Section 44AB Tax Audit for Pune’s Businesses, IT Companies, and Manufacturers

The tax audit under Section 44AB of the Income Tax Act, 1961 is a mandatory annual certification by a Chartered Accountant for businesses and professionals crossing specified turnover or receipts thresholds. The tax audit is not simply a mechanical form-filling exercise: it is a comprehensive examination of the taxpayer’s financial records from an income tax perspective, culminating in Form 3CD — a 61-clause statement of particulars that covers every significant aspect of the taxpayer’s tax compliance position for the year. Filed electronically on the Income Tax portal at incometax.gov.in by 30 September of the assessment year, the Form 3CD puts the Chartered Accountant’s professional credibility and certificate behind the accuracy of the taxpayer’s tax disclosures. An error, omission, or misstatement in Form 3CD can result in the Income Tax department using it as the basis for an assessment under Section 143(3) or an inquiry under Section 133(6). For this reason, the tax audit must be approached with the same rigour as the statutory audit — not as a filing exercise but as a substantive examination.

Pune’s business ecosystem presents a distinctive set of tax audit considerations that go well beyond the standard threshold-and-form-filling framework. IT and SaaS companies in Hinjewadi, Kharadi, and Baner have specific audit considerations around Section 10AA deductions (for SEZ units), ESOP perquisite taxation and TDS compliance, subscription revenue recognition under Ind AS 115 vs the Income Tax Act timing, and transfer pricing compliance for intragroup transactions with offshore parents and clients. Manufacturers in Chakan, Bhosari, and Pimpri-Chinchwad have specific considerations around additional depreciation under Section 32(1)(iia), investment allowance under Section 32AC, cost records maintenance, and the interaction of GST ITC with income tax deductibility of expenses. Startups eligible under Section 80-IAC have the specific intersection of startup tax exemption claims and the audit requirements. And Pune’s growing professional services sector — doctors, architects, management consultants, and CA firms — must navigate the Section 44ADA presumptive taxation regime and its interaction with Section 44AB. N D Savla & Associates, Chartered Accountants in Baner, Pune, conducts tax audits for businesses and professionals across Pune, combining our knowledge of the Income Tax Act with our understanding of the sector-specific accounting and compliance nuances of each client.

This page covers the Pune-specific dimensions of the Section 44AB tax audit: who must get a tax audit (threshold summary), Form 3CA vs Form 3CB, the high-risk Form 3CD clauses for Pune’s key sectors, the special provisions relevant to Pune’s IT and manufacturing industries, the interaction between the tax audit and the statutory audit (for companies), and the penalties for late filing. For a full discussion of the audit and assurance framework, see our Audit & Assurance Overview. For the statutory audit under the Companies Act (a separate, concurrent requirement for all companies), see our Statutory Audit guide

Section 44AB Threshold — Who Must Get a Tax Audit?

• Business (regular books): gross turnover or sales receipts exceeding Rs. 1 crore in the financial year
• Business (95%+ digital transactions): if at least 95% of both receipts and payments are through banking channels (NEFT, RTGS, UPI, account payee cheques), the enhanced threshold of Rs. 10 crore applies
• Profession (doctors, lawyers, architects, CAs, engineers, etc.): gross receipts from professional practice exceeding Rs. 50 lakh in the financial year
• Presumptive taxation opt-out under Section 44AD: a taxpayer who has opted for presumptive taxation in any of the 5 preceding years but now claims income lower than the presumptive rate (8% for cash / 6% for digital transactions) must maintain full books of accounts AND get a tax audit, regardless of turnover
• Company or LLP already under statutory/LLP audit: if the company’s or LLP’s turnover also crosses the Section 44AB threshold, a tax audit is required in addition to the statutory or LLP audit

⚠️ Important: The 95% digital threshold (Rs. 10 crore) applies only if BOTH receipts AND payments meet the 95% threshold. A Pune manufacturer who receives almost all payments digitally from OEM clients but makes some cash payments to contract labour would be tested against both sides. If cash payments exceed 5% of total payments, the Rs. 1 crore threshold applies despite digital receipts.

