FY 2025-26 Tax Audit Practitioner Sprint Under Section 44AB of the 1961 Act and Section 536 Sub-Clause 4 of the Income-tax Act 2025: Form 3CD 41-Clause Hot Spots, Section 43B(h) MSME Disallowance, Section 40(a)(ia) TDS Reconciliation, Section 271B Penalty, and the September 30, 2026 Ten-Step Sprint Plan

Practitioner advisory on tax audit compliance for FY 2025-26 (AY 2026-27) under the Income-tax Act 2025 transition. The tax audit framework under Section 44AB of the 1961 Act continues to apply to FY 2025-26 audits by force of Section 536 sub-clause 4 of the Income-tax Act 2025. This post is the practical companion for the September 30, 2026 due-date sprint.

Quick Summary

• FY 2025-26 tax audits are 1961 Act audits. The Section 536 sub-clause 4 saving clause of the Income-tax Act 2025 preserves the 1961 Act income-computation framework for any previous year ending on or before March 31, 2026. Section 44AB of the 1961 Act, Form 3CA / 3CB-3CD, and the Section 271B penalty regime continue to apply to FY 2025-26 audits.
• Section 44AB applicability thresholds are unchanged for FY 2025-26. Business turnover above Rs 1 crore (Rs 10 crore where cash receipts and cash payments do not exceed 5 percent each), professional gross receipts above Rs 50 lakh, and presumptive scheme opt-outs under Sections 44AD(4), 44ADA, and 44AE remain trigger points.
• Tax audit due date is September 30, 2026. ITR due date for tax-audit assessees is October 31, 2026 (transfer-pricing report assessees: November 30, 2026). Form 3CEB transfer-pricing report is due October 31, 2026.
• Section 271B penalty is the lower of 0.5 percent of turnover or Rs 1.5 lakh. The penalty is leviable for failure to get accounts audited or to furnish the audit report within the due date, subject to reasonable-cause defence under Section 273B.
• Form 3CD has 41 reporting clauses. Each clause draws from a 1961 Act provision. The Section 536 saving clause means the clause references stay the same for FY 2025-26 audits, including disallowance reporting under Section 40(a)(ia), Section 43B accruals, Section 32 depreciation, and Section 14A expenditure allocation.

Why This Matters in May 2026 (Four Months Before the September 30 Wall)

Tax audit season is the heaviest single quarter on every mid-tier practice calendar. From July through September, partner and manager time is consumed by Form 3CD finalization, Form 3CB ledger scrutiny, ICDS reconciliation, Section 43B accrual capture, Section 40(a)(ia) TDS-default disallowance computation, Section 14A expenditure allocation, and Form 3CEB transfer-pricing reporting. In FY 2025-26, that workload is overlaid with the Income-tax Act 2025 transition. Practitioners need a clear answer to a simple question: do I file the FY 2025-26 tax audit under the 1961 Act framework or the 2025 Act framework?

The answer is unambiguous: FY 2025-26 tax audits are filed under the 1961 Act framework, by force of Section 536 sub-clause 4 of the Income-tax Act 2025. The 2025 Act took effect April 1, 2026, but it explicitly preserves the 1961 Act income-computation framework for every previous year ending on or before March 31, 2026. FY 2025-26 (the previous year ending March 31, 2026) falls cleanly within the saving clause. Section 44AB of the 1961 Act, Form 3CA / 3CB-3CD, the Section 271B penalty regime, and the Section 273B reasonable-cause defence all continue to govern.

This post locks down the FY 2025-26 tax audit framework for practitioner reference: applicability thresholds, due dates, Form 3CD clause map, Section 43B and 40(a)(ia) hot spots, the Section 14A allocation question, presumptive scheme audit triggers, the penalty grid, a 10-step practitioner sprint plan, and a six-question client-memo FAQ. It is the working companion to Post 738 (AY 2026-27 ITR Practitioner Advisory), Post 723 (CBDT 99-Page FAQ), and Post 696 (Income-tax Act 2025 Issuance).

