Showing posts with label HC MUM. Show all posts
Showing posts with label HC MUM. Show all posts

Tuesday, July 31, 2012

Low Tax Effect Circular is retrospective & dept Must Show “Cascading Effect”

 
CIT vs. Varsha Dilip Kohle (Bombay High Court)

Low Tax Effect Circular is retrospective & dept Must Show "Cascading Effect"

The department filed an appeal in the year 2010 where the tax effect was Rs. Rs.6,69 lakhs. The issue raised was whether deduction of interest payment on funds introduced in the firm, (in the form of loan), could be allowed against remuneration received from the firm. In response to the point whether Instruction No.3 of 2011 dated 9.2.2011 issued by the CBDT which states that appeals should not be filed where the tax effect was less that Rs. 10 lakhs, the department argued that (i) as the appeal had been filed prior to the issuance of the circular, the circular did not apply and (ii) as the appeal had a "cascading effect" involved a "common principle", the appeal could not be dismissed in view of the Supreme Court's verdict in Surya Herbals. HELD dismissing the appeal:

In CIT vs. Polycott Corp 138 ITR 144 (Bom) & CIT vs. Vijaya V. Kavekar, it was held that Circular No.3 of 2011 has retrospective operation and applies even to pending cases. As regards Surya Herbals, the appeal does not involve any "cascading effect" as the department has not shown whether there are other appeals which raise the same point.

See also: CBDT's lettr dated 2.9.2011 & Virgo Marketing (SC)

Related Judgements
CIT vs. Virgo Marketing Pvt. Ltd (Supreme Court) In view of Para 11 of CBDT Instruction No.3/2011 dated 9th February, 2011, liberty is granted to the Department to move the High Court by way of review within four weeks.
CIT vs. Surya Herbal Ltd (Supreme Court) Liberty is given to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. There are cases under the Income – Tax Act, 1961, in which a common principle…
CIT vs. M/s Ranka & Ranka (Karnataka High Court) Though paragraph 11 of Instruction No. 3/2011 provides that the revised tax limits will apply only to fresh appeals, the same has to be held to be applicable to pending appeals as well because (i) the Department has not kept in mind the object with which such Instructions have…

Saturday, July 28, 2012

Whether expenses incurred on corporate film-making is revenue in nature?

 
Income tax - Whether expenses incurred on corporate film-making is revenue in nature - YES, rules ITAT

MUMBAI, NOV 24, 2011: THE issues before the Bench are - Whether corporate film making charges are akin to sales promotion and hence the same are allowable as revenue expenses - Whether, for claiming an amount as bad debt, it is necessary to establish that such an amount is of revenue character. And the verdict partly goes in favour of the assessee.

Facts of the case

Assessee is a company engaged in the business of manufacturing and repairs of specialized motors. It claimed the deduction of corporate film making expenses and claimed write-off of certain bad debts. During the course of assessment proceedings the AO observed that the expenses of corporate film-making provided enduring benefits to the assessee and hence the same were capital in nature. The AO also denied the claim of right of bad debts on the ground that the advances made by the assessee were capital in nature and hence the write-off of the same was not permissible. CIT (A) allowed the appeal of the assessee. Before the ITAT, the DR pointed out that the advances made by the assessee company were inter-corporate deposits and hence the same activity cannot be regarded as regular activity of business.

After hearing the parties ITAT held that,

++ we find that the categorical finding of the CIT(A) is that "it has been held in various decisions that the expenditure incurred in making of advertisement film is an expenditure of revenue in nature." Therefore, we find no infirmity in the order of CIT(A) deleting the disallowance of Rs. 1,25,000/- made by the AO on account of corporate film making charges treating the same as revenue expenditure. Accordingly, this ground of appeal of the revenue is dismissed;

