Form 3CD (Tax Audit Report) Updated for AY 2025-26: Clause-wise Important Changes

On 28th March 2025, the Ministry of Finance released Notification No. 23/2025/F. No. 370142/10/2025-TPL, introducing key amendments in the Income-tax Rules, 1962, particularly impacting Form 3CD (Tax Audit Report). These changes are applicable from 1st April 2025 (AY 2025–26).

This notification introduced the Income-tax (Eighth Amendment) Rules, 2025 and focused on:

1. Insertion of New Section 44BBC
2. Omission of Inoperative Sections
3. Clause 21 – Legal Settlements
4. Clause 22 – MSME Reporting Format Revised
5. Clause 26 – Editorial Updates
6. Clause 31 – Loan/Deposit Disclosures Updated
7. Clause 36B – New Clause Inserted

📊 Effective Date

All these changes apply from 1st April 2025, applicable for AY 2025–26 and onwards.

Clause-wise Changes in Form 3CD (Tax Audit Report) for AY 2025–26: A Detailed Breakdown

Clause 12 – Addition of Section 44BBC

• What Changed: Section 44BBC added for presumptive taxation.
• Implication: Assessees opting under this section must now disclose this in Form 3CD.

Clause 19 – Removed Deductions

• What Changed: The following deductions have been removed:
  • Section 32AC
  • Section 32AD
  • Section 35AC
  • Section 35CCB
• Implication: No reporting needed under these discontinued deductions.

Clause 21 – Expanded to Include Legal Settlements

• What Changed: A new row inserted for expenditures incurred to settle proceedings initiated under law notified by Government.
• Implication: Expenditures like fines, settlements, etc., under laws such as FEMA or SEBI Act must now be disclosed.

Clause 22 – MSME Reporting Redesigned

• What Changed: New format based on Section 15 & 23 of MSMED Act:
  1. Interest inadmissible u/s 23
  2. Amount unpaid under Section 15:
     • Paid within time → Allowed
     • Not paid in time → Disallowed u/s 43B(h)
• Implication: Disallowance linked to MSME payment timelines; auditors must track vendor registration & due dates.

Clause 26 – Language Edited

• What Changed:
  • Removed old sub-clauses (a) to (g)
  • Replaced “allowed” with “allowable”
• Implication: More standardised language; easier interpretation.

Clause 31 – Loan/Deposit Reporting with Codes

Sections 269SS and 269T of the Income Tax Act, 1961 are critical for regulating loan and deposit transactions to prevent tax evasion through cash transactions. These sections are closely monitored through Clause 31 of Form 3CD (Tax Audit Report).

From AY 2025–26, taxpayers and auditors must follow dropdown-based reporting of such transactions as per updated Form 3CD structure.

💳 Section 269SS – Acceptance of Loan/Deposit

• No person shall accept any loan, deposit or specified sum of ₹20,000 or more otherwise than by:
  • Account Payee Cheque
  • Account Payee Bank Draft
  • Electronic Clearing System

💸 Section 269T – Repayment of Loan/Deposit

• No person shall repay any loan, deposit or specified advance of ₹20,000 or more otherwise than via the prescribed banking modes.

What Needs to Be Reported in Form 3CD (Clause 31)?

Nature	Section	Threshold	Report When
Loan/Deposit Accepted	269SS	≥ ₹20,000	Accepted via cash/JE/transfer etc.
Loan/Deposit Repaid	269T	≥ ₹20,000	Repaid via cash/JE/transfer etc.
Aggregate Opening + New Loan	269SS	≥ ₹20,000	Total exceeds limit during year
Aggregate Repaid + Closing	269T	≥ ₹20,000	Total repaid during year ≥ 20K

💡 Practical Examples for Clause 31 Reporting

✅ Example 1: Loan Accepted in Cash > ₹20,000

Mr. A accepts loan of ₹25,000 in cash.

• Report under Section 269SS
• Use Code A (Cash Receipt)

✅ Example 2: Loan Repaid via Journal Entry

Mr. B repays ₹45,000 by debiting a creditor account.

• Report under Section 269T
• Use Code I or J (Journal Entry)

✅ Example 3: Multiple Loans from Same Person

Mr. C accepts three loans of ₹10,000 each (total ₹30,000).

• Aggregate crosses threshold → Report under 269SS

✅ Example 4: Acceptance Below Threshold

Mr. D accepts only ₹15,000 by cheque.

• Not reportable – below threshold and in prescribed mode

✅ Example 5: Repayment to Relative via Cash

Mr. E repays ₹50,000 in cash to sister.

