Fm 3CD Clause by clause analysis by Dr. Vinod K Singhania Fm 3CD Part A - Clauses 1, 2, 3, 5, 6, 7 Address Name PAN Status Individual, HUF, Firm, LLP, Company, Trust, AOP/BOI, Local Authity and Artificial Juridical Person Assessment year Previous year ended Fm 3CD Part A - 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 any other identification number allotted f the same Fm 3CD Part A - 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 any other identification number allotted f State excise duty Entry tax Luxury tax Entertainment tax Pression tax the same Fm 3CD Part A - Clause 8 Indicate the relevant clause section 44AB under which the audit has been conducted Fm 3CD Part A - Clause 8 Indicate the relevant clause section 44AB under which the audit has been conducted Clause (a) - Turnover exceeding Rs. 1 cre Clause (b) - Gross receipts exceeding Rs. 25 lakh Clause (c)(i) - Declared prit lower than deemed prit under section 44AE Clause (c)(ii) - Declared prit lower than deemed prit under section 44BB Clause (c)(iii) - Declared prit lower than deemed prit under section 44BBB Clause (d) - Declared prit lower than deemed prit under section 44AD 1
Clause 9 (a)if firm Association Persons, indicate names partners/members and their prit sharing ratios. (b)if there is any change in the partners members in their prit sharing ratio since the last date the preceding year, the particulars such change. Clause 9 (a) If firm Association Persons, indicate names partners/members and their prit sharing ratios. (b) If there is any change in the partners members in their prit sharing ratio since the last datetake the a copy preceding partnership year, the particulars suchdeed change. and indicate the name partners and prit sharing ratio from the deed Clause 9 No change - Obtain a representation from client. Change - Obtain a copy revised deed. Clause 10 (a) If firm Association Persons, indicate names partners/members and their prit sharing ratios. (b) If there is any change in the partners members in their prit sharing ratio since the last date the preceding year, the particulars such change. (a)nature business pression (if me than one business pression is carried on during the previous year, nature every business pression). (b)if there is any change in the nature business pression, the particulars such change. Clause 10 (a) Nature business pression (if me than one business pression is carried on during the previous year, nature every business pression). (b) If there is any change in the nature business pression, Ensure that thenature particulars such change. business and pression in Fm 3CD and in ITR-4/5/6 is same. Change - Review Board minutes and annual rept (a) Nature business directs. pression (if me than one business pression is carried on during the previous year, nature every business pression). (b) If there is any change in the nature business pression, the particulars such change. Clause 10 No change - Obtain a representation from client. 2
Clause 11 (a) Whether books account are prescribed under section 44AA, if yes, list books so prescribed. (b) Books account maintained and address at which the books account are kept. (In case books account are maintained in a computer system, mention the books account generated by such computer system. If the books account are not kept at one location, please furnish the addresses locations along with the details books account maintained at each location.) (c) List books account examined and nature relevant documents examined. Clause 11 (a) Whether books account are prescribed under section 44AA, if yes, list books so prescribed. (b) Books account maintained and address at which the books account are kept. (In case books account are maintained in a computer system, mention the books account generated by such computer system. If the books account are not kept at one location, Applies only to income please furnish the addresses locations along with the from pression as given details books account maintained at each in rule 6F. location.) Not applicable in the case (c) List books account examined and nature others. relevant documents examined. Clause 11 (a) Whether books account are prescribed under section 44AA, if yes, list books so prescribed. Location-wise list (b) Books account maintained andifferent address at which books the books account are kept. (In case maintained books by account the are maintained in a computer assessee system, mention should the be books account generated by such given. computer system. If the books account are not kept at one location, please furnish the addresses locations along with the details books account maintained at each location.) (c) Even electronic spread Part sheet B(like payroll recds) should be mentioned. List books account examined and nature relevant documents examined. A few examples are Indicate only those Cash Part and bankb vouchers books/recds which are Sales and purchase invoices, challans examined f the purpose Clause 11Deeds/agreement tax audit. (a) Whether books Inaccount case are prescribed computerised under section 44AA, if yes, list books, books list so prescribed. all books (b) Books account maintained generated and address throughat which systemthe books account are should kept. (In becase given. books account are maintained in a computer system, mention the books account generated by such computer system. If the books account are not kept at one location, please furnish the addresses locations along with the details books account maintained at each location.) (c) List books account examined and nature relevant documents examined. Clause 11 (a) Whether books account are prescribed under section 44AA, if yes, list books so prescribed. (b) Books account maintained and address at which the books account are kept. (In case books account are maintained in a computer system, mention the books account generated by such computer system. If the books Note account to be appended are not kept in audit at one rept location, pleasethe furnish books the addresses account have locations been examined along with on the a test detailscheck books basis in accdance account maintained with the atgenerally each location.) accepted auditing standards applicable in India. (c) List books account examined and nature relevant documents examined. Clause 12 Whether the prit and loss account includes any prits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant sections (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule any other relevant section). 3
