Assessment
Section 43B(h) of Income Tax Act: Are Retail or Wholesale Traders Covered?
A very strict and a beneficial law was inserted as section 43B(h) of Income Tax Act vide The Finance Bill 2023 effective from 01/04/2024 to promote timely payments to micro and small enterprises.Under the new provision ,the claim of expenditure in relation to persons who are micro and small enterprises shall be disallowed if not paid within the time limit prescribed under section 15 of the MSMED Act.
Section 43B(h) of Income Tax Act
The relevant part of section 43B(h) of Income tax Act is reproduced below :
Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—
……….
(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 …………
What is the Meaning of Micro & Small Enterprise as per sec. 43B(h)?
Explanation:
(e) “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006);
(g) “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).
Controversy related to Section 43B(h) of Income Tax Act
The question is whether the expenditure is disallowable in case of default by an assessee for paying a retailer or trader or supplier of goods or services who is recognised as such under MSMED Act?
Opinion
In the author’s opinion, anyone including retailers or wholesaler) registered as an Micro or Small Enterprise for any purpose under the MSMED Act shall get the benefit of protection under the Income Tax Act, even if the benefit under the MSMED Act is restricted for any reason.
Arguments in support of the opinion
Section 43B(h) of the Income Tax Act is a beneficial provision for a person recognized as a micro or a small enterprise under section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) as Explained under sec.43B of the Income Tax Act.
- Firstly, note the reference to MSMED is for the TIME LIMIT given in section 15 of the MSMED Act, which is a fixed maximum of 45 days in case of written agreement between parties and in case there is no written agreement , within 15 days .
- Secondly, the reference is regarding who a micro or small enterprise is. For that, the explanation merely means whoever is a micro or small enterprise as recognized under the MSMED Act.So, barring a time limit for payment and recognition as MSME, one need not visit or interpret anything from MSMED Act as far as the application of section 43B of the Income Tax Act is concerned,
- Further , nothing in section 43B or any provision under the Income Tax Act restricts the application of sub-clause (h) in case of any other circumstance if a person is a “micro OR small enterprise”. In fact , nothing is written in any other Act, in my knowledge, that overrides or restricts the application of section 43B(h) if a person is recognized as a “macro” or “small” enterprise.
Therefore, if any trader ,retailer, wholesaler, or person (Individual ) is recognized under the MSMED as MICRO or SMALL ENTERPRISE by the authorities under the MSMED Act, the provision of section 43B(h) shall apply in their case.
What about the MSME Policy Division clarification dated 01/09/2021 that the benefits to retailers and traders are restricted to Priority Sector Lending only?
This Circular is in no way affect the new law under section 43B(h) of Income Tax Act .The MSME Circular clearly restricts benefits only to other MSMED Acts. Read the paragraph from the Circular below :
“2. In this context, some MSEFCs have been approached by Traders to get the benefits of provisions of delayed payments as per MSMED Act, 2006 available to MSEs. It is clarified that as mentioned in the aforesaid OM, the benefits to Retail and Wholesale trade MSMEs are restricted upto Priority Sector Lending only, and any other benefits, including provisions of delayed payments as per MSMED Act, 2006, are excluded.“
Firstly ,the writer of that Circular could not have dreamt of providing a clarification that encompasses a law (section 43B(h) ) which came two years later in 2023(effective 1 April 2024).
Is registration with MSME necessary?
Yes, the MSME recognition is required for the protection under Income Tax Act because it has clearly provided in the Explanation to section 43B . In fact , although in context of benefit under MEMED Act , it has been held in a recent judgment by Supreme Court in Silpi Industries v Kerala State Road Transport Corporation categorically held that the seller/supplier ought to have registered under the provisions of the Act as on the date of entering into the contract with the buyer for the purpose of taking the benefit of the provisions of the Act. .
Conclusion on section 43B(h) of Income Tax Act
For those reasons, I believe section 43B(h) applies to every person who delays payment beyond the time limit prescribed under section 15 of the MSME Act in relation to anyone recognised as micro enterprise or small enterprise by the Authorities under MSMED Act . It does not matter they are recognised under MSMED Act only for restricted purpose.
