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2016 (6) TMI 47 - ITAT MUMBAI

2016 (6) TMI 47 - ITAT MUMBAI - [2016] 47 ITR (Trib) 769 - Treatment of receipt from sale of film scripts - income from other sources OR business income - Held that:- The assessee has failed to place on record any material evidence to controvert the findings of the learned Commissioner of Income-tax (Appeals)/Assessing Officer that the income from sale of film scripts is to be treated as "Income from other sources" and not "Business income" as claimed and consequent disallowance of various expen .....

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discretion in the matter. This proposition has been upheld by the hon'ble apex court in the case of CIT v. Anjum M. H. Ghaswala [2001 (10) TMI 4 - SUPREME Court ] and we therefore uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable, if any, under section 234A, section 234B, section 234C and section 234D of the Act while giving effect to this order. - I. T. A. No. 1007/Mum/2013 - D .....

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services in connection with cine equipment, filed its return of income for the assessment year 2009-10 on September 29, 2009, declaring a nil total income. The case was taken up for scrutiny and the assessment was completed under section 143(3) of the Income-tax Act, 1961 (in short "the Act"), vide order dated November 26, 2011, wherein the income was determined at ₹ 32,00,000 by treating the receipt for sale of film scripts as income from other sources instead of income from bu .....

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(Appeals) failed to appreciate that the assessee-company was in process of producing feature film, which was unable to do due to finance as well as non- availability of artists, preferred to sell the script, all this to attain the main objects of the company and to keep the company running with activity. The individual activity and the entire film making is very well covered under the main objects of the company, therefore, it should have been treated as normal business income instead of income .....

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expenses are still valid expenses to be adjusted against the income of the company to arrive the net profit of the company. 3. It is prayed that the above additions be deleted. 4. The learned Assessing Officer had erred in charge of interest under section 234A, section 234B, section 234C and section 234D of the Income-tax Act, 1961. 5. It is further prayed that the recovery proceedings may be stayed by your honour looking to the facts of the case. 6. It is further prayed that the appeal may be .....

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egistered post with acknowledgment due has not elicited any response from the assessee. Today, i.e., April 21, 2016, when the case was called for hearing, none was present for the assessee but the learned Departmental representative was present for the Revenue. In the above factual matrix of the case, we are of the considered opinion that the assessee is not interested in pursuing this appeal seriously and we, therefore, proceed to dispose of this appeal with the assistance of the learned Depart .....

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ing activities which is the main object of the company and, therefore, the income of ₹ 32,00,000 from sale of scripts ought to be treated as normal business income and not as income from other sources as held by the learned Commissioner of Income-tax (Appeals)/Assessing Officer (AO). It is further contended that the learned Commissioner of Income-tax (Appeals) disregarded the fact that all the day-to-day expenses, directors remuneration and other expenses were incurred since the assessee w .....

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79) filed on February 4, 2016, and submitted that all the details therein are part of the records of assessment and that of the learned Commissioner of Income-tax (Appeals). It was pointed out that it is certified that the details at S. Nos. 1 to 6 (pages 1 to 48) have been filed before the authorities below. The learned Departmental representative submitted that the written submission dated October 29, 2012, and November 2, 2012, filed by the assessee before the learned Commissioner of Income-t .....

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e learned Departmental representative submitted that all the relevant details in the assessee's paper book have been already been considered by the authorities below when coming to an adverse finding in the case at hand. It is contended that since the assessee has failed to bring on record any material evidence to controvert the findings in the impugned order, the order of the learned Commissioner of Income-tax (Appeals) be upheld. 5.3.1 We have heard the learned Departmental representative .....

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Officer noted that during the year, the appellant had derived income of ₹ 32,00,000 from sale of cine script to M/s. Pictures Thought P. Ltd. The appellant-company was engaged in the business of providing technical services for cine shooting and the equipment had been sold out in earlier years and, as such, it could not be said that the company was engaged in writing of cine script and the same had never been shown as an asset/work-in-progress by the appellant. The Assessing Officer obser .....

