Certain Expenses allow as deduction upon actual payment under Sec 43(B) & Sec 43B (h) of Income Tax Act

Section 43B of the Income Tax Act, 1961, specifies certain list of expenses allow as a deduction from the income from business and profession only when they are actually paid by the assessee. These expenses include tax, duty, cess, fee, interest, employee’s benefit fund contribution, bonus, commission, leave encashment, and payment to Indian Railways. The deduction is allowed in the year of payment or before the due date of filing ITR for that year, whichever is earlier. This section is applicable while computing income under the head PGBP (Profits and gains of business or profession), expenses only. New provision of payment to MSMED Act has been newly added under sec 43B 

Section 43B is applicable for certain list of expenses allow as a deduction only if dues are paid within the time limit specified in The Income Tax Act. :-

Below is the list of expenses allow as a deduction:

• Contributions to Employee Welfare Funds: Contributions made by the employer to employees’ PF and ESI funds and other welfare funds can be claimed as a deduction on the actual payment basis.
• Statutory Dues: Any tax, cess, duty, or fee shall be claimed on actual payment basis.
• Bonus and Commission: Any Bonus and commission payable to employees are allowed as a deduction under section 43B of the Income Tax Act. However, the bonus and commission should have been paid before the due date of filing the income tax return.
• Leave Encashment: Any payment made to the employee for unutilized leaves balance can be claimed as a deduction. However, Payment should have been paid before the due date of filing the ITR.
• Interest on Loans: Interest paid for any loan or borrowing from Scheduled Bank, Public Financial Institutions, State Financial Corporation or State Industrial Investment Corporation is allowed as a deduction if paid on or before the due date of ITR filing.
• Payment to Indian Railway: Amount payable to the Indian Railways for the use of Railways Assets.
• Payment to Micro or Small Enterprises: Any Amount payable to Micro or Small Enterprises shall be allowed as a deduction in the same year only if paid within the time limit specified by the MSMED Act, 2006. (Added as per Finance Act, 2023)
• All expenditures stated above shall be allowed as a deduction if payment is made within the timeline specified by the Act.

Given below are the conditions that you need to fulfill to avail of the the deductions under section 43B of the Income Tax Act: “

• Payment has been actually made: To claim deduction under section 43B, there must be a payment that was actually paid and not just accrued for that year. For example, if the employer announces a bonus for an employee and the employee has not been paid until the next financial year. Then the amount to be paid can not be claimed for deduction for the first year.
• Payment must have been made before the due date: The payment must have been made on or before the due date specified under referred law. For example, the due date for ESI contributions is the 15th of every month.
• Payment must be compulsory: Payment made by the employer must be a mandate and not optional. For example, any commission paid by the employer to his employee should be part of the employment contract.
• Payment must be evidentiary: Payment made by the employer or individual must be in written documents; payment made in cash can not be claimed as a deduction under section 43B.

The newly added clause (h) states that any sum payable by the assessee to a Micro and Small Enterprises  beyond the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum has been actually paid (irrespective of the accounting method employed). This clause is applicable when an enterprise is buying goods or taking services; from Micro and Small enterprise registered under the MSMED Act, 2006. It is applicable to Manufacturing and Services Providers Only. Notably, the registration of the buyer under the MSMED Act, 2006 is not mandatory. Clause (h) of Section 43B comes into effect from April 1, 2024.