ACIT 16(1), MUMBAI vs. ZOOM ENTERTAINMENT NETWORK LTD., MUMBAI

Grounds of appeal raised by the assessee read as under :- Each of the following grounds is independent of and without prejudice to one another.

Assessee has also filed an additional ground which reads as under :- “On the facts and circumstances of the case in the alternative amount of Rs. 2,26,02,802/- may be allowed as capital loss to be carried forward and set off in the subsequent year.”

Apropos issue of disallowance u/s. 40(a)(ia) of the I.T. Act. Assessee in this case operates Television channel by the name ‘Zoom’ and ‘moves now’ and is engaged in bollywood based specialty and lifestyle television segment. The Assessing Officer in this case made disallowance u/s. 40(a)(ia) of the I.T. Act of Rs. 87,78,259/- being programme, production and acquiring expenses and Rs. 27,95,83,044/- being channel placement fees and carriage fees. The assessee had deducted tax at source u/s. 194C of the Act at the rate of 2%. However, the Assessing Officer was of the opinion that these payments were subject to deduction of tax at source u/s. 194J of the Act and hence disallowance made u/s. 40(a)(ia) of Act.

Upon assessee’s appeal learned CIT(A) referred to the decision of Hon'ble Calcutta High Court decision in the case of DCIT Vs. S.K. Tekriwal (361 ITR 472) for the proposition that no disallowance u/s. 40(a)(ia) of Act is warranted where tax has been deducted at source under different section. Furthermore, learned CIT(A) further referred to Hon'ble Delhi High Court decision in the case of Prasar Bharti (Broadcasting Corporation of India) (292 ITR 580), wherein it had been held that payment made towards programmes produced for broadcasting falls within expression ‘work’ as defined in section 194C of the Act. Furthermore, learned CIT(A) observed that in assessee’s own case the ITAT, Mumbai Bench has also held that tax has been correctly deducted at source on payments made to cable operators u/s. 194C of the Act. Learned CIT(A) held that on merits also the assessee has correctly deducted tax at source on payments made both for programme, production and carriage fees u/s. 194C of the Act. Hence, learned CIT(A) deleted the addition of Rs. 87,78,259/- and Rs. 27,95,83,044/- made by the Assessing Officer u/s. 40(a)(ia) of Act.

Against the above order the Revenue is in appeal before us.

We have heard both the counsel and perused the records. The main contention of the Revenue is that learned CIT(A) has erred in as much as he

Upon careful consideration, we find that there are two decisions on this subject. One from Hon'ble Calcutta High Court in favour of the assessee and another from Hon'ble Kerala High Court in favour of the Revenue. No decision of Hon'ble Jurisdictional High Court in this subject has been brought to our notice. In these circumstances we place reliance upon Hon'ble Supreme Court decision in the case of M/s. Vegetables Products Ltd. (88 ITR 192). In this decision Hon'ble Supreme Court has expounded that if two views are possible, one in favour of the assessee has to be adopted in this view of the matter when the assessee had deducted tax at source under the provisions of section 194C. Assessee cannot be visited with provisions of section 40(a)(ia) of Act disallowance on the ground that deduction was required to be made u/s. 194J of the Act. Hence, respectfully following Hon'ble Calcutta High Court decision, we uphold the order of learned CIT(A).

Furthermore we note that learned CIT(A) has further referred to the ITAT decision in assessee’s own case, wherein it had been held that tax was to be deducted u/s. 194C on payments made to cable operators. Furthermore, Hon'ble Delhi High Court in the case of Prasar Bharti (Broadcasting of India) (supra) has held that broadcasting and telecasting including production of programme falls within expression ‘work’ as defined in section 194C. In assessee’s own case ITAT for A.Y. 2010-11 has followed this decision and decided the issue in favour of the assessee. On identical issue, Hon'ble Bombay High Court in the case of UTV Entertainment Ltd. in of 2015 and other vide order dated 10/11 October 2015 have held that on these items tax was deductible u/s. 194C and not u/s. 194J. Hence, the issue on 6 M/s. Zoom Entertainment Network Limited merit also is covered in favour of the assessee. Accordingly, ground No. 1 to 5 raised by the Revenue stand dismissed.