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er sources. Further, since it was held that there was no business activity during the year in the case of the appellant-company, the Assessing Officer disallowed the entire claim of expenses made by the appellant-company, holding that the appellant could not establish the reasonableness of the various expenses claimed. Accordingly, he assessed the entire amount of ₹ 32,00,000 under the head 'Income from other sources', without allowing any expenditure. 3.3 During the course of appe .....

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esaid company. Therefore, there is contradiction in the observation as well as the findings of the learned Assessing Officer that an asset can be there as script of company or it can be under work-in-progress (under making or half cook) in the company. (2) Also in addition to the same, it is a fact that a company being an artificial entity cannot write a cine script. However, script writing is always taken by an individual capacity. The script writing is a human activity. In the next line the ob .....

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t has to be done by its directors/employees/agents of the company. The script will certainly be written by individual or set of individuals or group and it is human activity. But for every activity of the company can be assigned as human activity. Our writing letter to your honour, representing before you is also human activity and we are doing on behalf of the company. With your permission, your honour is sending notice of hearing, hearing us, will apply mind on our submission and finally pass .....

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sly incorrect and will create havoc in legal terms. No company can be run by itself and has to be run by some individuals. Any activity can be said as personal because personal touch is necessary but it is intention that this working is done for company becomes the activity of the company. If Mr. Ratan Tata deals on behalf of the company, he is doing an activity where he is personally involved but it is for the company. Even sales man of the company is selling the product, he is doing activity p .....

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ial partners. However, the script and plots on situations were liked by other directors/producers, so they shown their interest to purchase the script. They wanted us to come on set of the film but directors have refused flatly as they do not wish to work as script writer but ready to sell the script/plotting on situations, dialogues, etc., and agreed that they do not have objection on changes in script/dialogue. In India, it is not so common to purchase film script or idea on particular situati .....

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y services, coaching classes are run as company or corporate entity which are purely domain on human and intellectual activity. (3) It is immaterial to emphasise that the sales has been done by the company, M/s. Film Logic India Pvt. Ltd. Since the asset under We would like to inform your honour that the learned Assessing Officer has without assigning proper reasons and without substantiating reasons, treated the company income as income of one of the directors, Mr. Ajay Tuli. We fail to underst .....

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tivity of hiring and providing technical services in its broad object of film related activities including making of film. But as there was change of technology from mechanical to digital, the company had to sell its equipment as prudent business decision. The company has established contacts and well versed with film and its related activities. The need of the hour was to run the company and its show and not to make it a defunct company. The company had to incur on the staff, AC, electricity, c .....

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ked was of script/plotting of situation/dialogue. It is further submitted that the directors have not taken any film or film related activity in their personal capacity for the last several years and they have always worked for the company and face of the company was used for such activity. The directors have taken directors remuneration as usual, so it was more of even moral binding for the directors to give value back to the company. The directors used company, the staff of company, place of c .....

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s in circulation, so some directors and producers were interested in such projects as their own. They wanted to have full team as script writer but it was flatly refused and finally it was decided that the scripts will be sold on as is where is basis. Right from the beginning it was the activity of the company and not of the individuals. No time it was thought for individuals. In any case this was neither started or at any point of time it was an individual affair. The directors, the staff were .....

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for their own benefit under the normal frame work of Income-tax or law of the land. There was no shift of activity or even thought from individual to company. If at all the directors wanted to start story/script activity even without intention to produce film in their personal name, they would have entitled to all the expenses as incurred by the company. Therefore, there is no revenue loss in either situation if we assess the things from the inception. The directors wanted to run the company, ca .....

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f film/TV/media to fulfil the objects of the company for which the company is formed. Had it was taken activity in their (directors) personal capacity that would have been their personal business/professional activity and would be entitled to all expenses ? So there was not even any kind of thought from tax planning point of view. Therefore, under no circumstances it can be said of individual activity or can be said individual income was diverted to company at any point of time. If name of the c .....

