AMENDMENTS TO FINANCE ACT 2006 A FOCUS ON FORM 3CD & FBT

T.N. PANDEY*
Income-tax (Ninth Amendment) Rules, 2006 - An Analysis
This article highlights the changes and various other aspects concerning the
Income-tax (Ninth Amendment) Rules, 2006, notified on August 10, 2006 and
applicable from that date. Theauthor makes a pointer to the changes made in Form
No. 3CD in which tax audit report is to be furnished to the Assessing Officers as also
to the details that are to be given in Annexure-II regarding the Fringe Benefit Tax. A
reading of the article would give the reader a clear idea of what is sought to be
achieved by the amendments.
The author has made a very good suggestion that instead of issuing rules on
different dates throughout the year, the CBDT should take a decision to notify rules
on quarterly basis. This would benefit every one who has to deal with such rules.
The CBDT should give serious thought to this suggestion.
Introduction
1. Vide Notification dated August 10, 2006, the Income-tax Rules, 1962 have been
amended ninth time in a period of little over 4 months since April 1, 2006, which gives an
average of 2 amendments per month. The ninth amendment spreads over 3 pages with an
annexure, running into 5 pages. In the later discussion, the contents of the changes made
are being examined. However, before doing that, it is proposed to raise a fundamental
issue regarding the making of changes in the Rules so frequently.
Rules need to be issued at fixed intervals - Not any time
2. If the past history of changes in Income-tax Rules is looked into, it would be found that
on an average, Income-tax Rules are varied and amended at least 20 to 25 times in a year.
The result is that the Rules book has become thicker than the Income-tax Act, 1961!
Further, for the assessees, tax officers, tax consultants and others interested in the
administration of the Act, it becomes a nightmarish exercise to keep track of various
changes and ensure timely and correct compliance. For publisher of books on Rules also,
it has almost become a constant vigilance exercise to ensure that the Rules book is
properly updated. The assessees have to purchase 2-3 revised editions of book of Rules in
a year, which is, prima facie, expensive and subject the persons required to comply with
Rules to unjustified costs. Hence, a look at the present system is necessary to make life
easy for all those who are concerned with the Income-tax Rules, which are being issued
from time-to-time.
To ease the situation, barring circumstances, where immediate issue of the Rules becomes
necessary, the CBDT should, as a practice, issue the Income-tax Rules on a quarterly
basis, i.e., on 1st April, 1st July, 1st October and 1st January only - not every now and
then. This would bring the existing haphazard way of issuing the Rules, as and when the
CBDT likes, to a more orderly system and give considerable relief to all those, who have
anything to do with the Rules. The CBDT should seriously give a thought to this practical
suggestion and see that in issuing the Rules, such a practice is adhered to.
The ninth amendment to Income-tax Rules in the year 2006
3. The amendment needs to be analysed under two broad heads, namely, -
 Amendment to Rules concerning Form No.3CD, to be furnished by auditors under
section 44AB
 A Rule relating to Fringe Benefit Tax (FBT)
3.1 Amendments relating to Form No.3CD - Tax Audit Report - Section 44AB makes it
obligatory for a person carrying on business to get his accounts audited by a Chartered
Accountant, and to furnish by the ‘specified date’, the report in the prescribed form of
such audit, if the total sales, turnover or gross receipts in business in the relevant previous
year exceed or exceeds Rs.40 lakhs. For a professional, the provisions of tax audit
become applicable, if his gross receipts in profession exceed Rs.10 lakhs.
These amendments are in respect of the particulars, which are to be furnished by the
auditors in the context of tax audit under section 44AB. As observed by the Finance
Minister, while presenting the Union Budget for 1984-85, and as stated in the
Memorandum explaining the provisions of the Finance Bill, 1984, the compulsory audit
is intended to ensure proper maintenance of books of account and other records, in order
to reflect the true income of the taxpayer and to facilitate the administration of tax laws
by a proper presentation of the accounts before the tax authorities. Broadly, through the
tax audit under section 44AB, much of the work that was earlier being done by the
Assessing Officers has now been passed on to the Chartered Accountants. The tax
authorities seem to have realized that the Assessing Officers have neither the time nor the
requisite expertise to critically examine the books of account and the particulars relating
to the accounts to compute the income under the Income-tax Act, 1961. The time
available with the Assessing Officer to complete the assessment is also limited. Hence,
the scheme of tax audit was started and has by now become an integral part of the Act.
