Section 43b
This query is : Open
12 September 2011
If a partnership firm does not make the provision for Expense of Municipal Tax for the year 2009-10 and pays the same in F Y 2010-11 then can the same be allowed as deduction for the F Y 2010-11 as we get deduction u/s 43B on payment basis, Please state the reason also
12 September 2011
Dear Anand,
Your query will hold good when the assessee is following accrual basis of accounting. Hence, opinion is given taking this into consideration.
1. As per AS prescribed under IT Act, AS-5 states that prior period expenses should be specifically stated.
2. Further, as per section 37, only revenue expenses related to previous year are allowed as deduction. Further, it is to be noted that the AS is applicable only when the assessee is following accrual basis of accounting.
3. One interesting thing is to note that 43B starts with notwithstanding anything contained in any other provisions of the IT Act, hence it has overriding effect over section 37. 43B specifically says taxes to be allowed on payment basis. Hence, in my opinion, the assessee will get deduction under section 43B.
Your query will hold good when the assessee is following accrual basis of accounting. Hence, opinion is given taking this into consideration.
1. As per AS prescribed under IT Act, AS-5 states that prior period expenses should be specifically stated.
2. Further, as per section 37, only revenue expenses related to previous year are allowed as deduction. Further, it is to be noted that the AS is applicable only when the assessee is following accrual basis of accounting.
3. One interesting thing is to note that 43B starts with notwithstanding anything contained in any other provisions of the IT Act, hence it has overriding effect over section 37. 43B specifically says taxes to be allowed on payment basis. Hence, in my opinion, the assessee will get deduction under section 43B.
13 September 2011
In computation of income under the head Profits and gains of business or profession (PGBP), some of the expenses are allowed under Income Tax Act 1961 and can be claimed by the assessee only in the year in which the payment is actually made.
As per Section 43B
Notwithstanding anything contained in any other provision of this Act*, a deduction Sudame otherwise allowable under this Act in respect of—
a) any sum payable by the assessee by way of tax, duty, cess or fee, (by whatever name called, under any law for the time being in force);
b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees;
c) any sum payable as bonus or commission to employee for services rendered;
d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing;
e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances;
f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee.
shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee.
* ?Notwithstanding anything contained in any other provisions of this act‘ denotes that section 43B overrides all the sections in Income Tax Act, 1961.
Exception- When deductible on accrual basis
The exception is applicable if the following three conditions are satisfied:
Assessee keeps books of accounts on mercantile basis
Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of income under sec 139(1)
The evidence of such payment is submitted along with return of income.
Overview Analysis of clauses
Clause (a)
It is of significance to remember that Sec 43B is applicable in case of tax, duty, cess or fee only when such items are paid under statute to pay under a particular law. This has been the most debatable issue and it is advised to refer most of the case laws which can solve this debate.
Clause (b)
Previously, Employer‘s contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund. Now these conditions have been deleted by Finance Act 2003 and such contributions are allowed as deductions if same has been deposited within the due date of filing return under sec 139(1).
It is worth noting that S.43B is applicable only to Employer‘s contribution and is not applicable to Employees‘ contribution.
Then what about Employees‘ contribution?
Sec. 2(24)(x) states as under:
Income includes:
-any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees‘ State Insurance Act, or any other fund for the welfare of such employees.
Sec..36(1)(va):
deduction shall be allowed for any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee‘s account in the relevant fund or funds on or before the due date.
Note: Here Due Date means date by which assessee is required as an employer, to credit an employees‘ contribution to the employees‘ account in relevant fund.
Explanation: The reason why the employees‘ contribution is treated as income is because employer‘s contribution is debited to profit and loss account while employees‘ contribution is not debited to profit and loss account but is treated as liabilities and provisions. So, in simple words, for in come tax act purpose, employees‘ contribution is treated as business income u/s 2(24)(x) and deduction is made from such income u/s 36(1)(va) if the contribution is paid within the due date of such contribution.
Clause (c)
It is worth noting that Sec 43B is applicable when bonus or commission is payable to employees only when some services are rendered by the employees. This means that there must be an establishment of Employer-Employee relationship between the employer and the employee. This item is referred in section 36(1)(ii). In other words if commission is paid to an agent, Sec 43B is not applicable as here there is an Agent-Principal relationship.
Clause (d) and Clause (e)
Previously certain courts held that if assessee is not able to pay interest on loans from institutions mentioned above, and as part of restructuring such institutions converts this interest into loan (such concept is known as Funded Interest Term Loan [FITL]), then it shall be deemed that such interest has been actually paid for the purpose of section 43B and deduction shall be allowed in the year in which such conversion is affected.
To nullify such practices, Section 43B was amended (vide Circular No 7/2006 dated 07-07- 2006 ) by Finance Act 2006 inserting therein two clarificatory Explanations namely; Explanation 3C and Explanation 3D the contents in simple words are as follow:
-If any sum payable by an assessee as interest on any loan is converted by the financial institution into a fresh loan, the interest so converted and not ?actually paid‘, shall not be deemed as ?actually payment‘
The converted interest (FITL) in wake of its conversion into a loan, will be eligible for deduction in the computation of income of the previous year in which the converted interest is ?actually paid‘.
