1991 (11) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of expenditure on an abandoned film as a trading loss.
2. Taxability of government subsidy received by the assessee.
3. Nature of expenditure on replacing a petrol engine with a diesel engine in a motor car.

Issue-wise Detailed Analysis:

1. Deduction of Expenditure on an Abandoned Film as a Trading Loss:

The primary issue revolves around whether the expenditure incurred on the incomplete film "Theeram Thedunna Thira" can be claimed as a trading loss. The assessee, engaged in the production and exhibition of cinematographic films, incurred a total expenditure of Rs. 3,47,478 on the film, which was abandoned due to the heroine's refusal to act after her marriage. The assessee claimed a trading loss of Rs. 2,64,011 after setting off the value of unused raw film stock.

The Income Tax Officer (ITO) doubted the abandonment and viewed the feature film in production as a capital asset, thus disallowing the claim under Section 37 of the IT Act. However, the Inspecting Assistant Commissioner (IAC) agreed with the assessee, recognizing the abandonment and treating the loss as a business loss, but restricted the deduction to the relevant assessment year 1980-81.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, stating that production is a continuous process, and expenses incurred over multiple years should be consolidated. The CIT(A) held that the loss should be recognized in the year the production became infructuous. The Tribunal upheld the CIT(A)'s decision, agreeing that the feature film in production is akin to work-in-progress and that the loss includes expenditure from preceding years.

2. Taxability of Government Subsidy Received by the Assessee:

The second issue concerns the taxability of the government subsidy received by the assessee. The assessee received Rs. 1,50,000 as a subsidy from the state government for three films, out of which only two were produced and released during the accounting year. The ITO considered the entire subsidy as revenue in nature and taxable.

On appeal, the CIT(A) followed the decision of the Cochin Bench (Special Bench) of the Tribunal in Excel Productions vs. ITO, which held that the subsidy related to the production of films and not to the business carried on by the assessee. Thus, the subsidy for the film "Ponnapuram Kotta," which was not produced during the year, was not taxable.

The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench's interpretation that the subsidy is related to the completion of the act of producing the film and not to the year of receipt.

3. Nature of Expenditure on Replacing a Petrol Engine with a Diesel Engine in a Motor Car:

The third issue is whether the expenditure on replacing a petrol engine with a diesel engine in one of the assessee's motor cars is capital or revenue in nature. Initially, no disallowance was made by the ITO, but during the first appeal, the ITO argued for disallowance, claiming it was capital expenditure. The CIT(A) allowed the claim, citing several decisions favoring the assessee.

The Tribunal analyzed the circumstances, noting that the replacement was a major one but did not increase the car's carrying capacity. The Tribunal rejected the Revenue's request to restore the matter to the ITO for further investigation, emphasizing that the ITO had initially allowed the expenditure as revenue and had not provided supporting materials for his later change of opinion. The Tribunal upheld the CIT(A)'s decision, recognizing the expenditure as revenue in nature.

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on all issues. The expenditure on the abandoned film was recognized as a trading loss, the subsidy for the unproduced film was not taxable, and the expenditure on the engine replacement was treated as revenue expenditure.