Taxmann's Guide to Tax Audit | September 2020

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PAGE
I-9
u Chapter-heads I-5
u Clauses of Form No. 3CD not relevant/applicable to Tax Audit for
assessment year 2020-21 I-31
u Clauses of Form No. 3CD relevant/applicable to individuals/
HUFs who are liable for Tax Audit u/s 44AB I-32
u Clauses of Form No. 3CD relevant/applicable to Firms/LLPs/
AOPs/BOIs who are liable for Tax Audit u/s 44AB I-33
u Clauses of Form No. 3CD relevant/applicable to companies who
are liable for Tax Audit u/s 44AB I-34
SECTION 44AB: AUDIT OF ACCOUNTS
OF CERTAIN PERSONS CARRYING ON
BUSINESS OR PROFESSION
0.1 Persons carrying on business or profession who are required to
get their accounts audited 1
0.2 Persons carrying on business or profession who are totally
exempt from tax audit u/s 44AB 2
0.3 “Audit” - Definition 2
0.4 Aims and objects of compulsory audit under section 44AB 4
0.5 Features of audit under section 44AB popularly known as ‘tax
audit’ 5
0.6 ICAI’s Guidance Note on Tax Audit [“the Guidance Note”] 6
0.7 Constitutionality of section 44AB 6
1
PERSONS CARRYING ON BUSINESS WHO ARE
OBLIGED TO COMPLY WITH PROVISIONS
OF SECTION 44AB AS REGARDS COMPULSORY
AUDIT OF ACCOUNTS
1.1 Which persons carrying on business are obliged to comply with
provisions of section 44AB as regards compulsory audit of
accounts ? 7
PAGE
Contents

PAGE
CONTENTS I-10
1.2 Is tax audit applicable when income is exempt under section 10? 7
1.3 Agriculturist having no income under the head “Profits and gains
of business or profession” 8
2
TURNOVER-LINKED COMPULSORY AUDIT
OBLIGATIONS U/S 44AB(a) ON CERTAIN PERSONS
CARRYING ON BUSINESS
2.1 When is a person carrying on business covered by compulsory
tax audit under section 44AB 9
2.2 Are there any cases where a turnover/total sales/gross receipts
threshold higher than Rs. 1 crore is applicable for attracting the
compulsory audit provisions of section 44AB? 11
2.3 What is the turnover or gross receipts threshold limit for non-
audit of accounts for resident individuals, HUFs and firms who
are declaring the profits of their business in accordance with
section 44AD 11
3
COMPULSORY AUDIT OBLIGATIONS U/S 44AB(c)/(e)
ON CERTAIN PERSONS CARRYING ON BUSINESS
REGARDLESS OF THEIR TURNOVER/GROSS
RECEIPTS/SALES (NON-TURNOVER-LINKED
AUDIT OBLIGATIONS)
3.1 Who are the persons carrying on business who are required to
get accounts audited regardless of their turnover/gross
receipts/sales in a financial year? 12
4
PERSONS CARRYING ON BUSINESS WHO ARE
EXEMPT FROM TAX AUDIT (COMPULSORY
AUDIT OBLIGATIONS) U/S 44AB
4.1 Who are the persons carrying on business who are exempt
from compulsory audit obligations of section 44AB? 13
4.2 Businesses covered by section 44B/section 44BBA exempt from
tax audit 13
5
PRESUMPTIVE TAX REGIME UNDER
SECTION 44AD FOR ELIGIBLE BUSINESSES
CARRIED ON BY RESIDENT INDIVIDUALS,
HUFs & FIRMS
5.1 What is the presumptive taxation regime of section 44AD of the
Act? 16

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I-11 CONTENTS
5.2 Which assessees are eligible to opt for the scheme under
section 44AD? 18
5.3 Which assessees are barred from availing section 44AD scheme? 19
5.4 Disqualification incurred by opting out of section 44AD before
availing it for 6 consecutive previous years 22
5.5 How to avoid the pitfalls of sub-sections (4) and (6) of section
44AD 23
5.6 Which are the businesses for which an eligible assessee can
avail section 44AD (‘eligible business’) 23
5.7 What is the meaning of the phrase ‘Engaged in an eligible
business’ used in section 44AD? 25
5.8 What is the amount which is deemed to be income by section
44AD? 25
5.9 What happens when actual income is more or less than the
presumptive income calculated under section 44AD? 28
5.10 Whether AO can make additions for discrepancies in assessee’s
account books where assessee opts for section 44AD? 28
5.11 FAQs on section 44AD 29
5.12 Are there any circumstances in which eligible assessee is
disqualified from availing section 44AD scheme? 29
5.13 Illustrations and Case Studies 30
5.14 What is the procedure for ‘opting in’ into the scheme? 34
5.15 What is the procedure for ‘opting out’ of the scheme? 34
5.16 What are the restrictions on opting in and opting out? 34
5.17 What are the consequences if eligible assessee opts out before
availing it for 6 consecutive years? 36
5.18 If an assessee furnishes audit report beyond date specified in
section 44AB, can he be denied benefit of claiming lower profits
and gains than specified in section 44AD? 37
5.19 Suppose an individual or HUF opts out of section 44AD in
Assessment Year 2018-19 after claiming the benefit in Assess-
ment year 2017-18 and its total income is less than the taxable
limit. If the individual/HUF does not maintain any books of
account nor furnishes any tax audit report, will the income
from eligible business declared @ less than 8% of total turnover
or gross receipts (say @ 2%) in the ITR be accepted as it is? 37
5.20 Are firms availing section 44AD entitled to deduction of interest
and remuneration paid to partners? 38
5.21 Will firms availing section 44AD have to amend their partner-
ship deeds to omit ‘interest to partner’/‘remuneration to
partner’ clauses? 38

PAGE
CONTENTS I-12
5.22 Will partnership firms be rendered ineligible to avail section
44AD if they pay interest/remuneration to partners? 38
5.23 Will assessee be required to maintain and furnish gross profit,
expenses and net profit details to AO? 39
6
PRESUMPTIVE TAX REGIME U/S 44AE FOR
ASSESSEES OWNING GOODS CARRIAGES AND
PLYING, HIRING OR LEASING THEM
6.1 What are the features of the presumptive scheme for truck
owners under section 44AE? 40
presumptive income calculated as above section 44AE @
Rs. 1,000 per ton p.m./@ Rs. 7,500 p.m. or part thereof? 42
account books where assessee opts for section 44AE? 43
6.4 What if assessee owned 11 trucks at any point of time during
the year but only 10 were operational as one was under repair?
Is assessee eligible to avail section 44AE scheme? 43
6.5 If assessee owns 8 trucks, can he opt for section 44AE for say 3
of them and opt for regular taxation for the remaining 5
trucks? 44
6.6 Who can opt for section 44AE scheme? 44
6.7 Goods carriage 45
6.8 Whether assessee can avail the scheme in respect of trucks
acquired on hire-purchase basis? Can he be considered owner
of such trucks? 47
6.9 Can one freely opt in and opt out of section 44AE scheme? 47
6.10 What are the consequences of opting out? Will assessee be
barred for availing it for certain number of years? 47
6.11 What are the implications of opting in into section 44AE regime? 47
6.12 If assessee claims his profits are lower than the presumptive
income under section 44AE, will he be required to maintain
books and get them audited if his income is below taxable
limit? 48
and gains than specified in section 44AE? 49
6.14 Are partnership firms/LLPs availing section 44AE entitled to
deduction under section 40(b) in respect of interest/remunera-
tion paid to partners? 49

