1. This appeal by the assessee is directed against the order dated 16-5-1988 of the CIT (Appeals), Coimbatore, relating to the assessment year 1985-86.
2. The facts of the case are that by a Deed of Declaration dated 4-7-1977, one P. Seetharaman created a private trust for the benefit of six teenagers. The said Declaration inter alia authorised the trustees, who are three in number, to carry on any business, trade or manufacture with the funds of the trust as also close such business whenever it was expedient so to do. Accordingly, the trustees carried on business in the name and style of Anil Engineering Trust at Coimbatore-18.
14. The Trust shall continue for the period of fifteen years and no part of the funds of the Trust shall revert back either to the Authors of the Trust or to the parents of any of the beneficiaries mentioned in the Trust either during the currency of the Trust or thereafter. The Trust can be put to an end to, earlier, if the Trustees decide that it is in the interests of the beneficiaries.
15. At the time of the determination of Trust as stated above the funds of the Trust with the Managing Trustee as on the date of determination and even during the currency of the Trust shall be held in the following manner in respect of the beneficiaries : 4. By a Deed of agreement dated March 31, 1984, the Trustees terminated the trust on March 31, 1984. Clauses 1 and 2 of the said Deed read as follows: 1. As all the Beneficiaries have become majors, the Trustees have agreed and declare hereby that the deed of Anil Engineering Trust stands terminated on 31st March, 1984.
2. The Trustees have handed over to the beneficiaries on 31-3-84 the entire assets and liabilities of the business of the Trust, the receipt of which is hereby acknowledged by the Beneficiaries. The Beneficiaries have expressed their willingness to continue the business.
5. Thereupon, the erstwhile beneficiaries of the private trust constituted a partnership firm on the terms and conditions incorporated in the partnership deed dated April 1, 1984. It is a matter of record that the very first year of account of the firm was the 12-month period ending on 31-3-1985 (being the previous year relevant to the assessment year 1985-86, which is now before us).
6. In the course of the assessment proceedings of the firm for the assessment year 1985-86, one of the questions that arose for consideration was whether the firm was eligible to revenue deduction in respect of a sum of Rs. 88,773. The said issue arose this way. When it was in existence, the aforesaid private trust, it would appear, had claimed revenue deduction, on accrual basis, in a sum of Rs. 88,773 being the sales-tax collected by it but not remitted to the credit of the Government. In the assessment for the assessment year 1984-85, the said claim of the trust was negatived invoking the provisions of Section 43B. It would appear that the said sum was actually paid by the assessee-firm in the relevant previous year ending on 31-3-1985. The assessee-firm claimed revenue deduction in respect of the said sum on payment basis. The Assessing Officer disallowed the assessee's claim on two counts. First, the assessee-firm had taken over the business of the erstwhile private trust and that consequently, the sum in question was an outlay on capital account. Secondly, on a proper interpretation of Section 43B of the Act, a revenue deduction in respect of the taxes paid would be available in a subsequent year only if the claim for revenue deduction on accrual basis had been rejected in the case of the same assessee. Accordingly, he negative the assessee's claim.
9. Shri Ravi, the learned Counsel for the assessee, vehemently contended that the assessee is entitled to succeed especially because it had taken over all the assets and liabilities of the business that was earlier done by the trust. In this regard, he referred to and relied upon the following cases: (2) CITv. T. Veerabhadra Rao, K. Koteswara Rao & Co. [1985] 155 ITR 152 (SC) (3) Emerald Paints & Colour Products (P.) Ltd. v. CIT [1986] 159 ITR 105 (Cal.) 10. On his part, Shri Seetharaman, the learned Departmental Representative, contended that the sum in question is an outlay on capital account.
11. We have looked into the facts of the case. We have considered the rival submissions.
12. At the outset, we may highlight the fact that the transaction here was not one for consideration. Earlier, the trustees of the private trust were carrying on the business for the benefit of the beneficiaries. The trust deed gave specific powers to the trustees to put an end to the trust even before the expiry of the stipulated fifteen years' period, if they considered that it was in the interests of the beneficiaries. It was in exercise of the said powers that the trustees determined the trust on the beneficiaries attaining majority.
The consequence was that the entire trust property (which was earlier managed by the trustees for the benefit of the beneficiaries) came to be handed over to the beneficiaries who, thereupon, constituted a partnership firm. Thus, this is not a case where a business belonging to 'A' was purchased for a consideration as a going concern by 'B'. It should, therefore, follow that the question of there being any outlay on capital account just does not arise in this case. The lower authorities were, therefore, not justified in disallowing the assessee's claim on the basis, inter alia, that the sum of Rs. 88,773 was an outlay on capital account.
13. Since the case before us is not one of purchase of a business as a going concern for consideration, the cases referred to and relied upon by the learned Counsel for the assessee, all of which were cases of purchase of a business of a going concern for a consideration, are not directly applicable to the case before us. Even so, the principle behind them will be helpful in resolving the issue before us.
14. In the Madras case of Iyanar Coffee & Tea Co. [supra), the assessee-firm was newly constituted to run independently the coffee business earlier carried on by another firm consisting of the same partners. The assessment to sales-tax relating to the pre-take-over period was made subsequent to the take-over and the new firm paid the sales-tax liability and claimed revenue deduction in respect thereof.
