ACIT,CIRCLE-13(1), HYDERABAD vs. M/S SURESH PRODUCTIONS PVT. LTD.,, HYDERABAD

आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M: This appeal has been filed by the Revenue against the order dated 08/04/2014 passed by the Learned Commissioner of Income Tax (Appeals)-V, Hyderabad (“Ld. CIT(A)”) relating to the A.Y. 2006-07 and in response to the appeal of the Revenue, the Memorandum of Cross Objection (“CO”) has also been filed by M/S Suresh Productions Pvt. Ltd. (“the Assessee”). For the sake of convenience, this appeal and CO were heard together and are being disposed of by this common order.

2. The CIT(A) erred in allowing deduction U/s..80-IA, to the tune of Rs.13.49 lakhs, when circumstantial evidence, clearly suggests that the funds were borrowed for the purpose of erection and commission of Wind Mill.

3. The CIT(A) erred in deleting addition made U/s..40(a)(ia) of the Act.

4. The CIT(A) erred in allowing excess expenditure claimed by the assessee for purchase of rights of the film ' Soggadu',. when the judicial pronouncements clearly favour to the tax authorities, to lift the corporate veil, from ascertaining vital facts.

5. Any other grounds at the time of hearing.”

“1) a) The learned CIT(Appeals), having allowed the grounds on mercantile system of accounting consistently followed by the assessee, should have also allowed the additional ground that revenue would have to redo/rectify a number of past and future assessments, if the method proposed by Assessing Officer were to be applied. The learned CIT(Appeals) ought to have allowed this ground also. b) The learned CIT(Appeals) failed to appreciate that the doctrine of approbate and reprobate does not act against law, (though employed as such by the Assessing Officer in the impugned reassessment), and consequently the learned CIT(Appeals) did not adjudicate on this additional ground raised before him. 2) For the above grounds and such other grounds that may be urged at the time of hearing, the Respondent prays that the cross objections be allowed. 3) The Respondent craves leave to add to, amend or modify the above grounds of cross objections either before or at the time of hearing of the appeal, if it is considered necessary.”

5. Brief facts of the case are that, the assessee is a company derives its income from the business of film production, maintaining film studios, laboratories, dubbing and editing theatres etc. The assessee filed its return of income for the A.Y. 2006-07 on 31/01/2008 showing total income at Rs.2,87,79,640/-. The Learned Assessing Officer (“Ld. AO”) completed the assessment u/s.143(3) of the Income Tax Act, 1961 (“the Act”) on 23/12/2008 determining the total income at Rs.2,88,92,567/-.

5.1 Later on, in accordance with direction of learned Commissioner of Income Tax, Hyderabad (“Ld. CIT”) u/s.263 of the Act, Ld. AO passed the order u/s. 143 r.w.s. 263 on 30/12/2011 determining the total income at Rs.5,39,24,455/-, withdrawing deduction of Rs.13,49,408/- u/s.80IA of the Act and making additions of Rs.11,82,480/- u/s.40(a)(ia) of the Act & Rs.2,25,00,000/- u/s. 40A(2)(b) of the Act.

5.2 Feeling aggrieved by the order of Ld. AO passed in direction of Ld. CIT, dated 30/12/2011 u/s.143(3) r.w.s. 263 of the Act, the assessee filed appeal before the Hon'ble ITAT, Hyderabad. The Hon'ble ITAT vide dated 22.06.2012 set-aside the matter to the file of Ld. AO with certain directions.

5.3 Finally after the direction of ITAT, the Ld. AO completed the assessment u/s. 143(3) r.w.s. 254 of the Act on 31/03/2014 determining the total income at Rs.5,39,24,455/-, disallowing deduction of Rs.13,49,408/- u/s. 80IA of the Act and making additions Rs.11,82,480/- u/s.40(a)(ia) of the Act & Rs.2,25,00,000/- u/s. 40A(2)(b) of the Act.