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I-13 CONTENTS
7
WHEN PERSON CARRYING ON PROFESSION IS
REQUIRED TO GET HIS ACCOUNTS AUDITED
U/S 44AB(b) & U/S 44AB(d)
7.1 Applicability of tax audit u/s 44AB to persons carrying on
professions 52
7.2 ‘Every person’ shall not include companies or other artificial
persons 53
7.3 Business and profession 54
7.4 Profession as Judicially Defined 55
7.5 When would the activity of a professional doctor/lawyer/
architect etc. be a ‘business’ or commercial activity as distinct
from professional activity 56
7.6 Horse-Trainer - Not a Profession 57
7.7 Stock-Broker - Not a Profession 57
7.8 Leadership of dance band - Not a profession 57
7.9 Tenant-right valuations and estates management 57
7.10 Manager or Managing Director - Not a profession 57
7.11 Gross Receipts - ICAI’s views 57
7.12 Where assessee carried on business as well as profession -
Obligations for tax audit under section 44AB 58
8
PRESUMPTIVE TAX REGIME AVAILABLE
UNDER THE ACT TO PERSONS CARRYING
ON SPECIFIED PROFESSIONS
8.1 What is the rationale for presumptive taxation scheme for
professionals (section 44ADA) 59
8.2 What is the presumptive tax regime applicable to professionals
under section 44ADA? 60
8.3 How to reckon the limit of Rs. 50 lakhs for the purposes of
section 44ADA? 61
8.4 If professional is also carrying on some “eligible business”
covered by section 44AD, can he avail either section 44AD or
section 44ADA in respect of such business? 62
8.5 If gross receipts of nursing home run by doctor exceed Rs. 50
lakhs but are less than Rs. 2 cr. can the doctor avail presump-
tive tax under section 44AD? 63
presumptive income calculated u/s 44ADA @ 50% of gross
receipts? 64

PAGE
CONTENTS I-14
account books where assessee opts for section 44ADA? 65
8.8 Which professional assessees are eligible to opt for the section
44ADA? 65
8.9 Are partnership firms eligible to avail section 44ADA scheme? 65
8.10 Are Limited Liability Partnerships (LLPs) eligible to avail
section 44ADA scheme? 65
8.11 Are companies eligible to avail the scheme? 65
8.12 Can an individual assessee availing deductions under section
80QQB or section 80RRB opt for section 44ADA? 66
8.13 Can one freely opt in and opt out of section 44ADA scheme? 66
8.14 What are the consequences of opting out? Will assessee be
barred for availing it for certain number of years? 66
8.15 If an assessee engaged in profession referred to in section
44AA(1) opts out of section 44ADA scheme by declaring less
than 50% of gross receipts as income from the profession and
his total income does not exceed the maximum amount not
chargeable to income-tax, will income from the profession
declared by him in his ITR be accepted as it is? 66
8.16 What are the implications of opting for section 44ADA regime? 67
8.17 What are the implications of not opting for or opting out of
section 44ADA? 68
8.18 What happens if total income of assessee (individual) does not
exceed the taxable limit and assessee claims that his income
from profession referred to is less than 50% of goods receipts
while gross receipts do not exceed Rs. 50 lakhs? 69
and gains than specified in section 44ADA? 69
8.20 Are partnership firms/LLPs availing section 44ADA entitled to
deduction under section 40(b) in respect of interest/remunera-
tion paid to partners? 70
8.21 What compliances are required if assessee opts for section
44ADA? 71
9
TURNOVER OR GROSS RECEIPTS
9.1 ‘Total sales, turnover or gross receipts’ 73
9.2 Distinction between ‘turnover’ and ‘total sales’ 74
9.3 ICAI’s views on ‘turnover’ 74

PAGE
I-15 CONTENTS
9.4 Items to be excluded/deducted from ‘turnover’ 74
9.5 Items to be included/not to be deducted from ‘turnover’ 75
9.6 “Gross Receipts” of business - ICAI’s Views 75
9.7 Items to be included in ‘gross receipts’ 75
9.8 Items not to be included in ‘gross receipts’ 76
9.9 Additional sales found as a result of search 77
9.10 Share brokers/sub-brokers - How to compute ` 1 crore limit 78
9.11 Turnover/gross receipts - Transactions in shares, securities and
derivatives 81
9.12 Turnover in case of chit fund companies 81
9.13 Computation of ` 1 crore limit - Commission agents 82
9.14 Tax audit in case of non-residents carrying on business 84
10
OBLIGATIONS CAST BY SECTION 44AB
10.1 Obligation cast by section 44AB 85
10.2 Audit of accounts, not audit of books of account 85
10.3 Audit confined to accounts of business or profession 86
10.4 Specified date 87
10.5 Accountant 87
10.6 Forms applicable for tax audit report under section 44AB 98
11
PREPARATION OF FINANCIAL STATEMENTS
11.1 Presentation of Financial Statements 99
12
FORM NO. 3CA
12.1 When applicable 100
12.2 Para 1 of Form No. 3CA 101
12.5 Where assessee has branches 106
12.6 Where assessee has branches abroad 106
12.7 Signature on Form No. 3CA 107

PAGE
CONTENTS I-16
13
FORM NO. 3CB
13.1 When applicable 108
13.2 Para 1 of Form No. 3CB 108
13.4 Para 3(a) of Form No. 3CB 109
13.5 Para 3(b)(A) of Form No. 3CB 109
13.6 Para 3(b)(B) of Form No. 3CB 110
13.7 Para 3(b)(C) of Form No. 3CB 112
13.10 Where assessee has branches 120
13.11 Tax auditor called upon to report on one or more businesses of
assessee 120
13.12 Signature by CA on Form No. 3CB 121
13.13 Reporting on revised accounts 121
14
FORM NO. 3CD
14.1 Statement of particulars 122
14.2 Manner of Reporting in Form No. 3CD by Tax Auditor 122
14.3 Signature of Form No. 3CD by tax auditor 123
15
CLAUSES 1 TO 3 AND 5 TO 7 ROUTINE PARTICULARS
(NAME, ADDRESS, PAN OR AADHAAR NUMBER,
STATUS, PREVIOUS YEAR, ASSESSMENT YEAR)
15.1 Routine particulars 124
15.2 Name of the assessee [Clause 1] 124
15.3 Address of the assessee [Clause 2] 124
15.4 PAN or Aadhaar number [Clause 3] 125
15.5 Status [Clause 5] 125
15.6 Previous year ended [Clause 6] 126
15.7 Assessment year [Clause 7] 126

PAGE
I-17 CONTENTS
16
CLAUSE 4 OF FORM NO. 3CD : REGISTRATION
UNDER INDIRECT TAX LAWS
16.1 Requirements of Clause 4 127
16.2 Whether tax auditor is required by clause 4 to determine
whether assessee liable for indirect taxes? 128
16.3 Audit Procedures 129
16.4 Documentation (Working Papers) 129
17
CLAUSE 8 OF FORM NO. 3CD RELEVANT
CLAUSE OF SECTION 44AB UNDER WHICH
TAX AUDIT IS APPLICABLE
17.2 Relevant clause of section 44AB under which audit has been
conducted 131
18
CLAUSE 9 OF FORM NO. 3CD : DETAILS
REGARDING FIRMS/AOPs/LLPs
18.1 Applicability of the clause 133
18.3 “Firm” includes Indian Limited Liability Partnership (LLP) and
not foreign LLP 134
18.4 ‘Partner’ [Section 2(23)(ii)] 134
18.5 Audit Checklist (for firms and AOPs) 135
18.6 Audit Checklist for LLPs - Clause 9 136
19
CLAUSE 10 OF FORM NO. 3CD : NATURE OF
BUSINESS/PROFESSION
19.1 Applicability of Clause 10 139
19.3 Audit Checklist 140
20
CLAUSE 11 OF FORM NO. 3CD :
BOOKS OF ACCOUNT
20.1 Applicability of clause 11 143

