Tax Audit Clause 44 Made Simple: Compile and Check It from the Balance Sheet, P&L, Ledgers and GST Portal (AY 2026-27)

 By CA Surekha Ahuja

Clause 44 takes more time to prepare than any other clause in Form 3CD, and it is the one most likely to be compared with your client's GST data. This guide shows how to complete it in hours instead of days.

1. The basics

• It is mandatory. CBDT deferred Clause 44 several times. The last deferment ended on 31.03.2022 and was not extended, so every tax audit report furnished since then must include it.
• The forms are unchanged for AY 2026-27. FY 2025-26 is still governed by the Income-tax Act, 1961, so the report is filed in Form 3CA/3CB with Form 3CD. The new Form 26 applies only from tax year 2026-27.
• What it asks for: the year's total expenditure, split by the GST status of the party paid. There are no GST-rate columns.

Column	What goes in it
2	Total expenditure
3	Paid to registered parties for exempt supplies
4	Paid to composition dealers
5	Paid to other registered parties (regular tax invoices)
6	Total paid to registered parties (3 + 4 + 5)
7	Paid to unregistered parties

2. The workflow at a glance

📊 [Insert image: Clause44_Workflow.png]

Each compiling step on the left has a matching check on the right. By the time you report a figure, it has already been tested.

3. Where each figure comes from

📊 [Insert image: Clause44_Source_Mapping.png]

Source	What to take	Column
Balance sheet	Fixed asset additions (tangible and intangible)	Col 2, then classify by vendor
	CWIP expenditure incurred during the year	Col 2, then classify by vendor
	Transfers from CWIP to fixed assets	Exclude (already counted when incurred)
	Capital advances, deposits, prepaid amounts	Exclude (not yet expenditure)
P&L account	All expense heads, net of ITC availed	Col 2 control total
	Depreciation, amortisation, provisions, write-offs	Exclude
	Partners' interest and remuneration, income-tax	Exclude
Ledger / vendor master	Regular vendor (tax invoice)	Col 5
	Composition dealer (bill of supply)	Col 4
	Registered vendor supplying exempt goods or services	Col 3
	Unregistered vendor, no GSTIN, employees, imports	Col 7
GST portal	GSTR-2B (12 months)	Validates Col 5
	GSTR-3B Table 5	Validates Cols 3 + 4
	GSTR-9 Table 8A	Validates ITC claimed
	Search Taxpayer	Decides Col 3, 4, 5 or 7

💡 Balance sheet tip: Count capital expenditure once, in the year it is incurred, even when it first sits in CWIP. Do not add it again when it is capitalised, or Column 2 will count the same spend twice.

4. Compile in five steps

Step 1: Column 2 from the balance sheet and P&L

1. Start with all expenses in the P&L.
2. Add capital expenditure incurred during the year: fixed asset additions plus CWIP spend, less transfers from CWIP.
3. Exclude depreciation, amortisation, provisions, write-offs, partners' interest and remuneration, and income-tax.

Report amounts net of GST where ITC was claimed, and including GST where it was not.

Step 2: Map the standard ledgers

📊 [Insert image: Clause44_Ledger_Mapping.png]

Ledger	Column
Salary, wages, bonus, staff welfare	7
Electricity	3
Interest paid to banks and NBFCs	3
Interest paid to unregistered lenders	7
Bank charges and processing fees	5
Rent paid to a registered landlord	5
Rent paid to an unregistered landlord (check RCM)	7
General insurance	5
Individual life or health insurance (exempt from 22.09.2025)	3
Petrol and diesel (non-GST; add a note)	3
Freight / GTA	5 or 7, depending on the transporter
Advocates and unregistered professionals	7
Government fees, stamp duty, municipal taxes (add a note)	7, or exclude
Imports	7
Depreciation, provisions, partners' remuneration, income-tax	Exclude

Step 3: Match vendors with GSTR-2B

1. Download GSTR-2B for all 12 months and combine the files into one sheet.
2. Make a pivot table of the vendor ledgers by party.
3. Look up each vendor's GSTIN in the combined 2B with XLOOKUP, or INDEX/MATCH in older Excel. Vendors that match go to Column 5.

Step 4: Check the remaining vendors on Search Taxpayer

Look up each vendor that has a GSTIN but is not in 2B on the GST portal:

• Composition dealer → Column 4. These dealers do not file GSTR-1, so they never appear in 2B.
• Exempt supply (the vendor issued a bill of supply) → Column 3.
• Cancelled registration or non-filer → flag it as a risk.

Step 5: Vendors with no GSTIN → Column 7

💡 Shortcut: Sort vendors by spend. The top 20–30 usually account for about 80% of the value. Verify those individually on the portal, and rely on the GSTIN tag in the vendor master for the rest.

5. Check with five tie-outs

1. Column 2 equals P&L expenses plus capital expenditure incurred, less the exclusions.
2. Each default mapping is backed by a note.
3. Column 5 matches the 12-month GSTR-2B taxable value. Separately, ITC claimed matches GSTR-9 Table 8A.
4. Columns 3 + 4 match the 12-month total of GSTR-3B Table 5.
5. Column 6 + Column 7 equals Column 2. The difference must be nil.

Explain any gap in checks 3 or 4: timing differences, ITC blocked under section 17(5), capital goods, imports, or vendors who have not filed returns.

Then test 10–15 actual invoices. A tax invoice supports Column 5. A bill of supply points to Column 3 or 4.

6. Red flags to raise with the client

Finding	Exposure
ITC claimed on purchases from composition dealers	The ITC is ineligible and must be reversed with interest
Vendor's registration is cancelled but its invoices still charge GST	Risk of fake ITC
Large Column 7 spend paid in cash	Section 40A(3) disallowance and bogus-purchase allegations
Unregistered GTA, advocates or landlords	Reverse charge (RCM) liability may be unpaid
Column 5 well above the GSTR-2B total	Vendors are not filing returns, so the ITC is at risk

Report these in a separate management letter, not in the tax audit report.

7. Report and document

Sample note to Clause 44:

The break-up has been compiled from the books of account and supplier GSTIN details, reconciled with GSTR-2B and GSTR-3B, and verified on a test-check basis. Non-cash items and appropriations of profit are excluded. Capital expenditure is included in the year it is incurred. Imports are shown in Column 7. Amounts are net of input tax credit availed, and include GST where no credit was availed.

• Management confirmation: get written confirmation of each vendor's GST status and the classification, by email or in the management representation letter.
• Working papers: keep the Excel working, the GSTR-2B downloads, Search Taxpayer screenshots for the top vendors, and the confirmation.
• Data not available: if the client cannot provide the data, report the limitation. Do not plug in estimates, because section 271J applies to the auditor.

8. Common mistakes

• ❌ Counting depreciation as well as the capital purchase, so the same asset is counted twice.
• ❌ Counting CWIP spend again when it is capitalised.
• ❌ Reporting amounts including GST when ITC was claimed.
• ❌ Splitting expenditure by GST rate. Clause 44 has no rate columns.
• ❌ Leaving composition dealers in Column 5.
• ❌ Comparing Column 5, which is an expense value, with GSTR-9 Table 8A, which is an ITC tax amount.
• ❌ Plugging in estimates instead of reporting a limitation.

Bottom line

The balance sheet and P&L give the total. The mapping classifies the standard ledgers. GSTR-2B and Search Taxpayer classify the vendors. GSTR-3B and GSTR-9 confirm the result. Compiled, tied out and documented this way, Clause 44 takes hours, and it will hold up when the department compares it with the client's GST data.

