Income Tax Appellate Tribunal - Mumbai
Siti Cable Network Ltd. vs Deputy Commissioner Of Income Tax on 27 January, 2003
Equivalent citations: (2004)82TTJ(MUM)106
ORDER
R.P. Rajesh, A.M.
1. This appeal is filed by the assessee against the order of CIT(A)-XI, Mumbai passed on 6th Feb, 2002, in respect of asst. yr. 1998-99.
2. In this Case assessee-company is carrying on the business of providing cable TV services throughout India. Cable channel run and owned by assessee-company is called 'Siti Cable'. The appellant gets subscriptions from cable operators using the appellants network on the basis of connectivity declared by the cable operators to TV homes. There is agreement between the appellant and the cable operators (Franchisee company) to this effect. The appellant also redistributes the signal of satellite TV channel (pay channels and free to air channels) The appellant-company pays subscription charges to pay TV channels on the basis of connectivity declared by the cable operators, which they accept and on the same basis the assessee has been getting the subscription money from the cable operators. The appellant-company's activities are spread over 43 cities in India. It has got about 80 control rooms for the same purpose. Different control rooms are operated in association with local private limited company called joint venture partner (JV partner). The fixed assets and all hardware of the JV partner are owned by the assessee-company. The local private limited company conducts day-to-day operations of JV. The basic source of income in the hands of assessee-company and JV partners is advertisement income and subscription revenue from customers having cable connection. The said revenue is shared between the assessee-company and J.V. partners in the ratio of 85:15.
3. For the asst. yr. 1998-99 the assessee-company filed return declaring loss of Rs. 6,11,49,404. Subsequently it was revised to loss of Rs. 7,02,24,222. The AO completed assessment under Section 143(3) on 31st March, 2001. The computation of total income is reproduced below :
Rs.
Rs.
Total Income as per Revised Statement of (-) 7,02,24,222 Total Income Add : As discussed above
(i) Understatement of Income by suppression of correct number of subscribers 85,28,26,527
(ii) Capital loss 1,21,75,624
(iii) Expenses of earlier years 51,46,224
(iv) Additional claim of expenses in revisedreturn 37,08,302
(v) Capital expenditure Dr to P&L A/c 31,52,537
(vi) Management charges not disclosed 21,75,277 87,91,84,491 Gross Total Income 80,89,60,269 Less : Brought Forward Losses :
Asst. yr. 1997-8 (subject to pending reassessment) 11,75,13,512 Asst. yr. 1996-97 (assessed loss as per assessment dt. 21-12-1998 passed under s.
16,50,43,508 28,25,57,020 143(3) Total Income 52,64,03,249 Rounded off 52,64,03,250
4. Aggrieved by the order, the assessee filed appeal before CIT(A), Learned CIT(A)-XI, Mumbai (Shri T. Hangzo) disposed of the appeal on 5th Feb., 2002, and allowed part relief.
5. Aggrieved by the order, assesses is before us with the following grounds:
"1. (i) The learned CIT(A) erred in law and facts in confirming the addition to income of Rs. 48,98,87,408, the reasons given by him for doing so are wrong, contrary to the facts of the case arid provisions of law,
(ii) The learned CIT(A) erred in law and facts in not considering the evidences, explanation and documents produced by the appellant.
(iii) The learned CIT(A) upheld the addition to income of Rs. 48,98,87,408 without any evidence of income accrued or earned by the appellant or identified source of the income.
(iv) The learned CIT(A) upheld the addition to income without pointing out any defect in the books of accounts or rejecting the books of accounts of the appellant.
(v) The learned CIT(A) ought to have deleted the addition of Rs. 48,98,87,408 to the income made on the basis of guesswork, surmises and without any basis.
2. The learned CIT(A) erred in law and facts in confirming the disallowance of Rs. 1,21,75,624 being cost of cable imported and written off as abandoned and not taken delivery from port. The reasons given by him for doing so are contrary to the facts of the case.
The learned CIT(A) ought to have allowed the" amount written off being incidental to and for the purpose of the business of the appellant.
3. The learned CIT(A) erred in law and facts in confirming the disallowance of expenses of Rs. 31,69,052 in disregard to the explanation and evidences produced by the appellant.
The expenses of Rs. 31,69,052 ought to have been allowed on judicious consideration of the facts that the expenses are accounted and incurred wholly and exclusively for the business of the appellant during the year.
4. The learned CIT(A) erred in law and facts in confirming the addition of Rs. 4,49,036 being goodwill written off and Rs. 27,03,501 being shortage of capital goods inventory written off, the reasons given by him for doing so are wrong and contrary to the facts."
6. Addition of Rs. 48,98,87,408 made on account of alleged suppression of correct number of subscribers :
In the course of assessment proceeding the AO noticed that the assessee has shown the number of subscribers at 7,46,186. The AO noticed that assessee has issued advertisement brochure. The said brochure was dt. 15th June, 1997. As per the said advertisement brochure, the assessee-company is having 32,00,000 subscribers and 15 million viewers as on 15th June, 1997. The AO has enclosed the copy of advertisement brochure as Annexure-II of assessment officer. Since the discrepancy between the number of subscribers disclosed in the annual audited accounts and the number of subscribers disclosed in the advertisement brochure issued by the company itself was very large, the AO asked the assessee to furnish factual justification for the said discrepancy and was also asked to show cause as to why the income should not be computed on the basis of subscribers disclosed in the advertisement brochure. In response to show cause notice the assessee filed reply, the relevant portion of the reply is reproduced below :
"As regards the difference between number of paid subscribers as per audited balance sheet and as published in the advertisement brochure of the assessee-company, we submit that the paid subscribers are correctly accounted in the balance sheet while advertisement brochure reflect the connectivity/subscribers at 5 times taking credit for under declaration of subscribers by cable operators and for viewership. The subscribers are multiplied by 5/6 taking the average number of members in a family in 5/6. These marketing brochures are prevalent in the industry.
