance with either cash or mercantile
system of accounting regularly employed by the assessee. The method of accounting followed by
the assessee is also relevant for the determination of sales, turnover or gross receipts.
Applying the above generally accepted accounting principles, a few typical cases may be
considered:
(i) Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can
be deducted from the turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and is not related to turnover. The same should not be deducted from the
figure of turnover.
(iii) Turnover discount is normally allowed to a customer if the sales made to him exceed a
particular quantity. This being dependent on the turnover, as per trade practice, it is in the
nature of trade discount and should be deducted from the figure of turnover even if the same
is allowed at periodical intervals by separate credit notes.
(iv) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount. If it is in the nature of commission on sales, the same cannot be deducted
from the figure of turnover.

(v) Price of goods returned should be deducted from the figure of turnover even if the returns are
from the sales made in the earlier year/s.
(vi) Sale proceeds of fixed assets would not form part of turnover since these are not held for
resale.
(vii) Sale proceeds of property held as investment property will not form part of turnover.
(viii) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form
part of turnover. However, if the shares, securities, debentures etc., are held as stock-in-
trade, the sale proceeds thereof will form part of turnover.
The term "gross receipts" is also not defined in the Act. It will include all receipts whether in cash or
in kind arising from carrying on of the business which will normally be assessable as business
income under the Act. Broadly speaking, the following items of income and/or receipts would be
covered by the term "gross receipts in business":
(i) Cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of the Government of India;
(ii) Any indirect tax re-paid or repayable as drawback to any person against exports under the
Customs and Central Excise Duties and Service Tax Drawback Rules, 1995;
(iii) The aggregate of gross income by way of interest received by the money lender;
(iv) Commission, brokerage, service and other incidental charges received in the business of chit
funds;
(v) Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling
etc.) and if the same is credited to a separate account in the books, only the net surplus on
this account should be added to the turnover for the purposes of section 44AB;
(vi) The net exchange rate difference on export sales during the year on the basis of the principle
explained in (v) above will have to be added;
(vii) Hire charges of cold storage;
(viii) Liquidated damages;
(ix) Insurance claims - except for fixed assets;
(x) Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or
not credited to miscellaneous income account;
(xi) Gross receipts including lease rent in the business of operating lease;

(xii) Finance income to reimburse and reward the lessor for his investment and services;
(xiii) Hire charges and instalments received in the course of hire purchase;
(xiv) Advance received and forfeited from customers.
(xv) The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession.
Note - Where the assessee carries on more than one business activity, the results of all business
activities should be clubbed together. In other words, the aggregate sales, turnover and/or gross
receipts of all businesses carried on by an assessee would be taken into consideration in
determining whether the prescribed limit (i.e., ` 1 crore & ` 10 crore for certain specified cases) as
laid down in section 44AB has been exceeded or not.
However, where the business is covered by section 44B or 44BBA, turnover of such business shall
be excluded. Similarly, where the business or profession is covered by section 44AD or 44ADA or
44AE and the assessee opts to be assessed under the respective sections on presumptive basis,
the turnover thereof shall be excluded.
Example 1. DB Pvt. Ltd. has a total turnover of ` 10.25 crore for the F.Y. 2023-24. Its receipts and
payment during the P.Y. 2023-24 are made otherwise than by way of cash.
DB Pvt. Ltd has to mandatorily get its books of account audited under section 44AB, since its
turnovers for the P.Y. 2023-24 exceed ` 10 crores, irrespective of the fact that its entire receipts
and payments are in a mode other than cash.
Example 2. DB Ltd. has a total turnover of ` 9 crores for the F.Y.2022-23. Out of this, only ` 7
crores is received during the previous year 2022-23. These amounts are received through account
payee cheque/bank draft and other permissible electronic modes. Apart from this, it also received
advance of ` 4 crores for the future supply of goods. Out of such advance, it received ` 46 lakhs in
cash. Assume that all payments are made otherwise than by way of cash. Is DB Pvt. Ltd. mandatorily
required to get its accounts audited?
For the purpose of computing the threshold limit of cash receipts, total receipts including the amount
received for turnover need to be considered. Since in the present case, ` 46 lakhs does not exceed
` 55 lakhs i.e., 5% of total receipts of ` 11 crores (` 7 crores plus ` 4 crores), DB Pvt. Ltd. is not
required to mandatorily get its accounts audited.

20.3 FORM 3CA & FORM 3CB

Form 3CA Form 3CB
Applicability Tax audit report is to be furnished Tax audit report is to be furnished in
in Form No. 3CA, in a case where Form No. 3CB, in case of a person who
the accounts of the business or carries on business or profession but
profession of a person have been who is not required by or under any
audited under any other law like the other law to get his accounts audited.
Companies Act, 2013 or the Limited In the case of companies having their
Liability Partnership Act, 2008. accounting year which is different from
the financial year, accounts of the
financial year are required to be
prepared and audited. The audit report
shall be in Form No. 3CB. This has
been clarified vide Circular No. 561
dated 22.5.1990.
Requirement In this case, it is not required for the In this case, the tax auditor is required
tax auditor appointed under section to give his opinion as to whether or not
44AB to give his opinion, as to the accounts audited by him give a true
whether or not the accounts give a and fair view:
true and fair view. It would only be (i) in the case of the balance sheet,
necessary for him to annex a copy of the state of affairs as at the last
of the audited accounts as well as a date of the accounting year.
copy of the audit report given by the
(ii) in the case of the profit and loss
statutory auditor along with his (tax
account, of the profit or loss of the
auditor’s) report in Form No. 3CA
assessee for the relevant
with statement of particulars
accounting year.
required to be furnished under
section 44AB is annexed in Form The second part of the report states
No. 3CD. that the statement of particulars
required to be furnished under section
The tax auditor is required to give
44AB is annexed to the audit report in
his opinion whether the prescribed
Form No. 3CD. The tax auditor is
particulars furnished in Form 3CD
required to give his opinion whether the
by the assessee are true and
prescribed particulars furnished by the
correct, subject to observations and
assessee are true and correct, subject
qualifications, if any.
to observations and qualifications, if
any
The tax auditor may have a difference
of opinion with regard to the particulars
furnished by the assessee These

differences are to be reported in Para 5

of Form 3CB. [Para 18.6 of the
Guidance Note on Tax Audit]
Revision of As per Rule 6G(3), the report of audit furnished in Form 3CA/3CB along with
Tax audit particulars in Form 3CD may be revised by the person by getting revised
report report of audit from an accountant, duly signed and verified by such
accountant, if there is payment by such person after furnishing of such report
which necessitates recalculation of disallowance under section 40 or section
43B. The revised report of audit has to be furnished before the end of the
relevant assessment year for which the report pertains.
Thus, a scenario may arise where, after issuing the audit report, but before
the due date for filing the return u/s 139(1), the assessee may make payment
of tax deducted at source or of tax, duty, cess, fee or other payments referred
to in section 43B, deduction for which is allowed only on actual payment basis.
A question may arise as to whether the revised audit report can be revised
again. There is no limit to revise the tax audit reports.
20.4 FORM 3CD – STATEMENT OF PARTICULARS

REQUIRED TO BE FURNISHED UNDER SECTION 44AB
This form prescribes the statement of particulars required to be furnished under section 44AB of the
Income-tax Act, 1961 in case of both corporate and non-corporate assessees carrying on business
or profession as Annexure to the audit report in Form 3CA or Form 3CB. This form has been
designed to facilitate the determination of assessee’s income from business or profession.
As per Para 19.3 of the Guidance Note on Tax Audit, while furnishing the particulars in Form No.
3CD, it would be advisable for the tax auditor to consider the following:
(a) If a particular item of income/expenditure is covered in more than one of the specified clauses
in the statement of particulars, care should be taken to make a suitable cross reference to
such items at the appropriate places.
(b) If there is any difference in the opinion of the tax auditor and that of the assessee in respect
of any information furnished in Form No. 3CD by the assessee, the tax auditor may consider
stating both the view points and also the relevant information related to matter in order to
enable the tax authority to take a decision in the matter.
(c) If any particular clause in Form No. 3CD is not applicable, he should state that the same is
not applicable.

(d) In computing the allowance or disallowance, he should keep in view the law applicable in the
relevant year, even though the form of audit report may not have been amended to bring it in
conformity with the amended law.
(e) In case the assessee has furnished prescribed particulars in part or piecemeal or relevant
form is incomplete or the assessee does not give the information against all or any of the
clauses, the auditor should not withhold the audit report. In such a case, he should qualify his
report in para 3 of Form 3CA or para 5 of Form 3CB as applicable on matters in respect of
which information is not furnished or if furnished, are inadequate/insufficient.
(f) The information in Form No. 3CD should be based on the books of accounts, records,
documents, information and explanations made available to the tax auditor for his
examination.
(g) In case the auditor relies on a judicial pronouncement, he may mention the fact as his
observations in para 3 of Form No. 3CA or para 5 provided in Form No. 3CB, as the case
may be.
(h) Where in respect of any particular aspect, reporting is required at more than one clause, in
that case, information may be furnished at any one of the clause and reference may be given
at other clause.
Clause by clause analysis of Form 3CD
Clause Particulars Reporting requirements in relation to the relevant

clause
PART A
1. Name of the (i) The name of the assessee whose accounts are being
assessee audited under section 44AB should be given as
specified in PAN.
(ii) In case there is a different trade name, the same
should be reported.
(iii) If the tax audit is in respect of a branch, name of such
branch should be mentioned along with the name of
the assessee.
(iv) In case of change in the name of the assessee, if the
change has taken place during the financial year,
name at the end of the financial year should be
stated. However, if the change in name has taken
place after the close of the financial year but before
signing of tax audit report, name as at the year
ending date should be mentioned. In either case, fact

of name change should be suitably clarified as an

observation in audit report.
2. Address (i)
The address to be mentioned should be the same as
has been communicated by the assessee to the
Income-tax Department as on the date of signing of
the audit report.
(ii) If the tax audit is in respect of a branch or a unit, the
address of the branch or the unit should be given.
(iii) In the case of a company, the address of the
registered office should be stated.
(iv) In the case of other assessees, the address of the
principal place of business should be stated.
The tax auditor should verify the relevant
details of the assessee from the available
income tax records or from the profile of the
assessee on Income-tax portal. In case of
difference, the same should be given as an observation in
the audit report.
3. Permanent Account (i) The permanent account number (PAN) allotted to
Number or Aadhaar the assessee should be indicated.
Number (ii) Clause further asks to mention Aadhaar number (in
case of Individuals) as an alternative.
(iii) It may be noted that in the e-filing format, PAN is a
mandatory field and Aadhaar is an optional field.
4. Whether the The auditor is required to examine from the appropriate
assessee is liable to evidence, the registration number or any other
pay indirect tax like identification number, if any.
excise duty, service For any indirect tax, if multiple registration numbers are
tax, sales tax, goods available, all registration numbers should be examined by
and services tax, the tax auditor and duly reported.
customs duty, etc. If The auditor should obtain the
yes, please furnish list of indirect taxes applicable on
the registration him if the different types of indirect
number, GST number taxes are leviable on him and that too in multiple states.
or any other
identification number It is recommended that the tax auditor should obtain from
allotted for the same the assessee:
- list of indirect taxes applicable on him
- copy of registration certificates issued by the various
authorities clearly mentioning the registration number
under that relevant law.
The auditor should obtain the list of indirect taxes

applicable on him if the different types of indirect taxes are

leviable on him and that too in multiple states.
It is recommended that the tax auditor should obtain from
the assessee:
The auditor should obtain the list of indirect taxes
applicable on him if the different types of indirect taxes are
leviable on him and that too in multiple states.
It is recommended that the tax auditor should obtain from
the assessee:
- list of indirect taxes applicable on him
- copy of registration certificates issued by the various
authorities clearly mentioning the registration number
under that relevant law.
Where indirect tax law does not require any registration,
appropriate identification number may be reported in this
clause. For example, in Customs Act, 1962, since there is
no registration number, a copy of Importer Exporter Code
(IEC) may be obtained, and information be accordingly
furnished.
5. Status The status of the assessee is to be mentioned as included
in the definition of person in section 2(31) namely,
individual, Hindu Undivided Family, company, firm, an
association of persons or a body of individuals, whether
incorporated or not, a local authority or artificial juridical
person.
It should not be confused with the residential status. In
case of proprietorship concern, the status shall be quoted
as individual.
6 Previous year The relevant previous year should be mentioned i.e.,
starting from 1st April to 31st March. If the business is
started during the year, the date of starting of business to
31st March.
In case of amalgamations, demergers, reconstitution, new
business, closure of existing business etc., the date of
beginning and ending of the previous year may be
different, the auditor may accordingly mention the relevant
date of beginning and ending of the previous year.
7. Assessment Year The assessment year relevant to the previous year for
which the accounts are to be audited should be mentioned.
8. Indicate the relevant The auditor is required to mention the relevant clause of
clause of section section 44AB under which the audit has been conducted.
44AB under which In case the assessee is carrying on business and his total

the audit has been sales, turnover or gross receipts as the case may be,
conducted exceeds one crore rupees in the relevant previous year,
the auditor is required to mention clause (a) of section
44AB.
If the assessee is carrying on profession and his gross
receipts exceed fifty lakh rupees in the relevant previous
year, the auditor is required to mention clause (b) of
section 44AB. Likewise, if the audit under section 44AB is
being conducted by virtue of provisions of section 44AE,
44BB and 44BBB, the auditor is required to mention clause
(c). For audit being conducted by virtue of provisions of
section 44ADA, clause (d) is to be mentioned under this
head. Where a person is required by or under any other
law to get his accounts audited, say a company, a society
etc. then audit under section 44AB is conducted under the
third proviso to section 44AB and not under clause (a) or
(b) of that section.
8a Whether the Assessee is required to pay income-tax at the rates
assessee has opted specified in the annual Finance Act. However, sections
for taxation u/s 115BA, 115BAA, 115BAB, 115BAD and 115BAE provide
115BA/ 115BAA/ option to the assessee to pay tax at special rates and
115BAB/ 115BAC1/ forego certain deductions, exemptions etc. The assessee
115BAD? can opt to pay tax under the rates prescribed in the
Finance Act or the one made available by any of the
aforesaid sections.
The tax auditor has to mention whether the assessee has
opted for taxation under any of the aforesaid sections and
in case answer is Yes, then, he has to select the
appropriate section. With effect from A.Y. 2024-25, tax
shall be payable as per section 115BAC, unless the
assessee being an individual, HUF, AOP (other than co-
operative society) or BoI or an artificial Juridical person
exercises the option to shift out of the default scheme and
pay tax under the optional tax regime as per the normal
provisions of the Act.
Companies can pay tax as per the normal provisions of the
Income-tax Act, 1961 or opt to pay tax as per section
115BAA or section 115BAB, subject to fulfillment of
conditions stipulated thereunder and forgoing certain
exemptions/deductions. Likewise, Co-operative Societies
can pay tax as per the normal provisions of the Income-
1 With effect from A.Y. 2024-25, tax shall be payable as per section 115BAC unless the assessee being an individual, HUF,
AOPs (other than co-operative society) or BoIs or an artificial Juridical person exercises the option to shift out of the default
scheme and pay tax as per the normal provisions of the Act.

tax Act, 1961 or opt to pay tax as per section 115BAD or

section 115BAE, subject to fulfillment of conditions
stipulated thereunder and forgoing certain
exemptions/deductions.
The tax auditor has to examine the income tax return of
the previous year to verify the option which has been
exercised by the assessee.
For the purpose of reporting under clause
8a, the tax auditor should verify whether –
 the application for exercise of
option in the prescribed form being 10-IB, 10-IC, 10-
ID, and 10-IF has been furnished electronically under
section 115BA, 115BAA, 115BAB and 115BAD.
 In case of section 115BAC, the auditor should verify
whether the assessee has furnished in Form 10-IEA
the option to shift out of the default tax scheme under
section 115BAC and pay tax under the optional tax
regime as per the normal provisions of the Act, is filed
by the assessee.
 In case, the assessee has not filed the relevant form,
written representation from the assessee should be
obtained whether he will be availing the concessional
regime or otherwise and based on written
representation, the reporting under this clause
should be made.
 Where reporting is made solely on the basis of
assessee’s representation, the fact should be stated
in paragraph (3) of Form 3CA or paragraph (5) of
Form 3CB.
PART B
9. (a) If firm or association Where the assessee is a firm or association of persons
of persons, indicate (AOP) or body of individuals, the names of partners of the
name of firm or members of the AOPs or BOIs and their profit
partners/members sharing ratios (%) have to be stated.
and their profit In case where the partner of a firm or the member of AOP/
sharing ratios. BOI acts in a representative capacity, the name of the
beneficial partner/member should be stated.
Thus, the details of partners or members during the entire
previous year will have to be furnished.
 The particulars in this clause should
be verified from the instrument or agreement
or any other document evidencing
partnership or AOPs including any supplementary

documents or other documents effecting such

changes.
 The tax auditor should obtain certified copies of the
deeds, documents, understanding, notice of changes
etc. including certified copies of the
acknowledgment, if any, evidencing filing of
documents with the concerned authorities, if
registered.
 In case of certain AOPs/BOIs, where shares are not
precisely ascertainable during the previous year
resulting in a situation wherein the shares of
members are indeterminate or unknown, the relevant
fact should be stated.
(b) If there is any change If there is any change in the partners of the firm or
in the partners or members of the AOPs/ BOIs or their profit or loss sharing
members or in their ratio since the last date of the preceding year, the
profit sharing ratio particulars of such change must be stated. All the changes
since the last date of occurring during the entire previous year must be stated.
the preceding year,
the particulars of
such change.
10. (a) Nature of business or The principal line of each business is to be reported. If the
profession (if more assessee is in more than one business, the information
than one business or has to be furnished in respect of all business. i.e., the
profession is carried sector in which the business or profession falls such as
on during the manufacturing, trading, commission agent, builder,
previous year, nature contractor, professionals, service sector, financial service
of every business or sector or entertainment industry. In case a person belongs
profession). to service sector, the nature of each type of service should
be broadly stated. Thereafter, the auditor is required to
mention the sub-sector pertaining to the sector selected.
The code is to be mentioned against the nature of
business pertains to the main area of business activity.
(b) If there is any change Any material change in the business should be precisely
in the nature of set out. The change will include change from manufacturer
business or to trader as well as change in principal line of business.
profession, the Likewise, any addition to or other than temporary
particulars of such discontinuance of, a particular line of business may also
change. amount to change requiring reporting. However,
temporary suspension of the business may not amount to
change and therefore need not be reported.
A review of business report or the minutes
of meetings would enable the tax auditor to

note the changes, if any. He may make necessary

enquiries on this basis and seek information to determine
whether any change has occurred or not. If need be, the
tax auditor should get a declaration from the assessee
regarding change in the nature of business.
In case of a business reorganization/reconstruction, if
there is a similar line of activity, no reference needs to be
made. However, if a new line of activity emerges, the same
may be stated. If any line of activity is being hived off in
case of restructuring, the same may be reported.
11. (a) Whether books of As per section 2(12A), books or books of account includes
account are ledgers, daybooks, cash books, account-books and other
prescribed under books, whether kept in the written form or in electronic
section 44AA, if yes, form or in digital form or as print-outs of data stored in such
list of books so electronic form or in digital form or in a floppy, disc, tape
prescribed. or any other form of electro-magnetic data storage device.
Rule 6F has prescribed the books of account and other
documents to be kept and maintained by a person carrying
on certain professions specified in section 44AA(1).
Section 44AA(2) provides that persons carrying on
business or profession, other than those specified in
section 44AA(1), shall keep and maintain such books of
account and other documents as may enable the
Assessing Officer to compute his total income in
accordance with the provisions of the Income-tax Act, if
his income from business or profession exceeds the
monetary limits prescribed under section 44AA(2) or his
total sales, turnover or gross receipts in business or
profession exceed the monetary limits prescribed under
section 44AA(2) in any one of the three years immediately
preceding the previous year.
(b) Lists of books of The address at which the books so maintained are kept is
account maintained also required to be mentioned under this clause. In case
and the address at the books of accounts are kept at more than one location
which the books of then the details of address of each such location along
account are kept. with the detail of books of account maintained thereof is to
(In case books of be stated.
account are In case, where books of account are maintained and
maintained in a generated through computer system, the details of
computer system, address of the place where the server is located or the
mention the books of principal place of business/Head office or registered office
account generated by by whatever name called is to be mentioned under this
such computer clause.
system. If the books

of account are not Where the books of account are stored on cloud or online,
kept at one location, IP address (unique) of the same may be reported. It is to
please furnish the be specified which books of account have been
addresses of maintained in computer system and which of the records
locations along with have been maintained in hard copy form.
the details of books of The tax auditor should obtain from the
account maintained assessee a complete list of books of
at each location). account and other documents maintained
by him (both financial and non-financial records) and make
appropriate marks of identification to ensure the
identification of the books and records produced before
him for audit. The list of books of account maintained by
the assessee should be given under this clause.
(c) List of books of Books of accounts examined would constitute the books
account and nature of of original entry and the other books of account. In addition
relevant documents to the list of books of accounts examined, the extent of
examined. examination is also to be reported.
Whereas sub-clause (b) requires furnishing list of books of
account maintained by the assessee and address of the
place where books of account are kept, sub-clause (c)
requires the tax auditor to state a list of books of account
and the nature of relevant documents that he has
examined.
The list of books of account prescribed,
maintained and examined has to be stated
under this clause. There may be difference
between the three lists. For example, books of account
may have been prescribed but all the prescribed books
might not have been maintained or the entire books of
accounts maintained might not have been produced for
examination. The tax auditor should exercise his
professional judgment in order to arrive at the conclusion
whether such a situation warrants any disclosure or
qualifications while forming his opinion on the matters
covered by reporting requirements in Form No. 3CB.
12. Whether the profit or Where the profit and gains of the business are assessable
loss account includes to the tax under presumptive basis under any of the given
any profits and gains sections, the amount of such profit and gains credited to
assessable on the profit and loss account should be stated under this
presumptive basis, if clause.
yes, indicate the Express mention of section 44ADA is not made in Form
amount and the No. 3CD. However, there is a residuary clause requiring
relevant section reporting under ‘any other relevant section’. Therefore,
[44AD, 44AE, 44AF, profits and gains assessable under section 44ADA should

44B, 44BB, 44BBA, also be reported under this clause.

44BBB, Chapter XII- The amount to be mentioned in this clause means amount
G (provisions relating included in the profit and loss account. The tax auditor is
to shipping not required to indicate as to whether such amount
business), First corresponds to the amount assessable under the relevant
Schedule (Insurance section relating to presumptive taxation. As such, the
business) or any report requirement gets satisfied, if the amount as per
other relevant profit and loss account is reported.
section]. Even where the assessee opts for
presumptive taxation, the tax auditor
should consider to impress upon the
assessee that it would be advisable to maintain some
basic records to support the turnover/gross receipts
declared for presumptive taxation.
13. (a) Method of accounting Section 145 provides that the income chargeable under
employed in the the head “Profits and gains of business or profession” or
previous year. “Income from other sources” must be computed in
accordance with either cash or mercantile system of
accounting regularly employed by the assessee.
The hybrid system of accounting, viz. mixture of cash and
mercantile, is not permitted. However, the assessee may
adopt cash system of accounting for one business and
mercantile system of accounting for other business. Once
the choice of method of accounting is decided, the
assessee must follow consistently the method of
accounting employed.
(b) Whether there had If there is any change in the method of accounting, that is
been any change in to be reported and the effect thereof i.e., increase or
the method of decrease in profits has to be stated under this clause.
accounting employed The tax auditor should apply reasonable
vis-à-vis the method checks to the earlier year’s accounts to
employed in the ascertain whether there is any change in
immediately the method of accounting as compared to that of the year
preceding previous under audit, after obtaining a written confirmation from the
year. assessee as to the method of accounting followed.
It may be noted that in view of Section 128 of the
Companies Act, 2013, every company is required to keep
books of account on accrual basis.
Note - A change in an accounting policy does not amount
to change in method of accounting. A change in the
method of valuation of stock will be a change in accounting
policy and hence, such change need not be mentioned in
clause 13(b).

