TMI Blog1996 (2) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... he period ended on 31-3-1977. Meanwhile the assessee had applied to the State Government for a licence to produce Indian Made Foreign Liquor (IMFL). It obtained the said licence from the Government on 10-7-1974 effective from 1-7-1974. Thereafter, the assessee-company started acquiring certain assets like land, building and also an orchard at Kumbalgodu. Up to the year ended on 31-3-1976, the assessee had acquired land to the extent of Rs. 79,100 and machinery worth Rs. 60,020. 2(a). On 22-12-1978, the assessee applied to the Excise Commissioner for transfer of the manufacturing licence by way of lease (so far actually unused by the assessee) in favour of a sister concern, viz., M/s. M.W.P. Ltd. This other company is also a subsidiary of M/s. United Breweries Ltd. When the application of the assessee before the State Government for transfer of the manufacturing licence by way of lease of M/s. MWP Ltd., was pending, the assessee entered into two different agreements simultaneously on 8-3-1979 with another sister concern, viz., M/s. McDowell Co. Ltd., which is also a subsidiary of M/s. United Breweries Ltd. Under one of the agreements, the assessee was to take on hire-basis cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval of McDowell. 3. The application made by the assessee before the State Government for transfer of its manufacturing licence by way of lease, in favour of M/s. MWP Ltd., was ultimately allowed by the Excise Commissioner by his order dated 15-6-1979 in terms of Government letter dated 7-6-1979. Thereafter, the assessee entered into one agreement on 25-7-1979 with M/s. MWP Ltd., under which the assessee leased its distillery licence to the extent of operation of manufacturing and bottling of IMFL at its factory to M/s. MWP Ltd. on payment of lease amount of Rs. 1,000 per month. At the same time also, the assessee transferred plant and machinery taken by it on hire from M/s. McDowell along with technical knowhow and other information also received from McDowell to M/s. MWP Ltd. It is required to be noted in this connection that no particular agreement was entered into between the assessee and M/s. MWP Ltd., for this purpose and the transfer was effected through exchange of letters only. One of these letters addressed by the assessee-company to M/s. MWP Ltd., on 27-7-1979 referred to the agreement of the latter company to pay an amount of Rs. 2 lakhs per month with effect from 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow-how and machinery. This is because either the agreements with McDowell Co. Ltd., should be viewed in isolation or all the agreements, namely, the agreement of the assessee with McDowell Co. Ltd. for acquisition of know-how and machinery, the agreement with MWP Ltd. for sub-letting them and the agreement with McDowell Co. Ltd. and the assessee for acquiring the liquor manufactured at cost or below cost should be taken together as a single transaction to ascertain whether they involved any extra commercial consideration. This becomes all the more important in the light of the recital in the agreement dated 25-7-1979 of the assessee with MWP Ltd. that the assessee had preferred an application dated 22-12-1978 to the Excise Commissioner for permission to lease out their distillery licence in favour of MWP Ltd. If this were so, the assessee had to explain why the assessee agreed with McDowell Co. Ltd., on 8-3-1979 for purchase of know-how and lease of machinery in spite of the decision already taken to lease out their distillery licence. This aspect of the matter has not been investigated by the authorities below and should throw considerable light on the intention of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for MWP Ltd., as compared to the assessee itself. The AO also found out from certain correspondences made by the representatives of the different companies to the AO that the benefits had been transferred by the assessee to MWP Ltd., as the latter was an infant organisation. The AO also discussed that in order to boost up the affairs of M/s. MWP Ltd., with a subscribed share capital of Rs. 790 only, all the arrangements under present consideration in these appeals were entered into between the three companies. He furthermore stated 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. The AO thus observed that the decision of the Supreme Court in the case of McDowell Co. Ltd v. CTO [1985] 154 ITR 148 would apply to the present case squarely. The AO finally came to the conclusion that the expenses incurred by the assessee towards making payment to McDowell on account of hiring of the plant and machinery and receiving of technical know-how by the assessee were not wholly and exclusively for the purpose of the business of the assessee and hence, such expenses were not allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount. The CIT(A) thus came to the conclusion that the disallowances were unwarranted. As to the question of applicability of the decision of the Supreme Court in the case of McDowell Co. Ltd., the CIT(A) came to the conclusion that the transactions under consideration were neither colourable nor were shown to be even remotely for the purpose of reducing the tax liability of the assessee. He remarked that in fact, McDowell had paid tax on the disallowed amount at the same rate of tax at which the assessee itself would have been liable to pay tax on the same. The CIT(A) also discussed with reference to the facts of the case that the agreements or the arrangements thereafter could not be considered as sham transactions. He also held that the provisions of section 40A(2) could not be applied to the transactions inasmuch as it had not been shown that McDowell