Disallowance of payment to MSME - Beyond the due date

Legal provision - Section 43B(h)

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

Our Analysis

1. This clause is applicable on all types of Purchases /expenses made from the enterprise which has been registered under MSMED Act,2006.
2. This clause is applicable to Micro & Small Enterprises. Medium Scale Enterprises are outside the ambit of this clause.
3. Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.
4. Section 43B(h) states that any sum payable by the assessee to a micro & small enterprises beyond the time limit specified in Section 15 of Micro, Small and Medium Enterprises Development Act 2006 shall be allowed only in computing the income referred in Section 28 of that previous year in which sum has been actually paid (irrespective of the previous year in which liability to pay sum was incurred by assessee according to the method of accounting regularly employed)
5. If payment to Micro & Small Enterprises has not been made in specified time, then that amount shall be added to the taxable income of assessee in Previous Year on account of Non payment to MSME & assessee has to bear the tax liability on such amount.
6. The assessee gets a deduction for such expenses or purchases in the year in which payment has been made.

Our Recommendation

1. Check with the vendor/bills for confirmation whether the vendor is registered with the MSME or not.
2. Categorized the vendor as MSME in the accounting system
3. Check the outstanding bills of the MSME vendor.
4. Make the payment of the outstanding bills of the MSME vendor within the due date from the bill date or before 31/03/2024 to avoid the disallowance.
5. Take special precautions for payment of the bills received after 15/02/2024, as the due date for payment may fall after 31/03/2024.

Thus, this amendment to Section 43B of the Act allows the payment as a deduction only on a payment basis. It can be allowed on an accrual basis only if the payment is within the time mandated under Section 15 of the MSMED Act.