Tax Audit -New clauses inserted by Income Tax (22nd Amendment) Rules 2020 in form 3CD with effect from 01st October 2020

1. As per the Notification No. 82/2020/F. No. 370142/30/2020-TPL dated 1st October 2020 (Notification) issued by the Central Board of Direct Taxes (CBDT), the Income Tax (22nd Amendment) Rules 2020 have been notified effective from the date of notification i.e. 1st October 2020.

2. The aforesaid notification seeks to:

2.1 Amend Rule 5(1) relating to allowable depreciation for assessees opting for concessional rates of income tax

2.2 Insert Rules 21AG and 21AH

2.3 Amend Form no. 3CD in Appendix II

2.4 Amend Form no. 3CEB

2.5 Amend ITR 6 in respect of returns applicable to companies

3. In this article, an attempt is made to understand the reporting requirements of the new clauses added/substituted in form no. 3CD by the aforesaid notification applicable for the Tax Audit to be conducted under section 44AB of the Income Tax Act 1961 (hereinafter “the Act”) for assessment year 2020-2021 as applicable.

Tax Audit

4. As per Para 3(a) of the aforesaid notification, the following 3 clauses/sub clause are inserted / modified with effect from 1st October 2020. The same are reproduced hereunder:

Quote

3. In the principal rules, in Appendix II,-

(a) in Form No 3CD,-

(i) in Part A, after serial number 8 and the entries relating thereto, the following shall be inserted, namely: –

New Clause 8a inserted. Yes/No
Whether the assessee has opted for taxation under section 15BA /115BAA /115BAB?”

(ii) in Part B, –

(I) in serial number 18, after clause (c), the following clauses shall be inserted, namely: –

New sub clauses 18(ca) and (cb) inserted after clause 18(c): Amount
“(ca) Adjustment made to the written down value under section 115BAA (for assessment year 2020-21 only)
(cb) Adjusted written down value”

(II) in serial number 32, for clause (a), the following clause shall be substituted, namely: –

New sub clause (a) substituted for existing clause (a):
Details of brought forward loss or depreciation allowance, in the following manner, to the extent available:
Sl No. Assessment Year Nature of loss/ allowance

(in rupees)

Amount as returned* (in rupees) All losses/ allowances not allowed under section 115BAA Amount as adjusted by withdrawal of additional depreciation on account of opting for taxation under section 115BAA^ Amounts as assessed (give reference to relevant order) Remarks
(1) (2) (3) (4) (5) (6)  (7) (8)

*If the assessed depreciation is less and no appeal pending than take assessed.

^ To be filled in for assessment year 2020-21 only.

5. Audit approach and procedures

5.1 Clause 8(a):

The new clause inserted in part A of the form 3CD requires the assessee to state whether the assessee has opted for taxation under any of the sections 115BA, 115BAA and 115BAB as under:

New Clause 8a inserted. Whether Yes/No
Whether the assessee has opted for taxation under section 115BA / 115BAA /115BAB?”

It may be noted that all the above sections i.e.115BA, 115BAA and 115BAB are applicable to the company assesses only.

5.1.1 The reply to the above clause can either be a “yes” or “no”. If the assessee has not opted for any concessional rates as provided under the sections 115BA, 115BAA and 115BAB, of the Act, then, the tax auditor is not required to take any further steps and no further audit procedure is required to be followed.

5.1.2 The answer to such question as per the clause in such case can be given as “No” only.

5.1.3 However, if the assessee informs that it has opted for the confessional rate of taxation as per the provisions of sections 115BA, 115BAA and 115BAB of the Act, then the audit approach is required to be modified.

5.1.4 Under sub-section (4) of section 115BA, under sub-section (5) of Section 115BAA and under sub-section (7) of section 115BAB, it is provided that to opt for concessional rates of income tax as provided in sections 115BA, 115BAA and 115BAB, the assesse is required to exercise the option for the application of these sections to its case in the prescribed manner.

