Form 3CD Clause 22 for AY 2026-27: MSME Reporting, Section 43B(h) & 15/45-Day Rule
- shubhamtulsian05
- Aug 21
- 7 min read
For AY 2026-27, Clause 22 of Form 3CD is one of the most data-intensive tax-audit disclosures for businesses that buy goods or services from micro and small enterprises. It is not limited to a year-end creditors list. The current clause separately asks for MSMED Act interest, the total amount required to be paid to micro or small enterprises during the year, and a break-up between amounts paid within the Section 15 time limit and amounts not paid within that time and inadmissible for the previous year.
The compliance risk is higher because Section 43B(h) of the Income-tax Act, 1961 removes the normal return-filing-date relaxation for delayed payments to qualifying micro or small enterprises. For FY 2025-26, this means tax-audit teams need invoice-level vendor classification, acceptance dates, agreed credit terms and payment matching—not merely ledger balances.
What does Form 3CD Clause 22 require for AY 2026-27?
CBDT substituted Clause 22 through Notification No. 23/2025 dated 28 March 2025, effective from 1 April 2025. The revised clause requires reporting of:
the amount of interest inadmissible under Section 23 of the Micro, Small and Medium Enterprises Development Act, 2006;
the total amount required to be paid to a micro or small enterprise, as referred to in Section 15 of the MSMED Act, during the previous year;
out of that amount, the sum paid within the time allowed under Section 15; and
the amount not paid within the Section 15 time limit and inadmissible for the previous year.
The Income Tax Department's current tax-audit reporting material also describes Clause 22 as requiring this MSME payment break-up. See the Department's Items Reportable in the Tax Audit Report.
Section 43B(h): why delayed MSME payments can become a tax disallowance
Section 43B(h) covers a sum payable by an assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act. The provision operates on actual payment. Importantly, the usual Section 43B proviso that can preserve a deduction where payment is made by the due date of the income-tax return expressly does not extend to clause (h).
Accordingly, a qualifying amount that crosses the MSMED Act payment deadline and remains unpaid at the end of FY 2025-26 can be disallowed for AY 2026-27 even if the business intends to settle it before filing the return. The deduction ordinarily shifts to the year of actual payment, subject to the statutory conditions.
The statutory text is available in the Income Tax Department's Section 43B reference.
What is the 15-day / 45-day payment rule under Section 15 of the MSMED Act?
Section 15 of the MSMED Act requires the buyer to pay on or before the date agreed in writing. Where there is no written agreement, payment is required before the 'appointed day'. Even where there is a written agreement, the agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance.
In practical terms, tax-audit teams should not apply a blanket 45-day rule to every MSME invoice. Where there is no qualifying written agreement, the appointed-day mechanism can produce a shorter timeline. Where there is an agreement, the agreed period must be tested and cannot exceed the statutory 45-day ceiling.
The Ministry of MSME publishes the MSMED Act, 2006 and its current delayed-payment guidance through the MSME Samadhaan framework.
Micro and small enterprises—not medium enterprises
Section 43B(h) and the second limb of Clause 22 focus on micro and small enterprises. A vendor merely described internally as an 'MSME' should therefore not be assumed to fall within the disallowance. The vendor's actual classification and registration details must be verified.
The Ministry of MSME's revised classification effective from 1 April 2025 classifies a micro enterprise by investment not exceeding ₹2.5 crore and annual turnover not exceeding ₹10 crore, and a small enterprise by investment not exceeding ₹25 crore and annual turnover not exceeding ₹100 crore. Those classification thresholds matter for FY 2025-26 vendor review.
Clause 22 is wider than a year-end outstanding list
A common error is to extract only sundry creditors outstanding on 31 March 2026. The wording of Clause 22(ii) asks for the total amount required to be paid to qualifying micro or small enterprises during the previous year. Current professional guidance therefore requires a broader payment-population analysis, followed by the Clause 22(iii) split.
For a reliable audit trail, the working paper should start from the full population of purchases/services from identified micro and small enterprises, rather than from only the closing payable balance.
Practical example
Assume a company receives services from a qualifying small enterprise on 10 February 2026. A valid written agreement provides 30 days' credit. The invoice is therefore contractually due within that agreed period, subject to Section 15. If the company pays within the permitted time, the amount falls into the timely-paid bucket for Clause 22. If it crosses the Section 15 deadline and remains unpaid at 31 March 2026, the tax team must evaluate the amount for Section 43B(h) disallowance for AY 2026-27.
The result can change if the acceptance date, written credit terms, supplier classification or payment date is different. That is why invoice-level evidence matters.
What records should businesses prepare before the tax audit?
vendor-wise Udyam Registration Number and classification as micro, small, medium or other;
the effective date of the vendor's registration/classification information used for the review;
nature of supply—goods, services or other category requiring separate analysis;
invoice date and day of acceptance or deemed acceptance;
written agreement and agreed credit period, where applicable;
payment date, bank reference and invoice allocation, including partial payments;
amounts required to be paid during FY 2025-26;
amounts settled within the Section 15 deadline;
amounts crossing the statutory deadline and outstanding at year-end; and
MSMED Act interest, if payable, with separate review under Section 23 of that Act.
