TMI Blog2006 (2) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... UMAR. JUDGMENT The judgment of the court was delivered by N. Kumar J.-The Income-tax Appellate Tribunal on an application filed by the Revenue has referred the following questions of law for our opinion under section 256(1) of the Income-tax Act, 1961 (for short hereinafter referred to as "the Act"): "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses as claimed by the assessee constituted its genuine business expenses and that the same were allowable under section 37(1) of the Income-tax Act, 1961? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest shown as payable to M/s. McDowell and Company was actually allowable?" The facts which led to this reference are briefly stated as hereunder: The respondent-assessee, M/s. Mysore Wine Products Limited is a company which is a wholly-owned subsidiary of M/s. Consolidated Investments Limited, which in its turn, is again a wholly-owned subsidiary of M/s. United Breweries Limited. M/s. McDowell and Company Limited and M/s. MWP Limited are two more subsidiaries of M/s. United Breweries Limited. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange of letters between the parties. Under the said contract M/s. MWP Limited had to pay an amount of Rs. 2 lakhs per month with effect from August 1, 1979, for utilising the facilities offered by the assessee. However, no formal agreement was entered into between the parties. The assessments of the assessee for the period from 1980-81 and 1981-82 were completed earlier in which the Department disallowed the expenditure incurred by the assessee paid by way of hire charges and consideration for transfer of know-how by applying section 40A(2) as the difference of amounts of payments made by the assessee to McDowell towards technical service fees and rent of plant and machinery and those received by the assessee in turn from M/s. MWP Limited from user of the said assets and facilities. The said disallowances were confirmed by the Commissioner (Appeals). When the matter was taken by the assessee to the Tribunal, the Tribunal by its order dated February 13, 1985, set aside the orders of the authorities below and restored the matter back to the Income-tax Officer for fresh disposals in accordance with law. While remanding the matter the Tribunal directed that either the agreements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Thirdly it was held that, the entire arrangements had been entered into for reducing the tax liability of the group as a whole and especially in the field of sales tax liabilities. Therefore, it was held that, the aforesaid expenses incurred by the assessee were not wholly and exclusively for the purpose of the business of the assessee and are not allowable under section 37(1). Aggrieved by the said order of the Assessing Officer, the assessee preferred an appeal to the Commissioner (Appeals). The Commissioner considered the entire material on record and was of the view that the Inspecting Assistant Commissioner/Income-tax Officer had not at all taken into consideration the explanation offered by the assessee while passing the order. He held from the material on record that the Income-tax Officer had not been able to show that the payments under the agreements with McDowell had in fact not been made for business purposes which appear on the face of the transactions. Secondly, he held once the business purpose is established, adequacy of consideration was not at all required to be taken into account. Thirdly it was held that, the transactions under consideration were neither colo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the assessee is paying a sum of R. 8 lakhs per month towards hire charges and if for the transfer of know-how by transferring the very same to MWP Limited the assessee is receiving only a sum of Rs. 2 lakhs which on the face of it will clearly go to show that the amount of Rs. 8 lakhs paid is not wholly and exclusively for the purpose of the assessee's business. (2) If the assessee had no intention of setting up the manufacturing activity after transferring the licence in favour of MWP Limited, the two agreements entered into with McDowell for hiring the machinery and transfer of know-how for a consideration of Rs. 8 lakhs cannot be said to be laid out or expended wholly and exclusively for the purpose of the assessee's business. (3) The tripartite transaction entered into between the three sister concerns did in no way benefit the assessee which is a condition precedent for allowing expenditure for the purpose of the assessee's business. (4) There is no material placed on record to demonstrate that under this arrangement the assessee received liquor from MWP Limited at a price lower than the price at which they sold it to other customers. Therefore, he submits the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g authorities have concurrently held that the said expenses are expended for the purpose of the business, the said finding is not liable to be interfered with. (7) Similarly, both the authorities have not committed any error of law in arriving at the conclusion at which they have arrived at which is based on evidence on record and, therefore, no case for interference is made out. Both learned counsel have relied on several judgments in support of their respective contentions. In order to appreciate the rival contentions, it is necessary to notice the law on the point. In the case of Swadeshi Cotton Mills Company Ltd. v. CIT [1967] 63 ITR 57, the Supreme Court dealing with the question what constitutes expenditure under section 10(2)(xv) of the old Act which is in pari materia with section 37(1) of the present Act has observed that the question as to whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. The final conclusion on the admissibility of an allowance claimed is one of law. It is open to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment may ensure to the benefit of a third party. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of the trade or business of the assessee. A Constitution Bench of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, held that, tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly entered into as a part of the assessee's legitimate commercial undertaking, in order to facilitate the carrying on of its business, it is immaterial that a third party also benefits thereby and such amounts are deductible. In deciding whether a payment of money is deductible expenditure, one has to take into consideration the questions of commercial expediency and the principles of ordinary commercial trading and prudence. If it is a case of tax planning, if it is within the framework of law it is a legitimate expenditure incurred by the assessee. Therefore, what the courts frown upon is whether the device adopted by the assessee is intended to avoid payment of tax and it is not real. In the light of the aforesaid principles, now we have to examine the facts of this case. The relationship between the three companies is not in dispute. As noticed by us they are all sister concerns. Admittedly, MWP Limited is not a dummy concern. In the very first year of its existence it has made profits to the extent of Rs. 33.07 lakhs during the assessment year 1980-81; Rs. 110.97 lakhs for the assessment year 1981-82 and Rs. 120.31 lakhs for the assessment year 1982-83. The agreement betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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