1. These two cross-appeals against the order of the Commissioner of Income-tax (Appeals) are disposed of together for the sake of convenience.
2. The assessee is a company and, as the name suggests, is engaged in the film industry. The assessment year is 1984-85 and the previous year is from 1-5-1982 to 30-4-1983.
3. First of all, we shall take up the assessee's appeal being I.T.A.No. 6193 (Bom.)/1987. The first five grounds taken up in the appeal pertain to disallowance made by the Income-tax authorities by invoking the provisions of sees. 37(3 A) and 40A(2)(a)of.theAct.
4. The facts in brief are: the assessee had contemplated to produce a feature film titled "Prem Rog". For this nurnose the assessee, through its Managing Director, Shri Randhir Raj Kapoor, approached Shri Ranbir Raj Kapoor (popularly known as Raj Kapoor) for guidance in the matter of selection of story, cast, other technicians, etc. etc. Under an Agreement dated 15-1-1981, entered into between the assessee and Raj Kapoor, the latter had undertaken 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 produced and certified by the Censor Board". The Censor Board had issued the certificate on 31-7-1982 and soon thereafter, the film was released on 30-8-1982. Meanwhile, the assessee had entered into Agency Agreement with nine distributors for the distribution, exhibition and exploitation of the film. 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 Section 37(3A) and Section 40A(2)(a) of the Act. We shall first take up the applicability of the provisions of Section 37(3A) of the Act in respect of the publicity expenditure of Rs. 36,17,545.
6. It was the stand of the assessee before the I.T. 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 its hands. The balance of Rs. 9,35,045 i.e.
Rs. 36,17,545 minus (Rs.23,50,000 + 3,32,500) debited to the P & L Account could only be considered for the applicability of the provisions of the said Section. Relying on the provisions of Rule 9A of the Income-tax Rules, 1962, dealing with "deduction in respect of expenditure on production of feature film", the assessee had taken up a stand that since Rs. 5,44,722 out of Rs. 9,35,045 was incurred prior to the Certificate granted by the Censor Board, Rs. 3,90,323 (Rs.9,35,045 - Rs. 5,44,722) could at best be considered for the purposes of the aforesaid section. Even here also, it was the stand of the assessee that the provisions of Section 37(3A) of the Act would not be applicable and, therefore, the said amount would be allowable under Section 37(3) of the Act.
7. Upon the reading of the relevant clauses of the Agency Agreement, the I.T.O. was of the view that 60% of Rs. 23,50,000 being publicity expenditure incurred by the distributors should also be considered for the applicability of the provisions of Section 37(3A) of the Act. The I.T.O., therefore, worked out Rs. 32,52,517 which would come within the purview of Section 37(3A) of the Act as under:Expenditure debited to P & L A/c.
9,35,045Add: 60% Rs. 23,50,000 being amount incurredby distributors as per the agreement 14,10,000 23,45,045Add: Out of hire charges.
Rs. 1,08,495 Out of outdoorexpen. hotels 2,64,963 conveyance, car hire etc.
5,35,014 9,07,472 ---------He, therefore, computed the disallowance of Rs. 6,30,503 as follows:Allowable expenditure.100% on first Rs. 1,00,000.
Rs. 1,00,000 80% of the balance of Rs. 31,52,517 25,22,014 26,22,014Total expenditure incurred Rs. 32,52,517Less: Allowable expenditure.
26,22,014 --------- 8. In appeal, the C.I.T.(A) upheld the action of the I.T.O. applying the provisions of Section 37(3A) of the Act. He, however, on the reading of the relevant clauses of the Agency Agreement, was of the view that the said provision of the Act would be applicable to the entire amount of Rs. 23,50,000 and not only to 60% thereof as had been taken by the I.T.O. 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% of Rs. 23,50,000 was wrongly considered by the I.T.O. The CIT(A), however, for the reasons stated in para 2.3 of his order under appeal, worked out further disallowace of Rs. 2,54,500. He, therefore, directed the I.T.O.to enhanced the income by Rs. 2,54,500.