We further submit that the number of subscribers of 7,46,186 shown in the directors report of the relevant year is as per the actual declaration by the cable operators and paid by cable operators but these are under declaration by the cable operators. There is no link between actual subscribers and claimed connectivity and viewership as these are estimated for penetration of cable TV But the paid/actual subscribers as per accounts are only correct.
Further, it is pertinent to note that the business of the company is scattered throughout the country.
(i) The network operations are managed by JV companies at local level.
(ii) The subscribers and advertisement management system managed by the assessee at Delhi and billing is done on cable operators by management companies on the basis of subscribers declaration submitted by JV companies
(iii) The collection from subscribers is done by cable operators.
(iv) The cable operator may be under declaring the subscribers and paying to JV companies only for declared subscribers.
(v) The pay channels are paid on the basis of the subscribers as per billing or records.
Hence, in nutshell, the number of subscribers shown in the directors report of the year is true and correct."
7. After analyzing the above submission of the assessee, the AO has summed up the main contention of the assessee that the number of subscribers is correctly disclosed in the balance sheet, that the advertisement brochure reflects the subscribers at 4 to 5 times, that this multiplication is done to take care of underdeclaration of subscribers by cable operators, that these marketing brochures are prevalent in the industry; that there is no link between the actual subscribers disclosed by the assessee and number of subscribers shown in the advertisement brochure and that the number of subscribers shown by the assessee in the directors report is true and correct. The assessee also filed a compilation of newspapers cuttings to show that in the cable TV industry, the vast difference between the number of subscribers having cable connection is widely prevalent and normal practice. It was also submitted that though the channel knows that the channel is receiving subscription in respect of much less subscribers than actual, the channel is not in a position to enforce the cable operators to declare correct number of subscription and, therefore, to pay the channels the correct amount of subscription. The AO issued notice under Section 133(6) of IT Act, 1961, to some of the JV partners of the assessee and they also submitted that they did not have any control over cable operators. It was also informed by the JV partners that it was in their knowledge that cable operators were indulging in substantial underdeclaration of subscribers but could not enforce anything on the cable operators for the simple reason that this business is very competitive. The above submission was considered by the AO. The AO has observed in his order that "In essence, what the assessee-company says is that a fundamentally immoral and sub-standard business practice has been in existence in this industry wherein the channel owners routinely declare under their authority that they have a very large number of subscribers; at the same time the same channel were declare the income in respect of much lesser number of subscribers. Further, they expect the judicial or quasijudicial authorities to take judicial notice of this sub-standard and immoral business practice."
8. The AO has referred to the decision of Madras High Court in the case of Coimbatore Spinning & Weaving Co. Ltd (1974) 95 ITR 375 (Mad), in which according to the AO similar issue arose. Following the decision of Madras High Court (supra) and some other decisions (the names of which are not mentioned by the AO in his order) wherein it has held that "any substandard and immoral practice alleged to exist in business of commercial circle cannot be taken judicial notice by quasi-judicial or judicial authorities. Further it has held that in such a case a very heavy burden lies on the assessee to prove that the book results are the correct ones and are to be relied upon and not the figures which are circulating in the commercial and business circle but not in the books". Further, the AO took into consideration the result of survey action conducted by the Department on Ultra Audio Pvt. Ltd. The assessee channel was using cable rights of films owned by Ultra Audio (P) Ltd. came to the conclusion that assessee-company is declaring a much larger number of subscribers under its own authority in its own advertisement brochure. The AO has further observed that assessee-company was obliged under the law to justify that number of subscribers declared in the accounts are correct and not the subscribers mentioned in the advertisement brochure. Accordingly, the AO rejected all the explanation and submission in support of the claim that the actual number of subscribers have been correctly disclosed in the books of accounts at 7,46,186 and AO computed the income by taking the figure of 32 lakhs as subscribers. The computation made by the AO is reproduced below :
(ii) "Thus, the income from subscription is worked out as below:
Rs.
Subscription Income 14,89,71,000 Advertisement charges 11,03,67,000 Total income disclosed in the accounts 25,93,38,000 Subscribers shown by assessee as on 31st March, 1998 7,46,186 Subscribers as discussed above 32,00,000 Thus, the subscription income from 32,00,000 subscribers is worked out as below:
32,00,000 x 25,93,38,000 ___________________________ = Rs. 1,11,21,64,527 7,46,186
(iii) Thus, the income from 32,00,000 subscribers works out to Rs. 1,11,21,64,527. The assessee has already offered income of Rs. 25,93,39,000 for taxation. Thus, further balance Rs. 85,28,26,527 (Rs. 1,11,21,64,527 - Rs. 85,28,26,527) is hereby brought to taxation.
(iv) Therefore, an amount of Rs. 85,28,26,527 is added on account of undisclosed income by way of underdeclaring lesser number of subscribes. Addition Rs. 85,28,26,527."
9. Aggrieved by the order, assessee filed appeal before CIT(A), At the outset, assessee pointed out the mistake in the computation of income from 32 lakhs subscriber at Rs. 85,28,26,527 and submitted that by AO's own calculation of income to the extent or Rs. 36,29,39,119 has been excess assessed. This requires outright deletion and to this submission learned CIT(A) agreed. So, the excess addition of Rs. 36,29,39,119 was deleted.
