ORDER
Shailendra K. Yadav, J.M.
1. This appeal has been filed by the assessee against the order of CIT(A), Central-VII, Mumbai, dt. 30th July, 2004 for the asst. yr. 2001-02.
2. Following grounds have been raised in the appeal:
“(I) On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the entire amount of Rs. 23 crores from M/s EEL was taxable as appellant’s income for asst. yr. 2001-02, without appreciating that–
(a) the appellant was bound under agreements dt. 10th Jan., 1995 and 11th Feb., 1995 between him and M/s ABCL to handover to M/s ABCL entire income from ‘engagements’ as defined in the said agreements except those under Clause 1.7 thereof and M/s ABCL could enforce the terms thereunder as per Clauses 11 and 20 thereof. Further, he was also legally bound by his assurance given in information memorandum of M/s ABCL issued in 1996 for placing shares thereof at a premium of Rs. 70 per share.
(b) the said agreements were genuine and bona fide as found by Hon’ble Tribunal vide its order No. 4453/Mum/2000 for asst. yr. 1996-97 in the case of appellant himself, which is highest fact finding authority under the IT Act, 1961. Further, the agreements cannot be held to be genuine in one context and non-genuine in another.
(c) the tripartite agreement between the appellant and M/s Star India (P) Ltd. (SIPL) and M/s EEL, dt. 12th April, 2001 was entered into by the appellant under the bona fide belief that the programme ‘Kaun Banega Crorepati’ amounted to a ‘feature film’ as allowed to be done by him under Clause 1.7 of the agreement dt. 10th Jan., 1995 with M/s ABCL. Further, in January, 1995, no one could have foreseen the income from KBC programme and losses incurred by M/s ABCL in later years.
(d) the plea by the appellant before the arbitrator that the entire income from ‘KBC’ belonged to him on the ground that it was a feature film, cannot be held against him as it is but natural for a party to argue one’s case forcefully before the arbitrator even when the weakness of the case is known to it.
(e) the dispute whether it amounted to ‘feature film’ on his own account or an ‘engagement’ resulting in income to M/s ABCL, arose between the appellant and other directors of M/s ABCL resulting in arbitration award dt. 19th June, 2002 by Justice T.D. Sugla (Retd.).
(f) the award dt. 19th June, 2002 awarded 30 per cent of income from ‘KBC’ to the appellant and 70 per cent thereof to M/s ABCL on the grounds cited therein and it was not a design to distribute income to avoid incidence of tax as can be seen from the facts of the case. When family shareholding of the appellant (35 per cent) and his entitlement to 4 per cent of profits of M/s ABCL is considered, the appellant’s share in receipts from ‘KBC’ in fact comes to 57 per cent thereof.
(II) On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that–
(a) the appellant had claimed receipt of Rs. 23 crores from KBC programme against which an outgo of Rs. 21.67 crores to ABCL was claimed under contractual obligations as in fact no such claim was made in the return of income.
(b) the amount of Rs. 15 crores received by appellant from ABCL was reinvested back to ABCL as share capital, as the said investment was made for the first time. It cannot be said to be a circular transaction as the investment appreciated by 7 times due to premium charged to outsiders.
(c) under the terms of Clauses 1.7 and 6.3 of the agreements dt. 10th Jan., 1995 and 11th Feb., 1995, the appellant was free to do any work and not merely acting in a feature film as mentioned in Clause 1.7, outside 120 days of guarantee period thereunder, as the appellant was so bound ‘during the term of this agreement’ as mentioned in Clause 6.3 thereof and not merely for 120 days of ‘guarantee period’.
(d) the arbitration award is not binding on third parties, as it would be binding on third parties and the Department also if the facts and circumstances of the case so indicate and the concept of ‘real income’ is adopted. Reliance in this respect is placed on Section 43 of Indian Evidence Act.
(e) income from programme ‘KBC’ could not accrue to M/s ABCL as contract was between appellant and M/s SIPL and M/s EEL, as the claim of M/s ABCL was based on terms of agreements dt. 10th Jan., 1995 and 11th Feb., 1995 with the appellant without any relevance to the source from which the income was earned by the appellant and amounted to overriding title of M/s ABCL thereon. Further, the amount was directly received on 26th Dec., 2000 by M/s ABCL as per FIRC dt. 13th Feb., 2001 from Hongkong & Shanghai Banking Corporation Ltd.
(i) the arbitrator had in fact enforced a ‘personal services contract’ as if the appellant undertook activities on behalf of M/s ABCL which yielded an amount equal to 70 per cent of sum received from the show ‘KBC’, as this is not a case of enforcement of contract of personal services but of enforcement of rights to income being legal obligation under agreements dt. 10th Jan., 1995 and 11th Feb., 1995.
(g) the amount payable by appellant to M/s ABCL amounted to ‘compensation’, because this is not a case of breach of an agreement for ‘personal service’ as mentioned at (f) above.
(h) the liability to pay the amount payable by appellant to M/s ABCL arose on the date of award, i.e., on 19th June, 2002 (asst. yr. 2003-04) and thus was not allowable in the assessment year under appeal, as the liability was only quantified by award dt. 19th June, 2002 and was already present in the assessment year under appeal by virtue of agreements dt. 10th Jan., 1995 and 11th Feb., 1995.
and
(i) firstly the KBC income was offered by the appellant in the return of income thereafter it was offered by ABCL.
(III) On the facts and in the circumstances of the case, the learned CIT(A) erred in not at all considering the submissions made before him citing nine incorrect and misleading statements/observations made in the assessment order in connection with agreements dt. 10th Jan., 1995 and 11th Feb., 1995 and other facts. Therefore, the assessment order is based on false premises which ought to have been demolished.
(IV) On the facts and in the circumstances of the case, the learned CIT(A) erred in upholding disallowance of appellant’s claim under Section 80RR of the IT Act, 1961, without appreciating that–
(a) the appellant is a well-known ‘artist’, so mentioned even in the assessment order;
(b) the income from ‘KBC’ has been derived by him in the exercise of his profession as an actor; .
(c) this income is from a non-resident, M/s EEL, in British Virgin Island; and
(d) this income has been brought into India on behalf of the appellant on 26th Dec., 2000 as per FIRC, dt. 13th Feb., 2001 from Hongkong & Shanghai Banking Corporation Ltd., which is Form No. 10H submitted to learned AO as noted in assessment order itself and erred in holding that this deduction was not allowable as
(i) this income was earned in India, by performance in India, which in fact is not a disqualification under the provisions of Section 80RR;
(ii) this activity did not contribute to a greater understanding of India and its culture abroad, which in fact also is not disqualification under the provisions of Section 80RR. However, this reasons assigned by the learned AO is not tenable in view of provisions of Clauses 1.4, 3.3, 3.5, 6.8, 16.1, 16.2 and 16.5 of the tripartite agreement with M/s SIPL and M/s EEL which seems to have not been looked into by learned CIT(A);
and
(iii) the ratio of decision in Harsha Bhogle v. AO (2004) 87 TTJ (Mumbai) 892 : (2003) 86 ITD 714 (Mumbai) applies to the present case, though Harsha Bhogle was merely a commentator on others’ actions and was not an actor by profession as the appellant undoubtedly is and exercise of his profession in ‘KBC’ programme is evidenced by clauses of agreement with M/s SIPL and M/s EEL cited at (ii) above.
The fact and circumstances in this case are not on the same footings and hence the ratio of Harsha Bhogle’s case (supra) cannot be applied.
(V) The appellant craves leave to add, alter, amend or modify any or all of the above grounds of appeal on or before the date of hearing.”
3. During the asst. yr. 2001-02, the assessee hosted for the first time a television programme show for M/s Star Television India (P) Ltd. (in short SIPL) by the name of Kaun Banega Crorepati (in short KBC). The assessee filed his return of income on 31st Oct., 2001 declaring total income of Rs. 4,61,97,840. The assessee thereafter filed revised return of income on 31st Oct., 2002 declaring total income of Rs. 6,08,88,217. The assessee filed re-revised return of income on 31st March, 2003 declaring total income of Rs. 3,23,52,630. In response to queries by the concerned AO, the assessee filed various details such as copy of tripartite agreement with E Entertainment Ltd. (EEL) and M/s SIPL, copy of the accounts of various parties, modalities involved in arbitration proceedings, cashflow statement and copies of agreement with various parties in support of the professional receipts. The AO observed, that in the returns filed by the assessee, the figures of not only the expenses but also receipts varied. In his return of income, the assessee has shown receipt of Rs. 23 crores from M/s EEL, a nonresident company, based in British Virgin Island (in short BVIL). The AO further observed that out of the said amount of Rs. 23 crores, the assessee transferred Rs. 21.67 crores to M/s Amitabh Bachchan Corporation Ltd. (in short ABCL). The assessee has claimed to have transferred the said amount as per agreement. The assessee was asked to furnish the said agreement, copies of FIRC, etc. in support of the said transaction.
3.1 The AO observed that the assessee is chairman-cum-managing director of M/s ABCL and controls majority of shares in the said company along with his wife Smt. Jaya Bachchan. On 10th Jan., 1995, the assessee had already entered into an agreement with said ABCL by which he was to receive Rs. 15 crores on a lump sum basis in consideration of his agreeing to provide services exclusively to the said ABCL. This agreement was subsequently revised by way of a supplementary agreement dt. 11th Feb., 1995. The said amount of Rs. 15 crores received by the assessee from M/s ABCL was invested back by him in the shares of ABCL. Thus, the company did not stand to lose anything even though, it had paid money to the assessee. It got its money back in the form of share capital and claimed the said expenses as revenue expenditure. Similar arrangement was made in the case of his wife, Smt. Jaya Bachchan for a consideration of Rs. 3 crores. It may be stated that in its return of income for asst. yr. 1995-96, M/s ABCL claimed the expenditure incurred on purchase of so-called brand equity of the assessee and his wife amounting to Rs. 18 crores as revenue expenditure by debiting it to its P&L a/c. In the return for asst. yr. 1996-97, the assessee and his wife claimed receipts of Rs. 15 crores and Rs. 3 crores respectively, as capital receipts not exigible to tax. In the assessment order passed ‘under Section 143(3) on 31st March, 1998, the AO in the case of M/s ABCL disallowed the said expenditure of Rs. 18 crores and treated the same as capital expenditure. The AO’s stand was confirmed by the CIT(A) but the amount of capital expenditure was allowed to be written off by way of deferred revenue expenditure over a period of 10 years. The appeal of ABCL and cross-objection of the Department are reported to be pending before Tribunal.
3.2 In the assessment of the assessee and his wife, the said amounts of 15 crores and Rs. 3 crores respectively, were held as revenue receipts by the AO vide his orders dt. 31st March, 1999. The findings in both these cases were confirmed by CIT(A). In further appeal, the Tribunal in a combined order dt. 5th Nov., 2002 in these cases held the same as capital receipts not liable to tax and the Department is in appeal before the Hon’ble High Court of Bombay.
3.3 The AO, however observed that M/s ABCL is a sick industrial company so declared by the Board for Industrial and Financial Reconstruction (BIFR) vide its order dt. 9th July, 1999, in case No. 60/99 had brought forward losses of Rs. 81.88 crores as on 1st April, 2000 under the IT Act.
3.4 The agreement with SIPL and EEL with regard to KBC was effective from 1st April, 2000 and the assessee was to receive a total amount of Rs. 112.22 crores as per Clause 8.1 of the same.
3.5 Schedule of payments received by assessee as per the said agreement is as under :
(Rs.)
Advance already paid by EEL and received by AB 23,00,00,000
Corpn. Ltd.
12th April, 2001 21,42,00,000 1st Oct., 2001 10,40,00,000 1st Jan., 2002 19,10,00,000 1st April, 2002 19,10,00,000 1st Oct., 2002 19,20,00,000 Total consideration 1,12,22,00,000
3.6 As already discussed, assessee in his revised return of income for this assessment year included receipts of Rs. 23 crores from M/s EEL in his professional receipts and reduced Rs. 21.67 crores from the same with the narration “Payment to AB Corpn. Ltd. as per arrangement”. An amount of Rs. 1.25 crores which was on account of TDS made on Rs. 23 crores by the payer, M/s EEL however, remained as income in the hands of the assessee. Although the remittance was in name of M/s ABCL the TDS certificate was in name of the assessee.
