1993 (2) TMI 94 - HC - Income Tax

Summary

Issues:
Whether the sum of Rs. 2,35,000, being the tax liabilities of the transferor-firm discharged by the assessee, was deductible in computing the assessee's business income for the assessment year 1974-75.

Analysis:
The case involved a private limited company that took over a firm along with its assets and liabilities. The company claimed a deduction of Rs. 2,35,000 in its assessment for the tax liability of the transferor firm. The Income-tax Officer initially disallowed the claim, which was upheld by the Appellate Assistant Commissioner. However, the Income-tax Appellate Tribunal allowed the deduction, leading to the reference to the High Court. The Court examined whether the amount paid by the assessee for the tax liability of the transferor was a revenue expenditure or capital expenditure.

The Court emphasized that for an expenditure to be deductible, it must be laid out wholly and exclusively for the purposes of the business and not in the nature of capital expenditure. It noted that if an expenditure is capital in nature, it cannot be claimed as a deduction under section 37 of the Income-tax Act. The Court clarified that section 40(a)(ii) comes into play only if the expenditure is considered a revenue expenditure under section 37. In this case, the tax liability discharged by the assessee was part of the consideration for the transfer of the business, making it a capital expenditure.

The Court referred to a previous decision of the Punjab and Haryana High Court, where a similar deduction claim was denied as capital expenditure. The Court highlighted that the tax liability discharged by the assessee was part of the consideration for acquiring the business, making it a capital expenditure and not deductible as revenue expenditure. Therefore, the Court concluded that the Income-tax Appellate Tribunal was not justified in allowing the deduction of Rs. 2,35,000 for the tax liability of the transferor-firm. The judgment was delivered in favor of the Revenue and against the assessee, with no order as to costs.