Section 37 — Certain deductions allowed on actual payment basis only. Successor to s.43B of the 1961 Act.
Section 37 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) puts seven categories of otherwise-allowable expenditure on a cash basis: they are deductible in computing income under section 26 only in the tax year in which they are actually paid, and that overrides any contrary provision in the Act, the method of accounting the assessee follows, and the year the liability was incurred. Sub-section (2) lists them — taxes, duties, cesses, surcharges and fees under any law; employer contributions to provident, superannuation, gratuity or employee welfare funds; amounts payable in lieu of an employee's accumulated leave; sums referred to in section 32(a); interest on loans, advances or borrowings from specified financial entities; amounts payable to the Indian Railways for use of railway assets; and amounts payable to a micro or small enterprise beyond the time limit in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. Sub-section (3) relaxes the rule for every item except the micro and small enterprise payment in clause (g): pay after the year end but on or before the due date for filing the return under section 263(1) and the deduction is allowed in the year the liability arose. Sub-sections (4) to (8) close the gaps — converting interest into a fresh loan, debenture or other deferred instrument is not payment; a sum already allowed when the liability was incurred cannot be allowed again on payment; employee contributions received by the assessee are outside the section; "specified financial entities" is defined; and for taxes, the sum payable includes a liability incurred in the year even if it was not yet payable under the relevant law.
The section stops an assessee on the mercantile system from deducting statutory dues, employee fund contributions, institutional interest and railway and small-enterprise dues while still holding on to the money. The section 15 msmed limb, uniquely denied the sub-section (3) grace period, ties the deduction to paying small suppliers within their statutory time.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Outer date for payment that still preserves the deduction in the year of the liability | The due date for filing the return of income under section 263(1) for that tax year | Available for every item in sub-section (2) except clause (g), the micro or small enterprise payment | 37(3) |
| Payment window for a micro or small enterprise | The time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 | The number of days is not stated in this section — it comes from that Act; exceeding it puts the sum into sub-section (2)(g) | 37(2)(g) |
Before finalising a year's accounts, identify every sub-section (2) item still unpaid and check whether it will be paid by the section 263(1) return due date; if it will, the deduction survives in the year of the liability, and if not, it waits for the year of actual payment. The one item that gets no such reprieve is a payment to a micro or small enterprise made beyond the section 15 msmed time limit — for that limb payment before the return due date does not help, so the supplier's due date has to be met inside the year. Where interest to a bank or financial institution has been restructured into a fresh loan or debenture, sub-section (4) treats it as unpaid, so the deduction cannot be claimed on the conversion. Keep the year of allowance recorded: sub-section (5) blocks a second deduction on payment if the sum was already allowed when the liability was incurred.
A firm closing its books on 31 March has Rs. 40 lakh of unpaid GST, Rs. 12 lakh of interest owed to a scheduled bank, and Rs. 30 lakh owed to a micro enterprise beyond the section 15 time limit of the Micro, Small and Medium Enterprises Development Act, 2006. If it pays the Rs. 40 lakh and the Rs. 12 lakh after year end but on or before the section 263(1) due date for filing its return, sub-section (3) preserves both deductions in the year the liability arose. The Rs. 30 lakh gets no such reprieve — clause (g) is the one item sub-section (3) excludes, so that deduction waits until the tax year of actual payment however early in the following year the supplier is paid. And if the bank instead agrees to roll the Rs. 12 lakh of interest into a fresh term loan, sub-section (4) says that is not payment at all, so the deduction is lost in that year too.
In the computation of business income annexed to the return, where each sub-section (2) item still unpaid has to be tested against the section 263(1) due date, and then in an assessment order or intimation that adds a listed sum back for the year. The section names no form or authority of its own; the date it turns on is the return due date under section 263(1).
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
| 1961 provision | What changed in the move |
|---|---|
| s.43B | 1. 'surcharge' is added to the first category. S.43B(a) read 'tax, duty, cess or fee'; s.37(2)(a) reads 'tax, duty, cess, surcharge or fee, by whatever named called, levied under any law in force'. 2. The requirement to file evidence of payment is dropped. The s.43B proviso allowed the deduction only if the sum was paid by the return due date 'and the evidence of such payment is furnished by the assessee along with such return'. S.37(3) imposes no such condition. 3. The three interest clauses collapse into one, with a single defined expression 'specified financial entities'. The set of lenders is unchanged, including the exclusion of a primary agricultural credit society and a primary co-operative agricultural and rural development bank. 4. The five transitional Explanations barring a second deduction for years up to 1983, 1988, 1996, 2001 and 2019 (Explanations 1, 3, 3A, 3AA and 3B) are replaced by one general rule in s.37(5): a deduction already allowed in the year the liability was incurred is not allowed again in the year of payment. 5. The msme carve-out from the return-due-date relief is preserved exactly, only re-lettered from clause (h) to clause (g). 6. Explanation 4, which defined 'public financial institutions', 'scheduled bank', 'State financial corporation', 'State industrial investment corporation', 'co-operative bank', 'micro enterprise', 'non-banking financial company' and 'small enterprise' by reference to other statutes, is not reproduced; s.37(7) names the entities but defines none of them. |
How we established this. Read s.37 of the 2025 Act against s.43B of the 1961 Act. The marginal headings correspond - 'Certain deductions to be only on actual payment' becomes 'Certain deductions allowed on actual payment basis only'. The governing sentence is the same: 1961 - 'a deduction otherwise allowable under this Act in respect of [the listed sums] 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'; 2025 - the same rule split into sub-sections (1) and (2), with s.26 substituted for s.28 and the parenthesis broken out into (a), (b) and (c). The listed sums map one to one: 43B(a) to s.37(2)(a); 43B(b) to (2)(b); 43B(f) to (2)(c); 43B(c) (sums referred to in s.36(1)(ii)) to (2)(d) (sums referred to in s.32(a)); 43B(d), (da) and (e) - interest to a public financial institution, State financial corporation, State industrial investment corporation, notified class of NBFCs, scheduled bank or co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank - are consolidated into (2)(e) with the same list of lenders reappearing as the definition of 'specified financial entities' in s.37(7); 43B(g) to (2)(f); and 43B(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' - to (2)(g) in the same words. The proviso, including the words '[except the provisions of clause (h)]', becomes s.37(3) with clause (g) carved out instead of clause (h). Explanation 2 becomes s.37(8) verbatim in substance; Explanations 3C, 3CA and 3D become s.37(4); Explanation 5 becomes s.37(6). This confirms the mapping s.43B to s.37, with s.43B(h) to s.37(2)(g) and (3), that earlier work in this pass had provisionally recorded.
All of them are in the Rules 2026 index.
See the circulars index.
See the notifications index.
