Income Tax MSME

Deduction u/s 43B of IT Act for payments made to MSME

CA Adityavikram Banka

Deduction u/s 43B of IT Act for payments made to MSME:

1. Finance Act 2023 inserted clause (h) in Sec 43B, which says that any amount payable to Micro or Small and Medium Enterprises (MSME) shall be allowed as a deduction in the same year only if paid within time limit specified by the MSMED Act, 2006.

2. Section 15 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, mandates that payments due to MSMEs should be made within the agreed-upon time frame between the parties, which cannot exceed 45 days. In the absence of a written agreement, these payments must be made within 15 days from the due date.

3. Consequently now, any payment made to MSMEs beyond the time limits specified in Section 15 of the MSMED Act 2006 can only be claimed as deductions when they are actually paid. Therefore, if a payment to an MSME is made beyond the time limits set by the MSMED Act but before filing the income tax return, the deduction can be claimed in the year of actual payment rather than the year in which the liability was incurred.

4. If the payment is pending for more than 15 days as on 31st Mar 2024, the assessee will not get the benefit of exemption from expenditure. In this, a written agreement of 45 days can also be made to extend more than 15 days for payment.

5. Let us consider some examples now:

I. Mr A had an expense payable to an MSME that accrued in the financial year 2023-2024 but he settled it on 4/04/24 i.e. subsequent financial year 2024-25 after the time limit prescribed under section 15 of the MSMED Act, 2006 ended.
In this scenario, as the payment is made beyond the time limit as prescribed under section 15 of the MSMED Act 2006 and also in the subsequent year 2024-25, Mr A will not be eligible for deduction of the said payment in the financial year 2023-2024 when the expenses accrued.

II. Mr A delivers goods of Rs. 35000 to Mr B (Buyer) on 15/03/2024 in absence of any agreement with regards to the time limit of Payment. Now Mr B has a time limit of 15 days i.e., within 30/03/2024 for raising any objection in case of having non satisfaction with regards to a goods delivered.

Scenario A – Mr B is satisfied with the delivery of goods and does not make any observation. In this scenario Date of acceptance is the date of first delivery of goods i.e., 15/03/2024. Due date for making the payment as per Sec 15 of MSMED act, 2006 is the appointed day which is the day after the expiry of 15 days from the date of acceptance. If Mr B makes the payment within 31/03/2024 (even though due date is 30/3/2024, since the payment is made in the same FY), he can claim the deduction in the FY 2023-24 otherwise in the FY in which he makes the payment.

Scenario B – Mr B makes objection regarding the quality of Goods delivered to the Mr A on 31/3/2024. And Mr A resupplies goods after addressing the objection on 5/4/2024. In this scenario Date of Deemed acceptance is the date of first delivery of goods i.e., 15/03/2024, as no objection is raised within 15 days from date of delivery. So this expenses will not be allowed as a deduction in FY 2023-24.

CA Adityavikram Banka
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