High Court Of Karnataka
DCIT vs. Mcdowell & CO. LTD.
Sections 36(1)(iii), 37(1)
Asst. Year 1994-95
R. Gururajan & N. Ananda, JJ.
IT Appeal No. 12 of 1999
15th September, 2006
Counsel Appeared
R.B. Krishna, for the Appellant : Arvind P. Datar for S. Parthasarathi, for the Respondent
JUDGMENT
R. Gururajan, J. :
This appeal is by the Revenue. Respondent filed his return of income for the asst. yr. 1994-95 on 8th June, 1995. The Department processed the return filed under the provisions of s. 143(1)(a) and as per intimation dt. 30th Oct., 1995 made a number of prima facie adjustments to the return filed. Such intimation dt. 30th Oct., 1995 was rectified under s. 154 of the Act in terms of an order dt. 13th Feb., 1996. Assessee filed an appeal against the intimation order dt. 30th Oct., 1995 before the CIT(A), who as per the order dt. 27th June, 1996 partly allowed the appeal. Assessee filed a second appeal to the Tribunal. The Tribunal allowed the appeal filed by the respondent. The Tribunal in this appeal basically considered as to whether the prima facie adjustments made by the appellant in its intimation were acceptable or not. The Tribunal was concerned with the merits of these adjustments made by the Department. Subsequently, the Department passed an order under s. 143(3) of the Act. After hearing the assessee, additions were made in terms of an order dt. 31st March, 1997. An appeal was filed against the order passed under s. 143(3) before the CIT(A). He disposed of the appeal by allowing the appeal in part. Both respondents and the appellants filed appeals before the Tribunal. The Tribunal allowed the appeal filed by the assessee in part and dismissed the appeal filed by the Revenue. It is in these circumstances, Revenue is before us.
2. The following questions of law are framed by this Court :
“A. (I) Whether the Tribunal was right in deleting the disallowance of interest on advances given by the respondent for the purported purchase of a coffee estate, without noting that such advance was not in the line of business of the respondent and even if such estate were purchased, the income therefrom would be purely agricultural in nature ?
(II) Whether Tribunal was right in law in disposing of the appeal for the asst. yr. 1994-95, when appeals on an identical issue were pending before it for the earlier years ?
B(I) Whether the Tribunal was right in deleting the disallowance of commission purportedly paid to M/s D.C. Johar & Sons, Cochin and M/s Brindo Sales (P) Ltd., Delhi, when the assessee had not produced any evidence to prove that the commission agents had rendered services to the assessee ?
(II) Whether the Tribunal was right in law in disposing of the appeal for the asst. yr. 1994-95, when appeals on an identical issue were pending before it for the earlier years ?
C. Whether the Tribunal was right in allowing the amounts claimed by the assessee as corporate guarantee devolution payments, unmindful of the fact that such claim was made with reference to a counter-guarantee given in favour of a company engaged in a business totally alien to that of the respondent and the fact that such amount was not even debited by the respondent in its books of account for the previous year ended 31st March, 1994, by merely placing reliance on an unconnected earlier order of the Tribunal ?
D. (I) Whether the Tribunal was right in cancelling the disallowance of expenditure incurred on maintenance of aircraft when the assessee had not discharged its primary burden of proof ?
(II) Whether the Tribunal was right in law in disposing of the appeal for the asst. yr. 1994-95, when appeals on an identical issue were pending before it for the earlier years ?
E. Whether the Tribunal was right in allowing the entire quantum of non-competition fee paid to UB Engineering Ltd., without noting that such payment was made to a group concern; for no specified services; and had efficacy for five years ?”
Heard Dr. Krishna learned counsel appearing for the appellant and Sri Arvind Datar, learned senior counsel appearing for the assessee. Advance for purchase of tea estate :
The first question of law is with reference to interest on advance for purchase of tea estate. Dr. Krishna, learned counsel, would argue that the assessee is not entitled for any benefits since the business of estate is not in the line of business of the assessee. He strongly relies on various case laws. On the other hand, Sri Datar, learned senior counsel would support the order by contending that the board of directors and the articles of association support the case of the assessee. It cannot be said that there is a new business as such warranting any interference in the case on hand.
