Introduction: Explore the implications of the recent amendment in Section 43B of the Income Tax Act, focusing on deductions tied to payments made to micro and small enterprises. Learn about the timeline constraints set by the MSMED Act, potential disallowances, and how this affects taxable income for businesses. Gain insights into scenarios, illustrations, and the necessary steps to ensure compliance.
Section 43B of the Income Tax Act in India pertains to certain deductions that are allowed only when the actual payment is made before the due date for filing income tax returns, irrespective of the accounting method followed by the taxpayer. In other words, these deductions are allowed only on actual payments before the due date for filing income tax returns, not on accrual basis.
In order to promote timely payments to micro and small enterprises, payments made to such micro and small enterprises is included within the ambit of section 43B of the Act by the Finance Act 2023. Accordingly, a new clause (h) is inserted in section 43B of the Act to provide that
(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.
Section 15 of the MSMED Act delineates the timeframe within which payments for goods or services provided by micro and small enterprises must be made by the buyer. According to the Act, payments should be completed by the date mutually agreed upon in writing by the involved parties, ensuring that this period does not surpass 45 days from the acceptance date of the goods or services. In instances where there is no written agreement between the parties, the payment must be made within 15 days following the acceptance of the goods or services.
This amendment implies that if a business or professional entity purchases goods/services from a Micro or Small enterprise, the payment of which is outstanding as on 31st March 2023 and fails to make payment within 15 days (where there is no agreement) or 45 days (where there is agreement) from the date of acceptance of goods or availing of service, will not be deductible when computing taxable business income. Consequently, the taxable income will increase by the outstanding amount, unless the payment is made within 15 days or 45 days from the date of delivery of goods/service. The same would be allowed as deduction in the previous year in which the payment is made.
- Day of Acceptance means
- The day of actual delivery of Goods or rendering of services, (or)
- If objection is raised regarding acceptance of goods or service by the buyer in writing within 15 days of delivery of goods or rendering of services, then the day on which such objection is resolved by the supplier.
- Deemed acceptance means the day of actual delivery of Goods or rendering of services, where NO objection is raised by the buyer regarding the acceptance of Goods or Services within 15 days of delivery of goods or rendering of service.
Further, the extended time period for payment till the due date of filing return of income under section 139(1) (i.e 31st July or 31st October as the case may be) is not available in case of amounts payable to micro and small enterprises. Thus, it will be allowed on accrual basis only if the payment is within the time mandated under the MSMED Act. This implies that the deduction will not be allowed, even if the payment is made within the due date for filing the income tax return.
Illustration: ABC Enterprise (partnership firm) purchased goods worth Rs. 10,00,000 from XYZ enterprise (Small enterprise). Date of Invoice is 28/02/2024 and date of delivery of goods is 01/03/2024 with the following terms of payment as specified in the agreement between the parties.
| Time limit | Due Date (30 days from 01/03/2024) | Actual date of payment | Year of deduction |
| 30 days | 30/03/2024 | 02/04/2024 | 2024-25 |
ABC had an expense payable to XYZ that accrued in the financial year 2023-2024 but he settled it in the subsequent financial year 2024-25 after the time limit prescribed under section 15 of the MSMED Act, 2006 ended.
In this scenario, as the payment is made beyond the time limit as prescribed under section 15 of the MSMED Act 2006 and also in the subsequent year 2024-25, ABC will not be eligible for deduction of the said payment in the financial year 2023-2024 when the expenses accrued.
Assuming ABC enterprise has annual net profit of Rs.20 lakhs. His tax computation is as mentioned below
| Tax liability without considering the amendment | Tax liability after considering the amendment | ||
| Net profit as per Profit and Loss Account | 20,00,000 | Net profit as per Profit and Loss Account | 20,00,000 |
| Add: Disallowance under section 43B on account of non-payment within the due date as per MSME Act | NIL | Add: Disallowance under section 43B on account of non-payment within the due date as per MSME Act | 10,00,000 |
| Taxable Income | 20,00,000 | Taxable Income | 30,00,000 |
| Tax thereon @ 31.2% | 6,24,000 | Tax thereon @ 31.2% | 9,36,000 |
On-going through the above table, it can be seen that there will be additional tax liability of Rs. 3,12,000 (9,36,000 – 6,24,000) [plus interest under section 234B and 234C on account of failure to pay advance tax] on entity ABC merely because it could not make payment to its supplier XYZ. The said expense will be allowed as deduction during the FY 2024-25.
