Income Tax--Business Disallowance Under Section 43B

Real Income and Imputed Disallowances--Divide in Taxation of Real Income

Srivatsan Ranganathan

There are a number of conditional expenditure provisions in the Income-tax Act, 1961. Some of the conditions imposed go against real income principles; though in the statute of Income tax they have been drafted, thus, specifically to accommodate or carve out certain exceptions. The learned author has discussed one such extraneous but possibly badly drafted section in this write-up.

1. The original law

section 43B is a creature that has survived in the Income tax statute since Finance Act, 1983. It has grown with many additions, carves outs to align itself with changing economic environment. This section allows certain expenditures to be claimed only on actual payment. In a law which taxes business income by and large on accrual basis, Section 43B is a special carved out to allow expenses only on cash basis. The section has also liberalized and loosened its purse strings by allowing the expense on actual payment if paid in the subsequent year or in certain cases if paid before the due date of filing of return of income as envisaged under Section 139(1), subject to certain conditions. This allowability upon payment is no matter the fact if that expenditure pertains to the relevant financial year or to an earlier year.