2020 (2) TMI 318 - AT - Income Tax

Disallowance of minimum guarantee royalty as capital in nature - HELD THAT - Apex court s recent decision in Taparia Tools vs. JCIT 2015 (3) TMI 853 - SUPREME COURT has settled the law that of a revenue expenditure is otherwise allowable, the mere fact that the same ought to have been split up or claimed lump sum is not the deciding factor. Their lordships yet another landmark decision in Chainrup Sampatram vs. Commissioner of Income Tax 1953 (10) TMI 2 - SUPREME COURT also held long back that the principles of conservatism consideration of prudence in the accounting treatment require that no anticipated profits be treated as income only if the same are utilized and converse is not true as anticipated losses can be allowed to be deducted from commercial profits at the first sight of reasonable possibility. We wish to make clear in light of the foregoing facts that the assessee had every reason to raise the impugned minimum guarantee royalty claim pertaining to acquisition of music rights in the year of actual payment going by the music industry market trends. We conclude in this backdrop of facts that the Revenue s latter argument also carries no substance. This issue is accordingly decided in assessee s favour. Disallowance of advertisement and sales promotion, consultancy, ad hoc head(s) - recording expenditure disallowance(s) from 10% made by the Assessing Officer to 2% in the lower appellate proceedings - HELD THAT - We find no substance in Revenue s instant argument seeking to revive the impugned ad hoc disallowance under four head(s). Apart from the fact that the earlier co-ordinate bench s order(s) have already upheld the CIT(A) s identical action, we note that the assessing authority itself is very fair in estimating the impugned disallowance @ 10% meaning thereby that assessee s claim(s) stand accepted in principle @ 90%. We therefore adopt judicial consistency to affirm CIT(A) s findings restricting all four disallowance(s) items from 10% to 2% only. The Revenue as well as assessee s corresponding grounds fail therefore as a necessary corollary. Nature of expenses - training and development expenses - Revenue or capital expenditure - HELD THAT - We find no substance in Revenue s grievance at the threshold itself since Motor Sales vs. Commissioner of Income Tax (1973) 1971 (10) TMI 20 - ALLAHABAD HIGH COURT has already decided the issue in assessee s favour. The CIT(A) s findings under challenge to this effect are affirmed therefore. Disallowing / shortage of stock / breakage (prerecorded cassettes) - The Revenue fails to dispute the clinching fact that the assessee s corresponding receipts derived from the corresponding of scrap sales on account of broken cassettes have been accepted. This tribunal s decision for assessment year 2002-03 has already decided this very issue in assessee s favour. Rent amount addition - HELD THAT - Both the learned representatives are ad idem during the course of hearing that the assessee s claim of impugned downward revision of rent charge and received in case of its sister concern requires necessary factual verification / computation once again in view of the learned lower authorities alleged failure in getting all the settlement records to this effect. We therefore deem it appropriate to restore the same back to the Assessing Officer to decide afresh as per law within three effective opportunities of hearing Addition of turnover mis-match in TDS certificates (in case of CESC and Indea Streamz) as well as part TDS credit - HELD THAT - After giving our thoughtful consideration, we find that although the Revenue s instant technical argument deserves to be accepted the fact also remains that the Assessing Officer had not taken into consideration all the foregoing aspect(s) whilst making the impugned disallowance(s) / addition(s). We therefore conclude in this factual backdrop that the instant issue has been rightly restored back to the assessing authority for afresh computation as per law. We make it clear