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Section 23: Interest not to be allowed as income-tax deduction

Micro, Small and Medium Enterprises Development Act, 2006 • Official Statutory Text & Practice Guide

MSME Law
3x Compound Interest
MSEFC Facilitation Council
Act 27 of 2006
Section 22 All 32 Sections of MSMED Act Section 24
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Buyer Sec 2

Legal Commentary & Landmark Judgments: Section 23

Section 23 of the MSMED Act prohibits any buyer from claiming interest paid or payable under the Act as an allowable business expenditure or tax deduction under the Income-tax Act, 1961.

  • Core Legal Standard: To reinforce the deterrent character of Section 16 compound interest, Section 23 creates an absolute tax bar: notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest paid or payable by a buyer in terms of the MSMED Act shall not be allowed as a deduction in computing taxable business income.
  • Operational Mechanism: This disallowance ensures that defaulting buyers bear the full economic burden of late payment penalties without shifting any part of the financial pain to the public exchequer via tax deductions.
Key Landmark Precedents:
  • Modern Industries v. SAIL (2010) 5 SCC 44: The Supreme Court noted that the non-deductibility of interest under Section 23 underlines the penal and deterrent nature of Chapter V, ensuring that corporate buyers cannot neutralize their defaults through tax shields.
Legal Commentary:

Section 23 significantly increases the effective cost of capital for defaulting corporate buyers. Because interest paid under Section 16 cannot be expensed against revenue, the after-tax impact of the compound interest penalty is extraordinarily severe, providing a powerful corporate governance incentive to prioritize MSME payables.

Section 22 All 32 Sections of MSMED Act Section 24