High-Risk Form 3CD Clauses for Pune Businesses

Form 3CD has 61 main clauses. The following clauses are the most significant for Pune’s business sectors and require careful preparation and verification:

Section 10AA — Tax Audit for SEZ Units in Pune

Several IT and technology companies in Pune operate from Special Economic Zone (SEZ) units at Hinjewadi IT Park, EON Free Zone (Kharadi), Magarpatta Cybercity, and other notified SEZs. Section 10AA of the Income Tax Act provides a deduction from income for profits from export of services from an SEZ unit:

• 100% deduction for the first 5 years from the year of commencement of production or provision of services
• 50% deduction for the next 5 years
• 50% of the profits reinvested in a Special Economic Zone Reinvestment Reserve Account (SEERA), deductible for the following 5 years

The Section 10AA deduction claim in the tax audit requires specific verification in Form 3CD:

• Clause 19A: the amount of deduction claimed under Section 10AA must be specifically reported
• Verification of SEZ approval and Letter of Approval (LoA) from the Development Commissioner of the SEZ: the unit must be a valid SEZ unit with a current LoA to claim Section 10AA
• Export documentation: the deduction is available only on profits from “export” of services. Services provided to clients outside India and paid for in convertible foreign currency qualify. Services to Indian clients from an SEZ unit do not qualify for Section 10AA
• Net foreign exchange earnings vs total turnover ratio: the Section 10AA formula deducts the proportionate profit (profit × export turnover / total turnover). Accurate computation of the export turnover figure is critical — it must exclude freight, insurance, and certain other costs
• Transfer pricing compliance: if the SEZ unit transacts with affiliated entities (parent company, group entities), the export price must comply with the arm’s length standard under the Income Tax Act’s transfer pricing provisions (Sections 92 to 92F)

ESOP Taxation and Form 3CD Compliance — For Pune’s IT and Startup Sector

Employee Stock Option Plans (ESOPs) are a significant compensation component for IT companies, startups, and MNC subsidiaries in Pune. The income tax treatment of ESOPs is multi-stage and generates specific obligations for the employer in the tax audit:

Stage 1 — Exercise of Options (Perquisite at Exercise)

When an employee exercises their ESOP (converts the option into shares), the difference between the Fair Market Value (FMV) of the shares on the date of exercise and the exercise price paid by the employee is a “perquisite” taxable in the employee’s hands under Section 17(2)(vi) of the Income Tax Act. This perquisite is:

• Taxable as salary income in the year of exercise: the employee must include it in their total income for the year
• Subject to TDS by the employer: the employer must deduct TDS under Section 192 on the perquisite value at the time of exercise. For unlisted company ESOPs, the FMV is determined by a Category I Merchant Banker or by reference to the most recent valuation. For listed company ESOPs, the FMV is the average of the opening and closing price on the exercise date on the recognised stock exchange
• Form 3CD Clause 36A disclosure: the tax auditor must report the value of perquisites on account of ESOPs and other benefits provided to employees, with a breakdown of the amount and the TDS deducted

Stage 2 — Sale of Shares (Capital Gains at Sale)

• When the employee sells the shares acquired through ESOP exercise, any gain over the FMV at the date of exercise is a capital gain (LTCG or STCG depending on the holding period, and listed vs unlisted shares)
• For listed shares: LTCG above Rs. 1.25 lakh is taxable at 12.5% (as per Finance Act 2024 amendments for FY 2024-25 onwards); STCG is taxable at 20%
• This is the employee’s own tax liability and is not a withholding obligation of the employer; however, the employer’s Form 3CD must correctly reflect the TDS at Stage 1 so that Stage 2 capital gains are correctly computed from the right base

Deferral for Startup ESOP Holders — Section 192(1C)

