Chapter 20: Tax Audit & Ethical Compliances
Exhaustive study notes covering mandatory tax audit under Section 63 of the Income-tax Act, 2025 (formerly Section 44AB), the ₹10 Crore safe harbour scheme for non-cash businesses, complete clause-by-clause reporting requirements in Form No. 26 (Parts A, B, C & D, Clauses 1 to 53), MSME delayed payment disallowance under Section 43B(h) / Clause 33, mandatory administrative late fees under Section 428(c), and ethical responsibilities and disciplinary liabilities of Chartered Accountants under the Chartered Accountants Act, 1949.
1. Overview, Legislative Objectives & Other Audit Reports under the 2025 Act
Tax Audit was originally introduced into Indian tax jurisprudence with effect from 1st April, 1985 (under Section 44AB of the 1961 Act) to assist revenue authorities in computing taxable income from books maintained in the ordinary course of business. Under the Income-tax Act, 2025, the statutory framework of tax audit is codified under Section 63 read with Rule 47 and the newly unified Form No. 26.
- Proper Bookkeeping: Ensures that books of account and other statutory records are properly maintained, audited, and faithfully reflect taxable income.
- Verification of Deductions & Claims: Enables systematic verification of claims for allowances, deductions, and tax exemptions, curbing artificial inflation of expenditure.
- Checking Tax Evasion: Deters fraudulent transactions, cash manipulations, unrecorded sales, and sham loans/deposits.
- Facilitating Administration: Minimizes routine routine inquiry and verification during assessment, saving administrative time and preventing repetitive inquiries.
Indian courts have consistently recognized the paramount sanctity of tax audit reports issued by Chartered Accountants:
The Bombay High Court held that it is quite competent for the income-tax authorities not only to accept the tax auditor’s report, but also to place immense reliance upon it for framing assessments.
Where the original books of account were destroyed in a fire, the Court held that assessment framed on the basis of the auditor’s report was completely valid in law.
In addition to Section 63, the Income-tax Act, 2025 incorporates multiple specific provisions requiring mandatory audits, certificates, or reports by a Chartered Accountant:
| Section | Nature of Audit / Statutory Requirement | Prescribed Form / Report | Statutory Purpose & Impact |
|---|---|---|---|
| Section 63 | Mandatory Tax Audit of Business or Profession exceeding prescribed turnover limits. | Form No. 26 (Parts A/B/C/D) | General compliance, verification of allowances, disallowances, and cash transactions. |
| Section 348 | Mandatory Audit of Registered Non-Profit Organisations (NPOs / Charitable Trusts). | Form No. 10B / 10BB | Condition precedent for claiming tax exemption under Sections 337 to 347. |
| Section 46 | Audit of Capital Expenditure incurred for Specified Businesses under Section 45 (Cold chain, warehousing, pipelines, etc.). | Accountant's Report | Mandatory requirement to substantiate 100% deduction of capital expenditure. |
| Section 200 / 206 | Minimum Alternate Tax (MAT) for Companies and Alternate Minimum Tax (AMT) for non-corporate entities. | Form No. 29B / 29C | Certifying book profits and adjusted total income computation. |
| Section 77 | Slump Sale Capital Gains computation. | Form No. 28 | Certifying computation of net worth of the undertaking or division transferred. |
| Section 172 | International Transactions and Specified Domestic Transactions (Transfer Pricing). | Form No. 3CEB | Certifying maintenance of arm’s length documentation u/s 171. |
| Section 146 | Deduction in respect of employment of new employees (30% additional employee cost). | Form No. 25 | Certifying additional employee cost and qualification of new employees. |
| Section 393(1) | Payee certificate for non-deduction of TDS (First Proviso to Section 201(1)). | Form No. 146 | Certifies payee furnished return, paid tax, and took payment into account. |
2. Tax Audit under Section 63 & Statutory Threshold Limits
Under Section 63(1) of the Income-tax Act, 2025, every person carrying on business or profession is mandatorily required to get his accounts of the tax year audited by an accountant (Chartered Accountant in practice) and furnish by the specified date the report of such audit in the prescribed form:
| Category of Assessee | Statutory Threshold Limit / Trigger Event | Key Statutory Conditions & Explanations |
|---|---|---|
| Business Assessee [Section 63(1)(a)] |
Total sales, turnover, or gross receipts in business exceed:
₹ 1,00,00,000 (₹ 1 Crore)
Elevated to ₹ 10 Crores if cash receipts and cash payments are ≤ 5% each!
