By CA Surekha Ahuja
Clause 34 is not a copy of the TDS return.
It is the conclusion of a reconciliation:
BOOKS → TDS LIABILITY → DEDUCTION → DEPOSIT → TDS RETURN → DEFAULT → CLAUSE 34
For FY 2025-26, there is an additional issue for partnership firms: Section 194T applies from 1 April 2025 to specified payments by a firm to its partners, while Section 40(b) separately determines the firm's deduction for partner remuneration and interest.
And this is the last year in which FY 2025-26 is reported through Form 3CA/3CB and Form 3CD under the Income-tax Act, 1961. The Income Tax Department confirms that the FY 2025-26 tax audit continues under the old Act and old forms, even though the report is filed after 1 April 2026.
For specified AY 2026-27 audit cases, CBDT has subsequently extended the tax-audit report date to 21 October 2026 and the corresponding ITR date to 21 November 2026.
Clause 34 tests three different things
| Clause | Core question |
|---|---|
| 34(a) | What TDS/TCS was applicable, deducted/collected and deposited? |
| 34(b) | Were the prescribed statements filed correctly and on time? |
| 34(c) | What interest is payable for TDS/TCS defaults? |
The mistake is to start with the TDS return. Start with the books. End with Clause 34.
The partnership-firm issue: drawing is not remuneration
A partner's capital/current account may contain:
| Transaction | Nature |
|---|---|
| Capital introduced | Capital contribution |
| Drawings / withdrawal | Withdrawal of funds |
| Remuneration credited | Remuneration |
| Interest credited | Interest |
| Share of profit | Share of partnership profit |
These cannot be clubbed merely because they appear in the same partner account.
A ₹20 lakh withdrawal is not remuneration merely because the partner received ₹20 lakh.
Conversely, remuneration credited to the partner remains remuneration even if the amount is subsequently withdrawn.
Cash movement and income classification are not the same thing.
This is where tax planning begins. The question is not:
“How much can the partner withdraw?”
It is: “How much remuneration or interest can legitimately be provided, what is deductible to the firm, what is subject to TDS, and how will it be reported?”
Section 40(b): deduction is a separate test
For FY 2025-26, remuneration to working partners is subject to the Section 40(b)(v) ceiling:
first ₹6 lakh of book profit, or in case of loss, ₹3 lakh or 90% of book profit, whichever is higher; and
balance book profit: 60%.
The remuneration must also be authorised by, and be in accordance with, the partnership deed, and the other conditions of Section 40(b) must be satisfied. Interest is subject to the applicable conditions, including the statutory 12% simple-interest ceiling.
Therefore: DRAWING → no deduction merely because money is withdrawn
REMUNERATION → deduction test under Section 40(b)
The planning should be completed before the accounts are finalised, not created merely by passing a year-end withdrawal.
Section 194T: the second test
From 1 April 2025, Section 194T requires a firm to deduct 10% TDS on sums in the nature of salary, remuneration, commission, bonus or interest paid or credited to a partner where the aggregate exceeds ₹20,000 during the financial year.
TDS is triggered at the earlier of: credit to the partner's account, including the capital account
or payment.
The words “including the capital account” need particular care.
They do not mean: Every withdrawal from a partner's capital account is subject to TDS.
They mean: Where a covered amount such as remuneration or interest is credited to the partner's capital account, that credit can trigger Section 194T.
Therefore: Capital contribution ≠ remuneration
Drawing ≠ remuneration
Remuneration credited to capital account → 194T test
194T and 40(b) must never be merged
This is the key practitioner point.
Section 194T asks: Is TDS required?
Section 40(b) asks: How much is allowable as a deduction to the firm?
For example:
Remuneration credited ₹20 lakh ↓
Test entire covered amount under Section 194T ↓
Separately compute Section 40(b) ceiling ↓
Determine deductible amount
The amount subject to TDS does not automatically become the amount deductible under Section 40(b). Likewise, the Section 40(b) ceiling should not simply be substituted for the actual Section 194T TDS base.TDS liability and deduction eligibility are separate statutory questions.
The fastest reliable Clause 34 method
The working should run through three loops.
Loop 1 — Books → TDS liability
Identify every TDS/TCS-sensitive payment or credit, including:
P&L expenditure; amounts capitalised to fixed assets/CWIP; advances where TDS applies;
year-end provisions; partner remuneration and interest; and other payments capable of attracting TDS/TCS.
Then determine the applicable section, threshold and amount liable.
Loop 2 — Liability → TDS return
Reconcile the amount identified from the books with the quarterly 24Q / 26Q / 27Q / 27EQ statements.
Every difference should have an identified reason: omission / wrong section / short deduction / timing difference / correction required / other valid reconciling item.
Loop 3 — Return → Deposit
Reconcile: TDS/TCS reported → challans → amount consumed → outstanding/default → interest
This is where unpaid or incorrectly deposited tax is identified.
The five check totals
Before finalising Clause 34, five controls should agree:
1. Books → Clause 34
Amount in the books reconciles with the applicable payment population.
