All about Clause 26 of Form 3cd.

1. What does Clause 26 says:-

In respect of any sum referred to in clause (a), (b), (c), (d), (e) or (f) of section 43B, the liability for which:-

(A) Pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

(a) Paid during the previous year;

(b) Not paid during the previous year;

(B) Was incurred in the previous year and was

(a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1); Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961

(b) Not paid on or before the aforesaid date.

(State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost etc. is passed through the profit and loss account.) 

Analysis: Clause 26 related to section 43B of Income Tax Act, 1961 has two sub clauses. 

Sub Clause (A) talks about the liabilities which exist on the first day of the previous year.

To prepare this clause the unpaid amount appearing under sub clause A & B are clubbed together. And the payment if any made during the period till the due date of tax audit is deducted from the same. 

Note: Do not consider the payments made during the year which has been considered in Last Year. 

Sub Clause (B) we consider the provisions made during the previous year. And deduct the amount if any paid till the due date to file income tax return.

  • Important note: It should be noted that for payment we should check the date of actual payments disbursed not the date on which cheque for the same was prepared.
  • Many companies prepare the cheque and consider the date as date of payment. Auditor should be careful while checking the same.

Payments on which Section 43B is applicable

  1. Payment of taxes
  2. Employer Contribution for benefit of Employee
  3. Bonus/ Commission payable to employees
  4. Interest on any loan or Borrowing or advance from any Public Financial institution or a State Financial Corporation or a industrial Investment Corporation or from a scheduled bank.
  5. Provision for Leave Encashment.
  6. Payment made to Railways.

Analysis of set off / written off provisions/liability created earlier?

Section 43B uses the word “Actually paid”. The set off or written off cannot be termed as payment.

Treatment under income tax: In many cases the assessee has made excess provision in earlier year and is written off in the current year. We consider the same as payment in the year it is written back, I,e we allow the expense written off under section 43B of income tax act.

  • Entry for creation of provision: (b)        Entry for set off of provision

Bonus Dr                                                         Provision for Liab Dr

To Provision For Liab                                                To Bonus

In entry (a)

Expense is booked in books of accounts maintained

And same is disallowed as expense under income tax. Means the same amount of provision has been taxed under income tax act.

Now In Entry (b)

Income is recognised in books of accounts.

Now if the amount written off / set off is not considered as expense it will result in double taxation on the amount set off.

As the same was taxed in the year in which the provision was made and now we are taxing it again in the year the amount is being set off.

So to avoid the double taxation we consider the amount set off as payment under section 43B.

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  1. Arjav Jain says:

    sir can you clarify me the clause 26(ii) i.e. “State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost etc. is passed through the profit and loss account.” whether it includes tax on purchase only or tax on all kind of expenses as both are part of P&L statement only.

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June 2021