Full Judgment Text
IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on : November 12, 2007
Date of Decision : November 21, 2007
ITR No.201/1986
THE COMMISSIONER OF INCOME-TAX DELHI -VII... Appellant
Through Mr.J.R.Goel, Advocate.
Versus
M/S. KWALITY RESTAURANT & ICE CREAM CO….Respondent
Through Mr.Ajay Vohra and
Ms. Kavita Jha, Advocates.
CORAM:
HON'BLE MR. JUSTICE MADAN B. LOKUR
HON'BLE DR. JUSTICE S. MURALIDHAR
1. Whether Reporters of local papers may be
allowed to see the order? Yes
2. To be referred to the reporter or not? Yes
3. Whether the order should be reported in the
Digest? Yes
DR. S. MURALIDHAR,J.
1. At the instance of the Revenue, the following question of law has been
referred for our opinion under Section 256(1) of the Income Tax Act, 1961
('Act') by the Income Tax Appellate Tribunal ('Tribunal'), Delhi Bench “E”,
New Delhi for the Assessment Year 1980-81:
“Whether on the facts and in the circumstances of the case, the
Tribunal is correct in law in holding that the purchase-tax of
Rs.89,180/- is a trading liability of the assessee, deductible in
computing its income?”
2. The Assessee is a partnership firm which manufactures ice cream. A firm
of the same name that was earlier constituted under a partnership deed dated
th st
16 October 1975 was dissolved with effect from 31 December, 1977. The
ITR No.201/1986 page 1 of 6
assets and liabilities of the erstwhile firm were taken over by the assessee firm,
under the same name. The assessee firm was constituted by a deed of
th
partnership dated 27 April 1980.
3. Relevant to the Assessment Year 1974-75 the Sales Tax Department
levied purchase tax on the raw material and packing material used by the
Assessee in the manufacture of ice cream. The demand raised by the Sales Tax
Department for the said Assessment Year 1974-75 was received by the
th
Assessee on 26 March 1979. The accounting period of the Assessee ended on
th
30 June 1979. The Assessee firm discharged the liability and claimed
deduction while computing its income for the Assessment Year 1980-81.
4. The Inspecting Assistant Commissioner ('IAC') in a detailed assessment
st
order dated 31 March, 1983 disallowed the deduction on the ground that
th
Clause 11 of the partnership deed dated 27 April, 1980 indicated that the
liability to pay the purchase tax was not that of the Assessee. In other words, he
was of the view that the partnership deed did not stipulate that a demand raised
by the Sales Tax Department against the erstwhile firm should be discharged by
the Assessee firm. Further the IAC held that the Assessee had been contesting
its liability to pay purchase tax and therefore the demand of purchase tax could
not be treated as a liability of the Assessee firm. The Commissioner of Income
Tax (Appeals) ['CIT(A)'] concurred with the IAC and held that the liability to
pay purchase tax was not that of the Assessee firm in terms of clause 11 of the
th
partnership deed dated 27 April, 1980.
th
5. In the further appeal by the Assessee, the Tribunal by its order dated 18
ITR No.201/1986 page 2 of 6
September, 1985 reversed the view taken by the IAC and the CIT (A).
Interpreting Clause 11 of the partnership deed, the Tribunal held that the entire
fund of the erstwhile firm belonged to the Assessee firm and it was only the
surplus that remained after satisfaction of the liabilities as stipulated in sub-
clauses (i) and (ii) of Clause 11 that was to be distributed among the individual
partners named therein. The Tribunal noted that the demand by the Sales Tax
Department was served on the Assessee firm and given the fact that under the
Sales Tax law the Assessee firm could be proceeded against for recovery upon
its failure to meet the demand, it could not be said that the liability was not that
of the Assessee. It was further held that the deduction could not be denied only
on the ground that the liability related to a previous year during which no
provision had been made by the Assessee.
