Income Tax Appellate Tribunal - Bangalore
Assistant Commissioner Of Income Tax vs Mysore Wine Products Ltd. on 13 February, 1996
ORDER
S. Bandyopadhyay, A.M.
1. All these three Departmental appeals for the three successive years involve common issues. Besides, there is a separate issue for asst. yr. 1982-83 also. Hence, the appeal's have been consolidated for the sake of convenience and a common order is being passed.
2. The assessee is a company having 25,000 equity shares of Rs. 10 each fully paid and is a wholly-owned subsidiary of M/s Consolidated Investments Ltd., which in its turn, is again a wholly owned subsidiary f M/s United Breweries Ltd. There are two more subsidiaries of M/s United Breweries Ltd., which are in the picture, viz., M/s McDowell & Co. Ltd., and M/s MWP Ltd. The assessee-company was incorporated on 30th March, 1961, and had very meagre income or losses from the business of trading in liquor upto the period ended on 31st March, 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 10th July, 1974, effective from 1st July, 1974. Thereafter, the assessee-company started acquiring certain assets like land, building and also an orchard at Kumbalgodu. Upto the year ended on 31st March, 1976, the assessee had acquired land to the extent of Rs. 79,100 and machinery worth Rs. 60,020.
2(a). On 22nd Dec., 1978, the assessee applied to the Excise Commissioner for transfer of the manufacturing licence by way of lease (so far actually used by the assessee) in favour of a sister concern viz., M/s MWP 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 8th March, 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 certain plant and machinery belonging to M/s McDowell & Co. (hereinafter referred to as "McDowell") for which the assessee was agreed to pay an amount of Rs. 3 lakhs per month commencing from 1st April, 1979 to 30th June, 1979, and Rs. 4 lakhs thereafter, i.e., from 1st July, 1979. This agreement was to remain valid for a period of three years only w.e.f. 1st April, 1979, and the assessee was obliged not to determine the hiring agreement during the period of continuation of the said agreement by returning the aforesaid hired machinery to M/s McDowell. It was furthermore provided in the agreement that in case of such earlier determination of the hiring agreement, before the expiry of the agreement period, the assessee was to pay by way of damage to M/s McDowell, the amount M/s McDowell would have received by way of hire charges to compensate McDowell for loss of revenue. Under the agreement again, the assessee was not entitled to sell, assign, mortgage, pledge, hypothecate, let, hire or otherwise deal with the hired machinery or any part thereof and not to part with the possession of the hired machinery without the express written permission of McDowell previously obtained, provided further, however, that the assessee might permit the use of the hired machinery by another firm or company as approved by McDowell.
2(b). In accordance with the other agreement entered into by the assessee on the same date, i.e., 8th March, 1979, with McDowell, McDowell was to make available to the assessee its know-how and other technical advice in the line of manufacture of liquors and wines subject to the terms and conditions stated in the agreement. This particular agreement under which McDowell was to become the technical advisors of the assessee relating to the manufacture of liquors and wines, was also to continue for a period of three years from the 1st day of April, 1979. In the said agreement, the assessee was required to make a monthly payment of Rs. 4 lakhs to McDowell from 1st April, 1979, onwards. The assessee was also to keep secret and not to divulge, except only to such of its employees to whom the communication was necessary and expedient, all the technical and other information supplied to it by McDowell although it was also provided that any one or more of the benefits arising out of the agreement might be transferred by the assessee to another firm or company with the approval 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 dt. 15th June, 1979, in terms of Government letter dt. 7th June, 1979. Thereafter, the assessee entered into one agreement on 25th July, 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 know-how 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 27th July, 1979, referred to the agreement of the letter company to pay an amount of Rs. 2 lakhs per month w.e.f. 1st April, 1979, for utilising the facilities offered by the assessee to the other company in the distillery of the assessee. No further details of the agreement between the two parties are found to the mentioned in the said letter. M/s MWP Ltd., replied by its letter dt. 7th Aug., 1979, confirming the agreement and expressing the same to be agreeable to it. Although it was stated in the said letter that if found necessary, M/s MWP Ltd., would enter into formal agreement with the assessee, according to the submissions made by both the sides, no such formal agreement seems to have been ultimately entered into between the two parties. The assessments of the assessee for all these three years were completed earlier in which the Department disallowed, by applying the provisions of s. 40A(2), the difference between the amounts of payments made by the assessee to McDowell on account of technical service fees and rent of plant and machinery (as discussed above) and those received by the assessee in turn from M/s MWP Ltd., from user of the said assets and facilities. The disallowances were confirmed by the CIT(A). When the matter was taken up by assessee to Tribunal, for asst. yr. 1980-81, the Tribunal, by its order dt. 13th Feb., 1985, set aside the orders of the authorities below and restored the matter back to the ITO for fresh disposal in accordance with law. In para 6 of its order, the Tribunal stated as below :
"On a consideration of the rival submissions, we are of the opinion that this matter requires further investigation of facts. We find that the authorities below proceeded on the footing that the provisions of s. 40A(2) were attracted to the agreements with McDowell & Co. Ltd. If that were all, the only question would be whether the provisions of that section are attracted to the agreements with McDowell & Co. Ltd. within the definition in that section and, if so, whether the payment made to it was excessive having regard to the market value of the goods and services received by the assessee. But, the Revenue depends upon the subsequent conduct of the assessee as well as the subsequent agreement to infer that the original transaction was based on some extra commercial considerations. This, however, means that the subsequent transactions of the assessee could not be ignored in actually assessing the consideration paid for the acquisition of the know-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 subletting 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 dt. 25th July, 1979, of the assessee with MWP Ltd. that the assessee had preferred an application dt. 22nd Dec., 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 8th March, 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 assessee and the real reasons why the tripartite transactions came into being. The closeness of the companies the shares of which are ultimately held by United Breweries Ltd. does provoke this enquiry and without such an enquiry, we are of the opinion it would not be proper either to confirm or delete the disallowance. We, therefore, deem it fit to set aside the orders of the authorities below and restore the matter to the ITO for fresh disposal in accordance with law. The appeal is treated as allowed."
