DCIT CEN CIR 29, MUMBAI V. YASH RAJ FILMS P. LTD, MUMBAI

ITA 3345/MUM/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8807 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 18-07-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 14-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIDISHA KALRA
• Assessee Lawyers: PORUS KAKAAR
• Keywords: Unexplained cash credit; Unexplained expenditure; Gift; Depreciation; Business expenditure; Maximum Marginal Rate; Corroborative evidences; Tax effect; Commercial expediency; Reason to believe; Revenue expenditure
• Section: 69C; 40A(3); 133(6); 37(1); 194C; 131; 68; 145

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -GBENCH MUMBAI , , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND AMARJIT SINGH,JUDICIAL MEMBER ./I.T.A./2597/MUM/2012, / ASSESSMENT YEAR: 2007-08 M/S. YASH RAJ FILMS PVT. LTD. 5 SHAH INDUSTRIAL ESTATE, VEERA DESAI RD. ANDHERI (WEST),MUMBAI-400 053. PAN:AAACY 1176 E VS. ACIT-CENTRAL CIRCLE-29 MUMBAI. ( /APPELLANT ) ( / RESPONDENT) ./I.T.A./3345/MUM/2012, / ASSESSMENT YEAR: 2007-08 ACIT-CENTRAL CIRCLE-29 MUMBAI. VS. M/S. YASH RAJ FILMS PVT. LTD. MUMBAI-400 053. ( /APPELLANT ) ( / RESPONDENT) / REVENUE BY: MS. VIDISHA KALRA -DR /ASSESSEE BY: SHRI PORUS KAKA-AR / DATE OF HEARING: 29/11/2016 / DATE OF PRONOUNCEMENT: 20.01.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE ORDER DTD.29.02.2012 OF THE CIT(A)- 40,MUMBAI,THE ASSESSING OFFICER (AO)AND THE ASSESSEE HAVE FILED CROSS APPEALS FOR THE YEAR UNDER CONSIDERATION.ASSESSEE-COMPANY, ENGAGED IN PRODUCTION AND DISTRIBUTION OF FEATURE F ILMS,FILED ITS RETURN OF INCOME ON 30.10. 2007, DECLARING INCOME OF RS.62.36 CRORES.THE AO COMPLETE D THE ASSESSMENT U/S.143(3)OF THE ACT ON 30.12.2009,DETERMINING ITS INCOME AT RS.1,21,08,16, 089/- DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)STATED THAT ASSESSEE DID NOT WANT TO PRESS GROUNDS NO.10AND 12(CONSIDERI NG THE SMALLNESS OF THE TAX EFFECT)RAISED FOR THAT YEAR.HENCE,BOTH THE GROUNDS STANDS DISMISSED,A S NOT PRESSED. ITA/2597/MUM/2012,AY.2007-08,BRIEF FACTS: 2. A SURVEY ACTION U/S.133A OF THE ACT WAS CARRIED OUT AT THE BUSINESS PREMISES OF THE ASSESSEE ON 10/09/2009.DURING THE COURSE OF SURVEY OPERATION CE RTAIN DOCUMENTS AND COMPUTER BACK UP OF BOOKS OF ACCOUNT IN RESPECT OF PRODUCTION DIVISION WERE IMPOUNDED.THE COMPUTER BACK- UP COMPRISED OF BOOKS OF ACCOUNT FOR THE AY.S2005-06- 2008-09 AND UPTO 10/09/2009.IMPOUNDED DOCUMENTS WERE VERIFIED WITH REFERENCE TO AUDITED FINANCIAL STATEMENTS FOR THE AY.S.2005-06- 2007-08 FILED WITH THE RETURNS OF INCOME.VIDE HIS L ETTER,07.10.2009,THE AO POINTED OUT CERTAIN 2597 &3345/M/12-YRF(07-08) 2 DISCREPANCIES FOUND IN RESPECT OF RECEIPTS OF MOVIE S RELEASED DURING THE ABOVE PERIOD AND THE COST OF PRODUCTION OF THE MOVIES AS WORKED OUT BY T HE ASSESSEE IN THE DOCUMENTS AS ON 31/03/ 2007 I.E. RELEVANT TO AY.2007-08.THE ASSESSEE BY VI DE ITS LETTER DT. 30.10.2009 TRIED TO RECONCILE THE DIFFERENCES POINTED OUT BY THE AO FOR ALL THE T HREE AY.S. AFTER THE PERUSAL OF THE EXPLANATION FILED BY THE ASSESSEE,THE AO OBSERVED THAT IN THE F IRST STATEMENT THE ASSESSEE HAD CLAIMED THAT THE UNALLOCATED INCOME FOR THE AY.2007-08 AGGREGATED TO RS.34.84 CRORES,THAT IN THE SECOND SUBMISSION THE UNALLOCATED INCOME FOR THE AY.2007-0 8 WAS SHOWN AT RS.114.04 CRORES THAT THERE WAS VAST DIFFERENCE IN BOTH THE SUBMISSIONS,THAT IT WAS SHIFTING ITS STAND TIME AND AGAIN.THERE WAS FREQUENT EXCHANGE OF LETTERS BETWEEN THE AO AND ASSESSEE AND FINALLY THE ASSESSMENT WAS MADE ON 30/12/2009,AS STATED EARLIER.DURING THE APP ELLATE PROCEEDINGS,THE AO WAS DIRECTED TO FURNISH REMAND REPORT.THE ASSESSEE AND THE AO HAS R AISED VARIOUS GROUNDS OF APPEAL FOR THE YEAR UNDER APPEAL. 3. FIRST GROUND OF APPEAL IS ABOUT TAXABILITY OF AMOUN T PAYABLE TO KALEDOSCOPE ENTERTAINMENT (KE).DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE AND M/S.MAYA MOVIES PVT.LTD.(MMPL)ENTERED INTO AN AGREEMENT ON 29.07.20 03FOR COMMERCIAL DISTRIBUTION AND EXHIBITION OF MOVIE MANGAL PANDEY-THE RISING 1857, THAT AS PER THE AGREEMENT THE ASSESSEE WAS APPOINTED EXCLUSIVE AGENT FOR THE EXHIBITION OF MOV IE IN CONSIDERATION OF MINIMUM GUARANTEE OF RS.13.50 CRORES.IN RESPONSE TO THE QUERY RAISED BY HIM IN THAT REGARD,THE ASSESSE STATED THAT IT DID NOT RECEIVE ANY AMOUNT,THAT THE AMOUNT IN QUESTION WAS SHOWN AS CREDITORS IN THE AY.2006- 07.THE AO HELD THAT THAT SAME SHOULD HAVE BEEN CLUB BED UNDER THE HEAD SUNDRY CREDITORS AND NOT AS UNSECURED LOANS,THAT IT HAD FAILED TO SUBSTANTIA TE THE INTRODUCTION OF RS.3.14 CRORES IN ITS BOOKS OF ACCOUNT BY PRODUCING SUPPORTING EVIDENCES, THAT THE AMOUNT HAD TO BE TREATED AS UNEXPLAINED CASH CREDIT WITHIN THE MEANING OF SECTION 68 OF ACT . 3.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS ARGUED THAT THE AM OUNT OF RS.3.13 CRORES SHOWN AS LIABILITY AS THE BUSINESS STATEMENTS/ACCOUNTS BETWEEN BOTH THE P ARTIES COULD NOT BE SETTLED DURING THE YEAR, THAT THE AMOUNT PAID BY KE TOWARDS PUBLICITY WAS DU E TO IT, THAT THE MINIMUM GUARANTEE WAS ALSO KEPT PENDING SINCE THE PICTURE WAS A HUGE FLOP,THAT THERE WAS DISPUTE BETWEEN PARTIES REGARDING CERTAIN ISSUE THAT THE AMOUNT WAS SHOWN AS LIABILIT Y RECEIVABLE AS ON 31.3.2006 AND 31.3.2007, THAT IN THE SUBSEQUENT YEAR THE ACCOUNT WERE SETTLE D AFTER MAKING PAYMENT OF RS.13 LAKHS,THAT THE 2597 &3345/M/12-YRF(07-08) 3 BALANCE AMOUNT OF RS.3.01 CRORES WAS OFFERED FOR TA XATION AFTER SETTLEMENT OF ACCOUNTS, THAT MISTAKE OCCURRED DUE TO OVERSIGHT IN CLASSIFICATIO N OF SUNDRY CREDITORS AND UNSECURED LOANS,THAT THE INCOME HAD CRYSTALLISED IN THE SUCCEEDING YEAR AND WAS OFFERED FOR TAXATION IN THAT YEAR,THAT THE ISSUE WAS ONLY OF TIMING AND YEAR OF TAXABILITY ,THAT THE COMPANY HAD PAID TAX IN THE NEXT YEAR AT THE SAME RATE, THAT AO WAS NOT JUSTIFIED IN HOLD ING THAT A FICTITIOUS LIABILITY WAS CREATED TO AVOID TAX PAYMENT,THAT IT HAD VIDE LETTER DTD.07. 12.2009,MENTIONED THAT THE AMOUNT WAS CREDITED BY THE DISTRIBUTION DIVISION ON 31.3.2007 TO HO DIV ISION UNDER THE HEAD UNSECURED LOANS,THAT VIDE LETTER DATED 26.12.2009 IT HAD INFORMED THAT MATTER WAS UNDER DISPUTE AND GOT SETTLED IN THE AY.2008-09,THAT THE AMOUNT OF RS.3.14CRORES WAS SHO WN AS LIABILITY AS THE ACCOUNTS WERE NOT FINALISED,THAT THE INCOME WAS OFFERED FOR TAXES BEF ORE THE DATE OF SURVEY.THE ASSESSEE REFERRED TO THE CASE OF MODEST MARITIME SERVICES PVT. LTD.(338I TR64) AND VISHNU INDUSTRIAL GASES P.LTD. (122ITR119). AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER,THE FAA OBSERVED THAT THE AMOUNT OF RS.3.14 CRORES,SHOWN IN THE DISTRIBUT ION DIVISION REPRESENTED THE LIABILITY OF AY. 2005-06,THAT THE AO HAD ACCEPTED THE SAME AS SUNDRY CREDITORS,THAT THE DISPUTED AMOUNT WAS CLAIMED TO REPRESENT THE AMOUNT PAYABLE TO KE PENDI NG ACCOUNT SETTLEMENT,THAT THE ASSESSEE ITSELF HAD OFFERED THE SAME IN THE AY.2008-09 AFTER MAKING PAYMENT OF RS.14 LAKHS,THAT THESE FACTS DID NOT CLINCH THE ISSUE REGARDING THE YEAR O F CRYSTALLIZATION OF REVENUE,THAT A SMALL SUM REMAINED PAYABLE BY THE ASSESSEE TO KE,THAT OUT OF TOTAL REVENUE OF RS.3.14 CRORES RS.14 LAKHS COULD NOT BE MATERIAL TO THE PRINCIPLE OF REVENUE-R ECOGNITION,THAT THE AMOUNT HAD ALREADY BEEN OFFERED IN THE SUBSEQUENT YEARS BEFORE THE SAME WAS DETECTED DURING THE SURVEY PROCEEDINGS,THAT NO USEFUL PURPOSE WOULD BE SERVED BY RAISING THE UN NECESSARY LITIGATION,THAT THE BALANCE OF OPINION FAVOURED RECOGNITION OF THE SAID REVENUE IN THE CURRENT YEAR AND NOT IN THE SUBSEQUENT YEAR,THAT WITH THE CLAUSE OF MINIMUM GUARANTEE IT DID NOT HAVE SUFFICIENT REASON TO HOLD THE RECOGNITION TILL NEXT YEAR,THAT IT WOULD BE TRAVEST Y OF JUSTICE IF AOS ACTION OF TAXING SAME REVENUE TWICE,THAT THE AO WAS JUSTIFIED IN TAXING D ISPUTED AMOUNT IN THE YEAR UNDER CONSIDERATION. 3.2. DURING THE COURSE OF HEARING BEFORE US, THE AUTHORI SED REPRESENTATIVE (AR) STATED THAT ACCOUNTS WITH KE COULD NOT BE SETTLED DUE TO LITIGA TION, THAT IN THE NEXT AY.SETTLEMENT TOOK PLACE, THAT THE ASSESSEE HAD VOLUNTARILY OFFERED INCOME I N THE SUBSEQUENT YEAR,THAT IT WAS A LIABILITY AND IT COULD NOT BE TREATED AS CASH CREDIT. HE REFERRED TO PAGE NO.143, 147 AND 148 OF THE PB AND 2597 &3345/M/12-YRF(07-08) 4 RELIED UPON THE CASES OF SHAH CONSTRUCTION CO. LTD. (237 ITR814)AND P.MARIAPPA GOUNDER (232 ITR 2). THE DEPARTMENTAL REPRESENTATIVE (DR)ARGUED THAT THE ASSESSEE WAS NOT MAINTAINING THE BOOKS OF ACCOUNTS PROPERLY,IT WAS MAINTAINING THREE DIVISION S NAMELY PRODUCTION, DISTRIBUTION AND HOME ENTERTAINMENT DIVISION,THAT EVEN FOR AUDIT PURPOSE BOOKS WERE NOT PROPERLY MAINTAINED AND NOT PRODUCED BEFORE THE AUDITORS,THAT IN THE BOOKS OF A CCOUNT NO LIABILITY WAS SHOWN REGARDING THE DISPUTED AMOUNT ON THE CLOSING DATE OF YEAR IN THE NAME OF KE,THAT IT HAD NOT PRODUCED ANY EVIDENCE BEFORE THE AO/FAA ABOUT THE DISPUTE,THAT T HERE WAS NO JUSTIFICATION FOR NOT SHOWING THE INCOME DURING THE YEAR FOR CONSIDERATION.REFERR ING TO PAGE 147 OF PB,HE STATED THAT IT WAS A GENERAL ENTRY AND NOT THE OPENING BALANCE FOR THE Y EAR. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE ITSELF HAD ADMITTED THAT THERE WAS ERROR I N THE TREATMENT GIVEN TO THE AMOUNT IN QUESTION,THAT IN THE BOOKS OF ACCOUNT ESPECIALLY IN THE BALANCE SHEET,THE SUM WAS SHOWN AS LIABILITY IN THE BOOKS OF ACCOUNTS IN THE YEAR WHE N THE ALLEGED LIABILITY HAD ARISEN,THAT THE ASSESSEE CLAIMED THAT THERE WAS DISPUTE,THAT NO EVI DENCE WAS PRODUCED BEFORE THE REVENUE AUTHORITIES ABOUT THE ALLEGED DISPUTE,THAT EVEN BEF ORE US,NO DOCUMENT WAS FURNISHED TO PROVE THAT THE ASSESSEE HAD SOME DISPUTE ABOUT THE RECEIPT.EVE N IF, FOR SAKE OF ARGUMENT EXISTENCE OF DISPUTE IS ACCEPTED THEN, IT WAS FOR RS.14 LAKHS ON LY.FOR SUCH A SMALL SUM OUT OF RS.3.14 CRORE,THE ASSESSEE DID NOT SHOW THE INCOME DURING T HE YEAR UNDER CONSIDERATION. 3.3.1. AS PER THE PROVISIONS OF SECTION 5(1)(B) OF THE ACT ,WHEN INCOME ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO AN ASSESSEE DURING THE PREVIOUS YEAR, IT IS TO BE TAXED IN THAT YEAR. THE RELEVANT YARDSTICK IS THE TIME OF ACCRUAL OR AR ISAL FOR THE PURPOSE OF TAXATION,VIZ.,IN ORDER TO BE CHARGEABLE, THE INCOME SHOULD ACCRUE OR ARISE TO THE ASSESSEE DURING THE PREVIOUS YEAR. THERE MUST BE A RIGHT TO RECEIVE THE INCOME ON A PARTICUL AR DATE.IT IS NOT THE CASE OF THE ASSESSEE THAT SUCH RIGHT DID NOT EXIST DURING THE YEAR UNDER APPE AL.SETTLED PRINCIPLES OF TAXATION JURISPRUDENCE TREATS AY.A SEPARATE UNIT AND INCOME OF EACH AY.HAS TO DETERMINED IN THAT PARTICULAR YEAR.AO OR THE ASSESSEE IS BARRED BY POSTPONING OR ADVANCING T HE INCOME.CERTAIN EXCEPTIONS ARE THERE WHEN EXPENSES OF EARLIER YEAR CAN BE ALLOWED IN SUBSEQUE NT YEAR OR UN-CRYSTALLIZED INCOME CAN BE TAXED IN SUBSEQUENT YEAR ON HAPPENING OF CERTAIN EV ENT.BUT, THESE ARE EXCEPTION AND THE EXCEPTIONS LAY DOWN THE RULE THAT INCOME ACCRUED OR ARISEN HAD TO BE TAXED IN YEAR OF ACCRUAL ONLY.IN THE CASE UNDER CONSIDERATION ACCRUAL OF INC OME IN NOT IN DOUBT.SO,IT WAS THE DUTY OF THE 2597 &3345/M/12-YRF(07-08) 5 ASSESSEE TO OFFER THE SAME FOR THE YEAR UNDER APPEA L.THERE WAS NO JUSTIFICATION OF ANY KIND TO POSTPONE IT.WE ARE NOT IMPRESSED BY THE ARGUMENTS T HAT RATE OF TAXES IN THE SUBSEQUENT YEAR WAS SAME AND THAT THE ASSESSEE HAD PAID TAXES IN THAT Y EAR.IF THIS LOGIC IS ACCEPTED SANCTITY OF THE AY.WILL BE LOST.BY DEFERRING PAYMENT OF TAXES THE A SSESSEE HAS DEPRIVED THE SOVEREIGN OF ITS DUE SHARE AND ENRICHED ITSELF.STATE LOSSES INTEREST,IF PAYMENT OF TAXES IS POSTPONED.IT IS ALSO A FACT THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND AS PER THAT SYSTEM IT HAD TO SHOW THE ACCRUED INCOME IN THE YEAR OF ACCRUAL.WE H AVE TAKEN NOTE OF THE FACT THAT ASSESSEE NOT A SMALL TIME TAXPAYER OF A MUFFOSIL PLACE.IT IS ONE O F THE LEADING PRODUCTION HOUSE OF MOVIES AND IS ASSISTED BY PROFESSIONAL.THEREFORE,WE ARE UNABLE TO ACCEPT THAT DUE TO ERROR OF SOME LOW LEVEL EMPLOYEE PROPER ENTRIES WERE NOT MADE IN THE BOOKS OF ACCOUNTS. 