Facts:
Co. A is a large corporate. Co. B is an mSME registered under the MSMED Act as a small enterprise. Co. A makes purchases goods from Co. B which are capital in nature for Co. A. Co. A capitalises these goods and charges depreciation on the same. The question arises whether the Co. A is covered under 43B(h) of the Act.
Analysis:
The language of section 43B(h) is as follows:
‘(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 Act, 2006 (27 of 2006)‘ (emphasis supplied)
The section starts with ‘any sum payable’. A plain reading of the section indicates that section 43B(h) should be applicable regardless of payments made for capital expenditure or revenue expenditure.
However, the large corporates could take an interpretation that the section was not applicable based on the intent of the section.
Section 43B was introduced by Finance Act, 1983 w.e.f. 1 April 1984. The language in the Memorandum indicates that the section refers only to items impacting the profit and loss account. In this regard, reference could also be made to the decision in CIT v. SB Foundry (185 ITR 555) wherein it has been held that disallowance under this section cannot be made unless the amount is claimed as an expenditure by debiting the profit and loss account. Hence, it can be said that section 43B is applicable only on items which are claimed as deduction in the computation of business income. It should not be applicable to items/goods which have been capitalised by the buyer, in this case Co. A.
Accordingly, an argument could be taken that items which have been capitalised and are not part of the profit and loss account should not be subject to section 43B(h).
A further question which arises is whether depreciation on this capital expenditure will be disallowed. Depreciation, as a general principle, represents the diminution in the value of a capital asset when applied to the purpose of making profit or gain[1]. It is the the wear and tear of an asset used for the purposes of earning revenue. One cannot deduce the correct income without considering the wear and tear which an asset undergoes while being used for generating receipts.
Under the income tax law, depreciation allowance has been defined as a concession granted by the State in the computation of income[2]. Further, Explanation 5 to section 32(1) of the Income tax Act provides that the provisions of depreciation will be allowed whether or not claimed by the assessee.
Given the above, an argument could be taken that section 43B is only applicable to expenses which are allowable as deduction. As depreciation is not an expense, but only an allowance or a concession. Hence, the benefit of section 43B(h) is not applicable to depreciation.
Conclusion:
Given this, any large corporate, in this case Co. A, buying a capital good from an mSME will be saved from the rigours of section 43B(h). Even if it delays the payment to mSME, in this case Co. B there will be no disallowance under section 43B(h) and the problem of non-payment/delayed payment to mSMEs i.e. Co. B, will persist even with the introduction of measures such as section 43B(h).
[1] CIT v. Anand Theatres (244 ITR 192)
[2] Parthas Trust v. CIT [1988] 169 ITR 334 (Ker)(FB)
SME BOTS 