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As per the income tax act, 1961 Section 43B states that only certain payments can be claimed as an expense in the year which they have been paid and not in the year in which the liability to pay such sum was incurred. This means that certain statutory expenses are allowed to be claimed in the year of payment only. This section is with reference to PGBP (profits and gains of business or profession).
This section in short, deals with certain types of payments and directs the taxpayer to claim such payments as an expense in the same assessment year when it was actually paid and not in the year in which the liability to pay such sum was incurred.
For example, Mr. Ram, owner of a logistics firm, has purchased a motorbike for rendering the courier services for his firm in August 2017. This purchase can be labeled as an actual expense/payment and pertains to the month of March 2017. For this, Mr. Ram can claim a deduction for the year ending March 2017 itself by showing a proof of this while filing his return in September 2017. If Mr. Ram pays this amount in October 2017, this deduction will be available for the year ending March 2018.
When filing the income tax returns, Mr. Ram can show the proof of making such payment and claim the deduction in the same year (in which the amount was accrued).
If you follow a mercantile system of accounting, the payments stated below can be claimed on the due basis:
Tax - Any sum payable by the assessee by way of tax, duty, cess or fee and all other types of taxes paid to government by whatever name it is called under the law. This includes GST, customs duty or any other taxes paid. Interest paid on these taxes are also eligible for deduction.
Employer contribution - Any contribution made by the employer towards benefit of their employees and comes under the category of a provident fund, gratuity or superannuation fund. The employer must ensure that such a contribution is made before the due date of depositing these funds or before the due date of filing income tax returns.
Bonus or Commission - Any sum payable by the employer to the employee as bonus or commission as payment for the services rendered. This amount must be the real bonus or commission paid to employees and not given in the form of dividends payable to them as shareholders.
Interest Payable - Any amount payable as interest on loan borrowed from any public financial institution, state financial corporation or state industrial investment corporation in accordance with the terms and conditions under the agreement.
Interest Payable on Advance - Any amount payable as Interest on loans and advances from a scheduled bank in accordance with the conditions governing such a loan.
Any amount under leave encashment provided by an employer to his employees.
Any amount made by the taxpayer to the Indian Railways is allowed to be claimed as an expense and when the payment is made. This has come into effect since FY 2017-2017.
The taxpayer can claim deductions if they follow an accrual system of accounting based on certain conditions:
If a taxpayer follows a mercantile system of accounting.
If all expenses are paid on or before the due date for submission of ITR.
The evidence of all such payments made must be submitted by the taxpayer while filing an ITR.
What is section 43B?
Section 43B of the Income Tax Act states that only certain payments can be claimed as an expense in the year which they have been paid and not in the year in which the liability to pay such sum was incurred. This means that certain statutory expenses are allowed to be claimed in the year of payment only.
Can expenditure covered under Section 43B can be claimed as a deduction in the year of payment, although it is an expenditure of a subsequent year?
Section 43B requires that specific items listed that are eligible for deduction may be allowed only on payment in the year of payment. However, in case such a payment is made in advance, it can be allowed in the year of payment, though the amount is deductible in normal circumstances under the law in the year in which it is booked as an expenditure. In case the payment is for an admissible item of expenditure it is deductible, irrespective of the year to which it relates to as long as it is paid during the year.