2012 (11) TMI 461 - AT - Income Tax

Validity of order passed u/s 263 by CIT(A) - sale of theatrical rights - DR submitted that CIT(A) had not considered the applicability of Rule 9A - Held that - It is evident from the order of the CIT(A) that the claim of cost of production of film was a subject matter of appeal before the CIT(A) and CIT(A) after consideration of remand report of the AO gave his finding. Therefore, this order of the AO, undisputedly had merged with the order of the CIT(A) as far as the claim of cost of production of film is concerned. AO specifically stated in the remand report to make working of deduction allowable u/r 9A of I.T. Rules. Further, also observed from para-10 of the assessment order that the AO called for the details from the assessee by issuing notice u/s 142(1) dated 18-12-2009 to furnish details of cost of production allowable as per Rule 9A of Rs. 27.19 crores. As mentioned hereinabove, the AO after considering the reply filed by the assessee vide letter dated 29-12-2009 as mentioned by the AO considered the claim of the assessee to the extent of Rs. 24,84,37,124/- and disallowed the balance amount of Rs. 2,34,91,380/-. Therefore, it is not factually correct that the AO at the time of making the assessment did not consider the applicability of Rule 9A vis-a-vis claim of the assessee on cost of production of film. CIT in his revisional proceedings cannot travel beyond reasons given by him for revision in show cause notice issued u/s 263. CIT has not exercised his revisional jurisdiction u/s 263 in respect of allowability of claim of production of film in the context of Rule 9A of I.T. Rules validly as the assessment order on this issue had already been merged with the order of CIT(A) dated 12-10-2011 much before issue of show cause notice dated 19-3-2012 to assume jurisdiction u/s 263 therefore, that the order of ld. CIT dated 29-3-2012 is liable to be vacated - in favour of assessee.

Issues Involved:
1. Validity of the order passed under Section 263 of the Income-tax Act.
2. Applicability of Rule 9A of the Income-tax Rules.
3. Merger of the assessment order with the order of the CIT(A).
4. Jurisdiction of the CIT under Section 263 when the issue has been considered by the CIT(A).
5. Scope of the CIT's revisional jurisdiction under Section 263.
6. Directions beyond the show cause notice issued under Section 263.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed Under Section 263 of the Income-tax Act:
The appeal was filed against the order passed by the CIT under Section 263 of the Act, which was challenged on the grounds of being erroneous and prejudicial to the interests of the revenue. The CIT had issued a show cause notice stating that the assessee claimed expenses on the production of the film "Darna Zaroori Hai," which were not allowable as per Rule 9A since the film was released in the subsequent year. The CIT concluded that the AO had not properly examined the facts and allowed the expenses erroneously, making the order prejudicial to the revenue.

2. Applicability of Rule 9A of the Income-tax Rules:
The CIT argued that the expenses claimed by the assessee for the production of the film were not allowable under Rule 9A since the film was released in the subsequent year. The assessee contended that it had sold its share of theatrical rights before the release, and as such, the entire cost of production was allowable as expenses in the current year. The AO had examined the allowability of the expenses during the assessment proceedings and allowed the claim after proper application of mind.

3. Merger of the Assessment Order with the Order of the CIT(A):
The assessee argued that the assessment order had merged with the order of the CIT(A), who had considered the claim of cost of production and given a finding on the issue. The CIT(A) had reduced the disallowance made by the AO after examining the details and remand report. Therefore, the CIT could not revise the assessment order under Section 263 on the same issue.

4. Jurisdiction of the CIT Under Section 263 When the Issue Has Been Considered by the CIT(A):
The Tribunal observed that the CIT(A) had considered the applicability of Rule 9A while allowing the cost of production of the film. The AO had also examined the issue during the assessment proceedings. Since the issue had been considered by the CIT(A), the assessment order had merged with the order of the CIT(A), and the CIT could not exercise jurisdiction under Section 263 on the same issue. This was supported by the Explanation (c) to Section 263(1) and various judicial precedents.

5. Scope of the CIT's Revisional Jurisdiction Under Section 263:
The Tribunal emphasized that the CIT's revisional jurisdiction under Section 263 is limited to correcting orders that are erroneous and prejudicial to the interests of the revenue. The CIT cannot invoke Section 263 to correct every mistake or error committed by the AO. If the AO has made an enquiry and allowed the claim after proper application of mind, the decision cannot be held to be erroneous simply because the CIT has a different view.

6. Directions Beyond the Show Cause Notice Issued Under Section 263:
The CIT had given directions to the AO to examine whether the assessee sold its share of theatrical rights and whether the revenue received from M/s Sahara was taxable in the current year. The assessee contended that these issues were outside the show cause notice issued under Section 263 and could not form the basis of revision. The Tribunal agreed with the assessee, stating that the CIT could not travel beyond the reasons given in the show cause notice.

Conclusion:
The Tribunal held that the CIT could not exercise revisional jurisdiction under Section 263 since the assessment order had merged with the order of the CIT(A) on the issue of cost of production of the film. The CIT's directions beyond the show cause notice were also invalid. Consequently, the order of the CIT under Section 263 was quashed, and the appeal of the assessee was allowed.

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