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CS Executive · Tax Laws and Practice · Computation of Total Income and Tax Liability of various Entities

Under the Income-tax Act, 2025 (applicable from the June 2027 session), Meridian Textiles Ltd, using the mercantile system, incurred a liability of Rs 4,00,000 for a cess levied under a law in force during tax year 2026-27 and paid it on a date after the end of that year but before the due date of filing the return for that year. How is the deduction treated?

The Rs 4,00,000 cess is deductible in tax year 2026-27. Section 37 normally requires actual payment, but payment after year end and on or before the return due date for that year lets the deduction be allowed in the year the liability was incurred.

  1. AAllowed in tax year 2026-27, the year the liability was incurredCorrect
  2. BAllowed only in the tax year in which it is actually paid, even though it is paid before the due date
  3. CNot allowed in any year because it was paid after the year end
  4. DAllowed half in each of the two years

Explanation

Section 37 allows certain sums, including tax, duty, cess or fee, only on actual payment. However, sub-section (3) provides that if such sums are paid after the tax year end but on or before the due date of filing the return for that year, the deduction is allowed in the year the liability was incurred. So the deduction falls in 2026-27. The option giving the payment year ignores this relief.

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