PERCEPT LTD,MUMBAI vs. ADDL CIT RG 1(1), MUMBAI

These are set of three appeals, two by assessee for Assessment Years [AY] 2008-09 & 2009-2010 and one by revenue for Assessment Year 2008-09. Since common issues are involved, we dispose-off the same by way of this combined order. First we take up revenue’s ITA No. 4287/Mum/2 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 appeal No. ITA No. 4515/Mum/2013 for AY 2008-09 where the revenue is aggrieved by allowance of film production expenses under Rule-9A of the Income Tax Act [Act].

Briefly stated, the assessee was engaged in ‘film production’ and assessed as a ‘resident corporate assessee’ who e-filed its return of income for impugned AY on 30/09/2008 declaring total income of Rs.33,68,30,694/- which was subsequently revised to Rs.27,51,20,876/- on 23/02/2009. The return was subjected to scrutiny assessment u/s 143(3) wherein total income was determined at Rs.41,84,92,622/- after making certain adjustments and disallowances vide Assessing officer [AO] order dated 31/12/2010. 3. AO noted that the assessee claimed production & distribution expenditure on three films which were released in earlier years as per the following details:-

The Ld. DR relied on the stand of AO and contended that the expenditure is prior period expenditure and as per Rule 9A, the same is inadmissible in the impugned AY. The ITA No. 4515/Mum/2013 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 assessee has already claimed this expenditure in previous AY. Per Contra, Ld. Counsel for Assessee [AR] has placed before us computation for AY 2007-2008 along with chart showing computation of deduction allowable as per Rule 9A/9B and adjustment under Rule 9A. The Ld. AR further contended that the movie ‘Traffic Signal’ was released during February, 2007 and earned revenue of Rs.455 Lacs in the AY 2007-08 as against cost of Rs.625.75 Lacs and therefore, the balance amount of Rs.170.75 Lacs was to be carried forward in the next year as per Rule 9A, out of which assessee has claimed impugned expenditure of Rs.166.05 Lacs.

We have heard the rival contentions and perused the material available on record which reveals that the film ‘Traffic Signal’ was released vide ‘Central Board of Film Certification (CBFC)’ certificate No. CIL/2/93/2006 dated 31/12/2006. Further, a perusal of the chart showing deduction as per Rule 9A for AY 2007-2008 reveals that the assessee has deferred claim of Rs.170.75 Lacs against this movie, which has been claimed in impugned AY and thus did not claim this expenditure in earlier AY. Therefore, the same was allowable to the assessee as per Rule 9A as rightly concluded by Ld. CIT(A) and therefore, we see, no reason to interfere with the same. The appeal of the revenue stand dismissed. ITA No. 4287/Mum/2013 6. The captioned appeal by the assessee for AY 2008-2009 assails the order of the Ld. Commissioner of Income Tax (Appeals)-3 [CIT(A)], Mumbai dated 28/03/2013 qua confirmation of various additions. Ground No. 1 & 2 is not pressed by Ld. AR during proceedings before us and therefore, the only effective grounds are Ground Nos. 3 & 4 which relates with disallowance of claim u/s 35D and additions u/s 41(1).

The assessee claimed an amount of Rs.28,32,640/- u/s 35D. AO noted that the assessee was private limited company and there was no public issue by assessee during the ITA No. 4515/Mum/2013 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 year and impugned amount represented part write-off of Share Capital issue expenses of Rs.1,41,63,200/- which included brokerage charges of Rs.1,32,30,390/- paid by assessee to ‘Edelweiss Capital Limited’. These expenses were not at all debited to the Profit & Loss Account but claimed in the computation of income u/s 35D to the extent of 20%. CIT(A) confirmed the same and aggrieved, the assessee has assailed the same before us by way of Ground No.3.

