Clause 44 Form 3CD Reporting, GST Linkages & Judicial Reliance

Clause 44 of Form No. 3CD under Rule 6G read with Section 44AB of the Income-tax Act, 1961 – Practical Issues, GST Linkages and Judicial Reliance on Clause 44 Disclosures

Summary: Clause 44 of Form No. 3CD, inserted under Rule 6G read with Section 44AB of the Income-tax Act, 1961 and operative for tax audit reports furnished on or after 1 April 2022, is presented as a disclosure requirement requiring classification of expenditure based on the GST registration status of suppliers. The article states that Clause 44 does not determine the allowability of expenditure under the Income-tax Act or the admissibility of input tax credit under GST law, but its disclosures may be compared with GST returns, books of account, purchase registers and other records during assessment. It discusses practical issues such as vendor classification, retrospective GST registration cancellation, multiple GST registrations, ERP limitations, capital expenditure reconciliation and documentation. The article also reviews judicial decisions where Clause 44 disclosures were examined during assessment proceedings, noting that the courts and tribunals did not treat Clause 44 as an independent basis for disallowance or interpret it as a substantive provision, while indicating that the reported figures may be used as one of the factual inputs for verification of expenditure and books of account during assessments.

Introduction

Clause 44 of Form No. 3CD has gradually become one of the most closely examined disclosures in a tax audit report. When it was introduced, it was largely viewed as a reporting requirement calling for a break-up of expenditure based on the GST registration status of suppliers. In practice, however, its significance has increased considerably after the reporting requirement became operational for tax audit reports furnished on or after 1 April 2022.

Today, the figures reported under Clause 44 can be compared with GST returns, purchase registers, vendor master records, books of account and other financial information available with the Income-tax Department. As tax administration increasingly relies upon technology and data analytics, inconsistencies in these records are more likely to attract scrutiny.

The legal position nevertheless remains unchanged. Clause 44 is a disclosure requirement forming part of the tax audit report. It neither determines the allowability of expenditure under the Income-tax Act nor decides the admissibility of input tax credit under the GST law. Its importance lies in the fact that it provides structured information which may be used by the tax authorities while examining the correctness of expenditure claimed by the assessee.

This article examines some of the practical issues that have emerged in the implementation of Clause 44, its relationship with GST records and accounting records, and the limited judicial decisions in which Clause 44 disclosures have been relied upon during assessment proceedings.

Statutory Background

Clause 44 was inserted in Form No. 3CD by Notification No. G.S.R. 666(E) dated 20 July 2018, issued under Rule 6G read with section 44AB of the Income-tax Act, 1961.

Soon after its introduction, the Central Board of Direct Taxes (CBDT) kept the reporting requirement in abeyance because taxpayers and tax auditors faced practical difficulties in compiling the prescribed information. The period of abeyance was extended from time to time, and the reporting requirement eventually became applicable to tax audit reports furnished on or after 1 April 2022.

Since then, Clause 44 has become a standard reporting requirement in tax audit reports covered by section 44AB.

Clause 44 – A Disclosure Provision, Not a Substantive Tax Provision

The first point that deserves emphasis is that Clause 44 is only a reporting requirement.

The clause does not determine whether expenditure is allowable under the Income-tax Act. Likewise, it does not decide whether input tax credit is available under the Central Goods and Services Tax Act, 2017 or the Integrated Goods and Services Tax Act, 2017. These issues continue to be governed by the substantive provisions of the respective statutes.

The purpose of Clause 44 is comparatively narrow. It requires expenditure to be classified according to the GST registration status of the supplier. This enables the tax authorities to obtain a broad picture of expenditure incurred during the year and, wherever necessary, compare the reported figures with other records maintained by the assessee.

Accordingly, an incorrect disclosure under Clause 44 does not, by itself, result in disallowance of expenditure. However, if the figures reported appear inconsistent with the books of account or other available records, they may become the subject of further enquiry during assessment proceedings. The distinction between reporting and allowability is therefore fundamental.

Why Clause 44 Has Acquired Greater Practical Significance

The importance of Clause 44 today arises not from any amendment in the law but from the manner in which tax administration has evolved.

Information reported in Form No. 3CD can now be examined alongside several other records, including:

• audited financial statements;
• books of account;
• purchase registers;
• vendor master records;
• GST returns, including inward supply details;
• fixed asset registers; and
• other information available with the Income-tax Department.

