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TMI Blog2018 (10) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... short), a subsidiary and Group Company of DIAGEO Plc, a United Kingdom based Liquor Conglomerate, was an 'allowable expenditure' in the hands of the Respondent Assessee under Section 37 of the Act. 3. The following Substantial Questions of law do arise in the present set of appeals which we have reframed as below:- [1] Whether the Tribunal was justified in holding that the Distributable Surplus paid by the Respondent Assessee M/s. CHAMUNDI WINERY AND DISTILLERY to DIAGEO INDIA PRIVATE LIMITED in pursuance of the Agreement dated 30/10/2007 between these two parties was not 'application of income', but an 'allowable expenditure' in the hands of the Respondent Assessee under Section 37 of the Act ? [ii] Whether the terms and conditions of the Agreement dated 30/10/2007 between M/S. CHAMUNDI WINERY AND DISTILLERY and DIAGEO INDIA PRIVATE LIMITED amount to 'Diversion of Income at source by over riding title' in favour of DIAGEO INDIA PRIVATE LIMITED even though the Excise Licence under the provisions of the Karnataka Excise Act, 1965 during the relevant period was taken in the name of Respondent Assessee CHAMUNDI and therefore, such profits and gains from the said business of manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Group Company of DIAGEO Plc., a UK based Corporate entity and it owns several Trade Marks and Brands specified in the Schedule III of the said Agreement and the popular amongst them are SMIRNOFF (Vodka), VAT 69 (Scotch Whisky), CAPTAIN MORGAN (Rum), SMIRNOFF ORANGE TWIST (Vodka), SHARK TOOTH(Vodka) and HAIG GOLD LABEL (Scotch Whisky) and the Preamble of the said Agreement dated 30/10/2007 is quoted below:- "WHEREAS: A. DIAGEO INDIA is engaged inter alia in the manufacture and marketing of alcoholic beverages and is a subsidiary of Diageo Plc. B. DIAGEO INDIA has valid and subsisting licence agreements with the respective Brand Owners of the Products listed in Schedule III to use the trade marks and reproduce the copyright works in India on the labels, caps of bottles, Packaging Materials and other support materials in respect of the Products to be manufactured and or bottled in India. C. CHAMUNDI is engaged in the manufacture, bottling and labeling of alcoholic beverages and had expressed its desire of carrying out manufacturing of the Products at its Plant at 56, Chollapanahalli Village, B C Road, Hoskote Taluka, Bangalore Rural District. D. CHAMUNDI has represented to D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales Tax/VAT payments, making payments of all other expenses relating to the manufacturing of the Products, as per the directions of DIAGEO INDIA. 3.2 DIAGEO INDIA shall procure orders for the Products from the distributors. DIAGEO INDIA shall submit to CHAMUNDI a Delivery Order for delivery of the Products by CHAMUNDI directly to the distributor as mentioned on Delivery Order. CHAMUNDI shall package the Products using the Packaging Materials purchased in accordance with DIAGEO INDIA's instructions/specifications and regulations of the appropriate Governmental Authority. DIAGEO INDIA would take all the commercial decisions with regard to selling price of the Products and communicate to CHAMUNDI. CHAMUNDI shall supply and deliver the Products on the Date of Delivery by loading the Products on to the transport vehicles at the Plant and raise its invoice, at the selling price communicated by DIAGEO INDIA, on the distributors for the Products so delivered. It is expressly clarified and reiterated that CHAMUNDI is dispatching the Products at the direction of DIAGEO INDIA and CHAMUNDI undertakes not to dispatch the Products without written authorisation from DIAGEO INDIA." 10. The res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om time to time, by the Governmental Authorities under the relevant Karnataka State Excise Rules for manufacture of liquor products. CHAMUNDI shall prompt proof of all payments made in respect of Consents, including any annual licence fees." 12. Para 15 of the Agreement makes DIAGEO responsible for providing Working Capital Finances for Operations envisaged in the said Agreement and the Bank Accounts to be operated by the persons duly authorised by the DIAGEO. The most important Clauses 16 and 17 providing for Distribution of Revenues between the two parties to the said Agreement are also quoted below for ready reference:- "15. WORKING CAPITAL FINANCES 15.1 DIAGEO INDIA shall be responsible for providing working capital finance for operations envisaged in this Agreement and CHAMUNDI shall open a separate bank account(s) in CHAMUNDI's name for the