1. This appeal is filed by the assessee. We are concerned with the asst. yr. 1996-97. The appeal is filed against the order passed by the CIT(A)-XXV at Mumbai, which is dt. 22nd June, 1999. The relevant assessment has been completed under Section 143(3) of the IT Act, 1961.
2. The assessee, in this case is engaged in production of TV serial.
The assessee produced a serial consisting of 52 episodes during the previous year relevant to the assessment year and sold the serial to M/s Zee Telefilms Ltd. The serial was encapsulated by the assessee by hiring out TV cameras, special lights, generators, sound equipments, etc. Necessary equipments as stated above were not owned by the assessee but they were taken on hire. The assessee had also hired editing studios equipped with sophisticated systems.
3. The assessee, while computing its taxable income has claimed Rs. 77,953, being deduction available under Section 80-IA. The AO found that the assessee had not owned any plant and machinery of its own and everything was hired by it and, therefore, the assessee could not be considered as an industrial undertaking. He disallowed the claim made by the assessee under Section 80-IA.4. In first appeal, the CIT(A) agreed to the contention of the assessee that the film production or television serial production amounted to manufacturing. But the CIT(A) also upheld the disallowance of the deduction on the ground that the assessee has not complied with the conditions stipulated for claiming the deduction under Section 80-IA.The CIT(A) found that the assessee has not complied with the conditions laid down in Section 80-IA(2)(ii). The said condition stipulates that the industrial undertaking claiming the deduction should not have been formed by transfer of a business or machinery or plant previously used for any purposes. The CIT(A) also referred to Clause (a) of Expln. 1 to Section 80-IA which states that the machinery or plant was not used in India at any time prior to the date of installation by the assessee.
The CIT(A) also referred to Clause (c) of the said Explanation which states that no deduction would be permissible on account of (sic- if) depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any earlier assessment year. The CIT(A) held that by hiring out of the necessary equipments, the assessee has not complied with the above conditions and on that ground confirmed the disallowance of deduction claimed under Section 80-IA. It is against the above that the assessee has come in second appeal before us.
5. Shri Hiro Rai, the learned advocate, appearing for the assessee, argued the case at length. He pointed out that the conditions pointed out by the CIT(A) are applicable only in a case where the assessee has procured the plant, machinery and equipments on transfer and/or in the case of plant and machineries procured from outside India. In the present case, the assessee has arranged the necessary equipments on hire and, therefore, the question of transfer does not arise.
Therefore, the relevant conditions pointed out by the CIT(A) do not apply to assessee's case.
6. To a query put by the Bench in the course of hearing that whether the hiring resorted to by the assessee would amount to transfer as there is 'a transfer of right to use', the learned advocate submitted that there is not even such a right to use in the sense of a transfer as held by the Hon'ble Bombay High Court in the case of CIT v. Bayer Agrochem Ltd. (1982) 134 ITR 240 (Bom). Considering a case of transfer of a godown, the Court held that the leave and licence permission granted to the party does not convey any right and at the highest it may be regarded as a licence given to the party to utilise the factory and use other vacant premises, but subject to effective control by the owners and also subject to the right of the owners to use the premises as factory. The learned advocate submitted that the issue was considered by the Hon'ble Court in the context of Section 15C of the IT Act, 1922. He submitted that in the present case, even all the sophisticated equipments hired by the assessee for the purpose of making the TV serial were under the effective control of the respective owners and the hire amounted to only a licence to use it on certain conditions and the same did not amount to any sort of transfer. The learned counsel further submitted that the issue is more straightly covered by the decision of Hon'ble Himachal Pradesh High Court in the case of CIT v. Nayyars Minerals Export (P) Ltd. the Court has held that hiring of the machinery by the new undertaking from the sister concerns would not be a transfer within the meaning of Section 80J(4).
7. The learned advocate further contended that the production of a feature film/TV serial being considered as a manufacturing activity, deployment of hired machinery would not make any adverse effect on the claim of the assessee in making a claim for deduction under Section 80-IA. He relied on the decision of the Hon'ble Bombay High Court in CIT v. Penwalt India Ltd. (1992) 196 ITR 813 (Bom), wherein the assessee was getting part of its activities performed by outsiders, but the business carried on under the direct supervision and control of the assessee, was held to be entitled for special deduction provided under Section 35 of the IT Act, 1961. In the present case, the learned advocate submitted that the assessee is in better footing as no activity was subcontracted but machineries alone were hired by the assessee. The learned advocate also relied on the decision of the Hon'ble Bombay High Court in CIT v. Neo Pharma (P) Ltd. (1982) 137 ITR 879 (Bom).
