This clause was inserted by the Central Board of Direct Taxes through its Notification No. 36/2009 dated 13-4-2009, in the Form No.3CD in Appendix II of the Income-tax Rules, 1962.
Clause 22 of Form-3CD : Interest Paid to MSME Creditors
The tax auditor is required to state the amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006.
The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) is an Act to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto.
Section 23 of the MSME Act lays down that an interest payable or paid by the buyer, under or in accordance with the provisions of this Act, shall not for the purposes of the computation of income under the Income-tax Act,1961 be allowed as a deduction.
The inadmissible interest has to be determined on the basis of the provisions of the MSME Act. Section 16 of the MSME Act provides for the date from which and the rate at which the interest is payable. Accordingly, where a buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed date or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
Provisions of the MSME Act, 2006 are reproduced for your reference –
Section 15 of the MSME Act states that where the supplier supplies goods or renders any services to any buyer, then the buyer shall make payment on or before the date mentioned in the agreement and, if there is no agreement, then before the appointed date.
The proviso to this Section states that the period of credit given by the seller shall not exceed 45 days from the day of acceptance or from the date of deemed acceptance. To understand the provision of this section, one must take note of the following definitions:
“Supplier” means a micro or small enterprise, which has filed a memorandum with the specified authority and has obtained the Unique Identification Number (UIN) for MSMEs.
“Buyer” means any person who buys any goods or receives any services from the suppliers for a consideration.
“Appointed date” means the day following immediately after the expiry of the period of fifteen days(15 Days) from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Explanation—For the purposes of this clause,—
(i) “the day of acceptance” means,—
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;
(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding 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;
Therefore, Section 15 of the Act clearly states that the payment to the suppliers shall be made within the date specified in the agreement, and in case there is no agreement then before the appointed date.
Conclusion – Maximum period that is allowed under the Act is a period of 45 days from the date of delivery of goods/services.
On combined reading of the above provision one can conclude that –
If no time limit is agreed between the parties -15th day is to be considered as due date for payment and interest is to be charge from 16th day.
If time limit is agreed between the parties and it lies between 15 to 45 days – Days as prescribed in the agreement is to be considered as due date of payment and interest is to be charged form the day succeeding such date
If days as prescribed in the agreement are more than 45 days – 45 th day is to considered as due date of payment and interest is to be charged from 46th day.
Further, as per Section 16 of the Act, if a buyer fails to make the payment within the stipulated date, it will be liable to pay compound interest with monthly rests on the outstanding amount additionally. The interest shall be calculated from the appointed date at three times of the bank rate notified by the RBI. Interest calculation along with history of bank rates are mentioned in our previous Articles (Link attached at the end).
The government has also launched an online delayed payment monitoring system called the MSME Samadhaan the ease of filing an application under the MSEFC. Any MSME, having a valid Udyog Aadhaar Memorandum (UAM) can make an application via this portal. After an application is made by the MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of the due amount along with the interest.
Role of Tax Auditor relating to above clause –
There can be two instances i.e Auditor issuing From 3CA/Auditor issuing Form 3CB. The responsibilities of both the Auditors defer while reporting under this clause.
Form 3CA – In respect of a taxpayer carrying on a business or profession and who is already mandated to get his accounts audited under any other law (i.e. law other than income tax law) . Tax Auditor has to state that in his opinion and to the best of his information and according to examination of books of accounts including other relevant documents and explanations given to him, the particulars given in the said Form No.3CD and the annexure thereto are true and correct subject to the observations/qualifications, if any. Therefore Tax Auditor is only responsible to check whether the details as provided in Form 3CD agree with the books of A/c’s.
Form 3CB – In respect of a taxpayer carrying on a business or profession but who is not required to get his accounts audited under any other law. Tax Auditor has to state that in his opinion and to the best of his information and according to the explanations given to him, the said accounts, read with notes thereon, if any, give a true and fair view.
If interest as required in the Act is not provided by the Auditee – There is no liability on the Tax Auditor as the same is not provided in books of A/c , the question of disallowance & reporting under this clause does not exist. But if the Auditor has to issue Form 3CB reporting responsibility changes from providing that “particulars given in 3CD are true and correct” to “Financial Statements give a true and fair view”. Therefore in such cases the Auditor has to issue qualification in his report by stating the amount of default and interest thereon. And under Clause 22 the amount of disallowance can be shown as NIL as the same is not provided in books of A/c’s.
Auditor shall take the following steps –
(a)The auditor should seek information regarding status of the enterprise i.e whether the same is covered under the Micro, Small and Medium Enterprises Development Act, 2006. Where the information is available and has been disclosed the same should be reported as such in Form No. 3CD. Where the information is not available the auditor should also mention the same in the Form No 3CD
(b) Since Schedule III and Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006 requires disclosure of information, the tax auditor should cross check the disclosure made in the financial statements.
(c) Obtain a full list of suppliers of the assessee which fall within the purview of the definition of “Supplier” under section 2(n) of the Micro, Small and Medium Enterprises Development Act, 2006. It is the responsibility of the auditee to classify and identify those suppliers who are covered by this Act
(d) Review the list so obtained
(e) Verify from the books of account whether any interest payable or paid to the buyer in terms of section 16 of the MSME Act has been debited or provided for in the books of account
(f) Verify the interest payable or paid as mentioned above on test check basis
(g) Verify the additional information provided by the auditee relating to interest under section 16 in his financial statement
(h) If on test check basis, the auditor is satisfied, then the amount so debited to the profit and loss account should be reported under this Clause
Other questions that may arise related to above provisions are –
Whether TDS is required to be deducted on interest on delay payment to MSME?
Whether Buyer has to charge GST on such amount as the same is not covered in exemption list of GST?
All such questions are answered in our other articles related to MSME –