Finance (no.2) Bill 2019- clause 13 – scope of S.43B increased to cover interest payable to two types of NBFC. As per author it is time to delete S.43B- there is loss to revenue by way of income-tax due to S.43B.

[CA DEV KUMAR KOTHARI]

S.43B- to allow specified sums only in year of actual payment or as per proviso if paid within due date to file ROI:

The provision of section 43B are old and well known by most of readers, though litigations is still continuing and on some issues finality is yet to be delivered by honorable Supreme Court. Due to un-natural provision, complexity and litigation have been experienced.

Basically S.43B permit deduction for certain type of expenses only on actual payment, either in the year of actual payment or as a relief and benefit or privilege, assesse can claim deduction in the year of accrual, if it is also actually paid, though beyond the previous year, but before the due date to file ROI u/s 139.1 and furnish evidence of such payment. Therefore, claim as per proviso to S. 43B is in nature of a privilege, which assesse can choose to claim in year of accrual by exercising option under proviso or he can claim the same in year of actual payment.

Scope of S.43B has been expanded from time to time by covering more items of expenses. The proposal is to cover interest payable to two types of NBFC under S.43B. Accordingly S.43B is proposed to be amended. The result of the amendment will be similar to presently applicable provisions to other items covered by S.43B. That is interest payable to two types of NBFC shall be allowed only in the year of actual payment, with an exception to allow deduction if interest has been actually paid before due date to file ITR u/s 139 by the person paying such sum and provision are also made to avoid possibility of double deduction etc.

Whether S.43B must be in IT Act:

Honesty is best policy is in any business. Therefore, person who has to pay any money to other must be careful to make payment voluntarily and timely. In case of difficulty, he can request the payee to allow some time. This happens in business in most of cases. We find that even payments covered by S.43B, most of payments are made timely or within extended time.

However, problems arise when business is in difficulty. When there is low cash inflow than required, businessman has to see priorities. For example, when cash available is short, business man is forced to choose first to pay to employee’s salary and wages and he defer payment of sums payable to EPF. This is because he can defer those payments and pay with interest. In worst situations, even payment of salary and wages is to be deferred or partly deferred so that other things required to carry business and keep employment are in more priority.

 Even in government departments and government companies delay in payment of even contribution by way of deduction from salary and wages of employees can be noticed. Classic case can be cited about GSRTC (Gujarat State Road Transport Corporation Ltd). In case of GSRTC even contribution of employees to PF was not deposited on time. Gujarat High Court confirmed disallowance of Employees PF contribution u/s 36.1.va rws 43B. The matter is pending before the honorable Supreme Court.

In most of cases, delay occur due to difficulty in business. It has also been experienced that when difficulties are over and business is in a position to pay even old dues are paid.

In case of Dishonest persons any provision like S.43B and even provisions for penalty and prosecution may not help in recovery of sun sums. We find mounting NPA of Financial Institutions and Banks in spite of S.43B due to difficulties and also dishonesty in some cases.

Therefore, it can be said that S.43B has not at all been  helpful  in ensuring timely payment of sums covered u/s 43B.

The persons who have to receive payment should be alert and attentive to ensure that the person liable to pay is paying on time. There are  statutory provisions for recovery of sums covered u/s 43B like statutory dues for PF, tax, duty, cess and fees, contracts of Banks and FI provide for recovery and even  penal interest , law also help them in recovery of sums. Still we find that:

1. Business running smoothly are generally paying such sums regularly
2. Business not running smoothly are finding it difficult to pay such sums regularly but as and when circumstances improve, they pay arrears.
3. Dishonest people may not pay even in good times- in this case persons receiving payment must be alert and make efforts to recover and to reduce mounting arrears. However, dishonest people attract other dishonest people, there is collusion between person liable to pay and agents of person entitled to receive payment. Hence due mount and are difficult to recover. 

Therefore, it can be said that it is not function of Income-tax Act , to make provisions like S.43B with a view to ensure early recovery of sums covered under the provision.

Question are whether there should be a provision like S.43B in the Income-tax Act?

Whether, S.43B has helped in timely payment of sums covered by S.43B?

Whether, after insertion of S.43B number of instances and amount of non-payment of sums covered u/S.43B have reduced and whether S.43B was instrumental in improvement?

As per empirical studies, news reports, instances being reported etc. it cannot be said that S.43B has helped in recovery of sums covered u/S.43B.

S.43B has created lot of litigation:

S.43B has created lot of litigation. The benefit to revenue is not known. There cannot be much benefit because S.43B only defer the year of claim. In most of cases deferment is of one assessment year.

When difficulties in business is intense and delays are more than one year, deferment of deduction can be of more than one year.

We find that on this website it self number of  judgments reported on S.43B are as follows:

Supreme Court - 23 first being dated 17.02.1993 and latest being dt.21.02.2019.

High Courts: 470 first being dt. 31.03.1986 and latest dt. 25.06.2019

Tribunals:  1235  - first being dt.  24.06.1985 and latest dt. 09.07.2019       

Total numbers will be much higher because all cases are not reported on this website.

Income-tax Department is looser due to S.43B:

As observed earlier, in most of cases deduction, due to delay in payment is not deferred as it is claimed as per proviso to S.43B. Incase assesse does not avail benefit of provision for claim deduction is  deferred due to S.43B for one year or many years depending on years of delay in actual payment.

