2008 (4) TMI 535 - AT - Income Tax

Disallowance of deduction u/s 80HHF - whether 90 per cent of receipts by way of cable subscriptions should be excluded from the profits of business computed under the head Profits or gains from Business or Profession in terms of the provisions contained in Explanation (f) to section 80HHF, which is similar to Explanation (baa) to section 80HHC - Disallowance on expenditure u/s 30 or u/s 37 - bad debts written off - advertisement expenditure - Disallowance of deduction u/s 80HHF - computation of profit in respect of export business of television software resulted in loss - scope of income to be excluded from the profits of business computed under the head Profits and gains of business or profession - HELD THAT - It is the settled legal position that when two provisions are in pari materia, whether under the same enactment or under different enactments, the decision rendered in relation to one provision would also be relevant in relation of the other provision. In view of the same, we are of the view that decisions given by the courts/Tribunal in relation to section 80HHC would be relevant in adjudicating the scope of the profits derived from the business specified in section 80HHF. To this extent, we are in agreement with the finding of the Assessing Officer. It is difficult to accept the contention of learned Sr. D.R. that judgment of the Apex Court in the case of P.R. Prabhakar 2006 (7) TMI 121 - SUPREME COURT would not apply to the present case. The only distinguishing feature is that Explanation ( f) excludes certain items of receipt from the profits of business computed under the head Profits Gains of Business or Profession . But such exclusion does not take away the requirement to compute the profits of business under the head Profits Gains from Business and Profession . In view of the discussion, the contention of the revenue in this behalf is rejected. The decision of the Jurisdictional High Court in the case of Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT is relevant with reference to either the concept of turnover or the scope of income to be excluded from the profits of business computed under the head Profits and gains of business or profession and consequently, the said decision cannot be applied till the process of computation of business profits under the above head is completed. This decision would be referred to appropriate stage later on. Therefore, it is held that for claiming deduction under section 80HHF, the profits derived from the business as referred to in sub-section (1) would be such profits as are computed in accordance with the provisions of sub-section (3) read with Explanation ( f ) thereof. For this purpose, the profits of the entire business would be taken into consideration. Consequently, it is held that the Assessing Officer was not justified in denying the claim on the ground that there was loss in the business of export television software on the basis of segmented Profit Loss Account. The order of the learned CIT(A) is, therefore, upheld on this aspect of the issue. Activity of cable subscription - whether 90 per cent of receipts by way of cable subscriptions should be excluded from the profits of business computed under the head Profits or gains from Business or Profession in terms of the provisions contained in Explanation (f) to section 80HHF, which is similar to Explanation (baa) to section 80HHC - On perusal of the CBDT Circular No. 621, clearly reveals that amendment was made to exclude only those incomes which do not have element of turnover. It is pertinent to note that Legislature referred to element of turnover and not export turnover. Therefore, considering the above circular which is binding on the tax authorities, we are of the view that any income arising from an activity involving turnover cannot be excluded from the profits of business in terms of Explanation (baa) to section 80HHC/Explanation (f) to section 80HHF. Whether consideration received by the assessee by way of cable subscriptions amounts to turnover - scope of the word turnover may vary in section 80HHC and section 80HHF - In the present case, the right to exhibit the programmes telecasted by various channels owned by Star Group in the Indian territory is with the assessee. The cable operators are the distributors through whom such programmes are exhibited to the subscribers of the public. The consideration varies from operator to operator depending upon the number of viewers. If the cable operator stops making payment, the assessee can stop the exhibition of programmes to such cable operators through the equipments installed by the assessee. Therefore, what the assessee receives in, our humble opinion, is the consideration on account of transfer of right to exhibition of programmes contained in such software and, therefore, the same would amount to turnover. No dispute that activity of distribution of channel programmes is an independent activity and therefore the profits arising therefrom would also form part of the profits of business. Accordingly, as per the test laid down by the Hon ble Supreme Court in the case of K. Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT , the cable subscription has to be treated as turnover. The test laid down by the Hon ble Bombay High Court in the case of Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT is that if the profits arising from an activity is in the nature of operational income then receipts from such activity would form part of profits of business as well as total turnover. There is no dispute that cable subscription activity is part of main objects of the assessee-company and therefore the receipts arising from the same would form part of the operational income. Consequently, such receipt would form part of turnover. The Constitution Bench of the Hon ble Supreme Court in the case of Navnit Lal C. Jhaveri v. K.K. Sen, AAC 1964 (10) TMI 16 - SUPREME COURT has held that circulars issued by the Board which are beneficial to the assessee are binding on the tax authorities. Keeping in mind the above binding judgment and the circular mentioned above, it must be held that cable subscription having element of turnover cannot be excluded from the profits of business computed under the head Profits and gains of business or profession . We hold accordingly. Thus, it has to be held that there is no judgment of the Apex Court on the scope of Explanation (baa) to section 80HHC . However, we find merit in the contention of the ld. Counsel for the assessee that the scope of the above Explanation was considered by the Hon ble Bombay High Court in the case of Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT . Therefore, the order of the CIT(A) is upheld. This would dispose of ground raised by the revenue. Disallowance on expenditure u/s 30 or u/s 37 - nature of expenditure - lease holding improvements - leave and licence agreement for occupying the premises known as masterpiece building - In the present case, necessary facts are not on record for determining the nature of expenditure incurred by the assessee. It would be appropriate that necessary details and relevant materials are brought on record for ascertaining the nature of expenses. Accordingly, the order of CIT(A) is set aside on this issue and the matter is restored to the file of AO for fresh adjudication of the matter after giving fair opportunity of being heard to the assessee. This would dispose of ground of the department s appeal. Disallowance on bad debts written off - assessee failed to prove that the debt had become bad - HELD THAT - However, the claim under section 36(1)( vii ) is subject to the provisions of section 36(2). In our opinion, the interest of justice would be met if an opportunity is given to the assessee to prove this aspect before the AO. Consequently, the order of learned CIT(A) is set aside on this issue and the matter is remitted to the file of Assessing Officer with the direction that if the assessee is able to prove that the amount claimed as deduction on account of bad debts was offered as revenue receipt in the earlier years, then he shall allow the claim of the assessee. It is clarified that the assessee would not be asked to prove that debt has become bad unless any decision by the jurisdictional High Court or the Apex Court is delivered to the contrary. This discussion will dispose of ground No. 1 in assessee s appeal. Addition on commission income (wrongly mentioned as addition in the ground No. 2 raised by the assessee) - Assessee was acting as an agent for booking advertisements on behalf of its principal against which it was entitled to commission - HELD THAT - We find that the issue arising in the appeal for AY 1997-98 has been decided by the Tribunal in favour of the assessee by holding that income accrued in the year in which the amount was received by the assessee or paid by the advertisers even under the Mercantile system of accounting. Since the lower authorities had relied on their orders for the preceding assessment years, the addition cannot be upheld since the additions made in the earlier years on this account have been deleted by the Tribunal. However, the learned D.R. has submitted before us that there is a change in the terms and conditions of payment of commission and that the same may be considered. We do not find any material difference since under both the agreements, the commission is to be paid on the basis of amount collected by the assessee. Clause ( E )(4) specifically provides that no commission shall be due to the assessee against the amounts not received. Therefore, it is clear from the terms of both the agreements that commission income accrued to the assessee only when the invoiced amount was received by the assessee on behalf of its principle. Therefore there is no reason to deviate from the earlier order of the Tribunal. Following the said decision of the Tribunal for earlier years, the issue is decided in favour of the assessee - Order of learned CIT(A) is therefore, set aside - addition confirmed by him is hereby deleted. Disallowance on advertisement expenditure - HELD THAT - We find that this issue is covered in favour of the assessee by the decision of the Tribunal for AY's 1997-98 to 1999-2000, wherein it has been held that such expenditure was incurred wholly and exclusively for the purpose of business and therefore no disallowance could be made in this regard. Therefore, Following the decision of the Tribunal for earlier years. The order of learned CIT(A) confirming the disallowance is hereby set aside and consequently, the disallowance confirmed by him is hereby deleted. This would dispose of ground No. 3 in the appeals of the assessee as well as revenue. In the result, both the appeals shall be treated as partly allowed.

