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2013 (11) TMI 319 - AT - Income TaxAllowability of deduction u/s 37(1) contractual liability for the services rendered The existence of the agreement between the parities has not disputed by the authorities below but the payment in question has been disallowed on the ground that no service was rendered by RCEPL and consequently it was held that the expenditure was not for the purpose of business - Held that - Production equipments are basic requirement of any film and utility/use of the equipments generally does not vary due to high or low Budget of the film. The Budget of the film mainly depends on other factors like artist who perform in the film, shooting site and subject/theme of the film etc. The authorities below have not brought on record as how the use of equipments in production of film is different in higher Budget or low Budget movies so as to result a significant variation in the hire charges expenses - Further the duration of the film remains almost same i.e. 2 30 to 3 00 hrs. - The assessee produced the confirmation of RCEPL in this respect and no finding has been given that the confirmation is false - The assessee filed the bills of transportation of equipment issued in the name of RCEPL. The genuineness of the bills is subject matter of the assessment proceedings of RCEPL. Even otherwise the AO has not given the finding that these bills are bogus - deduction allowed Decided in favor of assessee. Addition on account of wastage of 13,300 metres of negative films (raw) Held that - At the time of loading raw stock in the camera, some part in the beginning gets wasted. Similarly, some part at the end of the camera of raw stock also has to be left blank. Thus, these left out part would never be processed - One scene are shot from different angles. Out of all such angles, the one which director finds appropriate is processed. Accordingly, raw stock used for shooting of other angles is waste. c. Major part of the movie KAAL was shot in the forest area of Bangkok as well as of India. At such place, huge stock of raw films have to be maintained as this are isolated area and if there is a shortage of raw stock, the same could not be procured from the nearest area. Thus, excess stock may get damaged, if the same is not utilized in short span of time - Also weather is an important factor i.e. in foggy climate, reels of raw stock gets damaged and hence not useful for further use. If raw stock left in the camera is less than 100 metres, then the same has to be left as it is, as one bigger shot cannot be recorded in the size of les than 100 metres of stock. f. So far as proper shot as per satisfaction of director is not taken, re-takes of the same shot is taken. To that extent, raw stock used for retakes except the final one, is waste - Though the wastage in the case is higher than the normal wastage in ordinary circumstances however, keeping in view the peculiar facts as noted above the disallowance is not justified hence, deleted Decided in favor of Assessee. Ad-hoc disallowance of 25% of the expenditure towards payment to junior artists, costumes, dresses, makeup, hairdressers, dubbing, song recording, mixing, dancers, co-ordination charges and setting expenses Held that - Expenditure on these items is essential in the production of film and therefore, when the assessee has produced the bills and vouchers then there is no reason to hold that the expenditure is bogus It has been agreed with explanation of the assessee that the continuity report, call sheet and rehearsal book are the documents maintained for the purpose of shooting and not being part of the accounts book. These records are for internal management of work of shooting and once the shooting of a film is over there is no purpose to keep such a record which is otherwise not feasible A disallowance of 5% of the expenses claimed under these heads of expenses would meet the ends of justice Decided in favor of Assessee. Disallowance of expenses by the CIT(A) under Rule 9A and thereby enhanced the assessment Held that - Reliance has been placed upon the judgment in the case of Mukta Arts Pvt. Ltd. 2006 (1) TMI 170 - ITAT BOMBAY-E - Rule 9A is an outcome of exercise of power given to the Central Board of Direct Taxes under section 295(1) of the Income-tax Act, 1961. Thus it is a piece of delegated legislation and must function within the parameters fixed by Legislature by laying down the law, the policy and the standard which Legislature wants to maintain in the application and enforcement of the legislative enactment and be consistent therewith. It, therefore, follows that an ancillary channel, at any rate, cannot neither abridge rights or privileges granted by the statute itself nor confer any special benefits, rights or privileges beyond the provisions of the Act or in contradiction to the provisions of the legislative enactment because the object subordinate legislation is to carry out the statutory provisions effectively and not to neutralize or contradict them. If delegated legislation results into any such situations that would amount to legislation itself and which cannot be abdicated by the Legislature. In this view of the matter, it is not within the power of the Central Board of Direct Taxes to create a legal fiction like rule 9A in the fashion as contended by learned counsel for the assessee because this interpretation would go beyond the legislative policy enacted in the form of section 37(2), 37(2A), 37(3) etc. of the Act and make rule 9A void - The negative covenant/restricted provisions like section 37(2A) have been enacted with the object of restricting the deduction of expenditure which is otherwise allowable under section 37. It is a fact that expenditure incurred after the issue of certification by the Censor Board on account of advertisement and publicity and cost of positive prints are allowable under section 37(1) and, therefore, such expenses come within the purview of section 37(3) of the Act expenditure on and cost of positive prints has to satisfy the conditions of section 37 for allowance. Thus, there appears no reasonable basis to allow the same expenditure incurred before happening of an event i.e., up to the date of issue of certificate by the Censor Board in total without any restriction whatsoever and allow the expenditure of the same nature incurred after the issuance of certificate by the Censor Board subject to restrictive provisions of section 37 of the Act - Expenditure incurred in respect of preparation of positive prints as well as advertisement and publicity are allowable Decided in favor of Assessee.
