Articles

Pre-Budget 2021-22 Wish: Correct the Paradox of Putting ‘the Cart before the Horse’ i.e. ‘Audit before the Compliance’.

This article penned down by Sh. Mayank Mohanka, FCA, Founder Director is M/s TaxAaram India Pvt Ltd has been published in the renowned website Taxmann.com with the citation (2021) 123 taxmann.com 271 (Article).

Knowledge is meant for sharing, so for the benefit of our Readers, this article is now being shared here.

“Once in the Durbar of Raja Krishna Dev Rai, the king of Vijay Nagar in Southern India, two persons named ‘Vyapari’ and ‘Lekhakar’ came for seeking justice in respect of a dispute arising out of the announcement of the new levy of ‘additional kar’ (tax). This ‘additional kar’ was to be paid by the traders and businessmen, if they don’t pay their ‘basic kar’ to the treasury, by the due date i.e. the year end.

In order to ensure timely payment of this ‘basic kar’ by the traders and businessmen, within the due date, ‘Acharya Tathacharya’, the Raj Purohit of the King, had suggested to implement a ‘Lekha-Parikshan’ system of tax administration, wherein the qualified ‘lekhakars’, would have to vouch for the payment of this ‘basic kar’ by the traders and businessmen within the due date, in their ‘lekha-parikshan’ reports.  If the ‘lekhakars’ report any adverse finding regarding the late payment/non-payment of the ‘basic kar’, by the traders and business community, then these traders and businessmen were required to pay the said ‘additional kar’, as a measure of penalty.

Further, a penalty was also leviable on the ‘lekhakars’, if they report incorrectly in their reports. The due date of the ‘lekha-parikshan’ reports to be submitted by the ‘lekhakars’ was kept as one month prior to the due date of payment of ‘basic kar’ by the traders and businessmen.

It so happened that this person named ‘Vyapari’ has not been able to pay the ‘basic kar’, by the due date of submission of ‘Lekha-Parikshan’ report by the ‘Lekhakar’, due to some liquidity crisis on account of an epidemic.

However, this person named ‘Vyapari’ was to receive the payment for an order after 15 days of the due date of submission of ‘Lekha-Parikshan’ report by the ‘Lekhakar. So, ‘Vyapari’, tried to convince the ‘Lekhkar’ that he will positively pay the ‘basic kar’ after 15 days on receipt of his payment, well within the prescribed due date of payment of ‘basic kar’ and requested the ‘Lekhakar’, not to report anything adverse in his report.

However, ‘Lekhakar’, very politely expressed his inability to report on or to vouch for the timely payment of the ‘basic kar’ by ‘Vyapari’, in his report, simply because on the due date of submission of the ‘lekha-parikshan’ report, ‘Vyapari’ has not deposited the ‘basic kar’ and it can’t be ascertained with surety that he will deposit the same after 15 days or within the due date of deposition of ‘basic kar’.

So, in this peculiar scenario, both ‘Vyapari’ and ‘Lekhakar’ were correct in their respective perspectives. ‘Vyapari’ was correct as on the due date of submission of his ‘lekha-parikshan’ report, he was still having one full month to make the payment of the ‘basic kar’ to the treasury as per the statute. ‘Lekhakar’ was correct because he can’t invite penalty by uncertain or speculative reporting on a compliance which may or may not take place in future.

Now, as usual, king Krishna Dev Rai requested his reliable aide and counsellor Pandit Shri Rama Krishna (more popularly known as ‘Tenali Rama’) to resolve this peculiar problem.

Known for his brilliance and intelligence, Pandit Shri Rama Krishna innocently asked the King, “Maharaj, to have a smooth ride, you will put the horse before the cart or the cart in front of the horse?”

‘Of-course, horse before the cart’, exclaimed the King.

‘But the present statute of keeping the due date of submission of ‘lekha-parikshan’ reports one month prior to the due date of deposition of the ‘basic kar’, is nothing but placing the cart before the horse and still expecting the ride to go smooth.”, asserted Pandit Shri Rama Krishna.

Thus, Pandit Shri Rama Krishna, advised a very simple solution to this peculiar problem. He asked the king to keep the due date of submission of ‘Lekha-Parikshan’ reports after one month of the due date of deposition of ‘basic kar’, by the traders and businessmen. 

