[Analysis] How To Report Disallowance Under Sec. 43B(h) in Form 3CD?

Disallowance under Section 43B(h) of the Indian Income Tax Act, 1961, as reported in Form 3CD, pertains to specific expenses or payments that are not allowed as deductions from the income of the taxpayer until such expenses are actually paid. This section is crucial for ensuring that certain statutory dues and liabilities are discharged by the taxpayer before claiming them as deductions in the computation of taxable income.

Table of Contents

Background

1. Amendment made to Clause 26 of Form 3CD as regards Section 43B(h)
2. Need/Rationale for the amendment
3. Problems/issues with the amendment made to Clause 26
4. CBDT’s Corrigendum
5. Implications and Impact of the Corrigendum Notification
6. Points to be kept in mind by the tax auditor for reporting in amended Clause 22
7. Conclusion

Background

1. Introduction of Clause 43B(h) – The Finance Act of 2023 introduced Clause (h) in Section 43B of the Income-tax Act, effective from the assessment year 2024-25. This clause disallows sums payable to MSEs on an accrual basis if they are not paid within the timeframe allowed under Section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
2. Amendments to Form 3CD – The Central Board of Direct Taxes (CBDT) issued Notification G.S.R. 155(E) on 05-03-2024, amending Clause 26 of Form 3CD to include references to Clause (h), extending the reporting requirement to delayed payments to MSEs. However, it was later found that the amendment did not specifically require reporting of amounts not paid within the due date as per the MSMED Act
3. Corrigendum to the Amendment – A subsequent corrigendum issued by the CBDT, via Notification G.S.R. 223(E) dated 19-03-2024, corrected this oversight. The corrigendum made changes to Clause 22 of Form 3CD, and nullified the changes made to Clause 26. Amended Clause 22 requires the tax auditors to report disallowances under Section 43B(h) and interest on delayed payments to MSEs. This effectively separates the reporting of delayed payments to MSEs from other types of payments covered under Section 43B
4. Implications for Tax Auditors – The tax auditors do not need to report detailed break-ups of amounts payable to the MSEs but must form an opinion on the disallowability of these payments under Section 43B(h). Additionally, it covers the reporting requirements for interest on delayed payments and specifies conditions under which amounts payable to MSEs should be considered admissible for tax purposes
5. Conclusion – The clarifications and amendments provided by the CBDT address initial confusions and affirm the enforcement of Section 43B(h), ensuring that delayed payments to MSEs are duly reported and considered in tax audits

Introduction

This article analyses the amendment made to Clause 26 of Form 3CD through CBDT Notification G.S.R. 155(E), dated 05-03-2024, in relation to Section 43B(h) concerning delayed payments to micro or small enterprises (MSEs). The amendment was necessitated by the Finance Act 2023, which disallowed sums payable to MSEs if not paid within the time allowed under Section 15 of the MSMED Act 2006. However, the initial amendment failed to require reporting of amounts not paid within the due date under the MSMED Act. A subsequent corrigendum by CBDT, via Notification G.S.R. 223(E), dated 19-03-2024, corrected this oversight by amending Clause 22 of Form 3CD to require tax auditors to report disallowances under Section 43B(h) and interest on delayed payments to MSEs.

This article further details the implications of this corrigendum, emphasising that Clause 26 of Form 3CD will now continue to address payments covered by clauses (a) to (g) of Section 43B, while Clause 22 of Form 3CD will cover delayed payments to MSEs liable for disallowance under Section 43B(h). It outlines the tax auditor’s responsibilities in reporting amounts disallowable due to delayed payments to MSEs, including considerations for reporting, verifying the admissibility of amounts due to MSEs, and ensuring compliance with the MSMED Act.

1. Amendment made to Clause 26 of Form 3CD as regards Section 43B(h)

The CBDT¹ had notified several amendments to the tax audit report form (Form 3CD). One of the amendments notified was to Clause 26 by Item E of the said Notification which reads as follows:

“E. in clause 26, for the brackets, letters and word “(f) or (g)”, the brackets, letters and word “(f), (g) or (h)” shall be substituted”

2. Need/Rationale for the amendment

This amendment in Clause 26 of Form 3CD was made consequential to new clause (h) inserted by the Finance Act, 2023, in Section 43B, with effect from the assessment year 2024-25, to disallow on an accrual basis sums payable to micro or small enterprises if these are not paid within the time allowed under Section 15 of MSMED Act, 2006. The amendment incorporated a reference to Clause (h) in Clause 26 of Form 3CD.

