2009 (10) TMI 35 - HC - Income Tax

Payment of Luxury Tax Applicability of provisions of section 43B deferral scheme of incentive - ITAT held that circular No.496 and 674 issued by the Central Board of Direct Taxes were applicable to the luxury tax in relation to the provisions of Section 43B of the Income Tax Act 1961 whereas the said circulars cover the sales tax only and do not have mention of luxury tax held that - The circulars issued by the CBDT relate to the manner in which Section 43B of the Act has to be interpreted. This interpretation has to be consistent for every tax deferral scheme and the interpretation cannot change from Act to Act. The CBDT has not granted any exemptions from the provisions of Section 43B but has held that if its instructions are complied with then it will be deemed that the requirement of Section 43B has been met. This will be applicable across the Board to all Acts and cannot be limited only to the Sales Tax Acts. - However the assessee must produce before the Assessing Officer the requisite certificates showing that it is covered under the deferral Scheme

Issues:
Interpretation of Circulars No.496 and 674 issued by the Central Board of Direct Taxes in relation to luxury tax deferral scheme under Section 43B of the Income Tax Act, 1961.

Analysis:
The case involved a dispute regarding the applicability of Circulars No.496 and 674 issued by the Central Board of Direct Taxes (CBDT) to the luxury tax deferral scheme under Section 43B of the Income Tax Act, 1961. The appellant, a hotel company, sought to benefit from the deferred payment of luxury tax/sales tax for a period of seven years as permitted by the State of Himachal Pradesh to promote the hotel industry. The Assessing Officer initially rejected the plea of the appellant, stating that the necessary certificates proving eligibility for the luxury tax deferral scheme were not provided.

The appellant appealed, and the Commissioner, Income Tax (Appeals) ruled in favor of the appellant based on Circular No.496. The Income Tax Appellate Tribunal also upheld this decision. The revenue, represented by an advocate, argued that Circulars No.496 and 674 specifically referenced the Sales Tax Act and did not mention luxury tax, thus contending that the luxury tax deferral scheme was not covered. The advocate relied on Section 43B of the Income Tax Act, which mandates that deductions can only be allowed when the tax is actually paid by the assessee.

The court noted that Circulars No.496 and 674 indeed referred to sales tax deferral schemes offered by various states to promote industries in backward areas. The CBDT, in consultation with the Ministry of Law, decided that if state governments amended the Sales Tax Act to treat deferred sales tax as actually paid, it would meet the requirements of Section 43B. However, some states did not make the necessary amendments, leading to Circular No.674, which allowed the conversion of sales tax liability into loans for deduction in the assessment year of conversion.

The court emphasized that Circular No.674 clarified the application of Section 43B and held that revenue must adhere to the circulars issued by the CBDT. It cited judgments from other High Courts supporting the deduction of taxes under deferral schemes in the year they were payable, even if not actually paid. The court concluded that the purpose of deferral schemes, whether under the Sales Tax Act or any other Act, is to encourage industries, and the CBDT's instructions must be consistent across all tax deferral schemes.

The court ruled in favor of the assessee, stating that the circulars applied to luxury tax as well, but emphasized the need for the assessee to provide evidence of eligibility under the deferral scheme to the Assessing Officer. The matter was remitted to the Assessing Officer for further verification. The judgment favored the assessee, disposing of the appeal without costs.

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