PAGE
CONTENTS I-18
20.2 ‘Books of account’ 143
21
PRESUMPTIVE INCOME
21.2 Relevant Legal provisions 153
21.3 “Assessable on Presumptive Basis” 155
21.4 “Any other relevant section” - Interpretation of 156
22
CLAUSE 13 OF FORM NO. 3CD : METHOD OF
ACCOUNTING & COMPLIANCES
22.2 Method of accounting 161
22.3 Mercantile System/accrual basis of Accounting 161
22.4 Cash basis of accounting 163
22.5 Audit Checklist - Clause 13 165
23
METHOD OF STOCK VALUATION
23.1 Clause 14(a) - Method of Valuation of Closing Stock 171
23.2 Clause 14(b) - Details of deviation of Method of Valuation from
section 145A 175
23.3 Audit Checklist - Clause 14(b) 176
24
CLAUSE 15 OF FORM NO. 3CD : CAPITAL ASSET
CONVERTED INTO STOCK-IN-TRADE
24.1 Capital Asset 177
24.2 Conversion of capital asset into stock-in-trade 180
24.3 Whether minutes of board meetings are evidence of conver-
sion? 182

PAGE
I-19 CONTENTS
25
CLAUSE 16 OF FORM NO. 3CD : AMOUNTS NOT
CREDITED TO PROFIT AND LOSS ACCOUNT
25.2 Requirements of clause 16 187
25.3 ‘Not credited to profit and loss account’ 188
25.4 Clause 16(a) - Items covered by section 28 not credited to P&L
Account 188
25.5 Audit Checklist - Clause 16(a) 194
25.6 Clause 16(b) - Refunds/Drawback of taxes/duties admitted by
the authorities but not credited to P& L account 197
25.8 Clause 16(c) - Escalation claims not credited to P&L A/c 198
25.9 Audit Checklist - Clause 16(c) 198
25.10 Clause 16(d) - Any other income not credited to P&L A/c 198
25.11 Audit Checklist - Clause 16(d) 198
25.12 Clause 16(e) - Capital receipts not credited to P&L A/c 199
25.13 Audit Checklist - Clause 16(e) 200
26
PROPERTY (LAND OR BUILDING OR BOTH)
TRANSFERRED AT LESS THAN STAMP DUTY
VALUE - CLAUSE 17 OF FORM NO. 3CD
26.1 Computation of capital gains in real estate transactions –
Section 50C 202
26.2 Special provision for full value of consideration for transfer of
assets other than capital assets in certain cases [New section
43CA] 205
26.5 Transfer 207
27
CLAUSE 18 OF FORM NO. 3CD : DEPRECIATION
27.1A Depreciation u/s 32 is a statutory allowance and not an expen-
diture 212

PAGE
CONTENTS I-20
27.2 “Depreciation allowable” 212
27.3 Legal provisions related to depreciation 213
27.4 Additional depreciation - Section 32(1)(iia) 229
27.5 ‘Each asset or block of assets, as the case may be’ 233
27.6 Audit Checklist - Clause 18(a) - Description of each asset/block
of asset 233
27.7 Audit Checklist - Clause 18(b) - Rate of Depreciation 234
27.8 Audit Checklist - Clause 18(c) - Actual Cost/WDV 235
27.9 Audit Checklist - Clause 18(d) - Specified adjustments in respect
of additions/deductions during the year 238
27.10 Audit Checklist - Clause 18(e) - Depreciation Allowable 240
27.11 Audit Checklist - Clause 18(f) - WDV at the end of the year 241
28
CLAUSE 19 OF FORM NO. 3CD : AMOUNTS
DEDUCTIBLE UNDER SECTIONS 33AB,
33ABA, ETC.
28.1 No deduction under section 35CCB in respect of any expendi-
ture incurred on or after 31-3-2002 245
28.2 Investment allowance - Section 32AC 245
28.3 Section 32AD - Investment allowance for investment in new
plant and machinery in notified backward areas in certain
states 245
28.4 Section 33AB - Tea development account, coffee development
account and rubber development account 247
28.5 Section 33ABA - Site restoration fund 250
28.6 Section 35 - Scientific research expenditure 254
28.7 Section 35ABB - Expenditure for obtaining licence to operate
telecommunication services 260
28.8 Section 35AC - Expenditure on eligible projects 262
28.9 Investment-linked tax incentives - Section 35AD 262
28.10 Section 35CCA - Payment to associations and institutions for
carrying out rural development programmes 267
28.11 Expenditure on agricultural extension project [Section 35CCC] 267
28.12 Expenditure on skill development project [Section 35CCD] 271
28.13 Section 35D - Amortisation of preliminary expenses 280
28.14 Section 35DD - Expenditure in case of amalgamation or
demerger 284
28.15 Section 35DDA - Amortisation of VRS expenditure 287

PAGE
I-21 CONTENTS
28.16 Section 35E - Deduction of expenditure incurred on prospect-
ing etc. for certain minerals 288
29
CLAUSE 20 OF FORM NO. 3CD : BONUS/
EMPLOYEES CONTRIBUTION TO PF
29.2 Clause 20(a) - Bonus/Commission to Employees 303
29.3 Audit Checklist - Clause 20(a) 305
29.4 Clause 20(b) - Sum received from employees towards contribu-
tions to provident fund/superannuation fund/other funds -
Relevant provisions 306
30
DEBITED TO PROFIT AND LOSS ACCOUNT
30.0 Applicability of first item of clause 21(a) - Capital expenditure 311
30.1 Clause 21 - General 311
30.2 Relevant legal provisions - First item of Clause 21(a) 311
30.3 Capital Expenditure 312
30.4 Audit Checklist - First item of Clause 21(a) - Capital expenditure 316
30.5 Personal expenses - Second item of Clause 21(a) 317
30.6 Audit Checklist - Personal expenses - Second item of Clause
21(a) 319
30.7 Legal Provisions - Advertisement expenditure - Third item of
Clause 21(a) 320
30.8 Audit Checklist - Advertisement expenses - Fourth and Fifth
items of clause 21(a) 321
30.9 Legal provisions - Expenditure on clubs - Fourth and Fifth
items of clause 21(a) 322
30.10 Audit Checklist - Club expenditure - Fourth and Fifth items of
clause 21(a) 323
30.11 Legal Provisions - Expenditure prohibited by law - Sixth,
Seventh and Eighth items of clause 21(a) 323
30.12 Audit Checklist - Expenditure prohibited by law - Sixth,
Seventh and Eighth items of clause 21(a) 325
30.13 Requirement of sub-clause (b) of clause 21 326
30.14 Legal Provisions - Clause 21(b) 326

PAGE
CONTENTS I-22
30.16 Requirements of sub-clause (c) of clause 21 336
30.17 Legal provisions - Clause 21(c) 336
30.18 Judicial views on section 40(b) 338
30.19 ICAI’s views on clause 21(c) 340
30.20 Audit Checklist - Clause 21(c) in case of firm/LLP 342
30.21 Requirements of sub-clause (d)(A) of clause 21 344
30.22 Legal Provisions - Clause 21(d)(A) 344
30.23 Audit Checklist - Clause 21(d)(A) 347
30.24 Clause 21(d)(B) - Deemed income u/s 40A(3A) 348
30.25 Clause 21(d)(B) - Legal provisions - Section 40A(3A) 348
30.26 Clause 21(d)(B) - Audit Procedures 349
30.27 Requirements of sub-clause (e) of clause 21 350
30.28 Legal Provisions - Clause 21(e) 350
30.29 Audit Checklist - Clause 21(e) 350
30.30 Applicability of sub-clause (f) of clause 21 351
30.31 Legal Provisions - Clause 21(f) 351
30.32 Applicability of sub-clause (g) of clause 21 353
30.33 “Contingent liability” 353
30.34 Audit Checklist - Clause 21(g) 355
30.35 Applicability of clause 21(h) 356
30.36 Legal Provisions - Clause 21(h) 357
30.37 Audit Checklist - Clause 21(h) 357
30.38 Applicability of clause 21(i) 358
30.39 Relevant legal provisions - Clause 21(i) 358
30.40 Distinction between the proviso and GAAP (AS 16) 358
30.41 Audit Checklist - Clause 21(i) 358
31
CLAUSE 22 OF FORM NO. 3CD : AMOUNT OF
INTEREST INADMISSIBLE UNDER SECTION 23
OF MSMED ACT, 2006
31.1 Micro, Small & Medium Enterprises Development Act 360
31.2 Definition and classification of Micro, Small & Medium Enter-
prises under the MSMED Act, 2006 360

