Amendment to Form 3CD wef 1st April 2025 – Key Highlights

Income-tax (Eighth Amendment) Rules, 2025, have brought forth several changes to Form 3CD, the statement of particulars required to be furnished under Section 44AB of the Income Tax Act, 1961. These amendments, effective from April 1, 2025, aim to streamline reporting, enhance transparency, and align the form with recent legislative changes. Notably, a new clause concerning presumptive taxation for non-resident cruise ship operators has been introduced, while references to certain expired deduction sections have been removed. Furthermore, the rules mandate reporting of expenses incurred for settling legal contraventions and revise the disclosure requirements for payments to Micro and Small Enterprises (MSEs).

A significant inclusion is the amendment to Clause 12, which now incorporates Section 44BBC. This section introduces a special presumptive taxation regime for non-resident entities involved in the operation of cruise ships. Under this provision, 20% of specified receipts related to passenger carriage will be deemed as taxable income, simplifying the tax compliance for such operators by negating the need for detailed expense claims

Conversely, Clause 19 has been amended to omit references to Sections 32AC, 32AD, 35AC, and 35CCB. These sections pertained to investment-linked deductions and expenditure on eligible projects or natural resource conservation, but have either expired or been phased out over time. The removal of these sections ensures that Form 3CD remains relevant to currently applicable provisions of the Income Tax Act, reducing unnecessary reporting of defunct clauses.

Clause 21 has been revised to mandate the reporting of expenditure incurred for settling proceedings related to legal contraventions notified by the Central Government. This amendment increases transparency regarding expenses arising from regulatory or legal violations. The government aims to scrutinize such settlement costs, as judicial precedents have generally held that expenses incurred for penalties or legal violations are not deductible business expenses under Section 37(1).

Amendment to Form 3CD wef 1st April 2025 by the Income-tax (Eighth Amendment) Rules, 2025.- Highlights

The Income-tax (Eighth Amendment) Rules, 2025, introduce changes to Form 3CD, effective from April 1, 2025.

• Clause 12 now includes Section 44BBC, which deals with presumptive taxation for non-resident cruise ship operators.
• Clause 19 removes references to deductions under Sections 32AC, 32AD, 35AC, and 35CCB as they have expired.
•  Clause 21 mandates reporting of expenses incurred for settling proceedings related to legal contraventions notified by the Central Government.
• Clause 22 revises reporting of payments to Micro and Small Enterprises (MSEs) in line with Section 43B(h).
•  Clause 26 updates disclosures for liabilities under Section 43B and introduces a new sub-clause for Clause (h).
• Clauses 28 and 29 have been removed, simplifying the tax audit report.
•  Clause 31 now includes a dropdown selection for reporting the nature of loans or deposits.
• A new Clause 36B has been introduced to report details of share buybacks under Section 2(22)(f).

Amendment to Form 3CD 
[See rule 6 G(2)]

Statement of particulars required to be furnished under section 44AB of the Income Tax Act, 1961

Short title and commencement.– (1) These rules may be called the Income-tax (Eighth Amendment) Rules, 2025.

(2) They shall come into force on the 1st day of April, 2025.

Omission/Amendment/insertion of new clauses.

1) Clause 12.(Amendment)

Whether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant section 44AD, 44ADA, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44BBC Chapter XII-G, First Schedule or any other relevant section.)

This clause has been amended by insertion of section 44BBC in the main clause. Section 44BBC provides for Special provision for computing profits and gains of business of operation of cruise ships in case of non-residents

The newly introduced Section 44BBC under the Income-tax Act, 1961, through the Income-tax (Eighth Amendment) Rules, 2025, establishes a special presumptive taxation regime for non-resident assessees engaged in the operation of cruise ships. This section overrides the normal provisions for computing business income under Sections 28 to 43A, meaning deductions, depreciation, and other expense-related claims are not applicable. Instead, a flat 20% of specified receipts will be deemed as taxable profits and gains under the head “Profits and Gains of Business or Profession”, thereby simplifying tax compliance for eligible assessees.

The section applies to non-residents operating cruise ships, subject to conditions that may be prescribed by the Central Board of Direct Taxes (CBDT). The taxable income will be determined as 20% of the aggregate of certain amounts, which include

(a) the amount paid or payable to the assessee or to any person on his behalf for the carriage of passengers, and

(b) the amount received or deemed to be received by or on behalf of the assessee for such carriage. This ensures that all direct and indirect receipts related to passenger transportation are considered while computing deemed profits.

