Section 43B – Deductions only on Actual Payments

In computation of income under the head Profits and gains of business or profes­sion (PGBP), some of the expenses are allowed under Income Tax Act 1961 and can be claimed by the assessee only in the year in which the payment is actually made.

As per Section 43B

Notwithstanding anything contained in any other provision of this Act*, a deduction Sudameotherwise 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);

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;

c)     any sum payable as bonus or commission to employee for services rendered;

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;

e)     any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advanc­es;

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

shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the as­sessee.

*  ‘Notwithstanding anything contained in any other provisions of this act‘ denotes that section 43B overrides all the sections in Income Tax Act, 1961.

Exception- When deductible on accrual basis

The exception is applicable if the following three conditions are satisfied:

1. Assessee keeps books of accounts on mercantile basis
2. Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of income under sec 139(1)
3. The evidence of such payment is submitted along with return of income.

Overview Analysis of clauses

Clause (a)

It is of significance to remember that Sec 43B is applicable in case of tax, duty, cess or fee only when such items are paid under statute to pay under a particular law. This has been the most debatable issue and it is advised to refer most of the case laws which can solve this debate.

Clause (b)

Previously, Employer‘s contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund. Now these condi­tions have been deleted by Finance Act 2003 and such contributions are allowed as deduc­tions if same has been deposited within the due date of filing return under sec 139(1).

It is worth noting that S.43B is applicable only to Employer‘s contribution and is not applicable to Employees‘ contribution.

Then what about Employees‘  contribution?

Sec. 2(24)(x) states as under:

Income includes:

^-any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees‘ State Insurance Act, or any other fund for the welfare of such employees^.

Sec..36(1)(va):

deduction shall be allowed for any sum received by the assessee from any of his employ­ees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee‘s account in the relevant fund or funds on or before the due date.

Note: Here Due Date means date by which assessee is required as an employer, to credit an employees‘ contribution to the employees‘ account in relevant fund.

Explanation: The reason why the employees‘ contribution is treated as income is because employer‘s con­tribution is debited to profit and loss account while employees‘ contribution is not debited to profit and loss account but is treated as liabilities and provisions. So, in simple words, for in come tax act purpose, employees‘ contribution is treated as business income u/s 2(24)(x) and deduction is made from such income u/s 36(1)(va) if the contribution is paid within the due date of such contribution.

Clause (c)

It is worth noting that Sec 43B is applicable when bonus or commission is payable to employ­ees only when some services are rendered by the employees. This means that there must be an establishment of Employer-Employee relationship between the employer and the employee. This item is referred in section 36(1)(ii). In other words if commission is paid to an agent, Sec 43B is not applicable as here there is an Agent-Principal relationship.

Clause (d) and Clause (e)

Previously certain courts held that if assessee is not able to pay interest on loans from institu­tions mentioned above, and as part of restructuring such institutions converts this interest in­to loan (such concept is known as Funded Interest Term Loan [FITL]), then it shall be deemed that such interest has been actually paid for the purpose of section 43B and deduction shall be allowed in the year in which such conversion is affected.

To nullify such practices, Section 43B was amended (vide Circular No 7/2006 dated 07-07- 2006 ) by Finance Act 2006 inserting therein two clarificatory Explanations namely; Explana­tion 3C and Explanation 3D the contents in simple words are as follow:

^-If any sum payable by an assessee as interest on any loan is converted by the financial insti­tution into a fresh loan, the interest so converted and not ^‘actually paid‘, shall not be deemed as ^‘actually payment‘

The converted interest (FITL) in wake of its conversion into a loan, will be eligible for de­duction in the computation of income of the previous year in which the converted interest is ^‘actually paid‘.

(republished with amendments)