Audit of Fiscal Laws

Section 12 Audit of
Public Trusts

Audit Under Direct Income Tax

Tax Laws Act, 1961 Audit u/s 35D & 35E

Overview
Tax Audit u/s 44AB

Audit under Audit under

Indirect Tax Laws GST Laws

Audit(s) under the Income-Tax Act, 1961

Audit of Public Trusts
Introduction

Public Charitable Trusts can claim exemption u/s 11 & 12 of the Income Tax Act, 1961 by
complying the following conditions:

✓ Clause (a) of section 12A requires a charitable or religious trust or institution to make an
application for registration within one year from the date of creation of the trust or
establishment of the institution. The Commissioner is empowered to condone the delay in
making the application for registration if he is satisfied that there were sufficient reasons
for such delay. In such cases, the exemption provisions of section 11 and 12 would apply
from the date of creation of the trust or establishment of the institution.

Now, the application can be filed at any time. Further, a proviso has been inserted in clause
(a) to restrict the applicability of that clause to applications made prior to 1.6.2007.

Also, the power of the Commissioner to grant registration for past years, by condoning
the delay in filing such application, has been removed.

✓ Where the total income of the trust or institution as computed under this Act, without
giving effect to the provisions of Sections 11 and 12 exceeds the maximum amount which
is not chargeable to income tax in any previous year i.e. ` 2,50,000 for the A.Y. 2018-19,
the accounts of the trust or institution for that year have been audited by an accountant as
defined in the explanation below sub-section (2) of Section 288 of Income Tax, 1961.
 ✓ The assessee should also furnish a report in Form 10B.

Audit Programme for the audit of Public Charitable Trusts

Preliminary

Annexure to
the Audit Audit Routine
Report Programme Checking

Accounting
Principles

a. Preliminary:

i. Obtain a resolution from the trust specifying the appointment as also indicating the
scope of audit. In particular, the resolution should specify the duties of the auditor
in relation to the items specified in the annexure to the prescribed Form No. 10B.
ii. Obtain a letter of appointment from the trust, before accepting the audit,
communicate with such previous auditor.
iii. Obtain a certificate as to the opening balances of assets and liabilities and the fund.
iv. Obtain a list of books of accounts which are maintained by the trust.

b. Routine Checking:

i. Check the books of account and other records having regard to the system of
accounting and internal control.
ii. Vouch the transactions of the trust to satisfy that:
the transaction falls within the ambit of the trust;
the transaction is properly authorised by the trustees or other delegated
authority as may be permissible in law;
all incomes due to the trust have been properly accounted for on the basis
of the system of accounting followed by the trust;
all expenses appertaining to the trust have been recorded on the basis of the
system of accounting followed by the trust; and
amounts shown as applied towards the object of the trust are covered by the
objects of the trust as specified in the document governing the trust.
iii. Obtain a trial balance on the closing date certified by the trustees.
 iv. Obtain the Balance Sheet and Profit & Loss Account of the trust authenticated by
the trustees and check the same with the trial balance with which they should agree.

c. Accounting Principles:

The auditor should follow, i.e., generally accepted accounting principles and ascertain the
accuracy, truth and fairness of the Balance Sheet and Profit & Loss Account.

In particular, the auditor will scrutinize that:

i. all assets of the trust are verified;

ii. the assets of the trust have been properly valued and depreciation duly
provided for;

iii. all liabilities of the trust are properly accounted for;

iv. the investments of the trust are properly classified and indicated and market
values shown; and

v. outstanding due to the trust are properly accounted for and their recoverability
examined and provision made for irrecoverable.

d. Annexure to the Audit Report:

i. Obtain from the trustees, a certified list of persons covered by Section 13(3).
ii. Obtain from the trustees, a statement enlisting the various items specified in the
Annexure to Form No. 10B
iii. Verify the information supplied by the trustees
iv. Examine the need for a qualification in the report.

Audit of Accounts w.r.t. the Claim for Deduction under Sections 35D and 35E
The conditions under which certain specified preliminary expenditure
incurred before the commencement of business and once the business is
Section 35D commenced on expanding an industrial undertaking or in connection
with setting up a new industrial unit can be amortized are stated in
Section 35D of the Act.

The manner in which deductions are allowed in respect of expenditure on

Section 35E any prospecting operations relating to certain specified minerals listed in the
Seventh Schedule to the Act are stated in Section 35E of the Act.
 n respect of assessees other than a company or a co-operative society, these
deductions are admissible only if the accounts for, the year or years in which
Deductions are the above specified expenditure is incurred are audited by an “accountant”
permissible as defined in explanation below sub-section (2) of section 288 of the Income-
tax Act, 1961 and the report of such audit is furnished by the assessee along
with the return of income.

Rule 6AB of the Income-tax Rules 1962 provides that the report of audit
required to be furnished by the above-mentioned assessees under section
Rule 6AB 35D and 35E should be in Form No.3AE. While doing the audit, the auditor
is expected to follow general principles of auditing as mentioned in
Standards on Auditing.

Audit u/s 44AB of the Income Tax Act, 1961

Section 44AB of the Income Tax Act, 1961 requires the following persons to get their accounts
audited-

Every person -

a. carrying on business shall, if his total sales, turnover or gross receipts, as the case may
be, in business exceed or exceeds one crore rupees in any previous year.

b. carrying on profession shall, if his gross receipts, in profession exceed fifty lakhs rupees
in any previous year,

c. carrying on the business shall, if the profits and gains from the business are deemed to
be the profits and gains of such person under section 44AE or section 44BB or section
44BBB as the case may be, and he has claimed his income to be lower than the profits
or gains so deemed to be the profits and gains of his business, as the case may be, in any
previous year,

d. carrying on the profession shall, if the profits and gains from the profession are deemed
to be the profits and gains of such person under section 44ADA, and he has claimed
such income to be lower than the profits and gains so deemed to be the profits and gains
of his profession and his income exceeds the maximum amount which is not chargeable
to income-tax in any previous year, or

e. carrying on the business shall, if the provisions of sub-section (4) of section 44AD are
applicable in his case and his income exceeds the maximum amount which is not
chargeable to income-tax in any previous year, get his accounts of such previous year
audited by an accountant before the specified date and furnish by that date the report of
 such audit in the prescribed form duly signed and verified by such accountant and
setting forth such particulars as may be prescribed.

Note:

With effect from assessment year 2020-21, the threshold limit, for a person carrying on
business, has been increased from ` 1 crore to ` 5 crores in case when cash receipts and
payments made during the year does not exceed 5% of total receipt or payment, as the case
may be. In other words, 95% or more of the business transactions should be done through
banking channels.

Applicability of Tax Audit Provisions

Example 1. DB Pvt. Ltd. has total turnover of ` 525 lacs for the FY 2020-21.

✓ DB Pvt. Ltd has to conduct the Audit of Books of Accounts under section 44AB of the
Act for the FY 2020-21 as the turnover exceeds ` 5 crores.

Example 2. ABC & Co. (a partnership firm) engaged in trading of electronic goods is
expecting a turnover of ` 165 lacs for the FY 2020-21. (Assume the partnership firm would not
be able to ensure that the aggregate of all amounts received including amount received
for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per
cent of the said amount and aggregate of all payments made including amount incurred for
expenditure, in cash, during the previous year does not exceed five per cent of the said payment).

✓ Section 44AD would be applicable to Partnership Firm. Thus, ABC & Co. can declare the
minimum profit @ 8% of the turnover as its turnover during the PY 2020-21 is not
expected to exceed ` 2 crores. If the firm do not opt for presumptive income scheme under
section 44AD, it has to get books of accounts audited u/s 44AB of the Act.

Example 3. Mr. Anand Khater, a Commission Agent is expecting commission receipts of ` 137
lacs during the FY 2020-21(Assume he would not be able to ensure that the aggregate of
all amounts received including amount received for sales, turnover or gross receipts during the
previous year, in cash, does not exceed five per cent of the said amount and aggregate of
all payments made including amount incurred for expenditure, in cash, during the previous year
does not exceed five per cent of the said payment).

✓ Though Section 44AD is applicable to an Individual, it is not applicable to Commission

income. In the given case, since, Mr. Anand earns the commission income, he cannot take
the benefit of section 44AD. His total turnover during the FY 2020-21 in respect of
commission income is expected to exceed ` 1 crore, he would have to get his books of
accounts audited u/s 44AB of the Act.

Example 4. Mr. Vishal Raka, owning an Agency of Samsung Mobile for the city of Pune and
expects the turnover of ` 87 lacs during the FY 2020-21.
 ✓ Though Section 44AD is applicable to an Individual, it is not applicable to Commission
income. In the given case, since, Mr. Vishal earns the commission income, he cannot take
the benefit of section 44AD. His total turnover during the FY 2020-21 in respect of
commission income is not expected to exceed ` 1 crore, therefore, he need not get his
books of accounts audited u/s 44AB of the Act.

Tax Auditor

The tax audit is to be conducted by an ‘Accountant’ as defined in the Explanation to Section

288(2) of the Income tax act, 1961. According to the section, the term ‘accountant’ means

1. A CA within the meaning of the CA Act, 1949 &

2. Any other person who is entitled to be appointed as an Auditor of the company u/s 139 of
the companies act, 2013.

Circumstances when CA cannot conduct Tax Audit

As per the Guidance Note on Tax Audit, a CA in practice or Firm of CA’s cannot conduct Tax
Audit u/s 44AB of the Income Tax ,1961 in the following circumstances-

 Internal Auditor whether working with the assessee or independently practicing CA or

firm of CA’s acting as Internal Auditor of the assessee, cannot be appointed as Tax auditor.
 A CA who is responsible for writing or maintenance of books of account of the assessee
or any partner of such CA or the firm in which such CA is partner cannot accept the
appointment as the Tax Auditor.
 A CA cannot accept the Tax Audit assignment in respect of a concern in which he or his
relative has substantial interest.
 A CA should not accept that tax audit of a person to whom he is indebted for more than
10,000.

Tax Audit Report

Section 44AB requires the tax auditor to submit the audit report in the prescribed form and setting
forth the prescribed particulars. Sub-rule 1 of rule 6G provides that the report of audit of accounts
of a person required to be furnished under Section 44AB shall –

in the case of a person who

in the case of a person who
carries on business or
carries on business or
profession and who is required
profession, but not being a
by or under any other law to
person referred to in clause
get his accounts audited, be in
(a), be in Form No. 3CB.
Form No. 3CA.
Form 3CD: This is the form containing certain points on which the tax auditor has to provide
information.

These points require factual information about the assessee. The auditor should consider the
following aspects while furnishing the particulars in Form No. 3CD.

a. If a particular item of income/expenditure is covered in more than one of the specified

clauses in the statement of particulars, care should be taken to make a suitable cross
reference to such items at the appropriate places.
b. 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 view
points and also the relevant information in order to enable the tax authority to take a
decision in the matter.
c. If any particular clause in Form No. 3CD is not applicable, he should state that the same
is not applicable.
d. In computing the allowance or disallowance, he should keep in view the law applicable in
the relevant year, even though the form of audit report may not have been amended to
bring it in conformity with the amended law.
e. The information in Form No. 3CD should be based on the books of accounts, records,
documents, information and explanations made available to the tax auditor for his
examination.
f. In case the auditor is given incomplete information or information is given in parts, the
auditor should not withhold the entire audit report. If he thinks fit, he may qualify the
report.

Form 3CD Audit Report or Certificate?

Form 3CD contains information relating to the client.

There are some information denoted as facts and some information where auditor only
expresses his views based on facts.
The term “certificate” is used where the auditor verifies accuracy of facts while the term
“report” is used in case the auditor is expressing an opinion.

Guidance Note on Tax Audit issued by ICAI:

 A CA can accept maximum 60 tax audit assignments.

 Further, as per a Council decision, audits of accounts of persons carrying on business
covered by sections 44AE, 44BB or 44BBB is not included in the aforesaid limit.
 As per Chapter VI of Council General Guidelines, 2008 that in case of firm of Chartered
Accountants in practice, specified number of tax audit assignments means 60 tax audit
assignments per partner of the firm, in a financial year. Therefore, if there are 10 partners
in a firm of Chartered Accountants in practice, then all the partners of the firm can
collectively sign 600 tax audit reports. This maximum limit of 600 tax audit assignments
may be distributed between the partners in any manner whatsoever. For instance, 1 partner
 can individually sign 600 tax audit reports in case remaining 9 partners are not signing
any tax audit report.
 The audit of head office and branch offices of the assessee shall be regarded as one tax
audit assignment.

Penalty for Not Getting the Accounts Audited as Required u/s 44AB

According to section 271B, if any person who is required to comply with section 44AB fails to
get his accounts audited in respect of any year or years as required under section 44AB, the
Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

a. 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of
the gross receipts in profession, in such year or years.
b. 1,50,000.

However, according to section 273B, no penalty shall be imposed if reasonable cause for such
failure is proved.

Income Computation and Disclosure Standards (ICDS):

 Section 145 of the Income Tax Act, 1961 deals with the Method of Accounting.
 Under section 145(1), income chargeable under the heads “Profits and gains of business
or profession” or “Income from other sources” shall be computed in accordance with
either the cash or mercantile system of accounting regularly employed by the assessee.
 Section 145(2) empowers the Central Government to notify in the Official Gazette from
time to time, income computation and disclosure standards to be followed by any class of
assessees or in respect of any class of income.
 Accordingly, the Central Government has, in exercise of the powers conferred under
section 145(2), notified ten income computation and disclosure standards (ICDSs) to be
followed by all assesses (other than an individual or a HUF who is not required to get his
accounts of one previous year audited in accordance with the provisions of section 44AB),
following the mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head “Profit and gains of business or profession” or “
Income from other sources”. from the A.Y. 2017-18.
 All the notified ICDSs are applicable for computation of income chargeable under the
head “Profits and gains of business or profession” or “Income from other sources” and not
for the purpose of maintenance of books of accounts. In the case of conflict between the
provisions of the Income‐tax Act, 1961 and the notified ICDSs, the provisions of the Act
shall prevail to that extent.
 The Central Government has prescribed 10 Income Computation and Disclosure
Standards (ICDSs) as under:

A ICDS I relating to Accounting Policies.

 B ICDS II relating to Valuation of Inventories

C ICDS III relating to Construction Contracts.

D ICDS IV relating to Revenue Recognition.

E ICDS V relating to Tangible Fixed Assets.

F ICDS VI relating to the Effects of Changes in Foreign Exchange Rates.

G ICDS VII relating to Government Grants

H ICDS VIII relating to Securities.

I ICDS IX relating to Borrowing Costs.

J ICDS X relating to Provisions, Contingent Liabilities and Contingent Assets.

 The above ICDSs are to be followed by all assessee (other than an individual or a HUF
who is not required to get his accounts of one previous year audited in accordance with
the provisions of section 44AB following mercantile system of accounting). Therefore, it
is clear that those assessees who are following cash system of accounting need not follow
the ICDSs notified above.

FORM NO. 3CB

[See rule 6G(1)(b)]
Audit report under section 44AB of the Income -tax Act 1961, in the case of a person referred
to in clause (b) of sub - rule (1) of rule 6G

1. *I/we have examined the balance sheet as on, ........................, and the *profit and loss
account/income and expenditure account for the period beginning from ..........................to
ending on ........................................, attached herewith, of
........................(Name),..........................................................(Address),..............................
........(Permanent Account Number).

2. *I/we certify that the balance sheet and the *profit and loss/income and expenditure
account are in agreement with the books of account maintained at the head office at
........................and **........................branches.

3.
a. *I/we report the following observations/comments/discrepancies/inconsistencies;
if any:

b. Subject to above, -
 A. *I/we have obtained all the information and explanations which, to the best
of *my/our knowledge and belief, were necessary for the purpose of the
audit.

B. In *my/our opinion, proper books of account have been kept by the head
office and branches of the assessee so far as appears from*my/ our
examination of the books.

C. In *my/our opinion and to the best of *my/our information and according to

the explanations given to *me/us, the said accounts, read with notes thereon,
if any, give a true and fair view: -
i. in the case of the balance sheet, of the state of the affairs of the
assessee as at 31st March; and
ii. in the case of the *profit and loss account/income and expenditure
account of the*profit/loss or *surplus/deficit of the assessee for the
year ended on that date.

4. The statement of particulars required to be furnished under section 44AB is annexed

herewith in Form No.3CD.

5. In *my/our opinion and to the best of *my/our information and according to explanations
given to*me/us, the particulars given in the said Form No.3 CD are true and correct subject
to following observations/qualifications, if any:
a. ................................................................................................
b. ................................................................................................
c. ................................................................................................

**(Signature and stamp/Seal of the signatory)

Place: …………………
Name of the signatory .....................
Date : ………………… Full address .................................

Notes:

1. *Delete whichever is not applicable.

2. **Mention the total number of branches.
3. ***This report has to be signed by person eligible to sign the report as per the provisions
of section 44AB of the Income-tax Act, 1961.
4. The person, who signs this audit report, shall indicate reference of his membership
number/certificate of practice number/authority under which he is entitled to sign this
report.
 FORM NO. 3CD
[See rule 6G (2)]
Statement of particulars required to be furnished under section 44AB of the Income-tax Act,
1961
PART – A

1 Name of the assessee

2 Address
3 Permanent Account Number
Whether the assessee is liable to pay indirect tax like Excise duty, service tax, sales
4 tax, customs duty, etc. If yes, please furnish the registration number or any other
identification number allotted for the same
5 Status
6 Previous year
7 Assessment year
8 Indicate the relevant clause of section 44AB under which the audit has been conducted
The new clause inserted in part A of the form 3CD requires the assessee to state
whether the assessee has opted for taxation under any of the sections 115BA,
115BAA and 115BAB.
It may be noted that all the above sections i.e.115BA, 115BAA and 115BAB
are applicable to the company assesses only.
The reply to the above clause can either be a “yes” or “no”. If the assessee
has not opted for any concessional rates as provided under the sections 115BA,
8A
115BAA and 115BAB, of the Act, then, the tax auditor is not required to take any
further steps and no further audit procedure is required to be followed.
The answer to such question as per the clause in such case can be given as “No”
only.
However, if the assessee in forms that it has opted for the confessional rate of
taxation as per the provisions of sections 115BA, 115BAA and 115BAB of the Act,
then the audit approach is required to be modified.
PART – B
a. If firm or association of persons, indicate names of partners/members and their
profit-sharing ratios.
9
b. 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.
a. Nature of business or profession (if more than one business or profession is
10 carried on during the previous year, nature of every business or profession)
b. If there is any change in the nature of business or profession, the particulars of
such change.
a. Whether books of account are prescribed under section 44AA, if yes, list of
11
books so prescribed.
 b. 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.)
c. List of books of account and nature of relevant documents examined.
Whether the profit and loss account includes any profits and gains assessable on
presumptive basis, if yes, indicate the amount and the relevant section (44AD, 44AE,
12.
44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule or any other
relevant section.)
a. Method of accounting employed in the previous year.
b. Whether there had been any change in the method of accounting employed vis-
a-vis the method employed in the immediately preceding previous year.
c. If answer to (b) above is in the affirmative, give details of such change, and the
effect thereof on the profit or loss.

