Introduction

Salaried individuals who engage in stock trading or Futures & Options (F&O) transactions often have queries about income tax return filing, applicability for maintaining Books of Accounts and the applicability of tax audit on F&O transactions. This guide provides an in-depth analysis based on the latest provisions under the Income Tax Act, 1961.

Understanding Trading Transactions for Taxation

Trading in stocks or F&O can be broadly classified into two categories:

1. Speculative Business Transactions
2. Non-Speculative Transactions (F&O Trading)

1. Speculative Transactions:

As per Section 43(5) of the Income Tax Act, a speculative transaction is one where the purchase and sale of stocks or commodities are settled without actual delivery. Intraday trading in equities falls under this category. 

2. Non-Speculative Transactions (F&O Trading):

F&O trading, including commodity derivatives on recognized stock exchanges, is treated as non-speculative business income even though no physical delivery takes place.

 Applicability of Tax Audit for F&O Trading

Since F&O trading is considered business income, tax audit provisions under Section 44AB apply similarly to any other business income. Understanding the turnover limits and profit declaration rules is crucial for compliance.

When is Tax Audit Mandatory?

Tax audit under Section 44AB is applicable in the following cases:

1. Turnover up to Rs. 1 crore:
   • Tax audit is not required, regardless of profit or loss, provided Section 44AD(4) does not apply.
2. Turnover exceeding Rs. 1 crore but up to Rs. 10 crore:
   • Tax audit is not required if at least 95% of transactions are digital.
   • Tax audit is mandatory if cash transactions exceed 5% of total receipts or 5% of total payments. 

Please Note Receipts and payments are calculated separately, not cumulatively.

3. Turnover above Rs. 10 crore:
   • Tax audit is mandatory, irrespective of profit or loss.
4. Presumptive Taxation (Section 44AD) and Tax Audit:
   • If a taxpayer opts for Section 44AD, no tax audit is required for turnover up to Rs. 3 crore from Financial Year 2023-24 (Assessment Year 2024-25).
   • However, if Section 44AD(4) applies, tax audit is required if the declared profit is less than 6% (digital) or 8% (cash) of turnover, and total income exceeds the basic exemption limit.

Tax Audit for Professionals Under Section 44ADA and F&O Traders

If a taxpayer is carrying on a profession eligible for presumptive taxation under Section 44ADA and simultaneously engaged in F&O trading, the tax audit requirement is determined separately for each activity:

• For F&O trading, tax audit is applicable as per Section 44AB turnover limits discussed above.
• For professionals under Section 44ADA, tax audit is applicable if gross receipts exceed Rs. 75 lakh from Financial Year 2023-24 (Assessment Year 2024-25).
• If both activities are carried out simultaneously, each must be evaluated independently for tax audit applicability.

How to Calculate Turnover for F&O Trading?

Determining turnover for tax audit purposes is essential for accurate reporting. The method of turnover calculation varies based on the type of transaction:

1. Futures and Options (F&O) Trading: Turnover is calculated as the sum of absolute values of profits and losses from each squared-off trade during the financial year.
2. Options Trading: If an options contract is physically settled, the premium received on the sale is included in turnover computation.

Turnover Calculation as per ICAI Guidance Note: The calculation of turnover for tax audit purposes is guided by ICAI’s Guidance Note on Tax Audit. This method ensures uniformity in turnover computation and compliance with audit requirements.

Understanding the 5% Cash Transaction Clause Under Section 44AB

For businesses with turnover between Rs. 1 crore and Rs. 10 crore, tax audit is not required if cash receipts and cash payments do not exceed 5% of total transactions. This is computed separately as follows:

• Aggregate of all cash receipts, including sales, should not exceed 5% of total receipts.
• Aggregate of all cash payments, including expenses, should not exceed 5% of total payments.

If either of these conditions is violated, tax audit becomes mandatory.

Examples for Clarity

Example 1: Turnover Calculation for F&O Trading

• A trader has the following transactions:
  • Profit from Trade 1: Rs. 1,50,000
  • Loss from Trade 2: Rs. 75,000
  • Profit from Trade 3: Rs. 50,000
  • Loss from Trade 4: Rs. 1,25,000
  • Total absolute turnover = 1,50,000 + 75,000 + 50,000 + 1,25,000 = Rs. 4,00,000
• Since turnover is below Rs. 1 crore, no tax audit is required unless Section 44AD(4) applies. 

When is Books of Accounts Mandatory to maintain?

The Income Tax Act has specified the books of accounts that are required to be maintained for the purpose of Income Tax. These have been prescribed under section 44AA and Rule 6F.

