Income Tax Appellate Tribunal - Hyderabad
M/S Social Media India Limited,, ... vs Assessee on 25 March, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA.No.390/Hyd/2013
Assessment Year 2009-2010
M/s. Social Media India vs. ACIT, Circle 3(2)
Ltd., Hyderabad - 034. Hyderabad.
PAN AALCS-0774-M
(Appellant) (Respondent)
For Assessee : Mr. PVSS Prasad
For Revenue : Mr. P. Somasekhar Reddy
Date of Hearing : 25.03.2014
Date of pronouncement : 28.05.2014
ORDER
PER B. RAMAKOTAIAH, A.M.
This is assessee's appeal against the order of the CIT(A)-IV, Hyderabad dated 30.01.2013. Assessee has raised seven grounds on six issues, mostly disallowing claims of assessee as a capital loss or as capital expenditure by A.O. as confirmed by the CIT(A).
2. Briefly stated, assessee filed return of income declaring loss of Rs.3,39,20,945/-. A.O. made various disallowances thereby assessing the total income of Rs.9,58,37,060/-. Ld. CIT(A) gave relief on few issues on which there was no appeal by Revenue. Assessee is aggrieved on the disallowances confirmed by the CIT(A).
3. We have heard Ld. Counsel and Ld. D.R. and perused paper book placed on record containing pages 1 to 2 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd 316 and case law paper book. Ground no 1 is general in nature.
4. Ground No.2 pertains to the disallowance of Rs.1,21,21,330/- ie. advances written off by assessee by debiting to P & L account. This amount was claimed as loss. It was submitted by assessee that it had entered into contracts with various organisations for utilising space for advertisement, that it had made earnest money deposits for the purpose, that the charges had to be paid whether assessee was able to generate revenue or not, that assessee was unable to generate enough revenue and decided to terminate the business altogether. In the process, assessee had to forego earnest money deposit and advance payments made. Assessee relied on the following decisions :
(1) CIT vs. Textool Co. Ltd. 135 ITR 200
(2) Thackers H.P. & Co. vs. CIT 134 ITR 21
(3) JSW Steel Ltd. vs. ACIT 9 taxmann.com 77 (Bang.)
5. Ld. CIT(A) while analyzing various case law came to the conclusion that deposits written off were capital in nature. The detailed order on this issue is as under :
7.2. I have given the matter due consideration. While deciding a similar Issue, the Supreme Court, In the case of CIT Vs. Naintal Bank Ltd. [1965] 55 ITR 707 (SC), held that every loss is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. This was the case of a banking company and the court held that the loss of cash in a dacoity was incidental to the business since cash was the stock-in-
trade of the business. Similar view was also taken by the Hon'ble Supreme Court in the case of CIT vs. Mysore Sugars Co. Ltd. (1962) 46/649 (SC).
7.3 The crucial issue to be considered in the appellant's case is whether the loss has been incurred in the course of the business and whether it is incidental to the running of the 3 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd business. In the case of Aztec Software and Technology Services Ltd. v . ACIT [2007] 294 ITR(AT) 32 (Bang) (58), the assessee had challenged disallowance of payment of Rs.1 crore on termination of lease as a "capital expenditure". The amount in question was paid for taking a property on lease for expanding its business. Subsequently, the company decided not to carry the lease and agreement was terminated pre-maturely and the sum of Rs.1 crore was paid to the lessor under a negotiated settlement towards premature termination of lease. The ITAT held that the amount of Rs. 1 crore given as advance and written off under the settlement could not be treated as expenditure of revenue nature since it was connected with apparatus with which the business was to be carried.
7.4. In the case of Hasimara Industries Ltd. Vs. CIT (1998) 230 ITR 927 (SC), a sum of Rs. 20 lakhs had been deposited by the assessee with the licensor company for the purpose of security the licence under which the assessee had acquired the right to work the licensor's cotton mills. The Court held that the deposit was made for the purpose of acquiring a profit-making asset to carry on business in cotton and could not, therefore, be held to have been made on the revenue account or the loss thereof be treated as a business loss. The loss thereof was a loss suffered on the capital account and could not be deducted.
