2017 (1) TMI 1340 - AT - Income Tax

Taxability of amount payable to Kaledoscope Entertainment (KE) - Held that - Income had crystallized during the year and the assessee was supposed to pay taxes in that year only. We agree with the FAA that same income cannot be taxed twice. So, there should not be any addition of the impugned amount in any other year. - Decided against assessee. Disallowance under Rule 9A of the Income tax Rule 1962(Rules) - expenses incurred under the head advertisement and publicity of the movies in respect of movies Fanna and Dhoom-2 - Held that - As decided in assessee s own case in earlier years movies were released before 90 days from the end of the previous year. A perusal of the chart exhibited on page-542 of the paper book show that the assessee has shown aggregate income which is much higher than the cost of production of these movies. As the facts are in line with the provisions of Rule 9A(2), the entire cost of production deserve to be allowed. Accordingly, we direct the AO to delete the enhancement Enhancement has been made on the ground that such publicity expenses are not allowable as per Rule 9A and 9B of the Rules. It is the say of the Counsel that Rule 9A and 9B do not preclude the assessee to claim such genuine business expenses u/s. 37(1) of the Act. Since only ground for disallowing publicity expense is that such expenses are not allowable as per Rule 9A,9B, we find force in the submission of the Counsel that such expenses can be allowed u/s. 37(1) of the Act. However, since the AO has not considered this aspect as the additions have been made by the Ld. CIT(A) during the appellate proceedings, in the interest of justice and fair play, we restore this issue back to the files of the AO. The AO is directed to verify the claim of publicity expenses vis-avis business of the assessee for the year under consideration. The AO should also verify how much publicity expenses have been recovered by the assessee and credited to its Profit and loss account for the year under consideration. The assessee is directed to furnish necessary details to substantiate its claim of publicity expenses. - Decided in favour of assessee for statistical purposes. Disallowance made under Rule 9A/9B of the Rules - expenditure incurred by the assessee for getting the prints of old movies - Held that - We find that the addition was made with regard to the expenditure incurred by the assessee for getting the prints of old movies. The objection of the departmental authorities is that the expenditure was not for the movies released during the year. The assessee has claimed that income arising from movies had already been disclosed in earlier years. We find merit in the alternate argument advanced by the assessee that matter should be restored back to the file of the AO for fresh adjudication. He is directed to verify as to whether the assessee had offered the income of the movies in the earlier years and had incurred expenses during the year for getting new prints. If it is found that the income has already been taxed, there is no justification for not allowing the expenditure. Third ground stands allowed in favour of the assessee, in part. Disallowance of publicity cost incurred on regional film - Held that - We find that assessee had distributed a regional film, that after deducting publicity cost it paid the balance amount to the producer of the film, that it did not route the transaction through its books of accounts, that the payment was made through banking channel, that the recipient producer had admitted to have received the disputed amount and had shown in his return of income. Considering these facts, we are of the opinion that FAA was not justified in partly upholding the disallowance made by the AO. When the assessee had not claimed any deduction, there was no justification for making any disallowance. Addition of remuneration paid to the directors - Held that - It is found that the AO or the FAA have not doubted the ability of PC in rendering services to the assessee, that an independent agency has also certified that she was capable of handling the work related with movies, that she had shown the money received from the assessee in her individual return of income, that she had paid taxes at maximum marginal rate for the remuneration received by her. Considering these facts and the above referred order of the Tribunal, we are of the opinion that the AO/FAA was not justified in disallowing remuneration paid to the directors. Addition about the satellite income - Held that - While deciding the appeal for the AY.2006-07 Tribunal has dealt the identical issue held a careful perusal of the agreement show that the licencee i.e. SET Satellite Singapore Ltd. acquired rights to exhibit the movies 24 times during the licence period and since the licence period is for four years the SET Satellite could exhibit the movies not more than six times in each year which means that the transferee has 25% right of exhibiting the moves in each year which further means that the right only for 25% of the licence fee has accrued to the assessee in the first year. Therefore, the plea of the AO that the entire income has accrued to the assessee as soon as the agreements have been executed is not correct. The licence fee did not accrue to the assessee as per terms of the agreement. The taxability of the licence fee has to be decided on the provisions of the contract. As per the agreement the transferee has only the right to exhibit the films over a period of four years as the agreement is that of a lease the assessee has rightly and correctly spread the licence fee over a period of four years. The reliance placed by Ld. DR of Rule 9A appears to be misplaced as Rule 9A has no relation with the method of accounting as it nowhere deals with section 145 of the Act. Considering the entire facts in the light of the SET Satellite agreement, in our considerate view, the addition deserves to be deleted. Disallowance of 20% on junior artists/technicians/dress, costume, make-up, dubbing, sound