Note on Tax Audit Report

Reporting under Para 13 in form 3CD

1. First identify the disclosures required to be made under various ICDS and disclose the same in
para 13 (f).

In my opinion the following disclosures are required here-

ICDS I, Accounting Policies

a. All significant accounting policies adopted shall be disclosed.
b. Any change in an accounting policy which has a material effect shall be disclosed. The amount by which
any item is affected by such change shall also be disclosed to the extent ascertainable. Where such
amount is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the
accounting policies which has no material effect for the current previous year but which is reasonably
expected to have a material effect in later previous years, the fact of such change shall be appropriately
disclosed in the previous year in which the change is adopted and also in the previous year in which
such change has material effect for the first time.
c. If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed,
specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall
be disclosed.”

Vide Circular No. 10/2017, dated 23rd March, 2017 the CBDT has clarified as under:
Question 25: ICDS-I requires disclosure of significant accounting policies and other ICDS requires
specific disclosures. Where is the taxpayer required to make such disclosures specified in ICDS?
Answer: Net effect on the income due to application of ICDS is to be disclosed in the Return of income.
The disclosures required under ICDS shall be made in the tax audit report in Form 3CD. However, there
shall not be any separate disclosure requirements for persons who are not liable to tax audit.

Hence, if due to difference in Accounting standards followed in ICDS and Financial GAAP the differences
should be given in para 13(e) and the specific disclosures required in para 13(f) would also be disclosed.

Sample disclosure for ICDS I could be as follows-

 The Company has followed the Accounting policies as disclosed in the Notes to the audited financial
statements for the year ended 31.3.2017 under Significant Accounting Policies (refer note 2).
 There has not been any change in an accounting policy which has a material effect during the
previous year.
 The Company had followed the fundamental accounting assumptions of Going Concern,
Consistency and Accrual in preparation of its financial statements for the year ended 31.3.2017.
 There has not been any recognition of any expected losses or mark to market losses during the
previous year.
 There has not been any change in any of the accounting policies during the previous year.

ICDS II, Valuation of Inventories

 Inventories (Trading Goods) are valued at lower of cost and net realizable value. Cost comprises
of expenditure incurred in the normal course of business in bringing such inventories to their
location and includes, wherever applicable appropriate overheads. Cost is determined on
weighted average basis and includes all applicable cost of bringing the goods to their present
location and condition. Net realisable value is estimated selling price in ordinary course of business
less the estimated cost necessary to make the sale.
 In the financial statements, purchases and inventory do not contain duties, taxes, etc., which are
subsequently recoverable from taxing authorities. However, such treatment does not have any
 effect in to computation of taxable profit of the company. The impact is not ascertainable as
separate records for the same are not maintained.
 The total carrying amount of inventory during the previous year was as follows-
As at 31.3.2016 As at 31.3.2017
(Opening stock) (Closing stock)
Raw materials and components,
Work in progress,
Finished goods,
Stock-in-trade (in respect of goods acquired for trading),
Stores and spares, loose tools and
Others

It may be noted that under this ICDS, the cost of inventory should include duties, taxes, etc., which are
subsequently recoverable from taxing authorities, while inventory valued in accordance with the
provisions of the AS 2 does not include such duties, taxes, etc. A reference may be made to para 23 of
the Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 issued by the ICAI. Care
should be taken to make adjustment for the same and reconcile it with adjustments made under section
145A of the Act and reported under clause 14(b) of Form 3CD.

ICDS III, Construction Contracts

Following disclosures shall be made-

a. the amount of contract revenue recognised as revenue in the period; and

b. the methods used to determine the stage of completion of contracts in progress.
c. For contracts in progress at the reporting date,
(i) amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;
(ii) the amount of advances received; and
(iii) the amount of retentions.

ICDS IV, Revenue Recognition

Following disclosures shall be made in respect of revenue recognition —

a. in a transaction involving sale of good, total amount not recognised as revenue during the previous year
due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty;
b. the amount of revenue from service transactions recognised as revenue during the previous year;
c. the method used to determine the stage of completion of service transactions in progress; and
d. for service transactions in progress at the end of previous year:
(i) amount of costs incurred and recognised profits (less recognised losses) upto end of previous year;
(ii) the amount of advances received; and
(iii) the amount of retentions.

