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The Income Tax Act, 1961, requires certain assessees to have their accounts audited under Section 44AB. This audit is essential for verifying compliance with the Act and ensuring that the financial statements fairly represent the business transactions. The audit report is filed electronically on the Income Tax Department’s portal through Form Nos. 3CA or 3CB, along with Form 3CD. Part B of Form 3CD contains various clauses that detail specific disclosures needed from the assessee. Clause 30 is one such important provision focusing on borrowings and repayments on hundi made outside banking channels.

Background and Purpose of Clause 30

Clause 30 requires disclosure of any amount borrowed or repaid on hundi (a traditional promissory note) that is not settled through an account payee cheque or draft. The key objective is to track such transactions to reduce the possibility of unaccounted or undisclosed cash flows that evade taxation. The clause derives its mandate from Section 69D of the Income Tax Act, which deems such borrowings or repayments as income in the year they occur, unless otherwise accounted for.

In many business contexts, hundi transactions are common, especially in informal sectors or where ease and speed of money transfer take precedence over formal banking methods. However, such cash-based dealings have potential tax evasion risks. Therefore, this clause mandates detailed reporting and verification of such borrowings and repayments.

What Constitutes Borrowing on Hundi?

A hundi is a negotiable instrument generally drawn in a vernacular language. It functions somewhat like a promissory note but may not always comply with formal banking regulations. When an assessee borrows money by issuing a hundi or repays such an amount without using an account payee cheque or bank draft, the transaction falls within the ambit of Clause 30.

The law specifically focuses on amounts borrowed or repaid otherwise than by account payee cheque, emphasizing the importance of banking instruments in providing a verifiable trail of transactions.

Details to be Disclosed Under Clause 30

The assessee must provide a detailed statement listing all such borrowings and repayments on hundi during the previous year. The following particulars need to be furnished:

• Name of the lender or person from whom amount was borrowed or to whom repayment was made

• Permanent Account Number (PAN) of that person

• Complete address, including address lines, city, state, and pincode

• Amount borrowed

• Date on which the amount was borrowed

• Amount due, including interest

• Amount repaid

• Date of repayment

This exhaustive disclosure helps the tax authorities understand the nature and extent of cash borrowings and repayments outside banking channels.

Section 69D Explained

Section 69D serves as the legal foundation for Clause 30. It provides that any amount borrowed on hundi or repaid otherwise than by account payee cheque shall be treated as income of the assessee for the relevant financial year. The rationale behind this provision is to discourage cash transactions which evade tax scrutiny.

Importantly, once an amount borrowed on hundi has been deemed income in the year it was borrowed, repayment of that amount in subsequent years (if made outside banking channels) will not be considered again as income. However, any interest paid on such repayments must still be reported and taxed accordingly. This provision ensures that assessees cannot avoid tax by cycling the same cash amount repeatedly without transparency.

Auditor’s Responsibilities Regarding Clause 30

The auditor plays a critical role in verifying the disclosures under Clause 30. They must:

• Obtain a complete list of all borrowings and repayments on hundi from the assessee

• Verify these details with the books of accounts, including cash books, loan registers, and bank statements

• Cross-check the amounts borrowed and repaid with physical evidence such as hundi instruments or agreements, if available

• Assess whether the transactions are recorded properly and if they comply with Section 69D

If the auditor cannot obtain satisfactory evidence for the borrowings or repayments claimed, they should seek a written management representation to confirm the accuracy and completeness of such disclosures. The auditor’s verification safeguards the credibility of the financial statements and helps prevent under-reporting of income.

Practical Challenges in Auditing Hundi Transactions

Hundi transactions often take place informally, and documentation may be inadequate or missing. This presents challenges to auditors trying to substantiate such borrowings or repayments.

• In some cases, parties involved may not have formal PANs or addresses, complicating the disclosure requirements

• Absence of formal agreements may require reliance on verbal confirmation or management representations

• Cash transactions are inherently harder to track and verify than those routed through banks

Despite these challenges, auditors must apply professional skepticism and diligence in identifying potential hundi borrowings and repayments.

