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Income Tax Appellate Tribunal, MUMBAI “B” BENCH, MUMBAI
Before: SHRI SHAILENDRA KUMAR YADAV, & SHRI RAJESH KUMAR.
The present Appeal has been filed by the assessee against the order of the CIT(A)-39, Mumbai dated 15.03.2012 for the Assessment Year 2005-06 passed u/s.143(3)/254 of the Income Tax Act, 1961. A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 2
The common issue in all the grounds of appeal from 1 to 4 is against upholding the disallowance of Rs. 2,00,00,000/- being the cost of film, debited to the profit and loss account without appreciating the fact that the assessee was World Right Controller of the film and no deduction was claimed for the advances made for the financing the films towards purchase price and also CIT(A) not considering the fact that the assessee has the right to recover the advances from realisation by way of a percentage of overflow as stated in agreement and could not have exercised the ownership rights without purchasing them and the rights acquired during the year for Rs.2,00,00,000/- were subsequently exploited and income realised was credited to the profit and loss account.
The facts in brief are that the assessee is in the second round of appeal before the Tribunal. In the first round, the assessment was framed u/s.143(3) of the Act vide order dated 19.12.2007 making the disallowance of Rs. 2,00,00,000/- towards the cost of film “Hum Tumhare Hain Sanam”
(hereinafter referred to as HTHS). The disallowance was confirmed by the CIT(A) and in the appellate proceedings before A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 3 the tribunal, the issue was set aside to the file of the AO with a direction to frame assessment de novo in accordance with law and facts after considering all the evidences and allowing a reasonable opportunity of hearing to the assessee. But again the AO made the same additions which was also confirmed by the CIT(A).
The assessee entered into an agreement with BMB Productions dated 18.09.1999 for financing the film HTHS which was under production and under the agreement advanced a sum of Rs. 6.05 Cr at various stages of production of the film. Under the agreement, the assessee was given a right over the profits on future distribution of rights including copyrights, right for exploitation of the firm by distribution, exhibition in cinema, TV, satellite rights, video rights, DVD including the right of reissue and dubbing etc. The agreement also provided that the money realised from transfer and utilisation of rights would be adjusted towards the repayment of advance. Further, it was also provided that the assessee was to get 10% of the entire coverage of the picture and 50% of all income and overflow. In the event of default in the recovery, the assessee would be entitled to a charge and lien on all the A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 4 assets of the producer firm and its proprietor K.C. Bakodia. By the end of the financial year 2002-03 relevant to assessment year 2003-04, the outstanding advance was Rs.4.41 Cr as the recoveries made from distribution rights and exhibition were adjusted towards the repayment of advance. In the same financial year 2002-03, the assessee sold satellite rights of the film for a consideration of Rs. 2.20 Cr to SET India Pvt. Ltd. and the amount was credited to the profit and loss account and was not adjusted as repayment of advance by the assessee. On the first day of the financial year 2004-05 relevant to assessment year 2005-06 the unadjusted advance was Rs.4,26,97,250/- and therefore in order to recover the advance the assessee entered into agreement for acquiring the irrevocable televisions and exhibitions rights for a consideration of Rs. 2,00,00,000/-. The amount was debited to the profit and loss account and adjusted in advance account due from BMB Productions which was disallowed by the AO mainly for three reasons, first, Rs. 2,00,00,000/- claimed as expenses were prior period expenses pertaining to AY 2003-04 by placing reliance on note no.6 to final accounts, second expense was provided on the basis of letter from BMB ITA No.2822/Mum/12 A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 5 Production dated 1.4.2004 which was stated to be self serving document and third that the consideration paid of Rs. 2 crore pertained to transfer of TV rights perpetually but such rights were already acquired by the assessee vide agreement dated 18.09.1999.
