Section 43B(h): Time Limits and Eligibility Criteria

In the budget of AY2024-25, a new section was introduced in order to improve the payment cycle of Micro and Small Enterprises. An extract of the section is reproduced below:

Section 43B(h) of Income Tax Act, 1961

“43B(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 :

Provided that nothing contained in this section ⁵⁵[[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.”

Now as per plain reading of above section, we get to know that a person has to pay to his supplier within the time limit specified in section 15 of MSMED Act, 2006. If he fails to pay to the supplier within this time limit then the same purchase can be allowed only in the scenario if it is paid before the end of financial year.

1. Which type of expenditure is covered under this section?

Purchase of goods or services from Micro and Small Enterprise made on or after 1^st April 2023 are covered for this section 43B(h).

2. Now question arises whether your supplier is Micro, Small and Medium Enterprise?

Micro and Small Enterprise are not defined in Income Tax Act, 1961. So, for this we need to refer Official Gazette [PART II—SEC. 3(ii)] dated 26^th June 2020:

“1. Classification of enterprises– An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: —

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.”

It is to note that only Micro and Small suppliers are covered in section 43B(h). So, even if we fail to pay a supplier (i.e. classified as Medium Enterprise) within the time limit specified in section 15 of MSMED act this will not disallow that expenditure.

3. Now question arises How can I identify whether my supplier is Micro and Small suppliers?

To identify whether a supplier is Micro and Small Enterprise, we need to deep dive into how a supplier can become Micro and Small Enterprise for seeking benefit under MSMED Act,2006. For this we need to refer Section 8 of Micro, Small And Medium Enterprises Development Act, 2006:

“8. (1) Any person who intends to establish,—

(a) a micro or small enterprise, may, at his discretion, or

(b) a medium enterprise engaged in providing or rendering of services may, at his discretion; or

(c) a medium 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 (65 of 1951),

shall file the memorandum of micro, small or, as the case may be, of medium enterprise with such authority as may be specified by the State Government under sub-section (4) or the Central Government under sub-section (3):

Provided that any person who, before the commencement of this Act, established—

(a) a small scale industry and obtained a registration certificate, may, at his discretion; and

(b) an industry 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 (65 of 1951), having investment in plant and machinery of more than one crore rupees but not exceeding ten crore rupees and, in pursuance of the notification of the Government of India in the erstwhile Ministry of Industry (Department of Industrial Development) number S.O. 477(E) dated the 25th July, 1991 filed an Industrial Entrepreneur’s Memorandum

shall within one hundred and eighty days from the commencement of this Act, file the memorandum, in accordance with the provisions of this Act.

(2) The form of the memorandum, the procedure of its filing and other matters incidental thereto shall be such as may be notified by the Central Government after obtaining the recommendations of the Advisory Committee in this behalf.

(3) The authority with which the memorandum shall be filed by a medium enterprise shall be such as may be specified by notification, by the Central Government.

(4) The State Government shall, by notification, specify the authority with which a micro or small enterprise may file the memorandum.

(5) The authorities specified under sub-sections (3) and (4) shall follow, for the purposes of this section, the procedure notified by the Central Government under sub-section (2).”

This form of memorandum has been notified in the Official Gazette i.e. Udyam Registration. An extract of the same is being reproduced below:

As per Official Gazette [PART II—SEC. 3(ii)] dated 26^th June 2020:

“S.O. 2119(E).—In exercise of the powers conferred by sub-section (1) read with sub-section (9) of section 7 and sub-section (2) read with sub-section (3) of section 8, of the Micro, Small and Medium Enterprises Development Act, 2006, (27 of 2006), hereinafter referred to as the said Act, and in supersession of the notifications of the Government of India in the Ministry of Micro, Small and Medium Enterprises number S.O.1702 (E ), dated the 1st June, 2020, S.O. 2052 (E), dated the 30th June, 2017, S.O.3322 (E ), dated the 1st November, 2013 and S.O.1722 (E ), dated the 5th October, 2006, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-Section (ii), except as respects things done or omitted to be done before such supersession, the Central Government, after obtaining the recommendations of the Advisory Committee in this behalf, hereby notifies certain criteria for classifying the enterprises as micro, small and medium enterprises and specifies the form and procedure for filing the memorandum (hereafter in this notification to be known as ―Udyam Registration), with effect from the 1st day of July, 2020, namely:-“

