March 2011
Section 41(1) of the Income-tax Act, 1961 — Deferred sales tax liability being difference between payment of net present value and future liability credited by assessee to capital reserve account in its books of account would be a capital receipt and cann
By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi
Chartered Accountants
Reading Time 3 mins
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37 (2010) 42 SOT 457 (Mum.) (SB)
Sulzer India Ltd. v. Jt. CIT
ITA Nos. 2944 & 2871 (Mum.) of 2007 &
1317 (Pn.) of 2007
A.Ys.: 2003-2004 & 2004-05. Dated: 10-11-2010
Section 41(1) of the Income-tax Act, 1961 — Deferred sales
tax liability being difference between payment of net present value and future
liability credited by assessee to capital reserve account in its books of
account would be a capital receipt and cannot be termed as remission/cessation
of liability and, consequently, no benefit would arise to assessee in terms of
section 41(1)(a).
The assessee obtained incentive by way of sales tax deferral
scheme under the package scheme of incentive 1983 (the 1983 scheme) and the
package scheme of incentive 1988 (the 1988 scheme) notified by the Government of
Maharashtra. The aggregate deferral amount under 1983 and 1988 schemes was
Rs.752.01 lakh. The total amount of sales tax collected by the assessee for 7
years from 1-11-1989 to 31-10-1996 was to be paid after 12 years in 6 annual
instalments. However, by an amendment to the Bombay Sales Tax Act in 2002, if
the Net Present Value (NPV) of deferred tax as prescribed was paid, then the
deferred tax was deemed, in public interest, to have been fully paid. The
assessee, following the aforesaid amendment, made repayment of Rs.337.13 lakh on
30-12-2002 as per NPV of the deferred tax as prescribed under Circular No. 39T
of 2002 of Trade Circular dated 12-12-2002. The assessee claimed Rs.414.87 lakh,
being the difference between the deferred sales tax Rs.752.01 lakh and its net
present value amounting to Rs.337.13 lakh, as capital receipt and credited it in
the books of account of the assessee to the capital reserve account. However,
the Assessing Officer, keeping in view that the assessee had obtained the
benefit of payment of whole amount of Rs.752.01 lakh as deduction u/s.43B (in
view of CBDT’s Circular No. 496, dated 25-9-1987) brought the difference of
Rs.414.87 lakh to tax u/s.41(1). The CIT(A) upheld the addition made by the
Assessing Officer.
The Special Bench deleted the addition. The Special Bench
noted as under :
(1) The aggregate deferral amount under 1983 and 1988 schemes of Rs.752.01 lakh was to be paid by the assessee after 12 years in six equal annual instalments.
(2) As per the amendment of 2002 to the Bombay Sales Tax Act, 1959, the assessee was allowed to prematurely pay the entire amount of the deferred sales tax at the Net Present Value (NPV) as prescribed and, on making such payment, the deferred tax shall be deemed to have been fully paid.
(3) The amount paid by the assessee was determined and prescribed by SICOM (which was the implementing agency of the State Government.).
(4) The amount paid by the assessee represented the NPV of the future sum and there had been no remission or cessation of liability by the State Government.
(5) Had the State Government accepted a lesser amount after 12 years or reduced the number or amount of the annual instalments, then it could have been a case of remission or cessation.
(6) Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(1)(a) since no benefit arose to the assessee in terms of section 41(1)(a).
