• Fintaxwiser
• Posted on April 9, 2024
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In this regards, on clause (h) of section 43B has been inserted by the Finance Act, 2023, w. i.e. 1-04-2023 which deals with payment to Micro or Small Enterprise beyond the Time Limit specified under The Micro, Small and Medium Enterprises Development (MSMED) Act 2006. 

As per section 43B of the Income Tax Act, certain deductions to be allowed on actual payment 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.

Section 43(B) is applicable where Books account is maintained on Accrual Basis, not on Cash Basis. 

Also further provided that (except clause (h) of the Section 43(B) if the payment is made on or before due date of filling of ITR u/s 139(1) of the Income Tax Act then it shall be allowed as actual payment and allowed as deduction. 

Following clause (h) shall be inserted after clause (g) of section 43B by the Finance Act, 2023, w.e.f. 1-4-2023:

(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),

Note: clause (h) is applicable Only to Micro and small enterprise defined under section 2(h)and 2(m) of the MSMED Act. Not applicable to Medium and Large enterprise.

1. Meaning of Micro enterprises

Explanation 4(e) of Section 43(B) of Income Tax Act, “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the MSMED Act, 2006 (27 of 2006);

Latest Definition as per notification No. S.O. 1702(E) dated 01st June 2020 of Ministry Of Micro, Small And Medium Enterprises, the new definition of Micro Enterprise is:

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;

This definition is applicable to manufacturing or production of goods or engaged in providing or rendering of any service or services.

1. Meaning of Small enterprises

Explanation 4(g) of Section 43(B) of Income Tax Act “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the MSMED Act, 2006 (27 of 2006).

Latest definition as per notification No. S.O. 1702(E) dated 01st June 2020 of Ministry Of Micro, Small And Medium Enterprises, the new definition of Small Enterprise is:

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;

This definition is applicable to manufacturing or production of goods or engaged in providing or rendering of any service or services.

2. Meaning of Enterprises

As per Section 2(e) of the 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 (55 of 1951) or engaged in providing or rendering of any service or services.

3. Delayed Payments to Micro and Small Enterprises

As per section 15 of the MSMED Act 2006 “Liability of buyer to make payment”—

Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefore

1. on or before the date agreed upon between him and the supplier in writing or,
2. 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 MSMED 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.

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;

4. Interest On Delayed Payments

As per Section 16 of the MSMED Act 2006, Date from which and rate at which interest is payable. —

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 rates 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.

Rate of interest at three times of the bank rate notified by the Reserve Bank.

5. Interest Not To Be Allowed As Deduction

As per Section23 of the MSMED Act 2006, Interest not to be allowed as deduction from income: —

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.

6. Overriding Effect

As per Section 24 of the MSMED Act 2006, Overriding effect: —

The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

Some Question & Answer (Q&A)

1. 𝐖𝐡𝐚𝐭 𝐝𝐨𝐞𝐬 𝐬𝐞𝐜𝐭𝐢𝐨𝐧 43𝐁(𝐡) 𝐬𝐚𝐲:
   Any sum owed by an assessee to a micro or small enterprise that is outstanding beyond the time limit specified in section 15 of the MSMED Act, 2006, shall be allowed only in the previous year in which such sum is paid.
2. 𝐖𝐡𝐚𝐭 𝐢𝐬 𝐭𝐡𝐞 𝐭𝐢𝐦𝐞 𝐥𝐢𝐦𝐢𝐭 𝐩𝐫𝐞𝐬𝐜𝐫𝐢𝐛𝐞𝐝 𝐢𝐧 𝐬𝐞𝐜𝐭𝐢𝐨𝐧 15 𝐨𝐟 𝐌𝐒𝐌𝐄𝐃
3. If No Agreement – within 15 days of purchase.
4. When there is an agreement – As per agreement subject to maximum 45 days.
5. When there is an agreement to pay beyond 45 days – Payment to be done within the time-limit decided by buyer and seller which can be maximum 45 days.
6. In a Case where no agreement, then the buyer can make an agreement with retrospective effect?

Explanation 1 of section 2(b) of the MSMED Act 2006, the term used “actual delivery”. Explanation says that the day of the actual delivery of goods or the rendering of services;

So, the date is count from the date of actual deliver of goods or the rendering of services. Therefore, any agreement whether it is retrospective it will effective prospective, not retrospective.

