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TMI Blog2008 (1) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... as benefit obtained by the appellant by way of discounting under section 41(1) of the Act. 3.The appellant prays that it be held that sales tax deferral was in the form of a loan and as such was not a trading receipt liable to be taxed under section 41(1) of the Act. 4.Without prejudice to the above, the appellant prays that it be held that no benefit had accrued to it on account of remission in the sales tax deferral liability." 2. Though the assessee has raised various grounds of appeal, but, they all relate to an issue whether the benefit accrued to the assessee on account of premature payment of sales tax loan is chargeable to tax as a revenue receipt under section 41(1) of the Income-tax Act. 3. The facts in nut shell borne out from the record are that the assessee is a company and has set up its unit at District Raigad which is notified backward area, thus has become eligible for incentives as per schemes announced by the Government of Maharashtra in 1993. The incentives were in the form of deferment of payment of sales tax in terms of package scheme of incentives 1993 of the Government of Maharashtra. In terms of this scheme, the sales tax liability of the assessee up t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt, cannot be accepted. The Assessing Officer further noticed that sales tax liability was allowed as deduction in financial years 1998-99 and 1999-2000. Therefore, the first condition of section 41(1) are met in this case. The Assessing Officer further held that since assessee is now liable to pay only an amount of Rs. 50,40,288 as against Rs. 1,79,68,846, it obtained benefit of Rs. 1,29,24,558 Thus, the second condition of section 41(1) is also met. The Assessing Officer accordingly held that since there is cessation of liability, the benefit accrued to the assessee is to be treated as income and chargeable to tax. 6. The assessee preferred an appeal before the CIT(A) and reiterated its contention as raised before the Assessing Officer. Besides, it was con-tended that since the sales tax deferral loan is not nature of the trading receipt, it does not become trading receipt by subsequent process of remission. The transaction between the assessee and the M/s. SICON Ltd. was purely in the nature of financial arrangement, thereby, the present value of loans liability was determined and discounted at the prevailing market rate became payable by the assessee to M/s. SICON Ltd. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the instant case, since the liability has not been fully discharged and the sales tax department has raised a claim, the difference between the deferral tax liability and the payment to M/s. SICON Ltd. cannot be considered to the benefit accrued to the assessee and is chargeable to tax under section 41(1) of the Income-tax Act. 9. The learned Departmental Representative on the other hand has placed a reliance upon the Order of the CIT(A). The learned Departmental Representative, further invited our attention that the sales tax liability is a trading liability and is chargeable to tax as held in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC). Moreover, the entries made in the books of account are not relevant to determine the character of the receipt. Placing sales tax collected in a separate account, does not exonerate the assessee from the liability of the sales tax to be paid in the year of collection if the assessee does not avail the benefit of sales tax deferral scheme. Having availed the benefit of sales tax deferral scheme, the sales tax liability was considered to have been paid in the relevant assessment year under section 43B of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 496, dated 25-9-1987 (Clarification 2), and it was decided that, where the State Governments make an amendment in the Sales Tax Act to the effect that the sales tax deferred under the scheme shall be treated as actually paid the statutory liability shall be treated as discharged for the purpose of section 43B. 2.It has since been brought to the notice of the Board that some State Governments, instead of amending the Sales tax Act, have issued Government Orders notifying schemes under which sales tax is deemed to have been actually collected and disbursed as loans. Such Government Orders also provide that entries shall be made in the Government accounts giving effect to deemed collections by crediting the appropriate receipt-heads relating to sales tax collections and debiting the heads relating to disbursal of loans. It has, therefore, been represented that, as such conversion of the sales tax liability into loans have similar statutory effect as can be achieved through amendments of the Sales Tax Act, the amounts covered under the scheme should be allowed as deduction for the previous year in which the conversion has been permitted by the State Governments. 3.The Board have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect from 2010. The nature of receipt of sales tax collected from the customers, cannot be changed on account of deferral scheme or the circular issued by the Board for allowing deduction under section 43B of the Act. 12. Now the question arise when the assessee has settled the converted loan liability for a lesser amount under a different scheme launched by the State Government through SICON the agency appointed by the Government to implement the sales tax deferral scheme, what would be the nature of receipt/benefit accrued to the assessee on account of lesser payment of total loan liability. The assessee considered it to be the capital receipt not chargeable to tax, whereas, the revenue, treated the same to be revenue receipt and is exigible to tax. In order to decide the nature of receipt or benefit, we have to revert back to the original position as to what would be the nature of liability which accrued to the assessee. Undisputedly, it was the sales tax collected from the customers, but not paid to the sales tax department nor refunded to the customers. As per the judgment of the Apex Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra), the sales tax collected fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such 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 that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b )the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. [Explanation 1.-For the purposes of this sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and it was settled on payment of lesser amount. On payment of the lesser amount, the entire trading liabilities seized to exist. 15. According to the provisions of section 41(1) when an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the first mentioned person, i.e., the original assessee has obtained whether cash or any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of the benefit accruing to him shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which allowance or deduction has been made, is in existence in that year or not. In the instant case, assessee has claimed deduction under section 43B as per Board Circular No. 674 read with deferral scheme launched by the State Government and this trading receipt was converted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of liability up to December, 1999 and also agree to discount any future liability at the rate of 16 per cent discount. To this offer of the appellant, SICON responded by letter dated 17-3-2000 and appellant was required to furnish details of sales tax deferral and year wise payment schedule as finalized by the sales tax department. The requisite information was furnished by the appellant to SICON on 29-3-2000. Thereafter, appellant wrote another letter dated 14-6-2000 bringing to the notice of SICON, the amount of sales tax deferral payable and its present value at the rate of discounting of 11.52 per cent. The amount required to be paid was Rs. 50,44,288 on the total sales tax deferral of Rs. 1,79,68,846. This proposal was accepted by SICON. In view of these facts, the question to be decided in the present case is whether the remission of liability by way of discounting of sales tax deferral is liable to tax under section 41(1) of Income-tax Act or not. 9.As per provisions of section 41(1) of Income-tax Act, where an allowance or deduction has been made in the assessment of any year in respect of loss, expenditure or liability incurred by the assessee and subsequently duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax deferral has been converted into interest free loan by any authority. Under the incentives scheme of Govt. of Maharashtra, issued in 1993 the assessee was entitled to a deferral payment of sales tax of eligible units to be paid after ten years. On going through the advertisement published in Economic Times on 26-5-2000 by SICON (implementing agency) it is clear that Govt. of Maharashtra has formulated a proposal for premature payment of incentives. Even the scheme floated was named as 'Package Scheme of Incentives - Premature payment'. All the correspondence carried on by the appellant and SICON, talks about Sales-tax deferral benefit. In none of the correspondence there is any mentioned of the word 'Interest free loans'. For this purpose reference may be made to the correspondence dated 15-3-2000, 17-3-2000, 29-3-2000, 14-6-2000 between the appellant and SICON. On going through these correspondences, it is clear that what has been discounted is deferral sales tax liability and not discounting of any interest free loan as claimed by the appellant. Since discounting is of deferral sales tax liability any benefit obtained by the appellant by way of discounting is liable to tax und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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