Labour Welfare Fund (LWF) – Balance Sheet and Tax Audit Treatment

 The Labour Welfare Fund (LWF) is a state-level statutory contribution, governed under respective Labour Welfare Fund Acts and Rules. Although the rate and periodicity of payment differ across states (e.g., June and December in Delhi & Haryana), its accounting and tax treatment under the Income-tax Act, 1961 must be carefully considered—especially for labour-intensive and multi-state businesses.

Nature of Contribution

• Employer’s Contribution → Treated as a business expenditure, allowable under Section 43B only on actual payment.

• Employee’s Contribution (where applicable in certain states) → Governed by Section 36(1)(va) read with Section 2(24)(x); must be deposited within statutory due dates, failing which deduction is disallowed, even if paid before return filing.

Balance Sheet Treatment

• As on 31st March (Cut-off Date):

  • Any unpaid LWF (employer or employee portion) is shown under “Current Liabilities – Statutory Dues Payable”.

  • If paid before 31st March, it is charged to the Profit & Loss Account as an expense.

• Illustration (Delhi/Haryana):

  • Contribution for December 2024 is due in January 2025 → not payable as on 31st March 2024, hence no liability arises.

  • Contribution for June 2024 is due in July 2024 → liability must be accrued as on 31st March 2024 (if expense relates to FY 2023–24).

Tax Audit Reporting (Form 3CD)

• Clause 21(a) → Reporting of disallowance under Section 43B for unpaid employer contributions.

• Clause 21(b) → Reporting of employee contribution not deposited within due dates under the respective Labour Welfare Fund Act.

• Auditor must ensure state-wise mapping of liability and payment dates, as LWF differs across jurisdictions.

Practical Guidance for Multi-State Companies

In the digital era, labour-intensive companies often operate across multiple states. This means:

• Different rates, periodicity, and due dates for LWF in each state.

• Centralized accounting must track state-wise accruals and compliance, ensuring no liability is missed at year-end.

• In most cases, LWF is a small amount, but for large workforce companies, it can become material and requires proper accrual and disclosure.

Key Compliance Pointers

- Book employer contribution as expense only if paid before year-end, else carry forward as liability (Sec. 43B).
- Ensure employee contribution is deposited within due date prescribed under state law (Sec. 36(1)(va)).
- For multi-state entities, maintain a compliance calendar integrating all states’ LWF deadlines.
- Disclose outstanding dues clearly in Balance Sheet under statutory liabilities.

Conclusion

While the LWF liability is often small in monetary terms, its tax and audit implications are significant. Non-compliance can trigger disallowances under Section 43B/36(1)(va) and adverse reporting in Tax Audit (Form 3CD). For multi-state and labour-intensive businesses, a robust digital compliance system is the best safeguard against oversight.

Peer Review Applicability for CAs in 2025: Turnover, Foreign JV, Tax Audit & Audit Thresholds

 The Peer Review Mechanism of ICAI is no longer limited to audits of listed entities, banks, and insurance companies. With the launch of Audit Quality Maturity Model (AQMM v.2.0), ICAI has widened the mandatory scope in a phased manner starting April 1, 2026.

This has direct implications for signing of financial statements for FY 2024-25 (31.03.2025) and FY 2025-26 (31.03.2026). Firms must now carefully examine:

• Entity type (listed / unlisted / group entity / JV / foreign subsidiary)

• Thresholds of turnover, paid-up capital, and borrowings

• Date of signing (before or after April 1, 2026)

Applicability Framework

For signing 31.03.2025 financials (FY 2024-25):

Peer Review + AQMM mandatory only if firm audits:

1. Listed entity (equity/debt listed in India)

2. Banks (other than co-operative banks, except multi-state co-operative banks)

3. Insurance companies

 No threshold of turnover or capital applies yet.
 Group entities (subsidiaries/JVs) not covered yet.

For signing 31.03.2026 financials (FY 2025-26):

(A) If report signed before 01.04.2026 → Old rules apply

• Only listed entities / banks / insurance audits require Peer Review.

(B) If report signed on or after 01.04.2026 → Expanded scope applies

Category 1 – Group Entities (Holding / Subsidiary / Associate / JV)

• If firm audits Holding, Subsidiary, Associate, or JV of:

  • Listed entity (India listed)

  • Banks (other than co-operative banks, except multi-state co-op banks)

  • Insurance companies

• Branch audits are excluded.

• Foreign subsidiaries/JVs are covered only if parent is an Indian listed / Indian bank / Indian insurer.

Category 2 – Large Unlisted Public Companies
Peer Review mandatory if any one threshold is met as on 31st March of preceding year:

• Paid-up share capital ≥ ₹500 crores, OR

• Turnover ≥ ₹1,000 crores, OR

• Aggregate loans + debentures + deposits ≥ ₹500 crores

(Standalone financials, not consolidated, unless specified otherwise in law).

Category 3 – Effective from 01.04.2027 (future)

• Entities raising funds > ₹50 crores from public / banks / FIs during period under review, OR

• Any body corporate (including trusts) classified as a Public Interest Entity (PIE).

