TaxTMI 
TaxTMI 
TaxTMI 
Performance Audit Report on Assessment of Assessees in the Entertainment Sector (C&AG Report No. 1 of 2019)
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....ch 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 days from the end of the financial year or within thirty days from the date of completion of the film wh....
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....rtment 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 those, which came to notice in the course of test audit for the period 2013-14 to 2016-17 conducted in two phases from August 2017 to February 2018 and from July 2018 to August 2018. The audit has been conducted in conformity with the Au....
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....s 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 defeating the purpose of cross-verification of related transactions and prevention of possible leakages of revenue. (Para 2.2.3) Audit noticed instances where ITD did not utilise available sources effectively for collection and analysis of data from other centr....
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.... 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 4.2) Audit noticed instances where provisions related to allowances of deductions/expenses/set off and carry forward of losses/ MAT etc. were not followed correctly by the ITD. Audit also found the cases where the assessing officers committed mistakes in computation of tax during assessment. (Para 4.3 to ....
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....ancial 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 to improve the quality of assessments. {Para 4.9(b)} 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 prevent recurring and avoidable mistakes in computation of tax and interest. {Para 4.9(c)} Chapter 1: Introduction 1.1 Introduction Entertainment sector consists of different segments under its fold such as t....
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....d 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 coordinate within the department and with other central/state government departments to identify the probable assessees and to widen the tax base in the entertainment sector and check evasion of Income tax; b. to ascertain whether the systems, internal controls and processes are sufficient and robust to ensure effective assessment of assessees of Entertainment Sector and to check loopholes/ambiguity in the existing provisions applicable to entertainment sector; c. to assess the efficiency and effectiveness of the Assessing Office....
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....prising 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 in entertainment sector was also sought from other sources to study the department's effort to make the assessment effectively. c. Results of the audit examination were conveyed to the concerned AOs for their comments and draft review reports containing audit observations (conveyed during the period August 2017 to February 2018) were issued to the respective CCIT/CIT by the field audit offices for comments of the Income Tax Department (ITD). d. We issued draft performance audit report to the CBDT on 07 May 2018 for their comments. Post receipt of the CBDT's response 04 June 2018, we....
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....mber 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 data7 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: Number of scrutiny assessments completed and additions made under different codes of entertainment sector during the period 2013-14 to 2016-17 (Rs. in crore) Business Code No. of scrutiny assessments (FY 2013-14) Additions made in scrutiny assessments (FY 2013-14) No. of scrutiny assessments (FY 2014-15) Additions made in scrutiny assessments (FY 2014-15) No. of scrutiny assessments (FY 2015-16) Additions made in scrutiny assessments (FY 2015-16) No. of scrutiny assessments (FY 2016-17) Additions made in scrutiny assessments (FY 2016-17) 901 64 48.98 96 94.09 120 58.29 159 179.83 902 111 259.49 193 397.79 223 595.75 214 34....
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....ions 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) respectively. Further, for the purpose of efficient correlation between related assessee records and for effective cross-verification of information pertaining to assessments between personalities of film/TV industry, the ITD has created dedicated film/media assessing units. Coordination amongst various wings of the ITD and sharing of information is very important to prevent the possible leakage of revenue. Audit findings regarding coordination within the department are discussed in the succeeding paragraphs. 2.2.1 Sharing and using of information Audit noticed in 11 cases in Karnataka and Maharashtra involving tax effect of Rs. 201.96 crore that the information in respect of assessees was not shared amongst different charges of ITD at the time of completing the assessment, thereby impacting the quality of ....
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....olkata 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 data source, viz. data available with Ministry of Corporate Affairs (MCA) while completing the scrutiny assessment. Thus, both the AOs failed to ensure verification of genuineness before completion of scrutiny assessment of assessee. Had the information been shared between two assessment charges of the ITD, the unexplained amount of Rs. 579.28 crore would have been added back to the income of the assessee and amount of Rs. 187.95 crore be brought to tax. This is indicative of the fact that sharing of information between the different charges of the ITD was not effective leaving the scope of leakage of revenue. (c) Charge: PCIT-25, Mumbai Assessee: Sameer Baijnath Joshi Assessment Year: 2011-12 As per Section 50B of the Act, any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gai....
