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

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

The Finance Act 2023 introduced a significant amendment to the Income Tax Act, 1961, by inserting clause (h) in Section 43B, effective from the financial year 2023-24, assessment year 2024-25. This amendment mandates the disallowance of certain payments to micro and small enterprises if not made within the stipulated time under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. This move aims to ensure timely payments to Micro and Small Enterprises (MSEs), reflecting the government’s focus on promoting socio-economic welfare.

Purpose of insertion of clause (h) in Section 43B?

As per the memorandum explaining the Finance Bill 2023, it is covered as part of Socio Economic Welfare Measures whereby timely payments to Micro and Small Enterprises is being promoted.

It is an attempt of the government to support the Micro & Small Enterprises in making payments available for their outstanding dues.

For this , the payments made to such enterprises is included within the ambit of Section 43B to allow the payment as deduction only on payment basis.

What is Section 43B of Income Tax Act, 1961

Section 43B starts with “Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable” under this Act in respect of –

• Clause (a) to (g) : …… (not discussed in this article)
• Clause (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

Proviso clause to sec 43B

“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”

Meaning thereby in case of delayed payment, it will be allowed only in the year in which the actual payment is made. Otherwise it will be disallowed and it will be added back to income of the assesse.

Micro Small and Medium Enterprises Development Act (MSMED Act), 2006

CLASSIFICATION CRITERIA

Ministry of MSME vide its notification SO 2119(E) dated 26th June, 2020 has widened the eligibility criteria for an enterprise to be considered as MSME by providing Composite criteria of investment and turnover for classification purpose. It was made effective with effect from 01/07/2020

Classification criteria applicable w.e.f 01/07/2020

• Both the classification criteria of investment and turnover required to be fulfilled simultaneously
• If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category
• No enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover
• PAN based classification will be done : All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise

Calculation of investment in plant and machinery or equipment

• The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed. Where no prior ITR is available, the investment will be based on self-declaration basis and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
• The expression ―plant and machinery or equipment‖ of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings)
• The purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR
• The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery

Calculation of turnover

• Exports of goods or services or both, shall be excluded while calculating the turnover for the purpose of classification
• Exports turnover shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN
• The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory

Meaning of “Enterprises”

As per Section 2(e) of MSMED Act – “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 (55 of 1951) or engaged in providing or rendering of any service or services.

Section 15 of MSMED 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

Further this agreed period cannot be more than 45 days from the day of acceptance or the day of deemed acceptance

“Appointed Day” means 15 days from Date of Acceptance or deemed acceptance of any goods or any services by a buyer from a supplier.

Day of Acceptance means –

the day of the actual delivery of goods or the rendering of services;

or

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.

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.

Case Study :

If there is No Agreement (assuming no objection in writing made by buyer to supplier)

Section 16 of MSMED Act, 2006 : Date from which and rate at which interest is payable

if buyer fails to make payment of the amount to the supplier, as required u/s 15, then buyer shall be liable to pay interest at the rate which is 3 times of the bank rate notified by the RBI, compounded annually, payable monthly

Interest is payable from appointed date or agreed upon date, as the case may

MSMED Act,2006 having overriding power over any other law

Section 23 of MSMED Act: Interest not to be allowed as deduction from income

Section 24 of MSMED Act gives overriding power to section 15 to 23 of MSMED Act upon any other law for the time being in force.

Some FAQs

(based on own compilation & gathering of information from various sources. It is not issued as such by any Ministry or Govt Department)

Q1: To whom it is applicable ?

Ans: This is applicable any sum payable to Micro & Small entity only .

If any payment is outstanding for Medium enterprises then no disallowance U/s 43B(h)

Q2: Whether applicable for Trader registered under MSME ?

Ans : Only supplier status required to be seen for the purpose of applicability of clause (h) of section 43B.

As per Office memorandum issued by Ministry of MSME , dated 01/09/2021, It is clarified that the benefits to Retail and Wholesale trade MSMEs are restricted upto Priority Sector Lending only, and any other benefits, including provisions of delayed payments as per MSMED Act, 2006, are excluded.

