Clause wise discussion of form 3CD- Part 1

Clause 1- Name of the assessee

Under clause (1) the name of the assessee whose accounts are being audited under section 44AB should be given. However, if the tax audit is in respect of a branch, name of such branch should be mentioned along with the name of the assessee.

Clause 2- Address

a. The address to be mentioned under clause (2) should be the same as has been communicated by the assessee to the Income-tax Department for assessment purposes as on the date of signing of the audit report.

b. If the tax audit is in respect of a branch or a unit, the address of the branch or the unit should be given.

c. In the case of a company, the address of the registered office should also be stated. In the case of a new assessee, the address should be that of the principal place of business.

Clause 3 –PAN

Under clause (3) the permanent account number (PAN) allotted to the assessee should be indicated. It may be noted that in the e-filing format PAN is a mandatory field.

Clause 4 – Whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, customs duty, etc. If yes, please furnish the registration number or any other identification number allotted for the same

a. Under clause (4), the auditor is required to mention the registration number or any other identification number, if any, allotted, in case the the assessee is liable to pay indirect taxes like excise duty, service tax, sales tax, customs duty, etc.

b. The auditor is primarily required to furnish the details of registration numbers as provided to him by the assessee.

c. The reporting is however, to be done in the manner or format specified by the e-filing utility in this context.

d. The term “Indirect taxes” is neither defined in the Income-tax Act, 1961 nor under any other law.

e. It is recommended that the auditor should obtain from the assessee the list of indirect taxes applicable to him. Once the auditor obtains this management representation, he is required to obtain a copy of the registration certificate clearly mentioning the registration number under that relevant law.

f. In Customs Act, 1962, since there is no registration number, a copy of Export Import Code (IEC) may be obtained and information be accordingly furnished

SA 580 written Representations

In case the auditor prima facie is of the opinion that any indirect taxes laws is applicable on the business or profession of the assessee but the assessee is not registered under the said law, he should report the same appropriately.

Clause 5 – Status

Under clause (5) the status of the assessee is to be mentioned. This refers to the different classes of assessees included in the definition of “person” in section 2 (31) of the Act, 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.

Clause 6 – Previous Year

Under clause (6) the period of the previous year has to be stated.

As per Section 3 of the ITA, Previous Year is defined to mean,

"Previous year" means the financial year immediately preceding the assessment year

Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year

The auditor may accordingly, mention the relevant date of beginning and ending of the previous year in this clause. Hence, the tax auditor has to apply his professional judgement depending on the facts and circumstances of the same.

Clause-7 Assessment Year

Under clause (7) the assessment year relevant to the previous year for which the accounts are being audited should be mentioned.

Clause-8 Indicate the relevant clause of section 44AB under which the audit has been conducted

a. Under clause (8) the auditor is required to mention the relevant clause of section 44AB under which the audit has been conducted

b. In case the assessee is carrying on business and his total sales, turnover or gross receipts exceeds one crore in the relevant previous year, the auditor is required to mention clause (a) under this head.

c. If the assessee is carrying on profession and his gross receipts exceed twenty five lakh rupees in the relevant previous year, the auditor is required to mention clause (b) under this head.

d. 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 44AD, clause (d) is to be mentioned under this head

Clause-9(a) and 9(b) if firm   or   Association of Persons, indicate names of partners/members and their profit sharing ratios.

1. Where the assessee is a firm or association of persons (AOP) or body of individuals, the names of partners of the firm or members of the association of persons or body of individuals and their profit sharing ratios (%) have to be stated.

2. In case where the partner of a firm or the member of AOP/ BOI acts in a representative capacity, the name of the beneficial partner/member should be stated.

3. Thus, the details of partners or members during the entire previous year will have to be furnished. The term “profit sharing ratios” would include loss-sharing ratio also since loss is nothing but negative profits.

4. This would not cover any specific ratio or understanding in relation to payment of remuneration or interest to partners or members

5. If there is any change in the partners of the firm or members of the association of persons/ body of individuals or their profit or loss sharing ratio since the last date of the preceding year, the particulars of such change must be stated.

6. The particulars in this clause should be verified from the instrument or agreement or any other document evidencing partnership or association of persons. For this purpose, the tax auditor may also verify:

(i) in case of registered firms (including Indian LLPs), whether the relevant documents have been filed with the concerned authorities,

(ii) whether notice of changes, if required, has been given to the registrar of firms, and

(iii) any minutes or any other understanding recording any changes in thec partners/members or their profit sharing ratios.

7. The tax auditor should obtain certified copies of the deeds, documents, understanding, notice of changes etc. including certified copies of the acknowledgment,  evidencing filing of documents with the concerned authorities, if registered.

