Interest as per Sect 234B & 234C not leviable on taxes payable under MAT – Bombay HC


Interest as per Sect 234B & 234C not leviable on taxes payable under MAT – Bombay HC

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

The Text of the Order as follows :

1. Heard Mr.Ashok Kotangle, learned standing counsel, Revenue for the appellant; and Mr.S.E.Dastur, learned senior counsel assisted by Mr.Niraj Sheth, learned counsel for the respondent/assessee.

2. This order will dispose of the above two appeals. While Income Tax Appeal No.875 of 2017 arises out of Income Tax Appeal No.6835/Mum/ 2008 for the assessment year 2004- 05, Income Tax Appeal No.1237 of 2017 arises out of Income Tax Appeal No.7341/Mum/ 2008 for the assessment year 2005-06.

3. Issues raised in the two appeals being identical and parties being same though appeals pertain to two different assessment years, those have been heard together and are being disposed of by the present common order.

4. For convenience, Income Tax Appeal No.875 of 2017 is taken up as the lead case.

5. This appeal has been preferred under Section 260A of the Income Tax Act, 1961 (briefly “the Act” hereinafter) assailing the order dated 23rd November, 2016 passed by the Income Tax Appellate Tribunal, Mumbai Bench “F”, Mumbai (“Tribunal” for short) in Income Tax Appeal No.6835/Mum/ 2008 for the assessment year 2004-05.

6. The appeal has been preferred proposing the following two questions as substantial questions of law:-

“1. Whether on the facts and in the circumstances of the case and in law, Tribunal was justified in upholding the decision of the Commissioner of Income Tax (Appeals) holding that surplus arising on prepayment of deferred sales tax loan at net present value (NPV) is a capital receipt which cannot be termed as remission on cessation of a trading liability under section 41(1) of the Act?

2. Whether on the facts and in the circumstances of the case and in law, Tribunal was justified in confirming the decision of the Commissioner of Income Tax (Appeals) holding that interest under section 234B and section 234C of the Act was not chargeable with respect to tax liability determined under minimum alternate tax (MAT)?”

7. Respondent is an assessee under the Act. Status of the assessee is that of a resident company. Assessment year under consideration is 2004-05. Assessee carries on the business of refining of crude oil, selling of petroleum products and captive generation and distribution of electric power.

8. Assessee filed return of income declaring loss of Rs.60,29,17,798.00. Assessee however paid tax on book profit of Rs.31,61,94,360.00 computed in terms of section 115JB of the Act. Assessment was made under Section 143(3) of the Act.

9. In the course of the assessment proceedings an issue of considerable importance arose relating to an amount of Rs.255.685 crores shown by the assessee under the head “other income” and not in the nature of income liable to income tax.

10. Assessing Officer noted that there was a scheme of the Karnataka Government on the basis of which while the assessee was allowed to collect sales tax on its sales, sales tax so collected was considered as “sales tax deferment loan”. The loan so outstanding was to be paid by the assessee to the State Government within the periods specified in the scheme. In terms of the incentives granted to the assessee by the Government of Karnataka, assessee could repay the loan within a period of 11 years in respect of phase-I of the refinery and within a period of 14 years in respect of phase-II of the refinery. Such loan outstanding as on 29th April, 2004 amounted to Rs.517.130 crores. At this point of time Karnataka Government came up with a scheme vide notification dated 31st March, 2004. As per the scheme Government of Karnataka allowed prepayment of sales tax deferment loan outstanding as on 29th February at the net present value (NPV) before expiry of the deferred periods of 11 years and 14 years for phase-I and phase-II respectively. Availing this opportunity assessee made the payment of the deferred sales tax loan at the net present value (NPV) of Rs.261.445 crores as against the total outstanding loan amount of Rs.517.130 crores. Assessee contended that this difference of Rs.255.685 crores (Rs.517.130 crores less Rs.261.445 crores) was a capital receipt credited to the profit and loss account under the head “other income” which accrued on account of prepayment of sales tax deferment loan and therefore this amount was not covered by section 41(1) of the Act.

