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September 2018

AMENDMENTS IN FORM 3CD ANNEXED TO TAX AUDIT REPORT

By P. N. SHAH
Chartered Accountant
Reading Time 18 mins

Section 44AB relating to Tax Audit was inserted in the Income
tax Act by the Finance Act, 1984. Tax Audit requirement has become effective
from A.Y. 1985-86.  The above provision
for compulsory Tax Audit in cases of assessees carrying on business or profession
and having annual Turnover or Gross Receipts exceeding certain specified limits
was introduced with a view to provide authentic information to the Assessing
Officer with the return of income. Separate Tax Audit report Form 3CA for
Corporate assessees and Form 3CB for non-corporate assessees have been
notified. In these Audit Reports it is specifically stated that “Statement of
Particulars required to be furnished under Section 44AB is annexed herewith in
Form No:3CD”. In other words, the intention from the beginning has been that
Form 3CD will give certain specified particulars (i.e. information) relating to
the accounts audited by the Tax Auditor. In other words, the Assessing Officer
is provided with authentic information to enable him to frame the assessment
without further verification.

 

The initial draft of Tax Audit Report with statement of
particulars, as prepared by the Taxation Committee of the Institute of
Chartered Accountants was notified by CBDT with certain modifications. The Tax
Audit Report as notified in A.Y. 1985-86, continued with minor modifications
upto A.Y. 1998-99. In the subsequent years, Form 3CD has been revised from time
to time and additional responsibilities are placed on Tax Auditors. Originally,
Tax Auditors were only required to give information about certain items
appearing in the Financial Statements. Later on reporting requirement in Form
3CD required the Tax Auditor to express his opinion on certain items of
income/expenditure and state whether the same is taxable as income or allowable
as expenditure.

 

At present, Form 3CD contains 41 items (with several
sub-items) in respect to which information or opinion is to be given. By
notification dated 20th July, 2018, Form 3CD is amended with effect
from 20th August, 2018.  The
amendments made in this Form places additional responsibility on Tax Auditors.
Nine new items viz. 29A, 29B, 30A, 30B, 30C, 36A, 42, 43 and 44 are added.
Besides these items, some additional information is called for in the existing
items. It may be noted that this amended Form 3CD is to be used in respect of
Tax Audit Report given on or after 20/08/2018. If the Tax Audit Report is given
before 20/08/2018, the old Form 3CD is to be used. Since the amendments made in
Form 3CD will put additional responsibilities on Tax Auditors and some
important issues of interpretation will arise, an attempt is made in this
article to analyse the amendments made in Form 3CD.

 

1. New Clause 29A

This is a new item under which, if any amount is to be
included as income chargeable u/s. 56(2)(ix) in the case of the assessee, the
nature of the income and the amount of income will have to be given. Section
56(2)(ix) provides that any amount received by the assessee as advance or
otherwise in the course of negotiations for transfer of a capital asset is
taxable as income from other sources, if the said amount is forfeited and the
capital asset is not transferred.

 

2.  New clause 29B

Under this new item, if any amount is includible in the
income of the assessee u/s. 56(2)(x), the details about the nature and amount
of income will have to be given. It may be noted that section 56(2)(x) provides
that, if the assessee receives any gift or any movable or immovable property
for a consideration which is less than the Fair Market Value from a
non-relative, the difference in the value, if it is more than Rs. 50,000/- will
be taxable as income from other sources.

 

3.  New clause 30A

Under this item the Tax
Auditor has to state whether primary adjustment to transfer price, as referred
to in section 92CE(1), has been made during the previous year. If so, details
of such primary adjustment and amount of such adjustment should be stated. It
may be noted that this provision is applicable only if the primary adjustment
is more than Rs. 1 crore. If the excess money available with the associated
enterprise is required to be repatriated to India u/s. 92CE(2), whether such
remittance has been made within the prescribed time limit is also to be stated.
If not, the amount of imputed interest income on such amount which has not been
remitted to India within the prescribed time limit will have to be stated. This
item relates to International Transactions for which separate Tax Audit Report
u/s. 92E is required to be submitted in Form 3CEB. It is not understood as to
why this information is included in Form 3CD instead of Form 3CEB.

