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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI SANDEEP GOSAIN
सुनवाई की तायीख / Date of Hearing : 17.02.2017 घोषणा की तायीख /Date of Pronouncement : 26.04.2017 आदेश / O R D E R PER BENCH: There are two appeals under consideration filed by both the parties at the dispute and they are filed against the order of CIT(A) dated 24/01/2011 for the AY 2008-09. The issues raised in the “appeal of the assessee” relates to (i) the addition on the basis of AIR Information amounting to Rs. 1,61,798/- and (ii) Addition on account of content cost of Rs. 89.06 crore. AO disallowed the entire such claim considering the same as of capital nature and differing from AO, the CIT(A) capitalized based in the ratio of 85:15. Addition confirmed in this year works out to Rs. 13.46 crore i.e. equivalent of 15% (para 4.2 of the order of the CIT(A).
Per contra, the revenue is in appeal on various issues namely 1) content cost; 2) Sales promotion expenditure and Advertisment Expenditure of Rs 58.65 crore; 3) Legal and professional fee of Rs. 7,13,63,513/- ; and finally 4) the addition u/s 68 amounting to Rs. 398.29 crore ( both domestic as well as from non-residents). Before we deal with these issues, we shall take up the relevant facts of the assessee and the issues.
Background Facts: General facts include that the assessee is engaged in the „telecasting of TV channel and providing broad casting services‟. Assessee filed the loss return of income Declaring the loss of Rs. (-) Rs. 270.85 cr (rounded off). Said loss was further revised to (-) Rs. 276.39 cr. However, in the assessment, AO determined the assessed income at Rs. 277,00,41,030/-, a positive income. AO made additions amounting to Rs. 553,39,44,622/-. During the first appellate proceedings, the assessee got substantial relief on many accounts. Aggrieved with the same, the revenue is in appeal, we shall now deal with each of the issues raised by the assessee and revenue in their respective appeals. 6345/M/2011 – Assessee’s appeal 4. Confirming of addition of Rs. 1,61,798/- AIR information: Facts are that the AO was in possession of AIR information and during the assessment proceedings, the assessee was asked to reconcile the same. Barring the entries amounting to Rs. 1,61,798/-, all others were reconciled. It is the case of the assessee that the AO failed to give specific details for reconciliation. AO does not have any corroborative evidence to support the said addition. CIT(A) confirmed the same holding that the onus is on the assessee to reconcile.
Before us Ld. Counsel for the assessee filed a copy of the Tribunal in the case of A. F. Ferguson and others for the proposition that such blind additions are unsustainable in law. Ld AR read out the contents of para 6 of the said order of the Tribunal where one of us is the party (AM). Considering the same, we are of the opinion that there is no case for revenue. As such, the receipts disclosed in the books of accounts of the assesse in this account are more than the said sum of Rs. 1,61,798/- . Accordingly, the issue raised in the appeal of the assessee is allowable in favour of the assessee. Relevant grounds are dismissed.
Content Cost: This issue is common in both the appeals of revenue and assessee. Relevant facts are that the assessee debited a sum of Rs. 122.70 cr. in the content cost account in the books of accounts. Schedule 13 of the financial statements is relevant. The said content cost basically relates to inventories as on 31.03.07 plus the current year purchases. These inventories include TV programmes and Film Rights. There is no news content in the inventory. While finalising the accounts, assessee debited the entire cost to the P&L account as the current year expenditure. In the assessment proceedings, AO analysed the accounting policy of the assessee on this account as well as the market practice in this regard and held that the sum of Rs. 89.06 cr constitutes „IPRs‟ being commercial rights in the films / TV programmes. AO disallowed the entire sum of Rs. 89.06 cr. as capital expenditure. AO treated the same an intangible asset u/s 32(iii) of the Act. Without prejudice (as mentioned in para 6.15 of Assessment Order), AO held that the claim should be allowed / amortised over the year as in case of Zee TV, UTV etc. It is the case of the AO in the market, the content cost on TV programme / Film Rights are amortised over the years i.e 5 years and 3 years respectively. 7. However, during the first appellate proceedings, Ld FAA rejected the above decision of the AO and held that the cost of each item has to be amortised to the extent of 85% in the year of telecast and the balance 15% constitutes a „residual value‟. As per the contents of para 4.26 of FAA‟s order, the content cost constitutes a „revenue expenditure‟ in principle and the claim to the extent of 85% needs to be written off in current year and the balance of 15% can be written off over three years @ 5% each year. Thus, CIT(A) granted relief to assessee to the extent of Rs. 75,70,10,330/- and confirmed the addition of Rs. 13,35,90,058/-. Aggrieved, both the parties are in appeal before us.
Before us, Ld. DR opposes the deletion of the addition to the extent of Rs. 75,70,10,330/- and submitted that the CIT(A) has no basis or any reason for his decision of write off to the extent of only 85% of the cost in current year and the balance in 3 instalments of 5% each. Referring to the case of Zee Entertainment Enterprises Ltd x UTV, Ld. DR submitted in writing that whole of the same should at least be amortised in 3 years. Actually in the assessment order, without prejudice, AO also expressed the same in his own language ie the suitable no. of years. DR‟s submission dated 23.11.15 are relevant in this regard.
On the other hand, the Ld. AR for assessee submitted that the content cost constitutes „revenue expenditure‟ and the entire such cost has to be allowed in current year. Referring to the order of Tribunal in the case of Zee media Corporation vide Ld. AR submitted that the AO must comply with the said order of the Tribunal, where one of us (AM) in the author of it. Without prejudice, Ld. AR submitted that out of the said content cost, the cost to the extent of Rs. 26,50,87,870/- needs to be allowed in full as the said content was already telecast in the current year.