7.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A) who allowed the claim of the assessee as per his observation under para no. 6 of his order, which is reproduced as under: “6. Ground No.2 is with regard to reducing of interest on bank loan amounting to Rs.13,49,408 from the income derived from power generation in computing the eligible deduction u/s.80IA. 6.1 I have carefully considered the submissions of the appellant and the assessment order and agree with the submissions of the appellant. In fact, I have already decided an identical issue in the case of the appellant for the A.Y. 2009-10, vide ITA No.229/Addl.CIT R-13/CIT(A)-V/2013-14 dated 31.03.2014, which is reproduced hereunder :

"10.3 I have carefully considered the submissions of the appellant and the assessment order and I find force in the contentions of the appellant and agree with the same. As evident from the above, the Windmill was erected and conynissioneo' before 31-3-2004 out of its own reserves and interest free funds available and started power generation and sold the power so generated in the last days of the year ending with 31-3-2004 to Karnataka Power Grid, which was acknowledged by the Grid. The loan by Bank of Baroda was sanctioned only on 25-5-2004 and the actual disbursement of the loan started only from 17-9- 2004 to 15-12-2004, which were utilized for other business purpose of the assessee. Thus, I hold that there is no direct nexus between the loan amount being utilized for the purpose of Windmill and hence, the AO was not justified in reducing the interest paid to Bank of Baroda, for the purpose of deduction u/s 80IA. The AO is directed to adopt the deduction u/s 80/A at Rs.41,20, 766 as returned by the appellant and allow the same in the final computation of total income.

6.2 Following the same,I hold that there is no direct nexus between the loan amount being utilized for the purpose of Windmill and hence, the AO was not justified in reducing the interest paid to Bank of Baroda amounting to Rs.13,49,408 for the purpose of deduction u/s 80IA. Accordingly, the AO is directed to exclude the same from the income from power generation in computing deduction u/s 801A.”

7.2 Feeling aggrieved with the order of Ld. CIT(A), the Revenue is in appeal before us. The Ld.DR submitted that the assessee company had taken a loan from Bank of Baroda and the sanction letter of the bank shows that, the purpose of the loan was for erection and commissioning of the windmill. He further submitted that the payments were made for windmill from the assessee’s current and cash credit account, but not from any reserve or surplus account. Accordingly, when the loan was sanctioned by the bank, the same was reimbursed to the assessee’s current and cash credit account. The Ld. DR also submitted that the auditor’s of the company had clearly mentioned in his report that the loan amount had been utilised for the purpose for which it had been obtained. Ld. DR also submitted that the Manager of Bank of Baroda in his sworn statement had admitted that loan funds were sanctioned for windmill only. The Ld. DR also submitted that as categorically mentioned under para No.9 of the order of Ld. AO, the copy of sworn statement of the Bank Manager was given to the Accountant of the assessee on 21.3.2014 and an opportunity was given to cross examine the Bank Manager on 24.3.2014. But on that day the assessee did not appear for cross examination. Hence the Ld. DR, considering all his submissions, stated that it is clear that loan had been taken and applied for the purpose of windmill only. Hence interest paid on such loan should be deducted from the profit of the windmill only. Therefore the Ld. DR prayed that the disallowance made by the Ld. AO should be sustained and the order of the Ld. CIT(A) may be reversed.

7.3 Per contra, the Ld. AR placed heavy reliance on the order passed by the Ld. CIT(A) and requested to uphold the order of Ld. CIT(A). The Ld. AR submitted that the business of windmill was commissioned before the loan had been sanctioned. Therefore the loan obtained is after commencement of business of windmill. Hence he argued that, the contention of the Ld. DR that the loan had been taken for windmill is not correct, as the loan itself had been obtained after the commencement of business of the windmill. Hence the Ld. AR prayed before the Bench to uphold the decision of Ld. CIT(A). 7.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. There is no dispute about the facts that the loan had been obtained by the assessee after the commencement of the business of the windmill. But it cannot be argued that the same was not for the purpose of windmill. As rightly submitted by the Ld. DR that, as per the sanction letter of the Bank, the loan had been applied for the wind mill, as per the sworn statement of the Bank Manager, the loan had been sanctioned for the windmill and as per the report of the auditor of the company, the loan had been utilised for the purpose for which it had been obtained. By considering all these facts, we are of the considered opinion that the loan was obtained for the purpose of windmill and the interest paid on such loan should be deducted from the profit of windmill and accordingly the deduction u/s 80IA of the Act should also be reduced . Hence we are in agreement with the action taken by the Ld. AO and therefore allow the appeal of the Revenue. Accordingly, the ground raised by the Revenue is allowed. 7.5 Hence the Ground No.2 of the Revenue is allowed.

