[Opinion] An Overview of Issues Relating to Payments to MSMEs vis a vis Deduction u/s 43B of the Income-tax Act

CA V K Subramani – [2024] 158 taxmann.com 509 (Article)

With the time limit for filing the ITRs of the assessment year 2023-24 getting over by 31st December, 2023, it is time now for the taxpayers and tax counsels to take stock of legal provisions which are applicable for the current financial year and that would have significant impact in determination of total income of the assessment year 2024-25. This stock taking or review provides some leverage for avoiding legally any harsh legal provisions which may be waiting to get triggered if such due diligence is not done. The Finance Act, 2023 inserted clause (h) to section 43B applicable from 01.04.2024 which means it is applicable from the assessment year 2024-25 onwards.

The said clause (h) of section 43B vis a vis the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as MSME Act, 2006) is the focus of this write up.

Legal provision – Section 43B(h)

Clause (h) of section 43B says

“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″

shall be allowed only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum is incurred by the assessee according to the method of accounting regularly employed by him.

The proviso to section 43B which extends the time limit for allowance of deduction if actual payments are made up to the ‘due date’ for furnishing the return under section 139(1), would not apply in respect of the payment referred to in clause (h) of section 43B.

It is in this background, the taxpayers have to take precautionary measures to avoid disallowance of expenditure which may be outstanding (to MSME units) as on 31st March, 2024 representing the expenditures of the financial year 2023-24. Thus, one would hasten to add that any liability which was outstanding in respect of the period prior to 01.04.2023 would not be hit by clause (h) of section 43B even if it is outstanding as on 31st March, 2024 or even subsequent periods. Such outstanding amounts may be due to pending disputes with respect to those supplies or services between the parties and agreed for settlement of dues upon resolution of dispute or any other issue between them.

Coverage of MSME Act, 2006

The following are the relevant provisions of the Act which one has to take note of in this regard:

Section 2(e) defines the term “enterprise”:

“Enterprise means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering any service or services”

(emphasis supplied).

On reading the definition of “enterprise” one may note that the enterprise must be engaged in the manufacture or production of goods. Therefore, an enterprise which is engaged in trading is not covered by the term “enterprise”.

Yet another important expression is “engaged” which is not defined in the MSME Act, 2006. However, in the portal www.dcmsme.gov.in being the portal belonging to the Government of India the meaning of manufacturing enterprise is explained as

“employing plant and machinery in the process of value addition to the final product having a distinct name or character or use”.

Thus, a unit engaged in manufacturing or producing an article which is having distinct name or character or use can be stated as an entity covered by the definition.

In National Projects Construction Corpn. Ltd. v. CWT [1969] 74 ITR 465 (Delhi) the court was to decide about an industrial undertaking engaged in the manufacture or production or processing of goods or articles. It held that “the word ‘engage’ may have variety of meanings depending on the context and setting in which it is used. Ordinarily the expression connotes doing of more than one act or one transaction. Continuity of action is implicit in the meaning of the word. It has also been used in the sense of being busy or conducting or devoting attention or effort or employing oneself. The words “engaged in the manufacture, production” etc should normally, therefore mean continuously occupied in the manufacture as a principal business as distinguished from occasional participation or single act or casual employment or a mere supervision without physical participation. The extent of activity would be a relevant factor and if such activity is at an extended scale, it may be suggestive of being “engaged” in manufacturing activity.” (emphasis supplied)

Yet another limb of the definition is “manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951″.

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