The disclosures need to be made only in respect of service transactions with duration of more than 90
days.

It may be mentioned that Ind AS does not allow recognition of dividend but ICDS allows recognition of
dividend and so this difference may be reported, where applicable.

ICDS V, Tangible Fixed Assets

Following disclosure shall be made in respect of tangible fixed assets—

a. description of asset or block of assets;

b. rate of depreciation;
c. actual cost or written down value, as the case may be;
d. additions or 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) Central Value Added Tax credit claimed and allowed under the
(ii) CENVAT Credit Rules, 2004;
(iii) change in rate of exchange of currency;
(iv) subsidy or grant or reimbursement, by whatever name called;
e. depreciation Allowable; and
f. written down value at the end of year.”

The above information is in any case disclosed in para 18 of Form 3CD

Difference between IT depreciation and Financial Accounts depreciation should be disclosed in para 13(e).

ICDS VI, Effects of Changes in Foreign Exchange Rates

There are no specific disclosure requirement and only impact due to difference between AS and ICDS
needs to be ascertained and disclosed in para 13 (e).

The following differences may exist-

ICDS Ind AS Other AS

All exchange differences arising on Similar to ICDS except exchange Exchange differences arising on
translation of foreign currency differences arising on monetary items translation of foreign currency
monetary transactions are recognised that, in substance, forms part of transactions are generally recognised
in profit or loss. entity’s net investment in a non in profit or loss unless permitted
integral foreign operations are otherwise.
accumulated in equity until the
disposal of the non-integral operation
The method used to translate the Integral operations- no difference No difference with ICDS
financial statements of a foreign Non-Integral operations: Financial
operation depends on whether the statements are translated in a manner
foreign operation is integral or non- similar to ICDS except that:
integral to the reporting entity’s a. income and expenses are translated
operations. at actual rate or appropriate rate
approximating the actual rate.
Integral operations: Financial
b. all resulting exchange differences
statements are translated as if the
are accumulated in equity until the
transactions of the foreign operation
disposal of the net investment.
had been those of the entity itself.
Non-Integral operations: Financial
statements are translated as follows:
a. assets and liabilities, both monetary
and non-monetary, at the closing rate;
b. income and expenses at actual rate.
All resulting exchange differences are
recognised as income or expense.
However, translation and recognition
exchange differences in cases referred
to under section 43A of Act or Rule
115 of Income-tax Rules, 1962 are
dealt in accordance with such
provisions.
In respect of forward contracts not Derivatives are measured at fair value Similar to ICDS. In respect of such
intended for trading or speculation with change in fair value recognised in forward contracts, premium or
purposes: profit or loss unless they qualify as discount is ignored and at each
a. Any premium or discount arising at hedging instruments in a cash flow balance sheet date, contract value is
the inception of a forward exchange hedge or in a net investment hedge. marked to its current market value
contract is amortised as expense or and any gain or loss arising on such
income over the life of the contract. contract is then recognised.
b. Exchange differences are
recognised as expense or income in
the reporting period in which the
exchange rates change.
 In respect of forward contracts
intended for trading or speculation
purposes or are held to hedge the
foreign currency risk of a firm
commitment or a highly probable
forecast transaction, any premium,
discount or exchange difference are
recognised at the time of settlement.

ICDS VII, Government Grants

Following disclosure shall be made in respect of Government grants, —

a. nature and extent of Government grants recognised during the previous year by way of deduction from
the actual cost of the asset or assets or from the written down value of block of assets during the
previous year;
b. nature and extent of Government grants recognised during the previous year as income;
c. nature and extent of Government grants not recognised during the previous year by way of deduction
from the actual cost of the asset or assets or from the written down value of block of assets and reasons
thereof; and
d. nature and extent of Government grants not recognised during the previous year as income and
reasons thereof.

