2004 (10) TMI 35 - HC - Income Tax

Deduction of sales tax liability under section 43B - Whether Tribunal was right in law in allowing deduction of sales tax liability under section 43B, though the assessee had collected but not paid the amount of sales tax within the accounting period relevant to the assessment year under reference on the ground that the assessee was authorised to retain the amount for a prescribed period under the Deferred payment scheme of the Excise and Taxation Department of the State Government of Haryana? - The provisions having been made in the Sales Tax Rules framed by the State Government, the assessee was not required to make the payment under the relevant sales tax laws. The Tribunal was thus right in allowing deduction to the assessee - we answer the question of law against the Revenue and in favour of the assessee.

Summary

Issues:
1. Whether the Tribunal was right in allowing deduction of sales tax liability under section 43B of the Income-tax Act, 1961, when the assessee had collected but not paid the sales tax amount within the relevant accounting period due to a deferred payment scheme?
2. Interpretation of the deferred payment scheme by the Sales Tax Department of the Haryana Government.
3. Application of Circular No. 496, dated September 25, 1987, issued by the Central Board of Direct Taxes regarding sales tax deferral schemes.
4. Comparison with a similar case decided by the Gujarat High Court in CIT v. Bhagwati Autocast Ltd. [2003] 261 ITR 481.

Analysis:
1. The case involved the question of whether the Tribunal correctly allowed the deduction of sales tax liability under section 43B of the Income-tax Act, 1961, even though the assessee had collected but not paid the sales tax amount within the relevant accounting period due to a deferred payment scheme. The Tribunal considered the scheme called "Deferred payment scheme" formulated by the Sales Tax Department of the Haryana Government, allowing the assessee to retain the collected sales tax amount for a prescribed period. The Tribunal observed the specific rules and procedures under the scheme, emphasizing that the assessee was eligible under the scheme to retain the tax amount for a certain period before making the payment to the government.

2. The Sales Tax Department of the Haryana Government had introduced the "Deferred payment scheme" to incentivize industrial units in backward areas. The scheme permitted eligible units to collect sales tax and retain the amount for a specified period before making the payment to the government. The scheme aimed to encourage industrial growth by providing flexibility in tax payment timelines, as highlighted in the rules framed under the Haryana General Sales Tax Act, 1973. The Tribunal's decision was based on the provisions and requirements of this scheme, which allowed the assessee to defer the tax payment in accordance with the established procedures.

3. The Central Board of Direct Taxes issued Circular No. 496, dated September 25, 1987, providing clarification on sales tax deferral schemes introduced by various State Governments. The Circular emphasized the application of section 43B of the Income-tax Act, 1961, which required the actual payment of tax for claiming deductions. However, the Circular acknowledged representations from State Governments advocating for excluding cases of deferred sales tax payments from the purview of section 43B to maintain the effectiveness of the deferral schemes. The Circular highlighted the importance of State Governments amending sales tax laws to treat deferred tax payments as actually paid for the purposes of section 43B.

4. The decision in a similar case by the Gujarat High Court in CIT v. Bhagwati Autocast Ltd. [2003] 261 ITR 481 was referenced to support the Tribunal's decision in the present case. The Gujarat High Court's ruling emphasized the significance of State Government resolutions and Circulars issued by the Central Board of Direct Taxes in allowing deductions under section 43B for deferred sales tax payments. The decision highlighted that when the State Government's rules provided for the conversion of sales tax dues into a loan repayable by the assessee in instalments, the tax dues could be treated as actually paid, enabling the assessee to claim the benefit under section 43B. The Tribunal's decision aligning with the Gujarat High Court's interpretation supported the assessee's entitlement to the deduction, ultimately ruling in favor of the assessee against the Revenue.