|
General threshold is ₹ 1 Crore. However, where non-cash transactions prevail (cash receipts ≤ 5% AND cash payments ≤ 5%), the threshold is elevated tenfold to ₹ 10 Crores under the safe harbour proviso. |
| Professional Assessee [Section 63(1)(b)] |
Gross receipts in profession exceed:
₹ 50,00,000 (₹ 50 Lakhs)
Elevated to ₹ 75 Lakhs if cash receipts are ≤ 5%!
|
Applies to notified professions under Section 62(1) (Legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, film artists, authorised representatives). |
| Presumptive Business Opt-Out [Section 63(1)(c)] | Breach of 5-Year Lock-in under Section 57(4) (Old Sec 44AD(4)), where profits declared are lower than 8% / 6% AND total income exceeds basic exemption limit. | If an eligible assessee opts out of presumptive taxation under Section 57 during the 5-year lock-in period, he cannot opt back into Section 57 for the subsequent 5 tax years, and must mandatorily get accounts audited under Section 63! |
| Presumptive Profession Lower Profits [Section 63(1)(d)] | Resident professional claiming profits lower than the deemed 50% under Section 58(1) (Old Sec 44ADA) AND total income exceeds basic exemption limit. | If a professional’s gross receipts are ≤ ₹ 50L (or ₹ 75L), but he declares profits less than 50% of gross receipts and his total income exceeds the basic exemption limit, tax audit is mandatory! |
| Goods Carriage Operators [Section 63(1)(e)] | Assessee engaged in plying, hiring, or leasing goods carriages claiming profits lower than the presumptive rates under Section 59(1) (Old Sec 44AE). | Presumptive profit is ₹ 1,000 per ton of gross vehicle weight per month for heavy goods vehicles (> 12 MT), and ₹ 7,500 per month for other vehicles. Declaring lower profits triggers mandatory Section 63 audit. |
The terms "turnover" and "gross receipts" are commercial terms. The ICAI Guidance Note on Tax Audit lays down precise rules for their determination:
Inclusions in Turnover / Receipts:
- Gross sales value of goods and professional service billings;
- Sale of scrap, by-products, and manufacturing residues;
- Export incentives, duty drawbacks, and cash assistance;
- Excise duty, sales tax, or GST if the assessee follows the inclusive method of accounting;
- Advance received and forfeited in the course of business;
- Speculative Transactions: Aggregate of all positive and negative differences arising from speculative transactions represents speculative turnover!
- Derivatives / Futures & Options (F&O): Total of favorable and unfavorable differences, plus premium received on sale of options!
Exclusions from Turnover / Receipts:
- Trade Discounts & Turnover Discounts: Deducted in sales invoice or credited through credit notes;
- Sales Returns: Return of goods outward/inward;
- Sale proceeds of fixed capital assets (plant, machinery, cars, land);
- Sale proceeds of investments (shares, securities, mutual funds) unless held as stock-in-trade;
- Rental income, interest income, or dividends (chargeable under other heads);
- Goods sent on consignment (until actually sold by the consignee);
- Reimbursement of out-of-pocket expenses incurred on behalf of clients.
Under Section 63, the tax audit report must be furnished electronically on or before the "specified date", which is defined as one month prior to the due date of furnishing the return of income under Section 263(1).
Example: For corporate assessees and business assessees whose return due date is 31st October, the specified date for furnishing the tax audit report is 30th September of the assessment year.
3. The ₹ 10 Crore Safe Harbour Scheme for Non-Cash Businesses [≤ 5% Cash]
To promote digital payments and reduce compliance burden on digital businesses, the Proviso to Section 63(1)(a) elevates the tax audit turnover threshold tenfold from ₹ 1 Crore to ₹ 10 Crores, provided the assessee satisfies the Twin 5% Non-Cash Conditions.
Condition 1: Aggregate Cash Receipts ≤ 5%
Crucial Scope: "Aggregate of all receipts" is NOT restricted to turnover! It encompasses every single rupee received during the tax year—including sales turnover, debtors' realizations, loans taken, advances, capital introduction, sale of fixed assets, interest, and gifts!
Condition 2: Aggregate Cash Payments ≤ 5%
Crucial Scope: "Aggregate of all payments" encompasses every single rupee paid during the tax year—including trade purchases, creditors' payments, operating expenses, asset purchases, loan repayments, capital drawings, and taxes!
Under the Explanation to Section 63, the payment or receipt by a cheque drawn on a bank or by a bank draft which is NOT an account payee cheque or account payee bank draft SHALL BE DEEMED TO BE A PAYMENT OR RECEIPT IN CASH!
- Account Payee Cheque / Draft, ECS, UPI, NEFT, RTGS, IMPS, BHIM: Treated as non-cash (electronic banking modes).
- Bearer Cheques & Crossed Cheques: Treated as CASH for computing both the numerator and denominator!