“ 5.0 Applicability of Sec. 40(a)(ia) on Rent paid and payment made to the Contractor: Hon'ble ITAT referring to the view of the ITAT, Vizag bench in the case of Merlin Shipping Et Transports, Visakhapatnam Vs. Addl.CIT, Visakhaptnam in Dtd.09.04.2013, regarding the disallowance U/s 40(a)(ia), has directed the AO "to examine the facts and find out whether the amounts has been paid within the relevant previous year or remains payable on the date of Balance-sheet. If the amount has been paid within relevant financial year, no disallowance can be made U/s 40(a)(ia) of the Act"

However, the order of the special bench (of Vizag) has since been put under interim suspension by the Andhra Pradesh High Court. Further, CBDT has given clarification regarding disallowances U/s 40(a)(ia) vide circular dated 17.12.2013, that the sec. 40(a)(ia) would apply even to the amounts that have already been paid during the year. Hence, the referred case of Hon'ble ITAT, Visakhaptanam, is not applicable. In view of the above, a show cause dated 11.02.2014, to explain as to why the payment of Rs. 11.82 Lakhs towards lease rent shall not be disallowed U/s 40(a)(ia) of I.T. Act' 1961, was issued and served on the assessee on dated 12.02.2014. Regarding the payments made to contractors, it is noticed that this amount consists of opening balance of Rs. 28.30 lakh as on 01.04.2005 and Rs. 74.41 pertains to current AY. This expenditure is capitalized by the assessee, and not debited to PEtL account. Hence, applicability of 40(a)(ia) does not arise.”

8.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who allowed the claim of the assessee as per his observation under para no. 7 of his order, which is reproduced as under:

“ 7. Ground No.3 is with regard to disallowance u/s 40 (a) (ia) of the Act amounting to Rs.11.82 lakhs towards lease rent paid by the appellant.

7.1 I have carefully considered the submissions of the appellant and agree with the submissions. I have also verified the statement of details of rent paid amounting to Rs.11.82 lakhs to various persons, which was paid during the F.Y.2005-06 relevant to the A.Y.2006-07 i.e. asst. year under consideration, along with ledger account of the payees' in the books of the appellant and found the same was paid within the F.Y.2005-06 relevant to A.Y.2006-07 and hence, delete the addition of Rs.11.82 made u/s 40 (a) (ia) of the Act.”

8.2 Feeling aggrieved with the order of Ld. CIT(A), the Revenue is in appeal before us. The Ld. DR submitted that, during the year the assessee had incurred expenditure on account of lease rent amounting to Rs.11,82,480/- without making any TDS on the same. Hence the same was disallowed u/s. 40(a)(ia) of the Act. Hence he prayed before the Bench that the disallowance made the Ld. AO should be sustained and the order of the Ld. CIT(A) may be reversed.

8.3 Per contra, the Ld. AR placed heavy reliance on the order passed by the Ld. CIT(A) and requested to uphold the order of Ld. CIT(A). The Ld. AR submitted that as the amounts were paid during the year itself and there was no outstanding balance at the year end, the disallowance prescribed u/s 40(a)(ia) is not applicable to the assessee. Hence the Ld. AR requested the Bench to uphold the decision of Ld. CIT(A). In alternative submission the Ld. AR submitted that if the assessee is not succeeded on the ground of non-deduction of TDS, an opportunity may be provided to the assessee for availing the benefit of 2nd proviso to section 40(a)(ia) of the Act by furnishing the certificates as specified under 1st proviso to section 201(1) of the Act.