Serial Number Particulars Increase in Profit Decrease in Profit

13
d. Whether any adjustment is required to be made to the profits or loss for
complying with the provisions of income computation and disclosure standards
notified under section 145(2).
e. If answer to (d) above is in the affirmative, give details of such adjustments:

Particulars Increase in Profit Decrease in profit Net effect

ICDS I to IX
f. Disclosure as per ICDS I to X
a. Method of valuation of closing stock employed in the previous year.
b. In case of deviation from the method of valuation prescribed under section
145A, and the effect thereof on the profit or loss, please furnish:
14
Serial Number Particulars Increase in Profit Decrease in Profit

Give the following particulars of the capital asset converted into stock-in-trade:-
a. Description of Capital Assets
15. b. Date of Acquisition
c. Cost of Acquisition
d. Amount at which the asset is converted into stock-in-trade.
Amounts not credited to the profit and loss account, being, -
a. The items falling within the scope of section 28;
b. the proforma credits, drawbacks, refund of duty of customs or excise or service
tax, or refund of sales tax or value added tax where such credits, drawbacks or
16
refunds are admitted as due by the authorities concerned;
c. escalation claims accepted during the previous year;
d. any other item of income;
e. capital receipt, if any
 Where any land or building or both is transferred during the previous year for a
consideration less than value adopted or assessed or assessable by any authority of a
State Government referred to in section 43CA or 50C, please furnish
17
Consideration Value adopted or assessed or
Details of property
received or accrued assessable

Particulars of depreciation allowable as per the Income-tax Act, 1961 in respect of

each asset or block of assets, as the case may be, in the following form:-
a. Description of asset/block of assets.
b. Rate of depreciation.
c. Actual cost or written down value, as the case may be.
ca . Adjustment made to the written down value under section 115BAA (for
assessment year 2020-21 only)
cb . Adjusted written down value
18 d. Additions/deductions during the year with dates; in the case of any addition of
an asset, date put to use; including adjustment on account of :-
i. Central Value Added Tax credits claimed and allowed under the Central
Excise Rules, 1944, in respect of assets acquired on or after 1st March,
1994,
ii. change in rate of exchange of currency, and
iii. Subsidy or grant or reimbursement, by whatever name called.
e. Depreciation allowable.
f. Written down value at the end of the year.
Amounts admissible under sections:

Amounts admissible as per the provisions of the

Amount Income-tax Act, 1961 and also fulfils the conditions,
debited to if any specified under the relevant provisions of
Section
19. profit and Income-tax Act, 1961 or Income-tax Rules,1962 or
loss account any other guidelines, circular, etc., issued in this
behalf.
32AC/32AD/33AB/33ABA/35(1)(i)/ 35(1)(ii)/ 35(1)(iia) / 35(1)(iii)/
35(1)(iv)/35(2AA)/35(2AB)/35ABB/35AC/35AD/35CCA/35CCB/35D/35DD/35
DDA/35E
a. Any sum paid to an employee as bonus or commission for services rendered,
where such sum was otherwise payable to him as profits or dividend. [Section
36(1)(ii)]
b. Details of contributions received from employees for various funds as referred
to in section 36(1)(va):
20 Sum The actual date
Serial Due date
Nature of received The actual of payment to
number for
fund from amount paid the concerned
payment
employees authorities
 a. Please furnish the details of amounts debited to the profit and loss account,
being in the nature of capital, personal, advertisement expenditure etc.

Serial Amount
Nature Particulars
number in Rs.
Capital expenditure
Personal expenditure
Advertisement expenditure in any
souvenir, brochure, tract, pamphlet or
the like published by a political party
Expenditure incurred at clubs being
entrance fees and subscriptions
Expenditure incurred at clubs being
cost for club services and facilities
used.
Expenditure by way of penalty or fine
for violation of any law for the time
being force
Expenditure by way of any other
penalty or fine not covered above
Expenditure incurred for any purpose
which is an offence or which is
prohibited by law
21 b. Amounts inadmissible under section 40(a): -
i. As payments referred to non-resident referred in sub-clause (i)
A. Details of payment on which tax has not been deducted:
I. Date of payment
II. Amount of Payment
III. Nature of Payment
IV. Name and address of the payee
B. Details of payment on which tax has been deducted but has not been
paid during the previous year or in the subsequent year before the
expiry of time prescribed under section 200(1)
I. Date of payment
II. Amount of Payment
III. Nature of Payment
IV. Name and address of the payee
V. Amount of tax deducted
ii. As payment referred to in sub-clause (ia)
A. Details of payment on which tax is not deducted:
I. Date of payment
II. Amount of Payment
III. Nature of Payment
IV. Name and address of the payee
B. Details of payment on which tax has been deducted but has not been
paid on or before the due date specified in sub- section (1) of section
139:
 I. Date of payment
II. Amount of Payment
III. Nature of Payment
IV. Name and address of the payee
V. Amount of tax deducted
VI. Amount out of (V) deposited, if any
iii. Under sub-clause (ic) [wherever applicable]
iv. Under sub-clause (iia)
v. Under sub-clause (iib)
vi. Under sub-clause (iii):
date of payment
amount of payment
name and address of the payee
vii. Under sub-clause (iv)
viii. Under sub-clause (v)
c. Amounts debited to the profit & loss account being interest, salary, bonus,
commission or remuneration inadmissible under section 40(b)/40(ba) and
computation thereof;
d. Disallowance/deemed income under section 40A(3)

A. On the basis of the examination of books of 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 or account payee bank draft. If not, please furnish the details:

Name and Permanent

Serial Date of Nature of
Amount Account Number of the
number payment payment
payee, if available

B. On the basis of the examination of books of account and other relevant

documents/evidence, whether the payment referred to in section 40A(3A)
read with rule 6DD were made by account payee cheque drawn on a bank
or account payee bank draft If not, please furnish the details of amount
deemed to be the profits and gains of business or profession under section
40A (3A);

Name and Permanent

Serial Date of Nature of
Amount Account Number of the
number payment payment
payee, if available

e. provision for payment of gratuity not allowable under section 40A(7);

f. any sum paid by the assessee as an employer not allowable under section
40A(9);
g. Particulars of any liability of a contingent nature.
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.
 i. amount inadmissible under the proviso to Section 36 (1)(iii)
Amount of interest inadmissible under section 23 of the Micro, Small and Medium
22
Enterprises Development Act, 2006.
23 Particulars of payments made to persons specified under section 40A(2)(b).
Amounts deemed to be profits and gains under section 32AC or32AD or 33AB or
24
33ABA or 33AC.
25 Any amount of profit chargeable to tax under section 41 and computation thereof.
In respect of any sum referred in clauses (a), (b), (c), (d), (e) or (f) of Section 43 B, the
liability for which
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: -
a. paid during the previous year;
b. not paid during the previous year.
26 B. was incurred in the previous year and was
a. paid on or before the due date for furnishing the return of income of the
previous year under section 139(1)

b. not paid on or before the aforesaid date.

(State whether sales tax, custom duty, excise duty or any other indirect
tax, levy, Cess, impost etc. is passed through the profit and loss account.)
a. Amount of Central Value Added Tax credits availed of or utilised during the
27 previous year and its treatment in the profit and loss account and treatment of
outstanding Central Value Added Tax credits in the accounts.
b. Particulars of income or expenditure of prior period credited or debited to the
profit and loss account.
Whether during the previous year the assessee has received any property, being share
of a company not being a company in which the public are substantially interested,
28
without consideration or for inadequate consideration as referred to in section
56(2)(viia), if yes, please furnish the details of the same.
Whether during the previous year the assessee received any consideration for issue of
29 shares which exceeds the fair market value of the shares as referred to in section
56(2)(viib), if yes, please furnish the details of the same.
a. Whether any amount is to be included as income chargeable under the head
'income from other sources' as referred to in clause (ix) of sub-section (2) of
section 56? (Yes/No)
29A
b. If yes, please furnish the following details:
I. Nature of income:
II. Amount thereof:
a. Whether any amount is to be included as income chargeable under the head
'income from other sources' as referred to in clause (x) of sub-section (2) of
29B section 56? (Yes/No)
b. If yes, please furnish the following details:
i. Nature of income:
Details of any amount borrowed on hundi or any amount due thereon (including
30 interest on the amount borrowed) repaid, otherwise than through an account payee
cheque. [Section 69D]
 a. Whether primary adjustment to transfer price, as referred to in sub-section 1)
of section 92Ce, has been made during the previous year? (Yes/No)
b. If yes, please furnish the following details:—
i. Under which clause of sub-section (1) of section 92CE primary
adjustment is made?
ii. Amount (in Rs.) of primary adjustment:
30A iii. Whether the excess money available with the associated enterprise is
required to be repatriated to India as per the provisions of sub-section
(2) of section 92CE? (Yes/No)
iv. If yes, whether the excess money has been repatriated within the
prescribed time (Yes/No)
v. If no, the amount (in Rs.) of imputed interest income on such excess
money which has not been repatriated within the prescribed time:
a. Whether the assessee has incurred expenditure during the previos year by way
of interest or of similar nature exceeding one crore rupees as referred to in sub-
section (1) of section 94B? (Yes/No.)
b. If yes, please furnish the following details:—
i. Amount (in Rs.) of expenditure by way of interest or of similar nature
incurred:
ii. Earnings before interest, tax, depreciation and amortization (EBITDA)
during the previous year (in Rs.):
iii. Amount (in Rs.) of expenditure by way interest or of similar nature as
30B per (i) above which exceeds 30% of EBITDA as per (ii) above
iv. Details of interest expenditure brought forward as per sub-section (4) of
section 94B:
AY Amount (in Rs.)

v. Details of interest expenditure carried forward as per sub-section (4) of

section 94B:
AY Amount (in Rs.)

a. Whether the assessee has entered into an impermissible avoidance

arrangement, as referred to in section 96, during the previous year? (Yes/No.)
b. If yes, please specify:
30C
i. Nature of impermissible avoidance arrangement
ii. Amount (in Rs.) of tax benefit in the previous year arising, in aggregate,
to all the parties to the arrangement:
 a. Particulars of each loan or deposit in an amount exceeding the limit specified
in section 269SS taken or accepted during the previous year: -
i. Name, address, and Permanent Account Number (if available with the
assessee) of the lender or depositor
ii. Amount of loan or deposit taken or accepted
iii. Whether the loan or deposit was squared up during the year
iv. Maximum amount outstanding in the account at any time during the
previous year
v. Whether the loan or deposit was taken or accepted by cheque or bank
draft or use of electronic clearing system through a bank account
vi. In case the loan or deposit was taken or accepted by cheque or bank
draft, whether the same was taken or accepted by an account payee
cheque or an account payee bank draft.
31
b. Particulars of specified sum in an amount exceeding the limit specified in
section 269SS taken or accepted during the previous year: -
i. name, address, and Permanent Account Number (if available with the
assessee) of the person from whom specified sum is received.
ii. Amount of specified sum taken or accepted.
iii. whether the specified sum was taken or accepted by cheque or bank
draft or use of electronic clearing system through a bank account;
iv. in case the specified sum was taken or accepted by cheque or bank draft,
whether the same was taken or accepted by an account payee cheque or
an account payee bank draft.
(Particulars at (a) and (b) need not be given in the case of a Government company, a
banking company or a corporation established by the Central, State or Provincial Act.)
 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 othewise
than by a cheque or bank draft or use of electronic clearing system through
a bank account :—

i. Name, address and Permanent Account Number (if available with

the assessee) of the payer;
ii. Nature of transaction;
iii. Amount of receipt (in Rs.);
iv. Date of receipt;

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 occasions
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;—

i. Name, address and Permanent Account Number (if available with

the assessee) of the payer;
ii. Amount of receipt (in Rs.);

Bc Particulars of each payment made in an amount exceeding the limit

specified in section 269ST, in aggregate to a person in a day or in respect
of a single transaction or in respect of transactions relating to one event or
occasions 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:—

i. Name, address and Permanent Account Number (if available with

the assessee) of the payee;
ii. Nature of transaction;
iii. Amount of payment (in Rs.);
iv. Date of payment;

Bd Particulars of each payment made in an amount exceeding the limit

specified in section 269ST,in aggregate to a person in a day or in respect
of a single transaction or in respect of transactions relating to one event or
 occasions 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:—

i. (Name, address and Permanent Account Number (if available with

the assessee) of the payee;
ii. Amount of payment (in Rs.);

(Particulars at (ba), (bb), (bc) and (bd) need not be given in the case of
receipt by or payment to a Government company, a banking Company, a
post office savings bank, a cooperative bank or in the case of transactions
referred to in section 269SS or in the cse of persons referred to in
Notification No. S.O. 2065(E) dated 3rd July, 2017)

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: —
i. name, address and Permanent Account Number (if available with the
assessee) of the payee;
ii. amount of the repayment;
iii. maximum amount outstanding in the account at any time during the
previous year;
iv. whether the repayment was made by cheque or bank draft or use of
electronic clearing system through a bank account;
v. in case the repayment was made by cheque or bank draft, whether the
same was repaid by an account payee cheque or an account payee
bank draft.

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: —
i. name, address and Permanent Account Number (if available with the
assessee) of the lender, or depositor or person from whom specified
advance is received;
ii. repayment of loan or deposit or any specified advance received
otherwise than by a cheque or bank draft or use of electronic clearing
system through a bank account during the previous year.

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:—
 i. name, address and Permanent Account Number (if available with the
assessee) of the lender, or depositor or person from whom specified
advance is received;
ii. repayment of loan or deposit or any specified advance received by a
cheque or a bank draft which is not an account payee cheque or account
payee bank draft during the previous year.

(Particulars at (c), (d) and (e) need not be given in the case of a repayment of any loan
or deposit or any specified advance taken or accepted from the Government,
Government company, banking company or a corporation established by the Central,
State or Provincial Act).

a. Details of brought forward loss or depreciation allowance, in the following

manner, to the extent available
Amount as
adjusted by
withdrawal of Amounts as
All losses/
Nature of Amount additional assessed
allowances
S loss/ as depreciation on (give
AY not allowed Remarks
No allowance returned account of reference to
under section
(in rupees) (in rupees) opting for relevant
115BAA*
taxation under order)
section
115BAA*

Note: All losses/ allowances not allowed under section 115BAAand Amount as
adjusted by withdrawal of additional depreciation on account of opting for
taxation under section 115BAA*is required to be filled in for assessment year 2020-
32
21 only.
b. Whether a change in shareholding of the company has taken place in the
previous year due to which the losses incurred prior to the previous year cannot
be allowed to be carried forward in terms of section 79.
c. Whether the assessee has incurred any speculation loss referred to in section
73 during the previous year, If yes, please furnish the details of the same.
d. whether the assessee has incurred any loss referred to in section 73A in respect
of any specified business during the previous year, if yes, please furnish details
of the same.
e. In case of a company, please state that whether the company is deemed to be
carrying on a speculation business as referred in explanation to section 73, if
yes, please furnish the details of speculation loss if any incurred during the
previous year.
Section-wise details of deductions, if any, admissible under Chapter VIA or Chapter
III (Section 10A, Section 10AA).

Section under which Amounts admissible as per the provision of the Income-tax
33. deduction is claimed Act, 1961 and fulfils the conditions, if any, specified under
the relevant provisions of Income-tax Act, 1961 or Income-
tax Rules,1962 or any other guidelines, circular, etc, issued
in this behalf.
 a. Whether the assessee is required to deduct or collect tax as per the provisions
of Chapter XVII-B or Chapter XVII-BB, if yes please furnish:

Tax Section Nature of Total Total Total Amount Total Amount Amount of
deductio payment amount of amount amount of tax amount on of tax tax
n and payment or on which on which deducted which tax deducte deducted
collectio receipt of tax was tax was or was d or or
n the nature required deducted collected deducted collecte collected
Account specified in to be or out of (6) or d on (8) not
Number column (3) deducted collected collected deposited
(TAN) or at at less than to the
collected specified specified credit of
out of (4) rate out rate out of the Central
of (5) (7) Governme
nt out of
(6) and (8)
1 2 3 4 5 6 7 8 9 10

b. Whether the assessee has furnished the statement of tax deducted or tax
collected within the prescribed time. If not, please furnish the details:

Tax deduction Type Due date Date of Whether the statement

34 and collection of for furnishing, of tax deducted or
Account Form furnishing if furnished collected contains
Number information about all
(TAN) details/transactions
which are required to
be reported. If not,
please furnish list of
details/transactions
which are not reported.

c. Whether the assessee is liable to pay interest under section 201(1A) or section
206C (7). If yes, then please furnish:

Tax deduction and Amount of interest Amount paid out of

collection Account under section column (2) along with
Number (TAN) 201(1A)/206C(7) is date of payment.
payable

a. In the case of a trading concern, give quantitative details of principal items of

goods traded :
i. Opening Stock;
ii. purchases during the previous year;
35
iii. sales during the previous year;
iv. closing stock;
v. shortage/excess, if any
 b. In the case of a manufacturing concern, give quantitative details of the principal
items of raw materials, finished products and by-products:
a. Raw Materials:
i. opening stock;
ii. purchases during the previous year;
iii. consumption during the previous year;
iv. sales during the previous year;
v. closing stock;
vi. yield of finished products;
vii. percentage of yield;
viii. shortage/excess, if any.
b. Finished products/by-products:
i. opening stock;
ii. purchases during the previous year;
iii. quantity manufactured during the previous year;
iv. sales during the previous year;
v. closing stock;
vi. shortage/excess, if any.
In the case of a domestic company, details of tax on distributed profits under section
115-O in the following form :-
a. total amount of distributed profits
36. b. Amount of reduction as referred to in section 115-O(1A)(i)
c. Amount of reduction as referred to in section 115-O(1A)(ii)
d. total tax paid thereon
e. Dates of payment with amounts.
a. Whether the assessee has received any amount in the nature of dividend as
referred to in sub-clause(e) of clause (22) of section 2? (Yes/No.)
36A b. If yes, please furnish the following details: —
i. Amount received (in Rs.):
ii. Date of receipt:
Whether any cost audit was carried out, if yes, give the details, if any, of
37. disqualification or disagreement on any matter/item/value/quantity as may be
reported/identified by the cost auditor.
Whether any audit was conducted under the Central Excise Act, 1944, if yes, give the
38. details, if any, of disqualification or disagreement on any matter/item/value/quantity
as m ay be reported/identified by the auditor.
Whether any audit was conducted under section 72A of the Finance Act,1994 in
relation to valuation of taxable services, if yes, give the details, if a ny, of
39. disqualification or disagreement on any matter/item/value/quantity as may be
reported/identified by the auditor.
Details regarding turnover, gross profit, etc, for the previous year, and the preceding
previous year.
Serial Preceding previous
Particulars Previous year
40 number year
1 Total Turnover of the
assessee
2 Gross profit/Turnover;
 3 Net Profit/Turnover;
4 Stock-in-trade/Turnover;
5 Material consumed/Finished
goods Produced.
Please furnish the details of demand raised or refund issued during the previous year
41 under any tax laws other than Income-tax Act, 1961 and Wealth-tax Act, 1957 along
with details of relevant proceedings.
a. Whether the assessee is required to furnish statement in Form No.61 or Form
No.61A or Form 61B? (Yes/No)
b. If yes, please furnish:
Income tax Type of Due date Date of Whether the Form contains
Department Form for furnishing information about all
Reporting furnishing , if details/furnished
42
Entity transactions which are
Identification required to be reported. If
Number not, please furnish list of the
details/transactions which
are not reported.

a. Whether the assessee or its parent entity or alternate reporting entity is liable
to furnish the report as referred to in sub-section (2) of section 286? (Yes/No)
b. If yes, please furnish the following details :
i. Whether report has been furnished by the assessee or its parent entity or
43
an alternate reporting entity
ii. Name of parent entity
iii. Name of alternate reporting entity (if applicable)
iv. Date of furnishing of report
Break-up of total expenditure of entities registered or not registered under the GST:

Sl. Total amount Expenditure in respect of entities registered Expendit

N of Expenditure under GST ure
o incurred Relating Relating Relating to Total relating
during the year to goods to entities other payment to
44 or falling registered to entities
services under entities registered not
exempt compositi entities registere
from on scheme d under
GST GST
1 2 3 4 5 6 7

(Signature and stamp/seal of the signatory)

Place: ……………………………….
Name of the signatory
Date: ……………………………….
Full address ........................................
*Note: Reporting under Clause 44 has been kept in abeyance till 31 March 2021(Circular
No. 10/2020of the Central Board of Direct Taxes dated 24 April 2020)

Signature and Stamp/Seal of the Signatory:

Form 3CD has to be signed by the person competent to sign Form No. 3CA or Form No.3CB
as the case may be. He has also to give his full name, address, membership number, firm
registration number, wherever applicable, place and date. Further, the e-filing portal requires
the tax auditor to affix his Digital Signature while registering himself. He is also required
to put his stamp/Seal as well.

