Income Tax--Current Issues

Practice Update

V.K. Subramani

DISALLOWANCE OF INTEREST PAID OR PAYABLE TO MSME WHILE COMPUTING INCOME

While computing income under the head 'Profits and gains of business or profession' any amount of interest paid or payable to MSME units will have to be disallowed in view of section 23 of the MSMED Act which overrides the provisions of Income Tax Act, 1961. Every assessee has to disclose the amount of interest payable to MSME units in the annual accounts. Where the assessee does not compute and claim the same as expenditure, the tax auditor may have to disclose this fact in the audit report. Where a claim is made then it has to be disallowed and the relevant details are to be furnished in Form 3CD.

It would be appropriate to note the recent changes in investment and turnover limits specified for MSME units. For micro units, the investment limit is Rs. 1 crore and turnover limit is Rs. 5 crores. For small units, it is Rs. 10 crores for investment and Rs. 50 crores for turnover and for medium enterprises, it is Rs. 50 crores for investment and the turnover limit Rs. 250 crores. The following provisions of the MEME Act are relevant in the context of computing income for the purpose of income tax:

Section 22. Requirement to specify unpaid amount with interest in the annual statement of accounts: Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely -- (i) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year; (ii) the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year; (iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act; (iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and (v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.

Section 23. Interest not to be allowed as deduction from income: Notwithstanding anything contained in the Income Tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income Tax Act, 1961, be allowed as deduction.

Section 24. Overriding effect: The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.