2017 (3) TMI 324 - AT - Income Tax

Addition on account of profit on pre-payment of deferred sales tax loan liability - claimed by the assessee as capital receipt - AO rejected the claim of assessee and made addition on the premise that waiver of sales tax liability tantamounts to cessation of liability and hence, taxable u/s. 41(1) - whether the difference between the actual sales tax liability and the liability discharged by the assessee in terms of scheme floated by the State Government is capital receipt or revenue receipt ? - Held that - It is capital receipt and is not taxable u/s. 41(1) of the Act. See Sulzer India Ltd. Vs. Joint CIT 2014 (12) TMI 267 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of profit on pre-payment of deferred sales tax loan liability claimed as capital receipt.

Detailed Analysis:
1. The appeal was against the assessment order for the assessment year 2010-11, where the only issue raised was the addition of a specific amount on account of profit on pre-payment of deferred sales tax loan liability claimed as a capital receipt by the assessee. The Assessing Officer rejected the claim, considering it as taxable under section 41(1) of the Income Tax Act.

2. The assessee argued that the State Government had granted an incentive in the form of deferment of sales tax liability, allowing the prepayment of the deferred amount at a discounted price. The assessee contended that the difference between the total sales tax liability and the net present value paid was a capital receipt not chargeable to tax. The assessee relied on previous decisions by the Special Bench of the Tribunal and the High Court to support their claim.

3. The Department acknowledged that the issue raised was covered by a decision of the Hon'ble Jurisdictional High Court. The Tribunal examined whether the difference between the actual sales tax liability and the liability discharged under the State Government scheme constituted a capital or revenue receipt.

4. Referring to a similar case before the Special Bench, it was established that the difference between the payment made and the future liability was considered a capital receipt and not taxable under section 41(1) of the Act. The High Court concurred with this view, emphasizing that the scheme did not amount to remission or cessation of liability, but rather an early payment based on the correct value of the debt due.

5. Consequently, based on the decision of the Hon'ble Jurisdictional High Court, the Tribunal ruled that the amount in question was a capital receipt and not taxable under section 41(1) of the Act, thereby allowing the appeal of the assessee.

6. The judgment was pronounced on February 1, 2017, in favor of the assessee, highlighting the distinction between capital and revenue receipts in the context of pre-payment of deferred sales tax liability.

Conclusion:
The judgment clarified that the difference between the actual sales tax liability and the prepayment under the State Government scheme was considered a capital receipt and not subject to taxation under section 41(1) of the Income Tax Act. The decision was based on previous rulings and interpretations of the law regarding such transactions.