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TMI Blog2017 (5) TMI 527X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable opportunity to the assessee. With these directions, the issue raised in both appeals are allowed as above. Sales promotion & advance expenses - Held that:- The revenue is on the matching principle ie assessee cannot be allowed to claim huge expenditure against meagre income reported in this year. In the process, revenue lost the much established accounting principle of ‘Mercantile System of Accounting’ by the assessee in this year under consideration. We also find that the decisions relied on by the AO are distinguishable on both facts and legal issue. They are not on the brand building related issues. On the other hand, the decision in case of Core Healthcare Ltd and others (2008 (10) TMI 74 - GUJARAT HIGH COURT ) on this issue only. Nothing is made out by the Ld. DR that cricket sponsoring expenditure constitutes capital nature. It is never the case of the revenue that ₹ 7.03 crore of expenditure is not revenue in nature. The question is only if they should be amortized over the period of 6 years or otherwise. In our view, the CIT(A) order, on this issue, constitutes fair and reasonable and it does not call for any interference. The expenditure incurred on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditworthiness or genuineness of the transactions. Present addition is a case of surmises, suspicion etc. Therefore, the addition is unsustainable in law. For all these reasons also, we are of the view, the order of the CIT (A) is fair and reasonable. Therefore, the decision of the CIT (A) does not call for any interference. - ITA No.7216/M/2011, ITA No.6345/M/2011 - - - Dated:- 26-4-2017 - SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER For The Assessee : Shri Vijay Mehta For The Revenue : Shri Shishir Dhamija, CIT-DR ORDER PER BENCH: There are two appeals under consideration filed by both the parties at the dispute and they are filed against the order of CIT(A) dated 24/01/2011 for the AY 2008-09. The issues raised in the appeal of the assessee relates to (i) the addition on the basis of AIR Information amounting to ₹ 1,61,798/- and (ii) Addition on account of content cost of ₹ 89.06 crore. AO disallowed the entire such claim considering the same as of capital nature and differing from AO, the CIT(A) capitalized based in the ratio of 85:15. Addition confirmed in this year works out to ₹ 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is allowable in favour of the assessee. Relevant grounds are dismissed. 6. Content Cost: This issue is common in both the appeals of revenue and assessee. Relevant facts are that the assessee debited a sum of ₹ 122.70 cr. in the content cost account in the books of accounts. Schedule 13 of the financial statements is relevant. The said content cost basically relates to inventories as on 31.03.07 plus the current year purchases. These inventories include TV programmes and Film Rights. There is no news content in the inventory. While finalising the accounts, assessee debited the entire cost to the P L account as the current year expenditure. In the assessment proceedings, AO analysed the accounting policy of the assessee on this account as well as the market practice in this regard and held that the sum of ₹ 89.06 cr constitutes IPRs being commercial rights in the films / TV programmes. AO disallowed the entire sum of ₹ 89.06 cr. as capital expenditure. AO treated the same an intangible asset u/s 32(iii) of the Act. Without prejudice (as mentioned in para 6.15 of Assessment Order), AO held that the claim should be allowed / amortised over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h grounds no. 2 and 3 of that appeal, the Tribunal dealt with the issue on hand in para 18 to 25 and the same were allowed in favour of that assessee. But there is difference in both these cases i.e. Zee Media and the present case. In Zee Media, the accounting policy is in favour of amortization of TV programme over 3 years and of the Film Rights over 5 years (60 months). Inventories of tapes is taken on FIFO basis. Whereas in the instant case, unlike in case of Zee Media, entire content cost is written off in the current year. For the sake of completeness of the order, we proceed to extract the relevant paragraphs 18 to 25 of that order which read as follows:- 18. Ground nos. 2 and 3 relate to the merits of addition on account of disallowance of intangible assets ie News / TV Program / Film Rights. As described already in the preceding paragraphs, assessee purchased the said News / TV Program / Film Rights amounting to ₹ 90,05,07,680/- (pages 24 to 28 of the paper book). In this regard, Ld Counsel for the assessee submitted the break-up (page 49 of the paper book) of TV Programs, News and non-fiction, Film Rights. It provides the details of manner of amortization. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 26, relating to the intangible assets, Ld Counsel for the assessee read out the definition given to the intangible assets at para 6.1 and submitted that the Film Rights and TV Programs are outside the said definition given to the intangible assets . Further, Ld Counsel for the assessee also brought our attention to the para 63 of the said AS-26, and mentioned that the amortization is very much recognized in the accounts and therefore, the claim of the assessee should be allowed in full. 22. On the other hand, Ld DR for the Revenue submitted that the definition to the intangible assets vide para 6.1 of the said AS-26, the expression an intangible asset is an identifiable non-monetary asset........held for use in .............. supply of .......and services......... and it covers the TV Programs and Film Rights. Therefore, the provisions of AS-26 should apply in full. Further, bringing our attention to the definition current assets , Ld DR submitted that the current asset is defined as an asset such as receivables, inventory, work in progress or cash ie constantly flowing in and out of the organization in the normal course of its business, such as cash is converted into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red as income without claiming any expenditure. The assessee also generates revenue from broadcasting serials through satellite channels. The assessee gets revenue from production and broadcasting serials on the lines of feature films, the rights of broadcasting such serials are also treated as stock in trade till the time they are aired and the expenses are debited to the Profit and Loss account. The assessee treats the films and the serials at par and applied the provisions of Rule 9A and 9B of the Income Tax Rules, as are applicable in case of films on serials as well. On the other hand, the contention of the Revenue is that the film and serial broadcasting rights acquired by assessee are perpetual in nature. After first telecast, the assessee does not discard the films but carefully store the same in digital library for airing the same again. Therefore, the assessee gets enduring benefit from the rights acquired in films and serials and they do not expire on the date of first telecast as contemplated by the assessee. The rights are intangible assets within the meaning of Explanation (iii) to section 32 and do not fall within the purview of section 37(1). The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has a method of valuation of the news items/non fictional in nature, TV programs and the film rights. The details are given in the aforementioned Note No 7 to the financial statements. According to the same, while the news items purchased are debited to the P and L account as they do not have the repeat telecast value, other items like the TV program and the film rights constitutes current assets , which are amortised over the years and the period of such amortization is given in the said Note. Per contra, the case of the revenue on these issues is that these items constitute intangible depreciable capital assets and provisions of section 32 of the Act apply. Considering the same, we shall now undertake to discuss the item wise adjudication as follows. a. On the debits relating to the purchases of the News items : Regarding the nature of the news items purchased by the assessee and debited to the P and L account, we find it is in the common knowledge of every citizen that the news items do not have enduring benefit. Normally, the news items/non fictional items purchased by the assessee lose its value once they are telecast. Therefore, such items do not have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Film rights is not supported by any precedents and therefore, the arguments raised by the Revenue are not allowed. Thus, considering the covered nature of the issue as well as the consistent method of accounting followed by the assessee in this regard and also in the absence of any contrary material to support the arguments of the Revenue against the assessee s claim, we are of the opinion that the decision taken by the CIT (A) in the impugned order is required to be reversed. Accordingly, Ground nos. 2 and 3 raised by the assessee are allowed . 11. Considering the same, we are of the view that the claim of assessee is not in tune with the accounting policy in open market on this issue of amortization of TV programme/ Film Rights. No special reasons are demonstrated before us the reasons justifying the deviations by the assessee. Therefore, we are of the view that the AO is directed to apply the said order of the Tribunal in case of Zee Media (supra) of the granting reasonable opportunity of being heard to the assessee fully. AO is also directed to reduce the extent of cost already telecast i.e. ₹ 26,50,87,780/- from the total cost of ₹ 89.06 crore as there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure (Rs. 0.60 crore) etc. AO is of the view that these expenditure helps in brand building of INX Media or 9X Channel . 15. However, FAA analysed each of these expenditure (para 5-8 to 5-9) and held that these are revenue in nature and the cases cited by the AO are distinguishable on facts (para 5.5 and 5-11 of order of FAA). Further, FAA held that the said expenditure for brand building / brand image is an allowable deduction. In this regard, Ld FAA relied on the Gujrat High Court judgment in case of M/s Core Healthcare Ltd 308 ITR 263 and orders of the Tribunal in case of M/s Godrej Tea Ltd (supra) and Spice Communications Ltd, Reliance Jute Ltd, British Electrical Pumps Pvt. Ltd etc. Contents are para 5.16 of FAA s order are relevant. Thus, the FAA deleted the entire addition of ₹ 58,65,13,438/-. 