Section 44AB Applicability Map for FY 2025-26

Class of assessee	Turnover / gross receipts threshold (FY 2025-26)	Notes
Business (non-presumptive)	Above Rs 1 crore	Standard threshold under Section 44AB(a)
Business (cash receipts and cash payments each not exceeding 5 percent of total receipts and total payments)	Above Rs 10 crore	Higher threshold under proviso to Section 44AB(a). Practitioner must verify the 5 percent cash test on both receipt and payment side, separately.
Profession	Above Rs 50 lakh	Section 44AB(b). Threshold is gross receipts in the profession.
Presumptive business under Section 44AD: opted-out	Above Rs 2 crore (if profit declared below 8 percent / 6 percent of turnover)	Section 44AB(e) read with Section 44AD(4). Once opted out of Section 44AD, lock-in for 5 years.
Presumptive profession under Section 44ADA: profit below 50 percent of gross receipts	Above Rs 50 lakh	Section 44AB(d) read with Section 44ADA. Triggers audit if profession’s profit is declared at less than 50 percent of gross receipts and total income exceeds the basic exemption.
Goods-carriage business under Section 44AE	If profit declared below presumptive Rs 1,000 / Rs 7,500 per ton per month and total income exceeds basic exemption	Section 44AB(c) read with Section 44AE.
Other specified businesses (Section 44BB, 44BBB)	If income claimed lower than presumptive rate	Audit triggers under Section 44AB if assessee claims income lower than the presumptive deemed profit rate.

The Rs 10 crore higher-turnover threshold under the proviso to Section 44AB(a) is the single biggest practitioner trap. The 5 percent cash test applies separately on the receipt side and the payment side. A business with Rs 8 crore turnover, Rs 30 lakh cash receipts (3.75 percent of receipts, within limit), but Rs 50 lakh cash payments (where total payments are Rs 7.5 crore and cash payments are 6.67 percent, exceeding limit) fails the proviso on the payment side and reverts to the Rs 1 crore threshold. The audit is mandatory. Practitioners should run the 5 percent test on every borderline file in May and June, before audit fieldwork starts.

FY 2025-26 Tax Audit Due-Date Grid

Form / report	Section reference	Due date for FY 2025-26 / AY 2026-27
Tax audit report (Form 3CA / 3CB and Form 3CD)	Section 44AB; rule 6G of Income-tax Rules 1962	September 30, 2026 (one month before ITR due date)
ITR for non-transfer-pricing audit assessees	Section 139(1) Explanation 2(a)(ii)	October 31, 2026
Form 3CEB transfer-pricing report	Section 92E; rule 10E	October 31, 2026
ITR for transfer-pricing audit assessees	Section 139(1) Explanation 2(aa)	November 30, 2026
Form 10B / 10BB charitable institution audit	Section 12A(1)(b); rule 16CC, 17B	September 30, 2026
Form 29B MAT certificate	Section 115JB; rule 40B	September 30, 2026 (filed with ITR for companies under MAT)
Form 10-IEA opt-out / opt-in for new-regime AY 2026-27 (for tax-audit assessees)	Section 115BAC(6); rule 21AGA	On or before October 31, 2026 with ITR

Note that the Section 115BAC new-regime is the default for individual, HUF, AOP, BOI, and AJP assessees from AY 2024-25 onwards. Tax-audit assessees in business or profession who wish to remain in the old regime must file Form 10-IEA by the Section 139(1) due date. For AY 2026-27, that means October 31, 2026 for tax-audit assessees. A late Form 10-IEA cannot revive the old-regime option for AY 2026-27.

Form 3CD Reporting Clauses: 41 Clauses, Practitioner Hot Spots

Form 3CD (rule 6G(2)) has 41 reporting clauses. Each clause draws from a 1961 Act provision. Section 536 sub-clause 4 preserves these provisions for FY 2025-26 audits. The clauses most likely to consume practitioner time and generate disputes are:

