THE issue before the Bench is - Whether if the remission of a liability is made pursuant to "premature repayment of loan", such remitted amount can be considered as a receipt on account of revenue. NO is the answer.
Facts of the case
The assessee M/s. Sulzer India Ltd. filed return of income for AY 2003-04 declaring total income at Rs.10,59,76,986/-, claiming deduction u/s 80HHC for the sum of Rs.82,48,864/-. During assessment, AO observed that the Assessee had credited amount of Rs.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 period of 6 years under the Deferral Scheme of 1988. In response to a Notification issued by the Government of Maharashtra regarding premature repayment of deferral Sales Tax at Net Present Value (NPV), the Assessee made a repayment of Rs.3,37,13,393/ - against the total liability of Rs.7,52,01,378/- . The Assessee remitted the balance amount of Rs.4,14,87,985/- and credited the said amount to its capital reserve account. The AO asked the Assessee to show cause as to why the said amount should not be taxed in the hands of the Assessee as a revenue receipt. Relying on CBDT Circulars, Assessee claimed that the deferral Sales Tax under the Deferral Scheme was required to be treated as actually paid for the purposes of section 43B. Further, the conversion of Sales Tax liability into loans would be taken as discharge of the liability of Sales Tax and therefore, the deferral amount was in the form of a loan and not a trading receipt. On this basis, assessee contended that the remission of a loan cannot be treated as a revenue receipt and taxed as its income. The AO rejected this claim and by holding that the Board's Circular was in the context of section 43B and therefore not relevant for the present issue. On appeal, CIT(A) passed an order and sustained the additions made by AO.
On further appeal, after referring to the decision of special bench, Tribunal held that the deferred Sales Tax liability of Rs.4,14,87,985/- 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). Thus, 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 and answered in favour of the Assessee and against the Revenue.
Before HC, the Revenue's counsel had submitted that there was a difference in the language of section 41(1) and section 43B. Section 43B comes into play on actual payment. In the present case, we were concerned with two Sales Tax deferral schemes. It was submitted that there was 1983 Scheme under which the Assessee was obliged to pay Rs. 3.89 crores and under the 1988 Scheme Rs. 4.22 crores. The payment of Sales Tax under these Schemes was deferred up to 12 years. These Schemes were different and cannot be equated with exemption from the liability to pay tax. This was not akin to a tax holiday either. The liability to pay Sales Tax was merely deferred. However, from 1st November, 1989 to 31st October, 1996, the Assessee collected Rs.7.52 crores as Sales Tax from third parties. There was an obligation to pay this amount in the Government Treasury, within a period of 30 days. However, that obligation and in law was not required to be performed and fulfilled in this case. This amount collected from the third parties can be paid after 7 to 12 years. Thus, this was a facility to use the amount and which belongs to the Government/Revenue and for all this duration and period. The Board Circular Nos. 496 and 674 dated 25th September, 1987 and 29th December, 1993 respectively were referred to and it was submitted that they come into play only in the event section 43B was applicable. It was also 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 therefore, into the Government Treasury, within 30 days from the date of service of notice issued by the Commissioner in respect thereof. It was further submitted that if payment of Sales Tax collected by the Assessee in this case was made earlier than 7 to 12 years, that will discharge the liability of the assessee. However, if the payment of lesser amount was discharged by the Assessee, then, the remission was taxable. If that deduction had been granted, that will have to be withdrawn.
