Income Tax Appellate Tribunal - Mumbai
Sagar Entertainment Ltd, Mumbai vs Department Of Income Tax on 4 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'J' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI RAJENDRA (ACCOUNTANT MEMBER)
ITA No.344/Mum/2010
Assessment Year: 2006-07
Sagar Entertainment Pvt Ltd. Addl. CIT 11(1),
(formerly Sagar Entertainment Ltd), Mumbai.
Sagar India, Road No.12A, JVPD
Scheme, Vile Parle (W), Vs.
Mumbai-49
PA No.AAECS 6492 F
(Appellant) (Respondent)
ITA No.630/Mum/2010
Assessment Year: 2006-07
Addl. CIT 11(1), Sagar Entertainment Pvt Ltd.
Mumbai (formerly Sagar Entertainment Ltd),
Sagar India, Road No.12A, JVPD Scheme,
Vs. Vile Parle (W),
Mumbai-49
PA No.AAECS 6492 F
(Appellant) (Respondent)
Assessee by : Shri Arun Sathe
Respondent by: Shri Rakesh Ranjan
Date of hearing: 4 .12.2012
Date of pronouncement: 28 .12.2012
ORDER
Per B.R.Mittal, JM:
These cross appeals are filed by the assessee and the department for assessment year 2006-07 against order dated 6.11.2009 of ld CIT(A)-3, Mumbai disputing confirmation/deletion of additions made by the Assessing Officer.
2. Firstly, we take up the appeal filed by assessee being I.T.A. No.344/M/2010.
2 ITA No.344/Mum/2010 ITA No.630/Mum/2010Assessment Year: 2006-07
3. Ground No.1 of appeal is as under:
"Ld CIT(A) erred in enhancing the addition total income of Rs.72,000/- and also confirming addition of Rs.33,000 out of amount paid to Ms Rekha Chawala towards retainer ship fees and reimbursement of expenses."
4. At the time of hearing, ld A.R. submitted that above ground is not pressed for. Hence, Ground No.1 of appeal taken by assessee is rejected.
5. In Ground No.2 of appeal, assessee has disputed the order of ld CIT(A) in confirming addition of Rs.3,72,630 out of amount paid to Ms Shirin Benon towards liasoining work.
6. The Assessing Officer has stated that assessee was asked to explain and justify the business expediency towards commission payment of Rs.3,72,630/- to Ms Shirin Benon. He has stated that assessee was not able to explain as to why the commission had to be paid for liasoining for obtaining advertisements on Doordarshan. He has stated that no details of the said commission and the liasoning work done by Ms Shirin Benon have been furnished. Hence, AO stated that expenses cannot be allowed under the Income tax Act as the claim is not genuine business expenses. Ld CIT(A) also confirmed the action of AO for want of details of liaisoning work done by Ms Benon. He has further stated that assessee failed to identify and establish that the said expense in the name of Ms Benon was wholly and exclusively for their business and in commercial expediency. Hence, assessee is in further appeal before the Tribunal.
7. At the time of hearing, ld A.R referred to page 56 of additional paper book, which is a copy of confirmation of accounts and submitted that assessee also deducted TDS of Rs.19,004.00 on the said payment. Save and except above copy of confirmation accounts, assessee could not furnish any details in respect of bills submitted and the services rendered by Ms Benon to the assessee. Further, on perusal of said confirmation accounts, it is observed that assessee has also not paid commission charges of Rs.3,72,630 as claimed by the assessee. The above confirmation accounts do not establish that Ms Benon rendered any services to the assessee against which assessee has claimed commission charges of Rs.3,72,630. In view of above, we do not find any infirmity in the order of ld CIT(A) in confirming the disallowance made by the 3 ITA No.344/Mum/2010 ITA No.630/Mum/2010 Assessment Year: 2006-07 AO on account of claim of payment to Ms Benon. Hence, Ground No.2 of appeal is rejected.
