FIROZ NADIADWALA, MUMBAI V. ADDL CIT 11(1), MUMBAI

ITA 7977/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3818 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2007-2008
• Appeal Filed On: 25-11-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A P SINGH
• Assessee Lawyers: SANJIV M SHAH
• Keywords: Capital asset; Revenue expenditure
• Section: 263; 139

Judgement Text

ITA NO. 7977 /MUM/2011 PAGE 1 OF 18 IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND DR. S.T.M PAVALAN JUDICIAL MEMBER ITA NO.7977 /MUM/2011 (ASSESSMENT YEAR: 2007-08) FIROZ NADIADWALA, PLOT NO. 2 BARKAT, 5 TH CROSS, GULMOHAR RD, 1 ST FLR, JVPD SCHEME, 10 TH SHAH INDUSTRIAL ESTATE, VEERA DESAI ROAD, ANDHERI (W), MUMBAI 400 049 PAN AADPN1426C VS. ADDITIONAL COMMISSIONER OF INCOME TAX-11, (1), MUMBAI. DEPARTMENT BY: SHRI A.P. SINGH ASSESSEE BY: SHRI SANJIV M. SHAH DATE OF HEARING: 12/3/2013 DATE OF PRONOUNCEMENT: 10 /04/2013 O R D E R PER RAJENDRA SINGH, A.M. THIS APPEAL BY THE ASSESSE IS DIRECTED AGAINST THE ORDER DATED 30 TH SEPTEMBER 2011 OF CIT FOR THE ASSESSMENT YEAR 2007 -08. IN THE SAID ORDER, CIT HAD SET AISDE THE ASSESSMENT MADE B Y THE AO AND DIRECTED THE SAME TO BE MADE AFRESH AFTER HOLDING T HE ASSESSMENT ORDER WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS EN GAGED IN THE BUSINESS OF PRODUCTION OF FILMS HAD DECLARED TO TAL INCOME OF RS. 25207250 FOR ASSESSMENT YEAR 2007-08. THE ASSESSMEN T WAS COMPETED BY THE AO AFTER SCRUTINY U/S 143 (3) VIDE ORDER DATED 30 TH DECEMBER 2009 IN WHICH THE TOTAL INCOME WAS DETERMI NED AT RS. 26340772. SUBSEQUENTLY, CIT ON EXAMINATION OF THE A SSESSMENT RECORDS NOTED THAT DURING THE RELEVANT YEAR, ONLY O NE FILM I.E. PHIR ITA NO. 7977 /MUM/2011 PAGE 2 OF 18 HERA PHERI HAD BEEN RELEASED AND THE COST OF PRODU CTION OF WHICH HAD BEEN CLAIMED AT DEDUCTION. TWO OTHER FILMS I.E. WELCOME N FULL-N-FINAL WERE STILL UNDER PRODUCTION AND THE C OST OF PRODUCTION OF THESE FILMS HAD BEEN REFLECTED IN THE CLOSING ST OCK. CIT ALSO NOTED THAT IN RESPECT OF THESE TWO FILMS, THE ASSESSEE HA D PAID INTEREST OF RS. 3331086 AND 4193536 TO IDBI BANK. THE SAID INTE REST HAD BEEN CLAIMED BY THE ASSESSEE IN THE P&L ACCOUNT AND HAD ALSO BEEN ALLOWED BY THE AO. CIT ON EXAMINATION OF LETTER OF INTENT OF IDBI BANK NOTED THAT THE BANK HAD ADVANCED FOREIGN CURRE NCY LOAN SPECIFICALLY FOR THE PURPOSE OF MEETING PART OF THE COST OF PRODUCTION OF THESE TWO FILMS AND THESE LOANS WERE SECURED AS FIRST CHARGE ON THE NEGATIVES OF THE PROPOSED FILMS AND THERE WERE OTHER CONDITIONS IMPOSED BY THE BANK RELATING TO THE PRODUCTION OF F ILMS. CIT THUS, CONCLUDED THAT THE LOANS WERE DIRECTLY FOR THE PURP