Deduction towards interest to MSME  : Caution by the Tax Auditor

1. It may be noted that interest paid or payable to MSME units will have to be disallowed in view of section 23 of the MSMED Act. Though section 23 pertains to MSMED Act, it overrides the provisions of Income Tax Act, 1961.

2. Let us know about the provisions of the MEME Act which is highly relevant in the above context and impact the provision of Income Tax Act as well:

   
   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

3. It may be noted that while computing income under the head ‘Profits and gains of business or profession’, assessee has to disclose the amount of interest payable to MSME in the accounts.

4. It may be noted that the tax auditor is also under a duty to report the amount of Interest paid or payable to MSME. If the assessee does not compute and claim the same as expenditure, the liability is casted on the tax auditor to disclose this fact in the audit report.

5. In short, where a claim is made then it has to be disallowed and the relevant details are also required to be furnished in Form 3CD.

6. Who is MSME:
   Recently, the definition of MSME has been changed. The recent changes in investment and turnover limits specified for MSME units is as under:

   a) For micro units, the investment limit is Rs. 1 crore and turnover limit is Rs. 5 crores.

   b) For small units, it is Rs. 10 crores for investment and Rs. 50 crores for turnover and

   c) For medium enterprises, it is Rs. 50 crores for investment and the turnover limit Rs. 250 crores.

It is worthwhile here to mention that the non-reporting or erroneous reporting make the tax auditor also liable for penalty u/s 271J which is prescribed at Rs. 10,000/-.