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© All rights reserved Price : ` 1395 Law stated in this book is as amended upto 13th August, 2026 Published by : Taxmann Publications (P.) Ltd. Sales & Marketing : 59/32, New Rohtak Road, New Delhi-110 005 India Phone : +91-11-45562222 Website : www.taxmann.com E-mail : sales@taxmann.com Regd. Office : 21/35, West Punjabi Bagh, New Delhi-110 026 India Printed at : Tan Prints (India) Pvt. Ltd. 44 Km. Mile Stone, National Highway, Rohtak Road Village Rohad, Distt. Jhajjar (Haryana) India E-mail : sales@tanprints.com Disclaimer Every effort has been made to avoid errors or omissions in this publication. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to any one, of any kind, in any manner, therefrom. It is suggested that to avoid any doubt the reader should cross-check all the facts, law and contents of the publication with original Government publication or notifications. No part of this book may be reproduced or copied in any form or by any means [graphic, electronic or mechanical, including photocopying, recording, taping, or information retrieval systems] or reproduced on any disc, tape, perforated media or other information storage device, etc., without the written permission of the publishers. Breach of this condition is liable for legal action. For binding mistake, misprints or for missing pages, etc., the publisher’s liability is limited to replacement within seven days of purchase by similar edition. All expenses in this connection are to be borne by the purchaser. All disputes are subject to Delhi jurisdiction only.
Contents PAGE
I-5
Preface CHAPTER 1
: INTRODUCTION
CHAPTER 2
: PERSONS CARRYING ON BUSINESS OR PROFESSION TO
1
WHOM ‘TAX AUDIT’ APPLIES CHAPTER 3
: OBLIGATIONS CAST ON ASSESSEE BY SECTION 44AB/ 28
SECTION 63 CHAPTER 4
: QUALIFICATIONS AND DISQUALIFICATIONS OF TAX AUDITOR
CHAPTER 5
: LIMIT ON NUMBER OF TAX AUDITS THAT CAN BE ACCEPTED AND SIGNED BY A CA IN A FINANCIAL YEAR
CHAPTER 6
CHAPTER 10
: TAX AUDIT REPORTS
CHAPTER 11
: APPLICABILITY OF STANDARDS ON AUDITING TO TAX AUDITS
60
67 69
OF NON-CORPORATE ENTITIES
73
: APPLICABILITY OF STANDARDS ON AUDITING TO VERIFICATION OF PARTICULARS IN FORM NO. 3CD
CHAPTER 13
53
: FINANCIAL STATEMENTS OF NCEs WHO ADOPT CASH BASIS FOR ONE BUSINESS AND MERCANTILE BASIS FOR ANOTHER BUSINESS
CHAPTER 12
44
: FINANCIAL STATEMENTS OF A NON-CORPORATE ASSESSEE FOLLOWING CASH BASIS OF ACCOUNTING
CHAPTER 9
35
: FINANCIAL STATEMENTS OF A NON-CORPORATE ASSESSEE FOLLOWING ACCRUAL BASIS OF ACCOUNTING
CHAPTER 8
30
: FORMALITIES TO BE COMPLETED BY TAX AUDITOR PRIOR TO ACCEPTANCE OF A TAX AUDIT ASSIGNMENT
CHAPTER 7
7
163
: THINGS TO DO BEFORE FILING UP FORM 3CA/FORM 3CB AND FORM 3CD IN E-FILING UTILITY
167
CHAPTER 14
: FORM NO. 3CA
169
CHAPTER 15
: FORM NO. 3CB
184
CHAPTER 16
: FORM NO. 3CD
203
CHAPTER 17
: GENERATION OF UDINs FOR TAX AUDIT REPORT
205
I-7
CONTENTS
I-8 PAGE
CHAPTER 18
: LIABILITIES OF TAX AUDITOR
209
CHAPTER 19
: REVISION OF TAX AUDIT REPORT
212
CHAPTER 20
: CLAUSE 1 OF FORM NO. 3CD : NAME OF THE ASSESSEE
216
CHAPTER 21
: CLAUSE 2 OF FORM NO. 3CD : ADDRESS
218
CHAPTER 22
: CLAUSE 3 OF FORM NO. 3CD : PAN
219
CHAPTER 23
: CLAUSE 4 OF FORM NO. 3CD: REGISTRATION UNDER INDIRECT TAX LAWS
220
CHAPTER 24
: CLAUSE 5 OF FORM NO. 3CD : STATUS
223
CHAPTER 25
: CLAUSE 6 OF FORM NO. 3CD : PREVIOUS YEAR
226
CHAPTER 26
: CLAUSE 7 OF FORM NO. 3CD : ASSESSMENT YEAR
228
CHAPTER 27
: CLAUSE 8 OF FORM NO. 3CD : CLAUSE OF SECTION 44AB UNDER WHICH TAX AUDIT IS CONDUCTED
CHAPTER 28
: CLAUSE 8A OF FORM NO. 3CD : WHETHER ASSESSEE HAS OPTED FOR CTRR UNDER SECTIONS 115BA-115BAE
CHAPTER 29
CHAPTER 31
: CLAUSE 11 OF FORM NO. 3CD: BOOKS OF ACCOUNT
CHAPTER 32
: CLAUSE 12 OF FORM NO. 3CD: PRESUMPTIVELY ASSESSABLE INCOME
257 263 267
: CLAUSE 16 OF FORM NO. 3CD : AMOUNTS NOT CREDITED TO P&L ACCOUNT
CHAPTER 37
254
: CLAUSE 15 OF FORM NO. 3CD : CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE
CHAPTER 36
250
: CLAUSE 14 OF FORM NO. 3CD: METHOD OF STOCK VALUATION
CHAPTER 35
245
: CLAUSE 13 OF FORM NO. 3CD: METHOD OF ACCOUNTING AND ICDS
CHAPTER 34
235
: CLAUSE 10 OF FORM NO. 3CD : NATURE OF BUSINESS OR PROFESSION
CHAPTER 33
232
: CLAUSE 9 OF FORM NO. 3CD : DETAILS REGARDING PARTNERS OR MEMBERS OF FIRM/LLP/AOP/BOI
CHAPTER 30
229
271
: CLAUSE 17 OF FORM NO. 3CD : PROPERTY TRANSFERRED AT LESS THAN SDV
280
CHAPTER 38
: CLAUSE 18 OF FORM NO. 3CD : DEPRECIATION ALLOWABLE
289
CHAPTER 39