falls within the susceptible category of payees and furthermore that it was also not shown by the ITO that the fair market value of the facilities acquired by the assessee from McDowell by way of use of the machinery and the technical know-how supplied by McDowell was in fact, lower than the prices actually paid by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also stated (and this point seems to have been taken up before the lower authorities also) that the prohibition policy strongly advocated by the newly set up Janatha Government in the Centre at the relevant time, also desisted the assessee from taking up manufacturing activities directly. That is why, the assessee applied for transfer of the manufacturing licence in favour of MWP Ltd., by way of lease, in December 1978. It is the contention of the assessee that inasmuch as the said request of the assessee for transfer of the manufacturing licence was not granted by the Karnataka Government immediately, the assessee kept open the other alternative of embarking directly in the manufacturing activities by itself and that is why the two agreements with McDowell for receiving of technical assistance as well as taking on hire the plant and machinery from McDowell were entered into on 8-3-1979. It is contended that thereafter permission for transfer of the manufacturing licence was received some time towards the middle of June 1979 and since the assessee was never in the mood of itself venturing into manufacturing activities, it took up the opportunity of the proposal of MWP Ltd., to tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO [1980] 122 ITR 839 (Delhi). It has been tried to be pointed out that in majority of the above judgments, it was decided that to arrive at the conclusion that the expenditure to be allowed was dictated solely by business considerations, one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure as the case may be. In Meattles Lltd's case, the Delhi High Court held that in ascertaining whether the expenditure has been incurred wholly or exclusively for the purpose of the assessee's business one must look to the direct concern and direct purpose for which the money is paid and not to the remote or indirect result which may possible flow from or motivate the expenditure. The Delhi High Court again held in the case of Orissa Cement Ltd. that while it is true that expenditure incurred need not necessarily yield results or be incurred to directly benefit the business or be directly related to the earning of income, yet it must be incidental to the business and must be necessitated or justified by commercial expediency. A special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in favour of MWP, for taking on hire the plant and machinery belonging to McDowell at rather high rates of licence fees along with technical assistance from the said company which was already an expert in the field of manufacture of IMFL and for transferring the same to MWP Ltd., at a much lower cost. The learned DR argued that with the help of these arrangements, the UB Group made it possible for MWP Ltd., to produce IMFL at a comparatively cheaper rate inasmuch as it did not have to pay the high cost of lease rent towards plant and machinery belonging to McDowell and also of the technical assistance fees payable to the same concern. It was thus finally argued that inasmuch as all these arrangements were ultimately made for the benefit of MWP Ltd., and not for the assessee itself, the payment of technical services fees and also of licence fees for use of plant and machinery by the assessee to McDowell cannot be considered to have been incurred wholly and exclusively for its own business needs. It was furthermore contended that on account of MWP Ltd., being able to produce IMFL at a comparatively cheaper rate, it was possible for that company to pay lesser amount of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no income could be brought to tax in the hands of the holding company unless it is proved that the holding company had made some secret profits. The Supreme Court's decision as Sree Meenakshi Mills Ltd.'s case was also brought to our special attention in which the Supreme Court held as below : " However wrong-headed, ill-advised, unduly optimistic or over-confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income. " It was furthermore held that in order that the expenditure may be admissible as a deduction, it is not necessary that the primary motive in incurring it must be directly to earn income thereby. It was again pointed out that the Supreme Court had held at Walchand Co.'s case that in applying the test of commercial expediency for determining whether any expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessmen and not of the Revenue. A similar view was also taken by the Madras High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to our notice in which it is stated that it is not open in law to investigate the motive of the assessee and it is not permissible in law to bring in suppositions and then to find out whether the claim is allowable or not. Finally, special reference has also been made to the judgment of the Delhi High Court in the case of D.S. Bist Sons in which it is held that the income-tax authorities have to interpret commercial agreements on its own terms as contained in the documents and furthermore that it is only if and when there is a solid material to hold a taint of collusion or of shamness that the income-tax authorities may disregard the terms of agreement. 