Clause wise discussion on form 3CD Clause 14 (a) to (f)

[Tax Audit Report]

Particulars of depreciation allowable as per the Income-tax Act, 1961 in respect of each asset or block of assets, as the case may be, in the following form

(a) Description of asset/block of assets.

(b) Rate of depreciation.

(c) Actual cost or written down value, as the case may be.

(d) Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use, including adjustments on account of

(i) Modified Value Added Tax credit claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994

(ii) change in rate of exchange of currency, and

(iii) subsidy or grant or reimbursement, by whatever name called.

(e) Depreciation allowable.

(f) Written down value at the end of the year.

[Clause 14 (a) to (f)]

[Tax Audit Report]

Having regard to the nature of requirements prescribed, it may be necessary for the tax auditor to examine:

a) Classification of the asset

b) Classification thereof to a block

c) The working of actual cost or written down value

d) The date of acquisition and the date on which it is put to use.

e) The applicable rate of depreciation

f) The additions / deductions and dates thereof.

g) Adjustments required – specified as well as on account of sale, etc.

[Tax Audit Report]

The word “allowable” implies that depreciation should be permissible as a deduction, as per the provisions of the Act and the Rules.

This would require exercise of judgement having regard to the facts and circumstances of the case, developments in law from time to time, etc.

[Tax Audit Report]

The tax auditor has to examine the classification of the assets into various blocks.
For example, a particular asset may be classified as plant or machinery from the view point of one class of assessees, yet it may not be plant or machinery from the view point of another class of assessees.
The purpose for which the asset is used is also very material in this regard.
Hence, the tax auditor should ensure that the classification as made by the assessee is in consonance with legal principles.
In this connection, he should traverse through judicial pronouncements as well as through the past assessment history of the assessee, and upon an analysis thereof, if he comes to the conclusion that the matter is not free from doubt or controversy, he has to indicate the fact in his report by way of suitable qualification.
It may also be necessary to rely upon technical data for determining the proper classification of the block. Since the tax auditor is not a technical expert, he has to obtain suitable certificate from concerned experts

[Tax Audit Report]

Once the classification has been ascertained and checked properly, the rates applicable as per the Income-tax Rules, 1962 follow as a natural corollary. The tax auditor must have due regard to the Income-tax Rules, 1962, relevant clarifications from the Department and judicial decisions. Under sub-clauses (a) to (b), information in respect of description of assets, block of assets under which the concerned asset is classifiable and the rate of depreciation are to be stated.
This will include information about the existing assets. In respect of the existing assets, the computation of depreciation would involve stating the opening written down value of the block of assets which should be taken from the relevant income-tax records.
The tax auditor will be conducting the audit in the current year only. As such the tax auditor can rely upon the classification of assets and written down value stated in the income tax records available with the assessee.
The tax auditor should mention the fact that he has relied upon the income tax records of the assessee in respect of the information regarding the classification of assets and written down value of the existing assets.
If there is any dispute with regard to the classification of an asset in a particular block or the rate of depreciation applied, the tax auditor must give his working with suitable reasons..
Further, there may be disputes in the earlier years between the assessee and the Department regarding classification, rate of depreciation etc. and the tax auditor should give suitable disclosure depending upon the facts and circumstances of the case. Alternatively, where the tax auditor adopts a system of classification different from the one adopted by the assessee, suitable disclosure should be made regarding the effect thereof.
It will, therefore, be advisable to put a suitable note with regard to those items in respect of which disputes for the earlier years are not resolved upto the date of giving the audit report and it should be clarified that the amount of depreciation allowable may change as a result of any decision which may be received after the audit report is given. This note can be in the following manner

“NOTE: Certain disputes about (a) the rate of depreciation on ________ (b) determination of WDV of block of assets relating to ___________ and (c) ownership of ____________ have arisen in the assessment years ___________ for which assessments are pending/appeals are pending. The figures of WDV and/or rate of depreciation mentioned in the above statement may require modification when these disputes are resolved. Therefore, the amount of depreciation allowable as stated in the above statement will have to be accordingly modified.”

[Tax Audit Report]

For the purpose of determination of actual cost, the tax auditor has to be guided by the relevant legal provisions.
Since determination of actual cost has got accounting implications, he can rely on the relevant publications of the ICAI such as AS, Guidance Notes, Statement on Expenditure during Construction Period etc. Due to the amendments made by the Finance (No.2) Act, 1998, depreciation is allowable on intangible assets like know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.
There may be intangible assets like patents invented by the company, brand names, etc. for which the assessee might have incurred costs.
The tax auditor should examine the basis on which the cost of such intangible assets has been arrived at.

[Tax Audit Report]

The additions/deductions during the year have to be reported, with dates.
The tax auditor is advised to get the details of each asset or block of asset added during the year or disposed of during the year with the dates of acquisition/disposal. Where any addition was made, the date on which the asset was put to use is to be reported.
In respect of deductions, the sale value of the assets disposed of along with dates should be mentioned. As per Explanation 8 to section 43(1) of the Act, so much of interest as is relateable to any period after such asset is first put to use shall not form part of actual cost.
The tax auditor should check the working regarding the calculation of depreciation allowable under the Act.
To ascertain when the asset has been put to use, the tax auditor could call for basic records like production records/installation details/excise records/records relating to power connection for operating the machine and any other relevant evidence.
In the absence of any specific documentation with regard to the effective date from which the asset is put to use, he could get a representation letter from the management, in respect of the assets acquired. He should examine whether the apportionment of depreciation in cases like succession, amalgamation, demerger etc. has been properly made.

[Tax Audit Report]

The first adjustment relates to CENDVAT credit claimed and allowed under the Central Excise Rules, 1944 in respect of assets acquired on or after 1st March, 1994. Explanation 9 to section 43(1) of the Act provides that where an asset is or has been acquired on or after the 1st day of March, 1994 by an assessee, the actual cost of asset shall be reduced by the amount of duty of excise or the additional duty leviable under section 3 of the Customs Tariff Act, 1974 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944. It is necessary, therefore, for the tax auditor to examine the details of assets acquired on or after 1st March,1994 and the details of CENDVAT credit claimed and allowed in respect of those assets.

[Tax Audit Report]

The second adjustment relates to the change in the rate of exchange of currency.

Section 43A deals with the adjustment on account of change in the rate of exchange of currency. AS-11 (Revised) issued by the ICAI deals with accounting for effects of changes in foreign exchange rates. Therefore, the tax auditor should refer to them and arrive at a judgement as to whether the adjustment as contemplated in the said provisions of law and AS-11 has been made properly.

[Tax Audit Report]

The third adjustment relates to the subsidy or grant or reimbursement, by whatever name called.

Explanation 10 to section 43(1) provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relateable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.

As per the proviso to the above Explanation, where such subsidy or grant or reimbursement is of such nature that it cannot be directly relateable to the asset acquired, such of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

Subsidy coming within the scope of Explanation 10 to section 43(1) in respect of asset acquired in any earlier year(s) and received during the year has to be deducted from the written down value of such assets in the year of receipt.