MEGA BOLLYWOOD P.LTD, MUMBAI V. ASST CIT CEN CIR 21, MUMBAI

ITA 2822/MUM/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3407 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 06-05-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 26-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G N MUKWANAL
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH, MUMBAI BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER , AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER. ITA. NO. 2822/MUM/2012 (ASSESSMENT YEAR: 2005-06) MEGA BOLLYWOOD P. LTD. APPELLANT 5-C, SWAPNALOK, L. JAGMOHANDAS MARG, MUMBAI VS. ACIT, CIRCLE-21 RESPONDENT MUMBAI PAN: AAACY 0507D /BY APPELLANT: SHRI SASHI TULSIYAN, A.R. /BY RESPONDENT: SHRI G.N. MUKWANAL, D.R. /DATE OF HEARING : 09.08.2016 /DATE OF PRONOUNCEMENT : 26.08.2016 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A GAINST THE ORDER OF THE CIT(A)-39, MUMBAI DATED 15.03.2012 FOR THE ASSESSMENT YEAR 2005-06 PASSED U/S.143(3)/254 OF TH E INCOME TAX ACT, 1961. ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 2 2. THE COMMON ISSUE IN ALL THE GROUNDS OF APPEAL FR OM 1 TO 4 IS AGAINST UPHOLDING THE DISALLOWANCE OF RS. 2,00,0 0,000/- BEING THE COST OF FILM, DEBITED TO THE PROFIT AND LOSS ACCOUNT WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS WORLD RIGHT CONTROLLER OF THE FILM AND NO DEDUCTION WAS C LAIMED FOR THE ADVANCES MADE FOR THE FINANCING THE FILMS TOWAR DS PURCHASE PRICE AND ALSO CIT(A) NOT CONSIDERING THE FACT THAT THE ASSESSEE HAS THE RIGHT TO RECOVER THE ADVANCES FROM REALISATION BY WAY OF A PERCENTAGE OF OVERFLOW AS STATED IN AGR EEMENT AND COULD NOT HAVE EXERCISED THE OWNERSHIP RIGHTS WITHO UT PURCHASING THEM AND THE RIGHTS ACQUIRED DURING THE YEAR FOR RS.2,00,00,000/- WERE SUBSEQUENTLY EXPLOITED AND IN COME REALISED WAS CREDITED TO THE PROFIT AND LOSS ACCOUN T. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS IN T HE SECOND ROUND OF APPEAL BEFORE THE TRIBUNAL. IN THE FIRST R OUND, THE ASSESSMENT WAS FRAMED U/S.143(3) OF THE ACT VIDE OR DER DATED 19.12.2007 MAKING THE DISALLOWANCE OF RS. 2,00,00,0 00/- TOWARDS THE COST OF FILM HUM TUMHARE HAIN SANAM (HEREINAFTER REFERRED TO AS HTHS). THE DISALLOWANCE WAS CONFIRMED BY THE CIT(A) AND IN THE APPELLATE PROCEE DINGS BEFORE ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 3 THE TRIBUNAL, THE ISSUE WAS SET ASIDE TO THE FILE O F THE AO WITH A DIRECTION TO FRAME ASSESSMENT DE NOVO IN ACCORDANCE WITH LAW AND FACTS AFTER CONSIDERING ALL THE EVIDENCES A ND ALLOWING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. BUT AGAIN THE AO MADE THE SAME ADDITIONS WHICH WAS ALSO CONFI RMED BY THE CIT(A). 4. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH BMB PRODUCTIONS DATED 18.09.1999 FOR FINANCING THE FILM HTHS WHICH WAS UNDER PRODUCTION AND UNDER THE AGREEMENT ADVANCED A SUM OF RS. 6.05 CR AT VARIOUS STAGES OF PRODUCTION OF THE FILM. UNDER THE AGREEMENT, THE ASSESSEE WAS GIVEN A RIGHT OVER THE PROFITS ON FUTURE DISTRIBUTION OF RI GHTS INCLUDING COPYRIGHTS, RIGHT FOR EXPLOITATION OF THE FIRM BY D ISTRIBUTION, EXHIBITION IN CINEMA, TV, SATELLITE RIGHTS, VIDEO R IGHTS, DVD INCLUDING THE RIGHT OF REISSUE AND DUBBING ETC. THE AGREEMENT ALSO PROVIDED THAT THE MONEY REALISED FROM TRANSFER AND UTILISATION OF RIGHTS WOULD BE ADJUSTED TOWARDS THE REPAYMENT OF ADVANCE. FURTHER, IT WAS ALSO PROVIDED THAT THE ASSESSEE WAS TO GET 10% OF THE ENTIRE COVERAGE OF THE PICTURE AN D 50% OF ALL INCOME AND OVERFLOW. IN THE EVENT OF