The Rs. 25,000 PF Ceiling Test for Small Businesses

 By CA Surekha Ahuja

A change in the PF wage ceiling may look like a payroll change.

For a small business, it can become a working-capital and competitiveness issue.

From 17 September 2026, the wage ceiling for mandatory EPFO coverage has increased from ₹15,000 to ₹25,000 per month. The Government estimates that more than 51 lakh additional employees may come within mandatory EPFO coverage.

At the same time, businesses continue to operate within applicable minimum-wage requirements and the statutory payment framework for qualifying micro and small enterprise suppliers.

These are separate laws with separate objectives.

But for the promoter, they ultimately meet at one place:

CASH FLOW

Three legal obligations. One business question.

              ₹25,000 PF CEILING
                      │
                      ▼
          Wider statutory coverage
                      │
                      │
     ┌────────────────┼────────────────┐
     ▼                ▼                ▼
   PAYROLL        MINIMUM WAGES      SUPPLIERS
     │                │                │
 PF contribution   Wage compliance   MSE payment
     │                │                │
     └────────────────┼────────────────┘
                      ▼
              CASH OUTFLOW
                      │
                      ▼
             WORKING CAPITAL
                      │
                      ▼
             BUSINESS MARGIN
                      │
                      ▼
              COMPETITIVENESS

The legal provisions should therefore be understood first, and their combined economic effect analysed separately.

What exactly changed in PF

The Government has raised the wage ceiling for mandatory EPFO coverage from ₹15,000 to ₹25,000 per month, effective 17 September 2026.

The revised ceiling is intended to bring employees in the relevant ₹15,000–₹25,000 wage band within mandatory social-security coverage, subject to the applicable statutory and scheme provisions.

The change covers the applicable EPFO social-security framework, including EPF, EPS and EDLI.

The important point for employers is that the ₹25,000 figure is a wage ceiling for mandatory coverage.

It should not be interpreted as:

“Every employee earning above ₹25,000 will automatically have PF calculated on ₹25,000.”

The actual position requires examination of the employee's coverage, membership status, relevant wage and applicable statutory provisions.

The PF calculation needs to be understood correctly

Consider an employee newly coming within applicable PF coverage with a relevant PF wage of ₹20,000.

Assuming the applicable employee contribution is 12%:

₹20,000 × 12% = ₹2,400

The employee's contribution is deducted from wages and remitted towards PF.

Therefore, if gross wages remain unchanged:

Gross wage − employee PF deduction = lower immediate take-home pay

But this does not mean that gross salary has legally been reduced.

Nor does PF coverage automatically require the employer to increase gross salary to compensate for the employee contribution.

Any salary revision or gross-up is a separate commercial decision.

The employer contribution is separately calculated and represents an employer-side cash outflow.

The Government has also stated that, with the pensionable wage ceiling moving to ₹25,000, the maximum employer pension contribution at 8.33% rises from ₹1,250 to ₹2,083 per month.

Therefore, the right question for management is not simply: “What is 12%?”

It is: “What is the actual incremental employer cash outflow for our employee population?”

Minimum wages are a separate legal layer

PF and minimum wages should not be mixed.

Minimum-wage compliance depends upon the applicable wage notification, employment category, skill classification, location and other relevant parameters.

The business should therefore work through:

Applicable minimum wage
          ↓
Actual wage structure
          ↓
PF coverage
          ↓
Relevant PF wage
          ↓
Employee contribution
          ↓
Employer contribution
          ↓
Total employment cash impact

A labour-intensive business operating close to the applicable minimum wage may have considerably less room to absorb additional statutory employment costs than a business with high margins.

The supplier side: the 45-day MSMED framework

The other side of the cash-flow equation is the supplier.

Sections 15 to 24 of the MSMED Act, 2006 provide the statutory framework dealing with delayed payments to qualifying micro and small enterprises.

Where the provisions apply, payment has to be made within the agreed period subject to the statutory limit, with the agreed period not exceeding 45 days from acceptance or deemed acceptance.

Delayed payment can attract statutory interest under section 16, and the MSEFC mechanism under sections 20 and 21 provides a statutory route for delayed-payment disputes.

This creates an important working-capital question.

Business purchases goods/services
              ↓
      MSE supplier invoice
              ↓
      Acceptance/deemed acceptance
              ↓
      Agreed payment period
              ↓
       Maximum statutory limit
              ↓
        Actual payment

The buyer cannot simply assume that its own collection cycle determines how long it can defer payment to a qualifying MSE supplier.

And there is an important qualification:

The MSMED delayed-payment provisions are not a blanket rule for every vendor described as an “MSME”.

The status and eligibility of the supplier must be established.

Now connect the two sides

Consider a small manufacturer. It pays employees every month. It purchases material from suppliers.

It sells finished goods to customers. Its cash cycle may look like this:

EMPLOYEES
   │
   │ Payroll + PF
   ▼
BUSINESS
   │
   │ Purchases
   ▼
SUPPLIERS
   │
   │ Payment obligation
   ▼
BUSINESS
   │
   │ Sales on credit
   ▼
CUSTOMERS
   │
   │ Collection
   ▼
CASH

The problem arises when:

the business has to pay before it collects.

That is when a legal compliance issue becomes a working-capital issue.

The tax dimension

Delayed payment to a qualifying micro or small enterprise also has a tax dimension.

For periods governed by the Income-tax Act, 2025, section 37(2)(g) contains the relevant restriction for amounts payable to a micro or small enterprise beyond the time prescribed under section 15 of the MSMED Act.

For earlier periods governed by the Income-tax Act, 1961, the corresponding provision was section 43B(h).

Therefore:

MSE payment delayed
        │
        ├──► MSMED interest exposure
        │
        ├──► Working-capital pressure
        │
        └──► Tax deduction timing consequence

Vendor ageing should therefore be reviewed not merely by the purchase/accounts team but as part of the overall tax and working-capital review.

The real issue: who ultimately bears the cost

This is where the analysis becomes more important than the individual percentages.

A statutory obligation tells the business what it must pay.

But it does not necessarily determine who ultimately bears the economic cost.

That depends on bargaining power.

A statutory cost is imposed by law; an economic cost is determined by bargaining power.

The business may have three possibilities:

              STATUTORY COST
                    │
                    ▼
             Can price increase?
               /          \
             YES            NO
              │              │
              ▼              ▼
       Pass through       Absorb cost
                             │
                       ┌─────┴─────┐
                       ▼           ▼
                     Margin     Working capital
                       │           │
                       └─────┬─────┘
                             ▼
                       COMPETITIVENESS

This is why the same statutory change can have very different economic consequences for different businesses.

A business with strong pricing power may pass the cost to customers.

A business with weak pricing power may absorb it in its margin.

A business already facing slow collections may have to finance it.

The e-commerce factor cannot be ignored

The competitive environment for small businesses has changed.

A local retailer, distributor or manufacturer may now compete with businesses operating through:

• e-commerce;
• quick-commerce;
• digital marketplaces;
• centralised procurement;
• technology-enabled inventory management; and
• data-driven customer acquisition.

This does not mean that e-commerce should be characterised as inherently unfair.

The issue is more fundamental:

the small business may have less pricing power at precisely the time its statutory costs are increasing.

