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CS Professional · Advanced Direct Tax Laws and Practice · Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

A partnership firm owes Rs 3,00,000 to a micro enterprise supplier for goods purchased in a tax year. The amount remained unpaid beyond the time limit specified in section 15 of the MSMED Act, 2006. The firm paid it after the end of that tax year but before the due date for filing its return for that year. Under the Income-tax Act, 2025 (applicable from the June 2027 session), how is the deduction treated?

The deduction is allowed only in the tax year of actual payment. Sums owed to a micro or small enterprise beyond the MSMED Act time limit are deductible on a payment basis, and the extended relief for payment before the return due date does not apply to them.

  1. AAllowed in the tax year in which the liability was incurred, because payment was made before the return due date
  2. BAllowed only in the tax year in which the amount is actually paidCorrect
  3. CAllowed half in each of the two tax years
  4. DNot allowed in any tax year

Explanation

Section 37(2)(g) makes sums payable to a micro or small enterprise beyond the section 15 time limit deductible only on actual payment. The relief in section 37(3) for payment up to the return due date expressly excludes clause (g). So the deduction is available only in the year of actual payment, not in the earlier year. The first option wrongly applies the section 37(3) relief.

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