Form 3AA – Income Tax Department

Last Updated at: Feb 23, 2021
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Form 3AA - Income Tax

Return filing is an integral part of maintaining income tax compliance in India. It is the process that kickstarts assessment proceedings as assessees must file their IT returns on time in the prescribed format as per Section 139 of the Income Tax Act. Along with the income tax return, individuals will have to submit various additional documents from time to time. Most of these documents are tax audit reports prepared by professional company secretaries and chartered accountants. These become necessary when claiming deductions or indicating depreciation on audited accounts, whereas others are procedural forms. This article will look at Form 3AA of the Income Tax Act, which deals with regulating depreciation as per Section 32 of the IT Act.

What is Depreciation as per the Income Tax Act?

Depreciation is the process by which an asset’s value reduces over time due to wear and tear. In most cases, depreciation is applicable for long term assets, such as buildings, equipment, and vehicles. The two most commonly used types of depreciation are the Written down Value and Straight Line Method. While the first method calculates depreciation as per the asset’s book value, the latter fixes a constant depreciation level on an asset over its period of use. As per Section 32 of the Income Tax Act, 1961, depreciation serves as an expense for assets while computing income tax and calculation occurs according to the WDV method. Consideration of depreciation serves as a tax saving option and is an integral part of the income tax return filing.

Section 32 of the Income Tax Act

Depreciation is considered only for assets used in a business or profession, and for the use in the year of purchase. As per Section 32(1) (iia), additional depreciation amounting to 20% of the asset’s real cost may be allowed on equipment installed by manufacturers. However, for this rule to be applicable, the equipment must have been installed or purchased after 31 March 2005. Since 2014, this rule has applied to assessees involved in power generation and distribution. By 2018, the additional depreciation was allowed for assesses involved in power transmission, wherein assets used for less than 180 days would enjoy 20% additional depreciation.  

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Form 3AA of the Income Tax Act

Form 3AA of the Income Tax Act is an audit report that comes under Section 32(1)(iia) of the Indian Income Tax Act, 1961. The report serves as an affidavit from a professional chartered accountant and proves they have examined the assessee’s business records. It also certifies that the professional has obtained the information required to ascertain the expense incurred by the assessee in installing and purchasing new equipment. Additionally, the audit report also guarantees that the deduction claimed by the assessee under Section 32, Sub-section 1, Clause it is accurate. 

Annexure A attached to Form 3AA deals in detail with the deduction claimed by the assessee. Equipment purchased and installed during business expansion, increased industrial capacity, or starting a new venture comes under Section 32. It further contains details of the assessee in case the instalment occurred for a new industrial undertaking. Annexure A of Form 3AA contains details regarding the new undertaking, nature of the business, and date of commencement of the business.

Annexure B contains details regarding the deduction claim in case the assessee installed machinery to expand their business or industrial capacity. In such cases, the equipment must have been purchased or installed before 1 April 2002.

Form 3AA – Audit Report

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

  1. Books of account
  2. Method of accounting employed 
  3. Separate accounts regarding business and personal professional
  4. Amount of profit earned
  5. Further, Amount of depreciation;
  6. Amount of income tax paid or payable
  7. Amount of surtax paid or payable 
  8. Amounts carried to reserves or set aside
  9. Losses of subsidiary companies
  10. Dividends paid 

Details Required to File Form 3AA

  1. Assessee’s name 
  2. Address of assessee 
  3. Assessee’s Permanent Account Number
  4. Assessment year
  5. Nature of business operations
  6. Date of commencement of production
  7. Details of new machinery acquired – the name of the seller, details of machinery, date of purchase, date of installation, and asset cost.
  8. Total installed capacity on 31 March 2002
  9. Year by when the company achieved an increase in capacity

Things to Know About Form 3AA

  1. Form 3AA of the Income Tax Act serves as a report from an accountant that assessees must furnish to receive benefits under Clause (iia) of Section 32.
  2. In some instances, the applicants will have to attach copies of their profit/loss statement. Expenditure statement and audited balance sheets along with Form 3AA.
  3. While filling the form, applicants must delete all the options that do not apply to them. And fill only what is relevant and required.
  4. In case any matters stated in Form 3AA have a negative answer, the assessee must state why it is so.
  5. Any of the following individuals may file the report;
  • Chartered accountant as per the Chartered Accountants Act, 1949 
  • An individual who as per Section 2, Sub-section 2 of the Companies Act, 1956. Can act as an auditor for companies registered in a State
  • An individual who by any other law has the power or is entitled to audit the assessee’s accounts