A difference between these records does not automatically justify an addition or disallowance. Nevertheless, material differences frequently become the starting point for verification during assessment proceedings.

From a practical perspective, this makes the quality of underlying records just as important as the figures eventually reported in Clause 44.

Practical Linkage with GST Records

Preparation of Clause 44 depends substantially upon GST-related records maintained by the assessee.

Among the records that ordinarily require verification are:

• vendor-wise GST registration details;
• GSTIN-wise vendor master;
• purchase registers;
• classification of suppliers as registered, composition or unregistered;
• identification of exempt inward supplies;
• inward supplies not liable to GST; and
• transactions covered by Schedule III to the Central Goods and Services Tax Act, 2017.

Transactions falling within Schedule III are generally regarded as neither a supply of goods nor a supply of services under the GST law. Consequently, they require separate consideration while preparing Clause 44.

Merely extracting figures from accounting software is seldom sufficient. The GST character of each category of expenditure also requires careful examination before the disclosure is finalised.

Vendor Classification – One of the Most Common Practical Difficulties

Incorrect vendor classification continues to be one of the most frequent issues encountered while preparing Clause 44.

A supplier who was registered under GST during the year may subsequently surrender the registration or the registration may be cancelled. Conversely, an unregistered supplier may obtain GST registration after the relevant transaction.

Unless the vendor master is updated regularly, expenditure may be reported under an incorrect category even though the accounting entries themselves are accurate.

Another practical issue arises where GST registration is cancelled retrospectively. Such cases require careful evaluation of the supplier’s status having regard to the relevant facts and the effective date of cancellation. Whatever basis is adopted for reporting should be applied consistently and adequately documented so that the classification can be explained if called upon during assessment proceedings.

Interface with Accounting Records

Although Clause 44 is closely connected with GST records, its preparation also requires careful reconciliation with the books of account.

Particular attention should be paid to:

• total expenditure reflected in the audited financial statements;
• treatment of capital expenditure;
• items that do not form part of Clause 44 reporting;
• reconciliation between audited expenditure and Clause 44 disclosures; and
• explanatory schedules for significant differences, wherever necessary.

Preparation of these reconciliations at the time of the audit considerably reduces the possibility of avoidable queries at a later stage.

Audit Documentation – An Important Practical Safeguard

Experience shows that the quality of documentation often determines how efficiently assessment queries can be answered.

Depending upon the nature of the business, audit working papers may include:

• reconciliation between audited expenditure and Clause 44 disclosures;
• vendor-wise expenditure statements;
• GST registration status of suppliers;
• list of composition dealers;
• details of transactions kept outside Clause 44 reporting;
• reconciliation of capital expenditure; and
• management representations, wherever considered appropriate.

Well-maintained documentation enables the figures reported in Form No. 3CD to be readily explained if they are examined during assessment proceedings.

Judicial Reliance on Clause 44 Disclosures – An Emerging Trend

At present, there are very few judicial decisions that directly consider Clause 44 of Form No. 3CD. The available decisions are significant not because they interpret the clause, but because they demonstrate the manner in which the tax authorities have relied upon Clause 44 disclosures while examining expenditure and the reliability of books of account.

These decisions should therefore be viewed as having indirect relevance to Clause 44 rather than as laying down any legal principles governing its interpretation.

The most important decision in this context is that of the Delhi High Court in Pashupati Road Carrier Private Limited v. Assessment Unit, Income Tax Department (W.P.(C) No. 6141 of 2024, order dated 20 May 2024).

During assessment proceedings, the Assessing Officer examined the figures reported in Clause 44, including substantial expenditure relating to suppliers who were not registered under GST. Notices issued under section 142(1) sought supporting records and explanations. As the Assessing Officer was not satisfied with the material produced, proceedings under section 145(3) were initiated for examining the correctness and completeness of the books of account.

The assessee challenged the proceedings before the Delhi High Court on the ground that adequate opportunity had not been provided. After examining the record, the Court found that sufficient opportunity had been given and declined to interfere.

The significance of the decision lies in its recognition that figures reported under Clause 44 may be one of several factual inputs considered while examining the reliability of books of account. The Court did not hold that Clause 44 creates an independent basis for disallowance of expenditure or lays down any principle regarding its interpretation.

Judicial Use of Clause 44 Disclosures – An Emerging Trend

Judicial decisions dealing directly with Clause 44 are still limited. Nevertheless, a few recent cases demonstrate that the information disclosed under Clause 44 is increasingly being examined by the tax authorities while scrutinising expenditure, verifying books of account and seeking supporting evidence.

