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CA Intermediate · Taxation · Profits and Gains of Business or Profession

Kaveri Engineering, a firm following the mercantile system, bought components worth ₹6,00,000 from a registered micro enterprise on 1 January 2027, under a written agreement allowing 45 days of credit. The full amount was debited to purchases in tax year 2026-27. It paid ₹2,00,000 on 20 February 2027 and the balance of ₹4,00,000 on 10 April 2027. What amount must be added back to its business income for tax year 2026-27 on account of the rule on delayed payments to micro and small enterprises?

₹4,00,000 must be added back. The 45-day credit period expired on 15 February 2027, so unpaid dues to the micro enterprise are deductible only when paid. ₹2,00,000 was paid within the tax year and is allowed, while the ₹4,00,000 paid in April 2027 is deductible in the next tax year.

  1. A₹6,00,000
  2. B₹2,00,000
  3. C₹4,00,000Correct
  4. DNil

Explanation

Amounts owed to a micro or small enterprise beyond the permitted period (here 45 days, ending 15 February 2027) are deductible only in the year of actual payment. The ₹2,00,000 paid on 20 February 2027 was paid within the tax year, so it stays allowed. The ₹4,00,000 was still unpaid on 31 March 2027, so it is added back and allowed in tax year 2027-28. Adding back ₹6,00,000 wrongly ignores the payment made during the year.

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