DEFAULT IN THE RECOVERY, THE ASSESSEE WOULD BE ENTITLED TO A CHARGE AND LIEN ON ALL THE ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 4 ASSETS OF THE PRODUCER FIRM AND ITS PROPRIETOR K.C. BAKODIA. BY THE END OF THE FINANCIAL YEAR 2002-03 RELEVANT TO A SSESSMENT YEAR 2003-04, THE OUTSTANDING ADVANCE WAS RS.4.41 C R AS THE RECOVERIES MADE FROM DISTRIBUTION RIGHTS AND EXHIBI TION WERE ADJUSTED TOWARDS THE REPAYMENT OF ADVANCE. IN THE S AME FINANCIAL YEAR 2002-03, THE ASSESSEE SOLD SATELLITE RIGHTS OF THE FILM FOR A CONSIDERATION OF RS. 2.20 CR TO SET INDI A PVT. LTD. AND THE AMOUNT WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT AND WAS NOT ADJUSTED AS REPAYMENT OF ADVANCE BY THE ASSESSEE. ON THE FIRST DAY OF THE FINANCIAL YEAR 20 04-05 RELEVANT TO ASSESSMENT YEAR 2005-06 THE UNADJUSTED ADVANCE WAS RS.4,26,97,250/- AND THEREFORE IN ORDER TO RECO VER THE ADVANCE THE ASSESSEE ENTERED INTO AGREEMENT FOR ACQ UIRING THE IRREVOCABLE TELEVISIONS AND EXHIBITIONS RIGHTS FOR A CONSIDERATION OF RS. 2,00,00,000/-. THE AMOUNT WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT AND ADJUSTED IN ADVANCE ACCOUNT DUE FROM BMB PRODUCTIONS WHICH WAS DISALLOWED BY TH E AO MAINLY FOR THREE REASONS, FIRST, RS. 2,00,00,000/- CLAIMED AS EXPENSES WERE PRIOR PERIOD EXPENSES PERTAINING TO A Y 2003-04 BY PLACING RELIANCE ON NOTE NO.6 TO FINAL ACCOUNTS, SECOND EXPENSE WAS PROVIDED ON THE BASIS OF LETTER FROM BM B ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 5 PRODUCTION DATED 1.4.2004 WHICH WAS STATED TO BE SE LF SERVING DOCUMENT AND THIRD THAT THE CONSIDERATION PAID OF R S. 2 CRORE PERTAINED TO TRANSFER OF TV RIGHTS PERPETUALLY BUT SUCH RIGHTS WERE ALREADY ACQUIRED BY THE ASSESSEE VIDE AGREEMEN T DATED 18.09.1999. 5. IN THE SECOND ROUND ALSO THE LD CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE BY OBSERVING AND HOLDING AS UNDER:- 7. I HAVE CONSIDERED THE ISSUE. THE APPELLANT HAS F INANCED THE PRODUCER OF BMB PRODUCTIONS FOR PRODUCING THE F ILM 'HUM TUMHARE HAIN SANAM' AND ENTERED IN THE WORLD RIGHT CONTROLLER AGREEMENT DATED 3.3.1999. AS PER CLAUSE 1 OF THE AGREEMENT (EXTRACTED BY THE A.O. IN PAGE 6 OF THE I MPUGNED ASSESSMENT ORDER AND PARA 5.6.1 OF THIS ORDER), CLA USE 1 OF THIS AGREEMENT IS VERY CLEAR THAT THE PRODUCER HAS GRANTED ALL THE RIGHTS TO THE APPELLANT INCLUDING S ATELLITE RIGHTS. AFTER ACQUIRING THIS RIGHT, THE APPELLANT ENTERED I NTO A LICENCE AGREEMENT WITH SET INDIA PVT. LTD. ON 8.11.2002 AND GRANTED THE LICENCE OF 'EXCLUSIVE NON-STANDARD TELEVISION AND P AY PER VIEW RIGHTS' FOR A CONSIDERATION OF RS.2,20,00,000/-. TH IS AGREEMENT WAS ENTERED INTO BY THE APPELLANT WITH SET INDIA PV T. LTD. AND M/S. BMB PRODUCTIONS WAS NOT A PARTY TO THE AGREEME NT. THIS CLEARLY SHOWS THAT THE APPELLANT IS THE OWNER OF TH E RIGHTS IN VIEW OF WORLD RIGHT CONTROLLER AGREEMENT DATED 3.3. 1999. SINCETHE FINANCE AMOUNT WAS NOT FULLY RECOVERED, TH E APPELLANT SHOULD HAVE CREDITED THIS AMOUNT OF RS.2,20,00,000/- TOWARDS THE AMOUNT FINANCED. IT APPEARS THAT BY MISTAKE THE APPELLANT CREDITED THE ENTIRE AMOUNT OF RS.2,20,00,000/- AS INCOME IN THE P&L ACCOUNT AND OFFERED AS INCOME IN THE ACCOUNTING YEAR RELEVANT TO ASST. YEAR 2003-04 FOR INCOME TAX PURPO SES FOR ASST. YEAR 2003-04. LATER IT SEEMS THAT THE AUDITOR HAS P OINTED OUT THIS MISTAKE AND THE APPELLANT WANTED TO RECTIFY TH E MISTAKE. THIS IS REFLECTED IN NOTE NO.6 OF THE SIGNIFICANT A CCOUNTING POLICIES FOR THE ACCOUNTING YEAR 2004-05 I.E. IN TH E ACCOUNTING YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR 2005- 06. TO OVERCOME THE EXCESS INCOME OFFERED IN THE ASST. YEA R 2003-04, ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 6 THE APPELLANT HAS OBTAINED A LETTER DT. 1,4,2004 FR OM BMB PRODUCTIONS THAT THE RIGHTS WERE OBTAINED BY THE AP PELLANT FOR RS. 2 CRORE. THE LETTER'S HEADING ITSELF IS 'CONFIR MATION NOTE BY M/S. BMB PRODUCTIONS'. THIS HEAD NOTE ITSELF CLEARL Y SAYS THAT THE RIGHTS WERE ALREADY WITH THE APPELLANT. IF THE RIGHTS WERE NOT WITH THE APPELLANT IT COULD NOT HAVE GIVEN LICE NCE TO SET INDIA PVT. LTD. IN VIEW OF THE FACTS NARRATED ABOVE , I HOLD THAT TO OVERCOME THE MISTAKE OF OFFERING RS.2,20,00,000/- IN THE ACCOUNTING YEAR RELEVANT TO ASST. YEAR 2003-04, THE APPELLANT HAS MADE FUTILE ATTEMPT TO C LAIM THAT THE RIGHTS WERE PURCHASED FROM BMB PRODUCTIONS FOR RS.2,00,00,000/- IN THE ACCOUNTING YEAR RELEVANT TO ASST. YEAR 2005-06. AS POINTED OUT BY THE A.O. IN BOTH THE ASS ESSMENT ORDERS AND AS POINTED OUT BY THE CIT(A) IN THE EARL IER APPELLATE ORDER, THE EXPENDITURE CANNOT BE ALLOWED AS A DEDUC TION IN THIS ASSESSMENT YEAR AS THE APPELLANT IS FOLLOWING THE M ERCANTILE SYSTEM OF ACCOUNTING. 7.1 IN THE APPELLATE PROCEEDINGS, THE APPELLANT HAS SUBMITTED THAT LICENCE WAS GIVEN TO SET INDIA PVT. LTD. ONLY FOR 5 YEARS AND AFTER THAT THE RIGHTS WILL BE AVAILABLE WITH TH E PRODUCER AND THAT RIGHTS WERE TAKEN OVER IN PERPETUITY FOR RS.2 CRORES AND HENCE IT SHOULD BE ALLOWED AS DEDUCTION. THIS VIEW OF THE APPELLANT IS NOT CORRECT. THE APPELLANT IS HAVING T HE RIGHTS IN PERPETUITY UNTIL THE ENTIRE MONEY FINANCED WAS RECO UPED. SO THERE IS NO NEED TO PURCHASE THE RIGHTS FROM THE BMB PRODUCTIONS. FURTHER EVEN IF FOR ARGUMENT SAKE IT I S ACCEPTED THAT THE APPELLANT HAS PURCHASED THE RIGHTS (I.E. R IGHTS AVAILABLE AFTER LICENCE PERIOD WITH SET INDIA PVT. LTD. IS OVER), THEN, SINCE THE APPELLANT HAS CONSIDERED THAT RIGHT AS PURCHASE OF A RIGHT FOR RS.2,00,00,000/-, THE APPEL LANT SHOULD HAVE CONSIDERED THIS AMOUNT AS CAPITAL EXPEN DITURE AND SHOWN AS ASSET IN THE BALANCE SHEET AND NOT AS AN EXPENDITURE IN THE P&L ACCOUNT. IF THE APPELLANT HA S CONSIDERED THIS RIGHT AS A TRADING ASSET THEN THE A PPELLANT SHOULD HAVE VALUED THIS RIGHT AS RS.2,00,00,000/- A ND SHOULD HAVE SHOWN AS CLOSING STOCK. BUT THE APPELLA NT HAS NOT DONE SO. 7.2 IN VIEW OF ALL THE ABOVE DISCUSSIONS, I HOLD TH AT THE CLAIM THAT THE APPELLANT HAS INCURRED AN EXPENDITUR E OF RS.2,00,00,000/- TOWARDS PURCHASE OF RIGHTS OF THE SAID FILM AND IT IS AN ALLOWABLE EXPENDITURE UNDER THE PROVIS IONS OF INCOME TAX ACT FOR THIS ASSESSMENT YEAR IS NOT ACCE PTABLE. APPELLANT'S CONTENTIONS ARE REJECTED. THE A.O.'S OR DER IS UPHELD. ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 7 6. THE LD. AR VEHEMENTLY SUBMITTED BEFORE US THAT T HE LD. CIT(A) ERRED IN DISMISSING THE APPEAL AS HE HAS NOT APPRECIATED THE FACTS IN CORRECT PERSPECTIVE. THE LD. AR ARGUED THAT THE CIT(A) HAS MISUNDERSTOOD THE AGREEMENT ENTERED INTO WITH BMB PRODUCTIONS DATED 19.09.1999 WHERE UNDER THE R IGHTS OF WORLDWIDE CONTROLLER WERE GIVEN TO THE ASSESSEE AND NOT THE EXCLUSIVE OWNERSHIP RIGHTS WHICH WERE PURCHASED FOR RS. 2 CRORE IN THE FINANCIAL YEAR 2004-05 WHEN THE ASSESS EE REALISED THAT IT IS VERY DIFFICULT TO REALISE THE OUTSTANDIN G RIGHTS FROM THE PART SHARING OF THE PROFITS IF THE THINGS TURNED FA VOURABLY IN FUTURE. THE LD AR WHILE REFERRING TO THE VARIOUS C LAUSES OF THE AGREEMENT DATED 18.09.1999 TRIED TO EXPLAIN THAT TH IS WAS A FINANCING AGREEMENT UNDER