Section 43B income tax act, amount not deductible in respect of certain unpaid liabilities

Income tax section 43B is applicable only if the taxpayer maintain books of account on the basis of mercantile system of accounting. Deduction in respect of following expenses are allowed only if payment is made on or before the due date for furnishing return of income under section 139(1) [ in general, due date for furnishing return of income under section 139(1) is (i) where audit of books of account is compulsory under any law : 30th September of the assessment year; and (ii) in any other case : 31st July of the assessment year ] of the previous year in which such liability is incurred:

SECTION 43 INCOME TAX ACT | SECTION 43B AMOUNT NOT DEDUCTIBLE IN RESPECT OF CERTAIN UNPAID LIABILITIES | EXPENDITURES ALLOWED ON CASH BASIC SECTION 43B

(1) Any sum paid or payable [ any sum payable defined as a sum for which the taxpayer incurred liability in the previous year (PY) even though such sum might not have been paid or payable within that year under the relevant law i.e. liability must have been accrued whether falls due or not ] by way of tax, duty, cess, fee, by whatever name called, under any law for the time being in force.

(2) Any sum paid or payable as bonus or commission to employees for services rendered.

(3) Any sum paid or payable as interest on loan or borrowing from any 

• public financial institutions (i.e., IFCI, LIC, etc.);

• a State financial corporation; or

• State industrial investment corporation.

(4) Any sum paid or payable by the taxpayer as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the contact or agreement governing such loan or borrowing (for interest on any loan or borrowing):

• Systemically important non-deposit taking non-banking financial company or non-banking financial institutions means a non-banking financial company or non-banking financial institutions which is not accepting or holding public deposits and having total assets of not less than ₹ 500 crore as per the last audited balance sheet (B/S) and is registered with the Reserve Bank of India (RBI).

• Deposit taking non-banking financial company or non-banking financial institutions means a non-banking financial company or non-banking financial institutions which is accepting or holding public deposits and is registered with the Reserve Bank of India (RBI).

(5) Any sum payable as interest on any loans and advances (financial facility) from a scheduled bank or banking financial institutions or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank (PCARDBs) in consequence with the terms and conditions of the contact or agreement governing such loan or advances (financial facility).

(6) Any sum paid or payable by an employer in lieu of any leave at the credit of employee (i.e. leave encashment).

(7) Any sum paid or payable by an employer by way of contribution to any provident fund, superannuation fund, gratuity fund or any other fund for the welfare of employees.

(8) Any sum paid or payable by the taxpayer to the Indian Railways (IR) for the use of railway assets.

TAXPOINT

(1) If payment is not made before the date above-mentioned, then no allowance shall be allowed in respect of the outstanding liability. Deduction can, however, be claimed in the year of paid or payment.

(2) The method of accounting followed by the taxpayer is irrelevant.

(3) Section 43B is applicable only on those expenditure which are allowed under the provisions of this Act, if an expenditure is already disallowed under the provision of this Act, payment of such expenditure (which is allowed under the act of provisions) within time shall not be sufficient to make it an allowed expenditure. Example- Income tax paid ₹ 5,000 before due date of filing of return, is not allowed as deduction.

NOTES

(1) Section 43B is applicable only if the taxpayer is following mercantile system of accounting. However, if a taxpayer follows cash basis of accounting, deduction shall be allowed only in the year in which payment is made, even though the payment has been made on or before due date of filing of income tax return (ITR).

(2) The provision clear that “for claiming deduction, payment must be made on or before the due date of filing of income tax return” shall be applied only for the relevant previous year (PY) in which such liability is incurred. If payment is made afterwards, deduction shall be allowed in the previous year in which payment is actually made, without considering the due date of filing of income tax return (ITR).

Example: Mr. X paid professional tax ₹ 10,000 related to previous year 2015-16 on 07/05/2019. Deduction for such expenditure shall be allowed in the Previous Year 2019-20 and not in Previous Year 2018-19.

(3) Where outstanding interest on loan (taken from Banks, NBFC, PFIs, etc.) is converted into loan then such interest is not deemed as interest paid. 

(4) Where a deduction in respect of the aforesaid expenditure is allowed in an earlier year (before year) on accrual basis the same deduction will not again be allowed as deduction under this section 43B on payment basis.

(5) As per section 36(1)(va), any sum received by an employer from his employees as contribution towards provident fund, superannuation fund, any other fund set up under the provision of the Employee's State Insurance (ESI) Act, 1948 or any other fund for the welfare of such employees, is treated as employer's income. Subsequently, when such sum (employees as contribution towards provident fund, superannuation fund, any other fund) is credited by the employer to the employee’s account in the relevant fund on or before the due date of crediting such contribution or fund prescribed under the relevant Act, then deduction is allowed. If such contribution is not deposited within time allowed as per the provisions (section 43B) of the relevant Act, the deduction shall never be allowed, i.e. not now then never.