8. In certain cases of association of persons or body of individuals, it may be possible that the shares of the members are not precisely ascertainable during the previous year resulting in a situation whereby the shares of the members are indeterminate or unknown. In such circumstances, the relevant fact should be stated.

Clause 10(a) - Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business or profession)

Clause 10(b) - If there is any change in the nature of business or Profession, the particulars of such change.

i. The sector in which the business or profession falls such as manufacturing, trading, commission agent, builder, contractor, professionals, service sector, financial service sector or entertainment industry. In case of a person belongs to service sector the nature of each type of service should be broadly stated.

ii. Thereafter, the auditor is required to mention the sub-sector pertaining to the Sector selected

iii. Information has to be furnished in respect of each business.

iv. Any material change in the nature of business should be precisely set out. The change will include change from manufacturer to trader as well as change in the principal line of business.

v. For example, an assessee switching over from wholesale business to retail business or an assessee switching over from manufacturing his own commodities to manufacturing goods on job basis for others.

vi. Likewise, any addition to or permanent discontinuance of, a particular line of business may also amount to change requiring reporting.

vii. However, temporary suspension of the business may not amount to change and therefore need not be reported.

viii. A review of business report or the minutes of meetings would enable the tax auditor to note the changes

ix. Based thereon, he may make necessary enquiries and seek information and determine whether any change has occurred or not

x. If need be, the tax auditor should get a declaration from the assessee regarding change in the nature of business, if any.

xi. In the case of 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 because of business reorganization/ reconstruction, the same may be stated. In the case of restructuring, if any line of activity is being hived off, the same may also be reported.

Clause 11(a) – 11(c)

i. whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.

ii. List of books of account maintained and the address at which the books of account     are kept .

iii. (In case books of account are maintained in a computer system, mention the books of account generated by such computer system. If the books of accounts are not kept at one location, please furnish the addresses of locations along with the details of books of accounts maintained at each location.)

iv. List of books of account and nature of relevant documents examined.

v. The list of books of accounts prescribed, maintained and examined has to be stated

vi. There may be difference between the three lists. For example, books of accounts 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

vii. The CBDT under 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 sub-section (1) of section 44AA.

viii. As such, every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist and whose total gross receipts exceed one lakh fifty thousand rupees in all the three years immediately preceding the previous year, or where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are likely to exceed the said amount, is required to maintain the following books of account:

1. Cash book.

2. Journal, if the accounts are maintained according to the mercantile system of accounting.

3. Ledger.

ix. Apart from the aforesaid books of account, a person carrying on medical Profession is required to keep the following:

- daily case register in Form No.3C showing data, patient's name, nature of professional services rendered, fees received and date of receipt; and

- an inventory under broad heads, as on the first and the last days of the previous year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.

x. It may be noted that the daily case register and the inventory under broad heads do not constitute books of account and hence the same need not be mentioned under clause 11(a).

xi. The tax auditor should obtain from the assessee a complete list of books of 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.

xii. The list of books of account maintained by the assessee should be given under clause 11(b).

xiii. Section 44AA(2) provides that persons carrying on business or profession, other than those specified in sub-section (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.

xiv. Tax Auditor has to verify that the assessee has maintained such books of accounts and documents as may enable the Assessing Officer to compute the total income of the assessee in accordance with the provisions of the Act.

xv. It may be noted that though the Central Board of Direct Taxes has been empowered under sub-section (3) of section 44AA to prescribe books of account to be maintained under sub-section (2), so far no books of accounts have been prescribed.

xvi. For a person whose accounts of the business or profession have been audited under any other law, the requirement for maintenance of books of account is contained in the relevant statutes. In the case of other assessees, normal books of account to be maintained will be

cash book/bank book,

sales/purchase journal or

register and ledger

xvii. Assessees engaged in trading/manufacturing activities should also maintain quantitative details of principal items of stores, raw materials and finished goods. While giving his report in Form No. 3CB about maintenance of proper books of account, the tax auditor should ensure that they are maintained in accordance with the above requirements. In case where stock records are not properly maintained by the assessee due to the nature, level, volume and variety of items/ transactions, the tax auditor will have to consider the concept of materiality and practicality while giving particulars in Form No. 3CD.

xviii. It may be noted that section 4 of the Information Technology Act, 2000 states that “Where any law provides that information or any other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information or matter is-

(i) rendered or made available in an electronic form; and

(ii) accessible so as to be usable for a subsequent reference.”

From AY 2014-15, the address at which the books so maintained are kept is also required to be mentioned under clause (b).