PAGE
I-23 CONTENTS
31.3 Whether the new definition and classification based on com-
posite criteria applicable only to new enterprises established on
or after 01.07.2020? Or does it apply to enterprises existing as
on 30.06.2020 also? 366
31.3A Relevant provisions of the MSMED Act, 2006 366
31.4 Disallowance of interest payable under the MSMED Act 367
31.5 “Disclosures required in buyer’s annual accounts” 368
31.6 Identification of MSE suppliers 369
31.7 Notes on Accounts to be added by buyer entities 370
32
CLAUSE 23 OF FORM NO. 3CD : PAYMENTS TO
PERSONS SPECIFIED UNDER SECTION 40A(2)(b)
32.3 Persons specified under section 40A(2)(b) 374
32.4 ITAT’s Interpretation of reporting requirements 378
33
DEEMED TO BE PROFITS AND GAINS UNDER
SECTION 32AC/32AD/33AB/33ABA/33AC
33.2 Legal Provisions - Clause 24 381
33.4 Audit documentation - Clause 24 381
34
DEEMED TO BE PROFITS AND GAINS
UNDER SECTION 41
34.2 Deemed profits and gains under section 41 382

PAGE
CONTENTS I-24
35
SUMS COVERED BY SECTION 43B
35.0 Requirement of clause 26 389
35.2 Provisions of section 43B - Certain deductions to be only on
actual payment 390
35.3 What is “actual” payment 395
35.5 Audit procedures/documentation 402
36
CLAUSE 27 OF FORM NO. 3CD : CENVAT
CREDIT/INPUT TAX CREDIT (ITC)/
PRIOR PERIOD ITEMS
36.1 Applicability of clause 27(a) 405
36.2 Applicability of clause 27(b) 405
37
‘GIFTS’ OF UNLISTED SHARES RECEIVED BY
LLPs/FIRMS/COMPANIES ON OR
BEFORE 31-3-2017 - CLAUSE 28
OF FORM NO. 3CD
37.1 Clause 28 not applicable w.e.f. A.Y. 2018-19 408
38
SHARE PREMIUM RECEIVED BY CLOSELY
HELD COMPANIES IN EXCESS OF FMV
TAXABLE -SECTION 56(2)(viib) -
CLAUSE 29 OF FORM NO. 3CD
38.1 Statutory background 409
38.2 Valuation of fair market value of unquoted equity shares 410
38.3 Judicial rulings 411
38.4 Definition of “start-up” as per the new start-up Notification No.
GSR 127(E), dated 19.02.2019 414
38.5 Exemption from application of section 56(2)(viib) in case of
Start-Ups 414

PAGE
I-25 CONTENTS
38.6 Start-up should be a private limited company recognised by
DPIIT 417
38.7 Aggregate consideration for shares should not exceed INR 25
crores 417
38.8 Start-up has not invested in specified assets for period of 7
years from end of latest F.Y. in which shares are issued for
premium 418
38.9 Declaration in Form 2 to be submitted by start-up fulfilling
conditions in paras 38.6 & 38.7 above 420
38.9A Assessees to whom clause 29 is applicable 420
38.10 Reporting requirements of clause 29 421
38.11 Audit Procedures - Clause 29 421
39
AMOUNT CHARGEABLE UNDER
SECTION 56(2)(ix) - CLAUSE 29A
39.1 Requirements of Clause 29A 423
39.2 How tax auditor should verify and report under new clause
29A 423
40
GIFTS/DEEMED GIFTS CHARGEABLE UNDER
SECTION 56(2)(x) - CLAUSE 29B
40.1 Requirements of Clause 29B 426
40.2 Provisions of section 56(2)(x) 427
40.3 Tax-Exempt Gifts 428
40.4 Audit procedures 433
41
HUNDI TRANSACTIONS - CLAUSE 30
OF FORM NO. 3CD
41.2 Legal provisions - Section 69D 435
41.3 Hundi 436

PAGE
CONTENTS I-26
42
CLAUSE 30A OF FORM NO. 3CD : SECONDARY
TRANSFER PRICING ADJUSTMENTS
42.1 Primary Transfer Pricing Adjustments 441
42.2 ‘Primary Adjustments referred to in sub-section (1) of section
92CE’ 442
42.3 Secondary Adjustments 442
42.3A Books of account 445
42.4 Requirements of clause 30A 446
42.5 Audit Procedures 446
43
CLAUSE 30B OF FORM NO. 3CD : THIN
CAP ADJUSTMENTS
43.1 Concepts of “Thin capitalization” and “Thin Capitalization
adjustment” 450
43.2 Thin cap adjustment provisions - Section 94B 450
43.3 Ingredients of thin cap provisions of section 94B 451
43.4 Requirements of clause 30B 454
44
CLAUSE 31 OF FORM NO. 3CD : ACCEPTANCE/
REPAYMENT OF LOAN/DEPOSIT/SPECIFIED SUM
44.2 Legal provisions - Section 269SS 460
44.3 ICAI’s views on clause 31(a) 467
44.4 Requirements of clause 31(b) 469
44.5 Clause 31(b) - Specified sum - i.e. advance or other sum
received in connection with transfer of immovable property 470
44.6 Applicability of clause 31(c)/(d)/(e) 470
44.7 Legal Provisions - Section 269T 470
44.8 ICAI’s views on clause 31(c) 471
44.9 Requirements of clause 31(c) 472
44.10 Clause 31(d) and 31(e) - Particulars of repayment of loans or
deposits or specified advances in an amount exceeding the
specified limit in section 269T (` 20,000) received by cash or
uncrossed cheque or uncrossed bank draft or transfer entry 472

11 Ingredients of section 269ST 474
44.12 Persons to whom section 269ST shall apply 475
44.13 Receipts to which section 269ST shall apply 476
44.14 Applicability of section 269ST to transactions of accepting loan
or deposit 477
44.15 Applicability of section 269ST to transactions of sale of immov-
able property 477
44.16 Whether section 269ST shall apply to single cash withdrawal of
Rs. 2,00,000 or more from a bank account? 478
44.17 Applicability to receiving share application money by a com-
pany from a resident 478
44.18 Capital contribution accepted by firm/LLP from partner in
cash whether section 269ST applicable? 478
44.19 Drawings from firm by partner in cash-whether section 269ST
is applicable 478
44.20 Whether section 269ST shall apply to receipt of Rs. 2,00,000 or
more in cash where TDS deducted by payer? 478
44.21 Cash payment tendered to clear very old outstanding of
Rs. 5,00,000 from a dodgy debtor and it is risky to refuse
money from him 479
44.22 Applicability of section 269ST to cash against cheque 479
44.23 Applicability of section 269ST where hotel receives money from
guests for safe custody 479
44.24 Permissible modes of accepting payments 479
44.25 How to reckon the limit of Rs. 2,00,000? 482
44.26 Requirements of clause 31(ba) 484
44.27 Requirements of clause 31(bb) 484
44.28 Requirements of Clause 31(bc) 485
44.29 Requirements of clause 31(bd) 485
44.30 Audit procedures relating to sub-clauses (ba) to (bd) 485
44.31 Audit documentation 488
45
CLAUSE 32 OF FORM NO. 3CD : UNABSORBED
LOSS/DEPRECIATION
45.2/3 Applicability of clause 32(b) 490
45.4 Legal Provisions - Section 79 491
I-27 CONTENTS

