Tax Audit for FY 2025-26: Complete Guide to Form 3CD Changes
Tax Audit for FY 2025-26 (AY 2026-27): Complete Guide to Form 3CD Changes, Compliance Requirements & Audit Readiness
The Central Board of Direct Taxes (CBDT) has introduced significant amendments to the Tax Audit Report (Form 3CD) through Notification No. 23/2025. These changes are applicable from 1 April 2025 and therefore impact tax audits conducted for Financial Year (FY) 2025-26 relevant to Assessment Year (AY) 2026-27.
The revised reporting framework places greater emphasis on transparency, compliance monitoring, MSME payment disclosures, loan transaction reporting, and buyback transactions. Businesses, finance teams, and tax professionals should understand these changes well in advance to avoid reporting errors and potential scrutiny during assessments.
This article provides a comprehensive overview of the amendments, their practical implications, and a tax audit readiness checklist.
Who Should Read This Guide?
| Reader Category | Why It Matters |
|---|---|
| Business Owners | Understand compliance risks and reporting obligations. |
| CFOs & Finance Heads | Strengthen internal controls and improve audit preparedness. |
| Accounts & Finance Teams | Ensure proper documentation and reconciliations. |
| Chartered Accountants | Update audit procedures in line with revised Form 3CD requirements. |
| Tax Consultants | Guide clients on emerging compliance risks. |
| MSME Vendors & Customers | Understand the impact of delayed payments under Section 43B(h). |
Snapshot of Key Form 3CD Changes
| Clause | Nature of Change | Impact Area |
|---|---|---|
| Clause 12 | Inclusion of Section 44BBC | Presumptive taxation |
| Clause 19 | Removal of obsolete deduction sections | Deduction reporting |
| Clause 21 | Enhanced reporting of settlement and compounding expenditure | Expense verification |
| Clause 22 | Strengthened MSME disclosures | MSMED compliance |
| Clause 26 | Reporting impact of Section 43B(h) | Allowability of expenses |
| Clause 31 | Expanded reporting of loans, deposits and specified advances | Financial transactions |
| Clause 36B | New reporting for share buyback transactions | Corporate restructuring |
| Clause 44 | Continued GST expenditure reporting | Indirect tax reconciliation |
Clause 12 – Inclusion of Section 44BBC
Clause 12 requires reporting where income is computed under presumptive taxation provisions.
A new reference to Section 44BBC has been incorporated.
Section 44BBC applies to non-resident entities engaged in the business of operating cruise ships.
Practical Impact
Tax auditors should verify:
- Eligibility under Section 44BBC.
- Computation of presumptive income.
- Consistency with books of account and tax return disclosures.
- Supporting documentation relating to cruise operations.
Clause 19 – Removal of Obsolete Deduction Provisions
Certain deduction-related provisions that have either expired or become inoperative have been removed from reporting requirements.
The deleted sections include:
- Section 32AC
- Section 32AD
- Section 35AC
- Section 35CCB
Why This Change Matters
The amendment streamlines Form 3CD by eliminating reporting requirements for provisions that are no longer relevant for most taxpayers.
Tax auditors should ensure that old audit templates and software utilities are updated accordingly.
Clause 21 – Reporting of Settlement and Compounding Expenditure
Clause 21 deals with amounts that may not be allowable as deductions while computing taxable income.
The revised reporting requirements require greater disclosure regarding expenditure incurred in connection with settlements, compounding proceedings, or contraventions under laws notified by the Central Government.
Auditor’s Focus Areas
| Item | Report? |
|---|---|
| Penalties for violation of law | Yes |
| Compounding charges | Yes |
| Settlement payments covered by notified laws | Yes |
| Routine business expenditure | No |
Practical Considerations
Businesses should maintain adequate documentation supporting the nature of such payments and their tax treatment.
Tax authorities may closely review these disclosures during assessments.
Clause 22 and Clause 26 – MSME Reporting & Section 43B(h)
Among all recent tax audit developments, the interaction between MSME reporting and Section 43B(h) remains one of the most significant compliance areas.
Clause 22 requires disclosure of payments due to Micro and Small Enterprises, while Clause 26 requires reporting of disallowances under Section 43B, including those arising under Section 43B(h).
Understanding Section 43B(h)
Section 43B(h) links tax deductibility of expenditure with timely payment to Micro and Small Enterprises as defined under the MSMED Act, 2006.
Where payment is not made within the timelines prescribed under Section 15 of the MSMED Act, deduction may be deferred until actual payment.
Critical Compliance Note
Unlike certain other deductions covered under Section 43B, payment made before the due date of filing the income-tax return does not automatically safeguard the deduction where payment to a Micro or Small Enterprise exceeds the timelines prescribed under Section 15 of the MSMED Act.
Accordingly, businesses must closely monitor vendor ageing and ensure timely settlement of MSME dues.
Key Compliance Measures
Businesses should:
- Obtain MSME declarations from vendors.
- Update vendor master records regularly.
- Monitor ageing of outstanding balances.
- Identify overdue MSME liabilities.
- Review year-end outstanding balances.
- Maintain payment evidence and supporting records.
Clause 31 – Expanded Reporting of Loans, Deposits and Specified Advances
Clause 31 has been significantly expanded.
The revised reporting framework captures a wider range of transactions involving:
- Loans
- Deposits
- Specified advances
- Repayments
- Journal entries affecting such transactions
Why This Matters
Tax authorities increasingly use data analytics to identify transactions that may potentially violate provisions such as:
- Section 269SS: Taking / Accepting a Loan, Deposit, or Property Advance –> ₹20,000
- Section 269T: Repaying a Loan, Deposit, or Property Advance –> ₹20,000
- Section 269ST: Receiving any other cash sum (Sales, Gifts, Events) –> ₹2,00,000
Enhanced reporting enables better scrutiny of cash and non-cash financing arrangements.
