Clause 44 made its debut as a new addition to Form 3CD of the Tax Audit Report (TAR) starting from the Assessment Year 2022-23. It is worth noting that although this clause was initially introduced through a notification dated July 20, 2018, its enforcement was consistently postponed each year through a series of circulars. The final circular addressing this matter was Circular No. 05/2021, dated March 25, 2021, which extended the deadline for its implementation until March 31, 2022. Consequently, any Tax Audit Report in Form 3CD submitted after March 31, 2022, must adhere to the requirements outlined in clause 44.

Since the introduction of this clause in the Tax Audit Report, tax professionals have expressed significant concerns and challenges related to gathering the necessary information from the assessees’ accounting records. Additionally, there has been ongoing uncertainty surrounding the interpretation of the information presented in this clause, particularly from the perspective of tax authorities.

This article endeavors to offer valuable insights into Clause 44, taking into consideration the latest Revised Guidance Note issued by the Institute of Chartered Accountants of India (ICAI) [Please see: “Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023) – Ninth Edition 2023″]. Additionally, the author delves into a discussion about the risks associated with and potential mitigating strategies for providing information within this clause.

♦ Consolidated or Expenditure-wise information:

The primary question that arises is whether to provide the figures in a consolidated manner or furnish expenditure-wise details. In this context, Para 82.1 of the Guidance Note provides clarity by stating that the information required under this clause should be presented in a consolidated fashion, and there is no requirement to provide figures on an expenditure head-wise or nature-wise basis.

However, the Guidance Note suggests having a reconciliation statement in the following manner:

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

[Details of all deductions and additions must be maintained for each sub- entity (GSTIN wise) of the legal entity]

♦ Capital expenditure to be included or not:

According to the guidance note, the term “expenditure” encompasses “capital expenditure” as well. Therefore, it is essential to provide information regarding the capital expenditure also in the said clause. However, if the assessee is of the view that the capital expenditure need not be included in the total expenditure and is not in a position to give the details as required in clause 44 in respect of capital expenditures, the tax auditor should report the same in his main report (Form 3CA/3CB).

♦ Inter-branch transfers:

When it comes to transactions between distinct units of the same entity, it is crucial for the assessee to maintain accurate records. Specifically, these records should clearly indicate the value of outward supplies recorded by one unit as sales for determining GST liability and the value of inward supplies recorded by another unit as purchases for the purpose of claiming input tax credit. Although these values should be eliminated in the consolidated financial statements, it’s essential to prepare a comprehensive reconciliation statement and keep it on record. This reconciliation statement serves as a valuable resource during tax assessments and ensures transparency and compliance with tax regulations.

♦ Decoding the figures in Clause 44:

It is essential to bear in mind that the consequences of disclosing the data in this clause remain uncertain. As we are aware, the department is actively gathering information from all available sources, including the utilization of Artificial Intelligence (AI). Consequently, we cannot dismiss the possibility of cases coming under scrutiny triggered by specific flags or criteria associated with the figures reported in various columns of the Table given under clause 44. For instance, if the ratio of expenditures related to entities not registered under GST (as presented in column 7) compared to the total expenditure incurred (as reported in column 2) surpasses certain predefined thresholds, an inquiry may be initiated. This inquiry could take an internal or/and external form. When referring to internal scrutiny, it means that the department may conduct a comprehensive analysis of the available data for further investigation. In contrast, by mentioning external scrutiny, it means that the department may issue assessment notices to taxpayers, requesting additional information. It is prudent to be more concerned about internal scrutiny than external scrutiny, especially in light of the Aadhaar-PAN linking incident, given the department’s extensive repository of big data.

♦ Expenses related to entities having GSTIN but supplied exempt goods or entities falling under Composition Scheme:

Regarding the reporting of expenses related to supplies made by entities registered under GST but supplied exempted goods to the assessee or entities registered as composite suppliers, it becomes quite challenging to compile this information unless the taxpayer maintains their accounting records in a way that includes such details. This becomes particularly complex when dealing with a long list of suppliers. Therefore, a decision must be made on whether to provide figures in this column or not. If the choice is made to omit to furnish the information in this column, it is important to provide an explanation for this omission in the form of a comment in the main report.

