Section 43B is a provision under the Income Tax Act, 1961, which governs how certain expenses are deducted from business income. Unlike the usual practice where expenses are deducted when liability is incurred, Section 43B requires these expenses to be paid before they can be claimed as deductions. This applies specifically to businesses and professions under the "Profits and Gains of Business or Profession" (PGBP) head, aiming to ensure that only actual expenditures are considered for tax purposes.
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Detailed Analysis of Section 43B of Income Tax Act, 1961
The deduction of specific expenses from business income is governed by Section 43B of the Income Tax Act, 1961 emphasizing actual payment over accrual. This section ensures that businesses and professionals follow a payment-based deduction system for specific statutory and employee-related expenses.
Scope and Applicability
Section 43B applies to businesses and professions, which makes sure that deductions for specified expenses are contingent upon actual payment. It does not extend to individuals or entities not engaged in business or professional activities under PGBP. The section is designed to promote fiscal discipline, ensuring that statutory and employee-related obligations are met timely, with recent amendments further emphasizing support for micro and small enterprises (MSMEs).
Conditions for Deduction
To claim a deduction under Section 43B of Income Tax Act, the payment must be made on or before the due date for filing the income tax return for the relevant assessment year. If paid after this date, the deduction shifts to the year of actual payment. This rule applies to businesses using the mercantile system of accounting, where expenses are typically recorded when incurred.
List of Covered Expenses
The section enumerates a comprehensive list of expenses subject to its payment-based deduction rule, including:
Act, 2006, witStatutory Dues: Any tax, duty, cess, or fee levied by the Union, State, or local authorities, such as Goods and Services Tax (GST), customs duty, and other statutory levies, including interest on these dues.
Employee Welfare Contributions: Payments to funds for employee welfare, such as provident fund (PF), Employees' State Insurance (ESI), superannuation fund, and gratuity fund, which must be paid before the due date for deposit or the income tax return filing, whichever is earlier.
Bonus and Commission: Payments to employees by way of bonus or commission for services rendered, provided they are not dividends and are paid before the return due date.
Interest on Loans: Interest payable on loans or borrowings from specified entities, including public financial institutions, state financial corporations, state industrial investment corporations, and scheduled banks, as per the terms of the loan agreement, with payment required before the return due date.
Leave Encashment: Payments which are made by employers to employees in lieu of leave at their credit, deductible only upon actual payment.
Payments to Indian Railways: Any sum payable for the use of railway assets, ensuring compliance with infrastructure-related obligations.
Payments to Micro and Small Enterprises: Introduced by the Finance Act, 2023, this includes sums payable to MSMEs registered under the Micro, Small, and Medium Enterprises Development h deductions allowed only if paid within the stipulated time limits (15 days without a written agreement, 45 days with one).
Conditions for Claiming Deductions
To guarantee compliance, the deduction given under Section 43B of Income Tax Act, 1961 is subject to strict requirements :
Payment Timing: The expense must be actually paid, not just accrued to align with the cash basis for these specific deductions.
Due Date Compliance: Payment must be made on or before the due date for furnishing the return of income under Section 139(1) of the Income Tax Act, 1961, for the previous year in which the liability was incurred. For instance, for the financial year 2023-24 (assessment year 2024-25), the due date is typically September 30, 2024, for non-audit cases.
Compulsory Nature: In order to be eligible for a deduction, the payment must be compulsory, such as part of an employment contract or statutory requirement.
Documentary Evidence: Taxpayers must maintain substantial evidence of payments, with cash payments generally not deductible, emphasizing the need for formal banking transactions.
Recent Amendments and MSME Provisions
Section 43B was significantly updated by the Finance Act, 2023, particularly concerning MSMEs, reflecting the government's emphasis on supporting small businesses. The amendment stipulates:
MSME Definitions: Micro, Small and Medium Enterprises are defined as those entity with investment in plant and machinery or equipment less than Rs.1 crore and annual turnover less than Rs.5 crore. Small enterprises have limits of Rs.10 crore in investment and Rs.50 crore in turnover.