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e interest of directors or the company. Once again we say that no company can be run by itself and has to be run by some individuals. Any activity can be said as personal because personal touch is necessary but it is the intention that this working is done for the company becomes the activity of the company. If Mr. Ratan Tata deals on behalf of the company, he is doing an activity where he is personally involved but it is for the company. Even sales man of the company is selling the product, he .....

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n, then how this income was added to one of the directors. The expenses incurred for day-to-day working, employees, conveyance, rent, telephone expenses, general expenses were not transferred to personal. Just by treating income as personal income, the learned Assessing Officer, has created imbalance as all expenses remains with the company and income is transferred. If that is true and Mr. Ratan Tata or Mr. Birla will have huge personal income because for any decision they have to personally in .....

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we say The learned Assessing Officer was in haste and did not give any reasons for treating the income of one director only and not both directors, who have taken directors remuneration. From where and how, he arrived to such observation Further, the learned Assessing Officer has disallowed all the expenses of the company as the same was not pertaining to the business. How he arrived to such a conclusion. Even a khoka company will also incur some expenses every year. There may be selective disal .....

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ng some expenses still will be justified. Finally, we are surprised how the income is treated in the hands of the company as income from other sources, when the same was treated as individual income and nowhere it is mentioned that it is on protective basis. The company sold the scripts on as is where is basis and received ₹ 32 lakhs as gross income. Out of this, the company has given directors remuneration of ₹ 12 lakhs. The learned Assessing Officer is silent on the same. One incom .....

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d. As some director/producer found the scripts worth trying, they purchase the script as is where is basis, of course all plotting were discussed and explained to them but they were free to do whatever changes they deem fit without our objection. The expenses incurred were on day-to-day activity of the company and besides script, the company tried to make film, had various meetings for film production with financiers, directors, actors and many film related activities they wanted to pursue for h .....

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further submissions, vide letter dated November 2, 2012, as under : 'Re : Who wrote the script and how remuneration was paid The company wanted to produce the film and as team work the directors with one employee to assist have written the film scripts and discuss those scripts with artists/their secretaries, other film directors and film financiers/their agents. The directors were some time discusses those situation or narration to even drivers, employees, film fraternity people who are com .....

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n. The epic centre is film concept to have meeting with film director/actor or technician. To produce a film and to tie up with artist/actors, one has to go with 3-4 ideas to make the film and whichever is liked by the artists ; the film concept is finalised and then it needs further changes as per artists/director/artist's previous track record. During the process the concept/plotting were getting better and better by way discussions and their inputs for additions or modifications. After vi .....

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they cannot produce and if a party is interested in the concept/script, why not sell the script. So it was business decision by the company through their directors to sell the film scripts. Therefore, no remuneration as specific was paid to any of the director or employee which can be assigned as remuneration for writing script. The directors have received director remuneration and employees were getting their salaries for day-to-day company work and idea was to produce the film. The sale of fil .....

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ready to finance for production of film but their condition or point was who is the artist. If we can show acceptance letter from any big/settled saleable artist then they were ready to finance instantly. Last few years, the trend is if we can rope SRK, Salman Khan, Hrithik Roshan, Ajay Devgan, Emran Hashmi, Ranbir Kapoor and few others, then finance is not a problem but they usually accept the film from very reputed and tested production houses and do not take risk with new producers. For smal .....

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uction but could not materialise/finalise. The company must have talked to not less than 8-10 financiers or their agents for either finance for film production or to bring co-producer of the film. As finance was not taken it is not appropriate to take their confirmation. It is relevant to mention that 4-6 years back, the corporate were not there in the film business. Today the corporate companies are biggest source of finance as they pre-purchase the film from very start of production cycle. It .....

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re were two film scripts were sold to M/s. Picture Thoughts Pvt. Ltd. for ₹ 32 lakhs. (a) Film script for super natural thriller-Lady enters into body of lawyer and one after murder. This will be very good with special effects. (b) Film script for underworld romance-Don Daughter is in love with somebody else.' 3.4.1 I have gone through the assessment order, perused the submissions and also discussed the case with the authorised representative of the appellant. The Assessing Officer not .....

