Checklist for Clause 34 of Tax Audit Report to be Considered by Auditors

Clause 34 of the Tax Audit Report under Section 44AB of the Income-tax Act, 1961, requires auditors to report on compliance with tax deduction and collection obligations under Chapter XVII-B and XVII-BB. It covers whether the assessee was liable to deduct or collect tax (Clause 34a), furnish TDS/TCS statements (Clause 34b), and pay interest under sections 201(1A) or 206C(7) (Clause 34c). Given the volume and complexity of transactions, auditors must apply professional judgment, rely on supporting documents, and exercise due diligence while reporting, often with qualifications or disclaimers where full verification isn’t practicable.

Clause 34(a) – Whether the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB

1. While reporting under section 44AB of Income Tax Act, the auditor has to consider the following Points

• Reporting under this clause is to be done in the case of assessee to whom provisions of Chapter XVII-B or XVII-BB apply.
• The tax auditor should determine with his professional acumen as to whether provisions of Chapter XVII-B and/or XVII-BB are applicable to assessee or not.
• Since the reference to Chapter XVII-B has been made, it is clear that TDS under Income-tax Act is only covered. TDS under other laws (e.g. TDS on works contracts under erstwhile State VAT laws are not covered. The tax auditor is also not responsible for reporting timely deposit with the State Government of Professional Tax deducted from salaries of employees.
• In case of difference of opinion about the applicability or otherwise of Chapter XVII-B and/or XVII-BB, the answer to the question may have to be qualified depending upon the facts and circumstances of each case.
• Whether it is practically possible for the tax auditor to verify all the transactions to report compliance with provisions of Chapter XVII-B or XVII-BB, where the tax audit is time bound like in Bank Audits.

A disclaimer may be provided by the tax auditor

•  In case the tax auditor answers the question as “Yes”, thereafter he should proceed to provide for further details.
• Where the tax auditor is of the opinion that provisions of Chapter XVII-B and Chapter XVII-BB are not applicable he should answer the question as “No”.
• The Tax auditor should obtain a copy of the TDS/TCS returns filed by the assessee for reporting under this clause, to the extent possible.

The Auditor need to report section-wise details of TDS/TCS deducted/ collected and paid. Column wise considerations while reporting under this clause are as under:

2. Issues/Considerations

• In-built checks not provided.

For example, Column (5) – ‘Total amount on which tax was required to be deducted or collected out of (4)’, should not exceed the amount specified in column (4).

• The detail is to be provided in accordance with the nature of payment
• The tax auditor is required to furnish the details irrespective of any default on the part of assessee in complying with the provisions of Chapter-XVII-B or XVII-BB.

3. ICAI’s Comment

It has been observed that the total of expenses as mentioned under the clause under Tax Audit Report under specific heads like salary, rent etc were not matching with the relevant figures in financial statements.

4. As per Guidance note issued by the ICAI

• Rates of deduction is to be consider as per the law relevant to the P.Y.
• Refer relevant provisions, rules, circulars, notifications and such certificates obtained from the auditee to verify the cases where tax has been short deducted at source.
• In case the payer deducts/recipient collects tax at source at a rate lower than the specified rate on the basis of certificate issued under section 195 or 197, the lower rate or nil rate, as the case may be will be considered as the specified rate for the purpose of reporting under this Clause.
• As per the provisions of Sections 195/ 197, certificate can be issued for no deduction or lower deduction of tax at source.
• In case of payment to non-residents, the applicable rate of TDS is to be read along with the Double Taxation Avoidance Agreement.

There is no specific column to mention non- deduction of tax at source in the specified format. However, the amount may be calculated as follows

Non- deduction = Column (5) less [(6) plus (8)]

• Since the reference to Chapter XVII-B is made, it is clear that TDS under Income-tax Act is only covered. TDS under other laws (e.g. TDS on works contracts under State VAT laws) are not covered. The tax auditor is also not responsible for reporting timely deposit with the State Government of Profession Tax deducted from salaries of employees – ICAI’s Issues on Tax Audit.
• If tax auditor does not agree with the auditee’s views on deductibility/ non-deductibility of tax in particular cases, it would be advisable to state both views (his views as well as the auditee’s views)

5. Clause 34(b) – Whether the assessee is required to furnish the statement of tax deducted or tax collected. If yes, please furnish the details

• The auditor has to ascertain as to whether the assesse is required to furnish the TDS/TCS Statement. Earlier the requirement was to report under this clause only when the statements were filed late.
• An assessee is required to furnish the TDS/TCS Statement after he has deducted the tax/collected the tax and deposited the same to the Central Government. He can also file a correction/rectification statement.

Annexure A:

(a) The requirement of list of details/transactions which are not reported has been added w.e.f. 20th August 2018.

(b) For the required information, the auditor should peruse the TDS/TCS statement and the matters as stated in Rule 31A(4) (for TDS) and Rule 31AA(4) (for TCS).

(c) Transactions like that of transporters [whose tax is not to be deducted, if he gives a declaration under section 194(6)], TDS not deducted due to furnishing of Form 15G/15H, NIL TDS liability due to certificate under section 197, etc. could be the cases, which were required to be reported, but not reported by the assesse.

(d) In case assesse has deducted/collected and deposited the tax, but has not reported the same in the TDS/TCS statement, the same should also be reported. There could be various reasons for same including, non- availability of PAN. The auditor may after proper audit procedures and verifications also obtain suitable management representation regarding the same which could be as under:

We have reported all transactions that were required to be reported in the TDS/TCS statement and no transactions which were reportable but were not reported in the said statements.

(e) In case an assessee revises/corrects his TDS statement, details from the corrected statement should be verified.

(f) It could be difficult for the auditor to verify each and every transaction in this regard in certain cases. Therefore, while verifying such transactions, he can apply the concepts of materiality and audit sampling.

6. Clause 34(c) – Whether the assessee is liable to pay interest under section 201(1A) or section 206C(7)

Points for Consideration

• As per this clause, the auditor is required to furnish detailed information in case the assessee is liable to pay interest under section 201(1A) or section 206C(7) of the Act.
• Section 201(1A) – Levy of simple interest on failure to deduct tax or payment thereof to the credit of Central Government
• Section 206C(7) – Levy of simple interest on failure to collect tax or payment thereof to the credit of Central Government
• The reporting as to whether the assessee is liable to pay such interest should be in consonance with the reporting under clause 34(a).
• Reference to PART G of the statement generated by the Department in Form No.26AS should also be made.

Issues/Case laws

If the assessee is liable to pay interest under section 201(1A) or 206C(7), the auditor should verify such amount from the books of account and also from part G of the statement generated by the department in form no. 26AS.

In case the assessee had disputed the levy or calculation of interest under TRACES, in form no. 26AS, the auditor may re-calculate the amount of interest under section 201(1A) or Section 206C(7) up to the date of audit report for reporting under this Clause and also mention the fact by way of his observations suitably in form no. 3CA or form no. 3CB, as applicable.

ICAI’s Comment

It has been observed that in certain cases the date of payment with respective amount has not mentioned under the relevant columns of this sub-clause