WHICH THE FINANCE WAS GIV EN TO BMB PRODUCTION FOR PRODUCTION OF FILM WHICH WAS IN PROGRESS. IT WAS PROVIDED UNDER THE VARIOUS CLAUSES AS TO HOW THE ADVANCE WAS TO BE RECOVERED AND A FORMULA FOR PROF IT SHARING WAS PROVIDED. IT WAS ALSO ARGUED THAT THE AGREEMENT ALSO PROVIDED FOR THE SECURITY IN THE SHAPE OF TRANSFER OF NEGATIVE OF THE PICTURE IN THE NAME OF THE ASSESSEE. LD. COUNSE L SUBMITTED THAT HAD THERE BEEN A OUTRIGHT SALE OF RIGHTS IN TH E MOVIE, THEN THE SECURITY CLAUSE WOULD NOT HAVE BEEN THERE. THUS , THE LD. ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 8 COUNSEL SUBMITTED THAT CLAUSES NO.6 AND 9 PROVIDED FOR REPAYMENT AND MONEY THAT WOULD ACCRUE TO THE ASSESS EE AS FINANCER FOR THE ADJUSTMENTS AGAINST THE MONEY LENT . THUS, THE ENTIRE ARRANGEMENT WAS SIMILAR TO FINANCING A PROJE CT WHERE THE FINANCER DID NOT GET THE EXCLUSIVE RIGHTS OVER THE ASSETS BUT WAS PROVIDED A SECURITY OF ASSETS. THE LD. CIT(A) H AS WRONGLY UNDERSTOOD THAT ASSESSEE HAS ACQUIRED ALL THE RIGHT S VIDE AGREEMENT DATED 18.09.1999 AND WRONG CONCLUSION WAS DRAWN THAT THE RIGHTS WHICH WERE ALREADY VESTED IN THE AS SESSEE COULD NOT BE PURCHASED AGAIN. THE AMOUNTS ADVANCED WERE S HOWN AS ADVANCE RECOVERABLE FROM BMB PRODUCTIONS AND NOT AS PURCHASE PRICE OR STOCK IN TRADE AND THE REALISATIO N MADE AS PER THE AGREEMENT DATED 018.09.1999 WERE ADJUSTED T OWARDS THE REPAYMENT OF THE ADVANCE. IN A.Y. 2003-04 THE T OTAL AMOUNT REALISED FROM SALE OF DISTRIBUTION OF RIGHTS WAS SHOWN AS INCOME IN THE PROFIT AND LOSS ACCOUNT INSTEAD OF ADJUSTING THE SAME AGAINST THE ADVANCE RECOVERABLE. IN AY 200 5-06 THE ASSESSEE PURCHASED THE RIGHTS IN THE FILM IN PERPET UITY FOR A CONSIDERATION OF RS.2 CRORE AS CONFIRMED BY THE CON FIRMATION LETTER FROM BMB PRODUCTIONS DATED 1.4.2004 WHICH CL EARLY MENTIONED THAT IT WAS UNABLE TO REPAY THE ADVANCE T AKEN AND ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 9 THEREFORE GIVING THE EXCLUSIVE RIGHTS AS IRREVOCABL E PERPETUAL TRANSFER OF RIGHTS ON EXCLUSIVE BASIS. ACCORDINGLY A SUM OF RS. 2 CRORE WAS CHARGED OFF TO THE PROFIT AND LOSS ACCOUN T WHICH THE LD. CIT(A) TOTALLY MISUNDERSTOOD AS PRIOR PERIOD EX PENSES. THE CIT(A) ALSO WRONGLY CONCLUDED THAT THE TRANSFER OF RIGHTS TO SET INDIA PVT. LTD. WAS MADE ALREADY IN AY 2003-04 WHIC H COULD BE POSSIBLE ONLY WHEN THE ASSESSEE WAS ALREADY EXCLUSI VE OWNER OF THE RIGHTS THEREBY CONFUSING THE TWO (I) SALE OF RI GHT TO SET INDIA PVT. LTD. FOR A LIMITED PERIOD IN AY 2003-04 (II) TRANSFER OF EXCLUSIVE RIGHTS IN PERPETUITY IN FAVOUR OF THE ASS ESSEE IN AY 2005-06 AS MUTUALLY CONTRADICTORY AND WRONG ON THE BELIEF THAT THE ASSESSEE WAS ALREADY EXCLUSIVE OWNER OF TH E RIGHTS WHEREAS THE ASSESSEE WAS FINANCER ONLY. RELIANCE WA S PLACED ON THE CBDT CIRCULAR NO.92 DATED 18.9.1972 AND 154 DATED 05.12.1974 WHEREIN THE METHOD OF APPORTIONMENT OF C OST OF ACQUIRING OF DISTRIBUTION RIGHTS. SO FAR AS THE OBS ERVATIONS OF THE CIT(A) THAT THE PURCHASE WAS NOT SHOWN AS CLOSI NG STOCK AT THE YEAR END , THE LD SUBMITTED THE PICTURE HAD HA RDLY ANY VALUE AT THE YEAR END COUPLED WITH THE FACT THAT A CCRUALS WERE VERY POOR. ALTERNATIVELY THE LD COUNSEL OF THE ASSE SSEE SUBMITTED THAT THE ASSESSEE COULD HAVE CHOSEN TO WR ITE OFF THE ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 10 ENTIRE OUTSTANDING ADVANCE AS TRADING LOSS BUT THE ASSESSEE INSTEAD CHOSE TO PURCHASE THE BALANCE RIGHTS STILL AVAILABLE IN PERPETUITY AS AGAINST THE HAVING CHARGE AND LIEN O N THE RIGHTS OUT OF BUSINESS EXIGENCIES