Clause 12 Whether the prit and loss account includes any prits and gains assessable on Only amount (pertaining to presumptive basis, theseif businesses) yes, indicate credited the in amount and the relevant P&L A/c sections should (44AD, be 44AE, 44AF, 44B, mentioned 44BB, 44BBA, (section-wise 44BBB, list Chapter XII-G, First to beschedule given). any other relevant section). No need to give amount taxable under these sections. Clause 13 (a) Method accounting employed in the previous year. (b) Whether there has been any change in the method accounting employed vis-à-vis the method employed in the immediately preceding previous year. (c) If answer to (b) above is in the affirmative, give details such change, and the effect there on the prit loss. (d) Details deviation, if any, in the method accounting employed in the previous year from accounting standards prescribed under section 145 and the effect there on the prit loss. Clause 13 Part TheBeffect change in the method accounting on the prit loss needs to be disclosed only if such (a) Method accountingeffect employed is material in the previous (ICAI Syear. (b) Whether there has been Revised any change Guidance in Note). the method accounting employed vis-à-vis the method employed in the immediately preceding previous year. (c) If answer to (b) above is in the affirmative, give details such change, and theif effect quantification there on the the prit loss. effect change is not (d) Details deviation, if any, possible, in the the method fact should accounting employed in the previous be appropriately year from disclosed accounting standards prescribed under against section clause145 13(c). and the effect there on the prit loss. Clause 13 A change in accounting policy need not be repted under clause 13(c) as it is not a change in the method (a) Method accounting employed accounting. the previous year. (b) Whether there has been any change in the method accounting employed vis-à-vis the method employed in the immediately preceding previous year. (c) If answer to (b) above Ais change in thein affirmative, the method give stock details such change, andvaluation the effect is there a on change the prit in loss. accounting policy. It is not a change in the method (d) Details deviation, if any, in the method accounting accounting. Hence, such a employed in the previous year from accounting change need not be mentioned standards prescribed under under clause section 13(c). 145 and the effect there on the prit loss. AS(IT)-I issued under Part section B 145 requires that a change in accounting policy should be disclosed in the financial (a) Method accounting employed statements. in the previous year. (b) Whether there has been any change in the method accounting employed vis-à-vis the method employed in the immediately preceding previous year. (c) If answer to (b) above is in the Non-disclosure affirmative, give in the details such change, and the effect accounts there on a change the prit in loss. accounting policy will (d) Details deviation, if any, in have the method to be repted accounting employed in the previousunder year clause from13(d) accounting and standards prescribed undernot section under145 clause and13(c). the effect there on the prit loss. Clause 13 Clause 13 If the Part assesseeb is following mercantile system accounting and has not complied with AS(IT)-I and/ AS(IT)- II, the tax audit is required to rept (a) Method accounting the following employed against in clause the previous 13(d) year. (b) Whether there Details has been deviation(s) any change from in the AS(IT)-I method and/ AS(IT)-II; and accounting employed vis-à-vis the method employed in The effect there on the prit the immediately preceding previous year. loss (not on taxable income). (c) If answer to (b) above is in the affirmative, give details such change, and the effect there on the prit loss. If it is not possible to quantify (d) Details deviation, if any, thein effect the method deviations accounting on the employed in the previous prit year from loss, accounting suitable standards prescribed under disclosure section needs 145 and to the be effect made there on the prit loss. under this clause. 4
Clause 14 (a) Method valuation closing stock employed in the previous year. (b) Details deviation, if any, from the method valuation prescribed under section 145A, and the effect there on the prit loss. Clause 14 (a) Method valuation closing stock employed in the previous year. (b) Details deviation, if any, from the method Finished valuation goods, prescribed Raw under section 145A, and the materials, effect there Wk-inprogress, on the prit loss. Maintenance supplies, Consumables, and loose tools. Verify that the method valuation is in accdance with AS-2. If not, qualify the opinion as regards truth and fairness in Fm 3CB. Clause 15 - Give the following particulars the capital asset converted into stock-intrade (a) Description capital asset; (b) Date acquisition; (c) Cost acquisition; (d) Amount at which the asset is converted into stock-in-trade. Capital asset as per section 2(14). Definition as on April 1 the assessment years Clause 15 - Give the following particulars the capital asset converted should be into considered. stock-intrade (a) Description capital asset; (b) Date acquisition; (c) Cost acquisition; (d) Amount at which the asset is converted into stock-in-trade. Date acquisition to be given even if the asset was acquired pri to April 1, 1981 Actual cost acquisition Part to Bbe disclosed, even if f income-tax purposes, FMV Clause 15 - Give the following on April particulars 1, 1981 is adopted. the capital asset converted into stock-intrade (a) Description capital asset; (b) Date acquisition; (c) Cost acquisition; (d) Amount at which the asset is converted into stock-in-trade. Amount (as per books account) at which asset is converted into should Clause 15 - Give the following stock-in-trade particulars the capital asset converted be disclosed. into stock-intrade (a) Description capital asset; (b) Date acquisition; (c) Cost acquisition; (d) Amount at which the asset is converted into stock-in-trade. Under section 45(2), FMV on the date conversion is considered. 5