While issuing the tax audit report under section 44AB of the Income Tax Act 1961, the Auditor
should generate appropriate UDIN (Unique Document Identification Number) and refer
the same in its report.

Revision of Tax Audit Report:

Normally, the report of the tax auditor cannot be revised later. However, when the accounts are
revised in the following circumstances, the tax auditor may have to revise his tax audit report
also.

i. Revision of accounts of a company after its adoption in the annual general meeting.
ii. Change in law with retrospective effect.
iii. Change in interpretation of law (e.g.) CBDT Circular, Notifications, Judgments, etc.

The Tax Auditor should state it is a revised report, clearly specifying the reasons for such revision
with a reference to the earlier report.
 Audit provisions under Indirect Tax Laws
Definition of “Audit” has been as per section 2(13) of the CGST Act, 2017 is given below:

“audit” means the examination of records, returns and other documents maintained or
furnished by the registered person under this Act or the rules made thereunder or under any
other law for the time being in force to verify the correctness of turnover declared, taxes paid,
refund claimed and input tax credit availed, and to assess his compliance with the provisions
of this Act or the rules made thereunder.”

Objective of GST Audit

to verify the correctness of

Those
records.
to assess
returns and
Audit is auditee’s
documents
examination complianc
might have Refund Input tax
of records, Turnover Taxes e with the
been claimed; credit
returns and declared; paid provisions
maintained or and availed;
other of GST
furnished
documents; Act and
under GST
Rules.
Law or any
other law;

Types of Audit under GST

General Audit
Audit by GST
Tax Authorities
Special Audit
GST AUDIT
To File Returns + Audited
Audit by
Accounts + Reconcilation
Professionals
Statements

AUDIT BY THE TAX AUTHORITIES UNDER SECTION 65

Section Description Remarks

Section 65 Audit by tax Audit under section 65 is a routine audit by the tax office at
authorities the place of business of registered person or in tax office.
Notice for audit by Tax Authorities:

The registered person shall be informed by way of a notice not less than 15 working days
prior to the conduct of audit in such manner as may be prescribed. [Rule 101, FORM
GST ADT-01]

Completion period of audit:

The audit by tax authorities shall be completed within a period of 3 months from the date of
commencement of the audit , and such period is further extendable for a period of 6 months
by Commissioner for the reasons to be recorded in writing.

In this regard, “commencement of audit” shall mean the date on which the records and other
documents, called for by the tax authorities, are made available by the registered person or the
actual institution of audit, whichever is later.

Co-operation with Proper Office for Timely Completion of Audit:

During the course of audit, the authorised officer may require the registered person, to afford
him the necessary facility to verify the books of account or other documents as he may
require and to furnish such information and render assistance for timely completion of the
audit.

Findings to be Communicated to Registered Person:

On conclusion of audit, the proper officer shall, within 30 days, inform the registered person,
whose records are audited, about the findings, his rights and obligations and the reasons for
such findings in such manner as may be prescribed. [Rule 101, FORM GST ADT-02]

SPECIAL AUDIT UNDER SECTION 66

Special audit wherein the registered person can be directed to get his records including
books of account examined and audited by a chartered accountant or a cost accountant
during any stage of scrutiny, inquiry, investigation or any other proceedings; depending upon
the nature and complexity of the case [Section 66 read with rule 102] on order of Assistant
Commissioner or above with prior approval of the Commissioner.

Procedure of Special Audit [S. 66] Availing the services of experts is an age old practice and is
the process of law. These experts have done yeoman service to the process of delivering justice.
One such facility extended by the Act is under section 66 where an officer not below the
rank of Assistant Commissioner, duly approved, may avail the services of a chartered
accountant or cost accountant to conduct a detailed examination of specific areas of operations
of a registered person. Availing the services of the expert be it a chartered accountant or cost
accountant is permitted by this section only when the officer considering the nature and
complexity of the business and in the interest of revenue is of the opinion that:

• Value has not been correctly declared; or

 • Credit availed is not within the normal limits.

It would be interesting to know how these ‘subjective’ conclusions will be drawn and how the
proper officer determines what is the normal limit of input credit availed.

Circumstances for Notice for Special Audit:

An Assistant Commissioner who nurses an opinion on the above two aspects, after
commencement and before completion of any scrutiny, enquiry, investigation or any other
proceedings under the Act, may direct a registered person to get his books of accounts
audited by an expert.
Such direction is to be issued in accordance with the provision of Rule 102 (1) FORM
GST ADT-03
The Assistant Commissioner needs to obtain prior permission of the Commissioner to
issue such direction to the taxable person.
Identifying the expert is not left to the registered person whose audit is to be conducted
but the expert is to be nominated by the Commissioner.

Time Limit to Submit the Audit Report:

The Chartered Accountant or the Cost Accountant so appointed shall submit the audit report,
mentioning the specified particulars therein, within a period of 90 days, to the Assistant
Commissioner in accordance with provision of Rule 102(2) FORM GST ADT-04.

Extension in Submission of Audit Report:

In the event of an application to the Assistant Commissioner by Chartered Accountant or the Cost
Accountant or the registered person seeking an extension, or for any material or sufficient reason,
the due date of submission of audit report may be extended by another 90 days.

Expenses for Examination and Remuneration for Audit:

The expenses for examination and audit including the remuneration payable to the auditor will
be determined and borne by the Commissioner.

Audit by Professionals
Audit of Accounts [Section 35(5) read along with section 44(2) and rule 80]

 Every registered person must get his accounts audited by a chartered accountant
or a cost accountant if his aggregate turnover during a FY exceeds `2 crores. (For
FY 2018-19 and FY 2019-20: ` 5 crores)
 Such registered person is required to furnish electronically through the common
portal along with Annual Return a copy of:
• Audited annual accounts
• A Reconciliation Statement, duly certified, in prescribed FORM GSTR-9C.
  Reconciliation Statement will reconcile the value of supplies declared in the return
furnished for the financial year with the audited annual financial statement and such other
particulars, as may be prescribed.

Every registered person whose aggregate turnover during the financial years 2018-2019 and
2019-20 exceeds five crore rupees shall get his accounts audited as specified under sub-
section (5) of section 35 and he shall furnish a copy of audited annual accounts and a
reconciliation statement, duly certified, in FORM GSTR-9C for the financial years 2018-2019
and 2019-20, electronically through the common portal either directly or through a Facilitation
Centre notified by the Commissioner.

Financial Year (FY) Aggregate Turnover (in ` )

2017-18 2 Crore

2018-19 5 Crore NN-16/2020)

2019-20 5 crore (NN-79/2020)

Note: Where a taxpayer has multiple branches registered under GST in different States/ Union
Territories, the total aggregate turnover of all such branches is considered while calculating
the threshold limit. So, if the cumulative turnover of all the branches exceed threshold limit,
then the GST audit is applicable to each of these branches, irrespective of whether the
turnover of a particular branch is less than the threshold. In such cases, one can
appoint either one dedicated auditor for all branches or separate auditor for each
branch. Where multiple branches have different auditors, the Standard on Auditing: SA 299
—“Joint Audit of Financial Statements” may apply for the purpose of reporting GST audit
observations & reporting.

While Rule 80(3) of the CGST Rules speaks of the prescribed threshold limit at exceeding ` 5
Crore which is attributed to the ‘aggregate turnover’, the relevant section speaks of the
turnover in the State / turnover attributable to a GSTIN. Therefore, if a registered person is
liable to get his accounts audited under Section 35, all the registrations obtained under the
same PAN will also be liable for such audit, regardless of the turnover in each State in
which the other registrations have been obtained.

Qualification of GST Auditor & Eligibility:

Only a Chartered Accountant or a Cost Accountant can perform GST audit under section
35(5).

Points to note:

1. Internal Auditor not eligible to conduct GST audit:

An internal auditor cannot be appointed as a GST auditor of the same entity.
2. GST Auditor need not be a GST Practitioner:
 The GST Act/ Rules do not vest a GST practitioner with the power to audit under
section 35(5). The power to audit is granted only to a chartered accountant or cost
accountant who is in practice. Therefore, a chartered accountant is not required to
be registered as a GST practitioner for the purpose of certifying FORM GSTR-9C.

3. No GST Audit of Government subject to CAG Audit:

It may be noted that the section 35(5) shall not apply to any department of the Central
Government or a State Government or a local authority, whose books of account are
subject to audit by the Comptroller a nd Auditor-General of India or an auditor appointed
for auditing the accounts of local authorities under any law for the time being in force.

4. OIDAR and Foreign Airlines not liable for GST Audit:

Further, persons supplying online information and data base access or retrieval services1
from a place outside India to a person in India and persons who are foreign company
which is an airline company shall not be required to furnish reconciliation statement
in FORM GSTR-9C.

However, the foreign airline company is required to submit a statement of receipts and
payments for the FY in respect of its Indian business operations, duly authenticated by
a practicing chartered accountant in India or a firm or a Limited Liability Partnership
of practicing chartered accountants in India for each GSTIN by the 30th September, of the
year succeeding the FY.

Meaning of aggregate turnover:

Includes the value of all outward Excludes the Following

supplies

• Taxable Supplies ✓ CGST ✓ UTGST

• Exempt supplies ✓ SGST ✓ IGST

• Exports ✓ Compensation ✓ Value of inward

• Inter-state supplies of person having cess supplies on which tax
the same PAN be computed on all is payable under
India basis. reverse charge

PROCEDURE OF AUDIT

Preliminary Review

Before starting his work, the GST auditor shall conduct a preliminary review to assess
the CIS controls and the risks that could impact his work by considering the following points:

• Knowledge of the business

• Understanding the technology deployed
 • Understanding internal control system
• Risk assessment and materiality
Audit Planning

The auditors should obtain an understanding of the organization’s internal process of:-
a. accounting of transactions,
b. reporting to the GSTN Portal,
c. reconciliation of filed data, and
d. internal control systems implemented,
to plan the audit and develop an effective audit approach to meet audit requirements.
In planning the portions of the audit which may be affected by the client's CIS
environment, the auditors should obtain an understanding of the significance and complexity of
the CIS activities and the availability of data for use in the audit.

Steps for the GST Audit

• Inform the concerned assessee about the applicability of the GST audit;
• Confirm the eligibility to be the GST auditor under the related legislation;
• Understand the nature of business, the products or services, requirements of records to be
maintained, and advise the auditee to maintain accounts and records so required,
beforehand
• Prepare a questionnaire to understand the operations / activities of the auditee, and
specifically develop questions on those issues on which the GST law would have a bearing
• Preparation of the detailed audit program and list of records to be verified;
• Host of relevant reconciliations.

Audit Procedures under GST Law

During the course of audit, the registered person shall afford the auditor with the necessary facility
to verify the books of account and also furnish the required information and render assistance for
timely completion of the audit. As per the CGST Rules on Assessment and Audit Rules, the
auditor shall verify the documents on the basis of which the accounts are maintained and the
periodical returns/statements are furnished. While conducting the audit, the auditor is authorized
to:

Verify books & records

Returns & statements
Correctness of turnover, exemptions & deductions
Rate of tax applicable in respect of supply of goods and/or services
The input tax credit claimed/availed/unutilized and refund claimed.
Some of the best practices to be adopted for GST audit among others could be:

The evaluation of the internal control viz-a-viz GST would indicate the area to be focused. This
could be done by verifying:

a. The Statutory Audit report which has specific disclosure needs in regard to maintenance
of record, stock and fixed assets.
b. The Information System Audit report and the internal audit report.
c. Internal Control questionnaire designed for GST compliance.
i. The use of generalized audit software to aid the GST audit would ensure modern
practice of risk-based audit are adopted.
ii. The reconciliation of the books of account or reports from the ERP’s to the return
is imperative.
iii. The review of the gross trial balance for detecting any incomes being set off with
expenses.
iv. Review of purchases/expenses to examine applicability of reverse charge
applicable to goods/services. The foreign exchange outgo reconciliation would
also be necessary for identifying the liability of import of services.
v. Quantitative reconciliation of stock transfer within the State or for supplies to job
workers under exemption.
vi. Ratio analysis could provide vital clues on areas of non-compliance.

Audit Approach

a. Obtaining prior knowledge of the business and comparing them with similar businesses;
b. Preparing a master file of the clients (permanent master file);
c. Discussing on with the audit team on the methodology to proceed with the audit;
d. Studying and evaluating systems (including business systems) and internal control of the
business entity;
e. Assessing the audit risks and deploying of suitable personnel;
f. Assessing the risk appetite of the business entity;
g. Preparing of an audit plan / audit program and conducting the audit accordingly;
h. Reviewing meetings with the audit team;
i. Drawing conclusions on the basis of audit evidence obtained in the course of conducting
the audit and a discussion with the client on the observations and findings;
j. Discussing with the registered person and obtaining various management certificates;
k. Reporting the observations in the prescribed statutory format, if any, or evolving a suitable
format of reporting;
l. Maintaining Audit working papers file (Filing of documents either in permanent file or
working papers file);
m. Concluding the audit and intimating the management.
Accounting Standard Vs. GST

The auditor should also take into account the accounting standards followed at the time
of preparation of financial statements. There could be differences in the manner of
accounting treatment of certain transactions as per Accounting Standard in the financial
statements vis-à-vis the treatment under GST. Some of the differences are:

• Supplies on behalf of the principal are not reflected in the financial statements of the agent
and only commission is shown as the revenue of the agent. Under the GST Law,
such turnover would be treated as part of the agent’s turnover.
• Under AS-9 Revenue Recognition, branch transfers are not recognised as revenue
whereas under GST, it tantamount to supply as per Schedule I to CGST Act.

The above is only illustrative and there could be many more cases of differences in the
turnovers between the financial statements and the GST Law.

Preliminary Review

Before starting his wok, the GST Auditor shall conduct a preliminary review to assess the CIS
controls and the risks that could impact his work by considering the following points:

Knowledge of the Business

Understanding the technology deployed
Understsnding Internal Control System
Risk assessment and Materiality

Various Returns Under GST

GSTR 9 •to be filed by the regular tax payers filing GSTR 1, GSTR 2, GSTR 3

•to be filed by the persons registered under composition scheme

GSTR 9A
underGST.

GSTR 9B •to be filed by e-commerce operator

•Should be by the taxpayers whose annual turnover exceeds rupees 2

Crores during the financial year along with audited annual accounts
GSTR 9C
andreconciliation statement of tax already paid and tax payable as
peraudited accounts along with GSTR 9C

FILING OF ANNUAL RETURN IN FORM GSTR-9 BY THE REGISTERED PERSON

Although the Annual Return in FORM GSTR-9 is not part of audit to be done by an
auditor. But, it is an integral part of audit. Without understanding the contents of FORM
GSTR-9, the objective of audit may not be accomplished. It is the FORM GSTR-9 and the
audited Financial Statement of the registered person which require reconciliation to be
reported by an auditor in FORM GSTR-9C. Therefore, a detailed study of Annual Return in
FORM GSTR-9 is sine qua not.

Procedure of filing FORM GSTR-9: Annual Return

FORM GSTR 9 form is an annual return to be filed once in a year by the registered taxpayers
under GST including those registered under composition levy scheme. It consists of details
regarding the supplies made and received during the year under different tax heads i.e. CGST,
SGST and IGST. It consolidates the information furnished in the monthly/quarterly returns during
the year.

All the registered taxable persons under GST must file FORM GSTR 9 form. However, the
following persons are not required to file FORM GSTR 9

• Casual taxable person

• Input service distributors
• Non-resident taxable persons
• Persons paying TDS under section 51 of the CGST Act.
• Person supplying online information and database access retrieval services

Form GSTR 9C

Part-A: Reconciliation
Part-B: Certification
Statement

Part 2: Part 5:
Reconciliation of Auditor’s
Part 1: turnover declared
Part 3: Part 4:
Reconciliati recommendatio
Basic in the audited Reconciliation n on additional
Annual Financial on of tax
Details. paid of ITC Liability due to
Statement with non-
turnover declared reconciliation
in Annual Return

(SI No. 1 -4) (SI No. 9 to 11) (SI No. 12 to 16)

(SI No. 5 to 8)
 Analysis of GSTR 9C

PART –A -Reconciliation Statement

Part 1 Basic Details

Requires disclosure of the “financial year” to which the

Reconciliation Statement in Part A relates to. However, in terms
1 Financial Year of the General Clauses Act “financial year” shall mean the year
commencing on the 1st day of April and closing on the 31st day
of March.

