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1979 Supreme(All) 534
High Court Of Allahabad
C.S.P. Singh, R.R. Rastogi, JJ.
Commissioner Of Income-Tax – Appellant
Versus
Hind Motor Cycle Works – Respondent
Income-tax Reference 1164 of 1976
Decided On : Sep 17,1979
Ashok Gupta
A liability to pay a sum under a court decree can be a trading liability of the assessee and allowable as a deduction if it is taken over by the assessee under an agreement and if it is one that has accrued in the course of the business of the assessee.
Headnote:
INCOME TAX - Deduction - Trading liability - Liability to pay sum under court decree - Whether allowable as deduction - Interpretation of agreement - Whether liability pertains to relevant previous year.
Fact of the Case:
The assessee-firm took over the assets and liabilities of another firm, which had appointed a sole selling agent under an agreement. The sole selling agent filed a suit against the erstwhile firm for refund of security deposit and commission, which was decreed by the court. The assessee claimed the amount paid under the decree as a trading liability, but the ITO and AAC disallowed it. The Tribunal allowed the claim, holding that the liability was taken over by the assessee under the agreement.
Finding of the Court:
The court held that the liability to pay the sum under the court decree was a trading liability of the assessee and was allowable as a deduction. It interpreted Clause 4 of the agreement between the assessee and the erstwhile firm to include this liability, as the parties must be assumed to be in the full know of the existing affairs of the erstwhile firm. The court also held that the liability was one that had accrued in the course of the business of the assessee and, as such, was a trading liability.
Issues: Whether the liability to pay the sum of Rs. 14,250 under the court decree dated December 18, 1969, fell upon the assessee as a trading liability and was, therefore, allowable as a deduction.
Ratio Decidendi: The court interpreted Clause 4 of the agreement between the assessee and the erstwhile firm to include the liability to pay the sum under the court decree, as the parties must be assumed to be in the full know of the existing affairs of the erstwhile firm. The court also held that the liability was one that had accrued in the course of the business of the assessee and, as such, was a trading liability.
Final Decision: The question is answered in the affirmative, in favour of the assessee and against the department. There will be no order as to costs.
C.S.P. Singh, J.
1. THE Income-tax Appellate Tribunal, Delhi Bench 'B', has referred the following question for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in its view that the liability to pay the sum of Rs. 14,250 under the court decree dated December 18, 1969, fell upon the assessee as a trading liability and was, therefore, allowable as a deduction?"
2. ALTHOUGH the Commissioner has asked for a reference of four questions, the Tribunal has referred only the question indicated above. But, in the statement of the case drawn up in para. 8, it has been stated that the question referred also embraces within it the question of allowance of litigation expenses, amounting to Rs. 2,217, which was the subject-matter of question No. 2 of the reference application filed by the Commissioner. Before we state the facts relevant for deciding the referred question, it is necessary to consider as to whether the question as referred entitles us to consider the allowance of litigation expenses which amounted to Rs. 2,217. These expenses were incurred in defending a suit which was decreed and as a result of which the assessee became liable to pay the amount of Rs. 14,250, which formed the subject-matter of the question referred. ALTHOUGH the Tribunal in the statement of the case states that the question referred by them takes in its ambit the litigation expenses amounting to Rs. 2,217, we are unable to agree with its view. The claim for a deduction of Rs. 14,250 was entirely different from the claim of litigation expenses amounting to Rs. 2,217. This being so, we cannot read into the question referred, the dispute relating to the allow ability of expenses amounting to Rs. 2,217. Sri Ashok Gupta, counsel for the department, urged that the applicant should not be made to suffer on account of the mistake committed by the Tribunal, as the Commissioner had, in his application, asked for four questions, one of which specifically covered the question of litigation expenses. It is undoubtedly true that the Tribunal has erred in taking the view that the question referred includes within it the question of litigation expenses but the error cannot be rectified now, for, we can answer only the question that has been referred to us and not the question which, according to the Tribunal's view, forms a part of the question that is before us. The remedy of the Commissioner to rectify this error lay in moving an application under Section 256(2) for a direction from this court in respect of the question relating to litigation expenses. In view of this we have to confine our answer to the question as to whether the amount of Rs. 14,250 which the assessee-firm was made liable to pay under the court's decree dated December 18, 1960, was a trading liability.
The facts relevant for answering this question may now be stated. The assessment year involved in the reference is 1970-71. The relevant previous year ended on 31st March, 1969. The business which was carried on by the assessee-firm had been formerly carried on by another firm, consisting of five partners in the name and style of M/s. Hindustan Motor Cycle Works. This firm had appointed another firm, Hind Auto Engineering Company, as its sole selling agent under an agreement dated June 15, 1965. Under the terms of this agreement the sole selling agents were to receive commission on sales at the rate of 25 to 35% and had to deposit an amount of Rs. 2,500 as security. This sole selling agency was terminated on 24th September, 1969, but the deposit was not returned. As a result, the sole selling agents filed a suit for the refund of the amount and their commission as also interest. It is necessary at this stage to mention that the assessee-firm had taken over the assets and liabilities of Hindustan Motor Cycle Works by an agreement dated 1st April, 1969, and had started running its business in the name and style of M/s. Hind Motor Cycle Works.
