ACIT Non Corporate Circle 20(1), CHENNAI V. Allu Aravind Babu, CHENNAI

ITA 2369/CHNY/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4136 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 16-08-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Cost of acquisition; Fair market value; Commercial expediency; Set aside; Capital Gains
• Section: 15

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, C HENNAI . . . , , ! ' BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 2369/CHNY/2018 / ASSESSMENT YEAR : 2012-13 ASSISTANT COMMISSIONER OF INCOME TAX, NON CORPORATE CIRCLE -20(1), CHENNAI. VS. SHRI. ALLU ARAVIND BABU, NO. 98, KAMDAR NAGAR, MAHALINGAPURAM, CHENNAI 34. [PAN: ADAPA 9507B] ( / APPELLANT) ( #$%& /RESPONDENT ) %& ' ( / APPELLANT BY : SHRI. AR V SREENIVASAN, JCIT #$%& ' ( / RESPONDENT BY : SHRI. R. VIJAYARAGHAVAN ADVOCATE * '+! /DATE OF HEARING : 21.11.2019 ,-. '+! /DATE OF PRONOUNCEMENT : 19.02.2020 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE REVENUE FILED THIS APPEAL AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS)-14, CHENNAI IN ITA NO. 137/CIT(A)-14/2015-16 DATED 25.05.2018 FOR ASSESSME NT YEAR 2012-13. 2. SHRI. ALLU ARAVIND BABU, THE ASSESSEE, AN INDIV IDUAL, ENGAGED IN THE BUSINESS OF FILM PRODUCTION, REAL ESTATES AND I S THE MANAGING :-2-: ITA NO.2369/CHNY/2018 DIRECTOR OF ALLU ENTERTAINMENTS PVT LTD. WHILE MAK ING THE ASSESSMENT FOR ASSESSMENT YEAR 2012-13, THE ASSESSING OFFICER, INTER ALIA, DENIED ASSESSEES CLAIM OF INDEXATION IN RESPECT OF TWO PI ECES OF LAND AND INTEREST EXPENDITURE TOWARDS COST OF ACQUISITION FO R INDEXATION. FURTHER, HE DISALLOWED COST OF PURCHASE OF FILM RIGHTS AT RS . 6,57,16,337/- U/S. 40A(2) HOLDING, INTER ALIA, THAT THE ASSESSEE BOOKE D HUGE LOSS WHICH WOULD OFFSET THE CAPITAL GAIN MADE BY THE ASSESSEE IN THE PROPERTY TRANSACTION AS A DEVICE TO AVOID TAX PAYMENT ON THE CAPITAL GAIN BY SETTING OFF THE LOSS ETC. 3. THE LD. DR SUBMITTED THAT THE AO FOUND THAT THE ASSESSEE PURCHASED A PROPERTY ON 25.05.1992. HIS MOTHER AND SISTER ALSO PURCHASED ADJACENT PROPERTY ON 30.05.1992. THE ASS ESSEE ACQUIRED THE PROPERTY PURCHASED BY HIS MOTHER AND SISTER THROUGH THE SETTLEMENT DEED DATED 27.06.2011 AND SOLD ALL THE THREE PIECES OF LAND TOGETHER AND ADMITTED CAPITAL GAINS. WHILE COMPUTING THE CA PITAL GAIN, THE AO ADOPTED INDEXATION COST W.E.F. 17.06.2011 ON THE PR OPERTY ACQUIRED FROM ASSESSEES MOTHER AND SISTER. FURTHER, THE AS SESSEE CLAIMED CAPITALISATION OF INTEREST AT RS. 19,38,972/- TOWAR DS WHICH THE ASSESSEE FAILED TO SUBMIT NECESSARY DOCUMENTS. THEREFORE, T HE ASSESSING OFFICER REFUSED TO ALLOW THE CAPITALISATION OF INTEREST CLA IMED. IN THE P&L ACCOUNT, THE ASSESSEE HAS SHOWN PURCHASE OF LEASE R IGHT OF THE MOVIE :-3-: ITA NO.2369/CHNY/2018 BADRINATH AT RS. 