Income Tax Act, 1961 – Sections 9(1)(vi), 40(a)(ia), 68, 143(3) and 194J – Receipt of share application money – Deletion of addition – Assessee is a company engaged in business of telecasting television channels and providing broadcasting services filed its return of income declaring Nil income for year under consideration – AO completed assessment under Section 143(3) of the Act by making various additions to returned income – CIT(A) partly allowed appeal of assessee – Whether CIT(A) has erred in deleting addition made by AO under Section 68 of the Act on account of share application money received by assessee – HELD – Addition under Section 68 of the Act is required to be tested based on identity and creditworthiness of investor as well as genuineness of transaction – Assessee has received share application money through bank remittance from NSR PE Mauritius LLC – To prove identity and credit worthiness of investor, assessee submitted ledger account of share application money, relevant board resolution of assessee company, foreign inward remittance certificates from HDFC bank and shareholders agreement – Revenue authorities are only aggrieved with genuineness of transaction – Absence of one evidence or presence of some other evidence is crucial to decide genuineness of transaction – Issue set aside to file of AO to consider all evidences furnished by assessee, information received from Mauritius tax authorities, investment strength of investor etc. – AO is directed to examine transaction as per parameters of Section 68 of the Act – Appeal partly allowed.

 

Issue 2: Payment of channel placement fees – Allowable deduction – Whether CIT(A) has erred in deleting disallowance made by AO under Section 40(a)(ia) read with Section 194J of the Act in respect of channel placement fees – HELD – Disallowance of expenditure under Section 40(a)(ia) of the Act can only be made, if payment is Royalty in terms of Explanation 2 to Section 9(1)(vi) of the Act – Since payment made for channel placement as a fee is not Royalty in terms of Explanation 2 to Section 9(1)(vi) of the Act, no disallowance of expenditure can be made under Section 40(a)(ia) of the Act – There is no infirmity in order of CIT(A).

 

Issue 3: Income Tax Act, 1961 – Sections 14A, 35DD and 115JB – Computation of book profits – Addition of book debts – Whether CIT(A) has erred in upholding order of AO by making an addition of amount representing provision for doubtful advances, to book profits as computed under Section 115JB of the Act – HELD – Assessee claimed that “book debt‟ is not an asset which can diminish in value and hence, provisions thereof is not covered by requirement of disallowance of such provision for deduction to value of asset – There is no reason to agree with argument of assessee, because “book debts‟ are the assets of company and by making a provision for bad and doubtful debts, there is a provision of diminution in value of such book assets – Order passed by CIT(A) on this issue affirmed – Appeal partly allowed.

 

Issue 4: Absence of exempt income – Deletion of disallowance of expenditure –Whether CIT(A) has erred in confirming addition made by AO to book profit on account of disallowance under Section 14A of the Act – HELD – Claim of assessee is that there is no exempt income earned during the year – If there is no exempt income earned during the year, there cannot be any disallowance under Section 14A of the Act for impugned assessment year – Naturally, there is no adjustment required to book profit as such – Impugned disallowance is directed to be deleted.

 

Issue 5: Payment of legal fees – Applicability of provisions – Whether CIT(A) has erred in confirming disallowance of legal and professional fees paid to Ernst & Young for services rendered in connection with providing assistance in relation to demerger of general entertainment channel business of assessee to Zee entertainment Enterprises Ltd. – HELD – Assessee has paid amount to E&Y for rendering services in connection with providing assistance in relation to demerger – AO applying the provisions of Section 35DD of the Act allowed 1/5th of such expenditure as deduction – According to provisions of Section 35DD of the Act, if assessee incurs any expenditure exclusively for purpose of demerger of an undertaking, assessee shall be allowed deduction of an amount equal to 1/5 of such expenditure for each of five successive previous years beginning with previous year in which demerger takes place – Lower authorities are correct in applying provisions of Section 35DD of the Act.

 

Issue 6: Addition of differential amount – Whether CIT(A) has erred in upholding addition made by AO on account of mismatch between books of assessee as well as in information contained in form number 26AS – HELD – AO noted that there is a difference between receipt recorded in books of account and receipt disclosed in form number 26AS of assessee – AO issued notices to various parties – Many of parties did not respond – Outcome of this enquiry was made known to assessee, but no effort was made to reconcile amount – Issue restored back to file of AO by directing assessee to produce reconciliation of amount – One more opportunity is granted to assessee to explain difference with parties with which it has transacted – AO may examine submission of assessee and decide issue afresh.

 

Issue 7: Content cost – Restriction of deduction – Whether CIT(A) has erred in restricting allowance of content cost to extent of 85% and in amortizing balance 15% over three equal instalments in immediately succeeding years – HELD – Revenue expenditure which is incurred wholly and exclusively for purpose of business must be allowed in its entirety in year in which it is incurred and it cannot be spread over a number of years even if assessee has written it off in his books over a period of years – Revenue expenditure incurred by assessee should be allowed in year in which those expenses are incurred – There cannot be any formula to allow expenditure in various years in equal instalments, because it does not have support of law – Direction of CIT(A) to consider 85% of amount as revenue expenditure and spread rest of amount over a period of three years in three equal instalments is without any logic and support of law – Issue restored back to file of AO to decide it afresh keeping in view the above findings.

 

2023-VIL-1715-ITAT-MUM

 

IN THE INCOME TAX APPELLATE TRIBUNAL

“D” BENCH, MUMBAI

 

ITA No.7052/MUM/2016

(Assessment Year 2011-12)

 

ITA No. 3606/MUM/2017

(Assessment Year 2012-13)

 

Date of hearing: 25.08.2023

Date of pronouncement: 21.11.2023

 

M/s 9X MEDIA P LTD

 

Vs

 

ACIT-16(1)

 

ITA No. 7477/MUM/2016

(Assessment Year 2011-12)

 

ITA No. 4600/MUM/2017

(Assessment Year 2012-13)

 

ACIT-16(1)

 

Vs

 

M/s 9X MEDIA P LTD

 

Assessee by: Shri Ashok Rao, CA

Revenue by: Ms. Riddhi Mishra, CIT DR

 

BENCH

SHRI PRASHANT MAHARISHI, AM

MS. KAVITHA RAJAGOPAL, JM

 

ORDER

 

PER PRASHANT MAHARISHI, AM:

 

01. ITA No. 7477/Mum/2016 is filed by the Asst. Commissioner of Income Tax, 16- 1, Mumbai (the learned Assessing Officer) and ITA No.7052/Mum/2016 is filed by M/s 9X Media P. Ltd. (assessee / appellant) against the appellate order passed by The Commissioner Of Income-Tax (Appeals)-4, Mumbai [the learned CIT (A)] dated 28th September, 2016, for A.Y. 2011-12.

 

02. In ITA No.7052/Mum/2016, the assessee has raised following grounds of appeal:-

 

“1. On the facts and circumstances of the case, the Ld. CIT (Appeals) wan not justified in upholding the order of the Assessing Officer by confirming the addition of the amount of Rs. 13,30,79,646/-, being the surplus on demerger of entertainment channel undertaking, to the book profits of the Appellant as computed under section 115 JB of the Income tax Act, 1961 ("the Act").

 

2 On the facts and circumstances of the case, the Ld CIT (Appeals) was not justified in upholding the order of the Ld. Assessing Officer by confirming the addition of an amount of Rs 1,42,63,197/-.. representing provision for doubtful advances, to the book profits as computed under section 115 JB of the Act.

 

3. On the facts and circumstances of the case, the Ld. CIT (Appeals) ought to have deleted the additions of Rs.1,11,950/- made to the book profits of your Appellant an account of disallowance under section 14A of the Act.

 

4. On the facts and in the circumstances of the cases the Ld. CIT (Appeals) ought to have quantified the brought forward book losses or unabsorbed depreciation, whichever is less, in arriving at the taxable book profits of the Appellant for the concerned Assessment Year.

 

Legal and Professional

 

5. On the facts and circumstances of the case, the Ld. CIT (Appeals) was not justified in upholding the addition made by the Ld. Assessing Officer in not allowing 100% deduction of the amount of Rs.1.28 Crore spent on legal & professional fees paid to Earnest and Young for rendered in connection with providing assistance in relation to the demerger of the General Entertainment Channel of the Appellant to Zee Entertainment Enterprises Ltd. and in limiting the claim thereof to only a 25,60,000/- under the provisions of section 35DD of the

 

6. Without prejudice, on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified in dismissing Ground No. 5 in the appeal before him as being infructuous and he ought to have given a finding that the balance of the amortized cost would be allowable in equal installments in the immediately ensuing next four

 

Form 26As mismatch

 

7. On the facts and circumstances of the case, the Ld. CIT (Appeals) was not justified in upholding the additions of the following amounts made by the Ld. Assessing Officer to the income of the Appellant on account of difference between amounts shown as income tax in Form 26AS and that shown in the books of the Appellant.

 

i. Direcorate of Advertising Visual Publicity	Rs. 40,68,353
ii. Onscreen Broadcasting & Entertainment Pvt. Ltd	Rs. 1,15,127
iii. Geetanjali Gems ltd	Rs. 4,55,192
iv. Katha Medimix India	Rs. 21,12,301
v. TVC Skyshop Ltd.	Rs. 25,781
vi. Vinod Singh
[(prop. Khyati communication Ltd.)]	Rs. 2,85,200
vii. Ortel Communication ltd.	Rs. 1,58,400
viii. Optis Hotels Pvt Ltd.	Rs. 7,950
Total	Rs. 72,28,304
	==========

 

8. In any event, without prejudice, the Ld. CIT (Appeals) was not justified in upholding the additions made by the Ld. Assessing Officer of Rs.1,58,400/- and Rs 7,950/- pertaining to Ortel Communication Ltd and Optis Hotels Pvt. Ltd, respectively, as these parties had not at all dealt with your Appellant

 

9. In any event, without prejudice, the Id. CIT (Appeals) was not justified in upholding the additions made by the Ld Assessing Officer of Rs.21,12,301/- and Rs.2,85,200/- in respect of the two parties, viz, Kathan Medimix India and Vinod Singh (Pro. Khyati Communications Ltd.) as full reconciliation for these two parties had been provided to the Ld. Assessing Officer.

 

Content Cost

 

10. On the facts and circumstances of the case, the Ld. CIT Appeals was not justified in restricting the allowance of the Content Cost to only 85% of Rs.4,54,18,547/- (representing Rs.3,90,12,647/ on animated character episodes and Rs.64,05,900/- on in-house production cost of programmes) and in amortizing the balance 15% over three equal installments in the immediately succeeding years.

 

Disallowance under section 14A

 

11. On the facts and the circumstances of the case, the Ld. CIT (Appeals) was not justified in upholding the addition by the Ld. Assessing Officer of an amount of Rs.1,11,850/- under section 14A of the read with Rule 8(d) of the Income tax Rules 1962,

 

03. In ITA No. 7477/Mum/2016, the learned Assessing Officer has raised following grounds of appeal:-

 

“1. Whether on the facts, in the circumstances of the ease and as per law the Ld. CIT(A) has erred in directing to delete the addition made by the Assessing Officer (AO) u/s 68 of the IT Act, 1961 (Act) on account of monies received by way of Share Application from NAR-PE Mauritius, LLC (NSR) without appreciating that there was no justification from the investor for making investment in a loss making company and the investment happened without any due diligence, which is common practice.

 

2. Whether on the facts, in the circumstances of the case and as per law. the Ld. CIT(A) has erred in directing to delete the addition made by the AO u/s 68 of the Act on account of monies received by way of Share Application from NSR without appreciating that the ultimate source of the money is from companies located in Cayman Island, a lax heaven country and the creditworthiness of the companies and that of the ultimate beneficiary is not proved

 

3. Whether on the facts, in the circumstances of the case and as per law the Ld. CIT(A) has erred in directing to delete the addition made by the AO u/s 68 of the Act on account of monies received by way of Share Application from NSR without appreciating that the assessee has failed to prove the creditworthiness of the investor

 

4. Whether on the facts, in the circumstances of the case and as per law, the Ld. CIT(A) has erred in directing to consider 85% of the amount of Rs. 4,54,18,547/- (representing Rs 3,90,12,647/- on animated character episodes and Rs. 64,05,900/- on in-house cost of production programme) as revenue expenditure and the rest of the amount over a period of 3 years in 3 equal installments without realizing that in respect of the expenses incurred of Rs 4,54,18,547/-. The assessee has acquired perpetual rights and the same constitutes intangible assets to be categorized as capital assets.

