Case Law Details
Scrabble Entertainment Ltd Vs ACIT (ITAT Mumbai)
Once there is compliance to TDS provisions, even if there is short deduction of TDS or TDS has been deducted under different sections, there is no scope for the AO to disallow expenditure u/s 40(a)(ia) of the Act as the provisions u/s 40(a)(ia) is applicable only when there is no TDS deduction. This legal proposition is supported by the decision of Hon’ble Calcutta High Court in the case of CIT vs SK Tekriwal (supra) wherein it was held that if there is lesser deduction of TDS due to any difference of opinion, no disallowance can be made u/s 40(a)(ia) of the Act. If there is short deduction, the revenue is free to proceed to pass an order u/s 201 of the Act, but no disallowance can be made u/s 40(a)(ia) of the Act.
FULL TEXT OF THE ITAT JUDGMENT
These cross appeals filed by the assessee as well as revenue are directed against the order of the CIT(A)-4, Mumbai dated 11-01-2016 and they pertain to assessment year 2011-12. Since both the appeals pertain to the same assessee, for the sake of convenience, they were heard together and are disposed of by this common order.
2. The brief facts of the case are that the assessee company engaged in the business of sales of DFL projectors and related accessories of deployment of digital cinema. The assessee has filed its return of income for the assessment year 2011-12 on 27-09-2011 declaring total income at Nil. The assessment was completed u/s 143(3) on 27-03- 2014 determining the total income at Nil after setting off of brought forward losses by making addition towards unexplained cash credits towards share capital and share premium, expenditure incurred on UAE branch, disallowance of interest on inter-corporate loans, addition towards cessation of liability u/s 41(1), towards unproved sundry creditors, disallowance of expenditure for failure to deduct TDS / short deduction of TDS u/s 194C, addition towards AIR mismatch and disallowance of amortization of subsidized cost. The AO also recomputed book profit u/s 115JB by making adjustments towards addition made on account of disallowance of amortization of subsidized
3. Aggrieved by the assessment order, assessee filed appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions to contest each and every addition made by the AO. The CIT(A), for the detailed discussion in his order dated 11-01-2016 partly allowed appeal filed by the assessee, wherein he has deleted additions made by the AO towards unexplained cash credits u/s 68 towards share capital and share premium, disallowance of expenditure incurred for stting up UAE branch, disallowance of expenditure u/s 40(a)(ia) for failure to deduct TDS / short deduction of TDS and addition towards AIR mismatch; however, confirmed recomputation of book profit u/s 115JB by making adjustments towards disallowance of amortization of subsidized cost in respect of sale of projectors and accessories on the ground that the assessee has written off subsidized cost incurred on sales of projectors by changing its accounting policy without any valid reasons for change in standard accounting policies followed in the earlier years. According to the CIT(A), the assesse has consistently followed the policy of accounting subsidized cost over a period of agreement and charged to P&L account. However, during the current year, without any changes in facts, charged subsidised cost fully to the P&L account which results into under-statement of profit to the extent of Rs.2,34,89,480 which is evident from the fact that this fact has been mentioned in third para of Note No.5 of Part B of Schedule 22 in the balance-sheet. Since the assessee company has changed its accounting policy during the year without any valid reason for changes in accounting policy thereby reduced the net profit. Therefore, made an addition of Rs.2,34,89,480 towards book profit computed u/s 11 5JB of the Income-tax Act, 1961.
4. The Ld.AR for the assessee submitted that the Ld.AO failed to appreciate the fact that book profit computed u/s 11 5JB of the Act has to be computed based on the net profit as per the P&L Account prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. Assessee has prepared its P&L Account in accordance with Parts II and III of Schedule Vi of the Companies’Act and the same has been duly audited by the Auditors and also approved by the Board of Directors. Therefore, there is no reason for the AO to recompute book profit only on the basis of notes given to financial statements wherein for the purpose of disclosure of financial statements, the assessee has given a note regarding changes in accounting policy for treatment of subsidised cost in its financial statements. The assessee further submitted that the impugned expenditure has been already incurred by the assessee and only for the purpose of disclosure in financial statements in consonance with matching concept principles decided to amortise subsidised cost over a period of agreement. However, due to changed circumstances, the management has decided to charge subsidised cost in the year of its incurrence. Therefore, the treatment given for amortisation of subsidised cost is in accordance with accounting standards. Accordingly the AO was incorrect in making adjustment towards book profit. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Apollo Tyres Ltd (2002) 122 Taxman 562 (SC). The assessee also relied upon the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd vs JCIT (2015) 372 ITR 605 (SC).