4. Form No. 26 Structure: Part A, Part B & Part C [Auditor Opinions]
Under the Income-tax Act, 2025, the reporting architecture for tax audits has been streamlined into a single, unified document: Form No. 26. It replaces the erstwhile tripartite structure of Forms 3CA, 3CB, and 3CD, providing a standardized reporting interface for both corporate and non-corporate assessees.
| Feature | Part A of Form No. 26 (Old Form 3CA) | Part B of Form No. 26 (Old Form 3CB) |
|---|---|---|
| Applicability | In a case where the accounts of the business or profession of a person have been audited under any other law prior to the tax audit. | In a case where the accounts of the business or profession of a person have NOT been audited under any other law. |
| Target Assessees | Companies governed by the Companies Act, 2013; Banking Companies; Insurance Companies; Electricity Companies; Co-operative Societies. | Sole Proprietorships; Partnership Firms; LLPs (not subject to statutory audit under LLP Act); Hindu Undivided Families (HUFs); Trusts. |
| Scope of Auditor's Opinion | The auditor does not audit the financial statements anew. He certifies that the statutory audit has been conducted under the relevant Act, and expresses an opinion solely on whether the particulars in Part D are "True and Correct". |
The auditor conducts a full-scope financial audit. He expresses a dual opinion:
|
| Annexures Attached | Copy of the statutory audit report along with audited Balance Sheet, Profit & Loss Account, and Notes to Accounts. | Audited Balance Sheet, Profit & Loss Account, and Notes prepared and certified directly by the tax auditor. |
"True and Fair View" is an accounting concept governed by Standards on Auditing (SAs) and Accounting Standards. It implies that:
- The financial statements are free from material misstatement;
- Accounting policies are consistently applied;
- Transactions are recorded on accrual, going concern, and prudence principles;
- It permits reasonable estimation and materiality judgements.
"True and Correct" implies factual precision and exact mathematical and legal accuracy. There is no leeway for materiality or subjective discretion:
- The amounts reported (e.g., disallowances u/s 40(a), cash payments > ₹ 10,000, hundi loans) must be exact;
- Dates of statutory deposits (PF/ESI) must match bank challans exactly;
- Any divergence or approximation without qualification is an audit failure!
Paragraph 5 of Part A and Part B provides the primary statutory channel for the tax auditor to state his observations, qualifications, comments, or disclaimers:
- Where the tax auditor is unable to obtain sufficient appropriate audit evidence (e.g., cash vouchers unverified, stock records missing);
- Where the tax auditor disagrees with the treatment or interpretation adopted by the management regarding tax disallowances;
- Where conflicting legal interpretations exist (e.g., thin capitalization reporting or MSME disallowances), the auditor must report both viewpoints;
- Crucial Disciplinary Rule: Marking "No" or leaving a clause blank based solely on a Management Representation Letter (without independent verification or qualification in Paragraph 5) constitutes gross negligence and professional misconduct under the Chartered Accountants Act, 1949!
| Clause No. | Field Description | Reporting Requirements & Guidance |
|---|---|---|
| Clause 1 | Name of the Assessee | Name as per PAN database. Full name for individuals (no abbreviations). Trade names and branch names to be stated. Name changes during the tax year must be disclosed. |
| Clause 2 | Address | Address of registered office or principal place of business. |
| Clause 3 | Permanent Account Number (PAN) | 10-character alphanumeric PAN of the assessee. |
| Clause 4 | Status | Individual, HUF, Firm, Company, AOP, BOI, Local Authority, Artificial Juridical Person. |
| Clause 5 | Residential Status | Resident, Resident but not ordinarily resident (RNOR), or Non-resident. |
| Clause 6 & 7 | Email ID & Contact Number | Official electronic communication credentials. |
| Clause 8 | Tax Year | The relevant tax year (e.g., Tax Year 2026-27). |
5. Form 26 Part D: Detailed Reporting Requirements [Clauses 9 to 25]
Part D of Form No. 26 contains the detailed, clause-by-clause statutory particulars required to be furnished under Section 63. Below is the comprehensive analysis of Clauses 9 to 25:
