9911796707
TMI Blog2006 (1) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... ficate by Censor Board in total without any restriction whatsoever and allow the expenditure of same nature incurred after the issuance of Certificate by Censor Board subject to restrictive provisions of section 37 of the Act. This view can further be substantiated by the fact that the Legislature has not given overriding effect to Rule 9A by not framing the said Rule as Notwithstanding anything contained in any provisions of the Act and/or any other Rule of Income-tax Rules, 1962. Further, there is also no commercial/business necessity, attached to film production which may justify the exemption to film producers from the applicability of provisions of section 37(2A) and or section 37(3) in respect of expenditure forming part of cost of production as per Rule 9A. Thus, we are of the considered opinion that the revenue authorities are justified in holding that the provisions of the Act would be applicable in respect of expenditure deductible under rule 9A of the Income-tax Rules. Determination of quantum of entertainment expenses out of cost of production - We are also of the considered opinion that work place in such type of activities cannot be confined to fixed locations. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Accountant Member. 1. This appeal, filed by the assessee, is directed against the order of CIT(A) Cent. V at Mumbai dated 4-6-1996 for assessment year 1992-93 in the matter of assessment under section 143(3) of the Income-tax Act, 1961. 2. We have heard both the parties and have also perused the materials placed on record and applicable legal position. 3. The assessee has raised following effective grounds in this appeal:- "1. The learned CIT (Appeals) has erred in coming to conclusion that Rs. 20,10,373 and Rs. 9,48,475 being the expenses incurred during the production of the film for lodging/boarding, Muhurat expo etc. travelling expenses and claimed as cost of production and claimed as deduction under rule 9A is not deductible and the total amount spent is subject to disallowance under section 37(2A) and rule 6D for the reasons stated in his order. 2. The learned CIT has erred in confirming disallowance or Rs. 2,05,778 out of repairs expenses for the reasons stated in his order. 3. The learned CIT(A) has erred in confirming the disallowance of joint venture of Rs. 5,13,946 as claimed by the assessee and has further erred in confirming the addition of profit of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession" and, therefore, the allowability of the expenditure had to be examined with reference to the provisions contained therein. The Assessing Officer further relied on the decision of the Tribunal in the case of Rajshree Production (P.) Ltd. [IT Appeal No. 1081 (Bom.) of 1989J wherein the Tribunal categorically held that Rule 9A did not override the provisions of section 37(1) and since this decision was rendered later, therefore, the earlier decision of Tribunal in the case of K.R. Films (P.) Ltd. was no longer valid. The assessee, aggrieved by the decision of the Assessing Officer, preferred an appeal before the learned CIT(A) wherein he reiterated the submissions made before the Assessing Officer and also relied on the decision of the Tribunal in the case of Navodaya v. Asstt. CIT [1991] 40 TTJ (Coch.) 270 to support the contention that provisions of the Income-tax Act relating to the disallowance were not applicable in the case of film producer, where income had to be computed as per Rule 9A of the Income-tax Rules. The learned CIT(A) analysed the nature of expenses and held that the following expenditure of Rs. 2,43,872 was related to post release period and, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40A(2)(b) of the Income-tax Act. Similarly if the intention of the Legislature is not to allow deduction in respect of any other business it could not be said that the provisions of Rule 9A would override the provisions of section 37(2A) in allowing the entertainment expenditure in the case of a film producer. I would, therefore, hold that the provisions of Rule 9A only provides the manner in which income of the film producer has to be computed, but the claim for the expenditure incurred would be subject to the provisions of sections 30 to 44D of the Income-tax Act. It is undoubtedly true that the decision of the Hon'ble ITAT, Bombay in the later decision dated 24-6-1993 in the case of M/s. Rajshree' Productions (R) Ltd. referred, has held that Rule 9A does not override the provisions of section 37(1) and facility given under Rule 9A cannot be interpreted in such a manner that it nullifies the provisions of section 37(1) to section 37(5) of the Income-tax Act. Respectfully following the subsequent decision of the ITAT, Bombay, I would hold that the Assessing Officer was justified in disallowing an expenditure of Rs. 17,67,101 under section 37(2A). As regards post-release en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilms was capital expenditure and allowable under rule 9A. He also relied on the decision of the Tribunal in the case of Ketan Desai v. ACIT in ITA No. 2036/M/89 in support of his various contentions. Alternatively, the learned counsel contended that disallowance could be made only in respect of expenditure relating to cost of production incurred during the year and not relating to expenditure of prior years carried forward to the year under consideration. With regard to payments to hotel/restaurants where meeting/conferences were held with the objective of furtherance of business interests and promote sales, the learned counsel contended that such expenditure could not be termed as entertainment expenditure under section 37(2A) of the Act, read with Explanation (2) thereto and for this proposition he relied on the decision of the Tribunal in the case of M.C. Davar Aromatics (P.) Ltd. v. Dy. CIT [2002] 125 Taxman 134 (Mag.) (Ahd.). It was also contended that expenditure incurred at the work place on employees was not in the nature of entertainment. He also contended that expression (employees) also included persons whose services were hired on project to project basis and in this re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as far as the production expenses are concerned, is that so long as the Censor Board does not certify the film for release, no deduction would be allowed. Therefore, in case of a film which is partially completed and abandoned by the film producer due to commercial exigency or/and for other valid reasons, Rule 9A is not applicable. Rule 9A of the Income-tax Rules links the allowability of deduction of production costs to the exhibition or sale of rights in film and for this purpose the production expenses do not include expenditure on making positive prints and on advertisement after the Censor Board Certifies the film for release. The deduction of cost of production after certification by Censor Board is further based upon the period of release of the film in a particular year and selling of exhibition rights. If the film producer does not exhibit the film or sells the right of exhibition then in that case no deduction would be allowed for the cost of film in the previous year in which Certificate of Censor is received, but the entire cost of production is carried forward to the next following previous year and allowed as a deduction of that year. This creates a special fiction f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of production" to mean, the entire expenditure incurred on the production of film. However, advertisement expenditure incurred after the Censor Board Certification is obtained and also the cost of positive prints of the film are not to be included as part of the cost of production. The effect of the exclusion of these two items normally means that they could be allowed in the year in which these expenses are incurred regardless of whether film is released in that year or not as held by the Hon'ble Madras High Court in the case of CIT v. Prasad Productions (P.) Ltd. [1989] 179 ITR 147 the cost of making positive prints is allowable under section 37 of the Act. Further in the case of B. Nagi Reddy v. CIT [1993] 199 ITR 451, the Hon'ble Madras High Court held that any loss arising on account of feature film being abandoned midway without completing it, then, the expenditure incurred till that date including the payments made to artists, writers etc. would be allowable as a business loss on the principle of commercial expediency. All the above instances makes it clear that in case of film producer, the expenses which do not form part of cost of production as per Rule 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng all these factors in proper perspective, it is difficult to hold that the payment made to Shri Raj Kapoor was excessive or unreasonable having regard to the benefit derived by the assessee so as to bring its case within the purview of section 40A(2) of the Act. In view of our aforesaid conclusion, it is not necessary to deal in detail the assessee's contention that Rs. 50 lakhs paid to Shri Raj Kapoor could also be allowed as deduction, as it form part of "cost of production" of the film to which the provisions of Rule 9A are applicable. Suffice it to say that the stand taken by the assessee cannot tightly be brushed aside. We would, therefore, direct the ITO to allow the deduction of the entire amount of Rs. 50 lakhs paid to Shri Raj Kapoor and modify the assessment accordingly." On perusal of above, it would emerge that the Tribunal on the facts and circumstances of the case held that remuneration paid to Shri Raj Kapoor could not be construed as excessive or reasonable having regard to benefits derived by the assessee so as to bring such payment within the purview of section 40A(2) of the Act. Therefore, the Tribunal examined allowability of remuneration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of aforesaid, it is observed that the Tribunal gave a categorical finding that publicity expenditure incurred by the distributors on behalf of the producer was liable to be included for the purposes of working out disallowance under section 37(3A) of the Act. On the same issue the Tribunal also held that the expenditure incurred before the Certificate issued by the Censor Board was allowable as "cost of production" of the film under rule 9A and publicity expenses incurred after the certificate issued by the Censor Board were liable to be allowed after working out disallowances under section 37(3A) of the Act. 13. As noted in para 12 herein before, the Tribunal in the same decision held that remuneration paid to Shri Raj Kapoor was not excessive or un-reasonable considering the provisions of section 40A(2) even though the same was a part of cost of production and para 12.1, the Tribunal held that advertisement expenditure forming part of cost of production was allowable under rule 9A irrespective of provisions of section 37(3A) of the Act. Therefore, if the aforesaid decision is read as a whole for both types of expenditure which form part of cost of production, prima fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital expenditure is allowable in computing the profits and gains of the business. For example, depreciation under section 32, expenditure of scientific research under section 35, expenditure on know-how under section 35A, expenditure on acquisition of patent rights or copy rights under section 35A, amortization of certain preliminary expenses under section 35B. Thus, allowance