 

4.   New clause 30B

Under this item information about expenditure incurred by way
of interest, exceeding Rs. 1 crore,
as referred to u/s. 94B is to be given. This section applies to an Indian
Company or a permanent establishment (PE) of a foreign company in India. If
such Company or PE borrows money in India and pays interest, exceeding Rs.1 crore, and such interest is deductible
in computing income from business or profession in respect of foreign debt to
an associated enterprise, the deduction is limited to 30% of EBITDA or interest
paid, whichever is less. The information to be given under this item is as
under:-

 

(i)   Amount
of Interest Expenditure referred to in section 94B

 

(ii)   30%
of EBITDA for the year

 

(iii)  Amount
of Interest which exceeds 30% of EBITDA

 

(iv)  Information
of unabsorbed interest expenditure brought forward and carried forward u/s.
94B(4). It may be noted that u/s. 94B(4) interest expenditure which is not
allowed as deduction in one year u/s 94B is allowed to be carried forward for 8
years and will be allowed, within the limit u/s. 94B(2), in the subsequent
year.

 

5.  New clause 30C

(i)  Under
this item the Tax Auditor has to state whether the assessee has entered into an
impermissible avoidance arrangement, as referred to in section 96 during the
previous year. If so, nature of such arrangement and the amount of tax benefit
arising, in the aggregate, to all the parties to such arrangement should be
stated.

 

(ii)  This
is one item where the Tax Auditor has to give his opinion whether any
particular arrangement made by the assessee is for tax avoidance and is an
impressible arrangement. For this purpose one has to refer to sections 95 to
102 dealing with the General Anti-Avoidance (GAAR) provisions and section 144BA
of the Income tax Act. Reading these sections it will be noticed that the Tax
Auditor cannot give his opinion on the question whether GAAR provisions are
applicable in the case of the assessee and what is the tax benefit received by
all parties to this arrangement.

 

(iii) It may be noted that under Rule 10U it is provided that GAAR
provisions are not applicable to an arrangement where the benefit to all the
parties to the arrangement does not exceed, in the aggregate, Rs. 3 crore. Under Item 30C it is not
clarified whether the information is to be given only if the total tax benefit
exceeds Rs. 3 crore or in all cases.

 

(iv) If
we refer to procedure for declaring an arrangement as impermissible avoidance
arrangement, as provided in section 144BA, it will be noticed that even the
Assessing Officer cannot decide whether a particular arrangement is covered by
GAAR provisions. This procedure is as under:

 

(a) The
Assessing Officer (AO) can, at any stage of assessment or reassessment, make a
reference to the Principal Commissioner or Commissioner (CIT) for invoking
GAAR.

 

(b) On
receipt of this reference, the CIT has to give hearing to the assessee within
60 days and to decide whether GAAR provisions should be invoked.

 

(c) If
the CIT is satisfied with the submissions of the assessee he will have to
direct the AO not to invoke GAAR provision.

 

(d) If
the CIT is not satisfied with the submissions of the assessee, he has to refer
the matter to the “Approving Panel”.

 

(e) After
this reference by the CIT, it is for the Approving Panel to declare any
arrangement to be impermissible or not within six months.

(f)  It
is only after the above procedure is followed and the Approving Panel has
declared an arrangement as impermissible avoidance arrangement that the AO can
proceed to determine the tax consequences of such arrangement.

 

(v) In
view of the above provisions of sections 95 to 102 and 144BA, it can be
concluded that a Tax Auditor is not competent to say that a particular arrangement
is an impermissible avoidance arrangement. Even the AO or CIT has no authority
to decide whether the arrangement is an impermissible avoidance arrangement. It
is only the Approving Panel which can declare an arrangement as impermissible
avoidance arrangement.

 

(vi)
In view of the above, various Professional and Trade Bodies had made
representations to CBDT for deletion of Item 30C from Form 3CD. In response to
this, by a Notification dated 17/8/2018, the CBDT has deferred this Item upto
31/3/2019. Therefore, in the Tax Audit Report for A.Y. 2018-19 Item 30C in Form
3CD is not applicable. However, it is necessary to make a strong representation
to CBDT to delete this item altogether in subsequent years also.  If this item is not deleted in subsequent
years, it will be advisable for the Tax Auditor to put the following Note under
Item 30C.

 

“I am unable to express any opinion as to whether the
assessee has entered into an impermissible avoidance arrangement, as referred
to in Section 96, during the previous year. Whether an arrangement is an
impermissible avoidance arrangement or not can only be declared by the
Approving Panel as provided in Section 144BA(6) of the Income tax Act and I am
not authorised to express opinion in this matter.”

