Analysis of changes

introduced in
Guidance Note on

TAX AUDIT
Introduction
ICAI has released the Guidance Note on Tax Audit under Section
44AB of the Income-tax Act, 1961 (Revised 2023) [hereinafter referred
to as ‘2023 GN’ for short]. The 2023 GN makes a lot of changes in
recommendations vis-a-vis Guidance Note on Tax Audit under Section
44AB of the Income-tax Act, 1961 (Revised 2022)[‘2022 GN’]. These are
discussed in the paras below.
Contents
1. Audit report/certificate not to be treated as invalid if UDIN not updated within 4
60 days

2. Revision of the tax audit report is mandatory in the circumstances mentioned in 4

Rule 6G(3)

3. Determination of turnover in respect of derivatives, futures and options 5

4. Ineligibility of internal auditors as tax 6

auditors

5. Tax audit assignment cap for CA Firms- numerical illustration deleted to bring 7
more clarity

6. Adherence to relevant Auditing Standards and Guidance Notes for special 8

purposes

7. Tax Auditor’s authority to call for and access books of account, information, 8
documents, explanations, etc.

8. Discontinuation of annual revised Tax Audit Guidance Note for each assessment 9
year

9. Changes in the definition of “turnover” and “gross receipts” 9

10. Determination of turnover in case of assessees engaged in multiple business 11

activities

11. Omission of views on AO’s authority to mandate audit where turnover doesn’t 12
exceed section 44AB limits

12. Omission of views on audit requirements for agriculturists under Section 44AB 12

13. Omission of opinion on tax auditor’s responsibility for delayed completion and 12
uploading of Tax Audit Report

14. Omission of the opinion regarding AO’s authority to summon a Tax Auditor and 13
levy penalty under section 271J

15. Omission of opinion that AO should ordinarily accept figures in Form 3CD 13

16. Referring to relevant clauses of Form No. 3CD in Para 3 of Form 3CA 14

17. Referring to relevant clauses of Form No. 3CD in Para 5 of Form 3CB 14

18. Differences of opinion with regard to particulars furnished by assessee for Form 14
3CD to be reported by the tax auditor in Para 5 of Form No.3CB

19. Reporting of address under Clause 2 of Form No.3CD 15

Contents
20. Reporting of multiple registrations under indirect tax laws in Clause 4 of Form 15
No.3CD

21. Reporting about concessional tax regimes under Clause 8A of Form No.3CD- 15

22. Income taxable under a specific section yet not credited to P&L to be reported 16
against clause 16(a)

23. Govt grant in relation to a specific fixed asset and deducted from the gross 16
value of that asset is not to be reported in clause 16(e) of Form No. 3CD

24. Tax auditor to use his professional expertise and judgement to determine 16
whether receipt is taxable for reporting under sub-clauses (a) to (d) of clause 16
of Form No.3CD

25. Cross-referencing required of clauses 17 and 16(d) of Form No. 3CD 17

26. Reporting of amounts inadmissible under section 40(a) in Clause 21(b) of Form 17
No.3CD

27. Reporting of provision for payment of gratuity not allowable under section 17
40A(7) in Clause 21(e) of Form No. 3CD

28. Reporting of any sum paid by the assessee as an employer not allowable under 18
section 40A(9) in Clause 21(f) of Form No. 3CD

29. Reporting of particulars of payments made to persons specified under section 18

40A(2)(b) in Clause 23 of Form No. 3CD

30. Reporitng of any amount of profit chargeable to tax under section 41 and 18
computation thereof in Clause 25 of Form No. 3CD

31. Sums covered by Section 43B are allowed only on a payment basis, irrespective 19
of assessee’s method of accounting

32. Reporting of brought forward loss or depreciation allowance under Clause 32(a) 21
of Form No. 3CD

33. Applicability of TDS and TCS 22

34. Reporting of demands and refunds under any tax laws other than Income Tax 22
Act, 1961 and Wealth Tax Act, 1957

35. Reporting of break-up of total expenditure of entities registered or not 22

registered under GST under Clause 44
Analysis of changes introduced in Guidance Note on Tax Audit
5

1. Audit report/certificate not to be treated as invalid if

UDIN not updated within 60 days

Para 9.38 of the 2022 GN stated, “If the UDIN for any audit report/
certificate is not updated within the 60 days provided for the same,
the department will treat such audit report/certificate as invalid
submission.” The 2023 GN omits this sentence. No provision in the
Income-tax Act treats audit reports or certificates as invalid on not
updating UDIN. This might be the reason for omitting the relevant
sentence.

The 2023 GN also omits another sentence from Para 9.38 of 2022
GN, stating, “The verification of UDIN is in line with the ongoing
initiatives of the Income Tax Department (ITD) for integrating with
other government agencies and bodies.” Para 9.38 of the 2022 GN is
renumbered as Para 9.36 in the 2023 GN.

2. Revision of the tax audit report is mandatory in the

circumstances mentioned in Rule 6G(3)

Sub-Rule (3) of Rule 6G provides that the tax audit report furnished
under this rule may be revised by the person by getting the revised
report of audit from an accountant, duly signed and verified by such
accountant, and furnish it before the end of the relevant assessment
year for which the report pertains if there is payment by such person
after furnishing of report under sub-rules (1) and (2) which necessitates
recalculation of disallowance under section 40 or section 43B.

