M/s. SULZER INDIA LTD., PUNE V. JT. CIT. (OSD) - 8(3), MUMBAI

ITA 2944/MUM/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3748 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 30-08-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 16-04-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RONAK G DOSHI; S E DASTUR YOGESH THAR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Question of law; Capital receipt; Benefit of exemption; Revised return
• Section: 43B; 54; 56; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH, - SPECIAL BENCH BEFORE HONBLE SHRI. R.V. EASWAR (PRESIDENT) AND SHRI D.K. AGARWAL (J.M.) AND SHRI. T.R. SOOD (A.M.) I.T.A. NO.2944/MUM/2007 ASSESSMENT YEAR : 2003-2004 SULZER INDIA LTD. SULZER HOUSE BANER ROAD, AUNDH PUNE 411 007. PAN : AAACS 7876 U VS. JT.CIT RANGE 8(3), R.NO.204, 2 ND FLR., AAYAKAR BHAVAN, M.K. MARG, MUMBAI 400 020. (APPELLENT) (RESPONDENT) I.T.A. NO.2871/MUM/2007 ASSESSMENT YEAR : 2003-2004 ACIT RANGE 8(3), R.NO.204, 2 ND FLR., AAYAKAR BHAVAN, M.K. MARG, MUMBAI 400 020. VS. SULZER INDIA LTD. KARMYOG BLDG., PARSI PANCHAYAT RD., ANDHERI (E), MUMBAI 400 059. PAN : AAACS 7876 U (APPELLENT) (RESPONDENT) ASSESSEE BY: S/SHRI. S.E. DASTUR, YOGESH THAR AND RONAK G. DOSHI DEPARTMENT BY : SHRI. HEMANT LAL (CIT DR) INTERVENER ITA NO. NAME OF ASSESSEE NAME OF THE COUNSEL FOR INTERVENER 1317/PN/2007 ASSESSMENT YEAR : 2004-05 AKZO NOBEL CHEMICALS (INDIA) LIMITED 501,502, 5 TH FLOOR SAN MAHU COMPLEX 5, BUND GARDEN ROAD OPPOSITE POONA CLUB PUNE-411 001. PAN : AADCA 3941 N SHRI YOGESH THAR 2 O R D E R PER D.K. AGARWAL, J.M. THE HONBLE PRESIDENT, VIDE HIS ORDER DATED 23.11.2 009 HAS CONSTITUTED THE SPECIAL BENCH UNDER SECTION 255(3) OF THE INCOME TAX ACT, 1961(THE ACT) TO HEAR AND DECIDE THE FOLLOWING QUES TION IN ACCORDANCE WITH LAW: WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE REMISSION OF DEFERRED SALES TAX LIABILITY IS CH ARGEABLE TO TAX AS BUSINESS INCOME OF THE ASSESSEE U/S.41(1) BE ING REMISSION OF TRADING LIABILITY OR THE SAME IS EXEMP T FROM TAX AS CAPITAL RECEIPT BEING REMISSION OF LOAN LIABILIT Y. 2. AT THE TIME OF HEARING THE LD SR. COUNSEL FOR TH E ASSESSEE SHRI S.E. DASTUR, AT THE OUTSET, SUBMITS THAT THIS SPECIAL BE NCH WAS CONSTITUTED AS THERE WERE DIVERSION OF VIEWS OF THE CO-ORDINATE BE NCHES OF THE TRIBUNAL ON THE ABOVE ISSUE. IN THE CASE OF DY.CIT VS. STERL ITE OPTICAL TECHNOLOGIES LTD. AND VICE-VERSA IN ITA NO.7136 & 7177/M/04 FOR ASSESSMENT YEAR 2001-02 ORDER DATED 08.01.2008 THE TRIBUNAL HAS TRE ATED THE DIFFERENCE BETWEEN THE DEFERRED SALES TAX AND ITS PRESENT VALU E AS CAPITAL RECEIPT, NOT CHARGEABLE TO TAX, WHEREAS IN THE CASE OF SCHEN ECTADY SPECIALITIES ASIA (P.) LTD. VS. ACIT (2009) 29 SOT 1 (MUM) RELIE D ON BY THE LD DR WHEREIN IT HAS BEEN HELD THAT THE SAME IS CHARGEABL E TO TAX U/S.41(1) OF THE ACT. HE FURTHER SUBMITS THAT ON AN APPEAL FIL ED BY SI GROUP INDIA LTD FORMERLY KNOWN AS SCHENECTADY SPECIALITIES ASIA (P. ) LTD., RECENTLY, THE HONBLE JURISDICTIONAL HIGH COURT IN SI GROUP INDIA LTD. VS. ACIT (2010) 192 TAXMAN 91(BOM); ON THE QUESTION OF LAW WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TR IBUNAL WAS RIGHT IN COMPLETELY DISREGARDING THE CONTENTION OF THE APPEL LANT THAT THERE WAS NO REMISSION OR CESSATION OF THE SALE-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 PAYMEN T AGAINST THE SALES TAX 3 LIABILITY, HAS HELD THAT ONE OF THE REQUIREMENTS SPELT OUT FOR THE APPLICABILITY OF SEC.41(1)(A) HAS NOT BEEN FULFILLE D IN THE FACTS OF THE PRESENT CASE, THEREFORE, THEIR LORDSHIPS ANSWERED T HE QUESTION OF LAW IN FAVOUR OF THE ASSESSEE. HE FURTHER SUBMITS THAT SIN CE THERE IS NO DISPUTE THAT THE FACTS OF THE ASSESSEE'S CASE AND THE FACT S OF THE SI GROUP INDIA LTD.(SUPRA), AND ALSO STERLITE OPTICAL TECHNOLOGIE S LTD. (SUPRA), ARE THE SAME AND THE HON'BLE JURISDICTIONAL HIGH COURT WHIL E REVERSING ORDER OF THE TRIBUNAL IN SI GROUP INDIA LTD. (SUPRA) HAS DEC IDED THE ISSUE IN FAVOUR OF THE ASSESSEE, THEREFORE, THERE IS NO DIVERSION O F VIEWS OF THE TRIBUNAL AND, THEREFORE, THE BASIS FOR REFERRING MATTER TO T HE SPECIAL BENCH ON THE ISSUE NEED NOT NOW BE CONSIDERED AND, HENCE, THE RE FERENCE OF THE SAME ISSUE TO THE SPECIAL BENCH IS NO LONGER NECESSARY. HE FURTHER SUBMITS THAT IN CASE THE SAID PLEA IS NOT ACCEPTED THEN IT IS SUGGESTED THAT THE QUESTION SHOULD BE REDRAFTED TO READ AS FOLLOWS:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE SUM OF RS.4,14,87,985/- HAS RIGHTLY BEEN CHARGED TO TAX UNDER SECTION 41(1) OF THE INCOME TA X ACT, 1961. 3. ON THE OTHER HAND, THE LD. CIT (DR) SHRI HEMANT J. LAL WHILE OBJECTING TO THE PLEA OF THE LD SR. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE HONBLE JURISDICTIONAL HIGH COURT WHILE DECIDI NG THE ISSUE ON DIFFERENT GROUND IN FAVOUR OF THE ASSESSEE HAS KEPT THE ISSUE OPEN TO BE ADJUDICATED UPON AT THE APPROPRIATE STAGE IN APPROP RIATE PROCEEDING, THEREFORE THE ISSUE REFERRED TO THE SPECIAL BENCH H AS NOT BEEN RESOLVED BY THE HON'BLE JURISDICTIONAL HIGH COURT AND THEREFORE THE QUESTION REFERRED TO SPECIAL BENCH WHICH IS BORNE OUT FROM THE RECORD S, MAY BE DECIDED WITHOUT ANY CHANGE, ACCORDINGLY. 4. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AFTER CONSIDERING THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N SI GROUP INDIA LTD. 4 (SUPRA), WE FIND MERIT IN THE PLEA OF THE LD DR. THEIR LORDSHIPS IN THE CASE OF SI GROUP INDIA LTD.(SUPRA) HAVE OBSERVED V IDE PLACITUM-11 APPEARING AT PG.122 OF 326 ITR AS UNDER: IN THE VIEW THAT WE HAVE TAKEN IT IS NOT NECESSARY FOR THE COURT TO ADDRESS ITSELF TO THE WIDER ISSUE AS TO WH ETHER THE ASSESSEE, IN PAYING THE NET PRESENT VALUE OF THE DE FERRED SALE TAX LIABILITY SHOULD BE REGARDED AS HAVING OBTAINED ANY BENEFIT WITHIN THE MEANING OF CLAUSE(A) OF THE SUB- SECTION (1) OF SECTION 41. THE AFORESAID ISSUE IS KEPT OPEN T O BE ADJUDICATED UPON AT THE APPROPRIATE STAGE IN APPROP RIATE PROCEEDINGS. SINCE THE ISSUE RAISED FOR THE SPECIAL BENCH HAS NO T BEEN DECIDED AND KEPT OPEN BY THEIR LORDSHIPS TO BE ADJUDICATED UPON AT THE APPROPRIATE STAGE IN APPROPRIATE PROCEEDINGS, WE DO NOT FIND AN Y MERIT IN THE PLEA OF THE LD SR. COUNSEL FOR THE ASSESSEE THAT THERE IS N O REQUIREMENT TO CONSTITUTE THE SPECIAL BENCH ON THE QUESTION REFERR ED AND ACCORDINGLY WE REJECT THE SAID OBJECTION RAISED BY THE LD. SR. COU NSEL FOR THE ASSESSEE. HOWEVER, AT THE SAME TIME WE FIND FORCE IN THE SUBM ISSIONS OF THE LD. SR. COUNSEL FOR THE ASSESSEE THAT THE QUESTION NEEDS TO BE RE-DRAFTED BECAUSE THE PRESENT QUESTION BEFORE THE SPECIAL BENCH START S WITH THE PRESUMPTION THAT IT IS A CASE OF REMISSION. IN FACT THE LD. SR . COUNSEL STRESSED THAT MOST OF HIS ARGUMENTS WILL BE ON THE FACTS OF THE C ASE THAT NO REMISSION AT ALL IS INVOLVED AND CONSEQUENTLY IS THERE NO BENEFI T AS ENVISAGED BY SEC.41(1)(A) OF THE ACT. 5. AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES O F THE CASE, WE ARE OF THE VIEW THAT INSTEAD OF ORIGINAL QUESTION, THE FOL LOWING QUESTION SHOULD BE CONSIDERED BY THE SPECIAL BENCH: 5 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE SUM OF RS.4,14,87,985/- BEING THE D IFFERENCE BETWEEN THE PAYMENT OF NET PRESENT VALUE OF RS.3,37,13,393/- AGAINST THE FUTURE LIABILITY OF RS.7,52,,01,378/- HAS RIGHTLY BEEN CHARGED TO TAX U NDER SECTION 41(1) OF THE INCOME TAX ACT, 1961. 6. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EQUIPMENT MANUFACTURING AND TOTAL PROJECT SUPPLIER. THE ASSESSEE COMPANY HAS AN INDUSTRIAL UNIT AT KONDHAPURI, TAL. SHIRUR, DIST. PUNE WHICH AT THE RELEVANT TIME WAS A NOTIFIED BACKWARD AREA, CLASSIFIED UNDER GROUP D COMPRISING THE LEA ST DEVELOPED AREA OF THE STATE OF MAHARASHTRA, NOT COVERED UNDER GROUP A, GROUP B OR GROUP C UNDER THE MODIFIED PACKAGE SCHEME OF INCENTIVES (HE REINAFTER REFERRED TO AS THE 1983 SCHEME). IN ORDER TO ACHIEVE DISPERS AL OF INDUSTRIES OUTSIDE THE BOMBAY-THANE-PUNE BELT AND TO ATTRACT T HEM TO THE UNDER DEVELOPED AND DEVELOPING AREAS OF THE STATE, THE GO VERNMENT OF MAHARASHTRA ISSUED A MODIFIED PACKAGE SCHEME OF INC ENTIVE THE 1983 SCHEME BY WHICH A SCHEME FOR THE DEFERRAL OF SALES -TAX DUES WAS ANNOUNCED. THE ASSESSEE COMPANY HAD OPTED SALES- TAX DEFERRAL SCHEMES OF 1983 AND 1988 OF GOVERNMENT OF MAHARAS HTRA. ACCORDING TO 1983 SCHEME THE SALES-TAX WAS TO BE DEFERRED AND PAYABLE AFTER 12 YEARS IN SIX EQUAL INSTALMENTS, VIDE RESOLUTION NO. IDL-1082/(4096)-IND- 8, DATED 04.05.1983, WHEREIN IT WAS INTERALIA STATE D: (B) DEFER RAL AN ELIGIBLE UNIT NOT COVERED UNDER THE PROVISION O F PARA 5.3 WILL BE ENTITLED TO SALES TAX INCENTIVE BY WAY OF D EFERRAL AS FOLLOWS:- SUBJECT TO THE PROVISIONS OF THE BOMBAY SALES TAX ACT, 1959/BOMBAY SALES TAX RULES, 1959/CENTRAL SALES TAX ACT, 1956/CENTRAL SALES TAX (REGISTRATION AND TURNOVER) R ULES, 1957/THE CENTRAL SALES TAX (BOMBAY) RULES, 1957 AND THE CONDITIONS/STIPULATIONS IN THE CERTIFICATE OF ENTIT LEMENT ISSUED BY THE COMMISSIONER OF SALES TAX, THE PAYMENT OF THE SALES TAX LIABILITY AS PER RETURNS TO BE FURNISHED FOR AN Y PERIOD 6 COVERED BY THE ELIGIBILITY CERTIFICATE OR AS FINALL Y ASSESSED THEREUNDER WILL BE DEFERRED. THE SALES TAX LIABILI TY AS PER THE RETURNS SO DEFERRED SHALL BE PAID BY THE UNIT AFTER TWELVE YEARS/ IN ONE LUMPSUM OR IN INSTALMENTS, SUBJECT TO SUCH CONDITIONS AS MAY BE PRESCRIBED PURSUANT TO THE PRO VISIONS OF THE BOMBAY SALES TAX ACT, 1959, THE BOMBAY SALES TAX RULES, 1959. THE CENTRAL SALES TAX ACT, 1956, THE CE NTRAL SALES TAX (BOMBAY) RULES 1957, AND CENTRAL SALES TAX (REGISTRATION AND TURNOVER) RULES, 1957, AS AMENDED FROM TIME TO TIME. ASSESSEE OPTED FOR THE SAID DEFERRAL SCHEME. GOVER NMENT OF MAHARASHTRA AGAIN BROUGHT A SCHEME VIDE RESOLUTION NO. IDL-1088 /(6603)-IND-8, DATED 30.09.1988. ACCORDING TO THIS SCHEME, THE B ENEFIT WAS AVAILABLE EVEN ON EXPANSION OR DIVERSIFICATION OF THE EXISTIN G UNIT. ASSESSEE ACCORDINGLY AGAIN OPTED FOR DEFERRAL SCHEME IN RESP ECT OF ITS EXPANSION. IN 2002, GOVERNMENT OF MAHARASHTRA BROUGHT TRADE CI RCULAR NO.PSI- 2002/91/ADM-13/B-1041/CIRCULAR NO.39T OF 2002, DATE D 12.12.2002. THE SUBJECT OF THIS TRADE CIRCULAR READS AS FOLLOWS : SUB:PREMATURE REPAYMENT OF THE AMOUNT OF DEFERRED TAXES BY THE ELIGIBLE UNITS AT NET PRESENT VALUE (NPV) TRADE CIRCULAR HAS MENTIONED SUB-SECTION (4) OF SEC TION 38 OF B.S.T. ACT, 1959 WHICH WAS AMENDED AS FOLLOWS: PROVIDED ALSO THAT, NOTWITHSTANDING ANYTHING TO TH E CONTRARY CONTAINED IN THE ACT OR IN THE RULES OR IN ANY OF TH E PACKAGE SCHEME OF INCENTIVES OR IN THE POWER GENERATION PROM OTION POLICY, 1998, THE ELIGIBLE UNIT TO WHOM AN ENTITLEM ENT CERTIFICATE HAS BEEN GRATED FOR AVAILING OF THE INC ENTIVES BY WAY OF DEFERMENT OF SALES TAX, PURCHASE TAX, ADDITI ONAL TAX, TURNOVER TAX OR SURCHARGE, AS THE CASE MAY BE, MAY, IN RESPECT OF ANY OF THE PERIODS DURING WHICH THE SAID CERTIFICATE IS VALID, AT ITS OPTION, PREMATURELY PAY IN PLACE O F THE AMOUNT OF TAX DEFERRED BY IT AN AMOUNT, EQUAL TO THE NET P RESENT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRIBED, AND ON MAKING SUCH PAYMENTS, IN THE PUBLIC INTEREST, THE D EFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID. IT WAS FURTHER STATED IN THE SAID CIRCULAR THAT: 7 5. IT IS, HOWEVER, CLARIFIED THAT THE AMOUNT OF TA XES PAID AT NPV IS SUBJECT TO DETERMINATION BY THE ASSESSING, APPELLATE OR AS THE CASE MAY BE THE REVISING AUTHORI TY AT THE APPROPRIATE STAGES. IT IS FURTHER CLARIFIED THAT E VEN IF THE ISSUE OF DETERMINATION OF THE AMOUNT OF DEFERRED TA X IS IN DISPUTE AND PENDING BEFORE THE APPELLATE AUTHORITY, THE DEFERRAL UNIT DESIROUS OF PREPAYING ANY PART OF THE AMOUNT OF DEFERRED TAXES AT NPV WILL BE FREE TO AVAIL THIS FAC ILITY. SUCH PAYMENT AT NPV WILL AMOUNT TO DISCHARGE OF THE CORRESPONDING AMOUNT OF THE DEFERRED TAXES. 7. THE ASSESSEE COMPANY COLLECTED SALES-TAX DURING THE PERIOD 1.11.1989 TO 31.10.1996, (7 YEARS) UNDER 1983 SCHEM E RS. 3,29,93,863/- AND UNDER 1988 SCHEME RS. 4,22,07,515/- AGGREGATING TO RS. 7,52,01,378/. UNDER THE 1983 SCHEME THE AMOUNT WA S PAYABLE AFTER TWELVE YEARS IN SIX EQUAL ANNUAL INSTALMENTS COMMEN CING FROM 1.5.2003 AND THE AGGREGATE LIABILITY OF RS. 7,52,01,378/- W AS TREATED AS AN UNSECURED LOAN IN THE BOOKS OF ACCOUNT OF THE ASSES SEE. THE STATE INDUSTRIAL AND INVESTMENT CORPORATION OF MAHARASHTR A LTD. (SICOM) BEING THE IMPLEMENTING AGENCY UNDER 1979/1983/1988 SCHEME OFFERED TO THE ASSESSEE AN OPTION FOR THE SETTLEMENT OF THE DEFERR ED SALES-TAX LIABILITY BY AN IMMEDIATE ONE-TIME PAYMENT AT NET PRESENT VALUE (NPV). THE ASSESSEE PAID AN AMOUNT OF RS. 3,37,13,393/- ( RS. 1,76,02,272/- OF 1983 SCHEME + RS. 1,61,11,121/- OF 1988 SCHEME) TO SICOM WHICH ACCORDING TO THE ASSESSEE REPRESENTED THE NPV AS DE TERMINED BY SICOM. PAYMENT WAS MADE BY THE ASSESSEE TO SICOM ON 30.12. 2002. THE DIFFERENCE BETWEEN THE DEFERRED SALES-TAX AND ITS P RESENT VALUE AMOUNTING TO RS. 4,14,87,795/- WAS TREATED AS CAPITAL RECEIPT AND W AS CREDITED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE TO THE CAPITAL RESERVE ACCOUNT. 8. BEFORE THE ASSESSING OFFICER THE ASSESSEE WHILE RELYING ON CBDT CIRCULARS NO.496 DATED 25.09.1987 AND 674 DATED 29. 12.1993, SUBMITTED THAT DEFERRAL SALES-TAX UNDER THE DEFERRAL SCHEME I S REQUIRED TO BE TREATED AS ACTUALLY PAID SO THAT STATUTORY LIABILIT Y WILL BE TAKEN TO HAVE 8 BEEN DISCHARGED FOR THE PURPOSE OF SEC.43B. IT WA S FURTHER SUBMITTED THAT AS PER BOARD CIRCULAR CONVERSION OF SALES-TAX LIABILITY INTO LOAN SHALL BE TAKEN TO BE THE DISCHARGE OF LIABILITY FOR SALES -TAX. IT WAS FURTHER SUBMITTED THAT THOUGH THE SALES TAX COLLECTED FROM CUSTOMERS WAS A TRADING RECEIPT, THE SAME IS TAKEN TO HAVE BEEN PAI D TO THE GOVERNMENT UNDER THE DEFERRAL SCHEME. AFTER SUCH DEEMED PAYME NT, THE UNPAID SALES TAX IS BY WAY OF DEFERRAL LOAN AND NOT A TRADING RECEIPT AND HENCE THE REMISSION OF LOAN CANNOT BE TAXED AS INCOME OF THE ASSESSEE. HOWEVER, THE ASSESSING OFFICER OBSERVED THAT THE CIRCULAR RE LIED ON BY THE ASSESSEE HAS BEEN FOLLOWED IN THE EARLIER YEARS IN THE ASSES SEES CASE BY NOT MAKING ANY DISALLOWANCE U/S.43B OF THE ACT IN RESPE CT OF THE DEFERRED SALES-TAX ON THE GROUND THAT UNDER THE SCHEME, THE SALES TAX LIABILITY IS DEEMED TO HAVE BEEN PAID. THE ASSESSING OFFICER F URTHER OBSERVED THAT, AT PRESENT THE REAL QUESTION FOR CONSIDERATION IS W HETHER THE REMISSION OF DEFERRED SALES TAX RESULTS INTO TAXABLE INCOME OR O THERWISE. THEREFORE, THE BOARD CIRCULAR REFERRED BY THE ASSESSEE IS CONF INED TO THE TREATMENT U/S.43B AND HENCE, NOT AT ALL RELEVANT. HE FURTHER OBSERVED THAT, THE SCHEME PROVIDES FOR THREE CATEGORIES OF INCENTIVES. THE FIRST CATEGORY IS SALES TAX EXEMPTION WHICH IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE SECOND CATEGORY IS WHERE THE SALES TAX L IABILITY IS DEFERRED AND IS ALLOWED TO BE PAID BEYOND THE DUE DATES SPECIFIE D UNDER THE SALES TAX LAWS. THE THIRD CATEGORY IS WHERE THE SALES TAX PA YABLE IS TREATED AS LOAN AT THE TIME OF COLLECTION OF SALES TAX ON SALE S OR, THE DEFERRED SALES TAX LIABILITY IS PERMITTED TO BE CONVERTED, MID-STR EAM, INTO A LOAN LIABILITY. THE ASSESSING OFFICER FURTHER OBSERVED THAT, THE AS SESSEE HAS NOT FURNISHED ANY DOCUMENT OR ORDER IN TERMS OF WHICH S ALES TAX LIABILITY TREATED AS LOAN OR IS CONVERTED INTO A LOAN AT ANY SUBSEQUENT STAGE. ON THE CONTRARY, EVIDENCE ON RECORD DEMONSTRATES THAT THE ASSESSEE HAS OPTED FOR THE SECOND CATEGORY OF INCENTIVE VIZ., ME RE DEFERMENT OF SALES TAX LIABILITY. THEREFORE, THE ASSESSEES CONTENTIO N THAT THE AMOUNT REMITTED IS A PART OF LOAN LIABILITY IS NOT BORNE O UT FROM THE EVIDENCE FILED 9 BY THE ASSESSEE. ACCORDING TO THE ASSESSING OFFI CER THE SALES TAX LIABILITY HAS BEEN ALLOWED AS A DEDUCTION U/S.43B O F THE ACT FROM THE BUSINESS INCOME OF THE ASSESSEE IN THE EARLIER YEAR S, THEREFORE, AS PER PROVISION OF SEC.41(1) IF A TRADING LIABILITY IS DE DUCTED FROM THE BUSINESS INCOME AND THE SAME IS REMITTED WHOLLY OR PARTLY, THE REMISSION OF SALES TAX LIABILITY IS TO BE ADDED TO THE INCOME OF THE A SSESSEE AS BUSINESS INCOME AND ACCORDINGLY THE ASSESSING OFFICER BROUGH T TO TAX THE AFORESAID DIFFERENCE OF RS. 4,14,87,985/- U/S.41(1) OF THE ACT. 9. ON APPEAL BEFORE THE LD. CIT(A), IT WAS INTER-AL IA CONTENDED THAT THE APPELLANT HAS PAID THE PRESENT VALUE OF HIS FUTURE LIABILITY WHICH BOTH HAVE EQUIVALENT VALUE, THEREFORE, THERE IS NEITHER ANY G AIN NOR ANY LOSS TO EITHER OF THE PARTY INCLUDED IN THE TRANSACTION. T HEREFORE, THE QUESTION OF TREATING THE DIFFERENCE AS INCOME IN THE PRESENT CA SE DOES NOT ARISE. THE RELIANCE WAS ALSO PLACED ON VARIOUS DECISIONS FOR T HE PROPOSITION THAT THE NOTIONAL INCOME SHOULD NOT BE SUBJECT TO TAX AND PR OVISIONS CREATING A DEEMING FICTION ARE TO BE CONSTRUED STRICTLY. RELY ING ON THE RATIO OF THE DECISIONS AS REFERRED IN THE ORDER OF THE LD. CIT(A ) AT PAGES 11 TO 13 AND CBDT CIRCULAR AS REFERRED ABOVE IT WAS, THEREFORE, SUBMITTED THAT NOTHING HAS BEEN ACCRUED TO THE ASSESSEE AND THEREFORE QUES TION OF ADDING ANYTHING TO ITS INCOME DOES NOT ARISE AND, HENCE, T HE PROVISIONS OF SEC.41(1) ARE NOT APPLICABLE. 10. THE LD CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSION IN THE LIGHT OF THE 1983 AND 1988 SCHEMES AND ALSO THE CBD T CIRCULARS AND THE RATIO OF DECISIONS RELIED ON BY THE ASSESSEE OBSERV ED THAT THE COMBINED READING OF DOCUMENTS, PROVES BEYOND A SHADOW OF DOU BT THAT APPELLANT HAD COLLECTED SALES TAX WHICH WAS NOT PAID EARLIER, WHICH REMAINED AS DEFERRED SALES TAX LIABILITY, IT WAS NEVER CONVERT ED INTO A LOAN AND EVEN IF IT IS PRESUMED THAT DEFERRED SALES TAX LIABILITY WA S CONVERTED INTO LOAN, THE AMOUNT WAS PAID AT NET PRESENT VALUE OF THE DEF ERRED SALES LIABILITY 10 RESULTING INTO REMISSION WITHIN THE AMBIT OF REVENU E/ TRADING RECEIPT/ EXPENDITURE AND WOULD ATTRACT PROVISIONS OF SEC.41( 1) OF THE ACT. HE FURTHER OBSERVED THAT IN THE PRESENT CASE THE NPV M EANS THAT RS. 3,37,13,393/- IS SAME AS RS. 7.52 CRORES AFTER 12 YEARS SO FAR AS SALES TAX DEPARTMENT IS CONCERNED, THEN WHY THE APPELLANT HAS TAKEN THE AMOUNT OF RS. 4,14,87,985/- TO RESERVE. THE LD CIT(A) WHILE DISTINGUISHING THE DECISIONS RELIED ON BY THE ASSES SEE, UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. 11. AT THE TIME OF HEARING THE LD. SR. COUNSEL FOR THE ASSESSEE AFTER REFERRING TO THE FACTS OF THE CASE IN THE LIGHT OF THE SALIENT FEATURES OF 1983 SCHEME AND 1988 SCHEME APPEARING AT PAGE 102 T O 116 AND 117 TO 150, 153, 151 AND 101 OF THE ASSESSEE'S PAPER BOOK FURTHER SUBMITS THAT AS PER THE 1983 SCHEME, THE ASSESSEES SHIRUR UNIT WAS ENTITLED TO DEFER THE PAYMENT OF SALES-TAX COLLECTED DURING THE PERIO D 1.11.89 TO 31.10.96 (7 YEARS) UPTO THE MAXIMUM OF RS.666.94 LACS BEING 85% OF THE FIXED CAPITAL INVESTMENT OF RS.784.64 LACS. HE FURTHER S UBMITS THAT THE INCENTIVES UNDER THE 1988 SCHEME ARE SIMILAR TO THE 1983 SCHEME AND HENCE NOT REPEATED FOR SAKE OF BREVITY. THE AMOUN T OF TAX ACTUALLY DEFERRED UNDER THE 1983-1988 SCHEME WAS RS.4,22,07, 515 ( PG.101). THE AGGREGATE DEFERRAL UNDER THE 1983 AND 1988 SCHE ME WAS RS.7,52,01,378. [RS.3,29,93,863 + RS. 4,22,07,575] . THE AGGREGATE PREPAYMENT WAS RS.1,76,02,272 + RS.1,61,11,121 = RS .3,37,13,393. 12. HE FURTHER SUBMITS THAT IN THE PRESENT CASE, SE CTION 41(1) HAS BEEN INVOKED ON THE ALLEGED GROUND THAT THE ASSESSEE HAS OBTAINED SOME BENEFIT IN RESPECT OF A TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. ACCORDING TO LD. SR. COUNSEL FOR THE ASSE SSEE SECTION 41(1) DOES NOT APPLY IN THE PRESENT CASE BECAUSE (1) THE APPEL LANT 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 11 LIABILITY (4) THE BENEFIT IF ANY OBTAINED BY THE AP PELLANT IS ON CAPITAL ACCOUNT. 13. HE FURTHER SUBMITS THAT IN BOARD CIRCULAR NO.49 6 DATED 25 TH SEPTEMBER, 1987, IT WAS STATED THAT IF THE STATE GO VERNMENTS MAKE AN AMENDMENT IN THE SALES-TAX ACT TO THE EFFECT THAT T HE SALES-TAX DEFERRED UNDER THE SCHEME SHALL BE TREATED AS ACTUALLY PAID, SUCH A DEEMING PROVISION WILL MEET THE REQUIREMENT OF S.43B. BY T HE 1987 AMENDMENT, BY THE INSERTION OF THE 3 RD PROVISO TO SECTION 38(4) OF THE BOMBAY SALES TAX ACT, 1959, THE MAHARASHTRA GOVERNMENT MADE SUCH AN AMENDMENT, SICOM AN IMPLEMENTIONG AGENCY WAS AUTHORISED TO CON VERT THE DEFERRED SALES TAX IN TO A LOAN. IN 1995, A FOURTH PROVISO WAS INSERTED ENTITLING AN ASSESSEE TO PREPAY SUCH LOAN. THEREAFTER, AS PER T HE 2002 AMENDMENT, 4 TH PROVISO TO SEC.38(4) (BY WHICH THE EARLIER 4 TH PROVISO WAS SUBSTITUTED) PROVIDED THAT WHERE THE NET PRESENT VALUE OF THE DE FERRED TAX WAS PAID, THE DEFERRED TAX WOULD BE DEEMED, IN THE PUBLIC INT EREST, TO HAVE BEEN PAID. DETAILED PROCEDURE FOR SUCH PREPAYMENT WAS PR ESCRIBED VIDE CIRCULAR DATED 12 TH DECEMBER, 2002 (PG. 174-186). THE ASSESSEE MADE THE PREPAYMENT ON 30 TH DECEMBER, 2002 (PG.188-189 AND 207-208). HE FURTHER SUBMITS THAT THE FOURTH PROVISO TO SECTION 38(4) OF THE BOMBAY SALES-TAX ACT PROVIDES THAT THE ELIGIBLE UNIT TO WH OM AN ENTITLEMENT CERTIFICATE HAS BEEN GRANTED FOR AVAILING THE DEFER MENT INCENTIVES MAY PREMATURELY PAY IN PLACE OF THE AMOUNT OF TAX DEFER RED BY IT AN AMOUNT EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX AND ON MAKING SUCH PAYMENT, THE DEFERRED TAX SHALL BE DEEMED TO HAVE B EEN PAID. PURSUANT TO THE SAID FOURTH PROVISO, TRADE CIRCULAR DATED 12 .12.2002 (PG.174) LAID DOWN THE PROCEDURE OF PREPAYMENT OF THE AMOUNT OF D EFERRED SALES-TAX (PARA 3.1) AS PER THE RATES OF DISCOUNTING MENTIONE D IN THE ANNEXURE (PAGE 178-179). CIRCULAR NO.20T OF 1995 CLARIFIES THAT THE PREPAYMENT PROVISION IS IN THE INTEREST OF THE REVENUE. THE A PPELLANT OPTED FOR THE PREPAYMENT AS PER THE FOURTH PROVISO. THE SUMMARY OF THE PREPAYMENTS 12 IS AT PG.101 AND THE ACTUAL PREPAYMENT CERTIFICATES ARE AT PG.188-189 AND 207-208. ACCORDINGLY, THE LIABILITY OF RS.7,52,01,3 78, WHICH WAS PAYABLE AFTER 12 YEARS IN SIX EQUAL INSTALMENTS, WAS FULLY DISCHARGED BY PAYMENT OF RS.3,37,13,393 BEING THE PRESENT VALUE THEREOF. SEC.41(1) IS ATTRACTED WHERE A LIABILITY FOR PAYMENT OF RS.X WHICH IS PRES ENTLY PAYABLE IS SETTLED FOR RS.X-Y. AS PER THE TABLE PRESCRIBED BY THE ST ATE GOVERNMENT ITSELF THE AMOUNT OF LIABILITY PRESENTLY DUE WAS RS.3,37,1 3,393 AND THIS SUM WAS FULLY PAID. THE PRESENT IS NOT A CASE WHERE A LIABILITY PRESENTLY PLAYABLE IS SETTLED FOR A LESSER AMOUNT. WHEN A FU TURE LIABILITY IS DISCHARGED IN FULL BY PAYMENT OF ITS NET PRESENT VA LUE, NO BENEFIT CAN BE SAID TO HAVE BEEN OBTAINED. THE DIFFERENCE OF RS.4 ,14,87,985 CANNOT BE REGARDED AS A BENEFIT OBTAINED BY THE APPELLANT. REFERENCE WAS INVITED TO THE TABLE PRESCRIBED BY THE GOVERNMENT TO DETERM INE NPV (PAGES 178- 179) AND THE PREPAYMENT AMOUNTS COMPUTED BY THE SAL ES-TAX AUTHORITY (PAGES 188-189 AND 207-208) WHICH SHOWS THAT THE NE T PRESENT VALUE HAS BEEN DETERMINED BY THE SALES-TAX DEPARTMENT ITS ELF AS PER THE RULES PRESCRIBED BY THE GOVERNMENT. MOREOVER, THE 4 TH PROVISO TO SECTION 38(4) PROVIDES THAT ON PAYMENT OF THE NET PRESENT VALUE, THE DEFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID. THUS, IT IS SPECIFICA LLY MENTIONED THAT THE DEFERRED TAX IS FULLY PAID AND NOT WAIVED OR REMITT ED. THEREFORE, THERE IS NO QUESTION OF ANY BENEFIT ARISING TO THE APPELLANT . BENEFIT IS TO BE UNDERSTOOD COMMERCIALLY AND NOT BY MATHEMATICAL DIF FERENCE. THE BENEFIT IF AT ALL AROSE WHEN THE SALES-TAX DEFERMEN T WAS AVAILED OF. THE PRE-PAYMENT IS A MERE CONSEQUENCE OR WORKING OUT. IF A PAYMENT AS PER THE TERMS OF THE DEFERRAL SCHEME DOES NOT RESULT IN A BENEFIT THE SAME PAYMENT EARLIER MADE CANNOT BE TREATED AS BENEFIT O BTAINED. AGAIN WHETHER THERE IS A BENEFIT HAS TO BE DETERMINED BY APPLYING A UNIFORM PRINCIPLE AND NOT DEPENDING ON THE FACTS OF A CASE OR A PARTICULAR SITUATION. EVERY DEBTOR WOULD HAVE HIS OWN CONCEPT AND POINT OF VIEW ON WHETHER TO PREPAY DEPENDING ON HIS PRESENT VALUE FO R MONEY, HIS VIEW OF THE FUTURE, HIS USE FOR MONEY, ETC. HE FURTHER SU BMITS THAT WHEN THE FULL 13 PRESENT VALUE OF A LIABILITY IS PAID THERE IS NO RE MISSION. SINCE THERE IS NO BENEFIT, THE QUESTION WHETHER THE LIABILITY IS A TR ADING LIABILITY OR A LOAN BECOMES IRRELEVANT AND HENCE THE PREPAYMENT BENEFIT IF AT ALL IS IN THE CAPITAL FIELD. 14. HE FURTHER SUBMITS THAT IN DY. CIT VS. RELIANCE INDUSTRIES LTD.