The Finance Act, 2023 introduced clause (h) to Section 43B of the Income-tax Act, 1961, with effect from Assessment Year 2024–25. This amendment has now entered its second year of implementation (AY 2025–26), and has wide ramifications for businesses dealing with micro and small enterprises registered under the MSMED Act, 2006.
This guidance note offers an updated and structured understanding of the provision, the law's intent, interpretation challenges, tax audit implications, and best practices for reporting and compliance.
Statutory Language of Section 43B(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 as a deduction only on actual payment."
Key statutory link: Section 15 of the MSMED Act mandates payment to a Micro or Small Enterprise within:
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15 days (if no agreement exists), or
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Maximum 45 days (if agreement exists).
Interpretation of Section 43B(h): A Departure from “Due Date of Filing Return”
Unlike other clauses under Section 43B (such as provident fund, GST, etc.), clause (h) does not permit deduction on accrual basis even if paid before the return filing due date. If the payment to a registered MSME supplier is not made within the statutory time frame under the MSMED Act, the entire amount becomes disallowable, irrespective of the date of payment.
This creates a non-reversible timing disallowance unless:
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The payment is made within the permissible time; or
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It is disallowed in one year and allowed in the year of actual payment under Section 43B proviso.
Applicability for AY 2025–26
The provision continues to apply with no change in threshold or relaxation, and businesses must evaluate:
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Whether the supplier is registered under MSMED Act as a Micro or Small Enterprise;
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Whether a valid registration certificate (Udyam Registration) is available;
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Whether payment was made within 15/45 days of acceptance of goods/services.
Medium enterprises are not covered.
Tax Audit Reporting: Clause 22 & 26
Tax Audit under Section 44AB must report disallowance under 43B(h) in the following clauses of Form 3CD:
a) Clause 22 – Details of amounts inadmissible under Section 43B:
The break-up of delayed payments to Micro/Small enterprises, bifurcated into:
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Amounts not paid within time (disallowable);
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Amounts paid after time (allowable in year of payment).
b) Clause 26 – Disclosure under Section 269T:
If any payment exceeding ₹10,000 was made otherwise than by account payee cheque/bank draft/electronic modes, it must be disclosed under this clause.
Practical Scenarios
| Situation | Allowed in AY 2025–26? |
|---|---|
| Paid within 15/45 days | ✅ Yes – Allowed |
| Paid after 45 days but before return filing | ❌ No – Disallowed under 43B(h) |
| Not paid at all till 31.03.2025 | ❌ No – Disallowed |
| Paid after 31.03.2025 | ✅ Yes – Allowed in year of payment |
Strategic Handling & Best Practices
To mitigate disallowance risks under Section 43B(h), businesses should:
i. Vendor Validation
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Maintain updated Udyam Registration Certificates from suppliers.
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Categorize them correctly as Micro or Small under MSMED Act.
ii. System-Level Tracking
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Implement ERP or payment control systems to flag MSME invoices nearing due dates (15/45 days).
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Auto-reconcile due dates as per MSMED Act.
iii. Standardised Agreements
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Clearly define payment terms to utilize 45-day window legally.
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Avoid backdating GRNs or invoice acceptance dates.
iv. Tax Audit Preparedness
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Prepare a reconciliation statement of MSME payables with payment timelines.
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Tag MSME vendor balances in ERP for seamless tax audit reporting.
Judicial and Legislative Context
Though still evolving, the provision is seen as a compliance enforcement mechanism aligned with the objectives of the MSMED Act, i.e., ensuring liquidity to small enterprises. Courts may eventually weigh in on interpretational aspects such as:
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Whether "date of acceptance" includes disputes or rejections;
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Whether partial payments comply with the law;
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Interface with existing contractual obligations.
At present, the Department’s view is strictly literal—no deduction if payment exceeds MSMED Act timeline, even if paid before the return filing date.
Additional Considerations
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Section 36 and 37 also cannot override the 43B(h) condition for deductibility.
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Provisions and payables to MSMEs must be scrutinised before finalisation of books.
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Companies with significant MSME vendors may consider voluntary internal audit reviews of vendor categorisation and payment cycles.
Conclusion
Section 43B(h) marks a strict shift from conventional accrual-based accounting for MSME dues. For AY 2025–26, businesses must rigorously implement internal payment discipline, real-time vendor tracking, and accurate tax audit reporting, failing which, permanent disallowances may arise.
