Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1980-81 and 1981-82 - Assessee, 'MW' and 'MD' were sister concerns engaged in manufacturing and selling of Indian Made Foreign Liquor (IMFL) - Assessee entered into two agreements with 'MD' - Under one agreement, assessee acquired certain plant and machinery belonging to 'MD' for which they agreed to pay amount of Rs. 4 lakhs per month as hire charges - Under another agreement, 'MD' was to provide to assessee its know-how and other technical advise in line of manufacture of liquors and wines and assessee was to pay Rs. 4 lakhs per month to 'MD' for know-how - Thereafter, assessee transferred plant and machinery taken by it on hire from 'MD' along with technical know-how to 'MW' - Under said contract, 'MW' had to pay Rs. 2 lakhs per month for utilising facilities offered by assessee - Assessee claimed deduction of expenditure incurred by way of hire charges and consideration for transfer of know-how - Assessing Officer observed that entire arrangements, for giving higher amounts by assessee to 'MD' and at same time charging much lower amounts from 'MW', had been entered into for reducing tax liability of group as a whole and disallowed assessee's claim - Tribunal found that 'MD' had shown entire payment in its own accounts as its trading receipts and it had paid tax and allowed assessee's claim - Tribunal also allowed interest shown as payable to 'MD' on unpaid balances - Whether, on facts, Tribunal was justified in doing so - Held, yes FACTS The assessee, 'MW' and 'MD' were sister concerns engaged in manufacturing and selling of the Indian Made Foreign Liquor (IMFL). The assessee applied to the State Government for a licence to produce IMFL and it obtained the licence. Thereafter, the assessee applied to the Excise Commissioner for transfer of the manufacturing licence by way of lease in favour of its sister concern 'MW'. When the said application for transfer was pending before the Government, the assessee entered into the different agreements with another sister concern, 'MD'. Under one agreement, the assessee was to take on hire basis certain plant and…

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