Loans, Deposits and Advances in Tax Audit: A Transaction Review Checklist
Closing loan balances do not reveal every payment-mode issue. Review receipts and repayments transaction by transaction, with separate analyses for the relevant provisions.
AI Summary
Scope: FY 2025-26 / AY 2026-27 under the Income-tax Act, 1961 and applicable Income-tax Rules, 1962; do not reuse section/form references unchanged for Tax Year 2026-27. Verification date: 11 October 2026.
A nil closing balance can still need reporting
A business may receive and repay a loan within the year, leaving nothing on the final balance sheet. Reviewing only year-end loan ledgers can miss that transaction entirely. Obtain the complete receipt and repayment population, including temporary funding and items posted in current accounts.
For FY 2025-26, consider Sections 269SS and 269T and the relevant Form 3CD particulars. Certain immovable-property-related sums also need assessment. These rules are not the same as the expenditure-payment test or the large-receipt test.
Build a counterparty-wise movement file
Record opening balance, every receipt, every repayment, interest where relevant and closing balance. Include date, instrument or electronic mode, bank reference, counterparty identity and underlying agreement. Reconcile the movement with both the ledger and cash/bank records.
Inspect partner/director funding, deposits, intercompany current accounts and unusually described advances. A ledger headed “advance” does not determine the provision: distinguish a trading advance from a loan or a sum relating to transfer of immovable property.
Example: an outstanding balance changes the result
Assume a fictional ordinary borrower has ₹15,000 of an earlier loan from a person remaining unpaid. It receives another ₹8,000 from the same person. The combined amount is ₹23,000. A review that tests only the new ₹8,000 can miss the relevant Section 269SS aggregation condition.
The general ₹20,000-or-more threshold has multiple tests involving the new sum and existing unpaid amounts. Specific exceptions and the enhanced ₹2 lakh threshold for certain PACS/PCARD member transactions require separate assessment. Do not extend that special threshold to ordinary business loans.
Review repayments independently
A permitted receipt does not establish that its repayment mode is compliant. Examine repayments using Section 269T's own conditions, including relevant interest and aggregation. Keep an explanatory working where the account includes several types of movements.
| Situation | Review action |
|---|---|
| Loan received and repaid within the year | Test both legs despite nil closing balance |
| Several small receipts from one person | Apply the relevant aggregation and unpaid-balance tests |
| Property advance | Read the agreement and assess the applicable category |
| Journal transfer or settlement | Investigate substance and legal treatment; do not label automatically compliant |
Evidence for mode and exceptions
A narration saying “bank” may not establish the actual instrument. Obtain the bank record or other proof. For a claimed exception, identify the precise statutory basis and evidence, rather than recording a generic “business necessity” explanation.
Keep possible violations separate from confirmed conclusions. An automated exception report is a screening output. The auditor still needs to examine facts, exceptions, reporting requirements and any resulting legal implications.
Complete the working before the report
- Reconcile receipts and repayments with the books.
- Verify legal names and identifiers.
- Apply provision-specific thresholds and permitted-mode tests.
- Document exceptions and unresolved facts.
- Agree the approved particulars with the relevant Form 3CD fields.
Financial-statement preparation in assureOffice can provide the approved loan and deposit balances for reconciliation. Retain the transaction-level tax working separately: the final balance-sheet amount cannot tell the complete story of how funding moved during the year.
Trace receipts and repayments separately
Prepare separate receipt and repayment populations, linked by party and arrangement. Capture outstanding amounts and relevant earlier transactions needed for the legal assessment. A single net ledger movement can conceal several receipts and repayments that require individual examination.
Review journal entries, contra entries and balances transferred between accounts rather than assuming every non-cash-looking narration settles the question. Obtain the underlying documents and payment evidence. Mark exclusions with reasons and references, and reconcile the reviewed population with the books. This makes the final reporting position explainable without forcing the reviewer to reconstruct transactions from a closing balance.
Related articles
- Cash Payments in Tax Audit: Identifying Transactions That Need Further Review
- Current or Non-current? Classifying Loans, Deposits and Advances under Schedule III
- TDS Reconciliation for Tax Audit: Books vs Challans vs Returns