ORDER
V. Balasubramanian, Senior Vice President
1. In this departmental appeal, the order of the Commissioner (Appeals) is challenged with reference to the deletion of three amounts. The matter is considered seriatim below.
2. The IAC found that the assessee had debited the income and expenditure account with a sum of Rs. 64,649 being interest paid to two parties- Prasad Productions and Shree Laxmi Pictures. The assessee claimed allowance of the interest under Section 80V of the Income-tax Act, 1961 (‘the Act’). The IAC disallowed the claim, inter alia, for the reason that the provisions of Section 80V were introduced after 1-4-1976. The Commissioner (Appeals) allowed the claim restricting it to Rs. 48,487.
3. The learned counsel for the department has pointed out that even accepting that the borrowings could be regarded for payment of tax, it was not borrowed during the year of account. The money was borrowed earlier and continued to be utilised by the assessee. The dates of the loans were 3-12-1971 and 4-12-71. It was for the assessee to establish that it was the same money which it borrowed that it paid towards tax. Apart, therefore, from the claim being not relevant for the year under appeal, according to the learned, counsel, the borrowing cannot also be related to the payment of tax. For the assessee, it is pointed out that the accounts clearly indicated two borrowings of Rs. 50,000 each on 3-12-1971 and 4-12-1971. On 13-12-1971, a sum of Rs. 74,778 was paid into the Reserve Bank of India towards income-tax. The accounts clearly indicate that this amount could not have been paid but for the borrowals. It is clear, therefore, that the borrowed money was utilised only for tax payment. The interest on this amount was paid during this year and the claim is made because the assessee is following a cash system of accounting.
4. As correctly pointed out by the Commissioner (Appeals), no limitation can be read into the statutory provisions to the effect that the borrowings must be made during the previous year or even after 1-4-1976. In fact, if a stipulation were to be made that interest can be allowed only on amounts borrowed during the previous year, the provisions themselves might become otiose since interest is generally calculated or paid only after the year or a term. Apart from what the Commissioner (Appeals) has mentioned in his order, the above circumstances also would compel us to support his order on this point.
5. The IAC found that during the year of account, the assessee had entered into agreements with certain producers. The consideration for the professional services rendered by him was in the form of deferred annuities. Of the four agreements entered into, one relating to Vijay Suresh Combine was through a life insurance policy whereas the agreements with three other parties, Megha Movies for the picture ‘Kinara’, A.R. Productions for the picture ‘Karmayogi’ and Modern Films for ‘Priyatama’ were not through the LIC. The assessee was to get annuity instalments in respect of the latter three agreements of Rs. 16,000, Rs. 32,000 and Rs. 32,000, respectively with 10, 15 and 15 instalments, respectively. The amount paid by the producer in respect of these agreements came to Rs. 95,000, Rs. 1,98,000 and Rs. 2 lakhs, respectively. The assessee did not declare the aforesaid payments as his professional receipts on the ground that the payments represented the purchase price of annuity policies. There was no receipt, for the year of account. The IAC found that whereas the agreement with Vijay Suresh Combine involving a single premium on LIC policy in the name of the assessee, came within the norms of the Board’s instructions relating to such payments and was thus not taxable, the other three payments clearly represented taxable income. These other producers had entered into an agreement with a private limited company-Balaji Film Finance & Distribution Co. (P.) Ltd. for carrying on guarantee business. This private company was to act as guarantor for the due performance by the producers in respect of the annuity payments to be made to the assessee. The producers were stated to have deposited certain amounts with the private limited company instead of taking out a single premium annuity policy from the LIC. The agreement indicated that the three producers were to deposit the specified amount with the guarantor. If the instalments payable by the producer to the artist was paid, the guarantor was to repay the producer a proportionate part of the deposit along with interest. If he did not pay any instalment, the guarantor had to pay the amount to the assessee. The IAC also found that Balaji Film Finance & Distribution Co. (P.) Ltd. was constituted by three shareholders : the assessee’s brother-in-law and two of his uncles. It had only a equity capital of Rs. 7,500. The company had invested the total amount of Rs. 4,93,000 for the purchase of lease rights in some theatres in Bombay, etc. Some loans had also been advanced to concerns in which the assessee’s family and relatives were interested. From these and other facts peculiar to situations, the IAC came to the conclusion that these amounts should be treated as clear realisation of income by the assessee himself. The producers had already made due payment to the assessee by an arrangement which for all practical purposes resulted in a constructive receipt to the assessee from his profession. The IAC, therefore, added the sum of Rs. 4,93,000 as the income of the assessee. On appeal, the Commissioner (Appeals) held that there was nothing to indicate that Balaji Film Finance & Distribution Co. (P.) Ltd. represented a benami to the assessee. This party actually stood as a guarantor for the payment to the assessee. The funds received by it were utilised for certain purposes of its own. The Commissioner (Appeals) held that no part of this amount should be considered as the assessee’s income of the year.