In the second round also the ld CIT(A) dismissed the appeal of the assessee by observing and holding as under:-
7. I have considered the issue. The appellant has financed the producer of BMB Productions for producing the film "Hum Tumhare Hain Sanam" and entered in the World Right Controller agreement dated 3.3.1999. As per clause 1 of the agreement (extracted by the A.O. in page 6 of the impugned assessment order and para 5.6.1 of this order), Clause 1 of this agreement is very clear that the producer has granted all the rights to the appellant including satellite rights. After acquiring this right, the appellant entered into a Licence agreement with SET India Pvt. Ltd. on 8.11.2002 and granted the Licence of "Exclusive Non-Standard Television and Pay per View Rights" for a consideration of Rs.2,20,00,000/-. This agreement was entered into by the appellant with SET India Pvt. Ltd. and M/s. BMB Productions was not a party to the agreement. This clearly shows that the appellant is the owner of the rights in view of World Right Controller Agreement dated 3.3.1999. Sincethe finance amount was not fully recovered, the appellant should have credited this amount of Rs.2,20,00,000/- towards the amount f inanced. It appears that by mistake the appellant credited the entire amount of Rs.2,20,00,000/- as income in the P&L Account and offered as income in the accounting year relevant to asst. year 2003-04 for Income tax purposes for asst. year 2003-04. Later it seems that the Auditor has pointed out this mistake and the appellant wanted to rectify the mistake. This is reflected in Note No.6 of the Significant Accounting Policies for the accounting year 2004-05 i.e. in the accounting year relevant to the impugned assessment year 2005-06. To overcome the excess income offered in the asst. year 2003-04, A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 6
the appellant has obtained a letter dt. 1,4,2004 from BMB Productions that the rights were obtained by the appellant for Rs. 2 crore. The letter's heading itself is "Confirmation Note by M/s. BMB Productions". This head note itself clearly says that the rights were already with the appellant. If the rights were not with the appellant it could not have given Licence to SET India Pvt. Ltd. In view of the facts narrated above, I hold that to overcome the mistake of offering Rs.2,20,00,000/- in the accounting year relevant to asst. year 2003-04, the appellant has made futile attempt to claim that the rights were purchased from BMB Productions for Rs.2,00,00,000/- in the accounting year relevant to asst. year 2005-06. As pointed out by the A.O. in both the assessment orders and as pointed out by the CIT(A) in the earlier appellate order, the expenditure cannot be allowed as a deduction in this assessment year as the appellant is following the Mercantile System of Accounting.
7.1 In the appellate proceedings, the appellant has submitted that Licence was given to SET India Pvt. Ltd. only for 5 years and after that the rights will be available with the producer and that rights were taken over in perpetuity for Rs.2 crores and hence it should be allowed as deduction. This view of the appellant is not correct. The appellant is having the rights in perpetuity until the entire money financed was recouped. So there is no need to purchase the rights from the BMB Productions. Further even if for argument sake it is accepted that the appellant has purchased the rights (i.e. rights available after Licence period with SET India Pvt. Ltd. is over), then, since the appellant has considered that right as purchase of a right for Rs.2,00,00,000/-, the appellant should have considered this amount as capital expenditure and shown as asset in the Balance Sheet and not as an expenditure in the P&L Account. If the appellant has considered this right as a trading asset then the appellant should have valued this right as Rs.2,00,00,000/- and should have shown as closing stock. But the appellant has not done so.
7.2 In view of all the above discussions, I hold that the claim that the appellant has incurred an expenditure of Rs.2,00,00,000/- towards purchase of rights of the said film and it is an allowable expenditure under the provisions of Income tax Act for this assessment year is not acceptable. Appellant's contentions are rejected. The A.O.'s order is upheld.”
A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 7
The ld. AR vehemently submitted before us that the ld. CIT(A) erred in dismissing the appeal as he has not appreciated the facts in correct perspective. The ld. AR argued that the CIT(A) has misunderstood the agreement entered into with BMB Productions dated 19.09.1999 where under the rights of worldwide controller were given to the assessee and not the exclusive ownership rights which were purchased for Rs. 2 crore in the financial year 2004-05 when the assessee realised that it is very difficult to realise the outstanding rights from the part sharing of the profits if the things turned favourably in future. The ld AR while referring to the various clauses of the agreement dated 18.09.1999 tried to explain that this was a financing agreement under which the finance was given to BMB Production for production of film which was in progress.
