TaxTMI 
TaxTMI 
2018 (10) TMI 65
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....MITED (hereinafter referred to as 'DIAGEO' for 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, suc....
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....he aforesaid five Assessment Years. The DIAGEO is a Subsidiary 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, Hosko....
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.... requisites authorities, raising necessary invoice in respect of sales effected, making 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 n....
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....wn cost from time to time. CHAMUNDI shall also be responsible for the timely and full payment of annual licence fees as may be levied or imposed from 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 ....
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....17. DIAGEO INDIA'S ENTITLEMENTS 17.1 DIAGEO INDIA entitlements under this Agreement shall be calculated on the following basis: a) Gross Sales (On the basis of sales invoices raised) Gross Sales as determined 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, ....
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.... 13. Clause 24 of the Agreement under the heading "Miscellaneous" inter alia provides for each Party to bear its own Income-Tax and other Tax liabilities. Clause 24.2 clearly stipulates that it is neither a Partnership nor a Joint Venture between the two Parties. Clause 24.3 allows DIAGEO to assign its benefits 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 liabilit....
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....ermit any creation of charge by over riding title for diversion of income. The state excise department is the licensing authority to allow anybody to create a charge or indulge in liquor business. Hence the expenditure claimed is only an application of income and could not be allowed as deductible expense. 3.10 As evident from the above clause 15 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 accou....
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....duction of the amount as distributable surplus and treated the same as the appellant's income. The appellant had filed an appeal against the said assessment order. My predecessor vide appellate order in ITA.No.795/W-4(3)/CIT(A)-II/11-12 dated 23/8/2012 had confirmed the AO's action in treating the said amount as the appellant's income and dismissed the appellant's appeal. 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.30.10.20....
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....in the appeal under consideration are similar in all respects to those in the appeal for the assessment year 2009-10. Respectfully following the decision of the Hon'ble ITAT, Bangalore Bench 'C' for the assessment year 2009-10 in the appellant's own case, I hold that the distributable surplus amounting to Rs. 31,75,95,820/- to which M/s DIAGEO INDIA Pvt. Ltd. is entitled 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 ....
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.... of Liquor which is a restricted business activity and DIAGEO does not hold any Excise Licence under the said Excise Act, 1965 and therefore by a mutual arrangement or Agreement between the parties, the income taxable in the hands of the Respondent Assessee CHAMUNDI could not be made over to the DIAGEO without being first brought to tax under the provisions of the Income Tax Act, 1961. [III] The learned 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 Avoi....
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....these two parties, the liability of payment of Income-Tax in the hands of the Respondent Assessee cannot be avoided. [IX] Regarding the allowability of the said 'distributable surplus' paid by the Respondent Assessee CHAMUNDI0 to DIAGEO under Section 37 of the Act, the learned counsel for the Revenue submitted that there is no question of the same being allowed as an expenditure in the hands of the Respondent Assessee 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 assessa....
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....tire gross receipts of such business other than mere bottling charges in the hands of the Respondent Assessee and the ITAT was right in holding in favour of the Respondent Assessee CHAMUNDI. [IV] The learned counsel for the Respondent Assessee further argued that in the alternative, the entire 'distributable surplus' made over to DIAGEO should be allowed as 'business expenditure' in the hands of the Assessee because, in any 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....
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....riod. The business of manufacture and sale of liquor is closely controlled and regulated by the State Government including its storage, bottling, wastage, retail and wholesale sales thereof. The exclusive purchaser in the present case was a State Corporation, namely, KSBCL and therefore, such end to end control of the State Government under whose licence, the Respondent Assessee CHAMUNDI alone was to manufacture and sell the liquor, it cannot 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 Mate....
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....e of 'diversion of income at source', it should be allowed as a 'business expenditure' under Section 37 of the Act or as a trading loss under Section 29 of the Act. 29. In our opinion, the 'diversion of income at source' and 'business expenditure' under Section 37 are contradiction in terms and both contradictory claims cannot be made by the Assessee even in the alternative. The 'diversion of income' or rather 'distribution of surplus' under the 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 S....
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....L and in open market under its own Invoices, collected all gross Sale Receipts, met the day-to-day expenses, met all sales tax, excise duty, VAT, labour charges, as its operating costs and therefore the entire business activity done by CHAMUNDI in the name of the Respondent Assessee CHAMUNDI itself, therefore, it could not be said to be giving rise to the profits taxable in the hands of the DIAGEO. 34. We make it clear that neither the Assessing Authority 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, DI....