These decisions do not interpret the legal scope of Clause 44. Instead, they illustrate how the disclosure is being used during assessment proceedings as one of several factual inputs. The substantive allowability of expenditure continues to depend upon the provisions of the Income-tax Act and the evidence produced by the assessee.

Pashupati Road Carrier Private Limited v. Assessment Unit, Income Tax Department

Delhi High Court- W.P.(C) No. 6141 of 2024 Order dated 20 May 2024

During assessment proceedings, the Assessing Officer examined the figures reported in Clause 44 of Form No. 3CD. The tax audit report reflected substantial expenditure relating to suppliers who were not registered under GST. The Assessing Officer sought supporting records through notices issued under section 142(1). Since the explanation and supporting documents were found to be inadequate, proceedings under section 145(3) were initiated on the ground that the correctness and completeness of the books of account could not be accepted.

The assessee challenged the proceedings before the Delhi High Court, contending that adequate opportunity had not been provided before rejecting the books of account. After examining the record, the High Court observed that sufficient opportunity had been given and dismissed the writ petition.

The significance of this decision lies in the fact that the figures disclosed under Clause 44 formed one of the factual inputs considered while examining the reliability of the books of account. The Court did not hold that Clause 44 itself creates any independent basis for disallowance or lays down any principle regarding the interpretation of the clause.

ITO v. Iranna Bhujang Nadgam

ITAT Pune – ITA Nos. 42 & 43/PUN/2024 Order dated 22 May 2024

The principal dispute in this case related to substantial cash deposits resulting in additions under section 69 of the Income-tax Act. During assessment, the Assessing Officer also examined the disclosures contained in Form No. 3CD.

According to the assessment order, the auditor had reported “Nil” under Clause 44. The Assessing Officer viewed this as indicating that the assessee had not maintained the necessary break-up of expenditure based on the GST registration status of suppliers. This became one of the factual aspects considered during the assessment proceedings.

The Tribunal did not decide any issue concerning the interpretation of Clause 44. Instead, it restored the matter for fresh examination and directed that a remand report be obtained before the issues were finally decided.

This decision demonstrates that deficiencies in Clause 44 reporting may prompt further factual verification. However, the Tribunal did not suggest that such reporting deficiencies automatically determine the allowability of expenditure or justify additions under the Act.

DCIT v. Awlencan Innovations India Ltd.

ITAT Ahmedabad – ITA No. 1950/AHD/2025 Order dated 12 February 2026

In this case, the Assessing Officer questioned the allowability of a substantial provision for expenditure. During assessment, reference was made to the figures reported in the tax audit report relating to expenditure incurred with suppliers who were not registered under GST.

The assessment order noted that the tax audit report reflected significant expenditure relating to non-GST registered suppliers and sought further explanation regarding the genuineness and allowability of the expenditure.

The Tribunal restored the matter for fresh consideration on the factual issues involved.

Once again, the Tribunal did not interpret Clause 44 or hold that expenditure reported under any particular column automatically became inadmissible. The case merely illustrates that disclosures made in Form No. 3CD may be examined by the Department while verifying expenditure claims during assessment proceedings.

What Do These Decisions Indicate?

Although the above decisions arise from different factual situations, they reveal a common pattern.

None of the courts or tribunals has held that Clause 44 creates an independent charging provision or introduces a new condition for claiming deduction under the Income-tax Act. Likewise, no decision has held that expenditure becomes inadmissible merely because it has been reported under the column relating to unregistered suppliers or because of an error in reporting under Clause 44.

Instead, the decisions indicate that Clause 44 serves as a disclosure mechanism. Where the figures reported appear inconsistent with the books of account, GST records or supporting evidence, the Assessing Officer may seek further explanation or verification. The ultimate tax treatment, however, continues to depend upon the substantive provisions of the Income-tax Act and the evidence available on record.

Accordingly, Clause 44 should be viewed as a reporting and verification tool rather than as a substantive provision governing the allowability of expenditure.

Practical Issues Encountered in Reporting Clause 44

Experience over the last few years shows that the principal difficulties in preparing Clause 44 do not arise from the wording of the clause itself. They generally arise because of limitations in accounting systems, incomplete vendor records and inconsistencies in GST data.

Some of the common practical issues are discussed below.