For the other two years, viz., asst. yrs. 1981-82 and 1982-83, the CIT(A) himself set aside the orders of the ITO and directed him to make fresh assessments by following the aforesaid order of the Tribunal for asst. yr. 1980-81. Accordingly, fresh assessments were made by the Assessing Officer (AO) for all the three years by seeking directions of the IAC under s. 144B. In the fresh assessments, instead of resorting to the provisions of s. 40A(2), the entire amount of payments made by the assessee to McDowell at Rs. 87,00,000, Rs. 111 lakhs and Rs. 120 lakhs for the three years respectively were disallowed by considering them as having not been incurred wholly and exclusively for the purpose of business of the assessee under s. 37(1) of the Act. Detailed discussions were made in the assessment orders regarding the payments under consideration. The comparative financial positions of the three companies, viz., assessee, McDowell and MWP Ltd., for the three years ended at 31st March, 1980, 31st March, 1981, and 31st March, 1982 were made. The AO discussed very emphatically that whereas the net profits of the assessee-company had increased by eight times in the year ended on 31st March, 1982 (at Rs. 453.83 lakhs) in comparison with the net profits at Rs. 54.30 lakhs in the year ended on 31st March, 1980, the profits of McDowell had increased from Rs. 510 lakhs to Rs. 1,258 lakhs, i.e., at 2.4 times. The AO contended that on the other hand, M/s MWP Ltd., had been able to raise its profit from Rs. 32.07 lakhs as during the period ended at 31st March, 1980, to Rs. 1,120 lakhs as during the period ended at 31st March, 1982, i.e., at the rate of 25 times. The AO thus concluded that the arrangements for giving higher amounts by the assessee to McDowell and at the same time charging much lower amounts from MWP Ltd., had resulted in considerable gain for the other two companies and especially 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. vs. CTO (1985) 154 ITR 148 (SC) 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 under s. 37(1). It was also mentioned in the assessment order that the provisions of s. 40A(2) were also applicable in this case, but, as it had been proposed to disallow the entire sum payable to McDowell as not relating to the assessee's business, no separate disallowance was required to be made under s. 40A(2). Similar disallowances were also made by the AO in the assessments for the other two years.
4. The CIT(A) discusses that although in the original assessments, disallowances had been made under s. 40A(2), a plea was taken before the Tribunal that the disallowance might be sustained under s. 37 also, if not under s. 40A(2) and that in view of the fact that sufficient examination of the materials to justify such disallowances had not been done, the Tribunal set aside the orders of the authorities below. The CIT(A) also stated that in the reassessments consequent upon setting aside of the original assessments by the Tribunal, the ITO apparently found that the provisions of s. 40A(2) could not effectively be invoked and that is why disallowances of the entire payments made to McDowell were made by him by resorting to the provisions of s. 37. The CIT(A) discussed the entire gamut of the issue by stating in a nutshell the points of view of the AO. He also noted that while coming to the conclusion that the expenses under consideration were disallowable, the ITO had observed that no explanation had been offered to the question raised in the Tribunal's order as to why the assessee had entered into an agreement with McDowell on 8th March, 1979, for know-how and lease of machinery when it was already aware of the decision taken to transfer the licence in favour of MWP Ltd. The CIT(A) found out that the explanation, as required, had in fact, been submitted by the assessee on 17th July, 1986, to the IAC during the course of the proceedings under s. 144A pending before him. He observed that this explanation had not at all been considered by the IAC/ITO while passing the order. After discussing the above explanation, the CIT(A) came to the conclusion that the ITO had not at all been able to show that the payments under the agreements with McDowell had, in fact, not been made for business purposes, which appear on the face of the transactions. The CIT(A) also held that once the business purpose is established, adequacy for consideration was not at all required to be taken into account. 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. (supra), 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 s. 40A(2) could not be applied to the transactions inasmuch as it had not been shown that McDowell falls within the susceptible category of payers 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 price actually paid by the assessee. Ultimately, therefore, the CIT(A) deleted the disallowances for all the three years. The Department challenges the above decision of the CIT(A) in the present appeals before us.
5. The learned counsel for the assessee firstly contended before us that the present assessments, being not in tune with the directions given by the Tribunal, are liable to be quashed. We find from a careful reading of the operative portion of the order of the Tribunal dt. 13th Feb., 1985 (excerpts from which have already been given above), that the Tribunal wanted the AO to inquire, during the course of the reassessment proceeding as to why the assessee agreed with McDowell on 8th March, 1979, for purchase of know-how and lease of machinery in spite of the decision already taken to lease out their distillery licence. Ultimately, however, the Tribunal set aside the orders of the authorities below and restored the matter back to the ITO for fresh disposal in accordance with law. Thus, the Tribunal's order cannot be considered to be putting any fetters on the ITO in passing the reassessment orders. On the other hand, after making inquiry in the line as suggested by the Tribunal, the ITO was within his competence to pass reassessment orders in accordance with law in the way he wanted to do. Hence, the argument taken by the learned counsel for the assessee that it was not within folds of law for the ITO to disallow the entire payments made to McDowell by applying the provisions of s. 37(1), cannot be considered to hold good.
