2011 (8) TMI 303 - AT - Income Tax

Disallowance of loans and advances written-off disallowance of incentives written-off disallowance of bandwidth charges under section 40(a)(i) - cable subscription - cable network service providers - The cable operators are sharing the cable subscription collected from the public as per the agreement on the declared subscribers - Held that - the management companies are in the nature of distributing companies for the assessee. We are of the opinion that to determine the exact nature of the transaction it is necessary to examine the agreement between the assessee company and its distributing companies which are managing companies. The assessee should also demonstrate with evidence the purpose for which these advances were given. The claim of the assessee cannot be considered under section 36(1)(vii) as it does not fulfil criteria laid down under section 36(C). If a claim is to be considered under the provisions of section 37 or 28 itself it is for the assessee to lead evidence that these advances were given in the normal course of trade and have in fact become bad. The onus lies on the assessee to prove that the loss have crystallised in this year only. - Matter restored before AO for examination of facts. TDS u/s 194J - payment made for bandwidth- appellant submits that that the payment was made to non-resident and it is covered under the provisions of section 9(1) read with Explanation (2)(iva) - Held that - the agreement in question has to be examined before coming to a conclusion that the fee in question has not been paid only for purchase of Band width. If so no disallowance can be made. Written-off of inventories - the assessee is valuing its closing stock at cost on net realisable value whichever is less at the end of the accounting year - the loss arising on such re-valuation of stock for the purpose of reduction of share capital is not allowable - When the assessee values its stock at cost and net realisable value re-valuation loss in the middle of the year cannot be considered - Notice that all these losses written-off have been adjusted against equity share capital or share premium account and are not routed through Profit & Loss account - Therefore such deduction on re-valuing the stock that too on ad hoc basis as seen from the report of the valuer cannot be allowed as expenditure in the hands of the assessee.

Issues Involved:
1. Disallowance of claim being write-off of advances given to management companies.
2. Disallowance of bandwidth charges under section 40(a)(i) of the Income-tax Act.
3. Addition of estimated subscription income.
4. Disallowance relating to written-off of inventories.

Issue-wise Detailed Analysis:

1. Disallowance of Claim Being Write-off of Advances Given to Management Companies:
The assessee argued that advances were given for business purposes to management companies managing networks, which incurred losses, making the advances irrecoverable and thus written-off as business loss. The Assessing Officer (AO) disallowed the claim, stating the loss was capital in nature and not business-related. The Tribunal found that the exact nature of the transaction needed examination of agreements between the assessee and management companies, and evidence proving the purpose of the advances. It was decided that the claim could not be considered under section 36(1)(vii) as it did not meet the criteria of section 36(C). The Tribunal restored the issue to the AO for de novo adjudication, requiring the assessee to provide evidence that the advances were given in the normal course of trade and had indeed become bad.

2. Disallowance of Bandwidth Charges Under Section 40(a)(i) of the Income-tax Act:
The assessee contended that payments for bandwidth did not require tax deduction under section 194J, referencing the Delhi High Court judgment in CIT v. Estel Communications (P.) Ltd., which was upheld by the Supreme Court. The Tribunal noted that the agreement in question needed examination to determine if the payment was solely for bandwidth purchase, which would not attract disallowance. The Tribunal restored the issue to the AO for de novo adjudication to examine the agreement and determine the exact nature of the payment.

3. Addition of Estimated Subscription Income:
The Revenue's appeal on this issue was dismissed. The Tribunal found the issue covered in favor of the assessee by previous orders of the Mumbai Bench of the Tribunal and upheld by the Hon'ble Jurisdictional High Court. The Tribunal followed the binding decision of the High Court, dismissing the Revenue's ground.

4. Disallowance Relating to Written-off of Inventories:
The Revenue contended that the deduction claimed on re-valued inventories was not clear whether it was capital or inventory written-off. The Tribunal found that the re-valuation of stock during the year for restructuring purposes, approved by the High Court, was not allowable as an expenditure. The Tribunal noted that the loss on re-valuation was adjusted against share premium account and not routed through the Profit & Loss account. The Tribunal disallowed the re-valuation loss as it occurred in the middle of the year and was not part of the normal stock valuation process. The Tribunal allowed the Revenue's ground on this issue.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, requiring further examination by the AO on the issues of advances write-off and bandwidth charges. The Revenue's appeal was partly allowed, with the Tribunal upholding the disallowance of re-valuation loss on inventories and dismissing the addition of estimated subscription income.

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