Clause 32(a) of the Tax Audit Report in Form 3CD requires disclosure of the brought forward losses or depreciation allowance to the extent available. The disclosure must follow a specific format, including assessment year, nature of the loss or depreciation allowance, amount as returned, losses or allowances disallowed under section 115BAA, 115BAC, or 115BAD, adjustment for withdrawal of additional depreciation, amount as assessed with references to relevant orders, and additional remarks.
Auditor’s Responsibilities under Clause 32(a)
For proper reporting under this clause, the tax auditor must consider the provisions of sections 70 to 80 of the Income Tax Act, 1961, which deal with set-off and carry-forward of various losses. The auditor is expected to examine previous income tax returns, assessment orders, and earlier Form 3CD reports to reconcile the brought-forward losses and unabsorbed depreciation. The auditor must obtain records from management that include income tax returns, assessment orders, appellate and rectification or revision orders. These records must be verified thoroughly to ensure the correctness of the data provided in the clause.
Verifying Management Records
The auditor should verify the status of the case or demand from the income tax portal. Management representations regarding carry-forward losses and depreciation must be obtained and cross-verified. If the loss returns were filed belatedly, the company or firm is not permitted to carry forward and set off certain losses, such as normal business loss, speculative business loss, capital loss, or loss from maintaining racehorses. In the case of a firm or LLP with a change in constitution, or a closely held company, carry forward of losses is restricted based on conditions outlined in sections 78 and 79. However, unabsorbed depreciation is not restricted under these sections but is governed by section 32(2).
Provisions for Undisclosed Income
According to the 2023 Guidance Note, if any undisclosed income is discovered during a search, requisition, or survey under income tax proceedings, the assessee is not allowed to set off brought forward losses or unabsorbed depreciation against such income. The tax auditor must confirm whether such a proceeding has occurred and verify if any undisclosed income has been determined. Based on the computation of income, adjustments to carry forward losses should be made accordingly. The auditor should disclose the same in the “Remarks” column of the clause or provide a note or qualification in Para 3 of Form 3CA or Para 5 of Form 3CB if necessary.
Reporting Pending Assessments and Appellate Orders
If assessment, rectification, revision, or appellate proceedings are pending, these must be disclosed in the remarks section of Clause 32(a). Where consequential orders are pending, the auditor should mention their status and potential impact if it is material. If the order has been passed, its impact must be considered while reporting under this clause.
Overview of Clause 32(b): Change in Shareholding and Section 79
Clause 32(b) requires the auditor to verify whether a change in the shareholding of the company has occurred during the year, which could result in the disallowance of carry-forward losses under section 79. The auditor must obtain the list of shareholders and the annual report of the previous year to verify any such change. If a change results in disqualification for carry forward, such losses must be appropriately reduced and reported.
Understanding Section 79 of the Income Tax Act
Section 79 applies to companies that are not publicly held. It provides that losses cannot be carried forward unless at least 51 percent of the voting power is beneficially held by the same persons who held such voting power in the year in which the loss was incurred. This rule does not affect the carry forward of unabsorbed depreciation, as it falls under section 32(2) and not under section 79.
Exceptions to Section 79 Restrictions
There are specific exceptions where section 79 does not apply. These include cases where there is a change in shareholding due to the death of a shareholder, share transfer as a gift to a relative, amalgamation or demerger of foreign companies involving Indian subsidiaries where shareholders holding 51 percent remain unchanged, and changes due to an approved resolution plan under the Insolvency and Bankruptcy Code, 2016. In such situations, even if shareholding changes, carry forward of losses may still be allowed.
Overview of Clause 32(c): Speculation Loss under Section 73
Clause 32(c) addresses whether the assessee has incurred any speculation loss under section 73 during the previous year. If such a loss exists, its details must be disclosed. Section 73 of the Income Tax Act provides that losses from a speculation business can only be set off against profits from another speculation business. Such losses can be carried forward for up to four assessment years.
Application of Section 73
Under section 73, the assessee can carry forward speculation business loss for a maximum of four years and only use it against profits from the speculation business. The auditor must verify if any such losses exist and ensure they are correctly disclosed in Form 3CD. Verification must be done through the books of account, return filings, and any supporting documentation.
