M/s P Associates, a partnership firm (liable for tax audit under section 44AB) engaged in the business of food processing, provided following…

As per section 43B(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act shall be allowed as deduction only on actual payment. Section 15 of the MSMED Act, 2006 mandates payment of goods or services to supplier, being a micro or small enterprise by the buyer on or before the date agreed upon between them in writing i.e., as per the written agreement, which cannot be more than 45 days from the day of acceptance. M/s P Associates, a partnership firm made purchases from Teal Pvt. Ltd., Cyan Pvt. Ltd. and Rust Pvt. Ltd. Cyan Pvt. Ltd. is a micro enterprise and Rust Pvt. Ltd. is a small enterprise. Cyan Pvt. Ltd. is a micro enterprise as its investment in plant & machinery does not exceed 1crore and turnover does not exceed 5crores. Rust Pvt. Ltd. is a small enterprise, since investment in plant & machinery does not exceed 10crore and turnover does not exceed 50crores. Teal Pvt. Ltd. is not a micro or small enterprise. Hence, provisions of section 43B(h) are not applicable in respect of payment to it. In the present case, payment to Cyan Pvt. Ltd. is to be made by 1.12.2024 but such payment was made on 28.2.2025. Since such amount is actually paid during the P.Y. 2024-25 such sum is eligible for deduction during the P.Y. 2024-25. Payment to Rust Pvt. Ltd. is to be made on 14th April 2025, within 45 days from the date of purchase even if the agreed date was 20.4.2025. However, in the present case, payment was made on 18.4.2025, which is beyond the specified time limit of 45 days. Such payment is not allowed to be deducted during the P.Y. 2024-25 but is allowable on actual payment basis in the P.Y. 2025-26. Since payment to Cyan Pvt. Ltd. and Rust Pvt. Ltd. are made after the specified time limits, M/s P Associates is liable to pay compound interest from the appointed date or from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. Such interest being of penal nature is not allowed to be deducted while computing business income as per section 23 of MSMED Act, 2006. While conducting the audit of P Associates, the following points are to be kept in mind: seek information regarding status of the enterprise i.e., whether the same is covered under the MSMED Act, 2006.Obtain a full list of suppliers of the assessee which fall within the purview of the definition of “Supplier⁹” It is the responsibility of the auditee to correctly classify and identify those suppliers who are covered by this Act.verify from the books of account whether any interest payable or paid to the buyer in terms of section 16 of the MSMED Act has been debited or provided for in the books of account.verify the interest payable or paid as mentioned above on test check basis.verify the additional information provided by the auditee relating to interest under section 16 in his financial statement.verify that only interest paid or payable in terms of section 16 of the MSMED Act which has been debited to the Profit & Loss account is reported under clause 22 (i) . Such interest is not allowable as deduction for the purposes of computation of income under the Income-tax Act, 1961 in terms of section 23 of the MSMED Act.verify the payments which are required to be made to a micro or small enterprise during the relevant previous year and then the amount actually paid or not paid within the time limit specified under section 15 of the MSMED Act and also the amount which are inadmissible as deduction during the relevant previous year.