TaxTMI 
TaxTMI 
Performance Audit Report on Assessment of Assessees in the Entertainment Sector (C&AG Report No. 1 of 2019)
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....the facts and circumstances being similar in nature indicating inconsistent approach adopted by Assessing Officers in similar cases. 2. The entertainment sector consists of different segments under its fold such as television, radio, music, event management, films, animation and visual effects, broadcasting, sports and amusement etc. Therefore, expenses incurred by various segments of the entertainment sector may be examined on a case-to-case basis specific to the nature of business undertaken by assessees. Some of the issues (non-exhaustive) in respect to such expenses are suggested for examination by AOs as under: ^1[2.1 Pre-operative expenses: These expenses are generally incurred before commencement of businesses (pre-operative expenses), which may be examined w.r.t actual commencement of its businesses of assessees engaged in the entertainment sector under the provisions of section 35D of the Income-tax Act, 1961 for allowance of such pre-operative expenses for amortisation under that section.] 2.2 Declaration of expenses of feature film: (a) Assessees involved in production of feature films are required to furnish Form No. 52A, within thirty....
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....n." Report of the Comptroller and Auditor General of India for the year ended March 2018 Assessment of Assessees in Entertainment Sector Union Government Department of Revenue - Direct Taxes Report No. 1 of 2019 Laid on the table of Lok Sabha/Rajya Sabha on______________ Table of Contents Contents Page Preface i Executive Summary iii-vi Summary of Recommendations vii-viii Chapter 1: Introduction 1-4 Chapter 2: Coordination effort within/outside the department and expansion of tax base 5-19 Chapter 3: Internal control and ambiguity in the provisions of the Act/Rules 21-34 Chapter 4: Compliance issues relating to provisions of Income Tax Act 35-61 Appendices 63-71 Abbreviations 73 Preface This Report for the year ended March 2018 has been prepared for submission to the President under Article 151 of the Constitution of India. The Report contains significant results of the performance audit of Assessment of Assessees in Entertainment Sector of the Department of Revenue - Direct Taxes of the Union Government in 2013-14 to 2016-17. The instances mentioned in this Report are thos....
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....ponses. Summary of audit findings: Audit noticed that the number of cases selected for scrutiny assessments under the business code 906 [Others (Entertainment sector)] was not commensurate with the additions made in scrutiny assessments of cases under this code during FYs 2013-14 to FYs 2016-17. As a number of segments of the entertainment sector, viz. sports, event management, artist, animation, cable business etc. are clubbed under this code, segment specific refinement of assessees may not be possible for selection under scrutiny and monitoring purposes. (Para 2.1) Audit noticed instances where useful information of the assessee was not shared amongst different charges of Income Tax Department (ITD), thereby impacting the quality of assessment. Even, information of cash transactions, being a major source of unaccounted income, was not passed on to other charges of ITD for further verification of such transactions. (Para 2.2.1 and 2.2.2) Despite specific film circles/wards created to assess all the assessees of film and television industry in dedicated units, sufficient efforts were not made by the ITD to assess them in the designated circles/wards thereby defea....
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....ts of movies under production. Thus, there is risk of escapement of income as payment details do not get reflected in Form 26AS of the assessee (producer). (Para 3.5) Audit found that there was no uniformity in allowance of franchisee fee, as paid by Indian Premier League (IPL) franchisee to Board of Control for Cricket in India (BCCI), by the ITD, resulting in litigation of the matter and various appellate authorities treating such franchisee fee differently. (Para 3.6) Audit found that despite acceptance of recommendation (made in our earlier report No. 36 of 2010-11) by the Ministry for inclusion of PAN of payee in Form 52A, no action has been taken by the ITD in this regard. Audit also found control weaknesses in respect of Form 52A wherein submission of Form 52A was not being monitored and the details of production cost disclosed by film producer in Form 52A was not being properly verified during assessment. (Para 3.7) Audit noticed instances where additions made by the assessing officers to the income of the assessees on ad hoc basis by applying varying percentage ranging from five per cent to 20 per cent despite the grounds of additions were same. (Para ....
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....rms/companies etc. iii. changing template of Form 52A to include PAN of payees receiving payments from the producers. iv. capturing the details of receipts earned by movie producers from various movie rights/ overflow (surplus receipts) v. making it mandatory to disclose all details sought as per Form 52A vi. making it necessary to disclose, separately, details of amounts actually paid during the financial year and amounts due for payment as on the date of filing of Form 52A to facilitate cross verification of receipts in respect of the assessees who are following cash/mercantile basis of accounting. {Para 3.10(b)} With reference to Compliance Issues Audit recommends that: a. The CBDT may ensure that assessment orders are self explanatory (speaking orders) while arriving at ad hoc additions and thus also avoiding non-uniformity in ad hoc additions in similar cases. {Para 4.9(a)} b. CBDT may ensure that the provisions/conditions laid down in the Income Tax Act with respect to allowances of deductions/expenses/set off and carry forward of losses/ MAT etc. are duly complied with by the Assessing Officers in order ....
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....ificant source of revenue to the Government as pointed out above, we felt it was necessary to focus on this sector and see that the income tax is duly levied and collected from the business in this area. ⮚ In the year 2010-11, we had conducted performance audit on "Taxation of assessees engaged in the Film and Television Industry" wherein we had focussed only on Film and Television Industry. We, therefore, decided to broaden the scope by covering all the segments of the entertainment sector and conduct a comprehensive audit. ⮚ This office conducted a performance audit on Entertainment Sector in Indirect Taxes Wing (Service Tax) during the year 2016-17 wherein we had highlighted that the Central Board of Excise and Customs (CBEC) needs to utilise the already available data optimally and evolve a system of using third party data to identify potential assessees for broadening the tax base. Accordingly, we decided to cover these aspects from direct taxes side as well. 1.4 Objectives of the performance audit The objectives of conducting the performance audit were: a. to study the effectiveness of the department's efforts to co....