OSE OF PRODUCTION OF THE TWO FILMS AND, THEREFORE, SUCH INTEREST WAS NOT ALLOWABLE AS DEDUCTION AS THE FILMS HAD NOT BEEN RELEASED DURING THE YEAR AND THE SAME FORMED PART OF COST OF PRODUCTION AS DEFIN ED UNDER RULE 9A. CIT ALSO OBSERVED THAT THE FILM WAS A CAPITAL A SSET IN THE HAND OF THE PRODUCER AS HELD BY HONBLE HIGH COURT OF BO MBAY IN CASE OF SADICHHA CHITRA VS. CIT ( 189 ITD 774). THE SAID JU DGMENT HAD BEEN APPROVED BY HONBLE SUPREME COURT IN CASE OF S AHANI STEEL & PRESS WORKS VS. CIT IN (228 ITD 253). CIT ALSO NOTE D THAT THE BALANCE-SHEET FOR ASSESSMENT YEAR 2007-08 HAD SHOWN STOCK OF RS. 6256700 ON ACCOUNT OF CERTAIN FILMS WHICH HAD NOT B EEN RELEASED DURING THE YEAR. HOWEVER THE SAID STOCK WAS NOT REF LECTED IN THE CLOSING STOCK APPEARING IN THE P&L ACCOUNT. CIT THE REFORE ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE ASKING HIM TO EXP LAIN AS TO WHY THE ASSESSMENT ORDER SHOULD NOT BE TREATED AS ERRON EOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. ITA NO. 7977 /MUM/2011 PAGE 3 OF 18 3. THE ASSESSEE SUBMITTED THAT THE ISSUE REGARDING ALLOWABILITY OF DEDUCTION ON ACCOUNT OF INTEREST HA D BEEN SPECIFICALLY EXAMINED BY THE AO ON WHICH SPECIFIC QUERIES HAD AL SO BEEN RAISED AND REPLIED BY THE ASSESSEE VIDE LETTER DATED 11.11 .2009. THE AO HAD THEREFORE ALLOWED THE CLAIM AFTER EXAMINATION A ND AFTER APPLICATION OF MIND AND, THEREFORE, SUCH ORDER COUL D NOT BE CONSIDERED AS ERRONEOUS AND PREJUDICIAL TO THE INTE REST OF THE REVENUE. THE ASSESSEE ALSO SUBMITTED THAT JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF SADICHHA CHITRA (SUPRA) AND THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF SAHANI STEEL AND PRESS WORKS (SUPRA), WERE DISTINGUISHABLE AS THE SA ME RELATED TO GRANT OF SUBSIDY AND WERE NOT DIRECTLY ON THE ISSUE OF EXPENDITURE BEING CAPITAL OR REVENUE IN NATURE. THE ASSESSEE RE FERRED TO JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF CIT VS. MUKTA ARTS PVT. LTD. IN ITR/584/2001 IN WHICH THE HIGH CO URT IN THE JUDGMENT DATED 25.5.2008 HELD THAT A FILM IN PRODUC TION WAS MERELY STOCK IN TRADE AND THEREFORE IT WAS ARGUED T HAT THERE WAS NO QUESTION OF THE SAME BEING A CAPITAL ASSET. IT WAS THUS SUBMITTED THAT THE CLAIM OF INTEREST WAS ALLOWABLE WHICH HAD BEEN RIGHTLY ALLOWED BY AO AFTER NECESSARY EXAMINATION AND APPLI CATION OF MIND. AS REGARDS THE ERROR POINTED OUT IN RESPECT OF CLOS ING STOCK OF RS. 6258700 IN RESPECT OF OTHER FILMS NOT BEING REFLECT ED IN THE TRADING ACCOUNT, IT WAS SUBMITTED THAT THE AMOUNT REPRESENT ED VARIOUS ADVANCES GIVEN IN RESPECT OF PROPOSED FILMS WHICH W ERE NOT UNDER PRODUCTION AND THEREFORE THESE WERE NOT REQUIRED