Questions before the High Court was ;

(1)“Whether the Tribunal was justified in holding that the Distributable Surplus paid by the Respondent Assessee ,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 30/10/2007between , 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 ,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 hands of Diageo India Private Limited   who under the said Agreement dated 30/10/2007 supplied the Working Capital, Raw Materials and concentrates and right of user of Trade Marks and Brands to the Respondent Assessee on whether the income earned out of the said liquor business will still be taxable in the hands of the Respondent Assessee Chamundi   ?

After discussing various case laws the Court held that ;

question No.1 is answered in favour of the Revenue and against the Assessee and we hold that the “distribution of surplus” by the Assessee  Chamundi Winery and Distillery to Diageo India Private Limited in pursuance of the Agreement dated 30/10/2007 was an “application of income” by the Assessee Chamundi and the same was not an ‘allowable expenditure’ under Section 37 of the Income Tax Act of 1961.

[2] The substantial question No.2 is also answered in favour of the Revenue and against the Assessee and we hold that the terms and conditions of the Agreement dated 30/10/2007 between  Chamundi Winery and Distillery to Diageo India Private Limited  did not amount to “diversion of income at source by overriding title” in favour of  Diageo India Private Limited  because, the entire business under Excise licence in favour of the Respondent Assessee Chamundi was in fact  carried on by Chamundi only and the profits and gains arising out of such business were liable to tax in the hands of the Assessee  Chamundi Winery and Distillery .

[3] The substantial question No.3 is also answered in the following manner that the manner of accounting entries and the Method of Accounting in the Books of Accounts maintained by the Assessee Chamundi Winery and Distillery as well as  Diageo India Private Limited  will not alter and determine the taxability and character of “real income” arising and accruing in the hands of the Assessee Chamundi Winery and Distillery   in the present case and irrespective of any change of Method of Accounting, in all the Assessment Years in the present Appeals, the income from business of manufacture and sale of Liquor will be taxable in the hands of the Assessee Chamundi Winery and Distillery  .(ITA.No.155/2016, dt. 25.09.2018)( AY. 2008 -09 to 2012-13)

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