1. This appeal has come up for hearing before a Special Bench, in view of the following question referred to by the President: Whether an assessee who fails to object to an addition or disallowance made in a draft order under Section 144B, loses his rights to agitate against the said addition or disallowance in an appeal filed under Section 246 The above question was obviously referred in view of the conflicting views expressed by different Benches of the Tribunal.
2. So far as the question for consideration before the Special Bench is concerned, the facts relevant to the same are very limited and it may be stated now. The assessee is a partnership firm carrying on business of distribution, production and exhibition of films. It filed a return of income on 27-11-1976. A draft assessment order was served on the assessee on 30-3-1979 under Section 144B of the Income-tax Act, 1961 ("the Act"). Since there was variation in the income returned and the income proposed to be assessed by more than a lakh of rupees, the assessee by its letter dated 3-4-1979 requested for extension of time of two weeks for submission of objections and the ITO allowed the time.
However, no objections were filed by the assessee. The ITO, therefore, completed the assessment under Section 144B(3), read with Section 143(3) of the Act. The assessee filed an appeal before the Commissioner (Appeals) and inasmuch as objections against the assessment were accepted, the revenue has come up in appeal before the Tribunal. At the time of hearing of the appeal by the Division Bench, the learned departmental representative filed an additional ground stating that the assessee's appeal before the Commissioner (Appeals) was not maintainable, since the assessee did not file any objections after having received the draft assessment order. The additional ground was admitted. But when the question was sought to be decided the Bench hearing the matter found conflict between the decisions of different Benches of the Tribunal on the issue arising out of the additional ground. That is why the President was pleased to constitute a Special Bench for resolving the conflict.
3. The revenue was represented by Shri R.J. Joshi, standing counsel for the department. At the outset he pointed out that the purpose behind enactment of Section 144B is to reduce the appeals by having a higher forum for the purpose of processing an assessment and thereby making the assessments on agreed basis. He further pointed out that Section 144B is intended to be like a mini appeal. In that context, if the assessee does not raise any objections to the draft assessment order, it would amount to acceptance of the draft and the variations suggested by the ITO. This would, according to Shri Joshi, mean that the assessee has agreed and as such has no grievance against the assessment. If there is no grievance, the assessee cannot possibly feel aggrieved to file an appeal under Section 246. This is the sum and substance of his submission. He mainly relied on the decision of the Bombay High Court in the case of Jivatlal Purtapshi v. CIT [1967] 65 ITR 261. He has also referred to the Allahabad High Court decision in the case of Sterling Machine Tools v. CIT [1980] 123 ITR 181. He relied on some passages from the case reported in AIR 1971 SC 385. He further read out a few passages from the book of Income-tax Law by Chaturvedi and Pithasaria as also from the book of Income-tax Law by Sundaram which deal with the idea behind the enactment of Section 144B. In reply the learned counsel, Mrs. Shobha Jagtiani, submitted as follows : There was no acquiescence or acceptance of the draft assessment order by merely not filing objections. The assessment was made under Section 143(3) and as such is appealable under Section 246(1)(c). It is a procedural section and is intended for the purpose of completing the assessment. It is not a substantive section. Reference to the IAC is a matter of procedure for finalising the assessment. If the assessee fails to file the objections, he loses the chance of getting the assessment tested before a higher authority and nothing else. This, according to the assessee, might mean that losing certain benefits which the assessee otherwise would have got if the assessee filed objections and the matter was heard by (he IAC. Not objecting to the draft assessment order cannot be the same as agreeing to the order. There is no express provision in the statute barring an appeal. The scheme, of Section 144B itself does not contemplate foregoing of a right of appeal in a case where no objections are filed. Finally, it is pointed out that even if there is an admission it can be explained away and an appeal could be filed and more so in a case where there is no admission expressly or by implication. The learned counsel also pointed out that the issue that was involved in the assessment was contested and the assessee produced all the evidence that it was capable of.
4. Before we look to the provisions of Section 144B, we may initially point out that the provisions of Section 144B were enacted for the purpose of reducing the mounting arrears of appeals in tax cases. This is what has been stated by the Finance Minister while introducing the amendment by way of Section 144B. When finally the amendment came into statute book, the relevant provisions of the section reads as follows : 144B. (1) Notwithstanding anything contained in this Act, where, in an assessment to be made under Sub-section (3) of Section 143, the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6), the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the Income-tax Officer within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the Income-tax Officer may allow on an application made to him in this behalf.