TO BE REFLECTED AS PART OF THE CLOSING STOCK IN THE P&L ACCOUNT. IN RE LATION TO THE CLAIM OF INTEREST, IN WAS FURTHER SUBMITTED THAT BOTH THE FILMS WERE RELEASED DURING THE NEXT ASSESSMENT YEAR IN WHICH T HE INTEREST WAS ALLOWABLE AS DEDUCTION AND THEREFORE NO PREJUDICE H AD BEEN CAUSED TO THE INTEREST OF REVENUE. IT WAS, ACCORDINGLY, UR GED THAT PROCEEDINGS U/S 263 MAY BE DROPPED. ITA NO. 7977 /MUM/2011 PAGE 4 OF 18 4. CIT HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED BY THE ASSESSEE. IT WAS OBSERVED BY HIM THAT ASSESSEE IN T HE LETTER DATED 11.11.2009 TO THE AO HAD SUBMITTED THAT HE HAD BORR OWED MONEY WITHOUT ANY SPECIFIC COMMITMENT TO UTILIZE THE FUND S FOR THE PURPOSE OF PRODUCTION OF A PARTICULAR MOVIE AND THA T THE FUNDS WERE OF GENERAL PURPOSE FUNDS WITHOUT ANY SPECIFICATION S FOR USE IN A PARTICULAR FILM. HOWEVER, CIT NOTED THAT THIS SUBMI SSION OF THE ASSESSEE WAS NOT CORRECT ON FACTS. IT WAS ALSO NOTE D BY HIM THAT THE FOREIGN CURRENCY LOAN HAD BEEN ADVANCED BY IDBI BAN K SPECIFICALLY FOR THE PURPOSE OF MEETING THE COST OF PRODUCTION O F TWO FILMS AND LOANS WERE SEPARATELY SANCTIONED FOR THE TWO FILMS. CIT NOTED FROM THE LETTERS OF INTENT OF THE BANK AND OBSERVED THAT THESE LOANS WERE TO BE UTILIZED FOR THE PRODUCTION OF SAID FILMS AND NOT FOR ANY OTHER PROJECT AND LOANS WERE SECURED AGAINST FIRST CHARGE ON THE NEGATIVES OF THE FILM TO BE PRODUCED AND THERE WERE OTHER CON DITIONS IMPOSED IN THESE LETTERS OF INTENT RELATING TO THE PRODUCTI ON OF TWO MOVIES. THESE CONDITIONS INCLUDED A SEPARATE LABORATORY AGR EEMENT FOR FILM PROCESSING WITH UNDERTAKING THAT NO PRINT OF THE FI LM COULD BE RELEASED TO ANY FIRM OR COMPANY UNLESS AUTHORIZED B Y THE BANK IN WRITING AND PHYSICAL PROGRESS OF PRODUCTION WAS TO BE INTIMATED TO THE BANK FROM TIME TO TIME AND WORK WAS TO BE CARRI ED OUT IN ACCORDANCE WITH THE TIME SCHEDULE. THUS THE LOANS W ERE SPECIFICALLY SANCTIONED FOR THE PRODUCTION OF FILMS AND IT WAS N OT CORRECT ON PART OF THE ASSESSEE TO STATE THAT THESE WERE GENERAL PU RPOSE LOANS. THUS THE AO HAD TAKEN THE VIEW BASED ON WRONG FACTS WITH OUT ANY EXAMINATION. CIT ALSO OBSERVED THAT HONBLE HIGH C OURT OF BOMBAY IN CASE OF SADICHHA CHITRA VS. CIT (SUPRA) HAD HELD THAT SUBSIDY RECEIVED BY PRODUCER FOR PRODUCTION OF FILM WAS OF CAPITAL NATURE AS THE FILM BROUGHT INTO EXISTENCE A CAPITAL ASSET. TH US THE HIGH COURT ITA NO. 7977 /MUM/2011 PAGE 5 OF 18 HAD CLEARLY HELD THAT FILM WAS A CAPITAL ASSET AND IF IT WAS NOT SO IT WOULD NOT HAVE BEEN HELD THAT RECEIPT WAS OF CAPITA L IN NATURE. 