Thus, it may happen that after issuing the tax audit report, but before
the due date for filing the return under section 139(1), the assessee may
make payment of tax deducted at the source referred to in sub-clauses
(i) or (ia) of clause (a) of section 40 or of tax, duty, cess, fee or other
payments referred to in Section 43B deduction of which is allowed only
on actual payment basis. In such a case, sub-rule (3) of Rule 6G provides
for the revision of the tax audit report by the tax auditor.

Para 15.13 of 2022 GN stated, “However, it is not mandatory to revise

tax audit report in the circumstances mentioned in Rule 6G(3). If
the tax audit report is revised, while revising the tax audit report,
prescriptions in ‘Guidance Note on Revision of the Audit Report’ should
be considered.” The 2023 GN omits the above provisions.

Therefore, in the circumstances covered by Rule 6G(3), issuing a revised

tax audit report is mandatory, and a revised tax audit report is to be
issued regardless of prescriptions of the ‘Guidance Note on Revision of
the Audit Report’.
6 Analysis of changes introduced in Guidance Note on Tax Audit

It is to be noted that as per section 143(1)(a)(iv), a return filed under

section 139 or in response to notice under section 142(1) is processed
to disallow expenditure or increase the income indicated in the audit
report but not taken into account in computing the total income in the
return. Thus, the tax audit report revision is also mandatory to avoid
such disallowances or additions.

It may be advisable for tax auditors to make it clear to clients in the

letter of engagement that-

(a) client shall deposit dues covered by section 40(a)(i)/(ia) or section

43B before signing the tax audit report so that details of payment
can be mentioned in the tax audit report and uploaded and

(b) furnishing a revised tax audit report covering payments of such

dues between the date of the tax audit report and the date of
deposit of such dues in October will entail the specified amount of
additional audit fees.

3. Determination of turnover in respect of derivatives,

futures and options

Para 5.14(b) of the 2022 GN provided the following guidance on how

turnover or gross receipt in respect of transactions in derivatives,
futures and options is to be determined:

(a) The total of favourable and unfavourable differences shall be taken

as turnover.

(b) The premium received on the sale of options is also to be included

in turnover. However, where the premium received is included for
determining net profit for transactions, the same should not be
separately included.

(c) In respect of any reverse trades entered, the difference thereon

should also form part of the turnover.

The above guidance left a lot of doubts unanswered. For instance, what
is to be done in respect of open positions (i.e., trades not squared up
as at year-end and settled in the next financial year)? What if there
is a delivery-based settlement in derivative contracts? What about
treatment in the hands of the transferor of the underlying asset in case
of delivery-based settlement in derivative contracts?
Analysis of changes introduced in Guidance Note on Tax Audit
7

The new guidance in Para 5.10(b) of the 2023 GN provides that the
turnover or gross receipt in respect of transactions in derivatives,
futures and options is to be determined as follows:

(a) The total of favourable and unfavourable differences shall be taken

as turnover in case of squared-off transactions.

(b) In case of an open position at the end of the financial year (i.e.,
trades which are not squared off during the same financial year),
the turnover from the said transaction should be considered in the
financial year when the transaction has been actually squared off.

(c) In the case of delivery-based settlement in a derivatives

transaction, the difference between the trade and settlement
prices shall be considered as turnover. Further, in the hands of the
transferor of the underlying asset, the entire sale value shall also
be considered as business turnover where the underlying asset is
held as stock in trade.

(d) The premium received on the sale of options is also to be included

in turnover. However, where the premium received is included for
determining net profit for transactions, then such net profit should
not be separately included.

(e) In respect of any reverse trades entered, the difference thereon

should also form part of the turnover.

Para 5.10(b) of the 2023 GN clarifies that the above guidance for the
determination of turnover “is only and only for the purpose of
computing ‘turnover’ for tax audit”

4. Ineligibility of internal auditors as tax

auditors

Para 9.29 of 2022 Guidance Note stated, “But an internal auditor of the
assessee cannot conduct tax audit if he is an employee of the assessee”.
This sentence is omitted from by 2023 Guidance Note as it created
confusion by contradicting the very next sentence, which sets out the
correct extant legal position that “The Council of ICAI in its 281st meeting
held from 3rd to 5th October 2008 decided that an internal auditor of
an assessee, whether working with the organisation or independently
practicing chartered accountant or a firm of chartered accountants,
cannot be appointed as his tax auditor”. Para 9.29 of 2022 GN is now
renumbered as Para 9.27 in 2023 GN.
8 Analysis of changes introduced in Guidance Note on Tax Audit

5. Tax audit assignment cap for CA Firms- numerical

illustration deleted to bring more clarity

The 2023 GN omits the following illustration on the limit on number of

tax audit assignments that can be accepted by firm/LLP of CAs given in
Para 9.31 of 2022 Guidance Note:

If there are 10 partners in a firm of Chartered Accountants in practice,

then all the partners of the firm can collectively sign 600 tax audit
reports. This maximum limit of 600 tax audit assignments may be
distributed between the partners in any manner whatsoever. For
instance, 1 partner can individually sign 600 tax audit reports in case
the remaining 9 partners do not sign any tax audit report.

The above illustration gives a misleading impression that a CA could

join as a partner in say 12 CA firms/LLPs and can get benefit of
60*12=720 tax audits every year and 780 tax audits if additionally he has
a proprietary firm. This is not the case. The illustration in the above case
will apply only if:

(a) None of the 10 partners has a proprietary firm or is a partner in any

other CA firm and

(b) Other firms in which these partners are partners have not
accepted any tax audit assignments against their quota of
60 each, and they have not accepted any tax audits in their
proprietary practice.