3.7 The assessee subsequently filed a revised return of income on 31st Oct., 2002 and offered 30 per cent of Rs. 23 crores as his income and claimed that 70 per cent of Rs. 23 crores belonged to M/s ABCL. During the course of assessment proceedings, the assessee with regards to 30:70 distribution of receipts from M/s EEL, placed his reliance on the arbitration award dt. 19th June, 2002 given by the sole arbitrator, Justice T.D. Sugla (Retd.) wherein it was held by the sole arbitrator that receipts from KBC were to be shared in the ratio of 30:70 between the assessee and M/s ABCL.
3.8 In support of this contention, the assessee has filed copies of arbitration proceedings and the award. In this regard, the assessee wrote a letter dated 18th March, 2002 to Shri Amar Singh, one of the directors of M/s ABCL, regarding the alleged dispute that had arisen between the assessee and M/s ABCL about sharing of receipts from KBC. The relevant text of the letter is reproduced as under :
“In response to the issue raised by you in ‘your letter’, I would like to state that my counsel has advised me that as per the agreement dt. 10th Jan., 1995 and the supplement agreement dt. 11th Feb., 1995, I am at liberty to render professional service for 120 days.
Furthermore, just for the sake of Rs. 15 crores, my freedom to render professional services as an artist, as an anchor, in television or in any other capacity cannot be questioned and this has been amply clarified in the agreement. You must appreciate the futility of my working hard around the clock, if I support my family by generating income separately.”
3.9 In a joint letter dt. 18th March, 2002 sent by assessee and ABCL, the assessee approached Justice T.D. Sugla (Retd.) requiring him to act as sole arbitrator. The relevant portion of letter is reproduced as under:
“A dispute has arisen between us–(1) AB Corpn. Ltd. and (2) Amitabh Bachchan.
In which of an income ostensibly/or to be earned by Amitabh Bachchan as to whether the said income belongs to him or to AB Corpn. Ltd.
We had entered into an agreement on 10th Jan., 1995 for a period of ten years and there is no dispute between us that we are governed by the terms and conditions of the said agreement. Clause 20 of the agreement provides that in case of dispute, the dispute shall be referred to arbitrators in Mumbai.
We are glad to say that both of us (the parties) have decided to approach you to be our sole arbitrator for the purpose.
Accordingly, we request you to kindly take up this arbitration and pass your final award as early as possible.”
3.10 Justice T.D. Sugla (Retd.) vide his letter dt. 19th March, 2000 fixed the hearing for arbitration on 15th April, 2000 at 12.30 p.m. On the said date of hearing, minutes were recorded which were placed on record. Shri I.C. Jain, C.A. attended for assessee, and Shri Rajesh Yadav, chartered accountant for ABCL.
3.11 ABCL vide letter dt. 30th April, 2002 put forward its case before arbitrator as below :
“We wish to state the following :
In our opinion acting as an anchor in the KBC programme, does not amount to acting in a feature film, as there is no role of a hero or a villain, or anything of the sort in the KBC programme. Since the KBC programme cannot be treated as a feature film, the entire income earned out of the same belongs to AB Corpn. Ltd. (formerly known as Amitabh Bachchan Corporation Ltd.) and hence should be handed over to AB Corpn. Ltd..
It is observed that the agreement between Mr. Amitabh Bachchan and Star India Ltd. was entered into without disclosing the arrangements to AB Corpn. Ltd. This in our view amounts to violation of the various provisions of the said agreement.
Furthermore, we wish to highlight that as Mr. Amitabh Bachchan was busy around the clock in the KBC programme he was not available for discussion on the various schemes which the directors wanted to discuss with him for generating income for the company. In our opinion, Mr. Amitabh Bachchan devoted 100 per cent of his time on KBC programme which is in violation of the terms of the agreement dt. 10th Jan., 1995 and supplementary agreement dt. 11th Feb., 1995. It is quite clear that as per the provisions of the said agreement, Mr. Amitabh Bachchan was to handover all the income earned by him except from feature films or motion pictures wherein he acted as a hero or a villain. Since the KBC programme is purely an entertainment programme and his acting as an anchor does not amount to that of a hero or a villain either in feature films or in motion pictures. Last year on discussion and request to overcome our financial crisis he had handed over the income to the company with grace and without any objections or reservations about the same. Since Mr. Amitabh Bachchan agreed to handover the entire income from the KBC programme to AB Corpn. Ltd. Last year, we see no change in the circumstances, which might alter the character of the income.
In light of the above, Mr. Amitabh Bachchan is requested to handover the entire income from KBC programme during the period from 1st Oct., 2000 to 30th Sept., 2001 to AB Corpn. Ltd. and in future also it shall be Mr. Amitabh Bachchan’s personal responsibility to handover the entire income to AB Corpn. Ltd. This being a fundamental issue and essence of agreement, it should be followed religiously, otherwise in future nobody will subscribe to our companies. Moreover, the shareholders cannot be kept in the dark and made to suffer.”
3.12 Assessee vide his letter dt. 8th May, 2002 presented his case before the arbitrator, relevant portion of which is reproduced as under :
“One will appreciate that the above mentioned rights acquired by AB Corpn. Ltd. would/will generate substantial income if all the above rights are exploited, however they remain unexploited. The above submission made is evident from the fact that though I, on several occasions intimated AB Corpn. to exploit my service in terms of Clause 2.1.2 of the above referred agreement, no feedback till date has been received from AB Corpn. in this regard. I had to render services to earn my living, accordingly signed an agreement with Star India Ltd. in personal capacity, as Star India Ltd. was not ready to enter into an agreement with AB Corpn. Ltd.
Furthermore, I understand that AB Corpn. Ltd. is vehemently contending that the role of an anchor is not covered under the frame of a feature film. In my submission AB Corpn., Ltd.’s view is misplaced. You will kindly appreciate that, when the agreement was entered into on 10th Jan., 1995, inter alia, supplementary agreement dt. 11th Feb., 1995, I never visualized that I would be acting as an anchor for KBC programme.
According to me, the KBC programme is a feature film and I am playing the principal role. While entering into an agreement with Star India Ltd., I thought that I was not bound to disclose the terms and conditions of arrangements with Star India Ltd. I sincerely believe that it was my prerogative to enter into an agreement with Star India Ltd. in my personal capacity and that I was not supposed to disclose the same to AB Corpn. Ltd.
Based on the facts and in the circumstances mentioned above, it is submitted that the income out of the Kaun Banega Crorepati (KBC) belongs to me alone. As regards surrendering the KBC income last year, it was only on request made by AB Corpn. Ltd. that the said income was surrendered to AB Corpn. Ltd. by mistake hence no adverse inference should be drawn against my intention to hold the income from the KBC programme in my personal capacity, I would rather request that the income earned by me from the KBC programme, which was handed over by me last year to AB Corpn. Ltd. should be refunded back to me with grace.”
3.13 After seeking the clarifications from both the parties vide minutes dt. 28th May, 2002, the sole arbitrator declared the oral award on 30th May, 2002 which was followed by formal written award dt. 19th June, 2002. The relevant portion of award is reproduced as under :
“Having regard to all these factors I had made an observation during the final hearing on 28th May, 2002 that it might perhaps be appropriate and equitable in this case if the receipts by the respondent from KBC programme were partly held as belonging to him and the remaining part as that of the claimant company. After deliberations, both parties, it may be stated, have given their consent in writing on the 29th May, 2002 and left it to me to decide what percentage of the receipts ought to be treated as income of the respondent and what percentage that of the claimant company.
Taking into account the lump sum remuneration of Rs. 15 crores paid at the time of the execution of the agreement plus further remuneration as provided in Clauses 4.1 and 4.2 of the agreement I consider it fair, equitable and just that 30 per cent of the receipts by the respondent from KBC programme be treated as his income and the remaining 70 per cent be treated as the income of the claimant company.”
3.14 Assessee was asked by the AO to show cause as to why based on assessee’s tripartite agreement EEL and M/s SIPL, the arbitration award, assessee’s agreement with ABCL, copies of FIRC and TDS certificates, it should not be inferred that the whole transaction involving transfer of receipt on account of KBC show from assessee to ABCL, be not regarded as ‘make believe’ arrangement and treated as assessee’s income as already claimed before the arbitrator and taxed in his hands accordingly.
Assessee vide letter dt. 25th March, 2004 replied to the issue of receipts from KBC being transferred to ABCL and the text of his reply is as under :
“(i) The agreement entered into was by and between E-Entertainment Ltd., Star India Ltd. and Mr. Amitabh Bachchan (copy of the said agreement has been submitted to your office vide our letter dt. 6th June, 2003).
(ii) Vide agreement dt. 10th Jan., 1995 and supplemented thereafter by agreement dt. 11th Feb., 1995 entered into by and between AB Corpn. Ltd. (formerly known as Amitabh Bachchan Corporation Ltd.) and Mr. Amitabh Bachchan, (copy of the said agreement has been submitted to your office vide our letter dt. 6th June, 2003) it was intimated to Mr. Amitabh Bachchan that in consonance with the terms of the said agreement the amount should be handed over to AB Corpn. Ltd. Moreover his reference was also invited to the information memorandum issued to investors.
(iii) The amount to be handed over to AB Corpn. Ltd. being the point of contention the matter was referred to arbitrator. The claim and counter-claim made by AB Corpn. Ltd. and Mr. Amitabh Bachchan before the arbitrator has been submitted to your office vide our letter dt. 21st Feb., 2004.
(iv) Based on the fact and the circumstances, the arbitrator opined that the amount so received/receivable under the agreement entered into by and between E-Entertainment Ltd., Star India Ltd. and Mr. Amitabh Bachchan should be divided between AB Corpn. Ltd. and Mr. Amitabh Bachchan in the ratio of 70:30 respectively. Copy of the said award was submitted to your office vide our letter dt. 21st Feb., 2004.
(v) On the basis of the fact, the circumstances and on account of legal obligation M/s Bansi S. Mehta & Co. opined that the income relinquished in favour of AB Corpn. Ltd. cannot be treated as an application of income in the hands of Mr. Amitabh Bachchan. Copy of the said opinion was submitted to your office vide our letter dt. 21st Feb., 2004.
In the light of the above stated facts it is explicitly clear that under no circumstances the divisions of income can be said to be an application of income in the hands of Mr. Amitabh Bachchan.”
3.15 The vital facts, according to the AO are that the assessee had received a sum of Rs. 112.22 crores over a period of three assessment years. The respective amounts being, Rs. 23 crores for asst. yr. 2001-02, Rs. 50.92 crores for asst. yr. 2002-03 and Rs. 38.3 crores for asst. yr. 2003-04. Equally there were brought forward losses in the case of M/s ABCL aggregating to Rs. 81.88 crores. 70 per cent of 112.22 crores was to the extent of 78.55 crores which would get set off against the brought forward losses of nearly the same amount.
3.16 The AO taking support from the principle laid down by the apex Court in the following cases attempted to lift the corporate veil and examine the nature of the transaction, since according to him the series of arrangements were used for tax evasion or to circumvent tax obligation and according to him the Revenue authorities have power to reject such a transaction for the purpose of taxing statutes :
(i) Union of India v. Gosalia Shipping (P) Ltd. ;
(ii) CIT v. Durga Prasad More ;
(iii) Workmen, Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. ;
(iv) CIT v. Sri Meenakshi Mills Ltd. ; and
(v) Juggilal Kamlapat v. CIT .
In this backdrop, the assessee’s agreement with M/s ABCL was subjected to close scrutiny. He observed as under :
“(a) The agreement dt. 10th Jan., 1995 is signed only by assessee and not by any person on behalf of ABCL. Similarly, the supplementary agreement is neither signed by the representative of ABCL nor by witness. According to AO, the fact remains that agreements were signed only by the assessee and therefore, these are unilateral and self serving documents in nature and represent the assessee’s assertion and intention of entering into agreement with ABCL which was eventually not signed. Thus, the agreement is not a valid legal document.