5. CIT FURTHER OBSERVED THAT HONBLE SUPREME COURT IN CASE OF SAHNI STEEL AND PRESS WORKS (SUPRA) HAD SPECIFICALL Y APPROVED THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF SADICHHA CHITRA (SUPRA). AS REGARDS THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF MUKTA ARTS PVT. LTD (SUPRA) RELIE D UPON BY ASSESSEE, CIT OBSERVED THAT THE HONBLE HIGH COURT IN THAT CASE DID NOT GO INTO THE ISSUE WHETHER THE FILM WAS A CAPITA L ASSET OR NOT AS THE COUNSEL FOR THE REVENUE HAD STATED THAT NO QUES TION OF LAW WAS INVOLVED AND THE FILM IN QUESTION HAD BEEN ABANDONE D BEFORE COMPLETION. THE HIGH COURT HAD, THEREFORE, DISMISSE D THE DEPARTMENTAL APPEAL AS MISCONCEIVED. MOREOVER, THE EARLIER JUDGMENT OF THE HIGH COURT IN CASE OF SADICHHA CHIT RA (SUPRA) HAD NOT BEEN BROUGHT TO THE NOTICE OF HIGH COURT. THERE FORE, THE JUDGMENT IN CASE OF MUKTA ARTS PVT. LTD. ( SUPRA) COULD NOT BE CITED AS A PRECEDENT FOR THE ISSUE WHETHER FILM WAS A CAP ITAL ASSET OR STOCK IN TRADE. THE ASSESSEE HAD ALSO CITED SEVERAL JUDGMENTS OF HIGH COURTS HOLDING THAT FILM PRODUCTION AMOUNTED T O MANUFACTURE WHICH WERE DISTINGUISHED BY CIT ON THE GROUND THAT THESE WERE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IT WAS OBSERVED BY HIM THAT IN THIS CASE, COST OF PRODUCTION OF FILMS WAS REQUIRED TO BE AMORTIZED AND ALLOWED AS DEDUCTION IN ACCORDANCE WI TH RULE 9A. THE INTEREST PAID ON THE BORROWING WHICH HAD BEEN TAKEN DIRECTLY FOR THE PRODUCTION OF FILMS WAS PART OF THE COST IN CURRED FOR PRODUCTION OF FILMS, AND THEREFORE, ALLOWABILITY OF INTEREST WAS REQUIRED TO BE CONSIDERED AS PER RULE 9A AND NOT U/ S 36 (1) (III). ITA NO. 7977 /MUM/2011 PAGE 6 OF 18 6. AS REGARDS THE ARGUMENT OF THE ASSESSEE THAT THE IN TEREST PAID WAS ALLOWABLE AS DEDUCTION IN ASSESSMENT YEAR 200-09 WHEN THE FILMS WERE RELEASED. CIT OBSERVED THAT TAXES HA VE TO BE PAID IN THE YEAR IN WHICH THEY ARE DUE AND DEFERMENT OF REV ENUE EVEN BY A YEAR CAN BE PREJUDICIAL TO THE INTEREST OF REVENUE AS THE REVENUE WOULD LOSE THE INTEREST FOR A YEAR. THUS ALLOWING T HE INTEREST IN THIS YEAR WAS PREJUDICIAL TO THE INTEREST OF THE REVENU E. THE AO HAD COMPLETED THE ASSESSMENT WITHOUT APPLICATION OF MIN D AND THAT IT WAS NOT A CASE OF TAKING ONE OF TWO POSSIBLE. CIT T HEREFORE, HELD THAT THE ASSESSMENT ORDER PASSED BY AO WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. CIT ACCORDINGLY SET ASI DE THE ASSESSMENT ORDER U/S 263 AND DIRECTED THE AO TO MAKE FRESH ASS ESSMENT AFTER TAKING INTO ACCOUNT THE INTEREST AS PART OF COST OF PRODUCTION TO BE ALLOWED AS PER RULE 9A. AGGRIEVED BY THE DECISION O F CIT, THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 7. BEFORE US, THE LEARNED AR FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES THAT FILM WAS AN ITEM