This presumptive taxation scheme is similar to Sections 44B (shipping business) and 44BB (oil exploration services), where a fixed percentage of gross receipts is treated as taxable income, reducing the need for maintaining detailed expense records. The main advantage for non-resident cruise operators is ease of compliance, as they do not need to justify actual expenses. Additionally, it may provide a tax-saving opportunity if their actual profit margins exceed 20% of revenue. However, it is important to note that this provision applies only to passenger transportation, and it remains unclear whether ancillary services like catering, entertainment, or onboard sales will be covered.

The practical implementation of Section 44BBC will depend on further notifications from the CBDT, specifying the conditions and exclusions applicable to this regime. Future clarifications may address whether this applies solely to international cruise operations or also extends to domestic routes within India. Given the growing cruise tourism industry, this move could attract more non-resident operators by offering a simplified and predictable tax structure.

2) Clause 19. (Omission) Amounts admissible under sections:

This clause dealt with the amount admissible as deduction under various sections on fulfilment of the specified conditions. The Income-tax (Eighth Amendment) Rules, 2025, have omitted references to Sections 32AC, 32AD, 35AC, and 35CCB from Form 3CD, which is the prescribed format for tax audit reports under Section 44AB of the Income-tax Act, 1961. The omission of these sections aligns with the fact that these provisions have already been either sunsetted (expired) or phased out from the Income-tax Act.

Analysis of Omitted Sections

Section 32AC (Investment in New Plant and Machinery) – Omitted

This section provided an investment-linked deduction for companies investing in new plant and machinery beyond a certain threshold. It was applicable only until AY 2017-18, after which it ceased to be in force. Since it is no longer relevant, its reference in Form 3CD has been removed. 

Section 32AD (Investment in New Plant and Machinery in Notified Backward Areas) – Omitted

This section provided an additional depreciation deduction for investments made in notified backward areas of Andhra Pradesh, Telangana, Bihar, and West Bengal. It applied only to investments made before 31st March 2020. Since no new claims are possible post AY 2020-21, it has been omitted from Form 3CD.

Section 35AC (Expenditure on Eligible Projects or Schemes) – Omitted

This section allowed a 100% deduction for contributions made to certain government-approved projects for social and economic welfare. However, it was discontinued from 1st April 2017, meaning no fresh deductions are available. Since it is no longer in force, Form 3CD no longer needs to report transactions under this section.

Section 35CCB (Expenditure for the Conservation of Natural Resources) – Omitted

This section provided a deduction for expenses incurred on government-approved natural resource conservation programs. The provision was effectively phased out years ago, and no new approvals are being granted. Its omission from Form 3CD reflects the fact that it is no longer relevant for tax audits.

Reason for Omission from Form 3CD   

The removal of these sections from Form 3CD is a procedural update to ensure that the tax audit report only contains disclosures for active provisions of the Income-tax Act. Since Sections 32AC, 32AD, 35AC, and 35CCB are no longer applicable for fresh claims, their continued presence in Form 3CD was unnecessary. The Income-tax (Eighth Amendment) Rules, 2025, have therefore streamlined Form 3CD by eliminating outdated references, ensuring that tax auditors focus only on currently relevant deductions and allowances.

3) Clause 21. Amendment: Capital, personal, advertisement expenditure

(a) Please furnish the details of amounts debited to the profit and loss account, being in the nature of capital, personal, advertisement expenditure etc

The Income-tax (Eighth Amendment) Rules, 2025, have introduced an important change in Clause 21 of Form 3CD by inserting the text:

“Expenditure incurred to settle proceedings initiated in relation to contravention under such law as notified by the Central Government in the Official Gazette in this behalf.“ 

Explanation of the Amendment

Clause 21 of Form 3CD deals with various disallowable expenditures under the Income-tax Act, primarily under Section 37(1), which prohibits deductions for expenses incurred for purposes that are:

1. Illegal or prohibited by law
2. Incurred for offenses or penalties

With this amendment, tax auditors are now required to report any expenditure incurred to settle proceedings initiated under laws specifically notified by the Central Government. This means that if an assessee incurs an expense to settle a case, pay a fine, or resolve proceedings under such notified laws, it must be disclosed in Form 3CD.

