ACIT, CHENNAI V. Seven Arts Films, CHENNAI

ITA 1291/CHNY/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77296 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2014
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 10-08-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 10-06-2013
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: ANIL NAIR
• Keywords: Depreciation; Bad and doubtful debts; Commercial expediency; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHE NNAI . . . , ! , ' # $ BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER . / I.T.A. NO. 1291/MDS/2013 / ASSESSMENT YEAR : 2009-10 ASST. COMMISSIONER OF INCOME TAX, MEDIA CIRCLE-II, CHENNAI ( !% /APPELLANT) VS M/S.SEVEN ARTS FILMS, B-9, BROWN STONE APTTS., MAHALINGAPURAM, CHENNAI [PAN:AAMFS 2220 C] ( &'!% /RESPONDENT) REVENUE BY : SHRI ANIRUDH RAI, CIT-DR ASSESSEE BY : SHRI ANIL NAIR, CA., / DATE OF HEARING : 26-03-2014 / DATE OF PRONOUNCEMENT : 27-05-2014 #( / O R D E R PER VIKAS AWASTHY, J.M: THE APPEAL HAS BEEN FILED BY THE REVENUE AGAINST TH E ORDER OF COMMISSIONER OF INCOME TAX(APPEALS)-VI, CHENNAI, DATED 23-01-2013 RELEVANT TO THE ASSESSMENT YEAR (AY) 200 9-10. 2. THE ASSESSEE IS A FIRM ENGAGED IN THE PRODUCTION AND DISTRIBUTION OF FEATURE FILMS. THE ASSESSEE FILED ITS RETURN OF INCOME I.T.A. NO. 1291/MDS/2013 2 FOR THE AY.2009-10 ON 30-09-2009 DECLARING INCOME O F ` 1,40,59,210/-. THE RETURN OF THE ASSESSEE WAS PROC ESSED U/S.143(1) OF THE INCOME TAX ACT, 1961 (HEREIN AFT ER REFERRED TO AS THE ACT). SUBSEQUENTLY, THE ASSESSEE FILED REVIS ED RETURN OF INCOME ON 24-03-2011 DECLARING TOTAL INCOME AS ` 1,33,59,740/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 23- 08-2010. DURING SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSI NG OFFICER OBSERVED THAT THE ASSESSEE HAS SHOWN A SUM OF ` 39.13 CRORES REALIZED FROM TAMIL FEATURE FILM KUSELAN AND TELU GU FILM KATHANAYAKUDU. THE ASSESSEE HAD SOLD BOTH THE FI LMS OUTRIGHT TO M/S.KAVITHALAYA PRODUCTIONS PVT. LTD., AND M/S.VYJA YANTHI MOVIES VIDE AGREEMENT DT.16-02-2008. AS PER THE AGREEMENT , THE ASSESSEE HAD RECEIVED ` 25,50,00,000/- FROM M/S.KAVITHALAYA PRODUCTIONS PVT. LTD., TOWARDS THEATRICAL RIGHTS FO R TEN YEARS, PERPETUAL AUDIO RIGHTS, SATELLITE AND CABLE TV RIGH TS FOR ELEVEN YEARS AND NON-THEATRICAL RIGHTS INCLUDING DVD, VCD ETC., FOR A PERIOD OF TEN YEARS. SIMILAR AGREEMENT WAS ENTERED WITH M/S.VYJAYANTHI MOVIES AND THE ASSESSEE HAD RECEIVED ` 14.50 CRORES. AS