TaxUpdate Alert for Tax Professionals & Businesses 43B(h)

#TaxUpdate Alert for Tax Professionals & Businesses 43B(h)!

In a significant developmentIn a significant development, the Central Board of Direct Taxes (CBDT) has amended the Form 3CD to incorporate a reporting requirement for deductions under Section 43B(h) of the Income Tax Act. This adjustment comes through CORRIGENDA Notification No. 34/2024, dated March 19, 2024, which corrects an error identified in the earlier Notification No. 27/2024.

Originally, Notification No. 27/2024 linked the reporting of deductions under Section 43B(h) to Clause 26, suggesting that the deduction of expenses was allowable if paid by the due date as prescribed in general terms. However, this linkage was incorrect for the specifics of Section 43B(h), which deals with certain payments to Micro, Small, and Medium Enterprises (MSMEs) under the MSME Development Act. For such payments, the deduction is allowed if the payment is made by the due date as per the MSME Act; and if not, the deduction is then allowed in the year in which the payment is actually made.

Recognizing the error, the CBDT through CORRIGENDA Notification No. 34/2024, revised the directive to properly align the reporting of deductions under Section 43B(h) with Clause 22 of the Form 3CD. This amendment now accurately reflects that the deductions related to MSME payments are to be reported under the correct clause, ensuring compliance with the nuanced requirements of the MSME Act.

However, an oversight remains in addressing the reporting mechanism for cases where the due payments to MSMEs are made in the subsequent year, thereby becoming an allowed expenditure for that next year. The Notification corrects the clause under which these deductions should be reported but does not introduce a new disclosure system for tracking payments made in the subsequent years to MSMEs, thus leaving a gap in the reporting framework within Form 3CD.

This development highlights the CBDT’s responsiveness to rectifying errors in its notifications and its efforts to ensure that the tax reporting requirements are clear and accurately reflect the intent of the tax provisions. However, the absence of a disclosure mechanism for subsequent year payments to MSMEs indicates a need for further clarification or amendment to fully address the reporting requirements for these deductions​​​​, the Central Board of Direct Taxes (CBDT) has amended the Form 3CD to incorporate a reporting requirement for deductions under Section 43B(h) of the Income Tax Act. This adjustment comes through CORRIGENDA Notification No. 34/2024, dated March 19, 2024, which corrects an error identified in the earlier Notification No. 27/2024.

Originally, Notification No. 27/2024 linked the reporting of deductions under Section 43B(h) to Clause 26, suggesting that the deduction of expenses was allowable if paid by the due date as prescribed in general terms. However, this linkage was incorrect for the specifics of Section 43B(h), which deals with certain payments to Micro, Small, and Medium Enterprises (MSMEs) under the MSME Development Act. For such payments, the deduction is allowed if the payment is made by the due date as per the MSME Act; and if not, the deduction is then allowed in the year in which the payment is actually made.

Recognizing the error, the CBDT through CORRIGENDA Notification No. 34/2024, revised the directive to properly align the reporting of deductions under Section 43B(h) with Clause 22 of the Form 3CD. This amendment now accurately reflects that the deductions related to MSME payments are to be reported under the correct clause, ensuring compliance with the nuanced requirements of the MSME Act.

However, an oversight remains in addressing the reporting mechanism for cases where the due payments to MSMEs are made in the subsequent year, thereby becoming an allowed expenditure for that next year. The Notification corrects the clause under which these deductions should be reported but does not introduce a new disclosure system for tracking payments made in the subsequent years to MSMEs, thus leaving a gap in the reporting framework within Form 3CD.

This development highlights the CBDT’s responsiveness to rectifying errors in its notifications and its efforts to ensure that the tax reporting requirements are clear and accurately reflect the intent of the tax provisions. However, the absence of a disclosure mechanism for subsequent year payments to MSMEs indicates a need for further clarification or amendment to fully address the reporting requirements for these deductions​​.

The screenshots of the relevant notifications are attached herewith

The snapshot of the rectified notification

The snapshot of earlier notification