Direct Tax Laws & International Taxation · Tax Audit and Ethical Compliances

Clauses of Tax Audit Report and Reporting Duties

Updated 5 October 2026

A tax audit report is the auditor's opinion on the books, plus a statement of prescribed particulars drawn from them. To solve a question, find the clause the facts trigger, apply the tax rule, state the amount reportable, and conclude on disallowance or qualification. Report facts; do not compute the assessee's final income.

Understand Clauses of Tax Audit Report and Reporting Duties

A tax audit has two parts. The first is the audit report, where the accountant says whether the books are properly kept and whether the accounts give a true and correct view. The second is a statement of particulars. This is a long list of clauses where the auditor reports facts the Assessing Officer needs: what was disallowed, what was paid in cash, which TDS was missed, how depreciation was computed, and so on.

Think of the auditor as a fact-finder for the tax department. You do not decide the final taxable income. You report the amount, the nature and the legal position the assessee has taken. Where the law gives a disallowance, you report the amount that attracts it.

The clauses group into a few families. Disallowance clauses cover cash payments, payments to related parties at unreasonable rates, and TDS defaults. Compliance clauses cover loans, deposits and repayments in cash, and TDS or TCS statements. Computation clauses cover depreciation, deductions and the book-to-tax adjustments. Information clauses cover GST expenditure break-up, accounting method changes, and ICDS-type particulars.

Clause numbers are familiar from the older Form 3CD layout (for example, clause 44 for GST expenditure, 34 for TDS, 31 for loans and deposits). Exams under the Income-tax Act, 2025 test the subject of each clause, so learn the clause by what it asks. Check the form and its clause numbering against the currently notified form before you rely on any number.

Your duties are strict. You report on the basis of books and documents produced. You must give a qualification where you disagree or cannot obtain information. You must not suppress an adverse fact because the client objects. Where the assessee's view is a debatable legal position, report the fact and the assessee's stand, and state your own view where the form requires it.

Key rules to remember

Cash payment disallowance: Payments to one person in one day, otherwise than by account payee cheque/draft or a prescribed electronic mode, exceeding ₹10,000 in aggregate (₹35,000 for payments to a transporter for hire, plying or leasing of goods carriages) → the entire amount so paid to that person on that day is reportable and disallowed (100%, not just the excess); Tested per person, per day, on the aggregate paid to that person by non-permitted modes. The ₹35,000 limit for transporters is tested on the same per-person, per-day basis. Payments by account payee cheque, account payee draft or prescribed electronic modes through a bank account are outside the rule. If part of a bill is paid by a permitted mode, only the non-permitted portion is tested. The same clause also covers the s.40A(3A) position: where a liability was allowed as a deduction in an earlier year and is later paid, in excess of the limit, by a non-permitted mode, the payment is treated as the assessee's profits of the year of payment. These section numbers are from the earlier law. The Income-tax Act, 2025 carries corresponding provisions, so check the current numbering.
Cash loans, deposits and repayments: (1) Loan or deposit taken or accepted (s.269SS), or repayment of a loan or deposit made (s.269T), of ₹20,000 or more otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account or another prescribed electronic mode → report. (2) Receipt (s.269ST) of ₹2 lakh or more otherwise than by those modes, if it is (a) in aggregate from a person in a day, (b) in respect of a single transaction, or (c) in respect of transactions relating to one event or occasion from a person → report under a separate clause; The ₹20,000 threshold under s.269SS/269T covers loans, deposits and repayments. The ₹2 lakh limit under s.269ST is not tested on a single receipt alone. It applies on three tests: the daily aggregate from one person, a single transaction, or all transactions for one event or occasion. A breach of any one test is enough. Cash is not the only non-compliant mode: any mode other than account payee cheque, account payee bank draft, electronic clearing system through a bank account or another prescribed electronic mode is reportable. These section numbers are from the earlier law. The Income-tax Act, 2025 carries corresponding provisions, so check the current numbering. Report the party details and the amount, as the clause requires.
TDS default disallowance: Resident payee: Disallowance = 30% × payment on which tax was not deducted, or was deducted but not paid on or before the due date for filing the return. Non-resident payee: Disallowance = 100% of the sum payable on which tax is deductible but was not deducted, or was deducted but not paid by the due date; For a resident payee, if tax deducted is paid on or before the return due date, there is no disallowance. If tax is deducted and paid later, the disallowed amount is allowed in the year of payment. The non-resident rule is stricter: the whole payment is disallowed, not 30%. It is allowed in the year in which the tax is later deducted and paid.
Payments to specified persons: Report name, relationship, nature and amount of every payment to a specified person for which expenditure is claimed. Disallowable excess = amount paid − amount reasonable having regard to fair market value, benefit and legitimate business needs; Specified persons include relatives, directors, substantial shareholders and similar related parties. Reporting covers all such payments, not just the excess. The excess over fair market value is the part that may be disallowed.
GST expenditure break-up: Total expenditure = (exempt, nil-rated or non-GST goods/services) + (composition-levy suppliers) + (registered suppliers) + (unregistered suppliers and others); Totals must reconcile to expenditure in the P&L. The auditor reports on information from the books.
Depreciation reporting: Depreciation as per books vs. depreciation as per tax rules, block by block; Show opening WDV, additions, deletions, rate, depreciation and closing WDV. Report the difference.
Auditor's reporting duty: Report = facts from books + reconciled particulars + qualification where there is disagreement or lack of information; State clearly what you are certifying and what is management's representation.

