Tribunal rules discharged income tax liability not deductible as revenue expense

Skylark CMC (Private) Limited. Versus Deputy Commissioner Of Income-Tax.

Skylark CMC (Private) Limited. Versus Deputy Commissioner Of Income-Tax. - ITD 045, 577, TTJ 047, 249, Issues:
1. Disallowance of claim of deduction in respect of income-tax liability of a dissolved firm.

Analysis:
The judgment by the Appellate Tribunal ITAT Ahmedabad-B involved the disallowance of a claim of deduction regarding the income-tax liability of a dissolved firm, M/s C.M.C. (India). The Income Tax Officer (ITO) disallowed the deduction of Rs. 22,596, representing the income-tax liability of the firm, which was confirmed by the CIT (Appeals) citing a previous decision of the Punjab & Haryana High Court. The assessee, a partner of the dissolved firm, had taken over all assets and liabilities of the firm following its dissolution. The assessee paid the income-tax liability of the erstwhile firm in the relevant accounting year and claimed a deduction, which was rejected by the ITO and CIT (Appeals). The assessee relied on various legal precedents to support their claim.

The key question revolved around whether the income tax liability of the transferor company could be disallowed in the hands of the transferee company under section 40(a)(ii) of the Income Tax Act. The High Court's interpretation of the provisions led to the disallowance of the liability in the subsequent decision, emphasizing that liabilities formed part of the consideration for the acquisition of the business. The Tribunal found the facts of the present case to be identical to the earlier case, leading to the rejection of the deduction claim by the ITO.

The Tribunal also considered the principle laid down by the Supreme Court regarding expenditure for the purposes of trade, emphasizing that the discharged liability was part of the price for taking over the business and hence fell in the capital field. The Tribunal rejected the argument that the liability discharge was necessary to prevent property attachment, stating that the discharge of a capital liability does not automatically qualify for a revenue deduction. Other legal precedents cited by the assessee's counsel were found to be irrelevant to the present case.

In conclusion, the Tribunal upheld the disallowance of the deduction claim, following the High Court's decision and emphasizing that the discharged liability formed part of the capital consideration for taking over the business. The Tribunal rejected arguments based on other legal precedents and affirmed that the liability discharge did not qualify for a revenue deduction.