Year-wise Matrix

FS Year	Signing Date	Entity Type	Thresholds / Conditions	Peer Review Mandatory?
31.03.2025	Anytime (before 31.03.2026)	Listed entities	Listing in India	✅ Yes
		Banks	All banks except co-op (but incl. multi-state co-op)	✅ Yes
		Insurance Companies	N/A	✅ Yes
		Large unlisted public companies	Thresholds not yet in force	❌ No
		Holding/Subsidiary/Associate/JV of listed/bank/insurance	Not applicable yet	❌ No
31.03.2026	Before 01.04.2026	Same as above	Same	✅ Yes only for listed / banks / insurance
31.03.2026	On/After 01.04.2026	Listed entities / Banks / Insurance	N/A	✅ Yes
		Holding/Subsidiary/Associate/JV of listed/bank/insurance	Parent is Indian listed / bank / insurer	✅ Yes
		Unlisted public companies	Paid-up cap ≥ ₹500 Cr OR Turnover ≥ ₹1,000 Cr OR Borrowings (loans+debts+deposits) ≥ ₹500 Cr	✅ Yes
		Private companies / foreign companies without Indian listing	N/A	❌ No

Special Cases

1. JV of Indian Listed + Foreign Company → Covered (because of Indian listed linkage).

2. Indian subsidiary of a foreign listed company → Not covered (unless foreign parent also listed in India).

3. Indian audit of foreign subsidiary/JV of Indian listed company → Covered (group linkage test satisfied).

4. Private companies → Not covered (unless they themselves become listed or fall under PIE category from April 2027).

Disclosure Requirements

• ICAI will now publish AQMM Levels (v.2.0) on its website for all peer-reviewed firms.

• Peer Review Certificates will explicitly mention the AQMM Level alongside validity.

• Clients, regulators, and banks will increasingly rely on this publicly available benchmark for firm selection.

Practical Checklist for Firms

Before accepting / signing an audit engagement for FY 2024-25 or 2025-26, check:

Step 1 – Identify entity type

• Listed (equity/debt) in India?

• Bank / Insurance company?

• Unlisted public company?

• Holding/Subsidiary/JV of listed/bank/insurance?

Step 2 – Check thresholds (for unlisted public co.)

• Paid-up capital ≥ ₹500 Cr?

• Turnover ≥ ₹1,000 Cr?

• Borrowings (Loans + Debentures + Deposits) ≥ ₹500 Cr?

Step 3 – Signing date

• Before 01.04.2026 → Old rules apply

• On/after 01.04.2026 → Expanded rules apply

Step 4 – Cross-border check

• If foreign group entity → Ask: is the Indian parent listed / bank / insurer? If yes → Covered. If no → Not covered.

Step 5 – Documentation

• Ensure valid Peer Review Certificate (with AQMM level) is available and uploaded with NFRA / SEBI / RBI filings wherever applicable.

• Maintain internal checklist and minutes of peer review compliance before signing audit reports.

Conclusion

• For 31.03.2025 FS → Peer Review applies only to listed entities, banks, and insurance audits.

• For 31.03.2026 FS →

  • If signed before 01.04.2026 → old rule continues.

  • If signed on/after 01.04.2026 → expanded scope applies: group entities of listed/bank/insurance + large unlisted public companies (₹500 Cr/₹1,000 Cr thresholds).

• Foreign JVs/subsidiaries are covered only if tied to Indian listed/bank/insurance companies.

With ICAI publishing AQMM levels publicly, Peer Review will now act as a quality seal, and firms must prepare well in advance to ensure compliance.

Disclosure of Related Party Transactions Incurred Before and After Relationship Establishment:

A Practical Guide for Financial Statements, DPT-3, and Tax Audit Compliance

Introduction

As the financial year closes on 31 March, businesses across India are busy finalizing financial statements, preparing DPT-3 filings due by 30 June, and gearing up for Tax Audit submissions by 30 September.

A frequent compliance challenge arises around related party transactions (RPTs) that were incurred before the related party relationship officially existed but remain unpaid or outstanding at the year-end.

This article explains the correct approach for disclosure of such transactions — as well as those incurred after the related party relationship is established — under the key regulatory frameworks:

• Ind AS 24 — Related Party Disclosures in Financial Statements

• DPT-3 — Return of Deposits, Loans, and Advances (Companies Act, 2013)

• Tax Audit and Transfer Pricing requirements (Income Tax Act)

Understanding and applying these rules correctly is essential to avoid regulatory penalties, audit qualifications, and mismatches across compliance filings.

1. Related Party Transactions under Ind AS 24

Ind AS 24 defines related parties broadly, including entities with control or significant influence, key managerial personnel (KMP), and close family members.

Disclosure requirement:

• All related party transactions must be disclosed in the financial statements.

• Crucially, transactions that occurred before the related party relationship arose but remain outstanding as at 31 March must also be disclosed as related party transactions.

Interpretation:

• The standard emphasizes substance over form, requiring disclosures based on the situation at the reporting date.

• If a loan or advance exists at year-end with a party that became related subsequently, it’s treated as a related party transaction.

Importance:

• This prevents under-reporting of related party exposures and ensures stakeholders have a complete picture.

• Failure to disclose may lead to audit qualifications or regulatory observations.

2. DPT-3 Filing Under the Companies Act, 2013

DPT-3 requires companies to disclose loans, deposits, and advances outstanding as on 31 March, including those given to related parties.

Key points:

• All outstanding loans/advances to related parties as on the balance sheet date must be reported in DPT-3.

• Timing of the transaction (pre or post related party relationship) does not exempt disclosure if the amount is outstanding as at 31 March.

Consequences:

• Incorrect or omitted disclosures can lead to penalties of ₹1,000 per day up to ₹10 lakhs.

3. Tax Audit and Transfer Pricing Compliance

Under the Income Tax Act:

• Companies and firms exceeding specified turnover limits must undergo tax audits.

• Tax auditors must report related party transactions and outstanding balances in Form 3CD (Clause 27).

• Transfer pricing rules require documentation for certain related party transactions to ensure they are at arm’s length.