PER THE CONTENTIONS OF THE ASSESSEE, BO TH THE MOVIES DID NOT DO WELL IN THEATRES, THUS THE EXHIBITORS SU FFERED HUGE LOSSES DUE TO LACK OF COLLECTIONS FROM THEATRES. IT WAS M UTUALLY DECIDED I.T.A. NO. 1291/MDS/2013 3 AMONGST THE PRODUCERS I.E., THE ASSESSEE AND DISTRI BUTORS I.E., M/S.KAVITHALAYA PRODUCTIONS PVT. LTD., AND M/S.VYJA YANTHI MOVIES, THAT THEY WILL PAY BACK CERTAIN AMOUNT TO M/S.PYRAM ID SAIMIRA ENTERTAINMENT LTD., TO COMPENSATE FOR THE LOSS CAUS ED BY THE FILMS. IN THE LIGHT OF MUTUAL AGREEMENT, THE ASSESSEE PAID ` 1.50 CRORES TO M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD., ON 13 TH SEPTEMBER, 2008. THE SAID AMOUNT WAS REDUCED FROM THE GROSS A MOUNT RECEIVED ON THE SALE OF TAMIL AND TELUGU FILM RIGHT S. THE ASSESSEE PRODUCED SETTLEMENT AGREEMENT DT.13-09-200 8 BETWEEN THE ASSESSEE AND M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD. BEFORE THE ASSESSING OFFICER. THE ASSESSEE PAID ` 1.50 CRORES TO M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD., TO SETTLE T HE ISSUE. IT WAS FURTHER POINTED OUT THAT THE PAYMENT OF ` 1.50 CRORES WAS NEITHER SHOWN AS RECEIPTS IN THE P&L A/C NOR CLAIMED AS EXP ENDITURE. THE SAID AMOUNT IS TREATED AS REIMBURSEMENT TO M/S.PYRA MID SAIMIRA ENTERTAINMENT LTD., TO COMPENSATE HUGE LOSS SUFFERE D ON DISMAL PERFORMANCE OF THE FILMS KUSELAN AND KATHANAYAKU DU IN THE STATES OF TAMIL NADU, ANDHRA PRADESH AND KARNATAKA. THE ASSESSEE HAS FURTHER CONTENDED THAT THE SAID AMOUNT PAID IS NOT A GOODWILL BUT A GOODWILL GESTURE. THE ASSESSIN G OFFICER HELD THAT THE SAID PAYMENT IS NOT REVENUE EXPENDITURE AND IS THUS NOT ALLOWABLE AS EXPENDITURE U/S.37 OF THE ACT AND DIS- ALLOWED THE I.T.A. NO. 1291/MDS/2013 4 SAME. APART FROM THE AFORESAID DIS-ALLOWANCE, THE ASSESSING OFFICER MADE DIS-ALLOWANCE OF BAD DEBTS, DIS-ALLOWA NCE OF DEPRECIATION ON CAR AND DIS-ALLOWANCE U/S.14A OF TH E ACT. AGGRIEVED BY THE ASSESSMENT ORDER DT.22-12-2011, TH E ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(APPEALS ). THE CIT(APPEALS) AFTER CONSIDERING VARIOUS AGREEMENTS E NTERED INTO BETWEEN DIFFERENT PARTIES AND THE ASSESSEE, THE PUR POSE AND THE NATURE OF PAYMENT, CONCLUDED THAT THE PAYMENTS OF ` 1.50 CRORES IS IN THE NATURE OF COMPENSATION TO PROTECT THE REPUTA TION OF THE PRODUCERS. THE SAME CANNOT BE HELD AS GOODWILL B UT IS ONLY A SALES RETURN OR A DISCOUNT. THE SAID PAYMENT IS CO VERED BY SECTION 9 OF THE SALES OF GOODS ACT AND ACCOUNTING STANDAR D 9 AND DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. NOT SATISFIED WITH THE ORDER OF CIT(APPEALS), THE REVENUE HAS COM E IN APPEAL BEFORE THE TRIBUNAL. 