Key Changes Introduced by CBDT in Tax Audit Report
Table of Contents
Key Changes Introduced by CBDT in Tax Audit Report Forms
Clause 11 of Form 3CD Reporting on the books of accounts maintained
Clause 11 of Form 3CD requires comprehensive reporting on the books of accounts maintained by the assessee, including their locations and the details of the books at each location. Here’s a detailed approach to fulfill this requirement:
Steps for Reporting Under Clause 11 of Form 3CD
Listing Books of Accounts:
- Prepare a complete list of all books of accounts maintained by the assessee.
- These could include ledgers, journals, cash books, bank books, sales registers, purchase registers, and other relevant records.
Addresses of Locations:
- Identify all locations where these books are kept.
- Include the primary address (often the registered office) and any other locations such as branch offices, warehouses, or other business premises.
Details at Each Location:
- Specify which books of accounts are kept at each location.
- This can be presented in a tabular format for clarity.
Verification Process for Reporting Under Clause 11 of Form 3CD
- Physical Examination: Physically verify the existence of these books of accounts at the stated locations. Ensure that the books are being maintained in an orderly and systematic manner.
- Compliance with Companies Act: For company assessees, verify if Form AOC-5 has been duly filed with the Registrar of Companies. This form allows companies to maintain books of accounts at a place other than the registered office. Check the accuracy of the address details and whether the form is up-to-date.
Auditor’s Duties
Auditor’s Duties to Examine Books of Accounts:
- Perform a detailed examination of the books of accounts to ensure they reflect the true and fair view of the company’s financial position.
- Verify that the books are updated and maintained according to statutory requirements.
Assessment of ‘Proper Books of Account’:
- Assess whether the books maintained are ‘proper books of account’ as per the standard accounting practices and regulatory requirements.
- This assessment should be based on factors like completeness, accuracy, regularity, and compliance with applicable laws.
Reporting in Form No. 3CB
- Based on the examination, clearly state in Form No. 3CB whether the books of accounts are properly maintained. Confirm compliance with relevant provisions, particularly for company assessees, ensuring that Form AOC-5 has been filed if applicable.
Sample Report for Clause 11 of Form 3CD
Clause 11(a): List of Books of Accounts Maintained
- Ledger
- Journal
- Cash Book
- Bank Book
- Sales Register
- Purchase Register
Clause 11(b): Address at which Books of Accounts are Kept
Address | Books Maintained |
Registered Office: 123 Main St | Ledger, Journal, Cash Book, Sales Register |
Branch Office: 456 Commerce Rd | Bank Book, Purchase Register |
Warehouse: 789 Industrial Zone | Inventory Records |
Clause 11(c): Filing of Form AOC-5
- Company Assessee: [Yes/No]
- Form AOC-5 Filed: [Yes/No]
- Date of Filing: [DD/MM/YYYY]
Clause 11(d): Auditor’s Verification
- Based on the examination, the books of accounts are [proper/not proper] books of account as required under the law.
- This structured approach ensures thorough compliance with Clause 11 of Form 3CD, providing a clear and detailed record of the maintenance and locations of the books of accounts.
Amended Clause 21 of Form 3CD to expand the scope of reporting expenses related to violations of laws :
CBDT revises Income Tax Form 3CD Tax Audit Report Format, Income Tax Form 3CEB & Income Tax Form No. 65
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Disclosure of Expenses for Violation of Law (Clause 21 of Form 3CD)
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- The Central Board of Direct Taxes (CBDT) has amended Clause 21 of Form 3CD to expand the scope of reporting expenses related to violations of laws, both within India and internationally.
- The CBDT has broadened the scope of this clause to include Expenditure for any purpose that is an offence or is prohibited by law & Expenditure by way of penalty or fine for violation of any law, whether enacted in India or outside India.
- Clause 21 of Form 3CD now requires reporting of expenditures incurred for any purpose that constitutes an offence or is prohibited by law. It mandates the disclosure of penalties or fines for law violations, regardless of whether the laws are Indian or foreign.
- Enhanced transparency in financial reporting. Greater scrutiny of compliance with legal standards both domestically and internationally. Potential deterrence for engaging in activities that could result in legal violations.