| Clause | Nature of Reporting Field | Detailed Reporting Guidelines & Audit Procedures |
|---|---|---|
| Clause 9 |
Relevant Provision under which Audit is Conducted: Specify Section 63(1)(a) to (e). |
The auditor must select the specific clause of Section 63 under which the audit is conducted (e.g., Sec 63(1)(a) for business > ₹ 1 Cr / ₹ 10 Cr; Sec 63(1)(b) for profession > ₹ 50L / ₹ 75L; Sec 63(1)(c) for presumptive lock-in breach). |
| Clause 10 |
Special Concessional Tax Regimes: Whether opted for taxation u/s 199 or 200. |
Report whether the assessee has exercised option for concessional tax rates under Section 199 (new default regime u/s 115BAC for individuals/HUFs) or Section 200 (115BAA/115BAB for domestic companies, 115BAD/115BAE for co-operative societies), and verify Form 10-IEA/10-IC/10-ID filing. |
| Clause 11 |
Partnership Firm / AOP Particulars: Names of partners, profit-sharing ratios, and changes. |
State names of all partners/members, their respective profit sharing ratios (including loss sharing ratios) as per the partnership deed. Any change in constitution or profit-sharing ratio during the tax year must be explicitly detailed. |
| Clause 12 |
Nature of Business or Profession: Principal lines of business and sector codes. |
Disclose the nature of all businesses or professions carried on during the tax year along with prescribed sub-sector codes. Any new line of business started or any existing line discontinued must be stated. |
| Clauses 13 & 14 |
Books of Account & Storage Locations: List of books maintained, software/cloud details, and address where kept. |
|
| Clause 15 |
Method of Accounting: Mercantile or Cash System. |
Report whether Mercantile or Cash method is employed. Hybrid systems are legally prohibited under Section 145. Any change in accounting method compared to preceding year, and its financial impact on profit/loss, must be quantified. |
| Clause 16 |
Method of Valuation of Closing Stock: Compliance with Section 38 (Old Sec 145A). |
Disclose method of valuation (Cost, NRV, or lower). Section 38 mandates the inclusive method of valuation (incorporating taxes, duties, and cess, including GST). Reconciliation between exclusive and inclusive methods must be reported. |
| Clauses 17 & 18 |
Income Computation and Disclosure Standards (ICDS): Adjustments & Disclosures (ICDS I to X). |
|
| Clause 19 |
Amounts Not Credited to Profit & Loss Account: Items covered under Section 28 and capital receipts. |
Report all business receipts not credited to P&L, including export cash assistance, duty drawbacks, compensation for termination of agency/management, value of perks/benefits arising from business, escalation claims, and capital receipts. |
| Clause 20 |
Income Chargeable under "Other Sources": Items covered under Section 56. |
Report amounts credited to P&L that are chargeable under "Income from Other Sources" (interest on fixed deposits, dividends, family pension, rental income from non-business property). |
| Clause 21 |
Deemed Profits under Section 41: Balancing charge, bad debt recovery, remission of liability. |
Report taxable recoveries under Section 41(1) (remission of trading liability), Section 41(2) (balancing charge), Section 41(4) (bad debt recovered), and Section 41(5) (business loss adjustment after closure). |
| Clause 22 |
Conversion of Capital Asset into Stock-in-Trade: Compliance with Section 70 (Old Sec 45(2)). |
Disclose description of capital asset, date of acquisition, cost of acquisition, and the fair market value of the asset on the date of its conversion into stock-in-trade. |
| Clause 23 |
Transfer of Land / Building Below Stamp Duty Value: Compliance with Section 71 (Old Sec 43CA). |
Where land/building held as stock-in-trade is sold for consideration less than stamp value: Report property details, consideration received, stamp value, and whether difference exceeds 10% safe harbour. |
| Clauses 24 & 25 |
Hundi Borrowings & Repayments: Compliance with Section 69D. |
Report any amount borrowed on hundi or repaid (including interest) otherwise than through an account payee cheque drawn on a bank. |
6. Form 26 Part D: Detailed Reporting Requirements [Clauses 26 to 40]
Clauses 26 to 40 of Form No. 26 encompass the critical statutory battleground of income tax audits—disallowances for non-deduction of TDS, personal and illegal expenses, cash payments under Section 40A(3), statutory dues under Section 43B, and depreciation block computations.
