Clause wise discussion on form 3CD Clause 16 (a) and (b)

[Tax Audit Report]

(a) Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend. [Section 36(1)(ii)].

(b) Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x) and due date for payment and the actual date of payment to the concerned authorities under section 36(1)(va).

[Clause 16 (a) and (b)]

[Tax Audit Report]

Section 36(1)(ii) provides for deduction of any sum paid to an employee as bonus or commission for services rendered where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission.

In other words, if bonus or commission is in the nature of profit or dividend, it may not be normally allowable as a deduction unless such payment is wholly and exclusively made to the employee.

[Shahzada Nana & Sons v. CIT [1977)] 108 ITR 358 (SC). In the case of Loyal Motor Service Company Ltd. v. CIT [1946] 14 ITR 647, (Bom) the assessee company paid bonus at the rate of 2 months’ salary to its employees who were also shareholders in the company.
The tax authorities contended that the bonus paid was not allowable as it would have been payable to the employees as profit or dividend.
It was held by the court that it was not in the nature of profit or dividend and accordingly it was held to be allowable.

[Tax Audit Report]

The requirement is only in respect of the disclosure of the amount and the tax auditor is not expected to express his opinion about its allowability or otherwise.
The tax auditor should verify the contract with the employees so as to ascertain the nature of payments.

[Tax Audit Report]

Section 2(24)(x) includes within the scope of income any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or ESI Fund or any other Fund for employees’ welfare (hereafter referred to as “Welfare Fund”).

[Tax Audit Report]

Section 36(i)(va) of the Act permits deduction of such sum if it is credited by the assessee to the account of the employees in the relevant statutory fund on or before the due date, i.e., the date by which it is required to be credited as per the provisions of the applicable law etc.
It may be noted that Employees’ P.F Act provides for 5 days of grace period for payment of contribution.
This can be taken into consideration for determining the due date of payment. Similar grace period is available under ESI fund and other funds and the same treatment can be given.

[Tax Audit Report]

Section 36(1)(va) read with section 2(24)(x) does not give much latitude about the due date of payment.
However, the Appellate Tribunal has held that this provision should be liberally construed - vide Madras Radiators Pressing Ltd, v. DCIT – 59 ITD 515 (Mad), Fluid Air (India) Ltd. v. DCIT [1997] 63 ITD 182 (Bom.).

[Tax Audit Report]

The tax auditor should get a list of various contributions recovered from the employees which come within the scope of this clause.
He should also verify the documents relating to provident funds and other welfare funds. He should verify the agreement under which employees have to make contributions to provident fund and other welfare funds.
The ledger account of contributions from employees should be reviewed, the due dates of payments and the actual dates of payment should be verified with the evidence available.
In view of the voluminous nature of the information, the tax auditor can apply test checks and compliance tests to satisfy himself that the system of recovery and remittance is proper.
Under this clause, details of the amount deducted, due date for payment and actual date of payment in respect of provident fund, ESI fund or other staff welfare fund have to be stated. However, in case of big assessee such as public sector undertakings, banks etc.
where information to be stated is voluminous, the tax auditor may exercise his professional judgement and state only those cases under this clause where actual date of payment to the concerned authorities is beyond the due date of payment and state this fact by way of a suitable note