AND CONSIDERATION THAT I N FUTURE THE TIME MIGHT CHANGE FAVOURABLY AND MONEY WOULD BE REC OUPED FROM SALE OF RESIDUAL RIGHTS WHICH ULTIMATELY HAPPE NED IN SUBSEQUENT YEARS WHEN THE ASSESSEE REALISED GOOD AM OUNT OF MONEY FROM SELLING THE RIGHTS AND CREDITED THE REV ENUE IN THE SUBSEQUENT YEARS NAMELY AY 2007-08 AND 2008-09.THE CIT(A) WAS NOT JUSTIFIED IN REJECTING THE ACTUAL TRANSACTI ONS BY HOLDING THAT THERE WAS NO PROPER DOCUMENT IN SUPPORT OF THE PURCHASE. THE LD. COUNSEL SUBMITTED THAT IT WAS NOT NECESSARY TO HAVE A AGREEMENT FOR EACH AND EVERY TRANSACTION WHEN THE S AME WAS AGREED TO BY THE TRANSACTING PARTIES. BUT IN THIS C ASE THE CONFIRMATION LETTER FROM BMB PRODUCTION EVIDENCING THE PURCHASE OF REMAINING RIGHTS IN THE FILM WAS PLACED BEFORE THE AUTHORITIES BELOW WHICH WAS DISBELIEVED. THIS WAS N OT PART OF ANY TAX PLANNING AS OBSERVED BY THE CIT(A) WHO BELI EVED THAT THE ASSESSEE PURCHASED ALL THE RIGHTS IN THE PICTUR E IN TERMS OF AGREEMENT DATED 18.09.1999 WHEREAS THE SAME WAS A F INANCING ARRANGEMENT AND THE AGREEMENT CONTAINED VARIOUS CLA USES AS ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 11 TO AMOUNT TO BE LENT, SECURITY OF THE MONEY LENT FR OM BMB PRODUCTIONS AND MECHANISM FOR REPAYMENT. THE LD. C OUNSEL SUBMITTED THAT THE BONA FIDE OF THE ASSESSEE WERE PROVED FROM THE FACT RIGHTS WERE IN FACTS SOLD IN THE SUBSEQUEN T YEARS AND INCOME THEREFORM WAS OFFERED FOR TAX. IN DEFENCE TO HIS ARGUMENTS THE LD COUNSEL RELIED ON A NUMBER OF DECI SIONS NAMELY P. SATYANARAYANA V COMMISSIOER OF INCOME TA X 116 ITR 803(AP), CIT V SETHU FILM DISTRIBUTORS 212ITR 6 20(MAD) , CIT V CRESCENT FILMS PVT LTD 248 ITR 670 (MAD), BAD RIDAS DAGA V CIT 34 ITR 10 (SC) AND T.J. LALWANI V CIT( A) 78 ITR 176(BOM).LASTLY THE LD COUNSEL SUMMARISING HIS ARGU MENTS SUBMITTED THAT THE LD CIT(A) ERRED IN TREATING THE TRANSACTION OF PURCHASE AS PRIOR PERIOD EXPENSES WHICH WAS A GENUI NE PURCHASE AND ALSO TREATING THE AGREEMENT OF FINANCE AND SHARING OF REVENUE TO SECURE THE REPAYMENT OF MONEY ADVANCED AS AGREEMENT FOR TRANSFER OF EXCLUSIVE RIGHTS IN FA VOUR OF THE ASSESSEE WHEREAS AS A MATTER OF FACT THE ASSESSEE W AS VESTED IN THE RIGHTS OF WORLD RIGHT CONTROLLER WHEREBY THE A SSESSEE WAS CONFERRED THE RIGHT OF SUPERVISIONS OF COMMERCIAL E XPLOITATION OF THE FILM TO SAFEGUARD THE MONEY ADVANCED IN THE PRODUCTION OF THE FILM AND THE PROVIDED FOR SHARING OF REALISA TION IN PROFITS ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 12 AND ACCORDINGLY AMOUNT ADVANCED UNDER THE AGREEMENT WAS ALSO SHOWN AS ADVANCE RECOVERABLE. HAD THE ASSESSEE PURCHASED THE RIGHTS VIDE AGREEMENT DATED 18.09.199 9, THE SAME WOULD HAVE BEEN SHOWN AS PURCHASE OF EXCLUSIVE RIGHTS. IN FACT VIDE AGREEMENT DATED 18.09.1999 THE MONEY W AS ADVANCED AND LIMITED RIGHTS WERE TRANSFERRED TO THE ASSESSEE TO SECURE THE REPAYMENT BUT IN AY 2005-06 THE ASSESS EE PURCHASED THE REMAINING RIGHTS IN THE FILM AND BEC AME THE ABSOLUTE OWNER. THE LD AR PRAYED THAT IN VIEW OF TH E UNDERLYING FACTS SUPPORTED WITH THE CIRCULARS AND J UDICIAL DECISIONS , THE ORDER OF CIT(A) BE SET ASIDE AND DI SALLOWANCE BE DELETED. 