Summary

Issues Involved:
1. Claim under section 80HHF of the Income-tax Act, 1961.
2. Exclusion of 90% of receipts from profits of business.
3. Disallowance of expenditure on leasehold improvements.
4. Disallowance of bad debts written off.
5. Addition of commission income.
6. Disallowance of advertisement expenditure.

Issue-wise Detailed Analysis:

1. Claim under section 80HHF of the Income-tax Act, 1961:
The primary issue was whether the assessee's claim under section 80HHF could be denied due to a loss in export activity when computed on a standalone basis. The assessee, engaged in producing and exporting television programs, claimed a deduction of Rs. 12,97,67,452 under section 80HHF. The Assessing Officer (AO) denied the claim, stating that there was a loss in the export activity when corporate expenses were allocated proportionately. The CIT(A) reversed this, holding that the entire business profits should be considered, not just segmented profits, and allowed the deduction. The Tribunal upheld CIT(A)'s view, emphasizing that the formula in section 80HHF(3) should be applied to the entire business, not just isolated activities.

2. Exclusion of 90% of receipts from profits of business:
The AO excluded 90% of certain receipts from the business profits, including ad sales commission and subscription income, arguing these were not operational incomes. The CIT(A) ruled that subscription income should not be excluded, but upheld the exclusion of commission income. The Tribunal agreed with CIT(A) on subscription income, stating it had an element of turnover and was operational income. However, for commission income, the Tribunal directed the AO to follow the Tribunal's earlier decision for the assessment year 2002-03.

3. Disallowance of expenditure on leasehold improvements:
The AO treated the expenditure on leasehold improvements as capital expenditure, allowing only depreciation. The CIT(A) reversed this, allowing it as revenue expenditure. The Tribunal set aside CIT(A)'s order and remanded the matter to the AO to determine the nature of the expenses, emphasizing that only expenditures per se capital in nature should be capitalized and depreciated.

4. Disallowance of bad debts written off:
The AO disallowed the bad debts claim due to insufficient evidence that the amounts were previously offered as income. The CIT(A) upheld this. The Tribunal, referencing the Special Bench decision in Oman International Bank, held that writing off the debt as irrecoverable suffices, but remanded the matter to the AO for verification that the amounts were previously offered as income.

5. Addition of commission income:
The AO added Rs. 6,85,15,135 to the commission income, arguing the assessee had changed its accounting method. The CIT(A) upheld this. The Tribunal reversed, following its earlier decision that commission income accrues when amounts are received, not invoiced, under both old and new agreements.

6. Disallowance of advertisement expenditure:
The AO disallowed Rs. 21,78,87,244 of advertisement expenditure, questioning its necessity for business. The CIT(A) allowed partial relief. The Tribunal, following its earlier decisions, held the entire expenditure was incurred wholly and exclusively for business purposes and deleted the disallowance.

Conclusion:
The Tribunal's comprehensive analysis upheld the assessee's claims under section 80HHF, subscription income inclusion, and advertisement expenditure while remanding the leasehold improvement and bad debts issues for further verification. The addition of commission income was deleted, aligning with prior Tribunal decisions.