In case business/profession is being carried out by the individual or HUF the limits are increased as under: 

a. For Income – Limit is Rs. 2,50,000

b. For Turnover/Gross Receipt – Limit is Rs. 25,00,000

Tax Benefits on Losses in F&O Transactions

Losses incurred in Futures & Options (F&O) transactions can be set off against rental or interest income. Any unadjusted losses can be carried forward for up to eight years and offset against future business profits, including profits from F&O transactions.

Is Declaring F&O Loss in the Income Tax Return is Mandatory

Many taxpayers, particularly salaried individuals engaged in F&O trading, often fail to report these transactions in their income tax returns. This omission may occur due to ignorance, but it is crucial to note that reporting all sources of income is a legal requirement.

Brokers are mandated to report all security transaction details to the Income Tax Department by filing a Statement of Financial Transactions (SFT) annually. Non-disclosure of F&O transactions can attract scrutiny from the department, resulting in notices for non-compliance and potential penalties for failure to maintain books of accounts and non-filing of the required tax audit report along with the income tax return.

Notice Under Section 139(9) of the Income Tax Act (Defective Return)

Failure to furnish a Balance Sheet and Profit & Loss Account when required can lead to receiving a notice under Section 139(9) from the Centralized Processing Centre (CPC) of the Income Tax Department. The notice typically states:

“The assessee has claimed loss under the head ‘Profits and Gains of Business or Profession’; however, a Balance Sheet and Profit & Loss Account must be provided. If the assessee falls under Section 44AD/44AE/44ADA, the books of account must be audited if the income offered is below the prescribed limits as per the provisions of the Income Tax Act.”

While an audit is not mandatory if the turnover is below INR 1 crore, the income tax return must be duly filed with a complete Balance Sheet and Profit & Loss Account under Section 139 of the Income Tax Act.

Table in Glance:

Scenarios	Opted for 44AD	Declaring Profit	Remarks
1	Yes (Turnover is less than Rs. 2Cr.)	According to 44AD	Neither require to maintain books of accounts nor audit.
2	Yes (Turnover is less than Rs. 2Cr.)	Less than 8% or 6% as the case may be or declaring loss.	Require to maintain books of accounts and audit.
3	No (Turnover is less than limit given u/s 44AB)	Profit or loss whatever is the case.	No audit, maintain books of accounts if limit of 44AA is crossed.
4	No (Turnover is more than limit given u/s 44AB)	Profit or loss whatever is the case.	Audit and maintaining books of accounts is mandatory.

Note: In all the cases of loss audit is not mandatory. It depends case to case. But in general practice and to deal with future litigation this practice followed.

For the latest update on F&O Turnover definition read DEFINITION IN TURNOVER WITH DIFFERENT LAWS – Consult CA Online

Disclaimer: This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.

Introduction:

The new section 43B(h) will be applicable from April 1, 2024 (AY 2024-25), Section 43B(h) of the Income Tax Act introduces significant changes concerning expenses related to purchases or services from Micro and Small Enterprises. Please note this section is not applicable on Medium Enterprises.

43B(h) has been inserted as a Socio-Economic Welfare Measure to ensure timely payments to micro and small enterprises.

We all know that section Section 43B of the Act provides for certain deductions to be allowed only on Actual Payment basis.

Finance Bill 2023 has newly inserted a clause to this section which is as under:

Section 43B (h) of Income Tax Act says:

“any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”

The above clause indicated that, in order to be eligible to claim deduction of the sum payable to micro and small enterprises, the payment shall be actually made within the time limit specified in 15 of the MSME Act, 2006.

Section 15 of MSME Development Act, 2006 says:

“Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day*:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance”

It is very clear that, the buyer shall make the payment to the supplier as agreed between them, however the same cannot exceed beyond 45 days from date of acceptance or the day of deemed acceptance i.e., from the day of acceptance of the goods/service.

Section 2(b) of the MSME Development Act, 2006 says:

“Appointed Day” means the day following immediately after the expiry of the period of fifteen (15) days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation—For the purposes of this clause-

(i) “the day of acceptance” means-

(a) the day of the actual delivery of goods or the rendering of services; or

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;

(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Section 16 of MSME Development Act, 2006 says:

“Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank”


Consequences upon Failure to make payment to Micro and Small Enterprises under Section 43B(h)

1. If the payment is made after 45 days or 15 days as specified – then expenses disallowed in the year and deduction will be available in the year in which the payment is made.

• If the payment is due for more than 45 days or 15 days as specified but the payment is made before the end of the Financial Year – then in such case, the deduction of the expense will be available in the same year itself.

The classification of the enterprise as Micro, Small & Medium as defined in Micro, Small and Medium Enterprises Development Act, 2006 is hereby produced for your reference:

• Micro Enterprise
• Investment less than Rs. 1 crore
• Turnover less than Rs. 5 crore

• Small Enterprise
• Investment less than Rs. 10 crore
• Turnover less than Rs. 50 crore

• Medium Enterprise
• Investment less than Rs. 20 crore
• Turnover less than Rs. 100 crore

Clause 44 It was added w.e.f 20th August 2018 but Reporting under this clause was deferred till 31st March 2019 vide Circular No. 6/2018 dated 17th August 2018, So reporting in clause 44 is started from AY 2019-20.

