Clause 22 of Form 3CD and Section 43B(h) – Practical FAQs

This Clause does not require any details of status of payments during the current year of pre-existing liabilities due to MSE Suppliers which were not allowable in the preceding year due to non-payment so such payments can be claimed as deduction during the current year. These details are required in the amended Clause 26(A) of Form No. 3CD.

In Explanation 4 below section 43B, clauses (e) and (g) have been substituted to define the expression “micro enterprise” and “small enterprise” respectively as under:

‘(e) “micro enterprise” shall have the meaning assigned to it in clause (h) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’);

(g) “small enterprise” shall have the meaning assigned to it in clause (m) of section 2 of the Micro, Small and Medium Enterprises Development Act, 2006.’

As clauses (e) and (g) of Explanation 4 to section 43B make applicable the definitions of “micro” and “small” enterprises in the MSMED Act to section 43B(h), it is necessary to examine the definitions in MSMED Act.

Section 2(h) of MSMED Act defines “micro enterprise” to mean an enterprise classified as such under sub-section (1) of section 7.

Section 2(m) of MSMED Act defines “small enterprise” to mean an enterprise classified as such under sub-section (1) of section 7.

Sub-section (1) of section 7 of MSMED Act provides that the Central Government may, for the purposes of this Act, by notification (in the Official Gazette), classify any class or classes of manufacturing or service enterprises, whether proprietorship, Hindu undivided family, association of persons, co-operative society, partnership firm, company or undertaking, by whatever name called, into:

(a) Micro Enterprises

(b) Small Enterprises

(c) Medium Enterprises

Sub-section (9) of section 7 of MSMED Act provides that the Central Government may, while classifying any class or classes of enterprises under sub-section (1), vary, from time to time, the criterion of investment and also consider criteria or standards in respect of employment or turnover of the enterprises and include in such classification the micro or tiny enterprises or the village enterprises, as part of small enterprises.

Classification of enterprises based on composite criteria of investment and turnover.

The Central Government has issued Notification No. SO 2119(E), dated 26-6-2020 (hereinafter referred to ‘the Notification’), under sections 7(1) read section 7(9) of the MSMED Act. Para 3(1) of the said Notification provides that a composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium. Para 1 of the Notification provides for classification of enterprises based on the composite criteria. Para 1 provides that an enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:

• a micro enterprise, where the investment in plant and machinery or equipment does not exceed 2.5 crore rupees and turnover does not exceed ten crore rupees;
• a small enterprise, where the investment in plant and machinery or equipment does not exceed 25 crore rupees and turnover does not exceed 100 crore rupees; and
• a medium enterprise, where the investment in plant and machinery or equipment does not exceed 250 crore rupees and turnover does not exceed 500 crore rupees.

Analysis of classification of MSMEs based on composite criteria

Para 3 of the Notification clarifies as under:

• A composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium.
• If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.
• All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

Paras 8(5) and 8(6) of the Notification provide as under:

• In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the re-classification, for a period of three years from the date of such upward change. [Para 8(5)]
• In case of reverse-graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place. [Para 8(6)]

Turnover is reckoned on net turnover basis i.e. turnover of goods and services less exports of goods and services.

Para 5 of the Notification deals with Calculation of turnover as under:

• Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.
• Information as regards turnover and exports turnover for an enterprise shall be linked to the Income-tax Act or the Central Goods and Services Tax Act (CGST Act) and the GSTIN.
• The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory. The exemption from the requirement of having GSTIN shall be as per the provisions of the Central Goods and Services Tax Act, 2017 (12 of 2017).

Investment in plant and machinery or equipment is reckoned on a net investment basis, i.e. depreciated cost as per Income-tax return of plant and machinery or equipment less cost of pollution control, R&D and industrial safety devices.

Para 4 of the notification deals with the calculation of investment in plant and machinery or equipment and provides as under:

• The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income-tax Act, 1961.
• In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
• The expression “plant and machinery or equipment” of the enterprise shall have the same meaning as assigned to the plant and machinery in the Income-tax Rules, 1962, framed under the Income-tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).
• The purchase (invoice) value of a plant and machinery or equipment, whether purchased first-hand or second-hand, shall be taken into account, excluding Goods and Services Tax (GST), on a self-disclosure basis if the enterprise is a new one without any ITR.
• The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from calculating the investment amount in plant and machinery.