It was further submitted that from the total liability of Rs.7.52 crores, the amount which had been remitted to the Government was not this entire sum but a part thereof. However, it was not in dispute that entire sum of Rs.7.52 crores was collected. If that was not remitted, then, within the meaning of section 41(1), there was a benefit derived by the Assessee. The Assessee had enjoyed that money and had utilized it. It was submitted that the Assessee’s calculation overlooks the fact that the case will fall within the first part of section 41(1). The sum of Rs.4.14 crores was an amount received by the Assessee. The NPV amount had been paid early and hence, the benefit accrues in the AY concerned. It was also submitted that the deduction in terms of section 43B was not of the same category. The deemed payment as urged above was covered. In the present case, the Assessee was deemed to have received the amount of Rs.4.14 crores. The Income Tax Department was not concerned with the Assessee’s understanding, if any, with the State Industrial Corporation of Maharashtra Ltd. It was submitted that Rs.7.52 crores does not belong to the Assessee, but to the State. There was no adjustment permissible as far as this liability was concerned under the I.T. Act. It was also submitted that Special Bench of the Tribunal committed obvious error and in that regard, he invited our attention to the findings of the Tribunal in its Special Bench decision to the effect that the first requirement of section 41(1) had not been fulfilled in the facts of the present case. The Tribunal had confused itself between the concept of deemed date of payment and deemed payment. It was thus submitted that the order of the Tribunal was erroneous and should be set aside.
On the other hand, assessee's counsel had submitted that if the facts and circumstances were taken into consideration, then, these Appeals do not raise any substantial question of law. It had submitted that the Schemes of 1983 and 1988 should be perused in their entirety. If the benefit under the Scheme was 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 had been ascertained and determined in terms of the rules. The NPV was taken into consideration. Thus, the liability was not wiped out but its present value was ascertained and determined. That had been paid. There was no concession. There was absolutely no settlement negotiated or otherwise. The statutory mode of recognized deferred dues was adopted and hence no benefit was derived by the Assessee. There was no question of any remission. It was also pointed out that for example Rs.100/- was a liability and which had to be discharged on the expiry of the period specified in the Scheme. If that amount was to be received by the State after 12 years and its worth today had been ascertained means there was no benefit at all. Today if Rs.60/- had been paid it does not necessarily mean that there was any benefit or remission. The entire liability was discharged. In such circumstances, the Sales Tax dues had been paid, the liability had been discharged and if the State of Maharashtra and the Assessee understood the transaction in a particular way, the Central Government cannot dispute or question it. For these reasons, it submits that the Appeals be dismissed.
Held that,
++ in this case, the Assessee argued before the Commissioner that the Assessing Officer failed to appreciate that the remission is made pursuant to "premature repayment of loan", which is on account of capital and not on account of revenue. The provisions of section 41(1) would only apply when the Assessee receives, either in cash or otherwise in respect of loss, expenditure or trading liability, any benefit which was allowed as deduction in the earlier AY. The loan liability in the present case was never charged to profit and loss account by the Assessee and as such this question did not arise in past, the loan 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 CIT(A), 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 Rs.7,52,01,378/-, the Assessee paid a sum of Rs.3,37,13,393/- and the Department allowed him to keep the amount of Rs.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 Assessee's claim that the liability was a loan by the State Government and which came to be remitted was therefore doubted and questioned. The Assessing Officer held that the amount was nothing but deferred Sales Tax liability and since this was already allowed under section 43B, the remission was covered by section 41(1). He therefore held that the amount was taxable u/s 41(1). The Commissioner examined the claim of the Assessee that this is nothing but premature repayment of loan and which is on account of capital and therefore, not exigible to tax;