that the issues as to whether the assessee deserves credit of the impugned TDS in the year when it offers the corresponding income for assessment is fairly conceded by the department during the course of hearing. We accordingly affirm the CIT(A) s findings qua these two former issues. Expenditure on share investments and interest free loans given to sister concern - HELD THAT - Assessee has not derived any exempt income in the impugned assessment year. Hon'ble jurisdictional high court s decision in M/s Ashika Global Securities Ltd. 2018 (7) TMI 1425 - CALCUTTA HIGH COURT holds that the impugned disallowance does not come into play in case of absence of exempt income. Coming to latter aspect of interest free loans to sister concern, we notice that assessee had no interest free funds in the nature of share capital, reserves and surplus of ₹60.26 crores as against interest free loans of ₹24.17 crores; respectively. The CIT(A) has followed hon'ble s Bombay high court s decision in CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT that the necessary presumption in such an instance is of utilization of interest free funds only. We accordingly affirm the CIT(A) s findings under challenge Addition u/s 14A - HELD THAT - Rule 8D carries prospective effect only from assessment year 2008-09. We notice that the CIT(A) has restricted the impugned disallowance to 1% of the exempt income only; coming to ₹23,230/- in his lower appellate order under challenge. The assessee s share capital and reserves against the exempt investments read figures ₹84.13 crores and ₹59.99 cores; respectively. The CIT(A) has followed a catena of case law Income Tax Officer Ward-12(1) Kolkata vs. Nupur Carpets Ltd. 2015 (7) TMI 679 - ITAT KOLKATA that necessary disallowance @ 1% prior to assessment year 2008-09 is just and proper. We therefore decline the Revenue s instant second substantive grievance as well. Bad debt / business advance disallowance - HELD THAT - We notice that the Assessing Officer had made the impugned disallowance after holding that there was no evidence of the impugned debt sums to have become actually bad. This this issue is no more res integra in view of in T.R.F. vs. Commissioner of Income Tax 2010 (2) TMI 211 - SUPREME COURT that sec. 36(1)(vii) no more requires w.e.f 01.04.1989. Administrative expenditure disallowance - HELD THAT - CIT-DR fails to rebuttal the crucial fact that lower authorities have taken into account the assessee s non exempt income yielding investment as well. The fact also remains that we are dealing with an indirect head of expenditure wherein some kind of proportional location on estimate basis is always involved. We therefore deem it appropriate that a lump sum disallowance of ₹8 lakh including suo motu figure of ₹ 7 lakh would be just and proper with a rider that same shall not be treated as a precedent in any other assessment year. The assessee gets part relief. Necessary computation to follow as per law. Disallowance its leave encashment provision u/s 43B(f) for want of actual payment - HELD THAT - As during the course of hearing that hon'ble jurisdictional high court s decision in Exide Industries Ltd. vs. Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT quashing the statutory provision itself to be ultra vires stands has stayed by hon'ble apex court. Therefore the instant issue restored back to the Assessing Officer to be decided afresh after final outcome in Exide Industries Ltd. case. This last substantive grievance of assessee is accepted for statistical purpos during the course of hearing that hon'ble jurisdictional high court s decision in Exide Industries Ltd. vs. Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT quashing the statutory provision itself to be ultra vires stands has stayed on 08.05.2009 in hon'ble apex court. Therefore the instant issue restored back to the Assessing Officer to be decided afresh after final outcome in Exide Industries Ltd. case. This last substantive grievance of assessee is accepted for statistical purposes. es.