(2004) 88 ITD 273, THE SPECIAL BENCH OF THE MU MBAI TRIBUNAL TOOK THE VIEW THAT AN INCENTIVE RECEIVED UNDER THE 1979 PACKAGE SCHEME OF INCENTIVE IS A CAPITAL RECEIPT. THE PURPOSE AND OB JECT AND TERMS OF THE 1979 SCHEME IS SO FAR AS ARE RELEVANT ARE THE SAME AS UNDER THE 1983/1988 SCHEMES. THE FORM IS NOT RELEVANT BUT O NLY THAT IT IS AN INCENTIVE FOR DISPERSAL OF INDUSTRIES AND SETTING U P OF INDUSTRIES IN THE LESS DEVELOPED PARTS OF THE STATE. ACCORDING TO HIM SIM ILARITIES BETWEEN THE 1979 SCHEME (WITH WHICH RELIANCE WAS CONCERNED) AND 1983/1988 SCHEMES (WITH WHICH THE PRESENT CASE IS CONCERNED.) ARE AS UNDER :- 1979 SCHEME 1983 SHCEME 1988 SCHEME OBJECT PARA 22, PG.298 (19 TH LINE FROM TOP) OF THE RELIANCE REPORT UNDER THE MAHARASHTRA SCHEME, THE AIM WAS TO DISPERSE THE INDUSTRIES OUTSIDE THE BOMBAY-THANE- PUNE BELT PG.102 OF THE PB(PREAMABLE): IN ORDER TO ACHIEVE DISPERSAL OF INDUSTRIES OUTSIDE THE BOMBAY-THANE- PUNE BELT AND TO ATTRACT THEM TO THE UNDERDEVELOPED AND DEVELOPING AREAS OF THE STATE, PAGE 119 OF THE PB( PREAMABLE): IN ORDER TO ACHIEVE DISPERSAL OF INDUSTRIES OUTSIDE THE BOMBAY-THANE- PUNE BELT AND TO ATTRACT THEM TO THE UNDERDEVELOPED AND DEVELOPING AREAS OF THE STATE, CALCULATION OF INCENTIVE PARA 22, PAGE 298 (9 TH LINE FROM BOTTOM): FURTHER, THE INCENTIVES UNDER THE MAHARASHTRA PG.108 OF THE PB TABLE: GROUP D 85% OF THE FIXED CAPITAL INVESTMENT 7 YRS OR EARLIER IF PG.135 OF THE PB TABLE: GROUP C 60% OF THE FIXED CAPITAL INVESTMENT 6 YRS OR EARLIER IF 14 SCHEME WERE SUBJECT TO MONETARY CEILINGS DIRECTLY RELATED TO THE FIXED CAPITAL INVESTMENT. THE CEILINGS ARE REACHED. PG.153-4: ELIGIBILITY CERTIFICATE SHOWING CALCULATION OF INCENTIVE AT 85% OF THE FIXED CAPITAL INVESTMENT THE CEILINGS ARE REACHED. PG.153-4: ELIGIBILITY CERTIFICATE SHOWING CALCULATION OF INCENTIVE AT 60% OF THE FIXED CAPITAL INVESTMENT 15. HE FURTHER SUBMITS THAT THE HONBLE SUPREME CO URT IN CIT VS. PONNI SUGARS AND CHEMICALS LTD. (2008) 174 TAXMAN 87 (SC) HAS HELD THAT THE TEST OF THE CHARACTER OF THE RECEIPT OF A SUBSIDY I N THE HANDS OF THE ASSESSEE UNDER A SCHEME HAS TO BE DETERMINED WITH R ESPECT TO THE PURPOSE FOR WHICH THE SUBSIDY IS GRANTED. IT IS TO BE NOTED THAT IN PONNI SUGARS CASE THE PROCEEDS FROM THE SALE OF SUGAR (T HE ASSESSEES STOCK-IN- TRADE) WERE HELD TO BE ON CAPITAL ACCOUNT AND SO AL SO COLLECTION OF EXCISE DUTY. IT IS FOR THIS REASON THAT THE HONBLE SUPRE ME COURT STATED THAT EVEN A SUBSIDY TO ACQUIRE RAW MATERIALS MAY BE IN T HE CAPITAL FIELD DEPENDING ON THE OBJECT OF THE SCHEME. HE FURTHER SUBMITS THAT THE PURPOSE OF THE 1983 AND 1988 SCHEME ARE THE SAME AS THE OBJECT AND PURPOSE OF THE 1979 SCHEME WITH WHICH RELIANCE INDU STRIES LTD. SPECIAL BENCH (SUPRA), WAS CONCERNED, VIZ., DISPERSAL OF IN DUSTRIES OUTSIDE THE BOMBAY-THANE-PUNE BELT. IN RELIANCES CASE, THE S UBSIDY OPTED FOR WAS EXEMPTION FROM PAYMENT OF SALES-TAX AND THE SALES T AX DEEMED TO HAVE BEEN COLLECTED BY ASSESSEE (WHICH WAS NOT TO BE PAI D TO THE GOVERNMENT) WAS HELD TO BE ON CAPITAL ACCOUNT OR IN THE CAPITAL FIELD. IT WAS HELD THAT THE SALES TAX OUGHT TO BE REGARDED AS PAID TO THE G OVERNMENT AND RETURNED TO RELIANCE IN THE FORM OF A SUBSIDY (IN T HE PRESENT CASE A SUBSIDIZED LOAN). SO ALSO THE SALES TAX COLLECTED IN THE PRESENT CASE WAS ON CAPITAL ACCOUNT AND THE SUBSEQUENT PAYMENT TO TH E GOVERNMENT WHETHER IN THE PERIOD PRESCRIBED IN THE SCHEME OR T HE PREPAYMENT WOULD 15 BE ON CAPITAL ACCOUNT, I.E., ONE HAS TO DETERMINE T HE CHARACTER OF THE SUBSIDY IN THE FORM OF SALES-TAX COLLECTION. THER EFORE, THE PRESENT RECEIPT MUST ALSO BE REGARDED AS BEING OF THE SAME NATURE A S THE RECEIPT IN THE RELIANCE/PONNI SUGARS CASE, VIZ., A RECEIPT ON CAP ITAL ACCOUNT. IF A RECEIPT IS ON CAPITAL ACCOUNT, THEN , THE BENEFIT I F ANY OBTAINED ON ITS PREPAYMENT IS ALSO ON CAPITAL ACCOUNT TO WHICH SEC. 41(1) DOES NOT APPLY. HE FURTHER SUBMITS THAT THE DECISION OF THE SPECIAL BENCH IN RELIANCES CASE HAS BEEN APPROVED BY THE HONBLE BOMBAY HIGH C OURT IN CIT VS. RELIANCE INDUSTRIES LTD. IN CENTRAL EXCISE APPEAL N O.1299 0F 2008 DATED 15.4.2009. THE PRINCIPLE OF RELIANCE (WHEREIN THE I NCENTIVE WAS IN THE FORM OF SALES-TAX EXEMPTION) HAS BEEN APPLIED TO TH E CASE OF SALES-TAX DEFERRAL. IN THAT CASE, LOOKING AT THE OBJECT OF T HE SCHEME, THE TRIBUNAL HAS HELD THAT THE RECEIPT IN QUESTION WAS A CAPITAL RECEIPT. 16. HE FURTHER SUBMITS THAT IN ACIT VS. ASSOCIATED CAPSULES LTD. ITA NO.4818/MUM/08, FOR ASSESSMENT YEAR 2004-05 ORDER D ATED 20.10.2009, THE TRIBUNAL HAS FOLLOWED THE DECISION IN STERLITE S CASE (SUPRA), AND DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE . 17. HE FURTHER SUBMITS THAT IN EVEREST INDUSTRIES V S. ACIT IN ITA NO.814/MUM/2007, FOR ASSESSMENT YEAR 2003-04, ORDER DATED 4.12.2009, THE TRIBUNAL HAS COMPARED THE 1979 SCHEM E WITH WHICH RELIANCE WAS CONCERNED AND THE 1993 SCHEME (WHICH I S A SUCCESSOR TO THE 1983 SCHEME AND THE 1988 SCHEME) WITH WHICH EVEREST WAS CONCERNED. THE TRIBUNAL HAS THEREAFTER COME TO THE CONCLUSION THAT THE TWO SCHEMES ARE SIMILAR IN ALL MATERIAL RESPECTS WHEN DETERMINI NG THE QUESTION AS TO WHETHER THE INCENTIVE WAS CAPITAL OR REVENUE IN NAT URE AND HENCE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 18. HE FURTHER SUBMITS THAT THE DECISION OF THE TRI BUNAL IN CARTINI INDIA LTD. VS ITO ITA NO.1051/MUM/2008 FOR ASSESSMENT YEA R 2004-05, ORDER 16 DATED 19.5.2009 IS DISTINGUISHABLE. IN THAT CASE, THE ISSUE INVOLVED WAS ABOUT THE TAXABILITY OF RS. 5,48,517/- IS BEING THE REMISSION UNDER THE PREPAYMENT OF SALES TAX DEFERRAL SCHEME 2003. TH US, THE DECISION PROCEEDED ON THE FOOTING THAT THERE WAS A REMISSION OF THE LIABILITY. IN THE CASE OF THE ASSESSEE THERE IS NO REMISSION OR C ESSATION OF A LIABILITY AS THE LIABILITY HAS BEEN FULLY PAID (PAYMENT OF THE P RESENT VALUE IS AS GOOD AS PAYMENT OF THE FULL LIABILITY ON THE DUE DATE.). IN THE APPELLANTS CASE, IT HAS NOT BEEN ACCEPTED THAT THERE IS A REMISSION. IN STERLITE, EVEREST AND ASSOCIATED CAPSULES CASES THE ASSESSEE DID NOT URGE THAT THERE WAS NO BENEFIT AND THAT THERE WAS NO REMISSION OF A LIA BILITY. MOREOVER, IN CARTINIS CASE, THE ASSESSEE WAS ENTITLED TO AN INC ENTIVE ONLY TO THE EXTENT OF 15% OF THE FIXED CAPITAL INVESTMENT, WHICH IS A MATERIAL DIFFERENCE BETWEEN THAT CASE AND THE APPELLANTS CASE, WHEREAS THE APPELLANT IS ENTITLED TO AN INCENTIVE TO THE EXTENT OF 85% OF TH E FIXED CAPITAL INVESTMENT. HE FURTHER SUBMITS THAT AN INCENTIVE OF RS. 18,93,750 ON A FIXED CAPITAL INVESTMENT OF RS. 1,26,25,000 (15%) CAN HARDLY BE REGARDED AS AN INCENTIVE FOR SETTING UP THE UNIT AND INCURRI NG THE COST OF FIXED CAPITAL INVESTMENT, WHEREAS IN THE APPELLANTS CASE THERE CAN BE NO DOUBT THAT THE INCENTIVE WAS FOR SETTING UP THE UNIT IN A BACKWARD AREA. ALSO, IN CARTINIS CASE, THE ASSESSEE DID NOT AT ALL ARGUE T HAT (1) THE INCENTIVE WAS ON CAPITAL ACCOUNT (IN VIEW OF RELIANCE SPECIAL BEN CH AND OTHER DECISION REFERRED TO ABOVE) AND (2) THERE WAS NO BENEFIT ON PAYMENT OF PRESENT VALUE OF THE FUTURE LIABILITY. IN CARTINIS CASE ( PARA 7 AND 8), IT HAS BEEN HELD THAT THE BENEFIT IS REALLY THE RIGHT TO DEFER THE SALES-TAX PAYMENT. 19. HE FURTHER SUBMITS THAT EVEN ASSUMING WHILST ST RONGLY DENYING THAT ANY BENEFIT HAS BEEN OBTAINED BY THE APPELLANT, SUC H BENEFIT IS NOT IN RESPECT OF THE SALES-TAX DEFERRAL LIABILITY BUT IN RESPECT OF LOAN. THE 3 RD PROVISO TO SECTION 38(4) OF THE BOMBAY SALES-TAX AC T PROVIDES THAT WHERE A LOAN LIABILITY EQUAL TO THE AMOUNT OF DEFERRAL HA S BEEN RAISED BY SICOM, THE SALES TAX SHALL BE DEEMED TO HAVE BEEN PAID. PU RSUANT TO THE SAID 17 PROVISO, GOVERNMENT RESOLUTION DT.21 ST JULY, 1988 WAS PASSED PRESCRIBING THE PROCEDURE FOR CONVERSION OF THE SALE-TAX DEFERR AL INTO INTEREST FREE LOAN [PG.232 ONWARDS OF THE PAPER BOOK]. ON 08.10. 2002 THE APPELLANT WROTE TO SICOM OPTING FOR CONVERSION OF THE SALES-T AX DEFERRAL LIABILITY INTO A LOAN (PG.251). ON 10.10.2002 FURTHER LETTERS WERE WRITTEN BY THE APPELLANT TO SICOM FURNISHING THE DETAILS REQUIRED BY SICOM (PG.258- 259). ON 21.10.2002 SICOM BEING FULLY SATISFIED THA T THE CONDITIONS FOR EFFECTIVE SUCH CONVERSION WERE FULFILLED WROTE TO T HE SALES-TAX DEPARTMENT FOR CARRYING OUT THE MINISTERIAL ACT OF ISSUING A M ODIFIED ENTITLEMENT CERTIFICATE ON THE BASIS OF THE MODIFIED ELIGIBILIT Y CERTIFICATE ISSUED BY SICOM AND FORWARDED TO THE SALES-TAX AUTHORITIES AS PER THE ADMINISTRATIVE ORDERS FOR CONVERSION OF THE DEFERRE D SALES-TAX LIABILITY TO A LOAN LIABILITY. THIS SHOWS THAT SICOM WAS SATISFIE D THAT ALL THE CONDITIONS FOR CONVERTING THE SALES-TAX DEFERRAL LIABILITY TO A LOAN WERE FULFILLED. (PG.260-1). ON 30.10.2002 ASSTT. SALES-TAX COMMISSI ONER WROTE TO THE APPELLANT ASKING FOR CERTAIN DETAILS (PG.262). ON 11.11.2002: THE APPELLANT REPLIED TO THE SALES-TAX DEPARTMENT (PG.2 63). THEREAFTER, THE APPELLANT DID NOT RECEIVE ANY COMMUNICATION FROM TH E SALES-TAX DEPARTMENT WHICH MEANS THAT THE SALES TAX DEPARTMEN T WAS SATISFIED THAT THE ENTITLEMENT CERTIFICATE HAD TO BE MODIFIED AS D IRECTED BY SICOM. IN THE CIRCUMSTANCES, HE SUBMITS THAT THE APPELLANT HA D DONE ALL THAT WAS REQUIRED FROM HIM TO CONVERT THE DEFERRED SALES-TAX LIABILITY INTO A LOAN. THEREFORE, ACCORDING TO HIM THE LIABILITY HAS BEEN CONVERTED INTO A LOAN AND THE CONDITION PRESCRIBED IN BOARD CIRCULAR NO.6 74 DATED 29.12.1993 READ WITH CIRCULAR NO.496 DATED 25.09.1987 HAVE BEE N FULFILLED. ASSUMING THAT THERE WAS SOME DOUBT IN THE MATTER IT MUST BE RESOLVED IN FAVOUR OF THE APPELLANT. AN AUTHORITY MUST BE REGAR DED AS HAVING DONE THAT WHICH OUGHT TO HAVE BEEN DONE, OTHERWISE THE A SSESSEE WOULD BE DENIED A BENEFIT TO WHICH IT WAS LEGITIMATELY ENTIT LED FOR NO FAULT OF ITS OWN. RELIANCE WAS ALSO PLACED ON CIT VS. MRS. HILL A J.B. WADIA (1995) 216 ITR 376 (BOM) WHEREIN IT WAS HELD THAT IF THE A SSESSEE HAD DONE ALL 18 HE/SHE COULD TO PURCHASE THE HOUSE BUT THE PURCHASE COULD NOT BE FINALIZED FOR NO FAULT OF HIS/HER, THE ASSESSEE COU LD NOT BE DENIED EXEMPTION U/S.54. IN THAT CASE THE INVESTMENT OF A SMALL SUM OF RS.8,000 OUT OF THE TOTAL SUM OF RS.2,59,238/- IN T HE HOUSE STILL HAD TO BE DONE, NEVERTHELESS THE HONBLE BOMBAY HIGH COURT HE LD THAT SUBSTANTIALLY THE ENTIRE COST OF CONSTRUCTION HAD BEEN PAID BY TH E ASSESSEE WITHIN THE STIPULATED PERIOD AND THEREFORE DEDUCTION U/S.54 WA S ALLOWED. THE PRESENT CASE STANDS ON A MUCH STRONGER FOOTING WHER E EVERYTHING THAT THE APPELLANT COULD DO WAS DONE AND THE PROCESS OF CONV ERSION COULD NOT BE COMPLETED BECAUSE THE SALES-TAX AUTHORITIES DID NOT ISSUE THE MODIFIED ENTITLEMENT CERTIFICATE. 20. HE FURTHER SUBMITS THAT ONCE THE MODIFIED ELIGI BILITY CERTIFICATE IS ISSUED BY THE IMPLEMENTING AGENCY, THE SALES-TAX AU THORITY IS BOUND BY IT AND HAS NO JURISDICTION TO QUESTION IT. SEE: LAXMI INDUSTRIES VS. STATE OF RAJASTHAN 99 STC 584 (RAJ); SWASTIK METAL WORKS VS. THE STATE OF MAHARASHTRA (1998) 17 MTJ 332 (MUMBAI TRIBUNAL). I N ANY EVENT, FROM THE CORRESPONDENCE EXCHANGED BETWEEN THE APPELLANT AND SICOM/SALES- TAX AUTHORITY REGARDING CONVERSION OF SALES-TAX INT O A LOAN, IT IS APPARENT THAT A LOAN OF AN EQUIVALENT AMOUNT HAS FOR ALL PRA CTICAL PURPOSES BEEN RAISED BY SICOM. THEREFORE, THE CRUCIAL PART IN T HE ENTIRE PROCESS WAS OBTAINING THE APPROVAL OF THE SICOM TO THE PROPOSED CONVERSION AS SICOM WAS TO CONVERT THE SALES-TAX DEFERRAL LIABILI TY INTO LOAN. SALES-TAX DEPARTMENT WAS GETTING ITS DUES AND THEREFORE THEY SHOULD NOT HAVE ANY OBJECTION TO THE SAID PROCESS OF CONVERSION. ONCE SICOM HAD AGREED TO THE PROPOSED CONVERSION BY ISSUING A MODIFIED ELIGI BILITY CERTIFICATE, SALES- TAX AUTHORITIES WERE ONLY REQUIRED TO PERFORM THE M INISTERIAL ACT OF ISSUING A MODIFIED CERTIFICATE OF ENTITLEMENT. THIS CAN BE SEEN FROM THE FACT THAT ON 30 TH OCTOBER, 2002, I.E., WITHIN ONLY 9 DAYS OF SICOM W RITING TO THE SALES-TAX DEPARTMENT, THE SALES-TAX AUTHORITIES HAD CALLED FOR THE DETAILS OF THE STATUS OF ASSESSMENTS (RECEIVED BY THE APPEL LANT ON 07.11.2002), 19 TO WHICH THE ASSESSEE HAD PROMPTLY PROVIDED VIDE LE TTER DATED 11.11.2002 (PAGE-263). THE SALES-TAX AUTHORITIES DID NOT REQUIRE ANY FURTHER INFORMATION NOR REQUIRED THE APPELLANT TO D O ANYTHING FURTHER. IN THE MEANTIME, ON 12.12.2002, THE PREPAYMENT SCHEME UNDER THE FOURTH PROVISO WAS NOTIFIED AS NOTED EARLIER AND ACCORDING LY, THE APPELLANT APPLIED UNDER THE FOURTH PROVISO TO SECTION 38(4) F OR PREPAYMENT AND MADE SUCH PREPAYMENT ON 30.12.2002. AS SICOM HAD EXPRESSED ITS UNEQUIVOCAL SATISFACTION, THE CONDITION FOR CONVERS ION INTO A LOAN WERE SATISFIED AND THE AMOUNT PREPAID WAS REALLY THE PRE PAYMENT OF A LOAN AND THIS IS A TRANSACTION IN THE CAPITAL FIELD. THE FO URTH PROVISO PROPERLY CONSTRUED WOULD APPLY BOTH IN THE CASE OF LOAN AS W ELL AS DEFERRED SALES- TAX BY PREPAYMENT AS OTHERWISE THE ASSESSEE WHO HAD CONVERTED THE SALES-TAX LIABILITY INTO A LOAN WOULD BE WORSE-OFF. 21. HE FURTHER SUBMITS THAT THE THIRD PROVISO TO SE CTION 38(4) OF THE SALES TAX ACT SPEAKS OF CONVERSION OF SALES-TAX LIA BILITY INTO LOAN BY SICOM. SINCE IN THE PRESENT CASE, SICOM HAS GIVEN ITS CONSENT FOR THE CONVERSION, THE CONVERSION BY SICOM HAS BEEN DONE A ND THE REQUIREMENT OF THIRD PROVISO TO SECTION 38(4) IS ALSO FULFILLED . THEREFORE, THE SALES-TAX LIABILITY ON THE FACTS OF THE PRESENT CASE IS TO BE REGARDED AS HAVING BEEN CONVERTED INTO A LOAN AND THE PREPAYMENT THEREOF OU GHT TO BE REGARDED AS PREPAYMENT OF SUCH CONVERTED LOAN LIABILITY. TH EREFORE, THE BENEFIT, IF ANY, ON SUCH PREPAYMENT IS ON CAPITAL ACCOUNT. REL IANCE WAS PLACED ON THE RECENT DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN S.I. GROUP INDIA LTD. VS. ACIT (2010) 192 TAXMAN 91(BOM.), WHEREIN O N THE SIMILAR FACTS AND CIRCUMSTANCES, IT HAS BEEN HELD THAT THERE WAS NO REMISSION OR CESSATION OF LIABILITY, ONE OF THE REQUIREMENTS SPE LT OUT FOR THE APPLICABILITY OF SECTION 41(1)(A) HAS NOT BEEN FULFILLED. RELIANC E WAS ALSO PLACED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN MAHIND RA AND MAHINDRA LTD. VS. CIT 261 ITR 501 (BOM), WHEREIN IT HAS BEEN HELD THAT SECTION 41(1) DOES NOT APPLY TO A BENEFIT RECEIVED ON CAPITAL ACC OUNT. THE SAID DECISION 20 OF THE BOMBAY HIGH COURT HAS BEEN FOLLOWED BY DELHI HIGH COURT IN CIT VS. TOSHA INTERNATIONAL LTD. 176 TAXMAN 187 (DEL). THE DEPARTMENTS SLP AGAINST THE DELHI HIGH COURTS DECISION HAS BEE N DISMISSED BY THE SUPREME COURT [SEE 319 ITR (STATUTES) 7]. HE, THER EFORE, SUBMITS THAT THE PROVISION OF SECTION 41(1),DOES NOT APPLY TO TH E FACTS OF THE PRESENT CASE AND, THEREFORE, THE ADDITION MADE BY THE ASSES SING OFFICER AND SUSTAINED BY THE LD. CIT(A) BE DELETED. 22. ON THE OTHER HAND, THE LD.DR WHILE REFERRING TO THE QUESTION REFERRED TO THE SPECIAL BENCH AND THE PROVISION OF SECTION 41(1) OF THE ACT FURTHER SUBMITS THAT THE HONBLE SUPREME COURT IN T HE CASE OF POLYFLEX (INDIA) (P) LTD. VS. CIT 257 ITR 343(SC), WHILE HO LDING THE APPLICABILITY OF 41(1) HAS OBSERVED: IN THE ASSESSMENT FOR THE RELEVANT YEAR AN ALLOWAN CE OR DEDUCTION HAS BEEN MADE IN RESPECT OF ANY LOSS, EXP ENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE. THI S IS THE FIRST STEP. COMING TO THE NEXT STEP THE ASSESSEE MUST HA VE SUBSEQUENTLY (I) OBTAINED ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR (II) OBTAINED ANY BENEFIT IN RESP ECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. IN CASE EITHER OF THESE EVENTS HAPPEN, THE DEEMING PRO VISION ENACTED IN THE CLOSING PART OF SUB-S.(1) COMES INTO PLAY. ACCORDINGLY, THE AMOUNT OBTAINED BY THE ASSESSEE OR THE VALUE OF BENEFIT ACCRUING TO HIM IS DEEMED TO BE PR OFITS AND GAINS OF BUSINESS OR PROFESSION AND IT BECOMES CHAR GEABLE TO INCOME-TAX AS THE INCOME OF THAT PREVIOUS YEAR. THEREFORE , WHAT IS THEN REQUIRED TO BE SEEN FOR IN VOKING THE PROVISIONS OF SEC. 41(1) IS THAT THE ASSESSEE SHOULD HAVE I) INCURRED A TRADING LIABILITY, II) A DEDUCTION SHOULD HAVE BEEN MADE IN RESPECT OF SUCH TRADING LIABILITY, AND III) THE ASSESSEE MUST HAVE SUBSEQUENTLY OBTAINED A NY BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF. 21 23. HE FURTHER SUBMITS THAT SALES TAX IS CHARGED ON GOODS SOLD BY AN ASSESSEE DURING THE COURSE OF ITS TRADING ACTIVITY. HENCE, SALES TAX ACCRUED / COLLECTED ON THE SALE OF GOODS BY THE ASS ESSEE BECOMES A TRADING RECEIPT OF THE ASSESSEE. THIS IS THE SETTLE D POSITION OF LAW IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CAS ES OF CHOWRINGHEE SALES BUREAU P. LTD. VS. CIT (1993) 87 ITR 542(SC) AND SINCLAIR MURRAY AND CO. P. LTD. VS. CIT (1974) 97 ITR 615(SC). REF ERENCE MAY ALSO BE MADE TO THE DECISION OF THE HONBLE HIGH COURT OF G UJARAT IN THE CASE OF WOLKEM (P) LTD. VS. CIT REPORTED IN 259 ITR 430.(GU J.). 24. IN THE PRESENT CASE THE ASSESSEE HAS ITSELF BEE N TREATING THE SALES TAX COLLECTED AS PART OF TRADING AND NOT AS CAPITAL RECEIPTS IN ITS BOOKS OF ACCOUNT AND RETURNS OF INCOME FILED BY IT, EVEN DUR ING THE PERIOD WHEN IT WAS ELIGIBLE FOR THE BENEFITS OF SALES TAX DEFERRAL UNDER THE PACKAGE OF INCENTIVE SCHEMES. IN SUPPORT HE PLACED ON RECORD THE COPY OF AUDIT REPORT U/S. 44AB OF THE I.T. ACT, 1961 FOR THE ASSE SSMENT YEARS 2000-01, 2001-02 & 2002-03. HE FURTHER SUBMITS THAT IN COLUM N 13(E) OF THE TAX AUDIT REPORT, IN RESPECT OF AMOUNTS NOT CREDITED T O THE PROFIT & LOSS A/C., BEING CAPITAL RECEIPTS, IF ANY, THE AUDITOR HAS CAT EGORICALLY STATED NIL. THIS CLEARLY SHOWS THAT IT IS ACCEPTED POSITION THA T SALES TAX RECEIPTS HAVE NOT BEEN TREATED AS CAPITAL RECEIPTS. THE ASSESSEE, IN THE PROCEEDINGS BEFORE THE ASSESSING OFFICER AND LD. CIT(A) HAS ADM ITTED THAT THE RECEIPTS ON ACCOUNT OF SALES TAX WAS A TRADING RECEIPT, AND THE LIABILITY TO THE STATE GOVERNMENT ON ACCOUNT OF THE SALES TAX WAS A TRADIN G LIABILITY. THE RETURNS OF INCOME FOR THE ASSESSMENT YEARS, INCLUDI NG THE RETURNS FOR THE ASSESSMENT YEARS DURING THE PERIOD THE ASSESSEE WAS ELIGIBLE FOR THE BENEFITS UNDER THE SALES TAX DEFERRAL SCHEME, WERE FILED BY THE ASSESSEE VOLUNTARILY DISCLOSING THE ABOVE POSITION. EVEN IF THE SALES TAX COLLECTED AND THE LIABILITY TOWARDS THE SALES TAX INCURRED WE RE NOT ROUTED THROUGH THE P&L ACCOUNT OF THE ASSESSEE, IT WOULD MAKE NO D IFFERENCE SINCE THE SALES TAX COLLECTED WOULD GET OFFSET BY THE DEDUCTI ON CLAIMED AND ALLOWED 22 ON ACCOUNT OF THE SALES TAX PAID. THIS IS AGAIN SET TLED POSITION OF LAW IN VIEW OF DECISION OF HONBLE SUPREME COURT IN THE CA SE CHOWRINGHEE SALES BUREAU P.LTD. (SUPRA). 25. AS PER THE PACKAGE OF INCENTIVE SCHEME, SALES TAX LIABILITY HAS BEEN DEFINED TO MEAN THE FOLLOWING:- (I) SALES TAX / GENERAL SALES TAX / PURCHASE TAX AS THE CASE MAY BE, PAYABLE AND PAID OR DEFERRED UNDER THE LOCAL SALES TAX LAW DURING THAT PERIOD ON PURCHASE OF RAW MATERIALS REDUCED BY THE SET OFF AT APPROPRIATE RATES, IF ANY, ADMISSIBLE THERE UNDER AND ALSO ON S ALES OF FINISHED PRODUCTS OF THE ELIGIBLE UNITS. (II) CENTRAL SALES TAX PAYABLE AND PAID OR DEFERRED UNDE R THE SALES TAX ACT, 1956 DURING THAT PERIOD ON THE SAL ES OF FINISHED PRODUCTS OF THE ELIGIBLE UNITS MADE IN THE COURSE OF INTER STATE TRADE OR COMMERCE. UNDISPUTABLY, ANY LIABILITY RELATING TO A TRADING R ECEIPT WOULD BE A TRADING LIABILITY. AS HAS BEEN POINTED OUT, SALES TAX LIABI LITY HAS BEEN INCURRED BY THE ASSESSEE AND DEDUCTION HAS ALSO BEEN CLAIMED AN D ALLOWED IN RESPECT OF SUCH TRADING LIABILITY IN THE RETURN OF INCOME F ILED BY THE ASSESSEE IN ACCORDANCE WITH CIRCULAR NO. 496 DATED 25.09.1987. THIS IS AN UNDISPUTED FACT AND ADMITTED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AS WELL AS BY THE LD. COUNSEL FOR THE ASSESSEE DURING THE COUR SE OF PRESENT HEARING. THE ASSESSMENT FOR ALL THE YEARS, INCLUDING THE YEA RS DURING WHICH THE ASSESSEE WAS ELIGIBLE FOR THE BENEFITS OF DEFERRAL OF THE SALES TAX LIABILITY, FOR WHICH THE RETURNS WERE FILED VOLUNTARILY BY THE ASSESSEE HAVE BEEN COMPLETED, AND HAVE ATTAINED FINALITY. HENCE, FOR T HE ASSESSEE TO NOW MAKE A CLAIM THAT THE SALES TAX RECEIVED DURING THI S PERIOD WAS NOT A TRADING RECEIPT ON REVENUE ACCOUNT, BUT WAS A CAPIT AL RECEIPT IS NOT TENABLE AND CANNOT BE ACCEPTED. IT MAY BE NOTED THA T THE PREPAYMENT OF DEFERRED SALES TAX LIABILITY, WHICH IS THE SUBJECT MATTER OF THE APPEAL, OF THE SALES TAX COLLECTED AND DISCLOSED AS TRADING RE CEIPT, RELATE TO THE 23 EARLIER ASSESSMENT YEARS, THE ASSESSMENTS OF WHICH STAND COMPLETED AND HAVE ATTAINED FINALITY, AND NOT RELATED TO THE ASSE SSMENT YEAR 2003-04 WHICH IS THE SUBJECT MATTER OF APPEAL. 26. HE FURTHER SUBMITS THAT WHILE DECIDING THE CASE OF S.I. GROUP INDIA LTD.(SUPRA), THE HONBLE BOMBAY HIGH COURT, AFTER C ONSIDERING THE FACTS OF THE CASE, HAS CATEGORICALLY HELD THAT THE LIABILI TY OF THE ASSESSEE TO PAY SALES TAX IS INDISPUTABLY A TRADING LIABILITY IN RE SPECT OF WHICH AN ALLOWANCE OR DEDUCTION HAS BEEN MADE U/S. 43B. IN THIS CASE ALSO, THE FACTS ARE IDENTICAL AND THE ASSESSEE HAD AVAILED BENEFITS OF SALES TAX DEFERRAL UNDER THE PACKAGE OF INCENTIVE SCHEMES OF THE MAHARASHT RA GOVERNMENT. IN VIEW OF THE ABOVE, IT IS CLEAR THAT THE ASSESSEE HA S INCURRED A TRADING LIABILITY, WHICH HAS BEEN DEFERRED UNDER THE SCHEME S. IT IS IMPORTANT TO APPRECIATE THAT THE TRADING LIABILITY HAD BEEN INCU RRED AND HAD ACCRUED THE MOMENT SALES WERE EFFECTED BY THE ASSESSEE. 27. ANOTHER ARGUMENT WHICH WAS TAKEN BY THE LD. COU NSEL FOR THE ASSESSEE WAS THAT THE RECEIPTS ON ACCOUNT OF SALES TAX WERE CAPITAL RECEIPTS IN VIEW OF THE DECISION OF THE HONBLE SPE CIAL BENCH IN THE CASE OF RELIANCE INDUSTRIES LTD. REPORTED IN 88 ITD 273 (MU M.) (SB), WHEREIN THE TRIBUNAL HAD TAKEN THE VIEW THAT THE INCENTIVE RECE IVED BY THE ASSESSEE ON ACCOUNT OF COMPLETE EXEMPTION FROM PAYMENT OF SA LES TAX UNDER THE 1979 PACKAGE OF INCENTIVE SCHEME WAS CAPITAL IN N ATURE. ACCORDINGLY, THE INCENTIVE BY WAY OF DEFERRAL OF SALES TAX UNDER THE 1983 AND THE 1988 PACKAGE OF INCENTIVE SCHEMES, UNDER WHICH THE ASS ESSEE HAS CLAIMED BENEFITS OF DEFERRAL OF SALES TAX IN RESPECT OF ITS UNITS, SHOULD ALSO BE TREATED AS CAPITAL RECEIPTS. IN THIS REGARD HE SUBM ITS THAT IN THE 1979 SCHEME, SINCE, THE UNIT WAS COMPLETELY EXEMPTED FRO M PAYMENT OF THE SALES TAX, NO LIABILITY ON ACCOUNT OF SALES TAX COL LECTED BY THE UNIT EVER ACCRUED TO IT. HENCE, NO SALES TAX WAS PAYABLE TO T HE GOVERNMENT. 24 PROVISIONS OF SECTION 43B WOULD, THEREFORE, NOT APP LY IN THE CASE OF RELIANCE INDUSTRIES LTD. HOWEVER, IN THE CASE OF TH E ASSESSEE, WHICH WAS COVERED UNDER THE 1983 AND THE 1988 PACKAGE OF INC ENTIVE SCHEMES, THE LIABILITY TOWARDS THE SALES TAX ACCRUED THE MOM ENT SALES WERE EFFECTED BY THE UNIT. THIS LIABILITY WAS DEFERRED TO BE PAID AT A FUTURE DATE. THE SPECIAL BENCH, IN THE CASE OF RELIANCE INDUSTRIES L TD. (SUPRA), HELD THE RECEIPTS ON ACCOUNT OF SALES TAX AS CAPITAL RECEIPT S ON A FINDING OF FACT THAT THE ELIGIBILITY OF THE UNIT TO RECEIVE THE INCENTIV E, I.E., THE SUBSIDY IN THE FORM OF COMPLETE EXEMPTION FROM THE PAYMENT OF SALE S TAX, AROSE EVEN BEFORE THE UNIT WAS SET UP. IT ALSO GAVE A FINDING OF FACT THAT THE SUBSIDY WAS GIVEN FOR THE PURPOSE OF SETTING UP THE UNIT. R EFERENCE WAS ALSO MADE TO PAGE NO. 305 OF THE DECISION OF SPECIAL BENCH I N THE CASE OF RELIANCE INDUSTRIES LTD. (SUPRA), THE RELEVANT PORTION READS AS UNDER:- ON AN ANALYSIS OF THE SCHEME, THE TRIBUNAL HAS COME TO THE CONCLUSION THAT THE THRUST OF THE SCHEME IS THAT THE ASSESSEE WOULD BECOME ENTITLED FOR THE SALES TAX INCENTIVE E VEN BEFORE THE COMMENCEMENT OF THE PRODUCTION, WHICH IMPLIES THAT THE OBJECT OF THE INCENTIVE IS TO FUND A PART OF THE CO ST OF THE SETTING UP OF THE FACTORY IN THE NOTIFIED BACKWARD AREA. THIS FINDING OF FACT OF THE TRIBUNAL HAS BEEN APPRO VED BY THE SPECIAL BENCH AND IT IS ON THIS FINDING OF FACT THAT THE SP ECIAL BENCH AFTER APPLYING THE RATIO OF THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. VS. CIT REPORTED IN (1979) 142 CTR (SC) 261 HAS HELD THE SUBSIDY TO BE CAPITAL IN NATURE. A CCORDING TO HIM ON PERUSAL OF THE 1983 AND 1988 PACKAGE OF INCENTIVE SCHEMES NOWHERE SHOW THAT THE INCENTIVES WITH RESPECT TO THE SALES TAX WERE GIVEN FOR THE PURPOSE OF FUNDING A PART OF COST OF SETTING UP OF THE FACTORY OR THAT THE UNITS BECAME ELIGIBLE / ENTITLED FOR THE SALES TAX INCENTIVE EVEN BEFORE THE COMMENCEMENT OF THE PRODUCTION . IT COULD NOT BE POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS TO WHICH CLAUSE IN THE SCHEMES EVEN SUGGESTS THAT THE SUBSIDIES WERE GIVEN FOR THE PURP OSE OF FUNDING A PART OF COST OF SETTING UP OF THE FACTORY OR THAT THE UN ITS BECAME ELIGIBLE / ENTITLED FOR THE SALES TAX INCENTIVE EVEN BEFORE TH E COMMENCEMENT OF THE 25 PRODUCTION . THE ONLY REASON GIVEN BY THE LD. COUNSEL FOR THE AS SESSEE IN SUPPORT OF HIS CLAIM IS HIS RELIANCE ON DECISION OF HONBLE SPECIAL BENCH IN THE CASE OF RELIANCE INDUSTRIES LTD. (SUPRA). ACCOR DING TO THE LD. DR THE FINDINGS GIVEN IN THE CONTEXT OF THE 1979 SCHEME CA NNOT HOLD GOOD FOR THE 1983 AND 1988 SCHEMES WHEN NOTHING COULD BE POINTED OUT BY THE LD. COUNSEL THAT UNDER THE 1983 AND 1988 SCHEMES, THE S UBSIDIES WERE GIVEN FOR THE PURPOSE OF FUNDING A PART OF COST OF SETTIN G UP OF THE UNIT OR THAT THE UNITS BECAME ELIGIBLE / ENTITLED FOR THE SALES TAX INCENTIVE EVEN BEFORE THE COMMENCEMENT OF THE PRODUCTION . IN THE ABSENCE OF SUCH CONDITIONS, THE BINDING RATIO OF THE HONBLE SUPREME COURT IN T HE CASE OF SAHNEY STEEL & PRESS WORKS LTD. (SUPRA) HAS TO BE NECESSAR ILY FOLLOWED. 