6. It is submitted by Mr. J.R.Goel, learned senior standing counsel for the
Revenue, that in terms of Clause 11 of the partnership deed the provision made
for payment of sales tax and the refunds received in reference to the sales tax
paid in earlier years and lying with the erstwhile firm shall be dealt with only by
the named individuals. According to him since these named individuals alone
were required to handle the funds available with the erstwhile firm and
discharge its liabilities, it cannot be said that the Assessee firm was required to
undertake such liability. Further the purchase tax liability which was discharged
by the Assessee firm did not pertain to the Assessment Year 1980-81 and
therefore could not be allowed as a deduction.
7. In reply Mr. Ajay Vohra, learned counsel for the Assessee, submitted that
the proceedings against the erstwhile firm continued against the present firm.
ITR No.201/1986 page 3 of 6
The purchase tax liability of the earlier years could be claimed as a deduction in
computing the profits particularly since the demand was outstanding and in fact
served on the Assessee firm. He relied upon the judgment of the Supreme
Court in Kedarnath Jute Manufacturing Company Ltd. v. Commissioner of
Income-tax (Central), Calcutta (1971) 82 ITR 363 in which it was held that
whether the Assessee would be entitled to a particular deduction or not will
depend upon the provision of the law in relation thereto and that a deduction is
to be allowed even if no provision has been made therefor by the Assessee in its
accounts. He also relied upon the judgment of this Court in Additional
Commissioner of Income-tax, Delhi-II v. Rattan Chand Kapoor (1984) 149
ITR 1 in support of his submission.
8. The answer to the question framed will depend on the interpretation of
th
Clause 11 of the partnership deed dated 27 April 1980, which reads as under:
“11. That certain provisions for payment of sales-tax and
certain refunds received from sales-tax paid in earlier
years are lying with Unit Kwality Ice Cream Co., shall
be dealt within the following manner by Shri P.L.
Lamba, Shri Sunil Lamba, Smt. Meena Mehta, Smt. Sita
Rani and Smt. Nirmal Kapoor and/or their successors
and assigns:
(i) for the payment of sales-tax or purchase-tax in
st
respect of the period upto 31 December, 1977 and
legal expenses connected therewith;
(ii) for the payment of Income-tax which may be
found payable by the firm and/or partners as a
result of cessation of sales-tax liability for the
st
period upto 31 December, 1977;
(iii) lastly, the net surplus, if any, will be shared among
the parties hereto according to their shares.”
ITR No.201/1986 page 4 of 6
9. A plain reading of the above clause indicates that there is an
acknowledgment that there were surplus funds lying with the erstwhile firm.
This clause indicates the manner in which those funds will have to be dealt
with. It is clear that sub clauses (i) and (ii) give priority to the discharge of the
st
statutory purchase tax and sales tax liabilities in respect of the period up to 31
December 1977. Since this is mandated in Clause 11 itself, it cannot be said
that the individuals who are named in the said clause could have controlled
these funds to the extent of discharge of such liabilities. Clause (iii) only
indicates that the surplus, if any, will be shared amongst the named individuals,
all of whom are partners of the Assessee firm, according to their shares.
Therefore it is not possible to read Clause 11 in the manner suggested by the
learned counsel for the Revenue. There is nothing in the said clause which
states that the Assessee firm cannot and should not discharge the sales or
purchase tax liability of the erstwhile firm. In fact, as already noticed, the
demand in the instant case was in fact served by the sales tax department on the
Assessee firm and discharged by it.
10. We are also unable to concur with the views expressed by the IAC and
the CIT (A) that the purchase tax liability did not accrue to the Assessee since it
was being contested by the Assessee. It has been explained in very clear terms
by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. that the mere
fact that a statutory liability is contested by an Assessee will not take away its
essential character of a trading liability, the discharge of which can be claimed
as a deduction. We agree with the Tribunal that the reason that the demand
pertains to an earlier year cannot be a ground for denying deduction to the
ITR No.201/1986 page 5 of 6
Assessee of the said sum when it has actually discharged the demand during the
relevant Assessment Year.
11. For the above reasons, we answer the question framed for our
consideration in the affirmative, that is, against the Revenue and in favour of
the Assessee.
