[Solved] Issues in Applying Provisions of Section 43B of the Income Tax Act

Income Tax Notification No. 34/2013, dated 1st May 2013, provides that the e-filling of the Tax Audit report is mandatory from the assessment year 2013-14 onwards. It is filed along with the Income Tax return as the due date for filling both the Tax Audit Report and Income Tax returns were the same. However, Finance Act, 2020 provides the objective of pre-filled Income Tax returns a separate due date for filing Tax Audit report under the provision of section 44AB, of the Income Tax Act, 1961. It provided that the due date shall be one month prior to the date of filing of return of income as mentioned under section 139(1).

As we all know that provision of section 43Bof Income Tax Act, 1961, provides Notwithstanding anything contained in any other provision of this Act, a deduction 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, or

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, or

c) any sum referred to in clause (ii) of sub-section (1) of section 36, or

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, or

e) any sum payable by the assessee as interest on any loan or borrowing from a deposit-taking non-banking financial company or systemically important non-deposit taking the non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

f) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

g) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or

h) any sum payable by the assessee to the Indian Railways for the use of railway assets,

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Now, in Tax Audit Report under clause 26 of Form 3CD required to report whether any sum as mentioned in provisions of section 43B,

1. Were paid on or before the due date of filing of return of Income under 139(1), or
2. Not paid before the due date

Now, Finance Mistry by way of a press release dated 24th October 2020 has extended the last date for filing Tax Audit Report and/or Transfer Pricing report to 31st December 2020 (Earlier 31st October 2020 for Tax Audit and 30th November for Transfer Pricing), whereas the due date for filing return has been extended to 31st January 2021 (Earlier 30th November 2020 for cases where Tax Audit was applicable and 31st December in the case where Transfer Pricing provisions were attracted).

So, the following issues arise because of different due date for various Audit reports under the Income Tax act and filing of Income Tax return, which are as under:

1. How should Tax Auditor report payment which shall be made by the company say in the month of January, i.e. after the due date of filing Tax Audit report but before filing his return of income?
2. Whether Tax Auditor can report a payment as made which, would be made by the company in January relying on the Management Representation letter?
3. If Tax Auditor reports expense as not paid, which is the case when he files the report, how will the assessee get a deduction of that expense? Since in the pre-filled return the said amount would have already been disallowed, or when the return shall get processed, CPC shall propose disallowance under 143(1)(a) basis the Tax Audit report filed by Tax Auditor.
4. Will genuine payment of Assessee be disallowed because of reporting in Tax Audit report, even though it completely satisfies the conditions as mentioned in provisions of section 43B?

All the above issues can be resolved, in one of the following ways:

1. Provisions of section 43B can be amended to state that deduction shall be allowed if the payment is made before the due date as mentioned in Section 44AB, instead of section 139(1), or
2. Separate Line Item should be provided in Income Tax Return for all payments of nature as mentioned in Section 43B, which are paid after the due date of Tax Audit but before the due date of filing of return.
3. Appropriate clarification from the Central Board of Direct Taxes.

Disclaimer: The above-expressed views are purely the personal views of the authors. The possibility of other views on the subject matter cannot be ruled out. So the readers are requested to check and refer to relevant provisions of the statute, latest pronouncements, circulars, clarifications, etc before acting on the basis of the above write-up. The authors are not responsible in any way.