2013 (12) TMI 598 - AT - Income Tax

Whether expenses on abandoned film are allowable as deduction or not - Held that - Following Alembic Chemical Works Co. Ltd. vs. CIT 1989 (3) TMI 5 - SUPREME Court - A feature film is only a stock-in-trade of his business for a film producer - Where not released for exhibition, i.e., 'sold' directly or indirectly, the same is to be necessarily carried over as such - Where the film for some reason cannot be completed and the project is shelved it cannot be reharded as a capital asset - The value of the film declines considerably within a short period of its release - The only condition to which this would be subject is of the said suspension of work being not temporary, so that there is in fact no loss of value, of which though there is no indication in the present case - The loss ensuing thus would only be the loss for the year of its incurrence, i.e., the year in which the film project is abandoned - Decided against Revenue.

Issues Involved:
1. Maintainability of disallowance of expenditure for an abandoned film project.
2. Determination of whether the cost of an abandoned film is a capital or revenue expenditure.
3. Applicability of Rule 9A of the Income Tax Rules, 1962.
4. Consideration of relevant judicial precedents and their binding nature.

Issue-wise Detailed Analysis:

1. Maintainability of Disallowance of Expenditure for an Abandoned Film Project:
The primary issue in the appeal is whether the disallowance of Rs.88,31,000/- related to an abandoned film project by the assessee, who is in the business of producing feature films and television programs, is maintainable. The Assessing Officer (AO) disallowed the expenditure, treating the feature film as a capital asset in the hands of the producer, thereby considering the loss on abandonment as a capital loss, not a revenue loss. This decision was based on the jurisdictional High Court ruling in Sadicha Chitra vs. CIT, which held a feature film as a capital asset for the producer.

2. Determination of Whether the Cost of an Abandoned Film is a Capital or Revenue Expenditure:
The assessee argued that the film should be treated as stock-in-trade and, thus, the expenditure on its abandonment should be considered a revenue expenditure. The CIT(A) accepted this view, referencing multiple tribunal decisions that treated the cost of an abandoned film as a revenue loss. The CIT(A) distinguished the Sadicha Chitra case by stating that the observations regarding a feature film being a capital asset were obiter dicta, not the primary issue in that case.

3. Applicability of Rule 9A of the Income Tax Rules, 1962:
Rule 9A prescribes the manner of computing profits and gains from the business of film production. It allows the deduction of production costs when the film is exhibited or sold, provided it is released for at least 90 days in the relevant year. If the period is less than 90 days, the deduction is limited to the sums realized, with the balance carried forward to the next year. The rule treats the film as a commodity, with its cost recoverable within a short period. The tribunal found that post-1.4.1987, a feature film should be treated similarly to other manufactured goods, with its cost deductible as a business expenditure upon abandonment, provided the abandonment is not temporary.

4. Consideration of Relevant Judicial Precedents and Their Binding Nature:
The tribunal examined the decision in Sadicha Chitra, which held a feature film as a capital asset, and found it relevant. However, the tribunal also noted that subsequent decisions by the jurisdictional High Court, including in the assessee's own case, were based on concessions and did not establish a binding precedent. The tribunal emphasized that the correct legal position, not the parties' view, is what matters. The tribunal concluded that the cost of an abandoned film project should be treated as a revenue expenditure, as it is consistent with Rule 9A and the general principles of commercial accounting.

Conclusion:
The tribunal dismissed both the Revenue's appeal and the Assessee's Cross Objection. It held that the cost of an abandoned film project is a revenue expenditure and deductible as a business loss in the year of abandonment, provided the abandonment is not temporary. The tribunal found no merit in the Revenue's case and declared the assessee's alternate contention as infructuous. The order was pronounced in the open court on December 11, 2013.

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