It was provided under the various clauses as to how the advance was to be recovered and a formula for profit sharing was provided. It was also argued that the agreement also provided for the security in the shape of transfer of negative of the picture in the name of the assessee. Ld. counsel submitted that had there been a outright sale of rights in the movie, then the security clause would not have been there. Thus, the ld. A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 8 counsel submitted that clauses no.6 and 9 provided for repayment and money that would accrue to the assessee as financer for the adjustments against the money lent. Thus, the entire arrangement was similar to financing a project where the financer did not get the exclusive rights over the assets but was provided a security of assets. The ld. CIT(A) has wrongly understood that assessee has acquired all the rights vide agreement dated 18.09.1999 and wrong conclusion was drawn that the rights which were already vested in the assessee could not be purchased again. The amounts advanced were shown as advance recoverable from BMB Productions and not as purchase price or stock in trade and the realisation made as
per the agreement dated 018.09.1999 were adjusted towards the repayment of the advance. In A.Y. 2003-04 the total amount realised from sale of distribution of rights was shown as income in the profit and loss account instead of adjusting the same against the advance recoverable. In AY 2005-06 the assessee purchased the rights in the film in perpetuity for a consideration of Rs.2 crore as confirmed by the confirmation letter from BMB Productions dated 1.4.2004 which clearly mentioned that it was unable to repay the advance taken and A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 9 therefore giving the exclusive rights as irrevocable perpetual transfer of rights on exclusive basis. Accordingly a sum of Rs. 2 crore was charged off to the profit and loss account which the ld. CIT(A) totally misunderstood as prior period expenses. The CIT(A) also wrongly concluded that the transfer of rights to SET India Pvt. Ltd. was made already in AY 2003-04 which could be possible only when the assessee was already exclusive owner of the rights thereby confusing the two (i) sale of right to SET India Pvt. Ltd. for a limited period in AY 2003-04 (ii) transfer of exclusive rights in perpetuity in favour of the assessee in AY 2005-06 as mutually contradictory and wrong on the belief that the assessee was already exclusive owner of the rights whereas the assessee was financer only. Reliance was placed on the CBDT circular no.92 dated 18.9.1972 and 154 dated 05.12.1974 wherein the method of apportionment of cost of acquiring of distribution rights. So far as the observations of the CIT(A) that the purchase was not shown as closing stock at the year end , the ld submitted the picture had hardly any value at the year end coupled with the fact that accruals were very poor. Alternatively the ld counsel of the assessee submitted that the assessee could have chosen to write off the ITA No.2822/Mum/12 A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 10 entire outstanding advance as trading loss but the assessee instead chose to purchase the balance rights still available in perpetuity as against the having charge and lien on the rights out of business exigencies and consideration that in future the time might change favourably and money would be recouped from sale of residual rights which ultimately happened in subsequent years when the assessee realised good amount of money from selling the rights and credited the revenue in the subsequent years namely AY 2007-08 and 2008-09.The CIT(A) was not justified in rejecting the actual transactions by holding that there was no proper document in support of the purchase.
The ld. Counsel submitted that it was not necessary to have a agreement for each and every transaction when the same was agreed to by the transacting parties. But in this case the confirmation letter from BMB Production evidencing the purchase of remaining rights in the film was placed before the authorities below which was disbelieved. This was not part of any tax planning as observed by the CIT(A) who believed that the assessee purchased all the rights in the picture in terms of agreement dated 18.09.1999 whereas the same was a financing arrangement and the agreement contained various clauses as A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 11 to amount to be lent, security of the money lent from BMB Productions and mechanism for repayment. The ld. counsel submitted that the bona fide of the assessee were proved from the fact rights were in facts sold in the subsequent years and income thereform was offered for tax. In defence to his arguments the ld counsel relied on a number of decisions namely P. Satyanarayana V Commissioer of Income Tax 116 ITR 803(AP), CIT V Sethu Film Distributors 212ITR 620(Mad) , CIT V Crescent Films Pvt Ltd 248 ITR 670 (Mad), Badridas Daga V CIT 34 ITR 10 (SC) and T.J. Lalwani V CIT(A) 78 ITR 176(Bom).Lastly the ld counsel summarising his arguments submitted that the ld CIT(A) erred in treating the transaction of purchase as prior period expenses which was a genuine purchase and also treating the agreement of finance and sharing of revenue to secure the repayment of money advanced as agreement for transfer of exclusive rights in favour of the assessee whereas as a matter of fact the assessee was vested in the rights of world right controller whereby the assessee was conferred the right of supervisions of commercial exploitation of the film to safeguard the money advanced in the production of the film and the provided for sharing of realisation in profits ITA No.2822/Mum/12 A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 12 and accordingly amount advanced under the agreement was also shown as advance recoverable. Had the assessee purchased the rights vide agreement dated 18.09.1999, the same would have been shown as purchase of exclusive rights.