28. ACCORDING TO THE LD. DR THE RATIO OF THE SAID D ECISION IS THAT IF SUBSIDIES ARE GIVEN TO THE ASSESSEE FOR ASSISTING H IM IN CARRYING OUT THE BUSINESS OPERATION AND THE MONEY IS GIVEN ONLY AFTE R AND CONDITIONAL UPON COMMENCEMENT OF PRODUCTION, SUCH SUBSIDIES MUS T BE TREATED AS ASSISTANCE FOR THE PURPOSE OF THE TRADE AND REVENUE IN NATURE. AT PARA 4 OF THE DECISION THE HONBLE SUPREME COURT HAS OBSER VED:- THE CONTENTION OF MR. GANESH THAT THE SUBSIDIES WE RE CAPITAL IN NATURE AND WERE GIVEN FOR THE PURPOSE OF STIMULA TING SETTING UP AND EXPANSION OF INDUSTRIES IN THE STATE CANNOT BE UPHELD BECAUSE OF THE SUBSIDY SCHEME ITSELF. NO FIN ANCIAL ASSISTANCE WAS GRANTED TO THE ASSESSEE FOR SETTING UP OF THE INDUSTRY. IT IS ONLY WHEN THE ASSESSEE HAD SET UP I TS INDUSTRY AND COMMENCED PRODUCTION THAT VARIOUS INCENTIVES WE RE GIVEN FOR THE LIMITED PERIOD OF FIVE YEARS. IT APPE ARS THAT THE ENDEAVOR OF THE STATE WAS TO PROVIDE THE NEWLY SET U P INDUSTRIES A HELPING HAND FOR FIVE YEARS TO ENABLE THEM TO BE VIABLE AND COMPETITIVE. SALES TAX REFUND AND THE REL IEF ON ACCOUNT OF WATER RATE, LAND REVENUE AS WELL AS ELEC TRICITY CHARGES WERE ALL INTENDED TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY. ACCORDING TO THE LD. DR THE ABOVE OBSERVATIONS ALSO BRING OUT ONE POINT VERY CLEARLY WHICH IS THAT THE SUBSIDY SCHEME ITSEL F WOULD NOT DECIDE THE 26 NATURE OF THE SUBSIDY, WHETHER REVENUE OR CAPITAL. RATHER, IT IS THE PURPOSE FOR WHICH THE SPECIFIC SUBSIDY IS GIVEN WHI CH WILL DECIDE THE NATURE OF THE SUBSIDY. WITHIN A SUBSIDY SCHEME, WHE THER FOR DISPERSAL OF THE INDUSTRIES OUTSIDE A CERTAIN BELT OR FOR ENCOUR AGING SETTING UP OF INDUSTRIES IN A PARTICULAR AREA OF THE STATE OR THE ENTIRE STATE, A NUMBER OF SUBSIDIES / ASSISTANCE / INCENTIVES ARE GIVEN. I N FACT, THE MAHARASHTRA SCHEMES WHICH WE ARE CONCERNED WITH AT PRESENT IS I TSELF CALLED PACKAGE OF INCENTIVE SCHEME. THIS ITSELF SHOWS THAT THE SC HEME CONTAINS A PACKAGE OF INCENTIVES/ SUBSIDIES / ASSISTANCE LIKE SALES TAX INCENTIVE, OCTROI INCENTIVE, SPECIAL CAPITAL INCENTIVE, CONTRI BUTION TOWARDS THE COST OF FEASIBILITY STUDIES OF THE PROJECT, ETC. WITHIN THE SAME SCHEME, WHILE THE UNITS ARE ELIGIBLE FOR THE SALES TAX INCENTIVE ONLY AFTER THE COMMENCEMENT OF THE PRODUCTION, THE UNITS ARE ELIGIBLE TO DRAW T HE SPECIAL CAPITAL INCENTIVE AT A CERTAIN PERCENTAGE OF THE FIXED CAPI TAL INVESTMENT AFTER THE COMPLETION OF ALL EFFECTIVE STEPS DURING THE PROCES S OF SETTING UP THE UNIT AND, EVEN BEFORE THE COMMENCEMENT OF THE PRODUCTION (PAGE NO. 112 OF THE PAPER BOOK) AND IT IS THE SPECIFIC PURPOSE FOR WHICH EACH INCENTIVE / SUBSIDY IS GIVEN WHICH WILL DECIDE AS TO WHETHER TH E SUBSIDY IS IN THE NATURE OF A CAPITAL SUBSIDY OR REVENUE SUBSIDY. THE HONBLE SUPREME COURT HAS IN PARA 8 OF SAHNEY STEEL (SUPRA) HAS HEL D AS FOLLOWS:- .THE SALES TAX UPON COLLECTION FORMS PART OF PUBL IC FUNDS OF THE STATE. IF ANY SUBSIDY IS GIVEN, THE CHARACTER OF THE SUBSIDY IN THE HANDS OF THE RECIPIENT - WHETHER REV ENUE OR CAPITAL WILL HAVE TO BE DETERMINED BY HAVING REGA RD TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN.. THIS HAS BEEN DEMONSTRATED BY THE HONBLE SUPREME C OURT BY WAY OF AN EXAMPLE WHICH IS REPRODUCED BELOW: IF THE SCHEME WAS THAT THE ASSESSEE WILL BE GIVEN REFUND OF SALES TAX ON PURCHASE OF MACHINERY AS WELL AS ON RA W MATERIALS TO ENABLE THE ASSESSEE TO ACQUIRE NEW PLA NTS AND MACHINERY FOR FURTHER EXPANSION OF ITS MANUFACTURIN G CAPACITY IN A BACKWARD AREA, THE ENTIRE SUBSIDY MUST BE HELD TO BE A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. IT WI LL NOT BE 27 OPEN TO THE REVENUE TO CONTEND THAT THE REFUND OF S ALES TAX PAID ON RAW MATERIALS OR FINISHED PRODUCTS MUST BE TREATED AS REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE. IN BO TH THE CASES, THE GOVERNMENT IS PAYING OUT OF PUBLIC FUNDS TO THE ASSESSEE FOR A DEFINITE PURPOSE. IF THE PURPOSE IS TO HELP THE ASSESSEE TO SET UP ITS BUSINESS OR COMPLETE A PROJE CT AS IN SEAHAM HARBOUR DOCK CO.S CASE (SUPRA), THE MONIES M UST BE TREATED AS TO HAVE BEEN RECEIVED FOR CAPITAL PUR POSE. BUT, IF MONIES ARE GIVEN TO THE ASSESSEE FOR ASSISTING H IM IN CARRYING OUT THE BUSINESS OPERATION AND THE MONEY I S GIVEN ONLY AFTER AND CONDITIONAL UPON COMMENCEMENT OF PRODUCTION, SUCH SUBSIDIES MUST BE TREATED AS ASSISTANCE FOR THE PURPOSE OF THE TRADE. THE ABOVE EXAMPLE GIVEN BY THE HONBLE SUPREME COUR T ONCE AGAIN DEMONSTRATES THE POINT THAT UNDER THE SCHEME, IT IS THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN THAT DECIDES THE NATURE OF THE SUBSIDY REVENUE OR CAPITAL. IT IS NOT THE OBJECT OF THE SCHEME OF THE GOVERNMENT (WHICH IN SUCH CIRCUMSTANCES WILL NECESSARILY BE CAPITAL INTE NSIVE) WHICH WOULD DECIDE THE NATURE AND CHARACTER OF THE SUBSIDY, BUT IT IS THE PURPOSE FOR WHICH THE SUBSIDY UNDER THE SCHEME IS GIVEN WHICH W OULD DECIDE THE CHARACTER AND NATURE OF THE SUBSIDY. IN SEAHAM HARB OUR CASE, WHICH HAS BEEN EXTENSIVELY DISCUSSED AND RELIED UPON BY THE H ONBLE SUPREME COURT IN SAHNEY STEEL, THE SUBSIDY WAS REALIZED AT DIFFER ENT TIMES DURING THE COURSE OF THE EXPANSION OF THE PROJECT ITSELF. ALTH OUGH, SUBSIDY IN THE FORM OF REFUND OF SALES TAX PAID ON RAW MATERIALS OR FIN ISHED PRODUCTS IS NORMALLY TREATED AS REVENUE RECEIPT, HOWEVER, SINCE IN THE ABOVE EXAMPLE, THE PURPOSE OF THE SUBSIDY IN THE FORM OF REFUND OF SALES TAX PAID ON RAW MATERIALS OR FINISHED PRODUCTS WAS TO E NABLE THE ASSESSEE TO ACQUIRE NEW PLANTS AND MACHINERY FOR FURTHER EXPANS ION OF ITS MANUFACTURING CAPACITY IN A BACKWARD AREA, IT HAS B EEN HELD TO BE CAPITAL IN NATURE. THE CONTENTION OF THE LD. COUNSEL FOR TH E ASSESSEE THAT THE SUPREME COURT HAS STATED THAT EVEN A SUBSIDY TO ACQ UIRE FOR RAW MATERIALS MAY BE IN THE CAPITAL FIELD DEPENDING ON THE OBJECT OF THE SCHEME IS NOT CORRECT. AS PER THE DECISION OF THE H ONBLE SUPREME COURT IN SAHNEY STEEL (SUPRA) IT IS NOT THE OBJECT OF THE SCHEME, BUT THE 28 PURPOSE FOR WHICH THE SUBSIDY IS GIVEN UNDER THE SC HEME WHICH WILL DECIDE THE NATURE OF THE SUBSIDY. IN PONNI SUGARS & CHEMICALS LTD. 219 CTR (SC) 105, IT HAS BEEN CATEGORICALLY HELD IN PAR A 14 THAT IT IS THE OBJECT FOR WHICH THE SUBSIDY / ASSISTANCE IS GIVEN WHICH DETERMINES THE NATURE OF THE INCENTIVE SUBSIDY . APPLYING THE ABOVE PRINCIPLES IN THE CASE OF THE ASSESSEE, THERE IS NO CLAUSE UNDER THE 1983 AND 1988 SCHEMES, EVEN SUGGESTS, THAT THE SALES TAX SUBSIDY WAS GIVEN FOR ENABLING THE ASSESSEE TO SET UP THE INDUSTRIAL UNIT. INFACT, THE UNIT UNDER THESE SCHEMES WOULD BECOME ELIGIBLE FOR THE SALES TAX INC ENTIVES ONLY AFTER COMMENCEMENT OF COMMERCIAL PRODUCTION AND AFTER THE UNIT WAS SET UP. CLAUSE 2.1 OF THE 1983 PACKAGE OF INCENTIVE SCHE ME LAYS DOWN THAT THE ELIGIBILITY CERTIFICATE UNDER PART I OF THE 19 83 SCHEME WILL BE ISSUED BY THE IMPLEMENTING AGENCY AFTER COMMENCEMENT OF CO MMERCIAL PRODUCTION AS MAY BE DETERMINED BY IT, BASED ON TH E TOTALITY OF THE DOCUMENTARY EVIDENCE LED BY THE ELIGIBLE UNIT IN TH IS BEHALF, AS ALSO SUCH OTHER INFORMATION, DETAILS, ETC. REQUIRED / CALLED FOR IN CONNECTION THEREWITH SUCH AS THE DATE OF POWER CONNECTION, ELE CTRICITY CONSUMPTION BILLS OVER A PERIOD, FIRST SALE BILL, EXCISE LICENS E, EXTRACT OF EXCISE REGISTER OR OF PRODUCTION REGISTER, ETC. SAME IS THE POSITI ON IN CLAUSE 2.1 OF THE 1988 PACKAGE OF INCENTIVE SCHEME. THERE IS NOTHIN G IN THE SCHEMES THAT LAYS DOWN ANY CONDITION THAT THE DEFERRED AMOU NT OF SALES TAX SUBSIDY / LIABILITY WAS TO BE UTILIZED ONLY FOR REP AYMENT OF TERM LOANS TAKEN FOR SETTING UP THE UNITS OR FOR THE PURCHASE OF ANY CAPITAL ASSET. HE FURTHER SUBMITS THAT IN PARA NO. 13 OF ITS JUDGMENT , THE HONBLE SUPREME COURT IN SAHNEY STEEL (SUPRA) HAS HELD AS FOLLOWS:- IN THE CASE BEFORE US, SUBSIDIES HAVE NOT BEEN GRA NTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NE W ASSET. THE SUBSIDIES WERE GRANTED YEAR AFTER YEAR O NLY AFTER SETTING UP OF THE NEW INDUSTRY AND COMMENCEME NT OF PRODUCTION. SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING OR OF THE BUSINESS OF THE ASSESSEE. APPLYING THE TEST OF VISC OUNT SIMON IN THE CASE OF OSTIME (SUPRA), IT MUST BE HEL D 29 THAT THESE SUBSIDIES ARE OF REVENUE CHARACTER AND W ILL HAVE TO BE TAXED ACCORDINGLY. SIMILAR IS THE POSITION IN THE CASE OF THE ASSESSEE . THE SALES TAX SUBSIDY WAS GRANTED YEAR AFTER YEAR ONLY AFTER THE SETTING UP OF THE INDUSTRY AND UPON COMMENCEMENT OF THE PRODUCTION. IT WAS NOT GRA NTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW ASSET. 29. HE FURTHER SUBMITS THAT THE LD. COUNSELS CONTE NTION THAT IN PONNI SUGAR CASE THE PROCEEDS FROM THE SALE OF SUGAR (THE ASSESSEES STOCK-IN- TRADE) WERE HELD TO BE ON CAPITAL ACCOUNT IS NOT EN TIRELY CORRECT. IN THE SAID CASE THE SUBSIDY ON THE SALE OF SUGAR WAS HELD TO BE IN THE NATURE OF CAPITAL RECEIPT ONLY BECAUSE, IT WAS FOUND BY THE H ONBLE COURT THAT THE INCENTIVE, I.E., THE SUBSIDY WAS MANDATORALY REQUIR ED TO BE UTILIZED FOR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SET UP NEW UNITS OR FOR SUBSTANTIAL EXPANSION OF EXISTING UNITS. THE RATIO LAID DOWN BY THE HONBLE COURT IN SAHNEY STEEL HAS NOT BEEN DEVIATED FROM AT ALL. IN SAHNEY STEEL (SUPRA), THE HONBLE COURT FOUND THAT THE ASSESSEE WAS FREE TO USE THE MONEY IN ITS BUSINESS ENTIRELY AS IT LIKED. SIMILAR IS THE SITUATION IN THE CASE OF THE ASSESSEE. IN THE CASE OF SAHNEY STEEL, THE REFUND OF SALES TAX ON RAW MATERIALS, MACHINERY AND FINISHED GOODS WAS SUBJECT TO A MAXIMUM OF 10% OF THE EQUITY CAPITAL PAID UP IN THE CASE OF PUBLIC LIMITED COMPANIES AND THE ACTUAL CAPITAL IN THE CAS E OF OTHERS. HENCE, THE MAXIMUM LIMIT OF THE SUBSIDY WAS CAPPED ON THE BASI S OF A CAPITAL ASSET. IN THE CASE OF THE ASSESSEE THE MAXIMUM LIMIT OF TH E SUBSIDY WAS ALSO CAPPED ON THE BASIS OF FIXED CAPITAL INVESTMENTS, W HICH WERE CAPITAL ASSETS. WHILE THE OBJECTIVE OF THE SCHEME UNDER WHI CH SAHNEY STEEL RECEIVED THE INCENTIVE WAS STIMULATING SETTING UP A ND EXPANSION OF INDUSTRIES IN THE STATE, THE OBJECTIVE OF THE MAHAR ASHTRA SCHEMES UNDER WHICH THE ASSESSEE RECEIVED THE INCENTIVES WAS DISP ERSAL OF INDUSTRIES OUTSIDE THE BOMBAY-THANE-PUNE BELT AND STIMULATING SETTING UP OF THE INDUSTRIES TO THE OTHER UNDERDEVELOPED AND DEVELOPI NG AREAS OF THE STATE. 30 THE OBJECT OF THE BOTH SCHEMES WERE THE SAME IN SUB STANCE. IN THE MAHARASHTRA SCHEMES OF 1983 & 1988 ALSO, THERE IS A SYSTEM OF YEARLY REVIEW TO ENSURE THAT THE UNITS REMAIN IN NORMAL PR ODUCTION AND WERE ELIGIBLE FOR THE INCENTIVE / SUBSIDY. IN THE CASE OF THE ASSESSEE, THE SALES TAX SUBSIDY UNDER THE 1983 & 1988 PACKAGE OF INCEN TIVE SCHEMES WERE NOT GIVEN TO ENABLE THE ASSESSEE TO SET UP THE UNIT . IT WAS GIVEN TO THE ASSESSEE TO HELP IT IN THE INITIAL YEARS TO REMAIN COMPETITIVE VIS-A-VIS ESTABLISHED UNITS IN THE DEVELOPED PARTS OF THE STA TE WHICH HAD BETTER INFRASTRUCTURE FACILITIES, EASY AVAILABILITY OF MAN POWER, RAW MATERIALS, CUSTOMERS, ETC., SO THAT THEY COULD STAND ON THEIR OWN FEET. IN PARA NO. 31 ON PAGE 14 OF THE JUDGMENT OF THE HONBLE ANDHRA PRADESH HIGH COURT REPORTED IN 152 ITR 39, IT HAS BEEN HELD THAT BENEF ITS LIKE TAX HOLIDAY ETC. ARE GIVEN TO THE INDUSTRIAL UNITS IN THE INITIAL YE ARS WITH A VIEW TO STRENGTHEN THEM SO THAT THEY COULD BE RUN EFFICIENT LY AND THESE SUBSIDIES ARE REVENUE IN NATURE. THE DECISION OF THE HONBLE HIGH COURT HAS BEEN ENDORSED AND UPHELD BY THE HONBLE SUPREME COURT. 30. IT WAS ARGUED BY THE LD. COUNSEL FOR THE ASSESS EE THAT THE SCHEME OF 1979 WAS IDENTICAL TO THE SCHEMES OF 1983 AND 19 88. SINCE, THE SUBSIDY IN THE FORM OF SALES TAX EXEMPTION IN THE C ASE OF RELIANCE INDUSTRIES LTD.(SUPRA), WHICH WAS COVERED UNDER THE 1979 SCHEME WAS HELD TO BE CAPITAL IN NATURE, THE SUBSIDY ON ACCOUN T OF DEFERRED SALES TAX LIABILITY UNDER THE 1983 AND 1988 SCHEME SHOULD ALS O BE HELD TO BE CAPITAL. THE CONTENTION OF THE ASSESSEE CANNOT BE A CCEPTED FOR THE DETAILED REASONS ALREADY GIVEN IN RESPECT OF NATURE OF SUBSIDY UNDER THE 1983 AND 1988 SCHEME AND ALSO IN VIEW OF THE BINDIN G DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF SAHNEY STEEL A ND PONNI SUGAR. IF THE 1979 SCHEME IS IDENTICAL TO THE 1983 AND 1988 S CHEMES, THEN THE FINDING OF FACTS RECORDED FOR ARRIVING AT THE DECIS ION IN THE CASE OF RELIANCE INDUSTRIES LTD.(SUPRA) WITH UTMOST RESPECT, IS NOT CORRECT. A DECISION BASED ON INCORRECT FINDINGS OF FACT AND WITHOUT FOL LOWING THE BINDING RATIO 31 LAID DOWN BY THE HONBLE SUPREME COURT CANNOT BE SA ID TO HAVE LAID DOWN CORRECT LAW. THERE IS NOTHING IN THE 1979 SCHEME AL SO TO EVEN SUGGEST THAT THE SALES TAX SUBSIDY WAS GIVEN TO THE UNITS T O ASSIST THEM DIRECTLY OR INDIRECTLY IN THE SETTING UP OF THE UNIT AND THAT T HE UNIT BECAME ELIGIBLE FOR THE SUBSIDY EVEN BEFORE THE COMMENCEMENT OF THE COM MERCIAL PRODUCTION. THERE IS NOTHING IN THE SCHEME WHICH EV EN SUGGESTS REMOTELY THAT THE SUBSIDY WAS REQUIRED TO BE USED FOR REPAYM ENT OF ANY LOAN TAKEN FOR SETTING UP THE UNIT OR FOR PURCHASE OF ANY CAPI TAL ASSET. THE ASSESSEE WAS FREE TO USE THE MONEY IN ITS BUSINESS AS IT LIK ED. INFACT, THE ORDER OF THE DIVISION BENCH IN THE CASE OF RELIANCE INDUSTRI ES LTD.(SUPRA), WHICH HAS BEEN APPROVED BY THE SPECIAL BENCH ITSELF HOLDS THAT ..IT IS A FACT OF LIFE OF THE SETTING UP OF INDUSTRIES IN THE MODERN ERA THAT THE COST OF MACHINERY AND PLANT, ETC. ARE GENERALLY DEFRAYED BY WAY OF REPAYMENT OF BORROWINGS FROM OUT OF THE INTERNAL ACCRUALS OF THE INDUSTRY DURING THE COURSE OF ITS BUSINESS OPERATIONS.. (PARA 31 OF T HE ORDER OF SPECIAL BENCH IN THE CASE OF RELIANCE INDUSTRIES LTD (SUPRA ). THE ABOVE ITSELF IS SUFFICIENT TO SHOW THAT EVEN THE TRIBUNAL WAS OF TH E VIEW THAT THE COST OF SETTING UP OF THE INDUSTRY HAS BEEN MET THROUGH PRO FITS EARNED BY THE ASSESSEE AND OUT OF INTERNAL ACCRUALS DURING THE CO URSE OF ITS DAY TO DAY BUSINESS OPERATIONS. THERE WAS NO REQUIREMENT THAT THE SUBSIDY WAS REQUIRED TO BE EMPLOYED FOR THE PURPOSE OF REPAYMEN T OF BORROWINGS TAKEN FOR SETTING UP THE UNIT. 31. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO ARGUE D THAT THE DECISION OF THE SPECIAL BENCH IN THE CASE OF RELIANCE INDUST RIES LTD. HAS BEEN APPROVED BY THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF RELIANCE INDUSTRIES LTD. (APPEAL NO. 1299 OF 2008, DATED 15. 4.2009), WHEREIN THE TRIBUNAL DECISION FOR A SUBSEQUENT YEAR FOLLOWING T HE DECISION OF THE SPECIAL BENCH HAS BEEN AFFIRMED. ACCORDING TO THE L D. DR THE QUESTION AS FRAMED WAS NOT ADMITTED BY THE HONBLE HIGH COURT I N VIEW OF THE FINDINGS RECORDED BY THE SPECIAL BENCH THAT THE OBJECT OF THE SUBSIDY WAS TO SET 32 UP A NEW UNIT IN A BACKWARD AREA TO GENERATE EMPLOY MENT. THE HONBLE HIGH COURT HAS APPLIED THE PURPOSE TEST AS LAID DOW N BY THE HONBLE SUPREME COURT IN THE CASE OF PONNI SUGARS AND CHEMI CALS LTD. 306 ITR 392 (SC) TO THE ABOVE FINDINGS RECORDED BY THE SPEC IAL BENCH AND, HAS, ACCORDINGLY HELD THAT THE SUBSIDY IS CLEARLY ON CAP ITAL ACCOUNT. THERE IS NOTHING IN THE SCHEMES (AND SPECIALLY 1983 AND 1988 SCHEMES WITH WHICH WE ARE CONCERNED IN THE PRESENT APPEAL) WHICH SUGGESTS THAT THE SUBSIDY BY WAY OF SALES TAX DEFERRAL WAS GIVEN DIRE CTLY OR INDIRECTLY TO THE ASSESSEE FOR SETTING UP THE UNITS OR FOR THE CREATI ON OR PURCHASE OF CAPITAL ASSETS. THE UNITS WERE ELIGIBLE AND ENTITLED TO THE CLAIM OF THE SALES TAX SUBSIDY ONLY AFTER AND CONDITIONAL UPON THE COMMENC EMENT OF COMMERCIAL PRODUCTION. HENCE, IN VIEW OF THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASES OF SAHNEY STEEL AND PONNI SUGARS, THES E WERE OPERATIONAL SUBSIDIES AND, THEREFORE, REVENUE IN NATURE. 32. THE RELIANCE WAS ALSO PLACED BY THE LD. DR ON T HE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE O F ABHISHEK INDUSTRIES LTD. 286 ITR 1 IN SUPPORT OF HIS ARGUMENTS. IN THE SAID CASE THE NUMBER OF YEARS FOR WHICH THE UNITS WERE ELIGIBLE FOR SALE S TAX INCENTIVE DEPENDED UPON THEIR LOCATION AND THE OVERALL QUANTUM OF EXEM PTION WAS LIMITED TO A PERCENTAGE OF THE FIXED CAPITAL INVESTMENT MADE BY THE UNITS. IT WAS HELD BY THE HONBLE HIGH COURT THAT SINCE THE UNITS BECA ME ELIGIBLE FOR THE SUBSIDY (SALES TAX) ONLY AFTER THE COMMENCEMENT OF PRODUCTION, THESE WERE OPERATIONAL SUBSIDIES AND, REVENUE IN NATURE. NO DOCUMENT OR MATERIAL HAS BEEN PLACED ON RECORDS BY THE ASSESSEE TO SUBSTANTIATE ITS PLEA THAT THE SUBSIDY BY WAY OF SALES TAX DEFERRAL WAS TO ENABLE THE UNIT / ASSESSEE TO ACQUIRE NEW PLANT AND MACHINERY OR THAT IT WAS TO BE USED DIRECTLY OR INDIRECTLY TO SET UP THE INDUSTRY. 33 33. THE DECISION OF THE TRIBUNAL IN THE CASE OF STE RLITE OPTICALS TECHNOLOGIES LTD. AND EVEREST INDUSTRIES LTD.(SUPRA ), WOULD NOT HELP THE ASSESSEE IN VIEW OF THE ABOVE REASONS AND FURTHER I T HAS SIMPLY FOLLOWED THE DECISION OF HONBLE SPECIAL BENCH IN THE CASE O F RELIANCE INDUSTRIES LTD. (SUPRA) WITHOUT EXAMINING THE NATURE OF SUBSID IES AS PER THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN SAHNEY ST EEL AND PONNI SUGARS. FURTHER, THE ASSESSEE HAS HIMSELF ADMITTED AND DISCLOSED THAT THE SALES TAX RECEIPTS AS TRADING RECEIPTS, REVENUE IN NATURE. FOR THE SAME REASON, THE RELIANCE OF THE ASSESSEE ON M/S. ASSOCI ATED CAPSULES PVT. LTD.(SUPRA), WHICH HAS SIMPLY FOLLOWED STERLITE OPT ICALS TECHNOLOGIES LTD., WOULD BE OF NO HELP TO THE ASSESSEE FOR THE REASON GIVEN ABOVE. IN ANY CASE, THE QUESTION AS TO WHETHER SALES TAX RECEIPT IS REVENUE OR CAPITAL IS OF NO CONSEQUENCE TO THE ISSUE BEFORE THE BENCH SIN CE THE ASSESSEE HAS ITSELF ADMITTED AND DISCLOSED THE SAME AS REVENUE R ECEIPT AND, THE ASSESSMENTS HAVE ALSO BEEN COMPLETED, AND HAVE ATTA INED FINALITY. 34. ANOTHER CONTENTION OF THE LD. COUNSEL THAT SINC E THE PREPAYMENT BENEFITS EMANATE OUT OF THE PACKAGE OF INCENTIVE SCHEMES, THEY SHOULD BE HELD AS CAPITAL IS NOT TENABLE BECAUSE PREPAYMEN T OF DEFERRED SALES TAX LIABILITY IS NOT PART OF THE SAID SCHEME. RATHER, I T IS A PART OF A SEPARATE SCHEME FLOATED BY THE STATE GOVERNMENT AND, IN NATU RE, WAS MERELY A BUSINESS ARRANGEMENT BETWEEN THE STATE GOVERNMENT A ND THE UNIT HOLDERS WHO OPTED TO TAKE BENEFIT OF THE SAID BUSIN ESS ARRANGEMENT. THE BENEFITS OF PREPAYMENT OF THE DEFERRED SALES TAX LI ABILITY DO NOT FLOW OUT OF THE PACKAGE OF INCENTIVE SCHEMES AND HAVE NO RELA TION TO THE SAID SCHEMES. 35. IT WAS AN ADMITTED POSITION OF THE ASSESSEE BOT H BEFORE THE LOWER AUTHORITIES AS WELL AS OF THE LD. COUNSEL FOR THE A SSESSEE BEFORE THE HONBLE BENCH THAT DEDUCTION ON ACCOUNT OF THE SALE S TAX LIABILITY HAS BEEN 34 MADE. THUS CONDITION IN SECTION 41(1) IS, THEREFORE , SATISFIED. NOW, IT HAS BEEN STATED THAT SINCE THE RECEIPT IS A CAPITAL RE CEIPT AT INCEPTION, THERE WAS NO QUESTION OF INCLUDING IT IN THE SALES. THERE FORE, THERE WAS NO DEBIT TO THE PROFIT & LOSS ACCOUNT OF THE AMOUNT OF SALES TAX OR OBTAINING DEDUCTION IN RESPECT OF THE SAME U/S. 43B. SINCE DE DUCTION HAS NOT BEEN OBTAINED FOR THE SALES TAX, SEC. 41(1) OF THE I.T. ACT, 1961 DOES NOT APPLY. THE SAID STAND TAKEN BY THE LD. COUNSEL IS CONTRARY TO THE EARLIER STAND TAKEN BY HIM WHEREIN IT WAS ADMITTED BY HIM T HAT DEDUCTION U/S. 43B HAD BEEN TAKEN AND ALLOWED IN TERMS OF CIRCULAR NO. 496 OF THE BOARD. IN FACT, HE HAD HIMSELF ALSO SUBMITTED A COP Y OF THE CIRCULAR TO THE BENCH IN SUPPORT OF HIS CONTENTION THAT THE SALES T AX LIABILITY HAS BEEN DISCHARGED SINCE DEDUCTION U/S. 43B HAS BEEN ALLOWE D BY THE DEPARTMENT. IT HAS BEEN STATED BY THE LD. COUNSEL FOR THE ASSES SEE THAT SEC. 41(1) DOES NOT APPLY IN THE PRESENT CASE BECAUSE (1) THE APPELLANT HAS NOT OBTAINED ANY BENEFIT (2) THERE HAS NOT BEEN ANY REM ISSION 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 AP PELLANT IS ON CAPITAL ACCOUNT. THERE IS NO MENTION THAT SEC. 41(1) DOES NOT APPLY BECAUSE NO DEDUCTION HAS BEEN OBTAINED. INFACT, THE LD. COUNSE L HAS ADMITTED THAT DEDUCTION U/S.43B HAS BEEN ALLOWED. BEFORE THE LD. CIT(A) ALSO, THIS FACT HAS BEEN ADMITTED BY THE ASSESSEE. AT PAGE NO. 9 OF THE CIT(A)S ORDER, ASSESSEES SUBMISSIONS HAVE BEEN NOTED. IN THE THIR D LAST LINE, THE SUBMISSION OF THE AASSESSEE IS AS FOLLOWS: THE SALES TAX SO COLLECTED WOULD BE TREATED AS DE EMED PAYMENT BY VIRTUE OF THE AMENDMENT BY CIRCULAR NO. 496 DATED SEPTEMBER 25, 1987 AND CIRCULAR NO. 674 DATED DECEMBER 29, 1983 ISSUED BY THE CENTRAL BOARD OF DI RECT TAXES (CBDT) .. FOR THE PURPOSE OF SALES TAX AC T. AGAIN AT PAGE NO. 12, THE FOLLOWING SUBMISSION OF T HE ASSESSEE IS NOTED:- THEREFORE, IN THE PRESENT CASE THE SALES TAX LIABI LITY THOUGH NOT PAID, BY VIRTUE OF AMENDMENT OF SALES TAX ACT, WO ULD BE REGARDED AS ACTUALLY PAID 35 ON PAGE NO. 13 OF THE CIT(A)S ORDER, THE FOLLOWING SUBMISSION OF THE ASSESSEE IS NOTED IN THE FIRST FOUR LINES:- FROM THE ABOVE IT IS CLEAR THAT ALTHOUGH THE SALES TAX COLLECTED FROM THE CUSTOMERS WAS A TRADING RECEIPT, DUE TO THE DEFERRAL SCHEME THE SAME IS DEEMED TO HAVE BEEN PAID TO THE GOVERNMENT, THEREBY DISCHARGING THE LIABILIT Y. ALL THE ABOVE NOT ONLY PROVE THAT THE ASSESSEE WAS ITSELF ADMITTING THAT THE SALES TAX RECEIPTS, EVEN DURING THE PERIOD WHEN IT WAS ELIGIBLE FOR THE DEFERRAL INCENTIVE, WERE TRADING RECEIPTS, AND DISC LOSED AS SUCH IN ITS BOOKS OF ACCOUNT AS WELL AS THE RETURNS OF INCOME F ILED BY IT, IT HAD ALSO CLAIMED AND WAS ALLOWED DEDUCTION OF THE TRADING LI ABILITY UNDER SECTION 43B IN RESPECT OF THE SALES TAX COLLECTED / ACCRUED . THE CLAIM MADE NOW THAT THE RECEIPTS ON ACCOUNT OF SALES TAX WAS IN TH E NATURE OF CAPITAL RECEIPTS, AND THAT NO DEDUCTION HAS BEEN OBTAINED F OR THE SALES TAX IS, THEREFORE, NEITHER CORRECT NOR TENABLE. THIS ARGUME NT OF THE LD. COUNSEL CANNOT BE, THEREFORE, ACCEPTED. 36. THE LD. DR FURTHER SUBMITS THAT IT HAS BEEN CON TENDED BY THE LD. COUNSEL THAT EVEN ASSUMING THAT ANY BENEFIT HAS BEE N OBTAINED BY THE APPELLANT, IT IS IN RESPECT OF A LOAN LIABILITY BEC AUSE, AS PER THE 3 RD PROVISO TO SEC. 38(4) OF THE BOMBAY SALES TAX ACT, 1959 WHE RE A LOAN LIABILITY EQUAL TO THE AMOUNT OF ANY DEFERRED TAX PAYABLE BY AN ELIGIBLE UNIT HAS BEEN RAISED BY THE SICOM, THEN SUCH TAX SHALL BE DE EMED, IN THE PUBLIC INTEREST, TO HAVE BEEN PAID. IT HAS BEEN CONTENDED THAT THE APPELLANT HAS GONE IN FOR CHANGEOVER TO THE INTEREST FREE LOAN SC HEME AS PROVIDED FOR IN RESOLUTION NO. IDL 1087/6245/IND. 8 MANTRALAYA DATE D THE 21 ST JULY, 1988 (PAGE NOS. 232 TO 250 OF THE PAPER BOOK). IT H AS BEEN SUBMITTED BY HIM THAT ALTHOUGH THEY HAD APPLIED IN THE PRESCRIBE D FORM A FOR CHANGEOVER, ONLY MODIFICATION IN THE ELIGIBILITY C ERTIFICATE HAS BEEN CARRIED OUT BY SICOM, THE IMPLEMENTING AGENCY. ALTH OUGH, SICOM HAD 36 FORWARDED THE NECESSARY ENTITLEMENT CERTIFICATE TO THE SALES TAX AUTHORITIES FOR CARRYING OUT THE REQUIRED MODIFICAT ION THEREIN, THE NECESSARY MODIFICATION HAS NOT BEEN CARRIED OUT BY THE SALES TAX AUTHORITY. IT WAS ADMITTED BY THE LD. COUNSEL THAT SUCH APPROVAL FOR CHANGEOVER HAS NOT BEEN RECEIVED BY THE APPELLANT. IT HAS, HOWEVER, BEEN ARGUED THAT SINCE THEY HAD APPLIED FOR THE CONVERSI ON, IT SHOULD BE DEEMED THAT CONVERSION HAS BEEN APPROVED. DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HILLA J.B. WADIA H AS BEEN RELIED UPON BY THE LD. COUNSEL IN SUPPORT OF THIS PROPOSITION. IN THIS REGARD THE LD. DR SUBMITS THAT : I) THE PROCEDURE FOR CHANGEOVER TO THE INTEREST FRE E LOAN SCHEME FROM THE DEFERRAL SCHEME IS PROVIDED EXHAUSTIVELY IN CLA USES 6.9 TO 6.18 OF THE RESOLUTION DATED 21.07.2002. II) AS PER CLAUSE 6.13, THE PROCEDURES SET OUT IN C LAUSES 6.14 ONWARDS LEADING TO THE CHANGEOVER CAN BE UNDERTAKEN ONLY BY A UNIT WHOSE ELIGIBILITY CERTIFICATE AND CERTIFICATE OF ENTITLEM ENT HAVE BEEN MODIFIED. ADMITTEDLY, THE CERTIFICATE OF ENTITLEMENT OF THE A PPELLANT WAS NOT MODIFIED. HENCE, QUESTION OF IT COMPLYING WITH THE PROCEDURES IN THE SUCCEEDING CLAUSES WOULD NOT ARISE. III) ASSESSEE ALSO HAS NOT BEEN ABLE TO GIVE ANY EV IDENCE THAT IT HAS COMPLIED WITH ANY OF THE PROCEDURES REQUIRED TO BE COMPLIED BY IT AS PER CLAUSE 6.13 ONWARDS OF THE SCHEME. IV) MODIFICATION IN THE ELIGIBILITY CERTIFICATE ONLY SI GNIFIES THAT INSTEAD OF THE BENEFITS UNDER THE DEFERRAL SCHEME, THE UNIT HO LDER IS NOW ELIGIBLE FOR BENEFITS UNDER THE INTEREST FREE LOAN SCHEME. THIS DOES NOT IN ANYWAY MEAN THAT ITS DEFERRED SALES TAX LIABILITY HAS CHAN GED INTO INTEREST FREE LOAN. V) AFTER ALL THE FORMALITIES LAID DOWN IN THE PROCEDUR E HAVE BEEN COMPLIED WITH AND SICOM IS SATISFIED THAT THE APPLI CATION FOR PROVISIONAL LOAN IS IN ORDER, IT WILL SANCTION SALES TAX LOAN E QUIVALENT TO TOTAL AMOUNT OF TAX PAYABLE AS SHOWN IN THE RETURNS AND ELIGIBLE FOR DEFERRAL (CLAUSE 6.16). HE FURTHER SUBMITS THAT EVIDENCES ON RECORD AND THE SUBMISSIONS OF THE LD. COUNSEL LEAVE NO DOUBT THAT THERE IS NO SUCH SA NCTION ORDER FROM 37 SICOM / AN IMPLEMENTING AGENCY RAISING A LOAN LIABI LITY EQUAL TO THE TOTAL AMOUNT OF TAX PAYABLE BUT DEFERRED. IT IS, THEREFOR E, CLEAR THAT THE DEFERRED SALES TAX OF THE ASSESSEE HAS NOT BEEN CON VERTED INTO INTEREST FREE LOAN. FURTHER, THE ASSESSEE HAS APPLIED FOR OP TING INTO THE INTEREST FREE LOAN SCHEME FOR THE PAST PERIOD. UNDER THE CIR CUMSTANCES, IT WAS REQUIRED TO COMPLY WITH THE PROCEDURES LAID DOWN IN THE CLAUSES 6.21 AND 6.22 OF THE RESOLUTION. THE ASSESSEE, ADMITTEDLY HA S FAILED TO DO SO. THE QUESTION OF THE CONVERSION OF DEFERRED SALES TAX LI ABILITY INTO INTEREST FREE LOAN WOULD, THEREFORE, NOT ARISE. THERE IS NO PROV ISION IN THE RESOLUTION OR THE SCHEME WHEREIN IT HAS BEEN PROVIDED THAT ONC E AN APPLICATION HAS BEEN MADE, AND NO SANCTION ORDER OF CONVERSION HAS BEEN RECEIVED, IT WOULD BE DEEMED THAT CONVERSION HAS BEEN MADE. IN A BSENCE OF SUCH PROVISION, THE CONVERSION CANNOT BE DEEMED TO HAVE BEEN MADE. THE RELIANCE OF THE LD. COUNSEL ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HILLA J.B. WADIA IS COMPLETELY MISPLACED AS NO SUCH PROPOSITION HAS BEEN LAID DOWN IN THE SAID DECISION NOR IS IT RELEVANT TO THE FACTS OF THE CASE. IN THE SAID CASE, ALMOST THE ENTIRE PAYMENT TOWARDS THE PURCHASE OF THE FLAT WAS PAID BY THE ASSESSEE W ITHIN THE PERIOD PRESCRIBED UNDER THE ACT AND, THE HONBLE HIGH COUR T HELD THAT CONSIDERING THE FACTS OF THE CASE, THE ASSESSEE HAD ACQUIRED SUBSTANTIAL DOMAIN OVER THE FLAT IN QUESTION UNDER THE AGREEMEN T WITH THE SOCIETY COUPLED WITH PAYMENT OF ALMOST ENTIRE COST OF CONST RUCTION WITHIN A PERIOD OF TWO YEARS. HENCE, THE ASSESSEE WAS ELIGIBLE FOR THE CLAIM U/S. 54 OF I.T.ACT, 1961. IN THE PRESENT CASE, THE SANCTION OF SICOM RAISING LOAN LIABILITY EQUAL TO THE DEFERRED SALES TAX WAS A MAN DATORY REQUIREMENT UNDER THE 3 RD PROVISO TO SECTION 38 OF THE SALES TAX ACT FOR THE CONVERSION OF THE DEFERRED SALES TAX LIABILITY INTO INTEREST F REE LOAN TO TAKE PLACE. IN ABSENCE OF SUCH SANCTION ALLOWING CONVERSION, NO CO NVERSION INTO INTEREST FREE LOAN CAN BE SAID TO HAVE TAKEN PLACE. 