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Commissioner of Income-tax Vs. Hind Motor Cycle Works - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 1164 of 1976
Judge
Reported in[1982]134ITR348(All); [1980]3TAXMAN152(All)
AppellantCommissioner of Income-tax
RespondentHind Motor Cycle Works
Appellant AdvocateAshok Gupta, Adv.
Respondent AdvocateNone
Excerpt:
- .....above. but, in the statement of the case drawn up in para. 8, it has been stated that the question referred also embraces within it the question of allowance of litigation expenses, amounting to rs. 2,217, which was the subject-matter of question no. 2 of the reference application filed by the commissioner. before we state the facts relevant for deciding the referred question, it is necessary to consider as to whether the question as referred entitles us to consider the allowance of litigation expenses which amounted to rs. 2,217. these expenses were incurred in defending a suit which was decreed and as a result of which the assessee became liable to pay the amount of rs. 14,250, which formed the subject-matter of the question referred. although the tribunal in the statement of.....
Judgment:

C.S.P. Singh, J.

1. The Income-tax Appellate Tribunal, Delhi Bench 'B', has referred the following question for the opinion of this court:

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in its view that the liability to pay the sum of Rs. 14,250 under the court decree dated December 18, 1969, fell upon the the assessee as a trading liability and was, therefore, allowable as a deduction?'

2. Although the Commissioner has asked for a reference of four questions, the Tribunal has referred only the question indicated above. But, in the statement of the case drawn up in para. 8, it has been stated that the question referred also embraces within it the question of allowance of litigation expenses, amounting to Rs. 2,217, which was the subject-matter of question No. 2 of the reference application filed by the Commissioner. Before we state the facts relevant for deciding the referred question, it is necessary to consider as to whether the question as referred entitles us to consider the allowance of litigation expenses which amounted to Rs. 2,217. These expenses were incurred in defending a suit which was decreed and as a result of which the assessee became liable to pay the amount of Rs. 14,250, which formed the subject-matter of the question referred. Although the Tribunal in the statement of the case states that the question referred by them takes in its ambit the litigation expenses amounting to Rs. 2,217, we are unable to agree with its view. The claim for a deduction of Rs. 14,250 was entirely different from the claim of litigation expenses amounting to Rs. 2,217. This being so, we cannot read into the question referred, the dispute relating to the allowability of expensesamounting to Rs. 2,217. Sri Ashok Gupta, counsel for the department, urged that the applicant should not be made to suffer on account of the mistake committed by the Tribunal, as the Commissioner had, in his application, asked for four questions, one of which specifically covered the question of litigation expenses. It is undoubtedly true that the Tribunal has erred in taking the view that the question referred includes within it the question of litigation expenses but the error cannot be rectified now, for, we can answer only the question that has been referred to us and not the question which, according to the Tribunal's view, forms a part of the question that is before us. The remedy of the Commissioner to rectify this error lay in moving an application under Section 256(2) for a direction from this court in respect of the question relating to litigation expenses. In view of this we have to confine our answer to the question as to whether the amount of Rs. 14,250 which the assessee-firm was made liable to pay under the court's decree dated December 18, 1960, was a trading liability.

3. The facts relevant for answering this question may now be stated. The assessment year involved in the reference is 1970-71. The relevant previous year ended on 31st March, 1969. The business which was carried on by the assessee-firm had been formerly carried on by another firm, consisting of five partners in the name and style of M/s. Hindustan Motor Cycle Works. This firm had appointed another firm, Hind Auto Engineering Company, as its sole selling agent under an agreement dated June 15, 1965. Under the terms of this agreement the sole selling agents were to receive commission on sales at the rate of 25 to 35% and had to deposit an amount of Rs. 2,500 as security. This sole selling agency was terminated on 24th September, 1969, but the deposit was not returned. As a result, the sole selling agents filed a suit for the refund of the amount and their commission as also interest. It is necessary at this stage to mention that the assessee-firm had taken over the assets and liabilities of Hindustan Motor Cycle Works by an agreement dated 1st April, 1969, and had started running its business in the name and style of M/s. Hind Motor Cycle Works. Thus, before the assessee-firm took over the assets and liabilities of the erstwhile firm, the sole selling agents had already filed their suit claiming various amounts against the erstwhile firm. The suit was decreed on December 18, 1969, by the court, inter alia, for an amount of Rs. 14,250 payable to the selling agents by way of interest. The assessee claimed the amount as its trading liability but the ITO disallowed its claim on the footing that the liability related to the erstwhile firm. The AAC took a similar view. An appeal was then filed by the assessee to the Tribunal. Before the Tribunal, the only question canvassed was as to whether the assessee-firm had taken over the liability of the erstwhile firm in respect of the matter in dispute, for, it appears from the order of the Tribunal that it was conceded by the department that in case this were so the department would have no objection to the allowability of the claim. The Tribunal interpreted Clause 4 of the agreement, dated 1st April, 1969, which was to the following effect:

'That the assets and liabilities of the business hitherto carried on are taken by this firm at their book value as on 31st March, 1969. The balances of the retiring partners as on 31st March, 1969, are agreed to be retained as loan for the time being. The loan shall bear interest @ 6% per annum. '

and held that this clause was comprehensive enough to saddle the assessee with the liability of the erstwhile firm qua its sole selling agents. On this view of the matter, it held in favour of the assessee.

4. Sri Ashok Gupta appearing for the department urged that the liability did not pertain to the previous year relevant to the assessment year in question, for, the liability, if any, has accrued much earlier, and, secondly, that the liability was not a trading liability of the assessee-firm but was of the erstwhile firm and, as such, the assessee could not claim any deduction in respect thereof. A large number of decisions have been cited before us by the counsel for the department in order to persuade us to hold that the liability did not pertain to the relevant previous year and, as such, could not be allowed ; but, on the frame of the question and in view of the stand taken by the department throughout the proceedings, it is not possible to determine this controversy in the present reference. The question as framed invites our attention only to the issue as to whether the amount of Rs. 14,250 was a trading liability of the assessee and not as to whether it pertained to the relevant previous year. It has been seen that it was conceded on behalf of the department before the Tribunal that, in case the amount was a trading liability of the assessee, it would be allowable. This being so, we refrain from going into the question as to whether the deduction claimed pertained to the relevant previous year. Now, as to whether it was the trading liability of the assessee, Clause 4 of the agreement has already been extracted earlier. It has also been noticed that this agreement was entered into while the suit against the erstwhile firm was already pending. It also appears that the decree passed by the civil court created a liability against the assessee, for, there is no material on record to show that it created liability against the erstwhile firm and not the assessee. This liability arose on account of the fact that the security deposit was not refunded to the sole selling agents and certain amounts of commission, etc., remained due. The interest, which was decreed and with which alone we are concerned in the present reference, obviously relates to those demands. As the assessee-firm had taken over the entire assets and liabilities of the erstwhile firm and as the suit had already been filed when the agreementof the 1st April, 1969, was reached, Clause 4 can, in the context, be interpreted so as to include this liability also, for, the parties must be assumed to be in the full know of the existing affairs of the erstwhile firm. Further, as the assessee-firm had taken over all the liabilities of the erstwhile firm and as the payment of the interest was the liability of the erstwhile firm, it is futile to urge that this liability fell outside the purview of Clause 4. Seeing the nature of the dispute which led to the civil court decree, the liability was undoubtedly one that had accrued in the course of the business of the assessee and, as such, was a trading liability. The Tribunal was right in the view that it took.

5. The question is answered in the affirmative, in favour of the assessee and against the department. There will be no order as to costs.


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