Opinion Of Eminent Legal Luminaries On Controversial Issues

Expenses or payments not deductible – Cash payments exceeding prescribed limits

QUERY: Mr. A has taken over the running business of Mr. B with all its assets and liabilities w.e.f. April 1,2014. He makes a cash payment of Rs. 40,000/- on June 1, 2014 to one of the trade creditors of the predecessor, Mr. B., deduction in respect of which obviously not claimed by the Mr. A. Can there be any disallowance in the hands of Mr. A in the assessment year 2015-16?
ANSWER: The requisites of succession, as the Supreme Court laid down in CIT v. K. H. Chambers [55 ITR 674] are:
i) There shall be a change of ownership.
ii) The integrity of the business shall remain - the whole business should devolve upon the successor.
iii) The identity and continuity of the business should be substantially preserved. The same business shall be carried on by the person succeeding.
Further the Delhi High Court in Oriental Fire and General Insurance Co. Ltd. v. CIT [244 ITR 631]has observed that succession implies that there is an end of entity carrying on the business and its place has been taken by a new entity to run in continuity and as a going concern, the same business. Substantial identity and continuity of the business must be preserved. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person "succeed" to the business of another.
Now, from the facts, it is clear that Mr. A has succeeded to the running business of Mr. B and stepped into the shoes of Mr. B and paid his liability (creditors) in cash whose business he has succeeded.
So sub-section (3A) of section 40A of the Act clearly applies which provides that where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income tax as income of the subsequent year of the payment or aggregate of payments made to a person in a day exceeds twenty thousand rupees.


Posted in Income-tax

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