DCIT, CIRCLE- 27(1), NEW DELHI vs. UFO MOVIEZ INDIA LTD., NEW DELHI

PER ANUBHAV SHARMA, JM:

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.

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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).

2.1 The first addition was made by way of disallowance u/s 14A r.w.r. 8D as the Ld. AO observed that assessee company has made investments in shares with other companies and income of which does not from part of total income of the assessee. This addition of Rs. 5,10,65,516/- was considered by Ld. CIT(A) and was decided partly in favour of the assessee with following findings ; “5.2.8 In the case of appellant, it is noted that investment has been made in the Indian subsidiaries and also in foreign companies claimed to be strategic investment. Also, the dividend arising out of investment in foreign companies is taxable in India U/s. 115BBD of the Act. This fact coupled with ratio of decision of the jurisdictional High Court of Delhi in the case of M/s. Joint Investment Pvt. Ltd. Vs. CIT - (2015) 372ITR 694 supra leads to the conclusion that the maximum amount of disallowance of expenditure may be limited to the amount of exempt income claimed by the appellant. Therefore, respectfully following the decision of jurisdictional High Court supra, the disallowance u/s. 14A r.w.r. 8D is directed to be limited to Rs.3170437/-. Hence, the appellant gets relief of Rs.48159651/- (Rs.51330088 - Rs.3170437). Accordingly, this ground of appeal is partly allowed in favour of the appellant. 5.3 Ground No.2 (2.7) is directed against the adjustment of book profit u/s 115JB of the Act. From the impugned order it is noted that

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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

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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.” 3. Ld. CIT(A) has deleted the same on the basis of following relevant findings ;

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“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.

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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.” 4. The fifth addition was made by Ld. AO on account of change in valuation method of inventory considering the fact that change in accounting policy has resulted in the decrease in profit

4.1 The same was deleted by Ld. CIT(A) on the basis of relevant findings in para 5.6.5 “5.6.5 It is noted that the Ld. AO has disputed the claim of the appellant on the ground that reply submitted was not found satisfactory. The appellant reply before Ld. AO and also at the time of appellate proceeding is the same that change in method of valuation from FIFO to weighted average method has been adopted to have a more scientific and better presentation of its valuation of its stock. It is also noted that the said change in method is not confined to the particular year (the previous year) to have any immediate gain. Rather the said change in method has been adopted in the succeeding financial years as per audited accounts. Under these circumstances, when the appellant has freedom to adoptthe method of valuation as held in the case of CIT vs McMillan & Co. 33 ITR 182 (Supreme Court) and also the fact that change of method is not prohibited (Reform Flour Mills pvt. Ltd. vs CIT 114 ITR 227), the change in method of valuation adopted by the appellant in the previous year relevant to the AY 2013-14 and demonstrated to be regularly adopted in future years, the same needs to be presumed to be correct unless or until Ld. AO has reason based on facts that the said system does not reflect true and correct profits (CIT vs Woodward governor India P. Ltd. 179 taxmann 326 Supreme Court)

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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.”

"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

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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.” 7. The Assessee is in appeal raising following grounds :- “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,

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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

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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.

9.1 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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basis. Thereafter, in AY 2015-16, the inventories have been again determined on weighted average basis. Thus, it appears that after changing from first-in-first- out basis, in the present assessment year 2013-14 weighted average cost basis was adopted then in the next assessment year 2014-15 the assessee has returned to first-in-first-out basis. Thereafter, in the next assessment year 2015-16 the assessee has again come back to weighted average method. The ld. CIT(A) has interfered in the order of the AO on the basis that the change in the method is not confined to a particular year to have immediate gain, rather, the said change in method has been adopted in succeeding financial years as per the audited accounts and, thus, appreciating the freedom of the assessee to adopt the method of valuation, made the deletion. However, on the basis of auditor’s report furnished before us for AY 2014-15 and 2015-16 along with their relevant assessment orders, we are of the view that the assessee is making a random choice in the method of valuation and, thus, on the principle of consistency, he was not entitled to be benefitted and the ld.CIT(A) seems to have accepted the claim of the assessee without appreciating the actual evidences in that regard. Thus, we consider it an appropriate case to restore the issue to the file of the ld.CIT(A) to examine the subsequent year’s claim of the assessee in regard to the valuation of inventories and thereupon pass a fresh order on the issue. 13. In regard to ground No.5, in the appeal of the Revenue, we find that the ad hoc disallowance had no basis while the ld.CIT(A) has appreciated the fact that expenditures were not made to any private party, but, to National Film Development Corporation, which is a government body. It appears that the ld. AO, without appreciating the nature of business of the assessee requiring extensive promotion of its business activities, has drawn a conclusion on the basis of revenues generated. Nature of business of the assessee was such that the

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revenue depends not on anything produced by the assessee, but, on viewership attendance created by the shows. Thus, there is no error in the findings of the ld.CIT(A).

Order pronounced in the open court on 11th December, 2023. Sd/- Sd/- (N.K.BILLAIYA) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 11.12.2023 dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT AR, ITAT, New Delhi