CLAUSE 19 OF FORM NO. 3CD : AMOUNTS DEDUCTIBLE UNDER SECTIONS 33AB TO 35E
295
CHAPTER 40
: CLAUSE 20 OF FORM NO. 3CD: BONUS AND EMPLOYEES’ CONTRIBUTIONS TO PF/ESIC
CHAPTER 41
303
: CLAUSE 21 OF FORM NO. 3CD: AMOUNTS INADMISSIBLE UNDER SECTIONS 37(1), 40(a), 40(b), 40(ba), 40A(3), 40A(7), 40A(9), 14A AND 36(1)(iii)
312
I-9
CONTENTS PAGE
CHAPTER 42
: CLAUSE 22 OF FORM NO. 3CD : AMOUNTS INADMISSIBLE UNDER SECTION 43B(h) AND U/S 23 OF MSMED ACT, 2006
CHAPTER 43
: CLAUSE 23 OF FORM NO. 3CD : PAYMENTS TO RELATED PERSONS
CHAPTER 44
391
: CLAUSE 30 OF FORM NO. 3CD : HUNDI BORROWINGS AND REPAYMENTS
CHAPTER 51
388
: CLAUSE 29B OF FORM NO. 3CD : GIFTS OR DEEMED GIFTS TAXABLE UNDER SECTION 56(x)
CHAPTER 50
386
: CLAUSE 29A OF FORM NO. 3CD : AMOUNT TAXABLE UNDER SECTION 56(ix)
CHAPTER 49
379
: CLAUSE 27 OF FORM NO. 3CD : CENVAT & PRIOR PERIOD ITEMS
CHAPTER 48
375
: CLAUSE 26 OF FORM NO. 3CD : SUMS COVERED BY SECTION 43B EXCEPT MSE DUES
CHAPTER 47
373
: CLAUSE 25 OF FORM NO. 3CD : DEEMED PROFITS UNDER SECTION 41
CHAPTER 46
370
: CLAUSE 24 OF FORM NO. 3CD : DEEMED PROFITS UNDER SECTION 32AC/32AD/33AB/33ABA/33AC
CHAPTER 45
361
394
: CLAUSE 30A OF FORM NO. 3CD : SECONDARY TRANSFER PRICING ADJUSTMENTS
397
CHAPTER 52
: CLAUSE 30B OF FORM NO. 3CD : THINCAP ADJUSTMENTS
401
CHAPTER 53
: CLAUSE 30C OF FORM NO. 3CD : GAAR
405
CHAPTER 54
: CLAUSE 31 OF FORM NO. 3CD : ACCEPTANCE OR REPAYMENT OF LOAN/DEPOSIT ABOVE SPECIFIED LIMIT OF RS. 20,000 IN SECTIONS 269SS & 269T AND MODE OF RECEIPT OF PAYMENT ABOVE RS. 2,00,000 UNDER SECTION 269ST
CHAPTER 55
407
: CLAUSE 32 OF FORM NO. 3CD : UNABSORBED LOSS/DEPRECIATION
CHAPTER 56
: CLAUSE 33 OF FORM NO. 3CD : CHAPTER VI-A DEDUCTIONS
CHAPTER 57
: CLAUSE 34 OF FORM NO. 3CD : COMPLIANCE WITH TDS/TCS PROVISIONS
421 434 439
CHAPTER 58
: CLAUSE 35 OF FORM NO. 3CD : QUANTITATIVE DETAILS
448
CHAPTER 59
: CLAUSE 36A OF FORM NO. 3CD : DEEMED DIVIDEND U/S 2(22)(e)
451
CHAPTER 60
: CLAUSE 36B OF FORM NO. 3CD : DEEMED DIVIDEND U/S 2(22)(f)
453
CHAPTER 61
: CLAUSE 37 OF FORM NO. 3CD : COST AUDIT REPORT
455
CHAPTER 62
: CLAUSE 38 OF FORM NO. 3CD : CENTRAL EXCISE AUDIT REPORT
CHAPTER 63
: CLAUSE 40 OF FORM NO. 3CD : ACCOUNTING RATIOS
458 459
CONTENTS
I-10 PAGE
CHAPTER 64
: CLAUSE 41 OF FORM NO. 3CD : DEMANDS RAISED AND REFUNDS ISSUED UNDER TAX LAWS OTHER THAN IT ACT AND WT ACT
CHAPTER 65
: CLAUSE 42 OF FORM NO. 3CD : FURNISHING OF FORM NOs. 61, 61A AND 61B
CHAPTER 66
506
: AUDIT DOCUMENTATION REGARDING VARIOUS CLAUSES OF FORM NO. 3CD
CHAPTER 73
497
: WRITTEN REPRESENTATIONS/MRL CONCERNING VARIOUS CLAUSES OF FORM NO. 3CD
CHAPTER 72
489
: SAMPLE ENGAGEMENT LETTER FOR TAX AUDIT IN CASE OF AN ENTITY NOT LIABLE TO STATUTORY AUDIT UNDER ANY OTHER LAW AND WHERE REPORTING WILL BE IN FORM 3CB-3CD
CHAPTER 71
477
: SAMPLE ENGAGEMENT LETTER FOR TAX AUDIT IN CASE OF AN ENTITY LIABLE TO STATUTORY AUDIT UNDER ANY OTHER LAW AND WHERE REPORTING WILL BE IN FORM 3CA-3CD
CHAPTER 70
470
: CHANGES MADE IN TAX AUDIT REPORT FORMS UNDER ITA 2025 BY IT RULES, 2026
CHAPTER 69
469
: CLAUSE 44 OF FORM NO. 3CD : BREAK-UP OF TOTAL BUSINESS EXPENDITURE INCURRED BY ASSESSEE DURING THE YEAR ON ‘SUPPLIES’ ACCORDING TO PAYEES’ GST REGISTRATION STATUS
CHAPTER 68
466
: CLAUSE 43 OF FORM NO. 3CD : FURNISHING OF CbC REPORTING
CHAPTER 67
465
531
: RECENT AMENDMENTS TO THE MSMED ACT REGARDING CLASSIFICATION OF MSMEs
547
C H A P T E R
42
CLAUSE 22 OF FORM NO. 3CD : AMOUNTS INADMISSIBLE UNDER SECTION 43B(h) AND U/S 23 OF MSMED ACT, 2006
Tax consequences if an assessee-buyer who fails to pay MSE supplier within the time limit u/s 15 of MSMED Act 42.1 (1) Two tax consequences under the ITA 1961 flow to buyer-entity (assessee-buyer) when he fails to make payment to a Udyam-registered Micro/Small Enterprise within the time allowed under Section 15 of the MSMED Act, 2006: (a) Disallowance of amount payable under Section 43B(h) of ITA 1961 [Sub-clauses (ii) and (iii) of Clause 22 of Form No. 3CD] (b) Interest liability under Section 16 of MSMED Act on the amount payable till it is paid and disallowance of such interest under Section 23 of the same in computing taxable income under the Income-tax Act. [Sub-clause (i) of Clause 22 of Form No. 3CD] Definitions of ‘micro enterprise” and “small enterprise” (2) Micro-enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed Rs. 2.5 crores and turnover does not exceed 10 crores (3) Small enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed Rs. 25 crores and turnover does not exceed 100 crores (4) Medium enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed Rs. 125 crores and turnover does not exceed 500 crores [See also Chapter 73 for the recent amendments to the MSMED Act] (5) It may be noted that above revised composite criteria of investment and turnover limits apply with effect from 01.04.2025. The investment and turnover limits were enhanced 2.5 times and 2 times respectively with effect from 01.04.2025. The old limits were made applicable with effect from 01.07.2020. (6) Online filing of Udyam Registration on self-declaration basis on the Udyam Portal is essential for an enterprise to be treated as Micro Enterprise or Small Enterprise in terms of Notification 2119 [Para 2 of the said Notification]
361
Para 42.1
CLAUSE 22 OF FORM NO. 3CD
362
(7) Udyam Registration (UR) mandatory for availing all the schemes/benefits [FAQ 4 on MSME Samadhaan Portal] (8) PAN & GST linked details on investment & turnover are automatically taken by Udyam Portal from Govt data bases to update classification. The online system of Udyam Portal is fully integrated with Income Tax and GSTIN systems. (9) Investment=WDV as per ITR less cost of pollution control, R&D and industrial safety devices [OM, dated 6-8-2020 & Item 20 of Udyam Registration Form]. (10) Calculation of investment is linked to ITRs filed of previous years. (11) Investment=WDV as per ITR less cost of pollution control, R&D and industrial safety devices [OM, dated 6-8-2020 & Item 20 of Udyam Registration Form]. (12) Export of goods or services or both to be excluded. (13) Information on turnover & exports shall be linked to ITR or GSTIN. (14) Based on the information furnished or gathered from Government’s sources including ITR or GSTR, classification will be updated. (15) In case of graduation/reverse-graduation, communication will be sent to enterprise about change in status. (16) Udyam Verify feature on Udyam Portal allows one to verify whether Udyam Registration Number (URN) of a Micro or Small Enterprise (MSE) supplier is genuine & allows access to URC. (17) There is no indication in URN of Micro/Small/Medium status of an enterprise. (18) One has to obtain URN and access URC on portal. No PAN-based or namebased search of MSE status enabled on Udyam portal. (19) If supplier has not put his URN on Bill or invoice, then his URN and MSE status can be validated by accessing his Udyam Registration Certificate (URC) from the Udyam portal. (20) MSE status as per URC as on date of delivery of goods/services is crucial for Section 43B(h) of ITA 1961 and Section 23 of MSMED Act. (21) If supplier has not put his URN on Bill or invoice, buyer assessee must write to him asking to confirm whether he is MSE within 15 days , and ,if so, to share his URN. If, despite writing for the same & a reminder, URN is not furnished, then, Section 43B(h) cannot be invoked for supplies made till the date of furnishing the same as Name-based search/PAN-based search is not enabled on Udyam Portal as yet. Law does not compel a man to do what he cannot possibly perform. [Canara Bank v. ITO [2009] 121 ITD 1 (Nag. - Trib.)] (22) URC can be accessed through URN on Udyam portal at https://udyamregistration.gov.in/Udyam_Verify.aspx. (23) Enterprise activity-If URC shows only Trading activity, transactions with the MSE URC-holder are outside the purview of Sections 15,16 and 23 of MSMED Act and Section 43B(h). (24) Enterprise classification with effective date of classification must be noted.
363
FAILS TO PAY MSE SUPPLIER WITHIN THE TIME LIMIT
Para 42.1
(25) When medium enterprise is to be treated as Micro or Small for Section 43B(h): In case of an upward change in terms of investment or turnover or both, and consequent re-classification, an enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the re-classification, for a period of 3 years from the date of such upward change. [Para 8(5) of the Notification]. (26) Buyer-assessee not bound to entertain claim of MSE status of supplier if proof of the same through URN/URC not furnished. Claims based on CA certificates of turnover and investment furnished by a supplier need not be entertained. (27) Though both the above tax consequences arise out of the same default (delayed payment to Udyam-registered MSE supplier), there are the following differences between the two: (a) Whether disallowance is permanent or reversible : Disallowance of outstanding bill amount to MSE supplier under Section 43B(h) is reversible as a deduction will be allowed for the