(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the Income-tax Officer the acceptance of the variation, the Income-tax Officer shall complete the assessment on the basis of the draft order.
(4) If any objections are received, the Income-tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment : Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard.
(5) Every direction issued by the Inspecting Assistant Commissioner under Sub-section (4) shall be binding on the Income-tax Officer.
On a bare perusal of the above provisions, it is manifest that in a case where the variation between the income returned and the income sought to be assessed as proposed by the draft assessment order is more than Rs. 1 lakh [prescribed by the Board of Direct Taxes under Section 144B(1)], the ITO is not to finalise the assessment. He has to make a draft of the assessment and forward it to the assessee in the first instance. The assessee can raise objections to the draft assessment order and bring his point of view. The moment the assessee files objections to the draft, the ITO is precluded from completing the assessment. He has to send the draft along with the objections raised by the assessee to the IAC. The IAC will then looking to the draft order as well as the objections and after going through the entire records will give such directions as he feels fit. The IAC will have to hear the assessee before any directions are given which are prejudicial to the assessee. In other words, before the IAC accepts the draft assessment order overruling the objections raised by the assessee, he will have to give an opportunity of hearing to the assessee.
In this case the assessee having initially thought of filing objections took time which was granted by the ITO, but for reasons unknown (reasons being not on record) objections were not filed. The question, therefore, to be considered is whether in these circumstances the assessee can be precluded from filing an appeal or that the assessee's appeal before the first appellate authority is not maintainable. This question can be answered naturally by looking to the provisions of Section 246 which gives the right of appeal along with the provisions of Section 144B. The interaction of these two provisions will give us a clue to the controversy raised in this appeal. At this stage, it will be relevant to refer to the provisions of Section 246 (which are necessary for our purpose) : 246. (1) Subject to the provisions of Sub-section (2), any assessee aggrieved by any of the following orders of an Income-tax Officer may appeal to the Appellate Assistant Commissioner against such order :(a) ** ** **(b) ** ** ** (c) an order against the assessee, where the assessee denies his liability to be assessed under this Act or any order of assessment under Sub-section (3) of Section 143 or Section 144, where the assessee objects to the amount of income assessed, or to the amount of tax determined, or to the amount of loss computed or to the status under which he is assessed ;(d) ** ** **(f) ** ** ** (2) Notwithstanding anything contained in Sub-section (1), any assessee aggrieved by any of the following orders (whether made before or after the appointed day) may appeal to the Commissioner (Appeals) against such order : (f) an order of assessment under Sub-section (3) of Section 143 or Section 144 made on the basis of directions issued by the Inspecting Assistant Commissioner under Section 144B ; (i) an order made by an Income-tax Officer under the provisions of this Act in the case of such persons or classes of persons as the Board may, having regard to the nature of the cases, the complexities involved and other relevant considerations, direct.
By a mere reading of Section 246(1)(c) it is evident that an assessment made under Section 143(3) is appealable. In this case obviously the assessment was made under Section 143(3) though read with Section 144B.The point is whether that would make any difference as to the maintainability of appeal. Ordinarily appeal lies to the AAC under Section 246(1) against the various orders mentioned therein. But after the creation of the new posts of the Commissioner (Appeals) appeals lie to the Commissioner in regard to certain orders mentioned under Sub-section (2). Clause (i) provides an appeal to the Commissioner (Appeals) against an assessment made under Section 143(3) read with Section 144B. In this case no doubt the assessment was not made on the basis of directions issued by the IAC under Section 144B as there are no directions in fact. Ordinarily, therefore, appeal would lie to the AAC, but the appeal came to be heard by the Commissioner (Appeals) because of Clause (i) of Sub-section (2) of Section 246. It appears that the Board directed that where the additions made by the ITO are more than a lakh of rupees, the appeals would lie to the Commissioner (Appeals) and that is the reason why in this case the Commissioner (Appeals) heard the appeal. We have given these details only to make the matter clear, as some doubts arose in the course of hearing as to why and how the Commissioner (Appeals) heard the appeal. Be that as it may, we will have to come to the basis and real issue raised before us.
