This year’s audit cycle also brings greater reporting requirements in Form 3CD, particularly around payments to micro and small enterprises, loans and deposits, regulatory settlements and share buybacks.
The changes mean taxpayers need to ensure that the underlying transaction-level records are available and can be reconciled with the books and tax return.
MSME payments: Keep supplier and payment records ready
Under revised Clause 22, auditors have to report amounts payable to micro and small enterprises, interest that is not deductible under Section 23 of the MSMED Act, and payments made within or beyond the prescribed period. The related Section 43B(h) treatment is reflected in Clause 26.
Mrinal Mehta, Treasurer, Bombay Chartered Accountants’ Society (BCAS), said taxpayers should maintain supplier-wise Udyam status and payment dates to support the reporting.
Rahul Charkha, Partner, Economic Laws Practice, said the audit trail should cover supplier classification, invoice acceptance, the applicable payment period under Section 15 of the MSMED Act and proof of actual payment.
Samir Sanghvi, Country Head – Direct Tax Practice, Ascentium India, also flagged year-end reconciliation issues, including cases where cheques are issued on time but deposited later.
Loans and deposits: Non-cash settlements need attention
Clause 31 now requires more detailed reporting of loans, deposits, specified advances and repayments by mode.
Mehta said journal-entry settlements between group entities can now surface in reporting under Sections 269SS and 269T.
Charkha said businesses should therefore reconcile such transactions at the individual transaction level.
Sanghvi noted that settlements through asset transfers, barter or third-party journal entries may require particular attention and could lead to mismatches with the counterparty’s records. He also said reporting such transactions does not, by itself, mean that penalties under Sections 269SS, 269ST or 269T automatically apply.
Regulatory settlements: Check tax treatment
Under Clause 21, expenditure relating to settlements of proceedings for contraventions under specified laws has to be reported.
Mehta said settlement expenditure for regulatory contraventions is not deductible. Charkha said finance and legal teams should identify the relevant proceeding, settlement document and accounting treatment before the audit report is finalised.
Sanghvi said such payments need to be checked against the Section 37 disallowance provisions, as an incorrect deduction claim could potentially result in an adjustment during processing.
Share buybacks: Keep acquisition-cost records
Clause 36B requires reporting of the amount received in relation to a share buyback and the acquisition cost of those shares.
Charkha said taxpayers affected by buybacks should retain consideration statements and historic cost records. Sanghvi said separate reporting of the buyback amount and share cost can also help reconcile the transaction with the tax return.
What taxpayers should check before September 30
With the audit deadline approaching, taxpayers should ensure that:
- MSME supplier classification, Udyam status and payment dates are documented;
- loans, deposits and relevant repayments are reconciled transaction-wise;
- regulatory settlement payments have been reviewed for their tax treatment;
share buyback proceeds and acquisition costs are available where applicable; and - Form 3CD disclosures reconcile with the books, tax computation and supporting records.
Charkha said taxpayers should maintain transaction-level records that reconcile with the accounts and return, while auditors should document the basis for material classifications and qualifications.
The current cycle is also significant because the Income Tax Department’s portal continues to provide Form 3CA-3CD and 3CB-3CD under the Income-tax Act, 1961 for AY 2026-27.
For taxpayers covered by tax audit, the immediate priority is therefore to close outstanding reconciliations and provide supporting records to the auditor before the September 30 filing deadline.