As per Section 43B
Notwithstanding anything contained in any other provision of this Act*, a deduction Sudame otherwise allowable under this Act in respect of—
a) any sum payable by the assessee by way of tax, duty, cess or fee, (by whatever name called, under any law for the time being in force);
b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees;
c) any sum payable as bonus or commission to employee for services rendered;
d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing;
e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances;
f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee.
shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee.
* ?Notwithstanding anything contained in any other provisions of this act‘ denotes that section 43B overrides all the sections in Income Tax Act, 1961.
Exception- When deductible on accrual basis
The exception is applicable if the following three conditions are satisfied:
Assessee keeps books of accounts on mercantile basis
Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of income under sec 139(1)
The evidence of such payment is submitted along with return of income.
Overview Analysis of clauses
Clause (a)
It is of significance to remember that Sec 43B is applicable in case of tax, duty, cess or fee only when such items are paid under statute to pay under a particular law. This has been the most debatable issue and it is advised to refer most of the case laws which can solve this debate.
Clause (b)
Previously, Employer‘s contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund. Now these conditions have been deleted by Finance Act 2003 and such contributions are allowed as deductions if same has been deposited within the due date of filing return under sec 139(1).
It is worth noting that S.43B is applicable only to Employer‘s contribution and is not applicable to Employees‘ contribution.
Then what about Employees‘ contribution?
Sec. 2(24)(x) states as under:
Income includes:
-any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees‘ State Insurance Act, or any other fund for the welfare of such employees.
Sec..36(1)(va):
deduction shall be allowed for any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee‘s account in the relevant fund or funds on or before the due date.
Note: Here Due Date means date by which assessee is required as an employer, to credit an employees‘ contribution to the employees‘ account in relevant fund.
Explanation: The reason why the employees‘ contribution is treated as income is because employer‘s contribution is debited to profit and loss account while employees‘ contribution is not debited to profit and loss account but is treated as liabilities and provisions. So, in simple words, for in come tax act purpose, employees‘ contribution is treated as business income u/s 2(24)(x) and deduction is made from such income u/s 36(1)(va) if the contribution is paid within the due date of such contribution.
Clause (c)
It is worth noting that Sec 43B is applicable when bonus or commission is payable to employees only when some services are rendered by the employees. This means that there must be an establishment of Employer-Employee relationship between the employer and the employee. This item is referred in section 36(1)(ii). In other words if commission is paid to an agent, Sec 43B is not applicable as here there is an Agent-Principal relationship.
Clause (d) and Clause (e)
Previously certain courts held that if assessee is not able to pay interest on loans from institutions mentioned above, and as part of restructuring such institutions converts this interest into loan (such concept is known as Funded Interest Term Loan [FITL]), then it shall be deemed that such interest has been actually paid for the purpose of section 43B and deduction shall be allowed in the year in which such conversion is affected.
To nullify such practices, Section 43B was amended (vide Circular No 7/2006 dated 07-07- 2006 ) by Finance Act 2006 inserting therein two clarificatory Explanations namely; Explanation 3C and Explanation 3D the contents in simple words are as follow:
-If any sum payable by an assessee as interest on any loan is converted by the financial institution into a fresh loan, the interest so converted and not ?actually paid‘, shall not be deemed as ?actually payment‘
The converted interest (FITL) in wake of its conversion into a loan, will be eligible for deduction in the computation of income of the previous year in which the converted interest is ?actually paid‘.
14 September 2011
To Sachin Sir,
I agree with you that section starts with notwithstanding anything contained in any other provisions of the IT Act.
However the purpose of the law is to prohibit the allowance of expenditure for which payment is not made upto the due date of filing of return and not to allow such expenses for which provision has not been made in the books of accounts
I agree with you that section starts with notwithstanding anything contained in any other provisions of the IT Act.
However the purpose of the law is to prohibit the allowance of expenditure for which payment is not made upto the due date of filing of return and not to allow such expenses for which provision has not been made in the books of accounts
14 September 2011
Dear Anand,
The intention is clearly to allow the deduction on payment basis. And the assessee is also claiming the deduction on payment basis. Even if, the assessee may have provided for the same, it would have got disallowed and allowed as deduction only on payment basis.
Hence, in my opinion, still, due to section 43B having overriding impact over other sections, and the expenses are claimed by the assessee, only when he/she/it making the payment, there is no reason why the assessee should not get the deduction.
If you have a counterview, please share.
The intention is clearly to allow the deduction on payment basis. And the assessee is also claiming the deduction on payment basis. Even if, the assessee may have provided for the same, it would have got disallowed and allowed as deduction only on payment basis.
Hence, in my opinion, still, due to section 43B having overriding impact over other sections, and the expenses are claimed by the assessee, only when he/she/it making the payment, there is no reason why the assessee should not get the deduction.
If you have a counterview, please share.
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