7. PER CONTRA THE LD DR RELIED HEAVILY UPON THE ORD ERS OF AUTHORITIES BELOW AND COUNTERED THE ARGUMENTS OF LD AR BY SUBMITTING THAT THE ASSESSEE HAD ALREADY ACQUIRED T HE RIGHTS IN THE FILMS VIDE AGREEMENT DATED 18.09.1999 WHICH WER E SOLD TO SET INDIA PVT LTD IN AY 2003-04 AS OBSERVED BY THE LD CIT(A). THE LD DR WHILE DEFENDING THE ORDER OF AUTHORITIES BELOW SUBMITTED THAT THE ASSESSEE HAD WRONGLY SHOWN THE I NCOME IN AY 2003-04 OF RS.2.20 CR REALISED FROM SET INDIA P VT LTD ON 8.11.2002 FROM TRANSFERRING THE EXCLUSIVE NON STAN DARD ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 13 TELEVISION AND PAY PER VIEW RIGHTS AND IN ORDER T O UNDO THE SAID WRONG RETURNING THE INCOME THE WHOLE EXERCISE WAS UNDERTAKEN WHICH WAS RIGHTLY DISALLOWED BY THE AO AND CONFIRMED BY THE CIT(A). THE LD DR SUBMITTED THAT T HE ASSESSEE COULD NOT HAVE PURCHASED THE FILM RIGHTS WHICH WER E ALREADY VESTED IN THE ASSESSEE AND FINALLY PRAYED FOR UPHOL DING THE DECISION OF THE FAA. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORDS AS PLACED BEFORE US INCLUDING THE ORDERS OF THE AUTHORITIES BELOW AND VARIOUS CIRCULA RS AND DECISIONS RELIED BY THE LD COUNSEL OF THE ASSESSEE. THE ASSESSEE ENTERED INTO AN AGREEMENT OF FINANCING DATED 18.09 .1999 WITH M/S BMB PRODUCTIONS FOR LENDING MONEY FOR THE PRODU CTION OF A FILM HUM TUMHARE HAIN SANAM WHICH WAS UNDER PRODUCTION AT THE TIME OF ADVANCING MONEY AND THE M ONEY WAS ADVANCED ACCORDINGLY DURING THE VARIOUS STAGES OF P RODUCTION. COPY OF THE AGREEMENT IS PLACED AT PAGE 89 TO 100 O F THE PAPER BOOK. UPON PERUSAL OF THE SAID AGREEMENT IT IS CLEA R THAT THIS WAS AGREEMENT TO FINANCE THE PRODUCTION OF FILM SPE CIFYING THE VARIOUS TERMS AND CONDITIONS OF FINANCING, MODALITI ES OF REPAYMENT, AND SECURITY GIVEN TO SAFEGUARD THE MONE Y LENT. ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 14 CLAUSE NO. 1 PROVIDES FOR THE VARIOUS RIGHTS GIVEN TO THE ASSESSEE AS WORLDWIDE CONTROLLER SUCH AS SALE OF DISTRIBUTION RIGHTS INCLUDING COPYRIGHTS, RIGHT FOR EXPLOITATION OF FILM BY DISTRIBUTION, EXHIBITION IN CINEMA, TV, SATELLITE R IGHTS , VIDEO RIGHTS AND THERE SUCH AS DVD DUBBING ETC. CLAUSES NO 6 TO 9 PROVIDED FOR THE SHARING OF REVENUE BETWEEN THE ASS ESSEE AND BMB PRODUCTIONS, RIGHTS AS WORLDWIDE CONTROLLER AND REPAYMENT AND SECURITY OF MONEY ADVANCED AND ALSO T HE COURSE TO BE FOLLOWED IN THE EVENT OF DEFAULT IN HO NOURING THE COMMITMENTS UNDER THE AGREEMENT. IT IS ABUNDANTLY C LEAR FROM THE ABOVE THAT THE RIGHTS WERE GIVEN TO THE ASSESSE E ONLY AS FINANCER TO SECURE THE REPAYMENT OF MONEY ADVANCED BY SHARING THE REVENUE FROM THE FILM AS PROVIDED IN TH E CLAUSE 6 AND NO WHERE THE ASSESSEE WAS GIVEN EXCLUSIVE AND A BSOLUTE RIGHTS OF OWNERSHIP AND RIGHT TO RECEIVE THE 100 RE VENUE FROM THE FILM. THUS ONE THING IS VERY CLEAR THAT THE ASS ESSEE WAS NOT THE EXCLUSIVE AND ABSOLUTE OWNER OF THE RIGHTS BUT A MECHANISM WAS DEVISED TO MAKE THE REPAYMENT OF THE LOAN TAKEN FROM THE ASSESSEE. WE ALSO FIND THAT THE ASSE SSEE RECEIVED THE SHARE OF REVENUES FROM THE FILM AND AD JUSTED THE SAME TOWARDS THE ADVANCE RECOVERABLE. ON 8.11.2002 THE ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 15 ASSESSEE GRANTED A LICENSE OF EXCLUSIVE NON STANDA RD TELEVISION AND PAY PER VIEW RIGHTS TO SET INDIA PV T. LTD. FOR A CONSIDERATION OF RS.2.20 CRORE UNDER TRIPARTITE AG REEMENT BETWEEN ASSESSEE, BMB PRODUCTIONS AND SET INDIA PVT LTD. THE ENTIRE AMOUNT WAS OFFERED BY THE ASSESSEE TO TA XATION BY CREDITING THE INCOME IN THE PROFIT AND LOSS ACCOUNT AND WAS NOT CREDITED TO ADVANCE RECOVERABLE. AS ON 1.4.2004 THE ADVANCE OUTSTANDING WAS RS. 4,26,97,250/-. WHEN THE ADVANCE WAS NOT RECOVERED THROUGH THE MODES AS MENT IONED IN THE AGREEMENT DATED 18.09.1999, THEN THE ASSESSEE P URCHASED THE RIGHTS IN FILMS ON PERPETUAL BASIS FOR A CONSI DERATION OF RS. 2.00 ON THE BELIEF THAT IF THE CIRCUMSTANCES TURNS FAVOURABLE