Expenditure incurred by the assessee on leased premises, cannot be treated as capital expenditure and has to be allowed as Revenue expenditure

The expenditure incurred by the assessee on leased premises, cannot be treated as capital expenditure and has to be allowed as Revenue expenditure.

The finding of the Tribunal that 12.5% of net ad revenues is arms length price, was not challenged by the Revenue, we uphold the findings of the first appellate authority.

Money received from a holding company with whom the assessee does not have any trading or business transaction cannot be considered as trading receipt. When there is no contractual agreement or a right to receive, the amount is not taxable as income. Applying these principles to the facts of the case, we have no hesitation in upholding the finding of the CIT(A) that the gift in question cannot be considered as income. Coming to the entries in the books of account, it is well settled that entries in the books of account do not determine the tax ability or otherwise of a receipt.

Such receipts which do not form part of export turnover cannot be included in the total turnover for the purpose of computation of relief under section 80HHC.

IN THE INCOME TAX APPELLATE TRIBUNAL
“L” Bench, Mumbai

Before Shri J. Sudhakar Reddy, Accountant Member

and Shri R.S. Padvekar, Judicial Member

ITA No. 6775/Mum/2004

(Assessment Year: 2001- 02)

 ITA No. 6602/Mum/2004

(Assessment Year: 2001- 02)

 CO No. 134/Mum/2005

(Assessment Year: 2001-02)

 M/s. SET India Pvt. Ltd.

Interface Building No. 1, 4th Floor

Malad Link Road, Malad (W) Mumbai- 400064

Revenue by: Shr S.S. Rana

Assessee by: Shri Dinesh Vyas

Date of Judgement: 12th February 2010.

O R D E R

 Per J. Sudhakar Reddy, A.M.

These are cross appeals as well as cross objection filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals) –XI, Mumbai dated 14.07.2004 for the A.Y. 2001- 02.

2. The facts in brief are that the assessee is an Indian company and is engaged in the business of production/ acquisition and sale of television programmes etc., marketing of air time slots of foreign television channels to Indian advertisers and distribution of television channels. The assessee filed a return of income on 31st October 2001, declaring income of Rs. 16,42,33,430/-. The A.O. originally processed the return of income under section 143(1) on 11.03.2002 and thereafter converted the assessment into scrutiny assessment and passed an order under section 143(3) on 18^th March 2004 assessing an income of Rs. 51,40,07,364/-. While doing so the A.O., inter alia made the following dis allowances/ additions in respect of the following: –

i) Depreciation on integrated receivers and decoders (IRDs) allowed @ 25%, as plant and machinery, instead of @ 60% as computers.

ii) Expenditure on lease hold premises which was claimed as revenue expenses was disallowed and treated as capital expenditure.

 iii) Claim for deduction under section 80HHF was rejected

iv) Enhancement of service fees received by the assessee under an arrangement with SET Satellite (Singapore) Pte Ltd. by invoking provisions of section 92 of the Act.

v) Added an amount received as gift from SPE Mauritius Holding Ltd. under section 68 of the Act.

vi) Disallowed the claim of bad debts and advances written off.

vii) Added the amount of accumulated balance in provisions for gratuity and leave encashment account and also disallowing the claim of incremental liability for leave salary, which was computed on the basis of actuarial valuation by the assessee.

Aggrieved the assessee carried the matter in appeal.

3. The first appellate authority granted part relief. On the issues where the first appellate authority has not granted relief the assessee filed appeal in ITA No. 6602/Mum/2004 for A.Y. 2001-02 and on issues where the first appellate authority has granted relief, the Revenue ha filed appeal in ITA No. 6775/Mum/2004. The assessee also filed cross objection in CO No. 134/Mum/2004.

4. Mr. Dinesh Vyas, the learned senior Advocate filed separate paper books in the assessee’s appeal as well as in the Revenue’s appeal. The paper book in Revenue’s appeal is of 125 pages and the paper book in assessee’s appeal is of 54 pages. Detailed charts were also filed.

