Section 43B(h) and Limitation Period under Section 15 of MSMED Act

Introduction: The Micro, Small, and Medium Enterprises Development (MSMED) Act plays a pivotal role in defining the operational and financial dynamics between buyers and suppliers within the domain of Indian small and medium-sized enterprises (SMEs). Among its various provisions, Section 43B(h) and Section 15 stand out for their specific focus on the payment terms and conditions, aiming to ensure timely financial transactions and uphold the economic stability of these enterprises. This article delves into the nuances of these sections, shedding light on their implications, legal requirements, and the broader impact on the SME sector.

Section 43B(h) and Limitation Period under Section 15 of MSMED Act 

Reference to Section 43B(h):

• Section 43B(h) pertains to the limitation period specified under Section 15 of the Micro, Small, and Medium Enterprises Development Act (MSMED Act). 

Section 15 of MSMED Act:

• Specifies the payment terms between a buyer and a supplier in the context of goods or services. 
• Mandates that the buyer must make payment on or before the agreed-upon date in writing, not exceeding 45 days. 

Agreed Date and Appointed Day:

• If there’s a written agreement, payment should be made as per the agreed date (within 45 days). 
• In the absence of a written agreement, payment must be made before the “appointed day.” 

Definition of “Appointed Day” (MSMED Act):

• As per Section 2(b) of the MSMED Act. 
• “Appointed day” is defined as the day immediately following the expiry of the 15-day period from the day of acceptance or deemed acceptance of goods or services by the buyer from the supplier. 

Payment Obligation:

• Emphasizes the buyer’s obligation to make timely payments to the supplier for goods or services received. 
• The limitation period, whether based on the agreed date or the appointed day, ensures prompt payment and fair treatment of suppliers, especially micro and small enterprises. 

Importance of Timeframe:

• Timeframes set in Section 15 and linked to Section 43B(h) are crucial for fostering timely payments, preventing delays, and protecting the interests of small and medium-sized enterprises (SMEs). 

Legal Framework:

• The legal framework, as outlined in the MSMED Act, establishes clear guidelines for payment terms and helps in resolving disputes related to delayed payments. 

Conclusion:

• Section 43B(h) acts as a key provision within the MSMED Act, reinforcing the importance of adherence to agreed payment terms and providing a legal mechanism to address delays in payment.

Clarifications on Micro and Small Enterprises under Section 43B 

Explanation 4 Amendment: 

• Amendment to Explanation 4 below Section 43B. 
• Substitution of clauses (e) and (g) defining “micro enterprise” and “small enterprise.” 

Reference to MSMED Act: 

• Clauses (e) and (g) link to the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). 
• Examination of MSMED Act definitions required for clarity. 

MSMED Act Definitions: 

• Section 2(h): “Micro enterprise” definition. 

• Micro enterprise classified under sub-section (1) of Section 7. 

• Section 2(m): “Small enterprise” definition. 

• Small enterprise classified under sub-section (1) of Section 7. 

Classification Criteria (MSMED Act): 

• Sub-section (1) of Section 7 empowers the Central Government to classify enterprises into: 

• Micro Enterprises 
• Small Enterprises 
• Medium Enterprises 

Variation and Consideration (MSMED Act): 

• Sub-section (9) of Section 7 allows the Central Government to vary criteria and consider factors like employment or turnover. 
• Inclusion of micro or tiny enterprises or village enterprises as part of small enterprises. 

Notification No. 2119(E), dated 26-6-2020: 

• Issued under Section 7(1) and Section 7(9) of the MSMED Act. 
• Composite criterion of investment and turnover for classification. 

Criteria for Classification (Notification): 

• Micro Enterprise:

• • Net investment ≤ Rs 1 crore
  • Net turnover ≤ Rs 5 crore

• Small Enterprise: 

• • Net investment ≤ Rs 10 crore 
  • Net turnover ≤ Rs 50 crores 

• Medium Enterprise: 

• • Net investment ≤ Rs 50 crore 
  • Net turnover ≤ Rs 250 crores 

• Supplier Classification (Section 43B(h)): 

• • Only micro and small enterprises considered suppliers under Section 43B(h). 
  • Medium enterprises not recognized as suppliers, exempt from prompt payment and interest enforcement for delayed payment. 

