N. CHANADRA GLOBAL INFOTAINMENT LTD,MUMBAI vs. ITO 11(1)(3), MUMBAI

The facts relating to the above said issue are discussed in brief. The assessee is engaged in the business of production of films. Shri N. Chandra is one of the directors of the company and he is also a professional director of films. The assessee company started production of a new film titled as “Breaking news”. It entered into an agreement on 09-10-2006 with M/s Adlabs Films Ltd (AFL) for assignment of its rights over the film cited above. It was agreed that 2 M/s. N. Chandra Global Infotainment Ltd. the production of film shall be commenced by October, 2006 and the same shall be completed by October, 2007. The agreement provided that the above said film shall be directed by Shri N. Chandra and the IPR attached with the film shall be retained by the assessee. It was further agreed that the fixed price to be paid for assignment of work & rights shall be fixed at Rs.2.25 crores and in no event it shall exceed Rs. 2.50 crores. The variable rights have also been described in the agreement. Further, the respective rights and liabilities available for the assessee and M/s AFL were also prescribed in the agreement. The assessee has been described as “assignor” and M/s AFL has been described as “assignee” in the agreement.

The assessee obtained certificate for name of the film on 31.08.2007 and was preparing for release of films. In the mean time, some other person released another film titled as “Its Breaking News”, which resembled the name of the film that is going to be produced by the assessee. Hence the assessee was constrained to change the name of film to “Yeh Mera India” and the assessee got revised certificate on 20-12-2007. Due to these problems, the production of film could not be fully completed by the assessee. Hence the assessee was burdened with the liabilities that arose under the agreement entered with AFL.

By that point of time, the assessee had incurred a sum of Rs.2.49 crores towards production cost. Since the assessee felt that it may end up with huge losses, it transferred its right over the film along with attached liabilities to the director Shri N. Chandra for a consideration of Rs.1.85 crores. The said deal resulted in a loss of Rs.64 lakhs (Rs.2.49 crores less Rs.1.85 crores) and the assessee claimed the same as deduction.

The AO noticed that the “assignee firm M/s AFL” was taken over by another company named M/s Reliance Big Entertainment Ltd (RBEL) during the year ending 31.3.2009. Subsequently M/s RBEL transferred its rights over the film to another company named M/s Pen India Ltd on 07-07-2009 for a consideration of Rs.2.30 crores. The AO, by taking into the above said transaction, took the view that the consideration for transferring assessee’s right over the film to Shri N. Chandra should have been Rs.2.30 crores. Accordingly, the AO took the view that the loss suffered by the assessee should be restricted to Rs.19 lakhs (Rs.2.49 crores less Rs.2.30 crores). Accordingly the AO restricted the loss to Rs.19 lakhs and disallowed the excess claim of Rs.45 lakhs. The Ld CIT(A) also confirmed the same.

The Ld A.R, during the course of hearing, submitted that the transaction between the assessee and Shri N Chandra took place in the month of October, 2008, whereas the transaction between M/s RBEL and M/s Pen India P Ltd took place in the month of July, 2009. Accordingly it was contended that there was no justification for the tax authorities to compare the two different transactions entered into two different periods. He submitted the market rate of any commodity would vary between two different dates depending upon various external and internal factors. He further submitted that RBEL has also transferred the Satellite rights to Pen India P Ltd and accordingly, the theatrical right was priced at Rs.1.75 crores and the satellite rights was priced at Rs.0.55 crores, both aggregating to Rs.2.30 crores. The Ld A.R submitted that Pen India P Ltd was having certain clout over the television channels and it could pay for the satellite rights a sum of Rs.0.55 crores. He submitted that the assessee did not have any clout over the television channels nor did it specifically transfer satellite rates separately. Accordingly he submitted that the price of Rs.1.85 crores realised by the assessee was more than the price of theatrical rights of 4 M/s. N. Chandra Global Infotainment Ltd. Rs.1.75 crores that was determined between RBEL and M/s Pen India P Ltd. The Ld A.R further submitted that the assessee has taken a commercial decision to transfer its rights over the film in order to curtail further losses. He further submitted that the tax authorities are not justified in presuming that a businessman shall always make profit from business. The loss from business activities cannot be altogether avoided. He further submitted that the final production cost reached to an amount of Rs.9.28 crores, where as the film could generate collection of Rs.13.97 lakhs during the subsequent years. Accordingly, the Ld A.R submitted that the assessee had taken a commercial decision to transfer the rights with the purpose of reducing further losses and hence the Ld CIT(A) was not justified in confirming the disallowance made by the AO.

On the contrary, the ld D.R strongly supported the order of Ld CIT(A). He submitted that the RBEL could transfer its rights over the film to a third party for a sum of Rs.2.30 crores on a subsequent date and the said transaction shows that the assessee has transferred its rights over the film for inadequate consideration to a related party.

We heard the parties and perused the record. We notice from the agreement dated 09-10-2006 entered between the assessee company and M/s AFL that the assessee herein is described as “assignor” and M/s AFL is described as “assignee”. The agreement further describes the rights and liabilities of each of the above said two persons. It can be noticed that the assessee, in its capacity of ‘assignor’ has obtained certain rights and liabilities and M/s AFL, in its capacity as ‘assignee’ has obtained its own rights and liabilities. There should not be any dispute that the rights and liabilities of the assignor and assignee are distinct and different. Accordingly, we are of the view that it may not be correct

The assessee has transferred its rights and liabilities obtained by it, in its capacity as assignor, to Shri N. Chandra. The transaction has taken place in the month of October, 2008. Whereas the RBEL (successor of M/s AFL) has transferred its rights and liabilities obtained by it, in its capacity as assignee, to M/s Pen India P Ltd and the said transaction has taken place in the month of July, 2009. It can be noticed that both the transactions are in respect of two different rights and further they have taken place in two different periods. Accordingly, we are of the view that the tax authorities are not justified in treating both the transactions as representing same rights and liabilities attached to the film.

Further, we notice that the assessee has adequately demonstrated the circumstances under which it has decided to transfer its rights for a sum of Rs.1.85 crores along with attached liabilities. According to the assessee, it has taken a commercial decision to transfer its rights with the purpose of reducing further losses. Even though it was contended by the revenue that the transaction has taken with a related person, yet no material was brought on record to show that the transaction value was less than the market price prevailing at that point of time. The Ld A.R has narrated the details of subsequent events and the same shows that the decision taken by the assessee has benefitted it. We also notice that the assessing officer has accepted the fact that the assessee has incurred loss and hence he has allowed the loss to the tune of Rs.19.00 lakhs. The dispute is with regard to the quantum of loss only. However, in view of the foregoing discussions, we are of the view that the reasoning given by the tax authorities to restrict the loss to Rs.19.00 lakhs

Accordingly, we are of the view that the Ld CIT(A) was not justified in confirming the disallowance made by the AO. Accordingly we set aside the order of Ld CIT(A) passed on this issue and direct the AO to delete the impugned disallowance of Rs.45.83 lakhs.

In the result, the appeal filed by the assessee is allowed. Order has been pronounced in the Open Court on 7.6.2016.