Time Limits for Payment: Under Section 15 of the MSMED Act, 2006, payments to MSMEs must be made within 15 days if there is no written agreement, or within 45 days if there is one, from the date of delivery.
Deduction Rules: If payments surpass these limits, the remaining amount will not be deductible under Section 43B until actually paid which raises the tax payer's taxable income and tax obligation.
Practical Examples and Illustrations
In order to elucidate the application of Section 43B, consider the following examples:
Example 1 - PF Contribution: ABC Corporation, with a financial year ending March 31, 2024, has a PF contribution liability of ₹1,00,000 for the year. If paid by September 30, 2024 (the due date for filing the return for assessment year 2024-25), it can claim the deduction for the financial year 2023-24. If paid in October 2024, the deduction shifts to the financial year 2024-25.
Example 2 - Statutory Dues: A business owes ₹50,000 in GST for March 2024. If paid in April 2024 before the return due date, it is deductible in 2023-24. If paid in October 2024, it is claimed in 2024-25.
Example 3 - MSME Payment: A company has a ₹2,00,000 payable to an MSME supplier, with a 45-day agreement. If it is not paid within this period and outstanding by the return due date, it will be added to taxable income until paid resulting in increased tax liability.
Exceptions and Disallowances
Certain scenarios are excluded from Section 43B's purview:
Interest Conversion: Interest liabilities converted into share capital or loans are not considered payments, affecting mercantile basis accounting and disallowing deductions.
TDS and Advance Payments: Tax deducted at source (TDS) is not covered, as it is not an expense but a tax payment. However, advance payments for covered expenses can be claimed under Section 43B.
NPS Contributions: Contributions to the National Pension System (NPS) are included as employee welfare funds, deductible under Section 43B if paid timely.
Disallowances include payments to MSMEs beyond the MSMED Act, 2006, Section 15 due date, and any expense not meeting the payment and documentation criteria.
Comparative Analysis with Other Sections
Compared to Section 36 which deals with the general deductions under Profits and Gains from Business and Profession while Section 43B is specific to payment-based deductions, complementing the broader framework.
Section 139(1) governs due dates of return filing and is integral to Section 43B as it sets the deadline for claiming deductions, highlighting the interconnectedness of these provisions.
Summary
Section 43B of the Income Tax Act, 1961 ensures fiscal discipline in taxation and focuses on the payment for deductions. Its coverage of statutory dues, employee welfare and recent MSME provisions underscores its role in supporting economic stability and compliance. It becomes important for the taxpayers to navigate the conditions carefully, leveraging examples and updates in order to optimize tax planning and meet legal requirements.
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Section 43B of Income Tax Act: FAQs
Q1. What is right time to claim a deduction for expenses under Section 43B?
Deductions can be claimed only if the expense is paid on or before the due date for filing the income tax return for the relevant financial year, as specified under Section 139(1). If paid later, the deduction is allowed in the year of actual payment.
Q2. How does the MSME amendment under Section 43B affect businesses?
Introduced by the Finance Act, 2023, payments to micro and small enterprises must be made within 15 days (without a written agreement) or 45 days (with an agreement) as per the MSMED Act, 2006. If not paid within these limits, the amount is not deductible until actually paid, increasing taxable income.
Q3. What happens if I miss the payment deadline for an expense covered under Section 43B?
If the payment is made after the due date for filing the return, the deduction cannot be claimed in the year the liability was incurred. Instead it is allowed in the financial year when the payment is actually made impacting tax planning and cash flow.
Q4. Are there any exceptions to the payment requirement under Section 43B?
Generally, actual payment is mandatory, but advance payments for covered expenses can be claimed. However, converting interest into loans or share capital is not considered payment, and tax deducted at source (TDS) is excluded from Section 43B as it is not an expense.
