TMI Blog2013 (11) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the confirmation is false - The assessee filed the bills of transportation of equipment issued in the name of RCEPL. The genuineness of the bills is subject matter of the assessment proceedings of RCEPL. Even otherwise the AO has not given the finding that these bills are bogus - deduction allowed – Decided in favor of assessee. Addition on account of wastage of 13,300 metres of negative films (raw) – Held that:- At the time of loading raw stock in the camera, some part in the beginning gets wasted. Similarly, some part at the end of the camera of raw stock also has to be left blank. Thus, these left out part would never be processed - One scene are shot from different angles. Out of all such angles, the one which director finds appropriate is processed. Accordingly, raw stock used for shooting of other angles is waste. c. Major part of the movie "KAAL" was shot in the forest area of Bangkok as well as of India. At such place, huge stock of raw films have to be maintained as this are isolated area and if there is a shortage of raw stock, the same could not be procured from the nearest area. Thus, excess stock may get damaged, if the same is not utilized in short span of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge rights or privileges granted by the statute itself nor confer any special benefits, rights or privileges beyond the provisions of the Act or in contradiction to the provisions of the legislative enactment because the object subordinate legislation is to carry out the statutory provisions effectively and not to neutralize or contradict them. If delegated legislation results into any such situations that would amount to legislation itself and which cannot be abdicated by the Legislature. In this view of the matter, it is not within the power of the Central Board of Direct Taxes to create a legal fiction like rule 9A in the fashion as contended by learned counsel for the assessee because this interpretation would go beyond the legislative policy enacted in the form of section 37(2), 37(2A), 37(3) etc. of the Act and make rule 9A void - The negative covenant/restricted provisions like section 37(2A) have been enacted with the object of restricting the deduction of expenditure which is otherwise allowable under section 37. It is a fact that expenditure incurred after the issue of certification by the Censor Board on account of advertisement and publicity and cost of positive prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unior artists. The appellant prays that the said disallowance is unjustified and may please be deleted. Ground No.4: On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) grossly erred in confirming the disallowance made by the Ld. Assessing Officer of Rs. 8,42,346/- @ 25% on ad-hoc basis out of expenditure of Rs. 33,69,382/- incurred in respect of costumes dresses. The appellant prays that the said disallowance is unjustified and may please be deleted. Ground No. 5 On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) grossly erred in confirming the disallowance made by the Ld. Assessing Officer of Rs. 1,62,686/- on ad-hoc basis @ 25% of the expenditure of Es. 6,50,745 incurred in respect of makeup and hairdressers. The appellant prays that the said disallowance is unjustified and may please be deleted. Ground No. 6: On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) grossly erred in confirming the disallowance made by the Ld. Assessing Officer of Rs. 2,40,703 on ad-hoc basis @ 25% out of expenditure of Rs. 9,62,811/- incurred on account of dubbing, song recording mixing expenses. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment made to RCEPL is a contractual liability and an allowable deduction. The AO did not accept the explanation and contention of the assessee and held that the assessee failed to prove with tangible evidences that any service was provided by RCEPL. Further the AO was of the view that the payment is application of income which is not allowable. Accordingly, the AO disallowed the payment in question. On appeal, the CIT(A) doubted the use of cinematographic equipment supplied by RCEPL for the production of film "KAAL". The CIT(A) has not accepted the confirmation of RCEPL as well as the explanation of the assessee that the hire charges in respect of film "KAAL" are lower in comparison to the other films. The CIT(A) has given the reason that equipment charges are not paid on hourly basis therefore, the explanation cannot be accepted. Accordingly, the CIT(A) agreed with the AO that the payment is not allowable u/s 37(1) as not incurred for the purpose of business of the assessee. 