ASSISTANT COMMISSIONER INCOME TAX, CHENNAI vs. MANJUNATH RAI PRAKASHRAJ, CHENNAI

The Revenue has raised the following grounds of appeal:

Thereafter, the AO completed the assessment u/s.143(3) of the Act vide order dated 29.03.2016, determining the total income of the assessee at Rs.11,03,02,232/- after making the following additions/disallowances:

Being aggrieved by the relief granted by the Ld.CIT(A) in respect of the deletion of the disallowance of loss relating to the Dhoni film amounting to Rs.4,60,25,945/-, the Revenue is in appeal before us. On the other hand, at the time of hearing, the Ld.AR appearing on behalf of the assessee, placing oral reliance upon Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963,

The Ld.DR, appearing on behalf of the Revenue, strongly relied upon the findings recorded by the AO and submitted that the AO had rightly disallowed the loss of Rs.4,60,25,945/- claimed by the assessee in respect of the film “Dhoni”. It was, therefore, prayed that the addition of Rs.4,60,25,945/- made by the AO be sustained and the order of the AO be upheld.

Per contra, the Ld.AR appearing on behalf of the assessee vehemently supported the impugned order passed by the Ld.CIT(A), to the extent in deleting the addition of Rs.4,60,25,945/- representing the loss claimed by the assessee in respect of the film “Dhoni”. The Ld. AR submitted that the Ld.CIT(A), after a detailed appreciation of the facts, examination of the relevant agreements, books of account and supporting evidences placed on record, had arrived at a well-reasoned finding that the impugned loss was genuine, incurred wholly and exclusively in the course of the assessee's business, and was therefore allowable under the provisions of the Act. It was contended that the Revenue had not brought on record any fresh material or cogent evidence to demonstrate that the findings recorded by the Ld.CIT(A) were either factually incorrect or legally unsustainable. Accordingly, it was pleaded that the order of the Ld.CIT(A) deleting the addition deserved to be upheld.

Insofar as the issue relating to the confirmation of disallowance of Rs.1,19,35,102/- u/s.40(a)(ia) of the Act is concerned, the Ld.AR submitted that the AO had mechanically invoked the provisions of section 40(a)(ia) of the Act without conducting any independent enquiry as to whether the payments in question were, in fact, liable for deduction of tax at source under the relevant provisions contained in Chapter XVII-B of the Act. It was argued that the assessment order does not contain any finding regarding the nature of each payment, the applicable provision requiring deduction of tax at source, or the

The Ld. AR further submitted that even assuming, without admitting, that there was a failure on the part of the assessee to deduct tax at source, the AO had failed to examine whether the recipients of the respective payments had already accounted for the amounts received from the assessee as their income and offered the same to tax in their respective returns of income. It was contended that in view of the second proviso to section 40(a)(ia), read with the first proviso to section 201(1) of the Act, where the payee has duly offered the corresponding income to tax and discharged the tax liability thereon, no disallowance u/s.40(a)(ia) of the Act can be sustained in the hands of the payer. Since no verification whatsoever had been carried out by the AO in this regard, the impugned disallowance, according to the Ld. AR, could not be sustained in its present form.

The Ld.AR, therefore, fairly submitted that the matter relating to the disallowance u/s.40(a)(ia) of the Act may be restored to the file of the AO with a direction to undertake a comprehensive verification of the nature of the impugned payments, the applicability of the TDS provisions thereto, and whether the respective recipients had included the said receipts in their total income and paid the due taxes thereon, before deciding the issue afresh in accordance with law, after affording the assessee a reasonable opportunity of being heard.

We have heard the rival submissions advanced by both the parties, carefully perused the orders of the lower authorities and examined the entire material available on record. We have also given our thoughtful consideration to the factual matrix of the case, the documentary evidences placed before us, the findings recorded by the Ld.CIT(A), the remand report submitted by the AO and the legal submissions canvassed by the learned representatives appearing on behalf of the respective parties.