++ the AO has observed in the assessment order that interest accrued on inter-corporate deposits in the past also not shown as business income. Whereas the learned CIT(A) has observed that income on inter-corporate deposits was duly offered for taxation by the assessee in the preceding years. He gave a finding that the placement of inter-corporate deposits was in the normal course of business. In view of the above contradictory findings given by the authorities below, we set aside the order of the CIT(A) and remit the matter back to the file of the AO to examine the issue whether interest received on inter-corporate deposits offered for taxation as business income or not, whether placement of inter-corporate deposits was the normal course of business or not and decide, the entire issue pertaining to addition of Rs. 58,03,193/- consisting of advance made to suppliers at Rs 70,367/- and inter corporate deposit placed with Alpic Finance Ltd. Rs. 48,00,000/-, amount not recovered from debtors Rs. 72,552/- and accrued interest on inter-corporate deposits Rs. 8,60,274/-, de-novo after providing reasonable opportunity of being heard to the assessee in the matter.

Tuesday, September 28, 2010

HC (BOM): Circumstances subject to exercise of jurisdiction U/s 263

Where the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under section 263.

HIGH COURT OF BOMBAY Grasim Industries Ltd. vs. CITITR No. 113 of 1990

RELEVANT EXTRACTS:

11. Section 263 of the Income Tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by Section 263 are that the order must be considered by the Commissioner to be "erroneous in so far as it is prejudicial to the interests of the Revenue". This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. vs. CIT, 1 the Supreme Court held that the provision "cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer" and "it is only when an order is erroneous that the Section will be attracted" The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The ex-pression "prejudicial to the interests of the Revenue", the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court:

"The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income tax Officer adopted one of the courses permissible and the Income tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income tax Officer is unsustainable in law."

The principle which has been laid down in Malabar Industrial Co. Ltd. (supra) has been followed and explained in a subsequent judgment of the Supreme Court in Commissioner of Income Tax vs Max India Ltd . 2 While interpreting the provisions of Section 80HHC(3), the Supreme Court noted that the statutory provision had been amended eleven times and different views existed on the day when the Commissioner passed his order under Section 263.

The Court observed that "the mechanics of the section have become so complicated over the years that two views were inherently possible." Consequently, the subsequent amendment to the statutory provision, even though it was retrospective, would not attract the provisions of Section 263 particularly when the provision of law, as it stood, on the date when the Commissioner passed the order under Section 263, would have to be taken into account.

12. In Commissioner of Income Tax vs. Gabriel India Ltd.,3 a Division Bench of this Court observed that Section 263 does not confer an arbitrary or uncharted power on the Commissioner. In considering as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, the Commissioner must be guided by the material on the record. The power of suo motu revision under Section 263(1), is in the nature of supervisory jurisdiction. Two circumstances must exist in order to enable the Commissioner to exercise the power, namely, (i) the order must be erroneous; and (ii) by virtue of the order being erroneous, prejudice must have been caused to the interests of the Revenue.

Section 263 does not empower the Commissioner to substitute his judgment for that of the Assessing Officer, unless the decision is held to be erroneous. Both the conditions for the exercise of the power must be fulfilled. The order, in other words, sought to be revised, must be erroneous and must be prejudicial to the interests of the Revenue.

