Mumbai Tribunal rules differential amount on prepayment of deferred sales tax liability at NPV taxable as business income, post Income Computation and Disclosure Standards

In the case of Oricon Enterprises Ltd. ^[1] (Taxpayer), issue arose on taxability of the differential amount [i.e. difference between sales tax liability and net present value (NPV) of sales tax liability] which is credited to Profit and Loss Account (P&L) and arising on prepayment of deferred sales tax liability under Maharashtra State Government’s Package Scheme of Incentives (PSI). The issue was whether such gain credited to P&L should be treated as income in nature of subsidy for the purposes of Income Tax Act, 1961 (ITA) for tax years 2016-17 and 2017-18. Also, whether such income is taxable under the head business income as it is a benefit or perquisite arising from business. 

The Taxpayer had availed sales tax deferral under PSI scheme. Under the scheme, the company collected sales tax from customers but was allowed to defer payment to the Government for a period of 10 years. The deferred sales tax was to be repaid in five instalments after the expiry of the deferral period. This incentive was granted to promote industrial growth in backward areas. The scheme further provided an option for prepayment of deferred sales tax liability before completion of 10 years by paying the amount at NPV of the liability.

The Taxpayer opted for early repayment by paying significantly reduced amount against the outstanding liability which, resulting in a huge gain. This gain was credited to the Profit & Loss account as miscellaneous income but not offered to tax, contending that no fresh benefit accrued on such prepayment since it only repaid present value of future liability. The Taxpayer relied on Special Bench decision of Mumbai Tribunal in case of Sulzer India Ltd. v. JCIT [(2010) (42 SOT 457) (SB) (Mum.)]

The Mumbai Income Tax Appellate Tribunal (Tribunal) held that the differential amount arising from such prepayment under the PSI Scheme is taxable. It held that the definition of income has been broadened to include assistance in the form of grant, subsidy, concession etc. obtained from Government. The differential amount qualifies as a concession obtained from state government under PSI scheme. Hence, it has to be treated as income. The benefit was quantifiable and had even been recorded in its Profit and Loss Account. The scheme itself described this benefit as an “incentive”. The Tribunal held that the incentive was provided to support ongoing business operations in backward areas and did not relate to the acquisition of any capital asset. Hence, it was revenue in nature. The Tribunal held that this benefit is a waiver which is taxable as business income as the Taxpayer is paying a reduced amount. 

The Tribunal distinguished the reliance placed by Taxpayer on Sulzer India Ltd. v. JCIT (supra) as it dealt with law prior amendment to definition of income to include subsidy or concession.

^[1] [TS-813-ITAT-2025(Mum)]