ASSISTANT COMMISSIONER OF INCOME TAX, CHENNAI vs. MAJUNATH RAI PRAKASHRAJ, CHENNAI

आदेश / O R D E R

PER MANU KUMAR GIRI, JM:

This captioned Appeal filed by the Revenue is directed against the order of the Ld. Commissioner of Income Tax, Appeal, CIT(Appeals) Chennai-20 [‘CIT(A)’] dated 12.09.2025 for Assessment Year (AY) 2020-21.

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 2 ::

The order of the ld. Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law (1) The Ld CIT(A) has erred while deleting the disallowance of bad debts of Rs. 3,00,00,000/- claimed by the assessee as his eligible business expense incurred wholly and exclusively for the purpose of profession of the assessee without verification of material evidence to show that the same was a legal liability of the assessee.

(ii) The Ld CIT(A) has failed to consider that the payment of Rs.3,00,00,000/- by the assessee as compensation was based on a consent and not based on any finding of the Hon'ble High Court of Mumbai who identified the expense as a legal liability of the assessee. (iii) The Ld.CIT(A) has failed to consider the assessee, vide its Advocate's letter dated 15th October 2018, has sought to disassociate himself from M/s Movie Makers Inc who had actually signed MoU with M/s Essel Vision Production P Ltd and are legally liable to compensate for the non-completion of the movie. (iv) The Ld.CIT(A) failed to consider that M/s Essel Vision Production P Ltd had paid M/s Movie Makers Inc a sum of Rs 4,25,00,000/- for making of the project and not the assessee and therefore, the legal liability of the assessee to compensate for non- performance on an agreement that he did not sign does not arise. (v) The Ld.CIT(A) failed to consider that M/s Essel Vision Production P Ltd had claimed in its suit that one of the partner of M/s Movie Makers Inc is the assessee's brother-in- law and that the compensation could have been paid by the assessee on his behalf particularly when the assessee has not shown any income from M/s M/s Essel Vision Production P Ltd for the AY 2020-21. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of ld. CIT(Appeals) may be set aside and that of the Assessing Officer be restored.

2.1. Brief facts of the case are that the assessee is an individual engaged in the profession of acting, film direction, film production and other allied activities. For the assessment year 2020-21, he filed his return of income declaring a total income of

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 3 :: Rs.1,99,24,380/-. The case was selected for scrutiny under CASS and assessment was completed u/s. 143(3) of the Act.

2.2. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had claimed deduction of Rs.3,00,00,000/- under the head "Bad Debts". On being called upon to explain the claim, the assessee submitted that he had entered into an agreement dated 30.09.2015 with M/s Movie Makers Inc. for co-producing and directing the Hindi remake of the film "TADKAA – Love is Cooking". Thereafter, M/s Movie Makers Inc. entered into a Memorandum of Understanding dated 10.03.2016 with M/s Essel Vision Production Pvt. Ltd. (EVPL) for production of the said film.It was explained that owing to substantial delays in completion of the film, EVPL terminated the arrangement and instituted proceedings before the Hon'ble Bombay High Court against M/s Movie Makers Inc. as well as the assessee, who was arrayed as Defendant No.4. During the course of the proceedings, consent terms were recorded before the Hon'ble High Court whereby the assessee undertook to pay compensation of Rs.5.88 crores to EVPL. Out of the said liability, the assessee paid Rs.3 crores during the relevant previous year. The assessee further explained that the amount was inadvertently claimed as "Bad Debts" in the return of income owing to an accounting error committed during the Covid-19 pandemic and that, in substance, the expenditure represented business expenditure allowable u/s. 37(1) of the Act.The AO, however, rejected the explanation and disallowed the claim of Rs.3 crores. The AO observed that the claim originally made by the assessee as bad debt was not sustainable since the amount neither represented

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 4 :: any debt arising in the ordinary course of business nor satisfied the conditions prescribed u/s. 36(1)(vii) of the Act.

2.3. The AO further noticed that the Memorandum of Understanding dated 10.03.2016 had been executed only between M/s Movie Makers Inc. and M/s Essel Vision Production Pvt. Ltd. and that the assessee was not a signatory thereto. According to the AO, there was no contractual obligation cast upon the assessee requiring him to compensate EVPL for non-completion of the project. The AOalso observed that although the assessee was impleaded as Defendant No.4 before the Hon'ble Bombay High Court, the liability arose only under the consent terms entered into by the parties and not on account of any adjudication by the Court determining the legal liability of the assessee. According to the AO, the payment was voluntary in nature and therefore could not be regarded as an expenditure incurred wholly and exclusively for the purposes of the assessee's profession. The AO further referred to the advocate's letter dated 15.10.2018, wherein the assessee had denied liability and attempted to disassociate himself from M/s Movie Makers Inc. It was also noticed that the payments towards production had been made by EVPL to Movie Makers Inc. and not to the assessee. Therefore, according to the AO, there existed no direct business relationship between the assessee and EVPL.

