CIT vs. Khoday Breweries Ltd. (2016) 382 ITR 1 (SC)
Agreement – The fact that the agreement is with a retrospective effect, would not make it a sham transaction
The assessee, a manufacturer of liquor, in course of business used to sell liquor to dealers in sealed bottles with proper packing. The question whether the assessee was liable to pay sales tax towards bottles and packing material supplied to the dealers was a debatable question. Therefore, in order to safeguard the business interest, the assessee had collected certain amounts towards the doubtful tax liability. The assessing authority for the assessment years 1988-89 and 1989-90 had found that the amounts received from the dealers towards doubtful liability was a disguised collection of additional sale price and that the books of account of the dealers showed that payment of this additional amount was a part of the sales price. Therefore, the assessing authority held that the amount received towards anticipated tax liability was subject to assessment for tax.
The assessee had taken the premises of its sister concern along with machinery, i.e., the boiler (furnace) for manufacture of liquor. The warranty of life span of the boiler was said to be 6 to 7 years. In the term of lease, the rent was agreed at Rs.52,50,000 per annum for the above assessment year. The boiler went out of order. The lessor revamped the equipment and machinery. Accordingly, the assessee entered into a fresh agreement with lessor to enhance the rental to Rs.90,00,000 per annum. The assessing authority found that the enhanced agreement was a sham agreement and rejected the claim for deductions.
In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the assessing authority and held that the amount received towards doubtful tax liability were liable for assessment of tax. With regard to enhancement of lease rent, the Commissioner of Income-tax held that towards part of cost of revamp of equipment, the assessee was entitled for deduction of Rs.12,50,000. The balance of enhanced amount of lease was held as sham and was liable for tax.
The Tribunal in appeal held that on both the questions, the assessee was not liable to tax since the amount received towards doubtful tax liability was refundable to the dealers. Therefore, it was not in the nature of income for tax. So also in respect of enhanced rent, it was found that in view of revamp of the machinery, fresh rent agreement was entered into warranting the payment of higher rent and the said agreement is not a sham transaction. The appeal filed by the assessee was allowed accordingly. The appeal filed by the Revenue before the Tribunal regarding grant of partial deduction in the rental amount was dismissed.
At the hearing of the reference/appeal filed by the Revenue before the High Court, it was a categorical contention of the assessee that the amount in dispute was received from the dealers towards the doubtful tax liability. The asessee had also let in evidence of the dealers before the assessing authority that the advance amounts received had been refunded to them.
The High Court held that the liability to pay sales tax towards bottle and packing material was a doubtful question open for debate. Later on the assessee had refunded the amount to the dealers. In that view, the findings of the Tribunal that the said amount did not attract tax liability was sound and proper. Further, the documentary evidence disclosed that during the assessment year in question, the machinery was revamped. In that view, a fresh agreement was entered into to pay higher rent of Rs.90,00,000 instead of Rs.52,50,000. The fact that the agreement was with retrospective effect, would not make it a sham transaction. The lessor was also an assessee. The amount paid has been accounted by the lessor in installments. Therefore, the assessee was entitled to legitimate deduction towards the enhanced rent.
On a SLP being filed by the Revenue, the Supreme Court held that in view of the factual determination made by the High Court that the amounts realised to meet the contingent sales tax liability of the assessee had since been refunded to the persons from whom the same was collected and also a finding had been reached that the agreement enhancing the lease rent was not a sham document, it found no ground to continue to entertain the present special leave petition
