Tax Audit Report (Form 3CD)

In order to get the various amendments made to Income-tax Act, 1961 and other laws (indirect taxes) within the format of tax audit report (TAR), the Central Board of Direct Taxes (CBDT) issued notification No. 33/2018  on 20 July 2018 amending the report format of tax audit. These amendments to TAR will come in force from 20 August 2018, which implies that the tax audits filed with the Income-tax on or after 20 August 2018 will have to be in the amended TAR. The point wise changes have been discussed in the ensuing paragraphs:

1. Clause no. 4 of Form 3CD – Registration details of indirect taxesDetails regarding the registration number of Goods & Service Tax (GST) have been added.

2. Clause no. 19 and 24 of Form 3CD – Deduction for investment in new plant or machineryDisclosure with regard to section 32AD has been added in these clauses to Form 3CD. This section allows deduction in respect of investment made in new plant or machinery in notified backward areas.

3. Clause no. 26 – Section 43B Certain deductions on actual payment basisClause f of section 43B has been added for reporting under this clause which pertains to allowing of liability outstanding towards Indian Railways for use of their assets, on actual payment basis.

4. Serial no 29A – New clause introduced for section 56(2) (ix) of the ActThis section was introduced in Finance Act 2014 primarily to tax the advance amounts initially received against the capital asset in the course of negotiation and later forfeited and no transfer effected. Reporting under this section has been got under the TAR

5. Serial no. 29B – New clause introduced for section 56(2) (x)of the ActThis section of the Act widened the scope of taxability of any sum of money, immovable property or any other property received by one person from another person for no consideration or inadequate consideration.

6. Serial no. 30A – New clause introduced for section 92CE of the Act (‘Secondary adjustment’)Section 92CE was introduced by the Finance Act, 2017 which brought in the concept of secondary adjustment in the Act. According to this section, where there has been any primary transfer pricing adjustments made in the case of an assesse, under various circumstances, the assesse is required to make a secondary adjustment.

7. Serial no. 30B – New clause introduced for section 94B of the Act (‘Thin Capitalization’)Section 94B was introduced in Finance Act 2017 to limit the interest deduction in certain cases and to bring in the concept of Thin Capitalization. It is a situation where an entity is financed at a relatively high level of debt compared to equity. Some multinational companies engage in aggressive tax planning techniques such as placing higher levels of third party debt in high tax countries, using intragroup loans to generate interest deductions in excess of their actual third party interest expense, using third party or intragroup financing to fund the generation of tax exempt income. Certain relaxations are also provided under this section

8. Serial no. 30C – New clause introduced for section 96 of the Act (‘GAAR’)Section 96 (impermissible avoidance agreement) falls under the Chapter X-A (General Anti Avoidance Rule). This section was inserted to curb such arrangements where an agreement creates such rights between the parties to the agreement, by misuse of the provisions of the Act, which would not have been created in normal course between parties dealing at arm’s length. Under this clause, where the tax auditor is of the view that a particular arrangement falls under this provisions of the act then they are supposed to state the nature of such arrangement and the tax benefit created in the previous year to all parties in aggregate. Reporting under clause 30C has been deferred till 31^st March 2020 vide circular no. 9/2019 dated 14^th May 2019.

9. Serial no. 31 – Clause (ba), (bb), (bc) and (bd) introduced after clause (b) to serial no. 31 of TAR pertaining to section 269ST of the ActPursuant to introduction of section 269ST by Finance Act 2017, the TAR has been amended to include disclosure under this provision whereby there is a restriction on receiving by any person of an amount exceeding INR two lakh in aggregate from a person in a day; or in respect of a single transaction; or in respect of one event otherwise than by account payee cheque or account payee bank draft or use of electronic clearing system (ECS). Where this section of the act is applicable only to the recipient, the disclosure requirements even mandate the payer to make the relevant disclosures along with the name, address and PAN of the party involved.

10. Amendments have been made to the language of clause 31 (c), (d) and (e) of the TAR with regard to the provision of section 269T of the Act

11. Serial no. 34 – Clause (b) Details of eTDS returnsEarlier this provision required only reporting of the fact as to whether the eTDS statement submitted contains all details/ transactions (Yes/ No). Now with the amendment to this clause, the TAR requires reporting of such details/ transactions which have not been reported in the eTDS return. This will be a task for the assesse with huge volumes of transactions which will require reporting of all such entries.

12. Serial no. 36A – New clause for details regarding deemed dividend u/s 2(22) (e) of the ActUnder the provisions of this section where any company, in which public are not substantially interested, makes any payment by way of loan or advance, to any person who holds not less than 10 percent voting power or to any other person in which such shareholder has substantial interest, then such payment to the extent of accumulated profits, will be treated as deemed dividend.

13. Serial no. 42 – New clause for details regards Form no. 61, 61A and 61BThis requires reporting of details of submission and due date of the respective forms with the income-tax. It also requires the auditor to ensure if all the required details have been submitted and if not, then the unreported details/ transactions are required to be reported in Form 3CD. The details required to be submitted in respective forms have been given hereunder:

• Form 61 – this form requires details of all Form 60 to be submitted. Where transactions specified under Rule 114B of the Income-tax Rules, 1962 (‘the Rules’) have been undertaken by the assesse and document with that regard has been collected by the assesse without the PAN of the person giving the document, then the assesse is required to collect declaration in Form 60.
• Form 61A – Statement of specified financial transactions as given in Rule 114E of the Rules which mandates reporting of certain financial transactions undertaken during a particular financial year, before due date (31 May).
• Form 61B – Statement of reportable accounts in accordance with FATCA and CRS for a calendar year.

