ANALYSIS OF CLAUSE (H) OF SECTION

43B UNDER THE INCOME TAX ACT:

1. What is the need of clause H of section 43B ?

To promoting timely payments to micro and small enterprises
registered as Micro and Small enterprises under MSMED act
2006.

2. Understanding Section 43B(h):

•Section 43B(h) states that –
•Any sum payable by the assessee to a micro or small
enterprises, beyond the time limit specified in section 15 of
the Micro, small and Medium Enterprises Development Act 2006
shall be allowed as deduction only on actual payment.
•In simple words- This section will allow the payment as
deduction only on payment basis. It can be allowed on accrual
basis only if the payment is within the time mandated under
section 15 of the MSMED Act.
•Section 15 of the MSMED Act (Payment Time linesfor Micro
& Small Suppliers):
•This section mandate that - Enterprises are obligated
to pay Micro & Small suppliers-
•-within 15 days-If there is no written agreement
(between two parties)
•-within 45 days-If there is a written agreement (between
two parties)
3. Applicability of Clause (h) of Section 43B:
•Clause (h) of Section 43B comes into effect from April 1, 2023.
•It’s important to note that we have to check the Category of the
enterprises from which we have procuring goods or services under
the MSMED Act, 2006, our Category is not relevant here.
•it specifically Applies to Micro and Small Enterprises only,
does not apply to Medium Scale Enterprises.
•it does not applied to Trader/Retailer/Distributor.
•For the application of section 43B(h) the supplier should
categorised under MSMED Act, 2006 as a Micro and Small
Enterprises as a Manufacturer and/or Service Provider only.
•It does not matter we are trader or manufacturer or service
provider or categorised under MSMED act 2006 or not. If we
have to pay any sum to a Micro and Small Enterprises as a
Manufacturer and/or Service Provider then it has to pay
within 15 day or 45 days, as agreed among them.

4. Definition of Micro, small and Medium Enterprises as

per section 7 of MSMED Act, 2006:

Particulars Micro Small Medium

Investment in Maximum Maximum Maximum
Plant & Rs 1Crore Rs 10 Crore Rs 50 Crore
Equipment’s
Turnover Maximum Maximum Maximum
Rs. 5 Crore Rs. 50 Crore Rs.250 Crore

•It should be noted that both conditions i.e (Investment and

Turnover) should be fulfilled to check the category of the
enterprises.
5. INTEREST ON DELAYED PAYMENT
•As per section 16 of the MSMED Act,-
•the payment of interest on delayed payment is in the nature of
penalty or it is penal interest.
•Therefore, once the payment of interest on delayed payment to
MSME is regarded as a penal in nature and it is not allowed as
an expenditure under Income Tax Act 1961 due to the
overriding effect of section 23 of MSMED Act 2006.
•As per clause 22 of the Tax Audit requires Tax Auditor to report
the amount of interest inadmissible u/s 23 of the Micro, Small
and Medium Enterprises Development Act, 2006 (MSMED, Act
2006).
•Section 16 of the MSMED Act provides, if payment is not made
within the time limit specified under section 15, then the interest
payable shall be three times of the bank rate notified by the RBI.

6. APPLICABLE ON OUTSTAIDING PRIOR 01.04.2023:

•As the section is applicable for the computation of income from
the AY 2024-25, the payment to check shall be for the previous
year ending 31/03/2024.
•So, provision of section 43B(h) is not applicable on outstanding
balance as on 31/03/2023.

7. YEAR -END OUTSTANDIGN CREDITORS:

•If creditors are outstanding as on March 31 for a period exceeding
45 days or 15 days, as the case may be, the that expenses will be
disallowed for the relevant year, and it will be allowed in the year
in which the said payment is made.
• Examples:(If there is agreement made i.e. Max. 45 days )
S. No. Bill Date Due Date Payment Deduction
Date allowed in
FY
1 01/02/2024 17/03/2024 28/03/2024 2023-24
2 01/02/2024 17/03/2024 05/04/2024 2024-25
3 20/02/2024 05/04/2024 02/04/2024 2023-24
4 20/02/2024 05/04/2024 10/04/2024 2024-25

• Examples:(If there is no agreement made i.e. Max. 15 days )

S. No. Bill Date Due Date Payment Deduction
Date allowed in
FY
1 01/02/2024 15/02/2024 28/03/2024 2023-24
2 01/02/2024 15/02/2024 05/04/2024 2024-25
3 20/02/2024 06/03/2024 28/03/2024 2023-24
4 20/02/2024 06/03/2024 10/04/2024 2024-25