PUJA ENTERTAINMENT (INDIA) LIMITED ,MUMBAI vs. DY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2(4) , MUMBAI

Though the assessee has raised three grounds of appeal, the sole issue involved is in respect of claiming Rs.9,23,62,428/- written off towards old business advances as business expenditure u/s.37(1) or u/s. 28 as business loss, despite bringing on record copies of ledger extracts with all the details and TDS done thereon since ld. Assessing Officer treated the same as bad debts written off for the purpose of making disallowance u/s.36(1)(vii).

Facts of the matter are that, assessee is in the business of motion pictures and film production and distribution. Return of income was filed on 20.01.2021, reporting total income at Rs.15,71,94,280/-. While reporting the total income in the return, assessee had claimed write off of old advances as expenditure. In the submissions made before the ld. Assessing Officer, assessee categorically submitted that advances written off in the books of account are old advances given for the new ventures in ordinary course of business for new movies proposed to be released in near future. However, due to unforeseen reasons, new ventures did not materialise. Assessee tried to recover the advances or utilise the same with other ventures with the same party, but all the efforts went in vain. Since the projects could not be materialised and the advances never got converted into revenue, they were never offered for income in any of the preceding years. Further, these advances were non- recoverable business advances and were not in the nature of loan. Accordingly, the same have been claimed as business expenditure u/s. 37(1) or business loss u/s. 28. However, ld. Assessing Officer proceeded to treat the claim of the assessee u/s. 36(1)(vii) by holding it as claim of deduction for bad debts. According to him, since assessee did not fulfil the conditions prescribed u/s.36(1)(vii) nor that assessee fell in the exception provided in the section 36(2)(i) of assessee not 3 Puja Entertainment (India) Ltd., AY 2020-21

Before ld. CIT(A), assessee made a detailed explanation on the conduct of business undertaken by it which is peculiar to the industry to which assessee belongs. It submitted that in the line of business in which assessee is engaged, it is always better to obtain date wise schedule of highly reputed actors, actresses, directors or other artists. In order to reserve their schedule, payment is made is advance and the dates are reserved. Once the project details are shared with artists, either the same is accepted or rejected by them. If the artist accepts the project, production of the film starts and once the movie is released, revenue from such movie is offered for tax and the advance payment is settled against the artist's invoice. If the artist does not accept the project or the story line, the advance payment made to them is non-refundable but stands to the party's account until new project is approved.

1. Accordingly, during the relevant Assessment Year, assessee had written-off certain old advances in its books of accounts which were given to various parties for the ventures to be undertaken in ordinary course of business for new movies proposed to be produced in near future. However, due to unforeseen reasons, certain proposed ventures were abandoned and no new ventures could be undertaken with them till date.

2. In the present case of the assessee, since the projects could not be materialised then and no further projects were undertaken with them for a substantial period of time, it decided to write-off such old

3. Ld. CIT(A) while adjudicating on the issue, observed that there was no material on record to substantiate that the advances given were for furtherance of business, in absence of which claim of assessee u/s.37(1) was rejected. He further observed that assessee failed to bring any material before him to establish evidences in respect of bad debts claimed or provision made in that regard. He thus, sustained the disallowance made by ld. Assessing Officer by treating the claim as bad debts written off u/s.36(1)(vii). Ld. CIT(A) while sustaining the disallowance, placed reliance on the decision of Hon’ble Supreme Court in the case of CIT(A) vs. Khyati Realtors Pvt. Ltd. [2022] 141 taxmann.com 461 (SC). Aggrieved, assessee is in appeal before the Tribunal.

Before us, ld. Counsel for the assessee reiterated the modus operandi and peculiar manner of conduct of business in the industry to which assessee belongs to. The same is already narrated above and not repeated for the sake of brevity. In furtherance to above, ld. Counsel also referred to copy of various agreements and ledger confirmation from the parties to demonstrate that the payments made to these parties were business advances made in the course of conduct of business of the assessee. To corroborate that these payments were business advances made in the course of business, assessee had entered into agreement with these parties which laid out the mode, media and format of exploitation of work to include outcome of services of the director and film and other audio visual works as 7 Puja Entertainment (India) Ltd., AY 2020-21

1. On these facts, one such agreement between assessee and Shri Rajkumar Santoshi, dated 22.07.2011 was referred to, placed in the paper book at page -77. In the said agreement, assessee is referred to as ‘Producer’ and Shri Rajkumar Santoshi as ‘Director’. The Appointment/Acceptances of the agreement by both the parties is recited in clause 1, which states as under: “The Producers have agreed to appoint the Director to direct and write the story, screenplay and dialogues of the said feature Film tentatively to be titled to be produced by Producers and the Director has irrevocably agreed to perform the work to the best of his abilities for the remuneration herein set out hereunder.”