recording, mixing, music recording, dance expenses etc. - Held that - Respectfully, following the assessee s own case for earlier year we delete the addition made on account of payment made to junior artists and we restrict the disallowance to 5% for other expenses. Last Ground of appeal is decided in favour of the assessee, in part. Transfer of funds from one division to another as profit of the company - Held that - We find that the assessee had filed details of the revenue arising out of distribution of the above-mentioned two films, that it was following a particular system of accounting, that consolidated revenue of both the films was offered for taxation, that the FAA had verified the Ledger accounts and the bank statements of the DD as well as the HO. We agree that the accounting system followed by the assessee is different from the regular system maintained by other assessees. The AO has nowhere proved that total revenue of these two films was ₹ 12.91 crores ₹ 8.34 crores ₹ 9.95 crores. No incriminating document was found or impounded during the survey operation that could lead to the conclusion that the total revenue of these films was more than the income shown by the assessee in its regular books of accounts. In our opinion, the FAA had rightly observed that the AO had wrongly interpreted the transfer of funds from one division to another as profit of the company. Therefore, we hold that the order of the FAA does not suffer from any legal or factual infirmity. - Decided against revenue Addition made on account of print cost - Held that - We find that the assessee could not produce all the relevant documents at the time of assessment, that it had furnished details of ₹ 3.14 crores only, that later on, before the FAA, it filed the remaining evidences, that the FAA called for remand report, that in the remand report the AO did not adversely comment about the authenticity of the evidences. The expenditure incurred by the assessee is a legitimate business expenditure and is allowable as per the provisions of the Act. As the assessee had failed, at the time of assessment, to fully support the claim made by it, so, the AO had rightly restricted the expenditure to ₹ 3.14crores. But, there was no justification in not allowing the remaining amount of ₹ 1.10 crores once the assessee had produced the necessary evidences. We are of the opinion that there is no infirmity in the order of the FAA. So, upholding his order, we dismiss third ground. Additions made under the head unaccounted receipts - Held that - We find that assessee had distributed a regional film, that after deducting publicity cost it paid the balance amount to the producer of the film, that it did not prove the transaction through its books of accounts, that the payment was made through banking channel, that the recipient producer had admitted to have received the disputed amount and had shown in his return of income. Considering these facts and discussion held in earlier paragraphs, we are of the opinion that the AO was not justified in treating the income as concealed income. Depreciation on bungalow - Held that - The FAA after considering the old records and the order of the Tribunal had given a finding of fact that the premises was being used as office premises in the year. Nothing adverse to the said fact was brought on record by the department. Therefore, in our opinion, there is no need to interfere with the order of the FAA. Disallowance of expenses not incidental to the business of the assessee - Held that - We find that in the remand report submitted to the FAA, the AO had not discussed the issue as to how the then AO had arrived at the figure of ₹ 70,104/-. He had also not explained as to whether the assessee had claimed the said expenditure in the month of June,2006. In absence of these two vital facts there was no justification for making the addition of filing an appeal before us. Holding that the order of the FAA does not suffer from any infirmity. Addition u/s 40(A)(3) - Held that - We find that the AO had made the addition considering the consolidated figures appearing in the tally software with regard to expenses incurred by the assessee, that he did not verify the vouchers before invoking the provisions section 40A(3), that the assessee had claimed that no expenditure was more than the prescribed limit, that the FAA had verified the vouchers and books of accounts, that nothing was brought before us to negate the finding of fact given by him about non -contravention of the section 40A(3) of the Act. Addition made u/s.69C - Held that - We find that the assessee was maintaining its books of accounts regularly and was following a peculiar system, that after completion of the movie the account of each movie was merged in the main account. The AO without understanding the system followed by the assessee had invoked the provisions of section 69C Fluctuation of foreign currency loss - Held that - We find that the FAA has given a categorical finding of fact that the foreign exchange fluctuation loss related to expired contracts. Nothing was brought over notice to prove otherwise. Therefore, we see no need to interfere with the order of the FAA because he has followed the provisions of rule 115 of the rules and the mandate of AS-11. Confirming his order, we dismiss GOA 10. Disallowance u/s.40(a)(i) - Held that - FAA had partly allowed the appeal of the assessee, that it had directed the AO to make verification about the rates of deducting tax at source and to allow the expenses only after verification. In our opinion, the order of the FAA does not suffer from any infirmity. Confirming the same, we dismiss the ground raised by the AO. Disallowance of expenses on credit cards - Held that - We find that similar issue has been decided in favour of the assessee by the order of the Tribunal for the earlier year. We also agree with the argument raised by the assessee that in case of a private Ltd company, there cannot be any personal expenses. Considering the above, we uphold the orders of the FAA

