Section 43B For MSME

CHANGES IN SECTION 43B OF THE INCOME TAX ACT
The Hon’ble Finance Minister Smt. Nirmala Sitharaman has announced various measures for
MSME. To assure on-time payments, the stated clause would have been inserted as a Socio-
Economic Welfare Measure and has been realized through the Micro and small companies.
Section 43B of the Act furnishes for specific deductions to be permitted on real payments only
rather than on an accrual basis.
Sec 43B of the Income Tax Act of 1961 is proposed to be amended in 13 clauses of the
Finance Bill 2023 to disallow a deduction for transactions with Micro and Small Enterprises
where timely payments are not made that is, a new addition to disallowance has been
introduced and it is made being vide Sec-43B (h) to disallow expenditures which are supplied
or procured from a Micro or Small Enterprises and are not paid within the time limit prescribed
U/s 15 of MSME Development Act (MSMED) 2006.
These amendments will take effect from 1 April 2024 and will, accordingly, apply in relation to
the assessment year 2024-2025 and subsequent assessment years.
Disallowance u/s. 43B of the Act will be attracted in case the supplier is either Micro Enterprise
or Small Enterprise. Disallowance u/s. 43B of the Act will not be attracted if the supplier is
Medium Enterprise
Now let us understand the Definitions of Micro, Small & Medium Enterprises as per MSMED
Act
Micro Enterprise
Investment in Plant & Machinery less than INR 1 crore Turnover of less than INR 5 crore
Small Enterprise
Medium Enterprise
The above definition is for both Manufacturing Enterprises and Enterprises rendering Services
Sec-15 of MSME Development Act, 2006 is reproduced below:
“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 the supplier in
writing or, where there is no agreement on this behalf, before the appointed day”,
Where 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.”
Therefore, if a buyer is entering into an agreement with an MSME supplier, the due date of
payment cannot exceed 45 days from the date of actual delivery of goods or rendering of
services as the case may be. Where there is no written agreement, the due date will be the
16th day of actual delivery.
Provided that in no case the period agreed upon between the supplier and the buyer in writing
shall exceed 45 days from the day of acceptance or the day of deemed acceptance.
ANALYSIS OF THE ABOVE DEFINITION
• As per the definition of Enterprises, only persons dealing in either Manufacturing of

Goods or providing any services will be classified as an Enterprise. Trader / Retailer/
Distributor, etc would not be classified as an Enterprise and would not be covered
under the Micro or Small Enterprise Definition.
• As per Sec-15 of MSME Development Act 2006, the due date for an invoice is to be
determined as per the Terms of the Invoice or 45 days from the date of the invoice
whichever is earlier.
For example- If terms are agreed that payment is due to be made within 75 Days, but
still a maximum of 45 Days can be allowable (not beyond that) to make the payment
otherwise deduction will not be given in the same financial year if the financial year is
already the end
• Supplier under the MSME Development Act 2006 is defined as a person who is
registered under the Act, hence Micro or Small Enterprise who are not registered under
the Act would not be covered under the Definition of S-43B(h)
Hence, it is advisable to take an MSME registration certificate while dealing with MSME
Vendors.
It shall also be noted that there may be a situation where some defect in the goods or
deficiency in the provision of service is noticed and the buyer, in this situation, makes
an objection, the due date shall be counted from the date when the MSME supplier
removes an object. However, the objection is required to be made in writing by the
buyer to the supplier.
Let us take one tabular presentation to show what actually this provision means:
Expenses can be claimed only in the year in which expenses are actually paid, unlike
other disallowances U/s 43B where disallowance will not be attracted even if the
payment is made after the Financial Year but before the due date prescribed u/s 139(1)
of the return filing that is the provision of section 43B that allows for a time extension
up until the due date of the return would not apply to such payments under any
circumstances.
Invoice Date Due Date Paid Date Amount Deduction Disallowance
(within 45
days)
10/06/2023 25/07/2023 31-03-2024 10,90,000 FY 2023-24 No disallowance
10/06/2023 25/07/2023 05/04/2024 10,90,000 FY 2024-25 FY 2023-24
10/06/2023 25/07/2023 4,90,000 on 31/12/2023 and 10,90,000 FY 2023-24 FY 2023-24
remaining on 15/04/2024 4,90,000 FY 6,00,000
2024-25
6,00,000
01/03/2024 15/04/2024 20/04/2024 10,90,000 FY 2024-25 FY 2023-24
01/03/2024 15/04/2024 15/04/2024 10,90,000 FY 2023-24 No disallowance
Ex 1: Mr A (Supplier) delivers goods of Rs. 35000 to Mr B (Buyer) on 20/03/2024 with

the following dates of payment specified in written Agreement in different scenarios:
Scenarios Time limit Due Date Actual date of Year of
payment deduction
A Within 10 days 30/03/2024 26/03/2024 2023-24
B Within 10 days 30/03/2024 31/03/2024 2023-24
C Within 10 days 30/03/2024 04/04/2024 2024-25
D Within 20 days 09/04/2024 04/04/2024 2023-24
E Within 20 days 09/04/2024 12/04/2024 2024-25
F Within 60 days 19/05/2024 15/04/2024 2023-24
G Within 60 days 19/05/2024 15/04/2024 2024-25
Ex 2: Mr A (Supplier) 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 i.e.,
31/04/2024.
• Therefore, if Mr B makes the payment within 31/03/2024, 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.
31/04/2024.
Scenario C – Mr B makes objection regarding the quality of Goods delivered to the Mr
A on 26/3/2024 and Mr A resupplies goods after addressing the problem on 5/4/2024.
• In this scenario, date of acceptance is the date on which objection is resolved i.e.,
05/04/2024.
21/04/2024.
General Note: There may be a situation that an assessee issues a cheque to the
MSME supplier and due for some reason; the MSME supplier does not encash it within
the due date. In my view, in light of the judgment of the Hon’ble High Court of Punjab
and Haryana in the case of CIT vs Hindustan Wire Products Ltd. [2002] disallowance
u/s. 43B of the Act should not be attracted.
Conclusion:
1) Assesses the need to make payments on a timely basis in order to get a deduction
within the same financial year. This will be very beneficial for MSME’s development &
promotion.
2) There will be now additional responsibility on Income Tax Auditors to respectfully
check Trade creditors outstanding as of 31 March for allowing expense with respect to
the MSMED Act 2006 & Income Tax Act 1961.
3) Non-Compliance with these changes will lead to huge taxes on the concerned
Assesses, Proper accounting & other various mechanisms are required to adhere to
these amendments on a timely basis
4) Clause 10 of the Tax Audit report says Tax Auditor is to report the amount of interest
inadmissible u/s 23 of the Micro, Small and Medium Enterprises Development Act,
2006 (MSMED, Act 2006). As per the said section, any interest for delayed payment to
Micro, Small, and Medium Enterprises is not allowed as a deductible expenditure while
computing the income of the Assesses under the Income Tax Act, 1961. 5) Any
outstanding payment to MSME at end of the year needs disclosure in financials along
with interest due

Section 43B For MSME

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CHANGES IN SECTION 43B OF THE INCOME TAX ACT

ANALYSIS OF THE ABOVE DEFINITION

• As per the definition of Enterprises, only persons dealing in either Manufacturing of

Ex 1: Mr A (Supplier) delivers goods of Rs. 35000 to Mr B (Buyer) on 20/03/2024 with

Ex 2: Mr A (Supplier) delivers goods of Rs. 35000 to Mr B (Buyer) on 15/03/2024 in

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