The issues arising for our consideration are twofold, namely, (i) whether the Ld.CIT(A) was justified in deleting the disallowance of business loss amounting to Rs.4,60,25,945/- claimed by the assessee in respect of the Tamil feature film "Dhoni", and (ii) whether the disallowance made by the AO u/s.40(a)(ia) of the Act, requires interference.

At the outset, it is evident from the assessment order that the AO has proceeded to disallow the entire business loss merely on the basis of an assumption that the assessee ought to have earned higher collections from the exhibition and distribution of the film "Dhoni". According to the AO, since the film was allegedly successful at the box office, the realization disclosed by the assessee for the Chennai distribution territory appeared to be meagre. Based on such presumption alone, the AO further concluded that the expenditure claimed by the assessee was excessive and consequently disallowed the entire loss.

However, on a careful reading of the assessment order, we find that the AO has failed to identify even a single item of expenditure as being bogus, excessive, fictitious or unsupported by documentary evidence. Likewise, the AO has not brought on record any material whatsoever to demonstrate that the collections declared by the assessee were suppressed or that any receipts had escaped recording in the books of account. Except making general observations regarding the commercial success of the film, no investigation, enquiry or independent verification has been undertaken to substantiate such conclusion. The findings of the Ld.CIT(A) reveal that during the appellate

Significantly, the remand report submitted by the AO completely demolishes the very foundation of the assessment order. The AO categorically admitted in the remand proceedings that the ledger accounts, realization statements and other records furnished before the Ld.CIT(A) were already available during the course of the original assessment proceedings and had been duly considered while framing the assessment. Thus, it is not even the case of the Revenue that the assessee had produced any fresh or fabricated evidence before the first appellate authority.

Even more importantly, despite having an opportunity to verify the documentary evidences during the remand proceedings, the AO has not pointed out a single discrepancy in the realization account, expenditure account, ledger extracts or supporting records maintained by the assessee. There is no finding in the remand report that any expenditure was fictitious or unverifiable. Equally, there is no finding that any receipt had escaped accounting. Therefore, the remand proceedings only reinforce the correctness of the documentary evidence relied upon by the assessee.

The Ld.CIT(A), after examining the entire material available on record, has recorded a categorical factual finding that the assessee realized an aggregate sum of Rs.4,46,54,376/- from the distribution of the film while incurring expenditure aggregating to Rs.9,06,80,321/-, resulting in a business loss of Rs.4,60,25,945/-, which stood duly reflected in the books of account and

Another aspect which assumes considerable significance is that the AO has neither rejected the books of account maintained by the assessee nor recorded any dissatisfaction regarding their correctness or completeness. The books of account maintained by the assessee were duly subjected to statutory audit and the Tax Audit Report was also furnished along with the return of income. The AO has not invoked the provisions relating to rejection of books of account nor has he identified any defect in the accounting methodology regularly followed by the assessee.

Once the books of account are accepted and no defect is pointed out therein, the AO cannot selectively disregard the loss reflected in such books merely because, in his subjective opinion, the business ought to have yielded higher profits. Income-tax proceedings are governed by evidence and not by commercial perceptions or personal assumptions regarding the profitability of a particular business venture.

The Ld.CIT(A) has also observed that the AO proceeded on the premise that the film "Dhoni" was a commercial success at the box office. However, the Ld.CIT(A), after referring to publicly available information as well as the Daily Collection Reports (Form-11) filed before the Entertainment Tax Authorities by the theatre owners, found that the film did not perform commercially in the manner presumed by the AO. The Daily Collection Reports clearly indicated that the number of shows substantially declined after the initial release and the film

In fact, the Revenue has not produced any evidence whatsoever regarding the actual box-office collections, theatre occupancy, entertainment tax records or any market intelligence to substantiate the allegation that the assessee had suppressed its realization. The addition thus rests solely upon suspicion arising from the AO’s subjective perception of the commercial success of the movie.

