2010 (11) TMI 728 - AT - Income Tax

Remmission - Deferred sales tax liability - Board Circular No. 496, dated 25-9-1987 - it is not necessary for the court to address itself to the wider issue as to whether the assessee, in paying the net present value of the deferred sale tax liability should be regarded as having obtained any benefit within the meaning of clause (a) of the sub-section (1) of section 41 - in the present case, section 41(1) has been invoked on the alleged ground that the assessee has obtained some benefit in respect of a trading liability by way of remission or cessation thereof - In the present case the assessee has itself been treating the sales tax collected as part of trading and not as capital receipts in its books of account and returns of income filed by it, even during the period when it was eligible for the benefits of sales tax deferral under the Package of Incentive Schemes - aggregate deferral amount under 1983 and 1988 schemes was Rs. 7,52,01,338 (Rs. 3,29,93,863 Rs. 4,22,07,575) There was an amendment made under the Bombay Sales Tax Act, 1959, (the Sales tax Act) by insertion of the third proviso to section 38(4) of the Sales Tax Act, wherein SICOM or the relevant Regional Development Corporation or the District Industries Centre concerned was to convert the deferred sales tax into a loan and thereafter as per 2002 amendment, fourth provision to section 38(4) of the Sales tax Act by which the earlier 4th proviso was substituted, which provides that where the NPV of deferred tax as may be prescribed was paid, the deferred tax was deemed, in public interest, to have been paid Regarding Capital expenditure Vs. Business income - It is a trite law that the nomenclature given by an assessee to a particular account in its books of account is not the sole test to decide the real character of that account - The other requirement of section 41(1) is that the assessee must have subsequently (i) obtained any amount in respect of such loss and expenditure or (ii) obtained any benefit in respect of such trading liabilities by way of remission or cessation thereof - in this situation, it cannot be construed as remission of liability; because the Sate Government has not waived any of the liability as given in the illustrations - such payment of net present value of the future liability cannot be, classify as remission or cessation of the liability so as to attract the provisions of section 41(1)(a) of the Income-tax Act, 1961 Deferred sales tax liability Rs. 4,14,87,984 being the difference between the payment of net present value Rs. 3,37,13,393 against the future liability of Rs. 7,52,01,378 credited by the assessee under the capital reserve account in its books of account is a capital receipt and cannot be termed as remission/cessation of liability and consequently no benefit has arisen to the assessee in terms of section 41(1)(a) of the Income-tax Act, 1961 - Decided in the favour of the assessee

Issues Involved:

1. Whether the remission of deferred sales tax liability is chargeable to tax as business income under section 41(1) of the Income-tax Act, 1961, or is exempt from tax as a capital receipt.

Issue-wise Detailed Analysis:

1. Chargeability of Remission of Deferred Sales Tax Liability under Section 41(1):

The primary issue was whether the remission of deferred sales tax liability should be taxed as business income under section 41(1) of the Income-tax Act, 1961, or be considered a capital receipt exempt from tax.

Arguments by the Assessee:
- The assessee argued that the deferred sales tax liability, treated as a loan, was repaid at its Net Present Value (NPV), and the difference between the deferred amount and the NPV should be considered a capital receipt.
- The assessee relied on the CBDT Circulars No. 496 and 674, which treated deferred sales tax under the deferral scheme as actually paid for the purpose of section 43B.
- The assessee cited several judicial precedents, including the Special Bench decision in Reliance Industries Ltd., and argued that the remission of loan liability is not taxable as business income under section 41(1).

Arguments by the Revenue:
- The Revenue contended that the sales tax collected was a trading receipt, and the remission of deferred sales tax liability resulted in a taxable benefit under section 41(1).
- The Revenue argued that the deferred sales tax liability was not converted into a loan, and even if it was, the benefit from the remission of this liability should be taxed as business income.
- It was also argued that the assessee had obtained a deduction under section 43B, and the remission of this liability should be added back to the income under section 41(1).

Tribunal's Findings:
- The Tribunal noted that the sales tax collected by the assessee during the relevant period was treated as a loan liability payable after 12 years in six equal annual installments.
- The Tribunal observed that the assessee repaid the loan at its NPV as determined by SICOM, and there was no remission or cessation of liability by the State Government.
- The Tribunal referred to the provisions of section 41(1) and concluded that the first requirement of section 41(1), i.e., an allowance or deduction made in respect of loss, expenditure, or trading liability, was not fulfilled as the deduction was allowed under section 43B only for the purpose of that section.
- The Tribunal further noted that the second requirement of section 41(1), i.e., obtaining any benefit in respect of such trading liability by way of remission or cessation thereof, was also not fulfilled as the payment of NPV was equivalent to the future value of the deferred amount, and there was no remission or cessation of liability.
- The Tribunal held that the difference between the deferred sales tax liability and its NPV credited to the capital reserve account was a capital receipt and not taxable under section 41(1).

Conclusion:
The Tribunal concluded that the deferred sales tax liability of Rs. 4,14,87,984, being the difference between the payment of NPV of Rs. 3,37,13,393 against the future liability of Rs. 7,52,01,378, credited by the assessee under the capital reserve account, is a capital receipt and cannot be termed as remission or cessation of liability. Consequently, no benefit has arisen to the assessee in terms of section 41(1)(a) of the Income-tax Act, 1961. The modified question was answered in favor of the assessee and against the Revenue.

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