6. It will be proper for us to examine the explanation of the assessee about the reason to enter into the agreements under consideration with McDowell, having already taken the decision to licence the factory in favour of MWP Ltd. As already mentioned above, the CIT(A) has discussed clearly that the explanation in this regard had been submitted by the assessee on 17th July, 1986, to the IAC during the course of the proceeding under s. 144A pending before him. The said explanation was also given to us verbally by the learned counsel for the assessee. It is the contention of the assessee that although a manufacturing licence had been obtained by the assessee as far back as in 1974, the assessee was not very seriously inclined to embark upon manufacturing activities and that is why the said licence was kept idle for a long period of five years. The learned counsel for the assessee 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 course 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 8th March, 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 transfer all the facilities received from McDowell to MWP Ltd., though at somewhat lower prices. The contention of the assessee in this regard is that had the assessee not entered into the agreement with MWP Ltd., it would have been required for it to pay much higher damages to McDowell for non-fulfilment of the contract with it inasmuch as the assessee itself was not in a proper position to venture into manufacturing activities.
There is no doubt about the fact that some thorns of doubt appear on the face of this submission of the assessee. At the same time again, the assessee's contention cannot be considered to be totally irrelevant and not plausible. The learned Departmental Representative has tried to argue in this connection that granting of transfer of manufacturing licence is merely a formality and hence, there was no need for the assessee to enter into any direct manufacturing agreements with McDowell as is there in the present case, on account of the fact that the assessee was almost sure to ultimately be able to get the manufacturing licence transferred in favour of MWP Ltd. It is not that easy to accept this statement of the learned Departmental Representative on the face of the fact that it took about six months for the assessee to get the sanction of transfer of the manufacturing licence. In the meanwhile, one must say that there were causes of genuine doubt about whether the transfer would ultimately be sanctioned by the Government or not. We may, therefore, accept the version of the assessee as a plausible one.
7. Both sides have relied on a large number of decisions of different High Courts and also of the Supreme Court. The reliance placed by the learned Departmental Representative are :
(i) Andrew Yule & Co. Ltd. vs. CIT (1963) 49 ITR 57 (Cal)
(ii) CIT vs. Globle Theatres (P) Ltd. (1980) 122 ITR 240 (Bom)
(iii) Meattles Ltd. vs. CIT (1968) 68 ITR 79 (Del)
(iv) Orissa Cement Ltd. vs. CIT (1969) 73 ITR 14 (Del)
(v) CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC)
(vi) K. Shankaranarayana Iyer & Sons vs. CIT (1977) 110 ITR 571 (Mad)
(vii) Buland Sugar Co. Ltd. vs. CIT (1981) 130 ITR 434 (Del) at 440
(viii) Aluminium Corporation of India Ltd. vs. CIT (1972) 86 ITR 11 (SC)
(ix) Swadeshi Cotton Mills Co. Ltd. vs. CIT (1967) 63 ITR 57 (SC)
(x) Lachminarayan Madanlal vs. CIT (1972) 86 ITR 439 (SC)
(xi) W. T. Suren & Co. (P) Ltd. vs. CIT (1971) 80 ITR 602 (Bom) and
(xii) Siddho Mal & Sons vs. ITO (1980) 122 ITR 839 (Del) 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 Ltd. (supra), 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 possibly flow from or motivate the expenditure. The Delhi High Court again held in the case of Orissa Cement Ltd. (supra) 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 reference was made to the judgment of the Supreme Court reported in CIT vs. Chandulal Keshavlal & Co. (supra) in which it is held that if the expenses is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous of for some improper or oblique purpose outside the course of business, then the expense is not deductible. A similar view was also taken by the Madras High Court in K. Shankaranarayana Iyer & Sons (supra). The learned Departmental Representative also took pains to assert that the mere fact that the assessee established the existence of an agreement (in this case between the assessee and McDowell) and also the fact of actual payment, the discretion of the ITO to consider whether the expenditure was made exclusively for the purpose of the business is not taken away. To establish this particular proposition, reliance was made specially on the judgments of Supreme Court Aluminium Corporation of India (supra) Lachminarayan Madanlal (supra) and Swadeshi Cotton Mills Co. Ltd. (supra).
The decision of the Bombay High Court in W. T. Suren & Co. (P) Ltd. (supra) stating that there is no rule that if there is a written agreement between the parties, the authorities and the Court must look into that written agreement, and nothing else, was also emphasised. Lastly, reliance was also placed on the judgment of the Supreme Court in the case of McDowell & Co. Ltd. (supra) in which it has clearly been stated that tax planning may be legitimate, provided it is within the frame work of law and furthermore that colourable devices cannot be part of tax planning.
