Budget 2023 has proposed a significant amendment in section 43B of the Income Tax Act which will require extensive exercise for businesses, tax consultants and tax auditors. Although, this amendment aims to strengthen the working capital position of small businesses and to streamline their receivables.

As per a normal business practice and accrual concept of accounting, the expense is recorded in the books of accounts as soon as the liability with respect to that expense is incurred without consideration to the date of actual payment of such liability.

Accordingly, the Income Tax Law also allows deduction of the expenses in the year of accrual as a general principle.

However, section 43B of the Income Tax Act provides certain heads of expenditures whose deduction is to be allowed in the financial year in which the payment with respect to the expenditure is actually made irrespective of the fact that the liability to make that payment is incurred in an earlier year.

As per the proviso to that section, the deduction can be allowed in the year in which liability to pay that expenditure is incurred if the actual payment of that expenditure is made on or before the due date of filing of the income tax return pertaining to the said financial year.

Before the amendment proposed by Finance Bill 2023, the Section 43B read as under:

Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing , or
(da) any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or
(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or
(g) any sum payable by the assessee to the Indian Railways for the use of railway assets,
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :
Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return

The Finance Bill 2023 has proposed to insert one more expenditure head as clause (h) in the above list.
Now, the clause (h) shall read as follows:

(h) 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.

This means that if a business has purchased any goods or services from a Micro or Small Business (as per definitions under MSMED Act 2006)1, then the deduction with respect to such expenditure shall be allowed in the financial year if the payment with respect to such purchase has been made within the time limit as per MSMED Act2. If the payment is not so made, then the deduction shall be allowed in the year in which the payment is actually made.

Further, the option to claim the expenditure in the year of accrual by payment before return filing due date is not available for this clause.

Amendment in proviso of Section 43B is as follows:

(iv) in the proviso, after the words “nothing contained in this section”, the brackets, words and letter “[except the provisions of clause (h)]” shall be inserted;

This means that the newly introduced clause (h) is excluded from the proviso, which means deduction {only in case of expenses mentioned in clause (h)} will not be allowed in previous year, even if it is paid before the due date of furnishing Income Tax Return pertaining to the said financial year.

1 Definition of Micro & Small Enterprises as per MSMED Act:

Micro manufacturing and services units were increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover.
The limit of small units was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover.

2 Time Limit for payment under MSMED Act:
Section 15: The due date of payment shall be:
If there is an agreement, between the buyer and seller, then the date specified under the agreement subject to maximum of 45 days from the date of acceptance of purchase;

If there is no agreement, then within 15 days from date of acceptance of purchase

Author’s Remarks

The Buyer has to clear all dues to MSE(Micro or Small Enterprises) before 31st March. If it is payable on 31st March and the said period is expired (15 days in case of no agreement & maximum 45 days in case of agreement) then deduction will not be allowed in the Income Tax Return pertaining to the said financial year even if it is paid before the due date of furnishing Income Tax Return. However deduction can be claimed in the year in which the payment is actually made.