purpose of this Agreement. The bank account(s) shall be operated jointly by any two DIAGEO INDIA representatives as may be intimated to CHAMUNDI in writing. The bank account(s) will be used for working capital requirements of CHAMUNDI. DIAGEO INDIA shall ensure that sufficient funds are available in this account especially at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in (a) above xxx Less Excise duty xxx Sales Tax/VAT xxx Cost of Excise Adhesive labels xxx Cost of all Raw Materials and Packaging Materials (including the wastages as per norms provided in clause 12 above) used in the Manufacturing of the Products; xxx Distribution cost including freight, transit, insurance, bond/depot charges incurred by CHAMUNDI in respect of the Products; xxx Any other expenses (including debts written off) if and when agreed upon by DIAGEO INDIA in writing as deductible; xxx Balance before the sum as entitled under Clause 16 xxx Less The sum as entitled under Clause-16. xxx DIAGEO INDIA Entitlements xxx 17.2 If CHAMUNDI is unable to produce and service the Delivery Orders, CHAMUNDI shall compensate DIAGEO INDIA for a sum equal to the Gross Contribution lost on account of such failure. For this purpose, "Gross Contribution" means the difference between the then current selling price of the Products and the cost of Raw Materials and Packaging Materials in relation to the quantity not delivered timeously by CHAMUNDI. It is agreed to between the Parties that the Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits and burden under the said Agreement to any Third Party, however, CHAMUNDI WINERY AND DISTILLERY shall not assign either the benefit or the burden under the said Agreement to any Third Party without any prior consent of the DIAGEO. 14. The said relevant Clauses of the Agreement are also quoted below for ready reference:- "24. MISCELLANEOUS 24.1 Costs & Expenses a) Each Party agrees that it shall bear its own costs and expenses incurred by it in connection with any discussions, negotiations, investigations and due diligence undertaken in connection with the project, including costs and expenses associated with retention of financial, legal, tax and other professional advisers. b) Each Party shall bear its own income tax and other tax liabilities. DIAGEO INDIA shall ensure that sufficient bank balance is maintained to discharge sales tax/VAT liability. However, should there be any tax liability incurred by CHAMUNDI as a direct result of DIAGEO INDIA failing to perform any of its obligations under this Agreement, DIAGEO INDIA shall be liable to the extent of such tax liability actually incurred by CHAMUDI, provided that CHAMUNDI establishes to the reasonable satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said agreement the working capital finance was to be adequately made available by M/s Diageo. If this was the case the assessee could have booked finance charges or interest charges on the working capital and debit the same to the P & L account. Instead the assessee has transferred the profit of the business in the form of distributable surplus to the company M/s Diageo which is unacceptable since no parties can enter into an agreement to alienate their tax obligation from profit of the licensed and permitted business since tax is an integral part of the business. 3.11 In his submission vide para 2.1. assessee states that manufacturing operations, are supervised by personnel of brand owners, who are stationed in the distillery and if that were to be the case the assessee could have booked supervision charges in the P & L account. The Brands of the liquor manufacturer belonged to M/s Diageo, then the assessee could have booked royalty or technical knowhow fees. Since the excise Department granted the license to M/s CHAMUNDI Winery and Distillery and the entire business has been carried out duly by booking sales and purchases in its name and now to claim the business does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal. The appellant went in appeal to the Hon'ble ITAT, Bangalore against the said appellate order. By its order in ITA.No.1260/Bang/ 2012 dated 5/4/2013, the Hon'ble ITAT, Bangalore Bench 'C' allowed the appellant's claim, holding that the distributable surplus cannot be considered as application of income but an expenditure incurred by the appellant in the course of its business and allowable u/s 37 of the Act. The relevant passages from the said decision are reproduced below: "5.3.3 In this factual matrix of the matter, as discussed above, we are of the considered opinion that the example of theatre business cited by the learned counsel for the assessee is quite appropriate and applicable in understanding the true