ANIL SHARMA,MUMBAI vs. A.C.I.T. RG. 11(1), MUMBAI

The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

The assessee has also raised additional grounds of appeal before the tribunal , as under:-

The assessee has submitted that the additional ground of appeal raised by it is purely legal ground and need to be admitted in the interest of justice as it goes to root of the matter . The assessee prayed for the admission of the said additional ground of appeal. The Ld. DR raised preliminary objection to the admission of aforesaid additional ground of appeal. After hearing both the parties and keeping in view ratio of decision in the case of National Thermal Power Corp. Ltd. v. CIT (1998) 229 ITR 383(SC), we are inclined to admit the said ground of appeal which is a legal ground , to be adjudicated thereafter on merits in accordance with law. We order accordingly.

The brief facts of the case are that assessee is film director, editor, story writer, dialogue writer and producer. The assessee has during the financial year written off bad debts of Rs. 93,62,875/- out of which Rs. 92,71,234/- is on account of payment made on behalf of Movie World Studios Ltd. , which is a related concern of the assessee. There was debit opening balance of Rs. 71,55,949 in the books of the assessee against the name of said company and during the year the assessee has further made payment of Rs. 21,15,825/- and the last payment was made on 31st March, 2007 of Rs. 15,00,000/- was made by the assessee to the said company. The assessee wrote off Rs. 92,71,234/- as bad debts during the year under consideration. It was submitted that original amount was paid to Movie World Studio Limited in financial year 2004-05. The assessee submitted before the authorities below that assessee has advanced an amount of Rs. 2.5 crores to Movie World Studios Ltd. against the right of the film ‘Ab Watan Tumare Hawale Sathiyo’ against which some recovery was made from the business earlier years and the balance outstanding on 31st March, 2007 was 92,71,234/- which was written off. It was submitted that since the company was in bad shape and has incurred heavy financial losses in the film ‘Ab Watan Tumare Hawale Sathiyo’ and the amount was not received, the amount was written off as bad debts u/s 36(2) r.w.s. 36(1)(vii). The A.O did not accepted the contentions of the assessee that the debt has become bad as the assessee has made further payment of Rs.21,15,285/- during the year while last payment of Rs.15,00,000/- was made on the last day of the financial year i.e. on 31-03-2007. Thus, it was observed by AO that once payment has been made on the last day of financial year, how the debt can become bad bonafidely and the AO observed that it was not genuinely written off as bad debt. The AO relied upon several judicial precedents as mentioned in assessment order at page 4 and 5 to disallow the claim of the assessee as in view of the AO , the assessee has not explained the business exigency in making aforesaid advances nor bona fide of writing off of the said amount as bad debt was brought on record by the assessee and hence the claim of the assessee for bad debts u/s 36(2) r.w.s. 36(1)(vii) was rejected by the A.O , vide assessment order dated 20-11-2009 passed u/s 143(3) , which was later confirmed by learned CIT(A) in first appeal vide appellate order dated 18-11-2011 wherein assessee appeal stood dismissed.

Aggrieved by the appellate order dated 18-11-2011 passed by learned CIT(A) , the assessee is in appeal before the tribunal. Before us, the assessee has taken a fresh contention that advances made to Movie World Studios Ltd. were business advances and said write off was in fact business loss which was written off in the books of accounts and the same need to be allowed u/s. 37 of the Act instead of claim of bad debt write off made by the assessee u/s 36(1)(vii) r.w.s. 36(2). It is prayed by the assessee that the matter may be restored back to the file of the A.O for fresh adjudication after considering and verifying the contention of the assessee as to the claim of business loss and its allowability u/s 37. Ld. D.R did not objected to the set aside of the issue for fresh adjudication by the A.O . so that the AO gets an opportunity to make necessary enquiries and verifications w.r.t. claim of business loss set up by the assessee.

We have considered rival contentions and perused the material on record. We have observed that the assessee had submitted before the authorities below that assessee has advanced an amount of Rs. 2.5 crores to Movie World Studios Ltd. against the right of the film ‘Ab Watan Tumare Hawale Sathiyo’ against which some recovery was made from the business in earlier years and the balance outstanding on 31st March, 2007 was 92,71,234/- . It had been submitted by assessee before authorities below that since the company was in bad shape and has incurred heavy financial losses in the film ‘Ab Watan Tumare Hawale Sathiyo’ and the amount was not received, the amount was written off as bad debts and claim was made with Revenue for allowability of bad debt u/s 36(1)(vii) r.w.s. 36(2) but now it is contended that it was a business advance which has turned into loss and is to be allowed as business loss u/s 37(1), which need verification by authorities below. Keeping in a view fitness of the matter and in the interest of justice , this matter/issue needs to be restored to the file of the A.O for fresh adjudication on merits in accordance with law after considering and verifying the contentions of the assessee as to the genuineness and bona fide of the claim of the assessee as to the business loss incurred by assessee by virtue of advances made to Movie World Studio Limited which is to be evaluated on threshold of the provisions of Section 37 of the Act, after making such enquiry as the AO may deem fit in accordance with law. The A.O shall give proper and adequate opportunity of being heard to the assessee before adjudicating the issue on merits in denovo proceedings. The AO shall admit all relevant evidences and contentions of the assessee in denovo proceedings which shall be evaluated on merits by the AO in accordance with law. We order accordingly.

The second issued is with regard to the disallowability of finance charges of Rs. 24,95,770/- which was claimed by the assessee in P&L account , as detailed below:-

Aggrieved by the assessment order dated 20-11-2009 passed by the AO u/s 143(3), the assessee filed first appeal with learned CIT(A) who dismissed the appeal of the assessee by holding as under:-

Aggrieved by the appellate order dated 18-11-2011 passed by learned CIT(A) , the assessee filed an appeal before the tribunal .

At the outset, Ld. Counsel for the assessee submitted that assessee has raised total amounts of loan fund of Rs. 3,16,58,842/- as at 31-03-2007 which is reflected in Balance Sheet , out of which loan funds of Rs.1,73,66,504/- were utilised for the purpose of the business of the assessee while Rs. 1,42,92,338/- were utilised for non business purposes . It was submitted that out of total interest expenditure of 24,95,770/- , interest expenditure to the tune of Rs. 13,69,058/- need to be allowed as business expense as the same was utilised for business purposes. The assessee has given following chart duly signed by ‘Sh P R Toprani,AR’ given during the course of hearing before the tribunal, as under.

Ld. D.R on the other hand submitted that this contention of the assessee that part of the loan funds were utilised for business purposes need verification by the A.O and matter can be remanded back to the file of the A.O for verification of the contention of the assessee .

We have heard rival parties and perused the material on record. We have observed that the AO has disallowed finance charges of Rs. 24,95,770/- which was claimed by the assessee in P&L account , as detailed below:-

In the result, appeal of the Assessee in ITA No. 1041/Mum/2012 for assessment year 2007-08 is allowed for statistical purposes.