The Finance Act, 2023 made a crucial amendment by inserting sub-section (h) to Sec 43B, which will take effect wef 01-04-2024 ie AY 2024-25 till subsequent years. The foremost focus under the umbrella of socio-economic welfare is timely payments to Micro / Small Enterprises. This article delves into the relevant provisions, definitions, and explores judicial pronouncements to provide a comprehensive understanding.
First of all, let’s visit the relevant provisions / definitions of Sec 43B(h) along with other Sections in relevant Acts, read as under:
Sec 43B(h)-any sum payable by the assessee to micro or small enterprise beyond the time limit specified in section 15 of Micro, Small and Medium Enterprise Development Act, 2006
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assesse according to the method of accounting regularly employed by him) only in computing the income referred to section 28 of that previous year in which such sum is actually paid by him
First Proviso 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 assesse on or before the due date applicable in his case for furnishing 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
As per Clause (e) to Explanation 4 to Sec 43B, “micro enterprise” shall have the meaning assigned to it in clause (h) of Sec 2 of MSMED Act 2006
As per Clause (g) to Explanation 4 to Sec 43B, “small enterprise” shall have the meaning assigned to it in clause (m) of Sec 2 of MSMED Act 2006
Section 2 (n) of the MSMED Act, 2006, “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, —
- the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1of 1956);
- 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);
- 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;
Sec 7, read with other provisions, the following can be summarized
| Classification of enterprise as per Sec 7 of MSMED Act 2006 | |||||
| SN | Type of Enterprise | Enterprises engaged in | |||
| The manufacture or production of goods | Rendering of Service(s) | ||||
| Investment in Plant & Machinery less than Rs. | Turnover less than | Investment in Plant & Machinery less than Rs. | Turnover less than | ||
| 1 | Micro | 1 Crore | 5 Crore | 10 Lakh | 5 Crore |
| 2 | Small | 10 Crore | 50 Crore | 2 Crore | 50 Crore |
| 3 | Medium | 50 Crore | 250 Crore | 5 Crore | 250 Crore |
As per Explanation 1 to Sec 7(1) of Industries (Development and Regulation) Act, 1951, the following shall be EXCLUDED for calculating investment in Plant & Machinery:
(i) Cost of pollution control items
(ii) Cost of research and development items
(iii) Industrial safety devices; and
(iv) Such other items as may be specified by notification
Sec 15 of MSMD 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.
Sec 2(b) of MSMD Act 2006 – “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;
Combined reading of all of above, the following are the extracts:
1) Amount payable to Micro or Small Enterprises will be governed by provisions of Sec 43B(h) and payments to Medium Enterprise(s) are not covered by Sec 43B(h)
2) Please note payments covered u/s 43B, if paid on or before due date u/s 139(1) or before filing of ITR, then these payments are allowed as deduction in that particular year, BUT First Proviso to Sec 43B, specifically excluded clause (h), and as such if payments to Micro and Small Enterprises, if not paid before the due date, then the deduction will be allowed in the year, in which the payment has been actually made.
3) day of acceptance or day of deemed acceptance as per Sec 2(b) of MSMED Act 2006, will be calculated as follows:
(a) the day of the actual delivery of goods or rendering of service(s); or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or service(s), within fifteen days (not later than) from the delivery of goods, the day on which such objection is removed by the supplier;
(c) deemed acceptance means where no objection is made in writing by the buyer regarding acceptance of goods or service(s) with fifteen days from the day of delivery of goods or rendering of services, the day of actual delivery of goods or the rendering of service(s)
Please Note, here the date of Invoice is not important, the due date has to be calculated from actual date of delivery of goods or rendering of service(s) and if any objection (in writing-in 15 days) is made, the date when such objection is removed.
4) DUE DATE, will be
> 15 days from the day of acceptance or deemed acceptance, if no agreement is made;
> If there exists an agreement, the credit period allowed as per agreement, but not later than 45 days from the day of acceptance or deemed acceptance
5) Agreement in common parlance means, an offer made by one person and accepted by another and must be accepted by all parties involved. It can be a separate written / oral agreement, purchase order or even an invoice
To term Invoice an agreement, it must clearly state the credit period, signature of both parties (buyer’s signature add weight to its validity), and additional terms, like late payment penalties, interest on delayed period, dispute resolution mechanism, adds further strength to role as potential agreement. On the other hand, invoice has limitation, such as it is primarily meant for recording transections, and its enforceability can be challenged in court if terms are ambiguous, unclear, full signatures etc.
Purchase order specifics the goods or services ordered, price agreed upon, delivery schedule, payment terms agreed upon and signature of both parties to make it as binding agreement. Its’ advisable to mention such purchase order number / date in delivery challan and / or invoice
Formal Contract or legal agreement is most comprehensive, legally binding, outlining all terms and conditions, including but not limited to payment terms.
6) Here, “appointed day” is of utmost importance, means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or rendering of service(s)
7) If payments were not made in specified time, then amounts shall be added to the taxable income of the assesse in Previous Year of non-payment of such amounts and the assesse will be burdened with tax on such amounts not paid within specified time. However, the assesse will get deduction in the year in which these amounts have been made. In-fact, its deferment of deduction in respect of amounts payable to Micro or Small Enterprises.
