Federation
of All India Vyapar Mandal, Federation of Madras Merchants and Manufacturers
Association and Confederation of West Bengal Trade Associations have sought interim stay and finally
quashing the amendment in the Income Tax Act.
The petitions were registered on April
27 and are now awaiting listing. The matter is related to an amendment in the
Income Tax Act which prescribes that companies not making payment to micro and
small enterprises during a fiscal will have to wait for a full year for
deductions under the IT Act. The amendment
came into effect 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 business and to help them, the trade bodies
disagree. Section 43B of the Income Tax Act provides for certain deductions to
be allowed only on actual payment. Further,
the proviso allows deduction on accrual basis if the amount is paid by due date
of furnishing of the return of income. In order to promote timely payments
to micro and small enterprises, Finance Act 2023 provided that payments made to
such enterprises be included within the ambit of 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, have argued that
the new clause is violative of their fundamental rights. It has been
maintained that it is “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 as mere expenditure as
purchases along with sales constitute business which has been mistaken for an
expenditure of business. At the same time, it disregards the norm that RBI
in export and import allows letter of credit for 90 days.
Section 15
of the MSMED Act 2006 mandates payments to micro and small enterprises
within 45 days in case of written agreement and 15 days in case of no-written
agreements. There have been numerous instances, when payment was delayed. In
order to resolve this, while announcing Union Budget for fiscal year 2023-24,
Finance Minister Nirmala Sitharaman said: “To support MSMEs in timely receipt
of payments, I propose to allow
deduction for expenditure incurred on payments made to them only when payment
is actually made.”
An
explanatory memorandum made it clear that this will be applicable for small and
medium enterprises only. Micro
enterprises mean a unit where the investment in plant and machinery or
equipment does not exceed one crore rupees and turnover does not exceed ₹5
crore. For small enterprises, these figures will be ₹10 crore and ₹50 crore,
respectively.