Disallowance of Expenses by failure of payment to Micro and Small Enterprise as per section 43B of Income Tax Act

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By- CA JAGRUT H. SHAH, Nadiad

For the healthy and better improvement in working capital management of the Micro and Small Enterprises the Union Budget 2023 provided for promoting of timely payments to micro and small enterprises registered under the Micro, Small and Medium Enterprises Development Act 2006 a new clause (h) is proposed to be inserted under section 43B of the Income Tax Act.

Section 43B

Section 43B of the Income Tax Act provides for certain deductions to be allowed only on actual payment. By the first proviso of this section deduction is allowed on accrual basis in same previous year if the amount is paid on or before the due date applicable in case for furnishing the return of income of previous year under sub-section (1) of section 139 of the Income Tax Act.

Proposed Section 43B(h)

Newly proposed clause (h) under section 43B of Income Tax Act by finance bill 2023 provides any expenses incurred from the Micro and small enterprise which are registered under MSME development Act 2006 are claimed on accrual basis only on actual payment made within the time limit specified under section 15 of the Micro, Small and Medium Enterprise Development Act 2006. Otherwise, expenses will allow as deduction on payment basis.

It means expenses are not allowed in which liability of expense incurred even though payment is actually paid after the end of relevant finance year such paid date is beyond the due date of payment for expense as per section 15 of the MSME Development Act 2006 but before the due date of filing of income tax return.

Micro and small enterprises is defined by Explanation 4 of section 43B of Income tax Act.

Clause (e)

“micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006;’;

Clause (g)

“small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006.’.

Provision of MSME Development Act 2006

Section 15 of the MSME Development Act provides any payment is made by buyer to micro and small enterprise within time limit mentioned in the written agreement and such time limit cannot be more than 45 days. If there is no such written agreement between buyer and supplier its mandate for payment made within 15 days from the day of the actual delivery of goods or the rendering of services.

Micro, Small and Medium Enterprises specified in MSME Development Act 2006.

	Category of MSME enterprise	Classification criteria of net investment and net turnover
Manufacturing or Services	Micro Enterprise	Net investment in plant and machinery or equipment less than equal to Rs. 1 crore and net turnover (total turnover less export turnover) less than equal to Rs. 5 crores.
Manufacturing or Services	Small Enterprise	Net investment in plant and machinery or equipment less than equal to Rs. 10 crore and net turnover (total turnover less export turnover) less than equal to Rs. 50 crores.
Manufacturing or Services	Medium Enterprise	Net investment in plant and machinery or equipment less than equal to Rs. 50 crore and net turnover (total turnover less export turnover) less than equal to Rs. 250 crores.

Scenarios for the allowance or disallowance for payment to Micro and small enterprise as per proposed amendment in section 43B of the Act.

Invoice Date	Invoice Amount	Date of payment	Allowed/Disallowed in FY 2023-2024	Allowed in FY 2024-2025
01/05/2023	100000	11/05/2023	Allowed on accrual basis.
01/01/2024	200000	20/03/2024	Allowed on payment basis as paid in the same year in which liability incurred.
25/03/2024	200000	04/04/2024	Rs. 200000 is allowed on accrual basis.
27/03/2024	100000	07/04/2024 70000 07/07/2024 30000	Rs. 70000 is allowed on accrual basis. Rs. 30000 is disallowed.	Rs. 30000 is allowed on payment basis.
01/02/2024	300000	20/03/2024 Rs. 100000 20/04/2024 Rs. 200000	Rs. 100000 is allowed on payment basis as paid in the year. Rs. 200000 is disallowed.	Rs. 200000 is allowed on payment basis.