ITAT Chennai allows appeal, rejects disallowance under Section 40A(3) for cash paid as movie distributor’s agent

The Income Tax Appellate Tribunal (ITAT) in Chennai has allowed an appeal by an individual Assessee engaged in the film distribution business and also Managing Director of Kural TV Creations (P) Ltd, deleting the addition made by the Revenue under Section 40A(3). The ITAT held that Section 40A(3) is not applicable in cases where the Assessee is acting only as an agent for the distributor and collecting money from exhibitors/theater owners on behalf of distributors. In such cases, the payment made by the Assessee to various parties on behalf of the producer of the movie cannot be considered as income/expenditure of the Assessee to invoke provisions of Section 40A(3).

During the assessment proceedings for Assessment year 2012-13, the Revenue observed that the predominant component of the credits and debits to the profit and loss account relates to the sale and purchase of the rights of the movies ‘Vaanam and Osthi,’ and a substantial portion of payments were made in cash amounting to Rs. 4.73 crores. As a result, the Revenue disallowed the entire sum under Section 40A(3). The Commissioner of Income Tax (Appeals) or CIT(A) sustained the addition, noting that the Assessee’s case does not fall under the exceptions as provided under Rule 6DD of the Income Tax Rules, 1962.

However, the ITAT noted that the Assessee’s role was acting as an agent, whereby he entered into an agreement with exhibitors/theatre owners for screening the movie and collected money in cash/cheque from the said theatre owners for onward payment to Reliance Big Entertainment through Kural TV Creations. As per the tri-party agreement between Reliance Big Entertainment and the distributors (Kural TV and Balaji Real Media), the distributors are responsible for remitting Rs. 12.75 crores, one day before the theatrical release of the film.

The ITAT observed that the Assessee made cash payments to various parties on the directions of the distributor, i.e. Kural TV Creations, being its agent, to settle the accounts of various parties. The cash paid by the Assessee to various parties cannot be considered as an amount paid for the purchase of movie rights. Although the Assessee erroneously debited said amount to the profit and loss account, the settled principle of law is that entries in books of accounts will not decide the taxability of any income, and what’s relevant is to see the nature of income and its taxability.

The ITAT stated that although the provisions of Section 40A(3) deal with the disallowance of cash payment in excess of the prescribed limit, the proviso provided therein carves out an exception as to the consideration of business expediency and other relevant factors. The ITAT accepted the Assessee’s argument that unless the accounts of various persons, including technicians of the movie, were settled, it is impossible to release the movie on the specified date for the public audience. Thus, there was a business expediency in settling the accounts of various parties.

The ITAT also opined that the genuineness of these payments cannot be doubted since it is supported by necessary evidence, including necessary bank statements evidencing payments made to Reliance Big Entertainment. The ITAT relied on a Delhi ITAT ruling in Geo Connect, wherein it was held that where the genuineness of the payment made was not doubted, and the recipient of the amount made a pre-condition for payment in cash and further, due to business expediency, the Assessee had to make payment in cash, said payment cannot be disallowed under Section 40A(3).

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