4.1 After hearing, we have carefully perused the material on record.
4.2 The appellant is engaged in liquor business. An advance of Rs. 460 lakhs was made over for the purpose of acquisition of an estate. There has been recoveries from the said concern and accordingly an amount outstanding stood at Rs. 292 lakhs for the previous year relevant to the assessment year under appeal. The amount was advanced at 18 per cent interest. The board resolution passed on 22nd Dec., 1989 authorized the company to invest Rs. 4,79,00,000 excluding stamp duty and registration charges. An agreement was entered into in the light of the board resolution. The CIT(A) after noticing the resolution and after noticing the articles of association was of the view that the assessee cannot said to have acquired a new business and hence he upheld the claim of the assessee. Same was challenged before the Tribunal. The Tribunal has accepted the said order. Let us see as to whether the said order suffers in any way, warranting an answer in favour of the Revenue. Law is well settled in this regard. At this stage, we must also notice s. 36 of the IT Act. It provides for deduction as an expenditure. The only objection is that since this business of purchase of plantation has no nexus with liquor business, assessee is not entitled for any deduction according to the Revenue. The Tribunal after noticing the facts in our view has rightly accepted the case of the assessee.
5. Commission paid to agents : The second question deals with commission paid to M/s D.C. Johar & Sons, Cochin and M/s Brindco Sales (P) Ltd. The AO disallowed the same holding that payments to the above parties could not be established as to have been incurred wholly and exclusively for the purpose of business as the Government authorities control the entire transactions. The said finding was challenged before the CIT(A). The CIT(A) upheld the allowance. When the said order was challenged before the Tribunal, the Tribunal has chosen to accept the case of the Revenue (sic–assessee). Let us see as to whether the Tribunal is right in the case on hand. From the material on record we see that at the relevant point of time, the sales were made directly (to) the Government and Governmental corporations. According to the assessee, the said payment was made in the light of dues arising out of the Court decree for the purpose of better business of the assessee. Several documents were relied upon by the assessee to say that these agents have provided some service and that service is compensated by way of commission, therefore according to the assessee, he is entitled for deduction in the case on hand. The Tribunal has chosen to accept the case of the assessee in respect of these two firms on the ground of some service by these two agents. From the material on record it is seen that agreements that were provided were of the year 1990 and at the relevant point of time, there was a direct sale available in terms of the laws governing at that point of time. It was only thereafter, the Government corporations had the monopoly on purchase of liquor at the manufacturing units. Insofar as commission paid to agents is concerned, they were paid commission for the services rendered in the matter of sale of liquor to canteen stores department of the Indian military. At this stage, as rightly argued by Dr. Krishna, this issue had to be answered against the assessee in the given circumstances in the light of a judgment of the Kerala High Court in ITRC No. 58 of 1997 [reported as CIT vs. Premier Breweries Ltd. (2005) 196 CTR (Ker) 496—Ed.] in similar circumstances. The Division Bench after noticing the relevant facts has chosen to hold in para 7 reading as under : “We are of the view, mere existence of an agreement does not give rise to claim for payment of commission and the IT authorities can go into the question whether the commission paid is properly deductible under s. 37 of the IT Act, 1961.” It was further ruled in para 8 reading as under :
8. We are in full agreement with the reasoning of the assessing authority. We have already indicated that burden is entirely on the assessee to prove those transactions. Agreement entered into between RJ Associates and Golden Enterprises by itself would not advance the case of the assessee. In this connection we may refer to the decision of the apex Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT (1967) 63 ITR 57 (SC) wherein the apex Court dealt with the question whether amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the assessee’s business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. The said principle has been reiterated by the apex Court in Lachminarayana Madan Lal vs. CIT 1972 CTR (SC) 418 : (1972) 86 ITR 439 (SC). The apex Court in the above case held as follows :
‘The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee’s business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the ITO to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under s. 37 of the Act.’ We may also hasten to add if any expenditure spent by the assessee for purposes which has been clearly banned the assessee cannot claim any deduction of the amount alleged to have been spent for such purposes not provided by the authorities. In CIT vs. Sauser Liquor Traders (1997) 142 CTR (MP) 211 : (1996) 222 ITR 33 (MP) the apex Court held that even though illegal transactions might have resulted in profit which may be taxable no deduction for the amount paid by the assessee for illegal purposes can be allowed under s. 37 of the IT Act.”
6.1 The said judgment would be equally applicable to the facts of this case. The Division Bench has noticed a circular dt. 13th July, 1992 prohibiting any canvassing in terms of business of liquor. However, Sri Datar, learned senior counsel would invite our attention to a subsequent circular dt. 24th July, 1992 to say that the said judgment is not to be made applicable in the light of this circular. We do not accept this submission. The subsequent circular dt. 24th July, 1992 does not in any way alter/dilute the situation. The subsequent circular only permits the authorised representatives of suppliers to meet the managers of warehouses for collection of information at a time fixed by the managers suiting to their convenience. That by itself would not alter the situation as sought to be argued by Sri Datar, learned senior counsel. On the facts and in the given circumstances of this case, we are firmly of the view that the allowance by the Tribunal in the case on hand require our interference by way of answering the said question against the assessee and in favour of the Revenue.
