A S BANKA ADVISORS

Most tax audit disputes do not come from complex law. They come from a handful of Form 3CD clauses that founders, and sometimes their advisers, fill in on autopilot. The audit report for FY 2025-26 (Assessment Year 2026-27) is due by 30 September 2026, and for a private limited company the return follows on 31 October 2026. If your books hide a late PF deposit, an unpaid micro vendor, or an expense booked without TDS, the auditor has to report it, and the disallowance follows into your taxable income. This is a short, practical walk through the clauses that most often cost money, and what changes when the tax audit itself moves under the Income-tax Act 2025.

First, do you even need a tax audit for FY 2025-26?

The requirement sits in Section 44AB of the Income-tax Act 1961. On the Income Tax Department record, the thresholds are a turnover above Rs 1 crore for business, rising to Rs 10 crore where both your cash receipts and cash payments each stay within 5 percent of the total, so a predominantly digital business gets the higher limit. For a profession, the trigger is gross receipts above Rs 50 lakh. A professional who claims income below the Section 44ADA presumptive profit, or a business to which Section 44AD(4) applies, is also pulled in where income exceeds the maximum amount not chargeable to tax. Where an audit applies, the accountant reports in Form 3CA if the entity is already audited under another law, such as a company, or Form 3CB otherwise, together with the statement of particulars in Form 3CD.

Clause 26: the MSME rescue that does not exist

Clause 26 reports the Section 43B items: statutory dues, bank and financial institution interest, bonus, leave encashment, and, since Assessment Year 2024-25, sums payable to a micro or small enterprise under Section 43B(h). Founders treat these alike, and that is the mistake. For most 43B items, paying before the return due date preserves the deduction. For an MSME due it does not. Clause (h) is expressly left out of that rescue, so a micro or small vendor balance still outstanding on 31 March is disallowed for the year even if you clear it in July. The fix is unglamorous but decisive: pull your micro and small supplier ageing before you finalise, and settle what you can before 31 March rather than after.

Clause 20(b): the PF and ESI timing trap

This is the clause that quietly costs founders the most. Once you deduct the employee share of provident fund and ESI from salary, it is yours to deposit by the due date under the PF or ESI law. Under Section 36(1)(va), a deposit even one day late is disallowed permanently, not merely deferred to the year of payment. The Supreme Court closed the argument in Checkmate Services Pvt Ltd v CIT in October 2022, holding that the Section 43B rescue for the employer contribution does not extend to the employee share. Startups running payroll late in a tight month, then depositing PF a few days after the 15th, hand the auditor a reportable instance every time. Do not confuse this with the employer contribution, which is a 43B item and does get the pay before return rescue.

Clause 21(b) and 21(d): TDS defaults and cash payments

Clause 21(b) captures expenditure disallowed for a TDS failure. Where tax was not deducted, or was deducted but not paid by the return due date, on a payment to a resident, 30 percent of the expense is disallowed under Section 40(a)(ia). On a payment to a non resident, the disallowance is the full 100 percent under Section 40(a)(i). The usual miss is a payment that attracts TDS but was booked without it: professional fees, rent, contractor charges, commission. Clause 21(d) then picks up cash: under Section 40A(3), any expenditure paid in cash above Rs 10,000 to a single person in a single day is disallowed in full, subject to the Rule 6DD exceptions, with a higher Rs 35,000 limit for a payment to a transporter. Note that the whole payment is lost, not just the amount over the line, and that aggregated cash payments to the same vendor across a day count together.

Clause 34 and Clause 44: reconcile, and stop leaving 44 blank

Clause 34 asks the auditor to reconcile the tax you deducted and collected with what you actually deposited and reported. Mismatches between the books, Form 26Q or 24Q, and the challans surface here, and a late or short TDS statement drags in interest and fee exposure under Sections 201 and 234E. Clause 44 is the one everyone leaves blank: a break up of total expenditure between registered and unregistered GST suppliers, and within the registered head, across exempt, composition and other suppliers. The assumption that reporting is deferred is no longer safe; treat the clause as one you must complete, and extract the split from your GST purchase data through the year rather than reconstructing it in a panic at finalisation.

What changes next year: Section 63 and Form 26

The Income-tax Act 2025 takes effect from 1 April 2026 and governs FY 2026-27 onward. The tax audit requirement moves from Section 44AB to Section 63, and the substance of who must be audited, along with the Rs 1 crore, Rs 10 crore and Rs 50 lakh thresholds, carries forward. What changes is the report itself: the Income-tax Rules, 2026 prescribe Form No. 26 under Rule 47 as the audit report and statement of particulars under Section 63, applicable for tax years commencing on or after 1 April 2026. Forms 3CA, 3CB and 3CD continue for tax audits of previous years relevant to assessment years up to 2026-27, so the FY 2025-26 audit you are finalising now stays on those forms, and the audit for tax year 2026-27 is furnished in Form No. 26. The new form has four parts, with Part C and Part D taking the place of Forms 3CA and 3CB, and it is due one month before the return due date, that is by 30 September where the return is due on 31 October.

A pre-sign checklist

• Confirm applicability against the Rs 1 crore, Rs 10 crore and Rs 50 lakh thresholds.
• List micro and small supplier balances unpaid beyond their limit at 31 March 2026 (Clause 26).
• Reconcile PF and ESI deposit dates against the due dates and flag every late deposit (Clause 20(b)).
• Identify expenses booked without deduction and reconcile the TDS statements to the ledgers (Clauses 21(b) and 34).
• Scan for aggregated cash payments above Rs 10,000 to one person in a day (Clause 21(d)).
• Build the registered versus unregistered GST break up (Clause 44).
• Total the add backs, recompute taxable income, and estimate the advance tax and interest impact before signing.

None of this turns on clever positions. It turns on discipline in dates and documentation. Reconcile the MSME ageing, the PF and ESI deposit dates, the TDS, the cash payments and the GST break up before the auditor arrives, and the 30 September signing is a formality rather than a fight.

Download the full Form 3CD carousel PDF for a clause by clause map you can keep next to your working papers.

Want a second pair of eyes on your Form 3CD before you sign? A S Banka Advisors Private Limited works with founders and finance teams to pressure test the high risk clauses and quantify the add backs before the report goes out. Book a quick call: https://calendly.com/asbanka-info/30min

This article is for general information and does not constitute tax or legal advice. Source: Income-tax Act, 1961; Income-tax Act, 2025; Income-tax Rules, 2026; Form No. 26 FAQs of the Income Tax Department, incometaxindia.gov.in. Apply the law to your facts with a qualified professional before acting.