5. The Ld.DR, on the other hand, supported the order of the CIT(A).
6. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The assessee has treated subsidised cost on sale of projectors and its accessories as deferred revenue expenditure and amortised over a period of During the year under consideration, the assessee has changed its accounting policy so as to charge total subsidised cost incurred to the P&L Account in the year in which such cost has been incurred and such changes has been disclosed in the notes to accounts. The AO made addition to the book profit computed u/s 11 5JB on the ground that the assessee has failed to make positive adjustments towards amortisation of subsidised cost even though such expenditure is not deductible during the year under consideration because of its own treatment in the earlier financial year. The AO further observed that the assessee itself has considered subsidised cost as deferred revenue expenditure and amortised over a period of agreement by following matching concept principles of accounting. However, without any material changes in facts, changed its accounting policy to charge subsidised cost in the year of incurrence. Therefore, he opined that its financial statements are not in accordance with Parts II and III of Schedule Vi of the Companies’ Act and hence made adjustments towards amount written off to the book profit. It is the contention of the assessee that once its financial statements are prepared in accordance with Parts II and III of Schedule VI of the Companies’Act and said financial statements have been audited and approved by the Board, there is no scope for the AO to recompute book profit u/s 11 5JB of the Income-tax Act, 1961. The assessee further contended that adjustment made by the AO to recompute book profit u/s 115JB, is not in accordance with Explanation 1 to section 11 5JB as the item of adjustment is not in the list of positive adjustments. Therefore, the AO was incorrect in making adjustment towards amortisation of subsidised cost to the book profit in contravention of provisions of section 11 5JB. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Apollo Tyres Ltd (2002) 122 Taxman 562 (SC) and the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd vs JCIT (supra).
7. Having heard both the sides and considered materials on record, we find merit in the arguments of the assessee that the entire expenditure incurred towards subsidised cost on sale of projectors and its accessories was incurred and it was the assessee, who wanted to spread over such expenditure over a period of agreement in consonance with matching concept of principles of accounting. Normally, the revenue expenditure is to be allowed in the same year in which it is incurred. But at the instance of the assessee, who wanted spreading over, the benefit may be allowed when it was found that there was a continuing benefit to the business of the assesse over the entire period. What follows from the above is that normally the ordinary rule is to be applied, viz. revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, then the department cannot deny the same. However, in that case, where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principles of matching concept is satisfied. In the present case, admittedly, the assessee has incurred subsidised cost on sale of projectors and accessories and such cost has been treated as revenue expenditure and also amortised over a period of agreement. However, due to changed circumstances, it has changed its accounting policies so as to charge total subsidised cost incurred in the year in which such expenditure has been incurred. The assessee also disclosed such changes in accounting policies in the notes to accounts for better disclosure of its financial statements. It is also an admitted fact that the assessee has prepared its accounts in accordance with Parts II and III of Schedule VI of the Companies’Act, 1956. The accounts of the assessee has been audited by the statutory auditors and also approved by the Board. Once, accounts are prepared in accordance with Parts II and III of Schedule VI of the Companies’Act and such accounts have been approved by the Board of directors of the company, then there is no scope for the AO to make any adjustment towards book profit computed u/s 11 5JB. In this case, such adjustment is not in accordance with Explanation 1 to section 11 5JB of the Act. We further notice that the adjustments made by the AO towards amortisation of subsidised cost is not an item of positive adjustment provided under Explanation 1 to section 11 5JB of the Act. Therefore, we are of the considered view that the AO was incorrect in making adjustments towards book profit in respect of amortisation of subsidised cost. This legal proposition is supported by the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd vs CIT (supra) wherein it was observed that the AO is not permitted to make any adjustment towards book profit, once the accounts are prepared in accordance with Parts II and III of Schedule VI of the Companies’ Act, 1956. We further notice that the claim of the assessee that deduction towards expenditure incurred is covered by the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd vs JCIT (supra) wherein it was held that merley because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. Therefore, we are of the considered view that the AO was incorrect in making addition towards amortisation of subsidised cost to the book profit computed u/s 115JB of the Act. Hence, we direct the AO to delete addition towards book profit computed u/s 11 5JB of the Act.
