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TMI Blog2014 (12) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all fairness to him, he has also invited our attention to the orders passed by a Division Bench of this Court in Income Tax Appeal No. 1777 of 2011, Income Tax Appeal No.2016 of 2011, Income Tax Appeal No. 358 of 2012 and Income Tax Appeal No. 271 of 2012, wherein, according to him, similar question has been admitted. He submits that therefore, the Appeals be admitted. 3) Since Mr. Gupta has referred to the facts in Income Tax Appeal No. 450 of 2013, we would prefer to state them in brief. 4) The Assessee M/s. Sulzer India Ltd. filed return of income for the assessment year 2003-04 on 27th November, 2013 declaring total income at ₹ 10,59,76,986/, claiming deduction under section 80HHC of the I.T. Act in the sum of ₹ 82,48,864/. 5) During the assessment proceedings, the Assessing Officer observed that the Assessee had credited amount of ₹ 4,14,87,985/to the capital reserve contending that the said amount was a remission of loan liability. The Assessee stated that under the Industrial Backward Area Scheme of the Government of Maharashtra, it was entitled to defer the Sales Tax liability for a period of 7 years under the Deferral Scheme of 1983 and for a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, 1961. 8) The Special Bench passed an order on 10th November, 2010 holding therein that the deferred Sales Tax liability of ₹ 4,14,87,985/Page being the difference as noted above and credited by the Assessee under the capital reserve account in its books was an actual receipt and cannot be termed as remission/cessation of liability. Consequently, no benefit has arisen to the Assessee in terms of section 41(1)(a) of the Income Tax Act. Accordingly, the opinion was rendered and the matters were sent back to the regular Bench for disposal in accordance with this opinion. 9) A Miscellaneous Application was filed before the Special Bench, which was dismissed on 3rd August, 2012. 10) In view of the opinion of the Special Bench, the Appeals of the Revenue and that of the Assessee were disposed of by the Tribunal on 7th September, 2012. The issue being answered in favour of the Assessee and against the Revenue in terms of the larger Bench's decision, the Revenue has brought these Appeals under section 260A of the I.T. Act. The substantial questions of law arising from the orders referred to above are formulated at page 8 of the paper book. We proceed to admit th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are attracted only in the event section 43B of the Income Tax Act is applicable. Both Circulars, according to Mr. Gupta, contemplate deemed payment of Sales Tax dues. 13) Mr. Gupta submitted that the provisions of section 38 of the Bombay Sales Tax Act, 1959 (BST) mandate that the amount of tax shall be paid by the Dealer or the person liable therefor, into the Government Treasury, within 30 days from the date of service of notice issued by the Commissioner in respect thereof. Mr. Gupta submits that if payment of Sales Tax collected by the Assessee in this case is made earlier than 7 to 12 years, that will discharge the Assessee of the liability. However, if the payment of lesser amount discharges the Assessee in full, then, the remission is taxable. If that deduction has been granted, that will have to be withdrawn. 14) The submission of Mr. Gupta appears to be that from the total liability of ₹ 7.52 crores, the amount which has been remitted to the Government is not this entire sum but a part thereof. However, it is not in dispute that entire sum of ₹ 7.52 crores is collected. If that is not remitted, then, within the meaning of section 41(1), there is a benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. Finally he relied upon a Judgment of a Division Bench of this court in the case of Solid Containers Ltd. vs. Deputy Commissioner of Income Tax and Anr. reported in (2009) 308 ITR 417 (Bom.). 18) On the other hand, Mr. DasturSenior Counsel appearing on behalf of the Assessee submitted that if the facts and circumstances are taken into consideration, then, these Appeals do not raise any substantial question of law. Mr. Dastur submits that the Schemes of 1983 and 1988 should be perused in their entirety. If the benefit under the Scheme is taken into consideration, then, there was no liability in presenti. The Sales Tax was not payable. There was no option to pay earlier, but later on, such option was given does not mean any benefit accrued to the Assessee. The liability has been ascertained and determined in terms of the rules. The Net Present Value is taken into consideration. Thus, the liability is not wiped out but its present value is ascertained and determined. That has been paid. There was no concession. There is absolutely no settlement negotiated or otherwise. The statutory mode of recognized deferred dues was adopted and hence no benefit is derived by the Assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 incometax as the income of that previous year. Explanation 1 For the purposes of this subsection, the expression loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that subsection by way of writing off such liability in his accounts. Explanation 2 For the purposes of this subsection, successor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question was never debited to P. and L. Account and such question of invoking section 41(1) does not arise. Thus, there was a without prejudice argument. The Commissioner of Income Tax (Appeals), in his order of 19th January, 2007, held that the Assessee was beneficiary of Sales Tax Deferral Scheme of the Government of Maharashtra. It was