AI Drafter 
TaxTMI 
TaxTMI 
2014 (12) TMI 267
X X X X Extracts X X X X
X X X X Extracts X X X X
....stant Commissioner of Income Tax, 8(III), Mumbai being Income Tax Appeal No. 2871/Mum/2007 and another by the Assessee being Income Tax Appeal No. 2944/Mum/2007. The assessment year is 2003-04. These were cross Appeals against the order of the Commissioner of Income Tax (XIX) dated 19th January, 2007. 2) Mr. Gupta, the learned Senior Counsel submits that the Appeals raise substantial questions of law and as formulated at page 8 of the paper book (ITXA/450/2013). In all fairness to him, he has also invited our attention to the orders passed by a Division Bench of this Court in Income Tax Appeal No. 1777 of 2011, Income Tax Appeal No.2016 of 2011, Income Tax Appeal No. 358 of 2012 and Income Tax Appeal No. 271 of 2012, wherein, according to him, similar question has been admitted. He submits that therefore, the Appeals be admitted. 3) Since Mr. Gupta has referred to the facts in Income Tax Appeal No. 450 of 2013, we would prefer to state them in brief. 4) The Assessee M/s. Sulzer India Ltd. filed return of income for the assessment year 2003-04 on 27th November, 2013 declaring total income at Rs. 10,59,76,986/, claiming deduction under section 80HHC of the I.T. Act in the su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sident, the Judicial Member and the Administrative Member. It decided a question which was forwarded to it for its opinion. That question reads as under: "Whether on the facts and in the circumstances of the case and in law, the sum of Rs. 4,14,87,985/being the difference between the payment of Net Present Value of Rs. 3,37,13,393/against the future liability of Rs. 7,52,01,378/has rightly been charged to tax u/s 41/(1) of the I. T. Act, 1961." 8) The Special Bench passed an order on 10th November, 2010 holding therein that the deferred Sales Tax liability of Rs. 4,14,87,985/Page 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) of the Income Tax Act. Accordingly, the opinion was rendered and the matters were sent back to the regular Bench for disposal in accordance with this opinion. 9) A Miscellaneous Application was filed before the Special Bench, which was dismissed on 3rd August, 2012. 10) In view of the opinion of the Special Bench, the Appeals ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 is 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 are referred to by Mr. Gupta and he submits that they come into play or are attracted only in the event section 43B of the Income Tax Act is applicable. Both Circulars, according to Mr. Gupta, contemplate deemed payment of Sales Tax dues. 13) Mr. Gupta 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 therefor, into the Government Treasury, within 30 days from the date of service of notice issued by the Commissioner in respect thereof. Mr. Gupta submits that if payment of Sales Tax collected by the Assessee in this case is made earlier than 7 to 12 years, that will discharge the Assessee of the liability. However, if the payment of lesser amount discharges the Assessee in full, then, the remission is taxable. If that deducti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Hon'ble Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. vs. Commissioner of Income Tax, West Bengal reported in (1973) Vol. 87 ITR 542. Mr. Gupta has also relied upon an order passed by the Hon'ble Supreme Court in the case of Commissioner of Income Tax, Mumbai vs. Reliance Industries Ltd. in Civil Appeal No. 7769 of 2011 along with the connected Appeals, decided on 9th September, 2011. Finally he relied upon a Judgment of a Division Bench of this court in the case of Solid Containers Ltd. vs. Deputy Commissioner of Income Tax and Anr. reported in (2009) 308 ITR 417 (Bom.). 18) On the other hand, Mr. DasturSenior Counsel appearing on behalf of the Assessee submitted that if the facts and circumstances are taken into consideration, then, these Appeals do not raise any substantial question of law. Mr. Dastur submits that the Schemes of 1983 and 1988 should be perused in their entirety. If the benefit under the Scheme is 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 has been ascert....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to incometax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to incometax as the income of that previous year. Explanation 1 For the purposes of this subsection, the expression "loss or expenditure or some benefit in r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 assessment year. 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 Commissioner of Income Tax (Appeals), 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee indeed made a misleading statement that it had availed a loan and not benefit of deferral Sales Tax liability. This claim was found to be not supported and by any documentary material. 25) Therefore, proceeding on these lines, 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. 26) The commissioner proceeded to hold as under: "..... However, appellant never got this deferred payment of sales tax liability converted into loan as no evidence in this regard has been produced. Appellant's letter dated 8th October, 2002 addressed to M/s. SICOM Limited has already been reproduced above. This is also factually incorrect on the part of appellant to state that the amount of Rs. 7.52 crores was never claimed u/s. 43B. Appellant has claimed this amount in the years of accrual of liability on the basis of CBDT's Circular Nos. 496 and 674 as pointed above. In fact, appellant has made note on nontaxability of this amount, which appears on page 151 of paper book, which was the submission made by appellant before A.O. This note is enclosed as Annexure ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e sales tax collected was a loan in the first place. It is undisputed that sales tax so collected was not paid but was allowed through a legal fiction on the basis