The Objective for insertion of this Clause 44:

The main objective is to co-relate GST Data with Income Tax Data.

FAQ’s on CLAUSE 44

Q.1. Is reporting in this clause applicable only for Assessee who are GST registered?

Ans: No, Reporting is to be made by all assesses who are registered under GST or not.

Q.2. Interpretation of wordings “Breakup of total expenditure”? What expenditures are not Included?

Q.3. Tabular format for disclosure:

Sl. No.	Total amount of Expenditure incurred during the year	Relating to Goods or services Exempt from GST	Relating to entities Falling under Composition Scheme	Relating to Other Registered Entities	Total Payment to Registered Entities	Expenditure relating to entities not registered under GST
(1)	(2)	(3)	(4)	(5)	(6)	(7)

Q.4. Colum 2 says “Total amount of Expenditure incurred during the year” so shall we report head-wise / nature wise expenditure?

Q.5. What are the Expenditure relating to other registered entities (column 5)?

Ans: The value of all inward supplies from registered dealers, other than supplies from composition dealers and exempt supply from registered dealers, are to be mentioned in this column.

Q.6.  What is the meaning of “Total payment to registered entities (column 6)”?

Ans: The language used in sub-heading of column 6 is total’ payment’ to registered entities. The word ‘payment’ should harmoniously be interpreted as ‘expenditure’ as the combined heading of columns (3), (4), (5) is ‘Expenditure in respect of entities registered under GST’. Hence, the total expenditure in respect of registered entities i.e., sum total of values reported in columns (3), (4) and (5) should be reported in Column 6.

Q.7. Checks and Control while reporting?

Foreign Currency Exposure:

The Foreign Currency Exposure is a risk associated with the businesses and investors engaged in the activities (trade and investments) of dealing in foreign currency transactions. The entities involved in the activities of transactions in different foreign currency denominations and does not take steps to protect themselves from currency fluctuations.

This exposure arises when a company or individual holds assets, liabilities, or cash flows in a foreign currency without implementing any hedging mechanisms to mitigate potential adverse currency fluctuation.

Entities needs to hedge ourselves from foreign currency exposure in the market to avoid any risk of volatility in the exchange rates and Derivative hedging is the one of the best ways to hedge.

Unhedged foreign currency exposure (UFCE):

The RBI issues guidelines for banks to manage their foreign currency exposure either fund base or non-fund base, in an attempt to reduce the risk of unhedged exposure on the banking system during extreme volatility in forex markets.

Banks would be required to assess the unhedged foreign currency exposures of all entities to whom they have an exposure in any currency.

Accordingly, the banks were given advisory through the issuance of various directions, guidelines and circulars to develop a framework for regular monitoring of entities that do not have a hedge. Henceforth, the present directions dated 11th October 2022

Applicability of the Directions:

The provision pertaining to the current directions shall apply to all commercial Banks excluding Payments Bank and Regional Rural Banks along with the Overseas Branches and Subsidiaries of Banks incorporated in India.

These Directions shall come into effect from January 1, 2023.

Computation of UFCE:

Banks shall ascertain the Foreign Currency Exposure (FCE) of all entities at least on an annual basis. Banks shall compute the FCE following the relevant accounting standard applicable for the entity. For ascertaining the Foreign Currency Exposer, the banks shall also include all the sources of an entity’s exposure, including Foreign Currency Borrowings & External Commercial Borrowings.

UFCE shall be obtained from entities on a quarterly basis based on statutory audit, internal audit or self-declaration by the concerned entity. Moreover UFCE information shall be audited and certified by the statutory auditors of the entity, at least on an annual basis.

Provisioning and Capital Requirements:

The bank is required to calculate the total potential loss to the entity from Unhedged Foreign Currency Exposure. It shall be determined by using the data published by FEDAI on the annual volatility rate in the USD-INR exchange rate for the last 10 years and multiplying it with the UFCE of an entity.

The bank is required to ascertain the susceptibility of an entity towards adverse exchange rate movements. It shall be determined by computing the ratio of potential loss to the entity from UFCE and the entity EBID (Earnings before interest and depreciation).

In case if the bank is unable to gather information on UFCE and EBID of an entity due to restrictions on disclosure of information, then, in that case, the bank can compute the susceptibility ratio by using data that is immediately preceding the last four quarters.

In case of Unlisted Company if the information on EBID and UFCE is not available due to the non-availability of the last audited results of the last quarter, then, in that case, the bank shall undertake the latest quarterly and annual result. However, the EBID figure shall be for the last financial year.

