Court : Special Bench of the Mumbai Income Tax Appellate Tribunal
Citation : Sulzer India Ltd. , [AIT-2010-503-ITAT]
Brief : A recent decision of the Special Bench (SB) of the Mumbai Income Tax Appellate Tribunal (Tribunal) [AIT-2010-503-ITAT] in the case of Sulzer India Ltd. (Taxpayer) on the issue of whether settlement of deferred sales tax liability, under an option made available by the statutory authority to pay the net present value (NPV) of the liability payable in future, is chargeable to tax under the provisions of the Income Tax Laws (ITL). The benefit obtained on remission or cessation of a trading liability is taxable as business income under a specific provision of the ITL. The SB held that settlement of the deferred sales tax liability at NPV does not result in any benefit to the Taxpayer since the NPV represents the current economic value of the liability payable in future and, hence, there is no remission or cessation of a trading liability chargeable to tax under the provisions of the ITL.
Background and facts
- The ITL permits deduction of expenditure representing statutory liabilities like sales tax etc., only upon actual payment.
- Under a specific provision of the ITL, if any allowance or deduction is made by way of expenditure, loss or trading liability in previous tax years and, subsequently, the taxpayer is in receipt of the amount of the loss or expenditure or certain benefit accrues to the taxpayer by way of remission or cessation of trading liability, the same is chargeable to tax as business income.
- The Taxpayer set up an industrial unit in a notified backward area eligible for certain package of fiscal incentives announced by the state government. As part of the incentive scheme, the Taxpayer was eligible for sales tax deferral for a specified period in terms of which the liability to pay sales tax collected during the specified period was deferred and the same was payable after 12 years in six equal installments.
- The Taxpayer treated the amount of sales tax deferral as an unsecured loan in its books. Furthermore, based on a circular issued by The Central Board of Direct Taxes (Circular), for income tax purposes, the Taxpayer claimed deduction of the sales tax deferral liability which was allowed by the Tax Authority in previous tax years. The Circular clarified that if the state governments make an amendment in the relevant sales tax laws to the effect that the sales tax deferred under the incentive scheme shall be treated as actually paid, then, such a deeming provision will meet the actual payment condition for income tax purposes also.
- Subsequently, during tax year 2002-03, the sales tax authority announced a scheme of pre- payment of sales tax deferral which permitted the taxpayers who availed the deferral benefit to settle the liability by paying the NPV of the liability computed in terms of formula prescribed in the pre- payment scheme. The pre- payment scheme was stated to be in public interest.
- The Taxpayer availed the benefit of the pre¬payment scheme and paid NPV of INR33.71m in respect of sales tax deferral of INR75.20m. The Taxpayer credited the difference between the two amounts viz., INR41.49m to capital reserve in its books and claimed it as not chargeable to tax.
- The Tax Authority taxed the difference of INR41.49m as benefit obtained in respect of remission of trading liability.
- The first appellate authority upheld the action of the Tax Authority. The Taxpayer appealed further to the Tribunal.
- The issue was referred to the SB of the Tribunal in view of conflicting rulings of different benches of the Tribunal.
Issue before the SB: – Whether the difference between NPV and sales tax deferral payable in future is chargeable to tax as benefit obtained in respect of remission of trading liability.
Taxpayer’s contentions