11. Assessing Officer referred to section 41(1) of the Act and held that as and when any allowance or deduction is made in the assessment year in respect of any expenditure or trading liability incurred by the assessee and subsequently in any previous year the assessee obtains any benefit in respect of such liability by remission or cessation thereof that is required to be brought to tax. Sales tax collected is a trading receipt. Conversion of sales tax collected into loan and using the expression “sales tax deferment loan” did not change the real character of the receipt as trading receipt.

Nomenclature was not decisive; the real character of the receipt was required to be considered. Accordingly, contention of the assessee was rejected. Thus, the amount of Rs.255.685 crores was brought to tax, the same being added to the income of the assessee vide the assessment order dated 30th October, 2006. By the said assessment order Assessing Officer computed book profit under section 115JB of the Act at Rs.2,44,63,94,360.00 and charged interest thereon under sections 234B and 234C of the Act.

12. Aggrieved by the said order of assessment, assessee preferred appeal before the Commissioner of Income Tax (Appeals)-3, Mumbai, (“CIT(Appeals)” for short) or first appellate authority, raising various grounds of appeal. Assessee challenged the decision of the Assessing Officer treating the discount received by it on settlement of sales tax deferment loan as taxable income of the assessee. The issue was of taxability of the amount of discount. Following the decision of the CIT (Appeals) dated 30.04.2008 in the case of Associated Capsules Private Limited for the assessment year 2004-2005, the first appellate authority by the appellate order dated 16th September, 2008 allowed the said ground of appeal of the assessee and directed the Assessing Officer to exclude the amount of Rs.255.685 crores added to the income of the assessee. On the issue regarding charging of interest under sections 234B and 234C of the Act on the book profit computed under section 115JB of the Act, the first appellate authority followed the decision of the Karnataka High Court in the case of Kwality Biscuits Limited Vs. Commissioner of Income Tax, 243 ITR 519 and held that when income is taxable under section 115JB of the Act, interest under sections 234B and 234C could not be charged.

13. Aggrieved by the decision of the first appellate authority, Revenue preferred appeal before the Tribunal which was registered as Income Tax Appeal No.6835/Mum/2008. Assessee also preferred a cross objection being CO No.105/Mum/ 2009. Both the appeal and cross-objection were heard together. While the appeal by the Revenue was dismissed, cross-objection of the assessee was allowed vide the order dated 23rd November, 2016. However, in this appeal we are only concerned with decision of the Tribunal in rejecting the appeal of the Revenue.

14. On the issue relating to addition of Rs.255.685 crores made by the Assessing Officer by invoking provisions of section 41(1) of the Act was concerned, Tribunal took the view that the issue was squarely covered by the decision of the Bombay High Court in the case of CIT vs. Sulzer India Limited, 369 ITR 71 and held that the first appellate authority made no mistake in holding that the surplus arising on prepayment of deferred sales tax loan at NPV is a capital receipt which cannot be termed as remission or cessation of a trading liability so as to attract section 41(1) of the Act. Thus, order of the first appellate authority was affirmed by the Tribunal.

Interest as per Sect 234B & 234C not leviable on taxes payable under MAT – Bombay HC

15. On the question of charging of interest under sections 234B and 234C on income taxable under section 115JB of the Act is concerned, Tribunal held that at the relevant time i.e., at the time of making the assessment the decision of the Karnataka High Court in Kwality Biscuits Limited (supra) was holding the field as per which interest under sections 234B and 234C of the Act was not chargeable with respect to tax liability determined under MAT. Tribunal also noted that in Joint Commissioner of Income Tax Vs. Rolta India Limited, 330 ITR 470, Supreme Court held that where MAT companies defaulted in payment of advance tax in respect of tax payable under section 115JB, it was liable to pay interest under sections 234B and 234C of the Act. However, according to the Tribunal, the judgment of the Supreme Court in Rolta India Limited (supra) was delivered subsequently which would not discredit the bona fide reason entertained by the assessee in not depositing the advance tax on MAT in view of the prevailing judgment of the Karnataka High Court in Kwality Biscuits Limited (supra) which was then holding the field. In such circumstances, Tribunal held that there was no reason to interfere with the finding of the first appellate authority, albeit on a different ground.

