Sulzer India Ltd vs. JCIT (ITAT Mumbai Special Bench)

If NPV of future sales-tax liability is paid, there is no “remission” for s. 41(1)

The assessee availed of the sales-tax deferral schemes of 1983 & 1988 offered by the Maharashtra State Govt under which the sales-tax collected by the assessee could be paid after 12 years. The total sales-tax collected by the assessee was Rs. 7,52,01,378 which was deemed to have been paid and deduction was allowed u/s 43B. In 2002, the State issued a circular permitting premature repayment of the deferred sales-tax liability at its Net Present Value (NPV). The NPV of the deferred sales-tax liability was computed at Rs. 3,37,13,393, which the assessee paid and was discharged of the liability to pay Rs. 7,52,01,378. The difference between the deferred sales-tax and its NPV amounting to Rs. 4,14,87,795 was treated by the assessee as a capital receipt. The AO took the view that as a deduction for the sales-tax liability had been allowed u/s 43B, the “remission” from that liability was taxable u/s 41(1). This was upheld by the CIT (A). On appeal by the assessee, the issue was referred to the Special Bench in view of conflicting judgements. HELD by the Special Bench deciding in favour of the assessee:

(i) For s. 41(1) to apply, two conditions have to be satisfied. First, the assessee should have obtained an allowance or deduction in respect of any loss, expenditure or trading liability and second, the assessee should have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof;

(ii) The first requirement of s. 41(1) that the assessee should have obtained an allowance or deduction in respect of loss, expenditure or trading liability is not satisfied because all that CBDT Circular No. 496 dated 25.9.1987 provides is that “…the statutory liability shall be treated to have been discharged for the purposes of s. 43 B”. Accordingly, the benefit of deduction was allowed for the purpose of s. 43 B only and not under any other provisions of the Act. The AO applied the aforesaid Board Circular while giving the benefit of deduction u/s. 43B. Circulars are binding on the department;

(iii) The second requirement of s. 41(1) is also not satisfied because in paying the NPV, the assessee has paid the equivalent of the Future Value of the sum. As the sum of Rs. 3,37,13,393 is the NPV of the future sum of Rs.7,52,01,378 and its payment discharges the full liability, there is no remission or cessation of liability by the State Govt. It is a simple case of collecting the amount at net present value which is due later on (principles of s. 63 of the Contract Act applied);

(iv) The fact that the assessee has not obtained the modified Eligibility Certificate or that it used the expression ‘remission’ of loan liability in its books are irrelevant because the making or absence of an entry cannot determine rights and liabilities of parties.