Section 43B of the Income Tax act provides a list of expenses allowed as deduction under the head ‘Income from business and profession’. It states some expenses that can be claimed as deduction from the business income only in the year of actual payment and not in the year when the liability to pay such expenses is incurred. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.
The expenses currently covered under the ambit of Section 43B are as under:
- Any tax, duty, cess or fee paid under any law in force is allowed as a deduction when it is paid- this includes GST, customs duty or any other taxes or cesses paid. Interest paid on these taxes are also eligible for deduction.
- Contribution to any recognized employee’s benefit fund: contribution by the employer to any employee’s benefit fund namely PF fund, superannuation fund, gratuity fund before the due date for depositing those funds or before the due date of filing income tax returns
- Bonus or commission payable to employees- this amount should be the actual bonus/ commission paid to employees and not dividends payable to them as shareholders.
- Interest on borrowings from Public Financial Institutions or State Financial Corporation in accordance with the conditions governing such loan
- Interest on loans and advances from Scheduled Bank in accordance with the conditions governing such loan
- Leave encashment provided by an employer to his employees
- Payment to Indian Railways
In order to promote timely payments to micro and small enterprises, Finance Bill, 2023 has proposed to include payments made to such enterprises within the ambit of section 43B of the Act. Accordingly, it has been proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments. Meaning thereby if the financial year has been crossed and payment is made in next financial year before filing of ITR of earlier year, deduction can be availed only in next financial year.
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of the Act will allow the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
This amendment is proposed to take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years.
***
Don’t miss the next GST Update / Article / Judicial pronouncement
Subscribe to our newsletter from FREE to stay updated on GST Law
Resolve your GST queries from national level experts on GST free of cost.
TW Editorial Team comprises of team of experienced Chartered Accountants and Advocates devoted to spread the knowledge of GST amongst the various stakeholders.
