Section 37 — Actual Payment Basis | ITA 2025

Section 37 — CERTAIN DEDUCTIONS ALLOWED ON ACTUAL PAYMENT BASIS ONLY

Section 37 is the substantive equivalent of 1961 s. 43B — overriding the mercantile method by requiring ACTUAL PAYMENT for the enumerated categories: tax / duty / cess (a); employer PF / superannuation / gratuity (b); bonus / commission to employees (c); interest on loan from PFI / bank / NBFC (d)/(e); leave-encashment payable to employees (f); Indian Railways usage charges (g); MSME 45-day payment rule (h, FA 2023). The proviso allows deduction in year of payment if paid before return-filing due date u/s 263 — except for sub-clause (h), which has no grace period.

Statutory text — Income-tax Act, 2025

Marginal note — Certain deductions allowed on actual payment basis only

(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—

(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.

(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;

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

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

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

(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;

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

(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).

(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.

(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.

(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.

(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).

(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).

(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. Certain sums deemed as profits and gains of business or profession.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 37	INCOME-TAX ACT, 1961 — s. 43B
(a) Tax / duty / cess / fee	1961 s. 43B(a) — preserved
(b) Employer PF / superannuation / gratuity contribution	1961 s. 43B(b) — preserved
(c) Bonus / commission to employees	1961 s. 43B(c) — preserved
(d) Interest from PFI / bank / NBFC	1961 s. 43B(d)/(da)/(e) consolidated
(f) Leave encashment payable to employees	1961 s. 43B(f) — preserved
(g) Indian Railways usage charges	1961 s. 43B(g) — preserved
(h) MSME 45-day payment rule	1961 s. 43B(h) — FA 2023 — preserved

STATUTORY ARCHITECTURE

Section 37 OVERRIDES the mercantile method for the eight enumerated categories. The proviso allows deduction in the year of accrual IF actually paid before the s. 263 return-filing due date (typically 31-Jul / 31-Oct / 30-Nov). Critical FA 2023 carve-out: sub-clause (h) — MSME 45-day payment rule — does NOT enjoy the proviso grace-period. Any delay beyond 45 days from acceptance forfeits deduction in year of accrual; deduction shifts to year of actual payment.

JUDICIAL EVOLUTION — MSME 45-Day Rule Constitutional Validity

Bombay Chamber of Commerce v. UOI, (2024) Bom HC writ — challenged the constitutional validity of FA 2023 s. 43B(h) [now s. 37(?)(h)]. The challenge was dismissed at admission stage. The constitutional validity is therefore undisturbed.

DEPARTMENTAL PRACTICE — MSME 45-Day Rule

CBDT FAQ dated 06-04-2024 clarified: (i) sub-clause (h) applies only where the supplier is registered as a 'Micro' or 'Small' enterprise (Medium NOT covered); (ii) the 45-day window starts from acceptance of goods/services; (iii) where no written contract exists, 15-day default period applies; (iv) the 'A − B' formula does NOT apply to (h); deduction either qualifies or shifts to year of actual payment. Practitioners should obtain Udyam Registration certificate from each vendor — un-registered vendors fall outside the 45-day rule.

PLANNING NOTES & LITIGATION DEFENCE

(i) Maintain a 37-compliance register — track tax / duty / cess / PF / bonus / interest payable as on 31 March; ensure payment by return-filing date. (ii) For MSME payments, trigger payment within 45 / 15 days of acceptance — even one day's delay forfeits deduction in year of accrual; deduction shifts to year of actual payment. (iii) Form 3CD Item 26 — auditor's reporting on s. 37 / s. 43B disallowance / set-off. (iv) For interest on loan from NBFC, distinguish 'public financial institution' from 'NBFC' (sub-clauses (d) and (e) different) — NBFC interest is ALSO covered post FA 2018 amendment.

CROSS-REFERENCES

Section 32 — Other deductions (s. 37 overrides where applicable).
Section 35 — Amounts not deductible.
Section 36 — Cash-payment / disallowances.
Section 263 — Return of income (s. 37 proviso grace period).
Form 3CD Item 26 — auditor's reporting.
MSMED Act, 2006 s. 15 — 45-day payment obligation.

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