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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI SANJAY ARORA & SHRI DUVVURU RL REDDY
आदेश /O R D E R
Per Sanjay Arora, Accountant Member:
This is an Appeal by the Assessee arising out of the Order by the Commissioner of Income Tax (Appeals)-VIII, Chennai (‘CIT(A)’ for short) dated 27.03.2013, dismissing the assessee’s appeal contesting its’ assessment under section 143(3) of the Income-tax Act, 1961 ('the Act' for short) dated 26.12.2011 for assessment year (AY) 2009-10.
The sole issue arising in this appeal is the maintainability or otherwise in law of the assessee’s claim for deduction in respect of sales-tax, claimed at Rs. 34,03,566/-. The assessee, a firm in the business of manufacturing of sewage pipes, filed its return of income for the year on 01.10.2009 admitting an income of Rs.37,93,259/- (Paper-Book pages 5,7-9). This was later claimed to be revised (vide return filed on 09.11.2009) to Rs.14,93,259/- by claiming a sum of Rs.23 lakhs on account of sales-tax arrears paid during the year, filing along with a revised Balance-Sheet and Profit & Loss Account - which bore expenditure on account of sales tax paid at Rs.34,03,566/- (PB pgs. 59,109). The same, it was explained in the assessment proceeding, was in respect of sales-tax liability of a company, M/s. Joshi Stone Wares Pvt. Ltd., whose manufacturing unit had been purchased by the assessee-company. The sales-tax liability against the said company being pursued by the sales tax department, was discharged by the assessee under the sales tax amnesty scheme of the Government of Tamil Nadu. In the view of the Revenue, it was the liability of the said company and not that of the assessee. The same could thus only be treated as paid for and on its behalf. The claim was accordingly disallowed and confirmed in appeal for same reason.
Before us, the assessee’s plea was that the Assessing Officer (A.O.) by proceeding against the original return had committed an error in-as-much as he had not taken cognizance of the revised return, a valid return u/s.139(5) of the Act in-as-much as the original return was filed within the time allowed u/s.139(1), i.e., by 31.10.2009. He was, however, unable to answer as to where, if the sales-tax payment of Rs.23 lakhs was made during the relevant year, was the same reflected in the balance-sheet filed along with the original return (PB pg. 11). Then, again, what were the terms of the take-over agreement between the parties, etc. He sought time to answer those queries. The liability of Rs.11.04 lakhs, as originally claimed, however, he further submitted, is for the current year, and had wrongly been considered by the Revenue as part of the sales-tax arrears (of the transferor-company). The Ld. Departmental Representative (DR), on the other hand, submitted that the assessee’s plea is not maintainable, the payment in fact being only to protect the erstwhile property of the transferor-company, since taken over by the assessee, from being realized (through auction) for the discharge of the dues of the said company thereto by the Sales-tax Department. At any rate, if the claim in respect of the sales-tax paid of the transferor-company is accepted, the liability to the Department being admittedly to the tune of Rs.75 lakhs, so that there has been remission to the extent of the difference, would be required to be added to the assessee’s income u/s.41(1) of the Act.
We have heard the parties and perused material available on record. We shall take up the assessee’s preliminary objection first, before proceeding to discuss the issue on merits.
The Preliminary Objection 4.1 The objection of the A.O. having proceeded against the original return – in-as-much as he adopts the profit figure of the original profit and loss a/c (PB pgs. 7,13), i.e., as against the revised profit of Rs.14,83,259/-, is clearly misconceived. The revised return substitutes the original return in-so-far as the claims made by the assessee (per the original return) are concerned, without in any manner detracting from the status of earlier return as the original return. It is only because the same is a valid return in law that it could be revised. It is this return, a valid return in law, which was subject to the verification procedure under the Act and, therefore, there is no error by the A.O. in proceeding there-against. The assessee having, however, revised the same, the A.O. is bound to consider the claims preferred thereby, being a voluntary revision liable to be regarded as made bona fide. And, further, no prejudice could be caused to the assessee, which is the case in the instant case in-as-much as the A.O. has considered the entire claim qua sales-tax paid, which claim alone was revised by the assessee. Proceeding, however, from the figure of net profit as per the P & L Account (original), he disallowed only the amount debited thereto, i.e. Rs.11.04 lakhs. The impugned order, in which the assessment order merges, also considers the entire claim of sales tax, i.e. for Rs.34.04 lakhs. The preliminary objection fails.