Clause 15 - Give the following particulars the capital asset converted into stock-intrade (a) Description capital asset; (b) Date acquisition; (c) Cost acquisition; Repted in the year (d) Amount at which the conversion. asset is converted into Under section 45(2), capital stock-in-trade. gain is taxable in the year in which stock-in-trade is transferred. Clause 15 - Give the following particulars the capital asset converted into stock-intrade (a) Description capital asset; (b) Date acquisition; (c) Cost acquisition; Separate note should be given f those cases where (d) Amount at which theconversion asset is converted takes into place stock-in-trade. during the financial year 2013-14 but stock-in-trade is not transferred up to March 31, 2014. Clause 15 - Case Study Date acquisition June 30, 1976 Cost acquisition Fair market value on April 1, 1981 Rs. 20 lakh Rs. 30 lakh Date conversion June 1, 2013 Conversion value recded in books Fair market value on the date conversion Rs. 70 lakh Rs. 90 lakh Clause 16 - Amounts not credited to the prit and loss account, being, (a) the items falling within the scope section 28; (b) the prma credits, drawbacks, refund duty customs excise service tax, refund sales tax value added tax, where such credits, drawbacks refunds are admitted as due by the authities concerned; (c) escalation claims accepted during the previous year; (d) any other item income; (e) capital receipt, if any. Some examples are Perquisites arising from business, salary/interest Clause 16 - Amounts from not credited firm, non-compete to the prit and loss account, being, fees, sum received under (a) the items falling within keyman the scope insurance section policy, 28; (b) the prma credits, section drawbacks, 35AD receipts. refund duty customs excise service tax, refund sales taxall value items added covered tax, where by such credits, drawbacks section 28 should refundsbe are admitted as due byrepted the authities under this concerned; clause (c) escalation claims accepted except those during items thewhich previous year; fall under sub-clause (d) any other item income; (b)/(c)/(d). (e) capital receipt, if any. Clause (b) applicable only in the case mercantile system Clause 16 - Amounts notaccounting credited to the prit and loss account, being, (a) the items falling within the scope section 28; (b) the prma credits, drawbacks, refund duty customs excise service tax, refund sales tax value added tax, where such credits, drawbacks refunds are admitted as due by the authities concerned; (c) escalation claims accepted during the previous year; (d) any other item income; (e) capital receipt, if any. 6
Clause 16 - Amounts entitlement not credited to receive to thesuch prit amounts is necessary. Nmally, and loss account, being, an assessment similar der (a) the items fallingendsement within the scope by the concerned section 28; (b) the prma credits, executivedrawbacks, authity is necessary refund duty customs excise service tax, refund sales tax value added tax, where such credits, drawbacks refunds are admitted as due by the authities concerned; (c) escalation claims accepted during the previous year; (d) any other item income; (e) capital receipt, if any. Part F treating B a claim as admitted as due, unconditional The term accepted means accepted unconditionally by the other party. Mere raising claim does Clause not constitute 16 - Amounts Acceptance not credited to the prit CITand v. loss Hindustan account, Housing being, & Land (a) Development the items falling Trust within Ltd. the scope section 28; [1986] (b) 161 the ITR prma 524 (SC)] credits, drawbacks, refund duty customs excise service tax, refund sales tax value added tax, where such credits, drawbacks refunds are admitted as due by the authities concerned; (c) escalation claims accepted during the previous year; (d) any other item income; (e) capital receipt, if any. Receipts covered by sections 41(1) and 43CA will Part F determining B the nature a receipt (whether capital come Clause under this 16 - Amounts revenue), not credited the to taxthe audit prit clause and loss account, being, should use his expertise and (a) the items falling within pressional the scope judgment. section 28; (b) the prma credits, drawbacks, refund duty customs excise service tax, refund sales tax value added tax, where such credits, drawbacks Loans refunds and are admitted as due by the authities browings concerned; (although (c) escalation claims accepted capital during receipts) the previous are year; not required to be (d) any other item income; repted (e) capital receipt, if any. Clause 16 - Amounts not credited to the prit and loss account, being, (a) the items falling within the scope section 28; (b) the prma credits, drawbacks, refund duty customs excise service tax, refund sales Note to tax be appended value added in audit tax, rept where such credits, drawbacks refunds are admitted as due by the authities concerned; (c) escalation claims accepted during the previous year; (d) any other item income; not been credited to the prit and loss account. (e) capital receipt, if any. Based on the representation given by the Management and the documents/recds made available to me/us, there is no item the nature referred to in clauses 16(a) to (e) other than those disclosed in (as uploaded) which have Clause 17 - Where any land building both is transferred during the previous year f a consideration less than value adopted assessed assessable by any authity a State Government referred to in section 43CA 50C, please furnish - Details property - Consideration received accrued - Value adopted assessed On the date agreement Section 50C 43CA- On - the On date the on the date transfer? date agreement agreement if a fewif consideration conditions arereceived satisfied by Clause 17 - Where any landcheque/draft CIT building v. Venkat befe both Reddy the is transferred during the previous date [2013] 57 agreement SOT year 117 f (Hyd.) a consideration less than value adopted assessed assessable by any authity a State Government referred to in section 43CA 50C, please furnish Details property Consideration received accrued Value adopted assessed assessable 7