Five reconciliations to complete before filing Form 3CD
1. Vendor master vs Udyam evidence
Do not rely only on an ERP flag saying 'MSME'. Reconcile the vendor master to available Udyam evidence and retain the basis on which the enterprise was classified for the relevant transactions.
2. Purchase register vs Clause 22 population
Reconcile total purchases/services from identified micro and small enterprises to the population considered for Clause 22(ii). Document exclusions rather than silently dropping vendors.
3. Invoice due date vs Section 15 deadline
Map acceptance/deemed-acceptance dates and written credit terms. A generic accounts-payable due date in the ERP is not necessarily the statutory due date.
4. Vendor ledger vs bank payments
For part-payments and running accounts, maintain a consistent invoice-allocation methodology and preserve payment references. Incorrect allocation can materially change the overdue amount.
5. Clause 22 vs ITR disallowance schedules
The final Form 3CD reporting should reconcile with the tax computation and the relevant ITR disallowance fields. The Income Tax Department's AY 2026-27 validation rules expressly cross-reference Section 43B(h) amounts to Form 3CD reporting.
Does payment before the income-tax return due date cure Section 43B(h)?
Not in the same way as many other Section 43B items. The statutory proviso that generally permits deduction for specified liabilities paid by the Section 139(1) return due date excludes clause (h). Therefore, the relevant MSMED Act timeline must be respected; merely paying a delayed qualifying MSE invoice before filing the return does not invoke the ordinary Section 43B return-date relief for that year.
Is interest for delayed MSME payment deductible?
Section 23 of the MSMED Act separately provides that interest payable or paid by a buyer under that Act is not allowable as a deduction for income-tax purposes. Clause 22(i) therefore asks for the amount of such inadmissible interest. This is distinct from the principal-payment disallowance analysis under Section 43B(h).
AY 2026-27 transition point: the old Act still governs this tax audit
Although the Income Tax Act, 2025 took effect from 1 April 2026, FY 2025-26 / AY 2026-27 remains governed by the Income-tax Act, 1961 for return and tax-audit purposes. The Income Tax Department has expressly clarified that AY 2026-27 filings continue under the old Act and its prescribed forms.
How this fits into the wider AY 2026-27 tax-audit review
Clause 22 should be reviewed together with the broader Form 3CD common-mistakes and reconciliation checklist. Businesses should also confirm whether tax audit applies at all using our AY 2026-27 Section 44AB applicability guide and plan filing around the AY 2026-27 tax-audit due-date guide.
Clause 22 / Section 43B(h) checklist for FY 2025-26
Identify the complete vendor population potentially falling within micro or small enterprise status.
Verify Udyam and classification evidence instead of relying only on vendor declarations or ERP flags.
Capture acceptance/deemed-acceptance dates and written payment terms.
Compute the Section 15 deadline invoice by invoice.
Match payments, including partial payments, to invoices on a documented basis.
Separate timely payments from amounts crossing the MSMED Act deadline.
Reconcile year-end overdue amounts to the Section 43B(h) tax computation.
Identify MSMED Act interest separately for Clause 22(i) and Section 23 disallowance.
Reconcile Clause 22 amounts with the applicable ITR fields before filing.
Retain the working papers and evidence supporting vendor classification and payment-date conclusions.
Frequently asked questions
Does Section 43B(h) apply to medium enterprises?
The statutory clause refers to micro or small enterprises. Medium enterprises should not be automatically included merely because they fall within the broader MSME label.
Can I simply use 45 days for every MSME invoice?
No. Section 15 distinguishes between cases with a written agreement and cases without one, and the agreed period cannot exceed 45 days. The acceptance/deemed-acceptance mechanism must also be considered.
Should Clause 22 be prepared only from 31 March creditors?
No. Clause 22(ii) refers to the total amount required to be paid to qualifying micro or small enterprises during the previous year, followed by the payment-status break-up in Clause 22(iii). A closing-creditors-only approach can miss required data.
Can a payment made in April 2026 remove an FY 2025-26 Section 43B(h) disallowance?
If the qualifying amount had already crossed the Section 15 deadline and was unpaid at 31 March 2026, the ordinary Section 43B return-due-date proviso does not rescue clause (h). The deduction is generally examined in the year of actual payment, subject to the law.
Professional takeaway
For AY 2026-27, Clause 22 is best treated as an accounts-payable data project rather than a last-week tax-audit disclosure. Businesses that classify vendors, capture Udyam evidence, record statutory due dates and reconcile invoice-level payments during the year will be in a much stronger position than businesses attempting to reconstruct the information in September.
PGT & Associates assists businesses with Section 44AB applicability, Form 3CA/3CB/3CD preparation, Form 3CD reconciliations and review of Section 43B(h)/MSME payment data. Where Clause 22 exposure is material, the review should be completed early enough to resolve vendor-master and invoice-allocation issues before the tax-audit filing window closes.
Primary references
Disclaimer
This article is for general professional information and does not constitute tax, audit or legal advice. Section 43B(h), Clause 22 and MSMED Act outcomes depend on the facts, supplier status, contractual terms, acceptance dates, payment records and law applicable to the specific case. Obtain professional advice before taking a filing or tax position.
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