SATISH B. KAUSHIK,MUMBAI vs. ASST CIT 11(1), MUMBAI

These cross appeals by the Assessee and the Revenue are directed against the orders of the learned Commissioner of Income Tax (Appeals)- 3, Mumbai (Hereinafter called “the CIT(A)”) dated 18-06-2012 pertaining to the assessment year 2008-09. These cross appeals are heard together and disposed of by this common order for the sake of convenience and brevity.

The ground raised by the assessee in the memo of appeal filed with the Tribunal reads as under:-

On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of Ld AO in treating 3 properties as Deemed to be let out.

That the orders of both Ld Commissioner of Income Tax (Appeals) and Ld Assessing Officer are bad in law and on facts.”

The brief facts of the case are that the assessee carries on the business activity of acting and direction of feature film’s. During the assessment ITA 4832 & 5601/Mum/2012 3 proceedings carried on by the Revenue u/s 143(3) read with Section 143(2) of the Act, the learned assessing officer(hereinafter called “the AO”) observed that assessee has shown an amount of Rs. 4,38,395/- as amount written off under the head “Direct and Indirect Expenses”. The assessee was asked to explain as to why the claim of bad debts which is in the nature of investment should not be disallowed and more-over the assessee is following cash basis of accounting and bad debt per-se shall not arise. The assessee submitted that assessee has entered into a joint venture distribution business with Prachi Narmada Films Pvt. Ltd.(hereinafter called “the PNF”) in September, 2001 for the distribution of the feature film ‘Nayak’ for which an amount of Rs. 10 lakhs was advanced to the PNF. This was entirely in the nature of a business transaction wherein money was advanced for a joint venture business with an intention to earn profit’s out of it. The intention was never to earn any fixed return from it in the nature of investment as commonly understood. Out of the amount of Rs. 10 lakhs advanced, Rs. 4,38,395/- was still outstanding for more than six years and was not recoverable as the film did not do good business. The submission of the assessee was rejected by the AO as the provisions of section 36(1)(vii) of the Income Tax Act, 1961(Hereinafter called “the Act”) read with Section 36(2) of the Act were not fulfilled. The AO held that as per Section 36(2) of the Act which governs section 36(1)(vii) of the Act , a debt is to be allowed as bad-debt if it is taken into account in computing the income of the assessee of any previous year. The AO held that if the said amount has been offered to tax in any previous year then it can be written off as bad debts. The amount written off as irrecoverable is not debtors of the assessee as the assessee has given the advances. The amount which have been written off as irrecoverable are not the debtors of the said assessee but the assessee had given advances to the PNF and the assessee himself stated that an advance of Rs. 10 lakhs was given to the PNF out of which Rs. 4,38,385/- was outstanding since 6 years therefore the said amount has never been taken into account while ITA 4832 & 5601/Mum/2012 4 computing the income of the assessee of any previous year. The balance sheet as at 31st March, 2007 which reflected the name of the PNF under the head ‘Investment’. The A.O. observed that the investment as appearing in the balance sheet as at 31-3-2007 of the assessee are in the nature of capital advance and non recovery of the said investment can be capital loss but cannot be allowed as revenue loss, hence, the entry is passed by the assessee to reduce the burden of tax and accordingly the A.O. disallowed the same and added the same amount i.e. Rs.4,38,385/- to the total income of the assessee vide assessment orders dated 07-12-2010 passed by the AO u/s 143(3) of the Act.