It is trite law that suspicion, however strong, can never substitute legal evidence. Additions under the Income-tax Act cannot be sustained merely because the AO entertains doubts regarding the correctness of a business result. Unless such doubts are supported by cogent material, independent enquiry or incriminating evidence, the declared business results cannot be disturbed.

Equally well settled is the principle that the burden initially cast upon the assessee stands discharged once the assessee produces the books of account together with primary documentary evidences supporting the receipts and expenditure claimed. Thereafter, the burden shifts upon the Revenue to establish by positive material that such evidences are false, fabricated or otherwise unreliable. In the present case, not only has the assessee discharged its primary burden by producing comprehensive documentary evidence, but the Revenue has also failed to rebut the same despite being afforded a second opportunity during remand proceedings.

The AO has neither disproved the expenditure nor established suppression of receipts. There is no evidence of inflation of expenditure, diversion of funds, bogus payments or fictitious claims. Similarly, there is no material indicating undisclosed realization from distributors, exhibitors or theatre owners. Consequently, the very basis on which the entire business loss

Accordingly, we hold that the Ld.CIT(A) was fully justified in deleting the addition of Rs.4,60,25,945/- representing the business loss relating to the distribution of the film “Dhoni”. The order of the Ld.CIT(A) on this issue is based upon proper appreciation of facts, correct application of settled legal principles and comprehensive evaluation of the evidentiary material. We, therefore, uphold the same. Consequently, the grounds raised by the Revenue on this issue stand dismissed.

The Ld.AR submitted before us that the AO had invoked the provisions of section 40(a)(ia) of the Act in a mechanical manner without examining the nature of each individual payment and without recording any finding regarding the precise statutory provision contained in Chapter XVII-B under which tax was allegedly deductible. According to the Ld.AR, the assessment order is completely silent regarding the character of the payments, the contractual relationship between the parties, the applicable TDS provisions and the reasons for concluding that the assessee had defaulted in deducting tax at source.

The Ld.AR further submitted that even assuming that certain payments attracted deduction of tax at source, the AO had failed to examine whether the recipients of such payments had already included the corresponding receipts in their respective returns of income and discharged the due taxes thereon. It was submitted that in view of the second proviso to section 40(a)(ia), read with the

We find considerable merit in the above submissions. A careful reading of the assessment order reveals that the AO has not undertaken any exercise to determine the applicability of the relevant TDS provisions to each category of payment. Nor has the AO examined whether the conditions stipulated under the second proviso to section 40(a)(ia) of the Act stood satisfied. The assessment order does not disclose any verification with the recipients regarding inclusion of the receipts in their returns of income or payment of taxes thereon. In the present case, admittedly, no such exercise has been undertaken. In the absence of necessary factual verification, it would neither be proper nor appropriate for this Tribunal to record any conclusive finding one way or the other. At the same time, since the issue requires detailed factual verification regarding the nature of payments, applicability of the TDS provisions and compliance by the respective recipients, we are of the considered opinion that the ends of justice would be adequately served by restoring this issue to the file of the AO. Accordingly, we set aside the orders of the authorities below on this limited issue and remit the matter to the file of the JAO with a direction to undertake a comprehensive examination of each payment independently and thereafter decide the issue afresh in accordance with law. Needless to observe, the JAO shall afford the assessee adequate opportunity of producing all necessary documentary evidences and shall pass a reasoned and speaking order in accordance with law.

Accordingly, while we uphold the order of the Ld.CIT(A) deleting the disallowance of the business loss of Rs.4,60,25,945/-, the issue relating to the disallowance u/s.40(a)(ia) of the Act is restored to the file of the JAO for verification in accordance with law after granting reasonable opportunity of hearing to the assessee. Consequently, the Revenue's appeal on the first issue

In the result, the appeal of the Revenue stands dismissed.