Section 43B - Certain deductions on actual payment basis - Income Tax - Ready Reckoner - Income Tax

Section 43B : Certain deductions on actual payment basis Notwithstanding anything contained in any other provisions of the Income Tax Act, a deduction otherwise allowable under the Act in respect of Clause a. any tax, duty, cess or fee, by whatever name called, payable under any law for the time being in force, or Clause b. employer s contribution to provident fund, gratuity fund or any other fund for the welfare of the employees, or Clause c. any bonus or commission payable to the employees, or Clause d. interest payable on any loan or borrowing from any public financial institution or a State Financial Corporation or State Industrial Investment Corporation like IDBI, IFCI, UPSIDC, Delhi Financial Corporation, etc., or Clause da. interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, [such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf, Amended by FA, 2023 ] in accordance with the terms and conditions of the agreement governing such loan or borrowing , or, Clause e. interest payable on any LOAN or ADVANCE from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; or Clause f. leave encashment payable to employees ; or Clause g. any sum payable by the assessee to Indian Railways for the use of railway asset; or Clause h any sum payable by the assessee to a micro or small enterprise beyond the time-limit specified in section 15 of the MSME Development Act, 2006 Section 15 of the MSME Development Act, 2006 mandates payments to micro and small enterprises within the time If there is written agreement, which cannot be more than 45 days. If there is no such written agreement , the section mandates that the payment shall be made within 15 days. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSME Development Act, 2006. If the sum payable by the assessee to a micro or small enterprises is paid as per written agreement (maximum within 45 days) or within 15 days of no agreement, the deduction can be claimed on accrual basis if mercantile of accounting is followed by the assessee. If the sum payable by the assessee to a micro or small enterprises is not paid as per written agreement or within 15 days in case of no agreement, the deduction would be allowed in the previous year in which it is actually paid. Meaning of Micro and Small enterprises New definition of an enterprise shall be classified as a Micro, Small or Medium enterprise on the basis of Investment in plant and machinery or equipment and turnover, w.e.f. 01.07.2020, amended by RBI Notification (RBI/2020-2021/10 FIDD.MSME NFS.BC.No.3/06.02.31/2020-21) . Micro Enterprises Investment in plant and machinery or equipment does not exceed ₹ 1 crore rupees and Turnover does not exceed ₹ 5 crore; Small enterprises Investment in plant and machinery or equipment does not exceed ₹ 10 crore rupees and Turnover does not exceed ₹ 50 crore. Verification of MSME Registration Certificate - Go to - MSME Registration site ( https://udyamregistration.gov.in ) Go to - Print/ verify - click on verify udaym registration number; or click on this inke https://udyamregistration.gov.in/Udyam_Verify.aspx . [ Inserted by FA 2023 ] shall be allowed as deduction only in the previous year in which such sum is actually paid by him. This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting employed by him. Nothing contained in this section except the provisions of clause (h) shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. Conversion of interest a loan or borrowing or debenture or any other instrument Explanation 3C, 3CA 3D clarifies that if any sum payable by the assessee as interest on any such loan or borrowing or advance refereed to in (d), (da) and (e) above, is converted into a loan or borrowing or advance or any other instrument by which the liability to pay is deferred to a future date, the interest so converted and not actually paid shall not be deemed as actual payment, and hence would not be allowed as deduction. The clarificatory explanations only reiterated the rationale that conversion of interest into a loan or borrowing or advance or debenture or any other instrument by which the liability to pay is deferred to a future date does not amount to actual payment. Amendment made by Finance Act. 2022 The Finance Act, 2022 has amended, w.e.f. AY 2023-24 Explanation 3C, Explanation 3CA and Explanation 3D of section 43B to provide the conversion of interest payable under clause (d), Clause (da), and Clause (e) of section 43B , into debenture or any other instrument by which liability to pay is deferred to a future date, shall also not be deemed to have been actually paid. The manner in which the converted interest will be allowed as deduction has been clarified in Circular no. 7/2006 dated 17.07.2006. The unpaid interest, whenever actually paid to the bank or financial institution, will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, irrespective of the nomenclature, the deduction will be allowed in the previous year in which the converted interest is actually paid. Clarification on Non-applicability Payment by employer of employee's contribution to a fund on or before due date [ Explanation 5 inserted u/s 43B ] [ W.e.f. AY 2021-22 ] To clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provision of sec 2(24)(x) applies. Hence, any sum deducted by the employer as employee's contribution to a fund shall be allowed as deduction if the same is deposited by the employer on or before the due date mentioned in respective Acts. The deduction in respect of above sum will be allowed to the assessee u/s 36(1)(va) only if such sum is credited by the assessee to the employee's account in the relevant fund on or before the due date , being the date specified under the relevant act. As per section 43B, any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, would be allowable during any P.Y. if the same has been paid or before the due date applicable in his case for furnishing the return of income u/s 139(1) in respect of that P.Y. Meaning of Important Term ' co-operative bank' 'primary agricultural credit society' and 'primary co-operative agricultural and rural development bank shall have the meaning u/s 80P(4) . 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 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 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 ₹ 500 crore 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. Notes: The provisions of section 43B shall not apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) in respect of the previous year in which liability to pay such sum was incurred by the assessee. Where interest payable under clause (d) or (e) of section 43B is converted into a loan or advance or borrowing then it shall not be deemed to have been actually paid. If interest payable is converted in Funded Interest Term Loan (FITL), then deduction shall be allowed to FITL to the extent it is paid. Bank guarantee does not amount to actual payments. Bottling fees of liquor is not covered by section 43B . Electricity charges payable to State Govt. is not covered by section 43B since it is not tax, duty, cess or fee . Where sales tax due to the Government is converted as loan to be repaid by the assessee subsequently by installments, it would amount to actual payment of sales tax.