10. Coming to the main issue i.e., estimate of income on the basis of advertisement brochure, the learned CIT(A) sustained the decision of the AO. The relevant portion of the decision of learned CIT(A) is reproduced below :
"2.6 I have carefully considered the appellant's submissions. The undisputed fact is that the appellant had declared the number of subscribers at 32 lakhs in its advertisement brochure as against 7,46,186 subscribes shown in its return. The appellant has merely stated that although it has got 32 lakh subscribers, it could recover the subscription fees only from the 7 lakhs and odds subscribers because of the underdeclaration of the number of subscribers by the cable operators. This means that but for the misappropriation of the subscription fees the appellant would have received the subscription fees due to it from the 32 lakhs subscribers meaning thereby that the appellant has got a right to receive the subscription charges from the 32 lakhs subscribers. In the case of CIT v. Nandram Hunatram (1976) 103 ITR 433 (On), the Hon'ble Orissa High Court held that in the mercantile system of accounting the profit or loss at the end of the accounting year is based not on the difference between what was actually received and what was actually paid out, but on the difference between the right to receive and the liability to pay. When an ITO proceeds to include a particular income in the assessment, under the mercantile system he shall have to find out when the right to receive the amount accrued. The above decision is applicable to the case of the appellant who follows mercantile system of accounting. I may add that while it is for the appellant to take corrective steps to recover the subscription amounts due to it from the 32 lakhs subscribers or to sit back and wait for some miracles to happen enabling it to recover the amounts, the fact remains that the appellant has got enforceable rights to receive the subscription fees from the 32 lakhs subscribers. I find no reason for interference with the order of the learned AO and the addition is hereby confirmed to the extent of Rs. 48,98,87,408 (85,28,26,527 - 36,29,39,119)."
11. Accordingly, learned CIT(A) sustained the addition of Rs. 48,98,87,408 (85,28,26,527 - 36,29,39,119).
12. Before us, learned counsel appearing on behalf of the assessee submitted that :
"The appellant-company's activities are spread over 43 cities in India and there are local ground level problems. Cable TV industry is an unorganized industry and very local in nature. Hence, the appellant-company has appointed various local companies to monitor the cable operators, manage and maintain the network. The managing director of this local company is a local JV partner. The local company collects the subscriptions from cable operators, retains 15 per cent and remits 85 per cent to the appellant. These local companies are more than 70 in 43 cities. They accept 15 per cent on the basis of this connectivity as per a management agreement.
As the cable operators are paying subscription charges to cable network and various pay TV channels on the basis of declared connectivity, they tend to underdeclare the number of subscribers and in fact, the under-declaration goes up to 90 per cent in some cases. This happens because there is neither any device to check the underdeclaration nor it is humanly possible. This results in loss to cable networks, pay TVs, entertainment tax and new service-tax and income-tax. This is a problem of the entire industry and every segment associated with it, is worried and discussions are always held to remedy the situation.
The appellant receives advertisement from local business on their cable channels for which it issues advertisement brouchures and for the purpose of standing and reach of the network on the coverage, it mentions the connectivity and viewers as other networks are doing. This generally estimates the connectivity based on 5 times the declared connectivity (considering the fact that cable operators declare only 20 per cent of their actual connectivity to the network) and viewership 5 times the connectivity assuming that there are 5 members in a family (per connectivity). In view of this business practice, the appellant mentioned the connectivity at 3.2 million on the cover of its brochure."
13. Further, it is submitted that the authorities below have committed mistake in assuming accrual of income. For this preposition, the learned counsel has placed reliance on the decision of Hon'ble Supreme Court in the case of Godhra Electricity Co. v. CIT; (1997) 225 ITR 746 (SC). It is submitted that before holding that income has accrued, the probability of relization of same in a practical manner must be seen. It is submitted that Hon'ble Supreme Court in the above case held, "the question whether there was real accrual of income in respect of the enhanced charges has to be considered by taking into account the probability or improbability of realization in a realistic manner. It held that if the matter was considered in this light, it was not possible to hold that there was real accrual of income in respect of enhanced charges. In this regard, learned counsel also referred to the decision of Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC). Learned counsel also submitted that Hon'ble Supreme Court has held in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) that if the income has not resulted at all, the same cannot be said to be accrued. The learned counsel submitted that the concept of real income has to be taken into consideration in this case, and in the case of assessee no income has accrued apart from what has been disclosed by the assessee. It is submitted that lower authorities have failed to note that assessee has stated 3.2 million subscribers in advertisement brochure merely to attract advertisement. 3.2 million subscribers was merely the assessee's persephone possible connectivity of its cable network. The word "subscribers" was used instead of "connectivity" to attract advertisements. Therefore, the advertisement must not be read as an "admission" by the assessee of having 3.2 million subscribers,
14. It is submitted further that the cable operators are beyond control of the assessee and this has been noted by the AO in the course of making enquiry from joint venture co. Further it is submitted that the appellant does not directly deal with the cable operators, The appellant-company receives subscription from the local networking joint venture companies. The appellant-company has no option but to rely on the declared figures of the subscriptions submitted by the cable operators. Therefore, it is submitted that underdeclared subscription on the part of cable operators cannot be said to have accrued to the appellant from the practical point of view. Regarding reliance placed by the AO on the decision of Madras High Court in the case of Coimbatore Spinning and Weaving Co. Ltd. (supra), it was submitted that the facts of the case of the assessee are totally different from the facts of that case, which was decided by Hon'ble Madras High Court. Therefore, it is submitted that decision is not applicable, as advertisement brochure is not a "sworn statement" by the assessee. In advertisement, making tall claims about one's own product is well-known phenomenon. Finally, it was submitted that without prejudice to the above, even if it is held that the alleged undeclared subscriptions accrued to the appellant, the same could not be considered as his income. For this preposition reliance is placed on the decision of Supreme Court in the case of CIT v. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC), wherein it was held that even if the income has accrued in the year, if the same is reliquished on grounds of commercial expediency the same cannot be said to have accrued to the assessee. Further, reliance is placed on the decision of Punjab High Court in the case of Dewan Gian Chand v. CIT (1982) 138 ITR 138 (P&H) and in the case of CIT v. Shree Exports House Ltd. (1992) 194 ITR 695 (Cal). Accordingly, in view of the above decisions there cannot be any addition in the case of the appellant on the basis of alleged accrual of income.
