DCIT CC 38, MUMBAI vs. K SERA SERA PRODUCTIONS LTD, MUMBAI

ORDER

PER N.K. PRADHAN, AM

2. The grounds of appeal

filed by the revenue read as under:

1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in holding that the amount of Rs.11.25 crores credited to Profit &Loss Account on account M/s K. Sera Sera Productions of outright sale of rights in motion pictures by the assessee itself, represents share application money and hence is not income.

2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in holding the claim of the assessee that the amount of Rs.11 crores received by the assesses for the film 'Darna Zaroori Hai" is not an income when the assessee has claimed the entire expenses on account of such film in its Profits & Loss account as per Rule 9A of the Income Tax Rules, 1962.

3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in holding that the Profits & Loss account and balance sheet prepared by the assessee company in accordance with Schedule VI of the Companies Act, 1956 can include share application money as income especially when such accounts are duly audited by an independent statutory auditor.

4. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in holding that the income as per Profit & Loss account to be treated as share capital for the income tax purpose, irrespective of the fact that the directors of the assessee company have acknowledged the same as income in their report and not referred it to as share capital.

5. Whether on the facts and circumstances of the case, the act of the assessee in deviating from the Profit & Loss account prepared in accordance with Companies Act for the income tax purpose is justified and correct.

3. The appellant has also filed additional grounds of appeal which are as under :

1. Whether on facts and in the circumstances of the case and in law, the CIT(A) was right in deleting the addition of Rs. 11 crores made by A.O. on account of Income from movie “Darna Zaroori Hai” relying on assessee’s submission that such amount was actually Share Application Money and that this journal entry was reversed in A.Y. 2010-11, the books of the assessee, when no such adjustment was at all done by the assessee in its books? 2. Whether on facts and in the circumstances of the case and in law, the CIT(A) was right in deleting the income aspect of film "Darna Zaroori Hai" without considering the allowable expenses claimed by assessee with respect to such M/s K. Sera Sera Productions Rule 9A of I.T. Rules, when both the aspects of taxation of amount of income and the corresponding expenses to be allowable are inter- dependent and not independent? 3. Whether on facts and in the circumstances of the case and in law, the CIT(A) was right in deleting the income of Rs. 11 crores relying on assessee's submission which are factually incorrect since no reversal of entry found in books of accounts of AY. 2010-11 as claimed by assessee before CIT(A)? 3.1 As the additional grounds filed by the assessee are closely linked with the original grounds of appeal

, we admit it for adjudication.

4. Briefly stated, the facts are that the assessee derives income from film production and distribution. The Department conducted a search action u/s 132 of the Act on 12.09.2007 in the residential as business premises of the assessee and its group concern as well as Director(s). Thereafter, in response to notice u/s 153A issued on 24.07.2008 by the Assessing Officer (AO), the assessee filed its return of income for the assessment year (AY) 2006-07 on 10.09.2009 declaring total income of Rs.87,64,620/-. In response to a query raised by the AO, the assessee filed details like (i) income from film distribution; (ii) details of shareholders holding shares of more than 1%, (iii) details of share application money received, (iv) details regarding unsecured loan from Global Trade Finance Ltd. and also mobilization of equity share capital especially share premium. In response to a query raised by the AO to explain the difference in profit shown at Rs.2,67,69,626/- (as per profit and loss account enclosed with annual accounts) and Rs.13,67,69,626/- (as per profit and loss account forming part of annual accounts duly approved at the M/s K. Sera Sera Productions 05.12.2009 as under:

“We would like to state that during the previous year relevant to A-Y 2006- 07, of were to receive share application money amounting to Rs.11,00,00,000/- Sr. No. Name Amount (Rs.)

