Clause 26 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 26 reports section 43B liabilities in two parts: those that pre-existed on the first day of the year and were not allowable earlier, and those incurred during the year — each split by whether payment was made in time.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 the corresponding provision must be identified afresh, and the particulars move to Form No. 26 under rule 47 of the Income-tax Rules, 2026.
The sums clause 26 covers
Paragraph 46.2: notwithstanding anything in any other provision, the following are allowed in the previous year in which they are actually paid:
| Sum | |
|---|---|
| (a) | Any tax, duty, cess or fee, by whatever name called, payable under any law — GST, sales tax, VAT, service tax, excise duty, municipal or property tax and the like, but not income-tax, TDS or TCS |
| (b) | Any sum payable as an employer by way of contribution to any provident fund, superannuation fund, gratuity fund or any other fund for the welfare of employees |
| (c) | Any bonus or commission payable to employees for services rendered, where the sum would not have been payable as profits or dividend |
| (d) | Interest on any loan or borrowing from a public financial institution, State financial corporation or State industrial investment corporation |
| (da) | Interest on any loan or borrowing from such class of non-banking financial companies as notified |
| (e) | Interest on any loan or advance from a scheduled bank or co-operative bank, other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank |
| (f) | Any sum payable as an employer in lieu of any leave at the credit of his employee |
| (g) | Any sum payable to the Indian Railways for the use of railway assets |
| (h) | Any sum payable to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act, 2006 |
Paragraph 46.15: section 43B opens with a non obstante clause, so irrespective of the accounting treatment under the mercantile or cash basis permitted by section 145, deduction under section 43B is allowable only on payment basis.
The four boxes of clause 26
| Box | What goes in it |
|---|---|
| 26(A)(a) | Liability that pre-existed on the first day of the previous year, was not allowable in the assessment of any preceding year, and was paid during the previous year |
| 26(A)(b) | The same pre-existing liability, not paid during the previous year |
| 26(B)(a) | Liability incurred in the previous year (for clauses other than clause (h)) and paid on or before the section 139(1) due date |
| 26(B)(b) | The same, not paid on or before that date |
Clause 26 also asks the assessee to state whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess or impost is passed through the profit and loss account. The TAQRB observation on clause 26 is precisely about that: "Incorrect reporting was noticed under this clause where 'No' was reported despite excise duty being passed through the profit and loss account."
Paragraph 46.5: for a pre-existing liability, if it is paid after the end of the previous year the amount is allowed in the year in which it is paid — the proviso allowing payment till the return due date is not applicable to such a liability. So Part A is tested against the year end, and Part B against the section 139(1) due date. And the amount of the pre-existing liability should be verified from the previous year's ITR form.
The clause (h) MSME sums — a different route
Paragraph 46.7: for any sum referred to in clause (h) reported under Part (A) as pre-existing on the first day of the year, the tax auditor should cross-check the amount against the sum reported as inadmissible in clause 22 during the immediately preceding previous year. If it is paid during the year it goes in (a); if not paid, in (b). In the next year the auditor cross-checks clause 26(A)(a) against the amount reported as inadmissible in clause 22(iii)(b) and the amount reported in clause 26(A)(b) of the preceding year.
And the structural point: there is no reporting required under (B) in respect of any sum referred to in clause (h) of section 43B. An MSME sum incurred in the current year that is unpaid beyond the section 15 time limit is reported at clause 22, not at clause 26(B); it reaches clause 26 only in the following year, as an opening balance under clause 26(A).
"Allowed" becomes "allowable"
Paragraph 46.6: with effect from 1 April 2025, the term "allowed" has been replaced with "allowable" in the clause, to imply that any sum which was otherwise allowable but not allowed in any preceding previous year due to the operation of section 43B can be allowed in this previous year on payment basis. That includes, for clauses (a) to (g), amounts paid after the return due date of a preceding year, and for clause (h), sums paid after the section 15 MSMED due date.
What counts as actual payment
| Position | Authority |
|---|---|
| Deferred sales tax treated as actually paid under the State legislation discharges the liability for section 43B | Circular No. 496 dated 25.09.87; CIT v. Gujarat Polycrete Pvt Ltd (2000) 246 ITR 463. Paragraph 46.10 suggests the same principles may inform GST dues |
| A bank guarantee is not actual payment | CIT v. McDowell & Co Ltd (2009) 180 Taxman 514. The same case held bottling fees under Excise law to be neither fee nor tax but consideration for a right, and so outside section 43B |
| Advance deposit of duty is payment within section 43B | CIT v. Modipon Ltd (2017) 87 taxmann.com 275; CIT v. Maruti Suzuki India Ltd (2013) 212 Taxman 603 — advance deposits in the Excise PLA cannot be disallowed |
| The entire excise or customs duty paid in a year is deductible, irrespective of how much is in closing stock | Berger Paints India Ltd v. CIT (2004) 135 Taxman 586 (SC) |
| Mandi tax is not a tax, being collected for services rendered | CIT v. Mohanlal Mishrilal & Sons (1996) 87 Taxman 194; CIT v. Mohansingh & Sons (1995) 216 ITR 432 (MP) |
| Converted interest is not paid | Explanations 3C, 3CA and 3D — interest under clauses (d), (da) and (e) converted into a loan, advance, debenture or other instrument deferring the liability shall not be deemed to have been actually paid |
Paragraph 46.21: Circular No. 7/2006 dated 17 July 2006 explains that the converted interest, whenever actually paid, is revenue expenditure deductible in the year of actual payment — the change of nomenclature makes no difference, and the converted sum when paid does not represent repayment of principal. The Assessing Officer would be justified in seeking a certificate from the lender bank or financial institution as evidence of actual payment.
