Introduction
Section 43B of the Income Tax Act, 1961 has specified certain deductions which shall be allowed as deduction under the head ‘Income from business and profession’ on actual payment basis rather than accrual basis. Hence, section 43B advocates deduction of spending on an actual payment basis. However, this section shall not apply if payment is made by an assessee on or before due date of filing the return under section 139(1) in respect of the previous year in which liability was incurred. The Finance Act 2023 introduced a significant amendment, adding clause (h) to Section 43B, with a focus on fostering prompt payments to Micro and Small Enterprises (MSMEs). As per Memorandum of Finance Bill 2023, it is one of the Socio-Economic Welfare measures for promoting prompt payments to Micro and Small Enterprises. Further it is also stated in the memorandum that, the amendment will take the effect from April 01, 2024, and will accordingly apply to the Assessment Year 2024-25 onwards.
Understanding the Amendment in Section 43B
As per the Amendment made by the Finance Act, 2023 clause (h) shall be inserted after clause (g) of section 43B. Clause (h) reads as under:
“(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)”
Further, clause (e) & (g) of explanation 4 to section 43B also inserted which defines micro enterprise and small enterprise respectively, same are as under:
(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).
(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).
In addition to above, first proviso to section 43B is also amended to provide that the proviso will not be applicable for payment mentioned in clause (h).
From combined reading of all above, it can derived that if an assessee makes payment to micro or small enterprises beyond the limit specified in section 15 of the MSME Act, 2006 then deduction of such payment shall not be allowed in the previous year in which payment is due but it shall be allowed in the previous year in which payment is actually made.
It is important to note that, in this amendment, a reference has been made to Micro, Small and Medium Enterprises Development Act, 2006. Hence, before moving ahead, it is important to understand relevant provisions of Micro, Small and Medium Enterprises Development Act, 2006. Let’s understand it:
Section 15 of MSMED Act, 2006
“Liability of buyer to make payment.
15. Where any supplier, supplies any goods or gives 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.”
Section 2(n) defines supplier as under:
“Supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes, —
(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);
(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956);
(iii) any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.
Section 2(b) defines appointed day as under:
“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.
Explanation. —For the purposes of this clause, —
(i) “the day of acceptance” means, —
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier.
(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;”
From the combined reading of section 15 and section 2(b) of MSMED Act, 2006, following can be summarized:
A buyer is liable to make payment within a period of 15 days if there is not agreed date of payment and in case there is agreed date of payment then agreed date or maximum 45 days whichever is earlier. However, the period of 15 days/45 days shall be reckoned from the day of acceptance, which is summarised as under:
|
Sr. No. |
Case | Day of Acceptance/Deemed Acceptance |
| 1 | An Objection is made by the Buyer in writing, within 15 days from the day of delivery of goods or service | The day on which such objection is removed the supplier |
| 2 | In Any other case | The day of actual delivery of goods or service |
For defining micro and small enterprise, Section 43B of the Income act also refers MSMED Act, 2006. Section 7 of the MSMED Act, 2006 read with notification dated 01.06.2020 revising the limits, classification of micro and small enterprise can be summarised as under:
|
Enterprise Class |
Enterprise 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 | Enterprise engaged in providing rendering of services |
| Micro |
Investment in plant and machinery < Rs. 1 Crore AND Turnover < Rs. 5 Crore |
|
| Small |
Investment in plant and machinery < Rs. 10 Crore AND Turnover < Rs. 50 Crore |
|
From combined reading of Section 43B of Income Tax Act and relevant provisions of MSMED Act, 2006, following can be summarised:
> Only Micro and Small enterprises will be governed by section 43B(h) i.e., amount payable to medium enterprises will not be governed by section 43B(h).
> When there is no agreement between the buyer and supplier in writing, any amount remained outstanding as on 31st March, if not paid within 15 days from the date as mentioned above, shall be disallowed in that year.
> Any amount remained outstanding as on 31st March and if not paid within 45 days or period agreed between the buyer and supplier in writing, whichever is earlier, shall be disallowed in that year.
Frequently Asked Questions (FAQs) on Amendment in Section 43B
To get more clarity on practical applicability of this amendment, following frequently asked questions can be considered:
Q-1: From which Financial Year this amendment is applicable?
Ans.: This amendment is made applicable from AY 2024-25 i.e. FY 2023-24.