of Board's Circular Nos. 496 and 674. These circulars are reproduced below: "a. The scope of application of provisions of section 43B to the sales tax collected but not actually paid under deferral schemes of the State Governments was considered in Board's Circular No. 496, dated 2591987 (Clarification 2), and it was decided that, where the State Government make an amendment in the Sales tax Act to the effect that the sales tax deferred under the scheme shall be treated as actually paid, the statutory liability shall be treated as discharged for the purposes of Section 43B. b. It has since been brought to the notice of the Board that some Governments, instead of amending the Sales-tax Act, have issued Government Orders notifying schemes under which sales tax is deemed to have been actually collected and disbursed as loans. Such Government accounts giving effect to deemed collections by crediting the appropriate receiptheard relating to sales-tax collections and debiting the heads relating to disbursal of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of Sales Tax Act read with Circular No. 674 reproduced above makes it very clear that conversion into loan of any tax collected would also be deemed payment of tax u/s. 43B. Thus the deferral of sales tax or conversion into loan are on the same footing so far section 43B is concerned. In fact, the said section says that even where a loan liability has been raised, equal to the amount of tax payable, this loan amount also shall be deemed in the public interest to be payment of sales tax. Therefore, even if it is presumed that deferred sales tax liability was converted into loan, the same would be remission within the ambit of revenue/trading receipt/expenditure and would attract provisions of section 41. There are various other documents which show that appellant, itself, has treated the repayment of deferred sales tax on account of repayment of tax and not as repayment of loan. In this regard, the complete set of documents which show the repayment of this amount are at page nos. 153 to 196 of paper book. A letter dated 08.09.2003 by one, Mr. Mahendra Kulkarni, Deputy Manager of the appellant addressed to Joint Director of Industries is very relevant. ..... Then an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... same as Rs. 7.52 crores after 12 years so far as Sales Tax Department is concerned. For appellant, it is only a remission of an actual liability of Rs. 4,14,87,985/. The question is if it is only a notional figure, why the appellant has taken the amount to reserve. Therefore, this ground of appeal is dismissed and it is held that the amount of Rs. 4,14,87,985/has been correctly brought to tax u/s. 41 of the I. T. Act." 27) Thus, 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 Deputy Commissioner of Income Tax vs. Sterlite Optical Technologies Ltd. and viceversa in Income Tax Appeal Nos. 7136 and 7177/M/2004 for assessment year 200102, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9,93,863/+ Rs. 4,22,07,575/). We further find that it is also not in dispute that the sales tax collected by the assessee during the aforesaid period was allowed by the Assessing Officer u/s. 43B as actually paid in view of the CBDT Circular No. 496 dated 25.09.1987. We further find that there was an amendment made under the Bombay Sales Tax Act, 1959, (the Sales tax Act) by insertion of the third provision to sec. 38(4) of the Sales Tax Act, wherein SICOM or the relevant Regional Development Corporation or the District Industries Centre concerned was to convert the deferred sales tax into a loan and thereafter as per 2002 amendment, fourth proviso to sec. 38(4) of the Sales Tax Act by which the earlier 4th proviso was substituted, which provides that where the NPV of deferred tax as may be prescribed was paid, the deferred tax was deemed, in public interest, to have been paid. We further find that the assessee following the aforesaid amendment under the Bombay Sales Tax Act, 1959 has made repayment of loan of Rs. 3,37,13,393/( Rs. 1,76,02,272/of 1983 scheme + Rs. 1,61,11,121/of 1988 scheme) on 30.12.2002 as per NPV of the deferred tax as prescribed under Circular No. 39T of 2002 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsections 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 subsections. 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 section 38. 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. 31) In the present case, 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 198990 to 200102. 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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l also referred to the Judgments of the Karnataka High Court, Rajasthan High Court, Panjab and Haryana High Court, Madras High Court and equally the Judgment of this Court in the case of Solid Containers Ltd. (supra). 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 reported in (2003) 261 ITR 501 (Bom.). 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. reported in (2009) 176 Taxman 187 (Del.). It also referred to a Judgment in the case of SI group India Ltd. (supra) of the Bombay High Court, its Special Bench decision in Reliance Industries reported in (2004) 88 ITD 273 (Mum.) (SB) and other Tribunal decisions and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duction in assessment for previous year in which such conversion has been permitted by or under Government orders. In paras 1 and 2 of this Circular, the Department refers to the introduction by Finance Act, 1983 w.e.f. 1st April, 1984 of section 43B. Then, in para 3, it refers to several representations received from various State Governments and others that cases of deferred Sales Tax payments should be excluded from the purview of section 43B as the operation of this provision has the effect of diluting the incentive offered by the deferral schemes. In para 4, the Circular refers to the consultation with the Ministry of Law, Government of India and the various State Governments and very opinion of the Law Ministry. It has also made reference to the Bombay Sales Tax (Amendment) Act, 1987 and directs that where amendments are made in the Sales Tax laws on the lines indicated in the Circular, the statutory liability shall be treated to have been discharged for the purpose of section 43B of the I.T. Act. Section 43B of the I.T. Act reads as under: "S. 