7.5. I find that the ratio of these two decisions applies squarely to the appellant. The appellant had made a deposit with the various organisations which was necessary to be made to enable the appellant to be granted the right to use the advertisement space for commercial exploitation. The deposits enabled the appellant to acquire an apparatus or profit making asset for conducting its business. The expense was not on revenue account and its loss, therefore, cannot be treated as a business loss.
7.6. In the case of Textool Company Ltd., the assessee had paid an advance as premium to cover the entire imports under the license granted to it. The assessee had been unable to utilize the license in full as a result of which the premium to the extent of the shortfall stood forfeited. The court held that when the assessee claims a business loss, the main question to be considered is whether the loss is incidental to the business. It approved of the Tribunal's finding that the deduction claimed in writing off the forfeited amount was in the course of said incidental to the assessee's business and therefore deductable to its total income.
7.7. The decision in this case has been rendered in favour of the assessee on the basis of the specific facts of the case. The 4 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd premium paid by the assessee was in the course of the business which prompted the court to allow the assesse3e's appeal. The decision acknowledges the principle that a loss of the forfeited amount can be allowed only when the expense has been incurred in the course of and is incidental to the business. In the appellant's case, as already observed, the expense had been incurred for acquisition of a profit-earning apparatus and was therefore, not an expense incidental to the business. This decision cannot, therefore, be said to be supportive of the appellant's case.
7.8. In the case of Thackers H P & Co., the assessee had made a deposit with the Orissa Forest Corporation Ltd., under a contract for purchase of Tendu Leaves. As the contract was not fulfilled, the security was forfeited. The court took note of the fact that the business of the assessee was purchase and sale of Tendu leaves, that the contract was in the course of the same business and not at the commencement of the new business. The court concluded that the security deposit was not for obtaining the contract but for the due performance of its terms. The forfeiture of the deposit were therefore accepted as a revenue loss.
7.9 The court had made a factual finding in the case that the deposit had not been made for obtaining the contract but for due performance of its terms. In the appellant's case, the deposits had been made at the time of obtaining the contract whereby the appellant got the right to use the advertisement space itself. In otherwords. the deposit had been made for the commencement of the business itself; the appellant could not have conducted its business without making this deposit. The deposit was not for the performance of the appellant's contract. This decision is, therefore, distinguishable on facts.
7.10. In the case of JSW Steel Ltd., the ITAT found that there was no proper investigation of the matter and therefore remitted the matter back to the Assessing Officer. Since the decision does not give any specific finding of fact or law, it cannot be held to be of any assistance in the present appeal.
7.11. In view of the above, following the decisions cited above, as applied to the facts of the appellant, the deposits and advances written off to the extent of Rs.1,21,21,330/- are held to be capital in nature. The disallowance by the Assessing Officer is upheld and the fourth ground of appeal is dismissed."
5 ITA.No.390/Hyd/2013M/s. Social Media India Ltd. Hyd
6. It was contended by the Ld. Counsel that assessee had paid deposits to various organisations for utilising space for advertising in its business 'Out of Home Hoardings' ("OOH") division. The company being a new entrant to the business of media and advertising wanted to gain a foothold in the line of activity, obtained these bids by bidding at slightly higher rates by the erstwhile CEO of the company. This was done with a view to expand the business activity. All these advertising spaces are based on the period of time and the charges have to be paid to these agencies, whether the bidder has generated revenues or not. All these bids are backed by bank guarantees and advance payments to the respective agencies. Even after the company putting its best efforts, it did not find the clientele to advertise at these higher rates. Consequently, the company has to meet monthly/quarterly lease rentals to all these agencies without generating sufficient revenues to meet the fixed lease rental apart from the other over heads like salaries, branch office expenses, travelling expenses etc,. The management has taken a view to close down the operations immediately to contain further losses and opted for termination of contracts. Thus, the company has to forego all the EMD's, deposits and advance payments made to various agencies. The company had aggregated all such deposits under "Advances written off" and debited the same to the P & L account. Ld. Counsel placed on record details of various tendered documents along with EMD placed as under :
6 ITA.No.390/Hyd/2013M/s. Social Media India Ltd. Hyd S. Name of the Amount of Date of letter Forfeiture No party EMD communicati clause of the ng forfeiture agreement of EMD
1. Centre for Rs.6,00,000 25/07/2008 5.5(b), Railway P.No.8/16 of information the tender.
Systems Delhi
2. BBMP Rs.10,00,000 03/01/2009 Clause Bangalore No.22, P.No.11/13 of the Tender.
3. Metro rail, Rs.7,00,000 16/06/2008 Clause Kolkata No.3.3, P.No.7/17 of the tender.
4. NE Railway, Rs.1,02,300 08/09/2008 Page 114-
Lucknow 116 of paper
book
5. South Central Rs.3,72,605 15.10.2008 Page 119-
Railway, 120 of paper
Vijayawada book
6. South Central Rs.6,52,457 10.02.2009 Clause
Railway, No.1.8 (vii &
Mumbai ix) P.No.6/15
of the tender.
