2015 (5) TMI 236 - HC - Income Tax

Disallowance made u/s.40(c) - remuneration paid to two directors of the company - ITAT allowed claim - Held that - disallowance made by the ITO under section 40(c) of the Act was not justified. The amounts paid to the two individuals were not paid in their capacity as members of the Board of Directors but these amounts were paid as professional charges for directing and producing a film. The revenue is, therefore, not justified in disallowing the claim, the character of the remuneration mode being different. As we have observed above, we are of the view that the Tribunal was right in deleting the disallowance. - Decided in favour of assessee. Deduction section 80J - whether business of production of films constitutes an industrial undertaking ? - Held that - As relying on Commissioner Of Income-Tax Versus DK. Kondke 1991 (3) TMI 82 - BOMBAY High Court if the production of a cinematograph film amounts to manufacture of an article or goods within the meaning of section 104 (40(a) as it then stood, it follows that the said activities must be treated as that of an industrial undertaking within the purview of Section 80J of the Act.Accordingly, the activities of production of a film amounted to manufacturing of an article or goods. The activities be treated as those of an industrial undertaking within the purview of Section 80J of the Act. Even otherwise, this Court was of the view that film production will have to be considered as a manufacturing activity and the undertaking will have to be considered as an industrial undertaking as the same is considered under excise law and other allied laws also. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance made under section 40(c) of the Income Tax Act, 1961 for remuneration paid to directors.
2. Eligibility of film production business for deduction under Section 80J of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance under section 40(c) of the Act
The case involved the disallowance of payments made to two directors of a film production company under section 40(c) of the Income Tax Act, 1961. The Income Tax Officer (ITO) disallowed the payments exceeding a certain limit, which was challenged by the assessee. The Commissioner of Income Tax (Appeals) upheld the ITO's decision, but the Appellate Tribunal, based on a previous decision, deleted the disallowance. The High Court agreed with the Tribunal, stating that the payments were made as professional charges for directing and producing a film, not as remuneration for their role as directors. Therefore, the disallowance made by the ITO was deemed unjustified, and the Tribunal's decision to delete the disallowance was upheld.

Issue 2: Eligibility for deduction under Section 80J
The second issue pertained to the eligibility of the film production business for deduction under Section 80J of the Income Tax Act, 1961. The ITO had rejected the claim for deduction under Section 80J, arguing that a film production business did not qualify as an industrial undertaking. However, the Tribunal, relying on a previous decision in the case of D.K. Kondke, allowed the deductions under Section 80J. The High Court referred to the earlier decision and noted that film production activities amounted to manufacturing of goods, making them eligible for deduction under Section 80J as an industrial undertaking. The Court emphasized that film production should be considered a manufacturing activity, aligning with excise and other related laws. Therefore, the Court answered the second question in the affirmative, in favor of the assessee.

In conclusion, the High Court ruled in favor of the assessee on both issues, stating that the disallowance under section 40(c) was unjustified and that film production activities qualified as an industrial undertaking for deduction under Section 80J.