Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the income-tax liability of Rs. 28,413 relating to the assessee’s predecessor is an allowable expenditure under the IT Act, 1961 ?

Counsel Appeared

S.R. Ashok, for the Revenue : R. Subhash Reddy, for the Assessee

JUDGMENT

S. Ananda Reddy, J. :

At the instance of the Revenue, the Tribunal referred the following question, said to arise out of its order in ITA No. 234 of 1979, dt. 26th June, 1990, for the opinion of this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the income-tax liability of Rs. 28,413 relating to the assessee’s predecessor is an allowable expenditure under the IT Act, 1961 ?”

The brief facts of the case are that the assessee-company succeeded to the business of an AOP, viz., Hyderabad Race Club, Hyderabad, which was conducting the races. In the process of taking over the business, it took over all the assets and liabilities of its predecessor. At the time when the assets and liabilities were taken over by the assessee-company, there was no demand of income-tax. However, subsequently there was a demand for a sum of Rs. 28,413 which was due by the assessee’s predecessor and the said amount was paid by the assessee-company. In the assessment proceedings, the assessee-company claimed deduction. A perusal of the orders of assessment and the appellate order in the paper book shows that this issue was not at all considered. However, the Tribunal considered the issue in detail. The claim before the Tribunal was that the provisions of s. 40(a)(ii) of the IT Act, 1961 (hereinafter referred to “the Act”), are not applicable as the said expenditure is not an income-tax liability of the assessee, but that of its predecessor and, therefore, it should be allowed as a deduction. The Tribunal accepted the assessee’s contention, relying upon a judgment of the Punjab & Haryana High Court in the case of Dashmesh Transport Co. (P) Ltd. vs. CIT (1974) 93 ITR 275 (P&H) : TC 18R.204.

The Revenue being aggrieved is in reference. Learned counsel for the Department contended that the Tribunal was not justified in allowing a sum of Rs. 28,413 as a revenue deduction. Admittedly, the said amount represents the income-tax liability of the predecessor of the assessee. It is also a fact that the assessee-company took over all the assets and liabilities of its predecessor. The memorandum of understanding or agreement was not filed to show whether the assessee was liable or not in so far as the subsequent liabilities of its predecessor are concerned. In any case, without any coercive steps being taken by the Department, the assessee has come forward and discharged the liabilities of its predecessor. Now the dispute is whether it should be allowed as a revenue deduction. The contention of the Revenue is that it could not be allowed as a revenue deduction. Even assuming that the same would be treated as the assessee’s liability, as it is an income-tax liability, it would be treated as a personal liability and, therefore, it is not allowable as deduction. Even otherwise also, if it is a liability of its predecessor, it should go into the cost of acquisition of the assets and in that case it would be a capital expenditure and, therefore, it could not be allowed as a revenue deduction. Learned counsel also relied upon the following decisions in support of his contention : (i) Puspa Perfumery Products (P) Ltd. vs. CIT (1992) 194 ITR 248 (Cal) : TC 18R.209 and (ii) Dashmesh Transport Co. (P) Ltd. vs. CIT (1980) 125 ITR 681 (P&H) : TC 17R.828.

6. Learned counsel for the respondent-assessee, on the other hand, supported the view of the Tribunal and relied upon the following decisions: (i) CIT vs. Shriram Prayagdas and Mahadeo Prasad (1983) 144 ITR 883 (MP) : TC 16R.423 (ii) Dashmesh Transport Co. (P) Ltd. vs. CIT (supra).

From the above rival contentions, the simple issue that arises for consideration is whether the income-tax liability of the assessee’s predecessor should be allowed as a revenue deduction. The answer should be only in the negative. If it is treated as the assessee’s liability, it is a personal liability and, therefore, it should not be allowed as a revenue deduction. If it is treated as the liability of the predecessor of the assessee, then the same would go as a capital expenditure and hence the same is not allowable as a deduction. The Tribunal took the view that as the expenditure is not that of the assessee-company, the provisions of s. 40(a)(ii) are not applicable and, therefore, is allowable as deduction. In support of its contention, it also relied upon a decision of the Punjab & Haryana High Court in the case of Dashmesh Transport Co. (P) Ltd. vs. CIT (supra). But subsequently, in another decision, the very same High Court in the very same assessee’s case (1980) 125 ITR 681 (P&H) (supra) held that in the earlier case the Court has not expressed any opinion in the judgment as to whether the alleged expenditure was a capital expenditure or a business expenditure. The judgment, therefore, cannot operate as res judicata when shelter was taken under the above judgment in subsequent proceedings. In the light of the said observations of the very same High Court and also taking a different view under almost identical circumstances in the very same assessee’s case, it shows that the view taken by the Tribunal is not just and proper. Apart from that in the subsequent decision, it was held that if it is a liability of the predecessor, the said expenditure would become the capital expenditure of the assessee and hence is not allowable as a Revenue deduction. A similar issue was also considered by the Calcutta High Court in the case of Pushpa Perfumery Products (P) Ltd. vs. CIT (supra), where it was held that the income-tax liability of the predecessor would form part of the purchase consideration and, therefore, it is a capital expenditure and the assessee is not entitled for deduction.

Learned counsel for the assessee relied upon a decision of the Madhya Pradesh High Court in the case of CIT vs. Shriram Prayagdas & Mahadeo Prasad (supra). In this case, the assessee purchased the business of a transport company, which was in arrears of tax. Buses of the assessee were attached for realizing the tax due of the transport company. The buses were got released by paying tax due by the transferor of the buses and claimed as a revenue deduction. The claim of the assessee in that case was, though the assessee was not under an obligation to pay the said amount, but as its buses were attached and in order to carry on its business continuously, it got the buses released by paying the said amount and claimed the same as revenue deduction, which was allowed. The deduction of the Madras Pradesh High Court in that case was under the peculiar circumstances of that case and, therefore, it is not of any assistance to the assessee. Here, it is not the case of the assessee that there were any coercive steps. Even if coercive steps were taken it could not be considered as a revenue expenditure of the assessee, as admittedly, it is a liability of the predecessor of the assessee, from whom the assessee took over all the assets and liabilities. By virtue of the nature of taking over of all the assets and liabilities, it includes the tax liability of the predecessor, even in the absence of a demand at the time of taking over of the assets from its predecessor. By no stretch of imagination, the expenditure incurred by the assessee could be called the revenue expenditure for allowing as a deduction from the income of the assessee.

Under the above circumstances, we answer the question in the negative in favour of the Revenue and against the assessee.

[Citation : 249 ITR 391]