Bombay High Court
Nav Ketan International Films Pvt. Ltd. vs Commissioner Of Income-Tax on 22 November, 1993
Equivalent citations: [1994]209ITR976(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Mrs. Sujata Manohar, J.
1. The assessee, who is the applicant before us, is a private limited company, carrying on the business of production of motion pictures. The company was incorporated on April 10, 1963. Under Article 122 of the articles of association, the first two directors of the company are Mr. Dev Anand and Mrs. Mona Dev Anand. Under the said article 122, Mr. Dev Anand is a permanent director of the assessee-company and he holds office until his death or resignation or until he otherwise ceases to hold the office as director. Under article 125(1), each director shall be paid out of the funds of the company by way of remuneration for his services, a sum not exceeding Rs. 250 for each meeting of the board or committee of the board, attended by him as a director. Clause 125(2) provides that in addition to the remuneration payable as above, the directors may allow and pay to any director who is not a bona fide resident of the place where a meeting of the board of the company is held, certain fair compensation for travelling and other expenses as set out thereon. Article 126 provides that if any director be called upon to go or reside out of his usual place of business on the company's business or otherwise to perform extra services or make special exertions or efforts, the board may arrange with such director for such special remuneration for such extra services or special exertions or efforts wither by a fixed sum or otherwise as may be determined by the board subject to the provisions of the Act; and such remuneration may be either in addition to or in substitution of hiss remuneration above provided. Under article 126 it is further provided that so long as Mr. Dev Anand who is the permanent director, holds the office of managing director, he shall also be paid Rs. 1,500 per month with such additional sums as the board may from time to time determine. He has, however, not drawn the said remuneration.
2. The assessee-company produced, inter alia, two motion pictures called "Heera Panna" and "Shareef Badmash". The assessee-company entered into an agreement dated March 1, 1972, with Dev Anand under which the assessee-company appointed Dev Anand as a writer, director and the leading man of their firm "Heera Panna". Under the terms of the agreement, Dev Anand Agreed to write, direct and play the leading man's role in the said film on terms and conditions set out therein. Clause 5 of the said agreement provided that in consideration of the services so rendered by him the assessee shall pay him his remuneration as under : Rs. 50,000 payable to him in annuity instalments beginning from the year 1974 up to the year 2003 for which the assessee-company undertook to purchase a single premium policy from the Life Insurance Corporation of India Ltd. Accordingly, in the assessment year 1974-75, the assessee-company purchased the requisite single premium policy from the Life Insurance Corporation of India on payment of Rs. 7,77,604.
3. The assessee-company also entered into another agreement date June 1, 1971, with Dev Anand under which the assessee-company appointed Dev Anand as the leading male artiste for its film "Shareef Badmash". Under clause 5 of the said agreement in consideration of Dev Anand rendering services as the leading man in the said film, the assessee-company agreed to pay him Rs. 25,720 by annuity instalments beginning from the year 1973 and up to the year 2002 for which the assessee-company undertook to purchase a single premium policy from the Life Insurance Corporation of India. This agreement was modified by an agreement dated August 1, 1972, under which the remuneration payable to Dev Anand for acting as the leading male artiste in the film "Shareef Badmash" was increased by an annuity policy of Rs. 15,000 annually for 30 years commencing from the year 1974 in addition to the previous annuity policy of Rs. 25,720 as set out above. Under this agreement for the assessment year 1974-75, the assessee-company paid a sum of Rs. 6,33,281 for the purchase of the necessary life insurance policies. The assessee, in its account for the assessment year 1974-75, debited the said amounts of Rs. 7,77,604 and Rs. 6,23,281, totalling Rs. 1,10,885 against the cost of production of the said two motion pictures and claimed them as deduction in determining the taxable income of the assessee on the basis of the profit/loss shown as per the books of account. The Income-tax Officer, however, did not accept this deduction. He held that in view of the restrictions placed under section 40(c)(i) of the Income-tax Act, 1961, only a sum of Rs. 72,000 could be allowed as a deduction. He, therefore, disallowed the deduction of Rs. 13,38,885 in the computation of total income for the said assessment year. Being aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner, who allowed the appeal and directed the deletion of the addition of Rs. 13,38,885 so made. On an appeal from this judgment and order filed by the Department before the Income-tax Appellate Tribunal, the Tribunal set aside the order of the Appellate Assistant Commissioner.