The correct position is only a CA in full-time practice can do a tax audit

under section 44AB, and every CA in full-time practice can only do
60 tax audit assignments every financial year, whether through his
proprietary firm or by joining CA firms/CA LLPs as partners. The CA
firms or LLPs in which a CA is a partner will have to inter-se adjust his
quota of tax audits such that total tax audits accepted by all the firms/
LLPs in which he is a partner cannot exceed 60. For example, CA X is a
partner in CA firms A&Co and B&Co. A&Co has accepted 25 tax audits
in its quota. B& Co have accepted 15 tax audits against his quota. In his
proprietary practice, he has accepted 9 tax audits. Now, he joins C LLP
as a partner. C LLP can only accept 60-(25+15+9)=11 tax audits against his
quota of 60.

Para 9.32 of the 2022 GN (renumbered as Para 9.30 of the 2023 GN) sets
out the correct legal position explained above as under:

“Where any partner of the firm of chartered accountants in

practice is also a partner of any other firm or firms of chartered
accountants in practice, the ceiling limit of 60 shall apply with
reference to all the firms together in relation to such partner.
Analysis of changes introduced in Guidance Note on Tax Audit
9

Similarly, where any partner accepts one or more tax audit

assignments in his individual capacity, the total number of such
assignments under section 44AB which may be accepted by
him, whether directly in his individual capacity or as a partner of
the firm of chartered accountants in practice shall not exceed 60
tax audit assignments.”

6. Adherence to relevant Auditing Standards and

Guidance Notes for special purposes

Para 13.1 of 2022 GN provided that the tax auditor “would also be well
advised” to refer to the other Standards on Auditing (SAs) as may be
relevant, issued by ICAI, as well as the “Guidance Note on Audit Reports
and Certificates for Special Purposes”. The 2023 GN replaces the words
“would also be well advised ” in Para 13.1 with the word “should”.

According to NFRA [See NFRA Order No. NF-20012/1/2020, dated

22nd July 2020 in the matter of CA Udayan Sen], the word “should”
is presumptively mandatory as distinct from the unconditional
responsibility denoted by the word “shall”. NFRA has cited the Public
Committee Accounting Oversight Board (PCAOB) supporting this
interpretation. Based on NFRA’s view, the word “should” in Para 13.1 of
2023 GN means that the auditor must comply with requirements of
this type unless the auditor demonstrates that alternative actions he
followed in the circumstances were sufficient to achieve the objectives
of such requirements.

Therefore, the tax auditor would need to comply with SAs and
“Guidance Note on Audit Reports and Certificates for Special Purposes”
unless he demonstrates that alternative actions he followed in the
circumstances were sufficient to achieve the objectives of requirements
of relevant SAs and the said Guidance Note.

7. Tax Auditor’s authority to call for and access books of

account, information, documents, explanations, etc.

Para 13.2 of 2022 Guidance Note provided that “13.2 Section 143 of the
Companies Act 2013 gives certain powers to the auditors to call for the
books of account, information, documents, explanations, etc. and to
have access to all books and records. No such powers are given to the
tax auditor appointed under section 44AB.”The 2023 GN omits the
sentence “No such powers are given to the tax auditor appointed under
section 44AB” from Para 13.2.
10 Analysis of changes introduced in Guidance Note on Tax Audit

It is indeed true that there is no provision in the Act along the lines
of section 143(1) of the Companies Act,2013 that gives powers to the
tax auditors to call for the books of account, information, documents,
explanations, etc. and to have access to all books and records. Thus, it is
not clear why the sentence has been omitted.

8. Discontinuation of annual revised Tax Audit Guidance

Note for each assessment year

The 2023 GN has been released with less than a month left for
uploading tax audit reports for assessment year 2023-24. CAs are left
with no time to read the new 2023 GN, let alone discuss and digest it to
factor it into their audit programmes. At the same time, one cannot lose
sight of the fact that bringing out a revised and updated edition of the
Tax Audit Guidance Note is a tedious task and takes time. It is essential
to update and revise the Guidance Note thoroughly and release it by
April or May so that the update and revision are thorough and CAs get
enough time to digest and apply it. Therefore, the decision of the Direct
Tax Committee to “issue at annual intervals, a revised and updated
version of the Tax Audit Guidance Note, offering guidance for each
assessment year” seems to be withdrawn by 2023 GN by omitting Para
1.6 of 2022 GN which read as under-.

“1.6 This Guidance Note is revised to facilitate the compilation

of particulars and conducting audit and issuing a report for the
Assessment Year 2022-23. Further, DTC has decided to issue, at
annual intervals, a revised and updated version of the Tax Audit
Guidance Note, offering guidance for each assessment year. “

9. Changes in the definition of “turnover” and “gross

receipts”

Applicability of tax audit under section 44AB of the Income-Tax Act,1961

(‘the Act’) is linked to:

 Total sales, turnover or gross receipts exceeding the limit of

₹1crore(limit of Rs. 10 crores in certain specified cases) in case of
persons carrying on business; and

 Gross receipts from profession exceeding Rs. 50 lakhs

The definition of the terms “total sales”, “turnover”, and “gross receipts”
are important. But, these terms are not defined in the Act. Successive
editions of the Tax Audit Guidance Note issued by ICAI have been
offering guidance.
Analysis of changes introduced in Guidance Note on Tax Audit
11

