Form DPT-3: Due Date, Purpose, Return Date

What is Secretarial Audit?

A Secretarial Audit is an independent verification of a company’s compliance with corporate laws, rules, and regulations.

It helps companies to:

• Detect instances of non-compliance early.
• Promote good governance and transparency.
• Ensure that legal and procedural requirements are consistently met.

The audit is conducted by an independent professional, usually a Company Secretary (CS) holding a valid Certificate of Practice issued by the Institute of Company Secretaries of India (ICSI).

Secretarial Audit Applicability

Under the Companies Act, 2013, certain classes of companies are required to undergo a Secretarial Audit.

It is mandatory for:

• All Listed Companies.
• All Public Companies with:
  
  • Paid-up Share Capital of ₹50 crore or more, or
  • Turnover of ₹250 crore or more.
• All types of companies (including Private Companies) having outstanding borrowings of ₹100 crore or more from banks or financial institutions.

Secretarial Audit Report

The Secretarial Audit Report is the formal output of the audit process. It:

• Certifies whether the company is in compliance with applicable laws.
• Identifies any governance risks or gaps.
• Highlights areas of non-compliance and recommends corrective actions.

The report is prepared in Form MR-3, submitted to the Board of Directors, and included in the company’s Annual Report. As per Section 204 of the Companies Act, 2013, the audit can only be conducted and the report issued by a:

• Practising Company Secretary (PCS).
• Holding a valid Certificate of Practice from ICSI.

Scope of Secretarial Audit

The scope of a Secretarial Audit is broad and spans multiple laws, including but not limited to:

• Companies Act, 2013
• Securities Laws, including:
  
  • SEBI (LODR) Regulations
  • SEBI Takeover Code
  • SEBI Insider Trading Regulations
  • SEBI Listing Agreement
• Foreign Exchange Management Act (FEMA)
• Labour Laws
• Environmental Laws
• Industry-specific Regulations
• Secretarial Standards issued by ICSI

Additionally, the Secretarial Auditor also:

• Reviews the company’s systems and processes for compliance.
• Examines the Board structure and its functioning.
• May rely on reports from other professionals (auditors, legal counsel) for certain compliance areas.
  
  

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Eligibility Criteria for the Appointment of a Secretarial Auditor

To be appointed as a Secretarial Auditor, the individual must:

• Be a qualified Company Secretary (CS) and a member of ICSI.
• Hold a valid Certificate of Practice (CoP) issued by ICSI.
• Have undergone relevant training in corporate governance and compliance.
• Maintain professional ethics and conduct in line with ICSI guidelines.

Only a Practising Company Secretary (PCS) is authorised to conduct and issue a Secretarial Audit Report.

Process of Secretarial Audit

The typical step-by-step process for conducting a Secretarial Audit is:

1. Preparation of a Compliance Checklist:
   Based on applicable laws and regulatory frameworks.
   
   
2. Compliance Verification:
   The auditor examines the company’s records, registers, filings, and processes.
   
   
3. Management Interaction:
   Discusses preliminary findings and areas of concern with management.
   
   
4. Recommendations and Corrective Actions:
   Advises management on how to address any gaps or non-compliance issues.
   
   
5. Preparation of the Final Report (MR-3):
   The auditor formally documents observations and recommendations.
   
   
6. Filing and Disclosure:
   The report is submitted to the Board and included in the Annual Report as required.

Features of Company Secretarial Audit

A Secretarial Audit is distinguished by several key features:

• Independent Audit:
  Conducted by an external Practising Company Secretary.
  
  
• Comprehensive Scope:
  Covers company law, securities law, tax law, labour law, environmental law, and other applicable legal frameworks.
  
  
• Systematic & Evidence-Based:
  Based on a thorough review of records and procedures.
  
  
• Board-Level Reporting:
  Findings and recommendations are directly reported to the Board of Directors.
  
  
• Governance-Focused:
  Designed to strengthen the company’s corporate governance practices.

