Section 43B: expenses allowed only when actually paid (as set, 1961 Act, AY 2022-23)

Purpose of the section

Under the mercantile system an expense is deductible in the year it is incurred, even if unpaid. Many businesses claimed taxes, duties and employees' dues as expenses but did not pay them for years. Section 43B stops this: for the expenses it lists, the deduction is allowed only in the previous year in which the sum is actually paid, whatever the year in which the liability arose and whatever the method of accounting.

The expenses covered

1. taxes, duties, cesses and fees of every kind payable under any law (section 43B(a));
2. the employer's contribution to a provident fund, superannuation fund, gratuity fund or other fund for the welfare of employees (section 43B(b));
3. a sum referred to in section 36(1)(ii): bonus or commission paid to an employee for services rendered, where it would not otherwise have been payable to him as profits or dividend (section 43B(c));
4. interest on a loan or borrowing from a public financial institution, a State financial corporation or a State industrial investment corporation, under the loan agreement (section 43B(d));
5. interest on loans and advances from scheduled banks and from co-operative banks, except that primary agricultural credit societies and primary co-operative agricultural and rural development banks are left out, payable under the terms of the agreement governing the loan or advance (section 43B(e));
6. a sum payable by an employer for leave at an employee's credit (leave encashment) (section 43B(f));
7. a sum payable to the Indian Railways for using railway assets (section 43B(g)).

When the deduction is allowed

• General rule: in the year of actual payment.
• Relief: a sum incurred in a year and paid after its end, but on or before the due date for the return of that year under section 139(1), is allowed in the year it was incurred, provided proof of payment goes with the return (proviso to section 43B).
• Late payment: paid after that due date, it is allowed only in the year in which it is actually paid.

Points to note

1. Interest under clause (d) is deductible only if actually paid; interest converted into a loan or borrowing is not deemed to have been actually paid (Explanation 3C to section 43B). The same holds for clause (e) interest converted into a loan or advance (Explanation 3D to section 43B).
2. The section covers only expenses otherwise deductible; it does not make a non-deductible expense deductible.

Example

Example (our own): a manufacturer's accounts for 2021-22 include employer's provident fund dues of ₹60,000 for March 2022 and a bank loan interest of ₹90,000 for the year. He pays the provident fund dues on 15 May 2022 and the interest on 10 October 2022; his return is due on 31 October 2022. Both are paid by the due date, so both are allowed for 2021-22. Had he paid the interest on 15 November 2022, it would be allowed only for 2022-23.