(a) Income-tax---

----Business expenditure---Assessee doing business on its own and also as a joint venture by entering into partnership---Share income from firm shown as its business income---Dissolution of firm---Expenditure on dissolution was deductible---Indian Income Tax Act, 1961, S. 37.

(b) Income-tax---

----Reference---Scope of powers of High Court---Finding of Tribunal challenged--- Incidental findings can be considered---Different aspects of question referred do not form different questions---Indian Income Tax Act, 1961, S. 256.

When the ultimate conclusion arrived at by the Tribunal is questioned,' the incidental findings given by the Tribunal for coming to the ultimate conclusion would also form part of the challenge to the main question that arises for consideration. Where the question itself is under issue, the reference should not be limited to those aspects of the question, which had been argued before the Tribunal. It will be an over refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 256 of the Income Tax Act, 1961

The assessee was a private limited company. It used to produce feature films either by itself or by entering into an agreement with third parties as a joint venture. In the course of carrying on business, the assessee entered into a partnership with one N. The assessee under the joint venture produced two feature films in the assessment year under consideration. The Department as well as the Tribunal, were of the view that these two pictures were under production by entering into the partnership agreement and it was a separate business and not a joint venture. The Tribunal disallowed the expenses incurred in dissolution of the partnership. On a reference:

Held, (i) that the question referred by the Tribunal was whether the Tribunal was correct in holding that the dissolution expenses of the firm were capital in nature. In considering that question, the question whether the finding that the partnership business was a separate business could be considered;

(ii) that the production of feature films by entering into partnership with third parties could not be said to be a separate business. The partnership firm was not an assessee, and the share income earned by the assessee-company by entering into partnership with a third party was one of the items of its business income. In the course of the business, the assessee-company incurred the dissolution expenses. Therefore, it was deductible as revenue expenditure from the business income of the assessee.

CIT v. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589 (SC) ref.

Uthama Reddy for the Assessee.

C.V. Rajan for the Commissioner.

JUDGMENT

THANIKKACHALAM, J.---Atthe instance of the assessee, the Tribunal referred the following two questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"(1) In the facts and circumstances of the case was the Income-tax Appellate Tribunal correct in upholding disallowance of interest to the extent of Rs.2,075?

(2) In the facts and circumstances of the case was the Income-tax Appellate Tribunal correct in holding that the firm dissolution expenses were capital in nature and cannot be deducted in computing the total income?"

The assessee is a private limited company. The assessment was completed for the assessment year 1975-76 under section 144-B of the Income Tax Act, 1961. Amongst the additions proposed in the draft assessment order were:

?

(1)Interest pertaining the production of feature films amounting to Rs.2,075; and

(2)?????? Confirmation of dissolution fees of Rs.24,962. The proposed disallowance was out of the total interest expenditure of Rs.8,04,582.

One of the activities of the assessee was production of feature films. During the year ended on March 31, 1975, the pictures "Julie" and Sree Rajeswari Vilas Coffee Club" were under production and the cost of the picture up to March 31, 1975, was amounting to Rs.11,00,831. This amount has been capitalised and shown as an asset in the balance-sheet as on March 31, 1975. The proposed disallowance of the interest by the Income-tax Officer was in respect of the aforesaid pictures. In reply to the draft assessment order with regard to the proposed disallowance of interest, the assessee submitted that there is no basis for asking whether any part of the borrowed capital was utilised for production of films and there is, therefore, no case for disallowance of any interest on that account.

The assessee entered into a partnership with one Mr. Nagi Reddy with effect from June 1, 1972, and this partnership was dissolved on May 1, 1974. A sum of Rs.24,962 was incurred as an expenditure in connection with the dissolution of the above said firm. In reply to the draft assessment order, the assessee submitted that in the course of its business of film production, the company entered into joint ventures and partnership arrangement from time to time. Incidental expenses relating to such transactions are normal revenue expenditure. The company had earlier entered into partnership arrangement with Swasthi Sree Pictures.

The Inspecting Assistant Commissioner approved the draft assessment order made by the Income-tax Officer. Accordingly, the Income? tax Officer completed the assessment. .

On appeal before the Commissioner of Income-tax (Appeals), the assessee contested the above said two additions made by the Income-tax Officer. However, the Commissioner of Income-tax (Appeals) confirmed the order passed by the Income-tax Officer with regard to the above said two items. The Commissioner of Income-tax (Appeals) also pointed out that the assessee would be entitled to the reduction of interest at the time when the film is released for exploitation.

On further appeal, the Tribunal found that there is no evidence let in by the assessee to show that any part of the borrowings had been used for the purpose of production of films. The assessment of income from the exploitation of films is separate and that can be adjusted when the film would be released. Further, the Tribunal confirmed the order passed by the Commissioner of Income-tax in disallowing the interest payment of Rs.2,075. With regard to the expenditure incurred for the dissolution of the firm amounting to Rs.24,962, the Tribunal pointed out that the partnership entered into for the production of the above said two pictures is a separate business and not a joint venture and, therefore, the Tribunal came to the conclusion that disallowance of the expenditure incurred for the purpose of the dissolution of the firm is in order.

