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TMI Blog2024 (5) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, we restore this issue to the file of the assessing officer for the limited purpose with following directions: - (a) If MSN Singapore has not claimed/has not been notionally allowed depreciation under sec. 32 of Indian Income tax Act for any of the years, then the assessee is eligible to claim depreciation on the cost of goodwill acquired from MSN Singapore by way of demerger. (b) If MSN Singapore has claimed and/or has been allowed depreciation u/s 32 of Indian Income tax Act for any of the years, then the AO may compute depreciation on goodwill in accordance with the law. Accordingly, this issue is disposed of. Disallowance of Provision for Expenses - assessee had provided for outstanding expenses as at the yearend in books of accounts. Since no TDS was deducted, it voluntarily disallowed 30% of Provision for outstanding expenses u/s 40(a)(ia) - HELD THAT:- What is required to be examined is, whether the relevant liability has been incurred or not. The said liability may pertain to whole of the year also. So long as the liability towards expenses has been incurred by the assessee and if the payment has not been made, then the same has to be provided for in the books, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER For the Appellant : Shri Percy Pardiwala with Shri Nitesh Joshi Ms. Mansi Chheda For the Respondent : Shri Salil Mishra CIT-DR ORDER PER B.R. BASKARAN, ACCOUNTANT MEMBER: The assessee has filed these appeals challenging the orders passed by the AO for assessment years 2015-16 and 2016-17 u/s 143(3) r.w.s 144C of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP). Since common issues are urged in both these appeals, they were heard together and are being disposed of by this common order. 2. The facts relating to the assessee are discussed in brief. The assessment orders of both years have been passed in the name of M/s Sony Pictures Networks India P Ltd (SPN India). The name of the assessee company has been subsequently changed into Culver Max Entertainment Private Limited. Accordingly, this order has been passed by the Tribunal in the new name of the assessee. However, for the sake of convenience, we continue to refer the name of the assessee as SPN India , as the said name has been referred to both by the AO and Ld DRP. 3. The assessee SPN India is having a wholly owned subsidiary company named MSM Satellite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d depreciation of Rs. 1.53 crores. Accordingly, the AO disallowed the difference amount in depreciation of Rs. 13.76 crores. The Ld DRP, however, took the view that the goodwill amount has not been ascertained. The Ld DRP also took the view that the good will amount should be taken as NIL. Even though the ld DRP took the above said view, yet it upheld the disallowance made by the AO, i.e., the depreciation allowed by the AO was not interfered with. 5. The assessee debited its profit and loss account with Provision for expenses of Rs. 156.38 crores and claimed the same as deduction. The Ld A.R submitted that the said claim of provision for expenses was related to the expenses accrued to the assessee as at the year end, for which payment has not been made. Since the assessee did not deduct TDS from the above said expenditure so provided for, it voluntarily disallowed 30% of the expenses in accordance with the provisions of sec. 40(a)(ia) of the Act. The AO, however, took the view that the provision for expenses created by the assessee are in the nature of unascertained liabilities and accordingly held that entire provision is not allowable as deduction. Accordingly, the AO disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. A careful perusal of the above said proviso would show that the same is applicable to a case, where demerger h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 5 in the hands of MSM Singapore will not arise at all. Hence, we are of the view that the Explanation 5 referred to by the AO is also not applicable to the present case. 10. We notice that the Ld DRP has referred to certain other provisions also. The Ld DRP has referred to Explanation 7 to sec. 43(1) of the Act, which reads as under:- Explanation 7. - [Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. The above said Explanation 7 is applicable to a case of amalgamation. Identical provision is available in Explanation 7A for cases of demerger and the same reads as under:- Explanation 7A. - [Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the book value as held by the foreign subsidiary. Hence there was no modification of cost of assets and there is no allegation that the main purpose of transfer of asset was the reduction of tax liability. It is an undisputed fact that the said foreign subsidiary had held intangible asset of Good will in its books and the same has become the asset of the assessee company. Hence, we are of the view that the decision rendered in the case of United Breweries Ltd (supra) shall not apply to the facts of the present case. The Ld DRP has also observed that the assessee has accounted the residual of consideration as goodwill and hence depreciation cannot be claimed thereon. However, the fact would remain that, it is the MSN Singapore which had accounted the residual consideration as goodwill and not the assessee. Hence, above said observations of Ld DRP are also against the facts available on record. Accordingly, we are of the view that none of the reasons cited by the AO and ld DRP would justify the reduction of depreciation claimed on the amount of goodwill. 