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Disclosure of Expenditure for Compounding of Offences (Clause 21 of Form 3CD)
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- Clause 21 of Form 3CD has been further amended to specifically address expenditures related to the compounding of offences: It now includes the expenditure incurred to compound offences under any law, whether these offences occurred in India or abroad. This ensures comprehensive reporting of all costs associated with legal infractions.
- Clause 21 sought details of “Expenditure by way of any other penalty or fine not covered above”. Expenditure incurred to compound an offence under any law, whether in India or outside India.
- Comprehensive reporting of all costs related to legal offences. Ensures that all compounding expenses are transparently disclosed. Aligns financial reporting with legal compliance requirements.
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Amendment in Clause 26 for Disallowance of Delayed Payments to MSEs
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- A new provision under Clause 26 has been added to address the disallowance of delayed payments to Micro and Small Enterprises (MSEs) Section 43B(h) Compliance clause now seeks detailed reporting on delayed payments to MSEs that violate Section 43B(h).
- Detailed reporting on any delayed payments to MSEs that violate Section 43B(h).
- This amendment aims to enforce timely payments to MSEs, promoting their financial health and compliance with payment norms. Promotes timely payments to MSEs, enhancing their financial stability. Ensures adherence to Section 43B(h) provisions, which disallow deductions for delayed payments. Highlights the importance of timely settlement of dues to small enterprises.
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New Disclosure for Specified Domestic Transactions (Form 3CEB)
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- Form 3CEB has been amended to include disclosures regarding specified domestic transactions under Section 115BAE(4). It now requires particulars of business transactions between related persons that result in more than ordinary profits.
- Disclosure of business transactions between persons referred to in section Section 115BAE(4) that result in more than ordinary profits.
- Prevents profit shifting and ensures fair taxation. Enhances scrutiny of related-party transactions within domestic boundaries. Promotes compliance with fair profit reporting standards.
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Amendments Related to IFSC and Deduction under Section 80LA (Form 65)
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- Form 65 now includes new verification requirements regarding the status of the company as an IFSC unit and details related to Section 80LA deductions.
- Tax auditor must Ensures timely and accurate filing of applications related to IFSC status. Also Promotes transparency in the claiming of deductions under Section 80LA. Moreover Ensures proper tracking of the company’s qualification and deduction status.
- Form 65 has been updated to include new verification requirements and details concerning the deduction under Section 80LA:
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- IFSC Certification that the applicant-company is a unit of an International Financial Services Centre. Specification of the date on which the deduction under Section 80LA ceased to be applicable. & Date of the company qualifying for the status must be provided. The form now includes a verification field where the applicant must certify that the company is a unit of an International Financial Services Centre (IFSC).
- The applicant must specify the date on which the deduction under Section 80LA ceased to be applicable, ensuring that claims for deductions are accurately tracked and validated.
- The date of the company qualifying for the status must also be provided.
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Implications for Tax Auditors
Tax auditors must be aware of the following key points when preparing and filing these updated forms:
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- Tax Auditors Ensure that all expenditures, especially those related to legal violations and compounding of offences, are thoroughly documented and accurately reported. All legal violation-related expenses are accurately reported.
- IFSC-related certifications and deduction timelines are accurately verified and reported.
- Diligently verify the timeliness of payments to MSEs and report any delays in accordance with the new requirements under Clause 26.
- Delayed payments to MSEs are meticulously tracked and reported. Specified domestic transactions are scrutinized for fairness and proper profit reporting.
- Tax Auditors Pay close attention to specified domestic transactions that may result in higher-than-ordinary profits, ensuring proper documentation and reporting as per Form 3CEB amendments.
- For companies claiming deductions u/s 80LA, ensure that the necessary certifications and dates are accurately provided in Form 65.
- Continuously monitor updates from CBDT and ensure compliance with the latest requirements to avoid penalties and ensure accurate reporting.
These changes aim to enhance transparency, ensure compliance with legal and financial regulations, and support fair taxation practices. Tax auditors must adapt to these changes to ensure accurate and compliant financial reporting for their clients.