13.5 CRORES PRODUCED BY M/S. ALL U ENTERTAINMENT P LTD. (AEPL) IN WHICH THE ASSESSEE IS THE MANAGING D IRECTOR, AGAINST WHICH HE REPORTED RS. 9,00,85,065/- AS REALIZATION OF FILM. HE CLAIMED COST OF REALIZATION AT RS. 61,63,793/- AND DISTRIBU TION EXPENSES AT RS. 1,46,37,609/-. ON EXAMINING THE COPY OF AGREEMENT ETC., THE AO FOUND THAT THE ASSESSEE ADOPTED A DEVICE THROUGH WHICH TH E NOTIONAL LOSS WAS CREATED WITHOUT THE ASSESSEE DOING ANY ACTIVITY TO AVOID TAX PAYMENT ON CAPITAL GAIN BY SETTING OFF OF A LOSS AND HENCE HE HAS ADOPTED THAT THE FAIR MARKET VALUE OF MOVIE BADRINATH AT RS. 6,92, 83,663/- AS AGAINST RS. 13.5 CRORES ADOPTED BY THE ASSESSEE AND FOUND T HAT THERE WAS NO GAIN OR LOSS IN THE HANDS OF THE ASSESSEE. IN OTHE R TERMS, HE DISALLOWED RS. 6,57,16,337/-. ON APPEAL, THE LD. CIT(A) HELD THAT SINCE ALL THE LANDS WERE ACQUIRED IN 1992-93, THE COST OF INDEXAT ION SHOULD BE AWARDED FROM THAT YEAR AND ALLOWED THE CAPITALISATI ON OF INTEREST AND DELETED THE AOS DISALLOWANCE HOLDING THAT THE ASSE SSING OFFICERS CONCLUSION IS UNSUSTAINABLE AND DIRECTED TO ALLOW T HE ASSESSEES CLAIM. AGGRIEVED AGAINST THAT ORDER, THE REVENUE FILED THI S APPEAL WITH THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO F ACTS AND CIRCUMSTANCES OF THE CASE. 2.1 THE LEARNED CIT(A) ERRED IN DELETING THE ADDIT ION TOWARDS COST OF PURCHASE OF FILM RIGHTS U/S 40A(2) OF RS.6,57,16,33 7/- :-4-: ITA NO.2369/CHNY/2018 2.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH E FACT THAT THE ASSESSEE IS NOT IN THE BUSINESS OF FILM DISTRIBUTIO N AND NEVER PURCHASED MOVIE RIGHT/LEASE RIGHT DURING THE LAST TEN YEARS. 2.3 THE LEARNED CIT(A) OUGHT TO HAVE CONSIDERED THE RATIO OF THE DECISION IN THE CASE OF MC DOWELL AND CO. LTD (154 ITR 145) 2.4 THE LEARNED CII(A) OUGHT TO HAVE CONSIDERED THE RATIO OF THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS NEPC INDIA LTD (MAD) 303 ITR 271 AND THE DECISION IN TIRE CASE OF NUND & SAMONTA CO. P. LTD VS CIT(SC) 78 ITR 268 3.1 THE LEARNED CIT(A) ERRED IN DELETING THE ADDITI ON TOWARDS LONG TERM CAPITAL 3.2 THE CIT(A) ERRED IN DECIDING FINANCIAL YEAR IN WHICH COST OF ACQUISITION IS TO BE INDEXED BASED ON THE DECISION IN THE CASE OF MANJUTA J. SHAH WHICH HAS NOT ACCEPTED BY THE DEPARTMENT AND SLP IS PENDING 3.3 THE CIT(A) ERRED IN INVOKING THE SUB RULE (4) O F IT RULE 46A OF IT RULES, 1962 WHEN NO INDEPENDENT ENQUIRY OR PRODUCTI ON OF ANY DOCUMENT WAS SOUGHT BY CIT(A) AND ON THE CONTRARY DOCUMENTS FURNISHED BY THE ASSESSEE WERE ACCEPTED WITHOUT ANY VERIFICATION OR REMAND WITH REGARD TO ISSUE OF CAPITALIZATION OF INTEREST EXPENSES 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. HE CANVASSED AND ARGUED ON THE LINES OF GROUNDS OF APPEAL, SUPRA, AND PLEADED TO RESTORE THE ORDER OF THE AO. 4. PER CONTRA, THE