 

5. Whether on the facts, in the circumstances of the case and as per law, the Ld. CIT(A) has erred in directing to delete the disallowance u/s. 40(a) (ia) rws 194J in respect of 'Carriage Fees/Channel Placement fees' and failing to appreciate that the payments made for use/right to use of 'process' are 'royalty' as per Explanation 6 to section 9(1)(vi) hence such payments are covered u/s. 194J of the Income-tax Act,1961

 

6. Whether on the facts, in the circumstances of the case and as per law, the Ld. CIT(A) has erred in directing to delete the disallowance u/s 40(a)(ia) rws 194J of Carriage Fees/Channel Placement fees, whereas the jurisdictional ITAT. Mumbai „L‟ Bench. in its order dated 28.03.2014 in the case of ADIT (IT)- 2(2), Mumbai Vs Viacom 18 Media Pvt. Ltd has confirmed that the payments made for use/right to use of 'process' are 'royalty in terms of the Income tax Act, 1961.

 

7) Whether on the facts, in the circumstances of the case and as per law, the Ld. CIT(A) has erred in directing to delete the disallowance u/s 40(a)(ia) placing reliance on the decision of Calcutta High Court dated 10.12.2012 in CIT Vs S.K. Tekriwal [2014] without appreciating that the Hon'ble Kerala High Court in its judgment dated 20.07.2015 in the case of CIT-1, Kochi Vs PVS Memorial Hospital Ltd. [2015] 60 taxmann.com 69 (Kerala) has decided the issue in favour of the Department after discussing in detail the judgment in the case of CIT Vs S.K. Tekriwal (supra)

 

04. ITA number 3606/M/2017 is filed by the assessee for assessment year 2012 – 13 and ITA number 4600/M/2017 is filed by the learned AO for the same assessment year against the appellate order passed by CIT – [A] – 4, Mumbai dated 22/3/2017. The learned assessing officer is aggrieved by the deletion of addition of ₹ 41 crores under section 68 of the income tax act [ The Act] received from NSR Mauritius LLC which is identical to ground number 1 – 3 of the appeal of the AO for assessment year 2011 – 12. The learned AO is further aggrieved with direction of the learned CIT – A to consider 85% of the cost of animated character episode and in-house cost of production of program as revenue expenditure and balance 15% is to be allowed in three years in three equal installments. This is identical to ground number 4 of the appeal of the AO for assessment year 2011 – 12. The assessing officer is further aggrieved where the non-deduction of tax on carriage fees, channel placement fees resulted into disallowance during the course of assessment proceedings in view of introduction of explanation 6 to section 9 (1) (iv) of the act with effect from 1/6/1976.

 

05. Assessee is aggrieved against the appellate order against confirming the addition of ₹ 2,312,314/– on account of mismatch between the books of account and income shown in form number 20 6AS. This ground is identical to ground number seven – 9 of the appeal for assessment year 2011 – 12 of the assessee. The assessee is further aggrieved by the decision of the learned CIT – A wherein he allowed only 85% of the content cost and directed the further sum of 15% to be allowed in three equal installments. This is identical to ground raised in assessment year 2011 – 12 of the appeal of the assessee connected with the appeal of the learned assessing officer. Assessee is further aggrieved wherein the disallowance under section 14 A of rupees/42,969 has been upheld by the learned CIT – A without there being any exempt income during the assessment year.

 

06. For AY 2011-12, facts of the case shows that Assessee is a company engaged in the business of telecasting, television channels and providing broadcasting services. It filed its return of income on 30 September 2011 at ₹ Nil. Assessee has shown income from business and profession, capital gains and income from other sources, which is set off against brought forward business losses, brought forward short term losses and unabsorbed depreciation. The return of income was picked up for scrutiny.

 

07. During the course of assessment proceedings,

 

i. The learned Assessing Officer noted that assessee has received share application money of ₹14 crores from Mauritius based entity namely, New Silk Route PE, Mauritius LLC [NSR]. The assessee was to give the relevant evidences for the same. The assessee submitted copies of foreign inward remittances certificates, bank account and share application agreement. The assessee was asked to submit the details of the entity, New Silk Route PE, Mauritius LLC such as return of income accounts, bank statements, etc. The assessee submitted that it is not privy to the return of income as well as annual accounts of that entity and therefore, it is not possible to furnish the same. The learned Assessing Officer made request to Mauritius revenue authority under Double Taxation Avoidance Agreement (DTAA) through competent authority calling for the details of address, name of shareholders partners, directors of the entity, return of income filed with Mauritius authority, complete set of annual accounts, bank statement, sources of investment of ₹14 crores and relationship of any of the director or partners with the assessee. The information was received on 14th March 2014, wherein it is found that New Silk Root PE, Mauritius LLC has invested ₹14 crores is having 2 shareholders based in Cayman Island such as New Silk route PE Asia Fund, LL.P. and New Silk route PE Asia Fund-A, L.P. , shareholders of Limited Liability Company (LLC). The assessee was further asked to indicate the source of funds in the hands of the above shareholders and genuineness and nature of the transactions as prescribed under Section 68 of the Income-tax Act, 1961 (the Act). The learned Assessing Officer further noted that the return filed by the investor with Mauritius Tax authority was a loss of 40,106 USD for A.Y. 2011 and loss of 36,823 USD in A.Y. 2010. Therefore, the learned Assessing Officer was of the view that the investors do not have own funds. The source of funds for the balance sheet was share capital received in advance from the investors. The assessee in response submitted that it has already submitted

 

1. Various details vide letter dated 4 October 2013 such as ledger account, foreign inward remittance certificate, share subscription agreement and the balance sheets.

 

2. return of income filed before the Mauritius tax authorities of investor

 

3. Investor has audited accounts, bank statements and confirmation of having money invested in the assessee company.

 

4. FT&TR have also submitted the details of the investors.

 

5. None of the Directors of the investors is a director or related party of the assessee.

 

6. Investor is a foreign investor, assessee is not required to submit „source of the sources‟ of the fund as per the requirement of Section 68 of the Act.

 

The learned Assessing Officer held that assessee is not able to satisfactorily prove nature and immediate sources of funds of the further investor company, has been facing losses and do not have accumulated profits and resources. The learned Assessing Officer also questioned that any wise businessperson will not invest such huge money in continuously loss making company like assessee. No evidences are also provided and further, the funds so invested are without any Due Diligence Report for such huge investment. Thereafter, the learned Assessing Officer examined the provisions of Section 68 of the Income tax Act, 1961 (the Act) and after relying on several judicial precedents made an addition of ₹14 crores received as share application money under Section 68 of the Act.

 

ii. The learned Assessing Officer further examined the book profit computation made by the assessee. The learned Assessing Officer found that assessee has credited a sum of ₹13,13,79,646/- „below the line‟ on account of demerger of one unit to Zee Entertainment Ltd, which represents excess of liabilities over assets of undertaking. This sum was not offered by the assessee in the computation of book profit under Section 115JB of the Act; therefore, the learned Assessing Officer questioned the same. The assessee submitted that the profit and loss account of the assessee is prepared in accordance with the Companies Act and the above amount is shown „below the line‟. The amount credited is relating to demerger and is merely an adjustment entered and nowhere related to the business carried out during the year and therefore, it cannot be included in the computation of book profit. The assessee also referred to the order of the Hon'ble Bombay High Court dated 9 September 2010, whereby demerger of 9X channel business undertaking from assessee to ZEE Enterprise Ltd was approved. The assessee therefore stated that the accounting entry passed is in pursuance of the order of the Hon'ble High Court and therefore, it cannot be included in the book profit. The assessee explained how the above profit is credited to the Profit and Loss account. The learned Assessing Officer after considering the explanation of the assessee recorded the fact that assessee has transferred its liabilities amounting to ₹64.24 crores and transferred the total assets of ₹50.93 crores to ZEE Entertainment Ltd. and credited the balance sum of ₹13,13,79,646/- to the Profit and Loss account. The learned Assessing Officer also accepted the claim of the assessee that the above sum is not chargeable to tax under the normal computation provisions but it is chargeable to tax while computing book profit under Section 115JB of the Act. The learned Assessing Officer held that the Hon'ble Bombay High Court has never stated that above sum is not chargeable to tax under Section 115JB of the Act. He also rejected the contention of the assessee that the said receipt is a capital receipt and therefore, it is not taxable under Section 115JB of the Act. The learned Assessing Officer supported his view stating that Hon'ble Bombay High Court has also directed that such amount should be taken to the profit and loss account and therefore, it cannot be considered as capital receipt. Accordingly, he made an addition of ₹13,30,79,646/- to the total income under Section 115JB of the Act.

 

iii. The learned Assessing Officer further found that assessee has shown provision for doubtful advances amounting to ₹1,42,64,197/- and did not add the same to the computation of book profit. The learned Assessing Officer was of the view that in view of amendment to section 115JB of the Act to add „the amount set aside as provision for diminution in the value of any asset‟ clause (i) to Explanation 1 of Section 115 JB of the Act should be added to the book profit. Accordingly, he added the sum of ₹1,42,63,197/- while computing the book profit.

 

iv. The assessee debited the amount of ₹1.28 crores as legal and professional fees paid to Ernst & Young (E & Y). This fee was paid for services rendered in connection with providing advice in relation to the demerger of 9X channel. The learned Assessing Officer held that it is covered by the Provision of Section 35D of the Act. The learned Assessing Officer questioned the assessee. The assessee explained that the said expenditure was necessary for the smooth and efficient conduct of the business as the demerger of the undertaking was running at a loss. The assessee relied upon the several judicial precedents. The learned Assessing Officer rejected the contention of the assessee and held that provisions of Section 35DD of the Act is squarely applicable and only 1/5th of such expenditure is allowable to the assessee and therefore, addition of ₹1,02,40,000/- was made.

 

v. The learned Assessing Officer further noted that assessee has not deducted tax at source on payment of ₹3,98,750/- to UK party and ₹4,45,718/- claim as repairs and maintenance expenditure. However, it is not issue before us.

 

vi. On verification of form no.26AS, the learned Assessing Officer found that there is a difference between the amount received by the assessee as per Form no.26AS and amount shown in the profit and loss account. As the requisite information could not be furnished, such differential amount of ₹72,28,304/- was added to the total income of the assessee.

 

vii. The learned Assessing Officer further found that against business income the assessee has claimed deduction of content costs of ₹16,35,728/- which is capital expenditure. Out of the above sum, the learned Assessing Officer found that a sum of ₹11,80,00,000/- is a license fees paid on period-based content and there should be allowed as revenue expenditure. However, ₹3,80,12,647/- being animation cost on the basis of episode aired during the year and production cost programme of ₹64,05,900/- is a capital expenditure and therefore, same is an intangible assets. The learned Assessing Officer further found support from the identical disallowances made in A.Y. 2008-09. Accordingly, out of the total content cost of ₹16.35 crores ₹4,54,18,547/- was held to be a capital expenditure.

 

viii. The learned Assessing Officer further found that assessee has received agency commission of ₹75,27,50,136/- from advertising agencies towards advertisements, however, assessee accounted for the commission income after netting off the agency commission. He further held that out of the net commission income, the commissions paid are also not subjected to tax deducted at source and therefore, it is disallowable. Accordingly, ₹12,55,43,017/- was disallowed under Section 40a(ia) of the Act. However, it is not an issue before us.

 

ix. The learned Assessing Officer further noted that assessee has paid carriage fee of ₹10,87,48,125/- on which tax is required to be deducted at source under Section 194J of the Act in view of retrospective amendment in the definition of Royalty U/s 9(1) (vi) of the Act by introduction of explanation [6] with effect from 1/6/1976. As assessee has failed to do so, the above sum was disallowed under Section 40a (ia) of the Act.

