Section 43B of the Income Tax Act specifies certain expenses that can be claimed as deductions under the head ‘Income from Business and Profession’. It states that some expenses are deductible only in the year they are actually paid, and not in the year the liability to pay arises.
In our earlier discussion on Deductions under Section 36, we covered various deductions available from business or professional income. This section focuses on expenses that are allowable only upon actual payment. In other words, these deductions are based on payment, not accrual.
However, if an assessee wishes to claim such deductions in the previous year when the liability arises, the payment must be made on or before the due date for filing the return of income under Section 139(1) for that year. When submitting the income tax return, proof of such payment can be provided to claim the deduction in the same year in which the liability was incurred.
Budget 2024 Update
Effective from FY 2023–24: Any amount payable by an assessee to a micro or small enterprise that remains unpaid beyond the time limit prescribed in Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, will not be allowed as a deduction.
Note: This provision applies only to micro and small enterprises; medium enterprises are excluded.
Definition of Micro and Small Enterprises:
- Micro Enterprises: Enterprises engaged in manufacturing or providing services with an investment in plant, machinery, or equipment of less than ₹1 crore and an annual turnover below ₹5 crore.
- Small Enterprises: Enterprises with an investment in plant, machinery, or equipment below ₹10 crore and an annual turnover under ₹50 crore.
Time Limit as per Section 15 of the MSMED Act, 2006
According to Section 15, when a supplier provides goods or services to a buyer, payment must be made within:
- The agreed period, which cannot exceed 45 days from the date of delivery, if a written agreement exists.
- 15 days from the date of delivery, if there is no written agreement and the buyer does not raise any objection.
Example:
If Mr. Ankit, an employer, pays the Provident Fund (PF) for his employees in August 2023, pertaining to March 2023, he can claim this deduction for the financial year ending March 2023, provided he submits proof of payment while filing his return in September 2023. However, if he makes the payment in October 2023, the deduction will be allowed in the year ending March 2024.
Deductions Specified Under Section 43B
The following expenses are eligible for deduction under Section 43B of the Income Tax Act, 1961:
- Taxes, Duties, Cess, or Fees:
Any tax, duty, cess, or fee paid under any prevailing law is allowed as a deduction only when it is actually paid. This includes GST, customs duty, or any other statutory taxes or cesses. Interest paid on such taxes is also eligible for deduction. - Employer’s Contribution to Employee Welfare Funds:
Contributions made by an employer to recognized employee welfare funds, such as Provident Fund (PF), Superannuation Fund, or Gratuity Fund, are deductible if paid on or before the due date for deposit of such funds or the due date of filing the income tax return, whichever is earlier. - Bonus or Commission to Employees:
Actual bonus or commission payments made to employees are allowed as deductions. However, this does not include any amount distributed as dividends to shareholders. - Interest on Borrowings from Public Financial Institutions or State Financial Corporations:
Interest payable on loans or advances from such institutions is deductible, provided it complies with the terms and conditions of the loan agreement. - Interest on Loans and Advances from Scheduled Banks:
Interest paid on borrowings from scheduled banks is deductible if it follows the conditions under which the loan was granted. - Leave Encashment to Employees:
Any amount paid by an employer to employees as leave encashment is allowable as a deduction upon actual payment. - Payments to Indian Railways:
Any amount paid to the Indian Railways during the financial year is also eligible for deduction. - Payments to Micro and Small Enterprises:
Any sum payable to micro or small enterprises that remains unpaid beyond the time limit specified under Section 15 of the MSMED Act, 2006, is not deductible until it is actually paid.
It is important to note that conversion of interest (as mentioned in points 4 and 5) into a loan or advance does not qualify as payment for deduction purposes. Therefore, for taxpayers maintaining accounts on a mercantile basis, understanding these provisions is crucial to ensure eligibility for the specified deductions under Section 43B.
FAQs on Section 43B of the Income Tax Act, 1961
1. Is TDS included under Section 43B?
No, TDS is not included in Section 43B. The section deals with expenses that can be claimed as deductions only upon actual payment. TDS, on the other hand, is not an expense but a tax deducted on behalf of the deductee and deposited with the government. Therefore, TDS cannot be claimed as a deductible expense under Section 43B.
2. Is NPS covered under Section 43B?
Yes, Section 43B allows deductions for contributions made by an employer towards employee welfare funds, including the National Pension System (NPS), Employee State Insurance (ESI), and the Labour Welfare Fund, provided such contributions are paid before the due date of filing the income tax return.
3. Can expenses under Section 43B be claimed on advance payment?
Yes. Section 43B permits deductions based on actual payment. Therefore, if an expense is paid in advance and the payment is genuine, it can be claimed as a deduction under this section.
4. What is Section 43B of the Income Tax Act?
Section 43B pertains to the head ‘Income from Business and Profession’ and specifies that certain statutory and other business expenses can be claimed as deductions only when they are actually paid, regardless of the year in which the liability arises.
5. What is the latest amendment in Section 43B?
As per the Finance Act, 2023, any payment due to Micro or Small Enterprises under the MSMED Act, 2006 must be made within the time limit prescribed in Section 15 of the Act. If not paid within that time, such payments cannot be claimed as a deduction under Section 43B.
6. Does Section 43B apply to GST payments?
Yes. GST payments are covered under Section 43B. Any GST liability, including input tax reversals or output tax payable, can be claimed as a deduction only in the year it is actually paid to the government.
7. Is employer’s contribution to Provident Fund covered under Section 43B?
Yes. The employer’s contribution to recognized employee benefit funds such as the Provident Fund (PF), Superannuation Fund, or Gratuity Fund qualifies for deduction under Section 43B, provided it is paid before the due date for filing the income tax return under Section 139(1).
8. Does Section 43B apply to interest on loans?
Yes. Interest on loans or advances taken from public financial institutions, state financial corporations, or scheduled banks is covered under Section 43B. The deduction is allowed only when the interest is actually paid and not merely accrued.
9. Are leave encashment payments covered under Section 43B?
Yes. Any leave encashment amount paid by an employer to an employee is eligible for deduction under Section 43B, but only in the year of actual payment.
10. Can a taxpayer claim deduction if the payment is made after the end of the financial year?
Yes. If the expense listed under Section 43B is paid after the end of the financial year but before the due date for filing the income tax return under Section 139(1), the deduction can still be claimed for that financial year.
11. Are payments made to Indian Railways covered under Section 43B?
Yes. Any payment made to Indian Railways during the year is allowed as a deduction under Section 43B upon actual payment.
12. What happens if interest is converted into a loan?
If the interest due to a bank or financial institution is converted into a loan, it is not considered as payment. Hence, such conversion does not qualify for deduction under Section 43B.
