About Section 43B(h) of Income Tax Act, 1961
Section 43B of the Income Tax Act, 1961 provides for certain deductions to be allowed only an actual payment. It specifies that certain payments such as any tax, duty, cess, fee, interest on any loans or borrowings from banks, public financial institutions etc. are allowed as deduction only when they are actually paid within the financial year. But there is an exception provided by proviso to section 43B that if such payments are actually paid on before the due date of furnishing the return of income U/S 139 (1) i.e. due date of filing the original return, then it will be allowed.
Now the scope of this section has been increased by insertion of a new sub section (h) in section 43B by Finance Act, 2023 which provides that 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 shall also be disallowed and will be allowed subsequently when payment is actually made.
Now here the exception provided as aforesaid in proviso to Section 43B is not covered. For payment to micro and small enterprises the reference of payment is not on or before the due date of filing of I.T. Return u/s 139(1) but it is the time limit specified u/s 15 of the MSMED Act, 2006.
Related provisions of MSMED Act, 2006
According to MSMED Act, 2006 an enterprise is classified as Micro, small or medium enterprise on the basis of its turnover and investment in plant & machinery as follows:
|
Investment in Plant & Machinery |
Turnover Limit | |
| Micro | Not more than 1 Crore | Not more than 5 crore |
| Small | Not more than 10 Crore | Not more than 50 crore |
| Medium | Not more than 50 Crore | Not more than 250 crore |
Further, Sec. 15 of the MSMED Act, 2006 provides that the buyer has to make payment to the micro or small supplier for any goods purchased or services availed from such supplier within 45 days if there is any agreement in writing or within 15 days from the date of acceptance or actual delivery in absence of such agreement. It further provides that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance.
SECTION 43B(h) read with MSMED Act, 2006
On a combined reading of Section 43B(h) and provisions of MSMED Act, 2006 it transpires that:
1. Scope of Section 43B(h) is limited to payments to only micro and small enterprises and payments to medium enterprises are not covered.
2. Such payment has to be made within 45 days from the actual delivery/acceptance/deemed acceptance if there is an agreement in writing and within 15 days if there is no such agreement.
3. Section 15 of the MSMED Act, 2006 is attracted whenever there is delay in payments beyond 45 days or 15 days as the case may be. But for Section 43B(h) the cut off date will be 31st Creditors already paid during the financial year will not be covered. The period of 45 days/15 days has to be seen in respect of micro and small creditors unpaid as on 31st march. If 45/15 days are over and the amount still outstanding as on 31st March, such amounts will be disallowed. Further, if the 45/ 15 days will be over beyond 31st March, payments will not be disallowed if paid within such period but after the financial year and only the unpaid amounts will be added back.
4. Under MSMED Act, if the payment is not made within the stipulated period, the creditor can seek claim for payment of principal and interest by going to the MSME facilitation Council. The interest rate is three times the RBI rate and compounded on monthly rests and the interest paid/payable will not be allowed as deduction in the Income Tax Return. However, under Section 43B(h) the entire amount of unpaid creditors relating to micro and small enterprises will be disallowed if not paid within the stipulated period with 31st March as the cut off date.
WHAT MAY BE THE IMPACT OF SECTION 43B(h)
So far as MEMED Act, 2006 is concerned there should not be much problem for the enterprises because business runs on trust and even if payment is made beyond 45 days/15 days, business partners may not go to the MSME facilitation council to press for the payment of principal and interest. But sector 43B(h) will hit them hard as payments not made within the stipulated time will be added back to the total income and there may be huge tax liability.
For example, let us say if the total turnover is Rs. 10 crores and the total income is 10 lakhs and further the unpaid amount of micro and small creditors is Rs. 50 lakhs, the total income would be increased by Rs. 50 lakhs and the tax will be payable on Rs. 60 lakhs. This will result in huge tax liability though it will be allowed in subsequent assessment years on the basis of actual payment. So the impact can be huge.
How to know whether a creditor is registered under MSMED Act or not
1. This information should be obtained from each creditor. It is better if a written communication is sent to each creditor asking them whether they are registered under MSMED Act and to provide their Udhyam Registration Certificate.
2. Next step would be to verify these udhyam certificates by visiting udhyam gov.in with the udhyam registration numbers mentioned in the certificates. The Udhyam Registration Certificate will show the type of enterprise viz. Micro/small/medium and also the major activity viz. Manufacturing/Trading/Services. This information can be used for making decisions regarding payments to be made for the purpose of Section 43B(h).
3. Even if a creditor is not registered under MSMED Act, It would be advisable to get a confirmation from him about his not so registered.
Cases where sec. 43B(h) does not apply
1. Payments to suppliers who are not registered under MSMED Act, 2006 i.e. who are not having Udhyam Registration.
2. Payment to suppliers who are registered as medium enterprises.
3. Not applicable on opening balances as on 1.4.2023
4. Payments to suppliers who are wholesalers or retailers even if they are having udhyam registration. Because Udhyam Registration is granted to them only for the limited purpose of availing priority sector lending benefits vide office memorandum of MSME Dept. dt 1/9/2021.
5. It is not applicable to assessees who file their I.T. returns under presumptive taxation scheme i.e. u/s 44AD/44ADA/44AE.
6. Not applicable for payment for purchase of fixed assets which are capitalised except where 100% of such expenditure is allowed as deduction like expenditure or scientific research etc.
In my opinion the transactions entered into with the micro and small enterprises would also be outside the purview of Section 43B(h) if the transactions were entered into before the date of MSME registration even though after 1/4/2023. If the registration is obtained today, the transactions from today onwards should be considered.
Whether this provision applicable in only audit cases
Section 43B(h) is applicable to all assesses who are liable to maintain books of accounts and not only to audit cases. But it is not applicable to those assesses who file their I.T. returns under the presumptive taxation scheme i.e. u/s 44AD/44ADA/44AE.
What is the best course of action for Assessees
1. Make a full list of creditors as on date.
2. Exclude creditors who are not having Udhyam Registration.
3. Exclude creditors who are registered as Medium Enterprises.
4. Exclude creditors who are traders whether wholesaler or retailer.
5. Exclude the opening balances which are being carried forward.
6. The balance creditors need to be paid within the stipulated time period of 45/15 days as the case may be to avoid additions u/s 43B (h).
Summing up
Section 43B(h) imposes a compliance requirement on taxpayers to ensure that payments to micro and small enterprises are made in a timely manner to avail tax benefits. This aligns with the objective of MSMED Act which emphasises prompt payment to MSMEs for their goods and services.
This article is based on my understanding of the provisions of Sec. 43B(h) read with MSMED Act, 2006. However, there are many areas where there may be difference of opinion and it is expected that the government will soon come up with appropriate clarifications.
Author Bio
please let us know on how to contribute in tax guru.in and send you articles on latest issues related to practise