Office Memorandum on Inclusion of Retail and Wholesale Trades as MSMEs

• The Office Memorandum (OM) No. 5/2(2)/2020/E/P&G/POLICY, dated 2-7-2021, issued by the Central Government addressed a significant clarification regarding the inclusion of Retail and Wholesale trades as Micro, Small, and Medium Enterprises (MSMEs) on the Udyam Registration Portal. While these trades were allowed registration, the benefits extended to them were explicitly restricted to Priority Sector Lending only.
• A subsequent clarification was provided through the Central Government’s OM 1/4(1)/2021-P&G Policy, dated 01.09.2021. This memorandum reiterated the limitation on benefits for Retail and Wholesale trade MSMEs, specifying that their advantages would be confined to priority sector lending. Moreover, it explicitly excluded other benefits, including the provisions related to delayed payments as per the MSMED Act, 2006.
• Consequently, as per the provisions outlined in the OM dated 01.09.2021, a supplier classified as a micro or small enterprise, engaged solely in trading activities as indicated by their Udyam Certificate, would not be considered a “Supplier” for the purposes of section 15 and section 43B(h). The distinction is notable as it affects the applicability of certain provisions within the MSMED Act.
• It’s worth noting that while there may not appear to be a specific legal foundation for these restrictions in the MSMED Act, the current position remains in force. The memorandum stands as the operative guideline until such time as a trader or traders’ body challenges its validity in a court of law, seeking its annulment. Until any legal intervention, the restrictions outlined in the Office Memorandum will continue to apply.

Udyam Registration Notification and Its Implications on MSMEs

Udyam Registration Process:

• Paragraph 2 of the Notification outlines the Udyam Registration process for individuals intending to establish micro, small, or medium enterprises (MSMEs). 
• It emphasizes that the registration is based on self-declaration, with no mandatory requirement to upload documents or proof. 

Optional Nature of Registration:

• The use of the term ‘may’ in the notification indicates that Udyam Registration is not obligatory for enterprises to establish themselves as MSMEs. 
• This optional nature of registration is essential to note. 

Section 43B(h) and Section 15 of MSMED Act:

• Section 43B(h) of the Income Tax Act refers to Section 15 of the MSMED Act, which deals with delayed payment to a ‘supplier.’ 
• The definition of “supplier” in Section 2(n) specifically includes a micro or small enterprise that has filed a memorandum with the authority under Section 8(1) (Udyam Registration). 

Impact on Section 43B Disallowance:

• The summary highlights the crucial link between Udyam Registration and the invocation of Section 15 for disallowance under Section 43B of the Income Tax Act. 
• Without Udyam Registration, the provisions of Section 15 may not be invoked for disallowance under Section 43B. 

Challenges in Supplier Classification:

• The summary emphasizes the challenges faced by buyers in scrutinizing the financials and compliance details of all suppliers to determine their MSME classification. 
• It points out the impracticality of regularly obtaining financials, ITRs, and GST data from suppliers to monitor any changes in their classification. 

Validation through Udyam Registration:

• The only feasible and accurate method suggested for validating the classification of a supplier is to refer to their Udyam Registration. 

Conclusion:

• The detailed summary sheds light on the optional nature of Udyam Registration, its crucial role in the application of Section 43B(h), and the challenges faced by buyers in supplier classification. 
• Section 43B(h) will not apply with respect to payments for supplies made before the date of Udyam Registration. He would be regarded as a micro-enterprise only from the date of obtaining such registration as Udyam Registration does not operate retrospectively 

Distinction Between Section 37(1) and Section 43B(h) in Deductibility 

The detailed summary highlights the distinctions between Section 37(1) and Section 43B(h) of the Income Tax Act, emphasizing the unique aspects of Section 43B(h) and its applicability to amounts payable to micro or small enterprises (MSEs) in the context of capital expenditure. 