5. We have heard Shri S.S. Rana, the learned D.R. on behalf of the Revenue and Shri Dinesh Vyas, the Senior Advocate on behalf of the assessee. On a careful consideration of rival contentions and on a perusal of the papers on record we hold as follows: –

6. We first take up the department appeal in ITA No. 6775/Mum/2004. Ground No. 1 is on the issue of allowability of expenditure incurred by the assessee on lease hold premises. The assessee had incurred expenditure on lease hold premises at Bombay office, Chennai office, Delhi office as well as Bangalore office. The details of the expenditure are given at page 4 of the CIT(A)’s order. The CIT(A), after considering the arguments of the assessee and the findings of the A.O., analysed the nature of expenditure and has come the conclusion that certain expenses incurred by the Bombay Office and Delhi Office were in the nature of capital expenditure. He further held that certain other expenses were partly capital in nature. Thus 50% of such other expenses were treated as capital and the A.O. was directed to allow depreciation on the same. Aggrieved on this finding both the assessee and the Revenue have raised grounds of appeal.

7. We find that similar issue has come up before the “A” Bench of the Tribunal in assessee’s own case for the A.Y. 1996- 97 and the Tribunal in para 8 of its order held as follows: –

“18. We have considered the rival submissions and perused the orders of the Revenue authorities and other material on record, including the case law relied upon by the parties. We find merit in the contention of the assessee that it is only in the case of an expenditure being classified as of capital nature, that provisions of Explanation – 1 to S. 32(1)(iii) becomes applicable. Whether an expenditure is of capital or revenue nature has to be determined first, in the light of the ratio of the decisions of Apex Court and other courts. It is an undisputed fact that the assessee is only a lessee of the premises, on which the expenditure in question has been incurred. Consequently, the expenditure has resulted in third party assets & more so, since the lease agreement entered into by the assessee stipulated that the assessee was not entitled to remove any of the additions and alterations of permanent nature made to the property leased. In the circumstances, considering plethora of decision of the Apex Court, jurisdictional High Court and other Courts relied upon by the learned counsel for the assessee, noted above, we have to hold that the expenditure in question is only revenue nature, and is liable to be allowed as deduction on the computation of income. We accordingly accept the grounds of the assessee on this issue and direct the assessing officer accordingly.”

8. Similar view was taken by the Tribunal in assessee’s own case for the A.Y. 1998- 99 as well as for A.Y. 2000- 01. When the Revenue carried the matter in appeal, the Honourable Apex Court had vide its order dated 27.02.2009 in CC No. 1012/09 dismissed the appeal of the Revenue. In view of the above, respectfully following the proposition of law as laid down by the Tribunal in assessee’s own case for the earlier assessment years we hold that the that the expenditure incurred by the assessee on leased premises, cannot be treated as capital expenditure and has to be allowed as Revenue expenditure. Thus this issue is decided in favour of the assessee and ground No. 1 of the Revenue appeal is dismissed.

9. Ground No. 2 is against deletion of Rs. 10,01,80,302/- added by the A.O. on the ground that there is variation in the percentage of service fees under section 92 of the I.T. Act.

10. The assessee in this case has earned service fees @12.5% of net advertisement revenue receipt instead of 15% of gross advertisement revenue. It is submitted that this reduction in the rate of commission is in anticipation of rise in the subscription revenue and service fees. The A.O. held that the claim of the assessee cannot be accepted. The relevant extract is as follows: –

“4.1. Before the A.O., it was contented that: –

• “the appellant agreed for reduced rte of commission @ 12.5% of net ad-revenue instead of 15% of gross ad-revenue in anticipation of rise in subscription revenues and service fees.

• “The Profit Before Tax of appellant increased substantially in comparison to earlier years.

The A.O. did not accept the claim of the appellant in view of provisions of Sec. 92 of the I.T. Act on the following grounds: –

• “The rate of commission is less than what other channels had been receiving.
• “The term “ordinary profit” referred to Sec. 92 meant the profit an enterprise should get if it was an independent entity and dealt with other entitled independently. The concept is seen as Arms Length Price which has been elaborated by Finance Act, 2001 while introducing the Transfer Pricing Regulations in I.T. Act effective from 1-4-2002.

• “In the original agreement dated 1-10-1995 and letter dated 5-1-1996 the rate of advertisement commission was agreed upon @15% of gross advertising revenues in India. SET, Singapore were to reimburse major marketing costs to appellant. It is only vide letter dated 16.10.1998, that the advertising sales agency commission has been reduced from 15% of gross ad-revenues to 12.5% net ad-revenues in India.

• “The Subscription revenue and Service Fee and independent channels of revenue and if both channels do well, the profits of appellant would go up.

• “Other companies like Zee TV and Star India Ltd., have reflected advertisement revenues @ 15% of gross receipts though they are also on the same line.

