Loss on account of purchase of distribution rights of the film ‘Arakshan’ is a capital loss: ITAT

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Loss on account of purchase of distribution rights of the film ‘Arakshan’ is a capital loss: ITAT

 

M/s Nadiadwala Entertainment & Technologies 9 ITA No. 5663/M/2019 & CO NO. 23/M/2021

Facts:

  1. The assessee advanced a sum of Rs.8.9 crores to “Prakash Jha Production” on account of a feature film “Arakshan”.
  1. It was claimed by the assessee that the said investment was made for purchase of distribution rights of the film but the assessee could not fulfil its obligation of financing the further amount for production of the film and dispute arose between the parties.
  1. Prakash Jha Production acquired funds from some other parties and assessee was settled with a refund of Rs.3 crores. The balance amount was claimed by the assessee in return of income as operating expenses written off.
  1. The Ld. Assessing Officer (AO) disallowed the claim holding that written off of the loss was in the nature of prior period expenses and therefore not allowable.
  1. On further appeal, the Ld. CIT(A) however characterized the loss as short term capital loss being loss on purchase of distribution rights.

ITAT Mumbai held as below:

  1. The assessee has not incurred expenses for production of the film whereas, the assessee claimed that the said investment was made for purchase of distribution right of the film which are in the nature of intangible assets.
  1. So the investment was for purchase of capital asset and loss incurred on the same is in the nature on ‘short term capital loss’.

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B” MUMBAI

 

BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND

SHRI  SANDEEP  SINGH  KARHAIL  (JUDICIAL  MEMBER)

 

ITA No. 5663/MUM/2019

Assessment Year: 2013-14

 

ACIT, Circle-16(1),

Room No. 439, 4th floor, Aayakar Bhavan,

M.K. Road, Mumbai-400020.

Appellant  

Vs.

M/s Nadiadwala Entertainment & Technologies Ltd.,

Barkat, Plot No. 20, Gulmohar Cross Road, No. 5, JVPD Scheme, Juhu Scheme, Vile Parle-West,

Mumbai-400049.

PAN No. AACCN 0187 E

  Respondent

 

Co No. 23/MUM/2021 (ITA No. 5663/MUM/2019) Assessment Year: 2013-14

 

M/s Nadiadwala Entertainment & Technologies Ltd.,

Barkat, Plot No. 20, Gulmohar Cross Road, No. 5, JVPD Scheme, Juhu Scheme, Vile Parle-West,

Mumbai-400049.

PAN No. AACCN 0187 E

Appellant

Vs.

ACIT,  Circle-16(1),

Room No. 439, 4th floor, Aayakar Bhavan, M.K. Road,

Mumbai-400020.

Respondent

 

Assessee by                    :      Mr. Anant A. Pai, AR

Revenue by                       :      Mr. Chetan M. Kacha, DR

Date of Hearing                                     :      24/11/2022

Date of pronouncement                     :      30/11/2022

ORDER

 

 PER OM PRAKASH KANT, AM

 

This  appeal  by  the  Revenue  and  Cross-objection  by  the assessee are directed against order dated 27.06.2019 passed by the Ld. Commissioner of Income-tax (Appeals)-4, Mumbai  [in short ‘the Ld. CIT(A)’] for assessment year 2013-14.

  1. The grounds raised by the Revenue in its appeal in ITA 5663/M/2019 are reproduced as under:
  1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to treat the loss of Rs.5,90,00,000/-on account of write-off of amounts advanced for production of feature film “Aarakshan” as Short Term Capital Loss’ without appreciating the fact  that  the assessee had never acquired any rights over such film
  1. The appellant prays that the order of Ld.CIT(A) on the above grounds be set-aside and that of the assessing officer be restored.

 

  1. The grounds raised by the assessee in the cross-objection are reproduced as under:
  1. CIT (A) erred in allowing the loss of Rs. 5,90,00,000/- as loss under the head ” short term capital g ins” instead under the head ” profits & gains from business” as claimed by the Respondent
  1. Briefly stated, facts of the case are that the assessee filed its return of income for the year under consideration on 25.09.2013 declaring total income at Rs. Nil. The return of processed u/s 143(1) of the Income-tax Act, 1961 income was (in short ‘the Act’). Thereafter, the case  was  selected  for  scrutiny and  wherein the total income was determined at a loss of Rs.52,199/- in order u/s 143(3) dated 23.03.2016.

4.1     In     the     assessment      completed,     the     Assessing      Officer disallowed the loss on account of operating expenses of Rs.5.90 crores  holding  that same  being  in  the  nature  of prior  period expenses      and      hence      not      allowable     in      the     year     under consideration.     On     further    appeal,     the     Ld.     CIT(A)    however characterized the loss as short term capital loss purchase of distribution rights. being loss on purchase of distribution rights.