6. The learned counsel for the department has pointed out that this was a clear case of the assessee passing on his income to a benamidar. Admittedly, the conditions laid down in the Board’s circular or the principles followed therein do not apply to this case. When the producers paid money to Balaji Film Finance & Distribution Co. (P.) Ltd. it amounted to a virtual receipt by the assessee of income. The assessee is in a commanding position in the film field. The producers, therefore, while making agreements for payments are forced to abide by the directions of the artist. It is in this context, one has to examine the agreement, the producers and the assessee have with Balaji Film Finance & Distribution Co. (P.) Ltd. The company is perhaps solely put up for this guarantee activity. The shareholders of the company have no money, no background and no other experience in the film business or any other business. The guarantor apparently is found in the manner of an investment company since it had taken on lease theatres, etc. Its capital was only Rs. 7,500. According to the learned counsel, all these clearly indicate that the assessee was the prime motive force behind the guarantor company. The amounts received under the agreement by the guarantor were real receipts of the assessee from the producers.
7. For the assessee, it is pointed out that there was nothing to show that Balaji Film Finance & Distribution Co. (P.) Ltd. was in any way under the control of, much less the benami of the assessee. The agreements with the producers clearly contemplated payment of remuneration to the assessee for his professional services on an instalment basis and that too at a future date. Producers had depending on their financial position, entered into such agreement, whereby while carrying on the work in the present, they are obliged to make the payment only in the future partly out of recovery from the exploitation of films and partly from future receipts. There was nothing unusual in such an agreement. Merely because the future payment of annuity arrangement was not put through the LIC but in other forms it would not alter the position either in law or as a matter of fact. All the facts relating to Balaji Film Finance & Distribution Co. (P.) Ltd. have been disclosed to the ITO in full. The ITO assessing that concern has not even hinted at any benami transactions or made protective assessments in that party’s case. Merely because some of the relatives of the assessee are the shareholders of that company, the assessee cannot be regarded as the person carrying on the business done by them.
8. The issues before us are : (1) Whether there is anything irregular in the payment made by the producers on a deferred annuity basis ? (2) Whether Balaji Film Finance & Distribution Co. (P.) Ltd. are benamies of the assessee ? and (3) Whether the payment made by the producers to Balaji Film Finance & Distribution Co. (P.) Ltd. can be regarded as payment to the assessee ? On the first issue, we can see nothing against the assessee. A producer may make a payment on the spot in cash or at stipulated periods including on a future date. The latter payment he can make either in a lump sum or in instalments. Thus, it would be incorrect to say that there was anything wrong in Megha Movies remunerating the assessee by making payments of Rs. 16,000 each on 10 instalment dates in the future.
9. As regards the charge of Balaji Film Finance & Distribution Co. (P.) Ltd. being the benami of the assessee, the only evidence based which this inference is made that the shareholders of the company are relatives of the assessee ; that its capital is Rs. 7,500 only and that it does not have any background of film or other business. When the IAC treats the receipts of this company as the receipts of the assessee, he in fact holds this company to be a benamidar of the assessee. The criteria for deciding whether a person is benamidar or another have been judicially well laid down. It must necessarily be shown that money proceeds from a person apparently with a view to benefit another person but instead of doing so, really benefits himself. There is no such situation here. All that Balaji Film Finance & Distribution Co. (P.) Ltd. has done is to guarantee the payment to the assessee by the producers. This function of this company is akin to what any bank or other investment company does. It is true that as a guarantor or otherwise, the company has taken amounts from the producers. From Megha Movies, the company has taken an amount of Rs. 95,000 as deposit which it has invested in activities like leasing out certain theatres. In the first place, it is not clear whether the sum of Rs. 95,000 taken would be equivalent to the present value of 10 annuities on the specified dates of Rs. 16.000 each. Under the agreement with the producer, the assessee is entitled to the payment only on the specified dates. He is entitled, however, to ask for a guarantee for the payment. If this guarantee is given not by any institution like the LIC but a private company there is nothing wrong in that. In the case of a life insurance policy which is the subject-matter of the Board’s circular, etc., the producer after payment of the single premium washes his hand off the affair and he is nowhere in the picture. In the present case, the producer is very much in the picture until the last instalment is paid to the assessee. It is only on his failure to make the payments that the guarantor has to pay to the assessee. The fact that the guarantor returns a proportionate part of the money to the producer for amounts paid by the producer to the assessee, does not alter the position that this is a mere guarantee contract. The IAC has referred to the point that if Balaji Film Finance & Distribution Co. (P.) Ltd. were to fail, the assessee would have no remedy. In our view, this does not support the case of benami. The learned counsel for the department was asked by us to produce even a minimum of evidence to support its case of benami. Nothing other than a reference to the relationship is put up in this connection. We see nothing whereby the assessee could have the control or has any control over Balaji Film Finance & Distribution Co. (P.) Ltd. On the evidence, therefore, it cannot be held that this company is a benamidar of the assessee. Naturally, an amount received by it and merely as a guarantor cannot be treated as income of the assessee. We, therefore, uphold the decision of the Commissioner (Appeals) on this point.