So the equation becomes:

Higher statutory cost
        +
Slow customer collections
        +
Limited pricing power
        +
Digital/e-commerce competition
        ↓
Reduced margin
        +
Higher working-capital requirement
        ↓
Higher financing pressure
        ↓
Lower ability to invest and compete

This is the part of the PF ceiling debate that a simple payroll calculation misses.

The small business may be caught in the middle

A small enterprise can simultaneously be:  supplier to a large customer

and  buyer from another small enterprise.

Suppose:

LARGE CUSTOMER
      │
      │ Slow collection
      ▼
SMALL BUSINESS
      │
      │ Statutory supplier payment
      ▼
MSE SUPPLIER

The smaller business may then become the party financing the timing difference.

This raises a wider policy question:

Who in the supply chain has the financial capacity to carry the working-capital burden?

The answer should not automatically be:

one MSME finances another MSME.

The policy objective should instead be to ensure that receivables can be converted into working capital efficiently.

What should Government intervention focus on

The answer need not be to weaken:

• PF protection;
• minimum-wage requirements; or
• statutory MSE payment rights.

The more useful intervention is on the financing and competitiveness side.

The MSME policy framework already recognises delayed payments and access to finance as important competitiveness issues, with mechanisms including MSEFC/Samadhaan and receivable-financing initiatives such as TReDS.

The policy principle should therefore be: 

Do not weaken the statutory obligation. Make the cash flow easier to finance.

That could mean greater emphasis on:

Prompt payment

↓

Receivable financing

↓

Working-capital access

↓

Digital enablement

↓

Productivity

↓

Competitive viability

The objective should be compliance with competitiveness, not compliance at the cost of viability.

What should the promoter calculate

Every affected business should now prepare a simple monthly review.

The five numbers

Number	Management question
Incremental employer PF cost	What additional monthly cash leaves the business?
Minimum-wage gap	Is any wage revision required?
MSE payable ageing	What must be paid within the statutory framework?
Customer receivable ageing	When will the business actually collect?
Margin after statutory costs	Can the business absorb the cost without losing viability?

Then calculate:

Incremental statutory outflow
              +
MSE supplier payment requirement
              +
Financing cost
              −
Customer collections
              −
Price recovery
              │
              ▼
       NET CASH-FLOW PRESSURE

This is much more useful than calculating PF percentage in isolation.

Compliance cost is not always economic cost

Three distinctions are important. Employee PF deduction is not the same as

employer PF cost. 

Payment to an MSE supplier is not the same as an operating expense.

Tax deduction timing is not necessarily the same as permanent tax cost.

But all three can affect cash timing.

And cash timing matters enormously to a small business.

A profitable business can face liquidity pressure if customers pay slowly.

A modest-margin business can remain viable if its cash conversion is fast and working capital is efficiently financed.

Therefore:  Profitability tells you whether the business model works. Cash conversion tells you whether the business can realise that profit.

The Rs.25,000 PF Ceiling Test

The real test for a small business is not simply: “How much more PF will I pay?”

It is:               LEGAL CHANGE

                   ↓
          ADDITIONAL CASH OUTFLOW
                   ↓
          WORKING-CAPITAL IMPACT
                   ↓
          FINANCING REQUIREMENT
                   ↓
       CAN PRICE BE INCREASED?
             /           \
           YES             NO
            ↓               ↓
      Price recovery     Margin pressure
                            ↓
                      Competitiveness

And the complete business test is: 

PF
+
MINIMUM WAGES
+
MSE PAYMENT DISCIPLINE
+
FINANCING COST
        ↓
   CASH OUTFLOW
        ↓
WORKING CAPITAL
        ↓
 PRICING POWER
        ↓
     MARGIN
        ↓
COMPETITIVE CAPACITY

CA Sahuja Perspective

The increase in the EPFO wage ceiling is fundamentally a social-security reform.

Minimum-wage laws are fundamentally worker-protection provisions.

The MSMED delayed-payment framework is fundamentally a payment-protection mechanism.

These objectives need not conflict.

But legislation operates within an economic system.

If statutory cash commitments rise while customer collections remain slow and digital competition limits pricing power, the small business can experience a genuine working-capital squeeze.

The answer should not be to move the burden from one small enterprise to another.

The more sustainable approach is:

formal employment + prompt payment + receivable financing + digital competitiveness + access to working capital.

For the promoter, the exercise is clear:

Calculate the legal obligation.

↓

Quantify the cash impact.

↓

Measure the collection gap.

↓

Test pricing power.

↓

Protect working capital.

↓

Determine whether the business remains competitive.

Because ultimately:

A statutory cost is imposed by law; an economic cost is determined by bargaining power.

That is the real ₹25,000 PF Ceiling Test for Small Businesses.

CBDT Extends Tax Audit & ITR Deadlines for AY 2026-27

By CA Surekha S Ahuja

CBDT Extends Tax Audit & ITR Deadlines for AY 2026-27

In a press release dated 28 September 2026, the CBDT extended two due dates for taxpayers covered under S. No. 2 of the Table below Explanation 2 to Section 139(1). These are companies, taxpayers whose accounts must be audited, and partners of such firms.

📌 Tax Audit Report: extended from 30 Sept 2026 → 21 Oct 2026
📌 Income Tax Return: extended from 31 Oct 2026 → 21 Nov 2026

A formal notification will follow separately. Transfer pricing cases are not covered by this extension.

Clause 31 of Form 3CD for AY 2026-27: 269SS, 269T & 269ST — What Every Assessee and CA Should Check Before Tax Audit

 By CA Surekha S Ahuja

Clause 31 of Form 3CD is often treated as a cash transaction clause.

That is not the right way to approach it.

Clause 31 covers specified loans, deposits, specified sums, repayments and high-value receipts and payments. Under Clauses 31(a), 31(b) and 31(c), a transaction is reportable even where it has been undertaken through a permitted banking or electronic mode.

For FY 2025-26 / AY 2026-27, Form 3CD under the Income-tax Act, 1961 continues to apply.

The safest approach is:

Identify → Aggregate → Determine the Clause → Report → Identify the actual mode → Test compliance → Check exceptions

The most important point: Reporting is not the same as violation

This distinction should be understood first.

A qualifying transaction under 31(a), 31(b) or 31(c) does not become non-reportable merely because it was made through a permitted mode.

For example:

• ₹10 lakh loan received through NEFT;
• ₹5 lakh specified sum received through RTGS; or
• ₹8 lakh qualifying loan/deposit repaid through RTGS.

The mode may be compliant, but the qualifying transaction is still relevant for Clause 31 reporting.

Therefore:

Reportability and compliance are two separate tests.

• First: Is the transaction covered by Clause 31?
• Second: Was the prescribed mode followed?

This is the single most important practical distinction in completing Clause 31.

The position is different for Clauses 31(ba) to 31(bd), 31(d) and 31(e). These capture transactions where the prescribed mode requirements are not followed. For these sub-clauses, the mode itself determines whether the transaction falls within the reporting requirement.

Clause 31 at a glance

Clause	What is reported	Main provision	Practical trigger
31(a)	Loan or deposit accepted	269SS	₹20,000 threshold
31(b)	Specified sum received	269SS	₹20,000 threshold
31(ba)	High-value receipt through non-prescribed mode	269ST	₹2 lakh
31(bb)	Such receipt by non-account-payee cheque/draft	269ST	₹2 lakh
31(bc)	High-value payment through non-prescribed mode	269ST	₹2 lakh
31(bd)	Such payment by non-account-payee cheque/draft	269ST	₹2 lakh
31(c)	Loan/deposit/specified advance repaid	269T	₹20,000 threshold
31(d)	Specified repayment received otherwise than through prescribed modes	269T	₹20,000 threshold
31(e)	Such repayment received by non-account-payee cheque/draft	269T	₹20,000 threshold

The current tax-audit guidance separately identifies 31(a), 31(b), 31(c), 31(d) and 31(e), including the different reporting treatment for repayments.

