AHMEDABAD C BENCH IDAR TALKIES v. INCOME TAX OFFICER July 10, 1984 JUDGMENT Per Gaitonde - These appeals are filed by assessee against orders of AAC, dated 1-9-1981 for assessment years 1976-77 and 1977-78 and dated 16- 10-1981 for assessment year 1978-79. 2. appellant is firm consisting of three partners, viz.,: 1. Smt. Kamal K. Somaiya. 2. Smt. Bhagwati Ladharam. 3. Smt. Lilavati Ladharam. firm is engaged in business of exhibition of films at Mithapura in cinema talkie, namely, Idar talkies. Up to 1-7-1974, business was proprietary concern of Smt. Kamal K. Somaiya. ITO noticed that in these periods, assessee-firm had claimed, for first time, to have been paid certain booking commission to Shri Kishanchand, husband of Smt. Kamal K. Somaiya. Shri Kishanchand had his own business of cinema film exhibition at Bhavnagar. commission payments were claimed to have been made at Rs. 39,000, Rs. 52,000 and Rs. 52,000 for assessment years 1976-77, 1977-78 and 1978-79, respectively. ITO examined nature of payments to ascertain whether same could be allowable as deduction. He enquired from assessee about nature of work done by recipient, Shri Kishanchand, and justification of payment. He also examined agreement purported to have been executed between assessee-firm and Shri Kishanchand. He held that agreement is sham. He also held that there was no business necessity for payment of Rs. 750 per week for 1976-77 and Rs. 1,000 per week in later years. He took note of exhibition fees payable by assessee to owners of films and felt that payments made to Shri Kishanchand are far in excess of even film hire charges. He also took note of fact that Shri Kishanchand was actually incurring losses in respect of his cinema business at Bhavnagar. He further took note of fact that payments were not periodical payments, but through Hawala entries at end of year. Ultimately, he disallowed entire commission claimed in 1976- 77 and Rs. 40,000 out of Rs. 52,000 claimed for later years, applying inter alia section 40A of Income-tax Act, 1961 (the Act). 3. As assessee was not satisfied with order of ITO, it filed appeal to AAC, who examined question afresh in light of materials on record and explanations given. He did not specifically hold that agreement is sham, but taking into consideration overall picture, he dismissed appeals. Against these orders, assessee has come up in appeal. 4. At this stage, learned departmental representative submitted that provisions of section 40A(3) should have been applied. Since, however, this point does not arise out of orders of lower authorities, we are not in position to entertain same. 5. On behalf of appellant, Shri Patel submitted that authorities below have not understood nature of business and genuine need of payment of booking commission for very special work done by Shri Kishanchand. He pointed out that from assessment years 1971-72 to 1975- 76, when booking was being made directly by Smt. Kamal K. Somaiya, business was not doing as well as it did in later years, where even after payment of booking commission to Shri Kishanchand, income has increased substantially. following figures extracted from page 16 of paper book of assessee are relevant: Assessment yearIncome Rs. 1971-7214,535 1972-7314,688 1973-7412,671 1974-7517,855 1975-7613,617 1976-7732,070 1977-7834,400 1978-7932,890 Shri Patel further pointed out that film exhibition business requires peculiar type of expertise which partners of assessee-firm lacked. They had to engage services of expert in field and could not think of any person more reliable than Shri Kishanchand, who would doubtless be taking deep interest in welfare of assessee-firm whose partners are his close relatives. Shri Patel further pointed out that in this line of business, distributors in Bombay demand exorbitant rates taking advantage of ignorance of mofussil exhibitors. He further pointed out that it was successful negotiation by Shri Kishanchand, which enabled assessee-firm to get more favourable terms and rates from Bombay distributors. Illustrations were given on page 15 of paper book. 6. Regarding actual work done by Shri Kishanchand, including travelling, correspondence, etc., Shri Patel invited our attention to voluminous correspondence, etc., was produced before lower autho-rities. Bombay parties were contacting Shri Kishanchand in respect of films to be exhibited at appellants cinema house. ITO had sent letter dated 20-2- 1981 and assessee had given its reply by letter dated 28-2-1981 giving various details of work done, etc. 7. Regarding doubts raised by ITO about genuineness of agreements, Shri Patel submitted that there need be no reasons to doubt these agreements at all, particularly in view of voluminous evidence regarding actual work done by Shri Kishanchand as also corres-pondence from Bombay distributors. Shri Patel further submitted that there can be no proper link between exhibition charges and booking commission as attempted by ITO. Last but not least Shri Patel submitted that ITO himself accepted that work was done for 1977-78 and 1978-79 and allowed Rs. 12,000 for each year. This is highly subjective decision of ITO without any basis for such arbitrary disallowance, reliance was placed on Voltamp Transformers (P.) Ltd. v. CIT [1981] 129 ITR 105 (Guj.). 