(c) If answer to (b) above In case there is any change in the method of accounting,
is in affirmative, give employed vis-à-vis the method employed in the
details of such immediately preceding previous year, the details of the
change, and the same, along with impact on the profit for the year need to
effect thereof on the be mentioned.
profit or loss with As regards the impact on profit the concept of materiality
increase/ decrease in is the basic governing factor. If it is not possible to quantify
profits. the effect of the change in the method of accounting,
appropriate disclosure should be made under this clause.
(d) Whether any In exercise of the powers conferred by section 145(2), the
adjustment is Central Government notified the ICDSs to be followed by
required to be made all assessees (who are required to get their books of
to the profits or loss account audited) following the mercantile system of
for complying with the accounting, for the purposes of computation of income
provisions of income chargeable to income-tax under the head “Profits and
computation and gains of business or profession” or “Income from other
disclosure standards sources”.
notified under section This clause requires the auditor to state whether any
145(2)? adjustment is required to be made to profit and loss for
complying with the provisions of income computation and
disclosure standards (ICDS). Such adjustment is required
to be stated separately.
The increase/decrease in profit and net effect should be
reported in the absolute terms. The tax auditor should
obtain draft computation of the total income and
disclosures required under ICDS.
For the purpose of clause (d), the tax
auditor should obtain draft computation of
total income and disclosures required
under ICDS. Based on information and books of account,
the tax auditor should consider whether any adjustment is
required to be made to the profit or loss and if the answer
is in affirmative, to state ‘yes’ otherwise to state ‘no’.
While reporting, auditor has to consider draft of income
computation provided by the assessee. This fact should
be mentioned in Audit report in paragraph 3 of Form No.
3CA and paragraph 5 of Form No. 3CB.
(e) If answer to (d) above If answer to ‘d’ above is in affirmative, the tax auditor is
is in the affirmative, required to quantify the amount of adjustment against
give details of such each ICDS in clause ‘e’.
adjustments ICDS Tax auditor may refer technical guide on
wise with increase or ICDS issued by the ICAI in July, 2017. In
decrease in profit and working paper file of ICDS, checklist should

net effect. be prepared and maintained alongwith computation

working for any increase/decrease in income as per ICDS.
Also, last year tax audit report should be reviewed to
ascertain any effect in current year.
(f) Disclosure as per This clause requires disclosure of significant income
ICDS (to be given computation and disclosure policies adopted by a person
ICDS wise) for computation of income chargeable under the head
“Profits and gains from business or profession” or “Income
from other sources”.
In this clause, if information furnished is
based on income computation furnished by
the assessee, appropriate disclosure of
this fact should be mentioned in Form No. 3CA or 3CB as
the case may be.
14. (a) Method of Ascertain the method of valuation of closing stock
valuation of employed during the year. Where there is change in the
closing stock basis of determining cost, market value or net realizable
employed in the value even though there is no change in the method of
previous year. valuation. The auditor should understand the procedure
(b) In case of followed by the assessee in taking the inventory of closing
deviation from the stock at the end of the year and valuation thereof.
method of The tax auditor should –
valuation  obtain the inventory of closing
prescribed under stock, indicating the basis of valuation
section 145A, and thereof for reporting on the method of valuation of
the effect thereof closing stock.
on the profit and  review the methods of valuation adopted for valuation
loss of closing stock and compare the same with the
method prescribed under section 145A.
 obtain from the assessee, the inventory valuation
sheet of the stock in trade giving quantitative details,
method of valuation, rate and total value of each item.
 ascertain whether the method of valuation is such
that the value of closing stock includes the amount of
any tax, duty or cess actually paid or incurred by the
assessee to bring the goods to the place of its
location and conditions as on the date of valuation.
15. Give the following For furnishing the particulars required under this clause,
particulars of the capital the provisions of section 2(47) [meaning of transfer],
asset converted into stock- section 45(2) [conversion of capital asset into stock-in
in-trade: trade deemed to be transfer of the previous year in which
conversion took place], proviso below to section 47(iv) &

(a) Description of capital (v) [transfer of capital asset by a holding company to its
asset; subsidiary or vice versa not considered as transfer by
virtue of clause (iv) or (v) of section 47 if condition
(b) Date of acquisition;
specified thereunder are satisfied. However, such benefit
(c) Cost of acquisition; would not be available where capital asset is transferred
(d) Amount at which the by a subsidiary company to its holding company or vice
asset is converted versa as stock-in trade] and section 47A [Where transfer
into stock-in-trade. of capital asset by a holding company to its subsidiary or
vice versa not considered as transfer by virtue of clause
(iv) or (v) of section 47 but such capital asset is converted
into stock-in trade within eight years from the date of
transfer, such capital gain would be deemed to be capital
gains of the previous year in which such transfer took
place] have to be kept in mind.
The particulars to be stated under this clause should be
furnished with respect to the previous year in which the
capital asset have been converted into stock in trade. The
clause does not require the details regarding the taxability
of capital gains or business income arising from deemed
transfer. The description of the capital assets is required
to be mentioned, for example, shares, securities, land,
building, plant, machinery etc.
For ascertaining the correct date, the tax
auditor will have to refer the accounts of the
financial year in which such capital assets
is acquired. The date is important to determine whether
assets is long term capital assets or short term capital
assets.
In this clause, the cost of acquisition as per books of
accounts is to be mentioned. In case of depreciable
assets, the carrying cost appearing in the books will be
written down value. But the value to be reported should be
the original cost of acquisition. The amount recorded in
the books at which the asset is converted into stock in
trade should be stated. Such an amount may not be fair
market value as on the date of conversion.
The valuation of stock-in-trade is to be examined with
reference to AS-2: Valuation of Inventories or Ind AS-2:
Inventories, as applicable.
16 Amounts not credited to the
profit and loss account,
being –
(a) The items falling Under this clause various amounts falling within the scope
within the scope of of section 28 which are not credited to the profit and loss

section 28; account are to be stated.

Example. A Ltd., a manufacturing company sponsored the
Dubai trip of Mr. B, seller of construction material, along
with his spouse, upon achieving of sales target set by the
company. Neither any money received in the books, nor
any expenses incurred through the books.
The same is chargeable to tax as benefit or perquisite
arising from business or profession by virtue of section
28(iv). Thus, the same is required to be reported though it
is not credited in the profit and loss account.
(b) The proforma credits, For this clause, the tax auditor should examine all relevant
drawbacks, refund of correspondence, records, assessee’s particulars on portal
duty of customs or of the department and evidence in order to determine
excise or service tax, whether any particular refund/claim has been admitted as
or refund of sales tax due and accepted during the relevant financial year. The
or value added tax words ‘admitted by the concerned authorities’ would mean
where such credits, ‘admitted by the authorities within the relevant previous
drawbacks or refunds year'. Credits/claims which have been admitted as due
are admitted as due after the relevant previous year need not be reported here.
by the authorities If the assessee is following cash basis of accounting, it
concerned; should be clearly reported by the auditor that acceptance
of claim during the relevant year without actual receipt has
no significance.
Where such amounts have not been credited in the profit
and loss account but netted against the relevant
expenditure/income heads, such fact should be clearly
brought out.
(c) Escalation claims The escalation claim accepted during the previous year
accepted during the but not credited to the profit and loss account has to be
previous year; stated here.
Escalation claims would normally arise pursuant to a
contract (including contracts entered into in earlier years),
if so permitted by the contract. Only those claims to which
the other party has signified unconditional acceptance
could constitute accepted claims. Mere making of claims
by the assessee or claims under negotiations or claims
which are sub-judice [CIT v. Hindustan Housing & Land
Development Trust Ltd. [1986] 161 ITR 524 (SC)] cannot
constitute claims accepted.
(d) Any other item of Any other item which the auditor considers as an income
income; based on his verification of records and other documents
and information gathered, but which has not been credited
to the profit and loss account.

If employees contribution to any provident fund or

superannuation fund or any other fund is not paid on or
before the due date under the respective Act, then it
becomes income of the assessee. Such information is to
be stated in this clause. Similar information is also
furnished in clause 20(b) of Form 3CD, therefore, cross
referencing may be required.
Note - In giving the details under sub-clauses (c) and (d),
due regard should be given to AS-9: Revenue
Recognition/Ind AS 115: Revenue from Contracts with
Customers, as applicable.
(e) Capital receipt, if any. The tax auditor should use his professional expertise and
judgement in determining whether a receipt is capital or
revenue. The capital receipts are not generally credited to
the profit and loss account, hence, the auditor should take
enough care to check out any transaction generating
receipts of capital nature.
Note – The information under sub-clauses (a), (d) and (e)
of clause (16) is to be given with reference to the entries
in the books of account and records made available to the
tax auditor for the purpose of tax audit under section 44AB.
The auditor should check thoroughly the bank account of
the assessee and also the cash book to find out any credits
regarding any income earned but not credited to the profit
and loss account of the assessee. The tax auditor may
obtain a management representation in writing from the
assessee in respect of all items falling under this clause
The tax auditor may use his professional
expertise and judgement in determining
whether the receipt is taxable or not for the
purpose of reporting under sub-clauses (a) to (d) of clause
16 and may report in the observation para of audit report,
disclosing the basis of the same.
17. Where any land or Where any land or building or both is transferred during
building or both is the previous year for a consideration less than the value
transferred during the adopted or assessed or assessable by any authority of a
previous year for a State Government referred to in section 43CA or 50C, the
consideration less auditor is required to furnish the following details:
than value adopted or (a) Details of property
assessed or (b) Consideration received or accrued
assessable by any
(c) Value adopted or assessed or assessable.
authority of the State
Government referred The tax auditor has to furnish the details about the nature
to in section 43CA or of property i.e., whether the property transferred during the

50C, please furnish year is land or building along with the address of such
details of property, property. The tax auditor should obtain the list of all
consideration properties transferred by the assessee during the previous
received or accrued year.
and value adopted or The tax auditor has to furnish the amount of consideration
assessed or received or accrued, during the relevant previous year of
assessable. audit, in respect of land/building transferred during the
year as disclosed in the books of account of the assessee.
For reporting the value adopted or assessed or
assessable, the tax auditor should obtain from the
assessee relevant information with regard to sale of Land
or Building or both during the previous year.
In case the property is not registered, the auditor may
verify relevant documents from relevant authorities or
obtain third party expert like lawyer, solicitor
representation to satisfy the compliance of section 43CA/
section 50C. In exceptional cases where the auditor is not
able to obtain relevant documents, he may state the same
through an observation in his report in Form 3CA/CB.
18. Particulars of With respect to this clause, the tax auditor is required to
depreciation examine the following:
allowable as per the (a) Classification of the asset
Income Tax Act, (b) Classification thereof to a block
1961 in respect of
(c) actual cost or written down value
each asset or block of
asset, as the case (d) The date of acquisition and the date on which it is put
may be, in the to use
following form:- (e) The applicable rate of depreciation
(f) The additions / deductions and dates thereof
(g) Adjustments required – specified as well as on
account of sale, etc.
(a) Depreciation of For the purpose of determining the rate of depreciation,
asset/block of assets the tax auditor has to examine the classification of the
assets into various blocks. The tax auditor should ensure
that the classification as made by the assessee is in
consonance with legal principles.
In this connection, he should traverse through judicial
pronouncements as well as through the past assessment
history of the assessee, and upon an analysis thereof, if
he comes to the conclusion that the matter is not free from
doubt or controversy, he has to indicate the fact in his
report by way of suitable qualification. It may also be
necessary to rely upon technical data for determining the
proper classification of the block. Since the tax auditor is

not a technical expert, he has to obtain suitable certificate

from concerned experts.
(b) Rate of depreciation Once the classification has been ascertained and checked
properly, the rates applicable as per the Income-tax Rules,
1962 follow as a natural corollary. The tax auditor must
have due regard to the Income-tax Rules, 1962, relevant
clarifications from the Department and judicial decisions.
Under sub-clauses (a) to (b), information in
respect of description of assets, block of
assets under which the concerned asset is
classifiable and the rate of depreciation are to be stated.
This will include information about the existing assets. In
respect of the existing assets, the computation of
depreciation would involve stating the opening written
down value of the block of assets which should be taken
from the relevant income-tax records. The tax auditor
should ensure the opening block of assets matches with
the income-tax return filed for the immediately preceding
previous year.
(c) Actual cost or written For the purpose of determination of actual cost, the tax
down value, as the auditor has to be guided by the relevant legal provisions.
case may be. Since determination of actual cost has got accounting
implications, he can rely on the relevant Accounting
Standards and Guidance Notes. Depreciation is also
allowable on intangible assets like know-how, patents,
copyrights, trademarks, licenses, franchises or any other
business or commercial rights of similar nature. There may
be intangible assets like know-how, patents, copyrights,
trade marks, licences, franchises or any other business or
commercial rights of similar nature for which the assessee
might have incurred costs. From 01.04.2021, intangible
asset being goodwill does not qualify for depreciation. The
tax auditor should examine this and the basis on which the
cost of such intangible assets has been arrived at.
(d) Additions/deductions In case an asset is purchased in foreign currency on
during the year with deferred payment basis, the auditor should verify the
dates; in the case of actual cost on the basis of section 43A. Addition or
any addition of an reduction will be limited to the exchange difference
asset, date put to actually paid during the previous year. The tax auditor is
use; including required to verify that the adjustments in the cost of fixed
adjustment on assets on account of changes in the rate of exchange of
account of: currency in the schedule of fixed assets prepared for
(i) Central Value computation of depreciation as per Income-tax Rules are
Added Tax credits in accordance with the provisions of section 43A and

claimed and allowed information about such adjustment is provided under sub-
under the Central clause (ii) of clause 18(d) of Form 3CD.
Excise Rules, 1944, The provisions of Section 36(1)(iii) and Explanation 8 to
in respect of assets section 43(1) i.e., interest related to the period after asset
acquired on or after first put to use should not form part of actual cost of such
1st March 1994, asset, should be kept in mind for capitalization of interest
(ii) change in rate of to the cost of assets. Explanation 10 to section 43(1)
currency, and (iii) provides that where a portion of the cost of an asset
subsidy or grant or acquired by the assessee has been met directly or
reimbursement, by indirectly by the Central Government or a State
whatever name Government or any authority established under any law or
called. by any other person, in the form of a subsidy or grant or
reimbursement (by whatever name called), then, so much
of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of
the asset to the assessee. Subsidy in respect of asset
acquired in any earlier year(s) and received during the
year has to be deducted from the written down value of
such assets in the year of receipt.
Any expenditure for acquisition of any asset etc.
exceeding ` 10,000 otherwise than account payee
cheque/draft drawn on a bank or use of electronic clearing
system, then such expenditure shall be ignored for
determining actual cost. The tax auditor should also verify
that the amount of GST input credit deducted from cost of
capital goods tallies with the credit availed on this account.
The additions/deductions during the year have to be
reported, with dates. Where any addition was made, the
date on which the asset was put to use is to be reported.
In respect of deductions, the sale value of the assets
disposed of along with dates should be mentioned.
To ascertain when the asset has been put
to use, the tax auditor could call for basic
records like production records/installation
details/excise records/service tax records/ goods and
service tax records/records relating to power connection
for operating the machine, title deeds or building
completion certificate etc. in case of immovable assets
and any other relevant evidence. In the absence of any
specific documentation with regard to the effective date
from which the asset is put to use, he could get a
representation letter from the management, in respect of
the assets acquired.

(e) Depreciation The amount of depreciation and written down value of the
allowable. block at the year-end is calculated correctly by taking the
(f) Written down value at relevant figure at the beginning of the year and adjusted in
the end of the year. respect of the additions/deductions during the year.
The tax auditor shall check the WDV at the beginning of
the year in respect of each block of assets.
Wherever a claim for depreciation involves
any reliance on any judgement or opinion or
other contentions (as to its classification, rate
applicable, cost, date on which put to use etc.), it may be
advisable for tax auditor to disclose full particulars thereof
and the basis on which the depreciation allowable has
been determined and vouched by him.
19. Amounts admissible In case the assessee has obtained a separate Audit
under sections: Report for claiming deductions under any of these
33AB, 33ABA, sections, he must make a reference to that report while
35(1)(i), 35(1)(ii), giving the details under this clause.
35(1)(iia), 35(1)(iii), The Tax Auditor should indicate the amount debited to the
35(1)(iv), 35(2AA), Profit & Loss Account and the amount actually admissible
35(2AB), 35ABB, in accordance with the applicable provisions of law.
35AD, 35CCA, The amount not debited to the Profit & Loss Account but
35CCC, 35CCD, admissible under any of the sections mentioned in the
35D, 35DD, 35DDA, clause have to be stated. For example, sections 33AB and
35E 2 33ABA allow deduction in respect of amount deposited in
designated account for specified purposes which as per
the accounting principles are not debited to the Profit and
loss A/c.
The tax auditor should verify the claim of deductions by
examining whether the assessee is eligible for deduction
under the relevant section, the deduction is correctly
computed and whether the assessee fulfils all the
conditions specified in the relevant section for allowability
of deduction.
The tax auditor should also ensure the eligibility of the
expenditure/payment for deduction and compliance of the
conditions prescribed in the sub-section including
approval from the relevant/prescribed authority,
notification issued by the Central Government, any other
guideline circular etc. issued in this behalf. Tax auditor
should also refer Rule 6 of Income-tax Rules, 1962.
2Reference to section 32AC, 32AD, 35AC and 35CCB is not given, since no deduction under these sections is
available for the current assessment year.

In case the auditor relies on a judicial

pronouncement, he may mention the fact in his
observations para provided in Form No. 3CA
or Form No. 3CB, as the case may be.
20 (a) Any sum paid to an Section 36(1)(ii) provides for deduction of any sum paid to
employee as bonus an employee as bonus or commission for services
or commission for rendered where such sum would not have been payable to
services rendered, him as profit or dividend, if it had not been paid as bonus
where such sum was or commission.
otherwise payable to The tax auditor should obtain the list of
him as profits or employees eligible for bonus or commission
dividend for services rendered with amounts and check
the basis of calculation of bonus or commission.
(b) Details of Section 2(24)(x) includes within the scope of income any
contributions sum received by the assessee from his employees as
received from contributions to any provident fund or superannuation fund
employees for or ESI fund or any other fund for employees welfare.
various funds as Section 36(1)(va) permits deduction of any sum received
referred to in section by the assessee from any of his employees to which the
36(1)(va) namely, provisions of section 2(24)(x) are applicable, if it is
nature of fund, sum credited by the assessee to the account of the employees
received from in the relevant statutory fund on or before the due date.
employees, due date In respect of such sum, if any extension is granted by
for payment, actual respective authorities, it shall be considered. This can be
amount paid and the taken into consideration for determining the due date of
actual date of payment.
payment to the
Under this clause, details regarding the nature of fund,
concerned
details of the amount deducted, due date for payment,
authorities.
actual amount paid and actual date of payment to the
concerned authorities in respect of provident fund, ESI
fund or other staff welfare fund have to be stated.
Under this clause, 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.
The tax auditor should get a list of various contributions
recovered from the employees which come within the
scope of this clause and the date on which it is deposited.
He should also verify the documents relating to provident
funds and other welfare funds. He should verify the
agreement under which employees have to make

contributions to provident fund and other welfare funds.

The ledger account of contributions from employees
should be reviewed; the due dates of payments and the
actual dates of payment should be verified with the
evidence available. In view of the voluminous nature of the
information, the tax auditor can apply test checks and
compliance tests to satisfy himself that the system of
recovery and remittance is proper.
21 (a) Please furnish the - Capital expenditure is not allowable in computing
details of amounts business income unless specifically provided in any
debited to profit and sections of the Act. The details of capital
loss account, being in expenditure, if any, debited to the profit and loss
the nature of capital, account should be maintained in a classified manner
personal, stating the amounts under various heads separately.
advertisement The total amount of capital expenditure debited to the
expenditure, profit and loss account is to be reported under this
expenditure incurred clause in the e filing portal.
at clubs, expenditure - Personal expenses debited to the profit and loss
by way of penalty or account are to be specified under this sub-clause as
fine for violation of they are not deductible in the computation of total
any law for the time income under section 37.
being in force etc. Note - Section 143(1)(e) of the Companies Act 2013
specifically requires the auditor to inquire whether
personal expenses have been charged to revenue
account. In the case of a person whose accounts of
the business or profession have been audited under
any other law, the tax auditor will have to report in
respect of personal expenses debited in the profit
and loss account. In the case of a person who carries
on business or profession but who is not required by
or under any other law to get his accounts audited,
the tax auditor will have to verify the personal
expenses. if debited in the expenses account while
conducting the audit and verify the amount of
expenses mentioned under this clause.
- Section 37(2B) provides that no allowance shall be
made in respect of expenditure incurred by an
assessee on advertisement in any souvenir,
brochure, tract, pamphlet or the like published by a
political party. Therefore, the expenditure of this
nature should be segregated and reported under this
clause. The auditor may also keep in mind the
provisions of section 80GGB and 80GGC which allow
deduction in respect of contribution made by

corporate and non-corporate assessees respectively

to political parties and electoral trust, as required to
be reported by him in clause 33 of Form no. 3CD.
- The amount of payments made to clubs by the
assessee during the year being cost for club services
and facilities used should be indicated under this
clause. The fact whether such expenses are incurred
in the course of business or whether they are of
personal nature should be ascertained. If they are
personal in nature, they are to be shown separately
under Clause 21(a) referred to earlier.
- This clause requires separate reporting of penalty or
fine for violation of any law for the time being in force,
and any other penalty or fine. The tax auditor should
obtain in writing from the assessee, the details of all
payments by way of penalty or fine for violation of any
laws have been made and paid or incurred during the
relevant previous year and how such amounts have
been dealt with in the books of accounts produced for
audit. This clause covers only penalty or fine for
violation of law and not the payment for contractual
breach or liquidator damages. The tax auditor should
keep in mind the difference between the amount
prohibited by law and the amount paid which is
compensatory in nature under the relevant statue.
Supreme Court in Mahalakshmi Sugar Mills Co. Ltd.
vs CIT 123 ITR 429 and CIT vs Hyderabad Allwyn
Metal Works Ltd 172 ITR 113 (SC) wherein it was
held that when an amount paid by assessee could be
regarded as compensatory in character then it would
be allowable u/s 37(1) and if it were penal in nature
it was not allowable.
Tax auditor is not required to express any opinion as to the
allowability or otherwise of the amount of penalty or fine
for violation of law. He is only required to give the details
of such items as have been charged in the books of
accounts.
Example: XYZ Ltd. purchased goods from AP Ltd.
(medium enterprise) having turnover of ` 300 crores with
a commitment to pay for the same within 30 days and in
case of any delay, XYZ Ltd will pay interest @12% p.a. for
the same. Whether such interest is required to be reported
here or not?

