INCOME TAX

INSTRUCTION NO. 12/2006

 Dated: December 14, 2006

Subject: Provisions of Micro, Small and Medium Enterprises Development Act, 2006 - Interest not to be allowed as deduction from income.

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMEDA, 2006) which provides for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises has come into force from 2nd October, 2006. The provisions of Sections 22 and 23 of the said Act have a bearing on the assessment of 'buyers' under the Income Tax Act, 1961. Here, the term 'buyer' means a person who buys any goods or receives any services from a 'supplier' for a consideration.

2. Section 23 of MSMEDA, 2006 lays down that the amount of interest payable or paid by any buyer under or in accordance with the provisions of this Act shall not be allowed as deduction in the computation of income. Section 22 of the MSMEDA, 2006, inter alia, requires disclosure of the principal and interest due thereon separately in the annual statement of accounts. This enables the assessing officers to ascertain correct amount of disallowance on account of interest payable or paid by the buyer.

3. The relevant sections of the aforementioned Act are reproduced in the Annexure for convenience of reference.

4. The above may be brought to the notice of all assessing officers in your charge for effective implementation.

(Renu Jauhri)
Director (ITA-II)

ANNEXURE

Relevant provisions of the Micro, Small and Medium Enterprises Development Act, 2006.

" Section 22: 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, alongwith 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: 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."

2. The definition of a supplier under section 2 of the above mentioned Act is also reproduced below:-

2(n): "supplier" means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,-

(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956;

(ii) the Small Industries Development Corporation of a State or a Union Territory, by whatever name called, being a company registered under the Companies Act, 1956;

(iii) any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises."

3. Section 7(1) of the Act defines micro and small enterprises.

A "micro enterprise" means any class or classes of enterprises, whether proprietorship, HUF, Association of persons, co-operative society, partnership firm, company or undertaking, by whatever name called, if its investment in plant and machinery does not exceed twenty five lakh rupees if it is engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951. However, if the enterprise is engaged in providing or rendering of services, the investment in its equipment should not exceed ten lakh rupees.

A "small enterprise" - the definition of "small enterprise" is similar to that of a "micro enterprise" except that the amount of investments in case of a manufacturing enterprise is more than rupees twenty lakh but does not exceed rupees five crore, and in a case of service enterprise it is more than rupees ten lakh but does not exceed rupees two crore.