Income Tax Appellate Tribunal - Mumbai
Siti Cable Network Ltd, Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" BENCH, MUMBAI
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND
SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA no.4060/Mum./2007
(Assessment Year : 2004-05)
Siti Cable Network Ltd.
(Merged with Dish TV India Ltd.)
Madhu Industrial Estate, 4th Floor
Pandurang Budhkar Marg
Worli, Mumbai 400 013 ....................... Appellant
v/s
Asstt. Commissioner of Income Tax
Range-11(1), Aayakar Bhavan
M.K. Road, Mumbai 400 020 ................... Respondent
ITA no.4533/Mum./2007
(Assessment Year : 2004-05)
Asstt. Commissioner of Income Tax
Range-11(1), Aayakar Bhavan
M.K. Road, Mumbai 400 020 ....................... Appellant
v/s
Siti Cable Network Ltd.
(Merged with Dish TV India Ltd.)
Madhu Industrial Estate, 4th Floor
Pandurang Budhkar Marg
Worli, Mumbai 400 013 ................... Respondent
Revenue by : Mrs. Malathi Sridharan
Assessee by : Mr. Vijay Mehta
Date of Hearing - 23.6.2011 Date of Order - 12.8.2011
2 Siti Cable Network Ltd.
ITA no.4060/M/2007
ITA no.4533/M/2007
ORDER
PER J. SUDHAKAR REDDY, A.M.
These cross appeals are directed against impugned order dated 23rd March 2007, passed by the Commissioner (Appeals)-XI, Mumbai, for assessment year 2004-05.
2. Brief facts of the case are that, the assessee, a company, is engaged in the business of rendering cable network service (called Multi System Operator (MSO) to Cable Operators-subscribers, franchisees and affiliates, etc. Assessee's network is spread across the country and is maintained and managed through local distributors (Management JV Companies) managed by local Joint Venture Partners. The pay TV and FTA Channels and own cable channels are distributed / redistributed through the network. The cable operators are sharing the cable subscription collected from the public as per the agreement on the declared subscribers. The assessee pays subscription to pay TV channels to redistribute their channels to the network subscribers wherever the bulk deals are arrived at.
3. The assessee company filed its return of income on 31st October 2004, declaring total loss of ` 83,73,94,340. The Assessing Officer, in his order dated 22nd December 2006, passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), determined the income at ` 283,47,34,869, inter-alia, making addition on account of estimated subscription income, disallowance of loans and advances written-off, disallowance of incentives written-off, disallowance of bandwidth charges under section 40(a)(i) of the Act.
4. The assessee, being aggrieved by the stand so taken by the Assessing Officer, carried the matter in first appeal, wherein the Commissioner (Appeals) upheld the order of the Assessing Officer on the issue of disallowance of claim being write-off of advances given to management 3 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 companies and disallowance made under section 40(a)(i). Still aggrieved, the assessee is in further appeal before the Tribunal raising the very same issue.
5. The Commissioner (Appeals) allowed the claim of the assessee by deleting the addition of estimated subscription income and deleting the addition relating to written-off of inventories. On these two issues, the Revenue is in appeal.
First, we take up assessee's appeal in ITA no.4060/Mum./2007.
6. Before us, Learned Counsel, Mr. Vijay Mehta, appeared on behalf of the assessee, explained the nature of business being carried on by the assessee and submitted that the assessee has given advance to the management companies who were managing the networks in different parts of the country. He submits that these management companies had incurred loss and as the amount was not recoverable, the assessee has written-off the same and made the claim. He submits that the Assessing Officer was factually incorrect when he recorded that the resolution was passed by the Board of Director, which stated that advances were provided to the managing company to develop infrastructure and to meet their fund requirements. He argued that there is no such resolution of the Board and it is not known from where the Assessing Officer picked-up this fact. He pointed out that the disallowance was made on the ground that the loss was capital in nature. Learned Counsel, referring to the order of the Commissioner (Appeals), disputed the finding and submits that the advances were given for the purpose of business and to meet the exigencies of business and in those circumstances, the loss was business loss. He referred to assessee's paper book running into 86 pages and drew the attention of the Bench to Page-7 and submits that the details were furnished before the Assessing Officer. On a query from the Bench, learned Counsel submits that the agreement entered with the management companies is not on record. He further submits that the correspondence between the assessee company and 4 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 the management companies, evidencing the purpose for which the loan was given, is not on record. Nevertheless, he argues that the expenditure is for the purpose of business and that this is not disputed by the Revenue and also that even if it is given for infrastructure, it is the infrastructure of the management company and it cannot be the capital loss of the assessee. He, accordingly, prayed that the issue may be restored to the file of Assessing Officer, so as to enable him to verify all the agreements with the management companies as well as the evidences indicating the purpose of loans and advances.
