2022 (12) TMI 1115 - AT - Income Tax

Nature of expenses - expenses pertain to a film which may not be released - legal fees paid to the retainer advocates firm for taking care of litigation - whether expenditures were incurred for exclusively for the purpose of its routine business? - disallowance for the short reason that these? - HELD THAT - The approach is clearly erroneous because as long as it is not in dispute that the expenses are incurred wholly and exclusively for the purpose of business, as indeed is the position in this case, there is no occasion for disallowance of such expense. Whether the film is released or not, or whether it turns out to be a dud project, as in this case, is wholly irrelevant. We, therefore, uphold the plea of the assessee and direct the Assessing Officer to delete this disallowance - The assessee gets the relief accordingly. Disallowing service charges paid to the agent involved in the contract for the film Sher with film producing company - CIT(A) failed to appreciate that having failed to release the film Sher , the appellant has abandoned the said film permanently and thus the expenditure incurred in relation thereof is business loss/revenue expenditure - HELD THAT - We find that, as subsequent developments turned out, there is no dispute that the film Sher‟ was finally abandoned and it was never released. The entire expenditure incurred on the said project, including these expenses, constitute business loss and are allowable as such. We, therefore, uphold the plea of the assessee, and, accordingly, direct the Assessing Officer to delete the impugned disallowance - The assessee gets the relief accordingly. Interest expenditure paid in respect of funds borrowed in the normal course of business - HELD THAT - Only reason for impugned disallowance was that film was not released during the year, and as such interest was capitalized. However, once the film was eventually an abandoned project and was never released for public exhibition, the very basis of disallowance ceases to hold good in law. The entire project has turned out to be a dud project, and has come to an unsuccessful end. In this situation, and bearing in mind the fact that interest expenses having been incurred wholly and exclusively for the purpose of business is not in doubt anway, we deem it fit and proper to delete this disallowance as well. The assessee gets the relief accordingly.

Summary

Issues Involved:
1. Disallowance of legal fees.
2. Disallowance of service charges.
3. Disallowance of interest expenditure.

Detailed Analysis:

1. Disallowance of Legal Fees
The assessee challenged the disallowance of legal fees amounting to Rs. 2,286,520, which were paid to a retainer advocate firm for handling litigation related to the film "Sher." The Assessing Officer (AO) disallowed these expenses, stating they were not co-relatable to any income credited in the profit and loss account. The CIT(A) upheld this disallowance, reasoning that the expenses pertained to a film that might not be released. However, the Tribunal found this approach erroneous, stating that as long as the expenses were incurred wholly and exclusively for business purposes, their disallowance was unjustified. The Tribunal directed the AO to delete the disallowance, granting relief to the assessee.

2. Disallowance of Service Charges
The assessee contested the disallowance of Rs. 19,66,300 paid as service charges to Abrianna Advertising and Marketing Service Pvt. Ltd. for facilitating an agreement for the film "Sher." The AO disallowed these expenses, treating them as part of the Work in Progress (WIP) for the film, which was under production and not released. The CIT(A) confirmed the disallowance, citing Rule 9A, which allows deduction for the cost of production only in the year the film is certified for release by the Board of Film Censors. The Tribunal, however, noted that the film "Sher" was eventually abandoned and never released. It held that the entire expenditure, including the service charges, constituted a business loss and directed the AO to delete the disallowance, thus providing relief to the assessee.

3. Disallowance of Interest Expenditure
The assessee disputed the disallowance of Rs. 157,50,000 as interest expenditure on funds borrowed for the film "Sher." The AO had disallowed this interest, arguing that the funds were used for film production, which was a WIP project, and hence the interest should be capitalized as per Rule 9A. The CIT(A) upheld this view but directed the AO to recompute the disallowance based on the actual days the funds were used. The Tribunal found that since the film "Sher" was an abandoned project and never released, the basis for the disallowance did not hold. It emphasized that the interest expenses were incurred wholly and exclusively for business purposes and directed the AO to delete the disallowance, thereby granting relief to the assessee.

Conclusion
The Tribunal allowed the appeal, directing the deletion of disallowances for legal fees, service charges, and interest expenditure, recognizing these as legitimate business expenses or losses. The judgment emphasized that the nature of the expenses as business-related was not in dispute and that the eventual abandonment of the film project rendered the basis for the disallowances invalid.