Summary

Issues Involved:
1. Taxability of Amount Payable to Kaledoscope Entertainment (KE)
2. Disallowance under Rule 9A of the Income Tax Rules
3. Disallowance under Rule 9A/9B of the Income Tax Rules
4. Disallowance of Publicity Cost
5. Remuneration Paid to Directors
6. Addition of Satellite Income
7. Disallowance on Marketing Cost and Other Costs under Rule 9B
8. Ad Hoc Disallowance on Various Expenses
9. Deletion of Addition of ?9.95 Crores
10. Addition Made on Account of Print Cost
11. Addition on Unaccounted Receipts
12. Depreciation on Bungalow
13. Disallowance of Expenses Not Incidental to Business
14. Disallowance under Section 40A(3)
15. Addition under Section 69C
16. Foreign Currency Fluctuation Loss
17. Disallowance under Section 40(a)(i)
18. Disallowance of Expenses on Credit Cards

Detailed Analysis:

1. Taxability of Amount Payable to Kaledoscope Entertainment (KE):
The AO treated ?3.14 crores as unexplained cash credit under Section 68 of the Act, asserting that it should be clubbed under sundry creditors. The FAA upheld the AO's decision, reasoning that the income had crystallized in the year under consideration and should be taxed accordingly. The Tribunal confirmed the FAA's order, stating that the income had accrued and should be taxed in the year of accrual.

2. Disallowance under Rule 9A of the Income Tax Rules:
The AO disallowed ?1.62 crores incurred on advertisement and publicity expenses for movies Fanna and Dhoom-2, considering them as production expenses. The FAA dismissed the ground raised by the assessee. The Tribunal, following its earlier decision for AY 2006-07, allowed the expenses under Section 37(1) of the Act, directing the AO to verify the claim.

3. Disallowance under Rule 9A/9B of the Income Tax Rules:
The AO disallowed ?69.83 lakhs for print costs against old movies, treating them as prior period expenses. The FAA confirmed the disallowance. The Tribunal restored the matter to the AO for fresh adjudication, directing verification of whether the income had been offered for taxation in earlier years.

4. Disallowance of Publicity Cost:
The AO added ?9.40 lakhs as concealed income, which the assessee claimed was collected on behalf of the producer and not reflected in the books. The FAA verified the ledger accounts and held that the amount was not unaccounted receipts. The Tribunal agreed with the FAA, stating that no addition could be made when the expenditure was not claimed.

