Tax Audit in Madhya Pradesh — Complete Guide (Section 44AB)

Author: CA Pankaj Agrawal, M/s Pankaj Agrawal & Associates, Indore

Updated: 13 August 2025 (for AY 2025–26)

Word count (suggested for publishing): 2,800–4,000 words

Executive Summary (TL;DR)

If your business or professional practice in Madhya Pradesh crosses statutory thresholds, a Tax Audit under Section 44AB of the Income‑tax Act, 1961 is mandatory. A correctly performed tax audit safeguards you from penalties, improves financial credibility with banks and investors, and identifies opportunities for tax optimisation.

This guide is a ready‑to‑publish, copy‑and‑paste blog for your firm’s website. It contains statutory thresholds, practical audit advice, a Form 3CD walkthrough, GST reconciliation traps, sector‑specific notes for MP, downloadable lead magnets (checklist + engagement letter text), FAQs, JSON‑LD snippets for LocalBusiness & FAQ schema, and CRO/marketing suggestions to convert readers into clients.

Why this matters for businesses in Madhya Pradesh

Madhya Pradesh hosts a wide range of commercial activities — manufacturing clusters, trading hubs, service providers and professionals. Local businesses often face common audit issues:

• Higher proportion of cash transactions in trading clusters (Indore textile & wholesale markets).
• Frequent GST vs books mismatches due to invoice timing and e‑invoicing nuances.
• Presumptive taxation pop‑ups for small taxpayers who incorrectly apply rates or fail to maintain supporting evidence.

A proper tax audit reduces risk, resolves discrepancies proactively and demonstrates compliance to stakeholders.

Who must obtain a Tax Audit (concise statutory guidance)

Business (non‑presumptive): Tax audit is generally required where total turnover or gross receipts exceed ₹1 crore in a financial year. Exception: where cash receipts/payments are 5% or less of total, the limit increases (used in practice as higher threshold checks).

Professionals: Tax audit is generally required where gross receipts exceed ₹50 lakh in a financial year.

Presumptive scheme (Section 44AD, etc.): If a taxpayer has opted for a presumptive scheme but declares profits lower than the statutory rate (and total income exceeds the basic exemption limit), audit risks can arise; careful documentation of bank statements and digital receipts is recommended.

Practical note: Always compute cash percentage precisely (cash receipts ÷ total receipts) and retain supporting vouchers; the 5% test is a frequent area of contention.

What the Tax Audit covers — scope & practical expectations

A tax audit primarily examines whether the accounts maintained by the taxpayer give a true and fair view of the state of affairs and whether the particulars required in Form 3CD are correctly recorded.

Typical areas of audit scrutiny:

• Books of account, vouchers and supporting documents
• Bank reconciliations, cash books and POS/UPI summaries
• Sales and purchase registers and reconciliation with GST returns
• Fixed asset register and depreciation schedules
• Loan agreements, confirmations and related party transactions
• Stock valuation and physical verification (where applicable)
• TDS compliance, advance tax and returns reconciliation

Deliverable: Signed audit report (Form 3CA/3CB as applicable with Form 3CD annexure) and an exceptions & remediation memo for management.

Form 3CD — high‑impact clauses and sample practical answers

When preparing Form 3CD, auditors must include clear, factual statements and attach supporting working papers. Below are typical clauses that create queries and suggested practical responses you can standardise for clients.

• Clause 3 — Method of accounting: “Mercantile system of accounting; stock valuation on FIFO/weighted average as per books. Reconciliation attached for tax adjustments.”
• Clause 7 — Depreciation: “Depreciation provided as per Income Tax rules. Schedule attached showing block‑wise WDV as on 31.03.2025, additions, disposals and tax depreciation claimed.”
• Clause 19(1) — Loans/advances from related parties: “Details provided in Annexure A. Signed confirmations obtained from related parties where balances exceed ₹10,000.”
• Clause 22 — Dues to Micro/Small Enterprises: “Details as per records and supplier confirmations. No outstanding dues beyond 45 days where supplier registration is available.”
• Clause 27A — Sales through agents/commission agents: “Commission agreements attached; invoices issued in name of principal; reconciliations attached.”