5. On a careful analysis of Section 144B in conjunction with Section 246, we have no doubt, in our mind, that appeal lies to the first appellate authority and consequently appeal to the Tribunal. It is well known that a right of appeal is a statutory right. Once that right is conferred, it cannot be whittled down or taken away unless by express provisions or by necessary implication. We neither find within the four corners of Section 144B or elsewhere nor under Section 246 that the right of appeal given to an assessee against an assessment order passed under Section 143(3) is taken away or abrogated. By merely not filing objections to the draft assessment order, it cannot be said that the assessee is deemed to have accepted the assessment. Here we have to deal with the particular aspect on which Shri Joshi emphasised, viz., the construction of Sub-section (3) of Section 144B. It contains two parts. The first one deals with a case where no objections are received and the second deals with a case where the assessee intimates the acceptance of a variation proposed by the ITO. In either of these cases the ITO shall complete the assessment on the basis of a draft order. In such a situation the question of sending the draft order further to the IAC does not naturally arise. If the case falls within the second part of Sub-section (3), it would mean that the assessee accepts the assessment in which case there cannot be any grievance. Once an assessee accepts the assessment proposed by the ITO, he cannot be said to be an aggrieved person so far as the assessment is concerned.
Undoubtedly in such a situation the assessee may be caught within the principle enunciated by their Lordships of the Bombay High Court in the case of Jivatlal Purtapshi v. CIT (supra). That case dealt with a matter where one of the parties in the appeal conceded to a particular position and thereafter it was contended against the concession. The Court held that a person who conceded on a point specifically cannot be said to be an aggrieved person. On the same analogy, if an assessee accepts the variations proposed by the ITO under the second part of Sub-section (3) of Section 144B, such an assessee will not be an aggrieved assessee entitled to file an appeal. The wording of Section 246 clearly indicates that a person aggrieved only can file an appeal.
But is it the same position in a case where the first part of Sub-section (3) of Section 144B applies? We are afraid it cannot be.
The mere fact that objections are not received from the assessee cannot mean that the assessee accepted the variations. The consequence of the two different situations contemplated under Sub-section (3) of Section 144B are not similar or identical. The consequence in the case of the first part is totally different from the consequence that arises from the second part. In the second part there is a positive acceptance or agreement to the proposed assessment, whereas in the first part there is silence on the part of the assessee. Silence certainly cannot be construed as a positive acceptance of the matter. It may be that there is an old saying that silence amounts to acceptance but for construing a fiscal law such an inference is totally unwarranted and unjustified.
Non-filing of objections cannot also mean an acquiscence so as to treat the conduct of the assessee as a person not aggrieved.
6. Shri Joshi's contention based on the legislative history as regards the enactment of Section 144B also does not throw any light on the question. The idea in enacting Section 144B may be quite laudable and the purpose is definitely to reduce the arrears of appeals, if possible. When, the assessments are to be made by big variations between the income returned and the proposed assessment, the Legislature thought fit that a higher authority would look into the matter and find out if really the variation would be justified or not.
The higher authority is supposed to apply his mind to the problem with a matured thinking and experience and if he finds that the assessment suggested by the ITO cannot be supported, he may give direction to the ITO not to make such an assessment. The result may be that the assessee is saved of the trouble of going to the appellate authority against the assessment. This idea is definitely achieved to a large extent by the provisions of Section 144B. But we fail to see how the idea behind the provisions of Section 144B can be taken as a bar to the filing of an appeal against an assessment made by the ITO even if the assessee had not filed any objections. Basically the assessment made by the ITO is an assessment under Section 143(3) and if an assessee is not satisfied with such an assessment, he has a right to prefer an appeal as envisaged under Section 246(1)(c). As rightly pointed out by the learned counsel for the assessee that Section 144B is intended to be an extra measure of precaution in making a proper assessment by way of a procedure laid down and not that it created any substantive right so as to curtail jurisdiction of the appellate authorities fully. There is an extra safeguard when the assessment is tested by a superior authority.
