Tax Audit | Detailed Analysis of Clause 26 to Clause 29

1. Clause 26

In respect of any sum referred to in clauses (a), (b), (c), (d), (e) or (f) or (g) 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

 B.  Was incurred in the previous year and was

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

As per section 43B specified expenses are allowed only on the basis of actual payment even if the assessee is following the mercantile basis of accounting. If the specified expense for which the liability was incurred during the previous are paid on or before the due date for filing IT return, the deduction will be allowed in the previous year itself.

In clause 26(i)(A), an auditor is required to report the payment status of the liability that is already existing on the first day of the previous year and was not allowed in the assessment of any preceding previous years.

In clause 26(i)(B), an auditor is required to report the payment status of the liability that was incurred only in the previous year.

Where the liability to pay specified expense pre-exists on the first day of the previous year, deduction will be allowed only if the payment is made on or before the end of the previous year.

The deadline of “due date for filing the return” applies only in the case where the liability was incurred in the previous year and not to pre-existing liability.

The detail of such expenses are as below:

• Any tax, duty, cess or fee payable is allowed as a deduction when it is paid. Tax, duty and cess include GST, customs duty or any other taxes or cess paid but does not include income tax. Interest paid on these taxes are also eligible for deduction.
• Contribution by the employer to any recognized employee’s benefit fund namely PF fund, superannuation fund, gratuity fund before the due date of the respective fund or before the due date of filing Return of Income.
• Bonus or commission payable to employees.
• Interest on loan from Public Financial Institutions or State Financial Corporation, state industrial investment corporation, scheduled banks in accordance with the conditions governing such loan.
• Leave encashment provided by an employer.
• Interest on loans and advances from deposit-taking NBFC or systematically important non-deposit-taking NBFC.
• Any sum is payable to Indian Railways for use of railway assets.

An auditor shall distinguish the payments made during the previous year that were allowed in earlier years from those that were disallowed. The auditor is not required to comment upon the admissibility/inadmissibility of such expenses.

Where the company follows the practice of crediting the GST collected from the customer in a separate account and treats it as a liability. This should be properly indicated by way of a note.

The Gudance Note 2023, clarify what amounts to “actual payment” for section 43B and clause 26 purposes as under:

(a) Deferral of GST under incentive schemes may amount to actual payment
It is clarified that deferment of GST under incentive scheme where the tax may be regarded as paid by virtue of legislation or schemes notified under the legislation. The 2023 GN recommends that where the tax auditor faces such situations under GST law, he may, after careful consideration of the facts, consider the treatment of GST dues based on principles laid down by following Circulars/judicial decisions under erstwhile Sales Tax Regime:

• • • If under the sales tax legislation applicable, sales tax so deferred is treated as actually paid, then statutory liability shall be treated to have been discharged for the purpose of Section 43B – CBDT’s Circular No 496 dated 25.09.87.
    • The Apex Court, in the case of CIT v. Gujarat Polycrete Pvt Ltd (2000) 246 ITR 463, has held that the State Government may amend its Sales Tax Act to provide that the sales tax (deferred under an incentive scheme framed by it) will be treated as actually paid so as to meet the requirements of Section 43B.
    • Some State Governments, instead of amending the Sales Tax Act, have notified schemes under which sales tax is deemed to have been actually collected and disbursed as loans. The amount of such sales tax liability deemed to be converted into a loan may be allowed as a deduction in the assessment for the previous year in which such conversion has been permitted – CBDT’s Circular No 674 dated 29.12.93.
    • It was held by Gujarat HC in the case of CIT v. Goodluck Silicate Industries (P) Ltd (2002) 178 CTR 92 that where sales tax due to the Government is converted as loan to be repaid by the assessee, subsequently by instalments, it would amount to actual payment of sales-tax.

(b) Furnishing of a bank guarantee is not “actual payment”

It is clarified that Furnishing of a bank guarantee in respect of any sum payable by an assessee cannot be equated with actual payment as required under section 43B[ Supreme Court decision in CIT v. McDowell & Co Ltd (2009) 180 Taxman 514].

(c) Advance deposit of duty is actual payment and qualifies for section 43B deduction

Modipon Ltd (2017) 87 taxmann.com 275 has held that

“Even advance deposit of duty within the meaning of section 43B and it is entitled to the benefit of deduction”.

Similarly, in the case of CIT v. Maruti Suzuki India Ltd (2013) 212 Taxman 603, the Delhi High Court held that

“advance deposits in Excise Personal Ledger Account cannot be disallowed under section 43B”.

