Summary: Section 43B(h) of the Income-tax Act, 1961 requires special attention during tax audits because delayed payments to qualifying micro and small enterprises can result in disallowance of otherwise deductible expenditure. Unlike most other liabilities covered by Section 43B, payment before the income-tax return filing deadline does not preserve the deduction for the earlier year. The auditor must establish the supplier’s qualifying status, the date of acceptance or deemed acceptance, the applicable statutory payment deadline and the actual payment date. The article explains the distinction between the 15-day limit where no written agreement exists and the maximum 45-day period permitted under Section 15 of the MSMED Act, 2006. It discusses the revised MSME classification thresholds effective from 1 April 2025, treatment of traders, Udyam registration, disputed invoices and the importance of invoice-level verification. It also examines the amended Clause 22 of Form 3CD, including the reporting difficulty arising where payments are made late but during the same financial year. Practical recommendations include preparing vendor-wise and invoice-wise workings, reconciling disclosures with financial statements and Form MSME-1, documenting management representations and examining inadmissible interest under Section 23 of the MSMED Act. The equivalent provision under the Income-tax Act, 2025 is Section 37(2)(g), applicable from Tax Year 2026-27.
Why this clause causes trouble
Most disallowances in a tax audit come from something the client did. Section 43B(h) is different: it often comes from something the client did not know about. A supplier’s Udyam status, an acceptance date that no one recorded, or a payment made a few days late can each turn a normal business expense into taxable income for the year. In audit season, this is the clause where the books, the MSME note and Form 3CD most often disagree.
What the section says
Section 43B(h) of the Income-tax Act, 1961 covers any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the MSMED Act, 2006. Such a sum is allowed as a deduction only in the year in which it is actually paid.
This is where it differs from the other items in section 43B. For taxes, duties and similar items, paying before the due date of the return saves the deduction. For delayed MSME payments it does not. A payment made after year-end but before the ITR due date does not rescue the earlier year. It is simply allowed in the year of payment.
Who is covered
- Micro and small enterprises only. Medium enterprises are outside the section.
- The supplier’s status depends on both investment and turnover limits. From 1 April 2025 these are, for micro, investment up to ₹2.5 crore and turnover up to ₹10 crore, and for small, up to ₹25 crore and ₹100 crore.
- Check the Udyam certificate, not just the number printed on the invoice. It shows the category and whether the supplier is a manufacturer, service provider or trader.
- Traders are generally treated as outside the section, because the Udyam registration for retail and wholesale traders was allowed for priority-sector lending only. Service providers are covered if they are micro or small. Document why each excluded supplier is excluded.
- A supplier that registered mid-year is covered only for transactions on or after its registration date.
How the clock runs
- The clock starts on acceptance, meaning delivery of the goods or rendering of the services, or deemed acceptance. It does not start on the invoice date.
- With no written agreement, the limit is 15 days. A written agreement can extend it, but never beyond 45 days.
- A disputed invoice resets the clock only if there is a timely written objection. An oral or late objection does not.
Two examples on a 31 March year-end:
How Clause 22 of Form 3CD is reported
Clause 22 has three parts:
- 22(i): the interest inadmissible under section 23 of the MSMED Act.
- 22(ii): the amount that had to be paid to micro and small enterprises under section 15 during the year.
- 22(iii): of that amount, (a) paid within the section 15 limit and (b) not paid within the limit and inadmissible for the year.
The clause as it stands does not reconcile by design. An invoice paid late, but within the year, fits neither 22(iii)(a) nor 22(iii)(b). Report the clause as worded, keep a separate working bucket for those amounts, and explain any material gap in a remark. Do not push late-paid invoices into (a) to make the numbers tie.
Build the working at invoice level. For year-end creditors at least, split the amounts into four buckets:
Five mistakes clients make
- Treating 43B(h) like the other 43B items and paying before the ITR due date.
- Counting from the invoice date and not from the acceptance date.
- Assuming that a 90-day credit term in the contract overrides the 45-day ceiling. It does not.
- Having no vendor list that flags MSME status, so the auditee reports Nil.
- Forgetting the link with other filings: the MSME note in the accounts and, for specified companies, Form MSME-1 (due 31 October for April to September) should reconcile with Clause 22.
What to do in the last days before you sign
- Get a management list of MSME vendors with Udyam number, category and activity. Do not accept a Nil without testing it.
- Verify the Udyam certificates of the significant creditors.
- Prepare the invoice-level working and the four buckets above.
- Reconcile Clause 22 with the MSME note and the MSME-1 filings.
- Obtain a management representation on the completeness of the vendor list and on the payment terms. If information is incomplete, qualify the report instead of reporting Nil.
- Check interest under section 23 of the MSMED Act. Whether or not it is provided in the books, it is not deductible. Reporting Nil in 22(i) just because no provision exists is a weak position.
Grey areas worth flagging
Practice is still developing on a few points: dues that were outstanding before the clause took effect, retention money under a contract, unsold stock at year-end, and the exact scope of 22(ii). Where you take a position, state the basis you adopted in the report or the working papers.
The rule continues under the Income-tax Act, 2025 for Tax Year 2026-27 onward, so the working you build now is reusable.
The takeaway
Section 43B(h) is a timing rule that behaves like a permanent disallowance if no one is watching the dates. A vendor list, an acceptance-date record and an invoice-level working will settle most of it before the report is signed.
— AGM
This note is for general information and is not professional advice. Verify the provisions, thresholds and Form 3CD clauses against the Act and the latest notified forms before acting.