Successive editions of Tax Audit Guidance Note, including 2022 GN

cited the definitions in the Guide to Company Audit issued by the
Institute in the year 1980, the Statement on the Amendments to
Schedule VI to the Companies Act, 1956” issued by the Institute (Page
14, 1976 edition)and The Statement on the Companies (Auditors’ Report)
Order, 2003 issued by the Institute in April 2004. These definitions
were cited by successive editions of Tax Audit Guidance Note, though
Schedule VI of the Companies Act,1956 has been replaced with
Schedule III of the Companies Act,2013 and CARO,2003 was replaced
by CARO,2015, then by CARO 2016 and finally by CARO 2020. Therefore,
in order to remove references to old ICAI guidance dealing with
repealed obsolete legislation, 2023 GN omits Paras 5.5 to 5.7 of 2022 GN,
which discussed definitions of ‘turnover’ given in Guide to Company
Audit issued by the Institute in the year 1980, the Statement on the
Amendments to Schedule VI to the Companies Act, 1956” issued by the
Institute (Page 14, 1976 edition)and The Statement on the Companies
(Auditors’ Report) Order, 2003 issued by the Institute in April 2004.

ICAI’s “Statement on the Amendments to Schedule VI to the

Companies Act, 1956” (Page 14, 1976 edition), cited in Para 5.6 of 2022
GN, laid down the following principles for determination and disclosure
of turnover:

(a) Extra and ancillary charges included in invoices, such as those

relating to packing, freight, forwarding, interest, commission,
etc., should be excluded from turnover figures except where
separate demarcation of such charges is not possible because of
the company’s accounting system or where the company’s billing
procedure involves a composite charge inclusive of various services
rather than a separate charge for each service.

(b) If the invoices contain composite charges, it would not be proper

to attempt a demarcation of ancillary charges on a proportionate
or estimated basis. For example, if a company makes a composite
charge to its customer, inclusive of freight and despatch, the
charge so made should accordingly be treated as part of the
turnover. It would not be proper to reduce the value of the
turnover with reference to the approximate value of the service
relating to freight and despatch.

(c) On the other hand, if the company makes a separate charge for
freight and despatch and for other similar services, such charges
should be ignored when computing the value of the turnover to
be disclosed in the Profit and Loss Account.

(d) Turnover should be computed by reference to the company’s

invoicing and accounting policy and may thereby vary from
company to company.
12 Analysis of changes introduced in Guidance Note on Tax Audit

(e) For the sake of consistency as far as possible, a company should

adhere to the same basic policy from year to year. If there is any
change in the policy, the effect of that change may need to be
disclosed if it is material so that a comparison of the turnover
figures from year to year does not become misleading.

To say that the definition of “turnover” would vary from company to

company according to the company’s invoicing and accounting policy
is not an acceptable proposition in this era of Accounting Standards
and Income Computation and Disclosure Standards. Therefore, Para
5.6 of 2022 GN containing principles in (a) to (e) have been omitted
and are no longer applicable for the determination of ‘turnover’ for the
purposes of applicability of tax audit under section 44AB.

The Guide to Company Audit of 1980 cited in Para 5.5 stated, “Where
excise duty is included in turnover, the corresponding amount should
be distinctly shown as a debit item in the profit and loss account.”
The era of excise duty is gone as GST replaced it with effect from July
2017. Only petroleum products and liquor are under excise duty today.
Modern accounting practice under the Accounting Standards is to
account for turnover exclusive of indirect taxes like GST by crediting
the GST component of sales invoice to a GST payable account, which
liability account is debited when GST is paid through adjustment of
ITC credit or monetarily by cash or bank. Therefore, para 5.5 of 2022 GN
stands omitted.

10. Determination of turnover in case of assessees

engaged in multiple business activities

Para 5.21 of 2022 GN provided that in cases where the assessee carries
on more than one business activity,

(a) the results of all business activities should be clubbed together. In

other words, the aggregate sales, turnover and/or gross receipts
of all businesses carried on by an assessee would be taken into
consideration in determining whether the prescribed limit
(presently Rs. 1 crore & Rs 10 crore for certain specified cases) as
laid down in section 44AB has been exceeded or not.

(b) However, where the business is covered by section 44B or 44BBA,

turnover of such business shall be excluded.

(c) Similarly, where the business or profession is covered by section

44AD, 44ADA or 44AE and the assessee opts to be assessed under
the respective sections on a presumptive basis, the turnover
thereof shall be excluded.
Analysis of changes introduced in Guidance Note on Tax Audit
13

Para 5.17 of the 2023 GN retains the above guidance with one change
in (c) above. Para 5.17 of the 2023 GN requires the exclusion of turnover
of businesses for which presumptive taxation under section 44BB or
44BBB is opted for.

11. Omission of views on AO’s authority to mandate audit

where turnover doesn’t exceed section 44AB limits

Para 5.22 of the 2022 GN expressed a view that if AO wants assessee

to get his accounts audited in cases where the figures of turnover as
appearing in the books of account of the assessee do not exceed the
prescribed limits, he has no option but to pass an order for special
audit under section 142(2A) of the Act directing the assessee to get his
accounts audited from a chartered accountant as may be nominated
by the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner.

The 2023 GN omits the above views on what AO can or cannot do if

he wants the assessee to get accounts audited where turnover figures
as per books of account of the assessee do not exceed turnover limits
prescribed in section 44AB.

