A new amendment was introduced in Section 43B of the Act, by Finance Act, 2023 which will be applicable for FY 2023-24.
Section 43B of the Income tax Act deals with allowing deduction of various expenditure on actual payment of that expenditure i.e. the expense will be allowed as deduction while calculating PGBP income only if it is actually paid unlike other payment which are allowed on accrual basis and 43B is applicable irrespective of whether you are following cash accounting or accrual system of accounting.
A new clause (h) was inserted in Section 43B which is as under:
43B Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—
(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 (27 of 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:
Section 43B starts with a non-obstante clause i.e. “notwithstanding”, and hence it overrides the entire Act and it says that
Any sum payable by an assessee to a micro and small enterprise in respect of an expenditure, beyond the time limit prescribed in Section 15 of the MSME Act shall be allowed as expenditure in the year of actual payment.
Below are some important points:
1. It does not cover medium enterprise.
2. To read definition of MSME CLICK HERE: New MSME definition/ registration updated in MSMED act by notification | Udyam Registration – Taxontips
3. Earlier as per Company law only companies were required to take such declarations from it’s creditors but now all entity needs to take such declaration.
4. Section 15 of MSME Act, 2006 states that payment should be made within 45 days from the date of delivery of goods or receipt of services and this shall override the terms or agreements entered between MSME and assessee as section 43B talks about time limit as per MSME act.
5. Section does not clarifies whether this will cover only revenue expenditure or will also cover capital expenditure and all other clause of Section 43B only talks about revenue expenditure but since this clause starts with any sum payable, in our humble opinion it will also cover capital expenditure.
6. Unlike other expenditure of Section 43B which are allowed as deduction in the same year if they are paid before due date of filing return of income, payment of MSME shall not be allowed in the same year even if payment is made before due date of filing return of income. It will only be allowed in the year in which payment is actually made.
Hence, it is advisable to ask all clients to first find out, which creditors are registered as MSME and make the payment to them before 31.03.2024 to claim the expense. Although government is taking such steps to protect MSME, however there are various measure for it in MSME act already and including such payment requirement in Income tax act and overriding payment terms between two parties would not be a very welcoming step by various businesses and they should make a representation before Hon’ble FM to relax the requirement of such provision.
Guidance on above article for Indian Income Tax by:
Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo
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