UFO MOVIEZ INDIA LTD.,MUMBAI vs. ADDL.CIT-27(1), NEW DELHI

The appeals have been preferred by the Assessee & Revenue against the order dated 23.01.2018 of CIT (A)-9, New Delhi (hereinafter referred as Ld.

ITA No.3728/Del/2018 2 First Appellate Authority or in short Ld. ‘FAA’) arising out of an appeal before it against the order dated 14.12.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle 27(1), New Delhi (hereinafter referred as the Ld. AO).

Ld. AO has made adjustment in the book profit by making addition of (Rs.51330088 - Rs.264,572/-) mainly on account of disallowance made u/s. 14A. As regards the issue in relation to section 15JB, the Ld. 5.3.1 Counsel for the assessee in support of the aforesaid grounds of appeal submitted that disallowance computed as per Rule 8D of the Rules cannot be applied U/s. 115JB of the Act and the provisions of section 14A are restricted to computation of income under normal provisions of the Act which cannot be extended to the computation of income U/s. 115JB of the Act. 5.3.2 The issue of disallowance made u/s 14A to be added in the book profit to compute capital MAT has been decided in several judgments by the Hon’ble Courts/Tribunals. Reliance is placed on the decisions of ITAT Delhi Bench in the case of Goetze (India) Ltd. vs. CIT (200(0

32. SOT 101 and ITAT Ahmadabad Bench in the case of Cadila Healthcare Ltd. Vs. AC/7'in ITA No. 354/Ahd./2012. 5.3.3 Reliance is also placed on the judgment of Hon’ble ITAT Delhi, (Special Bench) in case of ACIT vs Vireet Investment Pvt. Ltd. wherein it has been held interalia that: "The computation under clause (f) of explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with rule 8D of the Income Tax Rules, 1962. 5.3.4 In view of above, the issue is found to be squarely covered in the favour of the appellant and therefore, this ground of appeal is allowed with the direction to the Ld. AO to recompute the MAT u/s. 115JB in the line of decision referred above.” 2.2 Then second addition was made on the basis of information in Form 3CD report, where ld. AO observed that there was delay in deposit of the employees contribution on account of ESI payments and therefore, making a disallowance u/s 36(1)(va) of the Act. The addition was made of Rs. 13,70,275/- which has ITA No.3728/Del/2018 4 been deleted by Ld. CIT(A) on the basis of judgment of Hon’ble Delhi High Court in the case of CIT vs. Aimil Ltd., reported at 321 ITR 508 (Delhi).

2.3 The third addition Ld. AO made was on the basis of information available in form 3CD that there were certain prior period expenses on account of advertisements, business promotion expenses which have been debited to P & L Account during the year. Thus, the disallowance of Rs. 197175/- was made. The same was not challenged before Ld. CIT(A).

2.4 The fourth addition Ld. AO made by holding the entry tax of Rs.19,35,583/- to be of capital nature on the basis that;

8. The assessee has not submitted any documentary proof to substantiate that entry tax has been paid only on the consumables and towards capital assets movement. Apart from earning income from software decryption and advertisement revenue one of the major source of income of the assessee is from lease rental income of Non- DCI equipment and DCI equipment. One of the activity in earning from lease rental income from Non-DCI and DCI equipment includes transportation and installation of the Non-DCI and DCI equipment to various location of the country. These equipment are in a nature of capital asset and the same have been shown as fixed assets in the balance sheet of the assessee. Therefore entry tax paid on account of movement of these assets is required to be treated as incurred on capital assets as the cost acquisition of fixed assets. Then cost of assets not only includes the cost of purchases but also any additional costs incurred in bringing the fixed asset into its present location and condition(e.g. delivery costs). Therefore, the entry tax paid to the extent paid in proportion of sales of services earned from lease of Non-DCI and DCI equipment by the assessee is treated to be paid on capital good and balance is treated to have paid towards consumables.

