Expenditure Allowed to MSE on Payment basis under Sec 43B(h)

Expenditure Allowed to Micro or Small Ent on Payment basis under Sec 43B(h) – effective from 01.04.2023

In order to promote timely payments to micro and small enterprises, a new clause (h) has been inserted in section 43B of the Act to provide that 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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment.

Section 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

Provided that nothing contained in this section [[except the provisions of clause(h)]] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1)”

Therefore, if payment to micro or small enterprise is done beyond credit period specified in Sec. 15 of MSMED Act, than it is to be allowed on Payment basis only.

Exception to Proviso of Sec. 43B specifies that even if the payment is made before filing Income Tax Return, it would be allowed only in the year in which payment is done.

MSME Definition as per MSMED Act, 2006:

Investment in plant & machinery AND Turnover for both Manufacturing and Service sector

Example: Credit period with Supplier is less than 45 days

Ram, a proprietor has purchased goods from a supplier XYZ Partnership firm (MSME registered) of Rs. 2 lakhs as on 20th March, 2024. The credit period agreed is 15 days from the date of invoice. Ram paid the supplier on 14th April, 2024 (within 30 days of date of invoice).

Whether Rs. 2 lakhs is to be disallowed u/s. 43B(h)?

Ans.: Yes

• If agreement stipulated credit period than payment is to be made within credit period as specified in the agreement however not more than 45 days
• If no agreement than within 15 days of invoice

“Section 15. Liability of buyer to make payment.—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 or, 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.”

Case Studies:

Ram, a proprietor has received services (or purchase of goods) of Rs. 2 lakhs from Supplier XYZ Partnership firm – small MSME registered, in F.Y. 2023-24. Is the service (or purchase of goods) allowed as expenses to Ram in F.Y. 2023-24 in the following scenarios? Note- Credit period of 45 days agreed between both parties. Income Tax Return for FY 2023-24 is filed on 15th July, 2024.

Interest on delayed payment to MSME

If payment is not made within the time limit specified under section 15, then the compound interest payable shall be three times of the bank rate notified by the RBI (Sec. 16)

Section 23 of MSMED Act provides, 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.

Reporting (in Tax Audit and Audited Financials):

–the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;

–the amount of interest paid by the buyer in terms of section 16, along with the amounts of the payment made to the supplier beyond the appointed day during each year;

–the amount of interest due and payable for the period of delay in making payment but without adding the interest specified under this Act;

–the amount of interest accrued and remaining unpaid at the end of each year; and

–the amount of further interest remaining due and payable even in the succeeding years, until actually paid

Key Summary Points

• Provision applicable to all assesses (irrespective of audit/turnover) in case of payment to registered micro or small enterprise
• If expense incurred and paid within Financial year, it is allowed irrespective of credit period
• If expense incurred during financial year and paid in next financial year within credit period allowed, expense allowed
• If expense incurred during financial year and paid in next financial year beyond credit period allowed, expense disallowed and allowed in the year of payment
• Interest on delayed payment : disallowed