(b) The agreement in substance provides, room to artist to act in feature films produced by others. The agreement further provides that artist would act in feature films to be produced by M/s ABCL for that he is to be paid Rs. 3 crores per film per year and the company would produce only one film per year featuring the artist/assessee. Therefore, for performance in feature film, separate remuneration is stipulated in the agreement.
(c) Feature film which artist is required to act would otherwise be copyright of producer which would also include ABCL as in case of other producers. The artist thus does not have any right in feature film in which he would act for ABCL which would assign.
(d) The artist did not possess any right in any performance on date of agreement which he could assign.
(e) The terms ‘design and patent’ referred to in the agreement remained undefined. Indemnity Clause 6.12 stipulates that artist agrees and shall keep fully indemnified at all times M/s ABCL from and against all actions, proceedings, claims, etc. and damages arising directly or indirectly as a result of any breach of non-performance by the artist of any of his undertakings, warrants or obligations. However, the rigors of this clause are diluted appreciably by Clause 11 providing for equitable relief which stipulates that M/s ABCL shall be entitled to seek injunctive and other equitable relief to prevent or curtail actual or threatened breach by the artist of the provisions of agreement. ‘Note : Injunction is normally filed along with ex parte ad interim injunction under Order 39, Rules 1 and 2 read with Section 1.59 (sic) of CPC where there is apprehension of irreparable losses to the plaintiff/petitioner. Plaintiff/petitioner is not entitled to file such petition along with ad interim injunction against undisputed liquidated damages. Moreover, it has no relevance while there was provision to refer to dispute to the arbitrator as per Clause 20 of said agreement.
(f) Clause (vi)–The indemnity Clause 6.12 stipulates that artist agrees and shall keep fully indemnified at all times M/s ABCL from and against all actions, proceedings, claims, etc. and damages arising directly or indirectly as a result of any breach or non-performance by the artist of any of his undertakings, warrants or obligations. However, the rigorous of this clause are diluted appreciably by Clause 11 providing for equitable relief to prevent or curtail actual or threatened breach by the artist of the provisions of the agreement. At the same time, Clause 20 makes it obligatory on the parties involved to refer themselves to arbitration in accordance with the Arbitration Act, 1940 in respect of all disputes or differences arising between them or in relation to construction, meaning and operation or effect of the contract of breach thereof Section 34 of the Arbitration Act prohibits action contemplated in Clause 11 of the agreement. From the above, it would be clear that M/s ABCL may not have any effective legal remedy in case of any breach by the artist but to subject itself to arbitration. At this juncture, one cannot ignore the influence of the artist on the functioning of M/s ABCL as he is chairman-cum-managing director of the said company.”
3.17 In the light of the above discussions, the following inferences were drawn :
“(a) The agreements suffer from ambiguities, the patent one being the recourses open to the company in case of any breach by the artist as explained above. The patent ambiguity is non-disclosure of basis on which payment of Rs. 15 crores is made and the basis on which modifications were made in supplementary agreement. Another facet of latent ambiguity is the non-disclosure of nature -of performance, whether present, past or future which have been assigned.
(b) The contention that the agreement is in nature of a restrictive covenant is not borne out of the terms, because there is restriction in effect over the artist to make public performances. Even otherwise Clause 6.3 puts restriction on artist with regard to third party while Clause 1.7 permits independent pursuit of artist’s professional career with third parties. The agreement cannot be said to be of the nature of restrictive covenant as is usually understood and as per decided case laws on the issue.
(c) The real intention behind the payment has been explained by the company while justifying the lump sum payment in their letter dt. 27th Feb., 1998 addressed both the company as well the artist. For the sake of convenience, the explanation is reproduced below :
‘By making a lump sum payment what the assessee-company has obtained is an advantage of not paying or incurring a liability in respect of every transaction entered into by the assessee-company with Mr. Bachchan…’.”
From the above, the AO concluded that it is evident that it was only to avoid recurring payment for every performance that the artist was to make for the company, that a lump sum amount was paid to him. The nature of the payments is clearly remuneration towards professional engagements and are, thus, in the nature of professional receipts. From the above discussion, the AO observed that it is clear that the agreements were self-serving in nature and represented a make-believe arrangement. In fact, no valid legal document came into existence.
3.18 The AO after perusing the tripartite agreement with SIPL and EEL, TDS certificates and FIRC deduced the following facts therefrom :
(i) Clause 6.3 of the agreement stipulates that the artist represents and warrants that he is free to enter into this agreement and that he is the sole absolute, unencumbered legal and beneficial owner of all rights granted to EEL and the production house in respect of the services to be rendered under this agreement, and that the artist is not under any disability, restriction or prohibition, legal or otherwise, which might prevent him form performing or observing any of the obligations provided in this agreement.
(ii) Clause 6.2 of the agreement stipulates that the artist will discharge all taxes or other withholding obligations required under any national, State, local laws, regulation or orders now or at any later time in force. The artist will indemnify and hold EEL and the production house, jointly and severally, harmless in respect of payment of any taxes and other withholdings in respect of payments received under this agreement in this regard and in respect of the services provided.
3.19 According to the AO, from the above two clauses, it is observed that the assessee had consciously entered into tripartite agreement with SIPL and EEL and was sure of his obligations/commitments towards M/s ABCL. He gave undertaking to SIPL and EEL in no uncertain -terms that he was the sole absolute, unencumbered legal and beneficial owner of all rights granted to EEL and the production house in respect of the services to be rendered under the said agreement. In fact, he was sure that the agreement with M/s ABCL was a make-believe arrangement and not meant to be acted upon. It did not have enough force to prevent the assessee from pursuing his own professional career, because it was never intended to be a restrictive covenant in reality. It had a limited purpose. It was a device to avoid, the tax and from a practical standpoint, as far as the assessee’s professional freedom was concerned, it imposed restrictions only in letter and not in spirit. The fact that the assessee could sign the said tripartite agreement while his brand equity was allegedly controlled by M/s ABCL goes in to prove that the assessee knew that there was no violation of his agreement with M/s ABCL, because the whole thing was a make-believe arrangement. His letters dt. 18th March, 2002 to the company- M/s ABCL and that dt. 8th May, 2002 to the sole arbitrator, leave no doubt in this regard.
3.20 The AO observed that the assessee had given undertakings to SIPL and EEL regarding discharge of tax liability arising as a result of the tripartite agreement, because he knew that it was his income and he was liable to pay taxes on the same. If it were M/s ABCL’s income then such undertaking would not have come from the assessee’s side as the assessee would not have had any locus standi in the case of ABCL. .
3.21 The. AO further observed that the TDS certificates were issued in the assessee’s name. The assessee received the money and then transferred it to ABCL.
3.22 Regarding arbitration and the arbitration award, the AO observed as under :
“(i) The assessee had claimed that there was a dispute between him and M/s ABCL in respect of the receipts from KBC. However, M/s ABCL did not claim any damages for violation of the agreement, if that was the actual case.
(ii) The dispute arose at a time when the KBC show was nearing completion. The arbitration proceedings started only in March, 2002. Why did the assessee and M/s ABCL choose to ignore the issue for so long and not take any remedial action immediately ?
(iii) M/s ABCL contended before the arbitrator that it was not aware that the assessee had entered into a tripartite agreement with SIPL and EEL. The assessee and his wife control majority shares of M/s ABCL. The assessee is the heart and soul of the said company. He has a preponderant, if not the whole, voice in the creation, running and management of the company, and he has been working in the capacity of the chairman-cum-managing director. Therefore, to say that at the time of signing of tripartite agreement, M/s ABCL was not aware, is a far-fetched and highly improbable proposition.
(iv) The assessee had contended vehemently before the arbitrator that the total receipts from KBC were actually his income, that the amount transferred to M/s ABCL was on its request, that it was a mistake and that the said amount should be refunded to him.
(v) Both the parties allegedly left the matter to the sole arbitrator to decide the dispute. The letter dt. 29th May, 2002 given by both the parties was not filed before the arbitrator. The arbitrator, without assigning any reason, held that 30 per cent proceeds from KBC will go to the assessee and 70 per cent will go to M/s ABCL. What is the basis of 30:70 division, is not known. Neither parties appear to have argued before the arbitrator as to be reasonable share of income to which they were entitled. At least no such minutes or correspondence was produced.
(vi) The assessee deliberately agreed for 30 : 70 ratio. Taking into account the brought forward losses of M/s ABCL of Rs. 81.88 crores, the amount of Rs. 78.554 crores (as per 30:70 division) gets set off against brought forward losses and does not bring in any tax liability. Any variation in this ratio would have either not fully appropriated the benefit or brought forward losses or resulted into higher tax liability in the hands of the company or the assessee or both taken together. Thus, the arrangement agreed to by the assessee in this alleged arbitration proceedings is a brilliant example of how transactions could be devised with the sole intent of escaping The incidence of tax.”
3.23 In this context, the assessee had placed reliance on the arbitration award and claimed that it is binding on the AO. The AO declined to agree with this contention that arbitrator’s award is generally considered binding between the parties for he is a Tribunal selected by the parties. The arbitration is an instrument of solemn character which is binding on parties and so is the award. If a party desires to avoid the effect either of agreement or the award, it must strictly comply with the provisions of law and an objection to award must be filed within time which cannot be extended. The assessee had the choice of objection, but avoided the same for reasons which are not too far to seek. Therefore, the decision contained in the said arbitration award, one needs to look at the circumstances leading to, and surrounding the arbitration award. The assessee and M/s ABCL have acted in connivance to devise a mechanism by which income from KBC gets transferred to M/s ABCL to the extent of 70 per cent and escape the incidence of tax. The assessee has tried to create a colourable device to avoid tax. Before the arbitrator, M/s ABCL relied on its agreement with the assessee. However, as already stated earlier, the said agreement was itself a colourable device to avoid tax when the issue of brand equity had arisen. Thus, there is a chain of events leading to tax avoidance in the manner that the assessee had sought to design. The AO relied on the decision of the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. v. . CTO . In that case, their Lordships have held that “even if transaction is genuine and even if it is actually acted upon, if the transaction is entered into with the intention of tax avoidance, then the transaction would constitute a colourable device.” Where the assessee enters into a series of transactions with the intended object of tax avoidance and the transactions are not really meant to be acted upon, it would be open to the taxing authorities to go behind the transaction and bring the real income to tax.
3.24 Regarding diversion or application of income, the AO observed that the issue whether transfer of KBC income to M/s ABCL was a case of diversion of income by overriding title or of application of income, needs to be examined in the light of the following judicial pronouncements :
(i) Provat Kumar Mitter v. CIT (1961) 41 ITR 624 (SC)
(ii) Motilal Chhadami Lal Jain v. CIT .
Applying the principles of the above cases to the facts of the assessee’s case, the AO observed that :
(i) the source of income was the assessee’s tripartite agreement with SIPL and EEL;
(ii) M/s ABCL had no locus standi vis-a-vis SIPL and EEL. In fact, the assessee has mentioned before the arbitrator that SIPL had refused to enter into any agreement with M/s ABCL whatsoever.
(iii) TDS certificates issued by EEL in the name of the assessee, the credit of which was taken by him in the return of income, clearly show that income accrued and arose to the assessee.
(iv) M/s ABCL had no charge on the source of income, that is, on EEL. It was in no position to recover the money from EEL.
In the light of these, the AO observed that the payment made to M/s ABCL by the assessee was nothing but a gratuitous payment. It was in the nature of application of income and not diversion of income by an overriding title. This, according to him. is further substantiated by the assessee’s own stand before the arbitrator.
3.25 The AO finally concluded that the whole transaction involving transfer of proceeds from KBC show to M/s ABCL to the extent of 70 per cent is nothing but a colourable device to divert the assessee’s income to avoid tax in the hands of the assessee. M/s ABCL on the other hand, being a sick industrial company under BIFR, has brought forward losses to set off such income received from the assessee. He, therefore, held that the receipts from KBC are liable to be taxed in his hands on the basis of the following summarised reasons :
(i) The assessee’s agreements with M/s ABCL were a make-believe arrangement and a colourable device. They were self-serving in nature and depicted assessee’s proposal to enter into an agreement with M/s ABCL which was not signed by the latter. No valid legal agreement came into existence.
(ii) These agreements were not meant to be acted upon as is clear from the conduct of the assessee while signing his tripartite agreement with EEL and SIPL.
