Section 37. Certain deductions allowed on actual payment basis only -in ITA 2025 and S.43B of ITA 1961 analysed.

ITA 2025

ITA 1961

37. Certain deductions allowed on actual payment basis only.

1[Certain deductions to be only on actual payment.

Words basis only have been added in ITA 2025

Corresponding provision matched.

(1) The sums payable, as specified in sub-section (2), which are otherwise allowable as a deduction under this Act, shall be allowed as a deduction while computing the income chargeable under section 26 only in the tax year in which such sums are actually paid irrespective of--

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

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In ITA 2025 restrictions apply to income from business and profession (s.26) on reading of this section.

S.43B of ITA 1961 was applied to all provisions.

(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.

shall be allowed (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) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:

In substance provisions of ITA 25 are similar to in ITA 1961 and have same effect

(2) The sums payable for the purposes of sub-section (1), shall be--

(a) tax, duty, cess, surcharge or fee, by whatever named called, levied under any law in force;

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[(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

same

(b) contribution of the employer to a provident fund or superannuation fund or gratuity fund or any fund for the welfare of employees;

(b) any sum payable by the assessee 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,

Same

(c) amount payable by employer in lieu of any leave at the credit of the employee;

[(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his 29[employee, or

Same

(d) any sum referred to in section 32(a);

[(c) any sum referred to in clause (ii) of sub-section (1) of section 36,]

Same . Relates to bonus and commission to employees in both provisions on same lines.

(e) interest on loans or advances or borrowings from specified financial entities as per the terms and conditions of the agreement governing such loans or advances or borrowings;

[(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution 7[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

[(da) any sum payable by the assessee as interest on any loan or borrowing from 41[such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or]

[(e) any sum payable by the assessee as interest on any 10[loan or advances] from a scheduled bank 31[or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank] in accordance with the terms and conditions of the agreement governing such loan 11[or advances],]

In substance provisions in both enactments are similar, There is difference of words and drafting style.

(f) amount payable to the Indian Railways for use of railway assets; or

[(g) any sum payable by the assessee to the Indian Railways for the use of railway assets,

'Amount payable' and 'any sum payable' appears same but it may lead to disputes. Please see note given below the table.

(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 (27 of 2006).

[(h) any sum 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 (27 of 2006.),

Amount payable' and 'any sum payable' appears same but it may lead to disputes. Please see note given below the table.

(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.

Provided that nothing contained in this section except the provisions of clause (h)shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Same changes are due to changes in sections and style of drafting.

(4) If interest on loans or advances or borrowings 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.

++++ to be read with subsection(7)

Explanation 3C.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing 38[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.

(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 it is paid.

Explanation 3.-For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]

[Explanation 3A.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

[Explanation 3AA.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (da) is allowed in computing the income referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]

23[Explanation 3B.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]

24[Explanation 3C.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing 38[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.]

35[Explanation 3CA.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (da), shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing 39[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.]

25[Explanation 3D.-For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance 40[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.]

In substance provisions are on same line and have same effect, the difference is due to consolidation of provisions and explanations.

Under both enactments care is take to avoid double deduction and interest will not be considered actually paid if it is not actually paid but payment has been deferred / restructured in one or other manner.

(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).

[Explanation 5.-For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.

Similar effect.

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(7) For the purposes of this section, "specified financial entities" means a public financial institution or State Financial Corporation or State Industrial Investment Corporation or such class of non-banking financial companies as may be notified by the Central Government or 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).

[Explanation 4.-For the purposes of this section,-

(a) "public financial institutions" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

27[(aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;]

(b) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

(c) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and 28[eligible for deduction under clause (viii) of sub-section (1) of section 36].]

32[(d) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.]

(8) For the purposes of sub-section (2)(a), "the sum payable" means a sum for which the assessee has incurred liability in the tax year even though such sum might not have been payable within that year under the relevant law.

[Explanation 2.-For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.]

(e) "micro enterprise" shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006.);

f) "non-banking financial company" shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934.);

[(g) "small enterprise" shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).