It is important to note that, where there is no written agreement between the parties, payment shall be made within 15 days from the day of actual delivery of goods/services.
Taxpayers will now have to categories the amount payable to Micro and Small Enterprise as on 31st March into two categories namely ‘MSME’s with whom there is agreement (Category A)’ and ‘MSME’s with whom there is no agreement entered (Category B)’. Time period for payment mentioned in Purchase Order (PO) or Invoice shall also be construed as having agreement with the parties.
Category A will have to be analysed further into sums outstanding for more than the agreed upon period and sums outstanding for less than agreed upon period. Category B will have to be analysed into outstanding for more than 15 days and sums outstanding for 15 days or less.
Accordingly, the sums which have been outstanding for more than the agreed upon period under Category A and sums outstanding for more than 15 days under Category B shall be disallowed in the previous year under consideration. The amount so disallowed shall be claimed as deduction in the previous year in which such sums are paid.
Please note that while analyzing the amounts payable to micro and small enterprises as on 31st March of a previous year, earlier years balances, if any shall be excluded.
What if the expenses for which the payment is due is not debited to P/L account and is capitalised in the books as an asset?
the expenses (purchase of machinery or any other asset) for which the payment is due is not debited to Profit & Loss account and is capitalized in the books as an asset, then the provision of Section 43B will never apply to such payments. As Section 43B of the Act, is applicable only on items which are to be claimed as deduction in the computation of business income, the delayed payments for items which are directly capitalised, will never be covered within the purview of this section.
The argument suggesting disallowance of depreciation on items in cases of delayed payments lacks strong support in the absence of specific provisions addressing this issue.
Position as to Traders:
As per MSMED Act, enterprises means any industrial undertaking or other business concern engaged in the business of manufacturing or production of article listed in the first schedule of Industries (Development and Regulation) Act, 1951 or concern engaged in providing services. but provision of Section 7 also empower government to include other enterprises as MSMED.
The Central Government, vide office memorandum issued on 2-7-2021 , had allowed the traders to get registration for UDHAYM under the NIC Code 45,46 and 47 but for limited purposes. In that O. M. it is specifically stated that benefit to retail and whole trader MSME shall be restricted only for Priority Sector Lending. Therefore, in our view, traders need not be considered for the purposes of Section 43B(h) as word enterprises in terms of MSMED Act connotates only for concern engaged in the manufacturing or processing or rendering of services. However, A suitable clarification by CBDT, with regard to the coverage or otherwise of the trading entities, under this provision, is very much desirable and essential, as currently only manufacturing and service entities are covered under the MSMED Act and the trading entities are not included in the definition of covered ‘enterprise’ under the MSMED Act.
Treatment of provision of expenditure
In any business provision for certain expenses are made on the last date of the year to match accrual concept of accounting. Where provision for expense is created like audit fees, legal fees etc., then in my view Section 43B(h) will not apply because payment as per Section 15 of MSMED Act is to be made within the specified time after acceptance of services or goods. In such cases, payment will be made only after the services are rendered, like audit is done and therefore, such sum will not be hit by Section 15 of the MSMED Act till the services are rendered. Once the services have been rendered then payment has to be made within time limit from date of rendering of services.
Expenses booked on accrual basis
If a payment due to a micro or small enterprise remains unpaid at the end of a financial year but is settled within the permissible period outlined in Section 15 of the MSMED Act in the following year, it will be considered deductible in the year the expense was incurred. However, if the payment is delayed beyond the deadline specified in Section 15 of the MSMED Act, the deduction will only be allowed in the fiscal year the payment is actually made. This is because the benefit of the first proviso to Section 43B(h) does not apply to payments to micro or small enterprises, meaning payments must be made within the specified timeframe to be eligible for deduction in the year of incurrence, even if the payment is made before the due date of the Income Tax Return (ITR) applicable to the taxpayer.
Illustration 1: ABC enterprise (partnership firm) purchased goods worth Rs. 10,00,000 from XYZ Enterprise (Small enterprise). Date of Invoice and date of delivery of goods is 01/01/2024. As per the agreement between the parties, credit period is 30 days. However, XYZ Enterprise makes the payment on or before 31/03/2024.
| Time limit | Due Date | Actual date of payment | Year of deduction |
| 30 days | 31/01/2024 | 31/03/2024 | 2023-24 |
ABC Enterprise made a payment to a MSE after the time limit set by section 15 of the MSMED Act, 2006, but within the same financial year in which the expense was incurred.
In this situation, ABC Enterprise settled the payment after the specified time limit of Section 15 of MSMED Act, 2006. This activates the revised provisions of Section 43B. However, as the payment was made within the same financial year that the expense was accrued, deduction shall be permitted in that financial year 2023-24 as outlined by the regulations of the Income Tax Act, 1961.
Illustration 2: ABC Enterprise purchased goods worth Rs. 10,00,000 from XYZ Enterprise (Small enterprise). Date of invoice is 28/02/2024 and date of delivery of goods is 01/03/2024. Details of terms of payment as specified in the agreement between the parties is mentioned below.
| Time limit | Due Date (30 days from the date of delivery of goods) | Actual date of payment | Year of deduction |
| 30 days | 31/03/2024 | 26/03/2024 | 2023-24 |
ABC Enterprise completes payment to a Mr. B within the time limit specified under section 15 of the MSME Act, 2006 and during the same financial year that the expense is accrued.
The provisions of section 43B of the Act would not apply to the payment that ABC Enterprise made to the MSE. He will be permitted to get a deduction in the financial year in which the expense was accrued i.e. financial year 2023-24.
Illustration 3: ABC Enterprise purchased goods worth Rs. 10,00,000 from XYZ Enterprise (Small enterprise). Date of invoice is 18/03/2024 and date of delivery of goods is 20/03/2024. Details of terms of payment as specified in the agreement between the parties is mentioned below.
| Time limit | Due Date ( 20 days from 20/03/2024) | Actual date of payment | Year of deduction |
| 20 days | 09/04/2024 | 04/04/2024 | 2023-24 |
Here, ABC Enterprise had expenses that accrued in March 2024, but he paid the vendor during the subsequent financial year in April 2024, within the deadline specified under section 15 of the MSMED Act, 2006.
In this situation, ABC made the payment as per the time limit specified under section 15 of the MSMED Act, 2006. Thus, the payment will be permitted in ABC’s tax calculation on an accrual basis in the financial year 2023-2024.
Illustration 4: ABC Enterprise (partnership firm) purchased goods worth Rs. 10,00,000 from XYZ enterprise (Small enterprise). Date of invoice and date of delivery of good is 01/03/2024 with the following terms of payment as specified in the agreement between the parties.
| Time limit | Due Date | Actual date of payment | Year of deduction |
| 30 days | 31/03/2024 | 02/04/2024 | 2024-25 |
ABC had an expense payable to XYZ that accrued in the financial year 2023-2024 but he settled it in the subsequent financial year 2024-25 after the time limit prescribed under section 15 of the MSMED Act, 2006 ended.
In this scenario, as the payment is made beyond the time limit as prescribed under section 15 of the MSMED Act 2006 and also in the subsequent year 2024-25, ABC will not be eligible for deduction of the said payment in the financial year 2023-2024 when the expenses accrued.
Assuming ABC enterprise has annual net profit of Rs.20 lakhs. His tax computation is as mentioned below
| Tax liability without considering the amendment | Tax liability after considering the amendment | ||
| Net profit as per Profit and Loss Account | 20,00,000 | Net profit as per Profit and Loss Account | 20,00,000 |
| Add: Disallowance under section 43B on account of non-payment within the due date as per MSME Act | NIL | Add: Disallowance under section 43B on account of non-payment within the due date as per MSME Act | 10,00,000 |
| Taxable Income | 20,00,000 | Taxable Income | 23,50,000 |
| Tax thereon @ 31.2% | 6,24,000 | Tax thereon @ 31.2% | 9,36,000 |
On-going through the above table, it can be seen that there will be additional tax liability of Rs. 3,12,000 (9,36,000 – 6,24,000) [plus interest under section 234B and 234C on account of failure to pay advance tax] on entity ABC merely because it could not make payment to its supplier XYZ. The said expense will be allowed as deduction during the FY 2024-25.
