MOVING PICTURE COMPANY INDIA LTD.,NEW DELHI vs. ACIT, NEW DELHI

Briefly stated facts of the case are that, the assessee a resident company is engaged in the business of production of TV programs i.e. films, Documentary films, rending services in media and entertainment industry. For the year under consideration, the assessee filed return of income on 30/09/2011 declaring loss of Rs. 1,70,25, 388/-. The case was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (in short the ‘Act’) was issued and complied with. In the assessment completed under section 143(3) of the Act on 31/01/2014, certain additions/disallowances were made assessing the total loss at Rs. 46,64,000/-. Aggrieved, the assessee filed appeal before the Ld. CIT(A), who partly allowed the appeal. Aggrieved with the addition sustained, the assessee is in appeal before the Tribunal, raising the grounds as reproduced above.

Before us, Ld. Counsel of the assessee first argued the ground No. 4 of the appeal, which relates to disallowance of depreciation of Rs. 1,13,65,036/-on fixed assets of media library created by way of capitalisation of stock and scrap in trade in the financial year 2006-07 corresponding to assessment year 2007-08. 4. The Ld. Counsel filed a paper book containing pages 1 to 48 and referred to page 18 of the paper book, wherein the assessee summarised addition/deletion to the asset of Media Library and depreciation charged from assessment year 2007-08 to assessment year 2011-12. The Ld. Counsel of the assessee submitted that the Ld. CIT(A) has followed the order of the Tribunal for assessment year 2007-08 and accordingly rejected the claim of the depreciation of the assessee on the revalued assets of media library. The Ld. Counsel, however, submitted that the depreciation claimed during the year under consideration also included the amount of media library other than the revalued amount of Rs. 3,19,95,890/-and thus the assessee is eligible for depreciation on the balance amount of the media library.

The Ld. DR on the other hand relied on the order of the lower authorities and submitted that the stock of media library was valued at Nil by the assessee in assessment year 2007-08 and thus closing stock was reduced to that extent and loss on diminishing value of the stock in trade was already claimed and thus again converting the same stock into capital asset, the assessee cannot be entitled for depreciation on that part of the asset which has been revalued.