13 .The question as to whether the Commissioner has acted within the fold of his jurisdiction under Section 263 or outside it, in the present case, must be decided with reference to the principles which have been laid down by the Supreme Court and by this Court. Section 41(1) provides that where an allowance or deduction has been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee obtained whether in cash or in any other manner, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtains or the value of the benefit accruing shall be deemed to be profits and gains of business or profession and would accordingly be chargeable to income as the income of that previous year. The State Legislature enacted the Kerala Forest Produce (Fixation of Selling Price) Act, 1978. Section 3(1) empowers the Government to fix the selling price of forest produce for the following financial year. Section 5 stipulated that after the publication of the notification under Section 3, no forest produce shall be sold by the Government at a price which is less than the notified selling price. On 9th March 1979, the Government of Kerala issued notifications in exercise of its power under the Act of 1978 for the period ending 31st March 1981 and also for the period commencing from 1st April 1981, being the previous year relevant to Assessment Year 1982 83. The assessee had been allowed a deduction of an amount of Rs.1.75 crores during the Assessment Years 1980 81, 1981 82 and 1982 83. The notifications that were issued by the State Government were challenged by the assessee before the Kerala High Court. By its judgment dated 15th April 1981, the High Court struck down the notifications in so far as they related to eucalyptus, on the ground that in fixing the prices for eucalyptus, the State Government had not followed the procedure prescribed by the Act. The Kerala High Court held that matters which were required to be considered had not been placed before the Committee which was statutorily to be constituted under the provisions of the Act and the Committee had failed to consider relevant material before making its recommendations, in regard to the price of eucalyptus. The judgment of the Kerala High Court, therefore, set aside the notifications on the ground that the mandate of the Act in fixing the price of forest produce had not been followed and that relevant consideration had not been borne in mind by the Committee. The liability of the assessee to pay arose by virtue of the provisions of Section 5 of the Act, under which, no forest produce could be sold by the Government at a price, which was less than the selling price; the selling price being de1` 1fined to mean that the price of forest produce fixed by the Government under Section 3. The judgment of the Kerala High Court did not prohibit the government from issuing a fresh notification. After the decision of the Kerala High Court, the Expert Committee constituted under the provisions of Section 4, convened for the purposes of deciding afresh, the selling price of eucalyptus upto 31st March 1982. The Committee held its meeting on 25th March 1982, which was six days before the end of the relevant period here, and recommended the fixation of the selling price of eucalyptus between Rs.328/  to Rs.384/  per metric ton between 1978 and 1981. The Special Secretary to the State Government in the Forest and Minor Irrigation Department recorded in a note dated 27th March 1982 that the Kerala Forest Produce (Fixation of Selling Price) Rules, 1978 had been amended on 28th May 1981. Some doubt was expressed as to whether these Rules could fasten a liability with retrospective effect in the absence of an amendment to the parent legislation. The State Government, in pursuance of the judgment of the Kerala High Court proceeded to issue fresh notifications on 31st March 1981, 29th April 1981 and 29th May 1981. By the notification dated 29th May 1981, the Government refixed the selling price in the year 1981 82 with effect from 1st June 1981. On 31st March 1982, selling prices were notified for the period from 1st April 1982. These notifications were once again challenged by the assessee in a Writ Petition before the Kerala High Court. The Petition was allowed by the Division Bench of the Kerala High Court on 28th May 1994 and the notifications were set aside with a declaration that the prices fixed of bamboo, reed and eucalyptus were not payable by the Petitioner. The judgment of the Kerala High Court did not conclude the proceedings. Special Leave Petitions were filed before the Supreme Court in which, while granting leave, interim orders were passed by the Supreme Court, directing the assessee to pay the price of forest produce at 60% of the rate fixed in the notification issued by the State Government under Section 3(e) of the Act, less the price already paid. The Bank Guarantees furnished by the assessee were allowed to be encashed to the aforesaid extent. The Supreme Court expressed the hope that the parties would be able to arrive at a settlement which may be "beneficial to all concerned, having regard to the checkered history of the litigation with its attendant uncertainties, and to avoid further long drawn out litigation." Eventually, a settlement was arrived at between the Government of Kerala and the assessee on 27th October 1988. By the settlement, a series of matters set out in the schedule, came to be settled and parties agreed that no payment will be due by either party to the other in respect of any of the matters mentioned in the schedule.

14. The narration of facts would thus show that the liability of the assessee in respect of the payment due for the supply of forest produce, under the Kerala Forest Produce (Fixation of Selling Price) Act, 1978, was not concluded by the judgment of the Kerala High Court dated 15th April 1981. The notifications fixing the price of eucalyptus were set aside by the Kerala High Court, on the ground that the Committee statutorily constituted under the Act, had not applied its mind to the relevant material. The liability of the assessee to pay at the price notified, arose under the Act, for the supplies of forest produce effected by the State Government to the assessee . The liability arose as a result of the supply of forest produce the quantification of liability was liable to be made by the instrument of the notifications issued in accordance with the provisions of the Act. The view that there was no remission or cessation of the liability during the previous year, relevant to Assessment Year 1982- 83, was a possible view having regard to the circumstances, which transpired after the judgment of the Kerala High Court.

