TMI Blog1998 (9) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaken to direct and edit the film for a consideration of Rs. 50,00,000. It was agreed between the parties that Raj Kapoor would be entitled to get Rs. 50,00,000 only after the film is fully produced and certified by the Censor Board". The Censor Board had issued the certificate on 31st July, 1982 and soon thereafter the film was released on 30th Aug., 1982. Meanwhile, the assessee had entered into Agency Agreement with nine distributors for the distribution, exhibition and exploitation of the firm. The total publicity expenses incurred on the film was Rs. 36,17,545. 5. On the aforesaid facts, disputes have arisen between the assessee and the Revenue about the applicability of the provisions of s. 37(3A) and s. 40A(2)(a) of the Act. We shall first take up the applicability of the provisions of s. 37(3A) of the Act in respect of the publicity expenditure of Rs. 26,17,545. 6. It was the stand of the assessee before the IT authorities that since out of this amount Rs. 23,50,000 were spent by the distributors, the same should not be considered in its hands. Similarly, contribution of Rs. 3,32,500 by the distributors towards All India Publicity should also not be considered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had been taken by the ITO. Since this would have resulted in the enhancement of the assessment, the CIT(A) issued a notice on the assessee to show cause why enhancement should not be made. The assessee resisted the action of the CIT(A) as, according to it, even 60 per cent of Rs. 23,50,000 was wrongly considered by the ITO. The CIT(A), however, for the reasons stated in para 2.3 of his order under appeal, worked out further disallowance of Rs. 2,54,500. He, therefore, directed the ITO to enhance the income by Rs. 2,54,500. 9. The learned representative for the assessee reiterated the submissions which were made before the IT Authorities and strongly urged that there was no question of any disallowance, leave apart the enhancement made by the CIT(A). In this connection, he invited our attention to the relevant portion of the Agency Agreement entered into between the assessee and Gems Jewels, Delhi, to impress upon us that the publicity expenditure incurred by the distributors can never be treated as the expenditure incurred by the assessee and that too for the purposes of s. 37(3A) of the Act. Thereafter, he invited our attention to the relevant portion of r. 9A which provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly justified in holding that the entire amount of Rs. 23,50,000 has to be considered for the purposes of s. 37(3A) of the Act. He, therefore, urged that we should uphold the order of the CIT(A) on this issue. 11. We have carefully considered the rival submissions of the parties as well as perused the material contained in the paper book of the assessee to which our attention was drawn by the parties. The relevant clauses of the Agency Agreement regarding publicity expenditure read as under: "2. That it is agreed by and between ourselves that a further sum of Rs. 4,25,000 (Rupees four lacs twenty five thousand only) has been allowed to be spent by you to meet the release, pre-release and post-release publicity expenditures of the said film in the said territory. All such publicity expenditure of all the centres of your circuit shall be subject to our final approval in writing. All type of publicity Schedules has to be sent for our approval 20 days before the release. No such expenditure shall be accepted by us which does not obtain our approval. It is further agreed that you will contribute a sum of Rs. 75,000 (Rupees seventy five thousand only) towards the All India Publicit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, we are in full agreement with the stand taken up by the assessee that in view of the specific provisions contained in r. 9A, that the publicity/advertisement expenses incurred by the assessee/distributors before the Certificate issued by the Censor Board has to be allowed as "cost of production" of the film and that portion of such expenses incurred after the Certificate issued by the Censor Board should be considered for the purposes of working out disallowances under s. 37(3A) of the Act. As the necessary information has to be ascertained in this regard, we set aside the orders of the IT Authorities on this point and restore the case once more to the file of the ITO with a direction to work out the amount of disallowance afresh in the light of the observations made in this order and after giving an opportunity of being heard to the assessee in this regard. As regards the expenditure of Rs. 9,07,472 incurred by way of hire charges, outdoor expenses, hotel etc. etc., we are of the view that same has to be considered as "cost of production" of the film by virtue of r. 9A. In order words, this expenditure has to be allowed as an allowable deduction. 