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TMI Blog1973 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding all the assets and liabilities of Messrs. Khalsa Nirbhai Transport Company Private Ltd., Group "A". In the articles of association of the assessee-company, article 18 provided. " The assets and liabilities of the Khalsa Nirbhai Transport Company Private Ltd. (group ' A '), Ludhiana, will be taken over by the company." The liabilities of Messrs. Khalsa Nirbhai Transport Company Private Ltd. included tax liability to the income-tax department to the tune of Rs. 1,01,095 which were, in fact, advance tax, penalties, including income tax, and these liabilities were prior to the taking over of the company by the assessee. The assessee claimed the amount of tax paid by it on behalf of the transferor-company as a permissible deduction under sections 28 and 37 of the Income-tax Act. The Income-tax Officer disallowed this claim on the basis that " payment of liability in respect of the predecessor ca nnot be allowed as a deduction specially when the liability is that on income-tax ". The assessee appealed to the Appellate Assistant Commissioner who took the following view: " Whatever price was paid for taking over the company, the company was naturally fixed after taking into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e powers vested in them by the law. The revenue would have further levied penalties for nonpayment of the taxes, etc. When the assessee has paid, as in the instant case, the claim is riot allowed. If the assessee had not paid he would have been, perhaps, swept out of business. The assessee's predicament is perhaps like the proverbial serpent with the lizard in his mouth. If he swallows he dies : if he throws out he becomes blind. It was contended that if they were taxes, etc., paid pure and simple, section 40(a)(ii) would have had constituted an insurmountable bar for the assessee but the taxes, etc., so paid are not taxes, etc., paid as such but an obligation discharged undertaken in the process of the taking over as specified in article 18 of the memorandum of association. While we are much impressed by the very unusual but interesting arguments of the learned counsel for the assessee that section 40(a)(ii) is not applicable we cannot agree with him because section 40(a)(ii) does not mention whose taxes paid by whom. It only mentions " in the case of any assessee ..... any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " " Section 29 is in the following terms : " 29. The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43." Section 40(a)(ii) which needs consideration is in the following terms : " 40. Amounts not deductible.-Notwithstanding anything contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "' profits and gains of business or profession ",- (a) in the cise of any assessee-... (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of, any such profits or gains. " There is one other provision which need be mentioned at this stage and that is section 170 which is in the following terms: " 170. (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to a s the predecessor) has been succe eded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession, (a) the predecessor shall be assessed in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Inspector of Taxes) v. Farquharson Brothers and Company. Section 40 also states that, notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head profits and gains of business or profession " : " in the case of any assessee- (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business of, or otherwise on the basis of, any such profits or gains." Mr. Awasthy, who represents the department, on the other hand vehemently contends that section 40 does not warrant the taking into account of the scheme of the Act. The plain words of section 40 have to be given effect to and according to him so long as the liability is tax liability no matter how and in which circumstances it is paid and by whom the person paying it cannot claim it as a permissbile deduction. According to him tax liability is tax liability and can assume no other form. It is immaterial whether it is that of the assessee or some one else. Mr. Awasthy has put the following proposition in support of his contention : " Income of an assessee is processed under various heads including incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off and claims it as a permissible deduction. Can it be said that what B paid was tax ? " In common parlance, it would be that what B was paying was tax of A but what section 40 prohibits is the deduction of tax due f rom B and not deduction of tax paid by B on account of A. Mr. Awasthy hesitated to go that far and did not contend that the tax paid by B cannot be claimed as a permissible deduction under section 40. This would fully illustrate that the view that we have taken is the only view possible so far as section 40 is concerned. This view finds some support from the provisions of section 170 of the Act. Section 170 provides that the tax liability when a business is transferred prior to the date of transfer rests with the transferor and after the date of transfer rests with the transferee. But, in certain circumstances, the transferee may be made liable for the liability of the transferor. What really matters is that the liability is that of the transferor and not of the transferee and the mere fact that in certain circumstances that liability can be put on the shoulders of the transferee will not in any manner detract from the fact that the liability to tax all the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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