Delays are generally due to genuine difficulties, when business is in loss. In such situations, due to losses, it makes no difference whether a sum is allowed or not allowed, because even after disallowance u/S.43B there remain loss.

In case of losses, in fact S.43B helps business man because delayed payment and delayed deduction on actual payment help to reduce taxable income in subsequent years, help to improve quality of losses by increasing life of loss for carryforward due to delayed deduction loss of subsequent years is increased which has longer life of Carry forward etc.   

Therefore, honorable FM is requested to put her team to analyze benefits and losses caused by S.43B to the collection of Income-tax. To see whether S.43B has in fact achieved its purpose or just because of bureaucratic whims S.43B is continuing in the Act and scope is being increased causing more compliance cost and more need to scrutinize ROI. In absence of S.43B there will be lot of simplicity.

Similarly some other provisions and policies on litigation should be reviewed. Where the effect is only deferment of deduction, there should not be such provision and litigation for example some other provisions of S.40 and litigation about rate of depreciation, stock valuation etc.

Budget proposal etc:

Budget proposal and related notes, explanations and budget speech are reproduced below with highlights, highlighted catch words, underlining, italicizing and coloring , added by author for easy analysis and understanding:

Budget proposal:

From FINANCE (No. 2) BILL, 2019

Amendment of Section 43B.

13. In section 43B of the Income-tax Act, with effect from the 1st day of April, 2020,––

(i) after clause (d), the following clause shall be inserted, namely:––

“(da) any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or”;

(ii) after Explanation 3A, the following Explanation shall be inserted, namely:––

“Explanation 3AA.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (da) is allowed in computing the income referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.”;

(iii) after Explanation 3C, the following Explanation shall be inserted, namely:––

“Explanation 3CA.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (da), shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.”;

(iv) in Explanation 4, after clause (d), the following clauses shall be inserted, namely:––

‘(e) “deposit taking non-banking financial company” means a non-banking financial company which is accepting or holding public deposits and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934(2 of 1934);

(f) “non-banking financial company” shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934(2 of 1934);

(g) “systemically important non-deposit taking non-banking financial company” means a non-banking financial company which is not accepting or holding public deposits and having total assets of not less than five hundred crore rupees as per the last audited balance sheet and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934(2 of 1934).’.

Notes:

Clause 13 of the Bill seeks to amend section 43B of the Income tax Act relating to certain deductions to be only on actual payment.

Clause (d) of the said section provides that in case of any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, deduction of any sum payable by the assessee as interest on such borrowing, in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall be allowed only in computing the income of such borrower in the previous year in which such sum is actually paid by him.

It is proposed to amend the said section by inserting clause (da) to provide that in case of any loan or borrowing from any systemically important non-deposit taking non-banking financial company or a deposit taking non-banking financial company, deduction of any sum payable by the assessee as interest on such borrowing, in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall be allowed in computing the income of such borrower only in the previous year in which such sum is actually paid by him.

It is further proposed to insert Explanation 3AA in the said section to provide that where a deduction in respect of any sum referred to in clause (da) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

It is also proposed to insert Explanation 3CA in the said section to provide that a deduction of any sum, being interest payable under clause (da) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.

It is also proposed to define the expressions “deposit taking non-banking financial company”, “non-banking financial company” and “systemically important non-deposit taking non-banking financial company” in the said Explanation 4 to the said section.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020- 2021 and subsequent assessment years.

From Speech of FM:

NBFCs

3.2 Incentives to certain Non-banking Financial Companies (NBFCs): Presently, interest income on bad or doubtful debts made by NBFCs is charged to tax on accrual basis. However, in cases of scheduled banks, public financial institutions, state financial corporations, state industrial investment corporations, cooperative banks and certain public companies like housing finance companies, interest on bad or doubtful debts is charged to tax on receipt basis. To provide a level playing field, it is proposed that interest on bad or doubtful debts in the case of deposit-taking NBFC and systemically important non deposit-taking NBFC shall be charged to tax on receipt basis. It is also proposed to provide that deduction of such interest shall be allowed to the payer on actual payment.

From Memorandum:

Incentives to Non-Banking Finance Companies (NBFCs)

The existing provisions of section 43D of the Act, inter-alia provides that interest income in relation to certain categories of bad or doubtful debts received by certain institutions or banks or corporations or companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account actually received, whichever is earlier. This provision is an exception to the accrual system of accounting which is regularly followed by such assessees for computation of total income. The benefit of this provision is presently available to public financial institutions, scheduled banks, cooperative banks, State financial corporations, State industrial investment corporations and public companies like housing finance companies. With a view to provide a level playing field to certain categories of NBFCs who are adequately regulated, it is proposed to amend section 43D of the Act so as to include deposit-taking NBFCs and  systemically important non deposit-taking NBFCs within the scope of this section. Consequentially, as per matching principle in taxation, it is proposed to amend section 43B of the Act to provide that any sum payable by the assessee as interest on any loan or advances from a deposit-taking NBFCs and systemically important non deposit-taking NBFCs shall be allowed as deduction if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent years. [Clauses 13 & 15]