6 Details of speculation loss, if any, incurred by assessee - Clause
32(c) 495
45.7 Details of loss referred to in section 73A in respect of any
specified business - Clause 32(d) 496
45.8 Whether company is deemed to be carrying on a speculation
business in terms of Explanation to section 73 496
46
CHAPTER VI-A DEDUCTIONS
46.3 Legal Provisions - Clause 33 500
47
CLAUSE 34 OF FORM NO. 3CD : AUDIT OF
COMPLIANCE WITH TDS PROVISIONS
47.2 Assessee’s primary responsibility 503
47.3 Audit Procedures - Clause 34(a) 503
47.4 Audit Procedures - Clause 34(b) 507
47.5 Audit Procedure - Clause 34(c) 507
Annex 47.1 : Remittances to non-residents under section 195 of the
Income-Tax Act - Matters connected thereto 509
Annex 47.2 : Form No. 15CB 511
48
CLAUSE 35 OF FORM NO. 3CD : QUANTITATIVE DETAILS
49
CLAUSE 36 OF FORM NO. 3CD : DIVIDEND
DISTRIBUTION TAX
CONTENTS I-28

CLAUSE 36A OF FORM NO. 3CD : DEEMED
DIVIDEND U/S 2(22)(e)
50.1 Deemed Dividend under section 2(22)(e) 520
51
CLAUSE 37 OF FORM NO. 3CD : COST AUDIT REPORT
52
CLAUSE 38 OF FORM NO. 3CD : CENTRAL
EXCISE AUDIT REPORT
53
CLAUSE 39 OF FORM NO. 3CD : SERVICE TAX
AUDIT FOR VALUATION FOR SERVICES
54
ACCOUNTING RATIOS
54.1 Principal items of goods traded or manufactured or services 528
55
DETAILS OF DEMANDS RAISED OR REFUNDS
ISSUED UNDER TAX LAWS : CLAUSE 41
OF FORM NO. 3CD
55.2 Audit Procedures - Clause 41 532
I-29 CONTENTS

CLAUSE 42 OF FORM NO. 3CD : FURNISHING OF
FORM NOS. 61, 61A AND 61B
56.1 Form No. 61 533
56.2 Form No. 61A 534
56.3 Form No. 61B 535
Annex 56.1 : Furnishing of statement of financial transaction 537
57
CLAUSE 43 OF FORM NO. 3CD : FURNISHING OF
COUNTRY BY COUNTRY REPORT (CbCR) U/S 286
57.1 Country by Country Report (CbCR) 542
57.2 Interpretation of requirements of clause 43 543
57.3 Audit Procedures & Reporting 544
57.4 Whether the Clause 43 also requires the tax auditor to com-
ment in respect of report under section 286(4) 545
58
CLAUSE 44 OF FORM NO. 3CD : BREAK-UP OF
TOTAL EXPENDITURE OF ENTITIES REGISTERED
OR NOT REGISTERED UNDER GST
58.1 Clause No. 44 - Break-up of total expenditure of entities
registered or not registered under the GST 546
APPENDICES
Appendix 1 : Relevant Extracts of Taxation and Other Laws
(Relaxation and Amendment of Certain Provisions)
Act, 2020 549
Appendix 2 : Relevant Rule of Income-tax Rules, 1962 564
CONTENTS I-30

457
C H A P T E R
44
CLAUSE 31 OF FORM NO. 3CD : ACCEPTANCE/
REPAYMENT OF LOAN/DEPOSIT/SPECIFIED SUM
(a) Particulars of each loan or deposit in an amount exceeding the limit specified
in section 269SS taken or accepted during the previous year :—
(i) name, address and Permanent Account Number or Aadhaar Number
(if available with the assessee) of the lender or depositor;
(ii) amount of loan or deposit taken or accepted;
(iii) whether the loan or deposit was squared up during the previous year;
(iv) maximum amount outstanding in the account at any time during the
previous year;
(v) whether the loan or deposit was taken or accepted by cheque or bank
draft or use of electronic clearing system through a bank account;
(vi) in case the loan or deposit was taken or accepted by cheque or bank
draft, whether the same was taken or accepted by an account payee
cheque or an account payee bank draft.
(b) Particulars of each specified sum in an amount exceeding the limit
specified in section 269SS taken or accepted during the previous year:—
(ifavailablewiththeassessee)ofthepersonfromwhomspecifiedsum
is received;
(ii) amount of specified sum taken or accepted;
(iii) whether the specified sum was taken or accepted by cheque or bank
draft or use of electronic clearing system through a bank account;
(iv) in case the specified sum was taken or accepted by cheque or bank
draft, whether the same was taken or accepted by an account payee
cheque or an account payee bank draft.
(Particulars at (a) and (b) need not be given in the case of a Government
company, a banking company or a corporation established by the Central,
State or Provincial Act.)
SAMPLE CHAPTER

(ba) Particulars of each receipt in an amount exceeding the limit specified in
section 269ST, in aggregate from a person in a day or in respect of a single
transaction or in respect of transactions relating to one event or occasion
from a person, during the previous year, where such receipt is otherwise
thanbyachequeorbankdraftoruseofelectronicclearingsystemthrough
a bank account:—
(i) Name, address and Permanent Account Number or Aadhaar Number
(if available with the assessee) of the payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in Rs.);
(iv) Date of receipt;
(bb) Particulars of each receipt in an amount exceeding the limit specified in
section 269ST, in aggregate from a person in a day or in respect of a single
from a person, received by a cheque or bank draft, not being an account
payee cheque or an account payee bank draft, during the previous year:—
(ii) Amount of receipt (in Rs.);
(bc) Particulars of each payment made in an amount exceeding the limit
specified in section 269ST, in aggregate to a person in a day or in respect
of a single transaction or in respect of transactions relating to one event
or occasion to a person, otherwise than by a cheque or bank draft or use
of electronic clearing system through a bank account during the previous
year:—
(if available with the assessee) of the payee;
(ii) Nature of transaction;
(iii) Amount of payment (in Rs.);
(iv) Date of payment;
(bd) Particulars of each payment in an amount exceeding the limit specified in
section 269ST, in aggregate to a person in a day or in respect of a single
to a person, made by a cheque or bank draft, not being an account payee
cheque or an account payee bank draft, during the previous year:—
(ii) Amount of payment (in Rs.);
(Particulars at (ba), (bb), (bc) and (bd) need not be given in the case of
receipt by or payment to a Government company, a banking Company, a
post office savings bank, a cooperative bank or in the case of transactions
referred to in section 269SS or in the case of persons referred to in
Notification No. S.O. 2065(E) dated 3rd July, 2017)
CLAUSE 31 OF FORM NO. 3CD 458

(c) Particulars of each repayment of loan or deposit or any specified advance
in an amount exceeding the limit specified in section 269T made during
the previous year:—
(ii) amount of the repayment;
(iii) maximum amount outstanding in the account at any time during the
previous year;
(iv) whether the repayment was made by cheque or bank draft or use of
electronic clearing system through a bank account;
(v) in case the repayment was made by cheque or bank draft, whether the
same was repaid by an account payee cheque or an account payee
bank draft.
(d) Particulars of repayment of loan or deposit or any specified advance in an
amount exceeding the limit specified in section 269T received otherwise
thanbyachequeorbankdraftoruseofelectronicclearingsystemthrough
a bank account during the previous year:—
(ii) amount of repayment of loan or deposit or any specified advance
received otherwise than by a cheque or bank draft or use of electronic
clearing system through a bank account during the previous year.
(e) Particulars of repayment of loan or deposit or any specified advance in an
amount exceeding the limit specified in section 269T received by a cheque
or bank draft which is not an account payee cheque or account payee bank
draft during the previous year:—
(ii) amount of repayment of loan or deposit or any specified advance
received by a cheque or a bank draft which is not an account payee
cheque or account payee bank draft during the previous year.
(Particulars at (c), (d) and (e) need not be given in the case of a repayment
of any loan or deposit or any specified advance taken or accepted from the
Government, Government company, banking company or a corporation
established by the Central, State or Provincial Act). [Clause 31]
Section 269SS and sub-clauses (a) and (b) of clause 31 of Form No. 3CD
Applicability of clause 31(a) 44.1
Clause 31(a) is not applicable in respect of the following assessees :
459 APPLICABILITY OF CLAUSE 31(a) Para 44.1