9. The learned representative for the assessee reiterated the submissions which were made before the I.T.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 M/s. 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 Section 37(3A) of the Act. Thereafter, he invited our attention to the relevant portion of Rule 9A which provides for "deduction in respect of expenditure on production of feature film", more particularly the following: "9A. (1) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed, (a) (b) in the case of a feature film (not being a regional language feature film), in accordance with the provisions of Sub-rule (5) to Sub-rule (7).
(i) "Board of Film Censors" means the Board of Film Censors constituted under the Cinematograph Act, 1952 (37 of 1952); (ii) "Cost of production", in relation to a feature film means the expenditure incurred on the production of the film, not being - (a) the expenditure incurred for the preparation of the positive prints of the film; and (b) the expenditure incurred in connection with the advertisement of the film after it is certified for release by the Board of Film Censors; and submitted that as per the Explanation all the expenses incurred on the production of a feature film upto issuance of the Certificate by the Censor Board has to be allowed. The only expenditure not allowable are (1) cost of positive prints and (2) publicity expenditure incurred after the issuance of Certificate by the Censor Board. He, therefore, urged that even assuming for the sake of argument that either the whole or 60% of Rs. 23,50,000 were to be treated as the expenditure incurred by the assessee, the same would qualify for deduction under Rule 9A. In any event, he submitted that only the expenditure incurred after the issuance of the Certificate by the Censor Board could at best be considered for the applicability of the provisions of Section 37(3A) of the Act. He further stated that these arguments will be equally applicable in respect of the expenditure aggregating to Rs. 9,07,472 incurred in respect of hire charges, outdoor expenses, hotels, conveyance, etc. etc.
10. The learned representative for the department, on the other hand, strongly relied on the orders of the I.T. authorities and justified their action. According to him, on the proper reading of the relevant clauses of the Agency Agreement, the CIT(A) was fully justified in holding that the entire amount of Rs. 23,50,000 has to be considered for the purposes of Section 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 expenditures 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 Publicity campaign to be done from our end and the same has to be remitted to us on demand.
3. That the M.G. Royalty amount of Rs. 40,00,000 (Rupees forty lacs only) plus publicity sanctioned amount of Rs. 4,25,000 (Rupees four lacs twenty five thousand only) plus total cost of positive answer prints shall be treated as Minimum Guarantee in respect of the said film TREM ROG' for above mentioned circuit.
6. That it is agreed upon that your share of commission shall be calculated in the following manners: (a) First you will recoup your M.G. Royalty amount of Rs. 40,00,000 (Rupees Forty lacs only).
(b) Recoupment of Publicity amount sanctioned Rs. 4,25,000 (Rupees four lacs twenty five thousand only).
(c) Recoupment of All India Publicity Contribution Rs. 75,000 (Rupees Seventy five thousand only) and cost of number of prints you will buy from the laboratory at the time of its first release in your circuit.
9. That you will not advertise the film in your circuit without having our prior approval in writing. The publicity design of banner, newspaper and other magazines shall be supplied by us for the best use of publicity campaign in your circuit. All such publicity expenses* (which are approved by us), are subject to recoupable, from the incomings realisation as stipulated hereinabove in this agreement and if the publicity expenditures are likely to be exceeded than the sanctioned amount of Rs. 4,25,000 (Rupees four lacs twenty five thousand only) you hereby agree and undertake to obtain our prior sanction in writing for such expenditures of the extra publications. If the extra amount is sanctioned for publicity then the same amount is also recoupable from the incoming realisations only.
12. On the proper reading of the aforesaid clauses, it is not possible to accede to the submissions made on behalf of the assessee that the publicity expenditure incurred by the distributors cannot be considered for the purposes of applicability of Section 37(3A) of the Act. It is quite apparent that the publicity expenditure incurred by the distributors was not on their account but it was for and on behalf of the assessee. In this view of the matter, we would hold that the I.T.authorities were justified in considering the publicity expenditure incurred by the distributors in the hands of the assessee for the purposes of working out disallowance Under Section 37(3A) of the Act.