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....tisement agencies (code 701) in respect of scrutiny assessments completed during the financial years 2013-14 to 2016-17. The selection of Commissionerates and units^3 within each Commissionerate was based on risk analysis of consolidated data obtained from DGIT(Systems) and information available at regional levels specific to different jurisdictions. We compulsorily selected dedicated film circles/wards created in four states^4 for selection of assessment cases. Within the selected assessment units under PCsIT/CsIT in 21 states (Appendix-2), a total of 6,691 assessment cases comprising all the segments of entertainment sector were identified for examination in audit based on the information available in the 'Demand and Collection Registers' maintained by the selected assessment units. Besides, we conducted detailed analysis in 24 cases to cross verify the correctness of the related party transactions. 1.7 Audit Methodology a. An entry conference with CBDT was held on 25 October 2017 wherein we explained the audit objectives, scope of audit and main focus areas of the performance audit. b. Collection of data and information relating to assessees engaged ....
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....in the course of assessment. ITD has allocated codes to the assessees engaged in entertainment sector under six categories^5. Of six categories, five categories have been assigned to Film & television sector while one category has been allotted for 'others'^6. Code wise data of assessees available in the website of ITD showed that during FYs 2013-14, only 13 per cent of assessees in entertainment sector were falling under five categories assigned to Film & television sector whereas a significant proportion, i.e., 87 per cent of assessees in entertainment sector were falling in 'others' category of entertainment sector. Number of taxpayers related to this sector under six categories is depicted in chart given below. With a view to assess the scientific selection of cases under scrutiny under different categories especially for codes 906, we further analysed the data^7 with respect to the number of scrutiny assessments completed and additions made during the period 2013-14 to 2016-17 for entertainment sector. Details of number of scrutiny assessments and addition made under different codes of entertainment sector is shown in the table below: Table: 2.1: Numbe....
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....As a number of segments, viz. sports, event management, artist, animation, cable business etc. are clubbed in 906 code, segment specific refinement of assessees may not be possible for selection under scrutiny and monitoring purposes. Thus, there is a need to identify categories under code 906 and further delineate it for allotment of specific code to the assessees under emerging segments such as sports, event management, artist etc., in order to facilitate scientific selection and effective evaluation of risk for scrutiny selection. 2.2 Coordination within the department The assessing units in ITD are structured in such a way so as to administer the different provisions of the Act pertaining to levy and collection of direct taxes. While regular assessments/re-assessments under the various provisions of the Act viz. 143(3), 147, 263, etc., are carried out in corporate/non-corporate assessment circles and wards, search and seizure related assessments under sections 153A, 153C, etc., are concluded in central circles. Assessments under Tax Deducted at Source (TDS) and international taxation provisions are carried out by designated AO (TDS) and AO (International Taxation) respect....
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.... of the Act, where any sum is found credited in the book of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The scrutiny assessment of the assessee was completed in March 2016 at income of Rs. 27.73 lakh. During the assessment proceedings, AO had sent letter to DCIT, Circle 8(2), Kolkata on 10 March 2016 to verify the identity, genuineness and the credit worthiness of the M/s Sahara Universal Mining Corp. Ltd. (SUMCL), as the assessee had received share application money along with premium of Rs. 579.28 crore from M/s SUMCL, Kolkata. Local verification by the audit revealed that the DCIT(8), Kolkata did not share the required information with the AO, who in turn, completed the assessment on 30 March 2016 without adding back the unexplained amount of Rs. 579.28 crore to the income of the assessee. Considering the substantial amount involved, the AO could have verified the genuineness of transaction through third party dat....
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....g to AO of Circle 25(3), intimated the AO of Circle 21(2), Mumbai on 13 June 2014 about the slump sale made by the assessee (Sameer B. Joshi) to verify the above transactions. However, AO of Circle 21(2), Mumbai had not taken any action stating that the case did not pertain to his charge. AO of Circle 21(2) Mumbai neither took any action nor referred the case to AO of Circle 25(3) to safeguard the interest of revenue. Had the information been sent to the actual assessment charge, i.e., Circle 25(3), the above transaction would have been brought to tax. This indicated lack of co-ordination within the different assessment units of ITD. The case for AY 2011-12 has become time barred which led to loss of revenue of Rs. 11.95 crore excluding interest. 2.2.2 Verification of cash transactions White paper on black money^14 highlighted that the cash has always been a facilitator of black money as transactions made in cash do not leave any audit trail. Given the primary importance of cash in relation to generation and use of black money, work needs to be done by way of legal curbs and regulations that can restrict the generation and flow of black money within the economy. As per sectio....
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....n cash from M/s Studio Green during FY 2012-13. Audit cross verified the assessment records of M/s Studio Green for AY 2013-14 and found that AO (assessing M/s Studio Green) had not added back the amount of expenses for which payment was made in cash by the M/S Studio Green to M/s Thirupathi Brothers Film Media, violating the section 40A(3) of the Act. Had the information of cash transaction been shared by AO of assessee, i.e., M/s Thirupathi Brothers Film Media to the jurisdictional AO, assessing M/S Studio Green, trail of such transactions would have been detected for prevention of possible leakage of revenue. 2.2.3 Effectiveness of creating dedicated Film Circles/wards With a view to have an overall control on the assessments and to achieve greater co-ordination and effective handling of the assessments of assessees related to Film industry, dedicated Film Circles have been created in Mumbai, Chennai, Bengaluru and Hyderabad as maximum number of films are produced there. To serve the above purpose, it was of utmost importance that all the cases related to film and television industry are assessed in the Film Circle. However, in Mumbai, it was noticed from the s....
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....dit findings in this regard are discussed in succeeding paragraphs. 2.3.1 Coordination with State Governments Entertainment tax, now subsumed in Goods and Services Tax (GST), could be obtained and utilized by the ITD to verify the income offered through the chain of producers upto the level of exhibitors on the sale of movie tickets that was collected by the State Governments. Thus, box office collection could be selected to cross verify the actual receipts shown in the books of the assesses with respect to those shown for the purpose of entertainment tax. 2.3.1.1 We sought information of entertainment tax data of Delhi state through the Accountant General for cross verification of entertainment tax deposited by the assessees and the income offered as per Income Tax Act. We received details of entertainment tax collected in respect of 30 assessees. We test checked and cross examined the entertainment tax deposited by the assessees and the income offered as per Income Tax Act in respect of two assessees, viz. M/s Movie Times Cineplex Pvt. Ltd. and M/s M2K Entertainment Pvt. Ltd. Audit findings in this regard are discussed in succeeding paragraphs. In Delhi, The details o....