10. The assessee claimed a sum of Rs. 6,33,979 as loss in the distribution of film ‘Jay Vijay’. The facts of the case are that the assessee was an artist in the abovementioned film. The distributor S.R. Bros, entered into an agreement with the producer Prasad Productions for distribution of the film in the territory of C.P. & Berar and C.I. Krishna Film Enterprises, a family concern of the assessee had entered into an agreement with S.R. Bros, on a 50 per cent partnership in the distribution of the said film. The film was released on 11-11-1977 in Bombay and in other territories but since it did not click the producer withdrew all the prints. It was reshot with substantial changes and was re-released on 22-8-1978 in Bombay circuit. The assessee entered into an agreement on 15-11-1978 with S.R. Bros, for purchase of the outright lease and exclusive rights of the picture for C.P. & Berar territory for a consideration of Rs. 7,65,000. Up to 31-3-1979, the assessee realised an amount of Rs. 1,75,724 out of which expenses to the extent of Rs. 44,707 had to be incurred on account of publicity and commission. The net loss of Rs. 6,33,979 was thus worked out. In fact, this loss was computed only because the entire cost was claimed as a deduction on the basis of Rule 9B of the Income-tax Rules, 1962. The IAC held that the claim was not genuine, the assessee was not a distributor arid, therefore, the provisions of Rule 9B would not apply to him. Secondly, he felt that the assessee entered into this deal anticipating a loss to wipe off his profit.
11. On appeal, the Commissioner (Appeals) held that the transaction was genuine and deleted the addition. This is challenged in the departmental appeal.
12. The learned counsel for the department has urged that the assessee is not a distributor. In fact, the picture was known to be a flop and even so he purchased the picture. This was thus a case of purchase of a loss to set off his high income for the year. For the assessee, it is pointed out that this is a normal transaction. Since the assessee had an interest in the success of the picture and there was nothing to show that after the remake and re-release it would result in a loss he ventured into the distribution as such to secure his dues including the professional fees. In the subsequent years, in respect of the same and other pictures even the department has treated the assessee as a distributor. There has been income from this source for the subsequent year also. There was no connection between the assessee and any of the other parties and there was no motive at all for the assessee, therefore, to purchase the loss at a benefit to outsiders.
13. On a consideration of the facts, we see no reason to differ from the decision of the Commissioner (Appeals) on this point. After the initial failure of the picture it was re-released after substantial alterations and in respect of the other areas, it would appear the picture was sold out. The assessee took out the distribution rights for one particular area, namely, C.P. & Berar. The loss has to be computed for the year because of the application of Rule 9B where the entire cost is claimed as a deduction for a picture released for exhibition for more than 90 days in the year. As a matter of fact, for the assessment year 1980-81, this picture has fetched receipts of Rs. 2,67,318. The entire distribution mechanism of this picture after the assessee took over his claim to have been directed by the assessee in his area. No evidence is available to show that this is a bogus claim or inaccurate. As stated above, the assessee directed the distribution in the area for subsequent year also netting a high figure of receipts of nearly Rs. 3 lakhs. In the face of these and other facts mentioned by the Commissioner (Appeals), the assessee’s transaction has to be treated as a normal business incident. As against his loss, in fact, the assessee has taken credit for his professional fees from the picture also. The subsequent years result were also not bad. In fact, even in the year 1983-84, receipts of Rs. 1,25,384 were received from the picture. The Commissioner (Appeals)’s order on this point is upheld.
14. The departmental appeal is dismissed.
Y.R. Meena, Judicial Member
1. I have carefully gone through the order passed by my learned brother. I agree with the view taken by my learned brother regarding the interest of Rs. 48,487 and loss of Rs. 6,33,979. However, unfortunately, I am unable to agree with the view taken by him regarding deletion of the addition of Rs. 4,93,000 made by the IAC (Assessment) as unaccounted professional fees.
2. The assessee is a film artist. He entered into agreements with certain producers for the professional services rendered by him. Out of the four agreements entered into, one relating to Vijay Suresh Combine was through a life insurance policy whereas the agreements with three other parties, namely, Megha Movies for the picture ‘Kinara’, A.R. Productions for the picture ‘Karmayogi’ and Modern Films for ‘Priyatama’ were not through LIC. A copy of the agreement is placed at page 18 of the assessee’s compilation. This tripartite agreement is between the assessee, the producers and Balaji Film Finance & Distribution Co. (P.) Ltd. The said Balaji Film Finance & Distribution Co. (P.) Ltd. is constituted by three shareholders, namely, the assessee’s brother-in-law and two of his uncles, having only an equity capital of Rs. 7,500. Under the agreement, the producers have deposited Rs. 95,000, Rs. 1,98,000 and Rs. 2 lakhs, respectively, with the guarantor, Balaji Film Finance & Distribution Co. (P.) Ltd. Under the tripartite agreement, this company has given guarantee that the producers shall pay Rs. 16,000, Rs. 32,000 and Rs. 32,000, respectively, in 10, 15 and 15 instalments. In case of default by the producers, Balaji Film Finance & Distribution Co. (P.) Ltd. had to pay the stipulated instalments to the assessee. In its turn, this Balaji Film Finance & Distribution Co. (P.) Ltd. has not taken any annuity policy for the assessee but has invested the amount in taking out some lease in cinema theatres in Bombay and further part of that deposit was advanced as loan to the relatives of the assessee. At the time of assessment, the ITO has taken the said agreement as bogus for the following reasons :
(i) The assessee for the past many years get remuneration through the media of annuity policies so that it can be easily inferred that he is fully aware of rules and regulations, practice and procedure relating to its exemption from taxation.
(ii) The important feature of the Board’s exemption policy is that the concerned annuity policy embodies that neither was the surrender value thereof nor were the annuities payable thereunder commutable. Thus, the underlying idea is that the lump sum payment made by the producer must lie in the coffers of the Government.
