By TIOL News Service

MUMBAI, NOV 20, 2017: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether absence of agreement regarding nature of amount received by a movie producer in respect of distribution rights, can form basis for thwarting tax liability of current year to subsequent A.Ys. NO is the verdict.

Facts of the case:

The Assessee, an individual, sold a movie during A.Y 1977-78, namely, “Charas” to M/s. Prakash Pictures on minimum guarantee basis for Rs.13,70,000/-. Since the assessee had shown only Rs.3,90,917/-, the assessment was reopened u/s 147(a). In response to the notice u/s 148, the assessee returned an income of Rs.4,98,530/- as against the earlier returned loss of Rs.6,93,200/-. The AO observed that addition of Rs.9,79,083/-, made on account of minimum guarantee realisation was upheld by the AAC and the addition was accepted by the assessee. In view of these facts, penalty of Rs.6,46,588/- was levied u/s 271(1)(c). On appeal, the CIT(A) however cancelled this penalty on the ground that since the assessee had shown the balance income in his return for A.Y 1978-79, there was no concealment. However, on further appeal, the Tribunal restored the penalty and held that non-availability of agreement did not mean that the nature of the transaction could not be disclosed. If the assessee had declared a loss, he thwarted his tax liability for two years by not declaring the entire receipts in A.Y 1977-78. The tribunal recorded a finding that even after the set-off of brought forward losses, the current year's loss would have been converted into positive income with the inclusion of the balance receipt of the minimum guarantee amount. By declaring the balance amount in the subsequent year, the assessee certainly furnished inaccurate particulars of income for the year under appeal and either avoided or deferred his tax liability. It was in these circumstances that the tribunal also rejected Miscellaneous Application seeking a rectification of its finding that the losses could have been converted into positive income with the inclusion of balance receipt of the minimum guarantee amount.

High Court held that,

++ the Revenue's counsel is right in his contentions for the simple reason that the assessee could not have got away by urging that the copy of the agreement with M/s. Prakash Pictures was not available. The assessee should have been candid and honest in disclosing that the agreement with M/s. Prakash Pictures which resulted in the assessee obtaining the sum of Rs.13,70,000/-. The assessee would have received this sum in respect of the distribution right of the picture “Charas” in Bombay Territory. The assessee, in the original file, did not disclose fully and truly all the particulars of income for the relevant year. The assessee maintains that the amount was not to be realised fully, but it was inaccurate in the sense that the distributor M/s.Prakash Pictures was also assessed to tax. M/s. Prakash Pictures produced the record and which referred that the assessee was paid the same price of Rs.13,70,000/-. M/s. Prakash Pictures debited this amount as the cost of acquisition of the picture. It is in these circumstances that we find that the assessee managed to thwart the tax liability as rightly held by the Tribunal. This finding of fact rendered by the Tribunal cannot be termed as perverse. The CIT(A) was carried away by the fact that the sum of Rs.13,70,000 was split in two parts, namely, Rs. 3,90,917/- and Rs.9,79,083/- respectively shown as minimum guarantee receipt and as advance from the distributor. However, the explanation of the asessee was that there is no concealment and at the time the accounts were framed, the assessee did not have the agreement between the parties so that it was not clear as to what was the minimum guarantee commission and what was the advance;

++ the Tribunal rightly came to the conclusion that it was immaterial as to whether the agreement was available or otherwise. However, it is not possible that the agreement in writing was not available. Even if formal written agreement was not available, it certainly would have been on the basis of some prior negotiations. The assessee and M/s. Prakash Pictures are both in film making and distributing business. Hence, they ought to have known the nature of transaction despite non-availability of the agreement. Secondly, the assessee cannot depend on other party to the transaction for making entries in his book. In other words, the assessee cannot say that he did not know how M/s. Prakash Pictures had treated the transaction. The Tribunal rightly held that such a lapse cannot be treated as technical error. The second argument that there was no tax effect and hence there was no mens-rea is equally baseless. If the assessee had included the entire receipts in the year under consideration, he would have ended up paying tax for the present year because even after setting off the brought forward losses, the loss would have been converted into positive income with the inclusion of the balance receipt. Further, by virtue of losses of A.Y 1977-78 and earlier years being wiped out, the assessee could not have availed of the benefit of further unabsorbed losses during the A.Y 1978-79. Thus, the Tribunal concluded that by not including the entire receipts in A.Y 1977-78, the assessee was able to thwart his tax liability for two years. Thus, by deferring the declaration to the subsequent year, the assessee certainly furnished inaccurate particulars of income for the year under appeal and either avoided or deferred his tax liability. For such reasons, we find that the questions forwarded to this court for its opinion would have to be answered in favour of the Revenue and against the assessee.

(See 2017-TIOL-2429-HC-MUM-IT)