Deduction of certain liabilities only on actual payment

The rule (section 37(1), formerly section 43B)

Under the mercantile system an expense is allowed when it is incurred, even if unpaid. For certain sums the Act overrides this: they are allowed only in the tax year in which they are actually paid, whatever the method of accounting and whatever the year in which the liability arose. The rule applies only to sums that are otherwise allowable as a deduction under the Act; it does not make any other payment deductible. The rule stops businesses from claiming deductions for statutory dues and employee benefits that they then leave unpaid.

Sums covered (section 37(2))

1. any tax, duty, cess, surcharge or fee levied under any law (for example GST, customs duty, municipal tax);
2. the employer's contribution to a provident fund, superannuation fund, gratuity fund or other employees' welfare fund;
3. bonus or commission to employees for services rendered, where it would not otherwise have been payable to them as profits or dividend (section 32(a));
4. interest on loans, advances or borrowings from specified financial entities, as per the agreement governing them. These are public financial institutions, State Financial Corporations, State Industrial Investment Corporations, non-banking financial companies of a class notified by the Central Government, scheduled banks, and co-operative banks, except a primary agricultural credit society and a primary co-operative agricultural and rural development bank (section 37(7));
5. leave encashment payable by the employer;
6. sums payable to the Indian Railways for the use of railway assets; and
7. sums payable to a micro or small enterprise beyond the time limit of section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (the day agreed in writing, which cannot be more than 45 days after acceptance; 15 days where there is no agreement).

Payment by the due date of the return (section 37(3))

A sum (other than item 7) that is paid after the end of the tax year but on or before the due date of filing the return for that year is allowed in that same year. If it is paid after the due date, it is allowed in the year of payment. A payment to a micro or small enterprise beyond the statutory time limit is allowed only in the year of payment, even if made before the due date of the return.

Other provisions

1. Interest converted into a fresh loan or other instrument that defers payment is not treated as actually paid (section 37(4)).
2. A sum allowed in the year the liability arose is not allowed again when paid (section 37(5)).
3. For a tax, duty, cess or fee, the sum payable covers a liability incurred in the tax year even where the law under which it is levied does not make it payable within that year (section 37(8)).
4. The rule does not apply to a sum the employer receives from employees as their own contribution to any of the funds referred to in section 2(49)(o): a provident fund, a superannuation fund, a fund under the Employees' State Insurance Act, 1948 or any other employees' welfare fund (section 37(6)). Such a sum is income of the employer (section 2(49)(o)) and is deductible if it is credited to the employee's account in the relevant fund on or before the due date of filing the return of income under section 263(1) for the tax year (section 29(1)(e), as substituted by Finance Act, 2026, section 39).

Illustration (our own)

A trader whose return is due on 31 October 2027 has the following unpaid at 31 March 2027: GST of ₹80,000 (paid on 20 April 2027), a bonus of ₹1,50,000 (paid on 15 November 2027) and ₹60,000 owed to a small supplier beyond 45 days (paid on 10 May 2027). For tax year 2026-27 the GST is allowed; the bonus is allowed only in 2027-28; the supplier's ₹60,000 is allowed only in 2027-28, the year of payment.