Income Tax Appellate Tribunal - Mumbai
Venus Records & Tapes P. Ltd ( Now Known As ... vs Assessee on 6 December, 2012
आयकर अपीलीय अिधकरण, अिधकरण मुंबई Ûयायपीठ 'एफ ' मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL " F " BENCH, MUMBAI सव[ौी एच.एल. कावा[ अÚय¢ एवं नरे Ûि कुमार ǒबãलैáया, लेखा सदःय के सम¢ BEFORE SHRI H.L. KARWA, PRESIDENT AND SHRI N.K. BILLAIYA, AM आयकर अपील सं./I.T.A. Nos. 6618 & 6617/Mum/2011 ( िनधा[रण वष[ / Assessment Years :2007-08 & 2008-09 M/s. Venus Records & Tapes बनाम/ बनाम The Addl. CIT-11(1), Pvt. Ltd., Vs. Aayakar Bhavan, (Now known as Venus Mumbai-400 020 Worldwide Entertainment Pvt.
Ltd., 106/1, Blue Diamond, Opp. SNDT College, Juhu Tara Road, Santacruz (West), Mumbai-400 049 आयकर अपील सं./I.T.A. Nos. 7108 & 7109/Mum/2011 ( िनधा[रण वष[ / Assessment Years :2007-08 & 2008-09 The Addl. CIT-11(1), बनाम/ बनाम M/s. Venus Records & Tapes Aayakar Bhavan, Vs. Pvt. Ltd., Mumbai-400 020 (Now known as Venus Worldwide Entertainment Pvt. Ltd., 106/1, Blue Diamond, Opp. SNDT College, Juhu Tara Road, Santacruz (West), Mumbai-400 049 ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACV 4561G (अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent) अपीलाथȸ ओर से/ Assesseet by: Shri Deepak Tralshawala ू×यथȸ कȧ ओर से/Revenue by : Shri A.P. Singh सुनवाई कȧ तारȣख / Date of Hearing :06.12.2012 घोषणा कȧ तारȣख /Date of Pronouncement : 12.12.2012 2 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 आदे श / O R D E R PER BENCH This set of cross appeals consisting of two appeals filed by the assessee and the two appeals filed by the Revenue are directed against the very same orders of Ld. CIT(A)-3 dt. 01.8.2011 for assessment years 2007-08 & 2008-09. As ground No.1 of both assessee's appeals involved common issues and ground No. 2 of Revenue's appeal is covered by the decision of the Tribunal in assessee's own case, therefore, all these appeals are taken up together and dispose of the same by this common order for the sake of convenience and brevity.
ITA Nos. 6617 & 6618/Mum/2011
2. Ground No. 1 of both assessee's appeals relate to the disallowance of interest attributable to interest free advances/loans u/s. 36(i)(iii) of the Act.
3. Briefly stated the facts of the case are that the assessee is engaged in the business of acquiring and creating rights in Audio and Video tapes. For the year under consideration, return was filed on 12.11.2007 declaring a total income at Rs. Nil after set off of brought forward losses. The return was selected for scrutiny assessment and accordingly statutory notices u/s. 142(1) and 143(2) were issued and served upon the assessee. It was noticed by the Assessing Officer that the assessee has claimed an interest expenses of Rs. 2,99,19,828/-. The assessee was asked to explain as to why proportionate interest expenses of Rs. 2,99,19,828/- debited to profit and loss account should not be disallowed as the assessee company 3 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 has given certain interest free loans and advances to directors/relatives/firm in which directors are interested. The assessee filed a detailed reply justifying why proportionate disallowance should not be done. However, the AO was of the opinion that in the preceding assessment year, the AO has not accepted the similar contention in his order dt. 17.12.2008. The AO thus went on to calculate the interest to be disallowed as exhibited on page 2 & 3 of the assessment order. The figures so arrived was taken at Rs. 1,61,92,183/- which was disallowed u/s. 36(i)(iii) and also as partially attracted u/s. 40A(2) of the I.T. Act.
4. The assessee preferred an appeal before the Ld. CIT(A) against this calculation/disallowance by the AO. It was explained to the Ld. CIT(A) that the AO has made disallowance of interest on loans and advances taken from bank which has been carried forward from assessment year 2001-02 onwards. It was also explained by the assessee that the loans and advances to sister concern/relatives/fir in which directors have interest are Rs. Rs. 4,91,46,854/- and interest free deposits are at Rs. 1.55 crores. It was further explained that the amount outstanding as on 31.3.2008 is Rs. 6.46 crores, to substantiate its claim that no proportional disallowance should be done. The assessee submitted that the company had share capital and interest free advances amounting to Rs. 36.30 crores whereas the interest free loans and advances given amounted to Rs. 6.46 crores which clearly indicates that the assessee had substantial large reserve of self generated interest free funds. The assessee relied upon the decision of the Jurisdictional High Court of Bombay in the case of Reliance Utilities Power Ltd., 313 ITR 340 (Bom). The assessee further pointed out to the Ld. CIT(A) that in assessee's own case for A.Y. 2005- 06 and 2006-07, The Ld. CIT(A) has given partial relief by restricting disallowance of interest expenditure on loan at Rs. 3,72,40,857/- as 4 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 against disallowance of interest made on loan amount of Rs. 4,59,54,419/- claimed by the assessee.
