[Opinion] Charitable Trust – Registration Under MSME Act, 2006, Rights and Obligation and Applicability of 43B(h)

CA Naresh Kumar Kabra & Rachit Gupta – [2025] 181 taxmann.com 522 (Article)

1. Introduction

As Section 43B(h) reshapes how businesses handle payments to MSEs, many charitable institutions are now asking a critical question—does this rule apply to them too? To understand the same let us first know what is section 43B(h) of the Income tax Act, 1961.

With effect from 1st April 2023 (Assessment Year 2024-25 onward), a new clause – clause (h)—has been added to Section 43B. Under this clause, amounts payable to a micro or small enterprise must be paid within the time-limit prescribed under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), if the payer wants to claim the deduction in the same year.

In simple words, if a business buys goods or services from a registered MSME and does not pay them on time, the expense will NOT be allowed as a deduction in the same financial year it will be allowed only in the year in which the payment is actually made.

Now to understand the time limit prescribed let us read the Section 15 of the MSMED Act, 2006, the said section states that

“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 in writing between the supplier and the buyer or, where there is no agreement in this behalf, before the appointed day”.

It further states that:

“In no case shall the period agreed upon in writing exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

If payment is delayed beyond the statutory limit, the buyer is liable to pay interest as per Section 16 of the MSMED Act. This interest is charged at 3 times the bank rate notified by the RBI.

Here the Appointed day means 15th day from the date of acceptance of goods or services, it can be understood that where there is no written agreement between buyer and Supplier registered under MSMED act, 2006 the payment must be made within 15 days from the day of acceptance of goods or service and where there is an agreement then the maximum permissible limit for making the payment is 45 days and if the payment is not made within the time limit, the expense shall not be allowed as deduction while computing the income under the Income Tax Act, 1961 and further interest on shall be charged for the delay made in the payment. This amendment signals a major shift – from an accrual-based deduction regime to a payment-based deduction regime for MSE-related payments thereby promoting prompt payments and supporting the liquidity of small enterprises.

2. Applicability of Section 43B(h) on Charitable Institutions

Now let us understand the applicability of Section 43B(h) on different categories of Assesses, for the regular assesses there is no confusion this section applies as discussed above. To get the clarity on the applicability of 43B(h) on charitable institutions let us go through the chapter wise bifurcation of the Income Tax Act, it can be said that the taxation of the Charitable institutions or Trusts is within the Scope of Chapter III of the Act which contains the sections from Section 11 to 13 and the applicability of 43B(h) is covered under Chapter IV of the Act, therefore it can be said that Section 43B(h) is not within the scope of Chapter III of the Act which governs the Trust Taxation.

Further under Sections 11 to 13, there are specific references to the provisions of ‘Profits & Gains of Business or Profession’ which have been made applicable to the computation of income under Section 11, such as the disallowances for cash payments above Rs. 10,000 under section 40A(3) or disallowances for non-deduction of tax on payments made to residents under section 40(a)(ia). However, there is no reference to disallowance under Section 43B(h) while computing income under Section 11. From the above references and facts it can be understood that 43B(h) does not applies to the Charitable Institution.

3. Trust Expenditure – The Actual Application Rule

The applicability of Section 43B(h) is effective from 1st April 2023, however, long before this amendment from The Finance Act 2022, the Income-tax Act set the line for treatment of expenditure of charitable and religious trusts, it is fundamentally governed by the concept of actual application, as reflected across Sections 11 and 12. Section 11(1)(a) allows exemption only for income “applied” during the year, a term consistently interpreted to mean actual spending rather than accrual.

This payment-linked approach is further reinforced by Sections 11(1)(b), 11(1)(c), and 11(2), all of which emphasise real utilisation of funds and not mere book entries. Section 12 subjects voluntary contributions to the same application requirements, while Section 13 examines the actual utilisation of funds to ensure they are not misapplied for the benefit of specified persons.

Taken together, these provisions create an inherently stringent framework under which trusts receive tax benefits only on actual payment, with no scope for recognition of accrued expenses. As a result, trusts already operate under a regime more restrictive than the timelines introduced for business entities under Section 43B(h), since trusts are never permitted to claim expenditure until the moment of actual outflow—irrespective of any statutory grace period applicable elsewhere.

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