Calcutta High Court
Puspa Perfumery Products Pvt. Ltd. vs Commissioner Of Income-Tax on 4 February, 1991
Equivalent citations: [1992]194ITR248(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment years 1981-82 and 1983-84, the following questions of law have been referred to this court :
"1. Whether the excess income-tax of Rs. 11,949 borne over the liability for income-tax taken over by the assessee-company is a capital expenditure and not entitled to revenue deduction in the nature and circumstances of the case ?
2. Whether the income-tax liability of the vendor-firm amounting to Rs. 11,949 and borne by the assessee-company is not a trading liability and not entitled to revenue deduction in the nature and circumstances of the case ?
3. Whether the excess income-tax of Rs. 29,000 borne over the liability for income-tax taken over by the assessee-company is a capital expenditure and not entitled to revenue deduction in the nature and circumstances of the case ?
4. Whether the income-tax liability of the vendor-firm amounting to Rs. 29,000 and borne by the assessee-company is not a trading liability and not entitled to revenue deduction in the nature and circumstances of the case ?"
2. Shortly stated, the facts are that the assessee is a private limited company which was incorporated to take over the running business of the firm of similar name, namely, Puspa Perfumery Products. The agreement in pursuance of which the business of the firm was taken over by the aforementioned company was drawn up on November 8, 1979. It provides, inter alia, as follows :
"1. The vendors do hereby transfer, sell and assign unto the purchaser-company all that running business with all its assets including goodwill, plant and machinery, furniture and fixtures, stock-in-trade, stores and implements, book debts and cash and bank balances, rights and titles including trade licence, sales tax registration numbers and all quota rights and all other entitlements to which the said running concern has or is entitled to either movable or immovable or whatsoever including all pending contracts and engagements thereto which the said running concern has been entitled in connection with the said business.
2. The purchaser-company also takes over all liabilities including loans, overdrafts from bank, trade creditors and all other business liabilities relating to expenditure, sales tax, all such amounts which the vendors are liable to pay to its creditors, employees and others in connection with the said running of the business including income-tax liabilities of the vendors' firm but not its partners.
3. The consideration for sale is Rs. 12,20,216 (Rupees twelve lakhs twenty thousand and two hundred sixteen only) which shall be satisfied within three months of this agreement. If, for any reason, the purchaser-company is unable to pay the amount of consideration, the unpaid amount shall be treated as loan which shall carry interest at 15 per cent. per annum.
4. The vendors do hereby agree to execute and sign all such documents and to do all such acts and things as may be required for the company to have the occupation and realisation of the assets and to help in all such proceedings as may be required to settle the liabilities.
(Rs.) (Rs.) Assets :
Goodwill 5,00,000.00 Fixed assets 1,32,652.00 Current assets, loans and advances and deposits (including stocks, debts, cash and bank balances) 16,64,068.00 22,96,720.00 Less : Liabilities Secured and unsecured loans (including Dena Bank O/D) 1,30,841.00 Liabilities for goods, expenses, sates tax, P. F., etc., and others. 7,85,663.00 Provision for income-tax 1,60,000.00 10,76,504.00 12,20,216.00
3. For the assessment year 1981-82, the accounting period of the assessee-company ended on November 7, 1980. After the company took over the business, it had to pay a sum of Rs. 1,89,000 towards income tax, i.e., Rs. 29,000, in excess of the liabilities for income-tax of Rs. 1,60,000 taken over by the company from the vendor-firm. The company claimed this excess amount as a revenue deduction from its income for the assessment year 1981-82 but the same was disallowed by the Income-tax Officer and confirmed in appeal by the Commissioner of Income-tax (Appeals).
4. During the accounting period relating to the assessment year 1983-84, the company had to pay a sum of Rs. 11,949 on account of income-tax demand raised on the vendor-firm. The company claimed this amount as revenue deduction from its income for the assessment year 1983-84 but the same was disallowed by the Income-tax Officer. However, on appeal, the learned Commissioner of Income-tax (Appeals) held that this payment of Rs. 11,949 was an allowable revenue deduction.