3.3.2. HERE,WE WOULD ALSO LIKE TO REFER TO THE CASES RELIE D UPON BY THE ASSESSEE. IN THE CASE OF P.MARIAPPA GOUNDER (SUPRA) THE HONBLE APEX COURT H AS DEALT THE ISSUE OF MENSE PROFITS AND CRYSTALLIZATION OF RIGHT TO RECEIVE THE MONEY.IN OU R OPINION,FACTS OF BOTH THE CASES ARE TOTALLY DIFF -ERENT.IN THE MATTER OF SHAH CONSTRUCTION(SUPRA),TH E HONBLE BOMBAY HIGH COURT HAS DELIBERATED UPON ENTIRELY DIFFERENT ISSUE.IN THAT M ATTER, THE ASSESSEE HAD TAKEN UP SOME CONTRACT WORKS IN THE MIDDLE EAST COUNTRIES.AGAINST SUCH CON TRACTS, ADVANCES WERE RECEIVED BY THE ASSESSEE WHICH HAD TO BE ADJUSTED AGAINST THE RUNNI NG BILLS SUBMITTED BY THE ASSESSEE FROM TIME TO TIME. AT THE END OF THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 1979-80, CERTAIN FOREIGN CURRENCY HAD REMAINED IN RESERVE AND FOR AC COUNT PURPOSES, THE ASSESSEE CONVERTED THEM INTO INDIAN RUPEES AT THE PREVAILING EXCHANGE RATE. THE AO BROUGHT SUCH AMOUNT TO TAX IN THE HANDS OF THE ASSESSEE. ON APPEAL,THE FAA DELETED TH E ADDITION ON THE GROUND THAT THE CREDIT BALANCE IN THE FOREIGN EXCHANGE RESERVE ACCOUNT DID NOT REPRESENT ANY PROFIT OR GAIN UNDER ACT.THE TRIBUNAL AFFIRMED THE ORDER OF THE FAA.ON A REFERENCE THE HONBLE COURT AFFIRMED THE ORDER OF THE TRIBUNAL.IN OUR OPINION,THE CASE IS OF NO HELP TO THE ASSESSEE.IN THE MATTER BEFORE US,INCOME HAD CRYSTALLIZED DURING THE YEAR AND THE ASSESSEE WAS SUPPOSED TO PAY TAXES IN THAT YEAR ONLY.WE AGREE WITH THE FAA THAT SAME INCOME CA NNOT BE TAXED TWICE.SO,THERE SHOULD NOT BE ANY ADDITION OF THE IMPUGNED AMOUNT IN ANY OTHER YE AR. CONSIDERING THE ABOVE,WE HOLD THAT THERE IS NO INFI RMITY IN THE ORDER OF THE FAA.CONFIRMING THE SAME,WE DECIDE GROUND NO.1 AGAINST THE ASSESSEE. 2597 &3345/M/12-YRF(07-08) 6 4. NEXT GROUND IS ABOUT DISALLOWANCE OF RS.1.62 CRORES UNDER RULE 9A OF THE INCOME TAX RULE 1962(RULES).DURING THE ASSESSMENT PROCEEDING,THE AO NOTICED THAT FOLLOWING EXPENSES WERE INCURRED UNDER THE HEAD ADVERTISEMENT AND PUBLICIT Y OF THE MOVIES IN RESPECT OF MOVIES FANNA AND DHOOM-2 SN. MOVIE NATURE OF EXPENSES AMOUNT (RS.) 1. FANNA NEWS PAPER ADS 47,03,604/- 2. -DO- PUBLICITY EXPENSES 31,51,251/- 3. -DO- MARKETING EXPENSES BY HOME ENTERTAINMENT 24 ,72,190/- 4. DHOOM-2 PUBLICITY ON NEWS PAPER 62,98,701/- 5. -DO- PUBLICITY EXPENSES 36,95,857/- 6. -DO- MARKETING EXPENSES BY HOME ENTERTAINMENT 16 ,64,300/- TOTAL 1,62,17,022/- HE HELD THAT THE ASSESSEE HAD PRODUCED BOTH THE MOV IES,THAT THE EXPENSES INCURRED FOR ADVERTISEM -ENT AND PUBLICITY WERE COVERED WITHIN MEANING OF R ULE 9A OF THE RULES.HE MADE AN ADDITION OF RS1.62 CRORES. 4.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN ORDER BEFORE THE FAA.BEFORE HIM, IT WAS ARGUED THAT TERMINOLOGY, POST PRODUCTI ON EXPENSES USED IN PRODUCTION OF FILM WAS NOTHING ELSE BUT PRODUCTION EXPENSES AND THAT IT DI D NOT INCLUDE PRINT COST OR MARKETING COST,THAT IT COVERED EXPENSES INCURRED ON DUBBING BACKGROUND SOUND, CENSOR CERTIFICATION EXPENSES,THAT SUCH EXPENSES WERE NOTHING BUT COST OF COMPLETING T HE MOVIE,THAT THE EXPENDITURE WAS ALLOWABLE U/S.37 OF THE ACT,THAT ALL THE ADVERTISEMENT AND PU BLICITY WAS DONE BEFORE CENSOR CERTIFICATION DATE.A REFERENCE WAS MADE TO THE COPIES OF THE BILL AND COPY OF THE CENSOR CERTIFICATE TO CLAIM THAT THE EXPENDITURE TO THE TUNE OF RS.1.28 CRORE W AS ALLOWABLE AS PER RULE 9A OF THE RULES. THE FAA CALLED FOR A REMAND REPORT FROM AO IN THAT REGARD.AS PER THE FAA THE AO DID NOT COMMENT UPON THE ISSUE RAISED BY THE ASSESSEE.IT WA S FURTHER ARGUED THAT AO HAD WRONGLY INTERPRETED RULE 9A OF THE RULES,THAT THE IMPUGNED EXPENDITURE WAS NORMAL BUSINESS EXPENDI - TURE DEDUCTIBLE UNDER 37 OF THE ACT.THE ASSESSEE RE LIED UPON CERTAIN CASE LAWS. REFERRING TO THE ORDER OF HIS PREDECESSOR FOR AY 2006-07,THE FAA DIS MISSED THE GROUND RAISED BY THE ASSESSEE. 4.2. THE AUTHORISED REPRESENTATIVE STATED THAT SIMILAR I SSUE WAS DECIDED BY THE TRIBUNAL FOR THE AY.2006-07(ITA/6350/MUM/2010/DTD.05.04.2013).THE DE PARTMENTAL REPRESENTATIVE LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 4.3. WE FIND THAT WHILE ADJUDICATING THE APPEAL FOR EARL IER YEAR,THE TRIBUNAL HAD HELD AS UNDER : 48.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL EVIDENCES BROUGHT ON RECORD. WE F IND THAT THE ENTIRE ISSUE REVOLVES AROUND THE 2597 &3345/M/12-YRF(07-08) 7 APPLICABILITY OF RULE 9A WHICH RELATES TO DEDUCTION IN RESPECT OF EXPENDITURE ON PRODUCTION OF FEATURE FILM.RULE 9A(2) IS VERY RELEVANT ON THE FAC TS OF THE CASE WHICH PROVIDES AS UNDER: XXXXX 49.A PERUSAL OF THIS RULE SHOW THAT WHEN THE MOVIE IS RELEASED FOR EXHIBITION ON COMMERCIAL BASIS, ATLEAST 90 DAYS BEFORE THE END OF SUCH PREVI OUS YEAR, THE ENTIRE COST OF PRODUCTION OF THE FILM SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE PROFITS AND GAINS OF SUCH PREVIOUS YEAR. IT IS ONLY WHEN THE FILM IS NOT RELEASED ATLEAST 90 DAYS BEFORE THE END OF SUCH PREVIOUS YEAR , IT IS PROVIDED THAT THE COST OF PRODUCTION IS RESTRICTED TO THE AMOUNT REALIZED BY THE FILM PRODUCER. IN THE INSTANT CASE, WE FIND THAT ALL THE THREE MOVIES WERE RELEASED BEFORE 90 DAYS FROM THE END OF THE PREVIOUS YEAR. A PERUSAL OF THE CHART EXHIBITE D ON PAGE-542 OF THE PAPER BOOK SHOW THAT THE ASSESSEE HAS SHOWN AGGREGATE INCOME WHICH IS MUCH H IGHER THAN THE COST OF PRODUCTION OF THESE MOVIES. AS THE FACTS ARE IN LINE WITH THE PROVISIO NS OF RULE 9A(2), THE ENTIRE COST OF PRODUCTION DESERVE TO BE ALLOWED. ACCORDINGLY, WE DIRECT THE AO TO DELETE THE ENHANCEMENT MADE BY THE LD. CIT(A) AT RS. 4.93 CRORES AND RS. 1.39 CRORES. IT W OULD NOT BE OUT OF PLACE TO MENTION THAT THE LD. CIT(A) HAS MADE ENHANCEMENT KEEPING IN MIND ISSUES INVOLVED IN GROUND NO. 1 OF THIS APPEAL. AS WE HAVE ALLOWED GROUND NO. 1, THE SAME WILL HOLD GOOD FOR THIS GROUND OF APPEAL ALSO. GROUND NO. 13 IS ACCORDINGLY ALLOWED. 50.GROUND NO. 15 RELATES TO ADDITION OF RS. 137.57 LAKHS BEING PUBLICITY EXPENSES NOT ALLOWABLE AS PER RULE 9A AND RULE 9B. 51.A PERUSAL OF THE ORDER OF THE LD. CIT(A) SHOW TH AT HE HAS MADE THE ENHANCEMENT OF RS. 137.57 LAKHS ON THE GROUND THAT SUCH PUBLICITY EXPENSES AR E NOT ALLOWABLE AS PER RULE 9A AND 9B OF THE RULES. IT IS THE SAY OF THE COUNSEL THAT RULE 9A A ND 9B DO NOT PRECLUDE THE ASSESSEE TO CLAIM SUCH GENUINE BUSINESS EXPENSES U/S. 37(1) OF THE ACT. S INCE ONLY GROUND FOR DISALLOWING PUBLICITY EXPENSE IS THAT SUCH EXPENSES ARE NOT ALLOWABLE AS PER RULE 9A,9B, WE FIND FORCE IN THE SUBMISSION OF THE COUNSEL THAT SUCH EXPENSES CAN BE ALLOWED U/S. 37(1) OF THE ACT. HOWEVER, SINCE THE AO HAS NOT CONSIDERED THIS ASPECT AS THE ADDITIONS HAVE BEEN MADE BY THE LD. CIT(A) DURING THE APPELLATE PROCEEDINGS, IN THE INTEREST O F JUSTICE AND FAIR PLAY, WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO. THE AO IS DIRECTED T O VERIFY THE CLAIM OF PUBLICITY EXPENSES VIS-AVIS BUSINESS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDE RATION. THE AO SHOULD ALSO VERIFY HOW MUCH PUBLICITY EXPENSES HAVE BEEN RECOVERED BY THE ASSES SEE AND CREDITED TO ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE IS D IRECTED TO FURNISH NECESSARY DETAILS TO SUBSTANTIATE ITS CLAIM OF PUBLICITY EXPENSES. GROU ND NO. 15 IS ALLOWED FOR STATISTICAL PURPOSES. CONSIDERING THE ABOVE,WE DECIDE SECOND GROUND OF AP PEAL IN FAVOUR OF THE ASSESSEE. 2597 &3345/M/12-YRF(07-08) 8 5. THIRD GROUND IS ABOUT DISALLOWANCE MADE UNDER RULE 9A/9B OF THE RULES.VIDE HIS LETTER DATED 24/11/2009,THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY COST (RS.69.83 LAKHS) OF PRINT CLAIMED AGAINST THE OLD FILMS SHOULD NOT BE DISALLOWED.AFTE R CONSIDERING THE SUBMISSION OF THE ASSESSEE , DT.7.12.2009,THE AO OBSERVED THAT THE ASSESSEE HAD MADE PAYMENTS TO ADLAB WHO WAS ENGAGED IN PROCESSING THE NEGATIVES/POSITIVE FILM ROLLS,THA T IT HAD INCURRED AN EXPENDITURE OF RS.69,83, 077/- TOWARDS PRINT COST AGAINST THE OLD MOVIE THAT WERE RELEASED IN THE EARLIER YEARS, THAT IT HAD REDUCED THE MOVIE RECEIPTS TO THAT EXTENT,THAT IN R ESPECT OF SOME MOVIES IT WAS PRODUCER AND IN SOME OF THE MOVIES IT WAS THE DISTRIBUTOR, THAT IT WAS NOT ELIGIBLE TO CLAIM COST OF PRINTS AS PER RULES 9A/9B OF THE RULES, THAT NO RECOVERY TOWARDS COST OF PRINTS HAD BEEN CREDITED TO THE RECEIPT ACCOUNT AGAINST THE MOVIE,THAT IT HAD REDUCED ITS P ROFIT BY RS.69.83 LAKHS.FINALLY,HE DISALLOWED THE CLAIM MADE BY THE ASSESSEE AND ADDED A SUM OF R S.69,83,077/- TO ITS THE TOTAL INCOME. 5.1. DURING THE APPELLATE PROCEEDINGS BEFORE THE AO THE ASSESSEE ARGUED THAT THE AO HAD MADE THE ADDITION WITHOUT APPRECIATING THE FACT THAT PAY MENT WAS MADE TO ADLAB TOWARDS FULL AND FINAL SETTLEMENT,THAT ADLAB HAD CONFIRMED THE RECEIPT IN RESPONSE TO THE LETTER ISSUED BY THE AO U/S. 133(6) OF THE ACT, THAT THE AO HAD NOT OFFERED ANY COMMENTS ABOUT THE PAYMENTS, THAT PAYMENTS WERE ALLOWABLE AS NORMAL BUSINESS EXPENSES AND WERE DEDUCTIBLE U/S.37(1) OF THE ACT, THAT EXCEPT FOR KRISH THE REVENUE FOR ALL THE MOVIES WAS OFFERE D FOR TAXATION IN EARLIER YEAR THE SMALL AMOUNT FOR TAXATION,UNDER DISPUTE WAS SETTLED DURING THE Y EAR UNDER APPEAL, THAT IT FOLLOWED ACCRUAL SYSTEM OF ACCOUNTING,THAT TILL THE EXPENSES WERE NO T CRYSTALLISED SAME WOULD NOT BE ACCOUNTED FOR.ASSESSEE PLACED RELIANCE ON GOETZE INDIA LTD. ( 112 TTJ 1) AND CIBA SPECIALITY LTD.(7 SOT 510). AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER THE FAA HELD THAT ADLAB HAD CONFIRMED THAT PAYMENT HAD BEEN MADE IN T HE CURRENT YEAR AS THE AMOUNT WAS SETTLED IN THE YEAR UNDER CONSIDERATION, THAT THE ISSUE WAS IDENTICAL TO THE REVENUE BEING OFFERED BY IT IN SUBSEQUENT YEAR, THAT THE EXPENSES WERE CLAIMED TO HAVE CRYSTALLISED IN THE YEAR UNDER APPEAL,THAT AS PER THE PRINCIPLE OF TAXATION EACH AY.HAD TO BE DEALT SEPARATELY, THAT EXPENSES OF A PARTICULAR YEAR HAVE TO BE CLAIMED AND ALLOWED IN THAT VERY YE AR,THAT THE SERVICES WERE RENDERED BY ADLAB IN THE PRIOR PERIOD,THAT QUANTIFICATION OF PAYMENT WAS NOT SUBJECT MATTER OF DISPUTE, THAT THE AO WAS JUSTIFIED IN NOT ALLOWING THE PRIOR PERIOD EXPENSES . 5.2. THE AR CONTENDED,BEFORE US,THAT THE ASSESSEE WAS HA VING A RUNNING ACCOUNT WITH ADLAB ,THAT BILLS FROM ADLAB WERE REGULARLY SETTLED,THAT THE AM OUNT IN QUESTION WAS THE ADDITIONAL COST PAID 2597 &3345/M/12-YRF(07-08) 9 FOR PRINTS OF THE MOVIES RELEASED IN EARLIER YEARS, THAT THE AMOUNT WAS PAID DURING THE YEAR AND LIABILITY WAS FINALLY SETTLED,THAT THE ASSESSEE HAD OFFERED THE INCOME IN EARLIER YEARS, THAT THE EXPENDITURE INCURRED FOR SUCH INCOME HAD TO BE ALLO WED.HE FURTHER STATED THAT EVEN IF THE MATTER WAS TO BE RESTORED BACK TO THE FILE OF AO HE SHOULD BE DIRECTED TO FIND OUT AS TO WHETHER THE INCOME ARISING OUT OF THE PRINTS WAS OFFERED FOR TA XATION IN THE EARLIER YEARS OR NOT.THE DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 5.3. WE FIND THAT THE ADDITION WAS MADE WITH REGARD TO T HE EXPENDITURE INCURRED BY THE ASSESSEE FOR GETTING THE PRINTS OF OLD MOVIES.THE OBJECTION OF THE DEPARTMENTAL AUTHORITIES IS THAT THE EXPENDITURE WAS NOT FOR THE MOVIES RELEASED DURING THE YEAR.THE ASSESSEE HAS CLAIMED THAT INCOME ARISING FROM MOVIES HAD ALREADY BEEN DISCLOS ED IN EARLIER YEARS.WE FIND MERIT IN THE ALTERNATE ARGUMENT ADVANCED BY THE ASSESSEE THAT MA TTER SHOULD BE RESTORED BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION. HE IS DIRECTED TO VERIFY AS TO WHETHER THE ASSESSEE HAD OFFERED THE INCOME OF THE MOVIES IN THE EARLIER YEARS AND HAD I NCURRED EXPENSES DURING THE YEAR FOR GETTING NEW PRINTS.IF IT IS FOUND THAT THE INCOME HAS ALREA DY BEEN TAXED,THERE IS NO JUSTIFICATION FOR NOT ALLOWING THE EXPENDITURE.THIRD GROUND STANDS ALLOWE D IN FAVOUR OF THE ASSESSEE,IN PART. 6. FOURTH GROUND DEALS WITH DISALLOWANCE ON COST OF PR INT,PUBLICITY AND ADVERTISEMENT EXPENSES UNDER RULE 9B AMOUNTING TO RS.4.55 CRORES.DURING T HE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD DEBITED RS.6.93 CRORES TO P&L ACCOUNT IN RESPECT OF DISTRIBUTION EXPENSES, MOST OF EXPENSES WAS INCURRED ON PUBLICITY AND PRIN T COST, THAT EXPENSE INCURRED ON ACCOUNT OF COST OF PRINTING AND ADVERTISEMENT AS PER RULE 9B OF THE RULES,THAT OTHER EXPENSES INCURRED ON ACCOUNT OF PAYMENT OF SUB DISTRIBUTOR/AUDIT FEE,DEP RECIATION AND OTHER GENERAL EXPENSES COULD BE ALLOWED.FINALLY, OUT OF THE TOTAL EXPENDITURE OF RS ,.6.93 CRORES,THE AO MADE A DISALLOWANCE OF RS.4,55,60,396/-. 6.1. BEFORE THE FAA THE ASSESSEE ARGUED THAT THE TOTAL EXPENSE OF RS.6.93 CRORES WAS INCURRED FOR THE PURPOSE OF DISTRIBUTION DIVISION,THAT THE EXPEN SE WAS LEGITIMATE BUSINESS EXPENSE AND HENCE ALLOWABLE,THAT THE EXPENSES IN QUESTION WERE NOT CO VERED UNDER RULE 9B OF THE RULES, THAT RULE 9A WAS NOT APPLICABLE TO THE EXPENSES,THAT IF AN AS SESSEE WOULD NOT SPEND MONEY ON PUBLICITY AND PRINT COST THE REVENUE WOULD BE ADVERSELY AFFEC TED.IT REFERRED TO CERTAIN CASES IN SUPPORT OF THE CLAIM,THAT ADVERTISEMENT AND MARKETING EXPENSES INCURRED FOR PROMOTING THE PRODUCT WAS ALLOWABLE AS REVENUE EXPENDITURE,THAT RULE 9A/9B W OULD NOT OVER RULE THE GENERAL PROVISIONS OF 2597 &3345/M/12-YRF(07-08) 10 THE ACT,THAT SAID RULES DID NOT DEAL WITH THE ALLOW ABILITY OF EXPENDITURE AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE FAA HELD THAT THE ISSUE OF APPLICABILITY OF RULE 9A/9B VIZ A VIZ COST OF ADVERTISEMENT AND PUBLICITY HAD BEEN DEALT IN DETAIL BY HIS PREDECESSOR WHILE DECIDING THE APPEAL FOR 2006-07.FOLLOWING THE ORDER OF HIS P REDECESSOR, HE DECIDED THE ISSUE AGAINST THE ASSESSEE. 