 

x. The learned Assessing Officer noted that despite no exempt income earned by the assessee during the year, assessee has made investment in mutual fund and therefore, invoked provision of section 14A of the Act and disallowed ₹ 1,11,950/- under Section 14A of the Act.

 

xi. The assessee was also denied the set off of the brought forward losses for the reason that same have been set off on account of addition in the hands of the assessee in earlier years.

 

08. Accordingly, assessment order under Section 143(3) of the Act was passed on 11th June, 2014, wherein as per normal computation of income total income was assessed at ₹53,62,69,680/-. The book profit was computed by making an addition on account of demerger profit, provision for bad and doubtful debts and Section 14A of the Act. It was determined at ₹21,14,16,440/-.

09. Aggrieved, by the same assessee preferred the appeal before the learned CIT (A) who passed an appellate order on 28 September 2016. The ld CIT [A] :-

 

i. With respect to the addition of ₹14 crores on account of share application money received from New Silk Root PE, Mauritius, LLC, the learned CIT (A) held that the above share application money has been received after obtaining statutory approvals from the Foreign Investment Promotion Board (FIPB) and therefore, the genuineness of the transaction is beyond doubt. He further held that the FT& TR has also given the required information as required by the Assessing Officer to prove the identity and creditworthiness of the investors and genuineness of transaction. He further noted that in A.Y. 2008-09, same entity invested the money and added u/s 68 of the Act by ld AO was deleted by the learned CIT (A) vide order dated 15th July, 2011 and therefore, the assessee has proved identity, creditworthiness and genuineness of the above entity. Accordingly, the addition under Section 68 of the Act was deleted.

 

ii. With respect to the addition of ₹13,30,79,647/-, being surplus arising and credited to the profit and loss account of the assessee in view of demerger, the learned CIT (A) confirmed the addition. The reason for confirmation of addition was that the gain or profits were arising in the hands of the assessee because of the transfer of the undertaking under demerger of general entertainment business is part and parcel of profit and loss account of the assessee. Thus, there is a profit to the assessee. Merely because the assessee has credited the same below the line, it does not make any difference. He further held that the Hon'ble Bombay High Court has not directed the assessee to credit the same below the line and not in the normal profit and loss account. Thus, according to him, such adjustment was against the spirit of demerger. He further relied upon the decision of the Hon'ble Supreme Court in case of Apollo Tyres Ltd. Vs. CIT 255 ITR 273. He also rejected the contention of the assessee that such sum is capital profit. He held that such surplus is not a simple capital profit, but is a capital gain arising on transfer of a live business. Accordingly, he confirmed the action of the learned Assessing Officer.

 

iii. Regarding the addition of ₹1,42,63,197/-, being provision for doubtful advances debited in the profit and loss account while computing the book profit under Section 115JB of the Act was also confirmed in view of retrospective amendment.

 

iv. With respect to the applicability of Provision of Section 35DD of the Act, fees paid to Ernst & Young (E&Y) of ₹1.28 crores, confirmed action of ld AO holding that the provisions of that section clearly applies to the facts of the case.

 

v. With respect to the addition of ₹72,28,304/-, being difference in From No.26AS and the income shown by the assessee, He held that the addition deserves to be sustained as notice under Section 133(6) of the Act sent to the deductor of tax which remains unserved and some of the parties did not respond. He examined the eight parties and found that the learned Assessing Officer has not made an addition only on the basis of AIR information but has also conducted an enquiry under Section 133(6) of the Act, which was also confronted to the assessee. Assessee was given an opportunity for reconciliation of the discrepancies but it failed. Accordingly, he confirmed the addition of ₹72,28,304/-.

 

vi. With respect to the disallowances of ₹4,54,18,547/-, being capital expenditure out of content cost to follow the decision of his predecessor for A.Y. 2008-09 holding that 85% of such expenditure should be treated as revenue expenditure and the balance 15% is to be written off in three equal installments in the immediately succeeding years.

 

vii. With respect to the disallowance under Section 14A of the Act, he confirmed the disallowance of ₹1,11,840/- under Section 14A of the Act, he rejected the contention of the assessee that where there is no exempt income no disallowance under Section 14A of the Act can be made.

 

viii. With respect to the set of brought forward losses, he directed the learned Assessing Officer to quantify the same and if found proper give credit.

010. Accordingly, he partly allowed the appeal of the assessee. Accordingly, both the parties are in appeal before us.

 

011. At the time of hearing, it was founded that on 9, February 2022 the assessee has raised additional ground of appeal as under:-

 

“on the facts and in the circumstances of the case, the learned CIT (appeals) ought to have quantified the brought forward book losses or unabsorbed depreciation, whichever is less in arriving at the taxable book profits of the appellant for the concerned assessment year”

 

012. The assessee submitted that the assessee has not been granted this adjustment, which is mandatory adjustment according to the provisions of the law, and therefore this claim is raised.

 

013. The learned departmental representative vehemently objected to the same and stated that this ground cannot be admitted now.

 

014. We have carefully considered the rival contention and perused the orders of the lower authorities. This ground is identical to ground number 4 of the appeal of the assessee. This ground is not required to be admitted therefore. However, we find that the claim made by the assessee is in accordance with the law and it is part of the computation of the book profit under section 115JB of the income tax act. According to explanation (1) (iii) the amount of book profit is required to be reduced by the aggregate amount of unabsorbed depreciation and loss brought forward, whichever is less, as per the books of account. Therefore, the claim of the assessee is a legal claim and when the income of the assessee is computed under section 115JB of the income tax act, it has to be computed by giving effect to the all the provisions of the income tax act and that section. Accordingly, we entertain the claim of the assessee and decided here it by deciding ground number 4 of the appeal of the assessee.

 

015. After careful hearing the parties, on this issue we find that assessee has submitted calculation of book profit and losses according to form number 29B certified by the chartered accountant as per letter dated 28/4/2023 wherein the computation of details of brought forward losses/unabsorbed depreciation as per books of accounts is certified by the chartered accountant. Therefore, we direct the learned assessing officer to compute the book profit in accordance with the law and grant deduction to the assessee of brought forward losses as per books of accounts or unabsorbed depreciation as per books of accounts whichever is less. In the certificate produced before us in form number 29B the assessee stated that brought forward losses per the books of accounts is ₹ 7,088,159,362/– and unabsorbed depreciation as per the books of accounts is ₹ 315,453,321/–. The lower of the above two amount is ₹ 315,453,321/– which is required to be allowed to the assessee after the verification. The computation of the book profit made by the assessee shows that the net profit as per profit and loss account is ₹ 61,405,646/-. If brought forward of unabsorbed depreciation, which is lower of the brought forward losses and unabsorbed depreciation of ₹ 315,453,321/– is allowed, the book profit would be, subject to taxation under section 115JB of the act is Rs Nil. Even if all the issues with respect to book profit computation were held against assessee, the Income U/s 115JB would be Nil. Therefore we set-aside the issue back to the file of the learned assessing officer to compute the book profit or loss after verification of the above certificate in form no 29B u/s 115JB of the Act, after giving an opportunity of hearing to the assessee. Thus, the ground number 4 of appeal of assessee is allowed.

 

016. Now we come to the appeal of the learned assessing officer as per ground number 1 – 3 are against the addition of ₹ 14 crores being share application money received by the assessee. The assessee has received share application money of ₹ 14 crores through bank remittance from NSR PE Mauritius LLC. The learned assessing officer asked the assessee to submit certain details regarding the above investor. The learned assessing officer further got enquiry made from FT & TR division of CBDT whereby certain details from the Mauritius revenue authorities was received. From the information received by AO, he noted that it had only two major shareholders based in Cayman Island namely (1) New silk route PE Asia fund, LP Cayman Island and (2) new silk route PE Asia fund A LP Cayman Island. It was seen by the learned assessing officer that NSR has made the remittance from share application money after getting the same money received from its shareholder companies. From the details submitted by the Mauritius revenue authority, the learned assessing officer was also of the view that NSR has a loss of US$ 40,106 for impugned year in which it had made remittance for share application money. It was further mentioned by the learned assessing officer that even in the immediately preceding year the entity had shown a loss of US$ 36,823. It was also the observation of the learned assessing officer that since inception the assessee company has also been showing heavy losses and has no active profits. Therefore the AO held that it is not accepted that any wise businesspersons will invest huge money in such apparently loss making company. Therefore, he invoked the provisions of section 68 of the income tax act and held that the nature and source of funds received by the assessee have not been offered to his satisfaction. Thus, the addition under section 68 of ₹ 14 crores was made.

 

017. When matter reached before the learned CIT – A he deleted the above addition as per paragraph number 3.16 and 3.17 of his order holding that the

 

i. Amounts were received after necessary statutory approval from the foreign investment promotion board, which was required in such cases. Therefore, the receipts cannot be held to be illegal.

 

ii. the AO has made a reference to Mauritius revenue authority under the Double Taxation Avoidance Agreement between India and Mauritius and the details received with respect to the investor from the Mauritius revenue authorities does not show any infirmity.

 

iii. None of the directors of that investor company is related to the directors of sale orders of the assessee.

 

iv. Mauritius revenue authorities has confirmed regarding the source of income of the investor company which has collectively raised over US$ 1.38 billion from a range of investors including the various other blue-chip investors such as pension funds, insurance companies and financial institutions from global investors primarily from the United States and Europe.

 

v. There was a share subscription, shareholders agreement that had been submitted to the foreign investment promotion board and it is pursuant to this agreement that the amount has been received.

 

vi. Annual accounts of investors, sources of funds of investor, details of investors in investors have been furnished and there is no doubt about genuineness of the funds.

 

vii. Same entity has invested in multiple companies in India, It is a private equity investor of wide repute viii. For AY 2008-09 identical addition is deleted by the ld CIT (A) where Rs 141 cr is invested by the same investor.

 

ix. Assessee has cited various judicial precedents wherein it is implied that in any event, the source of source is no required to be proved when the lender has been held as a genuine company and transaction has not been found bogus.

 

Therefore, following the various judicial precedents the learned CIT – A held that the addition is not justified and deleted the same. He was of the view that assessee has established the identity, creditworthiness and genuineness of the investor.

 

018. Before us the learned departmental representative submitted a note dated 12/11/2022 which reads as under:- following note has been prepared and submitted.

 

02. Grounds No.1, 2 & 3 are against the addition of Rs.14 crores being share application money. The relevant facts are like this. During the course of assessment proceedings, it was noted by the AO that the assessee had received share application money of Rs. 14 crore through bank remittance from NSR-PE Mauritius, LLC. (Hereafter mentioned as NSR). The AO asked the assessee to submit certain details regarding NSR, which was not done. The AO however, got an enquiry conducted through FT & TR of CBDT whereby certain details from Mauritius Revenue Authority was received. From the information received the AO noted that NSR had two major shareholders based in Cayman Islands namely a) New Silk Route PE Asia Fund, L.P Cayman Islands, & b) New Silk Route PE Asia Fund-A L.P Cayman Islands. It was seen by the AO that NSR has made the remittance for share application money after getting the same money from its shareholder companies. From the details submitted by the Mauritius Revenue Authority, the AO noted that M/S NSR had shown a loss of 40106 US $ in the impugned year in which

 

03. It had made remittance for share application money. It was mentioned by the AO that even in the immediately preceding year, the NSR had shown a loss of 36823 US $. The AO further mentioned that right from the incorporation time; the assessee company also has been showing heavy losses (except in the year A.Y.2011-12) and has no accumulated profits. In view of this the AO held that it cannot be accepted that any wise businessman will invest huge money in such a perennially loss making company. As per sec 68 of the Income Tax Act, 1961, where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged to income tax as the income of the assessee of that previous year. The assessee has not been able to satisfactorily prove the nature and source of share application money and hence the AO made the addition of Rs.14 crores being share application money as unexplained credit u/s.68 of the I.T Act.

 

04. The assessee filed appeal before the CIT (A) and the Ld.CIT (A) vide his order dated 28.09.2016, decided this issue in favour of the assessee. The Ld.CIT (A) has given several reasons for deleting the addition at Para 3.16 and 3.17 of his order. These reasons are mentioned in brief in the paragraphs below.

 

a) The amounts were received after necessary statutory approvals from the Foreign Investment Promotion Board, which was required in such a case. Hence, the receipts are legal.