Interpretation:

• Outstanding balances with parties who became related after the transaction date but before the year-end must be disclosed as related party transactions.

• This ensures consistency with financial reporting and DPT-3 filings.

Risks:

• Non-disclosure or incorrect reporting can result in penalties and reassessment by tax authorities.

4. Comparison Summary of Disclosure Requirements

Compliance Aspect	Ind AS 24 (Financial Statements)	DPT-3 (Companies Act Filing)	Tax Audit & Transfer Pricing (Income Tax)
Definition of Related Party	Control, significant influence, KMP, relatives	Same as Ind AS 24	Same + specified transactions
Pre-relationship Transactions	Disclose if balance outstanding at 31 March	Report if outstanding at 31 March	Disclose outstanding balances in Form 3CD
Post-relationship Transactions	Disclose fully	Report fully	Disclose fully
Penalties for Non-Compliance	Audit qualifications, regulatory action	₹1,000/day penalty (up to ₹10 lakh)	Penalties under Sections 271AA, 271G, 92D

5. Practical Example

Scenario:
Company A lent ₹5 crore to Company B in January 2025. The two companies became related parties in March 2025. The loan remains unpaid as of 31 March 2025.

Application:

• Ind AS 24: Disclose ₹5 crore loan as a related party transaction in financial statements, noting timing of relationship establishment.

• DPT-3: Report ₹5 crore outstanding loan under related party loans/advances.

• Tax Audit: Include ₹5 crore under related party transactions in Form 3CD.

6. Best Practices to Ensure Compliance and Avoid Defaults

• Maintain an updated related party register reflecting current relationships as at 31 March.

• Keep detailed transaction records and outstanding balances with dates and nature of transactions.

• Cross-check disclosures for consistency across financial statements, DPT-3 filing, and tax audit reports.

• Include clear explanatory notes regarding pre-relationship transactions and outstanding balances.

• Foster collaboration among finance, legal, and tax teams to harmonize interpretations and reporting.

• Seek professional advice when uncertain about complex relationships or transactions.

7. Checklist for Year-End Related Party Transaction Disclosures

Step	Action Point	Reference/Remarks
1. Identify Related Parties	Update list as per control/influence and KMP status	Ind AS 24, Companies Act, Income Tax definitions
2. Review All Transactions	Check transactions and balances with identified parties	Include loans, advances, purchases, sales, fees
3. Determine Transaction Timing	Categorize pre- and post-relationship transactions	Important for disclosure clarity
4. Confirm Outstanding Balances	Confirm balances as at 31 March	Ind AS 24 requires disclosure if outstanding
5. Prepare Financial Statement Disclosures	Disclose all RPTs and outstanding balances	Follow Ind AS 24 disclosure format
6. Prepare DPT-3 Filing Data	Include all loans/deposits/advances to related parties	Submit by 30 June to MCA
7. Prepare Tax Audit Report (Form 3CD)	Disclose all related party transactions and balances	Submit by 30 September to Income Tax Department
8. Add Explanatory Notes	Clarify timing and nature of pre-relationship transactions	Helps auditors and tax authorities
9. Review for Consistency	Cross-check all disclosures across filings and reports	Avoid mismatches that raise red flags
10. Obtain Professional Review	Consult auditors or tax advisors if necessary	Ensures compliance and reduces risk

Conclusion

For robust compliance and to avoid penalties, businesses must carefully identify and disclose all related party transactions outstanding at year-end, irrespective of whether those transactions occurred before or after the related party relationship was established.

Coordinated disclosure under Ind AS 24, DPT-3, and Tax Audit requirements ensures transparency and strengthens corporate governance.

Intangible Assets- Compliance Strategies & Case Studies

Introduction

Intangible assets play a crucial role in financial reporting, offering insights into a company’s intellectual and creative wealth. However, their correct recognition, measurement, and disclosure present challenges. The Financial Reporting Review Board (FRRB) of ICAI has observed various discrepancies in financial statements concerning compliance with Indian Accounting Standards (Ind AS), particularly Ind AS 38 on intangible assets.

Leading corporations like Infosys and TCS have successfully leveraged intangible assets such as proprietary software and patents to enhance their market value. In contrast, companies that fail to provide adequate disclosures often face regulatory scrutiny and investor skepticism. Improper reporting of intangible assets can lead to financial misstatements, negatively impacting stock valuations and stakeholder confidence.

This article presents key observations by the FRRB and provides guidance on ensuring compliance, supported by real-world examples and a case study.

Observations on Intangible Assets

Inadequate Disclosure of Goodwill

Observation

Many financial statements reflect substantial goodwill but fail to disclose its origin. Internally generated goodwill should not be recognized as an asset under Ind AS 38. If goodwill is acquired through a business combination, relevant disclosures under Ind AS 103 are mandatory but often missing.

Relevant Provisions

• Ind AS 38 - Intangible Assets: "Internally generated goodwill shall not be recognised as an asset."

• Ind AS 103 - Business Combinations: Mandates detailed disclosure of goodwill reconciliation for material business combinations.

Implication & Guidance

Companies must clearly disclose the source of goodwill and comply with impairment testing requirements under Ind AS 36. Failure to do so may result in non-compliance penalties and financial misstatements. If goodwill arises from a business combination, detailed disclosures as per Ind AS 103 should be incorporated.

Example: TCS Limited’s consolidated financial statements for FY 2023-24 correctly disclosed goodwill acquired under business combinations, ensuring transparency.

Misclassification of Research and Development (R&D) Expenditure

Observation

Some financial statements classify R&D expenses as either revenue or capital expenditure without distinguishing between research and development phases. Ind AS 38 requires research costs to be expensed immediately, while development costs may only be capitalized if specific conditions are met.

