Section 43B — Certain Deductions to be Only on Actual Payment

Section 43B of the Income-tax Act, 1961 mandates that certain specified expenses can only be claimed as deductions in the year they are actually paid, regardless of the method of accounting employed by the taxpayer. This section applies to expenses such as tax, duty, cess, or fee, contributions to provident fund or superannuation fund, bonus or commission to employees, and interest on loans from public financial institutions, among others. The significance of this section lies in its aim to curb tax evasion by ensuring that deductions are not claimed on accrued expenses that remain unpaid. The statutory test under this section requires the taxpayer to substantiate the actual payment of these expenses within the relevant financial year or before the due date of filing the return of income. The burden of proof rests on the taxpayer to demonstrate compliance with this requirement. In practice, this section is crucial for maintaining the integrity of the tax system by aligning deductions with cash flow realities.

Common Litigation Flashpoints

1. Timing of actual payment versus accrual
2. Classification of expenses under Section 43B
3. Proof of payment for deductions
4. Disallowance of unpaid expenses at year-end

Judgments on Section 43B — Certain Deductions to be Only on Actual Payment

• AT & T Global Network Services India Private Limited vs Assistant Commissioner of Income Tax — ITAT,
  Inadvertent errors in reporting should not preclude the allowance of legitimate deductions if the factual basis is verified.
• Checkmate Services P. Ltd. vs Commissioner of Income Tax-1 — SC,
  The non-obstante clause in Section 43B does not absolve the assessee from the liability to deposit employees' contributions on or before the due date as a condition for deduction.
• DCIT-7(1)(1) vs Goldman Sachs (India) Securities Pvt. Ltd. — ITAT,
  Discount on issue of employees stock options is allowable as deduction in computing the income under the head profits and gains of business.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• DCIT, Circle 13(1) vs M/s. National Fertilizers Ltd. — ITAT,
  Demurrage and wharfage charges are compensatory and not penalties, and accrued interest is not taxable until it is realized.