6.3. WE FIND THAT THE TRIBUNAL IN ITS ORDER FOR THE AY.2 006-07 HAD DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE.WHILE DECIDING THE GOA-2 WE HAVE REPRODUCED THE RELEVANT PORTION OF THE THAT ORDER.RESPECTFULLY,FOLLOWING THE ORDER FOR THE EARLIER YEAR,OF THE TRIBUNAL,WE DECIDE FOURTH GROUND IN FAVOUR OF THE ASSESSEE. 7. DISALLOWANCE OF PUBLICITY COST INCURRED,IS THE SUBJ ECT MATTER OF GROUND NO.5.DURING THE ASSESSMENT PROCEEDINGS,THE AO OBSERVED THAT FILM A B TO BANJA SAJANWA HAMAR WAS DISTRIBU - TED BY THE ASSESSEE DURING THE PERIOD RELEVANT TO A Y.2007-08, THAT THE ASSESSEE HAD ADMITTED THAT THE AMOUNT OF RS.9.40 LAKHS WAS NOT REFLECTED IN TH E BOOKS OF ACCOUNTS. HE ADDED THE AMOUNT IN QUESTION TO THE TOTAL INCOME OF THE ASSESSEE UNDER THE HEAD CONCEALED INCOME. 7.1. BEFORE THE FAA,DURING THE APPELLATE PROCEEDINGS, TH E ASSESSEE ARGUED THAT RECEIPTS COLLECTED BY IT ON BEHALF OF THE PRODUCER OF THE FILM AB TO BANJA SAJANWA HAMAR WERE PAID T O THE PARTY AFTER DELETING THE PUBLICITY EXPENSES INCURRED IN T HEIR ACCOUNT TOWARDS THE SAID MOVIE.COPY OF THE CONFIRMATION OF PAYMENT MADE TO SHARP FOCUS WAS ALS O SUBMITTED BEFORE THE AO,THAT ALL PAYMENTS WERE MADE THROUGH ACCOUNT PAYEE CHEQUES ON LY, THAT THE RECEIPTS WERE ROUTED THROUGH THE ASSESSEE SINCE THE PRODUCER HAD NO INFRASTRUCTU RE TO COLLECT THE REVENUE, THE DISPUTED AMOUNT WAS NEITHER ANY INCOME NOR EXPENSE,THAT THE AMOUNT WAS NOT SHOWN THE P&L ACCOUNT, THAT THE RECEIVER OF THE AMOUNT HAD SHOWN THE SAID INCOME IN ITS PROFIT AND LOSS ACCOUNT, THAT AFTER DEDUCTING THE PUBLICITY COST OF RS. 1.01 LAKHS BALA NCE OF RS. 8.72 LAKHS WAS PAID TO THE PRODUCER, THAT THE SAID FACT WAS CONFIRMED BY THE PRODUCER IN HIS REPLY TO THE SUMMONS ISSUED TO HIM BY THE AO,THAT THE AO HAD FAILED TO APPRECIATE THAT IN THE TRANSACTION THERE WAS NO INCOME, THAT ASSESSEE HAD UNDERTAKEN THE DISTRIBUTION OF THE FILM ON EXPE RIMENTAL BASIS, THAT INSTEAD OF SHOWING THE RECEIPT ON THE CREDIT SIDE AND EXPENSES ON THE DEBI T SIDE THE ASSESSEE HAD NETTED OF THE RECEIPT IN THE LEDGER ACCOUNT OF THE PRODUCER OF THE MOVIE, TH AT THERE WAS NO CONCEALMENT OF INCOME LOSS TO REVENUE AS THE INCOME WAS SHOWN BY THE PRODUCER OF THE FILM. 2597 &3345/M/12-YRF(07-08) 11 AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, T HE FAA VERIFIED THE LEDGER ACCOUNT OF THE HO FROM WHERE THE PAYMENTS WERE MADE AND THE AMOUNTS W ERE COLLECTED. HE HELD THAT AMOUNT FROM THE BOOKS OF ACCOUNTS HAD BEEN SET OFF AGAINST THE COLLECTION AND THE AMOUNT PAID TO THE PRODUCER OF THE MOVIE, THAT THE RECIPIENT COMPANY HAD COME F ROM THE RECEIPT OF THE BALANCE AMOUNT, THAT THE FACT OF PAYMENT COULD NOT BE DENIED,THAT THE AC TION OF THE AO TREATING THE INCOME AS UNACCOUNTED RECEIPTS WAS UNWARRANTED, THAT THE PAYM ENT OF RS. 8.72 LAKHS TO THE PRODUCER OF THE FILM CANNOT BE DENIED,THAT THE REMAINING EXPENDITUR E OF RS.1.01 LAKHS COULD NOT BE ALLOWED TO THE APPELLANT IN THE ABSENCE OF ITS CLAIM IN THE RE GULAR BOOKS OF ACCOUNTS. 7.2. BEFORE US,THE AR CONTENDED THAT THE ASSESSEE HAD NO T CLAIMED THE EXPENDITURE IN THE BOOKS OF ACCOUNT,THAT IT HAD NOT ASKED FOR ANY DEDUCTION,THA T NO ADDITION COULD BE MADE WHEN EXPENDITURE WAS NOT CLAIMED.THE DR STATED THAT ASSESSEE DID NOT FILE ANY RECONCILIATION. 7.3. WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT AS SESSEE HAD DISTRIBUTED A REGIONAL FILM, THAT AFTER DEDUCTING PUBLICITY COST IT PAID THE BAL ANCE AMOUNT TO THE PRODUCER OF THE FILM,THAT IT DID NOT ROUTE THE TRANSACTION THROUGH ITS BOOKS OF ACCOUNTS, THAT THE PAYMENT WAS MADE THROUGH BANKING CHANNEL, THAT THE RECIPIENT PRODUCER HAD AD MITTED TO HAVE RECEIVED THE DISPUTED AMOUNT AND HAD SHOWN IN HIS RETURN OF INCOME.CONSIDERING T HESE FACTS,WE ARE OF THE OPINION THAT FAA WAS NOT JUSTIFIED IN PARTLY UPHOLDING THE DISALLOWA NCE MADE BY THE AO.WHEN THE ASSESSEE HAD NOT CLAIMED ANY DEDUCTION,THERE WAS NO JUSTIFICATIO N FOR MAKING ANY DISALLOWANCE.GROUND NO.5 IS DECIDED IN FAVOUR OF THE ASSESSEE. 8. NEXT GROUND(GOA6-8)IS ABOUT REMUNERATION PAID TO TH E DIRECTORS AMOUNTING TO RS.7.07 CRORES. DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD PAID RS.9.04 CRORES TO ITS DIRECTORS AS PROFESSIONAL FEE.HE REQUIRED IT TO EXP LAIN AS TO WHY THE PROFESSIONAL FEE PAID BY IT TO THE DIRECTORS SHOULD NOT BE TREATED AS SALARY WITHI N THE MEANING OF SECTION 17 OF THE ACT. VIDE ITS LETTER,DT.7.12.2009,THE ASSESSEE FILED ITS EXPLANAT ION.AFTER CONSIDERING THE SAME,HE HELD THAT THERE WAS NO FORCE IN THE ARGUMENT OF THE COMPANY THAT TH E DIRECTORS HAD SUPERVISED THE OVERALL WORK OF THE ASSESSEE CARRIED OUT DURING THE PERIOD RELEV ANT TO AY. 2007-08, THAT PROFESSIONAL FEE OF RS.9.50 CRORES HAD BEEN DEBITED TO THE COST OF PROD UCTION IN RESPECT OF MOVIE FANNA AND DHOOM- 2 WHICH WERE RELEASED DURING THE YEAR, THAT BY DEBI TING THE PROFESSIONAL FEE IT HAD REDUCED THE PROFIT EARNED AGAINST THE MOVIE AND FOR THE AY,UNDE R CONSIDERATION,THAT IT HAD RELEASED THREE MOVIES AND ELEVEN OTHER MOVIES WERE UNDER PRODUCTIO N THAT WERE SHOWN AS WORK IN PROGRESS, 2597 &3345/M/12-YRF(07-08) 12 THAT THE DIRECTORS HAD NOT ONLY SUPERVISED THE DAY TO DAY ACTIVITIES OF THE MOVIES RELEASED DURING THE YEAR-THEY HAD ALSO CONTRIBUTED THEIR TIME AND S CRIPT IN SUPERVISING THE 11 MOVIES,THAT WHOLE PROFESSIONAL FEE SHOULD HAVE BEEN ALLOCATED AMONG T HE COST OF PRODUCTION OF MOVIES RELEASED DURING THE YEAR AND SHOWN AS WORK IN PROGRESS, THAT IT HAD NOT MADE SUBMISSION IN RESPECT OF SERVICES RENDERED FOR MOVIE RELEASE AND SUPERVISING THE MOVIES,THAT IT HAD NOT BOOKED ANY EXPENSE ON ACCOUNT OF PROFESSIONAL FEES IN THE COS T OF PRODUCTION OF UNRELEASED MOVIES. HE DEALT WITH THE PROFESSIONAL FEE PAID TO PAMELA CHOPRA(RS. 50 LAKHS) SEPARATELY.OUT OF THE REMAINING PROFESSIONAL FEE OF RS.9CRORES PAID TO OTHER DIRECT ORS HE MADE PROPORTIONATE ALLOCATION AMONG THE 14 MOVIES(11 MOVIES UNDER PRODUCTION + 3 MOVIES REL EASED DURING THE YEAR).HE TREATED RS.64.28 LAKHS AS COST OF PRODUCTION OF MOVIE.FINALLY,HE ALL OWED AN EXPENDITURE OF RS.1.92 CRORES (RS. 64. 28 LAKHS X 3) AND CAPITALISED THE BALANCE AMOUNT,I. E. RS.7.07 CRORES. 8.1. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ASSESSMENT ORDER, THE FAA HELD THE AO HAD NOT DISPUTED THE ALLOWABILITY OF REMUNERATIO N TO THE DIRECTORS OF THE FILMS PRODUCED BY THE ASSESSEE, THAT THE ARGUMENT ADVANCED BY THE ASS ESSEE TO THE EFFECT THAT DIRECTORS OF THE FILMS WERE DIFFERENT FROM THE DIRECTORS OF THE COMPANY WA S MEANINGLESS,THAT THE AO HAD NOT APPORTION -ED THE AMOUNT PAYABLE TO THE FILM DIRECTORS UNDER ANY SUCH CONFUSION, THAT HE HAD MERELY HELD THAT WHEN THE SERVICES OF DIRECTORSHIP OF FILMS WER E BEING RENDERED IN RESPECT OF 11 FILMS DURING THE YEAR, THEN THE REMUNERATION RECEIVED FOR SUCH P ROFESSIONALS DURING THE YEAR SHOULD BE DISTRIBUTED AMONG THE 11 FILMS RATHER THAN AMONG TH REE FILMS COMPLETED AND RELEASED DURING THE YEAR, THAT THE AO HAD ALSO NOT DISPUTED THE WORK OF DIRECTORSHIP QUALIFYING AS A PROFESSIONAL,THAT THE ARGUMENTS OF THE ASSESSEE DID NOT ADDRESS THE I SSUE RAISED BY THE AO, THERE WAS NO JUSTIFICATION FOR NOT ALLOCATING THE EXPENSES BY WA Y OF PAYMENT MADE TO THE DIRECTORS INTO ALL FILMS FOR WHICH THE WORK WAS DONE DURING THE YEAR,T HAT THE AO HAD OBSERVED THAT THE EXPENSES HAD TO BE CAPITALISED IN WORK IN PROGRESS, THAT THE TREATMENT GIVEN BY THE AO WOULD MEAN THAT SAME WOULD STAND ALLOWED IN THE RESPECTIVE YEARS, T HAT THERE WAS NO REASON TO BELIEVE THAT THE AO WOULD REFRAIN FROM DOING SO.ACCORDINGLY, THE FAA DI SMISSED THE GROUND,RAISED BY THE ASSESSEE. 8.2. GROUND SEVEN IS ABOUT ALLOWING THE PROPORTIONATE DI SALLOWANCE ON ACCOUNT OF DIRECTORS FEES DISALLOWED IN LAST YEAR FOR THE FILMS RELEASED DURI NG THE CURRENT YEAR. 2597 &3345/M/12-YRF(07-08) 13 8.3. IN GROUND NUMBER EIGHT THE ASSESSEE HAS RAISED THE ISSUE OF DISALLOWANCE OF RS. 50 LAKHS PAID TO ONE OF THE DIRECTORS,PAMELA CHOPRA (PC).DURING T HE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAD FAILED TO PRODUCE ANY DOCUMEN TARY EVIDENCE WHICH COULD SHOW THAT PC HAD EVER ATTENDED THE OFFICE OF THE ASSESSEE, THAT IT W AS NOT ABLE TO DESCRIBE THE WORK ATTENDED BY HER,THAT IT FURTHER FAILED TO FURNISH DETAILS OF QU ALIFICATION EXPERIENCE AND SKILL IN LYRICS AND SONG EXCEPT A COPY OF INTERNATIONAL MOVIE DATA,THAT THE IMD SHOWED HER AS A PLAYBACK SINGER IN MANY OF HER HUSBANDS FILMS PRODUCED DURING YEAR 19 85-2004, THAT ASSESSEE WAS OBLIGING ITS DIRECTOR BY GIVING HER HUGE PROFESSIONAL FEE.THE AO DISALLOWED SAID AMOUNT WITHIN THE MEANING OF SECTION 40A(2)(B) OF THE ACT. 8.3.1. DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE ARGU ED THAT PC WOULD ATTEND OFFICE REGULARLY AND WOULD HELP IN COORDINATING WITH VARIOUS ARTISTS , FINALISING THE LYRICS/SONGS, THAT SHE HAD IMMENSE ACUMEN IN THE FILM INDUSTRY,THAT AN INDEPEN DENT WEBSITE HAD COLLECTED THE INFORMATION ABOUT HER CONTRIBUTION MADE TO FILMS DURING LAST TW O DECADES, THAT THE ASSESSEE WAS PAYING HER REMUNERATION FOR LAST SO MANY YEARS, THAT NEVER IN THE PAST SUCH EXPENSES WERE DISALLOWED AS UN - REASONABLE,THAT THE COMPANY WAS THE BEST PERSON TO JUDGE IS WHAT NEEDS TO BE PAID TO WHOM,THAT SHE HAD CONTRIBUTED IN LOOKING TO PRODUCTION OF THE FILM AND RECORDING OF SONGS,THAT EACH ACTION COULD NOT BE DOCUMENTED, THE REMUNERATION OF RS.50 LAKHS PAID TO HER WAS OFFERED FOR TAXATION IN HER INDIVIDUAL RETURN AND TAX HAD BEEN PAID AT MAXI MUM MARGINAL RATE, THAT THERE WAS NEITHER TAX PLANNING NOR TAX EVASION, THAT SHE HAD SUNG SONGS I N VARIOUS FILMS, THAT SHE HAD ALSO WRITTEN THE STORY OF A FEW FILMS, THAT SHE WAS ALSO AN ASSOCIAT E PRODUCER OF MANY OF FILMS,THAT THE AO COULD NOT DECIDE AS TO WHAT WAS REASONABLE AND WHAT WAS N OT, THAT SHE HAD ACTED IN CAPACITY AS A DIRECTOR AS PER HER CALIBRE, KNOWLEDGE AND EXPERIEN CE.THE ASSESSEE PRODUCED VARIOUS DOCUMENTS, BEFORE THE FAA,TO PROVE THAT PC HAD RENDERED SERVIC ES TO THE COMPANY. THE ASSESSEE RELIED UPON THE CASES OF INDO SAUDI SERVICES (TRAVEL) (P.) LTD. (219 CTR 562). AFTER CONSIDERING THE AVAILABLE MATERIAL,THE FAA HE LD THAT THE AO COULD NOT SUBSTITUTE HIMSELF IN THE SHOES OF HEAD OF HRD DIVISION OF THE COMPANY,TH AT HE WAS AUTHORISED BY LAW TO GO INTO THE QUESTION WHETHER THE EXPENDITURE CLAIMED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR NOT,THAT HE HAD NOTICED FROM THE SURVEY PROCEEDINGS AND THE VISIT OF THE INSPECTOR THAT DEDUCTION WAS CLAIMED IN THE ABSENCE OF RENDERING O F SERVICES,THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS, THAT IT WAS ALSO HIT BY THE PROVISION OF SECTION 40A(2) (B) OF THE ACT. 2597 &3345/M/12-YRF(07-08) 14 8.4. WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT TH E TRIBUNAL HAS DEALT THE ISSUE OF REMUNERATION OF DIRECTORS,WHILE ADJUDICATING THE AP PEAL FOR THE AY.2006-07(SUPRA).WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL AND IT READS AS UNDER: 17.GROUND NO. 3 RELATES TO THE DISALLOWANCE OF DIRE CTORS REMUNERATION TO THE TUNE OF RS. 2.30 CRORES. THE ASSESSEE HAS FURTHER AGITATED THE ACTION OF THE LD. CIT(A) WHO ENHANCED THE DISALLOWANCE WITHOUT GIVING THE NOTICE U/S. 251 (2) OF THE ACT. 18.DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE COMPANY HAS DEBITED A SUM OF RS. 85,00,000/- EACH AS DIRECTORS REMUNERATION IN RESPECT OF THREE MOVIES RELEASED DURING THE YEAR. THE AO SOUGHT EXP LANATION FROM THE ASSESSEE TO JUSTIFY THE PAYMENT OF RS. 85,00,000/- EACH AS DIRECTORS R EMUNERATION IN RESPECT OF THREE MOVIES RELEASED DURING THE YEAR. THE ASSESSEE FILED A DET AILED REPLY DT. 24.12.2008 AND SUBMITTED THAT SHRI ADITYA CHOPRA WAS PAID 2 CRORES AS PRODU CERS FEES FOR ALL THE THREE MOVIES AND MRS. PAYAL CHOPRA WAS PAID RS. 30 LAKHS AS MANAGERI AL REMUNERATION FOR THREE MOVIES. IT WAS EXPLAINED BY THE ASSESSEE THAT THE AMOUNT IS PAID TO THE DIRECTORS FOR THE OVERALL INPUT MADE BY THEM THROUGHOUT THE YEAR FOR THE WORK DONE BY THEM. THE AO WAS OF THE OPINION THAT IN ADDITION TO THREE MOVIES TWO MORE M OVIES WERE ALSO UNDER PRODUCTION DURING THE YEAR. THEREFORE, THERE IS NO JUSTIFICATI ON FOR DEBITING THE ENTIRE REMUNERATION UNDER THE THREE MOVIES RELEASED DURING THE YEAR. T HE AO WENT ON TO ALLOW RS. 138 LAKHS AS DIRECTORS REMUNERATION AND APPORTIONED THE BALANCE OF RS. 92 LAKHS TOWARDS WORK-IN- PROGRESS OF TWO MOVIES UNDER PRODUCTION NAMELY DHOO M-2 AND FANNA AND MADE AN ADDITION OF RS. 1.45 CRORES. 