8. In Ground No.3 of appeal, assessee has disputed the order of ld CIT(A) in confirming the addition of Rs.10,07,508 out of telephone and electricity expenses. It is relevant to state that above ground is connected with Ground No.(d) of appeal taken by department which reads as under:
"On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in directing the AO to delete the addition of Rs.3,35,836 (2/3rd electricity and communication expenses of Rs.20,15,016 minus amount confirmed by the CIT(A) at Rs.10,07,508) made on account of non-sharing expenses with sister concern."
9. The relevant facts are that assessee debited administrative expenses of Rs.43,94,248/- and TV production expenses at Rs.23,84,669/- for the financial year relevant to assessment year under consideration. AO in para 7.1 has given details of income and expenditure account and the details of TV serial expenses and administrative expenses. Further, AO has also given details of profit and loss account and schedule of relevant expenditure of sister concern of the assessee namely M/s. Sagar Films P Ltd. On perusal of said details, AO in para 7.3 has stated as under:
"7.3 From the details as above, the following issues are noted:
(a) Unlike in last year, the assessee has discontinued the practice of sharing expenses with the sister concern even though there is no change in method of conducting business over the last year.
(b) Expenses related to the salary to technicians, salary to staff, staff welfare and mess expenses and electricity and production office expenses pertaining to sister concern M/s. Sagar Films Pvt.Ltd, are clearly taken up by the assessee.
(c) It is also seen that M/s. Sagar Films Pvt. Ltd., sister concern having a large turnover does not have any staff on its roll with an intention of avoiding FBT and the entire staff expenditure have been passed on M/s. Sagar Entertainment Ltd., assessee concern. The assessee has not given any cogent reason as to why the common expenses have not been shared with the sister concern."
10. In view of above, AO vide para 7.4 has disallowed Rs.27,00,000 considering the expenses pertains to sister concern of the assessee and it reads as under:
"On account of the cumulative reasons as above, it is held that the assessee has taken up on itself the expenses of its sister concern. The expenses shared of last year amount to Rs.71,17,108 have not been shared in the current year. The ostensive reason has been to avoid payment of FBT in M/s. Sagar Films Pvt Ltd. This treatment cannot be accepted and expenses amounting to Rs.27 lakhs as in 4 ITA No.344/Mum/2010 ITA No.630/Mum/2010 Assessment Year: 2006-07 last year are hereby disallowed as pertaining to the sister concern of the assessee. It is ordered accordingly."
11. Being aggrieved, assessee filed appeal before the first appellate authority.
12. On behalf of assessee, it was contended that certain Group Companies were functioning from shared premises in earlier years and, accordingly, expenses of electricity and telephone were shared by them. It was stated that group companies i.e. M/s. Sagar Information Technology P. Ltd. (Mahda Premises), M/s, Sagar Lila Finvest Holding P. Ltd. (Sagar Villa, JVPD)., M/s. Sagar Film P.Ltd. (Anand Vihar, Bajaj Road, Vile Parle (W), have moved to different addresses during A.Y. 2006-07 and one of the company M/s. Sagar Systems Ltd. was not functioning during A.Y. 2006-07. It was also contended on behalf of assessee that compared to F.Y. 2004-05, electricity expenses had gone down from Rs. 31,00,000/- to Rs. 16.71 lakhs. Similarly, communication expenses (including telephone) had gone down from Rs. 10.80 lakhs (telephone Rs. 9.51 lakhs) to Rs. 3.43 lakhs (telephone exps. Rs. 3.17 lakhs) which clearly shows that with division of offices, the expenses have gone down. It was also stated that AO denied incurring expenditure on behalf of its group company M/s. Sagar Films P. Ltd. Ld CIT(A) after considering above submissions of assessee, vide paras 3.5.2 and 3.5.3 sustained the disallowance to Rs.10,07,508. The relevant paras read as under:
"3.5.2 Facts and material available on record are considered. The A.O. has not established nor evidenced the reasons for considering the expenses for M/s. Sagar Films P. Ltd. as having been borne by Appellant. The reason and grounds for arriving at the conclusion that staff expenses M/s. Sagar Films P. Ltd. were borne by Appellant ostensibly to avoid payment of FBT in M/s. Sagar Films P. Ltd. has not been established. Notwithstanding these observations, it is seen from appellant's submission in appellate proceedings, that the address of M/s. Sagar Lila Finvest India P Ltd continues to be that of appellant's own which is Sagar Villa, JVPD, Mumbai. Therefore, at least expenses of this sister concern continued to be borne by Appellant in the year under consideration. The date of shifting of other concerns has also not been provided by appellant.