4. The Tribunal by its order dated November 22, 1978, inter alia, held that the restrictions placed with regard to the admissibility of expenditure under section 40(c)(i) apply to the payments made for the purchase of the annuity in question. In respect of the above order of the Tribunal, the following question has been referred to us under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the provisions of section 40(c)(i) are applicable in respect of the liability of the assessee to make the payment of Rs. 14,10,0885 to its director ?"
5. Section 40(c)(i), as it stood at the relevant time, was as follows :
"Section 40. - Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession', -. . . .
(c) In the case of any company -
(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefits or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,...."
6. Under section 40(c), the ceiling on such expenditure is placed at Rs. 72,000 under clause (A). We have therefore to consider whether the payments made by the assessee-company for the purchase of the said insurance policies can be considered as expenditure falling under section 40(c)(i). Sub-clause (i) of section 40(c) describes the nature of expenditure which is covered by that sub-clause. It must be an expenditure which results directly or indirectly in the payment of any remuneration, benefit or amenity to a director of the company (we are not concerned with other categories of persons). Dev Anand was undoubtedly a director of the company. However, the payments made to him under the two agreements in question cannot be considered as payment of remuneration to him or the granting of any benefit or amenity to him as a director of the said company. The agreements, in terms, clearly set out the purpose for which these payments are being made. It is a remuneration given to him for his acting as the leading male actor in the two films in question, as also for doing work as a writer and director in the case of one of the two feature films. The amounts are clearly by way of remuneration for these services which Dev Anand is expected to render to the said assessee-company. Acting as a leading male actor or writing the script of a film or directing it cannot, by any strenth of imagination, be considered as the duty of a director of the assessee-company. The two contracts in question relate to other work which Dev Anand was required to do for the assessee-company. Therefore, the expenditure which the assessee-company had incurred cannot be considered as resulting either, directly or indirectly, in providing any remuneration to a director of the assessee-company in his position as a director. Section 40(c)(i), in our view, would be attracted only to those cases where the director of a company is paid any remuneration or when any expenditure is incurred to provide any benefits or amenities to him in his position as a director.
7. The Supreme Court in the case of Bharat Beedi Works P. Ltd. v. CIT [1993] 201 ITR 1063 considered, inter alia, the application of section 40(c) in a case where the company paid royalty to a partnership firm for the use of its trade mark. These partners were also directors of the company which paid the royalty amounts. The Supreme Court, inter alia, examined the case on the assumption that each of the partners of the partnership firm individually received royalty payments. The Supreme Court considered whether section 40(c)(i) would be attracted to such a situation. It said that the payments which were made to the partners, who were directors of the company, were made in consideration of a valuable right parted by the partners in favour of the company, namely, their right to use the trade mark. The agreement, under which these payments were made, was not a mere device but was a genuine document. Hence, the payments which were made under that agreement could not be treated as payment made to the directors of the company as directors. Such a payment would not fall within the four corners of section 40(c). (See the observations at page 1070).
8. In view of the above observations of the Supreme Court, which would directly apply to the case before us, the payments which have been made by the assessee-company for the purchase of annuities in favour of Dev Anand, who also happens to be one of the directors of the assessee-company, are not covered by section 40(c). Hence, the restrictions placed under clause (A) of that sub-clause would not apply.
9. It was submitted before us by the Revenue that under article 126 of the articles of association of the assessee-company, there is a provision for payment of special remuneration to a director if he is called upon to go or reside outside his usual place of business on the company's business or if he is otherwise asked to perform extra services or to make special exertions or effort for the company. It was submitted by the Revenue that the remuneration paid to Dev Anand under the two agreements would fall under article 126. This submission does not appeal to us. The special remuneration which a director may be paid under article 126 is clearly remuneration for any extra services which a director may render to the company in his capacity as a director. This has nothing to do with other functions or other obligations which a director may be called upon to discharge under independent agreements with the company which have no relation whatsoever to his functioning as a director. Article 126, therefore, does not apply to the present case.
10. In the premises, the question which is referred to us is answered in the negative and in favour of the assessee.
11. In the circumstances of the case, there will be no order as to costs.