15. On the other hand, learned Departmental Representative vehemently supported the orders of authorities below. He further submitted that the copy of ad shows that there were 32 lakhs subscribers and 15 million viewers. Therefore, the action of the AO in estimating the income on the basis of advertisement brochure was justified. He further submitted that after all there must be some basis for giving the figure of 32 lakhs subscribes, which has not been disclosed by the assessee. Further, learned Departmental Representative referred to the order of CIT(A) p. 6 para. 2.6 where the learned CIT(A) recorded his findings (same has been reproduced above), Learned Departmental Representative also referred to the terms of contract with J.V. companies, which has been placed in the paper book Part-I p. 90. The learned Departmental Representative drew our attention to para 4 (e) and (f) which are as under:
4(e) The franchisee shall have to furnish to the network complete details of the new subscribers added at any point of time. These details are to be provided within 7 days of such additions and also as and when required by the first party.
(f) The franchisee shall maintain the record of their subscribers in a format prescribed by the network or otherwise so as to show the complete list of subscribers and their addresses attached to franchisee. These records shall be made available to the network at any time as desired by the network.
And submitted that from the above it is clear that franchisee were required to furnishing to the network complete details to show the complete list of subscribers and their addresses. Therefore, the assessee-company was expected to know the actual number of subscribers and if the assessee-company had given the figure of 32 lakhs in advertisement material that must be on the basis of details furnished by the franchisee. Therefore, learned authorised representative submitted that authorities below were justified in estimating the income taking the number of subscribes at 32 lakhs and the same should be sustained.
16. We have considered the submissions made from both sides. We have also perused the various details and material placed on record. We have also considered various arguments and submissions made by the appellant before the authorities below. Before coming to the actual question, whether the AO was justified in estimating the income by adopting the figure shown in the advertisement brochure issued by the appellant-company that is, 32 lakhs subscribers, it would be appropriate to have a look at the business structure of the appellant-company. The revenue to the appellant-company flows from advertisement and subscription, the major expenses are 15 per cent commission on advertisement and 15 per cent management charges paid to management companies. The business structure of the company is as under :
Business Structure Head Office SMS AMS MMS | | Regions (Regional Director) | | | J.V. Companies | | | cable operators | ___________________________________________________________________|_____________ | Business Structure | SCNL (HO) | Regional Officers (Regional Directors) | Business Managers | Management Companies (JV cos) | cable operators (Franchaisee)
17. Management companies known as JV companies are formed with local partner to manage the cable network and its business interest. The JV companies are entitled to 15 per cent commission on subscription and Ad revenue.
18. The head office of SITI Cable Network (SCNL) companies has the following operations (1) SMS--Subscribers management system : This department draws the invoices on the cable operator on the basis of report from JV companies and send these invoices to JV companies to deliver to cable operator and for collection. The collection as per report from JV companies is also updated in SMS.
The discounts and rebates, credit notes/debit notes are also issued by SMS.
In nutshell all subscribers records are maintained by this department.
The collection is done by JV companies who retain their share of 15 per cent and remit or credit 85 per cent to SCNL.
Subscription
Revenue Flow Bills
Subscriber (TV Home)
|
Cable operator Rs. 150 Cable operator
|
| J.V. co.
|
JV Company Rs. 25 (15%) SMS
|
SCNL Receive 21.25
(2) AMS --Advertisement management system :-- The Ad. Booking is done by HO, JV companies etc. Invoices are prepared by AMS on the basis of Ad. booking and telecast reports and sent to parties through the JV companies or agent and collection is directly received by AO. 15 per cent commission is paid to JV company, or agent in addition to D agency, if any.
Advertisements
Revenue Flow Bills
Advertiser
|
Ad. Agency Rs. 100 Advertiser
| Ad. Agency
JV Company (15%) 85%" |
| JV Co.
SGNL 70%" |
AMS
(3) MMS :--Material management system : This is centralized stores of spares maintained at H.O. The major purchases are done at H.O. and material, parts, equipments are sent to JV companies on the basis of indent approved by RO. The stock records of stores are under MMS. Certain urgent requirement and petty requirements are met from local purchase also and periodically the inventory is physically verified.
