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2015 (9) TMI 1237 - ITAT HYDERABAD

2015 (9) TMI 1237 - ITAT HYDERABAD - [2015] 43 ITR (Trib) 385 (ITAT [Hyd]) - Disallowance u/s 37(1) - expenditure on abandoned films - Rule 9A - huge loss pertaining to new projects - Held that:- Hon'ble Madras High Court in the case of CIT vs. Prasad Productions (P) Ltd (1989 (1) TMI 38 - MADRAS High Court ), wherein it was held that even if expenditure relating to positive prints is not allowable under rule 9A, the same can be allowed u/s 37(1) of the Act as it is incurred in connection with t .....

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much applicable. However, the assessee has shown the expenditure incurred towards the film ‘Shabari’, as his closing stock of the relevant financial year and has not claimed it as expenditure. When there is no claim, there can be no disallowance of the same. - Decided in favour of assessee. - ITA No. 1733/Hyd/2012 - Dated:- 23-9-2015 - Smt. P. Madhavi Devi, Judicial Member And Shri B. Ramakotaiah, Accountant Member For the Petitioner : Shri P. Murali Mohan Rao For the Respondent : Shri Konda Ra .....

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#8377; 21,37,030. Subsequently, the assessment was taken up for scrutiny u/s 143(3) of the I.T. Act and various details regarding assessee s claim u/s 37(1) were called for. Assessee filed the required details and on perusal of the same, the AO observed that the assessee has claimed as expenses incurred towards new projects (VCL H.O) of ₹ 7,75,04,457, (RGV H.O) ₹ 1,62,94,834 and ₹ 3,07,26,744 towards the cost of production of film Shabari . Similarly, he observed that the asses .....

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ture can be reported as per the provisions of Rule 9A of the I.T. Act. He observed that during the relevant period, the only pictures of the assessee which were released are Sholay on 31.08.2007, Badla alias Darling on 7.9.2007 and Shiva on 15.09.2007. Therefore, according to him, except the income and the expenditure pertaining to these three films, nothing else can enter the profit & loss a/c under the provisions of Rule 9A of the Act. He, therefore, asked the assessee to show cause as to .....

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o be ignored and he accordingly brought the disallowed expenditure to tax as income of the assessee. 3. Aggrieved, assessee filed an appeal before the CIT (A) alongwith additional evidence on the issue. The CIT (A) called for a remand report from the AO after verification of the additional evidence. AO, vide letter dated 9.12.2012, filed the remand report and after considering the same, the CIT (A) directed the AO to verify the expenditure claimed against RGV HO of ₹ 1,62,94,834 and also a .....

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invested money and has incurred expenditure in production of two movies, it however, found them to be unviable and therefore, has abandoned the said movies mid-way. He submitted that the film production was the business of the assessee and therefore, the expenditure incurred by the assessee even on abandoned movies is also business expenditure allowable u/s 37(1) of the I.T. Act. As regards the expenditure incurred by the assessee on the movie Shabari , it was submitted that the movie was under .....

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ut the authorities below have erroneously held that the assessee has not filed the details. He submitted that where all the details of the movie Shabari were before the AO and the CIT (A) and the assessee also satisfies the conditions mentioned under Rule 9A, there was no occasion for the CIT (A) to remand the issue back to the file of the AO for re-verification. Thus, according to him the order of the CIT (A) is erroneous and therefore, according to him the orders of the authorities below are t .....

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made by the AO are of the expenses incurred by the assessee on two abandoned projects and also on the project Shabari on the ground that the conditions prescribed under Rule 9A are not fulfilled. As regards the first two disallowances i.e. expenditure incurred on projects which were subsequently abandaoned as redundant, we find that the genuiness of the expenditure has not been doubted by the authorities below and the only reason for making the disallowances is that the conditions prescribed un .....

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ordance with the provisions of sub-rule (2) to sub-rule (4). Explanation : In this rule,- (i) Board of Film Censors means the Board of Film Censors constituted under the Cinematograph Act, 1952 (37 of 1952); (ii) cost of production , in relation to a feature film, means the expenditure incurred on the production of the film, not being- (a) the expenditure incurred for the preparation of the positive prints of the film; and (b) the expenditure incurred in connection with the advertisement of the .....

