Books That Cannot Be Rewritten: Accounts, Audit and Income Tax

Section 128 and the Audit Trail

In May 2024 the statutory auditor of a spice-blending company in Market Yard, Pune, asked to see a purchase entry from 28 March. The invoice was for cardamom from a Kumily supplier. The ledger showed ₹1,48,000. The edit log, a screen the accountant had never opened, showed that the entry had first been posted at ₹4,18,000 and changed on 2 April, three days after the financial year closed, from her login. She was called in. 'Madam, I only corrected the typing mistake,' she said. She was telling the truth: the supplier's invoice read ₹1,48,000, and she had transposed two digits. The correction was proper. What had changed was that the software now remembered the mistake, the correction and the woman who made it, and would go on remembering them for eight years.

The duty to keep books is old. Section 128(1) of the Companies Act, 2013 requires every company to prepare and keep at its registered office books of account and other relevant papers that give a true and fair view of its affairs, kept on the accrual basis and according to the double-entry system. The board may resolve to keep them elsewhere in India, provided the Registrar is told within seven days. Section 128(5) requires the books of the eight financial years preceding the current one to be preserved. Rule 3 of the Companies (Accounts) Rules, 2014 allows all of this to be done electronically, so long as the records stay accessible in India and can be retrieved in their original form. Since an amendment of 5 August 2022, a backup must also be kept daily on servers physically located in India.

The newer duty is narrower and much harder to argue with. The Companies (Accounts) Amendment Rules, 2021, notified on 24 March 2021, inserted a proviso into Rule 3(1). After two deferrals it took effect from 1 April 2023. Every company that keeps its books in electronic form must use accounting software that records an audit trail of each and every transaction, creates an edit log of each change made to the books together with the date of that change, and ensures that the audit trail cannot be disabled. Those last words carry the whole rule. Before April 2023 most popular packages offered an audit log as an optional setting, and in my experience most small companies left it off, usually because nobody had told them it existed, sometimes because it slowed the server.

The rule does not forbid corrections. It requires that they be visible. A ledger may still be amended after the year ends, an invoice reclassified, a provision revised on the auditor's advice. What can no longer be done is to make the earlier version disappear. The auditor checks this as well. Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 requires him to state in his report whether the software had the feature, whether it operated throughout the year for all transactions, whether it was tampered with, and whether the trail has been preserved as the law requires.

Failure falls on named people. Section 128(6) makes the managing director, the whole-time director in charge of finance, the chief financial officer or any other person charged with the duty liable to imprisonment of up to one year, or a fine of between ₹50,000 and ₹5 lakh, or both. Of the default cascade, this is one of the few links still carrying a prison term.

The Market Yard auditor recorded the cardamom entry in his working papers and moved on. The log entry is still there, timestamped 2 April 2024, 11:52 a.m.

The Statutory Auditor

In 2019 the owner of an injection-moulding unit in Pimpri asked me whether he was obliged to change his auditor. The same chartered accountant had signed his company's accounts since 2005, and a cousin in Mumbai had told him that the law now forbade anyone to audit a company for more than ten years. The cousin was partly right. The company was private, its paid-up capital was ₹4 crore, and its bank borrowings stood at ₹38 crore. It fell outside the rotation rule. Two years later a term loan for a new press took its borrowings past ₹50 crore, and it fell inside.

Section 139 of the Companies Act, 2013 governs appointment. The first auditor is chosen by the board within 30 days of incorporation, as the Baner founders discovered when they had to pass over a brother-in-law. After that, the members appoint the auditor at the first annual general meeting, to hold office from the conclusion of that meeting until the conclusion of the sixth, which amounts to a five-year term. The company informs the Registrar in Form ADT-1 within 15 days of the meeting. Section 141 sets out who may not be appointed: a relative of a director, a person holding securities in the company, a person indebted to it beyond the limit in Rule 10 of the Companies (Audit and Auditors) Rules, 2014, and others whose independence is compromised by money or blood.

Rotation is narrower than people suppose. Section 139(2) applies only to listed companies and to the classes in Rule 5: unlisted public companies with paid-up capital of ₹10 crore or more, private companies with paid-up capital of ₹50 crore or more, and any company with public borrowings from banks, financial institutions or public deposits of ₹50 crore or more. For those companies an individual auditor may serve one term of five consecutive years and an audit firm two, followed by five years' cooling off. The Pimpri client's accountant had by then served sixteen years, which included the years before the rule took effect, and had to stand down at the next AGM. He took it well. 'Sixteen years I have seen his stock register,' he said. 'Somebody else can see it now.'

An auditor cannot easily be removed mid-term. Section 140(1) requires a special resolution and the prior approval of the Central Government, sought in Form ADT-2. An auditor who resigns files ADT-3 within 30 days, stating reasons, and the reasons are read.

The auditor's report itself has a second layer. The Companies (Auditor's Report) Order, 2020, known as CARO 2020, was notified on 25 February 2020 and applies from 2021–22 onwards. It exempts one person companies, small companies, banking and insurance companies, Section 8 companies, and private companies that are neither holding nor subsidiary companies of a public company and that stay within three limits: paid-up capital and reserves of not more than ₹1 crore, borrowings of not more than ₹1 crore at any time during the year, and revenue of not more than ₹10 crore. Everyone else gets twenty-one clauses.

