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 Sudame otherwise 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 or (wef A.y 2018-19 from a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development 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.
g) Any sum payable to Indian Railways for the use of railway Assets (wef A.y 2017-18)-Section 43B to include certain payments made to Railways
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. However no annexure is possible with the new ITR forms. Such evidence should be maintained by the assessee and produced to Assessing officer as and when needed.
Overview Analysis of clauses
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.
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.Employees’ PF/ ESI Contribution not covered by Section 43B
Then what about Employees‘ contribution?
Sec. 2(24)(x) states as under:
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, 1948 (34 of 1948), or any other fund for the welfare of such employees ;
other deductions :Sec 36(1)(va):
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.
Explanation.—For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise;
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 income 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.
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‘.
As per the provisions of Sales Tax Act, sales tax deferred under any incentive plan (and treated as loan) shall be deemed to have been actually paid so as to meet the requirements of sec 43B of the Income Tax Act
Conversion of outstanding interest liability into share capital is not hit by the provisions of section 43B.
(Republished with amendments)