 

b) The AO has made a reference to the Mauritius Revenue Authority under the double tax agreement between India and Mauritius. The details with regard to NSR were called from the Mauritius Revenue Authorities.

 

c) It was also stated that none of the directors of NSR was in any way, related to any of the directors/shareholders of 9X.

 

d) Further, the Mauritius Revenue Authority has confirmed regarding the source of income of the company that NSR-PE is owned by New Silk Route PE Asia Fund LP and New Silk Route PE Asia Fund-A, LP which has collectively raised over $1.38 billion from a range of investors, including blue chip institution investors such as pension funds, insurance companies and financial institutions from global investors, primarily from the US and Europe.

 

e) Further, there was a share subscription cum Shareholders Agreement which had been submitted to the FIPB and it is pursuant to this agreement that the amount has been received.

 

f) Further the assessee has cited various judicial decisions wherein it is implied that in any event, the source of source is not required to be proved when the lender has been held as a genuine company and transaction has not been found bogus.

 

g) Further, the LD.CIT(A) is of the opinion that the various decisions relied upon by the AO are not pertinent to this case.

 

In view of the above, the Ld.CIT(A) has directed to delete the amount of Rs.14 crores added u/s.68 of the Act on account of amount received by way of share application from NSR during the year under consideration because as per his decision the identity, credit-worthiness and genuineness of NSR have been proved.

 

05. It is seen from the order of the Ld. CIT(A) that while giving relief on this issue, he has relied heavily on the approval given by the FIPB.. Foreign Investment Promotion Board was an inter-ministerial body under the Department of Economic Affairs. It was abolished in 2017 and was replaced by FIFP i.e. Foreign Investment Facilitation Portal. FIPB used to give approval for investment of non-automatic route. The approval of Foreign Direct Investment by the FIPB is not an estoppel against investigation by Enforcement Agencies like Income Tax or Enforcement Directorate. In any case, approval for huge amount of foreign direct investment is given by Govt. agencies every year. For example, in the FY.2019-20, approval of foreign direct investment amounting to 49.29B US$ has been given. Out of a, foreign direct investment thorough Mauritius was USS$ 8.24B. The mandate of giving approval by FDI is to promote investments in trade and industry in India and it has nothing to do with the taxation angle of the companies in which the investments has been made.

 

06. Even if it is accepted, that the approval by FIPB clearly establishes the genuineness of transaction and identity and credit worthiness of the creditor, in this particular case, the very process and act of FIPB approval has been put to question by law enforcement agencies like CBI and Enforcement Directorate. As per information available in public domain, several newspapers and news agencies have reported that criminal investigation is under progress against people who have been instrumental in giving FDI approval in the case of 9x Media P.Ltd (previously known as INX Media Pvt Ltd).

 

07. For example a news article published in Indian Express on 01.03.2018 can be found below:-

 

“CBI arrested Karti Chidambaram in connection with the INX Media case. It said Chidambaram had been resisting summons for questioning, and not cooperating with investigations. In the lone questioning session he attended, Karti was evasive and gave incorrect statements in the face of evidence therefore, he had to be arrested, CBI said.

 

However, the grounds for the arrest were probably laid as early as in 2008, even before INX Media secured all clearances from the Foreign Investment Promotion Board (FIPB). In January 2008, the Financial Intelligence Unit (FIU-IND) flagged foreign direct investment of over Rs 305 crore by three Mauritius-based companies in INX Media Pvt Ltd (now called 9X Media Pvt Ltd), formerly owned by Peter and Indrani Mukerjea.

 

The FIU alert was picked up by the investigation wing of the Income-Tax (1-T) Department in Mumbai, which subsequently forwarded the case to the Enforcement Directorate (ED). In 2010, ED registered a case against INX Media for alleged violations of the Foreign Exchange Management Act (FEMA).

 

Last year, while investigating a company associated with Karti, ED found some documents related to the INX Media deal in the computer of Karti's CA Bhaskarraman. The documents indicated payments made to Karti's alleged company by INX Media at the time the Finance Ministry granted it FIPB approval. ED sent a reference in this regard to CBI, which registered a case of corruption in May 2017, and searched premises connected to both Karti and his father P Chidambaram. Following this, ED lodged a case of money laundering against Karti..

 

According to the CBI FIR, on March 13, 2007, INX Media approached the FIPB for permission to issue 14.98 lakh equity shares and 31.22 lakh convertible non-cumulative redeemable preference shares of Rs 10 a piece to three nonresident investors Dunearn Investment (Mauritius) Pte Ltd, New Silk Route PE Mauritius LLC, and New Vernon Pvt Equity Ltd, under the FDI route. These shares represented 46.21% of the issued equity capital of INX Media. INX Media, according to CBI sources, sought this approval to start a music channel, 9XM, a Hindi general entertainment channel (GEC), and multiple entertainment channels in other languages.

 

According to CBI, the media firm, in its application to FIPB in 2007, also mentioned its intention to "make a down stream financial investment to the extent of 26 per cent of the issued and outstanding equity share capital of INX News Pvt Ltd, a subsidiary of INX Media".

 

While the FIPB granted permission to INX Media on May 30, 2007 to bring in FDI of Rs 4.62 crore, it rejected the proposal of downstream investment of INX Media in INX News. The CBI has alleged that INX Media flouted the conditional approval of FIPB, and brought in over Rs 305 crore of FDI in the firm against the approved inflow of Rs 4.62 crore. According to sources, the foreign entities bought shares of INX at Rs 862.31 a piece, which was 86.2 times more than their face value. The media organisation also made a downstream investment of 26% in its subsidiary, INX News.

 

CBI has alleged that on May 26, 2008, when FIPB sought clarification from INX Media after the IT Department began its probe, the media firm engaged Karti Chidambaram, promoter director of Chess Management Service (P) Ltd, to "amicably" resolve the issue by "influencing the public servants of the FIPB unit of Ministry of Finance by virtue of his relationship with the then Finance Minister, P Chidambaram".

 

Based on clarifications suggested by Chess Management, INX Media through its letter dated June 26, 2008, tried to justify its action on two counts: On the downstream investment issue, the company claimed that it was in accordance with the approval granted to it; on the excess foreign inflow, it said that was justified as premium received against shares issued.

 

However, CBI has alleged that Karti exercised influence over certain FIPB officials, and the department, instead of investigating the case, extended undue favours to the media firm by asking INX News to apply for fresh FIPB approval on the downstream investment already received by it.

 

At the same time, ED investigations have found, Advantage Strategic Consulting Pvt Ltd, a company that CBI has claimed is "indirectly controlled" by Karti, received a payment of Rs 10 lakh from INX Media on July 15, 2008. Although invoices issued by SPCL claimed that the service rendered was management consultancy, the ledger extract produced by INX Media to investigators showed that the payment had been made for "reply towards FIPB notification and clarification".

 

ED has also claimed to have found four invoices, dated in September 2008, raised by ACPL, its Singapore subsidiary and two other companies for US $ 700,000. According to CBI, INX Media was later granted FIPB permission for the investment in violation of norms.

 

08. Similarly, in an article available on internet of "The Hindu" dated 18.02.2020 the following information can be gathered:

 

A Delhi court directed the CBI on Tuesday to hand over to P. Chidambaram and his son Karti certain documents filed along with the charge sheet in the INX Media corruption case.

 

Special Judge Ajay Kumar Kuhar issued the direction to the CBI during the hearing in the INX Media corruption case.

 

The court was also hearing the money laundering case lodged by the Enforcement Directorate.

 

The Chidambarams were present in the court.

 

Mr. Chidambaram was taken into custody on August 21 when he was arrested by the Central Bureau of Investigation (CBI) in INX Media corruption case.

 

On October 16, the ED arrested him in the separate money-laundering case.

 

Six days later, on October 22, the apex court had granted him bail in the case lodged by the CBI.

 

On December 4, after 105 days of custody, Mr. Chidambaram was granted bail by the Supreme Court in the money laundering case lodged by the ED.

 

Karti is also currently out on bail in both cases.

 

CBI had registered its case on May 15, 2017, alleging irregularities in a Foreign Investment Promotion Board clearance granted to INX Media group for receiving overseas funds of 305 crore in 2007 during Mr. Chidambaram's tenure as finance minister.

 

Thereafter, ED had lodged the money laundering case.

 

09. The Ld.CIT(A) has also relied on the report of the Mauritius Revenue Authority. However, the Mauritius Revenue Authority has merely confirmed the existence of the company based at Mauritius through which the money for share application has been received by the appellant company. This, in itself does not explain anything about the nature of transactions and it is to be noted that Sec.68 speaks of both nature and source of transaction. In this case, it has been confirmed from the report of the Mauritius Revenue Authorities that during the relevant year, M/s. New Silk Route-PE Mauritius had shown a loss of 40106 US$ and in the immediately preceding year also, the company has shown loss .Further, it has been verified form the report of the Mauritius Revenue Authorities that M/s. New Silk Route-PE Mauritius has merely passed on the fund which it received from its shareholders i.e, M/s. New Silk Route-PE Asia Fund, L.P Cayman Islands and M/s. New Silk Route-PE Asia Fund, A.L.P Cayman Islands. Thus, the beneficial owners of the shares of the appellant company would be Cayman Island based companies and not Mauritius based company. This is clearly a tax avoidance scheme because as per Article 13(4) of the Double Taxation Avoidance Agreement of India with Mauritius, any capital gain arising of out sale of shares of an Indian company will not be taxed in India. Thus, a Mauritius based company has merely been interposed to make investment in Indian company so that when the shares are sold; there will be no tax liability in India. In this context, Article 13 of the IndoMauritius DTAA is here reproduced as under:-

 

1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated.

 

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

 

3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

 

[ 3A. Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State.

 

3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated;]

 

4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident.]

 

5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.

 

010. If the nature of transaction of the appellant company with the Mauritius based Company (NSR-PE) is examined, it will be obvious that the whole purpose of this transaction was to avoid payment of capital gain in India as and when the shares held by NSR-PE is sold. This is borne out from the fact that M/s. NSR-PE on its own did not have wherewithal to make any investment. Similarly, the appellant company has been facing heavy losses since its incorporation. In this situation, it did not stand to reason that the appellant company will attract such investment in the form of share application money. It has been mentioned in para 4 above, that the process and act of FIPB approval has been questioned in this case and criminal investigation has been launched against persons who have been instrumental in giving FIPB approval. It is interesting to note here that even the share holding companies of NSR i.e. M/s. New Silk Route-PE Asia Fund, L.P Cayman Islands and M/s. New Silk Route-PE Asia Fund, A.L.P Cayman Islands have been found to violate guidelines for investment. As per information available on internet the Securities and Exchange Commission (SEC) of the USA has vide its order dated 14.12.2016, censured these companies and has imposed a fine of 2,75,000 US $ for violation of investment guidelines. Thus, the nature of credit appearing in the books of the appellant becomes doubtful and consequently, the explanation offered by the appellant is not worthy of being satisfactory. In this situation, the provisions of Sec.68 is clearly triggered.

 

011. At this stage, it will be profitable to make a reference to the judgment given by the Hon'ble SC in the case of Vodafone International Holding B. V. vs. Union of India 341 ITR 1 (SC) (2012). In this judgment, the Hon'ble SC has given certain tests which can be used to understand whether the transaction of investment by a foreign company into an Indian company is genuine or not. These tests are described in brief in the subsequent paragraphs:

 

Look at Principle: (Para 60 of the order) It has been observed by the Hon'ble SC that "It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach." In the context of the present case it is to be seen that the investment has been merely routed through a Mauritius based company. The genuineness of the investments made by NSR-PE has been accepted by the LD. CIT(A) largely on the ground that FIPB has given approval for this transaction. However, as discussed in Para No.4 above, the approval itself has been questioned by law enforcement agencies. Thus, the Hon'ble ITAT should look into the entire gamut of facts of this transaction.

 

Fiscal Nullity Test: (Para 68 of the order):- It has been observed by the Hon'ble SC. "Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity." In the present case, it prima facie appears that M/s. NSR-PE Mauritius have been interposed only for routing investments by other companies of the appellant company.