Clause	Subject	1961 Act anchor	Hot-spot risk
13	Method of accounting and ICDS reconciliation	Section 145; rule 5	ICDS adjustments often missed; reconcile every ICDS standard line by line
16	Capital receipt or income	Section 28, 56	Disputes on whether a one-time receipt is income or capital
18	Depreciation as per Income-tax Act	Section 32; rule 5; Appendix I	Block-of-assets, additions in second half (50 percent rule), unabsorbed depreciation tracking
21(a)	Expenditure of capital nature debited to P&L	Section 37(1); 1961 Act jurisprudence	Common disallowance in scrutiny; capture every borderline item
21(b)	Amounts disallowed under Section 40(a)	Section 40(a)(i), 40(a)(ia), 40(a)(iib), 40(a)(iii)	TDS-default disallowance (30 percent for residents, 100 percent for non-residents); reconcile Form 26AS, vendor master, TDS deposit dates
22	Amounts admissible under Section 33AB, 33ABA, 35, 35ABA, 35ABB, 35AC, 35AD, 35D, 35DD, 35DDA, 35E	Multiple investment-linked deductions	Verify supporting documents; many provisions are time-bound
26	Amounts disallowed under Section 43B	Section 43B(a) to (h)	Statutory dues paid after year-end but before ITR filing; MSME interest disallowance under Section 43B(h)
27	CENVAT / GST tax credit availed but not credited to P&L	Section 145A	Verify GST input credit reconciliation; common opening-closing balance mismatch
30	Section 269SS and 269T compliance (loans and advances)	Sections 269SS, 269T, 271D, 271E	Cash receipt/repayment of Rs 20,000 or more; 100 percent penalty exposure under Section 271D / 271E
32	Brought-forward loss and unabsorbed depreciation	Sections 32(2), 72, 73, 73A, 74, 74A	Tranche-wise reporting; cross-verify against AY 2025-26 ITR carry-forward schedules
34	TDS / TCS deduction and deposit compliance	Sections 192 to 196D, 206C	Reconcile vendor master, deduction register, TDS deposit (Form 281), Form 26Q / 27Q / 27EQ statements
36A	Cash receipts above Rs 2 lakh from a person on a single day	Section 269ST; 271DA	100 percent penalty under Section 271DA; common in retail and real-estate files
40	Particulars of demand raised or refund received	Section 156; departmental records	Cross-verify with assessment order history and ITBA portal
41	GST registration and turnover	GST Act 2017 cross-reference	Reconcile GSTR-9 annual return turnover with books of account; common mismatch trigger

Section 43B(h): The MSME Interest Disallowance Hot Spot for FY 2025-26

Section 43B(h) of the 1961 Act was inserted by Finance Act 2023 and took effect from AY 2024-25. It disallows any sum payable to a micro or small enterprise (defined under Section 7 of the MSME Development Act 2006) beyond the Section 15 of the MSME Act period (45 days with written agreement, 15 days without). Payment after the year-end but before the ITR due date does NOT cure the disallowance (the proviso to Section 43B(h) excludes this concession). The disallowance is permanent in the year of accrual and the deduction shifts to the year of actual payment.

For FY 2025-26 tax audits, every practitioner must:

1. Pull the vendor master and identify every vendor that is a registered micro or small enterprise (MSME registration certificate, Udyam registration number).
2. For each MSME vendor, tabulate the invoice date, payment due date (per written agreement or default 15 days), actual payment date, and amount payable as of March 31, 2026.
3. Identify amounts that are payable beyond the Section 15 MSME Act period at year-end. Disallow under Section 43B(h) and report in Form 3CD clause 26.
4. Document the source documents in the audit working file: MSME registration certificate, invoice copy, written payment-term agreement (or absence thereof), proof of payment date.
5. In the client memo, note that the deduction reverts in the year of actual payment, not in the year of accrual.

Section 43B(h) is the single most-litigated clause in FY 2023-24 and FY 2024-25 tax audits. Expect FY 2025-26 to be no different. Department scrutiny on Section 43B(h) is likely to increase as the provision matures.

Section 40(a)(ia): TDS-Default Disallowance Mechanics

Section 40(a)(ia) disallows 30 percent of any sum payable to a resident on which TDS was deductible but not deducted or, having been deducted, not deposited within the Section 139(1) due date for the assessee. The disallowance is reported in Form 3CD clause 21(b).

Practitioner sprint on Section 40(a)(ia) for FY 2025-26:

1. Reconcile the vendor master with the TDS deduction register; flag any vendor where TDS was not deducted.
2. For every TDS deduction, verify the TDS deposit date against the Section 139(1) due date (October 31, 2026 for tax-audit assessees).
3. For TDS deducted but not deposited as of audit date, communicate to client to deposit before October 31, 2026 to avoid the Section 40(a)(ia) 30 percent disallowance.
4. For non-resident payments under Section 40(a)(i), the disallowance is 100 percent (not 30 percent). Reconcile Form 27Q TDS statements for non-resident vendor master separately.
5. Reconcile Form 26AS (consolidated tax credit statement of the deductee) with the deductor’s TDS register; mismatches must be reconciled before audit report sign-off.

Section 271B Penalty: The 0.5 Percent or Rs 1.5 Lakh Penalty

Section 271B of the 1961 Act provides for a penalty for failure to get accounts audited under Section 44AB or to furnish the audit report by the September 30, 2026 due date. The penalty is the lower of:

• 0.5 percent of total turnover or gross receipts, or
• Rs 1.5 lakh.

