2020 (6) TMI 104 - AT - Income Tax

Loss on pictures - deduction in respect of expenditure on acquisition of distribution rights of feature films - Assessee submitted that since Sections 36 37 of the I.T. Act are general provisions under which the assessee can claim set off of losses, it is to be accordingly allowed - whether the provisions of Rules 9A and 9B are applicable to compute the cost of acquisition of a movie and not with regard to loss incurred by an assessee? - HELD THAT - Having regard to the rival contentions and Rule 9B of the I.T.Rules, we find that the assessee is not claiming the expenditure incurred on the acquisition of movies but the assessee is claiming loss due to non-recovery of advances paid. Rule 9B only provides a method of computing deduction available in respect of expenditure on acquisition of distribution rights of feature films, but does not address the sequence in which deductions are to be allowed. Rule 9B does not preclude the assessee from claiming the loss on the distribution of feature films in the year in which such loss is incurred by the assessee. We have gone through the copies of the ledger a/c of advances received and written off which are now filed as additional evidence and find that the assessee has incurred loss on the distribution of each of the films which was been claimed by the assessee during the relevant A.Y. Any debt which has become bad, can be written off as bad debt without having to establish that it has really become bad. In the case before us, the assessee has claimed to incurred Loss due to non-recovery of advances and therefore, claimed it as loss which is not impermissible under the law. However, the additional evidence filed by the assessee needs verification. Therefore, the issue is set aside to the file of AO for denovo consideration. The assessee s grounds of appeal on this issue are accordingly treated as allowed for statistical purposes. Disallowance of expenditure debited to P L A/c on the ground that it is not supported by pucca bills - AO has disallowed only 5% of the expenditure and not 20% as alleged by the assessee in its grounds of appeal. Except raising the above grounds, the assessee has not be able to establish as to why 5% disallowance is unreasonable. Therefore, the grounds against this disallowance are rejected.

Issues Involved:

1. Disallowance of loss claimed on pictures under Rule 9B vs. Section 36(1)(vii) of the Income Tax Act.
2. Ad hoc disallowance of expenditure claimed under different heads due to lack of proper vouchers.

Detailed Analysis:

1. Disallowance of Loss Claimed on Pictures:

The primary issue revolves around whether the loss claimed by the assessee on pictures should be allowed under Rule 9B of the Income Tax Rules, 1962, or under Section 36(1)(vii) of the Income Tax Act, 1961. The assessee, a company engaged in the distribution and exhibition of films, claimed a loss of ?19,16,082/- on four movies, arguing that these were bad debts under Section 36 & 37 of the I.T. Act. The Assessing Officer (AO) disallowed the claim, stating that Rule 9B, which specifies the conditions for deduction in respect of expenditure on acquisition of distribution rights of feature films, should be applied. Rule 9B dictates that if a film is exhibited for more than 90 days before the end of the previous year, the entire cost of acquisition should be allowed as a deduction in that year, and if not, the balance cost should be carried forward to the next year.

The AO noted that three movies were exhibited for more than 90 days in previous years and thus the loss should have been claimed in those years, not in A.Y 2012-13. For the fourth movie, exhibited for less than 90 days, the balance amount should be carried forward to A.Y 2013-14. The AO also found that the assessee did not declare these amounts as bad debts in their books of accounts, which is a requirement under Section 36.

The CIT(A) upheld the AO’s decision, emphasizing that specific sections/rules (Rule 9B) prevail over general sections/provisions (Section 36(1)(vii)). The assessee argued that the loss represented advances paid for picture rights that had become bad debts, and thus should be allowed under Section 36(1)(vii). The assessee cited various judicial precedents, including the Delhi High Court case of Mohan Meakins vs. CIT, to support their claim that unrecovered advances could be treated as bad debts.

The tribunal, after considering the rival contentions and Rule 9B, found that Rule 9B provides a method for computing deductions for the acquisition of distribution rights but does not preclude claiming losses due to non-recovery of advances. The tribunal referred to the Delhi High Court case of Honey Enterprises vs. CIT, which clarified that Rule 9B does not address the sequence of deductions. The tribunal concluded that the assessee’s claim of loss due to non-recovery of advances is permissible under the law but required verification of additional evidence. Thus, the issue was set aside to the AO for denovo consideration.

2. Ad Hoc Disallowance of Expenditure:

The second issue concerns the AO’s disallowance of ?5,30,747/- (1/5th of ?26,53,736/-) due to the expenditure being supported by self-made vouchers. The CIT(A) confirmed the disallowance, noting that the expenditure was supported by "kucha vouchers" and not "pucca bills." The assessee argued that the disallowance was arbitrary and unreasonable, as the expenditure was verifiable despite some vouchers being self-made due to the nature of their business.

The tribunal found that the AO disallowed only 5% of the expenditure, not 20% as alleged by the assessee. The assessee failed to establish why a 5% disallowance was unreasonable. Therefore, the tribunal rejected the grounds against this disallowance.

Conclusion:

In conclusion, the tribunal treated the assessee’s appeal as partly allowed for statistical purposes. The issue of loss claimed on pictures was remanded back to the AO for fresh consideration, while the disallowance of expenditure due to lack of proper vouchers was upheld. The order was pronounced in the open court on 2nd June 2020.

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