COMMISSIONER OF INCOME-TAX VS GOLCHA PROPERTIES (PVT.) LTD. (IN LIQUIDATION)
1999 P T D 1761
[227 I T R 391]
[Rajasthan High Court (India)]
Before V. K. Singhal and M.A.A. Khan, JJ
COMMISSIONER OF INCOME-TAX
Versus
GOLCHA PROPERTIES (PVT.) LTD. (IN LIQUIDATION)
D.B. Income-tax References Nos. 49 to 54 of 1984, decided on 06/08/1996.
Income-tax---
----Appeal to Appellate Tribunal---Income from undisclosed sources-- Inference by I.T.O. that agreements were sham---Inference based on primary facts---Duty of Tribunal to consider facts---Tribunal holding that Revenue should prove by positive evidence that agreements were not genuine-- Tribunal's approach was erroneous---Matter remanded.
The assessee-company was engaged in the business of exhibition of cinematograph films at its theatres known as "Golcha Theatre", Delhi and "Maratha Mandir" Bombay, the former being a proprietary concern and the latter a lease-hold property. The Income-tax Officer examined the genuineness of the arrangements made by the assessee-company for running the two theatres and came to the conclusion that the arrangement made was sham and colourable, and that the same had been made only to divert its profits by the assessee-company to its sister concerns. The Income-tax Officer pointed out that the aforesaid two concerns were not members of the Motion Pictures Association and, as such, had no locus standi in the trade. The Income-tax Officer also pointed out that the contractors, i.e., D and M, did not perform any functions normally performed by such contractors so far as the Delhi cinema was concerned, for even the selection of the pictures to be screened at Delhi was made by the assessee, whereas normally the contractors should have selected that films and all dealings with film distributors should have been done by them. The Income-tax Officer also found that the company did not insist on any security or guarantee from the contractor and that it did not deduct the film hire payable to the distributors from the gross collection before handing over the net receipts to the contractors after deducting entertainment tax, theatre hire, etc. The company had made certain advances to distributors against some pictures under production and also had other direct dealings with some distributors particularly with PP. According to the Income-tax Officer, there was no need to do so, when the company, prima facie, had given over the right of exhibition to the contractors. This conduct, according to him, showed that the assessee was, in fact, exhibiting the films itself and was putting up the front of appointment of contractors. The entire thing according to him was, in reality, an elaborate show. However, the Tribunal held that it was the Income-tax Department which was alleging that the income of the two contracts from the exhibition of the films in the cinema theatres of the assessee-company belonged to the assessee and when the Department made such a positive averment, it was for the Department to substantiate and prove its averments. On a reference:
Held, that the Tribunal was wrong in taking the view that in such cases the Department had to bring some positive evidence. On the basis of the primary facts proved on record, the Tribunal should have arrived at a finding regarding the genuineness of the transactions.
CIT v. Golcha Properties (P.) Ltd. (1980) 126 ITR 809 (Raj.) ref.
K.S. Gupta for G.S. Bapna for the Commissioner.
A. Kasliwal for the Assessee.
JUDGMENT
M.A.A. KHAN, J.---In compliance with this Court's order, dated November, 1979 (CIT v. Golcha Properties (P.) Ltd. (1980) 126 ITR 809), passed under 256(2) of the Income Tax Act, 1961 (for short, "the Act"), in D.B. Civil Income-tax Cases Nos.48 of 1975 and 93 of 1978 and 79 of 1979, the Income-tax Appellate Tribunal, Jaipur Bench (for short "the Tribunal"), has referred the following common question, stated to be a question of law, to this Court for its opinion:
"Whether, on the facts and circumstances found by the Tribunal, there was material to come to the conclusion that the contract of the assessee-company with Dhartidhan (P.) Ltd., Bombay, and Madans, Bombay, for leasing out of exhibition rights to cinema houses belonging to the assessee-company, were real and genuine and income arising there from did not belong to the assessee-company?"
