THE ACIT 4(3), MUMBAI V. M/S. VALATION FINANCE AND MARKETING LTD, MUMBAI

ITA 4845/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55648 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 19-10-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 25-07-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Capital asset; Commercial expediency; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F,MUMBAI BEFORE SHRI R.S. SYAL (AM) & SHRI V. DURGA RAO (J M) I.T.A.NO.4845/MUM/2008 (A.Y.2003-04) ASSTT. COMMR. OF INCOME-TAX-4(3), 6 TH FLOOR, ROOM NO.649, AAYKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. VS. M/S. VALATION FINANCE & MARKETING LTD., MONICA BUNGLOW, FAZAL ROAD, CUFFE PARADE,MUMBAI-4005. PAN: AABCV1310P. APPELLANT RESPONDENT APPELLANT BY SHRI SHANTAM BOSE. RESPONDENT BY DR. K. SHIVARAM. DATE OF HEARING 19 - 10 - 2011 DATE OF PRONOUNCEMENT 25 - 10 - 2011 O R D E R PER R.S. SYAL, AM : THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) ON 23-05-2008 IN RELATION TO ASSESSMENT YEAR 2003-0 4. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.1,05,00,000/- ON ACCOUNT OF LOSS ON FILM DISTRIB UTION. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT I N ITS RETURN FILED AT LOSS OF RS.1,01,43,726/-, THE ASSESSEE CLAIMED LOSS IN FILM DISTRIBUTION AT RS.1.05 CRORE WITH A DETAILED NOTE ON BUSINESS ACTIVITY STATING T HAT IT WAS ORIGINALLY INTO THE BUSINESS OF DEALING IN AND INSTALLATION OF VIDEO CA MERA (SECURITY) SYSTEMS. DURING THE YEAR, THE DIRECTOR, WHO WAS MANAGING THE BUSINE SS, DECIDED TO EXIT OUT OF THE BUSINESS AND HENCE THE STOCK WAS RE-SOLD AT COST. I T WAS DECIDED TO VENTURE INTO ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 2 CONSULTANCY ADVISORY SERVICES AND FILM DISTRIBUTION /FINANCE. DURING THE YEAR, THE ASSESSEE ENTERED INTO AGREEMENT FOR COMMERCIAL THEA TRICAL DISTRIBUTION AND EXHIBITION OF THE MOVIE DANGER IN CERTAIN TERRIT ORIES, WHICH RESULTED IN TO LOSS OF THE ABOVE SAID AMOUNT. DURING THE COURSE OF ASSE SSMENT PROCEEDINGS, THE FACTS WERE ELABORATED BY EXPLAINING THAT THE ASSESS EE ENTERED INTO JOINT VENTURE AGREEMENT DATED 26-04-2002 FOR THE JOINT DISTRIBUTI ON OF THE FILM DANGER WITH THE PRODUCER M/S.HARMONE SHOWBIZ PVT. LTD. FOR SHARING 40% PROFITS OR LOSSES FROM THE DISTRIBUTION OF THIS FILM. SUBSEQUENTLY, IT WAS FOUND THAT THE BUSINESS WAS NOT LIKELY TO BE PROFITABLE AND THE ASSESSEE DECIDED TO EXIT FROM THE EARLIER AGREEMENT. AS AGAINST THE SETTLED PAYMENT OF RS.1.5 0 CRORE, THE ASSESSEE PAID A TOTAL SUM OF RS.1.05 CRORE AND THE FINAL SETTLEMENT WAS MADE THROUGH INTERVENTION OF A COMMON FRIEND. THE SAID AMOUNT OF RS.1.05 CRORE WAS CLAIMED AS DEDUCTIBLE LOSS DUE