13. As noted above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would also indicate that the payment made to Shri Raj Kapoor was neither excessive nor unreasonable so as to attract the provisions of s. 40A(2)(a) of the Act. He also stated that in all Shri Raj Kapoor worked for the film for 20 months without taking work of any other person including of his own R.K. Studios. Therefore, per month income of Shri Raj Kapoor working out to Rs. 3,00,000 and per day income worked out to Rs. 10,000 during this period. According to him, payment of Rs. 10,000 per day to Shri Raj Kapoor cannot be said to be high and excessive just because he happens to be a relative of the Directors of the assessee-company. Finally, he invited our attention to page 64 of his paper book containing the assessment order of Shri Raj Kapoor for the asst. yr. 1983-84 and highlighted the fact that the entire amount of Rs. 50 lakhs received from the assessee was offered for taxation in that year even though he could have offered for taxation a part of the said amount in the subsequent assessment year. This step was taken by the legal heirs of Shri Raj Kapoor as Shri Raj Kapoor had died in June, 1988 and the members of his family wanted to settle all the matters of Shri Raj Kapoor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r with any film would generate reaction among the masses. In the instant case, looking to the aggregate fees of Rs. 13 lakhs paid to the artists of goods standing would clearly show that since Shri Raj Kapoor was to direct the film, they had agreed to work for below their normal fees. In other words, by engaging and paying Rs. 50 lakhs to Shri Raj Kapoor the assessee was able to reduce the bill of various artists who acted in the film. It is also pertinent to note that during the period Shri Raj Kapoor was engaged for the direction of the film, he had not taken any other assignment. In other words, for 20 months he devoted whole time in directing/editing the film in question. It is also pertinent to note that the assessee could get 60 per cent share in the "over flow" as against 50 per cent which was the normal practice. The distributors/exhibitors had agreed to 60 per cent share of the assessee mainly on the ground that the film was directed by Shri Raj Kapoor. Considering all these factors in proper perspective, it is difficult to hold that the payment made to Shri Raj Kapoor was excessive or unreasonable having regard to the benefit derived by the assessee so as to bring its cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent that the consideration for this assignment of the distribution rights abroad was towards the use of the banner "R.K.". As has been pointed out by the ITO Shri Ranbir Raj Kapoor is already the director of the film and the goodwill for the purpose of overseas territories could be only associated with the name of the individual and not with the name of the concern. Any how that could not be said to be a sufficient consideration at all. It has been assigned only because both the concerns are related. Hence ITO is fully justified in coming to the conclusion that it is an assignment without consideration. The foreign exchange made available by R.K. Films Studios was only a practically working proposition in favour of the assessee, inasmuch as the assessee had not received any foreign exchange on sale of films by that time. That working arrangement alone cannot also be cited as a consideration for this transaction. If there has been no consideration, the amounts received have to be assessed in the hands of the transferees, irrespective of the tax effect. ITO is fully justified in adding the income from the foreign distribution rights in the hands of the assessee. Coming to the quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parties and here also we find force in the stand taken on behalf of the assessee. It appears to us that the IT authorities were unnecessarily obsessed by the fact that the assessee, the aforesaid firm, Shri Raj Kapoor, etc., etc., are nothing but representing the Kapoor family. In our view, this approach of the IT authorities is not sound, as the assessee, aforesaid firm and various members of the Kapoor family are separate and individual entities. Therefore, we cannot brush aside various legal documents exhibited by them and come to the conclusion that the income earned by the aforesaid firm was the income of the assessee or a device has been adopted by the assessee and sister concern to divert the profit which actually belonged to the assessee. On proper reading and appreciation of various agreements entered into between the assessee and the said firm, the said firm and Scanfloat/NFDC, it leaves no doubt in our mind that the profit earned in exploiting the film abroad should be taxed in the hands of the aforesaid firm. Apart from this, it is not in dispute that the aforesaid firm had in fact allowed its banner 'R.K.' to be exhibited by the assessee and it had helped the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Gramophone Co. of India Ltd., whereby the assessee had irrevocable authorised the said company to pay royalty to R.K. Film. At page 101 there is a letter dt. 23rd April, 1982 of the Gramophone Co. of India Ltd., addressed to the assessee informing that they have received the assessee's letter dt. 17th April, 1982. According to us, this material would not be sufficient to accept the assessee's claim that the royalty income should not be assessed in his hands. We have, therefore, no hesitation in upholding the order of the CIT(A) on this point. 