Emerald Paints & Colour Products (P.) Ltd. v. Commissioner Of Income-Tax

Satish Chandra, C.J:— The assessee is a private limited company. It carries on business of manufacture and sale of paints. The assessment year in question is 1975–76, the accounting period ending on December 31, 1974.

2. It appears that the assessee-company took over on lease the business of manufacture of paints from Messrs. Paints & Colour Products under a registered deed of lease dated April 5, 1972, on payment of Rs. 7,500 as lease rent. During the assessment proceedings, the assessee claimed deduction on account of sales tax payments which included an amount of Rs. 50,507. This amount was paid by the assessee on account of the liability of sales tax for business done earlier by the lessor (of the assessee). The Income-tax Officer disallowed this claim on the ground that it pertained to a period prior to the commencement of the lease. The assessee went up in appeal and succeeded. Tiie Appellate Assistant Commissioner held that in view of section 17 of the Bengal Finance (Sales Tax) Act, 1941, as well as the terms of the lease deed between the parties, the assessee was entitled to claim the deduction.

3. Being aggrieved, the Revenue went up to the Tribunal in appeal. The Tribunal held that in view of the provisions of section 17 of the Bengal Finance (Sales Tax) Act, 1941, and clause 2(A)(iii) of the lease deed, the order of the Appellate Assistant Commissioner was not right. It also held that in view of clause 7 of the said lease deed, the lessee had not accepted the past sales tax liabilities of the lessor. On this view, the order of the Income-tax Officer was restored.

4. At the instance of the assessee, the Tribunal has submitted this statement of the case and has referred the following question of law for our opinion:

“Whether on a proper construction of section 17 of the Bengal Finance (Sales Tax) Act, 1941, section 37 of the Income-tax Act, 1961, and the deed of lease dated March 30, 1973, the assessee was under any statutory obligation to pay the sum of Rs. 50,507 as sales tax for the years 1969, 1970 and 1971, prior to the date of lease as transferee of the business of the lessor?”

5. It may be mentioned that though the lease was executed on April 5, 1972, it was registered on March 30, 1973. The assessee, however, continued the business of the lessor with effect from April 5, 1972.

6. It is, however, not disputed that the assessee received notices of demand from the sales tax authorities for payment of the sales tax dues, the liability for which was incurred by the lessor. The notices of demand were received on August 1, 1972, for Rs. 20,436 for the year 1969, on December 27, 1973, for Rs. 19 relating to the year 1970 and on August 5, 1974, for Rs. 30,052 relating to the year 1971. It is also not disputed that the amounts of these three demands, namely, the sum of Rs. 50,507, was paid by the assessee during the accounting period relevant to the assessment year in question.

7. The material clauses of the lease deed between the parties are:

“2(A)(iii) To bear and pay all expenses, charges, dues and other monies payable in connection with the working of the factory and the business to be carried on by the lessee in connection therewith, including telephone, electric and all other charges.

3(vi) To take over all the stock-in-trade, and stock unfinished, semifinished stock, raw materials, pending orders, quotas, etc., other benefits, if any, if not already taken over at the lessor's book value for which no cash payment will be made to the lessor by the lessee; but all creditors, bank overdraft, and taxes payable by the lessee as per books should be paid and cleared by the lessee out of the sale proceeds of such stocks.”

7. The lessor will have no objection to continue work of the factory by the lessee with its licence until the lessee obtains sales tax registration certificates and fulfilled other statutory requirements.”

8. It will be seen that for the purpose of the present case, the relevant clause was clause 3(vi) which expressly provided that the lessee shall pay all creditors, bank overdrafts and taxes payable by the lessor as per books. Provision of clause 2(A)(iii) was confined to the current liabilities on account of the working of the factory of the lessee. Similarly, clause 7 is also not very material because it only provided that the lessor will have no objection to continue work of the factory by the lessee with its licence until the lessee obtains sales tax registration certificates and fulfilled other statutory requirements.

9. section 17 of the Bengal Finance (Sales Tax) Act, 1941, provides as follows:

“Where the ownership of the business of a registered dealer is transferred absolutely (by sale, gift, bequeath, inheritance or otherwise) or transferred by way of lease and the transferee or the lessee carries on such business, either in its old name or in some other name, the transferee or the lessee shall for all the purpose of this Act (except for liabilities under this Act already discharged by such dealers) be deemed to be and to have always been registered (in the case of lease, for so long as the lease subsists) as if the registration certificate of such dealer had initially been granted to the transferee or the lessee; and the transferee or the lessee shall on application to the Commissioner be entitled to have the registration certificate amended accordingly.”