4. Before us the Ld. AR of the assessee has submitted that there is an agreement for joint production of film between the assessee and RCEPL. The parties have agreed to share equally the net revenue f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hart of the expenses incurred on account of equipment charges for various films released under this banner. It has been explained that the equipment hire charges for this movie are lesser as compare to the other films. Therefore, it proves the claim of the assessee that equipments have been supplied by the RCEPL without any cost and no cost has been debited to the profit and loss account. The Ld. AR has further submitted that in the remand report the Assessing Officer accepted the fact that Shri Shahrukh Khan perform in the title song of the film and that it was produce jointly by Shri Shahrukh Khan and Shri Karan Johar. He has contended that the only objection of the Assessing Officer is that Shri Shahrukh Khan has performed in his individual capacity and it cannot be said that the services were rendered by RCEPL. The AO said that there is no contribution of RCEPL and as a result payment made to them is not justified. The Ld. Counsel has submitted that the AO has mis- understood the fact that a company provides services through its employee's directors etc. and in this case the director of the RCEPL himself has worked for the company. Further when no separate payment has been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to produce any evidence of transportation of equipment to the production/shooting site. The Ld. DR has pointed out that the bills/invoices filed by the assessee to show the transportation of equipment are not in proper order of serial number because the serial number and dates of the bill do not match. As regards the confirmation by the RCEPL the Ld. DR has submitted the certificate is self-serving document and in the absence of independent evidence it cannot be accepted. The assessee failed to prove that the expenditure has been incurred wholly and exclusively for the purpose of business. 6. We have considered the rival submissions as well as relevant material on record. The assessee entered into an agreement dated 9.8.2004 with RCEPL. Clause 5(b) of the agreement was subsequently amended on 9.8.2004. This agreement is for joint production of film and sharing of net profit from film "KAAL" in the ratio of 50:50. The obligation of the parties under the agreement is provided in clause 2 and 3 as under: "2. Obligations of RCEPL It should be the sole and exclusive responsibility of RCEPL. a. To allow DPPL unlimited use of all the cinematographic equipments which RCEPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sole discretion on the acceptability and the presentation of such products or service endorsement shall be of the DPPL. All such revenues arising from such endorsements shall be treated as over all Revenues of "The Pictures" which will go tords recovering of cost of production and profit sharing as enumerated later on in the agreement. e. DPPL, shall, in consultation with RCEPL, be entitled to sell or to conclude or to enter into al contracts in respect of the Sale Distribution, Exhibition, and Exploitation of "The Pictures". f. No hire charges will be charged by RCEPL on cinematographic equipments hired by DPPL. g. This agreement shall not constitute a partnership or joint venture, or Association of Persons between the parties hereto. 6. Credits a. Advertising, Promotion Publicity : In all Advertising, Promotion, Publicity, Brochures, Press Release or material the credits of the two companies will appear in equal prominence and stating Shah Rukh Khan and Karan Johar presents DPPl/RCEPL's____________ b. In Film: (i) The moving logos of DPPL and RCEPL will appear in the beginning." 8. The existence of the agreement between the parities has not disputed by the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer and CIT(A) rejected the claim on the ground that no evidence was produced regarding transportation of the equipment to the production or/shooting site. It is to be noted that these equipments are essential and inevitable for production of the film. There cannot be a case that the assessee has not used the equipment in production of the film. One important aspect of the matter is that the assessee has not booked any expenditure in respect of hire charges of these very equipments. Therefore, the claim cannot be term as bogus claim. Further the assessee has given the comparative chart of the equipment hire charges of various films and contended that the hire charges are very less in comparison to the other film. The CIT(A) has given the table of comparative hire charges at page 12 of the impugned order as under:- Sl. No Film Release date Equipment hire charge (Rs. ) Property Hire charges (Rs.) Total (Rs.) 1. Kuch Kuch Hota Hai 16.10.1998 3006214 3006214 2. Kabhie Khushi Kabhie Gam 14.12.2001 7078219 7078219 3. Kal Ho Naa Ho 27.11.2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not registered except it is otherwise required to be registered as per the law inforce. Therefore, we do not find any merits in this objection of Ld. DR. This payment is made against the services provided by RCEPL in connection with the production of the film "KAAL" and under the terms of the agreement therefore, it is an expenditure laid out for the purpose of business. In view of the above discussion we hold that the assessee has established that the payment has been made as per the agreement between the parties and against the services provided by RCEPL and therefore, is allowable u/s 37(1) of the Income Tax Act. 11. Ground No. 2 regarding disallowance of Rs. 9,64,250/- confirmed by CIT(A) on account of wastage of negative films (raw). During the assessment proceedings the AO noted that the assessee has purchased raw film having total length of 15,04,896 metres and