Purpose of the Amendment

a. Increased Transparency: The government wants to track and scrutinize expenses related to regulatory or legal violations. Taxpayers often claim such settlement expenses as business deductions, which the government aims to restrict.

b. Aligns with Judicial Precedents: Courts have held that expenses incurred for penalties, fines, or legal violations are not deductible as business expenses under Section 37(1). This amendment ensures that such expenses are properly reported and, if necessary, disallowed during assessment.

c. Targets Specific Laws: The amendment does not apply to all contraventions but only to those covered under laws notified by the Central Government. The government may notify laws related to economic offenses, corporate governance violations, or financial misconduct (e.g., FEMA, SEBI Act, GST, etc.).

d. Prevents Abuse of Deductions: Some businesses try to reduce taxable profits by claiming expenses related to settlements of regulatory violations. This amendment acts as a deterrent by making such expenses reportable.

Implications for Taxpayers

• Increased scrutiny: Businesses will have to justify the nature of settlement expenses and whether they are allowable.
• Potential disallowance: If the notified law prohibits deduction of such expenses, the Assessing Officer can disallow them.
• Compliance burden: Companies and auditors must identify and report such expenditures clearly.

This amendment strengthens tax administration by ensuring that businesses cannot claim deductions for expenses arising out of legal violations, reinforcing the principle that illegal or unethical business practices should not be tax-beneficial.

4) Clause 22. (Omission)

Reporting amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 or any other amount not allowable under clause (h) of section 43B of the Income-tax Act, 1961 has been omitted and replaced by a new clause. The new clause 22 is as under:

Amendment in Clause 22 of Form 3CD – Reporting of MSME Dues and Interest Disallowance

The Income-tax (Eighth Amendment) Rules, 2025, have revised Clause 22 of Form 3CD to expand the disclosure requirements related to payments to Micro and Small Enterprises (MSEs) under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and to align it with the newly inserted clause (h) of Section 43B of the Income-tax Act, 1961.

5) Key Changes in Clause 22

Previously, Clause 22 only required reporting of interest inadmissible under Section 23 of the MSMED Act, which disallows interest on delayed payments to MSMEs as a deduction.

With the 2025 amendment, Clause 22 now requires reporting of:

a. Interest Disallowance: Any interest on delayed payments to MSMEs, which is inadmissible under Section 23 of the MSMED Act.

b. Outstanding Payments to MSMEs: The total amount payable to Micro and Small Enterprises under Section 15 of the MSMED Act as of the end of the previous year.

C. Classification of Payments: The outstanding MSME dues are further categorized into:

(a) Payments made within the prescribed time limit under Section 15 of the MSMED Act.

(b) Payments delayed beyond the prescribed time limit, which will now be inadmissible as an expense under Section 43B(h) of the Income-tax Act.

Purpose of the Amendment

a. Alignment with Section 43B(h) – No Deduction for Delayed Payments: Clause (h) in Section 43B, introduced by the Finance Act, 2023, disallows deductions for payments to Micro and Small Enterprises if they are not made within the time limit specified under Section 15 of the MSMED Act (i.e., within 45 days if a written agreement exists, or 15 days if there is no written agreement). This amendment ensures that any unpaid MSME dues beyond the due date are disclosed and disallowed as an expense.

b. Ensuring Prompt Payments to MSMEs: The government aims to prevent large companies from delaying payments to small businesses and then claiming such dues as expenses. This amendment incentivizes timely payments by making delayed payments non-deductible under income tax law.

c. Better Compliance and Transparency: Auditors and tax authorities now get a clear picture of MSME dues, ensuring that companies properly disclose and account for payments. It enables effective monitoring of compliance with the MSMED Act, particularly regarding payment obligations.

Implications for Businesses

• Companies must ensure timely payments to MSMEs, or else they will lose the tax deduction for such expenses.
• Interest on delayed payments remains non-deductible, and now even the principal amount of delayed payments becomes disallowable under Section 43B(h).
• Tax auditors will play a crucial role in verifying and reporting MSME dues, increasing compliance responsibility.

This amendment strengthens the government’s “Ease of Doing Business” initiative by protecting small enterprises from delayed payments and promoting financial discipline among large businesses.

6. Clause 26.Amendment

In respect of any sum referred to in clause (a),(b), (c), (d), (e), (f) or (g) of section 43B, the liability for which:-

Amendment in Clause 26 of Form 3CD – Replacement of “Allowed” with “Allowable”

The Income-tax (Eighth Amendment) Rules, 2025, have introduced a critical modification in Clause 26 of Form 3CD by replacing the term “allowed” with “allowable” in the context of reporting liabilities under Section 43B of the Income-tax Act, 1961.