7. On ground no.2, the learned Counsel submits that the payment was made for bandwidth and in such circumstances, no deduction of tax need to be made under section 194J and, hence, there cannot be any disallowance under section 40(a)(i). In support of his arguments, he relied on the judgment of Hon'ble Delhi High Court in CIT v/s Estel Communications P. Ltd., (2008) 217 CTR Del. 102. Special Leave Petition filed against the said judgment, was dismissed by the Hon'ble Supreme Court, vide judgment dated 9th January 2009. He also relied on the following case laws:-
Pacific Internet (I) P. Ltd. v/s ITO, (2009) 27 SOT 523 (Mum.) Infosys Technologies Ltd. v/s DCIT, (2011) 10 Taxman.com 01, (Bang. - ITAT)
8. On ground no.2(ii), learned Counsel submits that this ground is academic in nature.
9. Learned Departmental Representative, Mrs. Malathi Sridharan, on the other hand, submits that there is no proof given to the assessee that loans and advances in question is a trade debt. She points out that this was never taken into account and, hence, the conditions of section 36(2), are not satisfied. Hence, she submits that the claim can be examined only as the business loss. She vehemently contended that the assessee is not in the business of providing loans and advances and, hence, it cannot be termed as business loss. She pointed out that the assessee has not lead any evidence 5 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 to prove that the losses have become bad and that only a Board resolution was filed. She pointed out that the write-off was not made in the books of account and only a statement was prepared and adjusted against share premium account and submits that under those circumstances, the claim cannot be allowed. She points out that the recipient has never treated which is the receipt as its income and the assessee now claims the same as it is expenditure and that too without filing any evidence.
10. Coming to ground no.2, she submits that the agreement has not been filed by the assessee and, hence, it would not be possible to come to a conclusion as to whether the facts are identical with the facts of the case of Estel Communications P. Ltd. (supra). She points out that in all those cases, the agreements were examined. She defended this ground by submitting that the payment was made to non-resident and it is covered under the provisions of section 9(1) r/w Explanation (2)(iva) of the Act. She contended that unless the agreement is examined, no decision can be taken on this issue.
11. Now, coming to Revenue's appeal, on ground no.1, learned Departmental Representative submits that the issue is covered by the decision of Mumbai Bench of the Tribunal in assessee's own case case in ITA no.300/Mum./2007, for assessment year 2003-04, order dated 26th March 2007, as well as ITA no.6178/Mum./2003, for assessment year 1997-98, order dated 9th March 2007.
12. On ground no.2, she submits that the deduction is wrongly claimed on the ground that the inventories are re-valued. She took this Bench to the findings of the Assessing Officer at Page-6, and submits that it was not clear as to whether it was capital which was written-off or whether inventories were written-of. She referred to paper book filed by the assessee and points out that an ad-hoc exercise has been undertaken to re-value the stocks and such loss on re-valuation was set-off against share premium account and is also being claimed as expenditure. She referred to Page-2/Para-3 of the 6 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 order passed by the Commissioner (Appeals) and submits that the Commissioner (Appeals) should have examined the High Court order before allowing the claim of the assessee instead of finding fault with the Assessing Officer for not verifying the High Court order on the issue. She submits that stocks are valued at cost or net realisable value at the end of the year and re-valuation loss cannot be allowed in the middle of the year. She points out that the entire purpose of re-valuation, was to reduce the share premium account. She contends that this issue was never before the High Court and that the High Court was merely considering restructuring of business as proposed by the assessee.
13. In reply, learned Counsel for the assessee submits that on ground no.1, the Commissioner (Appeals) had merely followed the orders of his predecessor-in-office in the earlier assessment year which were upheld by the Tribunal. He filed a copy of the Hon'ble Jurisdictional High Court judgment rendered in CIT v/s Siti Cable Network Ltd., vide Income Tax Appeals no.936/2007, 320/2004, etc., judgment dated 11th January 2011 and submits that the order of the Tribunal has been upheld by the High Court.
14. Coming to ground no.2, learned Counsel for the assessee submits that in the notes of account, it is very clear that what has been re-valued is only stocks and no fixed assets are involved. Referring to the valuation report of consulting engineers, which is at Pg.59 of the paper book, he submits that though the name of the report is given as "machinery valuation report", the fact remains that what was valued was various stock items of business. He referred to preamble of the report as well as the opinion and emphasized that only stocks were involved. On the argument that this was never written- off in the Profit & Loss account, the learned Counsel contends that this is a matter of presentation and if these items are written-off in the books of account as well as in the Profit & Loss account, then ultimately it would have 7 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 gone to reduce the reserves of the company which consisted of share premium account.