The direction has determined the figure for computing the incremental provisioning and capital requirements which are as follows:

Potential Loss or EBID ( in Percentage)	Incremental provisioning Requirements	Incremental Capital Requirements
Up to 15 %	0	0
15% to 30%	20 BPS	0
30% to 50%	40 BPS	0
50% to 75%	60 BPS	0
More than 75%	80 BPS	Risk weight + 25%

Further, the bank is required to calculate the incremental requirements on quarterly basis. 

For projects under implementation and the new entities, banks shall calculate the incremental provisioning and capital requirements based on projected average annual EBID for the three years from the date of commencement of commercial operations.

In the case of consortium arrangements, the consortium leader / bank having the largest exposure shall have the lead role in monitoring the unhedged foreign exchange exposure of entities.

Exemption / Relaxation (a) Banks shall have the option to exclude the following exposures from the calculation of UFCE:

(i) Exposures to entities classified as sovereign, banks and individuals.

(ii) Exposures classified as Non-Performing Assets.

(iii) Intra-group foreign currency exposures of Multinational Corporations (MNCs) incorporated outside India.

Provided that the bank is satisfied that such foreign currency exposures are appropriately hedged or managed robustly by the parent. (iv) Exposures arising from derivative transactions and / or factoring transactions with entities, provided such entities have no other exposures to banks in India.

Assessment of Unhedged Foreign Currency Exposure (UFCE):

The banks are further required to ascertain the UFCE by obtaining such information from the concerned entity on quarterly basis. Further, the information on UFCE supplied to the bank must be audited and certified by a statutory auditor of the entity.

The Securities and Exchange Board of India (SEBI) on Tuesday, 20^th December,2022 amended the buyback rules to gradually phase out the Open Market Route in favor of the Tender Route. SEBI has improvised the present share buyback norms for listed companies and has tightened the disclosure rules to increase the transparency and credibility of the market.

Over a period, buyback regulations have also evolved with the growth and complexity of the market. Initially, buyback was allowed only from the open market through stock exchanges. Subsequently, the tender method for buyback was also introduced. It was felt that the stock exchange route is less efficient as it may be difficult to buyback through this route the full quantity without affecting the share price. Also, it may take a long time to complete it. Further, there is a possibility of one shareholder’s entire trade getting matched with the purchase order placed by the company, thus depriving other shareholders to avail the benefit of the buyback. Therefore, a time-bound program under the tender route was considered a superior method.

Few of the major changes made by SEBI are:

Increase in the limit of utilization of proceeds:

The regulator has amended the rules on the way of using of the funds which are kept for buyback. The buyback norms at present require companies to utilize at least 50 per cent of the amount earmarked for this purpose. On Tuesday, SEBI has raised the minimum threshold of 50 per cent to 75 per cent for the purpose of utilization. In case of failure to use the minimum proceeds by the company, SEBI can direct the merchant banker to forfeit the amount deposited in an Escrow account.  

Reduction in time for the process of buyback:

In buyback under the Tender route, SEBI has reduced the timeline for completion by 18 days. It has dropped the requirement to file the draft letter of offer.

Advertisement for buyback to increase awareness/knowledge:

SEBI has made it mandatory to place the relevant advertisements/ documents with respect to buyback, such as, copy of the public announcement, letter of offer etc. on the respective website of the stock exchange(s), merchant banker and the company for better dissemination of information to shareholders.

Revision of price for Buyback:

SEBI has permitted the upward revision of the buyback price until one working day prior to the record date.

Additional Points:

• SEBI has also decided to create a separate window on stock exchanges for undertaking buyback till the time tender offers are fully in effect.
• SEBI has proposed to reduce the timeline for completion of process of buyback to 66 days with effect from 1^st April, 2023 and to 22 working days from 1^st April, 2024.
• It has also been proposed that Open Market Route will be completely closed by 1^st April, 2025.

These amendments aim to streamline the process of buyback, create a level-playing field for investors and promote the ease of doing business. We hope that the new regime to choose tender route for buyback with a shorter timeline and ability to revise the price upwards until the late stage will make the buy-back scheme much more robust, market friendly as well as investor friendly.

Companies Act, 2013 defines “charge” as an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage. There are various forms of creation of charge. Some of the terms used of creation of charge are: Mortgage, Hypothecation, Pledge, etc. Although these terms are used interchangeably many times, there is different meaning attached to these words. So in this article, you will be able to understand each of the terms separately which are used in the contracts.

MORTGAGE:

A mortgage is one of the ways to create charge against immovable property where the amounts involved are generally very high, and the transfer of title is often passed. Mortgage is the transfer of interest in a specific immovable property in order to secure an existing or future debt.