8. Armed with these judgments, the learned Departmental Representative tried to assail the decision of the CIT(A) in the present case and to establish that the entire payment to McDowell by the assessee was made for purpose other than business considerations. He argued that all the three companies under consideration, viz., the assessee, McDowell and MWP Ltd., belong to the same group and the affairs of these companies were conducted by the think-tank of the group for the purpose of benefit of the group as a whole. It was stated that the intention of the group was to establish the infant company MWP Ltd., with a very nominal amount of share capital as major contributor in the filed of manufacture of IMFL. Towards this end, arrangements were made between all the three companies for transfer of industrial licence by the 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 Departmental Representative 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 sales-tax than normally would have been payable and thus the entire arrangement can be considered to have been made for the purpose of reduction of sales-tax liability of the group also. The learned Departmental Representative thus contended that the judgment of the Supreme Court in the case of McDowell & Co. Ltd. (supra) squarely applies to the present case.
9. On the other hand, the learned counsel for the assessee also sought to place reliance on a large number of decisions of different High Courts and also of the Supreme Court viz. :
(i) CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 756 (SC)
(ii) CIT vs. Navsari Cotton & Silk Mills Ltd. (1982) 135 ITR 546 (Guj)
(iii) CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC)
(iv) CIT vs. Calcutta Discount Co. Ltd. (1973) 91 ITR 8 (SC)
(v) Travancore Titanium Product Ltd. vs. CIT (1966) 60 ITR 277 (SC)
(vi) Mysore Spinning & Manufacturing Co. Ltd. vs. CIT (1966) 60 ITR 572 (Bom)
(vii) Sree Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC)
(viii) CIT vs. Walchand & Co. (1967) 65 ITR 381 (SC)
(ix) Amarjyothi Pictures vs. CIT (1968) 69 ITR 755 (Mad)
(x) J. K. Commercial Corporation Ltd. vs. CIT (1969) 72 ITR 296 (All)
(xi) CIT vs. Vijayalakshmi Mills Ltd. (1974) 94 ITR 173 (Mad)
(xii) Jamshedpur Motor Accessories Stores vs. CIT (1974) 95 ITR 664 (Pat)
(xiii) Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC)
(xiv) CIT vs. Andhra Prabha (P) Ltd. (1980) 123 ITR 760 (Mad)
(xv) CIT vs. Seshasayee Bros (P) Ltd. (1981) 127 ITR 218 (Mad) (xvi) CIT vs. Om Parkash Behl (1981) 132 ITR 342 (P&H) (xvii) CIT vs. Bharat Barrel & Drum Mfg. Co. (P) Ltd. (1990) 182 ITR 21 (Bom) (xviii) D. S. Bist & Sons vs. CIT (1984) 149 ITR 276 (Del) (xix) CIT vs. Arun Dua (1989) 45 Taxman 246 (Cal) It has been pointed out that the Supreme Court held in the case of Delhi Safe Deposit Co. Ltd. (supra) that even if the payment be incidental for the purpose of keeping the trade going, it is made in the capacity of a trader and the expenditure incurred on the preservation of a profit-earning asset of a business will be a deductible expenditure.
Special attention was drawn to the judgment of the Supreme Court in Calcutta Discount Co. Ltd. (supra) in which it was held that though the shares were transferred by the holding company to a subsidiary below the market price, since the transaction was bona fide, 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 reported in Sree Meenakshi Mills Ltd. (supra) 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 in Walchand & Co. (supra) 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 Amarjyothi Pictures (supra). The learned counsel for the assessee also placed strong reliance on the judgment of the Allahabad High Court in the case of J. K. Commercial Corporation Ltd. (supra) holding that though the assessee is an imprudent businessman, yet if he incurs expenditure voluntarily for the purpose of his own business it would be allowable as a proper deduction and furthermore that the fact that the expenditure enured to the benefit of others is entirely irrelevant in determining the question whether the expenditure ought to be allowed as a deduction. The Madras High Court's decision in Vijayalakshmi Mills Ltd. (supra) holding that it is not for the Revenue to go into the question of reasonableness of expenditure while construing the question of allowance of the same and furthermore that it is not possible for the Revenue to go into the question whether the payment of the higher price was reasonable or not once it is found that the full amount at the higher rate had been actually paid, was also brought to our notice. Furthermore, strong reliance was placed on the judgment of the Supreme Court in Sassoon J. David & Co. (supra) in which it is held that it is for the assessee to decide whether any expenditure should be incurred in the course of its business, that such expenditure may be incurred voluntarily and without any necessity, and furthermore the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of the expenditure being allowed by way of deduction. The decision of the Madras High Court in Andhra Prabha (supra) which was affirmed by the Supreme Court CIT vs. Andhra Prabha (P) Ltd. (1986) 158 ITR 416 (SC) to the effect that the payment could not be disallowed merely because the payment was made to a sister-concern has also been relied upon. Regarding payment made to a sister concern, our attention was also drawn to the judgment of the Bombay High Court in Bharat Barrel & Drum Mfg. Co. (P) Ltd. (supra) in which it has been held that in the case of payment to a sister-concern, though there is a difference between the amount paid to the sister concern and in turn what is spent by them for rendering service to the assessee, the entire expenditure constituted business expenditure allowable as deduction. The judgment of the Punjab & Haryana High Court in Om Prakash Behl (supra) has also been brought 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 (supra) in which it is held that the IT 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 IT 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 amount under consideration to McDowell there has not been any overall tax reduction for the group as a whole. It has been argued that if by the arrangements, MWP Ltd. had been able to produce IMFL at cheaper rate, that enured to the benefit to the assessee inasmuch as the assessee was able to get supply of IMFL from that company (in some cases through McDowell) at less cost and was able to increase its profit on which tax was ultimately paid. It is thus argued that the judgment of the Supreme Court in the case of McDowell & Co. Ltd. (supra) does not apply to the present case.
