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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Mayajaal Entertainment Ltd.34/1, East Coast Road,Kanathur,Chennai-603 112. Vs. The Assistant Commissioner of Income Tax, Company Circle-IV(1) 121, M.G.Road, Chennai-600 034.
June, 12th 2012
            IN THE INCOME TAX APPELLATE TRIBUNAL
                      `A' BENCH, CHENNAI

         BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND
             SHRI VIKAS AWASTHY, JUDICIAL MEMBER

                               ITA No.1216/Mds/2011
                          (Assessment Year : 2006-07)

Mayajaal Entertainment Ltd.                  The Assistant Commissioner of
34/1, East Coast Road,                       Income Tax, Company Circle-IV(1)
Kanathur,                              Vs.   121, M.G.Road,
Chennai-603 112.                             Chennai-600 034.
PAN:AAACH7469P
    (Appellant)                                         (Respondent)

                                ITA No.1284/Mds/2011
                              (Assessment Year : 2006-07)

 The Assistant Commissioner of               Mayajaal Entertainment Ltd.
Income Tax, Company Circle-IV(1)             34/1, East Coast Road,
121, M.G.Road,                         Vs.   Kanathur,
Chennai-600 034.                             Chennai-603 112.
                                             PAN:AAACH7469P
    (Appellant)                                          (Respondent)

                   Assessee by      : Mrs.Pushya Seetharaman, Sr.Advocate
                                      &Mrs.G.Vardini & J.Sreevidya, Advocates
                  Revenue by        : Mr. Shaji P.Jacob, Addl. CIT

                 Date of Hearing    : 21st May, 2012
         Date of Pronouncement      : 8th June, 2012

                                ORDER

    PER VIKAS AWASTHY, JUDICIAL MEMBER:

           These two cross appeals one by the assessee i.e. ITA

    No.1216/Mds/2011          and    another    by   Revenue      i.e   ITA

    No.1284/Mds/2011 are arising out of the order of the CIT(A)-
                              2       ITA No.1216 & 1284/Mds/2011


V, Chennai dated 29.04.2011 relevant to the assessment year

2006-07.

2.   The assessee company filed its return of income for the

assessment year 2006-07 on 25.11.2006 declaring total loss

of ` 1,05,86,118/-. The case of the assessee was selected for

scrutiny and notice under section 143(2) was served on the

assessee on 20.11.2007. Before scrutiny assessment was

taken up, the assessee filed revised return on 31.03.2008 and

claimed deduction of amounts written off in the books of

account as irrecoverable or bad relating to book debts, trade

advances, inventories, work-in-progress     and fixed assets

aggregating to ` 236.18 crores, in addition to the loss

declared by the assessee in its original return.            The

Assessing Officer disallowed the claim of deduction of 236.18

crores claimed by the assessee in the revised return. In the

original assessment order as well as rectification order, book

profits under section 115JB were determined at ` 54,57,346/-.


3.   Aggrieved     by the order of Assessing Officer, the

assessee preferred an appeal before CIT(A). In the appeal
                                   3           ITA No.1216 & 1284/Mds/2011


before the CIT(A) the assessee raised as many as 12

grounds and an additional ground to carry forward loss

computed under normal provisions of the Income Tax Act,

1961.




4.      The authorised representative appearing before the

CIT(A) admitted that the following three grounds are main

grounds of appeal requiring adjudication:-

        "i)    Disallowance   of       claim      for   deduction       of

        `2,36,17,64,930/- towards write off of bad debts/trade

        advances/inventories/assets & CWIP is incorrect.

        ii)    Computation of book profit without deducting `

        2,36,17,64,930/- being the value of the exceptional

        items written off in the books after computing profit of

        the business for the year.

        iii)   To carry forward the loss computed under the

        normal provisions of the IT Act consequent to the

        above."

The CIT(A) partly allowed the appeal of the assessee by

allowing part of the inventories, loans & advances and

debtors to be written off as per the details given below:-
                               4         ITA No.1216 & 1284/Mds/2011


                        Relief claimed     Relief granted

Inventories             91,28,17,863       53,76,14,307

Loans & advances        37,76,35,892       30,74,52,104

Debtors written off     16,87,37,738        2,26,90,990

As regards the written off of fixed assets and capital work-in-

progress, the appeal of the assessee was rejected.