GSTIN “Goods and Services tax Identification Number” of the tax payer
2
or the Registered Person

The word “trade” is not only limited to occupation or business.

3A Legal Name It could be a connotation. The word “trade” ought to be
understood in its ordinary sense, without any reference to
“business”. Example: “Indigo” could be a trade name while the
3B Trade Name legal name is “Inter Globe Aviation Limited

It is possible that an entity could be subjected to audit under

several statutes.
Are you liable to Example: a Proprietary Concern could be subject to audit under
4
audit under any act? the Income tax Act, 1961 and a Private Limited Company could
be subject to the statutory audit under the Companies Act, 2013
as well as under the Income tax Act.

Part Reconciliation of turnover declared in audited Annual Financial Statement with

II turnover declared in Annual Return (GSTR9)

5 Reconciliation of Gross Turnover

Turnover (including The turnover as per the audited annual financial statement shall
exports) as per be declared here. There may be cases where multiple GSTINs
audited financial (State-wise) registrations exist for the same PAN. This is
statements for the common for persons / entities with presence over multiple
State / UT (For multi- States or in respect of multiple registration in a single State/UT.
A GSTIN units under Such persons/entities, will have to internally derive their
same PAN the GSTIN wise turnover & declare the same here. This shall
turnover shall be include export turnover (if any). It may be noted that reference
derived from the to audited financial statement includes reference to books of
audited Annual accounts in case of persons /entities having presence over
Financial Statement) multiple states.
 List of Documents:

The following list of documents could be obtained by the Auditor for the purpose of
declaring the details of turnover under this Sl. No.:

a. Annual Financial Statements

b. Registrant wise Trial Balance to facilitate furnishing the Form GSTR 9C for each
registrant;
c. Communication with the other Auditor to obtain details of the turnover declared
by them to ensure completeness and holistic reconciliation of turnover of the
Registered Person;
d. Form GSTR 9C, if already filed by a different Auditor, in case of multiple
registrations of the Registered Person;
e. GST (Viz. Form GSTR 3B and Form GSTR 1) returns filed by the Registered
Person to ensure that the turnover declared in the returns match the turnover
captured in the audited financial statements.
f. Income tax Returns (ITR) to ensure that the turnover details are reconciled with
the turnover per GST.

Unbilled revenue which was recorded in the books of

accounts on the basis of accrual system of accounting in
the earlier financial year for which the invoice is issued
Unbilled revenue at
under the GST law is required to be declared here. In other
B the beginning of +
words, when GST is payable during the financial year on
Financial Year
such revenue (which was recognized as income in the
earlier year), the value of such revenue is to be declared
here.

 To comprehend the scope of these Sl. Nos, there is need to understand the
concept of ‘Unbilled revenue’. In simple terms, unbilled revenue is the revenue
recognized in the books of accounts before the issue of an invoice at the end of
a particular period. Accounting Standard- 9 / IND AS 115 provides for
recognition of revenue on full completion / partial completion of the services
though the due date for issuing invoice as per the contract would be on a later
date.
 Unbilled revenue would appear in the profit and loss account of the previous
year. For information of unbilled revenue at the beginning of a Financial Year,
reference may be made to previous year’s audited financial statements.
However, as the GST was introduced from 1st July 2017 one needs to be careful
to exclude invoices raised during the period April 2017 to June 2017 from the
computation.
 Unadjusted advances Value of all advances for which GST has been paid but
C at the end of the + the same has not been recognised as revenue in the
Financial Year audited financial statement shall be declared here.

Aggregate value of four classes of deemed supplies

Deemed Supply
D +
under Schedule I
transactions specified under Schedule I of the CGST Act.
Any deemed supply which is already reported as part of
the turnover in the audited Annual Financial Statements
is not required to be included

Illustrative Examples of Deemed Supply:

The Auditor should look beyond the books of accounts and look for alternative evidence
and information for reporting in Sl.No. 5D. Such as

1. Permanent Transfer or disposal of business assets where input tax credit has been
availed on such assets
2. Supply of goods or services or both between related persons or between distinct
persons as specified in Section 25, when made in the course or furtherance of
business.
3. Supply of goods-
a. by a principal to his agent where the agent undertakes to supply such
goods on behalf of the principal; or
b. by an agent to his principal where the agent undertakes to receive such
goods on behalf of the principal.

Credit Notes issued Aggregate value of credit notes which were issued after
after the end of the Mar 31 in respect of any supply accounted in the current
E financial year but + financial year but for credit notes were reflected in the
reflected in the annual annual return (GSTR-9) shall be declared here.
return

Trade Discounts Trade discounts which are accounted for in the audited
accounted for in the annual financial statement but not on which GST was
audited Annual leviable (being not permissible) shall be declared here.
F Financial Statement +
but are not
permissible under
GST

The following are the control checks that a person should perform for validation of the
amounts reported under this head:

a. The valuation of trade discounts for the purposes of disclosures under this head,
has to be clearly documented.
 b. The input tax credit reflected in GSTR-2A attributable to such trade discounts
has to be maintained.
c. The trade discount has to be demarcated between the supplies made in the
erstwhile law and the GST regime.
d. The customer agreements have to be scrutinized to determine the quantum of
nonallowable discounts

The turnovers included in the audited financial statement

Turnover from April for the period April 2017 to June 2017 shall be declared
G -
2017 to June 2017 and deducted from the annual turnover to arrive at the
turnover as per the GST Laws.

Unbilled revenue which was recorded in the books of

Unbilled revenue at accounts on the basis of accrual system of accounting
H the end of Financial - during the current financial year, but GST was not
Year payable on such revenue in the same financial year shall
be declared here.

Value of all advances for which GST has not been paid
Unadjusted Advances
but the same has been recognized as revenue in the
I at the beginning of -
audited Annual Financial Statement shall be declared
the Financial Year
here.

Credit notes Aggregate values of credit notes which have been

accounted for in the accounted for in the audited Annual Financial Statement
audited Annual but were not admissible u/s 34 of the CGST Act shall be
J Financial Statement - declared here.
but are not
permissible under
GST

Adjustments on Aggregate value of all goods supplied by SEZ’s to DTA

account of supply of units for which the DTA units have filed bill of entry shall
K -
goods by SEZ units to be declared here.
DTA Units

There may be cases where Registered Persons might have

opted out of the composition scheme during the year.
Turnover for the Their turnover as per the audited Annual Financial
L period under - Statement would include turnover both as composition
composition scheme taxpayer as well as normal taxpayer. Therefore, the
turnover for which GST was paid under the composition
scheme shall be declared here.
 There may be cases where the taxable value and the
invoice value differ due to valuation principles under
Adjustments in
section 15 of the CGST Act, 2017 and rules thereunder.
turnover under
M +/- Therefore, any difference between the turnover reported
section 15 and rules
in the Annual Return (GSTR 9) and turnover reported in
thereunder
the audited Annual Financial Statement due to difference
in valuation of supplies shall be declared here.

Adjustments in Any difference between the turnover reported in the

turnover due to Annual Return (GSTR9) and turnover reported in the
N +/-
foreign exchange audited Annual Financial Statement due to foreign
fluctuations exchange fluctuations shall be declared here.

Illustration 1:

PQR Limited has exported goods to a Company located in USA. The value of goods is
$100,000. The exchange rate (Rs/$) on the date of filing Shipping Bill is

CBEC Notified ` 65

RBI Reference Rate ` 68

At the time of receiving money, the bank exchanged the foreign currency at ` 70.

Solution:

For the purpose of GST Returns, the exchange rate would be ` 65 and the exports to be
disclosed in the GST Returns would be ` 65,00,000. For the purpose of accounting
records, the exchange rate would be ` 68 and the exports recorded in the books would
be ` 68,00,000. The difference in revenue being ` 300,000 would have to be reduced
from the Annual turnover as per the financials to arrive at the revenue as per GSTR 9.

Additionally, difference in the amount booked in the accounts and actual amount
received being ` 70 – ` 68 = ` 2 x $100,000 = ` 200,000 would be credited to the Profit
and Loss Account as Forex Gain which again needs to be reduced from the Annual
turnover as per the financials to arrive at the revenue as per GSTR 9.

Illustration 2:

PQR Limited has exported goods to a Company located in USA. The value of goods is
$100,000. The exchange rate (Rs/$) on the date of filing Shipping Bill is

CBEC Notified ` 65

RBI Reference Rate ` 68

At the time of receiving money, the bank exchanged the foreign currency at ` 66.
 Solution:

For the purpose of GST Returns, the exchange rate would be ` 65 and the exports to be
disclosed in the GST Returns would be `65,00,000. For the purpose of accounting
records, the exchange rate would be `68 and the exports recorded in the books would be
` 68,00,000. The difference in revenue being ` 300,000 would have to be reduced from
the Annual turnover as per the financials to arrive at the revenue as per GSTR 9.

Additionally, the difference in the amount booked in the accounts and actual amount
received being ` 66 – ` 68 = (-) ` 2 x $100,000 = (-) ` 200,000 would be debited to the
Profit and Loss Account as Forex Loss which again needs to be added from the Annual
turnover as per the financials to arrive at the revenue as per GSTR 9.

Adjustments in Any difference between the turnover reported in the

turnover due to annual return (GSTR 9) & turnover reported in the
O +/-
reasons not listed audited financial statement due to reasons not listed above
above shall be declared here.

Annual turnover after

P
adjustments as above

Turnover as declared Annual turnover as declared in the Annual return (GSTR-9)

Q in Annual Return shall be declared here. This turnover may be derived from Sr
(GSTR9) No: 5N, 10 & 11 of Annual return (GSTR 9)

Un-Reconciled
R
turnover (Q -P)

6 Reasons for Un -Reconciled difference in Annual Gross Turnover

A Reason 1 Reasons for non-reconciliation between the annual

turnover declared in the audited annual financial
B Reason 2 statement & turnover as declared in the annual return
C Reason 3 (GSTR 9) shall be specified here.

7 Reconciliation of Taxable Turnover

Annual turnover after Annual turnover as derived in Table 5P above would be

A adjustments (from 5P auto populated here.
above)

Value of Exempted, Nil Value of Exempted, Nil rated, Non-GST supplies, No-
Rated, Non-GST Supply turnover shall be declared here. This shall be
B
supplies, No-Supply reported net of credit notes, debit notes & amendments if
turnover any.
 Clause 7B essentially comprises the following 4 classes / types of supplies:

a. Supplies taxable at a ‘NIL’ rate of tax; currently there are no goods / services
under ‘NIL’ rate category
b. Supplies that are wholly or partially exempted from CGST, SGST or IGST, by
way of a notification; E.g.: Milk, water, education service, health care services,
etc.,
c. Non-taxable supplies as defined under Section 2(78) of the CGST Act – supplies
that are not taxable under the Act (viz. alcoholic liquor for human consumption).
d. No supplies include the activities covered under Schedule III which are neither
a supply of goods nor a supply of services. Examples- Sale of land or completed
building, actionable claims, other than lottery, betting, and gambling.

Illustration

The following supplies would form part of the reporting under value of Exempted, Nil
rated, Non-GST supplies, No-Supply turnover in the case of a hospital:

i. Consultation fees received by the hospital ` 2,50,00,000/- (Exempted supply)

ii. Diagnostic services provided by the hospital ` 40,00,000/- (Exempted supply)
iii. Excess petrol available in the hospital sold to a related party ` 10,000/- (Non-
GST supply)
iv. Land sold by the hospital ` 5,00,00,000/- (No-supply)

Value of zero-rated supplies (including supplies to SEZs)

Zero rated supplies on which tax is not paid shall be declared here. This shall
C
without payment of tax be reported net of credit notes, debit notes & amendments
if any.

Exports of goods or services or

both.
Zero rated supply under the
provisions of GST law
means:
Supply of goods or services or
both to SEZ developer /SEZ unit

Value of reverse charge supplies on which tax is to be paid

Supplies on which tax is
by the recipient shall be declared here. This shall be
D to be paid by the recipient
reported net of credit notes, debit notes & amendments if
on reverse charge basis
any.
 Illustration

Please state which of the following are liable to reverse charge

a. GTA issued a consignment note on 1.1.18. The consignment notes charges GST
@ 12%. The consignor has booked the GTA. The recipient has paid the freight
to GTA on ‘to collect’ basis. Would this turnover be mentioned in Table 7D?
b. GTA issued a consignment note on 1.1.18. The consignment note does not
charges GST. The consignor has booked the GTA. The recipient has paid the
freight to GTA on ‘to collect’ basis. Would this turnover be mentioned in Table
7D?
c. Advocate Mr. X has provided legal service and charged GST of ` 18 on his
invoice of ` 100. The advocate’s client has paid 118 to the advocate. The
advocate has remitted ` 18 to government and is of the opinion that the aforesaid
transaction should not be reduced in Table 7D. Is the stand taken by the advocate
correct?

Solution

1. The Consignment note contains GST @ 12%, so reverse charge does not attract
as per N.No.13/17 CT (R) w.e.f 22.8.10. Hence tax has to be paid by GTA under
forward charge, and this transaction should not be entered in Table 7D.
2. Since consignment note has not charged GST @ 12%, reverse charge provisions
would apply. Tax is to be paid by the person liable to pay freight, that is, the
recipient and not the GTA under forward charge. Because of this, the impugned
transaction has to be entered in Table 7D.
3. Supplies by a Registered Person, whose suppliers are liable for reverse charge,
are to be inserted in Table 7D. Legal service provided by the advocate to his
client is liable for reverse charge (assuming all other conditions in reverse charge
notification stand satisfied). Hence the impugned transaction should be inserted
in Table 7D. GST wrongly collected and paid by the advocate under forward
charge will not change the fact that the aforesaid service is liable to reverse
charge and hence merits insertion in Table 7D.

The taxable turnover is derived as the difference between

Taxable turnover as per
the annual turnover after adjustments in Table 7A above &
E adjustments above (A-B-
the sum of all supplies (exempted, non-GST, reverse charge
C-D)
etc.) declared in Table 7B, 7C & 7D above.

Taxable turnover as per Taxable turnover as declared in Table 4N of the annual

F liability declared in return (GSTR-9) shall be declared here.
Annual Return (GSTR9)
 Unreconciled taxable
G
turnover (F-E)

8 Reasons for Un -Reconciled difference in taxable turnover

A Reason 1 Reasons for non-reconciliation between adjusted annual taxable

turnover as derived from Table 7E above & the taxable turnover
B Reason 2 declared in Table 7F shall be specified here.

Part
Reconciliation of tax paid
III

9 Reconciliation of rate wise liability and amount payable thereon

The table provides for reconciliation of tax paid as per reconciliation statement &
amount of tax paid as declared in annual return (GSTR-9). Under the head labelled
“RC”, supplies where tax was paid on reverse charge basis by the recipient (i.e., the
person for whom reconciliation statement has been prepared) shall be declared.

Tax payable

State Cess, if
Taxable Central Integrate
Description tax / applicabl
Value tax d Tax
UT tax e

1 2 3 4 5 6

5/12/18/28/3/0.25/0.10 %
A-K
(as applicable)

L Interest

M Late Fee

N Penalty

O Others

Total amount to be paid as per tables The total amount to be paid as per the
P above liability declared in Table 9A to 9O is auto
populated here.

Total amount paid as declared in Annual The amount payable as declared in Table 9
Return (GSTR 9) of the Annual Return (GSTR 9) shall be
Q declared here. It should also contain any
differential tax paid on Table 10 or 11 of the
Annual Return (GSTR 9).
 R Un-reconciled payment of amount

10 Reasons for un-reconciled payment of amount

A Reason 1 Reasons for non-reconciliation between payable/liability

declared in Table 9P above & the amount payable in Table
B Reason 2 9Q shall be specified here.

Additional amount payable but not paid (due to reasons specified under Tables 6,8 and
11
10 above)

To be paid through Cash

Taxable Central State tax Integrated Cess, if

Description
Value tax / UT tax tax applicable

1 2 3 4 5 6

5/12/18/28/3/0.25/0.10
% (as applicable)

Interest/Late
Fee/Penalty/Others
(Please specify)

Part Reconciliation of Input Tax Credit (ITC)

IV

12 Reconciliation of Net Input Tax Credit (ITC)

ITC availed as per audited Annual Financial Statement

shall be declared here. There may be cases where multiple
ITC availed as per audited
GSTINs (State-wise) registrations exist on the same PAN.
Annual Financial
This is common for persons / entities with presence in
Statement for the State/ UT
multiple States. Such persons / entities would have to
A (For multi-GSTIN units
internally derive their ITC for each individual GSTIN and
under same PAN this
declare the same here. It may be noted that reference to
should be derived from
the audited Annual Financial Statement includes
books of accounts)
reference to books of accounts in case of persons / entities
having presence in multiple States.

Any ITC which was booked in the audited Annual

ITC booked in earlier Financial Statement of the earlier financial year(s)
B Financial Years claimed in + but availed in the ITC ledger in the financial year for
current Financial Year which the reconciliation statement is being filed shall
be declared here. Since this is the first year of the
 GST, this column should ideally be zero. However,
as per the instruction related to the form, transitional
credit which was booked in earlier years but availed
during Financial Year 2017-18

ITC booked in current
Financial Year to be
C -
claimed in subsequent
Financial Years
Any ITC which has been booked in the audited
Annual Financial Statement of the current FY but the
same has not been credited to the ITC Ledger for the
said FY shall be declared here.

ITC availed as per audited ITC availed as per audited annual financial statement or
financial statements or books of accounts as derived from values declared in
D
books of account Table 12A, 12B & 12C above shall be auto populated
here.

ITC claimed in Annual Net ITC available for utilization as declared in Table 7J
E
Return (GSTR9) of annual return (GSTR 9) shall be declared here.

F Un-reconciled ITC

13 Reasons for un-reconciled difference in ITC

Reasons for non-reconciliation of ITC as per audited annual

A Reason 1 financial statement or books of account (Table 12D) & the net
ITC (Table 12E).

Reconciliation of ITC declared in Annual Return (GSTR9) with ITC availed on

14
expenses as per audited Annual Financial Statement or books of account

This table is for reconciliation of ITC declared in the Annual Return (GSTR 9) against
the expenses booked in the audited Annual Financial Statement or books of account.
The various sub heads specified under this table are general expenses in the audited
Annual Financial Statement or books of account on which ITC may or may not be
available. Further, this is only an indicative list of heads under which expenses are
generally booked. Tax payers may add or delete any of these heads but all heads of
expenses on which GST has been paid/was payable are to be declared here.

Amount of
Amount of Total
Description Value eligible ITC
ITC
availed

1 2 3 4

A Purchases
B Freight / Carriage

C Power and Fuel

Imported goods (Including

D
received from SEZs)

E Rent and Insurance

Goods lost, stolen, destroyed,

F written off or disposed of by
way of gift or free samples

G Royalties

Employees' Cost (Salaries,

H
wages, Bonus etc.)