In view of the above, the A.O. worked out the income accrued to the appellant from the Service Fee @15% of the gross revenue receipts as under: –

15% of gross revenue receipts of

Rs. 4,00,72,12,000/-                                Rs. 60,10,81,812/-

Shown by the assessee in the income    Rs. 50,09,01,501/-

The Difference                                            Rs. 10,01,08,302/-“

 11. After considering the contentions of the assessee the CIT(A) deleted the addition by following his order for the A.Y. 2000- 01 which is dated 14.08.2003.

12. After hearing the contentions of the Revenue we find that the Honourable Bombay High Court in the case of SET Satellite (Singapore) Pte Ltd. vs. DCIT (International Taxation) reported in 307 ITR 205 noted at page 216 as follows:

“From the order of the Commissioner of Income Tax, which has been accepted it is clear that the appellant herein has paid to its permanent establishment on the arm’s length principle. It recorded a finding of fact that the appellant has paid service fees at the rate of 15 per cent of gross ad revenue to its agent, ET India, for procuring advertisements during the period April 1998 to October, 1998. The fact that 15 per cent service fee is an arm’s length remuneration is supported by Circular No. 742 which recognises that the Indian agents of foreign telecasting companies generally retain 15 per cent of the ad revenues as service charges. Effective November 1998, a revised arrangement was entered into between the parties whereby the aforesaid amount was reduced to 12.5 per cent of net ad revenue (i.e., gross ad revenue less agency commission). Simultaneously, the appellant also entered into an agreement entitling SET India to enter into agreements, collect and retain all subscription revenue. Considering all these aspects and the fact that the agent has a good profitability record, it held that the appellant has remunerated the agent on the arm’s length basis. This finding of the Tribunal has not been disputed by the Revenue. The entire contention of the Revenue is that the advertisement revenue pertaining to its own channel and AXN Channel are also taxable in India.”

13. In view of the above observation that the finding of the Tribunal that 12.5% of net ad revenues is arms length price, was not challenged by the Revenue, we uphold the findings of the first appellate authority and dismiss this ground of the Revenue.

14. Next ground of the Revenue is against the deletion of the addition made by the A.O. on account of gift received by the assessee from SPE Mauritius. The A.O. dealt with the issue at page No. 6 of the order. The CIT(A) at page No. 10 on wards considered the issue and at page 14 in para 5.4 held as under: –

“5.4 I have considered the arguments of the appellant and contentions of the Assessing Officer. The amount in question has been received by the appellant from one of the principal share holder. The A.O. has not proved that the payment of US $ 5,64,909 was in lieu of certain business consideration from the payer to the appellant. The fact that appellant and SPEM are engaged in different business activities has also not been controverted. The A.O. has compared the relationship between SPEM and the appellant to that between the parent and child. The factum of gift has not been disputed nor controverted with the help of evidence. The receipt has not been established to be in the nature of income and cannot be considered as casual and non-recurring receipt taxable u/s. 10(3) of I.T. Act. Therefore, the action of A.O. treating the gift as business receipt cannot be sustained. The receipt shall not qualify for inclusion in the business profits nor in the turnover and accordingly shall not be considered for computation of deduction u/s. 80HHF of I.T. Act. The appellant gets relief of Rs. 2,62,79,566/-“

15. The facts of the case are that the assessee has received a gift of Rs. 2,62,79, 566/- from M/s. SPE Mauritius Holding Ltd. (hereinafter called SPEM), which is a majority shareholder of the assessee. The assessee’s case is that it had no business transaction whatsoever with SPEM and the receipt was not a recurring one. It was further submitted that the gift was not attributable to any custom or past practice and the SPEM had no contractual or statutory obligation to make any payment to the assessee. There is no consideration that has passed from the assessee to SPEM and no quid-pro-quo was involved. The assessee claimed that the gift was a capital receipt and that the payment was benevolent is a gesture of goodwill on the part of the donor. The A.O. did not accept the contention of the assessee on the ground that the reasons for remittance was not known and that the assessee had treated the amount in question as revenue receipt and credited the same to the P & L Account. The A.O. held that SPEM being the majority shareholder of the assessee company, the relationship is akin to that of a parent and child but at the same time, as both of them are in the business of TV marketing, the gift was given for promoting the business of the assessee. He held that the gift is a revenue receipt. The contentions of the assessee before the CIT(A) brought out in para 5.3 at page 13 of the CIT(A)’s order, which are extracted for ready reference: –

“5.3 Before me, it is contended that: –

“the gift has been received by the appellant from one of the principal share holders M/s. SPEM and not from any stranger.

