1996 (2) TMI 169 - AT - Income Tax

Assessing Officer, Assessment Year, Business Income, Business Loss, Excise Duty, High Court, Plant And Machinery, Tax Liability, Wholly And Exclusively

Summary

Issues Involved:
1. Disallowance of payments made to McDowell under Section 37(1) and Section 40A(2).
2. Disallowance of interest payments to McDowell.
3. Disallowance of depreciation claims.
4. Allowability of sales-tax liability for the assessment year 1982-83.

Detailed Analysis:

1. Disallowance of Payments Made to McDowell under Section 37(1) and Section 40A(2):
The Tribunal examined whether the payments made by the assessee to McDowell for technical know-how and plant and machinery lease were incurred wholly and exclusively for the purpose of business under Section 37(1). The Tribunal found that the assessee's agreements with McDowell were genuine business transactions and not sham or colorable devices to reduce tax liability. The Tribunal accepted the assessee's explanation that the agreements were entered into due to uncertainty about obtaining government approval for transferring the manufacturing license to MWP Ltd. The Tribunal also noted that the payments were made for genuine business purposes and that the amounts received from MWP Ltd., though lower, were still significant. The Tribunal upheld the CIT(A)'s decision to allow the expenses under Section 37(1), stating that the reasonableness of the payments could not be challenged once the business purpose was established.

2. Disallowance of Interest Payments to McDowell:
The Tribunal addressed the disallowance of interest payments on unpaid balances to McDowell, which included amounts for lease rent and technical know-how fees. The Tribunal noted that the interest payments were genuine and were provided for in the agreements between the assessee and McDowell. The Tribunal rejected the argument that the absence of a corresponding provision for charging interest on unpaid balances owed by MWP Ltd. to the assessee could justify disallowing the interest payments. The Tribunal concluded that the interest payments were allowable as they were incurred for genuine business purposes.

3. Disallowance of Depreciation Claims:
The Tribunal examined the disallowance of depreciation claims on assets. The assessee contended that depreciation was claimed only on assets owned by it and not on assets leased from McDowell. The Tribunal remitted the matter back to the AO for factual verification to determine whether the depreciation was claimed on assets actually owned by the assessee. If the assets were indeed owned by the assessee, the depreciation claims would be allowed.

4. Allowability of Sales-Tax Liability for the Assessment Year 1982-83:
The Tribunal considered the allowability of sales-tax liability claimed by the assessee in the revised return for the assessment year 1982-83. The liability arose due to an agreement with McDowell, which required the assessee to reimburse sales-tax on excise duty if the Government of Andhra Pradesh treated excise duty as part of the turnover and demanded sales-tax. The Tribunal interpreted the agreement clause to mean that the liability accrued when the Government of Andhra Pradesh amended its Distillery Rules on 4-8-1981, making excise duty part of the turnover. The Tribunal held that the liability was contractual and accrued on 1-11-1981, the date of the agreement. The Tribunal directed the AO to calculate the actual liability for the assessment year 1982-83 and allow it accordingly.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on the allowability of payments made to McDowell, interest payments, and sales-tax liability. The matter of depreciation claims was remitted back to the AO for factual verification. The Tribunal concluded that the expenses were incurred for genuine business purposes and were allowable under the relevant provisions of the Income-tax Act.