Treatment of Repayments of Previously Declared Hundi Borrowings

If an amount borrowed on hundi was already declared as income in an earlier financial year under Section 69D, its repayment in the current year through cash or other non-account payee cheque modes generally does not require fresh reporting. Only the interest paid on such repayments is subject to reporting and tax.

This exception avoids double taxation on the same amount while ensuring interest income is not overlooked.

Importance of Bank Channels in Borrowings and Repayments

The law promotes the use of account payee cheques and drafts to create a transparent and traceable record of borrowings and repayments. These banking instruments provide documentary evidence that reduces the risk of tax evasion and facilitates audit verification.

Non-banking transactions, such as those on hundi, lack this transparency and are therefore scrutinized heavily under Clause 30 and Section 69D. Assessees are encouraged to route borrowings and repayments through banking channels to avoid adverse tax implications.

Impact on Assessees and Compliance Tips

For businesses and professionals, adherence to Clause 30 is critical to avoid penalties and adverse audit opinions. Assessees should:

• Maintain detailed records of all borrowings and repayments, including the mode of payment

• Ensure that borrowings and repayments on hundi are minimized and preferably made through account payee cheques

• Obtain PAN and address details of lenders and creditors for disclosure purposes

• Provide full and accurate information to auditors to facilitate smooth audit procedures

• Understand the tax implications of non-compliance with Section 69D

Being proactive in compliance reduces risks and improves the credibility of financial reporting.

Case Scenarios and Illustrations

Consider a business that borrows ₹10 lakh on a hundi during the financial year and repays ₹5 lakh in cash without an account payee cheque. The entire ₹10 lakh borrowed would be deemed income under Section 69D in the year of borrowing unless it was already declared earlier. The repayment of ₹5 lakh in cash needs to be reported, but if it was already declared, only the interest portion on the repayment will be reported as income.

In another scenario, a company repays a loan amount borrowed on hundi in the previous year through account payee cheque. Since the repayment is through banking channels, Clause 30 requires no reporting on the repayment, provided the borrowing was declared as income earlier. Such examples illustrate the importance of understanding the timing and mode of borrowings and repayments for correct reporting.

Role of Management Representation Letter

When documentary evidence is insufficient, the auditor must seek management representation. This letter is a formal declaration by management regarding the completeness and correctness of the disclosures related to borrowings and repayments on hundi.

It provides a safeguard for the auditor against potential misstatements due to lack of evidence but does not substitute the need for obtaining sufficient audit evidence where possible.

Primary Adjustment to Transfer Price

In the realm of international taxation, transfer pricing regulations play a critical role in ensuring that cross-border transactions between associated enterprises are conducted at arm’s length. The Income Tax Act, 1961, incorporates provisions to prevent profit shifting and tax avoidance through manipulation of prices charged in related party transactions.

Clause 30A of Form 3CD specifically focuses on the disclosure of any primary adjustment made under Section 92CE(1) of the Act. The audit report ensures transparency in reporting transfer pricing adjustments and their implications, especially concerning the repatriation of excess money held abroad by associated enterprises.

Understanding Transfer Pricing and Primary Adjustments

Transfer pricing refers to the pricing of goods, services, intangibles, or financing between enterprises that are related or associated. The arm’s length principle mandates that such transactions should be priced as if the parties were unrelated, ensuring that profits are not artificially shifted to low-tax jurisdictions.

Sometimes, tax authorities or the assessee themselves identify discrepancies where the declared transfer price does not reflect the arm’s length price. Such discrepancies lead to adjustments known as primary adjustments.

What is a Primary Adjustment?

A primary adjustment is a recalibration of the transfer price to align it with the arm’s length principle. It results in an increase in the income or reduction in the loss of the assessee in India. Primary adjustments can arise from several sources, including:

• Voluntary adjustments made by the assessee while filing returns

• Adjustments accepted by the Assessing Officer during assessments

• Outcomes of Advance Pricing Agreements (APAs)

• Adjustments under Safe Harbour Rules

• Resolutions under Mutual Agreement Procedures (MAPs) with foreign tax authorities

These adjustments must be disclosed under Clause 30A along with detailed particulars.

