Income Tax Audit checklist on clauses 35 to 40 of Form 3CD under the Income Tax Act, 1961

Tax Audit checklist on clauses 35 to 40 of Form 3CD under the Income Tax Act, 1961

Clauses 35 to 40 of Form 3CD focus on reporting essential quantitative and financial details, ensuring accurate disclosure without requiring the tax auditor to express any opinion. Clause 35 mandates reporting quantitative details related to goods traded and raw materials, depending on whether the assessee is involved in trading, manufacturing, or both. This ensures transparency in inventory reporting, with no subjective judgment required.

Clause 36, which once required reporting on Dividend Distribution Tax (DDT) under section 115-O, has been omitted following the abolition of DDT by the Finance Act, 2020. This makes Clause 36 redundant starting from the assessment year 2021-22.

Clause 37 pertains to cost audits required under Section 148 of the Companies Act, 2013. Tax auditors must report whether any cost audit was conducted and detail any disqualifications or disagreements found. Clause 38 focuses on audits conducted under the Central Excise Act, 1944, specifically for manufacturers of certain products such as petroleum, natural gas, and tobacco. If such an audit occurs, the tax auditor must disclose any disqualifications or disagreements, strictly reporting facts. Clause 39, concerning audits related to taxable services under Section 72A of the Finance Act, 1994, became redundant after the introduction of GST in July 2017, when service tax was subsumed into GST. Clause 40 requires the reporting of turnover and key financial ratios for both the current and preceding years, with no judgment on their fairness. The tax auditor’s responsibility is solely to calculate and report these ratios.

Tax Audit checklist for Clause 35 of Form No.3CD

Tax Audit Checklist for Clause 35(a)(where assessee is a trading concern)

S. No.	Particulars	Yes/No N/A	Comment
(1)	Is the assessee a purely trading concern, and is it reported as such in clause 10(a) of Form No.3CD?
(2)	If yes, have you obtained certificates (MRL) from the assessee regarding the principal items of raw materials, finished goods, and by-products, and quantitative information is required to be reported in clause 35(b).
(3)	Traders should also maintain quantitative details of principal items of traded goods. The stock records maintained should be reported as books of account maintained in Clause 11(c) of Form No.3CD. Suppose the assessee does not properly maintain stock records due to the nature, level, volume and variety of items/transactions. In that case, the tax auditor must consider the concept of materiality and practicality while giving particulars in Clause 35 of Form No. 3CD.
(4)	Have you verified the details obtained from the assessee with the records maintained by the assessee?
(5)	(a) Have you checked the details given by the assessee with stock statements submitted to banks? (b) If there are any discrepancies, have the assessee satisfactorily explained these?
(6)	In the case of a company assessee, (a) Have you cross-checked details with those disclosed in audited accounts? (b) Have you considered the comments of the statutory auditor in the CARO report on physical verification of inventories by management at reasonable intervals and whether the discrepancies between physical and book stocks have been properly dealt with in books of account? (c) Have you considered the comments of the statutory auditor in the CARO report on whether stock statements submitted to lender banks agree with the books of account?
(7)	(a) Have you exercised professional judgment on what would constitute principal items of traded goods in the facts and circumstances of the case? (b) Have you ensured that the certificates obtained by assessees cover all the principal items? (c) Have you ensured that the data reported covers all principal items?Note: What constitutes principal items will depend on the facts of each case. Normally, items that constitutes more than 10% of the aggregate value of purchases, consumption, or turnover, as the case may be, are classified as principal items.
(8)	As required by SA-501 “Audit Evidence – Additional Considerations for specific items”, the tax auditor (if he is issuing Form No. 3CB also) should attend the physical stock-taking conducted by the management, if the inventories are material unless such attendance is impracticable due to matters such as nature and location of the inventory. If attendance is impractical, alternative procedures should be followed to verify the inventory.
(9)	As required by SA-501 “Audit Evidence – Additional Considerations for specific items”, the tax auditor (if he is issuing Form No. 3CB also) should directly confirm stocks of assessees held by third parties such as consignees, agents etc
(10)	Cross-check the data furnished by the management with GST records, excise records, VAT returns, production records, etc.

