The Judgment of the Court was delivered by

V.C Daga, J.— This appeal under S. 260-A of the Income Tax Act (“Act” for short) is at the instance of the assessee Shri Ramanand Sagar of Natraj Studio, producer of a T.V serial known as “Ramayan” relating to the Assessment Year 1989-90 during which nearly 52 episodes of one hour slot each were produced by the appellant. By consent of parties the appeal was taken up for final hearing at the stage of admission.

The facts

2. The appellant is an individual assessee assessed to tax under the Act. He filed his return under S. 139 of the Act for the Assessment Year 1989-90. The original assessment under S. 143(3) of the Act was completed on 27-3-1991 on the income of Rs. 67,08,050 as against the income of Rs. 43,67,830 returned by the appellant. The assessing officer made certain additions by disallowing certain expenditures.

3. The appellant claimed to have received Rs. 2 crore during the Assessment Year 1989-90 from the aforesaid T.V serial “Ramayan”. The appellant had claimed expenses in the sum of Rs. 18,31,055 on account of equipment hire charge paid to five different parties. As regards payments made to three parties the assessing officer was satisfied with the explanation furnished by the assessee. The assessing officer not being satisfied made a disallowance of Rs. 7,00,400 i.e in respect of payments made to M/s New Diamond, Mumbai in the sum of Rs. 6,00,000 and to M/s Video Flash amounting to Rs. 1,00,400.

4. The assessing officer, on the facts and circumstances of the case, took a view that the proper satisfactory proof in respect of the aforesaid two parties is not available; as such preferred to disallow the claim in respect of expenditure of Rs. 7,00,400 out of total equipment hire charges worth Rs. 18,33,055.

5. The appellant, being aggrieved by the above order of the assessing officer, unsuccessfully preferred appeals before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, Mumbai (“Tribunal” for short). The appellant before both the authorities below had canvassed various contentions so as to establish that the disallowance in the sum of Rs. 7,00,400 was wrongly made by the assessing officer in respect of equipment hire charges paid to the above two parties, namely, M/s New Diamond and M/s Video Flash.

6. The crux of the contentions before both the lower appellate authorities was that the payments were made by Account-Payee cheques against the bills issued by the said two parties. The nature of equipment hired were such, without which the appellant could not have produced the said T.V serial. It was thus urged that nearly 52 episodes, each of one hour slot, were produced during the assessment year and assessee had received more than 2 crore from the said serial “Ramayan” and, in this view of the matter, general and liberal view ought to have been taken by the assessing officer. It was also contended that an amount of Rs. 18 lakhs for equipment hire charges was not unreasonable taking into account over all facts and circumstances of the case. The same contentions were reiterated before this Court. The last submission made was that so far as the assessee is concerned, he had discharged his burden of proving the expenditure, as such disallowance is unsustainable. The expenses disallowed are liable to be allowed in toto.

Substantial question of law

7. In the submission of the appellant, appeal raises following substantial question of law warranting adjudication under S. 260-A of the Act.

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in saying that the assessee has not discharged the primary onus of proving that the expenditure of Rs. 7,00,400 on equipment hire charges paid to M/s New Diamond and M/s Video Flash was for the purpose of business?”

8. Per contra, the learned Senior Counsel for the Revenue, in support of the findings recorded by all the authorities below, submitted that the concurrent findings of fact based on appreciation of evidence are not open to challenge unless the same are proved to be perverse being based on surmises and conjunctures. He took us through all the orders adverse to the assessee and tried to impress upon us that all the relevant facts and circumstances have been taken into account by all the authorities below while making disallowance. It would not be permissible at this stage of the proceedings to re-appreciate the evidence afresh. He, therefore, prayed for rejection of this appeal.

The issue

9. The substantive issue in this appeal is: whether the assessee has proved the genuineness and reasonableness of the expenses incurred and discharged his burden so as to hold that the disallowance made by the authorities below was wrong, unsustainable and unwarranted?

Consideration

10. It would be convenient before we consider the issue to refer to the relevant provisions of the Act and to analyse the same. S. 37 of the Act deals with the question relating to the allowability of the expenditure incurred for the purposes of business. The onus of proof is upon the assessee to prove each of the following ingredients before the expenditure can be allowed as deduction:

(a) The item of expenditure not being of the nature described under Ss. 30 to 36 of the Act;

(b) The item of expenditure must not be in the nature of capital or personal expenses of the assessee;

(c) the expenditure must be laid out wholly and exclusively for the purposes of business or profession.

