2017 (3) TMI 957 - AT - Income Tax

Allowable deduction u/s 37(1) - expenditure incurred by the assessee by way of payment to Knight Riders Sports Pvt. Ltd. for obtaining sponsorship rights in favour of Star India Pvt. Ltd - Held that - The assessee entered into an arrangement with Star India Pvt. Ltd. on a mutually agreed basis whereby the loss suffered by Star India Pvt. Ltd. was sought to be recouped with the earnings from the sponsorship of Kolkata Knight Riders Cricket Team for which assessee incurred ₹ 10 crores on behalf of Star India Pvt. Ltd. In our considered opinion, it is not the legal necessity to spent the expenditure which is determinative of its allowability; rather, it is the existence or otherwise of commercial expediency which guides the allowability of expenditure under Section 37(1) of the Act. From the point of view of commercial expediency, it is abundantly clearly that assessee had a long-standing professional relationship with Star India Pvt. Ltd. and there is a nexus between the impugned expenditure and the purpose of business. The commercial expediency canvassed by the assessee in the instant case clearly establishes that the impugned expenditure falls within the scope of the expression wholly and exclusively for the purpose of business or profession within the meaning of section 37(1) of the Act. - Decided in favour of assessee Addition as Professional fee - accrual of benefit / perquisites u/s 2(24)(iv) - Held that - Proposition made out by Revenue is entirely mis-conceived inasmuch as no such appearances and promotions have indeed been carried out. Further, as per the Revenue because of such an arrangement, assessee has earned a benefit within the meaning of Sec. 2(24)(iv) of the Act. On this aspect also, in our view, the action of lower authorities is completely misdirected and is devoid of any factual support. The Assessing Officer has not been able to establish as to what benefit has been obtained by assessee within the meaning of Sec. 2(24)(iv) of the Act in the instant year as nothing is shown to have been received by the assessee. Therefore, in a nutshell, in our opinion, the addition of ₹ 7 crores made by Assessing Officer is purely on conjectures and surmises and is untenable in law and also on facts. Therefore, on this aspect also, assessee succeeds. Bringing to tax annual value of the Dubai Villa - Held that - Income from the Dubai Villa is liable to be taxed in India inasmuch as the same is includible in the return of income and whatever taxes that may have been levied in the other contracting State, the credit thereof is required to be allowed as per law. Therefore, in view thereof we hold the issue against the assessee and direct the Assessing Officer to rework the final tax liability in accordance with aforesaid direction. Thus, on this aspect assessee fails on its Ground. Interest under section 234B & 234C which is consequential in nature, and therefore this ground of appeal is dismissed.

Summary

Issues Involved:

1. Disallowance of ?10,00,00,000/- as professional fees returned to Star India Pvt. Ltd.
2. Addition of ?7,00,00,000/- as alleged professional fees.
3. Taxation of the annual value of the Dubai Villa in India.
4. Levying of interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Disallowance of ?10,00,00,000/- as Professional Fees Returned to Star India Pvt. Ltd.:

The appellant, a film actor, claimed a deduction of ?10 crores as professional fees returned to Star India Pvt. Ltd. The Assessing Officer (AO) disallowed this claim, reasoning that the appellant was not obligated to refund any amount since the discontinuation of the program was not attributable to the appellant. The AO also noted that no income was received from Star India Pvt. Ltd. during the year under consideration, and the expenditure did not relate to any professional receipts earned during the year. The CIT(A) upheld the AO's decision, stating that the payment was gratuitous and not commercially expedient.

Upon appeal, the Tribunal considered the appellant's long-standing professional relationship with Star India Pvt. Ltd. and the commercial expediency of maintaining goodwill. The Tribunal referred to various judgments, emphasizing that the expenditure incurred voluntarily for promoting business is allowable. The Tribunal concluded that the expenditure was commercially expedient and deductible under Section 37(1) of the Income Tax Act. The order of the CIT(A) was set aside, and the AO was directed to delete the addition of ?10 crores.

2. Addition of ?7,00,00,000/- as Alleged Professional Fees:

The AO added ?7 crores as professional fees, assuming that the appellant earned this amount for attending press conferences for Star India Pvt. Ltd. The appellant contended that these events never took place and no income was received. The CIT(A) upheld the AO's decision.

The Tribunal found that the addition was based on notional income, unsupported by any receipt or accrual of income. The Tribunal emphasized that only real income is taxable, not hypothetical or notional income. The Tribunal also dismissed the Revenue's contention that the appellant's brand equity resulted in a benefit under Section 2(24)(iv) of the Act. The addition of ?7 crores was deemed untenable and was directed to be deleted.

3. Taxation of the Annual Value of the Dubai Villa in India:

The AO included the annual value of a Dubai Villa, gifted to the appellant, in the total income, estimating it at ?96 lakhs and assessing an income of ?67,20,000/- after deductions. The appellant argued that under Article-6 of the Double Taxation Avoidance Agreement (DTAA) between India and UAE, the income should be taxed in UAE.

The Tribunal upheld the AO's decision, citing Notification Nos. 90 & 91/2008, which clarified that income "may be taxed" in the other state but is still includible in the total income in India. The Tribunal directed the AO to rework the final tax liability accordingly.

4. Levying of Interest under Sections 234B and 234C:

The Tribunal noted that the issue of interest under sections 234B and 234C is consequential in nature and dismissed this ground of appeal.

Appeal for Assessment Year 2010-11:

The only ground raised was similar to the taxation of the Dubai Villa, which was decided based on the same reasoning as for the assessment year 2009-10. The decision for 2009-10 was applied mutatis mutandis to the appeal for 2010-11.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the deletion of additions related to professional fees while upholding the taxation of the Dubai Villa's annual value and dismissing the ground related to interest under sections 234B and 234C.