38 37. THE LD. DR FURTHER SUBMITS THAT IT MAY BE NOTED THAT CONVERSION IS TO BE ALLOWED ONLY DURING THE PERIOD WHEN THE UNIT IS ELIGIBLE FOR THE DEFERRAL BENEFITS. IN RESPECT OF THE UNIT UNDER THE 1983 SCHEME, THE PERIOD OF ELIGIBILITY WAS 01.11.1989 TO 31.10.1996 (ELIGIBILITY CERTIFICATE DATED 08.11.1989 AT PAGE 153 OF THE PAPER BOOK FILE D BY THE ASSESSEE). THE UNIT COULD HAVE APPLIED FOR THE CONVERSION ONLY DURING 01.11.1989 TO 31.10.1996. THE ASSESSEE WAS NOT ELIGIBLE FOR SUCH CONVERSION WHEN IT APPLIED FOR THE SAME ON 08.10.2002 IN ANNEXURE A (PAGE NO. 255 AND 256 OF THE PAPER BOOK FILED BY THE ASSESSEE). THE Q UESTION OF THE DEFERRED SALES TAX OF THIS UNIT BEING CONVERTED INTO INTERES T FREE LOAN WOULD NOT, THEREFORE, ARISE. IN SUPPORT THE REFERENCE WAS MADE TO CLAUSE 6.10 OF THE RESOLUTION DATED 21.07.1998 WHICH STATES AS FOLLOWS :- AN ELIGIBLE UNIT WILL BE ENTITLED TO EXERCISE OPTI ON COVERING THE PAST PERIOD I.E., THE PERIOD PRIOR TO THE DATE OF OPTION IN PART OR IN FULL AS WELL AS THE REMAINING PORTION OF THE PERIOD COVERED BY THE ELIGIBILITY CERTIFICATE. BUT THE OPT ION ONCE EXERCISED SHALL BE FINAL AND BINDING ON ELIGIBLE UN IT AND THAT IT WILL NOT BE OPEN FOR THE UNIT TO CHANGE THE OPTION ONCE EXERCISED. SIMILARLY, THE OPTION IN RESPECT OF THE CONVERSION FROM THE SALES TAX DEFERRAL INTO THE INTEREST FREE LOAN SCHEME IS TO B E EXERCISED FOR THE PAST PERIOD OF ELIGIBILITY IN PART OR IN FULL AS WELL AS THE REMAINING PERIOD. THIS MEANS THAT WHILE FOR THE PAST PERIOD DURING THE ELI GIBILITY PERIOD, THE OPTION CAN BE EXERCISED FOR A PART OF THE PAST PERI OD OR THE FULL PERIOD, THE SAME OPTION SHOULD COVER THE REMAINING PART OF THE ELIGIBILITY PERIOD ALSO. FOR THE EXPANSION UNIT COVERED UNDER THE 1988 PACK AGE OF INCENTIVE SCHEME, ASSESSEE CLAIMS TO HAVE APPLIED FOR THE ENT IRE PAST PERIOD PRIOR TO THE DATE OF OPTION BUT HAS NOT APPLIED FOR THE C ONVERSION FOR THE REMAINING PART OF THE PERIOD DURING WHICH THE UNIT IS ELIGIBLE UNDER THE SCHEME FOR DEFERRAL UNIT. HENCE, THE APPLICATION IT SELF IS NOT CORRECT. FOR 39 THE ABOVE REASONS THE CERTIFICATE OF ENTITLEMENT WA S NOT MODIFIED BY THE SALES TAX AUTHORITIES. 38. HE FURTHER SUBMITS THAT THE LD. COUNSEL HAS RAI SED AN ARGUMENT THAT ONCE THE MODIFIED ELIGIBILITY CERTIFICATE IS ISSUED BY THE IMPLEMENTING AGENCY, THE SALES TAX AUTHORITY IS BOUND BY IT AND HAS NO JURISDICTION TO QUESTION IT AND IN SUPPORT HE PLACED RELIANCE ON TW O DECISIONS, VIZ., (1) LAXMI INDUSTRIES VS. STATE OF RAJASTHAN 99 STC 584 (RAJ.) AND (2) SWASTIK METAL WORKS VS. THE STATE OF MAHARASHTRA 17 MTJ 332 (MUMBAI TRIBUNAL). ACCORDING TO THE LD. DR, THE ARGUMENT O F THE LD. COUNSEL IS NOT TENABLE AND CANNOT BE ACCEPTED IN THE FACTS OF THE PRESENT CASE. THE TWO DECISIONS ALSO DO NOT COME TO THE AID OF THE ASSESS EE. THE ISSUE BEFORE US IS NOT THE CONFLICT OF POWER AND AUTHORITY BETWEEN SICOM AND SALES TAX AUTHORITIES. AS ALREADY SUBMITTED IT HAS BEEN CATEG ORICALLY LAID DOWN IN THE RESOLUTION OF THE STATE GOVERNMENT DATED 21.07. 1988 (PAGE 234 OF THE PAPER BOOK) THAT BOTH THE ELIGIBILITY CERTIFICA TE AND THE CERTIFICATE OF ENTITLEMENT ARE REQUIRED TO BE MODIFIED FOR THE ACT UAL PROCESS OF CONVERSION TO LOAN TO BE STARTED BY FOLLOWING THE P ROCEDURES LAID DOWN IN THE RESOLUTION ITSELF. EVEN IF IT IS PRESUMED THAT ONCE THE ELIGIBILITY CERTIFICATE IS MODIFIED, IT SHOULD BE ACCEPTED THAT THE ENTITLEMENT CERTIFICATE ALSO STANDS MODIFIED WOULD NOT HELP THE ARGUMENTS OF THE LD. COUNSEL. MODIFICATION IN THE ELIGIBILITY CERTIFICAT E IS ONLY FOR THE PURPOSE OF CERTIFYING THAT THE UNIT IS NOW ELIGIBLE FOR BENEFI TS OF INTEREST FREE LOAN UNDER THE SCHEME IN PLACE OF DEFERRAL OF SALES TAX. IT DOES NOT MEAN FOR A MOMENT THAT THE CONVERSION HAS TAKEN PLACE. IT IS O NLY WHEN SICOM, ON BEING SATISFIED THAT THE APPLICATION FOR PROVISIONA L LOAN IS IN ORDER AND SANCTIONS SALES TAX LOAN EQUIVALENT TO THE TOTAL AM OUNT OF TAX PAYABLE SHOWN IN THE RETURN AND ELIGIBLE FOR DEFERRAL AND , ON RECEIPT OF SUCH SANCTION LETTER, THE ELIGIBLE UNIT EXECUTE NECESSAR Y AGREEMENT IN THIS REGARD, THE CONVERSION TO LOAN CAN BE SAID TO HAVE TAKEN PLACE (CLAUSE 6.16 OF THE RESOLUTION DATED 21.07.1988 PAGE 234 OF THE PAPER BOOK ). 40 ADMITTEDLY, NO SUCH SANCTION HAS BEEN ISSUED. THE L D. COUNSEL HAS ALSO ADMITTED THAT THE PROCESS OF CONVERSION COULD NOT BE COMPLETED BECAUSE THE SALES TAX AUTHORITIES DID NOT ISSUE THE MODIFIE D ENTITLEMENT CERTIFICATE. IF PROCESS OF CONVERSION ITSELF HAD N OT BEEN COMPLETED, THE QUESTION OF THE DEFERRED SALES TAX LIABILITY GETTIN G CONVERTED INTO INTEREST FREE LOAN CANNOT ARISE. 39. THE LD. DR FURTHER SUBMITS THAT DURING THE COUR SE OF HIS PRELIMINARY ARGUMENTS THE LD. COUNSEL FOR THE ASSESSEE HAS CONT ENDED THAT THE FACT THAT DEPARTMENT HAS ALLOWED DEDUCTION U/S. 43B ITSE LF MEANS THAT THE DEFERRED SALES TAX LIABILITY STANDS DISCHARGED AND THAT IT HAS BEEN ACCEPTED THAT THE SAID DEFERRED TAX LIABILITY HAS B EEN CONVERTED INTO A LOAN IN THIS REGARD THE LD. DR SUBMITS THAT ALLOWING OF DEDUCTION U/S. 43B UNDER NO CIRCUMSTANCES EVEN SUGGESTS THAT IT HAS BE EN ACCEPTED BY THE DEPARTMENT THAT THE DEFERRED TAX LIABILITY HAS BEEN CONVERTED INTO LOAN. THE LIABILITY TOWARDS SALES TAX IS TO BE ALLOWED U/ S. 43B OF I.T. ACT, 1961 ONLY WHEN IT IS ACTUALLY PAID. HOWEVER, BY VIRTUE O F CIRCULAR NO. 496 DATED 25.09.1987 OF THE CENTRAL BOARD OF DIRECT TAXES (CB DT), SINCE, AMENDMENT HAS BEEN MADE IN THE SALES TAX ACT ITSELF TO THE EFFECT THAT SALES TAX DEFERRED UNDER THE SCHEME SHALL BE DEEMED AS ACTUALLY PAID, THE STATUTORY LIABILITY IS TREATED TO HAVE BEEN DIS CHARGED FOR THE PURPOSES OF SEC. 43B. THE CIRCULAR WAS ISSUED IN VIEW OF REP RESENTATION RECEIVED FROM VARIOUS STATE GOVERNMENTS AND OTHERS TO THE EF FECT THAT THE OPERATION OF THE PROVISIONS OF SEC. 43B HAD THE EFF ECT OF DILUTING THE INCENTIVES OFFERED BY THE DEFERRAL SCHEMES. HE POIN TED OUT THAT IT IS NOT IMPORTANT WHETHER DEDUCTION HAS BEEN RIGHTLY ALLOWE D OR NOT. THE ONLY CONDITION IN SEC. 41(1) WHICH IS REQUIRED TO BE SEE N IN THIS CONTEXT IS WHETHER DEDUCTION HAS BEEN MADE ON ACCOUNT OF THE T RADING LIABILITY OR NOT. IF THE DEDUCTION HAS BEEN MADE, ONE OF THE CON DITIONS LAID DOWN IN SEC. 41(1) IS SATISFIED. WHETHER THE DEFERRED SALES TAX LIABILITY HAS BEEN CONVERTED INTO INTEREST FREE LOAN OR NOT IS A QUEST ION OF FACT AND, THE FACTS 41 VERY CATEGORICALLY AND UNEQUIVOCALLY SHOW THAT SUCH CONVERSION OF DEFERRED SALES TAX LIABILITY INTO INTEREST FREE LOA N COULD NOT HAVE BEEN DONE AND HAS NOT BEEN DONE. IN FACT, THE FACT THAT THE A SSESSEE APPLIED AND OBTAINED THE BENEFIT OF PRE PAYMENT UNDER THE 4 TH PROVISO TO SEC.38 OF THE SALES TAX ACT, WHICH WAS ONLY WITH RESPECT TO THE D EFERRED SALES TAX LIABILITY, ITSELF PROVES THAT WHAT IT PREPAID WAS O NLY ITS DEFERRED SALES TAX LIABILITY AND NOTHING ELSE. THE ALLOWING OF DEDUCTI ON U/S. 43B ALSO DOES NOT MEAN THAT THE LIABILITY HAS ACTUALLY BEEN PAID. IT IS MERELY TREATED AS PAID IN LINE WITH THE AMENDMENT IN THE SALES TAX ACT AND IN COMPLIANCE TO THE BOARDS CIRCULAR. HENCE, THE DEEMING FICTION HAS BE EN TAKEN TO ITS LOGICAL CONCLUSION. 40. WITH REGARD TO THE APPLICATION OF THE 4 TH PROVISO TO SEC. 38 OF THE BOMBAY SALES TAX ACT TO INCLUDE PREPAYMENT FACILITY TO UNIT HOLDERS WHO HAVE OPTED FOR INTEREST FREE LOAN SINCE, THE SAID U NIT HOLDERS CANNOT BE PLACED AT A DISADVANTAGE WITH RESPECT TO UNIT HOLDE RS UNDER THE DEFERRAL SCHEME UNDER THE SAME PACKAGE OF INCENTIVE SCHEME , THE LD. DR SUBMITS THAT IT IS SETTLED LAW THAT NOTHING CAN BE READ INTO THE PROVISIONS OF THE ACT. IT IS VERY CLEAR FROM THE 4 TH PROVISO THAT IT SEEKS TO EXTEND THE BENEFIT OF PREPAYMENT ONLY TO THE UNIT HOLDERS FALL ING UNDER THE DEFERRAL SCHEME. IF IT HAD BEEN THE INTENTION OF THE GOVERNM ENT TO ALSO INCLUDE THE UNIT HOLDERS COVERED BY THE INTEREST FREE LOAN SCHE ME, THEY WOULD HAVE ALSO BEEN SPECIFICALLY INCLUDED IN THE SAID PROVISO . IT IS ALSO PERTINENT TO MENTION THAT 4 TH PROVISO WAS ADDED BY THE MAHARASHTRA TAX LAWS (LEV Y AND AMENDMENT) ACT, 1995 DATED 18.08.1995 WITH EFFE CT FROM 01.10.1995 AND AGAIN THE PROVISO WAS SUBSTITUTED BY THE MAHARASHTRA ACT NO. 20 OF 2002 DATED 04.05.2002 W.E.F. 01.05.2002. IT IS UNDER THIS SUBSTITUTED PROVISO THAT THE BENEFITS OF PREPAYMENT HAVE BEEN MADE AVAILABLE TO THE ELIGIBLE UNIT WHICH HAVE OPTED FOR DEFERRAL SCHEME. PRIOR TO SUBSTITUTION SIMILAR BENEFITS WERE MADE AVAILABL E TO DEALERS TO DISCHARGE THEIR LOAN LIABILITY UNDER THE 4 TH PROVISO. WHAT EMERGES IS THAT 42 SIMILAR BENEFITS WERE MADE SPECIFICALLY AVAILABLE I N RESPECT OF LOAN LIABILITY ALSO PRIOR TO 01.05.2002 AND NOW THE BENEFITS OF PR EPAYMENT HAVE BEEN GRANTED SPECIFICALLY TO THE ELIGIBLE UNITS FOR THE DISCHARGE OF THEIR DEFERRED SALES TAX LIABILITY. THIS SHOWS THAT THE BENEFITS O F THE 4 TH PROVISO TO SEC. 38 OF THE SALES TAX ACT IS AVAILABLE ONLY TO THE ELIGI BLE UNITS FOR DISCHARGING THEIR DEFERRED SALES TAX LIABILITY AND NOT TO DEALE RS WHO HAVE INCURRED LOAN LIABILITY, IN VIEW OF THE 4 TH PROVISO BEFORE ITS SUBSTITUTION BY THE CURRENT PROVISO W.E.F. 01.05.2002, WHICH PROVIDED WITH THE OPTION OF PREPAYING THEIR LOAN LIABILITY SEPARATELY UNDER THE SAME ACT. 41. WITH REGARD TO THE LD. COUNSELS PLEA THAT THE ASSESSEE HAD BEEN TREATING THE SALES TAX DEFERRED AS A LOAN IN ITS BO OKS OF ACCOUNT WHICH WAS EVIDENCED BY THE BALANCE SHEET FILED BY IT FOR THE EARLIER YEARS TO SHOW THAT THE SALES TAX DEFERRED WAS NOTHING BUT A LOAN LIABILITY THE LD. DR SUBMITS THAT APPLICATION FOR THE CONVERSION OF DEFE RRED SALES TAX LIABILITY INTO LOAN ITSELF WAS FILED WITH THE COMPETENT AUTHO RITY, I.E, SICOM ONLY ON 08.10.2002. THIS MEANS THAT BEFORE THIS DATE, I.E., 08.10.2002, THE LIABILITY WAS NOTHING BUT A DEFERRED SALES TAX LIAB ILITY. HENCE, THE QUESTION OF TREATING IT AS A LOAN BEFORE THIS DATE DOES NOT ARISE. IN ANY CASE, IT IS SETTLED LAW THAT ENTRIES IN THE BOOKS OF ACCOUNTS A RE NOT DETERMINATIVE OF THE NATURE OF TRANSACTIONS (TUTICORIN ALKALI CHEMIC ALS AND FERTILIZERS LTD. VS. CIT (1997) 227 ITR 172 (SC). 42. HE FURTHER SUBMITS THAT EVEN PRESUMING FOR THE SAKE OF ARGUMENT BUT NOT ACCEPTING THAT THE SALES TAX LIABILITY WAS CONVERTED INTO A LOAN LIABILITY, IT WOULD NOT ALTER THE CHARACTER OF THE LIABILITY IN THE HANDS OF THE ASSESSEE. THE CONVERSION HAS TAKEN PLACE MERELY BY WAY OF JOURNAL ENTRIES. ONLY A NEW NOMENCLATURE HAS BEEN GIVEN TO THE LIABILITY. THIS HAS BEEN DONE MERELY FOR THE EFFECTIVE MONITORING AND I MPLEMENTATION OF THE BENEFITS UNDER THE SCHEME. INCOME TAX ACT AND STATE GOVERNMENT 43 SCHEMES OPERATE IN DIFFERENT FIELDS. STATE GOVERNME NT SCHEMES HAVE NOTHING DO WITH THE COMPUTATION OF TAXABLE INCOME. NATURE OF EXPENDITURE / LIABILITY CANNOT BE CONCLUSIVELY DETERMINED BY TH E MANNER IN WHICH ACCOUNTS ARE MADE IN TERMS OF STATE GOVERNMENT SCHE MES. THE GOVERNMENT SCHEME WOULD NOT OVERRIDE THE PROVISION OF THE I. T. ACT, 1961. RELIANCE WAS ALSO PLACED ON THE RATIO OF THE DECISION IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT (2010) 320 ITR 577 (SC). 43. HE FURTHER SUBMITS THAT THE ASSESSEE HAS INCURR ED A TRADING LIABILITY IN RESPECT OF WHICH DEDUCTION HAS ALSO BEEN MADE. I T HAS BEEN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO BENEFIT HAS ACCRUED TO THE ASSESSEE ON ACCOUNT OF PREPAYMENT OF THE DEF ERRED LIABILITY AT NPV. ALTERNATIVELY, IT HAS BEEN ARGUED BY THE LD. COUNSE L THAT IF AT ALL ANY BENEFIT HAS ACCRUED, IT IS ON CAPITAL ACCOUNT. ACC ORDING TO THE LD. DR, THE ASSESSEE HAS, INFACT, OBTAINED BENEFIT IN RESPECT OF THE DEFERRED SALES TAX LIABILITY, WHICH IS A TRADING LIABILITY ON ACCOUNT OF ITS PREPAYMENT AT NPV, THE WORKING OF WHICH WAS PRESCRIBED BY THE STATE GO VERNMENT, BY WAY OF REMISSION AND CESSATION OF SUCH LIABILITY. FOR FIND ING OUT WHETHER THE ASSESSEE HAS OBTAINED ANY BENEFIT OR NOT, ONE NEED NOT TRAVEL BEYOND THE BALANCE SHEETS AND ACCOUNTS FILED BY THE ASSESSEE. IN SCHEDULE P TO THE NOTES TO ACCOUNTS (PAGE NO. 90 OF THE PAPER BOOK) F ILED ALONGWITH THE RETURN OF INCOME FOR THE A.Y. 2003-04 (DURING THE P ERIOD WHEN THE PREPAYMENT HAS TAKEN PLACE), IT HAS BEEN STATED AS FOLLOWS:- THE COMPANY HAS, IN RESPONSE TO A NOTIFICATION ISS UED BY THE GOVERNMENT OF MAHARASHTRA, REGARDING PREMATURE REPAYMENT OF DEFERRAL SALES TAX AT NET PRESENT VALUE , GONE IN FOR REPAYMENT OF THE TOTAL LIABILITY OF RS.75,20 1,378 ON 30 TH DECEMBER, 2002 AT NET PRESENT VALUE. THE TOTAL AMOUN T OF PAYMENT MADE IS RS.33,713,393. BASED ON THE OPINION OBTAINED BY THE COMPANY, IT HAS TAKEN THE VIEW THAT THE BALANCE OF RS.41,487,985 ARISING OUT OF THE REMISSI ON OF THE 44 LOAN LIABILITY, BEING CAPITAL IN NATURE, IS CREDITE D TO CAPITAL RESERVE. PERUSAL OF THE ABOVE LEAVES NO DOUBT IN MIND THAT T HE ASSESSEE ITSELF IS OF THE VIEW THAT THERE IS A REMISSION OF THE LIABILITY , ALBEIT, A LOAN LIABILITY AND THAT IT HAS BECOME RICHER BY RS.4,14,87,985 WHICH I T HAS ITSELF CREDITED TO THE CAPITAL RESERVE. THE REFLECTION OF THIS AMOUNT IN THE CAPITAL RESERVE ITSELF PROVES THAT THERE IS A BENEFIT TO THE ASSESS EE AND THAT THIS BENEFIT IS REAL. EVEN IF THE AMOUNT HAD BEEN CREDITED UNDER SO ME OTHER HEAD, IT WOULD HAVE MADE NO DIFFERENCE BECAUSE IT IS SETTLED LAW THAT NOMENCLATURE GIVEN A PARTICULAR TRANSACTION IS NOT DETERMINATIVE OF ITS TRUE NATURE. HE FURTHER SUBMITS THAT AN ANALYSIS O F THE BALANCE SHEET REVEALS THAT THE ASSESSEE HAD DEFERRED TAX LIABILIT Y OF RS.7,52,01,378 IMMEDIATELY PRIOR TO PREPAYMENT WHICH, AFTER PREPAY MENT, HAS BEEN REDUCED TO NIL. HOWEVER, THE ASSETS TO THIS EXTENT HAVE NOT DIMINISHED. THE ASSETS OF THE VALUE OF ONLY RS.3,37,13,393 HAVE GOT REDUCED LEAVING ASSETS OF THE VALUE OF RS.4,14,87,985 WITH THE ASSE SSEE WHICH IS MATCHED WITH THE CREDIT OF THE SAME AMOUNT IN THE CAPITAL R ESERVE. THIS IS BECAUSE, OUT OF THE TOTAL LIABILITY ON ACCOUNT OF D EFERRED SALES TAX OF RS.7,52,01,378, WHICH THE ASSESSEE WAS REQUIRED TO PAY, AN AMOUNT OF RS.3,37,13,393 ONLY HAS BEEN PAID, WHICH IS DEEMED TO BE FULL DISCHARGE OF THE EXISTING LIABILITY OF THE ASSESSEE, LEAVING A SURPLUS OF RS.4,14,87,985 IN THE HANDS OF THE ASSESSEE WHICH I S NOT REQUIRED TO BE PAID ANY MORE. THIS IS THE BENEFIT OBTAINED BY THE ASSESSEE. THE ASSESSEE HAS OBTAINED A BENEFIT IS DEMONSTRATED BY THE FOLLO WING SIMPLE EXAMPLE:- BEFORE THE PREPAYMENT, THE ENTRIES RELATING TO THE LIABILITY WOULD IN THE MOST SIMPLE TERMS LOOK LIKE THIS. BALANCE SHEET AS AT LIABILITY (IN RS.) ASSET (IN RS.) 45 SALES TAX LIABILITY 7,52,01,378 BANK A/C. (SALES TAX DEPOSITED) 7,52,01,378 7,52,01,378 7,52,01,378 AFTER THE PREPAYMENT, THE ENTRIES WOULD IN THE MOST SIMPLE TERMS LOOK LIKE THIS : LIABILITY (IN RS.) ASSET (IN RS.) CAPITAL RESERVE 4,14,87,985 BANK A/C. (SALES TAX DEPOSITED) 7,52,01,378 SALES TAX LIABILITY NIL LESS: SALES TAX LIABILITY PAID 3,37,13,393 4,14,87,985 4,14,87,985 4,14,87,985 HENCE, FROM OWING LIABILITY OF RS.7.52 CRORES, THE ASSESSEE IS NOW OWNER OF ASSETS OF THE VALUE OF RS.4.15 CRORES WHICH HE I S NO LONGER REQUIRED TO PAY TO ANY ONE. IT GOES WITHOUT SAYING THAT THE ASS ESSEE HAS BENEFITED BY RS.4.15 CRORES. THE CONDITION OF SECTION 41(1) IS, THEREFORE, SATISFIED. ASSESSEE COLLECTED RS.7.52 CRORES FROM ITS CUSTOMER S ON ACCOUNT OF SALES TAX. THIS MONEY WAS REQUIRED TO BE PAID TO THE STAT E GOVERNMENT AFTER THE REQUISITE NUMBER OF YEARS AS PER THE TERMS OF T HE 1983 AND 1988 SCHEMES. THE ASSESSEE ALSO OBTAINED DEDUCTION ON AC COUNT OF SALES TAX ACCRUED U/S. 43B, THEREBY, REDUCING ITS INCOME TO T HAT EXTENT. LATER ON, INSTEAD OF RS.7.52 CRORES WHICH THE ASSESSEE WAS RE QUIRED TO PAY, IT PAID ONLY RS.3.37 CRORES AND, THE BALANCE AMOUNT OF RS.4 .15 CRORES BECAME 46 HIS OWN DUE TO THE REMISSION OF THIS LIABILITY AND THE DEEMING PROVISION OF THE 4 TH PROVISO TO SEC. 38 OF THE SALES TAX ACT. THE ASSES SEE IMMEDIATELY BENEFITED BY RS.4.15 CRORES WHICH IT APPROPRIATED T O ITSELF, AND RIGHTLY REFLECTED THIS BENEFIT BY CREDITING IT TO THE CAPIT AL RESERVE. THIS WAS REAL BENEFIT, A COMMERCIAL BENEFIT AND NOT SOME NOTIONAL BENEFIT. INFACT, THE SAID 4 TH PROVISO ITSELF RECOGNIZES THE FACT THAT FULL LIABI LITY IS DIFFERENT AND HIGHER THAN THE PAYMENT ACTUALLY MADE SINCE IT DEEM S THAT THE PAYMENT OF RS.3.37 CRORES MADE WOULD BE TREATED AS FULL DIS CHARGE OF THE DEFERRED LIABILITY OF RS.7.52 CRORES. 44. WITH REGARD TO THE ARGUMENT OF THE LD. COUNSEL THAT THE NPV OF ITS LIABILITY WAS ONLY RS.3,37,13,393 AND, SINCE, IT HA D PAID THIS AMOUNT AS WORKED OUT BY THE GOVERNMENT ITSELF, IT HAD NOT OBT AINED ANY BENEFIT. IN OTHER WORDS THE PRESENT VALUE OF ITS LIABILITY IS O NLY RS.3.37 CRORES AND THE LIABILITY OF RS.7.52 CRORES WAS ONLY ITS FUTURE LIA BILITY. ACCORDING TO THE LD. DR THIS IS NOT CORRECT SINCE THE SALES TAX LIABILIT Y WAS FIXED THE DAY IT ACCRUED. IT CANNOT DIMINISH OVER A PERIOD OF TIME. IT CAN GET REDUCED ONLY IF A PART OF THE LIABILITY IS PAID OR IF THE PERSON TO WHOM THE LIABILITY IS OWED GIVES UP / WAIVES / REMITS PART OF THE LIABILI TY. THE ADMITTED LIABILITY AS PER THE BALANCE SHEET ITSELF WAS RS.7,52,01,378. THE ASSESSEE HAD NOT PAID ANY PART OF THE LIABILITY TILL ITS PREPAYMENT IN VIEW OF THE DEFERRAL INCENTIVE GIVEN TO IT THAT IT COULD PAY THIS ENTIRE LIABILITY AFTER A CERTAIN PERIOD OF TIME IN FUTURE. HENCE, THE PRESENT LIABIL ITY WAS RS.7.52 CRORES WHICH WAS ALLOWED TO BE DISCHARGED AT A SPECIFIED F UTURE DATE. IT WAS NOT A FUTURE LIABILITY SINCE THE SAME WAS ALREADY FIXED THE DAY IT HAD ACCRUED. THE LD. DR, WHILE DRAWING OUR ATTENTION TO THE DEFI NITION OF THE NET PRESENT VALUE (NPV) FROM THE BUSINESSDICTIONARY.COM ( HTTP://WWW. BUSINESSDICTIONARY.COM/DEFINITION/NET-PRESENT-VALUE -NPV.HTML), (COPY FILED) SUBMITS THAT NPV IS ALWAYS FROM THE PERSPECTIVE OF THE INVESTOR. IT IS THE DIFFERENCE BETWEEN THE PRESENT VALUE OF THE FUTURE CASH FLOWS FROM AN 47 INVESTMENT AND THE AMOUNT OF INVESTMENT. IN CALCULA TING THE NPV, THE PERSON WHO IS LIABLE TO PAY HAS NO ROLE TO PLAY. IN CALCULATING THE NPV, THE QUESTION ASKED BY THE INVESTOR (IN THIS CASE, THE S TATE GOVERNMENT) ALWAYS IS, HOW MUCH IS THE CASH WHICH WOULD FLOW I N TO ME, AFTER A CERTAIN TIME IN FUTURE FROM NOW, WORTH TODAY?. ONE THING IS CLEAR. WHAT IS BEING DONE BY THE STATE GOVERNMENT IS FINDING OUT T HE WORTH OF THE RS.7.52 CRORES, WHICH IT WOULD GET IN FUTURE FROM T HE ASSESSEE TODAY. THE GOVERNMENT MAY REQUIRE MONEY TO INVEST IN ITS SEVER AL WELFARE OR INFRASTRUCTURE PROJECTS. IT MAY FIND IT MORE BENEFI CIAL TO GET BACK ITS MONEY AVAILABLE WITH THE UNIT HOLDERS IN THE FORM O F DEFERRED SALES TAX LIABILITY PREMATURELY, RATHER THAN TO BORROW MONEY FROM OTHER AGENCIES AT HIGH INTEREST RATES. HENCE, IT WORKS OUT THE PRESEN T WORTH OF ITS MONEY AVAILABLE WITH THE UNIT HOLDERS AND, CONSEQUENTLY, THE NPV AND OFFERS A PREPAYMENT SCHEME TO THE UNIT HOLDERS. IT IS IMPORT ANT TO NOTE THAT NPV DOES NOT MEAN THE ACTUAL VALUE OF THE ASSET (AVAILA BLE IN THE FORM OF DEFERRED SALES TAX LIABILITY WITH THE UNIT HOLDERS) , BUT THE PRESENT WORTH OF THE SAID ASSET CONSIDERING THAT IT WOULD BE ABLE TO USE THE ASSET ONLY AT A LATER DATE WHILE THE REQUIREMENT FOR THE MONEY IS T ODAY. IT FOLLOWS THEN THAT THE LIABILITY THAT HAS BEEN PREPAID BY THE ASS ESSEE IS NOT THE ACTUAL LIABILITY, BUT ONLY THE PRESENT WORTH OF THE LIABIL ITY IN THE EYES OF THE STATE GOVERNMENT AS ON THE DATE OF PREPAYMENT. IF THE GOV ERNMENT HAD NOT COME OUT WITH THE SCHEME OF PREPAYMENT, COULD THE A SSESSEE HAVE PREPAID ITS LIABILITY OF RS.7.52 CRORES BY PAYING A MERE RS.3.37 CRORES? THE ANSWER IS NO. 45. THE GOVERNMENT CAME UP WITH THE SCHEME OF PREPA YMENT OF THE DEFERRED SALES TAX LIABILITY BY ENACTING THE 4 TH PROVISO TO SEC. 38 OF THE SALES TAX ACT. AS PER THIS, THE UNIT HOLDERS WERE G IVEN AN OPTION TO PREPAY THE SALES TAX DEFERRED LIABILITY AT A REDUCE D AMOUNT WORKED OUT AS PER THE RULES PRESCRIBED BY THE GOVERNMENT. IT IS B ECAUSE THE OPTION TO PREPAY WAS BENEFICIAL TO THE ASSESSEE THAT IT OPTED TO BENEFIT FROM THE 48 SCHEME AND WENT FOR PREPAYMENT OF ITS DEFERRED SALE S TAX LIABILITY. IN EFFECT, WHAT THE GOVERNMENT HAS DONE IS THAT IT HAS OFFERED TO THE ASSESSEE THAT AS AGAINST THE LIABILITY OF RS.7.52 C RORES PAYABLE AT A FUTURE DATE, IF IT PAID ONLY RS.3.37 CRORES (WHICH WAS THE PRESENT WORTH OF THE FUTURE CASH INFLOW OF THE GOVERNMENT), THE GOVERNME NT WOULD DEEM IT TO BE FULL DISCHARGE OF THE TOTAL LIABILITY AND THE GO VERNMENT WOULD NOT ASK FOR THE BALANCE LIABILITY OF RS.4.15 CRORES. IN EFF ECT, THE GOVERNMENT HAS GRANTED IN PUBLIC INTEREST, A REMISSION OF SALES TA X LIABILITY OF RS.4.15 CRORES TO THE ASSESSEE. IT HAS GIVEN UP THIS AMOUNT ON THE DATE WHEN PREPAYMENT IS MADE, THEREBY TAKING THE DEEMING PROV ISION IN THE 4 TH PROVISO TO SEC. 38 OF THE SALES TAX ACT TO ITS LOGI CAL END. IN THE PROCESS, THE ASSESSEE HAS BENEFITED BY RS.4.15 CRORES. THE L IABILITY OF RS.4.15 CRORES HAS, THEREFORE, BEEN REMITTED BY THE GOVERNM ENT. IN THE BOOKS OF THE ASSESSEE, LIABILITY OF THE VALUE OF RS.4.15 CRO RES HAS CEASED, I.E., IT HAS COME TO AN END. CONSEQUENTLY, THERE IS A CESSAT ION OF LIABILITY ALSO TO THE EXTENT OF RS.4.15 CRORES. THIS BENEFIT AS RESUL T OF REMISSION AND CESSATION IS REFLECTED IN THE BALANCE SHEET BY AN I NCREASE IN THE ASSET AND CREDIT TO THE CAPITAL RESERVE ACCOUNT. IN THE CASE OF STERLITE OPTICAL TECHNOLOGIES (SUPRA), RELIED UPON BY THE LD. COUNSE L THE TRIBUNAL HAS BEEN ACCEPTED THAT THERE WAS A WAIVER AS WELL AS BE NEFIT WHICH ACCRUED TO THE ASSESSEE. 46. THE CONTENTION OF THE LD. COUNSEL THAT BY PREPA YMENT, THE ASSESSEE IS DEPRIVED OF CASH IN PRAESENTI AND, HENCE, THERE CANNOT BE A BENEFIT, IS NOT TENABLE. THE ASSESSEE HAS OPTED FOR PREPAYMENT ONLY BECAUSE IT WAS BENEFICIAL TO IT. THE ONLY ARGUMENT OF THE ASSESSEE CAN BE THAT IF IT HAD NOT MADE THE PREPAYMENT, IT COULD HAVE EARNED SOME INCOME ON THE AMOUNT IT PAID TO THE GOVERNMENT IN DISCHARGE OF IT S DEFERRED LIABILITY. CONVERSELY, IT COULD HAVE EVEN LOST THIS MONEY. THE SE ARE ALL HYPOTHETICAL SITUATIONS AND THERE IS NO NEED TO TRAVEL INTO THE REALMS OF IMAGINATION. 49 47. TO SUM UP ACCORDING TO THE LD. DR, ALL THE COND ITIONS FOR INVOKING THE PROVISIONS OF SEC. 41(1) ARE SATISFIED. IT HAS BEEN HELD BY THE HONBLE RAJASHTAN HIGH COURT IN THE CASE OF WOLKEM (P) LTD. 259 ITR 430 THAT SEC. 41 ENACTS ADJUSTMENT PROVISIONS WHEREBY THE R EVENUE TAKES BACK WHAT IT HAS ALREADY ALLOWED, IF CERTAIN CONDITIONS COME TO PASS AND THE ASSESSEE RECOUPS SOMETHING FOR WHICH AN ALLOWANCE H AD ALREADY BEEN MADE AND DEDUCTED FROM HIS BUSINESS INCOME. SIMILA R VIEW HAS BEEN HELD BY THE HONBLE KARNATAKA HIGH COURT IN THE CAS E OF MYSORE THERMO ELECTRIC (P) LTD. 221 ITR 504, IN THE CASE OF EXPRE SS NEWSPAPERS PVT. LTD. VS. CIT 227 ITR 325 (MAD.) AND IN THE CASE OF SOLID CONTAINERS LTD. VS. DCIT AND ANOTHER (2009) 308 ITR 417 (BOM.) AND ALSO IN ACIT VS. COSMO FILMS LTD. 28 SOT 353 (DEL.). THE INCOME TAX DEPAR TMENT HAS ALREADY ALLOWED A DEDUCTION U/S. 43B TO THE ASSESSEE OF SAL ES TAX LIABILITY OF RS.7.52 CRORES. ALTHOUGH, THE DEDUCTION U/S. 43B IS TO BE ALLOWED ONLY ON ACTUALLY PAID BASIS, THE SAME WAS ALLOWED IN VIEW OF THE AMENDMENT MADE BY THE STATE GOVERNMENT IN THE 3 RD PROVISO TO SEC. 38 OF THE SALES TAX ACT AND BOARDS CIRCULAR. HOWEVER, THE ASSESSEE HAS FINALLY PAID ONLY RS.3.37 CRORES AS AGAINST THE DEDUCTION OF RS.7.52 CRORES CLAIMED AND ALLOWED TO IT. THE BALANCE LIABILITY OF RS.4.15 CRO RES IS NOT REQUIRED TO BE PAID BY IT, NOW OR IN FUTURE. THE AMOUNT OF RS.4.15 CRORES HAS, THEREFORE, BEEN RIGHTLY TAXED IN THE ASSESSMENT YEAR 2003-04 U /S. 41(1). THE LD. DR WHILE ALSO RELYING ON THE ORDER OF THE ASSESSING OF FICER AND THE LD. CIT(A) SUBMITS THAT IN VIEW OF HIS SUBMISSIONS, THE ADDITI ON MADE BY THE ASSESSING OFFICER U/S. 41(1) BE UPHELD. 