1. Mr. Koshal Patel 30,00,000/-

2. M/s Bhavani Infosy 75,00,000/-

3. Mr. Ashok Choudhary 95,00,000/-

4. Mr. Vikas Khedwal 1,50,00,000/-

5. M/s Asan Exim Consultancy Pvt. 7,50,00,000/- Ltd. Total 11,00,00,000/- However, upto 31.03.2006 the above mentioned parties failed to fulfill the commitment to pay the share application money and promised that the same will be paid in next financial year. We accordingly passed the following journal entry in our books of accounts as on 31.03.2006:

Mr. Koshal Patel Dr. 30,00,000/- M/s Bhavani Infosy Dr. 75,00,000/- Mr. Ashok Choudhary Dr. 1,50,00,000/- M/s K. Sera Sera Productions Mr. Vikas Khedwal Dr. 7,50,00,000/- 11,00,00,000/- To share application money (Being provision made towards share application money)

The balances arising out of the above journal entries in the name of above mentioned parties were included in the sundry debtors amounting to Rs.17,53,72,752/-. The credit entry of Rs.11,00,00,000/- standing in the name of Share Application Money credited to the profit and loss account under the head Outright Sale of motion picture of Rs.11,25,00,000/-. It is clarified that though the amount of Rs.11,00,00,000/- was included in the Profit & Loss Account under the head Outright Sale of Rights in Motion Pictures no adjustments was made in the fixed assets schedule for the same.

It is further clarified that the above mentioned journal entry so made during the previous year relevant to the assessment year 2006-07 inflating to debtors and share application money was subsequently reversed during the previous year relevant to the assessment year 2010-11.

In view of the above, it is quite clear that neither any income accrued to us nor any sum is found credited in our books maintained for the previous year relevant to the assessment year 2006-07. Therefore, it is neither any income u/s 28 nor any cash credit u/s 68 of the Income Tax Act, 1961.”

On examining the above submission, the AO observed that neither in the P&L account nor in the details furnished subsequently, there is mention of crediting or debiting share application money as claimed by assessee in the P&L account. As per the AO, in view of the debit and credit entries in the P&L account and various details furnished during M/s K. Sera Sera Productions the course of assessment proceedings, there is no dispute about total business receipts and allowable expenditure. It is specifically mentioned by the AO that the books of account were not produced to verify the claim made by the assessee. The AO thus made an addition of Rs.11 crores u/s 28(iv) of the Act.

5. In appeal, the Ld. CIT(A) observed that (i) the assessee has inadvertently shown the wrong entry of share application money of Rs.11 crore which was never received till date in the balance sheet and also increased the debtors in the name of these five parties in violation of Schedule-VI of the Companies Act, (ii) the assessee has also wrongly credited this amount of Rs.11 crore in the P&L account under the head ‘income from operation’ towards the release of a film “Darana Zaroori Hai”, (iii) the assessee has also violated the provisions of SEBI Act and Stock Exchange Regulations.

However, the Ld. CIT(A) held :

“But the share application money wrongly credited to the P&L account which was subsequently reversed in the AY 2010-11 cannot be treated as the income of the assessee. The provisions of section 28(iv) cannot be applied because as per these provisions the value of any benefit or perquisite, whether convertible into money or not arising from business or the exercise of a profession. But in the present case neither any benefit nor perquisite has been received by the assessee by making this wrong entry of share application money in the P&L A/c. In the totality of the facts and circumstances, it is held that although the assessee has violated the provisions of Company Act, SEBI Act and Stock Exchange Regulations but the wrong entry made in the P&L A/c has not resulted into real income earned by M/s K. Sera Sera Productions the company. Therefore, the addition made by the AO is deleted and ground of appeal is allowed.”