Section 92CE Overview

Section 92CE(1) mandates that an assessee must disclose whether a primary adjustment has been made. This section also introduces the concept of a secondary adjustment when excess money held by an associated enterprise outside India is required to be repatriated.

The key intention is to prevent the artificial shifting of profits and to ensure that if excess funds are held abroad due to primary adjustments, such funds are brought back to India within a specified time frame to avoid interest charges and additional tax complications.

Details to be Reported Under Clause 30A

Clause 30A requires the assessee to disclose the following information:

• Whether a primary adjustment has been made (Yes/No)

• The specific clause under subsection (1) of Section 92CE under which the adjustment is made

• Amount of the primary adjustment

• Whether excess money held by the associated enterprise needs repatriation as per subsection (2) of Section 92CE (Yes/No)

• If repatriation is required, whether it was done within the prescribed time (Yes/No)

• If repatriation was not done timely, the amount of imputed interest on the un-repatriated excess money

• Expected date of repatriation, if applicable

Providing these details is essential for both compliance and to avoid potential penalties related to secondary adjustments.

When Does a Primary Adjustment Occur?

Primary adjustments typically occur in the following situations:

• The Assessing Officer, during transfer pricing assessments, determines that the declared price is not at arm’s length and makes an upward adjustment to the income.

• The assessee voluntarily revises the declared price or income to align with arm’s length principles.

• APAs or MAPs conclude with a revision of transfer prices and income allocation.

• Application of Safe Harbour Rules results in adjustments in pricing or profit margins.

Such adjustments lead to an increase in taxable income, which must be reported comprehensively under Clause 30A.

Secondary Adjustment Explained

A secondary adjustment becomes relevant when the primary adjustment results in excess money being held outside India by an associated enterprise. The Indian tax laws require such excess money to be repatriated within 90 days from the filing of the income tax return.

If the repatriation is not completed within this time frame, the amount is treated as an advance from the associated enterprise, and interest is imputed on this amount. This interest is to be computed in accordance with Rule 10CB of the Income Tax Rules.

This provision aims to bring back excess profits to India and reduce the scope for holding surplus funds abroad to defer or avoid tax.

Exemptions from Secondary Adjustment

The secondary adjustment provisions are not applicable in the following cases:

• Where the primary adjustment is less than ₹1 crore for the relevant financial year

• Where the primary adjustment pertains to assessment years before April 1, 2016

These exemptions help ease compliance burdens on smaller adjustments and older years.

Calculation of Imputed Interest on Un-repatriated Amounts

If the excess money is not repatriated timely, the assessee is liable to pay imputed interest. The calculation involves:

• Taking the amount of excess money held outside India as a base

• Applying the prescribed interest rate, which is generally the higher of the State Bank of India’s (SBI) base rate or London Inter-Bank Offered Rate (LIBOR) plus a margin

• Considering the period for which the money remained unrepatriated

The auditor is expected to verify the correctness of this imputed interest calculation and confirm its adherence to Rule 10CB.

Auditor’s Role in Clause 30A Reporting

The auditor must exercise thorough scrutiny to confirm the accuracy of disclosures related to primary and secondary adjustments:

• Verify if a primary adjustment has been made during the year under review

• Check the relevant supporting documentation such as transfer pricing study reports, APA agreements, and assessment orders

• Confirm whether the excess money, if any, has been repatriated within the stipulated 90-day period

• Review the computation of imputed interest on any un-repatriated excess funds

• Assess whether the disclosures in the tax audit report accurately reflect the facts and figures

The auditor’s validation ensures compliance with transfer pricing provisions and helps the tax authorities track cross-border fund movements.

Practical Challenges in Reporting Clause 30A

The nature of transfer pricing adjustments and repatriation requirements poses certain challenges:

• Tracking the exact amounts of excess money held abroad may be complex, especially for multinational enterprises with multiple associated enterprises

• The timing of repatriation and the corresponding audit timeline may not always coincide, requiring careful coordination

• Computing imputed interest demands precision and knowledge of applicable rates and rules

• Maintaining documentation such as transfer pricing reports, APA agreements, and correspondence with tax authorities is vital but can be voluminous and complex

Despite these difficulties, accurate reporting under Clause 30A is crucial to avoid penalties and maintain tax compliance.

