Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer.

1. Key Provisions of Section 43B

As per Section 43B, the following expenses are allowed as a deduction only in the year of actual payment:

🔹 Taxes & Duties: Any tax, duty, cess, or fee payable under any law (e.g., GST, excise duty, customs duty, etc.).
🔹 Employer’s Contribution to Provident Fund (PF) & Other Welfare Funds: Employer’s contribution to PF, ESI, superannuation fund, gratuity fund, etc. is deductible only if paid before the due date under the respective law.
🔹 Bonus & Commission to Employees: Deductible only when paid.
🔹 Interest on Loans from Banks & Financial Institutions: Interest on borrowed capital from banks, public financial institutions, or NBFCs is allowed only if actually paid.
🔹 Leave Encashment: Deduction for leave encashment is allowed only if the amount is paid.
🔹 Payments to Railways: Any sum payable to the Indian Railways for freight charges is deductible only when paid.

2. Exception: Payment Before the Due Date of Filing ITR

An exception exists under the first proviso to Section 43B, which states that if the payment is made before the due date of filing the income tax return (ITR) under Section 139(1), the expense is still allowed in the same financial year. This is particularly relevant for loan interest, tax payments, and statutory contributions.

3. Disallowance & Impact on Businesses

• If an assessee claims a deduction without making the actual payment, the tax authorities will disallow the expense, increasing the taxable income.

• Non-payment of employer’s PF or ESI within the due date under the respective Act (not ITR due date) results in permanent disallowance, as per recent judicial rulings.

4. Key Amendments & Judicial Rulings

• Amendment in Finance Act 2023: Clarified that employer’s contribution to PF/ESI is deductible only if deposited within the due date of the respective law, not the ITR due date.

• SC Ruling in Checkmate Services (P) Ltd. case reaffirmed this principle, ensuring strict compliance with PF/ESI payment deadlines.

5. Practical Considerations

✅ Maintain proper records of payments to claim deductions.
✅ Ensure that statutory dues like GST, PF, and ESI are deposited on time to avoid disallowance.
✅ If payments are delayed, pay before filing ITR to claim deductions in the same year.

Conclusion

Section 43B is a crucial provision ensuring timely payments of statutory and financial liabilities. Businesses must align their accounting and payment cycles to avoid disallowances and ensure maximum tax benefits.