7. GVMC Rs.61,77,589 -- Clause
Visakhapatnam No.15P.No.2/
3 of the
tender.
8. GHMC, FOB Rs.24,45,937 -- Page 163 &
180 of paper
book.
6.1. Ld. Counsel submitted that assessee has to submit the tenders also with security deposits which are likely to be forfeited under the terms of contract in the event of non-
fulfillment of its part for the reasons beyond its control. Therefore, loss suffered by assessee on such forfeiture is a permissible deduction under section 28 of the I.T. Act. Assessee relied on various decisions as relied before the Ld. CIT(A) and also the decision of Coordinate Bench in the case of United Motors India Ltd. vs. ITO 6 taxmann.com 32.
7 ITA.No.390/Hyd/2013M/s. Social Media India Ltd. Hyd
7. Ld. D.R. however, relied on the facts and the order of the Ld. CIT(A) to submit that the amount was rightly treated as capital loss.
8. Having considered the rival contentions, we are unable to agree with the order of the Ld. CIT(A) fully. While the principles involved in treating the expenditure was correctly analysed on the basis of various legal propositions, we are afraid that these principles were wrongly applied to the facts of assessee. In this case, admittedly, assessee has made the deposits in the course of obtaining the advertisement business and these were written off as assessee has closed down that particular business. No asset has been created at the time of making deposit and assessee as part of its business only has to make deposits. Therefore, on the various principles relied upon by assessee, this expenditure has to be allowed as revenue loss and not as capital loss.
8.1 The Hon'ble ITAT, Mumbai in the case of United Motors India Ltd. vs. ITO 6 taxmann.com 32 held that it was apparent from the aforesaid facts that by making the interest free deposits for the purpose of obtaining the permissive use or licence to use the premises, assessee did not obtain any enduring advantage or capital asset. Assessee did not acquire any interest in the properties and all that he was entitled to was to occupy the premises under leave and licence of the landlords. In such circumstances, there was a prima facie case that the loss of the security deposits must be considered to be a loss incidental to the business." (para 9) and "In view of the aforesaid, the view taken by the A.O. that the loss of Rs.40,20,388/- arising on account of the write off of the advances against rental properties was a loss incidental to the 8 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd business could not be said to be unsustainable in law. In this view of the matter, the A.O. was right in allowing the aforesaid amount as a deduction and his action could not be called erroneous or prejudicial to the interest of the revenue."
8.2. Since the security deposits and earnest money deposits made did not give any enduring advantage or capital asset and the amounts were written off in the course of assessee's business, the same are to be considered as incidental to the business. Expenditure was not incurred for acquisition of any profit earning apparatus as wrongly observed by the Ld. CIT(A). Therefore, relying on the principles on the issue, we uphold assessee's contentions and direct the A.O. to allow the above amount. Accordingly, Ground No.2 of assessee is allowed.
9. Ground No.3 pertains to disallowance of sum of Rs.53,33,000/- being expenditure written off which represented forfeiture of rental deposit by the owners of the property. Here also, assessee opened "Study Abroad" Division during A.Y. 2008-09, earned an amount of Rs.1.38 crores from the division. However, during the year, the receipts were only Rs.8.20 lakhs. It was submitted that with a view to expand the study abroad even in various cities, assessee incurred expenditure towards rental deposit and interiors of premises. The advances written off included sum of Rs.53,33,000/- being rental advances given to owners of properties. Since these rental agreements were terminated as business was closed prematurely, assessee claimed the amounts as revenue loss. The details of the rental deposits written off are as under :
9 ITA.No.390/Hyd/2013M/s. Social Media India Ltd. Hyd Rental Deposit INR Vijayawada Study Abroad 8,40,000/-
Study Abroad centre at Andheri (W) 41,08,000/- Study Abroad centre at Ahmedabad 2,00,000/- Study Abroad centre at New Delhi 1,10,000/- Study Abroad centre at Bangalore 75,000/-
Total 53,33,000/-
9.1. It was submitted that losses caused on account of non-recovery of advances are allowable as business deduction if they are intimately connected with the conduct of assessee's business. Apart from the case law relied upon above in the earlier ground, assessee also relied on the decision of the Hon'ble High Court of Bombay in the case of IMB World Trade Corpn. Vs. CIT 186 ITR 412 (Bom.).
