The Assessing Officer has disallowed everything I still owed to Udyam-registered suppliers at the year end under s.43B(h) - which of those suppliers actually count, and when do I get the deduction back?
The client is a private limited company making auto components, assessed at a circle in Pune, turnover Rs 68,40,00,000 for FY 2024-25. Clause 22 of its Form 3CD for AY 2025-26 reports Rs 1,62,00,000 as payable to micro and small enterprises beyond the time limit in s.15 of the MSMED Act at 31 March 2025. A show-cause under s.142(1) dated 14 July 2026 in the s.143(3) proceeding proposes to disallow the whole figure under s.43B(h). The Rs 1,62,00,000 is in fact three different things. Rs 61,50,000 is owed to eleven Udyam-registered enterprises that actually manufacture forgings, fasteners and machined parts. Rs 84,00,000 is owed to six Udyam-registered wholesale traders in steel bar, bearings and consumables, whose certificates carry NIC codes in the trading group. Rs 16,50,000 is owed to two suppliers who took Udyam registration in November 2024, after the goods went in between April and September 2024 but before payment. Four of the manufacturers have signed purchase orders giving 60 days credit; the rest have nothing in writing. Everything was paid between 11 April 2025 and 22 August 2025, before the 31 October 2025 return due date. The company holds the Udyam certificates downloaded on 12 June 2026, the purchase orders, dated goods receipt notes and the ledgers.
Before answering the merits, break the Rs 1,62,00,000 apart supplier by supplier, because clause (h) is applied one supplier at a time and the officer is working from a single aggregate that nobody has tested. For each supplier pull the Udyam certificate and note its date of registration and its NIC activity codes, then build a schedule with the date of acceptance of the goods, the credit period actually agreed in writing, the s.15 due date on the 15 or 45 day rule, and the date of payment. Everything useful in this file is on that schedule, and the auditor's figure almost certainly is not.
Clause (h) disallows a sum payable to a micro or small enterprise beyond the time limit specified in s.15 of the MSMED Act, so the whole question is when the s.15 clock started and how long it ran. It runs from the day of acceptance or deemed acceptance of the goods, not from the invoice date, and it is fifteen days where there is no written agreement and the agreed period where there is one, capped at forty-five days. Two High Courts now state the scheme in those terms - payment by the date agreed in writing, otherwise before the appointed day, which is fifteen days from acceptance or deemed acceptance, with the proviso capping any agreed period at forty-five days from acceptance - and one of them adds what follows on breach, a statutory liability to compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. The 60-day credit in the four purchase orders therefore does not give 60 days; it is read down to 45. Software commonly builds clause 22 off invoice dates and off a flat 45 days for everyone, which overstates the figure in both directions. Section 43B also operates only on a deduction actually claimed, so anything sitting in the balance sheet and never debited to the profit and loss account is outside it altogether.
The memorandum extends the benefit of Udyam registration for wholesale and retail traders to Priority Sector Lending only, and excludes those traders from the delayed-payment provisions of the MSMED Act, s.15 among them. Clause (h) does no work of its own on timing: it borrows the s.15 time limit entirely. If s.15 never reached the supplier, there is no time limit for the payment to be beyond, and the clause has nothing to operate on. This is the largest bucket in the file and the only ground capable of removing it. The library now holds both of the decisions that get cited for and against the trader exclusion, and the first thing to know about them is that neither is a tax case. One is a writ petition against the customs authorities about the date from which a plywood quality control order applies to a micro enterprise; it does not mention s.43B(h). On the memoranda it is against the trader: wholesale and retail trade was excluded from the MSMED Act in 2017 and re-included in 2021 for priority sector lending only, so a trader's registration yields that and nothing beyond it. The other is an order under the Bharatiya Nagarik Suraksha Sanhita quashing a criminal prosecution of a buyer over an unpaid supply; it does not mention s.43B(h) either. On the same memorandum it goes the other way: the instrument is specifically in respect of lending and not for any other purpose, it is not at all applicable to a dispute about goods supplied and unpaid for, and the supplier's remedy is the one ss.15, 17 and 18 provide. Neither judgment refers to the other.
Clause (h) picks up a sum payable to a micro or small enterprise as that expression is defined in the MSMED Act, and the delayed-payment machinery in s.15 is addressed to a supplier as that Act defines one. The Supreme Court has twice fixed the point of time at the supply or the contract rather than at the payment. In 2021 it refused a supplier the benefit of the Act because there was no acceptable material to show that any supply of goods had taken place or any service been rendered after it was registered as a unit. In 2022 it concluded that a party who was not a supplier within s.2(n) on the date of entering into the contract cannot seek any benefit as a supplier under the Act. On that footing the goods delivered between April and September 2024 were delivered by persons who were not then suppliers within the Act, nothing became payable under s.15 in respect of them, and clause (h) has nothing to fasten on. A High Court has approached the same question the same way on facts where the registration post-dated the invoices by years.