Punishment for Default Secretarial Audit

Non-compliance with Secretarial Audit provisions carries penalties under:

Section 204(4) of the Companies Act, 2013:

The company, every officer in default, and the PCS (if found guilty) are liable to a fine of up to ₹5 lakh.

Section 448 (False Statements):

• Imprisonment up to 10 years, and/or
• Fine up to ₹10 lakh for making false statements in the audit report.

The Company Secretaries Act, 1980:

Disciplinary action against the Company Secretary may include:

• Suspension or cancellation of the Certificate of Practice.
• Monetary penalties.
• Professional misconduct proceedings.

Objectives of Secretarial Audit

The key objectives of Secretarial Audit are:

• Ensure the company complies with legal and regulatory frameworks.
• Identify non-compliance issues before they become liabilities.
• Promote good corporate governance.
• Protect the interests of stakeholders- investors, employees, customers, and regulators.
• Help management take corrective actions proactively.
• Prevent penalties and legal actions for non-compliance.

Benefits of Secretarial Audit

Conducting a Secretarial Audit offers many advantages:

• Enhances the company’s compliance culture.
• Reduces legal risks and the likelihood of penalties.
• Supports better corporate governance and transparency.
• Increases stakeholder confidence- important for investors and regulators.
• Helps Directors and Management make more informed decisions.
• Facilitates continuous improvement in internal processes and systems.

Frequently Asked Questions

What Is Capital Redemption Reserve?

The Capital Redemption Reserve (CRR) is a special reserve that a company must create when it redeems (buys back) its preference shares using its profits. As per corporate law, companies must transfer an amount equal to the nominal value of redeemed preference shares to the CRR to prevent capital reduction and maintain financial integrity.

When Is Capital Redemption Reserve Used?

CRR is utilised in various financial scenarios to maintain corporate stability, including:

• Issuing bonus shares: CRR can be used to issue fully paid bonus shares to shareholders.
  
• Funding share redemption: Ensures funds are available for preference share redemption.
  
• Capital reconstruction: Helps restructure a company’s capital without impacting free reserves.
  
• Balancing capital losses: Used in cases where capital losses need adjustment.
  
• Source for share buybacks: Required when companies buy back shares using free reserves.
  

Redemption Of Preference Capital

The redemption of preference shares is subject to the following regulations:

• Must be permitted in the Articles of Association.
  
• Redeemable within 20 years of issue.
  
• Methods of redemption:
  
  • Using Distributable Profits: Requires CRR creation.
    
  • Issuing Fresh Shares: CRR creation is not required if new capital is issued.
    
• Shareholder Approval (75%): Required for further preference share issues.
  
• Premium Payment: This can be funded from company profits or the securities premium account.
  

Modes of Redemption

The three primary modes of redemption are:

1. Using Distributable Profits: CRR creation is mandatory, equal to the nominal value of redeemed shares.
   
2. Issuing Fresh Capital: If a company issues fresh capital equal to the redemption amount, CRR creation is not required.
   
3. Combination of Both: CRR is required only for the portion funded through distributable profits.
   

Modes of Redemption of Preference Shares

Companies can redeem (buy back) preference shares using one of the following methods:

1. Using Distributable Profits
   The company uses its retained earnings or other profits to redeem the shares. In this case, it must create a Capital Redemption Reserve (CRR) equal to the nominal value of the redeemed shares to maintain financial stability.
   
2. Issuing Fresh Capital
   The company raises funds by issuing new shares to replace the redeemed preference shares. Since this method does not reduce capital, creating a CRR is not required.
   
3. Combination of Both
   A company may use both profits and fresh capital for redemption. CRR is required only for the portion funded through distributable profits, while the part covered by fresh capital does not require CRR.

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Calculation and Accounting Entries For Capital Redemption Reserve

Calculation of CRR

CRR = Nominal Value of Redeemed Preference Shares (if using distributable profits)

Journal Entries

Application of Capital Redemption Reserve

• CRR can only be used for issuing fully paid bonus shares.
  
• CRR cannot be used for dividend distribution.
  
• CRR must exclude unrealised gains and self-generated intangible assets before determining free reserves.
  
• Classified as a statutory reserve, separate from revenue reserves.
  

Companies Act and Capital Redemption Reserve

• Section 55: Companies redeeming preference shares from profits must transfer an equivalent amount to CRR.
  
• Section 69: Companies buying back shares using free reserves or securities premiums must transfer an amount equal to the face value of bought-back shares to CRR.
  

Difference Between Capital Redemption Reserve and Other Reserves

Tax Benefits For Capital Redemption Reserve

Under Section 36(1)(viii) of the Income Tax Act, 1961, specified entities can claim a tax deduction on contributions to a Special Reserve, reducing their taxable income. The deduction is capped at 20% of profits from eligible business activities before applying this clause. However, any future withdrawal from the reserve is treated as taxable income in the year of withdrawal.

Importance Of Capital Redemption Reserve

• Maintains Financial Stability: Prevents a reduction in share capital.
  
• Protects Shareholders’ Interests: Ensures capital is available for redemption.
  
• Supports Capital Restructuring: Used in financial restructuring strategies.
  
• Ensures Legal Compliance: Meets regulatory requirements under the Companies Act.
  
• Enhances Investor Confidence: Used for issuing bonus shares, benefiting shareholders.
  

Final Thoughts

The Capital Redemption Reserve (CRR) plays a vital role in corporate finance by ensuring companies retain sufficient funds while redeeming preference shares. As a statutory reserve, it helps maintain financial stability, protects creditors' interests, and complies with legal requirements.

While it cannot be used freely like other reserves, its role in issuing fully paid bonus shares makes it a strategic asset for companies looking to optimise their financial position.

Frequently Asked Questions

Overview of Taxation for Proprietorships in India

In India, proprietorships are taxed as individual taxpayers under the Income Tax Act. The business income is added to the proprietor's total income and taxed according to the applicable individual tax slabs. Proprietors typically file their income tax returns using:

• ITR-3: For individuals and HUFs having income from a proprietary business or profession
  
• ITR-4 (Sugam): For those opting for the presumptive taxation scheme under sections 44AD, 44ADA, or 44AE
  

Taxpayers can choose between the old tax regime (with deductions and exemptions) or the new one (with lower tax rates but no exemptions).

Do Proprietorship Firms Need to File Income Tax Returns?

Yes, proprietors are legally obligated to file ITRs if their total income exceeds the basic exemption limit, which for FY 2024-25 is:

• ₹2.5 lakh for individuals below 60 years
  
• ₹3 lakh for senior citizens (60-80 years)
  
• ₹3.5 lakh for super senior citizens (above 80 years)
  

Even if the income is below the exemption limit, filing returns is necessary to carry forward business losses, to claim TDS refunds and if there are any foreign assets or income involved.

Importance of Filing Income Tax Returns for Proprietorship Firms

Beyond legal compliance, filing ITR offers several advantages:

• Financial Credibility: Enhances your chances of securing loans, credit lines, or business investments
  
• Business Growth: Essential for bidding in tenders and expanding operations
  
• Avoiding Penalties: Non-filing attracts penalties and interest under the Income Tax Act
  
• Refund Claims: Enables claiming refunds on excess TDS deducted
  

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Tax Audit for Proprietorship

A tax audit is a review of accounts to ensure accuracy and compliance with tax laws. For proprietorships, audit requirements apply if:

• Turnover exceeds ₹1 crore (business)
  
• Gross receipts exceed ₹50 lakh (profession)
  
• Turnover exceeds ₹10 crore if 95% of payments and receipts are digital
  

Non-compliance with tax audit provisions can attract a penalty under Section 271B, which can be up to 0.5% of turnover or a maximum of ₹1.5 lakh.

