1986 (11) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40A(2) of the Income-tax Act, 1961.
2. Reasonableness of the consideration paid for distribution rights.
3. Classification of the assessee as an industrial company.
4. Consequential interest under Section 215 of the Act.

Detailed Analysis:

1. Applicability of Section 40A(2) of the Income-tax Act, 1961:
The primary issue was whether the provisions of Section 40A(2) applied to the payment made by the assessee-company to the trust for the purchase of distribution rights of the film 'Kranti.' The assessing officer argued that the transaction was influenced by the close relationship between the shareholders of the assessee-company and the trustees of the trust, invoking Section 40A(2) to disallow part of the payment. However, the Commissioner (Appeals) and the Tribunal concluded that Section 40A(2) was not applicable because the payment was made to a trust and not to any individual director or relative. The trust, being a charitable entity recognized by the department, could not be considered an Association of Persons (AOP) with trustees as its members. The trustees acted in a representative capacity, and their individual shareholdings in the company did not affect the trust's independent status. Therefore, the provisions of Section 40A(2) were not applicable to this transaction.

2. Reasonableness of the Consideration Paid for Distribution Rights:
The assessing officer disallowed Rs. 40,01,000 of the Rs. 90,01,000 paid for the distribution rights, deeming it excessive. The Commissioner (Appeals) reduced this disallowance to Rs. 20,01,000, considering the market conditions and the popularity of the film. The Tribunal, however, held that the consideration paid was not excessive or unreasonable. The Tribunal emphasized the differences between the agreement for the Bombay region, which was on a minimum guarantee basis and made two years prior, and the present perpetual outright purchase agreement for the UP and Delhi regions. The Tribunal noted that the film's popularity, the favorable market conditions, and the substantial earnings from the film justified the higher consideration. The Tribunal found no material evidence indicating that the payment was for considerations other than business needs, thus rejecting the disallowance.

3. Classification of the Assessee as an Industrial Company:
The assessee claimed to be treated as an industrial company, arguing that its income from film production in earlier years should be considered. The Commissioner (Appeals) rejected this claim, stating that there was no film production in the relevant year. The Tribunal found that the issue had not been fully considered, and the facts regarding the nature of income and major activities were not adequately ascertained. Therefore, the Tribunal set aside this issue to the Commissioner (Appeals) for a rehearing and a decision based on full facts and in accordance with the law.

4. Consequential Interest under Section 215 of the Act:
The ground regarding interest under Section 215 was stated to be purely consequential, and thus, no specific directions were necessary.

Conclusion:
The Tribunal allowed the assessee's appeal in part, dismissing the departmental appeal. The Tribunal concluded that Section 40A(2) was not applicable, the consideration for distribution rights was not excessive, and the issue of classification as an industrial company was remanded for further consideration.