“5.5.2 In the impugned order, Ld. AO is found to have declined the claim of the assessee by simply stating that these equipments are in a nature of Capital asset and the same have been shown as fixed assets in the balance sheet of the assessee. Therefore entry tax paid on account of movement of these assets is required to be treated as incurred on capital assets as the cost acquisition of fixed assets. 5.5.3 The contention of the appellant is that the entry tax paid on sale of products is a revenue expenditure. He also submits that entry tax cannot be considered to be the cost of acquisition of the fixed asset merely because the same is paid on movement of a capital asset from one state to another. The payment of entry tax does not lead to any addition / improvement in the value of lease equipment’s and moreover, capitalizing the value of item every time it moves from one state to another would not be tenable. 5.5.4. It is noted that the said assets (Non DCI equipment and DCI equipment) though has been categorized as fixed assets but they are basically movable equipments on which lease rental income is earned by the appellant. Those assets are already put to use for business purposes. I find that entry tax is akin to tolltax which is revenue in nature. Another noticeable fact is that entry tax is not an expenditure which could be construed to be making value addition to the said equipment. It is unreasonable that since these equipments are regularly and frequently transported from one state to another, entry taxes on every movement could be added to the cost of equipment. 5.5.5 In view of factum of the case and more particularly the nature of expenditure (entry tax), related assets and rental income thereon, I am inclined with the view of the appellant that the amount spent on entry tax is revenue in nature. Accordingly, addition of Rs.1777414/- is directed to be deleted. Hence, this ground of appeal is decided in the favour of appellant.”

9. As per notes to audit report the assessee has stated to have changed its accounting policy by changing the method of valuation of inventories from first in first out (FIFO) basis to weighted average cost basis. This has resulted in increase in consumption and decrease in closing stock by Rs. 16,36,709/-. The assessee was asked to justify the change in accounting policy. The assessee vide its letter dated 01.12.2016 filed reply and stated that the assessee company has changed its accounting policy for better presentation of Inventories.

ITA No.3728/Del/2018 6 The reply of the assesse was considered but not found to be satisfactory. The change in accounting policy has resulted in decrease in profit. Therefore, without any reasonable cause change in accounting policy cannot be permitted. The assessee has not given any satisfactory reason that lead to change in accounting policy. Therefore, an addition of Rs. 16,36,709/- is made and added back to total income of the assessee.”

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In view of above and due deference to the judgment by Hon’ble Courts (supra) , the ground of appeal is decided in favour of the appellant. Accordingly, addition of Rs. 1636709/- is directed to be deleted.”

5. Lastly, Ld. AO had made sixth addition on account of advertisement expenses being considered to be disproportionate to the revenue earned and the same were deleted by ld. CIT(A) with following relevant findings in para 5.7.3 “5.7.3 From the facts of the case and submission of the appellant it is noted that the Ld. AO has made the said disallowance @ 50% of expenses claimed on adhoc basis on the surmises that increase in expense does not commensurate with the increase in revenue. This is not the case of Ld. AO that the said expenditure is on account of payment to any related party and therefore, issue of reasonableness can be imported. From, the impugned order it is also noted that the Ld. AO has not brought out a finding that claimed expenditure is either bogus or not related to business or not supported with bills and vouchers. In fact, the claim of expenditure is duly recorded in the books of accounts and supported by relevant documents. Importantly, the expenditure is found to be on account of payment to the NFDC (National Film Development Corporation, a Govt, of India body).”

"i) On the facts and circumstances of the case, the Ld. CIT(A) has erred in restricting the addition made u/s 14A of the Act to the exempt of Rs. 31,70,437/- and in directing the A.O. to recomputed the MAT provision u/s 115JB of the Act, without considering the additions made u/s14A of the Act." ii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.13,70,275/ made on account of late payment of ESI & Provident Fund. iii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in treating entry taxes paid in connection of sale of services as ITA No.3728/Del/2018 8 revenue expenditure and hence in deleting the addition of Rs.17,77,414/- made under this head. iv) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.16,36,709/- made on account of change in valuation method of inventory without considering the fact that change in accounting policy has resulting the decrease in profit. v) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.95,20,860/ made on account of advertising expenses without considering the logic of the addition made by the AO." vi) That the appellant craves, leave or reserving the right to amend modify, alter, add or forego any around(s) of appeal at any time before or during the hearing of this appeal.”