The Finance Act, 2020 introduced Section 192(1C), which allows employees of eligible startups (Section 80-IAC recognised startups) to defer the payment of TDS on ESOP perquisites (Stage 1) until the earliest of: 5 years from the year of exercise; the date the employee leaves the startup; the date the employee sells the shares. This is a significant benefit for cash-strapped startup employees who receive ESOP shares but do not have liquidity to pay the tax at exercise. The tax auditor must verify: (a) the startup has Section 80-IAC recognition; (b) the ESOP plan qualifies for Section 192(1C) deferral; (c) the deferred TDS is correctly tracked and reported in the employer’s TDS returns.

Additional Depreciation Under Section 32(1)(iia) — For Pune Manufacturers

Section 32(1)(iia) of the Income Tax Act provides an additional depreciation of 20% (over and above the normal depreciation) on new plant and machinery acquired and installed by manufacturing companies during the financial year. This is one of the most significant and frequently under-utilised deductions available to Pune’s manufacturing sector. Key conditions and common audit issues:

• Who qualifies: the taxpayer must be engaged in the business of manufacture or production of any article or thing. Service companies and trading companies do not qualify
• New plant and machinery only: second-hand assets do not qualify. The asset must be new and must be put to use in the business during the year (simply purchased and capitalised but not installed/put to use before the year-end does not qualify)
• Rate: 20% of the actual cost of the new asset in the year of acquisition (not the written-down value). If the asset is put to use for less than 180 days in the year of acquisition, the additional depreciation is restricted to 10% (i.e., half)
• Remaining additional depreciation: from FY 2015-16, if the asset is put to use for less than 180 days in the year of purchase and additional depreciation is restricted to 10%, the remaining 10% additional depreciation is allowable in the immediately succeeding year
• Form 3CD Clause 14 verification: the tax auditor must verify and certify the computation of additional depreciation for each asset, ensuring the correct rate, the new-asset condition, the put-to-use date, and the 180-day rule are correctly applied

💡 A Pune auto ancillary manufacturer in Chakan purchases new CNC machines for Rs. 5 crore in November 2025 and installs them in January 2026. The financial year ends 31 March 2026. The machines are put to use for approximately 90 days before year-end — less than 180 days. Additional depreciation in FY 2025-26: 10% of Rs. 5 crore = Rs. 50 lakh (restricted to 50% for less than 180 days). Remaining 10% additional depreciation = Rs. 50 lakh, allowable in FY 2026-27. Normal depreciation at 15% (plant and machinery) on Rs. 5 crore with 50% restriction for less than 180 days: Rs. 37.5 lakh. Total depreciation in FY 2025-26: Rs. 87.5 lakh.

Section 80-IAC — Tax Audit for Eligible Pune Startups

Startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and subsequently certified under Section 80-IAC by the Inter-Ministerial Board (IMB) are eligible for a 100% deduction of profits for any 3 consecutive years out of the first 10 years from the year of incorporation. Pune’s startup ecosystem — particularly SaaS companies in Baner and Hinjewadi, biotech companies in Hinjewadi Bio SEZ, and technology hardware startups in Magarpatta — has a significant population of DPIIT-recognised startups. Tax audit considerations for 80-IAC eligible startups:

• Eligibility conditions must be verified by the tax auditor: the startup must be incorporated as a Private Limited Company or LLP; must be less than 10 years old from the date of incorporation; must not be formed by splitting or reconstructing an existing business; must have a DPIIT recognition certificate AND an IMB certification under Section 80-IAC
• Total turnover must not exceed Rs. 100 crore in any of the years for which deduction is claimed: if turnover exceeds Rs. 100 crore in a year, the 80-IAC deduction is not available for that year
• No set-off against other income: the 80-IAC deduction reduces the profit of the eligible business; losses from other income cannot be set off against the deducted profits
• ESOP deferral interaction (Section 192(1C)): startups eligible under 80-IAC are also eligible for the Section 192(1C) ESOP TDS deferral. The tax auditor must verify both the 80-IAC eligibility and the Section 192(1C) compliance for ESOP grants

