Thursday, October 21, 2010

HC (HP): Sec 43B, CBDT circular, luxury tax

(2010) 33 (I) ITCL 208 (HP-HC)

CIT v. Eastbourne Hotels (P) Ltd.

Counsel: Ms. Vandana Kuthiala, for the Appellant q M/s. K. D. Sood, for the Respondent

JUDGMENT

This appeal has been admitted on the following substantial question of law :

"(i) Whether on the facts and in the circumstances of the case the learned Tribunal was right in law in holding that Circular Nos. 496 and 674 issued by the Central Board of Direct Taxes were applicable to the luxury tax in relation to the provisions of section 43B of the Income Tax Act, 1961, whereas the said circulars cover the sales tax only and do not have mention of luxury tax ?"

2. Briefly stated the facts of the case are that to give an impetus to the industry in the State of Himachal Pradesh especially the hotel industry, the State has permitted the hotels to make deferred payment of luxury tax/sales tax for a period of seven years to new hotels set up in the prescribed areas. According to the assessee, M/s. Eastbourne Hotels Pvt. Ltd., Shimla, it fulfils all the conditions relatable to the deferred payment to the luxury tax/sales tax. It, therefore prayed that in terms of Circular Nos. 496 ((1988) 169 ITR (St.) 53) and 674 ((1994) 205 ITR (St.) 119) issued by the Central Board of Direct Taxes ("CBDT"), the payment of luxury tax be deemed to be made in the year in which it fell due. The assessing officer did not accept the plea of the assessee and held that the assessee-company has not filed the requisite certificates showing that it was eligible to the benefits of the luxury tax deferral scheme and held that the assessee's applications could not be decided at that stage.

3. The assessee filed an appeal and the Commissioner of Income-tax (Appeals) on the basis of Circular dated 2-9-1996, held that the assessee could not be denied the benefit of Circular No. 496. The Income Tax Appellate Tribunal, Chandigarh upheld the order the Commissioner (Appeals). Hence the present appeal by the revenue.

4. Mrs. Vandana Kuthiala, advocate appearing on behalf of the revenue has argued that Circulars Nos. 496 and 674 only make reference to the Sales Tax Act and not to luxury tax and, therefore, the luxury tax deferral scheme is not exempt. She has placed reliance on section 43B of the Income Tax Act which provides that deduction allowable under the Income Tax Act in respect of the tax can only be allowed in the year in which the same is actually paid by the assessee. She has contended that under this section, the luxury tax could be deducted only in the year it was deposited and since it has not been deposited, deduction for the deferred payment of luxury tax cannot be allowed.

5. There is no manner of doubt that Circulars No. 496 and 674 refer to sales tax. In Circular No. 496, the Central Board of Direct Taxes noted the provisions of section 43B and it found that a large number of States had introduced sales tax deferral schemes as a part of the incentives offered to entrepreneurs setting up industries in backward areas. Under these schemes, the eligible units are permitted to collect sales tax and retain such tax for a prescribed period. In the present case, the prescribed period is seven years whereafter the tax is payable either in lump sum or in instalments. Various State Governments made representations that the provisions of section 43B should be read in such a manner so as to give effect to the incentives offered under the deferral schemes and not be an obstruction to the said schemes. Thereafter, the matter was examined by the Central Board of Direct Taxes in consultation with the Ministry of Law and the following decision was taken :

"4. The matter has been examined in consultation with the Ministry of Law and the various State Governments. The Ministry of Law has opined that if the State Governments make an amendment in the Sales Tax Act to the effect that the sales tax deferred under the scheme shall be treated as actually paid, such a deeming provision will meet the requirements of section 43B."

6. It appears that in a number of States, amendments were not carried out in the Act as directed in clause 4 quoted hereinabove and the State Governments prayed that the amounts covered under the scheme be allowed as deduction for the previous year in which the conversion has been permitted by the State Governments. The Board reconsidered the matter and issued another Circular No. 674 on 29-12-1993 ((1994)205 ITR (St.) 119). Relevant portion of it reads as follows :

"The Board have considered the matter and are of the opinion that such deferral schemes notified by the State Governments through the Government orders meet the requirements of the Board's Circular No. 496, dated 25-9-1987, in effect though in a different form. Accordingly, the Board have decided that the amount of sales tax liability converted into loans may be allowed as deduction in the assessment for the previous year in which such conversion has been permitted by or under the Government orders."

7. A bare perusal of this circular shows that once the conversion has been permitted by the Government or under order of the Government, the deduction shall be permissible in the previous year in which such conversion is permitted. The Circular in our opinion totally covers the dispute. It is more in the nature of a clarification of section 43B. The revenue is bound by the circulars issued by the Central Board of Direct Taxes.

8. It may be mentioned that in view of the second circular, the Gujarat High Court in CIT v. Bhagwati Autocast Ltd. (2003) 261 ITR 481 and the Punjab and Haryana High Court in CIT v. Mahaluxmi Brick Manufacturing, Moulding and Fabricating Industries P. Ltd. (2005) 273 ITR 190 held that the assessee is allowed to claim deduction of the sales tax in the year in which it was payable notwithstanding the fact that it has not been actually paid in terms of the deferral scheme.

9. The argument of the revenue that the circulars make reference to the Sales Tax Act only and not to luxury tax and, therefore, do not cover the luxury tax deferral scheme is wholly without force. Deferral schemes for grant of incentives whether under the Sales Tax Act or any other Act have the same effect. The purpose is to encourage the industry. The circulars issued by the Central Board of Direct Taxes relate to the manner in which section 43B of the Act has to be interpreted. This interpretation has to be consistent for every tax deferral scheme and the interpretation cannot change from Act to Act. The Central Board of Direct Taxes has not granted any exemptions from the provisions of section 43B but has held that if its instructions are complied with then it will be deemed that the requirement of section 43B has been met. This will be applicable across the board to all Acts and cannot be limited only to the Sales Tax Acts.

10. However, we may point out that before taking benefit of the deferral scheme, the assessee must produce before the assessing officer the requisite certificates showing that it is covered under the deferral scheme. Therefore, though we hold that the circulars are applicable to luxury tax also, the assessee must produce before the assessing officer evidence to show that it is covered under the scheme. For this purpose, the matter is remitted to the assessing officer.

11. In view of the above discussion, the question is answered in favour of the assessee and against the revenue. The appeal is disposed of in the aforesaid terms. No order as to costs.

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