7. Devolution of corporate guarantee : The AO has chosen to reject the case of the assessee in the matter of providing relief in terms of this item. When the same was challenged before the appellate authority, the appellate authority also denied the benefit. The matter was taken to the Tribunal. The Tribunal, after noticing the facts, has chosen to accept the case as allowable expenditure. 7 The Supreme Court in CIT vs. Amalgamation (P) Ltd. (1997) 140 CTR (SC) 313 : (1997) 226 ITR 188 (SC) has chosen to consider this issue and the said judgment supports the assessee. In fact this Court in the case of this very assessee has chosen to hold in favour of the assessee in ITRC No. 660/98 dt. 8th [sic–22nd June], 2006 [reported as CIT vs. McDowell & Co. Ltd. (2006) 204 CTR (Kar) 353—Ed.] in somewhat identical circumstances. The said judgment to a certain extent holds good on this issue also. In these circumstances, we deem it proper to answer this question in favour of the assessee and against the Revenue.
8. Non-competition fee : The AO noticed that the assessee claimed an amount of rupees 1 crore as non- competition fee paid to UB Engineering Ltd., for acquiring a distillery at Nasik. It was in the light of the judgment of the Madras High Court in the case of CIT vs. Late G.D. Naidu by LRs. (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad). The annual report also treated this as deferred revenue expenditure. The AO being satisfied allowed only Rs. 20 lakhs and rejected Rs. 80 lakhs in terms of his order. The CIT(A), on challenge, held in favour of the assessee. The Tribunal would hold against the Revenue in the appeal preferred by the Revenue against the allowance of the entire amount by the appellate authority. From the material on record it is seen that the agreement with regard to allowing of Rs. 20 lakhs in the case on hand. All that the CIT(A) has done is to allow the remaining amount on the ground that the said claim is based on the decision of the Madras High Court in (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad) (supra). The Tribunal after noticing the rival contentions came to the conclusion that the expenditure incurred is revenue in nature. If the Department is satisfied that Rs. 20 lakhs spent by the company amounts to expenditure, then how can they question the remaining Rs. 80 lakhs in terms of the proceedings.
The law is same whether it is Rs. 20 lakhs or Rs. 80 lakhs. In these circumstances, and in the light of the acceptance of Rs. 20 lakhs as expenditure, we deem it proper to answer this question of law in favour of the assessee. Aircraft maintenance : The AO noticed that the assessee claimed an expenditure of Rs. 1,02,15,390. The AO refers to various material facts and thereafter he notices that the assessee has not placed any acceptable material with regard to the acceptance of his claim. The AO in the absence of any material on record has chosen to allow the claim to the extent of 75 per cent. On appeal, the appellate authority did not consider the claim in detail. He allowed 25 per cent of the amount as business expenditure. In appeal the Tribunal allowed the entire claim in the light of the question of law framed. We have seen the findings of the Tribunal. The AO and the CIT(A) have chosen not to consider the entire expenses. The Tribunal without discussing the material already available on record has chosen to allow the entire claim by holding that the list of passengers in various trips is unnecessary. The Tribunal in our view has not chosen to bestow its attention to the material facts in granting relief to the assessee. In these circumstances, we are of the view that a further fact finding is necessary for answering this question of law. In these circumstances, we deem it proper to set aside the finding on this issue and remit the matter for redecision to the Tribunal and in the light of the material already available on record. The Revenue has also raised the question with regard to disposal of the appeal for the asst. yr. 1994-95, during the pendency of identical issues for the earlier years before the Tribunal. We are not inclined to answer this question of law in the light of the subsequent passing of orders for earlier years and in the light of those proceedings also pending before us.
In the result, the following order is passed. Questions A(I), (II), C and E are answered in favour of the assessee. Question B(I) is answered in favour of the Revenue. Question D is not answered. The matter is remitted back for reconsideration to the Tribunal. Parties are directed to appear before the Tribunal on 29th Sept., 2006 without waiting for any notice from the Tribunal. Liberty is reserved to the assessee to file additional documents if any before the Tribunal. The Tribunal is directed to consider the material already available on record and the additional material if any and thereafter proceed to pass orders in accordance with law, without in any way being influenced by the earlier order or by this order. All contentions are left open. The Tribunal is directed to complete the proceedings within six months from the date of receipt of a copy of this order.
[Citation : 291 ITR 107]
