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Form 3CD – Income Tax Audit Form

Last Update Date : July 05, 2018

form 3cd

Every business with turnover above a certain threshold undergoes Income tax Audit. Tax audits are conducted by tax auditors who are qualified CAs. A tax auditor evaluates financial records to determine whether the taxpayer complies with the applicable Income Tax laws by verifying his books of accounts to validate the Income Tax computation and compliance with the laws of Income Tax.  Form 3CD is the tax audit report to be furnished by the tax auditors to the Income Tax department. The due date to furnish the same is 30th September of every year. It contains two parts and 41 clauses. Let us learn about the same in detail in this guide by H&R Block.

What is Form 3CD?

In simple terms, Form 3CD describes the format of the Audit Report which is to be filed by tax auditors under Section 44AB of Income Tax Act, 1961. The Income Tax Department of India has clearly laid down the rules associated with the use of this form. A tax audit is mandatory if the turnover of a business exceeds Rs 1 crore (Rs 2 crores in case of Carrying on business (opting presumptive taxation scheme under section 44AD)or exceeds Rs. 50 Lacs in case of Professionals.
As per rule 6G, there are two types of forms to be furnished under section 44AB. One is Audit report in from 3CA / 3CB and other is a statement showing relevant particulars in Form 3CD.
The due date of filing Tax audit report under Section 44AB is 30th September of the assessment year. However, if the assessee is liable for transfer pricing audit the due date for filing the Tax Audit is 30th November of the Assessment year-filing of tax audit report is mandatory from the AY 2013-14 onwards.

Detailed Analysis of the Audit Form 3CD?

Form 3CD as per rule 6G (2) has two parts –PART A and PART B.
Let’s discuss each clause in depth.

PART- A of the Form 3CD

This part generally includes the basic information like:

Clause 1: Name of the assessee

Here, mention the name of the assessee whose accounts is to be audited under section 44AB of the Income Tax Act.

Clause 2: Address

Mention the address under this clause and it should be same as the one communicated by the assessee to the Income Tax Department for assessment purpose as on date of signing of audit report.

Clause 3: Permanent Account Number

It is a mandatory field which requires the Permanent Account Number allotted to the assessee.

Note:

  • If assessee is proprietor then mention his/her name along with all the Proprietary Firms’ names.
  • In case of branch tax audit, branch name should be mentioned along with name of the assessee.
  • If there is any change in address as per income tax records, the same must be communicated.

Clause 4: Whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, customs duty, GST, etc. If yes, please furnish the registration number or any other identification number allotted for the same status. Registration number under different indirect tax must be mentioned here in case the assessee is liable to pay indirect tax.

Clause 5: Status

Status means the status as per section 2 (31) of the IT act and not the residential status. (Section 2(31) describes “person” and it includes an Individual, HUF, Firm, Company etc…)

Clause 6: Previous year from…………………….to……………….

Mention the period in this clause.

Clause 7: Assessment year

Here, you have to mention the assessment year.

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

Here the relevant clauses accordingly must be mentioned:

  • Clause (a) – If total sales, turnover or gross receipt in business exceeds Rs. 1 Crore
  • Clause (b) – If gross receipts in profession exceed Rs.50 lakh
  • Clause (c) – If Profits u/s 44AE, 44BB or 44BBB claimed to be lower than the presumptive profits and gains
  • Clause (d – If Profits u/s 44ADA claimed to be lower than the presumptive profits and gains.
  • Clause (e) – If Profit)s u/s 44AD claimed to be lower than the presumptive profits and gains.

Clause 9:

  1. If firm or association of persons, indicate names of partners/members and their profit sharing ratios.
  2. If there is any change in the partners or members or in their profit sharing ratio since the last date of the preceding year, the particulars of such change. Mention the ratio of profit sharing including loss if any.

Clause 10:

  1. 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)
  2. If there is any change in the nature of business or profession, the particulars of such change.
    In this clause mention the nature of business or profession also changes if any.

Clause 11:

  1. Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed.
  2. List of books of account maintained and the address at which the books of account are kept. (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 account are not kept at one location, please furnish the addresses of locations along with the details of books of account maintained at each location.)
  3. List of books of account and nature of relevant documents examined.
    • Here specify a list of books of account maintained along with Detail of Address of all locations where books of account are kept in case.
    • Also, the scope of Auditor has widened by including requirement to specify the nature of all the documents examined.
    • The tax auditor is also required to specify nature of all the relevant documents on basis of which the tax audit has been conducted along with a list of books of account examined, consequently increasing the scope of Tax Audit.
    • The tax auditor should also maintain proper record of working papers accordingly.

Clause 12: Whether the profit and loss account includes any profits and gains assessable on the presumptive basis, if yes, indicate the amount and the relevant section (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, and 44BBB, Chapter XII-G, First Schedule or any other relevant section.)

  • This means that the value of material supplied by the client is not included in Gross receipt and value of work in progress would not constitute turnover.
  • In case of composite business, if the books of accounts are commonly maintained, apportionment of the common expenses must be reasonably determined.
  • Turnover basis is mostly accepted by I-Tax Dept.