8. In the result, appeal filed by the assessee is allowed.
9. The first issue that came up for our consideration from revenue’s appeal is addition towards share capital and share premium u/s 68 of the Income-tax Act, 1961 as unexplained cash credit. The AO made addition towards share capital and share premium on the ground that the assessee was failed to justify issue of shares at a premium and no evidence / documents have been filed to prove the identity, genuineness of transactions and creditworthiness of the parties. According to the AO, the assessee has issued shares of face value of Rs.10/- at a premium of Rs.1 ,033 per share without any justification for offer of shares at a huge According to the AO, the market value of the shares as on the date of issue of share at a premium is Rs.88 and hence, the premium should have been charged at Rs.78/-, whereas the assessee has charged excess premium of Rs.955 per share. Therefore, he doubted the genuineness of transactions and accordingly made addition by following the decision of Hon’ble Bombay High Court in the case of Major Metals vs UOI 2016-LL-0517-33 It is the contention of the assessee that it is engaged in converting majority of the multiplexes and from time to time single screens in the country to digital cinema initiative platform and enjoys the privilege of being India’s DCI compliant entity having Virtual Print fee contracts. The assessee is now listed on the Bombay Stock Exchange and the National Stock Exchnage has issued shares to UFO at a price of Rs.1 ,043 per share having a face value of Rs.10/-. Such shares has been issued to hold controlling interest considering the growth in number of screens. The assessee has filed various details before the AO to justify issue of shares at a premium. The assessee also filed details to prove identity, genuineness of transaction and creditworthiness of the parties. Therefore, there is no reason for the AO to doubt genuineness of transactions so as to make addition u/s 68.
10. We have heard both the parties and considered material available on record. The AO made addition towards share premium u/s 68 of the Act on the ground that the assessee has failed to justify issue of shares at a premium when its market value was far less than the value of shares issued at a premium to UFO. Except this, the AO has not doubted identity, creditworthiness of the subscriber. The AO doubted the genuineness of transactions only on the basis of issue of shares at premium. On the other hand, the assessee has justified with necessary evidences, issue of shares at premium and also explained the reasons for issue of shares at premium. According to the assessee, UFO had acquired minority stock in the assessee as strategic investment by considering the goodwill and other aspects of revenue in the business. Therefore, we are of the considered view that there is no reason for the AO to doubt the genuineness of transaction only on the basis of issue of shares at a premium when the issue of shares at a premium is not at all relevant for the purpose of addition made u/s 68 of the Act. What needs to be considered for the purpose of unexplained cash credit u/s 68 is, identity, genuineness of transaction and creditworthiness of the parties. In this case, the assessee has proved all the 3 ingredients by filing necessary evidences and hence, there is no reason for the AO to make addition towards share premium when share premium cannot be considered as unexplained credit u/s 68 of the Act. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. The relevant portion of the order is extracted below:-
“6. I have considered the findings of the AO as well as rival submission of the appellant, carefully. The appellant is India’s largest digital cinema distribution network. It operates India’s largest satellite-based digital cinema distribution network using its UFO-M4 platform. Also involved in India’s largest D-Cinema network and E-Cinema movie delivery platform. The company is also listed on the Bombay Stock Exchange and the National Stock Exchange. Majority of the shareholders in this year are 3i Research (Mauritius) Limited, the Valuable group and Apollo group. It is very obvious from the evidences on record that UFO had acquired minority stake in the appellant at the price of Rs. 1,043.11 per share including share premium as strategic investment with the appellant. UFO and the appellant, as claimed by the appellant, are unrelated and independent parties. Over the year. UFO has acquired majority stake in the appellant having 26.4 1% in FY 2011-12 and was having 51.85%Jn FY 2012-13 it was having 76.42% And in FY 2013-14 the holding was of 91.33%. During the course of assessment proceedings Ld. AR of the appellant has submitted various documents like share subscription and share holders agreement, copy of bank statement showing receipt of share application money, copy of form No.2 filed with Registrar of Companies, certified copy of Board resolutions and annual accounts of UFO. All these evidences are very relevant to the issue under consideration. Further, the AO has not appreciated it properly and has wrongly presumed that the appellant has not produced any concrete evidence.
7. As regards the fair market value of companies share, the working given by AO is untenable because it is mechanical calculation having no reference to the goodwill, prospects-factor of revenue in the business. Obviously the AO made the addition u/s.68 of the Act without making out any case. There is nothing which can be presumed to be unexplainable because UFO is an existing party, transaction is done through banking channel and everything is verifiable. The AO has failed to explain as to how a sum found credited in the books of the appellant is unexplained or no explanation has been offered about the nature and source of such Obviously the AO has not shown anything contrary to the claim of the appellant, therefore provision of law u/s,68 cannot be applied to the facts of the case.
