ICAI Issues Exposure Draft on Revised Section 44AB Tax Audit Guidance Note

The Direct Taxes Committee of the Institute of Chartered Accountants of India, through an announcement dated 9th July, 2026, has issued an Exposure Draft of the revised Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 for public comments. The Committee stated that after issuing the Guidance Note in July 2025, it now proposes to revise the “Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 (Revised 2025)” for the benefit of members, and the Exposure Draft incorporates the proposed changes. Comments are invited on any aspect of the Exposure Draft and should identify the relevant paragraph or paragraphs and, where applicable, the specific clause of Form No. 3CD, provide a coherent rationale, and include a clear suggestion for change. Comments may also supplement any paragraph with relevant Supreme Court case law or relevant Circulars or Notifications. Comments are to be submitted through the specified online link by 25th July, 2025.

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Direct Taxes Committee
The Institute of Chartered Accountants of India
Date: 9th July, 2026

Sub: Exposure Draft – ‘Guidance Note on Tax Audit under section 44AB of the Income-tax Act,1961’ for Public Comments

In July, 2025; the Direct Taxes Committee had come out with “Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961”. DTC proposes to revise the “Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961 (Revised 2025)” for the benefit of the members. Accordingly, the Exposure Draft – ‘Guidance Note on Tax Audit under section 44AB of the Income-tax Act,1961’, incorporating the proposed changes, has been issued for public comments. The Exposure Draft can be accessed at the link: https://resource.cdn.icai.org/93172dtc-aps5776-exposure-draft.pdf

Comments are invited on any aspect of this Exposure Draft. Comments are most helpful if they-

1. indicate the specific paragraph or group of paragraphs of the Guidance Note to which they relate and the specific clause of Form No.3CD (in case the suggestion pertains to that clause);

2. contain a coherent rationale, and

3. provide a clear suggestion for the change.

Also, comments may be in the form of supplementing any para in the Exposure Draft with relevant case law of the Supreme Court/relevant Circular/Notification.cc

How to Comment?

The comments on the above mentioned Exposure Draft are to be sent at the following link latest by 25th July, 2025 –

https://forms.gle/QjjccvM8xm6wVv8g7

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Brief Analysis of Exposure Draft – ‘Guidance Note on Tax Audit under section 44AB of the Income-tax Act,1961’

The supplied material is an Exposure Draft – Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2025) issued by the Direct Taxes Committee of the Institute of Chartered Accountants of India (ICAI). It explains the statutory framework, scope, audit procedures, professional responsibilities, reporting requirements and clause-wise particulars connected with tax audit under section 44AB, Rule 6G and Forms 3CA, 3CB and 3CD. The draft states that the last date for receiving comments is 25.07.2026.

Background, purpose and statutory framework

The Guidance Note describes an audit as a check, review or inspection and explains tax audit as an audit of accounts of business or profession from the viewpoint of income-tax law. Section 44AB identifies taxpayers required to get their accounts audited by a chartered accountant. The audit aims to ascertain compliance with provisions and other requirements of income-tax law. The chartered accountant gives findings and observations in Forms 3CA or 3CB together with the statement of particulars in Form 3CD.

The stated objectives include ascertaining or deriving requirements of Form 3CD and reporting in Forms 3CA/3CB; providing assurance regarding proper maintenance of books and records and true and correct particulars in Form 3CD; facilitating administration of tax laws through proper presentation of accounts; and saving Assessing Officers’ time in routine verification. The first edition was published in 1985 and revisions followed in 1989, 1998, 1999, 2005, 2013, 2014, 2022 and 2023. The 2024 Implementation Guide on Revision in Form No. 3CD in March 2024 is incorporated and merged into this revised edition.

The draft traces amendments to Rule 6G and Forms 3CA, 3CB and 3CD, including Notification No. 10950/F.No. 153/74/98/TPL; Notification No. 280/2004; Notification No. 208/2006; Notification No. 33/2014; Notification No. 88/2016; Notification Nos. 58/2017 and 60/2017; Notification No. 33/2018; Notification Nos. 82/2020 and 28/2021; Notification No. 27/2024 read with Corrigenda to Notification No. 34/2024; and Notification No. 23/2025 dated 28.03.2025. The 2025 amendments affected clauses 12, 19, 21(a), 22, 26, 31(a)(ii), 31(b)(ii) and 31(c)(ii), inserted Note 1 after clause 31 and clause 36B after clause 36A, and omitted clauses 28 and 29.

