2020 (6) TMI 587 - HC - Income Tax

High Court rules surplus from tax loan prepayment as capital receipt not taxable under Income Tax Act

Pr. Commissioner of Income Tax, Mangaluru Versus Mangalore Refinery & Petrochemicals Ltd.

The High Court ruled in favor of the assessee, holding that the surplus arising from the prepayment of the deferred sales tax loan at net present value is ... Surplus arising on prepayment of deferred sales tax loan at net present value (NPV) - Whether a capital receipt which cannot be termed as remission on cessation of a trading liability under section 41(1)? - Tribunal held that decision of the Bombay High Court in Sulzer India Limited [2014 (12) TMI 267 - BOMBAY HIGH COURT] squarely covered the issue and that the first appellate authority made no mistake in holding that the surplus arising on prepayment of deferred sales tax loan at NPV was a capital receipt which could not be termed as remission or cessation of a trading liability so as to invite section 41(1) - HELD THAT:- Value (NPV) should be treated as a capital or a revenue/trading receipt and applicability of section 41(1) of the Act thereto came up for consideration before the Supreme Court in Balkrishna Industries Limited [2017 (11) TMI 1626 - SUPREME COURT] in which the decision of this Court in Sulzer India Limited [2014 (12) TMI 267 - BOMBAY HIGH COURT] was also considered. Supreme Court noted that the main judgment out of which the appeals arose and were considered in the said case was rendered in Sulzer India Limited (supra). Supreme Court referred to the decision of this Court in Sulzer India Limited (supra), more particularly to paragraph 40 thereof which has been extracted above, and held that the aforesaid approach of the High Court was without any blemish. Accordingly, the appeals were dismissed. No error or infirmity in the view taken by the Tribunal. This issue is squarely covered by the decisions in Sulzer India Limited (supra) and Balkrishna Industries Ltd. (supra) and Tribunal rightly followed the same. Consequently, we see no reason to interfere with the same. Question No.1 so framed is accordingly answered against the Revenue and in favour of the assessee. Interest under section 234B and section 234C - Whether interest not chargeable with respect to tax liability determined under minimum alternate tax (MAT)? - HELD THAT:- Though in Rolta India Limited [2011 (1) TMI 5 - SUPREME COURT] Supreme Court held that interest under sections 234B and 234C is payable on failure to pay advance tax in respect of tax liability under section 115JB of the Act, the fact remains that at the time of payment of advance tax by the assessee the decision of the Karnataka High Court in Kwality Biscuits Limited [2006 (4) TMI 121 - SC ORDER]was holding the field as per which assessee was not required to pay advance tax since the entire exercise of computing book profit could only be made at the end of the financial year and therefore, following the law applicable at that point of time, assessee did not pay the advance tax on the book profit which was subsequently computed. Therefore, there was no deliberate or intentional failure to pay advance tax on the book profit by the assessee. In the circumstances, Tribunal was justified in affirming the view taken by the first appellate authority that the charge of interest under sections 234B and 234C on the book profit was not justified. - Decided against revenue. Issues Involved:1. Taxability of surplus arising from prepayment of deferred sales tax loan under Section 41(1) of the Income Tax Act.2. Applicability of interest under Sections 234B and 234C for tax liability determined under Minimum Alternate Tax (MAT).Detailed Analysis:1. Taxability of Surplus Arising from Prepayment of Deferred Sales Tax Loan:The primary issue concerns whether the surplus arising from the prepayment of deferred sales tax loan at net present value (NPV) should be treated as a capital receipt or as a remission of trading liability under Section 41(1) of the Income Tax Act.- Background and Facts: The assessee, a resident company, engaged in refining crude oil and selling petroleum products, availed a sales tax deferment scheme from the Karnataka Government. The sales tax collected was converted into a loan repayable over 11 and 14 years for different phases of the refinery. The outstanding loan of Rs. 517.130 crores was prepaid at an NPV of Rs. 261.445 crores, resulting in a surplus of Rs. 255.685 crores, which the assessee treated as a capital receipt not liable to tax.- Assessing Officer's Stand: The Assessing Officer invoked Section 41(1), treating the surplus as a remission of trading liability, thereby adding Rs. 255.685 crores to the income of the assessee.- First Appellate Authority's Decision: The Commissioner of Income Tax (Appeals) followed the precedent set in the case of Associated Capsules Private Limited and directed the exclusion of the surplus from taxable income, treating it as a capital receipt.- Tribunal's Ruling: The Tribunal upheld the decision of the first appellate authority, citing the Bombay High Court's ruling in CIT vs. Sulzer India Limited, which held that the surplus arising from the prepayment of deferred sales tax loan at NPV is a capital receipt and not a remission of trading liability under Section 41(1).- High Court's Analysis: The High Court affirmed the Tribunal's view, referencing the Sulzer India Limited case, where it was established that the premature payment of sales tax liability at NPV does not constitute a remission or cessation of a trading liability. The Court noted that the obligation to remit the sales tax collected was not wiped out but was settled at its present value, thus not attracting Section 41(1).- Conclusion: The High Court ruled that the surplus arising from the prepayment of the deferred sales tax loan at NPV is a capital receipt, not liable to tax under Section 41(1). The question was answered in favor of the assessee and against the Revenue.2. Applicability of Interest under Sections 234B and 234C for Tax Liability Determined under MAT:The second issue pertains to whether interest under Sections 234B and 234C is chargeable when the tax liability is determined under Section 115JB (MAT).- Background and Facts: The assessee computed its book profit under Section 115JB and did not pay advance tax based on the prevailing judgment of the Karnataka High Court in Kwality Biscuits Limited, which held that interest under Sections 234B and 234C was not chargeable on MAT liability.- Assessing Officer's Stand: The Assessing Officer charged interest under Sections 234B and 234C on the book profit computed under Section 115JB.- First Appellate Authority's Decision: The Commissioner of Income Tax (Appeals) relied on the Kwality Biscuits Limited case and held that interest under Sections 234B and 234C was not chargeable on MAT liability.- Tribunal's Ruling: The Tribunal upheld the first appellate authority's decision, noting that at the relevant time, the judgment in Kwality Biscuits Limited was applicable, providing a justifiable reason for the assessee not to pay advance tax on MAT liability.- High Court's Analysis: The High Court analyzed the provisions of Sections 234B and 234C and noted that the Supreme Court's subsequent decision in Rolta India Limited, which mandated interest on MAT liability, was delivered after the relevant assessment period. The Court held that the assessee had a bona fide reason, based on the prevailing legal position, for not paying advance tax on MAT liability.- Conclusion: The High Court concluded that the interest under Sections 234B and 234C was not chargeable on the book profit computed under Section 115JB for the relevant period. The question was answered in favor of the assessee and against the Revenue.Final Judgment:The High Court dismissed the appeal, affirming the decisions of the lower authorities. The surplus from prepayment of deferred sales tax loan was held as a capital receipt, and interest under Sections 234B and 234C was not chargeable on MAT liability for the relevant period. No costs were ordered.