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Navigating the maze of tax audits in India may be daunting for businesses and people alike. Understanding the technicalities of tax audit reports and related paperwork, such as Forms 3CA/3CB and 3CD, is essential for ensuring compliance and minimizing the risk of penalties.
In this blog, we will explore the intricate details of tax audits. Whether you’re a company owner, a tax expert, or just interested in tax compliance, this guide will explain the purpose, procedure, and relevance of Forms 3CA, Form 3CB, and Form 3CD in the context of tax audits.
We go thoroughly into all the main aspects of tax audits, from interpreting the technical requirements of these documents to uncovering the vital insights they provide into a taxpayer’s financial circumstances. By the end of this blog, you’ll have a comprehensive understanding of how these documents shape the audit process and influence tax compliance strategies.
Let’s explore the intricate details of tax audits and shed light on the crucial functions of Forms 3CA, 3CB, and 3CD as we embark on this intriguing exploration together.
A tax audit is a process to ensure that income has been calculated in accordance with the provisions of the Income Tax Act and that the taxpayer’s books of account are accurate. Only a Chartered Accountant holding a full-time Certificate of Practice can sign and conduct a tax audit. The tax audit is reported using Form 3CA and 3CB, with details in Form 3CD.
Here are the 3ca and 3cb applicability for business and professionals
3ca and 3cb Applicability For Business
3ca and 3cb Applicability For Professionals
As per the provisions of the Income Tax Act, the Due date for filing a Tax audit report is one month before the due date for filing an income tax return. Please refer to the following table for more information.
| Assessee | Due Date for Tax Audit | Due Date for ITR |
|---|---|---|
| Company assessee and any other person who is liable to file tax audit | 30-Sep | 31-Oct |
| Assessee is liable to file a report under section 92CE | 31-Oct | 30-Nov |
The Phrase “Non-Filing” refers to when the person obliged to get his books Tax audited under the Income Tax Act,1962 doesn’t get his books audited, or there is a delay in filing the Tax audit form.
Non-filing of a Tax audit report attracts a penalty of 0.5% of total sales or gross receipts, as the case may be, or Rs. 1,50,000, whichever is less.
Forms to be filed in Tax audit
Form 3CA and 3CB are introduction forms in which basic details of the auditee (assessee) are filed. For further explanation and detailed content, please refer to the table below.
Difference between 3CA/3CB
| Particular | 3CA | 3CB |
|---|---|---|
| Contents | 1) Name, address, and PAN of the assessee 2) Date of audit report 3) Annexure (audited balance sheet, profit and loss account, form 3CD) 4) A statement by the auditor that all the particulars were filled in Form No. 3CA and annexure affixed are true to his understanding, 5) Audit remarks and qualifications found in Form 3CD 6) Auditor’s name, address, membership no, FRN no. and signature with seal/stamp |
1) Particulars of the assessee, i.e. name, address, PAN. 2) Date of audit report 3) Annexure (Balance sheet, profit and loss account, Form 3CD) 4) A statement by the auditor that they have acquired all the information required for the audit 5) Reporting of detailed observations and discrepancies raised in form 3CD 6) A statement that the accounts are continued at the branch and head office 7) A statement that the details filled in by the auditor are true to his understanding 8) Auditor’s name, address, membership no, FRN No. and signature with seal/stamp |
| Assessee type | This form is required to filed by assessee who are compulsorily required to get accounts audited under any other statutory act. | This form is required to be filed by assessee whose books are not compulsorily audited under any other statutory act. |
The above table clearly shows that an assessee has to file either Form 3CA or Form 3CB, but in every case, Form 3CD is filed.
The Form 3cd of the Income Tax Act comprises 44 clauses in total, which require the auditor to provide reports on the different matters mentioned within it. These clauses are categorized into two sections:
Part A includes essential factual information about the assessee.
Part B consists of details regarding the various compliances related to income tax laws that must be provided.