nature of the transactions entered into by the assessee and Diageo by virtue of Agreement dt.30.10.2007. From an application of the totality of the facts and circumstances of the case, we are of the view that the distributable surplus paid by the assessee in terms of clause 17 of the said Agreement is nothing but the amounts to which Diageo is entitled to receive over the expenses to be borne by them, leaving behind the real income to which the assessee is entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the agreement dated 30/10/2007 cannot be considered as application of income by the appellant but constitutes expenditure incurred by it in the course of its business allowable u/s 37 of the Act. Accordingly, I delete the disallowance of Rs. 31,75,95,820/- made by the AO." 18. The second appeal filed by the Revenue before the learned Income Tax Appellate Tribunal (ITAT) also came to be dismissed on 26/08/2015 in favour of the Respondent Assessee with the following observations:- "It is clear from the above grounds that Revenue is aggrieved on the CIT (A) placing reliance on Tribunal's order in assessee's own case for A.Y.2009-10. 02. Issue involved is a claim of Rs. 31,75,95,820/- by the assessee as payment to M/s. DIAGEO INDIA Pvt.Ltd. Payment was effected by the assessee pursuance to an agreement under which assessee was manufacturing and bottling liquor under the brand names of the said company. As per the AO, it was only utlisation of surplus of the assessee since assessee was billing for the sales in its books of account and the turnover was accounted for by it in full. Similar disallowance was there for A.Y.2009-10 also. In the said year, assessee had moved in appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the Revenue submitted that for providing the Working Capital Finances by the DIAGEO and allowing the Respondent Assessee CHAMUNDI to use its Brands whatever could be payable as interest to the financier or as Royalty charges for using such Brands and Trade Marks could only to be allowed as business expenses in the hands of the Respondent Assessee CHAMUNDI, but the whole of the profit earned by CHAMUNDI during the relevant period from the liquor manufacture and sale under the Excise Licence could not be assessed in the hands of DIAGEO. [IV] The learned counsel for the Revenue, Mr. Indra kumar has also submitted that there is no 'Diversion of Income' from CHAMUNDI to DIAGEO by overriding title in favour of DIAGEO and such private arrangements are nothing but Tax Avoidance and Tax Evasion tactics and the Respondent Assessee could not avoid its Income-Tax liability by claiming that it is only doing job work of Bottling of liquor manufactured for and on behalf of the DIAGEO and its entire profits belong to DIAGEO. [V] He submitted that even though such profits or 'distributable surplus' paid by CHAMUNDI to DIAGEO might have been taxed in the hands of DIAGEO within Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as it is not a business expenditure, but the 'distributable surplus' of the business which after payment of tax was required to be made over to the DIAGEO as per the terms of the contract and it is not a 'business expenditure' incurred by the Respondent Assessee CHAMUNDI to earn an income and therefore, Section 37 of the Act simply does not get attracted in the present case and therefore, the Tribunal clearly erred in allowing the same as a 'business expenditure' under Section 37 of the Act. CONTENTIONS OF THE RESPONDENT - ASSESSEE: 21. On the other hand, Mr. A. Shankar, the learned counsel for the Respondent Assessee CHAMUNDI raised the following contentions before the Court. [I] The learned counsel for the Respondent Assessee urged that the 'real assessable income' in the hands of the Assessee CHAMUNDI was only the bottling charges of Rs. 45 per Case and as per the Agreement dated 30/10/2007 and except the bottling charges, the Assessee was not entitled to receive anything in respect of the said manufacture and sale of liquor activity carried out by it wholly and exclusively for and on behalf of DIAGEO, who not only provided the Working Capital, Raw Materials, Brands a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y case, the said amount was made over and paid to DIAGEO to meet the contractual obligations of the Assessee under the Agreement dated 30/10/2007 and Section 37 of the Act permits such general deduction of any business expenditure incurred by the Assessee in meeting its contractual obligations under a legal, valid and enforceable contract. [V] Mr. Shankar though fairly submitted that Books of Accounts, method of Accounting and entries in Books do not determine and decide the fate of taxability