10. The learned counsel for the assessee has argued that it is not the case of the Department that the payments under consideration were not actually made to McDowell. On the other hand, McDowell has included these amounts within its income for the respective years. It has also been shown that all the three companies under consideration have been subjected to income-tax on their respective incomes in all these years at the same rate and by making payment of the amounts under consideration to McDowell there has not been any over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the assessee has strongly contended that whereas MWP Ltd. was able to raise its net profit to around 3.8 times during the period 1979-80 to 1981-82, the corresponding increase for McDowell and the assessee were, on the other hand, 2.4 times and 8 times respectively. Thus, he has argued that even in spite of the fact that the assessee had supplied technical services and also sub-leased the plant and machinery to MWP Ltd., at lesser rate, it was the assessee itself which gained most out of the entire arrangements. Thus, the learned counsel for the assessee ultimately argued that not only the arrangements have ultimately benefitted the assessee but the payments made by the assessee to McDowell being genuine and laid out for its actual business purposes are required to be allowed. 12. On examination of the facts of the case and also the legal issue involved, we find that the claim of the assessee has got to be upheld. We have discussed above that the reasons given by the assessee for entering into the agreements with McDowell can be considered as plausible and be accepted, even if it be with a pinch of salt. The real question is however, the allowability of the expense inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for supply of plant and machinery on lease basis. Much after that, i.e., about three months thereafter, the actual transfer of the industrial licence in favour of MWP Ltd., was sanctioned by the State Government. The version of the assessee that thereafter it finally resolved not to embark upon manufacturing activities and wanted to get rid of the liability taken over by way of having already entered into the agreements with McDowell by passing them on to MWP Ltd., although at much lower rates, seems to be acceptable. The learned counsel for the assessee has mentioned in this connection that although the payments received by the assessee from MWP Ltd., were less than those paid by the assessee to McDowell yet, the amounts received by the assessee were not very insignificant amounts and that the assessee actually received from MWP Ltd., Rs. 16,00,000, Rs. 75,00,000 and Rs. 96,00,000 for the three years respectively. The question before us is actually to judge whether the expenses by way of payments of the lease rent for plant and machinery and also the technical know-how fees to McDowell were laid out wholly and exclusively for the purpose of the business of the assessee. As discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as disallowable u/s 37(1) ? The answer is emphatically no. In such a case, the Department would not have at all tried to challenge the payment by the assessee u/s 37(1). There cannot be any doubt about the fact that the question of allowability of the payments u/s 37(1) cannot depend upon the amount of return ultimately received by the assessee from the agreement entered into by it with MWP Ltd., subsequently. It is required to look into the question of allowability of the expenses at the point when the agreements with McDowell themselves were entered into. Because of the two facts that firstly, the assessee had the option till that time to embark upon manufacturing activities on its own and secondly, that even the transaction by way of transferring the facilities obtained from McDowell to MWP Ltd., is also ultimately of the the nature of business transactions and the return received by the assessee from MWP has also been assessed as business income, there cannot be any doubt about the fact that the entire expenses under consideration are to be allowed as genuine business expenses of the assessee laid out wholly and exclusively for its business purposes. In deciding the allowabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, etc., by the assessee from McDowell during the different years. The disallowances of the interest payments were made firstly, on the ground that the original payments themselves were considered to be disallowable u/s 37(1). Secondly, it is the departmental contention that although there were provisions for accrual of interest on the unpaid balances in favour of McDowell in the agreements between the assessee and McDowell, there was no such corresponding provisions of charging interest by the assessee on the unpaid balances owed by MWP Ltd., in favour of the assessee. As stated earlier, there were no proper written agreements between the assessee and MWP Ltd., and the agreements were mostly verbal entered into through exchange of letters drafted in general terms. It appears that those agreements did not envisage any provision for payment of interest by MWP Ltd., to assessee. Although from a critical point of view, a question can be raised as to why the assessee should not charge interest on the unpaid balances owed to it, while at the same time, it would have to bear the liability of interest to McDowell, from the taxation-angle however, it is not possible to raise such a questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the depreciation has actually been claimed on the assets actually owned by the assessee or even on the other assets belonging to McDowell also. If it be found that depreciation has been claimed only on the assets owned by the assessee, then depreciation for all the years will have to be allowed. 