Transfer Pricing and the Tax Audit for MNC Subsidiaries

For Indian subsidiaries of foreign parent companies in Pune — particularly IT service delivery centres, R&D centres, and captive BPO/KPO operations in Hinjewadi and Kharadi — transfer pricing compliance is a critical dimension of the tax audit. Transfer pricing provisions under Sections 92 to 92F of the Income Tax Act require:

• International transactions (transactions between the Indian entity and its associated enterprises outside India) must be priced at “arm’s length” — i.e., at the price that unrelated parties would have agreed in similar circumstances
• Form 3CEB: if the Indian entity has reportable international transactions, Form 3CEB (a report by a Chartered Accountant certifying the arm’s length nature of the transactions) must be filed by the CA. The filing deadline for Form 3CEB is 31 October (not 30 September like Form 3CD). Note: Form 3CEB is a separate filing from Form 3CD, but both are filed by the CA for the same taxpayer
• Transfer Pricing documentation under Rule 10D: maintained documentation of the benchmarking analysis, comparables selection, and functional analysis supporting the arm’s length price must be available. The tax auditor should be satisfied that the documentation exists
• Form 3CD Clause 30A: the tax audit form requires disclosure of whether the taxpayer has entered into any international transaction or specified domestic transaction during the year, and whether Form 3CEB has been filed
• Advance Pricing Agreement (APA): several Pune-based MNC subsidiaries have obtained or are in the process of obtaining Advance Pricing Agreements with the CBDT, which pre-agree the arm’s length price for specified transactions for a period of 5 years. Where an APA is in force, the tax auditor must verify that the transactions are priced in accordance with the APA terms

Maharashtra Professional Tax and Its Deductibility in the Tax Audit

Professional Tax (PT) is a state-level tax levied by the Maharashtra government on individuals employed in Maharashtra, including salaried employees and self-employed professionals. As a CA conducting tax audits in Pune, we specifically verify:

• Employer PT: employers in Maharashtra must deduct PT from their employees’ salaries and deposit it with the state government. The employer also pays a nominal PT on its own account. Both are deductible under Section 36(1)(vii) of the Income Tax Act as a statutory levy
• Employee PT deduction: the PT deducted from an employee’s salary is deductible by the employee under Section 16(iii) of the Income Tax Act — a specific deduction from gross salary before computing taxable salary
• Form 3CD Clause 7(b): the tax auditor must report the method used to account for changes in tax liability (the PT paid is a direct tax-deductible expenditure)
• PT enrolment and registration compliance: both employers and self-employed professionals must be enrolled under the Maharashtra State Tax on Professions, Trades, Callings and Employment Act, 1975. Non-enrolment is a compliance gap that the tax audit should flag

Due Date, Penalty, and Reasonable Cause

• Tax audit report due date: 30 September of the Assessment Year (AY). For FY 2025-26: 30 September 2026
• Check the Income Tax portal at incometax.gov.in for any CBDT extension circular for the current year
• Income tax return (ITR) due date for tax-audit cases: 31 October of the AY (one month after the tax audit due date). ITR should be filed after the tax audit report, ensuring consistency of figures
• Penalty for late or non-filing under Section 271B: 0.5% of gross turnover or gross receipts, subject to a maximum of Rs. 1.5 lakh per default. This is per assessment year — not per form
• Reasonable cause defence: under the proviso to Section 271B, the penalty is waived if the taxpayer demonstrates “reasonable cause” for the delay. Acceptable reasonable cause: serious illness of the CA or key accounting personnel, natural calamity, system failure of the Income Tax portal, or death of an accountant immediately before the filing date. Routine delays (CA too busy, accounts not ready on time) are not accepted as reasonable cause