Section 43B(h) of Income Tax Act, 1961 and MSMED Act, 2006

The government has brought in the amendment in Section 43B of Income Tax Act, 1961 and inserted a new clause (h) w.e.f. 01^st April 2024. This amendment is brought to promote timely payments to micro and small enterprises.

Let us understand the amendment of Income tax act, 1961 and its relationship with MSMED Act, 2006.

What is Section 43B(h) of Income Tax Act, 1961

Section 43B of Income Tax Act, 1961 provides for certain deduction allowed only on actual payment. As per the clause (h) of the act if any sum payable by the assessee, to either Micro or Small enterprise is paid beyond the limit specified in Section 15 of the MSMED Act, 2006 will be disallowed while calculating the Income of the assessee.

Also, the 1st proviso to Section 43B is not applicable to clause (h) which means even if payment is made after the year end but before filing of Income tax return then also the expenditure will not be allowed for that assessment year.

Reference to MSMED Act, 2006.

Let’s understand what Section 15 of MSMED Act, 2006 is. The Section mandates payment to any Micro and Small enterprises (Medium enterprises is not included) be made within:

1. the agreed period which cannot be more than 45 days from the day of acceptance or deemed acceptance in any case; and

2. if there is no agreement then within Appointed Day from the day of acceptance or deemed acceptance.

As per the Section 2 of MSMED Act, 2006 ‘Appointed Day’ is the day immediately after the expiry of the period of fifteen days from the day of acceptance or deemed acceptance.

The explanation to the Section 2 of MSMED Act, 2006 defines day of acceptance and deemed acceptance.

Day of acceptance means:

• the day when the goods are delivered, or services are rendered; or
• If there is objection, in writing, from the buyer within 15 days from the day of delivery of goods, or rendering of the services, then the day on which objection is removed by the supplier.

Day of deemed acceptance means the day when the goods are delivered, or services are rendered if no objection is received as per point (ii) above.

Conclusion: The amendment mandates a buyer to make payment to a Micro and Small Enterprises within 45 days from the date of Supply of goods and services otherwise that particular expense will be disallowed for that financial year and will be allowed only in the year when in which the payment is made. Also, the interest will be applicable as per section 16 of the MSMED Act, 2006 at the rate of 3 times of the RBI notified bank rate. This amendment is brought to promote timely payments to micro and small enterprises.