Identify the taxpayer and which limb applies
For FY 2025–26 and AY 2026–27, apply section 40(a)(iib) of the Income-tax Act, 1961. Limb A addresses amounts paid as royalties, licence fees, service fees, privilege fees, service charges or other fees or charges, however described, where the levy applies exclusively to State Government undertakings. Limb B covers amounts appropriated directly or indirectly from such an undertaking by the State Government. Establish undertaking status from the statutory explanation and actual ownership, establishment or control facts. For the direct State shareholding limb, the test is more than 50% of paid-up equity share capital. The explanation also covers specified corporations established under State law; companies more than 50% held by specified public entities; companies or corporations where the State can appoint most directors or control management or policy; and specified authorities, boards, institutions or bodies established under State law or owned or controlled by the State. A State invoice alone does not establish either limb.
Read the applicable text: Income-tax Act, 1961, section 40(a)(iib) Supreme Court judgment of 3 January 2022 CBDT Form 3CD, clause 21 Notified ITR-6 for AY 2026–27 ITR-6 corrigendum Official AY utilities, schema and validation rules.
Read the levy, not the ledger label
For limb A, obtain the charging instrument, the category of payers subject to it, relevant licence terms and the identity of each covered entity. In Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd., the Supreme Court held, on the particular instruments before it, that exclusivity can apply where the relevant levy covers more than one State Government undertaking. The Court held that the gallonage fees, licence fees and shop rentals for the FL-9 and FL-1 licences fell within the provision. It held that the sales tax surcharge and turnover tax at issue were outside both limbs. Apply that reasoning to the actual statutory instruments; do not generalise the outcome to every levy carrying a similar name.
Trace any direct or indirect appropriation
For limb B, follow the State order, actual fund movements and the undertaking's accounts. Separate a transfer merely reflected in a balance-sheet or equity entry from an amount reducing the business profit used to compute income. An amount disclosed or transferred does not automatically justify a second add-back to profit. Consider the proper accounting and deductibility independently, and document the basis if a transaction could appear under both limbs.
Reconcile the audit and return once
Form 3CD clause 21(b)(v) is the section 40(a)(iib) disclosure. The notified AY 2026–27 ITR-6 puts the relevant amount at Part A-OI item 8Ag, within the section 40 total at 8Aj. That total flows to Schedule BP A item 16. Compare the legally disallowable population with the P&L impact and the signed computation. Section 40(a)(iib) is not an ordinary later-payment timing rule; do not create a payment-year reversal simply because a disallowed charge has since been paid.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Exclusive licence charge
A qualifying undertaking pays ₹14 lakh of a fee levied exclusively on covered State undertakings and debits it to profit. On the assumed facts the add-back is ₹14 lakh and no part of that debit remains deductible.
Illustrative example 2: Shared fee and exclusive levy
The undertaking pays and charges ₹19 lakh to profit: ₹7 lakh for a fee levied under the same instrument on private and State operators, and ₹12 lakh for a separate exclusive fee. On the stated limb A facts, add back ₹12 lakh and test ₹7 lakh under other applicable provisions.
Illustrative example 3: Appropriation charged to profit
Of ₹20 lakh remitted to the State, ₹11 lakh is a supported appropriation debited to profit; ₹9 lakh is assumed to be an equity movement already outside profit. The bridge for the stated profit starts with ₹11 lakh, not ₹20 lakh.
Illustrative example 4: Two covered State payers
A fee of ₹6 lakh each applies only to two State undertakings. The combined levy is ₹12 lakh. Assuming both paid and charged their respective fees to profit and limb A applies, each tests its own ₹6 lakh rather than treating multiple public payers as defeating exclusivity.
Illustrative example 5: Separate tax and fee rows
A ledger records ₹13 lakh paid and charged to profit: ₹8 lakh of tax on the same legal footing as the tax excluded by the judgment and ₹5 lakh of a qualifying exclusive fee. The section 40(a)(iib) add-back is ₹5 lakh on those assumptions; other tax rules remain separate.
Illustrative example 6: Prevent a duplicate Schedule BP entry
A supported ₹9 lakh adjustment already feeds BP A item 16 via Part A-OI. Adding it again elsewhere would produce ₹18 lakh of adjustments and overstate the bridge by ₹9 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm undertaking status | Constitution and statutory evidence |
| 2 | Obtain charging instruments | Law, licence and State order |
| 3 | Separate each legal charge | Invoice and levy cross-reference |
| 4 | Map the payer population | Licences and comparable payer records |
| 5 | Identify any appropriation | State decision and remittance trail |
| 6 | Trace profit impact | General ledger and computation starting point |
| 7 | Apply the relevant court reasoning | Issue and instrument comparison |
| 8 | Reconcile Form 3CD | Clause 21(b)(v) working |
| 9 | Trace the notified return field | 8Ag, 8Aj and BP A item 16 |
| 10 | Approve exceptions | Signed computation and evidence file |
Sixteen practitioner FAQs
1. Does government ownership alone decide the adjustment?
First verify undertaking status and the specific charge or appropriation.
2. Can a levy be exclusive if two public entities pay it?
Yes, depending on the instruments and the applicable payer population.
3. Does a common fee become exclusive because only one payer appears in our ledger?
No. Review who is legally subject to the levy.
4. Does the word royalty decide the outcome?
No. Examine the levy and the relevant statutory limb.
5. What if the State appropriates funds indirectly?
Limb B expressly includes indirect appropriation; prove the actual route.
6. Is a shareholder distribution automatically deductible before this test?
No. Determine book and tax treatment first.
7. Does the court ruling exclude every tax from every disallowance?
No. It interpreted this provision and the instruments before it.
8. What supports the payer-population test?
The levy instruments, licensing classes and reliable comparable evidence.
9. Which Form 3CD clause applies?
Clause 21(b)(v) addresses section 40(a)(iib).
10. Which Part A-OI item is specific?
Item 8Ag for the stated AY.
11. Where does the section 40 total enter BP?
Schedule BP A item 16 takes the 8Aj total.
12. Should a separate manual adjustment repeat that amount?
No. Trace one add-back from the profit starting point.
13. Does later payment automatically make it deductible?
This provision does not create that later-payment allowance.
14. Can a levy be split into components?
Yes, where the legal instruments and records support a split.
15. What if a historical order reached a different result?
Reconcile the facts, statutory version and relevant order separately.
16. What does the reviewer sign off?
Undertaking status, each limb, profit impact and the filed schedule bridge.
Official sources
Income-tax Act, 1961, section 40(a)(iib) Supreme Court judgment of 3 January 2022 CBDT Form 3CD, clause 21 Notified ITR-6 for AY 2026–27 ITR-6 corrigendum Official AY utilities, schema and validation rules