10. It will be seen that this section casts a statutory liability on the lessee in relation to the Sales Tax Act, i.e, the lessee, for all purposes of the Act, is liable even for the period the lessor had run the business and had incurred liabilities under the Sales Tax Act, the only exemption is in so far as the liabilities which are already discharged by the lessor. In all respects, the lessee becomes statutorily liable so long as the lease subsists irrespective of the period for which the liability related. Under the aforesaid section 17, the lessee was liable to discharge the sales tax liability that may have accrued to the lessor. The agreement between the parties also clearly provides for payment by the lessee of the taxes due by the lessor. It is thus evident that both under the statute as also under the agreement, the lessee was liable to discharge the liabilities that had accrued to the lessor.

11. In the present case, sales tax dues for the years 1969, 1970 and 1971, were outstanding against the lessor. The sales tax authorities demanded payment from the lessee. The lessee was liable to discharge the liabilities under the statute, namely, section 17 of the Bengal Finance (Sales Tax) Act, 1941, as well as under the lease deed. The discharge of such liability was covered by section 37 of the Income-tax Act, 1961, and was an allowable deduction. In view of clause 3(vi) of the lease deed, it is clear that the assessee was liable not only for the liabilities that had accrued during the lease period, but also that had accrued prior to the period of lease but had been demanded during the subsistence of the lease.

12. We, therefore, answer the question in the affirmative, in favour of the assessee and against the Department. There will be no order as to costs.

Suhas Chandra Sen, J.:— I agree. But I would like to add a few words of my own.

13. The assessment year concerned is the assessment year 1975–76 for which the relevant accounting period is January 1, 1974, to December 31, 1974. This is not a case of ordinary sales tax liability of an assessee. When a person sells his goods, he is fastened with a liability to pay sales tax. That liability is created by the statute. It has been held by the Supreme Court in the case of Kedar Nath Jute Manufacturing & Co. Ltd. v. CIT, [1971] 82 ITR 363, that such a liability arises at the moment the sale takes place and the quantum of that liability is deductible in the accounting year in which the sale has taken place irrespective of any assessment. The fact that the liability may have to be discharged in a subsequent year of account and after the assessment is completed is of no consequence.

14. The assessee is not a dealer. He has acquired the business of a dealer who had outstanding sales tax liability. The assessee's liability can be said to have arisen in two ways: one, under section 17 of the Bengal Finance (Sales Tax) Act, and the other under the agreement embodied in the lease deed itself. Section 17 provides:

“Where the ownership of the business of a registered dealer is transferred absolutely (by sale, gift, bequeath, inheritance or otherwise) or transferred by way of lease and the transferee or the lessee carried on such business, either in its old name or in some other name, the transferee or the lessee shall, for all the purposes of this Act (except for liabilities under this Act already discharged by such dealers), be deemed to be and to have always been registered (in the case of a lease, for so long as the lease subsists) as if the registration certificate of such dealer had initially been granted to the transferee or the lessee; and the transferee or the lessee shall on application to the Commissioner be entitled to have the registration certificate amended accordingly.”

15. It was argued on behalf of the Revenue that section 17 must be confined to the current sales tax liabilities; it did not apply to the outstanding liabilities of the earlier years. In view of the clear wordings of the section, it is not possible to accept this contention. The transferee or the lessee under this section is “deemed to be and to have always been registered as if the registration certificate of such dealer had initially been granted to the transferee or the lessee”. Therefore, the legal fiction is to treat the transferee as the registered dealer from the very initial stage. All the liabilities of a registered dealer have been fastened on the transferee. He is liable not only to pay the tax but also to file return and carry out other obligations under the Act. The position is further made clear by the phrase “for all the purposes of the Act”. It is very difficult to see how a transferee, who is deemed to be the registered dealer as if the registration certificate had initially been granted to him, can be said to be liable for only the current sales tax liabilities of the transferor. He has not been made liable for any limited purpose but “for all the purposes of the Act”. The exception is also illuminating. The exception is confined to the liabilities that have already been discharged by such dealers. This must mean that the liability is not only to pay tax but also to file return and other obligations under the Act. Therefore, in my opinion, the liability that has been created by section 17 is not only in respect of current liabilities but also the outstanding tax liabilities of the earlier years. It is to be noted that section 17 speaks of the liabilities generally. This must include the outstanding liabilities to pay tax. The liabilities cannot be confined to only “on-tax liabilities The language of the section is clearly against such construction. The transferee is deemed to be the registered dealer for all purposes of the Act. It is not possible to accept the contention that “for all purposes of the Act” will not include the purpose of realisation of the outstanding tax liabilities of the transferor.