The respective cases 4.2 The assessee’s case is that it having paid sales-tax (pertaining to the earlier years) of M/s. Joshi Stone Wares Pvt. Ltd., as its successor, the same is only a revenue expenditure on account of a trading liability and, thus, allowable, in view of s.43B of the Act, on payment, i.e., irrespective of the year to which the liability pertains. The payment for Rs.11.04 lakhs is in any case for the current year. The Revenue’s case is that the liability is only of the transferor-company, and it’s discharge by the assessee-firm is only for and on behalf of the said company, which it may have been called upon to or may have otherwise discharged in pursuance to the directive by the sales-tax authorities to protect the erstwhile property of the company, since taken-over. In fact, as contended, it is the property of the assessee-firm which was liable to be auctioned in case of non-payment, the same (payment) is only to remove an encumbrance thereon, so that it is toward a capital asset. Further still, the sales-tax liability taken over is admittedly to the tune of Rs.75 lakhs, so that there is remission for the balance (~ Rs.52 lakhs), which is liable to be treated as assessee’s income u/s. 41(1) of the Act, i.e., where the assessee’s claim for Rs.23 lakhs is considered as valid.
Discussion 4.3 Our first observation in the matter is that the assessee’s claim qua the take-over of the liability, to whatever extent, and it’s discharge under the amnesty scheme, is wholly unsubstantiated. Two, the amount of Rs.23 lakhs finds reflection as ‘Loans & Advances’ in the original balance- sheet as on 31.03.2009 (PB pg.107), which has been compared by us with revised balance-sheet to find reduction in the said portfolio ‘Loans & Advances’ (under the account head ‘Advance & Deposits’). This confirms the payment of Rs. 23 lakhs, which though could be in a preceding year. The assessee’s claim of this payment being a successor firm being unsubstantiated, we yet proceed on this premise in-as-much as the Revenue has not disputed the same. In the event of our holding the sum as allowable, the AO shall verify if the payment is toward sales-tax and, further, during the relevant year. In Pembril Engineering (P.) Ltd. v. CIT (Dy.) [2015] 155 ITD 72 (Mum), to which decision reference was also made by the Bench during hearing, the assessee-company transferred its business as a going concern on ‘as is where is’ basis. The transfer consideration was determined by reducing the outstanding statutory liabilities in respect of bonus, gratuity and leave encashment, and on that basis it was claimed that the condition of their payment (per section 43B) stands met. The same did not find acceptance by the Revenue. The Tribunal held that it continues to be the statutory liability of the assessee-company despite the transfer of the business by it. All that the transferee had undertaken was to settle all such liabilities as outstanding on the transfer date, with in fact the transfer agreement - to which reference was also made by the tribunal, being explicit in the matter. Reducing the value of the liabilities from the assets taken-over, for arriving at the transfer consideration, only amounted to keeping aside moneys for payment undertaken to be discharged – for and on behalf of the transferor. How could, it wondered, a statutory liability be contractually transferred? There was nothing to show that the payment had actually been made during the year, which only was relevant, with there not being even as much as a contention in respect of the payment of the impugned liabilities. The disallowance under section 43B, which comes into play only on specified liabilities being otherwise allowable under the Act, stipulating an additional condition of actual payment, was accordingly confirmed.
