A tax audit under section 44AB is not an audit of the bank account, but a surprising amount of it is answered out of the bank ledger. Cash payments, loans and deposits, disallowed expenditure, related-party movement: the evidence for each is sitting in bank entries somebody classified months ago, usually in a hurry.
This is what makes the bank ledger worth getting right before September rather than during it. By the time you are filling in Form 3CD, an unclassified ledger is not an inconvenience, it is a gap in the evidence.
Who it applies to, and when
Section 44AB requires a tax audit once turnover crosses the prescribed limit: broadly one crore for business, raised to ten crore where both cash receipts and cash payments each stay within five per cent of the total, and fifty lakh for a profession. The report is due by 30 September of the assessment year, though the date has been extended often enough that it is worth confirming rather than assuming.
The thresholds move between years, and there are interactions with presumptive taxation that this article does not attempt to cover. Check the limits for the year you are auditing. What does not move is the point of this piece: the clauses below are answered from bank data, and the quality of that data is decided long before the deadline.
Important
Treat every threshold in this article as a pointer, not authority. Limits under 44AB have changed several times and the five per cent cash condition has its own definitions. Verify against the provisions for the assessment year in front of you.
Clause 21(d): cash payments over the limit
Section 40A(3) disallows business expenditure paid otherwise than by an account payee cheque, draft or prescribed electronic mode where the payment to a single person in a single day exceeds ten thousand rupees. Clause 21(d) of Form 3CD is where that gets reported.
The bank ledger matters here in a way that is easy to miss. The disallowance concerns cash payments, so the evidence is partly an absence: expenditure that did not go through the bank. Reconciling the expense ledgers against bank movement is how you find payments that must therefore have been made in cash.
The direct bank angle is cash withdrawals. A pattern of round-sum withdrawals followed by expense entries of similar size and date is the shape this takes in practice, and it is visible in a party-wise view long before it is visible line by line.
Clause 31: loans, deposits and the two sections behind it
Clause 31 asks for particulars of loans and deposits accepted or repaid, and it exists to report breaches of sections 269SS and 269T. Both require amounts of twenty thousand rupees or more to move by account payee cheque, draft or prescribed electronic mode rather than in cash.
This is the clause where bank classification does the most work, because the reporting needs the counterparty, not just the amount:
- Name and address of the lender or depositor, which means the counterparty must have been identified when the entry was booked, not reconstructed in September.
- Whether the amount was taken or accepted by cheque, draft or electronic mode, which the bank narration records and a hand-typed entry usually loses.
- The maximum amount outstanding at any time during the year, which needs the full run of entries against that party rather than a closing figure.
Pro tip
A ledger where every bank entry already carries a real counterparty answers clause 31 as a report. A ledger where half the entries sit in Suspense answers it as a week of work.
What the auditor is really testing
Underneath the clause numbers, the questions are consistent, and none of them are about arithmetic.
Is this entry what it says it is
A transfer between the client's own accounts booked as a payment to an outside party inflates both expenditure and turnover-adjacent figures. It is the single most common misclassification in an imported bank ledger, and it has its own failure modes at audit.
Can you show where the number came from
An entry traceable to a statement line, with its instrument or UTR number attached, answers this in seconds. An entry typed from a printout does not, and the difference only shows up when somebody asks.
Was anything left undecided
Suspense again. It is the first thing a reviewer opens because it is the cheapest possible test of whether the classification work was actually finished. See ledger scrutiny before a tax audit for the wider check.
The work is in September because the data was left until September
Nothing above is difficult. It is voluminous, and it is voluminous specifically because the bank entries were never classified as they arose.
A firm that posts bank statements monthly with counterparties attached arrives at the audit with clause 31 already answerable and clause 21(d) already visible. A firm that posts a year of statements in September is doing the classification and the audit in the same fortnight, which is where errors get made and why the deadline feels the way it does.
The fix is not working faster in September. It is that the entries carry a party and a reference from the day they are booked.
Conclusion
The bank ledger feeds Form 3CD more than any other account, and it does so through clauses that need counterparties and instrument references rather than totals. Both are present in the bank statement and both are routinely lost between the statement and Tally.
Greenote reads the counterparty out of the narration, binds it to a ledger that already exists in your company, and carries the cheque or UTR number through to the voucher, on your own PC. That is not an audit tool, but it is the difference between a September of checking and a September of typing. See what it does.
One clause reaches past the bank statement entirely. Clause 31 asks about cash RECEIPTS, not cash deposits, and the aggregation rules under section 269ST are where the exposure usually sits. Cash deposits, 269ST and what the tax audit asks covers what to look for and when.
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