What is Section 43B(h)?
Through Finance Act 2023, a new clause (h) was introduced in section 43B of the Income Tax Act, 1961 (the Act). This amendment stated that, any sum payable to a Micro or Small Enterprise (‘MSE’) as defined under Section 7 MSME Development Act, 2006 (MSME Act), beyond the time limit specified under Section 15 of the MSME Act will only be allowed for computing the income under the head “profits or gains from business or profession” in the year in which the outstanding amount is actually paid. This amendment is applicable from FY 2023-24 (AY 2024-25).
What is Section 7 of MSME Development Act, 2006?
Provisions of Section 7(1) of MSME Act, classify the Micro, Small and Medium Enterprises as follows:
To be treated as Micro, Small and Medium Enterprise subject to the limits provided u/s 7 of MSME Act.
Not to be regarded as Micro, Small and Medium Enterprise.
What is Section 15 of MSME Development Act, 2006?
Section 15 of the MSME Development Act 2006 states that payment to Micro and Small Enterprise must be made within the following time period:
| Type of Agreement | Time limit for payment |
| Written agreement | Within 45 days |
| Other than written agreement | Within 15 days |
Implications:
The provisions of Section 43B is that the expenses of nature as given from clause (a) to (h) will be allowed as deduction in the year of its payment. The proviso which provides that if payment is made in the subsequent year before due date for filing of the return of income, the same will be allowed as deduction in the that year, however this benefit does not apply to clause (h) to Section 43B.
The provisions of Section 43B(h) is only applicable in case of Micro and Small Enterprises and does not cover the Medium Enterprises within its ambit and such enterprise is registered accordingly However, the provisions of Section 7(1) of the MSME Act does not cover the enterprise which is engaged in the business of trading. Accordingly, a trading concern does not fall in the ambit of provisions of Section 43B(h) of the Act.
Further, where payment for goods or services is outstanding towards a micro or small enterprise as on 31.03.2024 for a period exceeding the aforementioned time limit, the deduction in such a case towards such expense would not be allowed during the FY 2023-24. It is important to note that no such relief has been provided where the payment has been made after 31.03.2024 but before filing the return of income unlike other similar provisions of Section 43B. Such expense can only be taken as a deduction in the financial year in which the payment is actually made.
| SW Point of View: The stipulations delineated in Section 43B(h) exclusively pertain to Micro and Small Enterprises, with Medium Enterprises falling outside its purview. Additionally, the regulations outlined in Section 7(1) of the MSME Act do not extend to enterprises engaged in trading activities. Consequently, trading concerns are likewise not encompassed within the scope of Section 43B(h) of the Act. As a resultant effect of the aforementioned, traders may encounter difficulties in fulfilling payment obligations to manufacturers within the stipulated timeframe as per Section 43B(h) of the Act, owing to potential delays in receipt of payments from their outward supplies, given their status as trading concerns. |