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at a company, being an artificial entity, cannot write cine scripts, which is a human activity involving individual. Accordingly, he held that since the asset under consideration was the intellectual work of Mr.Ajay Tuli, one of the directors, the income has to be assessed as income from other sources of the appellant. Consequently, all the expenses claimed by the appellant were disallowed. Simultaneously, the same income was added in the hands of Mr. Ajay Tuli also, as business income. During t .....

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dence with bank or any other financier, in support of its claim that loan was to be obtained for starting film production activity or any such evidence to support the claim that film production business was to be taken up. It would be pertinent to mention here that till date, the appellant has not started the business. These details could not be furnished specifically by the appellant. However, it was claimed that the script was written jointly by the directors and employee of the company. The a .....

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der its own banner but due to paucity of funds, the same was not materialised. Here it would be relevant to mention that the appellant could not substantiate its claim regarding efforts made to get finance. The appellant further claimed that the Assessing Officer's conclusion that the script writing was the intellectual work of Mr. Ajay Tuli was misconceived since there are two directors and both run the company and took directors' remuneration and above all, they were assessed to tax as .....

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broad objective of film related activities, including making of films. It was claimed that on the same line, script was written but the same had to be sold on as is where is basis, and, hence, the business activity was of the company and not of the individual. In this regard, let us have a look into the clauses of the memorandum of association and articles of association of the appellant-company. The main object of the company as per the memorandum of association reads as under : 'To make fe .....

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entioned. Thus, the company never intended to do the business of script writing. In its submissions, this fact has been admitted by the appellant by stating that the directors wanted to keep the morale of the employees, for which either this activity or other activity was not material. In view of these facts, the income derived from sale of cine scripts amounting to ₹ 32,00,000 cannot be considered to have been out of the business activity of the appellant and, hence, the same cannot be ta .....

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e appellant against the income from sale of script. Admittedly, there are no equipment with the appellant for giving them on hire, and, hence, no depreciation could have been claimed. Further, it is noted that the appellant has claimed the interest payment of ₹ 2,33,588, which is paid for the loan taken for purchase of car during the year. It is further noted that the appellant has given loans and advances and deposits of ₹ 1,38,28,387, on which no interest is being charged. Further, .....

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ire charges 0.00 47,96,889.00 Bank charges 6,192.44 0.00 Conveyance 34,722.00 0.00 Electricity expenses 2,14,797.00 0.00 Insurance Equipment 0.00 3,43,940.00 Insurance 81,267.00 0.00 Petrol expenses 36,867.17 0.00 Professional fees 55,150.00 0.00 Prepayment charges 20,690.19 0.00 Audit fees 55,150.00 0.00 Rent 3,00,000.00 0.00 Staff welfare 60,561.97 0.00 Stationery and printing 3,972.00 0.00 Telephone expenses 1,71,273.59 0.00 Travelling expenses 4,90,495.48 0.00 Office expenses 2,405.00 0.00 B .....

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here during this year. From the above details of expenses, it may also be noted that last year, against the income shown from letting out of cameras of ₹ 47,96,889, the same amount was shown to have been paid as equipment hire charges. Directors' remuneration and insurance of equipment was claimed over and above this expenditure. Thus, during the last year, the appellant had incurred a loss, despite which directors' remuneration was paid, which does not appear to be a prudent busin .....

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h Court have held that the doctrine that the businessman is the best judge of business expediency does not affect the right and duty of the Assessing Officer to know whether expenditure was incurred for business purposes and not for other extraneous consideration. In view of the facts and legal position as discussed above, the expenses cannot be allowed under section 37(1). No explanation/justification has been provided by the appellant to state as to how these expenses are attributable to earni .....

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allowed under section 57(iii) of the Income- tax Act. Accordingly, an amount of ₹ 1,00,000 is allowed on estimate basis, which can be stated to have been laid out or expended wholly and exclusively for the purpose of making or earning this income. The Assessing Officer is directed to recompute the income of the appellant after allowing the deduction of ₹ 1,00,000." 5.3.2 We observe from the relevant portion of the impugned order extracted (supra) that the learned Commissioner of .....

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