No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under S. 36(1)(iv)/ (v) or as required by or under any other law for the time being in force like approved provident/gratuity funds etc. However bonafide expenditure out of such fund may be allowed if actually spent S.40 (10). Further u/s S.40 (11) assessee will be entitled to receive back the unutilised part of any such fund/assets.
5. Disallowances in respect of certain unpaid liabilities-Sec. 43B
Section 43B provides an exception to the mercantile system of accounting and says that taxes and other statutory payments will be allowed in the previous year, in which they are actually paid 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. The section covers any sums payable by the
assessee:-(a) by way of tax duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) 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) as per S.36 (1)(ii) i.e. Bonus or commission to employees or (d) interest on any loan or borrowing from any public financial institutions i.e. ICICI, IFCI, UTI, IDBI LIC 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 financial arrangement or
(e) 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) as an employer in lieu of any leave at the credit of his employee, The section provides for an exception subject to fulfillment of the following two conditions:—
1. Payment in respect of the expenses is actually made on or before the due date of submission of return of income.
2. The evidence of such payment is submitted along with the return of income.
To sum up, sums paid for statutory liabilities are allowable as they are accrued and paid in the same year. Sum paid after the year is over but before the due date of filing are allowed on accrual basis on submission of proof of payment. Other sums will be allowed only on cash basis and not on mercantile basis.
Following table summarises the position:
Application of Section 43B
Date of Payment Year of Deduction
During the year in the year of its accrual year of payment or accrual as both are same
After the end of the year in which it is accrued but on or before the due date of submission of return of income for that year and the proof of deposit is submitted along with the return of income
year of accrual
Any other time not covered above or proof not attached with return
Year of payment
Illustration-30:
ABC Limited pays Sales Tax for the financial year 2011-12 before 30/09/2012. Determine the assessment year in which the sales tax may be claimed as deduction.
Solution
Due date for filling return of income by a company assessee for the assessment year 2012-13 is 30/09/2012. As the tax is paid before the due date, it will be allowed on accrual basis in 2012-13 Illustration-31:
ABC Ltd pays the Excise Duty for the previous year 2011-12 on 01/10/2012 , in which assessment year will it be allowed ?
Solution;
ABC Ltd. pays tax after the due date for filling return of income , deduction will be allowed only in the year of actual payment year 2011-12 relevant to A.Y. 2012-13 .
Illustration -32
X Ltd. Has made the following payment of excise duty for the financial year 2011-12.
S.No. Date of payment Rupees
1 2/5/2011 25,000
2 20/07/2011 65,000
3 16/8/2011 80,000
4 5/12/2011 20,000
5 12/06/2012 40,000
6 2/12/2012 10,000
7 Unpaid 10,000
Total 2,50,000
Determine the year in which the excise duty will be deducted from the business profits.
Solution
First four payments due and paid in the same year 2011-12 will be allowed as deduction in A.Y. 2012-13
Rs. 40,000 paid on 12/06/2012 paid before the due date of filing return will be allowed as deduction in A.Y. 2012-13 if that the proof of payment is furnished along with the return of income .
Rs. 10,000 paid on 02/12/2012 is paid after the due date for filing of return for A.Y. 2011-12 will be allowed in the year of payment i.e. A.Y.2013-14
Unpaid amount of Rs. 10,000 will not be allowed as deduction until it is actually paid.
7. ILLUSTRATIONS:
Illustration -33
Income & Expenditure A/c of Lawyers & Co. for the year ending March 31, 2012 is as follows:
To Expenses 150,000 Professional Receipts
380,000
To Depreciation 20,000
To Remuneration to 150,000 By Other fees 90,000
partners
Interest on Capital to partners @ 20 per cent
20,000
To Net Profit 130000
Total 360000 470000
Other Information:
1. Expenses include Rs. 18,000 and Rs. 12,000 paid in cash as brokerage to a single party on a single day .
2. Depreciation calculated as per section 32 is Rs. 40,000 Compute the total income of the firm.
Solution
Computation of Total Income of Lawyers & Co. for A. Y.
2012-13
Net profit as per profit and loss account 1,30,000 Add: Expenses not allowable
40A(3)- Cash payments to a broker exceeding Rs. 20,000
30,000 Excess interest on capital to partners 20%-12%
i.e. 20000*8/20
8,000
38,000 1,68,000 Less: Depreciation u/s32
( Rs 40,000-Rs 20,000 debited in profit and loss account)
20,000
1,48,000 Add: Remuneration to partners debited to profit and loss
account
1,50,000
Book Profit 2,98,000
Maximum permissible remuneration(lower of the two : (i.e. 90 per cent of Rs 2,98,000 2,68,200
Actual 1,50,000 1,50,000
Business Income of the Firm 1,48,000
Illustration -34
Following is the Trading and Profit & Loss A/c of a firm consisting of A & B as the partners.
Trading and Profit & Loss A/c for the year ended 31st March, 2012.
Particulars Rs. Particulars Rs.
To Opening Stock 75,000 By Sales 20,00,000
To Purchases 15,00,000 By Closing Stock 85,000 To Gross Profit 5,10,000
Total 20,85,000 Total 20,85,000
To Salaries 2,50,000 By Gross Profit 5,10,000 To Sales Commission 40,000
By Bad Debts
Recovery 25,000
To Sales Tax 35,000
To General Expenses 5,000 Advance Income Tax 54,000 To Interest on Loan 42,000 To Interest on Capital 18,000 To Depreciation on
Furniture & Fittings 4,000 To Advertisement 16,000 To Free Distribution of
Samples 3,000
To Insurance premium
on Life of Partners 8,500 To Printing & Stationery 3,500
To Net Profit 56,000
Total 5,35,000 Total 5,35,000
Additional information::
1. Salaries include Rs. 40,000/- paid to partners, as per partnership deed and well within the limits u/s 40(b).
2. General Expenses are incurred for the purposes of pleasure tour of partners with their family members to Goa.
3. Income Tax paid includes Rs. 14,000/- paid as tax on behalf of partners.
4. Bad Debts recovered were earlier allowed as a deduction.
5. Interest on Capital to partners is in excess of limits specified u/s 40(b) by Rs. 1,500/- but as per partnership deed.
6. Cash expenses v for carriage of Rs. 40,000 in excess of Rs.
35,000
Compute taxable income of the firm for the assessment year 2012-13
SOLUTION:
Computation of Total Income of X & Y Co. for A.Y. 2012-13.
Particulars Rs. Rs.
Profit as per Profit and Loss Account 56000 Add: Expenses either disallowed or considered
separately
Salaries to Partners 40000
General Expenses incurred for
personal purpose by the partners 5000
Cash expenses 40A(3) 40000
Income Tax (Advance) 54000
Interest on Capital 18000
Insurance on Life of Partners 8500 165500 221500 Less: Interest to partners (18000-1500) 16500
Book Profit 205000
Less: Salaries to partners 40000
Business income 165000