19.THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) AND REITERATED THE SUBMISSION MADE BEFORE THE AO. THE LD. CIT(A) CALLED FOR REMA ND REPORT FROM THE AO. THE AO SUBMITTED THAT SINCE THE ASSESSEE IS FOLLOWING THE COMPLETION METHOD OF ACCOUNTING, THEREFORE, THE REMUNERATION SHOULD HAVE BEEN PROPOR TIONATELY ADDED TO THE COST OF PRODUCTION OF THE MOVIES UNDER PRODUCTION. ON BEIN G ASKED TO ELABORATE THE SERVICES FOR WHICH THE REMUNERATION WAS PAID, IT WAS POINTED OUT THAT REMUNERATION PAID TO SHRI ADITYA CHOPRA WAS FOR THE THREE MOVIES RELEASED IN THE YEA R FOR PRODUCTION, POST PRODUCTION, EDITING OF FILMS, ENSURING THE FILM GETS ADEQUATE P UBLICITY AND DISTRIBUTION OF THE FILMS IN VARIOUS LOCATIONS. REGARING THE REMUNERATION PAID TO MRS. PAYAL CHOPRA, IT WAS SUBMITTED THAT IT WAS FOR SET DECORATION, SET CONSTRUCTION, D ESIGN ETC. IT WAS ALSO POINTED OUT THAT MRS. PAYAL CHOPRA ALSO CO-ORDINATES WITH DRESS AND COSTUME DEPARTMENT FOR VARIOUS ITEMS OF WORK. 19.1.AFTER CONSIDERING THE FACTS AND SUBMISSIONS BR OUGHT ON RECORD, THE LD. CIT(A) FORMED A BELIEF THAT DIRECTORS REMUNERATION SHOULD BE COMM ENSURATE WITH THE SERVICES RENDERED BY THEM. THE LD. CIT(A) WAS OF THE OPINION THAT THE D IRECTORS DID NOT RENDER ANY SPECIALIZED OR SPECIFIC SERVICE IN THE PRODUCTION OF THE THREE FILMS. IN THE OPINION OF THE LD. CIT(A) THE ASSESSEE WAS NOT ABLE TO SPECIFY WHAT PARTICULAR SK ILLED SERVICES WERE RENDERED BY THE DIRECTORS FOR THE PRODUCTION OF THE THREE MOVIES. WHATEVER SERVICES PUT BY THE DIRECTORS MENTIONED BY THE ASSESSEE, THE LD. CIT(A) WAS OF TH E OPINION THAT THERE ARE SPECIALISTS IN THE FILM MAKING WHO LOOK AFTER THOSE SERVICES AND A RE SUITABLY PAID FOR THE SERVICES. THEREFORE, THE ASSESSEE HAS FAILED TO ESTABLISH THA T ADDITIONAL SPECIALIZED SKILLED SERVICES WERE RENDERED BY THE DIRECTOR. THE LD. CIT(A) WENT ON TO RELY UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SWADESHI COTT ON MILLS VS CIT 63 ITR 57. DECISION OF MADRAS HIGH COURT IN THE CASE OF MYCOL (PRIVATE) LTD. VS CIT 150 ITR 609. THE LD. CIT(A) FINALLY CONCLUDED THAT REMUNERATION PAID TO THE DIRECTORS ARE NOT WHOLLY AND EXCLUSIVELY FOR THE PRODUCTION OF THREE MOVIES REL EASED DURING THE YEAR AS THE ASSESSEE COULD NOT ESTABLISH THE NEXUS BETWEEN THE SPECIFIC SERVICES RENDERED BY THE DIRECTORS AND THE PRODUCTION OF THE THREE MOVIES AND WENT ON TO DISALLOW THE ENTIRE DIRECTORS 2597 &3345/M/12-YRF(07-08) 15 REMUNERATION TO THE TUNE OF RS. 2.30 CRORES IN PLAC E OF THE DISALLOWANCE OF RS. 92 LAKHS MADE BY THE AO. 22.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL EVIDENCE BROUGHT ON RE CORD. IT IS NOT IN DISPUTE THAT THE LD. CIT(A) HAS MADE ENHANCEMENT TO THE DISALLOWANCE MAD E BY THE AO WITHOUT AFFORDING ANY OPPORTUNITY TO THE ASSESSEE. WE MAY CANCEL THE ADD ITION AT THIS STAGE ONLY. HOWEVER ON MERITS, WE FIND THAT THE REVENUE AUTHORITIES HAVE N OT APPRECIATED THE FACTS AND THE CIRCUMSTANCES INVOLVED IN MAKING OF MOVIE. IT IS T HE SAY OF THE REVENUE AUTHORITIES THAT THE ASSESSEE COULD NOT BRING ANY EVIDENCE TO SHOW WHAT EXTRA SERVICES HAVE BEEN PUT BY THEM TO JUSTIFY THEIR REMUNERATION. NO DOUBT, IN THE MO VIE MAKING SPECIALISTS ARE INVOLVED FOR EVERY DEPARTMENT. HOWEVER, AT THE END OF THE DAY, IT IS FOR THE PRODUCERS OF THE FILM TO SEE THAT THEIR FILM GETS VERY HIGH PUBLICITY, IT IS ONL Y AFTER THE COMPLETION OF THE MOVIE , THE PRODUCERS EXTRA ROLE COMES INTO PLAY TO SAFEGUARD THEIR HEAVY INVESTMENTS TOWARDS COST OF PRODUCTION. THE PRODUCERS HAS TO SEE THAT THE MOV IE GETS GOOD PREVIEW FROM PRINT AND ELECTRONIC MEDIA FOR WHICH EXTRA EFFORTS HAVE TO BE DONE AS A PRO. FURTHER , TO SEE THAT THE MOVIES GET GOOD CINEMA HALLS, THE PRODUCERS HAVE TO BARGAIN WITH MULTIPLEXS AND SINGLE SCREEN THEATRES REGARDING PROFIT SHARING. THEREFOR E, IT CANNOT BE SAID THAT THE PRODUCERS HAVE NO ROLE TO PLAY AFTER THE MOVIE IS COMPLETED. FURTHER CONSIDERING THE MAGNITUDE OF THE PRODUCTION HOUSE OF THE ASSESSEE,IT CANNOT BE SAID THAT SHRI ADITYA CHOPRA AND MRS. PAYAL CHOPRA HAVE NOT PUT ANY EXTRA EFFORT. ALL THE SE FACTS HAVE NOT BEEN APPRECIATED BY THE REVENUE AUTHORITIES WHO HAVE GONE BY GENERAL OB SERVATIONS, THEREFORE, CONSIDERING THE ENTIRE FACTS INVOLVED IN THIS LINE OF BUSINESS, IN OUR CONSIDERATE VIEW, THE REMUNERATION PAID TO THE DIRECTORS WAS REASONABLE AND COMMENSURA TE WITH THE SERVICES PROVIDED BY THEM. ACCORDINGLY, WE DIRECT THE AO TO DELETE THE ADDITION MADE BY HIM AND ALSO DELETE THE ENHANCEMENT DONE BY THE LD. CIT(A). GROUND NO. 3 I S ACCORDINGLY ALLOWED. 8.4.A. WE WOULD ALSO LIKE TO DISCUSS THE REMUNERATION PAID TO PC.IT IS FOUND THAT THE AO OR THE FAA HAVE NOT DOUBTED THE ABILITY OF PC IN RENDERING SERVICES TO THE ASSESSEE,THAT AN INDEPENDENT AGENCY HAS ALSO CERTIFIED THAT SHE WAS CAPABLE OF H ANDLING THE WORK RELATED WITH MOVIES,THAT SHE HAD SHOWN THE MONEY RECEIVED FROM THE ASSESSEE IN H ER INDIVIDUAL RETURN OF INCOME,THAT SHE HAD PAID TAXES AT MAXIMUM MARGINAL RATE FOR THE REMUNER ATION RECEIVED BY HER.CONSIDERING THESE FACTS AND THE ABOVE REFERRED ORDER OF THE TRIBUNAL ,WE ARE OF THE OPINION THAT THE AO/FAA WAS NOT JUSTIFIED IN DISALLOWING REMUNERATION PAID TO T HE DIRECTORS.GROUND NO.6 AND 8 ARE DECIDED IN FAVOUR OF THE ASSESSEE AND GROUND NO.7 IS ALLOWED F OR STATISTICAL PURPOSES. 9. GROUND 11 IS ABOUT ADDITION ABOUT THE SATELLITE INC OME.DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT AN AGREEMENT BETWEEN THE ASSESSEE AND SET SATELLITE SINGAPORE WAS EXECUTED ON 06/12/206 TO AWARD TELECAST RIGHTS OF THE MOVIES ON TELEVISION IN RESPECT OF THE MOVIES DHOOM-2 AND KABUL EXPRESS FOR A TOTAL CONSIDERATION OF RS.1 8 CRORES, THAT ACCORDING TO THE TERMS AND CONDITIONS OF THE AGREEMENT THE ASSESSEE WAS TO REC EIVE RS.3 CRORES ON THE DATE OF EXECUTION OF THE AGREEMENT,THAT IT DID NOT OFFER SAME FOR TAXATI ON. THE AO WAS OF THE OPINION THAT BALANCE AMOUNT OF RS.15 CRORES ALSO BECAME THE INCOME OF TH E ASSESSEE FOR THE YEAR UNDER CONSIDERATION 2597 &3345/M/12-YRF(07-08) 16 ON ACCRUAL BASIS AS THE ASSESSEE WAS FOLLOWING MERC ANTILE SYSTEM OF ACCOUNTING, THAT IT HAD RECEIVED THE INCOME ON THE VERY DAY ON WHICH THE AG REEMENT WAS EXECUTED. THE ASSESSEE MADE ELABORATE SUBMISSIONS BEFORE THE AO IN THAT REGARD. HOWEVER,NOT SATISFIED WITH THE EXPLANATION, HE MADE AN ADDITION OF RS.18 CRORES TO THE INCOME O F THE ASSESSEE FOR THE YEAR UNDER APPEAL. 9.1. BEFORE THE FAA,THE ASSESSEE ARGUED THAT THE AO DID NOT CONSIDER THAT THE RIGHTS WERE FOR FOUR YEARS AND THE TOTAL RECEIPTS COULD NOT BE CONSIDERE D AS RECEIPT OF THE CURRENT YEAR, THAT THE AO ERRED IN NOT ALLOWING THE DEDUCTION OF RS.9 CRORES THAT WAS DISALLOWED IN EARLIER YEAR, THAT THE EFFECTIVE PERIOD OF TELECAST RIGHT,AS PER THE AGREE MENT,WAS FOUR YEARS COMMENCING ON 01/05/ 2007, THAT IT HAD GIVEN THE SATELLITE LIKE TO THE B ROADCASTER, THAT THE BROADCASTER HAD THE RIGHT FOR FOUR-FIVE YEARS TO TELECAST THE MOVIE UP TO A PARTI CULAR NUMBER OF TIMES IN EACH YEAR, THAT THE REVENUE WAS FOR THE PERIOD OF YEARS OF THE LICENSE AGREEMENT, THAT THE LICENSE AGREEMENT WAS DIFFERENT FROM THE SALE AGREEMENT, THAT IN THE LICE NSE AGREEMENT THE LICENSE RIGHTS WAS FOR YEAR AFTER YEAR AND THEREFORE, THE INCOME COULD ACCRUE I N A PARTICULAR YEAR ONLY, THAT THE REVENUE OVER THE PERIOD OF LICENCE DID NOT ACCRUE IN THE FIRST Y EAR OF SIGNING OF SATELLITE INCOME AGREEMENT, THAT THE REVENUE WOULD CRYSTALLISE YEAR AFTER YEAR, THAT THE LICENSE COULD BE TERMINATED IN THE MIDDLE OF TENURE WITHOUT COMPLETING THE TOTAL TURNOVER OF AGREEMENT,THAT THE RATES OF TAXES ON BOTH THE YEARS WERE SAME AND THE AMOUNT WAS OFFERED NOT ON C ASH BASIS BUT ON ACCRUAL BASIS.THE ASSESSEE RELIED UPON CERTAIN CASE LAWS. AFTER CONSIDERING THE AVAILABLE MATERIAL,THE FAA HE LD THAT THE ISSUE OF ACCRUAL OF SATELLITE INCOME AND THE YEAR OF TAXABILITY HAD BEEN DEALT IN DETAIL BY HIS PREDECESSOR WHILE DECIDING THE APPEAL FOR THE AY.2006-07,THAT HIS PREDECESSOR HAD ALSO CO NSIDERED THE CASES AND OPINION AVAILABLE ON THE ISSUE, THAT HE HAD HELD THAT INCOME ACCRUED ON THE DATE OF LINKING THE AGREEMENT, THAT THERE WAS NO REASON TO DEVIATE FROM HIS FINDING,THAT THE AO HAD NOT ALLOWED CREDIT OF RS. 9.40 CRORES AND HAD MADE THE PROTECTIVE ASSESSMENT. ACCORDINGL, HE DIRECTED THE AO TO GRANT RELIEF TO THE EXTENT OF RS. 9.40 CRORES.HE FURTHER OBSERVED THAT IF THE ASSESSEE WOULD GET RELIEF AT HIGHER FORM OF APPEAL REGARDING THE NON-TAXABILITY OF RS.9.40CR ORES IN THE AY.2006-07,THE DISPUTED AMOUNT WOULD BE TREATED AS INCOME FOR THE YEAR UNDER CONSI DERATION. 9.2. WE FIND THAT,WHILE DECIDING THE APPEAL FOR THE AY.2 006-07(ITA/3345/MUM/2012,DTD,05.04. 2013)THE TRIBUNAL HAS DEALT THE IDENTICAL ISSUE AS UNDER: 3. IN GROUND NO.1 THE ASSESSEE HAS CHALLENGED THE A DDITION OF RS. 9,40,00,287/- IN RESPECT OF SATELLITE INCOME FOR F.Y. 2005-06. IT IS THE SAY OF THE ASSESSEE THAT THE TOTAL RECEIPT WAS NOT ACCRUED IN THE YEAR UNDER ASSESSMENT. THIS ISSUE H AS BEEN DISCUSSED BY THE AO AT PARA-4 ON 2597 &3345/M/12-YRF(07-08) 17 PAGE-2 OF HIS ORDER. DURING THE COURSE OF THE ASSES SMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS SOLD SATELLITE RIGHTS TO SET. THE AGGREGATE AGREEMENT VALUE OF WHICH AMOUNTED TO RS. 50,00,00,000/-. THE AO FURTH ER OBSERVED THAT AS AGAINST THE AGREEMENT VALUE OF RS. 50 CRORES, THE ASSESSEE HAS SHOWN ONLY RS. 40,59,99,713/- AS SET SATELLITE INCOME RECEIPT DURING THE YEAR. THE AO SOUGHT EXPLANATION FROM THE ASSESSEE WHY IT HAS NOT INCLUDED RS. 9,40,00,287/- IN ITS TOTAL INC OME. THE ASSESSEE FILED A DETAILED REPLY VIDE LETTER DT. 24.12.2008. THE ASSESSEE SUBMITTED THAT ALL THE AGREEMENTS MADE FOR SATELLITE RIGHTS ARE FOR 4 TO 5 YEARS AND IN SUPPORT OF ITS CLAIM, T HE ASSESSEE FILED COPIES OF EACH AGREEMENT. THE AMOUNT OFFERED MOVIE WISE IS EXHIBITED AT PAGE- 3 OF THE ASSESSMENT ORDER. IN SUPPORT OF ITS CLAIM, THE ASSESSEE ALSO RELIED UPON THE DECISI ON OF ITAT COCHIN BENCH IN THE CASE OF MOLLY BOBAN VS ITO IN ITA NO. 01/COCH/2007 DECIDED ON 11.3.2008 WHEREIN THE TRIBUNAL HAS HELD THAT THE CONSIDERATION OF RS. 4 LACS RELAT ING TO TRANSFER/SALE OF RIGHTS IN PICTURES FOR A PERIOD OF 5 YEARS HAD TO BE ASSESSED IN 5 YEARS A ND NOT IN THE YEAR UNDER APPEAL ALONE. 3.1.THE AO REJECTED THE SUBMISSION OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND SINCE THE ASSESSEE HAS ACQUIRED A RIGHT TO RECEIVE THE INCOME, THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM THOUGH IT MAY BE RECEIVED LATER. ACCORDING TO THE AO, THE SALE IS COMPLETED AT THE MOMENT THE AGREEMENT IS EXECUTED AND PAYMENTS ARE RECEIVED AS PER THE MERCANTILE SYS TEM OF ACCOUNTING AND AS-9. THEREAFTER, THE AO RELIED UPON 3 DECISIONS OF THE HONBLE SUPRE ME COURT AND WENT ON TO MAKE AN ADDITION OF RS. 9,40,00,287/-. 4.THE ASSESSEE AGITATED THIS MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. THE LD. CIT(A) WAS OF THE OPINION THAT WHAT IS IMPORTANT IS NOT THE ACTUAL RECEIPT OF THE INCOME BUT THE LEGAL RIGHT TO RECEIVE IT. THE LD. CIT(A) FURTH ER OBSERVED THAT THE RECOGNITION OF REVENUE FROM TRANSFER OF EXHIBITION RIGHT IS GOVERNED BY RU LE 9A. THIS APART, THE RIGHT TRANSFERRED ARE IN THE NATURE OF ABSOLUTE TRANSFER OF OWNERSHIP. A S PER THE AGREEMENT FOR THE PERIOD FOR WHICH THE RIGHTS ARE TRANSFERRED, THE TRANSFEREE HA S ABSOLUTE AND UNLIMITED RIGHTS OVER THE TELECAST OF THE MOVIE. THE LD. CIT(A) ALSO RUBBISH ED THE CONTENTION OF THE ASSESSEE THAT SIMILAR METHOD HAS BEEN ACCEPTED FOR THE ASSESSMENT YEAR 2005-06 ON THE GROUND THAT THE PRINCIPLES OF RES JUDICATA DO NOT APPLY TO INCOME TAX PROCEEDINGS. THE LD. CIT(A) FINALLY CONCLUDED THAT THE METHOD OF RECOGNITION OF REVENU E FROM SATELLITE RIGHTS ADOPTED BY THE ASSESSEE LEADS TO FOLLOWING HYBRID SYSTEM OF ACCOUN TING WHICH IS NOT IN SYNC WITH SEC. 145 OF THE ACT AND CONFIRMED THE ADDITION OF RS. 9,40,00,2 87/-. XXXXXXX 8.