2023 (11) TMI 1192 - AT - Income Tax

MAT computation u/s 115JB - quantification the brought forward book losses or unabsorbed depreciation in arriving at the taxable book profits of the appellant for the concerned assessment year - HELD THAT - As we find that assessee has submitted calculation of book profit and losses according to form number 29B certified by the chartered accountant as per letter dated 28/4/2023 wherein the computation of details of brought forward losses/unabsorbed depreciation as per books of accounts is certified by the chartered accountant. Therefore, we direct the learned assessing officer to compute the book profit in accordance with the law and grant deduction to the assessee of brought forward losses as per books of accounts or unabsorbed depreciation as per books of accounts whichever is less. The computation of the book profit made by the assessee shows that the net profit as per profit and loss account is ₹ 61,405,646/-. If brought forward of unabsorbed depreciation, which is lower of the brought forward losses and unabsorbed depreciation of ₹ 315,453,321/ is allowed, the book profit would be, subject to taxation under section 115JB of the act is Rs Nil. Even if all the issues with respect to book profit computation were held against assessee, the Income U/s 115JB would be Nil. Therefore we set-aside the issue back to the file of the learned assessing officer to compute the book profit or loss after verification of the above certificate in form no 29B u/s 115JB of the Act, after giving an opportunity of hearing to the assessee. Addition u/s 68 being share application money received by the assessee - assessee has received share application money through bank remittance from NSR PE Mauritius LLC - AO held that it is not accepted that any wise business-persons will invest huge money in such apparently loss making company and held that the nature and source of funds received by the assessee have not been offered to his satisfaction - HELD THAT - Irrespective of the newspaper reports, irrespective of violation of FEMA , unless it affects the issue under The Income tax Act, addition under section 68 of the income tax act is required to be tested based on identity and creditworthiness of the investor as well as the genuineness of the transaction. Before us, the revenue authorities are only aggrieved with the genuineness of the transaction. Despite our query, we have not received any communication such as due diligence made by the PE investor, which is the main price negotiation therefore it is clear that such an investor does not make investments without appropriate due diligence. Further correspondences made with investor are also not shown to us. It is also not shown that how the investors were identified and invited for making investments. However, investor is stated to be a leading PE investor in the country, but it is clear that such investors make investments after putting lot of activities, price negotiation, etc. Therefore, this issue needs to be seen in totality of the facts. Absence of one evidence or presence of some other evidence is crucial to decide the genuineness of the transaction. As the coordinate bench has already directed the revenue in the order for the earlier assessment year, therefore, we set-aside this issue back to the file of the learned assessing officer to consider all these evidences furnished by the assessee, information received from Mauritius tax authorities, investment strength of the investor, investment made by the investor etc. Thus, ground numbers 1 3 of the appeal of the learned AO are restored back to the file of the learned AO to examine the transaction as per parameters of section 68. Nature of expenditure - animated character episodes and in-house cost of production programme - direction of CIT A to consider 85% of the amount as revenue expenditure and the rest of the amount to be allowed over a period of three years in three equal installments - AO holds that assessee has acquired perpetual rights and the same constitutes intangible assets to be categorized as a capital asset and therefore 85% of the cost cannot be allowed as revenue expenditure - HED THAT - Sum representing the spending on animated character episodes needs to be allowed fully in the current year. These episodes are produced by third party at a fixed cost per episode and provided to the company monthly for telecasting on the channels. Thus, it is clear that that animated character episodes are telecast on the channel in the same month of delivery. Therefore to that extent the learned assessing officer is directed to follow the order of the coordinate bench for assessment year 2008- 2009 2017 (5) TMI 527 - ITAT MUMBAI and allow the cost which has been telecast in the same year. With respect to the in-house production cost should also receive the same treatment i.e. that if the in-house production programs are telecast, the cost of such production should be allowed to the assessee in the year in which it is telecast. Therefore, we hold that the direction of the learned CIT A to consider 85% of the amount as revenue expenditure and spread the rest of the amount over a period of three years in three equal installments is without any logic and support of law. The revenue expenditure incurred by the assessee should be allowed in the year in which those expenses are incurred and if there is capital expenditure than they are subject to depreciation. There cannot be any formula to allow expenditure in various years in equal installments because it does not have support of law. Whenever the honourable courts have taken such a view is only because of the concession of the assessee as alternative. Decision of Madras Industrial Investments corporation 1997 (4) TMI 5 - SUPREME COURT also supports this view where in it has been held that Ordinarily, the revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. Facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. Disallowance u/s 40 (a) (ia ) - TDS u/s 194C or 194J - carriage fees and channel placement fees - claim of the revenue is that those payments are made for use/right to use of process are royalty as per explanation 6 to section 9 (1) (vi) of the act and therefore such payments are covered under section 194J - claim of the assessee is in this case the tax has been deducted under section 194C of the act at the rate of 1% whereas the learned assessing officer felt that it should have been at the rate of 10% under section 194J - HELD THAT - This issues is covered in favour of the assessee by the decision of NGC Networks (India) Pvt. Ltd 2018 (5) TMI 1148 - BOMBAY HIGH COURT wherein it has been held that a party cannot be called upon to perform an impossible Act i.e. to comply with a provision not in force at the relevant time but introduced later by retrospective amendment. Honourable court relied upon the co-ordinate bench decision in the case of Cello Plast 2012 (8) TMI 527 - BOMBAY HIGH COURT wherein the legal maxim lex non-cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform) was applied. Honourable High court noted that Explanation 6 to Sec.9(1)(vi) was introduced in 2012 w.r.e.f 1976. Therefore, it was held that the assessee could not have contemplated at the time of deduction of tax u/s 194C that deduction of tax would be required u/s 194J due to future retrospective amendment. It was also noted that Sec.40(a)(ia) refers to Explanation 2 to Sec.9(1)(vi) and not Explanation 6 to Sec.9(1)(vi) for the meaning of royalty. Thus, Honourable High court held that the disallowance of expenditure u/s 40(a)(ia) can only be if the payment is 'Royalty' in terms of Explanation 2 to Sec.9(1)(vi). Since, the payment made for channel placement as a fee, is not royalty in terms of Explanation 2 to Sec.9(1)(vi), no disallowance of expenditure can be made u/s 40(a)(ia). No infirmity can be found in the order of the ld CIT A . Accordingly, ground number 5 7 of the appeal of the learned assessing officer is dismissed. Addition being the surplus on demerger of entertainment channel undertaking to the book profit computed u/s 115JB - HELD THAT - Appropriation account is the part of profit and loss account. If the same amount is credited to the profit and loss account, why it is not considered for the purpose of provisions of section 115JB of the act is not comprehensible. Undisputedly the assessee has sold its general entertainment channel business and has earned a profit, which is credited to the profit and loss account whether below the line or above the line does not make any difference. Further, there is no direction of the honourable High Court approving the scheme that the amount requires to be credited below the line and not in the normal profit and loss account. Further we found support from the decision of Varun Corporation 2023 (8) TMI 884 - BOMBAY HIGH COURT where in loss arising on demerger was not allowed to be added to increase the book profit. In view of above, we do not find any infirmity in the order of the learned CIT A. Accordingly we dismiss ground number 1 of the appeal of the assessee. Addition to the book profit of amount representing provision for doubtful advances to the book profit - HELD THAT - As claim before us that the book debt is not an asset which can diminish in value and hence the provisions thereof is not covered by the requirement of disallowance of such provision for deduction to the value of the asset. We do not find any reason to agree with the argument of the learned authorized representative because the book debts are the assets of the company and by making a provision for bad and doubtful debts, there is a provision of diminution in the value of such book assets. Accordingly we do not find any infirmity in the order of the learned CIT A and ground number 2 of the appeal is dismissed. Addition to the book profit on account of disallowance u/s 14A - HELD THAT - As there is no exempt income earned during the year. If there is no exempt income earned during the year, there cannot be any disallowance under section 14 A of the act for the impugned assessment year. Therefore, naturally, there is no adjustment required to the book profit as such. Disallowance of legal and professional fees paid to Ernst young for services rendered in connection with providing assistance in relation to the demerger of general entertainment channel business of the appellant - AO applying the provisions of section 35DD of the act disallowed the above sum and allowed 1/5th of such expenditure as deduction - HELD THAT - We find that the expenditure incurred by the assessee admittedly is in case of demerger. According to provisions of section 35DD if the assessee incurs any expenditure only and exclusively for the purpose of demerger of an undertaking, the assessee shall be allowed deduction of an amount equal to 1/5 of such expenditure for each of the five successive previous years beginning with the previous year in which demerger takes place. Accordingly, the lower authorities are correct in applying the provisions of section 35DD of the act. However, the assessee should be allowed balance 4/5th of such expenditure in successive previous years. Mismatch between the books of the assessee as well as in information contained in form number 26AS - HELD THAT - Many of the parties did not respond and to many of the parties the enquiry letters could not be served. The outcome of this enquiry was made known to the assessee. Despite this, no effort was made to reconcile the amount, therefore, we do not find any reason to interfere in the findings of the lower authorities. However, it has been claimed before us that there is no transaction entered into by the assessee with some of the parties. Further, it was stated that the total receipts shown by the assessee is ₹ 78.23 crores whereas the AIR information is with respect to only ₹ 16.49 crores. We restore ground back to the file of the learned assessing officer directing the assessee to produce the reconciliation of the above amount and to show that how the assessee says that it has not transacted with some of the parties. Assessee is also directed to show whether in the total receipts shown in books of accounts, all the receipts mentioned in form no 26 As is included. Therefore, one more opportunity is granted to the assessee to explain the difference with the parties with which it has transacted.