After the introduction of section 44AB in the Act, Form Nos. 3CD and 3CE (commonly
known as Tax Audit Report) were introduced. The purpose, as mentioned earlier, of the
introduction of section 44AB and the tax audit reports was to reduce the burden of the
Assessing Officers so that disallowances and deductions, if any, under the various
provisions of the Act are properly and correctly calculated by the professionals and
reported in the tax audit report and the income can be computed properly.
However, due to the changes in the Income-tax Law over the years, certain clauses of the
old tax audit report became obsolete. Moreover, Form No.3CD, as initially introduced,
was not appropriately drafted and reporting under those clauses was hardly of any help to
the Assessing Officers. It may also be mentioned that there were no basic changes in the
tax audit format since its introduction for the first time in the assessment year 1985-86.
The Government realized the shortcomings of the earlier tax audit format and undertook
a comprehensive review of the matter and came out with the revised formats, which
considerably enhanced the scope of audit. The amendments in the tax audit report
structurally changed the reporting requirements. The introduction of new clauses in the
revised tax audit format required the tax auditor to report on various other particulars
like:-
 Deduction available under Chapter VIA;
 Depreciation admissible under the Act;
  Compliance of accounting standards issued under section 145, etc.
3.1-1 CHANGES MADE IN FORM NO.3CD BY THE NINTH AMENDMENT TO I.T.
RULES - APPENDIX-II
Rule 6G(2) stipulates that the particulars concerning Tax Audit are to be furnished
under section 44AB in Form No. 3CD. In Form No. 3CD, the following changes have
been made:—
S. No. of the Item No. in Present requirement Change made - Sub-item added
clause in the the Form,
Ninth where
Amendment change has
been made
2(i) 7 (b) If there is any change A new sub-item (b) has been
in the partners/ members substituted for the existing item as
or their profit sharing under:-
ratios, the particulars of “(b) if there is any change in the
such change partners or members or in their profit
sharing ratio since the last date of the
preceding year, the particulars of such
change”.
2(ii) 8 (a) Nature of business or “(a) Nature of business or profession if
profession more than one business or profession
is carried on during the previous year,
nature of every business or
profession”.
2(iii) 12A (new — “12A. Give the following particulars
item to be of the capital asset converted into
added after stock-in- trade:-
S.No.12) (a) Description of capital asset;
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is
converted into stock-in-trade”
2(iv) 13(b) Existing words are:- “(b) for the words ‘refunds of duty
(b) the pro forma credits, of customs or excise, or refunds of
drawbacks, refunds of sales tax’, the words ‘refund of duty
duty of customs or excise, of customs or excise or service tax,
or refunds of sales tax, or refund of sales tax or value added
where such credits, tax’ shall be substituted.