Key Changes in Clause 26

Clause 26 pertains to the reporting of sums covered under Section 43B, which includes statutory liabilities such as:

• Tax dues (GST, customs duty, excise duty, etc.)
• Employer’s contribution to PF, ESI, gratuity, etc.
• Interest on borrowings from public financial institutions and banks

Previously, the language used in the clause was:

“The liability for which pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was…”

Now, it has been changed to:

“The liability for which pre-existed on the first day of the previous year but was not allowable in the assessment of any preceding previous year and was…”

Purpose and Rationale Behind the Amendment

Clarification of Tax Treatment

The term “allowed” implies that the expense had already been claimed and granted in a previous assessment. However, Section 43B states that deductions for these expenses are permitted only in the year of actual payment, making the correct term “allowable” rather than “allowed.”

Prevention of Misinterpretation

The earlier wording could have led to confusion, as an expense not yet paid cannot be “allowed” for deduction. By using “allowable”, the amendment reinforces that these expenses are only eligible for deduction upon payment.

Alignment with Section 43B’s “Payment-Based Deduction” Principle

Section 43B follows a strict payment rule—liabilities like GST, excise duty, and employee contributions to PF/ESI can only be deducted if actually paid within the prescribed time. The change ensures that auditors report these amounts correctly, distinguishing between:

• Pre-existing liabilities that were not allowable in the past (because they were unpaid)
• Liabilities incurred during the year but allowable only if paid before the due date under Section 139(1)

Practical Implications for Taxpayers and Auditors

• More accurate reporting: Businesses need to clearly state whether liabilities were paid or unpaid in the respective years.

• Stricter compliance with payment timelines: Deductions will be denied if the tax or statutory dues are unpaid beyond the prescribed period.

• Enhanced audit scrutiny: Tax auditors must verify whether these liabilities were properly disclosed and only claimed in the correct year.

This amendment ensures that only “allowable” expenses under Section 43B are considered for deduction, reinforcing the fundamental principle that statutory liabilities must be paid to be eligible for tax benefits.

7) The clauses 28 and 29 (Omission)

Clause 28. Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia), if yes, please furnish the details of the same.

Clause 29. Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib), if yes, please furnish the details of the same.

Rationale for Omitting Clause 28 and Clause 29 from Form 3CD

The Income-tax (Eighth Amendment) Rules, 2025, have omitted Clause 28 and Clause 29 from Form 3CD, which previously required reporting under Section 56(2)(viia) and Section 56(2)(viib) of the Income-tax Act, 1961. These clauses were relevant to transactions where:

1. Clause 28 – An assessee received shares of an unlisted company without consideration or for inadequate consideration (covered under Section 56(2)(viia)).
2. Clause 29 – An assessee issued shares and received consideration exceeding the fair market value (FMV) of those shares (covered under Section 56(2)(viib), commonly referred to as the Angel Tax provision).

Reasons for Omission of These Clauses

• Repeal of Section 56(2)(viia): Section 56(2)(viia), which taxed the receipt of shares of unlisted companies at a value lower than their fair market value (FMV), has been removed by Finance Act, 2023. Since this provision no longer applies, Clause 28 became redundant and was omitted from Form 3CD.

• Subsuming of Provisions in Section 56(2)(x): The taxation of gifts, including the transfer of unlisted shares at inadequate consideration, has now been shifted to Section 56(2)(x), which is a more comprehensive anti-abuse provision. Since Clause 28 was specifically linked to Section 56(2)(viia), which no longer exists, the reporting requirement in Form 3CD has been removed.

• Modification of Angel Tax Provisions (Section 56(2)(viib)): Clause 29 related to Section 56(2)(viib), which taxed unlisted companies when they issued shares at a price higher than FMV (often applicable to startups and private equity investments). The Finance Act, 2023, expanded the scope of Section 56(2)(viib) to cover non-resident investors, leading to changes in valuation rules under Rule 11UA. As the reporting requirements have been restructured and partly shifted to Income-tax Return (ITR) forms, the need for separate reporting in Form 3CD has been removed.

• Reduction in Compliance Burden for Businesses: Previously, companies receiving equity investments had to justify their share valuation in Form 3CD under Clause 29. This led to practical difficulties, especially for startups raising funds at higher-than-FMV valuations. With the omission of these clauses, auditors are no longer required to report these transactions separately, thereby reducing compliance complexity for businesses.

Thus, the omission of Clause 28 and Clause 29 from Form 3CD is aligned with the legislative changes in Sections 56(2)(viia) and 56(2)(viib). The removal simplifies compliance for companies and auditors, ensuring that taxation of share transactions is governed only under relevant, updated provisions like Section 56(2)(x) and the modified Angel Tax provisions.