(i) any banking company;
(ii) any corporation established by a Central, State or Provincial Act;
(iii) any Government company as defined in section 617 of the Companies Act,
1956 [now section 2(45) of the Companies Act, 2013].
Clause 31(a) deals with acceptance of loan or deposit in an amount exceeding the
limit specified in section 269SS (i.e. Rs. 20,000).
Clause 31(b) deals with receipt of specified sum i.e. money receivable as advance
or otherwise in relation to transfer of immovable property whether or not transfer
takes place.
Legal provisions - Section 269SS 44.2
Section 269SS of the Act provides that no person shall take or accept from any other
person (herein referred to as the depositor) the following amounts otherwise than
by specified modes,
u any loan or
u deposit or
u any specified sum,
if,—
(a) theamountofsuchloanordepositorspecifiedsumortheaggregateamount
of such loan, deposit and specified sum; or
(b) on the date of taking or accepting such loan or deposit or specified sum, any
loan or deposit or specified sum taken or accepted earlier by such person
from the depositor is remaining unpaid (whether repayment has fallen due
or not), the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with
the amount or the aggregate amount referred to in clause (b), is twenty
thousand rupees or more:
Provided that the provisions of this section shall not apply to any loan or
deposit or specified sum taken or accepted from, or any loan or deposit or
specified sum taken or accepted by,—
(a) the Government;
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in clause (45) of section 2 of the
Companies Act, 2013;
(e) such other institution, association or body or class of institutions,
associations or bodies which the Central Government may, for rea-
sons to be recorded in writing, notify in this behalf in the Official
Gazette:
Provided further that the provisions of this section shall not apply to any loan
or deposit or specified sum, where the person from whom the loan or deposit
Para 44.2 CLAUSE 31 OF FORM NO. 3CD 460

or specified sum is taken or accepted and the person by whom the loan or
deposit or specified sum is taken or accepted, are both having agricultural
income and neither of them has any income chargeable to tax under this Act.
Specified Modes 44.2-1
In terms of section 269SS read with Rule 6ABBA [See Appendix 2], the specified
modes of accepting loan or deposit or specified sums are:
u by account payee cheque;
u by account payee bank draft;
u by use of electronic clearing system through a bank account; or
u Aadhaar Pay;
u Credit Card;
u Debit Card;
u Net Banking;
u NEFT;
u RTGS;
u IMPS;
u UPI; and
u BHIM.
“Loan or deposit” 44.2-2
“Loan or deposit” means loan or deposit of money;
“Specified sum” 44.2-3
“Specified sum” means any sum of money receivable, whether as advance or
otherwise, in relation to transfer of an immovable property, whether or not the
transfer takes place.
“Transfer” 44.2-4
Section 269SS applies to cash received in relation to transfer of an immovable
property. It does not matter whether immovable property being transferred is held
as capital asset or as stock-in-trade
Section 2(47) of the Act defines “transfer”. The definition is an inclusive definition
andexpandsthescopeoftheterm‘transfer’.However,thedefinitioninsection2(47)
is in relation to capital assets. All definitions in section 2 of the Act are subject to the
qualifyingphrase“unlessthecontextotherwiserequires”.Sincesection269SSisnot
intendedtobelimitedonlytocashtransactionsrelatingtoimmovablepropertyheld
as capital asset, the context appears to rule out the application of definition in
section 2(47) to section 269SS.
The expression ‘transfer’ will have to be understood in the same sense as the
expression is understood in Transfer of Property Act, 1882.
461 LEGAL PROVISIONS - SECTION 269SS Para 44.2

“Immovable Property” 44.2-5
Section 56(2)(x) applies to immovable property being land or building or both held
as capital asset . Therefore section 56(2)(x) does not apply to rural agricultural land
in India as the same is not a capital asset.
Section 194-IA requires seller to deduct TDS on consideration on transfer of
immovable properties where transferor is a resident. TDS is to be deducted @1% if
the consideration exceeds ` 50 lakhs. Section 194-IA defines ‘immovable property’
to mean any land (other than agricultural land) or any building or part of a building.
Agricultural land means agricultural land in India other than urban land covered
by section 2(14)(iii)(a)/(b).
Section 269SS does not define ‘immovable property’. There is no exclusion for rural
agricultural land. Therefore, section 269SS would apply even to transfer of rural
agricultural land in India except where both parties involved are having agricul-
tural income and neither of them has any income chargeable to tax under this Act.
Section 269UA(d) defines ‘immovable property’. However, section 269SS does not
expressly say that the said definition will apply. Therefore, the definition cannot be
applied to section 269SS.
How to compute the limit of ` 20,000 44.2-6
The limit of ` 20,000 will have to be reckoned person-wise by aggregating the
transactions with as under:
(a) theamountofsuchloanordepositorspecifiedsumortheaggregateamount
of such loan, deposit and specified sum; or
(b) on the date of taking or accepting such loan or deposit or specified sum, any
loan or deposit or specified sum taken or accepted earlier by such person
from the depositor is remaining unpaid (whether repayment has fallen due
or not), the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with
the amount or the aggregate amount referred to in clause (b),
The words “such” refer to loan or deposit or specified sum accepted or taken
otherwise than by specified modes - e.g. by cash. The word “any” refers to loan or
deposit or specified sum accepted or taken by any which mode.
Whatifoneplot/flatisbookedinjointnamesandanotherbookedinsoloname?
44.2-7
It may happen that one plot/flat is booked in solo name of an individual and another
by same individual in joint name with others. Suppose cash advance of ` 10,000 is
paidinoneandcashadvanceof`25,000ispaidinanother.Itwouldappearthatboth
are not to be clubbed for the limit of ` 20,000. It would appear that there would be
no violation in this case. Where such clubbing is to be done, law says in so many
words—a case in point is new clause (c) in section 269T which reads as under:
“(c)theaggregateamountofthespecifiedadvancesreceived bysuchpersoneither
in his own name or jointly with any other person on the date of such repayment
together with the interest, if any, payable on such specified advances,”;

Since section 269SS is not worded along the lines of clause (c) of section 269T, it can
be inferred that clubbing of deposits accepted from a person in his name is not to
be clubbed with advances received from him in joint names with any other person.
“Account Payee” vs. “Crossed” - Whether hairsplitting required? 44.2-8
Question of “account payee” or “crossed” applies only if loan or deposit is accepted
bychequeordraft.IfacceptedbyECS,thereisnoneedforhairsplittingonthisissue.
If the cheque or bank draft through which loan is received is ‘crossed’ but words
‘account payee’ is not written in the crossing but the transaction is otherwise
genuine and the bank confirms that these amounts have been deposited in
assessee’s account and are as per the banking norms and there was no flaw in the
transaction, penalty under section 271D is not imposable for such a trivial violation.
In CITv.MakhijaConstructionCo.[2002]123Taxman1003(MP)theCourtobserved
as under :
“. . . .The Tribunal has rejected appeal of the revenue mainly on the ground that
cheques were crossed and were deposited in the account of assessee-firm through
bankingchannel.Consequentlyandintheresult,provisionsofsection269SSofthe
Act could not be attracted. A further finding has been recorded that bank has also
issued a certificate in this regard that all the amounts of six creditors have been
shown in the account of Makhija Construction Co., i.e., assessee. Bank has further
mentioned that all the six transactions in question were as per the banking norms
and there was no flaw in the transaction, whereby the aforesaid amount of
` 2,15,000 was transferred in the account of the assessee. The Tribunal has come
to the conclusion that for such minor deviation, no penalty could have been
imposed on the assessee as otherwise the transaction appears to be genuine,
proper and bona fide.”
Althoughadistinctionexistsbetween‘crossed’and‘accountpayee’,hair-splittingon
this is not warranted at least in section 269SS/269T context but is so warranted in
section 40A(3) context.
Transactions between sister concerns 44.2-9
In Muthoot M. George Bankers v. Asstt. CIT [1993] 46 ITD 10 (Coch. - Trib.), the
Tribunal held as under :
‘. . . .From the copies of the accounts furnished before us all that can be gathered
is that funds have been transferred from and to the sister concerns as and when
required and since the managing partner is common to all the sister concerns, the
decisiontotransferthefundsfromoneconcerntoanotherconcernortorepaythe
funds could be said to have been largely influenced by the same individual. In
other words, the decision to give and the decision to take rested with either the
same group of people or with the same individual. In such circumstances of the
case, we hold that the transactions inter se between the sister concerns and the
assessee cannot partake of the nature of either “deposit” or “loan”, though interest
might have been paid on the same. . . .’
In Shree Durga Distillery v. Addl. CIT (Inv.) [ITA No. 349/Bang/2004, order, dated
30-11-2005], the Tribunal had the occasion to consider whether transactions