Overview of Clause 32(d): Loss from Specified Business under Section 73A
Clause 32(d) pertains to losses incurred from specified business under section 35AD, as referred to in section 73A. If the assessee incurs such a loss during the year, details must be provided. Section 73A states that losses from specified businesses can only be set off against income from another specified business.
Implications of Section 73A
The loss of a specified business that cannot be set off against another specified business in the same year can be carried forward indefinitely until it is absorbed. The auditor must check the business activities of the assessee to determine whether any fall under the definition of specified business and whether such losses are appropriately recorded, reported, and justified with evidence. All disclosures must be accurate and match the assessee’s records.
Overview of Clause 32(e): Deemed Speculation Business for Companies
Clause 32(e) requires the auditor to state whether a company is deemed to be engaged in speculation business as per the explanation to section 73. If so, the auditor must disclose any speculative losses incurred during the year.
Explanation of Section 73
According to the explanation, a company engaged in buying and selling shares is deemed to be carrying on a speculation business to the extent of those transactions. However, this does not apply to companies whose gross total income consists only of income from interest, house property, capital gains, or other sources. It also does not apply to companies whose principal business is trading in shares, banking, or lending.
Auditor’s Verification for Clause 32(e)
To report correctly, the auditor should review the company’s books of account and returns to identify any income from share transactions and verify whether such income qualifies the company as being in a speculation business. Exceptions must be evaluated based on the nature of income and business activities. Any speculation losses must be reported with appropriate justification and documentation.
Auditor’s Responsibility in Reporting Deductions
The auditor is required to obtain all necessary documentation from the assessee to verify the authenticity of the deductions claimed. This includes certificates, declarations, and any notifications under the Income Tax Act or Rules. The deductions should be calculated only after verifying that all statutory conditions for eligibility have been met. These conditions may include business commencement dates, export turnover, location in a special economic zone, or specific investments made under the provisions of section 80C to section 80U. The tax auditor must also ensure the deduction amount claimed is accurate and supported by evidence.
Application in Sole Proprietorships and HUFs
In the case of an assessee who is a sole proprietor or a Hindu Undivided Family, the tax auditor will only audit the business or profession subject to section 44AB. If the assessee has other sources of income that are not subject to audit, such as rental income or capital gains, those do not form part of this audit. In such cases, only deductions claimed in connection with the audited business or professional income should be reported under this clause.
Format for Reporting Deduction Details
To maintain uniformity, the deductions must be reported in a structured tabular format that includes the section under which the deduction is claimed, qualifying amount if required, admissible deduction amount, number of consecutive years claimed, and specific remarks. This approach allows for easier verification and compliance review by tax authorities. If any deduction has been partially allowed or disallowed in previous assessments, such facts should be disclosed under the remarks section.
Caution on Conditional Deduction Allowances
Most deductions under Chapter VI-A are conditional. These include deductions for specified investments, insurance premiums, donations, and contributions to retirement funds. The tax auditor must ensure that the investments or payments were made within the prescribed timelines, in eligible instruments, and under the name of the assessee. For deductions under section 10A or 10AA, the conditions such as export turnover, profits from export business, location in SEZ, and reinvestment of profits must be met. A careful review of documentary evidence such as bank statements, investment certificates, and export invoices is essential.
Overview of Clause 34(a): TDS and TCS Provisions under Chapter XVII-B and XVII-BB
Clause 34(a) requires the auditor to report whether the assessee is liable to deduct or collect tax under Chapter XVII-B or Chapter XVII-BB of the Income Tax Act. If so, detailed reporting is required regarding TAN, nature of payment, amount paid or received, tax required to be deducted or collected, and the actual amount deducted or collected. The auditor must also report whether the deduction or collection was made at the specified rate, at a lower rate, or not at all, and whether the tax was deposited with the central government.