22. The last point pertains to the charging of interest under s. 215 of the Act. Both the parties stated that this issue would be of consequential nature to our decision on the other grounds taken up by the assessee in its appeal and that taken up by the Revenue in its appeal. We would, therefore, direct the ITO to redetermine the issue of charging of the interest under s. 215 of the Act after giving an opportunity of being heard to the assessee in this regard. 23. The first ground taken up by the Revenue in its appeal pertains to the reduction of the addition made by the ITO from Rs. 18,31,000 to Rs. 8,31,000 by the CIT(A) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arguments of the assessee's counsel. It is seen that there are essential differences in the two agreements viz. the agreement of the assessee with R.K. Films Studios (P) Ltd., and that of the agreement of R.K. Films Studios (P) Ltd. with Jaipur Films. The assessee's date of agreement is 7th June, 1982 and that of the other party is dt. 1st Oct., 1982. This is relevant inasmuch as the picture was released on 13th Aug., 1982. The assessee had entered into the agreement even before the release of the picture. That means the success of the picture was uncertain. Secondly, the assessee had received the consideration sum of Rs. 5,50,000 even by 29th Oct., 1981, as seen from the copy of the account of R.K. Films Studios (P) Ltd., in the books of the assessee for this picture Prem Rog. This sum of Rs. 5,50,000 excluded the cost of prints which were to be borne by the distributors. They have incurred an expenditure of Rs. 1,57,856 towards the prints. In the other case the consideration was on adjustable advance based at a commission of 12-1/2%. The initial advance paid at the time of the agreement dt. 1st Oct., 1982 was only a sum of Rs. 2 lakhs and the entire sum of Rs. 9 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two grounds taken up by the Revenue read as under: (3) On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that in respect of the profits on production of cinematograph films, the assessee should be treated as an industrial undertaking and should be taxed accordingly. (4) Without prejudice to the ground No. 3 above, the learned CIT(A) erred in entertaining the additional ground relating to the assessee being an industrial company, when no such claim was made by the assessee before the ITO at any stage during the assessment proceedings and no such claim could be entertained in proceedings before the CIT(A) in view of the decision of the Supreme Court in the case of Addl. CIT vs. Gurja gravures P. Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC)." 28. Here also it would be necessary to reproduce below the relevant portion of the order of the CIT(A): "14. At the time of hearing it was submitted that the ITO has charged the tax at 65 per cent of the total income without giving a specific finding that the assessee was not entitled to be charged as an industrial company. the major portion of the income is profit from the cinemotograph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits could be said to arise only from the production of a cinematograph film. In the circumstances of the case, in the interest of justice, I hold that this point should be considered by the ITO after giving an opportunity to the assessee while giving effect to this order. ITO should pass a speaking order indicating the reasons for her conclusion to charge the assessee at a higher specific rate, when there is a claim for being assessed at a lower rate." 29. The learned representative for the Revenue strongly argued that the CIT(A) was not justified in entertaining an issue which was never agitated by the assessee before the ITO. According to him, as there was no material on record or decide the point at issue, the CIT(A) ought not to have entertained the same. The learned representative for the assessee, on the other hand, highlighted the fact that before entertaining the issue, the CIT(A) had in fact given an opportunity to the ITO to elicit his stand. He also submitted that the point regarding the appropriate rate of tax applicable to the assessee is a pure question of law for which no materual was required than that already brought on record. He also highlighted the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