(iii) The Balaji Film Finance & Distribution Co. (P.) Ltd. has not taken out any annuity policy for deferred payment to the assessee for which purpose alone the producers provided the necessary funds. The producers made over the full payment in accordance with the terms of the contract with the assessee and, therefore, one wonders at the three clauses of the guarantee agreement reproduced above. Thus, the operative clauses seem to vitiate the whole arrangement as also the claim made by the assessee for exemption in terms of Board’s instruction.
(iv) The assessee’s guarantors received lump sura payments from the producers and as shown above the funds have been used away in various investments and advances for the purpose of making income. And this is surely against the spirit of the Board’s instruction relied upon by the assessce for exemption of the sum in question.
(v) Balaji Film Finance & Distribution Co. (P.) Ltd. seems to be floated solely for the purpose of standing guarantors for the assessee alone as it has not secured nor endeavoured either to secure or transact any guarantee business or some such business for any other producer or artist.
(vi) What will happen if Balaji Film Finance & Distribution Co. (P.) Ltd. goes into voluntary liquidation for any reason-good or bad or artificial ? And then how will assessee get his dues especially so when the guarantors have used away monies received from the producers. The assessee is not in a position to explain as to how he benefits or secures himself in a better way by the new arrangement vis-a-vis guarantee scheme.
According to the IAC, the producers have made the due payments to the assessee by the arrangement as fixed up by the assessee and that for all purposes, such receipts would only be the assessee’s receipts from profession. He, therefore, added the amount of Rs. 4,93,000 to the income of the assessee for the year under consideration.
3. Being aggrieved, the assessee carried the matter in appeal to the Commissioner (Appeals). According to him, it cannot be held that Balaji Film Finance & Distribution Co. (P.) Ltd. is bogus or dummy or a benamidar of the assessee. Considering the agreement in question as genuine, he deleted the addition so made by the assessing authority.
4. In the appeal by the revenue before the Tribunal, on behalf of the assessee-respondent, it was argued by Shri D.M. Harish that the agreement in question is similar to the annuity policy being issued by the LIC. According to him, since the payments made by the producers to Balaji Film Finance & Distribution Co. (P.) Ltd. were under such an agreement, the same cannot be treated as the income of the assessee. He also explained as to how the said deposits to Balaji Film Finance & Distribution Co. (P.) Ltd. were invested.
5. I agree with Shri Harish that there was an agreement between three parties, the producers, the assessee and Balaji Films Finance & Distribution Co. (P.) Ltd. Under the agreements, the producers were supposed to deposit some amount with Balaji Film Finance & Distribution Co. (P.) Ltd. for the work assigned to the assessee in their respective films. But, at the same time, one cannot ignore the legal principles that mere agreement is not enough to decide the rights. Sometime, in view of the facts and circumstances related to a particular issue, it has to be seen as to what is the real intention of the parties or whether there is any collusion to avoid tax. In this case, it is claimed that the producers have made the deposits with Balaji Film Finance & Distribution Co. (P.) Ltd. The shareholders of this company, as mentioned earlier, are closely related with the assessee. It means, when the payment which is due to the assessee for his performance in the respective films is made by the producers to Balaji Film Finance & Distribution Co. (P.) Ltd., it is a payment in effect made to the assessee’s brother-in-law and uncles. Admittedly, this Balaji Film Finance & Distribution Co. (P.) Ltd. has no other business except its entering into agreements with the producers to take guarantee for the payments to be made by the producers to the assessee. It was the argument of Shri Harish that as the film artist has a very short period, for earning in film line, so for the future safety he entered into these agreements. A question was put by the Bench as to why instead of LIC the assessee has selected to deposit the money with a company having only Rs. 7,500 as capital with it and how the amount (deposits) would be more safe with this company which has no other business activities except the agreement in question. To this, Shri Harish replied that as the shareholders of the said company are close relatives of the assessee, the money was safe. This explanation is not satisfactory. In fact, the money would be more safe to the assessee when it could be taken straightaway by the assessee from the producers. So far as the guarantee given by the said company, 1 do not understand as to why the said company has given guarantee for the payments to be made by various producers to the assessee, in normal course company should give some guarantee for the assessee for performance and not give guarantee for producers for payment. When the agreements are with close relatives and which is likely to result in evasion of tax, the same have to be considered with due care, especially with regard to the intentions of the parties. In my view, mere formality of entering into an agreement is not enough to accept the same. A question may arise that the assessing authority has not brought any material on the record to disbelieve the genuineness of the agreement. However, in cases like this, it cannot be expected that the parties will come to the assessing authority and inform that they would enter into bogus agreements. Therefore, the point left to the assessing authority is to find out the ultimate intention behind such agreement taking into consideration the relationship of the parties, the effect of the agreement and the ultimate result of the agreement and purpose behind agreement. In the present case, in case the producers failed to pay the instalments as agreed to, I do not think that the assessee would file suit in a Court of law against his brother-in-law and uncle who have hardly gained out of their agreement. In the latest decision of the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, their Lordships have considered the difference between the concept of tax evasion and tax avoidance on the basis of agreement. After considering the whole issue, their Lordships have observed :
… the English cases at some length, only to show that in the very country of its birth, the principle of Westminster has been given a decent burial and in that very country, where the phrase ‘tax avoidance’ had originated, the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep frown. The courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.(p. 158)
Their Lordships have further observed :
We think that the time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is ‘the large hidden loss’ to the community (as pointed out by Master Sheatcroft in 18 Modem Law Review 209) by some of the best brains in the country being involved in the perpectual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not no skilful advisers on the other side. Then again there is the ‘sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it’. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the ‘artful dodgers’…. (p. 160)
And finally, their Lordships have observed :
It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ’emerging’ techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really arc and to refuse to give judicial benediction. (p. 161)
The Hon’ble Mr. Justice Misra observed :
Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. (P- 171)
Considering the observations of their Lordships on the issue in the aforesaid case and the facts of the case on hand, as discussed above, I am of the opinion that the intention behind the agreement in question is to evade tax. Mere agreement with close relatives is not enough to accept that the amount in question (Rs. 4,93,000) is not the income of the assessee. In fact, as pointed out by the Hon’ble Supreme Court in the aforesaid case, the intended effect’ of the agreement is to be taken note of. As pointed out earlier, Balaji Film Finance & Distribution Co. (P.) Ltd. has not entered into such agreements with any one else and this is the only solitary instance. In the circumstances, when the shareholders of the said company are close relatives of the assessee, the amounts paid by the producers to that company are nothing but the income of the assessee and the agreement is just a device to avoid payment of tax in the hands of the assessee.
