Certain deductions allowed on actual payment basis only.
37(1)
The following sums payable, as specified in sub-section (2), shall be allowed as deduction while computing the income chargeable under section 26 only in the tax year in which such sums are actually paid irrespective of––
- (a) any provision to the contrary in this Act; or
- (b) method of accounting regularly followed; or
- (c) the tax year in which the liability was incurred.
37(2)
The sums payable by an assessee referred to in sub-section (1), shall be––
- (a) tax, duty, cess, surcharge or fee, by whatever named called, levied under any law in force;
- (b) contribution of the employer to a provident fund or superannuation fund or gratuity fund or any fund for the welfare of employees;
- (c) amount payable by employer in lieu of any leave at the credit of the employee;
- (d) any sum referred to in section 32(a);
- (e) interest on loans or borrowings from specified financial entities as per the terms and conditions of the agreement governing such loans or advances;
- (f) amount payable to the Indian Railways for use of railway assets; or
- (g) amount payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.
37(3)
In case the amounts specified in sub-section (2), except the sum referred to in clause (g) thereof, are paid after the end of the tax year in which the liability was incurred, but on or before the due date of filing of return of income under section 263(1) for such tax year, the deduction towards such sum shall be allowed in such tax year.
37(4)
If interest on loans or advances specified in sub-section (2)(e) is converted into a loan or advance or debenture or any other instrument by which the liability to pay is deferred to a future date, then it shall not be deemed to have been actually paid.
37(5)
If a deduction in respect of any sum payable under sub-section (2) has already been allowed in any tax year when such liability was incurred, it shall not be allowed again in any subsequent tax year when paid.
37(6)
The provisions of this section shall not apply to a sum received by the assessee from any employee as contribution towards any of the funds referred to in section 2(49)(o).
37(7)
For the purposes of this section, “specified financial entities” means a public financial institution or State Finance Corporation or State Industrial Investment Corporation or notified class of non-banking financial companies or scheduled banks or co-operative banks (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank).
Section Summary:
Section 37 of the new income tax law mandates that certain specified expenses can only be claimed as deductions in the tax year in which they are actually paid, regardless of the method of accounting followed or the year in which the liability was incurred. This section ensures that deductions are aligned with actual cash outflows, promoting consistency and reducing disputes over timing of deductions.
Key Changes:
- Shift to Actual Payment Basis: Previously, deductions for certain expenses (e.g., taxes, contributions to employee funds, etc.) could be claimed based on the accrual method (when the liability was incurred). Now, deductions are allowed only when the payment is actually made.
- Expanded Scope of Deductible Payments: The section explicitly lists specific types of payments (e.g., taxes, employer contributions, interest on loans, etc.) that are subject to this rule.
- Timing Flexibility for Certain Payments: Payments made after the end of the tax year but before the due date of filing the return can still be claimed as deductions for that tax year (except for payments to micro or small enterprises under clause (g)).
- No Double Deduction: If a deduction was already claimed in a prior year when the liability was incurred, it cannot be claimed again in the year of actual payment.
Practical Implications:
For Businesses:
- Businesses must ensure timely payment of specified expenses (e.g., taxes, employee contributions, etc.) to claim deductions in the correct tax year.
- Cash flow management becomes critical, as delayed payments could lead to the loss of deductions for that year.
- Employers must ensure timely remittance of contributions to employee welfare funds (e.g., provident fund, gratuity) to avoid disallowance of deductions.
For Micro and Small Enterprises:
- Payments to micro or small enterprises beyond the time limit specified under the MSME Act (Section 15) are subject to stricter rules. Delayed payments may result in disallowance of deductions.
For Compliance:
- Taxpayers must maintain accurate records of payments made during the tax year and ensure alignment with the due dates for filing returns.
- Businesses must reconcile their accounting records with actual cash flows to avoid discrepancies in claiming deductions.
Critical Concepts:
- Actual Payment Basis: Deductions are allowed only when the payment is physically made, not when the liability is recorded in books.
- Specified Financial Entities: Includes public financial institutions, scheduled banks, and certain non-banking financial companies (NBFCs). Interest paid to these entities is subject to the actual payment rule.
- No Double Deduction: If a deduction was claimed in a prior year based on accrual, it cannot be claimed again in the year of payment.
- Interaction with MSME Act: Payments to micro or small enterprises must comply with the time limits under Section 15 of the MSME Act to qualify for deductions.
Compliance Steps:
- Maintain Payment Records: Keep detailed records of all payments made during the tax year, including dates and amounts.
- Timely Payments: Ensure that specified expenses (e.g., taxes, employee contributions, etc.) are paid within the tax year or by the due date for filing returns.
- Reconcile Books: Align accounting records with actual cash flows to ensure accurate deduction claims.
- Avoid Double Deduction: Verify that deductions claimed in prior years are not claimed again in the year of payment.
Examples:
Scenario 1: A business incurs a liability for employer contributions to a provident fund in March 2024 but pays it in April 2024. Under Section 37, the deduction can only be claimed in the tax year 2024-25 (when the payment is made), not in 2023-24 (when the liability was incurred).
Scenario 2: A company pays interest on a loan from a scheduled bank in June 2024 for the financial year 2023-24. Since the payment is made before the due date for filing the return (July 31, 2024), the deduction can be claimed for the tax year 2023-24.
Scenario 3: A business delays payment to a micro-enterprise beyond the 45-day limit specified under the MSME Act. The deduction for this payment will be disallowed, regardless of when the payment is made.
This section emphasizes the importance of timely payments and accurate record-keeping to ensure compliance and maximize tax benefits.