Based on the facts and circumstances of the case, UFO Moviez India Limited (hereinafter referred to as the ‘Appellant’) craves to prefer an appeal against the order dated 23 January, 2018 issued by the learned Commissioner of Income-tax (Appeals)-9, New Delhi [‘CIT(A)’] (received by the Appellant on 15 February 2018), Commissioner of Income Tax-27(1), New Delhi (‘AO’_ under section 143(3) of the Income-tax Act, 1961 (‘Act’) on the following grounds : General Ground 1. On the facts and circumstances of the case, the Hon'ble CIT(A) has erred in assessing the total income of the Appellant at Rs. 34,24,13,654 as against the returned income of Rs. 33,92,43,216 under normal provisions of the Act. Disallowance under section 14A of the Act read with Rule 8D of Income-tax Rules. 1962 ('Rules')

1. On the facts and circumstances of the case, the Hon'ble CIT(A) has erred in upholding the additional disallowance under section 14A of the Act made by the learned AO by directly invoking Rule 8D of the Rules, ITA No.3728/Del/2018 9 and without recording his satisfaction as to why the suo moto disallowance of Rs. 2,64,572 made by the Appellant was unreasonable and unsatisfactory.

2. On the facts and circumstances of the case, the Hon'ble CIT(A) has erred in Disregarding the fact that the investments were made by the Appellant out of its own funds and not out of borrowed funds.

3. On the facts and circumstances of the case, the Hon'ble CIT(A) has erred in disallowing the expenditure to the extent of the exempt dividend income earned without appreciating the fact that expenditure incurred towards earning exempt income was suo moto disallowed by the Appellant and no further expenditure has been incurred in earning the aforesaid exempt income.

4. Without prejudice to the above grounds, on the facts and circumstances of the case, the Hon'ble CIT(A) has erred in affirming the learned AO's action of invoking Rule 8D of the Rules and mechanically computing the disallowance under section 14A of the Act read with Rule 8D of the Rules, without appreciating that: 4.1 the learned AO had erred in not appreciating the fact that most of the Appellant's investments were in its subsidiaries/ group companies (strategic investments) and the said investments were made with a view to enhance its business and not to earn exempt dividend income;

4.2 the learned AO had erred in considering the interest expenditure on term loans and vehicle loans, bank charges and other borrowing costs (loan processing fees) for the purpose of computing disallowance under the provisions of Rule 8D(2)(ii) of the Rules; 4.3 the learned AO had erred in not considering the fact that the investments were made by the Appellant out of its own funds and not out of borrowed funds. The Appellant respectfully submits that each of the above grounds/ sub-grounds of appeal are without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend, substitute and/or ITA No.3728/Del/2018 10 modify in any manner whatsoever all or any of the above grounds/ sub-grounds of appeal at any time before or at the time of the appeal.” 8. Heard and perused the record.

9. We first take up the appeal of the assessee which is also connected with the ground No.1 of the appeal of the Department. The ld. DR was unable to impress that any proposition of law countering the one relied by the ld.CIT-AR that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the Income-tax Rules, 1962.

9.1 At the same time, as we go through the order of the ld.CIT(A), it comes up that he has observed in para 5.2.5 that:

“5.2.5 On careful consideration of the fact of the case I find that the Ld. AO has very categorically made his analysis and recorded satisfaction for computing the disallowance u/s. 14A in as much as he was in the complete seize of the fact regarding suo-moto disallowance made by the assessee in its ITR. Under the circumstances, I hold that the Ld. AO has duly fulfilled the requirement of recording of satisfaction and thus the ratio of Hon’ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Limited V. DCIT reported in (2017) 81 taxmann.com 111(SC) is apparently met with in the impugned order.” 9.2 But when we look at the para 5 of the assessment order where in Ld. AO has made discussion with regard to disallowance u/s14A read with Rule 8D, there is not a word about taking notice of the suo-motto disallowance of assessee and that the same were not discarded by recording proper satisfaction. In assessee’s own case for AY 2016-17 vide ITA 8014/Del/2019 order dated 10/5/23, mechanical application of Rule 8D has been considered and disallowance deleted. Thus we are inclined to allow the ground in appeal of assessee and reject the ground in appeal of Revenue.

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