Questions before the High Court was ;<\/p>\n
(1)\u201cWhether the Tribunal was justified in holding that the Distributable Surplus paid by the Respondent Assessee\u00a0,Chamundi Winery and Distillery to\u00a0Diageo India Private Limited\u00a0in pursuance of the Agreement dated\u00a030\/10\/2007\u00a0between these two parties was not \u2018application of income\u2019, but an \u2018allowable expenditure\u2019 in the hands of the Respondent Assessee under\u00a0Section 37\u00a0of the Act ?<\/p>\n
[ii]\u00a0\u00a0\u00a0\u00a0\u00a0 Whether the terms and conditions of the Agreement dated\u00a030\/10\/2007between\u00a0, Chamundi Winery and Distillery \u00a0\u00a0and\u00a0Diageo India Private Limited ,\u00a0amount to \u2018Diversion of Income at source by over riding title\u2019 in favour of\u00a0Diageo India Private Limited \u00a0\u00a0even though the Excise Licence under the provisions of the\u00a0Karnataka Excise Act, 1965\u00a0during the relevant period was taken in the name of Respondent Assessee\u00a0CHAMUNDI\u00a0and therefore, such\u00a0 profits and gains from the said business of manufacture and sale of liquor by\u00a0,Chamundi Winery and Distillery \u00a0\u00a0was not assessable\u00a0 in its hands ?<\/p>\n
[iii]\u00a0\u00a0\u00a0\u00a0 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\u00a0 Diageo India Private Limited \u00a0will determine the taxability of business income in the hands of\u00a0Diageo India Private Limited \u00a0\u00a0who under the said Agreement dated\u00a030\/10\/2007\u00a0supplied 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\u00a0Chamundi \u00a0\u00a0?<\/p>\n
After discussing various case laws the Court held that ;<\/p>\n
question No.1 is answered in favour of the Revenue and against the Assessee and we hold that the \u201cdistribution of surplus\u201d by the Assessee\u00a0 Chamundi Winery and Distillery\u00a0to\u00a0Diageo India Private Limited\u00a0in pursuance of the Agreement dated\u00a030\/10\/2007\u00a0was an \u201capplication of income\u201d by the Assessee\u00a0Chamundi\u00a0and the same was not an \u2018allowable expenditure\u2019 under\u00a0Section 37\u00a0of the Income Tax Act of 1961.<\/p>\n
[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\u00a030\/10\/2007\u00a0between\u00a0 Chamundi Winery and Distillery\u00a0to\u00a0Diageo India Private Limited \u00a0did not amount to \u201cdiversion of income at source by overriding title\u201d in favour of\u00a0 Diageo India Private Limited\u00a0\u00a0because, the entire business under Excise licence in favour of the Respondent Assessee\u00a0Chamundi\u00a0was in fact\u00a0 carried on by\u00a0Chamundi\u00a0only and the profits and gains arising out of such business were liable to tax in the hands of the Assessee\u00a0\u00a0Chamundi Winery and Distillery\u00a0.<\/p>\n
[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\u00a0Chamundi Winery and Distillery as well as\u00a0 Diageo India Private Limited\u00a0\u00a0will not alter and determine the taxability and character of \u201creal income\u201d arising and accruing in the hands of the Assessee\u00a0Chamundi Winery and Distillery \u00a0\u00a0in 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\u00a0Chamundi Winery and Distillery \u00a0.(ITA.No.155\/2016, dt. 25.09.2018)( AY. 2008 -09 to 2012-13)<\/p>\n