5. Thereafter, both the assessee and the Department came in appeal before the Tribunal. The Tribunal held that the income-tax liability payable by the erstwhile firm was not its trading liability though it resulted from its trading business. It was a debt due from it to the Government and had to be paid out of the income and not to earn income. The payment of such debt by the assessee-company would not become a trading liability merely because it was paid under an agreement of take over of the business. The liability was clearly of capital nature and could not, therefore, be allowed as a deduction while computing the assessee's total income as revenue liability of the assessee-company. The Commissioner of Income-tax (Appeals) was, therefore, justified in refusing to allow it in respect of assessment years 1981-82. The Tribunal was of the view that the Commissioner of Income-tax (Appeals) had erred while allowing the liability for the assessment year 1983-84. The Tribunal dealt with this aspect as follows :
"His (Commissioner of Income-tax (Appeals)) finding that the payment of income-tax liability was not part of the purchase contract or purchase consideration is also in our opinion not correct. The liability to income-tax had crystallised. Certain estimate of that liability was made by the two sides and that is why a sum of Rs. 1,60,000 was provided in its accounts. Subsequently, the said estimate turned out to be a little less. Making of that estimate would not, in our opinion, alter the character of the liability. It would continue to be a non-trading liability for the payment of which the assessee-company had contracted and which was part of the purchase consideration. The order of the Commissioner of Income-tax (Appeals) for the assessment year 1983-84 on the point, therefore, stands reversed and the order of the Income-tax Officer stands restored."
6. At the hearing before us, Mr. Murarka, learned counsel for the asses-see, has reiterated the contentions raised before the Tribunal. It is his contention that the liability undertaken by the assessee is a trading liability inasmuch as unless such liability was discharged, the assets of the business of the assessee would have been attached by the Revenue authorities for realisation of the outstanding dues of the erstwhile firm. He has relied on several decisions in support of his contentions.
7. He has relied on a decision of the Madras High Court in the case of Associated Printers (Madras) Private Ltd. v. CIT [1961] 43 ITR 281. In that case, the assessee took over a running business on February 1, 1950, at a time when a dispute between the predecessor and its workmen regarding their claim for Deepavali bonus for 1949 was pending adjudication by the Industrial Tribunal. After the transfer of the business, the assessee was also made a party to the industrial dispute. The Tribunal's award directing payment of one and a half month's basic wages as bonus was published on February 9, 1951. The assessee also agreed on June 30, 1951, to pay Deepavali bonus for 1950. The total amount of bonus for 1949 and 1950 amounting to Rs. 54,140 was debited in the assessee's accounts (maintained on the mercantile system) in the accounting year ending on January 31, 1952. The question was whether the sum of Rs. 54,140 so debited was an allowable expenditure under Section 10(2)(xv) of the Income-tax Act in the relevant assessment year 1952-53. The question for determination in that case was whether the liability to pay Rs. 54,140 as bonus for 1949 and 1950 which was undertaken by the assessee-company in its year of account 1951-52 was an allowable item of expenditure in assessing profit and loss of that year of account in the assessment year 1952-53. The court dealt first with the question as to whose liability it was that the assessee-company was discharging when it paid bonus for 1949 and 1950 in the year of account 1951-52.
8. There, the Madras High Court held that the bonus payable on the occasion of Deepavali in 1950 could not be viewed as payable wholly for services rendered to the predecessor-company. Before that bonus could be claimed, that is, even before the Deepavali in 1950, the assessee-company had taken over the business, and after February 1, 1950, the services were to the assessee-company. That the profits earned in the year of account ended on January 31, 1950, would, in the normal circumstances, have furnished the basis for determining the quantum of bonus payable on the occasion of Deepavali in 1950, did not alter the position, that the bonus was claimable and, if there had been no dispute, would have been payable only in the year of account that ended on January 31, 1951. Apart from this aspect of the case, it was a statutory liability that the assessee-company discharged when it paid the bonus for 1949. Section 18 of the Industrial Disputes Act made the award enforceable against the successor in business. The assessee-company was itself made a party to the industrial dispute, and, even as a party, it was bound by that award under Section 18 of the Industrial Disputes Act. It is true that there was no statutory liability as such when the assessee-company undertook to pay bonus for 1950. Had there been no direct settlement with the workmen, there would have certainly been an industrial dispute and Section 18 of the Industrial Disputes Act would then have imposed a statutory liability on the assessee-company. It was in form a contractual liability under a contract with the workmen, but was obviously undertaken to avoid an industrial dispute. Thus, it was a liability legally enforceable against it that the assessee-company discharged by providing for the payment of bonus for the two years 1949 and 1950. According to the Madras High Court, the liability itself accrued only after the date of the transfer. Obviously, it was not admitted, as that claim was eventually referred as an industrial dispute for adjudication by the Industrial Tribunal. When the claim is upheld by the Industrial Tribunal after adjudication, it becomes an accrued liability when the award becomes enforceable. If, as happened in the case of the claim for 1950, the claim for bonus is settled by agreement between the employer and the employees, it becomes an accrued liability on the date of the agreement.