However, we are in full agreement with the stand taken up by the assessee that in view of the specific provisions contained in Rule 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 Section 37(3A) of the Act. As the necessary information has to be ascertained in this regard, we set aside the orders of the Income-tax authorities on this point and restore the case once more to the file of the I.T.O. 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 the same has to be considered as "cost of production" of the film by virtue of Rule 9A. In other words, this expenditure has to be allowed as an allowable deduction.
13. As noted above, the assessee had paid Rs. 50 lakhs to Shri Raj Kapoor for directing/editing the film "Prem Rog". The assessee had taken up a stand before the Income-tax authorities that in view of the provisions contained in Rule 9A, the entire amount paid to Shri Raj Kapoor was nothing but the "cost of production" of the film and should, therefore, be allowed as deduction. The I.T. authorities, however, did not accept this stand of the assessee. On the contrary, invoking the provisions of Section 40A(2)(a) of the Act, they had disallowed Rs. 30 lakhs, 14. The learned representative for the assessee reiterated the submissions, which were made before the I.T. authorities and strongly urged that the entire amount of Rs. 50 lakhs paid to Shri Raj Kapoor should have been considered as the "cost of production" of the film and should, therefore, have been allowed as a deduction in view of the specific provisions contained in Rule 9A. Even assuming for the sake of argument that the provisions of the said Rule were not applicable in the instant case, the learned representative for the assessee stronelv argued that there was no justification in invoking the provisions of Section 40A(2)(a) of the Act and making disallowance of Rs. 30 lakhs in the manner did by the I.T.authorities. According to him payment made to Shri Raj Kapoor was neither excessive nor unreasonable having regard to the fair market value of his eminence and impact in the film world as a Director. In this connection, he highlighted the fact that the mere name of Shri Raj Kapoor associated with a film would be sufficient to make the success of the film. Apart from this, he also pointed out that large number of stars (both male and female) of high calibre and experience were willing to act in the film, as they were eager to associate their name with Shri Raj Kapoor. In this connection, he invited our attention to page 92 of his paper book containing the list of artists and the payment made to them, who acted in the film. In other words, he wanted to impress upon us that by engaging Shri Raj Kapoor as a Director, the assessee was able to reduce the charges of the other artists, who acted in the film. He also pointed out that due to the association of Shri Raj Kapoor with the film, the distributor/exhibitors had agreed to share "over flow" at 60% to the assessee and 40% to them as against 50% 50% in other cases. This too would also indicate that the payment made to Shri Raj Kapoor was neither excessive nor unreasonable so as to attract the provisions of Section 40A(2)(a) of the Act. He also stated that in all Shri Raj Kapoor worked for She 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 worked out toRs.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 assessment year 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 tax matters of Shri Raj Kapoor. He, therefore, submitted that if we were to sustain the disallowance made by the I.T. authorities, then Rs. 30 lakhs would be doubly taxed, once in the hands of the assessee and the other already taxed in the assessment of late Shri Raj Kapoor for the assessment year 1983-84. He, therefore, urged that ths disallowance of Rs. 30 lakhs made by the I.T. authorities should be deleted.
15. The learned representative for the department once again relied on the orders of the I.T. authorities and strongly urged that the disallowance made by them should be upheld. In this connection, he submitted that since the provisions of Rule 9A cannot be attracted in respect of the fees paid to Shri Raj Kapoor, Rs. 50 lakhs cannot be considered as" cost of production" of the film. According to him, since Shri Raj Kapoor was known mainly as an actor and not as a Director, the payment of Rs. 50 lakhs to him was definitely excessive and unreasonable and, therefore, the I.T.authorities were fully justified in invoking the provisions of Section 40A(2) of the Act. Finally, he submitted that there are number of provisions in the Act like Section 40A(2) which enable the Revenue to tax the same amount in two different hands. Therefore, the fact that Rs. 50 lakhs was included in the total income of Shri Raj Kapoor for the assessment year 1983-84 would not justify the assessee's claim that it should have been allowed as deduction by ignoring the provisions of Section 40A(2) of the Act which were clearly attracted in its case. He, therefore, urged that we should uphold the action of the I.T. authorities on this point.