14. Serial no. 43 – New clause with regard to Country by Country Reporting (CbCR) u/s 286 of the ActSection 286 r.w.r 10DB specifies the Companies liable to comply with CbCR requirements. Entities to which CbCR is applicable need to comply with reporting requirements of Form 3CEAC and 3CEAD, wherever applicable. The details of parent entity, alternate reporting entity and date of furnishing of these reports are to be mentioned under this clause of TAR.

15. Serial no. 44 – New clause of expenditure with respect to registered / unregistered entities under GSTThis clause requires breakdown of entire expenditure debited to Profit & Loss a /c into the following heads:

• Relating to goods or services exempt under GST
• Relating to entities falling under composition scheme
• Relating to other registered entities
• Relating to entities not registered under GST
  Reporting under clause 44 has been deferred till 31^st March 2020 vide circular no. 9/2019 dated 14^th May 2019.

If you are looking forward for more updates about tax amendment or require assistance in filing of tax returns, tax assessments and tax audits, our team of experts can assist you in complying with the tax regime.

Selling property? Expect a letter from the income tax department

When you sell a property next time, expect a letter from the Income-Tax (I-T) department, asking you to explain when you acquired it and the source of funds. This could be one of the ways the government could zero in on benami property holders.

Lawyers say that earlier it was usual practice by the department to call buyers to explain sources of funds whenever someone purchased a house. It’s possible, the department can now call sellers, too.

After the Income Declaration Scheme (IDS), 2016, demonetisation and giving another chance to black money hoarders to deposit cash and pay a penalty, the government is expected to go after   people with many properties. In a speech in Goa on November 13, Prime Minister Narendra Modi had said benami properties are next on his radar to eradicate corruption and black money.

Be cautious when helping relatives

A benami property means  assets are held by a person but the consideration for these has been paid by another. There are, however, exceptions. You can pay for a property that’s entirely in the name of your spouse or children. But, you cannot pay for a property that will be in the name of your siblings, parents or any other lineal ascendant or descendant, unless you are a joint owner. That applies even if the money is legitimate. But, there is a way out. Tax experts say an individual can buy the property in his name and later gift it to the close relative. It will be more expensive as the person will need to transfer the ownership through a gift deed and pay stamp duty.

If the property is held by a ‘karta’ of a Hindu Undivided Family and individuals who have fiduciary responsibility such as trustees, executors, partners, directors of companies and others, the asset will not be considered benami.

Under the Benami Transaction (Prohibition) Act, ‘property’ has been defined comprehensively to include not only immovable assets such as land, flat or house but also movable assets such as gold, stocks, mutual fund holdings and even bank deposits. One significant change is that it covers the conversion of the property, which was not covered in the old law. If the property is sold, then the proceeds from it are also considered benami.

The government knows

Real estate is the biggest area where many channel their black money. This is done using various methods. Property is bought in the name of close relatives or even servants or drivers to evade detection by tax authorities. “Typically, individuals with black money buy large tracts of land that can be developed in the future or they buy high-end properties,” says Amit Oberoi, national director, knowledge systems at Colliers International (India). While there’s no exact figure on the number of benami transactions, experts feel that it would be 25-30 per cent of all high-end propertysale. In the case of land, it could be higher.

To tighten screws on such transactions, the government has taken many initiatives and is sitting on a huge data repository. Explains Neha Malhotra, executive director at Nangia & Co: The Centre has revised norms making it mandatory for an individual to quote the permanent account number (PAN) on several high-value transactions, annual information filing is required by financial institutions and property registration has been made more stringent. There is also financial information sharing treaties with other countries. “It’s difficult for big transactions to go unnoticed,” says Malhotra. In fact, the department will soon be scanning social media posts of individuals. That’s part of the I-T department’s Project Insight programme. 

Based on the information and data available, the government can mine high-value transactions. Suppose someone has bought a property worth Rs 5 crore in his servant’s name and this propertygets shortlisted in the search. The tax authorities will then look into the ‘benamidar’s’ (servant’s) income sources to ascertain whether he can afford such a purchase. Once that possibility is ruled out, they will set out to find the actual owner.

Many tax and legal experts feel once the demonetisation drive ends, the I-T department will start sending notices to benami property holders, based on the data it has. After closure of IDS, the window to declare benami properties and other unaccountable assets is closed. The only way forward for property owners is to pay the fine. Else, they can also face imprisonment. Apart from awarding imprisonment of up to seven years to the beneficial owner and the benamidar, others involved in the deal, too, will not be spared. A fine of up to a fourth of the market value of the property can be imposed on all parties.

Law gets more teeth

In the previous version of the Act, the Centre was supposed to issue a separate notification on the authorities that would initiate action and how the different parties will be dealt with. It didn’t happen, according to legal experts. Explains Sharanya Ranga, partner at Advaya Legal: The amended Act lays down the entire process of bringing down different parties involved in ‘benami’ property to book. It names different authorities — the initiating officer, the approving authority, the administrator and the adjudicating authority — which will handle the cases. Officials of the income taxdepartment will be the main authorities handling benami property cases. 

The Act not only prescribes punishment for the beneficiary of benami property but also for the person who holds the title and any other parties involved.


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