These circumstances included the following:

(i) The recommendations made by the Expert Committee on 25th March 1982 for the refixation of prices of forest produce six days before the end of the financial year; (ii) The issuance of fresh notifications by the State Government; (iii) The challenge by the assessee to the fresh notifications; (iv) The judgment of the Kerala High Court dated 28th May 1984, setting aside the second set of notifications; (v) The filing of Special Leave Petitions before the Supreme Court challenging the judgment of the Kerala High Court in the second round; and (vi) The interim order passed by the Supreme Court requiring the assessee to pay at the rate of 60% of the prices/notifications and allowing encashment of Bank Guarantees for that purpose; and (vii) The eventual resolution of the dispute by a settlement of 27th October 1988.

15. In these circumstances, when the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under Section 263. At the least, it must be held that the question as to whether the liability of the assessee had ceased in the previous year relevant to the Assessment Year 1982 83, was an issue on which a possible view was that there was no final or irrevocable remission or cessation of liability, within the meaning of Section 41(1) of the Act, during Assessment Year 1982 83. This view could not, by any stretch of logic, be regarded as being insustainable in law. The condition precedent to the exercise of jurisdiction under Section 263, is that the order sought to be revised must be erroneous in so far as it is prejudicial to the interests of the Revenue. Following the judgments of the Supreme Court in Malabar Industrial Co. and Max India Ltd. (supra), it is now a settled principle that where the Assessing Officer has adopted one of the courses permissible in law or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. In the present case, two views were inherently possible and the assessee therefore, cannot be subjected to the exercise of the jurisdiction under Section 263. The Tribunal, with respect, has adopted a rather simplistic view of the matter, in coming to the conclusion that the liability had ceased to exist, consequent upon the judgment of the Kerala High Court, dated 15th Apri1981. This clearly overlooks the checkered history of the litigation. The fact that the litigation had a checkered history was noted in the interim order of the Supreme Court, which also referred to the "attendant uncertainties" and to the possibility of a "further long drawn out litigation".



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Saturday, August 14, 2010

HC (BOM):- 14A Rule 8 d , defined. Godrej & Boyce vs. DCIT

Godrej & Boyce vs. DCIT (Bombay High Court)

(435.0 KiB, 806 DLs)

Download: godrej_daga_capital_14A_rule_8D.pdf

Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable but can be applied only if assessee's method not satisfactory. Rule 8D is not retrospective and applies from AY 2008-09. For earlier years, disallowance has to be worked out on "reasonable basis" u/s 14A (1)

 

In AY 2002-03, the assessee claimed that no disallowance u/s 14A in respect of the tax-free dividend earned by it could be made as it had not incurred any expenditure to earn the dividend. The AO rejected the claim and made a disallowance u/s 14A. This was deleted by the CIT (A). On appeal by the department, the Tribunal followed the judgement of the Special Bench in Daga Capital 117 ITD 169 (Mum) (where it had been held that s. 14A(2) & (3) & Rule 8D are procedural in nature and have retrospective effect) and remanded the matter to the AO for re-computing the disallowance. The assessee challenged the decision of the Tribunal. HELD:

 

(1) The argument that dividend on shares / units is not tax-free in view of the dividend-distribution tax paid by the payer u/s 115-O is not acceptable because such tax is not paid on behalf of the shareholder but is paid in respect of the payer's own liability;

 

(2) S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax-free income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of the total income – a disallowance u/s 14A has to be effected;

 

(3) The argument that a literal interpretation of s. 14A leads to absurd consequences is not acceptable. S 14A is founded on a valid rationale that the basic principle of taxation is to tax net income i.e gross income minus expenditure;

 

(4) The argument that the method in Rule 8D r.w.s 14A (2) for determining expenditure relating to the tax-free income is arbitrary and violative of Article 14 is not acceptable because there is an adequate safeguard before Rule 8D can be invoked. The AO cannot ipso facto apply Rule 8D but can do so only where he records satisfaction on an objective basis that the assessee is unable to establish the correctness of its claim. Also a uniform method prescribed to resolve disputes between assessees and the department cannot be said to be arbitrary or oppressive. There is a rationale in Rule 8D and its method is "fair & reasonable". It cannot be said that there is "madness" in the method of Rule 8D so as to render it unconstitutional;

 

(5) Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income. It applies w.e.f AY 2008-09;

 

(6) For the AYs where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances;

 

(7) On facts, though in the earlier years, the Tribunal had held that the tax-free investments had been made out of the assessee's own funds, this did not mean that there was no expenditure incurred to earn tax-free income. Even though Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1). Also, the principle of consistency would not apply as s. 14A had introduced a material change in the law.