Relevant Provisions

• Ind AS 38 - Intangible Assets: "No intangible asset arising from research shall be recognised. Expenditure on research shall be recognised as an expense when incurred."

• Ind AS 38 - Intangible Assets: Lists conditions under which development costs can be capitalized.

Implication & Guidance

Companies should correctly classify R&D expenses—research costs must be expensed, and development costs should only be capitalized if all Ind AS 38 conditions are met. Misclassification can lead to misrepresentation of financial performance and asset values. Clear R&D accounting policies should be disclosed in annual reports.

Example: A pharmaceutical company developing a new drug can only capitalize development expenses if clinical trial success is probable and the drug has regulatory approval pathways.

Non-Disclosure of Intangible Assets Reconciliation

Observation

A company reported a significant increase in ‘Intangible Assets Under Development’ but did not disclose a reconciliation of carrying amounts at the beginning and end of the period, as required under Ind AS 38.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires disclosure of reconciliation showing additions, disposals, revaluations, and impairment losses.

Implication & Guidance

Companies must ensure proper reconciliation of intangible assets in financial statements. Clearly distinguishing between internally generated and acquired assets enhances investor understanding and compliance with regulatory requirements.

Example: Infosys Limited’s standalone financial statements for FY 2023-24 correctly provided a reconciliation of intangible assets.

Omission of Amortization Method and Useful Life

Observation

A company recognized software as an intangible asset but did not disclose the amortization method and useful life, violating Ind AS 38 requirements.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires disclosure of amortization methods and useful life for each class of intangible assets.

Implication & Guidance

To ensure compliance, companies must disclose the amortization method and useful life of intangible assets. These disclosures are crucial for assessing asset valuation and future financial performance.

Example: Infosys Limited’s FY 2023-24 financial statements correctly disclosed the amortization method and useful life for acquired software.

Lack of Clarity on Internally Generated vs. Acquired Intangible Assets

Observation

Some companies recognize intangible assets like software, memberships of corporate networks, customer contracts, and brand trademarks but do not specify whether they were internally generated or acquired.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires entities to distinguish between internally generated and acquired intangible assets.

Implication & Guidance

Companies must explicitly state whether their intangible assets are internally generated or acquired. This disclosure ensures compliance with Ind AS 38 and provides investors with clarity on asset valuation and financial decision-making.

Best Practices for Compliance

1. Ensure Comprehensive Disclosures: Companies should provide complete and clear disclosures of intangible assets, including goodwill, amortization methods, and R&D expenses.

2. Maintain Proper Classification: Clearly differentiate between research and development expenses, internally generated and acquired assets, and various intangible asset classes.

3. Conduct Regular Impairment Testing: Periodically assess the recoverable value of goodwill and other intangible assets to prevent overstatement.

4. Implement Strong Internal Controls: Establish governance frameworks to ensure compliance with Ind AS 38 and other applicable standards.

5. Provide Reconciliation of Intangible Assets: Include a reconciliation statement in financial reports to enhance transparency and compliance.

Case Study: Leveraging Intangible Assets for Business Growth

Company: XYZ Tech Solutions Pvt. Ltd.

Scenario: XYZ Tech Solutions developed a proprietary AI-based software and acquired premium memberships in corporate networks, significantly increasing its valuation. Initially, it expensed all software development costs and membership fees. However, after meeting Ind AS 38 recognition criteria, it capitalized later-stage development costs and classified network memberships as intangible assets.

Challenges Faced:

• Unclear differentiation between research and development expenses.

• Inadequate disclosure of goodwill from acquired startups.

• Lack of an amortization policy for software and memberships.

Corrective Actions Taken:

1. Implemented a structured R&D expense classification system.

2. Disclosed goodwill reconciliation and its impact on valuation.

3. Clearly defined the software’s useful life, membership amortization period, and disclosure policies in financial statements.

The company’s revised disclosures improved investor confidence, facilitated better financial planning, and ensured regulatory compliance. Proper disclosure and classification of intangible assets enhance investor confidence and regulatory compliance. Adhering to Ind AS 38 helps prevent financial misstatements and legal repercussions. Strong governance and internal controls are essential for maintaining compliance with financial reporting standards. By proactively addressing these challenges, organizations can mitigate risks, ensure reliable financial statements, and strengthen their market credibility.

Seamless Year-End Closing: Ensuring Accuracy, Compliance & Business Growth

As the financial year-end approaches, businesses must proactively finalize their financial statements, ensuring compliance, risk management, and operational efficiency. While auditors provide independent verification, management holds the primary responsibility for maintaining accurate records, implementing internal controls, and ensuring financial discipline. Auditors do not possess magic wands—a well-structured financial closing process requires a meticulous and collaborative approach between management and auditors.

A structured financial closure helps businesses avoid penalties, mitigate risks, and strengthen investor confidence. This guide provides exhaustive checklists—separately for management and auditors—to finalize financial statements on time, with accuracy, and without compliance failures.

Why Year-End Financial Planning Matters

For Management:

• Ensures regulatory compliance and prevents last-minute stress.

• Enhances strategic decision-making through financial insights.

• Improves financial transparency, credibility, and investor confidence.

• Mitigates risks of errors, penalties, fraud, and operational inefficiencies.

For Auditors:

• Ensures timely access to accurate and complete financial data.

• Reduces audit risk through structured internal controls.

• Facilitates a seamless, well-coordinated, and efficient audit process.

• Strengthens the company’s governance and financial credibility.

