I.T.O WD - 4(3),KOLKATA, KOLKATA vs. M/S ABP ENTERTAINMENT PVT LTD, KOLKATA

The first issue to be decided in this appeal of the revenue is as to whether the provisions of section 2(22)(e) of the Act towards deemed dividend could be invoked in the sum of Rs.1,14,45,125/- in the facts and circumstances of the case.

The brief facts of this issue are that the assessee company during the assessment year under consideration had received an advance of Rs.1,14,45,125/- from another group company M/s. ABP Pvt. Ltd [ in short ‘ABP’]. The assessee is an entertainment company and advance that was received from M/s. ABP Pvt. Ltd was for the investment in M/s. Kaleido Scope Entertainment Pvt. Ltd, which was to produce and eventually produced a Bollywood movie called Sathiya. This amount of advance of Rs. 1,14,45,125/-, which 1 M/s. ABP Entertainment Pvt. Ltd was received from M/s. ABP has been treated as deemed dividend u/s. 2(22)(e) by the AO. On 1st appeal, the said addition was deleted by the ld.CIT(A). Aggrieved, the revenue is in appeal before us on the following ground:- 1. That on facts and circumstances, the Ld CIT (A) erred in not treating deemed dividend U/S 2(22) (e) in the hands of the assessee.

None appeared on behalf of the revenue. It is noticed that the ld. JCIT/Sr.DR had filed an adjournment petition in respect of 16 cases as against 21 cases listed for hearing today. It is noticed that the ld. JCIT/Sr.DR was on leave on the said date of hearing. We do not appreciate such action of the ld.JCIT/Sr.DR in this regard as it is bounden duty to handover the files to any other ld.DR with the consent of the ld.CIT/DR, ITAT. The institution of ITAT cannot suffer due to the absence of ld. Sr.DR. Accordingly, the adjournment petition filed by the ld.Sr.DR is hereby rejected and we proceeded to dispose off the appeal after hearing the ld.AR and perusing the material available on record.

The ld.AR argued that the assessee company is not a shareholder of M/s. ABP Pvt. Ltd. Accordingly, the provisions of section 2(22)(e) of the Act cannot be invoked in the hands of the assessee. The ld.AR of the assessee has also brought to our attention to pages 2-3 of the ld.CIT(A)’s order, wherein shareholding pattern of both the lending company as well as the assessee company is reproduced herein below:- “ (a) Major share holders of M/s. ABP (P) Ltd holding more than 10% of shares and voting rights were:-

The ld.AR further argued that money was received by the assessee company for investment in M/s. Kaleido Scope Entertainment Pvt. Ltd, who eventually produced a 2 M/s. ABP Entertainment Pvt. Ltd Bollywood movie called Sathiya. Accordingly, this borrowing should be construed only in the course of business. It takes the character of pure business and falls under the exception of clause (ii) to section 2(22)(e) of the Act.

We have heard the ld.AR and perused the material available on record. We find from the records that the assessee is a not shareholder in the lending company i.e M/s. ABP Pvt. Ltd. We also find from the records that lending was in the ordinary course of business. Accordingly, it definitely falls within the exception clause (ii) of section 2(22)(e) of the Act. We hold that provisions for deemed dividend could be invoked in the hands of the shareholder and not otherwise. In this regard, we place our reliance on the following judgments :- • In the case of Universal Medicare (P) Ltd reported in 190 Taxman 144 (Bom), wherein it was held as under:- "However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of section 2(22)(e) is correct. Section 2(22)(e) defines the ambit of the expression 'dividend’. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of section 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfillment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression 'dividend'. Consequently, the effect of clause (e) of section 2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any 3 M/s. ABP Entertainment Pvt. Ltd

We also find that the ld. CIT(A) had deleted the addition on this issue by observing as under:-

In view of the above, we find no infirmity in the impugned order of the ld.CIT(A) in deleting the addition made by the AO u/s. 2(22)(e) of the Act. The ground raised by the revenue is dismissed.

Next ground is to be decided in this appeal of the revenue is as to whether a sum of Rs.23,00,717/- could be treated as revenue expenditure in the facts and circumstances of the case.

The brief facts of this issue are that the assessee has incurred the following expenditure and claimed the same as revenue in nature:-

The ld.AO disallowed the aforesaid expenditure treating the same as capital in nature. On 1st appeal, before the ld. CIT(A) the ld.AR had stated that the brokerage charges, stamp duty and registration charges have been paid towards acquiring on lease an office space of 5650 sq.ft at the Gariahat Mall for the purpose of assessee’s business, which has not been disputed by the ld.AO. The lease rentals paid have been debited in the P & L account and were allowed as deduction by the ld.AO. It was also argued that there was no creation of capital asset warranting capitalization of the same in the facts and circumstances of the case. The ld. CIT(A) has relied upon the decision of the Hon’ble Bombay High Court in the case of Hoechst Pharmaceuticals Ltd reported in (1978) 113 ITR 877(Bom), wherein it has been held as under”- "1. It has been observed in Hoechst Pharmaceuticals Ltd. 's case [1978)113 ITR 877 (Bom) that the period of lease which was of five years could not be said to be such a long period that the assessee could be said to have acquired or brought into existence an advantage of an enduring character. It was mentioned further that the brokerage paid "was really in the nature of remuneration paid in order to avail of the services of the broker with a view of acquire the premises on rent". The five- year period was described in the said judgment as a relatively short period end, following the decision of the Supreme Court in India Cements Ltd. 's case [1966] 60 ITR 52 and the ratio spelt out therein it was held in Hoechst Pharmaceuticals Ltd. 5 case [1978] 113 ITR 877 (Bom) that the Tribunal had taken the correct view and allowed the expenditure as being expenditure of a revenue nature.