  1. Aggrieved, the Revenue is in appeal for allowing claim as short term capital loss whereas the assessee is aggrieved for not treating the same as business loss.
  1. The assessee filed a Paperbook containing paged 1 to 68
  1. We have heard rival submission of the parties on the issue- in-dispute and perused the relevant material on record. The facts in brief qua, the issue-in-dispute are that the assessee advanced a sum of Rs.8.9 crores to “Prakash Jha Production” on account of a feature film “Arakshan”. It was claimed by the assessee that the said  investment  was  made  for  purchase  of  distribution  rights  of the    film   but    the    assessee     could    not    fulfil    its financing the further amount for production of obligation   of the film and dispute arose between the parties. The Prakash Jha Production acquired funds from some other parties and assessee was settled with a refund of Rs.3 crores. The balance amount was claimed by the assessee in return of income as operating expenses written off. The Ld. Assessing Officer disallowed the claim holding that written off of the loss was in the nature of prior  period  expenses and therefore not allowable. The relevant finding of the Assessing Officer is reproduced as under:
  • “4.2    As explained by the assessee above, the assessee had   funded   a   amount   of   Rs.8,90,00,000/-   to   PJP   on account of a Feature Film “Aarakshan”. This particular contract did not fructify and the film was never produced by the  assessee.  The   matter   went   in   to   dispute   and   the assessee could recover only Rs.3,00,00,000/- against the film  funding  of  Rs.8,90,00,000/-.  The  balance  amount  of Rs.5,90,00,000/- was never recovered. It is that amount which is written off and claimed as an expenses
  • “4.3 The contention putforth by the authorised representative of the  assessee  has  been  duly  considered  but  not  found acceptable in view of the following reasons:
  • As explained by the assessee above, the film was released on 12.08.2011 and the assessee had signed a settlement agreement dated 11th November, 2011. As seen from the subject of settlement. agreement, it is amply clear that both parties  i.e.  assessee  and  Prakash  Jha  production  has reached final settlement. Assessee had received the final settlement amount from Prakash Jha production from November  2011  to  February  2012;  also  assessee  has  not given  any  document  or  evidence  to  justify  that  assessee was trying to claim additional revenue from film realization of movie Aarakshan, which is disputed. Therefore, it is clear that  said  amount  cannot  be  written  off  in  F.Y.  2012-13: Without prejudice to the above, rule 9A of Inco    e-täx Rules, 1962 is not applicable to assessee since it has not produced movie. Further, assessee has made submission that it is not covered by rule 9B too of Income-tax Rules, 1962.

 

