First – Tax Audit Report
Income Tax Return – First
Both by same due date
In this article, the author highlights the issues faced by Tax Auditor and Assessee with respect to furnishing of Tax Audit Report one month prior to submission of Income Tax Return:
A taxpayer’s liability to income tax is not entirely based upon its Audited Financials made in a financial year. There may be some transactions after the end of the financial year but before the due date for furnishing Return of Income. The common example is payment of statutory dues covered u/s 43B of the Income Tax Act, 1961 after the end of a financial year but on or before the due date for furnishing of return of income. An assessee to whom the provisions of section 44AB of the Act are applicable is required to get his accounts audited by the “specified date” and furnish the report of such audit (Form 3CA/3CB & its Annexure in Form 3CD) by that date. Upto Assessment Year 2019-2020, the due date of furnishing such audit report was linked with the due date for furnishing the return of income under sub-section (1) of section 139.
However, for the first time w.e.f. Assessment Year 2020-21, the law entails the assessee to furnish audit report one month prior to the due date of submission of return of income under sub-section (1) of section 139.
The CBDT vide its press release dated 24th October, 2020 extended the due date of furnishing the Income Tax Returns and Audit Reports. It is observed that the date for furnishing of various audit reports under the Act including tax audit report and report in respect of international transaction has been extended to 31st December, 2020, the due date for furnishing of Income Tax Returns for the taxpayers in such cases has been extended to 31st January, 2021. Accordingly, the requirement of furnishing report one month prior to the submission of return of income would create many issues discussed hereunder:
Issues in Tax Audit Report:
Certain clauses required to be furnished in the report u/s 44AB of the Act would become otiose:
Clause 8a of Form 3CD requires a Tax Auditor to report “Whether the assessee has opted for taxation under section 115BA/115BAA/115BAB”. In this regard, the assessee has time till 31st January, 2021 to decide whether to exercise or not exercise the said option. For this clause, the Tax Auditor would not be able to reply the question in affirmative or negative as the time limit for exercising the option by the assessee has not yet expired.
Clause 18 of Form 3CD requires that where there is an additional depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020 then corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, depending upon the option under Clause 8a (supra).
Clause 21(b)(ii) of Form 3CD requires the Tax Auditor to report the details of amounts inadmissible under section 40(ia). In this regard, it is stated that the Tax Auditor would be unjustified if he disallows 30% of the tax deducted while reporting on 31st December, 2020 when the assessee has been allowed time to deposit the amount of tax deducted upto 31st January, 2021.
Clauses 26 of Form 3CD requires the Tax Auditor to report the payment details of liability falling u/s 43B. However, the law allows assessee time upto 31st January, 2021 for the same.
Clause 32a of Form 3CD requires the Tax Auditor to give details of available brought forward loss or depreciation allowance. In the said clause, the Tax Auditor inter alia, requires to give details of “All losses/ allowances not allowed under section 115BAA & Amount adjusted by withdrawal of additional depreciation on account of opting for taxation under section 115BAA”. The reporting of the same would depend upon whether the assessee has exercised option u/s 115BAA.
Clause 33 of Form 3CD requires the Tax Auditor to give section-wise details of deductions, if any, admissible under Chapter VIA or Chapter III. Here also, the reporting of the same would depend upon whether the assessee has exercised option u/s 115BAA.
Let us take a pause here by temporarily overlooking the above anomaly, and let’s recall the logical reasons behind insertion of section 44AB for Tax Audit. The said logic can be traced from departmental circular no. 387, dated 6th July, 1984 wherein in para 17.2 under clause (x), it is mentioned that:
17.2 A proper audit for tax purposes would ensure that the books of accounts and other records are properly maintained, that they faithfully reflect the income of the taxpayers and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers to carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilised for attending to more important investigational aspect of a case.
Due to aforesaid abnormality, the purpose of Tax Audit Report is defeated and the report would not truly reflect the income of the taxpayers and claims for deductions made by the taxpayers. The Assessing Officer would then have to carry out the routine verifications for which he earlier sought to rely upon a Tax Auditor.
In view of above discussions, as also for the detailed reasons set out, it is requested to CBDT that due date of Tax Audit report should be linked with the due date of submission of return of income under sub-section (1) of section 139.
Needless to add that under GST Law, the requirement to furnish Annual Return (Form GSTR 9) precedes the GST Audit Report (Form GSTR-9C). Likewise, it can also be contended that submission of Income Tax Return should precede the submission of Tax Audit Report.