3. Problems/issues with the amendment made to Clause 26

In the Article “Analysis of Changes notified by CBDT to tax audit report in Form No. 3CD” published on 07-03-2024, it was observed that

“Though the reference to Clause (h) of Section 43B has been inserted in Clause 26 opening sentence, sub-clause (B) of Clause 26 has not been amended to require reporting of amounts not paid within the due date under Section 15 of the MSMED Act. The deadline of depositing amounts on or before the ITR due date to claim deduction on an accrual basis applies to amounts covered by clauses (a) to (g) of Section 43B and not to amounts covered by clause (h) of Section 43B. It is hoped that CBDT will issue the necessary corrigendum in this regard.”

4. CBDT’s Corrigendum

Accordingly, a corrigendum to Notification G.S.R. 155(E) has been notified by CBDT² which reads as follows:

‘E. in clause 22, after the figures “2006”, the words and figures “ or any other amount not allowable under clause (h) of section 43B of the Income-tax Act, 1961” shall be inserted;’.

Thus, the Corrigendum Notification makes two changes to Form 3CD:

• The amendment to Clause 26 of Form 3CD by Notification 155(E) has been nullified.
• Clause 22 of Form 3CD has been amended. Pre-amended clause 22 required reporting of only interest on delayed payments to Micro and Small Enterprises (MSEs) under Section 16 of the MSMED Act, which is inadmissible under Section 23 of the MSMED Act. Amended Clause 22 requires the tax auditor to also report the amounts disallowable under Section 43B(h) of the principal amount due to MSEs for goods/services.

5. Implications and Impact of the Corrigendum Notification

Clause 26 will continue to deal with payments/amounts covered by clauses (a) to (g) of Section 43B. Delayed payments to the Micro and Small Enterprises (MSEs), which are liable to be disallowed under Section 43B(h), will not be covered by Clause 26 but by Clause 22. Thus, amended Clause 22 requires the tax auditor to report all amounts disallowable due to delayed payments to MSEs, be it the amount disallowable under Section 43B(h) of the ‘principal amount’ due to MSE Supplier for goods or services or the amount inadmissible under Section 23 of MSMED Act in respect of interest on delayed payment payable under Section 16 of MSMED Act.

6. Points to be kept in mind by the tax auditor for reporting in amended Clause 22

The following points are important regarding reporting of amounts disallowable under Section 43B(h) in Clause 22:

• No prescribed reporting format: In amended Clause 22, no format is specified for reporting amounts disallowable under Section 43B(h).
• Break-up/details not required: Only the total amounts liable to be disallowed under Section 43B(h) are required to be indicated in Clause 22. Break-up of amounts liable to be disallowed under Section 43B(h) or details of delayed payments which are liable to be disallowed under Section 43B(h) are not required to be given against Clause 22.
• Tax auditor’s opinion on disallowability: Clause 22 does not require merely reporting delayed payments to MSEs, i.e., payments made to them beyond the due date under Section 15 of the MSMED Act. It requires the tax auditor to form an opinion on the disallowability of such payments under Section 43B(h). Section 43B(h) comes into play only when deduction in respect of the amount payable to MSEs is otherwise allowable under the Income-tax Act.
• Verify whether amounts are otherwise admissible: The tax auditor needs to verify whether the amounts due to MSEs are otherwise admissible in terms of Sections 30 to 37(1) and are not liable to be disallowed under the Explanations below Section 37(1), Section 40, or Section 40A.
• No need to report delayed payments that are liable to be disallowed otherwise: If any amounts payable to MSE are not otherwise allowable in terms of Sections 30 to 37(1), or are liable to be disallowed in terms of Explanation 1/Explanation 2/Explanation 3 below Section 37(1) or interms of Section 40 or Section 40A, there is no need to report the amounts under amended Clause 22.
• Reporting of delays in payments of amounts outstanding as of 31-03-2024: Where payments of the outstanding amount as of 31-03-2024 are made after 31-03-2024 beyond the due date under Section 15 of the MSMED Act, these are to be reported in amended Clause 22 even if they are made on or before the due date under Section 139(1). This will cover amounts outstanding at the balance sheet date which have already become overdue as of the balance sheet date, as well as amounts outstanding at the balance sheet date, which become overdue after the balance sheet date. Of course, reporting is required only if otherwise allowable, as explained above. The interest payable under Section 16 of MSMEDA with respect to these delayed payments is also to be reported in Clause 22 as such interest is inadmissible under Section 23 of the MSMED Act.
• Delayed payments made on or before 31-03-2024: There is no question of reporting in Clause 22 as these amounts paid on or before 31-03-2024, even if paid after the due date specified under the MSMED Act, can be claimed on an actual payment basis. However, interest on such delayed payments under Section 16 of the MSMED Act will have to be calculated, and such interest will have to be reported under Clause 22 as amounts inadmissible under Section 23 of the MSMED Act.
• Reporting in respect of assessee following cash basis of accounting: There is no question of reporting any amounts disallowable under Section 43B(h) in respect of such assesses under Clause 22 since they will anyway claim deductions for such amounts on actual payment basis only. Interest on delayed payments to MSEs payable under Section 16 of the MSMED Act will be liable to be disallowed under Section 23 of the MSMED Act only when these are debited to the profit and loss account on a cash basis in the year of payment. However, disclosures under Section 22 of the MSMED Act in respect of amounts due to MSEs are to be given in audited accounts of the buyer-assessee if the buyer-assessee is liable to get accounts audited under any current law.
• Identification of MSEs: Verify that the assessee has a system to identify suppliers who are micro/small enterprises. This may include writing to the vendors to confirm their Udyam Registration and identifying them from the Udyam Registration Numbers printed on their bills.
• Verification of registration: Verify that the assessee has a system to check the Udyam Registration Number from the Udyam portal and the Udyam Certificate to verify the supplier’s status as a Micro or Small enterprise.
• Letter of Engagement/Audit Engagement Letter: Verify that Letter of Engagement or Audit Engagement Letter for tax audit under Section 44AB of Income-tax Act for AY 2024-25 includes a statement on Entity’s obligation to comply with Chapter V of MSMED Act, 2006 and Section 43B(h) of Income-Tax Act and responsibility of management to identify suppliers who are micro or small enterprises by writing to suppliers to share their Udyam Numbers if they are Udyam Registered, and to verify the Udyam Numbers on Udyam Portal. It may be prudent to revise/update AEL/Letters of Engagement in case of statutory audits and tax audits of existing clients to incorporate Management’s Responsibility on this. In case the assessee is following the cash basis of accounting, it would be prudent for the tax auditor to include a statement on Management’s Responsibility to Comply with Chapter V of the MSMED Act and to give disclosures in notes to accounts regarding dues to MSEs as required under Section 22 of MSMED Act.
• Upward reclassification: Verify by random check whether suppliers who were micro/small in the last three years and upgraded to medium are treated as micro/small for 3 years as per Para 8(5) of Notification No 2119(E), dated 26-06-2020.
• MCA Filing: In the case of the company assessee, verify whether Form MSME-I was filed with MCA on a half-yearly basis.
• Payments by cheques: Where MSE suppliers are paid by cheque and the books show that the cheque is issued on the due date, verify that cheques have been handed over on the due date and that acknowledgement has been received to that effect. Also, verify that the cheque issued was a crossed-account payee cheque.
• Check BRS: Verify the bank reconciliation statement (BRS) regarding cheques issued but not presented for a long time and whether these pertain to MSE suppliers.
• Payment due date to be reckoned delivery-wise: Verify that each purchase of goods/services is paid individually within the due date as per Section 15 of the MSMED Act. Payment made on an average due date basis is not in compliance with Section 15 of the MSMED Act.
• Payment for capital goods: Verify that the assessee has paid MSE suppliers of capital goods within the time allowed by Section 15 of the MSMED Act. Although delays in payments for capital goods may not attract disallowance under Section 43B(h), such delays also attract interest on delayed payments under Section 16 of the MSMED Act. In the case of the assessee, following the accrual basis of accounting, verify whether such interest payable is provided for in accounts and report such interest provided in clause 22 as amounts inadmissible under Section 23 of the MSMED Act.

7. Conclusion

The Corrigendum Notification of CBDT has cleared the confusion created by earlier Notification GSR 155(E), dated 05-03-2024. It has also scotched rumours that Section 43B(h) will be deferred by CBDT, and it has abundantly made it clear that Section 43B(h) is here to stay.

CA Srinivasan Anand G. has authored a book “FAQs on Timely Payments to MSME – An Interplay between Sec. 43B(h) of the Income-tax Act & MSMED Act”, which has been published by Taxman.

1. Notification G.S.R. 155(E), dated 05-03-2024
2. Notification G.S.R. 223(E),dated 19-03-2024