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Section 43B(h) of Income Tax Act

Section 43B(h) of Income Tax Act

Section 43B(h) of Income Tax Act: Applicability, Date, Limit, Example

The Income-tax Act allows the deduction of expenditure according to the system of accounting followed by the assessee. Where the assessee follows a cash system of accounting, the deduction should be allowed on an actual payment basis. In the case of a mercantile system of accounting, the deduction is allowed on an accrual basis.

However, Section 43B of the Income-tax Act, 1961 (IT Act) provides a list of several expenses which are allowed as a deduction on a payment basis. Thus, even if an assessee follows the mercantile method of accounting, deduction of the specified expenses shall be allowed if the payment is made on or before the due date of furnishing the return of income, except the sum payable to micro and small enterprises.

The Finance Act 2023 added one more item to the list in Section 43B by virtue of clause (h), the deduction of which shall be allowed on a payment basis. It provides that any sum payable to a micro or small enterprise (MSEs) beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) shall be allowed as a deduction in the previous year in which such sum is actually paid.

In this article, we have answered the frequently asked questions on Section 43B(h) and explored the challenges it presents for businesses seeking to maintain smooth and compliant payment practices with MSEs.

What does the recently introduced clause (h) offer, and how does it distinguish itself from the other clauses within Section 43B?

Section 43B applies to sums outstanding as of year-end and paid off after the 31st of March of the financial year.

The newly inserted clause (h) provides that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSME Act shall be allowed in the previous year in which such sum is actually paid.

Other clauses of Section 43B allow a deduction of year-end outstanding on an accrual basis if the payment is made on or before the due date of filing the ITR. In contrast, the deduction for the sum payable to MSEs covered by clause (h) shall be deductible only if paid on or before the time allowed by Section 15 of the MSMED Act.

Who are classified as micro and small enterprises?

In Explanation 4 below Section 43B, clauses (e) and (g) have been substituted to define the expression “micro enterprise” and “small enterprise” respectively as under:

Category of Enterprise
Criteria for classification
Micro Enterprise
  • Net investment in plant and machinery or equipment 
    does not exceed Rs 1 crore; and
  • Net turnover does not exceed Rs 5 crores.
Small Enterprise
  • Net investment in plant and machinery or equipment 
    does not exceed Rs 10 crore; and
  • Net turnover does not exceed Rs 50 crores.
Medium Enterprise
  • Net investment in plant and machinery or equipment 
    does not exceed Rs 50 crore; and
  • Net turnover does not exceed Rs 250 crores.

What is the time limit prescribed under Section 15 of the MSMED Act for making payment?

Section 43B(h) refers to the limitation period specified under Section 15 of the MSMED Act, which provides that 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. However, this agreed date cannot exceed 45 days.

If there is no agreement on this behalf, the buyer shall make the payment before the appointed day.

As per Section 2(b) of the MSMED Act, “appointed day” means the day immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

For example, where goods are supplied and accepted on 30-03-2024, the due date for payment under Section 15 of the MSMED Act shall be computed as follows:

Date of 
acceptance
of supply
Credit period
Due date for
 payment
Remarks
30-03-2024
30 days
28-04-2024
Due date as per terms 
of the agreement
30-03-2024
60 days
13-05-2024
Due date cannot exceed 45 
days from the date of acceptance
30-03-2024
No agreement
13-04-2023
In the absence of an agreement,
the due date cannot exceed 15 
days from the date of acceptance

If the payment is made on or before the due date specified in the third column, no disallowance shall be made under Section 43B(h).

Should terms mentioned on the invoice or purchase order be treated as an agreement?

The MSMED Act does not define the term ‘agreement’. Thus, it can be said that agreement can be written as well oral. In common parlance, an agreement means when one person makes an offer and another person agrees to it. It includes terms like due dates, acceptance of goods/services, consequences for late payment, and dispute resolution. So, if an invoice or purchase order has these details, it can be seen as an agreement.

Will the disallowance apply to the sum payable to retail traders or wholesalers?

Para 2 of Office Memorandum: No. 5/2(2)/2020/E/P&G/POLICY dated 2-7-2021 issued by Central Government has clarified that “The Government has received various representations and it has been decided to include Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only.” Central Government’s office memorandum 1/4(1)/2021- P&G Policy, dated 01.09.2021, further clarifies that “the benefit to Retail and wholesale trade MSMEs are restricted up to priority sector landing only and other benefit, including provisions of delayed payment as per MSMED Act, 2006, are excluded.

In view of the above Office Memorandum, dated 01.09.2021, a Supplier who is a micro or small enterprise cannot be treated as “Supplier” for section 15 and section 43B(h) purposes if his Udyam Certificate shows his activity as only a trader.

Although there does not appear to be any legal basis in MSMED Act for the Office Memorandum and Wholesale & Retail Trade are treated as distribution services under GATT/WTO, the above position will prevail till any Trader/Traders body challenges the OM in Court and gets it quashed.

Will the GST component be disallowed if the sum payable to MSE attracts Section 43B(h) disallowance?