Q3: Whether applicable on Opening Balance still outstanding as on 31/03/2024?

Ans : Since it was not claimed as deduction in the year 2023-24, Clause (h) is not applicable hence no disallowance.

Q4: What if there is default of TDS ? Whether there will be double disallowance ?

Ans : There will not be any double disallowance. Sec 43B(h) will be applicable if there is non compliance of TDS provision as well as delayed payment to micro or small entity.

Q5: What would be the sum payable if the payer has deducted TDS?

Ans : As actual amount payable is reduced from the total amount payable, hence 43B(h) would be applicable on net of TDS value only and not on gross value

Q6: Whether it is applicable if no audit applicable on assesse buyer?

Ans : Yes, this clause 43B(h) is applicable to all assesse whether under audit or not, it doesnot matter.

Q7: Whether it is applicable on assesse buyer if Income is offered for taxation on presumptive basis like section 44AD / AE / ADA ?

Ans : No. Not applicable.

Q8: Whether this is applicable in case of purchase of capital goods?

Ans : Not applicable

Section 2 (f) of MSMED Act defines “goods”, which means every kind of movable property other than actionable claims and money. So if there is any immovable property, then that will be out of purview

Further Section 43B starts with, Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act. The expression “otherwise allowable” means the expenses which are available as deduction.

Q9: Whether the sum payable includes the GST also?

Ans : In case where exclusive method of accounting is followed, GST on the invoice is not routed through P&L and is not deductible as an expenditure if credit is allowed on such item, in that case it should not be part of 43B.

If the expenditure is allowed including GST (for example blocked credit cases), then such GST payable should also be part of 43B

Q10: What if the assessee is maintaining books in cash method of accounting.?

Ans : In that case there won’t be any payable. It does not apply if the assessee is maintaining books in cash method of accounting

Q11: How to check, whether the entity is micro or small or medium enterprises or not?

Ans : Get latest Udyam Registration Certificate

obtain declaration from the supplier (last year basis)

Also, using the udyam registration number, it can be verified online whether entity is registered under MSME or not through the MSME portal using below link –

https://udyamregistration.gov.in/udyam_verify.aspx

Q12: Is there any option to cancel / surrender Udyam registration ?

Ans : Yes. It can be done from below link –

https://udyamregistration.gov.in/Udyam_Login.aspx

Q13: What if there is delay in payment beyond specified period but it is paid before the end of particular financial year?

Ans : There will not be any disallowance in case where the payment made beyond 15/45 days, as the case may be, but within the same financial year.

Q14: Whether agreement in writing is mandatory

Ans : Yes

Q15: What if there is written agreement for goods / service to be supplied but no clause related to payment terms ?

Ans : In that case, it will be deemed that there is no written agreement and payment is required to be made before the appointed day & Appointed day is 15 days from Date of Acceptance or Deemed Acceptance

Q16: What if in the sales invoice of the supplier it is mentioned that payment should be made within 07 days / 15 days ?

Ans : Then due date shall be considered as 7 days or 15 days only, unless any objection raised by buyer.

Conclusion: The insertion of clause (h) in Section 43B of the Income Tax Act, 1961, in conjunction with the provisions of the MSMED Act, 2006, represents a strategic move by the government to bolster the financial health of micro and small enterprises. By linking tax deductions to the timely payment of dues to MSEs, the amendment not only fosters a culture of prompt payment but also underscores the government’s commitment to socio-economic welfare. Businesses must adapt to these changes by aligning their payment processes and practices with the new legal requirements to ensure compliance and optimize their tax positions. This development is a testament to the evolving fiscal landscape, where tax policy is increasingly being used as a tool for broader economic and social objectives.

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The views presented and discussed in this presentation are personal views of presenter and for educational purposes only. Nothing conveyed or provided in this should be considered legal, accounting or tax advice.

Please contact your own consultant with any specific questions you have related to the information provided.