6. The agreement, a copy of which is at pages 18 to 23 of the assessee’s compilation, says that the producer will have to pay to the assessee a sum of Rs. 16,000 in each year commencing from 1984 to 1993. Clause 2(b) of the agreement says that the producer shall deposit a sum of Rs. 95,000 with the guarantor as and by way of security for the due performance by the producers. In Clause 2(b) it is said that :
(b) If any instalment payable by the producers to the artists under Clause 7/8 of the said letter of Engagement becomes due and payable and if the producers pay the said amount or instalment to the artists on due date then and in such event the guarantors shall pay or refund to the producers out of the said deposit of Rs. 95,000 (Rupees Ninety-five thousand only) an amount equal to 10 per cent of such deposit together with interest on such amount representing 10 per cent as aforesaid, at the rate of 2 per cent per annum.
The total payment supposed to be made by the producers to the assessee is Rs. 1,50,000. Assuming that the producer refuses to pay after the completion of Rs. 95,000 then why the guarantor should suffer. In normal course of cases of agreement, either the guarantor should be interested in the producer and take the risk, pay off the debt for producer but in this case this is not the situation. Guarantor firm’s partners are related to the assessee. Hence, the question arises as to why the guarantor should pay for the producer when the guarantor is not related to the producer. It is not understood as to why the guarantor, Balaji Film Finance & Distribution Co. (P.) Ltd. should suffer when it is not going to get anything out of this agreement except a risk as aforesaid or negligible benefit as against risk. This clearly reveals that it is nothing but a device to evade tax. Similar agreements are entered into with A.R. Productions and Modern Films. Therefore, considering the contents of the agreement, the effect of the agreement and the relations of the parties as also the ultimate intention of the parties, it is very much clear that it is for evading tax.
7. In view of the aforesaid discussion, I hold that the Commissioner (Appeals) was not justified in deleting the addition of Rs. 4,93,000 made by the IAC as the unaccounted income of the assessee for the assessment year under consideration. Accordingly, the order of the Commissioner (Appeals) on the point is reversed and that of the IAC is restored.
8. In the result, the appeal by the revenue is allowed in part.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961
Whether, on the facts and in the circumstances of the case, the Commissioner (Appeals) was justified in deleting the addition of Rs. 4,93,000 made by the assessing authority as the unaccounted income of the assessee from profession for the year under consideration ?
THIRD MEMBER ORDER
A. Krishnamurthy, Vice President
1. The point for my consideration as Third Member in this reference under Section 255(4) of the Act is :
Whether, on the facts and in the circumstances of the case, the Commissioner (Appeals) was justified in deleting the addition of Rs. 4,93,000 made by the assessing authority as the unaccounted income of the assessee from profession for the year under consideration ?
2. The short facts giving rise to the dispute on this point are as under : The assessee is a well known film artist. He entered into agreement with certain producers for rendering professional services. Under the agreement the assessee was to get in each case annuity of sum specified in the agreement spread over a number of years. Out of the four such agreements, it was noticed that the provision for payment of annuity under the agreement with Vijay Suresh Combine, Madras, was secured through a policy with the LIC, but in regard to other three agreements, the payment of annuities by the producers were guaranteed by a company, Balaji Film Finance & Distribution Co. (P.) Ltd. In the case of Megha Movies, Bombay, the producer agreed to pay the assessee for his services in the film ‘Kinara’ an annuity of Rs. 16,000 for 10 years and paid Rs. 95,000 to Balaji Film Finance & Distribution Co. (P.) Ltd. as a deposit in consideration of the said company standing as guarantors for due performance by the producer of the obligation of paying the annuity to the assessee. Similarly, the producer A.R. Productions, Bombay, agreed to pay annuity of Rs. 32,000 for 15 years in respect of services of the assessee in the film ‘Karmayogi’ and paid to Balaji Film Finance & Distribution Co. (P.) Ltd., a sum of Rs. 1,98,000 for their agreeing to stand as guarantors for the due performance by the producer of the obligation of paying to the assessee the annuity agreed to by the producer. The producer Modern Films also similarly paid Balaji Film Finance & Distribution Co. (P.) Ltd. a sum of Rs. 2 lakhs for their agreeing to stand as guarantors for due performance by the producer of the obligation and the agreement with the assessee to pay annuity of Rs. 32,000 per year for 15 years for the services in the film ‘Priyatama’.