drawbacks or refunds are
admitted as due by the
authorities concerned;
2(v) 15 Amounts admissible under For the words, figures and letters
 sections 33AB, 33ABA,
33AC, 35, 35ABB, 35AC,
35CCA, 35CCB, 35D,
35E
2(vi) 17 Amounts debited to profit
and loss account, being:
(a) amount inadmissible
under section 40A(3) read
with rule 6DD and
computation thereof
(b) –
(c) -
2(vii) 21 (i) In respect of any sum
referred to in clause (a),
(c), (d) or (e) of section
43B, the liability for
which:-
(A) pre-existed on the first
day of the previous year
but was not allowed in the
assessment of any
preceding previous year
and was
(a) paid during the
“Amounts admissible under sections
33AB, 33ABA, 33AC, 35, 35ABB,
35AC, 35CCA, 35CCB, 35D, 35E, the
words, brackets, letters and figures
“Amounts admissible under sections
(a) 33AB; (b) 33ABA; (c) 33AC
(wherever applicable); (d) 35; (e)
35ABB; (f) 35AC; (g) 35CCA; (h)
35CCB; (i) 35D; (j) 35DD; (k)
35DDA; (l) 35E shall be substituted
(a) for sub-item (h), the following sub-
item shall be substituted, namely –
“(h)(A) whether a certificate has
been obtained from the assessee
regarding payments relating to any
expenditure covered under section
40A(3) that the payments were made
by account payee cheques drawn on
a bank or account payee bank draft,
as the case may be. (B) amount
inadmissible under section 40A(3)
read with rule 6DD (with break-up of
inadmissible amounts)
(b) after sub-item (k), the following
sub-items shall be inserted, namely –
“(1) amount of deduction inadmissible
in terms of section 14A in respect of
the expenditure incurred in relation to
in-come, which does not form part of
the total income.
(m) amount inadmissible under the
proviso to section 36(1)(iii)”.
(a) in sub-item (i), for the words,
brackets, letters and figures ‘clauses
(a),(c),(d) or (e) of section 43B, the
words, brackets, letters and figures
clause (a),(b),(c),(d),(e) or (f) of
section 43B shall be substituted’.
(b) sub-item (ii) shall be omitted
 previous year;
(b) not paid during the
previous year;
(B) was incurred in the
previous year and was
(a) paid on or before the
due date for
furnishing the return
of income of the
previous year under
section139(1);
(b) not paid on or before
the afore-said date.
(ii) In respect of any sum
referred to in clause (b) of
section 43B, the liability
for which –
(A) pre-existed on the first
day of the previous year
but was not allowed in the
assessment of any
preceding previous year –
(a) nature of liability;
(b) due date of payment
under second proviso to
section 43B;
(c) actual date of payment;
(d) if paid otherwise than
in cash whether the sum
has been realized within
fifteen days of the
aforesaid due date.
(B) was incurred in the
previous year :-
(a) nature of liability;
(b) due date of payment
under second proviso to
section 43B;
(c) actual date of payment;
(d) if paid otherwise than
in cash, whether the sum
has been realised within
 fifteen days of the afore-
said due date.
2(viii) 24 - In item 24, after sub-item (b), the
following sub-item shall be inserted,
namely:-“
(c) Whether a certificate has been
obtained from the assessee
regarding taking or accepting loan
or deposit, or repayment of the same
through an ac-count payee cheque
or an account payee bank draft.
[Yes/No]
The particulars (i) to (iv) at (b) and the
certificate at (c) above need not be
given in the case of repayment of any
loan or deposit taken or accepted from
Government, Government company,
banking company or a corporation
established by a Central, State or
Provincial Act”.
2(ix) 25 Details of brought forward Item 25 shall be lettered as sub-item
loss or depreciation (a) thereof and after the sub-item as so
allowance, in the lettered, the following sub-item shall
following manner, to the be inserted, namely -“
extent available: (b) whether a change in shareholding
Serial No. Assessment of the company has taken place in the
Year, Nature of previous year due to which the losses
loss/allowance (in rupees), incurred prior to the previous year
Amount as returned (in cannot be allowed to be carried
rupees), Amount as forward in terms of section 79”.
assessed (give reference to
relevant Orders &
Remarks)
2(x) 27 (a) Whether the assessee For item 27 following item shall be
has deducted tax at source substituted :
and paid the amount so (a) Whether the assessee has complied
deducted to the credit of with the provisions of Chapter XVII-B
the Central Government in regarding deduction of tax at source
accordance with the and regarding the payment thereof to
provisions of Chapter the credit of the Central Government
XVII-B
(b) If the provisions of Chapter XVII-
(b) If the answer to (a) B have not been complied with,
above is in negative, then please give the following details*,
give the following de-tails: namely:-
 -Serial No., particulars of
head under which tax is
deducted at source,
amount of tax deducted at
source (in rupees), due
date for remittance to
Government, details of
payment - date/amount (in
rupees) & remarks
2(xi) Annexure It contains details about
in Parts A capital structure, loans,
&B turnover, profit,
commission received,
interest received and paid,
etc., and other particulars
regarding the nature of
business
(i) tax deductible and not deducted at
all
(ii) shortfall on account of lesser
deduction than required to be de-
ducted
(iii) tax deducted late
(iv) tax deducted but not paid to the
credit of the Central Government
* Please give details of cases covered
(i) to (iv) above.