 

6.  Existing clause
31

Under this item particulars about loan or deposit taken or
given in cash as referred to in section 269SS and 269T are to be stated. Now,
following additional particulars are required to be given about certain
transactions as referred to in section 269ST. This is a new section which has
come into force from 01.04.2017. The section provides that no person shall
receive Rs. 2 lakh or more, in the
aggregate, from another person, in a day, or in respect of a single transaction
or in respect of transactions relating to one event or occasion in cash. In
other words, all such transactions have to be made by account payee cheques,
bank draft or by any electronic media. The following particulars of such
transactions are now to be stated under Item 31.

 

(i)  Particulars
of each receipt in cash of an amount exceeding Rs. 2 lakh, in the aggregate, as specified in section 269ST, from
a person in a day or in respect of a single transaction or in respect of
transactions relating to one event or occasion from a person (herein referred
to as receipt / payment in a day) are to be given. Here, particulars relating
to name, address, PAN of the payer, nature of transaction, amount received and
date of receipt is to be given.

 

(ii)  Particulars
of each such receipts of an amount exceeding Rs.
2 lakh in a day by a cheque or bank draft which is not an account payee
cheque or a bank draft.  In some cases it
may be difficult to find out whether the 
cheque/ bank draft is marked as account payee. In such cases the tax
auditor should follow the Guidance Note on Audit u/s. 44AB issued by ICAI
wherein certain directions are given while reporting about cash loans received
and repaid u/s. 269SS/ 269T under Item No.31.

 

(iii) Particulars of each payment in cash of an amount exceeding Rs. 2 lakh, in the aggregate, as specified
in section 269ST, to a person, in a day, are to be given.  Here, particulars of the name, address, PAN
of the payee; value of transaction amount paid and date of payment are to be
stated.

 

(iv) In
the above case, if the payment is made by cheque / bank draft which is not
marked “Account Payee”, the particulars of the same will have to be given. 

 

As stated above, if the tax auditor
is not able to ascertain this fact, he should follow the Guidance Note on Tax
Audit u/s 44AB issued by ICAI, relating to Item No.31 dealing with reporting on
section 269 SS / 219T.

 

7.  Existing clause
34

At present particulars about tax deducted or collected at
source (TDS/TCS) are to be given. Under Item 34(b) if the assessee has not
furnished the statement of TDS or TCS within the prescribed time to the Tax
Authorities, certain particulars are to be given. This Item 34(b) is now
replaced by another Item 34(b) which requires the tax Auditor to state (i) TAN,
(ii) Type of Form, (iii) Due date for furnishing the statement of TDS/TCS to
Tax Authorities, (iv) Date of furnishing the statements of TDS/TCS and (v)
Whether this statement contains information about all details/transactions
which are required to be reported. If not, a list of details/transactions not
reported to be given.  It may be noted
that at present such list of unreported items is not required to be given.
Preparation of such list is the additional responsibility put on the Tax Auditor.

 

8.  New clause 36A

Under this new item the Tax Auditor has to state, whether the
assessee has received any advance or loan from a closely held company in which
he holds beneficial interest in the form of equity shares carrying not less
than 10% of voting power. If so, the amount of advance or loan and the date of
receipt is to be given. In other words, the Tax Auditor will now have to give
his opinion whether there is any advance or loan received which is to be
treated as “Deemed Dividend” u/s. 2(22)(e). This is going to be difficult as
there are so many conflicting judicial pronouncements on the interpretation of
section 2(22)(e). Even the tax department had difficulty in deciding the person
who should be taxed on the deemed dividend u/s. 2(22)(e). For this reason
section 115-O has been amended by the Finance Act, 2018. Section 115-O now
provides that the closely held company giving such advance or loan to a related
party as specified in section 2(22)(e), on or after 1/4/2018, will have to pay
tax at the rate of 30% plus applicable surcharge and cess.  Therefore, the requirement contained in Item
36A will apply for Tax Audit for A.Y. 2018-19 only.

 

9.  New clause 42

Under this item, if the assessee is required to file Forms
61, 61A or 61B with appropriate authorities, the particulars relating to the
same will have to be furnished. These particulars are (i) Income tax Department
Reporting Entity Identification Number, (ii) Type of Form, (iii) Due date for
furnishing the statement, (iv) Date of furnishing the same and (v) Whether the
Form contains the information about all details/transactions which are required
to be reported.  If this is not done, a
list of the details/transactions which are not reported.

