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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