[Opinion] Disallowance on Delayed Payment to Micro or Small Enterprises | An Interplay Between IT Act, 1961 and MSMED Act, 2006

Navneet Singal – [2024] 159 taxmann.com 240 (Article)

Prime Minister Sh. Narender Modi has tweeted, that,

“Strengthening the MSME sector is strengthening the entire society”

In his speech at ‘Udyami Bharat’ programme at Vigyan Bhawan, New Delhi, he mentioned that “We have been taught a verse since childhood, and we have all heard this verse, i.e. image that is, success is achieved only with hard work. Nothing happens by just thinking, and there is no shortage of thinkers. If I change the sentiment of this verse slightly in today’s context, then I would say that the ‘Atmanirbhar Bharat Abhiyan’ will be successful and India will be empowered only with the help of MSMEs. Although you belong to micro, small and medium enterprises, your role is very crucial for the heights that India is set to attain in the 21st century”.

The MSME sector in India generates almost 30% of the country’s business and employs 16,84,18,851 people, demonstrating the sector’s significance to the country’s economy. Over 99.90% of the 3,63,50,645 MSME enterprises that have registered on the Udyam site are micro and small enterprises (‘MSEs’).

The amendment to Section 43B(h) of the Finance Act, 2023 is intended to provide shelter to micro and small businesses, which are the cornerstone of a successful, independent India. If payments for the supply of products or services from these enterprises are not made on time, the businesses will not be allowed to deduct expenses related to such supply while calculating their income tax liability. This amendment will improve these enterprises cash flow in addition to requiring businesses to make payments on time.

In this article, the author has attempted to comprehend the relevance of the modifications brought about by the insertion of section 43B(h), the effect on businesses that work with micro and small businesses, and the interplay between the provisions of Income-tax Act, 1961 and MSMED Act, 2006. This article contains the follows aspects:

I. Impact of insertion of Section 43B(h) and its relevance
II. Micro and Small Enterprises – definition and applicability
III. Whether the provisions of section 43B(h) applicable to a non-registered enterprise?
IV. When a payment to MSEs will be considered as delayed payment?
V. Impact of delayed payments (Except the impact u/s 43B(h) on MSEs)
VI. Inclusion or exclusion of activities from the MSMED Act, 2006
VII. Major compliances in respect of MSMEs under MSMED Act, 2006
VIII. Impact of section 43B(h) under different scenarios
IX. Conclusion/way forward

I. Impact of insertion of Section 43B(h) and its relevance

The Central Government has introduced section 43B(h) vide Finance Act, 2023, to provide shelter to the MSEs from delayed payments on sale of goods or provision of services by them. Section 43B(h) reads as under:

“Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a) ……
(a) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15of 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 :

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 sub-section (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.

(Emphasis Applied)

The following inference can be withdrawn from the plain reading of the above section, i.e.,

1. Section 43B(h) applicable only to Micro and Small Enterprises (MSEs) and not to Medium Enterprises as defined in the MSMED Act, 2006
2. No deduction will be allowed in respect of expenses related to supply from MSEs in the case of delayed payment while computing the income under the head of ‘Profit and gains from business and profession (PGBP)’.
3. A payment will be considered delayed in case it is beyond the time-limit specified in section 15 of the MSMED Act, 2006
4. In case, an expense has been disallowed u/s 43B(h), it will be allowed in the year in which actual payments have been made.
5. The relief under proviso to section 43B will not be applicable to section 43B(h). Hence, in case of a delayed payment if it has been made before the due date of filing of return of income u/s 149(1), it will be considered as an expense only in the year when actual payment has been made and not in the year in which it has been incurred.

It is explicitly clear from the insertion of above section that any expense related to supply from MSEs is allowable only when payment of such expenses has been made and not otherwise.

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