“the identity of the donor is established beyond doubt.

“the gift, representing a voluntary and benevolent payment, constituted a gesture of good will on the part of donor.

“M/s. SPEM did not pursue television marketing business as suggested by the Assessing Officer.

“the appellant is in the business of export of TV programmes, marketing of air time slots and distribution of TV channels and does not have any business arrangements/ transaction with SPEM.

“the gift was voluntary and at the discretion of SPEM.

“there was no obligation on the appellant to utilise the gift for any specific purpose.

“the Stamp Duty paid on the gift deed has not been claimed by the appellant as deduction. Recognising that such gift constituted a capital receipt the stamp duty paid on the gift deed was specifically offered for dis allowance in A.Y. 2002- 03.

“even if the appellant has reflected the said gift a revenue receipt and the credited the same to P & L Account, the treatment adopted by the appellant in the books of accounts would not change the character of the gift into a revenue receipt and shall not govern the tax ability of the receipt.

The appellant relied on following decisions: –

Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC)

Tuticorin Alkali Chemicals & Fertilisers 227 ITR 172 (SC)

Stewarts & Lloyds of India Ltd. 165 ITR 416 (Cal)

“Without prejudice if the gift was held to be the revenue receipt, the same may be included in the computation of profits of business and deduction u/s. 80HHF must be allowed.”

16. Accepting these contentions the CIT(A) granted relief. Aggrieved the Revenue is in appeal.

17. The learned senior D.R., Mr. Rana submitted that the contention of the assessee that this receipt of money from its majority shareholder SPEM was not a revenue receipt but only a capital receipt is contradicted by the entries passed by the assessee in its books of account. He relied on the order of the A.O. and submitted that SPEM holds 49.5% of the shares of the assessee company and to argue that remittance has been made from the parent company to the subsidiary company without any reason is unbelievable. He relied on the definition of the term gift as given in The Law Lexicon as well as the decision of the Honourable Supreme Court in the case of Km. Sonia Bhatia vs. State of U.P. (SC) (1981) AIR Page 1274 at para 20. He contended that the burden of proof is on the assessee to demonstrate as to why he has received money from the parent company. He also pointed out that the parent company has not gifted a similar amount to any other person. He submits that it is possible that the gift has been given by the parent company, to the assessee, to complete some statutory/administrative requirements in India.

18. Mr. Dinesh Vyas, Senior Advocate strongly controverted the arguments of the Senior D.R. He drew attention of the Bench to the gift deed on page 38 of the paper book and certificate of foreign inward remittance to prove his point that the documentation in this case demonstrates that the amount in question is only a gift. He vehemently contended that the amount was received without any consideration and in such an event it is considered as a gift. He relied on the following case law: –

i. Income Tax Officer vs. Essar Teleholdings (2009) 30 DTR Tribunal Orders

ii. CIT vs. Groz-Beckert Saboo Ltd. 116 ITR 125 (SC)

iii. CIT vs. Stewarts & Lloyds of India Ltd. 165 ITR 416 (Cal)

iv. Mehboob Productions P. Ltd. Vs. CIT 106 ITR 758 (Bom)

19. He further submitted that it is well settled that treatment in the books of account does not govern tax ability of otherwise of any receipt. For this proposition he relied upon the judgement of the Honourable Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC) and Tuticorin Alkali Chemicals & Fertilisers 227 ITR 172 (SC). On the definition in The Law Lexicon and the judgement of the Honourable Supreme Court relied upon by the learned D.R., Mr. Dinesh Vyas submitted that the decision was in favour of the assessee. He prayed for relief.

20. After hearing the Revenue’s contention and considering the papers on record as well as the case law cited above, we hold that the undisputed fact is that there is no consideration paid by the assessee to SEPL. There are no business transactions whatsoever between these two entities. The declaration of gift, which is registered states that the same is given voluntarily and without consideration, to SET India Ltd. and SPE Mauritius Holding Ltd. The certificate of foreign inward remittance states that the purpose of remittance is gift to SET India from SPE Mauritius Holding Ltd. There is no material, whatsoever that the Revenue to come to a conclusion that there might be possibly some consideration or quid-pro-quo arrangement for this remittance of fund. The view of the A.O. that the amount may have received to complete some statutory/ administrative requirements in India is nothing but a pure surmise and conjectures. On these facts we now see the legal proposition. The Honourable Supreme Court in the case of Groz-Beckert Saboo Ltd. (supra) was considering a case where the assessee received free of cost certain raw material and semi finished needles from its collaborator which had sent some machinery to the assessee. The question was whether the sum representing raw material and semi finished needles received by the assessee free of cost, along with the machinery, can be deducted in computing the profits from the sale of the finished product. On page 129 the Honourable Court held as follows:

“The position was no different than what it would have been if, instead of giving these raw materials and semi-finished needles to the assessee free of cost, the West German collaborators had gifted the sums of Rs. 44,448.20 and Rs. 30,000 to the assessee and the assessee had introduced these amounts in the business and identical quantity of raw material and semi-finished needles had been purchased and semi-finished needles had been purchased for the business with these amounts.” The undisputed fact in this case was that the raw-material and semi-finished needles received free of cost were capital receipts.

21. In the case of Stewarts & Lloyd of India Ltd. the Honourable Calcutta High Court held as follows: –

“Held, that the material on record showed that there had been no business transaction between the assessee and the U.K. company after the assessee was converted into a public limited company on June 8, 1965. In the income-tax return filed by the U.K. company in the U.K., the payments made to the assessee were not claimed to be the business expenses of the U.K. company. The said amount of Rs. 22.5 lakhs was paid without any claim from the assessee. There was no evidence that the said payment by the U.K. company to the assessee was attributable to any legal obligation or custom or past practice. It was, therefore, clear that there was no obligation, contractual or statutory, to make the said payment to the assessee. It was not the case of the Revenue that the assessee was induced to take up the contract with the Indian Oil Corporation on the expectation that the U.K. company would indemnify the assessee if the assessee suffered a loss in executing the work. No consideration passed from the assessee to the U.K. company for the said payment and no quid pro quo was involved. The fact that, at the relevant time, the assessee was a subsidiary of the U.K. company would make no difference to the legal position. The U.K. company and the assessee at all material times were and remained different entities. Similarly, the fact that there were prior discussions between the assessee and the U.K. company regarding the method and manner of the payment and determination of the quantum to be paid would not affect the character of the receipt. There is nothing to bar consultation and discussion between a donor and a donee. The fact that the amount received from U.K. company had been shown in the profit and loss account of the assessee for the relevant assessment year under the head “Income from other sources” would also not be decisive in the determination of the character of the receipt. The sum of Rs.22.5 lakhs receivable by the assessee from the U.K. company with reference to the Baroda Refinery Project was not of the character of income.

Held also, that the Tribunal was right in holding that, in any event, no right to receive the amount paid by the U.K. company accrued to the assessee during the relevant accounting year.”

22. The jurisdictional High Court in the case of Mehboob Productions P. Ltd. reported at 106 ITR 758 laid down that all receipts by the assessee would not necessarily be deemed to be income of the assessee for the purpose of income tax and the question whether any particular receipt is income or not will depend on the nature of the receipt and true scope and effect of the relevant taxing provision. The Mumbai ”B” Bench of the Tribunal in the case of Essar Teleholdings was considering a case where one SCL irrevocably gifted such debt of Rs. 275.5 crores by way of its resolution of the board meeting and the assessee accepted the gift and a deed of confirmation was entered into between both the parties. On these facts the Tribunal found that the objection of the A.O. that the gifted property does not have any value as on the date of gift is devoid of merit. It held that the conditions of section 122 of the Transfer of Property Act were fulfilled. This brings us to the case law relied upon by the learned D.R. In The Law Lexicon, gift has been defined as follows: –

“Gift. A voluntary conveyance; that is, a conveyance not founded on consideration of money or money’s worth. “GIFT” is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called donee and accepted by or on behalf of the donee. Act IV of 1882 (Transfer of Property) S. 122. A gift is the act by which the owner of a thing voluntarily transfers the title and possession of the same from himself to another person without any consideration. Gifts are of two kinds: (1) Gifts inter vivos, and (2) gifts causa mortis.”

23. In the judgement of the Honourable Supreme Court in the case of Ku. Sonia Bhatia vs. State of U.P. and Others AIR 1981 SC 1274 it is held as follows: –

“The concept of gift is diametrically opposed to the presence of any consideration or compensation. A gift has aptly been described as a gratuity and an act of generosity and stress is on the fact that if there is any consideration then the transaction ceases to be a gift. Complete absence of consideration is the main hallmark which distinguishes a gift from a grant or for that matter other transactions which may be for valuable or adequate consideration.

