Tax Audit Clause 35: Make a Quantity Reconciliation

Opening stock is 500 units, purchases 800 and sales 1,100, while closing records show 190. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.

Scope and applicable period

Tax audit for FY 2025–26 / AY 2026–27 using Forms 3CA/3CB and 3CD under the Income-tax Act, 1961. Tax Year 2026–27 uses the new Act and corresponding notified reporting framework, including Form 26.

Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.

The key principle

Clause 35 quantitative particulars require quantities and units, not just inventory values. Trading and manufacturing operations have different information needs. Match opening stock, purchases/production, sales and closing stock, including losses, transfers and consumption where applicable. Keep unit conversions documented; a difference between kilograms and pieces can create a false shortage.

Worked example

Investigate the ten units through documented wastage, samples, transfers, returns or count errors. Do not insert a generic balancing loss merely to complete the report. For manufacturing, reconcile raw-material consumption, finished production and yield using consistent units and process records. Reconcile quantities to the stock records and values to the accounting inventory working, explaining why those two controls are different.

A practical sequence

Standardise quantity units before reconciling opening stock, purchases, production, sales and closing stock. Match goods returned and transfers to the appropriate movement category.

Investigate unexplained variances through count sheets and cut-off evidence rather than entering a balancing quantity. Map the resulting particulars to the current Clause 35 format for the activity.

Ensure that the quantity reconciliation and inventory valuation agree on the same population and reporting date.

Connect the reporting clause with the tax computation

Tax audit reporting is clause-specific. The relevant particulars may include transactions that do not remain in the closing trial balance or amounts presented differently in the financial statements. Keep the ledger population, screening logic, reportable items and proposed tax adjustments as separate stages. A figure disclosed in Form 3CD is not automatically an additional disallowance, and the same item should not be adjusted twice through different workings. Link every material conclusion to the governing provision and the current form field, then reconcile it with the return computation and final report.

Evidence checklist

Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.

• Item and unit-of-measure master
• Opening and closing quantity records
• Purchase, dispatch and return quantities
• Production, consumption and wastage evidence
• Unit conversion and variance explanations

Common mistakes and how to avoid them

• Using rupee values in a quantity field. Compare the conclusion with the item and unit-of-measure master and resolve any conflicting facts.
• Mixing pieces and kilograms without conversion. Trace the affected item to the purchase, dispatch and return quantities before finalising the working.
• Creating unsupported wastage as a balancing item. Use the unit conversion and variance explanations to make the final position and remaining exceptions clear.

Before you finalise

Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the unit conversion and variance explanations should agree with the conclusion presented to the client, reviewer or authority.

Frequently asked question

Can a correct stock value prove correct quantities? No. Quantity and valuation are separate controls; each needs its own reconciliation.

Sources and further reading

• CBDT Form 3CD — prescribed particulars, including amendments
• ICAI — Guidance Note on Tax Audit, publication portal
• Income Tax Department — forms and old/new Act transition

Related guide: As2 inventory valuation cost nrv practical example.