48. IN THE REJOINDER THE LD. SR. COUNSEL SUBMITS TH AT THE LD. DR HAS RELIED ON THE DECISION OF THE SUPREME COURT IN CHOW RINGHEE SALES BUREAU TO CONTEND THAT SALES-TAX IS A TRADING RECEIPT. T HIS IS UNDOUBTEDLY SO WHEN THE SALES-TAX IS COLLECTED IN NORMAL CIRCUMSTA NCES AND NOT WHERE COLLECTION UNDER A SUBSIDY SCHEME AS PER 1979, 1983 OR 1988 SCHEMES AS 50 HELD IN RELIANCES CASE (SPECIAL BENCH/ BOMBAY HIGH COURT). HE FURTHER SUBMITS THAT SALES-TAX WHEN COLLECTED AND DEFERRED AS PER THE PACKAGE SCHEME OF INCENTIVES CANNOT BE REGARDED AS A TRADIN G RECEIPT BUT IS A CAPITAL RECEIPT. IN THIS CONNECTION, RELIANCE WAS AGAIN PLACED ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN RE LIANCES CASE WHEREIN A SALES-TAX INCENTIVE RECEIVED UNDER THE PACKAGE SCHE ME OF INCENTIVES WAS TREATED AS A CAPITAL RECEIPT. THE DECISION OF THE SPECIAL BENCH HAS BEEN APPROVED BY THE BOMBAY HIGH COURT. 49. HE FURTHER SUBMITS THAT THE LD. DR ALSO STATED THAT THE APPELLANT HAS ALWAYS ACCEPTED THAT THE DEFERRED SALES-TAX IS A TR ADING RECEIPT. IT IS TO BE NOTED THAT IN THE ANNUAL ACCOUNTS FOR FY 2001-02 , THE ITEM IS MENTIONED AS DEFERRED SALES TAX LOAN (SEE PG.80). SIMILAR IS THE POSITION FOR THE EARLIER YEARS. EVEN AT PAGE 90, R EFERENCE IS MADE TO REPAYMENT OF LOAN LIABILITY THOUGH THE WORD REMI SSION IS WRONGLY USED BEARING IN MIND THE EARLIER PART OF THE NOTE. IT I S SUBMITTED THAT THE APPELLANT HAS RAISED A CONTENTION BEFORE THE LOWER AUTHORITIES THAT IN VIEW OF RELIANCE SPECIAL BENCH DECISION, THE AMOUNT SHOU LD BE REGARDED AS A CAPITAL RECEIPT. THEREFORE, THE DR IS NOT JUSTIFIE D IN CONTENDING THAT THE RECEIPT HAS ALWAYS BEEN TREATED BY THE APPELLANT AS A TRADING RECEIPT. IN ANY EVENT TREATMENT IN THE BOOKS OF ACCOUNT IS NOT RELEVANT. SEE TUTICORIN ALKALIS CASE 227 ITR 172 (SC). 50. THE LD. SR. COUNSEL FURTHER SUBMITS THAT THE BE NEFIT MUST BE DETERMINED BY AN APPLICATION OF UNIVERSAL TEST. IT DEPENDS UPON PERSON TO PERSON. THEREFORE, IN A GIVEN CASE THERE IS NO BEN EFIT. THE GOVT. DID NOT GIVE UP THE MONEY. IT IS ONLY AN EARLY PAYMENT. O NE RUPEE TODAY IS MORE VALUABLE THAN ONE RUPEE AFTER TEN YEARS. THER EFORE, THERE IS NO BENEFIT AT ALL. THERE IS NO REMISSION AS THE ASSES SEE HAS PAID THE AMOUNT AS PER STATE GOVT. SCHEME. IT IS AN ECONOMIC CONCE PT, COMMERCIAL CONCEPT OR COMMON SENSE CONCEPT. 51 51. HE FURTHER SUBMITS THAT THE LD. DR ALSO REFERRE D TO PG.7, PARA 8 OF THE DECISION OF THE BOMBAY HIGH COURT IN SI GROUP I NDIA LTD. VS. ACIT (SUPRA), WHEREIN IT IS STATED THAT THE LIABILITY OF THE ASSESSEE TO PAY SALES TAX WAS A TRADING LIABILITY. THE ISSUE BEFORE THE COURT WAS WHETHER THERE IS REMISSION OR CESSATION OF THE SALES-TAX LIABILIT Y WHEN THE AMOUNT PAID BY THE ASSESSEE TO SICOM TOWARDS PREPAYMENT OF THE DEFERRED SALES-TAX LIABILITY IS NOT ACCEPTED BY THE SALES-TAX AUTHORIT IES AS A PROPER PAYMENT OF THE SAID SALES-TAX LIABILITY. THE COURT HELD T HAT SINCE THE SALES-TAX AUTHORITIES HAVE NOT ACCEPTED THE PAYMENT TO SICOM AS DISCHARGING THE SALES-TAX LIABILITY; THERE WAS NO REMISSION OR CESS ATION THEREOF. DECISION OF THE COURT IS TO BE READ FOR WHAT IT EXPRESSLY DE CIDES AND NOT AS DECIDING SOMETHING NOT BEFORE THE LEARNED JUDGES OR WHAT THE LEARNED JUDGES WANTED TO DECIDE [SEE GOODYEAR INDIA LTD. VS. STATE OF HARYANA (188 ITR 402) (SC)]. HE FURTHER SUBMITS THAT THE ISSUE WHET HER THE RECEIPT WAS AT INCEPTION A CAPITAL RECEIPT OR A TRADING RECEIPT WA S NOT BEFORE THE HIGH COURT AND THE ASSESSEE PROCEEDED ON THE FOOTING THA T EVEN IF AT INCEPTION THE AMOUNT WAS A TRADING RECEIPT, SECTION 41(1) COU LD NOT APPLY AS THE SALES TAX LIABILITY SURVIVED. MOREOVER, THE QUESTI ON OF WHETHER ANY BENEFIT ARISES OR NOT HAS BEEN EXPRESSLY KEPT OPEN. IN FAC T, THE JUDGMENT ONLY DECIDES THAT SECTION 41(1) DOES NOT APPLY BECAUSE T HERE WAS NO REMISSION OF LIABILITY. THEREFORE, THE DECISION CANNOT BE RE GARDED AN AUTHORITY SALES- TAX DEFERRAL LIABILITY IS A TRADING RECEIPT. 52. HE FURTHER SUBMITS THAT THE LD. DR ALSO CONTEND ED THAT UNDER SECTION 43B DEDUCTION WAS ALLOWED AS PER CBDT CIRCU LAR NO.496 DATED 25.9.1987 AND 674 DATED 29.12.1993, WHICH IS A DEEM ING FICTION AND THEREFORE THE DEPARTMENT HAS NOT ACCEPTED THAT PAYM ENT IS ACTUALLY MADE. HE SUBMITS THAT THE DEEMING FICTION IS TO BE CARRIED TO ITS LOGICAL CONCLUSION. IN FACT, THE CIT(A) AT PAGE 16 HAS HIM SELF CANVASSED THE PROPOSITION THAT A DEEMING FICTION MUST BE CARRIED TO ITS LOGICAL 52 CONCLUSION. IN ANY EVENT, SINCE THE RECEIPT IS A C APITAL RECEIPT AT INCEPTION, THERE WAS NO QUESTION OF INCLUDING IT IN THE SALES. THEREFORE, THERE WAS NO DEBIT TO THE PROFIT AND LOSS ACCOUNT O F THE AMOUNT OF SALES- TAX OR OBTAINING DEDUCTION IN RESPECT OF THE SAME U NDER SECTION 43B. SINCE DEDUCTION HAS NOT BEEN OBTAINED FOR THE SALES -TAX, SECTION 41(1) OF THE ACT DOES NOT APPLY. 53. HE FURTHER SUBMITS THAT THE LD. DR CONTENDED TH AT THE CONVERSION CANNOT BE REGARDED AS HAVING BEEN DONE FOR THE FOLL OWING REASONS: 1) THE ASSESSEE APPLIED FOR CONVERSION IN OCTOBER 2002 AND MADE THE PREPAYMENT OF SALES-TAX LIABILITY IN DECEMBER 2002 THEREBY NOT ALLOWING THE SALES-TAX AUTHORITIES SUFFICIENT TIME TO ISSUE THE MODIFIED ENTITLEMENT CERTIFICATE. 2) THE ASSESSEE HAS NOT COMPLIED WITH SEVERAL STEPS WHICH ARE REQUIRED TO BE TAKEN FOR CONVERSION OF SA LES- TAX LIABILITY INTO A LOAN. IN THIS CONNECTION, THE VARIOUS STEPS MENTIONED AT PAGE 233 ONWARDS WERE POINTED OUT, WITH THE SUBMISSION THAT THESE STEPS WERE NOT COMPLIED WITH BY THE ASSESSEE. 3) THE ASSESSEE IN ITS CORRESPONDENCE WITH THE SALES-T AX AUTHORITIES HAS REFERRED TO THE DEFERRED SALES-TAX LIABILITY, AND NOT A LOAN, AS HAVING BEEN PREPAID. HE SUBMITS THAT THE AFORESAID CONTENTIONS OF THE LD . DR ARE MISCONCEIVED. 54. THE LD. DRS NEXT CONTENTION WAS THAT SEVERAL S TEPS WHICH WERE ENVISAGED UNDER THE SCHEME FOR CONVERSION OF LIABIL ITY INTO LOAN WERE NOT TAKEN AND IN THIS CONTEXT REFERENCE WAS MADE TO THE VARIOUS STEPS AT PAGE.233 ONWARDS. THERE WAS NO QUESTION OF COMPLYI NG WITH PARAS 6.13 ONWARDS AS A FORMAL MODIFIED ENTITLEMENT CERTIFICAT E AS PER PARA 6.12 WAS NOT FORTHCOMING. 55. THE LD. DR ALSO STATED THAT THE ASSESSEE IN ITS CORRESPONDENCE WITH THE SALES-TAX AUTHORITIES HAS REFERRED TO THE LIABI LITY AS DEFERRED SALES TAX LIABILITY AND NOT AS A LOAN. IT IS SUBMITTED THAT THE DISTINCTION BETWEEN 53 DEFERRED SALES-TAX LIABILITY AND LOAN IS RELEVANT F ROM THE PERSPECTIVE OF THE INCOME-TAX ACT IN VIEW OF THE PROVISIONS OF SECTION 41(1). IT IS FOR THIS REASON THAT THE REFERENCE IN THE PREPAYMENT RELATED CORRESPONDENCE IS TO DEFERRED SALES-TAX LIABILITY. 56. THE DECISION OF THE HONBLE BOMBAY HIGH COURT I N THE CASE OF SOLID CONTAINERS LTD. VS. DY.CIT (2009) 178 TAXMAN 192(BO M.) IS DISTINGUISHABLE FROM THE ASSESSEES CASE. THE HON BLE HIGH COURT WAS CONCERNED WITH A LOAN WHICH WAS OBTAINED FOR TRADE PURPOSES AND WHICH WAS PRESENTLY PAYABLE. THE QUESTION WAS REGARDING ASSESSABILITY OF THE WAIVER OF THE LOAN. THE BOMBAY HIGH COURT FOLLOWED THE DECISION OF THE SUPREME COURT IN T.V. SUNDARAM IYENGARS CASE 222 I TR 344. IN THE SAID CASE, CERTAIN DEPOSITS WHICH WERE RECEIVED FRO M REGULAR CUSTOMERS IN THE COURSE OF TRADING ORDERS PLACED BY THEM WITH TH E ASSESSEE, SUNDARAM IYENGAR, WHICH HAVE NOT BEEN CLAIMED BY THE CUSTOME RS WERE WRITTEN BACK TO THE PROFIT AND LOSS ACCOUNT. THE SUPREME C OURT HELD THAT SINCE THE DEPOSITS REPRESENTED TRADE ADVANCE PAYMENTS WHI CH WERE TO BE ADJUSTED AGAINST FUTURE TRADE TRANSACTIONS, ANY SUR PLUS ON SUCH ACCOUNT MUST BE REGARDED AS A TRADE SURPLUS AND ASSESSABLE AS BUSINESS INCOME ON A COMMON SENSE APPROACH. THE BOMBAY HIGH COURT HAS FOLLOWED THE SAID DECISION AND HELD THAT THE SURPLUS ARISING FRO M THE WAIVER OF LOAN WAS ASSESSABLE AS BUSINESS INCOME MAINLY BECAUSE THE LO AN WAS UTILIZED FOR TRADING PURPOSES OF THE ASSESSEE. THE DECISION OF THE BOMBAY HIGH COURT IN MAHINDRA & MAHINDRAS CASE 261 ITR 501 HAS BEEN DISTINGUISHED ON THE GROUND THAT IN THAT CASE THE LOAN WAS UTILIZED FOR CAPITAL PURPOSES. IN SOLID CONTAINERS CASE THE ASSESSMENT WAS UPHELD ON THE BASIS OF SECTION 41(1) BEING APPLICABLE. HE FURTHER SUBMITS THAT THI S DECISION IS WHOLLY DISTINGUISHABLE. IN THE PRESENT CASE, THE AMOUNT I S SOUGHT TO BE ASSESSED U/S.41(1). THE COMMON SENSE APPROACH WHICH HAS BEE N APPLIED BY THE BOMBAY HIGH COURT IN SOLID CONTAINERS CASE FOLLOWI NG SUNDARAM IYENGARS CASE IS NOT APPLICABLE TO SEC.41(1). IT IS WELL SETTLED THAT BUT FOR 54 THE DEEMING FICTION IN SEC.41(1), REMISSION OF A LI ABILITY CANNOT BE CONSIDERED AS AMOUNTING TO INCOME. RELIANCE WAS A LSO PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F COMMISSIONER OF AGRICULTURAL INCOME TAX VS. KERALA ESTATE MOORAD C HALAPURAM 27 TAXMAN 339 (SC), WHEREIN THE SUPREME COURT HAS HELD THAT I N ABSENCE OF A DEEMING PROVISION SUCH AS SECTION 41(1) OF THE ACT IN THE KERALA AGRICULTURAL I.T. ACT, 1950, THE REMISSION OF LIABI LITY CANNOT BE REGARDED AS AGRICULTURAL INCOME OF THE ASSESSEE. IN ANY EVENT, THE LOAN IN THE PRESENT CASE HAS BEEN UTILIZED FOR A CAPITAL PURPOSE, NAMEL Y, FOR FIXED CAPITAL INVESTMENT FOR SETTING UP THE UNIT IN A BACKWARD AR EA. THEREFORE, THE DECISION OF THE BOMBAY HIGH COURT IN SOLID CONTAINE RS CASE DOES NOT APPLY SINCE THE LOAN IN THAT CASE WAS UTILIZED FOR TRADING PURPOSE. IN THIS CONNECTION, REFERENCE WAS ALSO MADE TO THE FOLLOWIN G DECISIONS OF THE TRIBUNAL WHEREIN THE DECISION IN SOLID CONTAINERS CASE HAS BEEN DISTINGUISHED ON THE GROUND THAT THE LOAN WAS UTILI ZED FOR CAPITAL PURPOSES: ACCELERATED FREEZ & DRYING CO. LTD. 31 SOT 442 (CO CHIN) CIPLA INVESTMENTS LTD. VS. ITO 33 SOT 317 (MUM) 57. HE FURTHER SUBMITS THAT THE LD. DR ALSO CONTEND ED THAT IF THE LIABILITY WAS CONVERTED INTO A LOAN, THEN THE ASSESSEE COULD NOT HAVE PREPAID IT SINCE THE 4 TH PROVISO DOES NOT SPEAK OF PREPAYMENT OF LOAN BUT O NLY PROVIDES FOR PREPAYMENT OF DEFERRED SALES-TAX LIABI LITY. ACCORDING TO HIM 4 TH PROVISO APPLIES TO ALL CASES WHERE CERTIFICATE HA S BEEN GRANTED FOR AVAILING THE INCENTIVES BY WAY OF DEFERMENT. THER EFORE, IT IS WIDE ENOUGH TO COVER CASE OF DEFERMENT WHETHER THE SAME HAS BEEN CONVERTED INTO A LOAN OR NOT. IF IT IS NOT SO REGARDED IT WO ULD MEAN THAT IN A CASE WHERE THE LIABILITY HAS BEEN CONVERTED INTO A LOAN THE ASSESSEE WOULD BE WORSE OFF THAN WHERE THE LIABILITY HAS NOT BEEN CON VERTED INTO A LOAN. IT IS TO BE NOTED THAT IN 1995 THE FOURTH PROVISO WAS INS ERTED AND PROVIDED FOR 55 PREPAYMENT OF THE LOAN INTO WHICH THE DEFERRED SALE S-TAX LIABILITY WAS CONVERTED. CIRCULAR NO.20-T/1995 DATED 10.10.1995 ISSUED BY THE STATE GOVERNMENT CLARIFIED THAT SUCH CONVERTED LOANS COUL D BE PREPAID AND THE ECONOMIC PRINCIPLE FOR RECOVERY OF FUTURE DEBTS AT THE NET PRESENT VALUE SUGGESTS THAT THEY ARE IN THE INTEREST OF REVENUE. IN 2002, THE FOURTH PROVISO WAS SUBSTITUTED TO PROVIDE FOR PREPAYMENT O F THE DEFERRED TAX BY AN AMOUNT EQUAL TO THE NET PRESENT VALUE OF DEFERRE D TAX. THE SUBSTITUTED FOURTH PROVISO WIDENS THE SCOPE OF PERM ITTED PREPAYMENTS AND CANNOT BE INTERPRETED TO MEAN THAT THE PERSON W HO HAD DILIGENTLY CONVERTED THE DEFERRED TAX IS NOT ENTITLED TO AVAIL THE BENEFIT. THE FINANCE MINISTERS SPEECH ALSO EMPHASIZES THE RIGHT TO PREPAY WHICH WOULD INCLUDE BOTH CONVERTED LOANS AND OUTSTANDING DEFERRED TAX. ACCORDINGLY, THE DEPARTMENTS ARGUMENT THAT THE PRE PAYMENT BY THE ASSESSEE WAS OF DEFERRED TAX AS ALLOWED BY THE SUBS TITUTED 4 TH PROVISO WHICH SHOWS THAT THE AMOUNT HAD NOT BEEN CONVERTED INTO A LOAN IS NOT CORRECT. 58. HE FURTHER SUBMITS THAT THE LD. DR HAS PLACED R ELIANCE ON THE DECISION IN CIT VS. ABHISHEK INDUSTRIES (286 ITR 1) (P&H). THE EXACT NATURE OF THE SCHEME IS NOT REFERRED. IT WAS CERTA INLY NOT A PRE-PAYMENT CASE. PAGE 25 OF THE REPORT CLEARLY BRINGS OUT TH AT THE ASSESSEE HAS NOT PLACED ANY MATERIAL RELEVANT IN SUPPORT OF ITS CONT ENTION THAT THE BENEFIT WAS IN CAPITAL FIELD. THEREFORE, IT IS NOT APPLICA BLE TO THE FACTS OF THE ASSESSEE'S CASE. 59. RELIANCE HAS ALSO BEEN PLACED ON THE DECISION O F THE TRIBUNAL IN THE CASE OF COSMO FILMS (28 SOT 353)(DEL). THAT CASE D EALT WITH A TOTALLY DIFFERENT FACT-SITUATION, NAMELY, THE LIABILITY TO PAY THE DEFERRED SALES TAX WAS ASSIGNED TO A PRIVATE PARTY. THE TRIBUNAL TOOK THE VIEW THAT THIS RESULTED IN THE LIABILITY OF COSMO TO PAY THE DEFER RED SALES TAX LIABILITY COMING TO AN END. RELIANCE WAS PLACED ON EXPLANATI ON 1 TO SECTION 41(1) 56 TO HOLD THAT A UNILATERAL WRITE OFF WOULD RESULT IN REMISSION OF THE LIABILITY. IT SHOULD BE NOTED THAT THIS WAS NOT A CASE OF PRE- PAYMENT TO THE CONCERNED AUTHORITY AND A CREDIT WAS TAKEN IN THE P ROFIT AND LOSS ACCOUNT. PARA 16 OF THE ORDER ALSO SHOWS THAT THE ASSESSEE A PPEARED TO HAVE ACCEPTED THAT THERE WAS A BENEFIT BUT ONLY CONTENDE D THAT IT SHOULD BE SPREAD OVER THE PERIOD OF REPAYMENT. 60. IN WOLKEM (P) LTD. VS. CIT (259 ITR 430) (RAJ) CITED BY THE DEPARTMENT THE EXCISE DUTY WAS REFUNDED ON THE ASSE SSEE SUCCEEDING IN APPEAL. IT WAS INDISPUTABLE THAT SUCH AN AMOUNT WO ULD BE ASSESSABLE AS THE ASSESSEE HAD OBTAINED AN AMOUNT FOR WHICH DEDUC TION HAD BEEN ALLOWED EARLIER. THIS WAS NOT A CASE OF SALES TAX DEFERRAL AND, THEREFORE, REFERENCE WAS MADE TO CHOWRINGHEES CASE AS HOLDING THAT THE SALES TAX IS A COLLECTION OF REVENUE ACCOUNT. SUCH IS NOT THE P OSITION WHERE SALES TAX IS COLLECTED UNDER AN INCENTIVE SCHEME AND WHICH HA S TO BE REPAID LATER, HENCE NOT APPLICABLE. 61. SIMILARLY, IN MYSORE THERMO ELECTRIC (P). LTD. VS. CIT (221 ITR 504) (KAR) THERE WAS A REFUND OF THE EXCISE DUTY COLLECT ED WHICH SQUARELY FALLS WITHIN SECTION 41(1). THE ARGUMENT WAS THAT THE EX CISE DUTY HAD NOT BEEN SPECIFICALLY CLAIMED AS A DEDUCTION AND KEPT A SEPARATE ACCOUNT WAS NOT ACCEPTED. AGAIN IN EXPRESS NEWSPAPERS PVT. LT D. VS. CIT (227 ITR 325) (MAD) CITED BY THE LD. DR, AN INTEREST WHICH W AS EARLIER ALLOWED, WAS SETTLED BY PAYING A LESSER SUM. IT WAS NOT A CASE OF PRE-PAYMENT OF A FUTURE LIABILITY AT ITS NET PRESENT VALUE WHICH IS THE PRESENT CASE. TO SIMILAR EFFECT IS THE DECISION OF THE SUPREME COURT IN POLYFLEX VS. CIT (257 ITR 343)(SC) AGAIN CITED BY THE LD. DR. THE ASSES SEE BECAME ENTITLED TO REFUND OF EXCISE DUTY. IT WAS HELD THAT SEC.41(1) WOULD APPLY AS IT WAS A CASE OF THE ASSESSEE HAVING OBTAINED AN AMOUNT IN R ESPECT OF WHAT WAS EARLIER ALLOWED AS A DEDUCTION EVEN THOUGH THE REVE NUES APPEAL IN THE MATTER URGING THAT THE EXCISE DUTY HAD BEEN CORRECT LY COLLECTED WAS 57 PENDING. IT WAS NOT A CASE OF SALES TAX DEFERRAL O R PRE-PAYMENT AND HENCE, THE AFORESAID DECISIONS RELIED ON BY THE LD. DR ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE. HE, THEREFORE, R EITERATES THAT THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINE D BY THE LD. CIT(A) IS NOT SUSTAINABLE IN LAW AND THE SAME BE DELETED. 62. WE HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE MATERIAL FACTS ARE NOT IN DISPUTE. THE ASSESSEE COMPANY OBTAINED I NCENTIVE BY WAY OF SALES TAX DEFERRAL SCHEME UNDER THE PACKAGE SCHEME OF INCENTIVE 1983 (THE 1983 SCHEME) AND PACKAGE SCHEME OF INCENTIVE 1 988, ( THE 1988 SCHEME) NOTIFIED BY THE GOVERNMENT OF MAHARASHTRA. UNDER 1983 SCHEME THE ASSESSEES UNIT AT KONDHAPURI, TAL SHIRUR DIST. PUNE WHICH AT THE RELEVANT TIME A NOTIFIED BACKWARD AREA WAS ENTITLED TO DEFER THE PAYMENT OF SALES TAX COLLECTED DURING THE PERIOD 1.11.1989 TO 31.10.1996 (7 YEARS) UPTO THE MAXIMUM OF RS.666.94 LACS BEING 85% OF THE FIXED CAPITAL INVESTMENT OF RS.784.64 LACS. THE ASSESSEE COLLECT ED SALES TAX IN 7 YEARS RS. 3,29,93,863/- WHICH WAS TO BE REPAID AFTER 12 Y EARS IN 6 EQUAL ANNUAL INSTALMENTS. UNDER THE 1988 SCHEME, WHICH IS SI MILAR TO 1983 SCHEME, THE AMOUNT OF TAX ACTUALLY DEFERRED UNDER THE 1988 SCHEME WAS RS.4,22,07,515/-. THUS AGGREGATE DEFERRAL AMOU NT UNDER 1983 AND 1988 SCHEMES WAS RS.7,52,01,338/- (RS.3,29,93,863/- + RS.4,22,07,575/-). WE FURTHER FIND THAT IT IS ALSO NOT IN DISPUTE THAT THE SALES TAX COLLECTED BY THE ASSESSEE DURING THE AFOR ESAID PERIOD WAS ALLOWED BY THE ASSESSING OFFICER U/S.43B AS ACTUALL Y PAID IN VIEW OF THE CBDT CIRCULAR NO.496 DATED 25.09.1987. WE FURTHER FIND THAT THERE WAS AN AMENDMENT MADE UNDER THE BOMBAY SALES TAX ACT, 1 959, (THE SALES TAX ACT) BY INSERTION OF THE THIRD PROVISO TO SEC.3 8(4) OF THE SALES TAX ACT, WHEREIN SICOM OR THE RELEVANT REGIONAL DEVELOPMENT CORPORATION OR THE DISTRICT INDUSTRIES CENTRE CONCERNED WAS TO CONVERT THE DEFERRED SALES TAX INTO A LOAN AND THEREAFTER AS PER 2002 AMENDMENT, F OURTH PROVISIO TO 58 SEC.38(4) OF THE SALES TAX ACT BY WHICH THE EARLIER 4 TH PROVISO WAS SUBSTITUTED, WHICH PROVIDES THAT WHERE THE NPV OF DEFERRED TAX AS MAY BE PRESCRIBED WAS PAID, THE DEFERRED TAX WAS DEEMED , IN PUBLIC INTEREST, TO HAVE BEEN PAID. WE FURTHER FIND THAT THE ASSES SEE FOLLOWING THE AFORESAID AMENDMENT UNDER THE BOMBAY SALES TAX ACT, 1959 HAS MADE REPAYMENT OF LOAN OF RS.3,37,13,393/-(RS.1,76,02,27 2/- OF 1983 SCHEME + RS.1,61,11,121/- OF 1988 SCHEME) ON 30.12.2002 AS PER NPV OF THE DEFERRED TAX AS PRESCRIBED UNDER CIRCULAR NO.39T OF 2002 OF TRADE CIRCULAR DATED 12.12.2002 APPEARING AT PG.174-186 TO THE ASS ESSEES PAPER BOOK. THE ASSESSEE CLAIMED RS.4,14,87,985/- BEING THE DIF FERENCE BETWEEN THE DEFERRED SALES TAX RS.7,52,01,378/- AND ITS NET PRE SENT VALUE AMOUNTING TO RS. 3,37,13,393/-AS CAPITAL RECEIPT, CREDITED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE IN THE CAPITAL RESERVE ACCOUNT. HOWE VER, THE ASSESSING OFFICER KEEPING IN VIEW THAT THE ASSESSEE HAS OBTAI NED THE BENEFIT OF PAYMENT OF WHOLE AMOUNT OF RS.7,52,01,378/- AS DEDU CTION U/S.43B OF THE ACT IN VIEW OF CBDT CIRCULAR NO.496 DATED 25.09 .1987, THEREFORE, HE BROUGHT THE DIFFERENCE OF RS. 4,14,87,985/- TO TAX U/S.41(1) OF THE ACT. THE LD. CIT(A) ON AN APPEAL FILED IN THIS REGARD HA S ALSO UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. 63. IN ORDER TO BETTER APPRECIATE THE CONTROVERSY I NVOLVED, IT WOULD BE CONVENIENT TO EXTRACT SECTION 41(1) OF THE I.T. ACT , AS FOLLOWS: SECTION 41(1) WHERE AN ALLOWANCE OR DEDUCTION HAS B EEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF L OSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE (HEREINAFTER REFERRED TO AS THE FIRST MENTIONED PER SON) AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR. (A) THE FIRST MENTIONED PERSON HAS OBTAINED, WHETHE R IN CASH OR IN ANY 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 CE SSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFI TS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHA RGEABLE TO INCOME TAX AS THE INCOME OF THAT PREVIOUS YEAR, WH ETHER THE 59 BUSINESS OR PROFESSION IN RESPECT OF WHICH THE ALLO WANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEA R OR NOT; 64. WE HAVE REFRAINED FROM REPRODUCING THE REST OF THE SECTION WHICH IS NOT RELEVANT FOR THE PURPOSE OF THE PRESENT CONTROV ERSY, BEFORE US. 65. WE FEEL THAT IT IS WORTHWHILE TO STATE THE VARI OUS PRINCIPLES SET OUT BY HONBLE SUPREME COURT AND HIGH COURTS WHILE CONS IDERING THE PROVISION OF SECTION 41(1) OF THE ACT. 66. IN POLYFLEX (INDIA) (P) LTD. VS. CIT (2002) 257 ITR 343 (SC), IT HAS BEEN OBSERVED BY THEIR LORDSHIPS THAT SECTION 41(1) APPLIES IF THE FOLLOWING CONDITIONS AND CIRCUMSTANCES ARE SATISFIE D: IN THE ASSESSMENT FOR THE RELEVANT YEAR AN ALLOWAN CE OR DEDUCTION HAS BEEN MADE IN RESPECT OF ANY LOSS, EXPENDITURE O R TRADING LIABILITY INCURRED BY THE ASSESSEE. THIS IS THE FIRST STEP. COMING TO THE NEXT STEP THE ASSESSEE MUST HAVE SUBSEQUENTLY (I) OBTAIN ED ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR (II) OBTAINE D ANY BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF. IN CASE EITHER OF THESE EVENTS HAPPEN, TH E DEEMING PROVISION ENACTED IN THE CLOSING PART OF SUB-S.(1) COMES INTO PLAY. ACCORDINGLY, THE AMOUNT OBTAINED BY THE ASSESSEE OR THE VALUE OF BENEFIT ACCRUING TO HIM IS DEEMED TO BE PROFIT AND GAINS OF BUSINESS OR PROFESSION AND IT BECOMES CHARGEABLE TO INCOME-TAX AS THE INCOME O F THAT PREVIOUS YEAR. 67. IN WOLKEM (P) LTD. VS. CIT (2003) 259 ITR 430 ( RAJ), IT HAS BEEN OBSERVED THAT SEC.41 ENACTS ADJUSTMENT PROVISIONS W HEREBY THE REVENUE TAKES BACK WHAT IS HAS ALREADY ALLOWED, IF CERTAIN CONDITIONS COME TO PASS AND THE ASSESSEE RECOUPS SOMETHING FOR WHICH AN ALL OWANCE HAD ALREADY BEEN MADE AND DEDUCTED FROM HIS BUSINESS INCOME. THE PROVISION ALSO FIXES THE YEAR IN WHICH THE RECOUPMENT, ETC., IS TO BE TAXED. THE FIRST PART OF SUB-SEC.(1) CONTEMPLATES LOSS, EXPENDITURE OR TR ADING LIABILITY IS SOME FORMER YEAR FOR WHICH ALLOWANCE OR DEDUCTION HAD BE EN MADE IN A BYGONE ASSESSMENT YEAR. THE SECOND PART OF SUB-S.(1) CONT EMPLATES RECOUPMENT 60 OF SUCH LOSS OR EXPENDITURE OR BENEFIT IN RESPECT O F SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF IN SOME SUBSE QUENT YEAR. THE WORD SUCH APPEARING IN THE SECOND PART OF SUB-S.(1) SI GNIFIES THAT THE RECOUPMENT OR BENEFIT MUST BE IN RESPECT OF THE LOS S, EXPENDITURE OR TRADING LIABILITY MENTIONED IN THE FIRST PART OF SU B-S.(1). THE PAYMENT WITH RESPECT TO THE SALES-TAX OR EXCISE DUTY IS NORMALLY AN ALLOWABLE ITEM OF BUSINESS EXPENDITURE. 68. IN CIT VS. BHARAT IRON AND STEEL INDUSTRIES (19 93) 199 ITR 67 (GUJ.) (FB) THE HONBLE GUJARAT HIGH COURT WHILE CONSIDERING TH E SECTION 41(1) OF THE ACT, HELD AS UNDER (HEAD NOTE): THE KEY WORDS IN SECTION 41(1) OF THE INCOME-TAX AC T, 1961, ARE 'THE ASSESSEE HAS OBTAINED, WHETHER IN CASH OR IN ANY OT HER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LOSS OR E XPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF '. IT IS THE OBTAINING IN 'CASH O R IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT . . . OR SOME BENEFIT IN RES PECT OF SUCH TRADING LIABILITY . . .' WHICH IS CONTEMPLATED BY THE LEGIS LATURE WHEN IT USED THE WORDS 'HAS OBTAINED'. SECTION 41(1) INTRODUCES A FIC TION BY WHICH WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSE SSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILIT Y INCURRED BY THE ASSESSEE AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR THE ASSESSEE HAS OBTAINED, WHETHER IN CASH OR IN ANY OTHER MANNER WH ATSOEVER ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR SO ME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CE SSATION THEREOF, THE AMOUNT OBTAINED BY HIM OR THE VALUE OF BENEFIT ACCR UING TO HIM SHALL BE DEEMED TO BE PROFITS AND GAINS OF THE BUSINESS OR P ROFESSION AND, ACCORDINGLY, CHARGEABLE TO INCOME-TAX AS INCOME OF THAT PREVIOUS YEAR, WHETHER THE BUSINESS OR PROFESSION IN RESPECT OF WH ICH THE ALLOWANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEA R OR NOT. THE FICTION IS AN INDIVISIBLE ONE. IT CANNOT BE ENLARGED BY IMPORT ING ANOTHER FICTION, NAMELY, THAT IF THE AMOUNT WAS OBTAINED OR WAS RECE IVABLE DURING THE PREVIOUS YEAR, IT MUST BE DEEMED TO HAVE BEEN OBTAI NED OR RECEIVED DURING THAT YEAR. THE AMOUNT MAY BE ACTUALLY RECEIV ED OR IT MAY BE ADJUSTED BY WAY OF AN ADJUSTMENT ENTRY OR A CREDIT NOTE OR IN ANY OTHER FORM WHEN THE CASH OR THE EQUIVALENT OF CASH CAN BE SAID TO HAVE BEEN RECEIVED BY THE ASSESSEE. BUT IT MUST BE THE OBTAIN ING OF THE ACTUAL AMOUNT WHICH IS CONTEMPLATED BY THE LEGISLATURE WHE N IT USED THE WORDS 'HAS OBTAINED, WHETHER IN CASH OR IN ANY OTHER MANN ER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE IN TH E PAST'. IN THE CONTEXT IN WHICH THESE WORDS OCCUR, NO OTHER MEANING IS POS SIBLE. 61 69. RECENTLY IN SI GROUP INDIA LTD. (SUPRA) THE HON BLE JURISDICTIONAL HIGH COURT HAS OBSERVED THE FOLLOWING: (PLACITUM -8, PA GE- 121 OF 326 ITR): IN ORDER THAT THE PROVISIONS OF SUB-SEC.(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 U/ S.43B. HOWEVER, UNDER CLAUSE (A) OF SUB-SEC.(1) IT IS INTE R ALIA REQUIRED THAT THE ASSESSEE OUGHT TO HAVE OBTAINED SOME BENEFIT I N RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. THIS POSTULATES THAT THERE MUST BE A REMISSION OR CESSAT ION OF THE TRADING LIABILITY AND THAT CONSEQUENTLY A BENEFIT MUST ENUR E TO THE ASSESSEE..... 70. THUS TO INVOKE THE PROVISIONS OF SEC.