Section 43B of Income Tax Act 1961: Certain deductions to be only on actual payment

Introduction

Are you looking to understand about Section 43B of Income Tax Act 1961: Certain deductions to be only on actual payment ?

This detailed article will tell you all about Section 43B of Income Tax Act 1961: Certain deductions to be only on actual payment.

Hi, my name is Shruti Goyal, I have been working in the field of Income Tax since 2011. I have a vast experience of filing income tax returns, accounting, tax advisory, tax consultancy, income tax provisions and tax planning.

The Indian Income Tax Act 1961 provides a comprehensive framework for taxation in India. It covers various aspects of taxation, including income tax, corporate tax, and wealth tax. One of the crucial sections of this act is Section 43B, which lays down the conditions under which certain deductions can be claimed.

In this blog, we will discuss the provisions of Section 43B of the Income Tax Act 1961, which pertains to certain deductions that can be claimed only on actual payment.

Understanding Section 43B

Section 43B of the Income Tax Act 1961 lays down certain conditions for claiming deductions under various sections of the act. The section specifies that certain deductions can be claimed only on actual payment, regardless of whether the payment is made before or after the due date of filing the return.

Let us understand this with an example. Suppose you are running a business, and you have incurred expenses on rent, salaries, and other payments. You can claim deductions for these expenses under various sections of the Income Tax Act. However, as per Section 43B, you can claim these deductions only when you have made the actual payment.

Certain deductions to be only on actual payment section 43B of Income Tax Act 1961

Section 43B covers the following deductions that can be claimed only on actual payment:

1. Payment of employee contributions to welfare funds

As per Section 43B, any payment made by an employer to an employee welfare fund can be claimed as a deduction only if it is actually paid on or before the due date of filing the return.

2. Payment of taxes, duties, cess, or fees

Any taxes, duties, cess, or fees that are payable under any law can be claimed as a deduction only if they are actually paid on or before the due date of filing the return.

3. Payment of bonus or commission to employees

Any payment made by an employer to an employee as a bonus or commission can be claimed as a deduction only if it is actually paid before the due date of filing the return.

4. Payment of interest on loans or advances

Any interest paid on loans or advances taken for business purposes can be claimed as a deduction only if it is actually paid before the due date of filing the return.

5. Provision for gratuity or leave encashment

Any provision made for gratuity or leave encashment can be claimed as a deduction only if it is actually paid before the due date of filing the return.

Impact of Section 43B on taxpayers

Section 43B has a significant impact on taxpayers, especially businesses. As per the section, any deduction claimed for expenses incurred can be allowed only if the actual payment is made before the due date of filing the return.

This means that businesses need to ensure that they make all the necessary payments before the due date of filing the return to claim the deductions. Failure to do so may result in the disallowance of deductions and the imposition of penalties.

FAQs

What is Section 43B of the Income Tax Act 1961?

Section 43B of the Income Tax Act 1961 lays down the conditions under which certain deductions can be claimed only on actual payment.

What deductions are covered under Section 43B?

Section 43B covers deductions for employee contributions to welfare funds, payment of taxes, duties, cess, or fees, payment of

bonus or commission to employees, payment of interest on loans or advances, and provision for gratuity or leave encashment.

Can deductions be claimed even if the payment is made after the due date of filing the return?

No, as per Section 43B, deductions can be claimed only if the actual payment is made on or before the due date of filing the return.

What is the impact of Section 43B on businesses?

Section 43B has a significant impact on businesses, as it requires them to ensure that they make all the necessary payments before the due date of filing the return to claim the deductions. Failure to do so may result in the disallowance of deductions and the imposition of penalties.

Conclusion

Section 43B of the Income Tax Act 1961 is an essential provision that lays down the conditions under which certain deductions can be claimed only on actual payment. Taxpayers, especially businesses, need to be aware of this provision and ensure that they make all the necessary payments before the due date of filing the return to claim the deductions. Failure to do so may result in the disallowance of deductions and the imposition of penalties. Therefore, it is advisable to consult a tax professional to understand the provisions of Section 43B and comply with them to avoid any adverse consequences.

Section 43B, of Income Tax Act, 1961

Section 43B, of Income Tax Act, 1961 states that

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing , or

(da) any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or

(g) any sum payable by the assessee to the Indian Railways for the use of railway assets,

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return⁹⁹.

Explanation 1.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 2.—For the purposes of clause (a), as in force at all material times, “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.

Explanation 3.—For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3A.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3AA.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (da) is allowed in computing the income referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing ¹[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.]

Explanation 3CA.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (da), shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing ¹[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.

Explanation 3D.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance ²[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.

Explanation 4.—For the purposes of this section,—

(a) “public financial institutions” shall have the meaning assigned to it in section 4A³ of the Companies Act, 1956 (1 of 1956);

(aa) “scheduled bank” shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;

(b) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

(c) “State industrial investment corporation” means a Government company within the meaning of section 617⁴ of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of section 36;

(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;

(e) “deposit taking non-banking financial company” means a non-banking financial company which is accepting or holding public deposits and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934);

(f) “non-banking financial company” shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);

(g) “systemically important non-deposit taking non-banking financial company” means a non-banking financial company which is not accepting or holding public deposits and having total assets of not less than five hundred crore rupees as per the last audited balance sheet and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934).

⁵[Explanation 5.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.]