Nature of grant Amount recognised Nature of grant Amount recognised Nature of grant Amount recognised
Government grants recognised during
the previous year by way of deduction
from the actual cost of the asset or
assets or from the written down value
of block of assets during the previous
year
Government grants not recognised
during the previous year by way of
deduction from the actual cost of the
asset or assets or from the written
down value of block of assets
Government grants recognised during
the previous year as income
Government grants not recognised
during the previous year as income

ICDS VIII, Securities

This part of Income Computation and Disclosure Standard deals with securities held as stock-in-
trade.

No specific disclosure requirement.

The differences between ICDS and IGAAP/Ind AS are highlighted below

ICDS IGAAP Ind AS

Securities are initially recorded at No difference Securities are recorded at their fair
actual cost. Actual costs comprises of value on the date of acquisition.
purchase price and acquisition Transaction costs that are directly
charges such as brokerage, fees, tax, attributable to the acquisition of
duty or cess. financial assets are included in
amount recognised on initial
recognition, in case of financial asset
not designated at fair value through
profit or loss.
 In case of non-monetary exchange, The actual cost of a security acquired Securities are recorded at its fair value
the actual cost of a security acquired in exchange for other securities is fair on the date of acquisition
in exchange for another asset or for value of the security issued. The actual
other securities is the fair value of the cost of a security acquired in exchange
security so acquired for another asset is fair value of the
asset given up or investment acquired,
whichever is more clearly evident.
Subsequent measurements:
Measured at lower of actual cost or Similar to ICDS if securities are Depending upon the entity’s business
net realisable value. classified as current investments. model for managing the financial
However, securities not listed on a There is no specific guidance for assets and the contractual cash flow
recognised stock exchange or listed measuring fair value if there no active characteristics of the securities,
but not quoted on a recognised stock market exists. There is no specific securities are measured at: a.
exchange with regularity from time to guidance for determining the cost of amortised cost; or b. fair value
time are valued at initial actual cost. securities when same cannot be through other comprehensive
The term “Net realisable value” is not ascertained by specific identification income; or c. fair value through profit
defined in the standard. Actual cost, if method. Comparison of actual cost or or loss. d. Measured on standalone
not ascertainable by reference to fair value is performed either on an basis. Further, if certain conditions are
specific identification, the cost of such individual investment basis or by met, an entity can measure the group
security is determined on the basis of category of investment, but not on an of assets with offsetting risk positions
first-in, first-out method. Comparison overall (or global) basis. on the basis of its net exposure instead
of actual cost and net realisable value of individual positions within the
is done category wise (shares, debt group (portfolio measurement
securities, convertible securities and exception).
others) and not for each individual
security.

ICDS IX, Borrowing Costs

The following disclosure shall be made in respect of borrowing costs-

a. the accounting policy adopted for borrowing costs; and

b. the amount of borrowing costs capitalised during the previous year.

Disclosure could be as follows-

Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be capitalised as part of the cost of that asset. Other borrowing costs are
recognised in accordance with the provisions of the Act.

Inventory is qualifying asset if period to bring them to saleable condition is at least 12 months.

ICDS X, Provisions, Contingent Liabilities & Contingent Assets

Following disclosure shall be made in respect of each class of provision,

a. a brief description of the nature of the obligation;

b. the carrying amount at the beginning and end of the previous year;
c. additional provisions made during the previous year, including increases to existing provisions;
d. amounts used, that is incurred and charged against the provision, during the previous year;
e. unused amounts reversed during the previous year; and
f. the amount of any expected reimbursement, stating the amount of any asset that has been
recognised for that expected reimbursement.
Following disclosure shall be made in respect of each class of asset and related income recognised-

a. a brief description of the nature of the asset and related income;

b. the carrying amount of asset at the beginning and end of the previous year;
c. additional amount of asset and related income recognised during the year, including increases
to assets and related income already recognised; and
d. amount of asset and related income reversed during the previous year.

Contingent assets are recognised when it becomes reasonably certain that inflow of economic
benefit will arise, and the asset and related income are recognised in the previous year in which
the change occurs.