Clause 13: This is the clause recently added in the form and contains the particulars as shown in the image:

  • The tax auditor must verify Notes to Account for disclosure of significant accounting policies.
  • The tax auditor must compare the report with previous year’s tax audit report for basis adopted.
  • He/she must also scrutinize Notes to Accounts, Auditors’ report and CARO for change in method of accounting and the quantification thereof.
  • He/she must also disclose details of deviation in the method of accounting employed (based generally on ICAI Standards) in the Previous Year if any, from the standards prescribed under Section 145 and ICDS

Clause 14: Here, Mention the effect on the profit and loss account of deviation from method of valuation prescribed under Section 145A individually on the opening and closing stocks. Both the effects should be disclosed separately and not as per accumulated basis. In case there is netting off, there should be proper disclosure for the same.

Clause 15: Here, the details of capital asset if converted into stock-in-trade should be given.

Clause 16: Mention the amount not credited to profit and loss account.

NOTE: Only the claims accepted previous year must be disclosed in clause 16, barring mere claims on negotiation. Case CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC)

Clause 17: Mention the transactions related to 50C, (in case any land or building is transferred less than the consideration value.)

NOTE: Stamp Duly value is to be specified for land or building or both sold whether held in nature of Capital assets or Stock in trade.

Clause 18: Mention all the details related to depreciation allowable as per Income tax act along with change in rate of currency and subsidy or grant reimbursed by the government.

Clause 19: Mention all the admissible expenses in the profit and loss according to the section prescribed in the form.

Clause 20: Any bonus or commission paid to the employer instead of profits or dividends payable to him must be mentioned here.
Also if any contribution received from the employee for various funds as referred to in section 36(1)(va): should be described.

Clause 21: Here,

  • Furnish the details of amounts debited in the profit and loss account being in the nature of personal, capital or political party advertisement expenditure also the amounts inadmissible under section 40(a)
  • The tax auditor must obtain the list from client where payments were made otherwise than by a/c payee cheque/draft of amounts more than ₹ 10,000/- in cash or by cheques /drafts which are not crossed.
  • Cross verify the list given by the assessee with the bank statements.
  • Scrutinize cash book to ensure completeness and accuracy of list provided by the assessee.
  • Maintain proper records of payment of gratuity
  • Obtain proper list of payment made by an employer towards contribution of any fund, trust or company.
  • Maintain statements of particular transactions
  • Scrutinize the debits and credits of Profit and loss account to identify any transaction of contingent nature.

Clause 22: Mention any amount of Interest inadmissible under section 23 of the Micro, small and medium enterprises.

Clause 23: In case payment is made to specified persons under section 40A (2) (b) of Income tax act must be describe here.

Clause 24: In case any profit and gain is earned or deemed to be earned under section 32AC or 33AB or 33ABA or 33AC of the Income tax act should be disclosed here.

Clause 25: Any amount which is chargeable to tax under section 41 should be explained along with the computation

Clause 31: The tax auditor has to mandatorily mention the details of loans or deposits in case it exceeds the amount specified in section 269SS along with relevant documents.

NOTE: 269SS describes certain limits for lending and accepting the loans and deposits.

Clause 32: Prescribe the details of depreciation, brought forward losses and other relevant details applicable.

General Principles used in preparing Form 3CD

There are certain principles or points the assessee or taxpayer must remember while preparing Form 3CD as described below:

  • Assessee can rely upon the judicial announcements while taking any particular view about inclusion or exclusion of any items/clauses in from 3CD
  • In case there is a conflict of judicial opinion on any particular issue, the assessee may refer to the opinion which has been referred while giving the particulars under any specified clause.
  • The assessee can follow the various accounting standards, Guidance Notes, issued by the Institute from time to time for better clarification.

Important Points to be considered while Furnishing Form 3CD

It is the statutory duty of the tax auditor to prepare Form 3CD and submit the same to the Tax Authority. The auditor then verifies and authenticates the furnished information. Here, are some important points to be kept in mind by the tax auditor while furnishing details in Form 3CD:

  • The information in Form No.3CD should be purely based on the books of account, records, documents, information and explanations made available to the tax auditor for his examination.
  • If a particular item of income/ expenditure is covered in more than one of the specified clauses in the statement of particulars, a suitable cross-reference to such items at the appropriate places must be given.
  • If there is any difference in the opinion of the tax auditor and that of the assessee in respect of any information furnished in Form No. 3CD, the tax auditor should state both the viewpoints and also the relevant information in order to enable the tax authority to take an appropriate decision in the matter.
  • If any particular clause in Form No.3CD is not applicable, he should state that the same is not applicable.
  • In computing the allowance/ disallowance, the law applicable in the relevant year should be kept in view.
  • In case the auditor relies on a judicial pronouncement, mention the fact as his observations in clause (3) of Form No.3CA or clause (5) provided in Form No.3CB, as the case may be.

The tax auditor may qualify his report on matters in respect of which information is not furnished to him and state in his report that the relevant information has not been furnished by the assessee.

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