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Tuesday, July 27, 2010

HC (MUM):- ‘Overdraft facility can’t be attached for tax recovery’

The taxman does not have claim over the bank overdraft facility of a defaulter since the lender does not owe money, but has promised a loan for business, the Bombay High Court has ruled. By taking an overdraft facility, a taxpayer becomes a debtor to the bank and hence, no authority has the right to attach overdraft facility for recovering tax dues, the court said in an order dated July 8.

The court ruling came in a case between Navi Mumbai Municipal Corporation and Sargam Foods over outstanding municipal cess. The court said that Navi Mumbai Municipal Corporation did not have the right to attach the overdraft account of the Thane-based Sargam Foods to recover dues from the company. The overdraft facility was from the Dombivli Nagari Sahakari Bank.

To recover dues from defaulters, authorities issue notices to those who owe money to the defaulter, like in bankruptcy proceedings. While the assets of the defaulter could be sold to recover dues, contracted loans could not be treated as assets. There were precedents to such rulings.

"Where the banker lends money on an overdraft and the customer is always in debit, there is no stage at which the banker is debtor to the customer nor at any point of time he holds any money of the customer or the latter's account," the Madras High court had held. A similar judgement was delivered by the Karnataka High Court in 1999 in a case between Karnataka Bank and the Commissioner of Commercial Tax.

Sargam lawyer Jitendra Jain said such notices for recovery could be sent to "any person from whom money is due or may become due to the assessee or any person who holds or subsequently holds money for or on account of the assessee."

The division bench comprising justice RG Ketkar and justice PB Majmudar agreed with the verdict of Madras and Karnataka High Courts and set aside the order of NMMC. This does not stop the municipal corporation from recovering the money in any other manner.





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Monday, June 21, 2010

HC (MUM):In order to attract provisions of section 41(1)(a), there must be a remission or cessation of the trading liability and consequently a benefit must enure to assessee.

In order to attract provisions of section 41(1)(a), there must be a remission or cessation of the trading liability and consequently a benefit must enure to assessee

 

·        In order that the provisions of sub section (1) should be attracted the first requirement is that an allowance or deduction must have been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee.

 

[2010] 5 taxmann.com 90 (Bom.)

HIGH COURT OF BOMBAY

SI Group India Ltd.

v.

ITAT

ITA No. 1511 & 1512

June 10, 2010

FACTS

The Petitioner has an industrial unit in the district of Raigad which is a notified backward area. The Government of Maharashtra issued a package scheme of incentives in 1993 by which a scheme for the deferral of sales tax dues was announced. The Petitioner had during the period 1 May 1999 and 31 March 2000 collected an amount of Rs.1,79,68,846/ towards sales tax. Under the scheme the amount was payable in five annual installments commencing from April 2010 and the liability was treated as an unsecured loan in the books of account of the assessee. The State Industrial and Investment Corporation of Maharashtra Limited (SICOM) offered to the assessee an option for the settlement of the deferred sales tax liability by an immediate one time payment. The assessee paid an amount of Rs.50,44,280/ to SICOM which according to the assessee represented the net present value as determined by SICOM. Payment was made by the assessee to SICOM on 26 June 2000. The difference between the deferred sales tax and its present value amounting to Rs.1.29 Crores was treated as a capital receipt and was credited in the books of the assessee to the capital reserve account.