Summary

Issues Involved:
1. Disallowance of Minimum Guarantee (MG) Royalty Payments.
2. Disallowance of Advertisement/Sales Promotion, Consultancy, Ad Hoc, and Recording Expenses.
3. Classification of Training and Development Expenses.
4. Disallowance of Stock Shortage/Breakage.
5. Addition on Account of Rent.
6. Disallowance of Turnover Mismatch in TDS Certificates and TDS Credit.
7. Disallowance of Expenditure on Share Investments and Interest-Free Loans.
8. Disallowance of Administrative Expenditure under Section 14A.
9. Disallowance of Bad Debt/Business Advance.
10. Disallowance of Leave Encashment Provision under Section 43B(f).

Detailed Analysis:

1. Disallowance of Minimum Guarantee (MG) Royalty Payments:
The Revenue sought to reverse the CIT(A)'s deletion of the disallowance of ?19,62,00,000/- claimed as MG royalty payments, treating it as capital expenditure. The CIT(A) had allowed it as revenue expenditure, considering the assessee's business nature where music is treated as raw material. The Tribunal upheld the CIT(A)'s decision, citing precedents where such payments were considered revenue expenditure due to their integral role in the profit-earning process. The Tribunal also rejected the Revenue's argument for per cassette-wise payment, emphasizing that the expenditure's nature remains revenue irrespective of the payment mode.

2. Disallowance of Advertisement/Sales Promotion, Consultancy, Ad Hoc, and Recording Expenses:
The Revenue's appeal to maintain a 10% disallowance was rejected. The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 2%, consistent with previous Tribunal orders. The Tribunal noted that the Assessing Officer had already accepted 90% of the claims, and thus, the CIT(A)'s decision to limit the disallowance to 2% was justified.

3. Classification of Training and Development Expenses:
The Tribunal affirmed the CIT(A)'s decision to treat ?19,82,000/- of training and development expenses as revenue expenditure. This decision was based on the precedent set by the Allahabad High Court in Motor Sales vs. Commissioner of Income Tax (1973) 87 ITR 595 (All), which classified similar expenses as revenue in nature.

4. Disallowance of Stock Shortage/Breakage:
The Revenue's appeal against the deletion of ?54,00,000/- disallowance for stock shortage/breakage was dismissed. The Tribunal noted that the corresponding receipts from scrap sales had been accepted, and previous Tribunal decisions had ruled in favor of the assessee on this issue.

5. Addition on Account of Rent:
The Tribunal remanded the issue of ?9,90,000/- rent addition back to the Assessing Officer for fresh verification. The assessee claimed a downward revision of rent with a sister concern, which required factual verification.

6. Disallowance of Turnover Mismatch in TDS Certificates and TDS Credit:
The Tribunal upheld the CIT(A)'s decision to direct the Assessing Officer for factual verification and reconciliation of turnover mismatch in TDS certificates and to allow TDS credit in the year the corresponding income is offered for assessment. The Tribunal acknowledged the technical argument but emphasized the need for accurate computation.

7. Disallowance of Expenditure on Share Investments and Interest-Free Loans:
The Tribunal rejected the Revenue's appeal, noting that the assessee had no exempt income in the relevant year, and the interest-free loans were covered by sufficient interest-free funds. The CIT(A)'s decision was based on the Bombay High Court's ruling in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom).

8. Disallowance of Administrative Expenditure under Section 14A:
For assessment year 2006-07, the Tribunal upheld the CIT(A)'s restriction of administrative expenditure disallowance to 1% of exempt income, amounting to ?23,230/-. The Tribunal cited the Bombay High Court's judgment in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT 328 ITR 81 (Bom), which limited Rule 8D's applicability to post-2008-09 assessments.

9. Disallowance of Bad Debt/Business Advance:
The Tribunal dismissed the Revenue's appeal against the deletion of ?46,65,000/- disallowance for bad debt/business advance, referencing the Supreme Court's decision in T.R.F. vs. Commissioner of Income Tax (2010) 323 ITR 396 (SC), which clarified that actual bad debt need not be proven post-1989.

10. Disallowance of Leave Encashment Provision under Section 43B(f):
For assessment year 2010-11, the Tribunal remanded the issue of leave encashment provision disallowance of ?13,52,190/- back to the Assessing Officer, pending the Supreme Court's final decision in Exide Industries Ltd. vs. Union of India (2007) 292 ITR 470 (Cal).

Conclusion:
The Revenue's appeals (ITA No.470 to 473/Kol/2017) were dismissed, while the assessee's appeals (ITA No.309/Kol/2017) were dismissed, and ITA No.310/Kol/2017 & ITA No.312/Kol/2017 were partly allowed for statistical purposes and partly allowed, respectively.