2017 (3) TMI 803 - AT - Income Tax

Disallowance of interest - Held that - Keeping in view the similar stand taken by the assessee in assessment year 2005-06, a direction was given by the learned CIT(A) to the Assessing Officer to verify the exact amount of interest expenditure incurred by the assessee with respect to the residential building at Ramoji Film City and make a disallowance to that extent. In his impugned order for assessment year 2006-07, the learned CIT(A) has followed his own order for the assessment year 2005-06 and has given a similar direction to the Assessing Officer to verify the exact amount of interest expenditure claimed by the assessee with respect to the residential building at Ramoji Film City and make disallowance to that extent. We therefore, find no infirmity in the impugned order of the learned CIT(A) on this issue and upholding the same, we dismiss ground of the assessee s appeal Disallowance of the written off expenditure - Held that - In this remand report, during appeal proceeding appellant almost reiterating the submissions and enumerating the developments before the Assessing Officer on this issue, filed a letter purportedly filed by Sri Raj Kumar Santoshi, wherein it was claimed that the appellant failed to adhere to the time schedule agreed upon for making the film and in the same letter a passing remark was made by the said Santoshi The amount of ₹ 2,20, 00,000/- which was paid / was due to me as per the terms of the arrangements between us and From the contents of the above letter, apparently no conclusive finding can be made that the appellant had actually given an advance of ₹ 2.20 crores. Thus, the appellant fails on all fronts to prove the claim of even the major amount of ₹ 2.20 crores. Accordingly, I am not inclined to accept that amount of ₹ 3.20 was advanced to technicians and that the same was written off. As such, the disallowance made by the Assessing Officer is upheld Disallowance of expenditure written off during the year - Held that - As there is no doubt about that payment of the amount, we are not sure why Revenue has not accepted the same and CIT(A) doubts the same that no conclusive finding can be made. The contents of the letter is very clear that assessee has entered into an agreement for production of film Mahabharat to be directed by Shri Raj Kumar Santoshi and as a part of that, paid ₹ 2.20 Crores and incurred incidental expenditure, ultimately due to delay in start of the shooting of the picture, the project was abandoned. Since assessee has furnished evidence before the authorities, we do not find any reason to disbelieve the same. Accordingly, the ground raised by assessee with reference to expenditure of ₹ 3.20 Crores is considered allowable and AO is directed to allow the same Expenditure written-off towards production cost of feature film In the shadow of Cobra - Held that - Assessee supports the expenditure by various payments made through banks or through other concerns and the evidences were furnished before the AO in the remand. However, neither the AO nor the CIT(A) examined the same in correct perspective. However, assessee also has not furnished the complete details before us to examine whether such expenditure was incurred except that the balances are shown in the annual reports every year. This requires verification by the AO. Assessee is directed to furnish necessary evidences of production of film, persons employed or contracted, schedules of shooting etc, necessary agreements if any, in support of claim of incurring of the expenditure, if not the actual vouchers of the earlier period and AO is directed to examine and allow the claim after due verification.

Issues Involved:
1. Disallowance of interest on investment in share application money deposits.
2. Disallowance of interest on investment in residential building at Ramoji Film City.
3. Disallowance of advance to technicians written off.
4. Disallowance of expenditure incurred towards production cost of feature film "In the Shadow of Cobra."

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Investment in Share Application Money Deposits:
- The assessee contested the disallowance of ?1,04,60,798/- on the grounds that the borrowing of money and its investment in share application deposit constituted a business activity.
- The appellate tribunal noted that this issue had arisen in earlier years, and the assessee had withdrawn the ground in AY 2007-08. Consequently, the tribunal dismissed the ground as not pressed.

2. Disallowance of Interest on Investment in Residential Building at Ramoji Film City:
- The assessee argued that the investment in the residential building was out of profits and internal generation from the business units of the HUF, and there was no nexus between the investment and the borrowed funds.
- The Assessing Officer (AO) disallowed the interest attributable to the investment made in the residential building, as it was not for business purposes.
- The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, referencing a similar decision in the assessee’s case for AY 2007-08.
- The appellate tribunal noted that this issue had been consistently held against the assessee from AY 2005-06 onwards and upheld the CIT(A)’s decision, dismissing the ground.

3. Disallowance of Advance to Technicians Written Off:
- The assessee claimed an amount of ?3,20,73,859/- towards advances to technicians written off, arguing that these advances were necessary for exploring business ideas and were closely connected with the business.
- The AO disallowed the amount due to lack of proof of payment, such as receipts or vouchers.
- The CIT(A) upheld the disallowance, noting that the assessee failed to provide conclusive evidence of the payments, particularly a major amount of ?2.20 crores to a director, Sri Rajkumar Santoshi.
- The appellate tribunal, after reviewing the evidence, including a letter from Sri Rajkumar Santoshi confirming the receipt of ?2.20 crores, found the disallowance unjustified. The tribunal directed the AO to allow the expenditure of ?3.20 crores, thus allowing this ground in favor of the assessee.

4. Disallowance of Expenditure Incurred Towards Production Cost of Feature Film "In the Shadow of Cobra":
- The assessee claimed a write-off of ?10.84 crores for the production cost of the film "In the Shadow of Cobra," which was not released due to technical reasons.
- The AO disallowed the expenditure, citing lack of justification and supporting evidence.
- The CIT(A) upheld the disallowance, noting that the self-made vouchers and the bank confirmation did not conclusively prove the nature and purpose of the payments.
- The appellate tribunal found that while the expenditure on abandoned movies is generally allowable as revenue expenditure, the assessee failed to furnish complete details supporting the claim. The tribunal directed the AO to verify the necessary evidence of production, including agreements, schedules, and payments, and to allow the claim after due verification. This ground was set aside to the AO for fresh consideration.

Conclusion:
The appeal was partly allowed, with specific directions for the AO to verify and allow the claims related to the production cost of the feature film "In the Shadow of Cobra" after due verification. The disallowance of interest on investment in share application money deposits and residential building was upheld, while the disallowance of advances to technicians written off was overturned in favor of the assessee.

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