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE ORDERS OF THE LOWER AUTHORITIES AND THE DECISIONS RELIED UPON BY THE ASSESSEE ALONG WITH THE MATERIAL EVIDENCES BROUGHT ON RECORD IN THE FORM OF PAPER BOOK. A CAREFUL PERUSA L OF THE AGREEMENT SHOW THAT THE LICENCEE I.E. SET SATELLITE SINGAPORE LTD. ACQUIRED RIGHTS T O EXHIBIT THE MOVIES 24 TIMES DURING THE LICENCE PERIOD AND SINCE THE LICENCE PERIOD IS FOR FOUR YEARS THE SET SATELLITE COULD EXHIBIT THE MOVIES NOT MORE THAN SIX TIMES IN EACH YEAR WH ICH MEANS THAT THE TRANSFEREE HAS 25% RIGHT OF EXHIBITING THE MOVES IN EACH YEAR WHICH F URTHER MEANS THAT THE RIGHT ONLY FOR 25% OF THE LICENCE FEE HAS ACCRUED TO THE ASSESSEE IN T HE FIRST YEAR. THEREFORE, THE PLEA OF THE AO THAT THE ENTIRE INCOME HAS ACCRUED TO THE ASSESSEE AS SOON AS THE AGREEMENTS HAVE BEEN EXECUTED IS NOT CORRECT. THE LICENCE FEE DID NOT A CCRUE TO THE ASSESSEE AS PER TERMS OF THE AGREEMENT. THE TAXABILITY OF THE LICENCE FEE HAS T O BE DECIDED ON THE PROVISIONS OF THE CONTRACT. AS PER THE AGREEMENT THE TRANSFEREE HAS ONLY THE RIGHT TO EXHIBIT THE FILMS OVER A PERIOD OF FOUR YEARS AS THE AGREEMENT IS THAT OF A LEASE THE ASSESSEE HAS RIGHTLY AND CORRECTLY SPREAD THE LICENCE FEE OVER A PERIOD OF FOUR YEARS. THE RELIANCE PLACED BY LD. DR OF RULE 9A APPEARS TO BE MISPLACED AS RULE 9A HAS NO RELATION WITH THE METHOD OF ACCOUNTING AS IT NOWHERE DEALS WITH SECTION 145 OF THE ACT. CONSIDE RING THE ENTIRE FACTS IN THE LIGHT OF THE SET SATELLITE AGREEMENT, IN OUR CONSIDERATE VIEW, T HE ADDITION OF RS.9,40,00,287/- DESERVES TO BE DELETED.THE AO IS DIRECTED TO DELETE THE ADDITIO N.GROUND NO.1 IS ACCORDINGLY ALLOWED. 2597 &3345/M/12-YRF(07-08) 18 RESPECTFULLY FOLLOWING THE ABOVE,WE DECIDE THE ISSU E IN FAVOUR OF THE ASSESSEE. 10. NEXT GROUND IS ABOUT DISALLOWANCE ON MARKETING COST AND OTHER COST UNDER RULE 9B OF THE RULES FOR MOVIES KRISH AND KANK.VIDE HIS LETTER,DTD . 24/11/2009,THE AO REQUIRED THE ASSESSEE TO EXPLAIN THE COST OF PRODUCTION AS PER IMPOUNDED BOOKS OF ACCOUNTS WITH REFERENCE TO THE AUDITED STATEMENT.HE OBSERVED THAT THE ASSESSEE HAD DEBITED EXCESS COST OF PRODUCTION BY RS. 18.36 CRORES. HE ASKED THE ASSESSEE TO EXPLAIN AS T O HOW THE EXPENSES WERE ALLOWABLE IN VIEW OF 9B OF THE RULES. HE FURTHER REQUIRED THE ASSESSEE T O EXPLAIN AS TO HOW THE EXPENSES WERE DEBITED IN THE COST OF PRODUCTION OF THE MOVIE IN RESPECT O F DISTRIBUTION DIVISION.ASSESSEE FILED EXPLANA - TION VIDE LETTER IS DATED 14/12/2009 AND 16/12/2009 .AFTER CONSIDERING ITS REPLY,THE AO OBSERVED THAT THE ASSESSEE COULD NOT RECONCILE THE EXPENSES AMOUNTING TO RS.6.80 CRORES BY PRODUCING NECESSARY EVIDENCE, THAT IT HAD FAILED TO BRING ON RECORD ANY EVIDENCE WITH REGARD TO PAYMENT OF RS.4.90 CRORES TO THE PRODUCER, THAT IN ITS LETTER DATED 22/12/2009,THE ASSESSEE ITSELF HAD ADMITTED TO HAVE PAID MINIMUM GUARANTEE OF RS.3 CRORES TOWAR DS THE MOVIE KRISH TO THE PRODUCER.THE AO TABULATED THE RECEIPTS, EXPENSES INCURRED WORKING O F THE SHARE PRODUCERS AND THE DISTRIBUTORS FOR BOTH THE FILMS AND HELD THAT THE ASSESSEE HAD CLAIM ED ALL THE EXPENSES RELATED TO THE DISTRIBUTION OF THE MOVIES, THAT IT HAD FAILED TO CORRELATE THE EXPENSE OF 4.90 CRORES WITH THE EXPENSES DEBITED TO THE SUBMISSION ACCOUNT,THAT IT HAD DELIBERATELY ADDED RS.6.80 CRORES TO THE COST OF MOVIES PRODUCED BY IT TO ENHANCE THE COST OF PRODUCTION AN D TO REDUCE THE PROFIT TO THAT EXTENT, THAT THE ONUS WAS ON THE ASSESSEE TO PROVE THAT AN EXPENDITU RE OF RS.6.80 CRORES WAS ACTUALLY INCURRED FOR PRODUCING THE MOVIES,THAT IT HAD NOT PRODUCED ANY E VIDENCE SUCH AS CONFIRMATION FROM THE RESPECTIVE PARTIES, THAT IT HAD NOT GIVEN ANY SPECI FIC DETAIL IS TOO UNDER WHICH HAD THE ABOVE AMOUNT OF RS. 6.80 CRORES WAS INCURRED, THAT THE DI SPUTED AMOUNT DID NOT RELATE TO THE RECEIPTS CREDITED TO THE DISSOLUTION DIVISION, THAT SAME HAD TO BE DISALLOWED UNDER THE HEAD UNEXPLAINED EXPENDITURE AS PER THE PROVISIONS OF SECTION 69C OF THE ACT. 10.1. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE ARGUE D THAT THE EXPENSES TOWARDS DISTRIBUTION OF THE MOVIES WERE NOTHING BUT THE AMOUNT PAID TO T HE PRODUCERS TOWARDS MINIMUM GUARANTEE, PRINT COST AND PROCESSING COST ETC.,THAT THE COST O F PRINT AND PROCESSING WERE NOT COVERED UNDER RULE 9B OF THE RULES,THAT SAME WERE COVERED UNDER S ECTION 37 OF THE ACT,THAT NO FILM COULD BE RELE -ASED WITHOUT PRINT AND PUBLICITY EXPENSES,THAT SUC H EXPENSES WERE SHOWN IN PRODUCTION DIVISION, THAT THE PRODUCTION DIVIDEND HAD WORKED AS A PRODUC ER,THAT THE DISTRIBUTION DIVISION WOULD WORK 2597 &3345/M/12-YRF(07-08) 19 ONLY AS DISTRIBUTOR AND THAT TOO FOR BOMBAY TERRITO RY, THAT THE PRODUCTION DIVISION WORKED FOR ALL TERRITORIES EXCEPT BOMBAY TERRITORY, THAT THE MEASU RE PAYMENTS WERE TO BOTH THE PRODUCERS FOR ACQUIRING THE FILM RIGHTS, THAT QUESTION OF DISALLO WANCE UNDER RULE 9B WOULD NOT ARISE,THAT OUT OF THE TOTAL EXPENDITURE OF RS. 6.80 CRORES RS. 4.90 C RORES WAS PAYMENT TO THE PRODUCERS,THAT THE AO HAD ERRED IN MIXING THE FIGURES PRODUCTION DIVISION AND THE DISTRIBUTION DIVISION WHILE PASSING THE ORDER,THAT RS.4.90 CRORES WERE PAID FROM PRODUC TION DIVISION FOR ACQUIRING THE RIGHTS OF MOVIES FROM THE PRODUCER, THAT AS PER RULE 9B THE C OST OF ACQUISITION HAD TO BE ALLOWED TO AN EXPENDITURE EVEN IF THE INTERPRETATION OF THE AO WA S ACCEPTED, THAT THE MINIMUM GUARANTEE OF RS.3 CRORES PAID BY DISSOLUTION DIVISION WAS FOR BO MBAY TERRITORY,THAT RS.4.90 CRORES PAID BY CHEQUE WAS FOR THE TERRITORY OTHER THAN BOMBAY. THE FAA,AFTER CONSIDERING THE AVAILABLE MATERIAL,HE LD THAT THE WHOLE CONFUSION HAD ARISEN BECAUSE THE AMOUNT PAID OF RS.3 CRORES AND RS. 4.9 CRORES WERE CONSIDERED AS OVERLAPPING,THAT AN AMOUNT OF RS.4.9 CRORES WAS PAID TO THE PRODUCER,TH AT THE SAID PAYMENT I.E. RS. 4.9 CRORES HAD TO BE CONSIDERED AS A DEDUCTIBLE EXPENSE UNDER RULE 9B OF THE RULES.ACCORDINGLY,HE PARTLY ALLOW - ED THE APPEAL FILED BY THE ASSESSEE TO THE EXTENT O F RS.4.90 CRORES.HE FURTHER HELD THAT BALANCE DISALLOWANCE HAD TO BE CONFIRMED AS IT RELATED TO M ARKETING AND OTHER COST AND THAT SAME WERE DISALLOWABLE UNDER RULE 9B. 10.2. BEFORE US,THE AR ARGUED THAT RULE 9 HAD NO APPLICAT ION WITH REGARD TO PUBLICITY EXPENSES, THAT EXPENDITURE INCURRED BY THE ASSESSEE WERE DEDU CTIBLE AS PER THE PROVISIONS OF SECTION 37 OF THE ACT,THAT SIMILAR ISSUE HAD ARISEN IN EARLIER YE AR ALSO.THE DR SUPPORTED THE ORDER OF THE FAA. 10.3. WE FIND THAT WHILE DECIDING THE APPEAL FOR THE AY.2 006-07(SUPRA),THE TRIBUNAL HAD DEALT WITH THE ISSUE AND HAD HELD THAT PUBLICITY EXPENSES WERE ALLOWABLE U/S.37 OF THE ACT AND THAT FOR SUCH EXPENSES RULE 9 OF THE RULES HAD NO APPLICATIO N.WE ARE AGAIN REPRODUCING PARAGRAPHS 50- 51 OF THE SAID ORDER AND IT READS AS FOLLOW: 50.GROUND NO. 15 RELATES TO ADDITION OF RS. 137.57 LAKHS BEING PUBLICITY EXPENSES NOT ALLOWABLE AS PER RULE 9A AND RULE 9B. 51.A PERUSAL OF THE ORDER OF THE LD. CIT(A) SHOW TH AT HE HAS MADE THE ENHANCEMENT OF RS. 137.57 LAKHS ON THE GROUND THAT SUCH PUBLICITY EXPENSES AR E NOT ALLOWABLE AS PER RULE 9A AND 9B OF THE RULES. IT IS THE SAY OF THE COUNSEL THAT RULE 9A A ND 9B DO NOT PRECLUDE THE ASSESSEE TO CLAIM SUCH GENUINE BUSINESS EXPENSES U/S. 37(1) OF THE ACT. S INCE ONLY GROUND FOR DISALLOWING PUBLICITY EXPENSE IS THAT SUCH EXPENSES ARE NOT ALLOWABLE AS PER RULE 9A,9B, WE FIND FORCE IN THE SUBMISSION OF THE COUNSEL THAT SUCH EXPENSES CAN BE ALLOWED U/S. 37(1) OF THE ACT. HOWEVER, SINCE THE AO HAS NOT CONSIDERED THIS ASPECT AS THE ADDITIONS HAVE BEEN MADE BY THE LD. CIT(A) DURING THE APPELLATE PROCEEDINGS, IN THE INTEREST O F JUSTICE AND FAIR PLAY, WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO. THE AO IS DIRECTED T O VERIFY THE CLAIM OF PUBLICITY EXPENSES VIS-AVIS 2597 &3345/M/12-YRF(07-08) 20 BUSINESS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDE RATION. THE AO SHOULD ALSO VERIFY HOW MUCH PUBLICITY EXPENSES HAVE BEEN RECOVERED BY THE ASSES SEE AND CREDITED TO ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE IS D IRECTED TO FURNISH NECESSARY DETAILS TO SUBSTANTIATE ITS CLAIM OF PUBLICITY EXPENSES. GROU ND NO. 15 IS ALLOWED FOR STATISTICAL PURPOSES. WE FURTHER FIND THAT IN THE CASE OF DHARMA PRODUCTI ONS (P).LTD. (62SOT177),SIMILAR ISSUE WAS DELIBERATED UPON EXTENSIVELY AND WAS DECIDED AS UND ER: 26.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ABOUT THE DATE OF RELEASE OF THE FILM IN QU ESTION ON 29.4.2005. WE FURTHER NOTE THAT THE CENSO R BOARD OF FILMS ISSUED THE CERTIFICATION OF THE FILM ON 21.4.2005 THEREFORE, THE FILM WAS RELEASED FOR EXHIBITION ON COMMERCIAL BASIS AT THE BEGINNING OF THE PREVIOUS YEAR AND AS PER RULE 9A OF THE INCOME-TAX RULE THE ENTIRE COST OF PRODUCTION IS AL LOWABLE DEDUCTION. THE CIT(A) HAS ENHANCED THE DISALLOWANCE BY INVOKING RULE 9A IN RESPECT OF THE AMOUNT OF RS. 41,43,240/- ON ACCOUNT OF POSITIVE FILMS AND A SUM OF RS. 2, 26,30,328/- ON ACCOUNT OF ADVERTISEMENT AND PUBLICITY. THE REASON FOR DISALLOWANCE BY THE CIT(A) IS THAT THE ADVERTISEMEN T/PUBLICITY EXPENDITURE IS NOT PART OF THE COST OF PRODUCTION THEREFORE, IS NOT ALLOWABLE AS PER RULE 9A.THE DECISION RELIED UPON BY THE CIT(A) ARE ONLY IN RESPECT OF THE DISALLOWANCE OF EXPENDITURE UNDER RULE 9A OR 9B WHEREAS THE EXPENDITURE WHICH DO NOT FORM PART OF THE COST OF PRODUCTION CANNOT BE D ISALLOWED BY INVOKING RULE 9A AND THEREFORE, THE SAME IS ALLOWABLE U/S 37 OF THE INCOME-TAX ACT AS H ELD BY THE HON'BLE MADRAS HIGH COURT IN CASE OF PRASAD PRODUCTION (P.) LTD. (SUPRA) AT PAGE NOS. 15 6 AND 157 AS UNDER: 'ONLY DURING THE COURSE OF THE PENDENCY OF THE APPE AL BEFORE THE APPELLATE ASSISTANT COMMISSIONER, THE ASSESSEE EXERCISED AN OPTION AS P ER RULE 9A OF THE RULES AND UNDER EXPLANATION (II)(A) TO RULE 9A(1) OF THE RULES, THE EXPENDITURE INCURRED FOR THE PREPARATION OF THE POSITIVE PRINTS OF THE FILM COULD NOT BE INCLUDED W ITHIN THE EXPRESSION 'COST OF PRODUCTION'. IT IS FOR THIS REASON THAT SUCH EXPENDITURE IS CHARACTERI SED AS POST-PRODUCTION EXPENDITURE. ORDINARILY, ALL EXPENDITURE INCURRED ON THE PRODUCTION OF A FIL M WOULD BE ITS COST OF PRODUCTION, BUT THAT WOULD EXCLUDE THE EXPENDITURE INCURRED FOR THE PREP ARATION 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 GIVE N CASE, A PERSON CARRYING ON BUSINESS IN THE PRODUCTION OF FEATURE FILMS MAY PRODUCE A FILM, BUT FOR A VARIETY OF REASONS, HE MAY NOT BE IN A POSITION TO EXHIBIT IT BY OBTAINING POSITIVE PRINTS . HAVING PRODUCED A FILM, THE PERSON CARRYING ON THE BUSINESS OF PRODUCTION OF FEATURE FILMS MAY EIT HER KEEP THEM WITHOUT EXHIBITION OR EVEN PART WITH THEM WITHOUT MAKING ARRANGEMENTS FOR THEIR EXH IBITION. 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 O N THE BUSINESS OF PRODUCTION OF FILMS, HE MAY NOT ONLY PRODUCE THE FILMS BUT ALSO PREPARE THE POSITIV E PRINTS FOR THE PURPOSE OF EXHIBITION OR HE MAY NOT TAKE STEPS FOR THE EXHIBITION OF THE FILM HAVIN G 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 F EATURE FILM, THE LATTER CONTEMPLATES STAGE SUBSEQUENT TO THE COMPLETION OF THE PRODUCTION OF T HE 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-PRO DUCTION EXPENSES AND ALSO AN ITEM OF EXPENDITURE IN RELATION TO THE BUSINESS OF PRODUCTI ON AND EXHIBITION OF FEATURE FILMS AND WOULD, THEREFORE, QUALIFY FOR DEDUCTION AS EXPENDITURE LAI D OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. WE HAVE NOT BEEN REFER RED TO ANY PROVISION IN THE ACT OR THE RULES DISALLOWING SUCH EXPENDITURE AS AN ITEM OF BUSINESS EXPENDITURE FOR THE PURPOSE OF SECTION 37 OF THE ACT. THOUGH LEARNED COUNSEL FOR THE REVENUE PLA CED CONSIDERABLE RELIANCE UPON THE DECISION IN CIT V. CARBORUNDUM UNIVERSAL LTD. [1977] 110 ITR 621(MAD), 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 PROFI TS AND GAINS OF THE BUSINESS BY WAY OF 2597 &3345/M/12-YRF(07-08) 21 CONTRIBUTION TO THE SUPERANNUATION FUND OF ITS FORE IGN COLLABORATORS AND THAT CLAIM WAS DISALLOWED BY THE AUTHORITIES BELOW. HOWEVER, THE TRIBUNAL HEL D THAT THOUGH THAT AMOUNT WAS NOT AN ALLOWABLE DEDUCTION UNDER SECTION 36(1)(IV) OF THE ACT AS THE CONTRIBUTION WAS NOT TO A RECOGNISED PROVIDENT FUND OR TO AN APPROVED SUPERANNUATION FUN D NOR COULD BE ALLOWED UNDER SECTION 37 OF THE ACT, THE PAYMENT WAS ALLOWABLE UNDER SECTION 28 OF THE ACT. ON A REFERENCE, IT WAS HELD THAT THE NATURE OF PAYMENT BEING ONE DESCRIBED IN SECTIO N 36(1)(IV) OF THE ACT AND AS IT COULD NOT BE DEDUCTED UNDER THAT SECTION, IT CANNOT BE HELD TO B E DEDUCTIBLE UNDER SECTION 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 INCU RRED IN CONNECTION WITH THE OBTAINING OF POSITIVE PRINTS IS REALLY IN THE NATURE OF POST-PRO DUCTION EXPENDITURE AND THAT THERE IS NO PROVISION IN THE ACT OR THE RULES OBLIGING THE AUTHORITIES TO DISALLOW SUCH EXPENDITURE, THE CLAIM OF THE ASSESSEE THAT SUCH EXPENDITURE WOULD FALL UNDER SEC TION 37 OF THE ACT IS, IN OUR VIEW, WELL- FOUNDED. WE, THEREFORE, ANSWER THE SECOND QUESTION REFERRED TO US IN THE AFFIRMATIVE AND AGAINST THE REVENUE.' 