The Clause 31 flow chart

START — Is there a loan / deposit / specified sum / specified advance / high-value receipt or payment?

1. IDENTIFY THE NATURE
Loan / Deposit / Specified Sum / Repayment / Other Receipt or Payment

↓

2. APPLY THE RELEVANT THRESHOLD

• ₹20,000 → Sections 269SS / 269T
• ₹2 lakh → Section 269ST

↓

3. APPLY THE STATUTORY AGGREGATION TEST

• 269SS: current amount + earlier unpaid amount from the same person
• 269T: amount with interest + aggregate amount held from that person
• 269ST: person-wise daily aggregate, single transaction, and one event or occasion

↓

4. IDENTIFY THE CORRECT CLAUSE 31

↓

5. REPORT

• Under 31(a), 31(b) and 31(c), report the qualifying transaction; do not exclude it merely because payment was through bank/electronic mode.
• Under 31(ba) to 31(bd), 31(d) and 31(e), the prescribed/non-prescribed mode determines whether the transaction is reportable.

↓

6. RECORD THE ACTUAL MODE SEPARATELY

Cash / account-payee cheque / account-payee draft / ECS / prescribed electronic mode / other

↓

7. TEST COMPLIANCE

Permitted mode?

YES:
31(a), 31(b), 31(c) → reportable + compliant
Other mode-based sub-clauses → not reportable on account of prescribed-mode compliance

NO:
Reportable + examine exception / reasonable cause / penalty

1. Section 269SS — loan, deposit or specified sum accepted

Section 269SS restricts acceptance of a loan, deposit or specified sum otherwise than through the prescribed banking/electronic modes where the statutory threshold is attracted.

The test is not always limited to the amount of the individual receipt. Relevant earlier unpaid amounts and aggregation have to be considered.

Trigger

Check whether the relevant amount reaches the ₹20,000 threshold, including the statutory aggregation rules.

Example

• Opening loan balance from a person: ₹18,000
• Further cash loan received: ₹5,000

The ₹5,000 cannot be examined in isolation. The earlier unpaid amount and the new loan together come to ₹23,000, which crosses the ₹20,000 threshold. The ₹5,000 cash receipt therefore falls within section 269SS, even though it is below ₹20,000 on its own.

Default

Contravention of section 269SS can attract section 271D penalty equal to the amount of the loan, deposit or specified sum accepted in contravention.

Care point

Do not test 269SS merely from individual cash or bank entries. Review the party-wise outstanding balance.

2. Section 269SS — specified sum and property advances

A specified sum includes money received as an advance or otherwise in connection with the transfer of an immovable property, whether or not the transfer ultimately takes place.

This makes property transactions an important Clause 31 checkpoint.

Review separately

• booking advances;
• earnest money;
• sale advances;
• cancelled transactions;
• refunds; and
• adjustments.

Practical trigger

Property transaction → party → amount → mode → ₹20,000 test → subsequent refund/adjustment

Caution

Cancellation of the property transaction does not by itself remove the need to examine the original receipt under section 269SS.

3. Clauses 31(a) and 31(b) — report even when the mode is permitted

This is where one of the most common mistakes occurs.

Example 1

₹10 lakh unsecured loan received from director through NEFT
→ qualifying transaction → 31(a) reporting → permitted mode → no 269SS mode violation

Example 2

₹5 lakh property advance received through RTGS
→ qualifying specified sum → 31(b) reporting → permitted mode → no 269SS mode violation

Therefore:

“Received through bank” is not a reason for leaving 31(a) or 31(b) blank.

The transaction must first be identified for reporting; its mode is then separately examined.

4. Section 269T and Clause 31(c) — repayments made

Section 269T governs repayment of qualifying loans, deposits and specified advances where the statutory threshold is attracted.

Clause 31(c) deals with such repayments made by the assessee.

Example

Loan of ₹8 lakh repaid through RTGS.

The prescribed mode may have been followed. But the qualifying repayment is still relevant for Clause 31(c) reporting.

Correct sequence

Repayment identified → 31(c) reporting → Actual mode recorded → Section 269T compliance tested

Default

Contravention of section 269T can attract section 271E penalty equal to the amount of the loan, deposit or specified advance repaid in contravention.

Care point

Do not examine only the payment voucher. Review:

loan/deposit ledger + earlier outstanding + amount repaid + actual mode

5. Clauses 31(d) and 31(e) — repayment received by the assessee

These clauses are different from 31(c).

They deal with specified repayments received by the assessee where the repayment is received otherwise than through the prescribed modes or through a non-account-payee cheque/draft, as applicable.

Clause 31(d)

Repayment received otherwise than through the prescribed modes specified in the clause.

Clause 31(e)

Repayment received by a cheque or bank draft which is not an account-payee cheque or account-payee bank draft.

Thus:

• 31(c) = qualifying repayment made by the assessee
• 31(d)/(e) = specified repayment received by the assessee

This distinction should be built into the working paper.

6. Permitted-mode segregation — a must-have working paper

Clause 31 should not be worked out simply as:

“Cash transactions identified — therefore Clause 31 completed.”

The working should separately capture the actual mode.

Recommended working format

Party	Nature	Amount	Clause	Actual mode	Permitted?	Action
Director	Loan received	₹10 lakh	31(a)	NEFT	Yes	Report
Customer	Property advance	₹5 lakh	31(b)	RTGS	Yes	Report
Lender	Loan repaid	₹8 lakh	31(c)	RTGS	Yes	Report
Director	Loan received	₹5 lakh	31(a)	Cash	No	Report + 269SS review
Lender	Loan repaid	₹6 lakh	31(c)	Cash	No	Report + 269T review

The key principle

A permitted mode may make the transaction compliant; it does not by itself make a qualifying transaction non-reportable under 31(a), 31(b) or 31(c).

7. Do not review Clause 31 through the cash book alone

A proper Clause 31 review should cover:

• loan and deposit ledgers;
• director/shareholder/partner accounts;
• property advances;
• relevant customer/vendor advances;
• cash book;
• bank statements;
• journal entries;
• set-offs and adjustments; and
• party-wise outstanding balances.

ICAI's tax-audit material specifically emphasises obtaining complete borrowing/repayment information and examining relevant advances and supporting evidence.

8. Journal entries and set-offs — important caution

A transaction may be settled through:

• journal adjustment;
• set-off;
• transfer of an asset;
• transfer of a liability;
• conversion; or
• another mode.

Therefore:

No cash movement does not automatically mean no Clause 31 issue.

The substance of the transaction and the applicable statutory provision must be examined.

ICAI material on Clause 31 specifically highlights set-off/book-entry settlement as an area requiring consideration under sections 269SS, 269T and 269ST.

9. Section 269ST — the ₹2 lakh test

Section 269ST applies to the receipt of any sum of ₹2 lakh or more otherwise than by the prescribed modes, subject to its statutory exclusions.

There are three separate tests:

Test 1 — Person + day

Aggregate receipts of ₹2 lakh or more from a person in a day.