3. The IAC, who passed the order of assessment in this case, did not accept the assessee’s claim that in regard to the remuneration agreed to be paid by the three producers Megha Movies, A.R. Productions and Modern Films, nothing more than the amount of annuity due in the relevant year is chargeable to income-tax and the payment made by the producers to Balaji Film Finance & Distribution Co. (P.) Ltd. for their guaranteeing the due performance of the producers’ obligation under the contract of service with the assessee cannot be treated as remuneration paid to him for services rendered. According to the 1AC, the assessee can claim exemption of the producers’ payment on the basis of Board’s Instruction No. 1310 dated 26-2-1980 only where policy is purchased with the LIC for payment of annuity incorporating and certain conditions and certain features as set out by him in his order are present. As in the case of three producers no policies whatsoever were taken to secure the annuity payments on the stipulated dates and certain payments have been made by the producers to a private limited company as deposit for guaranteeing their due performance of annuity payments. The exemption contemplated by the Board’s circular would not apply. In these circumstances, the IAC treated the aggregate of Rs. 4,93,000, the payments made by the three producers to Balaji Film Finance & Distribution Co. (P.) Ltd. as unaccounted receipts from profession of the assessee for relevant year and included it in the total income.
4. In appeal the Commissioner (Appeals) deleted the addition and, therefore, aggrieved by his order the department had come up in appeal.
5. The learned Senior Vice President (Accountant Member) had upheld the order of the Commissioner (Appeals) and according to the learned Judicial Member the Commissioner (Appeals) was not justified in deleting the addition made by the IAC as unaccounted income of the assessee for the assessment year under consideration. The learned Senior Vice President found that the issues that arose for consideration are :
1. whether there is anything irregular in the payments made by the producers on deferred annuity basis ;
2. whether the payments made to Balaji Film Finance & Distribution Co. (P.) Ltd. can be regarded as payment to the assessee ; and
3. whether the Balaji Film Finance & Distribution Co. (P.) Ltd. are benami of the assessee.
He held that it is open to the producer to make the payment in cash or at stipulated period including a future date and the payment can be in one lump sum or in instalments. He also held that there is no evidence to support any finding that Balaji Film Finance & Distribution Co. (P.) Ltd. was a benamidar of the assessee so that the payments made to that company can be regarded as payment made to the assessee himself. On the other hand, the learned Judicial Member held that the mere formality of entering into agreement will not decide the issue and that one has to find out the ultimate intention behind the purpose of the agreements taking into consideration the relation between the parties and the effect of the agreements. He held that in the facts of this case the intention behind the agreements was to evade tax and having regard to the principles stated in the Supreme Court decision in the case of McDowell & Co. Ltd. (supra) the agreement was just a device to avoid payment of tax in the hands of the assessee. He, therefore, held that the deletion of Rs. 4,93,000 made by the Commissioner (Appeals) which was added by the IAC as unaccounted income of the assessee, was not justified. It is in these circumstances the point of difference has been referred under Section 255(4) to me as a Third Member.
6. At the hearing before me, the learned departmental representative strongly relied on the order of the IAC (Assessment). Particularly he referred to the conditions of Board’s circular for claiming exemption in respect of amounts paid under annuity on the basis of policy taken out with the LIC set out in the order of the IAC. He strongly relied also on the order of the learned Judicial Member and contended that the entire thing is a device adopted by the assessee for the purpose of avoiding tax, in view of the principles stated by the Supreme Court in its decision in McDowell & Co. Ltd.’s case (supra). He laid particular stress on the observations of the Supreme Court at p. 160. He also referred to the Supreme Court decision in the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 and the head-notes at page 78. He further submitted that in any view of the matter the receipt by Balaji Film Finance & Distribution Co. (P.) Ltd. of all the payments made to them by three producers must be regarded as receipts by the assessee and the amount of such payment should be added to his income. He further pointed out that though the assessee’s contention has been accepted by the Commissioner (Appeals) for this year, the decision of the Commissioner (Appeals) for the subsequent year 1981-82 has gone against the assessee.
7. The learned counsel for the assessee took us through the relevant agreements in this connection. Taking for instance the agreement for the producer Megha Movies dated 25-8-1973 appointing the assessee as a leading male artist in the picture ‘Kinara’, it is pointed out that the consideration for the services rendered by the assessee was payment made up of initial payment of Rs. 25,000 during the production of the picture and annual payment of Rs. 16,000 each in the years 1984 to 1993 aggregating only to Rs. 1,85,000. It is further pointed out that under this agreement the amounts stipulated to be paid shall accrue or become due to the assessee only on the due dates in the years specified and the time for the payment for each instalment shall be the essence of the contract. It is further undertaken by the producer in this appointment letter that as and by way of the security for the due payment of the remuneration stipulated they undertook to provide or procure guarantee of nationalised bank, recognised insurance company or any other institutions or limited company acceptable to the assessce in such form as he may require. It is further stipulated that under the said guarantee the assessee shall have right to receive the amount on due dates and guarantee should be irrevocable. It is submitted that this is a normal and genuine contract and the stipulation for annual payments is necessitated by the fact that the film artist’s active life is limited and there should be a provision for continued income during his lifetime. It is also further stated that there is absolutely no relationship between the producer and the artist.