(a) The annexure shall be numbered as
Annexure-I and in the Annexure as so
numbered, in Part B thereof, the
following changes shall be made:-
(i) for the words, ‘nature of business’
the words ‘nature of business or
profession in respect of every
business or profession carried on
during the previous year’ shall be
substituted;
(ii) In Sl. No. 1, for the words ‘Paid-
up share capital’, the words ‘Paid-
up share capital/capital of partner/
proprietor’ shall be substituted;
(iii) in Sl. No. 2, for the words ‘Share
application money’, the words
‘Share application money/current
account of partner or proprietor, if
any’ shall be substituted.
(iv) in Sl. No. 3, for the words
‘Reserves and surplus’, the words
‘Reserves and surplus/profit and
loss account,’ shall be substituted.
(v) in Sl.No. 8, for the words ‘Gross
turnover’, the words ‘Gross turn-
over/gross receipts’ shall be
substituted;
(vi) in Sl.No. 15, for the words and
brackets ‘Net profit (or loss)
before tax’, the words and
brackets ‘Net profit (or loss)
before tax as per profit and loss
account’ shall be substituted.
A new Annexure-II has been added after the re-designed Annexure-I and in this annexure,
details regarding FBT are to be given by auditor. These are being considered in later
discussion.
The foregoing details about the changes made are indicative of the position that the Form
No. 3CD has been enlarged and broad based so as to contain more information making
the work of the Assessing Officers and the Income-tax Department more easy.
3.2 Changes concerning FBT - Through the new annexure (marked as Annexure-II),
which has been added to Form No. 3CD for furnishing information concerning Tax Audit
under section 44AB, the Chartered Accountant has been made responsible to give
relevant information in regard to tax on fringe benefits. This is another exercise to pass
on the burden to the taxpayers to furnish required information through their Chartered
Accountant so that the smooth assessment concerning FBT could be possible.
Annexure, to be added to Form No.3CD, is in 5 pages and requires the Chartered
Accountant to give information in regard to liability for FBT in respect of the following
matters.
Value of fringe benefits is to be given in terms of section 115WC, read with section
115WB for each assessment year in the prescribed pro forma indicating the sections
under which respective benefits fall giving the following details:-
 The amount of expenditure debited to the profit and loss account; and in the
balance sheet separately;
 Details about the reimbursement made;
 Amounts debited under any other head;
 Total;
 Details about the deductions made;
 Percentage of expenditure/payment, being fringe benefit, i.e., whether it is 100 per
cent, 50 per cent, 20 per cent or 5 per cent.
In the annexure, detailed notes have been given in regard to the various benefits to enable
the Chartered Accountant to apply his mind regarding tax liability on fringe benefits
before giving details in the pro forma. For example, it has been clarified that expenditure
on hospitality does not include the following:-
 any expenditure on, or payment for, food or beverage provided by the employer to
his employees in office or factory;
 any expenditure on, or payment through paid vouchers, which are not transferable
and usable only at eating joints or outlets.
Likewise, it has been explained as in what circumstances, the varied rates prescribed are
to apply. The notes are explicit and detailed and should make the Chartered Accountant’s
task easy in regard to furnishing of the details required.
Summing up
4. In the foregoing discussion, the changes made in Form No.3CD in the context of tax
audit under section 44AB have been mentioned. These have made Form No.3CD more
comprehensive and detailed and would make the task of Assessing Officer easy.