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....ions 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 section 40A(3) of the Act, where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. During the examination of cases selected for sample, we noticed in five cases in three states15 that cash transactions were conducted among related parties. However, efforts were not made by the AO to obtain the details of corresponding parties and to pass the information to the jurisdictional AOs. Two cases are illustrated below (see box 2.2). Box 2.2 Illustrations of verification of cash transactions (a) Charge: PCIT-6, Hyderabad Assessee: K. Venugopal (Proprietor of M/s KV Films) Assessment Year: 2012-13 The scrutiny assessment of the assessee was completed in March 20....
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....ere. 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 scrutiny data received from DGIT (Systems), New Delhi that from FY 2013-14 to 2016-17, 240 assessees of film and television segment (business code 901 to 905) were assessed in other charges i.e. other than film Circles/ Wards. Similar issue was also raised in C&AG Report no. 36 of 2010-1116 wherein it was reported that 140 assesses were assessed outside the film circle, and CCIT-I Mumbai had issued instructions (April 2010) to all CCsIT in Mumbai to transfer all cases related to film and television industry to the Film Circle. However, still 240 cases were found to be assessed in other charges. Similarly, in Bengaluru, 62 assessees related to film and television segment were assessed outside Film Circles17. Thus the purpose to assess the cases of Film and Television Industry with a view to mitigate risk of revenue loss by cross verifying the facts and figures of inter-related projects and assessees was not fulfilled. The respective AOs of other than film circles, should have transferred ....
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....wo 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 of tickets sold are prepared separately for each show of the movie in Form '7'19 showing gross amount received from the sale of tickets and the amount of entertainment tax and surcharge collected. Audit noticed that non verification of revenue collection figures offered by the assessees in its books of accounts with reference to collection as shown in Form '7' had resulted in short demand of Rs. 67.99 crore. The cases are illustrated below (see box 2.3). Box: 2.3 Illustrative cases of coordination with other central/state departments (a) Charge: PCIT-6, Delhi Assessee: M/s Movie Times Cineplex Pvt. Ltd. Assessment Years: 2011-12 to 2014-15 The assessee engaged in the business of running two multiplex cinemas in Delhi had offered income of Rs. 127.95 crore (exclusive of entertainment tax) in its Profit & Loss Account for AYs 2011-12 to 2014-15 from the sale of tickets. However, audit noticed from the information provided by the Entertainment Tax Department, Delhi, that the asses....
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....check of 12 cases20 in Maharashtra (Pr. CIT-16, Mumbai charge) that in none of the cases the AO had taken any initiative to verify the revenue collection with actual collection as shown in Form B. The cases illustrated above show that ITD did not liaise with other departments and it had accepted the disclosures made by assessees without any cross verification. 2.3.1.3 In Karnataka, every person running the business of amusement had to file a monthly return in Form XXIII in accordance with Section 4E read with Rule 17-A of the Karnataka Entertainment Tax Act, 1958. The monthly return included details relating to payment for admission and all complimentary tickets and passes or relating to collection of amounts and the entertainment tax paid. In Karnataka, PCIT-1, Bengaluru charge, audit noticed that an assessee, Bengaluru Leisure Pvt. Ltd., had furnished total collection from business of amusement in Form-XXIII at Rs. 3.75 crore (net of entertainment tax) during FY 2012-13 (relevant to AY 2013-14). However, the assessee had offered only Rs. 2.78 crore as income in the Profit & Loss account (P/L account) for the same FY, and thus, suppressed the income to an extent of Rs. 0.97 cro....
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.... and there is existence of exclusive film circle and film ward in four states, the ITD has not devised any system to verify the Form 52A22 received vis-à-vis CBFC data of films certified. In the absence of such cross verification, the ITD is not in a position to ascertain about number of forms 52A required to be filed by the assessees. In the subsequent chapter (para 3.7.4), we have highlighted that Form 52A had not been submitted/delayed submitted by the producers of movie for 152 movies, thereby, impacting the effective verification by the AOs with respect to expenses claimed by the assessee. The ITD needs to devise the mechanism for utilizing the information of CBFC for proper monitoring of receipt of Form 52A from the assessees. 2.4 Role of survey in strengthening/widening of tax base Sections 133A and 133B of the Income Tax Act empower the ITD to conduct surveys to gather information relating to the financial transactions of the assessee. Survey enables ITD to identify new assessees, stop filers and detect tax evasions. Information in respect of regular surveys conducted (within the selected units) in the entertainment sector during FY 2013-14 to 2016-17 was sought f....