12. Omission of views on audit requirements for

agriculturists under Section 44AB

It was opined in para 6.1 of the 2022 GN that an agriculturist is not

required to get his accounts audited under section 44AB if he does
not have any income under the head “Profits and gains of business or
profession” chargeable to tax under the Act, This is so even if his total
sales of agricultural products may exceed the prescribed limit.

The 2023 GN omits the above opinion from Para 6.1.

13. Omission of opinion on tax auditor’s responsibility for

delayed completion and uploading of Tax Audit Report

A question arises as to whether a tax auditor can be held responsible

for not completing the tax audit and uploading the tax audit report
before the specified date. In this regard, Para 7.2 of the 2022 GN opined
as under:
14 Analysis of changes introduced in Guidance Note on Tax Audit

 Answer to this question will depend on the facts and

circumstances of the case.

 If there is any unreasonable delay on the part of the tax auditor, he

is answerable to the Institute if a complaint is made by the client.

 However, if the delay in the completion of the audit is attributable

to his client, the tax auditor cannot be held responsible.

 Therefore, no chartered accountant should accept audit

assignments which he cannot complete within the prescribed
time frame.

The 2023 GN omits the above opinion.

14. Omission of the opinion regarding AO’s authority to

summon a Tax Auditor and levy penalty under section
271J

Para 9.12 of the 2022 Guidance Note opined that AO or any other
authority who is authorised to issue summons and to call for evidence
or documents, can issue notice under section 131 of the Act to the tax
auditor and can call upon the tax auditor who has audited the accounts
to give any evidence or produce documents. Para 9.12 also opined that
an accountant who furnishes incorrect information in Form 3CA/Form
3CB/Form 3CD can be penalised by AO, CIT (A), or JCIT(A) under section
271J. GN 2023 omits Para 9.12.

The reason for omitting this para in respect of penalty under section
271J is unclear since section 271J is in the statute book and has not been
omitted.

The reasons for deleting the para so far as summons to the tax auditor
is concerned is understandable as there are doubts on whether CA,
in his capacity as tax auditor, can be compelled to produce books of
account as this violates confidentiality obligations imposed by clause
(1) of Part I of the Second Schedule to CA Act,1949 without there being
immunity clause like section 143(13) of Companies Act,2013.

15. Omission of opinion that AO should ordinarily accept

figures in Form 3CD

It was opined in Para 9.17 of the 2022 GN that-

 Since a CA duly verifies the figures in Form No. 3CD, tax authorities
should normally accept them.
Analysis of changes introduced in Guidance Note on Tax Audit
15

 AO may compute the income of the assessee by adopting

different figures if there is a specific reason for differing from the
view taken by the tax auditor,

16. Referring to relevant clauses of Form No. 3CD in Para 3

of Form 3CA

Para 17.7 of 2022 GN provides that:

 The Tax Auditor’s observations/comments/ adverse remarks/

disclaimers on any of the clauses of Form 3CD should be reported
in Para 3 of Form No.3CA, wherever required.

 In Form 3CD, while reporting under any clause, the tax auditor
may be of the view that any elucidation, qualification, disclaimer,
etc., is required. These aspects may also be stated in Para 3 of Form
No.3CA.All these aspects should also refer to the number of the
clause (of Form No. 3CD) to which it relates.

2023 GN inserts the words and parentheses “(of Form No. 3CD” in Para
17.7 to bring more clarity to the requirement

17. Referring to relevant clauses of Form No. 3CD in Para 5

of Form 3CB

Para 18.5 of 2022 GN provides that in Form 3CD while reporting under
any clause, the tax auditor may be of the view that any elucidation,
qualification, disclaimer, etc., is required to be stated. These aspects
may also be stated in the said paragraph(Para 5 of Form No.3CB). All
these aspects should also refer to the number of the clause (of Form
No. 3CD) to which it relates.

18. Differences of opinion with regard to particulars

furnished by assessee for Form 3CD to be reported by
the tax auditor in Para 5 of Form No.3CB

2023 GN has amended para 18.6 of 2022 GN to provide that where the
tax auditor has a difference of opinion with regard to the particulars
furnished by the assessee, he shall report these differences of opinion in
paragraph 5 of Form 3CB.
16 Analysis of changes introduced in Guidance Note on Tax Audit

19. Reporting of address under Clause 2 of Form No.3CD

Para 20.2 of the 2022 GN required that the tax auditor should verify
the relevant details of the address of the assessee from the available
income tax records or from the profile of the assessee on the Income
Tax portal. The 2023 GN amends Para 20.2 to require that in case of
difference, the same should be reported as an observation in Para 3 of
Form No.3CA/Para 5 of Form No.3CB.

20. Reporting of multiple registrations under indirect tax

laws in Clause 4 of Form No.3CD

Para 20.4 of 2022 GN provides that if multiple registration numbers

are available for any indirect tax, all such registration numbers should
be examined by the tax auditor. Now, the question is, what is the tax
auditor to do after examining them all?

2023 GN amends Para 4 by adding the words “and duly reported” at the
end of the sentence. Thus, if multiple registration numbers are available
for any indirect tax, all such registration numbers should be examined
by the tax auditor and duly reported.

2023 GN omits the sentence “Therefore, the question of whether the

assessee is liable to pay any of the aforesaid indirect taxes should be
considered. needs to be answered.” from Para 20.4. Thus, the tax auditor
is not required to determine the complex question of whether the
assessee is liable to pay any of the indirect taxes mentioned in clause 4.