16. Therefore, in view of the clear wordings of section 17, it cannot be doubted that the assessee was liable to pay the outstanding sales tax liability of the transferor and the assessee was fastened with that liability as soon as the transfer took place. The statutory liability of the assessee cannot be shifted by an agreement between the parties. By clause 3(iv) of the lease deed, the lessee has agreed:

“To take over all the stock-in-trade and stock unfinished, semi-finished stock, raw materials, pending orders, quotas, etc., other benefits, if any, if not already taken over at the lessor's book value for which no cash payment will be made to the lessor by the lessee; but all creditors, bank overdraft and taxes payable by the lessor as per books should be paid and cleared by the lessee out of the sale proceeds of such stocks.”

17. This clause clarifies that the taxes payable by the lessor as per books should be paid by the lessee out of the sale proceeds of the stock-in-trade. Now, this clause embodied an agreement between the parties which cannot override the statutory liability of the assessee to make payment of taxes. But this clause is not in conflict with section 17. Under this clause, the liability of the lessor to pay taxes as per books shall be discharged by the lessee out of the sale proceeds of the stocks. It may be construed that the liability of the lessee to pay all creditors, bank overdrafts and taxes was limited to the amount of the sale proceeds of the stocks. But this is an agreement which is not binding on the sales tax authorities. The statutory liability was upon the transferee and that could not be shifted by an agreement between the lessor and the lessee.

18. The assessee in this case followed the mercantile system of accounting. The assessee was served with three notices of demand dated August 1, 1972, December 27, 1973, and August 5, 1974. The first two notices fell outside the relevant accounting period which was the year ending December 31, 1974. Only the last notice of demand dated August 5, 1974, was served within the relevant accounting period. If the liability to pay the outstanding amount of sales tax of the lessor was created by section 17, then that liability arose as soon as the transfer of the business took place.

19. Under the principle laid down in the case of Kedarnath Jute Manufacturing Co. Ltd., [1971] 82 ITR 363 (SC), the liability arose, so far as the seller is concerned, as soon as the sale took place. The assessee being a transferee from the seller was fastened with that liability as soon as the transfer of ownership took place. The assessee, however, has claimed deduction of the amount not in the year in which the transfer took place, but in the year in which the tax was actually paid.

20. The two notices of demand dated August 1, 1972, and December 27, 1973, were served on the assessee in the year ending December 31, 1973; but the assessee did not claim any deduction of these amounts in that year. It is difficult to follow how the assessee following the mercantile system of accounting is entitled to claim any deduction on account of the liabilities of the earlier years in respect of which notices of demand were served in the earlier accounting period. The question, however, in the case before us, is of very limited scope and is as under:

“Whether on a proper construction of section 17 of the Bengal Finance (Sales Tax) Act, 1941, section 37 of the Income-tax Act, 1961, and the deed of lease dated March 30, 1973, the assessee was under any statutory obligation to pay the sum of Rs. 50,507, as sales tax for the years 1969, 1970 and 1971, prior to the date of lease as transferee of the business of the lessor?”

21. As many as four questions were raised in the reference application to the Tribunal including a general question as to whether the amount of Rs. 50,507 was liable to be deducted as an expenditure under section 37 of the Income-tax Act, 1961, for the assessment year 1975–76. The Tribunal has, however, referred only one question. The answer to the question that has been actually referred must be in the affirmative. The assessee was clearly under a statutory obligation to pay the outstanding amount of sales tax even though that liability arose prior to the date of the lease.

22. There cannot be any manner of doubt that the assessee was liable to pay this tax. The only doubt is whether the assessee was entitled to claim deduction as and when the liability was discharged having regard to the system of accounting followed by the assessee. But, in view of the limited scope of the question that has been referred, I agree that the answer must be in the affirmative.