allowed to defer payment of Sales Tax liability for a period of 7 years and 6 years respectively under the two Schemes. Subsequently, the State Government introduced a Scheme of premature repayment of deferral Sales Tax at some amount, on the payment of which, balance amount was allowed to be remitted. Therefore, against the total liability of ₹ 7,52,01,378/, the Assessee paid a sum of ₹ 3,37,13,393/and the Department allowed him to keep the amount of ₹ 4,14,87,985/. The Assessee did not offer the remitted amount as income and credited the same to the capital reserve account stating that this is a remission of capital receipt. The Assessing Officer held that the Assessee did not furnish any document or order in terms of which the Sales Tax liability was treated as a loan or converted into a loan at any subsequent stage. The As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, not exigible to tax. 26) The commissioner proceeded to hold as under: ..... However, appellant never got this deferred payment of sales tax liability converted into loan as no evidence in this regard has been produced. Appellant's letter dated 8th October, 2002 addressed to M/s. SICOM Limited has already been reproduced above. This is also factually incorrect on the part of appellant to state that the amount of ₹ 7.52 crores was never claimed u/s. 43B. Appellant has claimed this amount in the years of accrual of liability on the basis of CBDT's Circular Nos. 496 and 674 as pointed above. In fact, appellant has made note on nontaxability of this amount, which appears on page 151 of paper book, which was the submission made by appellant before A.O. This note is enclosed as Annexure 2 of this order. In this note at para 3, appellant has stated that although the sales tax collected from the customers was a trading receipt due to the deferral scheme the same is deemed to have been paid to the Government, thereby discharging the liability. It is, therefore, absolutely misleading on the part of appellant to state that amount of ₹ 7,52,01,378/was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l schemes of the State Governments was considered in Board's Circular No. 496, dated 2591987 (Clarification 2), and it was decided that, where the State Government 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 purposes of Section 43B. b. It has since been brought to the notice of the Board that some 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 accounts giving effect to deemed collections by crediting the appropriate receiptheard 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. (emphasis supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal to the amount of tax payable, this loan amount also shall be deemed in the public interest to be payment of sales tax. Therefore, even if it is presumed that deferred sales tax liability was converted into loan, the same would be remission within the ambit of revenue/trading receipt/expenditure and would attract provisions of section 41. There are various other documents which show that appellant, itself, has treated the repayment of deferred sales tax on account of repayment of tax and not as repayment of loan. In this regard, the complete set of documents which show the repayment of this amount are at page nos. 153 to 196 of paper book. A letter dated 08.09.2003 by one, Mr. Mahendra Kulkarni, Deputy Manager of the appellant addressed to Joint Director of Industries is very relevant. .. Then another letter dated 10.02.2003 addressed by the appellant to the Dy. Commissioner of Sales Tax (Adm.) wherein appellant has requested Dy. Commissioner of Sales Tax (Adm.) to issue Certificate of Payment of deferred tax at the Net Present Value . Copy of this letter is also enclosed as Annexure 4 of this order. There are several such letters covering all the payment wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of ₹ 4,14,87,985/has been correctly brought to tax u/s. 41 of the I. T. Act. 27) Thus, the Assessing Officer's order was upheld by dismissing the Appeal. In the meanwhile, what one finds is that there was a Special Bench constituted to resolve the divergence of views of coordinate Benches of the Tribunal. In the case of Deputy Commissioner of Income Tax vs. Sterlite Optical Technologies Ltd. and viceversa in Income Tax Appeal Nos. 7136 and 7177/M/2004 for assessment year 200102, an order was passed by the Tribunal on 8th January, 2008 treating the difference between the deferred Sales Tax and its present value as capital receipt, not chargeable to tax, whereas, in another case, the Special Bench of the Tribunal has referred to in para 2, it was held that the same was chargeable under section 41(1). Then, reference was made to an order passed by this Court in the case of SI group India Ltd. vs. Assistant Commissioner of Income Tax (2010) 326 ITR 117, answering the question subsequently framed and reproduced in para 2 of the Tribunal's order in favour of the Assessee. The requirement spelt out for applicability of section 41(1)(a) has not been fulfilled in the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t made under the Bombay Sales Tax Act, 1959, (the Sales tax Act) by insertion of the third provision to sec. 38(4) of the Sales Tax Act, wherein SICOM or the relevant Regional Development Corporation or the District Industries Centre concerned was to convert the deferred sales tax into a loan and thereafter as per 2002 amendment, fourth proviso to sec. 38(4) of the Sales Tax Act by which the earlier 4th proviso was substituted, which provides that where the NPV of deferred tax as may be prescribed was paid, the deferred tax was deemed, in public interest, to have been paid. We further find that the