3. SHRI ANIRUDH RAI, APPEARING ON BEHALF OF THE REV ENUE SUBMITTED THAT, THE ASSESSING OFFICER HAS RIGHTLY D IS-ALLOWED THE EXPENDITURE AS THE ASSESSEES PAID THE AMOUNT NOT TO MEET ANY LEGAL LIABILITY, BUT TO EARN GOODWILL, THEREFORE, I T IS NOT ALLOWABLE AS REVENUE EXPENDITURE. AT THE MOST, IT CAN BE TERMED AS CAPITAL EXPENDITURE TO EARN GOODWILL. THE TRANSACTION BETW EEN THE I.T.A. NO. 1291/MDS/2013 5 ASSESSEE AND THE DISTRIBUTORS IS NOT THAT OF SALES. THEREFORE, THERE IS NO QUESTION OF SALES RETURN AS PURPORTED BY THE CIT(APPEALS). THE NATURE OF TRANSACTION AT THE MOST CAN BE THAT O F ASSIGNMENT OF RIGHTS. THUS, THE THEORY OF SALES RETURN OR DISCOU NT IS NOT TENABLE. THE LD.DR FURTHER POINTED OUT THAT INITIALLY THERE WERE AGREEMENTS DT.16-02-2008 BETWEEN THE ASSESSEE AND M/S.KAVITHA LAYA PRODUCTIONS PVT. LTD., AND M/S.VYJAYANTHI MOVIES. THEREAFTER, ON 28-07-2008 THE ASSESSEE ENTERED SUPPLENTARY AGREEME NT WITH THE RESPECTIVE PARTIES. IN NONE OF THE AGREEMENTS, THE RE IS ANY MENTION OF M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD. THE RIGHTS OF THE FILMS WERE ASSIGNED TO M/S.KAVITHALAYA PRODUCTI ONS PVT. LTD., AND M/S.VYJAYANTHI MOVIES FOR CONSIDERATION. M/S.P YRAMID SAIMIRA ENTERTAINMENT LTD HAS NO LOCUS STANDI. THE LD.DR F URTHER SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSE SSEE IS NON- RECURRING IN NATURE. THE PAYMENT HAS BEEN MADE BY THE ASSESSEE TO SECURE ITS GOODWILL. HENCE, THE EXPENDITURE IS CAPITAL IN NATURE AND CANNOT BE ALLOWED AS EXPENDITURE U/S.37 OF THE ACT. 4. ON THE OTHER HAND, SHRI ANIL NAIR, APPEARING ON BEHALF OF THE ASSESSEE VEHEMENTLY SUPPORTED THE ORDER OF CIT(APPE ALS) AND SUBMITTED THAT THE PAYMENT OF ` 1.50 CRORES WAS MADE ON ACCOUNT OF BUSINESS EXIGENCIES. THE SAID EXPENDITURE WAS I N THE FORM OF I.T.A. NO. 1291/MDS/2013 6 COMPENSATION AND IS THUS REVENUE IN NATURE. THE LD .AR FURTHER STATED THAT THERE IS A DIFFERENCE BETWEEN GOODWILL AND GOODWILL GESTURE. THE PAYMENT WAS MADE PURELY AS GOODWILL GESTURE AND WAS NOT IN ANY WAY TO EARN GOODWILL. THE LD.AR CON TENDED THAT THE TERM GOODWILL AND GOODWILL GESTURE HAVE DIFFERENT C ONNOTATIONS. IN ORDER TO SUPPORT HIS SUBMISSIONS, THE LD.AR PLACED RELIANCE OF THE FOLLOWING CASE LAWS: I. AMARJOTHI PICTURES VS. CIT REPORTED AS 69 ITR 755 (MAD); II. CIT VS. GOBALD. MOTOR SERVICES P. LTD., REPORTED