Clause 18 - Particulars depreciation allowable as per the Income-tax Act, 1961 in respect each asset block assets, as the case may be, in the following fm : (a) Description asset/block assets. (b) Rate depreciation. (c) Actual cost written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case any addition an asset, date put to use; including adjustments on account (i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect assets acquired on after 1st March, 1994,(ii) change in rate exchange currency, and (iii) subsidy grant reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. Clause 18 - Particulars depreciation allowable as per the Income-tax Act, 1961 in respect each asset block assets, as the case may be, in the following fm : (a) Description asset/block assets. (b) Rate depreciation. (c) Actual cost written down value, as the case may be. (d) Additions/deductions during Ensure the year that withdepreciable dates; in the case any addition an asset, date put to use; including assets are crectly adjustments on account (i) Central Value Added Tax credits claimed and allowed classified under theas Central per relevant Excise Rules, 1944, in respect assetsblocks, acquired on rates after 1st and March, 1994, (ii) change in rate descriptions exchange as currency, given and by (iii) subsidy grant reimbursement, IT Rules by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. Put to use would include passive usage (standby Clause 18 - Particulars equipment, depreciation allowable as per the spares Income-tax which Act, 1961 are innot respect each asset block assets, as the case may be, in the following fm : used but are ready to be (a) Description asset/block assets. put (b) to Rate use) depreciation. (c) Actual cost written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case any addition an asset, date put to use; including adjustments on account (i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect assets acquired on after 1st March, 1994, (ii) change in rate exchange currency, and (iii) subsidy grant reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. Where the assessee has claimed CENVAT Credit Part on B the purchase an asset, Clause 18 - Particulars depreciation allowable as per the ensure that no depreciation Income-tax Act, 1961 in respect each asset block assets, under section 32 in respect as the case may be, in the following fm : (a) the Description CENVAT asset/block credit assets. ption (b) Rate has been depreciation. claimed by the(c) assessee. Actual cost written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case any addition an asset, date put to use; including adjustments on account (i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect assets acquired on after 1st March, 1994, (ii) change in rate exchange currency, and (iii) subsidy grant reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. Feign currency loan Part adjustment B on account exchange fluctuation Clause 18 - Particulars depreciation would be added allowable to block as per the Income-tax Act, 1961 in respect only each in the asset year inblock which assets, as the case may be, in the following the amount fm : actually paid (a) Description asset/block assets. (b) Rate depreciation. (c) Actual cost written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case any addition an asset, date put to use; including adjustments on account (i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect assets acquired on after 1st March, 1994, (ii) change in rate exchange currency, and (iii) subsidy grant reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. Under mercantile system subsidy Clause 18 - Particulars depreciation sanctioned allowable (even as per if the Income-tax Act, 1961 in respect each not asset received) block will be assets, as the case may be, in the following fm deducted : (a) Description asset/block assets. (b) Rate depreciation. (c) Actual cost written down value, as the case may be. (d) Additions/deductions during thesubsidy year with indates; respect in theasset case any addition an asset, acquired date put to in use; anyincluding earlier adjustments on account (i) year(s) Central Value and Added received Tax credits claimed and allowed under during the Central the year Excise has Rules, to be 1944, in respect assets acquired deducted on from afterthe 1stblock March, in 1994, (ii) change in rate exchange the year currency, receipt and (iii) subsidy grant reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. 8
Additional depreciation in the case power Clause 18 - Particulars depreciation generating allowable units? as per the Income-tax Act, 1961 in respect each asset block assets, as the case may be, in the following fm : (a) Description asset/block assets. (b) Rate depreciation. (c) Actual cost written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case Not available if any addition an asset, date put to use; including adjustments on account (i) Central Value nmal Added Tax credits claimed and allowed under the Central depreciation Excise Rules, is 1944, in respect assets acquired on claimed after 1st on March, 1994, (ii) change in rate exchange straightline currency, and basis (iii) subsidy grant reimbursement, by whatever under name section called. (e) Depreciation allowable. (f) Written down value at the end the year. 32(1)(i) In case business reganisation, ensure that 5th Clause 18 - Particulars depreciation proviso allowable to sectionas per the Income-tax Act, 1961 in respect each 32(1) asset is followed block assets, as the case may be, in the following fm : (a) Description asset/block assets. (b) Rate depreciation. (c) Actual cost written down value, as the case Additional/nmal may be. (d) Additions/deductions during the year with dates; depreciation in the case in any addition an asset, date put to use; including case an asset adjustments on account (i) Central Value Added Tax used