I Conveyance charges

J Bank Charges

K Entertainment charges

Stationery Expenses
L
(including postage etc.)

M Repair and Maintenance

N Other Miscellaneous expenses

O Capital goods

P Other Expense 1

Q Other Expense 2

R Total amount of eligible ITC availed

S ITC claimed in Annual Return (GSTR9)

T Un-reconciled ITC

Illustration:

The Input tax credit as booked in purchase account is as follows:

a. ITC on purchase of raw material: ` 1,50,000 (Purchase value: 20,00,000)

b. ITC on purchase of consumable: ` 60,000(Purchase value: 4,00,000)
 c. ITC on purchase of food items for staff: ` 12,000 (Purchase value: 120,000)
d. ITC availed by the registered person from the Purchase account: ` 222,000

Solution:

The reporting of the following transactions shall be made in this column:

 value of Purchases: 25,20,000

 Amount of Total ITC: 222,000

Amount of eligible ITC availed: ` 210,000

15 Reasons for un -reconciled difference in ITC

A Reason 1

Tax payable on un-reconciled difference in ITC (due to reasons specified in 13 and 15

16
above)

Description Amount Payable

Central Tax

State/UT Tax

Integrated Tax Cess

Cess

Interest

Penalty

Part V Auditor's recommendation on additional Liability due to non-reconciliation

To be paid through Cash

Description Value Central State tax / Integrated tax Cess, if

tax UT tax applicable

5/12/18/28/3/0.
25/0.10% (as
applicable)

Input Tax
Credit

Interest
 Late Fee

Penalty

Any other
amount paid
for supplies
not included
in Annual
Return
(GSTR 9)

Erroneous
refund to be
paid back

Outstanding
demands to
be settled

Other (Pl.
specify)

Verification:

I hereby solemnly affirm and declare that the information given herein above is true and correct
to the best of my knowledge and belief and nothing has been concealed there from.

**(Signature and stamp/Seal of the Auditor)

Place: ...............

Name of the signatory .....................

Membership No..................

Date: ...............

Full address ...........................

 PART –B-CERTIFICATION

i. Certification in cases where the reconciliation statement (FORM GSTR-9C) is

drawn up by the person who had conducted the audit:

1. I/we have examined the—(a) balance sheet as on ......... (b) the *profit and loss
account/income and expenditure account for the period beginning from ..............to
ending on ......., and (c) the cash flow statement for the period beginning from
...........to ending on ........., —attached herewith, of M/s ............... (Name),
..................................... (Address), .......................(GSTIN).

2. Based on our audit I/we report that the said registered person—

*has maintained the books of accounts, records and documents as required by the
IGST/CGST/<<>>GST Act, 2017 and the rules/notifications made/issued
thereunder

*has not maintained the following accounts/records/documents as required by the

IGST/CGST/<<>>GST Act, 2017 and the rules/notifications made/issued
thereunder:

1. ……………..
2. ……………..
3. ……………..

3.
a. *I/we report the following observations/ comments / discrepancies /
inconsistencies; if any: ........................................................................

b. *I/we further report that, -

A. *I/we have obtained all the information and explanations which, to
the best of *my/our knowledge and belief, were necessary for the
purpose of the audit/ information and explanations which, to the best
of *my/our knowledge and belief, were necessary for the purpose of
the audit were not provided/partially provided to us.

B. In *my/our opinion, proper books of account *have/have not been

kept by the registered person so far as appears from*my/ our
examination of the books.

C. I/we certify that the balance sheet, the *profit and loss/income and
expenditure account and the cash flow Statement are *in
 agreement/not in agreement with the books of account maintained
at the Principal place of business at ........................and **
........................additional place of business within the State.

4. The documents required to be furnished under section 35 (5) of the CGST Act and
Reconciliation Statement required to be furnished under section 44(2) of the CGST
Act is annexed herewith in Form No. GSTR-9C.

5. In *my/our opinion and to the best of *my/our information and according to

explanations given to *me/us, the particulars given in the said Form No. GSTR-9C
are true and correct subject to following observations/qualifications, if any:
a. ................................................................................................
b. ................................................................................................
c. ................................................................................................

**(Signature and stamp/Seal of the Auditor)

Place: ...............
Name of the signatory .....................
Membership No..................
Date: ...............
Full address ...........................

ii. Certification in cases where the reconciliation statement (FORM GSTR-9C) is

drawn up by a person other than the person who had conducted the audit of the
accounts:

1. *I/we report that the audit of the books of accounts and the financial statements of
M/s. .......................................... (Name and address of the assessee with GSTIN)
was conducted by M/s. ............................................................ (full name and
address of auditor along with status), bearing membership number in pursuance of
the provisions of the ..................................Act, and *I/we annex hereto a copy of
their audit report dated .................................. along with a copy of each of:-

a. balance sheet as on .........

b. the *profit and loss account/income and expenditure account for the period
beginning from ..............to ending on .......,
c. the cash flow statement for the period beginning from ...........to ending on
........., and(d) documents declared by the said Act to be part of, or annexed
 to, the *profit and loss account/income and expenditure account and
balance sheet.

2. I/we report that the said registered person—*has maintained the books of accounts,
records and documents as required by the IGST/CGST/<<>>GST Act, 2017 and
the rules/notifications made/issued thereunder

*has not maintained the following accounts/records/documents as required by the

IGST/CGST/<<>>GST Act, 2017 and the rules/notifications made/issued
thereunder:

B.
C.
D.

3. The documents required to be furnished under section 35 (5) of the CGST Act and
Reconciliation Statement required to be furnished under section 44(2) of the CGST
Act is annexed herewith in Form No. GSTR-9C.

4. In *my/our opinion and to the best of *my/our information and according to

examination of books of account including other relevant documents and
explanations given to *me/us, the particulars given in the said Form No.9C are true
and correct subject to the following observations/qualifications, if any:

a. ...............................................................................................
b. ...............................................................................................
c. ...............................................................................................

**(Signature and stamp/Seal of the Auditor)

Place: ...............
Name of the signatory .....................
Membership No..................
Date: ...............
Full address ...........................
 Format of Audit Report under the GST Law
Form GST ADT - 04 [See Rule 102(2)]

Reference No.:

Date:

To,

____________________

GSTIN ______________

Name _______________

Address _____________

Information of Findings upon Special Audit

Your books of account & records for the FY ___________ has been examined by ________
(CA/CMA) & this audit report is prepared on the basis of information available / documents
furnished by you & the findings/discrepancies are as under:

Short Payment of Integrated tax Central tax State/UT tax Cess

Tax

Interest

Any other amount

{upload pdf file containing audit observation}

You are directed to discharge your statutory liabilities in this regard as per the provisions of the
act & the rules made thereunder, failing which proceedings as deemed fit may be initiated against
you under the provisions of the act.

Signature: __________

Name: __________

Designation
 Question & Answers

You are doing Tax Audit of Private Limited Company for the financial year ending 31 st
March, 2019. During audit, you notice that the company is not regular in deposit of
VAT/GST and there remains pendency every year. The details of VAT/GST payable are:
i. GST payable as on 31/03/2018 of FY 2017-18 was ` 200 Lakh and out of which
`100 Lakh was paid on 15/09/2018 and ` 50 Lakh on 30/03/2019 and balance of `
50 Lakh paid on 16/09/2019.
ii. GST payable of current financial year 2018-19 was ` 100 lakh and out of this, ` 40
Lakh was paid on 25/05/2018 and balance of ` 60 Lakh remained unpaid till the
due date of return.

The date of Tax Audit report and due date of return was 30th September.

Now as a Tax Auditor, how/where the said transaction will be reflected in Tax Audit
Report under Section 43B(a)?

Answer:

Reporting in Tax Audit Report: Any amount of GST/Tax payable on the last day of
previous year (opening balance) as well as on the last day of current year has to be reported
in Tax Audit Report under clause 26(A) and 26(B) in reference of section 43 B.

Clause 26 (A) dealt GST/VAT payable on the pre-existed of the first day of the previous
year but was not allowed in the assessment of any preceding previous year and was either
paid {clause 26(A) (a)}/ or/ and/ not paid during the previous year {clause 26(A)(b)}

The details will be as under in regard to opening balances:

Liability Pre-existed on the previous year
Sr. Section Nature of Outstanding Opening Amount Amount Amount
No. Liability balance not allowed paid/set- written unpaid at
in previous year off during back to the end of
the year P&L the year
Account
01 43B(a) VAT/GST 100 Lakh 50 Lakh 0 50 Lakh

It has been assumed that 50 lakh was allowed in last year as it was paid before the due
date of return.

Liability incurred during the previous year

 Sr. Section Nature of Amount Amount paid/set- Amount unpaid on
No. Liability incurred in off before the due the due of filing of
previous year date of filing return/date upto
but remaining return/date up to which reported in
outstanding on which reported in the tax audit report,
last day of the tax audit whichever is earlier
previous year. report, whichever
is earlier
01 43B(a) VAT/GST 100 Lakh 40 Lakh 60 Lakh

In terms of Sl. No. 5Gof Form GSTR 9C, the turnovers included in the audited financial
statement for the period April 2017 to June 2017 shall be declared and deducted from the
annual turnover to arrive at the turnover as per the GST Laws.

Please specify which of the following supplies would form part of reporting under
turnover for the period April 2017 to June 2017

a. Goods were manufactured and cleared from a factory on 1.6.2017 on sale or

approval basis. The goods were not approved by the recipient and returned back
on 25.12.2017.
b. Goods were manufactured and cleared from a factory located in Bangalore on
30.4.2017. The goods were cleared to its showroom located in Hyderabad and
eventually been sold from there on 30.8.2017. The audit under the GST Law will
be conducted for Bangalore GST IN.
c. Continuous supply of service in the nature of telecommunication service has been
provided for the period 1.6.2017 to 30.6.2017. The bill is raised on 3.7.2017. T he
bill is payable by the customer only on 21.7.2017. Should the revenue be
recognised in the month of June 2017 and reduced from total turnover or should it
form part of turnover for the period July 2017 to March 2018 since the due date for
payment of consideration is 21.7.2017. The entity recognised the revenue in the
month of June 2017.

Answer:

a. Since the goods were not approved and returned after the stipulated period of 6
months, the value of the said supplies would not be included in turnover in the
audited financial statements. However, as per the 2nd proviso to Section 142(12)
of the CGST Act since the goods were returned after 6 months from appointed date
(i.e. 1.6.2017), GST would be payable for the tax period December 2017. Though
the transaction originated in the period April 2017 to June 2017, the turnover will
not be reflected under this Sl. No. However, one may reflect such adjustment under
 Part II, sl. No. 5 Clause O – ‘Adjustments in turnover due to reasons not listed
above’ as addition.

b. The said goods are liable to excise duty since the goods have been cleared on
30.4.2017. The goods would not form part of turnover as per the financial
statements since it is a branch transfer. It would stand reflected as branch transfers
under the State Level VAT laws. Since audit is being conducted for Bangalore GST
IN and since supply has occurred from Hyderabad GST IN, it would not be
necessary to make adjustments for the period April 2017 to June 2017.

c. As per proviso to Rule 3(b) of the Clause of Taxation Rules, 2011, the point of
taxation in the impugned case would be the date on which bill has been raised i.e.
3.7.2017. Though invoice has been raised in the GST regime, service tax is payable
since service has been provided during the currency of the Finance Act, 1994. The
date for payment of service tax as per the machinery provision i.e. POT R, 2011
may be 3.7.2017 but the said service would be liable to service tax because the
charge u/s 66B gets attracted for the period June 2017. Further as per S.142(11)(b)
since if a transaction is liable for service tax, then tax would not be payable under
the GST Laws. Hence the said amount should be deducted as turnover under this
Sl. No. for the period April 2017 to June 2017.

You are doing the tax audit of a Limited Company. After submission of Tax Audit Report,
management notices that there was apparent mistake of law and due to this mistake,
revised the final accounts. As a tax auditor, company seeks your opinion whether the tax
audit can also be revised or not.

Answer:

Revision of Tax Audit Report:

i. Normally, the report of the tax auditor cannot be revised later.
ii. However, when the accounts are revised in the following circumstances, the tax
Auditor may have to revise his Tax audit report also.
a. Revision of accounts of a company after its adoption in the annual general
meeting.
b. Change in law with retrospective effect.
c. Change in interpretation of law (e.g.) CBDT Circular, Notifications,
Judgments, etc.

The Tax Auditor should state it is a revised Report, clearly specifying the reasons
for such revision with a reference to the earlier report. Thus, the Tax Audit Report
can be changed under the given circumstances.
XYZ Limited is looking for an auditor for getting it accounts audited as per GST. Being
an expert in the indirect taxes field XYZ Limited is seeking your advice on types of audit
to be envisage as per GST Law. Explain.
(or)
Vijay Maniyar & Associates, a firm of Chartered Accountants, is of the view that under
GST law, audit can only be undertaken by the Departmental officers and there is no scope
of audit under said law for the Chartered Accountants. You are required to advise Vijay
Maniyar & Associates on the same.

Refer: Types of audit under GST.

Concession Ltd. is engaged in the business of manufacturing of threads. The company

recorded the turnover of ` 1.13 crore during the financial year 2017-18 before adjusting
the following:

Discount allowed in the Sales Invoice 8,20,000

Cash discount (other than allowed in Cash 9,20,000

memo/ sales invoice)
Trade discount 2,90,000

Commission on Sales 6,00,000

Sales Return (F.Y. 2016-17) 1,60,000

Sale of Investment 6,60,000

You are required to ascertain the effective turnover to be considered for the prescribed
limit of tax audit under the relevant Act and guide the company whether the provisions
relating to tax audit applies.

Answer:

The provisions relating to tax audit under section 44AB of the Income Tax Act, 1961
applies to every person carrying on business, if his total sales, turnover or gross receipts
in business exceed the prescribed limit of ` 1 crore and to a person carrying on a profession,
if his gross receipts from profession exceed the prescribed limit of ` 50 lakhs (w.e.f. A.Y.
2017-18) in any previous year. However, the term "sales", "turnover" or "gross receipts"
are not defined in the Act, and therefore the meaning of the aforesaid terms has to be
considered for the applicability of the section.

Some of the points for merit consideration in this regard as discussed in the Guidance Note
issued by the Institute are given below-
 i. Discount allowed in the sales invoice will reduce the sale price and, therefore, the
same can be deducted from the turnover.
ii. Cash discount otherwise than that allowed in a cash memo/sales invoice is in the
nature of a financing charge and is not related to turnover. Therefore, should not
be deducted from the turnover.
iii. Turnover discount is normally allowed to a customer if the sales made to him
exceed a particular quantity. As per trade practice, it is in the nature of trade
discount and should be deducted from the figure.
iv. Special rebate allowed to a customer can be deducted from the sales if it is in the
nature of trade discount. If it is in the nature of commission on sales, the same
cannot be deducted from the figure of turnover.
v. Price of goods returned should be deducted from the turnover even if the returns
are from the sales made in the earlier year/s.
vi. Sale proceeds of any shares, securities, debentures, etc., held as investment will
not form part of turnover. However, if the shares, securities, debentures etc., are
held as stock-in-trade, the sale proceeds thereof will form part of turnover.

In the given case, Concession Ltd. is engaged in manufacturing business. Therefore,

the tax audit would be applicable if the turnover exceeds ` 1 crore during the financial
year 2017-18. The calculation of effective turnover for the prescribed limit purpose, in
accordance with abovementioned conditions, is given below:

Recorded turnover during the year 1,13,00,000

Less: Discount allowed in the Sales Invoice (8,20,000)

Trade discount (2,90,000)

Sales Return (1,60,000)

Effective turnover 1,00,30,000

Conclusion: The effective turnover of Concession Ltd. is rupees one crore and thirty
thousand only which is over and above the prescribed limit for tax audit under section
44AB of the Income Tax Act, 1961. Thus, the provisions related to tax audit are applicable
to the company and is therefore liable for tax audit.

In the course of your tax audit assignment u/s 44AB of the Income Tax Act, 1961 of
Dream Bank Ltd., you have instructed your assistant to find out receipt of capital nature
which might not have been credited to Profit & Loss Account and needs to be reported in
Para 16(e) of Form 3CD. Your audit assistant seeks your guidance in reporting the same.
Specify any four illustrative examples of such receipt.
Answer:

Capital Receipts which, if not credited to the profit and loss account, are to be stated under
clause 16(e) of Form 3CD:

a. Guidance for reporting capital receipts: Capital receipts are not generally credited
to profit and loss account hence the auditor should take enough care to check out
any transaction generating the capital receipts by –
▪ Enquiring whether the assessee is in receipt of any amount of capital nature
during the previous year.
▪ Going through the financial statements, in particular reserve account, to
ascertain whether the assessee has received any such receipts and credited
them directly to reserve account.
▪ Enquiring whether the assessee has credited such receipts to profit and loss
account.
▪ Checking that any such receipts is accounted for in terms of method of
accounting followed by the assessee.

b. Illustrative examples of capital receipts: The following is an illustrative list of

capital receipts which, if not credited to the profit and loss account, are to be stated
under clause 16(e) of Form 3CD-
i. Capital subsidy received in the form of Government grants, which are in
the nature of promoters’ contribution i.e., they are given with reference to
the total investment of the undertaking or by way of contribution to its total
capital outlay. For e.g., Capital Investment Subsidy Scheme.
ii. Government grant in relation to a specific fixed asset where such grant is
shown as a deduction from the gross value of the asset by the concern in
arriving at its book value.
iii. Compensation for surrendering certain rights.
iv. Profit on sale of fixed assets/investments to the extent not credited to the
profit and loss account.

“ICAI Examiner Comments”

Some examinees wrote about Form No. 3CD. Also, few examinees
discussed about the items of profit and loss account which was not required.

While doing Tax Audit, under section 44AB of the. Income Tax Act, 1961, of the accounts
of Glue Private Limited for the Assessment Year 2018-19, it was found that during the
Financial Year 2017-18, Glue Private Limited had received 9,000 shares, the market value
of which was `90,000 on the date of transfer, at a price of `45,000 from Stick Private
Limited. The Management of Glue Private Limited maintained that the transaction was as
per the terms of negotiations and there would be no cause for the Auditor to bring this
matter in his Tax Audit Report -Comment.

Answer:

Reporting for Receipt of Shares, the Aggregate Fair Market Value of Which Exceeds
`50,000:
In this case, Glue Private Ltd. is a company, other than a company in which the public are
substantially interested. During the previous year 2017-18, the company received
property, being shares, for rupees 45000 as consideration, the fair market value of which
is `90,000.

A tax auditor has to furnish the details of shares received during the previous year, under
clause 28 of Form 3CD, in case, the assessee has received any property, being share of a
company not being a company in which public are substantially interested, without
consideration or for inadequate consideration as referred to in section 56(2) of the Income
Tax Act, 1961.