16. We have carefully considered the rival submissions of the parties and we find considerable force in the stand taken on behalf of the assessee. It cannot be disputed that Shri Raj Kapoor was not only a leading actor in his prime days but also very well known Director right from the first movie he directed in his earlier age. Over the years, he became more matured and improved in directing movies and except for a couple of movies, all the pictures directed by him were great success.
According to us, Shri Raj Kapoor had built up his own reputation and status which cannot be compared with other Directors as was done by the I.T. authorities. It is in this background that" we have to decide whether Rs. 50 lakhs paid to him was excessive or unreasonable. It cannot be denied that mere association of Shri Raj Kapoor 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 good standing would clearly show that since Shri Raj Kapoor was to direct the film, they had agreed to work far 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% share in the "overflow"asagainst50%which was the normal practice. The distributors/exhibitors had agreed to 60% 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 case within the purview of Section 40A(2) of the Act.
In view of our aforesaid conclusion, it is not necessary to deal in detail the assessee's contention that Rs. 50 lakhs paid to Shri Raj Kapoor could also be allowed as deduction, as it forms part of "cost of production" of the film to which the provisions of Rule 9A are applicable. Suffice it to say that the stand taken by the assessee cannot tightly be brushed aside. We would, therefore, direct the I.T.O.to allow the deduction of the entire amount of Rs. 50 lakhs paid to Shri Raj Kapoor and modify the assessment accordingly.
17. The next ground pertains to the inclusion of Rs. 8,31,000 being the income earned by exploiting the film in the overseas territories. It may be mentioned that the assessee had assigned the exploitation of the film in the overseas territories to a firmknown as R.K. Films & Studios. The'said firm in turn entered into agreement with Scanfloat Impacts Pvt. Ltd., and National Film Development Corporation of? U.S.S.R. in this regard. The I.T.O., for the reasons stated in his order, held that the income earned by the said firm was in fact the income earned by the assessee. He, therefore, included Rs. 18,31,000 in the total income of the assessee. Before the C.I.T.(A), the assessee had reiterated the submissions which were made before the I.T.O. viz., (1) the assessee had given exploitation rights to the said firm for the user of its banner viz., "R.K." for the distribution/exhibition of the film, (2) the said firm was helpful in getting necessary permission including that of the Reserve Bank of India for a shooting of certain scenes of the film in Holland and other European countries; (3) the said firm was in a better position to exploit the filnrabroad more particularly in U.S.S.R.; (4) there was no attempt on the part of the assessee or its sister concern to reduce/avoid tax payable by various concerns or its partners. In fact the partners of the said firm were paying tax at the rate of 67.5% as against rate of 63% applicable to the firm; and (5) in any event, only Rs. 8,31,000 was includible in the total income of the assessee and not Rs. 18,31,000 included by the I.T.O. The C.I.T.(A) upheld the action of the I.T.O.; wherein he has sustained the addition of Rs. 8,31,000 as against Rs. 18,31,000 made by the I.T.O. in the following manner: There is not much of force in the argument 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 I.T.O. 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. Anyhow that could not be said to be a sufficient consideration at all. It has been assigned only because both the concerns are related. Hence I.T.Q. is fully justified in coming to the conclusion that it is an assignment without consideration. The foreign exchange made available by M/s 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 transferers, irrespective of the tax effect. The I.T.O. is fully justified in adding the income from the foreign distribution rights in the hands of the assessee.
Coming to the quantum of addition there is considerable force in the arguments of the assessee's counsel. Having regard to the actual amount received from overseas distribution rights, the only amount that could be brought to tax is a sum of Rs. 8,31,000 received by the assessee from one party during this year. It is also noted that the receipts from the foreign territories distribution are accounted for only on cash basis. As such the addition of Rs. 18,31,000 is reduced to Rs. 8,31,000.