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....s new and emerging segments in entertainment industry. The CBDT has already allotted code (in the new ITR form for AY 2018-19) to individual artists excluding authors which covers artists in all fields. Hence, no separate code for film artists is now required. In this context, it is stated that event management, an emerging segment of entertainment sector, has not been allocated separate code in the return forms notified for AY 2018-19. As regards allocating codes to film artists, audit is of the view that film artists, being high risk assessees, may be allocated separate codes for better monitoring, improved vigilance and identification of such assessees for detailed scrutiny. b. The ITD may strengthen the existing mechanism for sharing and cross- verification of needful information within the Department to ensure quality assessments. The CBDT replied (June 2018) that the suggestion is noted for improvement/enhancement. c. The CBDT may effectively coordinate with external agencies such as central/state revenue departments/authorities for cross verification of revenue collection figures disclosed by assessees in its ITRs. The CBDT replied (June 2018) that the suggestion i....
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....e by the assessee in its profit and loss account. Further, in most of the countries like United Kingdom (UK), Italy, Spain, Australia, Mauritius etc. there is an incentive scheme run by the respective Governments for film production houses with a view to promote tourism and provide employment opportunities in their respective countries. Tax treaties signed under section 90 of the Act contain mechanism under the 'exchange of information' by virtue of which AO can make request to foreign jurisdiction for verification of production cost reimbursed by Indian film producer to foreign line producers and quantum of subsidies/incentives from foreign Government under section 90 of the Act. 3.1.1 During the performance audit, out of 208 production houses in Maharashtra, we identified 28 production houses/companies for examination which were mainly engaged in production of movies. Out of these 28 production houses/companies, we test checked the records of four production companies25, whose films were shot in foreign countries during the period of coverage of audit. Out of the four, three production companies had hired/engaged the foreign line producers. Audit findings in this regard are....
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....f verification, there is a possibility of suppression of the amount of incentive/subsidy received from foreign countries by the assessees and irregular expenses on account of cost of production may be claimed by the assessees, thus putting the interest of revenue to the Government at risk. Our Performance Audit Report on 'Levy and collection of Service Tax on Entertainment Sector'29 also highlighted the issue of non-verification of transactions between Indian production house and foreign company and it was suggested that there is a need to examine the complete loop of transactions between all the parties to verify if due service tax has been levied or not. 3.2 Verification of transactions of inter-related parties and revenues earned by movie producers The film industry consists of the technological and commercial institutions of filmmaking, artists and allied service providers. Considering the involvement of multiple parties in making the movies, it is important that the information furnished by an assessee is utilized to cross-verify the correctness of the information given by another assessees having transactions with the former (related party) to avoid the evasion of ....
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....t 376 cases were assessed in the film circle in FY 2016-17 and 170 cases related to film were assessed in four central assessment charges during 2013-14 to 2016-17. Out of total 546 cases, 243 cases pertained to Individuals/HUF who were following cash30 basis of accounting, while 303 cases pertained to companies/ firms who were following mercantile31 system of accounting. Due to adoption of different accounting methods, the income from one party was being deferred and expenses of the same was claimed by another party. Considering the involvement of high risk in cases of inter-related parties of the film industry, ITD need to look at such cases with greater amount of care to ensure that undue benefit is not being availed of by the assessees. 3.2.2 In film industry, a producer is the key person who makes the profit from sale of various rights (distribution rights, satellite rights, music rights, sponsorship revenue etc.) of film produced by him. The receipts of the producer mainly come from the distributors. The producer sells the distribution rights broadly in three ways - (i) Minimum guarantee basis (ii) Outright lease and (iii) Advance and commission clause lease which relates to....
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....eemed to accrue or arise in India. Further, as per explanation 2 to Section 9(1)(vii) of the Act, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services. In Maharashtra, in the case of M/s Endemol South Africa (Proprietary) Ltd. (ESAL) for AY 2012-13, the AO34 of International Taxation had concluded that the line producer fee of Rs. 9.60 crore paid by the Indian producer35 was of the nature of technical services for managerial and technical services provided for the production and not in the nature of administrative charges. On this ground, the AO had rejected the assessee's claim of refund stating that withholding of tax @ 10 per cent by the Indian producer while making payment to ESAL was proper. This view was also sustained by the Dispute Resolution Panel (DRP) considering such payment to line producer as fees for technical services. We noticed in three other cases36 where the payment of Rs. 223.76 crore was made by Indian producers against cost of production of movies to the foreign line producers which include fees for technical services, however, no tax w....
