2016 (8) TMI 557 - AT - Income Tax

Treatment to cost of production of an abandoned film - revenue or capital expenditure - Held that - As the cost of film under production was in the nature of stock-in-trade as per Rule 9A of the rules, that the said item was shown in current assets in the balance sheet and amortised in the year in which the film was released, that in case if the film was abandoned or scrapped the same was allowable as a revenue expenditure which included sundry creditors. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of cost of production of an abandoned film as revenue expenditure.

Analysis:
The case involved a challenge to the order of the CIT(A)-3 by the Assessing Officer (AO) regarding the treatment of the cost of production of an abandoned film as a revenue expenditure. The AO contended that the cost of production could not be written off as an expense due to the provisions of Rule 9A of the Income Tax Rules, 1962. The AO relied on the judgment of the Bombay High Court in a specific case to argue that the cost of the film was a capital asset and the expenditure on abandoning the film should be considered capital expenditure, hence taxable.

The First Appellate Authority (FAA) ruled in favor of the assessee, citing a Tribunal decision in a similar case where it was held that the cost of an abandoned feature film could be treated as a revenue expenditure if the film was permanently abandoned. The Authorized Representative (AR) for the assessee argued that the cost of the film under production was akin to stock-in-trade, shown in current assets, and amortized upon release. The AR referenced the judgment of the Jurisdictional High Court in another case, along with Tribunal orders in relevant cases.

The Tribunal examined the arguments and referred to a previous order where a similar issue was decided in favor of the assessee. The Tribunal considered judicial pronouncements and a CBDT Circular, concluding that the written-off expenditure for an abandoned film script was allowable as revenue expenditure. The Tribunal held that Rule 9A of the IT Rules, 1962 did not apply in such cases, following the decision of the Bombay High Court and the CBDT Circular. Consequently, the appeal by the AO was dismissed based on the precedent set by the Tribunal's previous decision.

In summary, the Tribunal upheld the treatment of the cost of production of an abandoned film as revenue expenditure, following relevant judicial decisions and the CBDT Circular. The appeal by the AO challenging the treatment was dismissed, aligning with the established legal position on the matter.