TMI Blog1991 (2) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... rm amounting to Rs. 29,000 and borne by the assessee-company is not a trading liability and not entitled to revenue deduction in the nature and circumstances of the case ?" Shortly stated, the facts are that the assessee is a private limited company which was incorporated to take over the running business of the firm of similar name, namely, Puspa Perfumery Products. The agreement in pursuance of which the business of the firm was taken over by the aforementioned company was drawn up on November 8, 1979. It provides, inter alia, as follows : " 1. The vendors do hereby transfer, sell and assign unto the purchaser-company all that running business with all its assets including goodwill, plant and machinery, furniture and fixtures, stock-in-trade, stores and implements, book debts and cash and bank balances, rights and titles including trade licence, sales tax registration numbers and all quota rights and all other entitlements to which the said running concern has or is entitled to either movable or immovable or whatsoever including all pending contracts and engagements thereto which the said running concern has been entitled in connection with the said business. 2. The purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm. The company claimed this amount as revenue deduction from its income for the assessment year 1983-84 but the same was disallowed by the Income-tax Officer. However, on appeal, the learned Commissioner of Income-tax (Appeals) held that this payment of Rs. 11,949 was an allowable revenue deduction. Thereafter, both the assessee and the Department came in appeal before the Tribunal. The Tribunal held that the income-tax liability payable by the erstwhile firm was not its trading liability though it resulted from its trading business. It was a debt due from it to the Government and had to be paid out of the income and not to earn income. The payment of such debt by the assessee-company would not become a trading liability merely because it was paid under an agreement of take over of the business. The liability was clearly of capital nature and could not, therefore, be allowed as a deduction while computing the assessee's total income as revenue liability of the assessee-company. The Commissioner of Income-tax (Appeals) was, therefore, justified in refusing to allow it in respect of assessment years 1981-82. The Tribunal was of the view that the Commissioner of Income-tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 54,140 so debited was an allowable expenditure under section 10(2)(xv) of the Income-tax Act in the relevant assessment year 1952-53. The question for determination in that case was whether the liability to pay Rs. 54,140 as bonus for 1949 and 1950 which was undertaken by the assessee-company in its year of account 1951-52 was an allowable item of expenditure in assessing profit and loss of that year of account in the assessment year 1952-53. The court dealt first with the question as to whose liability it was that the assessee-company was discharging when it paid bonus for 1949 and 1950 in the year of account 1961-52. There, the Madras High Court held that the bonus payable on the occasion of Deepavali in 1950 could not be viewed as payable wholly for services rendered to the predecessor-company. Before that bonus could be claimed, that is, even before the Deepavali in 1950, the assessee-company had taken over the business, and after February 1, 1950, the services were to the assessee-company. That the profits earned in the year of account ended on January 31, 1950, would, in the normal circumstances, have furnished the basis for determining the quantum of bonus payable on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealt with this question as follows (at p. 290): "Under normal circumstances the payment of bonus to the employees would be a trading expense, and it would not be an expenditure of a capital nature. If the liability to pay the bonus had been that of the transferor as an accrued liability, and that liability was transferred to the transferee under the terms of the contract of the transfer, that is, if the liability so transferred was one of the factors taken into account to fix the price payable by the transferee, then the amount expended in discharge of the liability so transferred would have been part of the price paid by the transferee for the acquisition of the business. Whether the accrued liability that was so transferred was a liability to an employee, or any other trade liability, can make no difference in principle." This case is, therefore, distinguishable on facts since it was held that the liability itself accrued only after the transfer, that is, the liability under the award and the subsequent liability under the agreement between the workmen and the assessee-company. The discharge of that liability was not part of the contract of transfer nor was payment of bonus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es released for carrying on the business and claimed the amount as business expenditure under section 37(1) of the Act. The Tribunal allowed the claim of the assessee. On a reference, the Revenue contended that the assessee was not liable for the tax dues of the transport company and that even if the assessee was held liable, the payment would amount to a capital expenditure. There, the Madhya Pradesh High Court held that the buses were attached by the Income-tax Department for realising the tax dues of the transport company. The possession of the buses by the assessee was absolutely necessary for carrying on his business. Commercial expediency required payment of the dues for the release of the buses so that the assessee might carry on its business. It was immaterial that the assessee was not bound to pay the tax dues of the transport company. Therefore, the amount paid by the assessee towards the tax arrears of the transport company was allowable as business expenditure under section 37 (1 ). In our view, the Punjab and Haryana High Court allowed the claim of the assessee solely on the ground that section 40 prohibited deduction of the tax liability of the assessee and not of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability cannot change. The plain words of section 40 have to be given effect to. So long as the liability is income-tax liability, no matter how and under what circumstances it is paid and by whom, the persons paying it cannot claim it as a permissible deduction. In whatever language it is couched, tax liability is a tax liability and can assume no other character. It is immaterial whether such tax liability was a part of the purchase consideration or not. It is true that section 170 provides that the tax liability, when business is transferred prior to the date of transfer, rests with the transferor and, after the date of transfer, rests with the transferee. The transferee may be made liable for the liability of the transferor but, if the transferee discharges such liability, it cannot be said that such payment has been made for the preservation and protection of the assessee's business from any process or proceedings which might have resulted in the reduction of its income and profits. In any event, this liability was not incurred by the assessee in the conduct of its business. As a matter of fact, from the agreement which has been set out hereinbefore, it would be evident th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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