2015 (9) TMI 1186 - HC - Income Tax

Print distribution and the subsequent compensation paid due to the loss incurred by the theater owners in exhibiting the films Kuselan and Kathanayakudu by the assessee/appellant - revenue v/s capital expenditure - whether the payment made by the assessee to PSEL, by way of compensation as goodwill gesture to maintain its goodwill, should be treated as revenue or capital in nature? - Held that - The Tribunal holds that payments made by the assessee is to protect its goodwill in the market and even if the payment is believed to be genuine, even then the same has to be held to be capital in nature and, therefore, cannot be allowed under Section 37 of the Act. However, on the other hand, the Tribunal holds that the assessee had made the payment in the form of compensation to stay afloat in the business. This would satisfy the contention of the assessee that the payment was made for the purpose of staying afloat in the business, made voluntarily and it is a commercial expediency. This finding of the Tribunal, on the face of it, appears to be in support of the assessee that because of commercial expediency, to stay afloat in business, the said amount was paid. The above findings of the Tribunal clearly depicts the dual stand taken by the Tribunal in its order and a paradox. The Tribunal has taken divergent views, one by holding that the expenditure is capital in nature, supporting the department and, on the other hand, has reasoned that it is compensation paid to stay afloat in business, meaning thereby commercial expediency. In any event, the assessee has, under the agreement, shown the reason for payment in question and we have extracted the said reason in the earlier part of the order. However, the said aspect has not been discussed by the Tribunal. It is an issue on fact on which the Tribunal ought to have given its finding as to whether the agreement and the payment justified the plea of commercial expediency to stay afloat in the business. The finding of the Tribunal ought not to be mutually destructive, one that supports the view of the Department and the other leaning on the view of the assessee. We, therefore, hold that on facts the Tribunal should be called upon to address the issue as to whether the payment made by the assessee, as goodwill, is capital in nature or is it a payment made for the purpose of staying afloat in business as a measure of commercial expediency. This Court is of the considered opinion that the Tribunal has to record its finding on these questions of fact and, therefore, the matter should be remanded to the Tribunal. Thus without going into the questions of law raised, this appeal is disposed of and the matter is remanded to the Tribunal for fresh consideration in the light of the discussion as above. - Decided in favour of assessee for statistical purposes.

Issues Involved
1. Whether the payments made by the appellant to M/s. Pyramid Saimira Entertainment Ltd. (PSEL) are capital expenditures and thus not deductible under Section 37 of the Income Tax Act, 1961.
2. Whether the Rs. 1,50,00,000/- paid to PSEL under the Settlement Agreement dated 13.09.2008 is a revenue expenditure deductible under Section 37.
3. Whether the payments to PSEL under the Settlement Agreement amount to a purchase of goodwill.
4. Whether the Tribunal erred in not following precedents set by this Court in similar cases.
5. Whether the Tribunal erred in questioning the genuineness of the payment made to PSEL.
6. Whether the Tribunal's findings are perverse and liable to be set aside.

Detailed Analysis

1. Nature of Payments to PSEL: Capital or Revenue Expenditure
The appellant argued that the payment of Rs. 1,50,00,000/- to PSEL was a revenue expenditure made as a goodwill gesture to maintain business relations and not as a purchase of goodwill. The Tribunal, however, concluded that the payment was made to protect the appellant's goodwill in the market, and therefore, it should be considered as capital expenditure. The Tribunal's decision was based on the premise that the payment was made voluntarily or due to market pressure, not out of any legal obligation.

2. Deductibility Under Section 37
The appellant contended that the payment was made in the ordinary course of business to compensate distributors and exhibitors for losses incurred from the theatrical release of the films "Kuselan" and "Kathanayakudu." The CIT (Appeals) initially ruled in favor of the appellant, stating that the payment was a reduction in sale consideration and a goodwill gesture, not a purchase of goodwill. However, the Tribunal overturned this decision, asserting that the payment was capital in nature and not deductible under Section 37.

3. Purchase of Goodwill
The Tribunal concluded that the payment to PSEL was akin to a purchase of goodwill. The appellant argued that the payment was made to protect its business reputation and maintain good relations with distributors and exhibitors, which is a common practice in the film industry. The Tribunal, however, did not accept this argument and held that the payment should be treated as capital expenditure.

4. Precedents and Legal Principles
The appellant cited several precedents, including decisions in Amarjothi Pictures, CIT vs. Gobald Motor Services, and CIT vs. Associated Electrical Agencies, to argue that the expenditure should be considered as revenue expenditure. These cases established that expenditures made for commercial expediency and to maintain business operations should be deductible. The Tribunal, however, distinguished the facts of the present case from these precedents and did not find them applicable.

5. Genuineness of the Payment
The Tribunal questioned the genuineness of the payment, stating that the appellant had not shown that the payments were actually received by the persons who suffered the losses. This cast doubt on the legitimacy of the payment, further supporting the Tribunal's decision to treat it as capital expenditure.

6. Perverse Findings
The appellant argued that the Tribunal's findings were perverse and should be set aside. The Tribunal's decision was based on its interpretation of the nature of the payment and its applicability under Section 37. The appellant contended that the payment was made out of commercial necessity to maintain business relations and should be considered as revenue expenditure.

Conclusion and Remand
The High Court noted the contradictory findings of the Tribunal, which both supported and opposed the appellant's claim. The Court emphasized the need for a clear determination of whether the payment was made for commercial expediency to stay afloat in business or if it was a capital expenditure. Consequently, the matter was remanded to the Tribunal for fresh consideration, instructing it to address the issue of whether the payment was made as a measure of commercial expediency and to provide a clear and consistent finding. The appeal was disposed of without addressing the questions of law, and no costs were ordered.

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