1998 (9) TMI 113 - AT - Income Tax

Issues Involved:

1. Applicability of Section 37(3A) regarding publicity expenditure.
2. Disallowance under Section 40A(2)(a) for payment to Shri Raj Kapoor.
3. Inclusion of income from overseas exploitation of the film.
4. Inclusion of royalty income from gramophone records.
5. Charging of interest under Section 215.
6. Reduction of addition from Rs. 18,31,000 to Rs. 8,31,000.
7. Deletion of Rs. 3,50,000 from the income for distribution rights in Rajasthan.
8. Classification of the assessee as an industrial company for tax purposes.

Detailed Analysis:

1. Applicability of Section 37(3A) regarding publicity expenditure:

The assessee argued that the publicity expenses incurred by distributors should not be considered in its hands. The ITO included 60% of the distributor's expenses under Section 37(3A), leading to a disallowance of Rs. 6,30,503. The CIT(A) enhanced this disallowance by considering the entire amount of Rs. 23,50,000. The Tribunal held that publicity expenses incurred before the Censor Board's certificate should be allowed as "cost of production" under Rule 9A, and only post-certificate expenses should be considered under Section 37(3A). The case was remanded to the ITO for recalculating the disallowance.

2. Disallowance under Section 40A(2)(a) for payment to Shri Raj Kapoor:

The IT authorities disallowed Rs. 30 lakhs of the Rs. 50 lakhs paid to Shri Raj Kapoor, invoking Section 40A(2)(a). The Tribunal found the payment reasonable given Raj Kapoor's reputation and the benefits derived by the assessee, such as reduced artist fees and higher distributor shares. The Tribunal directed the ITO to allow the entire Rs. 50 lakhs as a deduction.

3. Inclusion of income from overseas exploitation of the film:

The ITO included Rs. 18,31,000 as the assessee's income from overseas exploitation. The CIT(A) reduced this to Rs. 8,31,000. The Tribunal concluded that the income earned by the firm exploiting the film abroad should not be included in the assessee's income, as the firm provided significant services and legal agreements supported the transactions. The Tribunal deleted the Rs. 8,31,000 addition.

4. Inclusion of royalty income from gramophone records:

The ITO included Rs. 5 lakhs in the assessee's income, representing royalty rights assigned to a firm. The Tribunal upheld the CIT(A)'s decision to include this amount, finding insufficient evidence to support the assessee's claim that the royalty income should not be assessed in its hands.

5. Charging of interest under Section 215:

The Tribunal noted that the issue of charging interest under Section 215 would be consequential to the decisions on other grounds. The ITO was directed to redetermine the interest after giving the assessee an opportunity to be heard.

6. Reduction of addition from Rs. 18,31,000 to Rs. 8,31,000:

Given the Tribunal's decision to delete the Rs. 8,31,000 addition from the assessee's income, the issue raised by the Revenue on this point became infructuous and academic. The Tribunal dismissed this ground.

7. Deletion of Rs. 3,50,000 from the income for distribution rights in Rajasthan:

The CIT(A) deleted Rs. 3,50,000 added by the ITO, finding that the agreements for Rajasthan territory distribution were independent and justified. The Tribunal upheld the CIT(A)'s decision, agreeing with the reasoning provided.

8. Classification of the assessee as an industrial company for tax purposes:

The CIT(A) directed the ITO to consider whether the assessee should be treated as an industrial company based on the CBDT circular and relevant provisions. The Tribunal found no infirmity in the CIT(A)'s order and upheld the decision to remand the issue to the ITO with appropriate directions.

Conclusion:

The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was dismissed.

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