• The legal ownership of the asset can be transferred to the lender under mortgage if the borrower defaults on the repayment of the loan amount. However, the borrower continues to remain in possession of the property.
• A mortgage is usually used for immovable assets which are permanently fixed to the earth or attached to the land like house, land, building, or any property, etc. Home loans are classified as mortgages.
• The person creating the mortgage is called as Mortgagor while the person in whose favor mortgage is created (usually Banks) is called as Mortgagee.

PLEDGE:

Pledge is the bailment of goods as a security for payment of debt or performance of a promise. Bailment means delivery of goods with some purpose and with the condition that when the purpose is accomplished, the goods will be delivered back to the Bailor. Pledge is a contract between the lender and borrower, where the borrower pledges an asset as a security to the lender. Under Pledge, the ownership of the asset remains with the borrower, however, the possession of the asset is transferred to the Banker/Pledgee.

• Pledge can be charged only on movable goods like stocks. The bank shall take care of the possession in good faith and as the same as its own goods.
• In case of default by the borrower, the bank has a right to sell the goods in his possession with any intervention of the court and recover the amount due.
•  If there is any surplus while selling the asset, the amount is returned back to the pledger (borrower).
• The asset can only be sold by the pledgee after giving reasonable reminder and notice to the pledgor(borrower).
• In case of pledge, risk of lending comparatively reduces because possession of assets is with the lender.
• Some examples of pledge are gold /jewelry loans, advance against goods or stock, advances against National Saving Certificates etc.

HYPOTHECATION:

Hypothecation is another way of creating a charge but against movable assets. Hypothecation means offering an asset as collateral security to the lender. The borrower enjoys both the ownership as well as the possession.

• In the case of any default by the borrower, the lender can take the possession of the security and exercise his right to seize the asset and sell the asset to recover the dues.
• The charge created under hypothecation is Equitable Charge (where there is no variation).
• But in case of hypothecation of stocks to the bank, the charge which is created is called floating charge.
• The common example for hypothecation is car loans. In car or vehicle loans, it remains with the borrower but the same is hypothecated to the bank or financer. If the borrower defaults, the bank then takes the possession of the car after providing sufficient notice to recover the money.
• Sometimes when a bank or financial institution puts the already pledged asset as collateral for borrowing from another bank, it is called re-hypothecation.

ASSIGNMENT:

An assignment is another type of charge on current assets or fixed assets. Under assignment, the charge is created on the assets held in the books. Assignment refers to the transfer of right or interest to recover the debt.

• The transferor of the claim is called as the Assignor (Borrower) and the transferee is called the Assignee (Bank).
• Assignor cannot give better title to the assignee than what assignor has.
• In case of default, the assignee, i.e., the bank can recover the amount of actionable claim from the original debtor without reference to the Assignor.
• Assignment is possible through writing only.
• Assignment can be of two types: Legal and Equitable Assignment. Legal Assignment is the agreement where all the legal formalities are done on stamp paper while in case of equitable assignment, all the formalities are written on the paper but the legal element is missing from this.
• Examples of assignments include life insurance policies, books of debts, receivables, etc., which the bank can finance. For example – A bank can finance against the book debts. The borrower assigns the book debts to the bank in such a case.

LIEN:

The right to retain a property belonging to someone else till his debt is liquidated is called as Lien. Under a lien, the lender gets the right to hold up the asset used as collateral against the funds borrowed. However, unless the contract states otherwise, if the borrower defaults on the loan, the lender doesn’t have the right to sell the property.

Example: A piece of cloth is given to a tailor to stitch a suit. After the suit is made, the tailor has the right to retain it as security with him till he is paid the stitching charge by the person who placed the order for the suit. Once the payment is received, the tailor is bound to give the suit to the person concerned.

• It is a right given to the creditor to retain/possess the security until the loan amount is paid. It is the strongest form of security since possession of the security is with the creditor.
• Lien can be on both movable and immovable property.
• But generally, lending companies choose to have mortgages on immovable property and lien on movable security like shares, gold, deposits, etc.
• Examples of lien include rent receivable, unpaid fees, etc.

SET-OFF

A settlement of mutual debt between a creditor and a debtor through offsetting transaction claims is also known as setoff. In order to cover a loan in default, a bank has a legal right to seize funds of a guarantor or the debtor. The right of set-off enables the bank to combine two accounts (a loan account and a deposit account) of the same person. Through this settlement, a creditor can collect a greater amount than they usually could under bankruptcy proceedings. When a setoff clause is entered into, the bank can seize the customer’s current deposit.  For purposes of set-off, all bank branches are treated as one single entity. A bank exercising a right of setoff must fulfill the following conditions:

• the account from which the firm transfers funds must be held by the customer owing the firm money;
• the account from which the firm transfers the money and the account from which the money would otherwise have come, must be held with the same firm;
• both the accounts must be held in the same capacity by the customer;
• the debt must be due and payable.

