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TMI Blog2015 (9) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tested by the Assessing Officer? vi) Whether the Appellate Tribunal's findings are perverse and therefore liable to be set aside? 2. The facts, in a nutshell, are as hereunder :- The issue relates to 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. 3. The appellant is engaged in the business of production and distribution of movies/feature films. For the assessment year 2009-2010, the appellant filed its return of income on 30.09.2009 admitting a total income of ₹ 1,40,59,210/-, which was processed under Section 143 (1) of the Income Tax Act (for short 'the Act'). On 24.3.2011, the appellant filed a revised return admitting a total income of ₹ 1,33,59,740/-. The case of the appellant was selected for scrutiny and notice under Section 143 (2) of the Act was issued to the appellant. 4. It is the further case of the appellant that during the relevant assessment year, the appellant produced a film 'Kuselan' in Tamil and 'Kathanayakudu' in Telugu, which starred Rajinikanth and others. The rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted by the learned counsel for the assessee that VM has also made certain payment to PSEL, vide agreement dated 8.9.08 in a sum of ₹ 75 Lakhs as a goodwill gesture citing commercial expediency. 7. During the course of scrutiny proceedings, the Assessing Officer called upon the assessee to explain how the amount paid to PSEL in terms of the Settlement Agreement dated 13.9.08 could be claimed as revenue expenditure in terms of Section 37 of the Act and he sought to disallow the same as a payment made towards goodwill and that the said amount has to be treated as expenses, capital in nature. The assessee gave a detailed explanation to support the said payment as a payment made as goodwill gesture to save its business and it is a commercial expediency. However, the said explanation was was rejected by the Assessing Officer, who disallowed the said amount, vide adjudication order dated 22.12.2011. 8. Aggrieved by the said adjudication order, the assessee preferred appeal before the CIT (Appeals), who held in favour of the assessee stating that it is a case of sales-return invoking Section 9 of the Sale of Goods Act. It was further held by the CIT (Appeals) that the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goodwill gesture is one which results in goodwill over a long period of time whereas a goodwill is a crystallised item, price paid in excess of assets over liabilities. Hence a payment made as a goodwill gesture cannot be equated with goodwill, the former is a revenue item and the latter is a capital item as per the accounting methods and the Income Tax Act. Since the payment made of ₹ 150 lakhs on the commercial failure of the film is only to compensate the buyer PSEL and also to protect the reputation of the producer - appellant, the same cannot be held as a 'goodwill but it is only a sales-return or a discount, as squarely covered by S.9 of the Sale of Goods Act and Accounting Standard 9. Moreover, this is not the first time of such instances in the film industry, there are precedents. Hence, the AO is directed to delete the addition. 9. On appeal, at the behest of the Department, the Tribunal came to hold that the assessee/appellant had realised a sum of ₹ 39.13 Crores from the sale of the two feature films on outright sale to KPPL and VM under agreement dated 16.2.08. Before the Tribunal, the contention of the assessee was that both the movies did not do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the Tamil feature film Kuselan with artists Rajinikanth, Pasupathy, Vadivelu, Meena, Nayantara, etc., and directed by P.Vasu and the Telugu film Kathanayakudu with artists Rajinikanth, Jagapathy Babu, Sunil, Meena, Nayantara and sold the distribution cum marketing rights of Tamil film Kuselan to M/s.Kavithalayaa Productions Pvt. Ltd. vide an agreement dated 16/02/08 and the Telugu film Kathanayakudu to M/s.Vyjayanthi Movies vide an agreement dated 16/02/2008. WHEREAS the above said M/s.Kavithalayaa Productions Pvt. Ltd. and M/s.Vyjayanthi Movies have subsequently sold their respective rights to M/s.Pyramid Saimira Entertainment Ltd., vide agreements dated 25/04/2008 and 10th May, 2008 respectively and these sale agreements were confirmed by the party of the second part as the producers. Pursuant to the said agreement, the amount of consideration as agreed to between the parties had been duly paid by the respective parties. WHEREAS the film KUSELAN and KATHANAYAKUDU since released for commercial exhibition and has not been successful at the box office and the distributors/exhibitors in the respective states have made demands for compensation and as a goodwil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said decision that payments made in commercial exigency need not necessarily arise out of contractual obligations. 14. It is the further stand of the assessee that at no point of time the genuineness of the payment made to PSEL has been questioned by the Revenue. A finding in this regard is also found in the order of the Tribunal, which has recorded that the facts have not been disputed and the only dispute is with relation to the nature of the payment made to PSEL. 15. It is the further submission of the assessee that it is common trade practice for producers to compensate exhibitors/distributors when they suffer losses due to poor performance of a film. It is the further submission of the learned counsel for the assessee that the assessee has right to carry on business and any expenditure made by the assessee during the course of business for the purposes of removal of any restriction or obstruction or disability would be on revenue account, provided it does not result in the acquisition of a capital asset. Reliance was placed on the decision of the Supreme Court in the case of Bikaner Gypsums Ltd. - Vs - CIT (187 ITR 39). Learned counsel vehemently urged the Court to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of goodwill gesture, but at the same time, the Tribunal also gives a finding that the assessee made payment in the form of compensation to stay afloat in the business. This, according to the learned counsel for the appellant, establish a case of business expediency and to buttress this argument he relied on the following decisions :- 1) AIR 1966 SC 1053 :: 1966 (60) ITR 52 (SC) 2) AIR 1967 SC 453 :: 1966 (62) ITR 638 (SC) 3) AIR 1982 SC 757 :: 1982 (133) ITR 756 (SC) 4) 2004 (266) ITR 170 (Mad.); 5) 2004 (266) ITR 63 (Mad.) ; 6) 2007 (288) ITR 1 (SC) 20. Before proceeding to analyse the merits of the case threadbare to decide the nature of the expenditure made by the appellant, it would be expedient to refer to the decisions relied on by the learned counsel for the assessee as to the law on the subject. 