27.FOLLOWING THE ABOVE DECISION OF HON'BLE MADRAS H IGH COURT, THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE MUKTA ARTS (P.) LTD. (SUPRA) HAS H ELD IN PARA 13 AND 21 AS UNDER: '13. AS NOTED, RULE 9A ALSO DEFINES 'COST OF PRODUC TION' TO MEAN, THE ENTIRE EXPENDITURE INCURRED ON THE PRODUCTION OF FILM. HOWEVER, ADVERTISEMENT E XPENDITURE INCURRED AFTER THE CENSOR BOARD CERTIFICATION IS OBTAINED AND ALSO THE COST OF POSI TIVE PRINTS OF THE FILM ARE NOT TO BE INCLUDED AS PART OF THE COST OF PRODUCTION. THE EFFECT OF THE E XCLUSION OF THESE TWO ITEMS NORMALLY MEANS THAT THEY COULD BE ALLOWED IN THE YEAR IN WHICH THESE EX PENSES 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] 17 9 ITR 147THE COST OF MAKING POSITIVE PRINTS IS ALLOWABLE UNDER SECTION 37 OF THE ACT. FURTHER IN T HE CASE OF B. NAGI REDDY V. CIT AS REPORTED IN [1993] 199 ITR 451, THE HON'BLE MADRAS HIGH COURT H ELD THAT ANY LOSS ARISING ON ACCOUNT OF FEATURE FILM BEING ABANDONED MIDWAY WITHOUT COMPLET ING IT, THEN, THE EXPENDITURE INCURRED TILL THAT DATE INCLUDING THE PAYMENTS MADE TO ARTISTS, W RITERS 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 PA RT 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 EXPENSE S, HENCE THE PROPOSITION THAT IT OVERRIDES THE PROVISIONS OF THE ACT ON THE FACE OF IT, IS NOT VAL ID. 21. RULE 9A IS AN OUTCOME OF EXERCISE OF POWER GIVE N TO THE CENTRAL BOARD OF DIRECT TAXES UNDER SECTION 295(1) OF THE INCOME-TAX ACT, 1961. THUS IT IS A PIECE OF DELEGATED LEGISLATION AND MUST FUNCTION WITHIN THE PARAMETERS FIXED BY LEGISLATURE BY LAYING DOWN THE LAW, THE POLICY AND THE STANDARD WHICH LEGISLATURE WANTS TO MAINTAIN IN THE APPLICATION AND ENFORCEMENT OF THE LEGISLATIVE ENACTMENT AND BE CONSISTENT THEREWITH. IT, THEREFOR E, FOLLOWS THAT AN ANCILLARY CHANNEL, AT ANY RATE, CANNOT NEITHER ABRIDGE RIGHTS OR PRIVILEGES GRANTED BY THE STATUTE ITSELF NOR CONFER ANY SPECIAL BENEFITS, RIGHTS OR PRIVILEGES BEYOND THE PROVISION S OF THE ACT OR IN CONTRADICTION TO THE PROVISIONS OF THE LEGISLATIVE ENACTMENT BECAUSE THE OBJECT SUB ORDINATE LEGISLATION IS TO CARRY OUT THE STATUTORY PROVISIONS EFFECTIVELY AND NOT TO NEUTRALIZE OR CON TRADICT THEM. IF DELEGATED LEGISLATION RESULTS INTO ANY SUCH SITUATIONS THAT WOULD AMOUNT TO LEGISLATIO N 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 BEYON D THE LEGISLATIVE POLICY ENACTED IN THE FORM OF SECTION 37(2), 37(2A), 37(3) ETC. OF THE ACT AND MA KE RULE 9A VOID. IT IS ALSO A SETTLED JUDICIAL PRINCIPLE THAT SUBORDINATE LEGISLATION IN CASE OF C ONFLICT MUST YIELD TO PLENARY LEGISLATION. THE NEGATIVE COVENANT/RESTRICTED PROVISIONS LIKE SECTIO N 37(2A) HAVE BEEN ENACTED WITH THE OBJECT OF RESTRICTING THE DEDUCTION OF EXPENDITURE WHICH IS O THERWISE ALLOWABLE UNDER SECTION 37. IT IS A FACT THAT EXPENDITURE INCURRED AFTER THE ISSUE OF CERTIF ICATION BY THE CENSOR BOARD ON ACCOUNT OF ADVERTISEMENT AND PUBLICITY AND COST OF POSITIVE PR INTS ARE ALLOWABLE UNDER SECTION 37(1) AND, 2597 &3345/M/12-YRF(07-08) 22 THEREFORE, SUCH EXPENSES COME WITHIN THE PURVIEW OF SECTION 37(3) OF THE ACT EXPENDITURE ON AND COST OF POSITIVE PRINTS HAS TO SATISFY THE CONDITIO NS OF SECTION 37 FOR ALLOWANCE. THUS, THERE APPEARS NO REASONABLE BASIS TO ALLOW THE SAME EXPEN DITURE INCURRED BEFORE HAPPENING OF AN EVENT I.E., UP TO THE DATE OF ISSUE OF CERTIFICATE BY THE CENSOR BOARD IN TOTAL WITHOUT ANY RESTRICTION WHATSOEVER AND ALLOW THE EXPENDITURE OF THE SAME NA TURE INCURRED AFTER THE ISSUANCE OF CERTIFICATE BY THE CENSOR BOARD SUBJECT TO RESTRICTIVE PROVISIO NS OF SECTION 37 OF THE ACT. THIS VIEW CAN FURTHER BE SUBSTANTIATED BY THE FACT THAT THE LEGIS LATURE HAS NOT GIVEN OVERRIDING EFFECT TO RULE 9A BY NOT FRAMING THE SAID RULE AS 'NOTWITHSTANDING AN YTHING 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 WHI CH 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 P ER RULE 9A.' 28. IN VIEW OF THE ABOVE DISCUSSION AND FOLLOWING T HE DECISION OF HON'BLE MADRAS HIGH COURT IN CASE OF PRASAD PRODUCTIONS PVT. LTD. AS WELL AS DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE O F MUKTA ARTS (P.) LTD. WE HOLD THAT THE EXPENDITURE I NCURRED IN RESPECT OF PREPARATION OF POSITIVE PRINT S AS WELL AS ADVERTISEMENT AND PUBLICITY ARE ALLOWABL E.ACCORDINGLY THE ADDITION ENHANCED BY THE CIT(A) IS DELETED. RESPECTFULLY,FOLLOWING THE ABOVE TWO ORDERS OF THE TRIBUNAL,WE DECIDE GROUND NO.13 IF FAVOUR OF THE ASSESSEE. 11. NEXT GROUND DEALS WITH AD HOC DISALLOWANCE OF 20% O N JUNIOR ARTISTS/TECHNICIANS/DRESS, COSTUME,MAKE-UP,DUBBING, SOUND RECORDING, MIXING, M USIC RECORDING, DANCE EXPENSES ETC. 11.1. WE FIND THAT IDENTICAL ISSUE WAS DECIDED BY THE TRI BUNAL IN ITS ORDER DATED 05.04.2013 (SUPRA)IN FOLLOWING MANNER: 23.GROUND NO. 4,5,6, 7 & 8 RELATE TO THE ADHOC DIS ALLOWANCES MADE BY THE AO ON ACCOUNT OF EXPENSES CLAIM UNDER THE HEAD JUNIOR ARTIST/DRESS C OSTUMES AND MAKE UP/DUBBING, SONG RECORDING AND MIXING /SETTING EXPENSES AND EDITING MUSIC RECORDING AND DANCE EXPENSES. 24.DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS NOT MAINTAINED PROPER RECORDS IN RESPECT OF CALL SHEET AND CONTINUITY REPORT AND REHEARSAL BOOK, THEREFORE EXPENSES INCURRED UNDER THE AFOREMENTIONE D HEADS COULD NOT BE FULLY ALLOWED MERELY ON THE BASIS OF INTERNAL VOUCHERS. THE AO WENT ON TO DISALLOW 20% OF THE EXPENSES CLAIMED UNDER THE AFOREMENTIONED HEADS AS UNDER: 1. EXPENSES IN RESPECT OF PAYMENT TO JUNIOR ARTISTS-RS . 7,04,231/- DISALLOWED OUT OF RS. 35,21,159/- 2. EXPENSES IN RESPECT OF DRESS COSTUME AND MAKE UP RS. 10,04,984/- DISALLOWED OUT OF RS. 50,24,921/- 3. DUBBING AND MIXING EXPENSES RS. 41,14,289/- DISAL LOWED OUT OF RS. 2,05,71,448/- 4. SETTING EXPENSES RS. 27,37,555/- DISALLOWED OUT O F RS. 1,36,87,778/- 5. EDITING, MUSIC RECORDING & DANCE EXPENSES RS,. 1 6,16,304/- DISALLOWED OUT OF RS. 80,81,522/-. 25.THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) AND EXPLAINED THAT SO FAR AS EXPENSES FOR JUNIOR ARTIST IS CONCERNED, THE JUNIOR ARTISTS WERE SUPPLIED BY M/S. PAPPU & CO.. INFORMATION U/S. 133(6) OF THE ACT WAS CALLED FROM M/S. PAPPU & CO., AND FURTHER STATEMENT OF SHRI RAJENDRA A. NANDU, PROPRIETOR OF PAPPU & CO WAS RECORDED U/S . 131 OF THE ACT. MR. RAJENDRA NANDU THOUGH CONFIRMED THAT HE HAS SUPPLIED THE MANPOWER/ JUNIOR ARTISTS TO THE ASSESSEE BUT COULD NOT PRODUCE ANY EVIDENCE REGARDING THE REQUISITION MADE BY THE ASSESSEE. SUBSEQUENTLY, A SURVEY OPERATION WAS CONDUCTED AT THE BUSINESS PREMISES OF M/S. PAPU & CO., IN WHICH M/S. PAPPU & 2597 &3345/M/12-YRF(07-08) 23 CO. OFFERED AN ADDITIONAL INCOME OF RS. ONE CRORES FOR A.Y. 2009-10. AFTER CONSIDERING ALL THE FACTS, THE LD. CIT(A) WAS OF THE OPINION THAT THE A SSESSEE COULD NOT PRODUCE IMPORTANT DOCUMENTS AND THEREFORE AGREED WITH THE AO THAT THE EXPENSES CLAIMED ARE NOT VERIFIABLE AND CONFIRMED THE ADDITIONS MADE BY THE AO. 25.1.IN RESPECT OF OTHER ADHOC DISALLOWANCES, THE L D. CIT(A) TOOK A SIMILAR VIEW. XXXXXXXXX 28.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSE D 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 ARE 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 C ONFIRMED TO HAVE MADE AVAILABLE JUNIOR ARTISTS TO THE ASSESSEE. IT IS ALSO A FACT THAT IF THE CON TRACTOR I.E. PAPPU & CO., COULD NOT FURNISH THE FUL L ADDRESS OF THE JUNIOR ARTISTS, THE SAME CANNOT BE USED ADVERSELY AGAINST THE ASSESSEE. FURTHER, THE LD. CIT(A) HAS PLACED MUCH RELIANCE ON THE SURR ENDER OF RS. ONE CRORE FROM M/S. PAPPU & CO., DURING THE COURSE OF THE SURVEY OPERATIONS. I F THE SAID CONTRACTOR WAS NOT DISCLOSING ITS INCOME PROPERLY, THAT CANNOT BE HELD AGAINST THE A SSESSEE. ON THE CONTRARY, IT SHOULD SUPPORT THE CASE OF THE ASSESSEE THAT IT HAS MADE PAYMENTS TO M/S. PAPPU & CO., WHICH IN ITS TURN HAS NOT SHOWN ITS RETURN OF INCOME AS THE ENTIRE PAYMENT TO JUNIOR ARTISTS IS THROUGH JUNIOR ARTISTS ASSOCIATION AS FORMED BY M/S. PAPPU & CO. IN OUR HU MBLE OPINION, NO DISALLOWANCE CAN BE MADE ON THIS ACCOUNT. WE ACCORDINGLY DIRECT THE AO TO DE LETE THE ADDITIONS MADE ON ACCOUNT OF PAYMENT TO JUNIOR ARTISTS. 29.SO FAR AS OTHER ADHOC DISALLOWANCES MARE CONCERN ED, IN THE ABSENCE OF PROPER RECORDS, IN OUR CONSIDERATE VIEW, A DISALLOWANCE OF 5% OF THE EXPE NSES CLAIMED UNDER THESE HEADS OF EXPENSES WOULD MEET THE ENDS OF JUSTICE. THEREFORE, REVERSI NG THE FINDINGS OF THE LD. CIT(A), WE DIRECT THE AO TO RESTRICT THE DISALLOWANCES UNDER THE HEAD DR ESSES, COSTUMES, MAKE UP EXPENSES, DUBBING AND MIXING EXPENSES, SETTING EXPENSES, EDITING, MUS IC RECORDING AND DANCE EXPENSES TO 5% ONLY. GROUND NO. 4 TO 8 ARE THEREFORE PARTLY ALLOWED. RESPECTFULLY,FOLLOWING THE ABOVE,WE DELETE THE ADDI TION MADE ON ACCOUNT OF PAYMENT MADE TO JUNIOR ARTISTS AND WE RESTRICT THE DISALLOWANCE TO 5% FOR OTHER EXPENSES.LAST GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. ITA/3345/MUM/2012-AY.2007-08: 12. FIRST GROUND OF APPEAL,FILED BY THE AO,IS ABOUT DEL ETING THE ADDITION OF RS.9.95 CRORES. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT RECEIPTS IN RESPECT OF MOVIES KRISH (RS.5.95 CRORES) AND KANK(RS.4 CRORES) HAD BEEN CRE DITED IN THE MAIN ACCOUNT OF YRF PRIVATE LTD UNDER THE HEAD REVENUE FROM FILMS,THAT SAME SHO ULD HAVE BEEN CREDITED TO THE DISTRIBUTION ACCOUNT,THAT ON VERIFICATION OF THE DISTRIBUTION DI VISION(DD)ACCOUNT NO SUCH RECEIPTS WERE FOUND TO BE CREDITED. HE TABULATED THE DATES,NAMES OF THE ACCOUNTS,VOUCHERS ETC. IN FOLLOWING MANNER: SN. DATE NAME OF A/C. VOUCHER AMOUNT (RS.) NARRATIO N 1. 28/07/2006 YASH RAJ FILMS DISTRIBUTION MOVIE KRISH RECEIPTS 4,00,00,000/- PROFIT TRANSFERRED FROM YASH RAJ DISTRIBUTIOR 2. 28/07/2006 -DO- MOVIE KANK RECEIPTS 2,00,00,000/ - -DO- 3. 11/08/2006 -DO- MOVIE KANK RECEIPTS 2,00,00,000/ - -DO- 4. 29/08/2006 -DO- MOVIE KRISH RECEIPTS 1,50,00,000 /- -DO- 2597 &3345/M/12-YRF(07-08) 24 5. 25/09/2006 -DO- MOVIE KRISH RECEIPTS 3,00,00,000 /- -DO- 6. 14/10/2006 -DO- RECEIPTS 15,00,000/- -DO- 9,95,00,000/- HE FURTHER OBSERVED THAT THE ASSESSEE ITSELF HAD TR EATED THE TRANSFER OF ABOVE AMOUNT FROM THE FILM ACCOUNT TO MAIN ACCOUNT WAS PROFIT,THAT THE AG GREGATE RECEIPT OF RS.9.95 CRORES WAS OVER AND ABOVE THE RECEIPT SHOWN BY THE ASSESSEE IN THAT THE SUBMISSION ACCOUNT AT RS.12.81 CRORES IN RESPECT OF MOVIES KRISH AND RS.8.32 CRORES IN RESPE CT OF MOVIE KANK, THAT THE ASSESSEE FAILED TO SUBSTANTIATE THAT THE RECEIPTS OF RS.9.95 CRORES WE RE A PART OF TOTAL RECEIPTS CREDITED TO THE DISTRIBUTION DIVISION.AFTER OBTAINING EXPLANATION A BOUT THE DISPUTED AMOUNTS,THE AO MADE AN ADDITION OF RS. 9.95 CRORES TO THE TOTAL INCOME OF THE ASSESSEE. 12.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA.BEFORE HIM, IT WAS ARGUED THAT THE AMOUNT IN QUESTION WAS MERELY A RECEIPT TRANSFER BETWEEN TWO DIVISIONS,THAT IT WAS COLLECTED BY DISTRIBUTION OFF ICE AND WAS PARTLY TRANSFER TO THE HO,THAT WHENEVER THE DD WOULD RECEIVE MONEY FROM THE CUSTOM ER IT WOULD BOOK THE WHOLE RECEIPT AND WORK OUT THE NIGHT INCOME IN ITS BOOKS,THAT BASED O N THE GROSS COLLECTION IT WOULD TRANSFER AND APPROPRIATE AMOUNT TO THE HO, THAT THE HO WOULD SHO W THE AMOUNT IN THE PARTICULAR MOVIES ACCOUNT FOR THE TIMING FOR THE MIS PURPOSES, THAT A T THE END OF THE MOVIE IT WOULD BE TRANSFERRED TO THE DISTRIBUTOR DIVISIONS LEDGER ACCOUNT,THAT W ITHOUT APPRECIATING THE ACCOUNTING SYSTEM OF THE ASSESSEE THE AO HAD ADDED THE AMOUNT IN QUESTION UN DER THE HEAD UNACCOUNTED SALES. THE ASSESSEE PRODUCED THE COPIES OF LEDGER ACCOUNTS OF BOTH THE DIVISIONS AND COPY OF THE SUMMARY OF INCOME FROM FILMS KRISH AND KANK. 12.2. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, THE FAA VERIFIED THE LEDGER A/C.OF THE DD AND THE HO ALONG WITH THE BANK STATEMENTS.HE HELD THAT THE PAYMENTS WERE MADE FOR MINIMUM GUARANTEE FROM THE HO, THAT T HE FUNDS WERE REALISED BY THE DD, THAT THE AMOUNT SHOWN IN THE DDS BOOKS REPRESENTED THE COLL ECTION OF REVENUE FROM VARIOUS THEATRES, THAT AFTER COLLECTION OF THE REVENUE THE DD WOULD T RANSFER THE SAME TO HO, THAT THE AO HAD MISUNDERSTOOD THE CASH FLOW WITH THE REVENUE OF THE COMPANY, THAT THE SUM OF RS.9.95 CRORES TRANSFER WAS NOT PROFIT OF THE COMPANY, THAT IT WAS TRANSFER OF FUNDS INTO HO DIVISION,THAT THE PROFIT ON DISTRIBUTION OF THE MOVIES WAS ALREADY OF FERED AS INCOME IN THE DD,THAT THE SAME HAD BEEN CONSOLIDATED IN THE AUDITED ACCOUNTS OF THE CO MPANY,THAT THE AMOUNT IN DISPUTE DID NOT REPRESENT THE SEPARATE RECEIPT, THAT THE AO COULD N OT BRING ON RECORD ANY PROVE THAT THE TOTAL REVENUE OF THE TWO MOVIES WAS RS. 31.2 CRORES,THAT IT WAS A TRANSFER ENTRY FROM ONE DIVISION TO 2597 &3345/M/12-YRF(07-08) 25 ANOTHER AND IT DID NOT REPRESENT PROFIT,THAT THE AC TION OF THE AO IN INTERPRETING THE SAME AS UN - ACCOUNTED SALES AND MAKING THE ADDITION WAS UNWARRA NTED, THAT THE ASSESSEE ITSELF HAD OFFERED THE INCOME AFTER PAYING THE PRODUCERS SHARE FOR WHICH T HERE WAS NO DISPUTE.FINALLY, HE DELETED THE ADDITION MADE BY THE AO. 12.3. DURING THE COURSE OF HEARING BEFORE US,THE DR SUPPO RTED THE ORDER OF THE AO.THE AR STATED THAT THE AMOUNT IN DISPUTE WAS BASICALLY A TRANSFER ENTRY FROM ONE DIVISION TO ANOTHER,THAT THERE WAS NO ELEMENT OF PROFIT IN IT. 12.