TO INCOMPLETION/ABANDONMENT OF THE PROJECT FOR JOINT DISTRIBUTION OF THE FILM. THE AO DID NOT FIND ANY F ORCE IN THE ARGUMENTS ADVANCED ON THE GROUND THAT AS PER AGREEMENT DATED 26-04-200 2 THE THEATRICAL DISTRIBUTION, EXHIBITION AND EXPLOITATION RIGHTS OF THE FILM DANGER FOR THE TERRITORIES PRESCRIBED IN THE AGREEMENT BELONGED TO THE ASSESSEE AND M/S. HARMONE SHOWBIZ PVT. LTD. AS JOINT OWNERS. THE AO N OTICED FROM THE AGREEMENT THAT THE ASSESSEE WAS ENTITLED TO 40% SHARE IN PROF IT/LOSS FROM THE SAID DISTRIBUTION. IT WAS, THEREFORE, HELD THAT THE PAYM ENT WAS MADE TOWARDS ACQUISITION OF CAPITAL ASSET AND HENCE THE SAME COU LD NOT BE ALLOWED AS DEDUCTION. THE AO SUMMARIZED HIS FINDINGS AS UNDER : 1) THE ASSESSEE COMPANY WAS NOT HAVING FINANCIAL CAPACITY WITH AVAILABLE FUNDS OF RS.60,452/-. 2) IT HAD NO EXPERIENCE OF THEATRICAL DISTRIBUTI ON. 3 THE ASSESSEE WAS AWARE OF THE TERMS & CONDITIONS OF THE AGREEMENT WHICH PREVENTED ADJUSTMENT OF INCOME REC OVERIES ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 3 AGAINST THE CONSIDERATION TO BE PAID BY IT AND STIL L IT AWAITED FOR ADJUSTMENT. 4) ALL TRANSACTIONS WERE DONE IN SUCH A WAY THA T THE ASSESSEE WILL INCUR LOSS. AS SUCH THE PAYMENT OF RS.1,05,00, 000/- TOWARDS CANCELLATION OF AGREEMENT CANNOT BE TREATED AS BUSI NESS OR COMMERCIAL EXPEDIENCY. 5) WITHOUT PREJUDICE TO THE AFORESAID ARGUMENTS THE PAYMENT WAS TOWARDS ACQUISITION OF CAPITAL ASSET AND THE CA NCELLATION OF THE SAME CANNOT BE CONSIDERED AS REVENUE EXPENSES. HE, THEREFORE, DISALLOWED THE LOSS OF RS.1.05 CRORE AND ASSESSED INCOME AT RS.3,56,270/-. IN THE FIRST APPEAL, THE LD. CIT(A) OVERTURNED THE ASSESSMENT ORDER AND HELD THAT THE AMOUNT WAS DEDUCTIBLE. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED FROM THE FACTS NARRATED IN T HE ORDERS OF THE AUTHORITIES BELOW THAT THE FUNDS AVAILABLE WITH THE ASSESSEE AT THE BEGINNING OF THE YEAR AMOUNTED TO RS.60,452/- AND UNSECURED LOANS TOTALLE D AT RS.55,606/-. THERE WERE SALES OF RS.1,80,301/- IN THE YEAR IN QUESTION AND THE ASSESSEE EARNED RS.4,00,000/- AS ADVISORY FEES DURING THE ACCOUNTIN G PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT ENTERED INT O AGREEMENT WITH M/S. HARMONE SHOWBIZ P. LTD., COPY OF WHICH IS PLACED AT PAGES 34 TO 45 OF THE PAPER BOOK. AS PER THIS AGREEMENT WITH M/S. HARMONE SHOWB IZ P. LTD., WHO HAPPENED TO BE THE PRODUCER OF THE FILM DANGER, THE ASSESS EE BECAME JOINT OWNER IN THE DISTRIBUTION RIGHTS WITH 40% SHARE IN PROFIT/LOSS F OR A TOTAL CONSIDERATION OF RS.1.50 CRORE. SUBSEQUENTLY, CERTAIN DISPUTES AROSE AND THE ASSESSEE MOVED OUT OF THE AGREEMENT. THE EARLIER AGREEMENT WAS CANCELL ED BY LATER AGREEMENT, COPY OF