Practical checklist: For each clause include a one‑page working paper with references to voucher numbers, bank transaction IDs and spreadsheet tabs — this speeds review and response to tax authorities.

GST vs Income Tax — common reconciliation traps

Tax auditors increasingly reconcile GST returns with books — Mismatch areas lead to queries and adjustments.

Key areas to reconcile before audit:

1. GSTR‑1 / Invoice timing mismatches: Ensure timing differences are explained with delivery notes / dispatch proofs.
2. ITC claims not in GSTR‑2B: Maintain supplier confirmations and ensure ineligible credits (personal use, motor vehicles) are reversed.
3. E‑invoicing & IRN mismatches: Confirm that IRN numbers and invoice values in books match e‑invoice records.
4. Unreported outward supplies: Cross‑check bank credits and cash sales summaries against invoices.
5. Round‑off, FOREX and rate mismatches: Provide working for export invoices and any rate differentials.

MP tip: Traders and wholesalers often have significant cash components; maintain POS / bhav copy summaries and reconcile daily sales with bank deposits where possible.

Sector‑specific notes for Madhya Pradesh

Manufacturing (textiles, engineering, pharmaceuticals): Focus on raw material inputs, input tax credit documentation, inventory ageing and obsolescence provisions.

Trading & wholesale: Examine purchase bill authenticity, margin stability, and timing of invoicing (consignment vs sale).

Services (consultancy, IT, professional firms): Verify place of supply, TDS applicability, and classification of digital receipts (affects presumptive percentages and GST treatment).

Professionals (doctors, lawyers, CAs): Maintain serially numbered fee receipts, separate personal and professional expenditure and keep client confirmation sheets for large receipts.

Penalties, common objections and defence strategies

Common penalty risk: Failure to get accounts audited when required can attract penalties. Additionally, adjustments arising from under‑reporting or unexplained credits may cause demand and interest.

Frequent objections raised in audits or assessments:

• Bogus or unsupported expenses
• Undervalued or overvalued closing stock
• Unexplained cash credits or deposits
• Incorrect classification of income (business vs capital)

Defence strategies:

1. Retain contemporaneous documentary evidence (invoices, contracts, bank advices).
2. Use third‑party confirmations for significant balances.
3. Prepare narrative memos for unusual transactions (capital receipts, gifts, insurance claims).
4. Implement and document internal control checklists — demonstrates good faith and reduces penalty risk.

Our recommended Tax Audit timeline & client deliverables (copyable process)

Recommended schedule (minimum):

• T‑30 to T‑14 (Planning): Engagement letter signed; document list issued; access to accounting system arranged.
• T‑14 to T‑7 (Field work): Physical verification, sample vouching, GST & bank reconciliation, fixed asset verification.
• T‑7 to T‑3 (Draft reporting): Draft Form 3CD & audit report prepared; management review called for clarifications.
• T‑3 to T (Finalisation): Final signed report, Form 3CA/3CB with 3CD, working papers uploaded and client handed final deliverables.

Deliverables to client:

• Signed audit report (Form 3CA/3CB + 3CD)
• Exceptions & remediation memo (top 12 actionable points)
• GST reconciliation workbook (Excel) and supporting working papers
• Management presentation summarising material findings and tax planning suggestions

Indicative fee bands (standardise on website with caveat)

Note: Final fees depend on turnover, transaction volume, number of locations, complexity of reconciliations and statutory compliance required.

• Small businesses (turnover ₹1–3 crore): ₹35,000 – ₹60,000
• Medium businesses (turnover ₹3–10 crore): ₹60,000 – ₹1,50,000

“Fees are indicative. Final quote provided after preliminary document review and client discussion.”