Section 43B(h) of Income Tax Act, 1961: Analysis & Implications (2024)

Introduction

The Finance Act of 2023 introduced a significant amendment to Section 43B by adding a new clause. This amendment came into effect from FY 2023-24. According to this new clause, dues to Micro and Small enterprises must be paid within the time limit prescribed in the Micro, Small and Medium Enterprises Development Act 2006.

Section 43B states that certain expenses which shall be allowed on payment basis 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. It states that certain expenses can be claimed as deduction only in the year of actual payment and not in the year when the liability to pay such expenses is incurred.

Section 43B(h) of Income Tax Act

Section 43B(h) of Income Tax Act, 1961 provides 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 Act, 2006 shall be allowed as deduction of that previous year in which such sum is actually paid. The deduction of expenditure will be irrespective of the previous year in which liability is incurred.

Applicability of Section 43B(h)

SECTION 15 OF MSMED ACT,2006

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.

It is important to understand due dates as per section 15 of MSMED Act is factor for disallowance u/s 43B. if the payment is made before due date, then such expenditure will not be disallowed.

Classification of Micro, Small and Medium Enterprise

The Enterprise is classified as Micro, Small and Medium based on Investment in Plant and Machinery and Turnover as per last year. The classification criteria are mentioned below:

The Disallowance is attracted when the following conditions to be satisfied:

1. The Supplier is Registered on Udyam portal.

2. The Amount is Outstanding as on the year end i.e. 31st March as per the Books of Accounts.

3. The Outstanding Dues is to a Supplier classified as Micro or Small Enterprises as per MSMED Act 2006 (Wholesaler and retail trader are not covered by the provisions.)

4. The Outstanding Dues is beyond the time limit specified U/s 15 of MSMED Act 2006 i.e. 45 days

Outstanding Dues to MEDIUM Enterprises as per MSMED Act 2006 or any other Suppliers are not covered by the provisions.

Following are Some Examples of date of invoice and date of payments and when such expenditure will be allowed (assuming due date is 45 days):

Reporting In Tax Audit

Auditor needs to report Disallowance u/s 43B in Tax Audit Report in Clause 26. Due to addition of this clause the tax audit report has been amended. The amended clause 26 is given below:

“……26. In respect of any sum referred to in clause (a), (b), (c), (d), (e), 16[(f), (g) or (h)] of section 43B, the liability for which: –

(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

(a) paid during the previous year;

(b) not paid during the previous year;

(B) was incurred in the previous year and was

(a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

(b) not paid on or before the aforesaid date.

(State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost, etc., is passed through the profit and loss account.)……”

Few Questions:

Question: The Supplier has provided UDYAM number but has not provided the certificate. How can we find the Status of Supplier?

Assessee can find the Udyam certificate of Suppliers on Udyam Portal.

https://udyamregistration.gov.in/Udyam_Verify.aspx

Assessee would be required to fill the Udyam Number and captcha then need to click on verify.

Question: The Supplier has given certificate in which its status is small but during the year its turnover is more than 50 Crore. Whether to take that entity as Small or Medium?

Answer: The turnover is to be checked of previous financial year and not of current financial year. Udyam portal updates the classification of entity every year based on turnover of last year. The assessee needs to check classification of suppliers every year. Details of Turnover and Investment are automatically pulled by the Udyam Portal from the ITR and GST returns filed on the respective portals. So, there is no requirement to manually upload the details of turnover and investment on the Udyam Portal.

A snapshot of Udyam Portal is given below, showing that Classification is done.

Question: When classification Status needs to be checked? Whether on date of invoice or on 31/03?

The turnover is to be checked of previous financial year and not of current financial year. Hence, the Classification of entity is to be checked based on the turnover of previous financial year. The said classification is updated on the MSME portal every year after the end of a particular financial year. Once the classification status is updated Status remains the same for the year. If the classification is not updated for a particular year, then we need to wait till the update of classification for that year.

Question: How would calculations for advance tax working be made next year? Suppose an invoice is received on 1st June, due date is 14th July then while preparing advance tax working on 15th June should this invoice be considered or not, as payment isstillnotdue.

It should be considered as the same is not due on date of advance tax payment. it is prudent to assume that it will be paidwithinduedates. If the payment is not made within due dates, then effect should be given in next instalments of Advance tax.

Question: The assessee is not covered in Tax Audit, but there is business income. Whether section 43B(h) is applicable?

Yes, the provision of Section 43B(h) would be applicable even though the assessee is not liable of tax audit.

Question: Assessee is covered under Tax audit due to F & O business and also has other business. Whether 43B(h) is applicable only to his F&O business or Both Business?

The Section 43B(h) is applicable to both the business. Section 43B is applicable to all business who do not file ITR on presumptive basis. It is not depended on whether Tax Audit is applicable or not.

Question: What will be the impact of section 43B(h) in financial statements?

The Disallowance under section 43B(h) would affect the current tax in financial statements. Current tax in financial statements needs to be calculated after giving effect of disallowance u/s 43B(h)

Conclusion:

The assessee needs to check dues to MSME as on 31^st March. If the due dates as per section 15 of MSMED Act has been expired then the assessee cannot take deduction of expenditure and if the due dates are not expired on 31^st march then assessee needs to make payment before expiry of due dates to claim such expenditure in current financial year.

It is beneficial for the assessee to evaluate outstanding dues to Micro and Small enterprise before the year end. If the assessee has not paid to MSME within due date but before the year end then also he can take deduction of expenditure in current year. This will help to claim such expenditure in the current financial year.

It is advisable to Put Udyam number and due date as per MSME in the invoice of assessee.

(This article represents the views of authors only and does not intend to give any kind of legal opinion on any matter.)

Authors:

Vishal Kothari | Partner

Nitesh Jha | Manager

Sakshi Jain | Associate Consultant

(Authors can be reached at blogs@masd.co.in)