8. As regards charge of share premium, none of the arguments of the AO is convincing one or tenable, in the eye of law. Furthermore, it is very important to point out that Hon’ble Supreme Court in the case of CIT Vs Standard Vaccum Oil Co. (1966) 59 ITR 685 has held that premium realized from the issue of shares represented reserve accounts which is a “capital receipt” cannot be included in computing profit of the company. Recently Hon’ble Bombay High Court in the case of Vodafone India Services (P) Ltd vs Union of India (2014) 50 com300 has held that receipt of share premium cannot be considered as income, hence cannot be taxed. Similarly, the Hon’ble Juridictional Mumbai Tribunal in the case of Green Infra Ltd Vs ITO (38 taxmann.com 253) dated 23-08-2013 has held that such “share premium” is a “capital receipt”, hence not taxable income. As regards reference of the AO in the case of Major Metals Vs Union of India, it is pertinent to mention that the AO has relied upon the decision without bringing or understanding the factual aspect of the issue of that case. In that case share transaction itself was doubtful and on enquiry, investor companies were not found at the given address. Further entire transaction was also found doubtful by the Settlement Commission, hence while passing the order against the claim of that appellant issue of high share premium was also subjected to reasoning. Here the case is not like that. It is very obvious that the AO has made the addition of Rs. 1,83,12,324/- u/s.68 of the Act, without any contrary evidence in possession. He has also not appreciated the role of UFO movies India Ltd and relevance of high share premium. The AO also not analysed the business scenario and business prospects for which share premium charged. When creditors or investors are existing one and their accounts are ifiable. no such addition can be made u/s.68 of Income Tax Act. Vide:- CIT Vs Ania Investment Pvt. Ltd. (2010) 322 ITR 394 (Bom). CIT Vs Steller Investment ((2001) 251 ITR 263 (SC). Further, share capital and share premium is capital receipt which cannot be taxed when source of receipt is explained and documentary evidence are on record, Therefore I find no justification to approve such baseless addition made by the AO u/s.68 of the Act. The AO is therefore directed to delete Rs. 1,83,12,324/-.”
11. Facts remain unchanged. The revenue fails to bring on record any evidences to controvert the findings of facts recorded by the Ld.CIT(A). Hence, we are inclined to uphold the findings of CIT(A) and reject ground raised by the revenue.
12. The next issue that came up for our consideration is addition made by the AO towards disallowance of expenditure for setting up of UAE branch. The AO disallowed expenditure incurred for setting up of UAE branch on the ground that the assessee has not carried out any commercial activity; hence, expenditure is to be considered as preliminary and preoperative expenses u/s 35D of the Income-tax Act, 1961 and also amortised over a period of 5 years from the date of commencement of its business activity. It is the contention of the assessee that expenditure incurred for setting up UAE branch is a normal business expenditure incurred to establish branch office in UAE in connection with already existing business. Therefore, there is no reason for the AO to disallow expenditure incurred by holding that the expenditure is coming within the purview of section 35D of the Act.
13. Having heard both the sides and considered material on record, we find merits in the arguments of the assessee for the reason that the assessee has incurred various expenditure including registration charges, rent of premises, travelling expenses of its personnel and other miscellaneous expenses to set up a branch office in UAE in connection with its existing business. The assessee is already in the business of sales in UAE and only for facilitation of its business has set up a branch Therefore, we are of the considered view that expenditure incurred by the assessee is a revenue expenditure which cannot be considered as preliminary and preoperative expenses coming within the purview of section 35D of the Act. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
14. The next issue that came up for our consideration is disallowance of interest expenses of rs.2,14, 561. The AO disallowed interest expenses on the ground that the assessee has diverted interest bearing funds to give loans and advances to group companies. It is the contention of the assessee that its loans and advances to group companies is out of its own funds and also as the loans are given in commercial interest, the AO was incorrect in disallowing interest.
15. Having heard both the sides and considered material on record, we find merits in the arguments of the assessee for the reason that the assessee has demonstrated with evidence that loans to group companies are out of its own funds and also such loans has been given in commercial interest, therefore, the AO was incorrect in disallowing proportionate interest on loans given to group companies. The assessee is holding more than 33% equity stake in the company for which loans have been given and also derived commercial benefit. Therefore, the AO was incorrect in holding that the assessee has diverted interest bearing funds to give loans to group companies. The CIT(A), after considering relevant submissions has rightly deleted addition made by the AO. We do not find any error in the order of CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and dismiss ground raised by the revenue.