of income in the hands of the Assessee, but in the present case, the day-to-day entries in the Books of Accounts maintained in the ordinary course of business by the Respondent Assessee clearly indicated that the Assessee in Clause 17 of the Agreement was only entitled to bottling charges of Rs. 45/- per Case and nothing more and therefore there was no occasion for the Assessing Authority to tax the entire income or rather gross receipts of the business in the hands of the Assessee. [VI] Lastly, Mr. Shankar also submitted that as an alternative, the said 'distributable surplus' paid to DIAGEO should be allowed as a 'trading loss' under Sections 28/29 of the Act as the said money has not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be said by any stretch of imagination that such a business was being done exclusively for and on behalf of the third party, viz. DIAGEO, who was not at all subject to any control under the Excise Act. The income or business profits taxable under the Income Tax Act, 1961 naturally arose out of the said business activity of manufacture and sale of liquor only. Merely because the DIAGEO is a Brand owner and a big liquor business entity of United Kingdom, whose Indian Subsidiary, DIAGEO had a private arrangement or Agreement like the one under the Agreement dated 30/10/2007 with the Respondent Assessee and many other such Agreements with others and it provided not only right of user of Brands, Trademarks and Labels, but also provided some Raw Materials and concentrates and the Working Capital etc., and the Bank Accounts were to be operated by the Respondent Assessees were also closely monitored, it does not mean that the present Assessee was either only an agent or a benami of DIAGEO. For all practical and legal purposes, de facto and de jure, the Respondent Assessee was the Excise Licencee engaged in the business of manufacture and sale of liquor during the relevant period and mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dated 30/10/2007 required to be made by the Assessee CHAMUNDI to DIAGEO is only after the income is brought to tax in the hands of the Respondent Assessee and therefore the 'distributable surplus' which the Assessee has debited in the Profit and Loss Account and credited to the Account of the DIAGEO for first four Assessment Years, viz.A.Y.2008-09 to 2011-12, cannot be claimed as a 'business expenditure' under Section 37 of the Act. It is nothing but just the 'application of income' by the Assessee under the Agreement dated 30/10/2007 of course which has to be done after payment of due tax under the Income Tax Act which has not been done by the Assessee in the present case. 30. For A.Y. 2012-13, the debit of 'Distributable Surplus' to Profit and Loss Account of the Assessee was not made because by change of Accounting method, in the Escrow Bank Account opened in the name of DIAGEO to which Receipts on Sales were automatically swiped and credited in their Bank Account and after the operating expenses paid out of it, the Assessee did not have to separately pay such 'Distributable Surplus' to DIAGEO. However, again the said change of Accounting Method, the diversion of Rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor this Court is concerned about the manner in which DIAGEO has offered the Receipts of the said 'distributable surplus' from CHAMUNDI for Indian Income Tax in its own hands, which of course was liable to tax for the net Receipts after being taxed in the hands of CHAMUNDI. Even otherwise an income taxable in the hands of the Assessee, could always be received from a person who has paid tax on income in his hands before paying such amount to another person under the contractual obligations. 35. DIAGEO is admittedly a Subsidiary and Group Company of a UK based DIAGEO Plc. How much of its profits have been made subject to tax here in India, how much has been diverted to other Group Companies or Foreign Parent Company in UK, DIAGEO Plc. is neither before us nor is really relevant to decide the taxability in the hands of the Respondent Assessee CHAMUNDI, but if the income out of such a major liquor business is allowed to be diverted without being taxed in the hands of the Respondent Assessee, it could easily be a glaring case of "Base Erosion and Profit Shifting" by a Multi National Company. However we are not concerned with Chapter X of the Income Tax Act about the International Taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity ab initio once such amount was received as his Professional Income, it would be so taxable in his hands. The relevant extract from the body of the judgment is also quoted below:- ["In the circumstances the Appellate Assistant Commissioner