Clause (4) should be interpreted in light of the fact that it forms part of
Part A of Form No. 3CD, which generally requires the auditor to give the
factual details of the assessee. Accordingly, the tax auditor is primarily
required to furnish the details of registration numbers as provided to
him by the assessee. He is not required to determine whether the client
is liable to pay tax under any of the indirect tax laws.

21. Reporting about concessional tax regimes under

Clause 8A of Form No.3CD-

The following sentence in Para 20.12 of GN 2022 has been omitted by

GN 2023: “Since the option once which has been exercised for any
previous year, it cannot be subsequently withdrawn for the same or any
other previous year.” The above sentence is omitted since it is erroneous
and not in accordance with provisions of section 115BA/115BAA/115BAB/1
15BAC/115BAD. Para 20.12 is renumbered as Para 20.13 by GN 2023.
Analysis of changes introduced in Guidance Note on Tax Audit
17

22. Income taxable under a specific section yet not

credited to P&L to be reported against clause 16(a)

It is possible that an item of income may be taxable under a certain

specific section yet not credited to a profit and loss account, e.g. benefit
or perquisite arising from business or profession u/s 28(iv) tax on which
is deducted u/s 194R.

New Para 28.2 of GN 2023 clarifies that such income should be reported
under clause 16(c)[Sic: Clause 16(a)].

23. Govt grant in relation to a specific fixed asset and

deducted from the gross value of that asset is not to be
reported in clause 16(e) of Form No. 3CD

Clause 16(e) of Form No.3CD requires reporting of amounts not credited

to profit and loss account being capital receipts, if any.

Government grant in relation to a specific fixed asset where such

grant is shown as a deduction from the gross value of the asset by the
concern in arriving at its book value was required by 2022 Guidance
Note to be reported against clause 16(e).[Para 28.16 of the GN 2022] In
terms of the 2023 GN, such government grant deducted from fixed
assets is not to be reported against clause 16(e)as capital receipt not
credited to P&L.[Para 28.16 renumbered as Para 28.17 in GN 2023]

24. Tax auditor to use his professional expertise and

judgement to determine whether receipt is taxable for
reporting under sub-clauses (a) to (d) of clause 16 of
Form No.3CD

Para 28.18 of GN 2023 requires the tax auditor to use his professional
expertise and judgement to determine whether the receipt is taxable
or not for reporting under sub-clauses (a) to (d) of clause 16 of Form
No.3CD. Further, the tax auditor may report in the observation part
of the audit report [Para 3 of Form No.3CA/Para 5 of Form No.3CB],
disclosing the basis of the same.
18 Analysis of changes introduced in Guidance Note on Tax Audit

25. Cross-referencing required of clauses 17 and 16(d) of

Form No. 3CD

Para 29.12 of 2022 GN clarifies that if the value adopted for stamp duty
exceeds the consideration, then the difference between the stamp duty
value and the consideration amount is considered to ascertain income
under section 43CA or section 50C, as the case may be. Though this
information on income (difference between SDV and consideration) is
not asked in the clause, the same should be reported notwithstanding
the absence of requirement. 2023 GN further clarifies that since similar
information is also furnished in clause 16(d), cross-referencing may be
required. [Para 29.12 of 2022 GN is now renumbered as Para 29.9 of 2023
GN]

26. Reporting of amounts inadmissible under section 40(a)

in Clause 21(b) of Form No.3CD

Para 34.1 of 2023 GN provides that where assessee has not deducted
TDS and obtained a CA Certificate in Form No.26A to the effect that
deductee/payee has declared the payment in his ITR and paid tax on
the total income, including such payment and relies on the same so
that non-deduction of TDS does not attract disallowance, tax auditor
should verify the certificate in Form 26A and how it has been reflected
in the statement of TDS filed vide Form 24Q / Form 26Q / Form 27Q.

27. Reporting of provision for payment of gratuity not

allowable under section 40A(7) in Clause 21(e) of Form
No. 3CD

Clause 37.2 of 2022 GN requires the tax auditor to verify whether a

provision for gratuity has been made as provided in the trust deed.
2023 GN amends Para 37.2 to require the tax auditor to verify whether
the provision has been made as provided in the trust deed, rules and
regulations governing such trust deed and PCIT/CIT Approval Order
stipulations.
Analysis of changes introduced in Guidance Note on Tax Audit
19

28. Reporting of any sum paid by the assessee as an

employer not allowable under section 40A(9) in Clause
21(f) of Form No. 3CD

The new requirements of new Paras 38.2 and 38.3 of the 2023 GN are as
follows:

(a) Tax Auditor shall maintain detailed working papers documenting

the factual nature of such expenses incurred and debited to the
Profit and Loss for the previous year under consideration, which
are considered disallowable under section 40A(9) of the Income-
tax Act, 1961.

(b) Tax Auditor should get the relevant content in such working
papers duly confirmed by the assessee as a necessary safeguard.

(c) Tax Auditor should carefully examine the capacity of the assessee
while making such contribution before reaching any conclusion
on the allowability or disallowability of the contribution.

(d) If any such contribution is made by the assessee in a capacity

other than that of an employer, then such contribution is not to be
considered as disallowable u/s 40A(9) of the Income-tax Act, 1961
and is not to be reported in clause 21(f).

