Date: 24 May 2024

Section 43B(h) of Income Tax Act 1961, Applicability, Time Limits and Detailed Analysis

 

 

 

Methods of Accounting:

There are two methods of accounting one is accrual method and another one is cash method. In cash method expenses and incomes are recorded when actual payments are made i.e. cash is paid and received respectively but in accrual method expenses and incomes are recorded on accrued basis i.e. when liability to pay such expense is incurred and right to receive income is  established irrespective of actual payments.

Section 43B of Income Tax Act:

Section 43B of Income Tax Act 1961, allows expenses on actual payment basis and provides a list of all such expenses {bonus, Leave encashment, any tax, interest on loans from banks , PFI and NBFC and 43B(h)(Payment to MSME)} which are allowed as a deduction under head of "PGBP"  in computing income. As per this section such specified expenses can be claimed as deduction only in the year of actual payment not in the year in which the liability to pay such expenses incurred. Hence section 43B is relevant for such assessee who follows accrual method of accounting.

Time Limit for payment under section 43B (except 43b(h)):

As per section 43B, above mentioned expenses can be claimed as deduction only in the year of actual payment irrespective of the year in which liability was incurred. 

But Section 43B also provides that if assessee makes payment of above mentioned expenses {except Clause 43B(h)} before assessee files its income tax return or due date for filing assessee's income tax return assessee can claim the deduction of that expense in same year in which liability was incurred.

Section 43B(h) of Income Tax Act:

The Finance Act 2023 inserted clause (h) to section 43B, which provides that any amount payable (either goods or services or both) to a Micro or Small enterprise will be allowed as a deduction in year of actual payment (irrespective of the year in which liability to pay such expense incurred) if paid beyond the time limit prescribed under section 15 of Micro, Small and Medium Enterprise Development Act, 2006.

First Year and effective date of applicability of Section 43B(h):

As explained above that clause (h) was inserted by Finance Act 2023 and effective from 01-04-2024 i.e. applicable for the Assessment year 2024-2025 (Financial year 2023-24) and all subsequent years.

Section 15 of MSME Act, 2006:

If there is agreement between supplier and Buyer (Maximum time is 45 Days):

The buyer shall make payment on or before agreed date in agreement and In no case the agreed time shall exceed 45 days from the day on which goods are delivered or services are rendered.

If there is no agreement between supplier and Buyer (Maximum time is 15 Days):

When there is no agreement between buyer and supplier, supplier shall make payment within 15 days from the day on which goods are delivered or service are rendered.

Time limits of Payment for Section 43B(h):

If Payment of expense is not made in prescribed time limits of MSME Act, 2006:

As per section 43B, Expenses specified under clause 43B(h) can be claimed as deduction only in the year of actual payment irrespective of the year in which liability was incurred if payment of expense is not made to a Micro or Small enterprise within time limit prescribed (i.e. 45 Days or 15 Days as case may be) under section 15 of Micro, Small and Medium Enterprise Development Act, 2006.

If Payment of expense is made in prescribed time limits of MSME Act, 2006:

As per section 43B buyer can claim the deduction of expense in same year in which liability was incurred if payment of expense is made to a Micro or Small enterprise within time limit prescribed (i.e. 45 Days or 15 Days as case may be) under section 15 of Micro, Small and Medium Enterprise Development Act, 2006.

Examples:

Case No. Day on which Goods Delivered or Services Rendered Credit Days Date of Actual Payment Year in which  Deduction is allowed
1 31/03/2024 50 19/05/2024 FY 2024-25
2 10/03/2024 45 25/04/2024 FY 2024-25
3 15/02/2024 15 28/02/2024 FY 2023-24
4 01/12/2023 20 30/12/2023 FY 2023-24
5 15/03/2024 0 28/03/2024 FY 2023-24
6 20/03/2024 0 03/04/2024 FY 2023-24
7 22/03/2024 0 08/04/2024 FY 2024-25
8 01/01/2024 0 28/02/2024 FY 2023-24

Revised Definition of MSME

Below revised definition of MSME is applicable w.e.f. 1st July 2020.

Manfacturing and Service Enterprises Micro Small Medium
Investment in Plant & Machinery and Equipments Less than or equal to Rs. 1 Crore and Less than or equal to Rs. 10 Crore and Less than or equal to Rs. 50 Crore and
Annual Turnover Less than or equal to Rs. 5 Crore Less than or equal to Rs. 50 Crore Less than or equal to Rs. 250 Crore

Is section 43b(h) applicable to traders?

Govt. Issued the office memorandum No.5/2(2)/2021-E/P and G/Policy dated July 2, 2021, to include Retail and Wholesale Traders as MSMEs and allowing them to be registered on Udyam Registration Portal to avail the benfit of Primary Sector Lending only. As per this OM other benefits like provision of delayed payments were specially excluded and benefits were restricted to Primary Sector Lending only. 

Secondly Traders were not covered in the definition of enterprises under MSMED Act hence provisions of section 43B(h) is not applicable for due outstanding to traders as per above given provisions.

Is Section 43B(h) applicable on Medium enterprises?

As given in section 43B(h), Section is applicable only on ampunt payable to Micro and Small enterpirses, hence section is not applicable on the payments to be made to Meduim Enterprises.

Is registration of buyer/Payer is mandatory?

No registration of buyer/payer is not mandatory for applicability of Section 43B(h).

Is Seller/Receiver to be registered as a Micro or Small Enterprise Under MSMED Act, 2006. 

Yes, To avail the benefit of Section 43B(h), Seller/Receiver must be registered either as Micro or Small Enterprises under MSMED Act, 2006. In other words If Seller/Receiver is not registered under MSMED Act, the provisions of section 43B(h) will not be applicable to buyer/Payer.