One more opportunity is provided to an assessee before the completion of the assessment. If the assessee fails to take that opportunity, the result would be that he will have to argue the matter before the first appellate authority on the basis of the evidence available subject to the appellate authority's right to admit fresh evidence, but if the assessee fails to file his objections, the IAC will give an opportunity of hearing before he issues directions prejudicial to the assessee in which case the assessee can produce further materials to satisfy the IAC. These opportunities the assessee loses if he does not file the objections. The entire provisions of Section 144B are meant to be procedural in character in regard to the making of the assessment and they have nothing to do with the right of an assessee either to file an appeal or agitate assessment in any forum as envisaged under law. That it is a matter of procedure is so clear that any argument is hardly needed. It is only a step in the process of making an assessment. It is seen that the ITO gives only 7 days, time to file objections. No doubt he can extend the period by not more than 15 days. The purpose here again is to expedite the completion of the assessment and nothing else.
Now remains the consideration of the few decisions cited by the learned standing counsel. The first decision is that of the Bombay High Court which has already been referred to by us above. If we look to the facts, it is clear that there is a positive concession or agreement and in these circumstances the Court ruled that an assessee cannot be said to be an aggrieved person. The position before us is completely different. There is no such positive acceptance or agreement, nor is there any agreement by necessary implication as discussed above.
Similarly, in the decision of the Allahabad High Court in the case of Sterling Machine Tools v. CIT (supra), there is a positive agreement and, therefore, the Court held that such a person who has agreed to such a particular matter is not an aggrieved person to file an appeal.
7. In view of the above discussion and the conclusion arrived at by us it is unnecessary to look to the definitions of "aggrieved person" given in the judicial dictionary or to refer to several decisions which are really not relevant for the purpose of deciding the issue on hand before us. We, accordingly, hold that the appeal before the Commissioner (Appeals) filed by the assessee was maintainable and the additional ground taken by the revenue has no substance. This leads us to the decision on merits.
8. So far as the merits of the case are concerned, the matter is very simple. However, we have to give a few facts necessary for deciding the grounds raised by the revenue in this appeal. By a deed of partnership dated 3-8-1965, three partners, viz., Shri Ramesh G. Sippy, Shri Vijay G. Sippy and Miss Suki P. Sippy entered into a partnership agreement under the name and style of Sippy Films, for the purpose of carrying on business of production, distribution and exhibition of films. Actually there was another partnership agreement under the same name and style as per partnership deed dated 18-3-1965 with another partner Shri Ajit Gopaldas Sippy as a partner, but that partnership was dissolved on account of the retirement of Ajit Gopaldas Sippy with effect from 31-7-1965. Therefore, a fresh partnership with the abovementioned three partners came into existence with effect from 1-8-1965 and the same is evidenced from the deed dated 3-8-1965. The partnership was carrying on business as usual. It entered into a venture of producing the fabulous and multistarer film known as 'Sholey'. The film was almost complete and the director of the film is Ramesh Sippy, who is one of the partners of the firm. Before the film was actually sent to the Censors, Ramesh Sippy retired from the partnership. This retirement was evidenced by a deed of retirement dated 12-6-1975. The other partners continued to carry on the business. A fresh partnership deed was executed between the remaining partners on the same day, viz., 12-6-1975. The change in the constitution of the firm was intimated to the ITO. The partnership firm was treated as a registered firm all along and after the change in the constitution application in Form No.11 (A) was made by the assessee. (The accounting year of the assessee is calendar year.) The registration was allowed by the ITO as per his order under Section 185. There was another agreement entered into by the firm which came into existence after Ramesh Sippy retired from the partnership firm. That agreement is dated 15-8-1975. This is the date on which the film 'Sholey' was released for public exhibition. The agreement, inter alia, stipulates that there were several objections raised by the Board of Film Censors for issuing certificate to the film and Ramesh Sippy had to undertake lot of labour and trouble in completing the film with the requirements of the Censor Board which involved also reshooting of some portions of the film. In consideration of such services rendered by Shri Ramesh Sippy, the partnership firm agreed to pay him remuneration of Rs. 10,00,000. Paragraph 10 of the agreement, which is relevant for our purpose, may be extracted as under : (10) For the services rendered by the said Shri Ramesh Sippy, the party of the second part hereto, the firm agreed to pay him a remuneration of Rs. 10 lakhs for the invaluable services rendered by the retired partner after his retirement in helping to salvage the multi-million rupees production of the firm and in helping to obtain for the film a certificate for unrestricted public exhibition of the film 'Sholey'.