8. Similarly, in the case of the other producers A.R. Productions, the total amount payable for the assessee’s services in the film ‘Karmayogi’ is Rs. 5,55,000 made up of an initial payment during the production of the picture of Rs. 75,000 and annual payment of Rs. 32,000 commencing from the year 1989 and ending with 2003.
9. Similarly, in the case of A.R. Productions also there is an undertaking to provide a guarantee of nationalised bank, insurance company or in any other manner acceptable to the assessee in such form as the assessee may require. It was stated that part of the remuneration was to be paid during the production according to the custom of trade and the balance in instalments. It was further stated that there is no question of applying the principle of the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra), because the agreements between the producers and the assessee are genuine agreements for mutual benefit and it cannot be regarded as any device. It was further submitted that there is nothing wrong in the guarantee agreement also, because even the banks provide guarantees on margin money to be paid to the bank and simply because in this case it is not a bank but a private limited company that is no reason why the agreement cannot be regarded as genuine but a device. The learned counsel took us through the tripartite agreement entered into by the producer Megha Movies, the assessee and Balaji Film Finance & Distribution Co. (P.) Ltd. dated 3-11-1977 and pointed out that the producer had paid the guarantor company only a sum of Rs. 95,000 by way of deposit against the guarantee of payment of 10 instalments of Rs. 16,000. It is further pointed out that under a Clause of this agreement Clause 2(b) if any instalment payable by the producers to the artists becomes due and payable on due date and if the producers pay the said amount of instalments to the artist on due date then in such event the guarantors shall pay or refund to the producers out of the said deposit of Rs. 95,000 an amount equal to 10 per cent thereof together with interest on such amount representing 10 per cent as aforesaid at the rate of 2 per cent per annum. He, therefore, contended that the agreement was bona fide commercial agreement and there is nothing to show that it was a device. He then pointed out that even assuming that the payment made by the producers by way of deposit to Balaji Film Finance & Distribution Co. (P.) Ltd. must be regarded as payment made to the assessce on the ground that the company is a benami, the amount that could be so included in the year is only Rs. 75,000 out of Rs. 4,93,000 and in any case, therefore, the amount of addition even if it is to be sustained cannot exceed Rs. 75,000. It is pointed out that the assessee’s system of accounting is cash and, therefore, unless the assessee received the amount, no addition can be made.
10. The learned counsel for the assessee also submitted that Balaji Film Finance & Distribution Co. (P.) Ltd. could not be regarded as benami of the assessee only because one of its directors and shareholders is the brother-in-law of the assessee. It is pointed out that the said director Shri Romesh G. Sippy is a man with his own resources and business activities. In this connection, he drew our attention to the details of concerns and immovable properties in which Shri Romesh G. Sippy has interest or investments set out on page 93 of one of the paper books filed on behalf of the assessee in this appeal. It is further pointed out that there has been no examination of Shri Sippy in this connection with a view to examine him whether he was a benamidar of the assessee, nor has the assessee been given an opportunity to disabuse the departmental authorities of any suspicion harboured by them in this connection. Apart from the fact that one of the directors of Balaji Film Finance & Distribution Co. (P.) Ltd., i.e., the brother-in-law, who, it was pointed out, had substantial resources of his own, there is no other material to justify a finding that Balaji Film Finance & Distribution Co. (P.) Ltd. itself was a benamidar of the assessee. It is submitted that the principles of McDowell & Co. Ltd.’s case (supra) decision cannot be held to be applicable to the facts in this case and that decision cannot be used as a handle to harass taxpayers. Our attention was also drawn to the fact that Balaji Film Finance & Distribution Co. (P.) Ltd. was itself engaged in other profitable investments or activities such as taking leases of theatres in partnership with Rajshree group. Copies of assessment orders of the said Balaji Film Finance & Distribution Co. (P.) Ltd. for the assessment year 1979-80 and other years, which have been furnished, are relied upon.
11. The learned departmental representative referred to the agreements and pointed out that the aspects relating to the agreement and how they have been used as a media have been considered and discussed elaborately in the order of the Judicial Member. It was further submitted that it is not the department’s claim that the transactions are bogus but that the entire thing is a device adopted by the assessee for avoidance of tax, which has been deprecated in the decision of the Supreme Court in McDowell & Co. Ltd.’s case (supra).