rightly pointed out that "if the accused persons had themselves resolved to create a charitable trust in memory of the professional aid rendered to them by the appellant and had made the assessee trustee for the money so paid to him for that purpose, it could, perhaps, be argued that the money paid was earmarked for charity ab initio but of this there was no indication any where." In our opinion, the view taken by the Appellate Assistant Commissioner was the correct view. The money when it was received by the assessee was his professional income, though the assessee had expressed a desire earlier to create a charitable trust out of the money when received by him. Once it is held that the amount was received as his professional income, the assessee is clearly liable to pay tax thereon. In our opinion, the correct answer to the question referred to the High Court is that the amount of Rs. 32,500 received by the assessee was professional incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrue to the settler before the beneficiary can get it. Such income will undoubtedly be assessable in the hands of the settler despite the contract. We think that the true position is that if a person has alienated or assigned the source of his income so that it is no longer his, he may not be taxed upon the income arising after the assignment of the source, apart from special statutory provisions like section 16(1)c) or section 16(3) which artificially deem it to be the assignor's income. But if the assessee merely applies the income so that it passes through him and goes on to an ultimate purpose, even though he may have entered into a legal obligation to apply it in that way, it remains his income. This is exactly what has happened in the present case. We need only add that the principle laid down by the Privy Council in Bejoy Singh Dudhuria v. Commissioner of Income-tax [1993] 1 ITR 135 does not apply to this case; because this is not a case of an allocation of a sum out of revenue before it becomes income in the hands of the assessee. In other words, this is not a case of diversion of income before it accrues but of application of income after it accrues." 40. We feel this ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat on assignment of 50 per cent. of the share of the assessee in the firm it became the income of the trust by overriding title and it could not be added to the income of the assessee. On appeal to the Supreme Court: ... ... ... ... ... ... Held: The principle is simple enough but more often than not, as in the instant case, the question arises as to what is the criteria to determine, when does the income attributable to an assessee get diverted by overriding title? The determinative factor, in our view, is the nature and effect of the assessee's obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be a diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in dis-charge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title. The decisions of the Privy Council in Raja Bejoy Singh Dudhuria v. CIT [1993] 1 ITR 135 and P.C.Mullick v. CIT [1938] 6 ITR 206 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable." 44. In a recent decision rendered in April 2018, the Two Judges' Bench of the Hon'ble Supreme Court in the case of Deputy Commissioner of Income-Tax, Chennai Vs. T. Jayachandran [2018] 406 ITR 1 (SC) upholding the decision of the Madras High Court reported in [2013] 263 CTR 629 (Mad) dealt with an interesting case of a Share Broker who was working on behalf of the Indian Bank and got only his Commission Income but was sought to be taxed for the gross receipts for the sale of Shares and Securities dealt with by him on behalf of the Indian Bank, held in favour of the Assessee that he was not liable to be taxed, except for his Commission Income received from the Indian Bank. 45. This judgment relied upon before us by both the Revenue and the Assessee also reiterates the aforesaid principles about the 'Diversion of Income' by an over riding title at source in the following manner:- "(a) The Respondent - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment was framed under Sec 143(3) of the Income Tax Act, 1961 (in short 'the Act'). The Assessing Officer, vide order dated 25.01.1996, raised a demand for a sum of Rs. 14,73,91,000/- with regard to the sum payable to the PSUs while holding that the Respondent has not acted as a broker in the transactions carried out for the Indian Bank rather as an independent dealer and that there was no overriding title in favour of the PSU's with regard to the additional amount earned out of the securities transactions and it is a case of application of income after accrual and, hence, the