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3CB and 3CD, 35D

Max Payne (employed) (2574 Points)

01 July 2010

Background:

Company was incorporated in 03rd March 2010.

Directors have decided to prepare a single financial statement for the period from 03-03-2010 to 31-03-2011 as per section 210 of the Companies Act.

However, for Tax purpose, the company has to make the balance sheet as on 31st March 2010

There were no transactions, except capital contribution and preliminary expenses.

Question 1:

Is it correct to do the audit of the company and issue form 3CB + 3CD for the period 03-03-2010 to 31-03-2010, without Form 3CA?

We can make the financial statements for one month without presenting to a general meeting of the members?

Question 2:

Can we claim preliminary expense35D? (pls explain, we did not start the business activity of the company, but can it be said that business has commenced?)

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4 Replies

Amir (Learner) (4016 Points)
Replied 01 July 2010

HI Bhai,

Issue of Form 3CB & 3CD without 3CA –

No, it is not a mandate since Turnover limits have not triggered.

Can we make financial statements for one month without presenting it in general meeting? –

Bhai, unlike P/L A/c, which is prepared for a period, Balance sheet is prepared as on date and has no relevance with the period.

Further in respect of P/L A/c –

Clause (a) of Sec 210(3) - in the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months.

Can we say that the assesee has “commenced business” even when he has not started any “business activity”?

Let me tel you this question is decided on the facts of each case & is not a question of law.

Just trying to relate it with another query - What should be the date of completion of construction of House? - "Date on which it was ready to move in" or the "Date on which people actually moved in"......

Setting up’ means ready to commence, while actual commencement is when essential activity starts - There is a distinction between setting up of business and commencement of business. A business is said to be set up when it is ready to commence. Where the business consists of continuous course of activities, for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. Mere inclusion of a business in the main object clause in the memorandum of association is not enough to conclude that the business has commenced; the business pursuant to the object clause should have been started to justify the claim - CIT v. Sponge Iron India Ltd. [1993] 67 ITR 437/201 ITR 770 (AP).

Carrying on business is primary condition - The primary condition for the application of section 10 of the 1922 Act [corresponding to section 28 of the 1961 Act] is that the tax is payable by an assessee under the head ‘Profits and gains of business’ in respect of business carried on by him. When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he receives cannot bear the character of profits of business - New Savan Sugar & Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC)/Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC).

Installation/erection of machinery will not by itself suffice - Mere installation and erection of machinery is not sufficient by itself and till some end-product, which is the business of the company to produce, is or can be obtained, it cannot be said that the assessee is ready to commence production - CIT v. Industrial Solvents & Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.)/K. Sampath Kumar v. CIT [1986] 158 ITR 25 (Mad.).

Trial run of machinery will not suffice - A manufacturing concern cannot be said to have set up its business simply by installing the machinery and giving it a trial run with a hired generator set. Only after it has secured power connection, got ready for production and started purchasing raw materials can it be held to have set up the business - CIT v. Forging & Stamping (P.) Ltd. [1979] 119 ITR 616 (Bom.).

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Max Payne (employed) (2574 Points)
Replied 01 July 2010

Hi Amir bhai,

Thanks for ur response.... :)

I was gonna mod the first post and ask if we can do away with 3CB and 3CD because there is no turnover, but you have struck the nail on its head....

I have some further questions regarding the tax audit......

One, that since we are using section 210 of the companies Act to extend the financial year, we can say that 3CA also is not required, (because audit required only when the accounts are to be presented in AGM - i think that is section 216 and 219 of the companies act)

So on what basis do we proceed the financials for March 2010?

Can the directors make use of unaudited financials for filing the ITR?

Two, this is a service sector company, so we can say that the business is not commenced, and so the deduction under 35D should be deferred?

(Bhai, pls note - this is something we dont give too much care about, at least in my office, whether business has commenced to claim 35D!)

I think i may have deviated a bit from the original question, but pls do answer!

Amir (Learner) (4016 Points)
Replied 01 July 2010

Bhai,

U r most welcome..........!

3CA is required or not?

No, It is not required, but I think ur reason is not correct since the direction {Rule 6G} to submit 3CA comes from sec 44AB, which is related to turnover limits. So if a company is not falling under 44AB then no need to comply the rules made thereunder.

Further, Bhai for companies act, audit will be required for days in March 2010 since unaudited Financials cannot be presented in the AGM and as mentioned above even in case of extended FY (or 1st AGM) - P/L is to be presented since the incorporation of the company + Balance sheet has no underlying period.

So at AGM following AUDITED STATEMENTS shall be presented -

P/L will be prepared since 03.03.2010 to 31.03.2011 and will be presented in the AGM

Balance Sheet as on 31.03.2011

Can the directors make use of unaudited financials for filing the ITR?

In the context of present case- Yes ITR can be filed based on unaudited financials and if necessary Directors can revise it later on.

In general - I think this is more of academic discussion - Act nowhere prohibits return filing based on unaudited financials but the point is why would Directors do such a thing? One can argue that Directors can file the return based on unaudited financials and if necessary then revise it later on based on audit findings.

To put a full stop on this discussion - No ITR cannot be filed unless audit is done, especially after this mandatory e-filing and all, where you cannot submit the audit report separately unless asked for it.

Commencement of Business

When I was writing the first post this thought came to my mind that what will be the answer in case of service provider......So after me it was ur turn of striking the hammer...........:)

First, I would like to say that in case of MANUFACTURING concern, existence of at least single revenue generation transaction is not a pre-condition to prove the "commencement of business" - since production itself amounts to "commencement" and law doesnt wait for the transaction of sale to happen.

Bhai, I am not sure but I think on the same analogy - existence of at least single REVENUE generation transaction in the First PY should not be a precondition to establish the "commencement of business"

So, I feel - if the service provider was having a client + resources to provide the requisite services then this establishes the "commencement of business", even when no such service was performed/ delivered.

Deduction u/s 35 D should be deferred till assesee establishes the "commencement" ?

Yes, and without a doubt - Sec 35D is not a standalone section - it is a part of PGBP only & so long as "Business/Profession" does not come into "commencement" - no treatment can be done in PGBP.

Further, Sec 35D itself says -".........beginning with the previous year in which the business commences....................."