8. On behalf of department, Shri Saxena invited our pointed attention to fact that business was proprietary concern of Smt. Kamal K. Somaiya and was going on quite well even without payment of booking commission. He further invited our attention to fact that original agreement showed that it was made up for purpose of income-tax (since, however, this agreement was not produced before AAC or before us, we are not in position to examine this issue). Shri Saxena further pointed out that apart from close relationship, funds of assessee-firm were also lying with Shri Kishanchand. He further submitted that payment claimed to have been made to Shri Kishanchand is far in excess of legitimate needs of business or ultimate benefit of business and that provisions of section 40A(2) are attracted in this case as held by lower authorities. departmental representative, however, did not have any material regarding payments of booking commission by other exhibitors under similar circumstances to outside parties doing works similar to work done by Shri Kishanchand. 9. We have examined various facts and arguments. There is no doubt that ITO is empowered to examine scope for disallowance in terms of section 40A. For first year, ITO has proceeded as if agreement is sham and that payments were not made or had no relation whatever to business. For later two years, however, ITO has adopted yardstick of Rs. 1,000 per month has justified under circumstances of case. Actually, there can be no doubt that work of booking agent is skilled job which lady partner could not have done with efficiency with which Shri Kishanchand has done. data given above shows clearly that business has substantially benefited by expertise rendered by Shri Kishanchand. ratio of film hire charges paid to total collection has actually come down (see paragraph No. 12 of paper book). This figure which was between 34 and 41 per cent between 1971-72 and 1975-76 has come down to 25 per cent and 29 per cent for 1976-77 and 1977-78. correspondence between Bombay distributors and financiers and Apsara Cinema, which was proprie-tary concern of Shri Kishanchand, who was acting on behalf of assessee-firm, shows clearly that there was good deal of work done by Shri Kishanchand. fact that agreement which formed basis for payment, raised some doubts in mind of ITO, does not affect situation because work done can be held to be even independent of agreement. payment for booking of pictures at competitive rates (sic). We, therefore, hold that Shri Kishanchand did actually work for assessee and was required to be remunerated for work done by him for assessee. 10. question now is regarding reasonableness of commission. data given by ITO and comparison with hire charges does not show clearly that payment is in excess of legitimate business needs of assessee. discretion given to ITO under section 40A is not untrammelled discretion. It is true that ITO is not bound independently to collect evidence and decide that allowance claimed is excessive or unreasonable but when assessee proves that actual services have been rendered by recipient of commission and that such services have benefited assessee, decision of ITO to hold that payment of Rs. 12,000 only would meet requirements of case cannot be said to be warranted by facts. Taking evidence as whole, we hold that payments made to Shri Kishanchand are admissible in full. alleged loss of revenue, because Shri Kishanchands business has been running at loss is incidental and consequential and cannot be considered as criteria for disallowing payment on such subjective business as has been attempted in this case. By its very nature, there cannot perhaps be comparable cases. fact that assessee-firm has three lady partners, and fact that Shri Kishanchand did have necessary experience and did actually worked and did bring substantial benefits to assessee-firm, have to be taken note of in competitive business. On facts, we hold that payments made to Shri Kishanchand are allowable in full. 11. Appeals are allowed. *** Idar Talkies v. Income-tax Officer