3.5.3 The appellant's claim of all sister concerns having moved away from appellant's premise w.e.f the beginning of the previous year A.Y. 2006-07 is therefore not established conclusively and in fact proven wrong in respect of M/s. Sagar Lila Finvest India P. Ltd. by appellant's subsequent submission during appellate proceedings. Total expense debited on electricity and communication expense (telephone) are Rs.20,l5,016/- for the year under consideration. In the immediately previous year, the appellant had borne 1/3rd of these expenses and collected balance from sister concerns. Considering Appellant's submissions and the facts that one sister concern continued at the same premise and that dates of moving out other concerns has not been evidenced, disallowance this year is 5 ITA No.344/Mum/2010 ITA No.630/Mum/2010 Assessment Year: 2006-07 restricted to one half of expenses under these heads i.e. at Rs.10,07,508. Appellant gets partial relief in respect of this ground."
13. Hence, assessee as well as department are in appeal before the Tribunal.
14. On behalf of assessee, it was contended that expenditure as claimed by the assessee on account of telephone and electricity are only on behalf of assessee and the disallowance as sustained by ld CIT(A) is not justified. He submitted that the disallowance sustained by ld CIT(A) be deleted.
15. On the other hand, ld D.R. submitted that assessee could not furnish details as to when sister concerns shifted their office. He further submitted that some of the sister concerns of the assessee continued to function from the common premises. He further submitted that in respect of expenses for one of the sister concern namely M/s. Sagar Films Pvt Ltd., the expenses were borne by the assessee. Hence, order of ld CIT(A) to confirm the disallowance of Rs.27 lakhs is justified.
16. We have considered submissions of ld representatives of parties and orders of authorities below.
17. We observe that department has not disputed the fact that some of the sister concerns namely, M/s. Sagar Information Technology P. Ltd. and M/s, Sagar Lila Finvest Holding P. Ltd had shifted their offices to different places. The department has also not disputed the fact that one of the sister concern namely, M/s. Sagar Systems Ltd. was not functioning during A.Y. 2006-07. We also observe that some of the expenses like electricity expenses and communication expenses had also gone down substantially during the assessment year under consideration as compared to preceding assessment year. Considering said facts, we are of the considered opinion that ld CIT(A) has reasonably sustained the disallowance to Rs.10,07,508 in the facts and circumstances of the case particularly, when assessee has not been able to controvert the facts as observed by ld CIT(A). In view of above, we uphold the order of ld CIT(A) and reject Ground No.3 of appeal taken by assessee and Ground No.(d) of appeal taken by department.
18. In Ground No.4 of appeal, assessee has disputed the order of ld CIT(A) in respect of disallowance of Rs.1200 u/s.14A out of expenditure debited by the assessee.
6 ITA No.344/Mum/2010 ITA No.630/Mum/2010Assessment Year: 2006-07
19. We have heard ld representatives of parties and have perused the orders of authorities below. We observe that assessee invested a sum of Rs.2.4 lakhs in M/s. Sagar Systems Ltd., as equity capital. AO made adhoc disallowance of Rs.1200 u/s.14A. Ld CIT(A) has confirmed the said disallowance considering that the disallowance made by the AO is nominal. During the course of hearing, ld A.R. could not dispute the fact of making investment in equity shares of sister concern M/s. Sagar Systems Ltd. Considering the amount of Rs.1200, we are of the considered view that said disallowance of Rs.1200/- towards administrative expenses is reasonable and no interference is called for. Ground No.4 of appeal is rejected.
