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2013 (11) TMI 1336 - AT - Income TaxValidity of action of CIT u/s 263 of the Income Tax Act – Assessee was engaged in the business of production of films had shown two films i.e. "welcome" and "Full N Final" as being under production during the year and the one film i.e. "Phir Hera Pheri" had been released during the year - Examination the letter of intent of IDBI bank makes it clear that bank had advanced foreign currency loan specifically for the purpose of meeting the part of the cost of production of these two films and the loans were secured as first charge on the negatives of the proposed films and there were also some conditions prescribed which 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 had to be carried out in accordance with the time schedule prescribed in the agreement – Held that:- Foreign currency loan had been taken specifically for the production 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 board are binding on the authorities below and therefore it could not be said that such rules are not to be followed mandatorily.
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