 

The Assistant Commissioner of Income Tax, Range 3(3), in the assessment order for Assessment Year 200001 brought the aforesaid difference of Rs.1.29 Crores to tax under Section 41(1) of the Income Tax Act 1961. The appeal filed by the assessee before the Commissioner (Appeals) for 2000-01 as well as the appeal for 2001-02 came to be dismissed by the appellate authority. The Tribunal dismissed the appeals filed by the assessee for these two Assessment Years by a common order dated 6 January 2009. The assessee then moved the Tribunal in a miscellaneous application under Section 254 which was dismissed on 10 September 2009.

 

HELD

 

In order that the provisions of sub section (1) should be attracted the first requirement is that an allowance or deduction must have been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee. The liability of the assessee to pay sales tax is undisputedly a trading liability in respect of which an allowance or deduction had been made under Section 43B. However, under clause (a) of sub section (1) it is inter alia required that the assessee ought to have obtained "some benefit in respect of such trading liability by way of remission or cessation thereof". This postulates that there must be a remission or cessation of the trading liability and that consequently a benefit must enure to the assessee. In the present case, the dispute between the assessee and the Revenue is as to whether there was a remission or cessation of the liability on account of sales tax.

 

The assessee had collected an amount of Rs.1.79 Crores towards sales tax dues during the period 1 May 1999 and 31 March 2000. Under the package scheme of incentives announced by the Government of Maharashtra in 1993 the sales tax dues had to be paid in five installments commencing from April 2010. SICOM as the implementing agency quantified, according to the assessee, the net present value of the deferred liability of the assessee at Rs.50.44 lacs which was paid by the assessee to SICOM. However, the sales tax officer while passing the assessment order on 18 March 2004 did not consider the amount paid to SICOM as repayment of the deferred liability of the assessee to the extent of Rs.1.79 Crores under the Bombay Sales Tax Act, 1959 and Central Sales Tax Act, 1956. The appeals filed by the assessee before the Deputy Commissioner of Sales Tax were dismissed upon which the assessee filed a second appeal before the Maharashtra Sales Tax Tribunal. The Tribunal, by its judgment dated 8 February 2008 upheld the order of the lower authorities of not giving credit of the payment made by the assessee to SICOM. In these proceedings, neither the validity of the order passed by the Sales Tax Tribunal nor for that matter the correctness of the reasons that weighed with the Tribunal can be called into question. The Tribunal observed that though the assessee had made a premature payment of the deferred tax in accordance with the scheme issued by the Department of Industries of the State Government under the package scheme of incentives of 1993, the payment of the net present value was to be made in the challan prescribed under the Sales Tax Act which constituted the lawful mode of making payment and the payment which was made to SICOM would nonetheless have to follow the procedure prescribed under the Act. The Tribunal was of the view that the decision of the assessing authority and of the Deputy Commissioner of Sales Tax not to give credit to the payment made to SICOM would have to be upheld, but left it open to the assessee to procure a valid document under the scheme which would be "considered for relevant period for relevant deferred amount".

 

The net result of the order of the Sales Tax Tribunal dated 8 February 2008 is to uphold the decision of the assessing authority declining to grant credit of the payment made by the assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on 22 July 2008 a notice of demand was issued under Section 38 of the Bombay Sales Tax Act of 1959 to the assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs.1,33,13,555/. Having regard both to the order passed by the Sales Tax Tribunal on 8 February 2008 and the notice of demand issued on 22 July 2008, it is not possible for the Court to accept the contention that there was a remission or cessation of liability. Since the record before the Court does not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of Section 41(1)(a) has not been fulfilled in the facts of the present case.

 

______JUDGMENT________

 

 

(Per Dr. D.Y.CHANDRACHUD, J.) :

 

1. This judgment will govern two appeals instituted by the assessee under Section 260A of the Income Tax Act, 1961 and two petitions under Article 226 of the Constitution. Although several questions are raised in the appeals, for the purposes of these proceedings it would be sufficient to deal with the following question of law on which the appeals are admitted:

"Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in completely disregarding the contention of the Appellant that there was no remission or cessation of the sales tax liability on account of payment of the present value thereof being made to SICOM since the sales tax authorities had not given credit of the said payment against the sales tax liability;"

 