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 OR THE TRADING LIABILITY INCURRED BY THE ASSESSEE. II. THE ASSESSEE MUST HAVE SUBSEQUENTLY (I) OBTAINED AN Y AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR (II) OBTAINED ANY BE NEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. IN CASE EITHER OF THESE EVENTS HAPPEN, THE DEEMING PROVISION ENACTED IN CLOSING PART OF SUB-SEC.1 COMES INTO PLAY. III. THE AMOUNT OBTAINED BY THE ASSESSEE OR THE VALUE OF BENEFIT ACCRUING TO HIM IS DEEMED TO BE PROFIT AND GAINS OF THE BUSINES S OR PROFESSION AND IT BECOMES CHARGEABLE TO INCOME TAX AS AN INCOME OF TH AT PREVIOUS YEAR. 71. FURTHER ON A PLAIN READING OF SEC.41(1) OF THE ACT, IT IS ALSO CLEAR THAT THE PROVISIONS CONTAINED IN SEC.41(1) DOES NOT MAKE ANY DISTINCTION BETWEEN ANY CONTRACTUAL TRADING LIABILITY OR ANY ST ATUTORY TRADING LIABILITY. EVEN IF ANY STATUTORY LIABILITY IS REMITTED OR CEAS ED OF, OR ANY AMOUNT, WHETHER IN CASH OR IN ANY OTHER MANNER, HAS BEEN OB TAINED IN RESPECT OF THE EXPENDITURE INCURRED BY WAY OF STATUTORY LIABIL ITY, THE SAME WOULD BE DEEMED TO BE THE PROFIT AND GAINS OF THE BUSINESS O F THE ASSESSEE AND WOULD ACCORDINGLY CHARGEABLE TO INCOME-TAX AS THE I NCOME OF THAT YEAR IN WHICH SUCH BENEFIT OR AMOUNT IS OBTAINED. 62 72. AT THIS STAGE IT IS ALSO NECESSARY TO TAKE NOTE OF THE PROVISIONS OF SEC.38 OF THE BOMBAY SALES TAX ACT, 1959, APPLICABL E AT THE RELEVANT TIME: 38. PAYMENT OF TAX AND DEFERRED PAYMENT OF TAX, ETC . (1) TAX SHALL BE PAID IN THE MANNER HEREIN PROVIDED , AND AT SUCH INTERVALS AS MAY BE PRESCRIBED. (2) A REGISTERED DEALER FURNISHING RETURNS AS REQUI RED BY SUB-SEC.(1) OF SECTION 32, SHALL FIRST PAY INTO A GOVERNMENT TR EASURY, IN SUCH MANNER AND AT SUCH INTERVALS AS MAY BE PRESCRIBED, THE AMOUNT OF TAX DUE FROM HIM FOR THE PERIOD COVERED BY A RETURN ALO NG WITH THE AMOUNT OF PENALTY OR INTEREST OR BOTH] PAYABLE BY H IM U/S.36 (3) A REGISTERED DEALER FURNISHING A REVISED RETURN IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 32, WHICH REVISED R ETURN SHOWS THAT A LARGES AMOUNT OF TAX THAN ALREADY PAID IS PAYABLE, SHALL FIRST PAY INTO A GOVERNMENT TREASURY THE EXTRA AMOUNT OF TAX. (4) (A) THE AMOUNT OF TAX- (I) DUE WHERE RETURNS HAVE BEEN FURNISHED WITHOUT FULL PAYMENT THEREOF, OR (II) ASSESSED OR REASSESSED FOR ANY PERIOD U/S.33 OR SECTION 35 LESS ANY SUM ALREADY PAID BY THE DEALER IN RESPECT OF SUCH PERIOD, (III) ASSESSED UNDER SUB-SEC.(3) OF SECTION 41, AN D (B) THE AMOUNT OF PENALTY OR INTEREST OR BOTH (IF ANY) LEVIED U/S.36 OR 37 AND (C) THE SUM (IF ANY) FORFEITED TO THE STATE GOVERNM ENT U/S.37, AND (D) THE AMOUNT OF FINE (IF ANY) IMPOSED UNDER SUB- SEC.(3) OF SECTION 53 AND [(E) ANY OTHER DUES UNDER THIS ACT: SHALL BE PAID BY THE DEALER OR THE PERSON LIABLE TH EREFORE INTO A GOVERNMENT TREASURY WITHIN THIRTY DAYS FROM THE DAT E OF SERVICE OF THE NOTICE ISSUED BY THE COMMISSIONER IN RESPECT THEREO F: PROVIDED THAT, THE COMMISSIONER MAY, IN RESPECT OF ANY PARTICULAR DEALER OR PERSON AND FOR REASONS TO BE RECORDED IN WRITING EXTEND THE DATE OF PAYMENT OR ALLOW HIM TO PAY THE TAX OR PENA LTY OR INTEREST (IF ANY) OR THE SUM FORFEITED, BY INSTALMENTS BUT SUCH EXTENSION OR GRANT OF INSTALMENT TO PAY TAX SHALL BE WITHOUT PREJUDICE TO THE LEVY OF PENALTY, INTEREST, OR BOTH; PROVIDED FURTHER THAT, THE COMMISSIONER MAY, IN RES PECT OF A DEALER TO WHOM AN ELIGIBILITY CERTIFICATE HAS BEEN GRANTED EX TEND THE DATE OF PAYMENTS OR GRANT A MORATORIUM FOR PAYMENT OF THE D UES OR PROVIDE FOR PAYMENT OF THE DUES THEREAFTER IN INSTALMENTS, SUBJECT TO SUCH CONDITIONS AS MAY BE PRESCRIBED: 63 PROVIDED ALSO THAT, NOTWITHSTANDING ANYTHING CONTAI NED IN THIS ACT OR IN THE RULES MADE THEREUNDER BUT SUBJECT TO SUCH CO NDITIONS AS THE STATE GOVERNMENT OR THE COMMISSIONER MAY BY GENERAL OR SPECIAL ORDER SPECIFY, WHERE A DEALER TO WHOM INCENTIVE BY WAY OF DEFERMENT OF SALES TAX OR PURCHASE TAX OR BOTH UNDER THE 1979 SCHEME, THE 1983 SCHEME OR, AS THE CASE MAY BE THE ELECTRONIC SCHEME F ALLING UNDER THE PACKAGE SCHEME OF INCENTIVES DESIGNED BY THE STAT E GOVERNMENT OR OF THE TAX UNDER THE 1988 OR THE 1993 PACKAGE SCH EME OF INCENTIVES DESIGNED BY STATE GOVERNMENT HAVE BEEN GR ANTED BY VIRTUE OF ELIGIBILITY CERTIFICATE, AND WHERE A LOAN LIABILITY EQUAL TO THE AMOUNT OF ANY SUCH TAX PAYABLE BY SUCH DEALER HAS B EEN RAISED BY THE SICOM OR THE RELEVANT REGIONAL DEVELOPMENT CORPORATI ON OR THE DISTRICT INDUSTRIES CENTRE CONCERNED THEN SUCH TAX SHALL BE DEEMED IN THE PUBLIC INTEREST, TO HAVE BEEN PAID. PROVIDED ALSO THAT, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE ACT OR IN THE RULES OR IN ANY OF THE PACKAGE SCHEME OF INCENTIVES OR IN THE POWER GENERATION PROMOTION POL ICY 1998, THE ELIGIBLE UNIT TO WHOM AN ENTITLEMENT CERTIFICATE HA S BEEN GRANTED FOR AVAILING OF THE INCENTIVES BY WAY OF DEFERMENT OF S ALES TAX, PURCHASE TAX, ADDITIONAL TAX, TURNOVER TAX OR SURCHARGE, AS THE CASE MAY BE, MAY IN RESPECT OF ANY OF THE PERIODS DURING WHICH T HE SAID CERTIFICATE IS VALID, ITS OPTION, PREMATURELY PAY IN PLACE OF T HE AMOUNT OF TAX DEFERRED BY IT AN AMOUNT, EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRIBED , AND ON MAKING S UCH PAYMENTS, IN THE PUBLIC INTEREST, THE DEFERRED TAX SHALL BE DEEM ED TO HAVE BEEN PAID. (5) .... ..... ...... ..... 73. ON THE PLAIN READING OF ABOVE PROVISIONS OF SEC .38(1), (2),(3),(4), IT PROVIDES THE MANNER AS TO HOW THE PAYMENT OF TAX, P ENALTY AND INTEREST , AS PRESCRIBED, MAY BE MADE. THE FIRST PROVISO STATE S THAT THE COMMISSIONER MAY IN RESPECT OF ANY PARTICULAR DEALE R OR PERSON FOR THE REASON TO BE RECORDED IN WRITING EXTEND THE DATE OF PAYMENT OR ALLOW HIM TO PAY SUCH AMOUNT BY INSTALMENTS WITHOUT PREJUDICE TO THE LEVY OF PENALTY, INTEREST OR BOTH. THE SECOND PROVISO PRO VIDES THAT COMMISSIONER MAY IN RESPECT OF A DEALER TO WHOM AND ELIGIBILITY CERTIFICATE HAS BEEN GRANTED EXTEND THE DATE OF PAY MENTS OR GRANT A MORATORIUM FOR PAYMENT OF DUES OR PROVIDE INSTALMEN TS SUBJECT TO SUCH CONDITIONS AS MAY BE PRESCRIBED. THE THIRD PROVISO SAYS THAT THE STATE GOVERNMENT OR THE COMMISSIONER MAY BY GENERAL OR SP ECIAL ORDER WHERE 64 A DEALER TO WHOM INCENTIVE BY WAY OF DEFERMENT OF S ALES TAX OR PURCHASE TAX OR BOTH UNDER 1979 SCHEME, 1983 SCHEME OR 1988 SCHEME OR THE CASE MAY BE ELECTRONIC SCHEME OR 1988 SCHEME OR 199 3 PACKAGING SCHEME OF INCENTIVE, HAVE BEEN GRANTED BY VIRTUE OF ELIGIBILITY CERTIFICATE AND WHERE A LOAN LIABILITY EQUAL TO THE AMOUNT OF A NY SUCH TAX PAYABLE BY SUCH DEALER HAS BEEN RAISED BY THE SICOM OR OTHER D ESIGNATED AUTHORITIES, THEN SUCH TAX HAS BEEN DEEMED, IN THE PUBLIC INTEREST, TO HAVE BEEN PAID. THE FOURTH PROVISO PROVIDES THAT WHERE AN ENTITLEMENT CERTIFICATE HAS BEEN GRANTED TO THE ELIGIBLE UNIT F OR AVAILING OF THE INCENTIVES BY WAY OF DEFERMENT OF SALES TAX ETC. SU CH ELIGIBLE UNIT MAY IN RESPECT OF THE PERIODS DURING WHICH THE SAID CERTIF ICATE IS VALID, AT ITS OPTION, PREMATURELY PAY IN PLACE OF THE AMOUNT OF T AX DEFERRED BY IT AN AMOUNT EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRIBED AND ON MAKING SUCH PAYMENTS, IN THE PUBL IC INTEREST, THE DEFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID.(EMP HASIS SUPPLIED). 74. HERE IT IS ALSO CONSIDERED NECESSARY TO TAKE NO TE OF THE DICTIONARY MEANING OF THE NET PRESENT VALUE (NPV). 75. ACCORDING TO BUSINESS DICTIONARY.COM, SUBMITTED BY THE LD. DR, THE DEFINITION OF NPV READS AS UNDER :- DIFFERENCE BETWEEN THE PRESENT VALUE (PV) OF THE F UTURE CASH FLOWS FROM AN INVESTMENT AND THE AMOUNT OF INVESTME NT. PRESENT VALUE OF THE EXPECTED CASH FLOWS IS COMPUTE D BY DISCOUNTING THEM AT THE REQUIRED RATE OF RETURN (AL SO CALLED MINIMUM RATE OF RETURN). FOR EXAMPLE, AN INVESTMENT OF $1,000 TODAY AT 10 PERCENT WILL YIELD $1,100 AT THE END OF THE YEAR; THEREFORE, THE PRESENT VALUE OF $1,100 AT THE DESIRED RATE OF RETURN (10 PERCENT) IS $1,000. THE AMOUNT OF INVESTMENT ($1,000 IN THIS EXAMPLE) IS DEDUCTED FRO M THIS FIGURE TO ARRIVE AT NPV WHICH HERE IS ZERO ($1,000- $1,000). A ZERO NPV MEANS THE PROJECT REPAYS ORIGINAL INVESTMEN T PLUS THE REQUIRED RATE OF RETURN. A POSITIVE NPV MEANS A B ETTER RETURN, AND A NEGATIVE NPV MEANS A WORSE RETURN, THA N THE 65 RETURN FROM ZERO NPV. IT IS ONE OF THE TWO DISCOUNTE D CASH FLOW (DCF) TECHNIQUES (THE OTHER IS INTERNAL RATE O F RETURN) USED IN COMPARATIVE APPRAISAL OF INVESTMENT PROPOSA LS WHERE THE FLOW OF INCOME VARIES OVER TIME.[HTTP://WWW. BUSINESSDICTIONARY.COM/DEFINITION/NET-PRESENT-VALUE - NPV.HTML] ACCORDING TO WIKIPEDIA THE PRESENT VALUE (PV) FORMULA HAS FOUR VARIABLES, EACH OF WHICH CAN BE SOLVED FOR: 1. PV IS THE VALUE AT TIME=0 2. FV IS THE VALUE AT TIME=N 3. I IS THE RATE AT WHICH THE AMOUNT WILL BE COMPOUNDE D EACH PERIOD 4. N IS THE NUMBER OF PERIODS (NOT NECESSARILY AN INTE GER) 5. FUTURE VALUE OF A PRESENT SUM THE FUTURE VALUE (FV) FORMULA IS SIMILAR AND USES THE SAME VARIABLE S. FROM THE ABOVE DEFINITION AND EQUATION IT IS CLEAR THAT THE PRESENT VALUE OF A FUTURE SUM IS THE SAME AND IF THERE IS A DIFFE RENCE I.E., POSITIVE NPV THEN THE PROJECT REPAYS ORIGINAL INVESTMENT PLUS TH E REQUIRED RATE OF RETURN. IN OTHER WORDS A POSITIVE NPV MEANS A BETT ER RETURN AND NEGATIVE NPV MEANS A WORSE RETURN, THAN THE RETURN FROM ZERO NPV MEANING THEREBY THE SIMILAR VALUE OF A FUTURE SUM. 76. IN THE PRESENT CASE THE ASSESSEE HAD COLLECTED TOTAL AMOUNT OF RS.7,52,01,378/- TOWARDS SALES TAX DURING THE YEAR 1989-90 TO 2001-02. IT WAS TREATED AS A LOAN LIABILITY PAYABLE AFTER 12 YEARS IN SIX ANNUAL/EQUAL INSTALMENTS AND THUS, THE ASSESSEE TREATED THE SAID LIABILITY AS UNSECURED LOANS IN ITS BOOKS OF ACCOUNT. 66 77. PURSUANT TO THE AMENDMENT MADE UNDER SUB-SECTIO N(4) OF SECTION 38 OF BST ACT, 1959 BY SUBSTITUTING THE 4 TH PROVISO WHICH PROVIDES FOR PAYMENT OF NET PRESENT VALUE (NPV) OF DEFERRED TAXE S UNDER THE PACKAGE SCHEME OF INCENTIVES WHICH IS AS UNDER : PROVIDED ALSO THAT, NOTWITHSTANDING ANYTHING TO TH E CONTRARY CONTAINED IN THE ACT OR IN THE RULES OR IN ANY OF THE PACKAGE SCHEME OF INCENTIVES OR IN THE POWER GENERAT ION PROMOTION, PROMOTION POLICY, 1998, THE ELIGIBLE UNI T TO WHOM AN ENTITLEMENT CERTIFICATE HAS BEEN GRANTED FOR AVA ILING OF THE INCENTIVES BY WAY OF DEFERMENT OF SALES TAX, PU RCHASE TAX, ADDITIONAL TAX, TURNOVER TAX OR SURCHARGE, AS THE CASE MAY BE, MAY, IN RESPECT OF ANY OF THE PERIODS DURIN G WHICH THE SAID CERTIFICATE IS VALID, AS ITS OPTION, PREMA TURELY PAY IN PLACE OF THE AMOUNT OF TAX DEFERRED BY IT AN AMOUN T, EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRIBED, AND ON MAKING SUCH PAYMENTS, IN THE PUB LIC INTEREST, THE DEFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID. THE STATE GOVT. HAS BY NOTIFICATION NO.STR-12.02/CR -102/TAXATION-1 DATED 16.11.2002, INTRODUCED RULE 31D IN THE BOMBAY SALES TAX RULES, 1959 (BST RULES) LAYING DOWN THE PROCEDURE FOR DETE RMINATION OF SUCH NPV. THE PROCEDURE FOR DETERMINATION OF NPV OF THE AMOUNT OF DEFERRED TAXES HAVING BEEN PUBLISHED, THE DEFERRAL UNITS MAY EXERCISE THE OPTION UNDER 4 TH PROVISO OF SUB-SECTION 4 OF SECTION 38 OF THE BST ACT, 1959 OF PRE-MATURELY REPAYING AT NPV, THE AMOUNT OF DEFERRE D TAXES. THE RULE 31D OF THE BST RULES HAS BEEN PROVIDED WITH A TABLE AND THE NOTES BELOW IT FOR DETERMINATION OF NPV. FOR EXAMPLE THE PAYMEN T OF BST RS.27,903/- AND CST RS.70,171/- DUE ON 1.5.2003 WAS DEPOSITED O N 30.12.2002 I.E. FOUR MONTHS BEFORE THE DUE DATE, THE DISCOUNTED PER CENTAGE OF DEFERRED TAX TO BE PAID AS NPV WAS PRESCRIBED IN SAID TABLE AS 96.4955% AND ACCORDINGLY THE NPV AMOUNT OF BST AND CST WAS WORKE D OUT TO RS.26,925/ AND RS.67,712/- RESPECTIVELY AS PER CER TIFICATE DATED 27.12.2002 APPEARING AT PAGE 191 OF ASSESSEE'S PAPE R BOOK AND THE SAME WAS PAID ON 30.12.2002 AS PER CERTIFICATE DATE D 25.8.2003 67 APPEARING AT PAGE 188 OF ASSESSEE'S PAPER BOOK . TH IS AMOUNT WAS PAID BY THE ASSESSEE AS PER OFFER MADE BY THE STATE GOVT . WHO APPOINTED THE STATE INDUSTRIAL & INVESTMENT CORPORATION OF MAHARA SHTRA LIMITED (SICOM) FOR SETTLEMENT OF DEFERRED SALES TAX LIABIL ITY BY AN IMMEDIATE ONE TIME PAYMENT. ACCORDINGLY THE ASSESSEE HAS PAID AN AMOUNT OF RS.3,37,13,393/- TO SICOM WHICH ACCORDING TO THE AS SESSEE REPRESENTED THE NPV AS DETERMINED BY SICOM. THE PAYMENT WAS MA DE TO SICOM ON 30.12.2002 AS PER CERTIFICATES DATED 25.8.2003 APPE ARING AT PAGE 188 AND 207 OF ASSESSEE'S PAPER BOOK. THE REVENUE HAS P LACED NO MATERIAL ON RECORD TO SHOW THAT THE PRESENT VALUE (NPV) OF A FU TURE SUM IS NOT THE SAME OR IN THE PROCESS OF CALCULATION OF PRESENT VA LUE OF A FUTURE SUM THERE IS ANY CONVERSION GAIN TO THE ASSESSEE. IT I S ALSO NOT THE CASE OF THE REVENUE THAT THERE IS NO SUCH CONVERSION PROVIDED U NDER THE BST ACT, OR THE TABLE PROVIDED FOR DETERMINATION OF NPV IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE. IN THE ABSENCE THEREOF IT IS NOT POSSIBLE FOR US TO ACCEPT THE CONTENTION OF THE LD. DR THAT THERE WAS A REMIS SION OR CESSATION OF THE TRADING LIABILITY. 78. NOW WE SHALL REFER TO THE CASES DECIDED BY THE HON'BLE SUPREME COURT AND HIGH COURTS AND RELIED ON BY THE LD. DR A ND ASSESSEE'S COUNSEL. 79. IN COMMISSIONER OF INCOME-TAX VS SAHNEY STEEL A ND PRESS WORKS LTD. (1985) 44 CTR (AP) 243: (1985) 152 ITR 39(AP)( HEADNOTE): THE ASSESSEE RECEIVED REFUNDS OF SALES TAX ON PURC HASE OF MACHINERY AND RAW MATERIALS AND ON THE SALE OF FINI SHED GOODS UNDER A G.O. ISSUED BY THE STATE GOVERNMENT OF ANDHRA PRADESH. THE G.O. HAD BEEN ISSUED WITH A VIEW TO SPEED UP THE INDUSTRIAL DEVELOPMENT OF THE STATE. TH E AMOUNT REFUNDED HAD TO BE USED SPECIFICALLY FOR DEV ELOPMENT OF THE INDUSTRY AND COULD NOT BE DISTRIBUTED AS PRO FITS. THE ITO ASSESSED THE RECEIPTS BUT THE TRIBUNAL HELD THA T THE 68 DEVELOPMENT SUBSIDY WAS IN THE NATURE OF A CAPITAL RECEIPT AND IT WAS NOT ALSO ASSESSABLE UNDER S. 41(1). ON A REFERENCE, IT WAS CONTENDED ON BEHALF OF THE ASSESS EE THAT THE AMOUNTS WERE NOT OF THE NATURE OF 'INCOME' AT A LL AND IN ANY CASE IT WAS A VOLUNTARY CONTRIBUTIONS: HELD, (I) THAT IT WAS NOT NECESSARY FOR A RECEIPT TO CON STITUTE INCOME THAT IT MUST NECESSARILY BE IN THE NATURE OF RETURN. IT MAY BE THAT THERE IS NO CONSIDERATION FOR THE BENEF ITS EXTENDED TO THE ASSESSEE IN TERMS OF THE G.O. IN TH E COMMON LAW SENSE. BUT IT CANNOT BE SAID THAT IT IS AN ACT OF GENEROSITY ON THE PART OF THE STATE. THE STATE IS INTERESTED IN ITS INDUSTRIAL DEVELOPMENT; IT WANTS TO ATTRACT INDUSTR IES TO ENHANCE THE EMPLOYMENT POTENTIAL, ECONOMIC PROSPERI TY AND THE INCOME OF THE STATE. IT IS TO ATTRACT NEW ENTREP RENEURS THAT THE GOVERNMENT HAD COME FORWARD WITH THE SAID INCENTIVES. THE PAYMENTS COULD NOT BE CONSIDERED TO BE VOLUNTARY CONTRIBUTIONS. THE ASSESSEE AND FOR THAT MATTER ANY OTHER PERSON SETTING UP AN INDUSTRY IN THE STAT E OF ANDHRA PRADESH WAS ENTITLED TO THE FACILITIES AND IN CENTIVES PROVIDED BY THE SAID G.O. AS A MATTER OF RIGHT, WHI CH, IF DENIED, HE COULD ENFORCE IN A COURT OF LAW. THE FAC T THAT THE GOVERNMENT RESERVED TO ITSELF THE POWER TO WITHDRAW THE G.O. OR TO AMEND IT, DID NOT MEAN THAT SO LONG AS T HE G.O. WAS IN OPERATION, THE PERSONS CONCERNED DID NOT HAV E A RIGHT TO ENFORCE THE SAME. THE SOURCE AS WELL AS THE PAYM ENTS WERE BOTH CERTAIN AND DEFINITE. THE PAYMENTS WERE INSEPARABLY CONNECTED WITH THE BUSINESS CARRIED ON BY THE ASSESSEE. THE BENEFITS WERE AVAILABLE ONLY FROM THE DATE THE NEW INDUSTRIAL UNDERTAKING COMMENCED PRODUCTION AND FOR A PERIOD OF FIVE YEARS THEREFROM. THE REFUND OR THE S UBSIDY, AS IT MAY BE CALLED, WAS DEPENDENT UPON THE INDUSTRY C ONTINUING IN PRODUCTION. THERE WAS NO ROOM OR BASIS FOR DISAS SOCIATING THE SUBSIDY FROM THE BUSINESS OF THE ASSESSEE, INAS MUCH AS THE SUBSIDY WAS GIVEN FOR DEVELOPMENT OF THE BUSINE SS AND NOT FOR ANY OTHER UNRELATED PURPOSES. THE PAYMENT W AS NOT A SUBSIDY FOR SETTING UP THE PLANT BUT A SUBSIDY GIVE N FOR THE EFFICIENT AND PROFITABLE RUNNING OF THE INDUSTRY AN D ITS GROWTH. THE RECEIPT WAS, THEREFORE, OF A REVENUE NA TURE. ALL THREE ITEMS COMPRISED IN THE PAYMENT CONSTITUTED IN COME OF THE ASSESSEE. (II) THAT THE REFUNDS OF SALES TAX ON PURCHASE OF RAW MATERIALS AND ON SALE OF FINISHED GOODS FELL WITHIN S. 41(1) AND WERE ASSESSABLE AS GAINS OF BUSINESS. 69 80. ON FURTHER APPEAL BEFORE THE HON'BLE SUPREME C OURT IN SAHNEY STEEL AND PRESS WORKS LTD. VS COMMISSIONER OF INCOM E-TAX (1997) 142 CTR (SC) 261: (1997) 228 ITR 253 (SC)(HEADNOTE P G-254) : HELD, DISMISSING THE APPEAL, THAT, UNDER THE NOTIFICATION IN QUESTION THE PAYMENTS WERE MADE TO ASSIST THE NEW INDUSTRIES AT THE COMMENCEMENT OF BUSINESS TO CARRY ON THEIR BUSINESS. THE PAYMENTS WERE NOTHING BUT SUPPLEMENTA RY TRADE RECEIPTS. IT WAS TRUE THAT THE ASSESSEE COULD NOT USE THIS MONEY FOR DISTRIBUTION AS DIVIDEND TO ITS SHAR EHOLDERS. BUT THE ASSESSEE WAS FREE TO USE THE MONEY IN ITS B USINESS ENTIRELY AS IT LIKED AND WAS NOT OBLIGED TO SPEND T HE MONEY FOR A PARTICULAR PURPOSE. THE SUBSIDIES HAD NOT BEE N GRANTED FOR PRODUCTION OF, OR BRINGING INTO EXISTENCE ANY N EW ASSET. THE SUBSIDIES WERE GRANTED YEAR AFTER YEAR, ONLY AF TER THE SETTING UP OF THE NEW INDUSTRY AND COMMENCEMENT OF PRODUCTION. SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON OF THE BUSINESS OF THE ASSESSEE. THE SUBSIDIES WERE OF REV ENUE NATURE AND WOULD HAVE TO BE TAXED ACCORDINGLY. IT HAS ALSO BEEN OBSERVED BY THEIR LORDSHIPS (AT PL ACITUM H PAGE-267 OF ITR ) : IN VIEW OF THE AFORESAID, IT IS NOT NECESSARY TO D ISCUSS THE POINT RELATING TO APPLICABILITY OF SEC.41(1) OF TH E INCOME TAX ACT, 1961 IN THIS CASE. 81. IN COMMISSIONER OF INCOME-TAX VS PONNI SUGARS A ND CHEMICALS LTD. (2008) 219 CTR (SC) 105: (2008) 306 ITR 392 (SC)(HE ADNOTE PG-393) : THE ASSESSEE WAS A CO-OPERATIVE SOCIETY RUNNING A SUGAR MILL. DURING THE RELEVANT YEAR IN QUESTION, ON ACCO UNT OF ECONOMIC FACTORS, IT WAS NOT ECONOMICALLY VIABLE TO RUN NEW SUGAR FACTORIES AND, DUE TO HIGH FINANCIAL COSTS, F INANCIAL INSTITUTIONS DID NOT COME FORWARD TO ADVANCE LOANS TO THE ENTREPRENEURS OF NEW SUGAR FACTORIES. THE TEMPO OF ESTABLISHING NEW SUGAR FACTORIES RECEIVED A SERIOUS SETBACK. A COMMITTEE APPOINTED BY THE GOVERNMENT RECOMMENDED THAT FIVE POSSIBLE INCENTIVES FOR MAKING A SUGAR PL ANT ECONOMICALLY VIABLE COULD BE PROVIDED FOR, VIZ., CA PITAL SUBSIDY, LARGER PERCENTAGE OF FREE SALE OF SUGAR, H IGHER LEVY SUGAR PRICE, ALLOWING REBATE ON EXCISE DUTY AND REM ISSION OF 70 PURCHASE TAX. FOLLOWING THAT REPORT, SCHEMES WERE FORMULATED GIVING THE FOLLOWING BENEFITS : (I) INCE NTIVE SUBSIDY AVAILABLE ONLY IN NEW UNITS AND TO SUBSTANT IALLY EXPANDED UNITS ; (II) MINIMUM INVESTMENT FOR NEW UN ITS AND EXPANSION OF EXISTING UNITS ; (III) INCREASE IN FRE E SUGAR SALE QUOTA. THE BENEFIT OF THE SCHEMES HAD TO BE UTILISE D ONLY FOR REPAYMENT OF LOANS. THE DEPARTMENT AND THE HIGH COU RT HAD HELD THAT THE RECEIPTS FROM THE GOVERNMENT UNDER TH E INCENTIVE SCHEMES WERE IN THE NATURE OF REVENUE. ON APPEAL TO THE SUPREME COURT : HELD, ACCORDINGLY, REVERSING THE DECISION OF THE HIGH CO URT, ON THIS POINT, THAT THE MAIN ELIGIBILITY CONDITION IN THE SCHEMES WAS THAT THE INCENTIVE HAD TO BE UTILIZED F OR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SET UP NEW UNITS OR FOR SUBSTANTIAL EXPANSION OF AN EXISTING U NIT. THE SUBSIDY RECEIVED BY THE ASSESSEE WAS NOT IN THE COU RSE OF A TRADE BUT WAS OF A CAPITAL NATURE. 82. IN DY. COMMISSIONER OF INCOME TAX VS. RELIANCE INDUSTRIES LTD. (2004) 82 TTJ (MUM)(SB) 765 :(2004) 88 ITD 273 (MUM )(SB) IT HAS BEEN HELD THAT THE SALES TAX INCENTIVE GIVEN BY GOVERNME NT OF MAHARASHTRA TO ASSESSEE FOR SETTING UP INDUSTRIES IN NOTIFIED AREA S IN THE FORM OF EXEMPTION FROM LIABILITY TO PAYMENT OF SALES TAX FO R A PERIOD OF 5 YEARS WITH A VIEW TO BEING ABOUT NECESSARY INFRASTRUCTURE IN BACKWARD AREA, BASED ON THE AMOUNT OF INVESTMENT IN FIXED ASSETS, IS CAPITAL RECEIPTS NOT CHARGEABLE TO TAX. 83. CIT VS. RELIANCE INDUSTRIES LIMITED ( BOMBAY H IGH COURT) IN CENTRAL EXCISE APPEAL NO.1299 OF 2008 DATED 15.4.2009 ON TH E QUESTION OF LAW (D) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE HONBLE TRIBUNAL WAS RIGHT IN HOLDING THAT SALE TAX INCENTIVE IS A CAPITAL RECEIPT?, THEIR LORDSHIPS AFTER CONSIDERI NG THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CIT VS. RELIANCE I NDUSTRIES LTD. (2004) 88 ITD 273 (MUM.) (SB) AND THE TEST AS LAID DOWN BY TH E HON'BLE SUPREME COURT IN CIT VS. PONNI SUGARS AND CHEMICALS LTD. (2 008) 306 ITR 392 71 (SC) HAVE HELD THAT THE OBJECT OF THE SUBSIDY WAS TO SET UP A NEW UNIT IN A BACKWARD AREA TO GENERATE EMPLOYMENT, THEREFORE, THE SUBSIDY IS CLEARLY ON CAPITAL ACCOUNT. 84. IN ALL THE ABOVE CASES RELIED ON BY BOTH THE PA RTIES THE ISSUE WAS WHETHER THE SUBSIDY RECEIVED BY THE ASSESSEE IS CAP ITAL RECEIPT OR REVENUE IN NATURE. WHEREAS IN THE CASE BEFORE US THE ISSU E IS ENTIRELY DIFFERENT I.E. THE DIFFERENCE OF DEFFERED SALES TAX LIABILITY IS CHARGEABLE TO TAX AS BUSINESS INCOME U/S.41(1) BEING REMISSION OR CESSAT ION OF TRADING LIABILITY OR THE SAME IS EXEMPT AS CAPITAL RECEIPT. THEREFOR E, THE ABOVE DECISIONS RELIED ON BY THE LD. DR ARE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 85. IN POLYFLEX (INDIA) (P) LTD. VS. CIT (2002) 257 ITR 343 (SC) THE FACTS IN BRIEF ARE THAT (HEADNOTE): IN 1986 THE ASSESSEE HAD PAID EXCISE DUTY ON CERTA IN GOODS. PURSUANT TO THE DECISION OF THE CEGAT A SUM OF RS. 9 ,64,206 WAS REFUNDED IN SEPTEMBER, 1988. THEREAFTER THE EXCI SE DEPARTMENT FILED AN APPEAL TO THE HIGH COURT AND, O N THE APPEAL BEING DISMISSED, A PETITION FOR SPECIAL LEAV E TO APPEAL TO THE SUPREME COURT ; BUT THE FATE OF THAT PETITIO N WAS NOT KNOWN. FOR THE ASSESSMENT YEAR 1989-90, THE ASSESSI NG OFFICER BROUGHT TO TAX THE AMOUNT BY INVOKING SECTI ON 41(1) OF THE INCOME-TAX ACT, 1961, BUT THE APPELLATE AUTHO RITY AND THE APPELLATE TRIBUNAL HELD THAT THERE WAS NO REMISS ION OR CESSATION OF TRADING LIABILITY SO LONG AS THE PETIT ION FOR SPECIAL LEAVE TO APPEAL WAS PENDING IN THE SUPREME COURT. T HE HIGH COURT, ON A REFERENCE, HELD THAT THE AMOUNT WAS ASS ESSABLE TO TAX BUT OBSERVED, ON THE BASIS OF COUNSELS ARGU MENT, THAT THE TRIBUNAL OUGHT TO CONSIDER THE QUESTION WHETHER THE EXCISE DUTY WAS ACTUALLY REFUNDED TO THE ASSESSEE O R NOT AND PASS PROPER ORDERS IN THE LIGHT OF ITS FINDING. THE ASSESSEE PREFERRED AN APPEAL TO THE SUPREME COURT : IT HAS BEEN HELD , AFFIRMING 72 HELD, AFFIRMING THE DECISION OF THE HIGH COURT, THAT WHE RE A STATUTORY LEVY IS DISCHARGED BY THE ASSESSEE AND SUBSEQUENTLY THE AMOUNT PAID IS REFUNDED, IT WILL B E A CASE WHERE THE ASSESSEE HAS OBTAINED ANY AMOUNT IN RESP ECT OF SUCH EXPENDITURE WITHIN THE MEANING OF SECTION 41( 1) OF THE INCOME-TAX ACT, 1961 ; IT WILL NOT BE A CASE OF BEN EFIT BY WAY OF REMISSION OR CESSATION OF A TRADING LIABILI TY. WHERE EXPENDITURE IS ACTUALLY INCURRED BY REASON OF PAYME NT OF DUTY ON GOODS AND THE DEDUCTION OR ALLOWANCE IS GIVEN IN THE ASSESSMENT OF AN EARLIER PERIOD, THE ASSESSEE IS LI ABLE TO DISGORGE THAT BENEFIT AS AND WHEN HE OBTAINS REFUND OF THE AMOUNT SO PAID. WHETHER THERE IS A POSSIBILITY OF T HE REFUND BEING SET AT NAUGHT ON A FUTURE DATE IS NOT A RELEV ANT CONSIDERATION. ONCE THE ASSESSEE GETS BACK THE AMOU NT WHICH WAS CLAIMED AND ALLOWED AS BUSINESS EXPENDITU RE DURING AN EARLIER YEAR, THE DEEMING PROVISION IN SE CTION 41(1) COMES INTO PLAY AND IT IS NOT NECESSARY THAT THE RE VENUE SHOULD AWAIT THE VERDICT OF A HIGHER COURT OR TRIBU NAL. IF THE HIGHER COURT OR TRIBUNAL UPHOLDS THE LEVY AT A LATE R DATE THE ASSESSEE IS NOT WITHOUT A REMEDY TO GET BACK THE RE LIEF. THE CORRECT WAY OF UNDERSTANDING SECTION 41(1) IS T O READ THE LATTER CLAUSE, SOME BENEFIT IN RESPECT OF SUCH TRA DING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF AS A DIST INCT AND SELF-CONTAINED PROVISION. 86. IN WOLKEM (P.) LTD. VS COMMISSIONER OF INCOME-T AX (2003) 259 ITR 430 (RAJ)(HEADNOTE PG-431): DURING THE ACCOUNTING YEAR RELEVANT FOR THE ASSESS MENT YEAR 1986-87, THE ASSESSEE-COMPANY RECEIVED REFUND OF EX CISE DUTY AMOUNTING TO RS. 1,45,752. THE ASSESSEE DID NO T CREDIT THE SAID AMOUNT IN THE PROFIT AND LOSS ACCOUNT ON T HE GROUND THAT THE SAME WAS NOT TAXABLE. IT WAS CONTENDED THA T THE AMOUNT COLLECTED BY THE ASSESSEE AGAINST THE EXCISE DUTY WAS CREDITED TO THE SUSPENSE ACCOUNT AS SUCH IT WAS NOT PERTAINING TO THE ASSESSEE AND IT WAS PAYABLE TO TH E CENTRAL EXCISE DEPARTMENT AND AS SUCH IT DID NOT CONSTITUTE AN INCOME OF THE ASSESSEE UNDER ANY PROVISIONS OF THE INCOME- TAX ACT. IT WAS FURTHER SUBMITTED THAT PART OF THE AMOUNT WAS DUE TO DIFFERENT CUSTOMERS AND AS SUCH IT BEING A L IABILITY THE ADDITION WAS UNJUST. THE ASSESSING OFFICER REJECTED THE CONTENTION AND THIS WAS UPHELD BY THE TRIBUNAL. ON A 73 REFERENCE A PRELIMINARY OBJECTION WAS RAISED ON THE GROUND THAT A SIMILAR QUESTION HAD BEEN DECIDED BY THE HIG H COURT : HELD, (I) THAT THE VIEW TAKEN BY THE DIVISION BENCH OF T HE COURT IN THE CASE OF CIT V. WOLKEM PVT. LTD. [1997] 228 ITR 129 WAS PER INCURIAM AS IT WAS CONTRARY TO THE THRE E DECISIONS OF THE SUPREME COURT AND AN EARLIER DECIS ION OF THE COURT. (II) THAT THE AMOUNT WHICH WAS COLLECTED BY THE ASS ESSEE AGAINST THE EXCISE DUTY OR THE SALES TAX WAS ON ACC OUNT OF BUSINESS AND AS SUCH WAS A TRADING RECEIPT. THUS, I T WOULD FALL IN THE INCOME OF THE ASSESSEE. A SEPARATE ACCOU NT WOULD NOT CHANGE THE CHARACTER OF THE INITIAL COLLECTION. THE AMOUNT AFTER COLLECTION HAD NEITHER BEEN REFUNDED TO THE C USTOMERS NOR PAID TO THE GOVERNMENT. THE ADDITION OF RS. 1,4 5,752 WAS JUSTIFIED. 