Section 43B in Income Tax Act, 1961

Section 43B of the Income Tax Act provides a list of expenses allowed as deductions under the heading ‘Income from business and profession’. It states that some expenses can be claimed as deductions from business income only in the year of actual payment and not in the year when the liability to pay such expenses is incurred.

In our previous article, Deductions u/s 36, we discussed what kinds of deductions are available from income derived from business or profession. In this article, we shall look at what expenses are deductible only on actual payment being made. We can also say that the deduction is on payment and not on an accrual basis. However, for the purpose of claiming deductions in the relevant previous year in which the expenditure is incurred, the above sums have to be paid by the assessee on or before the due date for furnishing the return of income under section 139(1) in respect of the previous year in which the liability to pay such sum was incurred. When filing the returns, the assessee can show the proof of making such payment and claim the deduction in the same year (in which the amount was accrued).

Budget 2024 update

Applicable from FY 2023-24: any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. 

Note: This clause applies only to micro and small enterprises; medium enterprises are outside the ambit of this clause.

Before understanding the time specified in the MSMED Act, let’s understand the meaning of Micro and small enterprises:

Micro Enterprises: Any Manufacturing enterprise or enterprise rendering Services with an investment in Plant and Machinery or Equipment less than Rs.1 crore and an Annual Turnover of less than Rs. 5 crore. 

Small Enterprises: Investment in Plant and Machinery or Equipment less than Rs.10 crore and Annual Turnover is less than Rs. 50 crore 

Time limit prescribed in Section 15 of the MSMED Act

Section 15 of MSMED Act, 2006 provides where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment on or before the date agreed upon between him- If a written agreement exists maximum period allowed is 45 days from the date of delivery of goods or services. If no written agreement exists and no objection is raised by the buyer then the period would be 15 days from the date of delivery of goods or services.

For example, Mr. A, an employer, has paid the provident fund (PF) that is due to be paid by him to his employees in the month of August 2023. This amount of PF pertains to the month of March 2023. In this case, he can claim this deduction for the year ending March 2023 itself by showing a proof of this while filing his return in September 2023. If Mr. A pays this amount in October 2023, this deduction will be available for the year ending March 2023.

Deductions Specified under Section 43B

The following deductions are specified in this section

• Any tax, duty, cess or fee paid under any law in force is allowed as a deduction when it is paid- this includes GST, customs duty or any other taxes or cesses paid. Interest paid on these taxes are also eligible for deduction.
• Contribution to any recognized employee’s benefit fund: contribution by the employer to any employee’s benefit fund namely PF fund, superannuation fund, gratuity fund before the due date for depositing those funds or before the due date of filing income tax returns
• Bonus or commission payable to employees- this amount should be the actual bonus/ commission paid to employees and not dividends payable to them as shareholders.
• Interest on borrowings from Public Financial Institutions or State Financial Corporation in accordance with the conditions governing such loan
• Interest on loans and advances from Scheduled Bank in accordance with the conditions governing such loan
• Leave encashment provided by an employer to his employees
• Payment to Indian Railways
• Any sum payable to the Micro and small enterprises beyond the time-limit specified under the Section 15 of the MSMED Act.

When the interests mentioned in clauses 4 and 5 have been converted into a loan, such conversion does not amount to payment of interest, which is deductible. Therefore, for any person having income from business or profession maintaining his accounts on a mercantile basis, it is important to know the above provisions; otherwise, he may not be entitled to these deductions.