2. The Petitioner has an industrial unit in the district of Raigad which is a notified backward area. The Government of Maharashtra issued a package scheme of incentives in 1993 by which a scheme for the deferral of sales tax dues was announced. The Petitioner had during the period 1 May 1999 and 31 March 2000 collected an amount of Rs.1,79,68,846/ towards sales tax. Under the scheme the amount was payable in five annual installments commencing from April 2010 and the liability was treated as an unsecured loan in the books of account of the assessee. The State Industrial and Investment Corporation of Maharashtra Limited (SICOM) offered to the assessee an option for the settlement of the deferred sales tax liability by an immediate one time payment. The assessee paid an amount of Rs.50,44,280/ to SICOM which according to the assessee represented the net present value as determined by SICOM. Payment was made by the assessee to SICOM on 26 June 2000. The difference between the deferred sales tax and its present value amounting to Rs.1.29 Crores was treated as a capital receipt and was credited in the books of the assessee to the capital reserve account.

 

3. The Assistant Commissioner of Income Tax, Range 3(3), in the assessment order for Assessment Year 200001 brought the aforesaid difference of Rs.1.29 Crores to tax under Section 41(1) of the Income Tax Act 1961. The appeal filed by the assessee before the Commissioner (Appeals) for 2000-01 as well as the appeal for 2001-02 came to be dismissed by the appellate authority. The Tribunal dismissed the appeals filed by the assessee for these two Assessment Years by a common order dated 6 January 2009. The assessee then moved the Tribunal in a miscellaneous application under Section 254 which was dismissed on 10 September 2009.

 

4. Accordingly the assessee has filed two appeals before this Court under Section 260A to challenge the principal order of the Tribunal dismissing the appeals for Assessment Years 2000-01 and 2001-02. The Petitions under Article 226 questioned the correctness of the order passed by the Tribunal dismissing the applications under Section 254. During the course of the proceedings, we have heard submissions on behalf of counsel appearing on behalf of the assessee and counsel appearing on behalf of the Revenue on the merits of the appeals filed before this Court under Section 260A and which as noted earlier have been admitted. In the view which we are inclined to take on the appeals, the Petitions under Article 226, challenging the order of the Tribunal under Section 254 would be rendered redundant.

 

5. On behalf of the assessee, learned senior counsel submitted that the principal requirement for the applicability of Section 41 is that the assessee must obtain a benefit in respect of a trading liability by way of a remission or cessation thereof. The two submissions which have been urged on behalf of the assessee are that (i) there was no cessation of the liability of the assessee in the present case in respect of the payment of the sale tax dues; and (ii) assuming that there was a cessation, no benefit was obtained by the assessee. The submission which has been urged on behalf of the assessee is that as a matter of fact the issue pertaining to the sales tax liability was decided by the Sales Tax Tribunal by its judgment dated 8 February 2008 and the Tribunal specifically upheld the order passed by the lower authorities declining to give credit to the assessee of the payment which was made to SICOM. The matter, the court is informed, is pending in reference and consequently at this stage, so long as the order of the Tribunal continues to hold the field, it cannot be inferred that there was a remission or cessation of liability. Insofar as the second submission is concerned, the argument before the Court is that the assessee in paying the net present value of the deferred liability to pay the sales tax dues of Rs.1.29 Crores has not obtained any benefit as such within the meaning of Section 41(1) since the payment of Rs.50.44 lacs represents only the present value of the liability to make a deferred payment of Rs.1.79 Crores in future.

 

6. On the other hand, it was urged on behalf of the Revenue that the order of the Sales Tax Tribunal upon which reliance has been placed by the assessee would in fact indicate that the payments which were made by the assessee were regarded as having a nexus towards payments of the sales tax dues and liberty was granted to the assessee upon obtaining a valid document under the package scheme of incentives to be considered for the relevant period towards payment of the deferred amount.