19. From the above business structure and the modus operandi of revenue flow and system of working, it is clear that assessee is not dealing directly with the subscribers. It is only the JV companies who are having franchisee agreement with the cable operators and in turn the cable operators are directly dealing with the subscribers. How the revenue flows from subscriber to the appellant-company is reflected above. Thus, it is not the case that assessee had knowledge of actual subscribers through its direct contact with the subscribers. It is the cable operators who are in direct contract with the subscribers and in turn they are in contact with JV companies. Whatever revenue has been received by the JV companies, they are retaining 15 per cent and remitting the balance 85 per cent to SITI Cable Network (SCNL). In this view of the matter; there is a lot of force in the submission of the counsel that if there is any suppression of actual number of subscribers, then it is by the cable operators over which the appellant-company has got no control. So far the advertisement brochure is concerned, we also agree with the submission of the learned counsel that an advertisement mostly involves tall claim to promote the product advertisement, which is generally termed as publicity stunt. Further, the advertisement brochure is not a "sworn affidavit" like a prospectus/issued under Companies Act for inviting applications for shares. Therefore, the submission of the assessee that the case law relied by the ld AO i.e. decision of Hon'ble Madras High Court in the case of Coimbatore Spinning & Weaving Co. (supra) is misplaced, appears to be acceptable because in that case the assessee had disclosed inflated stock to Bank on a "sworn affidavit". Therefore, the Hon'ble Madras High Court has held "In a case like this that the assessee is confronted with his own 'sworn statement' which shows a different state of affairs, than the one shown in his own books of accounts, heavy burden lies on the assessee to prove that books of accounts alone gives the correct picture, and the sworn statement given in the banks were motivated". In the instant case there is no such thing. The books of accounts have been accepted by the learned AO and no defects have been pointed out in the books of accounts. In absence of any supporting evidence that assessee has disclosed lesser number of subscribers then what actually is, mere advertisement brochure will not be sufficient to prove that assessee has suppressed the number of actual subscribers. We are also in agreement with the learned counsel that in modern competitive market specifically in the field in which the appellant-company is working, such things, are common. The assertion of the AO that substandard and immoral business practices cannot be taken judicial notice has also got not much force to support his conclusion that assessee had suppressed the actual number of subscribers. For finding the truth the AO could have made some extra efforts to collect further evidence, if any, by examining some of the cable operators and JV company, but the same has not been done.
20. Coming to the decision of learned CIT(A), we find that he has invoked the decision of AO for the reasons given by the AO in this order and further has placed reliance on the decision of Orissa High Court in the case of CIT v. Nandram Unathram (1976) 103 ITR 433 (Ori) wherein the Hon'ble Orissa High Court has held that "In the merchantile system of accounting, the P&L a/c at the end of accounting year is based not on the difference between what was actually received and what was actually paid out, but on the difference between the right to receive and the liability to pay". The learned CIT(A) was of the view that since assessee was following the mercantile system of accounting, it was for the assessee to take steps to recover the subscription amount due to it from the 32 lakhs subscribers. Learned CIT(A) has also observed that the appellant has got enforceable right to receive the subscription fee from the 32 lakhs subscribers. We do not concur with the view of the learned CIT(A) because there is no basis to conclude that income has accrued to the assessee and there is no basis to conclude that assessee has got enforeable rights to receive the subscription fee from 32 lakh subscribers. The assessee has enforceable right to receive the subscription from the subscribers as reported by the cable operators over whom the assessee had no control as it is evident from the system of working adopted by the appellant-company. Accordingly, there is no accrual of right to receive subscription fee from the subscribers. Therefore, the reliance by learned CIT(A) on the decision of Hon'ble Orissa High Court (supra) is also considered as misplaced.
21. Before learned CIT(A) the assessee had placed reliance which has also been mentioned by learned CIT(A) in his order at p. 2.5 of his order. The decisions are :
(1) Commr. of Agrl. IT v. M.J. Cherian (2) Umachaian Shah & Bros. v. CIT (1959) 37 ITR 271 (SC) But the decision of these two cases have not been taken into consideration by learned CIT(A) in his order.
22. In the case of M.J. Cherian decision by Hon'ble Kerala High Court (supra), it has been held that "Agricultural ITO fixing yield from paddy at price higher than statutory price will be justified only when there is evidence that assessee did sale at higher price." The Hon'ble Court held that one would have been able to sell at prices in excess of legally fixed rates, did not necessarily imply that the assessee also did break the law by selling the paddy at prices in excess of the rate fixed by the rules. There is no presumption in favour of any illegality about the transaction. In fact the presumption is other way about. Likewise, Hon'ble Supreme Court in the case of Umacharan Shah & Bros. (supra) has inter alia held that the conclusion arrived at on the basis of surmises and conjectures cannot be sustained and suspicion cannot take the place of proof. It means that there must be evidence and material before AO for a particular decision. In the instant case, on the basis of advertisement brochure, the AO has presumed that assessee might have collected subscription charges from 32 lakhs subscribers, this action of the AO cannot be endorsed more particularly because of concept of real income theory propounded by various judicial authorities including Supreme Court. In the case of Godhra Electricity Co. Ltd. v. CIT (supra) :
"Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize."
The same view was taken by Hon'ble Supreme Court long before this decision, in the case of Godra Electricity i.e., in the case of CIT v. Shoorji Vallabhdas & Co. (supra). The gist of the decision of the Hon'ble Supreme Court is "If the income is riot resulted at all, the same cannot be said to be accrued."
23. In view of the above facts and the decisions, the estimate by the AO and endorsement of the same by the learned CIT(A) cannot be sustained. In our opinion the assessee had stated 32 lakh subscribers in advertisement brochure most probably to attract advertisement. We agree with the final submission of the learned counsel that advertisement must not be read as "an admission" by the assessee having 3.2 million subscribers. Accordingly, the addition made by the AO for Rs. 85,28,26,527 (subsequently reduced to 48,98,87,408 by CIT(A) is deleted and the first ground taken by assessee is allowed.
