The Hindu Business Line : Cash versus mercantile

A COMMON feature of any pre-Budget memorandum is the plea for withdrawal of Section 43B of the Income-Tax Act, 1961. This provision, inserted by the Finance Act 1983, has been controversy-ridden and a hassle for both assessees and the department. The section, which is on computation of business income, has the heading "certain deductions to be allowed only on actual payment." Therefore, inherently, the provision requires certain types of expenditure to be allowed on cash basis, the only exception being the time given to make the payment, that is, beyond March 31 but before the due date for filing the return of income. This naturally imposes an obligation on the assessee to prove that the payment has been made on a particular date to claim the deduction.

The section has six clauses, one proviso and six detailed explanations. A cursory reading of the section will not help one understand its real implications. One has to wade through a plethora of circulars on the subject and almost all High Courts have visited this provision in some context or the other. Added to this, the tax audit report contained in Form 3CD makes elaborate pointers and requirements to certify the claim for deduction.

The genesis

Section 43B was introduced primarily to tackle the problem of disputed taxes, duties or cess which were provided for in the accounts by the assessees and claimed as deduction without making actual payment. Over time, the scope of the provision expanded to cover contribution to employee fund, bonus, interest on loans and sum payable on account of leave salary. The list can be further extended if the authorities feel it necessary.

While the corporate sector is mandated to maintain accounts as per the accrual system of accounting even as its profits and gains are charged to tax based on the mercantile system as enshrined in Section 145, Section 43B negates this principle for six types of payments. No doubt, controls and checks are needed to ensure that deductions are not claimed unless an obligation for payment exists. But having an overbearing influence on payment as the basis for deduction will virtually mean that assessees have to follow the cash system of accounting on the debit side and the mercantile system only on the credit side.

Over the years, Section 43B seems to have become dated as various forms of disclosures and obligations are already cast through accounting standards in the published accounts. Another area of litigation is the effect of Accounting Standard 5, on period items and changes in accounting policies, on Section 43B and computation of business thereon.

There is enough litigation on the subject on what constitutes prior period items and whether they have to be allowed in the year in which the errors and omissions are corrected in the accounts. In the context of Modvat (now known as Cenvat) accounting, Section 43B has created confusion as regards quantifying the extent of disallowance and also on the adoption of the correct system of accounting. Valuation of closing stock, Guidance Note on Modvat accounting and Section 43B read together have given accountants and lawyers dealing with such cases sleepless nights. Tribunal and High Court decisions on the subject provoked the introduction of Section 145A, which specifically deals with Modvat accounting.

The need for reading Sections 43B and 145A together for large enterprises adopting Modvat accounting is an issue in itself. This has to be clarified and settled. It is time for a complete relook at Section 43B, including whether it needs to continue in its present form and how to harmoniously make it function with Section 145A.

(The author is a Chennai-based chartered accountant.)