Surplus/Savings arising on prepayment of deferred sales tax not taxable u/s (iv)

Brief of the case:

The ITAT Mumbai in the above cited case held that the surplus/savings  arising on prepayment of deferred cannot be taxed u/s 28(iv) as by making prepayment of a future liabity  at present value no monetary benefit arises to assessee  as the savings it made by prepayment would get set off against the interest it loses by making prepayment.

Facts of the case:

• The assessee company is engaged in the business of manufacturing of abrasives & refractory products and also dealt in ceramics and plastics. AO observed that the assessee company had made some gain on savings made by pre-payment of deferred sales tax  at Net Present Value (of the tax payable after 7 years) amounting to Rs.1,63,03,435/- which the assessee treated as capital receipt .However, AO sough the same to be taxed as remission of a trading liability u/s 41(1).
• CIT(A) accepted the assessee’s contention that savings due to prepayment of deferred sales tax would not amount to remission as envisaged in sec 41(1). However, as per CIT(A) the same results in benefit from business of the assessee as contemplated in sec 28(iv), therefore, such savings taxable as business income in Sec 28(iv).
• Aggrieved assessee is in appeal before ITAT.
  

Contention of the Assessee:

• The learned counsel for the assessee contended that the ‘benefit’ as envisaged u/s 28(iv) is something which actually flows to the assessee in monetary terms. By making prepayment of future liability assessee has not received any benefit because by making prepayment though at Net Present Value assessee may have saved some money but at the same time it has foregone the interest it would have earned on the money had it not used for prepayment.
• Therefore, by no means any benefit as envisaged u/s (iv) accrue to assessee.

Held by ITAT Mumbai:

• ITAT observed that the issue of taxability of surplus arising to the assessee on repayment on deferred sales tax liability has also arisen in earlier A.Y. i.e. A.Y. 2005-06 and 2006-07 wherein this issue has been decided in favour of the assessee by the Tribunal as well as by Hon’ble Bombay High Court. In those decisions it was held that such surplus cannot be said as remission of trading liability to be taxable u/s 41(1).
• The deferred sales tax was repayable after a period of 7 years in prescribed no. of instalments. But by way of amendment to Bombay Sales Tax Act, assessee got an option to repay the deferred sales tax in present date at Net Present Value of the same payable in future.
• By making payment of net present value of a future liability it cannot be said if any financial benefit, in real terms, has accrued to the assessee as the assessee has paid the same today which he could pay in future , had it not paid then it would have invested such money and earned interest on the same .
• It is noted that none of the authorities had gone into this aspect and did not quantify, in financial or monetary terms, if any amount could be worked out which could be said to be a ‘benefit’ that had accrued to the assessee.
• Therefore, the tribunal held that the surplus/savings arising of prepayment of a future liability can neither be taxed u/s 41(1) nor u/s 28(iv).