8.4 We have heard the rival contentions and gone through the records in the light of submissions made by the either side. There is no dispute about the facts that the payment of Rs.11,82,480/- had been made by the assessee on account of lease rent without any TDS. The issue arises before us to decide where the payment had been made during the year without TDS and there is no balance outstanding at the year end, whether the disallowance can be made u/s. 40(a)(ia) of the Act or not. The same issue had been decided by the Hon’ble Supreme Court in the case of Palam Gas Service Vs. CIT Dt.03.05.2017 [AIR 2017 SC (Civil) 1827], in which the Ld. Supreme Court held that the provisions of disallowance u/s. 40(a)(ia) of the Act are equally applicable to the cases, where payment had been made during the year also. Following the decision of the Hon’ble Supreme Court in the case of Palam Gas Service (supra), we held that, as the assessee has not deducted tax at source, hence the aforesaid payment of Rs.11,82,480/- are liable to be disallowed u/s 40(a)(ia) of the Act. Hence we are in agreement with the action of the Ld.AO therefore, we allow the appeal of the Revenue on this ground. 8.5 Now coming to the alternative argument of the Ld. AR, considering the principle of natural justice, we hereby make a direction to the Ld. AO that, an opportunity to be provided to the assessee for availing the benefit of 2nd proviso to section 40(a)(ia) of the Act by furnishing the certificates as specified under 1st proviso to section 201(1) of the Act before making addition of Rs.11,82,480/-. Hence this ground of the assessee is allowed for statistical purposes. 8.6 Hence the Ground No.3 of the Revenue is partly allowed for statistical purposes.

“ 6.0 Applicability of Sec. 40A(2)(b) and reasonableness involved in payment of consideration with regard to purchase of film "Soggadu": During the AY 2006-07, the assessee company has claimed a deduction of Rs. 5.25 Crores on account of purchase of the film "Soggadu"(new) from Ramanaidu Charitable Trust. It has paid Rs.3.0 Crore in that year and the remaining amount of Rs.2.25 Crores is shown as deferred liability to be paid in 20 years, still this sum of Rs.2.25 Crores is claimed as expenditure in the AY 2006-07. The Ramanaidu Charitable Trust has actually purchased this film from M/s Suresh Productions (firm) for a consideration of Rs. 5.20 Crores (a difference of Rs. 5.0 Lakh only). 6.1 As per the deed of settlement between Ramanaidu Charitable Trust and the M/s Suresh Productions (firm), for the film "Soggadu", the trust as well as the settler i.e., M/s Suresh Productions (firm) offered only Rs.3.0 Crores as receipts for the movie and paid taxes accordingly. Even the audit reports of these entities have certified the Profit a Loss a/c and Balance sheet as true. However, in the same AY i.e., 2006-07 the assessee has claimed the expenditure, towards the purchase of the same movie, as Rs. 5.25 Crores, and debited the same to Profit Et Loss account, whereas the seller is offering an income of Rs. 3.0 Crore. The above arrangement between the assessee and the firm is nothing but a mere arrangement to reduce the tax liability, which is otherwise due to the revenue. 6.2 It is well settled principle of law that what is permissible is avoidance but not evasion. When, an attempt is made by a company to evade tax it is bounded duty of the authorities to lift the corporate veil and find out the real intention behind the same. It is the duty of the authorities in every case, where ingenuity is expended to avoid taxing legislations, to get behind the smoke scr e en and d i s co v er t he t rue s t at e o f affa i r s . In v ar i o us j ud i c i al pronouncements it is held by judicial authorities that where the same persons entered into transactions though by introducing an intermediatary into some of the transactions, the income tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction. 6.3 In the present case, the assessee has devised a colourable mechanism, through which tax was evaded by both the parties of the financial transaction. The seller has shown the receipts as Rs.3.0 Crores only and the buyer has claimed Rs. 5.25 Crores as the expenditure. Hence, when the expenditure was considered as accrued and 6.4 arised in a financial transaction, it has to be reciprocated with the accrual and arisen of income to the other party of the financial transaction. It is against the general prudence of any business transaction across the world.

