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TAX AUDIT - SECTION 43B

Posted @ August 28, 2012, 7:24 pm under (TAX AUDIT)

As per Section 43B

 
Notwithstanding anything contained in any other provision of this Act*, a deduction Sudame 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);
 
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)     any sum payable as bonus or commission to employee for services rendered;
 
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;
 
e)     any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advanc­es;
 
f)       any sum payable by the assessee as an employer in lieu of any leave at the credit of his em­ployee.
 
shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the as­sessee.
 
* ?Notwithstanding anything contained in any other provisions of this act‘ denotes that section 43B overrides all the sections in Income Tax Act, 1961.
 
Exception- When deductible on accrual basis
 
The exception is applicable if the following three conditions are satisfied:
 
Assessee keeps books of accounts on mercantile basis
Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of income under sec 139(1)
The evidence of such payment is submitted along with return of income.
Overview Analysis of clauses
 
Clause (a)
 
It is of significance to remember that Sec 43B is applicable in case of tax, duty, cess or fee only when such items are paid under statute to pay under a particular law. This has been the most debatable issue and it is advised to refer most of the case laws which can solve this debate.
 
Clause (b)
 
Previously, Employer‘s contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund. Now these condi­tions have been deleted by Finance Act 2003 and such contributions are allowed as deduc­tions if same has been deposited within the due date of filing return under sec 139(1).
 
It is worth noting that S.43B is applicable only to Employer‘s contribution and is not applicable to Employees‘ contribution.
 
Clause (c)
 
Sec 43B is applicable when bonus or commission is payable to employ­ees only when some services are rendered by the employees. This means that there must be an establishment of Employer-Employee relationship between the employer and the employee. This item is referred in section 36(1)(ii). In other words if commission is paid to an agent, Sec 43B is not applicable as here there is an Agent-Principal relationship.
 
 
 
Clause (d) and Clause (e)
 
Previously certain courts held that if assessee is not able to pay interest on loans from institu­tions mentioned above, and as part of restructuring such institutions converts this interest in­to loan (such concept is known as Funded Interest Term Loan [FITL]), then it shall be deemed that such interest has been actually paid for the purpose of section 43B and deduction shall be allowed in the year in which such conversion is affected.
 
To nullify such practices, Section 43B was amended (vide Circular No 7/2006 dated 07-07- 2006 ) by Finance Act 2006 inserting therein two clarificatory Explanations namely; Explana­tion 3C and Explanation 3D the contents in simple words are as follow:
 
 
 
-If any sum payable by an assessee as interest on any loan is converted by the financial insti­tution into a fresh loan, the interest so converted and not ?actually paid‘, shall not be deemed as ?actually payment‘
 
The converted interest (FITL) in wake of its conversion into a loan, will be eligible for de­duction in the computation of income of the previous year in which the converted interest is ?actually paid‘.
 
 
 
 
 
As per Section 43B
 
Notwithstanding anything contained in any other provision of this Act*, a deduction Sudame 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);
 
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)     any sum payable as bonus or commission to employee for services rendered;
 
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;
 
e)     any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advanc­es;
 
f)       any sum payable by the assessee as an employer in lieu of any leave at the credit of his em­ployee.
 
shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the as­sessee.
 
* ?Notwithstanding anything contained in any other provisions of this act‘ denotes that section 43B overrides all the sections in Income Tax Act, 1961.
 
 
 
return of income under sub-section (1) of section 139. Since the due date
of filing of the return would usually be subsequent to the signing of the tax
audit report the tax auditor would be able to give information in respect of
matters only upto the date of signing of the tax audit report. This fact
should be stated under this clause by way of note as follows:
 
NOTE: Information given under clause 21(i) (B) is
only up to ……… and does not include any payment
which the assessee may make subsequently before the
due date of filing of the return of income under section
139(1).
 
The payment made subsequent to that date but before the date of filing
of the return, will still be eligible for deduction under section 43B.
Hence the tax auditor should advise the assessee to include necessary
evidence of payments made after the signing of the tax audit report but
before the due date of filing. This evidence may also be in the form of a
certificate from a chartered accountant obtained specifically for this
purpose - Circular No.601 dated 4.6.1991 vide Appendix XVII.
 
42.6 The provision made in the accounts for excise duty payable on finished
goods in the bonded warehouse will also have to be disclosed under
this clause. For enabling the assessee to claim this amount as a
deduction the tax auditor may have to verify that the said goods have
been cleared and that excise duty thereon has been paid or adjusted
against MODVAT credits before the due date applicable in his case for
furnishing the return of income under section 139 (1).
 
42.7 The information required under clause 21(i)(B) is for the purpose of
allowing the deduction of such sum as per the first proviso to section 43B
in respect of payments made after the end of the previous year but before
the due date of filing return of income. As such, reporting under clause
21(i)(B) is required only in respect of the amounts referred to in clauses
(a), (c), (d) or (e) of section 43B which were incurred in the previous year
but were outstanding as at the end of the relevant previous year.
 
42.8 The above particulars are required irrespective of the fact whether they
have been debited to profit and loss account or not and such a fact
should be stated under this clause.
 
42.9 The tax auditor is not required to determine any admissible or
inadmissible amount(s).
 
Under section 43B(a), sales-tax when paid is allowed as a deduction.
Although under clause (a) of section 43B items that have been debited to
the profit and loss account but not paid during the previous year, are to be
specified, where it is the practice of the company to maintain a separate
sales-tax/excise duty account and treat the sales tax/excise duty collected
as a liability, it would be necessary to show by way of note under this
clause, the amount of sales tax/excise duty collected but not paid. In
case, any sum has been paid before the due date of filing the return the
fact of payment along with the amount paid should also be disclosed.
 

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