As per the norms of Income Tax Act, 1961, when the income is generated under the head of profits and gains of business or profession (PGBP), individuals can claim certain payments as an expense. However, specific guidelines bind such a tax provision. To gain valuable insight into the limitations and applicability of the same individuals can check out the provision of Section 43B of Income Tax Act.

What is Section 43B?

Section 43B of Income Tax Act is concerned with profits and gains of business or profession PGBP. This provision states that individuals can claim certain payments as expenses; however, they can do so in the year it was paid and not in the year it was incurred. In other words, a few statutory payments can be claimed as expenses in the year of payment itself.

For instance, Suppose Karim owns a café, and he purchased an oven for his business in July 2018. One can label this expense as a payment or expense pertaining to March 2018 year-end. Note that Karim can claim a deduction on the purchase for the year ending in 2018 by simply providing a proof while filing ITR in September 2018.

Alternatively, if Karim decided to pay the oven’s price in November 2018, he will avail of the deduction in the year ending in March 2019. 

Since this section is relevant for those assessees who follow a mercantile accounting system, taxpayers under other accounting systems should find sections applicable to them. 

Payments Under Section 43B

In a broader sense, there are 7 types of payments that come under the purview of Section 43B of Income Tax Act

  • Contributions made towards employee benefits

Fundamentally, it is the amount paid by the employer towards employee welfare funds like – gratuity, provident funds, superannuation fund, etc.

  • Tax payments

Sum of money paid by the assessee in the form of tax, cess or duty to the government. Further, interest paid on these taxes qualifies for deductions. 

Invest in elss funds
  • Bonus or commission

Amount of money paid to employees as a bonus or commission for the services rendered. However, it does not include dividends paid out to shareholders. 

  • Interest payable on loans and advances 

Interest amount that has to be paid on advances and loans availed. Notably, such financial assistance should have been availed from scheduled banking institutions as per the terms and conditions of concerning agreements.

  • Leave encashment

The amount of money paid for encashing the employee’s leave balance.

  • Payments to Indian Railways

One can claim the taxpayer’s payout to Indian railways as an expense. However, to do so, it has to be remitted to Indian railway accounts from the fiscal year of 2016-17. In case payments are remitted post due date of submitting returns for a given year then the specific expense would be permitted in the year of actual payment.

  • Interest payable on loans

It is the amount of money paid on the loans that were availed form state financial corporations or public financial institutions. However, such loans must have been availed as per the guidelines prescribed.

One must note that according to the provisions of the Sales Tax Act, the amount of sales tax that was deferred under an incentive plan is considered to be paid to meet the requirements of Section 43B. 

Furthermore, when the interest earnings mentioned in clause 4 and 5 are converted into a loan, such conversions are not considered interest payment eligible for deductions. This further makes it vital for individuals who generate earnings from business or profession and maintain their accounts on the mercantile basis to become aware of Sec 43B‘s provisions. While at it, they should also find out about the exceptions that come under Sec 43B of ITA on an accrual basis. 

Exceptions Under Section 43B – On an Accrual Basis

Tax Paying individuals can claim deductions under Section 43B of Income Tax Act if they follow an accrual-based accounting system. However, to make the most of it, they need to meet a few conditions as well. For instance, 

  • In case the concerned taxpayer decides to follow a mercantile system of accounting.
  • When all expenses are cleared either before or on the due date of submitting income tax returns.
  • Taxpayers have to submit substantial proof of all payments while filing income tax returns.

It must be noted that converting interest liability into share capital does not come under the purview of Section 43B of Income Tax Act. Additionally, taxpayers must also bear in mind that this section does not apply to those payments that were made either on or before the due date of filing returns of income that come under Section 139(1) of the Act.

To eliminate all the confusions regarding Section 43B of Income Tax Act, taxpayers should find out more about the exemptions under it, on accrual and payment basis. They should also find out how to claim the same to save on taxes and plan their entire process more efficiently.