87. IN COMMISSIONER OF INCOME-TAX VS ABHISHEK INDUS TRIES LTD. (2006) 286 ITR 1 (P&H)(HEADNOTE PG-4): HELD (II) THAT THE BENEFIT UNDER RULE 4A OF THE PUN JAB GENERAL SALES TAX (DEFERMENT AND EXEMPTION) RULES, 1 991, ACCRUED FOR A PERIOD OF 10 YEARS FROM THE DATE OF P RODUCTION AND THE QUANTUM WAS FIXED AT 300 PER CENT. OF THE F IXED CAPITAL INVESTMENT FOR CATEGORY A INDUSTRIES AND 150 PER CENT. OF THE FIXED CAPITAL INVESTMENT FOR CATEGORY B INDUSTRIES TO BE AVAILED OF WITHIN 7 YEARS. BESIDES THIS, THER E WAS NO OTHER DOCUMENT OR MATERIAL TO SUBSTANTIATE THE ASSE SSEES CONTENTION THAT THE SALES TAX SUBSIDY OF THE KIND U NDER CONSIDERATION SHOULD BE TREATED AS CAPITAL RECEIPT AND NOT A REVENUE RECEIPT OR TO SHOW THAT THE KIND OF SUBSIDY UNDER CONSIDERATION WAS GIVEN TO THE ASSESSEE FOR CREATIO N OF CAPITAL ASSETS AS AN AID TO SETTING UP OF THE UNIT. RATHER, IT WAS EVIDENT THAT THE SUBSIDY WAS AN OPERATIONAL SUB SIDY PROVIDED BY THE STATE AFTER THE INDUSTRY HAD BEEN SE T UP AND COMMENCED COMMERCIAL PRODUCTION. IN THE ABSENCE OF MATERIAL TO SHOW THAT THE SUBSIDY WAS TO ENABLE IT TO CARRY OUT CAPITAL INVESTMENT IT COULD NOT BE PRESUMED THA T SUCH A SUBSIDY WAS A CAPITAL SUBSIDY. 88. IN MYSORE THERMO ELECTRIC (P.) LTD. VS COMMISSI ONER OF INCOME-TAX (1996) 221 ITR 504(KAR) (HEADNOTE PG-505): 74 IN THE ACCOUNTING YEARS RELEVANT TO THE ASSESSMENT YEARS 1976-77 TO 1978-79, THE ASSESSEE-COMPANY WAS ENGAGE D IN THE MANUFACTURE OF BATTERY SEPARATORS. THE EXCISE A UTHORITIES HAD LEVIED CERTAIN DUES ON THE ASSESSEES UNDER THE HEAD OF CENTRAL EXCISE, HOLDING THAT THEY WERE LIABLE TO PA YMENT OF THIS LEVY. ACCORDING TO THE ASSESSEES, THEY HAD PAI D THESE AMOUNTS UNDER DISPUTE AND SINCE IT WAS THE CONTENTI ON OF THE AUTHORITIES THAT CENTRAL EXCISE WAS PAYABLE ON THE GOODS, THEY HAD MAINTAINED A SEPARATE ACCOUNT FOR PURPOSES OF TENDERING THESE PAYMENTS WHICH IN TURN THEY RECOVER ED FROM THE DEALERS TO WHOM THEY SUPPLIED GOODS. ACCORDING T O THE ACCOUNTING PROCEDURE MAINTAINED BY THEM, THEY DESIR ED THAT THESE AMOUNTS SHOULD NOT BE MIXED WITH THEIR RECEIP TS OR COSTS. THIS SEPARATE ACCOUNT THEREFORE DID NOT FORM PART OF THE BALANCE-SHEET OR PROFIT AND LOSS ACCOUNT AND WA S MAINTAINED AS A SEPARATE AND INDIVIDUAL HEAD. THE A SSESSEES HAVING CONTESTED THEIR LIABILITY AS FAR AS THE LEVY OF CENTRAL EXCISE DUTY WAS CONCERNED IN THE COURT, AND HAVING BEEN SUCCESSFUL IN THEIR CHALLENGE, THE AUTHORITIES WERE DIRECTED TO REFUND TO THEM THE AGGREGATE AMOUNT PAID UNDER THIS HEAD WHICH THE AUTHORITIES DID, BY WAY OF ONE LUMP SUM REPAYMENT TOTALLING RS. 9,11,618 AND THE REFUND IN QUESTION WAS MADE DURING THE ASSESSMENT YEAR 1983-84. THE ASSESSEES CONTENDED THAT THIS AMOUNT RELATED TO A S EPARATE ACCOUNT ALTOGETHER; THAT THEY HAD AT NO POINT OF TI ME EARLIER CLAIMED ANY DEDUCTIONS OR ALLOWANCES IN RESPECT OF THIS AMOUNT, AND HENCE, THE AMOUNT WAS NOT ASSESSABLE IN THEIR HANDS. THE ASSESSING AUTHORITY ACCEPTED THIS POSITI ON WHEREAS, THE COMMISSIONER OF INCOME-TAX TOOK THE VI EW THAT THE PROVISIONS OF SECTION 41(1) OF THE ACT WOULD CLE ARLY APPLY AND THAT, CONSEQUENTLY, THE AMOUNT WAS LIABLE TO BE INCLUDED IN THEIR TAXABLE INCOME. THIS WAS CONFIRMED BY THE TRIBUNAL. ON A REFERENCE: HELD, THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT TH E PROVISIONS OF SECTION 41(1) COULD BE INVOKED TO TAX THE REFUNDS RECEIVED DURING THE ACCOUNTING YEAR RELEVAN T TO THE ASSESSMENT YEAR 1983-84 EVEN WHEN THE PART OF EXCIS E DUTY WAS NOT CLAIMED AS EXPENDITURE IN THE PROFIT AND LO SS ACCOUNTS OF EARLIER YEARS AND THE APPLICANT HAD KEP T A SEPARATE ACCOUNT IN RESPECT OF COLLECTION AND PAYME NT OF EXCISE DUTY. 89. IN EXPRESS NEWSPAPERS PVT. LTD. VS COMMISSIONER OF INCOME-TAX (1997) 227 ITR 325 (MAD) (HEADNOTE PG-326): IN THE COURSE OF THE ASSESSEE'S BUSINESS AS A DEAL ER IN SHARES, THE ASSESSEE BORROWED MONEYS FROM VARIOUS SHAREBROKERS. THE INTEREST PROVIDED FOR IN THE ACCO UNTS IN RESPECT OF SUCH BORROWALS WAS CLAIMED AS A DEDUCTIO N AND 75 WAS ALLOWED AS SUCH IN COMPUTING THE INCOME OF THE ASSESSEE IN THE EARLIER YEARS. SUBSEQUENTLY, AT THE TIME OF S ETTLEMENT OF ACCOUNTS WITH THE SHAREBROKERS, THE AMOUNT DUE T O THEM ON ACCOUNT OF INTEREST WAS SETTLED AT A FIGURE LOWE R THAN THE FIGURE PROVIDED IN THE ACCOUNTS. AS A RESULT, THE AM OUNTS THUS GIVEN UP WERE WRITTEN BACK IN THE ACCOUNTS AS INCOME. THESE SUMS WERE BROUGHT TO TAX UNDER SECTION 41(1) OF THE INCOME-TAX ACT, 1961. THIS WAS CONFIRMED BY THE TRIB UNAL. ON A REFERENCE: HELD, THAT THERE WERE TWO BASIC REQUIREMENTS FOR TH E APPLICATION OF SECTION 41(1) OF THE ACT. ONE WAS TH AT THERE MUST BE AN ALLOWANCE OR DEDUCTION IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS OR EXPENDITURE OR TRADING L IABILITY INCURRED BY THE ASSESSEE. THE OTHER WAS THAT SUBSEQ UENTLY DURING THE PREVIOUS YEAR THE ASSESSEE MUST HAVE OBT AINED EITHER IN CASH OR ANY OTHER MANNER WHATSOEVER AN AM OUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CE SSATION, SO THAT THE REMISSION OR CESSATION SO OBTAINED ON THE VALUE OF THE BENEFIT ACCRUING COULD BE DEEMED THE INCOME OF THE ASSESSEE. THE BENEFIT COULD BE BY WAY OF A BOOK ADJ USTMENT ALSO. ADMITTEDLY THOUGH THE ASSESSEE OBTAINED BENEFI T IN THE EARLIER YEARS ON ACCOUNT OF THE AMOUNT DUE TO THE SHAREBROKERS IN A LARGER AMOUNT, THIS WAS REDUCED T O A CONSIDERABLE EXTENT ON ACCOUNT OF SUBSEQUENT SETTLE MENT AND CONSEQUENTLY THE ACCOUNTS WERE ALSO ADJUSTED IN THI S REGARD. IT WAS NOT ALWAYS NECESSARY THAT THE ASSESSEE SHOUL D GET BENEFIT BY WAY OF CASH FOR APPLICATION OF THE PROVI SIONS OF SECTION 41(1) OF THE ACT. SINCE THIS WAS A TRADING LIABILITY, WHICH WAS WRITTEN BACK IN THE YEAR UNDER CONSIDERAT ION, APPLICATION OF THE PROVISIONS OF SECTION 41(1) WAS PERFECTLY JUSTIFIED. 90. IN SOLID CONTAINERS LTD. VS. DCIT AND ANOTHER ( 2009) 308 ITR 417 (BOM) : THE ASSESSEE HAD TAKEN A LOAN OF RS. 6,86,071 FOR BUSINESS PURPOSES WHICH WAS WRITTEN BACK AND DIRECTLY CREDIT ED TO THE RESERVES ACCOUNT, AS A RESULT OF CONSENT TERMS ARRI VED AT IN A SUIT. THE ASSESSEE CLAIMED THIS AMOUNT AS CAPITAL R ECEIPT, EVEN THOUGH IT HAD OFFERED THE INTEREST ON THE SAID LOAN AS ITS INCOME BY CREDITING THE SAME TO ITS PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER ADDED THE AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE AS ITS INCOME AND THIS WAS UPHELD B Y THE TRIBUNAL. ON APPEAL TO THE HIGH COURT : HELD, DISMISSING THE APPEAL THAT IT WAS A LOAN TAKEN FOR TRADING ACTIVITY AND ULTIMATELY, UPON WAIVER THE AM OUNT WAS 76 RETAINED IN THE BUSINESS BY THE ASSESSEE. THE AMOUN T HAD BECOME THE ASSESSEES INCOME AND WAS ASSESSABLE. 91. IN CIT VS. T.V. SUNDARAM IYENGAR & SONS LTD. (1 996) 222 ITR 344 (SC) : THE INCOME-TAX OFFICER FOUND THAT FOR THE ASSESSME NT YEARS 1982-83 AND 1983-84, THE ASSESSEE HAD TRANSFERRED A N AMOUNT OF RS. 17,381 TO THE PROFIT AND LOSS ACCOUNT OF THE COMPANY DURING THE ACCOUNTING PERIOD ENDED ON MARCH 31, 1982 (ASSESSMENT YEAR 1982-83), AND AN AMOUNT OF RS . 38,975 DURING THE ACCOUNTING PERIOD ENDED ON MARCH 31, 1983 (ASSESSMENT YEAR 1983-84). BUT THESE AMOUNTS W ERE NOT INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. T HE SUMS WERE STATED TO BE CREDIT BALANCES STANDING IN FAVOU R OF THE CUSTOMERS OF THE COMPANY. SINCE THESE BALANCES WERE NOT CLAIMED BY THE CUSTOMERS, THE AMOUNTS WERE TRANSFER RED BY THE ASSESSEE TO THE PROFIT AND LOSS ACCOUNT. THE IN COME-TAX OFFICER WAS OF THE VIEW THAT BECAUSE THE SURPLUS HA D ARISEN AS A RESULT OF TRADE TRANSACTIONS, THE AMOUNTS HAD THE CHARACTER OF INCOME AND HAD TO BE ADDED AS INCOME O F THE ASSESSEE FOR THE PURPOSE OF INCOME-TAX ASSESSMENT. THE ADDITIONS WERE DELETED BY THE COMMISSIONER OF INCOM E-TAX (APPEALS), AND THIS WAS UPHELD BY THE TRIBUNAL. HELD, THAT IF A COMMONSENSE VIEW OF THE MATTER WERE TAKE N, THE ASSESSEE, BECAUSE OF THE TRADING OPERATION, HAD BECOME RICHER BY THE AMOUNT WHICH IT TRANSFERRED TO ITS PR OFIT AND LOSS ACCOUNT. THE MONEYS HAD ARISEN OUT OF ORDINARY TRADING TRANSACTIONS. ALTHOUGH THE AMOUNTS RECEIVED ORIGINAL LY WERE NOT OF INCOME NATURE, THE AMOUNTS REMAINED WITH THE ASSESSEE FOR A LONG PERIOD UNCLAIMED BY THE TRADE P ARTIES. BY LAPSE OF TIME, THE CLAIM OF THE DEPOSIT BECAME TIME -BARRED AND THE AMOUNT ATTAINED A TOTALLY DIFFERENT QUALITY . IT BECAME A DEFINITE TRADE SURPLUS. THE ASSESSEE ITSELF HAD T REATED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THE AMOUNTS WERE ASSESSABLE IN TH E HANDS OF THE ASSESSEE. 92. IN ACIT VS. COSMO FILMS LTD. (2009) 28 SOT 353 (DEL.): 77 8. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WA S NOTICED BY THE ASSESSING OFFICER THAT THE SALES TAX DEFERRAL LIABILITIES OF RS.532.82 LAKHS WAS ASSIGNED BY THE ASSESSEE TO ONE PARTNERSHIP FIRM, M/S. GAYATRI & ANNAPURNA (IN SHORT G&A) FOR A SUM OF RS.131.41 LAKHS, AND THE BALANC E OF RS.401.41 LAKHS WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT BY THE ASSESSEE COMPANY. IN THE ORIGINAL RETURN OF INCOME FILED BY THE ASSESSEE COMPANY, THE AMOUNT SO CREDIT ED TO THE PROFIT AND LOSS ACCOUNT WAS OFFERED AS INCOME BEING A PART OF THE ASSESSEE'S RETURNED INCOME. BUT LATER ON, THE ASSESSEE REVISED ITS RETURN OF INCOME BY EXCLUDING THE SAID DIFFERENCE OF RS.401.41 LAKHS ON THE GROUND THAT IT WAS WRONGL Y INCLUDED. HOWEVER, AFTER CONSIDERING THE COMPOSITI ON OF PARTNERSHIP FIRM (GAYATRI & ANNAPURNA) AND ITS RELA TION TO ASSESSEE COMPANY AND OTHER COMPANY OF THE SAME GROU P, AND AFTER DELIBERATING UPON THE AGREEMENT OF ASSIGN ING THE DEFERRED SALES TAX LIABILITY BY THE ASSESSEE TO THE SAID FIRM, THE ASSESSING OFFICER HAS TAKEN A VIEW THAT DISCOUNT ING OF LIABILITY WAS CLEARLY ON REVENUE ACCOUNT BEING COVE RED BY SECTION 28 AND ALSO BY SECTION 41(1) OF THE ACT, AND THE ASSESSING OFFICER ,THEREFORE, INCLUDED THE SAID AMOU NT IN THE TOTAL INCOME DETERMINED IN THE ASSESSMENT . 10. THE CIT(A) DELETED THE ADDITION AND DIRECTED TH E ASSESSING OFFICER TO AMEND THE ASSESSMENT TO INCORP ORATE THE ADDITIONS TO THE EXTENT OF THE AMOUNT CORRESPON DING TO THE PAYMENT MADE BY M/S. GAYATRI & ANNAPURNA IN THE RELEVANT YEAR, OVER AND ABOVE THE DISCOUNTED VALUE. THE TRIBUNAL HAS HELD VIDE PARA- 31 OF 28 SOT 353 AS UNDER :- 31. TO SUM UP WE, THEREFORE, HOLD THAT THE ASSESSIN G OFFICER WAS JUSTIFIED IN LAW AS WELL AS ON FACTS IN TREATING THE SALES TAX DEFERRED LIABILITY AMOUNTING TO RS.401.41 LAKHS AS PROFIT AND GAIN OF BUSINESS CHARGEABLE TO INCOME-TA X AS THE INCOME OF THE YEAR UNDER CONSIDERATION IN WHICH S UCH LIABILITY HAS BEEN WRITTEN OFF IN THE ACCOUNTS AND CREDITED TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE INASMU CH AS THE UNILATERAL ACT OF THE ASSESSEE IN WRITING OFF THE SAID LIABILITY IN ITS ACCOUNTS BY CREDITING THE SAME TO THE PROFIT AND LOSS ACCOUNT IS AMOUNTED TO BE A REMISSION OR CESSATION OF THE SAID LIABILITY WITHIN THE MEANING OF SECTION 41(1) OF THE ACT READ WITH EXPLANATION 1 THERETO. 78 93. IN CARTINI INDIA LIMITED VS. INCOME TAX OFFICE R IN ITA NO.1051/MUM/2008 FOR THE ASSESSMENT YEAR 2004-05 OR DER DATED 19.5.2009 THE RELEVANT FACTS ARE AS UNDER: THE ASSESSEE COMPANY, DURING THE PREVIOUS YEAR 199 6-97, GOT REGISTERED UNDER THE 1988 PACKAGE SCHEME OF INC ENTIVES AS NOTIFIED BY THE STATE GOVERNMENT OF MAHARASHTRA. UNDER THE SCHEME, AN ELIGIBLE UNIT IS ALLOWED TO DEFER TH E SALES TAX COLLECTIONS BY CONVERTING THE SAID SUM INTO AN UNSE CURED LOAN REPAYABLE AFTER THE PERIOD OF TEN YEARS FROM THE DA TE OF CONVERSION. IT IS PERTINENT TO MENTION THAT THE QU ALIFYING AMOUNT OF THE LOAN IS BASED ON THE FIXED CAPITAL IN VESTMENT IN THE ELIGIBLE UNDERTAKING. THE ASSESSEE COMPANY HAD APPLIED FOR THE BENEFIT AND WAS HELD TO BE ENTITLED FOR THE PERIOD FROM 1 ST OF APRIL 1996 TO 30 TH OF SEPTEMBER 1997. SINCE THE AGGREGATE FIXED CAPITAL INVESTMENT OF THE ASSESSEE AS PER THE CERTIFICATE WAS RS.12,625 THOUSAND, AS P ER THE SCHEME, THE ASSESSEE WAS ENTITLED TO DEFER THE SALE TAX LIABILITY BY CONVERTING IT INTO AN UNSECURED LOAN U P TO AN AMOUNT NOT EXCEEDING 15% OF THE CAPITAL INVESTED, W HICH WORKED OUT TO RS.18,93,750/-. DURING THE YEAR UNDE R APPEAL, THE GOVERNMENT OF MAHARASHTRA INTRODUCED TH E PREPAYMENT OF SALES TAX DEFERRAL SCHEME 2003, WHE REUNDER THE ELIGIBLE UNDERTAKING WAS PERMITTED TO PREPAY TH E LOAN AMOUNT AT THE RATE OF NET PRESENT VALUE, REPAYABLE AT A FUTURE DATE. TAKING THE BENEFIT OF THE SCHEME, THE ASSESSEE COMPANY PREPAID THE LIABILITY AND AVAILED REMISSION OF RS.5,48,517/-. THE ASSESSING OFFICER CONSIDERED THE REMISSION OF THE LIABILITY OF RS.5,48,517/- ASSESSA BLE UNDER SECTION 41(1) OF THE INCOME TAX ACT, 1961. THE CIT( A) HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER. IT HAS BEEN HELD BY THE TRIBUNAL (PARA-11):- ....WE ARE THEREFORE OF THE CONSIDERED VIEW THAT I F THE ASSESSEE HAS BEEN ALLOWED A DEDUCTION IN RESPECT OF THE SALES TAX LIABILITY, IN THE YEAR THE SAME WAS ALLOWED TO BE CONVERTED INTO A LOAN, THEN THE AMOUNT REMITTED OUT OF THAT WOULD BE LIABLE TO TAX IN THE YEAR OF REMISSION. T HOUGH IT HAS BEEN STATED BY THE CIT(A) THAT THE ASSESSEE HAS BEEN ALLOWED A DEDUCTION IN THE YEAR OF LIABILITY / COLL ECTION, YET IN THE INTEREST OF JUSTICE, WE WOULD LIKE TO RESTORE T HIS ISSUE TO THE FILE OF THE ASSESSING OFFICER, FOR THE LIMITED P URPOSE OF VERIFICATION IN SO FAR AS IN OUR VIEW THE ASSESSEE MIGHT HAVE CLAIMED THE BENEFIT OF EXEMPTION OR DEDUCTION ON AC COUNT OF THE ESTABLISHMENT OF INDUSTRIAL UNIT IN THE YEAR OF LIABILITY. THEREFORE, THE CONDITION OF GRANT OF DEDUCTION TO T HE ASSESSEE IN RESPECT OF SUM OF RS.5,48,517/- IN EARLIER YEAR DESERVES TO BE VERIFIED AND ISSUE TO BE DECIDED ACCORDINGLY. I N CASE IT IS 79 FOUND THAT NO DEDUCTION WAS ALLOWED TO THE ASSESSEE UNDER SECTION 43B OF RS.5,48,517/- IN EARLIER YEAR(S), TH E ADDITION SHALL STAND DELETED. 94. WHEREAS IN THE CASE BEFORE US THE ENTIRE LOAN AMOUNT WHICH WAS PAYABLE AFTER 12 YEARS IN SIX EQUAL INSTALMENTS WAS REPAID AS PER PRESENT NPV AS PRESCRIBED BY THE STATE GOVT. AND NO REFUND WAS RECEIVED BY THE ASSESSEE, THEREFORE, THE ASSESSEE DID NOT GET ANY B ENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSA TION THEREOF, AND, THEREFORE, THE DECISIONS RELIED ON BY THE LD DR ARE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 95. IN THE FOLLOWING CASES IT HAS BEEN HELD THAT SE C.41(1) IS NOT APPLICABLE. 96. IN MAHINDRA AND MAHINDRA LTD. VS.COMMISSIONER O F INCOME-TAX (2003) 261 ITR 501(BOM.) IT HAS BEEN OBSERVED AND H ELD (HEADNOTE PG- 502) : THE ASSESSEE MANUFACTURED JEEPS. THE ASSESSEE FIL ED ITS RETURN FOR THE ASSESSMENT YEAR 1976-77. IN PART III OF THE RETURN, THE ASSESSEE SHOWED AN AMOUNT OF RS. 57,74, 064 AS CESSATION OF ITS LIABILITY TOWARDS THE AMERICAN COMP ANY. THE INCOME-TAX OFFICER CAME TO THE CONCLUSION THAT WITH THE WAIVER OF THE LOAN THE CREDITS REPRESENTED INCOME A ND NOT A LIABILITY. ACCORDINGLY, THE ASSESSING OFFICER HELD TH AT THE SUM OF RS. 57,74,064 WAS TAXABLE UNDER SECTION 28 OF TH E INCOME-TAX ACT, 1961. THE COMMISSIONER (APPEALS) HEL D THAT THE SUM OF RS. 57,74,064 WAS TAXABLE AS INCOME UNDE R SECTION 28(IV) OF THE ACT AS SUCH BENEFIT WAS OBTAIN ED IN THE COURSE OF BUSINESS AND THE MONETARY VALUE OF THAT B ENEFIT WAS INCOME. ALTERNATIVELY, THE COMMISSIONER (APPEALS ) TOOK THE VIEW THAT THE WAIVER OF THE LOAN AMOUNT OF RS. 57,74,064 AMOUNTED TO REMISSION OF TRADING LIABILITY AND, CON SEQUENTLY, THE SAID AMOUNT WAS TAXABLE UNDER SECTION 41(1). AC CORDING TO THE TRIBUNAL, SECTION 28(IV) WAS NOT APPLICABLE BECAUSE BENEFIT OF WAIVER WAS NOT RECEIVED BY THE ASSESSEE IN KIND. THE TRIBUNAL FURTHER TOOK THE VIEW THAT EVEN SECTIO N 41(1) OF 80 THE ACT WAS NOT APPLICABLE BECAUSE THERE WAS NO CESS ATION OF TRADING LIABILITY. ON A REFERENCE : HELD, (I) THAT THERE WERE TWO IMPORTANT FACTS WHICH HAD BEEN OVERLOOKED BY THE ASSESSING OFFICER. FIRSTLY, THE AS SESSEE CONTINUED TO PAY INTEREST AT 6 PER CENT. FOR A PERI OD OF TEN YEARS ON THE LOAN AMOUNT. THE AGREEMENT FOR PURCHAS E OF TOOLINGS WAS ENTERED INTO MUCH PRIOR TO THE APPROVA L OF THE LOAN ARRANGEMENT GIVEN BY THE RESERVE BANK OF INDIA . THEREFORE, THE LOAN AGREEMENT, IN ITS ENTIRETY, WAS NOT OBLITERATED BY SUCH WAIVER. SECONDLY, THE PURCHASE CONSIDERATION RELATED TO CAPITAL ASSETS. THE TOOLIN GS WERE IN THE NATURE OF DIES. THE ASSESSEE WAS A MANUFACTURER OF HEAVY VEHICLES AND JEEPS. IT REQUIRED THESE DIES FO R EXPANSION. THEREFORE, THE IMPORT WAS THAT OF PLANT AND MACHINERY. THE CONSIDERATION PAID WAS FOR SUCH IMPO RT. IN THE CIRCUMSTANCES, SECTION 28(IV) WAS NOT ATTRACTED . LASTLY, THE PRINCIPAL AMOUNT OF LOAN HAD BEEN FORGONE AS A PART OF TAKEOVER ARRANGEMENT TO WHICH THE ASSESSEE WAS NOT A PARTY. THE WAIVER OF THE PRINCIPAL AMOUNT WAS UNEXP ECTED. IN THE CIRCUMSTANCES, SUCH WAIVER WOULD NOT CONSTITUTE BUSINESS INCOME. (II) THAT IN ORDER TO APPLY SECTION 41(1), AN ASSES SEE SHOULD HAVE OBTAINED A DEDUCTION IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY I NCURRED BY THE ASSESSEE. THE ASSESSEE HAD NOT OBTAINED SUCH AL LOWANCE OR DEDUCTION IN RESPECT OF EXPENDITURE OR TRADING L IABILITY. THE ASSESSEE HAD PAID INTEREST AT 6 PER CENT. OVER A PE RIOD OF TEN YEARS ON RS. 57,74,064. IN RESPECT OF THAT INTEREST , THE ASSESSEE NEVER GOT DEDUCTION UNDER SECTION 36(1)(II I) OR SECTION 37. IN THE CIRCUMSTANCES, SECTION 41(1) OF THE ACT WAS NOT APPLICABLE. SECONDLY, EVEN ASSUMING THAT TH E ASSESSEE HAD GOT DEDUCTION ON ALLOWANCE SECTION 41( 1) WAS NOT APPLICABLE BECAUSE SUCH DEDUCTION WAS NOT IN RE SPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY. LASTLY THE TOOLINGS CONSTITUTED CAPITAL ASSETS AND NOT STOCK-IN-TRADE. THEREFORE, TAKING INTO ACCOUNT ALL THE ABOVE FACTS, SECTION 41 (1) OF THE ACT WAS NOT APPLICABLE. 97. IN CIT VS. TOSHA INTERNATIONAL LTD. (2009) 176 TAXMAN 187 (DEL.): THE ASSESSEE WAS ENGAGED IN THE MANUFACTURING OF BL ACK AND WHITE PICTURE TUBES. THE ASSESSEE-COMPANY RAN INTO HUGE LOSSES AND IT ULTIMATELY BECAME A SICK COMPANY AND REGISTERED WIT H THE BIFR. UNDER THE ONE TIME SETTLEMENT SCHEME, THE FINANCIAL INSTI TUTIONS AND BANKS REQUIRED THE ASSESSEE TO PAY 60% OF THE AMOUNT DUE TOWARDS PRINCIPLE AND WAIVED THE ENTIRE INTEREST PAYMENT. THERE IS N O DISPUTE WITH REGARD 81 TO THE WAIVER OF INTEREST PAYMENT. THE ONLY OBJECT ION RAISED BY THE ASSESSING OFFICER IS WITH REGARD TO THE WAIVER OF T HE PRINCIPLE AMOUNT TO THE EXWENT OF RS.10,47,93,857/- WHICH THE ASSESSEE HAD DIRECTLY CREDITED TO THE CAPITAL RESERVE ACCOUNT. ACCORDING TO THE A SSESSING OFFICER THE ASSESSEE HAD DERIVED BENEFIT ON THE BASIS OF EITHER DEPRECIATION OR UTILISING THE WORKING CAPITAL WHICH WOULD HAVE FORM ED PART OF THE EARLIER YEARS INCOME. ACCORDING TO THE ASSESSING OFFICER S INCE THE LOANS CEASED TO EXIST, THIS AMOUNTED TO CESSATION OF LIABILITY A ND, THEREFORE, IT HAS TO BE TREATED AS AN INCOME. CONSEQUENTLY, THE ASSESSING OFFICER ADDED THE SAID SUM OF RS.10.47 CRORES IN THE INCOME OF THE ASSESSE E. ON APPEAL THE CIT(A) AND THE TRIBUNAL FOLLOWING THE DECISION IN M AHINDRA AND MAHINDRA LTD. VS. CIT (2003) 261 ITR 501(BOM.) DELETED THE A DDITION MADE BY THE ASSESSING OFFICER . ON FURTHER APPEAL BY THE REVEN UE THE HONBLE HIGH COURT DID NOT INTERFERE WITH THE CONCLUSION OF THE TRIBUNAL AND UPHELD THE ORDER PASSED BY THE TRIBUNAL. ON FURTHER APPEAL BE FORE THE HON'BLE SUPREME COURT THEIR LORDSHIPS DISMISSED THE DEPART MENTS SPECIAL LEAVE PETITION AGAINST THE JUDGMENT DATED 23.9.2008 OF TH E DELHI HIGH COURT IN ITA NO.1143 OF 2008 WHEREBY THE HIGH COURT FOLLOWIN G 261 ITR 501 UPHELD THE ORDER OF THE TRIBUNAL HOLDING THAT AS TH E ASSESSEE HAD NOT GOT ANY DEDUCTION ON ACCOUNT OF ACQUISITION OF CAPITAL ASSETS AS IT HAD BEEN REFLECTED IN THE BALANCE-SHEET AND NOT IN THE PROFI T AND LOSS ACCOUNT AND THE REMISSION OF THE PRINCIPAL AMOUNT OF LOAN OBTAI NED FROM THE BANK AND FINANCIAL INSTITUTION HAD NOT BEEN CLAIMED AS EXPE NDITURE OR TRADING LIABILITY IN ANY EARLIER YEAR, SECTION 41(1) WAS NO T APPLICABLE AND THAT THE ASSESSEE COMPANY HAD EITHER SHOWN THE WAIVER OF INT EREST AS INCOME OR HAD NOT CLAIMED IT AS EXPENDITURE IN THE COMPUTATI ON OF INCOME FILED BEFORE THE LOWER AUTHORITIES. CIT VS. TOSHA INTERNA TIONAL : SLP (CIVIL) NO.18699 OF 2009.[(2009) 319 ITR 7 (ST.)]. 98. IN S.I. GROUP INDIA LTD. (FORMERLY KNOWN AS SCH ENECTADY SPECIALITIES ASIA (P) LTD.) VS. ACIT (2010) 326 IT R 117 (BOM.) THE BRIEF 82 FACTS OF THE CASE ARE THAT THE ASSESSEE HAS AN INDU STRIAL UNIT IN THE DISTRICT OF RAIGAD WHICH IS A NOTIFIED BACKWARD AREA. THE G OVERNMENT OF MAHARASHTRA ISSUED A PACKAGE SCHEME OF INCENTIVES I N 1993 BY WHICH A SCHEME FOR THE DEFERRAL OF SALES TAX DUES WAS ANNOU NCED. THE ASSESSEE DURING THE PERIOD 1 MAY 1999 AND 31 MARCH 2000 COLL ECTED AN AMOUNT OF RS.1,79,68,846/- TOWARDS SALES TAX. UNDER THE SCH EME THE AMOUNT WAS PAYABLE IN FIVE ANNUAL INSTALMENTS COMMENCING FROM APRIL 2010 AND THE LIABILITY WAS TREATED AS AN UNSECURED LOAN IN THE B OOKS OF ACCOUNT OF THE ASSESSEE. THE STATE INDUSTRIAL AND INVESTMENT CORP ORATION OF MAHARSHTRA LIMITED (SICOM) OFFERED TO THE ASSESSEE AN OPTION F OR THE SETTLEMENT OF THE DEFERRED SALES TAX LIABILITY BY AN IMMEDIATE ON E 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. THE PAYMENT WAS MADE BY THE ASSESSEE TO SICOM ON 26 JUNE 2000. THE DIFFERENCE BETWEEN THE DEFERRED SALES TAX AND ITS P RESENT 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 ACCOUN T. THE ASSISTANT COMMISSIONER OF INCOME TAX, RANGE 3(3), IN THE ASSE SSMENT ORDER FOR ASSESSMENT YEAR 2000-01 BROUGHT THE AFORESAID DIFFE RENCE OF RS. 1.29 CRORES TO TAX UNDER SECTION 41(1) OF THE ACT. THE APPEALS FILED BY THE ASSESSEE WERE DISMISSED BY THE CIT(A) AS WELL AS TR IBUNAL. ON FURTHER APPEAL IT HAS BEEN HELD (HEAD NOTE AT PA GE-118 OF 326 ITR ): HELD, ALLOWING THE APPEALS, THAT THE SALES TAX TRIB UNAL WAS OF THE VIEW THAT THE DECISION OF THE ASSESSING AUTH ORITY AND THE DEPUTY COMMISSIONER OF SALES TAX NOT TO GIVE CRE DIT TO THE PAYMENT MADE TO SICOM WOULD HAVE TO BE UPHELD, B UT LEFT IT OPEN TO THE ASSESSEE TO PROCURE A VALID DOC UMENT UNDER THE SCHEME WHICH WOULD BE CONSIDERED FOR THE RELEVANT PERIOD FOR THE RELEVANT DEFERRED AMOUNT. THE NET RESULT OF THE ORDER OF THE SALES TAX TRIBUNAL WAS T O UPHOLD THE DECISION OF THE ASSESSING AUTHORITY DECLINING T O GRANT CREDIT OF THE PAYMENT MADE BY THE ASSESSEE TO SICOM TOWARDS DISCHARGE OF THE DEFERRED SALES TAX LIABILI TY. AS A MATTER OF FACT, A NOTICE OF DEMAND WAS ISSUED UNDER SECTION 83 38 OF THE BOMBAY SALES TAX ACT OF 1959 TO THE ASSESSE E IN THE TOTAL AMOUNT OF RS.1,33,13,555. HAVING REGARD BOTH TO THE ORDER PASSED BY THE SALES TAX TRIBUNAL AND THE N OTICE OF DEMAND, IT WAS NOT POSSIBLE FOR THE COURT TO ACCEPT THE CONTENTION THAT THERE WAS A REMISSION OR CESSATION OF LIABILITY. THE RECORD BEFORE THE COURT DID NOT DISCLOSE THAT T HERE WAS A REMISSION OR CESSATION OF LIABILITY, ONE OF THE REQ UIREMENTS SPELT OUT FOR THE APPLICABILITY OF SEC. 41(1)(A). IT WAS NOT NECESSARY FOR THE COURT TO ADDRESS ITSELF TO THE W IDER 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 SEC.41. THIS ISSUE WAS KEPT OPEN TO BE ADJUDICATED UPON AT THE APPROPRIATE STAGE IN APPROP RIATE PROCEEDINGS. 99. IN DCIT VS. STERLITE OPTICAL TECHNOLOGIES LTD. AND VICE VERSA IN ITA NO.7136/AND 7177/MUM/2004 FOR ASSESSMENT YEAR 2001- 02 DATED 8.1.2008 REPORTED IN (2008 ) 2 ITATINDIA 184 (MUM.) THE BRIEF FACTS ARE THAT THE ASSESSEE HAS AN INDUSTRIAL UNIT IN AURANGA BAD DISTRICT WHICH IS A NOTIFIED BACKWARD AREA ELIGIBLE TO SALES TAX DEFERR AL SCHEME . IN THIS SCHEME, SALES TAX COLLECTED WAS DEEMED TO HAVE BEEN PAID TO THE SALES TAX AUTHORITIES AND THEREAFTER DEEMED TO BE RECEIVE D FROM SICOM BY WAY OF A LOAN. THE ASSESSEE COMPANY APPROACHED SICOM F OR PRE-PONING THE PAYMENT OF LOAN LIABILITY AT DISCOUNTED RATE AND VI DE LETTER DATED 28.3.2001 SICOM INTIMATED THE ASSESSEE THAT THE GOV T. OF MAHARASHTRA HAD DECIDED TO OFFER DISCOUNTED RATE OF 11.52% PER ANNUM FOR PRE-MATURE REPAYMENT OF LOAN AVAILED BY THE UNIT. THEREFORE, AGAINST THE LIABILITY OF RS.17,52,84,000/- THE DISCOUNTED RATE OF 11.52 PERC ENT PER ANNUM WAS OFFERED AND THE REPAYMENT SCHEDULE AT THE CURRENT D ISCOUNTED VALUE WAS WORKED OUT AT RS.10,15.75,307/- YIELDING A SAVING O F RS.7,37,08,693/- . THE ASSESSING OFFICER TREATED THE CONCESSION GRANTE D TO THE ASSESSEE COMPANY BY SICOM AS A SALES TAX SUBSIDY AND TAXED T HE SAME U/S.41(1) OF THE ACT. ON APPEAL THE LD. CIT(A) AFTER TAKING I NTO CONSIDERATION THE RATIO OF THE DECISION OF SPECIAL BENCH IN THE CASE OF RELIANCE 84 INDUSTRIES(2004) 88 ITD 273 (MUM.)