2019 (3) TMI 1271 - HC - Income Tax

Allowable expense u/s 37(1) - Advertising and Publicity expenses - Deduction in respect of expenditure on production of feature films - whether expenses were not part of cost of production as per Rule 9A of Income Tax Rules, 1962 and provisions of Section 37(1)? - HELD THAT - The cost of print and the cost of publicity and advertisement (which was incurred after the production and certification of the film by the Censor Board) are under consideration. These costs, we fail to see how can satisfy the description expenditure in respect of cost of production of feature film . We may recall term cost or production defined for the purpose of this rule specifically excludes the expenditure for positive print and cost of advertisement incurred after certification by the Board of Film Censors. What would therefore, be governed by the formula provided under Rule 9A is the cost of production minus these costs. The legislature never intended that those costs which are in the nature of business expenditure but are not governed by Rule 9A due to the definition of cost of production are not to be granted as business expenditure. In other words, if the cost is cost of production of the feature film, it would be governed by Rule 9A. If it is not it would be governed by the provisions of the Act. The Commissioner was, therefore, wholly wrong in holding that the expenditures in question were covered under Rule 9A of the Rules and therefore, not allowable. The Tribunal was correct in coming to the conclusion that such expenditure did not fall within the purview of Rule 9A and therefore, the assessee s claim of deduction was governed by Section 37 of the Act. Any expenditure in connection with the preparation of the positive prints for the purpose of exhibition would really be a post production expenditure and item of expenditure in relation to the business of production and exhibition of films and therefore, would qualify for deduction as expenditure laid out wholly and exclusively for the purpose of business. See CIT Vs. Prasad Productions P. Ltd. 1989 (1) TMI 38 - MADRAS HIGH COURT . - decided in favour of assessee.

Summary

Issues Involved:
1. Allowability of expenditure on positive prints and advertisement expenses under Rule 9A of the Income Tax Rules.
2. Applicability of Section 37 of the Income Tax Act, 1961 for such expenditures.

Detailed Analysis:

Issue 1: Allowability of Expenditure under Rule 9A
The core issue revolves around whether the expenditures on positive prints and advertisement expenses incurred after the certification of the film by the Censor Board can be allowed as deductions under Rule 9A of the Income Tax Rules. The Commissioner of Appeals disallowed the expenditure based on Rule 9A, which excludes costs for positive prints and post-certification advertisement from the "cost of production" of a feature film. This interpretation was upheld by the Assessing Officer but challenged by the Tribunal.

Key Judgment Extract:
"Clause (ii) of Explanation to sub-rule (1) explains the term 'cost of production' in relation to feature film as to mean expenditure incurred for preparation of the film but excluding (a) expenditure incurred in preparing positive prints and (b) expenditure incurred in connection with advertisement of the film after it is certified for release by the Board of Film Censors."

The High Court clarified that Rule 9A specifically excludes these expenditures from the cost of production. Therefore, these costs cannot be governed by Rule 9A and should be considered under other provisions of the Act.

Conclusion:
"These costs, we fail to see how can satisfy the description 'expenditure in respect of cost of production of feature film'."

Issue 2: Applicability of Section 37 of the Income Tax Act
The Tribunal allowed the assessee's appeal by ruling that the expenditures in question should be considered under Section 37 of the Act, which allows deductions for business expenditures not covered by specific provisions like Rule 9A. The Revenue argued that the expenditures should be disallowed under Rule 9A, but the High Court held that if Rule 9A does not apply, Section 37 should govern the deductions.

Key Judgment Extract:
"If a certain expenditure is claimed by the assessee by way of business expenditure, which does not form part of cost of production of a feature film, Rule 9A would have no applicability. In such a situation, the assessee's claim of expenditure would be governed by the provisions of the Act."

The High Court emphasized that the expenditures, although not included in the cost of production under Rule 9A, are still legitimate business expenses under Section 37.

Conclusion:
"The Tribunal was correct in coming to the conclusion that such expenditure did not fall within the purview of Rule 9A and therefore, the assessee's claim of deduction was governed by Section 37 of the Act."

Final Judgment:
The High Court dismissed the appeals filed by the Revenue, affirming the Tribunal's decision to allow the expenditures as deductions under Section 37 of the Act. The questions framed in the respective appeals were answered against the Revenue and in favor of the assessee.

Key Judgment Extract:
"Under these circumstances, questions framed in the respective appeals are answered against the Revenue and in favour of the assessee. Both the appeals are dismissed."

The judgment underscores the distinction between the cost of production under Rule 9A and allowable business expenses under Section 37, providing clarity on the treatment of post-certification advertisement and positive print costs in the film production business.