A gift is undoubtedly a transfer which does not contain any element of consideration in any element of consideration in any shape or form. In fact, where there is any equivalent or benefit measured in terms of money in respect of a gift the transaction ceases to be a gift and assumes a different colour. The motive or the purpose of making a gift should not be confused with the consideration which is the subject matter of the gift. Love, affection, spiritual benefit and many other factors may enter in the intention of the donor to make a gift but these filial considerations cannot be called or held to be legal considerations as understood by law. It is manifest, therefore that the passing of monetary consideration is completely foreign to the concept of a gift having regard to the nature of character and the circumstances under which such a transfer takes place.”

24. In the above judgement relied upon by the learned D.R. it is clearly laid down that a gift is a receipt of money where no consideration of money or money’s worth is involved. It is a voluntary act and does not contain any element of consideration in any shape or form. Money received from a holding company with whom the assessee does not have any trading or business transaction cannot be considered as trading receipt. When there is no contractual agreement or a right to receive, the amount is not taxable as income. Applying these principles to the facts of the case, we have no hesitation in upholding the finding of the CIT(A) that the gift in question cannot be considered as income. Coming to the entries in the books of account, it is well settled that entries in the books of account do not determine the tax ability or otherwise of a receipt. In the result we dismiss this ground of the Revenue.

25. Ground No. 4 is on addition of bad debts written off. The assessee has written off certain debts as bad. The issue of allow ability of bad debts is decided in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Star Chemicals Pvt. Ltd. 313 ITR 126. The Honourable Bombay High Court has also affirmed the judgement of the Special Bench of the Tribunal in the case of Oman International Bank in the case reported in 313 ITR 128. Respectfully following the same we uphold the order of the CIT(A) on this issue. We also note that the CIT(A) has given a clear finding of facts that the amounts which were written off in the books were offered to tax as income in the earlier years. This factual finding is not disputed before us. Thus ground No. 4 of Revenue is dismissed.

26. Ground No. 5 is against dis allowance of the provision for leave en-cash ment liability which was made by the A.O. but allowed by the CIT(A). The assessee claimed as a deduction incremental liability towards leave en-cash ment of salary computed on the basis of actuarial valuation. The A.O. disallowed this claim but the first appellate authority applied the judgement of the Honourable Supreme Court in the case of Bharat Earth Movers Ltd. 245 ITR 428 and allowed the claim of the assessee.

27. After hearing the rival contentions we find that the Tribunal in assessee’s own case for assessment years 1996- 97 and 1997- 98 had allowed similar issue. The judgement of the Honourable Supreme Court in the case of Bharat Earth Movers is in favour of the assessee. Respectfully following the same we dismiss ground No. 5.

 28. Ground No. 6.1 is on computation of relief under section 80HHF on:

(a) Service fees,

(b) Subscription fees,

(c) Service income,

(d) income from music segment, and

(e) income from sale of music rights.

The nature of each of these incomes is as follows: –

“Service Fees: Service fees is income from acting as advertising agent of SET Singapore, recognized when the advertisement is transmitted is received from the principle. Services are rendered in respect of coordination with various Ad agencies and collection service is also provided.

Advertising sales agency agreement has been entered into between SET India and SET Singapore, wherein SET India agrees to provide SET Singapore sales agency services including sale of ad time and various related services. In turn SET Singapore pays Service Fees as agreed between both the parties.

Payment from advertisers are received in a separate bank account from where SET India gets its share of commission and then the balance is remitted to SET Singapore.

Subscription Income: SET India distributes various satellite channels like Sony, Set Max, CNBC and HBO in India. For this it has entered into agreement with various cable operators/ Distributors/ MSO’s. The Subscription revenue is collected from such cable operators/ Distributors and 100% of the said revenues are retained by SET India as per the agreement between SET India and SET Singapore.

Service Income: SET India has fixed episode cost to be paid to production house and same is recovered with mark up of over and above fixed episode cost (generally in the range of 10 to 30%) from SET Singapore. Gross amount received from SET Singapore is recorded as income from sale of programs. Sometimes over and above fixed episode cost, production house incurs additional cost, which is also recovered from SET Singapore with mark up. This additional amount is recorded as Service income in books of accounts (though the nature of income is income from sale of programs) and expenses/ cost of the same is booked under the head “cost of programs.”

Income from Music Segment: Charges/ Fees received from Producer of film for showing video clipping (promos) of film on channel (between two programs in the channel) is recorded as Income from music segment. Fees are also received from SET Singapore for transmission of video clipping.