4.1 After considering the facts and the submissions and the judicial decisions relied upon by the assessee and following decision of his predecessor in office, the Ld. CIT(A) deleted the proportionate interest on advances amounting to Rs. 1.55 crores and directed the AO to recalculate the disallowable interest on loans and advances of Rs. 4.91 crores.
5. The Revenue and the assessee both are in appeal before us against this finding of the Ld. CIT(A). The Ld. Counsel for the assessee relied upon the decision of the Tribunal in assessee's own case for A.Y. 2005- 06 in ITA No. 4786/Mum/2010 and A.Y. 2006-07 in ITA No. 3405/Mum/2011 and pointed out that in both the years the grievance raised by ground No.1 in assessee's appeals as well as Revenue's appeals are identical in nature. Drawing our attention to page-7, para-4 of the Tribunal's order, the Counsel pointed out that the assessee has given interest free loans and advances to various sister concerns from A.Y. 1998-99 onwards which has been considered by the Tribunal. The Ld. Counsel further pointed out that in those years, the Tribunal has considered the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities Power Ltd. (supra) and contended that in that case, the Hon'ble High Court rejected the argument of the Revenue that shareholders funds were utilized for the purpose of fixed assets. Thereafter the Hon'ble High Court went on to rely upon the decision of Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. 134 ITR 219 and also in the case of East India Pharmaceutical Co. Ltd. Vs CIT 224 ITR 624 (SC), that if there are funds available, both interest free and overdraft/or loans taken, then presumption would arise that 5 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 investment would be out of interest free funds generated or available with the company, if interest free funds were sufficient to meet the investment. The Tribunal was convinced that the assessee has free reserves sufficient to give interest free advances to its sister concern. The Tribunal went on to consider the facts in the light of the decision of the Hon'ble Jurisdictional High Court in the case of Reliance Utilities Power Ltd. (supra). The Tribunal came to the conclusion that the disallowance to the extent, it has been sustained by the Ld. CIT(A) does not have any merit in it and accordingly deleted the disallowance sustained by the Ld. CIT(A) for both the years (A.Y. 2005-06 and 2006-07) and allowed assessee's ground and dismissed Revenue's ground.
5.1. It was contended by the Counsel before us that facts and circumstances being the same, the decision of the Hon'ble Jurisdictional High Court persists, therefore, in the light of the decision of the Tribunal in assessee's own case, disallowance sustained by the Ld. CIT(A) should be deleted.
6. Per contra, the Ld. Departmental Representative strongly opposed to the submission made by the Ld. Counsel for the assessee. It is the say of the DR that the interest free reserves of the assessee are fully absorbed by the losses shown in the balance sheet and it is incorrect to say that the assessee has sufficient interest free own funds. To substantiate, the Ld. DR relied upon the decision of the Tribunal in the case of Ganjam Trading Co. (P) Ltd. Vs DCIT in ITA Nos 3724/M/2005, 932/Mum/2006 and 1384 & 289/M/2007. The Ld. DR pointed out that in this case also there was a negative balance in the profit and loss account and the Tribunal was convinced that these negative balances will neutralize own 6 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 funds of the assessee. Therefore, in the light of this decision of the Tribunal, the disallowance made by the AO should be confirmed.
7. We have carefully considered the rival submission and perused the orders of the lower authorities and the judicial decisions relied upon by the rival parties. It is the say of the Revenue that the assessee's own capital have been fully neutralized by the losses brought forward from earlier years and, therefore, their remains no interest free own funds from which the assessee could have lent interest free advances to directors and other sister concerns. The Revenue may have some substance in its argument but at the same time we cannot ignore the findings of the Hon'ble Jurisdictional High Court in the case of Reliance Utilities Power Ltd. (supra). We find that the Hon'ble Jurisdictional High Court had rejected a similar plea taken by the Revenue that interest free funds available with the assessee have been fully utilized for the purpose of fixed assets. We further find that for the year under consideration, the assessee has shown a net profit of Rs. 4.11 crores after tax and the loan given to its sister concern is to the tune of Rs. 4.64 crores. In the light of these facts, it can be safely concluded that the assessee has interest free funds generated from its own sources by which it could have lent interest free loans and advances.
7.1 Further it has also to be borne in mind that the assessee has been giving loans and advances to the Directors and related concerns since A.Y. 1998-99. As on identical issues, the Tribunal has allowed assessee's appeal in favour of the assessee in the immediate preceding year as pointed out herein above following the order of the Tribunal and also that of the Jurisdictional High Court, we have no hesitation to hold that the disallowance sustained by the Ld. CIT(A) does not have any 7 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 merit and accordingly the same is deleted. Similarly for the same reasoning, as mentioned hereinabove , the grievance of the Revenue is also dismissed.
