Section 43B of Income Tax Act: Types of Payments & Exceptions

Section 43b of Income Tax Act 1961 deals with various payments and directs that taxpayers can claim as an expense in the same assessing year when it was paid. In simple words, taxpayers are only permitted to claim statutory expenses under the section only in the year of payment and not in the year of its accrual.

The next segment will comprehend the different types of payment and exceptions under Section 43b of Income Tax Return.

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What is Section 43b of Income Tax Act?

Under Section 43b of Income Tax Act, while assessing the expenses under the head PGBP (Profits and Gains of Business or Profession), taxpayers can only raise claims in the year of payment. It deals with specified modes of payments by taxpayers and directs them to claim payments as expenses in the same assessment year and not in the year it was incurred as an expense.

Here is an example for a comprehensive understanding.

Suppose Mr A, an owner of a logistics firm, bought a motorcycle for courier services in August 2022. This purchase is subject to an actual expense or payment in March 2023. Mr A can file a deduction claim for the year ending March 2023 as evidence while filing ITR. In case Mr A paid the amount in October 2022, the deduction will be available for the year ending March 2023.

What Are the Types of Payments Under Section 43b Where the Provisions Apply?

There is a wide range of payments under Section 43b where the provisions apply. They are-

1. Tax Payments to the Government

Any sum payable by assesses as tax, duty, cess, or fee under any law in force is permitted as a deduction while making payments. It includes customs duties, GST or any other form of taxes or cesses paid. Moreover, the interest payable on these taxes is eligible for deduction.

2. Contribution in Interest of Employees Benefits

It is the sum an employer pays to employee benefit funds such as gratuity, provident funds, retirement funds and more.

3. Bonus or Commission Payable to Employees

The assessee pays bonuses or commissions to employees against their services provided during a financial year. Moreover, the amount should be a real bonus or commission and not dividends payable to them as shareholders.

Note: Any commission payment under an agent and a principal relationship is not a part of Section 43b.

4. Interest Payable on Loans and Advances

It refers to the sum payable as interest on existing loans and other credit products borrowed from public or state financial institutions or state industrial investment organisations as per the terms and conditions of the agreement.

5. Interests Payable on Loans Taken from Bank

Any sum is payable as interest on loans and advances taken from a scheduled bank as per terms and conditions under an agreement.

Note: Except for the primary agricultural credit society, the scheduled bank can be a cooperative or a primary cooperative agricultural and rural development bank.

6. Leave Encashment of Employees

It is the employer’s sum to the employee towards encashment of their leave balance.

7. Payment to Indian Railways

Any amount taxpayers paid to the Indian Railway can be claimed as an expense while making the payment.

8. Sums payable to MSMEs

As per new amendments in the Finance Act 2023, deductions for MSME payments to be allowed on payment basis.

What Are the Exceptions Under Section 43b of Income Tax Return?

Taxpayers opting for an accrual-based accounting system are eligible to claim deductions under Section 43b of Income Tax Act but against a few conditions. They are-

The assessee should maintain a book of accounts on a mercantile basis.
The expense payment should be cleared on or before the due date of filing an Income Tax Return.
While filing Income Tax returns, the assessee has to submit evidence of the payment. Besides, it is permissible to attach proof as an annexure along with the new form of Income Tax return. Therefore, the assessee needs to present them to the assessing officer for the assessment process.

In addition, there are a few expenses that are disallowed under Section 43b of income tax act. They are-

Interest profits specified in ‘Interest Payable on Loans and Advances’ and ‘Interests Payable on Loans Taken from Bank’, if not paid and converted into loan or advance, then deductions are not allowed under Section 43b. Such interest is only allowed in the year in which the converted loan is paid. This is worth noting for individuals who run businesses or professions and maintain their books on a mercantile basis.
It is imperative to note that conversion of interest liability into share capital is disallowed under Section 43b of income tax act. Taxpayers should also note that Section 43b does not cover contributions made on or before the due date of income tax return submission under section 139(1) of Income Tax Act.

FAQs about Section 43B of Income Tax Act

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Is TDS covered under Section 43b?

No, TDS is not included and cannot be claimed as a deduction under Section 43b of Income Tax Act. It is a tax deducted on behalf of the deductee and deposited in the Government’s treasury, and thus it is not an expense.

Does Section 43b cover PF and ESI?

Yes, Section 43b applies only if the employers contribute to PF and ESI. Additionally, employees’ contribution is also a deduction if paid on or before its due date as per the respective welfare Acts.