Income from Music Rights: SET India had acquired certain rights including audio copy right in respect of certain live events performed. Said rights were sold to SONY Music Entertainment (India) Ltd. and total consideration of Rs.1 crore was received.”

29. The statement of employees strength filed by the assessee and perusal of the sample invoices of service income, sample invoices of income from music as well as agreement with SONY Music clearly demonstrate that these incomes are operational incomes and cannot be termed as stand alone incomes. The Tribunal “C” Bench in assessee’s own case in ITA No. 3446/Mum/2002 for A.Y. 1998-99 order dated 7th December 2005 wherein at para 11 on page 5 the Tribunal followed the judgement of the jurisdictional High Court decision in the case of CIT vs. Bangalore Clothing Co. 260 ITR 371 as well as the judgement of the Madras ITAT in the case of A.O. vs. Aswini Fisheries Ltd. 77 ITD 561 and decided the issue of service charges in favour of the assessee. Similarly in the case of subscription income, for the very same reasons as cited in the case of service fees, subscription income is operational income and cannot be said that it is an independent income unconnected with the operations of the assessee. Similar is our finding on music segment income and income from sale of music rights. Thus we uphold the findings of the learned CIT(A). This Bench of the Tribunal in the case of AACIT vs. Star India Pvt. Ltd. 22 SOT 444 (Mum) has decided the issue in favour of the assessee. Thus, respectfully following the same we uphold the order of the CIT(A) and dismiss Revenue’s ground.

30. Coming to ground No. 6.2 assessee’s contention is that if certain incomes as such miscellaneous income, consultancy charge, gift, interest income and foreign exchange gain are to be reduced from the profit of business, then these amounts should be reduced from total turnover for the purpose of computation of deduction under section 80HHF. For this proposition decision of the Honourable Bombay High Court in the case of CIT vs. Kantilal Chhotalal 246 ITR 439 is placed on record.

31. After hearing the rival contentions we find that the Hon’ble Bombay High Court in the case of Kantilal Chhotalal (supra) has held that the income which has no nexus with export activity has to be eliminated from he profits of business. It is further held that such receipts which do not form part of export turnover cannot be included in the total turnover for the purpose of computation of relief under section 80HHC. Applying the ratio of this decision to the facts of the case we uphold the decision of the first appellate authority and dismiss this ground of the Revenue.

32. Appeal of the Revenue is allowed in part.

33. We now consider the assessee’s appeal in ITA No. 6602/Mum/2004. The first issue in assessee’s appeal is on rate of depreciation allowable on Integrated Receivers and Decoders. The assessee’s claim is that the same should be classified as computers and not plant and machinery and that depreciation should be allowed at the rate of 60%. Both the parties admitted that the issue had come up before the Tribunal in assessee’s own case for A.Y. 2000-01 and the Tribunal had set aside the issue to the file of the A.O. Respectfully following the same, we set aside this issue to the file of the A.O. with the direction to follow the direction of this Bench for A.Y. 2000-01 on this issue and to decide the issue afresh in accordance with law.

34. Ground No. 2 is on the issue of expenditure incurred on leasehold premises. The assessee claimed the entire expenditure as being revenue in nature whereas the first appellate authority had treated certain expenditure as that which is incurred in the capital field. Similar issue has been discussed by us in the Revenue appeal while disposing off ground No. 1. Consistent with the view taken therein we hold that the expenditure in question is revenue expenditure and the claim of the assessee is to be allowed. In the result, ground No. 2 of the assessee is allowed.

35. Ground No. 3 is on computation of relief under section 80HHF in respect of certain miscellaneous income the nature of which is discussed hereinabove.

36. After hearing the rival contentions we find that the test to be applied is whether the income in question can be termed as operational income and whether the income can stand on its own, i.e. unconnected with the operations which result in the assessee earning income, which can be claimed as deduction under section 80HHF. The nature of income in question is as follows: –

37. The assessee has filed certain debit notes, to demonstrate its point that the income in question is operation income. Regarding recovery of expenditure with CNBC the following note is filed by the assessee which is at page 5 of the assessee’s paper book, which is extracted for ready reference: –

“During the year, the assessee was distributor of CNBC channel and has earned income which is booked under the head “subscription income”. In addition as per the agreement, the assessee incurred expenses on marketing and PR, which are separately recovered. Please refer clause 12 of the agreement with Television Eighteen Mauritius Limited and Television Eighteen India and which is enclosed. This recovery is recorded as Misc. Income, through it is not income just reimbursement of expenditure incurred for and on behalf of CNBC.