We heard both the parties on the issue of amortization or allowability of entire cost in the current year. Similar issue was adjudicated by this Tribunal in the case of Zee Media Corporation – ITA No. 1590/M/15 dated 12.08.15 for AY 2008-09. In connection with grounds no. 2 and 3 of that appeal, the Tribunal dealt with the issue on hand in para 18 to 25 and the same were allowed in favour of that assessee. But there is difference in both these cases i.e. Zee Media and the present case. In Zee Media, the accounting policy is in favour of amortization of TV programme over 3 years and of the Film Rights over 5 years (60 months). Inventories of tapes is taken on FIFO basis. Whereas in the instant case, unlike in case of Zee Media, entire „content cost‟ is written off in the current year. For the sake of completeness of the order, we proceed to extract the relevant paragraphs 18 to 25 of that order which read as follows:-
Ground nos. 2 and 3 relate to the merits of addition on account of disallowance of intangible assets ie News / TV Program / Film Rights. As described already in the preceding paragraphs, assessee purchased the said News / TV Program / Film Rights amounting to Rs. 90,05,07,680/- (pages 24 to 28 of the paper book). In this regard, Ld Counsel for the assessee submitted the break-up (page 49 of the paper book) of TV Programs, News and non-fiction, Film Rights. It provides the details of manner of amortization.
19. On perusal of said page 49, we find the opening balance of these items works out to Rs. 48.42 Crs (rounded off); total purchases amounting to Rs. 99.05 Crs (rounded off) while the News and non-fiction were completely amortized by debiting to the P & L Account whereas the TV Programs and Film Rights were differently amortized over a period of time depending upon the agreement and the nature and potential of the TV Programs and Film Rights. The total such amortization under these three heads works out to Rs. 76.41 Crs (rounded off) and the same is accounted on scientific basis without treating them as current assets with the facility of amortization and not by naming them as intangible assets claiming depreciation. 20. During the proceedings before us, Ld Counsel for the assessee supported the accounting method of the assessee in this regard and submitted that the „News items‟ do not have long life and they are not fit for repeated broadcasting and therefore, News and the non-fiction items have to be amortized in toto in the year of acquisition and use. Therefore, considering the same this part of the purchases of News items and non-fiction items are rightly debited to the P & L Account under the head „operational cost‟. The decision based on a scientific analysis and therefore, the decisions of the AO and the CIT (A) are required to be reversed on these claims relating to the News / non-fiction items. Ld AR relied on the judgment of the Hon‟ble Delhi High Court in the case of Television Eighteen India Ltd (supra) [2014] 364 ITR 597 (Delhi). 21. Similarly, on the TV Programs and Film Rights, Ld Counsel for the assessee submitted that they were amortized as per the Notes 7 to the financial statements, which is extracted and placed above. This method of accounting has been consistently followed by the assessee and the same was accepted by the AO in earlier assessment years without any dispute. Considering the set principle of consistency, the conclusions drawn by the AO and the CIT (A) are also required to be reversed. Bringing our attention to the provisions of Rule 9A & B of the IT Rules, 1962, Ld Counsel for the assessee submitted that the said Rules relate to the manufacturers and distributors only. Therefore, the reliance by the Revenue Authorities on these Rules is misplaced. Further, referring to the Accounting Standard (AS) 26, relating to the intangible assets, Ld Counsel for the assessee read out the definition given to the intangible assets at para 6.1 and submitted that the Film Rights and TV Programs are outside the said definition given to the „intangible assets‟. Further, Ld Counsel for the assessee also brought our attention to the para 63 of the said AS-26, and mentioned that the amortization is very much recognized in the accounts and therefore, the claim of the assessee should be allowed in full. 22. On the other hand, Ld DR for the Revenue submitted that the definition to the „intangible assets‟ vide para 6.1 of the said AS-26, the expression “an intangible asset is an identifiable non-monetary asset........held for use in .............. supply of .......and services.........” and it covers the TV Programs and Film Rights. Therefore, the provisions of AS-26 should apply in full. Further, bringing our attention to the definition „current assets‟, Ld DR submitted that the current asset is defined as an asset such as receivables, inventory, work in progress or cash ie constantly flowing in and out of the organization in the normal course of its business, such as cash is converted into goods and then back into the goods. In accounting, any asset being in use for lesser than one year, is considered a „current asset‟. Relying on the above definition, Ld DR for the Revenue submitted that News / non-fictional items, TV Programs, Film Rights did not constantly flow in and out for the assessee. In fact, assessee uses these TV Programs / Film Rights as bait for attracting the advertisements and Television Rating Point (TRP) rates. In that sense, the said rights do not constitute current assets. Therefore, these items constitute intangible assets, which are eligible for depreciation and therefore, the amortization adopted by the assessee should dismissed as done by the Revenue Authorities during the assessment as well as first appellate proceedings. 23. During rebuttal time, Ld Counsel for the assessee filed a copy of the order of the ITAT, Chennai Bench in the case of ACIT vs. M/s. Sun TV Networks Ltd in to 1520/Mds/2013 for the AYs 2004-05 to 2009-10, dated 31.10.2013 and submitted that the issue of amortization of TV Programs and Film Rights was approved in the said order vide paras 8 and 9 of the said Tribunal‟s order. The said paras read as under: “8. Now, we take up the common issue involved in all the appeals. The assessee is in the business of running satellite television channels. These channels telecast films, serials etc through satellite channels. The rights over these films are purchased from the producers of the respective films for broadcasting through satellite television. These rights come with an embargo that he films shall not be broadcasted or aired for a specified period from the date of release in theatres depending upon the success at the box office and other factors. Till the time, such films are broadcasted; they are to be treated as stock-in-trade. Once the films are broadcasted, the purchase value of the films is written-off. The expenditure on purchase of films is claim in the first year itself. The assessee has got only satellite telecasting rights and has no universal rights for airing the films or serials. Once the film or the serial is aired, its value is diminished in subsequent telecasts. The assessee earns substantial revenue in the first telecast itself. In repeat telecast, the assessee is able to generate marginal revenue. Whatever income is earned from the subsequent telecasts is offered as income without claiming any expenditure. The assessee also generates revenue from broadcasting serials through satellite channels. The assessee gets revenue from production and broadcasting serials on the lines of feature films, the rights of broadcasting such serials are also treated as stock in trade till the time they are aired and the expenses are debited to the Profit and Loss account. The assessee treats the films and the serials at par and applied the provisions of Rule 9A and 9B of the Income Tax Rules, as are applicable in case of films on serials as well. On the other hand, the contention of the Revenue is that the film and serial broadcasting rights acquired by assessee are perpetual in nature. After first telecast, the assessee does not discard the films but carefully store the same in digital library for airing the same again. Therefore, the assessee gets enduring benefit from the rights acquired in films and serials and they do not expire on the date of first telecast as contemplated by the assessee. The rights are intangible assets within the meaning of Explanation (iii) to section 32 and do not fall within the purview of section 37(1). The assessee is entitled to claim depreciation on same. 9. The issue of amortization of cost of movie and serial rights, programme production expenses, consumable and media expenses by treating them as intangible assets u/s 32(1)(ii) has been dealt in detail by the CIT (A) in his order dated 23.2.2013 relevant to the AY 2006-07 and 2007-08. We fully agree with the detailed findings and the reasoning given by the CIT (A) in his order allowing this ground of appeal
of the assessee. For the sake of brevity, we are not reproducing the finding of the CIT (A) in accordance with the judgment of the Hon‟ble Supreme Court of India in the case of CIT vs. K.Y. Pillah & Sons reported as 63 ITR 411 subsequently followed by the Hon‟ble Delhi High Court in the case of CIT vs. Global Vantedge (P) Ltd reported as 354 ITR 21 (Del). The Ld DR has not been able to controvert the well reasoned order of the CIT (A) on the issue. Accordingly, the findings of the CIT (A) on the issue are affirmed and this ground of appeal of the Revenue in respect of all the AYs is dismissed.”