after processing the film final length was 3458.13 metres. Assuming that the raw film exposed was 100 times of the final length of the film which works out to 345813 metres, the AO estimated the surplus of 11,59,083 metres of film which remained unexplained. The value of surplus raw film was worked out by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. The AO made an addition on account of unexplained raw film while passing the assessment order by taking the incorrect quantity of raw negative film purchase by the assessee. In fact the AO took the total quantity stock purchase for shooting purpose as well as for the purpose of giving print to the distributors. The said mistake was rectified in the remand proceedings and consequently the AO accepted the wastage of 13,300 metres instead of 11,59,083 metres took in the assessment order. We note that in remand report the AO considered the report of the M/s Adlabs Pvt. Ltd. and accepted the quantity of wastage as per the report of the lab. The CIT(A) has reproduced the relevant part of the remand report at page 36 and 37 of the impugned order as under: "Kind reference is invited to your referred letter dated 31.05.201 on the captioned subject. As directed, information u/s 133(6) of the Act was obtained from M/s Adlabs P Ltd. (now known as Reliance Mediaworks Ltd.) regarding the consumption of raw film by the assessee in respect of movie 'Kaal'. As per information received from M/s Reliance Mediaworks Ltd, they have processed three types of stock for the assessee viz sound nega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e camera of raw stock also has to be left blank. Thus, these left out part would never be processed. b. One scene are shot from different angles. Out of all such angles, the one which director finds appropriate is processed. Accordingly, raw stock used for shooting of other angles is waste. c. Major part of the movie "KAAL" was shot in the forest area of Bangkok as well as of India. At such place, huge stock of raw films have to be maintained as this are isolated area and if there is a shortage of raw stock, the same could not be procured from the nearest area. Thus, excess stock may get damaged, if the same is not utilized in short span of time. d. Also weather is an important factor i.e. in foggy climate, reels of raw stock gets damaged and hence not useful for further use. e. If raw stock left in the camera is less than 100 metres, then the same has to be left as it is, as one bigger shot cannot be recorded in the size of les than 100 metres of stock. f. So far as proper shot as per satisfaction of director is not taken, re-takes of the same shot is taken. To that extent, raw stock used for retakes except the final one, is waste." 15. Having regard to the peculiar circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or rehearsal book after completion of the shooting of the film because these documents are not required and accordingly destroyed. The assessee contended that it has already produced bills and vouchers in respect of the expenditure incurred in respect of the above items. The AO did not accept the contention and explanation of the assessee and estimated the disallowance at 25% of these expenses for want of reports/registers. 18. On appeal, the CIT(A) has confirmed the addition/disallowance made by the AO by recording the reasons that during the course of survey on 10.9.2009 in the assessee's premises it was noticed that call sheet, continuity report etc. being maintained by the assessee. Hence the CIT(A) was of the view that the assessee company has deliberately not produced these documents. 19. Before us the Ld. AR of the assessee has submitted that the Assessing Officer has made the addition for want of production of call sheet, continuity report and rehearsal book etc. whereas the assessee produced the relevant evidence in the shape of vouchers/bills in respect of this expenditure which were not found by the AO as bogus. The Ld. AR has further contended the assessee as expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments: Expenses in respect of payment of Junior Artists addition of Rs. 3,53,000/- Expenses in respect of Costumes Dresses addition of Rs. 8,42,346/- Expenses in respect of Makeup Hairdressers addition of Rs. 1,62,686/- Dubbing, Song Recording Mixing Expenses addition of Rs. 2,40,703/- Dancers Expenses Co-ordination charges addition of Rs. 3,25,399/- Setting Expenses addition of Rs. 15,86,176/- 21. The assessee explained before the AO as reproduced in para 7.2 of assessment order as under: "7.2 In response to the same, the assessee has submitted as under: Your goodself has stated then in the absence of not producing call sheet, continuity report, and not maintaining rehearsal book, your goodself intends to disallow the expenditure incurred on account of payment to junior artists, costumes dresses, makeup expenses and music recording and dancers expenses. In this connection, it is pointed out that the salt! required documents are only in existence during the currency of the shooting 01 the film. As soon as the shooting of the film is complete, then these documents are not required and accordingly destroyed. So far as the expenditure part is concerned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feasible. We