Section 43B Amendments FY 2023-24: Key Changes and Implications

Section 43B : Certain Disallowances, Definition, Provisions, Amendments, etc. F.Y. 2023-24 A.Y. 2024-25 Onwards

Introduction: The Income Tax Act’s Section 43B has undergone significant amendments for the financial year 2023-24 onwards. These changes impact deductions related to taxes, employee welfare fund contributions, and interest payments, emphasizing the actual payment timeline. This article delves into the key modifications and their implications.

SECTION 43B: CERTAIN DEDUCTIONS TO BE ONLY ON ACTUAL PAYMENT.

1. INTRODUCTION:

Section 43B of the Income Tax Act stipulates that certain deductions, including taxes, employee welfare fund contributions, and interest payments, will only be allowed when the actual payment is made, regardless of the year in which the liability was incurred.

The passage includes amendments introduced by the Finance Act, 2023, defining “micro enterprise” and “small enterprise,” and provides clarifications regarding the non-applicability of certain provisions to employee-received sums under specific conditions.

2. OVERRIDING PROVISIONS:

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of— following clauses

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 such sum is actually paid by him :

a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

c) any sum referred to in clause (ii) of sub-section (1) of section 36, or

d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

da) Any sum payable by the assessee as interest on any loan or borrowing from [a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or

g) any sum payable by the assessee to the Indian Railways for the use of railway assets, [or]

• Following clause (h) shall be inserted after clause (g) of section 43B by the Finance Act, 2023, w.e.f. 1-4-2024:

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 (27 of 2006),

• SECTION 15: OF MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006

LIABILITY OF BUYER TO MAKE PAYMENT:

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.

ANALYSIS:

Appointed day:

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.

As per the insertion of clause (h) to section 43B, if any amount remaining unpaid as at year end (Say Financial Year Ending 31st March, 2025 as this amendment is applicable from 1^st day of April 2024) to any creditors being any micro or small enterprise, whether for good or services beyond 45 days (or a shorter period if mutually agreed upon, or 15 days if no specific agreement exists), the unpaid amount will be disallowed.

Consequently, the unpaid amount will be treated as income and added to your taxable income. However, it is important to note that deduction will be allowed in the year of payment thereof. Therefore, it is imperative to ensure timely payment to all such creditors to avoid incurring a substantial additional tax liability. Failing to meet the stipulated payment timelines may result in the full tax liability being levied on the unpaid amount, thereby necessitating careful attention to compliance with the amended Section 43B (h).

It is strongly advisable to prioritize prompt payments to creditors to mitigate the risk of incurring undue tax consequences.

Provided that nothing contained in this section [except the provisions of clause (h)] 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 the assessee along with such return.

 ANALYSIS:

1. This provision is applicable to all business and professionals for Micro and small and not medium.

2. This also needs properly declaration from buyer’s regards things to classify them.

3. Now creditors will also needs to be separately classified them as per micro and small and others.

4. Tax auditors will have to compulsorily report the same in audit report.

• Section 16 of the MSME Act,2006:

Penal Interest provision: 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 of the bank rate notified by the Reserve Bank.

Explanation 1— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 2.— For the purposes of clause (a), as in force at all material times, “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.

Explanation 3.— For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3A.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3AA.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (da) is allowed in computing the income referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3B.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.

Explanation 3C.— For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing 57[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.

Explanation 3CA.— For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (da), shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing 57[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.

Explanation 3D.— For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance 57[or debenture or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.

Explanation 4.—

For the purposes of this section,—

1. Public Financial Institutions: A public financial institution under section 458 of the Companies Act, 2013 is any bank, financial institution, or insurance company that is registered under the Reserve Bank of India (RBI) Act, 1971 or any other law relating to the establishment of a financial institution in a foreign country with its headquarters in India. These institutions have a public interest obligation to serve the citizens of India and promote the development of the financial sector. They are overseen by the Ministry of Corporate Affairs and the RBI.

2. Scheduled Bank: Scheduled Bank means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

3. State Financial Corporation: Means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

4. State industrial investment corporation: Means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of section 36;

5. Co-operative Bank: “Primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;

6. Deposit taking non-banking financial company: means a non-banking financial company which is accepting or holding public deposits and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934);

Following clause (e) shall be substituted for the existing clause (e) of Explanation 4 to section 43B by the Finance Act, 2023, w.e.f. 1-4-2024:

• Micro enterprise:

Section 7(1)(a)&(b) of MSME Act,2006:

Clause 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 —

1. a micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees;

2. a small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees; or

3. a medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees;

Clause b): In the case of the enterprises engaged in providing or rendering of services, as —

1. a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;

2. a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or

3. a medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.

• Systemically important non-deposit taking non-banking financial company:

Means a non-banking financial company which is not accepting or holding public deposits and having total assets of not less than five hundred crore rupees as per the last audited balance sheet and is registered with the Reserve Bank of India under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934).

Conclusion: The amended Section 43B introduces crucial changes, especially regarding payments to micro and small enterprises. Businesses must categorize creditors appropriately, ensure timely payments, and adhere to the revised provisions to avoid adverse tax consequences. The interconnection with the Micro, Small and Medium Enterprises Development Act, 2006, underscores the importance of compliance and timely financial transactions.

As businesses navigate these amendments, staying informed and proactive in adhering to payment timelines becomes imperative. The holistic understanding provided in this article aims to assist taxpayers, tax auditors, and businesses in comprehending the nuances of the revised Section 43B and its implications for the financial year 2023-24 onwards.