15. Rival contentions heard. We first take up assessee's appeal. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record, as well as the case laws cited before us, insofar as ground no.1 is concerned, we find that the management companies are in the nature of distributing companies for the assessee. We are of the opinion that to determine the exact nature of the transaction, it is necessary to examine the agreement between the assessee company and its distributing companies which are managing companies. The assessee should also demonstrate with evidence the purpose for which these advances were given. The claim of the assessee cannot be considered under section 36(1)(vii), as it does not fulfill criteria laid down under section 36(C). If a claim is to be considered under the provisions of sections 37 or 28 itself, it is for the assessee to lead evidence that these advances were given in the normal course of trade and have, in fact, become bad. The onus lies on the assessee to prove that the loss have crystallised in this year only. A mere statement prepared for the purpose of re-structuring does not entitle the assessee to make a claim for business loss. The assessee is bound to lead evidence, if it has to make a claim under the Act. With these observations and as in our opinion, examination of the agreement is necessary, we set aside the order of the Commissioner (Appeals) and restore the issue back to the file of Assessing Officer for denovo adjudication and in accordance with law.
16. Coming to ground no.2, the Hon'ble Delhi High Court in Estel Communications P. Ltd. (supra), has held as follows:-
"Held - Tribunal considered the agreement that had been entered into by the assessee with T and come to the conclusion that there was no privity of contract between the customers of the assessee and T. In fact, the assessee was merely paying for an internet bandwidth to T and then selling it to its customers. The use of internet facility may require sophisticated equipment but that does not mean that technical 8 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 services were rendered by T to the assessee. It was a simple case of purchase of internet bandwidth by the assessee from T. Under the circumstances, the Tribunal came to the conclusion that there were no technical services provided by T to the assessee. It was as simple case of payment for the provision of a bandwidth. No technical services were rendered by the assessee. On a consideration of the material on record, no substantial question arises in the matter."
17. In our considered opinion, the agreement in question has to be examined before coming to a conclusion that the fee in question has not been paid only for purchase of Band width. If so, no disallowance can be made. As, neither the Assessing Officer nor the Commissioner (Appeals) has examined the issue, we set aside the order of the Commissioner (Appeals) and restore the issue back to the file of Assessing Officer for denovo adjudication in accordance with law.
18. In the result, assessee's appeal is allowed for statistical purposes.
19. Coming to Revenue's appeal, ground no.1, which is on the issue of addition made on estimated basis of subscription account, we find that the issue is covered in favour of the assessee in its own case in ITA no.6178/Mum./2003, for assessment year 1997-98, order dated 9th March 2007, as well as the orders for all the previous years up to the assessment year 2003-04. In ITA no.300/Mum./2007, order dated 26th March 2008, the Hon'ble Jurisdictional High Court, vide judgment dated 11th January 2011, passed in I.T. Appeal no.937 of 2007, has upheld the order of the Tribunal. Respectfully following the binding decision of the Hon'ble Jurisdictional High Court, we dismiss this ground of Revenue.
20. Coming to ground no.2, we find that the assessee is valuing its closing stock at cost on net realisable value, whichever is less at the end of the accounting year. On examination of the paper book, we find that the assessee has undertaken an exercise of re-structuring. A scheme of arrangement for reduction and adjustment of share capital and share premium account has been filed before the Hon'ble Jurisdictional High Court and the Hon'ble High Court vide its judgment dated 6th May 2004, approved 9 Siti Cable Network Ltd.
ITA no.4060/M/2007 ITA no.4533/M/2007 the same. During this exercise, the stocks have been re-valued. In our opinion, the loss arising on such re-valuation of stock for the purpose of reduction of share capital is not allowable. When the assessee values its stock at cost and net realisable value, re-valuation loss in the middle of the year cannot be considered. We also notice that all these losses written-off have been adjusted against equity share capital or share premium account and are not routed through Profit & Loss account. In our opinion, such deduction, on re-valuing the stock that too on ad-hoc basis, as seen from the report of the valuer, cannot be allowed as expenditure in the hands of the assessee. Keeping in view these discussions, we allow ground no.2 of the Revenue.
21. In the result, Revenue's appeal is partly allowed.
Order pronounced in the open Court on 12.8.2011
Sd/- Sd/-
N.V. VASUDEVAN J. SUDHAKAR REDDY
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, DATED: 12.8.2011
Copy to:
(1) The Assessee;
(2) The Respondent;
(3) The CIT(A), Mumbai, concerned;
(4) The CIT, Mumbai City concerned;
(5) The DR, "L" Bench, ITAT, Mumbai.
TRUE COPY
BY ORDER
Pradeep J . Chowdhu ry ASSISTANT REGISTRAR
Sr. Private Secretary ITAT, MUMBAI BENCHES, MUMBAI