WHICH IS PLACED AT PAGE 46 ONWARDS OF THE PAPER BOOK. INITIALLY THE ASSESSEE WAS SUPPOSED TO PAY RS.1.50 CRORE FOR PURCHASING 40 % SHARE IN PROFIT/LOSS FROM THE DISTRIBUTION OF THE FILM DANGER IN CERTAIN TE RRITORIES. HOWEVER, THE ASSESSEE ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 4 PAID ONLY A SUM OF RS.1.05 CRORE AND WALKED OUT OF THE AGREEMENT. NOW, THE QUESTION IS WHETHER SUCH SUM OF RS.1.05 CRORE IS DE DUCTIBLE AS BUSINESS LOSS AS HELD BY THE LD. CIT(A) OR A CAPITAL LOSS AS HELD BY THE AO. 5. BEFORE PROCEEDING FURTHER, IT WOULD BE RELEVANT TO NOTE THE CONTENTION OF THE LD. A.R. THAT THE ASSESSEE WAS ENGAGED IN THE B USINESS OF FINANCING AND THE SAID AMOUNT OF RS.1.05 CRORE BE TREATED AS AMOUNT A DVANCED IN FINANCING BUSINESS. HE ARGUED THAT PROFIT @ 40%, WHICH WAS TO ACCRUE TO THE ASSESSEE, SHOULD BE CONSIDERED AS A MODE OF DETERMINATION OF INTEREST TOWARDS THE INVESTMENT OF RS.1.05 CRORE. WE ARE NOT CONVINCED W ITH THE SUBMISSION PRIMARILY FOR THE REASON THAT THE ASSESSEE ENTERED INTO AN AG REEMENT WITH M/S. HARMONE SHOWBIZ P. LTD. WITH THE UNDERSTANDING THAT IT WOU LD PAY RS.1.50 CRORE AND GET 40% (FORTY PERCENT) AS SHARE IN PROFIT/LOSS . FROM THE COPY OF THE AGREEMENT, IT IS CLEAR THAT THE INTENTION OF THE ASSESSEE WAS TO ENTER INTO BUSINESS OF FILM DISTRIBUTION BY CONTRIBUTING A SUM OF RS.1.50 CROR E WITH A VIEW TO EARN 40% IN PROFIT/LOSS FROM THE DISTRIBUTION OF THE FILM DANG ER IN CERTAIN TERRITORIES. THERE WAS NEVER ANY INTENTION OF ADVANCING RS.1.05 CRORE AS FINANCE TO THE PRODUCER. IT IS RATHER APPARENT FROM THE FACT THAT THIS AGREEMEN T WAS ENTERED INTO WITH M/S. HARMONE SHOWBIZ PVT. LTD. AFTER THE COMPLETION OF T HE MOVIE WITH AN UNDERSTANDING TO SHARE 40% IN PROFIT/LOSS FROM THE DISTRIBUTION OF THE FILM IN CERTAIN TERRITORIES. IT IS OBVIOUS THAT THE QUESTIO N OF FINANCING THE FILM COULD HAVE ARISEN ONLY BEFORE THE PRODUCTION OF THE FILM AND N OT AFTER. WHEN A PERSON INVESTS CERTAIN FUNDS INTO A BUSINESS WITH THE UNDERSTANDIN G TO SHARE PROFITS OR INCUR LOSSES RESULTING THERE FROM, THE INTENTION IS ALWA YS TO CARRY ON BUSINESS AND NOT FINANCE WITH A VIEW TO EARN INTEREST. IT IS, NO DOU BT, TRUE THAT INTEREST MAY BE EARNED BY THE FINANCIER IN A PARTICULAR MANNER APAR T FROM A FIXED PERCENTAGE. HOWEVER, THE IMPORTANT CONDITION IS THAT THE AMOUNT SHOULD BE ADVANCED AS LOAN ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 5 AND NOT AS INVESTMENT FOR SHARING PROFIT OR INCURRI NG LOSS FROM THE BUSINESS IN WHICH THE AMOUNT IS INVESTED. HERE IS A CASE IN WHI CH THE ASSESSEE UNDERTOOK TO HAVE 40% SHARE IN PROFIT/LOSS FROM THE DISTRIBUTIO N OF THE FILM IN CERTAIN TERRITORIES. OBVIOUSLY, IT CANNOT