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Income Tax Appellate Tribunal, “A ” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The Revenue filed this appeal against the order of the Commissioner of Income Tax (Appeals)-14, Chennai in dated 25.05.2018 for assessment year 2012-13.
Shri. Allu Aravind Babu, the assessee, an individual, engaged in the business of film production, real estates and is the managing director of Allu Entertainments Pvt Ltd. While making the assessment for assessment year 2012-13, the Assessing Officer, inter alia, denied assessee’s claim of indexation in respect of two pieces of land and interest expenditure towards cost of acquisition for indexation. Further, he disallowed cost of purchase of film rights at Rs. 6,57,16,337/- u/s. 40A(2) holding, inter alia, that the assessee booked huge loss which would offset the capital gain made by the assessee in the property transaction as a device to avoid tax payment on the capital gain by setting off the loss etc.
The Ld. DR submitted that the AO found that the assessee purchased a property on 25.05.1992. His mother and sister also purchased adjacent property on 30.05.1992. The assessee acquired the property purchased by his mother and sister through the settlement deed dated 27.06.2011 and sold all the three pieces of land together and admitted capital gains. While computing the capital gain, the AO adopted indexation cost w.e.f. 17.06.2011 on the property acquired from assessee’s mother and sister. Further, the assessee claimed capitalisation of interest at Rs. 19,38,972/- towards which the assessee failed to submit necessary documents. Therefore, the Assessing Officer refused to allow the capitalisation of interest claimed. In the P&L account, the assessee has shown purchase of lease right of the movie “Badrinath” at Rs. 13.5 crores produced by M/s. Allu Entertainment P Ltd. (AEPL) in which the assessee is the managing director, against which he reported Rs. 9,00,85,065/- as realization of film. He claimed cost of realization at Rs. 61,63,793/- and distribution expenses at Rs. 1,46,37,609/-. On examining the copy of agreement etc., the AO found that the assessee adopted a device through which the notional loss was created without the assessee doing any activity to avoid tax payment on capital gain by setting off of a loss and hence he has adopted that the fair market value of movie “Badrinath” at Rs. 6,92,83,663/- as against Rs. 13.5 crores adopted by the assessee and found that there was no gain or loss in the hands of the assessee. In other terms, he disallowed Rs. 6,57,16,337/-. On appeal, the Ld. CIT(A) held that since all the lands were acquired in 1992-93, the cost of indexation should be awarded from that year and allowed the capitalisation of interest and deleted the AO’s disallowance holding that the Assessing Officer’s conclusion is unsustainable and directed to allow the assessee’s claim.
Aggrieved against that order, the Revenue filed this appeal with the following grounds of appeal:
“1. The order of the learned CIT(A) is contrary to facts and circumstances of the Case. 2.1 The learned CIT(A) erred in deleting the addition towards cost of purchase of film rights u/s 40A(2) of Rs.6,57,16,337/-
2.2 The learned CIT(A) ought to have appreciated the fact that the assessee is not in the business of film distribution and never purchased movie right/lease right during the last ten years. 2.3 The learned CIT(A) ought to have considered the ratio of the decision in the case of Mc Dowell and Co. Ltd (154 ITR 145) 2.4 The learned CII(A) ought to have considered the ratio of the decision of the Hon'ble Madras High Court in the case of CIT Vs NEPC India Ltd (Mad) 303 ITR 271 and the decision in tire case of Nund & Samonta Co. P. Ltd Vs CIT(SC) 78 ITR 268 3.1 The learned CIT(A) erred in deleting the addition towards Long Term Capital 3.2 The CIT(A) erred in deciding financial year in which cost of acquisition is to be indexed based on the decision in the case of Manjuta J. Shah which has not accepted by the department and SLP is pending 3.3 The CIT(A) erred in invoking the sub rule (4) of IT Rule 46A of IT Rules, 1962 when no independent enquiry or production of any document was sought by CIT(A) and on the contrary documents furnished by the assessee were accepted without any verification or remand with regard to issue of capitalization of interest expenses 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
He canvassed and argued on the lines of grounds of appeal, supra, and pleaded to restore the order of the AO.
4. Per contra, the Ld AR supported the order of the Ld. CIT(A) submitting that he followed the decision of Bombay High Court in the case of CIT vs Manjula J Shah, 2011 16 Taxmann.com 42. With reference to the issue on disallowance of cost of purchase of film rights, the Ld AR took us through the order of the Ld. CIT(A) and submitted that the AO held that the assessee purchased lease rights from AEPL and sold the distribution rights to AEPL again, whereas, the correct position is that the assessee purchased lease rights of the film from the producer AEPL. Now having acquired the rights, the assessee has to exploit the film and hence the assessee has entered into an agreement with AEPL engaging AEPL’s distribution division for doing the distribution of the film on certain commercial terms. The AO has wrongly came to a conclusion that the assessee acquired lease rights from AEPL and sold the distribution rights to AEPL which is an absurdity.
In fact, the trade of distribution is an activity carried on by the distributor for an on behalf of the producer/lease right holder for a fee generally called a distribution commission. The AO has wrongly understood that there is sale of distribution rights of the film to AEPL.
Therefore, the findings arrived by the AO is wrong and hence applying the McDowell’s case does not arise in this case at all.
