Uncover the implications of Section 43B(h) under the Income Tax Act, 1961, effective from FY 2023-24. Dive into the analysis, responsibilities on auditors, and the impact on sundry creditors. Stay informed for seamless financial compliance.
A Deep Analysis of Section 43B(h) of Income Tax Act, 1961 becoming Applicable from Financial Year 2023-24 in Respect of AY 2024-25
With the insertion of new Sub Section (h) in Section 43B of the Income Tax Act, 1961 by the Budget of this year, lots of responsibilities have been vested on the Auditors to analyse the veracity of Sundry Creditors in the Books of the Auditee as to if any one of them fall under Micro or Small Enterprise as on Balance Sheet date and if so, whether any sum payable to any of them has been paid to them on or before the specified due date of filing of Return of Income of the Auditee for the relevant Financial Year. The Auditee shall also be required to maintain due records as to classification of the Suppliers in different categories as Micro Enterprise or Small Enterprise in terms of MSMED Act, 2006 to ensure expeditious completion of Audits.
Section 43B of the Income Tax Act, 1961 starts as hereunder:
“Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of ………………………………………………………… shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which suc sum is actually paid by him
Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by assessee along with such return”
The new sub section (h) added to Section 43B of the I T Act, 1961 reads as hereunder:
(h): “any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”
Section 15 of MSME Development Act, 2006 stipulates as under:
“Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day*: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance”
Appointed day’ means 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.
Day of Acceptance or Deemed Acceptance means the day on which the buyer received the goods or service.
Let us look into the concept of Acceptance Day and Appointed day with the help of some examples:
SITUATION 1: NO WRITTEN AGREEMENT FOR CREDIT PERIOD AND NO OBJECTION IN WRITING FROM BUYER
| Date of Order | 1/1/2023 |
| Date of Supply | 17/1/2023 |
| Credit Period | NIL |
| Objection in Writing | None |
| Date of Acceptance or Deemed Acceptance | 17/1/2023 |
| Appointed Day | 17/1/2023 Plus 15 days= 1/2/2023 |
| Payment to be made on or before | 1/2/2023 |
SITUATION 2: WRITTEN AGREEMENT FOR CREDIT PERIOD of 60 days AND NO OBJECTION IN WRITING FROM BUYER
| Date of Order | 1/1/2023 |
| Date of Supply | 17/1/2023 |
| Credit Period | 60 days |
| Objection in Writing | None |
| Date of Acceptance or Deemed Acceptance | 17/1/2023 |
| Due date of payment as per Agreement | 18/3/2023 |
| Appointed Day | 17/1/2023 Plus 15 days= 1/2/2023 |
| Payment to be made on or before | 17/1/2023 Plus 45 Days = 3/3/2023 |
In the case of any objection from the Buyer, the number of days gets extended by the number of days taken by the supplier to remove the objection.
SITUATION 3: NO WRITTEN AGREEMENT FOR CREDIT PERIOD AND THERE IS OBJECTION IN WRITING FROM BUYER
| Date of Order | 1/1/2023 |
| Date of Supply | 17/1/2023 |
| Credit Period | NIL |
| Objection in Writing | 17/1/2023 |
| Date of Removal of Objection | 25/1/2023 |
| Date of Acceptance or Deemed Acceptance | 25/1/2023 |
| Due date of payment as per Agreement | NA |
| Appointed Day | 25/1/2023 Plus 15 days= 9/2/2023 |
| Payment to be made on or before | 9/2/2023 |
SITUATION 4: WRITTEN AGREEMENT FOR CREDIT PERIOD OF 60 DAYS AND THERE IS OBJECTION IN WRITING FROM BUYER
| Date of Order | 1/1/2023 |
| Date of Supply | 17/1/2023 |
| Credit Period | 60 DAYS |
| Objection in Writing | 17/1/2023 |
| Date of Removal of Objection | 25/1/2023 |
| Date of Acceptance or Deemed Acceptance | 25/1/2023 |
| Due date of payment as per Agreement | 26/3/2023 |
| Appointed Day | 25/1/2023 Plus 15 days= 9/2/2023 |
| Payment to be made on or before | 25/1/2023 Plus 45 days = 11/3/2023 |
If the objection is made by Buyer after 15 days from the date of acceptance, the same shall not be considered and the Appointed date in that case shall be 1/2/2023 as per situation 1 as of no objection was raised by the Buyer.
MEANING OF AN ENTERPRISE:
As per Section 2(e) of MSME Development Act, 2006, 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.
MEANING OF SUPPLIER:
As per Section 2 (n) of the MSMED Act, 2006, “supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,—
- the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);
- the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956);
- any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;
It means that in order to attract the disallowance under Section 43B (h) of the Income Tax Act, 1961, the Supplier must be either a Micro or a small enterprise registered under MSMED Act by virtue of Section 8 (1) of the said Act.
Here, the meaning of Micro or Small Enterprise as per MSMED Act needs to be looked into as laid down in Section 7 of the said Act.
Section 7 (a) in the case of the 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 (65 of 1951), as—
(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees;
(ii) a small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees;
Section 7 (b) in the case of the enterprises engaged in providing or rendering of services, as—
(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;
(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees;
A close reading of Section 16, 22, 23 and 24 of the MSMED Act will be of much significance in the context of disclosure in Financial Statements and disallowance of Interest.
SECTION 16: DATE FROM WHICH AND RATE AT WHICH INTEREST IS PAYABLE: “Where any buyer fails to make payment of the amount to the supplier, as required under Section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times the bank rate notified by Reserve Bank.”
Section 22: Requirement to specify unpaid amount with interest in the annual statement of accounts.—
Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:—
(i) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;
(ii) the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
(iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;
(iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and
(v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.
SECTION 23: Interest not to be allowed as deduction from income.—
Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
SECTION 24: Overriding effect: The provisions of Section 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
In view of above, it is now crystal clear that in addition to the fact of inadmissibility of Interest payable by a Buyer to any Micro or Small Enterprise in respect of any supply of goods or services, now from AY 2024-25, any amount remaining unpaid to any Micro or Small Enterprise towards any supplies from them for Goods or Services for any Financial Year shall be added back to the Income of that Financial Year unless and until the same is paid within the due date of filing of Return for that Financial Year and shall be allowed in the year of actual payment thereof on payment basis. This amendment has cast a greater Audit burden on the Auditors to verify the Creditors more deeply as to whether any of them are in the category of Micro or Small Enterprise in the year of Audit and in order to ascertain the same, only taking a declaration from the Auditee may not be enough and the Auditor will need to have a Certificate from the respective creditors remaining due as at the end of the Financial Year as to whether they fall under any of the two categories in terms of MSMED Act, 2006.
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DISCLAIMER: The author is a Practising Chartered Accountant. The information contained in this Article is merely to provide an independent analysis of the provisions in a nutshell to the reader. The reader should not consider it as any expert or legal opinion in any matter raised herein. The reader is always advised to seek independent professional advice from his respective consultant before taking any action on specific issues.
Author Bio
Well written article. However definition of MSME is now changed and there is no longer any distinction between service and manufacture. Turnover and Investment Limits have also been revised upwardly.