Interaction with Advance Pricing Agreements (APA) and Mutual Agreement Procedure (MAP)

When transfer pricing adjustments arise from APAs or MAPs, the reporting under Clause 30A must include:

• The nature of the adjustment and the section under which it is made

• Details of any excess money resulting from these agreements

• Compliance with repatriation requirements

APAs provide certainty on transfer pricing, but any primary adjustments emerging from these agreements still require disclosure. Similarly, MAP outcomes that result in income adjustments must be transparently reported.

Safe Harbour Rules and Their Impact on Clause 30A

Safe Harbour Rules provide simplified compliance options for certain specified industries or transactions, allowing the use of prescribed margins or prices without detailed transfer pricing analysis.

If a primary adjustment arises due to Safe Harbour Rules, the details must be disclosed in Clause 30A. These rules help reduce disputes but do not eliminate the need for accurate reporting and repatriation compliance.

Disclosure Format and Presentation

Form 3CD requires a clear Yes/No response on whether a primary adjustment has been made, followed by detailed particulars if the answer is yes. This includes:

• Specific clause under Section 92CE(1)

• Amount of primary adjustment

• Whether excess money is held abroad requiring repatriation

• Status and timing of repatriation

• Imputed interest details, if applicable

Providing these details in the prescribed format enables the Income Tax Department to monitor compliance effectively.

Consequences of Non-Compliance

Failure to disclose primary adjustments or repatriate excess money as per Section 92CE can lead to:

• Penalties under the Income Tax Act

• Interest liabilities on un-repatriated amounts

• Adverse audit reports impacting the credibility of financial statements

• Increased scrutiny from tax authorities, including transfer pricing audits and litigation

Therefore, both the assessee and auditor must ensure that the disclosures are complete, accurate, and timely.

Illustrative Example

Suppose an Indian company enters into an international transaction with its associated enterprise abroad. The declared transfer price results in income being understated by ₹2 crore. During assessment, a primary adjustment of ₹2 crore is made and accepted.

If the associated enterprise holds excess money of ₹2 crore outside India, it must repatriate this amount within 90 days from filing the return. If repatriation is delayed by 30 days, the assessee must compute imputed interest on ₹2 crore for those 30 days.

This entire scenario must be fully disclosed under Clause 30A in the tax audit report, including the adjustment amount, repatriation status, and interest computation.

Best Practices for Assessees and Auditors

To ensure smooth compliance with Clause 30A, the following practices are recommended:

• Maintain detailed documentation supporting transfer pricing declarations and adjustments

• Monitor the timing and amounts of repatriations closely

• Liaise with tax advisors and auditors early to address complex transfer pricing matters

• Prepare accurate computations of imputed interest where required

• Review and update internal controls on transfer pricing and foreign transactions regularly

These steps facilitate accurate reporting and reduce the risk of non-compliance.

Clause 30B: Interest or Similar Nature Expenditure Exceeding ₹1 Crore Under Section 94B(1)

Interest expenses are a common financial cost for businesses. However, to curb tax avoidance through excessive interest payments to associated enterprises, section 94B introduces restrictions on interest deductions. Clause 30B mandates detailed disclosure where such interest or similar expenditure exceeds ₹1 crore.

Background and Purpose of Section 94B

Section 94B was introduced as an anti-avoidance measure to limit interest deduction on borrowing from non-resident associated enterprises. The intent is to prevent erosion of the Indian tax base through excessive interest payments that artificially reduce taxable income in India.

Scope of Interest or Similar Expenditure Covered

Interest or similar expenditure under this section includes:

• Interest payable on borrowings or debts

• Finance costs such as discount or premium on securities

• Finance component of lease rentals

• Other expenses analogous to interest or finance costs

This comprehensive definition ensures all forms of interest-like payments are scrutinized.

Threshold Limit and Applicability

The deduction of interest is restricted only if the total interest or similar expenditure paid or payable to non-resident associated enterprises exceeds ₹1 crore in a financial year.

