Simplification of clause (h) to Section 43B of the Income Tax Act
Provisions of section 43B of the Income Tax Act, 1961 deals with a list of expenditures which are allowed as deductions under the head ‘Income from business and profession’ only in the year of actual payment.
Recently, section 43B has been stealing the limelight due to the insertion of new clause (h) vide the Finance Act, 2023. Notably, the new provisions are going to be effective from 1st April 2024.
Undoubtedly, the insertion aims to promote speedy payments to micro and small enterprises which ultimately resolves the working capital scarcity issue in the MSME sector.
Vide the present article, let us understand the basics of clause (h) of Section 43B of the Income Tax Act, along with, the impact of the same with the help of illustrations.
Basics of clause (h) of Section 43B of the Income Tax Act –
Bare reading of clause (h) of section 43B –
‘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’
Simplification of the above provisions of clause (h) of Section 43B –
- • Assessee is liable to pay any sum on account of buying goods or procuring any service from an enterprise which is registered under the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as MSMED Act, 2006);
- • The said sum payable is not paid by the assessee within the time limit specified in section 15 of the MSMED Act, 2006;
- • Such a sum, which is not paid within the time limit, is allowed as a deduction only in the year in which the payment is actually made.
It is vital to note here that only sums payable to micro and small enterprises are covered. Accordingly, clause (h) of section 43B doesn’t deal with the sum payable to medium enterprises.
Provisions of clause (h) of section 43B are even more simplified with the help of following flowchart –
Payment time limit as specified in section 15 of the MSMED Act, 2006 –
As per section 15 of the MSMED Act, 2006, payment is to be made within the following time limits –
| Particulars | Time limit |
| In case, there is a written agreement | Date as agreed upon (however, the time limit cannot exceed 45 days) |
| In case, there is no written agreement | Within a period of 15 days |
Non-applicability of clause (h) of Section 43B of the Income Tax Act –
Provisions of section 43B(h) don’t apply under the following circumstances –
- • Payments to enterprises not registered under the MSMED Act, 2006;
- • Payments to enterprises registered as medium enterprises under the MSMED Act, 2006;
- • Payments for goods purchased from wholesale as well as retail traders, as such traders are eligible only for the Priority Sector Lending benefit;
- • Payments outstanding as on 31st March 2023.
Evaluating the impact of clause (h) of Section 43B of the Income Tax Act –
The impact of clause (h) of Section 43B is simplified via the following table –
| Situations | Impact of clause (h) of Section 43B |
| When the assessee has made payment to a micro/ small enterprise within the time limit specified under the MSMED Act, 2006 |
• As payment is made within the time limit there will be no effect of clause (h). • Payment will be allowed as a deduction on an accrual basis. |
| When the assessee has made payment to a micro/ small enterprise beyond the time limit specified under the MSMED Act, 2006 |
• As payment is made beyond the time limit provisions of clause (h) gets activated.
• Payment will be allowed as a deduction on a payment basis i.e. deduction will be allowed in the year of making the payment. |
Let us go through the following illustrations for a better understanding of the impact of clause (h) of Section 43B of the Income Tax Act, when payment is made beyond the specified time limit –
| Illustration | Impact of clause (h) of Section 43B |
|
Payment made beyond the time limit specified in MSMED Act, 2006, but, in the same Financial Year – Suppose, expenditure accrued in September 2023 and payment is made in March 2024 |
• Payment made beyond the time limit activates clause (h); • However, there will be no impact of clause (h) as payment is made in the same Financial Year in which the expenditure is accrued. Hence, even if the expenditure is allowed on a payment basis the same is allowable in the Financial Year 2023-2024. |
|
Payment made beyond the time limit specified in MSMED Act, 2006, but, in the subsequent Financial Year – Suppose, expenditure accrued in September 2023 and payment is made in April 2024 |
• Payment made beyond the time limit activates clause (h); • In this case, expenditure even though accrued in the Financial Year 2023-2024, the same will be allowed as a deduction only in the Financial Year 2024-2025.
|
Synopsis –
- • Any amount payable to micro or small enterprises towards procurement of goods or services is required to be made within the time limit specified under section 15 of the MSMED Act, 2006;
- • New clause (h) of section 43B of the Income Tax Act gets activated, as and when such payment is not made within the specified time limit;
- • Post activation of clause (h), deduction will be available only in the year of actual payment and not in the year of accrual.
About the Author:
Poonam Gandhi is a Chartered Accountant and a Lawyer with extensive expertise in both fields. As a Professional Freelance Content Writer/Editor and Educator, she combines her diverse background to draft compelling and informative content. Poonam specializes in creating content that not only delivers results but also caters to search engine optimization strategies, ensuring maximum visibility and impact.
