Case Law Details
Advocate Akhilesh Kumar Sah
DCIT Vs Alfa Laval India Ltd. (ITAT Pune)
Alfa Laval India Ltd. case: Difference between the Net Present Value against the future liability credited by the assessee under the capital reserve account in its books of account, is a capital receipt, the addition made on account of the gain on settlement of the sales tax deferred liability not taxable
In DCIT vs. Alfa Laval India Ltd. [ITA No. 2638/PUN/2016 A.Y.: 2011-12, decided on 09.01.2019], one of the ground raised was whether on the facts and in the circumstances of the case, the CIT(A) was justified in holding that discount of Rs.72,74,168/- received on pre-payment of liability under the ‘Sales Tax Deferral Scheme’, as not a remission or cessation of liability under section 41(1) of the Income Tax Act, 1961 (for short ‘the Act’).
The brief facts of the above case were that the assessee company being a subsidiary of Alfa Laval AB, Sweden was engaged in manufacturing and sale of plate and spiral head exchanges, decanters and separators and also executed complete projects and systems for its customers. The assessee company had three divisions’ viz. Equipment division, the Projects division and the Parts and Services division. The Equipment division of the company was engaged in manufacture and sale of plate and spiral exchangers, decanters and separators etc. whereas the Projects division was engaged in installation and Commissioning of projects, plants and systems. The parts and services division was engaged in trading of spares and components and servicing related activities.
In respect of the above mentioned ground, during assessment proceedings, the Assessing Officer(AO) found that the assessee had reduced the amount of Rs.72,74,170/- from its ‘Statement of the Computation of Total Income’ contending that this amount was not taxable . The AO found that the assessee had total unpaid sales tax liability of Rs.4,60,55,889/- . Out of which, the assessee paid Rs.1,07,17,765/- on the due date. With the result, remaining outstanding sales tax liability became Rs.3,53,38,124/-. During the year, the assessee paid Rs.2,80,63,956/- being the net present value of Rs.3,53,38,124/- clearing its entire sales tax liability. Thus, the assessee received the benefit of Rs.72,74,168/- which the assessee claimed as exempt from tax. The assessee placed reliance on the decision of Special Bench of ITAT in the case of Sulzer India Ltd [134 TTJ (Mumbai) (SB) 385] and the decision of the ITAT, Pune in the case of ACIT vs. Spicer India Ltd. [ITA No. 1279/PN/2012].
The CIT(A) after considering the assessment order, submissions of the assessee and the facts of the case held that the issue was covered in assessee’s favour by the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Sulzer India Ltd. (2014) 369 ITR 717 ( Bom.) wherein the Hon’ble High Court had held that the difference between the NPV against the future liability credited by the assessee under the capital reserve account in its books of account, is a capital receipt. It cannot be termed as a remission or cession of a trading liability and consequently, no benefit has arisen to the assessee in terms of the section 41(1) of the Act. Therefore, by following the decision of the Hon’ble Bombay High Court, the addition of Rs.72,74,140/- made on account of the gain on settlement of the sales tax deferred liability was deleted.
The learned Members of the Pune ITAT sustained relief provided to the assessee by the CIT(A).
RELEVANT EXTRACT OF THE ITAT ORDER
10. With regard to the second ground of appeal, during assessment proceedings, the Assessing Officer found that the assessee has reduced the amount of Rs.72,74,170/- from its ‘Statement of the Computation of Total Income’ contending that this amount is not taxable . The Assessing Officer found that the assessee had total unpaid sales tax liability of Rs.4,60,55,889/- . Out of which, the assessee paid Rs.1,07,17,765/- on the due date. With the result, remaining outstanding sales tax liability became Rs.3,53,38,124/-. During the year, the assessee paid Rs.2,80,63,956/- being the net present value of Rs.3,53,38,124/- clearing its entire sales tax liability. Thus, the assessee received the benefit of Rs.72,74,168/- which the assessee claimed as exempt from tax. The assessee placed reliance on the decision of Special Bench of ITAT in the case of Sulzer India Ltd. 134 TTJ (Mumbai) (SB) 385 and the decision of the ITAT, Pune in the case of ACIT Vs. Spicer India Ltd.
11. Before the Ld. CIT(Appeal), assessee has made following detailed written submissions :
“2.1 It is submitted that our company is engaged in manufacture and sale of plate & spiral heat exchangers, decanters and separators and also executes complete projects and systems for its customers. The appellant has set up manufacturing units at Satara. The Appellant became eligible to sales tax deferral benefit under the Package Scheme of Incentives in respect of its unit at Satara which was implemented by SICOM Ltd acting as nodal agency on behalf of the State Government. As per the Scheme, the sales tax collected from customers was allowed to be accumulated and the appellant was liable to repay the amount after 10 years in 5 equal installments. Our company has disclosed the above amount as unsecured loan in its books. Section 38 of the Bombay Sales Tax Act was amended to provide for pre-payment of deferred sales tax liability at Net Present Value (NPV). Accordingly during the relevant previous year, our company decided to pre-pay the above loan at the NPV. Our company made pre-payment of Rs.2,80,63,956/- during the relevant previous year being the net present value of Rs.3,53,38,124/ – resulting in surplus of Rs.72,74,170/ -. Our company has treated the said surplus as capital receipt. However the learned Assessing officer has not accepted the above submission and offered the same to tax as revenue receipt u/ s.41(1) /28(iv).
2.2. Section 41(1) of the Income Tax Act, 1961 reads as under:
“41(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, anu amount in respect o(such loss or expenditure or some benefit in respect o(such trading liability bu wag o(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 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;
(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.
