Imp. change in Tax Audits to Form 3CD, W.e.f 01.04.2025

Significantly change in Tax Audits to Form 3CD, effective from 1.04.2025

These changes to Form 3CD, effective from 1st April 2025, significantly impact tax audits. The Income-tax (Eighth Amendment) Rules, 2025, were made to improve tax compliance, enhance MSME reporting, and increase scrutiny of financial transactions. This change in Clause 26 of Form 3CD, replacing “allowed” with “allowable” u/s 43B, may seem minor but has significant tax implications. Here’s a breakdown of the key implications:

Changes Impact on Section 43B of Form 3CD

This change in Clause 26 of Form 3CD, replacing “allowed” with “allowable” under Section 43B, may seem minor but has significant tax implications: Shift in Focus from Actual Allowance to Eligibility Previously, “allowed” implied that a deduction had been granted in the tax assessment based on actual payment. The term “allowable” now indicates that the deduction is eligible to be claimed if conditions under Section 43B are met, even if not yet granted in assessment. Auditors must now verify and report all liabilities that are eligible for deduction under Section 43B, rather than just those actually allowed. This requires additional scrutiny of payment timing, as deductions under Section 43B are based on actual payment rather than accrual. The previous wording might have led to misinterpretation, allowing deductions that were not yet due.

By using “allowable”, the amendment ensures that deductions are reported correctly as per the eligibility criteria. Section 43B allows deductions on a payment basis for certain liabilities like GST, PF, gratuity, bonus, and interest on loans. The amendment aligns the audit reporting with the law’s intention, ensuring clearer disclosures on outstanding liabilities.

Other change :

• Insertion of Section 44BBC: Likely introduces a new presumptive taxation scheme for specified professionals/businesses.
• Omission of Certain Deductions: Removal of references to Sections 32AC, 32AD, 35AC, and 35CCB means taxpayers can no longer claim these deductions in tax audit reports.
• Modification of Clause (21)—Legal Settlement Costs : Expands disclosure requirements for expenditures incurred in legal settlements related to contraventions specified by the government.
• Replacement of Clause (22) – MSMED Act Compliance : Mandatory disclosure of interest disallowed under Section 23 of the MSMED Act, 2006. Reporting of outstanding amounts payable to Micro and Small Enterprises under Section 15 of MSMED Act.
• Changes in Clause (26)—Tax Allowances: Likely refines how tax allowances are reported and references updated provisions. This change, when introduced, will require tax auditors to carefully verify pending liabilities and their payment status before reporting under Clause 26.
• Omission of Clauses (28) and (29): These clauses may have become redundant or merged into other clauses.
• Changes in Clause (31)—Reporting on Transactions : Introduction of new transaction codes to classify different types of payments and receipts, including cash transactions, non-account payee cheques, journal entries, etc. Requirement to specify the nature of loan or deposit transactions enhances transparency.
• Insertion of Clause (36B)—Buyback of Shares : Tax auditors must report buyback transactions, which aligns with regulatory scrutiny of buybacks under Section 115QA of the Income Tax Act.

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