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....milar in nature, different treatment was given by the same AO. 3.5 Absence of provision of TDS on purchase of distribution rights of movies under production In Maharashtra, PCIT-16, Mumbai Charge, audit noticed in the case of, M/s Cynergy Pictures Pvt. Ltd., that the assessee had received an advance of Rs. 2.50 crore against movies under production, viz. 'Rakhtacharitra 1' & 'Rakhtacharitra 2' in FY 2009-10 (AY 2010-11), however, tax was not deducted at source by the payer, as a result, it could not get reflected in Form 26AS39 of the assessee. The movies were released during FY 2010-11 (AY 2011-12). Audit further noticed that the assessee had not filed its Income Tax Return (ITR) for AY 2011-12 and the assessment for AY 2011-12 was completed under best judgment as per section 144 of the Act at an income at Rs. 1.65 crore. While completing the assessment, the AO had considered those receipts for taxation which were reflecting in Form 26AS and as such, amount of Rs. 2.50 crore received by the assessee had escaped levy of tax. Had tax at source been deducted on the amount of advance of Rs. 2.50 crore, the same would have come to the notice of AO through Form 26AS an....
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....e instalment of franchisee fee as revenue in nature and ITAT Bangalore in the case of GMRSPL had ordered to capitalize the entire bid amount (instead of annual instalments actually paid) and allowed depreciation @25 per cent thereon. Hence, the same expense had been treated differently at different appellate levels and as such the issue was litigated due to absence of specific provision in the Act to deal with such expenses. 3.7 Lack of mechanism for monitoring and utilization of Form 52A Section 285B was introduced42, to check inflation of expenditure by the film producers and enable the Department to get information about the recipients of payment for necessary action. Under this section, every person carrying on production of cinematograph film is required to furnish to the jurisdictional Assessing Officer a statement in Form 52A providing particulars of all payments of over Rs. 50,000 in aggregate, made by him or due from him to the persons engaged by him in the production, for each financial year or part of it, till completion of production, within 30 days from the date of completion of production or within 30 days from the end of the financial year, whichever is earlier. I....
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...."Cameraman Gangatho Rambabu" during FY 2012-13 relevant to AY 2013-14 and claimed production expenses against these movies. Audit noticed that assessee had claimed Rs. 4.59 crore as production expenses in the profit and loss account, whereas the payment shown by the assessee in Form 52A was Rs. 2.87 crore only. Thus, there was a variation of Rs. 1.72 crore between Form 52A and Profit & Loss Account. However, AO did not correlate the information furnished in Form 52A with production expenses claimed by the assessee while completing the assessment. The ITD replied (January 2018) that Form 52A reflected the payments made above Rs. 50,000 up to the date of filing while the payments made post filing of Form 52A were not reflected in the same. Further, the expenditure debited to Profit and Loss account and Form 52A were not comparable figures as both could relate to different periods of time. Merely because expenditure was not reflected in Form 52A, the same could not be disallowed. Reply of the ITD is not tenable as the columns of Form 52A included both the amounts paid and amount due as on the date of filing of Form 52A. Further, as per the ledger of the assessees, the payments wer....
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....variation in overall number of scrutiny cases finalized during financial year 2013-14 to 2016-17 ranges from 02 to 141 (Appendix-4). Mismatch in the data provided by DGIT (Systems) shows non-reliability of sector-wise data gathered in ITD. 3.9 Conclusion ⮚ There is a possibility of irregular claim of expenses by the assessee due to deficient monitoring mechanism in respect of the verification of the expenses as claimed by the Indian production houses on account of production cost payment made to the foreign line producers. ⮚ There is scope for suppression of profits by disclosing less incentive/ subsidy due to deficient monitoring mechanism in respect of verification of the incentive/subsidy received by the Indian production houses from Foreign Governments. ⮚ Inter related parties of this sector are following different accounting methods leaving the scope for deferment/escapement of income. ⮚ As per the existing provision in the Act, it is not mandatory for the producer to submit the details of revenue earned from overflow and from various movie rights. Thus, there is risk of evasion of tax due to possibility of underreporting of income by the p....