11. It has furthermore been argued that although it may be a fact that the assessee was able to recover less amounts in its turn from MWP Ltd., for transfer of the plant and machinery as well as the technical services for which it had to pay higher rates to McDowell, the same has, however, enabled the assessee-company to receive supply of IMFL from MWP Ltd. at considerably less cost. The CIT(A) is found to have examined this particular issue and made a mention of this fact in his appellate order. Some details, showing the price differential between what MWP Ltd. had charged the assessee and others were produced before us to establish the point of the assessee in this regard. The learned Departmental Representative tried to raise an issue in this connection that IMFL received from MWP Ltd., did not constitute a very significant factor of the total purchase of the assessee during any of the three years under consideration and hence, the argument that the assessee received substantial benefit by way of getting supply of IMFL at reduced price does not hold good. On factual verification, it is found that the contention of the learned Departmental Representative is correct to some extent. At the same time, it cannot also be denied that the assessee, in return for transferring the technical assistance and plant and machinery to MWP Ltd., was able to get supply of IMFL from that company at a rate/lower than the market rate.
The learned counsel for the assessee also brought our notice a glaring mistake made by the AO in the assessment order when he stated that in the year ended on 31st March, 1982, the net profit of MWP Ltd., rose to Rs. 1120 lakhs i.e., 25 times the figure of net profit earned by that concern in the year ended on 31st March, 1980. This point has been discussed by us earlier also. Actually the figure of net profit of MWP Ltd., for the year ended on 31st March 1982, was Rs. 120 lakhs only. Thus, the learned counsel 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 from 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 subleased 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 benefited 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 expenses incurred by the assessee. There is no doubt about the genuineness of the expenses and the Department has also not claimed that the payment was a sham one. This is evidenced by the fact that McDowell had shown the entire payments in its own accounts as its trading receipts. It may be that there might have been some overall planning on the part of the group as a whole to promote MWP Ltd., as the viable company. Leasing of industrial licence by the assessee in favour of MWP Ltd., and subsequent transfer of the plant and machinery and technical know-how received by the assessee from McDowell, also to MWP Ltd., might be a result of thinking in this line. But it is also a fact that the assessee, by itself, had not indulged in the manufacturing process. However, as pointed out by the learned counsel for the assessee, the object clauses in the memorandum of association of the assessee envisage building up of a manufacturing plant and carrying on the manufacturing operations. The assessee had obtained the manufacturing licence quite long back in 1974. At that time MWP Ltd., had not at all come into existence. It will, therefore, not be possible to say that the manufacturing licence had been obtained by the assessee solely with the purpose of transferring the same at a later date to MWP Ltd. On the other hand, the more plausible reasoning would be that the assessee was trying to prepare itself for carrying on the manufacturing operations by itself. It is also noteworthy that the assessee gradually went on acquiring assets like land and building and also an orchard (though not a grape orchard in practical sense) for this purpose. The explanation given by the assessee that on account of strong inclination of the newly set up Janatha Government in favour of prohibition, the assessee decided to transfer the same, can also be accepted. That is perhaps the reason why the assessee applied for transfer of the industrial licence in favour of MWP Ltd., in December, 1978. It is, however, a fact that the said transfer was not sanctioned by the State Government even within a period of two/three months. The option was, therefore, still available to the assessee for carrying on the manufacturing operations on its own. It may, therefore, be considered that the assessee, which did not have any experience in the manufacturing line at all, approached McDowell for technical know-how and also 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 got 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 of McDowell were laid out wholly and exclusively for the purpose of the business of the assessee. As discussed by us earlier, the assessee, till had the option of venturing into the manufacturing operations even in the month of March, 1979, and that is the reason it entered into the agreements under consideration. The agreements may, in the worst, be considered to be the result of an imprudent action on the part of the assessee but there is no denying of the fact that the agreements had in fact been entered into for the genuine business purpose of the assessee. It is the fact that the assessee ultimately did not carry on the manufacturing operations on its own. But even at that stage also, had the agreements been not acted upon, the assessee would have been liable to charge of damage as per the agreements with McDowell. Furthermore, the activity on the part of the assessee to transfer the technical assistance and also the plant and machinery in favour of MWP Ltd., has also been considered by the Department to be of the nature of business activities only. The amounts received by the assessee from MWP Ltd., on this account have also been assessed as business income of the assessee. Therefore, the expenses laid out for earning such business income are also considered as allowable in accordance with the provision of s. 37(1).
