The Income-tax Act allows the deduction of expenditure according to thesystem of accounting followed by the assessee. Where the assessee followsa cash system of accounting, the deduction should be allowed on anactual payment basis. In the case of a mercantile system of accounting, thededuction is allowed on an accrual basis.
However, Section 43B of the Income-tax Act, 1961 (IT Act) provides a list ofseveral expenses which are allowed as a deduction on a payment basis.Thus, even if an assessee follows the mercantile method of accounting,deduction of the specified expenses shall be allowed if the payment ismade on or before the due date of furnishing the return of income, exceptthe sum payable to micro and small enterprises.
The Finance Act 2023 added one more item to the list in Section 43B byvirtue of clause (h), the deduction of which shall be allowed on a paymentbasis. It provides that any sum payable to a micro or small enterprise(MSEs) beyond the time limit specified in Section 15 of the Micro, Small andMedium Enterprises Development Act 2006 (MSMED Act) shall be allowedas a deduction in the previous year in which such sum is actually paid.
In this article, we have answered the frequently asked questions on Section43B(h) and explored the challenges it presents for businesses seeking tomaintain smooth and compliant payment practices with MSEs.