In fact vide agreement dated 18.09.1999 the money was advanced and limited rights were transferred to the assessee to secure the repayment but in AY 2005-06 the assessee purchased the remaining rights in the film and became the absolute owner. The ld AR prayed that in view of the underlying facts supported with the circulars and judicial decisions , the order of CIT(A) be set aside and disallowance be deleted.
Per contra the ld DR relied heavily upon the orders of authorities below and countered the arguments of ld AR by submitting that the assessee had already acquired the rights in the films vide agreement dated 18.09.1999 which were sold to SET India Pvt Ltd in AY 2003-04 as observed by the ld CIT(A).
The ld DR while defending the order of authorities below submitted that the assessee had wrongly shown the income in AY 2003-04 of Rs.2.20 Cr realised from SET India Pvt Ltd on 8.11.2002 from transferring the “Exclusive Non Standard A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 13 Television and Pay per View Rights “ and in order to undo the said wrong returning the income the whole exercise was undertaken which was rightly disallowed by the AO and confirmed by the CIT(A). The ld DR submitted that the assessee could not have purchased the film rights which were already vested in the assessee and finally prayed for upholding the decision of the FAA.
We have heard the rival submissions and perused the relevant materials on records as placed before us including the orders of the authorities below and various circulars and decisions relied by the ld counsel of the assessee. The assessee entered into an agreement of financing dated 18.09.1999 with M/S BMB Productions for lending money for the production of a film “Hum Tumhare Hain Sanam” which was under production at the time of advancing money and the money was advanced accordingly during the various stages of production.
Copy of the agreement is placed at page 89 to 100 of the paper book. Upon perusal of the said agreement it is clear that this was agreement to finance the production of film specifying the various terms and conditions of financing, modalities of repayment, and security given to safeguard the money lent.
ITA No.2822/Mum/12 A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 14 Clause no. 1 provides for the various rights given to the assessee as worldwide controller such as sale of distribution rights including copyrights, right for exploitation of film by distribution, exhibition in cinema, TV, Satellite rights , Video rights and there such as DVD dubbing etc. Clauses no 6 to 9 provided for the sharing of revenue between the assessee and BMB Productions, rights as worldwide controller and repayment and security of money advanced and also the course to be followed in the event of default in honouring the commitments under the agreement. It is abundantly clear from the above that the rights were given to the assessee only as financer to secure the repayment of money advanced by sharing the revenue from the film as provided in the clause 6 and no where the assessee was given exclusive and absolute rights of ownership and right to receive the 100 revenue from the film. Thus one thing is very clear that the assessee was not the exclusive and absolute owner of the rights but a mechanism was devised to make the repayment of the loan taken from the assessee. We also find that the assessee received the share of revenues from the film and adjusted the same towards the advance recoverable. On 8.11.2002 the A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 15 assessee granted a license of “Exclusive Non Standard Television and Pay per View Rights” to SET India Pvt. Ltd. for a consideration of Rs.2.20 Crore under tripartite agreement The entire amount was offered by the assessee to taxation by crediting the income in the profit and loss account and was not credited to advance recoverable. As on 1.4.2004 the advance outstanding was Rs. 4,26,97,250/-. When the advance was not recovered through the modes as mentioned in the agreement dated 18.09.1999, then the assessee purchased the rights in films on perpetual basis for a consideration of Rs. 2.00 on the belief that if the circumstances turns favourable the film may fetch revenues in future and charged the same to the profit and loss account but valued the stock at nil at the year end. The ld. AR submitted that there was hardly any value of the stock and thus same was valued at nil. We also find that in the subsequent years i.e A.Y. 2007-08 and 2008-09 the good amount of receipts/incomes were received from distribution of film and accordingly offered for tax in those year. From the above it is clear that the payment of Rs. 2.00 Cr is not a prior period expenses nor the assessee was owner of the exclusive ITA No.2822/Mum/12 A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 16 rights of the films in terms of agreement dated 18.09.1999 and therefore the conclusions as drawn by the CIT(A) is not correct to this extent. From the facts of the case it is clear that the assessee has purchased the rights in AY 2005-06 for Rs. 2.00 Cr as corroborated by the fact that in the assessment years 2007-08 and 2008-09 the assessee received income from distribution of films and offered the same to the income tax.
