Certain Deductions to be only on Actual Payment [Section 43B] :
The following sums are allowed as deduction only on the basis of actual payment within the time limits specified in section 43B.
(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 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.
(c) Bonus or Commission for services rendered payable to employees.
(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.
(e) Interest on any loan or advance from a scheduled bank on actual payment basis.
(f) Any sum paid by the assessee as an employer in lieu of earned leave of his employee.
The above sums can be paid by the assessee on or before the due date for furnishing the return of income under section 139(1) in respect of the previous year in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with such return.
For the purposes of clause (a), “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. For example, an assessee may collect sales tax from customers during the month of March, 2014. However, in respect of such collections he may have to discharge the liability only within say 10th April, 2014 under the sales tax law. The explanation covers this type of liability also. Consequently, if an assessee following accrual method of accounting has created a provision in respect of such a liability the same is not deductible unless remitted within the due date specified in this section.
For this purpose, scheduled bank has the meaning assigned to it in clause (iii) of the Explanation to section 11(5), that is, the State Bank of India (SBI), a subsidiary of SBI, a nationalised bank or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934.
“State Industrial Investment Corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956, engaged in providing long-term finance for industrial projects and eligible for deduction under section 36(1)(iii).
Explanation 3B provides that where a deduction in respect of earned leave encashment paid to any employee is allowed in computing the business income of the employer for the previous year in which the liability to pay was incurred (applicable for previous year 2000 -2001 or any earlier year), no deduction shall be allowed in respect of such sum in the previous y ear in which the sum is actually paid.
Explanation 3C & 3D clarifies that if any sum payable by the assessee as interest on any such loan or borrowing or advance referred to in (d) and (e) above, is converted into a loan or borrowing or advance, the interest so converted and not “actually paid” shall not be deemed as actual payment, and hence would not be allowed as deduction. The clarificatory explanations only reiterate the rationale that conversion of interest into a loan or borrowing or advance does not amount to actual payment.
The manner in which the converted interest will be allowed as deduction has been clarified in Circular No.7/2006 dated 17.7.2006. The unpaid interest, whenever actually paid to the bank or financial institution, will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, irrespective of the nomenclature, the deduction will be allowed in the previous year in which the converted interest is actually paid.
Illustration
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation and Indian Bank and has not paid interest as detailed hereunder:
| Rs | ||
| (i) | Andhra Pradesh State Financial Corporation (P.Y. 2014-15 & 2015-16) | 15,00,000 |
| (ii) | Indian Bank (P.Y. 2015-16) | 30,00,000 |
| 45,00,000 |
Both Andhra Pradesh State Financial Corporation and Indian Bank, while restructuring the loan facilities of Hari during the year 2015-16, converted the above interest payable by Hari to them as a loan repayable in 60 equal installments. During the year ended 31.3.2016, Hari paid 5 installments to Andhra Pradesh State Financial Corporation and 3 installments to Indian Bank.
Hari claimed the entire interest of Rs 45,00,000 as an expenditure while computing the income from business of purchase and sale of agricultural commodities. Discuss whether his claim is valid and if not what is the amount of interest, if any, allowable.
Solution
According to section 43B, any interest payable on the term loans to specified financial institutions and any interest payable on any loans and advances to scheduled banks shall be allowed only in the year of payment of such interest irrespective of the method of accounting followed by the assessee. Where there is default in the payment of interest by the assessee, such unpaid interest may be converted into loan. Such conversion of unpaid interest into loan shall not be construed as payment of interest for the purpose of section 43B. The amount of unpaid interest so converted as loan shall be allowed as deduction only in the year in which the converted loan is actually paid.
In the given case of Hari, the unpaid interest of Rs 15,00,000 due to Andhra Pradesh State Financial Corporation (APSFC) and of Rs 30,00,000 due to Indian Bank was converted into loan. Such conversion would not amount to payment of interest and would not, therefore, be eligible for deduction in the year of such conversion. Hence, claim of Hari that the entire interest of Rs 45,00,000 is to be allowed as deduction in the year of conversion is not tenable. The deduction shall be allowed only to the extent of repayment made during the financial year. Accordingly, the amount of interest eligible for deduction for the A.Y.2016-17 shall be calculated as follows:
| Interest outstanding | Number of Installments | Amount per installment | Installments paid | Interest allowable (Rs ) | |
| APSFC | 15 lakh | 60 | 25,000 | 5 | 1,25,000 |
| Indian Bank | 30 lakh | 60 | 50,000 | 3 | 1,50,000 |
| Total amount eligible for deduction | 2 , 7 5 , 0 0 0 | ||||