1. Vendor Master Maintenance

Many organisations do not update their vendor master regularly. GST registration numbers may remain unchanged even after cancellation, amendment or fresh registration of the supplier.

As a result, expenditure may be classified under an incorrect category despite the accounting entries being otherwise accurate. Periodic verification of vendor registration details can substantially reduce such reporting errors.

2. Retrospective Cancellation of GST Registration

Another practical issue arises where a supplier’s GST registration is cancelled retrospectively after the end of the financial year.

The question then arises whether the expenditure should be classified according to the supplier’s status on the date of the transaction or in accordance with the retrospective cancellation order.

Since each case depends upon its own facts, it is advisable to document the basis adopted while preparing the disclosure and preserve adequate supporting records explaining the approach followed.

3. Multiple GST Registrations

Large organisations often operate through several GST registrations while preparing consolidated financial statements.

Preparation of Clause 44 therefore requires consolidation of expenditure relating to different GST registrations. Without proper reconciliation, there is a possibility of duplication or omission.

4. ERP and Accounting Software Limitations

Many accounting systems were not originally designed to generate reports in the format required for Clause 44.

Consequently, manual verification is often necessary to correctly classify expenditure relating to:

• registered suppliers;
• composition dealers;
• exempt supplies; and
• unregistered suppliers.

Blind reliance on system-generated reports may therefore result in inaccurate reporting.

5. Capital Expenditure

Capital expenditure presents another practical challenge because it may not always pass through the Profit and Loss Account.

Where capital expenditure is required to be considered for Clause 44 purposes, suitable reconciliation with the fixed asset register should be maintained so that the reported figures can be readily explained during assessment proceedings.

Common Reporting Issues Observed in Practice

Some of the more common issues noticed while preparing Clause 44 include:

• failure to reconcile Clause 44 with the audited financial statements;
• incorrect classification of suppliers because vendor records are not updated;
• omission of expenditure relating to composition dealers;
• failure to identify transactions that require separate treatment under GST;
• absence of reconciliation between purchase registers and books of account;
• inadequate documentation supporting the classification adopted; and
• complete reliance on ERP-generated reports without independent verification.

Most of these issues can be addressed through timely review before completion of the tax audit.

Documentation That Should Be Preserved

Since Clause 44 disclosures may be examined during assessment proceedings, appropriate documentation should form part of the audit records.

Illustrative documentation includes:

• reconciliation between audited expenditure and Clause 44 disclosures;
• vendor-wise expenditure statements showing GST registration status;
• GST registration verification records;
• details of composition dealers;
• reconciliation of capital expenditure;
• explanatory notes regarding significant classifications;
• schedules explaining differences, wherever applicable; and
• management representations, where considered appropriate.

Well-maintained documentation not only supports the figures reported in Form No. 3CD but also enables a timely and effective response to departmental queries.

Best Practices

Based on practical experience since Clause 44 became operative, the following measures can significantly improve the quality of reporting:

• update vendor GST registration details on a regular basis;
• verify GST registration status before finalising the tax audit;
• prepare reconciliations before commencement of the audit;
• maintain separate records for composition dealers wherever feasible;
• retain documentary evidence supporting significant classifications;
• reconcile capital expenditure separately; and
• ensure consistency between books of account, GST records and the disclosures made in Form No. 3CD.

These measures reduce the likelihood of reporting errors and facilitate smoother assessment proceedings.

Concluding Remarks

Clause 44 has assumed considerable practical importance since it became operative for tax audit reports furnished from 1 April 2022. Although it continues to be a disclosure requirement, the information reported under the clause is now routinely capable of being compared with GST records, accounting data and other information available with the Income-tax Department.

The limited judicial decisions available so far point in the same direction. They do not expand the legal scope of Clause 44 or treat it as a substantive provision governing the allowability of expenditure. Rather, they indicate that the disclosure may be used as one of the factual tools while examining the reliability of books of account, the completeness of expenditure records and the adequacy of supporting evidence.

For tax auditors, the emphasis should therefore be on the quality of the underlying documentation rather than merely completing the reporting format. Accurate vendor classification, proper reconciliations, well-maintained working papers and consistent documentation remain the most effective safeguards against future disputes.

Viewed in this perspective, Clause 44 is no longer merely another column in Form No. 3CD. It has become an important point of convergence between GST compliance, financial reporting and income-tax audit, reflecting the increasing reliance on data-driven verification in tax administration.