THE FILM MAY FETCH REVENUES IN FUTURE AND CHARGED T HE SAME TO THE PROFIT AND LOSS ACCOUNT BUT VALUED THE STOCK AT NIL AT THE YEAR END. THE LD. AR SUBMITTED THAT THERE WAS HARDL Y ANY VALUE OF THE STOCK AND THUS SAME WAS VALUED AT NIL. WE AL SO FIND THAT IN THE SUBSEQUENT YEARS I.E A.Y. 2007-08 AND 2008-0 9 THE GOOD AMOUNT OF RECEIPTS/INCOMES WERE RECEIVED FROM DISTR IBUTION OF FILM AND ACCORDINGLY OFFERED FOR TAX IN THOSE YEAR. FROM THE ABOVE IT IS CLEAR THAT THE PAYMENT OF RS. 2.00 CR IS NOT A PRIOR PERIOD EXPENSES NOR THE ASSESSEE WAS OWNER OF THE E XCLUSIVE ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 16 RIGHTS OF THE FILMS IN TERMS OF AGREEMENT DATED 18. 09.1999 AND THEREFORE THE CONCLUSIONS AS DRAWN BY THE CIT(A) IS NOT CORRECT TO THIS EXTENT. FROM THE FACTS OF THE CASE IT IS CL EAR THAT THE ASSESSEE HAS PURCHASED THE RIGHTS IN AY 2005-06 FOR RS. 2.00 CR AS CORROBORATED BY THE FACT THAT IN THE ASSESSM ENT YEARS 2007-08 AND 2008-09 THE ASSESSEE RECEIVED INCOME FR OM DISTRIBUTION OF FILMS AND OFFERED THE SAME TO THE I NCOME TAX. WE FIND MERIT IN THE ARGUMENT OF THE ASSESSEE THAT THE ADVANCE GIVEN TO BMB PRODUCTIONS WAS A TRADING ADVANCE GIVE N IN THE ORDINARY COURSE OF BUSINESS AND THE SAME WAS AN ALL OWABLE BUSINESS LOSS IF WRITTEN OFF IN THE BOOKS OF ACCOUN TS AND WE ARE NOT IN AGREEMENT WITH THE CIT(A) THAT THE WHOLE EXE RCISE WAS UNDERTAKEN TO NEUTRALISE THE INCOME RS. 2.20 RECEIV ED FROM SET INDIA PVT LTD WHICH OFFERED TO TAX IN AY 2003-0 4. MOREOVER THE CASE OF THE ASSESSEE IS ALSO SUPPORTED BY THE D ECISIONS REFERRED AND RELIED BY THE LD AR.THE HON'BLE HIGH C OURT OF ANDHRA PRADESH IN THE CASE OF P. SATYANARAYANA V. C OMMISSIONER OF INCOME-TAX (SUPRA) HAS HELD THAT WHERE A FILM DI STRIBUTOR ADVANCED CERTAIN AMOUNTS TO THE PRODUCER OF A FILM FOR THE PURPOSE OF PRODUCTION OF THE MOTION PICTURE UNDER A N AGREEMENT WHICH PROVIDED FOR REALIZATION OF THE AMO UNT ADVANCED ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 17 BY HIM Q FTER EXHIBITION OF FLIMS AND THE SAME COULD NOT BE REALIZED IN FULL OUT OF THE COLLECTIONS THROUGH EXHIBITION O F SUCH FILMS, AND BY AN AGREEMENT THE DISTRIBUTOR AGREES TO TAKE A PA RT OF THE AMOUNT FROM THE PRODUCER AND WRITES OFF THE BALANCE , THE LOSS ARISING TO THE DISTRIBUTOR THEREBY IS A TRADING LOS S INCURRED IN THE COURSE OF BUSINESS AND INCIDENTAL THERETO AND HENCE HE IS ENTITLED TO DEDUCTION UNDER S. 28 OF THE I.T. ACT, 1961. THE HON'BLE HIGH COURT OF MADRAS IN THE CASE OF COMMISSIONER OF INCO ME-TAX V. SETHU A FILM DISTRIBUTORS (SUPRA ) HAS HELD THAT TH E TRIBUNAL'S FINDING THAT THE ASSESSEE HAD ADVANCED MONEYS IN TH E COURSE OF MONEY-LENDING BUSINESS WAS BASED ON VALID MATERI ALS; (II) THAT ONCE IT WAS FOUND THAT THE ASSESSEE HAD B EEN ENGAGED IN THE COMMERCIAL BUSINESS ACTIVITY OF ADVA NCING MONEYS TO VARIOUS PRODUCERS, AS FILM FINANCIER , APART FROM THE BUSINESS OF DISTRIBUTION OF PICTURES, THE ADVANCES WERE SO GIVEN ONL Y IN THE NATURE OF LENDING MONEYS FOR INTEREST AND THE LOSS, IF ANY, HAD OCCUR RED INCIDENTALLY TO THE BUSINESS AND, THEREFORE, IT WAS ALLOWABLE AS BUSINESS LOSS. THE HON'BLE HIGH COURT OF MADRAS IN THE CASE OF COMMISSIONER OF INCOME-TAX V. CRESCENT FILMS (P.) L TD(SUPRA) HELD THAT, IN THE INSTANT CASE, THE SUM OF RS. 7,50 , 000 PAID BY THE DISTRIBUTOR WOULD HAVE BEEN LOST TO THE ASSESSE E, HAD THE PICTURE NOT BEEN COMPLETED. IN ORDER TO ENSURE THAT THE PICTURE WAS COMPLETED, THE ASSESSEE HAD AGREED TO L END MONEY ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 