In income tax, certain deductions are permitted only upon actual payment, irrespective of the method of accounting followed by the assessee. Section 43B of the Income Tax Act, 1961, enforces this principle, ensuring that taxpayers claim deductions only when the corresponding payments are made. This section primarily targets specific liabilities such as taxes, interest, and employee benefits.
Understanding Section 43B
Section 43B overrides other provisions of the Income Tax Act and allows deductions only when payments are actually made. This section applies to the following expenses:
Taxes, Duties, Cess, or Fees – Any sum payable under any law, including GST, excise duty, customs duty, or professional tax.
Employer’s Contributions – Contributions to Provident Fund, Superannuation Fund, Gratuity Fund, or any other employee welfare fund.
Bonus and Commission to Employees – Any sum payable to employees as per the employment contract.
Interest on Loans from Financial Institutions – Interest payable on loans from public financial institutions, state financial corporations, and state industrial investment corporations.
Interest on Loans from NBFCs – Interest payable on loans from certain specified non-banking financial companies (NBFCs) as notified by the Central Government.
Interest on Loans from Scheduled and Cooperative Banks – Interest payable on loans and advances from scheduled banks or cooperative banks (excluding primary agricultural credit societies and primary cooperative agricultural and rural development banks).
Leave Encashment – Any sum payable by an employer for leave encashment to employees.
Payments to Indian Railways – Any sum payable for the use of railway assets.
Payments to Micro and Small Enterprises (MSMEs) – Any amount payable to micro or small enterprises beyond the time limit specified under Section 15 of the MSME Development Act, 2006.
Key Provisions of Section 43B
Deduction Based on Actual Payment: Deduction is allowed only in the year in which the payment is actually made.
Exception for Payments Made Before Return Filing Due Date: If the assessee makes the payment on or before the due date of filing the income tax return under Section 139(1), the deduction is allowed in the year in which the liability was incurred.
No Deduction for Deferred Payments: If a liability is converted into a loan, debenture, or any other deferred payment instrument, it is not considered as actually paid.
Explanation and Illustrations
Example 1: Payment of GST
A company incurs a GST liability of ₹5,00,000 for the financial year 2023-24 but pays it on June 15, 2024 (before the return filing due date of July 31, 2024). Since the payment was made before the due date of return filing, the deduction will be allowed for the financial year 2023-24.
Example 2: Interest on Loan from a Bank
A business has an interest liability of ₹2,00,000 payable to a scheduled bank for FY 2023-24. However, it converts this interest into a fresh loan instead of making an actual payment. As per Explanation 3D of Section 43B, since the interest has not been actually paid, the deduction will not be allowed.
Importance of Section 43B
Prevents Tax Evasion: Ensures that deductions are not claimed without making the corresponding payments.
Encourages Timely Payments: Promotes timely tax payments, employer contributions, and loan interest payments.
Supports MSMEs: By enforcing timely payments to micro and small enterprises, this section aids in their financial stability.
Compliance and Best Practices
Maintain Proper Documentation: Keep records of payments made to avail deductions under Section 43B.
Ensure Timely Payments: Make payments before the due date of filing the income tax return to claim deductions.
Consult a Tax Professional: Seek professional guidance to comply with Section 43B and optimize tax benefits.
Conclusion
Section 43B plays a crucial role in ensuring tax compliance and preventing undue tax benefits. By mandating actual payment as a prerequisite for deductions, it promotes financial discipline among businesses and individuals. Taxpayers must be vigilant in making timely payments to maximize their deductions and avoid unnecessary disallowances.
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