Checklist for Management: Ensuring a Smooth Year-End Closing

Task	Priority	Remarks/Status
Strengthening Internal Controls & Automation
Implement an ERP system for automated financial reporting	High	In Progress
Ensure segregation of duties to prevent fraud and errors	High	Pending Review
Conduct monthly reconciliations of bank accounts, ledgers, and trial balances	High	Completed
Review and update internal policies on procurement, payroll, and revenue recognition	Medium	In Progress
Tax & Statutory Compliance
Ensure timely payment and reconciliation of GST, TDS, and advance tax	High	Pending Approval
Verify Form 26AS, GST returns, and TDS deductions for accuracy	High	Completed
Complete Transfer Pricing documentation (if applicable)	Medium	In Progress
Ensure employee tax compliance, including PF, ESIC, and professional tax	Medium	To Be Verified
Ensure readiness for CARO 2020 and Internal Financial Controls (IFC) reporting compliance	High	In Progress
Inventory Valuation & Physical Verification
Conduct year-end physical stock audits and reconcile discrepancies	High	Pending
Obtain third-party confirmations for inventory held by external parties	Medium	In Progress
Ensure correct valuation method application (FIFO, weighted average, etc.)	High	Completed
Finalization of Accounts & Financial Statements
Ensure proper cutoff procedures for revenue and expense recognition	High	Pending
Reconcile all intercompany transactions and related-party dealings	High	Completed
Prepare financial statements in compliance with IND-AS/GAAP	High	In Progress
Ensure disclosure of all contingent liabilities and provisions	Medium	Pending Approval
Audit Preparedness & Coordination
Provide auditors with prior year financials, policies, and reconciliations	High	Pending Submission
Address audit queries proactively and resolve open issues from previous audits	High	In Progress
Inform Board of Directors and Audit Committee of key financial issues	Medium	Pending Review
Finalize subsequent event disclosures as per reporting standards	High	In Progress

Checklist for Auditors: Ensuring Compliance and Accuracy

Task	Priority	Remarks/Status
Pre-Audit Planning & Risk Assessment
Review and assess internal financial controls implemented by management	High	In Progress
Identify key risk areas and high-value transactions for detailed examination	High	Completed
Communicate audit timelines, data requirements, and expectations with management	High	Pending
Verification & Audit Procedures
Perform substantive testing on revenue, expenses, and financial adjustments	High	In Progress
Verify asset valuation and ensure depreciation/amortization compliance	High	Pending
Review statutory payments, tax compliance, and reconciliation with Form 26AS	High	Completed
Examine related-party transactions for regulatory compliance	Medium	In Progress
Conduct physical verification of inventory and fixed assets	High	Pending
Ensure compliance with CARO 2020 and IFC reporting requirements	High	In Progress
Audit Reporting & Finalization
Discuss audit observations with management and obtain explanations	High	Pending Discussion
Finalize the auditor’s report, including qualifications or emphasis matters	High	In Progress
Ensure proper documentation of audit working papers	High	Completed
Submit final audit report and financial statements to regulatory authorities	High	Pending Submission

Critical Compliance Deadlines Before Year-End

Compliance Requirement	Due Date
GST Annual Return (GSTR-9)	31st December
TDS Return (Q4)	31st May
Income Tax Filing for Companies	30th September
Transfer Pricing Report (Form 3CEB)	31st October
Statutory Audit Completion	30th September

📌 Missing these deadlines can result in heavy penalties, interest liabilities, and increased scrutiny from regulatory authorities.

Post-Audit Action Plan: Strengthening Financial Governance

✅ Analyze audit findings and implement corrective measures within 60 days.
✅ Automate risk assessment and compliance tracking to prevent future lapses.
✅ Establish a year-round internal review mechanism to ease year-end pressure.
✅ Strengthen governance by leveraging data analytics for financial monitoring.
✅ Initiate early discussions with auditors for seamless future audits.

Common Pitfalls to Avoid

🚨 Delays in reconciliations and documentation leading to audit challenges.
🚨 Non-compliance with GST/TDS due dates causing penalties and interest.
🚨 Lack of internal coordination between finance, tax, and legal teams.
🚨 Unrecorded liabilities or revenue affecting financial accuracy.
🚨 Failure to respond to auditor queries on time, leading to extended timelines.

A Well-Structured Year-End Closing Drives Business Excellence

Year-end financial closing is not just a statutory requirement—it’s a strategic necessity. Management must take charge of internal controls, data integrity, and compliance, while auditors validate the financial position through independent assessment. By integrating technology, maintaining transparency, and proactively addressing compliance requirements, businesses can ensure a smooth financial closing and a stronger foundation for future growth.

Essential GST Reconciliations and Compliance Checklist for FY 2024-25

Key GST Reconciliations

At the end of the financial year 2024-25, businesses must conduct the following reconciliations to ensure accurate GST filings and compliance:

Sr. No	Reconciliation	Purpose	Remarks
1	GSTR-3B vs. Books of Accounts	Identifies discrepancies and ensures accurate records.	Regular review prevents tax liability issues.
2	GSTR-2B vs. GSTR-3B	Monthly matching is legally mandated.	Ensures correct ITC claims and avoids mismatches.
3	E-way Bill vs. GSTR-1 (Sales)	Helps detect unreported sales and tax evasion.	Important for audit compliance.
4	E-way Bill vs. Books (Purchase)	E-way Bill is proof of delivery; ensures ITC validity.	Helps prevent disputes on ITC claims.
5	Import IGST vs. GSTR-2B	Ensures ITC is claimed only if IGST is paid.	Avoids ineligible ITC claims.
6	E-invoice Reconciliation for Sales	Mandatory for businesses with turnover > ₹5 Cr.	Non-compliance may lead to penalties.
7	E-invoice Reconciliation for Purchase	No ITC without a valid e-invoice.	Ensures seamless ITC credit.
8	26AS/AIS-TIS vs. Books vs. GSTR-1	Reconciles income with government records.	Excess TDS means excess income declared.
9	TDS and TCS Reconciliation with Books	Ensures tax deductions are correctly reflected.	Prevents errors in tax filing.
10	GSTR-1 vs. Sales Register	Identifies discrepancies in reported sales.	Helps avoid notices from tax authorities.
11	Books vs. Electronic Cash Ledger	Ensures cash balance reconciliation.	Reduces cash flow mismatches.
12	Books vs. Electronic Credit Ledger	Ensures accurate credit utilization.	Prevents errors in ITC claims.
13	Table 5O of GSTR-9C vs. Books	Reconciles sales for annual return filing.	Ensures accurate turnover reporting.

Key ITC Compliance Checks

To ensure proper ITC claim and GST compliance, businesses should review the following:

Action Point	Description	Remarks
Ineligible ITC in GSTR-2B	Review ITC bifurcation in GSTR-2B and maintain records for ineligible ITC.	Essential for audit purposes.
No ITC on provisionally booked expenses	ITC should not be claimed on provisional entries.	Prevents non-compliance with GST rules.
Reversal of ITC under Rule 42/43	ITC reversal must be computed and paid by March GSTR-3B.	Avoids interest liability.
ITC Reversal for unpaid invoices	If invoices remain unpaid beyond 180 days, ITC must be reversed.	Critical for compliance to avoid penalties.
ITC Reversal for rejected goods/services	ITC should be reversed for returned or cancelled purchases.	Prevents undue credit claims.
ITC Blocked across locations	Analyze ISD and cross-charge mechanisms to unblock ITC.	Ensures smooth credit utilization.

Key Checks for Job Work Compliance

Action Point	Description	Remarks
Reconciliation of goods sent to job workers	Goods sent before 1st April 2024 must be received back within 1-3 years.	Avoids tax liability on unreturned goods.

Financial Statement Considerations

Action Point	Description	Remarks
Valuation of closing stock and ITC calculations	ITC on stock, consumables, and semi-finished goods should be assessed.	Ensures correct closing stock valuation.
Inventory reconciliation	Compare physical inventory with books to check for losses or theft.	Essential for financial accuracy.
Fixed asset verification	Review physical verification of assets and adjust records accordingly.	Prevents discrepancies in financial statements.

Related Party Transactions Compliance

Action Point	Description	Remarks
Valuation of related party transactions	Follow prescribed valuation methods under Rule 28.	Prevents tax underreporting.
Open market value (OMV) check	Verify that declared values meet OMV standards.	Avoids potential tax disputes.

Critical Deadlines and Actions Before 31st March 2025

Action Point	Description	Remarks
Hotel Tax Rate Declaration	Hotels must declare tax rate options to the jurisdictional authority.	Ensures compliance with tax structure.
ITC Reversal on Construction Expenses	Review ITC claims based on the Safari Retreats judgment.	Prevents non-compliance risks.
GST Amnesty Scheme under Section 128A	Waiver of interest/penalties on tax dues (2017-2020) if paid before March 31, 2025.	Helps businesses reduce tax liabilities.
Annexure V for GTA	GTA providers must submit Annexure V by 15th March for forward charge tax option.	Ensures smooth compliance with GST rules.
ISD Registration and RCM ITC Distribution	Mandatory ISD registration for businesses availing common ITC.	Prevents ITC losses and enhances credit flow.

This checklist ensures businesses stay compliant with GST regulations and avoid penalties. Reviewing these action points before the financial year-end will help maintain accurate records and optimize tax planning.

Accounting, Taxation, and Disclosure of Futures & Options (F&O) Transactions

Futures and Options (F&O) transactions demand a structured and professional approach to ensure accurate accounting, tax compliance, and optimal tax treatment. Given the complexity and dynamic nature of F&O trading, meticulous attention to detail is crucial when finalizing financial statements. Below is an exhaustive guide, incorporating best practices for F&O transactions, with analytical insights into critical aspects of accounting and taxation.

1. Accounting for Futures & Options (F&O) Transactions

(i) At the Inception of a Contract:

When entering into an F&O contract, the initial margin paid must be recorded to establish the contractual obligation. This step is fundamental as it impacts the liquidity position of the entity and influences subsequent margin calls and settlements.

Journal Entry:

• When the initial margin is paid:

  Account	Debit (₹)	Credit (₹)
  Initial Margin - Equity Index Futures Account	Amount	Bank Account

Additional margin payments, if required by the exchange or broker, should be recorded similarly.

Balance Sheet Treatment:

• The Initial Margin is classified as Current Assets since it represents a cash outflow that is recoverable once the contract is settled.
• Excess margin paid can be treated as a Deposit under Current Assets, allowing for transparency in liquidity planning.
• When margins are lodged in the form of securities or guarantees, this should be disclosed clearly in the Notes to Accounts, highlighting potential risks and contingent liabilities.

(ii) Daily Settlement (Mark-to-Market Adjustments):

The daily fluctuations in the value of open F&O positions require mark-to-market (MTM) adjustments. Proper MTM accounting is essential for determining the net exposure and understanding potential gains or losses at any given point.