Udyam Registration (UR) is mandatory for availing all the schemes/benefits [FAQ 4 on MSME Samadhaan Portal]. One cannot conclude by just reading Para 1 only of Notification 2119 whether an enterprise is a Micro or Small enterprise. The Notification has to be read as a whole. The Meemansa Rule of उपक्रमोपसंहारो cited by Supreme Court approvingly in U.P. Bhoodan Yagna Samiti v. Braj Kishore (1988) 4 SCC 274 as under :

उपक्रमोपसंहारो अभ्यासेऽपूर्वता फलम् ।

अर्थवादोपपत्ती च लिंगं तात्पर्यनिर्णये ॥

When you have to draw a conclusion from a piece of writing, you have to read it from beginning to end. Without doing this, it is difficult to understand the purpose. If there is any innovation (apoorvata/navyata) or something new, it should be noted. Then, one must notice the result of such innovation. Then, find what is intended to be conveyed and in what context.

We interpret Notification 2119 by taking note of the entire Notification and innovations introduced by it as under:

Para 2 – Becoming a micro, small or medium enterprise

• Online Filing of UR on self-declaration basis [Para 2(1)]

Para 6 – Registration process

• PAN & Aadhaar Compulsory
• GSTIN Compulsory unless exempted from GST Registration under CGST Act
• Features of Udyam Portal
• PAN & GST linked details on investment & turnover taken automatically from Govt data bases.
• The online system is fully integrated with Income Tax and GSTIN systems.

Para 4 – Calculation of investment in PME

• Investment=WDV as per ITR less cost of pollution control, R&D and industrial safety devices [OM, dated 6-8-2020 and Item 20 of Udyam Registration Form,]
• Calculation linked to ITRs filed of previous years

Para 5 – Calculation of turnover

• Export of goods or services or both to be excluded
• Information on turnover and exports shall be linked to ITR or GSTIN

When one takes due note of the Notification as a whole, the position emerges that to claim benefits as a Micro or Small Enterprise, Udyam Registration is mandatory. It is not mandatory for a micro or small enterprise to file Udyam Registration in terms of section 8 of the MSMED Act. Only Medium Manufacturing Enterprises are mandatorily required to file Udyam Registration failing which penalty is imposable under Section 27 of that Act. Nevertheless, micro or small enterprises have to file Udyam Registration to avail benefits under the MSMED Act as that alone is evidence of their status as micro or small enterprises. When law provides a simple online filing process without any filing fee and on self-declaration basis for availing benefits, there is no excuse for not filing it. It is noteworthy that Para 2 of the Notification providing for Udyam Registration is titled “Becoming micro, small or medium enterprise”.

For a buyer-entity to write to/email all its trade creditors and obtain their Udyam Registration Numbers is a big enough task. Imagine every buyer-entity having to obtain financials, ITRs and GSTRs of each and every trade creditor and classifying them as micro or small enterprise. It will be well nigh impossible to do so. Clearly, there is a set procedure under the MSMED Act and the Notification to validate the classification of enterprises through Udyam Registration and to automatically update details of Investment and Turnover from ITRs and GSTRs filed by them. Therefore, Udyam Registration provides the only acceptable evidence of the micro enterprise or small enterprise status of the supplier-entity. Therefore, only a Udyam-registered micro or small enterprise must be considered for section 43B(h) purposes. This conclusion can also be reached in another manner by interpreting the word “supplier” in section 15 of the MSMED Act.

It cannot be argued that since section 43B refers to only section 15 of the MSMED Act and does not refer to the definition of “Supplier” in section 2(n) of the MSMED Act, section 43B(h) will also apply to amounts due to an unregistered micro or small enterprise(i.e. micro or small enterprise not having Udyam Registration). The argument cannot be accepted for several reasons. Firstly, the term “appointed day” used in section 15 is defined in section 2(b) of the MSMED Act. If that definition is to be ignored on the ground that it is not referred to in section 43B, then section 43B(h) will be rendered nugatory in all cases where there is no written agreement between the buyer and the Supplier regarding the due date of payment. That section 15 of the MSMED Act is to be interpreted in the light of the definition in section 2(b) of the said Act is clear from the following extracts from the Explanatory Memorandum to the Finance Bill, 2023.

“Promoting timely payments to Micro and Small Enterprises

1. Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.

2. In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act. Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that 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 (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.

3. 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 payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.”

To the same effect is CBDT’s Circular No .1/2024, dated 23-1-2024, which clarifies as under:

21. Promoting timely payments to Micro and Small Enterprises

21.1 Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.

21.2 In order to promote timely payments to micro and small enterprises, payments made to such enterprises have been included within the ambit of section 43B of the Act vide Finance Act, 2023. A new clause (h) has been inserted in section 43B of the Act to provide that 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 (MSMED) Act, 2006 shall be allowed as deduction only on actual payment. However, it has also been provided that the proviso to section 43B of the Act shall not apply to such payments.

21.3 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, this amendment to section 43B of the Act allows the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.