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....e of Rs. 57.08 crore (Rs. 96.80 crore - Rs. 39.72 crore) involving tax effect of Rs. 24.06 crore including interest. ITD replied (February 2018) that assessee had checked its records and performance reports submitted to entertainment tax department, however, it could not locate any figure of entertainment tax collected and deposited as shown by the audit and there might be some error in picking-up the figures. The reply was not tenable as the AO had relied upon the statement of assessee and not verified the entertainment tax deposited by the assessee with the state department for cross-verification of income offered by the assessee in its Income Tax Return(ITR). 2.3.1.2 In Maharashtra, every theatre owner had to file a weekly return in Form B under The Bombay Entertainment Duty Act, 1923. This weekly return included the movie wise details of revenue collection and entertainment tax paid. Hence, the Entertainment Tax Department of the State Government had primary information about the revenue realized from the exhibition of a film. Audit noticed from test check of 12 cases^20 in Maharashtra (Pr. CIT-16, Mumbai charge) that in none of the cases the AO had taken any ini....
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....assessee, M/s Indian Performing Right Society Ltd. for AYs 2013-14 and 2014-15 was completed after scrutiny at income of Rs. 21.63 lakh and Rs. 19.81 lakh in March 2016 and December 2016 respectively. The assessee, engaged in collecting royalty on behalf of its members being composers or owner of any musical works, had been declaring net income as payable to its members and the same was claimed as exempt from tax. Audit noticed that fresh registration was not taken by the assesse, thus violating the provisions of Copyright (Amended) Act, 2012. Therefore, the royalty income of Rs. 38.28 crore and Rs. 39.67 crore in the AYs 2013-14 and 2014-15 respectively was required to be treated as income in the hands of the assessee and brought to tax. Had the ITD co-ordinated with the Registrar of Copyrights and taken action in the case, undue benefit availed by the assessee could have been prevented and loss to exchequer avoided. 2.3.2.2 Coordination with Central Board of Film Certification Audit also noticed that though the films are being certified by Central Board of Film Certification (CBFC), and there is existence of exclusive film circle and film ward in four states, the ITD has....
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....y for collection and analysis of data available with them. ⮚ Despite specific film circles/wards created to assess all the assessees of film and television industry in dedicated units, sufficient efforts were not made by the ITD to assess them in the designated circles/wards thereby defeating the purpose of cross-verification of related transactions and prevention of possible leakages of revenue. ⮚ Surveys, though an effective tool for strengthening tax base as well as deterrence against evasion, were not utilised adequately during FY 2013-14 to FY 2016-17. 2.6 Recommendations Audit recommends that a. CBDT may consider allocating separate codes to film artist and to emerging segments in entertainment industry viz. sports, event management etc. to ensure better monitoring, improved vigilance and identification of assessees for detailed scrutiny. The CBDT replied (June 2018) that the codes specifying nature of business have been rationalized and revised in the return forms notified for AY 2018-19 and as per the revised codes, the column pertaining to "Culture and sports" includes various new and emerging segments in en....
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.... audit envisaged to ascertain whether the systems, internal controls and processes were sufficient and robust enough to ensure effective assessments so as to prevent revenue loss due to under reporting of income or inflation of the expenses by the assessees. The aim was also to check loopholes and ambiguity in the existing provisions as well as weaknesses in the quality of assessments which would provide a gap to be exploited by the assessees to manipulate the reporting of income and expenditure. The present chapter deals with systemic issues and internal control/monitoring mechanism by the ITD in dealing with assessees relating to entertainment sector. 3.1 Verification of transactions in respect of films shot abroad For shooting a feature film in foreign locations, Indian production houses hire the services of foreign line production companies (line producers i.e. the resident companies which are registered in that specific country). The pre and/or post production expenses incurred by the foreign line producers are reimbursed by the assessee (Indian production house) on the basis of the agreement entered into between them and all the expenses reimbursed to the line producer ....
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.... in computing total income of the assessee. We noticed in four scrutiny assessment cases of four production companies that in two cases^27, the assessees had reduced the cost of production of movies by disclosing incentives/subsidy of Rs. 16.69 crore from foreign countries while in other two cases^28, the assessee had not shown any incentive/subsidy while claiming the cost of production of movies. Audit noticed that, in both the situations, AOs had accepted the submission of assessees and allowed the expenses without verifying the details of incentives/subsidy received from foreign country while completing the assessment under scrutiny. Audit further noticed that there was nothing on record to show the terms & conditions under which the incentive/subsidy was received from the foreign country. The AOs also did not utilize the mechanism of 'exchange of information' under section 90 of the Act with respect to the quantum and condition of the incentive/subsidy received from foreign country. Thus, the AOs were not ascertaining the correctness of the incentives/subsidy received from the foreign countries while completing the assessments and were relying completely on the di....
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....nd December 2016 respectively at income of Rs. (-) 4.39 crore, Rs. 1.58 crore, Rs. 4.16 crore, Rs. 29.71 crore, Rs. 14.19 crore, Rs. 38.89 crore and Rs. (-) 0.60 crore respectively. Audit noticed that the assessee had claimed and was allowed exemption under section 10(2A) of Rs. 195.50 crore towards share of profit received from M/s Anand Cine Service (firm) for the AYs 2008-09 to 2014-15. However, for the AYs 2008-09 to 2014-15, the firm had shown total profit of Rs. 26.44 crore out of which Rs. 25.57 crore pertained to the share of profit of the assessee. In this context, it was seen from notes to account of the assessee that share of profit from the firm was recognized on accrual basis whereas the firm followed cash system of accounting. As the objective behind exemption under sectio 10(2A) is to avoid double taxation, the profit which was credited by the assessee in their profit and loss account over and above the profit from the firm was not eligible for exemption under section 10(2A) and was required to be taxed in the hand of the assessee. As such, there was excess allowance of exemption under section 10(2A) by Rs. 169.93 crore (Rs. 195.50 crore - Rs. 25.57 crore) with conse....