The term used in this point is expenditure by way of

penalty or fine for violation of any law for the time being in
force etc. Since this is not a penalty for violation of any
law, the payment of interest by XYZ Ltd is not required to
be reported here.
However, in case AP Ltd. is a micro or small enterprise,
such interest is required to be reported in Clause 22.
(b) Amounts Section 40(a) specifies certain amounts which shall not be
inadmissible under deducted in computing the income chargeable under the
section 40(a)(i)/(ia) head “Profits and gains of business or profession”. Under
with details of section 40(a)(i), 100% disallowance attracted with respect
payment on which tax to sum paid or payable to a non-resident and under section
has not deducted or 40(a)(i)/(ia) 30% disallowance attracted with respect to
after deduction, tax sum paid or payable to a resident payee on tax is
has not been paid on deductible at source and such tax has not been deducted
or before the due or after deduction has not been paid on or before the due
specified under date of furnishing return of income under section 139(1).
section 139(1) and Under this clause, the tax auditor is required to report the
the amount details of payment on which tax is not deducted at source
inadmissible under and also the details of payment on which tax has been
section 40(a)(iib), deducted but not paid during the previous year or before
40(a)(iii), 40(a) (iv), due date of filing return of income specified under section
40(a)(v) 3 139(1). The tax auditor is advised to give details under this
clause for each individual payee.
Sub clause 40(a)(iib) provides that (a) any amount paid by
way of a royalty, license fees, service fees, privilege fees,
service charge or any other fees or charge by whatever
name called, which is levied exclusively on; or (b) which is
appropriated, directly or indirectly from, a State
Government undertaking by the State Government is
inadmissible expenditure. The Tax auditor should verify
any such payment made by State Government
undertaking to the State Government and should report
under clause.
The amount of salary which is paid outside India or to a
non-resident in respect of which tax has not been
deducted but which is required to be deducted under the
applicable provisions of the Income-tax Act,1961 or tax
has not been paid after deductione is not allowed as a
deduction u/s. 40(a)(iii) and the same is required to be
reported under this sub-clause. This information is
3 Sub-clause (ic) of section 40(a) relates to fringe benefit tax and sub-clause (iia) thereof relates to wealth-
tax. Reference to these sub-clauses are not given since these taxes have been abolished.

required to be given for each individual payee. The tax

auditor should also furnish the date of payment along with
the name and address of the payee.
40(a)(iv) provides that any payment to a provident or other
fund established for the benefit of employees of the
assessee shall be disallowed, unless the assessee has
made effective arrangements to secure that tax shall be
deducted at source from any payments made from the
fund which are chargeable to tax under the head
“Salaries”. The tax auditor is also required to report the
same under this sub-clause.
Any tax paid by an employer on non-monetary perquisites
is exempt in the hands of the employee as per section
10(10CC). Further, as per section 40(a)(v) the tax paid by
the employer on non-monetary perquisites provided to
employees shall not be deductible in computing profits and
gains from business or profession. The tax auditor is
required to report the amount of such tax paid by the
employer, in case it is debited to the profit and loss
account under this sub-clause.
For this purpose the tax auditor may examine
the books of accounts and tax deduction
returns.
In case where the assessee submits that any sum debited
to profit and loss account is not inadmissible under the
provisions of section 40(a), the tax auditor may exercise
his judgement in the light of the applicable laws and report
accordingly about the compliance of this provision. The tax
auditor may rely upon the judicial pronouncements while
taking any particular view. In case of difference of opinion
between the tax auditor and the assessee, the tax auditor
should state both the view points. In case of voluminous
nature of the information, the tax auditor can apply
materiality principles, tests checks and compliance tests
for verifying the information required to be provided under
this clause.
Note: Case Studies on the ethical aspects in relation to tax
audit under section 44AB and other Audit Reports are
presented at the end of this Chapter.
Case Study 1 pertains to reporting under Clause 21(b)
(c) Amounts debited to Tax auditor is required to state the inadmissible amount
profit and loss under section 40(b)/40(ba) and such information is also
account being, required to be given in respect of interest/ remuneration
interest, salary, paid to member of an AOP/BOI.

bonus, commission The inadmissible remuneration, salary, bonus or

or remuneration commission under section 40(b) has to be determined on
inadmissible under the basis of the provisions of sub-clause (v) of section
section 40(b)/40(ba) 40(b) read with the limits laid down therein. Such limits are
and computation laid down as a percentage of book profits.
thereof; It is advisable for the auditor to obtain from the assessee
a detailed working of the inadmissible remuneration,
salary, bonus or commission under section 40(b). He has
to verify the computation from the instrument or agreement
or any other document evidencing partnership including
any supplementary documents or other documents
effecting changes which would affect the computation of
the inadmissible amounts under section 40(b).
Under section 40(b)(iv), any payment of interest to any
partner which is authorised by, and is in accordance with,
the terms of the partnership deed and relates to any period
falling after the date of such partnership deed in so far as
such amount exceeds the amount calculated at the rate
specified under the Income-tax Act from time to time will
not be admissible as a deduction.
Section 40(ba) lays down that any interest or remuneration
paid by an AOP to its member shall not be allowed as a
deduction to the AOP.
In order to determine the amount inadmissible
under section 40(b), the tax auditor should
obtain the computation of total income from
the assessee.
The tax auditor may note that the information required to
be reported is the amount of inadmissible expenditure as
per section 40(b)/40(ba) and not the total amount debited
in the profit and loss account.
(d) Disallowance under Disallowance would be made if the payment or aggregate
section 40A(3) / of payments, exceeding ` 10,000 (` 35,000 in case of
deemed income plying, hiring or leasing of goods carriage) is made to a
under section person in a day otherwise than by an account payee
40A(3A) cheque drawn on a bank or account payee bank draft or
[On the basis of the use of electronic clearing system through a bank account
examination of books or through such other electronic mode as may be
of account and other prescribed. However, no disallowance would be attracted
relevant in respect of cases and circumstances prescribed under
documents/evidence, Rule 6DD.
whether the The tax auditor should obtain a list of all cash
expenditure covered payments in respect of expenditure exceeding
under section the prescribed limit under section 40A(3A).

40A(3)/40A(3A) read The list should be verified by the tax auditor with the books
with Rule 6DD were of accounts in order to ascertain whether the conditions
made by account for specific exemption granted under Rule 6DD are
payee cheque drawn satisfied. Details of payments which do not satisfy the
on a bank or account above conditions should be stated under this clause.
payee bank draft or Certain audit tools are available to find out such payments
use of electronic expeditiously and accurately. These tools may be
clearing system employed in case data is voluminous.
through a bank Practically, it may not be possible to verify each payment,
account or through reflected in the bank statement, as to whether the payment
such other electronic has been made through account payee cheque, demand
mode as may be draft or use of electronic clearing system through a bank
prescribed. If not, account or through such other electronic mode as may be
please furnish the prescribed, it is thus desirable that the tax auditor should
details of date of obtain suitable certificate from the assessee to the effect
payment, nature of that the payments for expenditure referred to in section
payment, amount 40A(3) and section 40A(3A) were made by account payee
and name and PAN cheque drawn on a bank or account payee bank draft or
or Aadhaar number use of electronic clearing system through a bank account
of the payee, if or through such other electronic mode as may be
available]. prescribed, as the case may be.
Where the reporting has been done on the basis of the
certificate of the assessee, the fact has to be reported as
an observation in para 3 of Form 3CA and para 5 of Form
3CB, as the case may be. The tax auditor, in his report,
may comment on such violation as under:-
“It is not possible for me/us to verify whether the payments
in excess of ` 10,000 have been made otherwise than by
account payee cheque or bank draft or prescribed
electronic modes, as the necessary evidence is not in the
possession of the assessee”.
Note: Case Studies on the ethical aspects in relation to tax
audit under section 44AB and other Audit Reports are
presented at the end of this Chapter. Case Study 2
pertains to reporting under Clause 21(d).
(e) Provision for As per section 40A(7), no deduction shall be allowed in
payment of gratuity respect of any provision made by the assessee for the
not allowable under payment of gratuity to his employees on their retirement or
section 40A(7); on termination of their employment for any reason.
The deduction, however, shall be allowed in relation to any
provision made by the assessee for the purpose of
payment of a sum by way of contribution towards an
approved gratuity fund or for the purpose of payment of
gratuity that has become payable during the previous year.

The tax auditor should call for the order of the

Principal Commissioner of Income-tax/
Commissioner of Income-tax granting approval
to the gratuity fund, verify the date from which it is effective
and also verify whether the provision has been made as
provided in the trust deed.
(f) Any sum paid by the Under section 40A(9), any payment made by an employer
assessee as an towards the setting up or formation of or as contribution to
employer not any fund, trust, company, association of person, body of
allowable under individuals, society registered under Societies
section 40A(9); Registration Act or other institutions is not allowable.
Tax Auditor shall maintain detailed working
papers documenting the factual nature of such
expenses incurred and debited to the Profit and
Loss for the previous year under consideration which are
considered disallowable u/s 40A(9). Tax Auditor should
get the relevant content in working papers prepared for
such disallowance duly confirmed by the assessee as a
necessary safeguard.
If any such contribution is made by the assessee in a
capacity other than that of an employer, then such
contribution is not to be considered as disallowable u/s
40A(9) of the Income-tax Act, 1961. Thus, the Tax Auditor
should carefully examine the capacity of assessee while
making such contribution before reaching any conclusions
for allowing or disallowing such contribution.
It may be noted that section 40A(9) allows deduction of
any contributions made as an employer towards
recognized provident fund or approved superannuation
fund or notified pension scheme or approved gratuity fund
or as required by or under any other law for the time being
in force. Thus, any contribution made to Employees’
Welfare Co-op Society will not be allowed as a deduction
in the case of the employer company under section
40A(9), unless such contribution is required by or under
any other law for the time being in force. Instruction: No.
1799, dated 3-10-1988.
(g) Particulars of any The assessee is required to furnish particulars of any
liability of a liability of a contingent nature debited to the profit and loss
contingent nature; account.
The tax auditor, for verifying the details of contingent
liability debited to the profit and loss account, may conduct
a detailed scrutiny of various account heads e.g.,
outstanding liabilities, provision etc., if required.

Accounting policy followed and disclosed would be helpful

in ascertaining and verifying details. The tax auditor may
also verify reporting under CARO and disclosure in the
Notes on accounts.
ICDS X, Para 9 provides that Contingent liability shall not
be deductible.
Tax auditor 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.
(h) Amount of deduction The expenditure which is relatable to the income which
inadmissible in terms does not form part of total income is not allowed as
of section 14A in deduction in terms of Section 14A of the Act.
respect of the Rule 8D lays down the method for determining the amount
expenditure incurred of expenditure in relation to income not includable in total
in relation to income income.
which does not form An assessee may claim that no expenditure has been
part of total income; incurred by him in relation to income which does not form
part of total income, even in such case the provision of
section 14A will apply.
The tax auditor has to verify the amount of inadmissible
expenditure as estimated by the assessee with reference
to established principles of allocation of expenditure based
on logical parameters like proportion of exempt and
taxable income recorded, turnover, man hours spent to
earn the relevant income etc. For allocation of interest
between taxable and nontaxable income, the quantum of
investment, the period and the rate of interest are
generally the relevant factors to be considered.
It is primarily the responsibility of the assessee to furnish
the details of amount of deduction inadmissible in terms of
section 14A i.e., in respect of the expenditure incurred in
relation to income, which does not form part of the total
income. The tax auditor has to examine the details of
amount of inadmissible expenditure as furnished by the
assessee. While carrying out such examination the tax
auditor is entitled to rely on the management
representation.
(i) Amount inadmissible The provisions of section 36(1)(iii) provide that the amount
under the proviso to of interest paid in respect of capital borrowed for the
section 36(1)(iii) purposes of business or profession would be allowed as a
deduction in computing the income referred to in section

28. The proviso thereunder provides that any amount of

the interest paid, in respect of capital borrowed for
acquisition of an asset (whether capitalized in the books
or account or not) for any period beginning from the date
on which the capital was borrowed for acquisition of the
asset till the date on which such asset was put to use, shall
not be allowed as a deduction.
The tax auditor, while determining the
admissible/ inadmissible amount under
section 36(1)(iii) should also keep in mind the
requirements of ICDS X relating to borrowing cost.
22. Amount of interest The tax auditor is required to state the amount of interest
inadmissible under inadmissible under section 23 of Micro, Small and Medium
section 23 of the Enterprises Development Act, 2006 (MSMED Act).
Micro, Small and MSMED is an Act to provide for facilitating the promotion
Medium Enterprises and development and enhancing the competitiveness of
Development Act, micro, small and medium enterprises.
2006. Meaning of Micro and Small enterprise
(1) In case enterprise in engaged in the manufacture
or production of goods pertaining to any industry
Micro enterprise
- Where the investment in plant and machinery ≤
` 25 lakhs
Small enterprise
- Where the investment in plant and machinery >
` 25 lakhs ≤ ` 5 crores
Note – For calculating investment in plant and
machinery, the cost of pollution control, research
and development, industrial safety devices and
such notified items shall be excluded.
(2) In case enterprise is engaged in providing or
rendering services
Micro enterprise
- Where the investment in equipment ≤ ` 10
lakhs
Small enterprise
- Where the investment in equipment > ` 10
lakhs ≤ ` 2 crores
Section 23 of the MSMED Act lays down that an interest
payable or paid by the buyer, under or in accordance with
the provisions of this Act, shall not for the purposes of the
computation of income under the Income-tax Act,1961 be

allowed as a deduction.
The inadmissible interest has to be determined on the
basis of the provisions of the MSMED Act. Section 16 of
the MSMED Act provides for the date from which and the
rate at which the interest is payable. Accordingly, where a
buyer fails to make payment of the amount to the supplier,
being micro and small enterprise, as required under
section 15, the buyer shall, notwithstanding anything
contained in any agreement between the buyer and the
supplier or any law for the time being in force, be liable to
pay compound interest with monthly rests to the supplier
on that amount from the appointed date or, as the case
may be, from the date immediately following the date
agreed upon, at three times of the bank rate notified by the
Reserve Bank.
Section 24 of MSMED Act provides that sections 15 to 23
shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in
force. Sections 15 to 24 of the MSMED Act make a buyer
liable to pay interest but they, by themselves, do not
require the buyer to make payment to the supplier.
However, as payment of such interest is considered as
penal in nature, no deduction is allowed under section 37
of the Income Tax Act, 1961.
The tax auditor, while reporting in respect of
clause 22, should:
(a) seek information regarding status of the
enterprise i.e., whether the same is covered under
the MSMED Act, 2006.
(b) cross check the disclosure made in the financial
statements, since Section 22 of the MSMED Act,
2006 requires disclosure of information.
(c) obtain a full list of suppliers of the assessee which
fall within the purview of the definition of “Supplier”
under section 2(n) of the Micro, Small and Medium
Enterprises Development Act, 2006. It is the
responsibility of the auditee to classify and identify
those suppliers who are covered by this Act.
(d) review the list so obtained.
(e) verify from the books of account whether any interest
payable or paid to the buyer in terms of section 16 of
the MSMED Act has been debited or provided for in
the books of account.
(f) verify the interest payable or paid as mentioned

above on test check basis.

(g) verify the additional information provided by the
auditee relating to interest under section 16 in his
financial statement.
If on test check basis, the tax auditor is satisfied, then the
amount so debited to the profit and loss account should be
reported under clause 22.
In order to promote timely payments to micro or small
enterprises, the Finance Act, 2023 include payments
made to such enterprises within the ambit of section 43B
of the Income-tax Act. Accordingly, a new clause (h) in
section 43B has been inserted w.e.f. A.Y. 2024-25 to
provide that any sum payable by the assessee to a micro
or small enterprise beyond the time limit specified in
section 15 of the MSMED Act shall be allowed as
deduction only on actual payment.
Note – Section 23 of MSMED Act specifically prohibits the
assessee from claiming the deduction in respect of interest
paid to MSME. Thus, no deduction would be allowed in
respect of such interest even if such sum is actually paid
by the assessee. However, any sum payable (not being
interest referred under section 23 of MSMED Act, 2006)
by the assessee to a micro or small enterprise (being a
supplier) beyond the time limit specified in section 15 of
MSMED Act, 2006 shall be allowed as deduction only on
actual payment.
23. Particulars of The section enjoins on the Assessing Officer, the power to
payments made to fix the quantum of disallowance. Under this clause, the
persons specified particulars of payments stated to be made to persons
under section covered under section 40A(2)(b) should be examined.
40A(2)(b) The tax auditor in this connection:
(a) Obtain full list of specified persons as contemplated in
this section.
(b) Obtain details of payments made to the specified
persons.
(c) Scrutinise all items of payments to the above persons.
(d) Call for all the contracts or agreements entered into by
the assessee and list out the contracts and
agreements entered into with the specified persons
and segregate the items of payments made to them
under these agreements.
Where the transactions are voluminous or the list contains
several names, scrutiny to be made to the extent possible.

In that case, reliance may be made on the information

supplied by the client with adequate disclosure in the report.
24. Amounts deemed to Section 33AB allowed deduction in respect of Tea
be profits and gains Development Account, Coffee Development Account and
under section 33AB Rubber Development Account. The auditor is required to
or 33ABA. report the deemed income chargeable as profits and gains
of business under the circumstances specified in section
33AB(4)/(5)/(7)/(8).
Section 33ABA allowed deduction in respect of Site
Restoration Fund. The auditor is required to report the
deemed income chargeable as profits and gains of
business under the circumstances specified in section
33ABA(5)/(7)/(8).
Tax auditor has to verify the details regarding
the deposit account and site restoration
account. He also has to verify the accuracy of
details given by the assessee by scrutinizing the books of
accounts and other relevant documents and evidence.
He also has to verify whether the assets acquired through
deposit account is not sold or transferred before expiry of
eight years from the date of acquisition. Verify the manner
of utilization of amount withdrawn from the specified
reserve account.
25. Any amount of profit The tax auditor should obtain a list containing all the
chargeable to tax amounts chargeable under section 41 with the
under section 41 and accompanying evidence, correspondence etc. He should
computation thereof. examine the past records to satisfy himself about the
correctness of the information provided by the assessee.
The tax auditor has to state the profit chargeable
to tax under this section. This information has to
be given irrespective of the fact whether the
relevant amount has been credited to the profit and loss
account or not. The computation of the profit chargeable
under this clause is also to be stated.
The tax auditor should check whether amounts which have
been written back in respect of trading liability by way of
remission or cessation thereof or otherwise, is credited to
Profit & Loss account. If any such liability credited to profit
and loss account is already offered to tax in any prior period,
the same shall not, once again, be considered as income in
the year in which it is so credited.
In case the amount given in this clause regarding section 41
of the Act is not routed through profit and loss account or

income and expenditure account, the auditor may include

the said fact in the observation para of the audit report.
26. In respect of any sum As per section 43B, deduction in respect of certain
referred to in clauses expenditure is allowable only on the basis of actual
(a), (b), (c), (d), (e), payment made within the time limits specified in section
(f) or (g) of section 43B.
43B, the liability for Section 43B is applicable in respect of expenditure for
which:- which a deduction is otherwise allowable under the Act.
(a) Pre-existed on the Therefore, where any expenditure is reported under any
first day of the other clause indicating that deduction is otherwise not
previous year but allowable, there is no need of reporting such expenditure
was not allowed in under this clause.
the assessment of If the assessee is maintaining its books of accounts on the
any preceding mercantile system, the tax auditor should verify the
previous year and aforesaid particulars of section 43B from the books of
was account for the year under audit as well as from the books
(a) paid during the of account, vouchers and documents of the immediately
previous year; succeeding assessment year and the return of income for
(b) not paid during the earlier assessment years so that the information about
the previous the aforesaid payments made in the subsequent year can
year; be furnished.
The tax auditor should clearly distinguish the liability
(b) Was incurred during
incurred during the year in respect of all the specified sums
the previous year and
for the liability that pre-existed on the first day of the
was
relevant previous year.
(a) paid on or
Note - In order to promote timely payments to micro and
before the due
small enterprises, the Finance Act, 2023 include payments
date for
made to such enterprises within the ambit of section 43B
furnishing the
of the Income-tax Act. Accordingly, a new clause (h) in
return of income
section 43B has been inserted w.e.f. A.Y. 2024-25 to
of the previous
provide that any sum payable by the assessee to a micro
year under
or small enterprise beyond the time limit specified in
section 139(1);
section 15 of the MSMED Act shall be allowed as
(b) not paid on or deduction only on actual payment.
before the
Section 15 of the of the Micro, Small and Medium
aforesaid date
Enterprises Development Act, 2006 mandates payment of
(State whether
goods or services to supplier, being a micro or small
sales tax,
enterprises by the buyer on or before the date agreed upon
customs duty,
between them in writing i.e., as per the written agreement,
excise duty, or
which cannot be more than 45 days. If there is no such
any other written agreement, the payment shall be made before the
indirect tax,
appointed day i.e., within 15 days.
levy, cess,
impost, etc., is If the sum payable by the assessee to a micro or small
enterprise is paid as per written agreement (maximum

passed through within 45 days) or within 15 days in case of no agreement,

the profit and the deduction can be claimed on accrual basis if
loss account). mercantile method of accounting is followed by the
assessee.
However, if the sum payable by the assessee to a micro
or small enterprise is not paid as per written agreement or
within 15 days in case of no agreement, the deduction
would be allowed in the previous year in which it is actually
paid.
The deduction with respect payments mentioned in clause
(a) to (g) would be allowed during the previous year, if
actual payment is made on or before the due date of
furnishing return of income. However, deduction in respect
of payment made to micro or small enterprises referred in
clause (h) beyond the time limit specified in section 15 of
the MSMED Act, 2006.would be allowed only on actual
payment basis.
27. (a) Amount of Central The amount of CENVAT/GST availed or utilized should be
Value Added Tax reported under this clause. In some cases, CENVAT/GST
credits availed of or availed may be lesser than the CENVAT/GST credit
utilised during the utilized during the year on account of opening balance in
previous year and its CENVAT/GST account or vice versa as such it would be
treatment in the profit advisable, in order to avoid any misleading conclusion and
and loss account and inferences to report the opening and closing balances of
treatment of CENVAT/GST.
outstanding Central Regarding the reporting of accounting treatment of
Value Added Tax CENVAT/GST credit, the clause requires that its treatment
credits in the in profit and loss account and the treatment of outstanding
accounts. CENVAT/GST credit in the account have to be reported
upon.
The tax auditor should verify and maintain the information
in his working papers for the purpose of reporting in the
format given in the e-filing utility.
(b) Particulars of income It may be noted that information under this clause would
or expenditure of be relevant only in those cases where the assessee
prior period credited follows mercantile system of accounting. Under cash
or debited to the profit system of accounting, expenses debited/ income credited
and loss account. to the profit and loss account would be current year’s
expenses/income even though they may relate to earlier
years. The tax auditor should obtain the particulars of
expenditure or income of any earlier year debited or
credited to the profit and loss account of the relevant
previous year when mercantile system of accounting is
followed.

