Section 37 — 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.