It is the reflex of every practitioner who has ever run a s.43B point, and it is wrong for clause (h). The first proviso - the one the Supreme Court held retrospective, and carried forward to employer contributions in a later decision - is switched off for a sum payable to a micro or small enterprise beyond the s.15 time limit. Circular 1 of 2024 says so in terms: the proviso does not apply, and the deduction comes only in the year of actual payment. The payments here fell between 11 April and 22 August 2025, which is before the 31 October 2025 return due date and does nothing at all for AY 2025-26.
The disallowance defers the deduction, it does not take it away. That is what the Supreme Court held about s.43B(f) when it upheld the provision: it does not touch the method of accounting or remove the deduction, it adds a condition of actual payment and moves the benefit to the year of payment. The payments here fall in FY 2025-26, so the deduction arises in AY 2026-27, whose return is still to be filed on today's date - which is the cheapest moment in this file. If it is missed, an additional claim can still be raised before the Commissioner (Appeals) or the Tribunal notwithstanding the bar on fresh claims made otherwise than by a revised return, and a s.264 application cannot be refused merely because the s.139(5) window for a revised return has closed.
Where a buyer misses the s.15 date, s.16 of the MSMED Act fastens compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India from the appointed day - a High Court has stated the liability in exactly those terms and directed the authorities to determine and release it - and s.23 of that Act says in terms that such interest shall not be allowed as a deduction in computing income under the Income-tax Act. The Tribunal has applied s.23 directly: interest paid to a micro, small or medium enterprise on account of delayed payment is not allowable, s.23 having overriding effect, and the charge under s.16 being penal in character rather than ordinary business expenditure. So the two levies travel by different routes: clause (h) defers the principal to the year of payment, while the interest is disallowed outright by the MSMED Act itself and paying it never buys a deduction. One qualification is worth money to a company in minimum alternate tax - a Bench has held that s.23 operates on the computation of income under the normal provisions and not on the computation of book profit under s.115JB, so a provision for interest payable to MSMED suppliers, being an ascertained liability, does not have to be added back. Practically this means the interest belongs below the line in the computation whether or not the supplier has demanded it, and clause 22 of next year's Form 3CD has to be got right so the same aggregate does not arrive again.
Clause (h) was inserted by the Finance Act 2023 with effect from 1 April 2024 and operates prospectively from AY 2024-25. The only order located that reasons about the clause at all decides that: a Tribunal set aside a s.263 order which had founded prejudice to the Revenue on the officer's failure to verify MSME trade payables in AY 2022-23, holding that a provision which did not apply to that year could not make the assessment erroneous, and noting that the payables had in any event been covered by a s.142(1) notice. That disposes of any attempt to reach backwards into an earlier year, by revision or otherwise; it does nothing for AY 2025-26, which is squarely inside the clause. As for the challenge, nothing has been struck down and s.43B(h) is in force. Tax-press reports in 2024 said a traders' federation had moved the Supreme Court and that the challenge was not taken up, but the library records that no order in that matter could be located at all and that the reports do not agree with each other - the entry is marked as a judgment not reachable, which is the weakest status in the collection. Telling a client the clause is under challenge is not advice. What is worth checking is the opposite point: where the Revenue has accepted the law laid down by a High Court in another assessee's case and not challenged it, it cannot take the contrary stand against your client without just cause.
Clause 22 of Form 3CD is exactly the kind of audit-report entry the processing centre adjusts on, and once the aggregate is reported the adjustment is made without anyone looking at the supplier list. The Tribunal order most often produced against that - reading down the audit-report limb of s.143(1)(a) so that no adjustment can be made where the report takes a stand contrary to the law laid down by the courts above - is marked overruled in this library, so it cannot be led. What survives is the narrower and better ground that a summary adjustment is not open on a genuinely debatable issue: a High Court has held that where the question was contentious on the date of the intimation the officer had to take scrutiny under s.143(3) instead of adjusting. The trader question is debatable on any view: the two decisions construing the Office Memorandum go opposite ways, and the fact that neither is a tax case makes the point more debatable rather than less, because it means nothing has been decided about clause (h) at all.
The manufacturer bucket is normally lost for AY 2025-26 and comes back in AY 2026-27 - there is no real argument against clause (h) where the supplier is a micro or small manufacturer and the money went out after the year end. Rebuilding the clock from acceptance dates rather than invoice dates usually recovers something at the assessment stage itself, because the clause 22 working is generally mechanical; a reduction of ten to twenty per cent of the reported figure is common. The trader bucket is genuinely open, but its strength has to be stated accurately: the two decisions on the Office Memorandum go opposite ways, neither of them is an income-tax case, and the point is therefore argued from the instrument with those two constructions produced as constructions and nothing more. Most officers and most Commissioners (Appeals) confirm the disallowance, so the fight lands at the Tribunal. The registration-date point rarely survives the officer, and the pending reference in the Supreme Court is a reason to keep it alive rather than a reason to expect it to be allowed.
