Tax audit- unreasonable requirement of reporting about receipt of deemed dividend- the relevant clause should be omitted from Form 3CD for AY 2018-19. For AY 2019-20 clause should be amended to seek report of payments to which S. 2.22.e can be applied

[CA DEV KUMAR KOTHARI]

Links and references and applicable provisions:

Section 2.22. e,  S.  44AB , S.  115 O,  section 295 of the Income-tax Act, 1961 (43 of 1961) 

 Income-tax Rules, 1962 -  Appendix II,  and  Form No. 3CD.

NOTIFICATION NO. 33/2018  dt.  20th July, 2018

Tax auditor u/s 44AB:

An accountant appointed for the purpose of audit under section 44AB may be required to audit accounts of his client, if he is carrying out audit of accounts also. In case audit of accounts is carried by other CA, then Tax auditor, is required to make out a report in form  3CD.

New requirement of reporting of deemed dividend:

In the recent amendment we find a new clause inserted in form  3CD, requiring reporting of any receipt which can be deemed as dividend u/s 2.22.e. The amendment relating to  newly inserted clause reads as follows:

(ix) after serial number 36 and the entries relating thereto, the following shall be inserted, namely:-

“36A. (a) Whether the assessee has received any amount in the nature of dividend as referred to in sub-clause (e) of clause (22) of section 2? (Yes/No)

(b) If yes, please furnish the following details:-

(i) Amount received (in Rs.):

(ii) Date of receipt:”;

Section 2.22.e is very complex and require lot of enquiry not related to account of auditee;

Section 2.22.e is very complex and it requires lot of studies which are not describable from accounts and records of assesse. In ordinary course of audit the auditor will only come across about receipts of the auditee. Whether any receipt is in nature of deemed dividend u/s 2.22.e require information which may not be available with the client also. Important information which need to be ascertained for reporting are:

a. Whether, any receipt to which S.2.22.e can be applied is received from a company in which assesse ( or specified concerns) had substantial interest at relevant time?

b. Whether such company is a company in which public are not substantially interested?

c. Whether such company had accumulated surplus when money was paid by company to assesse?

d. Whether such company is covered or is exempted from provisions of S.2.22.e according to its business, and income etc.?

e. Whether, the transaction is one to which S.2.22.e can be applied.

It is difficult for a shareholder to find out above details from company. As a shareholder, if assesse want to ascertain such information from concerned companies, the company may not divulge such information and may not be in position to make available information on many aspects. For example, whether assesse is having substantial interest,(directly or indirectly) as per S.2.22.e may not be ascertainable by company. What was accumulated surplus as on date of giving payment may not be ascertainable. Whether assesse has beneficial interest in company or not may  be ascertainable by company.

Without perfect information about such aspects and other aspects which may arise in course of audit, it is difficult for Tax Auditor to make a report on this issue in a reasonably correct manner.

When such reporting is not possible in a substantially and reasonably correct manner, it is likely that the Tax Auditor will have to avoid reporting for some reasons like lack of information.

An assesse may have shareholding in several company and may have received payments on several occasions. Examining each and every receipt from the angel of applicability or otherwise of S.2.22.e is not practicable and many not be possible in many situations.

Tax audit report (TAR) for assessment year 2018-19:

Tax audit Report is compilation of certain information which should generally be available from the accounts and records of auditee/ client. From the assesse / auditee tax auditor can know about shares held by him in various companies. However, it may not be possible to ascertain other aspects which need to be examined about applicability of S.2.22.e in relation to sums received from those companies. Furthermore, there can be several such companies.

Tax auditor cannot be expected to carry out any checking from accounts of any third party, he can only ask the client to obtain information and confirmation from parties having transactions with his client. Tax auditor may not be in a position to make independent enquiry from concerned parties. Even concerned parties may not be in a position to furnish information for reasons of privacy and confidentiality and also for no such obligation on his part.

Therefore this clause about reporting of deemed dividend, taxable in hands of recipient  should be omitted from Form 3CD. Particularly for the assessment year 2018-19, when deemed dividend is taxable in hands of recipient of payment, it would be very difficult to report.

Amendment in S. 115 O- tax payable by companies.

As per amendment to s.115 O with effect from 01.04.2018 by insertion of proviso to S. 115 O (1) company who made payment, which is deemed dividend u/s 2.22.e shall be liable to pay tax @30% on such dividend. On reading of amended section 115O alone, there is reason to get confuses as to whether this provision is applicable to assessment year 2018-19 as would be generally. However, as per explanatory notes the new tax shall apply to transactions undertaken on or after 01.04.2018. The relevant portion is reproduced below:

This amendment relating to imposition of dividend distribution tax on deemed dividend will apply to transactions referred to in sub-clause (e) of clause (22) of section 2 of the Act undertaken on or after 1st April, 2018.

Desired clause for Tax audit report from AY 2019-20:

From AY 2019-20, as per amended provisions, tax on deemed dividend, in respect of payments made by company on or after 01.04.2018)  shall be payable by companies who made payment to a person having substantial interest or related parties to whom s.2.22.e may attract.

Therefore, for tax audit report for AY 2019-20 the clause need to be amended in a proper way to seek information about payment made by company to any shareholder or his concerns who can be covered by s.2.22.e.

As auditor of company    this will not be very difficult, only so far it relates to share holder of company,  because the company can be  expected to provide information about shareholders who are having substantial interest in company to whom payment is made by company which can probably attract S. 2.22.e.

However, even for tax auditor of company, it will be difficult for tax auditor to enquire and report about payments made by company to any concern in which shareholder has substantial interest and payment was made to such concern. This is because a shareholder is not required to report to company about concerns in which he hold substantial interest. Only if shareholder is also a director, he, as a director is required to disclose concerns in which he has interest, that too only if a transaction is entered into between such company and shareholder who is director of company also.

Therefore, it would be difficult for tax auditor to give complete information. And therefore, report may have to be qualified or made conditional on some aspects to deny or restrict  liability of tax auditor.