Section 43B(h) of Income Tax Act related to MSME (Small & Micro) - Very Important Amendment

Latest Amendment in Section 43B of Income Tax Act related to MSME

Section 43B: Overview

This Section provides some expenses which are specified under Section 43B shall be allowed as deduction under the head 'Income from business and profession' on actual payment basis rather than accrual basis. It means Assessee can't claim the deduction in the year in which payment is due but in the year in which payment is made. However, this section shall not apply if payment is made by the Assessee on or before due date of return filing applicable under section 139(1) in respect of the previous year in which liability was incurred and evidence of such payment furnished by the Assessee along with his return.

For e.g. If taxes or duty are due for P.Y 2023-24 then assessee (Individual) has to pay such taxes till the due date of return filing i.e. 31st July 2024 for claiming deduction in the P.Y 23-24. If assessee fails to pay in the P.Y 23-24 then it shall be allowed in the P.Y in which such taxes or duty are paid.

Introduction to the latest Amendment to Section 43B

As per the Amendment made by the Finance Act, 2023 clause (h) shall be inserted after clause (g) of section 43B which says that if assessee makes payment to micro or small enterprises beyond the limit specified in section 15 of the MSME Act, 2006 then deduction of such payment shall not be allowed in the previous year in which payment is due rather it shall be allowed in the previous year in which payment is made. Even though deduction is allowed for expenses specified under section 43B when payment is made on or before due date of return filing in respect of the previous year in which liability was incurred but such provision shall not apply in case of clause (h) i.e. if payment is made to micro or small enterprises. In last we can say that payment related to micro or small enterprises shall be allowed in the current previous year only when it is paid on or before the limit specified in section 15 of MSME Act, 2006.

Section 15 of MSME Act, 2006

This Section deals with the delayed payment to MSMEs by the buyers. As per this section, buyer is liable to make payment within a period of 15 days if there is not agreed date of payment and in case if there is agreed date of payment then agreed date or maximum 45 days whichever is earlier. If buyer fails to make payment for goods or services supplied by an MSME then buyer shall be liable to pay compound interest to the supplier on the amount due, as per the rate notified by the Reserve Bank of India (RBI) and along with interest as per the latest amendment made by Finance Act, 2023 in section 43B buyer shall also not be allowed to claim deduction of such payment under the head 'Income from business and Professions'. But this amendment is applicable for only micro or small enterprises.

Meanings of Micro or Small Enterprises as per MSME Act are as follows-:

For e.g. If goods or services is sold or rendered by micro or small enterprises and agreed date is 24-08-2023 and payment is made by buyer on 25/02/2024 then it shall be allowed in P.Y 2023-24 because it has been more than 45 days as per section 15 but within same P.Y. payment is made and if goods is sold or rendered by micro or small enterprises on 14-06-2023 and there is no agreed date and payment is made by buyer on 25-10-23 then it shall not be allowed in P.Y 2023-24 because it has been more than 15 days as per section 15 but within same P.Y. payment is made.

In case goods or services is sold and rendered by micro or small enterprises on 10.02.2024 and payment is made on 05.04.2024 as payment is not made within 45 days and within same P.Y therefore it is disallowed during P.Y. 2023-24. It will be allowed during next P.Y i.e. 2024-25.

Tax Auditor need to check whether section 43B(h) of the Act is compiled and same is required to report in Tax Audit Report. Tax Auditor need to ensure that sundry creditors outstanding as on 31.03.2024 should not be older than 45 days otherwise it will get disallowed. Tax Auditor should send email to all such vendors through client and ensure how many Small and Micro entitles are out such sundry creditors whose balance is outstanding more than 45 days at year end.

Conclusion

Section 43B latest amendment related to MSME has a good impact for the micro or small enterprises because many supplier purchase goods or services from the micro or small enterprises but don't make payment on due date due to which MSMEs has to suffer. Now buyer will be able to claim a deduction of the payment  in current previous year only when they make payment within a period of 45 days in case of agreed date or within 15 days if nothing specifically agreed. If payment is made beyond above limits then it shall be allowed in the previous year in which payment is made.