Before us, Ld. Counsel for assessee [AR] contended that the assessee was a public company and issued share capital to various parties and incurred impugned expenditure of Rs.1,41,63,200 for issue of fresh capital which qualifies for deduction u/s 35D. The Ld. AR has drawn out attention to the fact that the assessee was private limited company but got converted into public limited company w.e.f. 17/01/2008 after which it issued share capital and placed before us a copy of amended certificate of incorporation issued by ‘Registrar of Companies, Maharashtra’ consequent upon change of name. The detailed break-up of expenditure incurred by assessee and computation of assessee’s claim was provided as under:- No. Particulars Amount (Rs.) Debited to 1. Share Issue Expenses-Stamp Duty Charges ROC Form 5 4,40,000/- Profit & Loss Account Stamp Duty 2. Registration & Filing Fees-Increase in Authorised Share 11,00,000/- Profit & Loss Account Capital 3. Success fees paid to Edelweiss Capital Ltd. 1,17,75,000/- Share Premium Account 4. Stamp Duty on issue of shares 8,48,200/- Share Premium Account Total 1,41,63,200/- Assessee’s Claim u/s 35D (20% of total expenditure) 28,32,640/- The copies of the relevant Form 5 regarding increase in share capital, Share Broker’s Bill, Details of Equity Shares allotted etc. has been placed in the paper-book before us. The Ld. AR has contended that the company was already converted into Public Limited Company ITA No. 4515/Mum/2013 ITA No. 4287/Mum/2 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 when the shares were allotted. Brokerage has been paid to the brokers after deduction of due TDS and all these expenditure qualifies for deduction u/s 35D. Reliance has been placed on following judicial pronouncements:- i. CIT Vs. Shree Synthetics Ltd. (High Court of Madhya Pradesh) (162 ITR 819) ii. CIT Vs. Multi Metals Ltd. (Rajasthan High Court) (188 ITR 151)

We have heard rival contentions and perused material available on record including cited case laws. The nature of expenses is not in dispute. First of all, it would be prudent to extract relevant portion of Section 35D, as it stood at the relevant time, as follows:- 35D. Amortisation of certain preliminary expenses.- (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),— (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation : Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words “an amount equal to one-tenth of such expenditure for each of the ten successive previous years”, the words “an amount equal to one-fifth of such expenditure for each of the five successive previous years” had been substituted. (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :— (a) …… (b) …….. (c) where the assessee is a company, also expenditure— (i) by way of legal charges for drafting the Memorandum and Articles of Association of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; ITA No. 4287/Mum/2 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed. Per query from the bench, Ld. AR submitted that the assessee was engaged in the production of cinematograph films and hence an ‘industrial undertaking’ and eligible to claim benefit of Section 35D as per the following judicial pronouncements:- i. CIT Vs. D.K.Kondke [192 ITR 128 Bombay High Court] ii. CIT Vs. Jyoti Prakash Dutta [367 ITR 568 Bombay High Court] Further, AR asserted that undisputedly the assessee was engaged in the production of films during the year as it earned revenue of Rs.78.80 Crores out of total revenue of Rs.107.85 crores earned by the assessee.

After perusing the relevant evidences and cited case laws, we find strength in the argument of Ld. AR. The assessee got converted into public company and issued share capital. It incurred expenditure of the nature covered by Section 35D as fortified by the judicial pronouncements of Hon’ble High Courts Madhya Pradesh & Rajasthan relied upon by the assessee. Due TDS was deducted on brokerage amount. The assessee earned substantial revenue from production of films and hence an ‘industrial undertaking’ as per decisions of jurisdictional Hon’ble Bombay High Court cited by the assessee. Hence, we are inclined to conclude that the assessee is eligible for impugned expenditure of Rs.28,32,640/- u/s 35D. This ground of assessee’s appeal stands allowed.

Ground No. 4 of assessee’s appeal is related with additions u/s 41(1) qua write-back of certain creditors for Rs.1,54,82,301/-. AO noted that the assessee bought running business of several companies on ‘going concern basis’ vide ‘business transfer agreement’ dated 29/02/2008. It acquired all assets and liabilities of these companies as they stood on the date of purchase. Thereafter, certain outstanding ‘Sundry Creditors’ mostly relating to ITA No. 4515/Mum/2013 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 ‘advertising & media expenditure’ belonging to vendor companies were written back by the assessee by way of credit to profit & loss account. However, treating the same as capital receipts, the assessee reduced the same from profits in its computation of income as ‘Excess provision written back’. The assessee contended that it purchased running business of several companies during the year on going concern basis and took over all assets and liabilities existing in the books of respective companies as on the date of purchase. It wrote off certain sundry creditors taken over from these companies and as no deduction in respect thereof was claimed by the assessee, the write back constituted capital receipts in its hand and therefore rightly been reduced from profit in its computation of income. The provisions of Section 41(1) were not applicable to the assessee as no deduction with respect to these write off was ever claimed by the assessee and further the assessee purchased the running business of several companies on ‘outright purchase basis’ and not as ‘successor’ and hence the same was not taxable in its hand even as per clause (b) of Section 41(1). Rejecting the same, AO concluded that the assessee capitalized the consideration paid to take over the business in its books of accounts and claimed deprecation thereupon and hence the write- back constituted income in the hands of the assessee. The same was assailed before CIT(A) where the assessee relying upon various judicial pronouncements contended that the provisions of section 41(1) were not applicable to these receipts as the assessee never claimed any deduction / allowance thereof. Further, the same did not arise from business or exercise of profession and hence not covered even by Section 28(iv). CIT(A) treating the assessee as ‘successor’ in business rejected the contentions of assessee and concluded that the said receipts were covered by clause (b) of Section 41(1) and hence rightly been disallowed by AO. The stand of CIT(A) has been assailed before us.

