Form 3CD Clause 35 for AY 2026-27: Stock, Quantitative Details & Yield Reconciliation
Updated: Sep 28
Direct answer: For FY 2025-26 / AY 2026-27, Clause 35 of Form 3CD requires tax-audit reporting of quantitative details for the principal items of goods traded or manufactured. A trading concern reports opening stock, purchases, sales, closing stock and shortage/excess. A manufacturing concern has a deeper reconciliation covering principal raw materials, consumption, sales, closing stock, yield of finished products, percentage yield, shortages/excesses, and quantitative movement of finished products/by-products. The objective is not merely to reproduce stock records: the auditor should be able to reconcile the quantities with books, inventory records, GST/e-invoice data where relevant, production records and the financial statements.
Update — 28 September 2026: CBDT changed the specified AY 2026–27 tax-audit report deadline from 30 September to 21 October 2026 and the related audited return deadline from 31 October to 21 November 2026. The separate Form 3CEB timeline is unchanged. Official Income Tax Department announcement.
Why Clause 35 matters in AY 2026-27
Google Search data for PGT & Associates currently shows multiple Form 3CD and tax-audit queries already ranking on page one or close to it, while the site has no dedicated Clause 35 article. That makes quantitative stock reporting a useful support topic for the existing Tax Audit AY 2026-27 cluster rather than another generic page competing for “Form 3CD” or “3CA vs 3CB”.
The Income Tax Department has confirmed that FY 2025-26 / AY 2026-27 continues to use Forms 3CA/3CB with Form 3CD under the Income-tax Act, 1961. The ordinary tax-audit report deadline is 21 October 2026. The Department’s Form 3CA-3CD / 3CB-3CD utility was most recently released on 2 April 2026.
What Clause 35 requires for a trading concern
For the principal items of goods traded, Clause 35(a) asks for the quantitative movement across the year. The core control is a quantity bridge from opening inventory to closing inventory.
Opening stock quantity
Purchases during FY 2025-26
Sales during FY 2025-26
Closing stock quantity
Shortage or excess, if any
A practical reconciliation can be expressed as: Opening quantity + Purchases − Sales ± other documented movements = Closing quantity, with every unexplained difference investigated. Transfers between locations, samples, free issues, damaged stock, write-offs, returns and conversion/repacking should not be allowed to disappear into a balancing figure.
What Clause 35 requires for a manufacturing concern
Manufacturing concerns need a two-level reconciliation. First, principal raw materials are traced from opening stock through purchases and consumption to closing stock. Second, finished products and by-products are reconciled through production and outward movement.
A. Principal raw materials
Opening stock
Purchases during the previous year
Consumption during the previous year
Sales of raw material, if any
Closing stock
Yield of finished products
Percentage of yield
Shortage or excess, if any
B. Finished products and by-products
The prescribed Form 3CD continues the quantitative reporting for finished products/by-products, requiring the auditor to capture opening quantities, production/purchases, sales and closing quantities along with shortage/excess information. For businesses with multiple SKUs, the “principal items” concept should be applied consistently and documented rather than changing the population merely because reconciliation is difficult.
The five reconciliations finance teams should complete before the audit
1. Stock ledger to financial statements
Closing quantities in the stock ledger should support the inventory value appearing in the financial statements. Quantity and valuation are separate tests: a correct rupee value does not cure an unexplained quantity difference, and a correct quantity does not prove that valuation is correct.
2. Purchases to GST and vendor records
Purchase quantities should be reconciled to purchase registers, goods-received notes, vendor invoices and relevant GST records. Timing differences around year-end should be identified separately from true mismatches.
3. Sales quantities to invoicing data
Sales quantities should be compared with the sales register, invoices, e-invoice data where applicable, dispatch records and credit/debit notes. Returns after dispatch and goods sent on approval require particular attention because they can distort both turnover and stock quantities.
4. Production to consumption and yield
For manufacturers, production records should explain how raw-material consumption converts into finished output. Large movements in yield percentage compared with prior periods, standards, budgets or industry norms should be investigated and documented rather than merely reported.
5. Shortage, wastage and scrap to supporting evidence
Normal process loss, evaporation, breakage, scrap, rejects and abnormal losses should be separately identified where material. The audit file should preserve production reports, scrap-sale records, write-off approvals, insurance claims, stock-count sheets and management explanations.