Interestingly, the above tale narrated in fiction has happened in real.

The Finance Act 2020 has inserted just five more words viz. ‘date one month prior to’ in clause (ii) of Explanation to Section 44AB of the Income Tax Act, 1961. But these five words have created some grave paradoxical inconsistencies in some of the important and significant reporting clauses in the Tax Audit Report in Form 3CA/3CB with 3CD u/s 44AB and have literally put the cart before the horse.

Clause (ii) of Explanation to Section 44AB reads as under:

"specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment year, means [date one month prior to] the due date for furnishing the return of income under sub-section (1) of section 139.”

In this Taxalogue, I am discussing atleast Seven (7) Reporting Clauses in the Tax Audit Report (Annexure Form 3CD), which requires reporting by the Tax Auditor on certain specified compliances by the tax auditee, the prescribed due dates of which falls after the due date of submission of tax audit reports.

These Seven (7) Reporting Clauses in the Tax Audit Report’s Annexure Form 3CD are discussed as under:

1. TDS Deposition Compliance:

Clause 21(b)(i)(B) in Form 3CD requires the reporting by the Tax Auditor, on details of payments/expenditure, on which tax has been deducted but has not been paid on or before the due date specified in section 139(1) the Act.

This reporting clause has some very serious and dire consequences for the auditee in his/her assessment as the expenses reported under this clause are disallowed to the extent of 30% if TDS on such expenses has not been deposited by the auditee uptill the due date of filing of ITR, u/s 139(1).

Therefore, in the present statutory framework of due dates, it is really very harsh and unrealistic to expect the tax-auditor to report correctly on the TDS deposition compliance, on the due date of submission of tax audit report, which is one month prior to the prescribed due date of filing of ITR u/s 139(1), for allowability of such expenditure.

2. Allowability of Expenditure on Payment Basis u/s 43B:

Clause 26(B) of Form 3CD requires reporting on allowability of certain expenditure on payment basis u/s 43B of the Income Tax Act.

Under section 43B certain expenditure are allowed on payment basis if they are made on or before the date of filing of the ROI u/s 139(1).

Therefore, it is really very unrealistic to expect the tax-auditor to report correctly on the eligibility of such expenditure as an allowable expenditure, on the due date of submission of tax audit report, which is one month prior to the prescribed due date of allowability of such expenditure i.e. filing of ITR u/s 139(1).

3. Clause 8a: The Taxation Laws (Amendment) Act, 2019 has inserted two new sections 115BAA and 115BAB w.e.f AY 2020-21 and has made consequential amendments to section 115BA, 115JB and section 92BA, giving the option to the corporate entities for availing the benefit of lower corporate tax rate of 22% plus surcharge in case of existing corporate entities and 15% plus surcharge in case of new manufacturing corporate entities incorporated on or after 1.10.2019.

Such an option can be exercised by the corporate entities uptill the due date of filing of return of income u/s 139(1).

Clause (8a) in Form 3CD requires the Tax Auditor to report as to whether the auditee has opted for the taxation regime u/s 115BAA or 115BAB, as the case may be, or not.

So, presently either the auditee is compelled to exercise this option on or before the due date of submission of tax audit report, which is one month prior to the due date of filing ITR, thus making the legislative mandate of exercise of this option uptill the due date of filing his ITR redundant and meaningless or the Tax Auditor is faced with the dilemma of uncertain and speculative reporting.

 4. Clause 18: Clause 18 requires reporting on the adjusted WDV of fixed assets if the auditee has adopted option of lower rate of taxation u/s 115BA/115BAA. The newly inserted sub-clauses in clause 18 are:

In order to avail the concessional corporate tax rate u/s 115BA/115BAA/115BAB, the auditee is required to forego certain deductions and brought-forward additional unabsorbed depreciation, which are otherwise allowable to it under various sections like 10AA, 32(1)(iia), 32AD, 33AB, 33ABA,35, 35AD, 35CCC 35CCD.

The Taxation Laws (Amendment) Act, 2019 has given the time-period to the taxpayers to exercise such option u/s 115BA/115BAA/115BAB uptill the due date of filing of ITR u/s 139(1) of the Act.

