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Section 43B – Deductions on Actual Payments

Last Update Date : August 13, 2018

section 43b of the income tax act

Section 43B of the Income tax act, 1961 states that certain statutory expenses are allowed to be claimed in the year of payment only. It disallows the sum which is not paid in the financial year or at least before the due date of filing tax return while computing income under the head “Profits and Gains of business or profession”.

This section in short deals with certain types of payments and directs the assessee to claim such payments as an expense in the same assessment year when it was actually paid and not in the year in which the liability to pay such sum was incurred.

Deductions Allowed on Actual Payments

In case an assessee follows the mercantile system of accounting, the payments stated below can be claimed on the due basis, provided the payment for the same is made within the stipulated period mentioned against each expenditure.

Types of Payments Eligible for Deduction

1. Payment of tax:

Any sum payable by the assessee by way of tax, duty, cess or fee and all other types of taxes paid to government by whatever name it is called under the law.

2. Contribution towards employee benefits:

Sum payable by the employer (assessee) to the employee towards contribution to welfare funds such as provident fund, gratuity or superannuation fund.

3. Commission/Bonus:

Any sum payable by the employer to the employee as bonus or commission as payment for the services rendered.

4. Interest on loans borrowed:

  • The sum payable as interest on loan borrowed. This includes loan borrowed by the assessee from public financial institution/state financial corporation/state industrial investment corporation like IDBI, IFCI, UPSIDC, Delhi Financial Corporation, etc… In accordance with the terms and conditions of the agreement.
  • It should be noted that payment of interest on loan borrowed by the assessee from public financial institution/state financial corporation/state industrial investment corporation like IDBI, IFCI, UPSIDC, Delhi Financial Corporation, etc. and on Interest on loan taken from a scheduled bank shall be allowed as deduction from business income only when such interest is actually paid.

5. Interest on loan or advance:

Interest charges payable by the assessee on loan or advance taken from a scheduled bank in accordance with the terms and conditions under the agreement.

6. Leave encashment:

Sum paid by the employer to the employee towards encashment of the leave balance.

7. Payments made to Indian Railways:

  • Payments made by the assessee to the Indian Railways is allowed to be claimed as an expense as and when the payment is made from financial year 2016-17.
  • In case the payments are paid after the due date of furnishing return of that year, then such expenditure is allowed in the year in which it is actually paid.

Let’s say, an expense is disallowed under section 43B for FY 2016-17 and is actually paid in April 2018. Since this expense is actually paid in April 2018, deduction will be allowed in AY 2019-20. Here it is not allowed in AY 2018-19 even when it is paid before due date of filing return of AY 2018-19.

Exceptions

The assessee can deduct the payment made under accrual system of accounting under certain conditions as stated below:

  • The assessee follows the mercantile system of accounting while recording books of accounts.
  • All the payments must be made on or before the due date of submission of ITR.
  • The evidence of all payments made must be submitted by the assessee while filing of Income Tax return.

What is the Stipulated Time Period for making Payments?

Payment must be paid on or before the due date of furnishing the return of income under section 139(1) in respect of the previous year in which the liability to pay such sum was incurred. But in case of payment of taxes and payment made in case leave encashment the payment of outstanding liability is made after the due date then deduction can be claimed in the year of payment only.

Details Provided in the Audit Report Form 3CD

Form 3CD is a statement showing relevant particulars and if a person is liable for the tax audit, then he has to mandatorily display the details about all the payments mentioned under section 43B in the Audit report in form 3CD.

Case Laws

  • Good Luck kinetic v/s ITO 2013 Goa- Disallowance under section 43B can be made even when the income is computed on presumptive basis.
  • CIT Vs. McDowell and Co. Ltd.- Furnishing of bank guarantee cannot be equated with actual payment for the purpose of this section
  • Jet Lite (India) Ltd. Vs. CIT- This section is attracted only when the expense is charged to Profit & Loss account.

Frequently Asked Questions

1. Whether expenditure covered under Sec.43B can be claimed as a deduction in the Year of payment, although it is an expenditure of a subsequent year?

Ans: Section 43B requires that specific items listed that are eligible for deduction may be allowed only on payment in the year of payment. But where such payment is made in advance, it can be allowed in the year of payment, though the amount is deductible in normal circumstances under the law in the year in which it is booked as an expenditure. As long as the payment is for an admissible item of expenditure it is deductible, irrespective of the year to which it relates to as long as it is paid during the year.

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