1.1. Further, clause-2 which deals with Term/Tenure is also reproduced which is in line with the modus operandi explained by the ld. Counsel, as noted in the above paragraphs. “2.1 The Director shall direct and start the Film tentatively to be titled on or before January, 2012 from the date hereof and during the making of the said Film. The said Film will be based on a Original story, screenplay and Dialogues written by the Director and his team. The Producers will be responsible for all artistic and other talents and money made available for the said Film, as deemed fit and proper as soon as possible after execution of this Agreement, the Director will concentrate on the subject, further conceptualize and develop the story, screenplay and dialogue written by himself and his writer/s. The Director will allot his dates on priority basis for the said Film as deemed necessary. The Director agrees to complete the said Film within 9 months with a grace period of 3 months from the date of start of first schedule of the shooting, subject to availability of funds.”

1.2. This agreement also contains various clauses pertaining to performance, allotment of time/dates, remuneration, producers right and remedies, copyrights and intellectual property rights in the work, undertaking by director, confidentiality, termination, etc. Against this agreement, assessee had made payment of Rs.1,83,00,000/- to Shri Rajkumar Santoshi which was subjected to TDS of Rs.17,50,000/-. These details are already tabulated above.

2. On a sample basis, reference was made to another agreement between assessee and Odd Ball Motion Pictures Pvt. Ltd. to whom assessee had made a payment of Rs.1,46,73,526/-. The said agreement is placed at page 144 of the paper book. Similarly, for other parties, copies of agreement are placed in the paper book. Assessee also furnished copies of ledger confirmation for certain parties giving details in respect of payments made, TDS done duly acknowledged by the respective parties. Details in respect of agreements and ledger confirmations furnished by the assessee is extracted below:

3. Assessee also brought on record various e-mail communications between different parties who confirmed the transaction undertaken

Ld. Sr. DR placed on record a written submission, dated 08.03.2024 which has been considered. On perusal of the same, the contention raised are in respect of treating the claim of deduction u/s.36(1)(vii) as bad debts subject to condition laid down in section 36(2) which assessee has failed to comply with. On claim made by assessee u/s. 36(1), it is contended that assessee has not incurred the expenditure during the year and hence not allowable. It is also contended that since assessee is not able to produce confirmation from the parties, therefore the advances written off should not be allowed as expenses.

We have considered the submissions made by both the parties and perused the material on record. It is a fact on record that assessee has claimed write off of business advances reported by it in its audited financial statement, year on year basis. It is undisputed that these advances are not loan in nature. Assessee has evidently demonstrated by placing on record, agreements entered with various parties to whom impugned advances were paid in the course of conduct of its business. Assessee had also explained the modus operandi typical to the industry to which assessee belongs, which falls in alignment with the recitals contained in agreements with these parties, some of which have been discussed in the above paragraphs. Assessee has furnished all the necessary details in respect of each of the parties to whom the advances were paid along with the purpose for which these were paid, details of which are already tabulated in the above paragraphs. It is also important to note that assessee while making the payment had a 10 Puja Entertainment (India) Ltd., AY 2020-21

1. On these payments made by assessee, since the business activity as foreseen by the assessee did not materialise over a long period of time and the amount continued in the books of accounts as advances, it eventually treated the same as loss incurred by it, in the conduct of business and thus, claimed it as business loss/deduction permissible u/s.37(1) of the Act. Contrary to this, ld. Assessing Officer has treated the same as bad debts written off u/s. 36(1)(vii) subject to conditions prescribed u/s. 36(2) and held assessee not eligible for the same having failed to meet the requirements of these sections.

2. In our view, even if deduction of advances written off by assessee, during the year are not allowable as bad debt, same would not jeopardize claim of assessee for deduction of it as business loss. Assessee has evidently demonstrated that money advanced by it was in the nature of business expediency and is an allowable deduction u/s.37(1), if not under this section then as a business loss u/s. 28(1).