24. Disallowance of loss claimed in respect of cost of cable imported and abandoned Rs. 1,21,75,624 In the course of assessment proceeding, the AO noticed that an amount of Rs. 1,21,75,624 has been written off as deductible expenditure. The facts of the matter are that the appellant-company imported co-axial cable for alleged replacement of existing overhead cable to underground and incurred and paid Rs. 1,21,75,624 to the supplier. It so happened that the goods reached the port, but delivery was not taken. In the process the loss of Rs. 1,21,75,624 was incurred. When the issue was raised by AO before the assessee, the assessee submitted that the goods were not taken delivery from the port because it was found that due to slump in prices it was not economically viable to take delivery. Hence, they were allowed to remain with the port authorities without payment of customs duty and was abandoned. It was also submitted that the goods imported were capable of being used as replacement and repairs of the existing network. The cable, if taken delivery of, would have been part of the appellant stores and spares i.e., the current assets of the appellant. The cable is already part of MMS (Material management system). The cost of these cables are, therefore, chargeable as repairs and allowable as revenue expenditure under Section 31 or under Section 37 of IT Act, 1961. Therefore, the loss revenue loss incurred in the normal course of the business. The AO did not accept the submission of the assessee and treated the same as loss of capital nature and hence disallowed the claim.
25. The learned CIT(A) concurred with the decision of AO and further observed that appellant was not in the business of buying and selling cable. Hence, the same cannot be said to be its stock-in-trade.
26. Aggrieved by the decision of lower authorities, the issue has been raised before us. The learned counsel reiterated the submissions made before lower authorities and also referred to detailed written submissions filed before AO, copy of which is placed in paper book p. 55 and written submission before CIT(A) placed at p. 61 of the paper book, the same are reproduced below :
(PB 55) "As regards your proposal to disallow these expenses being capital expenditure in this connection we submit that no goods are capital expenses till these are installed and put to use. The same goods can be capital if installed for expansion or for enduring benefit and if lying in stores or utilised for repairs/replacement etc. it is revenue expenses. In this case the goods imported and abandoned hence expenses incurred thereon are written off and claimed as revenue because the expenditure was incurred for the existing business of the company and allowable as expenditure under Section 37 being wholly and exclusively incurred for the existing business of the company and it is neither capital nor personal expenses. Further, the existing continuing business even the cost of projects abandoned is allowed as deductible expenses. Hence, kindly review and reconsider your proposal to disallow this amount.
These capital goods was arrived in 1995 and at that time same could not be cleared due to paucity of funds. However, in the meantime due to technological obsolesence they were of no usage and thence the assessee co. did not take delivery of these capital goods".
Submission before learned CIT(A) are as under : (PB 61) "In this case, it is important to note that import consignment consists of co-axial cable which can be used for setting, up cable TV network or replacement and repairs of existing network. The cable, if taken delivery of, it would have been part of assessee's stores and spares (MMS), the current assets. The cable is already part of MMS. The cable is laid overhead in the open on poles which is prone to theft, cutting by rivals etc. and need replacement or repairs and chargeable to revenue expenses.
The purpose of issue determines the accounting thereof whether it should be fixed assets or revenue expenses. There may be number of items which can be used for construction of new building or for repairs and existing one. The learned AO erred in taking the view that it is capital transaction on the ground that it would have created fixed assets entitled to depreciation.
The tax statute does not provide for taxation on the hypothecal basis. The learned AO has done that instead of the question whether the amount incurred for import of goods is for business purposes and written off is allowable as revenue expenses.
The amount was incurred for purchase of goods for business, the destroying abandoning these goods is business decision and loss on that account is business loss or expenses deductible against income under Section 37 of the Act. Take another case of cash loss by theft while cash is asset, is it the loss is not allowed as deduction? The vital point to be considered is whether it was loss in the course of business if so it is fully allowable expenses wholly and exclusively incurred for the business, incurred in the course of business and incidental to carrying of the business unless proved otherwise. In view of those submissions the disallowance of Rs. 1,21,75,624 requires to be deleted."
26(A). The learned counsel also referred to Board resolution for writing off loss, the copy of which is placed at 99 of paper book II. Further, it is submitted as per Schedule VI of Companies Act, 1956, the item No. 1 and 2 of MAO CARO Report are report on audit of fixed assets and item No. 3 to 6 are report on audit of inventories and stock (current asset). In this case, the current stores inventory is referred as "capital goods inventory", even in this report under Clause 3 of the report it is clearly mentioned by the auditor that the stock of capital goods store, raw stocks, programme rights have been physically verified by the management during the year at intervals (Annexure referred to in para 2 of auditor's report) placed at Para 13 of the paper book Part I. It is further submitted that these stocks and spares termed as capital stores is correctly shown under current assets in Schedule 8 to balance sheet which is placed at p. 21 of the paper book and the capital work-in-progress is shown under the head "fixed assets" separately vide p. 16 of paper book. It is further submitted that entries in books of accounts in any case does not determine the nature of expenditure whether capital or revenue. For this preposition, reliance is placed on the decision of Hon'ble Supreme Court in the case of Tuticorin Alkaline Chemicals v. CIT (1997) 227 ITR 172 (SC). Further, it is submitted that directors report also supports the write off of the amount during the year. The director report reads as under :
"Goods, in transit abandoned : Your company has imported material worth Rs. 1,21,75,624 for its underground cabling. However, on reaching the goods at port in India the value of goods have gone down to 1/4th of its landing price and further your company has decided nor to proceed with the underground cabling. Hence, your directors have decided to abandon the material as a whole. Therefore, the total amount has been treated as unusual write off during the current year."