2.4. The AO further observed that the assessee had not earned any income from EVPL during the relevant assessment year and that one of the partners of M/s Movie Makers Inc. happened to be the assessee's brother-in-law. Hence, according to the Assessing

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 5 :: Officer, the possibility that the payment was made on behalf of the said concern or for personal considerations could not be ruled out.

2.5. The AO also rejected the assessee's subsequent plea that the amount ought to be allowed u/s. 37(1), holding that such plea was merely an afterthought raised only after issuance of the show cause notice. Accordingly, the entire sum of Rs.3,00,00,000/- was disallowed.

3.1. The ld.CIT(A) observed that the Hon'ble Bombay High Court, while recording the consent terms, had accepted the undertaking furnished by the assessee for payment of Rs.5.88 crores and had thereafter passed successive orders recording the issuance of

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 6 :: cheques, extending the time for payment and warning the assessee of contempt proceedings in case of non-compliance. These facts clearly established that the liability had crystallized and the assessee had discharged part of such liability by paying Rs.3 crores during the relevant previous year.

3.2 The CIT(A) further observed that although the expenditure had been wrongly claimed as bad debt in the return of income, the nomenclature adopted by the assessee could not determine the true nature of the claim. Since the expenditure had arisen directly from the assessee's professional activities as a director and co-producer of the film and had been incurred wholly and exclusively in connection with such profession, the same was allowable u/s. 37(1) of the Act.Accordingly, the ld.CIT(A) directed the AOto delete the disallowance of Rs.3,00,00,000/-.

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 7 ::

Index of Paper Book S. Contents Page No. nos. 1 MoU between Mr. Prakashraj and M/s Moviemakers 1-5 Inc. (MMI) 2 MoU between M/s Moviemakers Inc. and Essel 6-10 Vision Productions Ltd. (EVPL) 3 Legal notice issued by EVPL to MMI and M/s Duet 11-18 Movies 4 Response to legal notice issued by EVPL by Mr. 19-21 Prakashraj

5.1 The ld. AR submitted that the assessee was the owner of the remake rights of the film and had entered into an agreement dated 30.09.2015 with M/s Movie Makers Inc. for jointly producing and directing the project. Under the said agreement, specific obligations were cast upon the assessee in his capacity as director, including responsibility for delays in production and disputes arising therefrom. The ld. Authorised Representative further submitted that the Hon'ble Bombay High Court proceedings clearly demonstrated that EVPL had impleaded the assessee as Defendant No.4 and had sought compensation against him personally. The assessee ultimately entered into consent terms before the Hon'ble Court and the Court monitored compliance by passing several orders requiring payment of the agreed compensation.

5.2. He argued that the payment was neither voluntary nor gratuitous but was made pursuant to legal proceedings arising directly from the assessee's professional activities. The compensation was paid to resolve commercial disputes, avoid

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 8 :: prolonged litigation and protect the assessee's professional reputation in the film industry. 5.3. The ld. AR further submitted that the claim was inadvertently shown as bad debt in the return because of an accounting error committed during the Covid period. However, merely because a wrong head of deduction was mentioned in the return, a legitimate claim could not be denied if otherwise allowable in law.

5.4. He further contended that the subsequent reply issued by the assessee's advocate denying liability before institution of the suit would not obliterate the contractual obligations already undertaken. The Revenue's contention regarding the assessee's brother-in-law being a partner in M/s Movie Makers Inc. was also stated to be wholly irrelevant, since the payment had arisen out of contractual and commercial obligations and not on account of any personal relationship.Reliance was also placed upon the decision of the Hon'ble Madras High Court in CIT v. Rambal (P.) Ltd. to contend that compensation or liquidated damages paid in the course of business constitute allowable business expenditure.

