CIT vs. McDowell & Co Ltd (Karnataka High Court)
As per an incentive scheme announced by the Government of Maharashtra, the assessee entered into an agreement to avail the benefits under deferral/1993 scheme which provides for deferment of payment of taxes. This agreement not only determined the eligibility of the assessee but also laid down the terms and conditions under which the agreement exists. The quantification of this deferment was made by Sicom Limited, a Government of Maharashtra Undertaking, which was an agent for the package scheme of incentives. Sicom quantified the entitlement of deferral of sales tax to the assessee. As against the total amount of Rs.20 crore collected by the assessee towards Bombay Sales Tax and Central Sales Tax, the maximum entitlement of sales tax incentives by way of deferment was determined at Rs.13.78 crore. The validity period of the deferral was determined as 1.4.2002 to 31.3.2017, thereby the assessee could retain the amount of sales tax collected to the extent of Rs.13.78 crore up to 31.3.2017. Consequent to the assessee opting for the scheme of deferment of sales tax, an amount of Rs.13.78 crore was deemed to have been paid for the purpose of s. 43B of the Act and the same was allowed as a deduction in AY 2003-04. The Maharashtra Government by way of Maharashtra Tax Laws (Levy and Amendment) Act, 2002 substituted the proviso to s. 38 of the Bombay Sales Tax Act, 1959 which came into effect from 1.5.2002. The proviso provided that notwithstanding anything to the contrary contained in the Act or in the Rules or in any of the package scheme of the incentives or in the Power Generation Promotion Policy 1998, the eligible unit to whom the entitlement certificate has been granted for availing of the incentives by way of deferment of sales tax, purchase tax, additional tax, turn over tax or surcharge as the case may be, may, in respect of any of the periods during which, the said certificate is valid, at its option, prematurely in place of the amount of tax deferred by it an amount, equal to the net present value of the deferred tax as may be prescribed and on making such payments, in the public interest, the deferred tax shall be deemed to have been paid. In view of the proviso to Section 38 of the Bombay Sales Tax Act, 1959, the net present value was determined at Rs.4.25 crore and the same was paid by the assessee. Consequent to the payment of the net present value, the the balance amount of sales-tax payable amounting to Rs. 9.52 crore was waived. The AO held that the said amount of Rs. 9.52 crore was taxable u/s 41(1). However, the Tribunal (presumably relying on Sulzer India Ltd vs. JCIT 138 ITD 137 (Mum) (SB)) upheld the assessee’s claim that the said amount was not chargeable. On appeal by the department to the High Court HELD by the High Court dismissing the appeal:
As per the scheme the assessee 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 the industrial unit in a rural area. The said loan had to be repaid after 15 years. Again it is an incentive. However, by a subsequent scheme, a provision was made for premature payment. When the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the said amount equal to the net present value of the deferred tax was determined at Rs. 4,25,79,684 and on such payment the entire liability to pay tax/loan stood discharged. Again it is not a benefit conferred on an assessee. Therefore, Section 41 (1) of the Act is not attracted to the facts of this case. Hence, the Tribunal was justified in holding that there is no liability to pay tax.
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