same in the year of actual payment on an actual payment basis. Deduction of interest payable under Section 16 is liable to be disallowed under Section 23 of MSMED Act and such disallowance is permanent and will never reverse even when interest liability is paid. (b) Applicability to buyer-assessee who has availed presumptive taxation scheme: Section 43B(h) would not apply to assessee-buyer availing presumptive taxation under Section 44AD or 44ADA or 44AE or 44BBB or 115VA of the Act. However, interest liability under Section 16 of the MSMED Act will be attracted in case of such buyers also and liable to be disallowed to them under Section 23 of the MSMED Act. Section 44AD or 44ADA or 44AE or 44BBB, or 115VA of the Act override sections 28 to 43C of the Act but do not override Section 23 of the MSMED Act. (c) Applicability to buyer following cash system of accounting: Section 43B(h) would not apply to assessee-buyers following cash system of accounting. However, sections 16 and 23 of the MSMED Act would apply irrespective of the method of accounting. Disallowance under Section 23 of the MSMED Act will be made when interest under Section 16 is actually paid and claimed as a deduction in P&L. (d) Escaping disallowance by paying late in the year of purchase: If purchases are made from a Udyam-registered MSE supplier on 1-4-2025 and payment is made on 31-3-2026, the buyer-assessee escapes disallowance under section 43B(h). However, he cannot escape interest liability under Section 16 and disallowance of such interest under Section 23 of the MSMED Act. (e) Applicability to outstandings at year-end: Section 43B(h) applies only to amounts paid beyond the due date under Section 15 of the MSMED Act if such amounts are outstanding on the balance sheet date and deduction is claimed on an accrual basis. Liability under Section 16 applies to delayed payments, whether or not such amounts were outstanding on the balance sheet date. (f) Applicability to outstandings for capital goods: Section 43B(h) will not apply to outstandings for purchase of capital goods from MSE suppliers unless such
Para 42.2
CLAUSE 22 OF FORM NO. 3CD
364
purchase is deductible under sections 30 to 36 (e.g. capital expenditure for scientific research deductible under Section 35). Section 15 of MSMED Act applies where any supplier supplies goods to any buyer. Goods are defined in Section 2(f) of the MSMED Act to cover all movable property. Section 2(f) does not exclude capital goods. Therefore, interest under section 16 of the MSMED Act would apply to delayed payments for capital goods from MSE Suppliers. Such interest is liable to be disallowed under Section 23 of the MSMED Act. For a detailed discussion, Refer Taxmann’s FAQs on Timely Payments to MSMEs by CA Srinivasan Anand G.
Important audit points
42.2
Tax auditor’s time-savers See also Chapter 68 (1) Sub-clauses (ii) and (iii) of this clause [dealing with Disallowance under Section 43B(h)] are not applicable if assessee follows cash basis of accounting. (2) Sub-clauses (i) of this clause (dealing with disallowance of interest) will not apply to assessees following the cash basis of accounting unless they make payment of the interest payable under Section 16 of the MSMED Act during the relevant previous year. However, assessees following cash basis of accounting are not exempted from making disclosures in the notes to accounts as required by Section 22 of the MSMED Act,2006. (3) As regards sub-clauses (ii) and (iii) in the context of assessees following mercantile system of accounting, see Para 68.3.6. (4) Section 43B(h) operates to allow deductions on an actual payment basis when a deduction is otherwise allowable under this Act in respect of a sum payable to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act. Therefore, any sum payable to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act is not reportable in Clause 22(iii)(b) if the same has already been reported in Clause 21(b)[disallowance under Section 40(a)(ia)]/Clause 21(d)(A)[disallowance under Section 40A(3)]. (5) If the assessee follows a mercantile system of accounting and interest on delayed payments computed as per Section 16 of the MSMED Act is not provided for in respect of delayed payments to MSEs, nothing will be reportable in Clause 22 with regard to inadmissible interest under Section 23 of MSMED Act, 2006. However, where the tax auditor is issuing his report in Form No. 3CB, the tax auditor shall make a suitably modify his opinion on true and fair view in Form No.3CB in this regard. Modified opinion (qualified opinion or adverse opinion) to be expressed in accordance with the requirements of SA 705(Revised). (6) This clause does not require reporting of any break-up of amount of interest disallowable under Section 23 of the MSMED Act. (7) This clause does not require any details of status of payments during the current year of pre-existing liabilities due to MSE Suppliers which were not allowable in the preceding year due to non-payment so such payments can be claimed as deduction