The assessee in the past was one of the leading producer in telugu film industry and also large film distributor in the areas of Nizam and West and East Godavari combined state of AP and was carrying on the business under name and style of sole proprietary concerns “Geetha Arts” and “Geetha Film Distributors” both are owned and operated as proprietary concerns of Mr. Allu Aravind Babu, the assessee. These entities were succeeded by AEPL through the one time corporatization permitted under the Income Tax Act. In effect, the assessee has been in the business of film production and distribution for over four decades.
Hence, the assumption made by the AO in arriving the irrational disallowance was explained before the Ld. CIT(A). Thereafter, the Ld. AR invited our attention to the submissions made in details before the Ld. CIT(A) stating that the consideration paid by the assessee for the lease rights of the film “Badrinath” for the areas of Nizam, East and West Godavari districts, combined state of AP was at Rs. 13.5 crores.
The reasonableness of this consideration can be evaluated from the following aspects vis., based on the population, based on the theatres as the medium though the film has to be exhibited. Inviting our attention to the district population/theatre approach, the Ld. AR submitted that the areas bought by the assessee in terms of population constitutes 52.38%, in terms of no. Of theatres it constitutes 45.74% averaging these two parameters the area of lease rights constitutes 49.06%. Thus, any rational approach to evaluate whether the consideration paid by the assessee, whether the same is excessive or unreasonable has to confirm that the consideration paid is completely reasonable and well within the acceptable norms of any yardstick that can be benchmarked in this regard. Therefore, the Ld. AR submitted that on the explanation furnished by the assessee by taking into the principles of commercial expediency and the relating case laws relied on by the assessee and other material. The Ld. CIT(A) held that the AO has not made out the case based on evidence to come to a conclusion that the transaction was a sham transaction, relying on various case laws on the principle of commercial expediency etc., the Ld. CIT(A) correctly allowed the appeal and relied on it. Further, he submitted that though the Revenue filed an appeal, it has not brought any material before the Hon’ble Tribunal to say that how the portion of expenditure claimed by the assessee is excessive or unreasonable with the comparable documents or material and hence, the Ld. AR pleaded that the order of the Ld. CIT(A) may be upheld.
We heard the rival submissions and gone through the relevant material. It is clear that the assessee, the mother of assessee and sister of the assessee acquired the impugned property during 1992.
The mother of the assessee and sister of the assessee settled their portion of the land by a settlement deed dated 17.06.2011. Thereafter, the assessee has sold and claimed capital gain, Therefore, in accordance with the case law relied on in CIT vs Manujal J Shah, the period of holding is to be reckoned from the year 1992-93 for the purpose of computing cost of indexation and therefore, we do not find any reason to interfere with the order of the Ld. CIT(A).
With regard to the claim of interest capitalisation towards cost of acquisition, for the purpose of indexation the assessee has submitted before the ld. CIT(A) that the land was purchased during 1999-2000 relating to assessment year 2000-01. The interest paid was in connection with the acquisition which happened almost 15 to 20 years back. The relevant papers were not able to be produced since the details of capitalisation happened about 20 years back. Since, the assessee has been subject to tax audit in the relevant assessment year and the books of account are duly audited and certified by the CA, the same was duly submitted by the AO as an alternative evidence to substantiate the interest capitalisation which the AO has not considered and made the disallowance. Considering such submissions, the Ld. CIT(A) held that he is convinced with the AO’s action on capitalisation interest on capitalising the interest is correct, as per law and directed the AO to include the interest on housing loan borrowed as part of the cost of acquisition. Since, the Revenue has not disputed the findings recorded by the Ld. CIT(A) with relevant material, we do not find any reason to interfere with the decision of the Ld. CIT(A) on this issue.
With regard to the disallowance on assessee’s claim on loss of distribution of movie relating to the movie “Badrinath”, the AO held that the assessee’s transaction was a sham transaction for the reason that the business loss of around Rs. 6 crores was set off of against the long term capital gain arising out of the sale of land leading to tax evasion.
The AO has also observed that there was unreasonably excess payment to a company in which the assessee was managing director and has invoked the provisions of section 40A(2). The AO has also held that the Fair Market Value was not computed correctly. Therefore, the AO came to a conclusion that the assessee’s claim of the loss in distributing movie right was only to claim the set off of long term capital gain arising in the relevant previous year. Before the Ld. CIT(A), the assessee has explained very clearly the nature and the scope of the transaction and made out the case that the amount paid to the company was at arm length which was prevalent as per normal practice in the assessee’s business. The assessee has also made out that there was no unreasonableness in the transaction and the transaction was fully accounted and all the relevant particulars were filed before the AO. It also submitted that the AO has not made out the case based on evidence but came to a conclusion that the said transaction was a sham transaction. Considering the material and the plea etc., the Ld. CIT(A) held that the AO has not made out the case based on evidence. The :-10-: AO has not determined the fair market value with comparable cases etc.
Therefore, he deleted the additions. The Revenue is not able to dislodge the findings recorded by the Ld. CIT(A) with relevant material. In the facts and circumstances, we do not find any reason to interfere with the order of the Ld. CIT(A) and hence the corresponding grounds of the Revenue are dismissed.
In the result, the Revenue’s appeal is dismissed.
Order pronounced on Wednesday, 19th February, 2020 at Chennai.