So, presently either the auditee is compelled to exercise this option on or before the due date of submission of tax audit report, which is one month prior to the due date of filing ITR, thus making the legislative mandate of exercise of this option uptill the due date of filing his ITR redundant and meaningless or the Tax Auditor is faced with the dilemma of uncertain and speculative reporting.

For AY 2020-21, the value of Adjustment to be made to the written down value u/s 115BA/115BAA as stated in clause (ca) is equal to the amount of unabsorbed additional depreciation as at 1st April 2019 which is required to be carried forward to the AY 2020-21. The other figures in the remaining clauses would depend upon the amount of adjustment in clause (ca).

The figures would vary depending upon whether the option u/s 115BA/115BAA has been exercised or not and for which the due date is 31st January 2021, but which was required to be reported by the Tax Auditor one month before i.e. on 31.12.2020.

5. Clause 20(b) requires the reporting on details of contributions received from employees for various funds as referred to in section 36(1)(va) by the employer and not deposited by the due date.

Currently the revenue authorities are interpreting the ‘due date’ to be the due date as provided in the Provident Fund Act i.e. deposition of employees contribution to provident fund by 15th day of the month next to the month of receipt of such contribution by the employer.

However, in several judgements of the Hon’ble High Courts like ‘CIT vs. Aimil Ltd (2010) 188 Taxman 265 (Delhi) and Vinay Cements (SC), it has been held that the ‘due date’ should be considered as the due date of filing of ITR for that assessment year.

6. Clause 32(a) requires reporting on details of brought forward loss or depreciation allowance, in the following manner, to the extent available:

In order to avail the concessional corporate tax rate u/s 115BA/115BAA/115BAB, the auditee is required to forego certain deductions and brought-forward additional unabsorbed depreciation, which are otherwise allowable to it under various sections like 10AA, 32(1)(iia), 32AD, 33AB, 33ABA,35, 35AD, 35CCC 35CCD.

The Taxation Laws (Amendment) Act, 2019 has given the time-period to the taxpayers to exercise such option u/s 115BA/115BAA/115BAB uptill the due date of filing of ITR u/s 139(1).

So, presently either the auditee is compelled to exercise this option on or before the due date of submission of tax audit report, which is one month prior to the due date of filing ITR, thus making the legislative mandate of exercise of this option uptill the due date of filing his ITR redundant and meaningless or the Tax Auditor is faced with the dilemma of uncertain and speculative reporting.

7. Clause 33 requires section-wise details of deductions, if any, admissible under Chapter VIA or Chapter III (Section 10A, Section 10AA):

In order to avail the concessional corporate tax rate u/s 115BA/115BAA/115BAB, the auditee is required to forego certain deductions which are otherwise allowable to it under various sections like 10AA, 32(1)(iia), 32AD, 33AB, 33ABA,35, 35AD, 35CCC 35CCD.

The Taxation Laws (Amendment) Act, 2019 has given the time-period to the taxpayers to exercise such option u/s 115BA/115BAA/115BAB uptill the due date of filing of ITR u/s 139(1) which is 31.1.2021 for the AY 2020-21.

So, presently either the auditee is compelled to exercise this option on or before the due date of submission of tax audit report, which is one month prior to the due date of filing ITR, thus making the legislative mandate of exercise of this option uptill the due date of filing his ITR redundant and meaningless or the Tax Auditor is faced with the dilemma of uncertain and speculative reporting.

In addition to the above discussed 7 Reporting Clauses in Form 3CD in the Tax Audit Report u/s 44AB, similar dilemma and confusion is being faced by the Auditors in various legislative provisions of the Income Tax Act, requiring the Auditor to submit their audit reports, one month prior to the ITR filing due date u/s 139(1).

These sections are tabulated as under:

Conclusion:

In view of the above, the concerned Law-Making Authorities are requested to Correct the Paradox of Putting ‘the Cart before the Horse’ i.e., ‘Audit before the Compliance’ arising out of the non-alignment of the due dates of submissions of tax audit and other audits reports and the ITR Filing due date u/s 139(1) of the Income Tax Act, 1961.