Manner to become micro, small or medium enterprise as per Official Gazette [PART II—SEC. 3(ii)] dated 26^th June 2020:

“2. Becoming a micro, small or medium enterprise.–

(1) Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof.

(2) On registration, an enterprise (referred to as ―”Udyam” in the Udyam Registration portal) will be assigned a permanent identity number to be known as ―”Udyam Registration Number”.

(3) An e-certificate, namely, ―”Udyam Registration Certificate” shall be issued on completion of the registration process.”

So, from the above we can conclude that those suppliers who don’t have Udyam Certificate would not be eligible to become Micro and Small Enterprise as per MSMED Act, 2006 and would not be covered in section 43B(h). Only way to identify whether a supplier is Micro or Small Enterprise is by asking them to provide you with their Udyam Certificate. If they don’t have Udyam Certificate, they wouldn’t be covered for disallowance for sec 43B(h). And if they have, then check for classification mentioned in the certificate.

As we have identified those suppliers which would be covered under 43B(h), now we need to understand time limit to pay them.

4. Which enterprise is to be considered as per MSMED Act, 2006?

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.

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.

It’s applicable only for suppliers who are engaged in Manufacturing or Services activities. You can check this on Udyam Certificate of the supplier.

5. What is the time limit to pay Micro and Small Suppliers?

As per sec 43B(h), time limit to pay Micro and Small Suppliers is mentioned in section 15 of MSMED Act, 2006. Let’s examine this section:

Section 15 of Micro, Small And Medium Enterprises Development Act, 2006

“15. 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.”

Let’s divide this scenario into two cases:

1^st Case: Where there is a written agreement, payment shall be made as per time mentioned in agreement. The agreement can be of maximum 45 days. This agreement can be mentioned in Invoice in the form of due date to pay or a separate standalone agreement.

2^nd Case: Where there is no written agreement, payment shall be made before appointed day.

Now question arises what is appointed date? For this we need to understand what is “appointed day”, “day of acceptance” and “day of deemed acceptance”. Let’s examine it.

As per MSMED Act, 2006 these terms are defined in section 2:

“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;”

To cut it short we can say in case where there is no written agreement three separate scenarios arise:

1^st Case: If you raise objection within 15 days of delivery of goods or rendering of service, then your due date to pay will be (15 days plus date when such objection is cleared/removed by supplier).

2^nd Case: If you raise objection after 15 days of delivery of goods or rendering of service, then your due date to pay will be 15 days from date of delivery of goods or rendering of service.

3^rd Case: If you don’t raise any objection, then your due date to pay will be 15 days from date of delivery of goods or rendering of service.

6. What if we miss the due date calculated above but pay before the due date of filing return u/s 139(1). Will this expenditure allowed?

NO, it has been specifically mentioned in the proviso to 43b(h).

7. What if my Invoice date is 15^th March 2024 and my due date to pay falls in FY2024-25?

If payment is made within the due date then only the expenditure will be allowed in FY2023-24. But if the same is made after the due date, then the same would be allowed in the year of payment but disallowed in FY2023-24.

Conclusion: Understanding the nuances of Section 43B(h) is crucial for businesses dealing with Micro and Small Enterprises. The eligibility criteria, identification process, and time limits for payment outlined in the MSMED Act and related notifications provide clarity. Adhering to these guidelines ensures compliance and allows businesses to make informed decisions regarding the allowed expenditures under Section 43B(h).