Illustration 5: ABC Enterprise (partnership firm) purchased goods worth Rs. 10,00,000 from XYZ enterprise (Small enterprise) on 15/03/2024. ABC is having an issue with regards to the quality of goods supplied, communicated the same to XYZ vendor on 18 March 2024. XYZ resupplies goods after addressing the objection on 30th March 2024 and accordingly made a payment on 3rd April 2024.
| Time limit | Due Date | Actual date of payment | Year of deduction |
| 10 days | 09/04/2024
(Date of acceptance is 30/03/2024. Therefore, due date is 10 days from 30/03/2024) |
03/04/2024 | 2023-24 |
ABC had an expense payable to XYZ that accrued in the financial year 2023-2024 but he settled it in the subsequent financial year 2024-25 within the time limit prescribed under section 15 of the MSMED Act, 2006 ended.
In this scenario, as the payment is made within the time limit as prescribed under section 15 of the MSMED Act 2006 and also in the subsequent year 2024-25, ABC will be eligible for deduction of the said payment in the financial year 2023-2024 when the expenses accrued.
Suppose ABC raised objection on 26th March 2024 and XYZ resupplies goods after addressing the objection on 30th March 2024. Here the date of deemed acceptance is date of first delivery of goods i.e., 15/03/2024, as no objection is raised within 15 days from date of delivery.
| Time limit | Due Date | Actual date of payment | Year of deduction |
| 10 days | 25/03/2024
(Deemed date of acceptance is 15/03/2024. Therefore, due date is 10 days from 25/03/2024) |
03/04/2024 | 2024-25 |
Here, XYZ fails to make payment within the time limit prescribed under MSMED Act. Therefore, the expenditure shall not be allowed as deduction during the FY 2023-24. The said expense will be allowed as deduction during the FY 2024-25.
Illustration 6: ABC Enterprise (partnership firm) purchased goods worth Rs. 10,00,000 from XYZ enterprise (Small enterprise) on 20/03/2024 with the following terms of payment as specified in the agreement between the parties.
| Time limit | Due Date | Actual date of payment | Year of deduction |
| 60 days | 19/05/2024 | 15/05/2024 | 2024-25 |
ABC had an expense payable to XYZ that accrued in the financial year 2023-2024 but he settled it in the subsequent financial year 2024-25. As per MSMED Act 2006, payment shall be made before the date as agreed between parties in writing and in no case, it shall exceed beyond 45 days from the day of actual delivery of goods/services. Adhering to this, the stipulated due date for payment as per the MSMED Act was 04/05/2024 (45 days from 20/03/2024), while the actual payment was made on 15/05/2024.
In this scenario, as the payment is made beyond the time limit as prescribed under section 15 of the MSMED Act 2006 and also in the subsequent year 2024-25, ABC will not be eligible for deduction of the said payment in the financial year 2023-2024 when the expenses accrued. However, if the payment is made before 04/05/2024, the expense will be permitted as a deduction during the fiscal year 2023-24.
It is important to note that, where there is no written agreement between the parties, payment shall be made within 15 days from the day of actual delivery of goods/services.
Conclusion:
The amendment to section 43B aims to encourage timely payments to MSEs, impacting the tax treatment of outstanding payments. Taxpayers are advised to carefully categorize amounts payable to MSEs and ensure compliance with the MSMED Act’s time limits to avoid disallowances and increased tax liabilities.
** The classification of Micro, Small and Medium Enterprises is defined under the MSMED Act 2006 amendment dated 01/06/2020. The Micro, Small and Medium Enterprises is based on the Investment in Plant, Machinery or Equipment values (excluding land and building) and Annual Turnover. This shall come into effect from 01.07.2020.
Micro Enterprise: Where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.
Small Enterprise: Where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.
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