Individuals can claim certain payments as an expense under the rules of the Income Tax Act of 1961 when their income is produced under the heading of profits and gains of business or profession (PGBP). Specific criteria, on the other hand, bind such a tax provision. The provision of Section 43B of the Income Tax Act can be used to acquire significant insight into the limitations and application of the same individuals.

What does Section 43B consist of?

Profits and gains of business or profession PGBP are dealt with in Section 43B of the Income Tax Act. Individuals can claim some payments as costs under this provision, but only in the year in which they were paid, not in the year in which they were spent. To put it another way, a few statutory payments can be claimed as costs in the year they are made.

Assume Ankit is the owner of a café, and in July 2018, he buys an oven for his establishment. This item might be classified as a payment or expense for the March 2018 year-end. Ankit can claim a deduction for the purchase for the 2018 tax year by simply presenting proof when completing his ITR in September 2018.

Alternatively, if Ankit paid for the oven in November 2018, he will be eligible for the deduction in the fiscal year ending in March 2019. Because this section applies to taxpayers who use the mercantile accounting system, taxpayers who use other accounting systems should discover portions that apply to them.

Payments Made Pursuant to Section 43B

In a larger sense, Section 43B of the Income Tax Act covers seven different sorts of payments —

  • Contributions made in the interest of employee benefits

It is, in essence, the sum paid by the employer to employee welfare funds such as gratuity, provident funds, and superannuation funds, among others.

  • Payments of taxes

The amount of money paid to the government by the assessee in the form of tax, cess, or duty. In addition, interest paid on these taxes is deductible.

  • Commissions or bonuses

Amount of money provided as a bonus or commission to employees for services rendered. It does not, however, contain dividends paid to shareholders.

  • Interest payable on loans and advances

The amount of interest that must be paid on advances and loans taken out. Notably, according to the terms and circumstances of the relevant agreements, such financial support should have been obtained from scheduled banking institutions.

The sum paid for the employee’s leave balance to be encashed.

  • Indian Railways Payments

The taxpayer’s payment to Indian railways can be claimed as an expense. It must, however, be remitted to Indian railway accounts beginning with the fiscal year 2016-17. If payments are made after the due date for filing returns for a particular year, the specified expense will be allowed in the year of payment.

  • Interest payable on loans

It refers to the sum paid on loans obtained from state financial corporations or public financial institutions. However, such loans must have been taken out in accordance with the rules.

The amount of sales tax-deferred under an incentive scheme is considered to be paid to meet the criteria of Section 43B, according to the provisions of the Sales Tax Act.

Furthermore, interest profits specified in clauses 4 and 5 are not considered interest payments eligible for deductions when converted into a loan. This makes it even more important for people who earn money through a business or profession and keep their books on a mercantile basis to be aware of Sec 43B’s regulations. They should also learn about the accrual exclusions under Sec 43B of the ITA while they’re at it.

Section 43B Exceptions – On an Accrual Basis

Tax Individuals who use an accrual-based accounting system can claim deductions under Section 43B of the Income Tax Act. They must, however, meet a few conditions in order to make the most of it. As an example,

  • If the concerned taxpayer chooses to use a mercantile accounting system.
  • When all expenses have been paid in full either before or on the due date for filing tax returns.
  • When filing income tax returns, taxpayers must provide sufficient documentation of all payments.

It’s worth noting that converting interest liability into share capital isn’t covered by Section 43B of the Income Tax Act. Furthermore, taxpayers should be aware that this section does not apply to contributions made on or before the due date for submitting income tax returns under Section 139(1) of the Act.

To clear up any misunderstandings about Section 43B of the Income Tax Act, taxpayers should learn more about the exemptions available under it, both on an accrual and payment basis. They should also learn how to claim the same to save money on taxes and streamline their complete process.

Deduction Illustration

Case – 1 under Section 43B of the Income Tax Act ABC Limited owes interest on a loan for the month of March 2020, which must be paid on or before the due date for filing an income tax return. The loan is obtained from a Scheduled Bank under the terms of the loan agreement. ABC Limited will pay the interest on the 15th of May 2020, which is before the deadline for completing the FY 2019-20 income tax return. As a result, AMC Limited is eligible to deduct the interest paid on a loan.

Case 2: If payment is made beyond the deadline for submitting an income tax return, ABC Limited will pay interest on October 18, 2020. The deadline to file an income tax return is September 30th, 2019. AMC Limited paid the interest on the loan after the deadline for filing the FY 2019-20 income tax return passed. As a result, AMC Limited is unable to deduct the interest paid on a loan.

Is TDS included in 43B?

Section 43B largely includes a list of expenses that can only be claimed as a deduction if they are paid in full. TDS is a tax deducted on the deductee’s behalf and deposited in the government’s treasury, not an expense. As a result, TDS is not covered by section 43B and hence cannot be claimed as a deduction.

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