29. Reporting of particulars of payments made to persons

specified under section 40A(2)(b) in Clause 23 of Form
No. 3CD

Para 43(2)(d)(v) requires that the tax auditor should refer to the details
given in the annual accounts for related party transactions as per AS-18,
if available, for examining and reporting under this clause. While using
the above information from annual accounts, the tax auditor should
consider the difference in the definitions of ‘related party’ as per AS-18
and ‘persons specified’ in section 40A(2)(b) of the Act.

30. Reporitng of any amount of profit chargeable to tax

under section 41 and computation thereof in Clause 25
of Form No. 3CD

New Para 45(1)(iv)(b) in GN 2023 draws the attention of tax auditors

to the Supreme Court’s ruling in CIT v. Sugauli Sugar Works (P.) Ltd.
[1999] 236 ITR 518/102 Taxman 713 (SC), wherein it was held that expiry
20 Analysis of changes introduced in Guidance Note on Tax Audit

of the limitation period does not extinguish a debt. The only remedy is
barred as it bars the creditors from taking recourse to a legal remedy
for enforcement of the debt. Hence, barring by limitation would not be
tantamount to cessation of liability u/s 41(1).

New Para 45.9 in GN 2023 requires that if any amount reported against
clause 41 is not routed through a profit and loss account or income and
expenditure account, the tax auditor may include the said fact in the
observation para [Para 3 of Form No.3CA/Para 5 of Form No. 3CB] of the
audit report.

31. Sums covered by Section 43B are allowed only on a

payment basis, irrespective of assessee’s method of
accounting

New Paras 46.8 to 46.11 and 46.13 clarify what amounts to “actual
payment” for section 43B and clause 26 purposes as under:

(a) Deferral of GST under incentive schemes may amount to

actual payment

New Paras, 46.8 to 46.10 of the 2023 GN, clarify regarding

deferment of GST under incentive scheme where the tax may
be regarded as paid by virtue of legislation or schemes notified
under the legislation. The 2023 GN recommends that where the
tax auditor faces such situations under GST law, he may, after
careful consideration of the facts, consider the treatment of GST
dues based on principles laid down by following Circulars/judicial
decisions under erstwhile Sales Tax Regime:

• If under the sales tax legislation applicable, sales tax so

deferred is treated as actually paid, then statutory liability shall
be treated to have been discharged for the purpose of Section
43B – CBDT’s Circular No 496 dated 25.09.87.

• The Apex Court, in the case of CIT V. Gujarat Polycrete Pvt Ltd
(2000) 246 ITR 463, has held that the State Government may
amend its Sales Tax Act to provide that the sales tax (deferred
under an incentive scheme framed by it) will be treated as
actually paid so as to meet the requirements of Section 43B.

• Some State Governments, instead of amending the Sales Tax

Act, have notified schemes under which sales tax is deemed
to have been actually collected and disbursed as loans. The
amount of such sales tax liability deemed to be converted into
a loan may be allowed as a deduction in the assessment for
Analysis of changes introduced in Guidance Note on Tax Audit
21

the previous year in which such conversion has been permitted

– CBDT’s Circular No 674 dated 29.12.93

• It was held by Gujarat HC in the case of CIT v. Goodluck Silicate

Industries (P) Ltd (2002) 178 CTR 92 that where sales tax due
to the Government is converted as loan to be repaid by the
assessee, subsequently by instalments, it would amount to
actual payment of sales-tax.

(b) Furnishing of a bank guarantee is not “actual payment”

New Para 46.11 of GN 2023 clarifies that Furnishing of a bank

guarantee in respect of any sum payable by an assessee cannot
be equated with actual payment as required under section 43B[
Supreme Court decision in CIT v. McDowell & Co Ltd (2009) 180
Taxman 514]

(c) Advance deposit of duty is actual payment and qualifies for

section 43B deduction

Modipon Ltd (2017) 87 taxmann.com 275 has held that “Even

advance deposit of duty within the meaning of section 43B and
it is entitled to the benefit of deduction”. Similarly, in the case of
CIT V. Maruti Suzuki India Ltd (2013) 212 Taxman 603, the Delhi
High Court held that “advance deposits in Excise Personal Ledger
Account cannot be disallowed under section 43B”.

New Paras 46.11, 46.12,46.14 and 46.15 of GN2023 clarify what kind of
statutory dues fall within the ambit of section 43B, as under:

 In CIT v. McDowell & Co Ltd (2009) 180 Taxman 514, the Apex
Court has held that Bottling fees payable for acquiring a right of
bottling of IMFL, which is determined under Excise Act and Rules,
is neither fee nor tax, but is consideration for grant of approval
by Government in respect of exclusive right to deal in bottling
of liquor in all its manifestation and, consequently bottling fee
payable under Excise Law for acquiring a right of bottling IMFL
does not fall within the purview of section 43B.

 The Apex Court in Mineral Area Development Authority and

Others V. Steel Authority of India and Others (2011) 4 SCC 450 has
held that “Royalty is tax”. Thus, Royalty payment outstanding as
on the balance sheet date shall be considered relevant for the
purpose of Section 43B.

 The Apex Court in Berger Paints India Ltd v. CIT (2004) 135
Taxman 586 ( SC) has held that “ The entire amount of excise duty/
customs duty paid by the assessee in a particular accounting
year is an allowable deduction in respect of that year, irrespective
22 Analysis of changes introduced in Guidance Note on Tax Audit

of the amount of excise duty/customs duty which is included in

the valuation of the assessee’s closing stock at the end of the
accounting year”.

