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TMI Blog2013 (11) TMI 1336X X X X Extracts X X X X X X X X Extracts X X X X ..... of two films and could not be utilized for any other project - Order passed by AO was erroneous and prejudicial to the interest of revenue as he accepted the explanation of assessee that the loans were of general purpose loans without any examination and application of mind - The interest on borrowings which had been specifically taken for the production of two films has to be considered as part of cost of production in view of definition of cost of production given in the Explanation to Rule 9A. Therefore allowing the interest as deduction even though the films were not released during the year was erroneous and prejudicial to the interest of revenue – CIT has correctly applied section 263 of Income Tax Act – Decided against the Assessee. Mandatory application of Rule 9A – Held that:- Rule 9A is the rule framed by the board for computation of income from exhibition of feature films - Such rules framed by the board are binding on the authorities below and therefore it could not be said that such rules are not to be followed mandatorily – As per Hon'ble Supreme Court in case of Joseph Valakuzhy [2008 (5) TMI 3 - Supreme court], it has been held that such rules framed by the boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dichha Chitra v. CIT [1991] 189 ITR 774. The said judgment had been approved by Hon'ble Supreme Court in case of Sahney Steel Press Works Ltd. v. CIT (228 ITD 253). CIT also noted that the balance-sheet for assessment year 2007-08 had shown stock of Rs. 6256700 on account of certain films which had not been released during the year. However the said stock was not reflected in the closing stock appearing in the P L Account. CIT therefore issued show cause notice to the assessee asking him to explain as to why the assessment order should not be treated as erroneous and prejudicial to the interest of revenue. 3. The assessee submitted that the issue regarding allowability of deduction on account of interest had been specifically examined by the AO on which specific queries had also been raised and replied by the assessee vide letter dated 11.11.2009. The AO had therefore allowed the claim after examination and after application of mind and, therefore, such order could not be considered as erroneous and prejudicial to the interest of the revenue. The assessee also submitted that judgment of Hon'ble High Court of Bombay in case of Sadichha Chitra (supra) and the judgment of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letters of intent relating to the production of two movies. These conditions included a separate laboratory agreement for film processing with undertaking that no print of the film could be released to any firm or company unless authorized by the bank in writing and physical progress of production was to be intimated to the bank from time to time and work was to be carried out in accordance with the time schedule. Thus the loans were specifically sanctioned for the production of films and it was not correct on part of the assessee to state that these were general purpose loans. Thus the AO had taken the view based on wrong facts without any examination. CIT also observed that Hon'ble High Court of Bombay in case of Sadichha Chitra (supra) had held that subsidy received by producer for production of film was of capital nature as the film brought into existence a capital asset. Thus the High Court had clearly held that film was a capital asset and if it was not so it would not have been held that receipt was of capital in nature. 5. CIT further observed that Hon'ble Supreme Court in case of Sahney Steel Press Works Ltd. (supra) had specifically approved the judgment of Hon'ble Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal before tribunal. 7. Before us, the learned AR for the assessee reiterated the submissions made before lower authorities that film was an item of stock in trade as held by Hon'ble High Court of Bombay in case of Mukta Arts (P.) Ltd (supra) and the same had been duly reflected in the balance-sheet. It was thus argued that interest was allowable as deduction u/s 36(1) (III) as the borrowings were made for the purpose of business. It was also submitted that even if the film was a capital asset interest on borrowed funds have to be allowed irrespective of the fact that whether the borrowings were for the purpose of revenue expenditure or for acquisition of a capital asset. The reliance for the proposition was placed on the judgment of Hon'ble High Court of Bombay in case of CIT v. Lokhandwala Construction ndustrial Ltd. ( 260 ITR579). The Learned AR also referred to judgment of Hon'ble High Court of Bombay in case of CIT v. DK Kondke (192 ITD 128)in which it was held that the film making was a manufacturing process and therefore it was argued that interest on money borrowed for manufacturing activity was allowable as deduction. Reference was also made to the decision of tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas the letter of intent from the bank clearly showed that the loans were specifically for production of two films and could not be used for any other project. The loan was also secured as first charge on the negatives of the films and also as first charge on all receivable from the films. It was thus pointed out that the AO had completed the assessment without any examination and without any application of mind and therefore the assessment order was erroneous which had caused prejudice to the interest of revenue. As regards applicability of Rule 9A. it was submitted that