  •  “4.4 Admittedly the expenses being of a prior period and not pertaining   to   the   year   under   consideration   cannot   be allowed the decisions of the Hon’ble Mumbai Tribunal in the case of Tipco Industries Ltd. V. The ACIT Income-tax Act, 1961  No.5708/Mum/2009  –  Assessment  year-2004-05, date of pronouncement: 03.08.2012 is relevant at para 15 which is self-explanatory is reproduced below:
  1. We have considered the rival submission and perused the brders of lower authorities. It is settled that the deduction can be permitted in respect of only those expenses which  are  incurred  in  the  relevant accounting year for the purpose of  computing yearly profits and gains. We find that the assessee of expenses pertaining to claim of the prior period cannot be accepted as nothing has been brought on record to substantiate its claim neither before the lower authorities nor before us. Ground No:3 is accordingly dismissed.
  • “4.5 In the  lights  of  the  above  findings  that  the  said expenses are  prior  period  expenses  herce  not  allowable W/s. 370) of  the Income Tax Act, 1961, the prior period expenses are not allowable expenses. Hence, Written off loss  -being  in  the  nature  of   prior  period expenses  of Rs.5,90,00,000/- is hereby disallowed and  added  back  to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) of the Income-tax Act, 1261 is initiated separately for furnishing inaccurate particulars of income.”
  • 7.1  On further appeal, the Ld. CIT(A) has characterized the loss as  short  term  capital  loss  as  against  claim  of  the  assessee  as business loss. The relevant finding of the Ld. CIT(A) is reproduced as under :
  • “6. I have carefully  perused the  order of  the AO and  the submissions made by the AR in support of his arguments. After taking into consideration the AO’s findings and order sheet notings, as well as  the facts  of  the case, decision on the ground raised by assessee is made here under:-
  • Only effective ground raised by the appellant is against disallowance of a sum or 35.90.00.000/- being written off as loss by the appellant by the AO by treating the same as prior period expenses. In para 4 of the assessment order. Ld. AO had mentioned that the assessee company had debited a sum of 25.90.00,000/- in the Profit & Loss account as cost of operating expenses. During the course of assessment proceedings,  Ld.  AO  asked  the  appellant  to explain   the  allowability  of   the  expense  claimed  by  it. According  to  the  Ld.  AO.  the  expenses  claimed by  the appellant pertained to prior period and not th consideration. Therefore, he disallowed the year under claim of the appellant and added the same to the total taxable income of the assessee During the course of appellate proceeding, a written submission was filed which find place in para 5 of this order. The appellant submitted that it’s a closely held Company incorporated with an object  to undertake production, distribution and funding of films. The appellant further submitted that one of the major share-holder and director of the Appellant Company. Mr. Firoz Nadiadwala also a proprietor  of  Base  Industries  Grou (BIG)   and Prakash      Jha      Production      (PJP)      jointly     produced      film “Aarakshan” for which apart from BIG’s contribution, funds had been contributed through Appellant as it was  to get distribution rights of the film. The appellant mentioned that he  could  recover  only  Rs.  3.00  Crs  as  against  the  film funding  of  Rs.8.90  Crs  and  had  written  off  the  loss amounting Rs.5.90 Crs us 28(i) of the Income-tax Act, 1961(Act) to the Profit & Loss A/c. The appellant further submitted  that  the  LAO  disallowed  the  loss  written  off amounting Rs. 5.90 Crs. treating the same as prior period expense giving reason that the film was 12.08.2011 and the Appellant had signed agreement dated 11th November, 2011. It released on a settlement was further submitted that the Appellant had received the final settlement amount from PJP from November 2011 to February 2012. Appellant further argued that although payments were recovered but issue was not s ttled finally. said amount Therefore, appellant further claimed that the could not be written off in F. Y.2012-13
  • 6.1.1 From perusal of the submission of the appellant it is evident that the expenditure was incurred for production of the film Aarakshan. Film was jointly produced by Mr. Firoz Nadiadwala, Proprietor of Base Industries Group (BIG) and Prakash Jha Production and the assessee company. Since the production of the film was a joint work of above three entities and not the assessee company, therefore, it was not the business expenditure of the assessee, assessee made an investment of R8.90 purchasing the distribution rights of the film. rather the crores for Distribution rights are intangible asset, hence, investment of assessee was for purchasing an intangible asset which was a capital asset. Film was  released on 12.08.2011,  therefore,  on date of release of film distribution rights were came in existence and for determining the purchase value of appellant signed settlement agreement dated these rights 11.11.2011 and  appellant  received  the  final  settlement  amount from November,2012 to February, 2012, but still some negotiations were going on between the assessee company and producer of the film. The final amount was only settled during the year under consideration. Therefore, the capital loss will be allowed only in the year under consideration. Since  the  loss  was  incurred for  purchasing  capital  asset, therefore, claim of the appellant regarding allowability of business loss is not accepted rather AO is directed to treat the loss on purchase of distribution rights as a short term capital loss and not the business loss.”
  • 7.2     We  find  that  the  assessee  has  not  incurred  expenses  for production of the film whereas, the assessee claimed that said investment  was  made  for  purchase  of  distribution  right  of  the film which are in the nature of intangible assets and therefore, investment was for purchase of capital asset and loss incurred on the  same  is  in  the nature  on  ‘short  term  capital loss’.  In  our opinion, finding of the Ld. CIT(A) on the issue-in-dispute is well reasoned and no interference is required in the same. We accordingly uphold  the  finding of the  Ld. CIT(A) on the  issue-in- dispute.  The  ground  raised  by  the  Revenue  as  well  as  by  the assessee in cross-objection are accordingly dismissed.
  1. In the result, the appeal filed by the Revenue as well as cross-objection of the assessee are dismissed.

Order pronounced under Rule 34(4) of the 1963 on 30/11/2022.

ITAT Rules,

                      Sd/-                                                                                                                                     Sd/-

(SANDEEP SINGH KARHAIL)                                                                       (OM PRAKASH KANT)

           JUDICIAL MEMBER                                                                                 ACCOUNTANT MEMBER

Mumbai;

Dated: 30/11/2022

Rahul Sharma, Sr. P.S.

Copy of the Order forwarded to :

  1. The Appellant
  2. The
  3. The CIT(A)-
  4. CIT
  5. DR, ITAT, Mumbai
  6. Guard

//True Copy//

BY ORDER,

(Sr. Private Secretary)

ITAT, Mumbai

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