M.A.A. Khan, J. - (1.) 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 therefrom did not belong to the assessee-company ?"
(2.) 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 therefrom 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.
(3.) 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 the 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 con firmed. Such additions were as under : JUDGEMENT_391_ITR227_1997Html1.htm The Tribunal examined the issue involved in all the years in appeal before it in assessment appeal for the assessment year 1965-66 (ITA 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. 13,000 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." ;