Amendment in Section 43B of Income Tax Act, 1961 (Certain expenses to be allowed on payment basis) by insertion of new clause (h) with effect from 01.04.2024.
Introduction: The recent amendment to Section 43B of the Income Tax Act, effective from April 1, 2024, introduces a new clause (h) with a specific focus on Micro and Small Enterprises (MSMEs). This socio-economic welfare measure aims to ensure timely payments to these entities by modifying the deduction provisions outlined in Section 43B.
Brief Background: –
The Finance Bill, 2023 introduced a significant amendment to the Income Tax Act, 1961 by adding a new clause (h) to Section 43B. This inclusion is designed as a Socio-Economic Welfare Measure, primarily targeting Micro and Small companies to ensure timely payments. Section 43B of the Act currently outlines specific deductions that are permissible only upon actual payments.
The proposed amendment, reflected in the new Section 43B (h), specifies the following:
“Section 43B (h): Any sum 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.”
Upon a thorough examination of the language used in Section 43B(h), it is evident that the amended provisions will exclusively apply to micro and small enterprises. Medium enterprises are explicitly excluded from the scope of these provisions. This interpretation is crucial in understanding the targeted applicability of the amendment, which focuses specifically on the requirements of micro and small businesses, excluding those categorized as medium enterprises.
This clause explicitly mandates that payments to Micro and Small enterprises must be made within the timeframe specified in Section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006. Adherence to this stipulated time duration is crucial for qualifying for the deduction of the sum owed to these micro and small enterprises. This amendment aims to promote timely payments and support the economic welfare of Micro and Small businesses.
The mentioned amendment exclusively pertains to micro and small enterprises. But it is crucial to note the definition of “Enterprise” as per the MSMED Act. So let us understand the definition of Enterprise as per MSMED Act.
> Enterprises is defined as follows:
As per Section 2(e) of the MSMED Act ‘enterprise’ means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services. (The industries which are specified in the First schedule are separately attached for your reference)
> Classification of Micro, Small & Medium Enterprises as per Section 7 of MSMED Act, 2006
As per section 7 of the MSMED Act the Central Government may, for the purposes of the MSMED Act, by notification, classify any class or classes of enterprises, whether proprietorship, Hindu undivided family, Association of persons, Co-operative society, Partnership firm, Company or Undertaking, by whatever name called, into a Micro, Medium or Small enterprise.
Section 7 of the MSMED Act itself classifies enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and Regulation) Act, 1951 and also enterprises engaged in providing or rendering of services an enterprise may classified as Micro, Medium or Small enterprise on the basis of investment in equipment.
|
Classification |
Micro | Small | Medium |
| Manufacturing Enterprises & Enterprises rendering services | Investment in Plant & Machinery or Equipment: –
Up to Rs.1 crore & Annual Turnover: – Up to Rs.5 crores |
Investment in Plant & Machinery or Equipment: –
More than 1 crore up to Rs. 10 crores & Annual Turnover: – More than 5 Crore up to Rs. 50 crores |
Investment in Plant & Machinery or Equipment: – More than 10 Crore but up to Rs. 50 crores & Annual Turnover: – More than Rs. 50 crores but up to Rs. 250 crores |
It is clarified by Explanation 1 to the 7(1) of MSMED Act that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.
Extract of Relevant Provisions of MSMED Act,2006
> Day of acceptance means-
– the day of the actual delivery of goods or the rendering of services; or
– where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier.
Day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services.
> “Appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier
Section 15 of MSMED Act: Time Limit of payment to MSMED Supplier
Scenarios explaining the above amendment are as follows:
|
Situation |
Tax consequence | Rationale |
| 1. X Pvt Ltd. purchases goods worth Rs. 15 lakhs from Y Pvt Ltd. Y Pvt Ltd. is an small enterprise as per Section 2 of the MSMED Act | ||
| (a) X Pvt Ltd. makes payment within the time allowed under Section 15 of the MSMED Act | (a) Entire sum will be allowed as purchases | Because payment has been made within the time limit |
| (b) X Ltd. makes payment after the time allowed under Section 15 of the MSMED Act but within previous year 2023-24. | (b) Entire sum will be allowed as purchases | Because payment has been made in the year of incurring expenses. |
| (c) X Ltd. makes payment in year 2024-25 after the time allowed under Section 15 of MSMED Act but before due date of ITR | (c) Payment will be disallowed in the year 2023-24 but will be allowed in the year 2024-25 | Because benefit of first proviso to section 43B will not be available in this situation. |
| 2. X Pvt Ltd engaged the audit services of Mr. Y. As per the agreement the fees were to be paid after completion of the audit within 15 days. X Pvt Ltd makes provision for audit fees as on 31-3-2024 for Rs. 1,50,000. The audit gets completed by 31.08.2024 and payment is made within 15 days from 31.08.2024. | No disallowance under section 43B called for | Audit fees will be allowed in the year 2023-24 because payment has been made as per agreement and period of 15 days will be counted from day of acceptance of service which in this case is 31.08.2024 |
In a nutshell,
- If agreement specifies 20 days, then payment is to be made within 20 days of Invoice.