24. Further, on the issue of allowability of the claim on the news items / non-fictional items, Ld Counsel for the assessee also brought our attention to the judgment of the Hon‟ble Delhi High Court in the case of CIT vs. Television Eighteen India Ltd (No.1) [2014] 364 ITR 597 (Delhi), wherein the issue relating to news / non-fictional items, was decided in favour of the assessee, and read out the held portion of the said judgment which reads as under:
“Held, dismissing the appeal, that there was no dispute that the data base of the programs which were utilised for the creation of “news archives” belonged to the assessee. The future likelihood of these resources being a possible source of revenue could not justify their inclusion in the capital stream. Furthermore, the expenditure, i.e., 10 per cent. Rs. 88,83,128/- was a part of the entire total expenditure incurred by the assessee which was concededly treated as revenue, even otherwise.” 24.1. Thus, it is the claim of the assessee that all the claims of the assessee are allowable on merits too in view of the covered nature of the items.
We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited precedents and paper book filed before us. The case of the assessee on the merits is that the assessee has a method of valuation of the news items/non fictional in nature, TV programs and the film rights. The details are given in the aforementioned „Note No 7‟ to the financial statements. According to the same, while the news items purchased are debited to the P and L account as they do not have the repeat telecast value, other items like the TV program and the film rights constitutes „current assets‟, which are amortised over the years and the period of such amortization is given in the said Note. Per contra, the case of the revenue on these issues is that these items constitute „intangible depreciable capital assets‟ and provisions of section 32 of the Act apply. Considering the same, we shall now undertake to discuss the item wise adjudication as follows. a. On the debits relating to the purchases of the News items: Regarding the nature of the news items purchased by the assessee and debited to the P and L account, we find it is in the common knowledge of every citizen that the news items do not have enduring benefit. Normally, the news items/non fictional items purchased by the assessee lose its value once they are telecast. Therefore, such items do not have repeat telecast value in terms of the revenue generation by way of advertisement from the sponsors. As such, it is a settled issue at the level of Hon‟ble Delhi High Court in the case of Television Eighteen India Ltd (supra) that the claims of the assessee relating to news / non-fictional items are allowable. Even otherwise, even if some income generated, that is not criterion for describing the items as „intangible assets‟ for the purpose of invoking the provisions of section 32(ii) of the Act. We rely on the above referred Delhi High Court‟s Judgment in the case of Television Eighteen India Ltd (supra). Further, we find that the assessee has a declared method of accounting relating to accounting of these transactions. He has been consistently following the same without any change. In fact, the Revenue has consistently allowed the claim in the past. This is for the first time, AO disturbed the claim of the assessee and invoked the provisions of section 32 (ii) of the Act, without any sustainable reasoning. Therefore, considering all the points mentioned above, we are of the firm opinion that the decision of the AO/CIT(A) is unsustainable legally. Hence, the assessee is entitled to claim the purchases of news items/non fictional items as an allowable expenditure. Accordingly, we direct the AO to delete the relevant addition. b. On the debits relating to the purchases of the TV Programs/Film rights: Assessee amortised the „inventories‟ as per the method of accounting consistently followed by him over the years. In fact, the Revenue has consistently allowed the claim in the past. This is for the first time, AO disturbed the claim of the assessee and invoked the provisions of section 32 (ii) of the Act without any sustainable reasoning. We have perused he judgment of Honble High Court of Delhi and the order of the Tribunal of Chennai Bench in the case of M/s Sun TV Networks Ltd (supra). We have also extracted the relevant paragraphs and already placed in this order above. We find similar issue of amortization of the TV Programs/Film rights came up before the Chennai Bench of the Tribunal wherein the issue was decided in favour of the assessee and rejected the AO‟s proposal to invoke the provisions of section 32(ii) of the Act in respect of the above programs/rights. As such, the Ld DR‟s argument on the applicability of the AS-26 to the TV Programs and Film rights is not supported by any precedents and therefore, the arguments raised by the Revenue are not allowed. Thus, considering the covered nature of the issue as well as the consistent method of accounting followed by the assessee in this regard and also in the absence of any contrary material to support the arguments of the Revenue against the assessee‟s claim, we are of the opinion that the decision taken by the CIT (A) in the impugned order is required to be reversed. Accordingly, Ground nos. 2 and 3 raised by the assessee are allowed.
