At first glance, Section 43(2) looks like a tiny definition clause. But the meaning it carries can shape your taxable profit, your deductions, and even how your financials appear. This section defines what “paid” truly means when computing income under Profits and Gains of Business or Profession. Whether you follow the cash method or the mercantile method, the law ensures your recognition of expenses stays consistent with the accounting system you use.
Understanding Section 43(2) helps avoid mismatched entries, unnecessary disallowances, & unexpected scrutiny. And if you run a business or profession—even a small one—it’s a provision worth knowing.
What Exactly Does Section 43(2) Say?
Section 43(2) defines the term “paid” in the context of computing profits & gains from business or profession.
The law says:
“Paid” means actually paid or incurred, according to the method of accounting (cash or mercantile) on the basis of which the profits or gains are computed.
In simple terms, the meaning of “paid” depends entirely on how you maintain your books.
Also Read: Deductions Allowed Only on Actual Payment Basis
Cash Method vs. Mercantile Method
To appreciate Section 43(2), you need to understand the two common accounting approaches:
1. Cash Method
You record income only when you receive it, and expenses only when you actually pay them.
Under this method:
-
An expense is considered “paid” only when the money actually leaves your hands.
2. Mercantile (Accrual) Method
Income is recorded when earned, & expenses when incurred—even if payment will happen later."
Under this method:
-
An expense is considered “paid” the moment it is incurred, regardless of when the cash moves.
Section 43(2) simply aligns the tax definition with your chosen accounting style.
Why This Definition Matters in Real Life
You’d be surprised how many tax disputes begin with a simple expense entry.
A relatable example
Imagine you’re a freelance designer who follows the mercantile method.
In March, your software vendor sends you an invoice for ₹12,000. You intend to pay it in April.
Under Section 43(2):
-
The expense is considered “paid” in March, because you incurred it & your accounting system recognizes it immediately.
But if you used the cash method:
-
You can claim it only in April, when you actually pay.
This difference may look small, but it affects:
- Your taxable profit
- Your deductions
- Your quarterly advance tax
- Your financial planning
Also Read: Section 43 : Definitions, Valuation, and Business Tax Implications
Avoiding Common Mistakes That Trigger Scrutiny
Section 43(2) helps prevent mismatches, but businesses sometimes slip up. Common issues include:
- Claiming expenses under the wrong year
- Mixing cash & mercantile entries
- Showing an expense as “incurred” but not recognizing it in the books
- Recording payments without documentation
Tax officers often verify whether the entries align with the accounting method chosen. A mismatch usually leads to disallowance of the expense.
How Section 43(2) Connects to Other Business Deductions
This section may be short, but it influences how you apply several other provisions under business income—like:
- Section 30 (rent)
- Section 31 (repairs & insurance)
- Section 32 (depreciation)
- Section 37 (general business expenses)
Each of these requires clarity on when an expense is “paid” or “incurred,” and Section 43(2) gives the foundational definition.
A Small Clause That Helps Maintain Fairness
The purpose of Section 43(2) is not to complicate your tax return—it’s to bring consistency.
Without it, taxpayers could:
- Delay recognizing liabilities to reduce profit"
- Claim deductions selectively
- Mix accounting practices to manipulate taxable income
This tiny but powerful definition keeps the system fair, transparent, and uniform across businesses.
Also Read: Understanding Actual Cost of Assets and Its Relevance
Real-Life Observation
Over the years, I’ve seen many small business owners unintentionally claim expenses in the wrong year simply because they didn’t know whether their system considered an expense “paid” or not.
A five-minute clarification on Section 43(2) often saved them hours of rework & weeks of stress.
Conclusion
Section 43(2) may seem like just a definition in the Income Tax Act, but it is a key building block in how business income is computed. If you want help aligning your accounts or understanding tax rules more clearly, you can always reach out through Callmyca.com.