assessee following the aforesaid amendment under the Bombay Sales Tax Act, 1959 has made repayment of loan of ₹ 3,37,13,393/( ₹ 1,76,02,272/of 1983 scheme + ₹ 1,61,11,121/of 1988 scheme) on 30.12.2002 as per NPV of the deferred tax as prescribed under Circular No. 39T of 2002 of Trade Circular dated 12.12.2002 appearing at Pg. 174186 to the assessee's paper book. The assessee claimed ₹ 4,14,87,985/being the difference between the deferred sales tax ₹ 7,52,01,378/and its Net Present Value amounting to ₹ 3,37,13,393/as capital receipt, credited in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the 4th proviso to sub section 4 of section 38. The Tribunal also refers to the dictionary meaning of the term Net Present Value . On analysis of the definition of the term Net Present Value it is the conclusion of the Tribunal that the positive NPV means a better return and negative NPV means a worse return. 31) In the present case, it is not in dispute that the Assessee collected the total amount towards the Sales Tax of ₹ 7,52,01,378/and in para 76, the Tribunal holds that it was collected from 198990 to 200102. The Assessee treated this liability as unsecured loans in its books of account. After amendment to section 38 of the Bombay Sales Tax Act, a Notification was issued by the State Government on 16th November, 2002 introducing Rule 31D in the Bombay Sales Tax Rules, 1959. That laid down the procedure for determination of NPV. Once the proviso was inserted and the Rules were published, the deferral units can exercise the option and of paying prematurely the Sales Tax. There was a table provided in Rule 31D of the Bombay Sales Tax Rules. The Tribunal extensively referred to this aspect in para 77 of the order under challenge and found that the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by its coordinate Benches. The Tribunal therefore held, when the entire loan amount, which was payable after 12 years in 6 annual/equal installments, was repaid as per NPV prescribed by the State Government and no refund was received by the Assessee, it means, it did not get any benefit in respect of the trading liability by way of remission or cessation thereof. The Tribunal referred to the case of Mahindra and Mahindra Ltd. vs. Commissioner of Income Tax reported in (2003) 261 ITR 501 (Bom.). This is a Judgment of this Court. It also referred to another Judgment of Delhi High Court in the case of Commissioner of Income Tax vs. Tosha International Ltd. reported in (2009) 176 Taxman 187 (Del.). It also referred to a Judgment in the case of SI group India Ltd. (supra) of the Bombay High Court, its Special Bench decision in Reliance Industries reported in (2004) 88 ITD 273 (Mum.) (SB) and other Tribunal decisions and that continues upto para 103 of its order. 34) In paragraph 104, the Tribunal held as under: 104. Having regard to the aforesaid law laid down by the Hon'ble Supreme Court and High Courts, we find that to invoke the provisions of section 41(1) of the Act, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t refers to several representations received from various State Governments and others that cases of deferred Sales Tax payments should be excluded from the purview of section 43B as the operation of this provision has the effect of diluting the incentive offered by the deferral schemes. In para 4, the Circular refers to the consultation with the Ministry of Law, Government of India and the various State Governments and very opinion of the Law Ministry. It has also made reference to the Bombay Sales Tax (Amendment) Act, 1987 and directs that where amendments are made in the Sales Tax laws on the lines indicated in the Circular, the statutory liability shall be treated to have been discharged for the purpose of section 43B of the I.T. Act. Section 43B of the I.T. Act reads as under: S. 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of ( a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in the previous year, then, in computing income referred to in section 28 of that previous year, the deduction under section 43B shall be allowed. Mr. Gupta relies upon this Circular and to urge that this Circular contemplates deemed payment of Sales Tax dues. That is on the footing that the payment was made earlier than 7 to 12 years, it will discharge the Assessee of the liability. If payment of lesser amount discharges the Assessee of his liability in full, then, the argument of Mr.Gupta is this is deemed payment of Sales Tax dues. 40) It is not possible to agree with Mr. Gupta. Because, premature payment of Sales Tax already collected but its remittance to the Government, as Mr. Gupta envisages, is not covered by this provision else the subsections and particularly section 43B(1) would have been worded accordingly. Therefore section 43B has no application. Insofar as applicability of section 41(1)(a), there also the applicability is to be considered in the light of the liability. It is a loss, expenditure or trading liability. In this case, the scheme under which the Sales Tax liability was deferred enables the Assessee to remit the Sales Tax collected from the custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan liability payable after 12 years in 6 annual/equal installments. Subsequently and pursuant to the amendment made to the 4th proviso to section 38 of the Bombay Sales Tax Act, 1959, the Assessee accepted the offer of SICOM, the implementing agency of the State Government, paid an amount of ₹ 3,37,13,393/to SICOM, which, according to the Assessee, represented the NPV of the future sum as determined and prescribed by the SICOM. In other words, what the Assessee was required to pay after 12 years in 6 equal installments