ACIT Vs Suresh Productions (ITAT Hyderabad)
ITAT Hyderabad held that entire re-assessment proceeding is illegal and deserves to be quashed in absence of mandatory issue of notice under section 143(2) of the Income Tax Act.
Facts-
The assessee is a partnership firm engaged in film production. It filed its return on 27.11.2003. The original assessment was completed on 17.11.2005 with an addition of Rs.4,11,133/-. Subsequently, it was noticed that the assessee made a wrong claim to the tune of Rs.1,50,00,000/- emanating from the agreement dated 01.04.2002. Therefore, the assessment was reopened by issue of notice u/s. 148 dated 18.03.2010 which was served on Mr. B.S. Murthy, Manager of the assessee on 26.03.2010.
During the course of re-assessment proceedings, AO noted that the original assessment of the sister concern M/s Suresh Movies Film Distributors (SMFD) was completed u/s.143(3) on 17-11-2005 on a total income of Rs.10,84,870/-. M/s. Suresh productions produced a film called “Nee Premakai” which was released on 01-03-2002. As AO felt that the unpaid amount of Rs.1.50 Crores was not an allowable expenditure, therefore, he disallowed the same in the reassessment proceedings being excess liability claimed towards cost of acquisition of the rights of the exploitation of the film. AO made addition of Rs. 1,50,00,000/- being the difference between the amount offered at Rs.75,00,000/- and the consideration money in the agreement at Rs.2,25,00,000/-.
CIT(A) held that re-assessment proceedings u/s. 147 cannot be sustained. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
The original assessment was completed under Section 143(3) on 17.11.2005 and notice u/s. 148 was issued after a period of 4 years from the end of the relevant A.Y and the reasons recorded nowhere shows any allegation by the Assessing Officer of any failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of the assessment, therefore, held that the re-assessement proceedings initiated by the Assessing Officer are not in accordance with law.
The law is well settled that non-issuance of notice u/s. 143(2) of the Act is not a curable defect and since in the instant case, the Assessing Officer has failed to issue the notice u/s. 143(2) prior to finalising the re-assessment order, therefore, the impugned assessment order suffers from patent illegality and therefore, deserves to be quashed.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
ITA No.1429/Hyd/2014 filed by the Revenue is directed against the order dated 31.03.2014 relating to A.Y 2003- 4. The C.O filed by the assessee is directed against the appeal filed by the Revenue vide ITA 1429/Hyd/2014. ITA Nos. 2102 to 2105/Hyd/2018 filed by the assessee are directed against the separate orders dated 1.6.2018 of the CIT (A)-6 Hyderabad relating to the A.Ys 2010-11, 2012-13, 2013-14 & 2014-15 respectively. For the sake of convenience, the above appeals and the Cross objection were heard together and are being disposed of by this common order.
2. There is a delay of 32 days in filing of the cross objection by the assessee for which the assessee has filed a condonation application along with an affidavit explaining the reasons for such delay which is due to the illness of the father of the assessee due to cancer. After considering the contents of the condonation application filed along with the affidavit and after hearing the learned DR, the delay in filing of the C.O by the assessee is condoned and the same is admitted for adjudication.
ITA No. 1429/Hyd/2014 – A.Y 2003-04 (Revenue)
3. Facts of the case, in brief, are that the assessee is a partnership firm engaged in film production. It filed its return of income on 27.11.2003 declaring total income of Rs. 1,24,22,829/-. The original assessment was completed on 17.11.2005 with an addition of Rs.4, 11,133/-. Subsequently, it was noticed that the assessee made a wrong claim to the tune of Rs. 1,50,00,000/- emanating from the agreement dated 01.04.2002. Therefore, the assessment was reopened by issue of notice u/s 148 dated 03.2010 which was served on Mr. B.S. Murthy, Manager of the assessee on 26.03.20 10. The assessee appeared before the Assessing Officer from time to time and filed the requisite details. Subsequently, in response to letter dated 22.11.2010 by the assessee, the Assessing Officer vide letter dated 23.11.2010, copy of which is filed by the Revenue at page 17 of the Paper Book, supplied the reasons for reopening which are as under:
4. The assessee vide letter dated 23.12.2010 filed its objection against the re-assessment proceedings the sum and substance of which has been reproduced by the Assessing Officer in the body of the assessment order and which reads as under:
5. However, the Assessing Officer was not satisfied with the objection raised by the assessee and rejected the same.
6. During the course of re-assessement proceedings, the Assessing Officer noted that the original assessment of the sister concern M/s Suresh Movies Film Distributors (SMFD in short) was completed U/s. 143(3) on 17-11-2005 on a total income of 10,84,870/-. M/s. Suresh productions produced a film called “Nee Premakai” which was released on 01-03-2002. By agreement dt.01-04.2002, i.e. nearly one month after the release of the film, the rights of the film were acquired by Suresh Movies Film Distributors for a price of Rs.2.25 Crores from Suresh Productions. As per the terms of the agreement an amount of Rs.75 lakhs was to be paid as down payment and the balance of Rs.1.50 cores was to be paid in installments starting with the year ending 31-03-2006 fixing the annual installment at Rs. 15 lakhs. In the P & L account the entire amount of Rs.2.25 crores was claimed by Suresh Movies Film distributors as against payment of Rs.75 lakhs only. As the Assessing Officer felt that the unpaid amount of Rs. 1.50 Crores was not an allowable expenditure, therefore, he disallowed the same in the reassessment proceedings being excess liability claimed towards cost of acquisition of the rights of the exploitation of the film. Being aggrieved against the order M/s. Suresh Movies Film Distributors filed appeal on the effective ground that the learned Assessing Officer erred in rejecting the mercantile system of accounting consistently followed by the assessee and consequently erred in disallowing the expenditure of Rs. 1.50 Crore treating the same as contingent liability though it had accrued in the previous year relevant to the A.Y.2003-04. The appeal was fully allowed accepting the view of Suresh Movies Film Distributors. The Assessing Officer accordingly made addition of Rs. 1,50,00,000/- being the difference between the amount offered at Rs.75,00,000/- and the consideration money in the agreement at Rs.2,25,00,000/-.
7. Before the learned CIT (A), the assessee apart from challenging the addition on merit challenged the validity of the re-assessment proceedings. The learned CIT (A) decided both the issues in favour of the assessee.
7.1. So far as the validity of the re-assessement proceedings are concerned, the learned CIT (A) held that the re-assessement proceedings u/s 147 cannot be sustained and bad in law by observing as under:
7.2 So far as the addition of Rs. 1.50 crore is concerned the learned CIT (A) also decided the issue in favour of the assessee by observing as under:
8. Aggrieved with such order of the learned CIT (A) the Revenue is in appeal before the Tribunal by raising the following grounds:
i) The learned CIT (A) erred in holding the reopening of assessment made by the Assessing Officer is invalid though the assessment was made on receipt of fresh information from re-assessment proceedings of M/s. SMFD a sister concern of the company.
ii) The learned CIT (A) erred in considering the fact that both the companies followed mercantile system of accounting and M/s. SMFD has debited to P&L Account the total consideration as expenditure.
iii) Any other ground that may be argued at the time of hearing”.
9. The assessee has filed the cross objection by taking the following grounds:
“1) a) The learned CIT(Appeals), having allowed the grounds on mercantile system of accounting consistently followed by the assessee, should have also allowed the additional ground that revenue would have to redo/rectify a number of past and future assessments, if the method proposed by Assessing Officer were to be applied. The learned CIT(Appeals) ought to have allowed this ground also.
b) The learned CIT(Appeals) failed to appreciate that the doctrine of approbate and reprobate does not act against law, though employed as such by the Assessing Officer in the impugned reassessment, and consequently the learned CIT(Appeals) did not adjudicate on this additional ground raised before him.
2) For the above grounds and such other grounds that may be urged at the time of hearing, the Respondent prays that the cross objections be allowed.
3) The Respondent craves leave to add to, amend or modify the above grounds of cross objections either before or at the time of hearing of the appeal, if it is considered necessary.”
10. The learned DR strongly challenged the order of the learned CIT (A) in quashing the re-assessment proceedings as well as deleting the addition on merit. So far as the order of the learned CIT (A) quashing the re-assessement proceedings are concerned, the learned DR submitted that the reopening had been made on the basis of receipt of fresh information during the re-assessement proceedings of M/s. SMFD, a sister concern of the assessee company. Therefore, the order of the learned CIT (A) quashing the re-assessement proceedings is not in accordance with law. He submitted that when both the companies are following mercantile system of accounting and SMFD has debited the entire expenditure in its P&L account therefore, M/s. Suresh Productions, i.e. the assessee should have also shown the entire amount during the impugned A.Y instead of spreading it over a number of years. He accordingly submitted that the order of the learned CIT (A) being contrary to fact and law should be reversed and that of the Assessing Officer be restored. He also relied on the decision of the Tribunal in the case of FRAICIS JOSEPH vs. Income Tax Officer (64 ITD 456) (Mad.)
11. The learned counsel for the assessee on the other hand while supporting the order of the learned CIT (A) submitted that the assessee is a partnership firm and entered into an agreement at Chennai on 1.4.2002 with M/s. Suresh Movies Film Distributors (SMFD). He submitted that a copy of this agreement was filed during the course of assessement proceedings for the A.Y 2003-04. This copy of the agreement was also given in the proceedings of the sister concern i.e. SMFD and the Assessing Officer assessing both the entities is the same. Referring to page No.359 of the Paper Book (Vol. III), he submitted that the assessment order u/s 143(3) in case of both the entities by the same Assessing Officer were passed on 17.11.2005. He submitted that in accordance with the agreement dated 1.4.2002 M/s. Suresh Productions was holding the exhibition and exploitation rights of the movie “NEE PREMAKAI”. He submitted that M/s. Suresh Productions assigned the rights of the movie for exhibition of the film in the entire state of A.P. for a period of 5 years from 1.4.2002 while the terms of the payment was extended to 15 years. He submitted that in consideration of the assignment by Suresh Productions, M/s. SMFD agreed to pay a sum of Rs.2,25,00,000/- as consideration in the following manner.
