15 February 2024
Section 43B(h) provides for disallowance of the sum payable to SME if not paid within the prescribed time. My queries are as follows:
1. Will the supplier be an SME as defined under the MSME Act but not having Udyog Aadhaar will be covered by section 43B(h)?
2. If an SME supplier asks the buyer to inform if it is registered under the MSME Act and the supplier although registered replies that he is not registered as MSME. Will payments to such suppliers would be out of the purview of the provision?
3. If any part of the due is retained by the recipient of supply in terms of the contract as retention money or security deposit would that amount be out of the purview of section 43B(h). Whether there would be any restriction in deducting the security deposit or retention money?
4. Can the payment to SME be converted into a loan with the express consent of the supplier to come out of the purview of s. 43B(h ).
11 July 2024
Section 43B of the Income Tax Act deals with certain deductions allowed only on actual payment basis. Clause (h) of Section 43B pertains to sums payable by the assessee to an SME (Small and Medium Enterprise) supplier as defined under the Micro, Small and Medium Enterprises Development Act, 2006. Let's address your queries one by one:
1. **Coverage of SME without Udyog Aadhaar:** - According to the Income Tax Act, for the purpose of Section 43B(h), an SME supplier refers to an enterprise as defined under the MSME Act, regardless of whether they have obtained Udyog Aadhaar registration. Therefore, if a supplier qualifies as an SME under the MSME Act based on their turnover and investment criteria but hasn't obtained Udyog Aadhaar, they would still be covered under Section 43B(h).
2. **Impact of Supplier's MSME Registration Status:** - If the SME supplier informs the buyer that they are not registered under the MSME Act, the payments to such suppliers would still fall under the purview of Section 43B(h) if they otherwise qualify as SMEs under the MSME Act. The buyer's responsibility is to ensure compliance with Section 43B(h) based on the supplier's status under the MSME Act, not based solely on their Udyog Aadhaar registration.
3. **Retention Money or Security Deposit:** - Retention money or security deposits withheld by the buyer do not fall under the scope of Section 43B(h) as they are not payments for supplies. These amounts are typically held as security or guarantees against performance or quality issues and are not considered as sums payable for goods or services received. Therefore, Section 43B(h) does not restrict the retention or deduction of security deposits or retention money.
4. **Conversion of Payment into Loan:** - If a payment due to an SME supplier is converted into a loan with the express consent of the supplier, it would no longer be considered a sum payable under Section 43B(h). However, this arrangement should be formalized with proper documentation to ensure clarity and compliance with both tax and contractual obligations.
In summary, Section 43B(h) applies to sums payable to SME suppliers as defined under the MSME Act, regardless of their Udyog Aadhaar registration status. Payments withheld as security deposits or retention money are not covered by Section 43B(h), and converting payments into loans with supplier consent can remove them from the scope of Section 43B(h). It's advisable to consult with a tax advisor or legal expert for specific cases to ensure compliance with tax laws and regulations.
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