In order to promote timely payments to micro and small enterprises, proposed new clause (h) in section 43B of the Income-tax Act, 1961, in the Union Budget 2023-24, which talks about certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on an accrual basis, if the amount is paid by the due date of furnishing of the return of income.
Accordingly, with effect from 1st April 2023, any sum payable by the assessee (Buyer) to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of the Act will allow the payment as a deduction only on a payment basis. It can be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.
Now got more understanding with examples:
An example I: Written Agreement having 45 Days time limit
Date of Transaction: 15th Feb 2024
Due Date of Payment as per Agreement (Max. 45 Days) 31st March 2024
Books of Accounts closed on 31st March 2024
In this scenario, the due date of payment falls at the year’s end i.e. 31st March 2024. If an assessee makes the payment till 31st March 2024, then the deduction is allowed only. If the assessee makes payment after 31st March 2024 then such deduction shall not be allowed for FY 2023-2024, as a deduction is allowed on a payment basis. If payment is done in FY 2024-2025, the claim as a deduction for FY 2024-2025.
Example II: No Written Agreement i.e. 15 Days time allowed for payment
Date of Transaction: 25th March 2024
Due Date of Payment in the absence of Agreement (15 Days): 9th April 2024
Books of Accounts closed on: 31st March 2024
In this scenario, the last date to clear the dues is 9th April 2024, which falls after the year’s end i.e. 31st March 2024. If an assessee makes the payment till 9th April 2024, the deduction is allowed on an accrual basis because as per the proposed clause, “deduction can be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act”. In our example, which is 9th April 2024.
Example III: Transaction during the year with or without agreement
Date of Transaction 15th May 2023
Due Date of Payment in absence of Agreement (15 Days) 30th May 2023
Due Date of Payment having Agreement (Max. 45 Days) 29th June 2023
Books of Accounts closed on 31st March 2024
In this scenario, if payment is made within due time or not, but on or before 31st March 2024, then expenses are allowed as a deduction on a payment basis.
CA Megha Tayal
cameghtayal@gmail.com