Test 2 — Single transaction

₹2 lakh or more in respect of a single transaction.

Test 3 — One event or occasion

₹2 lakh or more relating to one event or occasion from a person.

Example

Customer pays ₹1.20 lakh + ₹90,000 on the same day.

Individual payments are below ₹2 lakh. Aggregate = ₹2.10 lakh.

The relevant 269ST test therefore has to be examined.

Caution

Do not assume that splitting a large receipt into smaller instalments avoids section 269ST. The statutory tests specifically address aggregation, single transactions and one event or occasion.

10. Clauses 31(ba) to 31(bd)

These clauses separately capture high-value receipts and payments of ₹2 lakh or more where the prescribed mode requirements are not followed.

Receipts and payments through permitted modes are not reported under these clauses.

The working should therefore identify:

Person → date → amount → aggregate → transaction/event → mode → exception → Clause 31

The distinction between:

• receipt and payment; and
• prescribed and non-prescribed mode

should not be lost.

11. Statutory exceptions — always check before calling it a default

Sections 269SS, 269T and 269ST contain specified exceptions.

Depending upon the provision and conditions, these cover transactions involving entities such as:

• Government;
• banking companies;
• post office savings banks;
• co-operative banks;
• specified Government companies/corporations; and
• notified persons, institutions or classes.

Certain agricultural-income cases and specified co-operative agricultural lending institutions also have special provisions under section 269SS.

Therefore:

Amount alone does not establish a violation. Nature, parties, mode and statutory exception must all be checked.

12. Penalty exposure

Section	Default	Potential penalty
271D	Contravention of 269SS	Amount of loan/deposit/specified sum
271E	Contravention of 269T	Amount of loan/deposit/specified advance repaid
271DA	Contravention of 269ST	Amount received in contravention

The potential exposure can therefore be 100% of the relevant amount.

That makes Clause 31 a year-end risk review, not merely a form-filling exercise.

13. Reasonable cause — protection, not planning

The law provides a reasonable-cause defence in appropriate cases.

But the better sequence is:

Prevent the default → document the circumstances → preserve evidence → examine reasonable cause if required.

The genuineness of the transaction alone should not be treated as a substitute for compliance with sections 269SS, 269T or 269ST.

14. Six practical red flags

1. Related-party loans — Director, shareholder and partner accounts require special scrutiny.
2. Property advances — Review receipt, cancellation, refund and adjustment.
3. Cash repayment — A genuine loan does not automatically make cash repayment permissible.
4. Split receipts — Apply all relevant 269ST aggregation tests.
5. Journal settlements — Do not ignore them merely because the cash book is unaffected.
6. Old outstanding balances — Earlier unpaid amounts can affect the ₹20,000 test.

15. The year-end Clause 31 checklist

Before finalising Form 3CD:

• Extract all loans and deposits accepted
• Extract specified sums/property advances
• Extract all qualifying repayments
• Review party-wise opening and outstanding balances
• Reconcile cash and bank transactions
• Review journal/set-off entries
• Apply ₹20,000 tests under 269SS/269T
• Apply ₹2 lakh tests under 269ST
• Identify the correct Clause 31 sub-clause
• Record the actual mode separately
• Check statutory exceptions
• Identify non-compliance and penalty exposure
• Preserve confirmations and supporting evidence

The simplest way to remember Clause 31

₹20,000

• Loan / deposit / specified sum accepted → 269SS
• Loan / deposit / specified advance repaid → 269T

₹2 lakh

• High-value receipt/payment → 269ST

And always remember:

REPORT FIRST. MODE SECOND. COMPLIANCE THIRD.

(For 31(ba) to 31(bd), 31(d) and 31(e), the mode determines whether the transaction falls within the reporting requirement.)

CA Sahuja Perspective

Clause 31 should never be completed by asking only:

“Was there any cash transaction?”

The better question is:

“What qualifying transaction took place, which Clause 31 applies, what was the actual mode, and was that mode permitted?”

For AY 2026-27, the safest approach is a two-layer review:

Layer 1 — REPORTING
Identify every qualifying transaction and report it under the appropriate Clause 31.

Layer 2 — COMPLIANCE
Test its mode, aggregation, exception and penalty exposure.

The practical lesson is simple:

A permitted banking/electronic mode can make a qualifying transaction compliant; it does not, by itself, make the transaction non-reportable under Clause 31(a), 31(b) or 31(c).

Income Tax Department's New Foreign-Asset Message: Don't Ignore It — But Don't Misread It

 What taxpayers should check about overseas assets, AIS, Schedule FA and FAST-DS before 31 December 2026

By CA Surekha S Ahuja

The Income-tax Department is sending taxpayers a message along these lines: "Our records indicate that you may have overseas financial interests…"

The message refers to overseas bank accounts, shares, immovable property and other financial interests acquired in earlier years. It asks taxpayers to review the Foreign Assets Information in their AIS. It also points to the Foreign Assets of Small Taxpayers – Disclosure Scheme, 2026 (FAST-DS), open until 31 December 2026.

The message deserves attention. It also deserves to be read correctly.

It is a compliance prompt — not, by itself, a finding of undisclosed income.

It sits alongside the Department's NUDGE initiative, which focuses on better reporting of foreign assets and income in ITRs. FAST-DS, separately, provides a limited route for specified past omissions.

The real issue is not the message — it is the mismatch

A taxpayer receiving this message should not first ask, "How do I file FAST-DS?"

The first questions are:

1. Was I required to disclose this foreign asset?
2. Did I disclose it correctly?
3. If not, why not?

Only after answering these should FAST-DS be examined.

The whole approach in one flow

                 MESSAGE RECEIVED
          Don't panic — but don't ignore it
                        │
                        ▼
          1. CHECK AIS — what does the
             Department actually hold?
                        │
                        ▼
          2. LIST EVERY FOREIGN ASSET
             (not just the one mentioned)
                        │
                        ▼
      ┌──────────────────────────────────────┐
      │ For each asset, record:              │
      │ Year · Ownership · Residential status│
      │ Source · Value · ITR · AIS           │
      └──────────────────────────────────────┘
                        │
                        ▼
          3. RECONCILE WITH PAST RETURNS
                        │
                        ▼
          4. TEST THE LEGAL POSITION
             (see decision tree below)
                        │
                        ▼
          5. ACT — correct, declare, or
             document why nothing is due

That sequence matters more than the message itself.

Seven myths taxpayers should avoid

Myth 1: "The Department has found undisclosed income."
Not necessarily. Foreign financial information reaches the Department through information-sharing and compliance systems. Holding that information is not the same as establishing undisclosed income.

Information with the Department ≠ finding of undisclosed income. It is, however, a clear reason to reconcile your records.

Myth 2: "The money was already taxed in India, so there was no disclosure obligation."
This is one of the most important misconceptions. Source of funds and disclosure are two different questions.

Indian salary → tax paid → foreign shares bought → Schedule FA omitted.

The source may be fully explainable, yet the asset may still have required reporting. FAST-DS itself recognises this by treating assets bought from taxed income as a separate category.

A legitimate source does not remove a reporting obligation.

Myth 3: "It is a small investment, so it need not be reported."
There is no general rule that a small foreign asset need not be reported.

The Black Money Act's ₹20 lakh threshold (for assets other than immovable property) affects a specific penalty consequence. It is not a ₹20 lakh reporting exemption.

Penalty consequence ≠ reporting requirement.

