Certain categories of business expenditure — statutory taxes, duties, cess or fees, employer contributions to specified employee welfare funds, bonus or commission payable to employees, interest on loans from specified financial institutions and banks, and leave encashment liability, among others — are deductible only in the year in which they are actually paid, regardless of the year in which the liability was otherwise incurred or accrued under the mercantile system of accounting. This payment-basis override was introduced specifically to curb the practice of claiming large, merely provisioned statutory liabilities as deductions without actually discharging them.

A specific and taxpayer-friendly relief accompanies this rule: where the payment, though made after the close of the relevant tax year, is made on or before the due date for furnishing the return of income for that year, the deduction is still allowed in the year to which the liability relates, rather than being pushed to the year of actual payment. This relief was itself the subject of significant litigation over whether it should be applied retrospectively to years before its introduction.

Relevant Case Laws

Allied Motors (P) Ltd. v. CIT (1997) 224 ITR 677 (SC) — held that the proviso allowing a deduction for statutory dues paid before the due date for filing the return, even though paid after the close of the relevant tax year, is curative and remedial in nature — intended to remove an unintended hardship in the original provision — and therefore applies retrospectively, covering assessment years before the proviso was formally introduced, provided the payment itself was made before the return filing due date.

Frequently Asked Questions

Q. Can a business claim a deduction for GST or provident fund dues that are only provisioned but not paid?

A. No — for the specified categories of statutory dues covered by the payment-basis rule, a mere provision or accrued liability is not deductible; actual payment (within the permitted window) is required.

Q. What if the statutory due is paid after the year-end but before the tax return filing due date?

A. It remains deductible in the year to which the liability relates, following the retrospective, curative relief recognised in Allied Motors, rather than being deferred to the year of actual payment.

Q. Does this rule apply to ordinary trade payables to suppliers?

A. No — the payment-basis override applies specifically to the enumerated categories (statutory dues, specified employee welfare contributions, certain interest payments, leave encashment, and similar items), not to ordinary trade credit or supplier payables, which continue to be governed by the assessee's regular method of accounting.

Q. What happens if the statutory due is paid after the return filing due date has passed?

A. The deduction is then generally allowed only in the year in which the payment is actually made, rather than the year to which the liability originally related.

Precautions to Be Taken

1.      Track the specific list of statutory and employee-welfare dues subject to this payment-basis rule separately from ordinary trade payables, since the compliance requirement (actual payment by the return due date) differs materially between the two.

2.      Prioritise clearing statutory dues — GST, provident fund, ESI, bonus, and similar liabilities — before the income tax return filing due date each year, since missing this window pushes the deduction entirely to the year of actual payment.

3.      Maintain payment challans and remittance proof for every item covered by this rule, cross-referenced to the specific liability and tax year, since this evidence is routinely requested in scrutiny.

4.      Where a large statutory liability cannot be cleared before the return due date for genuine cash-flow reasons, plan the tax impact of the resulting deferral in advance rather than being surprised by it during assessment.

5.      Reconcile the tax computation's payment-basis adjustments against the books each year, since amounts provisioned in the books but not paid in time require a specific add-back in the tax computation that is easy to overlook.

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