Considering the same, we are of the view that the claim of assessee is not in tune with the accounting policy in open market on this issue of amortization of TV programme/ Film Rights. No special reasons are demonstrated before us the reasons justifying the deviations by the assessee. Therefore, we are of the view that the AO is directed to apply the said order of the Tribunal in case of Zee Media (supra) of the granting reasonable opportunity of being heard to the assessee fully. AO is also directed to reduce the extent of cost already telecast i.e. Rs. 26,50,87,780/- from the total cost of Rs. 89.06 crore as there is no justification for not allowing the content, which is already telecast in the current year. Thus, AO should examine the correctness of the said figure and the extent relatable to both TVprogramme or Film rights before granting the full deduction out of Rs. 89.06 crore. On the balance, the accounting policies in the market relating to this industry should be applied. AO shall grant reasonable opportunity to the assessee. With these directions, the issue raised in both appeals are allowed as above.
In the result, the appeal of the assesse is allowed protanto. – Revenue appeal Revenue raised four substantial issues in its appeal. 1st issue relates to the 13. „content cost‟ – its amortization. This issue is similar to the 2nd issue raised in the appeal of the assessee. In our adjudication, slightly deviating from the order of the Tribunal in the case of Zee Media Corporation supra, we held that the content cost constitutes revenue in nature and the entire such cost already telecost in the current year, needs to be allowed in full in this year considering the principle of exploitation of rights and the balance is required to be amortized on the industry‟s accounting policy. In this regard, AO was directed on this issue to follow the Tribunal‟s order in case of Zee Media Corporation (supra) with appropriate modification mentioned above. Accordingly, this issue is partly allowed.
Second issue relates to sales promotion & advance expenses amounting to Rs. 58,65,13,438/-. Relevant facts are that the assessee claimed expenses of Rs. 70,38,16,126/- under advance and sales promotion account. They appear in schedule 15 of the accounts relating to „Administration and General Expenses‟. As per the revenue, these expenses are required to be amortized over six years. Thus, 1/6th of the claim is allowed in the current year and the balance is amortized equally in next 5 AYs. This is with reference to Brand Marketing Cost. Thus, Rs. 11,73,02,688/- is allowed and the balance of Rs. 58,65,13,438/- is added to the income of the assessee. AO relied upon the Apex Court judgment in the case of M.I.I.C Ltd (225 ITR 802) (SC) and Bombay High Court judgment in the case of Taparia Tools Ltd (260 ITR 102) (Bom). AO is guided by the nature of expenditure ie sponsoring of Indo-Pak series 2007 (Rs. 4.8 Crs), launch expenditure (Rs. 0.60 crore) etc. AO is of the view that these expenditure helps in brand building of „INX Media‟ or „9X Channel‟.
However, FAA analysed each of these expenditure (para 5-8 to 5-9) and held that these are revenue in nature and the cases cited by the AO are distinguishable on facts (para 5.5 and 5-11 of order of FAA). Further, FAA held that the said expenditure for brand building / brand image is an allowable deduction. In this regard, Ld FAA relied on the Gujrat High Court judgment in case of M/s Core Healthcare Ltd 308 ITR 263 and orders of the Tribunal in case of M/s Godrej Tea Ltd (supra) and Spice Communications Ltd, Reliance Jute Ltd, British Electrical Pumps Pvt. Ltd etc. Contents are para 5.16 of FAA‟s order are relevant. Thus, the FAA deleted the entire addition of Rs. 58,65,13,438/-.
Before us, on this issue, Ld. DR for the revenue relied heavily on the order of the AO and he is critical of the order of the FAA. In the written submission dated 23.11.15, Ld. DR submitted the following:-
“These expenditures had not been incurred to earn the income returned by the assessee from telecasting the programmes in the year under consideration.
2. The life of the programme and the life of the channel / broadcaster were well beyond one year and the assessee would have the benefits following from the impugned expenditure, spread over several years. 3. The expenditure involved expenses which were clearly prior period expenses before the launch of the channel 9X and were clearly in the nature of brand building expenses for the company from which the benefit will accrue to the company for number of years to come and these expenses needed to be capitalised. 4. The expenses were required to be amortized and these should have been amortized over suitable number of years as is being done by the industry peers such as UTV Software Communications Limited. 5. These expenses were in the nature of deferred revenue expenses which were required to be amortized over a number of years since this was the first year of operations of the company and part of the expenses related to prior period before the company commenced its commercial operations” 17. The above it is evident that the revenue is on the matching principle ie assessee cannot be allowed to claim huge expenditure against meagre income reported in this year. In the process, revenue lost the much established accounting principle of „Mercantile System of Accounting‟ by the assessee in this year under consideration. We also find that the decisions relied on by the AO are distinguishable on both facts and legal issue. They are not on the brand building related issues. On the other hand, the decision in case of Core Healthcare Ltd and others (supra) on this issue only. Nothing is made out by the Ld. DR that cricket sponsoring expenditure constitutes capital nature. It is never the case of the revenue that Rs. 7.03 crore of expenditure is not revenue in nature. The question is only if they should be amortized over the period of 6 years or otherwise. In our view, the CIT(A) order, on this issue, constitutes fair and reasonable and it does not call for any interference. The expenditure incurred on account of sponsoring of cricket or launch expenditure are allowable revenue expenditure as they are in the nature of advertisement expenditure. Accordingly, the relevant grounds of the revenue on this issue are dismissed.
18. Disallowance of legal and professional fee of Rs. 7,13,63,513/-: Background facts include that the assessee claimed expenditure of Rs. 13,28,90,652/- under „legal and professional expenditure‟ head. Schedule 15 of account is relevant. In the assessment, AO disallowed an amount of Rs. 7,13,63,513/-. These payments were made to M/s Rap Consultancy Pvt. Ltd, M/s Robert Band, M/s Sai Krishna & Associates and towards the Stamp Duty Charges. Relevant agreement with these parties suggest these payments are for period from 01.04.07 to 31.12.07, whereas, the channel (INX Media, 9X Hindi Entertainment Channel) was launched in Nov 2007 only. Further, it was mentioned that business was set up on 01.06.2007. If the said „set up‟ is considered a sum of Rs. 4,07,57,674/- needs to be disallowed. Assessee, suo motto, disallowed the same (para 6.5 of FAA‟s order). In favour of claiming of the said balance expenses, assessee relied on various judicial pronouncements. FAA analysed each of the expenses and considered the business set up date as 1.6.2007 and the business commencement as Nov, 2007 and held that Rs. 7,13,63,513/- is allowable u/s 37(i) of the Act. Discussion in para 6.11 and 6.12 are relevant.