said amount is liable to be assessed as the income of the Respondent. ... ... ... ... ... ... The relationship between the Indian Bank and the Respondent is very much clear by the evidence led during the criminal proceedings. The Executive Director of the Bank has specifically spoken about the role of the Respondent as a broker specifically engaged by the Bank for the purchase of securities and that the Bank has included the interest money too in the consideration paid, for the purpose of taking demand drafts in favour of PSUs. Further, the evidence led by other bank officials points out that the price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The entire real income is earned by CHAMUNDI only, therefore such 'application of income' in the aforesaid agreed portions can be made only after meeting the tax obligations in the hands of CHAMUNDI itself. 47. Clause 24 of the Agreement dated 30/10/2007 itself says respective income tax obligations will be discharged by both the parties independently. 48. The Division Bench of the Rajasthan High Court in the case of Commissioner of Income Tax Vs. Jodhpur Co-operative Marketing Society [2005] 275 ITR 372 [Raj] dealt with a case of Co-operative Society which under the statutory obligations was liable to transfer 25% of its net profits to the specified funds and the Assessee Society claimed that such diversion was not taxable in its hands. Even negativing this plea of the Assessee - Co-operative Society, the Court explained the concept of 'Diversion of Income by over riding title at source' after discussing several case laws, some of which were cited before us also, in the following manner:- "The obligation to carry a part of net profit to a reserve fund does not envisage diversion of any part of profits in person other than society itself. There is no overriding title vesting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it derives by conducting races. These amounts are not paid to the club by any of those, who become liable to the payment of licence fees, penalties or fines, by way of voluntary contribution from them to the benevolent fund. The amounts are not paid by them with the intention that it be a contribution to the charitable or benevolent fund. The race club itself is under no statutory compulsion to earmark or divert any part of its income for the benefit of the jockeys, apprentices, stable boys, etc. The race club was under no statutory obligation to create a trust fund for their benefit. The fact that the club has done so and had done so with the best of intentions, does not on that score result in what is actually the income of the club, a part of which has been applied for benevolent purposes by having those amounts credited to the benevolent fund, becoming the income of the benevolent fund even at the inception. The income which the benevolent fund receives is by way of the amounts which the race club has allowed to be credited to that fund, the amounts so allowed by the club to be so credited being the amounts which it has collected from the jockeys, trainers and others, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour an overriding title is to be recognized. A rule framed by an assessee for its own internal management cannot be elevated to the level of statutory rule and the decision on the part of the club to apply a portion of what it receives for benevolent purposes cannot be regarded as an instance of diversion by overriding title when the amounts received by the club and allowed by it to be used by the fund were not amounts, which had been paid voluntarily with the object of making those payments for charitable purposes. Diversion of the income took place after, and not before the income had reached the assessee. - CIT vs. Bangalore Turf Club Benevolent Fund (1984) 38 CTR (Kar) 235: (1984) 145 ITR 323 (Kar): TC 44R. 1060 distinguished" CASE LAWS RELIED UPON BY THE RESPONDENT - ASSESSEE: 50. Mr. A. Shankar, the learned counsel appearing for the Respondent Assessee who has not only painstakingly prepared the said case and wonderfully argued on behalf of the Respondent Assessee has cited a large number of case laws under five broad headings which are enlisted below for ready reference, some of them are of greater significance and relevance and some are of lesser relevance and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 CIT Vs. Rajasthan State Government Sugar Mills Ltd 393 ITR 421 (Raj) 32-42 8 CIT Vs. G Balraj [2017] 390 ITR 50 (Kar) 43-47 10 CIT Vs. Chandulal Keshaval & Co., 38 ITR 601 (SC) 58-63 15 Sasoon J David & Co. P Ltd Vs. CIT 118 ITR 261 (SC) 86-94 16 S.A. Builders Ltd Vs. CIT 288 ITR 1 (SC) 95-100 20 CIT Vs. Dalmia Cement (B) Ltd. 