LD AR SUPPORTED THE ORDER OF THE LD. CIT(A) SUBMITTING THAT HE FOLLOWED THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS MANJULA J SHAH, 2011 16 TAXMANN.COM 42. WITH REFERENCE TO THE ISSUE ON DISALLOWANCE OF COST OF P URCHASE OF FILM RIGHTS, :-5-: ITA NO.2369/CHNY/2018 THE LD AR TOOK US THROUGH THE ORDER OF THE LD. CIT( A) AND SUBMITTED THAT THE AO HELD THAT THE ASSESSEE PURCHASED LEASE RIGHTS FROM AEPL AND SOLD THE DISTRIBUTION RIGHTS TO AEPL AGAIN, WHE REAS, THE CORRECT POSITION IS THAT THE ASSESSEE PURCHASED LEASE RIGHT S OF THE FILM FROM THE PRODUCER AEPL. NOW HAVING ACQUIRED THE RIGHTS, THE ASSESSEE HAS TO EXPLOIT THE FILM AND HENCE THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH AEPL ENGAGING AEPLS DISTRIBUTION DIVISION FO R DOING THE DISTRIBUTION OF THE FILM ON CERTAIN COMMERCIAL TERM S. THE AO HAS WRONGLY CAME TO A CONCLUSION THAT THE ASSESSEE ACQU IRED LEASE RIGHTS FROM AEPL AND SOLD THE DISTRIBUTION RIGHTS TO AEPL WHICH IS AN ABSURDITY. IN FACT, THE TRADE OF DISTRIBUTION IS AN ACTIVITY C ARRIED ON BY THE DISTRIBUTOR FOR AN ON BEHALF OF THE PRODUCER/LEASE RIGHT HOLDER FOR A FEE GENERALLY CALLED A DISTRIBUTION COMMISSION. THE AO HAS WRONGLY UNDERSTOOD THAT THERE IS SALE OF DISTRIBUTION RIGHT S OF THE FILM TO AEPL. THEREFORE, THE FINDINGS ARRIVED BY THE AO IS WRONG AND HENCE APPLYING THE MCDOWELLS CASE DOES NOT ARISE IN THIS CASE AT ALL. 5. THE ASSESSEE IN THE PAST WAS ONE OF THE LEADING PRODUCER IN TELUGU FILM INDUSTRY AND ALSO LARGE FILM DISTRIBUTO R IN THE AREAS OF NIZAM AND WEST AND EAST GODAVARI COMBINED STATE OF AP AND WAS CARRYING ON THE BUSINESS UNDER NAME AND STYLE OF SOLE PROPRIETA RY CONCERNS GEETHA ARTS AND GEETHA FILM DISTRIBUTORS BOTH ARE OWNED AND OPERATED AS :-6-: ITA NO.2369/CHNY/2018 PROPRIETARY CONCERNS OF MR. ALLU ARAVIND BABU, THE ASSESSEE. THESE ENTITIES WERE SUCCEEDED BY AEPL THROUGH THE ONE TIM E CORPORATIZATION PERMITTED UNDER THE INCOME TAX ACT. IN EFFECT, THE ASSESSEE HAS BEEN IN THE BUSINESS OF FILM PRODUCTION AND DISTRIBUTION FOR OVER FOUR DECADES. HENCE, THE ASSUMPTION MADE BY THE AO IN ARRIVING TH E IRRATIONAL DISALLOWANCE WAS EXPLAINED BEFORE THE LD. CIT(A). THEREAFTER, THE LD. AR INVITED OUR ATTENTION TO THE SUBMISSIONS MADE IN DETAILS BEFORE THE LD. CIT(A) STATING THAT THE CONSIDERATION PAID BY T HE ASSESSEE FOR THE LEASE RIGHTS OF THE FILM BADRINATH FOR THE AREAS OF NIZAM, EAST AND WEST GODAVARI DISTRICTS, COMBINED STATE OF AP WAS A T RS. 13.5 CRORES. THE REASONABLENESS OF THIS CONSIDERATION CAN BE EV ALUATED FROM THE FOLLOWING ASPECTS VIS., BASED ON THE POPULATION, BA SED ON THE THEATRES AS THE MEDIUM THOUGH THE FILM HAS TO BE EXHIBITED. INVITING OUR ATTENTION TO THE DISTRICT POPULATION/THEATRE APPROA CH, THE LD. AR SUBMITTED THAT THE AREAS BOUGHT BY THE ASSESSEE IN TERMS OF