The ld counsel for the assessee submitted that the advance of Rs.10 lacs was paid to the PNF in 2001 for buying the film “Nayak”. The assessee was having 25% share in the film ‘Nayak’ . The Ld. Counsel for the assessee submitted that the loss incurred in this film was Rs. 5,61,605/- which was claimed by the assessee and allowed by the Revenue in the assessment year 2002-03. The ld. Counsel drew our attention to the balance sheet and P&L account for financial year 2001-02 along with return of income filed with the Revenue for the assessment year 2002-03 whereby the distribution business ITA 4832 & 5601/Mum/2012 6 loss of Rs. 5,61,605/- was claimed by the assessee in the return of income filed with the Revenue. The ld. Counsel also drew our attention to the agreement entered into with the PNF dated 4th September, 2001 which is placed at paper book page 83 & 84.The ld. Counsel also drew our attention to the various letters and reminders sent by the assessee to the said PNF for refund of the amount Rs. 4,38,395/- which is placed at paper book page nos. 85 to 89. The ld. Counsel also drew our attention to the balance sheet for the years 2002-03, 2003-04, 2004-05, 2005-06, 2006-07 and 2007-08, copy of which are placed in the file to substantiate that the advance of Rs. 10 lacs was shown in the books of account albeit under the head ‘Investment’. The amount of Rs. 5,61,605/- was claimed as loss during the assessment year 2002-03 and balance amount of Rs. 4,38,395/- was carried forward as recoverable from the PNF in the books of account for the assessment year 2002-03, 2003-04, 2004-05, 2005-06 and 2006-07 and finally written off in the assessment year 2008-09. The ld. Counsel submitted that advance given to PNF is an irrecoverable advance which had been given in the ordinary course of business of buying share of distribution rights of a movie and it should be allowed as deduction. The amount advanced to M/s PNF was duly declared and disclosed to the Revenue in the return of income filed for the assessment 2002-03. He submitted that the case of the assessee was selected for scrutiny for the assessment year 2006-07 whereby this investment was reflected in the balance sheet and the Revenue has assessed the same u/s 143(3) of the Act vide orders dated 15-12-2008. The ld. Counsel relied on the decision of Hon’ble Andhra Pradesh High Court in the case of P. Satyanarayana v. CIT (1979) 116 ITR 803 (AP) and Hon’ble Supreme Court decision in the case of B.D.Bharucha v. CIT (1967) 65 ITR 403(SC) and submitted that the loss is allowable as bad-debt being business loss.

The ld. D.R., on the other hand, relied on the orders of authorities below.

We have considered the rival contention and also perused the material available on record including case laws relied upon by the rival parties. We have observed that the assessee is film actor and director of feature films. The assessee has made investment with PNF of Rs. 10 lakhs in the year 2001 whereby the assessee had 25% share in feature film ‘Nayak’ in the territory of Central India. The assessee was entitled for 25% of share in this venture. The assessee has got share of loss of Rs. 5,61,605/- which was offered for taxation in the assessment year 2002-03 and thereafter as per the facts emanating from the records the balance amount of Rs. 4,38,395/- was still recoverable from M/s PNF which was advanced in the year 2001. The income from this film ‘Nayak’ was also offered for taxation in the assessment year 2002-03 although it was loss and it is well established and settled proposition that the income include losses and hence negative income i.e. loss is also an income which was offered for taxation by the assessee in the assessment year 2002-03. The assessee has made efforts to recover the amount but could not recover the same for which necessary evidences are placed on record by the assessee in the paper book filed with the Tribunal. This amount has been considered to be bad debt by the assessee and has been written off in the books of account in the current assessment year under appeal. In the opinion of the assessee, the said amount has become irrecoverable and has been written off in the books of accounts maintained by the assessee. In our considered view , the assessee has fully satisfied the conditions laid down in section 36(1)(vii) of the Act read with Section 36(2) of the Act and the said amount of Rs. 4,38,395/- written off by the assessee as irrevocable as bad debt is allowable as revenue expenditure. Hence, The addition of Rs. 4,38,395/- made by the A.O. and as sustained by the CIT(A) is hereby ordered to be deleted. We order accordingly.

Coming to ground No. 2, from the perusal of the balance sheet of the assessee, the A.O. observed that the assessee has received an advance of Rs. ITA 4832 & 5601/Mum/2012 8 25 lacs which is reflected in the balance sheet under the head “Current Liabilities and Provisions’ which is in the nature of advance received from Tips Industries Limited. The assessee was asked to explain as to why advance received from Tips Industries Limited should not be treated as income as assessee is following cash method of accounting. The assessee explained that a sum of Rs. 25 lacs was received during the year from Tips Industries Ltd. for accepting the assignment to work as Director for their two forthcoming films. As per the letter from the company Tips Industries, it was specifically mentioned as advance on signing of the letter and accepting the assignment and not towards remuneration and the said advance is to be adjusted against the remuneration payable to the assessee only on the commencement of the first film and in the event of not starting the first film, the assessee is required to refund the said advance forthwith to the company. The A.O. observed that no TDS has been deducted by the Tips Industries Ltd. The assessee submitted that no film has commenced and the Tips Industries Ltd. is demanding refund of the advance paid to the assessee. This transaction is purely in the nature of loan and not towards remuneration and this amount is not included in the income of the assessee. The A.O. rejected the contentions of the assessee and held that the assessee is following cash system of accounting and any income becomes assessable only when it is received and thus advance received is also a receipt in the nature of income irrespective of the fact that when and how services are going to be performed. The AO held that as per the letter by Tips Industries Ltd. vide clause 3, it is stated that the said advance is not towards remuneration but only for accepting the directorial assignment and the said amount is in the nature of signing amount which has to be brought to tax as the assessee is following cash system of accounting and accordingly the A.O. added the said amount of Rs. 25,00,000/- to the total income of the assessee vide assessment orders dated 07-12-2010 passed by the AO u/s 143(3) of the Act.

