2004 (1) TMI 58 - HC - Income Tax

Whether, Tribunal is right in coming to the conclusion that the amount of Rs. 1,18,920 representing income tax liability of the erstwhile firm and paid by the assessee company cannot be allowed as deduction as an expenditure while computing the taxable income in the hands of the assessee? - assessee was one of the partners of the erstwhile firm and the assessee had agreed to take over the tax liabilities of the erstwhile firm at the time of dissolution. Hence, under the provisions of section 189 also, the assessee was bound to pay the income tax dues of the erstwhile firm Thus, our answer to the question is in the affirmative, i.e., in favour of the Revenue and against the assessee.

Summary

Issues:
Deduction of income tax liability of erstwhile partnership firm paid by assessee company as an expenditure while computing taxable income.

Analysis:
The case involved a reference regarding the deduction of income tax liability of an erstwhile partnership firm paid by the assessee company as an expenditure for computing taxable income. The assessee claimed a deduction of Rs. 1,18,920 representing the income tax liability of the dissolved partnership firm. The Commissioner of Income tax (Appeals) allowed the deduction, citing the Supreme Court judgment in CIT v. T. Veerabhadra Rao. However, the Income tax Appellate Tribunal disagreed and disallowed the deduction. The Tribunal held that income tax is a personal liability, and all partners of the firm are jointly liable for paying it. The assessee, being a partner of the erstwhile firm, paid the tax as part of acquiring the business, making it capital expenditure.

The assessee's counsel relied on the Madhya Pradesh High Court decision in CIT v. Shriram Prayagdas and Mahadeo Prasad, arguing that the nature of the liability changed when the business was taken over. The Revenue's counsel supported the Tribunal's decision, citing various judgments. Section 40 of the Income Tax Act was crucial, stating that amounts like income tax paid are not deductible in computing taxable income. The Supreme Court's decision in CIT v. T. Veerabhadra Rao was referenced, emphasizing that liabilities taken over by a successor are not deductible.

The Calcutta High Court's decision in Puspa Perfumery Products Pvt. Ltd. v. CIT was also discussed, highlighting that tax liability remains unchanged even after a business transfer. The Court agreed with the Calcutta High Court's view. The Madhya Pradesh High Court's decision was distinguished, emphasizing that payment due to commercial expediency was allowed, but being bound to pay predecessor's tax dues eliminates deductibility. The Tribunal's finding that the assessee was bound to pay the tax dues under section 189 was crucial in upholding the disallowance of the deduction. The Court ruled in favor of the Revenue, affirming that the payment of income tax dues of the predecessor firm cannot be allowed as a deduction.

In conclusion, the Court disposed of the reference, affirming the disallowance of the deduction for income tax liability paid by the assessee company, as it constituted capital expenditure and was not deductible under the Income Tax Act.