POPULATION CONSTITUTES 52.38%, IN TERMS OF NO. OF THEATRES IT CONSTITUTES 45.74% AVERAGING THESE TWO PARAMETERS THE AREA OF LEASE RI GHTS CONSTITUTES 49.06%. THUS, ANY RATIONAL APPROACH TO EVALUATE WH ETHER THE CONSIDERATION PAID BY THE ASSESSEE, WHETHER THE SAM E IS EXCESSIVE OR UNREASONABLE HAS TO CONFIRM THAT THE CONSIDERATION PAID IS COMPLETELY REASONABLE AND WELL WITHIN THE ACCEPTABLE NORMS OF ANY YARDSTICK THAT CAN BE BENCHMARKED IN THIS REGARD. THEREFORE, THE LD. AR SUBMITTED :-7-: ITA NO.2369/CHNY/2018 THAT ON THE EXPLANATION FURNISHED BY THE ASSESSEE BY TAKING INTO THE PRINCIPLES OF COMMERCIAL EXPEDIENCY AND THE RELATIN G CASE LAWS RELIED ON BY THE ASSESSEE AND OTHER MATERIAL. THE LD. CIT(A) HELD THAT THE AO HAS NOT MADE OUT THE CASE BASED ON EVIDENCE TO COME TO A CONCLUSION THAT THE TRANSACTION WAS A SHAM TRANSACTION, RELYIN G ON VARIOUS CASE LAWS ON THE PRINCIPLE OF COMMERCIAL EXPEDIENCY ETC. , THE LD. CIT(A) CORRECTLY ALLOWED THE APPEAL AND RELIED ON IT. FURT HER, HE SUBMITTED THAT THOUGH THE REVENUE FILED AN APPEAL, IT HAS NOT BROU GHT ANY MATERIAL BEFORE THE HONBLE TRIBUNAL TO SAY THAT HOW THE POR TION OF EXPENDITURE CLAIMED BY THE ASSESSEE IS EXCESSIVE OR UNREASONABL E WITH THE COMPARABLE DOCUMENTS OR MATERIAL AND HENCE, THE LD. AR PLEADED THAT THE ORDER OF THE LD. CIT(A) MAY BE UPHELD. 6. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL. IT IS CLEAR THAT THE ASSESSEE, THE MOTHE R OF ASSESSEE AND SISTER OF THE ASSESSEE ACQUIRED THE IMPUGNED PROPER TY DURING 1992. THE MOTHER OF THE ASSESSEE AND SISTER OF THE ASSESS EE SETTLED THEIR PORTION OF THE LAND BY A SETTLEMENT DEED DATED 17.0 6.2011. THEREAFTER, THE ASSESSEE HAS SOLD AND CLAIMED CAPITAL GAIN, TH EREFORE, IN ACCORDANCE WITH THE CASE LAW RELIED ON IN CIT VS MA NUJAL J SHAH, THE PERIOD OF HOLDING IS TO BE RECKONED FROM THE YEAR 1 992-93 FOR THE :-8-: ITA NO.2369/CHNY/2018 PURPOSE OF COMPUTING COST OF INDEXATION AND THEREFO RE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. C IT(A). 7. WITH REGARD TO THE CLAIM OF INTEREST CAPITALISAT ION TOWARDS COST OF ACQUISITION, FOR THE PURPOSE OF INDEXATION THE ASSE SSEE HAS SUBMITTED BEFORE THE LD. CIT(A) THAT THE LAND WAS PURCHASED D URING 1999-2000 RELATING TO ASSESSMENT YEAR 2000-01. THE INTEREST PAID WAS IN CONNECTION WITH THE ACQUISITION WHICH HAPPENED ALMO ST 15 TO 20 YEARS BACK. THE RELEVANT PAPERS WERE NOT ABLE TO BE PROD UCED SINCE THE DETAILS OF CAPITALISATION HAPPENED ABOUT 20 YEARS B ACK. SINCE, THE ASSESSEE HAS BEEN SUBJECT TO TAX AUDIT IN THE RELEV ANT ASSESSMENT YEAR AND THE BOOKS OF ACCOUNT ARE DULY AUDITED AND CERTI FIED BY THE CA, THE SAME WAS DULY SUBMITTED BY THE AO AS AN ALTERNATIVE EVIDENCE TO SUBSTANTIATE THE INTEREST CAPITALISATION WHICH THE AO HAS NOT CONSIDERED AND MADE THE DISALLOWANCE. CONSIDERING