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. JUDGEMENT_248_ITR194_1992Html1.htm
(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).;