The Assessing Officer has disallowed the expenditure on website maintenance, storage and related charges of Rs. 28,81,702/- as capital expenditure.

Upon assessee’s appeal learned CIT(A) has decided the issue in favour of the assessee by referring to following decisions which according to him are directly on the issue in favour of the assessee :-  CIT Vs. Indian Visit com Pvt. Ltd. (Delhi High Court)  DCIT Vs. Mahindra Reality and Infra Developers Ltd. (ITAT, Mum)

Furthermore, learned CIT(A) held that expenditure incurred towards maintenance, storage and internet charges related to website have not resulted in the assessee acquiring any fixed asset and benefit of enduring nature and hence expenditure was not capital in nature.

Against this order, the Revenue has filed this appeal before us.

Learned Counsel of the assessee submitted that the issue is covered in favour of the assessee by following decisions :

We have heard both the counsel and perused the records.

Upon carefully consideration, we note that the aforesaid decisions referred by learned CIT(A) are fully in favour of the assessee. We find ourselves in agreement with learned CIT(A) that charges of website hosting and maintenance cannot be said to be capital expenditure.

Brief facts of the case are as under :- During the previous year the assessee-company earned income by way of dividend of Rs.37,77,7007- on units of mutual fund that was exempt from tax. The appellant while filing its return of income, had suo moto disallowed indirect expenditure of Rs. 1,97,9027-. This amount was arrived at by allocating the indirect interest expenditure of Rs. 19,88,7657- in the ratio of average investment to average fixed asset and considering 0.5% of the average opening and closing investments as required by Rule 8D of the Income-tax Rule, 1962. In considering the average investments, only those investments, income from which was exempt from tax was considered by the assessee. However, the A.O. while applying Rule 8D considered also investments on which income earned was taxable and arrived at an aggregate amount of Rs 9,53,2077- as disallowable under section 14A(2) of the Income Tax Act, 1961. After reducing Rs.1,97,9027- disallowed by the assessee in its return of income, the A.O. added a further sum of Rs.7,55,3057- in the assessment order.

Upon assessee’s appeal learned CIT(A) directed the Assessing Officer to recalculate disallowance of expenditure under rule 8D considering the investment capable of exempt income and not entire investment.

Against this order assessee is in appeal before us. We have heard both the counsel and perused the records. Learned Counsel of the assessee contended that though the assessee has made suo-moto disallowance, assessee’s investment for earning exempt income is out of its own funds and hence no disallowance on account of interest needs to be done. Learned counsel further referred to the decision of Special Bench of the ITAT in the case of Vireet Investments and Hon'ble Apex court decision in the case of Maxopp Investment Ltd vs CIT, in Civil Appeal 104-109 of 2015 dated 12.02.2018 respectively for canvassing position that in computing disallowance only those investments should be considered which have earned

Upon careful consideration, we are inclined to remit this issue to the file of the Assessing Officer to compute section 14A disallowance afresh based on the following :- (i) If the assessee has non-interest bearing own funds more than investment in instrument for earning exempt income, no disallowance for interest should be done on touchstone of decision of Hon'ble Jurisdictional High Court in the case of HDFC Bank Ltd. (366 ITR 505).

We direct accordingly. Needless to add the assessee should be granted adequate opportunity of being heard.

The Assessing Officer in the assessment order noted that the assessee was asked to produce the details of transfer of share for claiming long term capital loss as computed u/s. 48 of the Act. Assessee explained as under :-

Considering the above the Assessing Officer held that there is no movement of transfer of asset, hence no capital loss arose. Hence, he held that the assessee has wrongly claimed long term capital loss. Hence, amount of Rs. 2,76,45,429/- was disallowed.