The penalty is leviable by the Assessing Officer. Section 273B provides a reasonable-cause defence: if the assessee proves there was reasonable cause for the failure, no penalty shall be imposed. Standard reasonable-cause defences include CA strike, technical malfunction on the e-filing portal, illness or death of the principal officer, and pendency of a writ at the relevant time. The defence is fact-specific and requires documentary evidence in the response to the show-cause notice.

Default	Penalty section	Quantum	Defence
Failure to get accounts audited or to file Form 3CA/3CB-3CD by September 30, 2026	Section 271B	Lower of 0.5% of turnover/receipts or Rs 1.5 lakh	Section 273B reasonable cause
Cash loan/deposit acceptance or repayment above Rs 20,000	Section 271D / 271E	100% of loan/deposit amount	Section 273B reasonable cause
Cash receipt above Rs 2 lakh from a person on a single day	Section 271DA	100% of amount received	Section 273B reasonable cause
Under-reporting of income	Section 270A(1)	50% of tax payable on under-reported income	Section 270A(6) bona-fide-explanation defence
Mis-reporting of income	Section 270A(8)	200% of tax payable on mis-reported income	Burden of proof on assessee that there was no mis-reporting
Failure to maintain books of account under Section 44AA	Section 271A	Rs 25,000	Section 273B reasonable cause

Ten-Step Tax Audit Sprint: May Through September 2026

1. May 19 to May 31: Lock down the audit universe. Identify every client where Section 44AB applies for FY 2025-26 based on turnover, profession threshold, presumptive scheme opt-outs, and Section 44AD lock-in years. Tabulate the audit calendar by client class.
2. June 1 to June 15: Conduct the borderline-threshold review. Run the Section 44AB(a) proviso 5 percent cash test on every client with turnover between Rs 1 crore and Rs 10 crore. Flag any that revert from Rs 10 crore to Rs 1 crore threshold.
3. June 16 to June 30: Initiate vendor-master scrub. Identify MSME-registered vendors, prepare Section 43B(h) tracking sheet for every MSME vendor, calculate amounts payable beyond Section 15 period as of March 31, 2026.
4. July 1 to July 15: Run Section 40(a)(ia) reconciliation. Cross-verify TDS deduction register, Form 26AS, Form 281 deposits, Form 26Q / 27Q / 27EQ statements. Communicate any pending TDS deposit gaps to client.
5. July 16 to July 31: ICDS reconciliation under Form 3CD clause 13. Run line-by-line check on each of the 10 ICDS standards; document deviations in the audit memo.
6. August 1 to August 15: Depreciation block-of-assets review. Verify additions in the second half (50 percent rule), unabsorbed depreciation tracking, classification of assets under Appendix I block rates.
7. August 16 to August 31: Section 14A and rule 8D allocation. Identify exempt-income-earning assets, allocate disallowable expenditure under rule 8D(2)(ii) and 8D(2)(iii). Document the allocation basis.
8. September 1 to September 15: Form 3CD finalization. Run all 41 clauses on every audit file. Cross-verify Form 3CD with the financial statements, journal entries, and Form 26AS.
9. September 16 to September 25: Sign-off and management representation letter. Obtain client board minute or partner authorisation. Lock the digital signature for upload.
10. September 26 to September 30: Upload Form 3CA / 3CB and Form 3CD on the e-filing portal. Verify successful upload and acknowledgement. Maintain audit working file for permanent record.

FAQs: Six Questions Practitioners Will Be Asked

Q1: Do I file the FY 2025-26 tax audit under the 1961 Act or the 2025 Act?

Under the 1961 Act. Section 536 sub-clause 4 of the Income-tax Act 2025 preserves the 1961 Act income-computation framework for any previous year ending on or before March 31, 2026. FY 2025-26 (previous year ending March 31, 2026) is within the saving clause. Section 44AB of the 1961 Act, Form 3CA / 3CB-3CD, and the Section 271B penalty regime apply. The first tax audit under the Income-tax Act 2025 framework will be for FY 2026-27 (AY 2027-28), due September 30, 2027.

Q2: My client’s turnover is Rs 8 crore. Cash receipts are 4 percent of receipts. Cash payments are 7 percent of payments. Is the tax audit threshold Rs 1 crore or Rs 10 crore?

Rs 1 crore. The proviso to Section 44AB(a) requires that both cash receipts and cash payments do not exceed 5 percent. Failure of the test on the payment side alone is sufficient to push the threshold back to Rs 1 crore. The audit is mandatory. Communicate to client immediately so they can plan working-capital posting for FY 2026-27 to stay within the proviso going forward.