Applicability of section 44AB

The draft reproduces and explains section 44AB. For business, audit applies where total sales, turnover or gross receipts exceed Rs. 1 crore in a previous year. Where aggregate cash receipts, including amounts received for sales, turnover or gross receipts, do not exceed 5% of the total, and aggregate cash payments, including expenditure, do not exceed 5% of total payments, the threshold operates as Rs. 10 crore. A cheque or bank draft that is not account payee is deemed cash for this purpose.

For profession, the threshold is gross receipts exceeding Rs. 50 lakh. The section also addresses specified cases under sections 44AE, 44BB, 44BBB, 44ADA and section 44AD(4). It does not apply to a person declaring profits and gains in accordance with section 44AD(1) or 44ADA(1), and also contains the stated exclusion concerning income under sections 44B and 44BBA.

Where accounts are required to be audited under another law, compliance is sufficient if those accounts are audited under that law before the specified date and the prescribed further report is furnished. The “specified date” is one month before the due date for furnishing the return under section 139(1).

Under Rule 6G, Form 3CA applies where accounts are required to be audited under another law; Form 3CB applies otherwise; and prescribed particulars are furnished in Form 3CD. The draft states that a company or LLP should select the third proviso to section 44AB as the applicable provision in clause 8 of Form 3CD because its accounts are audited under another law, with similar precautions for co-operative societies, trusts and other assessees audited under respective laws.

Business, profession and turnover

The draft discusses “business” under section 2(13) and “profession” under section 2(36). It lists professions under section 44AA(1), including legal, medical, engineering, architectural, accountancy, technical consultancy and interior decoration, and refers to additional notified professions including authorised representatives, company secretaries, specified film artists and information technology. It also identifies activities stated to have been held as business, including clearing, forwarding and shipping agents and stock and share broking.

The terms “sales”, “turnover” and “gross receipts” are stated not to be defined in the Income-tax Act. The draft discusses definitions and concepts under the Central Sales Tax Act, 1956, CGST Act, 2017 and Companies Act, 2013, together with ICAI’s glossary. Under GST, it discusses “aggregate turnover” under section 2(6) and “turnover in State/Union territory” under section 2(112).

For section 44AB purposes, the draft states that turnover may mean the aggregate amount for which sales are effected or services rendered. Where GST or another tax is included in the sale price, no adjustment should be made; where indirect taxes recovered are credited separately to tax accounts and payments are debited to those accounts, they are not included. Scrap sales shown separately as miscellaneous income are included.

The draft addresses discounts, sales returns, fixed assets, investment property, shares and securities, commission and consignment transactions, share brokers and sub-brokers. Discount allowed in the sales invoice reduces turnover; cash discount other than one allowed in a cash memo or sales invoice is treated as a financing charge and is not deducted; qualifying turnover discounts and trade rebates may be deducted; goods returns reduce turnover; sale proceeds of fixed assets and investment property do not form part of turnover; and investment securities are excluded, while securities held as stock-in-trade are included.

Shares, derivatives, VDAs and carbon credits

For speculative transactions, the aggregate of favourable and unfavourable differences is treated as turnover. For derivatives, futures and options, the draft provides that total favourable and unfavourable differences in squared-off transactions are taken as turnover; premium received on sale of options is included, subject to the stated treatment where already included in net profit; differences on reverse trades form part of turnover; open positions are considered in the financial year when actually squared off; and for delivery-based settlement in derivatives, the difference between trade price and settlement price is considered turnover, with the entire sale value also considered business turnover in the hands of the transferor where the underlying asset is stock-in-trade. Delivery-based commodity, stock and share transactions take total sales value as turnover.

A significant revision in paragraph 5.13 expressly includes in “gross receipts in business” the aggregate value and amount of gross receipts from sale or transfer of Virtual Digital Assets (VDAs) by a dealer engaged in dealing in such assets and corresponding receipts from carbon credits by a dealer engaged in that business.