between sister concerns can constitute a ‘loan or deposit’ for the purposes of
sections 269SS and 271D. The Tribunal held that transfer of funds inter se between
two sister concerns cannot be termed as a ‘loan’ or ‘deposit’. Deposit is given by the
lender for a fixed term while loan is given on the request of the borrower. If decision
onbehalfoflenderorborroweristakenbythesamepersoncontrollingthefinancial
affairs then it is difficult to term such transactions as loan or deposit as understood
incommonparlance.Further,theTribunalalsoreliedupon Asstt.CIT v.G.P.Taparia
[2005] 143 Taxman 46 (Jodh. - Trib.) (Mag.) that cash transactions with sister
concerns will not attract penalty as default of assessee would only be a technical
one.
Whether direct deposit of cash in closely held company’s bank account by the
director is ‘loan’ or ‘deposit’ under section 269SS? - In Mangala Builders Pvt. Ltd. v.
Addl. CIT [2006] 9 SOT 23 (Bang. - Trib.) (URO), this issue was considered by ITAT.
The Tribunal held that although the appellant-company and its Directors are two
different legal entities, the appellant is a closely held company whose affairs are
managed by the Directors. Since it was short of funds and to see that cheques issued
by it are cleared, it had to keep sufficient balance in Bank. At that point of time, the
Director out of his personal funds, deposited the sum in the bank account of the
appellant company. Though this can be considered as receiving the sum from
Director, it cannot be considered as taking a loan or accepting the deposits in its true
sense(forthepurposesofsection269SS).Theappellant,beingcloselyheldcompany
and the affairs being managed by the Director, broadly speaking, they are one and
the same. At this point of crisis, the appellant can bank upon only its Directors. If the
cheques are not cleared, ultimately any liability arising by way of criminal proceed-
ings under section 138 of the Negotiable Instruments Act, will fall on such Director
only. Thus the amount was deposited to save the hour of crisis and hence even if it
is considered as received in violation of provisions of section 269SS, it amounts to
reasonable cause within the meaning of section 273B which applies to section 271D
also (under which penalty is imposable for violation of section 269SS).
The Bangalore Bench of ITAT in Sri Renukeswara Rice Mills v. ITO [2005] 93 ITD
263 (Bang. - Trib.) had held in the context of section 40A(3) held that where the
payments are made otherwise than by account payee cheque directly in the bank
account of the payee, it meets with the intention of the Legislature and no
disallowance can be made under section 40A(3). Applying the same principle, it can
be opined that when direct deposit of cash is made in (closely held) company’s bank
account there would be no contravention of section 269SS.
Applicability of section 269SS/269T in respect of capital contributions of
partners 44.2-10
In Munjal Sales Corpn. v. CIT [2008] 168 Taxman 43 (SC), the Supreme Court held
that capital contributions by partners are ‘capital borrowed’ for the purposes of
section 36(1)(iii). The Court held ‘It is vehemently urged on behalf of the assessee
that partner’s capital is not a loan or borrowing in the hand of a firm. According to
the assessee, section 40(b)(iv) applies to partner’s capital whereas section 36(1)(iii)
applies to loan/borrowing. Conceptually, the position may be correct but we are

concerned with the scheme of Chapter IV-D’. From the Court’s remarks, it appears
that the Court’s ruling is only in the context of Chapter IV-D and this definition of
borrowings will not apply in other contexts in the Act. So, it appears that capital
contributions in money by partners are not hit by section 269SS/269T of the Act.
However, to be on a safe side, it makes sense for firms and LLPs to comply with
sections 269SS and 269T in the matter of partner’s capital contributions as well.
Cash against cheque - ‘Exchange’ 44.2-11
This is a money for money transaction which is called ‘exchange’. It is not a ‘loan’.
Giving a cheque means giving money so long as the cheque is not post-dated and
it does not get dishonoured subsequently. Hence, if the cheque is current dated and
was duly encashed, it appears that the tax auditor need not report this matter under
this clause.
Equity shares issued in satisfaction of loan 44.2-12
The word ‘repay’ in Oxford Dictionary is defined as payback (a loan), payback
(money owed to some one). The word ‘repayment’ cannot be equated with
‘settlement/adjustment/square-off’. In fact the words ‘squared up’ is used in clause
31(a)(iii). Words ‘squared up’ is not used in clause 31(c). Hence, it is possible to take
a view, clause 31(b) will only cover repayments by cash and repayment by bearer
cheque/draft.
Transfer of newly admitted partner’s loan account balance to capital account
as his capital contribution 44.2-13
Based on the Supreme Court’s decision in Munjal Sales Corpn. case (supra), it can
be argued that partner’s capital is also nothing but ‘capital borrowed’. Therefore,
this transaction can be construed as acceptance/taking of a loan otherwise then by
crossed A/c payee cheque/DD and reporting against clause 31(a)/(c) is required.
‘Renewal’ of deposits - Whether hit by clause 31 ? 44.2-14
The word ‘renew’ has been defined by Oxford English Dictionary as “extend the
period of validity of (a license, subscription or contract).” Shroud’s Judicial Dictio-
nary defines if as extension of time for payment. Thus, renewal is neither ‘accep-
tance’ nor ‘repayment’. ‘Accept’ means to ‘consent to receive (something offered)’.
‘Take’ means to accept or receive. Repay means to ‘pay back’ (loan/money owed).
Thus, analyzing all the above words, it appears that renewal is neither acceptance
nor repayment. ICAI’s contrary views in its Guidance Note on Tax Audit, it is
respectfully submitted, requires reconsideration.

‘Loan’, ‘Bailment’ - Hotel accepting cash from guests for safe custody
44.2-15
Retentions from contractor’s bills as ‘Security deposit’ - Whether ‘deposit’
44.2-16
AS-7 Construction Contracts [Para 39(c)] describes these amounts as ‘retentions’.
Thus,itisnotreallycorrecttocallthesesecuritydeposits.Theyare‘retentions’.Para
40 of (AS) 7 defines retentions as amounts of progress billings which are not paid
until the conditions in the contract are satisfied or until defects have been rectified.
So,withholdingamountsoutofcontractor’sbillsandreleasingthemafterwarranty
period does not attract clause 31(a) and/or clause 31(c). However, if contractor i.e.,
deposits money with assessee and this money is refunded by assessee to him on
expiry of warranty period - clause 31(a) and/or 31(c) will be attracted.
Share application money - When unsecured loan 44.2-17
According to the Guidance Note on Audit of Capital and Reserves issued by ICAI,
share application money not backed by application form or certificate from
registrar and share transfer agents or resolution of appropriate authority for issue
of capital should be treated as unsecured loan. (Para 37 of Guidance Note on Audit
of Capital & Reserves).
Thee-filingfillableForm3CDrequiresthattheinformationrequiredbyclause31(a)
should be reported in the following tabular format:
Possibilities
Hotel accepts sealed packet containing
currency notes and coins and returns
it. No entries made in cash book.
Cash accepted and entries made in cash
book. The exact amount is returned
but not in the same currency notes or
coins in which they were deposited.
This is a bailment. It is neither accep-
tanceofdepositsnorrepayment.Hence,
no need to report against clause 31(a)/
(c).
This is hit by both clause 31(a) and
clause 31(c) and must be reported.
▼
▼ ▼
▼ ▼

