Disclaimer in Clause No. 44 of Tax Audit Report IS better than Disclosure as Tax auditor requires to certify the report as True & Correct and not as True & Fair
Tax audit due date is approaching nearer. With this, the reporting requirements in clause 44 of the Tax Audit Report in Form No. 3CD have become a matter of hot discussion and concern for all the professionals. The issue is mainly arising as the system / software of the assessee is not giving the required information fully.
The clause 44 requires tax auditor to give the details of entire expenditure in the following format:
Break-up of total expenditure of entities registered or not registered under the GST:
| Sl No | 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 | |||||
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | ||
The question arises as to how to give these details now.
Ideally, at the time of purchase itself, one needs to first record the payment/expenditure as to whether it is from a registered person or from an unregistered person.
Unless and until this is done at the first instance itself, the next level of bifurcation would not be possible.
The clause 44 requires to broadly classify the expenditure as related to
- Registered entities
- Unregistered entities.
Now, all the purchases from the registered entities are further need to be segregated as to
- Purchases of goods which are exempt from tax.
- Purchases/expenditure from composition dealer
- Relating to other registered entities
- Other purchases – i.e., those which are not covered above will be the part of this category “Others”.
It may be noted that the details in clause 44 need not be given on individual expenses wise basis and it can be given on a consolidated basis.
The controversy related to applicability for the FY 2021-22 has also been by and large resolved and it is now very well known that the same is applicable for the audit report pertaining to FY 2021-22 & onwards.
Those taxpayers, who have filed the GST returns in its true spirit and format, may not find it difficult to compile all the details and cross check it as well. However, the chances of having filed it correctly are very rare as some or the other information was missing in the peak hours of GST returns filing.
To fill the clause 44, one can adopt the following step-wise approach:
- Take the debit side of the profit and loss account prepared from books of accounts including purchases, and other expenses.
- Expenses like salary, interest, petrol, etc can be excluded from the debit side of the P & L Account as it is not considered as “Supply” in GST.
- Take the figures of ITC Claims in GSTR-2 throughout the year or work out the figures of purchases from registered dealers by resorting to ITC Claim register.
- Now, one needs to further check the purchases other than those covered in GSTR – 2 so as to identify the purchases from the Composition dealer.
- One will be required to identify on an individual basis the purchases/expenditure from an unregistered person.
- After arriving at the figures of the purchases from the registered person, from the composition dealer, the purchases of exempt goods or services can be worked out.
- The figures in column No. 6 will be the total of column No. 3,4 & 5.
- One can keep any figure in column No. 3, 4, 5 or 7 as a balancing figure depending upon the nature of the comfort and working of the dealer.
There are the chances that the person may not be maintaining the details of the purchases from the Entities which are falling under the composition scheme of taxation. Similarly, the purchases of goods or services which are exempt from service tax may not have been separately maintained by the taxpayers.
Giving the details will be highly difficult in case the expenses are recorded in a particular group like
- Delhi site expenses or
- Amaranth Project expenses
- Ranchi Office expenses
- Pre-operative expenses
- Petrol/ conveyance reimbursement expenses
In all such cases, the particular ledger head may include the expenses related to registered as well as unregistered entities without any further classification into composition, exempt or registered entities. There may be numerous items in every one such category of the expenditure in such cases. Ideally, in all such cases, giving the details at this last hour may not be possible by the assessee.
The question arises whether the figures should be worked out on estimated basis or to the nearest possible extent or should a disclaimer be given as is given for stock valuation, prior period items, account payee payment, etc.
It may be noted that Tax audit report consists of two parts – Form No. 3CA or 3CD and Form No. 3CD.
Form No. 3CA / 3CB has to be there before reporting in Form NO. 3CD.
Form No. 3CA / 3CB requires auditor to certify the figure as “True & Correct” and not as “True and Fair”. It means that it doesn’t leave the scope of estimation or correctness to a major extent.
In short, if the auditor is doing estimation, it would be better to give the disclaimer rather than disclosure. It may be noted that the guidance note issued by the ICAI also mention at para 82.18 as under:
“82.18 An appropriate disclosure should be made by the Tax auditor in Form 3CA/3CB, as the case may be, for the view taken by the assessee in relation to the meaning of “Total expenditure” and the method of filling up the appropriate columns. If the assessee is not in a position to give the details as required in clause 44, an appropriate disclosure/disclaimer may be made by the auditor in Form 3CA/3CB. Where the assessee has provided reason for not being able to provide details, the same may be reported, if found appropriate”.
In short, Guidance note also recognizes the fact that it may not be possible for auditor to give the details in clause 44 and in such cases an appropriate disclosure/disclaimer may be made by the auditor in Form 3CA/3CB. It has been provided in the guidance note that where the assessee has provided reason for not being able to provide details, the same may be reported, if found appropriate.
The tax auditor in such a case, can give the following disclosure & disclaimer in Form No. 3CA or 3CB as may be applicable:
- Assessee has not maintained the details in proper format as required in Clause 44. In absence of this, we are unable to give the details as required in Clause 44 of Form No. 3CD.
- Considering the nature of business and volume of transactions, it is not possible for us to verify and give the details as required in Clause 44 of TAR in 3CD.
- Assessee has not maintained the details as required in Clause 44 of TAR in 3CD. In view of this, we express our inability to report the same.
- Details as required in the required format in Clause No. 44 are not maintained by the Assessee. It is told that the assessee is not having the proper system and manpower to compile and report the same. In view of this, we are unable to give the required details in Clause No. 44.
- The software and accounting system of the assessee is not properly designed so as to maintain & give the details in the format as required in Clause No. 44. Assessee has given the submission that they are not having the proper system and manpower to compile and report the same. Considering the nature of business and volume of transactions and submission done by the assessee, it is not possible for us to give the details as sought in Clause 44 of TAR in 3CD.
Even if Clause 44 is filled by the auditor then also the above details / disclosure regarding the view taken by the Auditor regarding the meaning of ‘Total Expenditure & method for filling appropriate Columns” is required to be mentioned in the Form NO. 3CA/3CB. The same could be as under:
- The total expenditure has been taken by excluding the amount of Depreciation, Salary, Wages, Bad debts, etc which are not considered as supply within the meaning of the Supply under GST Act.
- The figures in Column No. 6 of clause No. 44 have been taken as total of 3, 4 & 5 and word “Payment” has been taken as “Accrued”.
Whether disclaimer tantamount to Penal consequences of ICAI or Income Tax Department:
The issue is well discussed above. Guidance note also recognizes the fact that it may not be possible for auditor to give the details in clause 44 and in such cases an appropriate disclosure/disclaimer may be made by the auditor in Form 3CA/3CB. It has been provided in the guidance note that where the assessee has provided reason for not being able to provide details, the same may be reported, if found appropriate.
- The date required is voluminous and bulky. Without the same being maintained and streamlined, giving the details may not be possible. In view of this, the disclaimer may not involve the penal consequences.
- Wrong reporting or erroneous reporting would be more penal in nature as compared to the disclaimer / disclosure of reason for non reporting.