12. The reference is disposed of accordingly.
S. MURALIDHAR, J
MADAN B. LOKUR, J
November 21, 2007
dn
ITR No.201/1986 page 6 of 6
Reserved on : November 12, 2007
Date of Decision : November 21, 2007
ITR No.201/1986
THE COMMISSIONER OF INCOME-TAX DELHI -VII... Appellant
Through Mr.J.R.Goel, Advocate.
Versus
M/S. KWALITY RESTAURANT & ICE CREAM CO….Respondent
Through Mr.Ajay Vohra and
Ms. Kavita Jha, Advocates.
CORAM:
HON'BLE MR. JUSTICE MADAN B. LOKUR
HON'BLE DR. JUSTICE S. MURALIDHAR
1. Whether Reporters of local papers may be
allowed to see the order? Yes
2. To be referred to the reporter or not? Yes
3. Whether the order should be reported in the
Digest? Yes
DR. S. MURALIDHAR,J.
1. At the instance of the Revenue, the following question of law has been
referred for our opinion under Section 256(1) of the Income Tax Act, 1961
('Act') by the Income Tax Appellate Tribunal ('Tribunal'), Delhi Bench “E”,
New Delhi for the Assessment Year 1980-81:
“Whether on the facts and in the circumstances of the case, the
Tribunal is correct in law in holding that the purchase-tax of
Rs.89,180/- is a trading liability of the assessee, deductible in
computing its income?”
2. The Assessee is a partnership firm which manufactures ice cream. A firm
of the same name that was earlier constituted under a partnership deed dated
th st
16 October 1975 was dissolved with effect from 31 December, 1977. The
ITR No.201/1986 page 1 of 6
assets and liabilities of the erstwhile firm were taken over by the assessee firm,
under the same name. The assessee firm was constituted by a deed of
th
partnership dated 27 April 1980.
3. Relevant to the Assessment Year 1974-75 the Sales Tax Department
levied purchase tax on the raw material and packing material used by the
Assessee in the manufacture of ice cream. The demand raised by the Sales Tax
Department for the said Assessment Year 1974-75 was received by the
th
Assessee on 26 March 1979. The accounting period of the Assessee ended on
th
30 June 1979. The Assessee firm discharged the liability and claimed
deduction while computing its income for the Assessment Year 1980-81.
4. The Inspecting Assistant Commissioner ('IAC') in a detailed assessment
st
order dated 31 March, 1983 disallowed the deduction on the ground that
th
Clause 11 of the partnership deed dated 27 April, 1980 indicated that the
liability to pay the purchase tax was not that of the Assessee. In other words, he
was of the view that the partnership deed did not stipulate that a demand raised
by the Sales Tax Department against the erstwhile firm should be discharged by
the Assessee firm. Further the IAC held that the Assessee had been contesting
its liability to pay purchase tax and therefore the demand of purchase tax could
not be treated as a liability of the Assessee firm. The Commissioner of Income
Tax (Appeals) ['CIT(A)'] concurred with the IAC and held that the liability to
pay purchase tax was not that of the Assessee firm in terms of clause 11 of the
th
partnership deed dated 27 April, 1980.
th
5. In the further appeal by the Assessee, the Tribunal by its order dated 18
ITR No.201/1986 page 2 of 6
September, 1985 reversed the view taken by the IAC and the CIT (A).
Interpreting Clause 11 of the partnership deed, the Tribunal held that the entire
fund of the erstwhile firm belonged to the Assessee firm and it was only the
surplus that remained after satisfaction of the liabilities as stipulated in sub-
clauses (i) and (ii) of Clause 11 that was to be distributed among the individual
partners named therein. The Tribunal noted that the demand by the Sales Tax
Department was served on the Assessee firm and given the fact that under the
Sales Tax law the Assessee firm could be proceeded against for recovery upon
its failure to meet the demand, it could not be said that the liability was not that
of the Assessee. It was further held that the deduction could not be denied only
on the ground that the liability related to a previous year during which no
provision had been made by the Assessee.