It may be noted that there is a difference between

expenditure of any earlier year debited to the profit and
loss account and the expenditure relating to any earlier
year, which has crystallised during the relevant year.
Material adjustments necessitated by circumstances
which though related to previous periods but determined
in the current period, will not be considered as prior period
items.
In such cases, though the expenditure may relate to the
earlier year, it can be considered as arising during the year
on the basis that the liability materialised or crystallised
during the year and such cases will not be reported under
this clause. Similar consideration will apply in relation to
income also.
29. Whether during the Section 56(2)(viib) provides that where a company, not
previous year the being a company in which the public are substantially
assessee received interested, receives, in any previous year, from any person
any consideration for being a resident, any consideration for issue of shares that
issue of shares which exceeds the face value of such shares, the aggregate
exceeds the fair consideration received for such shares as exceeds the fair
market value of the market value of the shares shall be chargeable to income-
shares as referred to tax under the head “Income from other sources”.
in section 56(2)(viib), This clause is applicable where a company has issued
if yes, please furnish shares during the year. This can be checked from the
details of the same. financial statement / share register/ MCA records etc.
The tax auditor has to check 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). Section 56(2)(viib) is
applicable to companies in which public are not
substantially interested, therefore, reporting under this
clause to be done only for corporate assessee.
Note - In case of doubt about the valuation of the assets,
it is advisable to obtain the valuation report from the
certified valuer.
29A (a) Whether any amount This clause requires disclosure of whether any amount is
is to be included in chargeable to tax under section 56(2)(ix), and if so, to
income chargeable furnish prescribed details of such income.
under the head Section 56(2)(ix) provides for taxability as Income from
‘income from other Other Sources of any sum of money received as an
sources’ as referred advance or otherwise in the course of negotiations for
to in clause (ix) of transfer of a capital asset, if such sum is forfeited and the
sub-section (2) of negotiations do not result in transfer of such capital asset.
section 56? (Yes/No) The auditor is not required to report any such forfeited

(b) If yes, please furnish amount if it is in respect of a personal capital asset, where
the following details: such asset or the advance or the forfeiture is not recorded
(i) Nature of income in the books of account relating to the business or
(ii) Amount thereof profession.
If an advance has been received and has been
outstanding for a considerable period of time or has
become time barred, there is no requirement to report such
amount unless and until it is forfeited by an act of the
assessee.
Forfeiture of amounts received as advance towards
transfer of a capital asset is required to be reported under
this clause. Any advances received and forfeited towards
sale of stock-in-trade would be taxable under section 28(i)
and would not be required to be reported since the amount
would be credited to profit & loss account.
The tax auditor should obtain a representation
from the assessee regarding all such advances
received towards transfer of capital assets
which have forfeited during the year. He should examine
whether any amount of such advances has been written
back during the year and examine the basis of such write
back was on account of an act of forfeiture.
29B (a) Whether any amount This clause requires reporting as to whether any amount
is to be included as is to be included as income chargeable under the head
income chargeable ‘income from other sources’ as referred to in section
under the head 56(2)(x).
‘Income from other Section 56(2)(x) provides that where any person receives
sources’ as referred in any previous year, from any person or persons money,
to in clause (x) of immovable property, or other property and conditions
sub-section (2) of stated in the clause are satisfied, then, it is treated as
section 56? (Yes/No) income of the recipient.
(b) If yes, please furnish Receipt of assets, other than immovable property or
the following details: assets included within the purview of property under the
(i) Nature of said section, would not be covered by the provisions of this
income: section, and would, therefore not be required to be
(ii) Amount (in `) reported. For e.g., Stock-in-trade, not being a capital
thereof: asset, is not covered by this provision.
The tax auditor should obtain a representation
from the assessee regarding any such receipts
during the year, either received in his business
or profession and recorded in the books of account of such
business or profession. He should also scrutinise the
books of account to verify whether receipt of any such
amount or asset has been recorded therein. Based on

such verification, tax auditor has to consider whether the

question is to be answered in affirmative or otherwise.
In case answer to clause 29B(a) is yes, then tax auditor
has to furnish the following details namely nature of
income and amount. In case of nature of income, tax
auditor should state whether the income is by way of
receipt of any sum of money or from acquisition of any
immovable property like land, building etc. or other than
immovable property like shares and securities, jewellery,
drawings, paintings etc.
30. Details of any amount Details of the amount borrowed on hundi (including
borrowed on hundi or interest on such amount borrowed) and details of
any amount due repayment otherwise than by an account payee cheque,
thereon (including are required to be indicated under this clause.
interest on the The tax auditor should obtain a complete list of borrowings
amount borrowed) and repayments of hundi loans otherwise than by account
repaid, otherwise payee cheques and verify the same with the books of
than through an account. The tax auditor should obtain from the assessee,
account payee particulars of any amount borrowed on hundi or any
cheque [Section 69D] amount due thereon, including interest on the amount
borrowed or repaid otherwise than by an account payee
cheque.
The tax auditor should check whether any such
repayment/ payment has been made otherwise
than by an account payee cheque. If yes, list out
the amount involved on a transaction-to-transaction basis
indicating date of payment and mode of payment.
30A (a) Whether primary This clause is requiring reporting of primary adjustments
adjustment to and various other details, for the purpose of making
transfer price, as secondary adjustments under section 92CE.
referred to in sub- The tax auditor should obtain a certificate from
section (1) of 92CE, the assessee as to what transfer pricing
has been made adjustments has been made during the previous
during the previous year so that the primary onus should be with the
year? (Yes/No) management and then the same should also be verified
from the tax records to check whether there is any such
occurrence.
(b) If yes, please furnish Clause 30A requires reporting of whether primary
the following details:- adjustment to transfer price, as referred to in section
(i) Under which 92CE(1), has been made during the previous year. Thus
clause of sub- the tax auditor is required to verify whether any primary
section (1) of adjustment is ‘made’ in terms of section 92CE(1) during
92CE primary the previous year under consideration. The primary

adjustment is adjustment made may not necessarily relate to previous

made? year under consideration.
(ii) Amount (in `) of It is also necessary that the disclosure under Clause 30A
primary may need to be done is respect of each and every type of
adjustment primary adjustment made in the relevant financial year,
(iii) Whether the irrespective of the previous year to which this adjustment
excess money pertains to. For instance, an assessment order in relation
available with to say, F.Y. 2020-21 may be passed in during
the associated F.Y. 2022-23 wherein AO has made a primary adjustment
enterprise is to and the same has been accepted by the taxpayer.
be repatriated to Such primary adjustment may need to be reported in the
India as per the tax audit report of F.Y. 2022-23. The tax auditor then
provisions of needs to report the relevant clause of section 92CE(1)
sub- section (2) under which the relevant adjustment falls, and the amount
of section of adjustment.
92CE? (Yes/No) Under clause 30A(b)(iii), the requirement is to report
(iv) If yes, whether the excess money available with the associated
whether the enterprise is required to be repatriated to India as per the
excess provisions of section 92CE(2). In case any such primary
money has adjustment has taken place, which requires repatriation of
been the excess money or part thereof, the tax auditor should
repatriated verify whether the excess money has been received, and
within the whether it has been received within the prescribed time.
prescribed He should report accordingly.
time In case the excess money or part thereof has not been
(Yes/No) repatriated within the prescribed time, the imputed interest
(v) If no, the income, which would be the secondary adjustment, needs
amount (in to be computed. Since the reporting is for the previous
`) of imputed year, it is advisable for the tax auditor to ensure that the
interest amount of interest imputed till the end of the previous year
income on is furnished. In case the interest up to the date of filing of
such excess the tax audit report is given, it is advisable for the tax
money which auditor to provide a break-up of the amount of interest
has not been imputed till end of the relevant previous year and for the
repatriated period post the end of the relevant previous year ending
within the with the date of filing tax audit report. It is possible that
prescribed interest income may be imputed during the relevant
time. previous year in connection with primary adjustment made
during the earlier previous years. Such interest income
arising from primary adjustment made in earlier year is
also taxable during the previous year under consideration
and will be included in the return of income of the
concerned previous year. Thus, it may be advisable for the
taxpayer to furnish and tax auditor to verify and report the

information pertaining to such primary adjustments in

respect of interest income which is chargeable u/s.
92CE(2).
The tax auditor should obtain a certificate from
the assessee, as to what transfer pricing
adjustments have been made in the return/(s) of
income filed during the previous year, whether any
advance pricing agreement was entered into during the
previous year, whether any transfer pricing adjustment
was made/confirmed in an assessment order/appellate
authority order passed during the previous year, or
whether any agreement has been arrived at under a
Mutual Agreement Procedure during the previous year.
The tax auditor should also verify tax records to check
whether there is any such occurrence. In this regard, the
auditor should also obtain a prior management
representation on the information obtained to be true and
accurate, basis which he should make the disclosure in the
tax audit report. Hence the primary onus should be with
the management.
30B (a) Whether the This clause requires reporting for the purposes of
assessee has examining allowability of expenditure by way of interest in
incurred expenditure respect of debt issued by a non-resident Associated
during the previous Enterprises under section 94B while computing income
year by way of under the head “Profits and gains from business and
interest or of similar profession”.
nature exceeding one The excess interest is to be calculated as the lower of total
crore rupees as interest paid or payable in excess of 30% of earning before
referred to in sub- interest, taxes, depreciation and amortization (EBITDA) of
section (1) of section the borrower in the previous year or interest paid or
94B? (Yes/No) payable to associated enterprises for that previous year.
(b) If yes, please furnish The excess interest which is disallowed, is allowed to be
the following details:- carried forward for a period of 8 assessment years
(i) Amount (in ` ) of following the year of disallowance, to be allowed as a
expenditure by deduction against profit and gain of any business in
way of interest subsequent years, to the extent of maximum allowable
or of similar interest expenditure under this section.
nature incurred: In computing the limit of ` 1 crore, only interest and
(ii) Earnings before expenditure of similar nature which is deductible while
interest, tax, computing income under the head “Profits and Gains of
depreciation Business or Profession” should be considered, and not
and interest deductible under any other head of income or
amortization interest which is otherwise not deductible. Therefore, any
(EBITDA) interest disallowable under section 14A, under the proviso

during the to section 36(1)(iii), under section 40(a)(i) or section

previous year: 40A(2) should not be considered as interest for the
(iii) Amount (in ` ) of purposes of section 92B(1). Similarly, interest disallowed
expenditure by on account of transfer pricing under section 92, should
way of interest also not be considered, since such interest is not allowable
or of similar in computing income under the head “Profits and Gains of
nature as per (i) Business or Profession”.
above which In case such interest exceeds ` 1 crore, details in part (b)
exceeds 30% of of the clause need to be given. In item (i) of sub-clause
EBITDA as per (b), details of expenditure incurred by way of interest or of
(ii) above: similar nature need needs to be provided. The language in
(iv) Details of the clause creates a doubt whether details that need to be
interest given are of the total amount of interest and similar
expenditure expenditure claimed as a deduction and not just the
brought forward interest paid to non-resident AE(s). However, in view of
as per section the requirement of clause (a) where a specific question
94B(4) has been asked only with respect to section 94B(1) the
(v) Details of subsequent clauses seem to be consequential and flowing
interest from clause (a). Section 94B(1) confines itself to interest
expenditure paid to Non-resident AE and section 94B(2) can be
carried forward regarded as controlled by section 94B(1) since Section
as per section 94B(2) operates “for the purposes of sub-section (1)”. The
94B(4) computation of “excess interest” as per section 94B(2)
should be within the boundaries of interest referred to in
section 94B(1), which is NR AE interest paid. The
language of para 46.3 of CBDT Circular No. 2 of 2018
containing Explanatory Notes to Provisions of Finance Act,
2017 (dated 15 February 2018) is similar to the format of
reporting prescribed by CBDT in clause 30B of Form No.
3CD. The better view is to disclose interest paid only to
non-resident AE(s).
Thus, the tax auditor has to obtain and report the
expenditure incurred by way of interest or of similar nature
paid to its non-resident AE or to the lender to whom the
AE has provided an implicit or explicit guarantee or has
deposited a matching amount of funds, out of the total
interest and similar expenditure claimed as deduction. It
should be kept in mind that word ‘paid’ in terms of section
43(2) means actually paid or incurred according to the
method of accounting employed.
30C (a) Whether the This clause requires the tax auditor to report impermissible
assessee has avoidance arrangements as referred to in section 96
entered into an entered into by the assessee during the previous year and
impermissible to quantify the tax benefit arising in the aggregate in the

avoidance previous year to all parties to such arrangement.

arrangement, as The auditor should examine if, in any earlier year, whether
referred to in section any reference has been made for declaring an
96, during the arrangement as an impermissible avoidance arrangement,
previous year? if such reference has been made, the auditor should report
(Yes/No) the fact in Form 3CA/3CB.
(b) If yes, please In the light of the Chapter X-A, provisions of the Income-
specify:- tax Act relating to GAAR, the rules made thereunder and
(i) Nature of the CBDT Circular thereto, the auditor should examine the
impermissible following:
avoidance (i) The tax auditor should examine whether the Principal
arrangement: Commissioner or the Commissioner or the Approving
(ii) Amount (in ` ) of Panel has, in any earlier previous year, declared any
tax benefit in the arrangement as IAA. In case, if any arrangement has
previous year been declared to be an IAA in any earlier previous
arising, in year, the tax auditor should further examine if any
aggregate, to all transaction pertaining or in connection with such
the parties to declared IAA has taken place during the previous
the year under the audit.
arrangement”; (ii) The tax auditor should examine if, in any earlier
previous year, whether any reference has been made
for declaring an arrangement as an impermissible
avoidance arrangement, if such references been
made, the auditor should report the fact in Form 3CA
or Form 3CB, as the case may be.
In both the cases, the auditor should further examine if any
transaction pertaining or in connection with such declared
IAA or such arrangement in respect of which reference has
been made, has taken place during the previous year
under the audit. If any transaction pertaining or in
connection with such declared IAA or such arrangement
has taken place during the previous year under the audit,
the tax auditor should report this fact along with the tax
benefit arising to all parties. If, however, he is unable to
ascertain the tax benefit in the previous year arising, in
aggregate, to all the parties to the arrangement, he should
indicate the same in Form 3CA or Form 3CB, as the case
may be.
In either case, where the assessee has given response to
any show cause notice or has preferred an appeal, along
with outcome thereof should be taken into consideration
while reporting.
31. (a) Particulars of each This clause seek certain particulars of each loan or deposit
loan or deposit in an in an amount exceeding the limit specified in section

amount exceeding 269SS taken or accepted during the previous year.

the limit specified in Particulars of each loan or deposit falling within the scope
section 269SS taken of this section taken or accepted during the previous year
or accepted during have to be stated under this clause. Reporting is required
the previous year - only where each loan or deposit in an amount of ` 20,000
(i) name, address or more severally or in aggregate of the three sums, as
and PAN or specified in the section. This sub-clause requires six
Aadhaar specific particulars in respect of each loan or deposit
Number (if including the permanent account number or Aadhaar
available with number of the lender or depositor, if available.
the assessee) of The tax auditor should obtain the details from the
the lender or assessee in respect of each reportable loan or deposit and
depositor; verify the same from the records and evidence available
(ii) amount of loan with the assessee.
or deposit taken There will be practical difficulties while verifying the loan
or accepted; or deposit taken or accepted by the account payee cheque
(iii) whether the or an account payee bank draft. In such cases, the tax
loan or deposit auditor should verify the transactions with reference to
was squared up such evidence which may be available.
during the year; In the absence of satisfactory evidence, for answering, as
(iv) maximum to whether bank cheque or bank draft was ‘account payee’,
amount the tax auditors should make a suggested comment in his
outstanding at report. The suggested comment is as follows:
any time during “It is not possible for me/us to verify whether loans or
the previous deposits have been taken or accepted otherwise than by
year; an account payee cheque or account payee bank draft, as
(v) whether the the necessary evidence is not in the possession of the
loan or deposit assessee”.
was taken or Note – The Finance Act, 2023 has amended section
accepted by 269SS to provide for higher threshold limit of
cheque or ` 2,00,000 where a deposit is accepted by a primary
bank draft or agricultural credit society or a primary cooperative
use of agricultural and rural development bank from its member
electronic or a loan is taken from a primary agricultural credit society
clearing or a primary cooperative agricultural and rural
system development bank by its member [For more details, please
through a bank refer Chapter 19: Miscellaneous provisions].
account;
(vi) in case the
loan or deposit
was taken or
accepted by
cheque or
bank draft,

whether the
same was
taken or
accepted by
an account
payee cheque
or account
payee bank
draft.
(b) Particulars of each Under this clause particulars of any specified sum taken
specified sum in an or accepted in relation to transfer of an immovable
amount exceeding property, whether or not the transfer takes place has been
the limits specified in dealt with. Such specified sum may be any sum of money
section 269SS taken receivable whether or not the transfer takes place.
or accepted during The tax auditor should ascertain whether the
the previous year: assessee has any immovable property which
(i) name, address has been transferred or was proposed to be
and PAN or transferred during the year and review the relevant
Aadhaar agreements, documents etc. in this regard. The auditor
number (if should satisfy himself that the proceeds arising from such
available with transfer, based on the review of documents has been duly
the assessee) of credited to the bank account by an account payee cheque
the person from or account payee bank draft or use of electronic clearing
whom specified system through a bank account or through such other
sum is received; electronic mode as may be prescribed.
(ii) amount of
specified sum
taken or
accepted;
(iii) whether the
specified sum
was taken or
accepted by
cheque or bank
draft or use of
electronic
clearing system
through a bank
account;
(iv) in case the
specified sum
was taken or
accepted by
cheque or bank

draft, whether
the same was
taken or
accepted by an
account payee
cheque or
account payee
bank draft
(Particulars at (a) and
(b) need not be given
in the case of a
Government
company, a banking
company or a
corporation
established by the
Central, State or
Provincial Act)
(ba) Particulars of each The sub-clauses (ba), (bb), (bc) and (bd) of clause 31 deal
receipt in an amount with reporting of transactions of receipts and payments in
exceeding the limit excess of the specified limit made otherwise than by the
specified in section modes specified in section 269ST. Section 269ST does
269ST, in aggregate not distinguish between receipt on capital account and
from a person in a revenue account. Accordingly, sub-clauses (ba), (bb), (bc)
day or in respect of a and (bd) of clause 31 do not distinguish between receipts
single transaction or and payments on capital account and revenue account.
in respect of Once the receipt or the payment, as the case may be,
transactions relating exceeds the limit specified in section 269ST, the
to one event or particulars of such transactions will have to be reported
occasion from a under these clauses. The tax auditor should bear this in
person, during the mind while examining the books of account and records of
previous year, where the assessee.
such receipt is Particulars are required to be given if receipts or
otherwise than by a payments, even though individually are lower than ` 2 lakh
cheque or bank draft but in aggregate amount to ` 2 lakh or more if such
or use of electronic receipts or payments are to or from one person in a day
clearing system (whether related to a single transaction or otherwise) or
through a bank relate to a single transaction (even if the receipts or the
account - payments, as the case may be, are on different dates and
(i) Name, address, individual receipts or payments are less than ` 2 lakh) or
PAN or Aadhaar are in respect of more than one transaction but relate to a
Number (if single event or occasion (even if the receipts or the
available with payments, as the case may be, are on different dates and
the assessee) of

the payer; individual receipts or payments are less than ` 2 lakh).

(ii) Nature of Sub-clauses (ba) and (bb) of clause 31 requires particulars
transaction; to be furnished in respect of transactions exceeding ` 2
(iii) Amount of lakh where assessee has received the amount from a
receipt (in ` ) person, whereas sub-clauses (bc) and (bd) of clause 31
(iv) Date of receipt; requires information about the transactions exceeding ` 2
lakh where the payment has been made by the assessee
(bb) Particulars of each to a person.
receipt in an amount
While it is comparatively simple to work out receipts or
exceeding the limit
payments to or from a single person in a day, the tax
specified in section
auditor will have to exercise care and caution while
269ST, in aggregate
arriving at the particulars of receipts or payments
from a person in a
pertaining to a single transaction or relating to a single
day or in respect of a
event or occasion. The tax auditor will need to link all
single transaction or
receipts and payments, as the case may be, otherwise
in respect of
than by the modes specified in this section received/ made
transactions relating
in respect of single transaction and verify if the aggregate
to one event or
amount exceeds the limits specified in section 269ST. A
occasions from a
single invoice may relate to multiple transactions and vice-
person, received by a
a-versa, multiple bills may relate to a single transaction.
cheque or bank draft,
The tax auditor will have to exercise his judgement to
not being an account
decide whether the receipts/payments is pertaining to a
payee cheque or an
single transaction.
account payee bank
draft, during the Similarly, the tax auditor will have to exercise judgement
previous year:- in deciding whether receipts/payments though pertaining
to more than one transaction, pertain to a single event or
(i) Name, address
occasion.
and Permanent
Account For example, for a function organized by a person,
Number or assessee contractor may have been given catering
Aadhaar contract as well as contract for flower decoration. In such
Number (if a case, while the transactions may be different, the
available with occasion or event would be the same and provisions of
the assessee) of section 269ST will be attracted if the receipts exceeding
the payer; the limits specified under section 269ST are by mode other
than those specified in the section.
(ii) Amount of
receipt (in ` ) It is possible that the assessee may have purchased
goods or services while simultaneously he may have sold
(bc) Particulars of each goods or services to the same party, consideration for
payment made in an which exceeds ` 2 lakh. In such a case, if the amount of
amount exceeding consideration for purchase is set off against the amount
the limit specified in receivable for the sale of goods or services, such set off is
section 269ST, in not a receipt as contemplated under section 269ST. If the
aggregate to a amount of such set off exceeds ` 2 lakh, the tax auditor
person in a day or in may give appropriate note to the effect that such set off
respect of a single

transaction or in not being a receipt or payment has not been included in

respect of the particulars given and the relevant sub-clause.
transactions relating If such receipts or payments are otherwise than by account
to one event or payee cheque or an account payee draft or by use of
occasions to a electronic clearing system through a bank account, then,
person, otherwise the tax auditor will have to verify the mode of the receipt
than by a cheque or or payment, as the case may be. He will have to classify
bank draft or use of the receipt or the payment, as the case may be, as under:
electronic clearing (i) otherwise than by cheque or bank draft or use of
system through a electronic clearing system through a bank account,
bank account during into receipt or payment;
the previous year :-
(ii) by cheque or bank draft not being an account payee
(i) Name, address cheque or an account payee bank draft.
and PAN or
While section 269ST deals only with receipts exceeding
Aadhaar
` 2 lakh or more otherwise than by the specified modes,
number (if
sub-clauses (ba), (bb), (bc) and (bd) of clause 31 require
available with
details to be furnished of both receipts and payments.
the assessee) of
the payee; The particulars required under these sub-clauses need not
be given in case of a receipt by a or payment to a
(ii) Nature of
government company, banking company, a post office
transaction;
saving bank, co-operative bank or in the case of
(iii) Amount of transactions referred to in section 269SS.
payment (in ` );
(iv) Date of
payment;
(bd) Particulars of each
payment in an
amount exceeding
the limit specified in
section 269ST, in
aggregate to a
person in a day or in
respect of a single
transaction or in
respect of
transactions relating
to one event or
occasions to a
person, made by a
cheque or bank draft,
not being an account
payee cheque or an
account payee bank
draft, during the

previous year:
(i) Name, address
and PAN or
Aadhaar
number (if
available with
the assessee) of
the payee;
(ii) Amount of
payment (in ` )
(Particulars at (ba),
(bb), (bc) and (bd)
need not be given in
the case of receipt by
or payment to a
Government
company, a banking
Company, a post
office savings bank, a
cooperative bank or
in the case of
transactions referred
to in section 269SS
or in the case of
persons referred to in
Notification No. S.O.
2065(E) dated I3rd
July, 2017)
(c) Particulars of each This sub-clause requires particulars of each repayment of
repayment of loan or loan or deposit in an amount exceeding the limit specified
deposit or any in section 269T made during the previous year.
specified advance in Section 269T is attracted where repayment of the loan or
an amount exceeding deposit is made to a person, where the aggregate amount
the limit specified in of loan or deposits held by such person either in his own
section 269T made name or jointly with any other person on the date of such
during the previous repayment together with interest, if any, payable on such
year: deposit is ` 20,000 or more.
(i) Name, address, In the case of company assessee, loan or deposit is
PAN or Aadhaar defined to mean deposit repayable after notice or loan or
number (if deposit repayable after a period. Therefore, in case of a
available with company, loan or deposit repayable on demand will not be
the assessee) of considered for the purpose of this section as loan or
payee; deposit. However, in the case of non-company assessee,
(ii) amount of loan or deposit is defined to mean loan or deposit of any

repayment; nature. This distinction will have to be kept in mind while

(iii) maximum giving information under this sub-clause.
amount Loan or deposits discharged by means of transfer entries
outstanding at in the books of account constitute repayment of loan or
any time during deposits otherwise than by account payee cheque or
the previous account payee bank draft. Hence, such entries have to be
year; reported under this clause.
(iv) whether the The tax auditor has to take into account the
repayment was technological advancements in the field of
made by banking and information technology, where
cheque or bank loans have been repaid otherwise than through an account
draft or use of payee cheque or bank draft which are capable of being
electronic tracked such as bank transactions made electronically
clearing system through the internet or through mail transfer or telegraphic
through a bank transfer. These types of payments, though not made by
account; account payee cheques in the conventional manner, are
(v) in case capable of being tracked. In order to judicially apply the
repayment was provisions of section 269T, the tax auditor need not report
made by such cases under this clause. The “use of electronic
cheque or bank clearing system through a bank account” is a permissible
draft, whether mode for the purposes of section 269T. The entries that
the same was relate to transactions with a supplier and customer on
repaid by an account of purchase or sale of goods/ services will not be
account payee treated as loans or deposits repaid.
cheque or bank The monetary limit of ` 20,000 or more is applicable in
draft. respect of a banking company or a co-operative bank with
reference to each branch and in all other cases, assessee
as a whole.
Note - The Finance Act, 2023 has amended section 269T
to provide for higher threshold limit of ` 2,00,000, where a
deposit is made by a primary agricultural credit society or
a primary co-operative agricultural and rural development
bank to its member or a loan is repaid to a primary
agricultural credit society or a primary cooperative
agricultural and rural development bank by its member.
[For more details, please refer Chapter 19: Miscellaneous
Provisions].
(d) Particulars of Under this clause the tax auditor has to provide the details
repayment of loan or of repayment received by the assessee from a person in
deposit or any respect of loan or deposit or specified advances exceeding
specified advance in the limit specified in section 269ST received otherwise
an amount exceeding than by a cheque or bank draft or use of electronic clearing
the limit specified in system through a bank account during the previous year
section 269T based on the examination of books of accounts or other

received otherwise relevant documents.

