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Disclaimer for Clause No. 44 of the Tax Audit Report: Confusion & Clarification
The due date for the income tax return is over. Now, the next is the due date for uploading the audit report followed by the due date of filing income tax returns for such assessee whose accounts are required to be audited under the Income Tax Act or under any other Act.
For Assessee whose account is required to be audited under the Income Tax Act due to either turnover criteria or due to profit criteria, the real time is ahead. Under the Income Tax Act, 1961, every person carrying on business is required to get his accounts audited, if his total sales, turnover or gross receipts, in business exceed Rs. 1 crore in any previous year. The Tax Audit turnover threshold limit has been increased to Rs. 5 crores for business under section 44AB where at least 95 per cent turnover is made on digital transactions. This turnover limit for compulsory tax audit has been further increased to Rs. 10 crore vide Finance Act, 2021. In the case of a person carrying on the profession, he is required to get his accounts audited, if his gross receipt in the profession exceeds Rs. 50 lakh in the previous year. Further, few persons are also required to get the accounts audited even if the turnover is less than Rs. 2 Cr in case of business class assessee and Rs. 50 Lakh for professionals if the income offered for taxation is below the prescribed percentage of turnover / receipts. It may be recalled that the finance Act, 2020 has made changes in the due date of filing the tax audit report as one month prior to the due date for furnishing the return of income under section 139(1). This has been done to give the taxpayers the income tax return forms in a “pre-filled” manner.
The new clause (i.e., Clause No. 44) in the Tax Audit Report in Form No. 3CD has started creating panic in the mind of the taxpayers. This clause deals with reporting requirements related to GST expenditure. & is applicable from the assessment year 2022-23 i.e., FY 2021-22. Form 3CD of Tax Audit Report was originally amended in July 2018 by Notification No. 33/2018 dated 20.07.2018 to incorporate the following two clauses:
- Clause 30C on reporting of GAAR transactions and Clause 44 on reporting of GST transactions as under:
30C. (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:—
(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:
- Clause 44 to give the details of expenditure on the basis of applicability of GST as under:44. Break-up of total expenditure of entities registered or not registered under the GST:
||Total amount of Expenditure incurred during the year
||Expenditure in respect of entities registered under GST
||Expenditure relating to entities not registered under GST
|Relating to goods or services exempt from GST
||Relating to entities falling under composition scheme
||Relating to other registered entities
||Total payment to registered entities
Clause 44 of Form 3CD requires reporting of the total amount of expenditure incurred during the previous year vis a vis those Relating to goods or services exempt from GST, those related to entities falling under composition scheme vis a vis those related to entities falling under registered dealer categories vis a vis Expenditure relating to entities not registered under GST.
One may carefully note that this new clause is applicable to all the assessees whether the assessee is registered under GST or not. Further, the clause is applicable even for assessees who are required to get the books of accounts audited under presumptive scheme of taxation. Further, reporting under this clause is required for all the expenditure-revenue expenditure as well as capital expenditure. Even the purchase details will also form part of these reporting requirements.
The said notification of 2018 was to come into effect from 20.08.2018. Representations were done to defer it due to the genuine hardships of the taxpayers as the time was too less to ensure the compliance and the books of account were not maintained keeping this compliance in mind. As a result, CBDT issued an Order under section 119 of the Act vide Circular No. 06/2018 dated 17th August 2018, to keep the operation of Clause 44 in Form 3CD in abeyance till 31st March, 2019. In May 2019, the CBDT has once again deferred the implementation of clause 44 of Form 3CD till March 31, 2020 to make it applicable from April 1, 2020 vide CBDT Circular No. 09/2019 dated 14.05.2019. Amidst Covid-19, CBDT for the third time extended the applicability date of Clause 44 of Form 3CD vide Circular No. 10/2020 dated 24.04.2020 till March 2021. Subsequently for the fourth time, the CBDT vide an Order dated 25th March, 2021 deferred and postponed the reporting requirement of Clause 44 related to GST in Form 3CD of Tax Audit Report from 31.03.2021 to 31st March, 2022 vide a Circular No. 05/2021 dated 25.03.2021.