f less than credits claimed and allowed under the Central Excise Rules, 1944, in respect assets acquired on after 180 1st days March, 1994, (ii) change in rate exchange currency, and (iii) subsidy grant reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end the year. Clause 19 - Amounts admissible under sections 32AC to 35E. - 35(1)(ii) Clause 19 - Amounts admissible under sections 32AC to 35E. Section Amount chargeable to tax under these sections should be repted in item 24 Amount debited to prit and loss account - 32AC - 33AB - 33ABA - 35(1)(i) - 35(1)(iia) - 35(1)(iii) - 35(1)(iv) - 35(2AA) - 35(2AB) Amount admissible - 35ABB - 35AC - 35AD - 35CCA - 35CCB - 35CCC - 35CCD - 35D - 35DD - 35DDA - 35E Amount Amount admissible under admissible these sections by satisfying in the relevant case conditions the IT Act/IT Rules Clause amalgamation 19 - Amounts admissible under sections demerger 32AC? to 35E. Section Amount debited to prit and loss account Amount admissible Section Carry fward is possible in the case Merger Demerger Transfer company Transferee company 35 Yes No Indian co. 35ABB Yes Yes Indian co. Indian co. 35D Yes Yes Indian co. Indian co.* 35DDA Yes Yes Indian co. Indian co.* 35E Yes Yes Indian co. Indian co. *In the case demerger, the transferee company may not be any Indian company. 9
Clause 20 (a) Any sum paid to an employee as bonus commission f services rendered, where such sum was otherwise payable to him as prits dividend. [Section 36(1)(ii)]. (b) Details contributions received from employees f various funds as referred to in section 36(1)(va). Clause 20 CIT v. Career Launcher Part India BLtd. [2012] 207 Taxman 28 (Delhi) (a) Any sum paid to an employee as bonus commission f services rendered, where such sum was otherwise payable to him as prits dividend. [Section 36(1)(ii)]. (b) Details contributions Bonus received Obtain paid a from representation to a full employees time f various funds as referred direct from in the section (holding assessee 36(1)(va). shares) that bonus cannot commission be treated aspaid dividend, to employees even if is nmal not an dividend amount is which not declared would otherwise inspite be distributable due to him as prits prit dividends. A suitable note Where relevant, obtain a should be Part representation B from the appended, if assessee that there are no amount is paid after Clause 20 other funds f the welfare due date but within (a) Any sum paid to an employees within as bonus the grace period commission f services rendered, meaning where section such sum 2(24)(x). was otherwise payable to him as prits dividend. [Section 36(1)(ii)]. (b) Details contributions received from employees f various funds as referred to in section 36(1)(va). There is no duty cast on Part thebtax audit to verify whether the amounts Clause 20 PF/ESIC, etc., has been (a) Any sum paid to an crectly employee deducted as bonus from employee s salary. commission f services rendered, where such sum was otherwise payable to him as prits dividend. [Section 36(1)(ii)]. (b) Details contributions received from employees f various funds as referred to in section 36(1)(va). Serial Nature fund Amount received from employees Due date f Actual amount paid Actual date Serial Nature fund Amount received from employees Due date f Actual amount paid Actual date Clause 21(a) (first item) Amounts debited to the prit and loss account, being (a) expenditure capital nature; Clause 21(a) (first item) Amounts debited to the prit and loss account, being (a) expenditure capital nature; What is capital expenditure? Audit will have to apply his judgment on the basis available judicial rulings and accounting principles 10
Clause 21(a) (first item) Amounts debited to the prit and loss account, being (a) expenditure capital nature; Clause 21(a) (second item) Amounts debited to the prit and loss account, being (a) expenditure personal nature; If any such capital expenditure is deductible under any provision the Act, it should be highlighted in the Note Item-wise detail to be given in tabular fm Clause 21(a) (second item) Amounts debited to the prit and loss account, being (a) expenditure personal nature; Available income-tax judicial rulings on personal expenditure should be considered by the audit Clause 21(a) (second item) Amounts debited to the prit and loss account, being (a) expenditure personal nature; "The practice meeting certain types personal expenses employees is nmal and is recognised both by the Income-tax Authities and the Company Law Board. Illustrative such expenses are the provisions rent-free quarters, conveyance f personal use, medical expenses, expenses on leave travel, maternity benefits, canteen facilities etc. The charging to revenue such personal expenses, either on the basis the company s contractual obligations, in accdance with accepted business practice, is perfectly nmal and legitimate does not call f any special comment by the audit. Where, however, personal expenses not covered by contractual obligations by accepted business practice are incurred by the company and charged to revenue account, it would be the duty the audit to rept thereon". Clause 21(a) (second item) Amounts debited to the prit and loss account, being (a) expenditure personal nature; Clause 21(a) (third item) Amounts debited to the prit and loss account, being (a) expenditure on advertisement in any souvenir, brochure, tract, pamphlet the like, published by a political party; 11