Another relevant point discussed by the CIT (A) in his order is that there is nothing on record to show that the amounts paid by assessee to McDowell by themselves were above the market rates. The Departmental case is that the assessee actually received less amounts for transfer of the benefits to MWP Ltd. The said transfer, however, came at a later point of time. Had that transfer not taken place at all and the assessee was obliged to pay the amounts under consideration to McDowell by making arrangements on its own to carry on the manufacturing operations, would the payments have still been considered as disallowable ? The attacks against the payments made by the assessee have been made by the Department solely on the ground that there was no commensurate return from MWP on the same facilities. It might have been that as a result of the agreement between the assessee and MWP Ltd., which was entered into at a later point of time, the assessee would have been entitled to better returns from MWP Ltd., than what it had to pay to McDowell. Whether in such case also, the expense by way of making payment to McDowell would have been considered as disallowable under 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 under s. 37(1). There cannot be any doubt about the fact that the question of allowability of the payments under 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 transactions by way of transferring the facilities obtained from McDowell to MWP Ltd., are also ultimately of 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 allowability of the expenses, the reasonableness of the amount cannot be challenged, as has been laid down by the various Courts in some of the decisions as mentioned above. Furthermore, that in the process, some benefit might have enured to MWP Ltd., is of no concern in deciding the issue of allowability of the expenses in the hands of the assessee itself.
It has nowhere been shown by the Department that the arrangement has resulted in reduction in the tax liability of the three companies taken as a whole. The possibility of reduction in the sales-tax liability is a very remote one. If sales-tax liability is reduced, income-tax liability gets increased correspondingly. The decision of the Supreme Court in the case of McDowell & Co. (P) Ltd. (supra) cannot be considered to be relevant in the context of reduction of sales-tax liability, if at all, while deciding the issue relating to allowability of an expense for income-tax purpose. Hence, we are of the view that the above decision of the Supreme Court is certainly not applicable to the present case. The arrangements under consideration may, in the worst, be considered to have been thought over by the group as a whole with some definite plan and purpose. The arrangements cannot, however, be considered to be colourable, sham or a device to reduce the tax liability of the companies under consideration. Taking into consideration all these facts, we are ultimately of the opinion that the actions of the CIT(A) in allowing the expenses under consideration for all the three years as business expenses and in deleting the disallowances made under s. 37(1) are justified. We uphold the same.
13. The next appellate ground common to all the years relates to the deletion, by the CIT(A) of the disallowance of the amounts of Rs. 23,93,995, Rs. 47,87,362 and Rs. 1,42,18,031 being interest payments claimed to have been incurred by the assessee to McDowell. The above mentioned amounts of payments required to be made by the assessee to McDowell on account of lease rent of the plant and machinery and also the technical know-how fees are found to have been credited to the accounts of McDowell and not actually paid. The interest as above, accrued on the same. The learned counsel for the assessee has asserted that considerable parts of the interests are also constituted by interests accruing on unpaid balances of purchase prices of liquor and wine, 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 under 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 provision of charging interest by the assessee on the unpaid balance 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 question. Interests were provided for by the assessee in its accounts in favour of McDowell on the unpaid balances consisting partly of the payment required to be made under the two agreements dt. 8th March, 1979 and partly on the unpaid purchase price of liquor and wine by the assessee from McDowell. There is no reason why such interest payments cannot be allowed. If there was no provision in the agreement between the assessee and MWP Ltd. for not charging of interest by the assessee on the unpaid balance of MWP Ltd., that by itself cannot serve a good ground for disallowance of the interest payments under consideration. Mainly because of the reason that we have already allowed the main payments under the two agreements dt. 8th March, 1979 it will be required to allow the interest payments also. No challenge has been made by the Department about the amount of interest charged or the reasonableness of the rate. In consideration of all these facts, therefore, we hold that the CIT(A) was right in allowing the claims of interest payments also. We uphold his actions in this regard.
14. The next common ground relates to disallowances of the claims of depreciation of Rs. 7,27,347, Rs. 8,23,023 and Rs. 9,99,567 for the three years respectively. One of the Departmental contentions is that the assets on which depreciation has been claimed did not belong to the assessee. The learned Departmental Representative has placed reliance on the two decisions of the Karnataka High Court in the case of CIT vs. Bharat Gold Mines Ltd. (1991) 192 ITR 639 (Kar) and Ramkumar Mills (P) Ltd. vs. CIT (1989) 180 ITR 464 (Kar) in support of the Departmental contention.
The learned counsel for the assessee, however, strongly contended that the assessee did not claim depreciation on the assets belonging to McDowell and leased out to assessee. It has been contended that depreciation was claimed simply on the assets owned by the assessee itself. If the above claim of the assessee be correct, there is no reason for disallowing the claim of depreciation on such assets especially when it has been established that the assets leased out by the assessee to MWP Ltd., also gave rise to some business income. However, a factual verification about whether the assets on which depreciation has actually been claimed, belonged to the assessee or not seems to be necessary. We, therefore, remit this matter back to the file of the AO for examination as to whether 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 asst. yr. 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 30th Sept., 1982, the assessee showed income of Rs. 4,53,83,725. Revised return of income was, however, filed on 30th July, 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 P&L account for the year ended on 30th June, 1983, i.e., asst. yr. 1984-85. It is worthwhile to mention in this connection that there was no income or assessment of assessee for asst. yr. 1983-84 on account of change of the previous year from March ending to June ending. The assessee tried to explain before the AO that it had made huge purchases of liquor from McDowell including from branches of McDowell in Andhra Pradesh, where the assessee also maintained a branch office. McDowell developed a system of making its customers pay the excise duty component on the liquor directly to the Excise Department; and not including the said excise duty component in the sale bill made by it to the customer, thereby saving sales-tax thereon. This went on for some time and when the Sales-tax Department understood the modus operandi followed by McDowell to avoid sales-tax, it made an issue of the matter. The matter went up before the Andhra Pradesh High Court, which decided the case that whosoever paid the excise duty, it was part of the sale price of the liquor and sales-tax was leviable thereon. The above High Court decision was dt. 6th Dec., 1982. Consequently, McDowell has intimated the clients in about May, 1983 that they should be ready to pay relevant sales-tax to McDowell if their case fails before the Supreme Court also and that the customer should make necessary provision in the customers' accounts. The assessee, thus, claimed that the present issue related to the claim of sales-tax payable to McDowell relating to asst. yr. 1982-83.