18. The learned representative for the assessee reiterated the submissions which were made before the I.T.authorities and strongly urged that there was no justification in including the income earned by the aforesaid firm in the total income of the assessee. In this connection, he stressed the point that but for the banner of the said firm which was allowed to be used by the assessee, the firm would not have been that successful in the foreign countries. According to him, since Shri Raj Kapoor was well known to the Russian public any picture directed by him would do well in that country. It is for this reason that the assessee had given the exploitation rights of the film to the said firm. He also highlighted the fact that since the said firm had helped the assessee in the production of the film, the assessee had to pay the said firm. This was arranged by way of entering into agreement for exploitation of the film abroad. He, therefore, urged that if the assessee had made direct payments to the said firm, the same would have been allowed in computing its total income. Instead of that, the assessee entered into an agreement with the said firm, whereby exploitation rights were given to it. He, therefore, urged that there is no justification in retaining the addition of Rs. 8,31,000 sustained by the C.I.T.(A). In any event, inviting our attention to page 119 of the paper book, he submitted that the addition, if at all, to be made would be of Rs. 5,49,000 and odd, as only this amount was received in the relevant previous year and not Rs. 8,31,000 considered by the CIT(A). The learned representative for the department, on the other hand, once again relied on the orders of the I.T.authorities and justified then action. According to him, the action of the I.T.authorities could also be supported and justified by the provisions of Rule 9A(8)(a).
19. We have carefully considered the rival submissions of the parties and here also we find force in the stand taken on behalf of the assessee. It appears to us that the I.T. 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 I.T. 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 assessee to get necessary Government/R.B.I. permission to do shooting in Holland. For all these services rendered by the aforesaid firm, the assessee had to pay.
Looking from this angle also the profit earned on exploitation of the film abroad by the aforesaid firm cannot be included in the total income of the assessee. We would, therefore, delete Rs. 8,31,000 from the total income of the assessee.
20. The next point pertains to the addition of Rs. 5 lakhs representing the income received by the aforesaid firm to whom the royalty rights in respect of gramophone records were assigned by the assessee. Inviting our attention to pages 120 and 121 of the paper book containing letters exchanged between the assessee and the Gramophone Co. of India Ltd., the learned representative for the assessee strongly urged that the I.T. authorities were not justified in including Rs. 5 lakhs in the total income of the assessee. The learned representative for the department, on the other hand, once again supported the action of the I.T. authorities. He also referred to the said letters exchanged between the assessee and the Gramophone Co. of India Ltd. with a view to impress upon us that the royalty rights assigned to the aforesaid firm was with a view to reduce the total income of the assessee.
According to him, no evidence has been brought on record to show that the assessee had assigned the right to the aforesaid firm for any consideration. The learned representative for the assessee in his reply stated that the assessee had assigned rights as it had obtained interest-free loan from the aforesaid firm. He also stated that the said income had also been assessed in the hands of the aforesaid firm.
In other words, according to him, Rs. 5 lakhs should be deleted from the total income of the assessee, otherwise the same income would be taxed in the hands of Sthe two persons which is not permissible under the Act. Both the parties had also referred to the orders of the Tribunal in First ITO v. Yash Raj Chopra [1984] 10 ITQ,709 (Bom.) and Ranbir Raj Kapoor v. ITO [1988] 25TID 56 (Bom.) (SB).
21. We have considered the rival submissions of the parties as well as perused the material available on record and we do not find any justification to interfere with the order of the C.I.T.(A) on this point. On page 120 of the paper book there is a letter dated 17-4-1982 of the assessee addressed to the Gramophone Co. of India Ltd., whereby the assessee had irrevocably authorised the said company to pay royalty to M/s R.K. Film. At page 101 there is a letter dated 23-4-1982 of the Gramophone Co. of India Ltd. addressed to the assessee informing that they have received the assessee's letter dated 17-4-1982. 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 Section 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 I.T.O. to redetermine the issue of charging of the interest Under Section 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 I.T.O. from Rs. 18,31,000 to Rs. 8,31,000 by the C.I.T.(A) in respect of income earned by exploiting the firm in overseas territories. In view of our decision in the assessee's appeal (para 18 above), the issue raised by the Revenue becomes infructuous and academic in nature. We would, therefore, dismiss this ground in limine.