AS 100 ITR 240 (MAD); AND III. CIT VS. ASSOCIATED ELECTRICAL AGENCIES REPORTED AS 266 ITR 63 (MAD). AS REGARDS THE ROLE OF M/S.PYRAMID SAIMIRA ENTERTAI NMENT LTD., THE LD.AR SUBMITTED THAT, IT IS A LINK BETWEEN THE ASSE SSEE AND THE THEATRE OWNERS. THE AMOUNT HAS BEEN DISBURSED TO T HE EXHIBITORS THROUGH M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW. THE FACTS NARRATED HEREIN A BOVE HAVE NOT BEEN DISPUTED BY EITHER SIDES. THE ONLY DISPUTE IN THE PRESENT I.T.A. NO. 1291/MDS/2013 7 APPEAL IS WITH REGARD TO THE NATURE OF PAYMENT MADE BY ASSESSEE TO M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD. THE ASSE SSEE HAS CLAIMED ` 1.50 CRORES AS REVENUE IN NATURE WHEREAS THE REVENU E HAS CLASSIFIED THE PAYMENT AS CAPITAL. THE ASSESSE E HAS NOT SHOWN THE SAID PAYMENT IN ITS P&L A/C AS EXPENDITUR E. THE ASSESSEE HAS REDUCED THE AMOUNT FROM RECEIPTS. THE CIT(APPEALS) HAS HELD THE SAID OUT FLOW OF CASH AS SALES RETURN/ DISCOUNT. WE DO NOT AGREE WITH THE REASON GIVEN BY CIT(APPEALS) TO DELETE THE ADDITION. 6. A PERUSAL OF RECORDS SHOW THAT THE PAYMENT OF ` 1.50 CRORES HAVE BEEN MADE TO COMPENSATE THE EXHIBITORS OF THE TWO FILMS KUSELAN AND KATHANAYAKUDU AS THE FILMS HAVE NOT DONE WELL IN THE COMMERCIAL CINEMAS. RESULTANTLY, THE EXHIBITOR S SUFFERED HUGE LOSSES. AN AGREEMENT DT.13-09-2008 WAS ENTERED INT O BETWEEN M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD., AND THE ASS ESSEE. HOWEVER, IN THE AGREEMENTS DT.16-02-2008 AND SUPPLE MENTARY AGREEMENT DT.28-07-2008, BETWEEN THE ASSESSEE AND T HE DISTRIBUTORS I.E., M/S.KAVITHALAYA PRODUCTIONS PVT. LTD., AND M/S.VYJAYANTHI MOVIES, THERE IS NO MENTION OF M/S.P YRAMID SAIMIRA ENTERTAINMENT LTD. THE ASSESSEE HAS NOT BEEN ABLE TO SHOW AS TO WHO AUTHORIZED M/S.PYRAMID SAIMIRA ENTERTAINMENT LT D., TO RECEIVE I.T.A. NO. 1291/MDS/2013 8 PAYMENT FROM THE ASSESSEE TO BE DISBURSED TO THE EX HIBITORS WHO HAVE ACTUALLY SUFFERED LOSS. THERE IS NOTHING ON R ECORD TO SHOW WHETHER THE PAYMENTS HAVE BEEN ACTUALLY RECEIVED BY THE PERSONS WHO HAVE SUFFERED LOSSES. THEREFORE, FROM THE RECO RDS, WE FIND THAT M/S.PYRAMID SAIMIRA ENTERTAINMENT LTD., HAS NO LOCUS STANDI. 