4.4 Coming to the facts, it is undisputed that the payment of Rs.23 lakhs is towards sales tax arrears of the transferor-company. The transfer by it of its unit would not result in the transfer of a statutory liability, which is of the company and not of the unit per se, to the assessee-firm. Even if contracted for being paid by the assessee, which though remains unsubstantiated, it continues to be the liability of the company, and not of the former. Then, again, how would it be held it’s trading liability? Sales-tax is a levy on sales and, accordingly, forms part of the seller’s trading receipt, i.e., of the transferor-company. The corresponding sales tax liability is a concomitant trading liability, which would therefore be allowable on accrual basis. Section 43B of the Act, however, imposes the restriction of actual payment. The character of the liability in the hands of the assessee-firm, assuming so, is on capital account in-as-much as the unit acquired by it is only a capital asset. The same may, therefore, go to determine its cost. Even if not reckoned while determining the transfer consideration – in which case it is a discharge of a liability assumed on capital account, the same is at the best an encumbrance to which the property was subject, even as argued by the ld. D.R. Whether the same shall, in such a case, go to increase the cost of the property (to the assessee) is arguable; the property only securitizing the liability. In sum, even if contracted to pay, of which there is though no claim, it is not the assessee’s liability. The payment thereof by the assessee is in law only for and on behalf of the transferor company. Further, the discharge by the assessee is admittedly to release the attached property of the said company and, thus, a payment in the capital field. Reference in this regard may be made to the submissions before the first appellate authority, reproduced at para 3 of the impugned order (also refer Ground 3 before us). The assessee’s claims for Rs.23 lakhs, preferred per the revised return, stands rightly disallowed by the Revenue, which is accordingly upheld. Coming to the balance payment of Rs.11.04 lakhs, the assessee’s contention before us is of the same not being sales-tax arrears, as considered by the Revenue, but the sales tax liability for the current year, i.e., financial year 2008-09. We have already clarified that sales tax being a liability specified in s.43B, its deduction in the computation of business income shall be governed by the said non obstante provision, and the year to which the liability pertains becomes irrelevant. So, however, it is claimed before us that the unit was acquired in the year 2005, in which case it may well be the sales-tax liability of the assessee’s business, even if qua the said unit, since taken over, i.e., post acquisition. That is, could be the assessee’s liability. The Revenue authorities have proceeded by treating the said payment on the same footing as Rs.23 lakhs, to support which conclusion we find no basis. We accordingly consider it proper to restore the matter to the file of the ld. CIT(A) to examine this aspect of the matter, and decide the issue of its deductibility after hearing the parties by issuing definite finding of fact. Needless to add, he shall have regard to our observations/findings in this order. The burden to prove it’s claims, we may though clarify, is only on the assessee.
4.5 The assessee has per its Grounds of Appeal cited several decisions which were not referred to during hearing and, accordingly, not responded to by the other side. We have though perused the same to find that none of them are in relation to the question that arises for being answered in the present case, i.e., whether the impugned liability is the assessee’s liability, a pre- requisite for claiming deduction in its respect. There is accordingly no issue of the transfer of a statutory liability or, consequentially, its character as a trading liability in the hands of the transferee, i.e., aspects which have also been additionally considered by us. The liability under reference is covered by s. 43B, so that it is only the year of payment that is relevant. Before parting, we may also add that we having held that the liability qua sales tax arrears is the liability of the transferor-company, the question of any remission to the assessee on availing tax amnesty scheme does not arise. In fact, section 41(1) of the Act shall apply only where any deduction on account of interest and penalty, the other components of the demand raised by the sales tax authorities (Rs.70.37 lacs), had been claimed by the assessee in the first place, of which there is no claim. The argument of the ld. D.R. in this respect is wholly misconceived. We may also clarify that this appeal was earlier dismissed for non-prosecution. Abundant opportunity has been given to the assessee on its restoration under section 254(2) of the Act. Under these circumstances, it was considered proper to hear this appeal and decide the same. We have accordingly proceeded to do so on merits on the basis of admitted, undisputed facts, while restoring for fresh adjudication where the facts were disputed and not proved one way or other, so as to allow the assessee, in the interest of justice, further opportunity.
4.6 We decide accordingly. 5. In the result, the appeal is partly allowed for statistical purposes. Order pronounced on October 21, 2016 at Chennai.