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Introduction: Section 43B of the Income Tax Act 1961 has witnessed a significant amendment with the introduction of clause (h) effective from April 1, 2024, applicable from Assessment Year 2024-25. This clause mandates timely payments to micro and small enterprises (MSMEs) beyond the specified time limit. Understanding the implications of this amendment is crucial for taxpayers to ensure compliance with the revised regulations.

We have extracted Sec 43B of Income Tax Act 1961 which includes recent insertion of clause (h) of Sec 43B w.e.f 01-04-2024 applicable from AY 2024-25.

Sec 43B: Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(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 (any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission) or

Section 43B(h) of Income Tax Act 1961 w.e.f 01-04-2024 & Applicable from AY 2024-25

(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), 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 :

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.

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 [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 [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,—

(a) “public financial institutions” shall have the meaning assigned to it in section 4A58 of the Companies Act, 1956 (1 of 1956);

(aa) “scheduled bank” shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11;

(b) “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);

(c) “State industrial investment corporation” means a Government company within the meaning of section 61759 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;

(d) “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;

(e) “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:

(e) “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006);

(f) “non-banking financial company” shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);

(g) “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).

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

(g) “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).

[Explanation 5.— For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.]

As per MSMED Act 2006

Micro Enterprise: “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006);

What is clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 saying?

It is saying that “(h) ‘micro enterprise’ means an enterprise classified as such under sub-clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7”

What clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7 is saying?

It is saying that (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

(or)

(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

Small Enterprise: “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).

What is clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 saying?

It is saying that “(m) ‘small enterprise’ means an enterprise classified as such under sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b) of sub-section (1) of section 7”

What is sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b) of sub-section (1) of section 7 saying?

It is saying that (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—

(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

(or)

(b) in the case of the enterprises engaged in providing or rendering of services, as—

(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees

Definition of Micro Enterprise and Small Enterprise as MSMED Act 2006 has been summarized as follows

Section Reference Definition of Type of Sector Criteria
7(1)(a)(i) Micro Enterprise Manufacturing (i) a micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees
7(1)(a)(ii) Small Enterprise Manufacturing (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
7(1)(b)(i) Micro Enterprise Services (i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees
7(1)(b)(ii) Small Enterprise Services (ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or

Revised criteria w.e.f. 01-07-2020: As per Notification no. SO 1702(E) dated 1st June 2020

Definition of Investment in P&M Turnover criteria
Micro Enterprise does not exceed 1 crore rupees does not exceed 5 crore rupees
Small Enterprise does not exceed 10 crore rupees does not exceed 50 crore rupees

Note:

1. Both criteria should be satisfied

2. Unlike earlier, there is no differentiation between manufacturing and services activities and these criteria are equally applicable for “suppliers” engaged in supply of goods or services. 

Section 15 of the 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.

Summarized as follows

Type of arrangement for payment Payment time limit specified in section 15 of MSME Act
Agreement exists in writing Earlier of

a) As per agreement in writing

(or)

b) 45 days from date of acceptance or deemed acceptance

No agreement for payment 15 days following date of acceptance or deemed acceptance

Note : Terms of payment mentioned on the face of invoice/PO to be treated as agreement in “writing”

Example 1: Where agreement for payment exists

Date of service is 10th Jan

Date of objection is 20th Jan

Objection resolved and Date of acceptance is 25th Jan

Date of Invoice is 30th Jan

Payment Terms mentioned in invoice is 60days from the date of invoice

(in this case 60 days from 30th Jan i.e., 30th March)

But as per sec 15 of MSMED Act 2006

If Agreement exists in writing, then time limit for payment is Earlier of

a) As per agreement in writing (i.e., 30th March)

b) 45 days from date of acceptance or deemed acceptance (45 days from 25th Jan, Date of Acceptance i.e., 10th March)

Due date is 10th March.

Example 2: Where agreement for payment does not exists

If Agreement exists does not exists in writing, then time limit for payment is 15 days of acceptance or deemed acceptance, In the above example due date is 15 days from Date of Acceptance (i.e., 15 days from 25th Jan, it would be 9th February).

Impact of Section 43B(h) of Income Tax Act 1961, Applicable from FY 2023-24 (AY 2024-25)

S.No Date of Invoice/ Acceptance Agree-ment Exists Credit period as per MSMED Act,2006 Credit period as per written agre-ement Payment Date No of Days Taken for payment Dedu-ction available in FY
1 14-03-2024 Yes Lower of 45 days or As per agreement 60 Days 15-05-2024 62 Days FY 2024-25
2 15-03-2024 No 15 Days                    – 20-03-2024 5 Days FY 2023-24
3 27-03-2024 No 15 Days                    – 25-04-2024 29 Days FY 2024-25
4 31-03-2024 Yes Lower of 45 days or As per agreement 15 Days 10-04-2024 10 Days FY 2023-24

As per sec 16 of MSMED Act 2006

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, 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.

Such Interest paid is not allowed as expense in computation of Taxable income as per Income tax Act, 1961.

Conclusion: The insertion of clause (h) into Section 43B of the Income Tax Act 1961 marks a pivotal change, emphasizing the importance of timely payments to micro and small enterprises (MSMEs). Taxpayers need to adhere to the prescribed time limits for payments as per the Micro, Small and Medium Enterprises Development Act, 2006, to avoid penalties and ensure regulatory compliance. Additionally, understanding the revised criteria for defining micro and small enterprises under the MSMED Act is essential for accurate interpretation and application of the law.

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