The remuneration was, however, agreed to be paid in five equal instalments at Rs. 2 lakhs per annum beginning from 31-12-1976.
9. The total cost of the film 'Sholey' amounted to Rs. 3,02,92,771. In arriving at the cost of the film the assessee included the amount of Rs. 10 lakhs which the assessee-firm agreed to pay to Shri Ramesh Sippy as per the agreement dated 15-8-1975. The ITO determined the cost of the film which is inclusive of the aforesaid sum of Rs. 10 lakhs. He then determined the cost of amortisation at 46 per cent based on the collections of the first year. Consequently he gave a deduction of Rs. 4,60,000 towards the amortisation while determining the income of the film 'Sholey'. At the same time the ITO added back a sum of Rs. 4,60,000 in computing the income of the firm by invoking the provisions of Section 40(b) of the Act. To put the matter in the words of the ITO, it is better to extract what he has stated in his order : The payment has been shown after Shri Ramesh retired from the firm.
Shri Ramesh directed the film right from its beginning to its completion. The huge amount paid to him could not be merely for making modifications in the film. The remuneration is obviously for complete direction of the picture for the period when Shri Ramesh was partner. The remuneration payable for making modification could only be negligible amount. Remuneration paid to Shri Ramesh have been capitalised and treated as cost of production. Deduction of the same is by way of component in the cost amortised. The proportionate cost amortised would be on account of payment of remuneration to partner for direction of film. It does not stand to reason that Shri Ramesh should not be paid any remuneration for the services rendered by him for directing the film for about 3 years but huge payments should be made merely for making some modifications. The true nature of a transaction has to be determined from relevant facts of the case and not from the agreement. The description of the nature of payment in the agreement by the parties would also not alter the true nature of payment. In view of the facts mentioned above, I hold that remuneration paid to Shri Ramesh is for directing the film and not merely for carrying out modifications of the same. The payment was to a partner which has been claimed as deduction by the firm.
The same is, therefore, not deductible in computing the income of the firm. Propertionate remuneration to partner amortised at 46.01 per cent in this year works out to Rs. 4,60,000 which is added back in computing the income of the firm.
10. The matter was then carried in appeal by the assessee against the action of the ITO. The Commissioner (Appeals), who heard the matter, summarised the facts as below : 1. The firm had undergone a change in constitution on 12-8-1975 and that the ITO has not doubted the genuineness of this change.
2. On the date on which the retirement deed was drawn neither the remaining partners nor Shri Ramesh Sippy knew that the film would achieve the tremendous success after its release.
3. The amount of remuneration paid to Shri Ramesh Sippy has to be considered in the context of the total cost of the film which is not disputed by the ITO.Accordingly, he held that the sum of Rs. 10 lakhs paid to Ramesh Sippy was of the nature of remuneration given to him during the period when he was not a partner and as such cannot be treated as profit qua partner. Obviously the Commissioner (Appeals) had in mind that Section 40(b) is not attracted.
11. In appeal the learned departmental representative, Shri Srinivasan, wanted us to restore the order of the ITO. Prefacing his arguments, he pointed out that the assessee having not filed objections, prevented the IAC to go into the various matters regarding the proposed addition and, therefore, even if the ITO's order is not fool-proof, the Commissioner (Appeals), in the circumstances should have directed a fresh assessment by taking all the facts into account and applying the correct provisions of law. He further pointed out that the agreement entered into by the partnership firm cannot be said to be for the purpose of paying remuneration after the former retired but was really meant as remuneration for his services as director of the film while he was a partner.
The above arguments have been controverted by Mrs. Shobha Jagtiani, for the assessee, and she pointed out that payment of Rs. 10 lakhs to Shri Ramesh Sippy by 5 yearly instalments was quite justified and reasonable, having regard to the services rendered by him to the partnership firm which was facing a serious trouble with the Censors.
According to the learned counsel, it was because of Shri Ramesh Sippy's efforts that the film could be cleared for universal exhibition, otherwise the colossal cost in producing the film would have gone to drain if the film had not received a certificate or got a restricted certificate. It was also stated by her that Shri Ramesh Sippy did not want to get involved in such a financial lock-up and he wanted to go out of the venture. In substance, therefore, it was contended that the agreement which has not been pointed out as sham or bogus must be accepted as true and, therefore, the remuneration paid to Shri Ramesh Sippy cannot be held to be remuneration paid to a partner where in fact he ceased to be a partner. Consequently it was urged that provisions of Section 40(b) can have no application.