- If agreement specifies 60 days, then payment is to be made within 45 days of Invoice.
- If no agreement than within 15 days of invoice.
> Case Study to understand impact of above amendments.
1. Net Profit for the year AY 2024-25 (FY 2023-24) is 5,00,000/-
2. Amt outstanding towards Creditors (Micro & Small Enterprises) due more than 45 days Rs. 15,00,000/- out of which Rs.5,00,000/- was paid before 31.03.2024 and Rs.7,00,000/- was paid before filing Return of Income and balance amount of Rs.3,00,000/- was outstanding on the date of filing return of income.
Due to the outstanding amount payable to Micro and Small Enterprises exceeding 45 days, the said amount is subject to being added back to the net profit. This adjustment is necessitated by the disallowance under Section 43B, resulting from the insertion of the new section effective from April 1, 2023.
|
No. |
Details | Amt |
| 1. | Net Profit for the AY 24-25 | 5,00,000/- |
| 2. | Add: – Amt payable to Creditors (Micro & Small Enterprises) due more than 45 days (Note 1) | 10,00,000/- |
| Total Net Profit | 15,00,000/- | |
| Tax on Total income (@ 31.20% for Partnership Firm/LLP) | 4,68,000/- |
Note 1: Here amount payable to MSME creditors which is outstanding for more than 45 days as on 31st March and same is paid before due date of furnishing its Return of Income i.e Rs. 7,00,000/- will be disallowed as clause (h) of section 43B does not fall under the proviso of section 43B. Hence payment made after year end i.e. 31st march of previous year but before due date of furnishing return of income will be allowed in the year of payment and not in year when it accrued.
Proviso of section 43B states that deduction on accrual basis is allowed, if the amount is paid by due date of furnishing of the return of income.
Recommendation regarding Classification of MSME-
- The supplier strongly advises all business entities to obtain an annual declaration confirming their classification as micro or small enterprises under the Micro, Small, and Medium Enterprises Development Act, 2006. This declaration is instrumental in ensuring compliance with relevant regulations and facilitates purchasers in identifying the enterprise’s status.
- Additionally, it is recommended that Micro and Small enterprises include a specific note on their invoices, explicitly stating their enrollment under the Micro, Small, and Medium Enterprises Development Act, 2006. This practice is aimed at simplifying the compliance process for purchasers, making it clear that the invoicing entity qualifies as a micro or small enterprise under the mentioned Act. Such transparency aids purchasers in meeting their compliance obligations with confidence.
- Since it is the liability of the assesse to identify their supplier’s status, therefore, written declaration from all suppliers of goods or services as to their status of registration under the MSMED Act should be sought. If they claim their status as ‘registered’, also obtain a copy of their registration certificate from which their category as “micro”, “small” or “medium” may be established.
- Hence, it is imperative for the client to accurately maintain a distinct list of creditors categorized as MSME (Micro Small and Medium Enterprises) from the beginning of the fiscal year. This entails acquiring certificates or declarations from creditors confirming their status under the MSMED Act. This proactive approach is essential to mitigate any potential disallowances related to delayed payments to MSME creditors, as stipulated by the recent amendment.
Conclusion:
In conclusion, the Section 43B amendment of 2024 has a direct impact on MSMEs, encouraging timely payments for socio-economic welfare. The article emphasizes the need for businesses to understand and comply with the revised provisions, especially regarding the classification of enterprises under the MSMED Act. Practical recommendations, including obtaining annual declarations and maintaining a distinct list of MSME creditors, are crucial for navigating the complexities introduced by the amendment.
The inclusion of case studies provides practical insights into the tax consequences, enabling businesses to strategize and align their payment practices with the amended regulations. Staying informed about the Section 43B amendment is essential for businesses to optimize financial management and ensure compliance with the evolving tax landscape.
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Disclaimer: Please note that the views expressed in this article are the personal opinions of the authors and do not represent a view of any organization or any other person. No assurance is given if such view is acceptable by any judicial or tax authorities. It is advisable to undergo independent research before reaching to any conclusion.
This article is contributed by CA Ashwin Jain, Partner at ATMS & CO LLP, CA Ayushi Saini Manager at ATMS & CO LLP and inputs from Article Assistant Ankita Kewalramani.
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WHETHER THIS PROVISION IS APPLICABLE TO TRADERS ALSO????