8. The learned advocate further contended that the dominant formation of assessee's activity was the casting of artists and availing services of performance. The question of machinery, equipments, etc. are only secondary. The dominant formation of artists and technicians could never be "owned by the assessee". They can only be hired. The learned advocate, therefore, submitted that the technical interpretation of the conditions laid out for claiming the deduction would be a fallacy in respect of industries like film production and TV serials. He invited our attention to the decision of the Hon'ble Supreme Court in Bajaj Tempo Ltd. v. CIT , where the Court has considered the doctrine of dominant formation of new undertakings, in the context of special incentives. He, therefore, submitted that the orders of the lower authorities on this point may be set aside and the claim of the assessee may be allowed.
9. Shri K.K. Sharma, the learned Departmental Representative, appearing for the Revenue, contended that the provisions for special deductions under Section 80-IA were provided in the Act with the specific object of uplifting the marginal clauses by providing them suitable employment and also for the purposes of equitable development of industries in different parts of the country and the provisions never meant that the deductions must be given to the industries like film industries. He contended that the assessee did not own any plant, machinery or equipment. The learned Departmental Representative pointed out that the Hon'ble Supreme Court has laid down the parameters of a new industrial undertaking in the case of Textile Machinery Corporation Ltd. v. CIT , which has been followed by the Supreme Court in CIT v. Orient Paper Mills Ltd. . The Supreme Court has laid out that the assessee be pumping, substantial fresh capital for the purpose of establishing the new industrial undertaking and the assessee should organise the entire system for the purpose of establishing a distinct and different entity as a new set up. The assessee has not satisfied any of the parameters laid down by the Supreme Court and, therefore, it would not be possible to hold that the assessee is entitled for the deduction under Section 80-IA.10. In reply, the learned advocate further submitted that the Hon'ble Bombay High Court in CIT v. D.K. Kondke (1991) 192 ITR 128 (Bom) has held that production of cinematograph films amounted to manufacture of an article or goods and, therefore, the contentions of the learned Departmental Representative would not stand the text of law.
11. We heard both sides in detail. As rightly pointed out by the CIT(A) in his order, there is no meritorious difference between the production of feature film and the production of TV serial. The Hon'ble Bombay High Court in CIT v. D.K. Kondke (supra) has held that production of cinematograph films amounted to manufacture of an article or goods.
Therefore, we have to accept the contention of the assessee that it is engaged in a manufacturing activity and, therefore, entitled to claim the deduction available under Section 80-IA.12. Next we have to consider whether the CIT(A) is justified in coming to a finding that the assessee has not satisfied the conditions laid down in Section 80-IA(2)(ii). On a reading of the provisions contained in Section 80-IA, we find that the conditions pointed out by the CIT(A) related to a situation where the new industrial undertaking has been formed by transfer of assets or by procurement of assets from outside India. In the present case, the plant and machinery and equipments were deployed on hire. Whether this hiring of equipments amounted to transfer or right to use was an important question. But the learned advocate has answered the question in a proper manner. He has rightly relied on the decision of the Hon'ble Bombay High Court in CIT v. Bayer Agrochem Ltd. (supra). The Court has held therein that, the hiring of items in such circumstances did not amount to a transfer and it could be at the maximum a case of licence alone. Accordingly, we find that on hiring the necessary equipments, the assessee had not acquired any right over the equipments and the arrangement of hire did not result in any transfer in any form. The arrangement has not resulted even "in a transfer of right to use". What the assessee had was only "a permissive right to use" the hired equipments. Further, the issue has been more succinctly decided by the Hon'ble Himachal Pradesh High Court in CIT v.Nayyars Minerals Export (P) Ltd. (supra). The Court has clearly held therein that the hiring of the machinery by the new undertaking from the sister concern would not amount to a transfer. It is also important to note the dominant formation of the new undertaking as observed by the Hon'ble Supreme Court in Bajaj Tempo Ltd.'s case (supra). The manufacturing activity carried on by the assessee is of a special character. It cannot be compared with the concept of traditional industrial undertaking. The raw materials are not metals and chemicals as conceived in the usual parlance. The dominant formation in the business carried on by the assessee is casting of artists and technicians. They are all human beings with special skills. They can only be hired. The assessee cannot own them. The peculiar feature of business carried on by the assessee is that even the dominant ingredients of his inputs were not capable of ownership. The equipments and other paraphernalia are only secondary. Therefore, it is not proper to apply the conventional test in a case of film production or production of TV serial.
13. In the facts and the circumstances of the case, we find that the CIT(A) is not justified in holding that the assessee had not complied with certain conditions stipulated in Section 80-IA. These issues pointed out by the CIT(A) are not relevant in the case of the assessee.
We, therefore, direct the AO to grant relief as claimed by the assessee in accordance with law.
14. In result, this appeal filed by the assessee is allowed. Order accordingly.