Q3: My client opted out of Section 44AD in AY 2023-24. Can they go back to presumptive in AY 2026-27 (FY 2025-26)?

No. Section 44AD(4) imposes a 5-year lock-in once an eligible assessee declares profit below 8 percent (or 6 percent for digital receipts). The 5-year lock-in runs from the AY in which the opt-out occurred, plus 5 succeeding AYs. An opt-out in AY 2023-24 locks the assessee out of Section 44AD through AY 2028-29. For AY 2026-27 (FY 2025-26), the audit threshold is the standard Section 44AB(a) Rs 1 crore or Rs 10 crore (with cash test).

Q4: We missed the Section 44AB September 30 deadline last year and got a Section 271B show-cause. The reasonable-cause defence is technical-portal-failure. Will Section 273B save us?

Possibly, but the defence is fact-specific. Section 273B requires the assessee to prove reasonable cause to the satisfaction of the Assessing Officer. Documentary evidence is critical: e-filing portal screenshots with timestamp showing the failed-upload error, screenshots of e-filing helpdesk acknowledgement of the technical issue, and a chronology that shows the assessee made multiple bona-fide attempts before the deadline. ITAT precedent on technical-portal-failure defences is mixed; outcomes depend on the strength of contemporaneous evidence.

Q5: For Section 43B(h) MSME interest disallowance, my MSME vendor was registered in February 2026 but the supply was in October 2025. Does Section 43B(h) apply?

Yes. The trigger is the status of the vendor as a micro or small enterprise at the time the payment is due. If the vendor was a micro or small enterprise (as defined under Section 7 of the MSME Development Act 2006) at the time the Section 15 MSME Act period expired (45 days with written agreement, 15 days without), Section 43B(h) applies. Practitioner check: verify Udyam registration date, but also verify the substantive micro/small status as of the payment-due date.

Q6: My client did not file Form 10-IEA for AY 2025-26. Can they file Form 10-IEA late for AY 2026-27 and opt out of the new regime?

Form 10-IEA must be filed on or before the Section 139(1) due date for the AY in question. For AY 2026-27 (FY 2025-26), the due date is October 31, 2026 for tax-audit assessees. Late Form 10-IEA is not entertained for AY 2026-27 once October 31 passes. The default new regime under Section 115BAC then applies. Note that the new regime is the default for individual, HUF, AOP, BOI, and AJP assessees from AY 2024-25 onwards; companies under Sections 115BAA / 115BAB have their own opt-in mechanics (Form 10-IC / 10-ID) that are not displaced by the AY 2025-26 omission.

Bottom Line for the Audit Calendar

FY 2025-26 tax audit season runs under the 1961 Act framework. Section 536 sub-clause 4 of the Income-tax Act 2025 keeps the income-computation rules intact, and Section 44AB, Form 3CA / 3CB-3CD, ICDS, Section 43B(h), Section 40(a)(ia), and the Section 271B penalty regime continue without change. The September 30, 2026 due date is the hard wall. The October 31, 2026 ITR due date (November 30, 2026 for TP cases) follows. Practitioners should lock down the audit universe by end of May, run the borderline-threshold and Section 44AD lock-in scrub by mid-June, and start vendor-master and TDS reconciliation work by July. The Income-tax Act 2025 transition does not change a single tax-audit clause for FY 2025-26. It is a clean 1961 Act audit cycle.

Disclaimer: This article provides general information on Section 44AB tax audit applicability and Form 3CD reporting for FY 2025-26 (AY 2026-27) under the Income-tax Act 1961 framework, preserved by Section 536 sub-clause 4 of the Income-tax Act 2025. It is not legal or tax advice. For client-specific applicability determinations, threshold analysis, Section 43B(h) MSME mapping, Section 40(a)(ia) TDS reconciliation, presumptive scheme opt-out planning, or Section 271B penalty defence preparation, consult a qualified tax practitioner familiar with the client’s books of account, vendor master, and audit history.

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If your practice is gearing up for FY 2025-26 tax audit season, the May-to-July window is the time to lock down the audit universe, run the borderline-threshold scrub, identify Section 44AD lock-in clients, scrub vendor masters for Section 43B(h) MSME exposure, and run the TDS reconciliation under Section 40(a)(ia). Tax Update India advisors work with mid-tier practices on audit-season sprint planning, Form 3CD checklists, ICDS reconciliation models, and Section 271B reasonable-cause defence preparation.

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