Aggrieved by the orders dated 07-12-2010 passed by the AO u/s 143(3) of the Act , the assessee filed first appeal with the CIT(A).

Before the CIT(A) , the assessee submitted that the advance received is in the nature of refundable deposit/earnest money and to show the commitment to the director that the producer will not go back if viable project is put in place. The said advance was to be refunded if no new film is started and then it was to be adjusted against remuneration of film. The current status is that none of the film has been started and such deposit does not get character of income even under cash basis of accounting and hence income is not assessable to tax.

Aggrieved by the orders dated 18-06-2012 of the CIT(A), the assessee is in appeal before the Tribunal.

The ld. Counsel for the assessee submitted that the advance was received from Tips Industries Ltd of Rs. 25 lacs by the assessee. The ld. Counsel drew our attention to page No. 90 & 91 of paper book filed with the Tribunal, which is placed on record, whereby there is an mutual ITA 4832 & 5601/Mum/2012 10 understanding dated 05-02-2008 entered into by the assessee with the Tips Industries Ltd and based on the said mutual understanding an amount of Rs. 25 lacs was received by the assessee wherein it was clearly mentioned that the amount of Rs. 25 lacs paid to the assessee is an advance on signing of this mutual understanding dated 05-02-2008 and this advance is not towards remuneration but only for accepting the directorial assignment. It was also mentioned vide cl. 4 and 5 of the mutual understanding that the advance shall be adjusted against the remuneration only on commencement of the first film and in the event of not starting the first film the amount so advanced is refundable. The ld. Counsel submitted that no TDS has been deducted on this advance and no film has yet been started and the Tips Industries Ltd. is demanding refund of the advance amount. This transaction is a loan transaction and not remuneration paid to the assessee. In support, the ld. Counsel relied upon the decision of Hon’ble Karnataka High Court in the case of CIT v. Shankaranarayan Construction Co. (1992) 197 ITR 688 (KAR), upon the decision of Mumbai-Tribunal in the case of Robin Nana Bhai Bhatt v. ACIT (2014)29 ITR (Trib.) 531,decision of the Hon’ble Delhi High Court in the case of CIT v. Consulting Engineering Services (India) Limited (2001)250 ITR 849(Del. HC).

The ld. D.R., on the other hand, relied on the orders of authorities below.

We have considered the rival contention and also perused the material available on record including the case laws relied upon by rival parties. We have also carefully perused the mutual understanding dated 05-02-2008 entered into between the assessee and the Tips Industries Ltd. whereby the assessee has agreed to work with Tips Industries Ltd. It was also agreed by the assessee that both the film will start one after the other immediately after the film on the floor are completed or at least start one film within one year of the agreement whichever is earlier. The assessee was paid Rs. 25 lacs with the clear understanding that advance is not remuneration but paid only for ITA 4832 & 5601/Mum/2012 11 accepting the directorial assignment and the advance shall be adjusted against the remuneration only on the commencement of the first film and in the event of not starting the first film, the assessee would refund the advance immediately. The assessee is following cash system of accounting whereby the income is taxed based upon the receipt of income whether the services are rendered or not is immaterial. However, in the instant case, the amount of Rs.25,00,000/- has been advanced by the Tips Industries Ltd. with a clear understanding that it will not form part of the remuneration but for accepting the directorial assignment and it will be adjusted only on commencement of the first film. It was also agreed that in the event of non starting of the first film as per agreed terms, the said amount of Rs.25,00,000/- will be refunded by the assessee to Tips Industries Limited. It is an undisputed fact that the assesssee did not start the film as per mutual understanding dated 05-02- 2008 . It is stated that Tips Industries Limited is demanding their money back due to non-starting of the film by the assessee. In the instant case, the amount of Rs.25,00,000/- has been held by the assessee on behalf of Tips Industries Ltd. and is not being held by the assessee in his own right as the assessee can be deemed to hold the said amount in his own right on commencement of the film. No income is being generated or earned even under the cash system of accounting followed by the assessee as in the instant case the film has not commenced as per agreed terms and the amount has become refundable to Tips Industries Limited which is stated to be asking for refund of their advance. In our considered view, the addition made by the A.O. is not sustainable in law because the amount is being still held by the assessee on behalf of the Tips Industries Ltd and not on his own right as per the agreed terms of conditions as agreed vide mutual understanding dated 05-02-2008 as the assessee will be deemed to appropriate the said amount or hold the said amount in his own right only on the commencement of film and till then the assessee is holding the said amount of Rs.25,00,000/- on belhaf of Tips Industries Limited which is refundable in case of non-starting of the ITA 4832 & 5601/Mum/2012 12 film as per agreed terms as per mutual understanding dated 05-02-2008. The addition made by the A.O. as confirmed by the CIT(A) is hereby ordered to be deleted. We order accordingly.

