Business disallowances Disallowance Under Section 43B(h) While Making Payment to Micro and Small Enterprises—An Analysis

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The Tax Publishers Income Tax--Business disallowances Disallowance Under Section 43B(h) While Making Payment to Micro and Small Enterprises--An Analysis CA. Nisha Bhandari Clause (h) of section 43B as inserted w.e.f. assessment year 2024-25 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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment. The real impact of this provision can be seen as if now, when the Financial Year is ending. The assessees now need to ensure that the payments outstanding on 31 March, are paid to the Small and Micro Enterprises (SMEs) within the time prescribed as per Section 15 of the MSMED Act so as avoid disallowance in the current Financial Year by virtue of clause (h) of section 43B. The learned author analyses the provision in quite detail. 1. Disallowance under section 43B where amount is payable to Micro and Small Enterprises The Finance Act, 2023 has inserted a new clause (h) in section 43B so as to provide that w.e.f. assessment year 2024-25 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 (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 sum is actually paid by him. It is also provided that the proviso to section 43B shall not apply to payments referred to in section 43B(h). Therefore, any sum payable by the assessee to a micro or small enterprise shall not be allowed as deduction even if the same is paid on or before the due date applicable in his case for furnishing the return of income under section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred, if it is not paid within time specified under section 15 of the MSMED Act,2006. 2. Section 15 of the MSMED Act vis-a-vis section 43B(h) Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. After the amendment to section 43B payment beyond the date specified in section 15 of the MSMED Act, will be allowed as deduction only on payment basis. It can be allowed on accrual basis only if the payment is made within the time mandated under section 15 of the MSMED Act. As a consequence, if any sum remain payable at year end but paid within the time limit allowed under section 15 of MSMED Act then the same will be allowable in the year of incurment but if there is delay then such payments will be allowed only in the year of payment even if payment is made before due date of ITR because benefit of proviso to section 43B(h) is not available in respect of payment to Micro or Small Enterprises. 3. Meaning of Micro and Small enterprises SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Business disallowances

Disallowance Under Section 43B(h) While Making Payment to Micro and Small Enterprises--An Analysis

CA. Nisha Bhandari

Clause (h) of section 43B as inserted w.e.f. assessment year 2024-25 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 (MSMED) Act 2006 shall be allowed as deduction only on actual payment. The real impact of this provision can be seen as if now, when the Financial Year is ending. The assessees now need to ensure that the payments outstanding on 31 March, are paid to the Small and Micro Enterprises (SMEs) within the time prescribed as per Section 15 of the MSMED Act so as avoid disallowance in the current Financial Year by virtue of clause (h) of section 43B. The learned author analyses the provision in quite detail.

1. Disallowance under section 43B where amount is payable to Micro and Small Enterprises

The Finance Act, 2023 has inserted a new clause (h) in section 43B so as to provide that w.e.f. assessment year 2024-25 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 (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 sum is actually paid by him.

It is also provided that the proviso to section 43B shall not apply to payments referred to in section 43B(h). Therefore, any sum payable by the assessee to a micro or small enterprise shall not be allowed as deduction even if the same is paid on or before the due date applicable in his case for furnishing the return of income under section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred, if it is not paid within time specified under section 15 of the MSMED Act,2006.

2. Section 15 of the MSMED Act vis-a-vis section 43B(h)

Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. After the amendment to section 43B payment beyond the date specified in section 15 of the MSMED Act, will be allowed as deduction only on payment basis. It can be allowed on accrual basis only if the payment is made within the time mandated under section 15 of the MSMED Act.

As a consequence, if any sum remain payable at year end but paid within the time limit allowed under section 15 of MSMED Act then the same will be allowable in the year of incurment but if there is delay then such payments will be allowed only in the year of payment even if payment is made before due date of ITR because benefit of proviso to section 43B(h) is not available in respect of payment to Micro or Small Enterprises.

3. Meaning of Micro and Small enterprises