The Income Tax Act 1961 Sec 43 b allows tax deduction on a specified list of expenses under 'Income from profession and business.' However, only some of these expenses can be used for tax deduction from the total profession or business income in the year they are paid for under Section 43B of income tax and not in the year the liability is incurred. For these, we will also need an idea of the Sections 30 to 37 read along with 43B Income Tax Act relating to the deductions allowed on expenses incurred in a profession or business.
What is Section 43b of Income Tax Act
Sec 43B of income tax only relates to tax deductions on professional or business income that become deductible on the condition that they are paid. They are not just incurred liabilities that are unpaid in any financial year (FY). The taxpayer is provided with a specific time window to pay these expenses before filing the Income Tax Returns (ITR) and should show proof of having paid such liabilities in the FY claimed to be paid and not merely incurred.
For example, Mr Niyaz is an employer who pays the provident fund (PF) expenses of his employees in March 2018 when it was due to them only in July 2018. Now Mr Niyaz cannot claim the PF so paid by him in March 2018 but needs a payment receipt of the amounts paid in July 2018 to claim this expense in July 2018. He can do so un der the 43B Income Tax Act when he files his returns for August 2018 and not in April 2018 (a 43B disallowance) because such deductions are available not on an accrual basis but only on an accrual on a paid basis. When such payments are made in October or November 2018, the tax deduction becomes available for the FY ending on 31st March 2019.
Deductions specified under Sec43B, Section 43B(a):
Persons or taxpayers having an income source accruing from a profession or business who maintain their accounts on a mercantile basis should explore these provisions or lose such tax deductions that are built into Sec 43B of the Income Tax Act.
List of Expenses allowed u/s 43B
Here’s a tentative list of expenses that are allowed under sec 43b for tax deductions:
- Any cess, duty, fee or tax paid under any Indian law is allowed for tax deduction ONLY when it is paid. For example, customs duty, Goods and Services Tax (GST) or any other cess, taxes, fees etc., paid on these. The interest paid on such taxes is also considered tax-deductible under this section.
- Employer contribution paid to a recognised benefit fund for the employees is tax-deductible. Expenses like PF matching contributions made by the employer to the PF Fund, gratuity fund, superannuation fund etc., are paid either before such payments become due under the respective acts or before the ITR or income tax returns due date for filing.
- Commission or Bonus to the employees is also considered tax-deductible. The amounts that can be claimed are the commissions or bonuses paid out to the employees. Expenses on dividend payments made to the firm’s shareholders are disallowed for tax deductions and cannot be claimed under this head.
- Any interest on loans availed from the State Financial Corporation or Public Financial Institutions like Cooperatives etc. is tax-deductible on the production of proof regarding the rate of interest applied and payments made towards this component certificate from the concerned institutions.
- Loan interest on advances and loans from a Scheduled Bank are tax-deductible again subject to the loan terms and production of proof of such payments.
- The employee leaves encashment amounts provided to an employee by the employer is also tax-deductible.
- Indian Railways payments paid for are also tax-deductible.
However, if the loan interest mentioned in clause 5 & 4, is converted into a loan, then such amounts of interest converted into a loan become a loan repayment and not interest paid. Hence such amounts will not be tax-deductible.
Professional and Business Expenses:
To understand tax-deductible Business Expenses, one must be aware that several expenses of the list mentioned below that accrue in generating income from a profession or business are eligible for deductions to taxability U/S 30 to 37 of the IT Act 1961 and Section 43 b.
Businesses do have a long list of expenses like:
- Marketing and advertising expenses.
- Training and Continuing Education expenses of the employees.
- Credit card processing fees.
- Certain legal expenses.
- Contract employee wages paid to them.
- Professional tax, motor vehicle tax etc.
- Import duty, Cess, GST, sales tax and more.
- Property and municipal taxes.
- Loan repayments and interest paid on loans.
- Fines, penalties etc.
- Regulatory, Mandatory and License fees.
- Rentals on Equipment.
- Benefits programs for employees.
When do expenses become tax-deductible?
When such expenses, which are not an investment, personal or on increasing the capital, are met, there are deductions in the Income Tax Act covered under Sections 30 to 37. Section 37 of the Income Tax Act 1961 lays out the conditions under which the expenses covered from Sections 30 to 36 become eligible for a general tax deduction. It states that if an expense incurred during a profession or business and allowed U/S 30 to 36 are not personal and used solely for the taxpayer’s business or profession when computing the taxes, then such expenses are tax-deductible. It also states that expenses listed U/S 30 to 36 be treated as disallowance under Section 43B.
Sec 37 conditions:
Now, we should look at what expenses are defined under sections 30 to 36 and allowed U/S 37 of the Income Tax Act to know the disallowed expenses under Section 43B of Income Tax Act.
General Conditions in Section 37:
- The expenditure paid for should not be listed U/S 30 to 36.
- Capital expenditure bills and expenses are also disallowed for tax deductions. For example, expenses like improving acquiring, extending the life of fixed assets, small and any revenue expense that is normal in a profession or business are not tax-deductible.
- Personal Expenses are also not allowed for tax deductions under Sec 43B of Income Tax Act and Sec 37. For example, such expenses that satisfy personal needs and are not related to the profession or business, like buying a home, country club memberships etc., do fall under this category as they have no bearing on the profession/ business.
- The expenditure claimed should have been paid for and not merely accrued in the assessment year (AY) as per Section 43B. This means the assessee should have proof of having paid the amount in the previous year.
- The expense should be to further the profession or business of the taxpayer incurred and paid for in the previous year, meaning paying service taxes, GST, annual profession fees of architects etc. Also, such expenses should be incurred exclusively and wholly for furthering the profession or business. This means only crucial expenses like paying GST, PF amounts etc., fall under this category and not personal expenses like withdrawals for personal use incurred without necessity and voluntarily undertaken expenses.
- Illegal expenses like money spent on cricket betting, buying and selling for profit illegally industrial-grade alcohol or drugs for consumption are illegal and contrary to law and hence not allowed for tax deductions.
Specific expenses U/S 37:
Sec 37 disallows and allows certain specific expenses as tax-deductible. These are listed out below.
- CSR or Corporate Social Responsibility expenses under the Companies Acts of 2013 and 1956 are not tax exemptible since they are expenses not related to profession or business and do not further the interest of the business. This is a disallowance u/s 43B.
- Duty, taxes, fees or cess paid by an assessee under any Indian laws incurred explicitly in furthering the profession or business are tax-deductible U/S 37 on the condition that they are paid for and only for that particular FY. For example, export or import duties, professional tax, motor vehicle tax, license fee, property tax on business premises, cess, municipal taxes, etc.
- Here are some examples of the conditions related to damages like duties, taxes, levies, court fees etc., due to a contract executed in the normal course of profession or business. However, the damages claim for tax deduction is allowable only when proof that such damages resulted in professional or business laws. This implies that damages due to the taxpayer’s dishonesty, unlawful acts or an infringement of Indian laws like traffic offences are disallowed.
- Fines and penalties incurred in the course of profession or business are allowed. Examples are delays in contractual obligations due to unavoidable circumstances like a fire, general strikes etc.
Also Read: Penalty for Late Filing of Income Tax Return
Businesses will have expenses, and 43B of Income Tax Act and Sec 37 are very clear in what is allowed under tax deductions and which expenses are not permitted under a claim for tax deduction. If you run a business or are a practising professional you can use the Khatabook app that is specially designed for people like you. Claiming tax deductions is a learned art, and your accounting software needs to scale to your needs and be tax compliant. The app can manage all business expenses on your phone and provide you with real-time information on your account’s financial statements, compliance reports and more.