2017 (11) TMI 508 - AT - Income Tax

Refund to UTV Software deemed legitimate business expenditure under Section 37(1)

ACIT 11 (1), Mumbai Versus Shri Sanjay Navin Bhansali

The ITAT upheld the decision of the Ld.CIT(A) that the refund of Rs. 10 Crores by the assessee to UTV Software Communication Ltd. was a legitimate ... Allowing the expenditure claimed on account of refund and the professional fees - allowable business expenditure - CIT(A) allowed the claim of the assessee holding that the refund of fees by the assessee is out of commercial expediency it is not a sham or colorable transaction as stated by the Assessing Officer - Held that:- The assessee in the course of his business and out of commercial expediency refunded an amount of ₹.10 Crores to UTV and this amount can be said to have been incurred whole and exclusively for the purpose of business/profession of the assessee within the meaning of the section 37(1) of the Act. In the circumstances we uphold the order of the Ld.CIT(A) in holding that the refund of fee by the assessee is an allowable expenditure. - Decided against revenue Issues Involved:1. Whether the refund of Rs. 10 Crores by the assessee to UTV Software Communication Ltd. is allowable as an expenditure under Section 37(1) of the Income Tax Act.2. Whether the transaction of refund was a sham or colorable device to avoid tax.3. Whether the refund constitutes a diversion of income by overriding title or an application of income.Issue-wise Detailed Analysis:1. Allowability of Refund as Expenditure under Section 37(1):The primary issue revolves around whether the Rs. 10 Crores refunded by the assessee to UTV Software Communication Ltd. qualifies as an allowable expenditure under Section 37(1) of the Income Tax Act. The assessee, a film director and producer, refunded the amount based on an oral commitment made to UTV, which was not documented in the contract. The refund was claimed to be out of commercial expediency to maintain a good working relationship with UTV and to secure future projects. The Ld.CIT(A) allowed this claim, citing that the expenditure was incurred wholly and exclusively for business purposes, referencing judicial precedents such as CIT v. Walchand & Co. Pvt Ltd. and Sassoon J. David & Co. Pvt. Ltd., which support the deduction of such expenditures if they promote business and earn profits, even if incurred voluntarily and without necessity.2. Sham or Colorable Device:The Assessing Officer (AO) contended that the refund was a sham transaction designed to avoid tax, as there was no contractual obligation for the refund, and the marketing responsibility was solely UTV's. However, the Ld.CIT(A) rejected this view, emphasizing that the refund was a genuine transaction driven by commercial expediency. The Ld.CIT(A) noted that UTV confirmed the refund and accounted for it in their books, paying taxes on the amount, which negates the allegation of a sham transaction. The judgment also referenced the case of Vishnu Agencies Pvt. Ltd. and Jamshedpur Motor Accessories Stores, which highlight the validity of oral agreements and proper book entries in determining the genuineness of transactions.3. Diversion of Income by Overriding Title or Application of Income:The AO suggested that the refund might constitute a diversion of income by overriding title or an application of income, which is not allowable as a deduction. However, the Ld.CIT(A) found no merit in this argument, stating that the refund was an expenditure incurred out of commercial expediency and was wholly and exclusively for business purposes. The judgment reiterated that the assessee's decision to refund the amount was to maintain goodwill and secure future business, aligning with the principles laid out in judicial precedents.Conclusion:The ITAT upheld the Ld.CIT(A)'s decision, affirming that the refund of Rs. 10 Crores was a legitimate business expenditure under Section 37(1) of the Income Tax Act, incurred out of commercial expediency. The tribunal dismissed the Revenue's appeal, concluding that the transaction was not a sham or colorable device and did not constitute a diversion of income by overriding title. The decision was further supported by a similar ruling in the case of Shahrukh Khan, where a comparable expenditure was allowed as a business deduction.Order:The Revenue's appeal was dismissed, and the order of the Ld.CIT(A) was upheld, allowing the deduction of Rs. 10 Crores refunded by the assessee as an expenditure under Section 37(1) of the Income Tax Act.