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..... changing template of Form 52A to include PAN of payees receiving payments from the movie 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 The CBDT replied (June 2018) that the format of Form 52A shall be examined and revised as per the recommendations made by the Audit. Chapter 4: Compliance issues relating to provisions of Income Tax Act 4.1 Introduction During examination of assessment records in respect of Entertainment Sector, audit noticed mistakes relating to application of provisions of the Act/Rules, escapement of income, irregular allowance of expenses and deductions, irregular claim/set off/carry forward of losses, incorrect computation of profits/tax and other issues. Audit noticed that in 592 cases the pro....
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....y made on percentage basis ranging from 5 per cent to 20 per cent. In 28 cases, additions were made in terms of amounts only. No specific justification or basis of additions was recorded by AOs in the assessment orders. This indicated that there was no consistency in making ad hoc additions by the AOs despite the fact that the grounds of additions were same and in some cases even the AOs were same. No speaking orders were made by AOs in their assessment orders to logically arrive at the different percentage of additions especially in similar issues. Further, where significant expenses were incurred, the ratio of ad hoc addition was one per cent to 2.5 per cent as compared to ad hoc addition ranging from five per cent to 50 per cent in lesser expenses claimed by assessees. Thus, assessments made by AOs were inadequate and additions made were subjective and arbitrary. 4.3 Income escaping assessment Sections 28 to 59 of the Act deal with the manner in which the income from any business, profession, capital gains and other sources have to be computed. Deductions allowable against these sources of income are required to be disallowed and added back to the income of the assessee to fu....
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....nt in the assessee company was at Rs. 34.15 crore only as on 31 March 2012 (Rs. 100 x 34,14,499 shares) which indicated that he had not paid any premium for the shares allotted to him. However, a premium of Rs. 45.42 crore was shown as received by the assessee from Manohar Prasad. Similarly, from the records of A. Ravishankar Prasad, audit noticed that that no such investment was made by him in the assessee company. However, an investment of Rs. 246.93 crore including premium (Rs. 1,000 x 24,69,295 shares) has been shown against his name. Therefore, the face value and premium of Rs. 292.35 crore (Rs. 45.42 crore + Rs. 246.93 crore) shown in the books of assessee were in nature of unexplained cash credit under section 68 of the Act and should have been added back to assessed income. The omission had resulted in short levy of tax to the tune of Rs. 118.11 crore including interest. Besides, audit noticed that the opening balance of share premium amounting to Rs. 233.77 crore was also not paid by above mentioned share- holders. Therefore, the share premium amount of Rs. 233.77 crore shown in the balance sheet for the year 2011-12 by the assessee was also required to be treated as u....
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....lted in incorrect allowance of unexplained cash credit to the extent of Rs. 14.45 crore (Rs. 6.15 crore + Rs. 8.30 crore) involving total tax effect of Rs. 4.98 crore including interest. 4.3.2 Income not offered for tax In 65 assessment cases in 14 states47 involving tax effect of Rs. 338.08 crore, we found that the ITD had not brought to tax the amount which was realized as income of the assessees under various provisions of the Act. Four cases are illustrated below (see box 4.3). Box 4.3: Illustrations of cases where income not offered for tax (a) Charge: PCIT (Central)-3, Mumbai Assessee: M/s The Board of Control for Cricket in India (BCCI) Assessment Years: 2010-11 to 2014-15 As per Rule 115 of the Income Tax Rules, the rate of exchange for the calculation of the value in rupees of any income accruing or arising to the assessee in foreign currency shall be the Telegraphic Transfer (TT) buying rate of such currency as on the date on which the tax was required to be deducted. The scrutiny assessments of the assessee for AYs 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 were completed in February 2013, December 2013, December 2013, March 2016 and December 2016 at as....
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.....08 crore escaping assessment. (d) Charge: PCIT-1, Lucknow Assessee: Ganga Dutta Upadhyaya Assessment Year: 2012-13 The scrutiny assessment was completed in March 2015 at an income of Rs. 26.92 lakh. Audit noticed that the assessee had received total income of Rs. 10.90 crore as reflected in its 26AS, however, it had accounted Rs. 7.93 crore only in the profit and loss account and claimed the entire TDS of Rs. 15.63 lakh deducted thereon. The AO did not add back the remaining amount of Rs. 2.97 crore to the income of the assessee. The omission had resulted in underassessment of income of Rs. 2.97 crore involving tax effect of Rs. 1.24 crore. 4.4 Incorrect/irregular allowance of expenses and deductions Provisions of the Act allow the assessee to claim various expenses and deductions on fulfilment of certain prescribed conditions. If these conditions were not fulfilled, the corresponding expense/deductions were required to be disallowed by the assessing officer. We noticed 179 cases involving tax effect of Rs. 826.75 crore where Incorrect/irregular allowance of expenses and deductions were made by ITD. 4.4.1 Non/short deduction or non-deposit of TDS As per Section 40(a)(i....
