Understanding Section 43B of the Income Tax Act

Section 43B of the Income Tax Act applies to individuals who earn an income under the head' Profits and Gains from Business or Profession'. As per the provisions of this section, some payments/expenses can be deducted from the business income only when they are actually paid.

Assessors 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 note that payment must be made before the due date for filing a return 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 March 31, 2024, and the due date for filing tax returns is September 30, 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 wishes to claim a deduction for this expenditure under the provisions of Section 43B, it must make the payment before September 30, 2024.
• However, if the payment is made after September 30, 2024, XYZ Limited will not be eligible for 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.

• 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 made before the due date of the return.

Understanding the timeline of the MSMED Act requires understanding the meaning of Micro and small enterprises.

• Small enterprises: These entities have an investment of less than ₹ 10 crore in plant and machinery or equipment and an annual turnover of less than ₹ 50 crore.
• Micro enterprises: They include manufacturing or service-rendering enterprises with an investment of less than ₹ 1 crore in plant and machinery or equipment and an annual turnover of less than ₹ 5 crore.

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 employees in their capacity as 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, provided that the payment is made within the specified time limit.

Leave Encashment Payment

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

Payment to Micro And Small Enterprises

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

Section 43B encourages prompt payment, but it also recognises the chances of delay. The following exceptions allow flexibility if you fulfil specific conditions.

1. You use the mercantile system

Businesses following the mercantile accounting system can claim Section 43B deductions.

2. You complete payments before the ITR due date.

Businesses that make payments before the due date of filing income tax returns under Section 139(1) can claim the deduction even if the payment wasn’t made until the end of the financial year.

3. You have sufficient proof of payments to complete your income tax forms.

You must have all the relevant documents proving that the payment was actually made. You cannot claim deductions if you don’t have supporting paperwork.

It is essential to mention the expenses disallowed under Section 43B of the Income Tax Act. If any interest liability is converted into share capital, it will not be covered by section 43B of the Income Tax Act, 1961.

It is essential to fulfil the following conditions to claim deductions under Section 43B.

Actual payment

To claim the deduction, you must make the expense payment, instead of merely booking it in your expense records.

Example: Suppose you announce a bonus for your employees on 1 March 2024, but you make the actual bonus payment on 30 April 2024. Instead of claiming the deduction in the financial year 2023-24, you will have to wait till FY 2024-24 to claim it when it’s actually paid.

Mandatory payment

Section 43B considers compulsory payments only. Optional or discretionary payments don’t qualify.

Example: Suppose you pay an employee a certain amount of commission. However, the commission isn’t mentioned in the employment contract. Section 43B does not consider such a commission as a deductible business expense, and hence, it is not eligible.

Payment before the due date

As per Section 139(1), you can claim the deduction even if you haven’t made the payment by the end of the financial year, provided you pay it before the due date for filing income tax returns.

Example: If you contribute to the Employees’ State Insurance (ESI), you must make the actual payment by the 15th of the next month. Doing so makes your payment eligible for deduction. If you delay, you miss out on the benefits of Section 43B.

Proper documentation

Documentation and clear proof of the actual payment are necessary to claim the deduction. If you don’t possess the documents, your deduction claim can be rejected. There is no provision for cash payments under Section 43B.

Example: Suppose you give your employees a cash bonus on Diwali. Since there is no valid proof supporting the payment, it is not eligible for deductions under Section 43B.

Deductions under Section 43B of the Income Tax Act are allowed to all assessees, irrespective of the accounting system they follow. Therefore, assessees who follow the accrual or mercantile system must be aware of this, as it helps them reduce their tax liability and gain benefits.

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

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