Section 43B of the Income Tax Act provides for certain deductions to be allowed only on actual payment. Clause (h) has been inserted in the Section, by Finance Act 2023 (to be applicable from FY 2023-24), to include payments made to Micro and Small Enterprises within the ambit of Section 43B of the Income Tax Act.
Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, provides that payment for any Goods or Services to Micro and Small Enterprises should be made within time as per written agreement, which cannot be more than 45 days . If there is no Agreement then the payment has to be made within 15 days.
Section 43B has been amended to provide that any sum payable by the assessee to a Micro or Small Enterprise beyond time limit specified in section 15 of MSMED Act (i.e. agreed time or 45 days whichever less), then deduction of same shall be allowed only on actual payment. Deduction will be allowed on accrual basis only if the payment has been made within the time mandated u/s 15 of the MDMED Act.
Micro or Small Enterprises as defined in MSMED Act mean, Manufacturers or Service providers having Turnover upto Rs.50 Crores and Investment in Plant & Machinery upto Rs. 10 Crore.
Whether the Section is applicable for Payments outstanding to Traders registered under Udyog Adhar?
Section 43B(h) is only applicable for payments outstanding to Micro or Small Enterprises. Only Manufacturers and Service Providers with Turnover less than Rs.50 Crores are covered in the definition of Micro or Small Enterprises.
Traders (Even if Registered under Udyog Adhar), are not covered in definition of Micro or Small Enterprises under the MSMED Act 2006. As Registration of Traders under Udyog Aadhar is only for the limited purpose of Priority Sector Lending. Therefore there will not be any disallowance u/s 43B(h) if PAYMENT TO TRADERS is made beyond the period specified in section 15 of the MEMED Act.
Whether the Section is applicable for Payments outstanding to Manufacturers or Service Providers not registered under Udyog Aadhar?
Section 43B(h) is applicable for payments outstanding to Micro or Small Enterprises beyond period specified in section 15 of the MSMED Act. The Section 15 mentioning the Liability of the Buyer to make payment, is applicable only for payments to ‘Suppliers’. MSMED Act defines ‘Supplier’ as Micro or Small Enterprise which has filed memorandum as specified. Thus section 15 of the MSMED Act is not applicable for payment to Micro or Small Enterprises who are not registered under Udyog Aadhar.
Therefore this section will also not be applicable for Payments outstanding to Manufacturers or Service Providers not registered under Udyog Aadhar
The period of 15 days/ 45 days will be counted from which Date?
For the Purpose of calculating delayed payment u/s 15 of the MSMED Act, the period will be counted from day of acceptance or day of deemed acceptance, i.e.
a. Day of Actual Delivery of Goods or rendering of services.
b. Where any objection is made by buyer in writing regarding acceptance of goods or services within 15 days of delivery; the day on which the objection is removed.
Example:
Invoice Date: 1st March 2024
Actual Delivery of Goods: 6th March 2024
Agreement period: 45 days
The Period of 45 Days will be counted from 6th March 2024 and not from 1st March 2024. The Payment for the Invoice can be made till 20th April 2024 to avoid disallowance u/s 43B(h)
When should Payment to Micro and Small Enterprises be made for Expenditure of 2023-24 to claim deduction in 2023-24 itself?
Assuming there is an Agreement between Purchaser and Seller to make payment in 45 days, and Delivery of Goods is on the Date of Invoice
For Invoices raised till 15/02/2024: Payment should be made till 31st March 2024
For Invoices raised from 16/02/2024 to 31/03/2024: Payment should be made within 45 days
Examples:
Invoice Date 01/01/2024: if payment made till 31/03/2024 deduction allowed in 2023-24
Invoice Date 01/03/2024: if payment made till 15/04/2024 deduction allowed in 2023-24, if payment made on 20/04/2024 deduction allowed in 2024-25.
Whether old outstanding Balances as on 31/03/2023 will also be covered for disallowance u/s 43B(h)?
Section 43B(h) is applicable from FY 2023-24. Only the Expenditure incurred after 01/04/2023 will be covered for disallowance under this section. Old outstanding balances have already been allowed as deduction during the earlier Financial Years. These will not be covered for disallowance under this section for current year.
However if any payment is being made in the current year to any Supplier having outstanding balance as on 31/03/2023, the same will first be adjusted against old balance before making any adjustment for the Purchases of current year.
Example 1:
Amount outstanding to ABC Ltd as on 31/03/2023 : Rs.15 lakhs
Purchases during the FY 2023-24 : Rs.10 Lakhs
Payment during the FY 2023-24 to ABC Ltd : Rs.15 lakhs
The payment of Rs.15 lakhs in the current year will first be adjusted against old balance and Rs.10 lakhs out of current year Purchases, will be disallowed as the same has not been paid.
Example 2:
Amount outstanding to XYZ Ltd as on 31/03/2023 : Rs.10 Lakhs
No transaction during the FY 2023-24
No disallowance will be made u/s 43B(h) during FY 2023-24.
Whether this section is applicable only to Taxpayers who are covered under Tax Audit u/s 44AB?
This Section is applicable to all assesses whether they are covered under Tax Audit or not. In the Income Tax Return Forms recently notified for the AY 2024-25, a new column has been inserted under Part A-OI (Other Information) to disclose the sum payable to Micro or small enterprises beyond the specified time limit per the MSMED Act.
Will this section be applicable if ITR is filed on presumptive basis u/s 44AD or 44ADA?
Sections 44AD and 44ADA start with the words “Notwithstanding anything contained in sections 28 to 43C”. When ITR is filed under these sections, it is deemed that all Deductions/ Allowances under sections 28 to 43C have been allowed. There will not be any disallowance u/s 43B if ITR is filed u/s 44AD or 44ADA.
What is the Rate of Interest payable under MSMED Act for delayed payment?
When the payment is not made within the time specified u/s 15 of the MSMED Act, Buyer shall be liable to pay compound interest with monthly rests to supplier, at 3 times the Bank Rate notified by the RBI. (i.e. if Bank Rate notified by RBI is 6.75%, then Interest is payable at 20.25% for delayed payment). Moreover this Interest is also not allowed as Deduction while computing Profits from Business in Computation of Income. This Interest is payable even if there is no agreement between the Buyer and the Supplier.
Disclaimer: The information provided in this article is intended for general informational purposes only. While every effort has been made to ensure accuracy, completeness, and timeliness of the content, it should not be construed as legal or professional advice . Readers are advised to consult a qualified tax professional to obtain specific advice tailored to their individual circumstances. The author and publisher disclaim any liability for any loss or damage incurred by individuals or entities relying on the information presented in this article.
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