12. The Hon ble Supreme Court has held in the case of CIT vs. Smiff Securities Ltd (2012)(348 ITR 302)(SC) that good will is elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Income tax Act for any of the years, then the AO may compute depreciation on goodwill in accordance with the law. Accordingly, this issue is disposed of. 14. The next issue contested by the assessee relates to the disallowance of Provision for Expenses. As noticed earlier, the assessee had provided for outstanding expenses as at the yearend in books of accounts. Since no TDS was deducted, it voluntarily disallowed 30% of Provision for outstanding expenses u/s 40(a)(ia) of the Act. The AO took the view that the assessee has not established that these expenses are crystallized expenses. He also observed that the assessee did not explain the method of accounting, when the actual expenses exceeded the provision amount. The AO also found fault with the provision made for Agency incentive, Channel placement charges etc. Accordingly, the AO came to the conclusion that the provision for outstanding expenses has been made on adhoc basis and there is no reasonable certainty of incurring expenses. Accordingly, the AO held that the provision for outstanding expenses is disallowable in toto. Since the assessee had disallowed 30% of expenses u/s 40(a)(ia) of the Act, the AO disallowed rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 84,24,686 General and Administrative Expenses Channel Mapping Fees 28,33,300 Courier Charges 4,50,351 File management charges 25,014 Housekeeping Expenses 3,40,000 Photocopy Charges 87,553 Printing Stationery Charges 9,63,903 Rent expenses 5,20,937 Repair Maintenance 17,02,417 Staff welfare expenses 4,27,530 Web hosting expenses 3,09,873 Legal Professional charges 53,54,031 Payroll administration 30,500 Recruitment consultancy charges 3,00,000 Statutory Internal Audit Fees 21,00,001 Miscellaneous Expenses 3,80,213 Service charges 5,21,324 Total (B) 29,22,40,846 Aggregate amount of (A) +(B) Rs. 156,38,27,668/- 17. There is no dispute with regard to the fact that the assessee is following mercantile system of accounting. Under the said system, it is required to provide for all known expenses and losses as at the yearend. Hence, it is required to make provision for all outstanding expenses and it is a routine exercise followed universally when mercantile system of accounting is followed. Making provision for expenses is based on accrual concept. An accrual is a record of revenue or expenses that have been earned or incurred but have not yet been billed or bills not yet received. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. 19. In the instant case, we notice that the AO has observed that the relevant bills for the expenses have not been received by the assessee and hence the liability has not crystallized during the year under consideration. Thus, the AO is of the view that the provision for outstanding expenses could be made/claimed only if the relevant bills are received by the assessee andthe payment for the same was not made. The above said observation of the AO is in total contradiction with the accounting principles explained by the Hon ble Supreme Court in the above said cases. As observed by Hon ble Supreme Court in the case of Bharat Earth Movers Ltd (supra), what is required to be seen is that whether the liability to pay the expenses has been incurred or not? . If the said liability has been incurred prior to the closure of the accounting year and if the payment has not been made, then the mercantile system of accounting mandates that the provision for outstanding liability towards expenses should be made. Besides the above, the AO has also made observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onths has been incurred. Hence the period for which provision was made is not a relevant factor. Incurring of liability irrespective of duration of period is relevant. Accordingly, the various observations made by Ld DRP, in our view, would fail. 21. In view of the foregoing discussions, we are of the view that the provision for outstanding expenses claimed by the assessee is an ascertained liability only. Accordingly, we are of the view that the Ld DRP was not justified in confirming the disallowance made by the AO. Accordingly, the addition of 70% of expenses amounting to Rs. 109,46,79,368/- made by the AO is liable to be deleted. We order accordingly. 22. The assessee has raised grounds with regard to non-granting of TDS to the tune of Rs. 8,13,81,645/-. In this regard, the Ld A.R submitted that the TDS credit was not given by the AO for the reason that the TDS certificates are not in the name of assessee, but it was in the name of amalgamated/demerged company. He submitted that the relevant income has already been assessed in the hands of the assessee and hence the TDS deducted out of the said income should be allowed credit in the hands of the assessee. We notice that the co-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see submitted that the reversal of provision, which was offered as income in AY 2016-17, willlead to double assessment of same income. Accordingly, it was prayed that the reversal of provision relating to AY 2015-16 be reduced from total income. The AO accepted the alternative prayer of the assessee and accordingly reduced the total income by Rs. 109,46,79,368/-. 25. In AY 2015-16, we have held that the provision for outstanding expenses should not be disallowed and accordingly deleted the disallowance of Rs. 109,46,79,368/- made by the AO. The decision rendered by us in AY 2015-16 is applicable to AY 2016-17 also. Accordingly, we delete the disallowance of Rs. 119,54,12,673/-. 26. We noticed that the assessee had reversed the provision for outstanding expenses made in AY 2015-16 in the succeeding AY 2016-17 and accordingly offered the same as income in AY 2016-17. Since the AO had disallowed the provision for outstanding expenses in AY 2015-16, the assessee made an alternative plea before the AO that the income offered in AY 2016-17 by way of reversal of provision for outstanding expenses should be reduced from the total income. Said plea of the assessee was accepted by the AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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