Some important clauses are given here for reference:-
| Clause | Particulars | Explanation |
|---|---|---|
| 8 | Indicate the relevant clause of section 44AB under which the audit has been conducted. | This clause requires identification of the Relevant clause of section 44AB, for which the assessee is liable to be audited under the act. Where more than one clause is applicable, select the clause which is higher in alphabetical order. |
| 12 | Whether the profit and loss account includes any profits and gains assessable on a presumptive basis, if yes, indicate the amount and the relevant section (44AD, 44ADA, 44AE, 44AF, 44B, 44BB, 44BBA, and 44BBB, Chapter XII-G, First Schedule or any other relevant section.)? | This clause requires profit that is assessable on a presumptive basis and included in Profit and loss |
| 16 | Amounts not credited to the profit and loss account, being | Section 28 serves as the charging provision for the income categorized under the ‘profits and gains of business or profession’ category. Its purpose is to Encompass and disclose incomes that may not typically be considered as business income but are legally recognized as such under the Income Tax Act. Therefore, income which is not credited to the profit and loss account but is an income as per the Income Tax Act is reported here. |
| 16(a) | The items falling within the scope of Section 28 | |
| 16(b) | The proforma credits, drawbacks, refunds of duty of customs or excise or service tax, or refunds of sales tax or value added tax or Goods & Services Tax, where such credits, drawbacks, or refunds are admitted as due by the authorities concerned | |
| 16(c) | Escalation claims accepted during the previous year | |
| 16(d) | any other item of income | |
| 16(e) | Capital receipt, if any | |
| 21(a) | Please furnish the details of amounts debited to the profit and loss account, Being in the nature of capital, personal, advertisement expenditure etc. | These nature of expenses are disallowed under Income Tax Act is reported to be disclosed under this clause. |
| 21(b) | Amounts inadmissible under section 40(a)(i), 40(a)(ia), 40(a)(ic), 40(a)(iia), 40(a)(iib), 40(a)(iii), 40(a)(iv), 40(a)(v) | Expense or part of expense disallowed due to non-deduction or non-payment of TDS are reported under this clause |
| 21(c) | Amounts debited to profit and loss account being, interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba) and computation thereof; | This applies to assesses who are firms, AOPs, or BOIs and make payments to their partners or members in the form of interest, salary, or other compensation. The Act specifies a maximum amount that such expenses can have in the hands of the company, AOP, or BOI; if the expense goes over this limit, it cannot be reduced from income. |
| 21(d) | Disallowance/deemed income under section 40A(3) | Payment in cash of Rs . 10000 or more to a single person in a single day to be reported here for disallowance. |
| 21(e) | Provision for payment of gratuity not allowable under section 40A(7) | As per the provision, gratuity is only allowed on a payment basis. Hence, any provision of gratuity expense is disallowed. The disallowance is reported here. |
| 21(f) | Any sum paid by the assessee as an employer not allowable under section 40A(9); | Any payment incurred by an employer towards setting up of any fund, trust, Company, AOP, BOI, Society, etc. will not be allowed as a deduction subject to certain exceptions. |
| 21(g) | Particulars of any liability of a contingent nature | reporting of contingent liability is done under this clause |
| 21(h) | Amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income; | Expenses which are incurred for earning exempt incomes are disallowed under provisions of income tax act. Such expenses debited to profit and loss are reported here. |
| 21(I) | Amount inadmissible under the proviso to section 36(1)(iii) | Interest on a loan is generally allowed as a deduction. But in the case where a loan for the acquisition of an asset is taken, the interest shall not be allowed for the period between the date of borrowing of the loan and the date on which the asset was put to use. |
| 26 | In respect of any sum referred to in clauses (a),(b),(c),(d),(e),(f) or (g) of section 43B, the liability for which:- | This clause reports expenses disallowed due to non-payment, as section 43 allows expenses such as cesses, taxes, and duties, etc., only on a payment basis. |
| 26(a) | pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was | |
| 26(b) | was incurred in the previous year | |
| 31(a) | Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year: Name, address, and PAN of the lender or depositor, Amount of loan or deposit taken or accepted, whether the same was squared up during the year, maximum amount outstanding at any time during the previous year, whether the same was taken or accepted by cheque or bank draft (specify if account payee) or use of ECS through a bank account | where an assessee takes or give loan, deposit, or any sum in relation to immovable property in cash for more than Rs. 20,000, the same is reported in this clause |
| 31(b) | Particulars of each specified sum in an amount exceeding the limits specified in section 269SS taken or accepted during the previous year: Name, address, and PAN (if available) of the person from whom specified sum is received, amount of specified sum taken or accepted, whether the specified sum was taken or accepted by cheque or bank draft (specify if account payee) or use of ECS through a bank account | |
