Section 43B of the Income Tax Act

Section 43B of the Income Tax Act, 1961 governs how certain expenses such as tax, duty, and employee benefits incurred by businesses and professionals can be deducted from their taxable income. Deductions are permissible in the year of payment or before the due date of income return filing, whichever is earlier.

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What is Section 43B of the Income Tax?

Section 43B of the Income Tax Act, 1961 deals with deductions allowed under the head "Income from business and profession." It specifies certain expenses that can be claimed as deductions only in the year of actual payment, not in the year the liability to pay arises. This differs from the usual accounting practice of accrual accounting, where expenses are recognised in the period they are incurred, regardless of when they are actually paid. The sum owed to Micro and Small Enterprises can be deducted for the current year if paid within the timeframe given by The MSME Act.

What are the Deductions Specified Under Section 43B?

Section 43B of the Income Tax Act specifies various deductions under specific conditions. The allowable deductions include:

  1. Payment of Taxes, Duties, Cess, or Fees:

    Any tax, duty, cess, or fee paid under any applicable law is deductible when paid. This includes GST, customs duty, or any other taxes or cesses. Additionally, the interest paid on these taxes is also eligible for deduction.

  2. Contribution to Recognized Employee Benefit Funds:

    Contributions made by the employer to recognised employee benefit funds such as the Provident Fund, superannuation fund, and gratuity fund are deductible. This should be done before the due date for depositing those funds or before the due date of filing income tax returns.

  3. Bonus or Commission Payable to Employees:

    The actual bonus or commission paid to employees is eligible for deduction. However, this does not include dividends payable to them as shareholders.

  4. Interest on Borrowings from Public Financial Institutions or State Financial Corporations:

    Interest on loans from Public Financial Institutions or State Financial Corporations is deductible, subject to the conditions governing such loans.

  5. Interest on Loans and Advances from Scheduled Banks:

    Similarly, interest on loans and advances obtained from Scheduled Banks is deductible, following the conditions governing such loans.

  6. Leave Encashment by an Employer to Employees:

    Leave encashment provided by an employer to employees is eligible for deduction.

  7. Payment to Indian Railways:

    Payments made to Indian Railways are allowed as a deduction.

    It is important to note that if the interests mentioned in clauses 4 and 5 are converted into a loan, such conversion does not amount to payment of interest that is deductible. Therefore, individuals with income from businesses or professions maintaining accounts on an accrual accounting basis should be aware of these provisions to ensure entitlement to these deductions.

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What are the Expenses that are Covered Under Section 43B?

The following are the types of expenditures covered under Section 43B:

  1. Statutory Dues:

    Any tax, cess, duty, or fee is eligible for deduction based on actual payment.

  2. Contributions to Employee Welfare Funds:

    Deductions can be claimed on the actual payment basis for contributions made by the employer to employees' Provident Fund, Employee State Insurance (ESI), and other welfare funds.

  3. Bonus and Commission:

    Deductions are allowed for bonuses and commissions payable to employees, provided these payments are made before the due date of filing the income tax return.

  4. Leave Encashment:

    Payments made to employees for unutilised leave balances are deductible, but the payment must be made before the due date of filing the Income Tax Return (ITR).

  5. Interest on Loans:

    Interest paid on loans or borrowings from Scheduled Banks, Public Financial Institutions, State Financial Corporations, or State Industrial Investment Corporations is deductible if paid on or before the due date of ITR filing.

  6. Payment to Indian Railway:

    Amounts payable to the Indian Railways for the use of Railway Assets are covered under Section 43B.

  7. Payment to Micro or Small Enterprises (Added as per Finance Act, 2023):

    Any amount payable to Micro or Small enterprises is allowed as a deduction only if paid within the time limit specified by the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.

What are the Conditions for Claiming Deductions Under Section 43B?

To claim deductions under Section 43B of the Income Tax Act, taxpayers must fulfil specific conditions. Here are the key conditions:

  • Payment has been actually made: To qualify for a deduction under Section 43B, the payment must have been actually made during the relevant financial year and not merely accrued. For instance, if an employer declares a bonus for an employee, but the payment is delayed and occurs in the next financial year, the amount cannot be claimed as a deduction for the first year.

  • Payment must have been made before the due date: The payment should be made on or before the due date specified under the relevant law.

  • Payment must be compulsory: The payment made by the employer must be mandatory and not optional. For instance, any commission paid by the employer to an employee should be a part of the employment contract, making it a compulsory payment.

  • Payment must be evidentiary: Payments made by the employer or individual must be supported by written documentation. Payments made in cash cannot be claimed as deductions under Section 43B. Proper evidence, such as bank transactions or receipts, is essential for claiming the deduction.

FAQ's

  • Are TDS payments included under Section 43B?

    No, TDS is not eligible for deduction under Section 43B as it is not considered an expense; rather, it is a tax deducted and must be deposited with the government.
  • What is the most recent amendment to Section 43B?

    According to the 2023 Finance Act amendments, payments to Micro and Small businesses registered under the MSME Act, are not deductible if not made by the due date specified in Section 15 of the MSMED Act, 2006.
  • Can expenses listed in Section 43B be claimed for advance payments?

    Section 43B encompasses expenses claimable upon actual payment, and this includes advance payments in accordance with the provisions of the section.
  • What does Section 43B disallow?

    Section 43B disallows sums not paid within the financial year and also those not settled before the due date for filing income tax returns.
  • What is the timeframe specified for Section 43B?

    The recent Finance Bill, 2023 allows deductions for payments to Micro and Small Enterprises (MSEs) in compliance with Section 43B only if paid within the time limit outlined in Section 15 of the MSMED Act 2006. Therefore, deductions can be claimed for payments to MSE vendors within 15 days where no other agreement is in place.

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