Waiver of deferred sales tax liability under industrial incentive scheme constitutes taxable business income under section 28(iv)

ITAT Mumbai held that waiver of deferred sales tax liability totaling Rs. 90,22,491/- arising from prepayment at NPV constitutes taxable income. The tribunal ruled that the benefit received by paying reduced amount compared to actual sales tax collected falls within section 28(iv) as business income. The waiver qualified as an "incentive" under section 2(24)(xviii) based on Maharashtra government's industrial incentive scheme. Despite appellant's argument that Finance Act 2015 amendments didn't affect non-taxability, ITAT confirmed the waiver amount represents revenue benefit accruing from business operations and directed AO to treat it as taxable under section 28(iv). Appeal dismissed.

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The principal legal question considered is whether the amount credited to the profit and loss account on prepayment of deferred sales tax liability at Net Present Value (NPV) constitutes taxable "income" under section 2(24)(xviii) of the Income-tax Act, following the amendment introduced by the Finance Act, 2015.

Secondary issues initially raised relating to interest income unreconciled with 26AS and penalty initiation under section 270A were not pressed and thus not adjudicated.

The core issue revolves around the taxability of a financial benefit arising from the prepayment of deferred sales tax liability at a discounted NPV, where the appellant contended that no actual benefit or assistance accrued at the time of prepayment, and hence the amount should not be treated as income.

Regarding the principal issue, the Court examined the amended section 2(24)(xviii) of the Income-tax Act, which defines "income" to include "assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called)" provided by the Central or State Government or any authority, except certain exclusions related to capital assets or corpus of trusts.

The Court noted that the amendment was introduced to resolve extensive litigation concerning the taxability of government grants, subsidies, and assistance by broadly including all such benefits within the definition of income, thereby taxing them unless specifically exempted. The phrase "by whatever name called" was emphasized to demonstrate the legislature's intent to encompass all forms of government assistance.

Factually, the appellant had collected sales tax from customers amounting to Rs. 1,83,60,000 over ten years under a Package Scheme of Incentives designed by the State Government to promote industrial development in backward areas. Instead of paying the entire tax immediately, the appellant was allowed to defer payment and later prepay the liability at its Net Present Value, which was Rs. 93,57,509, as calculated scientifically by the Government.

The appellant argued that since it repaid only the NPV, no benefit accrued at the time of prepayment, as this merely represented the present value of the deferred liability, and any benefit had accrued earlier when the deferral was granted. Reliance was placed on pre-amendment judicial precedents, including a Special Bench decision and Supreme Court rulings, which had held that such prepayments at NPV did not constitute income.

The Court rejected this argument, holding that the benefit or concession arises precisely at the time of prepayment because the appellant pays a lesser amount than the total sales tax collected and deferred. This difference, amounting to Rs. 90,22,491, represents a tangible financial benefit or concession granted by the Government and therefore qualifies as "assistance" under section 2(24)(xviii).

The Court further observed that even if the appellant had repaid the entire deferred sales tax without discount, there would still be a benefit in the form of interest saved on loans, as the appellant would otherwise have used funds to repay bank loans and incur interest expenses. This economic advantage also supports the characterization of the waiver amount as income.

In interpreting the legislative intent, the Court referred to the explanatory notes accompanying the Finance Act, 2015, which clarified that the amendment aimed to align tax provisions with Income Computation and Disclosure Standards (ICDS), particularly ICDS-VII relating to government grants. The amendment was designed to avoid future litigation by explicitly taxing all government grants and assistance, except those accounted for in the cost of assets or welfare subsidies to individuals.

The Court relied on authoritative judicial pronouncements affirming the wide and inclusive meaning of "income" under section 2(24), emphasizing that it is not exhaustive but inclusive, thereby encompassing receipts that may not be explicitly enumerated but possess the nature of income. The Court cited Supreme Court decisions holding that the legislature's power to tax is broad and that economic benefits or concessions granted by the Government fall within the ambit of taxable income unless expressly exempted.

Regarding the nature of the receipt, the Court applied the "purpose test" established by the Supreme Court, which requires determining the character of the receipt based on the purpose for which the subsidy or grant was given. Since the incentive was to enable the appellant to run its business more profitably in a backward area rather than to acquire a capital asset, the receipt was held to be revenue in nature and taxable accordingly.

The Court also considered dictionary definitions of "assistance" and "government assistance," which encompass economic benefits or aid provided by the Government to enterprises, reinforcing the conclusion that the reduced payment constituted government assistance.

In addressing the appellant's reliance on pre-amendment judicial decisions, the Court clarified that such precedents are inapplicable post-amendment, as the legislative intent and statutory language now clearly include all forms of government assistance as income.

The Court noted that the appellant itself had recognized the benefit by crediting the waiver amount as "miscellaneous income" in its audited profit and loss account, supporting the characterization of the amount as income.

The Court further observed that the appellant's argument based on ICDS provisions was misplaced, as the ICDS themselves recognize government grants as income unless related to depreciable assets, and the amendment was introduced to harmonize tax law with accounting standards.

Finally, the Court upheld the constitutional validity of the amendment, relying on a recent High Court judgment which held that the amendment represents a rational legislative policy to align taxation with economic realities and does not violate constitutional principles of equality or impose arbitrary burdens.

In conclusion, the Court held that the amount of Rs. 90,22,491 representing the waiver or concession on prepayment of deferred sales tax liability at NPV is taxable income under section 2(24)(xviii) and section 28(iv) of the Income-tax Act. The appeals were dismissed for both assessment years.

Key holdings include:

"The Government intends to tax all types of subsidies, grants, cash incentives, duty drawback, waivers, concessions or reimbursement by whatever name called by the Central or State Government."

"The amendment to section 2(24) by insertion of sub-clause (xviii) by Finance Act, 2015 is a perfect example of a legislative endeavour to align definition of 'income' with evolving economic landscapes."

"The amount of benefit/assistance/cash incentive of Rs. 90,22,491/- is quantified and will come within the ambit of 'cash incentive'/concession/by whatever name called by Central Government/State Government."

"The character of receipt in the hands of the assessee has to be determined concerning the purpose for which the subsidy is granted. If the object of the subsidy is to enable the assessee to run the business more profitably, then the receipt is on the revenue account."

"The definition of 'income' under section 2(24) is inclusive and anything which can be properly described as 'income' is taxable under the Act unless exempted."

"The appellant company is paying the reduced amount to the Government as compared to the actual sales tax collected, and thus the waiver amount comes within the ambit of section 28(iv) of the Act as income arising from business."

"The amendment to section 2(24)(xviii) does not suffer from vice of discrimination and is constitutionally valid."

Thus, the Court conclusively determined that the waiver amount on prepayment of deferred sales tax liability at NPV is taxable income under the amended provisions of the Income-tax Act and dismissed the appellant's appeals accordingly.

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