12. The first issue to be considered in this case is whether the agreement dated 15-8-1975 entered into by the partnership firm with Ramesh Sippy is genuine in the sense that the remuneration of Rs. 10 lakhs agreed to be paid to Shri Ramesh Sippy is reasonable having regard to his services rendered after his retirement as a partner. The ITO no doubt tried to make out a case that the remuneration paid to Shri Ramesh Sippy was merely for directing the film and at that time he was a partner and it was only after the film was completed he retired from the firm. In order to find out whether the ITO is justified in his finding and whether the Commissioner (Appeals) has correctly reversed it, we have to see the various circumstances leading to the agreement and the evidence on record. The first and the foremost fact to be borne in mind is that the cost of the film amounted to more than Rs. 3 crores. When the film was complete and was sent to the Censors, the film faced difficulties. The Regional Officer, Central Board of Film Censors, wrote a letter on 28-6-1975 to the firm asking the assessee to make cuts and modifications in the film set out by them. There were altogether 14 modifications and cuts suggested in a number of reels.
Their main objection seems to be that the film was not suitable for unrestricted public exhibition unless the suggestions given by them are carried out. Thereafter the suggestions were mostly carried out and the assessee-firm wrote a letter on 29-7-1975 to the Chairman, Central Board of Film Censors. On 2-8-1975 again the partnership firm received a letter from the Board of Film Censors asking them to make further modifications and cuts. These suggestions were again carried out and it appears that it involved reshooting of the film in several scenes. The entire task was entrusted to Ramesh Sippy who is the main man in regard to the film production. There are two other partners left to continue the business. The partner Shri Vijay Sippy is mainly looking to the financial part, while Miss Suki is only a young lady. In the very nature of things, therefore, Shri Ramesh Sippy was the only person who had connections with the film and who directed the film earlier was entrusted with the job of clearing the matter with Censors. It was, therefore, stated by the assessee all through that Shri Ramesh Sippy looked to the matter regarding the censorship, reshooting some of the scenes and made several adjustments, cuts and modifications suggested by the Board of Film Censors so that the film could be certified for universal public exhibition. There can be no manner of doubt that the firm was really in a very chaotic situation when the Board of Film Censors objected to the certificate. A huge amount was invested. If it was not given public exhibition certificate, there would have been loss of collections. The firm, therefore, was very anxious to get the universal exhibition certificate for the film and consequently heavily relied on Shri Ramesh Sippy.
13. Secondly, when the cost of the film was more than Rs. 3 crores, payment of Rs. 10 lakhs to Shri Ramesh Sippy in the context of the evidence and the background as also the surrounding circumstances cannot be said to be unreasonable or in any way not connected with the services rendered by him after his retirement from the partnership firm. As a partner he was directing the film and, therefore, was not taking any remuneration, but once he ceased to be a partner he is entitled to take remuneration for any of the services rendered by him.
We, therefore, do not find anything unreasonable in the agreement entered into by the firm with Shri Ramesh Sippy for the payment of Rs. 10 lakhs.
14. Thirdly, the retirement of Shri Ramesh Sippy appears to have been only for the purpose of getting out of the firm. Perhaps Shri Ramesh Sippy did not want to get involved in the financial matters especially when the film 'Sholey' was taken at a colossal cost. At that stage nobody ever anticipated of the thundering success of 'Sholey'. Neither the two remaining persons nor Shri Ramesh Sippy ever imagined that the film would be a very big box office hit making extraordinary collections. The agreement entered into by Shri Ramesh Sippy with the partnership firm must be, therefore, understood in the light of his agreement to retire, evidenced by the retirement deed dated 12-6-1975.
15. Once it is held that the remuneration paid to Shri Ramesh Sippy was for his services rendered after his retirement and not as a partner, the provisions of Section 40(6) can have no application at all. We may also consider the question that even if the amount of remuneration or a part thereof can be treated as payment to Shri Ramesh Sippy as a director when he was a partner, whether Section 40(6) in the facts and circumstances could be brought into play by the ITO. First of all, the agreement to pay for the services rendered, which has been found to be genuine, came into existence only after Shri Ramesh Sippy retired.
