Thursday, January 11, 2024

Section 43B with Clarity on Amendments and Practical Wisdom

Section 43B of the Income Tax Act, 1961 is a crucial provision that outlines specific deductions allowed, regardless of the accounting method followed by the taxpayer. In this article, we will break down the essentials of Section 43B in a straightforward and analytical manner, emphasizing the recent amendment introduced by the Finance Act, 2023.

1. Key Deductible Payments under Section 43B

The following payments are eligible for deduction under Section 43B, irrespective of the accounting method employed by the taxpayer:

Payment TypeConditions for Deduction
Tax, duty, fees, or feesDeductible on actual payment basis
BonusDeductible on actual payment basis
Employer's contribution to PF/ESIDeductible on actual payment basis
Interest on loans from specified entitiesDeductible on actual payment basis, subject to agreement conditions
Leave salaryDeductible on actual payment basis
Payment to railways for the use of assetsDeductible on actual payment basis

2. Recent Amendment by the Finance Act, 2023

The Finance Act, 2023 introduced a significant amendment by adding a new clause (h) to Section 43B. This amendment focuses on payments to micro or small enterprises beyond the time-limit specified in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The key points are:

  • Any sum payable to a micro or small enterprise beyond the specified time limit shall be allowed as a deduction only when actually paid.
  • The benefit of the first proviso to Section 43B is not applicable to payments falling under Section 43B(h).

3. Practical Implications of the Amendment

The amendment's impact is evident in practical scenarios:

  • Payments to micro or small enterprises must adhere to the time limits specified in Section 15 of the MSMED Act.
  • If a payment is delayed beyond the MSMED Act's time limit, it will only be allowed as a deduction in the year of actual payment.

4. Understanding Section 15 of the MSMED Act

Section 15 of the MSMED Act specifies time limits for payment by buyers to suppliers, emphasizing:

  • Payment within the agreed-upon date in writing or, if not specified, before the appointed day.
  • The period agreed upon in writing should not exceed 45 days from acceptance or deemed acceptance.

5. Classification of Enterprises

Enterprises are classified as micro, small, or medium based on investment in plant and machinery and turnover. The criteria, effective from July 1, 2020, are:

Investment in Plant and MachineryUp to Rs. 1 croreAbove Rs. 1 crore to Rs. 10 croresAbove Rs. 10 crore and up to Rs. 50 crores
TurnoverUp to Rs. 5 croresAbove Rs. 5 crore to Rs. 50 croresAbove Rs. 50 crore and up to Rs. 250 crores

Note: Both criteria must be satisfied simultaneously.

6. Time Limits for Payment under Section 15 of the MSMED Act

Section 15 sets time limits for payment based on the existence of an agreement between the buyer and supplier:

  • If an agreement exists, payment must be made by the agreed-upon date.
  • If no agreement, payment should be made within 15 days from acceptance or deemed acceptance.

7. Practical Scenarios and Tax Consequences

Let's explore different situations and their tax consequences under Section 43B(h):

SituationTax ConsequenceRationale
Alfa Ltd. purchases goods from Beta Pvt. Ltd., a small enterprise. Payment made within time limits.Entire sum allowed as purchasesPayment made within the specified time limit, complying with Section 43B(h).
Alfa Ltd. makes delayed payment in the subsequent year.Entire sum allowed as purchasesPayment made in the year of incurring, adhering to the time limit set by Section 15 of the MSMED Act.
Alfa Ltd. pays after the MSMED Act's time limit but before the due date for ITR.Payment disallowed in the previous year, allowed in the subsequent yearThe first proviso to Section 43B(h) does not apply in this situation.

8. Case Study: Assessment Year 2024-25

Let's analyze the impact of the amendment using a case study:

Assessment Year 2024-25 (Amount in Rs.)

Net profit1,50,00,000
(a) Purchase of goods (Section 43B(h))2,00,00,000
(b) Architect services (Not covered by 43B(h))Nil
(c) Purchase from a trader (Not covered)Nil
(d) Purchase of equipment (Capital goods)Nil
Net income3,50,00,000
Tax impactAdditional tax payable: Rs. 60,00,000 plus interest under Section 234B and 234C

9. Carry Forward of Losses

In case of a business loss incurred in the subsequent year (Assessment Year 2025-26), the taxpayer can carry forward the loss for up to 8 years.

Note: The tax impact may be irreversible if the business is closed or insufficient profits are earned.

10. Conclusion

The recent amendment to Section 43B has far-reaching consequences for businesses dealing with micro and small enterprises. Understanding the provisions, adhering to time limits, and planning payments accordingly are crucial to avoid potential tax implications. Tax consultants, Chartered Accountants, and taxpayers should proactively prepare for year-end procedures and ensure timely payments to avoid disallowances.