9. It is, therefore, clear that the Madras High Court was of the view that the liability to pay bonus for 1949-50 became an accrued liability after the transfer and the law imposed the liability to pay such bonus on the assessee. Thus, it was its own legal liability that the assessee-company discharged when it provided for the bonus payment for the year of account 1951-52. The Madras High Court also considered the question whether the expenditure incurred by the assessee-company in discharging its legal liability was of a capital nature. The Madras High Court dealt with this question as follows (at p. 290) :
"Under normal circumstances the payment of bonus to the employees would be a trading expense, and it would not be an expenditure of a capital nature. If the liability to pay the bonus had been that of the transferor as an accrued liability, and that liability was transferred to the transferee under the terms of the contract of the transfer, that is, if the liability so transferred was one of the factors taken into account to fix the price payable by the transferee, then the amount expended in discharge of the liability so transferred would have been part of the price paid by the transferee for the acquisition of the business. Whether the accrued liability that was so transferred was a liability to an employee, or any other trade liability, can make no difference in principle."
10. This case is, therefore, distinguishable on facts since it was held that the liability itself accrued only after the transfer, that is, the liability under the award and the subsequent liability under the agreement between the workmen and the assessee-company. The discharge of that liability was not part of the contract of transfer nor was payment of bonus part of the purchase price. The discharge of the legal obligation was not part of the contract of transfer.
11. Mr. Murarka has placed heavy reliance on a decision of the Punjab and Haryana High Court in the case of Dashmesh Transport Co, Pvt. Ltd, v. CIT [1974] 93 ITR 275. In that case, the assessee was a private limited company. In accordance with article 18 of the articles of association of the company which provided, "the assets and liabilities of K Ltd. will be taken over by the company", the assessee-company took over the assets and liabilities of K Ltd. in July, 1964. The liabilities of K Ltd. included income-tax liability to the tune of Rs. 1,01,095, which were incurred prior to the taking over of K Ltd. by the assessee. The assessee claimed the tax paid by it on behalf of the transferor-company, K Ltd., as a permissible deduction under Sections 28 and 37 of the Income-tax Act, 1961. The Department and the Tribunal disallowed the claim applying Section 40(a)(ii) which disallowed deduction, in the case of any assessee, of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession. There, the Punjab and Haryana High Court held that the Tribunal was not right in holding that the sum of Rs. 1,01,095 was not allowable to the assessee-company as a deduction by reason of the provisions contained in Section 40(a)(ii) of the Act. When it is the business of the assessee and it is his income which are being assessed, Section 40 prevents deduction of tax which has been levied on the profits and gains of the assessee's business. The payment made by the assessee in this case did not fall in this category. It was payment of the liability to tax of another person who was the transferor and not of the assessee and the mere fact that, in certain circumstances, that liability was put on the shoulders of the assessee will not in any manner detract from the fact that the tax was one payable by the transferor.
12. Our attention has also been drawn to a decision of the Madhya Pradesh High Court in the case of CIT v. Shriram Prayagdas and Mahadeo Prasad [1983] 144 ITR 883. In that case, the assessee purchased the business of a running transport company which was in arrears of tax. The buses in the possession of the assessee were attached for the tax dues of the transport company and the assessee paid a certain sum and got the buses released for carrying on the business and claimed the amount as business expenditure under Section 37(1) of the Act. The Tribunal allowed the claim of the assessee. On a reference, the Revenue contended that the assessee was not liable for the tax dues of the transport company and that even if the assessee was held liable, the payment would amount to a capital expenditure. There, the Madhya Pradesh High Court held that the buses were attached by the Income-tax Department for realising the tax dues of the transport company. The possession of the buses by the assessee was absolutely necessary for carrying on his business. Commercial expediency required payment of the dues for the release of the buses so that the assessee might carry on its business. It was immaterial that the assessee was not bound to pay the tax dues of the transport company. Therefore, the amount paid by the assessee towards the tax arrears of the transport company was allowable as business expenditure under Section 37(1).
13. In our view, the Punjab and Haryana High Court allowed the claim of the assessee solely on the ground that Section 40 prohibited deduction of the tax liability of the assessee and not of any third party. We are unable to agree with this reasoning. The Punjab and Haryana High Court, in fact, proceeded on the footing that the assessee had paid the tax levied on the transferor.
14. It appears to us that the High Court was conscious that unless Section 40 was interpreted in the manner it was done, no relief could be granted to the assessee. Accordingly, it was held by the High Court that the assessee had paid the tax levied on the transferor and not on itself, as Section 40 prohibited deduction of income-tax levied on the assessee and not of any third party. The following passage from the judgment of the Punjab and Haryana High Court (see [1974] 93 ITR 275) will make it clear that the case was decided more on the ground of equity than on any principle (at p. 277) :
"To us it appears to be a case where the law is on the side of the Revenue but justice, perhaps, is on the side of the assessee, as learned counsel put it. After all, if the assessee had not paid the tax, etc., levied on the transferor-company he would have failed to discharge his contractual obligation and perhaps would have been answerable in a civil court for breach of contract or even for specific performance of the contract under the Contract Act. At the same time the Revenue would have recovered all its demands from the assessee by pointing out to the assessee article 18 of the memorandum of association. If he had not paid or had failed to pay, apart from freezing the assets, the Revenue would have brought all his business activities to a standstill by virtue of coercive powers vested in them by the law. The Revenue would have further levied penalties for non-payment of the taxes, etc. When the assessee has paid, as in the instant case, the claim is not 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." (emphasis * supplied).
15. With respect, we are, however, unable to agree with the views taken by the Punjab and Haryana High Court. In our view, whatever is not deductible in the hands of the transferor as a trading liability cannot be allowed as a deduction in the hands of the transferee. By reason of the transfer of the assets and liabilities of the business, the nature and character of the liability cannot change. The plain words of Section 40 have to be given effect to. So long as the liability is income-tax liability, no matter how and under what circumstances it is paid and by whom, the persons paying it cannot claim it as a permissible deduction. In whatever language it is couched, tax liability is a tax liability and can assume no other character. It is immaterial whether such tax liability was a part of the purchase consideration or not. It is true that 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, The transferee may be made liable for the liability of the transferor but, if the transferee discharges such liability, it cannot be said that such payment has been made for the preservation and protection of the assessee's business from any process or proceedings which might have resulted in the reduction of its income and profits. In any event, this liability was not incurred by the assessee in the conduct of its business. As a matter of fact, from the agreement which has been set out hereinbefore, it would be evident that the assessee took over the entire assets and liabilities to arrive at the consideration for the transfer. It was taken over as a running business by the assessee with all its assets and liabilities and, accordingly, the tax liability is of the business which was taken over by the assessee. The nature of such liability will not change because of the transfer or, to be precise, by reason of the change in the constitution of the business. The estimate of liabilities was made only for the purpose of arriving at a price to be paid as and by way of consideration for such transfer. The business of the transferor was continued and there was no question of preservation or protection of the business assets by payment of the tax liability.
16. It appears that, in a subsequent decision in Dashmesh Transport Co. (P.) Ltd. v. CIT [1980] 125 ITR 681 the Punjab and Haryana High Court has taken a contrary view. The earlier judgment in the case of the same assessee in [1974] 93 ITR 275 was distinguished by the said court in the manner following (at p. 683) :
"A perusal of the judgment, annexure 'F', would show that, in the earlier case, the Tribunal did not express any opinion on the question whether the expenditure incurred by the assessee-company was capital expenditure or business expenditure and instead disallowed the deduction on the ground that the same was barred by the provisions of Section 40(a)(ii) of the Act. On a reference, under Section 256(1) of the Act, the Division Bench of this court (Dashmesh Transport Co. P. Ltd. v. CIT [1974] 93 ITR 275) reversed that finding of the Tribunal and there arose no occasion to express any view on the question of the nature of the expenditure. As no opinion has been expressed in the judgment as to whether the alleged expenditure was capital expenditure or a business expense, the judgment cannot, by any stretch of reasoning, operate as res judicata. Otherwise also, it is well settled that a finding on any matter in relation to a particular year of assessment does not operate as res judicata on a similar question in the subsequent assessment year."
17. The Punjab and Haryana High Court was of the view that it is evident from article 18 of the articles of association of the assessee-company that it had taken over all the assets and liabilities of the transferor-company. The conclusion is, therefore, irresistible that the liabilities of the said company form part of the consideration for the acquisition of group 'A' transport of the transferor-company. The Tribunal, therefore, rightly came to the conclusion that the expenditure of Rs. 2,77,360 representing the liability of Khalsa Nirbhai Transport Company (P.) Ltd. and discharged by the assessee was in the nature of capital expenditure.
18. In our view, apart from the fact that the tax liability is not deductible, where the assets and liabilities are taken into account for ascertaining the purchase consideration, the liabilities in effect reduce the purchase consideration. In other words, the liabilities form part of the purchase consideration as held in Dashmesh Transport Company (P.) Ltd. [1980] 125 ITR 681 (P&H).
19. For the reasons aforesaid, we answer all the questions in this reference in the affirmative and in favour of the Revenue and against the assessee. There will be no order as to costs.
Shyamal Kumar Sen, J.
20. I agree.