Payments to Specified Persons: Preparing the Form 3CD Clause 23 Working
Clause 23 needs a reliable list of specified persons and the payments made to them. Learn how to build the working and avoid confusing reporting with automatic disallowance.
AI Summary
Scope: FY 2025-26 / AY 2026-27 under the Income-tax Act, 1961 and applicable Income-tax Rules, 1962; do not reuse section/form references unchanged for Tax Year 2026-27. Verification date: 11 October 2026.
Start with identity before extracting amounts
A query for ledger names containing “director”, “partner” or “relative” will not identify every specified person. Some transactions sit in ordinary supplier accounts, rent ledgers or expense reimbursements. Build the relationship register first, then use it to extract the transactions.
Clause 23 asks for particulars of payments to persons specified under Section 40A(2)(b). The income-tax list needs its own assessment. The accounting related-party note and the transfer pricing AE list can provide leads, but neither is a substitute for the applicable definition.
Create a specified-person register
Record legal name, PAN where available, relationship, relevant ownership/control information, dates and the basis for inclusion. Obtain management's confirmation and corroborating records where necessary. Preserve the distinction between the factual information supplied and the reviewer's conclusion.
Review directors, partners and relevant relatives, along with entities and interests captured by the statutory tests. Revisit changes during the year. A register copied from last year may omit a newly connected supplier or contain someone whose relationship changed.
Build the transaction working
For every included counterparty, identify the nature of the payment, invoice or settlement reference, amount, date, ledger and supporting agreement. Reconcile cash/bank payments with expense entries and outstanding balances rather than assuming they are the same figure.
| Field | Why it matters |
|---|---|
| Relationship and legal basis | Explains why the person is included |
| Nature of payment | Distinguishes rent, services, goods and other items |
| Amount and supporting reference | Allows verification and reconciliation |
| Difference between expense and payment | Prevents inconsistent population totals |
A practical example
A fictional company records ₹6 lakh of rent to a director-owned premises during FY 2025-26. It pays ₹5 lakh by year-end and has ₹1 lakh outstanding. The accounting expense, year-end payable and current-year cash settlement are three separate facts.
The preparer should examine the required Clause 23 reporting basis and retain a reconciliation. Do not report ₹6 lakh as a cash payment merely because it is the P&L charge. Equally, do not assume the unpaid component can be ignored in every connected statutory review. Record the applicable conclusion and align it with current form requirements.
Reporting is not automatic disallowance
Being a specified person does not by itself mean that the full expense is inadmissible. The Section 40A(2) review addresses excessive or unreasonable expenditure having regard to the relevant statutory considerations. Keep that assessment separate from identifying and reporting the person.
Useful evidence can include contracts, service descriptions, market information and the business rationale. Avoid creating a superficial comparison with an unrelated price that does not match the actual service, location or contractual conditions.
Common omissions
- Payments recorded under a trade name instead of the legal name.
- Transactions routed through general expense ledgers.
- New relationships arising during the year.
- Reimbursements included or excluded without examining their substance.
- Accounting and tax lists treated as identical without assessment.
Before finalising, agree the population with management, reconcile totals and document any reporting judgement. If financials are prepared in assureOffice, the related-party note should follow its accounting framework; retain the Clause 23 register separately as part of the tax-audit evidence pack.
Keep completeness and reasonableness distinct
A complete specified-person register answers who is potentially within scope. A separate payment working answers what was paid or recorded and why. Review both: a reasonable-looking amount can still be omitted from the reporting population, while inclusion does not itself mean the expenditure is excessive.
Preserve agreements, invoices, approvals and the basis for any reasonableness assessment. Where comparable information is used, explain differences in scope or circumstances. Avoid treating a generic market quote as conclusive evidence for a materially different service. The final conclusion should connect the actual payment with the facts and the relevant legal test.
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