Before us, Ld. DR contested the conclusions of the FAA and mentioned that the expenses beyond 01.06.2007 should not be allowed. However, per contra, Ld. AR for the assessee substituted that the business commenced only in Nov, 2007 and therefore, all the said expenses beyond 01.06.2007 should be allowed u/s 37(i) of the Act. Revenue argues „in writing‟ that the set up is not completed as on 1.06.2007. In reply, Ld. AR for the assessee brought our attention to the copy of the purchase order dated 30.05.2007 of a „Set Top Box‟ (MPEG-4, SD, DVB-S, Set Top Box (Model CDVB 6750, Coship – IRDETO CA) of 5000 nos. for sum of Rs. 1,53,75,000/-. The delivery date is 06.08.2007. Describing the details on the said purchase order ld. AR fairly submitted that the same was not there before the AO. Further, he could not file original purchase order also before us. It is not clear as to the appropriate date of set up or commencement of this line of business. There is no availability of an expert opinion in this matter too. However, it is the argument of Ld. AR that the business is set up as an „essential activity‟ is started and also first purchase as the case may be. Assessee relied on the judicial pronouncement in case of Hughes Escorts Communication, 106 TTJ 1065 (Del) and Victories I. Pvt. Ltd. 169/M/12 for the above legal propositions. To sum up, it is the player of Ld. AR that the AO‟s conclusion that the set up is not completed till Nov. 2017, is incorrect and it should be reversed to 01.06.2007.
Ld. AR filed a letter dated 13.02.2017 on the said issue and submitted in writing that the said „purchase order‟ dated 30.05.2007 constitutes as proforma invoice only. They raised the genuineness issue of this order. Further, referring to an agreement for channel placement with a cable operator named „M/s Jai Mata Di Enterprises‟ dated 10.10.2007, for distribution of the channels – 9X, 9XMV, News-X, Ld. DR questioned the follow up activity. Referring to the certificate of date of incorporation, Ld. DR commented that the date of incorporation is not the date of commencement of business. It is the stand of the revenue that the date of actual launching of broad cost/telecast and date of generation of revenue receipts, constitutes the date of commencement of business. Ld. DR cited the judgment in case of Sarabhai Sons Pvt. Ltd. 1973. Accordingly, it is the settled legal proposition of law that the „set up‟ of business is done when the culmination of all the necessary operations are done. Ld. DR also relied on the judgment in the case of Western India Veg. Products Ltd. and also Saurashtra Cement & Chem. Industries (91 ITR 170) (Guj H.C). These decisions suggest that the set up is complete when all necessary operations in place and the commencement of business started when the essential business activity i.e. purchase/sale/manufacturing activity started. Per contra, Ld. AR relied on the written submissions dated 11.01.2016 (para 47-55).
In the said submissions, it is the claim of the Ld AR that the assessee followed the set legal propositions while claiming the expenses. Ld AR relied on the contents of para 51 & 52 of the said note. These paras read as under:
“51. On perusal of the above, it is evident that an assessee can claim expenditure in the year in which the business is set up. What is relevant under the Act is the setting up of the business and not the commencement of the business. A business is commenced as soon as an essential activity of that business is started. Thus, the business commences with first purchase. It is also well settled that business is nothing more than continuous course of activities and for commencement of business all the activities, which goes to make up the business, need not be started simultaneously. Obviously, without setting up the business, an assessee cannot commence business activities.
In the present case before your Honours, the assessee had placed order for purchase of Set Top Box on 30.05.2007 which is placed on record of the Hon‟ble Bench. Therefore, the conclusion arrived at by the Assessing Officer that the expenditure incurred prior to November 2007 (ie the month in whic Channel 9X is launched) should be treated as capital expenditure as it pertained to „prior period‟of set up of the business of the assessee is incorrect. In this aspect, the reliance is placed on the decision of the Tribunal, Delhi Bench in the case of Hughes Escorts Communications Ltd vs. JCIT (106 TTJ 1065).....”
Ld. AR analysed the facts of the said case of Hughes Escorts and mentioned that the assessee‟s claim of expenses after set up and till date of commencement of business is held allowable by the High Court vide 311 ITR 253.
We have heard the parties and perused the Paper book / written submissions etc. Undisputed facts are that the date of “set up” and “date of commencement of business” are different as per assessee. „01.06.2007‟ is the date of “set up” and „Nov 2007‟ is the date of “commencement of business”. Assessee‟s claim that the expenditure incurring during this period 1.06.2007 and Nov 2017 constitutes “business expenditure” of the year. Per contra, Ld. DR claims that the date of set up of business suffer from lack of evidence and the cited purchase order dated 30.05.2007 does not command the genuineness in the absence of original bills or third party confirmation. However, there is no dispute that the Set Top Boxes were never purchased by the assessee. So, these were truly purchased sometime between 30.05.2007 to Nov 2007. The scheduled delivery date is 6.08.2007. In the absence of any evidence for delivery either on 30.05.2007 or on 6.08.2007 or in Nov 2007, we need to consider a particular date for the purpose of bringing dispute to the conclusion / finality. The payment of Rs. 1,53,55,000/- is undisputed. The Set Top Boxes were in place by Nov. 2007 undisputedly. The F.Y. under question is FY 2007- 08 and nearly10 years have gone. Remanding this issue as suggested by the Ld DR after lapse of 10 long years, in principle, is not good idea. In all probability, the supplier might have discontinued the business or he might have lost / destroyed the relevant records considering the fact of limitation of 6 years for purpose of section 148 of the Act.
Therefore, we are of the view that the expenses incurred till 31.08.2007 should be considered for capitalization and the date of set up of the business in place of assessee‟s claim of 01.06.2007. Delivery date is 6.8.2007 and reasonable time is needed for unp0arking, distribution and installation. Therefore, it cannot reliably argued that all the above activities are done only the said due date of 6.8.2007 for delivery to the assessee in Mumbai. Therefore, on estimation basis, we grant till the end of the month for installation activity. This is needed for completion of the set up of business completely. Consequently, the expenditure incurred by assessee between 1.9.2007 to November 2007 are to be allowed as deductible expenses. AO is directed to recomputed the above allowable expenses and assessee the income accordingly. Accordingly, the grounds raised
are partly allowed.