The assessee's claim was rejected all through. Deciding the issue in favour of the assessee, the jurisdictional High Court held that the assessee has stepped into the shoes of the old firm in respect of the coffee business, having taken over the entire assets and liabilities of that business and that consequently it was entitled to succeed.
15. In the Supreme Court case of T. Veerabhadra Rao, K. Koteswara Rao & Co. (supra), the assessee succeeded to the business of the predecessor firm, taking over all the latter's assets and liabilities including a debt due from one Laxmi Trading Co. The business carried on by the predecessor firm was carried on by the assessee. The assessee also paid income-lax on the interest accruing op the debt due from the said Laxmi Trading Co. Subsequently, the assessee-company accepted a sum of Rs. 25,000 from the said Laxmi Trading Co. in full and final settlement of the money owed to it by the latter and, in the process, wrote off a sum of Rs. 15,100 as irrecoverable and on this basis, claimed revenue deduction in respect thereof. Rejecting the departmental appeal by special leave on this issue, the Supreme Court observed : If a business, along with its assets and liabilities, is transferred by one owner to another, a debt so transferred would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, the same right should be recognised in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded as belonging to the new owner.
It is not imperative that the assessee referred to in Sub-clause (a) of Section 36(2) must necessarily mean the identical assessee referred to in Sub-clause (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of Sub-clause (b). The successor-assessee, in effect, steps into the shoes of his predecessor.
16. In the Calcutta case of Emerald Paints & Colour Products (P.) Ltd. (supra), the assessee (lessee) took over the lease business of the lessor under a registered deed of lease. Clause 3(vi) of the lease deed provided that the lessee shall pay all creditors, bank overdrafts and taxes payable by the lessor as per the books of account. The assessee claimed deduction of the liability for sales tax paid by the assessee for business done earlier by the lessor. The Assessing Officer negatived the assessee's claim. The first appellate authority allowed the assessee's claim. The ITAT restored the order of the Assessing Officer on this issue. Answering the question referred to it in favour of the assessee, the Calcutta High Court held that Section 17 of the Bengal Finance (Sales Tax) Act, 1941, casts a statutory liability on the assessee (lessee) in relation to the Act, i.e., the lessee, for all purposes of the Act, was liable even for the period the lessor had run the business and he had incurred liabilities under the Act, the only exception being in respect of the liabilities which had already been discharged by the lessor. In all respects, the lessee became statutorily liable so long as the lease subsisted irrespective of the period for which the liability related. The agreement between the parties also clearly provided for payment by the lessee of the taxes due by the lessor. Therefore, both under the statute as also under the agreement, the lessee was liable to discharge the liabilities that had accrued to the lessor. Therefore, the liability for sales tax for the period prior to commencement of the lease was an allowable deduction under Section 37 of the Income-tax Act, 1961.
380. That was also a case of purchase of a business as a going concern.
After the purchase, the customers of the previous owner of the business made certain claims against the purchaser on account of short-measurement in the supplies made earlier by the previous owner of the business. The assessee settled the claims and claimed revenue deduction in respect of the sum in question on the ground that it was a payment for protecting the name of the assessee-firm and was incurred in the course of its business. The Tribunal allowed the assessee's claim. The High Court answered the question of law referred to it (at the instance of the revenue) in the assessee's favour and against the revenue. The following observations of the High Court are apposite : ...the mere fact that certain liabilities are taken over by the assessee along with a business which it acquired for consideration, cannot, in all cases, lead to the conclusion that the value of the liabilities must also be regarded as forming an integral part of the purchase price and be regarded as payment under capital account. In our judgment, the real nature of an outgoing represented by the discharge of the liabilities attached to a business which an assessee acquires for consideration would depend upon whether the liabilities themselves could be related to the revenue account or to the capital account, as the case may be.
Applying the decision in the case of Cooke v. Quick Shoe Repair Service 11949] 30 TC 460 (KB), the High Court held that the outlay in question was not only on revenue account but also that it was necessitated by the need to protect the name of the assessee-firm. Consequently, the outlay was allowable as a business expenditure.
(i) In cases where a business is purchased as a going concern, the successor may be obligated to clear the liabilities of the purchaser either by virtue of statutory provisions or by the specific terms and conditions of the take-over.
(ii) Even in cases where a lump sum consideration is paid for acquiring a business as a going concern, the expenditure incurred by the successor to clear the liabilities of the predecessor cannot invariably be regarded as capital expenditure.
(iii)...the real nature of an outgoing represented by the discharge of the liabilities attached to a business which an assessee acquires for consideration would depend upon whether the liabilities themselves could be related to the revenue account or to the capital account, as the case may be.
19. As we see it, the rationale behind the aforesaid principles is equally applicable to cases of the type under consideration where the successor steps into the shoes of the predecessor not by reason of having purchased the business of the predecessor but in his own right as the beneficiary of a trust and in accordance with the terms of the trust deed. In the case before us, the outlay in question, namely, the sales-tax paid, is clearly an outlay on revenue account. We, therefore, hold that the assessee is entitled to revenue deduction in respect of the sum of Rs. 88,773. We, therefore, direct the Assessing Officer to allow revenue deduction in respect of the said sum.