| Clause | Statutory Subject Matter | Detailed Reporting Obligations & Audit Verification |
|---|---|---|
| Clause 26 |
Inadmissible Deductions under Section 40(a): TDS Defaults, Equalisation Levy, Tax/Cess. |
Report section-wise amounts inadmissible under Section 40(a):
|
| Clause 27 |
Disallowable Debits to Profit & Loss Account: Capital, Personal, and Illegal Expenses. |
|
| Clause 28 |
Penalties Levied under Any Law: In India or abroad. |
State all penalties levied during the tax year under any domestic or foreign law (e.g. GST penalties, customs penalties, environmental fines, municipal fines). |
| Clause 29 |
Payments to Specified Persons u/s 40A(2)(b): Excessive or unreasonable payments. |
List all payments made or to be made to relatives of directors/proprietor, key persons, or entities having substantial interest (≥ 20% voting power). Details must include recipient name, PAN, relationship, nature of payment, amount, and auditor's assessment of fair market value. |
| Clause 30 |
Disallowance of Cash Payments u/s 36(4) / 40A(3): Payments exceeding ₹ 10,000 / ₹ 35,000. |
Disallowance under Section 40A(3) for expenditure where payment exceeding ₹ 10,000 is made to a person in a day otherwise than by account payee cheque/draft, ECS, or prescribed electronic mode (limit is ₹ 35,000 for goods carriage hire). ICAI Guidance Note & Disciplinary Precedent: The auditor cannot escape liability by obtaining a management representation without verifying cash book records, bearer cheque counterfoils, and ledger vouchers! |
| Clause 31 |
Deemed Income for Cash Payments u/s 40A(3A): Unpaid liabilities allowed in earlier years. |
Where an allowance has been made in any earlier year for an expenditure, and during the current tax year the assessee settles the liability in cash exceeding ₹ 10,000 (₹ 35,000 for transport): The entire amount is deemed as taxable income u/s 40A(3A). |
| Clause 32 |
Statutory Liabilities under Section 44 / 43B: Taxes, duties, PF, bonuses, bank interest. |
Report amounts covered by Section 43B:
Allowed on payment basis if paid on or before the return filing due date u/s 263(1). Pre-existing liabilities paid during the year must be reconciled.
|
| Clause 34 |
Special Deductions under Sections 35, 35D, etc.: Scientific research, preliminary expenses. |
Report amounts allowable under Section 35 (Scientific research expenditure), Section 35ABB (telecom license), Section 35D (amortisation of preliminary expenses), and Section 35E (prospecting minerals). |
| Clause 35 |
Prior Period Income / Expenditure: Credited or debited to P&L. |
Disclose all prior period items credited or debited to the profit and loss account, specifying the prior tax year to which each item pertains and the date of recognition. |
| Clause 36 |
Depreciation Allowable under Section 32: Block of assets, additions, deletions, adjustments. |
Detailed schedule for each block of assets: Opening WDV, additions during the year (split into used for ≥ 180 days and < 180 days), deductions/realizations during the year, allowable depreciation, additional depreciation u/s 32(1)(iia), and closing WDV. |
| Clause 37 |
Brought Forward Losses & Unabsorbed Depreciation: Year-wise schedule and lapse status. |
Year-wise details of business loss, speculation loss, loss from specified business u/s 35AD, capital loss, and unabsorbed depreciation. Dates of assessment orders, return filing dates, and whether losses have lapsed must be reported. |
| Clause 38 |
Deductions Admissible under Chapter VIII (Chapter VI-A): Deductions under Sections 145 to 150 (Old 80-IA to 80JJAA). |
Section-wise quantification of admissible deductions under Chapter VIII (e.g. Section 146 / 80JJAA for new employee employment). Auditor must verify fulfillment of conditions (e.g. employee emoluments ≤ ₹ 25,000 p.m., minimum 240 days employment, electronic payment). |
| Clause 39 |
Utilisation of MAT / AMT Credit: Under Section 200 / 206. |
Report opening balance of tax credit, credit utilized during the tax year against regular tax liability, and closing balance carried forward. |
| Clause 40 |
Primary Transfer Pricing Adjustments: Compliance with Section 166 (Old Sec 92CE). |
Report primary adjustments made in transfer pricing (suo motu, by AO, or APA) exceeding ₹ 1 Crore, and whether secondary adjustment was made or repatriated within 90 days. |
7. Deep-Dive on MSME Delayed Payments Reporting [Clause 33 & Section 43B(h)]
The insertion of Clause 33 in Form No. 26 and Section 44(h) / Section 43B(h) of the Income-tax Act has revolutionized commercial settlements in India. To protect Micro and Small Enterprises from crippling liquidity crunches, the Legislature has mandated strict tax disallowance for delayed payments.
Clause 33(a): Inadmissible Interest u/s 23 of MSMED Act
Under Section 16 of the MSMED Act, 2006, where a buyer fails to pay a supplier within the statutory period, he is liable to pay compound interest with monthly rests at three times the Bank Rate notified by RBI.