was paid by the Assessee prematurely in terms of the NPV of the same. That the State may have received a higher sum after the period of 12 years and in installments. However, the statutory arrangement and vide section 38, 4th proviso does not amount to remission or cessation of the Assessee's liability assuming the same to be a trading one. Rather that obtains a payment to the State prematurely and in terms of the correct value of the debt due to it. There is no evidence to show that there has been any remission or cessation of the liability by the State Government. We agree with the Tribunal that one of the requirement of section 41(1)(a) has not been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deferred tax under a incentive Scheme and settled the amount. As against a higher sum, which was due and payable and afterwards, the Assessee paid the lesser sum of Rs.,25,79,684/to the Sales Tax Department on 29th March, 2004 and the amount got settled. 44) In relation to this very controversy and the very provision namely section 41(1), the High Court of Karnataka noted the rival contentions in para 5 and 6. Those were admittedly raised on the factual background that deferred Sales Tax was to be paid in the year 2007. The State Government itself determined the NPV of the amount, which was receivable in 2017, calculated the same and treated it as payment of deferred tax. 45) In dealing with the rival contentions, the High Court framed one identical substantial question of law as was dealt with by the Tribunal in the present case before us and held as under: ..... 8. As per the incentive scheme announced by the Government of Maharashtra, the assessee entered into an agreement with the Governor of Maharashtra to avail the benefits under deferral/1993 scheme which provides for deferment of payment of taxes. This agreement not only determines the eligibility of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puty Commissioner of Sales Tax has issued a certificate on 14.4.2004 waiving the balance of the amount payable. It is thereafter the assessee did not offer ₹ 9,52,61,916/for tax. .. 11. As could be seen from the aforesaid provision, 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. Therefore, the assessee should obtain benefit, before it is deemed to be profits and gains of business or profession. 12. In the instant case, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt by placing reliance upon the decision of the Apex Court in the matter of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 held that the loan was received by the assessee for carrying on its business and therefore, not a loan taken for the purchase of capital assets. Consequently, the decision of this Court in the matter of Mahindra and Mahindra Limited (supra) was distinguished as in the said case the loan was taken for the purchase of capital assets and not for trading activities as in the case of Solid Containers Limited (supra). In view of the above, the decision of this Court in the matter of Solid containers Limited (supra) will have no application to the facts of the present case and the matter stands covered by the decision of this Court in the matter of Mahindra Mahindra Limited (supra). The alternative submission that the amount of loan written off would be taxable under Section 28(iv) of the Act also came up for consideration before this Court in the matter of Mahindra Mahindra Limited (supra) and it was held therein that Section 28(iv) of the Act would apply only when a benefit or perquisite is received in kind and has no application where benefit is recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d laid down that remission was not income and in order to get over those judgments section 41(1) came to be enacted. In the case of Phool Chand Jiwan Ram (1981) 131 ITR 37 (Delhi), the assessee firm had purchased goods. They had also obtained loans from a party, accounts were settled and the balance was credited to the partners' account. It was held by the Delhi High Court that the amount referable to loans was not a trading liability. That, only amounts allowed as deduction in earlier years could be treated as a trading liability. In other words, unless the amounts heave been allowed as deduction in earlier years they cannot be treated as trading liability. In the circumstances, section 41(1) was not applicable. This case applies to the facts of our case also. In the case of CIT v. A.V.M. Ltd. (1984) 146 ITR 355 (Mad), it has been held by the Madras High Court that every deposit money does not constitute trading receipt. That, although such a receipt may be in connection with business, it could not be dealt with by the assessee as a receipt of its trade. Therefore, the amounts referable to loans received for purchase of capital asset would not constitute a trading liability an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the observations and conclusions at pages 346 and 347 of the report, which are relied upon heavily by Mr.Gupta, would have any application in the facts and circumstances of the present case. The Judgment of the Hon'ble Supreme Court is therefore distinguishable on facts. 52) We are of the opinion that the Revenue's argument really misses the point. 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. In that regard, we have perused the compilation of admitted documents placed on record by Shri. Dastur. From a perusal thereof, it is apparent that 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. This package evolves several measures to achieve this object. Then, there is a New Package Scheme of in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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