than by a cheque or In case the repayments are voluminous, it may not
bank draft or use of possible to verify each repayment, reflected in the bank
ECS through a bank statement, as to whether the acceptance of deposits or
account during the loans or specified advances has been through cheque,
previous year: bank draft or not.
(i) Name, address, Tax auditor can obtain a certificate form the
PAN or Aadhaar assessee to the effect that the repayment
number (if referred to in this sub-clause were received
available with through permitted mode. Where the reporting has been
the assessee) of done on the basis of the certificate of the assessee, the
the payer, same shall be reported as an observation in para 3 of Form
(ii) amount of No. 3CA or para 5 of Form No. 3CB, as the case may be.
repayment of
loan or deposit
or any specified
advance
received
otherwise than
by a cheque or
bank draft or
use of ECS
through a bank
account during
the previous
year.
(e) Particulars of Under this sub-clause, the tax auditor has to provide
repayment of loan or details of repayment received by the assessee from a
deposit or any person in respect of loan or deposit or specified advance
specified advance in exceeding the limit specified in section 269T received by
amount exceeding cheque or bank draft which is not an account payee
the limit specified in cheque or account payee bank draft during the previous
section 269T year based on the examination of books of accounts or
received by a cheque other relevant documents.
or bank draft which is It may not be possible to verify each repayment, reflected
not an account payee in bank statement, as to whether the acceptance or
cheque or account deposits or loans or specified advances has been made
payee bank draft through cheque, bank draft which is not an account payee
during the previous cheque or account payee bank draft.
year: The tax auditor should obtain suitable
(i) Name, address, certificate from the assessee to the effect that
PAN or Aadhar the repayment referred to in this sub-clause
Number (if were received in the permitted manner. Where the
available with reporting has been done on the basis of the certificate of

the assessee), the assessee, the same shall be reported as an

of the payer, observation in para 3 of Form No. 3CA or para 5 of Form
(ii) amount of No. 3CB.
repayment of
loan or deposit
or any specified
advance
received by a
cheque or a
bank draft which
is not an
account payee
bank cheque or
account payee
bank draft
during the
previous year.
(Particulars at (c), (d)
and (e) need not be
given in the case of a
repayment of any
loan or deposit or any
specified advance
taken or accepted
from the
Government,
Government
company, banking
company or a
corporation
established by the
Central, State or
Provincial Act)
32. (a) Details of brought The amount of brought forward loss or depreciation
forward loss or allowance is required to be quantified as per return and
depreciation assessment orders or appellate orders, if any.
allowance to the Depreciation on goodwill will not be available from A.Y.
extent available 2021-22.
containing Brought forward losses may relate to different heads of
information relating income such as property income, profits and gains of
to assessment year, business or profession, speculation business or capital
nature of gains.
loss/allowance (in `), Different provisions are contained in sections 32 and 70 to
amount as returned 79A of the Income-tax Act, 1961, with regard to loss/

(in `)* all depreciation under different heads. In the remarks column,
losses/allowances information about the pending assessment or appellate
not allowed under proceedings or about delay in filing loss returns should be
section 115BAA/ given. For giving the above information, the auditors
115BAC/ 115BAD, should study the assessment records i.e., the income-tax
amount as assessed returns filed, assessment orders, appellate orders, orders
(give reference to giving effect to appellate order and rectification/revisional
relevant order) and orders for the earlier years and ascertain if the figures
remarks. given in the above clause are correct. The tax auditor
* If the assessed should keep in mind the provisions of section 71B
depreciation is less regarding carry forward and set-off of loss from house
and no appeal property, section 73A regarding carry forward and set-off
pending than take of losses by specified business and also section 78
assessed. regarding carry forward and set-off of losses in case of
change in constitution of firm or on succession.
The tax auditor should obtain all the assessment orders or
appellate orders completed and pending during the audit.
If the consequential order for any revision /appellate order
is yet to be passed, the same can be disclosed along with
the impact thereof, if material.
It means in case of any undisclosed income determined in
case of an assessee during any proceedings of search,
requisition or survey, then no adjustment or set off shall be
allowed against such undisclosed income. The set off shall
not be available in case of both brought forward losses as
well as the unabsorbed depreciation.
From the Assessment Year beginning from 2022-23
onwards, the tax auditor has to confirm and verify whether
any search or survey has been taken place or undergoing
based on the records of assessment proceedings of the
assessee and accordingly shall check if any undisclosed
income has been determined in case of assessee.
The eligibility of brought forward losses and unabsorbed
depreciation against such undisclosed income as
computed by the assessee should be checked and based
on that, the necessary adjustments should be made to
losses to be carried forward by the assessee.
(b) Whether a change in The Tax Auditor should obtain the details of changes in
the shareholding of voting power pattern year-on-year and verify the reasons
the company has for any such changes before determining the allowability
taken place during of losses eligible to be carried forward.
the previous year due The Tax Auditor should obtain necessary representation
to which the losses to this effect wherever it is not feasible to verify or cross-
incurred prior to the check the shareholding pattern and changes therein.

previous year cannot The comparison of the composition of the shareholding is

be allowed to be to be done with reference to the last day of the current
carried forward in previous year and the last day of every previous year in
terms of section 79. which the loss was incurred. The carry forward of the loss
incurred in respect of different previous years is to be
determined with respect to the individual previous years.
Such comparison of the shareholding can be done by
referring to the Register of Members.
(c) Whether the Having regard to the definition of “speculative business”,
assessee has the tax auditor has to verify from the books of account and
incurred any other relevant documents as to whether the assessee is
speculation loss carrying on any speculation business. On verification if the
referred to in section auditor is of the opinion that the auditee is carrying on
73 during the speculation business, under this clause, the tax auditor
previous year. If yes, has to furnish the details regarding speculation loss
please furnish details referred to in section 73, if any incurred by the assessee
of the same. during the previous year. It may be noted that it is not
necessary that same speculation business needs to be
continued to set off its loss of earlier year(s) against profit
of same speculation business. It can be ‘any’ speculation
business i.e., a different speculation business.
(d) Whether the Under clause 32(d), the tax auditor has to verify from the
assessee has books of accounts and other relevant documents as to
incurred any loss whether the assessee is carrying on specified business as
referred to in section referred to under section 35AD. In case the auditor is of
73A in respect of any the opinion that the assessee is carrying on such specified
specified business business, he has to furnish the details of the loss incurred,
during the previous if any, in respect of any specified business during the
year, if yes, please previous year. In case the assessee carries on more than
furnish details of the one specified businesses and loss has been incurred in
same. both the business, the details of the loss incurred with
respect of each business is to be specified separately.
(e) In case of a The Explanation to Section 73 provides that where part of
company, please the business of a company (other than a company whose
state that whether the gross total income consists mainly of income which is
company is deemed chargeable under the heads income from securities,
to be carrying on a income from house property, capital gain and income from
speculation business other sources or a company the principal business of
as referred in which is the business of trading in shares or banking or
Explanation to granting of loans and advances consist in the purchase or
section 73, if yes, sale of shares of the other companies shall be deemed to
provide details of be carrying on a speculation business to the extent to
speculation loss if which business consists of purchase and sale of such
any incurred during shares.

the previous year. The tax auditor has to furnish the details regarding the
speculation losses incurred, if any, as referred to in
Explanation to section 73.
33. Section-wise details The tax auditor has to ensure that the assessee fulfils all
of deductions, if any, the conditions specified in the sections under which
admissible under deduction is claimed. For ascertaining this, the tax auditor
Chapter VIA or has to obtain all necessary evidence which would enable
Chapter III (Section him to express the opinion regarding the admissibility of
10AA) specifying the deductions. In order to ascertain the fulfillment of this
section under which condition, the tax auditor may have to check all
deduction is claimed documentary evidence. There may be cases where there
and the amounts is difference between the amount claimed by the assessee
admissible as per the and the amount computed by the tax auditor. In such
provision of the cases, it is quite possible that the assessee's claim is
Income-tax Act, 1961 based on some judicial pronouncement on the subject. In
and fulfils the such cases, it may be advisable for the tax auditor to report
conditions, if any, the amount admissible. The amount claimed and the
specified under the background behind and the basis of the claim of the
relevant provisions of assessee may form part of the working papers. If the claim
Income-tax Act, 1961 of the assessee is well-founded and settled by judicial
or Income-tax pronouncement, the tax auditor may accept the claim but
Rules,1962 or any he has to record in his working papers that admissible
other guidelines, amount has been reported on the basis of such judicial
circular, etc., issued pronouncement. In appropriate circumstances, such
in this behalf. judicial pronouncements etc. should be mentioned in the
report.
It may be noted that separate audit report or certificate is
required to be obtained under section 10AA and certain
sections like 80-IA, 80-IB, 80-IC, 80-JJAA under Chapter
VIA. While giving information with regard to the deduction
allowable under these sections, the tax auditor should
refer to separate audit reports/ certificates obtained by the
assessee.
These audit reports/ certificates may have been given by
the tax auditor or by any other auditor. The figures given
in such separate audit reports/certificates should be taken
into consideration while giving information with regard to
income covered by these sections.
Note: Case Study 3 and Case Study 4 deal with the ethical
aspects which have to be considered while issuing audit
report in Form 10CCB.
Some sections in Chapter VIA such as section 80G
(donations), Section 80GGB/80GGC (contributions to
political parties), section 80JJAA (wages of new workmen)

etc. relate to the expenditure incurred by an assessee.

There are other sections such as section 80-P (income of
cooperative societies), etc. which relate to income of the
assessee. In respect of all these sections, the tax auditor
should ascertain whether there is any expenditure or
income covered by the above sections recorded in the
books of accounts audited by him.
Section 115BAA, 115BAB, 115BAC and 115BAD provide
that no deductions under Chapter VI-A or Chapter III can
be claimed by the assessee opting for taxation under any
of these sections except deductions mentioned under
section 80M and 80JJAA, reply to clause 8a shall be
considered and accordingly admissibility of deductions
should be examined.
34. (a) Whether the While answering the issue of applicability of the provisions
assessee is required of Chapter XVII-B and/or XVII-BB, a number of debatable
to deduct or collect issues may arise before the assessee as well as the tax
tax as per the auditor. The auditor may have a difference of opinion with
provisions of Chapter regard to the applicability of the provisions of TDS/TCS on
XVII-B or Chapter a particular payment. In such a case, the tax auditor has
XVII-BB, if yes, to report the difference of opinion appropriately as an
please furnish details observation in the para 3 of Form No. 3CA or para 5 of
of Form No. 3CB as the case may be.
(1) Tax deduction It is essential to note that it is the primary responsibility of
and collection the assessee to prepare the information in such a manner
Account that the tax auditor can verify the compliance as required
Number (TAN) in the clause. The tax auditor is required to verify that no
(2) Section No. items have been omitted in the information furnished to
(3) Nature of him and reasonable test checks would reveal whether or
payment not the information furnished is correct. The extent of
check undertaken would have to be indicated by the tax
(4) Total amount of
auditor in his working papers and audit notes. The tax
payment or
auditor would be well advised to so design his tax audit
receipt
programme as would reveal the extent of checking and to
(5) Total amount on ensure adequate documentation in support of the
which tax was information being certified.
required to be
It may be noted that while determining the amount to be
deducted or
reported in this clause, the tax auditor has to check and
collected
verify the payments made by the assessee and should not
(6) Total amount on only restrict to verification of expenses debited to Profit &
which tax was Loss or the TDS/TCS returns filed and provided by the
deducted or assessee e.g., an advance payment made to any
collected at contractor may also be liable for deduction of tax. In the
specified rate case of payment to non-residents, the applicable rate of

(7) Amount of tax tax deduction at source is to be read along with the Double
deducted or Taxation Avoidance Agreement.
collected This clause also requires the tax auditor to furnish the total
(8) Total amount on amount out of the amount deductible or collectible, at
which tax was which the tax was deducted or collected at the rate less
deducted or than the specified rate. The lesser deduction is required to
collected at less be reported in this clause. This will include deduction at a
than specified lower rate than what is prescribed, application of wrong
rate or Amount section for deduction of tax at source, etc.
of tax deducted For example, section 194C requires deduction @2% in
or collected at case payment is made to a person other than individual or
less than HUF, but the deductor deducts only 1%, the same has to
specified rate be reported under this clause.
and amount of The tax auditor should also consider applicability of higher
tax deducted or rate of TDS/TCS under certain circumstances like non-
collected not furnishing of PAN, non-filers of return as provided in
deposited to the section 206AA/206AB/206CC/206CCA. The tax auditor
credit of Central should verify the cases where the tax has been deducted
Government. at source but not paid to the credit of the Central
Government till the date of the audit. It may be seen that
tax deducted but deposited late will not be –required to be
reported.
Tax auditor should obtain a copy of TDS/TCS
returns filed by the assessee and reconcile the
same with the books of accounts, which shall
form the basis of reporting under this clause. The tax
auditor should take into consideration the relevant
sections, rules, notifications, circulars and various judicial
pronouncements in relation to transactions of relevant
payment or collections. If the tax auditor has not agreed
with the interpretation/ views taken by the assessee, he
should report the same in Form 3CA/3CB.
(b) Whether the This clause deals with the information pertaining to
assessee is required statement of tax deducted and collected at source.
to furnish the The tax auditor has to ascertain and report as to whether
statement of tax the assessee is required to furnish the statement of tax
deducted, or tax deducted or tax collected at source within the prescribed
collected. If yes, time and answer 'yes’ or ‘no’ depending on his
please furnish the examination. If the answer is ‘yes’, the tax auditor shall
details of TAN, type provide further details in a table contained in Clause 34(b)
of form, due date for only with regard to the statement required to be furnished
furnishing, date of by the assessee.
furnishing, if The information given in clause 34(a) and (b) should be
furnished, whether reconciled with the disallowances reported under section

the statement of tax 40(a) in clause 21(b) to the extent applicable for cross
deducted or collected checking appropriateness of reporting under both the
contains information clauses.
about all transactions Depending upon transactions that require tax deduction or
which are required to collection, tax auditor should ascertain which statements,
be reported. If not, the assessee was required to furnish for the financial year
please furnish list of under audit. He should check which statements have been
details/transactions furnished by the assessee for tax deducted as well as
which are not collected. The reporting requirement is notwithstanding
reported. the fact that the assessee has furnished the statements of
tax deducted at source and tax collected at source or not.
The tax auditor should keep in mind laws
relating to tax deductions/collections at source
and various case laws so as to detect any case
of contravention or default in the provisions of Chapter
XVII -B / chapter XVII-BB.
If the information is voluminous, then the tax auditor
should consider reporting significant deficiencies with
appropriate remarks in paragraph (3) of Form 3CA or
paragraph (5) of Form 3CB.
(c) Whether the Under this clause, the tax auditor is required to furnish
assessee is liable to detailed information in case an assessee is liable to pay
pay interest under interest under section 201(1A) or section 206C(7) of the
section 201(1A) or Act. Where the assessee is liable to pay interest u/s
section 206C(7). If 201(1A) or u/s 206C(7), the tax auditor should verify such
yes, please furnish amount from the books of account as on 31st March of the
details of Tax relevant previous year and also from PART G of the
deduction and statement generated by the Department in Form No.26AS.
collection Account In case the assessee had disputed the levy or calculation
Number (TAN), of interest under TRACES, in Form No.26AS/AIS/TIS of
amount of interest the assessee, the auditor may re-calculate the amount of
under section interest under section 201(1A) or section 206C(7) up to
201(1A)/ 206C(7) the date of audit report for reporting under this clause and
is payable and also mention the fact in his observations paragraph
amount of interest provided in Form No.3CA or Form No.3CB, as the case
paid along with may be.
date of payment.
35. (a) In the case of a The tax auditor should examine whether the enterprise is
trading concern, give a trading concern or not. If yes, the tax auditor should
quantitative details of obtain certificates from the assessee in respect of the
principal items of principal items of goods traded, the balance of the opening
goods traded: stock, purchases, sales and closing stock and the extent
(i) Opening Stock; of shortage/excess/damage and the reasons thereof.
The entire quantitative information should be examined by

(ii) purchases the auditor from the records.

during the
previous year;
(iii) sales during the
previous year;
(iv) closing stock;
(v) shortage /
excess, if any
(b) In the case of a The tax auditor should ascertain whether the enterprise is
manufacturing a manufacturing concern and accordingly report it in
concern, give clause 10(a). If yes, this sub-clause is applicable. The tax
quantitative details of auditor should obtain certificate from assessee in respect
the principal items of of principal items of raw materials, finished goods and by-
raw materials, products and quantitative information required to be re–
finished products and ported in this sub-clause.
by-products: Note - This clause requires that quantitative details of
A. Raw Materials: “principal items” of raw materials and finished goods
(i) opening stock; should be given. Therefore, information about petty items
(ii) purchases need not be given. What would constitute principal items
during the will depend on the facts of each case. Normally, items
previous year; which constitute more than 10% of the aggregate value of
purchases, consumption or turnover as the case may be,
(iii) consumption
may be classified as principal items.
during the
previous year;
(iv) sales during the
previous year;
(v) closing stock;
(vi) yield of finished
products;
(vii) percentage of
yield;
(viii) shortage /
excess, if any.
B. Finished
products/by-
products:
(i) opening stock
(ii) purchases
during the
previous year;
(iii) quantity
manufactured

during the
previous year;
(iv) sales during the
previous year;
(v) closing stock;
(vi) shortage/
excess, if any.
36A (a) Whether the The tax auditor should obtain from the tax payer a
assessee has certificate containing a list of closely held companies in
received any which he is the beneficial owner of shares carrying not less
amount in the than 10% of the voting power and list of concerns in which
nature of he has a substantial interest.
dividend as The dividend taxable under section 2(22)(e) is restricted
referred to in to accumulated profits on the date of payment. Thus, the
sub- clause (e) accumulated profits have to be determined as on the date
of clause (22) of of the payment. Further, if at any time earlier any amount
section 2? has been considered as income under any of the clauses
(Yes/No) of section 2(22), the accumulated profits will have to be
(b) If yes, please reduced by such an amount.
furnish the The tax auditor may not be able to determine the
following accumulated profits such as on the date of payment of the
details:- closely held company making the payment for various
(i) Amount reasons. The tax auditor in such a case may arrive at the
received accumulated profits by appropriating the profit for the year
(in ` ): on a time basis. In such a case, the auditor should include
(ii) Date of appropriate remarks in para 3 of Form No. 3CA or para 5
receipt of Form No. 3CB, as the case may be, about the
methodology adopted by him.
For attracting section 2(22)(e), it is necessary that the
assessee receiving a loan or advance should be a
shareholder. Wherever the beneficial shareholder is not
the registered shareholder and the closely held company
has given loan or advance to the beneficial shareholder or
to a concern, the tax auditor should make appropriate
remark in Form No. 3CA or Form 3CB, as the case may
be.
The tax auditor should also obtain a certificate
from the tax payer giving particulars of any loan
or advances received by any concern in which
he has substantial interest from any closely held company
in which he is beneficial owner of shares carrying not less
than 10% of the voting power. These certificates are

necessary since the tax auditor may not be able to verify

the above from the books of account of the assessee.
The tax auditor should verify Form 26AS in the case of the
tax payer to know if the closely held company has
deducted tax at source from any payment made to it to the
taxpayer or the concern under section 194.
37. Whether any cost The tax auditor should ascertain from the management
audit was carried out, whether cost audit was carried out and if yes, a copy of the
if yes, give the same should be obtained from the assessee. Even though
details, if any, of the tax auditor is not required to make any detailed study of
disqualification or such report, he has to take note of the details of
disagreement on any disqualification or disagreement on any
matter/item/value/ matter/item/value/quantity as may be reported/identified
quantity as may be by the cost auditor. The information is required to be given
reported/identified by in respect of cost audit report which is received upto the date
the cost auditor. of tax audit report.
The tax auditor should examine the time period
for which the cost audit, if any, has been
required to be carried out. Information is
required to be given only in respect of such cost audit
report, the time period of which falls within the relevant
previous year. In effect, the information is required to be
given in respect of that cost audit report which is received
upto the date of tax audit report.
38. Whether any audit The tax auditor should ascertain from the management
was conducted under whether any audit was conducted under the Central Excise
the Central Excise Act, 1944 and if such audit was carried out, obtain a copy of
Act, 1944, if yes, give the report. Even though the tax auditor is not required to
the details, if any, of make any detailed study of such report, he has to take note
disqualification or of the details if any, of disqualification or disagreement on
disagreement on any any matter/item/value/quantity as may be reported/
matter/item/value/qu identified by the auditor. The tax auditor need not express
antity as may be any opinion in a case where such audit has been ordered
reported/identified by but the same has not been carried out. The information is
the auditor. required to be given in respect of excise audit report which
is received upto the date of tax audit report.
The tax auditor should examine the time period
for which the excise audit, if any, has been
required to be carried out. Information is required to be
given only in respect of such excise audit report the time
period of which falls within the relevant previous year. In
effect, the information is required to be given in respect of
that excise audit report which is received upto the date of
tax audit report.

