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2014 (12) TMI 267 - HC - Income TaxTreatment of deferred sales tax liability on remission - Business income or not Reliance placed upon CBDT Circular No. 496 dated 25th September, 1987 and Circular No. 674 dated 29th December, 1993 - Whether the Tribunal is justified in not upholding the finding of the Income Tax Authorities below that the deferred sales tax liability is chargeable to tax as business income of the assessee u/s. 41(1) on remission thereof and instead treating the same as exempt from tax as capital receipt being remission of loan liability Held that - The Assessee collected the total amount towards the Sales Tax of ₹ 7,52,01,378 and the Tribunal holds that it was collected from 1989-90 to 2001-02 - The Assessee treated this liability as unsecured loans in its books of account - the Revenue has not put up a case that there is no conversion provided under the BST or the table provided for determination of NPV is not applicable to the case of the Assessee - to invoke the provisions of section 41(1) of the Act, the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assesse in CBDT Circular No. 496 dated 25.9.1987 it has been clearly stated that the statutory liability shall be treated to have been discharged for the purposes of Section 43B - the Tribunal rightly concluded that it is incorrect or erroneous to hold that the assessee obtained benefit of reduction of Sales Tax liability under section 43B of the I.T. Act as per Central Board of Direct Taxes' Circular No. 496 dated 25th September, 1987. Relying upon THE COMMISSIONER OF INCOME TAX AND THE DEPUTY COMMISSIONER OF INCOME TAX Versus M/s McDOWELL & CO LTD NOW KNOWN AS UNITED SPIRITS LTD 2014 (11) TMI 272 - KARNATAKA HIGH COURT - the statutory levy being discharged by the Assessee, the amount thereunder was refunded to him - That will definitely be a case where he obtains an amount in respect of the expenditure within the meaning of section 41(1) - It will not be a case of benefit by way of remission/cessation of trading liability - the Incentive to establish a unit or factory in a industrially backward or hilly area is the core of the Sales Tax Deferral Scheme - Some time has to be given to the unit to establish itself before it starts giving corresponding benefit to the state - That opportunity is granted by deferring the remittance of the Sales Tax collected by the unit like the Assessee - the Government Resolution dated 4th May, 1983 evolves a package of incentives to disperse the industries from Bombay Thane Pune belt and to attract them to underdeveloped and developing areas of the State of Maharashtra - To carry this object further and also to achieve the purpose of early remittance of deferred Sales Tax collected by the units availing of the Schemes, the statutory option was incorporated in section 38 by substituting the 4th proviso to subsection 4 of section 38 of the Bombay Sales Tax Act, 1959 a combined reading of the Schemes and this Circular reveals the legislative intent thus, the order of the Tribunal is upheld Decided against revenue.
Issues Involved:
1. Taxability of deferred sales tax liability as business income under section 41(1) of the Income Tax Act. 2. Applicability of CBDT Circulars No. 496 and 674 to the issue of remission/cessation of sales tax liability. Detailed Analysis: 1. Taxability of Deferred Sales Tax Liability as Business Income Under Section 41(1) of the Income Tax Act: The primary issue in this case was whether the deferred sales tax liability, which was settled by the assessee at a net present value (NPV) lower than the total liability, should be taxed as business income under section 41(1) of the Income Tax Act. The assessee argued that the remission of the liability should be treated as a capital receipt and not as a revenue receipt, thus not taxable under section 41(1). The Assessing Officer (AO) had added the amount of Rs. 4,14,87,985 to the income of the assessee, treating it as remission of loan liability and invoking section 41(1). The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the deferred sales tax liability was not converted into a loan and was a trading receipt initially. The Commissioner noted that the sales tax collected was not paid but was deemed to have been paid under section 43B due to the CBDT Circulars. However, the Income Tax Appellate Tribunal (ITAT) Special Bench, after considering the facts and legal provisions, held that the deferred sales tax liability credited to the capital reserve account was an actual receipt and not a remission/cessation of liability. Therefore, no benefit arose to the assessee under section 41(1)(a). The Tribunal emphasized that the liability was settled by paying the NPV as prescribed by the State Government, which does not constitute a remission or cessation of liability. The High Court agreed with the Tribunal's findings, stating that the statutory arrangement under section 38(4) of the Bombay Sales Tax Act did not amount to a remission or cessation of the assessee's liability. The payment of NPV was a permissible exercise and did not confer any benefit to the assessee that could be taxed under section 41(1). 2. Applicability of CBDT Circulars No. 496 and 674 to the Issue of Remission/Cessation of Sales Tax Liability: The second issue was whether the CBDT Circulars No. 496 and 674, which deal with the deemed payment of sales tax under section 43B, were applicable to the case of remission/cessation of sales tax liability. The assessee contended that the deferred sales tax should be treated as paid for the purposes of section 43B, and the remission of the liability should not be taxed as income. The Tribunal noted that the benefit of deduction under section 43B was allowed only for the purpose of that section and not under any other provisions of the Act. The Tribunal held that the first requirement of section 41(1) was not fulfilled as the deduction was allowed under section 43B based on the CBDT Circulars, which created a legal fiction for the deemed payment of sales tax. The High Court upheld the Tribunal's view, stating that the CBDT Circulars contemplated deemed payment of sales tax dues for the purpose of section 43B and not for the purpose of section 41(1). The Court emphasized that the premature payment of NPV did not constitute a remission or cessation of liability under section 41(1). Conclusion: The High Court concluded 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 as business income under section 41(1). The Court also held that the CBDT Circulars No. 496 and 674 were applicable only for the purpose of section 43B and not for determining the taxability of remission/cessation of liability under section 41(1). The appeals were dismissed, and the substantial questions of law were answered in favor of the assessee.
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