Accordingly, he held that the expenditure incurred for acquiring office space on lease for the purpose of assessee’s business was squarely allowable as revenue expenditure. Thus, he deleted the addition made by the ld.AO towards brokerage, stamp duty and registration charges. Aggrieved, the revenue is in appeal before us on the following ground:- 2. That on facts and circumstances, the Ld CIT (A) erred in allowing Rs.23,00,717/- as revenue expenditure.

We have heard the ld.AR, who vehemently supported the order of the ld.CIT(A). We find that the ld.CIT(A) had dealt with the issue in favour of the assessee by placing his reliance on the decision of the Hon’ble Bombay High Court in the case of Universal Medicare (P) Ltd (supra). We hold that the expenditure incurred by the assessee towards brokerage, stamp duty and registration charges for acquiring the office space of 5650 sq.ft at Gariahat Mall on lease for the purpose of assessee’s business was squarely allowable as revenue expenditure and cannot be added at any stretch of imagination as capital expenditure. We find no infirmity in the impugned order of the ld. CIT(A) on this issue. We uphold the same. Accordingly, this portion of ground no.2 raised by the revenue is dismissed.

In respect of filing fee of Rs. 2 lakhs, we find that the ld. CIT(A) wrongly had deleted the addition as the issue is settled by the Hon’ble Supreme Court in the Punjab State Industrial Development Corporation Vs. CIT reported in (1997) 225 ITR 792 against the assessee, wherein it was held that the filing fees paid to Registrar of Companies [ ROC] towards increasing of authorized capital is not allowable as revenue expenditure. The ld.AR during the course of hearing before us has fairly conceded to this issue. Accordingly, this portion of ground no.2 raised by the revenue before us is allowed to that extent.

In respect of legal & professional charges amounting to Rs.5,80,520/-, we find that the same was paid towards consultancy expenses for getting the licenses and clearances from the Ministry of Information & Broadcasting. The ld. CIT(A) appreciated the fact that 6 M/s. ABP Entertainment Pvt. Ltd business activity of the assessee is entertainment, media and event management. We also find that the ld. AO had merely disallowed the said legal & professional expenses by treating the same as capital in nature without adducing any reason for the same. We hold that these expenses are required for obtaining clearances/licenses in connection with business activity of the assessee. Accordingly, it is squarely eligible for deduction. Hence, we find no infirmity in the impugned order of the ld. CIT(A) on this issue. This portion of ground no.2 is dismissed. To sum, ground no. 2 raised by the revenue on various issues is partly allowed.

The last issue to be decided in this appeal of revenue is as to whether the disallowance u/s. 14A of the Act could be made to the extent of Rs.8,57,363/- in the facts and circumstances of the case.

The ld.AO mechanically had applied Rule 8D(2)(iii) of the I.T Rules 1962 for making addition u/s. 14A of the Act to the extent of Rs.8,57,363/-. On 1st appeal, the ld. CIT(A) deleted the same. Aggrieved, the revenue is in appeal before us on the following ground:- 3. that on facts and circumstances, the Ld CIT (A) erred in deleting the disallowances u/s 14A to the tune of Rs.8,57,363/-, which was calculated by the Assessing Officer as per Rule-8D because the assessee has earned Long Term Capital Gain/Loss (exempted income).

We have heard the ld.AR and perused the material available on record. We find that the total income earned by the assessee company was of Rs. 1,16,86,236/- out of which Rs. 1,10,50,000/- was “Profit on sale of Investment”. After indexation this profit becomes a long term capital loss and no tax was required to be paid. In this scenario, a question arises whether provisions of section 14A could be applied when there is no resultant income much less exempt income. We find that the assessee had incurred only long term capital loss after indexation and in order to invoke the provisions of section 14A of the Act, the existence of exempt income is sine qua non . The ld. AO has not disputed the long term capital loss claimed by the assessee and had allowed the same. Hence, in 7 M/s. ABP Entertainment Pvt. Ltd this scenario invoking the provisions of rule 8D(2)(iii) of IT Rules 1962 directly without recording the satisfaction in terms of rule 8D(1) is not warranted in accordance with law. In this regard, we place reliance on the following decisions :- • CIT vs Ashish Jhunjhullwala in G.A.No. 29900[2013 in ITAT No. 157 of 2013 dated 8.1.2014 rendered bv Calcutta High Court " While rejecting the claim of the. assessee with regard to expenditure or no expenditure, as. the case may be, in relation to exempted income. the AO has to indicate cogent reason for the same. From the facts of the present case. it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at 1/2% of the total value. In view' of the above and respectfully following the coordinate bench decision in the case 0/ J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT(A)”. • CIT vs R.E.1. Agro Ltd ill GA 3022 of 2013 ill 1TAT 161 of 2013 dated 23.12.2013 rendered by Calcutta High Court which approved the findings o this tribunal which was relied upon by the Learned AR

In view of the aforesaid facts and respectfully following the judicial precedents (supra), we have no hesitation in confirming the impugned order of the ld.CIT(A) in deleting the addition on this issue. Ground no.3 raised by the revenue is dismissed.

In the result, the appeal of the revenue is partly allowed as stated above. THIS ORDER IS PRONOUNCED IN OPEN COURT ON 10-02- 2016