SUCH SUBMIS SIONS, THE LD. CIT(A) HELD THAT HE IS CONVINCED WITH THE AOS ACTI ON ON CAPITALISATION INTEREST ON CAPITALISING THE INTEREST IS CORRECT, A S PER LAW AND DIRECTED THE AO TO INCLUDE THE INTEREST ON HOUSING LOAN BORR OWED AS PART OF THE COST OF ACQUISITION. SINCE, THE REVENUE HAS NOT DI SPUTED THE FINDINGS RECORDED BY THE LD. CIT(A) WITH RELEVANT MATERIAL, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DECISION OF THE LD. CI T(A) ON THIS ISSUE. :-9-: ITA NO.2369/CHNY/2018 8. WITH REGARD TO THE DISALLOWANCE ON ASSESSEES CL AIM ON LOSS OF DISTRIBUTION OF MOVIE RELATING TO THE MOVIE BADRIN ATH, THE AO HELD THAT THE ASSESSEES TRANSACTION WAS A SHAM TRANSACTION F OR THE REASON THAT THE BUSINESS LOSS OF AROUND RS. 6 CRORES WAS SET OF F OF AGAINST THE LONG TERM CAPITAL GAIN ARISING OUT OF THE SALE OF LAND L EADING TO TAX EVASION. THE AO HAS ALSO OBSERVED THAT THERE WAS UNREASONABL Y EXCESS PAYMENT TO A COMPANY IN WHICH THE ASSESSEE WAS MANAGING DIR ECTOR AND HAS INVOKED THE PROVISIONS OF SECTION 40A(2). THE AO H AS ALSO HELD THAT THE FAIR MARKET VALUE WAS NOT COMPUTED CORRECTLY. THER EFORE, THE AO CAME TO A CONCLUSION THAT THE ASSESSEES CLAIM OF THE LO SS IN DISTRIBUTING MOVIE RIGHT WAS ONLY TO CLAIM THE SET OFF OF LONG TERM CA PITAL GAIN ARISING IN THE RELEVANT PREVIOUS YEAR. BEFORE THE LD. CIT(A), THE ASSESSEE HAS EXPLAINED VERY CLEARLY THE NATURE AND THE SCOPE OF THE TRANSACTION AND MADE OUT THE CASE THAT THE AMOUNT PAID TO THE COMPA NY WAS AT ARM LENGTH WHICH WAS PREVALENT AS PER NORMAL PRACTICE I N THE ASSESSEES BUSINESS. THE ASSESSEE HAS ALSO MADE OUT THAT THER E WAS NO UNREASONABLENESS IN THE TRANSACTION AND THE TRANSAC TION WAS FULLY ACCOUNTED AND ALL THE RELEVANT PARTICULARS WERE FIL ED BEFORE THE AO. IT ALSO SUBMITTED THAT THE AO HAS NOT MADE OUT THE CAS E BASED ON EVIDENCE BUT CAME TO A CONCLUSION THAT THE SAID TRA NSACTION WAS A SHAM TRANSACTION. CONSIDERING THE MATERIAL AND THE PLE A ETC., THE LD. CIT(A) HELD THAT THE AO HAS NOT MADE OUT THE CASE BASED ON EVIDENCE. THE :-10-: ITA NO.2369/CHNY/2018 AO HAS NOT DETERMINED THE FAIR MARKET VALUE WITH CO MPARABLE CASES ETC. THEREFORE, HE DELETED THE ADDITIONS. THE REVENUE IS NOT ABLE TO DISLODGE THE FINDINGS RECORDED BY THE LD. CIT(A) WITH RELEVA NT MATERIAL. IN THE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A) AND HENCE THE CORRESPONDING GROUNDS OF THE REVENUE ARE DISMISSED. 11. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. ORDER PRONOUNCED ON WEDNESDAY, 19 TH FEBRUARY, 2020 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER SD/- ( ! ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, / /DATED: 19 TH FEBRUARY, 2020 JPV '#+0121.+ /COPY TO: 1. %& / APPELLANT 2. #$%& /RESPONDENT 3. * 3+ ) ( /CIT(A) 4. * 3+ /CIT 5. 14#+ /DR 6. 567 /GF