Journal Entry:

• When MTM margin is paid or received:

  Account	Debit (₹)	Credit (₹)
  Mark-to-Market Margin - Equity Index Futures Account	Amount	Bank Account

• For a lump-sum MTM margin deposit:

  Account	Debit (₹)	Credit (₹)
  Deposit for Mark-to-Market Margin Account	Amount	Bank Account

• Subsequent payments to the MTM account:

  Account	Debit (₹)	Credit (₹)
  Mark-to-Market Margin - Equity Index Futures Account	Amount	Deposit for MTM Margin Account

Balance Sheet Treatment:

• The Deposit for MTM Margin Account is disclosed under Current Assets.
• Any debit or credit balance in the Mark-to-Market Margin - Equity Index Futures Account should be disclosed as Current Assets or Current Liabilities, depending on whether the balance is positive or negative.

(iii) Open Positions at Year-End:

At the year-end, the entity must assess the open F&O positions to determine whether provisions for anticipated losses or unrealized gains are required.

Provision for Anticipated Losses:

• Debit balances in the MTM account represent unrealized losses, which require a provision for anticipated losses to ensure that the financial statements reflect a true and fair view of the entity’s financial position.

Journal Entry:

Account	Debit (₹)	Credit (₹)
Profit & Loss Account	Amount	Provision for Loss Account

Note on Unrealized Profits:

• Unrealized profits should not be recognized in the financial statements, aligning with the conservative accounting principle. These profits must only be recorded when they are realized through settlement or squaring off of the positions.

(iv) Final Settlement/Squaring Off of Contracts:

The final settlement of F&O positions marks the conclusion of the contract, at which point all outstanding balances must be cleared, and any resulting profit or loss must be recognized.

Journal Entry for Profit/Loss:

• At final settlement (Profit or Loss):

  Account	Debit (₹)	Credit (₹)
  Mark-to-Market Margin - Equity Index Futures Account	Amount	Profit & Loss Account

Release of Initial Margin:

• Upon contract closure, the initial margin is refunded:

  Account	Debit (₹)	Credit (₹)
  Bank Account	Amount	Initial Margin - Equity Index Futures Account

FIFO Method for Squaring Off:

• The FIFO method (First In, First Out) is the recommended approach for determining the sequence of contract closings, especially in situations where multiple contracts are open at the same time. FIFO ensures that the oldest positions are closed first, offering a consistent approach for valuation and taxation.

2. Provision and Disclosure in Financial Statements at Finalization of Open Transactions

When finalizing open F&O positions, the following considerations must be addressed:

1. Provision for Losses:

   • Debit balance in the MTM account signifies that losses are expected to materialize in the future. A provision must be created for anticipated losses to reflect a conservative estimate of the entity’s exposure.

2. Unrealized Gains:

   • Unrealized gains should not be recognized in the income statement, as the realization of profits is contingent on the closure of open positions. However, these must be disclosed in the Notes to Accounts as contingent gains.

Disclosure in Notes to Accounts:

• Detailed disclosures should be made regarding the open positions, the rationale behind provisions for anticipated losses, and the treatment of unrealized gains. This provides transparency to auditors, regulators, and stakeholders.

3. Calculation of Turnover for Tax Purposes

F&O turnover plays a critical role in determining tax liability and ensuring compliance with tax audit requirements. The turnover for F&O transactions is calculated by summing up the absolute values of profits, losses, premiums received, and reverse trades.

Transaction Type	Turnover Calculation
Profits from F&O transactions	Absolute value of profits from contracts
Losses from F&O transactions	Absolute value of losses from contracts
Premium received on option writing	Total premium received
Reverse trades	Difference between purchase and sale price of contracts

Example:

Description	Amount (₹)
Profit on contract A	50,000
Loss on contract B	40,000
Premium on option writing	10,000
Total Turnover	1,00,000

4. Taxability of F&O Transactions

F&O transactions are taxed as business income (non-speculative), and losses can be set off against other heads of income (excluding salary). Key tax considerations include:

Aspect	Details
Nature of Income	Business income (non-speculative)
Set-off and Carry Forward	Losses can be set off against any other income (except salary) and carried forward for 8 years
Deduction for STT Paid	Not deductible under Sections 36 or 37 of the Income Tax Act
Tax Audit Threshold (AY 2024-25)	₹10 crores for 95% or more digital transactions; otherwise ₹1 crore

Example of Loss Set-Off:

Description	Amount (₹)
Business Income	5,00,000
Loss from F&O	2,00,000
Net Taxable Business Income	3,00,000

Unutilized losses can be carried forward for up to 8 assessment years.

5. Disclosures in Income Tax Return (ITR)

To ensure compliance with tax laws, traders must report F&O transactions accurately in their income tax return. Key forms and schedules for disclosure include:

Schedule/Form	Details to be Reported
ITR-3 or ITR-4	F&O transactions as business income
Schedule BP	Profit/loss from F&O transactions
Schedule P&L	Breakup of income and expenditure related to F&O
Balance Sheet	Margins paid, receivable, and payable balances
Tax Audit Report	Report turnover, profit/loss, and adherence to accounting standards (Form 3CD)

6. Compliance with Maintenance of Books of Accounts

F&O traders must maintain proper books of accounts to ensure compliance with tax laws and prevent disputes during audits.

Category	Requirement
Turnover < ₹10 lakhs & Income < ₹1.2 lakhs	Exempt from maintaining books under Section 44AA(2)
Above thresholds	Mandatory to maintain books (cash book, ledger, etc.)