Several of those clauses check the company against outsiders' records rather than against its own. Clause 3(i)(c) asks whether title deeds of immovable property stand in the company's name. Clause 3(vii) asks about undeposited statutory dues. Clause 3(viii) asks whether income surrendered in a tax assessment was missing from the books. Clause 3(xi) asks about fraud and whistle-blower complaints. Clause 3(ii)(b) applies where working-capital limits above ₹5 crore are secured on current assets, and asks whether the quarterly stock statements sent to the bank agree with the books. If they do not, the auditor must give the details.

For 2022–23, the Chakan auto-components firm's report carried a table under that clause. The quarter ending December 2022 showed a difference of 11,214 housings.

Income Tax: Returns, Advance Tax and the TDS Machinery

In February 2024 a transport contractor from Chikhli rang a tool-room in Bhosari four times in one afternoon. The tool-room had paid him ₹6 lakh in October for carrying dies to a customer in Ranjangaon, and had deducted ₹12,000 as tax at source before paying. That ₹12,000 did not appear in his Form 26AS, the statement the Income Tax Department keeps of tax credited against each permanent account number. His own accountant had told him he would have to pay it twice. The tool-room's accountant, when I asked, said, 'Madam, the money was kept aside only. It was in the account.' It was in the tool-room's account. It had not reached the government's.

The Income-tax Act, 1961 treats a company as a taxpayer in its own right, separate from its shareholders. A company files its return of income under Section 139(1) whether it has made a profit or a loss. The due date is 31 October following the end of the financial year for a company whose accounts must be audited, which is every company, and 30 November where the company has international or specified domestic transactions requiring a transfer pricing report. Most domestic companies now pay tax at 22 per cent under Section 115BAA, an effective rate of about 25.17 per cent once surcharge and cess are added, in exchange for giving up most deductions and exemptions.

The tax is not paid at the end. Section 208 requires advance tax wherever the year's liability will be ₹10,000 or more, and Section 211 sets the instalments for companies: 15 per cent of the estimated tax by 15 June, 45 per cent by 15 September, 75 per cent by 15 December and the whole by 15 March. The law expects a company to know, in June, roughly what it will earn by March. Many do not, and the Act prices the uncertainty instead of punishing it. Section 234C charges simple interest at 1 per cent a month on each shortfall in an instalment, and Section 234B charges the same rate where less than 90 per cent of the assessed tax was paid by 31 March. I advise clients to treat the September instalment as the serious one, because by then two quarters of numbers exist and the estimate stops being a guess.

The larger machinery is tax deducted at source, usually called TDS. Under Chapter XVII-B the company acts as an unpaid collector for the state. When it pays salaries, rent, professional fees, contractors or interest above specified thresholds, it must deduct tax at the rate the relevant section prescribes (Section 194C, for instance, sets 2 per cent for a contractor who is not an individual or HUF) and deposit it. Rule 30 of the Income-tax Rules, 1962 fixes the deposit date at the seventh of the following month, except for deductions made in March, which may be deposited by 30 April. The company then files quarterly statements: Form 24Q for salaries, 26Q for other payments to residents and 27Q for payments to non-residents, due on 31 July, 31 October, 31 January and 31 May. It issues certificates in Form 16 or Form 16A from the processed statements.

The deductee's credit depends entirely on the deductor's filing. This is the same networked dependence the GST regime would later build into input tax credit, and it existed here first.

The consequences are graded. Tax deducted but deposited late attracts interest at 1.5 per cent a month under Section 201(1A), with part of a month counted as a whole. A late quarterly statement carries a fee of ₹200 a day under Section 234E, up to the amount of tax involved. Failing to deduct at all on a payment to a resident disallows 30 per cent of that expense under Section 40(a)(ia). And Section 276B makes failure to pay deducted tax to the government an offence punishable with rigorous imprisonment of three months to seven years, because money withheld from someone else's payment was never the company's to keep.

The Bhosari tool-room deposited the ₹12,000 on 9 February 2024 with ₹900 interest for five months, and filed a corrected 26Q. The contractor's credit appeared on 4 March. He rang once more, to say so.

Transfer Pricing and Tax Audit: the Reports that Decide How a Return Is Read

The return a company files under Section 139(1) is a set of figures. Two reports filed before it tell the assessing officer what those figures mean, and in practice the officer reads them first.