We have heard rival contentions and perused relevant material on record including cited case laws. The undisputed facts are that the assessee wrote-off certain ‘sundry creditors’ of Rs.1,54,82,301/- mostly relating to ‘advertisement and media cost’ taken over ITA No. 4515/Mum/2013 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 by him from vendor companies. The amounts were written off by way of credit to profit & loss account but deducted from profit in the computation of income on the ground that the same constituted capital receipts and not covered by the provisions of Section 41(1). At this juncture, it would be prudent to produce relevant extract of Section 41(1) which reads as follows:- Section 41(1) “(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first- mentioned person) and subsequently during any previous year,- (a) the first- mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first- mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. Explanation 1…… Explanation2 - For the purposes of this sub- section," successor in business" means- (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first- mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm. (iv) where there has been a demerger, the resulting company. ” We find that in the present case, there was no loss, expenditure or trading liability incurred by the assessee in respect of which allowance or deduction has been made in the assessment for any year and thereafter assessee received some benefit qua this loss or expenditure. These creditors were taken over by the assessee from vendor companies and subsequently ITA No. 4515/Mum/2013 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 written off in the books of account. Nevertheless, undisputedly, the assessee never claimed any loss or expenditure qua these sundry creditors. Hence, the same is clearly not covered by clause (a). Clause (b) covers a situation where the assessee has been allowed allowance or deduction of certain expenditure and subsequently his ‘successor in business’ receives certain benefits out of the same. The expression ‘Successor in business’, as per Explanation- 2, covers four types of situation. Clause (iii) is related with firms which is not the case here and hence, not applicable. Clause (i) & (iv) applies in case of amalgamation / demerger of company, but here we are dealing with a case of ‘outright purchase’ as evident from ‘business transfer agreement’ and financial statements and therefore, the same is also not applicable. Clause (ii) covers case of ‘succession by other person in that business’ which is also not the case here. The case law relied upon by revenue in Hindustan Foods Ltd. Vs DCIT(supra) was concerned with a situation where the assessee issued certain redeemable debentures for consideration and subsequently unilaterally transferred amount lying against unclaimed debentures to general reserve account and utilized the said amount from time to time for its business purposes. Therefore, in that case, the assessee actually received consideration and thereafter stood benefitted by remission thereof and hence, this case law is distinguishable from the facts of this case. Even the case law of Apex court in ‘Nector Beverages (P) Ltd.’(supra) relied upon by assessee was related with taxability of sale of depreciable assets on which 100% depreciation was allowed and the apex court was concerned with applicability of Section 41(1) vis-à-vis Section 41(2) and hence, did not directly deal with present situation. The issue can be looked from another angle. Let us hypothetically assume that the assessee took over certain fictitious liabilities meaning thereby that actual liabilities stood at lower value. In that case, the value of ‘net assets’ i.e. ‘Value of Assets taken over Less value of liabilities taken over’ would have been at higher ITA No. 4515/Mum/2013 M/s. Percept Ltd. Assessment Years 2008-09 & 2009-10 value and consequently, the value of goodwill, which was nothing but ‘total consideration less net assets’ would have been at lesser value thereby resulting into less depreciation claim for the assessee. Even in that situation, as per the above cited apex court judgment, ‘depreciation is neither a loss, nor an expenditure, nor a trading liability, referred to in s. 41(1). Hence, the same further supports the stand of the assessee. Even otherwise, we are of the considered opinion that neither clause (a) nor clause (b) of Section 41(1) applies to the assessee on the facts and circumstances of the case. Hence, from any angle, we are inclined to delete the impugned additions and allow this ground of assessee’s appeal. ITA No. 4447/Mum/2013 14. This is assessee’s appeal for AY 2009-10 where the assessee is aggrieved by non- grant of deduction u/s 35D for Rs.28,32,640/- 15. Briefly stated, the assessee e-filed its return of income for impugned AY on 30/09/2009 declaring total income of Rs.13,82,60,196/- which was subjected to scrutiny assessment u/s 143(3) wherein total income was determined at Rs.16,52,57,050/- vide Assessing officer [AO] order dated 27/12/2011. The assessee suffered disallowance of Rs.28,32,640/- u/s 35D under similar circumstances which was confirmed by First Appellate Authority. The same has been assailed before us by raising sole ground of appeal