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.... property. The desire on the part of the assessee to create a trust out of the moneys paid to him created no trust; nor did it give rise to any legally enforceable obligation. The sum of Rs. 32,000 was taxable in the hands of the assessee. The rule in Bejoy Singh Dudhuria's case did not apply." 38. Further explaining the background in which the case was decided by the Appellate Authority, the Hon'ble Apex Court emphasized that unless the money paid was earmarked for charity 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 vi....
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..... ... ... ... In this view of the matter, it is not necessary to decide the further question if a contract of this nature operates only as a contract to be performed in future which may be specifically enforced as soon as the property comes into existence or is a contract which fastens upon the property as soon as the property comes into existence or is a contract which fastens upon the property as soon as the settler acquires it. In either view, the incomes from the shares will first accrue 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 ....
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....the firm and a sum of Rs. 5,000 out of his capital in the firm in favour of the trust. The beneficiaries were the assessee's brother's wife, the assessee's niece and his mother. The question was whether 50 per cent. of the income attributable to his share from the firm stood transferred to the trust resulting in diversion of income at source. The Appellate Tribunal held that there was no diversion of income and that section 60 of the Income-tax Act, 1961, applied. On a reference, the High Court held that 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 o....
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....on is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay 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....
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....s carried on behalf of Indian Bank was paid by way of additional interest to certain Public Sector Undertakings (PSU) on the deposits made with the Indian Bank and out of eight PSUs three has confirmed the receipt of such additional interest through demand drafts. (d) The Respondent filed his return of income for the Assessment Year 1991-92 on 01.11.1993 and declared his income at Rs. 4,82,83,620/-. The total income was determined at 4,85,46,120/- vide order dated 30.06.1994. However, later on, the case was taken up for scrutiny and assessment 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.....
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....judgment does not help the Assessee, though the Contract/Agreement dated 30/10/2007 in the present case may prima facie reflect that the Assessee CHAMUNDI was only entitled to get only the Bottling charges of Rs. 45/- per Case, but that is precisely what is hoodwinking of Revenue, in the face of the fact that the entire business is carried on by CHAMUNDI only and finally profit or income is applied by way of distribution of income between CHAMUNDI getting the apportionment at the rate of Rs. 45/- per Case of Bottles and balance amount going to DIAGEO. 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 pr....
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....mself to the levy of penalty, fine or the requirement to take out a licence from participating in the assessee's racing activity. The power to collect these amounts is the power of the stewards and of the club generally to regulate racing and to ensure that it is carried on in an orderly fashion only with persons, who are considered competent and desirable, being allowed to take part, subject to their complying with the rules of racing. The amount of the penalties, licence fees and fines collected are amounts which are received by the club as part of income, which 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....
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.... the benevolent fund in the rules did not result in the amounts which the club was to credit to that fund being diverted at source by the overriding title of the benevolent fund to those sums. The concept of diversion of income by overriding title is to be applied in situations which are clear and where the existence of the title in the legal or natural person in whom an overriding title is to be recognized is also certain, and the facts are such as to warrant the conclusion that the income is not that of the recipient, but in fact the income of the person in whose favour 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.....
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....ara Sakkare Kharkane Ltd 174 ITR 475 (Kar) 169-171 33 CIT Vs. Crawford Bayley & Co. 106 ITR 884 (Bom) 212-215 34 CIT Vs. Nariman B Bharucha & Sons 130 ITR 863 (Bom) 216-219 35 Jit and Pal X-Rays Pvt Ltd Vs. CIT 267 ITR 370 (All) 220-223 36 CIT Vs. Varanasi Nagar Vikas 275 ITR 140 (All) 224-226 38 Soma Trg Joint Venture Vs CIT 398 ITR 425 (J & K) 234-239 40 CIT Vs. Patuck 71 ITR 713 (Bom) 246-256 48 CIT Vs. Champa Properties Pvt.Ltd. .212 ITR 303 [Cal] 313-316 49 Rajkot District Gopalak Co-Op Milk Producers Union Ltd 204 ITR 590 (Guj) 317-320 50 CIT Vs. A Tosh & Sons Pvt. LTd 166 ITR 867 (Cal) 321-329 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 Kas....