10. Ld. D.R. relied on the orders of the CIT(A).
11. We have considered the rival contentions and perused the orders of the CIT(A). Following the principles relied upon in earlier ground, Ld. CIT(A) in this case also held that advances are not revenue expenses and the liability to incur expenses has not accrued until the time liability arises the advance remains in capital field, written off of such amounts was not allowed as revenue loss. On considering the principles on the issue and the decision relied upon, we are of the view that the acquisition of premises on lease was not ordinarily be in the capital field as the monies are advanced for the purpose of running business. Thus, advances even if crystallized would not result in any capital asset. Since these advances are made in the course of assessee's business on which assessee did earn incomes, premature closure of lease agreements resulted in forfeiture of deposits. Since the rentals paid are on revenue account, the forfeiture of the deposits in the rentals also shall 10 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd be on revenue account. Therefore, we are of the opinion that the write off of deposits is to be allowed as loss to assessee in the course of its business. Therefore, A.O. is directed to allow the above amount. Accordingly, Ground No.3 of assessee is allowed.
12. Ground No.4 pertains to sum of Rs.75 lakhs being advance paid to M/s. Shreya Broadcasting Corporation towards advertising contract and written off by assessee as not recovered. Assessee paid sum of Rs.75 lakhs to the above said company towards advertisement contract of which sum of Rs. 25 lakhs was refundable security deposit and the balance Rs. 50 lakhs was advanced. Since the business with this concern was terminated abruptly, entire amount of Rs. 75 lakhs had been written off. Ld. CIT(A) vide para 9.2 briefly noticed that circumstances and the manner in which these advances/deposits were made are similar to those relating to advance for obtaining advertisement space (contested in Ground No.2). Accordingly, CIT(A) upheld disallowance made by the Assessing Officer.
13. It was submitted that forfeiture of deposits and advances due to unavoidable reasons which are beyond control of assessee are allowable as business deduction. Assessee relied on the settled position of law and also invited attention to decision in the case of Fab India Overseas ITA.No.199/Del/2012. While admitting that on principles of law, the amount is allowable as loss to assessee, as CIT(A) gave finding that circumstances and manner are similar to the issue contested in Ground No.2, what we noticed is that there is no analysis of the amount paid to M/s. Shreya Broadcasting Corporation Pvt. Ltd. There is nothing on record to notice 11 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd whether the advances and deposits were made as part of obtaining advertising space or for doing any project or for any other purpose of acquiring asset/business. It is also not on record whether the said company is sister concern or not.
There is nothing on record to consider why the contracts have been cancelled and assessee has to forego the amounts. Since A.O. or the CIT(A) did not analyse the claim at all in the light of facts, we are of the opinion that this issue is to be re-examined by the A.O. and then allow the amount either as revenue loss or as capital loss depending on the facts of the case, applying the principles as discussed by us in ground No.2. Grounds by assessee are accordingly set aside to the file of A.O. for fresh consideration. Ground No.4 is allowed for statistical purposes.
14. Ground No.5 pertain to disallowance of sum of Rs.76,12,452/- being interior work advance payments given to various contractors for setting-up 'study abroad' centres by treating the expenditure in the nature of capital. Assessee- company incurred expenditure of interior work for which advance payments towards interior works in the leased premises were made as under :
Interiors Rs.
Advance payment towards interior work for.
