JUDGMENT
S.R. Rajasekhara Murthy, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee.
2. The following questions are referred for the opinion of this court by the Income-tax Appellate Tribunal, Bangalore Bench :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 144B of the Income-tax Act, 1961, were not applicable to the applicant’s case ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income-tax and surtax liabilities of the Syndicate Bank Ltd. which was amalgamated with the applicant company was not allowable as business expenditure in the computation of the total income of the applicant ?”
3. The assessee-company, the Industrial Credit and Development Syndicate Ltd., Manipal, is the successor company to the Syndicate Bank Ltd. After the Syndicate Bank was nationalised in the year 1969, under the Banking Companies (Acquisition and Transfer of Undertakings Act) and after the banking business was taken over by the Government of India, the Syndicate Bank Ltd. was amalgamated with the assessee-company under an agreement and the assessee succeeded to all the assets and liabilities of the Syndicate Bank Ltd. except the banking business. The amalgamation took effect from June 1, 1973.
4. For the assessment year 1974-75, the assessee filed a return disclosing an income of Rs. 12,76,010 for the year ending on July 31, 1973. The assessment was completed on the taxable income computed at Rs. 12,80,340. The assessee claimed deduction in respect of the capital gains tax payable by the predecessor-company, namely, the Syndicate Bank Ltd., as a deduction from its business income. The said claim was not considered by the Income-tax Officer since it was not claimed in the return filed by the assessee and was claimed only in a covering letter. The other reason for not considering the said claim was that the liability to capital gains tax payable by the predecessor-company had not been ascertained and not even been quantified. Therefore, the letter was ignored and the Income-tax Officer completed the assessment.
5. One other claim before the Income-tax Officer related to the income-tax and surcharge liabilities of the Syndicate Bank Ltd. which was claimed by the assessee as business deduction in its assessment for the year 1974-75. A sum of Rs. 48,451 was the income-tax liability for the assessment-year 1971-72 and the surtax liability was Rs. 9,738 relating to the assessment year 1973-74. These claims were made before the first appellate authority as additional grounds.
6. Both the Appellate Assistant Commissioner of Income-tax, Hassan Range, Hassan, and the Income-tax Appellate Tribunal rejected the first ground that a reference should have been made by the Income-tax Officer to the Inspecting Assistant Commissioner under section 144B taking into consideration the capital gains liability payable by the Syndicate Bank Ltd. This argument was based on the hypothetical claim made in respect of the capital gains liability of the predecessor-company. This claim was rejected on the ground that the liability to capital gains tax had not yet been ascertained and that, therefore, it was futile to urge that the Income-tax Officer should have referred the matter to the Inspecting Assistant Commissioner on the assumption that the income assessed exceeded the returned income by more than a lakh of rupees.
7. So far as the liability of the assessee to meet both the income-tax liability and the surcharge liability of the predecessor-company was concerned, it was held that the assessee was under an obligation to pay both these taxes by virtue of the amalgamation under which the assessee-company took over all the debts, liabilities and assets of the transferor-company. It was, therefore, held that these liabilities which the assessee-company had to meet was in the nature of capital expenditure incurred to take over the assets of the predecessor-company. The claim was also rejected relying on section 40(a)(ii) of the Income-tax Act which imposes a specific bar to allow deduction of any income-tax paid by an assessee. Both the Appellate Assistant Commissioner and the Appellate Tribunal rejected the claim to the allowance of these two amounts.
8. So far as the contention of the assessee that the matter should be referred to the Inspecting Assistant Commissioner under section 144B is concerned, the assessee’s contention has to be rejected on the sole ground that the difference between the returned income and the income assessed was only Rs. 4,330, and, admittedly, it was not a case where the amount of variation between the two figures exceeded one lakh rupees. Therefore, without going into the other aspect, viz. whether the liability to pay the capital gains tax by the predecessor-company was quantified or not, we hold that this ground was rightly rejected by all the three authorities.
9. Therefore, the first question is answered in the affirmative and against the assessee.
10. The second question relates to the claim made by the assessee for deduction of the income-tax and surcharge liability of the Syndicate Bank Limited.
11. Under clause 2(a) of the deed of amalgamation, all debts, liabilities and the obligations of the predecessor-company stood transferred to the transferee-company (assessee) pursuant to the provisions of section 394 of the Companies Act under which all the debts and liabilities of the transferor-company became the liabilities of the transferee-company. By virtue of clause (4) of the amalgamation deed, all proceedings by or against the transferor-company pending on the effective date and relating to the said concern shall be continued and enforced by or against the transferee-company, as the case may be.
12. The point that arises for consideration in this reference is whether, in the assessment of the assessee-company, the liabilities referred to above are eligible for deduction as revenue expenditure ?
13. The assessee relied upon the decision of the Punjab and Haryana High Court in the case of Dashmesh Transport Co. Pvt. Ltd. before the Appellate Assistant Commissioner in support of its claim for deduction. The Appellate Assistant Commissioner rejected the claim distinguishing the said decision and dismissed the appeal, following the Supreme Court decision in Gemini Cashew Sales Corporation .
14. It is brought to our notice by Sri Chanderkumar, learned counsel for the Department, that the same High Court held in a later case of the same assessee in Dashmesh Transport Co. Pvt. Ltd. [1980] 125 ITR 681, that the income-tax liability of the transferor-company paid by the Dashmesh Company was not eligible for deduction as revenue expenditure in its hands and the disallowance of the same by the Department was upheld by the High Court.
15. Referring to the earlier decision in Dashmesh Transport Co. Pvt. Ltd. v. CIR [1974] 93 ITR 275, their Lordships explained that the High Court and not expressed any opinion on the question as to the nature of expenditure incurred by the assessee-company and had allowed the deduction following the provisions in section 40(a)(ii) of the Act.
16. The second decision of the Punjab and Haryana High Court in Dashmesh Transport Co. Pvt. Ltd. v. CIT , was also relied upon by learned counsel for the Department. We are in respectful agreement with the reasons given by their Lordships.
17. We agree with the finding and reasons given by the Appellate Tribunal in rejecting the claim of the assessee. It was rightly held that the liabilities arose to the assessee-company under the amalgamation scheme and not in the course of its business.
18. In the result, the second question also is answered in the affirmative and against the assessee.