12. On consideration of the relevant facts and submissions of the parties, I agree with the learned Vice President (Accountant Member) that the Commissioner (Appeals) was justified in deleting the addition of Rs. 4,93,000 made by the assessing authority as unaccounted income of the assessee from profession for the year under consideration. In my view the learned Vice President has rightly posed the issues which arose for consideration, viz., (i) whether there is anything irregular in the payments agreed to be made by the producers on deferred annuity basis ; (ii) whether the payments made to Balaji Film Finance & Distribution Co. (P.) Ltd., can be regarded as payments to the asscssee ; and (iii) whether Balaji Film Finance & Distribution Co. (P.) Ltd. are the benamidars of the assessee. It is entirely a matter left to the parties to decide how one of them will remunerate the other for the latter’s service to be rendered to the former and certainly the parties are entitled to enter into an agreement mutually beneficial to them. The claim on behalf of the assessee that in order to ensure a steady and continued income over a period of his life, as an active life of an artist is limited, cannot be brushed aside as unreasonable or as an excuse because there is considerable truth in it. If, therefore, an artist agrees to take remuneration for his services by way of annuities becoming due on the stipulated dates or years, there is nothing wrong or suspicious in such an agreement. The agreement also works out to the advantage of the producer, for, he has not to part with immediately the entire remuneration agreed for the services rendered by the artist. The agreement in the present case is perfectly legitimate one and there is nothing illegal or opposed to public policy in it. That being the case and the matter being entirely one for the parties to decide to their mutual advantage, it is not open to the income-tax authorities to rewrite the agreement which they would like from the point of view of tax. Similarly, in regard to the agreement between the producer and the artist for payment of annuities agreed to be made, how the obligation of the producer should be ensured or secured is a matter between the parties and if an artist agrees to a guarantee given by a private party or limited company or any institution not necessarily the life insurance company, I fail to see how it is open to the Income-tax Department to dictate that it should be done through a life insurance policy and not otherwise. After all, the assessee as an artist is vitally interested in getting the annuities agreed to be paid and if he is satisfied with the guarantee by a person other than the LIC under a policy, I cannot see how the Income-tax Department can say that it should be done through a life insurance policy with the LIC. I, therefore, agree with the learned Vice President that there is nothing irregular in the payments agreed to be made by the producers on deferred annuity basis.
13. As regards the question whether payment made to Balaji Film Finance & Distribution Co. (P.) Ltd., should be regarded as payment made to the assessee, here also I fail to see how the payment made to Balaji Film Finance & Distribution Co. (P.) Ltd. can be regarded as payment made to the assessee. The evidence and material brought on record clearly show that the payment received by Balaji Film Finance & Distribution Co. (P.) Ltd. has not been held by it for and on behalf of the assessee but only as a consideration for guaranteeing the annual payments agreed to be made by the producer and the fact that whenever the instalment is paid a part of it is returned back to the producer shows that the payment is held by it, if at all temporarily, to be returned to the producer as and when the annual payments are made. The facts highlighted by the counsel for the assessee concerning the relationship of one of the directors of the assessee and such person’s own resources and business activity clearly support the assessee’s claim, that the said Balaji Film Finance & Distribution Co. (P.) Ltd. cannot be held to be under the absolute control of the assessee obliged to carry out his dictations. At any rate, there is no evidence whatsoever that any payment made to Balaji Film Finance & Distribution Co. (P.) Ltd. has ultimately been passed on to the assessee. The assessing officer has gone by surmises and suspicions without any concrete material brought on record. Much store has been set by the Supreme Court decision in McDowell & Co. Ltd.’s case (supra). I do not see how the observations in McDowell & Co. Ltd.’s case (supra) can be called in aid to support the claim of the department. The principle concerning tax avoidance, as I understand from the decision of McDowell & Co. Ltd.’s case (supra) and the decisions referred to therein is that a person cannot be allowed to avoid legitimate levy of tax which is due by merely adopting a device to conceal the true character of transaction and the substance of the matter. But it does not mean that a person cannot arrange to have a regular income from year to year instead of windfall in one or two years. It is no doubt true that if the entire remuneration had been paid to the assessee and it is accepted by him in the year in which services are rendered, higher rate of tax will be levied on such larger amount of income with the consequent increase in tax liability and if by some means or method he avoids such tax although in enjoyment of the entire income, then undoubtedly the principle of McDowell & Co. Ltd.’s case (supra) would come into play. But whereby an arrangement the assessee secures for himself steady and regular income from year to year instead of a lump sum payment and agrees to pay legitimate tax on the actual income due and received by him from year to year, what he avoids is not the tax but a larger amount of income accruing or arising to him in one or two years.
14. Before concluding, it is also found, as pointed out by the assessee’s learned counsel, that the payment made by the producers by way of deposit with the Balaji Film Finance & Distribution Co. (P.) Ltd. in the concerned year is only Rs. 75,000 out of Rs. 4,93,000. In any case, therefore, even if any amount is liable to be included in respect of payments made to Balaji Film Finance & Distribution Co. (P.) Ltd., it cannot exceed Rs. 75,000.
15. Another aspect that may be considered in this connection is that though the circular of the Board is concerned with the annuity secured by insurance policy, the question was examined in consultation with the Ministry of Law and legal advice secured by it was that where a film artist follows cash system of accounting for professional income and is paid remuneration wholly or partly through annuity policy or policies as per agreement, he can be taxed only on the particular amount of annuity as is paid in a year. The features stated in the circular are substantially present in the case of the assessee except that the annuity contemplated therein is through annuity policies of the LIC, but I do not think that makes any distinction in the principle. In the circumstances, I agree with the learned Vice President (Accountant Member) and hold that the addition of Rs. 4,93,000 made by the assessing authority as unaccounted income of the assessee from profession for the year under consideration is not justified and, should, accordingly, be deleted.
16. The case will now go to the Bench which heard the appeal for disposal under Section 255(4).