16. Before us, on this issue, Ld. DR for the revenue relied heavily on the order of the AO and he is critical of the order of the FAA. In the written submission dated 23.11.15, Ld. DR submitted the following:- 1. These expenditures had not been incurred to earn the income returned by the assessee from telecasting the programmes in the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claimed expenditure of ₹ 13,28,90,652/- under legal and professional expenditure head. Schedule 15 of account is relevant. In the assessment, AO disallowed an amount of ₹ 7,13,63,513/-. These payments were made to M/s Rap Consultancy Pvt. Ltd, M/s Robert Band, M/s Sai Krishna Associates and towards the Stamp Duty Charges. Relevant agreement with these parties suggest these payments are for period from 01.04.07 to 31.12.07, whereas, the channel (INX Media, 9X Hindi Entertainment Channel) was launched in Nov 2007 only. Further, it was mentioned that business was set up on 01.06.2007. If the said set up is considered a sum of ₹ 4,07,57,674/- needs to be disallowed. Assessee, suo motto , disallowed the same (para 6.5 of FAA s order). In favour of claiming of the said balance expenses, assessee relied on various judicial pronouncements. FAA analysed each of the expenses and considered the business set up date as 1.6.2007 and the business commencement as Nov, 2007 and held that ₹ 7,13,63,513/- is allowable u/s 37(i) of the Act. Discussion in para 6.11 and 6.12 are relevant. 19. Before us, Ld. DR contested the conclusions of the FAA and mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e culmination of all the necessary operations are done. Ld. DR also relied on the judgment in the case of Western India Veg. Products Ltd. and also Saurashtra Cement Chem. Industries (91 ITR 170) (Guj H.C). These decisions suggest that the set up is complete when all necessary operations in place and the commencement of business started when the essential business activity i.e. purchase/sale/manufacturing activity started. Per contra , Ld. AR relied on the written submissions dated 11.01.2016 (para 47-55). In the said submissions, it is the claim of the Ld AR that the assessee followed the set legal propositions while claiming the expenses. Ld AR relied on the contents of para 51 52 of the said note. These paras read as under: 51. On perusal of the above, it is evident that an assessee can claim expenditure in the year in which the business is set up. What is relevant under the Act is the setting up of the business and not the commencement of the business. A business is commenced as soon as an essential activity of that business is started. Thus, the business commences with first purchase. It is also well settled that business is nothing more than continuous course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 10 long years, in principle, is not good idea. In all probability, the supplier might have discontinued the business or he might have lost / destroyed the relevant records considering the fact of limitation of 6 years for purpose of section 148 of the Act. 23. Therefore, we are of the view that the expenses incurred till 31.08.2007 should be considered for capitalization and the date of set up of the business in place of assessee s claim of 01.06.2007. Delivery date is 6.8.2007 and reasonable time is needed for unp0arking, distribution and installation. Therefore, it cannot reliably argued that all the above activities are done only the said due date of 6.8.2007 for delivery to the assessee in Mumbai. Therefore, on estimation basis, we grant till the end of the month for installation activity. This is needed for completion of the set up of business completely. Consequently, the expenditure incurred by assessee between 1.9.2007 to November 2007 are to be allowed as deductible expenses. AO is directed to recomputed the above allowable expenses and assessee the income accordingly. Accordingly, the grounds raised are partly allowed . 24. Deletion of addition of ₹ 398, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n para 7 on pages 32 to 45 of his order and relied on various judicial precedents and held that it is not proper to invoke the provisions of section 68 of the Act. In the said paras, FAA considered various documentary evidences such as Income Tax returns, PAN, Certificate of incorporation, Audited Financial Statements, Bank account statements of the assessee, Board Resolution allotting shares, Registration of the company etc. 28. Aggrieved with the said decision of the CIT (A), the Revenue is in appeal on the issue of addition u/s 68 of the Act with reference to equity share capital of ₹ 16 Crs and preferential share capital with premium of ₹ 130.25 Crs. Total works out to ₹ 146.24 Crs. 29. Ld AR for the Revenue filed with submission dated 15.2.2017 and argued vehemently stating that the relief granted by the FAA is required to be reverted. Further, during the hearing time, Ld DR made various arguments ie identity, creditworthiness, genuineness of the transactions are proved, FIPB approval is not equated with the proving genuineness of transaction, non-resident investors addresses not provided, CIT (A) failed to cause enquiries suo moto , Foreign Institutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-investment companies. Referring to the allegation of non-cooperation, Ld AR submitted that the documents supplied to the AO and mentioned that the AO never allows the onus to shift to them. Further, Ld AR submitted that the AO did not comply with the remand report requirement of the Tribunal (dated 27.5.2016). Ld AR also highlighted the lack of proper response to the requirements of the Tribunal. Further, Ld AR also refers to the award of the cost on the AO in this regard. Further, Ld AR submitted that the case laws cited are distinguishable on facts. The fact of non-furnishing of the remand report is considered unfortunate. Referring to the request for remanding the issue of