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TMI Blog1986 (11) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... he film had been produced by the firm VIP films ofBombayand they had gifted the distribution rights inDelhiand UP to a charitable trust known as 'Satbaba Smirin Dass Charitable Trust'. It was from this trust that the assessee had purchased distribution rights on a perpetual basis. The right, title, and interest in the distribution, exhibition and exploitation of the film had been gifted through a deed dated2-10-1978. The assessee-company purchased the rights on20-9-1980from the trust. The film was released inDelhiand UP Circuit sometime in February 1981 for commercial exhibition. 4. The assessee had claimed the total consideration of Rs. 90,01,000 as a deduction under rule 9B of the Income-tax Rules, 1962 ('the Rules'). The assessing officer was, however, of the view that rule 9B was not applicable to the present case as the assessee had not acquired the right under an agreement with a film producer. In the present case the film was acquired from the trust and not from the producer, who had gifted the right to the charitable trust. The assessing officer was of the view that the consideration was not reasonable and for this purpose he looked into the shareholdings of the various sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relationship between the producer firm, the donee trust and the assessee-company, the assessing officer held that provisions of section 40A(2) was clearly attracted. 5. It had been pointed out before the IAC that the distribution rights had been purchased not from the trustees but from the trust itself and such a purchase was not under the minimum guarantee basis but on a perpetual basis. It was also pointed out that the realisation from the film during the short period after its release in this year was Rs. 98,92,614 and the amount realised up to the assessment year 1985-86 was Rs. 1,24,50,566. On the basis of these materials it was submitted that the consideration paid was not excessive at all. 6. The assessing officer pointed out to the vast powers given to the trustees under the trust deed and the trust was also created by the members of the family. After referring to certain case laws it was pointed out that the substance of the transaction should be looked into by the assessing officer. From this he inferred that the payment claimed was excessive and could not be allowed in view of the provisions of section 40A(2). 7. The IAC then proceeded to decide the market value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution rights had gone up considerably. It was further argued that the cost of production of a film was no index of the price of the distribution rights. It was also pointed out that the film was bound to be more popular in UP andDelhiwhere the films having Manoj Kumar as the hero was bound to attract more crowd considering the earlier history of his films. It was further contended that the observations of the assessing officer regarding the trust and the powers of the trustees were irrelevant and when the gift had been made to the trust the trust did not proceed to exploit the film but sold the rights for a consideration. It was further pointed out that the assessee-company could acquire the distribution rights of the film for UP and Delhi Circuit only from the trust as by that time that right had already been gifted to the trust. It was further pointed out that the assessee-company did not show any favour to the trust when he paid to the trust an amount which was slightly less than what was agreed upon in this year. But the amount was paid later on. Regarding the sale of mere distribution rights without the sale of prints and trailers, it was contended that the trust could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving gifted the distribution rights to the trust, the assessee-company was trying to make a gift by making a payment which was much higher than the normal commercial value of the distribution rights. At the same time the Commissioner (Appeals) held that Rs. 50 lakhs could not be considered as the reasonable value of the distribution rights. Having regard to the various factors including the popularity of the film in Delhi and UP region the rise in the market conditions in the period of two years and other factors available on record, the market value of this right was taken by him at Rs. 70,01,000 and in this manner he reduced the addition made by the IAC by Rs. 20,01,000. 12. Whereas the department has filed an appeal against the reduction allowed to the assessee, the assessee-company has challenged the maintenance of any addition on this account. 13. The departmental representative has submitted before us that the IAC has brought out very clearly the closeness between the producers to the trust and the assessee-company. He pointed out that the trust had been used for reducing the incidence of tax on theBombayfirm as well as the assessee-company. He contended that the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial difference not only from the angle of interest which would accrue on the payments which had already been made by the Bombay distributor in 1978-79 but also from the other fact that the investment will start after a few years of the payment. 15. The learned counsel for the assessee criticised the order of the Commissioner (Appeals) in disallowing a part of the consideration after holding the provisions of section 40A(2) were not applicable in terms. He asked how any part of the payment could be disallowed. He submitted that the payment itself was not doubted and in such circumstances ad hoc disallowance was wholly unjustified. For this reliance was placed on the decision in the case of Godavari Sugar Mills Ltd. v. CIT [1985] 155 ITR 306 (Bom.), where it was held that the ITO cannot disallow expenditure which has been in fact incurred by the assessee for the purposes of business upon the ground that such expenditure is excessive or unreasonable. It was further held that for such disallowance it was necessary to show that the transaction in question is a sham one or not a bona fide transaction. In that case the entire amount paid for the purchase of sugarcane was held