Commercial continuity allows deduction of inherited sales tax liability where the successor continues the same business concern.

A statutory sales tax demand relating to a branch business taken over by the assessee was treated as deductible under section 37(1) where the successor continued the same commercial concern with identical partners and stepped into the firm's shoes. The liability was regarded as an incident of the continuing business, not an expenditure disconnected from the assessee's own operations. Authorities cited by the revenue were distinguished because they involved different businesses or materially different facts, unlike the commercial identity and continuity shown here.

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Issues: Whether the sum of Rs. 20,507, representing sales tax demand relating to the erstwhile branch business taken over by the assessee, was an allowable deduction in computing the assessee's income under section 37(1) of the Income-tax Act, 1961.

Analysis: The assessee took over the branch business with its assets, liabilities, reserve fund, goodwill and commercial operations, and the partners remained identical. The demand was pursued and borne by the assessee in the course of the same trading activity. On the facts, the business of the former firm and the assessee was found to be one continuing concern, with the assessee stepping into the shoes of the firm. The statutory liability was treated as an incident of the continued business and not as an expenditure unconnected with the assessee's own business. The cases relied on by the revenue were distinguished because they involved different businesses or different factual settings, whereas here there was commercial identity and continuity.

Conclusion: The deduction was allowable under section 37(1) and the question was answered in favour of the assessee.

Final Conclusion: A statutory sales tax liability attached to a business that is taken over and continued as the same commercial concern by identical partners is deductible in computing the successor's income.

Ratio Decidendi: Where the facts show commercial continuity and identity between two partnership concerns, a statutory liability arising from the continued business is deductible as expenditure of the assessee's own business.

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