Section 56(2) provides that where a firm or a company not being a company in which the
public are substantially interested, receives, in any previous year any property being shares
of a company not being a company in which the public is substantially interested,
i. without consideration, the aggregate fair market value of which exceeds `50,000,
the whole of the aggregate fair market value of such property;
ii. for a consideration which is less than the aggregate fair market value of the
property by an amount exceeding `50,000, the aggregate fair market value of such
property as exceeds such consideration, shall be chargeable to income-tax under
the head “Income from other sources”.

As per the facts of the case, provisions and explanations given above, the income
generated by Glue Private Ltd., is rupees 45,000 i.e. in excess of fair market value of
shares received (i.e. `90,000), is lesser than rupees 50,000 as per section 56(2) of the
Income T ax Act, 1961. Therefore, the tax auditor of Glue Private Ltd. is not required to
furnish the details of such shares received under clause 28 of Form 3CD. The contention
of the management of the company, for not reporting such receipt of shares, is in order.

ABC Ltd., is consistently following Accounting Standards as required under section 133
of the Companies Act, 2013. During your tax audit under section 44AB of the Income Tax
Act, 1961, the Board of Directors informed you that profits of the Company is properly
arrived at and the Accounting Standards applicable to it have been followed consistently
and as such, there need not be any adjustments to be made as per Income Computation
and Disclosure Standards notified under section 145 of Income Tax Act, 1961. Based on
the requirements of Law in this regard, examine the validity of the stand of Management
in this regard.
Answer:

Income Computation and Disclosure Standards (ICDS):

Section 145 of the Income Tax Act, 1961 deals with the Method of Accounting: Under
section 145(1), income chargeable under the heads “Profits and gains of business or
profession” or “Income from other sources” shall be computed in accordance with either
the cash or mercantile system of accounting regularly employed by the assessee.

Further, Section 145(2) empowers the Central Government to notify in the Official
Gazette from time to time, income computation and disclosure standards to be followed
by any class of assessee or in respect of any class of income.

Accordingly, the Central Government has, in exercise of the powers conferred under
section 145(2), notified ten income computation and disclosure standards (ICDSs) to be
followed by all assesses (other than an individual or a HUF who is not required to get his
accounts of one previous year audited in accordance with the provisions of section 44AB),
following the mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head “Profit and gains of business or profession” or
“Income from other sources”. from the A.Y. 2017-18.

In the instant case, ABC Ltd. is consistently following Accounting Standards in

compliance with section 133 of the Companies Act, 2013 but not complying with the
provisions of Income Computation and Disclosure Standards notified under section 145
of the Income Tax Act, 1961. Contention of the management that they are following
Accounting Standards and need not to make any adjustments as per ICDS, is not correct.
Thus, ABC Ltd. is required to adjust the profits in compliance with ICDS.

As the auditor appointed under the GST Act, 2017, how would you verify 'Unbilled
transactions at the beginning of the financial year'?

Answer:

Verification of Unbilled revenue at the beginning of Financial Year:

To comprehend the scope of these Sl. Nos, there is need to understand the concept of
‘Unbilled revenue’. In simple terms, unbilled revenue is the revenue recognized in the
books of accounts before the issue of an invoice at the end of a particular period.
Accounting Standard- 9 / IND AS 115 provides for recognition of revenue on full
completion / partial completion of the services though the due date for issuing invoice as
per the contract would be on a later date.
Clause 5B requires the addition of unbilled revenue at the beginning of a Financial Year.
Unbilled revenue which was recorded in the books of accounts on the basis of accrual
system of accounting in the earlier financial year for which the invoice is issued under the
GST law is required to be declared here. In other words, when GST is payable during the
financial year on such revenue (which was recognized as income in the earlier year), the
value of such revenue is to be declared here.

Unbilled revenue would appear in the profit and loss account of the previous year. For
information of unbilled revenue at the beginning of a Financial Year, reference may be
made to previous year’s audited financial statements. However, as the GST was
introduced from 1st July 2017 one needs to be careful to exclude invoices raised during
the period April 2017 to June 2017 from the computation.

While conducting GST audit of PQR Ltd, you have observed the following:

PQR Limited has exported goods to a Company located in USA. The value of goods is
$100,000. The exchange rate on the date of filing Shipping Bill is : CBEC notified ` 65
and RBI Reference rate ` 68.

At the time of receiving money, the bank exchanged the foreign currency at ` 70.

How would you report the adjustments in turnover due to foreign exchange fluctuations
in Reconciliation statement in Form GSTR 9C prescribed in terms of Rule 80(3) of CGST
Rules, 2017.

Answer:

Reporting of Adjustment in Turnover due to Foreign Exchange Fluctuations in

Reconciliation Statement: Any difference between the turnover reported in the Annual
Return (GSTR9) and turnover reported in the audited Annual Financial Statement due to
foreign exchange fluctuations shall be declared in Sl. No. 5N. Adjustments in turnover
due to foreign exchange fluctuations.

For the purpose of GST Returns, the exchange rate would be ` 65 and the exports to be
disclosed in the GST Returns would be ` 65,00,000. For the purpose of accounting records,
the exchange rate would be ` 68 and the exports recorded in the books would be `
68,00,000. The difference in revenue being ` 300,000 would have to be reduced from the
Annual turnover as per the financials to arrive at the revenue as per GSTR 9.

Additionally, difference in the amount booked in the accounts and actual amount received
being ` 70 – ` 68 = ` 2 x $100,000 = ` 200,000 would be credited to the Profit and Loss
Account as Forex Gain which again needs to be reduced from the Annual turnover as per
the financials to arrive at the revenue as per GSTR 9.

You are the Tax Auditor of BL & Co., a partnership firm engaged in the business of plying
of Goods Carriages for the financial year 2017-18 having a turnover of `20 crores. How
would you deal and report on the following:
i. Payment of `50,000 in cash to Mr. R on 10th September, 2017 towards settlement
of invoice for expenses accounted in financial year 2016-17.
ii. Payment of 3 invoices of `15,000 each made in cash to Mr. Y on 8th, 9th, 10th July,
2017 respectively.

Answer:

Reporting of Payments Exceeding rupees 35,000 in Cash: Disallowance under section

40A(3) of the Income Tax Act, 1961 is attracted if the assessee incurs any expenses in
respect of which payment or aggregate of payments made to a person in a day, otherwise
than by an account payee cheque drawn on bank or account payee draft, exceeds rupees
10,000.

However, in case of payment made for plying, hiring or leasing of goods carriage, limit is
rupees 35,000 instead of rupees 10,000. Further, as per section 40A(3A) of the Income T
ax Act, 1961, where an allowance has been made in the assessment for any year in respect
of any liability incurred by the assessee for any expenditure and subsequently during any
previous year the assessee makes payment in respect thereof, otherwise than by an account
payee cheque drawn on a bank or account payee bank draft, the payment so made shall be
deemed to be the profits and gains of business or profession and accordingly chargeable
to income-tax as income of the subsequent year if the payments made to a person in a day,
exceeds rupees 10,000 (rupees 35,000 in case of plying, hiring or leasing of goods
carriages).

Therefore, as per the provisions and explanations discussed above, the given cases (on the
basis of assumption that payment is made towards plying, hiring or leasing of goods
carriages) are dealt as under-
i. Payment of rupees 50,000 made in cash(which is in excess of `35,000) to Mr. R on
10th September 2017 towards settlement of an invoice for expenses accounted in
financial year 2016-17 is likely to be deemed to be the profits and gains of business
or profession under section 40A(3A) of the Income Tax Act, 1961. Thus, the details
of such amount need to be furnished under clause 21(d)(B) of Form 3CD.
ii. Payments of 3 invoices of rupees 15,000 each made in cash on 8 th, 9th July, 2017
and 10th July, 2017 respectively aggregating rupees 45,000 need not be reported as
the payment does not exceed rupees35,000 in a day.
Tiger Ltd., is a company engaged in the production of wool. Along with its production
business, it is also engaged in buying and selling of securities with the expectation of a
favourable price change. During the year, its speculation loss on account of purchase and
sale of securities was to the tune of `12 lacs.

As a tax auditor, what is the reporting requirement in Form 3 CD under Section 44 AB of

the Income Tax Act, 1961?

Answer:

Reporting Requirement Under Clause (32)(e) of Form 3CD: Tiger Ltd. is engaged in
production business of wool and side by side dealing in buying and selling of securities
with the intention of speculation. During the current financial year, the company has made
Speculation Loss of `12 lakhs.

A tax auditor has to furnish the details of speculation loss incurred during the previous
year, under Clause 32(e) of Form 3CD, regarding whether the company is deemed to be
carrying on a speculation business as per explanation to section 73.

The Explanation to section 73 provides that where any part of the business of a company
(other than a company whose gross total income consists mainly of income which is
chargeable under the heads "Income from house property", "Capital gains" and "Income
from other sources" or a company the principal business of which is the business of trading
in shares or banking or the granting of loans and advances) consists in the purchase and
sale of shares of other companies, such company shall, for the purposes of this section, be
deemed to be carrying on a speculation business to the extent to which the business
consists of the purchase and sale of such shares.

Therefore, the tax auditor of Tiger Ltd. is required to furnish the details under Clause 32(e)
of Form 3CD with respect to the speculation loss of `12 lakhs made during the year.

A Co-operative society having receipts over `2 crores has appointed Mr. D as the statutory
auditor-Mr. D is eligible to do the same under the state Co-operative Societies Act. Mr. D
is not a chartered accountant. Mr. D is also appointed to conduct the tax audit of the society
under section 44 AB of the Income Tax Act, 1961. Comment

Answer:

Furnishing Audit Report of a Co-operative Society: As per Section 44AB read with
Explanation to Section 288(2) of the Income Tax Act, 1961, “accountant” means a
chartered accountant within the meaning of the Chartered Accountants Act, 1949, and
includes, in relation to any State, any person who by virtue of the provisions of section
141 of the Companies Act, 2013, is entitled to be appointed to act as an auditor of
companies registered in that State.

Accordingly, the person who is not a Chartered Accountant as mentioned in the question,
though is eligible to act as auditor of Cooperative Society under the Cooperative Society
Act, 1912, but is not eligible to carry out tax audit under Section 44AB of the Income Tax
Act, 1961.

Hence, such audit report cannot be furnished as tax audit report under Section 44AB of
the Income-tax Act, 1961.
“ICAI Examiner Comments”

Even though many examinees have given correct conclusion, few examinees failed
to refer Sec. 288(2) of the Income Tax Act, 1961 and its explanation while some of
them mistakenly related with professional misconduct under CA Act, 1949.

As an auditor appointed under section 44AB of the Income Tax Act, 1961, how would
you verify and report on the following:
i. The assessee has borrowed `50 lakhs from various persons-partly in cash and partly
by account payee cheque.
ii. The assessee has paid rent of `5 lakhs for premises to his brother.

Answer:

i. Borrowal of `50 Lakhs: As per Clause 31 of Form 3CD the particulars of each loan
or deposit taken or accepted during the previous year have to be stated in the Tax
Audit Report.

Further, Clause 31(a) requires reporting in case if the loan or deposit was taken or
accepted otherwise than by an account payee cheque or an account payee bank
draft.

In addition, as per Clause 31(c) the tax auditor has to state whether the taking or
accepting loan or deposit, or repayment of the same were made by account payee
cheque drawn on a bank or account payee bank draft based on the examination of
books of account and other relevant documents.

Furthermore, the tax auditor has the responsibility to verify the compliance with
the provisions of section 269SS and 269T of the Income Tax Act.
Therefore, in the present case, where the assessee has borrowed `50 Lakhs by way
of cash and partly by way of Account payee cheque, needs to be verified and to be
reported in compliance with Clause 31 of Form 3CD.
 “ICAI Examiner Comments”

Examinees failed to explain with reference to clause 31 of Form 3CD for

reporting on the mode of amount borrowed. Few examinees have discussed
generally on vouching and verification aspects instead of mentioning the
reporting requirements of tax auditor. Few examinees mixed up section
40A(3) of the Income Tax Act, 1961 on disallowance of cash payments
exceeding 20,000/- instead of explaining the provisions of 269SS.

ii. Payment of Rent: A tax auditor has to report under Clause 23 of Form 3CD which
deals with the particulars of payments made to persons specified under section
40A(2)(b) of the Income Tax Act, 1961. Where the assessee is an individual, the
specified persons include any relative of the assessee (i.e. Husband, Wife, Brother,
Sister or any other Lineal Ascendant or Descendant).
In the present case, an assessee has paid rent to his brother `5,00,000 which may
be disallowed if, in the opinion of the Assessing Officer, such expenditure is
excessive or unreasonable having regard to:

1. the fair market value of the goods, services or facilities for which the
payment is made; or
2. for the legitimate needs of business or profession of the assessee; or
3. the benefit derived by or accruing to the assessee from such expenditure.

Hence, this fact needs to be reported in the Tax Audit Report accordingly besides
compliance with TDS provisions, disallowance for cash payments and details
under Clause 21(d) & 34(a) of Form 3CD

“ICAI Examiner Comments”

Examinees have discussed generally on vouching and verification aspects

instead of mentioning the reporting requirements of Tax Auditor. Some
examinees failed to explain with reference to clause 23 of Form 3CD for
reporting the particulars of payments made to persons specified under
section 40A(2)(b) of the Income Tax Act, 1961. Instead of explaining Tax
audit requirements few examinees wrongly discussed AS 18 and SA 550
on “Related Parties”

A leading jewellery merchant used to value his inventory at cost on LIFO basis. However,
for the current year, in view of requirements of AS 2, he changed over to FIFO method of
valuation. The difference in value of stock amounted to ` 55 lakhs which is higher than
that under the previous method. In such a situation, what are the reporting responsibilities
of a Tax Auditor under Section 44AB of Income-tax Act, 1961.

Answer

Reporting for change in the method of valuation of stock: The change in the method of
valuation of stock is not a change in method of accounting, as it is only a change in
accounting policy. However, in the Income-tax Act, 1961 this is considered under method
of accounting. Under the Income-tax Act, 1961, if the change in method of valuation is
bonafide, and is regularly and consistently adopted in the subsequent years as well, such
change would be permitted to be made for tax purposes. In the instant case, the change in
the valuation of stock from LIFO basis to FIFO basis is pursuant to mandatory
requirements of the AS 2 ‘Valuation of Inventories’ and therefore should be viewed as
bonafide change.

This apart, the tax auditor in his report has to specifically refer to the method of valuation
of stock under Clause 14in Form 3CD.
a. Method of valuation of closing stock employed in the previous year.
b. Details of deviation, if any, from the method of valuation prescribed under section
145A and the effect thereof on profit or loss.

The auditor has to see that the method of stock valuation is followed consistently from
year to year. It is also necessary to ensure that method followed for valuation of stock
results is correct profits or gain. The change from LIFO to FIFO is bonafide, the disclosure
of which would have to be made the financial statements. As far as section 145A is
concerned, the tax auditor need not change the method of valuation of purchases, sales
and inventories which is regularly employed by the assessee. All that he has to do is to
adjust the valuation for any tax, duty, cess or fee actually paid or incurred by the assessee,
if the same had not already been adjusted.

ABC Printing Press, a proprietary concern, made a turnover of above ` 1.03 crore for the
year ended 31.03.2016. The Management explained its auditor Mr. Z, that it undertakes
different job work orders from customers. The raw materials required for every job are
dissimilar. It purchases the raw materials as per specification/requirements of each
customer, and there is hardly any balance of raw materials remaining in the stock, except
pending work-in-progress at the year end. Because of variety and complexity of materials,
it is rather impossible to maintain a stock-register. Give your comments.

Answer:

Non-maintenance of stock register: The explanation of the entity for the use of varieties
of raw materials for different jobs undertaken may be valid. But the auditor needs to verify
the specified job-orders received and the different raw materials purchased for each job
separately. The use of different papers (quality, quantity and size) ink, colour etc. may be
examined. If possible, the auditor may also enquire with the other similar printers in the
locality to ensure the prevailing custom. At the same time, he has to report and certify
under the clause 35(b) and clause 11(b) of Form 3CD read with the Rule 6G(2) of the
Income-tax Act, 1961, about the details of stock and account books (including stock
register) maintained. He (or his deputy) must verify the closing stock of raw materials,
work-in-progress and finished goods of the concern, at least on the date of its balance
sheet. In case the said details are not properly maintained, he has to specifically mention
the same with reasons for non-maintenance of stock register by the entity.

T Ltd. an Indian company, subject to Indian Income Tax Act, 1961, discloses advance
Income-tax paid (Current tax asset) and provision for Income-tax (Current tax liability),
separately in Balance Sheet for the year ended 31.3.2016, i.e., it does not offset the
amount. Comment.

Answer:

As per paragraph 27 of Accounting Standard (AS) 22 – Accounting for Taxes on Income,

an enterprise should offset assets and liabilities representing current tax if the enterprise:
i. has a legally enforceable right to set off the recognized amounts and
ii. intends to settle the asset and liability on a net basis.

An enterprise will normally have a legally enforceable right to set off an asset and liability
representing current tax when they relate to income taxes levied under the same governing
taxation laws and the taxation laws permit the enterprise to make or receive a single net
payment.

Since T Ltd. is an Indian Company, and as per Income Tax Act, 1961, such set off is
allowed which is legally enforceable. Thus, in view of Provisions of AS 22 and Income
Tax Laws, T Ltd. should offset advance tax paid against provision for income tax and
show only the net amount in the balance sheet.

Mr. Bhupesh, is a renowned criminal lawyer, practicing in Meerut. During the previous
year, he collected service tax of ` 25 lakhs but utilized it for his personal use. The
Commissioner of Central Excise issued a show cause notice to him as to why the tax,
collected by him, is not deposited to the government account. He appeared before the
Commissioner and stated his inability to pay the sum due to financial crisis. The
proceedings are still pending before the Commissioner. Mr. Bhupesh instructed his tax
auditor not to disclose his service tax registration details, while filling particulars to be
furnished in Form No. 3CD, believing that the income tax department might trace his
scrutiny proceedings details pending before Commissioner of Central Excise which would
bring disrepute to his profession.
Answer:

Reporting Requirement Under Clause (4) of Form 3CD: Mr. Bhupesh has defaulted in
payment of service tax for the previous year. Consequently, the Commissioner of Central
Excise issued a show cause notice for such non-payment of tax. The arguments are still
going on between the department and assessee. He also restrained his tax auditor from
disclosing service tax registration details in tax audit report.

Provisions and Explanations: A tax auditor is required to report under Clause (4) of Form
3CD, which requires him to mention the registration number or any other identification
number, if any, allotted, in case the assessee is liable to pay indirect taxes like excise duty,
service tax, sales tax, customs duty, etc.

Part A of Form No. 3CD generally requires the auditor to give the factual details of the
assessee. Thus, the auditor is primarily required to furnish the details of registration
numbers as provided to him by the assessee.

