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Covid – 19, RBI Moratorium & Expenses which are eligible for deductions only if it actually paid
In the backdrop of the outbreak of COVID-19, routines, business cycle, process & liquidity flow has been severely affected. In view of this, there are various incentives, concessions, relief announced by the Government by various packages.
In normal course, if the person is maintaining books of accounts on a mercantile (accrual) system of accounting then expenses are eligible for deduction on accrual basis and not on payment basis. However, there are certain payments which must be made before the due date of filing the income tax returns [u/s 139(1)] so as to be eligible for deduction. These provisions are contained in section 43B of the Income Tax Act – 1961. The expenses which are covered by section 43B are as under:
- Any sum payable by the assessee by way of tax, duty, cess or fee
- Any sum payable as an employer by way of contribution to any PF, superannuation fund or gratuity fund or any other fund for the welfare of employees. It may be noted that section 43B is applicable only to Employer‘s contribution and not to Employee’s contributions. Employee’s contribution is treated as business income u/s 2(24)(x) and deduction is available u/s 36(1)(va) if the contribution is paid within the due date of such contribution.
- Any sum payable as Bonus or Commission to employee for services rendered.
- Interest on any loan from any public/State financial institution or a State industrial investment corporation
- Interest on any loan or borrowing from a NBFC
- Interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
- Any sum payable as an employer in lieu of any leave at the credit of his employee, or
- Any sum payable by the assessee to the Indian Railways for the use of railway assets.
All above sums will be not eligible for deduction not on accrual basis even though mercantile system of accounting is followed. Deduction for above expenses is available only if the payment is done before the due date of filing the income tax return. It is advisable that all the payments of the nature referred to in (1) to (8) are paid before the date of filing IT Returns.
RBI has announced an EMI moratorium scheme for the term loan, working capital and other loans. All the borrowers were given a choice to avail the moratorium of 6 months. This moratorium period of 6 months is speared over two financial year viz. FY 2019-20 and FY 2020-21. The moratorium was optional and one may opt or may not opt for the moratorium. Those who do not opt for the moratorium and continue to pay the EMI will be eligible for deduction of interest as usual. However, if the person has availed moratorium option then the interest may not have been debited to the loan account by the bank. In such cases, taxpayers must take care to book the interest for the month of March -2020 in their books of accounts even if the same is not getting reflected in the bank statements for the month of March or is charged by the bank in subsequent months.
It may be noted that interest paid to Banks/NBFC is covered by section 43B & so will be eligible for deduction only if the same is paid before the due date of filing the income tax return. If the amount is not paid within the due date then the deduction will not be admissible. In such case, the deduction would be admissible in the year in which such interest is actually paid.
Conversion of Interest of Moratorium period into New Term Loan A/c:
There are few cases where the banks have offered further relaxation by providing more time in payment of interest by converting such moratorium period interest into Funded Interest Term Loan (FITL). The question arises whether interest will be admissible as deduction in such cases? Whether conversion of Interest in to FITL will tantamount to the payment and so would be eligible for deduction u/s 43B? It may be noted that Explanation 3C & 3D to section 43B provides that if any sum payable by an assessee as interest on any loan is converted by the bank/ institution into a fresh loan then the interest so converted and not ‘actually paid‘, shall not be deemed as actual payment. In short, such conversion will not be treated as equivalent to actual payment. Converted FITL will be eligible for deduction in the computation of the year in which it is paid
As far as section 43B is concerned, there are few important points which may be noted:
- If sales tax/GST payment is deferred under a Incentives scheme framed by the Government, then it is considered that the amount of sales tax has been paid and therefore deduction will be allowed in the year in which it is so deferred.
- Payment of interest on loan by issue of equity shares amounts to “actual payment” and so the provision of section 43B shall not be applicable in such cases. [JS Steels Ltd Vs. CIT (2011) 9 Taxmann.com 77]
- Unpaid electricity charges are neither tax, duty or cess and hence disallowance u/s 43B is not warranted [Wolkem (P) Ltd Vs. CUT (1995) JP ITAT]
- Even if the sales Tax/GST is not debited to the P & L A/c but routed through a separate account will not make section 43B redundant. This is the ratio that could be drawn from (1973) 71 Taxman 244 (Cal).
- Payment to gratuity fund or Leave encasement benefit through LIC can be considered as part of section 43B. [180 Taxman 275 (SC), (2013) 60 SOT 25 (Delhi)].
Housing Loan, Education Loan, Electric Vehicle Loan:
- a) Interest on housing loan u/s 24(b), interest u/s 80EEA on affordable housing & U/s 80EEB on electric vehicle loan is eligible for deduction on accrual basis and not on payment basis. It means that interest claim will not be affected whether the person has paid the amount of interest or not. Entire interest in such cases will be eligible for deduction.
b) Principal portion of the housing loan is eligible for deduction u/s 80C only if it is actually paid. So, if the person has opted for a moratorium then the claim u/s 80C would be reduced by the amount which is not paid due to the moratorium facility.
For the FY 2019-20 & 2020-21, the taxpayer needs to work out & plan the tax liability considering the impact of moratorium availed due to Covid – 19.
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