 

Treaty shopping or the treaty abuse doctrine: (para 98 of the order) It has been observed by the Hon'ble SC "DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying Treaty Shopping or Treaty Abusal Doctrine: (para 98 of the order): the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance." In the present case, it prima-facie appears that M/s. NSR-PE Mauritius has been established solely with a view to avoid tax without any commercial substance.

 

Round Tripping: Para 105 of the order: In this para, Hon'ble SC has made the following observation which is worth quoting: "India is considered to be the most attractive investment destinations and, it is known, has received $37.763 billion in FDI and $29.048 billion in Fll investment in the year to March 31, 2010. FDI inflows it is reported were of $ 22.958 billion between April 2010 and January 2011 and FII investment were $ 31.031 billions. Reports are afloat that millions of rupees go out of the country only to be returned as FDI or FII. Round Tripping can take many formats like under invoicing and over- invoicing of exports and imports. Round Tripping involves getting the money out of India, say Mauritius, and then come to India like FDI or FII. Art. 4 of the IndoMauritius DTAA defines a 'resident' to mean any person, who under the laws of the contracting State is liable to taxation therein by reason of his domicile, residence, place of business or any other similar criteria. An Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a Tax Haven, and then create a WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defense, but once it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as Round Tripping: then TRC can be ignored, since the transaction is fraudulent and against national interest.

 

012. From the foregoing analysis and discussion, it appears that the Ld.CIT(A) has wrongly deleted the addition of Rs.14 crores made by the AO u/s.68. This observation is made on the basis of following points.

 

a) The Ld.CIT (A) has relied heavily on FIPB approval. In fact, the Ld. CIT (A) has come to a conclusion that the genuineness of transaction, the identity of the creditor and its creditworthiness are established because the remittance by NSR has been made after obtaining approval from the FIPB. However, as mentioned in para 4 above, the process and act of FIPB approval in this case has been found to be questionable and has been subjected to criminal investigation.

 

b) NSR does not have the wherewithal to make any investment in the Indian Company and has been merely interposed to take advantage of DTAA between India and Mauritius.

 

c) The appellant company has been showing heavy losses since its incorporation and thus it does not stand to reason that the appellant company will attract such investment in the form of share application money.

 

d) The Ld.CIT(A) has considered only the source of funds whereas, as per Sec.68, both the nature and source of credit is required to be explained to the satisfaction of the Assessing Officer.

 

It is therefore prayed, that the order of the CIT(A) may kindly be set-aside on this issue and the order of the AO be restored.”

 

013. The learned authorized representative responding to the argument of the learned DR that the FIPB approval has been put to question by law enforcement agencies like Central bureau of investigation and enforcement Dir, submitted a letter dated 15/2/2018 of Central bureau of investigation from Deputy Supt of police [Eo-II/CBI/New Delhi ) which is addressed to the Chief financial officer of the assessee. It stated that that letter dated 5/2/2018 in the addressed to the signatory of the letter wherein clarification was sought on the scope of ongoing investigation relating to the FIPB approval accorded to the assessee company. The information conveyed by the above letter dated 15/2/2018 states that that ongoing CBI investigation into the affairs of assessee concerning the FIPB approval accorded to the company in May 2007 and subsequent approval accorded in November 2008. FIPB approval accorded to the company in 2011 and therefore is not subject matter of investigation for the present. The letter also states that it is confirmed that the Central bureau of investigation has not put any embargo to reserve bank of India on issuing any acknowledgement concerning the FCGPR filed by the company. He further stated that a communication is also placed on record wherein The Additional Commissioner of Income Tax Range 6 (1) Mumbai was intimated by Director Of Income Tax Intelligence New Delhi that there is a communication received dated 30th number 2010 from The Additional Director Of Enforcement wherein it has been stated that that directorate has not come across any contravention under the foreign exchange Management act in respect of investment in the assessee company. This letter was issued with the approval of The Director of Enforcement. He therefore submitted that there is no enquiry or any other allegation against the assessee with respect to the investigation by those agencies.

 

014. During the course of hearing before the bench, the learned authorized representative was asked to show

 

i. all the shareholders agreement entered into by the assessee with the investors,

 

ii. any financial and legal due diligence made by the investor prior to making any investment,

 

iii. appointment of any of the directors on the board of the assessee company by the investor,

 

iv. any rational available and shared by the investor at the time of negotiation of the price of the company,

 

v. Any valuation report of the company

 

vi. The relevant resolution of the Board of Directors et cetera to prove the genuineness of the investment.

 

015. In response to that the assessee has filed a letter dated 27 April 2023 wherein it is submitted

 

i. copy of share subscription agreement dated 26/2/2007,

 

ii. shareholders agreement dated 26/2/2007,

 

iii. amended agreement dated 14/8/2007

 

iv. Shareholding pattern of the assessee from 31/3/2012, 31/3/2014 till 31/3/2023.

 

016. With respect to other details, it was submitted that assessee is not privy to the information.

 

017. The learned authorized representative also referred to page number 74 of the paper book wherein as per letter dated 10 January 2011 details were produced before the learned assessing officer. He further referred to the Mauritius revenue authorities‟ letter dated 21 January 2014 placed at page number 119 of the paper book and further letter dated 20 February 2014 from the same agency placed at page number 120 – 283 of the paper book. He further referred to letter dated 26th November 2013 placed before the learned assessing officer with respect to the explanation of investment received of share application money of ₹ 14 crores. The source of income of the shareholder/investor was also given with the complete address. By the same letter, the assessee has submitted that two partners of the investor are the nominee directors of the company. He further referred to paragraph number three of that letter wherein the assessee has submitted the foreign inward remittance certificates, share subscription, shareholders agreement, and approval of the Ministry of Finance. With respect to the copy of the return of income filed by the investor with Mauritius tax authorities, annual accounts of the investors and the bank account statement of the investor, it was stated that assessee is not privy to that information. Accordingly, the learned assessing officer made request to the Mauritius revenue authority under the Double Taxation Avoidance Agreement through the office of the competent authority in India to get the requisite details with regard to the investor. He referred to paragraph number 3.4 of the order of the learned CIT – A wherein the information is received by the learned assessing officer which assessee could not furnish. He further referred to paragraph number 3.16 of the appellate order wherein the AO was made available the information with respect to the details of the PE investor, return of income filed with Mauritius tax authorities, complete set of accounts of the investor for two financial years, bank account of the investors from which ₹ 14 crores has been transferred to the assessee and source of investment made by the investor. The bank account statement of the investor for the last six years was also made available. He therefore submitted that the learned assessing officer has incorrectly made the addition under section 68 of the income tax act and the learned CIT – A correctly deleted the addition.

 

018. The ld DR submits that those letters of ED and CBI are old communication and it is public domain that investigation is continuing. The letters of those agencies were categorically refereeing to the present status then. Present status is not shown by the assessee and publicly available information states that it is in progress. She submits that the order of AY 2008-09 of ITAT does not discuss any evidences furnished by the assessee. As well in case. the dl DR was not granted an adjournment and bench heard the matter refusing adjournment to Revenue but also levied cost on ld AO . Therefore, it was an order like exparte order. She referred to various paras of the order and submits that there is no finding that creditworthiness and genuineness of the transaction is proved. She submits that written note provided by his predecessor DR needs to be considered. She extensively read the written submission and stated that FIPB approvals are under challenge and ITAT has considered the same evidence as sacrosanct. Therefore, that order should not be followed.

 

019. We have carefully considered the rival contention and perused the orders of the lower authorities. Facts, at the cost of repetition, shows that the assessee had received as application money of ₹ 14 crores through bank remittances from NSR Mauritius LLC. To prove the identity and credit worthiness of the investor, the assessee submitted the Ledger account of share application money, relevant board resolution of the assessee company, foreign inward remittance certificates from HDFC bank, share subscription, shareholders agreement dated 3 April 2010, approval of Ministry of Finance dated 31 May 2007, foreign investment promotion board‟s letter dated 27/7/2010 along with the application and amendment in approval by letter dated 1 March 2011. The bank statement of the assessee was shown with respect to the investment received. The assessee also on 30 April 2014 submitted the FIPB approval dated 14/10/2011, FIPB approval letter dated 28/10/2011 and various correspondences with the bank. The learned assessing officer on enquiry through the office of the competent authority with Mauritius revenue authority under the provisions of the Double Taxation Avoidance Agreement also got the details of the investor with respect to the address, name of shareholders with the complete address, tax returns for respective financial years and earlier two financial years filed with tax authorities in Mauritius, set of the Annual accounts such as balance sheet, profit and loss account with all annexure, schedules, notes on accounts of the investor for the impugned assessment year and further for the earlier 2 financial years, bank account of the investor from which the amount of ₹ 14 crores is transferred to the assessee and the bank account of investor for the last six years, the source of investment made by investor in the company etc. From this, it is apparent that such information was received through the office of the competent authority on 14/3/2014. It is also apparent that the amount of ₹ 14 crores invested in India in the assessee company through share application money was invested by that investor and it has two shareholders based in Cayman Island. The Cayman Island shareholders are New Silk Route PE Asia fund LP Cayman Island and New Silk Route PE Asia fund L LP Cayman Island. The source of the fund is the funds collectively raised of over US $ 1.38 billion from the range of investors as confirmed by the Mauritius revenue authorities as per letter dated 20 February 2014. The learned assessing officer further raised the query to the assessee that was replied to as per letter dated 30/4/2014. The learned AO is not satisfied with the explanation of the assessee and made the addition. The identical addition for assessment year 2008 – 09 was also made in the case of the assessee where the same entity has invested ₹ 1,321,439,817. This addition was also deleted by the learned CIT – A as per order dated 15/7/2011. This was also confirmed by the ITAT deleting the addition of the same. For that year, there was no reference to the competent authority for any information. However, during the year, there was a reference to FT & TR and information asked by the learned assessing officer was received. Therefore, the addition was deleted. Before us, the learned departmental representative has specifically referred to news items appearing in „The Indian express‟ on 1/3/2018 as well as in article available on Internet in „The Hindu‟ newspaper dated 18/2/2020 wherein certain facts were mentioned that there is a investigation by Central bureau of investigation and enforcement directorate. The learned authorized representative has also relied the various tests given by the honourable Supreme Court in the decision at 41 ITR 1 in case of Vodafone international Holdings BV versus Union of India such as, fiscal nullity test, Treaty shopping as well as round tripping. It is also the claim of revenue that the FIPB approval in this case is found to be questionable and has been subjected to criminal investigation. A further claim is made that New Silk Route does not have wherewithal to make any investment in the Indian company and has been merely interposed to take advantage of Double Taxation Avoidance Agreement between India and Mauritius. Further, it is claimed that Assessee Company has been showing heavy losses since its incorporation and thus does not make sense that assessee will attract such an investment in the form of share application money. Therefore, the learned CIT – A has considered only the source of funds whereas as per provisions of section 68 both the nature and source of credit is required to be explained to the satisfaction of the assessing officer. The assessee has produced the communication dated 15/2/2018 from central bureau of investigation and the letter dated 30 November 2010 of Directorate of Enforcement wherein it has been categorically stated that there is no enquiry now pending against the assessee for the time being. We have also raised certain query, which has been replied to on 27 April 2023. On careful perusal of a share subscription agreement dated 26 February 2007 between several entities where NSR PE Mauritius LLC is one of the parties for investment in Assessee Company along with several others. It provides that the investment would be in four trenches as per clause three, four, five and six of the agreement. It also contains the initial business plan at schedule [1] of the agreement stating estimation of operating income statement, balance sheet and cash flow statement of the assessee. A shareholders agreement dated 26 February 2007 was also called by us and furnished by the assessee. In that agreement, also the investor is one of the parties. On 14 August 2007 an amendment agreement was also entered into between the parties (10 parties) and the assessee, wherein it is stated that parties have entered into a share subscription agreement dated 26 February 2007 whereby the investors have agreed to subscribe to certain preference shares of the company in terms of schedule 2 to the subscription agreement. There is a shareholder agreement executed on 26 February 2007 to define the mutual rights and obligations of the parties. It is also mentioned that in terms of subscription agreement two parties have invested their portion of the initial preference investment shares and initial equity investment. However, some of the parties also explained that, they are no longer interested in participating in complying with the terms of the subscription agreement and shareholders agreement. Therefore, some of the other parties have agreed to subscribe to the portion of the investment agreed by those other parties. It also shows that trench -wise breakup of the shareholding of all the four trenches, after four trenches seven parties were the subscribers of preference shares in the company. NSR PE is 20% investor at the end of fourth trench. The shareholding pattern of the assessee as on 31st of March 2012 also shows that out of 7,14,53,000 shares of the assessee company, 5,70,00,000 shares are held by NSR PE Mauritius LLC. Identical shareholding pattern till 31st of March 2023 continues subject to minor changes. It is also stated that the investor is an investment management firm, which is making private equity investment in India, South Asia and other growing economies of Asia. The investor has invested in many companies in India such as Amonix, café Coffee Day, Destimoney, Ks oils, Nectar Life science, Reliance Infratel, Rolex Rings and ortel. The firm is led by Mr. Rajat Gupta, Mr. Victor menzenes, Mr. Parag Saksena managing a pool of US$ 1.38 billion capital. Therefore, assessee is not the only company where the investment has been made by this investor. Undoubtedly, investor is one of the prominent PE investor in India. Further, for assessment year 2008 – 09 the same company has made an investment of ₹ 132 crores in the company along with other non-resident investors. Addition was made by the ld AO u/s 68 and ld CIT [A] deleted the same. This issue reached before the coordinate bench in ITA number 7477/M/2016 and 6345/M/2011 for assessment year 2008 – 09 wherein the deletion of addition made by the learned CIT – A was upheld. The revenue, it was stated, has not filed any appeal before honourable High Court. The reference made by the learned AO to the Mauritius tax authorities to competent authority has received all the investment information with respect to the investor. For this year, the ultimate source of the money from companies located in Cayman Island is also provided. Now on our asking, the assessee has also produced the resolution of the board of directors of NSR PE Mauritius LLC wherein the resolution for investment of ₹ 14 crores for the issue of 0.001% compulsorily convertible preference shares of ₹ 10 each in the company was stated which is placed at page number 4 of submission dated 28/4/2023. Further the resolution of the assessee company for share subscription is also shown by which the investor in the company are NSR PE Mauritius LLC, India growth fund A unit scheme of Kotak Seaf fund, Kotak Mahindra capital company, INX media employee trust and promoters of the company. The learned assessing officer has merely looked at the lower profit of the investor in Mauritius. However, he has ignored that the statement of financial condition of the investor shows the total shareholders capital as on 31/3/2008 is of US$ 93,056,288, for the year ended on 31/3/2009 is of US$ 61,454,174 , for 31/3/2010 of US$ 120,003,184 and as on 31/3/2011 of US$ 110,079,587. Further, schedule of portfolio investment shown from the audited accounts of the investor as on 31/3/2008 is at US$ 140,368,006 which has fair value of US$ 140,295,169, as at 31/3/2009 of US$ 179,517,307 which has the fair value of US$ 100,321,578 and as at 31 March 2010 of US$ 181,505,112 which has a fair value of US$ 160,895,216. Therefore, merely saying that because of the low profitability/loss in Mauritius of investor makes the investment in the assessee company is not genuine is not acceptable. With respect to the news reports, it was stated that the coordinate bench in assessment year 2008 – 09 has already dealt with and therefore the issue is decided in favour of the assessee. We find that the learned assessing officer has not considered all the above financial factors of the investor. We have also considered issue decided in favour of the assessee for assessment year 2008 – 09, which is placed at page number 780 – 804 of the paper book. However on carefully looking at paragraph number 40 of that decision, it was found that before the coordinate bench the issue was whether there is any incriminating material against the assessee or not. In paragraph number 41, it is stated that some investigation was initiated by the revenue on both the counts of investment by resident and non-resident as well as foreign investment. In that case, the learned CIT – A deleted addition for want of evidences in any incriminating information against the assessee. The bench also directed that as and when such evidences gathered, the department is free to make use of the said information as per law and assess the income of the assessee after granting reasonable opportunity of being heard to the assessee. In those circumstances, the addition was deleted. The relevant paragraph of the order of ITAT are as under:-