(iii) The amount of Rs. 15 crores paid to the assessee by M/s ABCL as a lump sum consideration was routed back to the latter. The assessee and M/s ABCL devised this transaction with the solid intention of avoiding incidence of tax.
(iv) Income from tripartite agreement arose only to the assessee and not to M/s ABCL. M/s ABCL had absolutely no role in the agreement or the performance of the assessee giving rise to income.
(v) The arbitration award fits perfectly in the assessee’s scheme and 30:70 division of assessee’s income almost sets off the brought forward losses of M/s ABCL. As a result, neither the assessee nor M/s ABCL pays any taxes on the earnings through KBC.
(vi) The payment made by the assessee to M/s ABCL was gratuitous in nature and cannot be regarded as diversion of income by overriding title. It is a case of application of income since the income accrued and arose in the hands of the assessee.
The AO brought to tax the whole receipts from KBC programme in the hands of the assessee as an individual.
3.26 Another issue which came up for consideration before the AO was the assessee’s claim for deduction under Section 80RR. According to the assessee, his participation in KBC programme entitles him for deduction at 60 per cent under the provisions of Section 80RR of the Act. The AO rejected such claim on the following grounds :
(i) He has not furnished the required certificate in Form No. 10H for entertaining the claim.
(ii) The KBC programme in which the assessee had acted as a host was a programme conceived, prepared and broadcast in India. There was no performance outside India.
(iii) Section 80RR is not allowable in the cases of persons anchoring or hosting a TV programme as held by the Mumbai Bench of the Tribunal in the Harsha Bhogle v. AO (supra).
On these determinations, the assessee was aggrieved and was before the CIT(A).
4. During the course of appellate proceedings, it was submitted by the assessee that :
(i) The statement in para 12.1 of the assessment order that the agreements were signed only by the assessee is incorrect, as the agreements were approved at the board meeting of the company held on 2nd Jan., 1995 and common seal of the company was affixed on the said agreement.
The agreement with M/s ABCL was genuine, legally binding and was entered into at the time when it was improbable to visualize any programme of the type of KBC and its unparalleled success.
The assessee entered into agreement with EEL for the show “KBC” under genuine and bona fide belief that it amounted to a feature film as at that particular point of time such shows were not a vogue in 1995, when agreements were entered into with M/s ABCL.
The said agreement which has actually been acted upon by both the parties to it and adjudicated upon dispute between them cannot be held to be make belief agreement, especially when M/s ABCL had earned huge income of Rs. 30,40,00,000 being endorsement income and Rs. 54,04,93,261 being anchoring income, through the assessee between asst. yrs. 1996-97 and 2003-04.
The provisions of Clauses 6.3 and 1.7 of the said agreement dt. 10th Jan., 1995, were also quite clear, Clause 6.3 restricting any arrangements with third party subject of Clause 1.7, allowing the assessee professional career only as an actor in feature films, that to safeguarding the interest of M/s ABCL. The request from M/s ABCL was binding on the artist at all time.
In view of Clauses 11 and 20 of the agreement, it cannot be said that M/s ABCL had no force to get the agreement implemented.
(ii) The assessee was bound to handover to M/s ABCL entire income from “engagements” except those under Clause 1.7 thereof under the agreements dt. 10th Jan., 1995 and 11th Feb., 1995. However, to avoid litigation regarding income from EEL, arbitration was agreed upon and the assessee became liable to tax on 30 per cent of income from EEL. These developments, which could not have been visualized on 10th Jan., 1995 and 11th Feb., 1995, cannot form basis to hold that these agreements were make believe ones and not intended to be acted upon and that the arbitration award which was in the nature of settlement of dispute based on number of working days the assessee was bound under the agreements to work for M/s ABCL was devised with the sole intent of escaping incidence of tax.
(iii) The assessee was bound to work for M/s ABCL for 120 days in a year and excluding Saturdays, Sundays and other holidays/leave period, the assessee could do professional work for others only for about 74 days in a year, which comes to about 38 per cent of the total working days. It seems that the arbitrator has considered the said position while passing award. Further, the AO has failed to appreciate that no tax would be payable in the case of M/s ABCL for the year, if entire income from EEL is assessed in its hands because of its set off against brought forward losses. However, vide this arbitration award 30 per cent of such income is assessed in the hands of the assessee, on which he has to pay tax. This fact itself is sufficient to negate the learned AO’s allegation regarding international tax avoidance in this case.
(iv) The agreement allowed the artist to follow the profession within the time of about 240 days not in conflict with the interest of M/s ABCL. Had it not been allowed, the artist would not have survived with the average income of Rs. 1.5 crores per year (Rs. 15 crores divided by 10 years = Rs. 1.5 crores every year), in the absence of any production activity by M/s ABCL.
The assessee as a reputed and renowned actor had assured the shareholders and he could not backout of the assurance given in information memorandum of M/s ABCL while placing shares of M/s ABCL, enabling it to fetch a premium of Rs. 70 per share, as he would have been liable to prosecution, on the ground of giving false promises to lure the investors.
No person will give his personal income to company of which he is not a majority shareholder and in full control of the company. But for his commitment to the company he would not have agreed to share with the company. He (AO) would wrongly presume M/s ABCL to be the ownership company of the assessee and has proceeded to frame his order on these premises.
The purchase by the assessee of shares of M/s ABCL with the amount received under these agreements does not mean routing back of that amount to M/s ABCL as that amount belonged to the assessee in his own right. The amount invested has appreciated 7 times.
The first instalment amount of Rs. 23 crores (less TDS) from EEL was received by M/s ABCL directly vide FIRC dt. 26th Dec., 2000.
The genuineness of these agreements have been found acceptable in Tribunal’s common order dt. 5th Nov., 2002, in No. 4453/Mum/2000 for the asst. yr. 1996-97 in the case of Amitabh Bachchan and No. 4504/Mum/2000 for the asst. yr. 1995-96 in the case of Mrs. Jaya Bachchan.
The statement in para 15 of the assessment order that the agreement with M/s ABCL was a colourable device cannot be upheld in view of the finding of Tribunal as mentioned above. Further, income from KBC could not have been visualized in 1995 nor the fact that M/s ABCL would have losses to adjust the said income against those losses.
It was submitted that as the AO had no valid reason for disallowing or making additions, he had taken the shelter of McDowell’s case (supra) to prove his version which cannot be justified on any count and the story made out by him to invoke McDowell’s case (supra) falls flat as irrelevant and without any force.
The AO framed the order and has inferred many inferences without considering the ground realities and fact, which is evident that if entire income from KBC is assessed in the hands of the assessee, as per the stand of the Department, the Department will in fact stand to lose revenue.
The dispute and the arbitration award was as per terms of agreement with M/s ABCL. Under Arbitration and Conciliation Act, 1996, the award of an arbitrator is final and effect thereof is same as that of an order of a competent Court to decide civil disputes and it amounts to diversion of 70 per cent income by overriding title. It is thus not a case of application of income but of diversion of income by overriding title.
On the basis of above propositions/arguments, the assesses submitted that the findings of the AO summarized in para 16 of the assessment order that–
(a) the source of income is tripartite agreement and the income accrued/arose to the assessee;
(b) it was applied to discharge an obligation but not diverted at source by virtue of and in pursuance of assessee’s agreements with M/s ABCL which have been found genuine by the Tribunal in its order for the asst. yr. 1996-97 and by virtue of an arbitration award under the Arbitration and Conciliation Act, 1996, and
(c) M/s ABCL has no locus standi or charge vis-a-vis SIPL and EEL. It was a gratuitous payment, was erroneous and the income shown in the second revised return should be accepted.
As indicated earlier, a copy of the submission of the assessee was given to the AO who had submitted his reports and the copies of the reports of the AO were given to the assessee and in response certain further submissions have been made. On the basis of these reports and further submissions, certain issues have emerged for consideration as given below :
“Against the issue raised by the assessee that the agreements were approved by the board meeting of the company held on 2nd Jan., 1995, it was stated by the AO that the assessee is the heart and soul of the said M/s ABCL and he along with his family members controls the business of M/s ABCL. In that event, the ultimate approval from the end of the company in its board meeting is of little consequence considering the decision makers and signatories involved. The assessee’s voice is what matters and without him the company did not exist.
On the issue of diversion of Rs. 21.61 crores to M/s ABCL, it is observed by the AO that the position of the assessee on the issue is not very clear. On one hand it has been submitted that the said amount has been given to M/s ABCL, because of his commitment to the company to prevent it to go into liquidation, at the same time it has been submitted that the same has been diverted at source because the assessee was contractually bound to do so because of him having entered into agreement with M/s ABCL in January/February, 1995. This lack of clarity and the confusion clearly reflected that there was a design essentially to serve the interest of the assessee by diverting 70 per cent of the income in the hands of M/s ABCL which had large dose of carry forward losses enough for set off. The ratio of 30 : 70 has been designed in that fashion. The agreement with EEL and SIPL for KBC show provided for rendering of services on the part of the assessee for a minimum period of 65 days subject to a maximum of 104 days for each year. The schedule was to be mutually agreed upon. The schedule was flexible and the AO was of the view that it had kept in mind the assessee’s commitment to M/s ABCL for 120 days in a year. The AO was further of the view that it is not correct to say that the assessee was left with no time after meeting its commitment for KBC programme.
What was meant by the AO while observing that the said money of 15 crores have been routed back to the company is that it had dual advantage in the sense that the said company could benefit by the use of said amount which did not go out of its kitty and on the other side the assessee increased its stake and consequently controlling rights in M/s ABCL. In other words, it meant that the assessee being the whole and sole of M/s ABCL has benefited M/s ABCL by allowing it to use the fund at the same time had benefited himself by increasing its controlling rights. It meant that in the whole process, the assessee was the gainer. The payment being intrinsic and most important part of the said agreement of January/February, 1995 was aimed at serving the cause of the assessee alone.
The AO was of the view that the agreement in January/February, 1995 has been held to be valid by the Hon’ble Tribunal in their order in the case of the assessee for the asst. yr. 1996-97 based on incorrect factual position presented by the assessee. The Department is in the appeal in Mumbai High Court against the same. The said decision of the Tribunal referred to earlier was passed in different context. In the said case the agreement was being examined vis-a-vis the assessee’s claim on a particular receipt of Rs. 15 crores received by him from M/s ABCL as to whether the said receipt was a capital receipt or not ? The said decision referred to earlier was relevant to the factual position as it existed at the relevant time. It has been further elaborated by the AO that in the intervening period certain new facts had come to the knowledge of the Department relating to the way the agreement has been put into operation and the same may need reappraisal of conclusion drawn by the Hon’ble Tribunal referred to earlier. In such an eventuality, the assessee’s argument that Tribunal has held agreement to be valid would not have any consequences in the present proceeding and the same would not have binding effect on the present proceeding. The present case is to be decided in overall prospective of implication of the new facts. In fact, order of the Hon’ble Tribunal referred to by the assessee decided the issue on the basis :
(i) S. Shanmugavel Nadar v. State of Tamilnadu and Anr.
(ii) Employees Welfare Association v. Union of India AIR 1990 SC 324
(iii) S.P. Gupta v. President of India
(iv) Mumbai Kamgar Sabtra v. Abdulbhai Faizullabhai
(v) Hindustan Tea Trading Co. v. CIT
(vi) CIT v. Thana Electric Supply Ltd. .”
4.1 It was contended by the assessee’s Authorised Representative that during the proceeding the percentage of 30 to 70 division in the arbitration award was fixed on the basis of the fact that 32 per cent of the shareholding belonged to the assessee and he had not earned any income since last three years and the royalty of Rs. 15 crores paid to him. It was argument by the assessee that these must have been some of the factors which would have been considered by the arbitrator while fixing such percentage. Against this, the AO had submitted that these are mere guess work and are more assessee’s contention rather than the basis on which such percentage was fixed. In fact, it has been argued by the AO that the fixing of percentage is arbitrary.