24. The next ground taken by the Revenue pertains to the deletion of Rs. 3,50,000 being the income from distribution rights of the film in respect of Rajasthan territory. The facts of the case, the stand of the assessee and the decision of the I.T. authorities thereon could be gathered from the following extract from the order of the C.I.T.(A): It was pointed out that the assessee had assigned the Rajasthan territory for the film Prem Rog to M/s. R.K. Films & Studios Pvt.
Ltd. on 7-6-1982 for a sum of Rs. 5,50,000. Subsequently on 1-10-1982 the said company had reassigned the same to an outside party, M/s Jaipur Films for a sum of Rs. 9.00 lakhs pulus 87-1/2% of the overflow. These are two independent transactions and there is no inter connection between the two. There is no justification for taking a view that the assessee had diverted his income to the extent of the difference between the two amounts, simply because the sale of Rajasthan territory was to a sister concern. It was submitted that the agreement with M/s.R.K. Films & Studios Pvt. Ltd. was entered into on 7-6-1982 itself bofore the release of the picture Prem Rog. The agreement with the other party was after the release of the picture on 13-8-1982 in territories other than Rajasthan.By this time the picture had fared moderately well at the box office in the territories where the same was released already.
If the picture had not fared well in Rajasthan territory, the balance of adjustable advance was required to be written back by R.K. Films & Studios Pvt. Ltd., to the said Jaipur party after 24 months of the release in the said territory. However, the lease money payable to the assessee was outrate fixed price. There was a risk factor involved and the question of amount of profitability was not ascertainable at that time. Since the terms of both the agreements are not comparable, it was argued that the I.T.O. was not justified in comparing the sum of Rs. 5,50,000 received by the assessee outright basis with the sum receivable from M/s. Jaipur Films on a commission basis against the adjustable advance of Rs. 9.00 lakhs.
There is considerable force in 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 M/s. R.K. Films & Studios Pvt. Ltd., and that of the agreement of R.K. Films & Studios Pvt. Ltd. with M/s. Jaipur Films. The assessee's date of agreement is 7-6-1982 and that of the other party is dated 1-10-1982. This is relevant inasmuch as the picture was released on 13-8-1982. 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 October 29,1981, as seen from the copy of the account of R.K. Films & Studios Pvt. Ltd. in the books of the assessee for this picture Prem Rog-This sumlof 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 dated 1-10-1982 was only a sum of Rs. 2 lakhs and the entire sum of Rs. 9 lakhs was payable completely by the time the distributor was to take delivery of the prints. If the advance was not recouped by collections, the distributor was at liberty to claim refund from M/s. R.K. Films & Studios Pvt. Ltd. In the case of the assessee the consideration amount of Rs. 5,50,000 was non-refundable irrespective of the fact whether the distributor recouped his investment or not. In view of this specific difference in the terms of agreement, the same could not be treated on par. Further, it is also seen the assessee has given the agency to M/s. R.K. Films & Studios the distribution rights not only of this picture but also of the other film 'Bivi-O-Bivi' for a consideration of Rs. 1,51,000.
This is also referred to in the letter dated 7-6-1982 from the assessee to M/s. R.K. Films & Studios Pvt. Ltd. The minutes of the meeting of the Board of Directors of the assessee dated 29-9-1982 and 30-10-1982 were also noted. Taking into consideration of these facts, I hold that there is no justification for coming to the conclusion that the releasing of Rajasthan territory at Rs. 5,50,000 was not done for a sufficient consideration. There is no question of diversification of the profit from Rajasthan territory to the extent of Rs. 3,50,000. I.T.O. is directed to delete the addition of Rs. 3,50,000.
25. The learned representative for the Revenue strongly relied on the order of the I.T.O. and urgued that the CIT(A) was not justified in deleting Rs. 3,50,000 from the total income of the assessee. The learned representative for the assessee, on the other hand, supported the action of the CIT(A). In this connection, he also invited our attention to page 14 of his paper book containing break-up of distribution receipts of the film. The learned representative for the Revenue, in his reply, invited our attention to page 57 of the paper book containing the agreement entered into between the assessee and M/s. R.K. Films & Studios Pvt. Ltd. and M/s. R.K. Films & Studios Pvt.
Ltd. with the other party.