365
IMPORTANT AUDIT POINTS
Para 42.2
during the current year . These details are required to be reported in clause 26(A) of Form No. 3CD. Required (8) In e-filing utility, one needs to fill in the inadmissible interest under Section 23 of MSMED Act, 2006 in 22(i). (9) In the e-filing utility, one cannot fill up Clause 22(ii). One needs to fill up Clauses 22(iii)(a) and (b). The total of Clauses 22(iii)(a) and (b) gets auto filled in Clause 22(ii). See also Para 68.3.6. See Para 42.3. Audit procedures in case of company-assessee (10) Obtain from the assessee the audited accounts, statutory audit report, and half-yearly Form MSME-I filed with MCA. (11) Obtain from the assessee a full list of suppliers of the assessee who fall within the purview of the definition of “Supplier” under section 2(n) of the Micro, Small and Medium Enterprises Development Act, 2006. (12) It is the responsibility of the assessee-auditee to classify and identify those suppliers who are covered by the MSMED Act (i.e. a list of all Udyam-Registered MSE suppliers of goods or services). Identification and classification of “suppliers” is not the tax auditor’s responsibility. (13) Obtain from the assessee the list of trade payables and current liabilities being suppliers of goods and services to whom amount is outstanding as on the last day of the financial year along with working of disallowance u/s 43B(h) of the Act required to be reported under Clause 22. (14) In the list, against each supplier of goods and services, it should be mentioned whether it is registered under MSMED Act, 2006 or not, and in case it is registered, Udyam Registration Number, Type/Category of Enterprise (Micro/Small/Medium) and its Major Activity (Trading/Manufacturing/Service), date of Udyam Registration should be mentioned against each “supplier”. (15) The list should also mention whether there is a written agreement with the supplier, and if so, the credit period. Also, against each supplier, the amount outstanding as on the last date of the previous year should be mentioned. (16) Identify Udyam-registered MSE suppliers from disclosures in notes to accounts in the audited accounts, from the lists provided by the assessee and from Form MSME-I filed with MCA by inter alia applying the following procedures: (a) Check whether the enterprise is registered under the MSMED Act, 2006, since registration of MSME is a pre-requisite for attracting the provisions of section 43B(h) of the ITA 1961. (b) While checking the registration status, keep in view the following points u Since “supplier means a micro or small enterprise, which has filed a
memorandum with the authority referred to in sub-section (1) of section 8,-”(Section 2(n) of MSMED Act), Udyam registration of the supplier is sine quo non for availing benefits under the said Act including the benefit of prompt/timely payment under Section 15 of the said Act . Therefore, amount payable for supplies from entities which are not
Para 42.2
CLAUSE 22 OF FORM NO. 3CD
366
Udyam-registered will not attract disallowance under section 43B(h) of the Income-tax Act, 1961 in the hands of the buyer. u If any supplier entity is registered at any time during the current
previous year, then, such registration will be applicable prospectively from the date of Udyam Registration. Udyam Registration is not retrospectively applicable. Therefore, outstandings in respect of any supplies of goods or services whose delivery is received before the Udyam Registration date will not attract disallowance under section 43B(h). u If registration of the supplier is cancelled at any time during the previous year, then, it will be effective prospectively from the date of cancellation. Therefore, outstandings for any purchases or services received before the date of cancellation shall be covered under section 43B(h). (17) Traders are allowed to be registered with MSME only for a limited purpose of Priority Sector Lending and not for any other benefit. Accordingly, if the supplier to the auditee is a retail or wholesale trader, the provisions of section 43B(h) of the Income-tax Act, 1961 would not be attracted.