the said rules had been challenged before Karnataka High Court which had upheld the constitutional validity of Rule 9A as in V. Verghese v. Dy. CIT (No. 2) [1994] 210 ITR 526 (Kar.). It was thus, argued that income from the feature film had to be computed under Rule 9A. He also placed reliance on the judgment of Hon'ble Supreme Court in case of CIT v. Joseph Valakuzhy (302 ITR190) in the support of the argument that Rule 9A was mandatory. In that case, it was pointed out, that the film had not been exhibited for more than 180 days. The issue therefore was whether section 80 and 139 would apply for carry forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue. It is a settled legal position that for application of section 263, it is necessary that both the conditions i.e. the order being erroneous and also being prejudicial to the interest of revenue be satisfied. Further a stereo type order passed by Assessing Officer without conducting any enquiry, which is called for on the facts of the case is erroneous which causes prejudice to the interest of revenue as held by Hon'ble Supreme Court in case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84. The same view was followed by the Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323. Following the said judgment Hon'ble High Court of Delhi in case of Gee Vee enterprises v. Addl. CIT [1975] 99 ITR 375 have held that an order is erroneous not only because it contains some apparent error of reasoning or of law or of fact in the face of it but also because it is a stereo type order which simply accepts what the assessee has stated and fails to make enquiries which are called for on the facts and in the circumstances of the case. It is also a settled legal position as held by Hon'ble Supreme Court in case of Malabar Industrial Co. Ltd. that an order based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore clear from these details that the foreign currency loan had been taken specifically for the production of two films and could not be utilized for any other project. 12. The income from exhibition of feature films is required to be computed as per rule 9A which provides that in computing income from production of feature films, deduction on account of cost of production has to be allowed in accordance with rule 9A (2) to 9A (4). The cost of production has been defined in the Explanation to rule 9A as per which it means the expenditure incurred on production of film not being expenditure incurred for the preparation of the positive prints of the films and expenditure incurred in connection with the advertisement of the film after it is certified for release by the board of film censor. Sub Rule (2) and Sub Rule (3) of Rule 9A contains, provisions for deduction on account of cost of production. The sub rule (3) provides that in case the film has not been released for exhibition on commercial basis at least 90 days before end of such previous year, the cost of production of film in so far as it does not exceed the amount realized by the producer by exhibiting the film on a comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd applicability of the provisions of rule 9A and its correct application. Rule 9A is the rule framed by the board for computation of income from exhibition of feature films. Such rules framed by the board are binding on the authorities below and therefore it could not be said that such rules are not to be followed mandatorily. The decision of tribunal in case of Ram Bohra (supra) is a very old decision relating to assessment year 1976-77 delivered on the facts of that case. The constitutional validity of rule 9A had been challenged before the Honorable High Court of Karnataka in case of V. Verghese (supra) in which it was held that rule 9A which lays down method of deduction of cost while computing income from feature film was legally valid. Only certain stipulations that existed prior to 2.4.86 relating to production of regional films had been found to be invalid. Thus the rule which was found constitutionally valid has to be followed while computing the income. Further, whether the rule is mandatory or not is also clear from the judgment of Hon'ble Supreme Court in case of Joseph Valakuzhy (supra) in which case the feature film had not been exhibited for more than the specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which related to claim of deduction u/s 80 IA etc, are not relevant to the controversy arising in the present case. The issue is not regarding allowability of deduction u/s 80 IA, etc. from the income earned from the film. But the issue is regarding the method of computation of income. The claim of deduction arisen only for computation of income. These judgments therefore, are of no help to the assessee. It has also been argued that the interest if not allowed this year would have been allowed next year when the rate of tax was the same and therefore, there was no prejudice caused to the interest of revenue. This argument is also not valid as even if the rate of interest was same, taxes have to be paid in the correct year and paying the tax one year later would definitely result into loss of revenue on account of interest loss by the government. These aspects had not been brought to the notice of Hon'ble High Court of Delhi in case of Triveni Engg. Industries Ltd.(supra) on which the learned AR for the assessee has relied. The reliance placed by the learned AR on the judgment of Hon'ble High Court of Gujarat in case of Bhanumati Sons Trust (supra) is also misplaced. In that c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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