3. Repeatedly, authorities below have alleged that assessee has failed to furnish necessary documentary evidences including confirmation from the parties on the advances paid by the assessee. To this effect, we take note that required documentary evidences are placed on record by the assessee in the form of paper book, summary of which is extracted above in the table form. Having gone through the material on record as discussed above, payments made by the 11 Puja Entertainment (India) Ltd., AY 2020-21

4. Ld. CIT(A) has placed reliance on the decision of Hon'ble Supreme Court in the case of Khyati Realtors (supra) while upholding the addition made by ld. Assessing Officer. In this respect, we find that this judgement has been dealt by Hon'ble Juri ictional High Court of Bombay in the case of Mahindra and Mahindra Ltd. vs. CIT [2023] 151 taxmann.com 332 (Bom), for which it noted that judgement in the case of Khyati Realtors is of no help because it is not the case of assessee that it claimed deduction u/s.36 but was claimed u/s.28. Relevant extracts from the decision of Hon'ble High Court of Bombay if para-16 is reproduced below:

4.1. Further, in this decision of Mahindra and Mahindra Ltd. (supra), the substantial question of law which came up before the Hon'ble Court has a direct bearing on the issue in hand addressed by us in the present appeal. The substantial question framed by the Hon'ble Court is reproduced below” “Whether on the facts and in the circumstances of the case as well as in law the Tribunal was right in not allowing expenses of Rs. 42.89 lakhs incurred by the appellant company for MMC and not allowing deduction of write off of Rs. 622,01 lakhs (not Rs. 578.09 lakhs as originally put) u/s. 28 of the Act being the amount lent to MMC including interest due thereon and advances for purchase of machineries given in the course of business dealings with MMC?”

4.2. Fact in brief in relation to the above substantial question of law is that assessee claimed deduction of Rs.622.01 lakhs in computing the taxable income. This amount was considered not recoverable by the assessee and was written off while computing income under the head “profits and gains of business or profession”. Hon'ble Court examined whether the expenditure incurred or the deduction claimed arose in carrying on business of assessee or incidental to it. Hon'ble Court noted the fact that commercial expediency required assessee to incur expenditure or give advances or give ICDs cannot be dismissed lightly. According to the Hon'ble Court, list of allowances enumerated in section 30 to 37 are not exhaustive. According to it, an item of loss or expenditure incidental to business may be deducted in computing profits and gains even if it does not fall within any of these sections, for the tax is on profits and gains computed on ordinary commercial principles. In order to arrive at profits and gains, account must necessarily be taken of all losses incurred by the assessee. It was thus, held that business losses, though they fall outside the purview of sections 30 to 37 are allowable on ordinary commercial principles of computing principles. Hon'ble Court also held that whether to treat the debt as bad debt or as business loss / deduction u/s. 28 is a commercial or business decision of the assessee based on relevant

4.3. While arriving at these findings, support was drawn from the decision in the case of Harshad J. Choksi vs. CIT [2012] 25 taxmann.com 567 (Bom) which dealt with this issue in paragraph 9 to 12 that any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at profits and gains of the business u/s.28 of the Act. These paragraphs are extracted below for ready reference:

Section 28 of the Act imposes a charge on the profits or gains of business or profession. The expression "Profits and gains of business or profession" is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses

On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.

In fact this court in the matter of Commissioner of Income-tax v. R.B. Rungta & Co. (supra) upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922 which is similar/identical to Section 28 of the Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by this court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922,"

4.4. Hon'ble Court also made a useful reference to the judgement of Hon'ble Supreme Court in Badridas Daga vs. CIT [1958] 34 ITR 10 (SC)wherein it was held that, for assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed if it arises in carrying on business and is incidental to it. There is no bar in claiming a loss, if the same is incidental to carrying on of a business. Hon'ble Court, thus concluded that expenditure/debts incurred for the purpose of business are directly relatable to the business of the assessee and thus eligible for deduction under business expenditure/loss in assessee’s return of business income and therefore would be deductible u/s.28 of the Act. Appeal was thus allowed in favour of the assessee.

5. In the present case before us, assessee has written off trade advances being not recoverable for which elaborate discussion has already been made and findings arrived at by us in above paragraphs. Our observations and findings on the same are fortified by the decision of Hon'ble Juri ictional High Court of Bombay in the case of Mahindra and Mahindra Ltd. (supra). Accordingly, grounds taken by the assessee in this respect are allowed.

Assessee raised an additional ground, vide application, dated 17.01.2024 on the issue relating to assessment order passed without quoting Document Identification Number (DIN). Since we have adjudicated the appeal on the merits of the case, deleting the disallowance made, we leave open the additional ground raised by the assessee, without adjudicating there upon.

In the result, appeal of the assessee is allowed.