Amendment to Clause 26 of Form 3CD through CBDT Notification G.S.R. 155(E)
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Amendment Made to Clause 26 of Form 3CD
CBDT has recently announced an important change to Income Tax Form No. 3CD, a cornerstone document for tax audit reporting. these amendments, highlighted in Notification No. 27/2024 dated 05.03.2024, Objective to refine & update Tax Audit procedures to align with the evolving regulatory & legislative landscape.
The amendment to Clause 26 of Form 3CD, as per CBDT Notification G.S.R. 155(E) dated 05-03-2024, relates to the reporting requirements under Section 43B(h) of the Income Tax Act. This section pertains to the disallowance of payments to MSEs. if such payments are not made within the stipulated time frame. The amendment requires tax auditors to specifically report any delayed payments to MSEs that could result in disallowance under Section 43B(h).
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Need/Rationale for the Amendment
The rationale behind the amendment is to enhance transparency and compliance with payment norms to MSEs. By mandating the reporting of delayed payments, the amendment aims to:
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- Ensure timely payments to MSEs, thereby improving their liquidity and operational stability.
- Align tax reporting with the provisions of the Micro, Small, and Medium Enterprises Development (MSMED) Act, which stipulates timely payment to MSEs.
- Deter businesses from delaying payments to MSEs by introducing tax consequences for such delays.
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Problems/Issues with the Amendment
While the amendment aims to ensure timely payments to MSEs, several issues have arisen:
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- Businesses might find it challenging to track and report each transaction with MSEs accurately, especially those with a large number of transactions.
- The detailed reporting requirement increases the workload for auditors, requiring them to thoroughly verify each payment and its timing.
- There could be disputes between businesses and MSEs regarding the timing of payments and the classification of certain enterprises as MSEs.
- The amendment may lack clarity in terms of the exact documentation and evidence required to substantiate timely payments.
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CBDT’s Corrigendum
The CBDT issued a corrigendum to address some of the ambiguities and issues raised by stakeholders post-amendment. The corrigendum:
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- Provided additional clarifications on the documentation required to verify the timing of payments.
- Offered guidance on the classification of enterprises as MSEs based on updated definitions.
- Simplified certain reporting requirements to reduce the compliance burden on auditors and businesses.
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Implications and Impact of CBDT Notification:
The corrigendum has several implications:
- By simplifying documentation and reporting requirements, the corrigendum aims to ease the compliance process for businesses and auditors.
- The additional clarifications help in reducing ambiguities and potential disputes, ensuring smoother implementation.
- With clearer guidelines and reduced burdens, businesses are more likely to comply with the payment norms, thereby benefiting MSEs.
- The corrigendum reinforces the importance of timely payments to MSEs, aligning with the broader goal of supporting the MSME sector.
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Tax Auditor for Reporting in Amended Clause 26 of Form 3CD
Tax auditors should consider the following when reporting under the amended Clause 26:
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- Verify that the enterprises reported as MSEs are correctly classified according to the latest definitions and guidelines.
- Ensure that all payments made to MSEs are verified for timeliness based on the stipulated time frame.
- Maintain comprehensive documentation to support the verification of payment timings, including invoices, payment receipts, and bank statements.
- Clearly report any payments that are disallowable under Section 43B(h) due to delays, providing detailed justifications and evidence.
- Communicate with clients about the importance of timely payments and the potential tax implications of delays.
- Stay updated with any further clarifications or guidelines issued by CBDT to ensure compliance with the latest requirements.
CBDT Notification Section 43B(h)- disallowance under clause 22 of Form 3CD
The Central Board of Direct Taxes issued a Corrigendum to Notification No. 27/2024 dated March 05, 2024 vide Notification No. 34/2024 dated March 19, 2024, regarding amendment duly include disclosure of section 43B(h) disallowance under clause 26 of Form 3CD
Clause 22 of Form 3CD, pertaining to interest restrictions under MSME Development Act, was not amended. Now, Clause 22 of Form 3CD is amended to include disclosure of the amount disallowed u/s 43B(h).
By adhering to these points, tax auditors can ensure accurate and compliant reporting under the amended Clause 26 of Form 3CD.
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