of capital expenses incurred for a specific project under rule 9A does not lead to the conclusion that the provisions of the Act are not applicable. Further, if the capital expenditure so amortised is recovered by disposal/utilization of the same subsequently, the sum realized would be chargeable to tax as per provisions of the Act. The alternate contention of the assessee that only the expenditure incurred during the year forming part of cost of production could be considered for disallowance rather supports our view that Rule 9A provides additional restrictions for amortization of expenses as the cost of production carried forward from earlier years would comprise only of expenditure which was otherwise allowable in that period. It can be put differently to mean that cost of production to be carried forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 37 of the Act. This view can further be substantiated by the fact that the Legislature has not given overriding effect to Rule 9A by not framing the said Rule as "Notwithstanding anything contained in any provisions of the Act and/or any other Rule of Income-tax Rules, 1962." Further, there is also no commercial/business necessity, attached to film production which may justify the exemption to film producers from the applicability of provisions of section 37(2A) and or section 37(3) in respect of expenditure forming part of cost of production as per Rule 9A. 16. In view of above discussed facts and legal position, we are of the considered opinion that the revenue authorities are justified in holding that the provisions of the Act would be applicable in respect of expenditure deductible under rule 9A of the Income-tax Rules. 17. The related issue is regarding determination of quantum of entertainment expenses out of cost of production having regard to the situations which necessitated the incurrence of expenditure in connection with the production and marketing of the film. We find some merit in assessee's contention that the expenses incurred at the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital nature and disallowed accordingly. Aggrieved by the decision of the Assessing Officer the assessee carried the matter in appeal before the learned CIT(A) wherein the learned CIT(A) observed that the expenditure of similar nature or godown rent were not incurred in the financial years 1988-89 to 1990-91 which was explained by the assessee that when the necessity of the same was felt only then the expenditure was incurred. However, the learned CIT(A) held that the assessee had not produced any evidence regarding the items which were stored nor produced any agreement whereby it had undertaken to bear the expenditure of current repair. He also observed that the assessee company was a Pvt. Ltd. company in which Shri Subhash Ghai and his family members were the major shareholders, therefore, the expenditure can be termed as expenditure incurred for extraneous consideration and accordingly he confirmed the findings of Assessing Officer. Aggrieved by the decision of Revenue Authorities, the assessee is in appeal before us. 20. The learned counsel appearing on behalf of the assessee contended that take expenditure was incurred on the basis of commercial expediency and was of Revenue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered opinion that the expenditure was incurred by the assessee for business purposes and is allowable as revenue expenditure. Therefore, we reverse the order of Revenue authorities in this regard. Thus, this ground of the assessee is accepted. 23. Brief facts relating to the issue raised in ground No. 3 are that the assessee claimed loss of Rs. 5,13,946 on account for losses of Joint Venture in Methodist Complex. The Assessing Officer required the assessee to submit the explanation regarding the set off of such losses against the business income. The assessee submitted that if had incurred into a Joint Venture Agreement with M/s. Shiv Shakti Construction Pvt. Ltd. for the development of the property at Hyderabad. The Assessing Officer required the assessee to submit details of income of the said firm which were not furnished. It was contended that such Joint Venture firm was maintaining books of account on project completion method and project was completed in the accounting period relevant to this assessment year. Therefore, the same was allowable. However, the Assessing Officer noted that the said firm and its partners accounted for income from the said project on year to year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of CIT v. V.S. Dampo [1996] 131 CTR (Bom.) 203. 25. We have considered the submissions made by the learned Departmental Representative, material on record, orders of authorities below and also other applicable legal provisions. Admittedly, the Assessing Officer rejected the method of accounting followed by the assessee on the basis of method of accounting adopted by the said firm and considering the terms and conditions of the agreement. The Assessing Officer also held that the accrual of income from the project for the purpose of the income tax assessment of the firm or of the member of Joint Venture cannot be different. We are of the considered opinion that orders of the Revenue Authorities are in accordance with law and, therefore, we uphold the same. Thus, this ground of the assessee is rejected. 26. The issue in ground No. 4 is related to disallowance of depreciation of Rs. 43,131 in respect of Bulbs and Cables. The assessee claimed total depreciation of Rs. 4,31,233 which included depreciation of Rs. 64,696. The Assessing Officer observed there were no new purchase of bulbs and cables in the year under consideration and the depreciation so claimed was ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