Understanding the Reporting Table in Clause 34(a)
The reporting table under Clause 34(a) includes multiple data points. It starts with the Tax Deduction and Collection Account Number of the assessee and includes sections under which tax was deducted or collected, such as 194C for contractor payments or 194J for professional fees. The table further includes the nature of payment, total amount of such payments, taxable amount, amount on which tax was deducted at the specified rate, tax deducted, amount taxed at a lower than the specified rate, tax on that lower amount, and details of tax not deposited. Each of these must be verified from the books of account and returns filed.
Auditor’s Verification Process for Clause 34(a)
The auditor must obtain from the assessee all quarterly TDS and TCS statements, TDS certificates, and details of deductions made. These documents should be reconciled with the books of account. Any discrepancy in rates, amounts, or non-deduction of TDS must be noted. The auditor must also verify if the amounts mentioned in this clause match the disallowances reported in Clause 21(b) of Form 3CD under section 40(a), wherever applicable. If any tax was deducted at a rate lower than prescribed, or was not deducted, the reason for such action should be verified, and its legal validity should be assessed.
Reporting Non-Compliance and Observations
If the auditor finds that the assessee has not complied with TDS or TCS provisions or has deducted or collected tax but failed to deposit it, such cases must be reported. However, late deposits are not to be reported here, only amounts not deposited at all. If there is any divergence of opinion on whether a certain payment attracts TDS or not, the auditor should state this as an observation in Clause 3 of Form 3CA or Clause 5 of Form 3CB. Such observations help convey the auditor’s position and limit responsibility in case of later scrutiny.
Importance of Matching with Clause 21(b)
Details reported under Clause 34(a) should align with disallowances made under Clause 21(b), especially those related to non-deduction or non-payment of TDS. The linkage between these clauses is critical for consistency and for avoiding queries or notices during assessment. The auditor must perform a cross-check between the TDS registers, returns filed, and books of accounts to ensure no contradiction arises between deductions claimed and TDS defaults disclosed.
Practical Considerations for Tax Auditors
The auditor must consider whether any certificates for lower deduction or non-deduction under section 197 have been obtained and apply them accurately to determine compliance. Where transporters submit a declaration under section 194C(6) or where Form 15G/15H is submitted for non-deduction, the auditor should ensure proper documentation exists and verify whether these have been recorded correctly in the TDS returns. Non-compliance in such scenarios may require an appropriate disclosure or management representation letter.
Consequences of Incorrect or Incomplete Reporting
Incorrect or incomplete disclosure under Clause 34(a) may lead to notices, penalties, or prosecution under section 271C or section 276B of the Income Tax Act. Therefore, an accurate and comprehensive verification of TDS/TCS compliance is essential for both the auditor and the assessee. Any material mismatch should be highlighted in the audit report, and the auditor should take a professional view on its significance and whether it affects the true and fair view of the financial statements.
Clause 34 – Tax Deduction at Source (TDS) and Tax Collection at Source (TCS)
Clause 34 is an important clause that focuses on the reporting of compliance with TDS and TCS provisions by the auditee. It ensures that the taxpayer has complied with Chapter XVII-B (TDS) and Chapter XVII-BB (TCS) of the Income-tax Act, 1961. This clause is divided into three sub-clauses: (a), (b), and (c). Clause 34(a) requires the tax auditor to furnish details of TDS and TCS under various sections, such as Section 192, 193, 194, etc., and Section 206C for TCS. The reporting is done in a tabular format and includes columns like Tax Deduction and Collection Account Number (TAN), Section under which tax is deducted or collected, Nature of Payment, Total amount of payment or receipt, Total amount on which tax was required to be deducted or collected, Total amount on which tax was deducted or collected at the specified rate, amount of tax deducted or collected at the specified rate, amount on which tax was deducted or collected at less than the specified rate, amount of tax deducted or collected on such amount, amount of tax deducted or collected but not deposited to the credit of the Central Government. The auditor should verify whether the auditee has complied with all the applicable TDS and TCS provisions. They should check the relevant records, such as salary registers, contractor bills, professional service bills, rent agreements, purchase and sales invoices, etc., to determine whether the auditee was required to deduct or collect tax under the relevant provisions. In cases where tax is required to be deducted or collected but has not been done, the auditor should report such non-compliance clearly in this clause.