An additional question, as reproduced below, was also referred by the Tribunal for the assessment year 1968-69 to the Court in deference to this Court's order, dated August 6, 1980, in D.B. Income-tax Reference Case No.55 of 1979:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the contract of the assessee company with Dhartidhan (P.) Ltd., Bombay, for granting exhibition rights of Maratha Mandir at Bombay belonging to the assessee was real and genuine and income arising there from do not belong to the assessee-company?"
The Tribunal has referred the above questions to this Court, vide its combined order, dated October 28, 1983, on the basis of the following facts as found by it for the assessment years involved.
The assessee is a private limited company incorporated under the Companies Act, 1956. It is engaged in the business of exhibition of cinematograph films at its theatres known as "Golcha Theatre, Delhi" and "Maratha Mandir, Bombay", the former being a proprietary concern and the latter a lease-hold property. On an application by its creditors, the assessee company was wound up by this Court, vide order, dated May 10, 1968, and an official liquidator was appointed to manage its property and business. On an application, dated June 30, 1969, having been allowed by the learned company judge on August 12, 1969, the assessment proceedings for the assessment year 1965-66 and onwards were made.
In the course of the assessment proceedings for the assessment year 1965-66, the Income-tax Officer noted that the assessee-company had let out its aforesaid theatres for exhibition of films in the following manner:---
(i) to Dhartidhan (P.) Ltd., Maratha Mandir, Bombay, was let out on a fixed monthly rental of Rs.13,000 per week, vide agreement, dated April 18, 1963.
(ii) Golcha Cinema, Delhi, was let out to
(a) Dharti Dhan (P.) Ltd. on weekly rental of Rs.9,500 from April 1, 1964, to April 23, 1964, under agreement, dated April 18, 1964.
(b) Madans, Bombay on weekly rental of Rs.11,000 from April 24, 1964, to August 6, 1964, under agreement, dated April 21, 1964.
From August 7, 1964, to March 31, 1965, Golcha cinema was run by the assessee-company itself.
The Income-tax Officer examined the genuineness of the arrangements made by the assessee-company for running the two theatres and came to the conclusion that the arrangement made was quite sham and colourable and that the same had been made only to divert its profits by tire assessee-company to its aforesaid sister concerns which were faced with financial crisis. Almost similar facts were noted and similar findings were recorded by the Income-tax Officer for the subsequent years involved in these references. In appeals, the additions made by the Income-tax Officer to the income of the assessee-company for that reason were confirmed. Such additions were as under:
| Assessment year | Additions made (in rupees) |
| 1965-66 | 5,52,268 |
| 1966-67 | 13,767 |
| 1967-68 | 59, 314 |
| 1968-69 | 61,080 |
| 1969-70 | 78,869 |
| 1970-71 | 43,429 |
The Tribunal examined the issue involved in all the years in appeal before it in assessment appeal for the assessment year 1965-66 (I.T. A. No.953/JP of 1974-75). In paragraph No.9(a) of its order, dated June 29, 1976, the Tribunal found the following facts:
"The fourth ground of appeal pertains to the findings of the Appellate Assistant Commissioner and of the Income-tax Officer that the contracts entered into by the assessee with Dhartidhan (P.) Ltd. and Madans Ltd., the right to exhibit the films by them in the assessee's cinemas at Bombay and Delhi in exchange for fixed weekly rental. The profit and loss in exhibiting the films was to be enjoyed or borne by the two concerns named above. The assessee had nothing to do with the ultimate profits or loss incurred on the exhibition of the films in the theatre. The management of the said cinema halls was, of course, to remain the responsibility of the appellant. The cinema at Bombay was let out on a weekly rent of Rs.13,090 by agreement, dated April, 1963. For some time Golcha Cinema, Delhi, was let out for Rs.11,000 from April 1, 1964, to April 23, 1964, to Madans, Bombay and then on weekly rental of Rs.9,500 to Dhartidhan (P.) Ltd. It has been admitted by the learned Appellate Assistant Commissioner that the aforesaid system of appointing contractors for a particular period of time for a particular film on fixed weekly rental is quite common in the cinema trade. The case of the authorities below is that the contracts between the appellant company and the aforesaid two concerns were not genuine. The Income-tax Officer points out that the two contractors were closely connected with Shri M.C. Golcha and Shri H.C. Golcha, the main shareholders of the appellant company, that both these concerns were financially unsound and were running in heavy losses, and