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An assessee had been allowed sales tax claim u/s 43B pursuant to a scheme of the state government whereby the government had converted his sales tax liability into a loan. The CBDT had issued two circulars—No.496 in 1987 and 674 in 1993—to provide that in cases where incentives were granted to an assessee by way of sales tax deferment, payment of ST will be deemed to have been made and no dis allowance will be made u/s43B.The assessee had been allowed such a deduction in A Y 1994-95, when his unpaid ST was converted into a loan.The loan instalment was due to be paid before31.03.2006, but it was not paid even before 31.10.2006, the due date for filing return of income.
Now the AO seeks to disallow this amount of loan instalment treating it as part of sales tax.My understanding is that once the amount of unpaid ST was converted into a loan, it ceased to be an expense altogether. How can it acquire the colour of sales tax again? Isn’t the AO violating the CBDT circulars mentioned above? Besides, only expenses can be disallowed u/s 43B, which implies that Section 43B applies only to the Profit and Loss items. A loan is a Balance Sheet item. So there’s no question of“dis allowance” of a capital payment. How can the AO do that?Please let me know how we can put up a good case before the AO. Can you cite some case laws that can help us out? CA Sanjeev Bedi
The moot point of your question is “if the sales tax liability was converted into loan by the State govt, whether the “unpaid loan” can be disallowed u/s 43B of the I T Act.”
In my opinion , it can not be disallowed on account of Circular No 496 dated 25-9-1987 and Circular 674 . The circular is binding on A.Os. Let us start Circular No 496 which vide point 4 sates as follows:
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“4. The matter has been examined in consultation with the Ministry of Law and the various State Governments. The Ministry of Law has opined that if the State Governments make an amendment in the Sales Tax Act to the effect the sales tax deferred under the scheme shall be treated as actually paid, such a deeming provision will meet the requirements of section 43B.”
Later it was seen that many states govt. were notifying the scheme by govt. orders and Circular : No. 674, dated 29-12-1993 gave relief even in that case.The circular is reproduced below
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“1. The scope of application of the provisions of section 43B to the sales tax collected but not actually paid under deferral schemes of the State Governments was considered in Boards Circular No. 496, dated 25-9-1987 [Clarification 2], and it was decided that, where the State Governments make an amendment in the Sales-tax Act to the effect that the sales tax deferred under the scheme shall be treated as actually paid, the statutory liability shall be treated as discharged for the purposes of section 43B.
2. It has since been brought to the notice of the Board that some State Governments, instead of amending the Sales-tax Act, have issued Government Orders notifying schemes under which sales tax is deemed to have been actually collected and disbursed as loans. Such Government Orders also provide that entries shall be made in the Government accounts giving effect to deemed collections by crediting the appropriate receipt-heads relating to sales-tax collections and debiting the heads relating to disbursal of loans. It has, therefore, been represented that, as such conversion of the sales tax liability into loans have similar statutory effect as can be achieved through amendments of the Sales-tax Act, the amounts covered under the scheme should be allowed as deduction for the previous year in which the conversion has been permitted by the State Governments.
3. The Board have considered the matter and are of the opinion that such deferral schemes notified by the State Governments through Government Orders meet the requirements of the Boards Circular No. 496, dated 25-9-1987 in effect though in a different form. Accordingly, the Board have decided that the amount of sales tax liability converted into loans may be allowed as deduction in the assessment for the previous year in which such conversion has been permitted by or under Government Orders.”
As per the aforesaid circular , disallowance u/s 43B should not be made if following conditions are satisfied
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State Govt. issues orders under which the outstanding amount is Deemed Collected and disbursed as loan.
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The State Govt made necessary entries in govt. accounts giving effect to such deemed collection.
If in your clients case, the aforesaid conditions are fulfilled, there can not be any reason for disallowance of the said amount.Once the said amount is considered as Deemed Payment by the State govt., there can not be any question of going into the fact whether such payment was actually done or not.
Remember , the condition that State Govt has to amend its own Sales Tax Act or do the necessary entries as per the govt’s order is of prime importance. Supreme Court in CIT v. Gujarat Polyerete Pvt. Ltd. [2000] 246 ITR 463 (SC), in following words :
. . . provisions (of Circular No. 496) would apply only if a State Government had amended its Sales Tax Act to provide that the sales tax that was deferred under an incentive scheme framed by it would be treated as actually paid, so as to meet the requirements of section 43B. . . . “
. . . provisions (of Circular No. 496) would apply only if a State Government had amended its Sales Tax Act to provide that the sales tax that was deferred under an incentive scheme framed by it would be treated as actually paid, so as to meet the requirements of section 43B. . . . “
In Morvi Horological Industries v. ITO [1991] 36 ITD 115 (Ahd. – Trib.), the Tribunal quoted the above circular dated 25-9-1987, and observed :
In the State of Gujarat, necessary amendments have been made by executive instructions, copies of which have been filed before us. The above instructions of the Board would be applicable as far as applicability of section 43B to the liability of payment of sales-tax to sales tax deferred scheme. . . . . “
In the State of Gujarat, necessary amendments have been made by executive instructions, copies of which have been filed before us. The above instructions of the Board would be applicable as far as applicability of section 43B to the liability of payment of sales-tax to sales tax deferred scheme. . . . . “
Rajasthan High Court in Commissioner of Income-tax v. Devendra Udhyog [2003] 264 ITR 701 (Raj) 10-3-2003 reversed the order of Tribunal stating that there is nothing on record that necessary amendment by State govt was not done in Sales Tax Act
In your case, however I have following opinion:
1. The impugned amount was related to A.Y 1994-95 , therefore out of ambit of any type of consideration for an I T Authority , on account of time limitation.
2. Once the said amount is considered by the State Govt as Deemed Paid or Collected, there can not be question of payment by an I T Authority.
3. The Circular is binding on the A.O.
4. There is no provision under the I T Act to assess such “Deemed Paid amount” as receipt .
5. You do not need any case law for your case. However , two such favourable cases are :
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Kalpana Lamps and Components Ltd. v. Dy. CIT [2002] 255 ITR 491 (Mad).
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CIT v. K.N. Oil Industries [1997] 226 ITR 547 (MP),
If the A.O is hell bent on misinterpreting the provision, apply u/s 144A of the I T Act before the Jt/Add.C.I.T of range.
About taxworry
Dear Sir,
Thanks a million for a great, very thoughtful and helpful answer!
Regards,
CA Sanjeev Bedi