Section 43B of Income Tax

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Section 43B of Income Tax

The income tax provisions allow businesses to deduct expenses incurred in connection with the business from the profits and gains earned during the year. Taxpayers following the cash system of accounting deduct the expenses when they are actually paid.

On the contrary, those who follow the mercantile system claim the deduction on an accrual basis. However, as per section 43B of income tax, certain payments are allowed as deductions only on the basis of payment, irrespective of the accounting system followed by the assessee.

In this article, we shall discuss the expenses allowed under section 43B, the amendment, the conditions for claiming them, etc.

What is Section 43B of the Income Tax Act?

Section 43B of the Income Tax Act is applicable for those who earn an income under the head profits and gains from business and profession. As per the provisions of this section, some payments/expenses can be deducted from the business income only when they are actually paid.

Assesses can claim a deduction of these expenses in the year of payment or the due date of filing the return, whichever comes first. However, it is essential to know that the payment must be made before the due date of filing a return if one wants to claim the deduction.

To better understand the provisions of the Income Tax Act, let us understand section 43B of the Income Tax Act with an example:

  • XYZ Limited is a company whose accounting year ends on 31st March 2024, and the due date for filing tax returns is 30th September 2024.

  • Suppose the company makes a payment towards the Employee Provident Fund amounting to ₹1,00,000 for the FY 2023-2024 (April 2023- March 2024).

  • If the company wants to claim a deduction for this expenditure under the provisions of section 43B, it must make the payment before 30th September 2024.

  • However, if the payment is made after 30th September 2024, XYZ Limited will not get a deduction for this expense for the FY 2023-24. In such a case, the company can claim the deduction in the next financial year, 2024-25.

Amendment to Section 43B of Income Tax: Budget 2024

  • As mentioned above, only those expenses are allowed as deductions under section 43B, which have been paid before the date of filing the return. However, there is an exception to this provision, which was introduced in the Budget 2024.

  • As per the amendment, if payments to Micro and Small Enterprises are not made within the time specified under section 15 of the MSMED Act (15 days and 45 days), those payments will not be allowed as a deduction under section 43B even if the payment is before the due date of the return.

Expenses Covered Under the Purview of Section 43B

Under section 43B, the following will be allowed as deductions from the business income, provided the payment is made on or before the due date of filing the return:

Statutory Payments

Statutory payments made in the form of cess, duty or tax are allowed as a deduction only when they are actually paid. It also includes GST payments and any interest paid on such payments.

Contribution towards Employee Benefits

All employer contributions to employee benefits, such as provident fund, gratuity, superannuation, etc., must be made before the due date for filing a return or before the due date for depositing the funds to claim a deduction.

Commission or Bonus to Employees

It means an actual bonus or commission paid to employees. It does not include dividends payable to the employees in the capacity of shareholders.

Interest on Loans/Advances

Interest paid on loans taken from public financial institutions, state corporations, scheduled banks, etc., can be claimed as a deduction if the payment is made on or before the due date of filing returns.

Paying the Indian Railways

Any payment made to the Indian Railways for using their assets can also be claimed under the provisions of section 43B, given that the payment is made within the time limit.

Leave Encashment Payment

If the business makes a payment to an employee in lieu of his unutilised leaves, the payment shall qualify for deduction provided it is made on or before filing the return.

Payment to Micro And Small Enterprises

Amounts paid to micro and small businesses shall be allowed as a deduction from the business gains if they are made within the timeline specified under the MSMED Act, 2006.

It is essential to mention that if any interest liability is converted into share capital, it will not be covered by section 43B.

Conclusion

Deductions under section 43B of income tax are allowed to all assesses irrespective of the accounting system they follow. Therefore, assesses who follow the accrual or mercantile system must be aware of the same as it helps them to reduce their tax liability and gain benefits.

One must also keep in mind that deductions are allowed when payments are made on or before filing the return, except in the case of Micro and Small Enterprises.

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Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

Is TDS covered under section 43B?

Is TDS covered under section 43B?

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No, TDS does not qualify for deduction under section 43B as it is a deduction on behalf of the deductee and not an actual payment or expense for the business.

What are the conditions for claiming a deduction under section 43B?

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The conditions for deduction under section 43B are as follows: Actual payment must be made. The payment must be compulsory. The payment must be done before the on or before the due date. One must prove the payment. No cash payments will be allowed as deductions.

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