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TMI Blog2017 (11) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... ome was accepted u/s. 143(1) and subsequently the scrutiny assessment was completed u/s. 143(3) on 26.02.2014 determining the income of the assessee at Rs..18,07,47,030/-. While completing the assessment the Assessing Officer disallowed Rs..10 Crores which was claimed as expenditure by the assessee. The Assessing Officer in the course of Assessment Proceedings noticed that assessee has shown in his Profit and Loss Account receipts from M/s. UTV Software Communication Ltd [UTV] Rs..17.97 Crores during the Assessment Year 2011-12. He noticed that from this receipt Rs..10 Crores was reduced in the P&L account. The assessee was required to explain as to why the said amount was reduced and assessee submitted that the said Rs..17.97 Crores received during the year from UTV includes receipt of Rs..6.85 crores on account of professional fee for directing the film "Guzarish" produced by UTV along with SLB Films Private Limited and the remaining Rs..11.12 crores is given by the UTV to the assessee as an advance for the project to be undertaken in future. The assessee further explained that the amount of Rs..10 Crores was refunded to UTV from the professional fees of Rs..22 Crores paid to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the motivating reason for the refund is commercial expediency and the assessee has returned his part of fee received. It is also submitted that even UTV has confirmed the refund of money by the assessee and reduced their marketing expenses. Assessee also relied on various judicial pronouncements in support of its contention that when the refund is out of commercial expediency it is an allowable expenditure. 5. However, the Assessing Officer rejected the contentions of the assessee observing that assessee had received the income from performing his duty as a Director of the film Guzarish and it was not a case where the refund was given because the performance of duty by the assessee could not be done or the project could not materialize etc., He observed that the project was completed and released and assessee had fulfilled his obligation intoto for which he was paid Rs..22 Crores, hence assessee has earned this entire income. It was also observed that there was no agreement to refund any part of the fees if the film did not do well or if the marketing cost is escalated. He also observed that though there was subsequent agreement for reduction in reimbursement from Rs..27 Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Taxman 485] wherein it has been held that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business and such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits assessee is entitled to deduction even though there was no compelling necessity to incur such expenditure. Further the Ld.CIT(A) also considered the issue elaborately with reference to the submissions of the assessee and the averments of the Assessing Officer and held that assessee is entitled for deduction of the fee refunded to UTV observing as under: - "1.13 From the above sequence of event it is clear that there is no contradiction between the plea of the appellant and the confirmation filed by UTV at the insistence of the AO. During the course of assessment proceedings, the assessee had pleaded that the refund of the Directors fee was pursuant to an Oral agreement between the assessee and UTV in keeping with the terms of the Production Agreement. In order to verify the same the AO sent two notices u/s.133(6) to M/s. UTV calling for confirmation of the appellant plea an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company where the majority shareholding is with a multinational company M/s. Walt Disney Company (Southeast Asia) Pvt Ltd. Moreover, the appellant and M/s.UTV have no common directors or shareholders, which could allude to any collusion. I find that various courts have held that a transaction cannot be held to be a sham on the basis of surmises and conjectures. The Rajasthan High Court - Jodhpur in the case of M/S Indian Gum industries Ltd vs Asst. Commissioner, dt. on 29 August, 2013 held as under: '......However, this Court cannot lose sight of a very vital aspect of the matter that no revenue authority should term a genuine sole transaction as a sham on mere conjectures and surmises. Thus, in the considered opinion of this Court before castigating an assessee for a fake, or spurious transaction, or for his conduct of evasion of tax, a proper and meaningful enquiry is utmost essential which confirms adherence of principles of natural justice..." In these circumstances, I am unable to agree with the AO that the transaction regarding refund of Director Fee is a sham transaction. 1.16. In para 9.5, the AO has alleged that the refund of fees would come within the purview ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he release of the film 'Guzarish. After the refund of Rs. 10 crores this loss has got reduced to Rs. 44.18 crores. By any standards, this is a major loss for M/s.UTV, especially when it had paid a colossal amount of Rs. 22 crores as Directors Fee. If the appellant wanted to carry on getting fresh work from M/s.UTV it was imperative that it honor its oral commitments. In the case of Gujarat Agro Oil Enterprises Ltd. v. CIT [2002] 125 Taxman 912 (Guj), the Gujarat High Court has held as under: "......The expenditure was incurred for the purpose of protecting and safeguarding goodwill of the business which was an important business asset of the assessee. Therefore, the expenditure incurred by the assessee for engaging the advocate was an expenditure allowable under the provisions of section 37(1)..." 1.20 The appellant's commitment in honoring its agreement subsequently paid rich dividends, in as much as, the appellant was able to secure a fresh contract from M/s.UTV for Rs. 11.11 crores during the previous year itself; which was also offered for taxation in this year. Therefore, the refund of the Directors Fees was totally out of commercial expediency; even though profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar situation arose in the case of Shahrukh Khan and the Coordinate Bench by order dated 17.03.2017 in ITA.Nos.623/Mum/2013 and 4763/Mum/2013 held as under: - "7. We have carefully considered the rival submissions. Evidently, the dispute in this Ground revolves around the import of the provisions of section 37(1) of the Act. Section 37(1) of the Act, inter-alia, relates to deduction of an expenditure laid out or extended wholly and exclusively for the purpose of business or profession while computing the income chargeable under the head "profits and gains of business or profession". Precisely put, the controversy before us is as to whether the expenditure of Rs. 10 crores incurred by the assessee by way of payment to Knight Riders Sports Pvt. Ltd. for obtaining sponsorship rights in favour of Star India Pvt. Ltd. would constitute an expenditure expended wholly and exclusively for the purpose of asessee's business or profession so as to be deductible in terms of section 37(1) of the Act. The fact-situation lies in a narrow compass and has already been noted by us in sufficient detail in the earlier part of this order. Be that as it may, it would suffice to note that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g professional relationship between assessee and Star India Pvt. Ltd.and the impugned arrangement has to be viewed from the prism of a Principal - client relationship. In terms of the Artist Service Agreement dated ITA No.623/Mum/2013, A.Y.2009-10) ITA No.4763/Mum/2013, A.Y. 2010-11 30/03/2007, assessee was to shoot for 104 Episodes but no shooting took place for 52 Episodes on account of a decision of Star India Pvt. Ltd., whereas the consideration for the entire Episodes was paid to the assessee in advance. In such a situation, intention of Star India Pvt. Ltd to obtain or recover the value of the unutilized amount from assessee for non-shooting of the balance 52 Episodes is quite plausible. As per the Revenue, the Artist Service Agreement dated 30/03/2007 did not obligate the assessee to refund the unutilized amount because the non-shooting on a decision taken by Star India Pvt. Ltd. No doubt, the point made by the Revenue may be correct in the context of the terms and conditions of the Artist Service Agreement dated 30/03/2007 but the allowability of the impugned expenditure has to be examined in the context of its commercial expediency. The assessee entered into an arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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