SUPREME ENTERPRISES,MUMBAI vs. ADDL CIT 2(3), MUMBAI

The present appeal has been preferred by the assessee against the order dated 15.09.2011 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09. The appeal was earlier heard on 17.06.2015 and was reheard on 06.10.2015 for seeking certain clarifications from the assessee. There are two issues involved in this appeal. The first issue is in respect of claim of deduction u/s. 80ia(4)(iv) for generating power by wind mills. The assessee in this respect has taken the following grounds: “

Referring to the above grounds of appeal, the Ld. AR of the assessee has submitted that the Assessee is eligible for deduction u/s 80-IA of the Act in respect of the profits out of the generation of electricity out of Windmill activity and the unabsorbed depreciation of the earlier years, since already set off with the ineligible profits of the assessee from hotel business, could not be reduced from profits of eligible business for computing deduction u/s 80-IA of the Act. The Ld AR of the assessee has further stated that this issue is squarely in favour of the assessee by a series of decisions as mentioned below:

Further, the Ld AR has mentioned that in the decisions of Hon'ble Madras High Court, the Special Bench decision in the case of ACIT vs. Gold Mine Shares and Finance (p) Ltd. 113 ITD 209(SB), which is heavily relied upon by the Ld CIT (A) while dismissing the appeal of the assessee, has been duly considered. The Ld. DR on the other hand has relied upon the findings of the lower authorities on this issue.

We have considered the rival contentions. We find that the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. vs. ACIT (2010) 231 CTR (Mad) 368 (BCAJ) has held that the assessee is entitled to claim deduction u/s 80IA for 10 consecutive years out of 15 years and that initial year of benefit can be opted by the assessee. Losses and depreciation of the years earlier to the initial assessment year which have already been absorbed against profits of other businesses cannot be notionally brought forward and set off against the profits of the eligible business for computing the deduction u/s.80-IA. Similar view has been taken in the decision of Hon'ble Madras High Court in the case of CIT vs. Emerald Jewel Industry P. Ltd (supra) and by the Mumbai Tribunal in the case of M/s prashant Caterers vs. ITO (supra). Respectfully following the same, this issue is accordingly decided in favour of the assessee. The AO is directed to allow the claim of deduction in the light of the above stated decisions.

The other issue taken by the assessee is relating to the taxability of the difference between the amount paid less i.e. at net present value and future liability on account of incentive given by the State Govt. of deferred sales tax liability. The relevant ground read as under: “Ground No.(iv) “iv) The Learned Assessing officer has erred in not allowing claim of appellant overlooking that appellant was allowed benefit by Sales Tax Department by which Sales Tax payment was deferred for 10 years to encourage installation of Wind Mills and under the scheme the assessee was allowed to pay the Sales Tax Liability at a discounted value or at Net Present Value and the difference between

The issue raised vide ground No.(iv) is as to whether the amount of incentive granted by State government under Package Scheme of Incentive and under Power Generation Promotion Policy, 1998 should be treated as capital receipt or taxable revenue receipt. The assessee was allowed benefit by Sales Tax Department by which the sales tax payment was deferred for 10 years to encourage the installation of wind mills for the generation of electric power under the scheme. However, the assessee was allowed to pay the deferred/future sales tax liability prematurely/during the year under consideration at discounted value i.e. at net present value. The AO, however, taxed the difference between the future liability and the present discounted value as income of the assessee. At the outset, the Ld. A.R. of the assessee has brought our attention to the decision of the Hon’ble Bombay High Court in the case of “CIT vs. Reliance Industries Ltd.” (2011) 339 ITR 632 (Bom.) wherein the Hon’ble Bombay High Court, while relying upon the decision of the Hon’ble Supreme Court in the case of “CIT vs. Ponni Sugars and Chemicals Ltd.” (2008) 306 ITR 392 (SC), has held that if the object of the subsidy was to set up a new unit in a backward area to generate employment therein, then the subsidy was to be treated on capital account and the sales tax incentive was to be treated as capital receipt.

The Ld. AR of the assessee has further submitted that even otherwise it could not be construed as remission of liability, because the State Government had not waived of any of the liability. Had the State Government accepted lessor amount after twelve years or reduced such installments, then it could have been a case of remission/cessation. It was a simple case of collecting the amount at net present value which was due later on. Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability.

We find that the Hon’ble Bombay High Court in the case of “CIT vs. Sulzer India Ltd.” in ‘ITA No.450 of 2013 and others’ decided on December, 5th, 2014 has held that the difference between the net present value of sales tax liability and its future liability is not chargeable to tax under section 41(1) of the Act. It has been held that what the assessee was required to pay after 12 years in six equal installments was paid by the assessee prematurely in terms of the net present value of the same; that the state may have received a higher sum after the period of 12 years and in installments. However, the statutory arrangement for premature payment at net present value does not amount to remission or cessation of the assessee’s liability, rather, the state obtains a payment prematurely and in terms of the correct value of the debt due to it. The requirements of section 41(1)(a) are not fulfilled in such circumstances.

Admittedly, in the case in hand, the sales tax incentive was granted to the assessee under Package Scheme of Incentive and under Power Generation Promotion Policy, 1998 to encourage the installation of wind mill for generation of electric power. The sales tax liability was deferred which was allowed to be paid at a discounted value i.e. at net present value of the future liability. Hence, under the circumstances, the sales tax incentive being provided to the assessee to encourage the setting up of the wind mill thus is to be treated as capital receipt. However, the same, even otherwise also, cannot be treated as remission or cessation of liability in the light of the decision of the Hon’ble Bombay High Court in the case of “Sulzer India Ltd.” (supra). So, this issue is also squarely covered in favour of the assessee. This issue is accordingly decided in favour of the assessee.

In view of the above observations, the appeal of the assessee is hereby allowed.