20. Now we take up appeal filed by department being I.T.A. No.630/M/2010.
21. In Ground No.(a) of appeal, department has disputed the deletion of addition made by the AO u/s.40A(3) at Rs.44,634/- .
22. We observe that assessee paid a sum of Rs.1,08,970/- to Shri B.C. Patel, a retainer for studio maintenance/caretaker towards various maintenance expenses. Assessee also paid a sum of Rs.1,14,200 to Shri B.C.Patel for electricity bill of GEB. AO stated that said amount has been paid in cash and, accordingly, disallowed 20% of the said expenditure which comes to Rs.44,634/- u/s.40A(3) of the Act. However, ld CIT(A) deleted the said disallowance by considering that electricity payment was paid by the assessee by cheque which was returned due to insufficient funds and thereafter assessee had only option for making the payment in cash, which assessee did through Shri B.C.Patel by depositing the electricity bill. It falls within the exception laid down under Rule 6DD(k) of I.T.Rules, 1962.
23. During the course of hearing, ld A.R. submitted that a sum of Rs.1,08,970/- was paid to Shri B.C.Patel towards maintenance/caretaker during the year for maintaining studio and none of the payment exceeded Rs.20,000 at a time. He further submitted that the payment of electricity dues was paid in cash through Shri B.C.Patel as the assessee had no option because payment made by cheque was dishonored. Ld D.R. has not controverted above facts save and except relying on the order of AO.
7 ITA No.344/Mum/2010 ITA No.630/Mum/2010Assessment Year: 2006-07
24. Considering above facts of the case and submission of ld A.R. we are of the considered view that ld CIT(A) has rightly held that the disallowance made by the AO is not justified and accordingly, deleted the same. We uphold the order of ld CIT(A) and reject Ground No.(a) of appeal taken by department.
25. In respect of Ground No.(b) of appeal, department has disputed the deletion of addition of Rs.12,000 (20% of Rs.60,000) made u/s.40A(3) of the I.T.Act, 1961 on account of payment to Ms Rekha Chawla.
26. We have heard ld representatives of parties and orders of authorities below. We observe that assessee paid a sum of Rs.1,65,000/- to Ms Rekha Chawla. The said ground is connected with Ground No.1 of appeal taken by the assessee, which was not pressed for. However, in respect of payment of Rs.60,000/- to Ms Rekha Chawla, we observe that said payment was made for the services rendered by her during the assessment year under consideration. He submitted that said payment of Rs.60,000/- was not paid at one time. Assessee also deducted TDS on above amount. We are of the considered view that said payment was made to Ms Rekha Chawla for services rendered and regular remuneration was paid, on which TDS was also deducted. Therefore, ld CIT(A) has rightly considered that the provisions of section 40A(3) is not applicable to the said payment of Rs.60,000/-. Accordingly, we uphold the order of ld CIT(A) and reject Ground No.(b) taken by department.
27. Ground No.(c) reads as under:
"(c) On the facts and in the circumstances of the case and in law, ld CIT(A) has erred in directing the AO to delete the addition of Rs.13,36,919 on account of commission payments made to (a) Gaura Vision and (b) Kishore Chawla, though the assessee has not produced any proof substantiating the work done by these persons to justify the commission."
