Draft Comments for Sec 43B(h) on Tax Audit Report

This new section 43b(h) requires that payments for goods or services delivered by MSEs be settled within 45 days of acceptance. Businesses that fail to meet this deadline risk losing their ability to claim these payments as tax deductions. The Section 43B(h) was inserted by the Finance Act 2023.

This amendment aims to address the issue of working capital constraint in the MSME market by encouraging prompt payments to micro and small businesses. This change, which takes effect on April 1, 2024, will apply to the assessment year 2024-2025 and any subsequent years.

The newly added clause (h) states that any sum payable by the assessee to a Micro and Small Enterprise after the time limit specified in Section 15 of the MSMED Act shall be allowed as a deduction only in the previous year in which the sum was paid (regardless of the accounting method used).

Hence, in this article, we are presenting draft comments for Sec 43B(h) on the Tax Audit Report.

Comments relating to Form 3CD is to be reported in para 3 of Form 3CA or Para 5 of Form 3CB

Legal Solution No.1

The assessee has relied upon Apex Court Judgement CIT Vs Modipon 400 ITR 1 (2017) and relying on the same, the assessee had netted the payable to MSME with Advances Paid to MSME and shown the net amount in Clause 22 of Form 3CD.

Whereas the amount of Rs. ______ was payable to MSME, in relation to Sec 43B(h) and the amount of Rs.____ is paid in advance to MSME.

And/or

Legal Solution No. 2

The assessee was of the view that since the amount of Rs._____ though was incurred but was not payable as on 31/03/2024 to MSME and as Explanation 2 was only applicable to clause (a) and not to relevant clause (h) to Sec 43B, thus Sec 43B was not attracted to these payables, thus not reported in clause 22 to form 3CD.

Whereas the amount of Rs._____ was shown as creditors in relation to MSME under Sec 43B(h).

OR

Legal Solution No. 3

As the assessee has been maintaining his Books of Accounts on a Cash Basis, thus there were no creditors as on 31/03/2024

And/or

Legal Solution No. 4

The assessee was of the view that since the Stock Records have been maintained on an identification basis thus the goods purchased from the creditors as on 31/03/20324 are still lying in the Stock, thus the expenditure was not incurred, thus Sec 43B(h) was not attracted.

Whereas the amount of Rs.______ was shown as creditors in relation to MSME under Sec 43B(h).

And Where the above Legal Solutions cannot be used, then one can use General Comments based on the Relevant Scenario

Scenario 1: 100% Verified however based on the auditee’s MSME classification and management representations

In the course of our audit, for the purpose of verifying disallowances under section 438(h) of the Income-tax Act, 1961 as per clause 22, we have relied on the MSME classification provided by the auditee and the representations made by the management. We have not independently verified the accuracy of the MSME classification. Consequently, our verification of compliance with section 43B(h) is based on the information and representations provided by the auditee’s management. Our opinion is thus dependent on the correctness of these classifications and representations.

OR

Scenario 2: Absence of necessary records hence unable to verify under section 43B(h)

In the course of our audit, we noted that the auditee does not maintain complete records necessary to verify disallowances under section 43B(h) of the Income-tax Act, 1961. Consequently, we are unable to determine whether all amounts claimed under this section have been correctly accounted for and duly paid within the specified timeframes. This limitation restricts our ability to verify the completeness and accuracy of the compliance with section 43B(h) and thereby reporting in Clause 22. As such, our report is qualified to this extent.

OR

Scenario 3: Verification on a Test check basis and based on Representation received from the Client regarding MSME Classification (This Scenario is Not recommended by CA NITIN KANWAR as in his opinion we have to comment on the truth and correctness of Form 3CD)

In the course of our audit, for the purpose of verifying disallowances under section 43B(h) of the Income-tax Act, 1961 as per clause 22, we have conducted verification on a test check basis. We have relied on the MSME classification provided by the auditee and the representations made by the management. We have not independently verified the accuracy of the MSME classification. Consequently, our verification of compliance with section 43B(h) is based on the information and representations provided by the auditee’s management, and our opinion is formed based on the selected samples reviewed. Our opinion is thus dependent on the correctness of these classifications, representations, and the sample’s adequacy. Due to these limitations, the amount of disallowance mentioned in clause za may not be accurate or complete.

Disclaimer: This Article is shared by CA NITIN KANWAR. He can be reached at [email protected].