The third ground relates to the disallowance of depreciation on assets not used for the purposes of business as alleged by the Revenue. As per Form No. 3CD, Annexure IV, the assessee has claimed depreciation on block of furniture and fixture and computers installed at flats owned by the assessee namely ‘Raj Classique’, ‘Tranquil Treat’ , ‘Evershine Greens’ and ‘Saidwar’ flats. The assessee has declared ‘Raj Classique’ as self occupied property and rest of the assets i.e. three afore-stated flats are claimed by the assessee for being used for the purpose of business. The A.O. asked the assessee as to whether electricity is being charged at commercial rates as if it is a commercial property as rate of electricity are different for commercial properties vis-à-vis residential properties. The assessee replied that the assessee is mostly working on multiple projects at one time in his capacity as an actor, director for which he requires the use of different properties as office space. The assessee submitted that the he has the following properties and the details of use of each of the properties are given below:-

Before the CIT(A), the assessee submitted that section 32(1) provides that depreciation is allowable in respect of plant or furniture owned and used in business or profession on the written down value. It is of no consequence whether entire property is used for the purpose of business or not.

Aggrieved by the order dated 18-06-2012 of the CIT(A) , the assessee is in appeal before the Tribunal.

The ld. Counsel for the assessee submitted that depreciation has been claimed of by the assessee of Rs. 2,12,184/- which was disallowed by the A.O. and same has been confirmed by the CIT(A). The ld. Counsel submitted that the assets are part of block of assets in which depreciation was allowed by the Revenue in earlier years, the depreciation has to be also allowed in the impugned assessment year under appeal based on the principle of consistency and the same cannot be denied to the assessee in this assessment year under appeal. The ld. Counsel submitted that the case was selected by the Revenue for scrutiny for the assessment year 2006-07 and assessment order dated 15-12-2008 was passed u/s 143(3) of the Act whereby the depreciation was allowed by the Revenue. In support, he relied on the decision of the Mumbai-Tribunal in the case of E-City Entertainment (India) Pvt. Ltd. v. Addl. CIT, [2013] 24 ITR (Trib) 73 (Mumbai) and the decision of Mumbai-Tribunal in the case of G.R. Shipping Ltd. v. DCIT in for the assessment year 2001-02 dated 17th July 2008 which was confirmed by the Hon’ble Bombay High Court in Income Tax Appeal No. 598 of 2009 dated 28th July, 2009. The ld. Counsel also relied on the decision of the Hon’ble Delhi High Court in the case of CIT v. Oswal Chemicals and Fertilisers Ltd. [2012] 341 ITR 467 (Delhi).

On the other hand, the ld. D.R. supported the orders of authorities below.

We have considered the rival contention and also perused the material available on record and also the judicial pronouncements cited by the rival parties. We have observed that the assessee is the owner of four premises namely ‘Saidwar’, ‘Evershine Greens’, ‘Tranquil Treat’ and ‘Raj Classique’ which was stated by the assessee to have been utilized for the purpose of his business.The assessee is in the business of acting , direction and film production. The assessee has claimed that the assessee has utilized these premises for business for which the assessee has claimed depreciation for the furniture and fixture and computers installed at the above-stated four premises. The authorities below have rejected the contentions of the assessee and claim of the assessee for grant of depreciation on furniture and fixtures and computers installed at these premises was not accepted by the Revenue on the allegation that business user of these afore-stated four premises by the assessee is not proved. In our considered view and in the interest of justice, the matter need to be set aside and restored to the file of the AO for de-novo determination of the issue with respect to business user of these four premises by the assessee for his business activities and the assessee is directed to produce cogent evidence/material to substantiate his claim that these premises were in-fact used by him for his business. We have observed that the A.O. is insisting on the commercial electricity use as evidence for allowing the claim of the business user of the premises of the assessee, which in our view, no-doubt is a vital document/evidence to claim that the premises are used for commercial / business purposes but it is not the only/sole evidence to prove that the afore-stated premises are used by the assessee for the purposes of his business rather the assessee can prove the same by bringing other cogent material / evidences to prove his contentions that these premises were used for business purposes of the assessee. The assessee is also directed to bring on record cogent material/evidences to prove his contentions of business user of the afore-stated premises. The A.O. is directed to admit evidences furnished by the assessee in de-novo proceedings ITA 4832 & 5601/Mum/2012 18 in his defense and the AO should consider the necessary evidences submitted by the assessee before deciding the matter on merit.Needless to say that proper and adequate opportunity of hearing in accordance with law shall be granted to the assessee by the AO before deciding the issue on merits in de- novo proceedings. We order accordingly.