Practical points for the working paper
- Verify across three years. Paragraph 46.1: for a mercantile-basis assessee, verify the particulars from the books for the year under audit, from the books, vouchers and documents of the immediately succeeding assessment year, and from the returns of income for earlier assessment years.
- Cash-basis assessees. Paragraph 46.8: sums under clauses (a) to (g) debited to the profit and loss account will be allowable, since they would have been actually paid during the year.
- No double reporting at clause 26. Paragraph 46.3: section 43B applies to expenditure otherwise allowable, so where an expenditure is reported under another clause indicating that the deduction is otherwise not allowable, there is no need to report it under clause 26.
- Payments after signing still count. Paragraph 46.16: the auditor can verify only up to the date of signing, but a payment made after that date and before the return is filed is still eligible — and where the due date is extended, payments up to the extended date qualify.
- Report irrespective of debiting. Paragraph 46.23: the particulars are required whether or not debited to the profit and loss account, and that fact should be stated — for example where GST collected is accounted as a balance sheet item under the exclusive method.
- Separate tax accounts. Paragraph 46.17: where the practice is to maintain a separate CST, VAT, excise or GST account treating the collection as a liability, it is necessary to show by way of a note the amount collected but not paid, and where any sum has been paid before the return due date, the date and amount should also be disclosed.
- Reverse charge GST. Paragraph 46.26: where RCM liability is booked but not paid by the section 139(1) due date, it must be reported, and verified against the GST payable ledger or GSTR-3B reconciliations.
- Railway assets. Paragraphs 46.24 and 46.25: clause (g) does not include basic rail freight, which is for transport rather than use of assets, but does include hire of railway wagons or sidings and lease rent for railway land or buildings. Hoarding and display panel payments depend on the contract terms and parties.
- Employees' contributions are outside. Paragraph 46.18: Explanation 5 puts sums received from employees within section 2(24)(x) outside section 43B, so a delayed deposit is disallowable permanently.
- Write-backs of unallowed provisions. Paragraph 46.24: where amounts of a section 43B nature are credited to the profit and loss account although never allowed as a deduction, they are not chargeable, since the section 41(1) conditions are not satisfied. Identify and keep them in the working papers.
Paragraph 46.27 gives the clause 26 working paper format: S. No. · section · nature of liability · amount.
Worked example
| Liability | Box |
|---|---|
| GST of Rs 12,00,000 unpaid at last year's end and reported then in 26(B)(b); paid in August this year | 26(A)(a) |
| The same, still unpaid at this year's end | 26(A)(b) |
| Bonus of Rs 6,00,000 provided this year, paid on 20 September | 26(B)(a) |
| Bank interest of Rs 3,00,000 provided this year and converted into a term loan | 26(B)(b) — Explanation 3CA; conversion is not payment |
| MSME sum unpaid beyond the section 15 time limit, incurred this year | Clause 22, not clause 26(B) |
| The same MSME sum next year | 26(A), cross-checked to clause 22 of the preceding year |
| Advance duty deposit in the Excise PLA | Treated as actual payment |
Audit checklist
- Test Part A against the year end and Part B against the section 139(1) due date, including any extension.
- Verify the pre-existing balance from the previous year's ITR, and MSME sums from clause 22 of the preceding year.
- Report whether or not debited to the profit and loss account, and note amounts collected but not paid.
- Answer the indirect tax pass-through question consistently with the accounts.
- Treat a bank guarantee and converted interest as unpaid; treat advance duty deposits as paid.
- Exclude employees' contributions — they are outside section 43B and permanently disallowed if late.
- Check RCM GST against the payable ledger and GSTR-3B.
- Distinguish rail freight from hire of railway assets.
- Do not report at clause 26 an item already shown as otherwise inadmissible under another clause.
Common mistakes
- Applying the return due date to a pre-existing liability under Part A.
- Reporting current-year MSME sums under Part B.
- Answering "No" to the pass-through question while excise or GST runs through the profit and loss account.
- Treating converted interest or a bank guarantee as actual payment.
- Omitting amounts not debited to the profit and loss account.