Chill Zones at Mumbai & Hyderabad 17,00,000/-
Purchase of Magazine Hydrogen rights 10,00,000/-
Interior work for Chill Zone at Mumbai 7,92,452/-
Interior work for Chill Zone at Chennai & 9,00,000/-
Bangalore
Advance for interior work for Study Abroad at 20,01,258/-
Mumbai
Advance for interior work for Study Abroad at 5,77,186/-
Mumbai
Advance for interior work for Study Abroad at 6,41,556
Hyderabad
Total 76,12,452/-
12
ITA.No.390/Hyd/2013
M/s. Social Media India Ltd. Hyd
14.1. It was submitted that expenditure incurred on leased premises should be allowed as deductible expenditure. Assessee relied on the case of ACIT vs. Set India (P) Ltd. 3 ITR (Trib.) 454 (Mum.) for the proposition that any expenditure incurred on leased premises will be in the nature of revenue and therefore, liable to be allowed as deduction. Assessee also relied in principles laid down in the case of IBM world Trade Corpn Vs CIT( supra) that expenditure is of revenue nature. Ld. CIT(A), however, did not agree and for the reasons stated in earlier grounds, held that amount is capital loss and therefore, cannot be allowed. In order to consider the allowance of this expenditure, it is, necessary to examine the agreements with the lease holders. In the case relied upon by assessee i.e., ACIT vs. Set India (P) Ltd (supra), there is a finding that expenditure has resulted in third party assets and more so, the agreements stipulates that assessee was not entitled to remove any of the additions and alterations of permanent nature made to the property. However, as seen from the details of payments made, some of them are for purchase of machinery, some of them are acquiring certain intangible rights and some amounts are for interior works. Whether interior work was undertaken or not, whether that may result in any capital asset, has not been examined. Unless the nature of advances, the purpose for which the amount was paid were analysed in detail, it is difficult to hold that expenditure is capital or revenue, on the basis of legal principles alone. Therefore, we are of the opinion that this issue also requires re-examination by the A.O. who is directed to obtain the relevant details of advances made towards interior work etc., and analyse whether any asset is being created or not, and reason for cancellation of each of these agreements. Moreover, it is also to be analysed whether 13 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd the principles laid down earlier while allowing the lease rents/deposits would apply to the facts of the case also. In view of this, this issue is also restored to the file of the A.O. for fresh examination. Accordingly, Ground No.5 is allowed for statistical purposes.
15. Ground No.6 pertain to the issue of treating cost of acquisition as NIL and arriving at the short term capital gain by denying WDV of the amounts. Briefly stated, assessee acquired website by name "Bharatstudent.com" in A.Y. 2008- 09 and claimed depreciation in that year. Assessing Officer in the transfer pricing study of that year held the cost of acquisition as NIL and consequently depreciation was also disallowed. Following that order, in this year as assessee sold the said website for a consideration of Rs.3.85 crores, A.O. did not allow the expenditure and brought the entire amount to tax as short term capital gain. Ld. CIT(A) following the orders of predecessor on the issue in A.Y. 2008-09 confirmed the action of the A.O. holding that cost of acquisition is NIL thereby, entire sale price has to be brought to tax.
16. At the outset, it was submitted that ITAT in A.Y. 2008-09 in ITA.No.171/Hyd/2012 accepted the cost of website at Rs.3,67,82,683/- and also directed the A.O. to allow depreciation as claimed. Consequent to that, it was submitted that the direction may be given to the A.O. to compute short term capital gain in this year.
17. Having heard the rival contentions and examining the orders of the ITAT in earlier year, we are of the opinion that assessee's contentions are to be accepted. ITAT while analyzing the TPO orders held that website purchased by assessee was at 14 ITA.No.390/Hyd/2013 M/s. Social Media India Ltd. Hyd arm's length, therefore, cost paid should be considered as cost of the asset. Further, it also directed the A.O. to allow the depreciation as claimed. Consequently the WDV for this year has to be allowed as deduction while computing short term capital gain. A.O. is directed to do the needful and compute the short term capital gain accordingly. Accordingly, Ground No.6 of assessee is allowed.
18. In the result, appeal of assessee is allowed for statistical purposes.
Order pronounced in the open Court on 28.05.2014.
Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER Hyderabad, Dated 28th May, 2014 VBP/- Copy to :
1. M/s. Social Media India Ltd., 8-2-334, 1st Floor, South Eastern Wing, SDE Serene Chambers, Road No.7, Banjara Hills, Hyderabad - 500 034.
2. ACIT, Circle 3(2), Hyderabad.
3. CIT(A)-IV, Hyderabad
4. CIT-III, Hyderabad
5. D.R. ITAT, 'A' Bench, Hyderabad.