Ground No. 4 relates to the action of the A.O. in treating three properties namely ‘Evershine Greens’ , ‘Saidwar’ and ‘Tranquil Treat’ as deemed to be let out properties. The assessee was asked as to why these three properties other than Raj Classique (self occupied property) should not be considered as deemed let out properties. The assessee submitted the same submissions as submitted while replying with respect to disallowance of depreciation on furniture and fixtures and computers installed at these properties which are reproduced hereunder :

Before the CIT(A) the assessee contended that all the three properties namely Saidwar, Evershine Green and Tranquil Treat are being used for the personal use of profession hence there was no cause for treating the same as deemed let out properties. The assessee submitted that the AO should have given draft computation of income from house property and the rental from residential property generate returns about 3-4% of the amount of purchase of property, therefore rental income computed by taking 10% of book value is not commensurate with amount of investment. Section 23(1)(b) of the Act does not specify any such formula for determination of annual letting value.

The ld. Counsel for the assessee submitted that the properties have been used for the personal use of profession and hence it should not be treated as deemed let out properties as Section 22 of the Act clearly laid down that with respect to properties used for the purposes of business or profession, the annual value of such property shall be taken to be NIL for computing under the head ‘Income from House Property’ . These properties were used for the purpose of business and the same shall not be chargeable to tax under the head income from house property. He submitted that this issue is connected with the earlier issue relating to the claim of depreciation on the fixed assets. On the other hand, the ld. D.R. supported the orders of authorities below.

We have considered the rival submission and also perused the material available on record. The assessee’s claim is that all the three properties were being used for the personal use of profession hence it should not be treated as deemed let out properties. We find that the assessee also claimed depreciation on furniture and fixture and computers installed at these properties whereby we have set aside the matter of allowability of depreciation ITA 4832 & 5601/Mum/2012 21 on furniture and fixtures and on computers to the file of A.O. and directed the assessee to produce cogent evidence/material to substantiate his claim of business user of the afore-stated properties and the A.O. shall examine the same for deciding the issue of claim of depreciation and we apply the same principle in this issue also, hence, we set aside this issue to the file of A.O. for de-novo determination of issue after considering the cogent material/evidences brought on record by the assessee in his defense in de- novo proceedings . The A.O. is directed to admit evidences furnished by the assessee in de-novo proceedings in his defense and the AO should consider the necessary evidences submitted by the assessee before deciding the matter on merit. The A.O. is also directed to decide the issue in the light of the guidelines laid down by Hon’ble Bombay High Court in the case of Tiptop Typography (2014) 48 taxmann.com 191(Bom.HC) in arriving at the ALV of the above properties. Needless to say that the A.O will grant the assessee proper and adequate opportunity of being heard as per law to comply with principles of natural justice in accordance with law. We order accordingly.

At the outset, the ld. Counsel for the assessee submitted that the tax effect involved in this appeal of the Revenue is less than Rs. 10 lacs. He submitted that as per the latest CBDT Circular No. 21/2015, F. No. 279/Misc.142/2007-ITJ (Pt) dated 10th December, 2015 issued by Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, no appeal shall be filed by the Revenue in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3.

The ld. D.R. fairly conceded that tax effect involved in this appeal of the Revenue is less than Rs. 10 lacs and the CBDT Circular No. 21/2015 is applicable to this appeal and the appeal is not maintainable.

Keeping in view the CBDT Circular No. 21/2015 dated 10th December, 2015 which is applicable from retrospective effect and is also applicable to pending appeals and also in view of DR stating before us that this appeal bearing is now not maintainable/not pressed in view of the above CBDT Circular, we hold that this appeal bearing no. ITA No 5601/Mum/2012 filed by the Revenue which is covered by this order involving tax effect less than Rs. 10 lacs is not maintainable and is dismissed being not pressed. However, the Revenue is at liberty to file an application for recall of this appeals in accordance with law, if at any stage it is found that tax effect is more than Rs 10 lacs or the Revenue wants to agitate the matter in accordance with the provisions/clauses as contained in the afore-stated circular. We order accordingly.