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....rd. As a result, the amount received from overflow could not be ascertained. We also noticed in the same charge that another assessee^33 had given the details of income earned by sale of various rights of films and had also given the details of share received from overflow of revenue separately. However, the AO did not enquire about the overflow received in case of M/s DPPL. In the Income Tax Act/Rules, no specific form has been prescribed for the producer to submit the details of revenue earned from overflow as well as from various rights of movie, though there is a specific provision (Section 285B) in the Act which makes it mandatory for a producer to submit the details of payments in a statement (Form No. 52A) made by him or due from him to each person who is engaged by him in production of movie. Hence, whether the producer has offered the correct income from film as well as overflow of receipt is not ascertainable due to absence of mechanism mandating full disclosure of income earned from various rights of movie. 3.3 Variation in treatment of cost of production paid to foreign line producer Section 9(1)(vii) of the Act provides that income by way of fees for tec....
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....le in three other cases, the same was treated as administrative expenses. ITD had not offered any explanation for such inconsistent treatment. 3.4 Variation in treatment of write off of inventory and pre-operative expenses We noticed in Tamil Nadu that the AO had disallowed the 'write off of inventory of film rights and work in progress of films' amounting to Rs. 8.01 crore in case of M/s Penta Media Graphics Ltd. for AY 2014-15 in the charge of CIT-10, Chennai, whereas, in another case of M/s G.V. Films Ltd. For AY 2013-14 in the same charge, disallowance of Rs. 142 crore was not made in respect of the 'film rights and the work in progress written off'. Thus, there was no uniformity in allowance of write off of inventory of film rights by the AO despite the fact that both the assessees were assessed in the same circle. We also noticed in the charge of PCIT-5, Bengaluru that the AO had disallowed the pre-operative expenses of Rs. 2.93 crore in one case^37 and concluded that same should be amortized over a period of 10 years since the business activity commenced in next financial year. The disallowance was also upheld in the appeal (July 2016). However, in a....
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.... of Section 194C shall include 'broadcasting and telecasting including production of programmes for such broadcasting or telecasting', however, the distribution/production of movie had not been included within the ambit of 'work' for the purpose of deduction of tax at source under section 194C. 3.6 Absence of provision on amortization of franchisee fee Audit noticed from test check of scrutiny assessment cases of five Indian Premier League (IPL) franchisees^41 in two states that they had purchased the IPL franchise rights from Board of Control for Cricket in India (BCCI) in the year 2008 for a period of 10 years and they had to pay equal annual instalment of franchisee fee to BCCI in order to sustain the right. Audit further noticed that three franchisee companies (ISPL, KRSPL and GMRSPL) were claiming such instalment as revenue expenditure whereas two franchisee companies (JICPL and RCSPL), though paying franchisee fee in instalments, had capitalized the entire bid amount and were claiming depreciation on it @25 per cent. The ITD had treated it as intangible asset and allowed depreciation @25 percent on the amount of instalments paid. CIT (A) Mumbai has susta....
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....nvolved in other segments of entertainment sector such as documentaries, event managements etc. which are similar to film production and substantial amounts of expenses are incurred in these segments. In the absence of an enabling provision in respect of assessees involved in the entertainment sectors other than film sector, effective verification of expenses claimed by assessees in these sectors was not being carried out by AOs during the assessment proceedings. 3.7.2 In the case of producers, their assessments were being concluded without verifying the payment details contained in Form 52A, rendering the mechanism ineffective. We observed in two assessment cases in two states^44 that there was mismatch in the details of payments shown in Form 52A and the amounts accounted for in Profit & Loss Account. The payment details indicated in Form 52A were lesser than those indicated in Profit and loss account and the assessments were completed based on the higher amounts of expenditure recognized in the Profit and Loss Account. One case is illustrated below (See Box 3.3). Box 3.3: Illustration of variation observed in payment as per Form 52A vis-a-vis Profit and loss account ....
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....rs in 10 states that they had produced and released 152 movies during the period mentioned against the respective movie. The applicable Form 52A was (i) not submitted for 140 movies in ten states; and (ii) not submitted within prescribed time for 12 movies in three states as depicted in table below. However, the applicable penalty was not levied by the ITD. Table 3.1: Non submission/delayed submission of Form 52A State Number of producers Number of movie released Number of Form 52A not submitted Number of Form 52A submitted with delay Andhra Pradesh and Telangana 5 8 1 7 Assam 1 1 1 0 Karnataka 7 19 17 2 Kerala 23 33 30 3 Maharashtra 9 29 29 0 Punjab 1 1 1 0 Rajasthan 3 3 3 0 Tamilnadu 24 52 52 0 Uttar Pradesh 1 1 1 0 West Bengal 3 5 5 0 Total 77 152 140 12 3.8 Mismatch in the data provided by DGIT (Systems) and Assessment Charge data We noticed from the analysis of the scrutiny data as per 'Demand & Collection Register' (D&CR) vis-à-vis data provided by DGIT (Systems), New Delhi f....
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....production. Thus, there is risk of escapement of income as payment details do not get reflected in Form 26AS of the assessee (producer). ⮚ There is no specific provision in the Act/rules for ensuring uniformity and consistency in allowance of franchisee fee as paid by IPL franchisee to BCCI. This is resulting in litigation of the matter as various appellate authorities are treating such franchisee fee differently. ⮚ Submission of Form 52A is not monitored and details of production cost disclosed by film producer in Form 52A is not properly verified during assessment rendering the mechanism ineffective. Form 52A in the present format does not seek PAN of payee, rendering it difficult to track the payee for cross verification of the related party transactions. 3.10 Recommendations Audit recommends that: a. The CBDT may issue instructions to AOs for comprehensive verification of transactions with respect to cases involving: i. the reimbursement of production cost by Indian producers to foreign line producers ii. receipt of quantum of subsidies/incentives by Indian producers from foreign government iii. Adoption ....