How to solve Clauses of Tax Audit Report and Reporting Duties questions

Use this method for any case-based or written question on tax audit clauses.

1Read the facts and list each transaction with date, amount, party and mode of payment.
2Match each transaction to the family of clause it triggers (disallowance, compliance, computation or information).
3Recall the rule and its exact condition, such as the cash limit, party type or due date for TDS.
4Compute the reportable amount, working per person and per day for cash payments and by payment for TDS.
5State the reporting: the amount to be reported, the consequence (disallowance, if any), and the year in which relief may come later.
6Apply the auditor's duty. Say whether you need a qualification, a reliance statement or a management representation.
7Conclude in provision, facts, conclusion form with one line of final answer.

Quickest way: Clause-trigger shortcut

When to use it: When you have under four minutes for a short question carrying a case scenario.

Underline the mode of payment, the party type and any TDS fact in the scenario.
Cash? Check whether the aggregate to one person in one day exceeds the limit first.
Related party? Check fair market value and the specified-person list, and report all such payments.
TDS? Check deduction, then payment date. For a resident payee, apply the 30% disallowance. For a non-resident payee, the disallowance is 100% of the payment.
Write the amount reportable, then one line on the auditor's duty.

Common mistakes in Clauses of Tax Audit Report and Reporting Duties

Adding up cash payments across the year for one supplier.
Students read the limit as an annual cap.
Fix: Test each day separately for each person. Payments on different days do not combine.
Disallowing only the excess over ₹10,000 instead of the whole payment.
Confusion with older limit-based rules.
Fix: Add up what was paid to one person in one day by modes other than account payee cheque/draft or a prescribed electronic mode. If that aggregate exceeds the limit (₹10,000, or ₹35,000 for transporters of goods carriage, both on the same per-person, per-day basis), the whole amount paid to that person that day is disallowed. Payments by account payee cheque/draft or prescribed electronic modes are outside the rule. Remember that the same clause also picks up s.40A(3A) payments of earlier-year liabilities.
Testing the ₹2 lakh receipt limit under s.269ST only against one receipt.
Students treat it as a simple per-receipt limit.
Fix: Apply all three tests: aggregate from one person in a day, a single transaction, and transactions relating to one event or occasion. If any one reaches ₹2 lakh by a non-permitted mode, report it.
Treating the 30% TDS disallowance as the entire consequence and forgetting to report the TDS default clause.
Focus on income computation rather than reporting.
Fix: Write two things: the disallowance amount, and the TDS default details (tax required to be deducted, not deducted or not paid).
Computing the final taxable income in the answer.
Students mix the auditor's role with the assessee's return preparation.
Fix: Report the facts and the reportable amount. Leave total income to the assessee unless the question asks for it.
Memorising clause numbers without understanding the subject.
Rote learning from older material.
Fix: Learn each clause by what it reports. Use the number only as a label and verify it against the current form.
Not qualifying the report when information is missing.
Fear of client displeasure or ignorance of duty.
Fix: State that where the auditor cannot obtain information or disagrees, a qualification is given with reasons.

Worked examples

Example 1

M/s Rao & Sons is a trading firm subject to tax audit. During the year it made these payments, all claimed as expenditure: (i) ₹45,000 in cash to supplier A on one day for goods purchased; (ii) ₹6,000 and ₹7,000 in cash to supplier B on two different days; (iii) ₹20,000 and ₹18,000 in cash to a transporter for hiring a goods carriage, both on the same day; (iv) ₹50,000 to supplier C by account payee cheque. How will you report the payments and what is the disallowance?

