Sales Tax Liability Can Not Be Disallowed If State Govt. Considered It As Deemed Collected !

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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:

• "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

• "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

1. State Govt. issues orders under which the outstanding amount is Deemed Collected and disbursed as loan.
2. 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. . . . "

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. . . . . "

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 :

• Kalpana Lamps and Components Ltd. v. Dy. CIT [2002] 255 ITR 491 (Mad).
• 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.

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A.O Not Empowered to Issue Penalty Notice u/s 271D or 271E.

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One of my assessees, because of certain business urgencies, accepted a loan in excess of Rs. 20000/- in cash from one known lady [ who is also not an income tax assessee so far] during the previous year 2005-06.Now the AO has issued one show cause notice u/s. 271D in this connection.Learned members may guide me in this matter along with suitable citation of jurisdictional pronouncements, if any, in this regard.

CA SRINIVASAN RM

There are two issues arising from your question :
1. Who can issue a notice initiating penalty u/s 271D of the I T Act.
2.Whether the facts of case shows that the contravention of section 269SS was deliberate and for concealing the income or evading tax.

I feel the A.O has no power to initiate penalty proceeding u/s 271D for simple reason that he is not an authority for IMPOSING penalty. This is unlike other penalty proceeding u/s 271(1)......(b) or (c) . In those cases , not only that the penalty proceeding should emanate from assessment proceeding, but the penalty is imposed by A.O, although approval is required. In case of 271D or 271E, the power to IMPOSE penalty is vested in JCIT/Add.CIT . Hence , he is the authority to be satisfied that the violation is worth an initiation of penalty proceeding.Then That penalty authority shall hear the case and dispose of the proceeding. You should carefully read the order of Tribunal ,Chandigarh in case of Dewan Chand Amrit Lal v. Deputy Commissioner of Income-tax 98 ITD 200[2006]

• "The authority to impose the penalty under these provisions is the Dy. CIT (now Joint CIT). When the Assessing Officer does not have jurisdiction either to initiate or impose penalty under section 271D or 271E, a notice issued by him for making inquiries relating to the contravention of section 269SS or section 269T cannot be construed to be initiation of penalty proceedings by the competent authority. We would like to make it abundantly clear that even if a show-cause notice is issued by the Assessing Officer for imposition of penalty under section 271D or under section 271E that notice would be without any jurisdiction as the Assessing Officer has no authority under law either to initiate or impose the penalty under section 271D or under section 271E. We are, therefore, of the considered view that in the present appeals, at the relevant point of time, the DC1T had the jurisdiction to initiate and impose the penalty under section 271D and, therefore, the limitation under section 275(1)(c) has got to be computed form the date of initiation by the DCIT"

The second issue is of facts. If facts can be brought on record that there indeed was exigency and that no finding whatsoever was there that the said cash received was related to unaccounted income of the assessee . CBDTs Circular No. 387 dated 6-7-1984 is important for buttressing the point why such provision was brought in the Act.Relevant portion of extract is given as under:

• "(xxiv) Prohibition against taking or accepting certain loans and deposits in cash.32.1. Unaccounted cash found in the course of searches carried out by the Income-tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.

• "32.2 With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act, 1984, has inserted a new section 269SS in the Income-tax Act debarring persons from taking or accepting, after 30-6-1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken is Rs. 10,000 or more.

Similarly Section 269T which was introduced much before Section 269SS by the Income-tax (Second Amendment Act), 1981 (38 of 1981) w.e.f. 11-7-1981. While explaining the objects for incorporation of section 269T, the CBDT in Circular No. 345, dated 28-6-1982 indicated as under :

• 2.1 The proliferation of black money poses a serious threat to the national economy and it was considered necessary to take effective steps to contain and counter this major economic evil. The Government have, in recent past, taken several legislative and administrative measures to unearth black money. The Income-tax (Second Amendment) Act, 1981 (hereinafter referred to as the Amending Act) represents another step in the same direction.
• 2.2 It came to Governments notice that a substantial amount of black money was deposited by tax evaders with banks, companies, co-operative societies and partnership firms either in their own names or in benami names. The Income-tax (Second Amendment) Act, 1981, seeks to counter attempts to circulate black money in this manner."

Even Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 where it has been held that penalty is not to be imposed merely because it is lawful to do so and that it should not be imposed if there is only a technical or venial breach of law.

