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Rectification for Addition of Income by CPC reported under clause 16(d) of Tax Audit Report for AY 2021-22

GOT DEMAND FOR REPORTING DONE BY YOUR CHARTERED ACCOUNTANT UNDER CLAUSE 16(D) FOR OTHER INCOME? RESOLUTION BY RECTIFICATION.

Clause 16 of Tax Audit Report issued u/s 44AB of Income tax Act requires an auditor to report following details –

Clause 16 of Form 3CD

1. Amounts not credited to the profit and loss account, being: –

2. The items falling within the scope of section 28

3. The proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax, where such credits, drawbacks or refund are admitted as due by the authorities concerned

4. Escalation claims accepted during the previous year

5. Any other item of income

6. Capital receipt, if any

While we are not commenting on other sub-clauses in this article as our prime focus is on sub-clause (d) of clause 16.

There were two school of thoughts until now for reporting under this clause. Where majority Chartered Accountants believed that since audit report is issued under clause 44AB, which talks about only business income, all other income earned by individual assesses which are not in the nature of business, like Savings Interest earned or PPF Interest or gain received on sale of mutual funds, etc. are not required to be reported under this clause as the same are also not considered for deciding the tax audit limit.

There is another group which also does not report under this clause but they add all other incomes even those not related to business as business receipts and then while filing return of income deduct the same from business income and show under respective head of incomes.

Another school of thought says that since these are OTHER INCOME not credited to Profit and Loss account but it is earned by the Individual assessee whose report we are filing, we ought to report the Income reported under different heads of Income in Return of Income under clause 16(d).

While there were no issues faced by assesses until now for any of the option adopted by their respective Chartered Accountants, AY 2021-22 was different. Assessees were unnecessarily penalised for difference of opinion between CPC and Chartered Accountants by raising huge demand of tax.

CPC has considered sub-clause(d) and sub-clause (a) as one and the same. CPC believes that all the income reported under clause 16(d) are business income falling under section 28 which are not credited to Profit & Loss Account and has therefore added the total amount reported under the said clause in Income earned from Profits and Gains from Business and Profession, thus leading to double taxation on such income.

This difficulty was faced all Chartered Accountants who have reported under clause 16(d). For the solution there are 2 options, either you revise your audit report and file for rectification and your demand is sure to be removed. Another is rectification of return by using basic Mathematics.

OPTION – 1

Ask your chartered accountant to revise their audit report and remove the amount reported under clause 16(d). While very few chartered accountants would accept to revise their audit report, this is the sure sure way to remove your demand. After the revised audit report is filed by Chartered Accountant and approved by Asseessee, file for Rectification by “Reprocessing the return”. Rectification order generally takes approximately 15 days to process the return.

OPTION – 2

Step-1 Add the amount in PGBP

Add the amount in Profits and Gains from business and Profession under Cell 5d of Table 5 of Schedule Part A – OI Other Information (mandatory if liable for audit under section 44AB; for others, fill if applicable)

This amount will also need to be reported under Schedule BP > Table A-From business or profession other than speculative business and specified business > Row no. 23 Any other item of addition under section 28 to 44DA.

This will Increase your Business Receipts.

Step – 2 Amount reported under Other Taxable heads of Income

Remove the amount taxable under other heads as “Income Reported under Other heads of Income”. Just remember to properly select the head of Income where the income is actually reported in Original ROI.

Report the amount in respective head in row 3> of Table A From business or profession other than speculative business and specified business of> Schedule BP – Computation of income from business or profession

Step-3 For Exempted Income

For incomes which are exempt from tax but reported under clause 16(d) like Interest on PPF or Gold Interest or Agriculture Income, report the same under Row 5c > Table A From business or profession other than speculative business > Schedule BP Computation of income from business or profession

All the steps put together shall revert the same result as what was originally filled in ROI.

Validate the file and file rectification request, as “Return Data Correction (Offline)”

This should do the trick and remove your demand.

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4 Comments

  1. Shrikant says:

    Option 2 appears to be ingenious solution but could be a case of cure is worse than the disease. Form 3CD 16(d) very clearly describes nature of each such income and that it is not related to business/profession can easily be explained in appeal. Adding it suo moto to business income, as is suggested, might complicate the issue.
    In AY 2021-22 processing, CPC is ridiculously adding anything which is reported in Part A-OI 5(d) ignoring very clear breakup stated in 3CD 16(d) and even the explanation given in the filed responses.
    Incidentally, CPC had issued similar notices in AY 2020-21 also. But then the replies to them were considered and nothing was added in 143(1). By the way, those notices are now also visible under e-proceedings.
    In AY 2021-22, as could be seen from the view filed return timeline, 143(1)(a) notice got generated soon after filing, almost automatically, and is shown to have been issued on the date. However, because of portal glitch, actual notice was emailed only on 11-4-2022. Unlike AY 2020-21, notices/response of AY 2021-22 are NOT yet visible under e-proceedings ..and that is why i.e. maybe because of the same portal glitch, processing for AY 2021-22 has been done without looking at the responses!

    1. Krupa Shah says:

      you use any software or file through utility? you need to upload new json and ensure that the amounts are properly reflected in respective schedules, BP as well as OI.

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