BE SAID THAT THE AMOUNT CONTRIBUTED BY THE ASSESSEE WAS IN THE NATURE OF FINANCING FOR INTERES T. FURTHER, THE ASSESSEE AGREED TO PURCHASE DISTRIBUTION RIGHTS AT 40% OF THE SHARE IN PROFIT/LOSS FROM THE FILM DANGER IN CERTAIN TERRITORIES AND COULD INVEST ON LY RS.1.05 CRORE AND THEREAFTER THOUGHT IT BETTER TO COME OUT OF THE PROJECT AS IT WAS NOT SUITABLE TO IT. FURTHER, THE ASSESSEE, DURING THE COURSE OF ASSESSMENT PROCE EDINGS, STATED BEFORE THE AO THAT IT ENTERED INTO BUSINESS TRANSACTION WITH M/S. HARMONE SHOWBIZ PVT. LTD. ALL THESE FACTS AMPLY PROVE THAT THE ASSESSEE ENTERED I NTO THIS FIELD OF FILM DISTRIBUTION AS A BUSINESSMAN AND NOT AS A LENDER O F FINANCE. THIS CONTENTION OF THE LD. A.R., THEREFORE, FAILS. 6. COMING TO THE MAIN QUESTION AS TO WHETHER LOSS O F RS.1.05 CRORE SHOULD BE CONSIDERED AS REVENUE OR CAPITAL LOSS, IT CAN BE SE EN FROM THE AGREEMENT WITH M/S. HARMONE SHOWBIZ PVT. LTD. THAT THE PAYMENT OF RS.1.05 CRORE WAS MADE FOR ACQUIRING 40% SHARE IN THE PROFIT/LOSS FROM DISTRIB UTION OF FILM DANGER IN CERTAIN TERRITORIES. THE SAID PAYMENT WAS MADE WITH A VIEW TO ACQUIRE THE RIGHTS OF DISTRIBUTION OF THE FILM IN CERTAIN TERRITORIES. TH E LD. D.R. HAS RIGHTLY RELIED ON THE DIRECT JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SEMBI TRADERS (1996) 221 ITR 410 (MAD.), THE FACTS OF WHI CH ARE SIMILAR TO THOSE PREVAILING BEFORE US. IN THAT CASE ALSO, THE ASSESS EE, A FILM DISTRIBUTOR, MADE ADVANCE PAYMENT TO A FILM PRODUCER FOR THE PURPOSE OF GETTING DISTRIBUTION RIGHTS. THE ASSESSEE WAS UNABLE TO GET A DISTRIBUTION RIGHT BECAUSE THE FILM WAS NEVER COMPLETED. THE QUESTION AROSE ABOUT THE LOSS ARISIN G DUE TO AMOUNT PAID BY THAT ASSESSEE TO THE PRODUCER TOWARDS THE ACQUISITION OF DISTRIBUTION RIGHTS. THE ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 6 HONBLE HIGH COURT HELD THAT THE PAYMENT WAS FOR AC QUIRING A CAPITAL ASSET AND HENCE A CAPITAL LOSS ON BECOMING IRRECOVERABLE COUL D NOT BE ALLOWED AS A BUSINESS LOSS. SIMILAR VIEW HAS EARLIER BEEN TAKEN BY THE HO NBLE MADRAS HIGH COURT IN CIT VS COIMBATORE PICTURE (P) LTD. (1973) 90 ITR 452 (M AD) . 7. IT IS FURTHER NOTED THAT THE LD. CIT(A) AND THE LD. A.R. HAVE RELIED ON AN EARLIER JUDGMENT OF THE HONBLE MADRAS HIGH COURT I N B. NAGI REDDY V. CIT. (1993) 199 ITR 451 (MAD.), IN WHICH IT HAS BEEN HEL D THAT THE EXPENDITURE ON PRODUCTION OF TWO FILMS WHICH HAD BEEN GIVEN UP WOU LD BE TREATED AS REVENUE EXPENDITURE. THIS JUDGMENT IS CLEARLY DISTINGUISHAB LE FOR THE REASON THAT IT WAS RENDERED IN THE CONTEXT OF A PRODUCER OF THE FILM A ND NOT A DISTRIBUTOR. THE PARAMETERS FOR THE LOSS INCURRED ON THE PRODUCTION OF FILMS BY A PRODUCER AND THE