1973 (10) TMI 1 - HC - Income Tax

Outstanding tax liability of another concern paid by the assessee on taking over assets and liabilities of the other concern - Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,01,095 was not allowable as deduction by reason of the provisions contained in section 40(a)(ii)

Summary

Issues Involved:
1. Whether the sum of Rs. 1,01,095 was allowable as a deduction under the provisions of section 40(a)(ii) of the Income-tax Act.
2. Whether the sum of Rs. 1,01,095 represents the real income of the applicant chargeable to tax in its hands.

Issue-wise Detailed Analysis:

1. Deductibility under Section 40(a)(ii):

The primary issue was whether the sum of Rs. 1,01,095 paid by the assessee-company on behalf of the transferor-company could be allowed as a deduction under section 40(a)(ii) of the Income-tax Act. The assessee, a private limited company, took over the transport business of Messrs. Khalsa Nirbhai Transport Company Private Ltd., including its tax liabilities. The Income-tax Officer disallowed the deduction, reasoning that the payment of the predecessor's liability, especially income-tax, could not be allowed as a deduction. The Appellate Assistant Commissioner upheld this decision, considering the payment as capital expenditure, part of the price paid for taking over the assets and liabilities.

The Tribunal, while affirming the decision, provided a different rationale. It emphasized that section 40(a)(ii) imposes an unqualified bar on deducting any sum paid on account of any rate or tax levied on the profits or gains of any business. The Tribunal acknowledged the assessee's predicament but concluded that the law explicitly prohibited such deductions, irrespective of the contractual obligations or the justice of the situation. The Tribunal noted that section 40(a)(ii) does not specify whose taxes are paid by whom, thereby creating an insurmountable bar to the assessee's claim.

2. Real Income Chargeable to Tax:

The second issue was whether the sum of Rs. 1,01,095 represented the real income of the assessee chargeable to tax. The Tribunal had referred this question to the High Court for its opinion. The High Court examined the scheme of the Income-tax Act, particularly sections 28, 29, 40, and 170. It noted that section 40 prevents tax as a deduction when it has been levied on the profits and gains of the assessee's business. However, in this case, the payment was for the tax liability of another assessee (the transferor-company), and thus, it did not fall within the prohibition of section 40(a)(ii).

The High Court emphasized that section 40 should not be read in isolation but in the context of the entire scheme of the Act. It highlighted that the liability to tax remains with the transferor, and the mere fact that the transferee may be made liable in certain circumstances does not change the nature of the liability. The Court illustrated this with an example, showing that if a money lender pays the tax liability of another person and writes it off, it cannot be considered as tax paid by the money lender.

The Court also referred to the Supreme Court's decision in Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax, which supported the view that section 40 was meant to exclude deductions for taxes levied on the profits or gains of any business as determined under the Act.

Conclusion:

The High Court concluded that the payment made by the assessee did not fall within the category of tax levied on its business profits and gains. Therefore, the sum of Rs. 1,01,095 was not barred from deduction under section 40(a)(ii). The question was answered in the negative, in favor of the assessee, and against the department. No order as to costs was made.