ANALYSIS ON ALLOWANCE OF DEDUCTION ON PAYMENT BASIS IN CASE OF MSME – SECTION 43B(h) OF THE INCOME TAX ACT, 1961

Articles

ANALYSIS ON ALLOWANCE OF DEDUCTION ON PAYMENT BASIS IN CASE OF MSME – SECTION 43B(h) OF THE INCOME TAX ACT, 1961

13/02/2024

ANALYSIS ON ALLOWANCE OF DEDUCTION ON PAYMENT BASIS IN CASE OF MSME – SECTION 43B(h) OF THE INCOME TAX ACT, 1961

Micro Enterprises means there Investment in Plant and Machinery should not exceed 1 Crore and Turnover should not exceed 5 Crores.

Small Enterprises means Investment in Plant and Machinery should not exceed 10 Crore and Turnover should not exceed 50 Crores.

The payment system is governed by Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006

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.

Section 2(b) of the Micro, Small and Medium Enterprises Development 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.

Therefore, the payment to a micro or small enterprise shall be made up to;

A. 31st March of such previous year or

B. The due date specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 ,Whichever is earlier

Section 43B is in relation to the allowance of deduction on the basis of payment actually made by the assesse;

A. In such financial year or

B. Up to 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.

After clause (g) of section 43B of the Income Tax Act, 1961, clause (h) shall be inserted by the Finance Act, 2023, w.e.f. 1-4-2024:

“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),”

Section 43B(h) is applicable from 1st April, 2024 i.e. it is applicable for AY 2024-25. Therefore, it will impact the transactions made in PY 2023-24 up to 31st March 2024 also.

Proviso to Section 43B of the Income Tax Act, 1961

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.

As per section 43B(h) of the Income Tax Act, 1961 read with section 15 and section 2(b) of the MSMED Act, 2006; the payment is to be made to the creditors being micro and small enterprises up to the following date;

Where the due date of payment is AGREED in between the supplier and the recipient

Within FORTY FIVE days from the day of acceptance or the day of deemed acceptance of any goods or any services

Or
31st March of such previous year;

Where the due date of payment is NOT AGREED in between the supplier and the recipient

FIFTEEN days from the day of acceptance or the day of deemed acceptance of any goods or any services

Or
31st March of such previous year; Whichever is earlier

Consequences of not making the payment within time limit prescribed:

1. The amount will be added to the taxable income of the assessee. Means such amount, the assessee would not be allowed to claim deducted in the debit side of his Statement of Profit & Loss in that previous year.

But, the assessee shall be eligible for the deduction in the PY when payments are made.

2. Interest shall be applicable as specified in section 16 of the MSMED Act, 2006.

Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006

Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with MONTHLY RESTS to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, AT THREE TIMES OF THE BANK RATE notified by the Reserve Bank.

The interest paid to the supplier for delay in payment shall not be allowed as deduction under the Income Tax Act, 1961.

Section 23 of the Micro, Small and Medium Enterprises Development Act, 2006

Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.

Section 43 B(h) is related only Micro and Small Enterprises under this clause. Therefore, this clause shall not be applicable on Medium Enterprises.

The assessee is required to report the interest paid on delay in payment to the MSME Supplier in Clause 22 of Form 3CD.

If the supplier is not registered under the MSMED Act, 2006. Therefore, section 43B(h) shall not be applicable to the customers of such supplier.