2014 (9) TMI 940 - AT - Income Tax

Set-off of losses - Disallowance of expenditure related to production of films - Not covered under cost of production as defined under the provisions of rule 9A of the Income-tax Rules, 1962 - Held that - It was agreed by CIT (A) that as per rule 9A, assessee had correctly carried forward loss of ₹ 2,09,98,862 to the next previous year, i.e., financial year 2008-09 (assessment year 2009-10). I also agree with the contentions of the appellant that as per section 70, it was entitled to set off loss of any source against income from any other source under the same head and the appellant was correct in set off of balance loss of ₹ 87,46,787 of P-6 against the profit of film 'Chandamama' (P-5) of ₹ 51,00,888. Hence, CIT(A) does not dispute the fact that the assessee is eligible to set-off of loss. Disallowance of expenditure related to production of films - The Commissioner of Income-tax (Appeals) may be correct in holding that expenditure towards positive prints and advertisement cannot be considered towards cost of production as per rule 9A, he has failed to examine the assessee's claim under section 37(1) of the Act. In this context, it is to be noted that the hon'ble Madras High Court in the case of Prasad Productions P. Ltd. 1989 (1) TMI 38 - MADRAS High Court has held that even if expenditure relating to positive prints, etc., is not allowable under rule 9A, but, the same can be allowed under section 37(1) of the Act, as it is incurred in connection with the business. It is not disputed either by the Assessing Officer or by the Commissioner of Income-tax (Appeals) that the assessee has incurred the expenditure in connection with the business of production of film. Therefore, applying the ratio laid down by the hon'ble Madras High Court as well as the decisions of the Tribunal, we allow the assessee's claim that the expenditure incurred is to be allowed under section 37 of the Act, even though it may not be allowable under rule 9A. Further, the assessee is also eligible to set off the expenditure incurred against profit of P-5 under section 70(1) of the Act. Accordingly, we allow the grounds raised by the assessee and direct the Assessing Officer to delete the additions made. - Decided in favour of assessee.

Summary

Issues Involved:
1. Allowability of expenditure incurred in the production of films as revenue expenditure under Rule 9A of the Income-tax Rules, 1962.
2. Set off of loss of one film against the profit of another film under Section 70(1) of the Income-tax Act.
3. Disallowance of certain expenditures without affording an opportunity of being heard.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure as Revenue Expenditure under Rule 9A:
The assessee, a partnership firm engaged in the production and sale of feature films, filed its return of income declaring a loss for the assessment year 2008-09. The Assessing Officer (AO) observed that the assessee produced two films during the relevant year and incurred losses on one film (P-6), which was released within 90 days from the end of the relevant previous year. According to Rule 9A of the Income-tax Rules, losses from such films should be carried forward to the next year. The AO disallowed the set off of the loss of P-6 against the profit of another film (P-5) produced by the assessee, determining the income at Rs. 51,00,888.

The Commissioner of Income-tax (Appeals) (CIT(A)) agreed with the AO that the expenditure towards positive prints and advertisement cannot be considered as part of the cost of production under Rule 9A. The CIT(A) disallowed an amount of Rs. 83,83,593 out of the expenditure claimed by the assessee, allowing only Rs. 1,80,100. However, the CIT(A) acknowledged that the assessee correctly carried forward the loss of Rs. 2,09,98,862 to the next assessment year.

2. Set Off of Loss under Section 70(1):
The assessee contended that as per Section 70(1) of the Income-tax Act, it is eligible to set off the loss of one film against the profit of another film under the same head. The CIT(A) initially agreed with this contention but disallowed the set off of certain expenditures based on Rule 9A.

The Tribunal noted that the CIT(A) did not dispute the eligibility of the assessee to set off the loss of Rs. 87,46,786 of P-6 against the profit of P-5 amounting to Rs. 51,00,888. The Tribunal referred to the Madras High Court decision in CIT v. Prasad Productions P. Ltd. [1989] 179 ITR 147 (Mad), which held that even if certain expenditures are not allowable under Rule 9A, they can be allowed under Section 37(1) of the Act as business expenditures. The Tribunal concluded that the assessee is eligible to set off the expenditure incurred against the profit of P-5 under Section 70(1).

3. Disallowance without Opportunity of Being Heard:
The assessee raised a ground that the CIT(A) confirmed the disallowances on a different ground without affording an opportunity of being heard. The Tribunal did not specifically address this issue in detail but focused on the substantive grounds related to the allowability of expenditures and set off of losses.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to delete the additions made. The Tribunal held that the expenditures incurred by the assessee, even if not allowable under Rule 9A, are allowable under Section 37(1) of the Act as business expenditures. Additionally, the assessee is eligible to set off the expenditure incurred against the profit of P-5 under Section 70(1) of the Act. The appeal was pronounced in the open court on September 16, 2014.