Take a certificate from the Clause 21(a) (third item) Amounts management debited to the prit and loss account, being (a) expenditure on advertisement in any souvenir, brochure, tract, pamphlet Pamphlethe journal like, published by a political by a trade party; union fmed by a political party will not come under this clause if the trade union has a separate and distinct legal entity. Clause 21(a) (third item) Amounts debited to the prit and loss account, being (a) expenditure on advertisement in any souvenir, brochure, tract, pamphlet the like, published by a political party; Newspaper is not covered by this clause Clause 21(a) (fourth item) Amounts debited to the prit and loss account, being (a) expenditure incurred at clubs being cost f club services and facilities used; Clause 21(a) (fourth item) Amounts debited to the prit and loss account, being (a) expenditure incurred at clubs being cost f club services and facilities used; Payments to credit ganisations (like Dinner s Club), business clubs (like chambers not to be included Clause 21(a) (fourth item) Amounts debited to the prit and loss account, being (a) expenditure incurred at clubs being cost f club services and facilities used; Tax audit only needs to give item-wise data regarding club expenditure. No need to opine on allowability expenditure as deduction. Clause 21(a) (fourth item) Amounts debited to the prit and loss account, being (a) expenditure incurred at clubs being cost f club services and facilities used; Club expenditure pertaining to employees, directs, propriets, partners, etc., should be given 12
Clause 21(a) (fifth, sixth and seventh items) Amounts debited to the prit and loss account, being (a) - expenditure by way penalty fine f violation any law f the time being in fce; - any other penalty fine; - expenditure incurred f any purpose which is an fence which is prohibited by law; A few favourable judicial rulings 167 Taxman 192, 160 Taxman 96, 165 Taxman 188 (Mag.), 27 SOT 469, 2 ITR (Trib.) 355, 157 Taxman 514, 129 TTJ 49, 201 Taxman 292, 10 taxmann.com 256, 53 SOT 298, 19 ITR (Trib.) 57 Clause 21(a) (fifth, sixth and seventh items) Amounts debited to the prit and loss account, being (a) - expenditure by way penalty fine f violation any law f the time being in fce; - any other penalty fine; - expenditure incurred f any purpose which is an fence which is prohibited by law; Clause 21(a) (fifth, sixth and seventh items) Amounts debited to the prit and loss account, being (a) - expenditure by way penalty fine f violation Penalty any fine law f payable pursuant to a the time being in fce; contractual obligation - any other penalty (i.e., fine; liquidated damages) need not be - expenditure incurred repted f any purpose which is an fence which is prohibited by law; Clause 21(a) (fifth, sixth and seventh items) Amounts debited to the prit and loss account, being (a) - expenditure by way penalty fine f violation A few notes may anybe law appended f - the time being in fce; - any other penalty fine; - expenditure incurred f any purpose which is an fence which is prohibited by law; Clause 21(a) (fifth, sixth and seventh items) Amounts debited to the prit and loss account, being (a) - expenditure by way penalty fine f violation any law f the time being in fce; - any other penalty fine; - expenditure incurred f any purpose which is an fence which is prohibited by law; Clause 21(b) Amounts inadmissible under section 40(a) (i) as to non-resident referred to in sub-clause (i) 13
Tax deductible but not deducted should be Tax not deducted because direction repted under issued by AO under Clause 21(b) Amounts inadmissible this sub-clause section 197, not to under section 40(a) be repted (i) as to non-resident referred to in sub-clause (i) Date (A) Details on which tax is not deducted: Amount Nature Name the payee PAN the payee, if available Address line 1 Address line 2 City Town District Pincode Clause 21(b) Amounts inadmissible under section 40(a) (i) as to non-resident referred to in sub-clause (i) (B) Details on which tax has been deducted but has not been paid during the previous year in the subsequent year befe the expiry time prescribed under section 200(1) Date Amount Nature Name the payee PAN the payee, if available Address line 1 Address line 2 City Town District Amount tax deducted Clause 21(b) Amounts inadmissible under section 40(a) (ii) as referred to in sub-clause (ia) Tax deductible but not deducted should be Tax not deducted because direction repted under issued by AO under Clause 21(b) Amounts inadmissible this sub-clause section 197, not to under section 40(a) be repted (ii) as referred to in sub-clause (ia) (A) Details on which tax is not deducted: Date Amount Nature Name the payee PAN the payee, if available Address line 1 Address line 2 City Town District Pincode Clause 21(b) Amounts inadmissible under section 40(a) (ii) as referred to in sub-clause (ia) Date (A) Details on which tax is not deducted: Amount Nature Note to be appended Name the payee PAN the payee, if available Address line 1 Address line 2 City Town District Pincode No Clause 21(b) Amounts inadmissible under section 40(a) (ii) as referred to in sub-clause (ia) Date Amount Nature Name the payee PAN the payee, if available Address line 1 Address line 2 Payer Payee (B) Details on which tax has been deducted but has not been paid on befe the due date specified in sub-section (1) section 139 City Town District Pincode Pincode Amount tax deducted Amount out (V) deposited if any 14
Clause 21(b) Amounts inadmissible under section 40(a) (ii) as referred to in sub-clause (ia) A few notes may be appended Clause 21(b) Amounts inadmissible under section 40(a) (ii) as referred to in sub-clause (ia) Clause 21(b) Amounts inadmissible under section 40(a) (iv) under sub-clause (iia); (v) under sub-clause (iib); (vi) under sub-clause (iii); (vii) under sub-clause (iv); (viii) under sub-clause (v). Royalty, fees, etc. payable by State Government Clause 21(b) Amounts inadmissible under section 40(a) Undertaking to State Government (iv) under sub-clause (iia); (v) under sub-clause (iib); (vi) under sub-clause (iii); (vii) under sub-clause (iv); (viii) under sub-clause (v). Wealth-tax Salary to nonresident Provident fund contribution Tax on nonmonetary perqusite paid by employer Item-wise detail to be given only in the case Clause 21(b) Amounts inadmissible under section 40(a) (iv) under sub-clause (iia); (v) under sub-clause (iib); (vi) under sub-clause (iii); (vii) under sub-clause (iv); (viii) under sub-clause (v). Where the assessee has Fm provident 3CD fund/gratuity fund which is administered by a trust, the assessee must ensure Part that the B trustee has a proper system tax deduction in applicable cases. sub-clause (iii) Clause 21(b) Amounts inadmissible under section 40(a) (iv) under sub-clause (iia); (v) under sub-clause (iib); (vi) under sub-clause (iii); (vii) under sub-clause (iv); (viii) under sub-clause (v). Obtain a note/representation from the assessee regarding the nature arrangement f TDS in respect any s made from the provident/other funds. 15