that the main idea in treating them as contractors was to divert the profits of the appellant company to the family concerns showing losses with a view to avoid proper taxation. It was also pointed out that the aforesaid two concerns were not members of the Motion Pictures Association and as such had no locus standi in the trade. The Income-tax Officer also pointed out that the contractors, i.e., Dhartidhan (Pvt.) Ltd. and Madans Ltd., did not perform any functions normally performed by such contractors so far as the Delhi cinema was concerned, for even the selection of the pictures to be screened at Delhi was made by the appellant, whereas normally the contractors should have, selected the films and all dealings with film distributors should have been done by them, but, in the present case, all dealings with film distributors with regard to Delhi cinema were carried out directly by the appellant. With regard to the agreements at Bombay, of course, it has been admitted that the contractors had been dealing directly with the distributors of the film and that the assessee did not play any role. The Income-tax Officer has also made an issue of the fact that the company did not insist on any security or guarantee from the contractor and that it did not deduct the film hire payable to the distributors from the gross collections before handing over the net receipts to the contractors after deducting entertainment tax, theatre hire, etc. By this act, according to him, the appellant exposed itself to a great risk in the event of failure of the contractor to pay film hire to the distributor. This was, as per the officer, an abnormal conduct smacking of almost collusion. The company had made certain advances to distributors against some pictures under production and also had other direct dealings with some distributors particularly with Pandwa Pictures, Delhi. According to the Income-tax Officer, there was no need to do so, when the company, prima facie, had given over the right of exhibition to the contractors. This conduct according to him showed that the assessee was in fact exhibiting the films itself and was putting up the front of appointment of contractors. The entire thing according to him was in reality an elaborate show."
In paragraph 12 of its order, as aforementioned, the Tribunal recorded its findings in the following manner:
"We have carefully examined the rival submissions. It is common ground that Dhartidhan (Pvt). Ltd. have their individual existence and that they are having income from various sources, including the income from the contract taken for exhibition the film in the cinemas of the assessee-company. They have executed the contracts in accordance with the agreement entered into. They have earned the income and have utilised it for their own benefit. The official liquidator has scrutinized their arrangement and he did not regard that as being collusive or fake or sham or even against the interest of the assessee-company. It is the Department which is alleging that the income of the two contractors from the exhibition of the films in cinemas of the assessee-company belonged to the assessee-company. When the Department makes such a positive averment, it is apparently for the Department to substantiate or prove its averment. The case of benamiship cannot be made out merely on the basis of certain inferences and presumptions. There must be some positive evidence to show that it is the income of the assessee. There is nothing on record to prove this. Whether or not the contracts were conferring more benefits on the contractors than on the assessee is a debatable issue on the facts and in the circumstances of the present case. But, granting that some favour was shown to the contractors would it ipso facto go to show that the contracts in question were sham or not genuine? There must be some positive evidence to make out the case of benami. We are not satisfied on the basis of the evidence on record that the Department had been able to make out the case that the contracts in question did not bring into existence the real relationship as contemplated by them and that the said relationship has not been maintained all along by the two sides. The income of the two concerns has even flown back to the assessee company. There is in fact hardly any evidence in the present case on the basis of which one may be able to give the finding of benami. The clubbing of the income, in the circumstances appears to us to be totally unjustified. We would, therefore, delete the additions made on this account. "
Against the order of the Tribunal an application under section 256(1) was made. The Tribunal came to the conclusion that the question involved is purely a question of fact and in declaring this the Tribunal has not applied any principle of law. The- application was dismissed.
