2014 (11) TMI 272 - HC - Income Tax

Taxability of deferred tax u/s 41(1) or u/s 28(4) Whether the Tribunal was correct in holding that the assessee is not liable to pay tax in respect of the amount which was collected as BST and CST on behalf of Maharashtra State and allowed as a deduction during the assessment year 2003-04 which was waived during the current AY 2004-05 and had been brought to tax u/s 41 Held that - If the assessee obtains, whether in cash or in any other manner in respect of such loss or expenditure or some benefit in respect of trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of the previous year - the assessee should obtain benefit, before it is deemed to be profits and gains of business or profession. As per the scheme he was allowed to retain the sales tax as determined by the competent authority and pay the same 15 years thereafter - The tax collected was deemed to have been paid and, therefore, the tax so collected cannot be construed as income in the hands of the assessee - The tax so retained by the assessee is in the nature of a loan given by the Government as an incentive for setting up the industrial unit in a rural area - The loan had to be repaid after 15 years - Again it is an incentive - However, by a subsequent scheme, a provision was made for premature payment - when the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the said amount equal to the net present value of the deferred tax was determined and on such payment the entire liability to pay tax/loan stood discharged - Again it is not a benefit conferred on an assessee - Sectio n41 (1) of the Act is not attracted - the Tribunal was justified in holding that there is no liability to pay tax thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Deferred tax treatment under Sections 41(1) and 28(4) of the Income Tax Act, 1961.

Analysis:
1. The case involved an appeal by the Revenue against the Tribunal's decision that deferred tax cannot be taxed under Sections 41(1) or 28(4) of the Income Tax Act, 1961. The appellant, a listed Public Company, deducted an amount representing Sales Tax deferral Loan Incentive Scheme from book profit and did not offer it for tax. The Assessing Authority held the amount should be taxable as revenue, even without applying Section 41(1) of the Act, following a Supreme Court decision.

2. The Commissioner of Income tax (Appeals) upheld the Assessing Authority's decision, stating that if treated as revenue, the amount could be taxed over a period until 2017. The Tribunal, considering statutory provisions and precedents, ruled that when the deferred sales tax was deemed paid, there was no remission or benefit to the assessee, and hence, Sections 41(1) and 28(4) could not be applied. The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal.

3. The key question was whether the assessee was liable to pay tax on the amount waived under the Sales Tax Incentive Scheme. The Government of Maharashtra introduced a scheme allowing deferment of taxes, and the assessee opted for premature payment under an incentive scheme, extinguishing the liability. The Revenue argued that the amount partakes the character of income and is taxable under Section 41(1), while the assessee contended that no income accrued due to the scheme's nature.

4. The Tribunal's decision was based on the understanding that the deferred tax was not income but a loan given as an incentive. The premature payment extinguished the liability, and no benefit accrued to the assessee. Therefore, Section 41(1) was not applicable. The Court upheld the Tribunal's decision, stating that the deferred tax retained by the assessee was akin to a loan, and the premature payment discharged the liability, thus not attracting Section 41(1) of the Act.