24. Deletion of addition of Rs. 398,29,05,839/- u/s 68 of the Act on account of share application money (SAM), share capital and share Premium: Background facts are that the assessee received amounts totalling to Rs. 398.29 Crs from both resident investors and non-resident investors on accounts of (i) Share capital and (ii) preferential share capital with premium. Resident investors contributed Rs. 146.24 Crs on account of share capital of Rs. 16 Crs (rounded of) and preferential share capital of Rs. 130.25 Crs with premium. In addition, the non-resident investors contributed amounting toRs. 263.28 Crs on accounts of share application money, share capital and preferential share capital with premium.
25. During the assessment proceedings, AO invoked the provisions of section 68 of the Act. The issie of premium of Rs. 862.15 per share, FIPB approved only Rs. 4.6 Crs and balance of Rs. 263 Crs is introduced without any approval. However, the CIT (A) gave relief and we shall now take up the investments garnered from the residents and the non-residents separately.
26. Residents: Regarding the investments received from the case of residents, the case of the AO is that the assessee failed to meet the requirement of the conditions specified in the provisions of section 68 of the Act. It is also case of the AO that the assessee failed to discharge the onus on these conditions. AO also suspects the genuineness of the transactions as the assessee brought in the capital through many layers of companies before these investments found their way to the account of the assessee on account of equity share capital. There is huge / lot of dispute on facts relating to the identity, creditworthiness and genuineness of transactions of the said companies, who invested the funds through all the layers in fund movement. On these disputes, the stand of the assessee is that the assessment was taken up at the fag end of the year, and details which are relevant for making assessment were submitted in good faith. There is no failure on his part in matters of furnishing of details. Catena of judgments was relied upon by the assessee in its favour. Rejecting the arguments of the assessee, AO proceeded to made addition of Rs. 146.24 Crs on account of „residents‟ investment in the equity of the assessee-company.
27. During the proceedings before the FAA, the CIT (A) dealt this issue in para 7 on pages 32 to 45 of his order and relied on various judicial precedents and held that it is not proper to invoke the provisions of section 68 of the Act. In the said paras, FAA considered various documentary evidences such as Income Tax returns, PAN, Certificate of incorporation, Audited Financial Statements, Bank account statements of the assessee, Board Resolution allotting shares, Registration of the company etc.
28. Aggrieved with the said decision of the CIT (A), the Revenue is in appeal on the issue of addition u/s 68 of the Act with reference to equity share capital of Rs. 16 Crs and preferential share capital with premium of Rs. 130.25 Crs. Total works out to Rs. 146.24 Crs.
29. Ld AR for the Revenue filed with submission dated 15.2.2017 and argued vehemently stating that the relief granted by the FAA is required to be reverted. Further, during the hearing time, Ld DR made various arguments ie identity, creditworthiness, genuineness of the transactions are proved, FIPB approval is not equated with the proving genuineness of transaction, non-resident investors addresses not provided, CIT (A) failed to cause enquiries suo moto, Foreign Institutional Investor‟s capacity not proved, assesee failed to file tax returns of non-resident investors (relevant for non-residents‟ investments), relied on various decisions such as Subhalaxmi Vanija (P) Ltd 155 ITD 171 (Kol), Focal Exports P Ltd (218 ITR 2012) (Del) etc. Eventually, Ld DR requested for remanding the grounds to the file of the AO for fresh adjudication. The contents of written submissions of the assessee dated 14.1.2016 on pages 78 to 103 are relevant. Further, in another written submission dated 15.2.2017, Ld DR submitted that the AO complied with the direction of the Tribunal dated 27.5.2016 and the assessee is not cooperating with the remand proceedings. According to Ld DR, the AO continued to hold the investment from resident- Indians continues to be suspicious. AO blamed the assessee for not discharging of onus. In para 3.5 of the written submissions, it is mentioned that the AO has not furnished any remand report to the Ld DR and therefore, no remand report as required by the Tribunal could not be furnished. However, Ld DR fairly submitted that the source of the funds goes to the four asssessees of Reliance Group. In the said para 3.5, Ld DR submitted that Reliance Extrusion Private Limited, Reliance Exploration P Ltd, Reliance Commercial Holiday P Ltd and Ornate Traders Ltd are the companies that contributed the investment under consideration. These four companies of Reliance Group invested in Tiara Traders P Ltd, which in turn invested the said funds back-to-back transaction in the asssessee-company thorugh another layer of IIPL (Indrani Incom P Ltd). The total of such investment by this means works out to Rs. 41.22 Crs. Regarding another investment of Rs. 93.79 Crs, assessee explained that the source of funds goes to the IMPL INX Exe. Search P Ltd in the source for the funds invested through IMPL route. As such, no addition was made involving M/s. India Growth Fund (page 39 to 40 of the written submission of assessee). In the written submissions of the Ld DR, there is no reference to the investment made by the INX Exe. Search P Ltd / IMPL.
Per contra, Ld AR for the assessee brought our attention to the said written submissions and mentioned that the written submissions of the Ld DR is centred around the investments by IMPL (Rs. 93.79 Crs) and IIPL (Rs. 41.22 Crs). It works out to Rs. 135.01 Crs raised from the resident-investment companies. Referring to the allegation of non-cooperation, Ld AR submitted that the documents supplied to the AO and mentioned that the AO never allows the “onus” to shift to them. Further, Ld AR submitted that the AO did not comply with the remand report requirement of the Tribunal (dated 27.5.2016). Ld AR also highlighted the lack of proper response to the requirements of the Tribunal. Further, Ld AR also refers to the award of the cost on the AO in this regard. Further, Ld AR submitted that the case laws cited are distinguishable on facts. The fact of non-furnishing of the remand report is considered unfortunate. Referring to the request for remanding the issue of applicability of provisions of section 68 of the Act, Ld AR protested vehemently both orally and in writing (para 78 of the written submissions (surpa) are relevant). According to Ld AR, noting shall come out of such an exercise. In this regard, Ld AR brought our attention to the enquiries conducted by the Directorate of Enforcement and the letter dated 30.11.2010 (page 410 of the paper book) is relevant. Ld AR also brought our attention to the order of the Tribunal in the case of one of the said four companies of Reliance Group, when the Tribunal upheld the identity, creditworthiness and genuineness of the said company. Therefore, Ld AR pleaded that the investment by the said IIPL and IMPL are genuine and no addition is called for on account of resident-investors.
