Section 43B(h): Disallowances of expenses due to non-payment to MSMEs

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CA Piyush Agarwal 28 Mar 2024 2,982 Views 0 comment Print Income Tax | Articles

Section 43B (h) of Income Tax Act, 1961 – Disallowances of expenses due to non-payment to MSMEs

Introduction: Section 43B (h) of the Income Tax Act, 1961, introduced by the Finance Act, 2023, focuses on ensuring timely payments to MICRO & SMALL Enterprises (MSMEs). This amendment, effective from FY 2023-24, aims to promote compliance with the Micro, Small & Medium Enterprises Development Act, 2006 (MSMED), impacting deductions for expenses related to non-payment to MSMEs.

Section 43B (h) of Income Tax Act, 1961

Effective Date of New Clause (h) of Section 43B: –

> Clause (h) of Section 43B inserted by the FINANCE ACT, 2023.

> This Amendment is applicable from FY 2023-24 or AY 2024-25.

Analysis of New Clause (h) of Section 43B: –

> Assure on time payments to MICRO & SMALL Enterprises.

> According to Micro, Small & Medium Enterprises Development Act, 2006 (MSMED).

Definition of MSME Enterprises: –

ParticularsMICROSMALLMEDIUM
Turnover<=5 Crore<=50 Crore<=250 Crore
Investment in Plant & Machinery<=1 Crore<=10 Crore<=50 Crore

Time Limit for Payment: –

– Written Agreement exist: – Agreed Date OR Within 45 days from the date of acceptance, WHICHEVER IS EARLIER

– Written Agreement do not exist: – Within 15 days from the date of acceptance.

Non Applicability of New Clause (h) of Section 43B: –

> Clause not applicable on “MEDIUM” Enterprises.

> Clause not applicable on “CAPEX” items.

> Clause not applicable on “TRADERS”.

> Clause not applicable on BUYERs filing ITR u/s 44AD/ADA/AE, due to reporting u/s 43B (h) Not Applicable.

> Clause not applicable on NON REGISTERED Vendor (under MSMED Act, 2006).

> Clause not applicable on those payable for invoices dated on or before 31/03/2023.

Other Points: –

> Applicable on MICRO & SMALL Enterprises.

> Applicable on Manufacturing & Services Sector.

> Applicable on Goods & Services.

> IF payment is not made within the time limit specified, then EXPENSES will not be allowed as deduction and added back to TOTAL INCOME.

> EVEN IF payment is made before the due date of ITR OR filing of ITR in the subsequent year, the same is not allowed as expense in the PY.

> IF payment is made in the subsequent year, the same is allowed as expenses in the FY in which payment has been made.

Examples: –

ParticularsInvoice DatePayment Due (45 Days)Actual PaymentDeduction Allowed (FY)
Example-101-Feb-202416-Mar-202429-Mar-20242023-24
Example-201-Feb-202416-Mar-202403-Apr-20242024-25
Example-317-Feb-202402-Apr-202401-Apr-20242023-24
Example-417-Feb-202402-Apr-202404-Apr-20242024-25
Example-501-Mar-202414-Apr-202411-Apr-20242023-24
Example-601-Mar-202414-Apr-202422-Apr-20242024-25
Example-715-Nov-202329-Dec-202306-Apr-20242024-25
Example-815-Nov-202329-Dec-202328-Mar-20242023-24
Example-916-Feb-202431-Mar-202401-Apr-20242024-25
Example-1015-Sept-202329-Oct-202302-Apr-20242024-25
Example-1115-Sept-202329-Oct-202301-Oct-20232023-24

Conclusion: Section 43B (h) of the Income Tax Act, 1961, underscores the significance of timely payments to MICRO & SMALL Enterprises (MSMEs) by disallowing deductions for expenses in case of non-payment within stipulated timelines. With its applicability from FY 2023-24 onwards, this clause serves to enhance compliance with MSME regulations and promote fair business practices.

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