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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 ..... films. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed legal and professional fee of Rs. 27,40,834/- but "since it is not an expenditure co-relatable to any income credited in the profit and loss account during year under consideration" the said expenses were disallowed. The plea of the assessee that these amounts were paid to the lawyers to represent the assessee before Hon'ble Bombay High Court as there was dispute with respect to film "Sher" with Ashthivinayak Cinevision, the entity which was to produce the same under arrangements with the assessee, was rejected. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without complete success. Aggrieved, assessee is in further appeal before us. 4. 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. 5. We find that the learned CIT(A) has retained the disallowance of Rs. 22,86,520/- for the short reason that these expenses pertain to a film which may not be released. In our considered view, this approach is clearly erroneous because as long as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of WIP since the same was agreed and paid after the movie was ready.............. 5.2. Thus, it is crystal clear from the preceding paras of this order that the film being under production. Therefore, an amount of Rs. 19,66,300/- claimed as expenses by the assessee is hereby disallowed and added to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) of the Income-tax Act, 1961 is initiated separately for furnishing inaccurate particulars of income. 9. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) confirmed the disallowance and justified the disallowance as below:- 6.2 Ground No. 2: Vide this ground of appeal appellant is agitated against disallowance of 719,66,300/- on account of service charges paid to Abrianna Advertising & Marketing Services Pvt. Ltd. In para 5.1 of assessment order the AO has stated that film 'Sher' had not been released and the same was under production. The AO asked the assesee to explain as to why the amount paid to Abrianna Advertising & Marketing Services Pvt. Ltd. should not be added as WIP project "Sher" as the same was related to project. In response to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer are as follows:- 7. Disallowance of interest paid as per 9A: It is seen that the assessee has debited of Rs. 5,03,90,235/- as interest expenses under the head financial expenses at not 14 of profit & loss account on certain interest bearing funds borrowed of Rs. 40,31,51,211/-. It is seen from the record that the assessee has given advance of Rs. 17,50,00,000/- to M/s. Shree Ashtavinayak Cine Vision P. Ltd. out of the borrowed funds. During the course of the assessment proceedings, the authorised representative of the assessee was asked to show cause as to why the interest expenses claimed should not be disallowed as the funds borrowed are used for the film production cost which is work in progress project "Sher" at Rs.17,50,00,000/-, as the same is of capital in nature and not released in the year under consideration on the basis of the provisions mentioned under Rule 9A. 7.1. In response to the same, the authorized representative of the assessee has filed the letter stated therein that: "As already submitted that in FY 2011-12, assessee had issued ORCDs to Cinema Capital Venture fund for Rs.30 crores carrying interest @ 9%. The interest paid ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 in respect of all or some of the remaining areas, and the film is released for exhibition on a commercial basis at least [ninety] days before the end of such previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year. (3) Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer (a) himself exhibits the film on a commercial basis 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 realized by the film producer by exhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income of the assessee company. 6.3.1 As discussed in para 6.2.1 of this order, 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 interest as stated above cannot be allowed and needs to be capitalized. In this regard, I uphold the view of AO, however, as stated by appellant interest should not have been worked for the entire year but on basis of funds used during the year, considering the actual dates of payment. I, therefore, direct the Assessing Officer to recompute the amount of disallowance based on number of days funds were used during the year and not for the entire year. Hence, this ground of appeal is partly allowed. 17. The assessee is aggrieved and is in appeal before us. In the course of hearing before us, assessee also filed a brief note as follows:- The assessee is in the business of Film Financiers and Distributors. In the course of its business, the assessee used to get films produced from contract producers for a definite budget ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to produce the film and complete the project. The film therefore could not be released and the project has been abandoned. SACVL which was a famous film producer is facing number of criminal and insolvency suits and is now under liquidation. As per MCA website, this company has not held its AGM after 30/12/2013 and is presently under liquidation. The assessee could not recover any amount out of its trading advance of Rs. 17.50 Crore. Having lost all hopes of recovery, the assessee has written off Rs. 16.50 Crore out of this advance during FY 2019-20 (AY 2020-21). In the course of hearing, by relying on the covenants in the para 2.1 and para 2.5 of the agreement dated 22/02/2012, it has been submitted and argued by the AR that the advance being in the nature of a trading advance for acquiring Stock in Trade (trading goods) and not for acquiring a Capital Asset, no disallowance of interest on borrowed funds, legal fees and service charges paid to the agent was warranted. Alternatively, for the sake of argument, it has been submitted that if the assessee itself is considered to be a 'producer' of this Film 'Sher', no disallowance was warranted in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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