Auditor Checklist
Review:
- Cash receipts and repayments.
- Journal entries.
- Inter-group transactions.
- Related-party funding arrangements.
- Shareholder advances.
- Loan confirmations and agreements.
Special attention should be paid to journal entries because these are now specifically covered within the reporting framework.
Clause 36B – New Reporting of Share Buyback Transactions
A new reporting requirement has been introduced through Clause 36B.
Where a company has undertaken a buyback of shares during the previous year, prescribed details relating to the transaction are required to be disclosed.
Why This Clause Matters
The introduction of Clause 36B reflects the increasing reporting focus on buyback transactions and enables tax authorities to obtain transaction-level visibility regarding:
- Consideration paid on buyback,
- Cost of acquisition of shares, and
- Other prescribed transaction details.
Documentation to Maintain
- Board resolutions.
- Shareholder approvals.
- Buyback offer documents.
- Shareholding records.
- Cost of acquisition workings.
- Payment evidence.
Clause 44 – GST Expenditure Reporting Continues
Clause 44 continues to require reporting of expenditure based on GST registration status of suppliers.
Although no major amendment has been introduced in this clause, it remains one of the most scrutinized disclosures during tax audits.
Businesses should ensure:
- GST reconciliations are completed.
- Vendor classifications are accurate.
- Input tax credit records are maintained.
- Books are reconciled with GST returns.
Major Risk Areas for Businesses
The following areas are expected to receive increased attention during tax audits and assessments:
| Risk Area | Likely Impact |
|---|---|
| MSME payment delays | Section 43B(h) disallowance |
| Inadequate vendor classification | Incorrect reporting |
| Loan journal entries | Clause 31 reporting issues |
| Settlement and compounding payments | Potential disallowance |
| Share buyback transactions | New reporting obligations |
| GST mismatches | Reconciliation challenges |
Common Tax Audit Mistakes to Avoid
- Failure to collect MSME declarations.
- Ignoring vendor ageing reports.
- Incomplete loan documentation.
- Missing journal-entry-based loan transactions.
- Incorrect GST classifications.
- Lack of supporting records for settlements and penalties.
- Delayed reconciliation of books with statutory returns.
- Failure to update audit checklists for revised Form 3CD requirements.
- Inadequate review of related-party transactions.
- Last-minute preparation of audit schedules.
Tax Audit Readiness Scorecard – FY 2025-26
Use the following checklist to assess whether your organization is audit-ready.
| Compliance Item | Status |
|---|---|
| Books of account finalized | â–¡ |
| Trial balance reviewed | â–¡ |
| GST reconciliations completed | â–¡ |
| TDS reconciliations completed | â–¡ |
| MSME declarations collected | â–¡ |
| Vendor ageing report prepared | â–¡ |
| Section 43B(h) review completed | â–¡ |
| Related-party transactions reviewed | â–¡ |
| Loan and deposit review completed | â–¡ |
| Clause 31 journal entries identified | â–¡ |
| Fixed asset register updated | â–¡ |
| Depreciation verified | â–¡ |
| AIS/TIS reconciled | â–¡ |
| Tax audit schedules prepared | â–¡ |
| Prior-year observations reviewed | â–¡ |
Tax Audit Documentation Checklist
Before commencement of the audit, businesses should keep the following records readily available:
Financial Records
- Audited financial statements
- Trial balance
- General ledger
- Fixed asset register
- Inventory records
Tax Records
- GST returns
- TDS returns
- Advance tax workings
- Income-tax returns
- AIS/TIS reports
MSME Compliance Documents
- MSME declarations
- Vendor master data
- Ageing analysis
- Payment records
Loan & Financing Documents
- Loan agreements
- Bank confirmations
- Related-party transaction records
- Repayment schedules
Corporate Records
- Board resolutions
- Shareholder resolutions
- Buyback documentation (if applicable)
Key Takeaways
The amendments applicable to Tax Audit Reports for FY 2025-26 signal a clear shift toward enhanced transparency and transaction-level reporting.
Businesses should particularly focus on:
- Section 43B(h) compliance,
- MSME payment tracking,
- Loan and deposit reporting,
- Settlement and compounding expenditure,
- Share buyback disclosures, and
- Robust audit documentation.
Organizations that proactively review these areas before year-end are likely to experience smoother audits, lower compliance risk, and fewer assessment-related disputes.
Need Assistance with Tax Audit Preparation?
Our professional team can assist with:
- Tax Audit Documentation Review
- MSME Compliance Assessment
- Section 43B(h) Analysis
- GST and TDS Reconciliations
- Clause 31 Loan & Deposit Review
- Tax Audit Working Paper Preparation
- Audit Readiness Reviews
Contact us cacult0816@gmail.com to discuss your tax audit requirements and ensure your organization is fully prepared for FY 2025-26 compliance obligations.
Disclaimer: This article is intended solely for educational and informational purposes. Readers should refer to the relevant provisions of the Income-tax Act, Income-tax Rules, CBDT notifications, judicial precedents, and professional guidance before taking any action. Professional advice should be obtained based on the specific facts and circumstances of each case.
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- Old vs New Tax Regime for FY 2025-26: Tax Slabs, 87A Rebate, Marginal Relief & Which Option Saves More Tax
- Taxation of ESOPs, RSUs, and ESPPs in India
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