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Issues Involved:
1. Deduction of sales tax payments 2. Statutory obligation under Section 17 of the Bengal Finance (Sales Tax) Act, 1941 3. Interpretation of lease deed clauses 4. Applicability of Section 37 of the Income-tax Act, 1961 Issue-wise Detailed Analysis: 1. Deduction of Sales Tax Payments: The assessee, a private limited company engaged in the manufacture and sale of paints, claimed a deduction for sales tax payments amounting to Rs. 50,507 during the assessment year 1975-76. This amount was paid for the sales tax liability incurred by the lessor prior to the commencement of the lease. The Income-tax Officer disallowed this claim, but the Appellate Assistant Commissioner allowed it, citing Section 17 of the Bengal Finance (Sales Tax) Act, 1941, and the lease deed terms. However, the Tribunal reversed this decision, stating that the lessee had not accepted the past sales tax liabilities of the lessor as per the lease deed. 2. Statutory Obligation under Section 17 of the Bengal Finance (Sales Tax) Act, 1941: Section 17 of the Bengal Finance (Sales Tax) Act, 1941, was pivotal in this case. It stipulates that when the ownership of a business is transferred, the transferee or lessee is deemed to be registered for all purposes under the Act, including liabilities incurred by the previous owner, except for those already discharged. The Tribunal's interpretation was that the lessee was liable for the sales tax dues of the lessor, but the lease deed did not explicitly transfer this liability. However, the High Court found that Section 17 imposed a statutory liability on the lessee to pay the outstanding sales tax dues of the lessor. 3. Interpretation of Lease Deed Clauses: The lease deed contained several relevant clauses: - Clause 2(A)(iii) required the lessee to bear all expenses related to the factory's operation. - Clause 3(vi) stated that the lessee would take over all stock and pay all creditors, bank overdrafts, and taxes as per the lessor's books from the sale proceeds of such stocks. - Clause 7 allowed the lessee to continue operating the factory with the lessor's license until obtaining necessary registrations. The High Court emphasized Clause 3(vi), which explicitly required the lessee to pay taxes payable by the lessor as per books, thus supporting the assessee's claim for deduction. 4. Applicability of Section 37 of the Income-tax Act, 1961: Section 37 of the Income-tax Act, 1961, allows for the deduction of any expenditure laid out wholly and exclusively for business purposes. The High Court held that the payment of sales tax dues by the assessee, as required under the lease deed and Section 17 of the Bengal Finance (Sales Tax) Act, 1941, constituted an allowable deduction under Section 37 of the Income-tax Act, 1961. The Court concluded that the liability to pay the sales tax was both a statutory obligation and an agreement under the lease deed, making it a legitimate business expense. Conclusion: The High Court answered the referred question in the affirmative, favoring the assessee and against the Department. It held that the assessee was under a statutory obligation to pay the sales tax dues for the years 1969, 1970, and 1971, as per Section 17 of the Bengal Finance (Sales Tax) Act, 1941, and the lease deed. Consequently, the payment was an allowable deduction under Section 37 of the Income-tax Act, 1961. There was no order as to costs. Separate Judgment: Justice Suhas Chandra Sen concurred with the main judgment but added that the statutory liability created by Section 17 of the Bengal Finance (Sales Tax) Act, 1941, extended to both current and outstanding tax liabilities of the lessor. He emphasized that the assessee's liability arose as soon as the business transfer took place, and the agreement between the parties could not override this statutory obligation. He also pointed out that the assessee's claim for deduction was valid under the mercantile system of accounting, despite the timing of the notices of demand. The final judgment affirmed the assessee's statutory obligation to pay the outstanding sales tax liabilities of the lessor and allowed the deduction under Section 37 of the Income-tax Act, 1961.
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