[ Office Memo dated 1st September 2021 of Ministry of MSME] (18) Report against sub-clause (i) the aggregate of the following amounts: (a) Interest payable under Section 16 of the MSMED Act provided for in respect of : (i) Amounts payable to identified Udyam-registered MSEs as of the balance sheet date, which is overdue as of the balance sheet date in terms of Section 15 of the MSMED Act; and (ii) Amounts outstanding to MSE suppliers as of the balance sheet date which become overdue after the balance sheet date in terms of Section 15 of the MSMED Act. (b) Interest payable/paid under Section 16 of the MSMED Act in respect of delayed payments made during the previous year to Udyam-Registered MSE suppliers. (19) Report against sub-clause (iii) the amount arrived at as under: (A) amounts payable to identified Udyam-registered MSEs outstanding as of the balance sheet date in respect of (a) amounts debited to P&L account and (b) amounts not debited to P&L which are reported as allowable deductions in other clauses of Form No. 3CD. (B) Deduct from (a) amounts in (a) reportable/reported under Clauses 21(b)/21(d) (A). (C) (a) For reporting against sub-clause (iii), the starting point is expenditure debited to the P&L account, under Section 43B(h) of the Act, in respect of purchases of goods or services from Udyam-registered MSE suppliers during the previous year. (b) Add to (a) the purchase of goods/services not debited to P&L but reported as allowable expenditure under other clauses of Form No. 3CD (c) Deduct from (a) amounts reportable as disallowable under Clauses 21(b)/21(d)(A)/23
367
IMPORTANT AUDIT POINTS
Para 42.2
(d) The total of sub-clause (iii)(a) and (b) should be [(a)+(b)-(c)] (e) Consider the aggregate of the following pertaining the the amounts in (d) above: (i) Amounts payable to identified Udyam-registered MSEs as of the balance sheet date, which is overdue as of the balance sheet date in terms of Section 15 of the MSMED Act; (ii) Amounts outstanding to MSE suppliers as of the balance sheet date which become overdue after the balance sheet date in terms of Section 15 of the MSMED Act; (f) Report aggregate in (e) above in sub-clause (iii)(b) (g) Report against sub-clause (iii)(a) the payments made within time allowed under section 15 of MSMED Act in respect of the expenditure in (d) above. Audit procedures in case of any non-company assessee liable to statutory audit under any other law (20) Obtain from the assessee the audited accounts, statutory audit report. (21) Very similar to points (11) to (19) above. Additional audit procedures required in case of any non-company assessee NOT liable to statutory audit (22) Have you considered whether external confirmation procedures are to be performed as substantive audit procedures for trade creditors including MSE suppliers as required by Para 19 of SA 330? (23) Have you obtained consent of the Management to employ the external confirmation procedure? (24) As per the above guidance given in Para A50 of SA 330, have you considered including requests to suppliers to confirm their MSE(Micro or Small Enterprise) Status and furnish their Udyam Registration Numbers if they are registered MSMEs in balance confirmation requests for Trade Payables? (25) Have you considered including in balance confirmation requests to Udyam-Registered MSE Suppliers a request to confirm the date on which cheques were actually received by them, in those cases where cheque is shown in books of account to have been issued to MSE Suppliers on due date under section15 of MSMED Act but bank statement/bank reconciliation statement shows encashment by suppliers after a very long time (say more than 15 to 20 days) (26) Have you considered including in balance confirmation requests to Udyam-Registered MSE Suppliers a request to confirm the unwritten agreement with the entity to present the cheques for payment only after getting a phone call of go-ahead from the auditee entity? (27) Have you maintained control over all the following steps of the External Confirmation Procedure? u Determining the information to be confirmed or requested u Selecting the appropriate confirming party
Para 42.2
CLAUSE 22 OF FORM NO. 3CD
