Amount not deductible in respect of certain unpaid liabilities

Section 43B is applicable only if the taxpayer maintains books of account on the basis of mercantile system of accounting. The provisions of section 43B are given below—

GENERAL RULE – CERTAIN EXPENSES ARE DEDUCTIBLE ON PAYMENT BASIS – The following expenses (which are otherwise deductible under the other provisions of the Income-tax Act) are deductible on payment basis—
a. any sum payable 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 an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employees;108
c. any sum payable as bonus or commission to employees for service rendered;
d. any sum payable as interest on any loan or borrowing from a public financial institution (i.e., ICICI, IFCI, IDBI, LIC and UTI) or a state financial corporation or a state industrial investment corporation;
e. interest on any loan or advance taken from a scheduled bank including a cooperative bank; and
f. any sum payable by an employer in lieu of leave at the credit of his employee.
The above expenses are deductible in the year in which payment is actually made.

EXCEPTION – WHEN DEDUCTIBLE ON ACCRUAL BASIS – The exception is applicable if the following two conditions are satisfied—

Condition one – Payment in respect of the aforesaid expenses is actually made on or before the due date of submission of return of income

Condition two – The evidence of such payment is submitted along with the return of income.

If the above two conditions are satisfied and if the assessee maintains books of account on mercantile basis, then the expenditure is deductible on “accrual” basis in the year in which the liability is incurred.

Date of payment In which year it is deductible Basis of deduction—
payment or accrual
Situation one – If the payment in
respect of the aforesaid sums is made
during the relevant previous year (i.e.,
the year in which the liability is incurred)
In the year in which the payment
is made
Payment basis
Situation two – If the payment in respect of the aforesaid sums is made after the end of relevant previous year (i.e., the year in which the liability is incurred) but on or before the due date of submission of return of income1 for that year and the proof of deposit is submitted along with the return of income In the relevant previous year
on accrual basis (i.e., the year in
which the liability is incurred)
Accrual basis
Situation three – If the payment is made at any other time (not being covered by the above situations) In the year in which the payment is made Payment basis
Situation four – If the payment is not
made at all
Not deductible Not deductible

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