Date of receiver of Invoice is not relevant to count timeline of payment. 

• Whether Medium Enterprises is covered? OR Whether in a case where enterprises growing from small to Medium enterprises is covered?

The answer is No but technically it also covered. How it is:

As per Frequent Ask Question samadhaan portal, Changes have been made in the Samadhaan Portal in accordance with S.O.4926 (E) dated 18.10.2022.

The Notification mentions that in case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the re-classification, for a period of three years from the date of such upward change. 

Accordingly, a small enterprise growing to Medium and covered by the Notification can avail the provision for delayed payment as per Chapter-V of the MSMED Act, 2006.

• Is It Required To Get Udyam Registration To Avail Benefits Of Section 43B(h) Of The Income Tax Act?

Yes, Udyam Registration is mandatory for availing all the schemes/benefits of this office including benefits under delayed payment provisions. Section 2(n) of the MSMED Act 2006 “supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes, —.

• Is It Section 43B(h) Applicable In Case Where Udyam Registration Is Surrendered?

Not applicable for future transactions but all past transitions are covered subject to declaration given by the suppliers. 

• Whether Section 44AD, 44ADA, 44AE, 44BBB And 114VA Has Overriding Effect Over Section 43B(h)?

Yes, but section 16 of the MSMED Act 2006 is applicable and accordingly section 23 is also applicable to disallow interest expenses.

• Whether Previous Year’s Liability Outstanding On 01st April 2023 Will Be Count First In Payment Of payment made in Current Year 2023-24?

Yes, the payment outstanding on 01st April 2023 and new liability incurred dung the current year shall be discharged First in First Out. For Example

Payment outstanding of Micro & Small Enterprises –  Rs30,000/-

Expenses incurred during the year 2023-24from Micro & small – Rs20,000/-

Payment made during the current year 2023-24 – Rs40,000/-

In this case, out of R. 40k for Rs.30/- will be first discharged and then Rs10k/- out of current year outstanding. Balance outstanding for Rs.10k/- will be disallowed if not paid on or before 31^st March 2024.

• Whether Section 43B(h) Is Applicable To Charitable Institution Exempted Under Section 11 To 13 Of The Income Tax Act?

No, the reason being, as per section 43B of the IT Act, only in Computing the Income referred to in section 28 of the Income Tax Act wherein only certain income under Profits and gains of business or profession is chargeable. But where charitable institution has income under section 28, then it is applicable.

1. Whether Section 43B(h) Is Applicable Before Udyam Registration of Obtain By Supplier?

No, it is required to take Udyam Registration to avail all benefits of MSMED Act 2006.

1. What Constitute Actual Payment For Section 43B(h)?

Where payment is made within time specified in section 15 of the MSMED Act, but in case where if the payment is made beyond the time specified in Section 15 of the MSMED Act, it is made during the same year and is not outstanding as at the year-end. 

The mode of payment is not prescribed under section 15 of the MSMED Act, so even the cheque dated 31^st March is issued and honoured latter on then it is also actual payment subject to cheque should not be dishonoured. 

Therefore, the amount will be allowed on an actual basis and not disallowed.

But where payment is beyond the appointed date, the interest shall be charged and the same will be disallowed under section 23 of the MSMED Act.

1. Now A Days Industry Has Practice To Hold GST Amount To Ensure Timely Filling Of GSTR – 1?

GST collected on sale is liability od seller to pay on time and is not an expenses and not be charged as deduction against income of section 28 of the Income Tax Act. So, section 43B(h) is not applicable on amount of GST payable to buyers. But the interest amount of delay payment shall be disallowed under section 23 of the MSMED Act.  

1. What is the action point of a Buyer who should adopt?
2. Send a letter to verify your suppliers’ MSE status’. Ask for their Udyam Certificate.
3. Maintain a separate MSE supplier database, tracking due dates and payments.
4. No Micro, Small Enterprises creditors outstanding exceed 15/45 days as on 31.03.2024.
5. Pre-agreement on payment terms for purchases.
6. Regularly monitor payments and outstanding to Micro Small Enterprises suppliers.
7. Recommendation to the Seller/Buyers?
8. Write Udyam registration Number on invoices;
9. Inform buyers of your Micro Small Enterprises status.
10. Specify a credit period (up to 45 days) on invoices.

Declaimer: The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this article are for general informational purposes only.