If the sum payable to the Micro or Small Enterprise includes GST, the disallowance is restricted to the amount excluding GST if the GST is claimed as Input Tax Credit (ITC) in the books of accounts. However, if the buyer opts not to claim the input tax credit under GST and treats it as an expense in its Profit and Loss account, deduction against GST will only be allowed based on actual payment.

Are the provisions of Section 43B(h) applicable to non-registered suppliers?

Para 2 of the Notification provides that any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online on the Udyam Registration portal based on self-declaration with no requirement to upload documents, papers, certificates or proof. The word ‘may’, used in the notification, indicates that it is not mandatory for an enterprise to get registered to establish itself as an MSME. However, Section 43B(h) mentions Section 15 of the MSMED Act, which talks about the delay in payment to a ‘supplier’. Section 2(n) defines “supplier” to mean a micro or small enterprise that has filed a memorandum with authority referred to in Section 8(1) (i.e., Udyam Registration). So, without registration on the Udyam Portal, Section 15 of the MSMED Act may not be invoked for disallowance under Section 43B of the IT Act.

Further, it is well-nigh impossible for any buyer to scrutinise the financials, ITRs and GSTRs of all his suppliers to determine their classification into micro, small or medium enterprises and to call for financials, ITR and GST data from suppliers every now and then to check whether there is any change in classification. The only feasible and accurate method to validate the classification of the supplier is to refer to his Udyam Registration.

Is the disallowance under Section 43B applicable if supplies are made before obtaining Udyam registration?

Section 43B(h) will not apply with respect to payments for supplies made before the date of Udyam Registration. He would be regarded as a micro-enterprise only from the date of obtaining such registration as Udyam Registration does not operate retrospectively.

If goods were purchased from MSEs on 01-04-2023 and payment was made on 31-03-2024, will it be disallowed under Section 43B(h) for the assessment year 2024-25?

There will be no disallowance. Even though 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. Therefore, the amount will be allowed on an actual basis and not disallowed. However, such a delay is not a smart strategy as interest under Section 16 of the MSMED Act, 2006 will be payable by the assessee to the supplier at three times the bank rate compounded at monthly rests.

Does Section 43B(h) apply with respect to the amounts due towards the purchase of Capital Goods?

Unlike Section 37(1), the deductibility under Section 43B is not linked to the distinction between capital expenditure and revenue expenditure. Section 43B applies to sums payable in respect of which a deduction is otherwise allowable under this Act.

Therefore, Section 43B(h) would apply to amounts payable to micro or small enterprises with respect to the purchase of capital goods for which a 100% deduction is admissible under Sections 30 to 36. For example, the deduction of 100% of capital expenditure under Section 35AD and the deduction of 100% of capital expenditure on scientific research under Section.

If a 100% deduction of capital expenditure is not allowable, there would be no disallowance with respect to depreciation on capital goods purchased if the MSE supplier of capital goods is not paid in time. This is because depreciation is not a “sum payable in respect of which deduction is otherwise allowable”. What can be disallowed under Section 43B(h) must have the character of a sum payable in respect of which deduction is otherwise allowable.

The Courts had taken the view that depreciation cannot be disallowed on the cost of the asset which was capitalised in books of account, but tax thereon was not deducted under Section 40(a)(i)/(ia) of the Act3.

Can depreciation be disallowed if payment for the purchase of a fixed asset is made beyond a prescribed limit?

Depreciation cannot be disallowed under Section 43B.

Whether disallowance attracts if the assessee opts for a presumptive taxation scheme under Section 44AD, Section 44ADA, Section 44AE, etc.?

Section 43B(h) begins with a non-obstante clause “notwithstanding anything contained in any other provision of this Act”. Therefore, apparently, Section 43B overrides all provisions of the Act including provisions of presumptive taxation under Section 44AD, Section 44ADA, Section 44AE, Section 44BBB and Section 115VA (Tonnage Tax)

However, Sections 44AD, 44ADA, 44AE, 44BBB and 115VA also begin with non-obstante clauses as ‘Notwithstanding anything to the contrary contained in Sections 28 to 43C,…….’

Therefore, Section 43B(h) overrides all other provisions of the Act except Sections 44AD, 44AE, 44ADA, 44BBB and 115VA. Therefore, Section 43B(h) will not apply to eligible assessee-buyers who opt for presumptive taxation under Sections 44AD, 44AE, 44ADA, 44BBB or 115VA.

Will Section 43B(h) apply to fees payable to a CA firm?

Nothing in the MSMED Act or Chartered Accountants Act, 1949 disqualifies a CA firm from filing Udyam Registration as a micro or small enterprise. The MSMED Act does not exclude professional services from the ambit of the expression “service”. Therefore, a CA firm may be registered as a micro or small enterprise in terms of specified turnover and investment by applying for a Udyam Registration.

How to verify if the Udyam Number furnished by the supplier by printing on the invoice or otherwise is genuine?

Search his Udyam Registration Number on the Udyam Portal under the newly enabled “Verify Udyam Registration Number” at the following link https://udyamregistration.gov.in/udyam_verify.aspx

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