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TMI Blog1991 (2) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier firm came into existence in the year 1959 with five partners out of whom Ananthasivan was one of the partners. The building which belonged to this firm was sought to be levied with property tax by the Corporation of the City of Bangalore ; the matter was pending thereafter in litigation. During the pendency of this litigation, the earlier firm was dissolved. The earlier firm had incurred several debts. As per the deed of dissolution, the entire assets and liabilities were taken over by Ananthasivan including the goodwill of the business. This dissolution was effected under deed dated May 27, 1973. Within a few days, the assessee-firm was reconstituted under a deed dated June 1, 1973. The property tax which was the subject-matter of litigation in the High Court went in favour of the Corporation of the City of Bangalore. Therefore, the Bangalore City Corporation proceeded to recover the arrears of property tax from the assessee-firm, which was occupying the property in question. A demand notice was issued and coercive steps were sought to be taken. Therefore, the assessee-firm paid the arrears of tax. The assessee sought deduction of this payment as a revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guard its business interest and as a matter of commercial expediency, paid the arrears of tax when coerced by the City Corporation (by the issuance of a distraint warrant), and so the said payment will be a business expenditure and not a capital expenditure. The Appellate Tribunal found that there was nothing on record to show that the assessee (the new firm) took over all the debts of the dissolved firm and the matter was remanded to the Commissioner (Appeals) to decide whether the liabilities were of Ananthasivan or of the new firm. The Appellate Tribunal observed that if it was the liability of Ananthasivan, then the assessee will not be entitled to the deductions claimed in respect of the arrears of tax; for this, the Appellate Tribunal relied on the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140. Mr. Sarangan contended that the question whether the liability for arrears was of Ananthasivan or of the assessee was not very relevant, and the approach ought to be to examine whether the payments were made by the assessee as a matter of commercial expediency. Mr. Chanderkumar, learned counsel for the Revenue, however, contended that the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question are necessary to carry on the business, just as investment on machinery is necessary to carry on an industrial activity. The discharge of the liability which is fastened as a charge on the property releases the property from the burden of the charge and goes into the augmentation of the capital value of the property. Thus viewed, there can be no doubt that the payment by the assessee towards the arrears of tax is nothing but an expenditure in the nature of capital expenditure. The existence of arrears of property tax should be presumed to be known to the assessee when it was constituted, because any prudent person who transacts any dealing in relation to an immovable property is expected to verify the tax liability in relation to the said property ; arrears of property tax attach themselves as a burden on the property by operation of law. The nature of property tax is quite different from other taxes like sales tax or income-tax; property tax due to a municipal body is reflected in the municipal property registers. It is not possible to hold that the partners, who joined Ananthasivan should be assumed to be ignorant about property tax arrears. If knowledge of the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating to the business of somebody else which under the provisions of the Act is deemed to be and becomes the liability of the assessee. The loss becomes allowable if it 'springs directly from and is incidental' to the business of the assessee. The decision, therefore, mainly depends upon whether the loss claimed is a business loss of that nature. In our opinion, the amount which became payable by the respondent firm cannot be called its business loss. In order to be deductible the loss must be in the nature of a commercial loss and, as has been said above, must spring directly out of it and must really be incidental to the business itself. It is not sufficient that it falls on the trader in some other capacity or is merely connected with his business. " It was further pointed out that the liability arose in the said case, not because of the assessee's business but the liability arose because of the business of another person. The Supreme Court negatived the contention that the expenditure was in respect of the assessee's business. A notable feature of the case is that the agency of the assessee was incidental to its business since it was carrying on the business of commission a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the Revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business." Therefore, a possibility of the business assets being sold, if the liability is not met and expenditure incurred, is not a reason to hold it as a business expenditure. In the instant case before us, the assessee's claim is basically on the ground that, if property tax arrears had not been paid, the business premises would have been lost to the assessee. The payment is not made in the course of business and as incidental to the said business; it had nothing to do with the conduct of the business. The liability had arisen, earlier to the assessee's business, and the prior liability attached to the premises was being cleared by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 138 ITR 382, the Bombay High Court was concerned with the claim of an assessee regarding expenditure (commission paid) incurred in connection with the completion of the unfinished contract taken over by the assessee ; the claim was allowed. The business of the assessee and the commission paid therein were closely interlinked with each other. In CIT v. Georgepolous [1984] 146 ITR 380, the Madras High Court observed that an unforeseen liability which had to be met by the assessee is not a capital expenditure, because, such liability never went into the making of the consideration for obtaining the business. This decision is distinguishable on the very facts stated therein. In CIT v. Shriram Prayagdas and Mahadeo Prasad [1983] 144 ITR 883, the Madhya Pradesh High Court held that payment of arrears of taxes by the present owner of the vehicles to save the vehicle from attachment was an expenditure incurred out of commercial expediency. Similarly, CIT v. Hind Motor Cycle Works [1982] 134 ITR 348 of the Allahabad High Court was cited in support of the principle that, when the transferee-firm had taken over the liability of the old firm, it is trading liability. As to this decision, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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