FMCG Distributor — First-Time Section 44AB Tax Audit
A Pune proprietor supplying 60-plus retail accounts crossed the 44AB threshold with 22 days to spare — incomplete records, undisclosed HUF dealings, a ₹1.2 lakh inventory gap, and two TDS defaults. We filed a clean, unqualified Form 3CD before the deadline.
What we walked into.
A first-time 44AB audit with 22 days on the clock. The proprietor had no prior audit experience and arrived with incomplete records. Three compounding issues awaited: cash purchases on multiple single days exceeded the Section 40A(3) ceiling of ₹10,000 and would attract automatic disallowance without documented explanation; a physical stock count had uncovered a ₹1.2 lakh shortage against the books, with no write-off entry passed; and payments between the proprietorship and an HUF operated by the same proprietor raised Clause 26 related-party concerns and risk of double deduction. On top of all this, a TDS review revealed two short-deduction instances — one under Section 194C (transport contractor) and one under Section 194H (commission agent) — that needed correcting before the audit report could be signed.
How we executed the engagement.
Cash Payment Analysis
Transaction-level review of all books against bank statements and purchase invoices. Every cash payment above ₹10,000 was examined for business purpose, vendor identity, and whether grouping across related parties could breach the daily ceiling. A detailed reconciliation memo was prepared for each instance.
Inventory Write-off Coordination
A signed stock-take certificate was obtained from the warehouse supervisor. We coordinated with the proprietor to pass a formal write-off entry with supporting documentation before the audit report date — bringing closing stock into agreement with the physical count.
HUF Payment Reconciliation
All inter-entity transactions between the proprietorship and the HUF were pulled, reconciled against HUF books, and confirmed to be bona fide business expenses at arm’s length. A Clause 26 summary was prepared and attached to the audit file confirming no overlap in deduction claims.
TDS Revised Returns
Both TDS under-deduction instances (194C and 194H) were corrected via revised returns filed before the audit report date — converting pending defaults into clean records and preventing a demand under Section 201.
Form 3CD Completion
All 44 clauses of Form 3CD were completed with supporting workpapers. A management representation letter covering all disclosures — including the cash payment explanations and inventory write-off — was drafted, reviewed, and signed by the proprietor before Form 3CA was issued.
The capabilities we brought to bear.
Section 40A(3) Cash Analysis
Mapping every single-day cash payment above the threshold against business purpose and vendor identity, with a reconciliation memo ready for any scrutiny.
Inventory Shortage Resolution
Stock-take certification, formal write-off entry coordination, and books-to-physical reconciliation before the audit sign-off date.
HUF Related-Party Compliance
Clause 26 analysis and arm’s-length confirmation for all inter-entity transactions — no double-deduction risk left open.
TDS Default Correction
Revised returns filed under Sections 194C and 194H before the report date, preventing Section 201 demand.
Form 3CD Workpapers
End-to-end 44-clause documentation with management representation letter — audit-ready from day one.
The numbers that matter.
The results we delivered.
Proactive disclosure on the cash payments and correcting the TDS defaults before we signed the report meant there was no open thread for the department to pull on. The client walked away with a clean record — not just a filed form.