We have heard both the parties and perused the numerous data / paper book / written submissions of both the parties along with the orders of the Revenue Authorities. We have also discussed the stand points of both the parties in the dispute. We also remanded this part of the issue to the file of the AO for fresh examination. The order sheet entry dated 27.5.2016 is relevant in this regard. When the hearing was scheduled, there is non-cooperation from the Revenue and the Tribunal had to award cost on the AO for his inaction. This appeal is as old as six years and the AO is not responding to the basic needs of the appellate work in this case. Revenue is repeatedly resorting to the needless adjournments. Notwithstanding the constraints, we gave last opportunity to comply with the directions and the case was adjourned to 17.2.2017. During the hearing proceedings, Ld DR filed written submissions dated 12.2.2017 (supra) and on this issue, in paras 3.4 and 3.5, it is mentioned that remand proceedings are going on and the outcome is still awaited at his end. However, it is inferred to us that the said nominal award of cost was paid and however, the remand report is not submitted to the Tribunal by the AO. It is unfortunate and deplorable. The casual nature of the AO (JCIT-16(1), Mumbai) is evident from the following extracts. Para 3.5 of AO‟s letter dated 13.2.2017 are relevant and the same read as under:- “3.5.......The transactions are highly suspicious in nature and the layering seems to be done in order to defeat any investigation into the source of funds. Further, in order to ascertain the ultimate source of funds, notice u/s 133(6) of the Income Tax Act, 1961 has been issued to four parties namely M/s. Reliance Extrusion Pvt Ltd, Reliance Exploration Pvt Ltd, Reliacne Commercial Holding Pvt Ltd and Ornate Traders Pvt Ltd. Outcome of the same is still awaited and the same will be forwarded as an when it is received.
From the above developments, it is obvious that the suspicious nature of the basic factor that drove the AO to invoke the provisions of section 68 of the Act. Otherwise, there is no clinching evidence in possession of the AO to conclude that the said “cash credits” from resident investors into equity share capital and the preferential share capital with premium really attracts the provisions of section 68 of the Act.
Addition u/s 68 of the Act and Onus related issues: We have also perused the documentation furnished by the assessee regarding indentity, creditworthiness and the genuineness of transaction. In our opinion, the initial onus on the assessee is reasonably discharged by the assessee and the AO still attempts to refuse the onus which stands shifted to him. Almost 9 months have elapsed by asking the AO to submit a remand report and there is no such report of any kind from the file of the AO. Actually, we wanted a “reasoned report / speaking order” on 27.5.2016. Further, it is relevant to mentioned that one of four companies of Reliance Group, which contributed equity to IIPL through Tiora Comtrade Limited / INX Services P Ltd route, and where the source of funds for the investment was added by the AO of the said company was heard and it was decided by the Tribunal in favour of the assessee-company. The effect is that the funds, what was transformed to the present assessee are held genuine. This establishes the fact in favour of the assessee‟s claim on creditworthiness and genuineness of the transaction.
Therefore, we are of the view „on the investments by the resident- companies‟ that the AO has not made out proper case and not fortified his addition with any clinching evidences either on identity or on creditworthiness or on the genuineness of the transactions. Thus, the addition of „investment by IIMPL and IIPL in the equity share capital and preferential share capital with premium‟ is unsustainable in law. Therefore, the conclusions of the CIT (A) on this issue are fair and reasonable and it does not call for any interference. Accordingly, relevant grounds of the Revenue are dismissed.
NON-RESIDENTS: Regarding the addition on account of non-resident foreign institution investments into the share application money and share application and the preferential share capital with premium, we find, a sum of Rs...... is brought in through Maritius route. Basic facts are that the assessee raised share application money, equity shares with premium and preferential shares with premium totalling to Rs. 263. 28 Crs. The companies who invested are Maritius based New Silk Route PE M. LLC, New Version P Eg Ltd and Ducan Investment (M) PTE Ltd. In the assessment u/s 143(3) of the Act, AO made addition of the said amount u/s 68 of the Act. AO claims that the assessee failed to furnish the details relating to identity, creditworthiness and genuineness of transactions. AO is content with the documents furnished by the assessee. The documents are share subscription agreement, Board Resolution allotting shares, Registers, FIPB approvals, correspondence with Bank intimating the receipt of funds, Bank statements of the assessee etc. Assessee relied on various judgments to support the correctness of the claim of the assessee. Assessee claims that invoking of the provisions of section 68 of the Act is uncalled for and claimed that assessee discharged the onus completely. Assessee submitted detailed written submissions dated 14.1.2016 (supra). Accordingly, it is the claim of the assessee that the investor company named Duncorn Investments (Mauritius) PTE Ltd is subsidiary company of Singapore Government Company named Temasek Holdings (P) Ltd (a Singapore based company). (Para 70 of the written submissions is relevant). Referring to New Selk Route PE (M) Ltd and New Verman P Eg Ltd, it is submitted in working that they are owned by well known Banking Executives. As per the said note, the fund movement is in the knowledge of the FIPB / Ministry of Finance. Assessee filed FC – GPRs Transaction (page 350 to 377 and 381 to 408) (para 74). Assessee referred the AO‟s decision in invoking the provisions of section 68 of the Act. However, FAA deleted the entire addition. Rejecting the same, AO proceeded to make addition of the share application money, equity share capital and preferential share capital premium collected by the assessee from the said companies. AO invoked the provisions of section 68 of the Act. AO questioned the onus is not discharged by the assessee fully and the premium collected @ Rs. 862.15/- per share is very high when the company is a loss making one and the company NAV is only 131.45 Crs (Para 60(i) of the written submissions of the assessee are relevant. AO is of the view that FIPB approved only Rs. 4.60 Crs and Rs. 263 Crs is brought in without FIPB route. AO made use of the assesses inability to supply certain details of the said investors of foreign origin.