In case the books of accounts are kept at more than one location then the auditor is required to mention the details of address of each such location along with the detail of books of account maintained thereof.

In case, where books of accounts are maintained and generated through computer system, the auditor should obtain from the assessee the details of address of the place where the server is located or the principal place of business/Head office or registered office  and mention the same accordingly in clause 11(b).

Since the assessee is required to maintain evidence such as bills, vouchers, receipts, debit note, credit note, inventory register, agreements, orders etc., the auditor generally examines these documents while conducting audit. The underlying documents would differ from assessee to assessee depending on the nature of activity carried on by the assessee. Reference to such supporting evidence/ relevant documents is also required to be made under this clause.

Clause-12 Whether the Profit and Loss Account includes any Profits & Gains assessable on presumptive basis, if yes, indicate the amount and the relevant section {44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule or any other relevant Section}.

Generally Not applicable. However go through the consolidated Profit & Loss account to see whether it includes any such profit.

44AD – Eligible business

44AE- transport business

44AF- Business of retail trading of goods

44B- shipping business of non resident

44BB- Providing service or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils

44BBA-Operation of aircraft by non-resident

44BBB-Civil construction etc. in certain turnkey power project by non-residents

The amount to be mentioned under this clause means the amount included in the profit and loss account. The tax auditor is not required to indicate as to whether such amount corresponds to the amount assessable under the relevant section relating to presumptive taxation

The tax auditor may come across three different situations as follows:

Where the assessee, maintaining regular books of account has more than one business which include business of the nature assessable on presumptive basis under any of the said sections and the profit and loss account prepared from such books of account, inter alia, includes the income of the business assessable under the scheme of presumptive taxation.

This situation may give rise to the problem of apportionment of common expenditure in order to arrive at the correct amount of profit credited to profit and loss account and assessable on a presumptive basis. In such a situation, the endeavour of the tax auditor should be to arrive at a fair and reasonable estimate of such expenditure on the basis of evidence in possession of the assessee or by asking the assessee to prepare such estimate which should be checked by him.

It is also necessary to mention the basis of apportionment of common expenditure. However, if the tax auditor is not satisfied with the reasonableness of such apportionment, he should indicate such fact under this clause by a suitable note.

In case separate books of accounts

A separate set of accounts are maintained for respective businesses, it poses no problem for the tax auditor in ascertaining the amount of profit to be disclosed.

Where the assessee, having regular books of account for his main business, has some additional business of the nature described in any of the aforesaid sections and no books of account whatsoever is maintained for such additional business but the net income is credited to the main profit & loss account of the assesse

The tax auditor is unable to satisfy himself about the correctness of the net income from the presumptive business credited to the profit and loss account. He should, therefore, state the amount of income as appearing in the profit and loss account, with a suitable note expressing his inability to verify the said figure. In the absence of books of account, the tax auditor would be unable to form an opinion about the true and fair view of the profit and loss account or balance sheet of the assessee and therefore, it would become necessary for him to qualify his report in Form No. 3CB.

Clause 13 –

13(a) Method of accounting employed in the previous year.

13(b) whether there had been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year.

13(c) if answer to {b} above is   in the affirmative,   give details of such change, and the effect thereof on the Profit or Loss.

13(d) Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the Profit or Loss.

• Review Accounting policies from audited accounts. Check whether assessee is following Mercantile or Cash method of accounting.

• While following mercantile basis of accounting, check whether any item of income or expense is accounted for on cash basis. Since Hybrid method of accounting is not allowed, state the nature and amounts of such items.

• Scrutinize the last week of last month’s journal vouchers thoroughly to see provisions for expenses made & whether they are on same basis as in earlier year. Payment vouchers for first two months of subsequent year should be scrutinized to verify the correctness thereof.

• Ensure that following heads of accounts are scrutinized thoroughly and compared with earlier year to check whether accounting is on same basis as in earlier years.;
- Refund for income-tax, sales tax, etc.
- Export incentives
- Claims for loss or damage
- Grants/Subsidies
- Interest on delayed payments

• Determine whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding year.

• Ensure that any change in the method of accounting employed is appropriately disclosed and the effect thereof on the profit/loss is also disclosed.
• Obtain management representation.

• Check whether there is any deviation from the Accounting Standard (IT) – I & Accounting Standard (IT) – II notified under section 145(2) of IT Act regarding;
a) Fundamental accounting assumption of Accrual, Consistency & Going Concern.
b) Prudence, Substance over form & Materiality in accounting policies.
c) Disclosure of significant accounting policies and changes in such policies with the resultant impact, if material on accounts of year of change or subsequent year.
d) Disclosure of prior period and extraordinary items or change in accounting estimate in Profit & Loss Account and report the effect thereof on profit & loss.
• Ensure that deviation from such standards is appropriately disclosed and the effect thereof on the profit/loss is also indicated.