Myth 4: "The account is old or dormant, so it does not matter."
An old account can still need examination. So can:

• an overseas brokerage account
• foreign shares, ESOPs or RSUs
• a foreign pension or retirement account
• property bought while working abroad
• a joint or beneficially owned account
• an account where you only had signing authority

Ask: When was it acquired? Who owned it? What was your residential status then? Was it held in the reporting period? Was it disclosed?

Myth 5: "If it appears in AIS, it is already in my ITR."
AIS is information, not your return. The two must be reconciled.

Equally, if something does not appear in AIS, that does not mean it need not be reported. The obligation comes from the law, not from what AIS happens to show.

Myth 6: "I received the message, so I must file FAST-DS."
No. The message should trigger an assessment of facts and law, not an automatic declaration. FAST-DS has defined categories, conditions and value limits. Receiving the message does not establish eligibility.

Myth 7: "I did not receive the message, so there is nothing to worry about."
Equally unsafe. The disclosure obligation does not start when the Department sends a message. No message is not an exemption.

The key distinction: two separate questions

	What it asks
Question 1	Was the foreign asset or income required to be disclosed?
Question 2	If there was an omission, is FAST-DS available for that case?

These questions must never be answered in reverse order.

                   FOREIGN ASSET
                         │
                         ▼
          Q1 · WAS DISCLOSURE REQUIRED?
             (residential status is key)
                 /                \
               NO                  YES
               │                    │
               ▼                    ▼
        RECORD THE BASIS     WAS IT DISCLOSED?
                               /          \
                             YES           NO
                              │             │
                              ▼             ▼
                        NO FA ISSUE —   WHY NOT? Establish
                        keep evidence   source · status ·
                                        value · year
                                             │
                                             ▼
                              Q2 · WHICH FAST-DS ROUTE?
                   ┌─────────────────┼─────────────────┐
                   ▼                 ▼                 ▼
              CATEGORY 2        CATEGORY 1       OUTSIDE FAST-DS
            Taxed income or     Untaxed or       Above ceiling or
            acquired as NR      unexplained      ineligible
            Up to ₹5 crore      Up to ₹1 crore   Other legal
            ₹1 lakh fee         60% of value     analysis needed

FAST-DS is not the starting point. Your actual history is.

Residential status can change the answer

The Department's Schedule FA guidance states that Schedule FA is not required for a non-resident or a resident but not ordinarily resident (RNOR). FAST-DS separately deals with assets acquired while non-resident that became reportable after the taxpayer became resident.

The year of acquisition and your status in each relevant year can therefore be decisive. This matters most for:

• Indians who worked abroad and later returned
• people who became residents after several years overseas
• accounts opened during foreign employment or education
• overseas pensions and retirement accounts
• investments made while non-resident
• inherited or jointly held foreign assets

The reconciliation checklist

Don't start by opening Form 1. Start here.

Check	What to establish
1. Asset	What exactly is the foreign asset or financial interest?
2. Ownership	Legal owner, beneficial owner, beneficiary, joint holder or signatory?
3. Timeline	When acquired or opened? Held in which years?
4. Residential status	ROR, RNOR or non-resident in each relevant year?
5. Source	Salary, savings, inheritance, gift, overseas income or taxed Indian income?
6. ITR	Reported in the relevant return and Schedule FA?
7. AIS	What is currently visible to the Department?
8. FAST-DS	If there was an omission, does the case actually fit the scheme?

FAST-DS: what it is — and what it is not

	Category 1	Category 2
Covers	Undisclosed foreign income or assets	Assets bought from taxed income, or acquired while non-resident, but not reported
Ceiling (aggregate)	₹1 crore	₹5 crore
Payable	30% tax + 30% additional = 60% of value	Flat ₹1 lakh fee
Valuation date	31 March 2026	31 March 2026

• Window: 16 August to 31 December 2026, via Form 1 on the e-filing portal.
• Ceilings are all-or-nothing: cross the limit and the category is unavailable. You cannot declare part and leave the rest.
• Immunity follows only a valid declaration and payment.
• Payments are not refundable.

The ₹1 lakh fee is not a universal settlement amount. And the scheme's existence does not mean every omission belongs in it. Eligibility must be established case by case.

Why these messages are going out now

FAST-DS is operational, Form 1 guidance is published, and the NUDGE initiative focuses specifically on Schedule FA. It is reasonable to see this message as part of a broader, data-driven compliance outreach.

But you should not try to infer the Department's precise basis in your case merely from receiving the message.

The practical lesson is simpler: if the Department is asking you to look at your foreign assets, look at them properly.

The bottom line

• Do not ignore the message — but do not read it as a tax demand.
• The message does not, by itself, establish undisclosed income.
• An overseas asset can have a fully legitimate source and still have a disclosure problem.
• AIS is not a substitute for disclosure in your return.

CHECK → RECONCILE → DETERMINE DISCLOSURE → TEST FAST-DS → ACT

The most expensive mistake may not be having a foreign asset. It may be choosing the wrong compliance route after discovering it.

Gratuity Provision in Tax Audit: Provision, Payment, Write-back and LIC Fund — AY 2026-27

 By CA Surekha S Ahuja

The gratuity charge in P&L is not automatically the tax deduction

Gratuity is a classic year-end tax-audit trap.

A company may recognise an actuarial gratuity liability in its accounts, but the closing liability is not itself the tax deduction.

The tax treatment depends on what actually happened:

PROVISION → PAYABILITY → PAYMENT → APPROVED FUND CONTRIBUTION → WRITE-BACK

For AY 2026-27, FY 2025-26 is governed by the Income-tax Act, 1961. Income from 1 April 2026 onwards falls under the Income-tax Act, 2025 and the new Tax Year regime.

The law in one view

Transaction	Tax treatment	Legal basis
Provision for future gratuity	Generally disallowed	s. 40A(7)(a)
Gratuity that became payable during the year	Exception to the above	s. 40A(7)(b)
Contribution to approved gratuity fund	Deductible subject to payment conditions	s. 36(1)(v) + s. 43B(b)
Contribution to unapproved fund	Generally disallowed	s. 40A(9)
Direct gratuity payment out of provision disallowed earlier	Deduction may arise on payment	s. 37(1), read with s. 40A(7)
Provision allowed earlier and subsequently paid	No second deduction	Explanation to s. 40A(7)
Write-back of provision disallowed earlier	Generally not taxable merely because of write-back	No earlier tax deduction
Write-back where deduction was allowed earlier	May be taxable	s. 41(1)

Section 40A(7)(a) disallows a provision for gratuity, subject to the specific exceptions in section 40A(7)(b). The Explanation also prevents a second deduction where the original provision had already been allowed.

1. Provision is not payment

Suppose the gratuity charge debited to P&L for FY 2025-26 is ₹30 lakh.

If that charge represents future gratuity liability and the gratuity has not otherwise become payable during the year, the amount is generally added back under section 40A(7).

But the correct statement is not: "Every gratuity provision is disallowed."

Section 40A(7)(b) creates an exception for a provision for gratuity that has become payable during the previous year.

Therefore:

Future gratuity provision
→ generally disallow.

Gratuity that became payable during FY 2025-26
→ examine the section 40A(7)(b) exception.

The closing actuarial liability should never simply be equated with the amount to be added back. The tax working should identify the current-year charge and separately examine amounts that became payable.