S. Name of Address of PAN or Amount Whether Maximum Whether In case
No. the lender the lender Aadhaar of loans the loan amount the loan the loan
or deposi- or deposi- Number or deposi- or deposit outstand- or deposit ordeposit
tor tor (If availa- ts taken are squa- ing in the was taken wastaken
ble with or accep- red up previous or accep- or accep-
assessee) ted during the year ted by a ted by a
of the previous cheque or chequeor
lender or year bank draft bank
depositor or ECS draft,
whether
it was
taken or
accepted
by an
account
payee
chequeor
account
payee
bank
draft
ICAI’s views on clause 31(a) 44.3
The following views of ICAI are relevant in this regard :
u Sale proceeds collected by the selling agent (on behalf of his principal) is not
a loan or deposit.
u The definition of deposit does not exclude a current account. Therefore, if
the transactions in a current account exceed the amount of ` 20,000, it will
be necessary to give the information against this sub-clause. This is so even
if no interest is paid on current account.
u In case, the lender’s account is a mixed account, the transactions relating to
loans and deposits (temporary advances) should be segregated from other
accounts and the transactions relating to loans/deposits only should be
stated under this clause.
u Advance received against sale of goods is not a loan or deposit.
u In case of loan taken in earlier years, opening credit balance is not specifi-
cally required to be disclosed. However, while giving figures of maximum
amount outstanding at any time during the year or while giving information
about repayment of loan/deposit, the opening balances in the loan accounts
will have to be taken into consideration.
u Information has to be given in respect of interest-free loans also.
u Security deposits against contracts, etc. are ‘deposits’ and therefore, such
information in respect of them should be given. However, if these ‘security
deposits’ are in the form of amounts retained/withheld from bills, these are
‘retentions’ as per (AS) 7 and not ‘deposits’. To that extent, above view of ICAI
needs reconsideration.
467 ICAI’S VIEWS ON CLAUSE 31(a) Para 44.3

u Loans and deposits taken or accepted by transfer entries constitute accep-
tance of deposits or loans otherwise than by account payee cheques/drafts
or ECS. Hence, such entries have to be reported under this clause.
u The entries that relate to transactions with a supplier and customer are not
loans or deposits accepted.
u If the aggregate loans/deposits in a year (from a single party) exceed
` 20,000 but each individual item is less than ` 20,000 the information will still
be required to be given in respect of all such entries starting from the entry
when the balance reaches ` 20,000 or more and until the balance goes down
below ` 20,000. The tax auditor should verify all loans/deposits taken or
acceptedwherebalancehasreached `20,000ormoreduringtheyearforthe
purpose of reporting under this clause.
u In case of loans or deposits taken or accepted through electronic transfers
(possible due to technological advances) through internet/mail transfer-
these are not through account payee cheque/DD or through ECS. All the
same, they are capable of being tracked. These loans and deposits need not
be reported.
In terms of Rule 6ABBA, loans or deposits may be received by the following
‘other prescribed electronic modes’ for section 269SS purposes: (i) Debit
card; (ii) Credit card; (iii) Net Banking; (iv) UPI; (v) BHIM; (vi) RTGS; (vii)
NEFT; (viii) IMPS; (ix) Aadhaar Pay.
If loan or deposit is received by the modes specified in Rule 6ABBA, no need
for reporting even though received otherwise than by account payee
cheque/DD or ECS.
u In the absence of conclusive or satisfactory evidence that the loan/deposit
was taken/accepted by account payee cheque/DD or use of electronic
clearing system through bank, he should make a suitable comment in his
report as suggested below :
“It is not possible for me/us to verify whether loans or deposits have been taken
or accepted otherwise than by an account payee cheque or account payee bank
draft, as the necessary evidence is not in the possession of the assessee”.
u Share application money advance supported by appropriate documentation
is neither deposit nor loan.
u Subsequent allotment of shares or repayment of application money as a part
of allotment process does not alter the character of application money and
provision of section 269SS/T are not attracted in such a case. - CIT v.
Rugmini Ram Ragav Spinners (P.) Ltd. [2008] 304 ITR 417 (Mad.) and CIT v.
IP India (P.) Ltd. [2011] 16 taxmann.com 407/[2012[ 204 Taxman 368 (Delhi)
and CIT v. Numero Uno Financial Services P. Ltd. [2012] 20 taxmann.com
508/206 Taxman 96 (Delhi) (Mag.). However, contrary view has been taken
in Bhalotia Engineering Works (P.) Ltd. v. CIT [2005] 275 ITR 399 (Jhar.).
Certificate from assessee (management representation) 44.3-1
Where loan or deposit is accepted by use of ECS, tax auditor will not be required
to verify whether cheque/DD is “account payee” or not. Tax auditor should advice
the auditee at the start of the financial year itself to accept/repay loans/deposits/
specified sum through ECS rather than by cheque or DD.

Where loan or deposit is accepted by cheque or Bank draft, it may not be practi-
cally possible for the tax auditor to verify each payment, reflected in the bank
statement as received through cheque or DD, as to whether the payment/accep-
tance of deposits or loans has been made through account payee cheque, demand
draft, pay order or not. Therefore, the 2014 Guidance Note requires the tax audi-
tor to obtain suitable certificate from the assessee to the effect that the payments/
receipts referred to in sections 269SS and 269T were made by account payee
cheque drawn on a bank or account payee bank draft as the case may be. Where
the reporting has been done on the basis of the certificate of the assessee, the
same shall be reported as an observation in clause (3) of Form No. 3CA and clause
(5) of Form No. 3CB, as the case may be.
[Para 51.5 of the 2014 Guidance Note]
Verification procedures 44.3-2
There will be practical difficulties in verifying the loan or deposit taken or
accepted by account payee cheque or an account payee bank draft. In such cases,
the tax auditor should verify the transactions with reference to such evidence
which may be available. In the absence of satisfactory evidence, the tax auditor
should make a suitable comment in his report as under :
“It is not possible for me/us to verify whether loans or deposits have been taken or
accepted otherwise than by an account payee cheque or account payee bank draft,
as the necessary evidence is not in the possession of the assessee”.
[Para 49.6 of the Guidance Note]
Requirements of clause 31(b) 44.4
The E-filing fillable Form 3CD requires that the information requested by clause
31(b) should be reported in the following tabular format
S. Name of the Address of PAN or Amount of Whether the In case the
No. person from the person Aadhaar specified sum specified sum specified
whom the from whom Number (if taken or was taken or sum was
specified sum the specified available accepted accepted by accepted or
is received sum is with the the use of taken by
received assessee) of cheque or cheque or
the person bank draft or bank draft,
from whom use of ECS whether the
the specified same was
sum was taken or
received accepted by
an account
payee
cheque or a
account
payee bank
draft
469 REQUIREMENTS OF CLAUSE 31(b) Para 44.4

ThisbookprovidesadetailedcommentaryonprovisionsrelatingtoTaxAuditand
clausesofForm 3CD
ThePresentPublicationisthe12thEdition,updatedtill20thSeptember2020,in-
corporatingallthechangesmadebythefollowing:
Thekeyfeaturesofthisbookareasfollows:
•TheFinanceAct2020
•TheTaxationandOtherLaws(RelaxationandAmendmentofCertainProvisions)
Act2020
•AnalysisoftheauditrequirementunderIncometaxprovision
•Anin-depthdiscussiononeveryclauseofthetaxauditreportForm No.3CA,3CB
and3CD;
•AnalysisofguidancenotereleasedbytheICAIontaxAudit.

Taxmann's Guide to Tax Audit | September 2020

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Taxmann's Guide to Tax Audit | September 2020