Issues Involved:
1. Disallowance of contractual liability paid to M/s. Red Chillies Entertainment Pvt. Ltd. 2. Addition on account of wastage of negative films. 3. Ad-hoc disallowance of expenses paid to junior artists. 4. Ad-hoc disallowance of expenses incurred on costumes and dresses. 5. Ad-hoc disallowance of expenses incurred on makeup and hairdressers. 6. Ad-hoc disallowance of expenses incurred on dubbing, song recording, and mixing. 7. Ad-hoc disallowance of expenses incurred on dancers and coordination charges. 8. Ad-hoc disallowance of expenses incurred on setting expenses. 9. Enhancement of disallowance under Rule 9A for expenses incurred on positive prints and advertisement & publicity. Detailed Analysis: 1. Disallowance of Contractual Liability: The assessee claimed a deduction for a payment of Rs. 1,51,80,116/- made to M/s. Red Chillies Entertainment Pvt. Ltd. (RCEPL) under a joint production agreement for the film "KAAL". The Assessing Officer (AO) disallowed the payment, doubting the services rendered by RCEPL and considering the payment as an application of income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, questioning the use of cinematographic equipment and the genuineness of the services provided by RCEPL. The Tribunal, however, found that the agreement was genuine, services were indeed rendered by RCEPL, and the payment was made under commercial expediency. The Tribunal allowed the deduction under Section 37(1) of the Income Tax Act. 2. Addition on Account of Wastage of Negative Films: The AO made an addition of Rs. 60,00,000/- for unexplained wastage of raw film. On appeal, the CIT(A) reduced the addition to Rs. 9,64,250/- after verifying the wastage with M/s Adlabs Pvt. Ltd. The Tribunal accepted the assessee's explanation for the wastage due to the peculiar circumstances of shooting in forest areas and deleted the disallowance. 3. Ad-hoc Disallowance of Expenses Paid to Junior Artists: The AO made a 25% ad-hoc disallowance of Rs. 3,53,000/- for payments to junior artists due to the non-production of call sheets and continuity reports. The CIT(A) upheld the disallowance. The Tribunal, referencing a similar case (Yash Raj Films Pvt. Ltd. Vs ACIT), deleted the disallowance, recognizing the necessity of such expenses in film production. 4. Ad-hoc Disallowance of Expenses Incurred on Costumes and Dresses: The AO disallowed 25% of Rs. 33,69,382/- incurred on costumes and dresses, which was upheld by the CIT(A). The Tribunal reduced the disallowance to 5%, aligning with the precedent set in the Yash Raj Films case. 5. Ad-hoc Disallowance of Expenses Incurred on Makeup and Hairdressers: Similar to the above, the AO disallowed 25% of Rs. 6,50,745/- incurred on makeup and hairdressers. The CIT(A) confirmed this disallowance. The Tribunal reduced it to 5%. 6. Ad-hoc Disallowance of Expenses Incurred on Dubbing, Song Recording, and Mixing: The AO disallowed 25% of Rs. 9,62,811/- on dubbing, song recording, and mixing expenses, confirmed by the CIT(A). The Tribunal reduced the disallowance to 5%. 7. Ad-hoc Disallowance of Expenses Incurred on Dancers and Coordination Charges: The AO disallowed 25% of Rs. 13,01,594/- incurred on dancers and coordination charges, which was upheld by the CIT(A). The Tribunal reduced it to 5%. 8. Ad-hoc Disallowance of Expenses Incurred on Setting Expenses: The AO disallowed 25% of Rs. 63,44,705/- incurred on setting expenses, confirmed by the CIT(A). The Tribunal reduced the disallowance to 5%. 9. Enhancement of Disallowance under Rule 9A: The CIT(A) enhanced the disallowance by Rs. 2,67,73,568/- for expenses incurred on positive prints and advertisement & publicity under Rule 9A. The Tribunal, referencing the Hon'ble Madras High Court decision in CIT Vs Prasad Productions Pvt. Ltd., held that such expenses are allowable under Section 37 of the Income Tax Act as they are post-production expenses. The Tribunal deleted the enhanced disallowance. Penalty Appeal: The penalty levied under Section 271(1)(c) for the enhanced disallowance of advertisement and publicity expenses was deleted by the Tribunal, following the deletion of the disallowance in the quantum appeal. Conclusion: The quantum appeal was partly allowed, and the penalty appeal was fully allowed, providing significant relief to the assessee.
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