7. Key Considerations for Optimal Tax Treatment

Key Consideration	Details
Audit Requirements	Ensure compliance with tax audit based on turnover thresholds
Loss Utilization	Plan to set off F&O losses against other income to minimize tax liability
Separate Accounts	Maintain clear, separate accounts for F&O transactions to simplify the audit process
Advance Tax Payments	Properly estimate F&O business income to avoid penalties under Sections 234B and 234C
Digital Transactions	Leverage digital transactions to take advantage of higher tax audit thresholds

8. Accounting Software for F&O Transactions

To streamline accounting and ensure seamless tax reporting, F&O traders can leverage specialized accounting software.

Software	Features
Tally ERP 9/Prime	Customizable ledgers, automated P&L reports, integration with broker statements
Zoho Books	Cloud-based, real-time transaction tracking, GST compliance
QuickBooks	Expense tracking, reconciliation features for SMEs

Financial Insights - Combined and Carve-out Statements

 Introduction

In the realm of finance, accurate and informative financial statements are essential for businesses to convey their financial health and performance. While consolidated financial statements are commonly used to present the financial position of a group of companies, there are instances where combined and carve-out financial statements become invaluable. These specialized financial statements serve specific purposes and require a thorough understanding of their nuances to ensure accuracy and transparency. Let's delve into the intricacies of combined and carve-out financial statements to understand their significance and the circumstances in which they are prepared.

Understanding Combined and Carve-out Financial Statements

1. Combined Financial Statements: A Comprehensive View Combined financial statements involve aggregating the historical financial information of multiple businesses that do not form a legal group. These statements prove useful in scenarios where entities collaborate for specific purposes but do not have control over each other. Common examples include joint ventures, takeovers, or strategic partnerships. By combining financial data, stakeholders gain a comprehensive view of the collective performance of the participating entities, which aids in making informed decisions and assessing the overall financial health of the collaboration.

2. Carve-out Financial Statements: Isolating and Analyzing a Segment Carve-out financial statements focus on a specific part of an entity, such as a division, segment, or business activity, that is carved out from its overall operations. These statements become necessary during restructuring, spin-offs, demergers, or acquisitions when isolated financial presentation is required. Carve-out statements allow stakeholders to analyze the performance of the isolated segment separately, providing valuable insights into the financial standing and operational effectiveness of the particular division or business unit.

Circumstances Requiring Combined/Carve-out Financial Statements

Combined and carve-out financial statements are prepared in various critical scenarios:

• Combined Financial Statements:

  • During acquisition or disposition negotiations, where entities are not legally grouped but financial data is essential for evaluation and decision-making.
  • For filing requirements of entities like Real Estate Investment Trusts, Infrastructure Investment Trusts, etc., where combined financials are necessary to comply with regulatory norms.
  • When combined financials offer a more meaningful representation of commonly controlled entities, such as when multiple entities are managed by one or more individuals, and their financial information must be presented together.
  • For common loan arrangements involving multiple companies within the same group, where the lender requires a comprehensive view of the combined entities' financial position.

• Carve-out Financial Statements:

  • In cases of demergers, spin-offs, or corporate restructuring, where specific segments or divisions need individual financial presentation to facilitate the assessment of the viability and financial performance of the carve-out business.
  • For acquisitions, when potential acquirers require detailed financial information of a particular carve-out business to evaluate its worth and compatibility with their business objectives.

Preparation of Combined and Carve-out Financial Statements

• Combined Financial Statements for Multiple Entities: When combining several entities entirely, the process resembles that of preparing consolidated financial statements. Intra-group transactions are eliminated, and other adjustments are made to present a unified view of the combined entities' financial position, operating performance, and cash flows.

• Combined Financial Statements with Carve-out Businesses: Carve-out financial statements are prepared first for the relevant businesses. These statements are then combined with others using procedures similar to consolidated financial statements, ensuring seamless integration of financial data and maintaining consistency in accounting treatment.

• Preparation of Carve-out Financial Statements: Creating carve-out financial statements requires meticulous allocation of transactions and balances to the specific carve-out business. Suitable methods are adopted to allocate shared expenses and income between the carve-out business and the remaining entity. Full disclosure is made to ensure transparency and to facilitate the understanding of the carve-out business's financial performance in isolation.

Important Aspects and Disclosures

• Taxation: The determination of tax expenses depends on whether combining/carve-out businesses file separate tax returns or are part of a larger tax entity. Proper tax accounting ensures accurate financial reporting and compliance with tax regulations.

• Impairment: Impairment indicators are assessed independently for each reporting period, considering the position post combination. Impairment tests are crucial in providing a true and fair view of the asset's recoverable value.

• Transaction Costs: All costs related to transactions, such as advisory, legal, and accounting fees, are recognized as expenses in the periods incurred. Properly accounting for these costs ensures transparency and prevents misrepresentation of financial results.

• Capital: When legal capital is not determinable, presenting net asset value as capital provides stakeholders with insights into the underlying value of the carve-out business.

• Cash Flow Statements: Cash flow statements are prepared following applicable accounting standards using either direct or indirect methods. Clear and accurate cash flow reporting is essential for understanding an entity's ability to generate cash.

• Disclosures: Specific disclosures are made, including the purpose of preparation, list of combining/carve-out businesses, accounting policies, basis for allocation, critical assumptions, judgments, and estimates. Adequate disclosures ensure transparency and enable stakeholders to comprehend the financial statements effectively.

Conclusion

Combined and carve-out financial statements are valuable tools in specific financial scenarios, offering unique insights into the financial performance of entities or their individual segments. By understanding these specialized financial statements and the circumstances in which they are prepared, businesses can meet specific reporting needs and provide stakeholders with a comprehensive and informative view of their financial operations. Proper preparation and disclosure of these statements enable better decision-making and enhance the stakeholders' confidence in the accuracy and integrity of the financial information provided.