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....ook profit u/s 115JB and MAT credit u/s 115JAA 25 91.38 Mistakes in computation of tax and other issues 66 280.60 Total 592 1,922.93 4.2 Absence of justification in making additions While making additions to the income of assessees on ad hoc basis, AOs were adopting different approaches in respect of disallowance although the grounds of the additions were same. We noticed 208 assessment cases in five states^45 where there was no uniformity in making additions to the income of assessees on ad hoc basis in the assessment orders. These additions were largely made on percentage basis ranging from five per cent to 20 per cent on ad hoc basis for varied reasons such as 'want of vouchers', unsubstantiated expenses, absence of third party vouchers etc. However, no specific justification or the basis of additions was recorded in the assessment orders by the AOs for the differential treatment even though the grounds of addition were same. Illustrations in respect of Maharashtra and Karnataka states are discussed below (see box 4.1). Box 4.1: Illustrations of absence of justification in making additions (a) We noticed in 129 cases in the....
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.... credited may be charged to income-tax as the income of the assessee of that year. We noticed in 18 cases in six states^46 that ITD had not made additions under section 68 of the Act although the amount credited in the books of the assessees remained unexplained. This had resulted in short levy of tax of Rs. 305.31 crore. Four cases are illustrated below (see box 4.2). Box 4.2: Illustration of Unexplained credit not brought to tax (a) Charge: PCIT-16, Mumbai Assessee: M/s M. I. Marathi Media Ltd. Assessment Year: 2013-14 The scrutiny assessment was completed in February 2016 at a loss of Rs. 6.56 crore. The assessee had credited an amount of Rs. 88.24 crore as interest free inter corporate deposit received from M/s Prosperity Agro India Ltd. (PAIL) in AY 2013-14. However, the Balance Sheet of PAIL did not reflect any such deposit given to the assessee. Hence, the entry in assessees books denotes an unexplained credit and the same should have been added to the income of assessee under the provisions of Section 68. Omission to do so had resulted in short levy of tax of Rs. 38.65 crore including interest. (b) Charge: PCIT-10, Ch....
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....ment was completed in March 2016 at a loss of Rs. 19.39 crore. Audit noticed that the assessee had shown in its books of accounts (as on 31 march 2013) an amount of Rs. 15.22 crore and Rs. 14.99 crore being share premium received from M/s Agri Gold Farm Estates India Private Limited (AGFEIPL) and M/s Dream Land Ventures India Private Limited (DLVIPL) respectively. However, the books of account of AGFEIPL showed 'nil' investment in assessee company, while, as per books of account of DLVIPL, it had invested only Rs. 8.40 crore as against Rs. 14.99 crore shown in the books of the assessee. Thus, there was a difference of Rs. 21.81 crore in the books of the assessee to that of the books of two allottee companies with respect to the amount invested in shares. Consequently, the excess amount of Rs. 21.81 crore shown in the books of assessee should have been treated as unexplained credits under section 68 of the Act and added back to the income of assessee. The omission resulted in underassessment of income of Rs. 21.81 crore involving tax effect of Rs. 7.07 crore. (d) Charge: PCIT-1, Bhubaneswar Assessee: M/s N.K Media Ventures (P) Ltd. Assessment Years....
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....d at the TT selling exchange rate published by the SBI at the time of payment. Audit noticed that the instalments were paid by franchisees^48 in Indian rupees by using same exchange rate of 1 USD = 40 INR (Exchange rate as on the date of agreement with franchisee) for every year. However, BCCI did not recover the fee as per current prevailing exchange rate. Similarly, the ITD also had not assessed the income considering the provisions of Rule 115. As such, income of BCCI from franchisee fee from FY 2009-10 to 2013-14 was received less by Rs. 325.78 crore resulting in short levy of tax of Rs. 100.67 crore. (b) Charge: PCIT-2, Bengaluru Assessee: M/s Kasthuri Medias Pvt. Ltd. Assessment Year: 2014-15 As per Section 50C of the Act, if a property is sold below the value fixed by the stamp valuation authority, then the value assessed by such authority shall be the deemed value of consideration for the purpose of calculating capital gain. The scrutiny assessment of the assessee was completed in December 2016 at a loss of Rs. 7.41 crore. The assessee, while computing the capital gain, had adopted a consideration of Rs. 1.50 crore on sale of com....
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....d such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1). We noticed in 50 assessment cases in 14 states^50 involving tax effect of Rs. 591.25 crore that the assessees had claimed expenses although the applicable TDS thereon was not deducted or, after deduction, not deposited to the government account within prescribed time limit. However, the ITD had not disallowed these expenses. Five cases are illustrated below (see box 4.4). Box 4.4: Illustrations of non/short deduction or non-deposit of TDS (a) Charge: PCIT-4, Chennai Assessee: M/s New Generation Media Corporation Pvt. Ltd. Assessment Year: 2014-15 The scrutiny assessment of the assessee was completed in December 2016 at a loss of Rs. 43.66 lakh. The assessee had claimed the expenses of Rs. 8.36 crore towards 'design & development and service charges' and Rs. 11.25 crore towards 'equipment hire charges' on which TDS was not deducted and the same was confirmed from Form 26Q as well as 26AS of corresponding assessees. However, the expenditure was not disallowed under section 40(a)(ia) of the Act. T....
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.... for the said AYs, the TDS Officer communicated (December 2012) that the assessee was in default in deduction of TDS under sections 194C, 194J and 194-I of the Act. Despite timely communication, the AO did not act on the information received for disallowing the related expenditure aggregating to Rs. 17.03 crore^52. The omission resulted in short computation of income of equal amount involving short levy of tax aggregating to Rs. 9.19 crore. (e) Charge: PCIT-1, Kolkata Assessee: R. P. Techvision (India) Pvt. Ltd. Assessment Year: 2013-14 The audit noticed from Tax Audit Report that total tax of Rs. 21.05 crore was deducted by the assessee while making payments for commission, contractors, fee for professional & technical service and rent but the same was not deposited to the Government Account. It was further noticed that out of Rs. 21.05 crore, only Rs. 59.01 lakh^53 was disallowed during scrutiny assessment completed in March 2016. Thus, the balance amount of Rs. 20.46 crore was required to be added back for not depositing the TDS to Government Account. Irregular allowance of expenditure of Rs. 20.46 crore resulted in under assessment of income ....