ILLUSTRATIONS ARE
| If no agreement is there | |||||
| DATE | Deduction in FY | Remarks | |||
| Invoice | Delivery | Due | Payment | ||
| 15-02-2024 | 15-02-2024 | 01-03-2024 | 15-03-2024 | 2023-24 | Paid in FY 2023-24, Hence allowed deduction; but liability for penal interest arises |
| 15-02-2024 | 15-02-2024 | 01-03-2024 | 15-04-2024 | 2024-25 | Paid in FY 2024-25, Hence allowed deduction; AND liability for penal interest arises |
| 15-03-2024 | 18-03-2024 | 02-04-2024 | 01-04-2024 | 2023-24 | Paid in FY 2023-24, Before appointed day, hence allowed deduction in FY 2023-24. No liability of interest. |
| 15-03-2024 | 18-03-2024 | 02-04-2024 | 02-04-2024 | 2023-24 | Paid in FY 2024-25, as it has been paid on appointed day, hence allowed deduction in FY 2024-25. Liability of penal interest arises. |
.
| If agreement is there | ||||||
| DATE | Credit Period | Deduction in FY | Remarks | |||
| Invoice | Delivery | Due | Payment | |||
| 15-02-2024 | 15-02-2024 | 16-03-2024 | 16-03-2024 | 30 days | 2023-24 | Paid in FY 2023-24, Hence allowed deduction; but liability for penal interest arises |
| 15-02-2024 | 15-02-2024 | 16-03-2024 | 15-04-2024 | 30 days | 2024-25 | Paid in FY 2024-25, Hence allowed deduction; AND liability for penal interest arises |
| 15-03-2024 | 18-03-2024 | 02-05-2024 | 01-05-2024 | 60 days | 2023-24 | Paid in FY 2023-24, Before appointed day, hence allowed deduction in FY 2023-24. No liability of interest. |
| 15-03-2024 | 18-03-2024 | 02-05-2024 | 02-05-2024 | 60 days | 2023-24 | Paid in FY 2024-25, as it has been paid on appointed day, hence allowed deduction in FY 2024-25. Liability of penal interest arises. |
AND finally it can be capsuled as follows:
| Transection in | Payment in | Credit Period | Deduction Allowed in | Basis of Deduction | Penal interest Liability |
| Current FY | Current FY | Within Limits | Current FY | NA | No |
| Current FY | Current FY | Beyond Limits | Current FY | NA | Yes |
| Current FY | Next FY | Within Limits | Current FY | Accrual Basis | No |
| Current FY | Next FY | Beyond Limits | Next FY | Payment Basis | yes |
8) Here an interesting question arises, if payments due in a particular FY were paid in that FY itself, even if paid beyond due date, then where the problem is?
In that cases, the assessee will be liable to pay penal interest, even if not demanded by the supplier (Micro or Small Enterprises) at 3 times the Bank Interest rate as notified by the Reserve Bank of India. Refer Notification RBI/2006-2007/306. Also refer Sec 16 of MSMED Act
No deduction u/s Sec 37 of the Income Tax Act will be made, as the interest expense is in the nature of penal interest
Moreover, Clause 10 of the Tax Audit Report mandates to report the amount of interest inadmissible u/s 23 of MSMED Act 2006
9) Had it not been demanded, or not mentioned in the Invoice, or even no clause in written agreement is there about the penal interest, EVEN the assessee is liable to Penal Interest. Now question arises, in that cases whether any provision should be made in the accounts or it should be shown as contingent liability.
Its’ advisable to calculate the penal interest amount, in case its’ not demanded and not paid, then treat the same as contingent liabilities and make a proper disclosure in the audited financials. Also state that the profits are overstated to that amount of penal interest not provided for and liabilities are under stated to the extent of interest not provided for.
On the other side, any Provision of such penal interest is not recommended, because once the Interest paid account is debited, and credited to any account [even to suspense account], the TDS provisions u/s 194A will be applicable; and it unnecessarily amount of extra out flow of funds. Even Micro or Small creditors will claim; had it not been claimed.
Moreover, on one side interest expense has to be claimed and on the other side interest paid has to be added back to the returned income, as contravention to Sec 37; unnecessarily the liability in the balance sheet has to be carried forward, which will in-turn will effect current ratio for loan taking companies; and in no way it will reduce any burden of outflow of funds.
10) Now further, argument can be, is the provisions of Sec 43B(h) are applicable to retailers / distributors / traders etc. In that regard, its requested to Again Refer to Sec 43B(h), “……….Micro or Small Enterprise …..”