7. AS REGARD THE NATURE OF PAYMENT IS CONCERNED, TH E ASSESSEE HAS TRIED TO EXPLAIN THAT THE PAYMENT IS IN THE NAT URE OF GOODWILL GESTURE AND NOT GOODWILL. THE ASSESSEE HAS TRIED T O DISTINGUISH BETWEEN GOODWILL AND GOODWILL GESTURE BY RELYING ON CERTAIN DECISIONS. AS PER THE CONTENTIONS OF THE ASSESSEE, SINCE THE PAYMENT IS IN THE FORM OF GOODWILL GESTURE, IT IS R EVENUE IN NATURE. IN OUR CONSIDERED OPINION THE ASSESSEE MADE THE SAI D PAYMENTS TO PROTECT ITS GOODWILL IN THE MARKET. THE ASSESSE E HAS TO OPERATE AND DO BUSINESS IN THE MARKET IN FUTURE AS WELL, TH E ASSESSEE HAD TO MAINTAIN ITS GOODWILL. THE ASSESSEE HAS NOT BEEN ABLE TO SHOW FROM THE AGREEMENTS DT.16-02-2008 OR SUPPLEMENTARY AGREEMENT DT.28-07-2008 THAT THE SAID PAYMENT IS MADE IN ACCO RDANCE WITH THE COVENANTS OF AGREEMENT. A PERUSAL OF RECORDS, A S WELL AS ASSESSEES OWN ADMISSION MAKE IT ABSOLUTELY CLEAR T HAT THE PAYMENT WAS NOT MADE TO DISCHARGE ANY LEGAL LIABILI TY. THE PAYMENT WAS MADE EITHER VOLUNTARILY OR OUT OF PRESS URE FROM THE I.T.A. NO. 1291/MDS/2013 9 MARKET FORCES BUT IT WAS CERTAINLY NOT OUT OF BUSIN ESS OBLIGATION. THE ASSESSEE MADE THE PAYMENT IN THE FORM OF COMPEN SATION TO STAY AFLOAT IN THE BUSINESS. 8. THE AR IN SUPPORT OF HIS SUBMISSIONS HAS RELIED ON THE JUDGMENTS OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF AMARJOTHI PICTURES VS. CIT (SUPRA), CIT VS. GOBALD. MOTOR SERVICES P. LTD., (SUPRA) AND CIT VS. ASSOCIATED ELECTRICAL AGENCIES (SUPRA). IN ALL THE CITED CASES, THE HONBLE HIGH COURT HAS HELD THAT EXPEDIENCY OF EXPENDITURE SHOULD BE L EFT TO THE JUDGMENT OF ASSESSEE CONCERNED. THE REVENUE HAS TO CONFINE ITSELF ONLY TO DECIDE THE REALITY OF EXPENDITURE. IN THE CASE OF CIT VS. ASSOCIATED ELECTRICAL AGENCIES (SUPRA), THE HONBLE COURT HAS HELD THAT COMMERCIAL EXPEDIENCY NEED NOT NECESSARIL Y HAVE ITS ORIGIN IN CONTRACTUAL OBLIGATIONS. WE FIND THAT THE JUDGMENTS ON WHICH THE ASSESSEE H AS PLACED RELIANCE DOES NOT SUPPORT THE CASE OF ASSESS EE. THE FACTS IN THE PRESENT CASE ARE DISTINGUISHABLE. THE ASSESS EE HAS NOT BEEN ABLE TO SHOW THAT THE PAYMENTS WERE ACTUALLY R ECEIVED BY THE PERSONS WHO SUFFERED LOSSES. THIS CAST SHADOW OVER GENUINENESS OF PAYMENT. EVEN IF THE PAYMENT IS BELIEVED TO BE GENUINE, THE I.T.A. NO. 1291/MDS/2013 10 SAME IS HELD TO BE CAPITAL IN NATURE AND THUS CANNO T BE ALLOWED U/S.37 OF THE ACT. IN VIEW OF THE ABOVE, THE IMPUGNED ORDER IS SET AS IDE AND THE APPEAL OF THE REVENUE IS ALLOWED. ORDER PRONOUNCED ON TUESDAY, THE 27 TH MAY, 2014 AT CHENNAI. SD/- SD/- ( . . . ) ( ! ) (DR. O.K. NARAYANAN) (VIKAS AWAS THY) / VICE PRESIDENT ! / JUDICIAL MEMBER '# /CHENNAI, $ /DATED: 27 TH MAY, 2014 TNMM #% & '( )#( /COPY TO: 1. *+ /APPELLANT 2. &,*+ /RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. (01 & 2 /DR 6. 13 4 /GF