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lm producer sells all rights of exhibition of the film, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year; or (b) the film producer- (i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas; or (iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film .....

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asis in all or some of the areas; or (b) sells the rights of exhibition of the film in respect of some of the areas; or (c) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is not released for exhibition on a commercial basis at least [ninety] days before the end of such previous year, the cost of production of the film in so far as it does not exceed the amount realised .....

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e, during the previous year in which a feature film is certified for release by the Board of Film Censors, the film producer does not himself exhibit the film on a commercial basis or does not sell the rights of exhibition of the film, no deduction shall be allowed in respect of the cost of production of the film in computing the profits and gains of such previous year; and the entire cost of production of the film shall be carried forward to the next following previous year and allowed as a ded .....

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me of the remaining areas,] the amount realised by exhibiting the film, or the amount for which the rights of exhibition have been sold or, as the case may be, the aggregate of such amounts, is credited in the books of account maintained by him in respect of the year in which the deduction is admissible; (b) in a case where the film producer has transferred the rights of exhibition of the feature film on a minimum guarantee basis, the minimum amount guaranteed and the amount, if any, received or .....

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ot covered by the provisions of this rule; or [(b)] having regard to the facts and circumstances of any case, it is not practicable to apply the provisions of this rule to such case, deduction in respect of the cost of production of the film may be allowed by the [Assessing Officer] in such other manner as he may deem suitable. [(7)] For the purposes of this rule,- (i) the sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarante .....

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usal of the above Rule, we find that the said Rule is applicable to computation of income on the films released after certification by the Board of Film Censors. In the case before us, the expenditure on production of feature films is on account of two films which have been abandoned as redundant and therefore, there is no question of certification for release or the release thereafter. Therefore, the provisions of Rule 9A would not apply to the assessee. The learned Counsel for the assessee had .....

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ue expenditure and has to be allowed as such. One of us i.e. Accountant Member is a signatory to the decision of this Tribunal in the case of Teja Cinema, wherein similar decision was taken by following the decision of the Hon'ble Madras High Court in the case of CIT vs. Prasad Productions (P) Ltd (179 ITR 147), wherein it was held that even if expenditure relating to positive prints is not allowable under rule 9A, the same can be allowed u/s 37(1) of the Act as it is incurred in connection .....

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and advertisement cannot be considered as cost of production in view of bar imposed under Rule 9A of the Act. However, as would be evident from the observation made by the learned CIT(A), he does not dispute the fact that assessee is eligible to set off of loss ₹ 87,46,786 of P-6 against the profit of P-5 amounting to ₹ 51,00,888. In this context we refer to the observation of the learned CIT(A) in Para 7.3 of his order, which is extracted herein for the sake of clarity. "7.3 I .....

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of ₹ 51,00,888." However, though, the CIT(A) may be correct in holding that expenditure towards positive prints and advertisement cannot be considered towards cost of production as per Rule 9A, he has failed to examine assessee's claim u/s 37(1) of the Act. In this context, it is to be noted that Hon'ble Madras High Court in case of CIT Vs. Prasad Productions Pvt. Ltd. (supra) has held that even if expenditure relating to positive prints etc., is not allowable under rule 9A, .....

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t;cost of production". It is for this reason that such expenditure is characterized as post-production expenditure. Ordinarily, all expenditure incurred on the production of a film would be its cost of production, but that would exclude the expenditure incurred for the preparation of the positive prints of the film so produced. The purpose of obtaining positive prints is to exhibit the film produced which is a stage after the completion of the production. In any given case, a person carryin .....

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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 .....

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the business. We have not been referred to any provision in the Act or the rules disallowing such expenditure as an item of business expenditure for the purpose of s. 37 of the Act. Though learned counsel for the Revenue placed considerable reliance upon the decision in CIT vs. Carborundum Universal Ltd. (supra), we are of the view that that decision does not in any manner assist the Revenue. In that case, the assessee claimed deduction of a certain amount in the computation of its profits and g .....

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ure of payment being one described in s. 36(1)(iv) of the Act and as it could not be deducted under that section, it cannot be held to be deductible under s. 28 of the Act on general principles in arriving at the true profits and gains of the business in a commercial sense. In the view we have taken that the expenditure incurred in connection with the obtaining of positive prints is really in the nature of post-production expenditure and that there is no provision in the Act or the rules obligin .....

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