Form 3CD for tax audit was recently amended to keep pace with the changes in the income-tax law and to make things a little less irksome for the tax-payer.
"A fool and his money are soon parted. The rest of us wait till income-tax time," is a popular saying in the United States. For assessees who are under a tax audit, Form 3CD that their auditor signs gives the Assessing Officer the relevant information.
Given the areas that the form covers, it was felt that a re-scan of the form was necessary to plug the possible loopholes which could lead to the term dreaded by tax-payers "additions". The Government thus recently amended the Form to keep pace with the changes in income-tax law.
Starting off by asking the tax-payer to list each and every business he is engaged in, the Form asks for details of any changes in partners, members or their profit-sharing ratio. With an eye on gathering more capital gains tax, each and every asset that has been converted into stock-in-trade needs to be stated, along with dates and costs.
One question in the erstwhile Form sought to know about credits, drawbacks or refunds of Customs or excise duties. The revenue-generating machine, service tax, and the latest kid on the block, Value Added Tax, have also been added to this list.
Section 40(A)(3) of the Income-Tax Act rules that all payments made in excess of Rs 20,000 need to be paid either by an account payee cheque or a demand draft.
Given that the amount is miniscule in today's scenario, auditors used to disclaim that they were unable to physically verify whether all payments met this criteria.
The new Form offers a solution by asking the auditor to get a certificate from the management stating that all payments made in excess of Rs 20,000 were made either by an account payee cheque or a demand draft.
Considering that the Banking Transaction Tax looks at amounts of or above Rs 50,000, it would probably be in the fitness of things to change the limit in Form 3CD to Rs 50,000 too. Inadmissible items need to be broken up in the Form.
Questions on allowances
There were detailed questions in the previous form regarding the allowances and disallowances under Section 43B a deferred tax in its raw form. Since answers to these questions could be found elsewhere, the revised Form does away with the need to answer such a detailed questionnaire. The Income-Tax Act also frowned upon tax-payers accepting or paying loans or deposits above a particular limit otherwise than by an account payee cheque or a demand draft.
Similar to the requirement under Section 40(A)(3), this Section too talks about obtaining a certificate from the tax-payer that this has been complied with. Just in case one gets the impression that this would be applicable to payments to our friendly neighbourhood bank also, the Form goes on to exempt payments to government companies and banks.
Section 79 of the Income-Tax Act disallows certain losses in case of changes in the shareholding pattern. The Form mandates specifying such amounts.
Over the past few years, the Government has adhered to the principle of collecting taxes where it hits the most at source. Taxes deducted at source would probably exceed advance tax and self-assessment tax payments by a large margin. The Form calls for statistics on the shortfall in deduction of tax at source as also late deductions of tax and taxes deducted but not paid into the credit of the Central Government.
Annexure 1 to the Form gives codes for various types of businesses and asks for a condensed version of the profit and loss account and the balance-sheet. Annexure 2 summarises the tax that has caused some stir amongst corporates the Fringe Benefit Tax.
The tax audit report, as originally enshrined and the revised version, serves as a ready reckoner to the Assessing Officer to complete the assessment of the tax-payer. However, what one needs to assess is the usefulness of the form to ensure that assessments are completed without irking the tax-payer. There have been instances wherein mention of a few details in the tax audit report has resulted in opening a Pandora's box. With mergers and acquisitions abounding, the tax effects of these exercises could be complicated.
Maybe a general clause could be added to highlight such tax complications; this would assist both the auditor and the assessing officer.
Mohan R. Lavi
(The author is a Hyderabad-based chartered accountant.)