254 ITR 377 (Del) 116-120 21 CIT Vs. Devayhi Beverages Ltd 296 ITR 41 (Del) 121-122 31 Kashiram Radhakishan Vs CIT 155 ITR 609 (Raj) 201-206 32 DN Sinha Vs. CIT 102 ITR 491 (Cal) 207-211 45 Asis Power Projects Vs. DCIT 370 ITR 256 (Kar) 273-277 41 Badridas Daga Vs. CIT 34 ITR 10 (SC) 257-262 42 CIT Vs. Mysore Sugar Co Ltd 46 ITR 651 (SC) 263-266 43 CIT Vs. Y V Sreenivasa Murthy 63 ITR 306 (Kar) 267-269 44 Harshad J Choksi Vs. CIT 349 ITR 250 (Bom) 270-272 46 Ramchandar Shivnarayan Vs. CIT 111 ITR 263 (SC) 278-283 Sl.No OTHER CASE LAWS Page No 11 Manglore Ganesh Beedi Works Vs. CIT 378 ITR 640 (SC) 64-70 12 D.S. Bist & Sons Vs. CIT 149 ITR 276 (Del) 71-74 37 PCIT Vs. IDMC Ltd. 393 ITR 441 (Guj) 227-233 47 UOI Vs.Azadi Bachao Andolan & Anr 263 ITR 706 (SC) 284-312 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osure of Accounting Policies being accounting standards which are a kind of guidelines for accounting periods starting from April 1, 1991. It is a cardinal principle of law that the difference between capital recovery and interest of finance income is essential for accounting for such a transaction with reference to its substance. If this was not carried out, the assessee would be assessed for income-tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principle of the Income-tax Act, 1961 and to its scheme and spirit. ... ... ... ... ... ... Held accordingly, that the assessee could be charged only on real income which could be calculated only on a real income which could be calculated only after applying the prescribed method. The Act is silent on such deduction. For such calculation, the assessee had to have recourse to the Guidance Note prescribed by the Institute of Chartered Accountants of India. Only after applying such method which was prescribed in the Guidance Note, could the assessee show fair and real income liable to tax under the Act. Therefore, it could not be said that the assessee claimed deduction by virtue of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Palkhivala, the word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of the income-tax, profits have got to be assessed provided they are real profits. Such profits have got to be ascertained on ordinary principles of commercial trading and accounting. However, the Income-tax Act has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the Income-tax Act must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act." 55. On the principles of "Diversion of Income by overriding title at source", the learned counsel for the Assessee mainly relied upon the decisions of the Hon'ble Supreme Court in the case of (i) Commissioner of Income Tax Vs. Sitaldas Tirathdas 41 ITR 367 (SC); (ii) Raja Bejoy Singh Dudhur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clearcut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in answering the question raised." 58. Similarly in another case of Electricity Supply Company only, in the case of Godhra Electricity Co. Ltd. Vs. Commissioner of Income-Tax 225 ITR 746 (SC), the Hon'ble Supreme Court held that the enhanced rate of the Electricity Supplies, which amount could not be realized by the Assessee due to litigation and subsequent take-over of the Undertaking by the Government, such amount due on account of the enhancement of rates had not really accrued to the Assessee C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee firm had to confer the benefit on M. The firm was carrying on the business of manufacture and sale of tiles; the factory was not easily divisible and the new partnership had to utilise the assets of the firm as a whole including the interest of M in the same. The business could not have been carried on without providing for such utilisation. The assessee-firm came into existence only by creating a pre-existing charge at source. The amount paid to M was diverted at source and did not form part of the assessee's income. CIT v. Sitalda Tirathdas [1961] 41 ITR 367 (SC) applied." 62. The said judgment is of little help to the Respondent Assessee in the present case before us as firstly, it is not a case of Partnership before us as the concept of mutuality and partnership has been specifically negatived and excluded in the Agreement dated 30/10/2007 between the parties before us and secondly, there is no such "diversion of profits at source" by a overriding contractual obligation. It is more of a self agreed swipe of profits from CHAMUNDI to DIAGEO, retaining only the portion of the profits in the name of the bottling charges at the rate of Rs. 45/- per Case and therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter that the payment may inure to the benefit of a third party. The relevant extract is quoted below for ready reference. "In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principle of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure 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 partly 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." 