Deduction of Expenses of Payment to Indian Railways

Key points of Deduction of Expenses of Payment to Indian Railways

• Any payment made to Indian Railways for the use of railway assets made on or after 1-4-2016 would be allowable only on actual payment, irrespective of the year in which the liability is incurred; and, where the payment is made before the due date of filing return of income, it would be allowed in the year in which it is incurred.
• This amendment will take effect from 1^stApril, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.
• Finance Act, 2016 adds to the list of expenditure allowed only on payment in section 43B, with effect from assessment year 2017-18. It includes “any sum payable by the assessee to the Indian Railways for the use of railway assets”, in the list for allowance only on payments basis. [Note :- Section 43B of the Act allows deductions in respect of certain payments, like, tax, duty, etc., only upon actual payment and in the year of payment. Also, where the payment in respect of a particular previous year is made before the due date of filing the return of income for that year, the expenditure is allowed in the year in which it is incurred.]
• The Amendment neither defines ‘ railway assets ‘ nor defines ‘use’.
• The liability incurred by an assessee for any other transaction (that is, other than use of railway assets) should not be governed by the provision. Thus, freight payments would not be covered, since they are not for use of railway assets; but, they are for the service – carriage of goods. To illustrate, definition of ‘work’, for the purposes of section 194C of the Act (providing for deduction of tax at source from payments to contractors etc.), includes ‘carriage of goods or passengers by any mode of transport’; but, it excludes ‘by Railways’. Thus, the Act itself recognises that the carriage of goods by Railways could be regarded as work; accordingly, such payments (including for the services) cannot be regarded as for use of railway assets.
• Use’ and ‘railway’ assets would imply that Indian Railways may confer some permission or authorisation or right to use its assets, like, wagons, railways sidings or platform or stalls or its immovable properties. Usually, in respect of such user, the payments are made periodically and, therefore, in respect of which, there may be some default or delays, etc. To discourage laxity in payments, the provision is made for allowance only on actual payment under Section 43B.

Deduction of Expenses of Payment to Indian Railways : Illustration

An assessee, during financial year 2016-17, has to make payment of Rs. 50,000 and Rs. 1,00,000 for use of two different railway assets to Indian Railways. The due date of filing Return would be, say, 30-9-2017. The assessee makes payment of

• Rs. 50,000 before 30-9-2017 and
• Rs. 1,00,000 on 31-10- 2017

In the above case, Rs. 50,000 paid for use of railway assets before due date of Return would be allowable in computing total income of assessment year 2017-18;

However, the allowance of Rs. 1,00,000 can be made in assessment year 2018-19, that is, year of payment and not the year of incurring the liability.

Deduction of Expenses: Section 43B

Section 43B disallows the sum which are not paid in the financial year as well as not paid before due date of filing income tax return.

The following sum are allowed in the year in which they are incurred, only if they are paid before the due date of furnishing the return of income under section 139(1) of that year.

1. 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. (See Note 1)
2. 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
3. any bonus or commission to employees. If commission is payable to an agent, then this section is not applicable.
4. any sum payable by the assessee as interest on any loan or borrowing from any public financial institution 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 (See Note 2)
5. any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances (See Note 2)
6. any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee (Leave Encashment)
7. Payment made to Indian Railways for use of Railway Assets (From financial year 2016-17)

It they are paid after due date of furnishing return of that year, then such expenditure is allowed in the year in which it is actually paid.

Note 1 – “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. For eg Vat for the month of March is payable by 14th April. Since this liability is incurred in month of march only, this amount is covered under this section and will be disallowed if not paid till the due date of furnishing return.
If sales tax payment is deferred under a scheme framed by the government, then it is considered that the amount of sales tax has been paid and therefore allowed in the year in which incurred.

Note 2 – In case of (d) & (e), if interest is not actually paid and converted into loan or advance, then it is not treated as actually paid and therefore not allowed as deduction in the year to which it relates. Such interest is allowed in the year in which such converted loan is actually paid. [Circular no. 7/2006]

Deduction of Expenses of Payment to Indian Railways :-

Clause 23 of Finance Bill 2016

Clause 23 of the Bill seeks to amend section 43B of the Income-tax Act relating to certain deductions to be only on actual payment.

The aforesaid section, inter alia, provides that certain sum payable by the assessee shall be allowed as deduction irrespective of the previous year in which the liability to pay such sum was incurred if the same is actually paid on or before the due date of furnishing of the return of income.

It is proposed to insert a new clause in the said section so as to provide that any sum payable by the assessee to the Indian Railways for use of railway assets shall be allowed as deduction only, if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year.

This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.