5.    Aggrieved against this order of the CIT(A) dated

29.04.2011, both the assessee as well as department has

preferred respective appeals before the Tribunal. The

assessee has taken the following grounds of appeal:-

       "1. The CIT(A) has erred in disallowing the
     appellant's claim for write off of inventories to the
     tune of ` 3,75,20,03,556/- in respect of Num TV
     Animations.
       2.   The CIT(A) has erred in disallowing the
     appellant's claim for write off of loans and advances
     to the tune of ` 7,01,83,788/- relating to Intelvision
     and KSSEL on the ground that it was only capital
     loss.
       3.   The CIT(A) has erred in disallowing the
     advances of ` 68,28,86,116/- towards capital work
     in progress on the ground that the loss on account
     of non-recovery of the advances would amount to
     only capital loss.
                                 5      ITA No.1216 & 1284/Mds/2011


       4.     The CIT(A) has erred in disallowing a sum of
     ` 5,22,881/- relating to KSSEL being the value of
     fixed assets written off in the books of account.
       5.     The CIT(A) has erred in confirming the
     disallowances of appellant's claim for deduction of
     amount written off in respect of the discarded assets
     to the tune of ` 22,06,64,440/- in the following
     cases:-
       Media Dreams Ltd.                      3,07,370
       Intelvision                          48,75,734
       Num TV                           21,54,81,336
                                      ---------------------
              Total             `       22,06,64,440

      6.    The CIT(A) has erred in disallowing the
     appellant's claim for foreign debts written off `
     14,60,46,748/- in respect of Num TV Animation
     Overseas for lack of approval of RBI."


6.    The revenue has challenged the impugned order on the

following grounds:-

      1. The order of the CIT(A) is contrary to law and facts
         and circumstances of the case.
      2.1   The CIT(A) erred in allowing the claim of the
      assessee towards loans & advances written off to the
      tune of ` 30,74,52,104/-
      2.2   The CIT(A) failed to note that the advances
      claimed by the assessee not only pertains to telecasting
      rights but also other aspects such as bandwidth,
      software   licenses,   production    of    TV     episodes,
                          6        ITA No.1216 & 1284/Mds/2011


production of animation films etc. The expenses
towards bandwidth and software licenses are of capital
in nature and hence cannot be considered as revenue
loss.
2.3     The CIT(A) ought to have seen that loans and
advances are reflected in the balance sheet under the
heading exceptional items in schedule 18 and are not
reflected in the P & L account. Hence it is a below the
line item and has been routed through a different name
in the balance sheet.
2.4     It is also submitted that the evidences for breakup
of advances written off have been produced by the
assessee for the first time before the CIT(A) and the
CIT(A) failed to give an opportunity to the Assessing
Officer in terms of Rule 46A.
3.1     The CIT(A) erred in allowing bad debts written off
to the tune of ` 2,26,90,990/-
3.2     It is submitted that as in the case of loans and
advances the bad debts are also not reflected in the P &
L account and they are reflected in schedule 18 of the
balance sheet under the heading exceptional items. The
claim is not routed through P and L account.
4.1     The CIT(A) erred in allowing the assessee's claim
towards inventories written off to the tune of `
53,76,14,307/-
                               7        ITA No.1216 & 1284/Mds/2011


     4.2   The CIT(A) failed to note that the assessee has
     not established as to how and why the assets have
     become obsolete.
     4.3   It is submitted that the decision of the ITAT relied
     upon by the CIT(A) in the case of Kopran Drugs Ltd. Vs.
     ACIT ( 2 ITR (Trib) 155) cannot be said to be applicable
     to the facts of this case on all force since the said
     decision pertains to the transfer entries of share
     premium account to the P & L account on account of
     write off of obsolete stocks in pursuance of a scheme of
     demerger and it is not so here.
     5.1   The CIT(A) erred in deleting the book profits
     computed under section 115JB.
     5.2   The CIT(A) failed to note that the loss claimed by
     the assessee in the return of income is not genuine. The
     computation of book profits is justified.
     6.1   The CIT(A) erred in directing the Assessing
     Officer to carry forward the loss as quantified by him.
     6.2   It is submitted that since the losses allowed by the
     CIT(A) are contested by the department in appeal this
     ground is raised as a consequential ground."



7.   The counsel appearing on behalf of the assessee

submitted that there was a scheme of amalgamation between

four companies i.e. 1) Media Dreams Ltd. 2) Intelivision Ltd.
                                  8          ITA No.1216 & 1284/Mds/2011


3)     Kris Srikanth Sports Entertainment Ltd. 4) Num and

Animation division of Pentamedia Graphics Ltd. with the

assessee company. The scheme of amalgamation was

approved by the Hon'ble Madras High Court on 12.10.2004

and     amalgamation       was   effective    from    1.1.2004.    The

amounts/assets written off relating to the four amalgamating

companies were carried forward in the respective companies'

books prior to amalgamation. After amalgamation these

amounts were transferred to the books of accounts of

amalgamated company i.e. the assessee. The Assessing

Officer as well as CIT(A) has disallowed the claim of the

assessee towards write off of assets as per details given

below:-

     i) Write off of inventories in respect
            of Num TV Animation                  ` 3,75,20,03,556
     ii) Loans & advances relating to
            Intelvision & KSSEL                  `  7,01,83,788
     iii) Capital work-in-progress               ` 68,23,86,116
     iv) Fixed assets written off
            relating to KSSEL                     `    5,22,881
     v) Discarded assets written off             ` 22,06,64,440
     vi) Foreign book debts written off          ` 14,60,46,748
            In respect of Num TV Animation