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD FILED DETAILS OF THE REVENUE ARISING O UT OF DISTRIBUTION OF THE ABOVE-MENTIONED TWO FILMS,THAT IT WAS FOLLOWING A PARTICULAR SYSTEM OF ACCOUNTING,THAT CONSOLIDATED REVENUE OF BOTH THE FILMS WAS OFFERED FOR TAXATION,THAT THE FAA HAD VERIFIED THE LEDGER ACCOUNTS AND THE BANK STATEMENTS OF THE DD AS WELL AS THE HO.WE AGREE THA T THE ACCOUNTING SYSTEM FOLLOWED BY THE ASSESSEE IS DIFFERENT FROM THE REGULAR SYSTEM MAINT AINED BY OTHER ASSESSEES. THE AO HAS NOWHERE PROVED THAT TOTAL REVENUE OF THESE TWO FILMS WAS RS .12.91 CRORES + RS.8.34 CRORES + RS.9.95 CRORES. NO INCRIMINATING DOCUMENT WAS FOUND OR IMPO UNDED DURING THE SURVEY OPERATION THAT COULD LEAD TO THE CONCLUSION THAT THE TOTAL REVENUE OF THESE FILMS WAS MORE THAN THE INCOME SHOWN BY THE ASSESSEE IN ITS REGULAR BOOKS OF ACCOU NTS.IN OUR OPINION, THE FAA HAD RIGHTLY OBSERVED THAT THE AO HAD WRONGLY INTERPRETED THE TR ANSFER OF FUNDS FROM ONE DIVISION TO ANOTHER AS PROFIT OF THE COMPANY.THEREFORE,WE HOLD THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.CONFIRMING THE SAME,WE D ECIDE THE FIRST GROUND OF APPEAL AGAINST THE AO. 12.5 .SECOND GROUND IS EXTENSION OF FIRST GROUND AND IS GENERAL IN NATURE.WE ARE NOT ADJUDICATING THE SAME. 13. THIRD GROUND DEALS WITH ADDITION MADE ON ACCOUNT OF PRINT COST.DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE COST OF PRINT IN RESPECT OF MOVIE DHOOM-2 WAS SHOWN AT RS.4.28 CRORES AGAINST THE EXPENSES OF RS.4.24 CROR ES,THAT AS PER THE DETAILS FILED BY THE ASSESSEE IT HAD CREDITED THE AGGREGATE AMOUNT OF RS.3.14 CRO RES AS THE COST OF PRINT RECOVERED,THAT THE DIFFERENCE BETWEEN THE TWO AMOUNTS I.E. RS.1.10 CRO RES (RS. 4.24 CRORES (-) RS. 3.14 CRORES) HAD TO BE ADDED TO THE INCOME OF THE ASSESSEE. 2597 &3345/M/12-YRF(07-08) 26 13.1. DURING THE APPELLATE PROCEEDINGS BEFORE THE FAA,THE ASSESSEE ARGUED THAT THE AO HAD MADE THE ADDITION UNDER RULE 9A OF THE RULES BY TREATING COST OF PRINT AS NOT ALLOWABLE WITHOUT APPRECIATING THE FACT THAT SAME WAS TO BE ALLOWED A S NORMAL BUSINESS EXPENDITURE DEDUCTIBLE U/S. 37 OF THE ACT THAT THE AO HAD WRONGLY INTERPRETED R ULE 9A,THAT THE ASSESSEE HAD TO INCUR THE PRINT COST TO DELIVER THE PRODUCT I.E. FILMS TO VARIOUS C INEMA HALLS,THAT THE AO GAVE THE DEDUCTION OF RS.3.10 CRORES INSTEAD OF RS. 4.24 CRORES,THAT CONF IRMATION OF RS. 3.10 CRORES ONLY COULD BE PROVI -DED DUE TO LACK OF TIME, THAT THE BALANCE CONFIRMA TION WERE TO BE RECEIVED FROM OTHER PARTIES,THAT THE REMAINING CONFIRMATION WERE AVAILABLE WITH THE ASSESSEE, THAT THE ASSESSEE HAD SUBMITTED THE FULL STATEMENT OF RECOVERY PRINT COST FROM THE DIST RIBUTORS, THAT THE AO DISALLOWED THE DIFFERENCE ON ACCOUNT OF CONFIRMATION NOT HAVING BEEN RECEIVED FROM BOMBAY AND DELHI/ UP,THAT WHILE SUBMITTING THE REPLY ON 29/10/2009 THE ASSESSEE HAD OMITTED THE WORD PRINTS BESIDES THE AMOUNT RECEIVED FROM YASH RAJ FILMS DISTRIBUTORS (RS.71.14 LAKHS) AND YASH RAJ PP ASSOCIATES PRIVATE LTD.(RS.43.32 LAKHS),THAT THE OMISSION CAUSED THE A O TO CALCULATE ONLY THE AMOUNT WHICH WERE PREFIXED WITH PRINTS IGNORING THE ACTUAL AMOUNT CRE DITED TOWARDS PRINT COST RECORD IN THE BOOKS OF ACCOUNTS. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, THE FAA HELD THAT THERE WAS NO DISPUTE REGARDING THE RECOVERY OF PRIN T COST BEING ALLOWABLE AS DEDUCTION,THAT THE AO HIMSELF HAD NOT DISALLOWED ANY AMOUNT ON ACCOUNT OF PRINT COST FOR THE MOVIE FANNA,THAT AT THE TIME OF ASSESSMENT THE ASSESSEE COULD PRODUCE C ONFIRMATION OF RS.3.14 CRORES ONLY, THAT THE AO HAD ALLOWED THE DEDUCTION TO THAT EXTENT, THAT T HE PARTIES WHO HAD RECEIVED THE AMOUNTS HAD CONFIRMED THE TRANSACTIONS TOWARDS THE PRINT COST, THAT IN THE REMAND REPORT THE AO HAD NOT GIVEN ANY ADVERSE FINDING IN RESPECT OF THE CONFIRMATIONS . HE DELETED THE ADDITION MADE BY THE AO. 13.3. DURING THE COURSE OF HEARING BEFORE US,THE DR AND THE AR SUPPORTED THE ORDERS OF THE AO AND THE FAA. 13.4. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT T HE ASSESSEE COULD NOT PRODUCE ALL THE RELEVANT DOCUMENTS AT THE TIME OF ASSESSMENT, THAT IT HAD FURNISHED DETAILS OF RS. 3.14 CRORES ONLY, THAT LATER ON,BEFORE THE FAA,IT FILED THE REM AINING EVIDENCES, THAT THE FAA CALLED FOR REMAND REPORT, THAT IN THE REMAND REPORT THE AO DID NOT ADVERSELY COMMENT ABOUT THE AUTHENTICITY OF THE EVIDENCES. THE EXPENDITURE INCU RRED BY THE ASSESSEE IS A LEGITIMATE BUSINESS EXPENDITURE AND IS ALLOWABLE AS PER THE PROVISIONS OF THE ACT. AS THE ASSESSEE HAD FAILED, AT THE TIME OF ASSESSMENT, TO FULLY SUPPORT THE CLAIM MADE BY IT,SO,THE AO HAD RIGHTLY RESTRICTED THE 2597 &3345/M/12-YRF(07-08) 27 EXPENDITURE TO RS.3.14CRORES.BUT,THERE WAS NO JUSTI FICATION IN NOT ALLOWING THE REMAINING AMOUNT OF RS.1.10 CRORES ONCE THE ASSESSEE HAD PRODUCED TH E NECESSARY EVIDENCES.WE ARE OF THE OPINION THAT THERE IS NO INFIRMITY IN THE ORDER OF THE FAA. SO,UPHOLDING HIS ORDER,WE DISMISS THIRD GROUND. 14. FOURTH GROUND PERTAINS TO ADDITIONS MADE UNDER THE HEAD UNACCOUNTED RECEIPTS, AMOUNTING TO RS.9.40LAKHS.WHILE DECIDING THE GROUND NO.5,FILED B Y THE ASSESSEE(PARAGRAPH 7-7.3)WE HAVE DEALT THE ISSUE AT LENGTH.THE AO HAS CHALLENGED THE ORDER OF THE FAA,AS HE HAD GIVEN PART RELIEF. 14.1. WE FIND THAT ASSESSEE HAD DISTRIBUTED A REGIONAL FI LM, THAT AFTER DEDUCTING PUBLICITY COST IT PAID THE BALANCE AMOUNT TO THE PRODUCER OF THE FILM , THAT IT DID NOT PROVE THE TRANSACTION THROUGH ITS BOOKS OF ACCOUNTS,THAT THE PAYMENT WAS MADE THR OUGH BANKING CHANNEL,THAT THE RECIPIENT PRODUCER HAD ADMITTED TO HAVE RECEIVED THE DISPUTED AMOUNT AND HAD SHOWN IN HIS RETURN OF INCOME.CONSIDERING THESE FACTS AND DISCUSSION HELD IN EARLIER PARAGRAPHS,WE ARE OF THE OPINION THAT THE AO WAS NOT JUSTIFIED IN TREATING THE INCOM E AS CONCEALED INCOME.GROUND NO. 4 IS DECIDED AGAINST HIM. 15. NEXT GROUND PERTAINS TO PAYMENT OF DIRECTORSREMUNE RATION.IT WAS BROUGHT TO OUR NOTICE THAT THE ISSUE STANDS DECIDED BY THE ORDER OF THE TRIBUN AL.WE WOULD LIKE TO REFER TO PARA 17 AND PARA 22 OF THE ORDER OF THE TRIBUNAL FOR THE EARLIER AY. (SUPRA),WHEREIN THE ISSUE HAS BEEN DEALT.WE HAVE REPRODUCED THE RELEVANT PORTION OF THE ORDER I N THE EARLIER PART OF OUR ORDER.RESPECTFULLY FOLLOWING THE SAME,WE DECIDE GROUND NUMBER FIVE AGA INST THE AO. 16. SIXTH GROUND DEALS WITH DEPRECIATION ON BUNGALOW A MOUNTING TO RS. 5.40 LAKHS. DURING THE ASSESSMENT PROCEEDINGS,THE AO HELD THAT BUNGALOW WA S NOT USED FOR PURPOSE OF BUSINESS THAT THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE WHICH COULD S HOW THAT IT HAD CARRIED OUT ANY BUSINESS ACTIVITY FROM THE SAID BUNGLOW DURING THE YEAR RELE VANT FOR THE AY. 2007-08, THAT THE COMPANY HAD ADMITTED THAT THE SAID BUNGALOW WAS UNDER REPAI R, THAT AT THE TIME OF CONDUCTING SURVEY OPERATION IT WAS NOTICED THAT BUSINESS ACTIVITIES W ERE NOT BEING CARRIED OUT FROM THE SAID PLACE SINCE LONG,THAT AS PER THE RETURN OF INCOME FOR THE AY.2007-08 THE ASSESSEE WAS CARRYING OUT ITS BUSINESS FROM ANDHERI, THAT THE LOCAL ENQUIRIES REV EALED THAT THE BUNGALOW WAS USED AS RESIDENCE OF ONE OF THE DIRECTORS.ACCORDINGLY, DEPRECIATION C LAIMED ON BUNGALOW WAS DISALLOWED. 16.1. BEFORE THE FAA,IT WAS ARGUED THAT THE BUNGALOW WAS USED AS OFFICE AND SAME HAD BEEN ACCEPTED BY THE DEPARTMENT IN EARLIER YEARS,THAT TH E TRIBUNAL HAD ACCEPTED THE FACT THAT BUNGALOW 2597 &3345/M/12-YRF(07-08) 28 WAS USED FOR BUSINESS PURPOSES OF THE COMPANY, THAT DEPRECIATION FOR EARLIER YEARS WAS ALLOWED, THAT THE OFFICE WAS UNDER REPAIR AND HENCE THERE WA S NO ACTIVITY AT THE TIME OF VISIT OF SURVEY TEAM, THAT FROM THE AY. 2010-11 THE PLACE WAS USED PARTLY AS OFFICE AND PARTLY AS RESIDENCE. THE FAA VERIFIED OLD RECORDS AND EARLIER ASSESSMENT AND HELD THAT ASSESSEE WAS USING THE BUNGALOW AS A REGISTERED OFFICE OF THE COMPANY,THAT THE TRIB UNAL IN ITS ORDER FOR THE BLOCK PERIOD 1991- 2001(ITA.SS/685/MUM/2002) HAD CONFIRMED THE FACT TH AT BUNGALOW WAS USED FOR PURPOSE OF BUSINESS, THAT FOR THE PERIOD UNDER CONSIDERATION T HE ASSESSEE WAS TO BE ALLOWED DEPRECIATION. 16.2. THE DR ARGUED THAT THERE WERE CHANGE IN FACTS AS CO MPARED TO LAST YEAR,THAT THE PROPERTY WAS UNDER REPAIR,IT WAS NO LONGER AN OFFICE EVEN BE FORE RENOVATION.THE AR STATED THAT SURVEY WAS CARRIED OUT IN 2010,THAT THE AO HAD ALLOWED DEP RECIATION WHILE COMPLETING ASSESSMENT FOR AY.2009-10, U/S.143(3), THAT IN THE AY 2010-11 IT W AS SHOWN AS RESIDENCE OF ONE OF THE DIRECTORS.HE REFERRED TO PG-23 OF THE PB. 16.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE SURVEY WAS CARRIED OUT DURING THE AY.2010-11,THAT T HE ASSESSEE HAD CLAIMED DEPRECIATION FOR THE AY.UNDER APPEAL,THAT ON THE BASIS OF RENOVATION WOR K CARRIED OUT IN THE YEAR 2010 THE ISSUE OF ALLOWABILITY OF DEPRECIATION FOR EARLIER YEAR SHOUL D NOT HAVE BEEN DECIDED.THE AO HAD TO CONSIDER THE FACTS OF THE YEAR UNDER CONSIDERATION. THE FAA AFTER CONSIDERING THE OLD RECORDS AND THE ORDER OF THE TRIBUNAL HAD GIVEN A FINDING OF FA CT THAT THE PREMISES WAS BEING USED AS OFFICE PREMISES IN THE YEAR.NOTHING ADVERSE TO THE SAID FA CT WAS BROUGHT ON RECORD BY THE DEPARTMENT. THEREFORE,IN OUR OPINION,THERE IS NO NEED TO INTERF ERE WITH THE ORDER OF THE FAA.UPHOLDING HIS ORDER,WE DISMISS GROUND NO.6. 17 .SEVENTH GROUND IS ABOUT DISALLOWANCE OF EXPENSES N OT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE.DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD INCURRED ADDITION OF RS.70,104/-UNDER VARIOUS HEADS, ON 26/0 6/2006. HE HELD THAT THE EXPENSES INCURRED BY IT WERE NOT INCIDENTAL TO THE BUSINESS CARRIED O UT BY IT, THAT THE IMPUGNED EXPENDITURE DID NOT RELATE TO ANY MOVIE, THAT THE ASSESSEE HAD NOT FILE D ANY CONFIRMATION FROM THE CONCERNED PERSON REGARDING RECEIVING THE ABOVE AMOUNT.HE MADE AN ADD ITION OF RS.70,104/-TO THE TOTAL INCOME OF THE ASSESSEE. 17.1. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE ARGUE D THAT IT WAS NOT ABLE TO FIND OUT AS TO WHEREFROM THE AO HAD OBTAINED THE ENTRIES AMOUNTING TO RS.70,104/-THAT THERE WAS NO PARTICULAR 2597 &3345/M/12-YRF(07-08) 29 PAYMENT OF SUCH AMOUNT.IN ITS SUPPORT THE ASSESSEE SUBMITTED THE CASHBOOK PRINTOUT OF 26/06/ 2006.THE FAA CALLED FOR REMAND REPORT IN THAT REGAR D.IN HIS REPLY,THE AO DID NOT MENTION ANYTHING SPECIFIC ABOUT THE DISALLOWANCE. THE AO AL SO DID NOT EXPLAIN AS TO WHETHER THE ASSESSEE HAD ACTUALLY CLAIMED THOSE EXPENSES ON 26/06/2006.T HE FAA OBSERVED THAT THE ASSESSEE HAD SYSTEMATICALLY MAINTAINED SELF ATTESTED VOUCHERS IN RESPECT OF CASH PAYMENTS,THAT THE DISALLOW - ANCE MADE COULD NOT BE RELATED TO ANY PARTICULAR IT EM OF CLAIM, THAT IT WAS NOT POSSIBLE TO SUSTAIN THE DISALLOWANCE IN THE FACE OF THE CLAIM MADE BY T HE ASSESSEE, THAT NO DISCREPANCY WAS NOTICED IN THE BOOKS OF ACCOUNTS PRODUCED BY THE ASSESSEE.H E DIRECTED THE AO TO DELETED THE DISALLOW - ANCE. 17.2. BEFORE US,THE DR STATED THAT MATTER COULD BE DECIDE D ON MERITS. THE AR SUPPORTED THE ORDER OF THE FAA. 17.3. WE FIND THAT IN THE REMAND REPORT SUBMITTED TO THE FAA, THE AO HAD NOT DISCUSSED THE ISSUE AS TO HOW THE THEN AO HAD ARRIVED AT THE FIGURE OF RS.70,104/-.HE HAD ALSO NOT EXPLAINED AS TO WHETHER THE ASSESSEE HAD CLAIMED THE SAID EXPENDITU RE IN THE MONTH OF JUNE,2006.IN ABSENCE OF THESE TWO VITAL FACTS THERE WAS NO JUSTIFICATION FO R MAKING THE ADDITION OF FILING AN APPEAL BEFORE US. HOLDING THAT THE ORDER OF THE FAA DOES NOT SUFF ER FROM ANY INFIRMITY,WE DISMISS GOA 7. 18 .NEXT GROUND DEALS WITH DISALLOWANCE U/S.40A(3)OF T HE ACT AMOUNTING TO RS.9.23 LAKHS, BEING 20% OF RS. 46.16 LAKHS.DURING THE ASSESSMENT PROCEE DINGS, THE AO HELD THAT ASSESSEE HAD MADE CERTAIN CASH PAYMENTS IN EXCESS OF RS.20,000/- ON P ARTICULAR DATES.AFTER CONSIDERING THE SUBMI- SSION OF THE ASSESSEE,THE AO DISALLOWED 1/5 TH OF THE TOTAL EXPENDITURE I.E.RS.46,16,540/- AND MADE AN ADDITION OF RS.9,23,308/-TO ITS TOTAL INCOM E. 18.1. BEFORE THE FAA,THE ASSESSEE STATED THAT ADDITION WA S MADE UNDER A WRONG IMPRESSION BY THE AO THAT EACH ITEM REFERRED TO A SINGLE CASH PAYMENT , THAT NONE OF THE PAYMENT TO A SINGLE PERSON WAS MORE THAN RS.20,000, THAT THE PAYMENTS WERE ONL Y MADE AN ENTRY IN THE MAIN BOOK FROM EACH MOVIE ACCOUNT,THAT EACH PAYMENT WAS LESS THAN RS.20,000/-FOR WHICH ALL SUPPORTING DOCU - MENTS WERE PRODUCED BEFORE THE AO, THAT THE UNIT GO ING ON AN OUTDOOR SHOOT PREPARED THE EXCEL SHEET OF EACH AND EVERY VOUCHER OF THE EXPENDITURE, THAT ALL THE VOUCHERS FOR A PARTICULAR DAY OR WEEK WERE CONSOLIDATED AND A SINGLE ENTRY WAS PASSE D IN THE ACCOUNTING SOFTWARE, THAT THE AMOUNT REFLECTED IN TALLY WAS FOR MORE THAN RS.20,0 00/-,THAT EACH VOUCHER WAS LESS THAN RS. 20, 000/-. 