Thereafter, no Order of the Board extending the applicability of Clause 44 of Form 3CD from 31.03.2022 is issued.
In short, the chances of further deferment of clause 44 is now looking meager.
One school of thought doubts that the new clause will be applicable for all the reports pertaining to AY 2023-24 and onwards and not applicable for the reports signed for the AY 2022-23.
To understand this, one needs to visit the contents of the Circular No. 5/2021 dated 25.03.2021 which has deferred the applicability of clause 44 in 2021. It reads as under:
“In view of the prevailing situation due to COVID-19 pandemic across the country, it has been decided by the Board that the reporting under clause 30C and Clause 44 of the Tax Audit Report shall be kept in abeyance till 31st March, 2022.”
The above extension and words are not very clear to clarify the above issue. However, one may note that the CBDT Order of 2018 wherein the date was extended for the first time clearly used the below words:
“reporting under the proposed clause 30C and proposed clause 44 of the Tax Audit Report shall be kept in abeyance till 31st March, 2019. Therefore, for Tax Audit Reports to be furnished on or after 20th August, 2018 but before 1st April, 2019, the tax auditors will not be required to furnish details called for under the said clause 30C and clause 44 of the Tax Audit Report.”
In short, as per the original proposal, all the TAR furnished on or after 1st April, 2019 shall be required to be furnished with clause 44.
The complete reading of all the orders right from 2018 to last one in 2021 will convey just one thing that all the reports furnished on or after 01.04.2022 will be subject to the new clause 44.
Now, it cannot be pleaded that the assessee was not given sufficient time4 to maintain the required details. It has been more than 4 years that the proposal of reporting has been in the public domain. The assessee was ought to have maintained the required details.
The question arises as to whether the auditor can make a disclaimer in the audit report that the required details are not maintained by the assessee and so the auditor is unable to express an opinion on the same or provide the required details.
The fact remains, without the required details being inbuilt in the system, the auditor would not be able to make the declaration. In view of this, few professional believes that the following disclaimer can be given by the auditor in the tax audit reports:
- No details as required by clause 44 is separately maintained by the assessee and in absence of this, we are unable to comment.
- Assessee informed that the required information under clause 44 has not been maintained in absence of any disclosure requirements under the GST law. Further, the software of the assessee is not configured to generate reports on information asked for under this clause. In view of above, we are unable to verify and report the desired information under this clause.
- We have been informed by the assessee that the information required under this clause has not been maintained by it in absence of any disclosure requirements under the GST Act.
- It is not possible for us to determine the breakup of total expenditure of entities registered or not under the GST as necessary information is not maintained by the assessee In its books of accounts.
Further, the standard accounting software used by the assessee is not configured to generate any report in respect of such historical data in absence of any prevailing statutory requirements regarding the requisite information in this clause.
In view of above, we are unable to verify and report the desired information in this clause.
- In absence of the proper system of assessee, we are unable to comment and give the details as required in Clause 44.
One may recall that the tax audit report also requires the details like payment or receipt without an account payee instruments. Similar disclaimers were commonly given on for it.
Even the disclosure of prior period items, ICDS, Inventory valuation, etc was also required in the tax audit report wherein almost similar common disclaimer are given that the professional that the assessee is not having the due system and working so as to verify and make the disclosure.
Now, the most important part which may be noted is that clause 44 doesn’t have the appropriate place to make the above “Disclaimer”. The place provided in numerous private software is for working purposes and it doesn’t get uploaded at the income tax portal. So, putting it in the software in clause 44 will be of no use if not placed properly. The best place to make the disclosure & disclaimer would be in Form No. 3CA or Form No. 3CB wherein the disclosure could be done by the professional so as to make the proper reporting.
Whether it would be professional negligence, permissible or not permissible as per ICAI rules is the next big question. Whether non reporting or disclaimer would involve disciplinary action is what one needs to look into. It would be better if the ICAI comes out with specific guidelines on Clause No. 44.
On a lighter note, considering the voluminous nature of compliance, the professional may now make the clause wise reporting bills to the client.
Let us enjoy the hectic audit time ahead. Bigger is the client, biggest is going to be the risk. Let the risk and fees be commensurate too.