Tax Audit Checklist for Clause 35(b)(where assessee is a manufacturing concern/manufacturing-cum-trading concern)

S. No.	Particulars	Yes/No/N/A	Comment
(1)	Is the assessee a manufacturing concern/manufacturing-cum-trading, and is it reported as such in clause 10(a) of Form No.3CD?
(2)	If yes, have you obtained certificates(MRL) from the assessee regarding the principal items of goods traded, the balance of the opening stock, purchases, sales and closing stock, the extent of shortage/ excess/damage, and the reasons thereof?
(3)	Manufacturer/Manufacturer-cum-trader should also maintain quantitative details of principal items of raw materials and finished goods and byproducts. The stock records maintained should be reported as books of account maintained in Clause 11(c) of Form No.3CD. Suppose the assessee does not properly maintain stock records due to the nature, level, volume, and variety of items/transactions. In that case, the tax auditor must consider the concept of materiality and practicality while giving particulars in Clause 35 of Form No. 3CD.
(4)	Have you verified the details obtained from the assessee with the records maintained by the assessee?
(5)	(a) Have you checked the details given by the assessee with stock statements submitted to banks? (b) If there are any discrepancies, have the assessee satisfactorily explained these?
(6)	In the case of a company assessee, (a) Have you cross-checked details with those disclosed in audited accounts? (b) Have you considered the comments of the statutory auditor in the CARO report on physical verification of inventories by management at reasonable intervals and whether the discrepancies between physical and book stocks have been properly dealt with in books of account? (c) Have you considered the comments of the statutory auditor in the CARO report on whether stock statements submitted to lender banks agree with the books of account?
(7)	(a) Have you exercised professional judgment on what would constitute principal items of raw materials, finished products and byproducts in the facts and circumstances of the case? (b) Have you ensured that the certificates obtained by assessees cover all the principal items (c) Have you ensured that the data reported covers all principal items?Note: What constitutes principal items will depend on the facts of each case. Normally, items that constitute more than 10% of the aggregate value of purchases, consumption, or turnover, as the case may be, are classified as principal items.
(8)	As required by SA-501 “Audit Evidence – Additional Considerations for specific items”, the tax auditor (if he is issuing Form No. 3CB also) should attend the physical stock-taking conducted by the management if the inventories are material unless such attendance is impracticable due to matters such as nature and location of the inventory. If attendance is impractical, alternative procedures should be followed to verify the inventory.
(9)	As required by SA-501 “Audit Evidence – Additional Considerations for specific items”, the tax auditor (if he is issuing Form No. 3CB also) should directly confirm stocks of assessees held by third parties such as consignees, agents etc
(10)	Cross-check the data furnished by the management with GST records, excise records, VAT returns, production records, etc.

Tax Audit checklist for Clause 37 of Form No.3CD

S. No.	Particulars	Yes/No/N/A	Comment
(1)	(a) Is the assessee a company? (b) If yes, then complete this checklist. (c) If not, report “Not applicable’ by selecting it from the dropdown, and no need to fill the rest of the points in this checklist
(2)	(a) Ascertain whether the cost audit of the assessee company was carried out during the year as per Section 148 of the Companies Act, 2013. (b) If so, obtain a copy of the cost audit report and an MRL from the assessee.
(3)	(a) Read the cost audit report (b) No need for the tax auditor to make a detailed study of the cost audit report (c) Note any disqualification or disagreement on any matter/ item /value/quantity as may be reported/identified by the auditor appointed under CEA 1944 (d) Report the disqualification/disagreement reported in the cost audit report in 500 characters in the space provided in the e-filing utility in Clause 37
(4)	Have you factored in the following points while reporting in Clause 37?  •  This clause does not require the tax auditor to verify or examine anything. All that it requires of the tax auditor is to specify (“yes” or “no”/”NA”) whether any cost audit of the company’s cost accounts was carried out. If so, the tax auditor must give details of qualification or disagreement on any matter/item/value/quantity as may be identified/reported by the cost auditor.  •  Information needs to be given against this clause only if the cost audit report pertains to the period covered by the tax audit report  •  The tax auditor is not required to express any opinion where a cost audit has been ordered but not carried out.  •  If a cost audit has been ordered but is not complete as of the date of the tax audit report, the tax auditor should report that the cost audit is not complete and that the cost audit report is not available with the assessee.