6. It is submitted by Mr. J.R.Goel, learned senior standing counsel for the
Revenue, that in terms of Clause 11 of the partnership deed the provision made
for payment of sales tax and the refunds received in reference to the sales tax
paid in earlier years and lying with the erstwhile firm shall be dealt with only by
the named individuals. According to him since these named individuals alone
were required to handle the funds available with the erstwhile firm and
discharge its liabilities, it cannot be said that the Assessee firm was required to
undertake such liability. Further the purchase tax liability which was discharged
by the Assessee firm did not pertain to the Assessment Year 1980-81 and
therefore could not be allowed as a deduction.
7. In reply Mr. Ajay Vohra, learned counsel for the Assessee, submitted that
the proceedings against the erstwhile firm continued against the present firm.
ITR No.201/1986 page 3 of 6
The purchase tax liability of the earlier years could be claimed as a deduction in
computing the profits particularly since the demand was outstanding and in fact
served on the Assessee firm. He relied upon the judgment of the Supreme
Court in Kedarnath Jute Manufacturing Company Ltd. v. Commissioner of
Income-tax (Central), Calcutta (1971) 82 ITR 363 in which it was held that
whether the Assessee would be entitled to a particular deduction or not will
depend upon the provision of the law in relation thereto and that a deduction is
to be allowed even if no provision has been made therefor by the Assessee in its
accounts. He also relied upon the judgment of this Court in Additional
Commissioner of Income-tax, Delhi-II v. Rattan Chand Kapoor (1984) 149
ITR 1 in support of his submission.
8. The answer to the question framed will depend on the interpretation of
th
Clause 11 of the partnership deed dated 27 April 1980, which reads as under:
“11. That certain provisions for payment of sales-tax and
certain refunds received from sales-tax paid in earlier
years are lying with Unit Kwality Ice Cream Co., shall
be dealt within the following manner by Shri P.L.
Lamba, Shri Sunil Lamba, Smt. Meena Mehta, Smt. Sita
Rani and Smt. Nirmal Kapoor and/or their successors
and assigns:
(i) for the payment of sales-tax or purchase-tax in
st
respect of the period upto 31 December, 1977 and
legal expenses connected therewith;
(ii) for the payment of Income-tax which may be
found payable by the firm and/or partners as a
result of cessation of sales-tax liability for the
st
period upto 31 December, 1977;
(iii) lastly, the net surplus, if any, will be shared among
the parties hereto according to their shares.”
ITR No.201/1986 page 4 of 6
9. A plain reading of the above clause indicates that there is an
acknowledgment that there were surplus funds lying with the erstwhile firm.
This clause indicates the manner in which those funds will have to be dealt
with. It is clear that sub clauses (i) and (ii) give priority to the discharge of the
st
statutory purchase tax and sales tax liabilities in respect of the period up to 31
December 1977. Since this is mandated in Clause 11 itself, it cannot be said
that the individuals who are named in the said clause could have controlled
these funds to the extent of discharge of such liabilities. Clause (iii) only
indicates that the surplus, if any, will be shared amongst the named individuals,
all of whom are partners of the Assessee firm, according to their shares.
Therefore it is not possible to read Clause 11 in the manner suggested by the
learned counsel for the Revenue. There is nothing in the said clause which
states that the Assessee firm cannot and should not discharge the sales or
purchase tax liability of the erstwhile firm. In fact, as already noticed, the
demand in the instant case was in fact served by the sales tax department on the
Assessee firm and discharged by it.
10. We are also unable to concur with the views expressed by the IAC and
the CIT (A) that the purchase tax liability did not accrue to the Assessee since it
was being contested by the Assessee. It has been explained in very clear terms
by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. that the mere
fact that a statutory liability is contested by an Assessee will not take away its
essential character of a trading liability, the discharge of which can be claimed
as a deduction. We agree with the Tribunal that the reason that the demand
pertains to an earlier year cannot be a ground for denying deduction to the
ITR No.201/1986 page 5 of 6
Assessee of the said sum when it has actually discharged the demand during the
relevant Assessment Year.
11. For the above reasons, we answer the question framed for our
consideration in the affirmative, that is, against the Revenue and in favour of
the Assessee.
12. The reference is disposed of accordingly.
S. MURALIDHAR, J
MADAN B. LOKUR, J
November 21, 2007
dn
ITR No.201/1986 page 6 of 6