Clause 33(b): Principal Disallowance u/s 43B(h) / Section 44(h)
Under Section 43B(h), any sum payable by the assessee to a Micro or Small Enterprise beyond the time limit specified in Section 15 of the MSMED Act, 2006:
Section 15 of the MSMED Act prescribes strict, non-negotiable payment deadlines from the "appointed day" (date of acceptance or deemed acceptance of goods/services):
| Contractual Scenario | Statutory Payment Time Limit | Tax Consequences of Default |
|---|---|---|
| Case 1: No Written Agreement | Payment must be made within 15 DAYS from the date of delivery/acceptance. | If unpaid on the 16th day and outstanding as on 31st March: Disallowed in current tax year. |
| Case 2: Written Agreement with Term ≤ 45 Days | Payment must be made within the agreed period (e.g., 30 days). | If unpaid beyond the agreed days and outstanding on 31st March: Disallowed in current tax year. |
| Case 3: Written Agreement with Term > 45 Days | Statutory ceiling of 45 DAYS strictly applies! (Any clause exceeding 45 days is void ab initio). | Payment made beyond 45 days is legally delayed. If outstanding on 31st March, it is disallowed. |
For all other statutory liabilities under Section 43B (taxes, PF, bonus, bank interest), deduction is allowed if payment is made on or before the due date of furnishing the return of income under Section 263(1).
HOWEVER, Section 43B(h) is deliberately excluded from the Proviso! Paying an MSME after the 15/45-day statutory window (even if paid before the return filing due date) will NOT save the deduction in the year of accrual! It is disallowed in the current year and allowed only in the next tax year when actually paid.
Who Qualifies as an MSME Supplier?
- Micro Enterprise: Investment in Plant & Machinery ≤ ₹ 1 Crore AND Turnover ≤ ₹ 5 Crores;
- Small Enterprise: Investment ≤ ₹ 10 Crores AND Turnover ≤ ₹ 50 Crores;
- Medium Enterprises are EXCLUDED: Section 43B(h) does NOT apply to sums payable to Medium enterprises (> ₹ 50 Cr turnover);
- Mandatory Udyam Registration: The supplier must possess a valid Udyam Registration Certificate on the date of supply.
Exclusion of Wholesale & Retail Traders
As per Office Memorandum issued by the Ministry of MSME, wholesale and retail traders are eligible for Udyam registration solely for Priority Sector Lending (PSL) benefits.
8. Form 26 Part D: Detailed Reporting Requirements [Clauses 41 to 53]
The concluding segment of Part D (Clauses 41 to 53) addresses specialized corporate and international tax compliances—including Corporate Social Responsibility (CSR), interest limitation under thin capitalization, cash loan restrictions, quantitative inventory reconciliations, and comprehensive TDS/TCS audits.
| Clause | Reporting Domain & Statutory Subject | Detailed Reporting Obligations & Audit Verification |
|---|---|---|
| Clause 41 |
Corporate Social Responsibility (CSR) Expenditure: Disallowance under Section 37(1) Explanation 2. |
Report all expenditure incurred by the company towards CSR activities under Section 135 of the Companies Act, 2013 debited to P&L. By virtue of Explanation 2 to Section 37(1), CSR expenditure is statutorily deemed as NOT incurred for business purposes, and is fully disallowable. |
| Clause 42 |
Thin Capitalization / Interest Limitation u/s 177 / 94B: Excess interest paid to Associated Enterprises (AEs). |
|
| Clause 43 |
Foreign Remittances (Form 145 / 15CA / 15CB): Remittances to non-residents. |
Disclose all foreign remittances made during the tax year reported in Part D of Form 145 / Form 15CA, and verify whether CA certificates in Form 15CB were obtained. |
| Clause 44 |
Amounts Not Includible in Total Income: Exempt income and DTAA relief. |
List all receipts/incomes credited to the P&L account which are claimed as exempt from income-tax under Chapter III (Sections 10 to 13) or pursuant to Double Taxation Avoidance Agreements (DTAAs). |
| Clause 45 |
Cash Loans, Deposits & Repayments: Sections 493, 494 & 495 (Old 269SS, 269T & 269ST). |
Comprehensive verification of cash restrictions:
|
| Clause 46 |
Statement of Financial Transactions (SFT): Compliance with Section 507 (Form 95 / 61A). |
Report whether the assessee was required to furnish SFT in Form 95 / Form 61A, whether furnished within due date, and details of transactions reported. |
| Clause 47 |
Shares Issued at Premium (Angel Tax): Compliance with Section 56(2)(viib). |
Where an unquoted company issues shares to any person at a premium: Report consideration received, face value, and fair market value (FMV) determined as per Rule 11UA. |
| Clause 48 |
Deemed Dividend under Section 2(22)(e) / Section 87: Loans or advances to substantial shareholders. |
Report any payment by a closely held company by way of advance or loan to a shareholder holding ≥ 10% voting power or to an entity where such shareholder has a substantial interest (≥ 20%), to the extent of accumulated profits. |
| Clauses 49 & 50 |
Comprehensive TDS & TCS Compliance: Chapter XIX-B audit verification. |
|
| Clause 51 |
Disallowance for TDS Statement Defaults: Compliance with Section 397(3) / 200(3). |
Report amounts inadmissible under Section 35(b)(i) / 40(a) where the deductor failed to deliver quarterly TDS/TCS statements within the prescribed time limit. |
| Clause 52 |
Indirect Tax Liabilities & Reconciliations: GST, Customs, and Central Excise. |
Report indirect tax registration numbers, total turnover as per books vs total turnover reported in GST returns (GSTR-9 / GSTR-9C), and reconcile any differences. |
| Clause 53 |
Quantitative Inventory Details: Trading and manufacturing units. |
Schedule of physical quantities for trading goods, raw materials, and finished goods: Opening stock, purchases/production, sales/consumption, closing stock, shortages/wastages, and percentage of yield/loss. |
9. Mandatory Administrative Fees for Tax Audit Failure [Section 428(c)]
Under modern tax administration, routine delays in filing the tax audit report have been decoupled from subjective, litigious penalty proceedings (erstwhile Section 271B) and converted into automatic, mandatory administrative late fees under Section 428(c).
