Avoid Disallowances and Penal Interest on Delays in MSME payments

 

 WEF 1.4.2023 i.e ASST YEAR 2024-25 SECTION 43B become applicable to delayed expense payments for MSME Payments:

1. The amendments to Section 43B of the Income Tax Act aim to promote timely payments to MSMEs.
2. Deductions will now be allowed solely on a payment basis in the year in which payment is actually made, Therefore, segregate the payments on the basis of the time limit specified in MSME Act; If Paid within the time limit specified: Allowed in the year on accrual bases. Otherwise in the subsequent year of actual payment.
3. Specified Time Limit: within 15 days of acceptance/ deemed acceptance of goods / service.  It can be extended if agreed in writing to maximum 45 days only.

Hon’ble  Madras High Court  in Eden Exports Co. v Union of India ruled that parties cannot mutually agree to extend payment periods beyond the timelines specified under Sec 15 of the MSMED Act. IN NO CASE MSME ACT ALLOWS AGREED TERMS OVER 45 DAYS.

Illustrations:

a)       If No written agreement all payments for bills upto 31.3.24 must be paid by 15^th April 2024 if there is no agreement for extension in writing for over 15 days.

b)      If written agreement for extension of time limit for payment it can be for  maximum allowed 45 days period : The expenditure against Bill dated 15.2.24 paid on 24.6.24  will be disallowed in the Income of the AY 24-25 and to be allowed in the year of actual payment

c)       If Bill dated 15.2.24 paid on 5.4.24 even if there was agreement in writing for 45 days period expenses disallowed in the Income of the AY 24-25 since payment is after 45 days and to be allowed in the year of actual payment in AY 25-26 .

d)      If  goods against bill dated 15.02.24 were defective and the defect was removed on 29.03.24, the agreed 45 days to pay should in our opinion be counted from 29.03.24 onwards being the date of deemed acceptance of goods.

5. Segregation of vendors: It is essential to distinguish between micro and small enterprises and medium enterprises to determine the applicability of the amendment accurately.
6. Buyer of Goods or Services includes non-corporate entities as well.
7. Verify the registration status of their vendors to determine eligibility for deductions. a declaration from all creditors just like KYC is crucial, which would include their registration certificate. This process is essential for tax audits, particularly in disallowing interest under Section 16 of the Act.
8. Timely payment track: To ensure timely payments to MSMEs, maintain date schedules to track due dates.
9. For Outstanding payments of Micro and Small as on 31.3.24 to be claimed in AY 2024-25 :

-          Pay them within specified time limit

-          Even for expense provisions made on 31.3.24 for dues to MSME pay them within specified time limit otherwise expense to be disallowed and allowed in subsequent year .

-          The evidences of such payment to be attached with ITR . In Tax Audit cases The Tax Auditor to confirm as per Form 3 CD requirement.

10. Record such disallowed Expenses on 31.3.24 to be claimed in Asst year 2025-26: If unable to pay or delayed for any reason and to be claimed in subsequent year.
11. Vendor transition: Identify the shift of vendors from micro and small enterprises to medium enterprises – may pose difficulties in careful monitoring.
12. Exclusions:

-          Medium enterprises are not included in this disallowance u/s 43B. Medium Enterprise are those having Plant and equipment not exceeding 50 crores and Turnover not exceeding Rs.250 crores.

-          If the supplier is not Regd under as Micro or Small enterprise under MSME Act on the date of such supply as held by Hon’ble Supreme Court in Silpi Industries v Kerala Road Transportation (2021).

-          Supplier Enterprise does not include whole sale or retail traders or distributors eg, stationary supplier, Steel or Material Trader suppliers, Importers selling electronics etc. It includes either Manufactures or Service Providers e.g. CAs, Advocates, Maintenance contractors, civil contractors, Fabricators, interior decorators etc .

13. Cheques issued to micro and small but not presented: Disallowance under Section 43B should not be attracted, as per legal precedent in CIT vs Hindustan Wire Products Ltd case by Honble P& H court in 2002. our opinion if the date of giving the cheque to the vendor is within the statutory time and there are no reflections of intentional delays by this excuse in regular course.
14. If Creditors or Suppliers are not registered as Micro or Small enterprises.

Micro Small and Medium:

Type	Investment in Plant & Machinery not to exceed	AND Turnover not to exceed	Whether Both Conditions must be satisfied	Plant and Machinery to exclude	43 B applicability for timely payment wef Asst Yr. 2024-25
Micro	Rs. 1 crore	Rs. 5 Crore	YES	Pollution Control, R&D, Industrial Safety Devices and such other items that may be specified.	YES
Small	Rs.10 crore	Rs.50 Crore	YES		YES
Medium	Rs.50 Crore	Rs.250 Crore	YES		NOT APPLICABLE

 

15. Penal Interest on buyer for delayed Payment (Section 16 of MSME Act) notwithstanding anything in any agreement between the buyer and the supplier or in any law for the time being in force, is obligated to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, @ 3 times of the bank rate notified by the RBI i.e. if RBI notified rate is 9%. Interest payable is 9* 3=27% p.a compounded monthly.