15. There is a special ground for assessment year 1982-83 in respect of the claim of the assessee towards sales-tax liability of Rs. 71,80,558 disallowed in the assessment but ultimately allowed by the CIT(A) in the impugned order. The AO discusses that in its return filed on 30-9-1982, the assessee showed income of Rs. 4,53,83,725. Revised return of income was, however, filed on 30-7-1984 in which income was shown at Rs. 3,82,03,170. In the revised return, the assessee claimed an amount of Rs. 71,80,558 on account of sales-tax liability considered by the assessee to have become payable for this year. However, the amount was actually debited to the profit and loss account for the year ended on 30-6-1983, i.e., assessment year 1984-85. It is worth while to mention in this connection that there was no income or assessment of assessee for assessment year 1983-84 on account of change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the CIT(A) that though the debit note was sent by McDowell to the assessee after the relevant accounting year, since the amount relates to the year under consideration, it is an admissible deduction in this year and without this deduction, real income for the year could not be computed. The CIT(A) found that the aforesaid agreement dated 1-11-1981 between the assessee and McDowell had never been brought to the notice of the ITO and he had no occasion to consider that. He, therefore, felt that the ITO should have an opportunity to consider this agreement before deciding the issue of allowability of the sales-tax. In the circumstances, he set aside the assessment with a direction to the ITO to consider the scope of the agreement dated 1-11-1981 between the assessee and McDowell and to decide the issue of allowability of sales-tax of Rs. 71,80,558 claimed as deduction in this year. 16. When the matter was once more taken up by the AO in the reassessment proceeding, he considered in detail the written submissions of the assessee on this issue. The AO stated in the re-assessment order that the above agreement dated 1-11-1981 between the assessee and McDowell had never been brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion the amount payable by the assessee-company on account of sales-tax liability. He, therefore, came to the conclusion that certainly this was not the kind of " sufficient proof " referred to in the agreement. He also referred to the judgment of the Andhra Pradesh High Court under consideration which showed that the liability to pay both excise duty and sales-tax thereon was that of McDowell and stated that this liability had been foisted on the assessee-company through the so-called agreement. The AO finally held that even assuming that there was a valid agreement and that by oversight, that had not been referred to in the earlier assessment proceedings, it could not be said that the liability accrued to the assessee with effect from the date of the agreement, viz., 1-11-1981. He also referred to the reduction in the claim made later-on on the basis of the accounts as per auditors. Since however, he had already held that the assessee was not entitled to any deductions towards sales-tax liability on excise duty, the change in the figures according to him, will not alter the position. Ultimately the AO disallowed the entire claim of the assessee. 18. In the further appeal filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as in the other two cases, it was simply held by the different High Courts that the Income-tax Law makes a distinction between an actual liability in praesenti and liability de futuro which, for the time being, is only contingent. The different High Courts held that whereas the present liability was debitable the later liability being contingent in nature, is not debitable. The learned DR also relied upon the decisions of this Bench of the Tribunal dated 21-8-1995 in ITA No. 746 (Bang.)/1994 in the case of Bharat Electronics Ltd., and another one dated 7-9-1995 in ITA No. 64 (Bang.)/1994 in the case of HMT Ltd., in which the Tribunal had held that the liability towards meeting increased remuneration to the employees of the two assessees under consideration did not arise in the relevant assessment year. Although there was a big talk in the market about the pay scales being revised, actually however, the agreements enforcing the liabilities were held by the Tribunal to have come at a later date. 21. In the instant case, the allowability of the entire sales-tax liability depends on clause 8 of the Agreement under consideration. The same also depends on how the liability was foist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. When two possible interpretations be there, it is an accepted principle that the one which goes in favour of the assessee will have to be taken into consideration. We are, therefore, of the opinion that clause 8 of the aforesaid agreement dated 1-11-1981 is to be interpreted in the sense that by virtue of amendment of the Distillery Rules by the AP Government with effect from 4-8-1981, the Government of AP has already treated the excise duty paid by McDowell as part of its turnover. The subsequent provisions like demanding sales-tax and other charges on excise duty and also regarding furnishing of sufficient proof in this regard merely relates to quantification of the liability. We are, therefore, of the opinion that although the liability towards payment of sales-tax by the assessee, in this case, is of the nature of a contractual liability, the said contractual liability was imposed on the assessee by McDowell immediately on entering into the agreement with it. Hence, the date of accrual of statutory liability on the part of McDowell would be 4-8-1981 and that of the contractual liability on the assessee would be 1-11-1981. The fact that the assessee was not in a position to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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