Section 43B: deductions allowed only on actual payment (as set, 1961 Act, AY 2019-20)

Purpose of the section

A business that keeps mercantile accounts would normally deduct an expense in the year it is incurred, whether or not it is paid. Section 43B overrides that rule for certain sums which businesses tended to claim but not pay, such as taxes and employees' dues: whatever the method of accounting, they are deductible only in the year of actual payment, subject to the relief for payment by the return due date.

Sums covered

The section applies to the following sums payable by the assessee (section 43B(a) to (g)):

1. tax, duty, cess or fee of any kind payable under a law in force (for example customs duty or municipal taxes);
2. the employer's contribution to a provident fund, superannuation fund, gratuity fund or any other fund for the welfare of employees;
3. bonus or commission paid to employees for services, the sum referred to in section 36(1)(ii);
4. interest on a loan or borrowing from a public financial institution, a State financial corporation or a State industrial investment corporation, under the terms of the loan agreement;
5. interest on a loan or advance from a scheduled bank, or from a co-operative bank (primary agricultural credit societies and primary co-operative agricultural and rural development banks excepted);
6. leave encashment payable by an employer to an employee in lieu of leave at his credit;
7. any sum payable to the Indian Railways for the use of railway assets.

When the deduction is allowed

• Rule: the sum is allowed in computing business income of the previous year in which it is actually paid, even if the liability arose in an earlier year.
• Relief (proviso): a sum paid after the end of the year but on or before the due date for filing the return of that year under section 139(1) is allowed in the year in which the liability arose, provided proof of payment is furnished with the return.
• Paid later still: a sum paid after that due date is allowed only in the year of payment.
• For taxes, a sum payable includes one for which the liability arose in the year even if the law did not require payment within that year (Explanation 2).

Example (our own figures)

A trader whose accounts close on 31 March 2019 provides for bonus of ₹2,00,000 and municipal taxes on his shop of ₹50,000 for 2018-19. The return is due on 31 July 2019. He pays the municipal taxes on 20 April 2019 and the bonus on 30 November 2019. The ₹50,000 of taxes is allowed for 2018-19, being paid by the due date; the ₹2,00,000 bonus is disallowed for 2018-19 and allowed for 2019-20, the year in which it is paid.