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....t of the assessee-society is to promote the sport of cricket in the State of West Bengal. The assessee, being a State Cricket Association, is entitled to revenue on sale of tickets, advertisement, contractual income etc. when it conducts international matches. It is entitled to all in-stadia sponsorships, advertisements and beverage revenue, etc. It earns income under the following head :- (1) Subscription from members (2) Sale of tickets (3) Revenue from advertisements (4) Receipts from BCCI (5) Interest from bank deposits (6) Revenue from contractual payments like beverage. It uses all these incomes to promote the sport of cricket in the State of West Bengal. The assessee-society, being a member of BCCI, hosts the matches which are conducted by BCCI and sell tickets to the cricket viewers. The role of the assessee is only to provide stadium for conducting matches. Other than that, it has no role in conducting the international matches and Indian Premier League matches. The other activity of the assessee-society is to conduct training programmes, inter-university, inter-school and inter-association matches and provide coaching classes for college students at district level in the ....
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....of IT Act. The reply is not tenable. As per rule 9A, the cost of production has to be restricted to the extent of income realized by the assessee. (c) Charge: PCIT-3, Mumbai Assessee: M/s Cinepolis India Pvt. Ltd. Assessment Year: 2014-15 The scrutiny assessment was completed in December 2016 at a loss of Rs. 15.16 crore. Audit noticed that the Government of Punjab, Bihar, Maharashtra and Madhya Pradesh had exempted the assessee from collection of entertainment tax due to which the assessee treated the collection of entertainment tax of Rs. 13.08 crore as capital receipt and claimed exemption thereon. The said claim of exemption was also allowed by the AO. However, it was seen from the 'Entertainment Tax Exemption Agreements' entered into between the assessee and the states that the said exemption was related to the multiplex projects which required heavy capital and long gestation period to make profits. Consequently, the amount of exemption received by the assessee on account of entertainment tax was required to be adjusted against the block of assets of multiplex under the provision of explanation 10 of Section 43(1) of the IT Act. Omission ha....
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....ad resulted in under- assessment of income of Rs. 1.70 crore (after giving the benefit of depreciation @25 per cent being an intangible assets) with consequent short levy of tax of Rs. 75.49 lakh. (b) Charge: CIT-4, Hyderabad Assessee: M/s Prakash Arts Pvt. Ltd. Assessment Years: 2013-14 to 2014-15 The scrutiny assessments of the assessee were completed in March 2016 and November 2016 at an income of Rs. 3.92 crore and Rs. 4.06 crore respectively. The assessee had incurred expenditure of Rs. 16.12 crore (Rs. 12.95 crore towards 'Hoarding erection & maintenance' and Rs. 3.17 crore towards 'Bus shelter erection & maintenance'). Since the above expenses were in nature of capital expenditure, the same were required to be capitalised. The omission had resulted in excess allowance of expenditure of Rs. 13.70 crore (after giving the benefit of depreciation @ 15 per cent being plant and machinery) with consequential short demand of Rs. 3.96 crore. (c) Charge: CIT-2, Delhi Assessee: M/s Bharti Telemedia Ltd. Assessment Year: 2013-14 Audit noticed that the assessee had debited interest expenses o....
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....interest. 4.5 Irregular set off/carry forward of losses We noticed in 31 cases involving tax effect of Rs. 80.81 crore where irregular set off/carry forward of losses were allowed by ITD. The cases are discussed in succeeding paragraphs: 4.5.1 Losses adjusted against additions made under section 68 and 69 of the Act As per Section 115BBE of the Act, where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on income referred to in the above sections, at the rate of 30 per cent; and (b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a). It also stipulates that notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1). Audit noticed in seven cases in Delhi and Maharashtra states that the additions made by ....
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....e including interest. ITD had initiated remedial action under section 148 of the Act in March 2018. (c) Charge: PCIT-16, Mumbai Assessee: M/s Naurang Godavari Entertainment Ltd. Assessment Year: 2013-14 The scrutiny assessment of the assessee was completed in March 2016 at an income of Rs. 7.84 crore. The AO had made addition of Rs. 13.56 crore under section 68 of the Act and Rs. 1.70 crore under other provisions of the Act. However, the business loss of Rs. 7.42 crore which was required to be set off against addition of Rs. 1.70 crore, had been set off against the total addition, resulting in underassessment of income of Rs. 5.72 crore with consequent short levy of tax of Rs. 2.52 crore including interest. 4.5.2 Excess set off of losses Under section 72 of the Income Tax Act, 1961, where the net result of computation under the head 'Profits & Gains of Business or Profession' is a loss to the assessee and such loss cannot be wholly set off against income under any other head of the relevant year, so much of the loss as had not been set off shall be carried forward to the following assessment year/years, to be set off against the pro....
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....e. 4.5.3 Irregular allowance of carry forward of losses Audit observed in 11 assessment cases in eight states^58 that excess losses were allowed for carry forward for future set off resulting in potential loss of revenue of Rs. 32.29 crore. Three cases are illustrated below (see box 4.9). Box 4.9: Illustrations of irregular allowance of carry forward of losses (a) Charge: PCIT-3, Kolkata Assessee: M/s Bangla Entertainment Pvt. Ltd. Assessment Year: 2011-12 The scrutiny assessment of the assessee was completed in March 2014 at a loss of Rs. 5.80 crore. Audit noticed that the assessee had filed return of income for AY 2011-12 beyond the time limit prescribed under section 139(1). Hence the loss was not allowable to be carried forward under the provisions of section 80. However, the assessee was allowed to carry forward the loss. This had resulted in irregular allowance of carry forward of loss of Rs. 5.80 crore involving potential tax effect of Rs. 1.79 crore. ITD accepted the objection (January 2016) and took remedial action under section 263 of Act. (b) Charge: PCIT, Trivandrum Assessee: M/s Asianet Satellite Comm....
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.... Bengaluru, Assessee: M/s IDG Media Pvt. Ltd. Assessment Years: 2013-14 & 2014-15 The scrutiny assessment was completed in December 2015 and March 2016 at nil income for both AYs. Audit noticed that though the assessee had adjusted the unabsorbed depreciation of Rs. 1.64 crore against the book profit of AY 2012-13, it again claimed the same unabsorbed depreciation while computing the book profits for the AYs 2013-14 and 2014-15. The same was also allowed by the AO. This had resulted in underassessment of book profit aggregating to Rs. 3.28 crore involving tax effect of Rs. 69.75 lakh. (b) Charge: PCIT-16, Mumbai Assessee: M/s Bang Bang Films Pvt. Ltd. Assessment Year: 2014-15 The scrutiny assessment of the assessee was completed in October 2016 at a loss of Rs. 1.52 crore. Audit noticed that the assessee had not routed the consideration of Rs. 22.28 crore on transfer of business on slump sale basis through profit and loss account but directly shown it in the computation of income for adjusting the loss. As such profit and loss was not prepared in accordance with the provisions of Part II and III of Schedule VI of the Co....