40. Details regarding These ratios have to be calculated only for assessee who
turnover, gross profit, are engaged in manufacturing or trading activities. While
etc. for the previous calculating these ratios, the tax auditor should assign a
year and preceding meaning to the terms used in the above ratios having due
previous year: regard to the generally accepted accounting principles. All
1. Total turnover of the ratios mentioned in this clause are to be calculated in
the assessee terms of value only.
2. Gross profit/ For the purpose of calculating the ratio mentioned in (4),
turnover only closing stock is to be considered. The term ` stock-in-
3. Net profit/ trade' used therein does not include stores and spare parts
turnover or loose tools. The term “stock-in-trade” would include only
finished goods and would not include the stock of raw
4. Stock-in-trade/
material and work-in-progress since the objective here is
turnover
to compute the stock turnover ratio.
5. Material
Material consumed would, apart from raw material
consumed/
consumed, include stores, spare parts and loose tools.
finished goods
produced Under this clause, calculation of the ratios is also to be
stated. As such, computation of various components
(The details required
based upon which these ratios have been worked out is
to be furnished for
required to be stated under this clause. There should be
principal items of
consistency between the numerator and the denominator
goods traded or
while calculating the above ratios. Any significant
manufactured or
deviation thereof should be pointed out in Form 3CA or
services rendered)
Form 3CB, as the case may be. The relevant previous year
figures are to be taken from last previous year audit report
or the reinstated figures, to make the ratios comparable
with current year. In case the preceding previous year is
not subject to audit, nothing should be mentioned in the
relevant column.
The ratios has to be given for the business as a whole and
need not be given product wise.
41. Please furnish details The assessee may be assessed under various tax laws
of demand raised or other than Income-tax Act, 1961 resulting into a demand
refund issued during order or refund order. The tax auditor should obtain copy
the previous year of all the demand/refund orders issued by the government
under any tax laws authorities during the previous year under any tax law
other than Income- other than Income-tax Act, 1961.
tax Act, 1961 and The auditor should exercise his professional judgement in
Wealth Tax Act, determining the applicability to relevant tax laws for
1957 4 alongwith reporting under this clause.
details of relevant It may be noted that even though the
proceedings. demand/refund order is issued during the previous
4 abolished with effect from the 1st April, 2016

year, it may pertain to a period other than the relevant

previous year. In such cases also, reporting has to be
done under this clause. The tax auditor should verify the
books of account and the orders passed by the respective
Department for ascertaining whether any such demand
has been raised or refund order has been issued under
any other tax law and accordingly report the same. It is
advisable to cross verify the demands from online portal of
the respective Department. If there is any adjustment of
refund against any demand, the auditor shall also report
the same under this clause. Appropriate representation
should be obtained from the assessee. In case of
corporate assessee, the auditor may check the said
details with the disclosures of contingent liabilities in the
audited financials, disclosures in statutory auditor’s report
pursuant to CARO, if applicable.
42. (a) Whether the This clause has been introduced where the tax auditor has
assessee is required to report whether the tax payer is required to furnish a
to furnish statement statement in Form 61/61A/61B.
in Form No. 61 or As per Rule 114D(1), every person referred to in clauses
Form No. 61A or (a) to (k) of rule 114C(1) and Rule 114(2) and who is
Form No. 61B? required to get his accounts audited under section 44AB
(Yes/No) who has received any declaration in Form 60 (this form is
(b) If yes, please furnish used by an individual or a person other than a company or
Income-tax a firm who does not have PAN and who enter into any of
Department the transactions specified in rule 114B) is required to
Reporting Entity furnish statement in Form No. 61 containing particulars of
Identification such declaration.
Number, Type of The Annual Information Return or Statement of financial
form, Due date for transaction required to be furnished under section
furnishing, Date of 285BA(1) is to be furnished in Form No. 61A. Statement
furnishing (if of Reportable Account under section 285BA(1)(k) is to be
furnished), Whether furnished by a reporting financial institution in respect of
the form contains each account which has been identified pursuant to due
information about all diligence procedure as a reportable account.
details/ transactions The tax auditor should verify that whether the
which are required to assessee is liable to report the transaction in
be reported. If not, the prescribed form or not, if yes, whether the
please furnish list of assessee has filed the same and he has furnished all the
the details/ particulars required in the Form.
transactions which The tax auditor is further required to state whether the
are not reported. Form contains information about all details or furnished
transactions which are required to be reported. In case it
is not, the tax auditor is required to furnish list of the details

of transactions which are not reported. If the volume of

deficiencies is large, the tax auditor may state certain
deficiencies by way of an illustration and make appropriate
remark in para 3of Form 3CA or para 5 of Form 3CB.
Form No. 61, 61A and 61B uploaded on the income tax
portal should be examined by the tax auditor for purpose
of reporting.
43. (a) Whether the This clause seeks information about applicability to furnish
assessee or its the report as referred to in section 286(2). Section 286(2)
parent entity or casts an obligation on the parent entity or the alternate
alternate reporting reporting entity, if it is resident in India to furnish report, in
entity is liable to respect of the international group of which it is a
furnish the report as constituent, for every accounting year, within a period of
referred to in sub- 12 months from the end of the said reporting accounting
section (2) of section year to the prescribed authority.
286 (Yes/No) The reporting requirement under section 286 shall not
apply in respect of an international group for an accounting
year, if the total consolidated group revenue, as reflected
in the consolidated financial statement for the accounting
year preceding such accounting year does not exceed
` 6,400 crores (Rule 10DB).
The obligation to furnish the report referred to in section
286(2) arises under following situations requiring reply in
affirmative to clause 43(a):
(i) If the assessee itself is the parent entity of the
international group and is resident in India, it will
have the obligation to furnish the report under section
286(2);
(ii) If the assessee is resident in India and has been
designated as the alternate reporting entity of the
international group;
(iii) If the assessee is a constituent of the international
group with its parent entity resident in India and the
group has not designated any other resident
constituent entity as the alternate reporting entity, the
parent entity will have the obligation to file the report
under section 286(2).
(iv) If the assessee is neither the parent entity nor has it
been designated as the alternate reporting entity, but
other constituent entity resident in India of the
international group has been designated as the
alternate reporting entity by the group, such other
constituent entity resident in India will have obligation

to file the report under section 286(2).

The tax auditor should verify in the case of the
assessee if any of the above four situations
exist. The tax auditor should verify if the
assessee whose parent is a non-resident has filed Form
No. 3CEAC. It will indicate if the assessee or another
constituent entity resident in India has been designated as
the reporting entity for the international group. The tax
auditor may obtain necessary certificate from the
assessee in respect of constitution of the international
group, entities that are resident in India and not resident
in India and entity if appointed as the alternate reporting
entity.
If none of the above four situations described above exists,
the reply to clause 43(a) will be negative.
(b) If yes, please furnish If the assessee is liable to file Form 3CEAC, the tax auditor
the following details: has to verify whether the necessary compliance as
(i) Whether report prescribed in section 286 has been done and the requisite
has been information has been furnished by the assessee.
furnished by the If the assessee has filed a report, the tax auditor should
assessee or its verify acknowledgement for furnishing the same. If the
parent entity or report has been filed either by the parent of the assessee
an alternate or another constituent entity of the international group, the
reporting entity tax auditor should ask for a copy of the report and
(ii) Name of parent acknowledgement for filing the report.
entity The term parent entity is defined in section 286(9)(h). The
(iii) Name of tax auditor should examine which is the parent entity and
alternate report name thereof. The term alternate reporting entity is
reporting entity defined in section 286(9)(c). The tax auditor should
(if applicable) examine whether any such alternate reporting entity exists
(iv) Date of and if yes, name of the alternate reporting entity should be
furnishing of stated.
report From acknowledgement for furnishing report as referred to
in section 286(2), date for furnishing of the said report
should be stated. The tax auditor may obtain necessary
certificate from the assessee in respect of the constituent
entity.
44. Break-up of total This clause requires to provide details of the expenditure
expenditure of in respect of entities registered under GST, which is
entities registered or further sub-classified into four categories as follows:
not registered under (a) Expenditure relating to goods or services exempt from
the GST. Specifying GST - Here, the value of all inward supply of goods or
total amount of services which are exempt from GST is to be given.
expenditure incurred

during the year, (b) Expenditure relating to entities falling under

expenditure in composition scheme - Value of all inward supplies
respect of entities from composition dealers is to be mentioned here.
registered under GST (c) Expenditure relating to other registered entities -
relating to goods or Value of all inward supplies from registered dealers,
services exempt from other than supplies from composition dealers and
GST, relating to exempt supply from registered dealers, are to be
entities falling under mentioned here.
composition scheme, (d) Total payment to registered entities - The word
relating to other ‘payment’ should harmoniously be interpreted as
entities and total ‘expenditure’, as the combined heading is
payment to ‘Expenditure in respect of entities registered under
registered entities. GST’. Hence, the total expenditure in respect of
Expenditure relating registered entities i.e., sum total of values reported in
to entities not (a), (b) and (c) should be reported in (d) above.
registered under GST
Under this clause, expenditure relating to entities not
also need to be
registered under GST is also to be given. The value of
specified.
inward supply of goods and/or services received from
unregistered persons should be reported here.
It is important to differentiate the ‘current status’ of
supplier’s registration from their status as it was at the time
of supply. There are several instances where registration
may be cancelled with effect from an earlier date which
may be prior to the date of supply to assessee. Events
occurring after balance sheet date that alter the data
relating to year under audit does not alter the nature of the
expenditure, that it is from registered suppliers. Auditors
may elect to extend their review up to a certain cut-off date
or not at all. In either case, disclosure of notes of the
position with regard to (i) known cancellations and (ii)
treatment in the disclosure considering possibility of such
cancellations would go a long way in making the report
meaningful and unambiguous.
Under clause 44, the language used is “expenditure in
respect of”. Since, the word used is ‘expenditure’, it is
necessary that the capital expenditure should also be
reported in the format prescribed. Separate reporting of
capital expenditure will provide ease in reconciliation.
In case of multiple GST registrations of an entity, there is
likelihood of inter-branch supply, which is eliminated at the
consolidated financials. Proper reconciliation for such
type of transactions may be kept on record. This report
may be prepared for an entity as a whole or for a branch
thereof, as may be audited and accordingly the information

in these columns may have to be filled up consolidating

the expenditure incurred under various GST registrations.
Note - It may be noted that any expenditure that is
incurred, wholly and exclusively for business or profession
of the assessee qualifies for the deduction under the Act.
Registration or otherwise of the payee under the GST Act
has no relevance in considering allowability of
expenditure.
20.5 SUMMARY OF PROVISIONS IN RESPECT OF WHICH

INFORMATION TO BE FURNISHED IN FORM 3CD
The following table will give you a bird’s eye view of certain provisions for which the information is
to be given in Form 3CD
Section of the Income-tax Clause No. Details to be furnished
Act, 1961 of the
Guidance
Note
44AB 8 Indicate the relevant clause of section 44AB
under which the audit has been conducted
115BA,115BAA, 115BAB, 8a Mention whether the individual/HUF/AOP/BOI
115BAC, 115BAD has opted to shift out of the default regime u/s
115BAC.
In case of companies/co-operative societies,
mention whether they have opted for
concessional rates of taxation under the special
regimes under section 115BAA/115BAB or
115BAD, as the case may be.
44AA 11(a) Mention whether books of account are prescribed
under section 44AA, if yes, list of books so
prescribed.
44AD, 44AE, 44AF, 44B, 12 Mention whether the profit or loss account
44BB, 44BBA, 44BBB, includes any profits and gains assessable on
Chapter XII-G (provisions presumptive basis, if yes, indicate the amount
relating to shipping and the relevant section.
business)
145(2) 13(d) Mention whether any adjustment is required to be
made to the profits or loss for complying with the
provisions of income computation and disclosure
standards.

145A 14(b) Review the methods of valuation adopted for

valuation of closing stock and compare the same
with the method prescribed under section 145A.
45(2) 15 Mention the details of capital asset converted into
stock- in-trade
28 16 Indicate the amounts falling within the scope of
section 28 which are not credited to the profit and
loss account
43CA or 50C 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, furnish the following details:
(a) Details of property
(b) Consideration received or accrued
(c) Value adopted or assessed or assessable
32 18 Mention the particulars of depreciation allowable as
per the Income-tax Act, 1961 in respect of each
asset or block of asset in the mentioned format.
Section 43(1) and Explanations thereunder and
section 36(1)(iii) also to be kept in mind.
33AB, 33ABA, 35(1)(i), 19 State the amounts admissible under these
35(1)(ii), 35(1)(iia), sections
35(1)(iii), 35(1) (iv),
35(2AA), 35(2AB), 35ABB,
35AD, 35CCA, 35CCC,
35CCD, 35D, 35DD,
35DDA, 35E
36(1)(ii) 20(a) Indicate the sums paid to an employee as bonus
or commission for services rendered, where such
sum was otherwise payable to him as profits or
dividend
36(1)(va) read with 20(b) Mention the details of contributions received from
2(24)(x) employees for various funds as referred to in
section 36(1)(va)
37 21(a) Mention the details of amounts debited to profit
and loss account, being in the nature of capital,
personal, advertisement expenditure,
expenditure incurred at clubs, expenditure by way
of penalty or fine for violation of any law for the
time being in force etc.

40(a)(i)/(ia)/(iib)/ 21(b) Indicate the amounts inadmissible under section

(iii)(iv)/(v) 40(a)(i)/(ia) with details of payment on which tax
has not deducted or after deduction, tax has not
been paid on or before the due specified under
section 139(1) and the amount inadmissible
under section 40(a)(iib), 40(a)(iii), 40(a) (iv),
40(a)(v)
40(b)/40(ba) 21(c) State the amounts debited to profit and loss
account being, interest, salary, bonus,
commission or remuneration inadmissible under
section 40(b)/40(ba) and computation thereof
40A(3)/ 40A(3A) 21(d) State the amount of disallowance under section
40A(3)/ deemed income under section 40A(3A)
40A(7) 21(e) Indicate the provision for payment of gratuity not
allowable under section 40A(7)
40A(9) 21(f) State the amount of payment made to an
employer towards the setting up or formation of
or as contribution to any fund, trust, company,
association of person, body of individuals, society
registered under society registration act or other
institutions which is not allowable
ICDS X 21(g) Examine the particulars of any liability of a
contingent nature debited to the profit and loss
account.
14A 21(h) Verify and state the amount of expenditure
relatable to the income which does not form part
of total income which is not allowed as deduction
in terms of section 14A
36(1)(iii) 21(i) Indicate the amount inadmissible under the
proviso to section 36(1)(iii)
Section 23 of MSMED Act, 22 Indicate the amount of interest inadmissible
2006 under section 23 of the MSMED Act, 2006.
40A(2)(b) 23 Mention the particulars of payments made to
persons specified under section 40A(2)(b)
33AB or 33ABA 24 Report the deemed income chargeable as profits
and gains of business under the circumstances
specified in section 33AB(4)/(5)/(7)/(8) or in
section 33ABA(5)/(7)/(8)
41 25 Indicate the amount of profit chargeable to tax
under section 41 and computation thereof

43B(a)/(b)/(c)/(d)/ 26 Indicate the amount of expenditure not allowable

(e)/ (f) or (g) as per section 43B.
- 27(a) Indicate the amount of Central Value Added Tax
credits availed of or utilised during the previous
year and its treatment in the profit and loss
account and treatment of outstanding Central
Value Added Tax credits in the accounts.
- 27(b) Mention the particulars of income or expenditure
of prior period credited or debited to the profit and
loss account.
56(2)(viib) 29 Mention 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 details of the same
56(2)(ix) 29A(a)/(b) Indicate the sum of money received as an
advance or otherwise in the course of
negotiations for transfer of a capital asset, if such
sum is forfeited and the negotiations do not result
in transfer of such capital asset.
56(2)(x) 29B(a)/(b) Mention the amount which is treated as income in
the hands of a person who received in any
previous year, from any person or persons
money, immovable property, or other property
and conditions stated in the clause are satisfied.
69D 30 Details of the amount borrowed on hundi (including
interest on such amount borrowed) and details of
repayment otherwise than by an account payee
cheque, are required to be indicated
92CE 30A(a)/(b) Mention the details of primary adjustment to
transfer price and details of excess money
available with the AE.
94B 30B(a)/(b) Mention the details of expenditure incurred during
the previous year by way of interest or of similar
nature respect of debt issued by a non-resident
Associated Enterprises under section 94B.
96 30C(a)/(b) Mention the details of impermissible avoidance
arrangements as referred to in section 96 entered
into by the assessee during the previous year and
to quantify the tax benefit arising in the aggregate
in the previous year to all parties to such
arrangement.

269SS 31(a)/(b) Furnish the particulars of each loan or deposit or

specified sum in an amount exceeding the limit
specified in section 269SS taken or accepted
during the previous year.
269ST 31(ba)/ (bb)/ Furnish the particulars of each receipt in an
(bc)/ (bd) amount exceeding the limit specified in section
269ST.
269T 31(c)/(d)/(e) Furnish the particulars of each repayment of loan
or deposit or any specified advance in an amount
exceeding the limit specified in section 269T
made during the previous year.
32(a) Furnish the details of brought forward loss or
depreciation allowance to the extent available.
79 32(b) Furnish the details of change in the shareholding
of the company taken place during the previous
year due to which the losses incurred prior to the
previous year cannot be allowed to be carried
forward in terms of section 79.
73 32(c) Furnish the details of speculation loss incurred by
the assessee during the previous year.
73A 32(d) Furnish the details of loss incurred in respect of
specified business during the previous year.
Explanation to section 73 32(e) Mention whether the company is deemed to be
carrying on a speculation business as referred in
Explanation to section 73.
Chapter VIA or section 33 Provide section-wise details of deductions, if any,
10AA admissible under Chapter VIA or Chapter III.
- 34(a)/(b) Mention whether the assessee is required to
deduct or collect tax as per the provisions of
Chapter XVII-B or Chapter XVII-BB.
201(1A)/206C(7) 34(c) Mention the details of the amount of interest
under section 201(1A) or section 206C(7).
- 35(a)/(b) Provide quantitative details of principal items of
goods, in case of a trading or manufacturing concern.
2(22)(e) 36A Mention whether the assessee has received any
amount in the nature of dividend as referred to in
section 2(22)(e)
- 37 Mention the details of disqualification or
disagreement on any matter/item/value/quantity
as may be reported/identified by the cost auditor.

- 38 Mention the details of disqualification or

disagreement on any matter/item/value/quantity
as may be reported/identified under audit was
conducted under the Central Excise Act, 1944.
- 40 Provide the details regarding turnover, gross
profit, etc. for the previous year and preceding
previous year.
- 41 Provide the details of demand raised or refund
issued during the previous year under any tax
laws other than Income-tax Act, 1961.
- 42(a)/(b) Mention whether the assessee is required to
furnish statement in Form No. 61 or Form No. 61A
or Form No. 61B.
286(2) 43 Mention whether the assessee or its parent entity
or alternate reporting entity is liable to furnish the
report as referred to in section 286(2).
- 44 Provide the break-up of total expenditure of
entities registered or not registered under the
GST.
20.6 PENALTY FOR FAILURE TO FURNISH TAX AUDIT

REPORT [SECTION 271B]
If any person fails to get his accounts audited in respect of any previous year furnish a tax audit
report as required under section 44AB, the Assessing Officer may direct that such person shall pay,
by way of penalty, a sum equal to
- ½ % of the total sales, turnover or gross receipts, as the case may be, in business, or of the
gross receipts in profession, in such previous year or years or
- ` 1,50,000,
whichever is less.
However, according to section 273B, no penalty shall be imposed if reasonable cause for such
failure is proved.
Example : DB Ltd’s turnover for the FY 2022-23 is ` 15 crore from textile business and ` 3 Crore
from petrol pump business. All transactions are through banking channels. DB Ltd. prepared its
financial statements for textile business and got its accounts audited and furnished the same to the
Income Tax department within the prescribed time. The company was of the view that since the

turnover from the petrol pump business is ` 3 crore and all transactions were through banking
channels, the accounts of petrol pump business were not required to be audited. Section 44AB is
attracted where the total turnover from business exceeds the threshold of ` 10 crore i.e., total
turnover indicates that the turnover from all businesses are to be aggregated.
Example: Taking the facts from Example 6, the Assessing Officer wants to invoke penalty on ` 18
crore i.e., ` 15 crore plus ` 3 crore, considering ½% of the total turnover. Since the assessee has
already furnished the report for ` 15 crore, the penalty u/s 271B shall be invoked only on turnover
of ` 3 crore and not on turnover of ` 18 crore.

CASE STUDIES
Case Studies have been included to underline the ethical aspects which have to be considered by
a chartered accountant while issuing tax audit report under section 44AB as well as audit reports
and certificates under the other provisions of the Income-tax Act, 1961. These case studies are
based on the orders passed by the Disciplinary Committee of ICAI and/or the final orders passed by
the Appellate Authority constituted by the Central Government under the Chartered Accountants
Act, 1949.
Every Case Study begins with “A Word about the Case Study” which, as the phrase suggests, gives
an overview as to what the case study is about. Thereafter, each case Study is presented in the
following manner, highlighting the -
I. Relevant provisions of income-tax law
II. Relevant clauses of Part I of the Second Schedule to the Chartered Accountants Act, 1949
III. Facts of the case
IV. Contentions/Submissions of the chartered accountant
V. Bases for Conclusion
VI. Key Takeaways
Additional categories have also been included in a Case Study, if found necessary.
CASE STUDY 1
A Word about the Case Study
This Case Study highlights the ethical aspects which have to be considered by a chartered
accountant while issuing tax audit report. The issue involved in this Case Study relates to the
responsibility of the chartered accountant in relation to reporting in Clause 34(a) and clause
21(b) of Form 3CD for non-deduction of tax at source and consequent disallowance under
section 40(a)(ia).
I Relevant provisions of income-tax law
(1) Section 194J
Section 194J requires tax deduction at source@10% on, inter alia, fees for
professional services, at the time of credit of such sum to the account of the payee
or at the time of payment, whichever is earlier.
As per clause (a) of the Explanation to section 194J, “Professional services” means
services rendered by a person in the course of carrying on, inter alia, medical
profession.

(2) Section 40(a)(ia)

Section 40(a)(ia) provides for disallowance of 30% of the sum payable to a
resident, on which tax is deductible at source under Chapter XVII-B of the Income-
tax Act, 1961 and such tax has not been deducted or after deduction, has not been
paid on or before the due date for filing return of income u/s 139(1).
(3) Reporting requirement in Clause 21(b) of Form 3CD (Relevant Extract)
Amounts inadmissible under section 40(a)
(ii) as payment referred to in sub-clause (ia)
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(4) Reporting requirement in Clause 34(a) of Form 3CD (Relevant Extract)
Whether the assessee is required to deduct or collect tax as per the provisions of
Chapter XVII-B or Chapter XVII-BB, if yes, please furnish –
(10)
(1)
(2)
(3)
(4)
(5)
(6)
(8)
(9)
(7)
Total amt on which tax was deducted or collected
Total amt on which tax was deducted or collected

Total amt on which tax was required to be
Amt of TDS or TCS not deposited to the credit of

Total amt of payment or receipt of the nature
Amt of tax deducted or collected out of (6)
Amt of tax deducted or collected on (8)

at less than specified rate out of (7)
the Central Govt. out of (6) & (8)

deducted or collected out of (4)
at specified rate out of (5)

specified in column (3)
Nature of payment
Section
TAN
II Relevant clause of Part I of the Second Schedule to the Chartered Accountants Act, 1949
As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act,
1949, a chartered accountant in practice shall be deemed to be guilty of professional
misconduct, if he does not exercise due diligence, or is grossly negligent in the conduct
of his professional duties.