Applicability – This amendment takes effect from 1st April, 2024 and will accordingly apply in relation to the assessment year 2024-25 and subsequent assessment years.

Therefore, the intent of section 43B(h) is that section 15 should be interpreted for section 43B(h) purposes in the light of definitions given in section 2 of the MSMED Act.

Section 15 of the MSMED Act reads as under:

“Liability of buyer to make payment.Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

Paraphrasing section 15 of the MSMED Act, the following position emerges:

(a) Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment for the same on or before the date agreed upon between him and the supplier in writing;

(b) In no case, the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or deemed acceptance; and

(c) Where there is no written agreement regarding the credit period, the buyer shall make payment before the appointed day.

It may be noted that where the credit period is agreed in writing, payment is to be made on or before the agreed due date, which shall in no case exceed 45 days. If the credit period is not agreed upon in writing, the supplier will be paid before the appointed day.

Though section 43B(h) refers to

“the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006”,

it does not define crucial terms used in section 15 of MSMED Act which are necessary to give force and life to section 15 as well as section 43B(h). The crucial terms on which sections 15 and 43B(h) hinge are “the appointed day”, “the day of acceptance or deemed acceptance”, “supplier”, “goods”, “service” and “buyer”. These terms are, however, defined in section 2 of the MSMED Act.

The “appointed day” is relevant only if the buyer and the seller have not agreed to any due date for payment in writing. As per section 2(b) of the MSMED Act, “appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

The term “Supplier” is defined in section 2(n) of the MSMED Act. Only a “supplier” as defined in section 2(n) of the MSMED Act can avail of the rights under Chapter V of MSMED Act such as right to timely payment under section 15, right to interest on delayed payment under section 16, Right to file plaint with MSEFC for recovery of dues from buyer etc. Section 2(n) defines “supplier” to mean a micro or small enterprise which has filed a memorandum with authority referred to in section 8(1) (i.e. Udyam Registration). The term “supplier” also includes:

(a) National Small Industries Corporation;

(b) Small Industries Development Corporation of a State or a Union territory; and

(c) Any company, co-operative society, trust or body registered or constituted under any law and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.

The following points are noteworthy:

(a) “The day of acceptance” means the day of the actual delivery of goods or the rendering of services;

(b) Where any objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, “the day of acceptance” means the day on which the supplier removes such objection;

(c) “The day of deemed acceptance” means where no objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services.

Illustration of provisions of Section 15 of MSMED Act

Illustration 1 – No credit period in writing and no objection in writing from buyer:

Illustration 2 – Credit period of 60 days in writing and no objection in writing from Buyer as regards Goods or services:

Illustration 3 – No credit period but written objection raised by buyer within 15 days of supply:

If the objection is made after 15 days from the date of supply, it will not be considered. In this case, the appointed date will be 19-2-2004, i.e., the day following immediately after the expiry of 15 days from the date of actual delivery of goods. Accordingly, the due date of payment will be 18-2-2024.

Illustration 4 – Credit period of 60 days along with written objection from buyer within 15 days:

If the objection is made after 15 days from the date of supply, it will not be considered. Accordingly, the payment due date as per section 15 will be 19-3-2024.

Section 16 of the MSMED Act provides that where any buyer fails to make payment of the amount to the supplier, as required under section 15:

(a) the buyer shall be liable 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,

(b) at three times the bank rate notified by the Reserve Bank.

The current bank rate is 5.75% (as per the RBI’s website). So, the Interest rate under Section 16 works at 17.25% p.a.

The above provisions apply notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force.

Section 17 of the MSMED Act deals with the Recovery of the amount due. Section 17 provides that

“For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereof as provided under section 16”.

Section 23 of the MSMED Act states that interest payable or paid by the buyer, under or in accordance with the provisions of this Act, shall not be allowed as a deduction for the purposes of the computation of income under the Income-tax Act, 1961. Section 22(v) of the MSMED Act seeks to make the disallowance provisions in section 23 effective by requiring disclosure in the audited annual accounts of ‘the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23’.

Two tax consequences flow to buyer-entity when it fails to make payment to a Udyam-registered Micro/Small Enterprise within the time allowed under Section 15 of the MSMED Act:

(1) Disallowance of amount payable under Section 43B(h)

(2) Interest liability under Section 16 of MSMED Act on the amount payable till it is paid and disallowance of such interest under Section 23 of the same in computing taxable income under the Income-tax Act.

Though both the above tax consequences arise out of the same default (delayed payment to Udyam-registered MSE supplier), there are the following differences between the two:

• Year from which applicable – Section 43B(h) applies from the assessment year 2024-25. Disallowance of interest on delayed payment under section 16, read with section 23 of the MSMED Act, is applicable from the date the MSMED Act came into force on 2nd October 2006.