6.5 The Managing Director of M/s SPPL is Sri. D. Rama Naidu and Director is Sri. D. Suresh Babu. The trustees of Ramanaidu Charitable Trust are Smt. D. Rajeswari, Shri. D. Rama Naidu, Shri D. Suresh Babu and Shri. D. Venkatesh, all belongs to same family. The partners of M/s Suresh Production (firm) are Sri. D. Rama Naidu, Sri. D. Suresh Babu and Sri D. Venkatesh Babu. If the corporate veil is lifted, all the three entities are held / owned / run by specified persons only. Hence, section 40A(2)(b) of income tax Act is applicable for the transactions between the assessee company and the Rama Naidu Charitable trust. In the present case there is no value addition to the movie by the Ramanaidu Charitable Trust. It has acted only as via media between M/s Suresh Productions (Firm) and the assessee company M/s SPPL. The ultimate beneficiary is M/s Suresh Productions (firm) only.

6.6 In view of the above, a show cause dated 11.02.2014, to explain as to why the expenditure incurred towards this movie shall not be considered as Rs.3.0 Crores, same as the income offered by seller of this financial transaction,- was issued and served on the assessee on dated 12.02.2014. 7.0 In the assessee reply vide letter dated 19-02-2014 it is contended that -- "The above referred matter is already a subject matter of appeals filed before the Commissioner of Income- tax, Appeals. You have now raised the same issue again asking for details. In the assessment order passed consequent to the order of CIT under 263 all these conditions were already made and the matter is pending disposal before the CIT Appeals. Consequent to the order of ITAT against the said 263 order you are now raising the same issues once again. If you propose to do additions on these issues referred in your letter asking details it amount to double taxation of the same income• and double demand raising on the same issued for the same assessment year" 8.0 The assessee has submitted details of interest free reserves available with the company, along with the reply letter dtd. 19.02.2014. As perused from the details furnished, it can be noted that these heads are taken out from the balance sheet as at 31.03.2004, which indicates only aggregate figures. But the fund flow towards this project was made through the assessee's current and cash credit accounts, but not from any reserves or surplus. Hence, the assessee's contention is not acceptable. 9.0 As requested by the assessee a copy of sworn statement of Sr.Manager (Credit)- Bank of Baroda, was given to Sri. Rajendra, Accountant on 21.03.2014 and an opportunity was given to cross examine tht Sr. Manger (Credit) - Bank of Baroda on 24.012014. But on that day the assessee did not appear for cross examination. 10.0 As the objection raised by the assessee, the order passed by DCIT U/s 143(3) r.w.s. 263 is pending for disposal before Ld. CIT(A). But in judicial hierarchy, hon'ble ITAT directions are binding on the assessing officer. The AO is bound to follow the direction issued by hon'ble ITAT. Hence, even though the order passed U/s 143(3) r.w.s 263 is pending before Ld. CIT(A), the issues were verified / examined as per the directions of hon'ble ITAT. Incase, it is found that the addition is required to be made on the hon'ble ITAT referred issues, and if the addition is already made on the same issue in the order passed U/s 143(3) r.w.s. 263, no fresh addition will be made again. Only those issues which were not considered for addition in the order 143(3) r.w.s. 263 is proposed be added in the order being passed as per the directions of hon'ble ITAT.” 9.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who allowed the claim of the assessee as per his observation under para no. 8 of his order, which is reproduced as under:

“ 8. Ground No.3 is with regard to disallowance of Rs.2.25 Crorres towards rights acquisition of film ‘Soggadu’. 8.1 I have carefully considered the submissions of the appellant and agree with the same. As contended by the appellant, the Ao traversed beyond the direction of the CIT-1, Hyderabad vide proceedings u/s 263 of the Act. The direction of the CIT was only to examine the applicability of section 40 A (2)(b) of the Act and reasonableness of payments for purchase of rights over the film ‘Soggadu’ from M/s Ramanaidu Charitable Trust. As per section 40A (2)(b), the provisions are attracted in case of a company only when transactions are entered into with any director of the company or any relative of such director. In this case, M/s Ramanaidu charitable Trust is a separate taxable entity and it is not a director in the appellant company nor can it be construed that the Charitable Trust is a relative of any of the directors of the appellant company. Therefore, at the threshold itself, the provisions of section 40A(2)(b) are not attracted to the transactions entered into between the appellant company and M/s. Ramanaidu Charitable Trust.