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 9 :: adjudicated against him. The ld. DR further submitted that the assessee himself had denied liability through his advocate's letter dated 15.10.2018 and had sought to distance himself from Movie Makers Inc. Therefore, the subsequent payment lacked commercial nexus with the assessee's profession. He further argued that EVPL had advanced funds only to Movie Makers Inc. and not to the assessee. No evidence had been produced to establish that the assessee had personally received any money or had undertaken any contractual obligation towards EVPL. The ld. DR also contended that the assessee had not earned any income from EVPL during the relevant assessment year and that one of the partners of Movie Makers Inc. was the assessee's brother-in-law. Therefore, according to the Revenue, the possibility that the payment had been made on behalf of the said concern could not be ruled out. Accordingly, he submitted that the ld.CIT(A) erred in treating the payment as business expenditure and the assessment order deserved to be restored.

7.1 The primary controversy before us is whether the payment of Rs.3,00,00,000/- made by the assessee to M/s Essel Vision Production Pvt. Ltd. is allowable as deduction u/s. 37(1) of the Act notwithstanding the fact that the same was originally claimed as "Bad Debts" in the return of income.

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 10 ::

7.2 From the materials available on record, we find that there is no dispute regarding the assessee's professional involvement in the film project. The agreement dated 30.09.2015 clearly establishes that the assessee was not merely an actor but was the co-producer and director of the film. The agreement specifically casts responsibilities upon the director with regard to timely completion of the project and envisages liability in case disputes arise on account of delays attributable to the director. It is equally evident from the subsequent events that EVPL instituted commercial proceedings before the Hon'ble Bombay High Court not merely against M/s Movie Makers Inc. but also against the assessee personally. The assessee was arrayed as Defendant No.4 and eventually entered into consent terms before the Hon'ble Court agreeing to compensate EVPL. The subsequent judicial orders passed by the Hon'ble Bombay High Court demonstrate that the Court continuously monitored compliance of the settlement by recording issuance of cheques, granting extensions of time and warning the assessee of contempt proceedings in the event of default. Therefore, it cannot be accepted that the payment was purely voluntary or made without any commercial compulsion. The liability had its genesis in the contractual arrangements entered into by the assessee in the course of his professional activities and ultimately crystallized during the judicial proceedings before the Hon'ble Bombay High Court.

7.3 The Revenue has repeatedly emphasized that the assessee was not a signatory to the Memorandum of Understanding executed between Movie Makers Inc. and EVPL. In our considered opinion, such contention overlooks the larger factual matrix. The assessee's

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 11 :: liability is not founded merely upon the subsequent MoU but upon the entirety of the contractual arrangements, his role as co- producer and director, the obligations undertaken by him under the agreement dated 30.09.2015, and the legal proceedings wherein he was personally impleaded and ultimately agreed to discharge the liability.

7.4 We also find no merit in the Revenue's contention that the expenditure loses its character merely because it was initially claimed as bad debt. It is a settled proposition that the true nature of an expenditure has to be determined on the basis of its substance and not the nomenclature adopted in the return of income. If an expenditure is otherwise allowable under the provisions of the Act, a mistaken description in the return cannot deprive the assessee of the legitimate deduction.

7.5 The further contention of the Revenue regarding the assessee's subsequent denial of liability, absence of income from EVPL or relationship with one of the partners of Movie Makers Inc. does not advance its case. These circumstances do not dilute the fact that the payment ultimately arose out of the assessee's professional engagement in the film project and was made to resolve litigation emanating from such professional activity. The ld.CIT(A), after appreciating the agreements, the High Court orders and the surrounding circumstances, has recorded a categorical finding that the expenditure was incurred wholly and exclusively for the purposes of the assessee's profession. We find no infirmity in the said finding warranting our interference. Accordingly, we uphold the

ITA No. 3664/Chny/2025 (AY 2020-21) ACIT Vs Majunath Rai Prakashraj :: 12 :: order of the ld. CIT(A) allowing deduction of Rs.3,00,00,000/- u/s. 37(1) of the Act.The grounds raised by the Revenue are dismissed.

Sd/- Sd/- (इंतूरी रामा राव) (मनु कुमार िग�र) (INTURI RAMA RAO) (MANU KUMAR GIRI) लेखा सद*य/ACCOUNTANT MEMBER �या�यक सद*य/JUDICIAL MEMBER

चे�नई/Chennai, +दनांक/Dated: 03rd August, 2026. SNDP, Sr. PS

आदेश क! ��त,ल-प अ.े-षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF Digitally signed SANDE by SANDEEP KUMAR EP Date: 2026.08.05 KUMAR 16:56:38 +05'30'