66. We respectfully agree and there is no dispute about these principles but the question before us is that the "distribution of surplus" by CHAMUNDI to DIAGEO cannot be treated as an expenditure at all, because on the own admission and showing of the parties in the Agreement, it is nothing but "distribution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax". These were the pre-Second World War sentiments expressed by the British courts. It is urged that McDowell's case [1985] 154 ITR 148 (SC) has taken a new look at fiscal jurisprudence and "the ghost of Fisher's case [1926] AC 395 at 412 (HL) and Westminster's case [1936] AC 1 (HL); 19 TC 490, have been exorcised in the country of its origin". It is also urged that McDowell's case [1985] 154 ITR 148 (SC) radical departure was in tune with the changed thinking on fiscal jurisprudence by the English courts, as evidenced in W.T. Ramsay Ltd. v. IRC [1982] AC 300, Inland Revenue Commissioner v. Burmah Oil Company Ltd. [1982] Simon's Tax Cases 30 and Furniss v. Dawson [1984] 1 All ER 530 (HL). As we shall show presently, far from being exorcised in its country of origin, Duke of Westminster's case [1936] AC 1 (HL); 19 TC 490 continues to be alive and kicking in England. Interestingly, even in McDowell's case [1985] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impact of Furniss case [1984] 1 All ER 530 (HL), Burma Oil's case [1982] Simon's Tax Cases 30 and Ramsay's case [1982] AC 300 (HL). The Law Lords were at great pains to explain away each of these judgments. Lord Keith of Kinkel says, with reference to the trilogy of these cases, (at page 225 of [1990] 183 ITR)" 69. In a recent decision, the Court of Appeal (Civil Division) in England in the case of Chappell Vs. Revenue and Customs Commissioners [2017] 1 All ER 550 again discussed elaborately the transactions which have no commercial business purpose apart from the avoidance of a liability to tax and the propositions in this regard emanating from the Ramsay principles and which is found relevant for the present case also and therefore, the relevant extract from this judgment is also quoted below for ready reference:- "[30] A useful and extremely interesting description of how the Ramsay principle or approach to construction has developed through the case law can be found in the judgment of Lord Millett NPJ in the decision of the Hong Kong Court of Final Appeal in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, (2003) 6 ITLR 454. The structural approach I ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook. On the contrary, as Lord Steyn observed in McGuckian [1997] 3 All ER 817 at 826, [1997] 1 WLR 991 at 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements. [68] Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the Court to focus on a specific transaction, as in MacNiven and Barclays Mercantile, then other transactions, although related, are unlikely to have any bearing on its application'." 70. In view of this also, it is clear that the Courts and the Tax Authorities can look into the real purpose of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gations, the Courts and the Income Tax Authorities have to examine such aspects carefully in comparison to the above two other categories of statutory requirements and the Court decrees and then examine the real purport and object of such private arrangements and Contracts. 76. Besides the issues of the legality of the Agreement, the real intention of the parties should be ascertained as to see whether such arrangements and contracts have been entered into to deflect and divert the applicability of Income-Tax laws on the Assessee who has really earned the "real income", profits and gains under such Contract or whether such diversion is only an arrangement to suit the purposes of tax avoidance in such cases. 77. Therefore, we reiterate that it will depend upon the facts and circumstances of each and individual case whether in those circumstances, it would amount to a "diversion of income by overriding title at source" or an arrangement to serve the purposes of tax avoidance, as is the case before us. 78. With these observations and analysis, we are of the considered opinion that these Appeals filed by the Revenue deserve to be allowed and the substantial questions of law framed a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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