2. What happens when the previously disallowed provision is paid?

Suppose: Opening tax-disallowed provision: ₹10 lakh

• Current-year gratuity charge: ₹3 lakh
• Gratuity paid during the year from the provision: ₹4 lakh

If the ₹4 lakh relates to a provision that was disallowed earlier, deduction may arise when the gratuity is actually paid, subject to the applicable provisions.

The legal basis is the general deduction provision in section 37(1), read with section 40A(7).

But if the same payment has already been charged to P&L and thereby claimed in arriving at accounting profit, it should not be deducted again.

Equally, where the underlying provision had already been allowed as a deduction, the Explanation to section 40A(7) prevents a second deduction when the amount is subsequently paid.

The practical test : Was the amount already allowed for tax, or is the payment now releasing a provision on which tax deduction was denied earlier?

That is why a tax-disallowed gratuity provision register is essential.

3. Do not put every gratuity payment under section 43B

This distinction is important.

Section 43B(b) deals specifically with an employer's contribution to a gratuity fund.

It is therefore not correct to treat every gratuity paid directly to an employee as a section 43B payment.

Direct payment to employee

Analyse under the section 40A(7) framework, including whether the gratuity had become payable and whether a previously disallowed provision is being utilised.

Contribution to approved gratuity fund : Analyse under section 36(1)(v) read with section 43B(b). 

The legal character of the payment determines the tax treatment.

4. LIC Group Gratuity: the policy is not the tax test

An employer may have an LIC Group Gratuity arrangement. But the relevant question is not merely: "Is there an LIC policy?"

It is: Is the contribution being made to an approved gratuity fund and are the statutory conditions satisfied?

Section 36(1)(v) provides the deduction for contributions to an approved gratuity fund, while section 43B(b) governs the timing of deduction by reference to actual payment.

Tax computation for a funded arrangement - 

As a practical computation:

Add back: the full gratuity charge recognised in the books under AS 15 / Ind AS 19, to the extent not otherwise deductible.

Deduct: the eligible contribution actually paid to the approved gratuity fund, subject to section 43B.

And importantly: Gratuity paid by LIC/fund to employees does not give the employer a second deduction where the employer's eligible contribution has already been allowed.

Before claiming the contribution, verify:

• approval of the gratuity fund;
• irrevocable trust documentation;
• LIC policy/scheme;
• contribution demand;
• actual payment date; and
• fund statement.

An LIC policy by itself is not the statutory test for deduction.

5. A write-back follows the tax history of the provision

Suppose actuarial remeasurement reduces the liability and ₹50,000 is credited to P&L.

Do not automatically treat ₹50,000 as taxable income.

Ask: Was the original provision allowed as a tax deduction?

If disallowed earlier:  the write-back generally should not become taxable merely because it is credited to P&L.

If allowed earlier: section 41(1) may bring the corresponding benefit to tax.

The principle : The tax treatment of the write-back follows the tax treatment of the original provision.

The current year's accounting entry cannot be examined in isolation.

6. The reconciliation that catches the mistake

Assume:

Particulars	₹
Opening tax-disallowed provision	10,00,000
Current-year gratuity charge	3,00,000
Gratuity paid from provision	(4,00,000)
Excess provision written back	(50,000)
Closing provision	8,50,000

Assuming the opening provision was entirely disallowed in earlier years:

Add back: current-year provision — ₹3,00,000

Less: eligible gratuity payment — ₹4,00,000

Less: write-back of previously disallowed provision — ₹50,000

Net tax adjustment: ₹1,50,000 deduction

The movement independently confirms the number:

₹10 lakh opening − ₹8.50 lakh closing = ₹1.50 lakh

If the tax computation does not reconcile with the movement in the tax-disallowed provision, stop and investigate before filing.

7. Form 3CD and ITR: do not force the wrong section

For AY 2026-27, the relevant Form 3CD provisions include:

Clause	Gratuity relevance
21(e)	Provision for payment of gratuity not allowable under section 40A(7)
21(f)	Amounts covered by section 40A(9)
26	Amounts covered by section 43B, including relevant gratuity-fund contributions

CBDT's current tax-audit guidance expressly identifies Clause 21(e) for provision for gratuity not allowable under section 40A(7) and Clause 21(f) for section 40A(9).

The important distinction

A gratuity provision belongs to the section 40A(7) analysis.

An eligible contribution to an approved gratuity fund belongs to the section 43B analysis.

A direct gratuity payment should not be shifted into Clause 26 merely to make the numbers appear to match.

On the ITR side, a direct payment that is not a section 43B item should be claimed through the appropriate deduction route, including the relevant "any other amount allowable as deduction" field where applicable, rather than being put into the 43B row.

The objective is not to make 3CD and ITR mechanically identical by using the wrong statutory provision.

It is to make the legal character, 3CD disclosure and ITR computation tell the same story.

8. FY 2025-26: the gratuity valuation deserves another look

The Code on Social Security, 2020 gratuity provisions became applicable from 21 November 2025. The Ministry of Labour's FAQ confirms that the gratuity calculation provisions apply from that date and that a fixed-term employee becomes eligible for gratuity on completing one year of service under the contract.

This can affect the underlying gratuity liability and the actuarial valuation for FY 2025-26.

But keep the two laws separate:

A liability under labour law does not automatically become a deductible provision under income-tax law.

The tax question remains whether the amount is merely provided, has become payable, has been paid, or represents an eligible contribution to an approved fund.

AY 2026-27 — 10-point gratuity audit check

Before signing the tax audit report:

1. Obtain the actuarial valuation.

2. Reconcile the opening and closing gratuity liability.

3. Identify gratuity that became payable during FY 2025-26.

4. Separate it from the future gratuity provision.

5. Trace every payment — through provision or directly through P&L.

6. Maintain the tax-disallowed gratuity register.

7. For LIC/approved-fund arrangements, verify approval + contribution + payment.

8. Trace every write-back to the year in which the provision was originally dealt with for tax.

9. Reconcile Clause 21(e), 21(f) and 26 with the computation.

10. Ensure the 3CD, computation and ITR tell the same legal story.

Final Perspective

The real mistake is not making a gratuity provision.

It is losing the tax history of that provision.

For AY 2026-27, follow the legal sequence:

PROVISION → PAYABILITY → PAYMENT → WRITE-BACK

For a funded arrangement:

APPROVAL → CONTRIBUTION → PAYMENT → DEDUCTION

For every material amount, the working paper should answer four questions:

What was provided?
When did it become payable?
When and how was it paid?
Was a tax deduction already claimed?

That is the real control.

Do not deduct the accounting provision merely because it is an expense.
Do not disallow the same amount twice.
Do not claim the same payment twice.
And do not treat an LIC policy as a substitute for approved-fund verification.

For AY 2026-27, a properly maintained gratuity tax reconciliation can prevent a small year-end accounting entry from becoming a tax-audit or return-processing problem.

One final transition point

The above analysis is for AY 2026-27 under the Income-tax Act, 1961. From 1 April 2026, the Income-tax Act, 2025 applies. The terminology, section numbering and tax-audit reporting framework change; for Tax Year 2026-27, the erstwhile Forms 3CA/3CB/3CD are replaced by the unified Form No. 26 under section 63 of the new Act.

When Does an Audit Under Another Law Make the ITR Due on 31 October

 By CA Surekha S Ahuja

AY 2026-27 | FY 2025-26

An audit report does not decide the ITR due date.

The legal requirement to get the accounts audited does.

