1981 PTD 180 (PLP)

Date of hearing: 15th June, 1980. MUHAMMAD AFZAL LONE, J.‑‑These two Reference Applications have been filed by the Assessee under section 66(1) of the Income‑tax Act for the opinion of this Court on the following questions of law, arising cut of the Tribunal's order dated 7.12‑1973. The reference relates to the Assess ment Years 1969‑70 and 1970‑

71. The questions of law, reproduced below, are common to both the years :‑‑ (1) Whether on facts and in the circumstances of the case the Income‑tax Officer and the Tribunal having accepted the factum of agency bet wean the assessee and Messrs Nails Films, was their any material on the basis of which it was open to the Tribunal to held that the distribution agreement dated 19‑9‑1968 was collusive and whether the finding is not vitiated as being Inconsistent, self-contradictory, based upon unsubstantiated assumption and surmises? (2) Whether on facts and in the circumstances of the case it was upon to the Tribunal to assume that lingo the agent who carried on business of distribution of films had conceded an addition of Rs. 10,000 in bib assessment it would be permissible to Include Rs. 90,0(10 In the Income of the assesses overlooking the foot that the business to which addition was agreed by the agent Included exhibition of films other than those owned by the assessee and whether the order has boon vitiated on that score?

2. The assessee who is an individual is a partner in four cinemas. During the relevant period his other source of income was, that in the Assessment Year 1969‑70, he purchased from Messrs Shamim Ara Productions, the exhibitions and exploitation rights is the film "Saiqa" for a consideration of Rs. 1,75,

000. Similarly, during the period covered by the next Assessment Year he acquired such rights in the film "Disbar Jani", for a sum of Rs. 3 lacs. The film "Saiqa" was exhibited in both the years. These two films were exploited by the petitioners through Messrs Naila Film Distributors in pursuance of an agreement in which the entire publicity expenses had to be incurred by the petitioner and 10 % of the grose receipts paid by him, us commission to the distributors. The petitioner after adjustment of the publicity expenses etc. and the commission against the gross collections declared a loss of Rs. 1,08,889 for the first year and Rs. 1,53,490 for the second year.

3. It is to be noticed that the Proprietor of Messrs Naila Distributors is the son of the petitioner. Assessing Officer took the view that the agreement between the father and the son which was not in writing on any stamped paper, was collusive and motivated by evasion of tax. He found that the account version of Messrs Naila Film Distributors was disbelieved by the Income‑tax Officer and with their consent an addition of R.s. 10,000 made in the receipts for each charge year. The Assessing Officer, therefore, did not accept the loss disclosed by the petitioner and by means of two separate orders dated 30‑6‑1973 made. In addition of Rs. 1,50,000 in the first year and Rs. 2,00,000 in the second year.

4. The petitioner appealed against these assessment orders. In the opinion of the Tribunal because of the relationship between the petitioner and the Proprietor of the distributors' concern, coupled with the later's agreed assessment, resting on addition in their receipts, of Rs. 10,000 as commission, the possibility that the agreement was a more contrivance, to evade tax liability, could not be ruled out. The Tribunal, however, maintained that since the Income‑tax Officer, did not dispute the payment of commis sion to the distributors, the two ‑concerns could not be treated as an entity. It also disagreed with the quantum of additions made by the Income‑tax Officer, on the assumption of suppression of income, and held that such additions should stave been proportionate to the addition in the gross receipts, in the distributors' hands. Accordingly, the Tribunal through a single order in both the appeals, directed an addition of Rs. 90,000 each, to the gross receipts in both the years. It is in these circumstances that the petitioner has instituted the instant reference applications.

5. In respect of the first question, the learned counsel for the petitioner argued that there was no legal bar for him to have entered into an agreement with the concern of his son, for exploitation of the films in question. It was contended that this concern had business connections ail over the country; merely because its proprietor is the none of the petitioner that would not render the agreement between them, as a collusive arrangement. It was further argued that the Tribunal acted an mere surmises; its finding to the effect that the agreement was a device to evade the tax liability, was not founded on any evidence.

6. In support of the second question, the argument anchored on the averments made in the "Statements of Facts", was that in the charge years under assessment. Messrs Naila Films, in addition to the distribution of the two films, namely "Saiqa" and "Disbar Jani" did some other business as well; in the first year they distributed "Doosri Maan" and whereas in the second year another film "Saalgirra" was dealt with by them. It was thus contended that even 6n the premises on which the Tribunal proceeded, the agreed addition of Ps. l0,000 n the accounts of Messrs Nails Films was not wholly relateable to the gross receipts in the hands of the petitioner; allegedly suppressed by him. The submission was that as the basis of the addition of Rs. 90,000 was wholly wrong the Tribunal's order could not be sustained.

7. The question whether or not the agreement dated 19‑9‑1968 wall collusive, is a question of fact. It was found by the authorities below that the agreement was not drawn on a. non‑judicial stamp paper, as required by law. This fact coupled with the relationship of father and sons between the parties, and the suppression of income by the latter, constituted material for discarding the agreement. Evidence need not essentially be direct; it may be even circumstantial. The quality and the sufficiency of evidence are not the valid grounds for interfering of the tribunal, which is the final fact, finding body in law. Our answer, to the fist question is thus in favour of the Revenue.

8. As regards the second question, it is by now well settled, if that Income‑tax' Authorities find that income gains and profits cannot be properly adduced from the account version given by an assessee, his books of account can be rejected and they can compute his income on such basis and in such manner as determined by them. In malting such assessment, they have to act on some rational basis, and cannot lay hand on irrelevant material. We find that the instant reference applications were filed directly in this Court, under section 66 of the Income‑tax Act, 1922, as amended by the Finance Ordinance, 1971 and the facts stated by the assessee, in the applications have not been controverted and reply thereof filed by the Department. In accordance with the averments made by the assessee in the "Statement of Facts" and as argued by his learned counsel, it would be legitimate to assume that in the charge years under condonation Messrs Naila, Film besides "Saiqa" and "Disbar Jani" exhibited two other films namely "Doosri Maan" and "Saalgirra". This fact was, however, completely ignored by the Tribunal, in computing the petitioner's income, by making an addition of Rs. 90,000 in iris declared version of each of the two assessment years. In this view of the matter, these additions cannot be sustained and the Tribunal is required to make a fresh computation of the petitioner's income. Our answer to the second question is thus in favour of the petitioner. The two reference applications are disposed of accordingly, with no order as to costs. Reference answered.