 

“35. NON-RESIDENTS: Regarding the addition on account of non-resident foreign institution investments into the share application money and share application and the preferential share capital with premium, we find, a sum of Rs...... is brought in through Mauritius route. Basic facts are that the assessee raised share application money, equity shares with premium and preferential shares with premium totalling to ₹ 263. 28 Crs. The companies who invested are Maritius based New Silk Route PE M. LLC, New Version P Eg Ltd and Ducan Investment (M) PTE Ltd. In the assessment u/s 143(3) of the Act, AO made addition of the said amount u/s 68 of the Act. AO claims that the assessee failed to furnish the details relating to identity, creditworthiness and genuineness of transactions. AO is content with the documents furnished by the assessee. The documents are share subscription agreement, Board Resolution allotting shares, Registers, FIPB approvals, correspondence with Bank intimating the receipt of funds, Bank statements of the assessee etc. Assessee relied on various judgments to support the correctness of the claim of the assessee. Assessee claims that invoking of the provisions of section 68 of the Act is uncalled for and claimed that assessee discharged the onus completely. Assessee submitted detailed written submissions dated 14.1.2016 (supra). Accordingly, it is the claim of the assessee that the investor company named Duncorn Investments (Mauritius) PTE Ltd is subsidiary company of Singapore Government Company named Temasek Holdings (P) Ltd (a Singapore based company). (Para 70 of the written submissions is relevant). Referring to New Selk Route PE (M) Ltd and New Verman P Eg Ltd, it is submitted in working that they are owned by well known Banking Executives. As per the said note, the fund movement is in the knowledge of the FIPB / Ministry of Finance. Assessee filed FC – GPRs Transaction (page 350 to 377 and 381 to 408) (para 74). Assessee referred the AO‟s decision in invoking the provisions of section 68 of the Act. However, FAA deleted the entire addition. Rejecting the same, AO proceeded to make addition of the share application money, equity share capital and preferential share capital premium collected by the assessee from the said companies. AO invoked the provisions of section 68 of the Act. AO questioned the onus is not discharged by the assessee fully and the premium collected @ ₹ 862.15/- per share is very high when the company is a loss making one and the company NAV is only 131.45 Crs (Para 60(i) of the written submissions of the assessee are relevant. AO is of the view that FIPB approved only ₹ 4.60 Crs and ₹ 263 Crs is brought in without FIPB route. AO made use of the assesses inability to supply certain details of the said investors of foreign origin.

 

36. Before the FAA, assessee reiterated the submissions made before the AO that the foreign investors are either Government owned indirectly or owned by the Bank Executives of international fame. They have international identity and undoubted creditworthiness and therefore, genuineness is beyond any suspicious. Fact of Tamasek investing in famous bank like ICICI, Mahindra & Mahindra, Tata Teleservices other blue chip companies like Bank of Denamon, Bank international Indonesia, Hana Bank, China Consortium Bank etc were also cited. Considering the same, and on finding that the AO merely suspected the transactions, FAA deleted the entire addition on this account. Aggrieved, the Revenue is in appeal before the Tribunal.

 

37. Before the ITAT, Ld AR for the Revenue relied on the order of the AO and filed the written submissions. The Tribunal directed the AO / Revenue to file the remand report on the Foreign Investors‟ investment into share application money, equity share capital and preferential share capital with premium and wanted a speaking report on this issue. AO did not comply with the said directions till date. Actually, almost an year is passed the Revenue is non-serious and non-committed to the demand of the Bench of the Tribunal. Tribunal has even awarded the cost on the AO for his inaction and nonresponse. The Income Tax Act confers the AO with powers to collect the data and producing the people before him for the said purposes. It is not clear why the Department is dragging the fact backwards from conducting the investigation proactively. On the last date of hearing in February, 2017, AO filed a letter dated 13.2.2017 and relevant parts are already extracted in the preceding paragraphs of this order. The casual nature of the AO is evident from the following lines that reads as under:

 

“3.5...........,.Outcome of the same is still awaited and the same will be forwarded as an when it is received.”

 

38. The above portion indicates that the „surmises and the roaring enquiries‟ are the force behind the addition of ₹ 263.28 Crs (rounded of). In fact, a specific remand report was called for from the AO vide the notings 27.05.2016, and relevant para relating to the investments by residents and non-residents is reproduced as under:-

 

“Date: 27.05.2016

 

Regarding the Domestic Share capital, share premium and share application, we find there is a need for clarification as to the source of funds, genuineness of the transactions and creditworthiness of the parties. Considering the law laid down by the various High Court on this issue as on today on the issues mentioned above, we are of the opinion that AO should go into the issue afresh and examine the said parameters laid down in para 68.

 

In this case, it is argument of the Ld Counsel that the source of funds are substantiated to be if AO has to go into the root of the original source of the credits. AO may consider this also and submit the detail report after examining the chain of transaction involving many entities whether doing or not doing business activities.

 

Similar exercise is required with regard to Foreign Funding ie Share Capital, Share Application and Share Premium. Even if assessee exhibits inability to furnish information regarding identity, creditworthiness and source of foreign fund, the AO is directed to invoke all the powers vested on him by the statute and gather relevant facts necessary for complete of proceeding under consideration meaningfully. Thus, AO is directed to furnish and reasoned report / speaking order and all the issues mentioned above and submit the same within a month time from the date of receipt of this direction. The case is adjourned for 15th July, 2016.”

 

39. In response to the above, the Revenue sought adjournments on 15.07.2016; 22.7.2016; 05.08.2016 etc. On 9.12.2016 when the case came up for hearing the Department sought for further adjournment. While granting the same, the following order sheet notings were recorded,-

 

Date: 9.12.2016

 

NOTE

 

Today the matter is fixed for hearing of the appeal by the Revenue / Assessee. However, the Revenue has filed an application seeking adjournment for 2 months. In this regard, Ld Counsel for the assessee strongly objected the application of adjournment moved by the Revenue. After hearing the Ld AR and on perusal of the Order Sheet, we noted that the direction to submit the report was granted on 27.5.2016. Thereafter, five adjournments have already been sought by the Revenue for compliance. But, we noted that the said directions have not been complied with. Even in the present application, no plausible reasons have been mentioned for seeking adjournment. However, considering the interest of justice, we adjourn the matter to 17.02.2017 and impose ₹ 2000/- as cost upon the Revenue for delaying to submit the said report and not complying with the directions of the Tribunal. It is made expressly clear that no further adjournment would be granted. The said cost be remitted to the Prime Minister‟s relief fund on or before 17.02.2017 and submit a copy of the challan to the Registry, ITAT for filing on record. Registry is directed to inform both the parties through notice the next date of hearing as per the procedure.”

 

40. In response to the above, the Revenue filed the above stated letter dated 13/15.02.2017 giving no commitment or remand report of any kind. Therefore, there is no incriminating material so far gathered by the AO / investigation wing of the Department against the claim of the assessee. As on date, the CBDT has not come out with any incriminating material against the assessee. Therefore, we are of the view that it is premature to make any addition on this account without having any information against the assessee either on identity or creditworthiness or genuineness of the transactions. Present addition is a case of surmises, suspicion etc. Therefore, the addition is unsustainable in law. For all these reasons also, we are of the view, the order of the CIT (A) is fair and reasonable. Therefore, the decision of the CIT (A) does not call for any interference.

 

41. Before parting, it may be relevant to mention that the Revenue has gone on record in mentioning that, with reference to the foreign funding of share application money/ share capital / share premium, a reference is made tothe Joint Secretary, (FT & TR-II) CBDT, New Delhi for obtaining information under Exchange of Information Article in the DTAAs/ TIEAs/ Multilateral Agreements. Outcome of the same is awaited. Similarly, with reference to the domestic funding, the Department has issued notices u/s 133(6) of the Act to all the four companies (supra). Thus, some investigation is now initiated by the Revenue on both the accounts of investments by resident and non-residents, foreign investors. These efforts now supports the decision on the CIT (A), who deleted the addition for want of evidences / any incriminating information against the assessee. As and when such evidences are gathered, the Department is free to make use of the said information as per law and assess the income of the assessee after granting reasonable opportunity of being heard to the assessee. With these observations, the relevant grounds of the appeal of the Revenue relating to both domestic and foreign funding are dismissed.”