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....ge represents recovery of the net investment/fair value of the asset lease term. The finance income reflects a constant periodic rate of return of the net investment of the lessor outstanding in respect of the finance lease. While the finance income represent a revenue receipt to be included in income for the purpose of taxation, the capital recovery element (annual lease charge) is not classifiable as income, as it is not, in essence, a revenue receipt chargeable to income-tax. The method of accounting as derived from the Institute's Guidance Note is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting, and is in fact, incorporated in the Institute's Accounting Standards on Disclosure 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 i....
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....over such taxes had to be excluded. Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the "total turnover". If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3). ... ... ... ... ... ... We do not find any merit in the above contentions advanced on behalf of the Department. It is important to note that tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains properly so called. Gross receipts or sale proceeds, however, include profits. According to The Law and Practice of Income Tax by Kanga 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....
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.... its clear profit is ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes - one is for commercial and tax purposes and other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the "Consumers' Benefit Reserve Account". They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessee's real profits. So, to arrive at the taxable income of the assessee from the business under section 10(I) of the Act, the said amounts have to be deducted from its total income. Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions 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, ....
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....od "diverted at source by overriding title" and the same could not be taxed in the hands of the new Partnership Firm. 61. Upholding the said contention, the Division Bench of this Court held as under:- "Held, that on the date when the new partnership was entered into, M had preexisting rights in the partnership and its assets. Therefore, without settling her rights, the other partners could not exclude her from the partnership. The partners other than M decided to exclude her and provide her compensation for the user in the new partnership of the assets of the firm to the extent of her share in the old partnership. Such a position did not result from her retirement nor severance from the partnership but from her exclusion by the other partners. Though M was not a party to the deed dated April 1, 1975, the partners of the 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 asse....
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....ct before the Division Bench of this Court in the aforesaid case, viz. Nagarbail Salt-owners Co-operative Society Ltd.(supra). 65. On the question of allowability of the said surplus paid by the CHAMUNDI to DIAGEO under Section 37 of the Act, the learned counsel for the Assessee relied upon the decision in the case of Commissioner of Income-Tax Vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), in which enumerating the principles with regard to Section 10(2) (xv) equivalent to Section 37 of the 1961 Act, the Hon'ble Supreme Court held that in deciding whether a payment of money is a "deductible expenditure", one has to take into consideration the questions of commercial expediency and the principles 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. 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 i....
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....d in the following manner touching the aspects of 'Tax Avoidance' etc., in the following manner. "In the classic words of Lord Sumner in IRC v. Fisher's Executors [1926] AC 395 at 412 (HL): "My Lords, the highest authorities have always recognized that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any expressed terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame". Similar views were expressed by Lord Tomlin in IRC v. Duke of Westminster [1963] AC 1 (HL); 19 TC 490, 520 (HL) which reflected the prevalent attitude towards tax avoidance: "Every man is entitled if he can to order his affairs so that the tax attaching under the 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 exp....
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....on is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it". 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). The basic assumption made in the judgment of Chinnappa Reddy J. in McDowell's case [1985] 154 ITR 148 (SC) that the principle in Duke of Westminster's case [1936] AC 1 (HL) has been departed from subsequently by the House of Lords in England, with respect, is not correct. In Craven v. White [1988] 3 All ER 495; [1900] 183 ITR 216, the House of Lords pointedly considered 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)" ....
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....se this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, upon its true construction, applies to the facts as found." [32]-[67] ... ... ... ... ... ... [66] The position was summarized by Ribeiro PJ in Arrowtonw Assets, at [35], in a passage cited in Barclays Mercantile: "The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically". [67] Reference to "reality" should not, however, be misunderstood. In the first place, the approach described in Barclays Mercantile 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 ente....
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.... the balance surplus could only be taken as entitlement of DIAGEO INDIA Pvt.Ltd. 73. We further hold clearly and firmly that Book entries and Method of Accounting is not determinative and conclusive for deciding the computation of 'taxable income' in the hands of the Assessee though they may be relevant to be considered. 74. This is where we feel the tax avoidance effort has been made by the parties and we cannot uphold the same in the overall analysis of the facts and legal position applicable to the facts of the present case. 75. What we further feel is that the "diversion of income by transfer of overriding title at source" should normally have the support of the statutory requirements or some decretal binding character of Courts of law and even though the private contractual obligations can also bring about such "diversion of income at source" but in this last sphere of private contractual obligations, 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....