A change in an accounting policy will not amount to a change in the method of accounting and hence such change in the accounting policy need not be mentioned under sub-clause (b)

The Finance  Act, 2014 has amended section 145 w.e.f AY 2015-16 to the effect that the words ‘accounting standards’ be replaced with the words ‘income computation and disclosure standards’. an amendment has been made in order to clarify that the standards notified under section 145(2) are only meant for computation of income and disclosure of information and the assessee need not maintain books of account on the basis of AS notified under the Income-tax Act, 1961. The Accounting Standards issued by ICAI/ Companies Accounting Standard Rule, 2006 would still be required to be followed by the assessee, for preparation of financial statements

Clause 14(a)-14(b)

a. Method of valuation of closing stock employed in the previous year.

b. Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss

The method of valuation of closing stock is to be stated under this clause. AS-2 “Valuation of Inventories” issued by ICAI requires disclosure of significant accounting policies

(i) raw material at cost or net realisable value whichever is lower,

(ii) finished goods at cost or net realizable value whichever is lower.

In sub-clause (a) of clause 14 of Form No.3CD, the reference is made to "closing stock". The expression "stock-in-trade" means finished goods and raw materials. Since sub-clause (b) refers to section 145A where the term "inventories" is used, the term "closing stock" will include all items of inventories. AS-2 defines the term "inventories" to include finished goods, raw materials, work-in-progress, materials, maintenance supplies, consumables and loose tools. Therefore, method of valuation of items of inventories will have to be given under sub-clause (a)

It is not necessary to indicate any change in the method of valuation of closing stock under this clause.

any such change in the method of valuation of closing stock would amount to change in an accounting policy and needs to be disclosed in the financial statements as required by AS-1 and AS(IT).

Section 145A

This section provides that the valuation of purchase and sale of goods and inventory for the purpose of computation of income from business or profession shall be made on the basis of the method of accounting regularly employed by the assessee but this shall be subject to certain adjustments

The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income. These adjustments are as follows:

a. Any tax, duty, cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw materials, stores etc.) if not already added in the books of  

b. Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account.

c. Any tax, duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw materials etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts.

Clause 15

Give the following particulars of the capital asset converted into stock-in-trade:-

(a) Description of capital asset;

(b) Date of acquisition;

(c) Cost of acquisition;

(d) Amount at which the asset is converted into stock-in-trade.

Explain Capital gain point

Transfer

Under clause (IV) any transfer of a capital asset by a company to its subsidiary company if the parent company or its nominees hold the whole of the share capital of the subsidiary company and the subsidiary company is an Indian company will not be treated as a transfer.

Under clause (v) any transfer of a capital asset by a subsidiary company to the holding company if the whole of the share capital of the subsidiary company is held by the holding company and the holding company is an Indian company will not be considered as a transfer.

The provisions of section 47A are relevant here. Accordingly, where at any time

before the expiry of a period of 8 years from the date of transfer of a capital asset referred to in clause (iv) or clause (v) of section 47, such capital asset is converted by the transferee company into, or is treated by it as, stock-in trade of its business or the parent company or its nominees or, as the case

may be, the holding company ceases to hold the whole of the share capital of the subsidiary company, the amount of profits or gains arising from the transfer of such capital assets not charged under section 45 by virtue of the provisions contained in clause (iv) or clause (v) of section 47 shall be deemed to be income chargeable under the head “capital gains” of the previous year in which such transfer took place

Under clause (a) description of the capital asset is required to be mentioned for example shares, security, land, building, plant, machinery etc.

(c) the cost of acquisition is required to be reported.

Here the cost of acquisition as per the books of account is to be mentioned.

In case of depreciable assets, the carrying cost appearing in the books will be the written down value. But the value to be reported will be the original cost of acquisition.

Even in case of an asset acquired prior to the 1st day of April, 1981 the value to be reported will be the original cost of acquisition. The assessee may exercise the option of considering the fair market value of

the asset as on 1st April, 1981 for assets acquired prior to that date for the purpose of computation of capital gains as provided under section55(2)(b)(i).

Further, in case of block of assets a particular asset loses its identity and therefore to report the original cost of acquisition may not be possible in all cases

In case of corporate entities where the requirements of CARO are applicable the cost may be available from the fixed asset register.

However, in case of companies where CARO is not applicable and other partnership concerns, the reporting requirements as to the original cost of acquisition may not be practically possible.