368
u Designing the confirmation requests, including determining that requests
are properly addressed and contain return information for responses to be sent directly to the auditor; and u Sending the requests, including follow-up requests when applicable, to the
confirming party. (28) As per the above guidance given in Para A50 of SA 330, have you considered including requests to suppliers to confirm their MSE(Micro or Small Enterprise) Status and furnish their Udyam Registration Numbers if they are registered MSMEs in balance confirmation requests for Trade Payables? (29) Have you considered including in balance confirmation requests to Udyam-Registered MSE Suppliers a request to confirm the date on which cheques were actually received by them, in those cases where cheque is shown in books of account to have been issued to MSE Suppliers on due date under section15 of MSMED Act but bank statement/bank reconciliation statement shows encashment by suppliers after a very long time (say more than 15 to 20 days)? (30) Have you considered including in balance confirmation requests to Udyam-Registered MSE Suppliers a request to confirm an unwritten agreement with the entity to present cheques for payment only after getting a phone call of go-ahead from the auditee entity? (31) Have you taken into account the following when selecting individual items of Trade Payables for which audit evidence should be obtained by external confirmation? u suppliers who are not MSEs as per records of the Company so that their
MSE Status and Udyam Registration Numbers can be ascertained along with balance confirmation (32) suppliers who are Udyam-Registered MSEs to whom books of account show payment made by cheque on due date under section15 of MSMED Act but bank statement/bank reconciliation statement shows encashment of cheque after an unduly long time (confirm from such parties the date on which cheque was actually handed over to them) Impact on other clauses of Form No. 3CD u TDS under Section 194A is deductible on interest payable under Section 16
of the MSMED Act though it is an inadmissible expense. If the TDS is not deducted on such interest paid, provided for, or not deposited after deduction, report it in Clause 34. The lapse regarding TDS does not make such interest reportable in Clause 21(b), as the same expenditure cannot be disallowed twice. u In the case of an assessee, a partnership firm/LLP, the amounts reported as
inadmissible in this Clause will have to be considered in computing book profit for Clause 21(c). u While carrying out procedures for verification and reporting in clause 22,
the tax auditor may come across tacit unwritten arrangements to circumvent Section 43B(h) between assessee and his Micro and Small Enterprises (MSE) suppliers whose amounts are already overdue as at 31.03.2026 in terms of section 15 of MSMEDA whereby the cheques will be issued to them on
369
DEPARTMENTAL GUIDANCE FOR FILLING UP CLAUSE 22
Para 42.3
31st March but they will present the cheques for payments only on getting telephonic OK from the assessee. These cheques are shown as payments by assessee as of 31st March but these cheques then get presented sometime in April last week or in May first week. Likewise, there may be arrangements during the previous year as regards amount falling due to MSE suppliers during the year to issue cheques on the last date of the due date under Section 15 of the MSMED Act whereby the MSE Supplier will present the cheque on getting telephonic OK from the assessee. Such arrangements may require reporting in Clause 30C as Impermissible Avoidance Arrangements. u In case of data relating payments of pre-existing liabilities owing to MSE
Suppliers reported under Clause 26(A), verify that inadmissible interest under Section 16 read with Section 23 of MSMED Act is provided for or paid and duly report the same in Clause 22(i). Also, ensure that interest payable/paid is disclosed in notes to accounts pursuant to Section 22 of MSMEDA. Modification of opinion in Form 3CB if disclosures not made as per Section 22 of MSMED Act u Where the tax auditor is issuing his report in Form No. 3CB, he should verify
that the auditee has disclosed the information as required under section 22 of the MSMED Act, 2006, in the financial statements under audit. Suppose the auditee makes no disclosures in the financial statements. In that case, the tax auditor should appropriately qualify his report in Form No. 3CB.
