2011 (3) TMI 1041 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - whether this surplus arising out of prepayment of sales tax loan and credited to the profit and loss account constitutes capital receipt or revenue receipt - as per CIT(A) since this amount of Rs.34.35 Crores remission of trading liability has been held as taxable, the Assessing Officer failed to tax - Held that - The view taken by the A.O. is one of the possible view and it is not a case to invoke section 263 of the Act. It is not even revenue s case that Assessing Officer not applied the mind with regard to taxability on account of remission of liability, but all that it is contended before us is Assessing Officer reached incorrect conclusion. However, not only that the Assessing Officer had formed a possible view of the matter but also the view so formed by him in the light of the Special Bench decision in the case of Sulzer India Limited (2010 (11) TMI 728 - ITAT, MUMBAI) which is binding precedent for us reflects correct legal position. In view of the facts and circumstances of the case and also following the aforesaid decisions of Malabar Industrial Co. Ltd. Versus Commissioner of Income-Tax 2000 (2) TMI 10 - SUPREME Court we set aside the order passed by the Commissioner u/s.263 and restore the order of the Assessing Officer. Deferred sales tax liability 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

Summary

Issues Involved:
1. Taxability of surplus arising from the prepayment of sales tax loan.
2. Application of Section 41(1) of the Income Tax Act, 1961.
3. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Surplus Arising from Prepayment of Sales Tax Loan:
The assessee, a company, availed the Sales Tax Deferment Scheme, 1989, of the Government of Rajasthan, which allowed deferred payment of 50% of sales tax liability for up to 11 years. The assessee repaid the loan liability of Rs.106.47 Crores by paying Rs.72.12 Crores, resulting in a surplus of Rs.34.35 Crores, which was credited to the profit and loss account. The Assessing Officer (AO) treated this surplus as a capital receipt and allowed the claim. The Commissioner, however, viewed this surplus as a revenue receipt taxable under Section 41(1) of the Income Tax Act, 1961, arguing that the sales tax collected was a trading receipt, and the remission of this liability should be taxable.

2. Application of Section 41(1) of the Income Tax Act, 1961:
The Commissioner argued that the remission of the loan liability of Rs.34.35 Crores should be taxed under Section 41(1) of the Act, as the sales tax liability, which was converted into a loan, remained a trading liability. The Commissioner held that the remission of such a trading liability is taxable as it provides a benefit to the assessee. The assessee contended that the sales tax loan was not a trading liability but a capital receipt, and thus, Section 41(1) was not applicable. The Tribunal referred to the Special Bench decision in M/s. Sulzer India Limited vs. JCIT, which held that Section 41(1) does not apply to such cases, supporting the assessee's view.

3. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961:
The Commissioner invoked Section 263, arguing that the AO's order was erroneous and prejudicial to the interests of the revenue. The assessee countered that the AO had considered all details and made a reasoned decision, which was one of the possible views supported by legal precedents. The Tribunal referred to the Supreme Court decisions in Malabar Industrial Co. Ltd. vs. CIT and CIT vs. Max India Limited, which clarified that Section 263 can only be invoked if the AO's order is both erroneous and prejudicial to the revenue. The Tribunal concluded that the AO's view was a possible and legally sustainable one, thus setting aside the Commissioner's order under Section 263 and restoring the AO's order.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the surplus from the prepayment of the sales tax loan was correctly treated as a capital receipt by the AO. The invocation of Section 263 by the Commissioner was deemed inappropriate as the AO's order was not erroneous or prejudicial to the interests of the revenue. The Tribunal's decision was pronounced in the open court on 11.3.2011.