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TMI Blog2018 (10) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the correct perspective of applicability of Indian Tax laws on the income and profits of CHAMUNDI, ought to have provided for deduction of Income-tax payable on its profits and gains taxable in the hands of CHAMUNDI and thereafter from the net balance after deducting entitlements of CHAMUNDI under Clause 16, the balance surplus could only be taken as entitlement of DIAGEO INDIA Pvt.Ltd. 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. 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. 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 Authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, such profits and gains from the said business of manufacture and sale of liquor by M/S. CHAMUNDI WINERY AND DISTILLERY was not assessable in its hands ? [iii] Whether the method of Accounting or entries made in the Books of Accounts by the Respondent Assessee or maintaining the Bank Accounts under the close control and supervision of DIAGEO INDIA PRIVATE LIMITED will determine the taxability of business income in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Hoskote Taluka, Bangalore Rural District. D. CHAMUNDI has represented to DIAGEO INDIA that it has a fully operational Plant and has all requisite consents and facilities to manufacture the Products at the Plant. E. CHAMUNDI has agreed to manufacture and sell the Products under control and supervision of DIAGEO INDIA for the period and subject to the terms and conditions hereinafter recorded. F. The Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts 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 not to dispatch the Products without written authorisation from DIAGEO INDIA. 10. The responsibilities of DIAGEO to provide the Working Capital, Raw Materials and to take important commercial decisions about the quality, quantity, price, delivery schedule, etc. as given in para 7.1 with no right to CHAMUNDI WINERY AND DISTILLERY to use the Intellectual Property of DIAGEO are also quoted be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 used for working capital requirements of CHAMUNDI. DIAGEO INDIA shall ensure that sufficient funds are available in this account especially at the time of issuing cheques. The said bank account(s) shall be used for: (a) the payment for all Raw Materials and Packaging Materials purchased for the purposes of this Agreement as set out in Clause 4.1; (b) the payment of excise duti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding maintenance of book of accounts related to DIAGEO INDIA operations. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought to its notice that the nature of business as discussed in detail already does not permit 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,51,18,500/-. The AO, who had made the assessment for that assessment year, had disallowed the appellant s claim for deduction 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of ₹ 30,51,18,500 is not sustainable in law and on facts of the case and accordingly delete the same . 3.4 The facts 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 ₹ 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 ₹ 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 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 30/10/2007. [II] The learned Senior Counsel for the Revenue submitted that the source of Business Income in the present case is Manufacture and Sale 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 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before it reaches DIAGEO, and which is not the case here, the entire income is liable to be taxed in the hands of the Respondent Assessee and by a colourable device adopted by 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 learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not a case of mere application of income by the Assessee but a diversion at source and therefore the Assessing Authority had erred in imposing tax in the hands of the Assessee on the entire 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 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee CHAMUNDI in the present case was the Excise Licencee under the provisions of the Karnataka Excise Act, 1965 and DIAGEO had no Excise Licence in its name from the State during the relevant assessment period. 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me arising or accruing firstly, in the hands of the Respondent Assessee CHAMUNDI for the period in question. 28. We cannot appreciate the argument of the learned counsel for the Assessee that if it is not a case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was undertaking the entire business activity of manufacture and sale of liquor in its name and ownership. It not only had Bank Accounts in its name, purchased raw materials from market, sold entire liquor to KSBCL 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income at the time when it was paid to him and no trust or obligation in the nature of a trust was created at that time and when the assessee created a trust by executing the trust deed he applied part of his professional income as trust 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 ₹ 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third proviso to section 16(1)(c) applied and the dividend which his wife received could not be deemed to be his income under section 16(1)(c) and that in his case section 16(3) did not apply, because there was no transfer of the shares to his wife. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s quoted below for ready reference:- The assessee was a partner in a firm having a 10 per cent. share therein. He created a trust by a deed of settlement assigning 50 per cent. out of his 10 per cent. right, title and interest (excluding capital) as a partner in the firm and a sum of ₹ 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 attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere purchased and sold to Indian Bank for which Bank of Madura charged service charges. The Respondent was paid commission in respect of transactions done on behalf of Indian Bank. Under instructions from Indian Bank, a portion of the amount realized from the security transactions 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 ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent held the said amount in trust to be paid to the public sector units on behalf of the Indian Bank based on prior understanding reached with the bank at the time of sale of securities and, hence, the said sum of ₹ 14,73,91,000/- cannot be termed as the income of the Respondent. 46. This 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 ₹ 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 ₹ 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Commissioner of Income Tax Vs. Madras Race Club [2003] 126 Taxman 6 (Mad), dealt with a similar controversy involved before them in the following manner:- The payments made are compulsory exactions, which if not complied with will result in the disqualification altogether of the person, who has subjected himself 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch form part of its income. The execution of a trust deed and the inclusion of a provision in the rules of racing for crediting the sums to the benevolent fund was merely the application of a part of the income of the assessee for benevolent purpose. Creation of the benevolent fund by the trust deed and the provision made for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (SC) 197-200 39. CIT Vs. Bokaro Steel Ltd 236 ITR 315 (SC) 240-245 Sl.No. CASE LAWS ON DIVERSION BY OVERRIDING TITLES Page No 3 CIT Vs. Sitaldas Tirathdas 41 ITR 367 (SC) 12-16 4 CIT Vs. Pompie Tile Works 175 ITR 1 (Kar) 17-19A 5 CTI Vs. Dharma Productions (P) Ltd 153 ITR 105 (Bom) 20-27 6 Raja Bejoy Singh Dudhuria Vs. CIT 1 ITR 135 (Privy Council) 28-31 9 CIT Vs. Nagarbail Salt-Owners Co-Op Society Ltd 291 CTR 287 (Kar) 48-53 22 DCIT, Vs. T. Jayachandran Civil Appeal No.4341 of 2018 dated 24.04.2018 (SC) (2018) 406 ITR 1 SC) 123-137 23 CIT Vs. Sunil J Kinariwala [2003] 259 ITR 10 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Kashiram Radhakishan Vs CIT 155 ITR 609 (Raj) 201-206 32 DN Sinha Vs. CIT 102 ITR 491 (Cal) 207-211 45 Asis Power Projects Vs. DCIT 370 ITR 256 (Kar) 273-277 41 Badridas Daga Vs. CIT 34 ITR 10 (SC) 257-262 42 CIT Vs. Mysore Sugar Co Ltd 46 ITR 651 (SC) 263-266 43 CIT Vs. Y V Sreenivasa Murthy 63 ITR 306 (Kar) 267-269 44 Harshad J Choksi Vs. CIT 349 ITR 250 (Bom) 270-272 46 Ramchandar Shivnarayan Vs. CIT 111 ITR 263 (SC) 278-283 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income-tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principle of the Income-tax Act, 1961 and to its scheme and spirit. Held ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the Income-tax Act must be complied with. Where a ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:- 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 assessee-firm came into existence only by creating a pre-existing charge at source. The amount paid to M was diverted at source and did not form part of the assessee s income. CIT v. Sitalda Tirathd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plus 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 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. Another test is whether the transaction is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 926] 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 expressed by the British courts. It is urged that McDowell s case [1985] 154 ITR 148 (SC) has taken a new look at fiscal jurisprudence and the ghost of Fisher s cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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) 69. In a recent decision, the Court of Appeal (Civil Division) in England in the case of Chappell Vs. Revenue and Customs Commissioners [2017] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entering into genuine arrangements. [68] Secondly, it might be said that transactions must always be viewed realistically, if the alternat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries 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. Besides the issues of the legality of the Agreement, the real intention of the parties should be ascertained as to see whether such ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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