COMPANIES (INCORPORATION) THIRD AMENDMENT RULES, 2022

Companies (Incorporation) Third Amendment Rules, 2022 has been notified on 18^th August 2022 by Ministry of Corporate Affairs (MCA) to further amend the Companies (Incorporation) Rules, 2014. In this amendment, MCA has introduced a new Rule 25B, which is about Physical verification of the registered Office of the Company. However, this new Rule will come into effect once notified in the Official Gazette.

OVERVIEW OF RULE 25B

Earlier, as per Section 12 of the Companies Act 2013, physical verification of the company’s registered office was required only when ROC have reasonable grounds to believe that the company concerned is not carrying on a business. However, after the amendment in the Companies (Incorporation) Third Amendment Rules, 2022, physical verification has been implemented as per Rule 25B.

After Rule 25A (Active Company Tagging Identities and Verification), MCA has inserted new Rule 25B (Physical verification of the Registered Office of the company).

Companies (Incorporation) Third Amendment Rules, 2022 has been introduced by the government to ensure a more transparent process for the physical verification of companies’ registered addresses. According to the new Rule 25B, the Registrar of Companies (ROC), based upon the information made available on MCA 21 portal, shall visit the Address of the Registered Office of the company and do the physical verification of the Registered Office of the company.

• As per the new rule 25B, ROC will carry out a physical verification of the location of the Registered Office of the company in the presence of two independent witnesses.
• The Registrar shall carry the documents filed on the MCA 21 portal in support of the Address of the company’s registered office for physical verification.
• To check the authenticity and validity of the documents as well as the office, the same shall be cross-verified with the copies of supporting documents of such Address collected during the physical check, duly authenticated from the occupant of the property where the Registered Office is situated.
• The Registrar will also need to have a photograph of the company’s registered Office for proof during the physical verification.
• If required, RoC will also seek assistance from the local police.

After conducting the verification process, a detailed report shall be prepared including all the information such as location details and photographs.

REGISTERED OFFICE OF A COMPANY

The company’s Registered Office is the main Office of the Company at which all the communication relating to the company are sent by the governmental departments. Company’s Registered Office shall be declared during company incorporation/LLP incorporation by the Directors of the company/LLP and they shall maintain all the required documents at the registered Office.

• Registrar of Company (ROC) will be determined by the state or location where the Registered Office of the Company is situated.
• Any change in the Company’s address/location of the Registered Office must notify the Registrar of Company (ROC) within a specified period of time.

REPORT ON PHYSICAL VERIFICATION OF COMPANIES REGISTERED OFFICE

Verification Report of the Registered Office of the company will be prepared by RoC in the given format.

• Name and Company Identification Number (CIN) of the company
• Latest Address of the company as per the MCA 21 records
• Date of authorization letter issued by the Registrar of Companies
• Name of Registrar of Companies
• Date and Time of Physical verification
• Location Details of Company along with the landmark
• Details of person available at the time of Physical verification

Along with these details, ROC will also have to attach the following documents with the report:

• Copy of agreement/ownership /rent agreement/No objection certificate (NOC) of the registered Office of the company from owner/tenant/lessor
• Photograph of the Registered Office
• Self-Attested ID card of the person available

NOTICE TO COMPANY AND DIRECTORS

Suppose the Registered Office is unable to receive and acknowledge all notices due to its location or any other issue. In that case, the ROC will notify the Company and all Directors of the intention to remove the company’s name from the official Register of Companies (ROC) by the way of show-cause notice and request them to send their reply along with the required documents.

The Director of the company needs to send their reply against the show-cause notice along with the necessary documents within 30 days from the date of the notice by the MCA; otherwise, ROC will have to take further action under section 248 of the Companies Act.

A lively Small and Medium-sized Enterprise (SME) sector is an imperative element for a solid market economy. SMEs assume a significant part in the political economy, assisting to promote and strengthen reforms. There are about 44 million MSME units in India which contribute 45% of the India’s manufacturing output, account for about 35 % of our exports, and provide employment to more than 59 million people in the country.

 The continuing development, intensity and prosperity of MSME units are complicatedly connected with the wellbeing and development of Indian economy. In the long term, SMEs can create a significant ascent in pay, opportunities and the overall GDP. Assuming the business environment to be helpful and steady to new organizations, they won’t just create more employment yet additionally make a variety of items and administrations for the consumers to choose from.

Where MSME are looking for re-organizing their working capital, make or buy decisions, new investment and return thereof, Chartered Accountants can play a very important role as business solution providers. They are being trained in three-year of thorough training to handle a wide range of challenges and having active experience. Chartered Accountants play significant part in the turn of events and advancement of SME area.

