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2016 (7) TMI 930 - GUJARAT HIGH COURT

2016 (7) TMI 930 - GUJARAT HIGH COURT - TMI - Reopening of assessment - nature of expenditure - capital expenditure OR revenue expenditure - interest free loan advanced by assessee company to a sister concern - Held that:- Both the issues came up for consideration before the Assessing Officer at the time of original assessment. In the letter dated 27.7.2011, the assessee had given the breakup of the expenditure of sum of ₹ 1.74crores pointing out that the same was closing stock as on 31.3. .....

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claims were originally examined by the Assessing Officer. He in fact, suggested that such examination was not proper and that therefore, the claims were required to be disallowed. Surely, the Assessing Officer was not acting in the capacity of a revisional authority and, therefore, had no jurisdiction to judge the consideration bestowed to these claims by the Assessing Officer. In fact, there is yet another additional ground with respect to the ground of addition recorded in the reasons. The as .....

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016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI, JJ. FOR THE PETITIONER : MR B S SOPARKAR, ADVOCATE FOR THE RESPONDENT : MRS MAUNA M BHATT, ADVOCATE ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challenged the notice for reopening dated 24.3.2014 issued by respondent Assessing Officer. The petitioner is engaged in the business of Media and Entertainment sector. For the assessment year 2009-2010, the petitioner had filed return of income on 26.9.2010, declaring total inc .....

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n 31.3.2009, it revealed that they had debited an amount of ₹ 1,74,79,414/- towards 'Product Development Expenses'. Since the assessment derives enduring benefit from this type of expenditure, the expenditure is capital in nature. As per section 37 of the IT Act, 1961, capital expenditure and expenditure of a personal nature are not allowable expenditure. The misclassification of expenditure resulted in underassessment of income of ₹ 1,74,79,414/- . 2.1 The amount of ₹ .....

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s at 31.03.2009 & Auditors report in Form 3CD of the Assessee Company that they had given advance to subsidiary company M/s. Fuse Interactive Pvt. Ltd. for ₹ 376.27 lakh during the year. There was an opening balance of advance amounting to ₹ 175.97 lakh. However, no interest was charged from the subsidiary company although the assessee company ha incurred interest expenses of ₹ 77.90 lakh during the year on Bank overdraft. Since the assessee had blocked their funds in the s .....

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see M/s. Fuse + Media Pvt. Ltd. for the assessment year 2009-10 and is required to be reassessed. 4. In view of above, I have reason to believe that income to the tune of ₹ 2.19 Cr (1.74 Cr. +45.15 lakhs) has escaped assessment. 2. The petitioner raised objections to the process of reopening under communication dated 11.6.2014. Such objections were rejected on 16.9.2014. 3. Learned counsel for the petitioner taking us through the material on record contended that the Assessing Officer had .....

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ording to the Assessing Officer was in the nature of capital expenditure, but wrongly claimed as revenue expenditure. Second issue pertains to interest free loan advanced by assessee company to a sister concern. In that respect, as pointed out by the counsel for the Revenue, during the assessment proceedings, the assessee had conveyed to the Assessing Officer under a letter dated 27.7.2011 as under : 5) Inventory For the Assessment year under consideration, the company does not have any opening .....

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ntains a complete video streaming website and all of its administrative applications. This system is called Fuse+Media Web Application (FMWA). b) ₹ 95,31,342 for the script, storyboards, writing and voice recording etc. for the animation episodes produced. The script and all the rights like copyrights, trade secret, mask work, rights, trademark, etc. thereto belong to the assessee i.e. the company. The breakup of, the above mentioned amount, as stated above, in enclosed herewith in Annexur .....

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(iii} by contending that the overdraft facility has been utilized to advance money to FIPL and not used entirely by FMPL for its own business. In this regard, it would be pertinent to refer to the provisions of the said section which is reproduced hereunder: (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of e .....

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s of investment in film production and as a part of its larger business objective, it has incorporated FlPL to jointly carry out the activities of animation studio and to produce animation episodes. FlPL has produced 7 (seven) episodes of "Doubtsourcing series . These episodes have also won two international awards. As ultimately, FlPL has been furthering the business objective of FMPL by producing animation episodes, it was commercially expedient for FMPL to advance the said amount to FlPL .....

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ere in it has been held that where an advance is made to a sister concern from the commercial expediency of the business, no disallowance be made to the total income. The relevant observation of the Hon ble Supreme Court is as under: "It is true that the amount borrowed in question was not utilized by the assessee in its own business, but had been advances as interest free loan to its sister concern. However in our opinion, the fact is not really relevant. What is relevant is whether the as .....

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armchair of the businessman or in the position of board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profits. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have t .....

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pedient and prudent step. Further reliance can also be placed on the decision of the Hon ble Madras High Court in the case of CIT vs. Sambandham Spinning Mills Limited (298 lTR 306) wherein the Hon ble High Court has held that no disallowance of interest paid on borrowed capital be made when the tax payer has granted interest free advance to its sister concern. In view of the above decisions, it is submitted that money advanced to a wholly owned subsidiary based on the commercial expediency of t .....

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ure was incurred. In a later communication dated 4.10.2011, the assessee had made a detailed submission why no addition should be made on the ground that the assessee had made interest free advances to a sister concern. 8. Any attempt on part of the Assessing Officer now to revisit such claims would be based on change of opinion. In fact, when the assessee brought this aspect to the notice of the Assessing Officer in the objections, the Assessing Officer had the following to say : 6. As a matter .....

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but a judicial view. Being a quasijudicial authority, the Assessing Officer cannot take a view, either against or in favour of the assessee/revenue, without making proper enquiries and without proper examination of the claim made by the assessee in the light of applicable law. Reference is made to the decision of Delhi High Court in the case of GEE VEE Enterprise v. Addl. CIT (99 ITR 375) wherein after considering the decision of Supreme Court in cases of Ram Pyari Devi Saraogi v. CIT( 67 ITR 8 .....

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