Here “enterprise” means and 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 or engaged in providing or rendering of any service or service(s)”
Only the Micro and Small Enterprises engaged in the:
- production or manufacture of goods, in any manner, pertaining to any industry as specified in the First Schedule to the Industries (Development and Regulation) Act 1951 or
- providing / rendering service(s)
will be covered. Traders / distributors / retailers / distributors etc of goods are not covered by the stringent provisions of Sec 43B(h)
Additionally, as per O.M. 5/2/(2)/2021-E/P &G/Policy dated 02-07-2021, Udyam Registration to wholesale and retail traders are only for getting benefit of Priority Sector Lending. Thus, purchases from these traders is outside the preview of Sec 43B(h)
However, in author’s opinion, if supply of goods by Traders / distributors / retailers / distributors embedded with supply of services, and a single invoice / agreement is there in respect of supply of goods and services, these suppliers will be covered by the provisions of Sec 43B(h)
11) All payments, whether for inventory, purchases, expenses or even for capital goods will be covered, because sub-section (h) starts with “any sum payable…..”
12) In Author’s opinion, as the provisions of Sec 43B(h) are applicable from 01-04-2024 [AY 2024-25], the creditors outstanding as on 31-03-2023, even not paid till 31-03-2024 will not be added back, as no expenses / purchases have been claimed in AY 2024-25
However, if any sum in respect of capital goods purchased in FY 2022-23, [for which no payment was made in FY 2022-23] was outstanding as on 31-03-2023, and not paid even till 31-03-2024, the disallowance will be made to the extent of depreciation claimed on that particular asset in AY 2024-25
On the same lines, if no payment has been made in specified time in respect of capital goods purchased in FY 2023-24 [ for which no payment has been made in FY 2023-24] and are outstanding as on 31-03-2024 in respect of purchase of capital goods, the disallowance to the extent of depreciation claimed on that particular asset should be made in FY 2023-24.
13) Interestingly and technically, if the provisions of Sec 43B(h) will be applicable to assesses covered under presumptive taxation u/s 44AD/44ADA/44AE, and answer is Sec 43B including sub section (h) is applicable to presumptive taxation u/s 44AD/44ADA/44AE, as has been decided by Hon’ble ITAT Panaji in the case of Good Luck Kinetic vs ITO, ITA 26/Pnj/2013 pronounced on 15-06-2015, because:
- Sec 43B starts with “Non-Obstante Clause” ie “Notwithstanding anything contained in any other provisions of this Act……..” which has overriding effect over all other provisions of the Act, even Sec 44AD/44ADA/44AE
- Sec 44AD/44ADA/44AE has overriding effect from Sec 28 to 43C, stating “Notwithstanding anything to the contrary contained in sec 28 to 43C,……”
- Moreover, Crown has no limitations and has precedence over all other allowances and claims
- Additionally, sec 43B was enacted (in 1983) with the object to curb the practice of not discharging statutory liabilities for a longer period and afterwards sec 44AD/44ADA/44AE was introduced to help / relax small businessmen to comply taxation liabilities and to reduce compliance costs.
14) Issue of Cheques, But not encashed by Supplier : In the case of CIT vs Hidustan Wire Products Ltd (2002) 102 Taxman 744, Hon’ble High Court of Punjab & Haryana, disallowance u/s 43B should not be attracted, when the assesse has issued a cheque to Micro or Small Enterprise, BUT the same has not been presented with the bank or has not been encashed by the MSME supplier
15) Set off debit / credit of same supplier : In case the Supplier (Micro or Small Enterprise) is also a Buyer from the assesse, and thereby a situation arises the Supplier is also having debit balance, along with credit balance. Now the situation arises, if the set-off of balance will amount to “actual payment”.
Hon’ble High Court of Jharkhand in the case of CIT vs Shakti Spring Industries (P) Ltd [2013] 219 Taxman has held that “actual payment” does not mean actual receipt and delivery of currency by two transecting parties when they are creditor and debtor both; “actual payment” does not mean payment in cash or through cheque or demand draft so as to physical delivery of currency and then deliver it again to the same creditor, who is also debtor of the receiving person. So set-off between same debtor-creditor is allowed
16) All the disallowances, whether in respect of any sum payable to Micro or Small Enterprise will be made under the head “Profits and Gains from Business or Profession” and not under any other head of income
17) Registration under MSMED Act 2006 of the supplier is compulsory, but not for the Buyer, as it is applicable to assesse. Assessee has defined in Sec 2(7) of the Income Tax Act, 1961
Conclusion : Sec 43B(h) is a crucial change impacting payments to Micro and small enterprises, and the businessmen has to align their payments schedule accordingly, to get the deduction of amounts payable to Micro and small enterprises, otherwise, taxes has to be paid. The provisions of Sec 43B(h) will act as double edged sword, as it will lead to increase more outflow of funds either in the shape of payment to Micro / Small Enterprise, OR in the shape of tax outflows, if Micro / Small Enterprise were not paid in specified time. On the other hand, it will lead to increase in operating costs. Additionally, authenticity of information provided by the assesse will be a huge challenge for the Tax Auditors. The present practice by the Tax Auditors [Even Clause (a) of Para 42.7 of Guidance Note on Tax Audit u/s 44AB of IT Act 2022 also suggests the same] of mentioning a general remark that information about MSME status of suppliers is not applicable; will be not be viable in future, as department may enquire about the status of creditors to make disallowances u/s 43B(h).
The author recognises the contribution made by his daughter Adv Airik Singla in preparing the above submissions.
Author Bio