The guidance note 2023 has clarified what kind of statutory dues fall within the ambit of section 43B, as under:

• • • In CIT v. McDowell & Co Ltd (2009) 180 Taxman 514, the Apex Court has held that Bottling fees payable for acquiring a right of bottling of IMFL, which is determined under Excise Act and Rules, is neither fee nor tax, but is consideration for grant of approval by Government in respect of exclusive right to deal in bottling of liquor in all its manifestation and, consequently bottling fee payable under Excise Law for acquiring a right of bottling IMFL does not fall within the purview of section 43B.
    • The Apex Court in Mineral Area Development Authority and Others v. Steel Authority of India and Others (2011) 4 SCC 450 has held that “Royalty is tax”. Thus, Royalty payment outstanding as on the balance sheet date shall be considered relevant for the purpose of Section 43B.
    • The Apex Court in Berger Paints India Ltd v. CIT (2004) 135 Taxman 586 (SC) has held that

“ The entire amount of excise duty/customs duty paid by the assessee in a particular accounting year is an allowable deduction in respect of that year, irrespective of the amount of excise duty/customs duty which is included in the valuation of the assessee’s closing stock at the end of the accounting year”.

• • • The MP HC in case of CIT v. Mohanlal Mishrilal & Sons (1996) 87 Taxman 194 & CIT v. Mohansingh & Sons (1995) 216 ITR 432 has held that

“Mandi tax is not a tax as it is paid by a trader who enjoys the facility of mandi because some services are provided by the mandi and, therefore, that cannot be taken as tax as the same is collected for the services rendered”.

2. Clause 27

(a) Amount of Central Value Added Tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding Central Value Added Tax credits in the accounts.

In this clause, the tax auditor has to obtain a list of the Central Value Added Tax credit carried forward from the previous year and Central Value Added Tax credit availed and utilized by the Assessee during the relevant period. In case such a list is not available, the auditor should scrutinize the CENVAT ledger and verify, whether the amount in return matches with the amount appearing in the books. In case of any difference ensure whether reconciliation has been prepared for such difference.

With regard to GST Input tax credit, there is a conflict, the utility of Form 3CD requires reporting of ITC, however, the form as provided in rules is not amended to include the words Input Tax Credit. Thus, the predominant view is that as the same has not yet been duly notified by CBDT, hence the same may not be reported.

(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.

A detailed list of prior period items debited or credited to profit and loss account should be given under this clause. Expenditure or income of prior periods that are crystallized during the current year should not be considered as prior period items for reporting under this clause.

Sales/Purchases returns during the year under audit should not be regarded as income or expenditure of the prior period.

This clause would be relevant only for the persons following the mercantile system of accounting. Particulars of income or expenditure of prior period credited or debited to the profit and loss account are provided in the below format:

3. Clause 28

Whether during the previous year the assessee has received any property, being the share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia), if yes, please furnish the details of the same.

This is based on section 56(2)(viia), which is applicable on or after the 1st day of June 2010 but before the 1st day of April 2017 so not relevant from A.Y 2018-19 therefore we shall mention No under this clause.

4. Clause 29

Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib), if yes, please furnish the details of the same.

If during the previous year the assessee received any consideration for issue of shares that exceeds the fair market value of the shares as referred to in section 56(2)(viib) details of the same shall be provided under this clause.

For reporting under this clause:

• The auditor should confirm whether the assessee is a closely held company (A company other than a company in which the pubis are substantially interested) and obtain a list from the assessee containing details of shares issued to any resident person along with consideration received for issue of shares.
• The auditor should verify the details with books and other relevant documents and check if the consideration received exceeds the face value of such shares.
• The auditor should obtain the valuation report from the merchant Banker as per 11UA(2)(b) and obtain a management representation Letter from the assessee, justifying the issue price and also verify the fair market value of shares.
• Where the issue price is less than the fair market value, the auditor should select “NO” from the dropdown in the select button in the e-filing utility.
• Company issuing shares is required to file Form No. 61A under Rule 114 E if there is a receipt from any person of an amount aggregating to Rs. 10 lakhs or more in a financial year for acquiring shares (including share application money) issued by the company.
• The auditor should verify that the company has filed Form 61A and report as required in clause 42(a)/(b).
• The auditor should consider the provisions of Rule UA (@) while reporting under this clause.