Amended definition Royalty Amended definitions royalty Explanations 4, 5 and 6 inserted in section 9(1)(vi) Royalty is defined in Explanation 2 to section 9(1)(vi). It means consideration received receivable f transfer all any right in respect certain rights property infmation. Amendment by the Finance Act, 2012 with retrospective effect from June 1, 1976. Meaning royalty As amended by Finance Act, 2012 AFTER THE AMENDMENT, ROYALTY WILL INCLUDE Consideration f the transfer all any right f use right to use a computer stware (including granting a licence) irrespective the medium through which such right is transferred Explanation 4 to section 9(1)(vi). Meaning royalty As amended by Finance Act, 2012 AFTER THE AMENDMENT, ROYALTY WILL INCLUDE Consideration in respect any right, property infmation, whether not a. the possession control such right, property infmation is with the payer; b. such right, property infmation is used directly by the payer; c. the location such right, property infmation is in India Explanation 5 to section 9(1)(vi). Meaning royalty As amended by Finance Act, 2012 AFTER THE AMENDMENT, PROCESS INCLUDES Transmission by satellite (including uplinking, amplification, conversion f down-linking any signal), cable, optic fibre by any other similar technology, whether not such process is secret Explanation 6 to section 9(1)(vi). Consequences amendment Tax will be deductible u/s194j/195 Payment f use/purchase stware. Payment f roaming charges. Payment f telephone services. Payment f uplinking charges. Payment f bandwidth netwk charges. Relief given by Notification 21/2012 Payment f interconnection/pt access charges. Payment f any services provided by the other party by equipment/sophisticated technology. 16
Consequences amendment Tax will be deductible u/s194j/195 Payment f use/purchase stware. Payment f roaming charges. Payment f telephone services. Payment f uplinking charges. Recent ruling Bombay Tribunal Payment f bandwidth netwk charges. Payment f interconnection/pt access charges. Payment f any services provided by the other party by equipment/sophisticated technology. Notification 21/2012 Notification 21/2012, dated June 13, 2012 A Ltd. (a resident taxpayer) purchased stware and at the time purchase it deducted tax at source under section 194J 195. Without any modification A Ltd. transfers stware to B Ltd.. A Ltd. gives a declaration (giving its PAN) that at the time purchase, tax was deducted by it under section 194J/195. Recent ruling Bombay Tribunal If these conditions are satisfied B Ltd. will not deduct tax at source under section 194J (w.e.f. July 1, 2012). Consequences amendment Tax will be deductible u/s194j/195 Recent ruling Bombay Tribunal in the case Sonata Infmation Technology Ltd. v. Dy. CIT [2012] 54 SOT 223 (Mum.). F the purpose sections 40(a)(ia), 194J, 195, royalty means royalty defined in section 9(1)(vi), Explanation 2. Finance Act, 2012 extended the scope definition royalty by inserting Explanations 4, 5 and 6 in section 9(1)(vi). New Explanations 4, 5 and 6 are not applicable f the purpose section 40(a)(ia), 194J, 195. Clause 21(c) Amounts debited to the prit and loss account, being interest, salary, bonus, commission remuneration inadmissible under section 40(b)/40(ba) and computation there; 17
Mode computation disallowance Clause 21(c) Amounts debited to the prit and loss account, being interest, salary, bonus, commission remuneration inadmissible under section 40(b)/40(ba) and computation there; Particulars Section Amount debited to P&L account Amount admissible Amount inadmissible Remarks Clause 21(c) Amounts debited to the prit and loss account, being interest, salary, bonus, commission remuneration inadmissible under section ICAI s views on clause 21(g) Inadmissible amount should be wked out having due regard to Circular 739, dated March 25, 1996. [Para 36.7 Revised ICAI s Guidance Note]. 40(b)/40(ba) and computation there; 1 SOT 608 (Hyd.), 34 SOT 495 (Pune) 77 ITD 419 (Ahd.) Clause 21(d) Disallowance/deemed income under section 40A(3): (A) On the basis the examination books account and other relevant documents/ evidence, whether the expenditure covered under section 40A(3) read with rule 6DD were made by account payee cheque drawn on a bank account payee bank draft. If not, please furnish the details: Only It is desirable that the tax audit inadmissible Part shouldbobtain a suitable certificate amount should from the assessee to the effect that Clause be given21(d) Disallowance/deemed the s f income expenditure referred to in section 40A(3) were under section 40A(3): made by account payee cheque/draft (A) On the basis the examination books account and other relevant documents/ evidence, whether the expenditure covered under section 40A(3) read with rule 6DD were made by account payee cheque drawn on a bank account payee bank draft. If not, please furnish the details: Date Nature Amount Name payee PAN payee, if available Clause 21(d) Disallowance/deemed income under section 40A(3): (B) On the basis the examination books account and other relevant documents/evidence, whether the referred to in section 40A(3A) read with rule 6DD were made by account payee cheque drawn on a bank account payee bank draft If not, please furnish the details amount deemed to be the prits and gains business pression under section 40A(3A); Only deemed income should be repted Clause 21(d) Disallowance/deemed income under section 40A(3): (B) On the basis the examination books account and other relevant documents/evidence, whether the referred to in section 40A(3A) read with rule 6DD were made by account payee cheque drawn on a bank account payee bank draft If not, please furnish the details amount deemed to be the prits Date and gains Nature business Amount pression Name under PAN section payee, if 40A(3A); payee available 18