21. In India Cements Ltd. - Vs - Commissioner of Income Tax, Madras (AIR 1966 SC 1053 :: 1966 (60) ITR 52 (SC), the Supreme Court dealt with a case where the appellant therein had obtained loan and had utilised the same for obtaining assets. The High Court, in the said case, held the said amount to be capital in nature on the ground that the expenditure wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant portion is extracted hereinbelow :- 7. It was urged by the Commissioner that the bank was under no legal liability to pay to the constituents the value of the jewellery pledged with it. It was said that the bank was, as a pledgee, a bailee of the jewellery and was in law required to take as much care of the pledged jewellery as a person of ordinary prudence would take under similar circumstances of his own jewellery of the same bulk, quantity and value, and the bank having provided an adequate number of watchmen, it was not liable for the loss of the property pledged. Granting that, on proof that it had taken as much care of the jewellery pledged with it as it would have taken if it belonged to it, the bank could enforce its rights and recover the full amount due from the constituents, the question still remains whether in admitting liability for the value of the jewellery pledged, the bank laid out expenditure for the purpose of the business. The question is not about the strict enforcement of the legal rights and obligations between the bank and its constituents. The sole question is whether the bank in incurring the expenditure acted in the interest of and for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under :- ..... In British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 ; [1925] 10 TC 155, 193 (HL), Lord Cave observed : It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce [1915] AC 433 (HL) and Smith v. Incorporate d Council of Law Reporting for England and Wales [1914] 3 KB 674 (KB), that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade;...... Rowlatt J. in Mitchell v. B. W. Noble Ltd. [1927] 1 KB 719 ; II TC 372, held that the money spent on getting rid of a director and saving the company from scandal was deductible. Affirming the above view, the Court of Appeal (whose judgment appears at p. 731) held that as the payment was not made to secure an actual asset so as effectually to increase the capital of the company but was made in order to enable the directors to carry on the business of the company as they had done in the past unfettered by the presence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under s. 37. We, therefore, reject the contention of the revenue that the amount in question could not be claimed as a deduction under s. 37 of the Act. 24. In Commissioner of Income Tax - Vs - Madras Refineries Ltd. (2004 (266) ITR 170 (Mad.), the assessee, to maintain its goodwill, had incurred expenditure, which expenditure was not for the purpose of earning the income and, therefore, the said expenditure was disallowed. On appeal, this Court held that the monies spent for the purpose of earning the goodwill cannot be considered as being wholly outside the ambit of business concern, as the business can succeed in a greater measure with the aid of such goodwill. In the said context, this Court held as under :- 5. The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses as claimed by the assessees were allowable as they were incurred indirectly to facilitate the carrying on of the business or to preserve their existing source of income with a view to safeguarding the business and also increasing their profits in future. * * * * * * * * * 15. The reasons given by the Tribunal, for taking the view that it did, cannot be said to be arbitrary or irrational, having regard to the facts available on record. It was not the case of the Revenue that any part of the monies agreed to be paid by the assessees to the company and for which sums credit had been given in the books of the assessees have subsequently come back to the assessees in any other manner. While it is no doubt true that there was no legal compulsion on the assessee to agree to pay the sums which are mentioned in the letter of the managing director of the company, there was also no legal bar to their agreeing to pay a higher price for supplies already received if they felt that it was in their long term interest to pay such a higher price. It was also open to them to agree to bear a part of the advertising and marketing costs as those costs were incurred with a view to enla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Insulated Helsby Cables Ltd. (1925 (10) TC 155 (HL)) wherein the House of Lords pointed out that even voluntary payment on the ground of commercial expediency and in order to indirectly facilitate doing of business could be considered as a claim for deduction. That principle has been approved by the Supreme Court in the case of Eastern Investments Ltd. - Vs - CIT (1951 (20) ITR 1) and Chandulal Keshavlal Co. (1960 (38) ITR 601). For better clarity, the said portion is quoted hereunder :- 21. In Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC) ; AIR 1979 SC 1291 this court held that the expression for the purpose of business occurring under the provision is wider in scope than the expression for the purpose of earning income, profits or gains , and this has been the consistent view of this court. 22. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he memory of the assessee' s deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia' s case [1979] 118 ITR 200 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this court that the expression for the purpose of business is wider in scope than the expression for the purpose of earning profits vide CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), etc. (Emphasis supplied) 27. On the abovesaid reasoning, the Supreme Court in S.A. Builders case (supra), remanded the matter to the Tribunal to consider the issue in the following manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has not been able to show from the agreements dated February 16, 2008 or supplementary agreement dated July 28, 2008 that the said payment is made in accordance with the covenants of agreement. A perusal of records, as well as the assessee's own admission make it absolutely clear that the payment was not made to discharge any legal liability. The payment was made either voluntarily or out of pressure from the market forces but it was certainly not out of business obligation. The assessee made the payment in the form of compensation to stay afloat in the business. 8. The authorised representative in support of his submissions has relied on the judgments of the Hon'ble jurisdictional High Court in the case of Amarjothi Pictures v. CIT [1968] 69 ITR 755 (Mad), CIT v. Gobald Motor Service P. Ltd. [1975] 100 ITR 240 (Mad) and CIT v. Associated Electrical Agencies [2004] 266 ITR 63 (Mad). In all the cited cases, the hon'ble High Court has held that expediency of expenditure should be left to the judgment of the assessee concerned. The Revenue has to confine itself only to decide the reality of expenditure. In the case of CIT v. Associated Electrical Agencies [200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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