Summary

The judgment involves the following Issues:

1. Addition to book profits due to surplus on demerger.
2. Addition to book profits due to provision for doubtful advances.
3. Disallowance under section 14A.
4. Quantification of brought forward book losses or unabsorbed depreciation.
5. Deduction of legal and professional fees under section 35DD.
6. Form 26AS mismatch.
7. Content cost amortization.
8. Disallowance under section 40(a)(ia) for carriage fees/channel placement fees.
9. Addition under section 68 for share application money.

Issue 1: Addition to Book Profits Due to Surplus on Demerger
The assessee argued that the surplus on demerger should not be added to book profits under section 115JB. The Tribunal upheld the CIT(A)'s decision, noting that the surplus arising from the transfer of the undertaking under demerger should be included in the book profits as per the provisions of section 115JB.

Issue 2: Addition to Book Profits Due to Provision for Doubtful Advances
The Tribunal confirmed the addition of Rs. 1,42,63,197 representing provision for doubtful advances to the book profits under section 115JB, citing the retrospective amendment to section 115JB which requires such provisions to be added back.

Issue 3: Disallowance under Section 14A
The Tribunal ruled that since there was no exempt income earned during the year, no disallowance under section 14A could be made. Consequently, no adjustment to the book profits under section 115JB was required.

Issue 4: Quantification of Brought Forward Book Losses or Unabsorbed Depreciation
The Tribunal directed the AO to compute the book profits by deducting the lower of the brought forward book losses or unabsorbed depreciation as per the books of accounts. The Tribunal noted that the lower amount was Rs. 31,54,53,321, which should be allowed after verification.

Issue 5: Deduction of Legal and Professional Fees under Section 35DD
The Tribunal upheld the CIT(A)'s decision to apply section 35DD, allowing only 1/5th of the legal and professional fees paid for demerger assistance in the current year and directing the balance to be amortized over the next four years.

Issue 6: Form 26AS Mismatch
The Tribunal restored the issue of mismatches between the books of accounts and Form 26AS to the AO for verification. The assessee was directed to reconcile the discrepancies and provide necessary explanations.

Issue 7: Content Cost Amortization
The Tribunal directed the AO to follow the decision in the assessee's case for AY 2008-09, allowing the cost of animated character episodes and in-house production costs as revenue expenditure in the year they were telecast. The remaining costs were to be amortized over three years.

Issue 8: Disallowance under Section 40(a)(ia) for Carriage Fees/Channel Placement Fees
The Tribunal ruled in favor of the assessee, citing the Bombay High Court's decision in NGC Networks (India) Pvt. Ltd., which held that retrospective amendments cannot impose a TDS liability for past years. The disallowance under section 40(a)(ia) was deleted.

Issue 9: Addition under Section 68 for Share Application Money
The Tribunal restored the issue of addition under section 68 for share application money received from NSR PE Mauritius LLC to the AO for fresh examination. The AO was directed to consider all evidence and information received from the Mauritius tax authorities and decide the issue afresh.

Conclusion
The appeals of both the assessee and the AO for AY 2011-12 and 2012-13 were partly allowed, with several issues restored to the AO for fresh examination and verification.