Clause 21(e) Provision f gratuity not allowable under section 40A(7); Clause 21(e) Provision f gratuity not allowable under section 40A(7); Gratuity fund to meet future liability Provision f unapproved gratuity fund is not deductible Clause 21(f) Any sum paid by the assessee as an employer not allowable under section 40A(9); Clause 21(f) Any sum paid by the assessee as an employer not allowable under section 40A(9); Obtain a list contributions/s made by the client as an employer towards the setting up ( fmation contribution to) any fund, trust, company, etc., but other than to - Recognised gratuity fund - Recognised provident fund - Recognised superannuation fund - Any fund as required by any law Clause 21(f) Any sum paid by the assessee as an employer not allowable under section 40A(9); Clause 21(f) Any sum paid by the assessee as an employer not allowable under section 40A(9); Tax audit has to scrutinise - Staff welfare a/c - General expenses a/c - Donation account Payments to employees (e.g., reimbursement staff picnic) are not covered It covers contributions to - Employees welfare trust - Scholarship funds - Other unrecognised fund 19
Clause 21(f) Any sum paid by the assessee as an employer not allowable under section 40A(9); Clause 21(g) Particulars any liability a contingent nature Clause 21(g) Particulars any liability a contingent nature Clause 21(g) Particulars any liability a contingent nature Provision f contingent liability should be repted in clause 21(g). Also qualify the audit rept in Fm 3CB as regards truth and fairness accounts. This is because making provision f a contingent liability violates AS-29. Take a certificate from the client that there is no contingent liability debited to P&L A/c Clause 21(g) Particulars any liability a contingent nature Clause 21(h) Amount deduction inadmissible in terms section 14A in respect the expenditure incurred in relation to income which does not fm part the total income 20
Rule 8D is to be applied by the Assessing Officer (when he is not satisfied with the crectness Part Bthe claim expenditure by the assessee). Rule 8D should not be applied by the audit to calculate the inadmissible amount Clause 21(h) Amount deduction inadmissible in terms section 14A in respect the expenditure incurred in relation to income which does not fm part the total income Tax audit has taken into consideration CBDT s clarifications given in Circular 5/2014. Obtain a representation from client as to the income exempt from tax and expenditure incurred and also allocation methodology Clause 21(h) Amount deduction inadmissible in terms section 14A in respect the expenditure incurred in relation to income which does not fm part the total income Obtain a representation from client as to the income exempt from tax and expenditure incurred and also allocation methodology Clause 21(h) Amount deduction inadmissible in terms section 14A in respect the expenditure incurred in relation to income which does not fm part the total income Clause 21(i) Amount inadmissible under the proviso to section 36(1)(iii) Clause 21(i) Amount inadmissible under the proviso to section 36(1)(iii) Obtain a representation from client as to the date on which capital asset was put to use. Proviso to section 36(1)(iii) provides any interest liability pertaining to the period commencing from date browing till the asset is put to use, is not deductible Clause 22 - Amount interest inadmissible under section 23 the Micro, Small and Medium Enterprises Development Act, 2006. 21
Clause 22 - Amount interest inadmissible under section 23 the Micro Small and Medium Enterprises Development Act, 2006. Investment in plant and machinery should not be me than Rs. 5 cre f a manufacturing concern investments in equipment should not exceed Rs. 2 cre in the case service provider Clause 22 - Amount interest inadmissible under section 23 the Micro Small and Medium Enterprises Development Act, 2006. Interest not deductible under Income-tax Act If the buyer fails to make to these enterprises within stipulated period (not me than 45 days), he will have to pay compound interest (rate interest would be 3 times bank rate notified by RBI) Clause 23 - Particulars s made to persons specified under section 40A(2)(b). Clause 23 - Particulars s made to persons specified under section 40A(2)(b). Only actual s to persons specified in section 40A(2)(b) to be repted and not the amount debited to prit and loss account Total is to be disclosed. Audit is not required to give his Clause opinion 23 on the - Particulars s made unreasonability/ to persons specified to excessiveness persons the specified under section s. 40A(2)(b). That is the under this clause 23. Assessing Officer s prerogative. Name related person PAN related person Relation The tax audit is only required to give particulars s under section 40A(2)(b) Nature transaction Payment made Clause 23 - Particulars s made to persons specified under section 40A(2)(b). ICAI Revised Guidance Note It may be difficult to identify such s in each and every case where the volume transactions is rather huge and voluminous. Therefe, it may be necessary to restrict the scrutiny only to such s in excess certain monetary limits depending upon the size the concern and the volume business the assessee. 22
Clause 23 - Particulars s made to persons specified under section 40A(2)(b). X Ltd. holds me than 20% shares in Y Ltd. Y Ltd. Clause 24 - Amounts deemed to be prits and gains under section 32AC 33AB 33ABA 33AC. X Ltd. Y Ltd. makes to Z Ltd. X Ltd. holds me than 20% shares in Z Ltd. Z Ltd. Clause 24 - Amounts deemed to be prits and gains under section 32AC 33AB 33ABA 33AC. Clause 25 - Any amount prit chargeable to tax under section 41 and computation there. Section Description Amount Clause 25 - Any amount prit chargeable to tax under section 41 and computation there. Only repting the amount - e-filing Ptal requires prit taxable under name party section 41 is not enough. - When name party is Clause The computation 25 - Any the amount prit chargeable amount is also to required tax to not available? under section 41 and be given computation there. 41(1) - Recovery against any deduction 41(2) - Balancing charge 41(3) - Sale assets used f scientific research 41(4) - Recovery bad debt 41(4A) - Amount withdrawn f special reserve 41(5) - Adjustment loss. Name party Amount income Section Description transaction Computation if any 23