1982 (5) TMI 69 - AT - Income Tax

Summary

Issues Involved:
1. Whether an assessee who fails to object to an addition or disallowance made in a draft order under Section 144B loses the right to appeal under Section 246.
2. The genuineness and reasonableness of the remuneration paid to a retired partner for services rendered.
3. Applicability of Section 40(b) in disallowing remuneration paid to a partner.
4. Determination of the cost of the film for amortization purposes.
5. Whether the liability of Rs. 10 lakhs payable to a retired partner can be treated as part of the cost of the film under the mercantile system of accounting.

Detailed Analysis:

1. Right to Appeal Under Section 246:
The primary issue was whether failing to object to a draft order under Section 144B precludes an assessee from appealing under Section 246. The Tribunal examined the legislative intent behind Section 144B, which aims to reduce appeals by providing an intermediate forum for assessment. The Tribunal noted that Section 144B is procedural and does not create substantive rights. It was held that merely not filing objections does not equate to acceptance of the draft assessment order. Silence cannot be construed as positive acceptance, and the right to appeal is a statutory right that cannot be taken away unless explicitly stated. Thus, the appeal before the CIT(A) was deemed maintainable.

2. Genuineness and Reasonableness of Remuneration:
The Tribunal examined the facts surrounding the payment of Rs. 10 lakhs to a retired partner, Ramesh Sippy, for services rendered post-retirement. The ITO had argued that the payment was for services rendered while he was a partner. However, the Tribunal found that the payment was justified and reasonable given the services rendered by Sippy in resolving issues with the Censor Board, which were critical for the film's release. The Tribunal concluded that the agreement was genuine and the remuneration reasonable.

3. Applicability of Section 40(b):
Section 40(b) disallows remuneration paid to a partner. The Tribunal held that since the remuneration was for services rendered after Ramesh Sippy's retirement, Section 40(b) was not applicable. The Tribunal also noted that the ITO had not included the income from the film 'Sholley' in the period when Sippy was a partner, further supporting the conclusion that Section 40(b) did not apply.

4. Determination of Cost for Amortization:
The Tribunal upheld the inclusion of the Rs. 10 lakhs paid to Ramesh Sippy in the cost of the film for amortization purposes. The ITO had allowed amortization based on the total cost, which included the Rs. 10 lakhs. The Tribunal found no reason to exclude this amount from the cost of the film, given the significant services rendered by Sippy post-retirement.

5. Liability Under Mercantile System:
The Tribunal addressed the argument that the liability of Rs. 10 lakhs did not become due during the accounting year. It was held that under the mercantile system, the liability was incurred when the agreement was made, and it was includible in the cost of the film. The Tribunal clarified that the focus was on determining the cost of the film, not whether the liability was a deductible revenue expenditure for the year.

Conclusion:
The Tribunal concluded that the appeal filed by the assessee was maintainable, the remuneration paid to the retired partner was genuine and reasonable, Section 40(b) was not applicable, and the Rs. 10 lakhs was rightly included in the cost of the film for amortization purposes. The appeal by the Revenue was dismissed.