further note that an identical issue has been considered and decided by the Co-ordinate Bench of this Tribunal in case of Yas Raj Films Pvt. Ltd. (supra) in para 28 and 29 as under: "28. We have considered the rival submissions, perused the orders of the lower authorities and the material evidence brought on record which is placed in the paper book. It is not in dispute that many junior artists engaged in the making of a movie. The main artists in a movie are hardly 15 to 25 in numbers whereas the entire movie moves ahead on junior artists. it is also not in dispute that the supplier M/s. Pappu Co., has confirmed to have made available junior artists to the assessee, It is also a fact that if the contractor i.e. Pappu Co., could not furnish the full address of the Junior artists, the same cannot be used adversely against the assessee. Further, the Li CIT(A) has placed much reliance on the surrender of Rs. One crore from M/s. Pappu Co., during the course of the survey operations. If the said contractor was not disclosing its income properly, that cannot be held against the assessee, On the contrary, it should support the case of the assessee that it has made pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra). He has further submitted that the expenses incurred after the film was certified for release are allowable u/s 37 of the Income Tax Act in the nature of business expenditure. In support of his contention he has relied upon the decision of Hon'ble Madras High Court in case of CIT Vs Prasad Productions Pvt. Ltd. 179 ITR 147. He has also relied upon the decision of this Tribunal in case of Mukta Arts Pvt. Ltd. Vs ACIT 292 ITR (AT) 16 (Mum.) wherein the Tribunal has followed the decision of Hon'ble Madras High Court in case of Prasad Productions Pvt. Ltd. and held that the expenses which do not form part of production as per Rule 9A are allowable as per normal provisions of the Act. Thus, the Ld. AR has contended that Rule 9A is not applicable so far as the expenditure which do not form part of the cost of production namely advertisement and publicity expenditure. Therefore, the entire expenditure is allowable as incurred for business purpose. On the other hand, the Ld. DR has relied upon the order of the CIT(A) and submitted that the CIT(A) has placed reliance on the decision of Hon'ble Jurisdiction High Court in case of CIT Vs S. M 261 ITR 271 as well as in case of CIT Vs Prog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keep them without exhibition or even part with them without making arrangements for their exhibition. It cannot, therefore, be assumed that in all cases of production of a film, the producer must necessarily obtain the positive prints of the film as well. In other words, if a person carries on the business of production of films, he may not only produce the films but also prepare the positive prints for the purpose of exhibition or he may not take steps for the exhibition of the film having produced it. The production and exhibition of a feature film constitutes two distinct and separate stages and while the former would take in all activities which culminate in the production of a feature film, the latter contemplates stage subsequent to the completion of the production of the film, viz., exhibition of the film produced. Viewed thus, any expenditure incurred in connection with the preparation of the positive prints for purposes of exhibition would really be post-production expenses and also an item of expenditure in relation to the business of production and exhibition of feature films and would, therefore, qualify for deduction as expenditure laid out or expended wholly and excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. as reported in [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 as reported in [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 make it clear that in case of film producer, the expenses which do not form part of cost of production as per rule 9A are allowable as per the normal provisions of the Act. It, therefore, follows that rule 9A does not cover all these situations and all types of expenses, hence the proposition that it overrides the provisions of the Act on the face of it, is not valid. 21. Rule 9A is an outcome of exercise of power given to the Central B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 the 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 the provisions of section 37(2A) and/or section 37(3) in respect of expenditure forming part of cost of production as per rule 9A." 28. In view of the above discussion and following the decision of Hon'ble Madras High Court in case of Prasad Productions Pvt. Ltd. as well as decision of the Co-ordinate Bench of this Tribunal in case of Mukta Arts Pvt. Ltd. we hold that the expenditure incurred in respect of preparation of positive prints as well as advertisement and publicity are allowable. Accordingly the addition enhance by the CIT(A) is deleted. ITA No. 4791/M/2013 29. In the penalty appeal the assessee has challenged the levy of penalty by the CIT(A) in respect of the enhancement of disallowance of expenditure on account of advertisement and publicity. 30. We have heard the Ld. AR as we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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