In so far as question No.2 is concerned, it relates to disallowance of dissolution expenses of the firm amounting to Rs.24,962. According to learned counsel for the assessee, the assessee-company is doing business in hiring the studio, production and exploitation of films. In the course of the business, the assessee borrowed nearly Rs.80 lakhs prior to 20 years. The assessee employed the borrowed capital in the business carried on by it. Deduction for payment of interest was claimed periodically: to the assessment year under consideration, a sum of Rs.24,962 vas claimed as an expenditure for the dissolution of the firm, which came into effect from June 1, 1972. This dissolution expenditure" was not claimed out of the share of profits made in the partnership firm. The partnership firm is not an assessee. The share income earned by the assessee-company from the abovesaid partnership was not assessed in the hands of the firm. In fact, the same is assessed in the hands of the assessee, which is a company. Therefore, it is not correct on the part of the Department to say that the production of the abovesaid two feature, films in the assessment year under consideration is a separate business. On the other hand, production of the abovesaid two feature, films is a part of the business done by the assessee. Therefore, when the assessee is claiming deduction with regard to the expenditure incurred for running the business, the assessee claimed the abovesaid sum as one of the items of expenditure incurred for the purpose of carrying on the business. It was, therefore, submitted that the Tribunal was not correct in coming to the conclusion that the abovesaid expenditure is related to the separate partnership business and the expenditure incurred for dissolution of the firm cannot be considered as revenue expenditure allowable out of the share of profit made from the firm. For these reasons, it was submitted that the Tribunal was not correct in disallowing the dissolution expenditure.

On the other hand, learned standing counsel appearing for the Department submitted that the production of the abovesaid two feature films was done by the assessee as a separate business. The expenditure involved for the dissolution of the firm cannot be deducted as revenue expenditure from the share of profits received from the firm. The assessee has not adduced any evidence to show that the production of the abovesaid two feature, films under a partnership agreement is also part of the business carried on by the assessee. The burden is on the assessee to prove that the production of the abovesaid two feature, films through a partnership agreement is a part of the business done by the assessee. According to learned standing counsel, maintenance of separate accounts would go to show that the production of the feature films is a separate business. For these reasons, it was submitted that the Tribunal was correct in disallowing the dissolution expenditure claimed by the assessee.

We have heard learned counsel appearing for the assessee as well as learned standing counsel appearing for the Department. The assessee is a company carrying on business in the production and exploitation of feature films. The assessee is also hiring the studio for production of films. In the assessment year under consideration the assessee incurred expenditure for dissolution of the partnership firm in which the company is a partner. The partnership firm in which the assessee-company is a partner came into existence from June 1. 1972, and it was dissolved on May 1, 1974. Thus, the partnership firm was in existence for a period of 23 months. The assessee used to produce the feature films either by itself or by entering into an agreement with third parties as a joint venture. In the course of carrying on business, the assessee entered into a partnership with one Mr. Nagi Reddy. The assessee under the joint venture produced two feature films in the assessment year under consideration. The Department as well as the Tribunal were of the view that these two pictures were under production by entering into the partnership agreement with one Mr. Nagi Reddy and it is a separate business and not a joint venture. The above, two feature films were produced by the assessee. The Department was of the view that the dissolution expenditure cannot be deducted from the profit made out of the partnership concern. The assessee is getting share income from the partnership firm. A sum of Rs.67,048 was shown as the share income from the partnership firm. Dissolution expenditure was not claimed out of the profit made from the partnership firm. In fact, the dissolution expenditure was claimed as one of the items of expenditure claimed as incurred by the assessee-company in the course of carrying on its business in producing the feature films. Therefore, on the facts, it is not correct on the part .of the Department as well as the Tribunal to say that the dissolution expenditure was claimed out of the share of profits made from the firm. It also remains to be seen that the partnership firm is not an assessee and the share income derived from the partnership was not assessed in the partnership assessment. The assessee is showing the share income from the partnership as an item of income earned by the assessee during the course of business carried on by it. Therefore, it is not correct to state that the abovesaid two feature films produced through the partnership concern is a separate business. It is also significant to note that the partnership itself came to an end during the course of carrying on the business by the assessee.

Learned standing counsel for the Department submitted that there is a finding given by the Tribunal that the abovesaid two feature films were produced by the assessee by entering into a partnership with a third party. The assessee has not questioned this finding of the Tribunal. Therefore, it is not now open to the assessee to challenge the finding given by the Tribunal that the partnership business is a separate business. The question referred by the Tribunal was whether the Tribunal was correct in holding that the firm dissolution expenses were capital in nature and cannot be deducted in computing the total income. But, according to the assessee, the dissolution expenses claimed by the assessee can be allowed as a revenue expenditure, incurred in the course of its business.

The Tribunal disallowed the dissolution expenses because it came to the conclusion that the production of the abovesaid two feature films was done through the partnership concern and, therefore, it is a separate business. When the ultimate conclusion arrived at by the Tribunal was questioned, the incidental findings given by the Tribunal for coming to the ultimate conclusion would also form part of challenging the main question that arises for consideration. Where the question itself was under issue, the reference should not be limited to those aspects of the question, which had been argued before the Tribunal. It will be an over refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Indian Income-tax Act, 1922. (see CIT v. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589). According to the assessee, in the course of doing its business, it entered into partnership with third parties for the purpose of production of feature films, The production of feature filing by entering into a partnership with third parties is one of its activities in earning the income. Both by joint venture as well as on its own efforts the assessee is doing its business. Therefore, the production of feature films by entering into partnership with third parties cannot be said to be a separate business. The partnership firm is not an assessee. The share income earned by the assessee-company by entering into partnership with a third party is one of the items of its business income. In the course of the business, the assessee-company incurred the dissolution expenses. Therefore it is deductible as revenue expenditure from the business income of the assessee. Therefore, the Tribunal was not correct in holding that the share income was earned by the assessee through a separate business.

In view of the abovesaid findings, we answer the question referred to us as question No.2 in the negative and in favour of the assessee.

Inasmuch as learned counsel for the assessee has withdrawn question No. l that was returned unanswered. There will be no order as to costs.

M.B.A./1622/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.