Business Income- Remission or Cessation of Trading Liability – Settlement of deferred Salestax liability by an immediate one-time payment to SICOM – Sales-tax Authorities declining to grant credit of payment made to SICOM – No remission or cessation of liability – Section 41(1) (a) not attracted.

The assessee had an industrial unit in the district of Raigad which was a notified backward area. The Government of Maharashtra issued a package scheme of incentives in 1993 by which a scheme for the deferral of sales tax dues was announced. The assessee had during the period May 1, 1999 and March 31, 2000 collected an amount of Rs.1,79,68,846 towards sales tax. Under the scheme, the amount was payable in five annual installments commencing from April 2010 and the liability was treated as an unsecured loan in the books of account of the assessee. The State Industrial and Investment Corporation of Maharashtra Limited (SICOM) offered to the assessee an option for the settlement of the deferred sales tax liability by an immediate one-time payment. The assessee paid an amount of Rs.50,44,280 to SICOM which, according to the assessee, represented by net present value as determined by SICOM. Payment was made by the assessee to SICOM on June 26, 2000. The difference between the deferred sales tax and its present value amounting to Rs.1.29 crore was treated as a capital receipt and was credited in the books of the assessee to the capital reserve account.

The Assessing Officer in the assessment order for the assessment year 2000-01 brought the aforesaid difference of Rs.1.29 crore to tax u/s. 41(1) of the Incometax Act 1961. The appeal filed by the assessee before the Commissioner (Appeals) for 2000-01 as well as the appeal for 2001-02 came to be dismissed by the appellate authority. The Tribunal dismissed the appeals filed by the assessee for these two assessment years by a common order. The assessee then moved the Tribunal in a miscellaneous application u/s. 254 which was dismissed.

The main contention of the assessee before the High Court was that the principal requirement for the applicability of section 41 of the Act is that the assessee must obtain a benefit in respect of a trading liability by way of a remission or cessation thereof. He argued that in the present case, there was no cessation of the liability of the assessee in respect of the payment of the sales tax dues and even if there was such a cessatioin, no benefit was obtained by the assessee. This contention was supported by the fact that the issue pertaining to the sales tax liability was decided by the Sales Tax Tribunal by its judgment dated February 8, 2008, and the Tribunal had specifically upheld the decision of the assessing authorities declining to grant credit to the assessee of payment which was made to State Industrial and Investment Corporation of Maharashtra Limited (SICOM) of Maharashtra. This contention is accepted by the High Court holding that the net result of the order of the Sales Tax Tribunal dated February 8, 2008, was to uphold the decision of the assessing authority declining to grant credit of the payment made by the assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on July 22, 2008, a notice of demand was issued under section 38 of the Bombay Sales Tax Act of 1959 to the assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs.1,33,13,555. Having regard both to the order passed by the Sales Tax Tribunal on February 8, 2008, and the notice of demand issued on July 22, 2008, it was not possible for the court to accept the contention that there was a remission or cessation of liability. Since the record before the court did not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the facts of the present case.

According to the Supreme Court, the aforesaid facts, clearly demonstrated that the assessee had not been granted the benefit of the said cession for the assessment years in question. According to the Supreme Court, the High Court had rightly held that one of the requirements for the applicability of section 41(1)(a) of the Act had not been fulfilled in the present case.

The Supreme Court did not find any error in the order of the High Court and the appeals were accordingly dismissed.