Section 43B in Income Tax Act

Section 43B Income Tax Act Amendment - Budget 2024

This amendment is applicable to any sum payable by the assessee to a micro or small enterprise beyond the time limit specified under section 15 of the MSMED Act, 2006. This clause only applies to micro and small enterprises, while medium enterprises stay out of the purview of this act.

Time Limit under Section 15 of the Income Tax Act

As per section 15 of the MSMED Act 2006, if any supplier provides goods or services to a buyer, then the buyer should make payment on or before the date agreed upon.

If there is a written agreement, then the maximum period allowed is 45 days from the date of delivery of goods or services.

If there is no written agreement and the buyer does not raise any objection, then the maximum period will be 15 days from the date of delivery.

Section 43B of Income Tax Act - Meaning

Section 43B of the Income Tax Act, 1961, is a provision that specifies certain expenses that can be deducted from the income from business and profession only when they are actually paid by the assessee. These expenses include tax, duty, cess, fee, interest, employee's benefit fund contribution, bonus, commission, leave encashment, and payment to Indian Railways. The deduction is allowed in the year of payment or before the due date of filing ITR for that year, whichever is earlier. This section is applicable while computing income under the head PGBP (Profits and gains of business or profession), expenses only.

• ABC Corporation's accounting year ends on March 31st, and the due date for filing its income tax return for the financial year 2023-24 (Assessment Year 2024-25) is September 30th, 2024.
• Let's say ABC Corporation makes a contribution of ₹1,00,000 towards EPF for its employees for the financial year 2023-24 (April 1st, 2023, to March 31st, 2024).
• If ABC Corporation pays this contribution before September 30th, 2024, it can claim a deduction for this contribution in the financial year 2023-24 itself. However, if the payment is made after September 30th, 2024, ABC Corporation won't be able to claim this deduction for the financial year 2023-24, but it can claim it in the subsequent financial year when the payment is made.
• This example illustrates the importance of timely payment of certain expenses to claim deductions under Section 43B of the Income Tax Act.

What are the Expenses Covered Under Section 43B?

Section 43B is applicable for certain expenses that are allowed only if dues are paid within the time limit specified in The Income Tax Act. :-

Below is the list of expenditures:

• Contributions to Employee Welfare Funds: Contributions made by the employer to employees' PF and ESI funds and other welfare funds can be claimed as a deduction on the actual payment basis.
• Statutory Dues: Any tax, cess, duty, or fee shall be claimed on actual payment basis.
• Bonus and Commission: Any Bonus and commission payable to employees are allowed as a deduction under section 43B of the Income Tax Act. However, the bonus and commission should have been paid before the due date of filing the income tax return.
• Leave Encashment: Any payment made to the employee for unutilized leaves balance can be claimed as a deduction. However, Payment should have been paid before the due date of filing the ITR.
• Interest on Loans: Interest paid for any loan or borrowing from Scheduled Bank, Public Financial Institutions, State Financial Corporation or State Industrial Investment Corporation is allowed as a deduction if paid on or before the due date of ITR filing.
• Payment to Indian Railway: Amount payable to the Indian Railways for the use of Railways Assets.
• Payment to Micro or Small Enterprises: Any Amount payable to Micro or Small Enterprises shall be allowed as a deduction in the same year only if paid within the time limit specified by the MSMED Act, 2006. (Added as per Finance Act, 2023)
• All expenditures stated above shall be allowed as a deduction if payment is made within the timeline specified by the Act.

What are the Conditions for Claiming Deductions U/S 43B?

Given below are ethe conditions that you need to fulfill to avail of the the deductions under section 43B of the Income Tax Act -

• Payment has been actually made: To claim deduction under section 43B, there must be a payment that was actually paid and not just accrued for that year. For example, if the employer announces a bonus for an employee and the employee has not been paid until the next financial year. Then the amount to be paid can not be claimed for deduction for the first year.
• Payment must have been made before the due date: The payment must have been made on or before the due date specified under referred law. For example, the due date for ESI contributions is the 15th of every month.
• Payment must be compulsory: Payment made by the employer must be a mandate and not optional. For example, any commission paid by the employer to his employee should be part of the employment contract.
• Payment must be evidentiary: Payment made by the employer or individual must be in written documents; payment made in cash can not be claimed as a deduction under section 43B.

What are the Exceptions under Section 43B of the Income Tax Act?

Individuals who pay taxes can claim deductions under Section 43B of the Income Tax Act by adhering to an accrual-based accounting system. However, to maximize these deductions, certain conditions must be met. For instance:

• If the taxpayer opts for a mercantile accounting system.
• When all expenses are settled either prior to or by the deadline for submitting income tax returns.
• Taxpayers must provide substantial evidence of all payments when filing income tax returns.

It's important to note that converting interest liabilities into share capital is not covered by Section 43B of the Income Tax Act. Additionally, taxpayers should be aware that this section does not apply to payments made on or before the due date for filing income tax returns under Section 139(1) of the Act.

Section 43B of the Income Tax Act talks about the expenses that can be allowed as deductions from the income earned from business and profession. However, this deduction is only allowed on the expenses actually paid and not on the expenses accrued. If you are someone who has income from a business and profession head and want to maximize your tax savings by claiming as many deductions as possible, you can hire a tax professional to guide you through your taxes and also help with the e-filing of income tax returns.

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