This distinction matters particularly for LLPs, partnership firms, trusts, societies, cooperative societies and other regulated entities, where an audit may arise under different laws or for different purposes.

For AY 2026-27, the return for FY 2025-26 continues to be governed by the Income-tax Act, 1961, even though the new Income-tax Act, 2025 has come into force from 1 April 2026.

The real question is:  Were the accounts required to be audited under the Income-tax Act or under any other law for the time being in force?

That wording in Explanation 2 to section 139(1) is more important than the mere existence of an audit report.

AY 2026-27: the practical due-date map

Situation	ITR due date
Individual/HUF — no business or profession and no audit category	31 July 2026
Business/profession income, accounts not required to be audited	31 August 2026
Firm/LLP not falling in an audit category	31 August 2026
Company	31 October 2026
Accounts required to be audited under the Income-tax Act	31 October 2026
Accounts required to be audited under another law	31 October 2026
Working partner of a firm whose accounts are required to be audited	31 October 2026
Person required to furnish report under section 92E	30 November 2026

The Income Tax Department's current transition FAQ confirms the 31 August non-audit and 31 October audit-category dates for AY 2026-27.

For cases where the ITR due date is 31 October, the tax-audit report for FY 2025-26 is generally due by 30 September 2026. For section 92E cases, the audit report is generally due by 31 October 2026.

The real test: “audited” or “required to be audited”?

This is the key distinction.

Audit situation	Does it by itself put the return in the 31 October category?
Tax audit required under section 44AB	Yes
Statutory audit required under another applicable law	Yes
Company statutory audit	Yes
Audit obtained only because a bank requires it	Not merely for that reason
Investor/commercial audit	Not merely for that reason
Internal or management audit	No
LLP audit conducted under the statutory mechanism of Rule 24(8)	Requires specific examination

Section 139(1) specifically refers to a person whose accounts “are required to be audited under this Act or under any other law for the time being in force.”

Therefore, the first working-paper question should always be:

What legal provision required the audit?

LLPs: where the real nuance lies

LLPs require special attention because the LLP Act, 2008 itself provides a statutory audit framework.

Section 34(4) requires LLP accounts to be audited in accordance with the prescribed rules.

Rule 24(8) of the LLP Rules, 2009 provides an exemption where:

• turnover does not exceed ₹40 lakh in a financial year; or
• contribution does not exceed ₹25 lakh.

The word “or” matters

These are alternative limits, not cumulative conditions.

Satisfying either limb brings the LLP within the Rule 24(8) exemption.

But that is not necessarily the end of the analysis.

The second proviso to Rule 24(8) provides that where the partners of such an LLP decide to get the accounts audited, the accounts shall be audited in accordance with the Rules.

Therefore, for an audit-exempt LLP, the analysis should be:

Does the Rule 24(8) exemption apply?
↓
Did the partners exercise the statutory audit option?
↓
Was the audit conducted in accordance with the LLP Rules?
↓
Does that statutory audit bring the LLP within the audit category under Explanation 2 to section 139(1)?

This is where the Paramsukh Infradevelopers LLP ruling becomes relevant.

Paramsukh Infradevelopers LLP: why the ruling matters

In Paramsukh Infradevelopers LLP v. ITO, Ward 1(1)(1), Agra, ITA No. 56/Agr/2023, AY 2019-20, the ITAT Agra SMC Bench considered an LLP which was otherwise within the Rule 24(8) exemption but whose partners had decided to have its accounts audited.

The audit was undertaken within the LLP statutory framework, including reference to section 34(4), with relevant LLP records supporting the position.

The Revenue treated the return as belated, affecting the LLP's claim to carry forward a business loss of about ₹16.96 lakh.

The Tribunal held that the second proviso to Rule 24(8) provided a statutory mechanism for the partners to have the accounts audited and that, once exercised, the accounts were to be audited in accordance with the LLP Rules.

On those facts, the Tribunal treated the LLP as falling within the audit category contemplated by the applicable provision of section 139(1), allowing the return to be treated as timely for the relevant purpose.

The decision can be read here: Paramsukh Infradevelopers LLP — ITAT Agra

What should not be inferred 

Paramsukh should not be read as saying:  Every voluntary audit of an LLP automatically makes the ITR due on 31 October.

The more precise proposition is: Where an otherwise audit-exempt LLP exercises the specific statutory option under the second proviso to Rule 24(8), and the accounts are audited in accordance with the LLP Rules, Paramsukh supports the 31 October position on such facts.

It is an ITAT Agra SMC decision, not a High Court or Supreme Court ruling. Therefore, the precise statutory route followed and the supporting documents remain important.

Partnership firms: do not confuse commercial audit with statutory audit

The Indian Partnership Act, 1932 does not impose a general annual statutory audit requirement on every partnership firm.

Therefore, an audit undertaken merely because:

• a bank requires it;
• an investor requires it;
• management wants it; or
• another commercial party requires it

does not, by itself, establish the 31 October category.

However, where section 44AB requires tax audit, the firm's accounts are required to be audited under the Income-tax Act and the audit-category due date applies.

The working partner's due date should then be examined with reference to the firm's audit status. Section 139 expressly links the working partner's due date to the audit status of the firm.

Trusts, societies and cooperative societies: identify the governing law

Here, the answer is statute-specific.

For a trust or institution, examine the applicable audit requirement under the Income-tax Act, including section 12A(1)(b) where relevant.

For societies, cooperative societies and other regulated entities, identify:

Governing law → audit provision → threshold/condition → legal requirement → section 139(1) consequence.

The entity's name alone does not determine the due date.

A statutory audit required under the applicable governing law can bring the entity into the 31 October category.

A purely voluntary or commercial audit cannot simply be assumed to do so.

The five-minute working paper

Before selecting the ITR due date, record:

Question	What to document
Entity	Company / LLP / firm / trust / society / cooperative etc.
Governing law	Relevant statute and provision
Audit provision	Exact section/rule requiring or permitting audit
Threshold/condition	Turnover, contribution or other applicable test
Actual position	Whether the statutory requirement/option was triggered
Audit evidence	Resolution, audit report, financial statements, MCA filings or other relevant records
Tax conclusion	31 August / 31 October / 30 November, with the statutory basis

For an LLP claiming the Rule 24(8) route, preserve the turnover computation, contribution records, partner decision/resolution, audit report, LLP agreement and relevant MCA filings.

Why the date matters

This is not merely a calendar exercise.

The difference between 31 August and 31 October can affect:

• validity of a loss return and carry-forward;
• exposure to consequences of belated filing;
• compliance planning;
• partner-level filing timelines;
• audit and reporting coordination; and
• the evidentiary position if the due date is later questioned.

The mistake is often made before the ITR is filed — by assuming that an audit report itself determines the due date.

It does not. The statutory basis for the audit determines the starting point of the analysis.

Last Words

For AY 2026-27, do not ask only: “Has the entity been audited?”

Ask: “Under which law, under which provision, and because of which facts were its accounts required to be audited?”

For an LLP, go one step further: “If it was otherwise exempt under Rule 24(8), did the partners exercise the statutory audit option under its second proviso, and was the audit conducted under the LLP Rules?”

The ITR due date follows the legal audit position — not merely the existence of an audit report.

That distinction can turn a seemingly simple 31 August vs 31 October decision into an important compliance and loss-carry-forward issue.

General information for compliance and educational purposes. The applicable law, facts and judicial position should be independently examined before determining the filing due date.