Section 43B: Deductions Allowed Only on Actual Payment – Direct and Indirect Taxes with Tax Ready Reckoner

Section 43B of the Income Tax Act, 1961 is a crucial provision that disallows certain expenses unless they are actually paid by the assessee during the previous year. This section overrides the accrual system of accounting and ensures that deductions are claimed only when payments are made.

Table of Contents

Key Features of Section 43B

Cash Basis Over Accrual Basis: Even if an expense is recorded in books on an accrual basis, it won’t be deductibleunless actually paid.
Applies to Specific Expenses: Covers statutory dues, employee benefits, and interest payments.
Due Date Extension (Proviso): Some payments are allowed if made before the due date of filing ITR.

List of Expenses Covered Under Section 43B

The following expenses are deductible only on actual payment:

EXPENSE CATEGORY	DESCRIPTION	DUE DATE FOR PAYMENT (IF NOT PAID IN FY)
1. Taxes, Duties, Cess	Any tax, duty, or cess payable to the government (e.g., GST, excise duty, customs duty).	Before ITR due date (usually July 31)
2. Employer’s Contribution to PF/ESI	PF, ESI, or any other employee welfare fund.	Due date under respective Acts (e.g., PF by 15th of next month)
3. Bonus or Commission to Employees	Any bonus, incentive, or commission payable to employees.	Before ITR due date
4. Interest on Loans from Banks/Financial Institutions	Interest on term loans, working capital loans, etc.	Before ITR due date
5. Leave Encashment	Payment for earned leave encashment.	Before ITR due date
6. Payment to Railways	Freight charges payable to Indian Railways.	Before ITR due date
7. State Govt. Guaranteed Loans Interest	Interest on loans guaranteed by State Governments.	Before ITR due date

Conditions for Deduction

Payment Must Be Made in the Same Financial Year(or by ITR due date for some expenses).
No Deduction for Unpaid Liabilities: If not paid, the expense is added back to income.
TDS Compliance: If TDS applies, it must be deducted and deposited on time.

Exceptions (Proviso to Section 43B)

Some payments (like taxes, bonus, interest) are allowed if paid before the ITR due date(usually July 31 of the next year).
Example:
- A company accrues ₹1 lakhas bonus in FY 2023-24 but pays it on July 15, 2024 (before ITR due date).
- Allowed as deduction in FY 2023-24(even though paid next year).

Practical Implications

Impact on Cash Flow: Businesses must ensure timely payment of statutory dues to claim deductions.
Tax Planning: Delay in payment beyond the due date leads to higher taxable income.
Audit & Compliance: Failure to pay may lead to disallowance and penalties.

Example Calculation

EXPENSE	AMOUNT (₹)	PAID IN FY?	DEDUCTIBLE?
PF Contribution	50,000	Yes (before due date)	✅ Yes
GST Payable	1,00,000	No (unpaid)	❌ No (added back)
Employee Bonus	30,000	Paid on July 20 (before ITR due date)	✅ Yes