From making exceptional products to offering custom administrations, SMEs are an imperative piece of the financial texture of the world. There are many advantages of SMEs for entrepreneurs, buyers, workers and networks. Small and medium endeavours, as they are additionally known, can do things that can be challenging for larger organizations.

Few of the advantages are listed below:

Close relationship

It is quite possibly the clearest advantage. Medium and particularly small companies will manage their clients, which will empower them to address their issues more precisely and to offer a more individualized assistance, and even lay out some bond with their clients. When you know the business, the client’s connection with the SME will frequently be less difficult as compared to any large organization.CAs can play a significant part for making mindfulness among stakeholders.

Flexible

As a result of their size and less difficult construction, they will have a more prominent ability to adjust to changes. Furthermore, it will assist them with being nearer to their clients, which will permit them to know the variations in the market before any other individual.

Economic Development

SMEs have the remarkable capacity to fuel economic development. They set out many new job opportunities, drive the trend of advancement and extend the tax base. In most developing and developed economies, more than 90% of SMEs further develop the employment rate. As a matter of fact, when large businesses scale down and eliminate job opportunities, SMEs continue creating and developing more job positions.

Reduced complications in compliance:

At present a normal SME or start up invests a great amount of time and energy to deal with the different kinds of assessments at different places. Recording separate returns under every office, according to the specified courses of events, in itself is a nightmare. Further, businesses like restaurants, which fall under both sales and service taxation, have to calculate both VAT and service tax separately for compliance purposes. GST, by virtue of its unified structure and neat classification of goods and services for the purpose of taxation, essentially wipes out every such entanglement, and most importantly reduces compliance effort and costs.

Adaptable to dynamic environment:

SMEs act as a cushion against recession by adapting and innovating as per the changing circumstances. SMEs adapt fast to the dynamic business world by switching on to e-commerce and online transaction of goods and services. The progression in innovation has not just eased out the method involved with selling and purchasing, it has assisted the people with reducing expense on promoting and showcasing as well. The different online business platforms make life simple for SMEs.

CA professionals can play pro-active role in creating awareness entry into ready and big market of supplying to Ministries, departments and CPSUs through procurement policy; motivating and facilitating SMEs in registering under SPRS; by filing forms on behalf of SMEs and facilitating pre-registration capability audit.

Although SMEs have its downsides too, it is just with accuracy and care that the public authority can empower business by making business-accommodating approaches and simple funding options. Liberal arrangements urge prospective entrepreneurs to go all in and create value for themselves as well as society eventually. Chartered Accountants play major and important role in the development and promotion of MSME sector. Do not see a CA professional just for the purpose of audit; a certified Chartered Accountant can be of help in anything from money related issues to business related decisions.

APPLICABILITY:

CARO 2020 is applicable to all the companies which were covered under CARO 2016. There has been absolutely no change on the applicability of CARO with respect to CARO 2016. It is applicable to all the statutory audits commencing on or after 1^st April, 2021 corresponding to the financial year 2020-21.

Previously, there were 16 clauses and 10 sub-clauses, but after CARO 2020, there are 21 clauses and 28 sub-clauses. 7 clauses were newly entered, 1 clause has been merged and 1 has been deleted.

The amendments made under CARO 2020 have been divided into 4 categories:

SCHEDULE III AMENDMENTS –

1. Clause 3(i)(c) Title Deeds of Immovable Properties: There had been an amendment in this clause as-

“Whether the title deeds of all the immovable properties (other than the properties where the company is the lessee and the lease agreements are duly executed in favor of the lessee) disclosed in the financial statements are held in the name of the company, if not, provide the details thereof”.

2. Clause 3(i)(d) PPE Revaluation: This clause has been newly added under CARO 2020.

“Whether the company has revalued its Property, Plant and equipment (including the Right to Use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets”;

3. Clause 3(i)(e) Benami Property: This clause has been newly added under CARO 2020.

“Whether any proceedings have been initiated or are pending against the company or holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements.”

4. Clause 3(ii)(b) Working Capital: This clause has been newly added under CARO 2020.

“Whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions, are in agreement with the books of account of the Company, if not, give details;

FAQs on Working Capital

Q1. Can working capital loan be sanctioned on the basis other than current assets?

A. No, working capital loan cannot be sanctioned other than on the basis of current assets.

Q2. If the amount of loan sanctioned is more than 5 crores, but the amount utilized is 1 crore – is it covered here?

A. Yes, it is covered here too since the provision only states about the sanction of the loan not about utilization.

Q3. Does the term ‘Sanction’ include Renewal?

A. Yes, renewal is allowed but it should be only on the basis of current assets.

Q4. If the company is also submitting monthly returns – whether the same also need to be verified by the auditor?

A. Guidance Note provides that the auditor will verify the returns on quarterly basis only.  Even if the returns are submitted monthly, it will be verified by the auditor quarterly.