♦ Expenses related to entities having GSTIN and supplied taxable goods:

Regarding the reporting of expenses related to supplies made by regular suppliers (excluding composite suppliers), one has got the option to cross-verify the data provided by the assessee using information obtained from the following sources:

(i)		From GST Portal: We can retrieve Table 8A of GSTR 9 data in an Excel sheet format downloaded from the GST portal and calculate the total taxable value figures.
(ii)		From the Income Tax Site: We can verify the value of purchases from GST-registered suppliers as reported in the Annual Information Statement (AIS).

While it is possible that the figures from these sources may not align perfectly, they can provide us with a sense of the reasonableness of the data provided by the assessee. In cases where a significant discrepancy exists, we may request an explanation from the assessee and then make a decision accordingly.

♦ Expenses related to entities having GSTIN and supplied taxable goods:

If the figures reported under the column “Expenditures relating to entities not registered under GST” are substantial, it is imperative for an auditor to investigate and understand the underlying reasons. The following factors may help mitigate the risk of any anomalies:

(a)		Assessee engaged in the business of dealing in agricultural commodities that are exempt from tax;
(b)		Major expenditures are covered under Non-GST or exempt category;
(c)		Where the expenses are subjected to TDS;
(d)		Where the payment for the expenses were made through the banking channel;
(e)		Smaller businesses might be involved in the supply chain, and they may fall below the GST registration threshold, contributing to the presence of non-registered entities in the expenses.

By examining these factors and obtaining a clear understanding of the nature of the expenses and the entities involved, the auditor can make a more informed assessment and mitigate the risk of misinterpretation or misreporting.

As a corollary, when the figures reported in the mentioned column are substantial, and the following instances are present, the auditor should exercise heightened vigilance to ensure the authenticity of the transactions:

(a)		Taxable Products: If the products purchased are taxable under GST, it raises the significance of these transactions and warrants closer scrutiny.
(b)		Cash Payments: Payments made in cash can increase the risk of irregularities or inaccuracies in reporting, and therefore, require careful examination.
(c)		Absence of TDS: Transactions not subjected to Tax Deducted at Source (TDS) can potentially indicate a need for closer inspection, as TDS is a common regulatory requirement for certain types of payments.
(d)		Internal Documentation: Transactions primarily supported by internal vouchers, bills, or purchase notes, as opposed to external invoices or receipts, may necessitate a more thorough examination to verify their legitimacy.

If the auditor encounters difficulties in forming a conclusive opinion based on the data provided by the assessee, it is essential to include appropriate comments in the main report. These comments should clearly convey an concerns or uncertainties regarding the reported transactions, ensuring transparency and clarity in the audit process.

♦ Expenses covered under Reverse Charge Mechanism (RCM):

In case of expenditures that were subjected to tax on reverse charge basis, we may encounter with two issues-

(a)		Expenses incurred in respect of supplies made by a person registered under GST but issuing RCM invoices;
(b)		Expenses incurred in respect of supplies made by an unregistered person where the assessee pays tax under RCM on voluntary basis.

In the first scenario, the expenditure under the said category ought to be reported under column 5 of clause 44 i.e., “Relating to other registered entities”.

In the second scenario, the expenditure under the said category should be reported under column 7 i.e., Expenditure relating to entities not registered under GST”.

♦ Concluding Remarks:

Before parting with, readers attention is invited to the comment made in clause 82.20 of the Guidance Note which is reproduced hereunder:

82.20 An appropriate disclosure should be made by the Tax auditor in Form 3CA/3CB, as the case may be, for the view taken by the assessee in relation to the meaning of “Total expenditure” and the method of filling up the appropriate columns. If the assessee is not in a position to give the details as required in clause 44, an appropriate disclosure/disclaimer may be made by the auditor in Form 3CA/3CB. Where the assessee has provided reason for not being able to provide details, the same may be reported, if found appropriate.

Author: CA V. Sudharsan

CA