Paragraph 5.14 adds that bad-debt recoveries, section 41 remission of liability, and capital receipts not credited to the statement of profit and loss do not form part of “gross receipts in business”.

Where an assessee carries on more than one business, aggregate sales, turnover and gross receipts of all businesses are considered. Turnover of businesses covered by sections 44B or 44BBA is excluded, as is turnover of businesses or professions covered by sections 44AD, 44ADA, 44AE, 44BB or 44BBB where the assessee opts for presumptive assessment under the respective provision. Each partnership firm is treated separately. Applicability is determined independently each year. The draft also states that interest, salary, bonus, commission or remuneration received by a partner from a firm cannot be treated as gross receipt or turnover in the stated circumstances.

Special cases, specified date and penalty

The draft discusses exempt entities, trusts, associations, institutions, co-operative societies, persons below the taxable limit and non-residents. It states that section 44AB does not distinguish between residents and non-residents and discusses audit applicability where statutory conditions are satisfied.

It separately addresses the specified date and penalty provisions, including section 271B, and the tax auditor’s role where an assessee seeks to establish reasonable cause for failure to obtain or furnish the audit report.

Tax auditor, appointment and professional responsibilities

The Guidance Note contains extensive material on who may act as tax auditor, appointment, communication with the previous auditor, acceptance and removal of assignments, professional misconduct, branch audits, joint audits, ceiling on assignments and maintenance of records.

An internal auditor of an assessee cannot be appointed as tax auditor, following the ICAI Council decision effective from 12.12.2008. Management may remove a tax auditor on valid grounds, such as unreasonable delay creating no possibility of uploading the report before the specified date, but not merely because an adverse report has been given or is apprehended.

The draft refers to a ceiling of 60 tax audit assignments relating to an assessment year or such other limit as ICAI may prescribe from time to time. Audits of books of persons covered by sections 44AD, 44ADA and 44AE are stated not to be included in that limit under the cited Council Guidelines. A new clarification in paragraph 9.36 states that where more than one branch office of an auditee is audited by the same auditor, it should be counted as one tax audit assignment. Paragraph 9.38 incorporates a point relating to UDIN.

A new note addresses revision of a tax audit originally conducted by another member. The draft also contains Appendix VIIIA on The Chartered Accountants (Limit on Number of Tax Audits) Guidelines, 2025.

Financial statements, accounting standards and audit procedures

Paragraph 10 is updated in line with the Guidance Note on Financial Statements of Non-Corporate Entities and the Guidance Note on Financial Statements of LLPs. New Appendices XXIII and XXIV provide formats for preparation of financial statements of non-corporate entities and LLPs.

The audit-procedure discussion addresses Standards on Auditing, audit evidence, test checks, materiality, internal controls, representations and use of experts. The sample engagement material states that audits are conducted under SAs to obtain reasonable rather than absolute assurance and recognises inherent limitations, including collusion or improper management override of controls. It also addresses SA 620 where specialised knowledge or expertise is required.

The draft distinguishes the “true and correct” requirement for particulars in Form 3CD from the “true and fair” terminology associated with financial statements. It refers to prudence, substance over form and materiality, and states that particulars should be given for material items while factual correctness is assessed.

DPDP Act, confidentiality and data governance

New paragraphs 13.13 to 13.15 discuss the Digital Personal Data Protection (DPDP) Act, 2023. The draft states that tax auditors routinely handle sensitive personal data such as PAN, Aadhaar, salary records and bank details. It states that, while the Chartered Accountants Act, 1949 and Code of Ethics already mandate client confidentiality, the DPDP Act elevates this into a statutory obligation.

The draft states that audit firms must establish robust internal data-governance frameworks, including data-protection policies, need-to-know access restrictions and security for digital tools such as cloud platforms and AI applications. Client information must remain confidential at every audit stage and not be disclosed, accessed or used except as permitted by law or authorised by the client. It further states that auditors should update engagement letters with clear data-processing clauses, prepare strict confidentiality agreements for staff and third-party vendors, and proactively document security measures.