8) Clause 31: Amendment: Reporting of Loans and Deposits

Rationale for Amendment in Reporting of Loans and Deposits in Form 3CD

The Income-tax (Eighth Amendment) Rules, 2025 have replaced the phrase “amount of specified sum taken or accepted” with “Amount of each loan or deposit taken or accepted and code of the nature of such amount, as given in Note 1; [Dropdown to be provided]” in Form 3CD.

Key Changes in the Amendment

Elimination of the Term “Specified Sum” The earlier wording “amount of specified sum taken or accepted” was vague and did not clearly define the nature of transactions covered. The amendment replaces it with a more precise term: “Amount of each loan or deposit taken or accepted”, ensuring clarity in reporting.

Standardization with Dropdown-Based Selection

Instead of allowing open-ended descriptions, the amendment introduces a “Dropdown to be provided” for selecting the nature of the transaction. This standardization minimizes errors, misreporting, and subjectivity in classifying transactions.

Alignment with Section 269SS & 269T

The amendment aligns Form 3CD reporting with the loan and deposit provisions under Section 269SS and Section 269T, which regulate the mode of accepting and repaying loans and deposits. The revised wording ensures that only loans and deposits (not other sums) are reported, avoiding unnecessary reporting burdens.

Improved Audit and Compliance Monitoring

By specifying “each loan or deposit”, the amendment ensures that auditors report every individual transaction rather than lumping multiple transactions into a single figure. This helps in better tracking of transactions and detecting any non-compliance under the Income Tax Act.

Exclusion of Non-Loan Transactions

The phrase “specified sum” was broad enough to include advances, credits, or other sums, which may not strictly qualify as loans or deposits under the Income Tax Act. By restricting reporting to only loans and deposits, the amendment removes ambiguity and reduces unnecessary disclosures.

Note 1. – The code for the nature of amount/ receipt/ repayment is as below –

Thus the amendment refines Clause 31 of Form 3CD to enhance clarity, compliance, and ease of reporting. It ensures that only loans and deposits are reported, introduces a dropdown menu for better categorization, and eliminates confusion regarding the term “specified sum”, thereby improving the quality of tax audits.

9) Clause 36B. New Insertion

The introduction of Clause 36B in Form 3CD enhances monitoring of buyback transactions, ensures correct tax treatment, and helps prevent misuse of buybacks for tax planning purposes. By requiring details of the buyback amount and cost of acquisition, it aids tax authorities in identifying potential tax avoidance strategies and ensures better enforcement of Section 115QA.

a) Whether the assessee has received any amount for buyback of shares as referred to in sub-clause (f) of clause (22) of section 2? (Yes/No)  

b) If yes, please furnish the following details:

(i)    Amount received (in Rs.)

(ii)  Cost of acquisition of shares bought back

Rationale for Inserting Clause 36B in Form 3CD

The Income-tax (Eighth Amendment) Rules, 2025 have introduced Clause 36B in Form 3CD to mandate reporting of amounts received by an assessee from the buyback of shares as per Section 2(22)(f) of the Income Tax Act, 1961.

Key Provisions Under Section 2(22)(f)

Section 2(22)(f) defines “deemed dividend”, including amounts received by shareholders from a company buying back its own shares, subject to certain conditions.

Any distribution to shareholders in such cases is taxable in the hands of the company under Section 115QA, which imposes a buyback tax of 20% (plus surcharge & cess) on the distributed income.

However, transactions involving unlisted companies earlier led to potential tax avoidance, where shareholders could classify buyback proceeds as capital gains instead of dividend income to benefit from lower tax rates.

Reasons for Introducing Clause 36B

• Ensuring Proper Tax Compliance : The amendment aims to track buyback transactions and ensure that companies have correctly paid the buyback tax under Section 115QA. It also helps verify whether shareholders are correctly classifying the income (capital gains vs. dividend income). 

• Preventing Tax Avoidance: Some assessees structured buybacks as disguised dividends to evade higher tax rates on dividends. By mandating disclosure of the amount received and cost of acquisition, tax authorities can scrutinize such cases and prevent misclassification of income.

• Improving Transparency in Share Transactions Buyback transactions, particularly in closely held companies, often involve significant related-party transactions and valuation issues.

This clause provides a mechanism for tax auditors to report and verify these transactions, ensuring that buybacks are genuine and not used for tax evasion. 

Aligning with Increased Scrutiny on Buyback Transactions

In recent years, tax authorities have been tightening regulations around buyback transactions, especially involving private and unlisted companies. This amendment strengthens the audit framework by mandating specific reporting of such transactions in tax audit reports.

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