Section 43B- Deductions Allowed only on Actual Payment -Profits and Gains of Business and Profession

Section 43B-Deductions Allowed only on Actual Payment

Under Section 43B, some of the Expenses are allowed and can be claimed by the Assessee only in the year in which the payment is actually made for computing income under the head Business and Profession.

Notwithstanding anything contained in any other provisions of Income-tax Act, in respect of certain  expenditure/ payments, the deduction is allowed (irrespective of the previous year to which the liability to pay  such sum was incurred by the assessee according to method of accounting regularly employed by him) only if the  amount has been actually paid during the previous year. However, in case an assessee follows mercantile system  of accounting, the payments covered in items No. 1 to 6 in the chart below can be claimed on ‘due’ basis as well,  provided the payment for the same is made within the stipulated period mentioned against each expenditure:

Nature of Expense Stipulated time period
1.  Any sum payable by way of tax, duty, cess or fee, by whatever name called,  under any law for the time being in force. Due amount should be paid on  or before the due date of  furnishing the return of income  u/s 139(1) in respect of the  previous year in which the  liability to pay such sum was  incurred.

However, in cases (1) to (8), if  the payment of outstanding  liability is made after the due date, deduction can be claimed in the year of payment.

2.  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.
3.  Any sum payable to an employee as bonus or commission for services  rendered.
4.  Any sum payable by the assessee as interest on any loan or borrowing from  any public financial institution or State Financial Corporation or State Industrial  Investment Corporation like IDBI, IFCI, UPSIDC, Delhi Financial Corporation,  etc. in accordance with the terms and conditions of the agreement governing  such loan or borrowing.
5. Any sum payable by the assessee as interest on any loan or borrowing from a deposit-talking NBFCs and systematically important non-deposit-talking NBFCs in accordance with the terms and conditions of the agreement governing such loan or borrowing . [Clause (da) inserted w.e.f A.Y. 2020-21]
6.  Any sum payable by the assessee as an employer as interest on any loan or advance from a schedule bank or a co-operative bank (other than a primary agricultural credit society or primary co-operative agricultural and rural development bank) in accordance with the terms and conditions of the agreement governing such loan.
7. Any sum payable by the assessee an employer in lieu of any leave at the credit of his employee.
8. Any sum payable by the assessee to the Indian Railways for the use of  railway assets.

Payment by employer of employee’s contribution to a fund on or before due date  [Explanation 5 inserted under section 43B] [W.e.f. A.Y. 2021-22]

Section 43B has been amended by inserting Explanation 5 to the said section to clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of section 2(24)(x) apply. Hence, any sum deducted by the employer as employee’s contribution to a fund shall be allowed as deduction if the same is deposited by the employer on or before the due date mentioned in the respective Acts.

1.         Presently, payment of interest on any loan/borrowing from a public financial institution, state financial  corporation or state industrial development corporation and interest on any loan/advance from a scheduled  bank is allowed as a deduction from business income, when such interest is actually paid. Explanation 3C  and 3D have been inserted by the Finance Act, 2006 to section 43B to provide that where such interest is  converted into a loan, borrowing or advance and is not paid, interest so converted will not be treated as  having been actually paid, and accordingly, will not be allowed as a deduction from business income.

2.         It may be noted that the provisions of section 43B are applicable only in respect of employers contribution  to provident fund, ESI, etc. Employee’s contribution to provident fund, ESI, etc. shall be allowed as  deduction only when the payment of the same is made on or before the due date mentioned under the  respective welfare Acts. If the employee’s contribution to such fund is paid after the due date under the  respective Acts, the deduction for such payment made by the employer shall not be allowed under section  36(1)(va).

See also  Compulsory Tax Audit of Accounts [Section 44AB] – Profits and Gains of Business and Profession
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