SRK gets Tax Deduction for Securing KKR Sponsorship for Star India: ITAT Mumbai allows Appeal [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai allowed tax deduction of 10 crores to the famous actor Shah Rukh Khan for securing KKR sponsorship for Star India Pvt Ltd.

The bench comprising of Accountant Member G.S.Pannu, and Judicial Member, Amit Shukla held that he had a long-standing professional relationship with Star India and had entered into an arrangement with the Channel on a mutually agreed basis whereby loss suffered by the channel was sought to be recouped with earnings from sponsorship of assessee’s Cricket Team Kolkata Knight Riders and assessee incurred Rs. 10 crores on this behalf, since there is a nexus between impugned expenditure and purpose of business, the actor is eligible for deduction.

The factual settings of the case are that, the assessee, an Actor by profession, had declared income from profession based on the cash method of accounting. The Assessing Officer noticed that in the Income and Expenditure Account for the year under consideration, assessee had claimed an expenditure of Rs.10 crores under the head ‘Professional fees returned to Star India Private Limited’. The said amount represented payment by the assessee to Knight Riders Sports Pvt. Ltd. on behalf of Star India Private Ltd. for grant of sponsorship rights for IPL Season -2.

The assessee maintained that the amount was paid for procuring the sponsorship rights of Knight Rider Sports Pvt. Ltd. for IPL Season -2, assessee paid Rs.10 crores on behalf of the Star India Pvt. Ltd. to Knight Rider Sports Pvt. Ltd and this amount was claimed as a professional expenditure.Rejecting the plea, the AO disallowed the claim on various grounds.Further, the AO made an addition of 7 crores under the head “professional fee” on ground that brand equity of Knight Riders Sports and Star India was enhanced because of appearances by assessee, and in subsequent year, assessee had purchased shares of Knight Riders Sports, there is a certain amount of income within meaning of section 2(24)(iv) attributable to assessee’s appearance. An amount of rs. 67,20,000/= was also added to the total income of the assessee as annual value of his Dubai Villa.The first appellate authority sustained the order and therefore, the appellant approached the Tribunal on second appeal.

Adv. Hiro Rai, the counsel for the appellant submitted before the Tribunal that the actor had a long-standing professional relationship with Star India Pvt. Ltd and the Company was a major client of him from whom he earned a huge sum in the past several years including the year under consideration.On the basis of these contentions, the counsel vehemently contended that the impugned expenditure was incurred on account of sufficient commercial expediency and that it has to be examined from the point of view of a businessman and the Assessing Officer has misdirected himself.

Answering the question whether the expenditure of Rs.10 crores incurred by the assessee by way of payment to Knight Riders Sports Pvt. Ltd. for obtaining sponsorship rights in favour of Star India Pvt. Ltd. would constitute an expenditure expended wholly and exclusively for the purpose of asessee’s business or profession, the bench said that there is a subsisting professional relationship between assessee and Star India Pvt. Ltd and “the impugned arrangement has to be viewed from the prism of a Principal – client relationship.”

It was further noted that the assessee entered into an arrangement with Star India Pvt. Ltd. on a mutually agreed basis whereby the loss suffered by Star India Pvt. Ltd. was sought to be recouped with the earnings from the sponsorship of Kolkata Knight Riders Cricket Team for which assessee incurred Rs.10 crores on behalf of Star India Pvt. Ltd.

“In our considered opinion, it is not the legal necessity to spent the expenditure which is determinative of its allowability; rather, it is the existence or otherwise of commercial expediency which guides the allowability of expenditure under Section 37(1) of the Act. From the point of view of commercial expediency, it is abundantly clearly that assessee had a long-standing professional relationship with Star India Pvt. Ltd. and there is a nexus between the impugned expenditure and the purpose of business. The Ld. Representative for the assessee has rightly relied upon the judgment of Dhanrajgiri Raja Narasingiriji (supra) to contend that it was not for the Revenue to prescribe what expenditure should an assessee incur and under what circumstances. In the present case, there is no challenge to the bonafides of the expenditure incurred and, in our view, the same can be understood to have been incurred wholly and exclusively for the purposes of business within the meaning of section 37(1) of the Act.” the bench said.

Regarding the addition of 7 crores as “professional fee,” the bench found the same as not sustainable since it felt that there was no such appearance and promotions had been carried out and Assessing Officer had not able to establish as to what benefit had been obtained by assessee.

The bench pointed out that “the impugned addition of Rs. 7 crores is merely an assessment of a notional income, which is neither supported by receipt or accrual of income. It cannot be overemphasized that what is required to be assessed to income-tax is the real income and not a hypothetical or notional income.”

With regard to the addition of income from Dubai Villa, the assessee urged that the same is not taxable in India in view of the provisions of Para -1 of Article – 6 of the Double Taxation Avoidance Agreement between India and UAE.

Rejecting the contentions, the bench held that “income from the Dubai Villa is liable to be taxed in India inasmuch as the same is includible in the return of income and whatever taxes that may have been levied in the other contracting State, the credit thereof is required to be allowed as per law.”

Read the full text of the order below.

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