27. The learned CIT(A) has referred to auditors report which is not against the assessee. Learned counsel further placed reliance on the following decisions :
(1) CIT v. Madras Spinners Ltd. (1989) 177 ITR 495 (Ker) (2) CIT v. Mohammad Ishaque Mohammed Gulam (1994) 210 ITR 817 (MP) (3) CIT v. Mahalaxmi Textile Mills Ltd. (1967) 66 ITR 710 (SC) (4) CIT v. Polyolefins Industries Ltd. (1988) 169 ITR 538 (Bom)
28. On the other hand, learned Departmental Representative supported the decision of authorities below on the issue. He also submitted that paucity of fund cannot be taken a valid reason for not lifting the goods from the customs authority. Learned Departmental Representative also referred to notes on accounts placed in the paper book at p. 35 where under Sub-clause 3 under the head "depreciation" it has been mentioned that cost of cable excluding cable laying expenses are depreciated equally over a period of 10 years, the useful life as certified by its manufacturer and submitted that the expenditure of Rs. 1,21,75,624 is a capital expenditure.
29. We have considered the submissions made from both sides. We have also perused the various papers relating to consignment abandoned by the assessee placed in the paper book page 73 to 81. It is an admitted fact that the capital goods i.e. co-axial cable arrived in 1995 which was not lifted by the assessee and the assessee-company has decided to write off the cost of the consignment during the accounting year relevant to assessment year under appeal. The learned authorised representative failed to explain the reason of such a gap of more than two years to decide to write off the amount at the fag end of the financial year relevant to assessment year under appeal. The Board's resolution dt. 18th Feb., 1998, which has been filed in the paper book Part II has been pressed by learned counsel in support of the claim. This was vehemently objected by learned Departmental Representative. It was submitted that since Board's resolution was not produced before authorities below, it constitutes a new evidence therefore, it cannot be admitted at this stage. Here it is necessary to bear in mind that assessee was aware that non-clearance of goods from port would add to the cost of cable multifold because of demurrage charges etc. If the assessee has not lifted the goods in 1995 for alleged want of liquid fund, by the next year, the cost of cable including demurrage charges has become double and any prudent business man would have definitely taken a decision whether to abandon the goods or leave the goods at least by the end of previous year 1996-97. Under these circumstances it is difficult to accept the new version of the assessee that the Board has taken a decision to abandon the goods only during the asst. yr. 1998-99. There is also no third party evidence/independent evidence that the decision for abandoning the goods was taken during this year. Therefore, we do not admit this additional evidence.
30. Now, coming to the main contention of the assessee, the learned authorised representative submitted that it was meant for replacement of old cables already installed. In other words the assessee has laid overhead cables, which is admittedly a capital expenditure. However, the claim that overhead cabling is sought to be replaced by laying underground cable and therefore, it amounts to replacement of old cables and thence revenue expenditure. The learned authorised representative has relied on various decisions in support of this submission, which have been mentioned above. The learned counsel also took us to various papers placed in the paper book to impress upon us that the cable was meant to be used as a stores and hence it has to be considered on revenue account. In the course of hearing, the C.A. assisting the learned counsel stated that the cable network was a nascent business, only commenced during the year 1994-95 and indent was placed for purchase of cables from Atlanta during that period only. To do more specific the shipment left Atlanta port on 27th July, 1995, and the goods arrived during the year 1995 itself. The learned counsel has not disputed these facts. In these backdrop of facts it has to be examined as to whether cable was intended to be used for extension of business or for mere replacement of old cables.
31. On conspectus of the materials placed before us we are of the view that the material (cable) was intended to be used as capital asset i.e., in the process of setting up/extension of cable business. Therefore, it has to be treated as capital expenditure. At any rate overhead cabling is different from underground cabling. Hence, it cannot be termed as Indented for the purpose of replacement; replacement connotes replacement of overhead cable with new cable. Whereas, in the instant case, it is not shown by the assessee that overhead cable was worn out. But assessee in order to have the enduring advantage of underground cabling, the impugned cable was purchased. Thus, even on this ground it cannot be termed as revenue expenditure. The ratio of the decision on which reliance is placed is distinguishable on facts. Hence, the decision of authorities below to treat the expenditure as capital expenditure is sustained and the second ground taken by the assessee is dismissed.
32. Disallowance of expenses relating to asst. yr. 1998-99 recorded in the books of subsequent year The AO in the course of assessment proceeding found that the assessee company has revised the return claiming additional expenses of Rs. 90,74,818 which actually pertain to asst. yr. 1998-99 but were claimed in asst. yr. 1999-2000 originally. The AO noted that the expenses are only Rs. 69,76,056 and there is an income figure also of Rs. 16,09,540. Therefore, the AO decided to allow the difference between the above two amounts Rs. 53,66,516. So the AO computed excess claim to the extent of Rs. 37,09,302 and the same was disallowed and added in the computation of total income.