As per Section 428(c) of the Income-tax Act, 2025, if any person fails to get his accounts audited in respect of any tax year or fails to furnish the tax audit report by the specified date under Section 63, he shall be liable to pay the following mandatory administrative fee:
| Period of Delay in Furnishing Tax Audit Report | Mandatory Administrative Fee Payable |
|---|---|
| Delay up to ONE MONTH from the specified date | ₹ 75,000 |
| Delay BEYOND ONE MONTH | ₹ 1,50,000 |
The fee leviable under Section 428(c) is subject to an overall ceiling of 0.75% of total sales, turnover, or gross receipts, or ₹ 1,50,000, whichever is lower! Furthermore, because Section 428(c) is an administrative fee, the defense of "reasonable cause" under Section 470 cannot be invoked to waive it.
10. Ethical Compliances & Professional Misconduct of Chartered Accountants
A tax audit is a public-trust statutory engagement. The Chartered Accountant acts not merely as an agent of the assessee, but as an independent quasi-judicial certifying officer assisting the Sovereign Republic in revenue determination. Failure to discharge professional duties with integrity, independence, and due diligence invites severe disciplinary proceedings under the Chartered Accountants Act, 1949.
To maintain audit quality and prevent commercial over-solicitation, the Council of ICAI has prescribed strict quantitative ceilings:
Individual Member & Partner Limit:
- A Chartered Accountant in practice, whether in individual capacity or as a partner of a firm, cannot accept more than 60 tax audit assignments under Section 63 in a financial year.
- In a partnership firm, the limit applies at 60 audits per partner (e.g. a firm with 4 partners can accept a maximum of 240 tax audits).
Statutory Exclusions from Ceiling:
- Audits conducted under presumptive taxation schemes (Section 57 / 44AD, Section 58 / 44ADA, Section 59 / 44AE) are excluded from the 60-audit ceiling;
- Audits conducted for branches do not count towards the parent entity ceiling.
The Disciplinary Directorate of ICAI actively prosecutes tax auditors under the following fundamental clauses of the Second Schedule to the Chartered Accountants Act, 1949:
| Disciplinary Provision | Nature of Professional Default | Practical Tax Audit Application & Precedents |
|---|---|---|
| Clause (7) of Part I, Second Schedule |
Failure to Exercise Due Diligence or Gross Negligence: A CA in practice is guilty of misconduct if he "fails to exercise due diligence, or is grossly negligent in the conduct of his professional duties". |
|
| Clause (8) of Part I, Second Schedule |
Failure to Obtain Sufficient Information: A CA in practice is guilty of misconduct if he "fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion". |
|
| Clause (1) of Part II, Second Schedule |
Contravention of Act, Regulations, or Guidelines: Contravenes any of the provisions of this Act, regulations made thereunder, or any guideline issued by the Council. |
Accepting more than 60 tax audit assignments in violation of Council Guidelines No. 1-CA(7)/02/2008. |
| Clause (8) of Part I, First Schedule |
Non-Communication with Previous Auditor: Accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing. |
Tax auditor must send written communication via Registered Post with Acknowledgement Due (RPAD) or traceable official email to the previous tax auditor prior to accepting appointment. |
Under Section 21B of the Chartered Accountants Act, 1949, where the Disciplinary Committee finds a member guilty of misconduct under the Second Schedule, it may: (i) Reprimand the member; (ii) Remove the member’s name from the Register permanently or for a specified period; and/or (iii) Impose a fine which may extend up to ₹ 5,00,000!