There are favourable judgment of High Courts and tribunal . You may search for those. In my view ,Rajasthan High Court's decision is very much applicable in your case. In case of Commissioner of Income-tax v. Manoj Lalwani [2003] 260 ITR 590 (Raj)the Hon'ble High court held

• "In the present case the Tribunal has found that the assessee is an exporter and was in urgent need of the money for complying with the time bound supplies and, therefore, he took a loan of Rs. 2,50,000 (Rs. two lac fifty thousand) from his brother-in-law Mukesh Manwani. Out of the loan so taken, an amount of Rs. 2,45,000 (Rs. two lac forty-five thousand) was immediately deposited in the Bank, which indicates that the amount of loan, in fact, was received by him from Mukesh Manwani. It was only to meet the emergent need of time bound supplies; the loan was taken as he did not have sufficient time and funds and, that there was no intention to violate the provision of section 269SS of the Act of 1961. The Tribunal, in these circumstances, has arrived at a conclusion that the cash loan was taken by the assessee in the exceptional circumstances and that it is a case of reasonable cause, as a consequence thereof set aside the penalty imposed by the revenue authorities. As we have already held that on a reasonable cause being shown, the assessing authority has jurisdiction not to impose the penalty and, therefore, in our opinion, the Tribunal has acted in accordance with the law in waiving the penalty imposed on the assessee by the revenue authorities."

Further Supreme Court's decison in the case ADI v. Kum. A.B. Shanti [2002] 122 Taxman 574. is an important to understand that the provision contained in the Act that no penalty can be imposed unless assessee is given an opportunity to explain , means that if he explains properly, penalty may not be imposed .The Apex court held as under :

• "It is important to note that another provision, namely, section 273B was also incorporated which provides that notwithstanding anything contained in the provisions of section 271D, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision if he proves that there was reasonable cause for such failure and if the assessee proves that there was reasonable cause for failure to take a loan otherwise than by account payee cheque or account payee demand draft, then the penalty may not be levied. Therefore, undue hardship is very much mitigated by the inclusion of section 273B. If there is a genuine and bona fide transaction and if for any reason the taxpayer cannot get a loan or deposit by account payee cheque or demand draft for some reasons, the authority vested with the power to impose penalty has got discretionary power."

Therefore ,facts need to bring forth to buttress the point that there was neither any black money i.e unaccounted money involved nor the loan was taken in normal circumstances.

Tags: india, penalty, income tax

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Even Autonomous bodies of States are subject to TDS!

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Is Panchayat Udyog exempt from Income Tax, if yes on what grounds, If there is any section/direction/ notification, kindly give detail, TDS has been deducted wrongly by some dept. on furniture supplied by Panchayat Udyog which I think is exempt on mutual benefit concept. Total Turnover of P/U for the f/y 2005-2006 is 56.00 lacs.Now if P/U is exempt from income tax would it be possible to file return to claim refund of tds with out Tax Audit. ............vyakatitivemittal@ ... in

I had a similar query whether municipal corporation is liable to tax? what if we have to deduct tax on some payment made to it? is it exempt from TDS? .......................alpachristie@.......in

I take the second question first!
For this Section 4 and Section 10 [20] requires revisit.

Section 4(2 ) is charging section for TDS or TCS and it states "In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act "

Section 4(1 ) states "Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: "

Now READ section 10(20) of the I T Act which says "In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-...............................................................................

................
[20] the income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area;

Explanation.—For the purposes of this clause, the expression “local authority” means—
(i) Panchayat as referred to in clause (d) of article 243 of the Constitution; or
(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or
(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or
(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924)."

Therefore , the income of the Municipal Corporation can not be taken for computing TOTAL INCOME by virtue of Section 10(20) of the I T Act , as such the same is not chargeable to tax as per Section 4(1 ).Thereby , TDS provision is also not applicable.

Now Comes FIRST question :

Is Panchayat Udyog exempt from Income Tax?

The income of Panchayat , by virtue of Section 10[20] is exempt from being included in total income, Therefore,like Municipal Corporation , it is also exempt from TDS also. However, the important question is in the instant case is to know the proper facts and origin of the entity known as Panchayat Udyog. That is, whether the Panchayat Udyog is covered under definition of Panchyat or it is a separate entity. If it is separate entity, then the TDS provision shall be applicable because the exemption under Section 10[20] of the I T Act is not applicable on its income.

The issue that State and its created Autonomous bodies are same or separate entity for the purpose of Income Tax Act can be understood by reading the very recent judgment of Supreme Court in Adityapur Industrial Area Development Authority v. UOI [2006] 283 ITR 97 (SC) wherein the issue whether Area Development Authority [ADA after this]is subject to TDS or not was decided against the ADA . In this case , the I T Authority issued notice to the bank for TDS on the fund /FD deposited by ADA . The notice was challenged before High Court with the argument that DDA being local authority is not subject to tax . However, neither High Court nor Supreme Court , after going through the relevant Act which created the ADA , agreed with the argument of the appellant and found that DDA does not come under the definition of Local Authority , thus not exempt from tax.

Thus answer to the first question is if Panchayat Udyog is same as Panchayat which only facts of the case can decide , TDS will not be appliacble. In that case, your client can get Refund.

However, I find that supply of furniture does not come under the TDS provision because it falls under the category of sales and not the contract. Thus TDS is wrong .

It is always possible to file return of Income and even if six years have passed and you forgot to claim refund which otherwise was allowable, you can apply before CIT/CCIT u/s 119[2][b] of the I T Act.

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