8.2 Regarding the reasonableness of the cost of acquisition of rights of film 'Soggadu’, the appellant following a consistent method of accounting in its transactions with M/s Ramanaidu Charitable Trust, which was accepted by the department all along for the last 30 years. In support of this view, the appellant cited various case-laws, which are applicable to the facts of the case. In fact, in the case of the appellant company and M/s. Suresh Productions, sister company, I have already held in detail vide my orders dated 31-03-20L4 for the A.Ys 2003-04, 2008-09, 2009-10 accepting the mercantile system of accounting adopted by the appellant in accounting for the transactions with M/s. Ramanaidu Charitable Trust. 8.3 Following the same, I hold that the A.O. was not justified in making a disallowance of Rs.2.25 crores towards cost of acquisition of rights of film 'Soggadu' and hence, delete the same. As discussed above, I also hold that the provisions of Section 40A (2)(b) are also not applicable to the facts of the case of the appellant company.”

9.2 Feeling aggrieved with the order of Ld. CIT(A), the Revenue is in appeal before us. The Ld.DR submitted that as per the direction of Hon’ble ITAT, the Ld. AO had to check the applicability of section 40A(2)(b) and reasonableness involved in payment of consideration with regards to purchase of film “Soggadu”. The film “Soggadu” was purchased by the assessee from Ramanaidu Charitable Trust. With regards to the applicability of Section 40A(2)(b) of the Act to such purchases, the Ld. DR submitted that the Managing Director of the assessee company is Shri D. Ramanaidu and director is Shri D.Suresh Babu, whereas the trustee of Ramanaidu Charitable Trust are Smt. D. Rajeswari, Shri D. Ramanaidu, Shri D. Suresh Babu and Shri D. Venkatesh, all belongs to the same family. Hence he submitted that Section 40A(2)(b) of the Act is applicable to the purchase executed between the assessee company and the Ramanaidu Charitable Trust. With regards to the reasonableness involved in the payment of consideration with respect to the purchase of film “Soggadu”, he submitted that, the assessee company had purchased the film from Ramanaidu Charitable Trust at Rs.5.25 Crores and the condition for payment was that, Rs.3 Crores was to be paid in the same year and Rs.2.25 Crores was to be paid in next 20 years. The assessee claimed the purchase cost of Rs.5.25 Crores as expenditure, however Ramanaidu Charitable Trust offered only Rs.3 Crores as income in their books of account. Therefore, apparently their seems to be understatement of income by Rs.2.25 Crores in the hands of Ramanaidu Charitable Trust or there is overstatement of expenditure to the same extent in the hands of the assessee. As the seller of the film offered only Rs.3 Crores as revenue in their books of account, hence the assessee in consequence should be eligible to claim only Rs.3 Crores as expenditure and not Rs.5.25 Crores. Hence he prayed that the disaalowance made by the Ld. AO amounting to Rs.2.25 Crores should be sustained and the order of the Ld. CIT(A) may be reversed.

9.3 Per contra, the Ld. AR placed heavy reliance on the order passed by the Ld. CIT(A) and requested to uphold the order of Ld. CIT(A). The Ld. AR submitted that both the parties i.e. assessee and Ramanaidu Charitable Trust have accounted for the expenditure and revenue as per their own accounting policies, regularly followed since long. Hence the expenditure claimed and revenue offered by both the parties are in accordance with law. Hence he prayed before the Bench to uphold the order of Ld. CIT(A).

9.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. The Ld. Dr submitted that the assessee and the seller of the film are related persons u/s. 40A(2)(b) of the Act, to which the Ld. AR had also no objection. Hence there is no dispute about the fact that the assessee and the seller of the film are related persons u/s. 40A(2)(b) of the Act. Further, there is also no dispute about the facts that against the single transaction of film the assessee had claimed an expenditure of Rs.5.25 Crores and on the other side the seller of the film had offered only Rs.3 Crores as revenue from the sale of the film. As both the parties are related persons u/s.40A(2)(b) of the Act, in our considered opinion, the assessee had made excess claim of Rs.2.25 Crores as expenditure in his books of account. The same should not be allowed to the assessee during the year under consideration. Hence we disallow such excess claim of Rs.2.25 Crores claimed as expenditure and upheld the view of the Ld. AO. Accordingly, the ground of the revenue is allowed. 9.5 Hence the Ground No.4 of the Revenue is allowed.