The AO disallowed the claim of the assessee on various grounds, the principal ones out of which were that the liability was not statutorily quantified and no actionable demand had been raised against the assessee; that McDowell had schemed to avoid sales-tax incidence and hence, a customer of McDowell is not responsible, unless it is made a condition in each sale bill, involving the customer also in the scheme of avoidance, that the sales-tax is incidental on sale and payable by the vendor whether or not he collected it from the customer, having chosen not to collect that portion of claim as remote from sale, and finally that in any case, the claim was a premature claim made in asst. yr. 1982-83.
When the matter went up before the CIT(A) it was represented before him that an understanding had been reached between the assessee and McDowell in the form of an agreement dt. 1st Nov., 1981, and that according to para 8 of the said agreement, the assessee was required to bear the sales-tax liability. The learned representative of the assessee argued before 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 dt. 1st Nov., 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 dt. 1st Nov., 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 reassessment order that the above agreement dt. 1st Nov., 1981, between the assessee and McDowell had never been brought to the notice of the ITO and that he had no occasion to consider this. This issue was tried to be made by the learned Departmental Representative also in his arguments before us. However, since the CIT(A) himself, in the earlier appeal before him, had directed the AO to consider this agreement, we are of the view that no purpose would be served by challenging the relevance of the agreement before us. The AO found out that the only correspondence letter filed was McDowell's letter dt. 28th Feb., 1983, in which the assessee had been asked to provide for sales-tax liability in its accounts upto 30th June, 1983, on the basis of the Andhra Pradesh High Court's judgment dt. 9th Dec., 1982. A copy of the debit note prepared by the McDowell against the assessee dt. 30th June, 1985, was also filed before the AO. As per this, the sales-tax on excise duty on despatches made from 27th Aug., 1981, to 7th July, 1983, payable by the assessee-company was shown at Rs. 2,08,63,386. This debit note was sent by McDowell to the assessee-company along with its letter dt. 6th Dec., 1985. It was clarified by the representative of the assessee before the AO that in the return filed for asst. yrs. 1982-83 and 1984-85, the total amount claimed towards its liability was Rs. 2,64,33,633 on the basis of the provisional calculation. The present claim at a reduced figure was stated to be with reference to the auditor's certificate.
In the reassessment order, the AO reiterated the points taken up by his predecessor in the original assessment order. He held that those grounds were still valid even in the reassessment proceedings and that the CIT(A) had not disturbed those findings. The AO, thereafter, discussed the cl. 8 of the agreement dt. 1st Nov., 1981, in detail (to which we shall be returning later on). He stated that the allowability of the liability under the said clause depended on the following two contingencies :
(i) In the event of the Government of Andhra Pradesh treating the excise duty paid by the buyer as part of the turnover of the seller and demanding sales-tax and other charges, and
(ii) on sufficient proof being furnished by the seller, to the buyer in this regard.
17. The AO contended thereafter that the Department was made aware of the liability of the assessee towards sales-tax for the first time in the revised return filed on 28th July, 1984. He also discussed that the copy of the letter dt. 28th Feb., 1983, by McDowell did not even mention 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., 1st Nov., 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 before him, the CIT(A) discussed that an identical issue had arisen in the case of MWP Ltd., and that it had been decided by the CIT(A) dealing with the appeal in that case in his order dt. 5th Oct., 1989, for asst. yr. 1982-83 itself that similar claim of sales-tax liability was allowable in the hands of MWP Ltd. The CIT(A), thereafter, stated that for the detailed reasons given by the learned CIT(A) in the other case, with which he ultimately agreed, he would be deleting the disallowance of Rs. 71,80,558.
19. A copy of the order of the CIT(A) in the case of MWP Ltd., has not been placed on our record by either of the sides. Hence, we are not in a position to decide the issue on the basis of the discussions made in the said appellate order. However, we propose to decide the same on the basis of the facts on our record.
20. The learned Departmental Representative has strongly relied upon cl. 8 of the agreement, dt. 1st Nov., 1981, between the assessee and McDowell which reads as under :
"It is hereby agreed by the buyer (assessee) that in the event of the Government of Andhra Pradesh treating the excise duty paid by the buyer as part of turnover of the seller (McDowell) and demanding Sales tax and other charges on the excise duty, the buyer hereby agrees with the seller to reimburse the sales-tax and other charges payable by the seller to the Government of Andhra Pradesh on sufficient proof being furnished by the seller to the buyer in this regard."
The learned Departmental Representative has harped on the discussions made by the AO in the reassessment order to the effect that the two conditions, as stated to be present in the above mentioned clauses, were not satisfied during the relevant year and that they can be considered to have been satisfied either by the order of the Andhra Pradesh High Court or on sending of the debit note by McDowell to the assessee at a much later date. In support of his contentions, he has relied upon the following three decisions :
(i) Mysore Lamp Works Ltd. vs. CIT (1990) 185 ITR 96 (Kar)
(ii) P. K. Mohammed (P) Ltd. vs. CIT (1986) 162 ITR 587 (Ker)
(iii) Rajasthan State Mines & Minerals Ltd. vs. CIT (1994) 208 ITR 1010 (Raj) It has been held by the Karnataka High Court in the case of Mysore Lamp Works Ltd. (supra) that the amount to be set apart under s.
