SC rejects plea by Micro and Small businesses challenging 45-day pay rule in Income Tax law

 Micro and Small Enterprises (MSEs) received a setback on Monday as the Supreme Court declined to hear their plea against the new Income Tax provision. However, the apex court granted the MSEs leave to pursue their case in the High Court.

 “Counsel appearing on behalf of the petitioner seeks the permission of the Court to withdraw the petition under Article 32 of the Constitution with liberty to approach the High Court. The petition is dismissed as withdrawn with liberty aforesaid,” a three-judge bench comprising Chief Justice D. Y. Chandrachud, J B Pardiwala, and Manoj Mishra said in an order.

 The petition filed by the Federation of All India Vyapar Mandal, the Federation of Madras Merchants and Manufacturers Association, and the Confederation of West Bengal Trade Associations sought an interim stay and quashed the amendment in the Income Tax Act. The amendment prescribes that companies not making payments to micro and small enterprises during a fiscal year will have to wait for a full year for deductions under the IT Act. The amendment was enacted for assessment year 2024-25 starting April 1, 2024.

 While the Finance Ministry has repeatedly stressed that the amendment is meant to ensure timely payment to micro and small businesses and to help them, the trade bodies disagree. Section 43B of the Income Tax Act allows certain deductions only on actual payment. Further, the proviso allows deduction on an accrual basis if the amount is paid by the due date of furnishing of the return of income. To promote timely payments to micro and small enterprises, the Finance Act 2023 provided that payments made to such enterprises be included within section 43B of the Act.

 Accordingly, a new clause (h) in section 43B of the Act was inserted to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment.

 The trade bodies, in their petitions, argued that the new clause is violative of their fundamental rights. They maintained that it was “colourable legislation”, the principle that implies that the government has enacted this legislation under the guise of having authority even though it does not possess any competent authority. The basis for this is that while seven clauses (a to g) of Section 43B of the IT Act deal with governmental or industrial institutions, clause (h) deals with private businesses. This particular clause infringes upon the fundamental right under Article 19(1)(g) of micro and small enterprises to do business on their own terms by granting the credit of more than 45 days to the buyers, the petitioners argued. 

 It affects the allowability of purchases, which cannot be termed mere expenditure as purchases and sales constitute business, which has been mistaken for an expenditure of business. At the same time, they argued that it disregards the norm that RBI in export and import allows letters of credit for 90 days.

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