 

[bold and underline supplied by us]

 

020. On carefully reading the order of ITAT extracted above, we do not find that what those evidence those are examined by ITAT. Further FIPB approval weighed heavily in the mind of ITAT to satisfy the conditions of section 68 of the Act. However, on reading section 68 of the Act, we do not find that RBI approval, FIPB approval helps any way case of assessee. In fact, it is shown that GOI has challenged those FIPB approvals only. Further, the letters of ED and CBI placed before us were not produced before that bench. It also did not consider the level of inquiry being conducted by GOI. However, we failed to understand, on receipt of information subsequent to decision of ITAT, how the revenue would be able to assess the income of the assessee then. Therefore, the facts for that year and the investigation of the revenue for this year are different. Admittedly, the letter dated 15/2/2018 of Central bureau of investigation and letter dated 30 November 2010 of Enforcement Directorate are non-categorical and are for the year prior to those newspaper reports. Claim of revenue is that investigation is continuing, this is not denied by assessee. Therefore, those letters are of little help. However, irrespective of the newspaper reports, irrespective of violation of FEMA , unless it affects the issue under The Income tax Act, addition under section 68 of the income tax act is required to be tested based on identity and creditworthiness of the investor as well as the genuineness of the transaction. Before us, the revenue authorities are only aggrieved with the genuineness of the transaction. Despite our query, we have not received any communication such as due diligence made by the PE investor, which is the main price negotiation therefore it is clear that such an investor does not make investments without appropriate due diligence. Further correspondences made with investor are also not shown to us. It is also not shown that how the investors were identified and invited for making investments. However, investor is stated to be a leading PE investor in the country, but it is clear that such investors make investments after putting lot of activities, price negotiation, etc. Therefore, this issue needs to be seen in totality of the facts. Absence of one evidence or presence of some other evidence is crucial to decide the genuineness of the transaction. As the coordinate bench has already directed the revenue in the order for the earlier assessment year, Therefore, we setaside this issue back to the file of the learned assessing officer to consider all these evidences furnished by the assessee, information received from Mauritius tax authorities, investment strength of the investor, investment made by the investor etc. Thus, ground numbers 1 – 3 of the appeal of the learned AO are restored back to the file of the learned AO to examine the transaction as per parameters of section 68 of the Act.

021. Identical grounds are raised by the learned assessing officer in appeal of assessment year 2012 – 13 as per ground number 1 – 3, wherein the addition under section 68 of income tax act of ₹ 41 crores has been deleted by the learned CIT – [A] for the same investor. As we have already restored back the identical grounds for assessment year 2011 – 12 to the file of the learned assessing officer, with similar directions, we restore these grounds of appeal for assessment year 2012 – 13 also to the file of ld AO.

 

022. Ground number 4 of the appeal of the AO is against direction of the learned CIT – A to consider 85% of the amount of ₹ 45,418,547 with respect to animated character episodes and in-house cost of production programme as revenue expenditure and the rest of the amount to be allowed over a period of three years in three equal installments. The learned AO holds that assessee has acquired perpetual rights and the same constitutes intangible assets to be categorized as a capital asset and therefore 85% of the cost cannot be allowed as revenue expenditure.

 

023. This ground is connected to ground number 10 of the appeal of the assessee. Identical issues were challenged for assessment year 2008 – 09 before ITAT. Coordinate bench has dealt with this issue and at Para number 11 of that order has held that following decision of ITAT in case of Zee media, the AO was directed to consider cost already telecast from the total cost as there is no justification for not allowing the content which is already telecast in the current year. Based on the above order it is clear that a sum of ₹ 39,012,647 representing the spending on animated character episodes needs to be allowed fully in the current year. These episodes are produced by third party at a fixed cost per episode and provided to the company monthly for telecasting on the channels. Thus, it is clear that that animated character episodes are telecast on the channel in the same month of delivery. Therefore to that extent the learned assessing officer is directed to follow the order of the coordinate bench for assessment year 2008- 2009 [ITA No.7216/M/2011, ITA No.6345/M/2011 dated 26/04/2017] and allow the cost which has been telecast in the same year. It was held as under :-

 

“11. Considering the same, we are of the view that the claim of assessee is not in tune with the accounting policy in open market on this issue of amortization of TV programme/ Film Rights. No special reasons are demonstrated before us the reasons justifying the deviations by the assessee. Therefore, we are of the view that the AO is directed to apply the said order of the Tribunal in case of Zee Media (supra) of the granting reasonable opportunity of being heard to the assessee fully. AO is also directed to reduce the extent of cost already telecast i.e. ₹ 26,50,87,780/- from the total cost of ₹ 89.06 crore as there is no justification for not allowing the content, which is already telecast in the current year. Thus, AO should examine the correctness of the said figure and the extent relatable to both TV programme or Film rights before granting the full deduction out of ₹ 89.06 crore. On the balance, the accounting policies in the market relating to this industry should be applied. AO shall grant reasonable opportunity to the assessee. With these directions, the issue raised in both appeals are allowed as above.”

 

024. Further, with respect to the in-house production cost should also receive the same treatment i.e. that if the in-house production programs are telecast, the cost of such production should be allowed to the assessee in the year in which it is telecast. Therefore, we hold that the direction of the learned CIT – A to consider 85% of the amount as revenue expenditure and spread the rest of the amount over a period of three years in three equal installments is without any logic and support of law. The revenue expenditure incurred by the assessee should be allowed in the year in which those expenses are incurred and if there is capital expenditure than they are subject to depreciation. There cannot be any formula to allow expenditure in various years in equal installments because it does not have support of law. Whenever the honourable courts have taken such a view is only because of the concession of the assessee as alternative. Decision of Honourable supreme court in Madras Industrial Investments corporation 225 ITR 802 (SC) also supports this view where in it has bene held that Ordinarily, the revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. Accordingly, ground number 4 of the appeal of the learned AO as well as ground number 10 of the appeal of the assessee with respect to the content cost is restored back to the file of the learned assessing officer to decide the issue afresh keeping in view the above findings.

 

025. Identical grounds have been raised by the assessee in assessment year 2012 – 13 by ground number 2 and 3 of the appeal and by the learned assessing officer for that assessment year as per ground number 4 – 5 of the appeal, therefore, as there is no change in the facts and circumstances of the case for assessment year 2012 – 13 compared to the facts and circumstances of the case for assessment year 2011 – 12, we restore all these grounds of appeal as well as the appeal of the learned assessing officer to the file of the learned assessing officer with similar direction.

 

026. The ground number 5 – 7 are with respect to the order of the learned CIT – A in directing to delete the disallowance under section 40 (a) (ia ) read with section 194J in respect of carriage fees and channel placement fees. The claim of the revenue is that those payments are made for use/right to use of process are royalty as per explanation 6 to section 9 (1) (vi) of the act and therefore such payments are covered under section 194J of the income tax act. The claim of the assessee is in this case the tax has been deducted under section 194C of the act at the rate of 1%whereas the learned assessing officer felt that it should have been at the rate of 10% under section 194J of the act. The short deduction was in respect to amount of ₹ 102,112,508 and further sum of ₹ 6,635,617 has been paid to Prasar Bharti on which no tax was required to be deducted as it had an exemption certificate under section 12 A of the act. The claim of the assessee is that for the impugned assessment year i.e. AY 2011 – 12, this explanation is not applicable as it was inserted retrospectively with effect from 1/6/1976 by The Finance Act 2012 and therefore it cannot fasten a liability for tax deduction at source on the assessee for assessment year 2011 – 12. It is claimed that the assessee could not have conceived that such a retrospective amendment would come in the future and therefore the TDS at the lower rate of 1% would not be in order.

 

027. After hearing the parties, We find that above issues is covered in favour of the assessee by the decision of the honourable Bombay High Court in NGC Networks (India) Pvt. Ltd [TS-41-HC-2018(BOM)] wherein it has been held that a party cannot be called upon to perform an impossible Act i.e. to comply with a provision not in force at the relevant time but introduced later by retrospective amendment. Honourable court relied upon the co-ordinate bench decision in the case of Cello Plast wherein the legal maxim lex non-cogitad impossible (law does not compel a man to do what he cannot possibly perform) was applied. Honourable High court noted that Explanation 6 to Sec.9(1)(vi) was introduced in 2012 w.r.e.f 1976. Therefore, it was held that the assessee could not have contemplated at the time of deduction of tax u/s 194C that deduction of tax would be required u/s 194J due to future retrospective amendment. It was also noted that Sec.40(a) (ia) refers to Explanation 2 to Sec.9(1)(vi) and not Explanation 6 to Sec.9(1)(vi) for the meaning of royalty. Thus, Honourable High court held that the disallowance of expenditure u/s 40(a)(ia) can only be if the payment is 'Royalty' in terms of Explanation 2 to Sec.9(1)(vi). Since, the payment made for channel placement as a fee, is not royalty in terms of Explanation 2 to Sec.9(1)(vi), no disallowance of expenditure can be made u/s 40(a)(ia). No infirmity can be found in the order of the ld CIT [A]. Accordingly, ground number 5 – 7 of the appeal of the learned assessing officer is dismissed.

 

028. Identical grounds have been raised by the assessee for assessment year 2012 – 13 in ground number 5 – 8 of the appeal. Both the parties confirmed that there is no change in the facts and circumstances of the case. For similar reasons given by us in deciding those grounds for assessment year 2011 – 12, we dismiss these grounds of appeal of the learned AO.

 

029. Accordingly appeals of the learned assessing officer for both these assessment years are partly allowed for statistical purposes.

 

030. Coming to the appeal of the assessee wherein ground number 1 is with respect to the addition of ₹ 133,079,646/– being the surplus on demerger of entertainment channel undertaking to the book profit computed under section 115JB of the act. Fact shows that during the year assessee had demerged its entertainment channel business undertaking to Zee entertainment Enterprises private limited. In the process there was a surplus towards the excess of liabilities over assets transferred of ₹ 133,079,646/-. When assessee drew profit and loss account, it determined the profit for the year, thereafter brought forward losses of the profit and loss account and reduced this sum therefrom. This was on the face of the profit and loss account. Assessee claimed that this amount was not credited to the profit and loss account but was set off against the balance of the profit and loss account, which had a debit balance of ₹ 7,403,612,682 at the beginning of the year i.e. on 1/4/2010. In the scheme of arrangement between the assessee and Zee entertainment Enterprises Ltd approved by the honourable Bombay High Court, above amount was supposed to be reduced against the balance of profit and loss account in the balance sheet. The learned assessing officer found that though the assessee has credited the sum to the profit and loss account, however the same was not included in the computation of the book profit under section 115JB of the act. According to the learned assessing officer, the above amount is chargeable to tax under section 115 JB of the Act. Therefore, the book profit was increased by the above sum. The learned CIT – A when confronted with this ground by the assessee held that the General Entertainment Channel [ GEC] business has been transferred under the scheme of demerger and therefore there is a profit to the appellant, which is to be shown in the profit and loss account. The assessee has earned a profit of ₹ 13.31 crores but has disclosed it „below the line‟ in appropriation account, which is against the direction of the Honourable Bombay High Court’s order dated 9/9/2010. He further held that the difference between the assets and liabilities has been adjusted by the assessee against the debit balance of profit and loss account whereas the surplus was to be taken into the profit and loss account as per the scheme of arrangement. He rejected the contention of the assessee that surplus credited to „below the line‟ is a capital profit and not a revenue. Accordingly, he upheld the action of the learned assessing officer in increasing the book profit by the above sum. Therefore, assessee is in appeal before us.

 

031. The argument of the learned authorized representative is that

 

i. the profit on demerger of the business is a capital profit on transfer of general entertainment channel business, which is arising in terms of the order of the honourable Bombay High Court dated 9 September 2010. So accounting entries are as per direction of Honourable High court.

 

ii. assessee has accounted for below the line by adjusting the balance brought forward of profit and loss account from earlier years which is nothing but the balance of the profit and loss account in the balance sheet.