Upon assessee’s appeal learned CIT(A) recapulated the facts as under :- “As stated by the Assessee, it has entered into a stock purchase agreement on 1stMay 2008 with the owners of the said channel. The company, thereafter set-up a wholly owned subsidiary in the US called ZEN International INC. in the state of Delaware and remitted a sum of US $ 1 million, equal to Rs.4,52,00,5497-, on 10fh September, 2008. ZEN International Inc. allotted 10,000 equity shares of the face value of 0.01 to the company on 10th September 2008. On 15thSeptember 2008 the company assigned the stock purchase agreement to ZEN International Inc. pursuant to which ZEN India remained liable for the performance of the obligation under stock purchase agreement as well as the escrow agreement entered into on 8th July 2008 between ZEN India, the owners of the channel and the escrow agent. Subsequently, on account of some reason, Appellant had decided not to go ahead for purchase of channel and had terminated the transaction and had written off the investment in ZEN International Inc. following termination agreement dated 08.01.2009”.

Thereafter learned CIT(A) observed that such written off investment is a loss of capital which cannot be allowed as revenue expenditure. Learned CIT(A) held that obtaining permission of RBI does not make any difference to the assessment. He noted that here was a case of investment made for acquiring channel of TV Asia in USA, but because of some reasons the assessee had not gone ahead and hence it lost investments. Thus learned CIT(A) held that cannot be regarded as loss of revenue but capital loss.

Furthermore, learned CIT(A) noted that such investment has been shown as asset in the balance-sheet, hence writing it off cannot be said to be revenue expenditure. Learned CIT(A) further held that alternative claim that 11 M/s. Zoom Entertainment Network Limited investment was made in shares of company that was engaged in its existing line of business, hence such loss is allowable is not tenable because such investment in shares is a capital investment and if such business is not started in America due to any reason and such investment made in subsidiary is written off, that cannot be presumed to be business expenditure. Hence learned CIT(A) dismissed the alternative claim also.

Against this order assessee has filed the appeal.

Learned Counsel of the assessee reiterated details of investment in this regard. He recapulated that the assessee has sent US$ 1 million to wholly on subsidiary in USA by name ZEN. That ZEN has advanced US$ 500,000 for acquisition of Asia Star Broadcasting Inc., USA. However the matter could not be completed and US$ 500,000 given to M/s. Asia Star Broadcasting Inc. (ASB) was forfeited by ASB. The assessee has made provision in the books of account for the year ended 31st March, 2009 for loss of 500,000 dollars in the value of investment in ZEN. The same was not claimed as deduction in the return of income for A.Y. 2009-10. He reiterated that thereafter upon liquidation of ZEN in USA, the assessee received a sum of Rs. 22,500/- upon dissolution. That write off of the balance was duly done after RBI permission. Learned counsel further submitted that assessee had invested in wholly on subsidiary in USA for acquiring shares in capital of ASB which was into the same business of operating television channel. That since the business of the assessee was also the same, it was envisaged that there would be business advantage. That since said proposal could not be implemented there was loss. That in similar circumstances, the ITAT, Mumbai in CIT Vs. Colgate Pamolive India Ltd. in vide order dated 25.10.2011 held that loss incurred on sale of shares in strategic subsidiary was incidental to business and allowable as deduction in computing taxable income.

Learned Counsel of the assessee further submitted that in additional ground, balance of investment account in ZEN of Rs. 2,26,48,009/- has 12 M/s. Zoom Entertainment Network Limited reduced by Rs. Rs. 22,500/- received from ZEN amounting to Rs. 2,26,25,509/- is allowable as short term capital loss in his computation of income for A.Y. 2011-12. In this regard learned counsel placed reliance upon the case of CIT Vs. Jaykrishana Harivallabhdas (231 ITR 108). He further submitted that decision of Hon'ble Apex Court in the case of CIT Vs. R.M. Amin (106 ITR 368) is not applicable. He further submitted that decision relied upon by learned Departmental Representative of ITAT Special Bench, Mumbai in the case of Bennett and Coleman & Co. Ltd. (133 ITD 1) is not applicable.