5.1.4 Rule 21AD in respect of sub-section (4) of section 115BA, Rule 21AE in respect of sub-section (5) of section 115BAA and Rule 21AF in respect of sub-section (7) of section 115BAA prescribes that the assessee can exercise the option provided under these sections by filing the following forms electronically on or before the due date of fling the return under section 139(1), on the website of the department for opting the application of concessional rates under these sections:

Under Section 115BA         –           Form no. 10-IB

Under Section 115BAA      –           Form no. 10-IC

Under Section 115BA         –           Form no. 10-ID

5.1.5 So the auditor should obtain:

5.1.5.1 the acknowledgement from the assessee client, and the copy of the forms 10-IB, 10-IC or 10-ID as applicable, submitted electronically to the department online for the relevant assessment year 2020-2021; and

5.1.5.2 verify whether the same is filed before the due date for filing the return under section 139(1) (i.e. 30th November 2020) for the assessment year 2020-2021,

and then only accept a reply “Yes” to the above question given as per the clause 8a.

5.2 Clause 18(ca) and 18(cb):

The new sub-clauses (ca) and (cb) of the Clause 18 inserted in part B of the form 3CD require the assessee to state whether the adjustments have been made to the written value under section 115BAA and if yes, then adjusted written value to be disclosed as under:

New sub clauses 18(ca) and (cb) inserted after clause 18(c): Amount
“(ca) Adjustment made to the written down value under section 115BAA (for assessment year 2020-21 only)
(cb) Adjusted written down value”

5.2.1 Reporting under sub-clause (ca) of Clause 18:

Sub-clause (ca) of Clause 18 requires adjustments to be made to the written value as provided under section 115BAA to be reported for assessment year 2020-21 only.

Therefore, it may be noted that this sub-clause is not applicable to all other company assessees.

5.2.2 Before proceeding further, it may be noted that this sub-clause is applicable to only those assessees who have exercised the option for application of section 115BAA in their case.

5.2.3 The provision of Section 115BAA which are applicable to certain domestic companies are summarized hereunder:

(i) The domestic company could be any company.

(ii) The domestic company could be engaged in any business or profession.

(iii) The domestic company has not claimed any deductions under the provisions of the following sections during the year under consideration:

Sections Benefits / deductions
(a) 10AA Applicable for newly established Units in Special Economic Zones.
(b)  clause (iia) of sub-section (1) of section 32 Additional depreciation for new plant and machinery @ 20% or @ 35% if in specified backward areas
(c) 32AD Investments in any backward area in Andhra Pradesh, Bihar, Telangana and West Bengal – 15% of the investments
(d) 33AB Deposits scheme of Tea, Coffee or Rubber Board – 100% or 40% of the profits
(e) 33ABA Site restoration fund – 100% of 20% of the profits – Prospecting, extracting or mining
(f) sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 Expenditure on business research, donations to a scientific research, university, college or institution or public company
(g) 35AD Specified Business
(h) 35CCC Expenditure on agricultural extension project
(i) 35CCD Expenditure on Skill development projects
(j) under any provisions of Chapter VI-A under the heading “C. Deductions in respect of certain incomes” other than the provisions of section 80JJAA

(iv) As can be observed from the above para (iii), the issue of adjustment in the written down value of the block of assets can be due to additional depreciation allowable under clause (iia) of sub-section (1) of section 32 (refer item no. (b) in the above table.

For ready reference the relevant portion of clause (iia) of sub-section (1) of section 32 is reproduced hereunder:

“Quote

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :

Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect, as if for the words “twenty per cent”, the words “thirty-five per cent” had been substituted :

Unquote”

(v) Accordingly, a one time additional depreciation is allowable @20% over and above the normal depreciation to a manufacturing domestic company for any new machinery or plant (other than ships and aircraft), acquired and installed after 31st March 2005.

The one time additional depreciation is allowable @ 35% instead of 20% in case of for any new machinery or plant (other than ships and aircraft), acquired and installed on or after 1st April 2015 but before 1st April 2020,  for setting up any undertaking or enterprise in the backward area notified by the central government in the following states:

(a) Andhra Pradesh

(b) Bihar

(c) Telangana and

(d) West Bengal

(vi) If the above additional depreciation could not be claimed due to inadequacy of the taxable profit or for any other reason, it could be carried forward as unabsorbed depreciation, which could be carried forward without any time lines.