Reporting Details and Considerations
In Clause 34(a), the reporting also includes amounts on which tax was deducted or collected at a rate lower than the specified rate due to lower deduction certificates or declarations under Sections like 197 or 197A. In such cases, the auditor must ensure that relevant certificates or declarations are obtained and are valid. The auditor should also ensure the correctness of the TAN mentioned and verify it from the TRACES portal or other reliable sources. If the auditee has branches or multiple offices with separate TANs, the reporting should be done TAN-wise. Also, where no tax has been deducted or collected, and the assessee is not required to do so as per law, the auditor should not include those amounts in the reporting table but should maintain proper documentation. If the auditee has deducted or collected tax but not deposited it to the credit of the Central Government, such instances should be highlighted, as these attract penal consequences under the Act. Clause 34(b) requires the reporting of the statement of TDS or TCS filed by the auditee. It includes furnishing the type of form (e.g., Form 24Q, 26Q, 27EQ), the due date of furnishing the statement, the actual date of furnishing, and whether the statement contains all transactions reported in Clause 34(a). This part ensures that the auditee has complied with the filing requirements of quarterly TDS/TCS statements. The auditor should obtain a copy of the filed TDS/TCS returns, acknowledgment receipts, and confirm whether all required transactions were reported. If any transaction was missed or there were errors in the original returns, the same should be documented and corrected by filing revised returns. The auditor should also reconcile the details furnished in Clause 34(a) with the returns filed to ensure consistency.
Reporting of TDS/TCS Disallowance
Clause 34(c) pertains to reporting of whether the auditee is liable to pay interest under Sections 201(1A) and 206C(7) for late deduction/collection or late payment of TDS/TCS. This helps the tax department determine the additional tax liability of the auditee. The auditor must verify from the books of accounts and challans whether any interest liability has arisen due to delay in deduction or payment of tax. If such interest is payable, the auditor must report it and also mention whether it has been paid by the auditee. If the auditee has made delayed payments but paid the interest subsequently, it should be recorded accordingly. If interest is not paid, that must also be reported. The auditor should exercise due diligence and may also use TDS software, Form 26AS, and other online tools to verify the interest calculations. In some cases, the auditee may have made representations or appeals against interest charges, and such matters should also be disclosed if they are relevant and pending. The auditor is not expected to reverify the tax department’s calculation, but to report based on available data and documentation.
Practical Challenges in Reporting Clause 34
There are several challenges faced by tax auditors in reporting Clause 34. Firstly, obtaining complete and accurate data for reporting TDS and TCS deductions can be difficult, especially if the auditee has multiple departments or lacks a centralized accounting system. Secondly, reconciling books with filed returns and ensuring that all reportable transactions are included is time-consuming and complex. Thirdly, when payments are made through various modes (cash, online, foreign remittance), tracing the nature of payment and applicable TDS section requires detailed examination. Fourth, in cases of non-residents, deduction of tax under Section 195 involves additional verification such as Form 15CA/CB, determination of residential status, and applicability of Double Taxation Avoidance Agreements (DTAAs). Fifth, interest calculation for delayed deduction or payment is sensitive and often prone to dispute. Even a few days’ delay can trigger interest, and the tax auditor must exercise caution while reporting. Finally, with frequent changes in TDS/TCS provisions anthe d the addition of new sections like 194N, 194Q, and 206C(1H), keeping track of applicable sections during the financial year is a significant task. Thus, Clause 34 requires meticulous work and a strong understanding of practical taxation.
Reliance on External Sources and Disclosures
Tax auditors may rely on external sources like Form 26AS, AIS (Annual Information Statement), and TRACES reports for verifying TDS and TCS compliance. While such reliance is permitted, the auditor must corroborate these with internal books and documentation. If there are discrepancies between 26AS and books, these should be resolved and explained appropriately. Additionally, the auditor should maintain working papers for all calculations, certificates, acknowledgments, reconciliations, and management representations. These are essential to support the conclusions drawn in Clause 34 and to defend the position in case of a future inquiry or notice. If the auditee has provided any representations regarding non-deduction due to thresholds, exemptions, or legal opinions, these should be documented. The auditor should evaluate whether the reliance placed on such representations is justified and should qualify the report if any material misstatement is observed. Transparency and full disclosure are vital, and where the auditor is not able to obtain sufficient information, appropriate remarks or qualifications should be included in Form 3CA/3CB and 3CD.
