Section 43B (h) of Income Tax Act, 1961 – Disallowances of expenses due to non-payment to MSMEs
Introduction: Section 43B (h) of the Income Tax Act, 1961, introduced by the Finance Act, 2023, focuses on ensuring timely payments to MICRO & SMALL Enterprises (MSMEs). This amendment, effective from FY 2023-24, aims to promote compliance with the Micro, Small & Medium Enterprises Development Act, 2006 (MSMED), impacting deductions for expenses related to non-payment to MSMEs.
Section 43B (h) of Income Tax Act, 1961
Effective Date of New Clause (h) of Section 43B: –
> Clause (h) of Section 43B inserted by the FINANCE ACT, 2023.
> This Amendment is applicable from FY 2023-24 or AY 2024-25.
Analysis of New Clause (h) of Section 43B: –
> Assure on time payments to MICRO & SMALL Enterprises.
> According to Micro, Small & Medium Enterprises Development Act, 2006 (MSMED).
Definition of MSME Enterprises: –
Particulars | MICRO | SMALL | MEDIUM |
Turnover | <=5 Crore | <=50 Crore | <=250 Crore |
Investment in Plant & Machinery | <=1 Crore | <=10 Crore | <=50 Crore |
Time Limit for Payment: –
– Written Agreement exist: – Agreed Date OR Within 45 days from the date of acceptance, WHICHEVER IS EARLIER
– Written Agreement do not exist: – Within 15 days from the date of acceptance.
Non Applicability of New Clause (h) of Section 43B: –
> Clause not applicable on “MEDIUM” Enterprises.
> Clause not applicable on “CAPEX” items.
> Clause not applicable on “TRADERS”.
> Clause not applicable on BUYERs filing ITR u/s 44AD/ADA/AE, due to reporting u/s 43B (h) Not Applicable.
> Clause not applicable on NON REGISTERED Vendor (under MSMED Act, 2006).
> Clause not applicable on those payable for invoices dated on or before 31/03/2023.
Other Points: –
> Applicable on MICRO & SMALL Enterprises.
> Applicable on Manufacturing & Services Sector.
> Applicable on Goods & Services.
> IF payment is not made within the time limit specified, then EXPENSES will not be allowed as deduction and added back to TOTAL INCOME.
> EVEN IF payment is made before the due date of ITR OR filing of ITR in the subsequent year, the same is not allowed as expense in the PY.
> IF payment is made in the subsequent year, the same is allowed as expenses in the FY in which payment has been made.
Examples: –
Particulars | Invoice Date | Payment Due (45 Days) | Actual Payment | Deduction Allowed (FY) |
Example-1 | 01-Feb-2024 | 16-Mar-2024 | 29-Mar-2024 | 2023-24 |
Example-2 | 01-Feb-2024 | 16-Mar-2024 | 03-Apr-2024 | 2024-25 |
Example-3 | 17-Feb-2024 | 02-Apr-2024 | 01-Apr-2024 | 2023-24 |
Example-4 | 17-Feb-2024 | 02-Apr-2024 | 04-Apr-2024 | 2024-25 |
Example-5 | 01-Mar-2024 | 14-Apr-2024 | 11-Apr-2024 | 2023-24 |
Example-6 | 01-Mar-2024 | 14-Apr-2024 | 22-Apr-2024 | 2024-25 |
Example-7 | 15-Nov-2023 | 29-Dec-2023 | 06-Apr-2024 | 2024-25 |
Example-8 | 15-Nov-2023 | 29-Dec-2023 | 28-Mar-2024 | 2023-24 |
Example-9 | 16-Feb-2024 | 31-Mar-2024 | 01-Apr-2024 | 2024-25 |
Example-10 | 15-Sept-2023 | 29-Oct-2023 | 02-Apr-2024 | 2024-25 |
Example-11 | 15-Sept-2023 | 29-Oct-2023 | 01-Oct-2023 | 2023-24 |
Conclusion: Section 43B (h) of the Income Tax Act, 1961, underscores the significance of timely payments to MICRO & SMALL Enterprises (MSMEs) by disallowing deductions for expenses in case of non-payment within stipulated timelines. With its applicability from FY 2023-24 onwards, this clause serves to enhance compliance with MSME regulations and promote fair business practices.