18 AND THAT LENDING WAS A SEPARATE TRANSACTION AND WAS NOT PART OF THE DISTRIBUTION ARRANGEMENT. THE MONEY SO LENT HAV ING BECOME IRRECOVERABLE BY REASON OF THE PICTURE FAILING AT T HE BOX OFFICE AND THE PRODUCER BEING UNABLE TO REPAY HIS DEBTS, T HE MONEY SO LOST TO THE ASSESSEE WAS RIGHTLY HELD BY THE COM MISSIONER AND THE TRIBUNAL TO BE A TRADING LOSS. THE HON'BLE SUPREME COURT IN THE CASE OF BADRIDAS D AGA V. COMMISSIONER OF INCOME(SUPRA) HELD THAT WHEN A CLAI M IS MADE FOR A DEDUCTION FOR WHICH THERE IS NO SPECIFIC PROVISION UNDER SECTION 10(2), WHETHER IT IS ADMISSIBLE OR NO T WILL DEPEND ON WHETHER, HAVING REGARD TO ACCEPTED COMMERCIAL PR ACTICE AND TRADING PRINCIPLES, IT CAN BE SAID TO ARISE OUT OF THE CARRYING ON OF THE BUSINESS AND BE INCIDENTAL TO IT. THE LOSS F OR WHICH A DEDUCTION IS CLAIMED MUST BE ONE THAT SPRINGS DIREC TLY FROM THE CARRYING ON OF THE BUSINESS AND IS INCIDENTAL TO IT , AND NOT ANY LOSS SUSTAINED BY THE ASSESSEE EVEN IF IT HAS SOME CONNECTION WITH HIS BUSINESS. IF THAT IS ESTABLISHE D, THEN THE DEDUCTION MUST BE ALLOWED, PROVIDED THAT THERE IS NO PROVISION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 19 THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF T. J. LALVANI V. COMMISSIONER OF INCOME-TAX HAS HELD THAT THE TRIBUN AL CONCLUSION THAT THE LOAN TRANSACTION WAS NOT IN THE COURSE OF THE ASSESSEE 'S BUSINESS WAS NOT CORRECT. THE TWO CIRCU MSTANCES MENTIONED BY THE TRIBUNAL WERE NOT SUFFICIENT TO WA RRANT SUCH A CONCLUSION. THERE WAS, THEREFORE, NO EVIDENCE FOR T HE FINDING RECORDED BY THE TRIBUNAL THAT THE LOSS IN QUESTION HAD NOT BEEN INCURRED BY THE ASSESSEE IN THE COURSE OF HIS BUSIN ESS SO AS TO BE DEDUCTIBLE UNDER THE PROVISIONS OF THE INDIAN INCOM E-TAX ACT; AND IT IS NOT NECESSARY THAT IN ORDER THAT AN EXPE NDITURE SHOULD BE IN CONNECTION WITH THE CARRYING OUT OF A BUSINES S OR INCIDENTAL TO IT, IT MUST BE NECESSARILY REFERABLE TO ANY SPECIFIC OR DIRECT TRANSACTION IN THE COURSE OF THE CARRYING ON OF THE BUSINESS. THE FINANCING BY THE ASSESSEE OF THE BUSINESS OF LO OKMANJI AND OF ALL ITS IMPORT OF GOODS ON LOOKMANJI'S LICEN CES WAS AN ACTIVITY OF THE ASSESSEE IN THE COURSE OF HIS BUSIN ESS AND THE LOSS ARISING ON THE LOAN, THEREFORE, WAS A LOSS, WHICH H AD OCCURRED IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE AND INCIDENTAL TO IT AND WAS, THERE/RE, CLAIMABLE BY T HE ASSESSEE AS A DEDUCTION. THOUGH IT WAS DIFFICULT TO TREAT IT AS COMING UNDER SECTION 10(2)(XV), IT WAS CLAIMABLE BO TH AS A TRADING LOSS UNDER SECTION 10(1) OR AS A DEBT OF THE BUSINE SS WHICH HAD ITA NO.2822/MUM/12 A.Y. 2005-06 [MEGA BOLLYWOOD P. LTD. VS. ACIT] PAGE 20 BECOME IRRECOVERABLE UNDER SECTION 10(2)(XI). 9. IN THE CASE OF THE ASSESSEE ALSO HAD THE ASSESSE E CHOSE TO WRITE OFF THE AMOUNT ADVANCED IN THE ORDINARY COURS E , THE SAME WOULD HAVE BEEN AN ALLOWABLE DEDUCTION AS HAVE BEEN HELD IN THE ABOVE DECISIONS. IN VIEW OUR THE OBSERV ATIONS AS GIVEN ABOVE AND RATIO LAID DOWN IN ABOVE DECISION S , WE ARE INCLINED TO SET ASIDE THE ORDER OF CIT(A) AND DIREC T THE AO TO DELETE THE ADDITION OF RS.2 CRORES. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF AUGUST, 2016. SD/- SD/- ( RAJESH KUMAR ) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBE R MUMBAI: DATED 26/08/2016 PRABHAT KESARWANI TRUE COPY / COPY OF ORDER FORWARDED TO:- 1. / REVENUE 2. / ASSESSEE 3. !'!#$ % / CONCERNED CIT 4. %- / CIT (A) 5.-./00#$, #$, !' / DR, ITAT, MUMBAI 6./4567 / GUARD FILE. BY ORDER / , / !, #$, !'