2019 (5) TMI 619 - AT - Income Tax

Allowability of advance write off - business loss on account of advances toward audio rights to Karishma International as irrecoverable - HELD THAT - Assessee need to put all the facts of the case in proper perspective before the authorities below surrounding this write off of ₹ 20 lacs and authorities below are also directed to appreciate the facts in proper perspective after considering all the details to arrive at conclusion that this can be allowed as business loss or not. Thus, keeping in view our detailed discussions as above, we are of the considered view that matter need to be restored to the file of the AO for denovo assessment. Disallowance u/s. 36(1)(iii) - expenditure on account of interest paid on term loans and other loans - AO rejected the contention of the assessee that free reserves were utilised for giving said interest free rent deposit - alleged to utilised the interest bearing funds to advance the interest free rent deposits - HELD THAT - perusal of audited financial statements for all these years clearly reveals as detailed above that the availability of interest free funds with the assessee were much higher than interest free refundable rent deposit of ₹ 9 crores advanced by the assessee and in the absence of any cogent material inextricably linking interest bearing borrowings with the interest free refundable rent deposit granted by the assessee, the presumption will apply that the assessee has released the interest free refundable rent deposit out of interest free funds available with it. The decision of Hon‟ble Bombay High Court in the case of Reliance Utilities and Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT is relevant. - Decided in favour of assessee Expenditure incurred towards audio rights - nature of expenditure - revenue or capital - HELD THAT - No distinguishing facts are brought on record by both the rival parties in the year under consideration before the Bench vis-a-vis facts as were there in preceding years. Further, no judgment of Superior Court is brought on record by both the rival parties holding against the assessee. Thus, we have no reason to take a different stand than what was taken by tribunal consistently over preceding years in assessee‟s own case. Respectfully, following the decision of tribunal for AY 2010-11 2018 (8) TMI 1802 - ITAT MUMBAI , we hold that the expenditure incurred by the assessee in acquiring audio rights are revenue expenses and learned CIT(A) appeal has rightly deleted the additions as were made by the AO.

Summary

Issues Involved:
1. Disallowance of interest expenditure of ?1,08,00,000 under Section 36(1)(iii) of the Income-tax Act, 1961.
2. Write-off of ?20,00,000 as business loss on account of advances towards audio rights.
3. Treatment of audio rights expenses amounting to ?3,10,99,925 as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure:
The assessee had given an interest-free refundable rent deposit of ?9,00,00,000 to the wives of the Directors of the company for taking commercial premises on lease. The AO disallowed interest expenditure of ?1,08,00,000, being 12% of the interest-free refundable rent deposit, under Section 36(1)(iii) of the Income-tax Act, 1961, on the grounds that the rent deposit was given out of business receipts and not from free reserves. The CIT(A) upheld the AO's decision, stating that the assessee failed to demonstrate business expediency for making such a deposit and that the funds were not from interest-free reserves. However, the Tribunal observed that the assessee had sufficient interest-free funds available and, in the absence of any direct nexus between interest-bearing borrowings and the rent deposit, held that the presumption would apply that the deposit was made out of interest-free funds. Consequently, the Tribunal ordered the deletion of the addition made by the AO.

2. Write-off of ?20,00,000 as Business Loss:
The assessee claimed a write-off of ?20,00,000 as a business loss on account of advances towards audio rights to Karishma International, which was deemed irrecoverable. The AO disallowed the claim, considering it as a capital loss since the amount was given to create a lien on the overseas territory of a feature film, which is capital in nature. The CIT(A) upheld the AO's decision, stating that the loss was capital and not revenue. The Tribunal, after a detailed analysis of the facts and agreements, observed that the matter required further examination, including the commercial expediency of the transactions and the fate of certain cheques issued to secure the advance. The Tribunal restored the matter to the AO for a denovo assessment, directing the AO to give proper and adequate opportunity to the assessee to present its case.

3. Treatment of Audio Rights Expenses:
The AO treated the audio rights expenses amounting to ?3,10,99,925 as capital expenditure, allowing depreciation on the same, while the assessee claimed it as revenue expenditure. The CIT(A) allowed the assessee's claim, following the Tribunal's decisions in earlier years where similar expenses were held to be revenue in nature. The Tribunal, consistent with its earlier decisions in the assessee's own case, held that the expenditure incurred for acquiring audio rights is revenue in nature and allowed the assessee's claim.

Conclusion:
The Tribunal partly allowed the assessee's appeal for AY 2011-12, allowed the appeals for AY 2012-13 and 2013-14, and dismissed the Revenue's appeal for AY 2012-13. The Tribunal directed the AO to re-examine the write-off of ?20,00,000 as business loss and upheld the assessee's claim for the treatment of audio rights expenses as revenue expenditure.