6. Before us, the Ld. DR submits that the AO has made an addition of Rs. 11 crore on the basis of certain entries in the P&L account as filed by the assessee along with the return of income. In the profit and loss account the assessee has shown total receipts amounting to Rs.37,43,28,823/-. Out of it, an amount of Rs.11 crore is mentioned with narration “income from operation-Darna Zaroori Hai”. The AO further found that this amount of Rs.11 crore was received from the five parties. The Ld. DR submits that (i) the auditors while finalizing the accounts of the assessee-company for the AY 2006-07 have treated the above amount of Rs.11 crore as income from the movie- Darna Zaroori Hai, (ii) however, the assessee has taken a very different stand saying that this amount represents share application money receivable from five parties, (iii) it defies common sense and logic as to why to auditors could treat a so-called share application money as income from operation on Darna Zaroori Hai movie, (iv) share application money received or receivable is a capital receipt which is entered directly into the balance sheet only without routing it through the P&L account. Regarding the contention of the Ld. counsel of the assessee that the movie Darna Zaroori Hai could not get sold and the proof of this fact is that it is still there in the closing stock, the Ld. DR submits that on verification it is found to be incorrect as the copy of account of stock in hand as on 31.03.2006 clearly indicates that against Darna Zaroori Hai, the figure of Rs.3,54,87,929/- is mentioned as opening stock; however, M/s K. Sera Sera Productions NIL which proves that the above movie has indeed been sold. Thus it is argued that the movie Darna Zaroori Hai was indeed bought by the concerned distributors and the income was earned from the same and it was accordingly correctly reflected in the profit and loss account by the concerned auditors. It is also argued that it is not clear as to in which assessment year namely AY 2010-11 or AY 2011-12, the reversal of entries has been done. The Ld. DR submits that if the appellant still contends that they have indeed reversed the entry in AY 2010-11 or AY 2011-12, whatever may be the AY, they may be asked by the Bench to produce the necessary books of accounts and other documents before the AO and to this effect, the assessment may be set aside to the file of the AO.

7. Per contra, the Ld. counsel of the assessee submits that during the year under consideration, the assessee was to receive share application money from five parties amounting to Rs.11 crore. However, upto 31.03.2006, funds against share application money were not received and were to be received in the next financial year. It is stated that the assessee had inadvertently shown the amounts to be received as share application money from the said five parties as income from operations for Darna Zaroori Hai. This inadvertent error was pointed out in the notes to accounts on page 35 of the annual report point No. h(v), clearly stating that “current year profit of Rs.136,769,626/- included share application money of Rs.11.00,00,000/-“. It is stated that there is no justification in making the additions on account of such mistake merely for the reason that there were entries in M/s K. Sera Sera Productions the profit and loss account showing the said amounts as income from outright sale. It is further stated that confirmations were filed before the AO and these confirmations show that the assessee had inadvertently shown the above amount as income from operations. It is further argued that whether the entries have been reversed in AY 2010-11 or not will not affect the taxability of Rs.11 crore being share application money during the AY 2006-07 and the point to be adjudicated is whether Rs.11 crore as the income of the assessee simply because it had inadvertently shown the same in the profit and loss account. Stating that the AO has assessed the said amount as income on the basis of profit and loss account, which is against the basic principle of taxation that only real income can be taxed, reliance is placed by the Ld. counsel on the decision in Delhi Stock Exchange Association Ltd. v. CIT 41 ITR 495, Kedarnath Jude Manufacturing Co Ltd. v. CIT 82 ITR 363, CIT v. Shoorji Vallabhdas & Co. Ltd. 43 ITR 144, Pullangode Rubber Produce Company Ltd. v. State of Kerala & Anr 91 ITR 18 K.S. Narayanswami Iyer v. CIT 29 ITR 515, CIT v. Nagri Mills Co. Ltd. 33 ITR 681, CIT v. J.D. Italia 141 ITR 948. Responding to the contentions of the Ld. DR that books of accounts were not produced to verify the claim made by the assessee, the Ld. counsel submits that the assessee vide letter dated 02.12.2009 had submitted clarification regarding share application money wrongly credited to the P&L account along with the financial statements, M/s K. Sera Sera Productions computation of income and grouping of current assets, loans and advances and sub-head sundry debtors-others.

Also it is explained by him that the movie Darna Zaroori Hai had been completed in AY 2006-07 and received censor certificate on 22.02.2006, was sold and had started to fetch revenues during the AY 2006-07 and therefore, the assessee did not hold the movie as closing WIP as on 31.03.2006.

The AO found from the P&L account that the assessee had shown receipts of Rs.37,43,28,823/-. Out of it an amount of Rs.11,00,00,000/- is mentioned with the narration “Income from Operation-Darna Zaroori Hai”. The AO further found that this amount of Rs.11,00,00,000/- was received from the following five parties:

Sr. No. Name Amount (Rs.)