• Non-Linkage to Capital/Revenue Expenditure: Unlike Section 37(1), which is tied to the distinction between capital and revenue expenditure, Section 43B doesn’t hinge on this classification. Instead, its applicability is broader, encompassing sums payable for which a deduction is otherwise allowable under the Income Tax Act. 
• Application to Capital Goods Expenditure: Section 43B(h) specifically extends to amounts payable to MSEs related to the purchase of capital goods. This includes scenarios where a 100% deduction is permissible under Sections 30 to 36, such as the deduction for capital expenditure under Section 35AD and scientific research under Section. 
• No Disallowance for Depreciation: The summary clarifies that if a 100% deduction for capital expenditure is not allowable, there would be no disallowance for depreciation on capital goods purchased if the MSE supplier is not paid on time. Depreciation does not fall under the category of a “sum payable in respect of which deduction is otherwise allowable.” 
• Character of Disallowable Sum: Section 43B(h) disallowance is contingent on the character of the sum payable, requiring it to be a payment for which deduction is otherwise allowable. The focus is on the nature of the expenditure and its eligibility for deduction under the Income Tax Act. 
• Judicial View on Depreciation: Historical judicial views are referenced, indicating that courts have held that depreciation cannot be disallowed on the cost of an asset capitalized in the books of account, even if tax on it was not deducted under Section 40(a)(i)/(ia) of the Act 

Interplay Between Section 43B(h) and Presumptive Taxation Sections 

The detailed summary delves into the interplay between Section 43B(h) and provisions related to presumptive taxation under the Income Tax Act, specifically Sections 44AD, 44AE, 44ADA, 44BBB, and 115VA. The analysis sheds light on the hierarchy of these provisions and the overriding effect of non-obstante clauses. 

• Non-Obstante Clause in Section 43B(h): Section 43B(h) initiates with a potent non-obstante clause, proclaiming that it prevails over all other provisions of the Income Tax Act. This clause indicates the overarching application of Section 43B(h).
• Apparent Override of All Other Provisions: At first glance, Section 43B(h) seems to override all provisions of the Income Tax Act, including those pertaining to presumptive taxation, such as Sections 44AD, 44AE, 44ADA, 44BBB, and 115VA.
• Non-Obstante Clauses in Presumptive Taxation Sections: The summary highlights that Sections 44AD, 44AE, 44ADA, 44BBB, and 115VA also commence with non-obstante clauses, specifying that they operate notwithstanding anything to the contrary in Sections 28 to 43C. 
• Hierarchical Understanding: A nuanced interpretation reveals that Section 43B(h) does not have a blanket override on all provisions. Instead, it is established that Section 43B(h) yields to the non-obstante clauses in Sections 44AD, 44AE, 44ADA, 44BBB, and 115VA. 
• Exclusion of Presumptive Taxation Assessees: Consequently, the summary concludes that Section 43B(h) will not be applicable to eligible assessees who opt for presumptive taxation under Sections 44AD, 44AE, 44ADA, 44BBB, or 115VA. Presumptive taxation regimes maintain their precedence in such scenarios.

Applicability of Section 43B(h) in Regular Assessment vs. Minimum Alternate Tax (MAT) 

Section 43B(h) of the Income Tax Act pertains to the computation of taxable business profits and is applicable during regular assessments. However, its applicability differs when it comes to calculating Minimum Alternate Tax (MAT) under Section 115JB. 

Regular Assessment (Section 43B(h)):

• • Section 43B(h) operates in the context of regular assessments, focusing on ensuring timely payments to micro or small enterprises by imposing disallowances for delayed payments. 
  • It is part of the framework for computing taxable business profits during routine assessments, considering various deductions and disallowances. 

MAT Calculation (Section 115JB):

• • Section 115JB deals with Minimum Alternate Tax (MAT), designed to ensure that companies pay a minimum amount of tax on their book profits, irrespective of the tax liability computed under regular assessments. 
  • The provisions of Section 43B(h) do not directly apply to the MAT calculation, as MAT has its own set of rules and considerations. 

Distinct Nature of MAT:

• • MAT operates independently, focusing on book profits and determining a minimum tax payable by companies. 
  • Disallowances specified in Section 43B(h) for regular assessments are not mirrored in the MAT computation, highlighting the separation of the two frameworks. 