The Revenue challenged the said order under section 256(21 and by the order, dated November 9 1979, this Court took the circumstances by which the Income-tax Officer came to the conclusion that Dhartidhan (Pvt.) Ltd. and Madans Ltd. were not genuine and this Court specified the circumstances as under:
(1) Both the above concerns were not solvent concerns and were running into losses from year to year.
(2) The distributor's share in the film was not made a charge on the exhibition account maintained for Dhartidhan. By not doing so the asses see-company exposed itself to a very great risk and that too without securing itself, by having a sound security from Dhartidhan.
(3) Copies of the agreements for films screened at both the cinemas were made not available to the Income-tax Officer on the ground that the same were not traceable. Thus, the Income-tax Officer observed that it was not possible for him to judge as to at whose initiative the films were booked for the two cinemas of the company. Past record also showed that these films were always booked by the assessee-company itself. ,
(4) From the assessee's own books of account it was proved that the assessee-company had been booking pictures and dealing with the distributors in a manner suggestive of complete non-existence of its so-called contractor.
(5) At Golcha Cinema, Delhi, the picture 'Sanjh-Savera' was booked by the assessee-company and it was the assessee which had made an advance of Rs.60,000 to Panday Pictures, who were the distributors of this picture.
(6) Agreement for release of the picture 'Rajkumar' was entered into by the assessee-company on making an advance of Rs.1,10,000. If Madans were genuine contractors this advance of Rs.1,10,000 should have been made by the Madans and not by the assessee.
(7) The picture ' Pyar Kiya to Darna Kya' was run against the wishes of Pandav Pictures at Golcha Cinema, Delhi, beyond the 4th week and it was the assessee-company which had been dealing with Pandav Pictures as there was no account of Dhartidhan in the books of Pandav Pictures qtta their pictures run at Golcha Cinema, Delhi. Then, it was the assessee-company which had made advances of Rs.30,000 for the picture ' Pyar Kiya To Darna Kya' of Pandav Pictures in 63-64.
(8) The agreement dated, December 1, 1964, between the assessee and Panday Pictures whereby the account between the parties was understood leaves no one in any doubt that it was the assessee company which had been making advances for booking of pictures of distributors, de facto running pictures and dealing with the distributors.
(9) All the shareholders of Dhartidhan (P.) Ltd. were directors of the assessee-company. Dhartidhan was running in loss and the main idea behind creating it as contractor was to divert the profit of the company so as to evade taxation. Madans was the proprietary concern of the late .Smt. Madan Kanwar, an old lady and mother of Shri Mehtab Chand Golcha and grandmother of Shri H.C. Golcha. Her case was also that of chronic loss. So, it was again with a view to divert the profits of the assessee-company to a losing concern that Madans were created as contractor.
(10) The affairs of Madans were looked after by one Shri Mehta, Chartered Accountant, who was paid not by Madans but by another company under the management of Shri M. C. Golcha and Shri H. C. Golcha.
(11)The publicity was undertaken by the assessee-company and that the contract or was not properly debited with the expenditure incurred on account of publicity which proved that the letting out contracts were not meant to be acted upon in reality."