 

The above requirement will place additional burden on the Tax
Auditor who will have to study the requirements of the following Sections,
Rules and Forms.

 

(a)  Section
139A(5), Rules 114C and 114D and Forms 60 and 61. These deal with declarations
received by the assessee in Form 60 from persons who have applied for PAN u/s.
139A.

(b) Section
285BA, Rule 114E and Form 61A.  This
refers to obligation of a person to furnish statement of financial transactions
or reportable account u/s. 285BA.

 

(c)  Section
285BA, Rule 114G and Form 61B. This also relates to the requirements of section
285BA relating to Annual Information Reporting.

 

10. New clause 43

This new item relates to report to be furnished in respect of
International Group u/s. 286. If the assessee or its parent or alternate
reporting entity is liable to furnish the Report u/s. 286(2), the following
information is to be furnished.

 

(i)    Whether
such Report u/s. 286(2) is furnished

 

(ii)   Name
of parent entity or alternate entity

 

(iii)  Date of furnishing the Report

 

11.  New clause 44

The Tax Auditor has now to furnish break-up of total
expenditure of entities registered or not registered under GST. It is not clear
as to whether the details are to be given only of expenditure such as telephone
expenses, professional fees and similar expenses or of purchases of raw
materials, stores, finished goods etc. The following details of expenditure are
to be given.

 

(i)   Total
amount of expenditure incurred during the year. Since break-up of the
expenditure is to be given the total expenditure under each head of expenditure
such as telephone, professional fees etc., will have to be given.

 

(ii)   Expenditure
in respect of entities registered under GST to be specified under different
categories viz. (a) Goods or Services exempt from GST (b) Entities falling
under composition scheme, (c) Entities which are registered under GST and (d)
Total payment to registered entities.

 

(iii)  Expenditure
relating to entities not registered under GST.

 

Reading this item it is not clear as
to why this information is called for. This information has no relevance with
the determination of total income or determination of tax liability under the
Income tax Act. Various Professional and Trade Bodies had made representations
to CBDT for deletion of this Item. In response to this, by a Notification dated
17/8/2018, the CBDT has deferred this Item upto 31/3/2019. Therefore, in the
Tax Audit report for A.Y. 2018-19 this Item is not now applicable. However,
efforts should be made to get this Item deleted even for subsequent years.

 

12. Some Additional Information to be Given

There are some other items in Form 3CD where specific
information is to be given. Some additional information is to be given under
these items in the amended Form 3CD. These items are as under:

 

(i)   In
Item No:4 GST Registration Number is to be given.

 

(ii)   In
Item 19 details of amounts admissible under various sections are to be given at
present. Now information of amount admissible u/s. 32AD dealing with Investment
in new plant or machinery in notified backward areas in certain States is to be
given. Similarly, this information is now to be given in Item 24 also.

 

(iii)  In
Item No:26 dealing with information relating to various items listed in section
43B, information about any sum payable by the assessee to the Indian Railways
for the use of Railway Assets which has not been paid during the accounting
year will have to be given.

 

TO SUM UP

From the above amendments in Form 3CD it will be noticed that
the Tax Auditor who gives his Tax Audit Report on or after 20/08/2018 will have
to devote considerable extra time to report on the new items added in Form
3CD.  As discussed above, he will have to
give his opinion about interpretation of section 2(22)(e) relating to deemed
dividend which is going to be difficult. Further, the Item 30C requiring the
Tax Auditor to express his opinion whether the assessee has entered into an
impermissible tax avoidance arrangement and what is the tax benefit to the
parties to such arrangement is beyond the authority of a Tax Auditor. Item 44
requiring particulars about GST transactions has no relationship with
computation of income or tax and therefore, this item should also be deleted
from Form 3CD. Although CBDT has notified that Items 30C and 44 are not
applicable for Tax Audit Report for A.Y. 2018-19, it is necessary to make a
strong representation for deletion of these two items from Form 3CD for
subsequent years also. There are some new areas in which the additional
particulars will have to be given by the Tax Auditor. Collection of these
particulars will be time consuming and the time between the publication of
amendments in Form 3CD and the date by which tax audit report is to be given
may not be found to be sufficient. It is essential that such important
amendments in Form 3CD should be made by CBDT well in advance after due consultation with the Institute of Chartered
Accountants of India and all other stakeholders. 




 

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