16. Aggrieved, Revenue is before us in appeal under section 260A of the Act raising the above two questions for consideration.

17. Mr.Kotangale, learned standing counsel, Revenue has assailed the findings of the Tribunal on both the issues and submits that the findings being contrary to law are liable to be appropriately interfered with. In so far the first issue is concerned, it is a fit case where provision of section 41(1) of the Act is attracted and the amount received on sales tax deferment loan as rebate was liable to be treated as income being a trading receipt. In so far levy of interest under sections 234B and 234C of the Act in the event of failure of the assessee in depositing advance tax on MAT, the position has been clarified by the Supreme Court in the case of Rolta India Limited (supra). The decision of the Supreme Court in Rolta India Limited (supra) being the law of the land, Tribunal was not justified in taking a contrary view. In addition to the decision in Rolta India limited (supra), Mr.Kotangale has relied upon the decisions of the Supreme Court in Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons Ltd., 222 ITR 344 and in the case of Commissioner of Income Tax Vs. Anjum M.H.Ghaswala, 201 ITR 252.

18. Per contra, Mr.Dastur, learned senior counsel for the respondent/assessee has supported the order of the Tribunal on both counts. He submits that in so far the first question is concerned, premature payment of sales tax already collected termed as the “sales tax deferment loan” as per scheme of Government of Karnataka does not attract section 41(1) of the Act and refers to the decision of the Bombay High Court in Sulzer India Limited (supra) which decision has been affirmed by the Supreme Court in CIT Vs. Balkrishna Industries Limited, (2018) 15 SCC 608. In so far the second question is concerned, Mr.Dastur has referred to sections 234B and 234C of the Act and submits that Karnataka High Court in Kwality Biscuits Limited (supra) had held that for not paying advance tax in respect of tax leviable on the book profits determined under section 115JB of the Act, interest could be charged under sections 234B and 234C of the Act. That was the law applicable at the time of making of assessment. Infact, this decision of the Karnataka High Court was not disturbed, rather affirmed by the Supreme Court in CIT Vs. Kwality Biscuits Limited, 284 ITR 434. This position was clarified by the Bombay High Court in Prime Securities Limited Vs. ACIT, 333 ITR 464 and again in CIT Vs. JSW Energy Limited, 379 ITR 36(Bom).

19. Submissions made by learned counsel for the parties have been considered. Also perused the relevant materials on record as well as considered the decisions cited at the Bar.

20. In so far the first question is concerned as already noticed above, it relates to addition of Rs.255.685 crores made by the Assessing Officer by invoking the provisions of section 41(1) of the Act. We have already noticed that assessee was granted incentives by the Karnataka Government whereby it availed sales tax deferment for a period of 11 years for phase-I of the refinery and 14 years for phase-II of the refinery. The scheme was called sales tax deferment loan scheme. The sale tax so collected was converted into loan to be repaid by the assessee to the State Government within the two periods specified as per phase-I and phase-II. Such a loan amount outstanding as on 29th February, 2004 was to the extent of Rs.517.130 crores. Government of Karnataka issued two notifications, both dated 31st March, 2004, allowing prepayment of the sales tax deferment loan at the net present value (NPV) before expiry of the deferred periods of 11 years or 14 years as per phase-I and phase-II respectively. As per the said notifications assessee pre-paid the deferred sales tax loan at NPV of Rs.261.445 crores against the outstanding amount of Rs.517.130 crores resulting in a surplus of Rs.255.685 crores which was credited to the profit and loss account as “other income”. In the assessment proceedings assessee treated the said “other income” as capital receipt, not liable to be taxed. However, Assessing Officer did not accept the said contention of the assessee by taking the view that sales tax deferred loan amount was nothing but sales tax collected which was a trading liability and remission or cessation of a part of the same was taxable under section 41(1) of the Act. Thus, according to him the surplus of Rs. 255.685 crores arising on account of prepayment of deferred sales tax loan was a remission or cessation of trading liability, liable for assessment under section 41(1) of the Act.