38. On a perusal of the nature of income and events that gave rise to the same we are of the considered opinion that recovery DNVR charges is nothing but operational income. The amount recovered towards marketing and general administration expenses for promotion of CNBC channel is reimbursement of expenditure, though recorded as miscellaneous income. Hence, this cannot be considered as a separate source of income, which is independent of the operations of assessee. In any event it has to be verified whether an element of profit is there in this amount recovered by the assessee. If it is just reimbursement of expenses without an element of profit, the assessee stands succeed on this issue. Thus, we set aside the issue to the file of the A.O. for fresh decision, with the direction that if it is mere reimbursement of actual expenditure, it cannot be termed as income. Only in case the assessee has charged Television Eight, Mauritius on cost + basis, then the income to the extent of profit earned on such amount recovered is to be eliminated from the profits of business for the purpose of computation of relief under section 80HHF. Coming to recovery of amounts earlier written off, the profits of business had been reduced when the amount was written off as a bad debt and now on recovery of the same this entry is to be reversed and the profits from income has to be accordingly increased. Thus we are of the considered opinion that the amount written back, which are given in greater detail at page No. 26 of the paper book should be treated as business income and the assessee is entitled for deduction under section 80HHF. Thus, this ground of the assessee is allowed in part.

39. Assessee has raised an alternative contention that wherever it is held that the miscellaneous income is to be reduced from the profits of business, then only 90% of the net receipt should be reduced. Reliance is placed on the decision of the Honourable Delhi High Court in the case of CIT vs. Shri Ram Honda Power Equip 289 ITR 475 and other decisions. We apply this proposition laid down by the Honourable Delhi High Court on this issue of netting to the facts of the case and direct the A.O. to reduce only 90% of the net receipts, wherever it has been decided that particular income should be eliminated from the profits of business for the purpose of computation of relief under section 80HHF.

40. Next issue is on the deduction under section 80HHF of consultancy fees. After hearing the rival contentions we are of the considered opinion that consultancy fees can be considered as income which is on its own and has to be eliminated from profits of business for the purpose of computation of relief under section 80HHF. In any event as in earlier case, we apply the decision of the Honourable Delhi High Court in the case of Shri Ram Honda Equip and the judgement of the Special Bench of the Tribunal in the case of Lalson Enterprises vs. DCIT (SB) Del) 89 ITD 25 and direct the A.O. to reduce only 90% of the net receipts from consultation fees.

41. Next ground is on the dis allowance of deduction in respect of advance written off. The details are given at page 26 of assessee’s paper book, which is abstracted for ready reference: –

 42. After considering the rival contentions, we are of the considered opinion that the advance amount paid to a party, for promotion of event by name “Bungee Jumping” was in connection with the business of the assessee and when the same is written off, for whatever reasons, it is a business loss and has to be allowed as such. Coming to the advance to a party of development and up gradation of TMS software, the assessee has written of the same as it has not received the software in question. The software was to be used for the revenue management department. We are of the considered opinion that the write off of a business loss and is to be allowed as such. In the result, ground of the assessee is allowed.

43. Ground Nos. 8 & 9 is on levy of interest under section 234D. Admittedly the issue is now covered in favour of the assessee and against the Revenue by the decision of the Special Bench of the Tribunal in the case of Ekta Promoters 305 ITR 1 (Del). Respectfully following the same we allow the ground of the assessee.

44. Appeal of the assessee is allowed in part.

45. This leaves us with the cross objection CO No. 134/Mum/2005. After hearing the Revenue’s submission we hold as follows

46. Ground No. 1 of the cross objection is dismissed as not pressed.

 47. Ground No. 2 is an alternative ground and in view of our findings in the Revenue appeal in this ground is dismissed as consequential, which need not be adjudicated.

48. Similarly ground Nos. 3 & 4 are alternative grounds and for the same reasons given while disposing off ground No. 2, we are of the opinion that these grounds are to be dismissed as they have been come academic in view of our decision in the Revenue appeal.

49. Ground No. 5 is also an alternative ground on the issue of gift received from SPE Mauritius Holding Ltd. In view of our decision in the Revenue appeal this ground does not survive. In the result, ground of the assessee is dismissed.

50. In the result, the cross objection is dismissed.

Order pronounced in the open court on 12th February 2010.