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....Assessee: K. Manju Assessment Years: 2007-08 to 2012-13 The scrutiny assessments for AY 2007-08 to 2012-13 were completed in March 2014 at income of Rs. 1.10 crore, Rs. 1.14 crore, Rs. 1.57 crore, Rs. 0.76 crore, Rs. 3.64 crore and Rs. 1.26 crore respectively. Audit noticed that AO, while discussing the assessment order, had disallowed the expenditure of Rs. 6.83 crore from AY 2008-09 to 2012-13, on which no tax was deducted at source. However, while computing the taxable income, the same was not added back to the income of the assessee. Further, AO had adopted the undisclosed income of the assessee at Rs. 2.23 crore instead of Rs. 6.84 crore, resulting in under assessment of income of Rs. 4.62 crore. The omissions had resulted in under assessment of income of Rs. 11.45 crore involving a tax effect of Rs. 6.09 crore. (d) Charge: PCIT, Panaji Assessee: Goa Cricket Association Assessment Years: 2009-10, 2010-11 & 2011-12 The scrutiny assessments for AYs 2009-10, 2010-11 and 2011-12 were re-opened under section 14751 wherein the claim of exemption under section 11 on the ground of non-registration of the assessee as a charitable trust as per the provisions of section 12AA ....
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....ssessee had claimed and was allowed exemption of Rs. 34.75 crore under section 11 of the Act from AY 2012-13 to AY 2014-15 although it had received subsidy of Rs. 98.02 crore from BCCI which was commercial in nature and, hence the AO should have disallowed the exemption claimed by the assessee and brought the same to tax. It is pertinent to mention that in the case of BCCI and other eight state cricket associations55, AO had considered their activities as commercial after hosting of Indian Premier League (IPL) and disallowed the exemption and taxed the subsidies received from BCCI as commercial receipts. However, in the instant case, AO had allowed the exemption to the assessee, i.e., M/s Cricket Association of Bengal despite the transaction being commercial in nature. The mistake had resulted in underassessment of income of Rs. 34.75 crore for AY 2012-13 to AY 2014-15 with consequent short levy of tax of Rs. 13.71 crore including interest. The ITD in its reply (March 2018) stated that the assessee-society is a member of the national body, Board of Control for Cricket in India (BCCI), which regulates and promotes the sport of cricket in India and the main object of the assessee-s....
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....Hence, as per provisions of Section 2(15) of the Income Tax Act, 1961 the assessee was not eligible for exemption of tax. (b) Charge: CIT-6, Hyderabad Assessee: M/s Sri Venkateswara Cine Chitra Pvt. Ltd. Assessment Year: 2013-14 The scrutiny assessment of the assessee was completed in March 2016 at nil income. The assessee had offered income of Rs. 13.86 crore and claimed production cost of Rs. 15.70 crore against the movie 'Ongole Gita' which was released on 1st February 2013. As the film was not released within 90 days before the end of the financial year, the assessee was eligible for claiming cost of production only to the extent of Rs. 13.86 crore as per the provisions of Rule 9A. However, AO allowed full expenditure of Rs. 15.70 crore on account of production cost to the assessee. The mistake had resulted in allowing excess expenditure of Rs. 1.84 crore with short levy of tax of Rs. 59.74 lakh. The ITD partially accepted audit observation (January 2018) stating that the publicity and positive prints expense of Rs. 87.65 lakh included in the production cost were otherwise allowable under section 37 of IT Act. The reply is not tenable. As per rule 9A, the cost....
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....ars. Omission to do so has resulted in underassessment of income of Rs. 24.54 crore involving cumulative tax effect of Rs. 8.16 crore in both the assessment years. 4.4.3 Expenses not allowable under various provisions of the Act Audit noticed in 81 assessment cases in 15 states56 that though the expenses were not allowable to the assessees under various provisions of the Act, the ITD had allowed the expenses leading to the short demand of Rs. 167.41 crore. Four cases are illustrated below (see box 4.6). Box 4.6: Illustrations of expenses not allowable under various provisions of the Act (a) Charge: PCIT-2, Ahmedabad Assessee: M/s Fuse Plus Media Pvt. Ltd. Assessment Year: 2011-12 The scrutiny assessment of the assessee was completed in January 2014 at an income of Rs. 6.59 crore. The assessee had debited an amount of Rs. 2.26 crore towards 'Product Development Expenses' which was capital in nature as the assessee had derived enduring benefit from it. Hence, the same was required to be capitalised. Omission had 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 conseque....