 

iii. Accounting standard – 14 of Accounting For Amalgamation issued by the Institute of chartered accountants of India stating that the surplus on demerger are capital profits

 

iv. Provisions of section 41(1) has not been applied by the learned assessing officer and it has not been treated as profit chargeable to tax under the normal provisions of the act by the learned assessing officer.

 

v. business reorganization has been made tax neutral as per The Finance Bill 1999 and therefore if the profit on demerger is to be subjected to book profit under section 115JB of the act, tax neutrality would not be achieved.

 

vi. real income theory this amount would not be income of the assessee and therefore the book profit cannot be increased by the above sum.

 

vii. Reliance was placed up on several judicial precedents.

 

032. The learned departmental representative vehemently supported the order of the learned CIT – A.

 

033. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also perused the several judicial precedents relied upon by the learned authorized representative and mentioned by the learned revenue authorities in the respective orders. The fact shows that the assessee had filed a scheme of arrangement between the assessee and Zee entertainment Ltd on 23 July 2010 for the demerger and transfer of its general entertainment channel business to Zee entertainment Ltd with effect from the closing hours of business on 30. March 2010. The scheme was approved by the honourable Bombay High Court as per order dated September 9/2010. Such approved scheme was filed with the Registrar Of Companies in September 22, 2010. The assessee has given effect to the demerger and transfer in the financial statements. It was found that total assets of ₹ 509,327,461/- were transferred along with total liabilities of 64,24,07,108/-. Thus, there was the net gain on transfer was ₹ 133,079,647/-. It is apparent that total liabilities transferred by the assessee were much higher than the total assets transferred. This amount was credited to the Profit & loss account „below the line‟. The profit and loss account were drawn and profit/(loss) after tax was determined for the year. Thereafter the balance brought forward from earlier year of the profit and loss account was shown at loss of ₹ 7,403,612,682, from that adjustment on account of demerger of ₹ 133,079,646 was reduced and a further reduction of securities premium of ₹ 7,217,574,078 was made. Accordingly, the net profit/(loss) was carried to the balance sheet of ₹ 11,046,688/– While computing the taxable income of the assessee under section 115JB of the act. Assessee took (initiated) the computation of book profit by taking the net profit as per the profit and loss account of ₹ 64,005,647/-. Thus, it ignored credit to profit and loss account of Rs 13.39 crores. Thus, No adjustment was made by increasing the book profit by the sum of ₹ 133,079,646/–. The learned assessing officer was of the view that the above amount should go to increase the book profit under section 115JB of the act. The assessee before us stated that it has been credited to the profit and loss appropriation account and therefore the amount of book profit cannot be increased by the same. For this proposition, he furnished before us the extract of page number 944 of the accountancy by WILLIAM PICKLES (third edition) (1960) to support his argument. On careful consideration we find that the same book states that the appropriation account is the final section of the profit and loss account which is carried the balance from the main profit and loss account, representing the profit and loss for the current year. Therefore, the above commentary itself says that the appropriation account is the part of profit and loss account. If the same amount is credited to the profit and loss account, why it is not considered for the purpose of provisions of section 115JB of the act is not comprehensible. Undisputedly the assessee has sold its general entertainment channel business and has earned a profit, which is credited to the profit and loss account whether below the line or above the line does not make any difference. Further, there is no direction of the honourable High Court approving the scheme that the amount requires to be credited below the line and not in the normal profit and loss account. Further we found support from the decision of Honourable Bombay high court in case of Varun Corporation [2023] 154 taxmann.com 548 (Bombay) where in loss arising on demerger was not allowed to be added to increase the book profit. In view of above, we do not find any infirmity in the order of the learned CIT – A. Accordingly we dismiss ground number 1 of the appeal of the assessee.

 

034. However, during appellate proceedings before us the assessee submitted that even if the net profit as per the profit and loss account is increased by the above sum but assessee‟s claim of brought forward loss or unabsorbed depreciation, whichever is less, is granted as deduction from book profit, it will remains Nil. While deciding Ground no 4, we have directed the learned assessing officer to allow the lower of brought forward losses as per books of account and unabsorbed depreciation as per books of account to reduce from the book profit. The lower of two is the unabsorbed depreciation as per the books of account of ₹ 315,453,321/– which is less than the amount involved of ₹ 133,079,646/– as per ground number 1, and therefore, though we have dismissed ground number [1] of the appeal of the assessee but it may not have any impact on the book profit taxation under section 115JB of the act.

 

035. Ground number 2 of the appeal of the assessee wherein the learned CIT – A has upheld the order of the learned assessing officer by making an addition to the book profit of amount of ₹ 1,42,63,197/– representing provision for doubtful advances to the book profit, stating that by the Finance Act, 2009 with retrospective effect from 1/4/2001 clause (i) has been added in explanation (1) of section 115JB of the act providing increase of the book profit by the amount set-aside as provision for diminution in the value of any asset. However, claim before us that the „book debt‟ is not an asset which can diminish in value and hence the provisions thereof is not covered by the requirement of disallowance of such provision for deduction to the value of the asset. We do not find any reason to agree with the argument of the learned authorized representative because the „book debts‟ are the assets of the company and by making a provision for bad and doubtful debts, there is a provision of diminution in the value of such book assets. Accordingly, we do not find any infirmity in the order of the learned CIT – A and ground number 2 of the appeal is dismissed.

 

036. Ground number 3 is with respect to the addition made by the learned assessing officer of ₹ 111,950/– to the book profit on account of disallowance under section 14 A of the act. This is also connected with ground number 11 of the appeal of the assessee where the learned CIT – A has upheld the disallowance under section 14 A of the act of ₹ 111,850/–. It is the claim of the assessee that there is no exempt income earned during the year. If there is no exempt income earned during the year, there cannot be any disallowance under section 14 A of the act for the impugned assessment year. Therefore, naturally, there is no adjustment required to the book profit as such. Accordingly, ground number 3 and 10 of the appeal of the assessee is allowed.

 

037. Identical ground in ground number 4 of the appeal is raised by the assessee wherein the learned CIT – A has confirmed the disallowance under section 14 A of the income tax act of ₹ 442,969/– without there being any exempt income. Therefore, for the reasons given by us in allowing the ground of appeal for assessment year 2011 – 12 where also there was no exempt income earned by the assessee during the assessment year, we also allow ground number 4 of the appeal of the assessee.

 

038. Ground number 4 is identical to additional ground raised by the assessee with respect to deduction of brought forward book losses or the unabsorbed depreciation as per the books of account, the lower of the above two amount should be granted to the assessee as a deduction from the book profit under section 115JB of the act, as we have already allowed this ground of the appeal.

 

039. Ground number 5 is with respect to the disallowance of legal and professional fees of ₹ 1.28 crores paid to Ernst & young for services rendered in connection with providing assistance in relation to the demerger of general entertainment channel business of the appellant to Zee entertainment Enterprises Ltd. Assessee claimed it as revenue expenditure. Ld AO applied section 35 DD and allowed 1/5th of the same. The learned CIT – A has restricted the same by applying the provisions of section 35DD of the act to the extent of ₹ 2,560,000/- . Ground number 6 of the appeal is with respect to the claim of the assessee that if the above sum is considered as a deductible sum under section 35DD of the act, then for the balance of the amortized period, Such amortized cost should be allowable in equal installments in the subsequent four assessment years. The fact shows that the assessee has paid ₹ 1.28 crore to E&Y for rendering services in connection with providing assistance in relation to the demerger. Thus, stand of the assessee that these are the revenue expenses is not correct. This expense are dealt with u/s 35DD of the Act. The AO applying the provisions of section 35DD of the act disallowed the above sum. He allowed 1/5th of such expenditure as deduction. The learned CIT – A upheld action of the learned assessing officer.

 

040. On careful consideration of the rival arguments and the orders of the lower authorities, we find that the expenditure incurred by the assessee admittedly is in case of demerger. According to provisions of section 35DD if the assessee incurs any expenditure only and exclusively for the purpose of demerger of an undertaking, the assessee shall be allowed deduction of an amount equal to 1/5 of such expenditure for each of the five successive previous years beginning with the previous year in which demerger takes place. Accordingly, the lower authorities are correct in applying the provisions of section 35DD of the act. However, the assessee should be allowed balance 4/5th of such expenditure in successive previous years. Accordingly, ground number 5 of the appeal is dismissed and ground number 6 of the appeal is allowed.

 

041. Ground number 7, 8 and 9 are with respect to the disallowances made by the learned assessing officer as there is a mismatch between the books of the assessee as well as in information contained in form number 26AS. During the course of assessment proceedings, it was found that there is a mismatch of income In form number 26AS and as shown by the assessee in its books of accounts. The assessee filed the reconciliation statement but could not reconcile the discrepancy of ₹ 7,228,304/–. The learned assessing Officer further issued notices under section 133 (6) of the act to the above parties but some of the letters returned and some parties did not respond. Therefore, assessee was further asked to reconcile the discrepancy but the assessee did not do so. In some of the responses, it was also found that the parties confirmed to have made payments to the assessee but assessee did not disclose these receipts in its books. Before the learned CIT – A, he categorically noted that there is a specific mention of amount of ₹ 44,067,717/– to have been paid by the director of Advertising Visual Publicity where the assessee did not show the full amount but disclosed only ₹ 34,599,364/–. Similar facts exist with respect to the other two parties. The learned assessing officer made an enquiry under section 133 (6) of the act which was also communicated to the assessee along with the result of such enquiry and further opportunity was given to the assessee to reconcile the discrepancy but the assessee failed to do so and accordingly the addition was confirmed.

 

042. The learned authorized representative before us submitted details furnished at per page number 812 and 813 of the paper books. It was further stated that in assessee’s own case for assessment year 2008 – 09 identical addition were deleted. The learned authorized representative further relied upon the several judicial precedents stating that in absence of the material or enquiry done by the assessing Officer no addition could be made in the hands of the assessee.

 

043. The learned departmental representative vehemently supported the orders of the lower authorities and stated that the reliance placed on the decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09 is not relevant as in that case the amount disclosed in the books of accounts of the assessee are more than the amount stated in form number 26AS. It was further stated that when the assessee has been made aware about the enquiries made by the learned assessing officer, no reconciliation was made by the assessee and therefore the addition made by the learned assessing officer and confirmed by the learned CIT – A is correct.

 

044. We have carefully considered the rival contention and perused the orders of the lower authorities. We find that the learned assessing officer noted that there is a difference between the receipt recorded in the books of account and receipt disclosed in form number 26AS of the assessee. The learned assessing officer issued notices under section 133 (6) of the act to various parties. Many of the parties did not respond and to many of the parties the enquiry letters could not be served. The outcome of this enquiry was made known to the assessee. Despite this, no effort was made to reconcile the amount, therefore, we do not find any reason to interfere in the findings of the lower authorities. However, it has been claimed before us that there is no transaction entered into by the assessee with some of the parties. Further, it was stated that the total receipts shown by the assessee is ₹ 78.23 crores whereas the AIR information is with respect to only ₹ 16.49 crores. In view of the above facts, we restore ground number 7 – 9 of the appeal back to the file of the learned assessing officer directing the assessee to produce the reconciliation of the above amount and to show that how the assessee says that it has not transacted with some of the parties. Assessee is also directed to show whether in the total receipts shown in books of accounts, all the receipts mentioned in form no 26 As is included. Therefore, one more opportunity is granted to the assessee to explain the difference with the parties with which it has transacted. Ld AO may examine the submission of the assessee, and decide the issue afresh. Accordingly, ground numbers 7 – 9 of the appeal are allowed for statistical purposes.

 

045. Identical ground number 1 of the appeal is raised by the assessee for assessment year 2012 – 13 wherein the addition of ₹ 2,312,314 is upheld by the learned CIT – A on account of mismatch between the income offered as per books of accounts and income in form number 26AS. As we have restored ground number 7 – 9 of the appeal for assessment year 2011 – 12, we also restore this ground of appeal back to the file of the learned assessing officer with similar direction.

 

046. In the result appeal filed by the assessee for both the assessment, years are partly allowed.

 

047. Accordingly appeal of the learned AO and of the assessee for assessment year, 2011 – 12 and 2012 – 13 are partly allowed.

 

Order pronounced in the open court on 20.11. 2023.

 

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