We have heard the rival submissions and perused the relevant material on record. In the assessment year 2007-08, the assessee revalued certain part of media library (films etc. produced by the assessee) at Rs. 3,19,95,873/- which was appearing at nil value in the stock in trade and converted the same as capital asset eligible for depreciation. The Tribunal in for assessment year 2007-08 however, rejected the claim of the assessee of conversion of the stock in trade into capital asset and held that for the purpose of Income- tax, the relevant part of the stock in trade shall be continued at nil value and denied the claim of the depreciation on such a revalued fixed assets. In the year under consideration, the Ld. CIT(A) , following the finding of the Tribunal rejected the claim of the depreciation of the assessee. The relevant finding of the Ld. CIT(A) is reproduced as under: “4.4 Ground No. 5 of appeal is directed against disallowing a sum of Rs. 1,13,65,036/- out of depreciation claimed by the assessee on media library. AO observed that during the AY 2007-08, the assesse has converted stock-in-trade of Rs. 3,19,95,873/- into fixed asset under the head media library. The intangible assets(media library) in question is in the nature of 'stock' and 'scrap' generated in the course of carrying on the business and has a commercial value. AO was of the view that as the assessee is in the business of producing and making videos and films, the same cannot be treated as fixed asset. No explanation regarding the conversion of stock in trade and its valuation is given before it was converted into a fixed asset. AO observed that the assessee failed to file a valid explanation on the transfer of this item and claiming 25% depreciation on it. Therefore, the claim of depreciation of Rs 1,13,65,036/- on these assets is disallowed by the AO. The above issue has a bearing in the assessment order for the AY 2007 -08 which was decided by Hon'ble ITAT. While deciding the issue the Hon'ble ITAT in its decision dated 16.03.2012 in for AY 2007-08 held as under:- “2.7 We have considered the facts of the case and submissions made before us. The assessee was in possession of certain pilot projects, children films, Jataka stories and some other films under co-production. As these items were not sellable, their values have been taken to be nil till last year. However, these items were valued at Rs. 3,19,95,890/- in this year. A separate class of asset, namely, media library, was created and these items were put under this head of assets with a value of Rs. 3,19,95,890/-. The submission of the assessee is that it was done with a view to window dress the balance-sheet. No transaction has been taken with any outside party. Mere change of the classification of assets from stock-in-trade to capital asset does not lead to any income although such an inference may be there in case of conversion of a capital asset into stock-in-trade. It is in this background that a capital reserve of equivalent amount is created. As and when any of the item is sold, capital gains will be declared with reference to the actual cost of nil rather than the value placed now on them. The question is-whether, this amount is liable to be taxed in this year as income? 2.8 It is an accepted position of law that the re-valuation of assets in the books of the assessee does not lead to generation of income as no transaction has been taken up with an outside party. In other words, a person cannot make profit from himself by merely making some entries in the books of account. The case of the assessee is that the value of these items had been taken as nil as there was no buyer for these items. However, with a view to show improved balance-sheet for taking higher loan from the banks these assets have been shown in the balance- sheet now. Nonetheless, no item could be sold in this year also. We have considered this submission also. We find that the assessee has not incurred any expenditure which has not been recorded in the books of account. The ld. CIT(Appeals) has given a clear finding that all expenses regarding production of films etc. have been duly accounted for in the books. Therefore, it cannot be said that these assets have come out of any unaccounted income. In this light, it becomes clear that the assessee was in possession of these assets, which were valued at nil for the purpose of arriving at the value of work-in-progress. In the light of this fact, it is reasonable to infer that un-saleable work-in-progress, which was valued at nil in earlier years, has now been valued at Rs. 3,19,95,890/-. This value admittedly is an artificial value because this work-in-progress is un-sellable even now though there is a possibility of getting some amount, may be even large amount, in some future date if some buyer finds interest in these items. The ostensible purpose is to window- dress the balance-sheet, not a laudable purpose but a purpose tainted with immorality of getting higher loan with no corresponding security. Therefore, even if re-valuation may not per se lead to generation of income, we cannot approve the entries made in the books of account in this behalf, which also have tax implication in future, namely, that the business profit shall become taxable under the head 'capital gains'. Accordingly, it is held that the re- classification of the assets and the value placed thereon in the books will have no consequence as far as income tax assessments are concerned. In other words, the assets for the purpose of income-tax shall continue to be grouped as stock-in-trade at nil value. Since no value has been realized in respect of this stock-in-trade. we are also of the view that nothing can be taxed in this behalf in this year." From the above decision of Hon'ble ITAT, it is clear that till the A Y 2007-08 the items in the media library were valued at 'nil' and were shown under the head stock-in-trade. The value of these items had been taken as nil as there was no buyer for these items. However, with a view to show improved balance-sheet for taking higher loan from the banks these assets have been shown in the balance sheet as fixed asset in AY 2007-08. Assessee was in possession of these assets, which were valued at 'nil' for the purpose of arriving at the value of work-in-progress. In the AY 2007-08, the assets were reclassified as fixed asset and valued at Rs. 3,19,95,890/-. This value admittedly is an artificial value because this work-in-progress is un-sellable. The ostensible purpose is to window-dress the balance-sheet, Hon'ble ITAT did not approve the entries made in the books of account which also have tax implication in future'. Accordingly, held that the reclassification of the assets and the value placed thereon in the books will have no consequence as far as income tax assessments are concerned. It was held that the assets for the purpose of income-tax shall continue to be grouped as stock-in-trade at nil value. No explanation was given by the assessee about the basis of valuation of fixed assets before it was converted from stock-in trade to fixed asset. Hon'ble ITAT held that re-classification , of the assets and the value placed thereon in the books will have no consequence as far as income tax assessments are concerned. It was held that the assets for the purpose of income-tax shall continue to be grouped as stock-in-trade at nil value. In view of the above, the claim of depreciation by the assessee on the above assets as fixed assets is not allowable. Therefore, the disallowance made by the AO is fully justified. The appeal is dismissed in this ground.”

Before us, the Ld. Counsel submitted a chart of addition/deletion and depreciation claimed on media library during the assessment year 2007-08 to 2011-12, which is available on page 18 of the paper book. The said chart is reproduced as under :

The assessee has also enclosed yearwise depreciation chart filed alongwith the tax audit report in form No. 3 CD.

