Meaning of actual payment u/s 43B of income tax act 1961

Introduction

Certain deductions allowable on actual payment.

1. Tax, Duty, Cess & Fee
2. Employer’s contribution to provident, superannuation, gratuity and other funds
3. Bonus & commission
4. Interest on loans from public financial institutions
5. Interest on loans from scheduled banks
6. Leave Salary
7. Use of railways assets to railways authorities.

The section contains restrictions on these seven clause deductions. It supersites Section 145 & provides that deduction shall be allowed, only on the actual payment basis irrespective of the method of accounting followed by assessee.

Meaning of Actual Payment?

Whether constructive payment can also be inferred here as actual payment?

The answer is - It may or may not. Usually, Actual payment is, the sum actually paid by the assessee and not a constructive payment. E.g. bank guarantee furnished by the assessee against the payable is not an actual payment. (CIT vs Mcdowell & Co. Ltd.) (2009) 180 Taxmann 51 (SC). But sometimes, various judicial pronouncement has extended the meaning of actual payment to constructive payment i.e. ITC set off against the liability as allowable under the legislative laws may be constituted as actual payment.

Some other Explanations

1. Generally, disallowance cannot be made unless the amount is claimed as expenditure in the P&L. However, GST collected to separate accounts does not render Section 43B inapplicability. Income tax authorities can disallow the GST liability if it is not paid by the assessee. Meaning thereby the term "disallowance" for the purpose of section 43B has a much wider scope. It is not restricted to allowance under the act.

2. GST & Custom paid on the manufactured goods are allowed as deduction even if, the goods are part of closing stock and not sold. Interest payable in the indirect taxation regime, even if it is considered as tax in those acts, cannot be treated as tax under the income tax act. Hence, unpaid interest cannot be disallowed u/s 43B.

3. Bonus paid to the employees before the due date of filing of return, even though the agreement to pay the bonus was after the relevant financial year is allowable as deductions. Bonus paid to a bonus trust instead of employees will attached disallowance under this section.

4. Conversion of interest into loan is disallowed as per clause (d), Explanation 3C of the Act, inserted in 2006 with retrospective effect from April 1989. But pursuant to a settlement, when the creditor agrees to convert a loan portion of interest into shares, it must be treated as an extinguishment of liability for the purpose of section 43B. (CIT vs Rathi Graphics technologies Ltd.) (Delhi). Here, again a constructive payment was allowed as actual payment for the purpose of this section.

5. Leave encashment clause (f), was struck down by a bold decision of honorable apex court. (Bharat Earth Mover Ltd). No reasons were given by the legislature as to why the amendment was brought in force. The legislature has the power to bring the amendment, but they must disclose the reasons for such amendment which should be in consistent with the provisions of the constitution and the laws of the land. The original section was incorporated to plug the deductions claimed by not discharging the statutory liability. Subsequently, the provisions were made to restrict the contingent liability of the assessee for the unpaid loans. This clause was not in accordance with the originality of the legislative purpose. hence, was stuck down by honorable Supreme court and Calcutta high court.