III Facts of the case

A survey was conducted on the premises of a hospital consequent to which it was found
that the hospital had made payments of consultancy charges to doctors, without deducting
tax under section 194J, even though the payments to each doctor exceeded the threshold
of ` 30,000.
In the tax audit report, the amount inadmissible under section 40(a)(ia) was mentioned as
NIL in clause 21(b) of Form 3CD. Also, there was no mention of or reporting of TDS
section 194J in clause 34(a).
IV Contentions of the Chartered Accountant
The Chartered Accountant contended that since the doctors did not provide any
professional service to the hospital, the provisions of section 194J would not be attracted.
He explained his contention that sometimes, due to unavoidable reasons/circumstances,
the hospital collected the consultation fees on behalf of the doctors and the same is then
paid/remitted to the doctors. Such payments were not expenses of the hospital and
hence, the question of TDS does not arise.
He also contended that as per the decision passed by the Special Bench of the Tribunal
(Vishakapatnam) in case of Merilyn Shipping and Transports v. ACIT, section 40(a)(ia) is
applicable only in respect of the amounts of expenditure which are payable as on 31 st
March of every year and it cannot be invoked to disallow the amounts which have been
actually paid during the previous year, without deduction of tax at source. In this case, all
payments were made to the respective doctors before 31st March.
Therefore, according to him, the payment made to doctors by way of reimbursement of
the fees collected from patients does not fall under the ambit of TDS and even if it does,
the same would not be disallowed under section 40(a)(ia) due to the above decision.
Note – It may be noted that the Supreme Court, in Palam Gas Service v. CIT (2017) 394
ITR 300, observed that when the entire scheme of obligation to deduct the tax at source
and paying it over to the Central Government is read holistically, it cannot be held that the
word “payable” occurring in section 40(a)(ia) refers only to those cases where the amount
is yet to be paid and does not cover the cases where the amount is actually paid. Once
the section mandates a person to deduct tax at source not only on the amounts payable
but also when the sums are actually paid to the contractor, any person who does not
adhere to this statutory obligation has to suffer the consequences which are stipulated in
the Act itself.
Also, the CBDT has, vide Circular No.10/2013 dated 16.12.2013 that the provisions of
section 40(a)(ia) are amply clear that the term “payable” would include the “amounts which
are paid during the year”.
The case in question relates to a period prior issuance of the Circular and the
pronouncement of the Supreme Court ruling.
V Basis for Conclusion
(1) As per the Guidance Note on Tax Audit issued by ICAI, the tax auditor is required to
report as to whether tax is deductible under any section of Chapter XVII-B and any
amount is inadmissible u/s 40(a)(ia) under clauses 34(a) and 21(b), respectively.

(2) If tax has not been deducted on the basis of Court judgement in a particular
case, then, the tax auditor is required to disclose the same in his report so
as to enable the Income-tax department to know the reason as to why tax was
not deducted by the assessee.
(3) On perusal of the profit and loss account of the hospital vis-à-vis the working
papers of the CA, it has been noted that consultancy charges were shown as
expenses in the Profit and Loss account of the hospital. Thus, the contention that
the hospital collected fees on behalf of doctors and payment of such fees is not
expenditure for attracting TDS u/s 194J is not correct, since such expenditure has
been debited to the profit and loss account
In this case, the CA had ignored the reporting requirements in Form 3CD and had not
exercised due diligence in carrying out his professional duties. Hence, he was held guilty
of professional misconduct falling within the meaning of clause (7) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949.
VI Key Takeaway
The tax auditor should exercise due diligence while reporting under various clauses of
Form 3CD. In case he has taken a view that tax is not deductible by virtue of a Court
judgement, like in this case, he should disclose the same in his report.
CASE STUDY 2
accountant while issuing tax audit report. The issue involved in this Case Study relates to the
responsibility of the chartered accountant in relation to reporting in clause 21(d) of Form 3CD of
expenditure exceeding ` 10,000, for which payment is made otherwise than by way of account
payee cheque/bank draft, ECS or other prescribed electronic modes. Such expenditure would
attract disallowance under section 40A(3) of the Income-tax Act, 1961.
(1) Section 40A(3)
Where the assessee incurs any expenditure, in respect of which payment or
aggregate of payments made to a person in a day otherwise than by an account
payee cheque drawn on a bank or by an account payee bank draft or use of
electronic system through bank account or through such other prescribed electronic
modes exceeds ` 10,000, such expenditure shall not be allowed as a deduction.
The prescribed electronic modes are credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time
Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat
Interface for Money) Aadhar Pay.

The provision applies to all categories of expenditure involving payments for goods
or services which are deductible in computing the taxable income.
(2) Reporting requirement in Clause 21(d) of Form 3CD
(A) On the basis of the examination of books of account and other relevant
documents/evidence, whether the expenditure covered under section 40A(3)
read with rule 6DD were made by account payee cheque drawn on a bank or
account payee bank draft. If not, please furnish the details -
Serial Date of Nature of Amount Name and
No. payment payment PAN/Aadhar No. of
the payee, if available
II Relevant clauses of Part I of the Second Schedule to the Chartered Accountants

Act, 1949
of his professional duties.
misconduct, fails to obtain sufficient information which is necessary for expression of an
opinion or its exceptions are sufficiently material to negate the expression of an opinion.
A search was conducted u/s 132 of the Income-tax Act, 1961 in the case of PQR Jewellers,
a leading gold jewellery retail chain, on 30.1.2023. As part of the post search enquiries,
data from the billing software was analysed. On analysis of this data, it was found that the
concern was involved in violation of section 40A(3) in a major way to the tune of ` 30
crores in the purchase of old gold.
The tax audit report of the concern for the P.Y. 2021-22 was issued by a chartered
accountant u/s 44AB of the Income-tax Act, 1961. The audit report has a specific clause,
namely, clause 21(d), concerning compliance of section 40A(3). However, the chartered
accountant had not properly filled up this clause and had failed to highlight the extensive
violation of section 40A(3).
The chartered accountant submitted that he had done test checks and he did not come
across any payment which warrants disclosure in Form 3CD. He also submitted that
standing instructions were given by the management of the entity to the employees to
make payments above ` 10,000 only through account payee cheques and/or bank drafts
or other permissible electronic modes. Copy of these instructions were verified by him. He
had also taken a representation from the Management that net payment in cash to any
person in a day did not exceed ` 10,000.

Therefore, the tax auditor submitted that he had taken reasonable professional care and
on the basis of test checks, nothing came to his attention to warrant a reporting of violation
of section 40A(3).
V Contentions of the Director of Income-tax (Investigation)
The DIT (Investigation) made the following contentions -
(1) As part of the post search enquiries, data from the billing software was analysed
and violations u/s 40A(3) to the tune of ` 30 crores were noticed. In order to verify
the findings culled from digital data, some of the customers whose whereabouts
were available from computer records were contacted and their statements were
recorded under oath. These customers admitted under oath that they had sold old
gold and received the amounts (all exceeding ` 10,000) in cash. The fact which
emerges from the enquiries is that PQR Jewellers purchase old gold and make
payments for these purchases in cash, even if they exceed ` 10,000.
(2) Though the audit report has a specific clause, namely, clause 21(d) concerning
compliance of section 40A(3), it was not properly filled up and the auditor failed to
highlight the extensive violation of section 40A(3).
He drew reference to the Guidance Note on Tax Audit issued by ICAI which states
that there may be practical difficulties in verifying whether each payment is made
through account payee cheque or bank draft or ECS or other prescribed electronic
modes. Where the reporting has been done on the basis of the certificate of the
assessee, the fact has to be reported as an observation in para 3 of Form 3CA and
para 5 of Form 3CB, as the case may be. The tax auditor, in his report, may
comment on such violation as under:-
“It is not possible for me/us to verify whether the payments in excess of ` 10,000
have been made otherwise than by account payee cheque or bank draft or
prescribed electronic modes, as the necessary evidence is not in the possession of
the assessee”.
However, in this case, the tax auditor had mentioned “Yes” in response to the
statement in sub-clause (A) of Clause 21(d) on 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.
(3) As per the Guidance Note, for the purpose of furnishing the required particulars,
the tax auditor should have obtained a list of all cash payments in respect of
expenditure exceeding ` 10,000/- made by the assessee during the relevant year
which should include the list of payments exempted in terms of Rule 6DD with
reasons. This list should have been verified by the tax auditor with the books of
accounts in order to ascertain whether the conditions for specific exemption granted
under Rule 6DD are satisfied. Details of payments, which do not satisfy the above
conditions, should have been stated under this clause. He should have made use
of the audit tools which are available to find out such payments expeditiously and
accurately where the data is voluminous.

(4) Reference was drawn to the CBDT Circular No. 387, dated 06.07.1984, which
clarifies the purpose of tax audit. The relevant extract of the circular is given below:-
“A proper audit is for tax purposes would ensure that the books of accounts and
other records are properly maintained, that they faithfully reflect the income of the
tax payer and he correctly makes claims for deduction. Such audit would also help
in preventing fraudulent practices. It can also facilitate the administration of tax laws
by a proper presentation of the accounts before the tax authorities and considerably
saving the time of the 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 investigational aspects of the case”.
(5) In this case, given the massive scale of violation of section 40A(3), the chartered accountant
has not exercised reasonable diligence before offering the remarks; and the audit in this
case was not carried out as per the Guidance Note of the ICAI and the CBDT Circular.
VI Basis for Conclusion
(1) In Form 3CD, particulars in respect of cash payments made in violation of Section
40A(3) are required to be reported, as such payments are inadmissible as deduction.
(2) The contention of the chartered accountant that the test checks conducted by him
did not reveal the aforesaid violation was not tenable. Considering the nature of
business of the assessee, namely, jewellery business, the onus was on the
chartered accountant to verify the same before reporting in Form 3CD. Stating the
fact that no such transaction was identified during test check is not acceptable
because such payments can be identified independent of bank transaction provided
the chartered accountant had extended the verification to cover the same. Mere
reliance on certificate issued by the management is not acceptable.
(3) The chartered accountant was, thus, required to point out in tax audit report, the
violation of the provisions of section 40A(3) thereof involving expenditure to a
person in a day exceeding ` 10,000 otherwise than by way of account payee
cheque/bank draft, ECS and other prescribed electronic modes. However, the
chartered accountant has certified that there were no such instance, though such
instances aggregate to a large quantum of ` 30 crores.
Thus, in this case, the chartered accountant was held guilty of professional misconduct
falling within the meaning of clauses (7) and (8) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949.
VII Key Takeaway
The chartered accountant should consider the nature of business of the assessee and
accordingly undertake necessary checks to verify whether there are violations in the
provisions of the Act, like cash payments in violation of section 40A(3) made, as in this
case, by the assessee engaged in jewellery business. He should make use of the audit
tools which are available to find out such payments expeditiously and accurately where
the data is voluminous.

CASE STUDY 3
accountant while issuing Form 10CCB. While issuing Form 10CCB, the chartered accountant
has to ensure compliance with the conditions stipulated under the relevant section (in this case,
section 80-IA) for claim of deduction. Since the profit-linked deductions are available for a
specified period, ten years in case of deduction u/s 80-IA, the chartered accountant has to ensure
that the ten year period has not already elapsed. In case he notices the error after issuing Form
10CCB, he should withdraw the report timely and inform the same to the assessee immediately.
(1) Section 80-IA
Section 80-IA provides for deduction of 100% of the profits and gains derived from
the business of, inter alia, developing or operating and maintaining or developing,
operating and maintaining any infrastructure facility for 10 consecutive assessment
years.
Section 80-IA(7) requires audit of accounts and furnishing of audit report in the
prescribed form on or before the specified date i.e., 30 th September of the
assessment year for claim of such deduction.
(2) Rule 18BBB and Form 10CCB
Rule 18BBB requires the audit report under section 80-IA(7) to be furnished in
Form 10CCB along with the copy of the agreement of the enterprise with the
Central Government or State Government or the local authority for carrying on the
business of developing or operating and maintaining or developing, operating and
maintaining the infrastructure facility.
In Form 10CCB, the chartered accountant gives a declaration that in his opinion
the enterprise satisfies the conditions stipulated in section 80-IA and the amount
of deduction claimed thereunder is as per the provisions of the Income-tax Act,
1961 and meets the required conditions.
II Relevant clause of Part I of the Second Schedule to the Chartered Accountants Act,
1949
of his professional duties
M/s. XYZ & Co. is a firm engaged in developing, operating and maintaining a highway
project filed its return of income for A.Y.2016-17 on 30th September, 2016 claiming
deduction under section 80-IA, on the basis of Form 10CCB issued by the chartered
accountant. However, in August, 2017, it came to the notice of the chartered accountant
that the ten year period for which the company had been eligible to claim deduction and
had, in fact, claimed deduction had expired in A.Y.2015-16. The chartered accountant

withdrew the audit report in Form 10CCB and advised the firm to file a revised return u/s
139(5). At that point of time, the time limit for filing a revised return was one year from
the end of the relevant assessment year i.e., upto 31.3.2018. Accordingly, the firm filed a
revised return u/s 139(5) for A.Y.2016-17 on September, 2017. The Assessing Officer
completed the assessment on the basis of the revised return and issued the assessment
order on 1.3.2019.
The Chartered Accountant contended that as soon as he came to know about the error,
he withdrew his report in Form 10CCB and informed the assessee accordingly. The
assessee, accordingly, filed a revised return withdrawing the claim under section 80-IA.
He informed the Commissioner of Income-tax about the same in March 2019 at the first
available opportunity since he was neither the tax auditor of the company nor was he
representing the assessee before the tax authorities. He added that the Assessing Officer
had completed the assessment on the basis of the revised return. Further, according to
him, his report in Form 10CCB was neither the subject matter at the time of assessment
nor at the time of penalty proceedings.
(1) The claim for deduction under section 80-IA was made by the assessee in the
original return, supported by Form 10CCB issued by the chartered accountant.
However, as soon as the chartered accountant came to know of the error, he
withdrew his report and informed the assessee, who also filed a revised return
withdrawing the claim under section 80-IA.
(2) Therefore, the chartered accountant had withdrawn his audit report in Form 10CCB
and informed the assessee, who also had filed a revised return immediately
withdrawing the claim for deduction under section 80-IA.
Accordingly, the chartered accountant was held “not guilty” of professional misconduct
under clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
VI Key Takeaway
The chartered accountant should exercise due care while issuing audit reports and ensure
that all the conditions stipulated under the relevant provisions of the Income-tax Act, 1961,
including the time period for claim of deduction, are satisfied. In case he notices an error
subsequently, he should immediately withdraw his report, and communicate the same to
the assessee immediately.
CASE STUDY 4
accountant while issuing audit report in Form 10CCB and conducting tax audit. The issue involved
in this Case Study relates to the responsibility of the chartered accountant to ensure compliance
with the stipulated conditions for claim of profit-linked deduction under Chapter VI-A while issuing

audit report. He has to ascertain whether a certain activity carried out by the assessee would
constitute “manufacture” for claim of deduction under section 80-IE and whether the conditions
for claim of deduction have been satisfied in a case where the assessee is a company which had
taken over a sole proprietary concern.
The actual case on the basis of which this Case Study is developed was in relation to section 80-
IB for the A.Y.2002-03 to A.Y.2008-09, prior to the insertion of definition of “manufacture” in the
Income-tax Act, 1961 w.e.f. 1.4.2009. The Case was decided in the year 2014 and reference was
invited to the definition of “manufacture” under the Income-tax Act, 1961 by the Assistant
Commissioner of Income-tax (ACIT). However, in the final decision, the meaning assigned to
“manufacture” under different laws were resorted to considering that there was no definition in
the Act during the relevant period (i.e., A.Y.2002-03 to A.Y.2008-09).
In this Case Study, the dates have, therefore, been modified to a period post insertion of the
definition and reference has been given to section 80-IE, since section 80-IB is no longer relevant
for manufacture or production of article or thing.
(1) Section 80-IE
Section 80-IE applies to an undertaking which has begun to manufacture or
produce any eligible article or thing on or before 1.4.2017. Deduction of 100% of
profits and gains from such business would be available for ten consecutive
assessment years from the year in which it begins to manufacture or produce eligible
article or thing.
The conditions to be satisfied for claim of deduction are that the undertaking should
not be formed by -
(i) splitting up or the reconstruction of a business already in existence and
(ii) the transfer to a new business, of machinery or plant previously used for
any purpose.
(2) Section 2(29BA)
“Manufacture” with its grammatical variations, means a change in a non-living
physical object or article or thing –
(a) resulting in transformation of the object or article or thing into a new and distinct
object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a
different chemical composition or integral structure.
(3) Form 10CCB
This is the form for audit report, inter alia, u/s 80-IE. It requires a chartered
accountant to give a declaration that the undertaking satisfies the conditions
stipulated under section 80-IE and the amount of deduction claimed is as per the
provisions of the Income-tax Act and meets the required conditions.

II Relevant clause of Part I of the Second Schedule to the Chartered Accountants Act,
1949
As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949,
a chartered accountant in practice shall be deemed to be guilty of professional misconduct,
if he does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties.
Alpha Packaging Services Ltd. located in Guwahati has been claiming deduction under
section 80-IE of the Income-tax Act, 1961 since P.Y.2016-17 on the ground that it was
engaged in manufacture or production of an eligible article or thing. A survey conducted on
the company followed by a scrutiny of the case showed that the company was merely
involved in packaging washing powder of a leading brand, Turf, obtained from Unilever Ltd.
and giving the same back to them. The tax audit report as well as the report in Form 10CCB
for claiming deduction under section 80-IE was issued by the same chartered accountant.
A show cause notice was issued by the ACIT to the chartered accountant stating the
company got undue relief under section 80-IE for the last seven years on the basis of his
report in Form 10CCB to the effect that the concern was involved in
manufacturing/production of an eligible article or thing.
IV Contentions of the ACIT
The ACIT contended that the report in Form 10CCB issued by the chartered accountant is
not correct since –
- The company is not in any way involved in manufacturing or production of any article
or thing. The company is merely involved in packaging of washing powder that was
given by LMN Ltd. It was not involved in manufacturing of any pouch or cover or sachet
which was independently saleable as a product in the market.
- The company is not a new undertaking because it had taken over a proprietary concern
and hired the plant and machinery of the said proprietary concern. Hence, it did not
satisfy the condition for claim of deduction u/s 80-IE.
V Submissions of the Chartered Accountant and the ACIT’s counter contentions
CA’s Submission ACIT’s Contention
1. The report in Form 10CCB was This contention is not acceptable as Form
only a declaration not a 10CCB is a declaration by the chartered
certificate accountant that the undertaking satisfies the
stipulated conditions for claim of deduction
and the amount claimed is as per the
provisions of the Income-tax Act, 1961 and
meets the required conditions.
2. Reliance on the Certificate of The activity(s) which amount to manufacture
Directorate of Industry, Assam or production is different under each Act. The

chartered accountant issuing Form 10CCB

has to ensure that the same amounts to
“manufacture” as per the definition given in
section 2(29BA) of the Income-tax Act, 1961.
3. Reference to Supreme Court Even according to the Supreme Court ruling,
ruling in ITO v. Arihant tiles and the condition to be fulfilled is that there should
Marbles Pvt. Ltd. wherein it was be emergence of a new and distinct
held that only when the marble commodity. In the case of the assessee, the
blocks are cut into slabs and washing powder remains a washing powder.
there is an activity of polishing The original product and the end product
and ultimate conversion of block remained the same. No new and distinct
into polished tiles, such slabs commodity emerges as a result of packaging.
and tiles ultimately produced are Further, the end product is patented by
held to be manufacturing activity Unilever and it cannot undergo change in any
because a new product has manner.
emerged.
4. The proprietary business was The assessee did not own plant and
taken over by the company with all machinery, and such assets hired by the
assets and liabilities except plant assessee amounted to transfer and thus, the
and machinery pertaining to the company was not entitled to deduction u/s 80-
old units. The plant and machinery IE.
was not transferred to the
company but given on hire to it and
for using the machines, payment of
hire charges was made and shown
in the statement of profit and loss.
Hence, the company has not
violated any condition.
VI Basis for Conclusion in the original case
(1) The definition of manufacture was inserted with effect from 1.4.2009. Since the case
in question actually related to a period prior to insertion of definition of “manufacture”
in the Income-tax Act, 1961, it was decided that though packaging or repackaging of
a product is not manufacturing activity, the further activity of removing dust, grinding
can be treated as manufacturing activity because the said activity changes the quality
of the product and makes the product commercially marketable in different form. This
conclusion emerged on the basis of Court ruling in relation to Excise law and other
case laws holding that provisions of a taxing statute granting incentive for promoting
growth should be construed liberally.
(2) Certain Tribunal and High Court rulings have held that in order to constitute an
industrial undertaking (which was a requirement under section 80-IB), the industrial
unit need not necessarily own its plant and machinery and hiring of plant and
machinery would not inhibit the ability of industrial unit or company to claim deduction.

(3) Considering the rationale emerging from the Court decisions as regards whether the
activity of packaging constituted manufacture/production and whether hiring of plant
and machinery from the sole proprietary concern which was taken over by the
company would be in violation of the stipulated condition, the benefit of doubt was
extended to the chartered accountant and he was held “not guilty of professional
misconduct”.
VII Key Takeaways in the context of the current provisions of Income-tax law
(1) In the current context, however, the definition of “manufacture” as per section 2(29BA)
of the Income-tax Act, 1961 would be relevant. Therefore, the chartered accountant
giving a declaration in Form 10CCB has to ensure that the activity carried on by the
assessee amounts to “manufacture” as per the said definition. He may rely on judicial
rulings based on the definition of manufacture u/s 2(29BA) or a similar definition under
any other law for this purpose. It may be noted that “making the product commercially
marketable”, which was one of the bases for conclusion in the actual case is not
included in the definition of manufacture under section 2(29BA).
(2) With the introduction of several anti-avoidance provisions in the Income-tax Act,
1961, in the last decade, the action of taking over all assets and liabilities of the sole
proprietary concern except plant and machinery and subsequently hiring the plant
and machinery from the said concern itself in order to claim deduction under section
80-IE may be viewed as a tax avoidance measure. This may be viewed as an
arrangement entered into solely or primarily for the purpose of obtaining a tax
advantage and even GAAR provisions may be attracted if the tax benefit is more than
` 3 crores.
Therefore, the chartered accountant must ensure satisfaction of conditions for
claiming deduction under section 80-IE before issuing the audit report under Form
10CCB.
CASE STUDY 5
accountant while issuing certificate in Form 15CB. The issue involved in this Case Study relates
to the responsibility of the chartered accountant to examine the agreement between the remitter
and the beneficiary as well as the relevant documents and books of account to ascertain the
nature of remittance and determine the rate of deduction of tax at source.
I Relevant provision of income-tax law
Section 195(6) and Rule 37BB
The person responsible for paying to a non-corporate non-resident or a foreign company,
any sum, whether or not chargeable under the provisions of the Income-tax Act, 1961, has

to furnish information relating to payment of such sum in the prescribed form and manner.
Rule 37BB(1) provides that the person responsible for paying to a non-corporate non-
resident or a foreign company, any sum chargeable under the provisions of the Income-tax
Act, 1961, has to furnish the information in Part C of Form No.15CA, if the amount of
payment or the aggregate of such payments, as the case may be, during the financial year
exceeds ` 5 lakh, after obtaining a certificate in Form No.15CB from a chartered
accountant.
II Relevant clauses of Part I of the Second Schedule to the Chartered Accountants Act,
1949
if he does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties.
fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion.
The Income-tax department collected documents from X Bank which revealed that M/s. Y
Travels and Consultancy Services (Y Travels) had remitted substantial amounts abroad.
The documents collected include Form 15CB issued by the chartered accountant, list of
passengers, copy of their passports, date of travel and invoice raised by the foreign party.
On enquiring from the passengers and verifying their passports, it is found that they did not
travel abroad during the dates mentioned in the documents. Further, the passengers
denied any sort of transactions with Y Travels. The department, therefore, concluded that
the amounts were remitted abroad on the basis of false invoices and for wrong reasons,
leading to FEMA violations and that the Form 15CB issued by the chartered accountant
facilitated such violations. During the six-month period in question, the chartered
accountant had issued 80 certificates in Form 15CB approximately involving remittances
of ` 25 crores in favour of Y Travels.
IV Submissions of the Chartered Accountant
The chartered accountant submitted that he had issued Form 15CB based on invoices
produced by the company and verifying the KYC documents of the signatory to the invoices.
He submitted that since he was not the statutory auditor of the company, he did not examine
the books of account before issue of Form 15CB or conduct due diligence of its business
activities. He had charged ` 2,000 per certificate. Mostly, the fees was collected in cash.
Some part of the fee was credited to his bank account.
(1) Form 3CB is a certificate of an accountant wherein he certifies that he has examined

the agreement between the remitter and the beneficiary requiring such remittance
as well as the relevant documents and books of account required for ascertaining
the nature of remittance and for determining the rate of deduction of tax at source.
(2) The CA certifying the form undertakes to have verified the agreement between the
remitter and the beneficiary as well as the relevant documents and books of account
to ascertain the nature of remittance and determine the rate of TDS.
(3) In this case, however, the CA mentioned that he had only verified KYC of signatory
to invoice and the invoices thereof. He had not only failed to justify as to how
verification of invoices was considered as sufficient compliance for certifying the
forms but also failed to bring on record the said invoices. Thus, he failed to provide
any basis on which he relied for issuing Form 15CB certificates to the company.
(4) The CA issuing certificate in Form 15CB is, therefore, required to examine the
agreement between the remitter and the beneficiary along with the relevant
documents as well as books of account of the company –
(i) for arriving at a conclusion as to the nature of remittance and rate of TDS; and
(ii) for ensuring that the particulars mentioned in the certificate were true and
correct.
In this case, since he has failed to do so, he is held guilty of professional misconduct as
per clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act,
1949 for failure to obtain sufficient information and failure to exercise due diligence in
discharging his professional responsibilities.
VI Key takeaway
As elucidated in the Guidance Note, while issuing certificates, absolute level of assurance
is expected to be provided by the practitioner on the subject matter. Therefore, a CA has
to exercise due diligence and discharge the duties expected of him as a professional while
issuance of such certificates. Accordingly, in this case, before issuing certificate in Form
15CB, the CA should verify the agreement between the remitter and the beneficiary, along
with the relevant documents and books of account of the company for arriving at a
conclusion as to the nature of remittance and rate of TDS. Only after ensuring that the
particulars mentioned in the certificate were true and correct, should he issue such
certificate. In case after issuing the certificate in Form 15CB, he comes to know that the
remittance was not genuine, he has to withdraw the same within 7 days.

