TaxTMI 
TaxTMI 
2006 (2) TMI 125
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....hich 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 assessee-company was incorporated on March 30, 1961, and was carrying on the business of trading in liquor up to the period ending on March 31, 1977. It applied to the State Government for a licence to produce Indian made foreign liquor (IMFL) and it obtained the licence on July 10, 1974, effective from July 1, 1974. It also acquired assets like land, building and an orchard at Kumbalgodu. Up to the year ending on March 31, 1976, they have incurred expenditure of Rs. 79,100 towards acquisition of land and Rs. 60,020 towards acquisition of machinery. On December 22, 1978, the assessee applied to the Excise Commissioner for transfer of the manufacturing licence by way of lease in favour its sister concern M/s. MWP Limited. When the said application for transfer was pending before the Government, the assessee entered into two different agreements simultaneously on March 8, 1979, with another sister concern....
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....he 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 with McDowell should be viewed in isolation or all the agreements namely the agreement of the assessee with McDowell for acquisition of know-how and machinery, the agreement with MWP Limited, for sub-letting them and the agreement with McDowell 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. It also held, because of the recitals in the agreement dated July 25, 1979, of the assessee with MWP limited that the assessee had preferred an application dated December 22, 1978, to the Excise Commissioner for permission to lease out their distillery licence in favour of MWP Limited. If this were so, the assessee had to explain why the assessee agreed with McDowell on March 8, 1979, for purchase of know-how and lease of machinery in spite of the decision already take....
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....or 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 colourable nor were shown to be even remotely for the purpose of reducing the tax liability of the assessee. Lastly he held that, 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. On an overall consideration of the material he held that the arrangement could not be considered as a sham transaction. Therefore, he deleted the disallowances for the two years. The Revenue challenged the correctness of the order of the Commissioner by preferring an appeal. The Tribunal after re-examining the facts held that, the Assessing Officer had wrongly mentioned that in the bargains MWP Limited had gained most, i.e., at 25 times of the earlier years' profit taking into consideration erroneously Rs. 1,120 lakhs in the year ended March 31, 1982, as against the actual figure of Rs. 120 lakhs only. The evidence on record showed tha....
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.... 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 assessing authority was justified in disallowing this expenditure which was based on material on record which has been wrongly interfered with by the first appellate authority as well as by the Tribunal and, therefore, this being purely a question of law, the answer to the questions has to be in favour of the Revenue and against the assessee. Per contra, Sri Aravind Datar, learned senior counsel appearing for the respondents submitted as under: (1) On the first blush though the said statement appears to merit consideration, on a deeper analysis of the material on record, it is evident in the first place that there is no avoidance or reduction of the income-tax by any of the three firms to the Department. (2) The transactions are real and not sham. (3) As held by the assessing authority itself, the assessee was benefited to a large extent in the matter of payment of sales tax. The other material on record clear....
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....d 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 assessee to contend that the decision arrived at by the income-tax authorities was based on no evidence at all. If the assessee satisfies the court that the decision of the income-tax authorities is based on no evidence then the question at issue becomes one of law and the court would be entitled to say that the decision of the Income-tax Officer is defective in law. The Income-tax Officer is entitled to examine the circumstances of each case to determine for himself whether the remuneration paid to the employee or any portion thereof was properly deducted under section 10(2)(xv) of the Income-tax Act. The Supreme Court in the case of K. Ravindranathan Nair v. CIT [2001] 247 ITR 178, dealing with the scope of interference by the High Court regarding a finding of fact has held that, it is the Tribunal which is the final fact-finding authority. A decision of the Tribunal on the facts can be gone into by the High Court if a ....
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....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 transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. The aforesaid judgment was followed by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, where while considering the observations made by Justice Chinnappa Reddy it was observed that, "we are afraid that we are unable to read or comprehend the majority judgment in McDowell's case [1985] 154 ITR 148 (SC) as having endorsed this extreme view of Chinnappa Reddy J., which, in our considered opinion, actually militates against the observations of the majority of the judges which we have just extracted from the leading judgment of Ranganath Mishra J. (as he then was)." A Division Bench of the Madras High Court in the case of CIT v. Andhra Prabha P. Ltd. [1980] 123 ITR 760, has held that, so long as the payment had been made bona fide out of commercial considerations ....
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....ncern. 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 between the assessee and McDowell is not in dispute under which the assessee has to pay a sum of Rs. 8 lakhs to McDowell. The said payment is reflected in the books of the assessee. When the payments are not made, when it became outstanding, interest was liable to be paid on the said amount which is also reflected in the books of the assessee's account. Though the charges of Rs. 8 lakhs were not actually paid to McDowell they have shown in their accounts the receipt of the said amount accrued and have paid income-tax. Even for the interest receivable, it is reflected in their books as paid which fact is not in dispute. The receipt of Rs. 2 lakhs from MWP by the assessee is not in dispute. The finding recorded by the Assessing Officer shows in this tripartite agreement the assessee is benefited in the form of sales tax. The material on record also discloses as held by the first appellate authority and the Tribunal, that MWP Limited su....