Section 43B(h) in Relation to Charitable Trusts 

The detailed analysis provides an in-depth examination of the applicability of Section 43B(h) to charitable trusts under the Income Tax Act. It explores the specific provisions governing charitable trusts and their potential exemption from the disallowance under Section 43B(h). 

• Scope of Section 43B(h): Section 43B(h) is designed for businesses or professions with income computed under the head “business and profession.” The analysis clarifies that this provision targets entities engaged in commercial activities. 
• Special Provisions for Charitable Trusts: Charitable trusts fall under the purview of Sections 11 to 13, which constitute special provisions addressing the taxation of charitable and religious institutions. Section 11 focuses on computing income from property held for charitable and religious purposes. 
• Principles of Income Computation for Charitable Trusts: The analysis underscores that for trusts registered under Section 12AB, the computation of ‘income’ referred to in Section 11(1) follows commercial principles, distinct from the ordinary provisions of the Income Tax Act. Sections 14 and the five heads of income do not apply to such organizations. 
• Specific References in Sections 11 to 13: While Sections 11 to 13 make specific references to certain provisions related to ‘Profits & Gains of Business or Profession,’ there is no explicit mention of disallowance under Section 43B(h) in the context of computing income under Section 11. 
• Non-Applicability of Section 43B(h) to Charitable Institutions: The analysis concludes that unless expressly provided, the provisions of ‘Profits & Gains of Business or Profession’ do not apply to charitable institutions. Consequently, the question of disallowance under Section 43B(h) does not arise when computing income under Section 11 for charitable trusts. 
• Interest Payable under Section 16 of the MSMED Act: While Section 43B(h) may not be applicable, the analysis notes that charitable trusts are still subject to Section 16 of the MSMED Act, which mandates interest payment in case of delayed payments to micro or small enterprises. 

Applicability of Section 43B(h) to Udyam-Registered Micro or Small Enterprises 

• Section 43B(h) of the Income Tax Act addresses the timely payment to micro or small enterprises and its impact on the deductibility of business expenses. The section specifies that if a buyer, who is also an assessee, fails to make payment to a Udyam-registered Micro or Small Enterprise (MSE) within the stipulated period, certain disallowances may occur. Below is a summary of its application: 

Case Study 1:

 Case Study 2:

Impact of Payment Timing on Disallowance under Section 43B and Interest Liability, In the scenario where goods are purchased from Micro and Small Enterprises (MSEs) on April 1, 2023, and the payment is made on March 31, 2024,  

The following key points can be summarized: 

• Non-Disallowance under Section 43B: There will be no disallowance under Section 43B of the Income Tax Act. The payment, although made beyond the time specified in Section 15 of the MSMED Act, is within the same financial year. 
• Actual Basis Allowance: The amount paid within the fiscal year will be allowed on an actual basis and will not be disallowed. This is because the payment is not outstanding as of the year-end. 
• Caution Against Delay Strategy: While there may be no disallowance for payments made within the same year, intentionally delaying payments is cautioned against. This is because interest under Section 16 of the MSMED Act will be applicable. 
• Interest Liability Under Section 16: If there is a delay in payment, the assessee will be liable to pay interest to the supplier at three times the bank rate compounded at monthly rests, as per Section 16 of the MSMED Act, 2006. 
• Prudent Financial Strategy: The summary suggests that delaying payments might not be a smart financial strategy due to the associated interest liability, even if there is no disallowance under Section 43B. 
• Overall Consideration: The summary highlights the importance of prudent financial management, balancing the allowance of expenses with potential interest liabilities, and avoiding intentional delays in payments to MSEs. 

Conclusion: In conclusion, Section 43B(h) and Section 15 of the MSMED Act constitute essential components of the legislative framework designed to support and protect the interests of micro, small, and medium enterprises in India. By mandating timely payments and providing a clear mechanism for addressing delays, these provisions not only foster a culture of financial discipline among buyers but also contribute significantly to the economic viability and sustainability of SMEs. As such, understanding and adhering to these legal mandates is crucial for all stakeholders involved, ensuring the smooth functioning and growth of this vital sector within the Indian economy.