Clause 34 – Compliance with TDS and TCS Provisions
Clause 34 is subdivided into three main sections: (a), (b), and (c). These sub-clauses relate to Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) compliance.
Clause 34(a): Details of TDS/TCS Liability and Deduction
This sub-clause requires the auditor to report on:
- Whether the assessee is required to deduct or collect tax under Chapter XVII-B or Chapter XVII-BB.
- If yes, whether they have deducted or collected such tax and deposited it into the government account on time.
The auditor must provide the following information in a tabular format:
- Section under which tax was deductible/collectible (e.g., 194C, 194J, 206C)
- Nature of payment (e.g., professional fees, contract payments)
- Total amount of payment/receipt
- Amount on which tax was required to be deducted/collected
- Amount on which tax was deducted/collected
- The rate at which tax was deducted/collected
- Amount of tax deducted/collected..
- Amount of tax deposited to the credit of the Central Government
- Date of payment to the credit of the Central Government
Key Considerations:
- The auditor is required to verify and match the data with the books of accounts and TDS returns filed (Form 24Q, 26Q, 27Q, etc.).
- Details must be compiled section-wise and nature-wise for all applicable transactions.
- Any short deduction or late payment must be reported, which may lead to disallowance under section 40(a)(i.
Clause 34(b): Statements of TDS/TCS
This sub-clause requires the following details:
- TAN (Tax Deduction and Collection Account Number)
- Type of Form filed (e.g., 24Q, 26Q, 27EQ)
- Quarter for which the return was filed
- Whether the statement of TDS/TCS was filed on time
- If not, details of the delay and consequences
Key Aspects:
- Cross-verification with the TRACES portal and acknowledgment receipts is important.
- Delay in filing TDS/TCS returns may lead to late filing fees under section 234E and penalty under section 271H.
Clause 34(c): Interest Payable for Delay or Non-compliance
This sub-clause mandates the reporting of interest payable under the following provisions:
- Section 201(1A) for delay in deduction/payment of TDS
- Section 206C(7) for delay in collection/payment of TCS
The auditor must report:
- Amount of interest payable
- Section under which interest is payable
- Whether interest has been paid or not
- Period of delay
Practical Insights:
- Interest under section 201(1A) is calculated at 1% per month for non-deduction and 1.5% for delay in remittance.
- Even if the interest is paid by the assessee, it should be disclosed.
Documentation and Audit Approach
Auditors are required to maintain robust documentation supporting each disclosure made under Clauses 32 to 34. The following documents should be verified and retained:
- Agreement copies for Clause 32 disclosures
- Consolidated related party transaction statements for Clause 33
- TDS registers and challans
- Form 26AS and TDS reconciliation statements
- Acknowledgment copies of TDS returns
- Working papers for interest computation
An effective audit trail, working papers, and reconciliation with statutory filings are essential for transparency and to ensure the audit stands scrutiny by the tax department.
Conclusion
Clauses 32 to 34 of the Tax Audit Report under Form 3CD are of significant importance, as they cover critical aspects of the taxpayer’s compliance with various statutory provisions. Each clause demands meticulous attention from the tax auditor to ensure that disclosures made are both accurate and complete.
Clause 32 relates to the financial impact of carried forward losses and unabsorbed depreciation in cases of business reorganization and requires clarity and precision in reporting, particularly about amalgamations and demergers. Clause 33 focuses on the identification and disclosure of transactions with related parties, a key area subject to scrutiny for potential transfer pricing and tax avoidance issues. Clause 34, which spans multiple sub-clauses, comprehensively addresses the assessee’s compliance with TDS and TCS provisions, including timely deductions, payments, filing of statements, and interest liability.