- BOMBAY HIGH COURT
- COMMISSIONER OF INCOME-TAX VS PLASMAC MACHINE MFG. CO. LTD.
- DATED: 4th FEBRUARY, 1993
- EQUIVALENT CITATIONS: [1993]201ITR650(BOM)
HELD THAT
In the instant case, evidently, the tax liability discharged by the assessee was in pursuance of the agreement with the transferor for taking over the business and was a part of the consideration for the transfer. That being so, it was out and out a "capital expenditure" and the question of deduction thereof in the computation of the income of the assessee did not arise.
BRIEF FACTS
- The assessee is a private limited company which was incorporated under the Companies Act , 1956 on February 7, 1973.
- With effect from April 1, 1973, the assessee took over the firm of M/s. Plasmac Machine Manufacturing Co. along with its assets and liabilities under an agreement dated April 30, 1973.
- In its assessment under the Income-tax Act, 1961, for the assessment year 1974-75, the assessee claimed a deduction of a sum of Rs. 2,35,000 in respect of the tax liability of the firm discharged by it.
- The claim was, however, not allowed by the Income-tax Officer.
- On appeal, the order of the income tax Officer was confirmed by the Appellate Assistant Commissioner.
- On further appeal, the Income-tax Appellate Tribunal allowed the deduction claimed by the assessee on the ground that the claim was not hit by section 40 (a) (ii) of the Act and hence this reference at the instance of the Revenue.
SECTION 40(a)(ii) OF THE INCOME TAX ACT, 1961
Section 40(a)(ii) of the Income Tax Act states that any expenditure or allowance which is deductible under Sections 30 to 38 of the Act shall be disallowed in computing the income chargeable under the head "Profits and Gains of Business or Profession" if the tax has not been deducted at source or after deduction has not been paid during the previous year.
In simple terms, if a business has made payments to suppliers or contractors but has not deducted TDS or failed to deposit the TDS amount with the government, then the corresponding expenses will be disallowed while calculating taxable income.
ISSUE
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 2,35,000 being the tax liabilities of the transferor-firm discharged by the assessee, was deductible in computing the assessee's business income?
OBSERVATIONS & DECISION
7. There is no dispute about the fact that the amount paid by the assessee in discharge of the tax liability of the transferor was a part of the consideration for the transfer of the business. If that is so, we fail to understand how such an amount can be claimed as deduction by way of revenue expenditure in the computation of the income of the assessee-company.
8. In order to claim deduction, the expenditure must be an expenditure (not being in the nature of capital expenditure) laid out wholly and exclusively for the purposes of the business. Only then, it becomes an allowable deduction under section 37 of the Act.
9. Section 40 comes into play only if a part of the expenditure is otherwise held to be a revenue expenditure falling under section 37.
10. In that case only, the restrictions imposed on the allowability in that section will come into operation and if it falls in any of the categories specified therein, despite the expenditure being a revenue expenditure within the meaning of section 37 of the Act, no deduction shall be allowed. But, where the expenditure itself is capital expenditure and not revenue expenditure, such expenditure would not be allowable as a deduction under section 37 of the Act.
11. Hence, the question of applicability or non-applicability of section 40 (a) (ii) of the Act will not be at all relevant in such a case.
12. In the instant case, evidently, the tax liability discharged by the assessee was in pursuance of the agreement with the transferor for taking over the business and was a part of the consideration for the transfer. That being so, it was out and out a "capital expenditure" and the question of deduction thereof in the computation of the income of the assessee did not arise.
13. It appears that the Tribunal while deciding the question in favour of the assessee, relied on the decision of the Punjab and Haryana High Court in Dashmesh Transport Co. Pvt. Ltd. v. CIT [1974] 93 ITR 275. Counsel for the assessee was fair enough to point out that the Punjab and Haryana High Court itself has not followed the above decision in the case of the assessee itself in a later decision which is reported in Dashmesh Transport Co. (P.) Ltd. v. CIT [1980] 125 ITR 681.
14. In this case also a claim was made for deduction of a sum of Rs. 2,77,364 paid by the assessee on account of the income-tax liability of a company whose business assets and liabilities it had purchased.
15. The court held that the assets and liabilities of the transferor company formed part of the consideration for the acquisition of the business of the transferor-company. The expenditure of Rs. 2,77,364 representing the liability of the transferor-company which was discharged by the assessee was, therefore, held to be in the nature of capital expenditure and, as such, not deductible in the computation of the income of the assessee.
16. In the light of the foregoing discussion, we are of the clear opinion that the Tribunal was not justified in holding that the assessee was entitled to the deduction of the sum of Rs. 2,35,000 in respect of tax liability of the transferor-firm discharged by it.
17. Accordingly, the question referred to us is answered in the negative, that is, in favour of the Revenue and against the assessee.
18. No order as to costs.
CONCLUSION
From the above decision of the Hon'ble Bombay High Court it is clear that the tax liability paid by the transferee company of the transferor company under an agreement of transfer of all assets and liabilities of transferor company is of Capital Nature and hence not eligible to be deducted as revenue expenditure of the transferee company/.
DISCLAIMER
The case law presented here is only for sharing information with readers. The views expressed are of personal nature, shall not be considered as professional advice. In case of necessity do consult with professionals.
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