The first is the tax audit. Section 44AB requires a person carrying on business to have its accounts audited by a chartered accountant, for tax purposes, if turnover exceeds ₹1 crore in the year. The threshold rises to ₹10 crore where cash receipts and cash payments each stay within 5 per cent of the total. Companies already have a statutory audit under the Companies Act, so the chartered accountant reports in Form 3CA rather than 3CB. The substance is in the annexure, Form 3CD, a statement of particulars that runs to forty-four clauses. It is less an opinion than an inventory. It asks whether the company's method of accounting changed, what it paid to related persons under Section 40A(2)(b), whether statutory dues covered by Section 43B were paid before the return date, how much depreciation it claimed and on what. Clause 34 asks whether tax deductible at source was deducted and deposited on time, and whether the quarterly statements were filed. The Bhosari tool-room's ₹12,000 would have surfaced there in any case, nine months later and in front of a stranger. The report is due one month before the return, which for most companies means 30 September. Failure attracts a penalty under Section 271B of half a per cent of turnover, capped at ₹1,50,000. Modest, as tax penalties go. The real cost is that a missing 3CD makes the return look defective, and Section 139(9) allows the department to treat it so.

The second report concerns transfer pricing, the prices at which related companies deal with each other. Section 92 requires that any income arising from an international transaction between associated enterprises be computed at arm's length, meaning the price that unrelated parties would have agreed. The concern is plain enough. A subsidiary in Pune that buys components from its parent in Stuttgart at an inflated price moves profit out of India without anyone breaking a contract. Section 92BA extends the rules to specified domestic transactions above ₹20 crore. Section 92D and Rule 10D require contemporaneous documentation: the functions each party performs, the risks it bears, the method chosen, and the comparable companies used to test the price. Section 92E requires an accountant's report in Form 3CEB, due 31 October, one month before the extended return date of 30 November.

I had a client in Hadapsar, the Indian subsidiary of a German pump maker, whose finance controller once told me the group's pricing was 'decided in head office, madam, we just receive the invoice'. That is precisely the sentence the documentation exists to replace. The Act does not require the Indian company to set the price. It requires the Indian company to justify it. Where documentation is not kept, Section 271AA charges 2 per cent of the value of each international transaction. Where the officer asks for documents and they are not produced, Section 271G charges another 2 per cent. Where the 3CEB is not filed at all, Section 271BA adds ₹1,00,000. Groups with consolidated revenue above ₹500 crore and international transactions above ₹50 crore also file a master file in Form 3CEAA, describing the whole group's business to the Indian tax administration.

The Hadapsar company's 2019–20 transactions with its parent were worth ₹63 crore. Its benchmarking study, when the transfer pricing officer asked for it in 2022, used eleven comparable companies. Four had been chosen in Germany. The officer rejected all four, and the adjustment ran to ₹4.1 crore.

From 1961 to 2025: What the New Act Renumbers and What It Leaves Alone

Every section cited so far in this chapter has a retirement date. The Income-tax Act, 2025 received presidential assent on 21 August 2025 and takes effect from 1 April 2026. The Income-tax Act, 1961, amended in nearly every Finance Act for sixty-four years until its numbering had sprouted sections such as 115BAA and 194-IA, will then stop governing new years. It will continue to govern old ones. The law here is still settling: the rules and forms under the new Act were in draft as at 1 January 2026. I state the position once and leave it there.

The largest conceptual change is a single phrase. The 1961 Act taxed the income of a 'previous year' in the following 'assessment year', a pairing that has confused every first-year commerce student since Nehru. The 2025 Act replaces both with the tax year, which for a company is the financial year itself. Income earned in 2026–27 is taxed for tax year 2026–27. Nothing about the money changes. The label stops misleading people.

The rest is mostly renumbering and consolidation. The new Act is shorter, with 536 sections arranged in twenty-three chapters, and it moves much of what used to be provisos and explanations into tables. Tax deduction at source, scattered across more than thirty sections from 192 to 196D, now sits largely in Section 393, with the rates set out in tabular form. Tax audit, which practitioners have called '44AB' for so long that the number became a noun, becomes Section 63. Clients will go on saying '44AB' for a decade. I expect to correct them about once a quarter and then give up.

Substance is what the Act leaves alone, and it leaves most of it alone. The company still deducts tax when it pays a contractor and deposits it by the seventh of the following month. It still files quarterly statements, still pays advance tax in four instalments due on 15 June, 15 September, 15 December and 15 March, and still obtains a tax audit report before the return. Arm's length remains the test for transactions with associated enterprises, and the documentation still has to exist before the officer asks for it. The CBDT has described the exercise as simplification without change of policy. Read against the old text, that description is broadly accurate, though 'broadly' is the word a practitioner should keep in mind when a familiar clause turns out to have been redrafted.

The practical burden is that for some years every company will run two numbering systems at once. Returns for 2025–26 will be filed in 2026 under the 1961 Act. TDS for April 2026 will be deducted under the 2025 Act. A notice about 2023–24 will cite the old sections; a notice about 2026–27 will cite the new. The compliance calendar does not care about the renumbering. The person who drafts replies to notices has to keep both statutes open on the desk, and I have already bought a second bookstand.

The Hadapsar subsidiary's appeal against the ₹4.1 crore adjustment was filed before the Dispute Resolution Panel in 2023 under Section 144C of the 1961 Act. It will be decided under that Act whatever happens on 1 April 2026. Its controller rang in January to ask whether the new law helped him. It did not. And none of it touched the tax his company charged on every pump it sold in Maharashtra, which has run since 1 July 2017 on a different statute, through a different portal, on a monthly clock of its own.