1969 (11) TMI 23 - HC - Income Tax

Common trading activity between the assessee and the firm - business of firm carried on by another firm of same partners after separation of business - claim for a deduction of the sum under section 37(1) , as sum was an expenditure incurred by the assessee s business

Summary

Issues Involved:
1. Whether the sum of Rs. 20,507 was an allowable deduction in the computation of the assessee's income for the previous year ending on February 8, 1962, relevant for the assessment year 1962-63.

Issue-wise Detailed Analysis:

1. Allowable Deduction of Rs. 20,507:

The central issue revolves around whether the sum of Rs. 20,507, which was a sales tax liability of a firm, can be claimed as a deduction by the assessee in the computation of its income for the relevant assessment year.

The assessee, originally a branch of the firm "A. R. A. Karuppiah Nadar", took over all assets and liabilities, including a sales tax reserve fund, when it became an independent partnership concern. The sales tax assessment for the coffee business for the accounting year ending March 31, 1959, resulted in a demand of Rs. 20,507 on January 31, 1961. The assessee claimed this amount as a deduction under section 37(1) of the Income-tax Act, 1961, arguing that it was an expenditure incurred by its business.

The Income-tax Officer rejected this claim, stating that the liability was that of the firm and related to the financial year 1958-59, and since the firm was still functioning, the claim was not admissible. The Appellate Assistant Commissioner and the Tribunal upheld this disallowance.

The court examined the factual and legal aspects, noting that the partners of both the firm and the assessee were the same, and the business of the assessee was a continuation of the firm's business. The sales tax authorities recognized the assessee as solely liable for the demand, and the assessee had obtained a refund of sales tax for the firm for the year 1958-59, which it included in its profit and loss account.

The court emphasized the legal notion that a firm is not distinct from its partners, and the rights and obligations of the firm are those of the individual partners. Given the identical partners and similar profit-sharing in both the firm and the assessee, the court concluded that they should be treated as one firm for the purpose of the deduction.

The court referenced several cases, including Vissonji Sons & Co. v. Commissioner of Income-tax, where it was held that two firms with identical partners are essentially one firm in law. The court also noted that the assessee's assumption of the sales tax liability was a necessary annexure to the business taken over and continued.

The court rejected the revenue's argument that the assessee and the firm should be treated as different legal entities under fiscal law, citing the Supreme Court's decision in State of Punjab v. Jullundur Vegetable Syndicate, which held that a firm is a legal entity for tax purposes but recognized the commercial unison of the firm and the assessee in this case.

Ultimately, the court upheld the assessee's claim for deduction under section 37(1) of the Income-tax Act, 1961, stating that the business of the firm and the assessee was interlocked, and the statutory liability arose from their common trading activity.

Conclusion:

The court answered the question in favor of the assessee, allowing the deduction of Rs. 20,507 in the computation of its income for the relevant assessment year, with costs awarded to the assessee.