The reporting is however, to be done in the manner or format specified by the e-filing
utility in this context. The information may be obtained and maintained in the following
format: -
Sr. Relevant Indirect tax Place of Business/profession/service Registration/
No Law which requires unit for which registration is in place/ Identification
registration or has been applied for: - number

1 2 3 4

Furthermore, the auditor has to keep in mind the provisions of Standard on Auditing 580
“Written Representation”. In case the auditor prima facie is of the opinion that any indirect
tax laws is applicable on the business or profession of the assessee but the assessee is not
registered under the said law, the auditor should report the same appropriately.

Conclusion: Therefore, the tax auditor of Mr. Bhupesh is required to furnish service tax
registration number under Clause (4) of the Form 3CD. Thus, contention of Mr. Bhupesh
not to disclose the service tax details is not tenable.

BB Ltd., a non-resident company, is engaged in the business of extraction of mineral oils,

having turnover of ` 20 lakhs during the financial year 2016-17. The company claims that
its profits and gains chargeable to tax under the head "Profits and gains of business or
profession" is lower than the deemed income chargeable under section 44BB of the
Income Tax Act, 1961. Therefore, it decided to get its accounts audited under section
44AB of the Income Tax Act, 1961.
Answer:

Reporting Requirement Under Clause (8) and (12) of Form 3CD: BB Ltd., is a non-
resident company which is engaged in the business of extraction of mineral oils, hence,
its income is chargeable in accordance with the provisions of section 44BB of the Income
Tax Act, 1961. But it has turnover of ` 20 lakhs during the financial year 2016-17.
Therefore, the company does not need to get its accounts audited under section 44AB of
the Income Tax Act, 1961 as it is below the prescribed limit applicable for auditing of
accounts. However, company is claiming lower income in comparison to deemed income
under section 44BB of the said Act, thus, the company needs to get its accounts audited.
Provisions and Explanations: Under Clause (8) of Form 3CD, the tax auditor is required
to mention the relevant clause of section 44AB under which the audit has been conducted.
In case the assessee is carrying on business and his total sales, turnover or gross receipts
as the case may be, exceeds one crore in the relevant previous year, the auditor is required
to mention clause (a) under this head. If the assessee is carrying on profession and his
gross receipts exceed fifty lakh rupees in the relevant previous year, the auditor is required
to mention clause (b) under this head. Likewise, if the audit under section 44AB is being
conducted by virtue of provisions of section 44AE, 44BB and 44BBB, the auditor is
required to mention clause (c). For audit being conducted by virtue of provisions of section
44ADA, clause (d) is to be mentioned under this head. For audit being conducted by virtue
of provisions of section 44AD, clause (e) is to be mentioned under this head.

Further, as per Clause (12) of Form 3CD, if the profit and loss account of the assessee
includes any profits and gains assessable on presumptive basis, the tax auditor has to
indicate the amount and the relevant sections (44AD, 44AE, 44AF, 44B, 44BB, 44BBA,
44BBB, Chapter XII-G, First Schedule or any other relevant section).

Conclusion: As per the facts of the case, provisions and explanations given above, the tax
auditor of BB Ltd. is required to mention clause (c) of section 44AB, under clause (8) of
Form no. 3CD.

In addition to above, the tax auditor has to indicate, under Clause (12) of Form No. 3CD,
the amount of profits and gains assessable on presumptive basis under section 44BB of
the Income Tax Act i.e. the amount of profits and gains credited/debited to the Profit &
Loss Account.

M/s. N.S. Enterprises, a manufacturing concern, sold a house property in Mumbai for a
consideration of ` 48 lakh, to Mr. Gunaj on 1.8.2016. M/s. N. S. Enterprises had purchased
the house property in the year 2014 for ` 40 lakh. The stamp duty value on the date of
transfer, i.e., 1.8.2016, is ` 85 lakh for the house property.
Answer:

Reporting Requirement Under Clause (17) of Form 3CD: In this case, M/s N.S.
Enterprises is a manufacturing concern and sold the house property in Mumbai for a
consideration of ` 4 8 Lakh which is less than value assessed by Government i.e. Stamp
Duty value of ` 85 Lakh.

Provisions and Explanations: As per Clause 17 of Form 3CD, the tax auditor is required
to furnish detailed information in case if any land or building or both is transferred during
the previous year for a consideration less than value adopted or assessed or assessable by
any authority of a State Government referred to in section 43CA or 50C, as under:
Details of Consideration Value adopted or
property received or accrued assessed or assessable

The auditor should obtain a list of all properties transferred by the assessee during the
previous year. He may also verify the same from the statement of profit and loss or balance
sheet, as the case may be. Further, the auditor has to furnish the amount of consideration
received or accrued, during the relevant previous year of audit, in respect of land/building
transferred during the year as disclosed in the books of account of the assessee.

For reporting the value adopted or assessed or assessable, the auditor should obtain from
the assessee a copy of the registered sale deed in case, the property is registered. In case
the property is not registered, the auditor may verify relevant documents from relevant
authorities or obtain third party expert like lawyer, solicitor representation to satisfy the
compliance of section 43CA / section 50C of the Act. In exceptional cases where the
auditor is not able to obtain relevant documents, he may state the same through an
observation in his report 3CA/CB.

Conclusion: As already discussed in fact of the cases, M/s. N. S. Enterprises, has sold the
house property to Mr. Gunaj which is less than stamp duty value. Hence, tax auditor is
required to report on the same under Clause 17 of Form 3CD.

SL Pvt. Ltd. is a company engaged in the production of wool. Along with its production
business, the company is also engaged in buying and selling of securities with the
expectation of a favourable price change. It reports the following data for the current
financial year:

S No Particulars Amount

1 Paid up Share Capital 100 lakhs

 2 Capital Reserve 33 lakhs

3 Capital Redemption Reserve 45 lakhs

4 Revaluation Reserve 32 lakhs

5 Speculation Loss on account of Purchase and 12 lakhs

Sales of Securities

Answer:
Reporting Requirement Under Clause (32)(e) of Form 3CD: SL Pvt. Ltd. is engaged in
production business and side by side dealing in buying and selling of securities with the
intention of speculation. During the current financial year, the company has made
Speculation Loss of ` 12 lakhs.

Provisions and Explanations: A tax auditor has to furnish the details of speculation loss
incurred during the previous year, under Clause 32(e) of Form 3CD, regarding whether
the company is deemed to be carrying on a speculation business as referred in explanation
to section 73.

The Explanation to section 73 provides that where any part of the business of a company
(other than a company whose gross total income consists mainly of income which is
chargeable under the heads "Interest on securities", "Income from house property",
"Capital gains" and "Income from other sources" or a company the principal business of
which is the business of trading in shares or banking or the granting of loans and advances)
consists in the purchase and sale of shares of other companies, such company shall, for
the purposes of this section, be deemed to be carrying on a speculation business to the
extent to which the business consists of the purchase and sale of such shares.

Conclusion: Therefore, the tax auditor of SL Pvt. Ltd. is required to furnish the details
under Clause 32(e) of Form 3CD with respect to the speculation loss of ` 12 lakhs made
during the year.

Saurabh International Ltd. (SIL) was engaged in providing certain services on which it did
not pay any service tax. As per SIL, said services were not liable to service tax. However,
Department issued a show cause notice to SIL demanding service tax along with interest
worth ` 5,45,000 on the same and such demand was also confirmed. An appeal was filed
to the Commissioner of Central Excise (Appeals) which passed an order which upheld the
demand on SIL. SIL, being aggrieved by the order of the Commissioner of Central Excise
(Appeals), decided to file an appeal to the CESTAT against such order. SIL has also
requested the tax auditor not to report as those services were not liable for service tax and
it has also filed an appeal for the same.
Answer:

Reporting Requirement Under Clause (41) of Form 3CD: In the instant case, Saurabh
International Ltd. (SIL) is engaged in providing certain services on which it did not paid
any service tax. Therefore, Department issued a show cause notice and demand for Service
Tax along with interest thereon. SIL has also filed an appeal mentioning that said services
are not liable to service tax, but Central Excise (Appeals) has passed an order confirming
the demand and SIL being aggrieved by the order of Commissioner of Central Excise
(Appeals) decided to file an appeal against the same. SIL also requested the tax auditor
not to report on the same as the concerned services were not liable for any service tax and
they have also decided to file an appeal to CESTAT against the order of Commissioner of
Central Excise (Appeals).

Provisions and Explanations: As per Clause 41 of Form 3CD, the tax auditor should
furnish the details of demand raised or refund issued during the previous year under any
tax laws other than Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of
relevant proceedings.

Therefore, the tax auditor should obtain a copy of all the demand/ refund orders issued by
the governmental authorities during the previous year under any tax laws other than
Income Tax Act and Wealth Tax Act along with its proceeding. It may be noted that even
though the demand/refund order is issued during the previous year, it may pertain to a
period other than the relevant previous year. In such cases also, reporting has to be done
under this clause.

Conclusion: In the instant case, reporting of the demand raised by Department and
proceeding relating to it including appeal filed by SIL and decision thereon is required to
be made by tax auditor as per Clause 41 of Form 3CD. Hence request of SIL, not to report
on the same is not acceptable.

ABC Pvt. Ltd. and XYZ Pvt. Ltd. are the companies in which public are not substantially
interested. During the previous year 2018-19, ABC Pvt. Ltd. received some property,
being shares of XYZ Pvt. Ltd., the details of which are provided below:

No. of Shares: 1,000

Aggregate fair market value of shares 1,00,000

Consideration value: Nil

The management of the company contends that the shares need not to be furnished in Form
No. 3CD. As the tax auditor of ABC Pvt. Ltd., how would you deal with the matter?
Answer:

Reporting for Receipt of Shares, the Aggregate Fair Market Value of Which Exceeds `
50,000:
In this case, ABC Pvt. Ltd. is a company, other than a company in which the public are
substantially interested. During the previous year 2018-19, the company received
property, being shares, for no consideration, the aggregate fair market value of which is `
1,00,000.

Provisions and Explanations: A tax auditor has to furnish the details of shares received
during the previous year, under clause 28 of Form 3CD, in case, the assessee has received
any property, being share of a company not being a company in which public are
substantially interested, without consideration or for inadequate consideration as referred
to in section 56(2)(viia) of the Income Tax Act, 1961.

Section 56(2)(viia) provides that where a firm or a company not being a company in which
the public are substantially interested, receives, in any previous year any property being
shares of a company not being a company in which the public is substantially interested,
i. without consideration, the aggregate fair market value of which exceeds `50,000,
the whole of the aggregate fair market value of such property;
ii. for a consideration which is less than the aggregate fair market value of the
property by an amount exceeding `50,000, the aggregate fair market value of such
property as exceeds such consideration, shall be chargeable to income-tax under
the head “Income from other sources”.
The fair market value of shares means the value as determined in accordance with the
method prescribed in Income Tax Rules, 1962.

Conclusion: As per the facts of the case, provisions and explanations given above, the
income generated by ABC Pvt. Ltd., being whole of the aggregate fair market value of
shares received (i.e. 1,00,000), is chargeable to income-tax under the head “Income from
other sources” as per section 56(2)(viia) of the Income Tax Act, 1961.

Therefore, the tax auditor of ABC Pvt. Ltd. is required to furnish the details of such shares
received under clause 28 of Form 3CD. The contention of the management of the
company, for not reporting such receipt of shares, is not acceptable.

“ICAI Examiner Comments”

Candidates in general, were not aware of the section 56(2)(via) of the IT Act,1961
and clause 28 of Form 3CD. Quite a few treated it as capital gain instead of “Income
from Other Sources”.

Write a short note on - Method of accounting in Form No. 3CD of Tax Audit.
Answer:

Method of accounting in Form No. 3CD of Tax Audit: Clause 13 of Form No. 3CD of the
tax audit requires to state method of accounting employed in the previous year. It also
requires to state the change in method of accounting vis -à-vis the preceding year. If so,
details of change and the effect on the profit or loss are to be stated. Also details of
deviation thereof if any, from accounting standards prescribed under section 145 and the
effect thereof on the profit or loss are stated.

Section 145 provide that method of accounting be either cash or mercantile. Hybrid system
is not permitted.

XYZ Ltd. pays `90000 for its 6 employees to a Hotel as boarding and lodging expenses of
such employees for a conference. The Company pays the amount in cash to the Hotel. The
Hotel gives 6 bills each amounting to `15000. The Company contends that each bill is
within the limit, so there is no violation of the provisions of the Income Tax Act, 1961.
As the tax auditor, how would you deal with the matter in your tax audit report for the
Assessment Year 2014-15?

Answer

Reporting for Payment in Cash above ` 20,000: As per section 44AB of the Income Tax
Act, 1961, the tax auditor should report whether in his opinion the particulars in respect
of Form 3CD are true and correct. It is the primary responsibility of the assessee to prepare
the information in form 3CD.

Disallowance under section 40A(3) of the Income Tax Act, 1961 is attracted if the assessee
incurs any expenses in respect of which payment or aggregate of payments made to a
person in a day, otherwise than by an account payee cheque drawn on bank or account
payee draft, exceeds ` 20,000. However, exemption is provided in respect of certain
expenditure in Rule 6DD. In such cases, disallowance under section 40A(3) would not be
attracted.

In the given case, the tax auditor found that a hotel issued 6 bills to XYZ Ltd. each
amounting to ` 15,000 for boarding & lodging expenses of 6 employees. XYZ Ltd. in
aggregate has paid ` 90,000 to the hotel in cash. Consequently, no expenditure shall be
allowed for deduction as per the provisions of section 40A(3).

Furthermore, under clause 21(d)(A) of Form 3CD, the tax auditor has to scrutinize on the
basis of the examination of books of 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 or account payee bank draft. If not, the same has
to be reported under abovementioned clause. Contention of the company that each bill is
within the limit is not tenable since aggregate of payments need to be considered.

Therefore, the payments made by the XYZ Ltd. are inadmissible under section 40A(3) of
the Income Tax Act, 1961 and hence, needs to be reported under clause 21(d)(A) of Form
3CD.

Mr. A engaged in business as a sole proprietor presented the following information to you
for the FY 12-13. Turnover made during the year ` 124 lacs. Goods returned in respect of
sales made during FY 10-11 is ` 20 lacs not included in the above. Cash discount allowed
to his customers ` 1 lac for prompt payment. Special rebate allowed to customer in the
nature of trade discount ` 5 lacs. Kindly advise him whether he has to get his accounts
audited u/s 44AB of the Income Tax Act, 1961.

Answer

Turnover Limit for the Purpose of Tax Audit: The following points merit consideration as
stated in the Guidance note on Tax Audit issued by the Institute of Chartered Accountants
of India-
i. Price of goods returned should be deducted from the figure of turnover even if the
return are from the sales made in the earlier years.
ii. Cash discount otherwise than that allowed in a cash memo/sales invoice is in the
nature of a financing charge and is not related to turnover. The same should not be
deducted from the figure of turnover.
iii. Special rebate allowed to a customer can be deducted from the sales if it is in the
nature of trade discount.

Applying the above stated points to the given problem,

1 Total Turnover 124L

2 Less: i) Goods Returned 20L

ii) Special rebate allowed to customer in 5L

the nature of trade discount would be deducted

Balance 99L

As the limit for tax audit is ` 1 crore, therefore, he would not be required to get his accounts
audited under section 44AB of the Income Tax Act, 1961.

As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how
would you report on the following:
 i. Capital expenditure incurred for scientific research assets.
ii. Expenditure incurred at clubs

Answer:

a. Capital Expenditure incurred for Scientific Research Assets: Expenditure on

Scientific Research (capital as well as revenue) covered under section 35 of the
Income-Tax Act, 1961, is to be reported by a tax auditor under clause 19 of Form
3CD. The tax auditor is required to report the following –
i. amount debited to the profit and loss account, and
ii. amounts admissible as per the provisions of the Income-tax Act, 1961 and
also fulfils the conditions, if any specified under the relevant provisions of
Income-tax Act, 1961 or Income-tax Rules, 1962 or any other guidelines,
circular, etc., issued in this behalf.

b. Payment to Club: As per Clause 21(a) of Form 3CD, the amount of expenditure
incurred at clubs by the assessee during the year being entrance fees and
subscriptions, and being cost for club services and facilities used should be
indicated.

The payments made may be in respect of directors and other employees in case of
companies, and for partners or proprietors in other cases. The fact whether such
expenses are incurred in the course of business or whether they are of personal
nature should be ascertained. The tax auditor is required to furnish the details of
amounts debited to the profit and loss account, being in the nature of capital,
personal, advertisement expenditure etc.

While conducting the tax audit of A & Co. you observed that it made an escalation claim
to one of its customers but which was not accounted as income. What is your reporting
responsibility?

Answer:

Reporting of Escalation Claim: A tax auditor has to report under clause 16(c) of Form
3CD on any escalation claim accepted during the previous year and not credited to the
profit and loss account under clause 16(c) of Form 3CD.

The escalation claim accepted during the year would normally mean “accepted during the
relevant previous year.” If such amount are not credited to Profit and Loss Account the
fact should be reported. The system of accounting followed in respect of this particular
item may also be brought out in appropriate cases. If the assessee is following cash basis
of accounting with reference to this item, it should be clearly brought out since acceptance
of claims during the relevant previous year without actual receipt has no significance in
cases where cash method of accounting is followed.

Escalation claims should normally arise pursuant to a contract (including contracts entered
into in earlier years), if so permitted by the contract. Only those claims to which the other
party has signified unconditional acceptance could constitute accepted claims. Mere
making claims by the assessee or claims under negotiations cannot constitute accepted
claims. After ascertaining the relevant factors as outlined above, a decision whether to
report or not, can be taken.
Mr. R, the Tax Auditor finds that some payments inadmissible under Section 40A(3) were
made, and advised the client to report the same in form 3CD. The client contends that cash
payments were made since the other parties insisted upon the same and did not have Bank
Accounts. Comment.

Answer:

Form 3CD: The audit under section 44AB of the Income Tax Act 1961 requires that the
tax auditor should report whether in his opinion the particulars in respect of Form 3CD
are true and correct. It is the primary responsibility of the assessee to prepare the
information in form 3CD. The auditor has to examine whether the information given is
true and correct. The form 3CD is not a report of Tax Auditor. The report is in the form
of 3CA or 3CB depending on the nature of the organization of the entity. If the tax auditor
is satisfied that the information contained in form 3CD is true and correct then he can give
unqualified report in form 3CA or 3CB saying" in my opinion and to the best of my
information and according to the explanations given to me and considering the materiality
the particulars given in form 3CD are true and correct.” But in the given case the tax
auditor has found that the form 3CD contains the incomplete, misleading and false
information.