(SB) HELD THAT T HE BENEFIT AVAILABLE TO THE ASSESSEE IS ON ACCOUNT OF CONCESSION GIVEN B Y THE GOVT. IS ON ACCOUNT OF CAPITAL RECEIPT, THEREFORE HE DELETED TH E ADDITION MADE BY THE ASSESSING OFFICER. ON FURTHER APPEAL BY THE REVENU E TO THE TRIBUNAL, THE TRIBUNAL AFTER CONSIDERING THE DECISION IN THE CAS E OF SAHNEY STEEL AND PRESS WORKS SUPRA, HAS HELD VIDE PARA 10.4 OF THE O RDER AS UNDER : 10.4 FROM THE ABOVE OBSERVATIONS OF THE HONBLE SU PREME COURT, IT IS VERY CLEAR THAT EVEN THE SALES TAX REFUND CAN BE TREATED AS A CAPITAL RECEIPT IN THE HANDS OF AN ASSESSEE PROVIDED THE SA ME IS GRANTED TO MEET DIRECTLY OR INDIRECTLY THE CAPITAL COST ON THE FIXE D ASSETS AND TO HELP THE ENTREPRENEUR IN THE ESTABLISHMENT AND EXPANSION OF THE INDUSTRIAL UNIT. THUS, WHERE THE SUBSIDY OR INCENTIVE GIVEN BY THE G OVERNMENT FOR ACQUISITION OF AN ASSET OR FOR BUYING ANY NEW ASSET S FOR COMPLETION OF THE PROJECT, SUCH SUBSIDY WOULD BE OF CAPITAL NATURE. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF RELIANCE INDUSTRIES (SU PRA) HAS CONSIDERED SIMILAR VIEWS OF MAHARASHTRA SCHEME AND HAD ALSO MA DE A COMPARATIVE ANALYSIS OF ANDHRA PRADESH SCHEME AND MAHARASHTRA S CHEME. THE JUDGMENT OF THE APEX COURT IN SAHNEY STEEL AND PRESS WORKS WAS ALSO TAKEN INTO CONSIDERATION AND THEN AFTER ANALYZING A LL THE MATERIAL, IT WAS FOUND THAT THE BENEFIT AVAILED BY THE ASSESSEE WAS ON ACCOUNT OF CAPITAL RECEIPT. IT HAS BEEN CATEGORICALLY HELD THAT SALES TAX INCENTIVE GIVEN BY MAHARASHTRA GOVERNMENT FOR SETTING UP INDUSTRIAL UN IT IN THE NOTIFIED AREAS WITH A VIEW TO BRING ABOUT THE NECESSARY INFR ASTRUCTURE IN THE BACKWARD AREAS, IS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX. THE DEFERRAL BENEFIT RECEIVED BY THE ASSESSEE HAS ALSO RESULTED ULTIMATELY IN THE FORM OF PARTIAL EXEMPTION FOR SALE TAX LIABILITY AND THE SAID EXEMPTION WAS PROVIDED UNDER AN IDENTICAL INCENTIVE SCHEME OF MAH ARASHTRA GOVERNMENT. THEREFORE, THE BENEFIT AVAILED BY THE A SSESSEE HAS TO BE HELD AS CAPITAL RECEIPTS NOT CHARGEABLE TO TAX. 100. IN ACIT VS. M/S. ASSOCIATED CAPSULES PVT. LTD. IN ITA NO.4818/MUM/08 FOR ASSESSMENT YEAR 2004-05 DATED 20 .10.2009 THE TRIBUNAL FOLLOWING THE DECISION IN THE CASE OF STER LITE SUPRA, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DISMISSED THE GROUND RAISED BY THE REVENUE. 101. IN EVEREST INDUSTRIES LTD. VS. ACIT IN ITA NO. 814/MUM/2007 FOR THE ASSESSMENT YEAR 2003-04 ORDER DATED 4.12.2009 THE TRIBUNAL 85 FOLLOWING THE DECISION IN THE CASE OF STERLITE SUPR A, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 102. IN CIPLA INVESTMENTS LTD. VS. ITO (2009) 33 SO T 317(MUM)(HEADNOTE): THE ASSESSEE HAD TAKEN AN UNSECURED LOAN FOR INVES TMENT IN SHARES FROM ITS HOLDING COMPANY AND SAME COULD NOT BE PAID DUE TO LOSSES. THE HOLDING COMPANY HAD WRITTEN IT O FF AS IRRECOVERABLE FROM THE ASSESSEE, WHEREAS, THE ASSES SEE HAS NOT WRITTEN BACK THE SAID AMOUNT AS CESSATION OF LI ABILITY U/S.41(1). SUBSEQUENTLY, THE ASSESSEE COMPANY WAS DISSOLVED. THE ASSESSING OFFICER MADE ADDITIONS TO THE INCOME OF THE ASSESSEE OF LOAN LIABILITY AS INCOME U/S. 41(1). THE COMMISSIONER (APPEALS), WHILE ACCEPTING THAT PR OVISIONS OF SECTION 41(1) DID NOT APPLY, HELD THAT PROVISION S OF SEC. 28(IV) WOULD APPLY AND MADE ADDITIONS TO THE PROFIT S AND GAINS OF BUSINESS OF THE ASSESSEE ON ACCOUNT OF CES SATION OF LIABILITY. ON SECOND APPEAL THE FACTS OF THE INSTANT CASE INDICATED THAT THE HO LDING COMPANY HAD ADVANCED FUNDS TO THE ASSESSEE COMPANY IN 1998 WHICH WAS RECEIVED AS SHARE APPLICATION MONEY, AND LATER ON TRANSFERRED TO UNSECURED LOAN. THE AMOUNT S WERE UTILISED IN INVESTMENTS AND THE INCOMES THEREON WER E OFFERED UNDER THE HEAD CAPITAL GAINS AND NOT AS BUSINESS INCOME. AS WAS RIGHTLY HELD BY THE COMMISSIONER (APPEALS), PROVISIONS OF SECTION 41(1) INVOKED BY THE ASSESSING OFFICER DID NOT APPLY. FOR ATTRACTING THE PROVISIONS OF SE CTION 41(1), THE FIRST REQUISITE CONDITION TO BE SATISFIED IS TH AT THE ASSESSEE SHOULD HAVE GOT THE DEDUCTION OR BENEFIT O R ALLOWANCE IN RESPECT OF LOSS, EXPENDITURE OR TRADIN G LIABILITY INCURRED BY IT AND, CONSEQUENTLY, DURING ANY PREVIO US YEAR, THE ASSESSEE SHOULD HAVE RECEIVED ANY AMOUNT IN RES PECT OF SUCH LOSS, EXPENDITURE OR TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREON. THE REMISSION WOULD BECOME I NCOME ONLY WHEN THE ASSESSEE HAS CLAIMED DEDUCTION EARLIE R. IN THE INSTANT CASE, THE ASSESSEE HAD NOT GOT ANY DEDUCTIO N ON ACCOUNT OF ACQUISITION OF CAPITAL ASSETS AS THE SAM E HAD BEEN REFLECTED IN THE BALANCE SHEET AND NOT IN THE PROFI T AND LOSS 86 ACCOUNT AND HENCE, APPLICABILITY OF PROVISIONS OF S ECTION 41(1) WAS NOT THERE. THE COMMISSIONER (APPEALS)S ORDER TO THAT EXTENT WAS CORRECT BOTH ON FACTS AND ON LAW. HOWEVER, HE HAD WRONGLY INVOKED THE PROVISIONS OF SECTION 28 (IV). IT WAS THE CONTENTION OF THE ASSESSEE THAT IT HAD NOT DONE ANY TRADING ACTIVITY NOR SHOWN ANY INCOME AS BUSINESS I NCOME ON THE INVESTMENTS MADE. THE FINDING OF THE COMMISSIO NER (APPEALS) THAT THE AMOUNT WAS RECEIVED IN THE COURSE OF ITS BUSINESS WAS AGAINST HIS FINDING GIVEN WHILE CONSID ERING THE ADDITION UNDER SECTION 41(1). THE ASSESSEE'S BUSIN ESS ACTIVITY MIGHT COMPRISE INVESTMENT IN SHARES AND SE CURITES, BUT AS FAR AS COMPUTATION OF INCOME WAS CONCERNED, THE PROFIT AND LOSS IN THOSE TRANSACTIONS WAS SAID TO B E UNDER THE HEAD CAPITAL GAINS AND NOT UNDER BUSINESS INCOME . HENCE, THE GAIN EARNED BY THE ASSESSEE IN THE COURSE OF BU SINESS IN INVESTMENT AND ADVANCEMENT OF LOANS WAS IN THE CAPI TAL FIELD BUT COULD NOT BE ON THE REVENUE FIELD. IT HAD BEEN HELD IN CATENA OF DECISIONS THAT REMISSION OF A DEBT BY THE HOLDING COMPANY WHICH WAS NOT CLAIMED AND ALLOWED AS A DEDU CTION IN ANY MANNER IN ANY EARLIER PREVIOUS YEAR COULD NO T BE BROUGHT TO TAX EITHER UNDER SECTION 41(1) OR UNDER SECTION 28(IV). THERE WAS NO BENEFIT OR PERQUISITE ARISING TO THE ASSESSEE IN THAT REGARD. MOREOVER, THE ASSESSEE HA D TO WRITE OFF THE AMOUNT IN THE BOOKS OF ACCOUNT AND THE AMO UNT WAS STILL OUTSTANDING AT THE END OF THE YEAR. THE LOAN S AVAILED FOR ACQUIRING THE CAPITAL ASSET, I.E., SHARES, WHEN WAI VED COULD NOT BE TREATED AS ASSESSABLE INCOME FOR INVOKING TH E PROVISIONS OF SECTION 28(IV). SINCE THE ORIGINAL RE CEIPT WAS UNDOUBTEDLY ON ACCOUNT OF CAPITAL NATURE, ITS WAIVE R DID NOT HAVE THE QUALITY OF CHANGING THE SAME INTO A REVENU E RECEIPT. IN VIEW OF THOSE FACTS AND ALSO VARIOUS PRINCIPLES LAID DOWN IN THE CASE LAWS RELIED UPON BY THE ASSESSEE, IT WAS O PINED THAT THE COMMISSIONER(APPEALS) ERRED IN TREATING THE AMOU NT AS TAXABLE INCOME IN THE HANDS OF THE ASSESSEE UNDER S ECTION 28(IV). ON THE FACTS OF THE INSTANT CASE, THE PROV ISION OF SECTION 28(IV) DID NOT APPLY AND THE AMOUNT WAS NOT TAXABLE UNDER THE PROVISIONS OF THE ACT. ACCORDINGLY, THE AS SESSEE'S GROUNDS WERE ALLOWED. THE ASSESSING OFFICER WAS DIR ECTED TO DELETE THE AMOUNT. 103. IN ACCELERATED FREEZ & DRYING CO. LTD. VS. DCI T (2009) 31 SOT 442(COCHIN)(HEADNOTE) : 87 THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS O F SEA FOOD EXPORTS. IT HAD AVAILED TERM LOANS FROM THREE BANKS FOR THE PURPOSE OF ACQUIRING CAPITAL ASSETS NECESSARILY TO BE DEPLOYED IN ITS MANUFACTURING SYSTEM. THE ASSESSEE COMPANY BECAME DEFAULTER IN MAKING THE REPAYMENTS O F TERN LOANS ALONG WITH INTEREST DUE TO ITS BAD FINANCIAL POSITION. UNDER A SCHEME FRAMED BY THE RBI KNOWN AS ONE TIME SETTLEMENT SCHEME, THE ASSESSEE REACHED AN AGREEMENT WITH THOSE BANKS FOR ONE TIME SETTLEMENT (OTS) OF TH E OUTSTANDING LIABILITIES DUE TO THOSE BANKS IN THE P REVIOUS YEAR UNDER APPEAL. THE TOTAL LOAN THAT REMAINED PAYABL E TO THE BANKS AMOUNTED TO RS.3486.03 LACS. THE LOANS WERE SETTLED FOREVER ON PAYMENT OF RS.2450 LACS AND THEREBY THE ASSESSEE COMPANY OBTAINED THE BENEFIT OF WAIVER OF TERM LOANS AMOUNTING TO RS.10.36 CRORES. THIS LOAN AMOU NT WAIVED OFF BY BANKS WAS CREDITED BY THE ASSESSEE IN THE GENERAL RESERVE ACCOUNT. FOR THE RELEVANT ASSESSME NT YEAR, THE ASSESSEE CLAIMED THAT THE WAIVER AMOUNT WAS NOT TAXABLE IN ITS HANDS INASMUCH THE SAID AMOUNT COULD NOT BE TREATED AS ITS INCOME EITHER UNDER SECTION 28(IV) OR UNDER SECTION 41(1). THE ASSESSING OFFICER DID NOT AGREE WITH TH E ASSESSEE AND BROUGHT THE SAID AMOUNT TO TAX UNDER S ECTION 28(IV). ON APPEAL, THE COMMISSIONER (APPEALS) HELD THAT SECTION 28(IV) ENABLES THE ASSESSING OFFICER TO CHAR GE THE VALUE OF BENEFITS OR PERQUISITE TO TAX AND, THEREFO RE, THE WAIVER AMOUNT RECEIVED BY THE ASSESSEE WAS RIGHTLY BROUGHT TO TAX UNDER SECTION 28(IV). HELD IT IS A TRITE LAW THAT THE NOMENCLATURE GIVEN BY AN ASSESSEE TO A PARTICULAR ACCOUNT IN ITS BOOKS OF ACCOUNT IS NOT THE SOLE TEST TO DECIDE THE REAL CHARACTER OF THAT ACCOUNT. THEREFORE, THE FACT THAT THE ASSESSEE HAD CREDITED THE LOAN WA IVER AMOUNT IN ITS GENERAL RESERVE AMOUNT WOULD NOT INFL UENCE THE PROCESS OF DETERMINING THE EXACT NATURE OF THE ISSU E. SECTION 28(IV) SEEKS TO CHARGE THE VALUE OF ANY BENE FIT OR PERQUISITE, WHETHER CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION, AS PROFITS AND GAINS OF BUSINESS OR PROFESSION. THEREFORE, WHAT IS TO BE EXAMINED IS WHETHER THE WAIVER OF LOAN WOULD AMOUNT TO A PERQUISITE SO AS TO BE TAXABLE, AS SUCH, UNDER SECT ION 28. THE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA AND MAHINDRA LTD. VS. CIT (2003) 261 ITR 501/128 TAXMAN 394, 88 HAS EXPLAINED THAT SECTION 28(IV) SEEKS TO CHARGE T HE VALUE OF ANY BENEFIT OR PERQUISITE, MEANING THEREBY THAT THE BENEFIT MUST BE IN KIND; THE COURT FURTHER HELD THAT WAIV ER OF LOAN IS IN RESPECT OF MONEY TRANSACTION AND, THEREFORE, WOULD NOT BE IN NATURE OF ANY BENEFIT OR PERQUISITE AS CONSTR UED IN SECTION 28(IV). FOR THE PURPOSE OF SECTION 28(IV), THE LOAN WAIVER AMOUNT CREDITED BY THE ASSESSEE IN ITS GENERAL RESERVED AC COUNT WAS COVERED BY THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA LTD.(SUPRA) AND, THEREF ORE, THE SAID WAIVER AMOUNT COULD NOT BE HELD AS TAXABLE. 104. HAVING REGARD TO THE AFORESAID LAW LAID DOWN B Y THE HONBLE SUPREME COURT AND HIGH COURTS, WE FIND THAT TO INVO KE THE PROVISIONS OF SECTION 41(1) OF THE ACT, THE FIRST REQUIREMENT IS AS TO WHETHER IN THE ASSESSMENT OF THE ASSESSEE, AN ALLOWANCE OR DEDUCTI ON HAS BEEN MADE IN RESPECT OF LOSS, EXPENDITURE OR THE TRADING LIABILI TY INCURRED BY THE ASSESSEE. IN THE CASE OF THE PRESENT ASSESSEE THE R EVENUES PLEA IS THAT THE ASSESSEE HAS OBTAINED THE BENEFIT OF DEDUCTION OF SALES TAX LIABILITY U/S. 43 B OF THE ACT AS PER CBDT CIRCULAR NO. 496 D ATED 25.9.1987. HOWEVER, WE FIND THAT IN THE SAID CIRCULAR IT HAS B EEN CLEARLY STATED VIDE PARA 5 THAT ...THE STATUTORY LIABILITY SHALL BE TR EATED TO HAVE BEEN DISCHARGED FOR THE PURPOSES OF SECTION 43 B (EMPHASIS SUPPLIED). THUS, THE BENEFIT OF DEDUCTION WAS ALLOWED FOR THE PURPOSE OF SECTION 43 B OF THE ACT ONLY AND NOT UNDER ANY OTHER PROVISIONS OF THE ACT. THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HAS ALSO APPLIE D THE AFORESAID BOARD CIRCULAR WHILE GIVING THE BENEFIT OF DEDUCTION U/S. 43 B OF THE ACT. IT IS SETTLED LAW THAT THE CIRCULARS ARE BINDING ON THE D EPARTMENT VIDE NUMBER OF DECISIONS OF THE HONBLE APEX COURT [SEE IN NAVN IT LAL C. JHAVERI VS. K.K. SEN, AAC (1965) 56 ITR 198(SC), ELLERMAN LINES LTD. VS. CIT (1971) 82 ITR 913 (SC), K.P. VARGHESE VS. ITO (1981) 131 I TR 597 (SC) AND UCO BANK VS. CIT (1999) 237 ITR 889 (SC)]. IT IS AL SO SETTLED LAW THAT THE COURT CANNOT ADD WORDS TO STATUTE OR READ WORDS INTO IT WHICH ARE NOT 89 THERE VIDE UNION OF INDIA VS. DEOKI NANDAN AGGARWAL (1992) SUPP. 1 SCC 323 (80). THE SIMILAR VIEW HAS BEEN REITERATED RECE NTLY IN CIT VS. TARA AGENCIES (2007) 292 ITR 444 (SC). THIS BEING SO WE ARE OF THE VIEW THE FIRST REQUIREMENT OF SECTION 41(1) HAS NOT BEEN FUL FILLED IN THE FACTS OF THE PRESENT CASE. 105. THE OTHER REQUIREMENT OF SECTION 41(1) IS THAT THE ASSESSEE MUST HAVE SUBSEQUENTLY (I) OBTAINED ANY AMOUNT IN RESPEC T OF SUCH LOSS AND EXPENDITURE OR (II) OBTAINED ANY BENEFIT IN RESPECT OF SUCH TRADING LIABILITIES BY WAY OF REMISSION OR CESSATION THEREO F. IN THE CASE BEFORE US WE FIND THAT THE SALES TAX COLLECTED BY THE ASSESSE E DURING THE YEARS 1989-1990 TO 2001-2002 AMOUNTING TO RS.7,52,01,378/ - WAS TREATED BY THE STATE GOVERNMENT AS A LOAN LIABILITY PAYABLE AF TER 12 YEARS IN SIX ANNUAL/ EQUAL INSTALMENTS. SUBSEQUENTLY PURSUANT TO THE AMENDMENT MADE IN THE FOURTH PROVISO TO SECTION 38(4) OF THE BST ACT, 1959 WHICH PROVIDES THAT WHERE AN ENTITLEMENT CERTIFICATE HAS BEEN GRANTED TO THE ELIGIBLE UNIT FOR AVAILING OF THE INCENTIVES BY WAY OF DEFERMENT OF SALES TAX ETC. SUCH ELIGIBLE UNIT MAY IN RESPECT OF THE PERIO DS DURING WHICH THE SAID CERTIFICATE IS VALID, AT ITS OPTION, PREMATURELY PA Y IN PLACE OF THE AMOUNT OF TAX DEFERRED BY IT AN AMOUNT EQUAL TO THE NET PRESE NT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRIBED AND ON MAKING SUC H PAYMENTS, IN THE PUBLIC INTEREST, THE DEFERRED TAX SHALL BE DEEMED T O HAVE BEEN PAID. IN THE CASE BEFORE US THE ASSESSEE HAS OPTED THE OFFER OF SICOM, AN IMPLEMENTING AGENCY OF THE STATE GOVERNMENT AND REP AID AN AMOUNT OF RS.3,37,13,393/- TO SICOM WHICH ACCORDING TO THE AS SESSEE REPRESENTED THE NPV OF THE FUTURE SUM AS DETERMINED AND PRESCRI BED BY SICOM. THE SAID PAYMENT WAS MADE TO SICOM ON 30.12.2002 AS PER CERTIFICATES DATED 25.08.2003. IT HAS ALREADY BEEN DEMONSTRATED IN PA RA- 74 OF THIS ORDER THAT NPV IS EQUIVALENT TO FUTURE VALUE OF THE SUM. IN OTHER WORDS, WHAT THE ASSESSEE WAS REQUIRED TO REPAY AFTER 12 YEARS I N SIX ANNUAL/ EQUAL INSTALMENTS, THE SAME WAS REPAID BY THE ASSESSEE, I N THE PUBLIC INTEREST, 90 AS NPV IS EQUIVALENT TO THE FUTURE VALUE OF THE SUM . FURTHER THERE IS NO IOTA OF EVIDENCE TO SHOW THAT THERE HAS BEEN ANY RE MISSION OR CESSATION OF LIABILITY BY THE STATE GOVERNMENT. THUS, ONE OF THE REQUIREMENTS SPELT OUT FOR THE APPLICABILITY OF SECTION 41(1)(A) HAS NOT B EEN FULFILLED IN THE FACTS OF THE PRESENT CASE. 106. ALTERNATIVELY, IT WAS ARGUED ON BEHALF OF DEPA RTMENT THAT THE ASSESSEE WAS REQUIRED TO COMPLY WITH PROCEDURE LAID DOWN IN CLAUSES 6.21 AND 6.22 OF THE STATE GOVERNMENT RESOLUTION. ACCORD ING TO THE LD. DR THE ASSESSEE HAS ADMITTEDLY, FAILED TO DO SO. THEREFORE THE QUESTION OF CONVERSION OF DEFERRED SALES TAX LIABILITY INTO INT EREST FREE LOAN DOES NOT ARISE. FURTHER, THERE IS NO MODIFIED ELIGIBILITY CE RTIFICATE INCORPORATING THE CHANGE FROM DEFERRED SALES TAX LIABILITY TO INTERES T FREE LOAN. HOWEVER, WE FIND THAT THE ASSESSEE ON THE BASIS OF LETTER ISSUE D BY SICOM TO THE SALES TAX AUTHORITY HAS PASSED NECESSARY ENTRIES IN THE B OOKS OF ACCOUNT CLAIMING THE DIFFERENCE OF DEFERRAL AMOUNT AS CAPIT AL RECEIPT. MERELY BECAUSE IF THE SALES TAX AUTHORITIES HAVE NOT ISSUE D THE MODIFIED ELIGIBILITY CERTIFICATE DOES NOT MEAN THAT THE PAYMENT OF RS. 3 ,37,13,393/- MADE BY THE ASSESSEE CANNOT BE ACCEPTED AS HAVING BEEN PAID AT NPV OF THE FUTURE SUM OF RS.7,52,01,378/- TOWARDS DISCHARGE OF FULL L IABILITY. IT IS SETTLED LAW THAT THE LAW DOES NOT CONTEMPLATE OR REQUIRE THE PE RFORMANCE OF AN IMPOSSIBLE ACT-LEX NON COGIT AD IMPOSSIBILIA, VIDE LIFE INSURANCE CORPORATION OF INDIA VS. CIT(1996) 219 ITR 410 (SC) . FURTHER BOTH THE PARTIES HAVE SUBMITTED AND AGREED DURING THE COURSE OF THEIR ARGUMENTS THAT THE ENTRIES RECORDED IN THE BOOKS OF ACCOUNTS ARE NOT DETERMINATIVE OF THE NATURE OF TRANSACTION VIDE TUTICORIN ALKALI CHEMICALS AND FERTIZILERS LTD. VS. CIT (1997) 227 ITR 172 (SC). EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT THE ASSESSEE DID NOT GET MODIFIED ELI GIBILITY CERTIFICATE OR THE REPAYMENT OF LOAN PAID BY THE ASSESSEE AT ITS N PV OF FUTURE SUM, THEN IN THAT CIRCUMSTANCES, MERELY BECAUSE THE ASSESSEE HAS PASSED NECESSARY 91 ENTIRES IN ITS BOOKS OF ACCOUNT, IT CANNOT BE HELD THAT THERE IS ANY CESSATION OR REMISSION OF LIABILITY. 107. THE LD. DR HAS PUT GREAT EMPHASIS ON THE NOTES TO THE ACCOUNTS WHICH HAVE BEEN REPRODUCED BY US IN PARA-43 APPEARI NG AT PAGE-43 OF THIS ORDER WHEREIN THE ASSESSEE ITSELF HAS USED THE EXPRESSION REMISSION OF THE LOAN LIABILITY. HOWEVER, THE POSITION IN LAW IS WELL SETTLED THAT MAKING OF AN ENTRY OR ABSENCE OF AN ENTRY CANNOT DE TERMINE RIGHTS AND LIABILITIES OF PARTIES. IN OTHER WORDS, IF THE LAW DOES NOT LEAD TO INCURRING OF A LIABILITY, OR DOES NOT LEAD TO A CORRESPONDING RIGHT TO INSIST FOR DISCHARGING SUCH A LIABILITY ANY ACCOUNTING PRACTIC E (EVEN IF SUGGESTED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA) CA NNOT LAY DOWN ANYTHING TO THE CONTRARY. AS HELD BY THE HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. VS. CIT (1997 ) 227 ITR 172 (PAGE 183): IT IS TRUE THAT THIS COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MAD E BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WH EN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE O R NOT OR WHETHER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE PE RMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCOR DING TO THE PRINCIPLES OF LAW AND NOT IN ACCORDANCE WITH ACCOUN TANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVERRIDE SECTIO N 56 OR ANY OTHER PROVISION OF THE ACT AS WAS POINTED OUT BY LORD RUSSELL IN THE CASE OF B. S. C. FOOTWEAR LTD. [1970] 77 ITR 857, 860 (CA), THE INCOME-TAX LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY PROFESSIO N. 108. WE HAVE ALSO EXAMINED THIS ISSUE FROM ANOTHER ANGLE IN THE LIGHT OF INDIAN CONTRACT ACT, 1872. CHAPTER IV DEALS WITH TH E PERFORMANCE OF CONTRACTS. SECTION 63, WHICH HAS BEEN PLACED IN CHA PTER IV, READS AS UNDER: 92 SECTION 63. PROMISEE MAY DISPENSE WITH OR REMIT PERFORMANCE OF PROMISE. __ EVERY PROMISEE MAY DISPENSE WITH OR MAY REMIT, WHOLLY OR IN PART, THE PERFORMAN CE OF THE PROMISE MADE TO HIM, OR MAY EXTEND THE TIME FOR SUC H PERFORMANCE, OR MAY ACCEPT INSTEAD OF IT ANY SATISF ACTION WHICH HE THINKS FIT. ILLUSTRATIONS (A) A PROMISES TO PAINT A PICTURE FOR B. B AFTERWARDS F ORBIDS HIM TO DO SO. A IS NO LONGER BOUND TO PERFORM THE PROMIS E. (B) A OWES B 5,000 RUPEES. A PAYS TO B, AND B ACCEPTS, I N SATISFACTORY OF THE WHOLE DEBT, 2,000 RUPEES PAID A T THE TIME AND PLACE AT WHICH THE 5,000 RUPEES WERE PAYABLE. T HE WHOLE DEBT IS DISCHARGED. (C) A OWES B 5,000 RUPEES. C PAYS TO B 1,000 RUPEES, AND B ACCEPTS THEM, IN SATISFACTION OF HIS CLAIM ON A. THI S PAYMENT IS A DISCHARGE OF THE WHOLE CLAIM. (D) A OWES B, UNDER A CONTRACT, A SUM OF MONEY, THE AMOU NT OF WHICH HAS NOT BEEN ASCERTAINED. A, WITHOUT ASCERTAIN ING THE AMOUNT, GIVES TO B, AND B, IN SATISFACTION THEREOF, ACCEPTS, THE SUM OF 2,000 RUPEES. THIS IS A DISCHARGE OF THE WHOLE DEBT, WHATEVER MAY BE ITS AMOUNT. (E) A OWES B, 2,000 RUPEES, AND IS ALSO INDEBTED TO OTHE R CREDITORS. A MAKES AN ARRANGEMENT WITH HIS CREDITORS , INCLUDING B, TO PAY THEM A COMPOSITION OF EIGHT ANN AS IN THE RUPEE UPON THEIR RESPECTIVE DEMANDS. PAYMENT TO B O F 1,000 RUPEES IS A DISCHARGE OF BS DEMAND. THE ABOVE CLEARLY SHOWS THAT PROMISEE MAY, INTER AL IA, REMIT PART OF THE PROMISE OR WHOLE OF THE PROMISE AND EVEN THEN THE C ONTRACT CAN BE SAID TO HAVE BEEN PREFORMED. FOR EXAMPLE, ILLUSTRATIONS (B) AND (C) CLEARLY SHOW THAT WHEN A LARGE AMOUNT WAS DUE AND ONLY A SM ALLER AMOUNT WAS PAID, THEN, IN VIEW OF THE REMISSION OF THE BALANCE AMOUNT, THE CONTRACT CAN STILL BE SAID TO HAVE BEEN PERFORMED AND SUCH D EBT WOULD STAND DISCHARGED. IN THE COMMENTARY BY POLLOCK & MULLA, T HIRTEENTH EDITION ON INDIAN CONTRACT ACT, THE LEARNED AUTHORS HAVE OBSER VED AT PAGES 1267 & 1268 AS UNDER: 93 THIS SECTION DOES NOT APPLY TO CASES WHERE THE WH OLE CONTRACT HAS BEEN SUPPLANTED BY A NEW ONE, BUT TO C ASES WHERE THE OLD CONTRACT SUBSISTS, AND THERE IS A VOL UNTARY REMISSION OF PERFORMANCE OF SOME PROMISE IN IT, FOR EXAMPLE, THE REMISSION OF PART OF THE DEBT AT THE TIME IT BE COMES PAYABLE. IT DOES NOT COVER A CASE OF A BINDING PROM ISE TO DISPENSE WITH OR REMIT PERFORMANCE IN THE FUTURE UN LESS THAT WAIVER IS MADE THE SUBJECT OF A FRESH CONTRACT. SECT ION 63 APPLIES WHETHER THERE IS ACTUAL REMISSION, IE, IN PRAESENTI AND IN FUTURO , IE, NOT A MERE PROMISE TO REMIT, AN AGREEMENT TO REMIT IN FUTURO CLEARLY REQUIRES CONSIDERATION, IF IT IS TO BE A BINDING CONTRACT. THIS MUST BE DISTINGUISHED FROM A REMISSION OR DISPENSATION WHICH IS MADE CONTINGENT ON THE HAP PENING OF A FUTURE EVENT. IN SUCH A CASE THE REMISSION IS IN PRAESENTI , THOUGH IT IS SUSPENDED UNTIL THE EVENT OCCURS. TH E HOLDER OF A PROMISSORY NOTE FROM THE OFFICERS OF A MASONIC LODGE AGREED IN WRITING TO MAKE NO CLAIM IF THE L ODGE BUILDING WHICH HAS BEEN BURNT DOWN IS RESUSCITATED. HE COULD NOT SUE ON HIS NOTE AFTER THE LODGE WAS REBUILT. IT WOULD BE MONSTROUS IF HE COULD. HOWEVER, A CONDITIONAL REMIS SION IS NOT ENFORCEABLE UNDER THE SECTION, AS WHEN CONDITIO NAL, IT IS NOT AN ABSOLUTE REMISSION AND THE PLAINTIFF IS NOT ESTOPPED FROM ENFORCING HIS RIGHTS IN FULL. WHERE THE PROMIS EE WISHES HIS RIGHTS TO CONTINUE IN THE EVENT OF SOME CONDITI ONS SIMULTANEOUSLY IMPOSED ON THE PROMISOR, HE MUST SEE THAT THE RELEASE IS MADE DEPENDENT ON THE PERFORMANCE BY THE PROMISOR OF HIS PART OF THE AGREEMENT. THE ABOVE AGAIN SHOWS THAT REMISSION IS POSSIBLE ON LY IN PRAESENTI AND NOT IN FUTURE. NOW COMING BACK TO THE CASE BEFORE US, THE ASSESSEE WAS LIABLE TO PAY SALES TAX AMOUNTS COLLECTED FROM 1.11.1989 TO 31.10 .1996, PAYMENTS OF WHICH WERE DEFERRED UNDER THE SCHEME, AND THE AMOUN TS WERE PAYABLE AFTER TWELVE YEARS IN SIX EQUAL ANNUAL INSTALMENTS COMMENCING FROM 1.05.2003, WHICH MEANS THAT THE LIABILITY WAS PAYAB LE IN FUTURE. LATER ON, THE STATE GOVERNMENT CAME WITH A SCHEME BY WHICH IT WAS PROVIDED THAT IF SOME DEALER OPTS, THEN THEY COULD PAY THE FUTURE LIABILITY AT A 94 DISCOUNTED VALUE OR WHAT WE MAY CALL NET PRESENT VA LUE IMMEDIATELY. THUS, IN THIS SITUATION, IT CANNOT BE CONSTRUED AS REMISSION OF LIABILITY; BECAUSE THE SATE GOVERNMENT HAS NOT WAIVED ANY OF T HE LIABILITY AS GIVEN IN THE ILLUSTRATIONS. HAD THE STATE GOVERNMENT ACCE PTED LESSER AMOUNT AFTER TWELVE YEARS OR REDUCED SUCH INSTALMENTS, THE N IT COULD HAVE BEEN A CASE OF REMISSION OR CESSATION. HOWEVER, IN THE CAS E BEFORE US THE STATE GOVERNMENT HAS CHOSEN TO RECEIVE THE MONEY IMMEDIAT ELY WHICH WAS RECEIVABLE FROM 1.05.2003 TO 1.05.2008. THE AMOUNT OF RS.3,37,13,393/- WAS ACTUALLY PAID TO SICOM ON 30.12.2002. THUS, THE AMOUNT WHICH WAS PAYABLE FROM 1.05.2003 TO 1.05.2008, HAS BEEN PAID ON 30.12.2002. THUS, IT DOES NOT SATISFY THE CONDITION OF ACTUAL R EMISSION IN PRAESENTI AS OPINED BY THE LEARNED AUTHORS IN THE ABOVE COMMENTA RY. IT IS A SIMPLE CASE OF COLLECTING THE AMOUNT AT NET PRESENT VALUE WHICH IS DUE LATER ON AND EVEN THE FORMULA FOR COLLECTING THE NET PRESENT VALUE WAS ALSO GIVEN BY THE SICOM AND THE AMOUNTS HAVE BEEN PAID AS PER THAT FORMULA. THEREFORE, SUCH PAYMENT OF NET PRESENT VALUE OF THE FUTURE LIABILITY CANNOT BE, IN OUR OPINION, CLASSIFY AS REMISSION OR CESSAT ION OF THE LIABILITY SO AS TO ATTRACT THE PROVISIONS OF SECTION 41(1)(A) OF TH E INCOME TAX ACT, 1961. WE ARE FULLY CONSCIOUS THAT ISSUE BEFORE US IS REGA RDING STATUTORY LIABILITY AND THE ABOVE DISCUSSION AND THE PROVISIONS OF THE INDIAN CONTRACT ACT REFERRED TO BY US IN THE ABOVE PARA RELATE TO CONTR ACTUAL LIABILITY. HOWEVER, WE HAVE REFERRED TO THESE PROVISIONS JUST TO UNDERSTAND THE MEANING OF THE EXPRESSION REMISSION FOR THE PURPO SE OF DECIDING THE 95 CASE BEFORE US UNDER THE INCOME TAX ACT AND OUR DEC ISION IS BASED ON THE PROVISIONS OF THE INCOME TAX ACT, 1961. 109. FOR THE REASONS AS STATED ABOVE, WE HOLD THAT THE DEFERRED SALES TAX LIABILITY RS.4,14,87,984/- BEING THE DIFFERENCE BE TWEEN THE PAYMENT OF NET PRESENT VALUE RS.3,37,13,393/- AGAINST THE FUTU RE LIABILITY OF RS.7,52,01,378/- CREDITED BY THE ASSESSEE UNDER THE CAPITAL RESERVE ACCOUNT IN ITS BOOKS OF ACCOUNT IS A CAPITAL RECEIP T AND CANNOT BE TERMED AS REMISSION/CESSATION OF LIABILITY AND CONSEQUENTL Y NO BENEFIT HAS ARISEN TO THE ASSESSEE IN TERMS OF SEC.41(1)(A) OF THE INC OME TAX ACT, 1961. ACCORDINGLY, THE MODIFIED QUESTION AS FRAMED IN PAR A-5 OF THIS ORDER IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 110. THE MATTER WILL NOW GO BEFORE THE REGULAR BENC H FOR DISPOSING OF THE APPEALS KEEPING IN VIEW OUR DECISION RENDERED HEREI NABOVE. 111. BEFORE PARTING WITH THIS ORDER WE DESIRE TO PL ACE ON RECORD OUR DEEP APPRECIATION TO BOTH THE PARTIES FOR ASSISTING THE BENCH. ORDER PRONOUNCED IN THE OPEN COURT ON 10.11.2010. SD/- SD/- SD/- (T.R. SOOD) (R.V.EASWAR ) (D.K.AGARWAL) ACCOUNTANT MEMBER PRESIDENT JUD ICIAL MEMBER MUMBAI, DATED:10.11.2010. JV. 96 COPY TO: THE APPELLANT THE RESPONDENT INTERVENER THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI & PUNE. THE DR E BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.