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.... at nil income. Audit noticed that the assessee had taken short term borrowing of Rs. 113.76 crore and claimed interest expense of Rs. 88.84 crore. As per Cash Flow Statement for AY 2011-12, the assessee had capitalised interest of Rs. 34.72 crore (i.e. approximately 57.81 per cent of total interest) in the books of account and claimed remaining interest expenses of Rs. 25.33 crore as revenue expenditure. Audit also noticed that the assessee had inventory i.e. Capital Work in Progress (CWIP) of Rs. 402.24 crore in the AY 2012-13 (Previous Year Rs. 555.70 crore) and also there was no change in accounting method during current year. Hence, the proportionate interest of Rs. 50.63 crore (57 per cent of the total interest of Rs. 88.84 crore) against the CWIP should have been capitalised during AY 2012-13 also. Omission had resulted in under assessment of income of Rs. 50.63 crore involving short levy of tax of Rs. 22.34 crore including 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 a....
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.... set-off against the income assessed under section 68 of the Act. Moreover, ITD has found the same issue acceptable and re-opened the case under section 148 in respect of M/s INX News Pvt. Ltd. which is illustrated below. (b) Charge: PCIT-3, Delhi Assessee: M/s INX News Private Limited Assessment Year: 2013-14 The scrutiny assessment was completed in March 2016 at nil income after setting off of brought forward losses of Rs. 36.85 crore. Audit noticed that AO had added an amount of Rs. 12.20 crore to the income of assessee on account of "Share Application Money" under section 68 treating it as bogus transfer of money. However, the AO allowed the set off of brought forward losses against the above additions made under section 68. The mistake had resulted in under assessment of income of Rs. 12.20 crore involving short levy of tax of Rs. 5.38 crore 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....
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....erest. ITD in its reply (January 2018) stated that in AY 2012-13, addition was made under section 68 of the Act on protective basis, hence set off of loss relating to AY 2012-13 was in order. Reply of the ITD is not tenable as there was no loss for AY 2012-13 to be carried forward in the subsequent years. (c) Charge: PCIT-16, Mumbai Assessee: M/s Crest Animation Studios Ltd. Assessment Year: 2011-12 The scrutiny assessment was completed in May 2015 at an income of Rs. 113.79 crore. Audit noticed that the AO had allowed the set off of business loss of Rs. 19.22 crore as against the available losses of Rs. 8.99 crore. The mistake had resulted in underassessment of Rs. 10.23 crore involving tax effect of Rs. 4.65 crore. 4.5.3 Irregular allowance of carry forward of losses Audit observed in 11 assessment cases in eight states58 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....
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....ward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on his total income and the tax which would have been payable under the provisions of section 115JB. 4.6.1 Under assessment of book profits Audit noticed in 21 cases in Gujarat, Karnataka and Maharashtra that there was mistake in computation of income under section 115JB resulting in underassessment of income and consequent short demand of tax/ interest of Rs. 87.30 crore. Three cases are illustrated below (see box 4.10). Box 4.10: Illustrations of under assessment of book profits (a) Charge: PCIT-3, 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....
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....aphs. 4.7.1 Mistakes in levy of tax/surcharge/interest Audit noticed in 29 assessment cases in 11 states59 that there was mistake in computation of tax/interest resulting in loss of revenue of Rs. 144.76 crore. Seven cases are illustrated below (see box 4.12). Box 4.12: Illustrations of mistake in levy of tax/interest (a) Charge: PCIT-16, Mumbai Assessee: M/s Star India Pvt. Ltd. Assessment Year: 2012-13 The scrutiny assessment of the assessee 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 ....
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.... in seven cases in Karnataka, Kerala and Maharashtra states that the AO had incorrectly allowed the TDS credit/relief under section 90/91 resulting in loss of revenue of Rs. 23.51 crore. One case is illustrated below (see box 4.13). Box 4.13: Illustrations of incorrect grant 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 Report60 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....
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....ent Year: 2012-13 The scrutiny assessment of the assessee was completed in March 2015 at a loss of Rs. 5.74 crore. Audit noticed that AO adopted the figure 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 ....
