Income Tax: Section 43B(h) and Reporting Requirement under Tax Audit

Effective from April 1, 2024, the Finance Act, 2023 has introduced clause (h) to section 43B of Income Tax Act, 1961 ('the Act') applicable from the assessment year 2024-25 onwards. This amendment mandates that any sum payable to a micro or small enterprise beyond the time limits specified under section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, (MSMED Act) will only be deductible in the year the payment is made.

To ensure comprehensive reporting of disallowances under section 43B(h) the Act, the Central Board of Direct Taxes has amended Form 3CD, revising clause 22 and introducing sub-clause (b). This change requires tax auditor to disclose amounts disallowed under section 43B(h) of the Act. However, section 43B(h) does not apply to taxpayers opting for presumptive taxation under sections 44AD, 44ADA, 44AE, 44BBB, etc. of the Act.

This article delves into the critical aspects of this new reporting requirements

Relevant Extract from Section 43B(h)

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 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 :

Provided?that nothing contained in this section?except the provisions of clause (h) ?shall apply in relation to any sum which is actually paid?by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139?in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Clause (h) of section 43B states that any sum payable to a micro or small enterprise beyond the specified time limits under the MSME Act will only be allowed as a deduction in the year it is actually paid, irrespective of when the liability was incurred.

Steps for Complying with Section 43B(h) Reporting Requirements

Step 1: Obtain the full list of year-end balances of trade payables as of March 31, 2024, and verify accuracy.

Step 2: Identify amounts payable to micro and small enterprises under section 43B(h). When doing so, consider the following:

• The supplier must be an industrial undertaking or a business concern engaged in manufacturing, producing goods, or rendering services. A supplier who is trader is not within the scope of section 43B(h) the Act. Section 2(e) of MSMED Act

(e) "enterprise" means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;

• The supplier should be registered with the Udyam Authority to benefit from the MSME Act.
• MSME registration does not apply retrospectively. For instance, if the supplier registered on October 1, 2023, only supplies made after that date would qualify, as established by the Supreme Court in Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd. (2023) 6 SCC 401.

Step 3: Exclude balances from the following categories:

• Year-end balances from earlier years.
• Year-end balance pertaining to purchase of capital goods on which depreciation is claimed will not get covered. However, if it pertains to an asset on which 100% deduction is claimed under section 35AD of the Act, the same shall not be excluded.
• Year-end balances pertaining towards GST needs to be excluded if expenses are claimed using exclusive method i.e. for GST credit is taken instead of claiming the same as expense.

Step 4: Determine the time limit for payment under the MSMED Act:

• If there is a written agreement, use the agreed number of days or 45 days from the date of acceptance. For examples (as given in Implementation Guide on Revision in Form 3CD and Form No. 3CEB, issued by the Institute of Chartered Accountants of India in March 2024)

• Without a written agreement, the time limit is 15 days from the date of acceptance.

Step 5: Total the year-end trade payable balances that exceed the time limits under the MSMED Act and report these amounts in sub-clause (b) of clause 22 in Form 3CD.

Best Practices for Compliance Taxpayers and tax auditors should maintain detailed reconciliations of reported amounts and year-end trade payable balances as reflected in the balance sheet. I will recommend that if the reader need further guidance on the reporting process, refer to the Implementation Guide on Revision in Form 3CD and Form No. 3CEB, issued by the Institute of Chartered Accountants of India in March 2024.

This article is intended solely for informational and educational purposes. The content does not constitute professional advice or a comprehensive guide on the subject matter. Readers are advised to consult with their tax advisors or legal professionals for specific advice tailored to their individual circumstances.

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