Case Law Details

Case Name : Schenectady Specialities Asia Pvt Ltd Vs ACIT (ITAT Mumbai)
Appeal Number : 2009-TIOL-151 – ITAT- MUM
Date of Judgement/Order :
Related Assessment Year :
Courts : All ITAT (4418) ITAT Mumbai (1458)

Background

The Mumbai Tribunal has recently held in the case of  Schenectady Specialities Asia Pvt. Ltd. that the difference between the sales tax collected but not deposited by the assessee with the Government under a sales tax deferral scheme, and the amount settled by the assessee under the premature payment option, is to be treated as income of the assessee, for the assessment year in which such sales tax liability is discharged.

Facts

The assessee is a company and has set up its unit in Raigad District, which is a notified backward area and is thus eligible for incentives as per schemes announced by the State Government of Maharashtra. The incentives were inter alia, in the form of deferment of payment of sales tax in terms of the Package Scheme of Incentives, 1993.

In terms of this Scheme, the sales tax liability of the assessee upto the end of financial year 1999-2000, aggregating to Rs. 1,79,68,846, was required to be paid by the assessee in five equal annual installments from April 2010 onwards.

State Industrial & Investment Corporation of Maharashtra Ltd. (“SICOM”), the agency appointed by the State Government of Maharashtra for proper implementation of the scheme, offered the assessee a premature payment option. Under that option, the deferred sales tax liability of the assessee would be settled by an immediate one-time payment of Rs. 50,49,288, which represented the present value of the future sales tax deferral payment of Rs 1,79,68,846. The assessee accepted the offer and recorded in its balance sheet, the amount payable to SICOM at Rs. 50,44,288.

The difference of Rs. 1,29,24,558 (i.e. Rs. 17,968,846 less Rs. 5,044,288) was credited by the assessee to its capital account by treating the same as a capital receipt; and accordingly, the assessee did not offer the same to tax in its return of income.

During the course of assessment proceedings, the Assessing Officer (“AO”) questioned the assessee as to why the benefit accrued on account of cessation of liability should not be treated as income of the assessee chargeable to income-tax.

Assessee’s contentions

Before the AO, the assessee raised the following contentions:

• The liability on account of deferred sales tax payment is an unsecured loan ; any benefit arising on its settlement , by making payment of its present value is not chargeable to tax since it is in the nature of a capital receipt.

• No benefit was obtained from SICOM as only the present value of the total deferral sales tax payment was paid.

• The sales tax collected from customers was accounted for in a separate “Sales tax collection” account in the balance sheet and was not credited to the profit and loss account. Accordingly, the provisions of section 41(1) of the Income-tax Act, 1961 were not applicable.

• Sales tax deferral loan is not a trading receipt and , as such, does not become a trading receipt subsequent to its remission thereof.

• There was a dispute between the sales tax department and SICOM regarding the payment of sales tax amount and there is a possibility that the sales tax department would not treat this sales tax liability as discharged.

Revenue’s contentions

• The assessee had never treated deferral payment of sales tax liability as unsecured loan in its books of account. Therefore, the contention of the assessee that the amount received is a capital receipt cannot be accepted.

• The sales tax liability is a trading liability2 and , having availed the benefit of sales tax deferral scheme, the sales tax liability was considered to have been paid in the earlier years under section 43B of the Act.

• The gain arising on remission of sales tax liability is income taxable under section 41(1) of the Act.

Tribunal’s Ruling

• Sales tax collected by the assessee is a trading receipt, and in view of the deferral scheme, the same is deemed to have been paid to the State Government

– The fact that sales tax collected was not routed through the profit and loss account would not make any material difference. It is the true nature and the quality of the receipt , and not the heading under which it has entered in the books of account , that would be decisive.

– If a receipt is a trading receipt, the fact that it has not been shown in the books of account of the assessee would not prevent the assessing authority from treating it as a trading receipt.

• Gain on remission of sales tax liability is taxable income under section 41(1)

– The assessee had claimed deduction of sales tax collected under section 43B as per Circular No. 674 dated 29 December, 1993. The sales tax collected was converted into interest-free loan liability.

– As the total loan liability was settled and discharged at a lesser amount, the assessee gained in terms of money and the difference between the settled amount and total loan liabilities was income of the assessee. In this regard, reliance was placed on the CIT(A)’s order.

– The contention of the assessee that the sales tax deferral loan, which was not in the nature of a trading receipt, and would not become a trading receipt by subsequent process of remission, cannot be accepted for following reasons:

• The assessee had filed no evidence that the sales tax deferral has been converted into an interest free loan by any authority

• The scheme floated by SICOM was termed as “Package Scheme of  Incentives-Premature payment”.

• All the correspondence between the assessee and SICOM talked about sales tax deferral benefit and did not state ‘Interest-free loans’.

• What was discounted was the deferred sales tax liability and not discounting of any interest-free loan as claimed by the assessee.

• Sales tax liability cannot be said to be in dispute

– SICOM is the agency appointed by the State Government of Maharashtra, and as such, was competent to issue the offer of settlement of the sales tax loan liability against the payment of the lesser amount, which was accepted by the assessee.

– Nothing was placed on record to establish that SICOM had issued the offer without the approval of the State Government of Maharashtra.

– A dispute that arose between SICOM and the State Government of  Maharashtra was of no concern to the assessee , as the offer was issued by  SICOM as the nominated agency of the State Government of Maharashtra This binds the Government itself , as it is an estoppel against the Government  on acceptance of the offer by the assessee.

– No additional demand was raised by the sales tax department. Hence, it cannot be said that sales tax liability had not been settled and it was under dispute.

– The entire sales tax liability had been discharged for a lesser amount.

Conclusion

The ruling of the Tribunal is of significant importance to all, especially in cases of various assessees involved in litigation with the tax department on similar grounds. Such assessees may need to re-examine their strategy in light of this decision. This matter is likely to be further litigated before higher appellate authorities for further deliberation and decision.

.1 Schenectady Specialities Asia Pvt Ltd v. ACIT [2009-TIOL-151 – ITAT- MUM]

2 Chowringhee Sales Bureau Pvt Ltd. v. CIT [1973] 87 ITR 542 (SC)

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Type : Judiciary (10235)

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