The Central Board of Direct Taxes (CBDT), vide newly issued notification no. G.S.R. 786(E) issued on 19th October 2023 has mandated the submission of an audit report in Form 56F for claiming deductions under Section 10AA of income Tax Act, 1961, which must be prepared by a Chartered Accountant.
This notification has been deemed to take effect from July 29th 2021, coinciding with the removal of the obligation to submit Form 56F for Section 10A deductions on the same day. The deadline to furnish the Form 56F has been extended by the board to 31st December 2023. The notification has also certified that no person will be adversely affected by giving retrospective effect to the Income-tax (Twenty Sixth Amendment) Rules, 2023
The new Rule 16D of Income Tax Rules, 1962 explicitly outlines the obligation for taxpayers to furnish a report, which must be prepared by a qualified accountant. It should be submitted in accordance with Section 10AA(8) of the Income Tax Act and is closely linked to sub-section (5) of Section 10A within the same act. Crucially, the report must strictly adhere to the prescribed format laid out in Form No. 56F.
Section 10AA is primarily concerned with deductions that pertain to the total income of recently established units located within Special Economic Zones. Sub-section 8 of Section 10AA integrates the stipulations outlined in sub-section (5) of Section 10A. Section 10A(5) of the Income Tax Act specifies the obligation for businesses to submit an Audit Report prepared by an Accountant along with their income tax return to qualify for deductions under Section 10A. This very same obligation has been extended to also encompass Section 10AA.
Rule 16D, inserted by vide notification no. G.S.R. 786(E) issued on 19th October 2023 lays down the framework for the newly mandated audit report in Form 56F. It specifies that “the report of an accountant which is required to be furnished by the assessee, under sub-section (8) of section 10AA read with sub-section (5) of section 10A shall be in Form No. 56F.” This form serves as the standardised medium for submitting the required audit report.
According to the notification, in Appendix II, after Form No.56E [as it stood immediately before its omission by the Income-tax (21st Amendment) Rules, 2021], the Form 56F was inserted.
Omission of Rule 16D and Form 56F under Section 10A
The board has omitted Rule 16D and Form 56F to be furnished under Section 10A by the Income Tax (Twenty-first Amdt.) Rules, 2021, w.e.f. 29-7-2021. Also, necessary changes were made to Rule 130 of the Income Tax Act. However, through the new notification, the Rule 16D and Form 56F was inserted again for claiming deduction under Section 10AA of the Income Tax Act.
Applicability of Form 56FF under Rule 16DD
The Rule 16DD and Form 56FF has been inserted by vide notification no. G.S.R. 903(E) (Income-tax (35th Amendment) Rules, 2021 issued on 29th December 2021. However the notification has been deemed to take effect from July 29th 2021.
For business owners operating within Special Economic Zone (SEZ) units, the creation of a reserve account is essential to access deductions under Section 10AA of the Income Tax Act. These deductions remain applicable for a period of 5 years following the initial 10 years of tax benefits. During this time, up to 50% of their export profits is deducted from their profit and loss account and credited to the SEZ Reinvestment Reserve Account.
Several conditions govern the utilization of this reserved amount:
It’s important to note that Form 56FF is mandatory for disclosing information about the purchase of machinery or equipment when utilising the reserved amount from the reinvestment reserve account.
The reason for discussing Form 56FF with Form 56F is that, SEZ reinvestment reserve account can be shown as deduction while filing the returns as per Section 10AA(1)(b) which comes under the purview of Form 56F. And the purchase of plant/machinery details shall be furnished in Form 56FF. Both forms are available in the portal for filing.
From whom shall Assessee furnish Audit Report in Form 56F
The audit report in form 56F shall be furnished by the assessee from a Chartered Accountant within the meaning of the Chartered Accountant Act, 1949.
Consequences of Non-compliance
Submitting the audit report in Form 56F, duly certified by a Chartered Accountant, is a legal requirement. Failure to comply with this requirement results in the taxpayer becoming ineligible for the income tax deduction provided under Section 10AA of the Income Tax Act.
A Case in Point
To emphasise the significance of adhering to this new regulation, the case of Mr. Mahendra Kumar Damani vs. The Asst. Director of Income Tax was brought to light. In this case, the Chennai Income Tax Appellate Tribunal (ITAT) ruled that the Income Tax deduction under Section 10AA of the Income Tax Act 1961 could not be availed without filing a tax audit report. This underscores the crucial role of complying with the newly instituted reporting requirements for successfully claiming deductions in Special Economic Zones.
Read More: Income Tax Deduction u/s 10AA of Income Tax Act cannot be Availed without Tax Audit Report: ITAT
Contents of Annexure A
In addition to Form 56F, there is a requirement to furnish an Annexure A. This annexure is intended to include comprehensive information about the assessee, including Name, assessment year, name of the unit, location, nature of business, Date of initial registration in SEZ, Total turnover of the business, Total turnover of the Unit, Total profits derived by the business, Total profits derived by the Unit,Total export turnover, Amount of deduction under section 10AA to which the assessee is entitled with the working sheet..etc.
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