We find merit in the argument of the assessee that the advance given to BMB Productions was a trading advance given in the ordinary course of business and the same was an allowable business loss if written off in the books of accounts and we are not in agreement with the CIT(A) that the whole exercise was undertaken to neutralise the income Rs. 2.20 received from SET India Pvt Ltd which offered to tax in AY 2003-04. Moreover the case of the assessee is also supported by the decisions referred and relied by the ld AR.The Hon'ble High Court of Andhra Pradesh in the case of P. Satyanarayana v. commissioner of Income-tax (supra) has held that where a film distributor advanced certain amounts to the producer of a film for the purpose of production of the motion picture under an agreement which provided for realization of the amount advanced A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 17 by him qfter exhibition of flims and the same could not be realized in full out of the collections through exhibition of such films, and by an agreement the distributor agrees to take a part of the amount from the producer and writes off the balance, the loss arising to the distributor thereby is a trading loss incurred in the course of business and incidental thereto and hence he is entitled to deduction under s. 28 of the I.T. Act, 1961. The Hon'ble High court of Madras in the case of commissioner of Income-tax v.
Sethu a Film Distributors (supra ) has held that the Tribunal's finding that the assessee had advanced moneys in the course of money-lending business was based on valid materials;
(ii) that once it was found that the assessee had been engaged in the commercial business activity of advancing moneys to various producers, as film financier, apart from the business of distribution of pictures, the advances were so given only in the nature of lending moneys for interest and the loss, if any, had occurred incidentally to the business and, therefore, it was allowable as business loss.
The Hon'ble High Court of Madras in the case of Commissioner of Income-tax v. Crescent Films (P.) Ltd(supra) held that, in the instant case, the sum of Rs. 7,50, 000 paid by the distributor would have been lost to the assessee, had the picture not been completed. In order to ensure that the picture was completed, the assessee had agreed to lend money A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 18 and that lending was a separate transaction and was not part of the distribution arrangement. The money so lent having become irrecoverable by reason of the picture failing at the box office and the producer being unable to repay his debts, the money so lost to the assessee was rightly held by the Commissioner and the Tribunal to be a trading loss.
The Hon'ble Supreme Court in the case of Badridas Daga v.
Commissioner of Income(supra) held that when a claim is made for a deduction for which there is no specific provision under section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it, and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed, provided that there is no provision against it, express or implied, in the Act. A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 19 The Hon'ble Bombay High Court in the case of T. J. Lalvani v.
Commissioner of Income-tax has held that the Tribunal conclusion that the loan transaction was not in the course of the assessee 's business was not correct. The two circumstances mentioned by the Tribunal were not sufficient to warrant such a conclusion. There was, therefore, no evidence for the finding recorded by the Tribunal that the loss in question had not been incurred by the assessee in the course of his business so as to be deductible under the provisions of the Indian Income-tax Act; and it is not necessary that in order that an expenditure should be in connection with the carrying out of a business or incidental to it, it must be necessarily referable to any specific or direct transaction in the course of the carrying on of the business.
The financing by the assessee of the business of Lookmanji and of all its import of goods on Lookmanji's licences was an activity of the assessee in the course of his business and the loss arising on the loan, therefore, was a loss, which had occurred in connection with the business of the assessee and incidental to it and was, there/öre, claimable by the assessee as a deduction. Though it was difficult to treat it as coming under section 10(2)(xv), it was claimable both as a trading loss under section 10(1) or as a debt of the business which had A.Y. 2005-06 [Mega Bollywood P. Ltd. Vs. ACIT] Page 20 become irrecoverable under section 10(2)(xi).”
In the case of the assessee also had the assessee chose to write off the amount advanced in the ordinary course , the same would have been an allowable deduction as have been held in the above decisions. In view our the observations as given above and ratio laid down in above decisions , we are inclined to set aside the order of CIT(A) and direct the AO to delete the addition of Rs.2 crores.
In the result, the appeal of the assessee is allowed.
Pronounced in the open Court on this 26 th day of August, 2016.
Sd/- Sd/- (RAJESH KUMAR) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: Dated 26/08/2016 Prabhat kesarwani True Copy आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।