We have heard both the counsel and perused the records. We find that the assessee is in this case was intending to acquire TV channel running in USA. There was business synergy between the assessee’s business in the said channel operating in USA. The intention of the assessee was to expand its existing line of business overseas. The assessee entered into a stock purchase agreement with the said US company on 1st May, 2008.

For going ahead with the project, the assessee set up a wholly owned subsidiary in the US called ZEN and remitted a sum of US$ 1 million equal to Rs. 4,52,00,549/- on 10.9.2008. Now, financial year before us is 2010-11. For the entire intervening period there was no question by the revenue regarding treatment of the nature of advance. No case was made out that the amount sent to the subsidiary was not for the purpose of business or not for business expediency. Resultantly, no disallowance on account of interest or for that matter payment to AE not at arm’s length was made out. In this regard we note that on similar issue of KSS Ltd., Hon'ble Bombay High Court in of 2006 vide order dated 26.11.2018 was considering the issue of advance by the Indian assessee to its overseas AE for acquisition of Hoolywood moves. The Revenue’s case that money was lying with the AE for quite some time and charge for diversion of interest was rejected by Hon'ble High Court. High Court had noted that the money was routed through the AE by the assessee for the purpose of acquisition of distributorship. There the sum was advanced for specific purpose of acquisition of distributorship of films. Hence, it was held

We have referred to the above decision only to highlight that in a situation akin to the present assessee money was advanced or money was spent through overseas intermediary for a business purpose. It was held that the same was for the purpose of business of the assessee. This analogy is fully applicable on the facts of the case. The purpose for which US$ 1 million was sent by the assessee to its overseas subsidiary was for the purpose of acquisition of TV unit/business in the USA, which was operating in the same line of assessee’s business and assessee’s intention was to expand its activity in overseas market. Hence, subsidiary was only a method by which the assessee was going to spend US$ 1 million for the purpose of its business. In this view of the mater when the amount sent was for the purpose of business, the loss thereof undoubtedly is a business loss. During current year out of the above sum invested of US$ 1 million, the assessee has received only Rs. 22,500/-. Hence, resultant loss is business loss and deserves to be allowed. In this regard we may also gainfully refer to the decision of this Tribunal in the case of Colgate Pamolive India Ltd. in vide order dated 25.10.2011. In the said case the issue was of loss on sale of shares of subsidiary which was strategic investment of the assessee. The Tribunal had allowed such loss as revenue by elaborately referring to catena of case laws which are germane on the issue before us also. We may gainfully refer to the adjudication of the Tribunal in this case as under :- 7. We find that Camelot was set up to manufacture toothbrushes exclusively for the assessee company and that it had no other customer than the assessee. It was said to have been set up as a small scale industrial undertaking with a view to certain preferential treatment in the excise laws, but whatever it manufactured was bought by the assessee company alone. Camelot did incur the losses but the assessee company extended financial help to Camelot from time to time. This financial help was clearly in assessee's own business interests because, if the assessee company was not to do so, Camelot could not have continued to exist, and all these losses incurred by Camelot were essentially relatable to doing business with assessee alone, i.e. Camelot's only customer. The loans and advances so given by the assessee were therefore wholly incidental to its business and 14 M/s. Zoom Entertainment Network Limited

We find that the above case law fully supports the case of the assessee that investment done in subsidiary which is actually a business investment, loss thereof was under the realm of business loss. As already noted above Hon'ble Jurisdictional High Court decision in the case of KSS (supra) also supports the proposition of advance to the subsidiary or AE only for fulfillment or purpose of assessee’s business are to be treated as business advances for business purposes of the assessee. Consequently, loss on such business loss/investment is business loss and deserves to be allowed as such. Accordingly, we set aside the order of learned CIT(A) on this issue and decide the issue in favour of the assessee.

Since we have already held that the impugned amount was a business loss, additional ground raised by the assessee for the same being capital loss cannot be accepted and hence additional ground stands dismissed.

In the result, appeal by the assessee on this issue stands allowed.

In the result, Revenue’s appeal stands dismissed and assessee’s appeal stands partly allowed.