++ 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 DCIT vs. Sterlite Optical Technologies Ltd. and vice-versa in Income Tax Appeal Nos. 7136 and 7177/M/2004 for AY 2001-02, 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. ACIT 2010-TIOL-413-HC-MUM-IT, 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 facts of the present case. The argument before the Tribunal was since there was divergence of views, once the High Court has decided in favour of the Assessee, hence, no reference is required to be made to the larger Bench. However, the DR argued that this Court has not decided the issue but has kept it open for being adjudicated and at an appropriate stage and in appropriate proceedings. Therefore, the issue remains alive and there is indeed divergence in views of the Tribunal. That is how the Special Bench framed the question on which its opinion was sought in para 5. Thereafter, it noted the facts as are available on record, including in the order of the Commissioner of Income Tax (Appeals). The Special Bench noted all the arguments of the Assessee as also that of the DR. The facts and these arguments are noted up till para 61 of the order. Thereafter, the Tribunal proceeded to hold that section 41(1) does not make any distinction between the contractual trading liability or any statutory trading liability. Even in the case of statutory liability there is a remission or cessation of any amount whether in cash or in any other manner has been obtained in respect of the expenditure of this nature, the same would be deemed to be profit and gains of the business of the Assessee and accordingly be chargeable to income tax as the income of that year in which the benefit of amount is obtained. In para 72, the Tribunal reproduced section 38 of the Bombay Sales Tax Act and which was applicable at the relevant time. Particularly it emphasises sub-sections 1, 2, 3 and 4 and holds that the manner as to how the payment of Sales Tax, penalty and interest is to be made is found in these sub-sections. The provisos are referred to and particularly whether if premature payment in place of the amount of tax deferred is made in terms of the 4th proviso to sub section 4 of section38. 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;
++ it is not in dispute that the Assessee collected the total amount towards the Sales Tax of Rs.7,52,01,378/- and in para 76, 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. 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 Sales Tax was deposited in some period four months before the due date and that is how the discounted percentage of deferred Sales Tax to be paid as NPV was prescribed. The NPV amount of Bombay Sales Tax dues and Central Sales Tax dues was worked out as per Certificate dated 27th December, 2002. The amount under the Certificate was paid on 30th December, 2002. That is also evident by a further Certificate dated 25th August, 2003. This amount was paid by the Assessee as per the offer made by the State Government and after the State appointed SICOM for settlement of deferred Sales Tax liability by immediate one time payment. The Assessee paid a sum of Rs.3,37,13,393/- , which, according to the Assessee, represented the NPV as determined by SICOM. This amount was paid by the Assessee, as evidenced by the above Certificates. The Revenue placed no material on record to show that the value does not reflect the NPV or that the NPV is yet to be calculated. The Tribunal found that 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. It is in these circumstances that it accepted the contentions of the Assessee and rejected that of the departmental representative. The Tribunal made detailed reference to the decided cases and brought to its notice by both, the Assessee and the Revenue. The Tribunal found that the principle in the decided cases pertains to the subsidy received by the Assessee and whether it is capital receipt or revenue in nature. The controversy before the Tribunal is entirely different. That is whether the difference of deferred Sales Tax liability is chargeable to tax as business income under section 41(1) being remission or cessation of trading liability or the same is exempted as capital receipt. Therefore, the Tribunal held that the cases cited by the Revenue are distinguishable and on facts;
++ in para 85, a detailed reference is made to the decision of the Supreme Court in the case of Polyflex (India) Pvt. Ltd. The Tribunal also referred to the Judgments of the Karnataka High Court, Rajasthan High Court, Punjab and Haryana High Court, Madras High Court and equally the Judgment of this Court in the case of Solid Containers Ltd. The Tribunal also referred to certain orders passed 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 2003-TIOL-427-HC-MUM-IT. 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. 2008-TIOL-481-HC-DEL-IT. It also referred to a Judgment in the case of SI Group India Ltd. of the Bombay High Court, its Special Bench decision in Reliance Industries 2003-TIOL-14-ITAT-MUM-SB and other Tribunal decisions and that continues up-to para 103 of its order. A perusal of these findings shows that the Tribunal 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. The Tribunal held that the benefit of deduction was allowed for the purpose of section 43B only and not under any other provisions of the Act. The Tribunal held that the Assessing Officer applied the Circular while giving benefit of deduction u/s 43B. Thus, if the sum is actually paid by the Assessee 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;
++ 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 sub-sections 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 customers or consumers to the Government not immediately but as agreed after 7 to 12 years. If the amount is not to be immediately paid to the Government upon collection but can be remitted later on in terms of the Scheme, then, we are of the opinion that the exercise undertaken by the Government of Maharashtra in terms of the amendment made to the Bombay Sales Tax Act and noted above, may relieve the Assessee of his obligation, but that is not by way of obtaining remission. The worth of the amount which has to be remitted after 7 to 12 years has been determined prematurely. That has been done by finding out its NPV. If that is the value of the money that the State Government would be entitled to receive after the end of 7 to 12 years, then, we do not see how ingredients of sub section (1) of section 41 can be said to be fulfilled. The obligation to remit to the Government the Sales Tax amount already recovered and collected from the customers is in no way wiped out or diluted. 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 fulfilled in the facts of the present case. In such circumstances, the Tribunal's conclusion in para 109 that the difference between the NPV Rs.3,37,13,393/- against the future liability of Rs.7,52,01,378/- credited by the Assessee under the capital reserve account in its books of account, is a capital receipt is correct. It cannot be termed as remission or cessation of a trading liability and subsequently no benefit has arisen to the Assessee in terms of section 41(1);
++ we agree with the Tribunal's conclusion also because in a recent Judgment brought to our notice, the High Court of Karnataka has taken a similar view. In its Judgment delivered in the case of McDowell and Co. Ltd. the Karnataka High Court determined and decided a similar controversy. A similar scheme was availed of by M/s. McDowell, the Assessee before the Karnataka High Court under the BST, wherein, it paid the NPV against premature payment of the amount of the 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. 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. Once we concur, then, we do not deem it necessary to deal with the other Judgments cited by Mr. Dastur. They are essentially cited so as to urge that what has taken place as between the Assessee, the State Government and SICOM could not be questioned by the Revenue. In the final analysis, we find that Mr. Gupta can derive no assistance from the Judgment of Polyflex (India) Pvt. Ltd. There, the Assessee paid excise duty on certain goods. Pursuant to the decision of the Customs, Excise and Gold Control Appellate Tribunal, a sum of Rs.9,64,206/- was refunded in September, 1988. The Excise Department filed an Appeal to the High Court but it was dismissed. A Petition for special leave to Appeal before the SC was filed, but fate of that Petition was not known. For the assessment year 1989-90, the Assessing Officer brought to tax the amount by invoking section 41(1) but the Appellate Authority and the Appellate Tribunal held that there was no remission or cessation of trading liability so long as the Petition for special leave to appeal was pending in the Supreme Court. A reference was made to the High Court, but it held that the amount was assessable to tax. However, on the basis of the Counsel's argument that the Tribunal ought to consider the question whether the excise duty was actually refunded to the Assessee or not, the case was sent back to the Tribunal. This was a clear case, in our view, as held by the Supreme 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) of the I.T. Act. It will not be a case of "benefit by way of remission/cessation of trading liability". It is in these circumstances that the Judgment of the Supreme Court was rendered. We do not find that 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 Supreme Court is therefore distinguishable on facts;
++ 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 incentives, 1988. Both Schemes have clauses and paras containing Sales Tax deferral incentives. 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. That is informed by the Trade Circular dated 12th December, 2002 issued by the Commissioner of Sales Tax, Maharashtra. A combined reading of the Schemes and this Circular reveals the legislative intent as noted above. In such circumstances, a proper understanding of all this by the Tribunal cannot be termed as perverse. The view taken by it is imminently possible. Once this conclusion is reached, the other Judgments cited by the Revenue are obviously distinguishable and on facts. As a result of the above discussion, we find that the questions of law formulated by us and termed as substantial will have to be answered in favour of the Assessee and against the Revenue. Those are answered accordingly. The Appeals are dismissed. Insofar as Income Tax Appeal No. 909 of 2012 is concerned, at page 4 of the paper book in that Appeal, two additional questions in para 4(B) and 4(C) are termed as substantial questions of law. However, the Counsel appearing for the parties conceded that questions (B) and (C) are covered by two Judgments noted by the Tribunal, namely, in the case of Associated Capsules Pvt. Ltd. vs. Deputy Commissioner of Income Tax and Anr. 2011-TIOL-28-HC-MUM-IT and Commissioner of Income Tax vs. Saumya Finance and Leasing Co. Pvt. Ltd. 2008-TIOL-66-HC-MUM-IT. These are Judgments which are rendered in favour of the Assessee by this Court and against the Revenue. Therefore, the additional questions also cannot be termed as substantial questions of law. That Appeal is also dismissed accordingly.
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