income tax

Resolving Tax Demands on Additional Income Reporting Under Clause 16(d)

Rectification for Additional Income Reporting by CPC Under Clause 16(d) of the Tax Audit Report for AY 2021-22

Have you received a tax demand concerning the additional income reported by your Chartered Accountant under Clause 16(d)? Here we provide a pathway for resolution through rectification.

Understanding Clause 16 of the Tax Audit Report

Clause 16 of the Tax Audit Report, as stipulated by Section 44AB of the Income Tax Act, mandates auditors to report various items, including:

  1. Amounts not included in the profit and loss account, such as:
    • Income covered under Section 28
    • Proforma credits, drawbacks, refunds of customs or excise duties, and sales tax or value-added tax refunds recognized by authorities
    • Escalation claims accepted in prior years
    • Other income items
    • Capital receipts, if applicable

This discussion specifically centers around sub-clause (d) of Clause 16.

Varied Approaches to Reporting Under Clause 16(d)

Historically, there have been two primary viewpoints regarding reporting under this clause:

  • Majority View: Many Chartered Accountants contend that since the audit report aligns with Section 44AB, which addresses only business income, other income types, such as savings interest, Public Provident Fund (PPF) interest, or mutual fund gains, should not be included in this report. These incomes are also excluded from the business income calculation when determining the tax audit threshold.

  • Alternative View: Some practitioners choose not to report under this clause but classify all other incomes as business receipts. They then deduct these amounts from business income when filing the income tax return, categorizing them under their respective income headings.

Another perspective suggests that because these incomes are classified as "OTHER INCOME" not reflected in the Profit and Loss account, they should indeed be reported under Clause 16(d) in the income return.

While taxpayers previously had no issues with either reporting method, the Assessment Year (AY) 2021-22 introduced specific complications. Many faced penalties due to discrepancies between the Central Processing Centre (CPC) assessments and the reports provided by their Chartered Accountants, leading to significant tax demands.

The CPC has merged sub-clauses (d) and (a), claiming that all income reported under Clause 16(d) qualifies as business income per Section 28. This interpretation creates a risk of double taxation as amounts reported under this clause are added to business and profession income.

Solutions for Rectification

To address this issue, consider the following options:

Option 1: Revise the Audit Report

  1. Engage your Chartered Accountant to revise the audit report, removing the amount recorded under Clause 16(d). Although compliance may vary, this remains the most effective solution to eliminate the tax demand.

  2. Once your Chartered Accountant files the revised audit report and secures your approval, proceed to file for rectification by “reprocessing the return.” Rectification orders typically require about 15 days for processing.

Option 2: Rectification of the Return Using Basic Mathematics

  1. Adjust the PGBP Amount:

    • Include the amount under "Profits and Gains from Business and Profession" in Cell 5d of Table 5 of Schedule Part A – OI (Other Information; required for those subject to audit under Section 44AB).

  2. Report Other Taxable Income:

    • Deduct the amount taxable under other heads as “Income Reported under Other Heads of Income,” ensuring it matches the original Return of Income (ROI).

  3. Handle Exempted Income:

    • For exempt incomes reported under Clause 16(d)—such as PPF or agricultural income—report these in Row 5c of Table A from business or profession, in Schedule BP for calculation.

Automated CPC Adjustments

The CPC now employs AI-driven tools to identify discrepancies between Clause 16(d) and ITR disclosures. Taxpayers need to reconcile these differences during rectification.

Conclusion

By adhering to these steps, calculations should align with the original amounts declared in the ROI. Validate your file and submit the rectification request as “Return Data Correction (Offline).” This structured approach aims to effectively resolve any tax demand issues.