28. Assessing Officer has stated that assessee was asked to explain and justify the business expediency towards commission payment of Rs.11,90,619 to M/s. Gaura Vision and Rs.1,47,300/- to Mr Kishore Chawla. Assessee stated that commission was paid to them for obtaining various advertisements on Doordarshan during telecast of serials. Therefore, payment was made for the purpose of business expediency. AO did not accept above explanation of the assessee and stated that the commission claimed to 8 ITA No.344/Mum/2010 ITA No.630/Mum/2010 Assessment Year: 2006-07 have to been paid is misnomer for payment of non-business and illegal gratification. Hence, AO disallowed the same. Being aggrieved, assessee filed appeal before ld CIT(A).
29. During the course of hearing of the appeal before ld CIT(A), assessee filed details of commission paid to M/s. Gaura Vision and Mr Kishore Chawala. It was contended that commission payable to M/s. Gaura Vision was towards sales order for advertisements slots booked for assessee's TV serials 'Ankehn' for different episodes and payment of commission paid to Shri Kishore Chawla was for procuring business of the telecasting serials on regional channels. Ld CIT(A) has stated that the AO has adduced no evidence on which such a conclusion could be drawn that the payment was made to them for non-business and illegal gratification. The same has not been substantiated. Ld CIT(A) has further stated that AO has not doubted the genuineness of the expenditure nor treated it as not being incurred wholly and exclusively for assessee's business. Accordingly, ld CIT (A) has allowed the payment of commission debited towards Gaurav Vision and Mr Kishore Chawla as business expenses. Hence, department is in appeal before the Tribunal.
30. During the course of hearing, ld D.R. relied on the order of AO and on the other hand, ld A.R. relied on order of ld CIT(A).
31. Considering the reasoning as mentioned by ld CIT(A) and in the absence of any submission of ld D.R., to controvert the observation of ld CIT(A) (supra), we do not find any reason to interfere with the order of ld CIT(A). Hence, we uphold the order of ld CIT(A) and reject Ground No.(c) of appeal taken by department.
32. Ground No.(e) reads as under:
"(e) On the facts and in the circumstances of the case and in law, ld CIT(A) has erred in directing the AO to delete the addition of Rs.34,71,375 being interest expenses without appreciating the fact that the entire advances given to the directors or sister concerns were interest free."
33. AO has stated that assessee has taken substantial overdraft for running business. It is stated that the opening balance of borrowings was Rs.2.71 crores, the 9 ITA No.344/Mum/2010 ITA No.630/Mum/2010 Assessment Year: 2006-07 closing balance as on 31.3.2006 was of Rs.1.68 crores. It is stated that assessee debited a total interest of Rs.36.70 lakhs (wrongly mentioned as Rs.36.70 crores due to typographical mistake) on account of the overdraft and other loans. AO in para 8.1 has stated details of loans and advances given by the assessee to its sister concern as under:
Advance recoverable in cash or in kind or for value 37189085.43 37681058.534 to be received (inclusive of deposit to director & his associate of Rs.29205461 towards property taken on lease.
Loans to the persons/firms/companies where 26397532.25 26479532.25 directors are related /interested (maximum outstanding during the year Rs.26479532) 63586617.68 64160590.78
34. Assessee stated that these are old advances receivable. However, AO stated that assessee cannot be allowed to claim all advance of moneys to sister concern out of own funds in the earlier period and be allowed to have taken overdraft from banks for operational capital needs. He stated that assessee could have as well received these amounts back from sister concerns and others in which directors are substantially interested. AO considering the average borrowed capital of Rs.2.195 crores and considering the fact that amounts left with sister concerns are in excess of the amounts borrowed, disallowed the entire interest expenditure debited of Rs.34,71,375. Being aggrieved, assessee filed appeal before ld CIT(A).
35. On behalf of assessee, it was contended that the total interest charges were as under:
1) Bank working capital finance including bill discounting and overdraft Rs.33,69,714.
2) Term loan and car loan interest Rs.70,072.
3) Paid to others Rs.31,590/-.
