Loading judgment…
Facts
The assessee, M/s. Ushakiron Movies (P) Ltd, engaged in film production facilities, wrote off Rs.1,60,26,000 (comprising principal and interest) as bad debts or business loss on advances made to film producers for movie production. The Assessing Officer and CIT(A) disallowed this claim, holding that the assessee did not satisfy the conditions under Section 36(1)(vii) read with Section 36(2) and that the advances were capital in nature, not integral to its business of lending money. The assessee argued that the advances were part of its business activities and therefore an allowable business loss under Sections 28 or 37, citing a similar claim allowed in AY 2016-17.
Held
The Tribunal noted the contradictory stances taken by the assessee and the lack of evidence that interest income from these advances was offered to tax in prior years as business income. It clarified that the assessment order for AY 2016-17, cited by the assessee, was a summary acceptance of returned income without detailed examination, thus not serving as a precedent for the current claim. Concluding that a proper verification was required regarding the nature of the loan and whether interest income was taxed as business income, the Tribunal remanded the matter back to the Assessing Officer for fresh adjudication.
Key Issues
1. Whether the write-off of advances (principal and interest) to film producers constitutes an allowable business loss or bad debt under Sections 28, 36, or 37 of the Income Tax Act. 2. Whether the assessee fulfilled the statutory conditions for claiming bad debts and if the advances were integral to its business activities.
Sections Cited
28, 36, 36(1)(vii), 36(2), 37, 41(1), 142(1), 143(2), 143(3), 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘ DB-B ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Madhusudan Sawdia
Per Vijay Pal Rao, Vice President
This appeal filed by the assessee is directed against the order dated 27/03/2024 of the learned CIT (A)-NFAC Delhi, relating to A.Y.2017-18.
The assessee has raised the following grounds of appeal:
The assessee has also filed a modified ground No.3 as well as an additional ground of appeal as alternate plea as under:
4. The assessee company is engaged in the business of establishing an integrated film city with all necessary infrastructure for film production. The assessee filed its return of income for the year under consideration on 30/10/2017 declaring total income of Rs.27,87,35,960/- and agricultural income of Rs.8,21,346/-. The case was selected for scrutiny under CASS. The Assessing Officer inter alia made an addition/disallowance of claim of deduction of the amount of loan written off to the tune of Rs.1,60,26,000/-. The assessee challenged the action before the learned CIT (A) and reiterated its claim that the amount written off is an allowable claim as the same was advances to the producers of the film which is inextricably related to the business of the assessee. However, the learned CIT (A) has confirmed the addition made by the Assessing Officer on the ground that the assessee has not satisfied the conditions provided u/s 36(1)(vii) r.w.s. 36(2) of the I.T. Act, 1961.
5. Before the Tribunal, the learned AR of the assessee has submitted that the assessee has explained the reasons for writing off the bad debts amounting to Rs.1,60,26,000/- and Page 3 of 13 furnished the list of clients whose amounts have been written off and charged to the P&L Account for the financial year 2016-17. The learned AR has further submitted that the assessee is in the business of providing film production facilities and loans/ advances were given to the producers of the film who are also availing the services of the assessee and therefore, the advances/ loans were given by the assessee for the purpose of business of the assessee. He has referred to the memorandum of association of the assessee company and submitted that one of the main business of the assessee company is to arrange the finance for production, exhibition, distribution of movies, purchase of machinery, equipment etc. The advances were given to the film producers in the course of normal business activities of the assessee and therefore, the outstanding amounts were written off during the year is an allowable deduction u/s 28/37 of the I.T. Act, 1961 as business loss. The learned AR has pointed out that for the A.Y 2016-17, the Assessing Officer allowed the claim of written off of the advances and interest there upon amounting to Rs.94,87,067/- while passing the assessment order u/s 143(3) of the Act placed at page No.53 of the paper book. He has relied upon the following decisions: i) Hon'ble Madras High Court in the case of Ashok Leyland Ltd vs. ACIT (2022) 141 taxmann.com 171 (Mad.) ii) ITAT Mumbai Special Bench in the case of Dy. CIT vs. Shreyas S. Morakhia (2010) 40 SOT 4232 (Mum SB) iii) Hon'ble High Court of Bombay in the case of CIT vs. Shreyas S. Morakhia (2012) 19 taxmann.com 64 (Bom.)
Page 4 of 13 iv) Bangalore Bench of the Tribunal in the case of Pranava Electronics (P) Ltd vs. Dy. CIT (2022) 40 Taxmann.com 9 (Bang.Trib.)
On the other hand, the learned DR has submitted that the Assessing Officer has rightly disallowed the claim of the assessee when the conditions provided u/s 36(2)(i) are not satisfied. No deduction on account of bad debts written off shall be allowed unless such debts have been taken into account while computing the total income of any previous year. In the present case, the assessee is not in the business of finance and therefore, such advances cannot be allowed as deduction when becomes bad. He has relied upon the orders of the authorities below.
We have considered the rival contentions as well as the relevant material available on record. The assessee has given the loan of Rs.1.00 crore to M/s. Raja Rajeswari Pictures for production of the film vide loan agreement dated 1/4/2013. The assessee also offered credit up to Rs.30 lakhs for various services provided by the assessee to the borrowers. Though the assessee is in the business of providing infrastructure facilities for film production, however, there is no direct relation between the assessee’s business activities and loan given by the assessee for production of feature films. The Assessing Officer has denied the claim of the assessee by giving findings in para 7 and 7.1 as under:
Thus, the Assessing Officer has given the reasons for disallowing the claim of the assessee as the conditions provided u/s 36(2) are not satisfied being the advances were not taken into account as income of the assessee in the previous year.
In appeal, the learned CIT (A) has confirmed the disallowances made by the Assessing Officer while giving a similar reasoning in para No.6.4 to 6.10 as under:
Page 7 of 13 Page 8 of 13 Page 9 of 13
Thus, the learned CIT (A) has given the reasons for upholding the disallowances that the assessee has taken contradictory stand for claiming the deduction on account of bad debts written off and further the conditions provided u/s 36(1)((vii) r.w.s. 36(2) of the I.T. Act, 1961 are not satisfied for claiming the deduction on account of bad debts written off. The learned AR referred to the assessment order for the A.Y 2016-17 and submitted that the Assessing Officer while passing the scrutiny assessment order dated 17/12/2018 has accepted the claim of the assessee on account of bad debts written off. We find that the Assessing Officer for the A.Y 2016-17 has passed the assessment order as under:
Thus, it is manifest that the Assessing Officer has not discussed any issue but the order is passed summarily accepting the returned income as declared in the revised return of income filed by the assessee. Therefore, this order would not help the case of the assessee on the issue of disallowance of claim of bad debts written off. The assessee has relied upon various judgments in support of the claim and there is no quarrel that if the advances are given by the assessee in the normal course of business of the assessee and then the non-recovery of those advances leading to written off on the part of the assessee would be an allowable claim because the said loss is directly related to the business of the assessee and the interest, if any, on the amounts advances are offered to tax as business income of the assessee in the preceding years. Therefore, to apply the analogy that the advances are given under the normal course of business of the assessee or as a commercial expediency, then the writing off of such advances on becoming bad is an allowable claim. The assessee has not filed any record to show that the interest income has been offered to tax by the assessee as business income in the preceding years so as to consider the transaction of the loan and advances as directly connected with the business activities of the assessee. Accordingly, in the facts and circumstances of the case, we are of the considered opinion that the matter requires a proper verification and examination of the relevant facts regarding the nature of the loan given by the assessee as well as the interest, if any, offered by the assessee to tax as business income of the assessee. Hence, the matter is remanded to the record of the Page 12 of 13 Assessing Officer for fresh adjudication after examination of the relevant record to be produced by the assessee in support of the claim that the loan and advances given by the assessee are in the normal course of the business of the assessee, the Assessing Officer shall decide the issue as per law.