21. When this was appealed against, the first appellate authority took the view that the amount of Rs.255.685 crores accrued to the assessee due to preponement of the payment of the converted loan at the discounted rate. The first appellate authority found that this issue was already decided at the stage of first appeal in the case of Associated Capsules (P) Limited for the assessment year 2004-05 wherein it was held that on such surplus the provisions of section 41(1) of the Act were inapplicable and, therefore, directed the Assessing Officer to delete the aforesaid amount which was added to the income of the assessee.

22. Before the Tribunal assessee contended that the case of the Associated Capsules (P) Limited was adjudicated by the jurisdictional High Court i.e. Bombay High Court alongwith the bunch of cases in Sulzer India Limited (supra) where the High Court considered identical scheme of the Government of Maharashtra with respect to premature repayment of deferred sales tax loan. High Court had upheld the contention that the surplus arising on such repayment was not an amount falling for consideration in terms of section 41(1) of the Act. On the other hand, it was contended on behalf of the Revenue that the sales tax collected formed part of the trading receipt as held by the Supreme Court in Chowringhee Sales Bureau P. Ltd. Vs. CIT, 87 ITR 42 and therefore, any cessation or remission in payment of such liability would attract the provisions of section 41(1)of the Act.

23. Tribunal considered the rival submissions and held as follows:-

“9. We have carefully considered the rival submissions and find that the conclusion drawn by the CIT (A) on this aspect is fully covered by the judgment of the Hon’ble Bombay High Court in the case of Sulzer India Ltd. (supra). The point argued by the ld. DR, based on the judgment of the Hon’ble Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. (supra), is untenable in as much as the same has already been considered by the Hon’ble Bombay High Court in its judgment. There is also no dispute to the assertions made by the learned representative for the assessee that the sales tax deferred scheme under the Package Scheme of 1983 and the Package Scheme of Incentive, 1985 notified by Government of Maharashtra, which was considered by the Hon’ble Bombay High Court in the case of Sulzer India Ltd. & Others (supra) is pari materia to the scheme availed by the assessee herein, as notified by the Government of Karnataka. Having regard to the aforesaid, we find that the judgment of the Hon’ble Bombay High Court in the case of Sulzer India Ltd. (supra), squarely covers the controversy before us, and the CIT (A) made no mistake in holding that the surplus arising on prepayment of deferred sales tax loan at NPV is a capital receipt, which cannot be termed as remission or cessation of a trading liability so as to invite section 41(1) of the Act. The order of the CIT (A) is hereby affirmed and Revenue fails in its Ground of appeal no.1.”

24. Thus, Tribunal held that decision of the Bombay High Court in Sulzer India Limited (supra) squarely covered the issue and that the first appellate authority made no mistake in holding that the surplus arising on prepayment of deferred sales tax loan at NPV was a capital receipt which could not be termed as remission or cessation of a trading liability so as to invite section 41(1) of the Act. Accordingly, order of the first appellate authority was affirmed.

25. Before examining the decision of this court in Sulzer India limited (supra) a brief reference to section 41(1) of the Act is considered necessary. Section 41 comes under chapter IV of the Act which deals with computation of total income and under heading (D) deals with profits and gains of business or profession. Section 41 deals with profits chargeable to tax. Section 41(1) reads as under :-

“S. 41(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year –

(a) the first mentioned person has obtained, whether in cash or in 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 cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income tax as the income of that previous year.

Explanation 1 – For the purposes of this sub section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub section by way of writing off such liability in his accounts.

Explanation 2 – For the purposes of this sub section, “successor in business” means –

(i) where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) where the first mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv) where there has been a demerger, the resulting company.”

For Further Details – Read Full Order

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