Tax Audit is a reporting of transactions keeping in mind different sections of Income Tax Act (ITA). The provision of tax audit is reported in Form 3CD which is prescribed under Rule 6G of the Income Tax Rules, 1962. Form 3CD contains 44 clauses that cover various sections of the Income Tax Act, 1961. It provides data to Income Tax department such as amount and date of payment of statutory dues, payments on which TDS not deducted or TDS deducted and deposited before filing of income tax return, amount of loss or unabsorbed depreciation carried forward to future years, etc.
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S.No. |
Particulars |
Description |
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1 |
Meaning of Tax Audit |
Tax Audit is an examination of books of accounts of the assessee keeping in mind the provisions of Income Tax Act, 1961. |
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2 |
Head of Income on which Tax Audit is applicable |
Tax Audit is applicable to those who carry on business or profession during the previous year. |
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3 |
Why Tax Audit is required? |
Section 44AB of the Income Tax Act makes it mandatory to audit the accounts of the person who carries on business during the year provided the turnover exceeds:
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4 |
Which form to be filled for Tax Audit to furnish details u/s 44AB? |
The form 3CD is prescribed under Rule 6G (2) of Income Tax Rules, 1962. |
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5 |
How many clauses are there in Form 3CD? |
There are 44 clauses in Form 3CD, some of the relevant clauses are explained further. |
How Tax Audit is beneficial to assessee?
A lot of information is required to be reportedper the clauses of Tax Audit. The assessee has to assemble all of that information which in turn creates his database stronger. Here is a small list of a few itemsthat are required to be reported in Form 3CD,which is not exhaustive:
a. List of assets on which depreciation under Income Tax Act is claimed. This brings together all the assets used by the assessee to run its business or profession.
b. The assessee keeps a track on the contribution made towards provident fund, employee state insurance, etc., which is reportable in one of the clauses of Tax Audit. It enables assessee to ensure that payment is made before due date and return is filed on time.
c. Detail of capital expenditure, personal expense, advertisement expense mustbe disclosed separately.
d. List of loans accepted and repaid during the year along with maximum outstanding balance.
Clause-wise analysis of reporting requirement
Form 3CD consists of 44 clauses where some clauses are related to facts and some require detailed analysis of the business. The table below discusses the relevant clauses of Tax Audit, wherein analysis of business is required:
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Clause in Tax Audit |
Requirements |
How Is it Beneficial? |
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Clause 1 to 14 |
Basic information like name of the assessee, address, PAN, status, previous year, assessment year,etc. |
It provides the basic idea of the business of the assessee. |
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Clause 18 |
List of assets used for business purpose is required to calculate depreciation on assets. The details required are:a list of addition/sale of assets along with supporting bills, date put to use, rate and amount of depreciation. |
The assessee has list of assets which could be used to further plan expansion, disposal, etc. |
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Clause 20(b) |
For reporting under this clause, contribution made by employeestowards various funds such as provident fund, employee state insurance, etc.is recorded along with date of payment to department. The relevant challans for the depositsare also required to be submitted. |
The assessee has control over regularization of compliance which is mandatory to run business smoothly. |
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Clause 21 (a) |
The details ofcapital expenditure, personal expenses, advertisement expenses, segregation of subscription and services availed for club, penalty, fine, etc. debited to profit and loss account are recorded under this clause. |
This clause segregates the expenditure in different heads so that expenses could be regularized and should not increase beyond budgeted figure. |
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Clause 21 (b) |
This involves detailed analysis of profit and loss keeping in mind various sections of TDS. This ensures that TDS is deducted while making payment and deposited with the department. The expenses on which TDS is deducted must be cross-verified by TDS returns. The TDS challans and acknowledgment of TDS return are to be kept in records for verification. |
TDS compliance is mandatory to avoid the disallowance of expense. |
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Clause 31 |
It requires details of loanstaken or deposits accepted during the year. This clause enables assessee to track the repayment, payment of interest or default if any. |
The assessee will be able to maintain a list of all the persons from whom loans have been taken or deposits have been accepted during the year. The list includes name, PAN of those persons, maximum outstanding balance, etc. |
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Clause 33 |
Section-wise details of deductions under Chapter VIA, example, PPF (u/s 80C), health insurance premium (u/s 80D), education loan (u/s 80E), saving bank interest (u/s 80TTA). |
It is beneficial in a way that assessee will have details of deduction claimed in different sections along with proof of the same. |
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Clause 34 |
In this clause, all expenses on which TDS is deducted and the respective rate is to be disclosed. If TDS is deducted at a rate which is less than as specified in the act, then the same must be recorded specifically. The date of furnishing of the TDS return and amount of interest paid on late deposit of TDS, if any, must also be recorded. |
This helps in timely deposit of TDS return and avoid the interest on late deposit of TDS. |
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Clause 40 |
This clause reflects the picture of grossand net profit of business with respect to turnover.Stock in trade and material consumed ratio can also be recorded under this clause. |
This enables assessee to set his profit margin and planning working capital. |
The authors can also be reached at chanchaljain2007@gmail.com or ca.jain18@gmail.com .
Disclaimer: The above article is meant for informational purpose only and does not purport to be advice or opinion, legal or otherwise, whatsoever. While due care has been taken during the compilation of this article to ensure that the information is accurate to the best of our knowledge and belief, the contents of such article do not substitute for professional advice that may be required. The individual expressly disclaims all and any liability to any person who has read this document or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this article
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