If the assessee fails to satisfy any of these tests, the expenditure claimed is not allowable. The assessing officer is duty-bound to consider reasonableness of the expenditure including the bona fide nature of any item of expenditure and/or its quantum to the extent it may throw light on the bona fide nature.

11. The mere fact that the accounts of the assessee contain debit and that the debit has been duly authorised on behalf of the assessee will not make the expenses deductible from the taxable profits. The assessing officer is entitled to find out that the sums so paid are not wholly and exclusively laid out for the business of the assessee. In fact, it is his duty to apply his mind to this question. He is entitled to disallow any sum which may be held not for the purposes of business, e.g payment in utter disregard of the value of the corresponding goods or services and without any satisfactory explanation for such disregard. To put it in another way, the mere fact that the payment has been made under a contract is not conclusive of the expenditure being laid out wholly and exclusively for the purposes of the business. Once doubts arise about the bona fide nature of the payment, it is necessary to look into all the necessary circumstances such as relationship of the payee to the assessee, the general standards of similar expenditure in comparable business, the true worth of the services or goods in question and so forth.

12. It is also open to the assessing officer to question the reality of the expenditure, i.e, the true nature of payment, the true consideration for it and so forth, once he considers the payment and the purpose to be bona fide it is not open for him to substitute his own judgment of what is reasonable quantum of expenditure for the assessee. The assessing officer can only decide whether the expenditure is real, whether it relates to the business and is wholly spent for that purpose. The assessing officer would be well within his jurisdiction to disallow the expenditure in excess of reasonable limits. However, the discretion is to be exercised judicially, i.e, it must act according to the reason and justice and not according to his private opinion; according to law and not according to humour or fancy. The mere fact that the assessee had made payments could not carry matter any further, that fact itself would not be sufficient to entitle the assessee to claim deduction. The reasonableness should be judged from the view of the businessman. Where an element of extra-commercial consideration appears, the assessing officer should consider all the relevant evidence and decide to what extent it is to be attributed to bona fide business purposes. Where a person to whom the remuneration is paid is not a genuine entity or the recipient has not rendered any service then, in that event, the assessing officer shall be justified in disallowing the amount paid as not having been wholly or exclusively laid out for the purposes of business. At the same time it is also obligatory on the part of the assessee to prove the reasonableness of the amount spent. The proof is required so as to establish that the claim is bonafide. In a nutshell, each case has to be decided on its own merits taking into account the various factors, some of which, are enumerated hereinabove.

Findings

13. Turning to the facts of the present case, the assessing officer, the first Appellate Authority and the Tribunal, the final fact finding authority, have reached to the conclusion that the expenses incurred in the name of equipment hire charges paid to M/s New Diamond and M/s Video Flash, in the sum of Rs. 7,00,400, have not been proved to be genuine and reasonable. In support of the said finding all the authorities below have relied upon various circumstances, some of which can be cataloged hereinbelow:

(i) The assessee produced zerox copies of the bills stated to have been issued by the above two parties.

(ii) The notices issued under S. 133(6) of the Act were returned unserved, which were brought to the notice of the assessee.

(iii) The said two parties were not produced by the assessee in spite of grant of several opportunities.

(iv) One Shri Mohd. Zubair, son of Wali Mohd. appeared on behalf of Video Flash so as to prove the receipt of equipment hire charges but could not establish that he had equipment with him so as to provide the same to the assessee on hire. He claimed to have hired the said equipment from different parties but he could not furnish details thereof. No bills or vouchers or any account books were produced so as to demonstrate that the said equipment were hired by him.

(v) The bank certificates certifying the payments made by Account-Payee cheques were not produced before the assessing officer. The Appellate Authority excluded the same from consideration relying on R. 46-A of the Income Tax Rules.

So far as the payments made to the second supplier of equipments M/s New Diamond are concerned, the authorities below recorded following additional reason to make disallowance of Rs. 6,00,000:

(vi) The amounts were not paid by Account-Payee or crossed cheques to M/s New Diamond, the alleged supplier of equipments on hire.