                   Total                 `           4,87,18,07,529
                               9       ITA No.1216 & 1284/Mds/2011


8.    On the other hand, D.R. appearing for the revenue

submitted that the CIT(A) has erred in allowing the following

claims of the assessee:-

Loans & advances written off to the tune of ` 30,74,52,104

Bad debts written off                           ` 2,26,90,990

Inventories written off                       ` 53,76,14,307

He further submitted that the CIT(A) has erred in allowing the

deduction claimed by the assessee under section 115JB of

the Act. He submitted that loss claimed by the assessee in the

return of income is not genuine. The D.R. also submitted

written submissions during the course of argument. In order

to support his contentions/submissions, he relied on the

following judgements:-

      i)     Hasimara Industries Ltd. Vs. CIT., 231 ITR

             842(SC)

      ii)    CIT Vs. R.Chiambaranatha Mudaliar, 240 ITR 552

      iii)   Allied Electronics & Magnetics Ltd. Vs. DCIT., 304

             ITR 160

      iv)    CIT Vs. Swamiji Mills Ltd., 342 ITR 250(Mad)
                                10       ITA No.1216 & 1284/Mds/2011


The D.R. submitted that the assessee had only filed four

papers before the Assessing Officer during the course of

assessment     including letter dated 5.8.2008 and details of

assets written off for the assessment year 2006-07. Except for

the four papers which are at page nos.1 to 4 of the paper

book submitted by the D.R., he submitted that no other

document was furnished before the Assessing Officer by the

assessee . He contended that no partywise claim of advances

made by different amalgamating companies was provided

before the Assessing Officer.

9.    The counsel appearing for the assessee in order to

support her contentions relied on the paper books giving

details of bad debts written off, fixed assets written off, capital

work-in-progress written off, inventory written off and

advances written off. In addition to the above, the counsel

relied on the order passed by the Hyderabad Bench of the

Tribunal in the case of Gulf Oil Corporation Ltd. Vs. ACIT.,

reported as 111 ITD 124 and the            order of the Mumbai

Bench of the Tribunal in the case of Sabra Impex Ltd. Vs.

ITO reported as 141 TTJ (Mum) (UO)11. During the course of
                             11      ITA No.1216 & 1284/Mds/2011





arguments, the counsel for the assessee also referred to the

order of Mumbai Bench of the Tribunal in the case of Kopran

Drugs Ltd., Vs. ACIT., reported as 35 DTR (Mumbai) (Trib)

380. Except for the aforesaid cases, the counsel for the

assessee has not referred to any other judgement / order in

the paper book filed in the court on 21.5.2001 at the time of

hearing of the case.


10.   We have heard rival submissions of the DR as well as

counsel for the assessee. We have also gone through the

judgements /orders relied on by both the parties. The D.R. in

his paper book at pages 11 & 12 has placed on record

computation of total income (revised) along with the revised

return for the assessment year 2006-07 filed by the assessee.

On confronting with the revised return filed by the assessee

and the details given at pages 11 & 12 of the computation of

total income, the counsel appearing on behalf of the assessee

conceded that calculations have been wrongly made although

the same have been certified by the Chartered Accountant.

On confronting with the fact that huge losses which now the
                                  12        ITA No.1216 & 1284/Mds/2011


assessee wants to write off existed at the time of

amalgamation of the companies, how valuation of the assets

was made, the counsel for the assessee was unable to give

any satisfactory reply to the query raised by the Bench. The

counsel for the assessee conceded that paper books giving

details of the assets written off were not supplied to the

Assessing Officer and for the first time these details were

given to the CIT(A), and no plausible reason was given for not

submitting these documents to the Assessing Officer. The

assessee has relied on the case of Gulf Oil Corporation Ltd.

(supra), Sabra Impex Ltd. (supra) and Kopran Drugs

Ltd.(supra). The facts of the said cases and the ratio laid

down by the Tribunal in the aforementioned cases are totally

different from the issue in hand. Therefore, the judgements

relied on by the        Authorised Representative do not come to

the   rescue       of     assessee     or        to    support     the

contentions/submissions made by the counsel for the

assessee.

11.   The CIT(A) has rejected the calculations made by the

Assessing Officer under the provisions of section 115JB of
                               13      ITA No.1216 & 1284/Mds/2011


the Act. We are of the view that the Assessing Officer has

rightly made calculations -     reducing the book profits by

inventories written off, advances written off, discarded assets

and bad debts written off. The Assessing Officer has made

calculations as per the provisions of section 115JB of the Act

and has rightly observed in his order that "the book profit

cannot be adjusted except for the items specified in the

section". The items aforementioned by the assessee are not

specified in section 115JB. Therefore, the deduction claimed

by the assessee in the book profit has rightly been disallowed

by the Assessing Officer. The action of the Assessing Officer

in rejecting the books of accounts of the assessee is in

accordance with the law laid down by the Hon'ble Supreme

Court of India in the case of Apollo Tyres Ltd., Vs. CIT

reported as 255 ITR 273(SC).


