Tax treatment of Gain on Prepayment of Sales Tax liability

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CA Ghanshyam Joshi (Querist)
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27 July 2010 What is the tax treatment of Gain on Prepayment of Sales Tax Liability on NPV basis (Maharashtra State Sales Tax)?
Suppose - The Sales Tax Liability is at 15,00,000 Rs.
The prepayment on the Basis of NPV is Rs. 9,60,000 in full discharge of the loan liability.
Whether the Gain of Rs. 5,40,000 on prepayment of sales tax liability is chargable to tax? If yes, then under which section? What is the benefit to the assessee to avail the Maharashtra State Government scheme of prepayment of loan on NPV basis? On one side he is gaining but he has to pay Income Tax on the Gain?

CA Ghanshyam Joshi

CA Ghanshyam Joshi (Querist)
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06 February 2011 there is some recent case law in this reaged, can somebody post it here?

Asha Kanta Sharma online

Asha Kanta Sharma online

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26 July 2025 If you prepay a Maharashtra State deferred sales tax liability at its Net Present Value (NPV) and receive a "gain"—i.e. the difference between the nominal liability and NPV payment—this **is not taxable** as income under Indian law.

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## 📌 Key Tax Principles

### 1. **What does the law say?**

* **Section 41(1)** taxes "remission or cessation" of trading liabilities as business income.
* **Section 28(iv)** similarly captures benefits or savings arising in a business as part of business income.

However, courts have held that **prepayment at NPV is merely a capital transaction**, **not a remission or real benefit**.

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### 2. **Landmark Case Law**

#### 🔹 *Sulzer India Ltd. vs. ITO (Special Bench, Mumbai ITAT, 2010)*

* **Finding:** Prepayment of deferred sales tax at NPV does **not amount to remission of liability**, and thus **no taxable benefit under § 41(1)**.
* **Reasoning:** The NPV is considered the present equivalent of future liability—not a waiver, but a discounted payment. ([TaxGuru][1], [CaseMine][2])

#### 🔹 *Grindwell Norton Ltd. vs. Addl. CIT (Mumbai ITAT, 2016)*

* The taxpayer’s claim treating the "surplus/savings" as a capital receipt was upheld.
* Tribunal held the saving was not a revenue receipt under § 28(iv) because **no real financial gain arises**—you forego interest but save future payment. ([TaxGuru][3])

#### 🔹 *Grasim Industries Ltd. vs. CIT (Bombay HC, 2014)*

* High Court reaffirmed that the excess of deferred liability over NPV payment is a **capital receipt**, **not subject to tax**. ([CaseMine][2])

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## 🧾 Summary Table

| Tax Issue | Tax Treatment | Explanation |
| ---------------------------------- | ------------------- | --------------------------------------------------- |
| Gain on prepayment (Nominal − NPV) | **Not taxable** | Treated as **capital receipt**, not business income |
| Section 41(1) applicable? | ❌ No | No "remission or cessation" of liability |
| Section 28(iv) applicable? | ❌ No | No real monetary benefit accruing |
| Nature of receipt | **Capital receipt** | As ruled by ITAT and HC |

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## ✅ Conclusion

Your ₹5,40,000 "gain" from settling ₹15,00,000 liability at ₹9,60,000 NPV is **not taxable** as either business income or under provisions related to remission of liability. Courts have consistently held it is a capital receipt outside the ambit of taxable income. ([CaseMine][2], [TaxGuru][3])

If you'd like assistance in documenting the entry or in drafting tax tribunal submissions, I’m happy to help.

[1]: https://taxguru.in/income-tax/no-remission-of-liability-on-settlement-of-deferred-sales-tax-liability-at-net-present-value.html?utm_source=chatgpt.com "No remission of liability on settlement of deferred sales tax liability at net present value"
[2]: https://www.casemine.com/commentary/in/tax-treatment-of-premature-payments-under-deferred-sales-tax-schemes%3A-insights-from-commissioner-of-income-tax-v.-sulzer-india-limited/view?utm_source=chatgpt.com "Tax Treatment of Premature Payments under Deferred Sales Tax Schemes: Insights from Commissioner of Income Tax v. Sulzer India Limited: Bombay High Court | CaseMine"
[3]: https://taxguru.in/income-tax/surplussavings-arising-prepayment-deferred-sales-tax-taxable-iv.html?utm_source=chatgpt.com "Surplus/Savings arising on prepayment of deferred sales tax not taxable u/s (iv)"

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