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....see was completed in January 2017 at an income of Rs. 898.79 crore. Audit noticed that the AO had levied interest of Rs. 2.52 crore under section 234B of the Act, instead of Rs. 59.93 crore which resulted in short levy of interest of Rs. 57.41 crore. (b) Charge: PCIT (Central)-3, Mumbai Assessee: M/s The Board of Control for Cricket in India (BCCI) Assessment Year: 2014-15 The scrutiny assessment of the assessee was completed in December 2016 at an income of Rs. 1131.09 crore. Audit noticed that though the assessed income was more than Rs. one crore, the surcharge @ 10 per cent was not levied. Omission had resulted in loss of revenue of Rs. 34.95 crore. (c) Charge: PCIT (Exemption), Ahmedabad Assessee: M/s Gujarat Cricket Association Assessment Year: 2014-15 The scrutiny assessment was completed in December 2016 at an income of Rs. 83.56 crore. Audit noticed that though the income was more than Rs. one crore, the AO had not levied the surcharge. This had resulted in loss of revenue of Rs. 2.78 crore. ITD had initiated remedial action under section 154 of the Act in September 2017. (d) Charge: CIT (Exem....
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.... of TDS credit/relief under section 90/91 Charge: PCIT (Central)-2, Mumbai Assessee: M/s Sony Pictures Networks India Pvt. Ltd. Assessment Year: 2012-13 The scrutiny assessment was completed in January 2017 at an income of Rs. 434.21 crore. Audit noticed that the assessee had claimed and was allowed foreign tax credit relief of Rs. 21.52 crore under section 90 of the Act on royalty income of Rs. 324 crore received from Multi Screen Media Singapore (MSMS) on which no tax was deducted in Singapore by MSMS. However, it was seen from profit and loss account as well as 3CEB Report^60 that no royalty income was received by the assessee from Multi Screen Media Singapore (MSMS) during the Assessment year. Since, Singapore incentive scheme covered only royalty payment for nil withholding tax whereas other payments made by a Singapore entity required withholding tax for which credit in India was allowed. Thus the tax credit claimed by the assessee should have been disallowed. Omission had resulted in loss of revenue of Rs. 21.52 crore. 4.7.3 Mistake in computation due to adoption of wrong figures Audit observed in 30 assessment cases in eight states^....
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....igure of returned loss at Rs. 11.52 crore as against the actual loss of Rs. 1.15 crore and after making the addition of Rs. 5.78 crore the AO determined the loss at Rs. 5.74 crore instead of income of Rs. 4.63 crore. The mistake had resulted in underassessment of income of Rs. 4.63 crore as well as allowing incorrect carry forward of loss of Rs. 5.74 crore with consequent total tax effect of Rs. 3.70 crore. (d) Charge: PCIT-10, Chennai Assessee: M/s Thirupathi Brothers Film media Pvt. Ltd. Assessment Year: 2012-13 The scrutiny assessment of the assessee was completed in March 2015 at an income of Rs. 3.93 crore. Audit noticed that the assessee filed revised return of income at Rs. 3.93 crore as against original return of income of Rs. 1.92 crore. However, in assessment order, income was taken at Rs. 1.93 crore instead of correct revised income of Rs. 3.93 crore. The mistake had resulted in short assessment of income amounting to Rs. 2 crore with consequent total tax effect of Rs. 88.25 lakh including interest. ITD rectified the mistake under section 154 of the Act (October 2017). (e) Charge: PCIT (Central)-3, Mumbai Assessee: M/....
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.... of losses/MAT, mistakes in computation of tax and interest etc., involving tax effect of Rs. 1,922.93 crore, which impacted quality of assessments. 4.9 Recommendations Audit recommends: a. The CBDT may ensure that assessment orders are self explanatory (speaking orders) while arriving at ad hoc additions and thus also avoiding non-uniformity in ad hoc additions in similar cases. b. CBDT may ensure that the provisions/conditions laid down in the Income Tax Act with respect to allowances of deductions/expenses/set off and carry forward of losses/MAT etc. are duly complied with by the Assessing Officers in order to improve the quality of assessments. The CBDT while agreeing to the recommendation during Exit Conference (June 2018) stated that with the implementation of Income Tax Business Application (ITBA), the Assessing Officer is required to follow a more detailed and comprehensive approach while making additions/disallowance to compute taxable income. c. CBDT may make it mandatory for the Assessing Officers, at all stages of assessments, to auto generate tax demand through its assessment module having in built checks and validations to pre....
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....te Contents 675 dated 03-01-1994 CBDT clarified that a script writer can be regarded as "playwright" and similarly "director" can be treated as an 'artist' for the purposes of section 80RR of the Act. However, a producer would not be entitled to deduction under section 80RR of the Act, because he does not fall under any of the categories mentioned in the said section. 715 dated 08-08-1995 CBDT has given clarification on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995. Advertisement agencies, contract on hoardings, etc. are covered under this Circular. 742 dated 02-05-1996 CBDT has clarified that the income in the cases of the foreign telecasting companies (FTCs), which are not having any branch office or permanent establishment in India or are not maintaining country wise accounts, shall be computed by adopting a presumptive profit rate of 10 per cent of the gross receipts meant for remittance abroad or the income returned by such companies, whichever is higher and subject the same to tax at the prescribed rate, i.e., 55 per cent at present. 06 of 2001 dated 05-03-2001 CBDT has clarifie....