to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the decision of the Supreme Court in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546. The learned counsel further relied on the decision of the Bombay High Court in the case of CIT v. Y.S. Desale [1982] 137 ITR 117. In this case their Lordships have observed that for the purpose of becoming an AOP, some persons must join in a common action for producing income. In the present case the trustees had not joined hands with each other but had been appointed by the settlers. Trustees are individuals and the trust itself is also an individual. In view of this, it was contended that the IAC was wrong in considering the trust to be an AOP and the trustees to its members. In view of this, it was contended that the above sub-clauses would not be applicable. It was also submitted that the trustees or some of the trustees or one of the trustees may have substantial interest in the company in their individual capacity but it was not enough. Unless it was shown that the trustees were having substantial interest in the business of the company in their capacity as trustees, the above provisions could not be applied. It was pointed out that the trust as such does not own shares of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee agreement as compared to the perpetual lease purchase, the factor of period of two years and the factor of the area, namely, Bombay as compared to UP and Delhi was taken into consideration, the bridge of difference can be filled up. He also contended that nobody can calculate several years prior to the release of the film accurately the various factors and, therefore, a small difference in the consideration could not result in invoking the provisions of section 40A(2). In this connection, he pointed out that the collections made by the assessee-company within a few months of the release of the film would show that the payment of consideration was not excessive. In a period of six months the realisation was about Rs. 98 lakhs. This amount could leave to the assessee a margin and the loss which is shown by the assessee is due to the allowance of the whole consideration in the year of agreement itself. Our attention was drawn to the observations of the Hon'ble Gujarat High Court in the case of Mehta Parikh & Co. Ltd. v. CIT [1980] 124 ITR 448. That was a case where the question considered was the provisions of section 40(c) of the Act. Their Lordships observed : " ....However, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is on the department. The provisions of section 40A(2) have been introduced to stop excessive payments where the parties concerned are related to each other in the manner laid down in that section. Where the assessee is a company, which is the case before us, the payment in question should either be to the director of the company or to a person having a substantial interest in the company or any person of which a director, partner, or member has a substantial interest in the company or any relative of any such director or person. The payment in the present case has been made to the trust and we have no material on the basis of which it could even be argued that the trust was not a genuine one. We find that the department has recognised it as a charitable trust having certain objects of public utility. The case of a trust could be brought under the provisions of section 40A(2) only if we can hold that the trust was an AOP and/or the trustees are members of such association. It is not possible to accept the plea of the assessing officer that the trust is an AOP where the trustees have combined to carry on any activity of profit. The trustees cannot be considered as members of that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion which arises is whether without applying the provisions of section 40A(2) any payment can be held to be excessive or unreasonable and disallowed. We have already indicated above, the decisions of the Courts where it had been clearly laid down that any such disallowance can be made if there is material on record to show that the transaction is sham and not bona fide or it is established that the consideration which has been paid is partly or wholly for a consideration other than business. For establishing such a situation the onus will be entirely on the revenue. On the basis of the records, we have to give a finding whether any such inference can be drawn. As already stated above, all the parties are very close to each other and it may also be accepted that they were in a position to influence the decision of the other parties and if there is any material to show that a highly excessive payment had been made, which could not be justified from the commercial angle and the consideration is due to some other reasons, a disallowance can be made in an exceptional case. As already observed by the Gujarat High Court, the approach of the revenue authorities in these matters should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were earned inDelhiand UP area were enough to cover the cost of purchase within a period of six months. It cannot also be forgotton that after the purchase of the film for distribution in these years the assessee-company could exploit it in any manner it liked including its release on TV Circuit and the production for the purpose of video shows. If all these considerations are kept in view, it cannot be said that the consideration put in the agreement was excessive and was fixed with some other consideration in view. The learned Commissioner (Appeals) has discarded the evaluation made by the IAC and preceded to fix his own value of the distribution rights on the ground that the amount fixed in the agreement was not sacrosanct. In our opinion, apart from the close connections and close relations, there should have been some specific material to indicate the gross excessiveness of the consideration to hold that the consideration given in the agreement could be discarded. 22. In the present case, we are not concerned with a case where the transaction is held to be sham or bogus. Here again, we are not concerned with a case where the payment is shown to be for other considerations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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