SECTION 43B(h) OF INCOME TAX ACT, 1961
KEY CHANGES FOR FY 2023-24 & AY 2024-25 Onwards

The Income Tax Act’s Section 43B has undergone significant amendments for the financial year 2023-24 onwards. The modifications made for the Financial Year 2023-24 and Assessment Year 2024-25 have implications for businesses and taxpayers. In this blog, we will delve into the key changes in Section 43B and their impact.

Background of Section 43B

Section 43B of the IT Act, 1961, is a provision that specifies certain expenses that can be deducted only when they are actually paid by the assessee. These expenses include tax, duty, cess, fee, interest, employee's benefit fund contribution, bonus, commission, leave encashment, and payment to Indian Railways. The deduction is allowed in the year of payment or before the due date of filing the return of income for that year, whichever is earlier.

Below is the list of expenditures

a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

c) any sum referred to in clause (ii) of sub-section (1) of section 36, or

d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

• da) Any sum payable by the assessee as interest on any loan or borrowing from [a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or

g) any sum payable by the assessee to the Indian Railways for the use of railway assets.  

Key Changes for FY 2023-24 and AY 2024-25

Following clause (h) shall be inserted after clause (g) of section 43B by the Finance Act, 2023, w.e.f. 1-4-2024

h) 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 such sum is actually paid by him.

Provided that nothing contained in this section [except the provisions of clause (h)] shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub­section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Section 15: Micro, Small and Medium Enterprises Development Act, 2006  

Liability of Buyer to Make Payment  

Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day,

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance or the day of deemed acceptance.

Appointed day: Appointed day means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

As per the insertion of clause (h) to section 43B, if any amount remaining unpaid as at year end to any creditors being any micro or small enterprise, whether for good or services beyond 45 days (or a shorter period if mutually agreed upon, or 15 days if no specific agreement exists), the unpaid amount will be disallowed.  

Drastic Consequences – on delayed Payments to Micro or Small Enterprises Vendors

What is consequences of not making the payment within prescribed time frame?

• In case outstanding payments is not made within prescribed time, then that outstanding payable amount shall be added to taxable income of taxpayer & that taxpayer has to bear Income tax liability on respective outstanding amount. The Assessee gets deduction in previous year where payments is made.
  
  
• In case the business enterprise not make payment to Micro or Small Enterprises in above prescribed period, then it has to make payment of compound interest at monthly rests to supplier at 3 times Bank Interest as same is notified by RBI.

 Is the above interest allowable as deduction in computation of Income Tax Taxpayer?

• As per Micro, Small and Medium Enterprises Development Act, 2006, Section 16, above interest expenses are in nature of Penal Interest paid by business enterprise. So, interest expenses incurred for delayed payment to Micro or Small Enterprises is not allowed under Section 37 of Income Tax Act,1961.

Note: It is to be noted that only Micro or Small entity are covered under this clause. Therefore, this clause shall not be applicable on Medium Enterprises.

What is Micro or Small Enterprises and whether Wholesaler and retailer covers under the provisions of Section 43B(h)

Small Enterprises

Business Entity or Enterprise which is fulfilled all the below mentioned conditions.

(a) Sale or Turnover should not more than INR 50 Cr.

(b) Investment is Plant & Machinery Should not more than INR 10 Cr.

Micro Enterprises

Business Entity or Enterprise which fulfilled all the following mentioned condition.

(a) Sale or Turnover should not more than INR 5 Cr.

(b) Investment is Plant and Machinery Should not more than INR 1 Cr.

Before 02 July 2021, retail and wholesale traders were not included in MSME definition, vide Office Memorandum No. 5/2(2)/2021-E/P&G/Policy dated 02 July 2021 retail and wholesale traders covered under MSME definition but with the condition that its restricted to Priority Sector Landing only (vide Office Memorandum No. 1/4(1)/2021-P&G/Policy dated 01 September 2021). That means other benefits, including provision of delayed payments as per MSMED Act, 2006 are excluded.

Hence, Purchases from and Payment to Retail and Wholesale Traders will not be governed by Section 43B(h), accordingly there will not be any disallowance on account of delay in making payment beyond 15 days or 45 days.

Let us understand with help of Practical Example:

X has sold goods to Y on 01 July 2023. X is a Micro Enterprise. Y has made payment to X on 01 Feb 2024.

As Y has made payment to X before 31 March 2024 but after 45 days According to Income Tax Act 1961, We will allow payment in PY 2023-24.

But Y has to make payment of compound interest at monthly rests  to X at 3 times the Bank Rate notified by RBI even if not demanded by X calculated from due date till date of payment.

Further, this interest expense is disallowed while computing Income under head PGBP. 

Points to be kept in mind before year closing

1. Ask for Udhyam Registration certificate from your Suppliers (Creditors) in writing or through e-Mail. and determine whether your suppliers (creditors) of goods or services are "MICRO" or "SMALL" .

2. Payment to suppliers / creditors falling in the category of "MICRO" or "SMALL'' have to be done within 15 days / 45 days of Invoice. If there is no written term of payment then it is 15 days, and if there is a written term of payment then payment has to be done in a maximum of 45 days.

3. If payments to suppliers classified as "MICRO" or "SMALL" are not made within 15 or 45 days of the invoice, then payment will be added to income under the Income Tax Act and will be allowed on a payment basis.

4. Additionally, at year's end, kindly take note that there are "No MICRO and SMALL" Creditor invoices dated February 15, 2024, or earlier that ought to be paid in full by March 31, 2024.
5. Additionally, it applies to creditors who are manufacturers and service providers as well as businesses registered under the MSME Act; traders are not covered by the definition of an enterprise. 
6. Please register if you qualify for "MICRO" or "SMALL" enterprise. Make sure to include your Udyam Registration and Category on your invoice as well. This will help you avoid litigation costs and use the MSME Samadhan option for any payment recovery that may be necessary.