On perusal of the above chart, it is evident that in the assessment year 2007-08, the total addition of Rs. 7,97,00,000/-has been made to the fixed assets of media library, which included amount of Rs. 3,19, 95,890/- on account of revaluation of the stock in trade. No doubt that in view of the order of the Tribunal(supra), the assessee is not entitled to depreciation in respect of the amount of Rs. 3,19,95,890/-however, the claim of the depreciation in respect of the balance amount of rupees ( 7,97,00,000 – 3,19,95,890) = 4,77,04,110/- cannot be denied, if otherwise it is allowable in terms of section 32 of the income tax act. Similarly the additions made to the media library of Rs. 2,13,783/- and Rs. 11,21,148/- are also eligible for depreciation if actual addition to fixed asset has been made by the assessee subject to the conditions of Section 32 of the Act. We find that the lower authorities have not examined this issue of allowability of the depreciation other than the amount of Rs. 3,19,95,890/-, we feel it appropriate to restore this issue to the file of the Ld. Assessing Officer for examining the allowability of the depreciation on the amount other than the Rs. 3,19,95,890/-in accordance with the provisions of the Act. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The ground of the appeal, is accordingly allowed for statistical purposes.

In ground No. 2 the assessee has raised the issue that following expenses have been disallowed by the Assessing Officer on ad hoc and incorrect basis:

According to the Assessing Officer, the assessee did not maintain any logbook for vehicles and no details of telephone expenses and other expenses was maintained. The Assessing Officer has also mentioned that no documentary evidence such as invoice or voucher to prove the genuineness of the expenses were submitted before him. In view of the facts, the Ld. Assessing Officer made disallowance of Rs. 4,78,022/- in respect of the above heads of expenses. The Ld. CIT(A) upheld the disallowance of observing is under: “4.1 I have carefully considered the submissions of the AIR of the appellant company, the facts of the case as well as the findings of the A.O. Ground no. 1 of appeal is general in nature and not pressed for by the appellant. Therefore, no adjudication is called for. Ground no. 2 of appeal is directed against disallowance of expenses being in the nature of personal expenses. AO observed that expenses have been debited to the P & L a/c which has element of personal use. Assessee has not maintained any log book for vehicles and no details regarding telephone expenses was maintained phone number wise. With regard to staff welfare expenses, business promotion expenses, tour & travel expenses, personal nature of expenses cannot be ruled out. As regards servant salary, the assessee was unable to provide the salary slip of the servants employed. AO also observed that these expenses are also not fully verifiable. AO further observed that the assessee has not submitted any documentary evidence such as ledger book or invoice or voucher to prove the genuineness of the expenses. Therefore, sum of Rs 4,78,022/- as per calculation given by the AO is disallowed being personal in nature and not for business purposes. In the absence of supporting documentary evidences such as vouchers & invoices, the disallowance made by the AO is fully justified and therefore, sustained. Appeal fails in this ground.”

Before us the Ld. Counsel submitted that disallowance has been made on ad-hoc manner, which is not permitted under the law. On the other hand, the Ld. DR relied on the order of the lower authorities.

We have heard the rival submissions and perused the relevant material on record. We note that the Assessing Officer has made disallowance mainly in view of nonproduction of the vouchers or logbook or other evidences in support of the claim of the expenses by the assessee. It is also settled law that no such disallowance can be made on ad hoc basis without pointing out specific defects in the claim of the assessee. In view of the above facts and circumstances of the case and the issue of the claim of depreciation already restored to the file of the Ld. Assessing Officer, we feel it appropriate to restore this issue also to the file of the Assessing Officer for deciding a fresh after providing adequate opportunity of being heard to the assessee. This ground for the appeal is allowed for statistical purposes. 14. In ground No. 3 also the assessee has challenged disallowance of Rs. 55,150/-out of the expenditure incurred through the credit card held by the directors of the company. In absence of the details of expenses incurred by the credit card for the purpose of the business of the company, the Assessing Officer made disallowance at the rate of 50% of the total expenses incurred through the credit card . We have heard the rival submissions of the parties on the issue in dispute .Since the disallowance on this account has also been made on percentage basis in ad-hoc manner without pointing out specific expenditure being not for the purpose of the business, we feel it appropriate to restore the issue also to the file of the Ld. Assessing Officer for deciding afresh after providing adequate opportunity of being heard to the assessee. This ground of the appeal is also allowed for statistical purposes.