5. Remuneration Paid to Directors:
The AO capitalized ?7.07 crores out of ?9 crores paid as professional fees to directors, treating it as cost of production. The FAA upheld the AO's decision. The Tribunal, following its earlier decision for AY 2006-07, allowed the remuneration, stating that the directors' services were reasonable and commensurate with their contributions.

6. Addition of Satellite Income:
The AO added ?18 crores as satellite income for movies Dhoom-2 and Kabul Express, considering the entire amount as accrued in the year of agreement. The FAA allowed relief of ?9.40 crores. The Tribunal, following its earlier decision for AY 2006-07, held that the income should be spread over the license period and deleted the addition.

7. Disallowance on Marketing Cost and Other Costs under Rule 9B:
The AO disallowed ?6.80 crores, treating it as unexplained expenditure. The FAA allowed ?4.90 crores as deductible expenses under Rule 9B. The Tribunal, following its earlier decision, allowed the expenses under Section 37(1) of the Act.

8. Ad Hoc Disallowance on Various Expenses:
The AO made ad hoc disallowances on various expenses due to lack of proper records. The FAA upheld the disallowances. The Tribunal, following its earlier decision, deleted the addition for junior artists and restricted other disallowances to 5%.

9. Deletion of Addition of ?9.95 Crores:
The AO added ?9.95 crores as unaccounted sales. The FAA deleted the addition, stating it was a transfer entry between divisions. The Tribunal upheld the FAA's order, confirming that it was a transfer of funds, not profit.

10. Addition Made on Account of Print Cost:
The AO disallowed ?1.10 crores for print costs, allowing only ?3.14 crores. The FAA allowed the full amount after verification. The Tribunal upheld the FAA's order, stating there was no justification for not allowing the remaining amount.

11. Addition on Unaccounted Receipts:
The AO added ?9.40 lakhs as unaccounted receipts. The FAA deleted the addition, verifying the transactions. The Tribunal upheld the FAA's decision, confirming that the amount was not concealed income.

12. Depreciation on Bungalow:
The AO disallowed depreciation on the bungalow, considering it not used for business. The FAA allowed the depreciation, verifying its use as an office. The Tribunal upheld the FAA's decision, confirming the bungalow's use for business.

13. Disallowance of Expenses Not Incidental to Business:
The AO disallowed ?70,104 as non-business expenses. The FAA deleted the disallowance, finding no discrepancy in the books. The Tribunal upheld the FAA's decision, confirming the expenses were incidental to business.

14. Disallowance under Section 40A(3):
The AO disallowed ?9.23 lakhs for cash payments exceeding ?20,000. The FAA deleted the disallowance, verifying the vouchers. The Tribunal upheld the FAA's decision, confirming no contravention of Section 40A(3).

15. Addition under Section 69C:
The AO added ?7.35 lakhs as unexplained expenditure. The FAA deleted the addition, understanding the book entries. The Tribunal upheld the FAA's decision, confirming the amount was explained.

16. Foreign Currency Fluctuation Loss:
The AO disallowed ?17.04 lakhs as capital expenditure. The FAA allowed the loss, considering it period cost. The Tribunal upheld the FAA's decision, confirming the loss was allowable.

17. Disallowance under Section 40(a)(i):
The AO disallowed ?93.71 lakhs for non-deduction of TDS. The FAA partly allowed the appeal, directing verification. The Tribunal upheld the FAA's decision, confirming the expenses were allowable after verification.

18. Disallowance of Expenses on Credit Cards:
The AO disallowed ?46.81 lakhs as non-business expenses. The FAA deleted the disallowance, considering FBT. The Tribunal upheld the FAA's decision, confirming the expenses were business-related.

Conclusion:
The Tribunal's detailed analysis addressed each issue comprehensively, often following precedents set in earlier years. The decisions largely favored the assessee, emphasizing proper verification and adherence to established accounting principles.