(vii) Set off of any loss carried forward or depreciation from any earlier assessment year, if attributable to any of the above deduction is not to be allowed if the option under section 115BAA is exercised.

(viii) Set off of any loss carried forward or allowance for unabsorbed depreciation deemed so under section 72A is not allowable if the option under section 115BAA is exercised.

(ix) Any other depreciation i.e. normal depreciation is allowable in a manner to be prescribed.

(x) Accordingly, Notification No. 82/2020/F. No. 370142 /30 / 2020-TPL dated 1st October 2020 issued by the CBDT has prescribed that the assessee exercising the option under section 115BA, 115BAA and 115BAB shall restrict the rate of depreciation to 40% in case of the items of the block of assets where the rate of depreciation prescribed as per the rules are more than 40%. However, since this is effective from 1st October 2020, the same is not applicable and therefore not required to be reported for the assessment year 2020-2021.

5.2.4 So it will be imperative for the assessee domestic companies to identify and quantity the following:

(i) unabsorbed depreciation as at 1st April 2019, in respect of items of deductions attributable to deductions as listed out in para 5.2.3 (iii) above.

(ii) unabsorbed depreciation as at 1st April 2019, in respect of carried forward unabsorbed depreciation deemed to be allowable to the assessee companies in respect of amalgamations under section 72A

5.2.5 The auditor is required to check and verify the correctness of the unabsorbed depreciation based on the previous years’ income tax returns and the assessment orders and compare the same with the adjustments made in the adjusted figures of the opening balance as at 1st April 2019 and the balances as a result of the additions of unabsorbed depreciation on the opening block of assets of plant and machinery (except ships and air crafts).

5.2.6 After quantifying the above items of unabsorbed depreciation, the written down value of the block of assets as at 1st Aril 2019 I to be adjusted and reported are as under:

Clause 18(ca): The amount of adjustment made on account of unabsorbed depreciation in respect of unabsorbed depreciation (i.e additions made to the block of assets as at 1st April 2019);

Clause 18(cb): The adjusted written down value of the block of assets after making the above addition of unabsorbed depreciation.

5.3 Clause 32(a):

The existing sub-clauses (a) of clause 32  in part B of the form 3CD is substituted, with a new clause as under:

New sub clause (a) substituted for existing clause (a):
Details of brought forward loss or depreciation allowance, in the following manner, to the extent available:
Sl No. Assessment Year Nature of loss/ allowance

(in rupees)

Amount as returned* (in rupees) All losses/ allowances not allowed under section 115BAA Amount as adjusted by withdrawal of additional depreciation on account of opting for taxation under section 115BAA^ Amounts as assessed (give reference to relevant order) Remarks
(1) (2) (3) (4) (5) (6)  (7) (8)

*If the assessed depreciation is less and no appeal pending than take assessed.

^ To be filled in for assessment year 2020-21 only.

5.3.1 The clause requires information in respect of brought forwarded losses and unabsorbed depreciation, which can be verified from the previous return and the assessment orders

5.3.2 The above brought forwarded lossess/allowance not allowed under section 115BAA are to be listed out assessment year wise and section wise as per the return (and where assessed, as per the assessment order) are to be reported under this clause. The figures for the unabsorbed additional depreciation under section 32(1)(ii) is to be separately reported.

5.3.3 It may be noted that the unabsorbed business losses can be carried forward only for eight years. Therefore while listing out the losses under this clause, it should be noted that the business losses for more than eight years are not to be considered under this clause.

5.3.4 The auditor should obtain the statement of unabsorbed losses and depreciation for the assessment year carried forward for the assessment year 2019-2020 and verify the items as listed out in 5.3.2 and 5.3.3 above.

5.3.5 These details should be collated and collected assessment year wise and reported in the above table in clause 32(a).

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