4.2 The AO has opined that the assessee has been consistently attempting from the word go to manipulate the sequence of events which includes filing of series of revised returns and altering claims made therein, the way the submissions have been made during the course of assessment proceedings and also the way in which the assessee has conducted himself when putting into use the different clauses of agreement into operation and the way the arbitration proceedings have proceeded resulting in a not too transparent arbitration award unequivocally points to a singular design on the part of the assessee to distribute the income which actually, legitimately belonged to him in different hands in this case of M/s ABCL with a motive to reduce ultimate tax liability on the said amount. The whole sequence of event culminating in the arbitration award has been essentially structured to fit into the whole game plan of the assessee.
4.3 The AO has submitted that during the previous year relating to the asst. yr. 2001-02, the income of Rs. 23 crores had already accrued to the assessee when the arbitration award was not in existence.
4.4 It had been contended during the appellate proceeding that the arbitration award involving dispute between the assessee and ABCL having been accepted by both the parties should have binding effect on IT Department, while deciding apportionment of proceeds in the respective hands for tax purposes, unless it is held–
(a) the same has not taken into consideration the respective claims of the parties properly before arriving at a logically consistent conclusion, and
(b) on overall analysis the arbitration award and the whole process looks unreal and sham.
4.5 In this connection, the AO had argued that the whole sequence of events which includes filing of successive of revised returns showing in later return 30 per cent of the receipt/income from KBC show which was legitimately due to him 100 per cent for services rendered for KBC show against legally valid agreement entered into by him in his individual capacity, and diverting balance 70 per cent to the hands of M/s ABCL for set off against large dose of carry forward loss available points to unmistakable conclusion that the same was not just and fair and clearly an afterthought designed to reduce ultimate incidence of tax on income from KBC show. The AO was of the view that the arbitration proceedings and resultant declaration of award does not seem to have taken into account properly the respective claims of the parties before arriving at a logically consistent decision. It looks completely unreal and can be categorized to be sham. In view of the above, it had been further argued by the AO that even as per the yardstick/proposition of the assessee, the said arbitration award cannot have any binding effect on IT Department.
4.6 After giving careful consideration to the respective position of the assessee as well as the AO on the issue which has been discussed earlier, the learned CIT(A) thought first to go to analyse the crux of the matter which relates to the arbitration award, which allegedly arose because of dispute between the assessee and M/s ABCL. The assessee has relied entirely on the arbitration award given by the Hon’ble former Justice, Shri T.D. Sugla. The arbitrator has noted the claim of M/s ABCL and defence of the assessee and pronounced his own views on each of these issues.
4.7 Regarding claim of M/s ABCL, the relevant portion of the order of the learned CIT(A) is reproduced as under :
(a) M/s ABCL was not aware of the agreement of the assessee with SIPL and with EEL. The arbitrator has not commented anything on this charge. However, he has noted that the assessee is the brain, the heart and the soul of M/s ABCL. These observations would show that the claim that M/s ABCL was not aware of the assessee’s contract with KBC show is ridiculous. The popularity of KBC programme was so staggering that it is unthinkable that an organization connected with entertainment world would be unaware of assessee’s involvement in KBC programme.
(b) ABCL was of the opinion that acting as an anchor in KBC by the assessee did not amount to acting in feature film. The arbitrator has also commented that assessee’s role in KBC falls in the field of other audio visual work and distinct from acting in feature films.
(c) As the assessee was busy round the clock with KBC programme, he was not available for discussion with the directors of ABCL for the development of programme and generation of (income for) the company. The arbitrator has not commented on this claim of ABCL. It is observed that this claim of ABCL goes counter to the earlier claim that ABCL was not aware of KBC programme. If ABCL was not aware of the assessee’s activities, how a claim can be made that he was not available because of his involvement in KBC ?
(d) Programme like KBC ought to have taken up for ABCL by the assessee. The arbitrator has indirectly agreed with this claim. But if that be the case, there is no reason why the entire amount earned by the assessee should not have been handed over to ABCL, not 70 per cent of it.
(e) The assessee as the main promoter of ABCL had given assurance to the potential shareholders that he would bring a host of entertainment related activity under the umbrella of the company. ABCL also invoked the plea of the promissory estoppel before the arbitrator. The arbitrator has been persuaded by this argument of ABCL. He has opined that in view of the assurance given to the prospective shareholders, the income from KBC programme rightfully belongs to ABCL.
4.8 Regarding the defence raised by the assessee before the arbitrator in respect of the claim of ABCL, the relevant portion of the order of the CIT(A) is reproduced as under :
(i) ABCL could have earned a lot of money of exploiting him or his goodwill or talent. But despite his requests to ABCL, these were not exploited. The arbitrator did not find any evidence in support of this claim. As the learned CIT(A) stated earlier, the arbitrator did not comment on the claim of ABCL that the assessee was not available despite the directors pleading with the assessee for development of business and generation of income for ABCL. There is no evidence to the effect that ABCL ever drew up any scheme or programme to exploit the assessee, nor arbitrator declined to give time to ABCL, in order to discharge his obligation under the contracts between them.
(ii) The agreement with Star India was signed with the assessee in his personal capacity, as Star India was not willing to enter into agreement with ABCL. The arbitrator has not made any plea on this commitment of the assessee.
(iii) KBC programme could be treated as a feature film in which the assessee played principal role. The arbitrator has not accepted this plea and had commented that this would fall in the field of ‘other audio visual work’ as distinct from feature film. However, the arbitrator has noted that such type of engagement was not visualized at the time of signing of agreement between the assessee and ABCL.
(iv) During the earlier year the assessee handed over the income from KBC to ABCL in an act of sympathy/generosity and no adverse inference ought to be drawn therefrom. The arbitrator has not commented on this, presumably on the ground that he had concluded that 70 per cent of all the receipts from KBC programme would go to ABCL.
4.9 The learned CIT(A) was of the view that agreement between the assessee and ABCL have not been properly interpreted. The arbitrator has noted that the assessee had agreed and given to ABCL the right to use the assessee and his name in relation to ‘engagement’ as defined in the contract. “Engagement” had been defined in the contract dt. 10th Jan., 1995 as under :
“(i) an actor/performer anchor in cinematograph films, feature films, television films and other audio-visual works howsoever described.
(ii) a singer or voice recording….
(xviii)…”
4.10 Regarding engagement schedule, it has been defined in the contract as under :
“‘Engagement schedule’ means a schedule during which the artist will fulfil his obligations under these presents, which schedule shall contain dates, time and locations for publicity and includes the recording, shooting, pre-production period and post-production periods.”
4.11 From the above engagement schedule it shows that there would be some definite programme drawn up by ABCL containing date, time and location for the performance of the assessee. The contract defines guaranteed period as under :
‘”Guaranteed period’ means the period of 120 working days exclusive of bank and public holidays in any given calendar year during which the artist shall be available for engagements.”
4.12 The contract requires that the assessee should be available for engagement during the period of 120 working days. But these 120 working days should be scheduled by ABCL. Which 120 days ABCL would engage, the assessee has given a guarantee that he would be available. It does not prevent him to engage his own activity if (on) some days there is no pre-planned programme by ABCL. 120 days refers to the maximum period for which ABCL could engage the assessee. Beyond this he was free to engage in his own activity.
4.13 The relevant clauses, that is, para 1.7 and para 6.3 of the order of the learned CIT(A) is extracted below :
“1.7. It is expressly understood that nothing contained in the agreement shall restrict the right of the artist to pursue his professional career as an actor, whether in a principal role or otherwise, in feature films that the artist may in personal capacity sign up or enter into a contract to act in feature film, with any third party/person having no interest whatsoever in the corporation or its activities. Provided that the artist shall not sign for any role in any feature film in cases where the corporation has obtained from the artist a prior commitment in relation to a feature film similar to the one contemplated above. And provided further that the artist shall accord priority to complete the feature films contemplated in Clause 2.1.2 below.
6.3 Save and except as provided for in Clause 1.7, the artist shall not enter into an arrangement whereby he is available to any other person during the term of this agreement for any engagement(s). The artist has not entered and shall not enter into any arrangement which may conflict with this agreement.”
4.14 It has been contended by ABCL before the arbitrator that the assessee has freedom only to act in feature films and cannot take any other activity even outside the mandatory 120 days period of availability in a year. The contract binds the assessee only for a maximum of 120 days of assignment. That means, when he is free from the assigned task in 120 days, he is not bound to sit idle if no assignment is scheduled and no advance notice has been given to him so that he is available full time on those days. The definition of engagement describes the activities that could be performed by the assessee during the engagement schedule. This goes on to say that the activities would be except those accruing to the artist by virtue of Clause 1.7. Clause 1.7 allows the assessee to pursue professional career as an actor in his professional capacity. That means the definition of “engagement” requires the assessee to do any of those Clause 1.7 enumerated activities during the “engagement schedule”. Therefore, Clause 6.3 is being interpreted by reading the clauses in the contract harmoniously. If so done, that would mean that the assessee was free to do anything outside the 120 days’ mandatory commitment period in a year. This clause has not been analyzed adequately and sweeping conclusions have been arrived at that the assessee had agreed to engage himself for ABCL and limit his activities for ‘personal purposes’. The interpretation to say that in terms of Clause 1.7, the assessee was practically to work full time for ABCL is not borne out from the fact on record as the above discussion would show. When the maximum commitment of the assessee is only for 120 days in a year, one wonders how it could be concluded that the assessee was to work full time for ABCL. The assessee could undertake any assignment outside the committed 120 days. This is what the arbitrator is describing as activities for personal purposes.
4.15 The CIT(A) explained the terms of agreement and the rights and liabilities of the appellant to point out that he did not put up an adequate defence. Clearly, he was trying to ride two horses at the same time. The arbitrator has correctly pointed that the appellant was the brain, heart and soul of ABCL. In this situation, it is inconceivable that there was a genuine dispute between the assessee and ABCL. According to CIT(A), it is corroborated by the fact that the assessee tamely surrendered his interest in favour of ABCL. CIT(A) has observed that income was diverted to ABCL to get set off against brought forward losses. Accordingly, AO had every justification to conclude that the whole arrangement was a make believe one. CIT(A) also observed that any principle of accrual of income or income-tax law for taxation of income has been kept in view while declaring the award. No reason has been assigned for adopting 70:30 ratio for splitting the income. Assessee has argued that an arbitrator does not need to give detailed reasoning in his award.
4.16 The assessee has argued that under Arbitration and Conciliation Act, 1996, the award of the arbitrator is final and binding on all the parties to the dispute and the legal effect thereof is the same as that of an order of a competent Court to decide civil dispute. At best, the award of the arbitrator can be regarded as something comparable to a compromise decree of a civil Court. On the point of claim of deduction under Section 80RR, the CIT(A) has upheld the order of AO on the issue :
“In a number of judicial decisions, Courts have held that a compromise decree or order does not operate as res judicata because the same is merely the record of a contract between the parties to suit to which is super added the seal of the Court and the Court does not decide anything. In Subba Rao v. Jagannadha , a Bench of three Judges held that a compromise decree is not a decision of the Court, nor can it be said that a decision of the Court was implicit in it. It is the acceptance by the Court of something to which the parties agreed. Such a decree cannot operate as res judicata [Baldevdas Shivlal v. Filmistan Distributors (India) (P) Ltd. , A.A. Associates v. Prem Goel ].
In Subba Rao’s case (supra), Court held that the compromise decree might have created an estoppel by conduct and such estoppel must be specifically pleaded. In Sailendra Narayan Bhanja Deo v. State of Orissa , five-Judges Bench of Supreme Court held that a judgment by consent is effective as estoppels between the parties as a judgment whereby the Court exercises its mind on a contested case. In Byram Pestonji Ganwala v. Union of India the Court held that a judgment by consent is intended to stop litigation between the parties just as much as a judgment resulting from a decision of the Court at the end of a long drawn out fight. A compromise decree creates an estoppel by judgment and quotes the following paragraph from the Spencer-Bower and Turner in res judicata (2nd Edn., p. 37) :
‘Any judgment or order which in other respects answers to the description of a res judicata is nonetheless so because it was made in pursuance of the consent and agreement of the parties. Accordingly, judgments, orders, and awards by consent have always been held no less efficacious as estoppels than other judgments, orders, or decisions, though doubts have been occasionally expressed whether, strictly, the foundation of the estoppel in such cases is not representation by conduct, rather than res judicata.
