7 Income Tax Expenses allowed only on Payment Basis- Section 43B

Section 43B : Income Tax allows two type of accounting- Cash basis and mercantile basis (accrual basis). Generally, most assessees opt for mercantile system on accounting and book all the expenses on accrual basis but there are some particular expenses which are allowed to be deducted from income only if they have actually paid them.

As per section 43B of Income Tax Act, 1961, the assessee who maintains the book of accounts on Mercantile system are allowed to take certain deductions of expenses only on Payment basis.

Lets take an example of GST Late fee. Mr BabaTax has to pay Rs 50,000 GST Late fee for the whole year (ACCRUAL BASIS) but he has paid only Rs 40,000 (CASH BASIS). So he would be allowed to deduct only Rs 40,000 from income of Previous Year while computing Income.

List of Expenses allowed on Payment basis

1. Tax, duty, cess or fee

Any sum payable by the way of tax, duty, cess or fee is allowed as expense only on actaual payment. It means any charges charged due to enforcement of LAW or ACT, or payable due to LAW or ACT.

Example, GST Late Fee, Export Duty, Import Duty, excise duty, etc.

2. Payment to Indian Railway

Deduction for amount Payable to INDIAN RAILWAY for services provided by them is allowed only on payment basis. It was added to the list with a view to ensure the prompt payment of dues to Railways for use of the Railway assets.

Read Also: Income Tax Rate For AY- 2020-2021/ FY- 2019-2020

3. Contribution to Employee Benefits

Employer’s Contribution to Provident Fund, Superannuation fund or any fund payable for staffs is allowed as expense only on actual payment. (Employer-Employee relation must be present)

Example, Every Year Company A contributes in provident fund Rs 2,00,000. If till the end of Financial Year Company A did not make the payment. Rs 2,00,000 will not be allowed as deduction from the company’s Income. However, if company made the contribution before the due date for furnishing the return of income, the sum will be allowed as deduction.

4. Bonus or Commission payable to Employee.

The amount should be the actual bonus/ commission paid to employees and not dividends payable to them as shareholders.

Read Also: Income tax on dividend income in India for AY 2020-21

5. Leave Encashment

Leave encashment provided by an employer to his employees is allowed only when it is actually paid. 

6. Interest on loan or borrowing

Interest on loan or borrowings in accordance with the conditions governing such loan taken from-

1. Public Financial Institution. (eg HDFC,ICICI)
2. State Financial Corporation.
3. State industrial investment corporation.

Read Also: No Tax Audit on showing Income @ 50% of Gross Receipts

7. Interest on loan or advances

Interest on loans and advances from Scheduled Bank in accordance with the conditions governing such loan or advances taken from:

1. A Scheduled Bank.
2. A Co-operative Bank. (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank)
3. Deposit-taking Non-Banking Financial Corporation.
4. Systemically Important Non-Deposit NBFC.

Note: For the removal of any doubts, it has been clarified that a deduction of any sum being interest payable under point 6 or point 7, 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

Time Limit of Payment

All the above-mentioned expenses must be paid on or before the due date of furnishing Income Tax Return relating to the previous year in which the expenditure was incurred.

If payment paid after “Return Filing last date” then deductions are available in the year in which payment is made.

Read Also: Declare Income only 8% of turnover – Section 44AD Of Income Tax Act, 1961

Exception of Section 43B

The exception is applicable if the following three conditions are satisfied:

1. Assessee keeps books of accounts on mercantile basis.
2. Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of incom.
3. The evidence of such payment is submitted along with return of income. However no annexure is possible with the new ITR forms. Such evidence should be maintained by the assessee and produced to Assessing officer as and when needed.

Read Also: Income from business of plying, hiring or leasing goods carriages – Section 44AE of Income Tax, 1961

Example

Let us assume, if Company BabaTax has to pay 50,000 GST Late fee for the whole year (ACCRUAL BASIS). Assuming FY 2019-2020 and Return filing last date is 31^st January 2021

CASE 1- Paid 50,000 on 4^th January 2021-

Whole Rs 50,000 will be allowed as a deduction in FY 2019-2020.

CASE 2- Paid 50,000 on 4^th February 2021-

Whole Rs 50,000 will be allowed as a deduction in FY 2020-2021.

CASE 3- Paid 10,000 on 4^th January 2021 and 40,000 on 4^th February 2021-

Rs 10,000 will be allowed as deduction in FY 2019-2020 and Rs 40,000 allowed as a deduction in FY 2020-2021.

Read Also: 5 common bank transactions mistakes to avoid in tax return

The author of the above article is Aditya Kishore.

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