1. The assessee is a private limited company. It was incorporated on 2-1-1979. Before its incorporation, a memorandum of association was drawn up on 25-12-1978. As per this memorandum it was decided that the newly constituted company will take over the business or businesses earlier carried on by a firm called 'New Cawnpore Flour Mills'. One of the main objects of the company as per its memorandum was : 1. To acquire, take over and take possession of the business and the undertaking with all its movable and immovable assets (including actionable claims) and all other assets, rights, benefits, titles, interests, approvals, registrations, permits, facilities, concessions, sanctions, privileges, licences, debts belonging to or held by the parties hereto in connection with the business, carried on by them in partnership under the name and style of 'New Cawnpore Flour Mills' as aforesaid and to undertake and discharge all the liabilities in respect of any debt or obligation incurred or any contract entered into by, to, with or on behalf of the aforesaid partnership and the goodwill, if any, of such business.
Article 2 of the articles of association of the assessee reads as under : 2. The business and assets specified in the schedule hereto shall belong to and become the property of the company and having regard to the obligations imposed and liabilities on the company by these presents shall be taken at their net book value and the shares to which the parties hereto are to be entitled as aforesaid shall be deemed to be fully paid up by means of the net assets so brought in.
Cash money, bank balances, book debts, claims, receivables, securities, investments, deposits, stocks, and other assets whether mentioned or not, at 82/2, Cooperganj, Kanpur and Kejriwal Flour Mills, Gorakhpur or at any other office or offices of the said New Cawnpore Flour Mills, anywhere in India.
2. The firm whose business was taken over by the assessee had paid sales tax. The levy was contested in appeal first by the firm itself and subsequently by the present company. However, the assessee succeeded to the claim and received a refund of Rs. 1,81,866. The details of the refunds are given on page 1 of the paper book submitted by the assessee. Before us, it was conceded that the sum of Rs. 79,750 related to the period after the business had been taken over by the assessee. In other words, it was conceded before us that the above amount was clearly taxable in the assessment of the assessee. We will, therefore, confine ourselves to the balance of Rs. 1,02,108 only, although the dispute before the lower authorities was for the entire amount of Rs. 1,81,866.
3. The ITO was of the view that the above amount represented the assessee's income under Section 41(1) of the Income-tax Act, 1961 ('the Act') as it was in the nature of a revenue receipt. According to him, the amount was also taxable as business income under Section 28 and 28(iv) of the Act. He, therefore, included the amount in the total income of the assessee.
4. The assessee appealed to the Commissioner (Appeals). It was submitted before him that the amount could not be assessed as the assessee's income under Section 41(1) in view of the decision of the Supreme Court in CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 and of the Allahabad High Court in Moti Lal & Sons v. CIT [1975] 101 ITR 177.
The Commissioner (Appeals) agreed with this submission. He was, however, of the opinion that the amount was still taxable under Sections 176(3A) and 170(1)(b) of the Act. He also observed that there could not be any dispute that the receipt of the amount was in the nature of a revenue receipt in view of the two decisions of the Supreme Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615.
5. The above finding of the Commissioner (Appeals) has now been challenged before us by the learned counsel for the assessee. We have heard the parties. We will deal with the various issues in seritum in this order. We will first take up the question whether the provisions of Section 41(1) are applicable to the present case. The answer to this issue is found in the decisions of the Supreme Court and the Allahabad High Court referred to above. The Supreme Court in Hukumchand Mohanlal's case (supra) held that the Act did not contain any provision making the successor in business or legal representative of an assessee to whom an allowance had already been granted, liable to tax under Section 41(1) in respect of the amount remitted and received by the successor or the legal representative. This principle squarely applies to the present case. The present assessee who was sought to be taxed was not the assessee contemplated under the above section. It was the firm of New Cawnpore Flour Mills, which had paid the tax while the refund has been received by the assessee, which is a successor to the firm. A similar view was taken by the Allahabad High Court in Moti Lal & Sons' case (supra). The decision of the Supreme Court stated above was followed in this case. It was held that Section 10(2A) of the Indian Income-tax Act, 1922 ('the 1922 Act') corresponding to Section 41(1) of the 1961 Act can be applied only if two conditions are satisfied, firstly, it must be shown that an allowable for deduction has been made in this assessment in respect of a loss, expenditure or trading liability, and, secondly, the same assessee must have received the amount allowed in respect of such loss, expenditure or trading liability. The successor in business or a legal representative of the assessee to whom the allowance has been granted, is not liable to tax under Section 41(1) in respect of an amount remitted and received.