2. Column 5 → Columns 6 + 8 + amount not deducted
The mathematical relationship must hold for each relevant row.
3. TDS per books → TDS per returns
The four quarterly statements should reconcile with the TDS payable records.
4. TDS per returns → challans
Tax reported should reconcile with tax deposited/consumed.
5. TDS default → Clause 21(b)
A default identified in the audit should not disappear merely because it has not yet appeared as a portal demand.
The precise treatment should, of course, be determined provision-wise.
Clause 34(a): do not confuse “reported” with “liable”
A return-first approach has one fundamental weakness: It cannot identify a payment which was never reported in the first place.
That is why the books should establish the initial population. For each nature of payment, the auditor should move through:
TOTAL PAYMENT / CREDIT ↓
EXCLUDE VALID NON-LIABLE ITEMS ↓
AMOUNT LIABLE ↓
NORMAL / HIGHER RATE
or
LOWER-RATE DEDUCTION ↓
TAX DEDUCTED ↓
TAX DEPOSITED ↓
CLAUSE 34
A Section 197 lower-deduction case, a valid 15G/15H case or another specifically excluded/modified case should not simply be treated as an ordinary deduction case.
The reporting treatment must follow the relevant form and section requirements.
Clause 34(b): filing is not the same as completeness
Clause 34(b) should not be reduced to: “Was the quarterly statement filed?”
The auditor should also ask: “Did the statement contain the transactions that should have been reported?”
For FY 2025-26, the regular quarterly due dates are:
| Quarter | 24Q / 26Q | 27EQ |
|---|---|---|
| Q1 | 31 July 2025 | 15 July 2025 |
| Q2 | 31 October 2025 | 15 October 2025 |
| Q3 | 31 January 2026 | 15 January 2026 |
| Q4 | 31 May 2026 | 15 May 2026 |
A Q4 statement filed on time but omitting partner remuneration credited in March 2026 is not a complete compliance merely because the filing date was met.
Clause 34(c): compute interest independently
TDS defaults generally involve two separate interest situations:
Failure to deduct → 1% per month or part
Deducted but not deposited → 1.5% per month or part
TCS has its own statutory interest provision.
The auditor should therefore compute the default from the actual dates in the books and compare the result with the available default/reconciliation information.
TRACES is a reconciliation source, not a substitute for audit judgment.
One partner-account working paper can prevent multiple errors
For a partnership firm, prepare one additional reconciliation:
PARTNER ACCOUNT ↓
CAPITAL, DRAWINGS, REMUNERATION, INTEREST
PROFIT SHARE ↓
CLASSIFY ↓
TEST 40(b) ↓
TEST 194T ↓
TDS / 26Q ↓
CLAUSE 34
This connects the partner ledger, tax computation, TDS return and tax-audit report.
The year-end sequence
The professional sequence should be:
ESTIMATE BOOK PROFIT ↓
IDENTIFY WORKING PARTNERS ↓
CHECK PARTNERSHIP DEED ↓
COMPUTE 40(b) CEILING ↓
DETERMINE REMUNERATION / INTEREST ↓
CREDIT CORRECTLY ↓
TEST 194T ↓
DEDUCT & DEPOSIT TDS ↓
FILE 26Q ↓
RECONCILE CLAUSE 34
This is tax planning with compliance built into it.
Five mistakes to avoid
1. Treating drawings as remuneration
Withdrawal does not create a deduction.
2. Treating remuneration as drawings
Its character does not disappear merely because it is subsequently withdrawn.
3. Calculating 194T from the 40(b) ceiling
TDS and deductibility are separate tests.
4. Assuming TDS makes remuneration deductible
Section 40(b) conditions continue to apply.
5. Preparing Clause 34 from the TDS return alone
The books must establish the population first.
Where the clauses should ultimately agree
For a partnership firm, the relevant chain is:
PARTNER ACCOUNT → SECTION 40(b) → SECTION 194T → FORM 26Q
→ CLAUSE 34 → CLAUSE 21
The partner information and profit-sharing details should also be consistent with the relevant disclosures in Clause 9.
A difference between these schedules should be investigated before the report is signed.
CA S.Ahuja Perspective
The professional question is not: “How much can the partner withdraw from the firm?”
It is: “What can legitimately be structured as remuneration or interest, what is merely withdrawal, what is deductible, what is subject to TDS, and how will the entire position reconcile in Clause 34?”
The entire exercise can be reduced to:
CLASSIFY → PLAN → AUTHORISE → RECORD → TEST 40(b) → TEST 194T → RECONCILE → REPORT
A partner's withdrawal is not remuneration.
A firm's remuneration is not automatically deductible.
194T TDS liability is not the same as Section 40(b) deduction.
And:
Clause 34 is not a copy of the TDS return. It is the conclusion of the books-to-return reconciliation.
For FY 2025-26, that distinction is particularly important because partner remuneration, partner withdrawals and the new Section 194T obligation now meet directly within the tax-audit trail.