DISTRIBUTOR FROM THE DISTRIBUTION OF THE FILMS ARE QUITE DIFFERENT. THIS FACT HAS BEEN CLEARLY ADMITTED BY THE LD. AR AS WELL. PRESEN TLY WE ARE CONCERNED WITH A CASE OF AN ASSESSEE WHO IS DISTRIBUTOR AND NOT PROD UCER OF THE FILM. AS SUCH, THIS JUDGMENT IS NOT APPLICABLE. ON THE OTHER HAND, THE LATER JUDGMENT IN THE CASE OF SEMBI TRADERS (SUPRA) AND THE EARLIER JUDGMENT IN C OIMBATORE PICTURE (SUPRA) ARE FULLY APPLICABLE. 8. AT THIS STAGE, IT WOULD BE RELEVANT TO CO NSIDER THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF HARIMARA INDUSTRIES LT D. V. CIT (230 ITR 927). IN THIS CASE, THE ASSESSEE WAS ENGAGED IN TEA BUSINESS . IT DEPOSITED CERTAIN AMOUNT WITH THE LICENSOR COMPANY FOR THE PURPOSE OF SECURI NG LICENCE UNDER WHICH THE ASSESSEE COULD WORK LICENSORS COTTON MILL. THERE W AS A LOSS OF DEPOSIT WITH THE LICENSOR. THE HONBLE SUPREME COURT HELD THAT THE D EPOSIT WAS MADE FOR THE PURPOSE OF ACQUIRING A PROFIT MAKING ASSET AND THE LOSS WAS SUFFERED ON CAPITAL ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 7 ACCOUNT AND HENCE COULD NOT BE ALLOWED AS BUSINESS LOSS. THE FACTS OF THE INSTANT CASE ALSO SHOW THAT THE PAYMENT WAS MADE BY THE ASS ESSEE FOR ACQUIRING A PROFIT MAKING ASSET (IN THE SHAPE OF DISTRIBUTION R IGHTS OF THE FILM) AND HENCE THE LOSS THEREOF COULD NOT BE ALLOWED AS BUSINESS LOSS. 9. WE, THEREFORE, HOLD THAT THE SAID LOSS OF RS.1.05 CRORE IS A CAPITAL LOSS AND CANNOT BE ALLOWED AS DEDUCTION. THE VIEWPOINT OF TH E LD. CIT(A) ON THIS ISSUE IS SET ASIDE AND THAT OF THE AO IS RESTORED. 10. IN VIEW OF OUR FINDING ON THIS LOSS AS CAPITAL IN NATURE AND HENCE NOT DEDUCTIBLE, THERE IS NO NEED TO EXAMINE THE OTHER A SPECT AS TO WHETHER THE TRANSACTION WAS DONE BY THE ASSESSEE IN SUCH A WAY THAT IT WOULD INCUR LOSS AS HAS BEEN HELD BY THE AO. 11. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED ON THE 25TH DAY OF OCTOBER, 2011. SD/- SD/- (V. DURGA RAO) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 25TH OCTOBER , 2011. NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A)-XV,MUMBAI. 4 CIT,CITY-4,MUMBAI. 5.DR,F BENCH,MUMBAI. ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 8 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. ITA NO.4845/MUM/2008 VALATION FINANCE & MARKETING P.LTD. 9 DETAILS DATE INITIALS DESIGN ATION 1 . DRAFT DICTATED ON 1 9 - 1 0 - 2010 SR.PS/ 2 . DRAFT PLACED BEFORE AUTHOR 20 - 1 0 - 2011 SR.PS/ 3 . DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 . DRAFT DISCUSSED/APPR OVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8 . DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 . DATE O N WHICH FILE GOES TO THE A R 10. DATE OF DISPATCH OF ORDER *