Section 22 of MSMED : Section 22: Requirement To Specify Unpaid Amount With Interest In The Annual Statement Of Accounts

Explanation using Example

Imagine a manufacturing company, 'XYZ Pvt. Ltd.', that has an annual turnover exceeding the threshold that requires it to have its accounts audited under the Income Tax Act. This company purchases raw materials from various small suppliers, some of which are registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

During the financial year, XYZ Pvt. Ltd. faced some cash flow issues and failed to pay some of its small suppliers within the prescribed period (the 'appointed day' as per the MSMED Act). Now, as per Section 22 of the MSMED Act, when XYZ Pvt. Ltd. prepares its annual financial statements, it needs to include additional information specifically related to its transactions with these small suppliers:

• XYZ Pvt. Ltd. must disclose the total principal amount of the bills outstanding and the interest due on these amounts separately as of the last day of the financial year.
• The company must also report any interest it has actually paid during the year under Section 16 of the MSMED Act, as well as any payments made to suppliers after the due date.
• If XYZ Pvt. Ltd. made any delayed payments without adding interest as per the MSMED Act, it needs to disclose the interest that would have been payable for the delay.
• The financial statements should show any interest that has accumulated due to late payments but has not yet been paid by the end of the financial year.
• Finally, any interest that remains unpaid, which would continue to accrue in the following years, should be disclosed. This is important because, as per Section 23 of the MSMED Act, such unpaid interest is not allowed as a deductible expense for income tax purposes until it is actually paid.

By including this information in its financial statements, XYZ Pvt. Ltd. not only complies with the MSMED Act but also provides transparency about its financial obligations to its small suppliers.