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Issues Involved:
1. Whether the excess income-tax borne by the assessee-company over the liability taken over from the vendor-firm is a capital expenditure and not entitled to revenue deduction. 2. Whether the income-tax liability of the vendor-firm borne by the assessee-company is not a trading liability and not entitled to revenue deduction. Issue-wise Detailed Analysis: Issue 1: Excess Income-tax as Capital Expenditure The court addressed whether the excess income-tax of Rs. 11,949 and Rs. 29,000 paid by the assessee-company over the liability taken over from the vendor-firm constitutes capital expenditure. The assessee-company, a private limited entity, took over the running business of a firm, including its liabilities, as per an agreement dated November 8, 1979. The company paid Rs. 1,89,000 towards income tax for the assessment year 1981-82, which included Rs. 29,000 in excess of the Rs. 1,60,000 liability taken over. Similarly, for the assessment year 1983-84, the company paid Rs. 11,949 towards the vendor-firm's income-tax demand. The Income-tax Officer disallowed these amounts as revenue deductions, a decision upheld by the Tribunal. The Tribunal ruled that the income-tax liability payable by the erstwhile firm was not a trading liability, but a debt due to the government, payable out of income, not for earning income. Thus, the payment of such debt by the assessee-company was deemed a capital expenditure, not deductible as a revenue expense. Issue 2: Income-tax Liability as Non-trading Liability The court examined whether the income-tax liability of the vendor-firm borne by the assessee-company is a trading liability. The Tribunal held that the income-tax liability of the vendor-firm, although resulting from its trading business, was not a trading liability. The liability was a debt due to the government, payable out of the firm's income, and not for earning income. The Tribunal concluded that the payment of this liability by the assessee-company under the takeover agreement did not convert it into a trading liability. Consequently, the liability was of a capital nature and could not be allowed as a revenue deduction. The Tribunal reversed the Commissioner of Income-tax (Appeals) decision for the assessment year 1983-84, restoring the Income-tax Officer's order. Legal Precedents and Reasoning: The court considered various precedents, including the Madras High Court's decision in Associated Printers (Madras) Private Ltd. v. CIT, where the liability for bonus payments was deemed a trading expense. However, this case was distinguished on the facts, as the liability accrued post-transfer and was not part of the purchase price. The court also reviewed the Punjab and Haryana High Court's decision in Dashmesh Transport Co. Pvt. Ltd. v. CIT, which allowed the deduction of tax paid on behalf of the transferor-company. The court disagreed with this reasoning, emphasizing that section 40 of the Income-tax Act disallows deduction of income-tax liability, regardless of who pays it. The Madhya Pradesh High Court's decision in CIT v. Shriram Prayagdas and Mahadeo Prasad was also discussed, where payment of tax arrears for a transport company was allowed as business expenditure due to commercial expediency. The court, however, maintained that the nature of the liability as income-tax did not change due to the transfer of business and could not be allowed as a revenue deduction. Conclusion: The court concluded that the excess income-tax borne by the assessee-company over the liability taken over from the vendor-firm is a capital expenditure and not entitled to revenue deduction. Additionally, the income-tax liability of the vendor-firm borne by the assessee-company is not a trading liability and not entitled to revenue deduction. All questions were answered in the affirmative, in favor of the Revenue and against the assessee, with no order as to costs.
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