applicability of provisions of section 68 of the Act, Ld AR protested vehemently both orally and in writing (para 78 of the written submissions (surpa) are relevant). According to Ld AR, noting shall come out of such an exercise. In this regard, Ld AR brought our attention to the enquiries conducted by the Directorate of Enforcement and the letter dated 30.11.2010 (page 410 of the paper book) is relevant. Ld AR also brought our attention to the order of the Tribunal in the case of one of the said four comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise, there is no clinching evidence in possession of the AO to conclude that the said cash credits from resident investors into equity share capital and the preferential share capital with premium really attracts the provisions of section 68 of the Act. 33. Addition u/s 68 of the Act and Onus related issues : We have also perused the documentation furnished by the assessee regarding indentity, creditworthiness and the genuineness of transaction. In our opinion, the initial onus on the assessee is reasonably discharged by the assessee and the AO still attempts to refuse the onus which stands shifted to him. Almost 9 months have elapsed by asking the AO to submit a remand report and there is no such report of any kind from the file of the AO. Actually, we wanted a reasoned report / speaking order on 27.5.2016. Further, it is relevant to mentioned that one of four companies of Reliance Group, which contributed equity to IIPL through Tiora Comtrade Limited / INX Services P Ltd route, and where the source of funds for the investment was added by the AO of the said company was heard and it was decided by the Tribunal in favour of the assessee-company. The effect is that the fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the written submissions is relevant). Referring to New Selk Route PE (M) Ltd and New Verman P Eg Ltd, it is submitted in working that they are owned by well known Banking Executives. As per the said note, the fund movement is in the knowledge of the FIPB / Ministry of Finance. Assessee filed FC GPRs Transaction (page 350 to 377 and 381 to 408) (para 74). Assessee referred the AO s decision in invoking the provisions of section 68 of the Act. However, FAA deleted the entire addition. Rejecting the same, AO proceeded to make addition of the share application money, equity share capital and preferential share capital premium collected by the assessee from the said companies. AO invoked the provisions of section 68 of the Act. AO questioned the onus is not discharged by the assessee fully and the premium collected @ ₹ 862.15/- per share is very high when the company is a loss making one and the company NAV is only 131.45 Crs (Para 60(i) of the written submissions of the assessee are relevant. AO is of the view that FIPB approved only ₹ 4.60 Crs and ₹ 263 Crs is brought in without FIPB route. AO made use of the assesses inability to supply certain details of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd share application, we find there is a need for clarification as to the source of funds, genuineness of the transactions and creditworthiness of the parties. Considering the law laid down by the various High Court on this issue as on today on the issues mentioned above, we are of the opinion that AO should go into the issue afresh and examine the said parameters laid down in para 68. In this case, it is argument of the Ld Counsel that the source of funds are substantiated to be if AO has to go into the root of the original source of the credits. AO may consider this also and submit the detail report after examining the chain of transaction involving many entities whether doing or not doing business activities. Similar exercise is required with regard to Foreign Funding ie Share Capital, Share Application and Share Premium. Even if assessee exhibits inability to furnish information regarding identity, creditworthiness and source of foreign fund, the AO is directed to invoke all the powers vested on him by the statute and gather relevant facts necessary for complete of proceeding under consideration meaningfully. Thus, AO is directed to furnish and reasoned report / spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see either on identity or creditworthiness or genuineness of the transactions. Present addition is a case of surmises, suspicion etc. Therefore, the addition is unsustainable in law. For all these reasons also, we are of the view, the order of the CIT (A) is fair and reasonable. Therefore, the decision of the CIT (A) does not call for any interference. 41. Before parting, it may be relevant to mention that the Revenue has gone on record in mentioning that, with reference to the foreign funding of share application money/ share capital / share premium, a reference is made tothe Joint Secretary, (FT TR-II) CBDT, New Delhi for obtaining information under Exchange of Information Article in the DTAAs/ TIEAs/ Multilateral Agreements. Outcome of the same is awaited. Similarly, with reference to the domestic funding, the Department has issued notices u/s 133(6) of the Act to all the four companies (supra). Thus, some investigation is now initiated by the Revenue on both the accounts of investments by resident and non-residents, foreign investors. These efforts now supports the decision on the CIT (A), who deleted the addition for want of evidences / any incriminating information again ..... X X X X Extracts X X X X X X X X Extracts X X X X
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