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....a companies to advertising companies for booking of advertisements but to payments for engagement of models, artists, photographers, sportspersons, etc. and, therefore, is not relevant to the issue of TDS. Relevant Judicial Decisions: Case details Citation of the decision Gist Firoz Nadiadwala Vs. Additional CIT - 11(1), Mumbai ITA No. 7977/Mum/2011 (ITAT Mumbai Bench 'F') It was held that the interest on loan borrowed specifically for production of a film which was not released during year was not allowable, and should be carried forward to next year as cost of production in terms of rule 9A. Sagar Sardhadi Vs. ITO, Ward 11(1)(4), Mumbai ITA No. 5525/Mum/2010, ITAT Mumbai Bench 'E' It was held that the cost of production of film can be allowed as deduction only when conditions as specified under rule 9A are satisfied, and such deduction cannot be permitted by adopting an indirect method of reducing the value of film. Malayala Manorama Co. Ltd. Vs. ACIT Circle - 1, Kottayam ITA Nos. 429 & 481 of 2010 It was held that where equipment purchased for starting FM radio broadcasting services could not put to use till end of....
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....exhibitors of its films which did not do well in theatres resulting loss to exhibitors, such payment not being to discharge any legal obligations but to protect assessee's goodwill, would be treated as capital expenditure. DCIT, 8(3)(1), Mumbai Vs United Home Entertainment (P.) Ltd. ITA No. 1977/Mum/2015 ITAT Mumbai Bench 'F' It was held that where the programs (assets) without incurring dubbing costs, could not be utilised for earning revenue, all expenditure incurred would amount to be capital expenditure and would form part of cost of acquisition rights under license and should be amortised along with cost of license. Appendix-2 (Refer Para 1.6) Sample Size Name of the State Number of PCSIT/CsIT Selected Total Number of Assessment Units Units Selected Andhra Pradesh & Telangana 12 123 30 Bihar 3 81 24 Chhattisgarh Nil Nil Nil Delhi 19 365 94 Gujarat 15 289 42 Haryana 6 116 23 Himachal Pradesh 1 21 3 J&K 1 18 3 Jharkhand 3 81 13 Karnataka and Goa 12 194 73 Kerala 6 131 36 Madhya Pradesh 3 4....
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....ion in number of cases 0 10 25 25 Ward 14(5), Hyderabad No. of Scrutiny Assessment of Entertainment Sector as per DGIT System 0 34 50 34 No. of Scrutiny Assessment of Entertainment Sector as per D & CR Register 0 80 66 56 Variation in number of cases 0 46 16 22 Circle 2(3)(1), Bengaluru No. of Scrutiny Assessment of Entertainment Sector as per DGIT System 10 8 15 20 No. of Scrutiny Assessment of Entertainment Sector as per D & CR Register 12 11 30 28 Variation in number of cases 2 3 15 8 Ward 2(3)(5), Bengaluru No. of Scrutiny Assessment of Entertainment Sector as per DGIT System 5 13 14 15 No. of Scrutiny Assessment of Entertainment Sector as per D & CR Register 4 17 19 24 Variation in number of cases -1 4 5 9 Circle 16(1), Mumbai No. of Scrutiny Assessment of Entertainment Sector as per DGIT System 162 231 275 282 No. of Scrutiny Assessment of Entertainment Sector as per D & CR Register 293 238 416 376 Variation in number of cases 131 7 141 94 Circle 20(1), Chennai No. of S....
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....ion Picture Producers] 0905 Entertainment Industry [Television Channels] 0906 Entertainment Industry [Others] 6. It covers assessees associated with sports, film, event management, cable business, animation etc. 7. Data obtained from DGIT (Systems) 8. Addition of Rs. 2,863.42 crore out of total addition of Rs. 4,292.23 crore 9. Addition of Rs. 10,306.31 crore out of total addition of Rs. 12,783.66 crore 10. 771 out of 1,229 11. 1,995 out of 2,942 12. AY 2011-12, which was assessed in the assessment charge of ITO 11(1)(3), Mumbai (now ITO 16(1)(3), Mumbai) 13. ITO 11(1)(3), Mumbai (now ITO 16(1)(3), Mumbai) 14. Issued by Ministry of Finance, Department of Revenue, CBDT (May 2012) 15. Andhra Pradesh & Telengana, Maharashtra and Tamilnadu 16. Report on "Taxation of assessees engaged in the Film and Television Industry". 17. DCIT 2(3)(1), Bengaluru, ITO 2(3)(5), Bengaluru- both under PCIT 2, Bengaluru 18. Para 9 - Chapter 4 of ITD MOP - Vol. III; Para 34.2.2. under Chapter 9 of Vol. II 19. As per rule 14 of the Delhi Entertainment and Betting Tax Rules, 1997 20. (1) Rajiv Malhotra (2) M/s Swanston Multiplex Cinema Pvt. Ltd. (3) M....
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....9. Form 26AS is a consolidated tax statement which has all the tax related information associated with a PAN 40. M/s Maddock Films Pvt. Ltd. and M/s Rajkumar Hirani Films Pvt. Ltd. ( both in PCIT 16, Mumbai) 41. (i) M/s Jaipur IPL Cricket Pvt. Ltd. (JICPL) in PCIT (Central)-1, Mumbai, (ii) M/s Knight Riders Sports Pvt. Ltd. (KRSPL) in PCIT (Central)-2, Mumbai, (iii) M/s Indiawin Sports Pvt. Ltd. (ISPL) in PCIT (Central)-3, Mumbai, (iv) M/s Royal challengers Sports (P) Ltd. (RCSPL) in PCIT-5, Bengaluru and (v) M/s GMR Sports Pvt. Ltd. (GMRSPL) in PCIT (Central), Bengaluru 42. as clarified by CBDT vide circular no. 204 issued in July 1976 43. Para 3.37 of Report (Direct Taxes) No. 36 of 2010-11. 44. Karnataka (Sri Seethabhairaveshwara Productions in PCIT-2, Bengaluru) and Andhra Pradesh & Telangana (Sri D. V. V. Danayya) 45. Maharashtra (129 cases), Karnataka (55 cases), Andhra Pradesh & Telangana (15 cases), Uttar Pradesh (5 cases), Madhya Pradesh (4 cases) 46. Andhra Pradesh & Telangana, Assam, Karnataka, Maharashtra, Odisha and Tamilnadu 47. Andhra Pradesh & Telangana, Assam, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Maharashtra, Odi....