2019 (9) TMI 293 - AT - Income Tax

High Court rules gain on prepayment of sales tax deferral loan not remission of liability.

Assistant Commissioner of Income Tax, Circle – 9, Pune Versus M/s. Lear Automotive India Pvt. Ltd.

The High Court ruled in favor of the assessee in a case where the Revenue appealed against the treatment of gain on prepayment of sales tax deferral loan ... Gain on prepayment of sales tax deferral loan - capital receipt or revenue receipt - income liable to be charged to tax as deemed profits and gains of firm u/s. 41(1) - HELD THAT:- We find that the issue whether the gain of pre-mature payment of deferred Sales Tax at net present value against total Sales Tax liability is capital in nature or revenue receipt/remission or cessation of liability u/s. 41(1) has been laid to rest by Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Sulzer India Ltd. [2014 (12) TMI 267 - BOMBAY HIGH COURT] as held 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. 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 - 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 - 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 – a combined reading of the Schemes and this Circular reveals the legislative intent – thus, the order of the Tribunal is upheld – Decided against revenue. Issues:1. Treatment of gain on prepayment of sales tax deferral loan as capital receipts.2. Acceptance of income liable to be charged to tax as deemed profits and gains of firm u/s. 41(1) of the Act.Issue 1: Treatment of gain on prepayment of sales tax deferral loan as capital receiptsThe case involved the Revenue appealing against the order of the Commissioner of Income Tax (Appeals) regarding the treatment of a gain on prepayment of sales tax deferral loan as capital receipts. The assessee, engaged in manufacturing automotive seating systems, prepaid its deferred sales tax liability at net present value (NPV). The Revenue contended that the difference between the deferred sales tax liability and the amount paid was a remission of liability u/s. 41(1) and section 28(iv) of the Act. However, the assessee argued that the gain should be treated as a capital receipt based on precedents set by the Hon'ble Bombay High Court and the Supreme Court. The High Court held that the difference between the payment of NPV against future liability could not be considered remission/cessation of liability u/s. 41(1) of the Act. The Court emphasized the core purpose of the Sales Tax Deferral Scheme and the legislative intent behind such incentives. The judgment in the case of Commissioner of Income Tax Vs. Sulzer India Ltd. was affirmed by the Supreme Court in the case of Commissioner of Income Tax Vs. Balkrishna Industries Ltd.Issue 2: Acceptance of income liable to be charged to tax as deemed profits and gains of firm u/s. 41(1) of the ActThe second issue raised in the appeal was the acceptance of income liable to be charged to tax as deemed profits and gains of the firm u/s. 41(1) of the Act. The Revenue argued that the income should be treated as deemed profits and gains under this section. However, the assessee's position, supported by legal precedents, was that the gain from prepayment of the sales tax deferral loan should be considered a capital receipt and not be charged to tax as business income. The Tribunal, after examining the facts and legal arguments, upheld the decision of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. The settled law established through previous judgments supported the assessee's contention, leading to the rejection of the Revenue's appeal.In conclusion, the appellate tribunal upheld the order of the Commissioner of Income Tax (Appeals) in both issues, ruling in favor of the assessee based on established legal principles and precedents set by higher courts. The judgment emphasized the distinction between capital receipts and revenue receipts, providing clarity on the treatment of gains from prepayment of deferred sales tax liabilities.