Before the FAA, assessee reiterated the submissions made before the AO that the foreign investors are either Government owned indirectly or owned by the Bank Executives of international fame. They have international identity and undoubted creditworthiness and therefore, genuineness is beyond any suspicious. Fact of Tamasek investing in famous bank like ICICI, Mahindra & Mahindra, Tata Teleservices other blue chip companies like Bank of Denamon, Bank international Indonesia, Hana Bank, China Consortium Bank etc were also cited. Considering the same, and on finding that the AO merely suspected the transactions, FAA deleted the entire addition on this account. Aggrieved, the Revenue is in appeal before the Tribunal.
Before the ITAT, Ld AR for the Revenue relied on the order of the AO and filed the written submissions. The Tribunal directed the AO / Revenue to file the remand report on the Foreign Investors‟ investment into share application money, equity share capital and preferential share capital with premium and wanted a speaking report on this issue. AO did not comply with the said directions till date. Actually, almost an year is passed the Revenue is non-serious and non-committed to the demand of the Bench of the Tribunal. Tribunal has even awarded the cost on the AO for his inaction and non- response. The Income Tax Act confers the AO with powers to collect the data and producing the people before him for the said purposes. It is not clear why the Department is dragging the fact backwards from conducting the investigation proactively. On the last date of hearing in February, 2017, AO filed a letter dated 13.2.2017 and relevant parts are already extracted in the preceding paragraphs of this order. The casual nature of the AO is evident from the following lines that reads as under:
“3.5...........,.Outcome of the same is still awaited and the same will be forwarded as an when it is received.” 38. The above portion indicates that the „surmises and the roaring enquiries‟ are the force behind the addition of Rs. 263.28 Crs (rounded of). In fact, a specific remand report was called for from the AO vide the notings 27.05.2016, and relevant para relating to the investments by residents and non-residents is reproduced as under:-
“Date: 27.05.2016 Regarding the Domestic Share capital, share premium and share application, we find there is a need for clarification as to the source of funds, genuineness of the transactions and creditworthiness of the parties. Considering the law laid down by the various High Court on this issue as on today on the issues mentioned above, we are of the opinion that AO should go into the issue afresh and examine the said parameters laid down in para 68. In this case, it is argument of the Ld Counsel that the source of funds are substantiated to be if AO has to go into the root of the original source of the credits. AO may consider this also and submit the detail report after examining the chain of transaction involving many entities whether doing or not doing business activities. Similar exercise is required with regard to Foreign Funding ie Share Capital, Share Application and Share Premium. Even if assessee exhibits inability to furnish information regarding identity, creditworthiness and source of foreign fund, the AO is directed to invoke all the powers vested on him by the statute and gather relevant facts necessary for complete of proceeding under consideration meaningfully. Thus, AO is directed to furnish and reasoned report / speaking order and all the issues mentioned above and submit the same within a month time from the date of receipt of this direction. The case is adjourned for 15th July, 2016. JM AM 39. In response to the above, the Revenue sought adjournments on 15.07.2016; 22.7.2016; 05.08.2016 etc. On 9.12.2016 when the case came up for hearing the Department sought for further adjournment. While granting the same, the following order sheet notings were recorded,-
ITA No.7216/M/2011 (By Revenue) Date: 9.12.2016 NOTE Today the matter is fixed for hearing of the appeal by the Revenue / Assessee. However, the Revenue has filed an application seeking adjournment for 2 months. In this regard, Ld Counsel for the assessee strongly objected the application of adjournment moved by the Revenue. After hearing the Ld AR and on perusal of the Order Sheet, we noted that the direction to submit the report was granted on 27.5.2016. Thereafter, five adjournments have already been sought by the Revenue for compliance. But, we noted that the said directions have not been complied with. Even in the present application, no plausible reasons have been mentioned for seeking adjournment. However, considering the interest of justice, we adjourn the matter to 17.02.2017 and impose Rs. 2000/- as cost upon the Revenue for delaying to submit the said report and not complying with the directions of the Tribunal. It is made expressly clear that no further adjournment would be granted. The said cost be remitted to the Prime Minister’s relief fund on or before 17.02.2017 and submit a copy of the challan to the Registry, ITAT for filing on record. Registry is directed to inform both the parties through notice the next date of hearing as per the procedure. JM AM
In response to the above, the Revenue filed the above stated letter dated 13/15.02.2017 giving no commitment or remand report of any kind. Therefore, there is no incriminating material so far gathered by the AO / investigation wing of the Department against the claim of the assessee. As on date, the CBDT has not come out with any incriminating material against the assessee. Therefore, we are of the view that it is premature to make any addition on this account without having any information against the assessee either on identity or creditworthiness or genuineness of the transactions. Present addition is a case of surmises, suspicion etc. Therefore, the addition is unsustainable in law. For all these reasons also, we are of the view, the order of the CIT (A) is fair and reasonable. Therefore, the decision of the CIT (A) does not call for any interference.
Before parting, it may be relevant to mention that the Revenue has gone on record in mentioning that, with reference to the foreign funding of share application money/ share capital / share premium, a reference is made tothe Joint Secretary, (FT & TR-II) CBDT, New Delhi for obtaining information under Exchange of Information Article in the DTAAs/ TIEAs/ Multilateral Agreements. Outcome of the same is awaited. Similarly, with reference to the domestic funding, the Department has issued notices u/s 133(6) of the Act to all the four companies (supra). Thus, some investigation is now initiated by the Revenue on both the accounts of investments by resident and non-residents, foreign investors. These efforts now supports the decision on the CIT (A), who deleted the addition for want of evidences / any incriminating information against the assessee. As and when such evidences are gathered, the Department is free to make use of the said information as per law and assess the income of the assessee after granting reasonable opportunity of being heard to the assessee. With these observations, the relevant grounds of the appeal of the Revenue relating to both domestic and foreign funding are dismissed.
In the result, appeal of the Revenue is partly allowed.