On the basis of- the above circumstances which were taken note of, it' was found that the Income-tax Officer has found that both Dhartidhan and Madans were contractors created due to favour by the assessee, otherwise none of them had any role to play as contractors and the cinemas were in fact managed and run by the assessee-company itself and the profits flowing from the exhibition of films at these two theatres rightly belonged to the assessee. The Appellate Tribunal did not take into consideration all the above facts and circumstances pointed out by the Income-tax Officer while holding the contracts to be not genuine but laid great emphasis on the fact that it was the Department which was alleging that the income of the two contracts from the exhibition of the films in the cinema of the assessee-company belonged to the assessee and when the Department made such a positive averment it was apparently for the Department to substantiate and prove its averments. The Tribunal further held that the case of benamiship could not be made out merely on the basis of certain inferences and presumptions and there must be some positive evidence to show that the income of the contractors was in fact the income of the assessee. It has observed that as there was nothing on the record to prove that there was evidence in the present case on the basis of which it could be held that the transactions were benami. In arriving at this conclusion, in our view, the Tribunal took a wrong approach. The Tribunal was wrong in taking the view that in such cases the Department has to bring some positive evidence. On the basis of primary facts proved on record, the Tribunal should have arrived at a finding whether the transactions were genuine or not. In this view of the matter, the Tribunal has committed an error in taking a wrong approach of the case and in holding that the Department must prove by positive evidence the case of benamiship and ignored the primary facts proved on record. In other words, the Tribunal committed an error of law in taking the view that such burden could only be discharged by the Department by leading positive evidence only. It was observed that the Department could have relied on the facts and circumstances held established by the assessee's own record as highlighted by the Income-tax Officer in his order. From the above observations, it is evident that the approach of the Tribunal was not in accordance with law. It was not necessary for the Department to bring positive evidence and it was observed that the Tribunal should have drawn a finding that the transactions were genuine or not in the light of the basic primary facts proved on record.
It may be observed that the Income-tax Officer found that the company had two cinema houses, one at Delhi known as Golcha Cinema and the other at Bombay known as Maratha Mandir. The cinema at Delhi is in the proprietorship of the company while the cinema at Bombay was on lease for 20 years which expired in 1978. But for exhibition purposes those were let out on fixed rental to Dhartidhan and Madans. Maratha Mandir was on fixed; rental to Dhartidhan (Pvt.) Ltd. at the rate of Rs.13,000 per week and Golcha Cinema was on weekly rentals of Rs.9,500 from April 1, 1964, to April 23, 1964, vide agreement, dated April 18, 1963, and at the rate of Rs.11,000 from April 24, 1964, to August 6, 1964, and from August 7, 1964, to March 31, 1965, it was run by the company. The Income-tax Officer found that Dhartidhan and Madans were not the members of the association as they were neither film distributors nor owners or had a regular lease of any cinema hall. Dhartidhan was running in losses. Copies of the film screened were not produced before the Income-tax Officer. The films were booked by the assessee-company itself. Shares of Dhartidhan were held by the relatives while Madans was the proprietary concern of the late Madan Kanwar, mother of M.C. Golcha. The Income-tax Officer found that the business was not done by these concerns. It was a device to divert the profits of the company. In the light of the facts found by the Income-tax Officer it was obligatory 'on the part of the Tribunal to have pierced the veil whether the so-called agreement was acted upon in the sense that the business was done by Dhartidhan and Madans. From the record, it is established that for exhibition of the films, an agreement was entered into by the assessee company. Various inferences drawn by the Income-tax Officer on the basis of facts brought on record were not taken into consideration. The conclusion of the Tribunal that the income was retained with Dhartidhan and Madans cannot be considered sufficient for the purpose of finding out whether it was a device to divert the income by the assessee-company and whether the transaction was genuine or not. It was to be examined on the basis of the evidence on record. It was not necessary for the Department to bring positive evidence. The evidence could be from primary facts, which were collected by the Department and placed on record. The evidence could be oral or documentary and it could be by way of inference from the queries made by the Income-tax Officer from the assessee-company. If on the basis of the reply given by the assessee-company an inference was drawn by the Income-tax Officer, it would be discharging of the obligation of the Department.
In view of the observations of this Court as mentioned above, the view of the Appellate Tribunal is not correct. The order of the Tribunal is liable to be quashed. The matter should be heard de novo by taking into consideration various circumstances mentioned by this Court and the basic facts, which were taken into consideration by the Income-tax Officer.
Consequently, we quash the order of the Appellate Tribunal and direct the Tribunal to proceed de novo in the matter in the light of the observations made by this Court in the order, dated November 9, 1979. The reference is returned unanswered. No order as to costs.
M.B.A./2024/FCOrder quashed.