2597 &3345/M/12-YRF(07-08) 30 18.2. THE FAA VERIFIED THE VOUCHERS AND CASHBOOK PRODUCED BY THE ASSESSEE HE HELD THAT THE CRUCIAL EVIDENCE WHETHER THE CASH PAYMENT WAS LESS THAN RS. 20,000/-OR NOT WAS THE VOUCHER,THAT THE AO HAD NOT RETAINED ANY SUCH VOUCHER EVEN BY WA Y OF SAMPLE, THAT THE CLAIM OF THE ASSESSEE THAT EACH ITEM OF CASH EXPENSES WAS LESS THAN RS. 2 0,000 COULD NOT BE BRUSHED ASIDE,THAT THERE WAS NO CONTRAVENTION OF THE PROVISIONS OF SECTION 4 0A(3)OF THE ACT. 18.3. THE DR AND THE AR RELIED UPON THE ORDERS OF THE AO AND THE FAA RESPECTIVELY.WE FIND THAT THE AO HAD MADE THE ADDITION CONSIDERING THE CONSOL IDATED FIGURES APPEARING IN THE TALLY SOFTWARE WITH REGARD TO EXPENSES INCURRED BY THE AS SESSEE, THAT HE DID NOT VERIFY THE VOUCHERS BEFORE INVOKING THE PROVISIONS SECTION 40A(3), THAT THE ASSESSEE HAD CLAIMED THAT NO EXPENDITURE WAS MORE THAN THE PRESCRIBED LIMIT,THAT THE FAA HAD VERIFIED THE VOUCHERS AND BOOKS OF ACCOUNTS,THAT NOTHING WAS BROUGHT BEFORE US TO NEGA TE THE FINDING OF FACT GIVEN BY HIM ABOUT NON -CONTRAVENTION OF THE SECTION 40A(3) OF THE ACT.THE REFORE,WE DECIDE THE ISSUE AGAINST THE AO AND CONFIRM THE ORDER OF THE FAA. 19. GOA 9 PERTAINS TO ADDITION MADE U/S.69C OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD TRANSFERRED AND AMOU NT OF RS.7.35 LAKHS FROM MOVIE ACCOUNT FANNA TO THE MAIN ACCOUNT OF YASH RAJ FILMS PRIVATE LTD. AS PER THE AO ON VERIFICATION OF THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE IN THE COMPUTER THE AMOUNT IN QUESTION WAS NOT FOUND TO HAVE BEEN CREDITED TO THE CASHBOOK OR THE BANK ACCOUNT OF THE COMPANY. ACCORDINGLY HE HELD THAT RS.7.35 LAKHS REMAIN TO BE EXPLAINED BY T HE ASSESSEE. INVOKING THE PROVISIONS OF SECTION 69C OF THE ACT,HE MADE AN ADDITION OF RS.7,35,435/- TO THE INCOME OF THE ASSESSEE. 19.1. IN THE APPELLATE PROCEEDINGS, THE ASSESSEE ARGUED T HAT RS. 7.35 LAKHS IN CASH WAS TRANSFERRED FROM ACCOUNT FANNA TO YRF PVT.LTD.ACCOUNT TO NULLIF Y THE CASH BALANCE IN THE FANNA ACCOUNT THAT THE CASH WITHDRAWAL FROM THE SAID ACCOUNT AND EXPEN SES OF THAT ACCOUNT WERE ALREADY ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS FOR THE AY.2006-07 IN YASH RAJ PRIVATE LTD, THAT THE AMOUNT IN QUESTION WAS THE NET OF CASH WITHDRAWAL AND CASH EX PENSES OF FANNA,THAT CASH WITHDRAWN FROM ON ACCOUNT IN THE AY.2006-07 WAS RS. 22.46 LAKHS IS REDUCED BY EXPENSES INCURRED OF RS. 15.10 LAKHS,THAT IT WORKED OUT TO A NET FIGURE OF RS. 7.3 5 LAKHS, THAT THE AMOUNT WAS REFLECTED IN THE MAIN ACCOUNT OF YASH RAJ FILMS PRIVATE LIMITED,THAT IT WAS JUST A MIRROR ENTRY IN THE MAIN BOOK FROM FANNA ACCOUNT. 2597 &3345/M/12-YRF(07-08) 31 AFTER CONSIDERING THE AVAILABLE MATERIAL,THE FAA HE LD THAT THE ARGUMENT OF THE ASSESSEE WAS BASED ON BOOKS OF ACCOUNTS, THAT THE COMPANY WAS MA INTAINING PRODUCTION ACCOUNT OF EACH MOVIE,THAT SAME WAS MARGIN THE MAIN ACCOUNT ONCE TH E MOVIE WAS RELEASED FOR THE YEAR WAS COMPLETED,THAT THE ADDITION WAS RESULT OF STRONG UN DERSTANDING OF THE BOOK ENTRIES. HE DELETED THE ADDITION MADE BY THE AO. 19.2. THE DR LEFT THE ISSUE TO THE DISCRETION OF THE BENC H.THE AR SUPPORTED THE ORDER OF THE FAA. WE FIND THAT THE ASSESSEE WAS MAINTAINING ITS BOOKS OF ACCOUNTS REGULARLY AND WAS FOLLOWING A PECULIAR SYSTEM, THAT AFTER COMPLETION OF THE MOVIE THE ACCOUNT OF EACH MOVIE WAS MERGED IN THE MAIN ACCOUNT. THE AO WITHOUT UNDERSTANDING THE SYST EM FOLLOWED BY THE ASSESSEE HAD INVOKED THE PROVISIONS OF SECTION 69C OF THE ACT. IN THE CI RCUMSTANCES WE HOLD THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY. GROUND NU MBER NINE IS DISMISSED. 20 .FLUCTUATION OF FOREIGN CURRENCY LOSS IS THE SUBJEC T MATTER OF GROUND NO.10.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESS EE HAD CLAIMED LOSS ON FLUCTUATION OF FOREIGN CURRENCY FOR THE MOVIES CHECK DE INDIA, JHO OM BARABAR JHOOM AND TARA RUM PUM. HE HELD THAT MOVIES AGAINST WHICH THE LOSS HAD BEEN CL AIMED WERE UNDERPRODUCTION AND NO RECEIPTS AGAINST THEM WERE CREDITED TO PROFIT AND LOSS ACCOU NT, THAT THE EXPENSES INCURRED AGAINST SUCH MOVIES SHOULD HAVE BEEN CAPITALISED AGAINST THE COS T OF PRODUCTION OF THE MOVIES INSTEAD OF CLAIMING THE SAME AS REVENUE EXPENDITURE, THAT AS-1 1 WAS NOT APPLICABLE TO THE FACTS OF THE CASE UNDER CONSIDERATION, THAT THE ASSESSEE WAS FOLLOWIN G PROJECT COMPLETION METHOD. HE MADE AN ADDITION OF RS. 17.04 LAKHS TO THE TOTAL INCOME OF THE ASSESSEE. 20.1. BEFORE THE FAA,THE ASSESSEE ARGUED THAT ENTRY OF TH EREFORE DISCOUNT WAS PASSED ON THE INSISTENCE OF STATUTORY AUDITOR AS PER AS-11, ISSUE D BY THE INSTITUTION OF CHARTERED ACCOUNTANTS OF INDIA, THAT THE AMOUNT WAS FOR THE PERIOD RELEVA NT TO THE CURRENT FINANCIAL YEAR AND WAS RIGHTLY CHARGED TO PROFIT AND LOSS ACCOUNT, THAT IT WAS THE COST OF PRODUCTION BUT WAS REGULAR EXPENDITURE,THAT IT WAS AKIN TO THE AUDIT FEES WHIC H WERE CHARGED TO PROFIT AND LOSS ACCOUNT ON YEARLY BASIS,THAT FOREIGN EXCHANGE FLUCTUATION COST WAS NOTHING BUT THE PERIOD COST. THE FAA HELD THAT AS PER RULE 115 OF THE RULES FORE IGN EXCHANGE FLUCTUATION ARISING ON CONTRACT WHICH HAD EXPIRED NEEDED TO BE CHARGED TO THE PROFI T AND LOSS ACCOUNT, THAT THE UNEXPIRED CONTRACT WERE TO BE CORRECT TO THE YEAR OF EXPIRY O F THE CONTRACT, THAT THE ASSESSEE HAD BROUGHT ON 2597 &3345/M/12-YRF(07-08) 32 RECORD THAT AMOUNT CHARGED AS FLUCTUATION LOSS HAD ARISEN DUE TO FLUCTUATION IN THE CURRENCY AND THAT ALL THE CONTRACTS HAD BEEN COMPLETED, THAT THE ADDITION HAD RESULTED FROM THE BASIC PREDICTION IN THE FACTS AS UNDERSTOOD BY THE AO, THAT THE ASSE SSEE HAD CLAIMED THAT FLUCTUATION RELATED TO EXPIRED CONTRACTS WHEREAS THE AO OBSERVED THAT IT R ELATED TO ONGOING MOVIES, THAT THE ASSESSEE HAD EXPLAINED THE NATURE OF FOREIGN EXCHANGE FLUCTU ATIONS, THAT THE EXPENDITURE WAS TO BE HELD AS PERIOD COST, THAT IT HAD RIGHTLY CHARGED THE EXPEND ITURE TO PROFIT AND LOSS ACCOUNT. 20.2. THE DR STATED THAT THERE WERE NO AGREEMENT WITH FOR EIGN PARTIES,THAT AS-11 WAS NOT APPLICABLE, THAT THE ASSESSEE HAD NOT SHOWN THE REC EIPT, THAT AS PER THE ACCOUNTING PRINCIPLES THERE WAS NO LOGIC TO ALLOW THE LOSS CLAIMED BY THE ASSES SEE .THE AR CONTENDED THAT LOSS ON ACCOUNT OF FLUCTUATION WAS ALLOWABLE,THAT THE COST PERTAINED T O THE YEAR UNDER CONSIDERATION,EVEN IF IT WAS WORK IN PROGRESS IT COULD NOT BE TREATED AS A CAPIT AL EXPENDITURE. 20.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL.WE FIND THAT THE FAA HAS GIVEN A CATEGORICAL FINDING OF FACT THAT THE FOREIG N EXCHANGE FLUCTUATION LOSS RELATED TO EXPIRED CONTRACTS. NOTHING WAS BROUGHT OVER NOTICE TO PROVE OTHERWISE.THEREFORE, WE SEE NO NEED TO INTERFERE WITH THE ORDER OF THE FAA BECAUSE HE HAS FOLLOWED THE PROVISIONS OF RULE 115 OF THE RULES AND THE MANDATE OF AS-11.CONFIRMING HIS ORDER ,WE DISMISS GOA 10. 21 .NEXT GROUND IS ABOUT DISALLOWANCE U/S.40(A)(I)OF T HE ACT.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE HAD MADE PAYMENTS TO CER TAIN PARTIES WITHOUT DEDUCTING TAX AT SOURCE. HE DIRECTED THE ASSESSEE TO FILE EXPLANATION ABOUT SUCH PAYMENTS. HE HELD THAT IMPOUNDED BOOKS OF ACCOUNTS REVEALED THAT EXPENSES WERE INCURRED TO WARDS THE PROCESSING AND PRINTING CHARGES, THAT THE PROVISIONS OF SECTION 194C WERE APPLICABLE WITH REGARD TO THE ASSESSING CHARGES/PRINT PROCESSING CHARGES,THAT THE ASSESSEE DID NOT PRODUC E THE PURCHASE BILLS IN SUPPORT OF ITS CLAIM THAT ABOVE-MENTIONED PAYMENTS INVOLVED THE COST OF RAW FILM ROLLS,THAT IT HAD CLAIMED PAYMENTS TOWARDS PROFESSIONAL FEES TO ADVOCATE/CA.S/OTHER PR OFESSIONALS, THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE AS PER THE PROVISIONS OF SECTION 194J WHILE MAKING THE PAYMENTS TO THE PROFESSION - ALS,THAT THE ASSESSEE HAD MADE PAYMENT OF RS. 60.75 LAKHS TO YRF STUDIO ON ACCOUNT OF UTILITY SERVICES, THAT IT DID NOT FILE ANY SUPPORTING EVIDE NCE ABOUT AVAILING THE SERVICES FROM THE STUDIO, THAT IT HAD HIRED THE STUDIO ON RENTAL BASIS, THAT THE ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE AS PER THE PROVISIONS OF SECTION 194-I OF THE ACT, THA T THE PAYMENTS MADE TO VIGILANT SECURITY 2597 &3345/M/12-YRF(07-08) 33 SERVICES WERE IN NATURE OF CONTRACTS AND THE PROVIS IONS OF SECTION 194C WERE ATTRACTED. IN VIEW OF THE DISCRETION, THE AO DISALLOWED AND AMOUNT OF RS. 93.71 LAKHS U/S.40 (A) (IA) OF THE ACT. 21.1. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE ARGUE D THAT THERE WAS NO RENT WAS PAID TO YRF STUDIO,THAT IT WAS ONLY A PAYMENT FOR UTILITY C HARGES LIKE PAYMENT OF ELECTRICITY WATER SECURITY AND HOUSEKEEPING SERVICES,THAT ALL SUCH EX PENSES FELL UNDER CONTRACT, THAT TAX WAS DEDUCTED AT SOURCE AT THE RATE APPLICABLE TO A CONT RACT, THAT LATER ON STARTED DEDUCTING TAX AT THE RATE PRESCRIBED U/S.194-I AFTER CIRCULAR NO.2WAS IS SUED ON 13/07/2006 WITH REGARD TO UTILITY SERVICES,THAT AFTER THE AMENDMENT IT DEDUCTED TAX A T SOURCE ON PAYMENT MADE TO STUDIO AT THE PRESCRIBED RATE FOR RENT, THAT THE AMENDMENTS WERE PROSPECTIVE IN NATURE AND TAX WAS DEDUCTED BEFORE THE AMENDMENTS, THAT KODAK INDIA LTD HAD SUP PLIED RAW MATERIAL, THAT NO TAX WAS TO BE DEDUCTED AT SOURCE FOR PURCHASE OF RAW MATERIAL.AFT ER CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE FAA HELD THAT THE ASSESSEE HAD NOT DETECTED TAX IN RESPECT OF PAYMENT OF RUPEES THREES LAKHS MADE TO NEELAM SAGAR UNDER THE HEAD PROFESSIONAL FE ES,DISALLOWANCE FOR THE SAID PAYMENT HAD TO BE CONFIRMED, THAT ASSESSEE HAD PRODUCED EVIDENCES ABOUT PAYMENTS ALONG WITH THE BILL/VOUCHERS, THAT TAX WAS DIRECTED AT RATES APPLICABLE TO PARTIC ULAR PAYMENTS AT PREVAILING ON THE DATE OF RESPECTIVE PAYMENTS.ACCORDINGLY,HE DIRECTED THE AO TO ALLOW THE EXPENSE FOR WHICH TAX WAS DEDUCTED AT SOURCE AT PRESCRIBED RATES AFTER CAUSIN G DUE VERIFICATION IN THAT REGARD. 21.2. BEFORE US, THE DR CONTENDED THAT THE FAA WAS NOT SU RE ABOUT THE DECISION TAKEN BY HIM THAT HE HAD MENTIONED THE WORD IT APPEARSWHILE DE CIDING THE APPEAL,THAT HE HAD ALLOWED THE BENEFIT TO THE ASSESSEE EVEN THOUGH HE WAS NOT SUR E ABOUT THE FACTS.THE AR RELIED UPON THE ORDER OF THE FAA. 21.3. WE FIND THAT THE FAA HAD PARTLY ALLOWED THE APPEAL OF THE ASSESSEE, THAT IT HAD DIRECTED THE AO TO MAKE VERIFICATION ABOUT THE RATES OF DEDUCTIN G TAX AT SOURCE AND TO ALLOW THE EXPENSES ONLY AFTER VERIFICATION.IN OUR OPINION, THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY INFIRMITY. CONFIRMING THE SAME,WE DISMISS THE GROUND RAISED BY THE AO. 22. LAST GROUND DEALS WITH DISALLOWANCE OF EXPENSES ON CREDIT CARDS.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT ASSESSEE HAD MADE PAY MENT TO RELIANCE ENERGY LTD IN RESPECT OF BUNGALOW OF Y.R.CHOPRA,ENTERTAINMENT EXPENSES,FEES/ SUBSCRIPTION,INSURANCE EXPENSES,OFFICE EXPENSES TOWARDS FURNITURE GIFTS FOOD AND REFRESHME NTS BY USING CREDIT CARDS.HE OBSERVED THAT ASSESSEE HAD FAILED TO SUBSTANTIATE THAT THE EXPENS ES WERE INCURRED FOR CARRYING ON THE BUSINESS 2597 &3345/M/12-YRF(07-08) 34 ACTIVITY, THAT IT FAILED TO PRODUCE ANY EVIDENCE WH ICH COULD SHOW THAT EXPENSES WERE NOT INCURRED FOR ENTERTAINING THE MEMBERS OF THE FAMILY,THAT EXP ENSES TO THE TUNE OF RS. 46.81 LAKHS WERE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE ASSESSEE.HE MADE AN ADDITION OF RS.46,81, 657/-TO ITS TOTAL INCOME. 22.1. BEFORE THE FAA,THE ASSESSEE MADE SUBMISSIONS WITH R EGARD TO ALL THE EXPENSES INCURRED BY IT AND DISALLOWED BY THE AO.AFTER CONSIDERING THE A VAILABLE MATERIAL,HE HELD THAT POST FRINGE BENEFIT TAX REGIME THE ONUS HEAD SHIFTED ON THE AO TO PROVE THAT THE ITEM OF EXPENSES ON CREDIT CARDS DID NOT RELATE TO BUSINESS OF AN ASSESSEE, TH AT THE ASSESSEE HAD CONSIDERED THE EXPENSES IN QUESTION FOR THE PURPOSE OF FBT,THAT THERE WAS NO J USTIFICATION FOR MAKING THE ADDITION IN THE HANDS OF THE ASSESSEE. 22.2. WE FIND THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVO UR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL FOR THE EARLIER YEAR.WE ALSO AGREE WITH TH E ARGUMENT RAISED BY THE ASSESSEE THAT IN CASE OF A PRIVATE LTD COMPANY,THERE CANNOT BE ANY PERSON AL EXPENSES.CONSIDERING THE ABOVE,WE UPHOLD THE ORDERS OF THE FAA AND DISMISS GROUND NO. 12. AS A RESULT,APPEALS FILED BY THE ASSESSEE AND THE A O STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH JANUARY,2017. 20 , 2017 SD/- SD/- ( / AMARJIT SINGH ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 20.01.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.