 The MP HC in case of CIT v. Mohanlal Mishrilal & Sons (1996) 87

Taxman 194 & CIT v.Mohansingh & sons (1995) 216 ITR 432 has held
that “Mandi tax is not a tax as it is paid by a trader who enjoys the
facility of mandi because some services are provided by the mandi
and, therefore, that cannot be taken as tax as the same is collected
for the services rendered”.

32. Reporting of brought forward loss or depreciation

allowance under Clause 32(a) of Form No. 3CD

Paras 63.7 and 63.8 of 2022GN pertained to clause 32(a) but were
misprinted under clause 32(b). The 2023 GN deletes Paras 63.7 and 63.8
from under clause 32(b) and inserts them under clause 32(a) as New
Paras 62.4 to 62.6. New Paras 62.4 to 62.6 of 2023 GN require as under:

(a) In case any undisclosed income is determined in case of an

assessee during any proceedings of search, requisition or survey,
then no adjustment or set-off shall be allowed against such
undisclosed income.

(b) The set-off shall not be available in case of both brought forward
losses as well as unabsorbed depreciation.

(c) The Tax Auditor has to confirm and verify whether any search or
survey has taken place or is undergoing based on the records of
assessment proceedings of the assessee and accordingly check if
any undisclosed income has been determined in the case of the
assessee.

(d) The eligibility of brought forward losses and unabsorbed

depreciation against such undisclosed income as computed by
the assessee should be checked and, based on that, the necessary
adjustments should be made to losses to be carried forward by the
assessee.

(e) The tax auditor should make appropriate disclosure in the

“Remarks” column of the annexure provided for clause 32(a) of
Form 3CD. In case if the website utility of Form 3CD does not have
a specific column for such reporting, the tax auditor, if deemed fit,
can provide a note/qualification in Para 3 of Form 3CA / Para 5 of
Form 3CB in this regard.
Analysis of changes introduced in Guidance Note on Tax Audit
23

(f) Any assessment, rectification, revision or appeal proceedings

pending at the time of tax audit have to be disclosed in the
remarks column by way of information.

(g) If consequential orders for any revision/appellate order is yet to be

passed, the same can be disclosed along with the impact thereof if
material. In case, order of appeal/revision is passed, the same shall
be considered for reporting.

33. Applicability of TDS and TCS

Para 68.12 of GN 2023 clarifies that the tax auditor may take the status of
the demand payable as per the TDS CPC (popularly known as TRACES)
for the purpose of reporting in clause 34.

34. Reporting of demands and refunds under any tax laws

other than Income Tax Act, 1961 and Wealth Tax Act,
1957

2023 GN omits the sentence “Hence, the cess or duty like Marketing
Cess, Cess on Royalty, Octroi Duty, Entry Tax etc. would not be covered
as other tax laws.” which was there in Para 79.1 of 2022 GN. It appears
that any demands raised or refunds issued in respect of Marketing Cess,
Cess on Royalty, Octroi Duty, Entry Tax etc. would have to be reported
under Clause 41.

35. Reporting of break-up of total expenditure of entities

registered or not registered under GST under Clause 44

Para 82.3 of 2023 GN clarifies as under:

(a) Headings of columns 3-6 and column 7 of Tabular format in

clause 44 require reporting of “Expenditure in respect of entities
registered under GST” and “Expenditure relating to entities not
registered under GST”, respectively.

(b) Thus, the expenses within the scope of GST i.e., which are
tantamount to ‘supply’ in section 7 of the CGST Act, 2017, are only
required to be reported in clause 44 in any of the columns from 3
to 7.
24 Analysis of changes introduced in Guidance Note on Tax Audit

New Para 82.4 of 2023 GN requires the tax auditor to maintain a

working paper of reconciliation of total expenditure as per P&L with the
value of expenditure reported in clause 44 in the following manner:

Amount
Description *
(Rs.)
Total value of expenditure in P&L for the year XXXX
Add: Total value capital expenditure not included in P&L for the year XXXX
Less: Total value of non-cash charges considered as expenditure XXXX
Less: Total value of expenditure excluded for being transactions in XXXX
securities and transactions in money
Less: Total value of expenditure excluded by virtue of Schedule III to the XXXX
CGST Act, 2017
Balance being value of expenditure for clause 44 XXXX

* Details of all deductions & additions must be maintained for each sub-entity (GSTIN-wise)
of the legal entity.

New para 82.16 of GN 2023 clarifies as follows:

(a) It is important to differentiate the ‘current status’ of a supplier’s

registration from their status as it was at the time of supply.

(b) There are several instances where registration may be cancelled

with effect from an earlier date, which may be prior to the date of
supply to assessee.

(c) Events occurring after the balance sheet date that alter the data
relating to the year under audit do not alter the nature of the
expenditure, that it is from registered suppliers.

(d) Tax Auditors may elect to extend their review up to a certain cut-
off date or not at all. In either case, disclosure should be made of
notes of the position with regard to (i) known cancellations and
(ii) treatment in the disclosure considering the possibility of such
cancellations.

Para 82.18 of GN 2023 clarifies that in case of multiple GST registrations

of an entity, there is a likelihood of inter-branch supply, which is
eliminated in the consolidated financials. Proper reconciliation for such
types of transactions may be kept on record.
Analysis of changes introduced in Guidance Note on Tax Audit
25

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