Show the solution

Identify the rule: where payments to one person in one day exceed ₹10,000 in aggregate, otherwise than by account payee cheque/draft or a prescribed electronic mode, the whole amount paid to that person that day is disallowed. For payments to a transporter for hire of a goods carriage, the limit is ₹35,000, tested on the same aggregate-per-day basis.
Supplier A: ₹45,000 on one day exceeds ₹10,000. The whole ₹45,000 is reportable and disallowed.
Supplier B: ₹6,000 and ₹7,000 are on different days. The aggregate on each day is below ₹10,000, so there is no disallowance. Payments on different days are not combined.
Transporter: ₹20,000 + ₹18,000 = ₹38,000 on the same day. This exceeds ₹35,000, so the whole ₹38,000 is reportable and disallowed.
Supplier C: payment by account payee cheque is outside the rule, so nothing is reportable for the ₹50,000.
Total reportable and disallowed: ₹45,000 + ₹38,000 = ₹83,000.
Auditor's duty: report the details of supplier A and the transporter (name, nature, amount) in the clause on payments by non-permitted modes. No earlier-year liability is paid here, so the s.40A(3A) limb does not arise. State that your conclusion rests on the books and vouchers produced.

Answer: Report ₹83,000 as payments exceeding the limit and disallowed in full: ₹45,000 to supplier A and ₹38,000 to the transporter (aggregate for the day exceeds ₹35,000). The payments to supplier B (different days) are within the limit, and the ₹50,000 paid to supplier C by account payee cheque is outside the rule.

Example 2

Mehta Enterprises paid professional fees of ₹5,00,000 to a resident consultant during the year. No tax was deducted, and no exemption applies. Assume the rate of deduction was 10%. Explain how the auditor reports it and the disallowance. What if the assessee deducts and pays the tax in the next tax year?

Show the solution

Identify the default: tax was required to be deducted on resident professional fees but was not deducted.
Compute tax required to be deducted: ₹5,00,000 × 10% = ₹50,000. This is reported in the TDS default clause as tax deductible but not deducted.
Compute the disallowance: the payee is a resident, so the 30% rate applies. 30% × ₹5,00,000 = ₹1,50,000. This is reported as a disallowance for non-deduction.
Reporting duty: give the nature of payment, amount, rate, tax deductible and tax not deducted, with the consultant's details as the form requires.
If the assessee later deducts and pays the tax in the following year, the ₹1,50,000 becomes allowable in that following year, subject to the conditions of the law.
Interest on late deduction and payment is a separate liability. It is not part of the 30% disallowance.

Answer: Tax deductible but not deducted is ₹50,000, reported in the TDS default clause. Because the payee is a resident, the disallowance is ₹1,50,000 (30% of ₹5,00,000). If the tax is deducted and paid in the next year, ₹1,50,000 is allowed as a deduction in that year.

Exam tips

Case-scenario MCQs often hide one trigger fact, such as the date of payment or party type. Read the facts twice before choosing.
In written answers, use provision, facts, conclusion form. Lead with the rule, apply the numbers, then state the amount reportable.
Show every computation step. Marks are awarded for the 30% working and for the per-person, per-day test.
For the auditor's duty questions, mention reliance on books, management representation where relevant, and qualification where information is lacking.
Do not skip the information clauses. A GST expenditure break-up question is easy marks if you remember the four-way split and the reconciliation to the P&L.

Practice questions from Tax Audit and Ethical Compliances

Clauses of Tax Audit Report and Reporting Duties: frequently asked questions

How do I report GST expenditure in the tax audit report?

Break up total expenditure into exempt or non-GST items, supplies from composition dealers, supplies from registered dealers, and others including unregistered suppliers. The total must tie to the expenditure in the profit and loss account. In the older form layout this was clause 44.

How should TDS defaults be reported by the tax auditor?

Report the nature of payment, the amount, the tax that should have been deducted, the tax actually deducted, and the amount paid late or not paid. Also report whether the TDS statements were filed on time. The related disallowance goes in the disallowance clause.

Is the tax auditor responsible for computing total income?

No. The auditor reports particulars and facts from the books. The assessee computes total income and files the return. The auditor must still report amounts that the law disallows.

When should the auditor qualify the tax audit report?

Qualify it when you disagree with the assessee's treatment or when you cannot obtain the information needed. State the reason and the amount affected if it can be measured. Do not hide a material fact because the client objects.