Departmental guidance for filling up clause 22
42.3
In Departmental Guidance “Items reportable in the Tax Audit Report”, the following guidance is available for filling up Clause 22 of Form No. 3CD Clauses
Description
Clause 22
Clause 22 requires particulars of the amount of interest inadmissible under Section 23 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 or total amount payable to micro or small enterprises under Section 15 of the MSMED Act during the previous year, along with a break-up of the amount paid within the prescribed time and the amount not paid within such time and disallowed for the year.
TAX AUDIT AUTHOR : PUBLISHER : DATE OF PUBLICATION : EDITION : ISBN NO : NO. OF PAGES : BINDING TYPE :
Srinivasan Anand G. Taxmann August 2026 19th Edition | Assessment Year 2026-27 9789375614968 568 Paperback
Rs. 1,395 DESCRIPTION Tax Audit is the definitive practitioner's manual on the audit of accounts under Section 44AB—written from the tax auditor's chair rather than the commentator's desk. Published since 2004 and now in its 19th Edition, it treats a tax audit as a procedure rather than a subject, and is built as a workflow: from whether the audit is required at all, through eligibility to accept it and the Standards governing its conduct, into a dedicated chapter for every clause of Form No. 3CD, and out through signing, e-filing, UDIN generation, liabilities and revision. Each clause chapter is a self-contained work programme. What sets this Edition apart is that four authorities are brought to bear on every clause at once—ICAI's 2026 Tax Audit Guidance Note, cited over 170 times; CBDT's Departmental Guidance, 'Items Reportable in the Tax Audit Report', reproduced clause-wise; ICAI's Guidelines on Ethical Issues 2026 with the new Chartered Accountants (Limit on Number of Tax Audits) Guidelines 2025; and the Income Tax Act 2025 read alongside as a comparative thread, culminating in a chapter on the merged Form No. 26. The book itself has been re-engineered into 'a smarter version of the book with far fewer pages, making it easier to handle and more portable'—commentary converted into Time Savers, planning tips, must-do and must-not-do lists, and clause-wise checklists. This book is intended for the following audience: • Chartered Accountants in Practice are the core audience—this is the working manual for the assignment, from the pre-acceptance formalities through to the UDIN, and the reasoned record to fall back on if the report is later examined by ICAI, NFRA or the Assessing Officer • Audit Managers, Seniors and Articled Assistants get something rarer: a book whose structure maps onto how the work is actually delegated. Because each clause chapter opens with a numbered checklist and a Time Saver block, a clause can be handed to a junior as a defined, reviewable task. It doubles as an in-house training text • CFOs, Financial Controllers and Tax Heads of Auditee Entities will find it the clearest available account of what their auditor will ask for and why—making it a practical tool for pre-audit readiness and for avoiding a qualified report • Non-corporate Assessees and their Advisers—proprietorships, HUFs, partnership firms, LLPs, AOPs and BOIs—are served with unusual care. The book devotes whole chapters to entities outside statutory audit, to those on the cash basis, to those running one business on accrual and another on cash, and to first-time audits where the opening balances have never been audited • Tax Litigators, Counsel and Departmental Officers will value the frank treatment of what a tax audit report can and cannot be taken to certify, and the clause-wise marshalling of guidance and case law • CA Final and Other Professional Students get Section 44AB, Form No. 3CD and the Standards on Auditing presented in a live audit setting rather than in the abstract The Present Publication is the 19th Edition | Assessment Year 2026-27, amended upto 13th August 2026. This book is authored by CA. Srinivasan Anand G., with the following noteworthy features: • [Tax Audit Time Savers for Each Clause of Form No. 3CD] The signature device of this Edition, and the reason it reads differently from every other book on the subject. Forty-five of the forty-eight clause chapters open with a Time Saver block that tells the auditor what he need not do—which clauses to skip outright for a given class of assessee, where the e-filing utility auto-populates or auto-closes a field, where reliance on the statutory audit report is legitimate and what must then be disclosed, and where a single Yes/No selection disposes of the clause. The device has an honest counterpart: where a shortcut would be wrong, the book says so in the same voice —'Reporting one consolidated amount is not a 'tax audit time-saver' but a violation of requirements of Clause 30'
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