11. ICAI Test Your Knowledge (TYK Questions 1 to 7)
Below are all 7 comprehensive Test Your Knowledge (TYK) questions from the official ICAI Study Material, complete with rigorous statutory analysis, mathematical calculations, and professional ethics disciplinary evaluations.
Sunlight & Co., a partnership firm engaged in trading of electronic goods, has a turnover of ₹ 2,65,00,000 for the T.Y. 2026-27. Its financial particulars are as under:
| Particulars | Amount (₹) |
|---|---|
| (i) Total turnover of T.Y. 2026-27 | 2,65,00,000 |
| (ii) Aggregate of all receipts during the year (including turnover) | 2,90,00,000 |
| (iii) Cash receipts out of (i) above | 14,00,000 |
| (iv) Cash receipts out of (ii) above (inclusive of figure in (iii)) | 16,00,000 |
| (v) Aggregate of all payments during the year | 1,35,00,000 |
| (vi) Cash payments out of (v) above | 6,95,000 |
(a) Is Sunlight & Co. required to get its accounts audited under section 63?
(b) Would your answer change if the cash receipts indicated in (iii) is ₹ 13 Lakh instead of ₹ 14 Lakh?
Mr. Abhinav Ahuja runs a travel agency business since 2010. His total turnover for T.Y. 2026-27 is ₹ 2,90,57,400. Receipts and payments details:
| Transaction & Date | Amount (₹) | Mode of Receipt / Payment |
|---|---|---|
| Receipts via UPI, NEFT & A/c Payee Cheques (15.4.26 to 17.3.27) | 1,29,58,400 | BHIM UPI, NEFT, A/c payee cheques |
| Receipt on 07.05.2026 | 13,35,000 | Bearer Cheque |
| Other aggregate receipts (≤ ₹ 2,000 per person) | 1,44,21,600 | A/c payee cheques, NEFT, UPI (Except ₹ 52,500 in cash) |
| Total Receipts | 2,87,15,000 | |
| Aggregate of all payments made during T.Y. 2026-27 | 2,58,00,000 | Electronic & banking modes |
| Cash payments incurred for expenditure (≤ ₹ 10,000 per person) | 20,58,000 | Cash |
Mr. Abhinav contended that he is not required to get his accounts audited since his turnover is less than ₹ 10 Crores and cash receipts are less than 5%. Examine his contention.
X Ltd., an Indian company, paid interest of ₹ 95 Lakhs to X Inc., a non-resident associated enterprise (AE). X Ltd. also took a loan of ₹ 5 Crores from Y Inc. (Indian branch of a foreign bank, an unrelated lender) and paid interest of ₹ 50 Lakhs. X Inc. had provided a guarantee to Y Inc. and deposited matching funds of ₹ 3 Crores.
The tax auditor is of the view that interest paid to Y Inc. is also subject to thin capitalization reporting under Section 177 / Clause 42. The management contends that since Y Inc. is an unrelated bank, its interest is not covered. Discuss the auditor's reporting responsibility.
ABC Ltd. is engaged in transportation of building materials. It paid truck hiring charges of ₹ 45 Lakhs to individual truck owners (holding less than 10 goods carriages) without deducting TDS, as they furnished PAN declarations under section 393(4) / 194C(6).
The tax auditor is of the view that since no tax was deductible, these transactions need not be reported in Form 26. What is the reporting responsibility of the tax auditor and the consequent ethical implications?
A search under section 247 on LMN Ltd. (engaged in jewellery business) revealed that the company made unrecorded cash payments exceeding ₹ 10,000 each to customers. In Form 26, the tax auditor had marked "No" in response to Clause 30 (cash payments u/s 40A(3)), stating that he relied on a Management Representation Letter that no cash payments exceeded ₹ 10,000. Examine the ethical implications.
XYZ & Co., an interior decoration firm, employed 20 new employees on 01.04.2026 at a monthly salary of ₹ 28,000 (Basic Salary ₹ 24,000 + Transport & Special Allowance ₹ 4,000). The firm claimed deduction under section 146 (Old 80JJAA) of ₹ 18 Lakhs (30% of ₹ 60 Lakhs).
The Chartered Accountant certified Form 25 and reported the deduction in Clause 38 of Form 26, contending that basic salary was less than ₹ 25,000 p.m. Is his contention correct? Examine the ethical implications.
The Income-tax Department collected documents from ABC Bank revealing that a Chartered Accountant had issued Form 146 certificates (payee certificate for non-deduction of TDS u/s 393(1)) for multiple housing loan borrowers. During inquiry, the CA admitted that he issued the certificates based merely on invoices produced by borrowers, without examining their books of account or verified tax returns, and collected fees partly in cash. Examine the ethical implications.