From the above mentioned judicial pronouncements, it is clear that principle of res judicata is not applicable in case of decree passed by the Court under the compromise between the parties. However, such decree is binding on the parties on the basis of principle of estoppel.’
In any case, the award is binding only on the parties before the arbitrator and not on any party who was not party to the proceeding.
In Municipal Council v. Mani Raj , the Supreme Court held that the award of an arbitrator is not binding on a party not in the proceeding before the arbitrator, even if he is in possession of the property in dispute between the parties to the arbitration proceeding. The Court observed :
‘We have considered the submissions made by the learned Counsel for the parties. We do not wish to examine and express opinion as to the respective contentions on merits touching the question of title over the property in dispute in the view we are taking. It cannot be disputed that the appellant is in possession of the disputed property. It was not a party in the award case and the earlier two orders passed on 11th Jan., 1971 and 26th Aug., 1993 on the basis of which direction was given to the appellant to deliver possession of the disputed property. In the circumstances, the application made by the appellant ought to have been allowed when the direction adversely and seriously affected the valuable rights of the appellant over the immovable property in dispute. We are of the view that the High Court committed a manifest error in rejecting the application filed by the appellant, seeking intervention in the award case. The application of the appellant ought not to have been dismissed on the ground of delay and laches having regard to the facts and circumstances of the case and particularly when the appellant was not a party to the earlier orders. The appellant was denied opportunity of putting forth its case before the High Court.’
From the above rulings, it is clear that the AO is not bound by the award given by the arbitrator while deciding how much income is taxable in the hands of the assessee in the asst. yr. 2001-02.
There is no doubt that the assessee had entered into an agreement with Star India and E. Entertainment in his personal capacity. His personal activities are distinct and different from those he has used to undertake under the banner of ABCL. An income which has been received for work done under a contract cannot be treated as something different from it. When ABCL has never entered into a contract with Star India and E. Entertainment, there is no question of any income accruing or arising to ABCL. There is only one income which has accrued to the assessee from one activity which was anchoring of the KBC programme. So there cannot be more than one person to whom the income would accrue. The contract clearly states that the remuneration is payable to the assessee in his individual capacity. The arbitrator has also noted that Star India and E. Entertainment were not willing to enter into an arrangement under ABCL banner. When the payer of the income did not want to have anything to do with ABCL, there is no question of any income accruing or arising to ABCL from out of the money received under the contract with Star India and E. Entertainment. Therefore, the AO was right in taking the entire amount of Rs. 23 crores as income of the assessee during the year. The payment of 70 per cent of the amount cannot be treated as an expenditure laid out for earning the income. Therefore, it is not an allowable expenditure.
It is a matter of record that it has been concluded that there was a breach of agreement by the assessee. The only recourse for breach of agreement is to award compensation. In fact it has been concluded further that out of what the assessee received, 70 per cent belongs to ABCL. In fact things have been assumed to be in existence which was never so. Effort has been made to make out a case that the only implication of the award is that the assessee did undertake activities on behalf of ABCL which generated income to the extent of 70 per cent of the receipts from Star India and E. Entertainment. In fact the way the things have been put across by the assessee, it seems that a case has been made out that the arbitrator has, in effect, tried to enforce the contract between the assessee and ABCL.
Section 14 of the Specific Relief Act, 1963, states that for a contract which runs into minute or numerous details or which is dependent on the personal qualification or volition of the parties, the Court cannot enforce specific performance. In Dr. S.B. Dutt v. University of Delhi , the Supreme Court considered a case in which a professor was dismissed from service and the dispute was referred to an arbitrator. The arbitrator gave the award in which he stated that the removal of the professor was wrongful. He continued to hold that the dismissal had no effect in his status and he still continues to be a professor of the university. The Supreme Court held that such an award is illegal as it seeks to enforce a contract of personal service. The Court observed :
’10. The appellant contends that the High Court was wrong in its view that the award disclosed an error on the face of it. The High Court had held that it was not open to the arbitrator “to grant Dr. Dutt a declaration that he was still a professor in the university which no Court could or would give him.’ The High Court felt that this declaration amounted to specific enforcement of a contract of personal service which was forbidden by Section 21 of the Specific Relief Act and, therefore, disclosed an error on the face of the award.
11. We are in entire agreement with the view expressed by the High Court. There is no doubt that a contract of personal service cannot be specifically enforced. Section 21 Clause (b) of the Specific Relief Act, 1877, and the second illustration under this clause given in the section makes it so clear that further elaboration of the point is not required. It seem to us that the present award does purport to enforce a contract of personal service when it states that the dismissal of the appellant ‘has no effect on his status’, and ‘He still continues to be a professor of the university.’ When a decree is passed according to the award, which if the award is unexceptionable, has to be done under Section 17 of the Arbitration Act after it has been filed in Court, that decree will direct that the award be carried out and hence direct that the appellant be treated as still in the service of the respondent. It would then enforce a contract of personal service, for the appellant claimed to be a professor under a contract of personal service, and so offend Section 21(b).
12. It was said that this might make the award erroneous but that was not enough; before it could be set aside, it had further to be shown that the error appeared on the face of the award. The learned Counsel contended that no error appeared on the face of the award as the reasoning for the decision was not stated in it. It was said that this was laid down in the well-known case of Champsey Bhara & Co. v. Jivraj Balloo Spinning & Weaving Co. Ltd. (1923) LR 50 IA 324. We were referred to the observations occurring in the judgment at p. 331 to the following effect :
An error in law on the face of the award means, in Their Lordship’s view, that you can find in the award or a document actually incorporated thereto, as for instance a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous.’
13. We are unable to agree the Judicial Committee laid down the proposition that the learned Counsel for the appellant ascribes to them. When they referred to the reasons for the judgment, they were contemplating a case where the judgment, that is, the award itself, did not disclose an error but the reasons given for it in an appended paper, did. They did not intend to say that no error can appear on the face of an award unless the reasons for the decision contained in the award were given in it. In our view, all that is necessary for an award to disclose an error on the face of it is that it must contain, either in itself or in some paper intended to be incorporated in it, some legal preposition which on the face of it and without more, can be said to be erroneous. This was the decision of the Judicial Committee in the Champsey Bhara & Co. (supra). As the award in this case directs specific enforcement of a contract of personal service, it involves a legal proposition which is clearly erroneous.
14. Another point raised on behalf of the appellant was that the portion of the award which held that his dismissal had no effect on his status and that he continues to be a professor was merely consequential and hence a surplus-age and, therefore, an error disclosed in it would not vitiate the award. This contention seems to us to be unfounded. The award held that the appellant had been dismissed wrongfully and mala fide. Now, it is not consequential to such a finding that the dismissal was of no effect, for a wrongful and mala fide dismissal is nonetheless an effective dismissal though it may give rise to a claim in damages. The award, no doubt, also said that the dismissal of the appellant was ultra vires but as will be seen later, it did not thereby hold the act of dismissal to be a nullity and, therefore, of no effect. We are also clear in our mind that the contention about the offending portion of the award being a mere surplus-age affords no assistance to the appellant for it was not said on his behalf that the offending portion was severable from the rest of the award and should be struck out a mere surplus-age. It, therefore, has to remain as a part of the award and so long as it does not, it would disclose an error on the face of the award and make it liable to be set aside as a whole.’
On the basis of the above rulings, I would hold that it would not be correct to interpret, as has been interpreted by the assessee that the arbitrator had in fact enforced a kind of contract as if the assessee undertook activities on behalf of ABCL and such activities yielded an amount (70 per cent of the amount received by the appellant) to ABCL as income. It is a settled law that if there is any breach of an agreement for personal service, the arbitrator can only award an amount as compensation for breach of contract. Therefore, the amount payable by the assessee to ABCL can only be treated as a payment of compensation. So it would not be correct and proper to interpret the arbitration award the way the assessee has tried to interpret as above which has to be a reasonable, harmonious and legal interpretation.
It would be worthwhile to analyze the consequences if the 70 per cent amount is treated as compensation for breach of contract. During the previous year relevant to asst. yr. 2001-02, no amount was payable by the assessee to ABCL by way of compensation. The compensation, was awarded much later. The liability of the assessee to ABCL in terms of the award did not come into existence during the year under review. The compensation does not become due until it is awarded by the arbitrator. In CIT v. Highway Construction Co. (P) Ltd., the High Court held that the compensation awarded by the arbitrator to the assessee accrued only on the date of decree. The income accrued when the assessee gets vested with the right to claim the amount. Conversely, the expenditure accrues to the payer when the payee has a right to receive the amount. The obligation to pay 70 per cent of the receipt in term: of the award did not arise during the previous year relevant to asst. yr. 2001-02. Therefore, no expenditure can be allowed with respect to the amount paid by the assessee to ABCL in terms of the award. The AO is to take the state of affair as was in existence during the previous year to determine the income of the assessee. He has correctly taken into account the amount received by the assessee from Star TV and E. Entertainment on his own rights as the income taxable during the year. It means that the entire receipt of Rs. 23 crores will be taxed as income of the assessee for asst. yr. 2001-02. The assessee’s plea on this issue fails.”
5. Before us, the learned Counsel for the assessee submitted that CIT(A) has erred in holding that the entire amount of Rs. 23 crores from M/s EEL was taxable as assessee’s income for asst. yr. 2001-02 without appreciating that assessee was bound under agreements dt. 10th Jan., 1995 and 11th Feb., 1995 between him and M/s ABCL to handover to M/s ABCL entire income from “engagements” as defined in the said agreements except those under Clause 1.7 thereof and M/s ABCL could enforce the terms thereunder as per Clauses 11 and 20 thereof. Further, he was also legally bound by his assurance given in information memorandum of M/s ABCL issued in 1996 for placing shares thereof at a premium of Rs. 70 per share. CIT(A) has not appreciated the fact that agreements were genuine and bona fide as found by Tribunal vide its order No. 4453/Mum/2000 for asst. yr. 1996-97 in the case of assessee itself which is the highest fact finding authority under the IT Act. Further, the agreements cannot be held to be genuine in one context and non-genuine in another.
5.1 Authorities below have not appreciated the tripartite agreement between the assessee and M/s Star India (P) Ltd. (SIPL) and M/s EEL, dt. 12th April, 2001 was entered into by the assessee under the bona fide belief that the programme “Kaun Banega Crorepati” amounted to a “feature film” as allowed to be done by him under Clause 1.7 of the agreement dt. 10th Jan., 1995 with M/s ABCL. Further, in January, 1995, no one could have foreseen income from “KBC” programme and losses incurred by M/s ABCL in later years. The authorities below have not appreciated the plea by assessee before the arbitrator that the entire income from “KBC” belonged to him on the ground that it was a feature film cannot be held against him as it is but natural for a party to argue one’s case forcefully before the arbitrator even when the weakness of the case is known to it.