The limitation applies on the lower of:

• 30% of EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization), or

• Interest expenditure paid to the associated enterprises

Thus, the deductible interest is capped, with the excess being disallowed as a deduction.

Components of Disclosure Under Clause 30B

The tax audit report must include the following details:

• Total interest or similar expenditure incurred during the year

• EBITDA for the year

• Interest expenditure exceeding 30% of EBITDA

• Interest expenditure brought forward from earlier years and carried forward to subsequent years along with the relevant assessment years and amounts

Calculation of EBITDA for Interest Limitation

EBITDA is computed as:

Profit before tax

• Interest expense

• Depreciation and amortization

This figure forms the base for calculating the 30% threshold applicable under section 94B.

Treatment of Interest Brought Forward and Carried Forward

If any interest disallowed in previous years under section 94B is carried forward, it can be claimed as a deduction in subsequent years, subject to the same section’s provisions. The details of such brought-forward interest must be disclosed in the audit report, including the assessment year in which it arose and the amount carried forward.

Aggregation of Interest Expenses

The assessee must clarify whether the ₹1 crore threshold and the 30% EBITDA limit are applied in aggregate for all non-resident associated enterprises or separately for each.

This determination can significantly affect the quantum of disallowed interest.

Auditor’s Role and Verification Process

The auditor must:

• Verify the total interest or similar expenditure paid or payable to non-resident associated enterprises

• Confirm the correctness of EBITDA calculation based on financial statements

• Ensure the interest limitation has been correctly applied

• Review interest disallowance and carry-forward computations from prior years

• Ascertain proper disclosure of all details as mandated

Accurate verification ensures compliance and prevents potential tax disputes.

Practical Challenges and Considerations

Certain complexities often arise in applying section 94B:

• Correctly identifying non-resident associated enterprises and classifying interest payments

• Distinguishing between interest and other financial charges

• Calculating EBITDA with adjustments as per accounting standards

• Maintaining records of carry-forward interest amounts and reconciliation

• Dealing with cases where loans and interest arise from complex intra-group financing arrangements

These challenges require thorough documentation and professional judgment.

Clause 30C: Reporting of Impermissible Avoidance Agreements (IAA)

Introduced through a notification in 2018, Clause 30C of Form 3CD requires disclosure of any impermissible avoidance agreements identified by tax authorities. This clause enhances transparency and strengthens the regulatory framework against tax avoidance arrangements.

Understanding Impermissible Avoidance Agreements

Impermissible Avoidance Agreements refer to arrangements that have been declared by the Principal Commissioner, Commissioner, or an Approving Panel to be avoidance schemes lacking commercial substance or designed primarily to obtain tax benefits.

The concept aligns with anti-avoidance principles and provisions under Chapter X-A of the Income Tax Act, which deal with avoidance of tax through certain arrangements.

Applicability Timeline

Although introduced in 2018, Clause 30C became applicable for tax audit reports filed after March 31, 2022. Its retroactive nature requires auditors and assessees to carefully examine past years for any identified avoidance agreements.

Reporting Requirements Under Clause 30C

The auditor must report if:

• Any earlier year arrangements were declared as IAAs by the Principal Commissioner, Commissioner, or Approving Panel, or

• Any references have been made for declaring arrangements as IAAs, even if a final declaration has not been made

If any transactions related to these IAAs occurred during the audit year, the auditor must disclose:

• The nature of such transactions

• The aggregate tax benefit derived by all parties involved in the arrangement

Dealing with Incomplete Information

If the auditor is unable to ascertain the aggregate tax benefit due to lack of information, this fact must be disclosed explicitly in the audit report.

Transparency about incomplete information helps avoid misrepresentation and signals the need for further inquiry.

Responses to Show Cause Notices and Appeals

Auditors must also consider and report:

• Responses submitted by the assessee to show cause notices related to IAAs

• Appeals filed concerning IAAs and the outcomes of such appeals

Including these details offers a holistic view of the status of impermissible avoidance agreements and related tax positions.

