APPLICABILITY OF SECTION 43B (H) OF INCOME TAX ACT, 1961

The Finance Act of 2023 introduced Section 43B (h), which specifies that any amount owed to Micro and Small enterprises for supplied goods or rendered services can be deducted within the same year if it's paid within the deadline set by the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. This amendment is effective from 1st April, 2024 and applies to the assessment year 2024-25 and subsequent years.

According to section 15 of the Act, business enterprises are required to make payment within 45 days from the date of acceptance of goods or provision of services depending on the presence of a written agreement between parties. Where no agreement has been entered by the parties in such a case payment required to be made within 15 days from the date of acceptance of goods or provision of services. 

It stipulates that any amount owed by the taxpayer to a micro or small enterprise, if paid within period as specified in section 15 of the MSMED Act, 2006 will be eligible for allowance in such financial year in which liability incurred.

However, if amount payable to Micro or Small Enterprises is made beyond the stipulated time, then deduction shall be allowed in the financial year in which payment actual made.

Additionally, it is clarified that the exception provided in the proviso to section 43B of the Act does not cover such payments. This proviso extends the deduction allowance timeframe if actual payments are made by the due date for submitting the return under section 139(1). However, in the case of payments mentioned in clause (h) of section 43B, this proviso does not apply.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q 1	Is it mandatory that supplier should have registration under the MSMED Act, 2006 to attract the disallowance u/s 43B (h)?
Ans.	Yes. Meaning of Supplier as per Sec 2(n) of MSMED Act means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8. Therefore only those micro and small enterprises who have obtained UDYAM registration shall be eligible to obtain benefit of section 43B (h).
Q 2	Whether section 43B (h) is applicable for dues outstanding to traders having MSME registration?
Ans.	The Central Government, through an office memorandum dated July 2, 2021, permitted traders to register under UDYAM using NIC Codes 45, 46, and 47, but with certain limitations. The memorandum explicitly mentions that the benefit for MSMEs engaged in retail and wholesale trading is limited to Priority Sector Lending. Consequently, other benefits provided by the MSMED Act do not extend to traders. Therefore, traders are not eligible for the benefits outlined in section 15 of the MSMED Act, and consequently, section 43B (h) cannot be applied to outstanding dues owed to traders.
Q 3	How year-end provisions will be dealt with for disallowance under 43B (h)?
Ans.	In accordance with section 15 and section 2(b) of the MSMED Act, 2006, payment must be completed within 15/45 days from the actual delivery of goods or services. Consequently, if provision is made but the actual delivery of goods or services doesn't occur by the year's end, no disallowance can be applied under section 43B (h).
Q 4	What if the buyer makes payment to the supplier after 15/45 days, but before the end of the financial year?
Ans.	When payment is made beyond the time period but before ending financial year, in such a case deduction can be allowed in the same financial year in which liability accrued.
Q 5	Can disallowance be attracted under section 43B (h) for dues outstanding in relation to capital expenditure?
Ans.	Under the Income Tax Act, capital expenditure is not considered an allowable expense. Therefore, no disallowance will occur under section 43B (h) for outstanding dues related to capital expenditure.
Q 6	What if the buyer makes payment to the supplier after 15/45 days, but before filing the return of income for that financial year?
Ans.	Following the amendment to the initial proviso in section 43B, the benefit outlined in the initial proviso won't be accessible for payments owed to micro and small enterprises. Consequently, even if the payment is made before filing an income tax return, the deduction can only be claimed in the year when the actual payment is made, not in the year of accrual.
Q 7	Disallowance under 43B (h) can be attracted for assessee opting presumptive taxation i.e., 44AD/44ADA/44AE etc.?
Ans.	Where an assessee opt for presumptive taxation, section 43B does not apply to him. So the question of allowance or disallowance does not arise.
Q 8	Status of expenses booked after March 15 where 15 days period has not expired on 31st March
Ans.	If any amount remains payable to a micro or small enterprise at the end of the year but is paid in the following year within the timeframe permitted under Section 15 of the MSMED Act, it will be deductible in the year it was incurred. However, if there is a delay beyond the time limit specified in Section 15 of the MSMED Act, such payments will only be deductible in the year of payment, even if the payment is made before the due date of the Income Tax Return applicable to the assessee. This is because the benefit of the first proviso to Section 43B (h) is not applicable to payments made to Micro or Small Enterprises.
Q 9	What if cheque paid to supplier remains unpaid? Can I escape disallowance
Ans.	In a scenario where an assessee issues a cheque to an MSME supplier, and due to certain circumstances, the supplier fails to encash it within the due date, the judgment of the Honourable High Court of Punjab and Haryana in the case of CIT v. Hindustan Wire Products Ltd. [2002] 120 Taxman 744 (Punjab & Haryana) suggests that disallowance under section 43B of the Act should not be applicable. However, the company will need to provide evidence to prove the supplier's default in encashing the cheque, including: a) A copy of the cheque indicating the date of payment. b) A copy confirming the delivery of the cheque to the supplier, within the stipulated timeframe.
Q 10	Whether deduction is allowed if payment is not made within 15/45 days to Medium Enterprises?
Ans.	Section 43B (h) covers only micro and small enterprises. It does not cover medium enterprises. Thus, if payment is not made by 31st March of the previous year the outstanding amount due to medium enterprise is not liable for disallowance.