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in resp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as 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 under section 43B of the I.T. Act. 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. 40) 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 subsections and particularly section 43B(1) would have been worded accordingly. Therefore section 43B has no application. Insofar as applicability of section 41(1)(a),....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed a benefit in respect of such trading liability by way of a remission or cessation thereof. As rightly noted by the Tribunal, the Sales Tax collected by the Assessee during the relevant year amounting to Rs. 7,52,01,378/was treated by the State Government as loan liability payable after 12 years in 6 annual/equal installments. Subsequently and pursuant to the amendment made to the 4th proviso to section 38 of the Bombay Sales Tax Act, 1959, the Assessee accepted the offer of SICOM, the implementing agency of the State Government, paid an amount of Rs. 3,37,13,393/to SICOM, which, according to the Assessee, represented the NPV of the future sum as determined and prescribed by the SICOM. 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rnataka 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. 44) 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. 45) In dealing with the rival contentions, the High Court framed one identical substantial question of law as was dealt with by the Tribunal in the present case before us and held as under: "..... 8. As per the incentive scheme announced by the Government of M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iew of the proviso to Section 38 of the Bombay Sales Tax Act, 1959, the net present value was determined at Rs. 4,25,79,684/. It was paid on 2.4.2004 in Form No. 25. Consequent to the payment of the net present value, the Deputy Commissioner of Sales Tax has issued a certificate on 14.4.2004 waiving the balance of the amount payable. It is thereafter the assessee did not offer Rs. 9,52,61,916/for tax. ..... 11. As could be seen from the aforesaid provision, if the assessee obtains, whether in cash or in any other manner in respect of such loss or expenditure or some benefit in respect of trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of the previous year. Therefore, the assessee should obtain benefit, before it is deemed to be profits and gains of business or profession. 12. In the instant case, as per the scheme he was allowed to retain the sales tax as determined by the competent authority and pay the same 15 years thereafter. The tax collected was deemed to have be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee therein was that the loan was a capital receipt and has not been claimed as deduction from the taxable income in the earlier years and would not come within the purview of Section 41(1) of the Act. However, this Court by placing reliance upon the decision of the Apex Court in the matter of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 held that the loan was received by the assessee for carrying on its business and therefore, not a loan taken for the purchase of capital assets. Consequently, the decision of this Court in the matter of Mahindra and Mahindra Limited (supra) was distinguished as in the said case the loan was taken for the purchase of capital assets and not for trading activities as in the case of Solid Containers Limited (supra). In view of the above, the decision of this Court in the matter of Solid containers Limited (supra) will have no application to the facts of the present case and the matter stands covered by the decision of this Court in the matter of Mahindra & Mahindra Limited (supra). The alternative submission that the amount of loan written off would be taxable under Section 28(iv) of the Act also came up for consideration before this Court i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that before section 41(1) came to be enacted, various judgments as reported in Mohsin Re4hman Penkar v. CIT (1948) 16 ITR 183 (Bom) and Orient Corporation v. CIT (1950) 18 ITR 28 (Bom) had laid down that remission was not income and in order to get over those judgments section 41(1) came to be enacted. In the case of Phool Chand Jiwan Ram (1981) 131 ITR 37 (Delhi), the assessee firm had purchased goods. They had also obtained loans from a party, accounts were settled and the balance was credited to the partners' account. It was held by the Delhi High Court that the amount referable to loans was not a trading liability. That, only amounts allowed as deduction in earlier years could be treated as a trading liability. In other words, unless the amounts heave been allowed as deduction in earlier years they cannot be treated as trading liability. In the circumstances, section 41(1) was not applicable. This case applies to the facts of our case also. In the case of CIT v. A.V.M. Ltd. (1984) 146 ITR 355 (Mad), it has been held by the Madras High Court that every deposit money does not constitute trading receipt. That, although such a receipt may be in connection with business, it cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of "benefit by way of remission/cessation of trading liability". It is in these circumstances that the Judgment of the Hon'ble 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 Hon'ble Supreme Court is therefore distinguishable on facts. 52) 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 attr....