Worked example: trading concern
Assume a distributor has 12,000 units of a principal product at 1 April 2025, purchases 80,000 units during FY 2025-26 and records sales of 84,500 units. The theoretical closing quantity is 7,500 units. If physical/ledger closing stock is 7,350 units, the 150-unit difference should not simply be described as “shortage”. The team should trace returns, samples, damaged stock, transfers and write-offs, quantify the unresolved balance, and document the treatment before finalising Clause 35.
Worked example: manufacturer and yield
Suppose 100,000 kg of a principal raw material is available for consumption and actual consumption is 92,000 kg. If finished production is 78,200 kg, the gross yield is about 85% of raw material consumed. If the comparable prior-year yield was 91%, the six-percentage-point fall is a clear audit signal. It may be commercially explainable—product mix, moisture, process changes or quality rejection—but the explanation should be supported by production data.
Common Clause 35 mistakes
Reporting values instead of quantities
Using financial-statement stock value as a substitute for item-wise quantity reconciliation
Ignoring goods returns, branch transfers, samples, free issues or job-work movements
Treating every difference as normal wastage without evidence
Reporting total inventory when the clause asks for principal items
Using inconsistent units of measurement across opening stock, purchases, sales/consumption and closing stock
Failing to investigate abnormal changes in manufacturing yield
Finalising Form 3CD before the physical-stock and GST reconciliations are complete
Pre-filing Clause 35 checklist
Freeze the list of principal traded/manufactured items and document the basis
Standardise units of measurement and conversion factors
Reconcile opening quantities with the prior year closing quantities
Reconcile purchases with goods-received and invoice records
Reconcile sales with invoices, dispatch and returns
For manufacturers, reconcile raw-material consumption with production records
Compute current-year yield and compare it with prior periods
Identify and evidence shortage, excess, wastage, scrap and write-offs
Tie closing quantities to stock ledgers and year-end physical verification
Ensure the final Clause 35 figures agree with the audit working papers before upload
How Clause 35 connects with other Form 3CD work
Clause 35 should not be prepared in isolation. It has practical links with closing-stock valuation and Section 145A work, turnover reconciliation, GST reporting, purchase testing and the broader Form 3CD consistency review. Where a quantity anomaly changes inventory valuation or cost of goods sold, it can flow directly into taxable profit.
Related PGT & Associates guides: https://www.pgtandassociates.com/post/tax-audit-for-ay-2026-27-thresholds-forms-3ca-3cb-3cd-30-september-deadline | https://www.pgtandassociates.com/post/form-3cd-common-mistakes-ay-2026-27-reconciliation-checklist | https://www.pgtandassociates.com/post/form-3cd-clause-14-closing-stock
FAQs
Is Clause 35 applicable to every tax-audit assessee?
Clause 35 is designed around quantitative details of principal goods traded or manufactured. Its practical relevance therefore depends on the nature of the assessee’s business and the availability/applicability of quantitative inventory information. Pure service businesses do not have the same goods-movement profile as traders or manufacturers.
Does Clause 35 require every SKU?
The prescribed clause refers to principal items. The selection should be reasonable, consistent and documented. Material products should not be excluded simply because the underlying records are difficult to reconcile.
Is a physical stock count enough?
No. A year-end count establishes a closing quantity at a point in time. Clause 35 requires the movement during the year, so opening stock, purchases/production, consumption/sales and adjustments must also be reconciled.
Can GST data replace the stock ledger?
No. GST and e-invoice data can be strong corroborative evidence for outward and inward movements, but they do not capture every inventory event and are not a substitute for complete books and inventory records.
What is the tax-audit deadline for AY 2026-27?
For the ordinary FY 2025-26 tax-audit case, the Income Tax Department states that the report is due on 21 October 2026. Transfer-pricing cases follow the separate statutory timetable.
Primary references
Income Tax Department — prescribed Form 3CD: https://incometaxindia.gov.in/forms/income-tax%20rules/103120000000007767.pdf
Income Tax Department — Tax Audit / Forms FAQ for FY 2025-26 and the 2026 transition: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/%20income%20tax%20forms-faq
Income Tax Department — Form 3CA-3CD / 3CB-3CD downloads and current utility: https://www.incometax.gov.in/iec/foportal/downloads/income-tax-forms
Need help with AY 2026-27 tax-audit reconciliations?
PGT & Associates assists businesses and professionals with tax-audit readiness, Form 3CD reconciliation and documentation. For a professional review of your FY 2025-26 records, visit https://www.pgtandassociates.com/ or write to info@pgtandassociates.com.
Disclaimer: This article is for general professional information and does not constitute legal, tax or audit advice. Applicability can vary with facts, records, entity type and subsequent notifications or clarifications. Obtain case-specific professional advice before acting.
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