36. It was also stated before ld CIT(A) that interest free advances to Shri Ramananda Sagar of Rs.2.35 crores and M/s. Sagar Art Corporation of Rs.35 lakhs was towards security deposits for using their premises i.e utilization of funds for purpose of business which was made at the time of incorporation of the assessee company many years earlier and out of company's own capital. It was also stated that a sum of Rs.2.64 crores was inherited by the assessee from M/s. Sagar Tourist Resorts Ltd., at the time of 10 ITA No.344/Mum/2010 ITA No.630/Mum/2010 Assessment Year: 2006-07 incorporation of M/s. Sagar Art International with assessee company and other trade advances of Rs./24.13 lakhs. The said advances except trade advances were made by M/s. Sagar Art International out of issued and paid up capital of the assessee. It was further stated that assessee availed working capital financing, i.e. bills discount /overdraft to part finance to its debtors and inventories and there was no diversion of bank finance to advance interest free money. Ld CIT(A) after considering above facts vide para 3.6.2 deleted the disallowance of interest made by the AO which reads as under:
".3.6.2 Appellants stated further that the company availed working capital financing i.e bills discount /overdraft to part finance to its debtors and inventories. There was no diversion of bank finance to advance interest free money and therefore to disallow interest paid to bank would amount to disallowing legitimate business expenditure of the company."
37. Hence, this appeal by the department.
38. During the course of hearing, ld D.R. submitted that assessee has advanced its own money and charged no interest and whereas for its business purposes, had used borrowed fund. Therefore, assessee could have saved interest payment had assessee used its own money in stead of giving interest free advances to its sister concerns. Ld D.R. relying on the decision of Hon'ble of Hon'ble Supreme Court in the case of S.A. Builders vs CIT, 288 ITR 1(SC) submitted that if the assessee has advanced interest free loans to its sister concern, which is not for commercial expediency, assessee cannot claim deduction of interest in respect of amount borrowed for the purposes of its business. Ld D.R. also placed decision dated 10.7.2008 of ITAT in the case of ACIT vs. Landmark Builders P. Ltd., in I.T.A. No.2937/M/2002 and submitted that in the said case, it was held that test of commercial expediency has to be applied to allow interest u/s.36(1)(iii) of the Act.
39. On the other hand, ld A.R. submitted that there is no nexus of the borrowed funds by the assessee and interest free funds given by the assessee to its sister concern. He submitted that borrowed funds were utilized by the assessee for its business purposes. He further submitted that interest liability is on account of bank working capital facility and the said borrowed fund was never utilized to give interest free advance to any of its sister concerns.
11 ITA No.344/Mum/2010 ITA No.630/Mum/2010Assessment Year: 2006-07
40. We have carefully considered the submissions of ld representatives of parties and perused the orders of authorities below. We have also gone through the decisions relied upon by ld D.R.
41. We observe that there is no dispute to the fact that assessee has not used borrowed funds for giving interest free advances to its sister concerns. The borrowed fund has been utilized by the assessee for its business purposes. Hence, there is no nexus between the interest free advances given by the assessee to its sister concerns and money borrowed by the assessee on which interest has been claimed by the assessee in its profit and loss account. The case of S.A. Builders (supra) relied upon by ld D.R. is not applicable to the facts of the case as in that case, Hon'ble Supreme Court observed that assessee borrowed funds from the bank and lent some of it to its sister concern (subsidiary) as interest free loan. In that context, it was held that there was not commercial expediency to advance to sister concern and, accordingly, interest was disallowed, which is not a case before us. Hence, we do not find any infirmity in the order of ld CIT(A) to delete the disallowance of interest made by the AO. Accordingly, we uphold order of ld CIT(A) and reject Ground No.(e) of the appeal taken by department.
42. In the result, appeal filed by assessee is partly allowed and whereas appeal filed by department is dismissed.
Pronounced in the open court on 28TH December, 2012
SD/- Sd/-
(RAJENDRA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 28th December, 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),3, Mumbai
4. Commissioner of Income Tax, XI , Mumbai
5. Departmental Representative, Bench 'J' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI