1991 (4) TMI 175 - AT - Income Tax

Summary

Issues Involved:
1. Computation of disallowance under Section 37(3A) of the IT Act, 1961.
2. Classification of expenditure as capital or revenue.
3. Depreciation and classification of studio and mobile outdoor unit bus as plant.
4. Depreciation on movie lens and entitlement to extra shift allowance.
5. Taxability of film subsidy received by the assessee.

Detailed Analysis:

1. Computation of Disallowance under Section 37(3A) of the IT Act, 1961:
The assessee computed disallowance for advertisement, publicity, and publicity materials totaling Rs. 12,42,343, resulting in a disallowance of Rs. 2,28,468. The ITO included additional expenditures such as pre-release advertisement, hotel payments, and car expenses, increasing the total disallowance to Rs. 3,60,687. The appellate authority excluded certain items from the purview of Section 37(3A) as they were deemed capital in nature, reducing the disallowance.

2. Classification of Expenditure as Capital or Revenue:
The appellate authority agreed that Section 37 does not deal with capital expenditure, thus excluding pre-release advertisement, hotel payments, and production expenses for cars and jeep from Section 37(3A). The Tribunal upheld that expenditure on the cost of production up to the stage of negative films is capital in nature and outside the scope of Section 37(3A).

3. Depreciation and Classification of Studio and Mobile Outdoor Unit Bus as Plant:
The studio was argued to be a plant due to its specialized construction for film production. The Tribunal inspected the studio and concluded that the main floor, due to its unique design and functionality, qualifies as a plant, allowing higher depreciation. However, other parts of the studio were considered buildings. The mobile outdoor unit bus, despite its special fittings, was classified primarily as a motor vehicle, eligible for 30% depreciation but not for investment allowance.

4. Depreciation on Movie Lens and Entitlement to Extra Shift Allowance:
The Tribunal held that movie lenses, used for viewing 3D films, are consumable stores and not capital assets, thus deductible as revenue expenditure. Extra shift allowance on the studio building and other non-cinematographic equipment was allowed in principle, subject to verification of usage details. However, cinematographic equipment, including movie cameras, were not eligible for extra shift allowance as they fall under NESA.

5. Taxability of Film Subsidy Received by the Assessee:
The CIT(A) ruled that the film subsidy was not taxable, following the Andhra Pradesh High Court decision in CIT vs. Chitra Kalpa, which distinguished it from revenue subsidies. The Tribunal upheld this view, rejecting the Revenue's appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeal, granting relief on several counts, including the classification of certain expenditures as capital and allowing higher depreciation on specific assets. The Department's appeal was dismissed, affirming the non-taxability of the film subsidy and other favorable rulings for the assessee.