26. We have carefully considered the rival submissions of the parties as well as perused the material already brought on record and are of the view that no infirmity could be found in the order of the CIT(A) deleting Rs. 3,50,000 from the total income of the assessee. As we fully agree with the order of the CIT(A) on this point, we have no hesitation in upholding the same.
(3) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) 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 Commissioner of Income-tax (Appeals) 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 Income-tax Officer at any stage during the assessment proceedings and no such claim could be entertained in proceedings before the Commissioner of Income-tax (Appeals) in view of the decision of the Supreme Court in the case of Additional Commissioner of Income-tax v.Gurjargravures P. Ltd. - 111 ITR 1.
28. Here also it would be necessary to reproduce below the relevant portion of the order of the C.I.T.(A):- At the time of hearing it was submitted that the I.T.O. has charged the tax at 65% 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 cinematograph film. The Central Board of Direct Taxes have accepted the position that the income' arising from the production of a cinematograph film partakes the nature of income of an industrial company. In this connection a reference was made to Circular No. 24 dated 23-7-1969 in F.No.6/22/68-IT(A-I). It was submitted that the principle involved in the definition of an industrial company as given in Section 2 of the Finance Act, 1984 for the purpose of charging the differential rate of income-tax was the same as Section 104 of the I.T. Act. It was therefore submitted that the I.T.O. has wrongly charged the rate of 65% on the assessee's total income. This additional ground was passed on to the I.T.O. for comments. In her letter dated 21-8-1987 the I.T.O. has pointed out that this issue was never raised before the I.T.O. and the assessee had throughout paid the taxes at 65%. The assessee had also filed its estimate of advance,tax at 65%. Since no claim has been made before the I.T.O. and there is no material on record to support such a claim, the appellate authority cannot entertain the question of relief to the assessee. I.T.O. has also pointed oat that this ground of appeal pertains to factual matters and not to any legal point or dispute and as such it should not be allowed to be raised at the appellate stage. The assessee's counsel has pointed out, in reply to the I.T.O.'s remarks that the question of calculating the rates of taxes did not arise at all at the time of assessment inasmuch as the return filed by the assessee was a loss return. All the major additions made by the I.T.O. are being disputed. This is purely a legal issue as to whether the production of a cinematograph film is entitled to be treated as an industrial undertaking or not. Hence it was argued that the ground may be admitted.
I have considered the submissions of the I.T.O. and also that of the assessee's counsel in this regard. There is no occasion for this point having been raised before the I.T.O. inasmuch as the return was a loss return. Now that the total income has resulted in a positive income, this point becomes immaterial. Having regard to the circular of the CBDT referred to by the assessee's counsel, it is clear that in respect of the profits on production of cinematograph films, the assessee is to be treated as an industrial undertaking and tax accordingly. This leaves only the question to be determined as to whether the 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 I.T.O. after giving an opportunity to the assessee while giving effect to this order. I.T.O. 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 I.T.O. According to him, as there was no material on record to 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 fad that before entertaining the issue the CIT(A) had in fact given an opportunity to the I.T.O. 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 material was required than that already brought on record. He also highlighted the fact that instead of deciding the issue straightaway, the CIT(A) had restored the matter to the file of the I.T.O. with appropriate direction. He, therefore, urged that we should uphold the order of the CIT(A) on this point.
30. On due consideration of the rival submissions of the parties, here also we do not find any infirmity in the order of the CIT(A). On the proper reading of the provisions containing powers of the first appellate authority in the Act and the Rules made thereunder, it cannot be denied that the first appellate authority has a power to entertain fresh issue or evidence which was not furnished before the I.T.O.However, in doing so certain guidelines are laid down in the Rule so as to give opportunity of being heard to the I.T.O. to examine and verify the claim made by the assessee. In the instant case, as could be seen from the order of the CIT(A) (reproduced above), he has followed the procedure laid down under the Act, and the Rules made thereunder. In this view of the matter, we do not find any justification to interfere with the order of the CIT(A) on this point also.
31. In the result, the appeal filed by the assessee is partly allowed and that filed by the Revenue is dismissed.