(c) 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 income-tax as the income of that previous year.
There are various judicial decisions on the applicability of Section 41(1). It appears from the same that to invoke the provisions of section 41(1), the following conditions must be fulfilled:
(i) In the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure the trading liability incurred by the assessee.
(ii) The assessee must have subsequently (a) obtained any amount in respect of such loss or expenditure or (b) obtained any benefit in respect of such trading liability by way of remission or cessation thereof. In case either these events happen, the deeming provision enacted in closing part of sub-so (I) comes into play.
(iii) The amount obtained by the assessee or the value of benefit accruing to him is deemed to be profits and gains the business or profession and it becomes chargeable to income-tax as an income of that previous year.
2.3 Thus to invoke the provisions of section 41(1), the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee and subsequently obtained any benefit in respect of such a trading liabilities by way of remission or cessation thereof. In the present case, our company has only made a pre-payment of its liability as per the option provided by the state government and there is no waiver of such liability. In this case it is submitted that the above prepayment could not be construed as remission of liability because the State Government had not waived of any of the liability but only accepted the amount at its present value which was due later.
2.4 It is submitted that the CBDT has issued circular clarifying that deferred sales tax under the deferred scheme has to be treated as actually paid so that the statutory liability will be taken to be actually paid for the purposes of Section 43B. After such deemed payment, the unpaid sales tax is by way of deferral loan and not a trading liability and hence remission of such loan cannot be treated as income of the appellant. It is further submitted that in the present case, there is no question of any benefit arising to the appellant. Section 41(1) is applicable when a liability for payment of Rs X is settled for lesser amount at X – Y. In this case, the liability for payment is settled at its present value and there is neither any remission nor any waiver of such amount. On payment of such NPV, such deferred sales tax is assumed to be paid fully and not waived. Benefit has to be understood commercially and not mathematically. In view of this, it is submitted that the appellant company has not derived any benefit due to such pre- payment and therefore the resultant surplus cannot be considered as taxable u/ s. 41.
2.5 It is further submitted that in the present case, s. 41(1) has been invoked on the alleged ground that our company has obtained some benefit in respect of a trading liability by way of remission or cessation thereof. In this respect, it is submitted that s.41( 1) does not apply in the present case because (1) the appellant has not obtained any benefit (2) there has not been any remission of a liability (3) the benefit if any obtained by the appellant is not in respect of a trading liability (4) the benefit if any obtained by the appellant is on capital account. In view of this, it is respectfully submitted that the provisions of Section 41(1) cannot be invoked in the present case. Our company relies upon the following decisions in support of the above submissions.
(a) CIT Vs. Sulzer India Ltd. (2014) 369 ITR 717 (Born.)
(b) Jurisdictional Pune Tribunal decision in the case of ACTT Vs. Spicer India Ltd. in ITA No. 1279/ PN/ 2012 for Assessment year 2004-05.
(c) Copies of above decisions are enclosed herewith as Annexure-5
2.6 The learned Assessing Officer has further held that this surplus is taxable u/ s.28(iv) of the Income Tax Act, 1961. Section 28(iv) provides as under:
The following income shall be chargeable to income tax under the head “profits and gains of business or profession”.-
XXXX
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession
It is submitted that in the present case, the appellant has not earned any benefit as submitted in para 2.3 & 2.4 above. The Appellant has only made a pre-payment of its deferred sales tax liability at the Net Present Value. The Net Present Value is the current value of the future liability. Since the payment is made at NPV, there is no remission or waiver of any liability and therefore the allegation that such benefit is taxable u/s. 28 is baseless and without any merit. Section 28 of the Income Tax Act 1961 does not bring capital receipts into the income tax net. It is respectfully submitted that the benefit, if any, was received by our company at the time of setting up’ of the unit and the deferral since these benefits are related to the setting up of the units. In view of this, it is submitted that even f it is held that there is any benefit, it has to be considered to be on capital account and not on revenue account. [t is submitted that the learned Assessing officer has not discharged the onus cast upon him by the provisions of the Act to prove as to how a capital receipt is taxable u/ s. 28(iv) and therefore the taxing the same u/ s. 28 is without any merit and not in accordance with the provisions of the Income Tax Act 1961.
2.7 In view of this, we request your Honour to kindly direct the learned Assessing Officer to delete the above addition and oblige.
2.8 Without prejudice to the above, it is submitted that the benefit, if any, was received by our company at the time of setting up of the unit and the deferral since these benefits are related to the setting up of the units. In view of this, the same should have been reduced from the respective blocks by the learned Assessing officer as per the provisions of Section 43. In view of this, we request Your Honour to direct the [earned Assessing officer to delete the addition and oblige us.”
12. The Ld. CIT(Appeal) after considering the assessment order, submissions of the assessee and the facts of the case held that the issue is covered in assessee’s favour by the decision of Hon’ble Jurisdictional High Court in the case of CIT Vs. Sulzer India Ltd. (2014) 369 ITR 717 ( Bom.) wherein the Hon’ble High Court has held that the difference between the NPV against the future liability credited by the assessee under the capital reserve account in its books of account, is a capital receipt. It cannot be termed as a remission or cession of a trading liability and consequently, no benefit has arisen to the assessee in terms of the section 41(1). Therefore, by following the decision of the Hon’ble Bombay High Court, the addition of Rs.72,74,140/- made on account of the gain on settlement of the sales tax deferred liability was deleted.
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