16. The next issue that came up for our consideration is addition of outstanding sundry creditors of Rs.80,52,899 u/s 41(1). The AO made addition towards unproved sundry creditors on the ground that the assessee has failed to file any evidence to prove the sundry creditors appearing in the books of account. It is the contention of the assessee that the AO was incorrect in making addition towards sundry creditors u/s 41(1) without appreciating the fact that the assessee has not derived any cash or kind benefit by cessation of liability and such liability has been paid in the subsequent financial year. Therefore, the AO was incorrect in disallowing sundry creditors u/s 41(1) of the Act.
17. Having heard both the sides, we find merit in the arguments of the assessee for the reason that the Ld.CIT(A) has recorded a categorical finding that the assessee has paid all sundry creditors in the subsequent financial year and proof for such payment has been furnished. The AO has made addition towards sundry creditors without bringing on record any evidence to prove that there is cessation of liability in the impugned financial year and also, the assessee has derived benefit out of such cessation of liability. Therefore, we are of the considered view that the CIT(A) was right in deleting addition made by the AO towards sundry creditors u/s 41(1) of the Act. We do not find any error in the order of the CIT(A) and therefore, we are inclined to uphold the order of the CIT(A) and reject ground raised by the revenue.
18. The next issue that came up for our consideration is disallowance of expenditure u/s 40(a)(ia) for short deduction of tax at source u/s 194C of the Income-tax Act, 1961. The AO made disallowance of expenditure on the ground that digital print fee is incurred for the services rendered which is professional / technical service; hence, provisions of section 1 94J is applicable whereas the assessee has deducted TDS u/s 1 94C. Thus, there is short deduction of TDS which attracts disallowance of expenditure u/s 40(a)(ia) of the Act. It is the contention of the assessee that the AO has erroneously disallowed genuine expenditure without appreciating the actual nature of transactions and services rendered by the recipients. The assessee has made proper TDS u/s 1 94C as the nature of expenditure incurred by the assessee is squarely coming within the purview of section 194C, but not u/s 194J of the Act. The assessee further contended that even assuming that there is short deduction of TDS, the question of disallowance of expenditure u/s 40(a)(ia) cannot be considered as the Calcutta High Court in the case of CIT vs SK Tekriwal 46 Taxman.com 444 (Cal) held that even if there is lesser deduction of TDS, no disallowance can be made u/s 40(a)(ia) of the Act.
19. Having heard both the sides and considered material available on record, we find merits in the arguments of the assessee for the reason that once there is compliance to TDS provisions, even if there is short deduction of TDS or TDS has been deducted under different sections, there is no scope for the AO to disallow expenditure u/s 40(a)(ia) of the Act as the provisions u/s 40(a)(ia) is applicable only when there is no TDS deduction. This legal proposition is supported by the decision of Hon’ble Calcutta High Court in the case of CIT vs SK Tekriwal (supra) wherein it was held that if there is lesser deduction of TDS due to any difference of opinion, no disallowance can be made u/s 40(a)(ia) of the Act. If there is short deduction, the revenue is free to proceed to pass an order u/s 201 of the Act, but no disallowance can be made u/s 40(a)(ia) of the Act. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. Therefore, we uphold the findings of CIT(A) and reject ground raised by the revenue.
20. The next issue that came up for our consideration is addition made by the AO towards AIR mismatch for Rs.62,900. The AO has made addition of Rs.62,900 on the ground that the assessee has made TDS claim of Rs.1 ,258 without considering corresponding receipts in the books of account. It is the contention of the assessee that it has furnished reconciliation of TDS difference and explained that certain parties have deducted excess TDS. The assessee further contended that it had not claimed TDS credit of Rs.1 ,258 by filing return of income; however, corresponding income was offered to tax. Hence, there was no loss of revenue. Therefore, there is no reason for making addition on the basis of TDS.
21. Having considered material on record, we find merits in the argument of the assessee for the reason that when the assessee has filed reconciliation statement explaining difference in TDS claim, there is no reason for the AO to resort to notional addition on the basis of TDS claim. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error or infirmity in the order of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
22. In the result, appeal filed by the revenue is dismissed.
23. As a result, the appeal filed by the assessee is allowed and appeal filed by the revenue is dismissed.
