2012 (6) TMI 322 - AT - Income Tax

Interest payable on the picture under production whether it will be allowable business expenditure u/s 36(1)(iii) and not forming a part of cost of production under Rule 9A Held that - The interest attributable to the borrowings utilized in the production of film will be added to the cost of production for being allowed under Rule 9A and the interest on borrowings used for other purposes will be allowed as a deduction for the current year u/s 36(1)(iii) no point in ignoring the applicability of Rule 9 on interest on borrowings used for the production of the film when other normal expenses otherwise allowable under other sections like 36, 37 etc are capitalized under Rule 9A - determination of the extent of actual amount of borrowing used for the purpose of production of film the matter is remitted back to the file of the AO to determine the same in favour of revenue for statistical purpose. Capital gains - Transfer of the property on the basis of joint development agreement - purview of section 2(47) r.w.s. 53A of the Transfer of Properties Act assessee contention that the assessee has received the right to receive consideration on a later date Held that - Mere accrual of the consideration received in the subsequent years does not defer the taxability of the capital gains as property was handed over in part performance under S.53A of the Transfer of Property Act, and it could not be said that the transaction was without consideration - date on which possession was handed over to the developer is relevant for determination of the year in which the capital gains are assessable to tax - the possession of the land having been handed over to the developer in the assessment year under consideration, the transfer takes place in the assessment year under consideration only, and consequently the assessee is liable to be assessed to tax in relation to the capital gains in the year under consideration itself against assessee.

Summary

Issues Involved:
1. Disallowance of interest on loans borrowed for film production under Rule 9A.
2. Taxability of capital gains on a development agreement under section 2(47) read with section 53A of the Transfer of Property Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Loans Borrowed for Film Production:

The appellant, an actor and film producer, claimed interest expenses of Rs. 37,00,359/- in the P&L account. The AO disallowed Rs. 6,86,749/- of this amount, attributing it to loans borrowed for the production of the movie "Yuvakudu," which was under production. The AO cited Rule 9A of the I.T. Rules, stating that such interest should be treated as part of the cost of production and allowed only in the year of the film's release.

The appellant argued that interest on borrowed funds for film production should be deductible under section 36(1)(iii) of the Act, regardless of whether the film was under production. The appellant supported this with numerous case laws indicating that interest is allowable as a deduction when borrowed funds are used for business purposes.

The CIT(A) agreed with the appellant, stating that Rule 9A does not prohibit the allowance of interest as a business expenditure under section 36(1)(iii). The CIT(A) emphasized that indirect costs like interest should not form part of the cost of production as they are incurred irrespective of film production.

The Revenue appealed, arguing that interest on borrowed funds should be capitalized under Rule 9A and allowed only in the year of the film's release. The Tribunal noted that while interest on borrowings used for business is generally deductible, it should be capitalized in certain circumstances, such as when it relates to an incomplete asset. The Tribunal remitted the case back to the AO to determine how much of the borrowings were used for film production and how much for other business operations. The interest attributable to film production should be added to the cost of production under Rule 9A, while interest on other borrowings should be allowed as a deduction under section 36(1)(iii).

2. Taxability of Capital Gains on a Development Agreement:

The assessee owned a plot of land and entered into a development agreement with a developer, agreeing to receive 35% of the built-up area and car park area. The AO treated this agreement as a transfer under section 2(47) read with section 53A of the Transfer of Property Act, computing capital gains based on the fair market value as per SRO records.

The assessee contended that the development agreement did not constitute a transfer as no monetary consideration was received, and the property was still under construction. The CIT(A) agreed, stating that section 53A applies only when consideration is received and possession is handed over. The CIT(A) held that the development agreement did not amount to a transfer for capital gains purposes and that the AO could consider capital gains in the year the transfer actually takes place.

The Revenue appealed, arguing that the possession of the land handed over to the developer constituted a transfer under section 2(47). The Tribunal agreed with the Revenue, citing case laws that support the view that handing over possession under a development agreement constitutes a transfer. The Tribunal held that the transfer took place in the assessment year under consideration, making the assessee liable for capital gains tax in that year.

Conclusion:

The Tribunal allowed the Revenue's appeal on the first issue for statistical purposes, directing the AO to determine the extent of borrowings used for film production. On the second issue, the Tribunal upheld the Revenue's contention, holding that the development agreement constituted a transfer for capital gains purposes. The Revenue's appeal was partly allowed.