Therefore, it is not possible to link up the payment made to Shri Ramesh Sippy as a partner. The second aspect of the matter is that the ITO himself did not compute the income of the first period in which Shri Ramesh Sippy was a partner by including the income ..arising from 'Sholey'. A little clarification may be needed here. The firm is admittedly having income from different sources. For the period during which Shri Ramesh Sippy remained as a partner, the income was computed and separately allocated. After Shri Ramesh Sippy's retirement, i.e., from 12-6-1975, the income was computed separately. In this the ITO has included the income from 'Sholey'. There the cost of the film included the sum of Rs. 10 lakhs and the amortisation was given by the ITO to the extent of Rs. 4,60,000. This shows that while computing the income of the second period in which Shri Ramesh Sippy was not a partner, the deduction towards amortisation was given. We, therefore, fail to see how Section 40(6) can at all be applied in this situation.
16. There was some argument at the bar as to whether any amount can be disallowed when the amount of Rs. 10 lakhs paid as remuneration was only taken towards the cost of the film and there was no deduction towards the remuneration as normally contemplated. But this argument need not detain us longer, since ultimately deduction by way of amortisation was involved and it is only in respect of that amount that the ITO made an attempt to bring it under Section 40(6). But we have already shown that the action of the ITO is untenable.
17. The revenue has also taken up a ground which does not really arise out of the order of the Commissioner (Appeals) and that ground reads as follows: No part of the amount of Rs. 10,00,000 was payable or became due during the accounting year and hence under the mercantile system of accounting the learned Commissioner (Appeals) should have upheld the disallowance of Rs. 4,60,000 which was wrongly debited in the books.
Though this ground does not arise out of the order of the Commissioner (Appeals), this ground being in the nature of a pure question of law on the admitted facts, the same is entertained. In fact the learned counsel for the assessee has also not raised any serious objection to the consideration of the ground and arguments were advanced by her against the ground. It is evident that the very deduction of amortisation allowance of Rs. 4,60,000 given by the ITO is objected to.
Normally it would not have been permissible to go against the order of the ITO himself but since this ground is directly linked up with the addition sustained by the Commissioner (Appeals) by a like amount on a different basis, we have thought fit to consider it. In order to consider this question, we have mainly to look to the agreement dated 15-8-1975 by which the sum of Rs. 10 lakhs was agreed to be paid to Shri Ramesh Sippy by the assessee-firm.
18. The question to be considered is whether the liability of Rs. 10 lakhs payable by the assessee to Shri Ramesh Sippy can be treated as the cost of the film on which the assessee would be entitled to amortisation allowance. Admittedly, the assessee follows mercantile system of accounting. However, Shri Srinivasan attempted to argue that since the amount was not due as per the agreement and it became due only in instalments from the respective dates mentioned in Clause 2 of the agreement, there was no liability incurred by the assessee. This argument is devoid of any merit, inasmuch as we are concerned, with the cost of the film and not whether the liability in respect of the payment to be made to Shri Ramesh Sippy is incurred. Undoubtedly the liability has been incurred by the assessee. The cost of the film included various items of expenses and obviously the payment to be made to Shri Ramesh Sippy for his services is also includible in the cost.
It is well settled that in order to determine the cost of a particular asset all the expenses relating to the acquisition thereof are includible. It is more so, in the case of a film the cost of which has to be determined by including the cost incurred in connection with the release. There cannot be any doubt that the liability for the services rendered by Shri Ramesh Sippy in the facts and circumstances of this case is includible in the cost of the film. Once the cost is arrived at, the assessee would be entitled to the amortisation allowance according to the accepted principles. What we are, therefore, concerned with is to determine the cost of the film and not the question whether the liability in respect of payment to Shri Ramesh Sippy has been incurred and, therefore, allowable as a deduction for the year under appeal. To make the matter clear we are here concerned only with the cost of the film and not whether the liability is incurred in this year so as to deduct the same as a revenue expenditure. The ground taken by the revenue, in our opinion, is misconceived.
19. In the above view of the matter, the order of the Commissioner (Appeals) is upheld and the appeal is dismissed.