Tax Audit checklist for Clause 38 of Form No.3CD

S. No.	Particulars	Yes/ No/N/A	Comment
(1)	(a) Is the assessee a manufacturer of any of the 6 products (petroleum crude, diesel, petrol, aviation turbine fuel, natural gas, and tobacco) as reported in Clause 10(a) of Form No.3CD and is he registered with Central Excise as reported in Clause 5 of Form No.3CD? (b) If yes, then complete this checklist.
(2)	(a) Obtain an MRL from the assessee as to whether any audit under CEA 1944 was conducted during the previous year under audit. (b) Obtain from the assessee a copy of the audit report under CEA 1944.
(3)	(a) Read the audit report issued under CEA,1944 (b) No need for the tax auditor to make a detailed study of such audit report (c) Note any disqualification or disagreement on any matter/ item /value/quantity as may be reported/identified by the auditor appointed under CEA 1944 (d) Report the disqualification/disagreement reported in the central excise audit report in 500 characters in the space provided in e-filing utility in Clause 38
(4)	Have you factored in the following points while reporting in Clause 38?  •  If excise audit has been ordered but is not completed by the time the tax auditor gives his report, he has to report appropriately in this report stating that since excise audit is not completed, the excise audit report is not available with the assessee.  •  The tax auditor should examine the period for which the excise audit, if any, has been required to be carried out. Information is required to be given only in respect of such excise audit report the time period of which falls within the relevant previous year. In effect, the information is required to be given in respect of that excise audit report which is received up to the date of tax audit report.

Tax Audit checklist for Clause 40 of Form No.3CD

S. No.	Particulars	Yes/No/N/A	Comment
(1)	(a) Is the assessee engaged in manufacturing activities as reported in Clause 10(a)? (b) If so, have you reported all the five items in Sl. Nos. (1) to (5) in Clause 40 ? (c) If not, is the assessee engaged in trading activities as reported in Clause 10(a)? (d) If the assessee engaged in trading activities, have you reported in Clause 40 all the items except the item in Sl.No.(4)? (e) If the answer to (c) is “No”, is the assessee engaged in service sector activities as reported in Clause 10(a)? (f) If so, have you reported items as Sl. No.(1) and (3) only?
(2)	(a) Have relevant previous-year figures been taken from the previous year’s audit report or the restated figures to make the ratios comparable with the current year? (b) If the preceding previous year’s accounts were not audited, have you given a note in Clause (5) of Form No.3CB stating the facts?
(3)	(a) Have you worked out turnover as the aggregate amount for which sales are effected or services rendered by the enterprise less trade discounts and sales returns? (b) Have you included scrap sales in the turnover figure? (c) Have you worked out turnover without making Section 145A adjustments/ICDS adjustments?
(4)	For the GP/turnover (%) ratio, have you worked out gross profit as the profit figure before deducting administration, selling, distribution and financing expenses?
(5)	Have you taken the net profit before tax for the NP ratio (NP/Turnover %)?
(6)	(a) For working out stock in trade/turnover % ratio, have you taken the closing stock and not the average stock? (b) Have you taken closing stock of finished goods only and not of raw materials, WIP, stores, spares and loose tools? (c) Have you taken the value of closing stock without making Section 145A adjustments?
(7)	For the Materials Consumed/Finished Goods (%) ratio, (a) Have you taken consumption of raw materials, stores, spares and loose tools? (b) Have you taken consumption figure net of GST ITC as per accounts without making Section 145A adjustments? (c) Have you computed value of finished goods produced as under: (a)Raw materials consumedxxxxx (b)Stores and spares consumedxxxxx (c)Wagesxxxxx (d)Other manufacturing expenses excluding depreciationxxxxx  Sub-totalxxxxx  Add: Opening work-in-progressxxxxx  Less: Closing work-in-progressxxxxx  Value of finished goods producedxxxxx