12.   The CIT(A) while accepting the claim of the assessee

for inventories written off as obsolete stock has erred in

relying on the decision in the case of Kopran Drugs

Ltd.(supra). In the aforesaid case, the assessee had acquired
                              14       ITA No.1216 & 1284/Mds/2011


the business of the demerged company as a going concern.

Whereas, in the instant case, the assessee has not placed on

record any document to show that the assessee had taken

over the amalgamating companies as a going concern. Thus,

the ratio of the Kopran Drugs Ltd. case (supra) will not apply

to the instant case. Moreover, it is not the case of the

assessee that the inventories are being written off for being

obsolete alone. The assessee has stated before the

Assessing Officer that it could not receive the amounts from

various parties and when it has become bad, the same was

written off. The assessee was unable to show how and why

the inventories have become obsolete. The assessee failed to

tender any evidence before the Assessing Officer in support

of the claim.

      Similarly, for allowing the claim of the assessee for

writing off of the loans and advances, the CIT(A) has relied on

the judgement of the Hon'ble Madras High Court in the case

of Crescent Films (P). Ltd., 248 ITR 670(Mad). The ratio laid

down by the Hon'ble Madras High Court          in the aforesaid

case is not applicable to the instant case. As per the decision
                               15        ITA No.1216 & 1284/Mds/2011


of the Hon'ble High Court, it is the revenue loss incurred in

the course of the business i.e. deductible under the provisions

of section 37 of the Act.     In the present case, there was

amalgamation of four companies into the assessee company.

The assessee intends to write off the losses incurred by the

assessee in acquiring the assets and liabilities of the

amalgamating companies,         which is     capital   in   nature.

Therefore, the decision of the Hon'ble High Court in the case

of Crescent Films P.Ltd. (supra) is not applicable to the

present case.


13.   As regards bad debts is concerned, bad debts are

allowable as deduction u/s.36(i)(vii) only if it is written off as

irrecoverable in the books of accounts in the previous year in

which claim for deduction is made. The term "written off" in

accounting practice means that an account which was

previously shown as asset must be transferred to the expense

account or the profit and loss account. The writing off of bad

debts without charging the same in the profit and loss account

is not a write off at all. In the present case, the assessee had
                                16       ITA No.1216 & 1284/Mds/2011


not written off the debts in the books of account as per

provisions of section 36(1)(vii). The CIT(A) has erred in

discarding the view of the Assessing Officer by terming it as a

short sight.   The principles of accounting are to be followed

strictly   while giving treatment to the adjustments and

recording findings thereon. It would not be out of place to

mention here that the assessee intends to write off debts

terming than to be `Bad'      which it had acquired from the

amalgamating companies.          Moreover, the assessee is

claiming write off of bad debts in violation of the provisions of

section 36(2)(i) as well. The relevant extract of the provision is

reproduced hereinbelow:-


      "36(2) (i) no such deduction shall be allowed unless
     such debt or part thereof has been taken into
     account in computing the income of the assessee of
     the previous year in which the amount of such debt
     or part thereof is written off or of an earlier previous
     year, or represents money lent in the ordinary
     course of the business of banking or money-lending
     which is carried on by the assessee"

In the case of the assessee, the A.R. has failed to show that

the provisions of section 36(2)(i) were satisfied.              The

assessee has not placed on record the scheme of
                                     17         ITA No.1216 & 1284/Mds/2011


amalgamation either before the lower authorities or before the

Tribunal. Therefore, claim of bad debts, inventories etc. of the

assessee has rightly been disallowed by the Assessing

Officer.

14.     In our considered opinion, the CIT(A) has erred in

modifying the order of the Assessing Officer which is a well

reasoned and detailed order. We, therefore, set aside the

order of the CIT(A) and restore the order of the Assessing

Officer. Accordingly, we dismiss the appeal of the assessee in

ITA No.1216/Mds/2011 and allow the appeal of the revenue in

ITA No.1284/Mds/2011.

      Order pronounced in the open court on Friday, the 8th of June, 2012 at
      Chennai.

            Sd/-                                             Sd/-
   ( N.S. Saini )                                   (Vikas Awasthy)
 Accountant Member                                  Judicial Member
Chennai,
Dated the 8th June, 2012.

somu

Copy to:       (1) Appellant      (2) Respondent     (3) CIT
                (4) CIT(A)         (5) D.R.          (6) G.F.
 
 
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