Disallowance under section 40A(3) is attracted if the assessee incurs any expenses in
respect of which payment of aggregate of payments made to a person in a day, otherwise
than by an account payee cheque drawn on bank or account payee draft exceeds ` 20,000.
However, exemption is provided in respect of certain expenditure in Rule 6DD. In such
cases, disallowance under section 40A(3) would not be attracted.

Under clause 21(d)(A) of Form 3CD, the tax auditor has to scrutinize on the basis of the
examination of books of 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 or account payee bank draft. If not, the same has to be
reported under abovementioned clause.
Cash payment made on insistence of other parties on the contention that they do not have
bank accounts is not covered under the list of exceptions provided under Rule 6DD.
Therefore, Mr. R has to report the payments inadmissible under section 40A(3) under
clause 21(d)(A) of Form 3CD.

Draft an Audit programme for conducting the audit of a Public Trust registered under
section 12A of the Income Tax Act

Refer Audit Programme for the Audit of Public Charitable trusts.

Labour charges paid on which tax is deducted at source at an inappropriate rate. As a tax
auditor, how would you report?

Answer:

Reporting in Form 3CD: Section 40(a)(ia) of the Income-tax Act, 1961 specifies that
amounts payable to a contractor or sub-contractor, being resident, for carrying out any
work (including supply of labour for carrying out any work) on which tax is deductible
under Chapter XVII-B and such tax has not been deducted or after deduction has not been
paid on or before the due date specified in sub-section (1) of section 139, shall not be
deducted in computing the income. Therefore, if tax is deducted at an inappropriate rate,
the amount is disallowable under section 40(a)(ia) of the Income-tax Act. This fact needs
to be reported in Clause 21(b)(ii) of Form 3CD where details of payment on which tax not
deducted and details of payment on which tax has been deducted but not paid on or before
the due date specified in sub- section (1) of section 139 needs to be reported. In case, the
assessee submits that the rate is proper, though in the auditor’s view it is improper, the tax
auditor should exercise his judgement and accordingly report in Clause 21(b)(ii) of Form
3CD.

As a tax auditor, which are the accounting ratios required to be mentioned in the report in
case of manufacturing entities? Explain in detail any one of the above ratios and how does
it help the tax auditor in his analytical review.

Answer:

Refer Clause 40 of Form 3CD.

The details required to be furnished for principal items of goods traded or manufactured
or services rendered. These ratios have to be calculated only for assessees who are engaged
in manufacturing or trading activities. This clause is not applicable to assessees carrying
on profession. Moreover, the ratios have to be given for the business as a whole & need
not be given product wise.
M/s. SB & Co. has been appointed as tax auditor under section 44 AB of Income Tax
Act, 1961 by Woodcraft Interior Consultants, a professional partnership firm, having
turnover 1.25 Crores. M/s. RS & Co. are the statutory auditors of the firm but they are
unable to give their report on the financial statements of the firm. M/s. SB & Co., have,
however, completed their tax audit and want to issue their reports. Comment.

Answer:

Tax Audit Report: Section 44AB requires the tax auditor to submit the audit report:
i. in the case of a person who carries on business or profession and who is required
by or under any other law to get his accounts audited, in Form No. 3CA;
ii. in the case of a person who carries on business or profession, but not being a
person referred to in clause (i), in Form No. 3CB.

Further, the statement of particulars should be given in Form No. 3CD.

Form No. 3CA requires the Tax auditor to enclose a copy of the audit report conducted
by the statutory auditor or the auditor of the financial statements as the case may be. Where
a statutory auditor has not been appointed under the statute or where the report of the
statutory auditor is not available for whatever reasons, it will be possible for the Tax
auditor to give his report in Form No. 3CB and to certify the relevant particulars in Form
No. 3CD.

It may however, be noted that the Tax auditor in such cases will have to conduct the
financial audit as well in order to enable him to certify whether or not the accounts
reported upon by him give a true and fair view of the state of affairs of the assessee
whose accounts are audited by him under Sec 44AB.

In the instant case, M/s SB & Co. has been appointed as tax auditor under section 44AB
of Income Tax Act, 1961 by Woodcraft Interior Consultants, a professional partnership
firm. Here it may be noted that there is no statutory audit requirement for a professional
partnership firm, therefore M/s SB & Co. may issue their report in Form No. 3CB.

“ICAI Examiner Comments”

Majority of the candidates failed to discuss the circumstances in which Form 3CA
and Form 3CB are furnished by a Tax Auditor. Some candidates wrongly discussed
the relationship between the statutory auditor and the tax auditor and concluded
wrongly that Tax auditor has to wait till statutory audit is completed.

It seems that candidates failed to understand the requirement of the question.

Comment with respect to computation of total sales, turnover or gross receipts in business
exceeding the prescribed limit under Section 44 AB of Income Tax Act, 1961.
i. Discount allowed in the sales invoice
ii. Cash discount
iii. Price of goods returned related to earlier year
iv. Sale proceeds of fixed assets.

Answer:

In the context of section 44AB of the Income Tax Act, 1961: Following considerations
are required with regard to computation of sales, turnover or gross receipts in business
exceeding the prescribed limit under section 44AB of the Income Tax Act, 1961-

i. Discount allowed in the sales invoice will reduce the sale price and, therefore, the
same can be deducted from the turnover.
ii. Cash discount otherwise than that allowed in a cash memo/sales invoice is in the
nature of a financing charge and is not related to turnover. Therefore, should not
be deducted from the turnover.
iii. Price of goods returned should be deducted from the turnover even if the returns
are from the sales made in the earlier year/s.
iv. Sale proceeds of fixed assets would not form part of turnover since these are not
held for resale.

Discuss the applicability of Tax audit in the following cases:

• DB Pvt. Ltd. has total turnover of `125 lacs for the FY 2018-19.
• ABC & Co. (a partnership firm) engaged in trading of electronic goods having a
turnover of `165 lacs for the FY 2018-19.
• Mr. Anand Khater, a Commission Agent has commission receipts of `137 lacs
during the FY 2018-19.
• Mr. Vishal Raka, owning an Agency of Samsung Mobile for the city of Pune and
makes the turnover of `87 lacs during the FY 2018-19.

Answers:

i. Section 44AD is not applicable to company assessee, hence Limit of `2 crore is not
applicable to DB Pvt. Ltd and it has to conduct the Audit of Books of Accounts
under section 44AB of the Act for the FY 2018-19 as turnover exceeds `1 crore.
ii. Section 44AD is applicable to Partnership Firm. Thus, ABC & Co. can declare the
minimum profit @ 8% of the turnover as its turnover during the PY 2018-19 does
not exceed `2 crores. If the firm do not opt for presumptive income scheme under
section 44AD, it has to get books of accounts audited u/s 44AB of the Act.
iii. Though Section 44AD is applicable to an Individual, it is not applicable to
Commission income. In the given case, since, Mr. Anand earns the commission
 income, he cannot take the benefit of section 44AD. His total turnover during the
FY 2018-19 in respect of commission income exceeds `1 crore, he has to get his
books of accounts audited u/s 44AB of the Act.
iv. Though Section 44AD is applicable to an Individual, it is not applicable to
Commission income. In the given case, since, Mr. Vishal earns the commission
income, he cannot take the benefit of section 44AD. His total turnover during the
FY 2018-19 in respect of commission income does not exceeds `1 crore, therefore,
he need not to get his books of accounts audited u/s 44AB of the Act.

State with reasons whether an auditor conducting tax audit ‘certifies’ or ‘reports’ on
information contained in the statement of particulars attached to the tax audit report under
Section 44AB of Income-tax Act, 1961.

Answer:

Section 44AB of the Income-tax Act, 1961 requires the auditor to submit the audit report
in the prescribed form and setting forth prescribed particulars. The statement of particulars
as required in Form 3CD are required to be annexed to the main audit report. The audit
report is in two parts. The first part requires the auditor to give his opinion as to whether
or not the accounts audited by him give a true and fair view and the second part of the
report is in the form of an “Annexure” containing statement of particulars in respect of
certain specified matters. The tax auditor has to report whether particulars are true and
correct.

In this context, it is important to appreciate the distinction between the terms “report” and
“certificate”. Briefly speaking, the term “certificate” is used where the auditor verifies the
accuracy of facts while the term “report” is used in case the auditor is expressing an
opinion. Strictly speaking, having regard to the usage of the word true and correct, these
particulars require definitive information compiled from the books of account. Hence, it
can be said that an auditor conducting tax audit ‘certifies” the information contained in
the statement of particulars.

However, having regard to the distinction, it is significant to examine whether all thirty-
two clauses included in the statement of particulars are capable of being simply certified
on the basis of books of account or there are some clauses in respect of which different
auditor(s) may hold different opinion. F or instance, Clause 14 dealing with valuation of
closing stock would require the auditor to examine and opine on the basis adopted for
ascertaining the cost and, thus, to ensure that method followed for valuation of stock
results in disclosure of correct profits and gains. Similarly, Clause 18 relating to
depreciation would require the auditor to exercise judgement having regard to the facts
and circumstances of the case, etc.
Thus, there are several matters on which the auditor is required to exercise judgement
while giving his report on various amounts included in the statement of particulars. No
doubt that the auditor obtains the statement of particulars in Form No. 3CD duly
authenticated by the assessee, it does not merely involve checking the corresponding
figures with the documents and books of account but requires the auditor to exercise his
judgement which may at times lead to different figures by different persons reporting
thereon. There can also be situations leading to difference of opinion between the tax
auditor and the assessee.

Therefore, it can be said that an auditor conducting tax audit “reports” on certain
information, apart from certifying certain factual information contained in the statement
of particulars annexed to the tax audit report under section 44AB of the Income-tax Act,
1961.

Write a short note on - Accounting ratios in Form 3CD of Tax Audit.

Answer:

Accounting Ratios in Form 3CD of Tax Audit: Details regarding turnover, gross profit,
etc., for the previous year and preceding previous year should be provided as follows:

Serial Previous Preceding

Particulars Previous year
Number year
1 Total turnover of the assessee

2 Gross profit/turnover

3 Net profit/turnover

4 Stock-in-trade/turnover

5 Material consumed/finished goods produced

The details required to be furnished for principal items of goods traded or manufactured
or services rendered. These ratios have to be calculated only for assessees who are engaged
in manufacturing or trading activities. This clause is not applicable to assessees carrying
on profession. Moreover, the ratios have to be given for the business as a whole and need
not be given product wise.

‘A' Limited has paid minimum alternate tax under Section 115 JB of the Income-tax Act,
1961, for the year ended 31st March, 2016. The company wants to disclose the same as
an 'Asset' since the company is eligible to claim credit for the same. Comment.
Answer:

As per Para 6 of the Guidance Note issued by ICAI on “Accounting for credit available in
respect of MAT under the IT Act, 1961”, although MAT credit is not a deferred tax asset
under AS 22, yet it gives rise to expected future economic benefit in the form of
adjustment of future income tax liability arising within the specific period.

The Framework for the preparation and presentation of financial statements, issued by the
ICAI, defines the term ‘asset’ is a resource controlled by the enterprise as a result of past
events from which future economic benefits are expected to flow to the enterprise.

MAT paid in a year in respect of which the credit is allowed during the specified period
under the Income-tax Act, 1961is a resource controlled by the company as a result of past
event, namely the payment of MAT. The MAT credit has expected future economic
benefits in the form of its adjustment against the discharge of the normal tax liability if
the same arises during the specified period. Accordingly, such credit is an asset.

According to the Framework, once an item meets the definition of the term ‘Asset’, it has
to meet the criteria for recognition of an asset, so that it may be recognised as such in the
financial statements.
Para 88 of the Framework provide the following criteria for recognition of an asset:

An asset is recognised in the balance sheet when it is probable that the future economic
benefits associated with it will flow to the enterprise and the asset has a cost or value that
can be measured reliably.

In addition to the above, the auditor shall take a confirmation letter from the assessee for
the said facts.

Thus, if the auditor is satisfied that the probability of the company to claim the said credit
is high, it could recognise the same as an asset.

While writing the audit program for tax audit in respect of A Ltd., you wish to include
possible instances of capital receipt if not credited to Profit & Loss Account which needs
to be reported under clause 16(e) of form 3CD. Please elucidate possible instances.

Answer

The following is an illustrative list of capital receipts which, if not credited to the profit
and loss account, are to be stated under clause 16(e) of Form 3CD-
a. Capital subsidy received in the form of Government grants, which are in the nature
of promoters’ contribution i.e., they are given with reference to the total investment
 of the undertaking or by way of contribution to its total capital outlay. For e.g.,
Capital Investment Subsidy Scheme.
b. Government grant in relation to a specific fixed asset where such grant is shown as
a deduction from the gross value of the asset by the concern in arriving at its book
value.
c. Compensation for surrendering certain rights.
d. Profit on sale of fixed assets/investments to the extent not credited to the profit and
loss account.

Ploy Ltd., engaged in the leasing of goods carriage, appointed you as the tax auditor for
the financial year 2016-17. How would you deal with the following payments relating to
the leasing transactions in your tax audit report.

i. Payments of 6 invoices of ` 5,000 each made in cash to Mr. X on 4th July, 2016.
ii. Payments of 2 invoices of ` 18,000 each made in cash to Mr. Y on 5th July, 2016
and 6th July, 2016 respectively.
iii. Payment of ` 40,000 made in cash to Mr. Z on 7th July, 2016 against an invoice
for expenses booked in 2015-16.

Answer:

Reporting of Payments Exceeding ` 35,000 in Cash: Disallowance under section 40A(3)

of the Income Tax Act, 1961 is attracted if the assessee incurs any expenses in respect of
which payment or aggregate of payments made to a person in a day, otherwise than by an
account payee cheque drawn on bank or account payee draft, exceeds ` 20,000.

However, in case of payment made for plying, hiring or leasing of goods carriage, limit is
` 35,000 instead of ` 20,000.

Further, as per section 40A(3A) of the Income Tax Act, 1961, where an allowance has
been made in the assessment for any year in respect of any liability incurred by the
assessee for any expenditure and subsequently during any previous year the assessee
makes payment in respect thereof, otherwise than by an account payee cheque drawn on
a bank or account payee bank draft, the payment so made shall be deemed to be the profits
and gains of business or profession and accordingly chargeable to income-tax as income
of the subsequent year if the payments made to a person in a day, exceeds ` 20,000 (`
35,000 in case of plying, hiring or leasing of goods carriages).

However, exemption is provided under Rule 6DD having regard to nature and extent of
banking facilities available and other relevant factors.
Subsequently, under clause 21(d)(A) and 21(d)(B) of Form 3CD, the tax auditor has to
scrutinize on the basis of the examination of books of account and other relevant
documents/evidence, whether the expenditure covered under section 40A(3) and 40A(3A)
respectively read with rule 6DD were made by account payee cheque drawn on a bank or
account payee bank draft. If not, the same has to be reported under abovementioned
clauses.

Therefore, as per the provisions and explanations discussed above, the given cases are
dealt as under-

i. Payments of 6 invoices of ` 5,000 each aggregating ` 30,000 made in cash on 4 th

July, 2016 need not be reported as the aggregate of payments do not exceed `
35,000.
ii. Payments of 2 invoices of ` 18,000 each made in cash on 5 th July, 2016 and 6th July,
2016 respectively aggregating ` 36,000 need not be reported as the payment do not
exceed ` 35,000 in a day.
iii. Payment of ` 40,000 made in cash against an invoice for expenses booked in 2015-
16 is likely to be deemed to be the profits and gains of business or profession under
section 40A(3A) of the Income Tax Act, 1961. Thus, the details of such amount
need to be furnished under clause 21(d)(B) of Form 3CD.

Beam Ltd., having principal place of business in Gujarat, is engaged in the generation,
transmission, distribution and supply of electricity throughout the India. The management
of the company came to know that the provisions related to maintenance of cost records
and cost audit are applicable to the company. The company, therefore, appointed a cost
auditor for the financial year 2016-17.

The cost auditor reported certain disqualifications in Form CRA-3 of the cost audit report
to which the management of the company disagreed.

The management of Beam Ltd. ingeniously instructed its tax auditor not to reveal any of
the disqualifications related to the cost audit while filling particulars to be furnished in
Form No. 3CD contending that the disqualifications are not relevant and there is no
correlation between tax audit and cost audit as well.

As a tax auditor, how would you deal with the matter?

Answer:

Reporting Requirement for Disqualifications in Cost Audit Report: A tax auditor is

required to ascertain under Clause (37) of Form 3CD whether cost audit was carried out
and if yes, provide the details of disqualification or disagreement on any
matter/item/value/quantity as may be reported/identified by the cost auditor.

The tax auditor should obtain the copy of cost audit from the assessee. Even though the
tax auditor is not required to make any detailed study of such report, he has to take note
of the details of disqualification or disagreement on any matter/item/value/quantity as may
be reported/identified by the cost auditor. The tax auditor need not express any opinion in
a case where such audit has been ordered but the same has not been carried out.

In the given case, the cost auditor of Beam Ltd. has reported certain disqualifications in
Form CRA-3 of the cost audit report.

Therefore, the tax auditor of Beam Ltd. is required to provide the details of
disqualifications reported by the cost auditor under Clause (37) of the Form 3CD. Thus,
the contention of the management of Beam Ltd. not to reveal any of the disqualifications
related to the cost audit on the belief that there is no correlation between tax audit and cost
audit is not acceptable.

You are appointed as tax auditor of Mr. X, a practicing advocate in Agra. During the
previous year he collected Service Tax of ` 7 lakhs but utilized for personal use. The
Commissioner of Central Excise issued a show cause notice to him why the tax collected
by him is not deposited to the Government account. He appeared before the Commissioner
and stated his inability to pay the sum due to financial crisis. The proceedings are still
pending. Mr. X requests you not to disclose his Service Tax registration details while
filling particulars to be furnished in Form No. 3CD.
As a tax auditor how would you deal with this?

Answer:

Reporting Requirement Under Clause (4) of Form 3CD: Mr. X has defaulted in
payment of service tax for the previous year. Consequently, the Commissioner of Central
Excise issued a show cause notice for such non-payment of tax. The proceedings are still
pending. He also restrained his tax auditor from disclosing service tax registration details
in tax audit report.

Provisions and Explanations: A tax auditor is required to report under Clause (4) of
Form 3CD, which requires him to mention the registration number or any other
identification number, if any, allotted, in case the assessee is liable to pay indirect taxes
like excise duty, service tax, sales tax, customs duty, etc. The reporting is however, to be
done in the manner or format specified by the e-filing utility in this context.
Conclusion: Therefore, the tax auditor of Mr. X is required to furnish service tax
registration number under Clause (4) of the Form 3CD. Thus, contention of Mr. X not to
disclose the service tax details is not tenable.

“ICAI Examiner Comments”

Most of the candidates failed to visualize the requirement of the question and
answered about reporting requirement due to non-payment of GST under clause 41
instead of GST registration number under clause 4.

It does not matter how slowly you go as long you do not stop.

-Confucius