1985 (1) TMI 91 - AT - Income Tax

Summary

Issues:
1. Disallowance of payments made to a film director under section 40(c) of the Income Tax Act, 1961.
2. Disallowance of expenditure on advertisement under sections 37(3A) and 37(3D) of the Income Tax Act.

Analysis:

Issue 1: Disallowance of payments made to a film director under section 40(c) of the Income Tax Act, 1961

The case involved payments made to a film director for directing motion pictures by an assessee company. The Income Tax Officer (ITO) disallowed a portion of the payments under section 40(c) of the Act, limiting the deduction to Rs. 72,000. The CIT(A) held that the payments should not be considered for disallowance under section 40(c) but should be examined under section 40A(2) to determine if they were excessive or unreasonable. The Department appealed, arguing that the overall limit of Rs. 72,000 under section 40(c) applied. However, the Tribunal referred to a Karnataka High Court decision which concluded that payments to independent entrepreneurs should not fall under section 40(c) but should be scrutinized under section 40A(2)(a). As the film director provided services independently, not as a director of the company, the payments were not subject to disallowance under section 40(c). The Tribunal upheld the CIT(A)'s decision, emphasizing the need to assess the expenditure's reasonableness under section 40A(2)(a).

Issue 2: Disallowance of expenditure on advertisement under sections 37(3A) and 37(3D) of the Income Tax Act

The second issue pertained to the disallowance of expenditure on advertisement under sections 37(3A) and 37(3D) of the Income Tax Act. The assessee debited sums under "publicity" in the production cost of a film, which the ITO disallowed partially under section 37(3A). The assessee contended that section 37(3D) applied, exempting the disallowance for industrial undertakings producing new articles. The CIT(A) agreed with the assessee, but the Department appealed. The Tribunal analyzed section 37(3D) and concluded that the exemption applied only if the industrial undertaking began manufacturing new articles in the relevant year. Since the undertaking had been producing films for years and did not start manufacturing new articles in the years in question, section 37(3D) did not apply. The Tribunal set aside the CIT(A)'s decision and upheld the ITO's disallowance under section 37(3A).

In conclusion, the appeals were partly allowed based on the above analysis of the issues involved in the judgment.