5.2 Revenue authorities did not appreciate that the dispute whether it amounted to “feature film” on his own account or an “engagement” resulting in income to M/s ABCL arose between the assessee and other directors of M/s ABCL, resulting in arbitration award dt. 19th June, 2002 by Justice T.D. Sugla (Retd.). Revenue authorities did not appreciate that the award dt. 19th June, 2002, awarded 30 per cent of income from “KBC” to the assessee and 70 per cent thereof to M/s ABCL on the grounds cited therein and it was not a design to distribute income to avoid incidence of tax as can be seen from the fact of the case. When family shareholding of the assessee (35 per cent) and his entitlement to 4 per cent of profits of M/s ABCL is considered, the assessee’s share in receipts from “KBC” in fact comes to 57 per cent thereof. Accordingly, CIT(A) and Revenue authorities were not justified in holding that assessee had claimed receipt of Rs. 23 crores from “KBC” programme against which, an outgo of Rs. 21.67 crores to ABCL was claimed under contractual obligations as in fact no such claim was made in the return of income. Revenue authorities also erred in holding that amount of 15 crores received by the assessee from ABCL was reinvested back in ABCL as share capital, as the said investment was made for the first time. It cannot be said to be a circular transaction as the investment appreciated by, ,7 times due to premium charged to outsiders. CIT(A) erred in holding that under the terms of Clauses 1.7 and 6.3 of the agreements, dt. 10th Jan., 1995 and 11th Feb., 1995, the assessee was free to do any work and not merely acting in a feature film as mentioned in Clause 1.7, outside 120 days of guarantee period thereunder, as the assessee was so bound “during the term of this agreement” as mentioned in Clause 6.3 thereof and not merely for 120 days of “guarantee period”. CIT(A) also erred in holding that arbitration award is not binding on third parties, as it would be binding on third parties and the Department also if the facts and circumstances of the case so indicate and the concept of “real income” is adopted. Reliance in this respect is placed on Section 43 of Indian Evidence Act. CIT(A) also erred in holding that income from programme “KBC” could not accrue to M/s ABCL as contract was between assessee and M/s SIPL and M/s EEL, as the claim of M/s ABCL was based on terms of agreements, dt. 10th Jan., 1995 and 11th Feb., 1995, with the assessee without any relevance to the source from which the income was earned by the assessee and amounted to overriding title of M/s ABCL thereon. Further, the amount was directly received on 26th Dec., 2000 by M/s ABCL as per FIRC dt. 13th Feb., 2001 from Hongkong & Shanghai Banking Corporation Ltd. CIT(A) erred in holding that the arbitrator had in fact enforced a “personal services contract” as if the assessee undertook activities on behalf of M/s ABCL which yielded an amount equal to 70 per cent of sum received from the show “KBC”, as this is not a case of enforcement of contract of personal services but of enforcement of rights to income being legal obligation under agreements, dt. 10th Jan., 1995 and 11th Feb., 1995.
5.3 The CIT(A) erred in holding that the amount payable by assessee to M/s ABCL amounted to “compensation”, because this is not a case of breach of an agreement for “personal service” as mentioned above. CIT(A) further erred in holding that liability to pay the amount payable by assessee to M/s ABCL arose on the date of award, i.e., on 19th June, 2002 (asst. yr. 2003-04) and thus, was not allowable in the assessment year under appeal, as the liability was only quantified by award dt. 19th June, 2002 and was already present in the assessment year under appeal by virtue of agreements dt. 10th Jan., 1995 and 11th Feb:, 1995. In fact and circumstances, CIT(A) erred in not considering the submissions made before him in connection with the agreements dt. 10th Jan., 1995 and 11th Feb., 1995 and other facts. Therefore, the assessment order is based on false premises which ought to have been demolished. It was also submitted that the authorities below have wrongly concluded that there is tax planning by assessee to evade tax because there was no stretch of imagination by which it could be exhibited in asst. yr. 1995 that the losses suffered by ABCL could be set off by the income of the assessee. In this regard, the learned Authorised Representative of the assessee pointed out that MA No. 277/Mum/2004 filed by the Revenue has been rejected and ultimately submitted that claim of assessee is genuine. On the other hand, the learned Authorised Representative at the outset of the hearing, submitted that assessee has filed paper book consisting of 139 pages before the Hon’ble Bench on 2nd Nov., 2000 in the item at serial No. 4 of the paper book starting from page No. 96, document relating to arbitration proceedings, before sole arbitrator has been filed up to page No. 118. Page No. 96 contains letter dt. 18th March, 2000 addressed to Hon’ble Justice T.D. Sugla (Retd.) with request to be the sole arbitrator to the parties. There is a letter of even dt. 18th March, 2002 of Hon’ble Justice T.D. Sugla, sole arbitrator, addressed to between the parties and assessee. There is letter of even dt. 18th March, 2002 at p. 152 of the paper book filed by the Department addressed by assessee to one Amar Singh, copy of which has been submitted before the AO. In this letter dt. 18th March, 2002, there is a reference to letter dt. 16th March, 2002 received by assessee from AB Corporation Ltd. and mention of advance received from assessee by appellant-assessee with regard to agreement entered into by and between applicant-assessee and E Entertainment Ltd. The respondent in this appeal requested to instruct the assessee to produce the letter dt. 16th March, 2002 as well as legal advice received by applicant-assessee with regard to agreement. In response to this, the learned Authorised Representative for assessee submitted that they are not able to produce the letter dt. 16th March, 2002 in spite of their best efforts. Apart from this, Departmental Representative for respondent wanted to know whether is there any resolution passed by the company to refer the matter to the arbitration and also to the fact that any other option/alternative for recovery of the amount was considered by assessee and if yes, what was the sum ? Apart from this at p. 68 wherein fresh certificate of incorporation consequent to change of name is placed on record, wherein Sopan Releasing Co. (P) Ltd., has been changed to Amitabh Bachchan Corporation (P) Ltd. Our attention was drawn to p. 70 of the paper book wherein the main object of the company has been said to be protection of industrial co-operations between advances, deposit on land, money, securities and properties, to order that any company, corporate film person or association whether management or otherwise or other security. Thus, the learned Departmental Representative drew our attention to the fact that there is no mention of film making in said memorandum. Our attention was also drawn to p. 78 wherein at 16 ‘F’, there is a mention that above Clauses 60A to 60F were added to personnel resolution passed at extraordinary meeting held on 25th Feb., 2005 and the order of company logo dt. 30th Aug., 1996. In this regard, learned Departmental Representative drew our attention to p. 83. The contention of Departmental Representative was that how ABCL entered into film producers prior to the resolution to this effect. Thus, vide agreement dt. 10th Jan., 1995 and 10th Feb., 1995 prior to amendment in the memorandum to this effect as discussed above. In this regard, the learned Departmental Representative drew our attention to the provisions of Section 17 of Companies Act which deals about the change of objects and approval thereof.
6. We have considered the rival submission and have carefully gone through the discussions in the impugned order as also the papers to which our attention was drawn at the time of hearing from the respective paper books filed by both the sides. During the year under consideration, the assessee acted as an anchor to the television programme show popularly known as “Kaun Banega Crorepati” (KBC) as per tripartite agreement with EEL. The assessee received during the current assessment year Rs. 23 crores from EEL and transferred certain sum to ABCL as per agreements mentioned above.
6.1 It is these agreements entered into in 1995 by the assessee with ABCL which have been seriously questioned by the tax authorities. If their contentions were to be upheld, it will only amount that 100 per cent of Rs. 23 crores received by the assessee under the tripartite agreement is assessable in his hands, where if we accept the assessee’s stand in relation to those agreements, it would mean only 30 per cent of the disputed receipts will accrue to the assessee as an individual. The crux of the issue centers around the acceptability of the genuineness of those agreements. There is absolutely no dispute that the tripartite agreement entered into by the assessee with SIPL and EEL does not make any reference to the agreement entered into by the assessee with ABCL. The dispute by the Department has gone into all seriousness because ABCL over a period of time between 1995 and 2001 has suffered huge losses to the extent of Rs. 81.88 crores. The huge losses were suffered by ABCL in Miss World Pageant Programme in 1996, held at Bangalore. These losses had eroded the financial credibility of ABCL which has been ultimately declared a BIFR company on a reference made on 9th July, 1990. On these facts there are no serious disputes.
6.2 The main ground which lead the AO to doubt the agreement entered into by the assessee with ABCL was that it was not signed by any person on behalf of ABCL, nor it bore the common seal of the company. Similarly the supplementary agreement is not signed either by the representative of ABCL or by any witness. According to the Revenue authorities, the agreement was signed by the assessee and is simply a unilateral and self serving document in nature and it only represents the assessee’s assertion and intention entering into an agreement with ABCL, which was not signed by ABCL. According to the Department the whole agreement is an invalid document. The Bench, during the course of hearing called for the original agreements and the assessee’s counsel produced both the agreements. On perusal of the said agreements it was found that there is a seal of ABCL and the signature of the director of ABCL is also there on the last page of the agreements. The same was shown by the Bench to the learned Departmental Representative in the open Court. Subsequently, in order to verify whether the seal of ABCL and the signature of its director is visible in the agreements, the photostat copy of the same were taken. Ultimately it was found from the photostat done at the instance of the Bench that neither the signature on behalf of ABCL or its seal is legible in the photostat copies. On this, the learned Departmental Representative was fair enough not to proceed further on this issue. Therefore, on this count, we are unable to accept the stand of the Department that the so called agreements have rendered themselves invalid for want of any signature in this regard. The original bore the signature and seal of ABCL, therefore, the legal implication as to the genuineness of the documents is established in favour of the assessee.
7. Now the other contention of the Revenue is that it is a make-believe transaction and is done only as a tax evading device or desire mainly to reduce the burden of tax in the hands of the assessee individual. To address this issue, we have to go back to the several events which resulted in the execution of these agreements. The execution of these agreements has been established beyond any doubt. They are genuine documents executed by the parties in 1995. In 1995, the assessee executed these agreements with ABCL whereunder he has clearly sold his persona and brand name for a consideration of Rs. 15 crores. The receipt of this consideration has been assessed by the Department. The Department took the stand that it is a revenue receipt when it was received. The assessee took the stand that it was a capital receipt. Ultimately the Tribunal was required to adjudicate on that issue. The Tribunal recognized the existence of the agreement produced by the assessee while dealing with those assessments. The Tribunal came to the conclusion that the agreements cannot be held to be non-genuine. Now it is not open for us to say that it is genuine in that context while dealing with the assessability of the receipt of the sum from ABCL and at the same time, it is non-genuine when it comes to the obligation arising out of the same agreement. In other words, the Revenue is only trying to blow hot and cold taking contrary stands in relation to the same agreements. Any how, as regards the genuineness of those agreements, it has already reached the stage of finality in the hands of the final fact-finding authority viz., Tribunal while dealing with the appeal in ITA Nos. 4453 and 4504/Mum/2000 and CO No. 111/Mum/2001. The Revenue’s miscellaneous application arising out of that order has already been rejected by the Tribunal and the matter is now reported to be before the Hon’ble Bombay High Court. It is humanly impossible to envisage and expect that an agreement made in 1995 is part of a design or device to save tax in the year 2001-02 and also to further imagine that ABCL will suffer loss in 1995-96 till 2000-01. Nobody imagined that KBC programme will be such a success in reviving the artist, who was totally and financially sunk before this programme along with his group company ABCL. The losses were not suffered in 2001-02 when the income was released but they were suffered in 1996 and ABCL had a worst financial beating much before the receipts or even the conceptualization of the programme. We do not think that these agreements were only make-believe transactions arranged just to defeat the taxing provisions. So the attempt to lift the corporate veil by the AO, in our view, is not fair and reasonable especially viewed from the fact that the Department accepted the genuineness when it came to the question of taxability of the receipt of 18 crores to the assessee and his wife under the same agreements. The assessee, as the agreements of 1995 clearly show, has sold himself to ABCL and he is bound to account for all the professional receipts from the engagements unless they fall under the exemption Clause 1.7 of the agreement which only allowed a limited freedom to the assessee to act in a feature film produced by others provided it is not on same concept for which ABCL has obtained prior commitment of the assessee for its own production and also the assessee would accord highest priority to complete the feature films produced by ABCL as contemplated in Clause 2.1.1 of the agreement. In fact, before the arbitration proceedings the assessee relied upon Clause 1.7 and ABCL relied upon Clause 6.3 of the agreement dt. 10th Jan., 1995. The stand taken by the assessee and ABCL cannot be used against them to hold that the very agreement was non-genuine or make believe arrangement and it is equally wrong on the part of the Department to conclude that the agreement dt. 10th Jan., 1995, between the assessee and ABCL, to be sham and the income of the assessee for the year upon the arbitration proceedings is a mere make believe. It is no doubt true that the Departmental authorities have extensively discussed that the assessee had consciously entered into the tripartite agreement with SIPL and EEL without disclosing his obligations and commitments towards ABCL. That does not mean that he can escape from his own obligations towards ABCL, when in fact, there is no dispute that he has received the consideration of Rs. 15 crores for transfer of his persona and brand name to ABCL. The agreements, if one were to go through, clearly leads to an impression that the assessee had a definite obligation towards ABCL to account for all the engagements, which do not fall within the exceptional Clause 1.7 of the agreement. It is these subsisting obligations under the agreement that drew the assessee as well as ABCL to a sort of litigation/dispute as to the exact nature as well as the scope of Clauses 1.7 and 6.3 of the agreement dt. 10th Jan., 1995. These obligations have driven the assessee and ABCL to go before the sole arbitrator and, the sole arbitrator, as the proceedings before him show, has considered the claims and counter claims of both the parties in the light of the various clauses of the agreements in question. A litigation, if carried on, would have landed the assessee to account for 100 per cent of the receipt from KBC programme in favour of ABCL as a part of its claim over the assessee’s obligation to account for the same. It is these disputes which have been ultimately referred to arbitration proceedings. We do not accept the theory that as canvassed by the learned Departmental Representative, the entire reference is not at all a reference to the arbitrator but only a medium or an arrangement made in the direction to achieve a tax evasion. The sole arbitrator Justice T.D. Sugla has examined the issue in the light of the rival claims and the agreements entered into by the parties and has considered it fair, equitable and just that 30 per cent of the receipt by the assessee from the KBC programme accrues to him and the remaining 70 per cent should be handed over to the claimant company viz., ABCL. We are aware that the Department is not a party to the arbitration proceedings and, therefore, cannot be legally said to be bound upon it. But the Revenue, as correctly argued by the learned Counsel for the assessee, cannot ignore the legal implications of transactions and the disputes that were there between the parties in making the assessment. The Revenue cannot assess more than the real income in respect of the transactions entered into by the parties. The relevant clauses of the agreement which have a bearing upon the issue, although extensively discussed by the two Revenue authorities, are again extracted below for making this a self-contained.