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....et off and carry forward 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 prevent rec....
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....right" 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 clarified that the total income of FTCs from advertisements, hitherto computed on a presumptive basis shall now be determin....
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....hers, 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 relevant financial year as licence could not be obtained from Ministry, depreciation thereon cannot be allowed. Further, where assessee could not generate....
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.... 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 47 47 Maharashtra 23 282 88 North East Region 3 22 14 Odisha 5 54 14 Punjab 11 236 29 Rajasthan 9 98 29 Tamil Nadu 18 284 80 Uttar Pradesh 11 328 43 Uttarakhand 1 48 21 West Bengal 14 150 60 Total 176 2,968 766 Basis of selection: Aggregated data was provided ....
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....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 Scrutiny Assessment of Entertainment Sector as per DGIT System 96 93 111 98 No. of Scrutiny Assessment of Entertainment Sector as per D & CR Register 152 212 187 131 Variation in number of cases 56 119 76 33 Ward 20(5), Chennai No. of Scrutiny Assessment of Entertainment Sector as per DGIT System 22 24 22 33 No. of Scrutiny Assessment of Entertainment Sector as per D & CR Register 37 45 31 60 Variation in number of cases 15 21 9 27 Abbreviations ACIT Assistant Commissioner of Income Tax Addl. CIT Additional Commissioner of Income Tax AO Assessing Officer AY Assessment Year CBDT Central Board of Direct Tax CBEC Central Board of Excise and Customs CCIT Chief Commissioner of Income Tax CIT Commissioner of Income Tax CIT (A)....
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....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/s Quality Cine Labs Pvt. Ltd. (4) M/s The Bengal Properties Pvt. Ltd. (5) M/s Fida Films and Hotels Company Pvt. Ltd. (6) M/s Shringar Films (7) Champaklal Pranlal Zaveri (8) Rahul Madhusudan Haskar (9) M/s Raksha Entertainment Pvt. Ltd. (10) M/s Rajshri Pictures Pvt. Ltd. (11) M/s Maruti International and (12) M/s Mukta Arts Ltd. 21. Copyright Act is formulated by Ministry of Commerce and Industry 22. Every person carrying on production of cinematograph film is required to furnish to the jurisdictional Assessing Officer a statement in Form 52A providing particulars of all payments of over Rs. 50,000 23. Andhra Pradesh & Telengana, Karnataka & Goa, Kerala, Maharashtra, Rajasthan and Tamilnadu 24. Bihar, Delhi, Haryana, Himachal Pradesh, J&K, Jharkhand, Madhya Pradesh, NER, Odisha, Punjab, Uttar Pradesh, Uttarakhand and West Bengal 25. M/s Yashraj Films Pvt. Ltd., M/s Sunny Sounds Pvt. Ltd. & M/s Excel Entertainment Pvt. Ltd. in PCIT-16, Mumbai and M/s Red Chillies Entertainment Pvt. Ltd....
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....ha and Tamilnadu 47. Andhra Pradesh & Telangana, Assam, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Maharashtra, Odisha, Punjab, Rajasthan, Tamilnadu and Uttar Pradesh 48. M/s Indiawin Sports Pvt. Ltd. (ISPL), M/s Knight Riders Sports Pvt. Ltd. (KRSPL) and M/s Jaipur IPL Cricket Pvt. Ltd. (JICPL) 49. Calculated by extrapolating the stamp duty paid by the purchaser @ one per cent of the value fixed as per reverse mechanism. 50. Andhra Pradesh & Telangana, Goa, Gujarat, Haryana, J&K, Karnataka, Kerala, Maharashtra, NER, Odisha, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal 51. March 2014 (AYs 2010-11 & 2011-12) and March 2016 (AY 2009-10) 52. AY 2009-10: Rs. 5.96 crore; AY 2010-11: Rs. 6.37 crore; AY 2011-12: Rs. 4.70 crore 53. 33.26 lakh for advertisement and Rs. 25.75 lakh for business promotion 54. Andhra Pradesh & Telangana, Goa, Gujarat, Haryana, Karnataka, Maharashtra, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal 55. (1) Mumbai Cricket Association (Maharashtra) (2) Rajasthan Cricket Association (Rajasthan) (3) Punjab Cricket Association (Punjab) (4) Tamil Nadu Cricket Association (Tamil Nadu) (5) Kerala Cricket Association (Kerala) (6....