Supreme Court Reject MSME’s Plea

Supreme Court declined to hear the MSME’s plea against the new Income Tax provision. However, the apex court granted the MSMEs leave to pursue their case in the High Court.

Under Section 43B(h) of the Income Tax Act 1961, buyers purchasing goods from any of the 36 MSMEs are required to settle the outstanding amount within 45 days.

To ensure timely payments to micro, small and medium enterprises (MSMEs), a new regulation was implemented on April 1. It requires companies to settle their dues to MSMEs within 45 days. Non-compliance will lead to a tax liability on the overdue amount. More than 40,000 small businesses, including 12,000 in Gujarat, have cancelled their registration and approached the Supreme Court with an appeal to remove the regulation, according to report by CNBC Awaaz.

The Finance Act 2023 introduced an amendment to the Income Tax Act by adding clause (h) to Section 43B. This clause says that payments owed to MSMEs, not resolved within 45 days, will not qualify for tax deductions until the payment is made. The aim is to motivate larger entities to prioritise their settlements with MSME counterparts, thereby promoting a more robust economic environment for these smaller businesses.

 “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 The petition is dismissed as withdrawn with liberty aforesaid,” a three-judge bench comprising Chief Justice D. Y. Chandrachud, J B Pardiwala, and Manoj Mishra said in an order.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.

 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.