7.2 So far as it relates to applicability of Sec. 40A(2), it is found that AO has made only a passing reference of Section 40A(2). It has not been described as to how Section 40A(2) was applicable. Ld. DR also could not state that how section 40A(2) was applicable to make the impugned disallowance. Therefore, after considering the order passed by authorities below and the arguments of both the parties, we hold that disallowance of interest cannot be sustained even on the application of Sec. 40A(2) of the Act.
The assessee succeeds on this ground and Revenue fails.
8. Ground No. 2 of assessee's appeals are also accordingly allowed.
9. Ground No. 2 of both Revenue's appeals relate to allowing the claim of deduction of Rs. 1,90,67,357 for A.Y. 2007-08 and Rs. 60,92,337/- for A.Y. 2008-09 on account of excess amortization of cost of rights purchased.
10. At the very outset, Counsel for the assessee pointed out that similar grievance was taken by the Revenue in A.Y. 2005-06 and 2006-07 before the Tribunal in ITA Nos. 4786/M/2010 and 3405/M/11 (supra). The Tribunal has given its finding on page-22 para-10 of its order which reads as under:
"We have considered the rival submissions in the light of the material placed before us. The assessee has purchased video rights / other copy rights in the ordinary course of its business. 100% cost of such rights, if any part of such right is sold during the year, are 8 ITA Nos.6617 & 6618/M/11 & 7108 & 7109/M/11 claimed as revenue expenditure as per accounting method consistently adopted by the assessee. Ld. CIT(A) has held that this has been done in accordance with the method adopted by the assessee in earlier years as well as in subsequent years. This finding of fact has not been disputed by the revenue by bringing any material on record to show that these findings of Ld. CIT(A) are incorrect. It is also not the case of AO that assessee deviated from the method earlier adopted by the assessee with respect to claiming such expenditure. The AO himself has observed that Rule 9B is not applicable. The AO being of the view that as assessee has not valued the pendency of rights as its closing stock, therefore, the cost to the extent it could be allowed should be restricted to the sale receipts on partial sale of total bundle of rights. Therefore, the AO after reducing the revenue received by the assessee against those rights has added the balance amount to the income of the assessee. Against such action of AO, Ld. CIT(A) has observed that this action of AO has disturbed the method of accounting adopted by the assessee in earlier years as well as subsequent years. The consistent method adopted by the assessee has been disturbed without adequate reasons and without giving any credit for adjustment to be carried out in respect of opening as well as closing stock of such rights. We find force in the observation of Ld. CIT(A) that without properly valuing the opening as well as closing stock of the assessee, the AO could not adopt such course of action. The portion of bundle of rights which were standing on 1st Day of the relevant accounting year has not been taken into consideration, similarly closing stock has not been valued probably on account of difficulty to be faced in this respect. If assessee was adopting the consistent method which has not been disturbed in past, without making a proper adjustment on account of impact of earlier years and without stating the reasons that as to why the method adopted by the assessee was wrong and contrary to the accounting principle, the expenditure could not be restricted to the amount of revenue earned by the assessee, as such action of the AO is contrary to the aforementioned decision of Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (supra). The AO has accepted that these are allowable expenditure but he has restricted the same to the extent of revenue earned by the assessee in the year under consideration. It has been held by Hon'ble Supreme Court in the aforementioned case that if the expenditure has been laid out or expended wholly and exclusively for the purpose of making or earning income, the allowability thereof is not dependent upon the making or earning income."
As the facts and the circumstances are the same though quantum may defer, respectfully following the decision of the Tribunal, ground No. 2 of Revenue's appeals for both the years are dismissed.
9 ITA Nos.6617 & 6618/M/11 &7108 & 7109/M/11
11. In the result, the appeals filed by the assessee are allowed and the appeals filed by the Revenue are dismissed.
पǐरणामतः िनधा[ǐरती कȧ अपीलɅ ःवीकृ त एवं राजःव कȧ अपीलɅ खाǐरज कȧ जाती है Order pronounced in the open court on 12.12.2012 . आदे श कȧ धोषणा खुले Ûयायालय मɅ Ǒदनांकः 12.12.2012 को कȧ गई ।
Sd/- Sd/-
(H.L. KARWA) (N.K. BILLAIYA)
अÚय¢ /PRESIDENT लेखा सदःय / ACCOUNTANT MEMBER
मुंबई Mumbai; Ǒदनांक Dated 12.12.2012
व.िन.स./ RJ , Sr. PS
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. आयकर आयुƠ(अपील) / The CIT(A)-
4. आयकर आयुƠ / CIT
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai
6. गाड[ फाईल / Guard file.
आदे शानुसार/ ार BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai