2014 (12) TMI 267 - HC - Income Tax

Deferred sales tax not taxable as business income under Income Tax Act

The Commissioner of Income Tax-8 Versus M/s. Sulzer India Limited, Hardoli Paper Mills Limited, M/s. Associated Capsules Pvt. Ltd., M/s. KSB. Pumps Ltd., M/s. SI. Group India Ltd., M/s. Godrej Consumer Products Limited, M/s. Grindwell Norton Ltd., M/s. Grindwell Norton Ltd.

The Commissioner of Income Tax-8 Versus M/s. Sulzer India Limited, Hardoli Paper Mills Limited, M/s. Associated Capsules Pvt. Ltd., M/s. KSB. Pumps Ltd., ... Issues Involved:1. Taxability of deferred sales tax liability as business income under section 41(1) of the Income Tax Act.2. Applicability of CBDT Circulars No. 496 and 674 to the issue of remission/cessation of sales tax liability.Detailed Analysis:1. Taxability of Deferred Sales Tax Liability as Business Income Under Section 41(1) of the Income Tax Act:The primary issue in this case was whether the deferred sales tax liability, which was settled by the assessee at a net present value (NPV) lower than the total liability, should be taxed as business income under section 41(1) of the Income Tax Act. The assessee argued that the remission of the liability should be treated as a capital receipt and not as a revenue receipt, thus not taxable under section 41(1).The Assessing Officer (AO) had added the amount of Rs. 4,14,87,985 to the income of the assessee, treating it as remission of loan liability and invoking section 41(1). The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the deferred sales tax liability was not converted into a loan and was a trading receipt initially. The Commissioner noted that the sales tax collected was not paid but was deemed to have been paid under section 43B due to the CBDT Circulars.However, the Income Tax Appellate Tribunal (ITAT) Special Bench, after considering the facts and legal provisions, held that the deferred sales tax liability credited to the capital reserve account was an actual receipt and not a remission/cessation of liability. Therefore, no benefit arose to the assessee under section 41(1)(a). The Tribunal emphasized that the liability was settled by paying the NPV as prescribed by the State Government, which does not constitute a remission or cessation of liability.The High Court agreed with the Tribunal's findings, stating that the statutory arrangement under section 38(4) of the Bombay Sales Tax Act did not amount to a remission or cessation of the assessee's liability. The payment of NPV was a permissible exercise and did not confer any benefit to the assessee that could be taxed under section 41(1).2. Applicability of CBDT Circulars No. 496 and 674 to the Issue of Remission/Cessation of Sales Tax Liability:The second issue was whether the CBDT Circulars No. 496 and 674, which deal with the deemed payment of sales tax under section 43B, were applicable to the case of remission/cessation of sales tax liability. The assessee contended that the deferred sales tax should be treated as paid for the purposes of section 43B, and the remission of the liability should not be taxed as income.The Tribunal noted that the benefit of deduction under section 43B was allowed only for the purpose of that section and not under any other provisions of the Act. The Tribunal held that the first requirement of section 41(1) was not fulfilled as the deduction was allowed under section 43B based on the CBDT Circulars, which created a legal fiction for the deemed payment of sales tax.The High Court upheld the Tribunal's view, stating that the CBDT Circulars contemplated deemed payment of sales tax dues for the purpose of section 43B and not for the purpose of section 41(1). The Court emphasized that the premature payment of NPV did not constitute a remission or cessation of liability under section 41(1).Conclusion:The High Court concluded that the difference between the deferred sales tax liability and its NPV, credited to the capital reserve account, was a capital receipt and not taxable as business income under section 41(1). The Court also held that the CBDT Circulars No. 496 and 674 were applicable only for the purpose of section 43B and not for determining the taxability of remission/cessation of liability under section 41(1). The appeals were dismissed, and the substantial questions of law were answered in favor of the assessee.