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TMI Blog2022 (12) TMI 1115X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Rs. 22,86,520/-. The assessee gets the relief accordingly. 6. Ground no 1 is thus allowed. 7. In ground no 2, the assessee has raised the following grievance:- 2 The CIT(A) was not justified in confirming the action of the AO in disallowing service charges of Rs. 19,66,300 paid to the agent involved in the contract for the film Sher with film producing company. The 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. 8. So far as this disallowance is concerned, the Assessing Officer, during the course of the scrutiny assessment proceedings, made the disallowance of Rs. 19,66,300 on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esponse to this, the assessee company filed a written submission. The Ld. AO was not satisfied with the explanation of the assesseee company, therefore, he disallowed the amount of 719,66,300/- claimed as expense and added it to the total income of the assessee. 6.2.1 During the course of appellate proceedings, the appellant claimed that the film was complete and as such the expenses should be allowed. As per Rule 9A deduction for cost of production of a feature film is allowed in the previous year in which it is certified for release by the Board of Film Censors. Since in appellant's case, film was not certified for release by the Board of Film Censors, deduction of above said expense of service charges amounting to Rs. 19,66,300/- cannot be allowed. Hence, I upheld the view taken by AO in this regard and reject this ground of appeal of the assessee. Therefore, this ground of appeal is dismissed. 10. The assessee is not satisfied and is in further appeal before us. 11. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 12. We find that, as subsequent developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying interest @ 9%. The interest paid against these debentures was Rs.2.70 crores. The debentures were issued immediately after the company was incorporated and the funds were used to start the commercial operations. In the absence of these funds, the assessee would not have started the operations. On going through the above details, your goodself will also appreciate that there is no interest expenses which can be disallowed/capitalized. The interest paid during the year was towards loan taken for projects which were executed during the year and income from which has been offered to tax. 7.2. Hence, considering the above facts, on the basis of Rule 9A of the Income-tax Rules, 1962 which reads as under: (1) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4). Explanation: In this rule, (i) Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the film in so far as it does not exceed the amount realized by the film producer by exhibiting the film on a commercial basis or the amount for which the rights of exhibition are sold or, as the case may be, the aggregate of the amounts realized by the film producer by exhibiting the film and by the sale of the rights of exhibition, shall be allowed as a deduction in computing the profits and gains of such previous year; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year. 7.3. Therefore, in view of the above, since the film is not released in the year under consideration, hence the claim of assessee of interest on loan is disallowed as it falls within the preview of Rule 9A of the Income-tax Rules, 1962. The assessee has to capitalize the interest incurred in the cost of production of movie Sher . Hence, in view of the above, interest on loan works out to Rs.1,57,50,000/- (i.e. Rs.17,50,00,000/- @ 9%) is hereby disallowed as capital in nature and added back to the total income of the assessee. Penalty Proceedings u/s. 271(1)(c) of Income-tax Act, 1961 are separately initiated for furnishing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of its business, the assessee used to get films produced from contract producers for a definite budget (Price). Feature films are stock in trade of the assessee costs of which are fully deductible against the revenue generated. In this case, the assessee had hired a producer who was producing the feature film namely 'Sher' with star cast of M/s. Sanjay Dutt and Vivek Oberoi and being directed by Mr. Soham Shah and granted a trading advance of Rs. 17.50 Crores under an agreement date 22/02/2012. (Page 3-23 of Paper Book). As per terms of the agreement, the contract producer Shree Ashtvinayak Cinevision Limited (SACVL) was to produce the film Sher' and deliver to the assessee latest by the end of December, 2012. Till the film was produced and delivered, a lien in favour of the assessee was created on the under production film 'Sher' to secure the money so advanced. In case of failure of the contract producer (SACVL), the assessee was entitled to get full refund of the advance of Rs. 17.50 Crore with interest @ 21% per annum. (Para 2.1 and Para 2.5 of Agreement on page 6 of the Paper book). The A0 has disallowed 1,57,50,000 being part of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the assessee itself is considered to be a 'producer' of this Film 'Sher', no disallowance was warranted in view of Circular No. 16 dated 06/12/2015 as the film has not ultimately been released and the project has been abandoned. The assessee has lost entire amount of trading advance of Rs. 17.50 Crore and could not recover a single Rupee from the contract producer. No disallowance was therefore warranted. 18. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 19. We find that the 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 ..... 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