[Opinion] Section 43B(h) Is Not Sacrosanct as It Does Not Consider Trade Terms

Dr (CA) Hemant O Sharma & CA (Prof) Pradeep Kamthekar – [2024] 166 taxmann.com 566 (Article)

1. Introduction

Section 43B(h) disallows a deduction for any sum payable by an assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small, and Medium Enterprises Development Act (MSMED Act). This provision requires the payment to be made within 45 days from the day of acceptance of goods or services. Any payment exceeding this period will only be allowed as a deduction in the year they are actually paid.

This provision has sparked debate as it does not consider common trade practices where oral agreements or extended credit terms beyond 45 days are prevalent. Many argue that these terms should not be strictly enforced by the income tax department, as the MSMED Act’s timelines are often not adhered to in business practices, with even government companies often paying beyond the 45-day limit. The provision also does not compel buyers to reduce prices when payments are made within the specified period, leading to the view that such disallowances may be revenue-neutral and not warrant strict enforcement.

Section 43B(h) states:

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

(a)…

(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.

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 19 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.”

2. Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act)

“Liability of buyer to make payment.

15. Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and supplier in writing or where there is no agreement in this behalf, before the appointed day;

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

“appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

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