15(1) of the Payment of Bonus Act, 1965, is not to discharge any present liability at all. In this case as well 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 in 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 Departmental Representative also relied upon the decision of this Bench of the Tribunal dt. 21st Aug., 1995, in ITA No. 746(Bang)/1994 in the case of Bharat Electronics Ltd., and one dt. 7th Sept., 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 cl. 8 of the agreement under consideration. The same also depends on how the liability was foisted on McDowell itself for the first time. It is found that actually the Andhra Pradesh Government amended its Distillery Rules w.e.f. 4th Aug., 1981, foisting the liability towards sales-tax on excise duty component on sellers like McDowell. Although later on, the validity of the said amendment done by the Andhra Pradesh Government was upheld by the Andhra Pradesh High Court, it cannot be said that the liability itself was created by the decision of the Andhra Pradesh High Court. The liability on the part of McDowell must be considered to have originated as soon as the Distillery Rules were amended w.e.f. 4th Aug., 1981. The later judgment of the Andhra Pradesh High Court and also the subsequent acts on the part of the Sales-tax Department of Andhra Pradesh Government in making actual claims on McDowell must be considered to be procedures relating to quantification of the liability of McDowell. This point has clearly been held by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC).
However, although the liability towards payment of sales-tax by McDowell was of the nature of a statutory liability enforceable from the date of amendment of the Distillery Rules under consideration, yet, so far as the assessee is concerned, there was no statutory liability on it. On the other hand, the assessee was under a contractual liability by virtue of the agreement between it and McDowell dt. 1st Nov., 1981. We have already discussed that much happens on the interpretation of clause of the aforesaid agreement, which has been extracted above. The Departmental authorities seem to be wanting to interpret this particular clause with a future connotation, suggesting that if in future Government of Andhra Pradesh would treat the excise duty paid by McDowell as part of turnover of McDowell and demand sales-tax and other charges on the excise duty, the assessee would be liable to reimburse to McDowell the sales-tax and other charges payable by it to the Government of Andhra Pradesh. However, this particular clause can be interpreted with a present connotation also. It may be held that this particular clause states that the assessee agrees on the basis of the Government of Andhra Pradesh already treating the excise duty paid by McDowell as part of turnover of it and demanding sales-tax and other charges on the excise duty, etc. The expression "in the event of" can be used both in the sense of a future connotation as well as of a present connotation. 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 cl. 8 of the aforesaid agreement dt. 1st Nov., 1981, is to be interpreted in the sense that by virtue of amendment of the Distillery Rules by the Andhra Pradesh Government w.e.f. 4th Aug., 1981, the Government of Andhra Pradesh 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 4th Aug., 1981, and that of the contractual liability on the assessee would be 1st Nov., 1981. The fact that the assessee was not in a position to quantify the liability in this year and hence to provide the same in the accounts of this year, is of no relevance as has been decided by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) Furthermore, McDowell was disputing the said liability before the Andhra Pradesh High Court also does not go against the allowance of the statutory liability in the hands of McDowell. We are, therefore, finally of the opinion that although the proper quantification of the liability in the hands of the assessee by way of sending of a debit note by McDowell to the assessee came at a much later point of time, the liability must be considered to have accrued to the assessee by virtue of the agreement dt. 1st Nov., 1981. Again, the learned Departmental Representative has tried to raise a point that although the agreement was dt. 1st Nov., 1981, the assessee had claimed liabilities starting from the months of August, 1981 onwards. This point is not readily understandable. Once the agreement is entered into between the two parties, the statutory liabilities which had come into operation on McDowell at a slightly earlier point of time, will have to be taken care of by the assessee by virtue of the aforesaid agreement, although no specific mention about retrospective operation of the stipulation be mentioned in the agreement. It is required to be mentioned in this connection that in cases of Bharat Electronics Ltd. and HMT Ltd., also, the Tribunal had discussed that when the agreement between the employees and the Government would come into effect or that the companies would declare their schemes for allowing increased remuneration to their employees with retrospective effect, the entire liability for the earlier periods would have to be allowed in the year in which the agreement was actually entered into or the companies passed orders.
22. Taking into consideration all these facts, we are of the view that the CIT(A) rightly allowed the claim of sales-tax liability to the assessee for asst. yr. 1982-83.
However, a point has been raised by the learned Departmental Representative about actual quantity of the liability to be allowed in this connection. A reference has been made to the points made by the assessee that although on the basis of provisional calculation, total liability of Rs. 2,64,33,663 had been claimed for asst. yrs. 1982-83 and 1984-85, later on however, the assessee restricted its claim to Rs. 2,08,63,386 only for these two years. It is quite likely that the liability of the assessee towards sales-tax for the asst. yr. 1982-83 would also change and gets reduced accordingly. The matter is, therefore, being sent back to the file of the AO with a direction that he actually calculate the liability pertaining to the asst. yr. 1982-83 and allow the same in place of the earlier claim for Rs. 71,80,558.
23. In the result, the Departmental appeals are partially allowed to the abovementioned extent.