Presumptive Taxation Scheme: A Simplified Option for Small Proprietors

To ease compliance for small taxpayers, the Income Tax Act offers presumptive taxation schemes:

• Section 44AD: For small businesses with turnover up to ₹2 crore (to be extended to ₹3 crore from AY 2025-26 if cash transactions are below 5%)
  
• Section 44ADA: For professionals with receipts up to ₹50 lakh
  
• Section 44AE: For those involved in the business of transportation
  

ITR Guidelines for Proprietorship Firms – Union Budget 2024–25 Insights

The Union Budget 2024 brought several important changes aimed at easing compliance, promoting transparency, and offering relief to taxpayers, especially for salaried individuals and businesses.

Here's a quick overview of key updates relevant to individual taxpayers and proprietorships:

1. Increased Standard Deduction Under the New Tax Regime

To offer more relief to salaried individuals, the standard deduction under the new tax regime has been increased from ₹50,000 to ₹75,000.

2. Reduced TDS Rates on Specified Payments

The budget has also reduced the Tax Deducted at Source (TDS) rates on certain specified payments to improve ease of doing business and simplify compliance for both payers and recipients. This change will benefit small and mid-sized businesses by easing their cash flow and lowering the burden of upfront tax deduction.

3. Government Scheme for First-Time Entrepreneurs

The Union Budget 2024 introduced a new loan scheme to support first-time entrepreneurs. The scheme aims to promote inclusive entrepreneurship and boost India’s startup ecosystem.

Proprietorship Tax Rate & Surcharge AY 2025-26 | FY 2024-25

Under the New Regime

Under the Old Tax Regime

Deadline for Proprietorship ITR Filing

• Non-audited firms: July 31st of the assessment year (AY)
  
• Audited firms: October 31st of the assessment year (AY)
  

For AY 2025-26:

• Non-audited deadline: July 31, 2025
  
• Audited deadline: October 31, 2025
  

List of Documents Needed for Proprietorship Income Tax Return Filing

• PAN card of the proprietor
  
• Aadhaar card
  
• Bank account statements
  
• Profit & Loss statement
  
• Balance sheet
  
• GST returns (if registered)
  
• TDS certificates (Form 16A/26AS)
  
• Sales invoices and purchase bills
  
• Expense receipts
  
• Investment proofs for claiming deductions (under the old regime)
  

How to File an Income Tax Return for a Proprietorship (Step-by-Step Guide)

Here's a simple, step-by-step guide to help you file accurately and on time:

Step 1: Choose the Right ITR Form

• ITR-3: For proprietors with regular business or professional income
  
• ITR-4: For those opting for the Presumptive Taxation Scheme under Sections 44AD, 44ADA, or 44AE
  

Step 2: Prepare Financial Information

• Compile key documents
  
• Calculate your total income and tax liability
  
• Claim eligible deductions (only under the old regime).
  
• Verify TDS credits and advance tax paid.
  

Step 3: Log into the Portal

• Visit the Income Tax e-Filing portal
  
• Log in using your PAN and password.
  

Step 4: Submit the Return

• Select Assessment Year 2025–26 and the appropriate ITR form (ITR-3 or ITR-4)
  
• Enter all relevant details—income, deductions, taxes paid, etc
  
• Validate and submit the return
  
• E-verify using Aadhaar OTP, bank account, or DSC
  

Step 5: Download

• Download the acknowledgement (ITR-V) and save it for your records.
  

Conclusion

Running a proprietorship already comes with a long to-do list, and filing your income tax return might feel like just another box to check. But here’s the truth: Filing your ITR on time helps you stay on the right side of the law, but it also unlocks serious advantages like improved loan eligibility, smoother business expansion, and better financial credibility.

That’s why choosing the right ITR form (like ITR-3 or ITR-4), keeping your documents ready, and understanding your tax regime can save you a lot of future headaches.

Don’t wait until the last minute- start organising your financials today and file your ITR on time to stay ahead, stay compliant, and build a more credible, growth-ready business.

Frequently Asked Questions