2021 (3) TMI 747 - HC - Income Tax

Revision u/s 263 - Tribunal relying upon section 43(2) of the Act to allow the deduction on account of expenditure towards acquisition of distribution rights without actual payment, overlooking Explanation to Rule 9B(1) of the Income Tax Rules - HELD THAT - As per Explanation to Rule 9B, the cost of acquisition means the amount paid by the film distributor to film producer under an agreement. In the case on hand, admittedly, the assessee was following mercantile system of accounting. Therefore, as per section 43(2), the paid will include what is incurred as per the method of accounting followed by the assessee for computing the income from business. The revenue has not disputed that the assessee was following the mercantile system. Therefore, the assessee was well within his right to claim the whole of the sum mentioned in agreement as part of the cost of acquisition. AO had called for the relevant agreement during the course of original assessment proceedings and the assessee also submitted the same before the AO. AO during the course of original assessment proceedings, considered the issues and gave the allowances to the assessee. Revisionary powers were invoked by the Commissioner of Income Tax based on letter of the Assessing Officer and not based on an independent assimilation of facts. The Tribunal has rightly observed that the Commissioner of Income Tax was only trying to stamp his approval to a change of opinion of the Assessing Officer. The Tribunal has rightly came to the conclusion that the original order of the Assessing Officer did not suffer from any error which was prejudicial to the interests of revenue, warranting invocation of revisionary powers vested on the Commissioner of Income Tax under section 263 - Decided in favour of assessee.

Summary

Issues Involved:
Challenging order passed by Income Tax Appellate Tribunal regarding Assessment Year 2006-2007.

Analysis:

Issue 1:
The assessee filed the return of income belatedly for the assessment year 2006-07, reporting a loss. The Assessing Officer completed the assessment under section 143(3) read with section 147, determining the total income. The Commissioner of Income Tax invoked proceedings under section 263 to examine the issue related to the claimed cost of acquisition of a film.

Issue 2:
During the revision proceedings under section 263, the Commissioner held that the Assessing Officer's order was erroneous and prejudicial to the revenue's interest. The Commissioner pointed out that the assessee had paid only a fraction of the claimed cost of acquisition of a film, and the deduction computation was not in line with Rule 9B which prescribes the amount of deduction for distribution rights of feature films.

Issue 3:
The Tribunal, in its order, noted that the assessee followed the mercantile system of accounting. It interpreted section 43(2) to allow deductions based on what is incurred as per the accounting method followed by the assessee. The Tribunal concluded that the original order of the Assessing Officer was not erroneous and did not warrant the Commissioner's revisionary powers under section 263.

Conclusion:
Upon careful consideration, the High Court found that the assessee was entitled to claim the entire amount mentioned in the agreement as part of the cost of acquisition. The Tribunal's decision was upheld, stating that the original order of the Assessing Officer was not prejudicial to the revenue's interests. Consequently, the Tax Case Appeal was dismissed in favor of the assessee, with no costs awarded.