Introduction to the latest Amendment to Section 43B

As per the Amendment made by the Finance Act, 2023 of section 43B which states that :

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“Following clause (h) shall be inserted after clause (g) of section 43B by the Finance Act, 2023, w.e.f. 1-4-2024:

(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.” 

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As per the Amendment made by the Finance Act, 2023 clause (h) shall be inserted after clause (g) of section 43B which says that if assessee makes payment to micro or small enterprises beyond the limit specified in section 15 of the MSME Act, 2006 then deduction of such payment shall not be allowed in the previous year in which payment is due rather it shall be allowed in the previous year in which payment is made.

This provision does not apply to expenses specified under section 43B when the payment is made on or before the due date of return filing for the previous year in which the liability was incurred, except for clause (h) pertaining to payments made to micro or small enterprises.

Section 15 of MSME Act, 2006

As per this section, buyer is liable to make payment within a period of 15 days if there is not agreed date of payment and in case if there is agreed date of payment then agreed date or maximum 45 days whichever is earlier. If buyer fails to make payment for goods or services supplied by an MSME then buyer shall be liable to pay compound interest to the supplier on the amount due, as per the rate notified by the Reserve Bank of India (RBI) and along with interest as per the latest amendment made by Finance Act, 2023 in section 43B buyer shall also not be allowed to claim deduction of such payment under the head ‘Income from business and Professions’. But this amendment is applicable for only micro or small enterprises.

Following examples can be referred to get a better understanding of the above:

Example 1:

If goods or services are sold or rendered by micro or small enterprises and the agreed date is 26.07.2023 and the payment is made by the buyer on 20.02.2024, then it will be considered allowable in the Assessment Year 2024-25. This is because the payment has been made more than 45 days after the agreed date, as stated in section 15, but still within the same Assessment Year.

Example 2:

If goods or services are sold and rendered by micro or small enterprises on 10.02.2024 and the payment is made on 05.04.2024, then it will be disallowed for the current Assessment Year 2024-25. This is because the payment has been made more than 45 days not within the same Assessment Year 2024-25. However, it will be allowed in the subsequent Assessment Year 2025-26.

The recent amendment to Section 43B, which pertains to MSMEs, has a positive impact on micro and small enterprises. This is because many suppliers purchase goods or services from these enterprises but fail to make payments on the due date, causing significant hardship for the MSMEs. However, with the latest amendment, buyers will now be able to claim a deduction for the payment in the current or previous year, but only if the payment is made within 45 days from the agreed date or within 15 days if no specific agreement is in place. If the payment is made beyond these time limits, it will be allowed as a deduction in the previous year in which the payment is made.

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