Section 43B(h) MSME & Form 3CD Clause 22: Tax Audit Guide

Section 43B(h) has made MSME vendor review an important part of tax audit and year-end closing. The provision links income-tax deductibility with the payment timelines prescribed under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

For FY 2025-26 / AY 2026-27, tax audit continues under the Income-tax Act, 1961. Therefore, Section 43B(h) and the current Form 3CD reporting requirements remain directly relevant for this audit season.

What does Section 43B(h) do?

Section 43B(h) applies where an otherwise allowable business deduction is payable to a micro or small enterprise and the payment is made beyond the time permitted under Section 15 of the MSMED Act.

If the applicable MSMED payment period is breached, the deduction is generally allowed only in the year of actual payment. The usual Section 43B relief for payment before the income-tax return filing due date does not rescue a payment that has already crossed the Section 15 MSMED timeline.

Current MSME classification from 1 April 2025

The MSME classification limits were revised with effect from 1 April 2025. For current-year review, the applicable limits are:

Category	Investment in Plant & Machinery / Equipment	Annual Turnover	Section 43B(h)
Micro	Not exceeding ₹2.5 crore	Not exceeding ₹10 crore	Applicable, subject to other conditions
Small	Not exceeding ₹25 crore	Not exceeding ₹100 crore	Applicable, subject to other conditions
Medium	Not exceeding ₹125 crore	Not exceeding ₹500 crore	Not covered by Section 43B(h)

Both the investment and turnover criteria need to be considered under the MSME classification framework. Tax audit teams should not continue using the pre-April-2025 limits while reviewing FY 2025-26 vendors.

The 15-day and 45-day payment rule

The payment period comes from Section 15 of the MSMED Act.

• No written agreement: payment should be made before the appointed day, effectively within 15 days from the day of acceptance or deemed acceptance.
• Written agreement: payment should be made by the agreed date, but the agreed credit period cannot exceed 45 days from the day of acceptance or deemed acceptance.

If the buyer raises a written objection regarding acceptance of goods or services within the prescribed 15-day period, the date on which the objection is resolved can affect the acceptance date. This should be supported by actual documentation rather than reconstructed only at tax-audit stage.

Does every Udyam-registered supplier trigger Section 43B(h)?

No. A Udyam number alone should not be treated as the complete test.

Section 43B(h) refers specifically to micro and small enterprises covered by the relevant MSMED delayed-payment framework. Pure wholesale and retail trading activities registered under NIC codes 45, 46 and 47 were permitted Udyam registration for priority-sector-lending purposes, while the delayed-payment protection under Chapter V of the MSMED Act does not apply to such trading activity.

Accordingly, the auditor should review the supplier's Udyam status, enterprise category and nature of activity before concluding that Section 43B(h) applies.

What changed in Form 3CD Clause 22?

Clause 22 was revised for reporting applicable from 1 April 2025. It now requires a more structured MSME payment analysis rather than only one disallowance figure.

Clause 22 currently captures:

1. interest inadmissible under Section 23 of the MSMED Act;
2. the total amount required to be paid to micro or small enterprises referred to in Section 15 of the MSMED Act during the previous year; and
3. out of that amount, the portion paid within the permitted time and the portion not paid within that time and inadmissible for the previous year.

This makes a vendor-wise and invoice-wise working much more useful than a simple year-end list of MSME creditors.

Practical tax-audit working for Clause 22

A useful working paper should capture at least:

• supplier name and Udyam registration number;
• micro / small / medium classification;
• nature of activity, including whether the supplier is engaged in trading;
• invoice date and amount;
• date of acceptance or deemed acceptance, where relevant;
• whether a written payment agreement exists;
• agreed credit period, subject to the 45-day ceiling;
• actual payment date;
• whether payment was within the Section 15 period; and
• amount reportable / inadmissible for the year.

The total working should reconcile with the relevant purchase or expense population and with year-end trade payables. Differences should be explained rather than adjusted through a balancing figure.

Interest under the MSMED Act is a separate issue

Where the buyer fails to pay within the permitted MSMED period, Section 16 provides for compound interest with monthly rests at three times the RBI Bank Rate, subject to the statutory provisions.

Section 23 of the MSMED Act specifically prevents deduction of interest payable or paid under the delayed-payment provisions while computing taxable income. Clause 22 therefore requires separate attention to this interest component as well.

Year-end invoices paid after 31 March

A payment after 31 March is not automatically disallowed merely because it falls in the next financial year.

For example, if a March invoice is paid in April but still within the valid Section 15 payment period, Section 43B(h) should not be applied merely because the bank payment occurred after year-end. The invoice date, acceptance date, agreement and actual statutory due date must be checked.

On the other hand, once the applicable 15/45-day period has been breached, payment before the income-tax return filing due date does not restore the deduction to the earlier year under the normal Section 43B proviso.

Financial statements and tax-audit reporting should reconcile

The MSME working also affects financial statement review. Trade payables, MSME disclosures, subsequent payments and tax-audit reporting should be based on consistent underlying vendor information.

For companies, Schedule III contains specific trade-payable presentation and ageing requirements. For non-corporate entities, the applicable ICAI financial statement guidance should be followed separately; Schedule III should not be described as automatically applicable to every non-corporate entity.

How assureOffice fits into the workflow

assureOffice Financial Builder can help convert Tally data or traditional Excel financials into a structured Balance Sheet, Statement of Profit and Loss and Notes to Accounts, including reviewed Trade Payables presentation.

The Section 43B(h) conclusion and Form 3CD Clause 22 working still require professional review of supplier status, invoice-level payment dates and supporting documents. The software should reduce repetitive financial-statement preparation, not replace the tax auditor's judgement.

Frequently Asked Questions

If a March invoice is paid in April but within the valid 45-day period, is it automatically disallowed?

No. A post-year-end payment is not automatically disallowed. If a valid written agreement exists and the payment is made within the permitted period, not exceeding 45 days from acceptance or deemed acceptance, the Section 15 timeline has not been breached. The actual facts and documentation should be verified.

Can the deduction be claimed if payment is made before the ITR due date but after the MSMED time limit?

Generally no. Section 43B(h) is excluded from the normal return-filing-date relief available for several other Section 43B items. Once the Section 15 payment period is breached, the deduction is generally available in the year of actual payment.

Does Section 43B(h) apply to medium enterprises?

No. The clause refers to amounts payable to micro or small enterprises. Medium enterprises are outside this specific provision.

Does every trader with a Udyam certificate qualify for Section 43B(h)?

No. Udyam registration for wholesale and retail traders was permitted for priority-sector-lending purposes, but the delayed-payment provisions of Chapter V do not extend to pure trading activity in the same manner. The supplier's actual activity should be checked.

What is the most important control for Clause 22?

Maintain a vendor-wise, invoice-wise MSME working throughout the year. Waiting until tax-audit season to identify Udyam status, agreement terms and payment dates creates unnecessary reconciliation work.

Practical takeaway

Section 43B(h) is not simply a “31 March outstanding creditors” test. The correct review requires supplier eligibility, current MSME classification, the Section 15 payment period and actual invoice-level payment timing.

Keep the MSME working invoice-wise, reconcile it with the books, and use the final reviewed balances for both tax audit and financial statement preparation.