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Analysis of Clause (h) In Section 43B of the Income Tax Act, 1961 and Delayed Payments to Micro and Small Enterprises
(Inserted by the Ministry of Finance vide Circular No. 1/2024 dated January 23, 2024)
Section 43B (h) of the Income Tax Act, 1961 (the Act) is relating to Certain deductions to be only on actual payment. Further, the proviso of this section allows deduction on an accrual basis, if the amount is paid by the due date of furnishing of the return of income.
To promote timely payments to micro and small enterprises as specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the payments made to such enterprises have been included within the ambit of section 43B of the Act on January 23, 2024, by the addition of clause (h) in Section 43B, which shall be effective from 01 April 2024.
A new clause (h) has been inserted in section 43B of the Act to provide that any sum payable by the Assessee u/s 15 of MSMED Act 2006 shall be allowed as a deduction only on actual payment. It has also been provided that the proviso to section 43B of the Act shall not apply to such payments.
To understand the same, let us understand provisions u/s 15 of the MSMED Act, 2006
A. Section 15 of the Micro Small & Medium Enterprises Development Act, 2006 (MSMED Act, 2006)
If any Supplier supplies any goods or renders any services to any Buyer, the Buyer is to make the payment for the same on or before the date agreed upon between them in writing which should not be later than 45 days from the day of Acceptance or the day of Deemed Acceptance of goods or services. If there is no agreement in writing, then the payment to be made within 15 days from the day of Acceptance or the day of Deemed Acceptance of goods and services.
The day of Acceptance and day of Deemed Acceptance is explained below:
The day of Acceptance means the day of the actual delivery of goods or services or the day on which the Objection is removed by the Supplier. (Buyer is to raise the objection in writing within 15 days from the day of delivery of goods or services).
The day of Deemed Acceptance is the day of the actual delivery of goods or services, where noObjection is Received from the Buyer
B. Threshold limit for defining the term Micro, Small, and Medium Enterprises as per Section 7 of MSMED Act 2006
| Investment in Plant and Machinery | Turnover | |
|---|---|---|
| Micro Enterprise | Does not exceed Rs 1 crore | Does not exceed Rs 5 crores |
| Small Enterprises | Does not exceed 10 crores | Does not exceed 50 crores |
| Medium Enterprises | Does not exceed 50 crores | Does not exceed 250 crores |
C. Analysis of Clause (h) In Section 43B of the Income Tax Act, 1961
| Date of Acceptance or Deemed Acceptance | Expiry of time (45 days from the Date of Acceptance or Deemed Acceptance) | Date of Actual Payment | Deduction allowed as per Section 43B(h) | Impact on Tax Liability |
|---|---|---|---|---|
| 20/12/2023 | 03/02/2024 | Before 31/03/2024 | In FY 2023-24 | NIL |
| 20/12/2023 | 03/02/2024 | 21/04/2024 | In FY 2024-25 | Tax for FY 2023-24 will be increased as this expense is not allowed as deductible expenses in FY 2023-24 |
| 01/03/2024 | 20/04/2024 | Before 20/04/2024 | In FY 2023-24 | NIL |
| 01/03/2024 | 20/04/2024 | 1/05/2024 | In FY 2024-25 | Tax for FY 2023-24 will be increased as this expense is not allowed as deductible expenses in FY 2023-24 |
D. Conclusion
The amendment to section 43B of the Act allows the payment as a deduction only if actual payment is made and it can be allowed on an accrual basis only if the payment is made within the time limit, as mentioned under section 15 of the MSMED Act, 2006. If the Payment is not made within the time limit specified u/s 15 of the MSMED Act, 2006 then the deduction can be claimed from Taxable Income in the subsequent year when the actual payment is made.