INCOME TAX FAQ on payments made to MSE’s & section 43B(h) applicability

FAQ on payments made to MSE’s & section 43B(h) applicability

FAQ on payments made to MSE’s & section 43B(h) applicability

FAQ on Impact on payments made to MSE’s & section 43B(h) applicability 

Following questions & Answers elated to specific tax & payment scenarios U/s  43B of the Income Tax Act, particularly related to payments made to Micro and Small Enterprises (MSEs) under the Micro, Small and Medium Enterprises Development Act, 2006. Here is a detailed breakdown of the answers to the questions related to Section 43B(h) of the Income Tax Act, as amended for payments to MSEs:

Q 1 From which Financial Year is this amendment applicable ?

Ans : This amendment is applicable starting from Assessment Year (AY) 2024-25, i.e., Financial Year (FY) 2023-24.

Q 2: Is this amendment applicable to amounts outstanding to micro and small enterprises as of 31/03/2023?

Answer:
No, the amendment is not applicable to dues outstanding as of 31/03/2023 or prior. Since Section 43B(h) was introduced from AY 2024-25, only dues arising from FY 2023-24 onwards will attract the provisions of this section. Old dues prior to 01/04/2023 are not affected by this section.

Q 3: Is it mandatory for the supplier to have registration under the MSMED Act to attract disallowance U/s  43B(h)?

Answer:
Yes, the supplier must be registered under the Micro, Small and Medium Enterprises Development Act, 2006 for Section 43B(h) to apply. As per Section 2(n) of the MSMED Act, a "supplier" refers to a micro or small enterprise that has filed a memorandum with the relevant authority U/s  8(1). Suppliers usually indicate their UDYAM registration number on invoices, which helps verify their MSME status. Without this information, no disallowance U/s  43B(h) can be made.

Q 4: Does Section 43B(h) apply to dues outstanding to traders with Micro, Small and Medium Enterprises registration?

Answer:
No, Section 43B(h) does not apply to dues outstanding to traders with MSME registration. Although traders are allowed to register under UDYAM for certain purposes (such as Priority Sector Lending) based on the Office Memorandum dated 2-7-2021, the benefits U/s  15 of the MSMED Act are not extended to traders. Therefore, disallowance U/s  43B(h) cannot be made for outstanding dues to traders.

Q 5: If a supplier engages in both trading and manufacturing/services, does Section 43B(h) apply to dues outstanding to that supplier?

Answer:
Yes, in such cases, Section 43B(h) can apply. If the supplier engages in both trading and manufacturing/services, the section applies to the dues related to the manufacturing/services component, which is covered under the Micro, Small and Medium Enterprises Development Act, 2006.

Q 6: How are year-end provisions dealt with concerning disallowance U/s  43B(h)?

Answer:
As per Section 15 of the MSMED Act, payment must be made within 15/45 days from the actual delivery of goods or services. If no actual delivery has taken place by the end of the year, no disallowance U/s  43B(h) can be made for any year-end provisions, as the liability to pay has not yet arisen.

Q 7: What happens if the buyer makes payment to the supplier after 15/45 days but before the end of the financial year?

Answer:
If the payment is made after the 15/45-day period but before the end of the financial year, the deduction can still be claimed in the same financial year, since the payment has been made within the same year.

Other Practical guidance for taxpayers and businesses in managing payments to MSMEs :

These answers clarify the applicability and implications of the amended Section 43B(h) concerning payments to MSMEs under the MSMED Act, ensuring compliance with the provisions from FY 2023-24 onwards. These clarifications offer practical guidance for taxpayers and businesses in managing payments to MSMEs and understanding the implications of Section 43B on such transactions.

Unpaid Cheque to Supplier :

If a cheque is issued to an MSME supplier but remains unencashed by the due date, disallowance U/s  43B might not apply. Based on the Punjab & Haryana High Court's ruling in CIT v. Hindustan Wire Products Ltd., disallowance could be avoided if the company can prove that the cheque was delivered within the due date. This would require documentation like:

  • Copy of the cheque with the date of issue.
  • Proof of delivery of the cheque to the supplier.

Dispute Between Buyer and Supplier:

There may be situation where the buyer makes any objection in writing regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, then what would happen. In that case as per MSMED Act the day on which such objection is removed by the supplier shall be treated as day of acceptance and the payment has to be made before the appointed day which will be day following immediately after the expiry of the period of fifteen days from the day of acceptance

Expenses Booked After March 15 :

Under Section 43B(h), payments to MSMEs must be made within the time frame specified in Section 15 of the MSMED Act (either 15 days if no written agreement exists or 45 days if there is a written agreement). If the payment is made within this period, the deduction is allowed in the year of incurrence. However, if payment is delayed, the deduction is allowed only in the year of actual payment, even if it's made before the due date for filing the ITR.

Payment Made After 15/45 Days But Before Filing ITR:

For payments made to MSMEs after the 15/45-day period but before filing the income tax return, the benefit of the first proviso to Section 43B is not applicable. Thus, deductions can only be claimed in the year of actual payment, not in the year of accrual.

​​Presumptive Taxation and Section 43B(h) :

Assessees opting for presumptive taxation U/s s like 44AD, 44ADA, 44AE, etc., are not subject to the provisions of Section 43B, as these sections begin with a "Non Obstante" clause. Hence, no disallowance will be made under 43B(h) for such taxpayers.

Capital Expenditure and Disallowance U/s  43B(h):

Section 43B applies to deductions that are otherwise allowable under the Income Tax Act. Since capital expenditure is not deductible under the Act, Section 43B disallowance does not apply to dues related to capital expenses. The ruling in Wipro Limited vs. Addl CIT (ITAT Bangalore) supports this interpretation.

Disclaimer: The content of this post isn't considered to be professional or legal advice, We aren't responsible for any damages arising from your access to the location content & must not be relied on or used as a substitute for legal advice from a lawyer professional in your jurisdiction. CARajput is among India's big digital compliance services platform which committed to helping people have started & developed their businesses. We had started with the goal of creating it easier for start-ups to start out their business. Our main aim is to assist the businessman with applicable laws & regulations compliance and providing support at each & every level to make sure the business stays compliant and growing continuously. For any query, help or feedback you may in touch on singh@carajput.com or Call or what’s-up on 9-555-555-480

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