 

7. Section 41(1)(a) of the Act provides as follows :

"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 an  other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of 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;"

 

8. In order that the provisions of sub section (1) should be attracted the first requirement is that an allowance or deduction must have been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee. The liability of the assessee to pay sales tax is undisputedly a trading liability in respect of which an allowance or deduction had been made under Section 43B. However, under clause (a) of sub section (1) it is inter alia required that the assessee ought to have obtained "some benefit in respect of such trading liability by way of remission or cessation thereof". This postulates that there must be a remission or cessation of the trading liability and that consequently a benefit must enure to the assessee. In the present case, the dispute between the assessee and the Revenue is as to whether there was a remission or cessation of the liability on account of sales tax.

 

9. The assessee had collected an amount of Rs.1.79 Crores towards sales tax dues during the period 1 May 1999 and 31 March 2000. Under the package scheme of incentives announced by the Government of Maharashtra in 1993 the sales tax dues had to be paid in five installments commencing from April 2010. SICOM as the implementing agency quantified, according to the assessee, the net present value of the deferred liability of the assessee at Rs.50.44 lacs which was paid by the assessee to SICOM. However, the sales tax officer while passing the assessment order on 18 March 2004 did not consider the amount paid to SICOM as repayment of the deferred liability of the assessee to the extent of Rs.1.79 Crores under the Bombay Sales Tax Act, 1959 and Central Sales Tax Act, 1956. The appeals filed by the assessee before the Deputy Commissioner of Sales Tax were dismissed upon which the assessee filed a second appeal before the Maharashtra Sales Tax Tribunal. The Tribunal, by its judgment dated 8 February 2008 upheld the order of the lower authorities of not giving credit of the payment made by the assessee to SICOM. In these proceedings, neither the validity of the order passed by the Sales Tax Tribunal nor for that matter the correctness of the reasons that weighed with the Tribunal can be called into question. The Tribunal observed that though the assessee had made a premature payment of the deferred tax in accordance with the scheme issued by the Department of Industries of the State Government under the package scheme of incentives of 1993, the payment of the net present value was to be made in the challan prescribed under the Sales Tax Act which constituted the lawful mode of making payment and the payment which was made to SICOM would nonetheless have to follow the procedure prescribed under the Act. The Tribunal was of the view that the decision of the assessing authority and of the Deputy Commissioner of Sales Tax not to give credit to the payment made to SICOM would have to be upheld, but left it open to the assessee to procure a valid document under the scheme which would be "considered for relevant period for relevant deferred amount".

 

10. The net result of the order of the Sales Tax Tribunal dated 8 February 2008 is to uphold the decision of the assessing authority declining to grant credit of the payment made by the assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on 22 July 2008 a notice of demand was issued under Section 38 of the Bombay Sales Tax Act of 1959 to the assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs.1,33,13,555/. Having regard both to the order passed by the Sales Tax Tribunal on 8 February 2008 and the notice of demand issued on 22 July 2008, it is not possible for the Court to accept the contention that there was a remission or cessation of liability. Since the record before the Court does not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of Section 41(1)(a) has not been fulfilled in the facts of the present case.

 

11. In the view that we have taken it is not necessary for the Court to address itself to the wider issue as to whether the assessee, in paying the net present value of the deferred sales tax liability should be regarded as having obtained any benefit within the meaning of Clause (a) of sub section (1) of Section 41. The aforesaid issue is kept open to be adjudicated upon at the appropriate stage in appropriate proceedings.

 

12. The Tribunal, in our view, was in error in proceeding on the basis that there was a remission or cessation of liability. The attention of the Tribunal was drawn to the order passed by the Sales Tax Tribunal. The fact that the order of the Sales Tax Tribunal was placed for consideration before the Income Tax Appellate Tribunal emerges from the order of the Tribunal itself. Consistent with the order passed by the Sales Tax Tribunal which continues to hold the field, the ITAT could not have come to the conclusion that there had occurred a remission or cessation of liability during the Assessment Years in question.

 

13. For the aforesaid reasons, the appeals filed by the assessee are allowed and the question of law as framed is answered in favour of the assessee and against the Revenue. In the view which we have taken it is not necessary for the Court to enquire into the correctness of the order passed by the Tribunal on the application under Section 254. Both the petitions shall accordingly stand disposed of. In the circumstances of the case, there shall be no order as to costs.

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