33. When the issue came before CIT(A), the assessee submitted before CIT(A) that the income shown in the statement is already reduced and the total expenses are Rs. 80,86,346 and not Rs. 69,76,056 as stated by the AO and it was also submitted that the income of Rs. 16,09,540 is not to be deducted. The learned CIT(A) also agreed to the finding of AO that the expenses relating to assessment year under appeal but claimed in 1999-2000 is Rs. 69,76,056 but he has not agreed so far the income under the head 'sales and services' at Rs. 16,09,540. As per CIT, this income is only Rs. 10,70,290. Accordingly the excess expenses claimed was computed by CIT(A) at Rs. 31,69,052. The computation of expenditure and income and excess claim by CIT(A) is reproduced below :
34. As a result learned CIT(A) allowed relief of Rs. 5,39,250.
35. This is not accepted by the assessee and, therefore, the same is challenged by the assessee by taking Ground No. 3. The learned counsel submitted that learned CIT(A) has wrongly taken the figures of expenses. It is further submitted that the CIT(A) has wrongly deducted Rs. 10,70,209 instead of adding it. This is net amount of expenses (Rs. 13,39,915-Income Rs. 89,407 and Rs. 1,80,218) Rs. 10,70,209. Hence, the disallowance as per CIT(A) should have been Rs. 10,28,472. This is on account of left out items Rs. 9,95,417 and Rs. 33,055-Rs. 10,2,472. The CIT(A) has disallowed an amount of Rs. 10,28,472 on the ground that no evidence produced supporting that this expenses is pertaining to asst. yr. 1998-99 and not to asst. yr. 1999-2000. Copy of correct statement of total expenses and computation of total income for the asst. yr. 1999-2000 are enclosed. Hence, the mistake in the CIT(A) of Rs. 21,40,418 requires to be rectified and expenses of Rs. 10,28,472 are required to be allowed for asst. yr. 1988-89 as it is not claimed in asst. yr. 1999-2000 as can be verified from the computation of total income of that year.
36. On the other hand learned Departmental Representative supported the order of CIT(A)
37. We have considered the (sic). Although learned authorised representative has filed detailed computation of expenses of Rs. 90,74,818 which is placed in the paper book Part II at p. 198 yet since it would be necessary to make a verification from the details of expenses claimed in the asst. yr. 1999-2000, we consider it proper that this matter should go back to the file of AO for a fresh examination of the claim regarding the expenses claimed for this year, which has been claimed in revised return. Accordingly this issue is restored to the file of AO, with a direction to allow opportunity to the assessee to file necessary evidence and explanation in support of the claim and to take a fresh decision as per law. Accordingly the third ground is restored to the file of AO for fresh decision.
38. Disallowance in respect of goodwill written off Rs. 49,036 and disallowance of Rs. 27,03,501 being capital goods inventory written off In the course of assessment proceeding the AO examined the tax audit report and found that auditor has mentioned at Clause 4(i) that goodwill of Rs. 4,49,036 and shortage of capital goods Rs. 27,03,501, has been debited to the P&L a/c. The AO has treated that these are capital in nature. Accordingly he has disallowed the same.
39. Learned CIT(A) while examining the issue came to the conclusion that the assessee's claim was wrong. Accordingly, he sustained the addition of Rs. 4,49,036. In respect of disallowance of Rs. 27,03,501 being shortage of capital goods stores, it was submitted before learned CIT(A) that shortage of Rs. 27,03,501 was in the stores including damages, this can be verified from schedule 9 to the accounts; it is not shortage in assets or capital goods as observed by learned AO. It was also submitted that the shortage and damaged stores are written off and not any fixed assets. The CIT(A) has recorded his finding at p. 6.4 of his order and has observed that apart from the observation in tax audit report, pointed out by the AO, the directors report in (unusual write off) states that :
"Capital goods inventory shortages/damages : Upon physical verification of the inventory of capital goods at central store certain shortages of an aggregate value of Rs. 27.04 lakhs were identified and written off during the year under review."
40. Aggrieved by the order, assessee is in appeal. It is submitted that the appellant wrote off goodwill cost of Rs. 4,49,036 in its accounts. The said goodwill was shown as a part of fixed assets in the fixed assets schedule in the balance sheet. The goodwill, when written off shown a part of depreciation written off on the fixed assets in the balance sheet in the fixed assets schedule and thus as a part of the depreciation written off as per accounts. In the computation of income for income-tax purpose the depreciation as per accounts was added back and thus as per income-tax rules it was claimed as a deduction. No depreciation was claimed on goodwill for income-tax purposes. The learned counsel referred to p. 101 and 102 of the paper book part II where copies of statement of depreciation claimed in assessment is enclosed. In respect of disallowance of Rs. 27,03,501 it is submitted by the learned counsel that the audit reports Clause (3) and 12) on physical verification of current assets revenue stock is also referred as capital goods stores. The current stores and spares in those days, was referred to as capital goods stores in the accounts vide paper book p. 21 and accordingly it is termed as such in Form No. 3CD vide page No. 39 of the paper book and director's report p. 7 of the paper book. It is submitted that the shortage in fixed assets is separately reflected in Clause I audit report, as Rs. 2,76,09,372 and schedule of fixed assets vide p. 9 and Directors Report vide p. 7. Accordingly, it is submitted that shortage of Rs. 27,03,501 is in current stores allowable as revenue expenses and not of capital goods or fixed assets. Accordingly, it is submitted that the authorities below have failed to appreciate the full facts and wrongly made the addition of the above two amounts.
41. On the other hand learned Departmental Representative supported the decision of authorities below.
42. We have considered the submission made from both sides. We have also perused the various papers in support of the submission, which are placed in the paper book and we find that the submission of the assessee is correct. Therefore, the disallowance of Rs. 31,52,537 (4,49,036 goodwill + 27,03,501 shortage of capital goods) is deleted.
43. As a result, the appeal by the assessee is partly allowed.