6. In this connection, we will also like to refer to an old decision of the Bombay High Court, which was relied on by the learned counsel for the assessee before us. The decision is in the case of CIT v. Agarwal & Co. [1952] 21 ITR 293. It was held in this case that in order to attract the provisions of the Act, and in order to levy income-tax, it is not enough to enquire when a particular income accrues. What is more important, and what is more pertinent, is to enquire whose income it is, which is sought to be taxed. Receipt by itself is not sufficient to attract tax, it is only receipt as 'income' which can attract tax. If an income is assigned by a person to another, in respect of that income it is not the assignee, who is liable to pay tax but the assignor. The assignee receives the income not by reason of the fact that it is his income, but he receives it by virtue of the assignment. His title to the income arises, not by reason of the fact that he has earned it, but by reason of the fact that there is an assignment in his favour. This principle applies to the present case also. The assessee is a successor of the firm of New Cawnpore Flour Mills. It has received the refund of the sales tax by virtue of the fact that it has taken over the business of the former and not because it is its own income. Section 28 cannot, therefore, be attracted to such an income. A similar view was taken by the Delhi High Court in a recent case of CIT v. Mineral & Metals Trading Corporation of India Ltd. [1985] 23 Taxman 143. In this case, the decision of the Supreme Court in Hukumchand Mohan Lal's case (supra) was relied on.
7. Before we proceed further, we may also refer to two decisions cited by the learned departmental representative. One is of the Madhya Pradesh High Court in Addl. CIT v. Chandrakant D. Patel [1983] 139 ITR 233. In this case, the assessee contended that the amount of sales tax was recovered and paid by the assessee in his individual capacity and, therefore, it did not constitute a trading receipt in the hands of the assessee, which was a partnership firm. It was held that the above plea had been given up by the assessee before the Tribunal. The Court, however, observed as under : ... Moreover, as found by the ITO, which has not been challenged by the assessee, as per the deed of partnership, the liabilities and assets as well as the litigation of the proprietary concern were taken over by the assessee-firm. In the circumstances, it is not open to the assessee to raise the aforesaid contention and on merits also it has no substance.(p. 238) These observations no doubt have thrown some doubt on the view expressed earlier. A similar view was expressed by the Allahabad High Court in the case of T.N. Shah (P.) Ltd. v. Addl. CIT [1979] 120 ITR If in a given case, the income of a business is computed by taking into account certain debt, it does not appear reasonable that in the absence of any statutory prohibition, allowance on account of the debt having become bad should be denied only because the assessee's identity has changed, though the identity of the business continues.(p. 357) However, keeping in view the decision of the Supreme Court in Hukumchand Mohanlal's case (supra) and the decision of the Allahabad High Court in Motilal & Sons' case (supra), which specifically dealt with the question of taxability under Section 41(1), we hold that the assessee is not liable to tax on the sum of Rs. 1,02,108 under Section 41(1).
8. We will now deal with whether any liability attaches to the above amount under Section 176(3A). In view of this section where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
9. The above section applies only where the business has been discontinued. We have, therefore, to see whether the present case is of the discontinuance of a business. We have already stated above that earlier the business was carried on by the firm of New Cawnpore Flour Mills. It has been taken over as a going concern by the present company. In our view this does not amount to discotinuance of the business, but this is a case of succession of one assessee by another assessee. This principle is clear from the decision of the Supreme Court in CIT v. A.W. Piggies & Co. [1953] 24 ITR 405. In this case also a business formerly run by a firm had been taken over by a limited company. Taking over of the business of the firm by the company was throughout considered as the case of a succession and not of discontinuance of the business. A clear case on the point is of the Privy Council in CIT v. P.E. Poison [1945] 13 ITR 384. It was held in this case that the word 'discontinued' in Section 25(3) of the 1922 Act, means only a complete cessation of the business and does not include the case of discontinuance of the business by the person formerly carrying it on as a result of the transfer or assignment of that business to another person, who thereafter carries it on. Unless otherwise stated, the same word has to be given similar meaning in an Act. According to this principle, therefore, the discontinuance means a complete cessation of the business and not the transfer of the business by one person to another. The Madras High Court in O. RM. M. SP. S. V.Meyyappa Chettiar v. CIT [1943] 11 ITR 247 gave a similar finding. The Court held that the word 'discontinuance' in Section 25(3) means 'cessation' and does not cover cases of succession. The direct case on the point is of the Calcutta High Court in Krishna Hydraulic Press Ltd. v. CIT [1943] 11 ITR 504. Here the assessee-company had taken over the business of a firm. It was held that the assessee was the successor to the firm.
10. In view of the above authorities, there is no escape from the conclusion that the present is the case of a succession by the assessee to the business of the firm. It is not a case of discontinuance of the business. As such, the provisions of Section 176(3A) cannot be applied in order to bring to tax the refund of the sales tax in the assessment of the assessee.
11. We will now deal with Section 170(1)(b) which has also been relied on by the Commissioner (Appeals) for assessing the above amount. In our opinion, the application of this section is misconceived. It is a machinery section. It lays down the procedure where there is succession of business of one person by another person. The section says that the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession and the successor shall be assessed in respect of the income of the previous year after the date of succession. Unless the amount is held to be the income of the previous year, the question of its assessment either in the hands of the predecessor or in the hands of the successor will not arise. We have already stated above that the amount is not in the nature of income of the previous year in the hands of the assessee.
It cannot, therefore, be assessed under the above section.
12. The Commissioner (Appeals) has also referred to Section 28(iv).
According to this section, the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is assessable under the head 'Profits and gains of business or profession'. The Gujarat High Court in CIT v.Alchemic (P.) Ltd. [1981] 130 ITR 168 has held that it is only if the benefit or perquisite is not in cash or money that Section 28(iv) would apply and the question of including the value of such benefit or perquisite as income from business would ever arise. This section, according to the principle laid down by the Court, has no application to a cash receipt. Following this principle, we hold that the present amount received by way of refund of sales tax cannot be brought to tax under the above section also.
13. Our finding, therefore, is that the amount of Rs. 1,02,108 is not in the nature of income in the hands of the assessee and is not taxable as its income. The assessee will, therefore, succeed only in part.
14. The next contention relates to the disallowance of a claim of Rs. 1,33,654. This is the amount of the sales tax due from the assessee for June 1983. However, it was payable after 30-6-1983. The assessee's accounting year is from 1-2-1982 to 30-6-1983 relevant for the assessment year 1984-85. Admittedly, this amount was not paid up to 30-6-1983, i.e., in the years under appeal. The ITO was, therefore, of the view that it could not be allowed as a deduction in terms of Section 43B of the Act inserted by the Finance Act, 1983, with effect from 1-4-1984. This section states that notwithstanding anything contained in any other provision of the Act, a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax or duty under any law for the time being in force shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income of the business of that previous year in which such sum is actually paid by the assessee. In other words, the above amount according to the ITO is liable to be allowed only in the assessment year in which it is actually paid. Since it was not paid in the assessment year 1984-85, when Section 43B is applicable, he was of the opinion that the assessee was not entitled to its deduction. The assessee contended that the above section did not apply to its case as it related only to a sum 'payable' by the assessee by way of tax. It was submitted before the ITO that since the amount was not payable to the Sales Tax Department up to 30-6-1983, i.e., up to the end of the assessment year under appeal, provisions of Section 43B had no application and its allowability did not depend upon its actual payment. This contention was rejected by the ITO following the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. His view was upheld by the Commissioner (Appeals). The latter also observed that even otherwise the sales tax was a revenue receipt in the light of the decisions already cited in our order.
15. The assessee is now in appeal before us. In our opinion, no interference is called for in the findings of the lower authorities.
The Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s. case (supra) held that the moment a dealer made either purchases or sales, which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till the quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. In view of this principle, the liability for payment of sales tax for the month of June 1983 amounting to Rs. 1,33,654 arose before the end of June 1983, i.e., during the assessment year under appeal itself. The provisions of Section 43B are, therefore, applicable to this amount and it was rightly disallowed as it had actually not been paid.
18. It was alternatively submitted before the Commissioner (Appeals) that the assessee had also discharged one of its sales tax liabilities relating to the assessment year 1983-84 on 23-2-1982. This amounted to Rs. 1,96,994. It was contented that this amount then also required to be allowed in the light of Section 43B. The contention was rejected by the Commissioner (Appeals) observing that no such claim was made before the ITO and this inverted logic did not retract the position discussed in his order earlier.
17. The above findings of the Commissioner (Appeals) has been challenged before us. In our opinion, there is merit in the contention of the assessee. We have already held above that Section 43B is applicable to the year under appeal and, therefore, if any payment of any tax is made in this year, the assessee is entitled to its deduction. However, that deduction is subject to the Explanation to the above section. It lays clown that where a deduction has already been allowed in the earlier year in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction in respect of such sum in computing the income of the previous year in which it is actually paid. We have, therefore, to see whether the above amount of Rs. 1,96,994 was or was not allowed to the assessee in any of the earlier years. The learned counsel for the assessee was unable to show us this fact. In our opinion, in the interest of justice, the only course open to us is to direct the ITO to go into the matter. He has first to verify whether there was any such liability of Rs. 1,96,994 towards the sales tax due by the assessee. He has then to find out whether such liability had been allowed in any of the earlier years. If it was not allowed, then he has to allow it as a deduction in the assessment year under appeal under Section 43B.18. The other contentions raised in the appeal were not pressed before us and are, therefore, rejected.