1985 (5) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 6,457 towards income from cinema exhibition.
2. Addition of Rs. 700 sustained by the Commissioner (Appeals) out of miscellaneous expenditure.
3. Deduction of litigation expenditure amounting to Rs. 8,274.

Detailed Analysis:

1. Addition of Rs. 6,457 towards income from cinema exhibition:
The assessee, a registered firm running a cinema theatre, reported a total collection of Rs. 64,574 from 233 morning shows. The firm claimed that the theatre was hired out to an individual named Nagulu for morning shows at Rs. 50 per show, resulting in a rental receipt of Rs. 11,650. However, the Income Tax Officer (ITO) was not satisfied with this arrangement as the assessee failed to produce Nagulu or any agreement/confirmation letter. Consequently, the ITO concluded that the morning shows were conducted by the assessee itself and added Rs. 6,457 to the income, estimating 10% of the receipts as income.

The Commissioner (Appeals) upheld the ITO's finding on different grounds, calculating that the maximum collections per show should be Rs. 2,218, leading to an optimum total of Rs. 5,12,600 for 233 shows. The reported collection of Rs. 64,574 was only 12% of the optimum, which the Commissioner deemed meagre, thus upholding the estimate.

On further appeal, the Tribunal accepted the ITO's finding that the assessee had not proven the hiring arrangement. The Tribunal clarified that the collection figure of Rs. 64,574 could not be rejected as it was supported by statements given to entertainment tax authorities. The Tribunal found the ITO's estimate of Rs. 6,457 excessive and reduced it by Rs. 3,000, taking into account that morning shows would not run to full capacity.

2. Addition of Rs. 700 sustained by the Commissioner (Appeals) out of miscellaneous expenditure:
The assessee contested the addition of Rs. 700 out of a total miscellaneous expenditure of Rs. 9,730. After hearing both parties, the Tribunal concluded that no interference was necessary, thereby upholding the addition.

3. Deduction of litigation expenditure amounting to Rs. 8,274:
The firm had incurred litigation expenses due to a suit filed by a former partner, Shri M.V.V. Krishnamurthy, who contested his unilateral retirement from the partnership by the other partners. The trial court ruled in favor of Krishnamurthy, declaring his retirement illegal and void, and entitling him to a share in the firm's profits and assets. The ITO and the Commissioner (Appeals) disallowed the litigation expenses as business expenditure, reasoning that it was a dispute between partners rather than for the business's benefit.

The Tribunal examined the principles governing the allowance of litigation expenses under Section 37 of the Income-tax Act, 1961, referencing several case laws. The key consideration was whether the litigation affected the business or assets of the firm. The Tribunal found that the litigation did not impair the business or affect the firm's assets. Krishnamurthy's objection was primarily to his removal from the partnership, and his prayer for dissolution was to ascertain his share, not to wind up the business. Thus, the Tribunal agreed with the authorities that the expenditure was not allowable as it did not pertain to the preservation of the firm's assets or the effective running of the business.

Conclusion:
The appeal was partly allowed, with the Tribunal reducing the addition towards income from cinema exhibition by Rs. 3,000 and upholding the other findings of the lower authorities.