Q-2: Whether this amendment can be made applicable for an amount outstanding to micro and small enterprise as on 31/03/2023?
Ans.: This amendment is made applicable from AY 2024-25 i.e. FY 2023-24. Hence, this amendment is not applicable for an amount outstanding to micro and small enterprise as on 31/03/2023.
Q-3: To attract the disallowance u/s 43B(h), is it mandatory that supplier should have registration under MSMED Act?
Ans.: From the combined reading of section 15 and section 2(n) of the MSMED Act, 2006 (both sections reproduced above), only such micro and small enterprises which are registered under MSMED Act shall be considered for the purpose of applicability of section 43B(h). If supplier is not registered under MSMED Act 2006, then disallowance u/s 43B(h) cannot be invoked for dues outstanding to them.
Q-4: How to verify whether supplier is registered under MSMED act or not?
Ans.: After amendment in section 43B(h) in Budget 2023, many suppliers have started to include their MSME registration number on their invoices. Through MSME Portal, one can verify MSME registration and the type of enterprise (Micro/ Small/ Medium) using the registration number. By this way, one can find that whether supplier is registered under MSMED act or not.
Q-5: What if supplier has not intimated his registration under MSME in any manner to buyer?
Ans.: It is the responsibility of the supplier to intimate its registration to the buyer. If in any case, the supplier has not in any manner intimated his MSME registration, then in absence of availability of information, no disallowance can be made under section 43B(h).
Q-6: Whether section 43B(h) is applicable for dues outstanding to traders having MSME registration?
Ans.: As per section 2(e) of MSMED act, 2006 – “enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951) or engaged in providing or rendering of any service or services.
Hence, definition of enterprise does not include traders. Hence, section 43B(h) is not applicable for dues outstanding to traders.
The Ministry of Micro, Small and Medium Enterprises vide Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/Policy dated July 2, 2021 has allowed Udyam registration for retail and wholesale trade. However, benefits to Retail and Wholesale trade MSMEs are restricted to Priority Sector Lending only. Hence, other benefits available under MSMED act are not applicable to traders. Resultantly benefit of section 15 of MSMED act is not available to traders and hence 43B(h) cannot be made applicable to dues outstanding to traders.
Q-7: If supplier is engaged in both i.e. trading as well as manufacturing/services, in that situation whether section 43B(h) is applicable for dues outstanding to that supplier?
Ans.: In such a situation, section 43B(h) can be made applicable for dues outstanding to such suppliers.
Q-8: Can disallowance be attracted under section 43B(h) for dues outstanding in relation to capital expenditure?
Ans.: Section 43B reads as – “Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of……”
It is clear from above that 43B can be made applicable only to those deductions which is otherwise available under income tax act. Capital expenditure is not an allowable expense under income tax act. Hence, no disallowance will be attracted under section 43B(h) for dues outstanding in relation to capital expenditure.
Q-9: How year-end provisions will be dealt in for disallowance under 43B(h)?
Ans.: As mentioned above, as per section 15 and section 2(b) of MSMED Act, 2006 payment must be made within 15/45 days from the actual delivery of goods or services. Hence, for any provision made for which actual delivery of goods or service does not taken place till the end of year, no disallowance can be made under section 43B(h).
Q-10: what if buyer makes payment to supplier after 15/45 days, but before end of financial year?
Ans.: In such situation, deduction can be claimed in same financial year as payment is made in same year.
Q-11: what if buyer makes payment to supplier after 15/45 days, but before filing the return of income for that financial year?
Ans.: As per the amendment made in first proviso to section 43B, benefit of first proviso will not be available for due to micro and small enterprise,
Hence, though payment is made before filing return of income, deduction can only be claimed in the year in which actual payment is made and not in the year of accrual.
Q-12: Disallowance under 43B(h) can be attracted for assessee opting presumptive taxation i.e., 44AD/44ADA/44AE etc.?
Ans.: Section 43B is not applicable to assessee opting presumptive taxation. Hence, no disallowance can be made in such cases.
Conclusion
This amendment to section 43B is blessing for the micro and small suppliers and at the same time it may turn into tax bomb for the buyer who keeps such suppliers unpaid. This amendment brought additional duties and responsibilities upon the taxpayers as well auditors. The interplay between provisions of Income tax act and MSMED Act makes understanding of this legislative change little difficult.
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