| 31(ba) | Particulars of each receipt in an amount exceeding the limit specified in section 269ST, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person during the previous year, where such receipt is otherwise than by a cheque or bank draft or use of electronic clearing system through a bank account | Section 269ST states that a person is not allowed to accept a receipt of more than Rs. 2lakh from either:- (i) From a person in a day (in total); (ii) In respect of a single transaction; or (iii) In respect of transactions relating to a single event/occasion; If such an amount is paid through any mode other than an account payee cheque/bank draft or use of ECS through a bank account. The reporting of non-compliance with this section will be made in this clause. |
| 31(bb) | Particulars of each receipt in an amount exceeding the limit specified in section 269ST, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person, received by a cheque or bank draft, not being an account payee cheque or an account payee bank draft, during the previous year | |
| 31(bc) | Particulars of each payment made in an amount exceeding the limit specified in section 269ST, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion to a person, otherwise than by a cheque or bank draft, or use of electronic clearing system through a bank account during the previous year | |
| 31(bd) | Particulars of each payment made in an amount exceeding the limit specified in section 269ST, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion to a person, made by a cheque or bank draft, not being an account payee cheque or an account payee bank draft, during the previous year | |
| 31(c) | Particulars of each repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T made during the previous year | Repayment of a loan or any amount in relation to purchase of an immovable property (specified sums) exceeding Rs. 20,000 otherwise than by way of an account payee cheque or bank draft or use of a bank account through ECS would attract a penalty equal to the amount borrowed. Details of all repayments of loans or specified sums paid exceeding Rs. 20,000 during the year are provided herein. |
| 31(d) | Particulars of repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T received otherwise than by a cheque or bank draft or use of electronic clearing system through a bank account during the previous year | |
| 31(e) | Particulars of repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T received by a cheque or bank draft which is not an account payee cheque or account payee bank draft during the previous year | |
| 33 | Section-wise details of deductions, if any, admissible under Chapter VIA or Chapter III (Section 10A, Section 10AA). | The reporting of deductions claimed under chapter VIA or u/s 10A or 10AA is reported under this clause. |
| 34(a) | Whether the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB, please furnish | The compliances with regard to TDS payable on certain expenses are the general subject of these clause. The tax auditor documents the expenses for which taxes were supposed to be withheld, regardless of whether those taxes were really withheld and paid to the government on schedule if compliance is not met on time. |
| 34(b) | Whether the assessee is required to furnish the statement of tax deducted or tax collected? | |
| 34(c) | Whether the assessee is required to furnish the statement of tax deducted or tax collected? | |
| 40 | Details regarding turnover, gross profit, etc., for the previous year and the preceding previous year: 1. Total turnover 2. Gross profit/turnover 3. Net profit/turnover 4. Stock-in-trade/turnover 5. Material consumed/finished goods produced | Required ratios are reported under this clause. |
| 44 | Break-up of total expenditure of entities registered or not registered under the GST | This clause requires reporting a split of the total expenditure into types relevant to GST, such as expenditure in relation to exempt goods/services under GST, payments to entities under the Composition Scheme, Payments to entities not registered under GST, etc. |
Conclusion
Understanding the intricacies of tax audit reports and the accompanying documentation, such as Forms 3CA/3CB and 3CD, is crucial for individuals and companies alike. These forms not only ensure accurate and transparent tax reporting but also minimize the risk of penalties and help identify potential areas for deductions and credits.
For individuals exceeding the prescribed threshold limits, completing and filing a tax audit report provides a comprehensive overview of their financial situation, including income, expenses, and assets. This transparency is essential for meeting tax obligations accurately and reducing the risk of penalties and interest.
For companies exceeding the specified turnover limits, tax audit reports are indispensable in demonstrating compliance with tax laws and regulations to stakeholders such as shareholders, creditors, and regulatory authorities. The meticulous documentation provided by Forms 3CA/3CB and 3CD offers a clear picture of the company’s financial performance and integrity, enhancing trust and confidence in its operations.
At Mercurius, we understand the complexities of tax audits and the importance of meticulous documentation. Our team of experts is dedicated to helping you navigate these challenges with ease. Whether you are an individual seeking to fulfill your tax obligations or a company aiming to demonstrate compliance and financial integrity, we are here to assist you every step of the way.
Contact us today to learn how we can support your tax audit needs and ensure your financial peace of mind.