Significance of Clause 30C for Assessees

Reporting IAAs impacts an assessee by:

• Providing clarity on exposure to anti-avoidance measures

• Facilitating compliance with audit and disclosure norms

• Preparing the assessee for potential tax adjustments and litigation risks

• Signaling transparency to tax authorities

It is vital for companies to maintain records and correspondence relating to any avoidance arrangements identified by tax authorities.

Auditor’s Responsibilities Under Clause 30C

The auditor must:

• Inquire with management and review records to identify any IAAs or references thereto

• Verify if any related transactions took place during the year under audit

• Collect details of tax benefits claimed or received

• Disclose the required information accurately in Form 3CD

• Ensure that any inability to obtain complete information is also reported

Diligence in these procedures is crucial to uphold audit quality and compliance.

Challenges Faced in Reporting IAAs

Reporting under Clause 30C poses challenges such as:

• Determining whether an arrangement qualifies as an IAA, especially if only references or ongoing investigations exist

• Quantifying tax benefits in complex multi-party transactions

• Obtaining timely and accurate information from management, particularly if disputes are in litigation or appeals

• Handling the sensitivity and confidentiality surrounding avoidance agreements

These factors require auditors to exercise professional skepticism and judgment.

Interaction with Other Anti-Avoidance Provisions

IAAs relate closely to other anti-avoidance measures, including:

• General anti-avoidance rules (GAAR) under Chapter X-A

• Transfer pricing adjustments and documentation

• Thin capitalization and interest limitation rules

• Specific anti-avoidance rules under various sections

A comprehensive understanding helps auditors identify potential IAAs and fulfill their reporting obligations effectively.

Practical Illustration of Interest Limitation and IAA Reporting

Consider a multinational company that incurs ₹5 crore as interest on borrowings from its foreign associated enterprise. The EBITDA computed for the year is ₹10 crore.

Under section 94B, only 30% of ₹10 crore, i.e., ₹3 crore, is allowed as interest deduction. The excess ₹2 crore interest must be disallowed and carried forward.

Further, suppose tax authorities had earlier declared an arrangement involving this company as an impermissible avoidance agreement. The auditor needs to disclose these details in Clause 30C, including any tax benefits derived from such arrangement and related communications with tax authorities.

Compliance Tips for Taxpayers and Auditors

To navigate Clause 30B and Clause 30C requirements smoothly, consider the following tips:

• Maintain clear records of interest payments, including payees and nature of expenses

• Regularly reconcile financial statements to ensure EBITDA and interest figures are accurate

• Track carry-forward interest amounts meticulously for subsequent year adjustments

• Engage with tax advisors to assess exposure to IAAs and maintain up-to-date knowledge of relevant cases

• Implement robust internal controls to identify transactions potentially falling under IAAs

• Ensure timely and transparent disclosures in Form 3CD with supporting documentation

These measures facilitate compliance and minimize risks of penalties or adverse audit findings.

Conclusion 

The reporting requirements under Clauses 30, 30A, 30B, and 30C of Form 3CD reflect the Income Tax Department’s focused efforts to enhance transparency and tighten compliance in areas prone to tax avoidance and complex transactions. Each clause addresses a specific aspect whether it is borrowings through hundi, transfer pricing primary and secondary adjustments, interest limitation on payments to non-resident associated enterprises, or impermissible avoidance agreements.

For auditors, understanding the nuances of these provisions is crucial to effectively perform tax audits and provide accurate, compliant disclosures. Their role goes beyond mere verification of figures to include detailed examination of transactions, cross-checking records, and ensuring that appropriate management representations and documentation support the disclosures.

For assessees, proactive compliance and thorough documentation can reduce audit risks, avoid penalties, and support smoother interactions with tax authorities. Maintaining transparency in borrowing transactions, transfer pricing adjustments, interest expenses, and any avoidance agreements ensures alignment with the arm’s length principle and the anti-avoidance framework.

Ultimately, these clauses are integral to safeguarding the tax base and promoting fair taxation. A thorough grasp of their requirements and challenges helps taxpayers and auditors navigate the evolving regulatory landscape efficiently and uphold the principles of integrity and accountability in tax reporting.