JUDGMENT :

Ranjan Gogoi, J.

1. The High Court of Karnataka by the impugned order dated 3rd July, 2007 had answered the questions referred to it for its opinion under Section 256(2) of the Income Tax Act, 1961 (as it then existed) against the assessee and in favour of the revenue. Aggrieved, the assessee has filed this appeal upon grant of leave under Article 136 of the Constitution of India.

2. At the outset, the questions of law on which the High court had rendered its opinion may be set out as below.

“i. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in deleting the disallowance of service charges paid to M/s Universal Trading Company made under Section 40A(2)?

ii. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss shown by the assessee in the film business amounting to Rs.31,48,670/-was allowable?

iii. Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee's claim for deduction under Section 35(2A) in respect of donation to Aparna Ashram?”

3. The necessary discussions can best be unfolded by taking up each of