2008 (1) TMI 656 - AT - Income Tax

Deduction under section 43B - Remission or cessation of trading liability - deferral scheme of Government of Maharashtra and the offer given by SICON for the early payment - whether the benefit accrued to the assessee on account of premature payment of sales tax loan is chargeable to tax as a revenue receipt under section 41(1)? - claimed that liability on account of deferral sales tax payment is an unsecured loan and any benefit arising on the settlement of the same by making payment of its present value is not chargeable to tax being in the nature of capital receipt - not obtained any benefit from SICON because it has paid only the present value of the total deferral sales tax payment - HELD THAT - In the instant case, assessee has claimed deduction under section 43B as per Board Circular read with deferral scheme launched by the State Government and this trading receipt was converted into a loan liability. The total amount of loan liability was not at all paid by the assessee as it was settled under the different scheme launched by SICON. Since the entire liability was settled and discharged at a lesser amount, the assessee got certain benefits in terms of money and the difference between the settled amount and total loan liabilities is the income of the assessee of previous year. We do not find any force in the arguments of the assessee that the said difference or the benefit accrued to the assessee is a capital receipt because it was accrued on account of cessation or remission of part of the trading liability which was created on account of conversion of sales tax collected into a loan liability under a deferral scheme. We have also examined the Order of the CIT(A) and we find that CIT(A) has examined the claim of the assessee in the light of provisions of section 41(1) of the Act in a right perspective. Since we do not find any infirmity in the Order of the CIT(A) we confirm the same in this regard. We have also examined the other arguments of the assessee with regard to the disputes between the Government and SICON on settlement of this loan liability and we are of the view that SICON is the agency appointed by the Government to implement the deferral scheme. The offer of the settlement of the loan liability against the payment of a lesser amount was issued by SICON in order to collect the funds and the assessee has accepted that offer and availed the benefit. Nothing has been brought on record to establish that SICON has issued offers without the approval of the Government. SICON was not competent to issue such type of an offer. Nothing was also placed on record to establish that the Government has ever raised a demand of the aforesaid sales tax deferral liability. A dispute is raised between the Government and SICON and the assessee has no concern with it as the offer was issued from SICON a nominated agency of the Government which bounds the Government itself as it is an estoppel against the Government on its acceptance by the assessee. Since the offer was accepted by the assessee and settled the sales tax deferral liability or the loan liability against a lesser payment, no demand from the Government can be raised. More so, in the absence of a specific demand from the Government, it cannot be said that loan liability has not been finally discharged and it is under dispute. In these circumstances, we are of the view that the entire sales tax deferral liability from the loan liability has been discharged on payment of a lesser amount. Whatever difference is there, it would be the income of the assessee for the assessment year in which the liability is discharged. We, therefore, find ourselves in agreement with the Order of the CIT(A) who has rightly adjudicated the issue. We, therefore, confirm the Order of CIT(A) in both the years. In the result, appeals of the assessee are dismissed.

Issues Involved:
1. Whether the benefit accrued to the assessee on account of premature repayment of sales tax loan is chargeable to tax as a revenue receipt under section 41(1) of the Income-tax Act, 1961.
2. The nature of the sales tax deferral as a loan versus a trading receipt.
3. The applicability of section 41(1) of the Income-tax Act to the remission of the sales tax deferral liability.

Issue-wise Detailed Analysis:

1. Whether the benefit accrued to the assessee on account of premature repayment of sales tax loan is chargeable to tax as a revenue receipt under section 41(1) of the Income-tax Act, 1961:

The core issue revolves around whether the benefit accrued to the assessee from the premature repayment of the sales tax loan qualifies as a revenue receipt chargeable to tax under section 41(1) of the Income-tax Act. The assessee, a company operating in a notified backward area, availed incentives from the Government of Maharashtra's 1993 package scheme, which allowed deferment of sales tax payments. The deferred sales tax liability amounted to Rs. 1,79,68,846, payable in five equal installments starting from April 2010. The assessee opted for a premature repayment scheme offered by M/s. SICON Ltd., settling the liability with an immediate one-time payment of Rs. 50,49,288, resulting in a difference of Rs. 1,29,24,558, which the assessee treated as a capital receipt.

During assessment proceedings, the Assessing Officer (AO) rejected the assessee's claim that the benefit was a capital receipt, noting that the sales tax liability had been allowed as a deduction in previous years, thus fulfilling the conditions of section 41(1). The AO concluded that the benefit accrued to the assessee due to the cessation of liability should be treated as income and taxed accordingly.

2. The nature of the sales tax deferral as a loan versus a trading receipt:

The assessee argued that the sales tax deferral was in the nature of an unsecured loan and not a trading receipt, thus not liable to be taxed under section 41(1). However, the CIT(A) and the Tribunal found that the sales tax collected from customers constituted a trading receipt. The Board Circular No. 674 clarified that the conversion of sales tax liability into a loan under the deferral scheme amounted to an actual payment of the statutory liability under section 43B of the Income-tax Act. The Tribunal emphasized that the true nature and quality of the receipt, not its accounting treatment, determine its taxability. The sales tax collected was initially a trading receipt, and its nature did not change due to the deferral scheme or the subsequent remission of liability.

3. The applicability of section 41(1) of the Income-tax Act to the remission of the sales tax deferral liability:

Section 41(1) of the Income-tax Act stipulates that any benefit arising from the remission or cessation of a trading liability, for which a deduction was previously allowed, is deemed to be profits and gains of business or profession and is chargeable to tax. The Tribunal noted that the sales tax collected was initially a trading receipt, and the deferral scheme converted this liability into a loan, which was deemed discharged under section 43B. The subsequent settlement of this loan at a reduced amount resulted in a benefit to the assessee, which falls within the purview of section 41(1). The Tribunal upheld the CIT(A)'s decision, confirming that the difference between the total liability and the settled amount constituted taxable income under section 41(1).

In conclusion, the Tribunal dismissed the assessee's appeals, affirming that the benefit accrued from the premature repayment of the sales tax loan is chargeable to tax as a revenue receipt under section 41(1) of the Income-tax Act. The nature of the sales tax deferral as a trading receipt and the applicability of section 41(1) were key factors in this decision.

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