14. All the authorities below, after careful consideration of the submissions advanced and after scanning the evidence tendered, reached to the unanimous conclusion that the payments were not reasonable much less genuine. With the result, the aforesaid expenditures were disallowed by the assessing officer. The said disallowance was maintained by both the lower appellate authorities. Being aggrieved by the aforesaid order of the Tribunal, the assessee preferred present appeal giving rise to the question of law framed in the opening part of this judgment.

15. The learned counsel appearing for the appellant contended that the findings recorded by all the authorities below are perverse. The respondents failed to discharge onus of proof that the expenditures incurred by the assessee were not for the purposes of business. The learned counsel took us through all the orders of the authorities below along with documents and invited our attention to two certificates issued by the bankers of the assessee both dated 14-8-1999 certifying the payments made by cheque in favour of M/s New Diamond Samir, Mumbai and M/s Video Flash, Mumbai so as to establish genuineness of the payments made to the said two parties by way of equipment hire charges.

16. The bankers certificate issued in favour of the assessee certifying the payments made in favour of M/s New Diamond Samir, Mumbai does not show that the payments were made by issuing Account-Payee cheques. The payments made from time to time in favour of the said party M/s New Diamond is in the sum of Rs. 6 lakhs. The amount of payment is not small. It is really surprising that the payment worth more than Rs. 20,000 has been made without issuing crossed and/or Account-Payee cheques. The zerox copies of the bills and the vouchers with respect to these payments were produced before us so as to establish the genuineness and reasonableness of the total payments made in the sum of Rs. 6 lakhs. The zerox copies of the documents produced and the bills tendered for our consideration hardly inspire any confidence. The bills issued by M/s New Diamond, Mumbai do not give any credit in the bills for the payments of equipment hire charges already made and received much prior to the date of issuing of bills. The genuine commercial transaction carried out in the usual course of business would normally give credit of the past payments made and would show the balance liability and/or balance amount recoverable from the person in whose favour the bill is issued. We are not at all impressed with the documents produced before us by the appellant-assessee and we have our own doubts about the genuineness thereof. Since all the authorities below have examined the evidence in detail, we do not propose to go into this aspect in detail. We, for our satisfaction, went through the documents, mode and manner thereof to find out whether or not the conclusions or findings of the authorities below are reasonable and proper. We confirm the findings recorded by all the authorities below and hold that disallowance of the payment made to M/s New Diamond, Mumbai by way of equipment hire charges in the sum of Rs. 6 lakhs is proper. We cannot find any fault with the findings recorded by all the authorities below including the Tribunal whose order is a subject-matter of challenge in this appeal. The appeal to this extent is dismissed.

17. Let us turn to the disallowance made to the extent of payment made to M/s Video Flash, Mumbai towards equipment hire charges in the sum of Rs. 1,00,400. The bankers certificate evidencing the payment made to M/s Video Flash, Mumbai, by issuing Account-Payee cheques was produced before the Commissioner of Income Tax (Appeals), the same was excluded from consideration as it did not answer the requirement of R. 46-A of the Income Tax Rules. The certificate produced by the assessee from his banker does establish that the payments have been made to the said party M/s Video Flash by Account-Payee cheques and all the cheques were of Central Bank of India, Andheri Branch, Mumbai. The son of the proprietor of M/s Video Flash did appear before the assessing officer and deposed having supplied the equipment on hire. Since the payments were made by Account-Payee cheques, in our opinion, it must overshadow all other shortcomings sought to be pointed out by the authorities below while disallowing the expenditures incurred by the assessee in the sum of Rs. 1,00,400. The expenses appear to be genuine since made by the Account-Payee cheques. The same appears to be reasonable. Had this piece of evidence been taken into account by the Commissioner of Income Tax (Appeals) and the Tribunal, probably different finding would have been recorded by them. In our opinion, the said vital piece of evidence was wrongly excluded by the authorities below from consideration. The burden of proof has been satisfactorily discharged by the assessee so far as equipment hire charges paid to M/s Video Flash, Mumbai in the sum of Rs. 1,00,400 is concerned, as such, the disallowance made in this behalf cannot be sustained. We, therefore, hold that the assessee was and is entitled to claim deduction of expenses to the extent of Rs. 1,00,400. To this extent, this appeal is allowed. The appellant shall be entitled to deduction of Rs. 1,00,400 treating the said expenditure wholly incurred for the purposes of business.

18. In the result, appeal is partly allowed with no order as to costs.