“Clause 1.7
It is expressly understood that nothing contained in the agreement shall restrict the right of the artist to pursue his professional career as an actor, whether in a principal role or otherwise, in feature films that the artist may in his personal capacity sign up or enter into a contract, to act in feature film, with any third party/person having no interest whatsoever in the corporation or its activities. Provided that the artist shall not sign for any role in any feature film in cases where the corporation has obtained from the artist a prior commitment in relation to a feature film similar to the one contemplated above. And provided further that the artist shall accord priority to complete the feature films contemplated in Clause 2.1.2.”
While according to the assessee there is a restriction in effect over the artist to make public performances. Clause 6.3 of the agreement puts restriction on artist with regard to third party. Clause 6.3 of the said agreement reads as under :
“Clause 6.3
Save and except as provided for in Clause 1.7, the artist shall not enter into any arrangement whereby he is available to any other person during the term of this agreement for any engagement(s). The artist has not entered and shall not enter into any arrangement which my conflict with this agreement.”
Under such conflicting situation, parties have referred their dispute as envisaged under Clause 20 of the agreement. According to the said clause, the dispute amongst the party has to be referred as per provisions of Arbitration Act. Clause 20 of the said agreement read as under :
“20. Settlement of disputes and governing laws–All disputes or differences arising between the parties out of, or in relation to the construction, meaning and operation or effect of the contract or the breach thereof shall be referred to arbitration in Bombay, in accordance with the Arbitration Act, 1940 and the rules thereunder. This agreement shall be governed by and construed in accordance with the laws of India and the Courts in Bombay alone will have jurisdiction.”
It has been done in this case. So, the agreement cannot be said to be self-serving and it does not represent a make belief arrangement.
7.1 Now we would like to discuss the facts leading to the reference to the arbitrator, the powers of the arbitrator and the ground for setting aside the award in the following manner so as to understand the implication of arbitration proceedings over the disputed issue. The indemnity Clause 6.12 which stipulates that artist agrees and shall keep fully indemnified at all times M/s ABCL from against all actions, proceedings, claims, etc. and damages arising directly or indirectly as a result of any breach or non-performance by the artist of any of his undertakings, warrants or obligations. According to the Revenue authorities, the rigours of this clause are diluted by Clause 6 of the said agreement, which provides for equitable relief. Accordingly, M/s ABCL was entitled to seek injunctive and other equitable relief to prevent or curtail actual or threatened breach by the artist of the provisions of agreement. Since parties to agreements were having option to refer the matter for arbitration as per provisions of Arbitration Act, 1940, we find nothing wrong if one of the two available options was availed by the party to resolve their dispute. The suit for injunction under the relevant provisions of Specific Relief Act along with application for ex pane ad interim injunction under Order 39, Rules 1 and 2 read with Section 151 takes considerably long time for reacting finally. The resolution of dispute under Arbitration Act is fast. Apart from this, the Court proceedings are not only time consuming but costly as well in comparison to arbitration proceedings. Under these circumstances, we do not find anything wrong if the matter be considered to be resolved under the provisions of Arbitration Act, 1940, as provided under Clause 20 of the agreement. The dispute to the arbitrary was referred under the relevant provisions of Arbitration Act. The consent is the basis of arbitration. So, referring the dispute by consent and further consent for allocation of income between assessee and M/s ABCL is well recognized under the Arbitration Act, 1940. Chapter II of the Arbitration Act provides arbitration without intervention of the Court, while Chapter III of the Arbitration Act provides arbitration without intervention of the Court where there is no suit. Chapter IV of the Arbitration Act provides arbitration in suit. It shows that arbitration can take place even if suit is pending between the parties. So, the issue is validly been referred for arbitration at the strength of Clause 20 of the agreement.
Section 13 : Powers of arbitrator–The arbitrators or umpire shall, unless a different intention is expressed in the agreement, have power to —
(a) administer oath to the parties and witnesses appearing;
(b) state a special case for the opinion of the Court on any question of law involved, or state the award, wholly or in part, in the form of a special case of such question for the opinion of the Court;
(c) make the award conditional or in the alternative;
(d) correct in an award any clerical mistake or error arising from any accidental slip or omission;
(e) administer to any party to the arbitration such interrogatories as may, in the opinion of the arbitration or umpire, be necessary.
Section 30 of Arbitration Act provides for grounds for s etting aside award, which reads as under :
Section 30 : Grounds of setting aside award–An award shall not be set aside except on one or more of the following grounds namely :
(a) that an arbitrator or umpire has misconducted himself the proceedings;
(b) that an award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have became invalid under Section 35;
(c) that an award has been improperly procured or is otherwise invalid.
The award can be set aside under the provisions of Section 30 of the Arbitration Act.
The tripartite agreement between the assessee and SIPL and M/s EEL, dt. 12th April, 2001 was entered into by the assessee under the bona fide belief that the programme “Kaun Banega Crorepati” amounted to a “feature film” as allowed to be done by him under Clause 1.7 of the agreement dt. 10th Jan., 1995 with M/s ABCL. In January, 1995, no one could have foreseen income from “KBC” programme and losses incurred by M/s ABCL in later years. Under these circumstances, the agreement in question cannot be said a make belief arrangement. The plea by the assessee before the arbitrator that the entire income from “KBC” belonged to him on the ground that it was a “feature film” should not be held against him, as it is but natural for a party to argue one’s case forcefully before the arbitrator even when the weakness of the case is known to it. The said plea should not be allowed to come in his way, while the matter has been duly referred to the arbitrator when dispute arose between the parties. The said dispute has been resolved by the arbitration award dt. 19th June, 2002 by Justice T.D. Sugla (Retd.). Thus, the dispute was validly referred to the arbitrator at the strength of Clause 20 of the said agreement and dispute was speedily and validly resolved under the relevant provisions of Arbitration Act.
7.2 During the course of hearing an enquiry was made why SIPL did not enter into an agreement with ABCL, with whom the assessee’s persona vested. It was submitted that SIPL was not agreeable to enter into the contract with ABCL may be for the reasons best known to it, may be for the reason that by then ABCL was already a sick company with threats of liquidation hanging over it at the instance of the creditors across the country. This could be one reason why there is no mention of the commitment of the assessee towards ABCL while entering into the tripartite agreement. But we do not like to go into that aspect of the matter for the simple reason that such non-mentioning of the obligation by ABCL in the tripartite agreement does not in any way take away the obligation of the assessee under the agreements which have already been entered into by the assessee by then. The assessee would have even lost the KBC programme had he insisted upon the incorporation of ABCL in the tripartite agreement. At that time, as we have understood the facts of the case, the assessee himself was in deep financial trouble and could not have envisaged putting a condition over a programme which was almost in the direction of a rebirth to the assessee who was financially sunk. It is a mere coincidence that the KBC has become successful programme and has financially revived the ABCL as Well as the assessee.
7.3 Now coming to the view of the Department that the payment to ABCL under the arbitration award is only an application of income and not diversion of income by overriding title, we are unable to find any force in it. The income although received by the assessee had to be accounted to ABCL in terms of the agreement dt. 10th Jan., 1995. There is no escape for the assessee in this regard. Since we have already held the agreement of 1995 to be a genuine agreement on which the parties have acted upon, the nature of dispute arising out of this agreement cannot be held to be non-genuine and, therefore, was correctly a subject-matter of reference under the relevant provisions of the Arbitration Act as well as under the subsisting agreement between the parties. The sole arbitrator has settled the dispute to the satisfaction of both the parties and the award has also been accepted by both the parties leaving no scope for us to hold that such proceedings or the award itself was non-genuine. Therefore, in our view the only conclusion that can be reached in the facts and circumstances of the case is that to the extent there is an outgoing from out of Rs. 23 crores as a result of the arbitration award, the same is the result of diversion of income at source before its accrual in the hands of the assessee. In the light of these discussions the main issue is decided in favour of the assessee and it must be understood that the principles laid down in all the case laws specifically dealt with by the AO and the CIT(A) and also canvassed by both the parties before us should be taken to have been considered while coming to this decision although not specifically referred to herein.
7.4 We may now deal with the decision in the case of L. Hans Raj Gupta and Anr. v. CIT , relied upon. The Hon’ble High Court, after considering the decision of the Hon’ble Supreme Court in CIT v. Sitaldas Tirathdas , held the report as under :
“The principles deducible from the above decisions are that if a person has assigned his source of income in such a manner that it ceases to be his, he cannot be taxed on that income but if, on the other hand, he merely applies the income in such a manner that it passes through him and goes over to another person he may be taxable on the income notwithstanding the legal obligation to apply it for the transferee…. But if there is an overriding title created to divert the income from the assessee it cannot be considered as the income of the assessee at all. Such diversion by overriding title may be created either by a will or by law or by any other document. The crux of the problem always being –is it an application of income or a diversion at the source before becoming the income of the assessee.”
In the light of the above decision as soon as the assessee has entered into another agreement in violation of the agreement dt. 10th Jan., 1995, the income earned thereafter was not of his but belonged to ABCL from the date of agreement and not from the date of arbitration award as tried to be made out by the learned CIT(A). Hence, the contention of the learned senior Departmental Representative that the award was a contractual liability and, therefore, if applicable, is applicable only from asst. yr. 2002-03 is not tenable.
8. Before parting with, we may deal with certain other issues that were raised by the learned Departmental Representative regarding the argument that income cannot accrue to the company as the activity underlining there is ultra vires its object clause as enshrined in the memorandum and articles of association. In our view, the taxability of an income does not depend upon the memorandum and articles of association as held by the jurisdictional High Court in CIT v. Himalayan Tiles & Marble (P) Ltd . In any case, Clauses 53, 56 and 128 of memorandum of association are exhaustive enough to cover the activities carried on by the company.
9. Another significant feature of this case is the similar agreements entered into by the assessee with ICICI, Pepsi and Luxor, etc. as a brand ambassador of these products. The income from these had been made over by the assessee to ABCL and the Department has taxed such income in the hands of ABCL virtually accepting that the agreement of 1995 is binding, valid and genuine. Therefore, in the light of this information it cannot be said that when it comes to the assessment of income accruing to the assessee by virtue of the tripartite agreement, the agreement of 1995 that the assessee has entered into with ABCL has become invalid, non-genuine and, therefore, not binding or a part of make believe arrangements.
10. Our view that the Revenue is only trying to blow hot and cold taking contrary stand in relation to the assessee’s agreement with ABCL as detailed in para 7 above, becomes very revealing when the Revenue had appreciated the very same agreement in respect of receipts from ICICI, Pepsi, Luxor, etc. as brand ambassador of their products.
11. As regards the issue relating to Section 80RR, at the time of hearing the learned Counsel for the assessee did not press the same, since the assessee did not file the required Form No. 10H. Hence, the findings of the CIT(A) on this issue are confirmed.
12. In the result, the appeal is partly allowed.