September 24, 2023

Form 3AA of the Income Tax Act

Return filing is an essential part of managing income tax compliance in India. It is the process that kickstarts assessment procedures as assessees must file their IT returns on time in the designated format according to Section 139 of the Income Tax Act. Along with the income tax return filing, individuals will have to submit several additional documents from time to time. 

Most of those documents are tax audit reports developed by professional company directors and chartered accountants. These become mandatory when claiming deductions or showing depreciation on audited accounts, whereas others are procedural forms. 

Section 32 of the Income Tax Act

Depreciation is regarded only for assets employed in a business or profession, and for the use in the year of purchase. As per Section 32(1) (iia), further depreciation amounting to 20% of the asset’s real cost may be provided on equipment introduced by manufacturers. 

Nevertheless, for this rule to be applicable, the devices must have been installed or acquired after 31 March 2005. 

Since 2014, this rule has implemented to assess involved in power generation and distribution. By 2018, the extra depreciation was provided for assesses involved in power transmission, wherein assets used for less than 180 days would enjoy 20% additional depreciation.  

Form 3AA of the Income Tax Act

Form 3AA of the Income Tax Act is an audit summary that comes below Section 32(1)(iia) of the Indian Income Tax Act, 1961. The report works as an affidavit from a professional chartered accountant and shows they have reviewed the assessee’s business records. 

It also certifies that the professional has received the information needed to determine the expense incurred by the assessee in installing and buying new equipment. Additionally, the audit report also guarantees that the deduction demanded by the assessee below Section 32, Sub-section 1, Clause is correct. 

Annexure A appended to Form 3AA accords in detail with the reduction claimed by the assessee. Equipment bought and installed during business expansion, improved industrial capacity, or beginning a new venture comes below Section 32. 

It further includes details of the assessee in case the installment happened for a new industrial project. Annexure A of Form 3AA comprises aspects about the new project, nature of the business, and date of initiation of the business.

Annexure B comprises details regarding the deduction claim in case the assessee installed machinery to grow their business or industrial capacity. In such circumstances, the equipment must have been bought or installed before 1 April 2002.

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Form 3AA – Audit Report

Auditors check and go by the following while filing or issuing Form 3AA or a tax audit report to an assessee.

  1. Books of account under income tax
  2. System of accounting employed 
  3. Separate accounts about  business and personal professional
  4. Amount of profit gained
  5. Amount of depreciation;
  6. Amount of income tax given or payable
  7. Amount of surtax given or payable 
  8. Amounts moved to reserves or set aside
  9. Losses of subsidiary companies
  10. Dividends paid 

Details Required to File Form 3AA

  • Assessee’s name 
  • Address of assessee 
  • Assessee’s Permanent Account Number
  • Assessment year
  • Nature of business operations
  • Date of commencement of production
  • Details of new machinery obtained– the name of the merchant, details of machinery, date of acquisition, date of establishment, and asset cost.
  • Total installed capacity on 31 March 2002
  • Year by when the company obtained an increment in capacity

Things to Know About Form 3AA

  • Form 3AA of the Income Tax Act works as a report from an accountant that assessees must provide to get benefits below Clause (iia) of Section 32.
  • In some cases, the applicants will have to attach photocopies of their profit/loss statements. Expense statement and audited balance sheets with Form 3AA.
  • While filling the form, applicants must eliminate all the options that do not implement to them. And fill only what is appropriate and needed.
  • In case any circumstances declared in Form 3AA have a negative answer, the assessee must declare why it is so.
  • Any of the following individuals may register the report;
    1. Chartered accountant
    2. An individual who according to Section 2, Sub-section 2 of the Companies Act, 1956. Can serve as an auditor for companies filed in a State
    3. An individual who by any other law has the capability or is authorized to audit the assessee’s accounts

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