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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

Ms. Kavya Rao, a trader, bought goods worth Rs 5,00,000 from a micro enterprise and paid the price after the time limit specified in section 15 of the MSMED Act, 2006, but before the end of the tax year in which it became due. For the Income-tax Act, 2025 which statement is correct regarding the benefit of section 37(3) for this sum?

The sum is deductible only in the tax year it is actually paid. Section 37(2)(g) covers dues to micro or small enterprises beyond the statutory time limit, and section 37(3) expressly excludes clause (g) from the benefit of payment up to the return due date.

  1. AThe sum is deductible only on actual payment, and section 37(3) extension for later payment up to the return due date does not apply to this sumCorrect
  2. BThe sum is deductible in the year liability was incurred if paid before the return due date under section 263(1)
  3. CThe sum is never deductible as it breached the MSMED time limit
  4. DThe sum is deductible on accrual regardless of payment under the mercantile system

Explanation

Section 37(2)(g) covers amounts payable to a micro or small enterprise beyond the section 15 time limit. Section 37(3) extends relief for payments up to the return due date for the other items in sub-section (2) but expressly excepts clause (g). Hence deduction only in the year of actual payment, without the extension.

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