4.1 Section 56(2)(viib)

This section is applicable to private limited companies which receive any consideration for issue of shares for a value that exceeds the FMV of such shares from a resident person then the aggregate consideration received for such shares exceeding the FMV of the shares shall be deemed to be the income of the issuer company and taxable under the head Income from Other Sources. The FMV shall be higher of value as determined in accordance with the Rule 11U and 11UA of the Income Tax, Rules, 1962 and any other value as may be substantiated by the company to the satisfaction of the Assessing Officer

This section shall not be applicable when consideration for the issue of shares received by venture capital undertaking from a venture capital company or a venture capital fund.

4.2 Clause 29A

Whether any amount is to be included as Income Chargeable under the head income from other sources as referred to in clause (ix) of subsection 2 of section 56? (YES/No)

If yes, please furnish the following details:

i.  Nature of income

ii.  Amount (in Rs.) thereof [Clause 29A(b)]

Requirement:

Advance received on capital asset forfeited is required to be reported here.

Auditor’s Responsibility:

The reporting under this clause pertains to income from other sources. Whereas, under section 44AB, an audit is required for the books of account of business or profession. Hence, reporting in this clause is required only to the extent entries in relation to such income are made in books of business or profession.

The auditor should obtain a certificate from the assessee regarding all such advances received towards a capital asset that has been forfeited during the year. He should also obtain agreement and review the forfeiture clause by virtue of which advance received on such capital asset is forfeited and obtain balance confirmation of person whose advance is forfeited.

He should also obtain management representation regarding receipt of advance and its forfeiture.

Mere notice of forfeiture by the assessee which is contested by the other party may not be considered forfeiture.

4.3 Section 56(2)(ix)

Advance money forfeited by the Seller from advance or otherwise received in the course of negotiations for the transfer of a capital asset for non-compliance from the buyer with the clauses in the agreement would be taxable as Income under head Income from Other Sources.

4.4 Clause 29B

Whether any amount is to be included as income chargeable under the head Income from other sources as referred to in clause (x) of sub section 2 of section 56

The reporting under this clause pertains to income from other sources in the form of gifts/deemed gifts received which are taxable under section 56(2)(x). Whereas, under section 44AB, an audit is required for the books of account of business or profession. Hence, reporting in this clause is required only to the extent entries in relation to such income are made in books of business or profession.

Auditor’s Responsibility:

4.5 Section 56(2)(x)

Section 56(2)(x) provides that where any person receives the following amount from any person then he needs to declare such amount as Income from other sources subject to certain exemptions.

• Any sum of money that is received without consideration, in aggregate exceeding Rs. 50,000 during the financial year.
• Any immovable property without any consideration, the stamp duty value of which exceeds Rs. 50,000 or for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000 the stamp duty value of such property as exceeds such consideration.
• Any movable property without consideration where aggregate fair market value whereof exceeds Rs. 50,000 or for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the aggregate fair market value of such property as exceeds such consideration.

Exceptions in the case of Individuals:

• Spouse of the individual
• Brother or sister of the individual
• Any inherent ascendant or descendant of the individual
• Brother or sister of the parents of the individual
• Any inherent ascendant or descendant of the individual
• Brother/sister of the spouse of the individual.
• Any inherent ascendant or descendant of the spouse of the individual

Exceptions in case of HUF:

• Any member thereof

Circumstances when 56(2)(x) not applicable:

• On the occasion of an individual’s marriage
• By way of will or inheritance
• In the case of death of the payer or donor
• From any local authority
• From any fund/foundation/other educational institution/university/hospital/other medical institution/any trust or institution referred to in under section 10
• From any trust or institution that is registered under section 12A or section 12AA
• By any trust or fund or any institution or university or other educational institution or hospital or any other medical institution referred to in sub-clause (iv)/(v)/(vi) or sub-clause (via) of clause (23C) of section 10

Note

This document is prepared as per the guidance note provided by ICAI

Dive Deeper:
Detailed Analysis of Clause 9 to 12
Detailed Analysis of Clause 13 and Clause 14
Detailed Analysis of Clause 15 and Clause 16
Detailed Analysis of Clause 17 to Clause 19
Detailed Analysis of Clause 20 and Clause 21
Detailed Analysis of Clause 22 to Clause 25
Detailed Analysis of Clause 30 to Clause 30C
Detailed Analysis of Clause 31
Detailed Analysis of Clause 32 to Clause 34
Detailed analysis of Clause 35 to Clause 38
Detailed Analysis of Clause 39 to Clause 41
Detailed Analysis of Clause 42 and Clause 43