5.  Clause 3(viii) Surrender or disclosure of Unrecorded income: This clause has been newly added under CARO 2020.

“Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, if so, whether the previously unrecorded income has been properly recorded in the books of accounts during the year”;

6. Clause 3(iii)(f) Loans /Advances to Promoters/ Related Parties: This clause has been newly added under CARO 2020.

“Whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, Related Parties as defined in clause (76) of section 2 of the Companies Act, 2013.

7. Clause 3(ix)(b) Wilful Defaulter: This clause has been newly added under CARO 2020.

“Whether the company is a declared wilful defaulter by any bank or financial institutions or other lender”;

If the company is declared as a wilful defaulter, then the details such as date of declaration, date of default, amount of default and it’s nature, shall be disclosed to the Auditor.

8. Clause 3(ix)(d) Short term fund utilization for long term: This clause has been newly added under CARO 2020.

“Whether the funds raised on short term basis have been utilized for long term purposes, if yes, the nature an amount to be indicated”;

9. Clause 3(xix) Capacity of meeting current liability: This clause has been newly added under CARO 2020.

“On the basis of financial ratios, ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that the company is capable of meeting  its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date.

10. Clause 3(xx) Transfer of CSR fund: This clause has been newly added under CARO 2020.

(a) “Whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act”;

(b) “Whether any amount remaining unspent under sub-section (5) of the section 135 of the Companies Act pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub-section (6) of section 135 of the said Act”;

FUND RELATED AMENDMENTS

11. Clause 3(iii)(a) Investment/Guarantee/Security: There had been an amendment as well as new addition in this clause as-

“Whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so –

(a) Whether during the year the company has provided loans or provided advances in the nature of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if do, indicate –

(A)The aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint venture and associates;

(B)The aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates;

12. Clause 3(iii)(b) Investment, Guarantee, Security, Loan/Advance given – not prejudicial: There had been an amendment in this clause as-

“Whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest;

13. Clause 3(iii)(e) Ever-greening of Loan: This clause has been newly added under CARO 2020.

“Whether the loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year [not applicable to companies whose principal business is to give loans];

14. Clause 3(v) Deemed Deposit: There had been an amendment in this clause as-

“In respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal  or Reserve Bank of India or any court or any other tribunal, whether the same  has been complied with or not;

15. Clause 3(ix)(a) Default in Repayment: There had been an amendment in this clause as-

“Whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported in the format given – to give lender wise details in case of banks, financial institutions and Government only and not in respect of other lenders.

16. Clause 3(ix)(e,f) Fund – Subsidiaries, Associates, Joint Ventures: These clauses has been newly added under CARO 2020.

e) “Whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case;

f) “Whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised;

17. Clause 3(xvii) Cash Losses: This clause has been newly added under CARO 2020.

“Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses;

CONTROL RELATED AMENDMENTS

18. Clause3(i)(a) Record of Intangible Assets: This clause has been newly added under CARO 2020.

B. “Whether the company is maintaining proper records showing full particulars of intangible assets”

19. Clause 3(ii)(a) Inventory Physical Verification: There had been an amendment in this clause as-

“Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account;

20. Clause 3(ix) Fraud Related: There had been an amendment in this clause as-

“Whether any fraud by the company or any fraud on the company by its officers or employees has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated;

“Whether any report under sub-section (12) of Section 143 of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government;

21. Clause 3(ix) Whistle Blower Complaints: This clause has been newly added under CARO 2020.

“Whether the auditor has considered whistle-blower complaints, if any, received during the year by the company;

22. Clause 3(xiv) Internal Audit system and report: This clause has been newly added under CARO 2020.

“Whether the company has an internal audit system commensurate with the size and nature of its business”;

“Whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor”;

23. Clause 3(xviii) Resignation of Statutory Auditor: This clause has been newly added under CARO 2020.

“Whether there has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken into consideration the issues, objections, or concerns raised by the outgoing auditors;

24. Clause 3(xxi) Consolidated Financial Statements: This clause has been newly added under CARO 2020.

The CARO 2016 did not apply to the consolidated financial statements. But the CARO 2020 contains this clause that is now applicable to report on consolidated financial statements.

“Whether there has been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor’s Report) Order (CARO) reports of the companies included in the consolidated financial statements, if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks”

SPECIFIC REGULATION AMENDMENTS

25. Clause 3(xii)(c) Default in Payment: This clause has been newly added under CARO 2020.

“Whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof”;

26. Clause 3(xvi) NBFC/CIC: This clause has been newly added under CARO 2020.

b) “Whether the company has conducted any Non-Banking Financial of Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per Reserve Bank of India Act,1934”;

c) “Whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria”;

d)” Whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group”;

The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors. Therefore, CARO 2020 has included the above-mentioned reporting requirements.