Last edition under the 1961 Act

Paragraph 13.16 states that this is the last edition of the Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961. It states that, with effect from 1 April 2026, the Income-tax Act, 2025 has come into force and tax audits are governed by section 63 of that Act. Readers are advised to refer particularly to section 536, containing transitional provisions relevant to implementation of the new Act.

TAQRB observations and clause-wise reporting

A major feature of the revised draft is incorporation, across relevant Form 3CD clauses, of TAQRB observations concerning irregularities, deficiencies and common errors noticed during review of tax audit reports, with an appropriate disclaimer.

The detailed clause-wise discussion spans particulars of members and partners; nature of business or profession; books and documents; presumptive income; accounting method; closing-stock valuation; conversion of assets into stock-in-trade; income not credited to profit and loss account; property valuation; depreciation; deductions under sections 32AC to 35E; bonus, commission and PF recoveries; inadmissible expenditures under sections 40 and 40A; contingent liabilities; section 14A; proviso to section 36(1)(iii); payments to micro or small enterprises; specified persons under section 40A(2)(b); deemed profits; section 41; section 43B; tax credits; prior-period expenditure; sections 56(2)(ix) and 56(2)(x); hundi loans; section 92CE; section 94B; GAAR under section 96; sections 269SS, 269T and 269ST; brought-forward losses and depreciation; section 79; speculation losses; section 73A; Chapter VIA and Chapter III deductions; TDS/TCS; quantitative details; deemed dividend; buyback receipts; cost, excise and service-tax audits; turnover and profit ratios; demands and refunds; Forms 61/61A/61B; section 286(2); and GST compliance.

Examples of TAQRB observations include reporting under clause 38 based only on management representation without examining the excise audit report, contradictory reporting concerning such reports, unnecessary reporting under clause 17 where actual consideration and value adopted under sections 43CA/50C were identical, and omissions in quantitative reporting under clause 35(a).

For section 43B, the draft addresses sums payable for use of railway assets and states that basic rail freight is not included as it concerns transport service rather than use of railway assets. It also states that where GST liability under RCM is booked but not paid on or before the due date for filing the return under section 139(1), the amount must be reported, with verification from the GST payable ledger or GSTR-3B reconciliations.

For Chapter VIA and Chapter III deductions, the tax auditor is advised to examine qualifying conditions and documentary evidence. Separate audit reports or certificates under provisions including sections 80-IA, 80-IB, 80-IC and 80JJAA are to be considered; where another auditor issued the report, the draft refers to SA 600.

Audit report, filing and UDIN

Section 44AB requires the prescribed audit report with prescribed particulars. The draft discusses Forms 3CA and 3CB, Form 3CD, qualifications and observations, signing and furnishing the report, electronic filing and joint auditors. Where accounts have already been audited under another law, the tax auditor under section 44AB need not give an opinion on whether those accounts give a true and fair view but annexes the audited accounts and statutory audit report with Form 3CA and Form 3CD.

For joint auditors, the draft notes that present income-tax filing options do not provide modalities for uploading reports by all joint auditors; it states that a hard copy duly signed may be given to the assessee and a consolidated report uploaded by one auditor with disclosure. It further states that UDIN should be written on the hard copy of Form 3CA/3CB before the copy is given to the auditee.

Appendices and revised management representation

The Guidance Note contains extensive appendices covering Forms 3CA, 3CB and 3CD; ICAI clarification; other accountant reports and certificates; CBDT circulars; mandatory communication and Code of Ethics extracts; Council Guidelines; tax-audit assignment records; the 2025 tax-audit limit guidelines; sample engagement letters; minimum recommended fees; entity classification; accounting standards; SA 700; business and profession codes; MSME notifications; office memoranda; useful websites and reference publications; and financial-statement formats.

Appendix IXA, the Sample Management Representation Letter, has been revised in line with the format published by the Auditing and Assurance Standards Board (AASB) in its FAQs on Management Representation Letter. The accompanying materials address access to books, vouchers, digital records and documentation, internal controls, additional information, unrestricted access to relevant persons, internal audit reports and significant changes in control design or operation.