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1973 Supreme(P&H) 149
PUNJAB & HARYANA HIGH COURT
D.K.Mahajan and Pritam Singh Pattar JJ.
Dashmesh Transport Company Pvt.Ltd.
Versus
Commissioner Of Income-tax
Income tax Reference No. 35 of 1972,
Decided On : OCTOBER 23, 1973
Section 40(a)(ii) of the Income-tax Act, 1961, does not bar the deduction of tax paid by the assessee on account of the tax liability of another assessee.
Headnote:
INCOME TAX - DEDUCTION - SUM PAID BY ASSESSEE ON ACCOUNT OF TAX LIABILITY OF TRANSFEROR COMPANY - WHETHER ALLOWABLE AS DEDUCTION - SECTION 40(A)(II) OF THE INCOME TAX ACT, 1961.
Fact of the Case:
The assessee, a private limited company, took over the transport business of Messrs. Khalsa Nirbhai Transport Company Private Ltd., Group "A", along with its assets and liabilities, including tax liability to the income-tax department amounting to Rs. 1,01,095. The assessee claimed this amount as a permissible deduction under Sections 28 and 37 of the Income-tax Act, 1961. The Income-tax Officer disallowed the claim, and the Appellate Assistant Commissioner affirmed the decision, treating the payment as capital expenditure. The Income-tax Appellate Tribunal upheld the decision on the ground that Section 40(a)(ii) of the Act barred the deduction.
Finding of the Court:
The court held that the payment made by the assessee was not its tax liability but a liability incurred under Article 18 of its Articles of Association. The tax liability was that of the transferor-company, and Section 40 merely recognized the English rule of law that income-tax is not a deduction before arriving at profits but a part of the profits. The court further held that Section 40 prevents tax as a deduction when it has been levied on the profits and gains of the assessee's business, which was not the case in this instance.
Issues: Whether the sum of Rs. 1,01,095 paid by the assessee on account of the tax liability of the transferor company was allowable as a deduction under Sections 28 and 37 of the Income-tax Act, 1961.
Ratio Decidendi: The court interpreted Section 40(a)(ii) of the Income-tax Act, 1961, in light of the scheme of Chapter IV and Part "D" of Chapter IV of the Act, which deal with the computation of total income and profits and gains of business or profession, respectively. The court held that Section 40 prohibits the deduction of tax levied on the profits and gains of the assessee's business, but the payment made by the assessee in this case was not tax liability of its own business but a liability to tax of another assessee. Therefore, Section 40 did not bar the deduction.
Final Decision: The court answered the question referred to it in the negative, holding that the sum of Rs. 1,01,095 paid by the assessee on account of the tax liability of the transferor company was allowable as a deduction under Sections 28 and 37 of the Income-tax Act, 1961.
D.K.Mahajan, J.
1. The Income-tax Appellate Tribunal (Chandigarh Bench) has referred the following question of law for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,01,095 was not allowable as deduction by reason of the provisions contained in Section 40(a)(ii) of the Act ?"
2. The assessment year in question is 1966-67. The assessee is a private limited company. It was incorporated on the 3rd day of July, 1964. The company in July, 1964, took over the transport business including all the assets and liabilities of Messrs. Khalsa Nirbhai Transport Company Private Ltd., Group "A". In the articles of association of the assessee-company, Article 18 provided :
"The assets and liabilities of the Khalsa Nirbhai Transport Company Private Ltd. (group A), Ludhiana, will be taken over by the company."
3. The liabilities of Messrs. Khalsa Nirbhai Transport Company Private Ltd. included tax liability to the income-tax department to the tune of Rs. 1,01,095 which were, in fact, advance tax, penalties, including income-tax, and these liabilities were prior to the taking over of the company by the assessee. The assessee claimed the amount of tax paid by it on behalf of the transferor-company as a permissible deduction under Sections 28 and 37 of the Income-tax Act. The Income-tax Officer disallowed this claim on the basis that "payment of liability in respect of the predecessor cannot be allowed as a deduction specially when the liability is that on income-tax". The assessee appealed to the Appellate Assistant Commissioner who took the following view:
"Whatever price was paid for taking over the company, the company was naturally fixed after taking into consideration the total value of assets and liabilities, The liabilities discharged in terms of the agreement of taking over the company can only be regarded as capital expenditure being part and parcel of the price paid for taking over of the assets together with the liabilities of the old concern. The Income-tax Officer was, therefore, justified in treating all these payments as capital expenditure and not allowable as a deduction in the case of the appellant-company."
4. Against the decision of the Appellate Assistant Commissioner, the matter was taken in appeal to the Income-tax Appellate Tribunal (Chandigarh Bench). The Tribunal affirmed the decision of the Appellate Assistant Commissioner regarding the amount of Rs. 1,01,095 (the tax liability of the transferor-company) but on a different ground altogether. The reasoning of the Tribunal may now be stated in its own words :
"We have given our most anxious thought and consideration to this problem before us which appears to be simple from the point of view of both the parties but ultimately not so simple as that. If we agree with the propositions of the learned counsel for the assessee that the taxes and penalties were paid in discharge of the contractual obligations of the assessee-company the assessee must have its claim. But then the bar contained in Section 40(a)(ii) as emphatically urged by the departmental representative stares us in the face too and particularly the words used therein, viz., "any rate or tax levied on the profits or gains of any business" and that too "in the case of any assessee" as Section 40(a) opens out.
To us it appears to be a case where the law is on the side of the revenue but justice, perhaps, is on the side of the assessee, as the learned counsel put it. After all, if the assessee had not paid the tax, etc., levied on the transferor-company he would have failed to discharge his contractual obligation and perhaps would have been answerable in civil court for breach of contract or even for specific performance of the contract under the Contract Act. At the same time the revenue would have recovered all its demands from the assessee by pointing out to the assessee Article 18 of the memorandum of association. If he had