TEST YOUR KNOWLEDGE

Questions
1. Sunlight & Co., a partnership firm engaged in trading of electronic goods, has a turnover of
` 265 lakhs for the F.Y. 2023-24. Examine whether Sunlight & Co. is required to get its books
of account audited mandatorily as per section 44AB from the information given below –
Particulars `
(i) Total turnover of F.Y.2023-24 2,65,00,000
(ii) Aggregate of all receipts during the year (including amount 3,25,00,000
received for turnover mentioned in (i) above)
(iii) Cash receipts out of (i) above 14,00,000
(iv) Cash receipts out of (ii) above (This is inclusive of the figure 16,00,000
mentioned in (iii) above)
(v) Aggregate of all payments during the year 1,35,00,000
(vi) Cash payments out of (v) above 6,95,000
Would your answer change if the cash receipts indicated in (iii) is ` 13 lakh instead of ` 14
lakh?
2. Mr. Abhinav Ahuja runs a travel agency business since the year 2010. His total commission
receipts for the F.Y. 2023-24 is ` 287 lakhs. The details of receipts and payments made by
him during the year 2023-24 are as follows:
Particulars Amount (`) Mode of
receipt/payment
Date of Receipt
15.4.2023 15,65,000 BHIM UPI
27.4.2023 13,80,000 A/c payee cheque
7.5.2023 13,35,000 Bearer cheque
6.6.2023 18,21,000 A/c payee cheque
15.8.2023 15,25,000 NEFT
19.9.2023 16,72,000 NEFT
18.10.2023 15,35,600 UPI
15.2.2024 16,25,350 UPI
17.3.2024 18,19,450 NEFT

Other aggregate receipts not exceeding 1,44,21,600 A/c payee cheques,

` 2,000 per person on certain occasions NEFT and UPI
from various customers. Out of this,
receipts of ` 52,500 are received in
cash.
Payments
Aggregate all payments made during the 2,58,00,000
P.Y. 2023-24
Amount incurred for expenditure in cash 20,58,000
(not exceeding ` 10,000 per person in
each case)
Mr. Abhinav contended that he is not required to get his accounts audited since his turnover
does not exceed ` 3 crores and he is eligible to declare his income as per presumptive
provisions of section 44AD. Examine the contention of Mr. Abhinav Ahuja.
3. X Ltd., an Indian company, paid interest of ` 95 lakhs to X Inc., a non-resident associated
enterprise in the P.Y.2023-24 on loan borrowed from it. X Ltd. also obtained loan of ` 5
crore@10% p.a. on 1.4.2023 from Y Inc., a foreign company in which it holds 20% voting
power. X Inc. deposits ` 2 crore with Y Inc. X Ltd. contends that the provisions of section
94B are not attracted in its case, since the interest paid to non-resident associated enterprise
does not exceed ` 1 crore in the P.Y.2023-24. The tax auditor is, however, of the opinion that
the interest of ` 20 lakh (i.e., 10% of ` 2 crore) also has to be considered for the purpose of
section 94B. X Ltd. contends that X Inc. has not deposited a corresponding and matching
amount of ` 5 crore with Y Inc, and hence, the provisions of section 94B will not be attracted
in this case. Examine the reporting requirement, if any, of the tax auditor in this case.
4. ABC Ltd. is engaged in transportation of building material and transportation of goods to
contractors. It made payment for hiring dumpers for this purpose. The company has not
deducted tax at source on the ground that since the payment was for transportation of goods
and not renting out machinery and equipment, such payments could not be termed as rent
paid for use of machinery under section 194-I and hence, no tax was deductible at source.
The tax auditor is, however, of the view that the transactions being in the nature of contracts
for shifting of goods from one place to another would be covered under works contracts,
thereby attracting the provisions of section 194C. He relied upon the Gujarat High Court ruling
in CIT (TDS) v. Shree Mahalaxmi Transport Co. (2011) 339 ITR 484.
What is the reporting responsibility of the tax auditor in such a case and the consequent
ethical implications? Examine.

5. A search was conducted u/s 132 of the Income-tax Act, 1961 in the case of LMN Jewellers
(P) Ltd., a gold jewellery retail chain, on 28.2.2023. As part of the post search enquiries, data
from the billing software was analysed. On analysis of this data, it was found that the company
was involved in violation of section 40A(3) in a major way to the tune of ` 20 crores in the
purchase of old gold.
In order to verify the findings culled from digital data, some of the customers whose
whereabouts were available from computer records were contacted and their statements
were recorded under oath. These customers admitted under oath that they had sold old gold
and received the amounts (all exceeding ` 10,000) in cash. The fact which emerged from the
enquiries is that LMN Jewellers (P) Ltd. purchase old gold and make payments for these
purchases in cash, even if they exceed ` 10,000.
However, the tax auditor had mentioned “Yes” in response to the statement in sub-clause (A)
of Clause 21(d) on 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.
The tax auditor submitted that standing instructions were given by the management of the
entity to the employees to make payments above ` 10,000 only through account payee
cheques and/or bank drafts or other permissible electronic modes; and copy of these
instructions were verified by him. He further submitted that he had also taken a representation
from the Management that net payment in cash to any person in a day did not exceed
` 10,000. Also, he mentioned that the test checks conducted by him did not reveal any
violation.
Examine the ethical implications in this case and the consequences thereof.
6. XYZ & Co, a firm engaged in interior decoration business, employed 20 new employees on
1.4.2022 on a monthly salary of ` 25,000 to be paid by account payee cheque. In addition,
each employee was entitled to 10% employer contribution to recognised provident fund. The
employees were also entitled to transport allowance of ` 3,000 p.m. paid in cash. The gross
total income of XYZ & Co. included profits and gains from business of ` 62 lakh.
The firm claimed deduction under section 80JJAA of ` 18 lakh, being 30% of 60 lakh (20 new
employees x ` 25,000 p.m. x 12) on the basis of the report of the chartered accountant issued
in Form 10DA. The same chartered accountant was also the tax auditor of the firm. The
chartered accountant contended that “emoluments” do not include employer contribution to
PF. Also, cash payments were not to be considered as “additional employee cost” for the
purpose of section 80JJAA. Hence, only ` 25,000 p.m. per employee paid by account payee
cheque has to be treated as additional employee cost. Since the same does not exceed the

limit of ` 25,000 p.m. and the employees have been employed for more than 240 days in the
P.Y.2022-23, the employees would qualify as “additional employees” for the purpose of
deduction under section 80JJAA for A.Y.2023-24.
Is his contention correct? Examine the ethical implications in this case.
7. The Income-tax department collected documents from ABC Bank which revealed that M/s.
Alpha Travels and Consultancy Services (Alpha Travels) had remitted substantial amounts
abroad. The documents collected include Form 15CB issued by the chartered accountant, list
of passengers, copy of their passports, date of travel and invoice raised by the foreign party.
On enquiring from the passengers and verifying their passports, it is found that they did not
travel abroad during the dates mentioned in the documents. Further, the passengers denied
any sort of transactions with Alpha Travels. The department, therefore, concluded that the
amounts were remitted abroad on the basis of false invoices and for wrong reasons, leading
to FEMA violations and that the Form 15CB issued by the chartered accountant facilitated
such violations. During the nine-month period in question, the chartered accountant had
issued 120 certificates in Form 15CB approximately involving remittances of ` 30 crores in
favour of Alpha Travels.
The chartered accountant submitted that he had issued Form 15CB based on invoices
produced by the company and verifying the KYC documents of the signatory to the invoices.
He however, failed to bring on record the invoices. He further submitted that since he was
not the statutory auditor of the company, he did not examine the books of account before
issue of Form 15CB or conduct due diligence of its business activities. He had charged `
3,000 per certificate. Mostly, the fees was collected in cash. Some part of the fee was
credited to his bank account.
Examine the ethical implications in this case.
Answers
1. As per section 44AB, every person carrying on business or profession is required to get his
accounts audited before the “specified date” by a Chartered Accountant, if the total sales,
turnover or gross receipts in business exceeds ` 1 crore in any previous year.
However, tax audit is not required in case of such person carrying on business whose
total sales, turnover or gross receipts in business ≤ ` 10 crore in the relevant previous
year (P.Y.), if:-

P.Y. ≤ 5% of such payments or
In this case, the turnover of Sunlight & Co. exceeds ` 1 crore but does not exceed ` 10 crore.
Accordingly, it has to be seen whether cash receipts exceed 5% of aggregate receipts and
cash payments exceed 5% of aggregate payments, to determine whether tax audit is
compulsory.
In this case, the percentage of cash receipts of ` 16 lakhs to aggregate receipts of ` 325
lakhs is 4.92% and the percentage of cash payments to aggregate payments is 5.14%.
Since the cash payments made during the year exceed 5% of aggregate payments, the firm
is required to get its accounts audited under section 44AB and furnish audit report before the
specified date, irrespective of the fact that its turnover does not exceed ` 10 crores and its
cash receipts do not exceed 5% of total receipts.
It may be noted that, in this case, Sunshine & Co. cannot declare profits as per the
presumptive provisions of section 44AD, since the percentage of turnover receipts in cash of
` 14 lakhs to the total turnover of ` 265 lakhs is 5.28%.
If the cash receipts indicated in (iii) is ` 13 lakhs instead of ` 14 lakhs, the percentage of
turnover receipts in cash of ` 13 lakhs to the total turnover of ` 265 lakhs would be 4.91%.
In such a case, Sunshine & Co. can declare profits as per the presumptive provisions of
section 44AD, in which case, it need not get its books of account audited under section 44AB.
2. As per section 44AB, every person inter alia carrying on business or profession is required to
get his accounts audited before the “specified date” by an accountant, if total sales, turnover
or gross receipts in business exceeds ` 1 crore in any previous year.
However, tax audit is not required in case of such person carrying on business whose total
sales, turnover or gross receipts in business ≤ ` 10 crore in the relevant previous year (P.Y.),
if -
P.Y. ≤ 5% of such payments or

As per section 44AD, a resident individual, HUF or Partnership firm (but not LLP) engaged in
eligible business and who has not claimed deduction under section 10AA or Chapter VIA
under “C – deductions in respect of certain incomes” whose total turnover/ gross receipts in
the P.Y. ≤ ` 200 lakhs (where cash receipts do not exceed 5% of total turnover, higher
threshold limit of ` 300 lakhs applicable) can declare 8%/6%, as the case may be, of total
turnover/ sales/gross receipts or a sum higher than the aforesaid sum claimed to have been
earned by the assessee. However, a person inter alia carrying on any agency business are
not eligible for presumptive provisions of section 44AD.
In the present case, since Mr. Abhinav Ahuja is carrying on travel agency business, he is not
eligible for presumptive provisions of section 44AD, though his turnover does not exceed
` 3 crores.
In this case, the turnover of Mr. Abhinav Ahuja exceeds ` 1 crore but does not exceed ` 10
crore. Accordingly, it has to be seen whether cash receipts exceed 5% of aggregate receipts
and cash payments exceed 5% of aggregate payments, to determine whether tax audit is
compulsory. During the P.Y. 2023-24, his cash receipts are ` 13,35,000 plus ` 52,500
totalling to ` 13,87,500, which is 4.83% of total receipts of ` 2,87,00,000. Cash payments
made during the P.Y. 2023-24 are ` 20,58,000 which is 7.98% of aggregate payments of
` 2,58,00,000. Since his cash payments during the P.Y. 2023-24, exceed 5% of aggregate
payments made during the year, he is required to get the accounts audited under section
44AB and furnish tax audit report on or before the specified date i.e., one month prior to the
due date of filing return of income under section 139(1).
3. Relevant provision of law - Section 94B provides that where the debt is issued by a lender
which is not associated but an associated enterprise either provides an implicit or explicit
guarantee to such lender or deposits a corresponding and matching amount of funds with the
lender, such debt shall be deemed to have been issued by an associated enterprise.
In this case, the debt issued by Y Inc. is ` 5 crore and the deposit made by the associated
enterprise, X Inc. with Y Inc. is ` 2 crore. Since the deposit is not of a matching amount, the
X Ltd. contends that provisions of section 94B will not be attracted in respect of interest
payable by it to Y Inc. The tax auditor is of the opinion that interest on ` 2 crore amounting
to ` 20 lakhs will have to be considered for the purpose of section 94B. Accordingly, the
interest payable/paid by X Ltd. to non-resident associated enterprises during the year would
be ` 115 lakhs and hence, the provisions of section 94B would be attracted, since the same
exceeds the threshold of ` 1 crore. This appears to be the legislative intent, since otherwise

it is possible to escape the application of this provision by even by depositing a marginally

lower amount than the loan taken.
Relevant clause of Form 3CD - Clause 30B(a) of Form 3CD requires the tax auditor to state
whether the assessee has incurred expenditure during the previous year by way of interest
or of similar nature exceeding one crore rupees as referred to in sub-section (1) of section
94B.
Relevant paras of the Guidance Note on Tax Audit - As per para 18.6 of the Guidance
Note on Tax Audit, the tax auditor may have a difference of opinion with regard to the
particulars furnished by the assessee. These differences are to be reported in para 3 of Form
No. 3CA or para 5 of Form 3CB. As per para 19.3, if there is any difference in the opinion of
the tax auditor and that of the assessee in respect of any information furnished in Form No.
3CD by the assessee, the tax auditor may consider stating both the view points and also the
relevant information related to matter in order to enable the tax authority to take a decision in
the matter.
Therefore, the tax auditor has to report the difference of opinion appropriately as an
observation in para 3 of Form No. 3CA or para 5 of Form No. 3CB as the case may be.
Accordingly, in this case, the tax auditor may state both the view points in Clause 30B
as well as report the difference of opinion appropriately as an observation in para 3 of
Form 3CA to enable the tax authority to take a decision in the matter.
4. In clause 34(a) of Form 3CD, the tax auditor is required to report whether the assessee is
required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB,
and if yes, to furnish the details mentioned thereunder. While answering the issue of
applicability of the provisions of Chapter XVII-B and/or XVII-BB, a number of debatable issues
may arise before the assessee as well as the tax auditor. The tax auditor may have a
difference of opinion with regard to the applicability of the provisions of TDS/TCS on a
particular payment. In such a case, the tax auditor has to report the difference of opinion
appropriately as an observation in para 3 of Form 3CA. This requirement is contained in the
Guidance Note on Tax Audit.
Also, in clause 21(b)(ii) of Form 3CD, the amount inadmissible under section 40(a)(ia) has to
be mentioned.
In case the tax auditor does not comply with the reporting requirements under these clauses
and fails to mention the difference of opinion appropriately as an observation in para 3 of

Form 3CA, clause (7) of Part I of the Second Schedule to the Chartered Accountants Act,
1949 for not exercising due diligence may be invoked.
5. As per section 40A(3), where the assessee incurs any expenditure, in respect of which
payment or aggregate of payments made to a person in a day otherwise than by an account
payee cheque drawn on a bank or by an account payee bank draft or use of electronic system
through bank account or through such other prescribed electronic modes exceeds ` 10,000,
such expenditure shall not be allowed as a deduction.
Clause 21(d) of Form 3CD requires the tax auditor to report, 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; and if not, to furnish details mentioned thereunder,
namely, date of payment, nature of payment, amount etc.
The Guidance Note on Tax Audit issued by ICAI states that there may be practical difficulties
in verifying whether each payment is made through account payee cheque or bank draft or
ECS or other prescribed electronic modes. Where the reporting has been done on the basis
of the certificate of the assessee, the fact has to be reported as an observation in para 3 of
Form 3CA.
The tax auditor is required to point out in tax audit report, the violation of the provisions of
section 40A(3) thereof involving expenditure to a person in a day exceeding ` 10,000
otherwise than by way of account payee cheque/bank draft, ECS and other prescribed
electronic modes. However, in this case, the tax auditor has certified that there was no such
instance, though such instances aggregate to a large quantum of ` 20 crores.
The tax auditor should have considered the nature of business i.e., jewellery business of the
assessee and accordingly undertaken necessary checks to verify whether there are cash
payments in violation of section 40A(3). He should have made use of the audit tools which
are available to find out such payments expeditiously and accurately where the data is
voluminous.
In this case, considering the nature of business of the assessee, namely, jewellery business,
the onus was on the tax auditor to verify the same before reporting in Form 3CD. Mere
reliance on certificate issued by the management is not acceptable in such a case. Also, even
in a case where the reporting has been done on the basis of the certificate of the assessee,
the fact has to be reported as an observation in para 3 of Form 3CA, which he had failed to
do.

Thus, in the case, the tax auditor had failed to exercise due diligence in the conduct of his
professional duties. He had also failed to obtain sufficient information which is necessary for
expression of opinion. On account of such failure, clauses (7) and (8) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949 may be invoked.
6. Deduction under section 80JJAA is allowable to an assessee to whom section 44AB applies
and whose gross total income includes any profits and gains derived from business, in respect
of employment of new employees. The amount of deduction is 30% of additional employee
cost incurred in the course of such business in the previous year, for three assessment years
including the assessment year relevant to the previous year in which such employment is
provided.
“Additional employee cost” means the total emoluments paid or payable to additional
employees employed during the previous year. However, in the case of an existing business,
the additional employee cost shall be nil, if emoluments are paid otherwise than by an account
payee cheque or account payee bank draft or use of ECS through bank account or other
prescribed electronic mode.
“Emoluments” means any sum paid or payable to an employee in lieu of his employment by
whatever name called but does not include, inter alia, contribution by employer to provident
fund.
“Additional employee” means an employee who has been employed during the previous year
and whose employment has the effect of increasing the total number of employees employed
by the employer as on the last day of the preceding year, but does not include, inter alia, an
employee whose total emoluments are more than ` 25,000 p.m.
In this case, the contention of the chartered accountant that the emoluments do not include
employer contribution to PF is correct. However, emoluments include ` 3,000 paid in cash
by way of transport allowance to the employee. Hence, the total emoluments per employee
is ` 28,000 p.m. Due to this reason, the 20 employees employed on 1.4.2022 will not qualify
as “additional employees” for the purpose of deduction under section 80JJAA, since their total
emoluments are more than ` 25,000 p.m. Hence, XYZ & Co. is not eligible for any deduction
under section 80JJAA due to failure to fulfil the condition for being treated as an “additional
employee”. In this case, the chartered accountant has failed to ensure compliance with the
condition stipulated for claim of deduction under section 80JJAA and has wrongly issued the
report in Form 10DA certifying the deduction claimed by the assessee under section 80JJAA.

Also, clause 33 of Form 3CD requires section-wise details of deductions, if any, admissible
under Chapter VIA. Here again, the tax auditor has to ensure that the assessee fulfils all the
conditions specified in the section under which the deduction is claimed. However, in this
case, the tax auditor has failed to do so.
On account of such failure, clause (7) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949 may be invoked.
7. Form 15CB is a certificate of an accountant wherein he certifies that he has examined the
agreement between the remitter and the beneficiary requiring such remittance as well as the
relevant documents and books of account required for ascertaining the nature of remittance
and for determining the rate of deduction of tax at source. The chartered accountant certifying
the form undertakes to have verified the agreement between the remitter and the beneficiary
as well as the relevant documents and books of account to ascertain the nature of remittance
and determine the rate of TDS. In this case, however, the chartered accountant mentioned
that he had only verified KYC of signatory to invoice and the invoices thereof. He had not
only failed to justify as to how verification of invoices was considered as sufficient compliance
for certifying the forms but also failed to bring on record the said invoices. Thus, he failed to
provide any basis on which he relied for issuing Form 15CB certificates to the company.
On account of such failure, clauses (7) and (8) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949 for failure to exercise due diligence in discharging his
professional responsibilities and failure to obtain sufficient information may be invoked.

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CHAPTER 20

After studying this chapter, you would be able to -

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Reports and Certificates

Tax Audit report u/s 44AB Other Reports and Certificates

Form 3CA Form 3CB

Form 3CD [to be Form 3CD [to be

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A chartered accountant in practice would be deemed to be guilty of professional misconduct under

20.2 TAX AUDIT UNDER SECTION 44AB

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20.3 FORM 3CA & FORM 3CB

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differences are to be reported in Para 5

20.4 FORM 3CD – STATEMENT OF PARTICULARS

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Clause Particulars Reporting requirements in relation to the relevant

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of name change should be suitably clarified as an

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applicable on him if the different types of indirect taxes are

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tax Act, 1961 or opt to pay tax as per section 115BAD or

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documents or other documents effecting such

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note the changes, if any. He may make necessary

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44B, 44BB, 44BBA, also be reported under this clause.

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net effect. be prepared and maintained alongwith computation

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section 28; account are to be stated.

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If employees contribution to any provident fund or

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not a technical expert, he has to obtain suitable certificate

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In case the auditor relies on a judicial

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contributions to provident fund and other welfare funds.

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corporate and non-corporate assessees respectively

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The term used in this point is expenditure by way of

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required to be given for each individual payee. The tax