• Report under Section 269T
• Code A (Cash Payment)

✅ Example 6: Share Application Money

• Amount received as share application money and shares allotted – Not a Loan, Not Reportable

Dropdown Codes for Mode of Transaction

Code	Mode of Transaction
A	Cash Payment
B	Cash Receipt
C	Payment via Non-Account Payee Cheque
D	Receipt via Non-Account Payee Cheque
E	Transfer of Asset
F	Transfer of Liability
G	Conversion of Assets
H	Conversion of Liabilities
I	Journal Entry [Debit]
J	Journal Entry [Credit]
K	Any Other Mode [Debit]
L	Any Other Mode [Credit]

Clause 36B – Buyback of Shares

• What Changed: New clause inserted to disclose:
  • Amount received on buyback
  • Cost of acquisition of such shares
• Implication: Ensures correct capital gain computation & audit transparency.

Clause 44 – GST Classification of Expenditure

• What Changed: Segregation of expenses based on vendor’s GST status:
  • Registered with GST – ITC eligible
  • Registered – ITC not eligible
  • Composition Dealer
  • Unregistered
  • Exempt supply vendors
  • Located outside India
• Implication: Helps match 3CD data with GSTR-2A/2B and avoid ITC mismatches.

ITR and Form 3CD Cross-Verification: Avoiding Validation Errors in AY 2025–26

With the increasing integration of the Income Tax Return (ITR) utility and Form 3CD validations, the Assessment Year 2025–26 introduces tighter checks between data fields. Mismatches between ITR and Tax Audit Report can now lead to submission errors or notices.

What Must Be Cross-Verified?

Form 3CD contains clause-wise disclosures. The ITR utility, especially for ITR-3 and ITR-5, requires validation of certain figures from 3CD.

Here is a clause-to-schedule mapping:

ITR Schedule	Form 3CD Clause	Relevant Section
Schedule ESR	Clause 19	Sec 35(1)(ii)/(iia)/(iii)/(iv), etc.
Schedule BP	Clause 22	Sec 43B(h) (MSME payments)
Schedule ESR	Clause 19	Sec 35(2AA)/(2AB)/35CCC/35CCD
Schedule 40	Clause 21(b)	Sec 40(a)(i)/(ia)/(ib)/(iii)
Schedule 43B	Clause 26(B)(b)	PF, Leave Encashment, Bonus, etc.

Common Mismatch Scenarios

1. MSME Payment Disallowance:
   • Clause 22 not updated with correct amount → leads to mismatch with Schedule BP (19)
2. Deduction under Scientific Research (Sec 35):
   • Incorrect split between capital and revenue expenses
3. TDS Disallowance u/s 40(a)(ia):
   • Schedule 40 shows expense, but Clause 21 not filled
4. Mismatch in Expense Allowability:
   • Expenditure allowed u/s 43B (like bonus or PF) shown in ITR but not in Clause 26

💼 Key Audit Tips for Form 3CD Filing

As Form 3CD reporting gets tighter from AY 2025–26, Chartered Accountants must go beyond mere form-filling. Accuracy, interlinking with ITR, and timely vendor-level compliance—especially under the MSME Act—are now essential for audit quality and client risk management.

✅ 1. Reconcile GSTR-2B & Clause 44

• Match ITC availability with GST-tagged vendor classification
• Ensure expenses from unregistered/exempt vendors are captured properly

✅ 2. Prepare a Ledger-Wise Loan Register

• Identify opening, new, and repaid loans > ₹20,000
• Tag mode of acceptance or repayment with dropdown code (Clause 31)

✅ 3. MSME Vendor Analysis

• Request Udyam Certificate from vendors
• Tag each invoice with credit period
• Monitor Section 15 & Section 23 of MSMED Act

✅ 4. Validate Clauses with ITR Schedule

• Use mapping:
  • Clause 19 → ESR Schedule
  • Clause 22 → Schedule BP (Row 19)
  • Clause 26 → Schedule 43B

✅ 5. Highlight Journal Entries Involving Loans

• Report journal-based loan acceptance/repayment under Clause 31
• Code I/J should not be ignored

Common Errors & How to Avoid Them

Error Type	Solution
Not Reporting MSME Disallowance	Maintain invoice-wise MSME tracker
Using Wrong Mode Code	Refer dropdown table; avoid assumptions
Mismatch with ITR Schedule	Use reconciliation template before final upload
Treating Share Application as Loan	Refer ICAI exposure – it’s not a loan if documented
Ignoring Accrued Interest	Report only actual accepted/repaid funds

MSME Compliance Workflow

1. Identify MSME vendors and maintain Udyam registration proof
2. Check invoice-wise credit period (15/45 days)
3. Create alert system for upcoming due dates
4. Flag any unpaid amount that breaches the due date
5. Classify them under Clause 22 → allowed/disallowed

Final Takeaway

Tax Audit is no longer a mere compliance checklist. It demands proactive documentation, intelligent cross-linking, and transparency in fund flows.

As CAs, we must:

• Educate clients about MSME and cash compliance
• Cross-verify every ITR schedule with 3CD
• Maintain documentation trail for every disclosure

Stay tuned to TaxHandout for more practical blogs, downloadable formats & compliance insights.