OF STOCK IN TRADE AS HELD BY HONBLE HIGH COURT OF BOM BAY IN CASE OF MUKTA ARTS PVT. LTD (SUPRA) AND THE SAME HAD BEEN D ULY REFLECTED IN THE BALANCE-SHEET. IT WAS THUS ARGUED THAT INTEREST WAS ALLOWABLE AS DEDUCTION U/S 36(1) (III) AS THE BORROWINGS WERE MA DE FOR THE PURPOSE OF BUSINESS. IT WAS ALSO SUBMITTED THAT EVE N IF THE FILM WAS A CAPITAL ASSET INTEREST ON BORROWED FUNDS HAVE TO BE ALLOWED IRRESPECTIVE OF THE FACT THAT WHETHER THE BORROWING S WERE FOR THE PURPOSE OF REVENUE EXPENDITURE OR FOR ACQUISITION O F A CAPITAL ASSET. THE RELIANCE FOR THE PROPOSITION WAS PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF CIT VS. LOK HANDWALA CONSTRUCTION INDUSTRIAL LTD. ( 260 ITR579). THE LEA RNED AR ALSO REFERRED TO JUDGMENT OF HONBLE HIGH COURT OF DELHI IN CASE OF CIT VS. DK KONDKE (192 ITD 128) IN WHICH IT WAS HELD TH AT THE FILM ITA NO. 7977 /MUM/2011 PAGE 7 OF 18 MAKING WAS A MANUFACTURING PROCESS AND THEREFORE IT WAS ARGUED THAT INTEREST ON MONEY BORROWED FOR MANUFACTURING ACTIVITY WAS ALLOWABLE AS DEDUCTION. REFERENCE WAS ALSO MADE TO THE DECISION OF TRIBUNAL IN CASE OF AK FILMS PVT. LTD. IN ITA NO. 2 20/MUM/2008 IN WHICH IT WAS HELD THAT PRODUCTION OF TV SERIAL WAS A MANUFACTURING ACTIVITY AND DEDUCTION U/S 801B WAS ALLOWABLE TO TH E ASSESSEE. IT WAS ALSO SUBMITTED THAT THE AO HAD ALLOWED THE CLAI M OF INTEREST AFTER RAISING SPECIFIC QUERIES AND AFTER RECEIVING THE EXPLANATION OF THE ASSESSEE. THUS THE CLAIM HAD BEEN ALLOWED AFTER DUE ENQUIRY AND APPLICATION OF MIND AND, THEREFORE, SUCH ORDER COULD NOT BE CONSIDERED AS PREJUDICIAL TO THE INTEREST OF REVENU E. THE LEARNED AR ALSO REFERRED TO THE DECISION OF TRIBUNAL IN CASE O F SHRI RAM BOHRA (32TTJ147) IN WHICH IT WAS HELD THAT RULE 9A WAS NO T MANDATORY. THEREFORE NOT APPLYING THE PROVISIONS OF RULE 9A AN D ALLOWING THE INTEREST U/S 36 (1)(III) WAS ONE POSSIBLE WHICH WAS SUPPORTED BY THE DECISION OF TRIBUNAL AND THEREFORE NO ERROR CAN BE POINTED OUT ON THIS ACCOUNT IN THE ORDER OF ASSESSING OFFICER. MOR EOVER, EVEN IF RULE 9A WAS APPLICABLE, THE ISSUE WHETHER THE INTEREST W ILL BE PART OF THE COST OF PRODUCTION OF THE FILM WAS A DEBATABLE ISSU E ON WHICH DIFFERENT VIEW WAS POSSIBLE AND SINCE, THE AO HAD T AKEN ONE OF THE POSSIBLE VIEWS NO ACTION U/S 263 COULD BE TAKEN IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF MALABA R INDUSTRIAL LTD (243 ITR 83). IT WAS FURTHER SUBMITTED THAT EV EN IF THE ORDER WAS ERRONEOUS THERE WAS NO PREJUDICE TO THE INTERES T OF REVENUE AS THE INTEREST WAS ALLOWABLE AS DEDUCTION IN THE NEXT YEAR IN WHICH THE FILMS WERE RELEASED. HE REFERRED TO JUDGMENT OF HIGH COURT OF DELHI IN CASE OF CIT VS. TRIVENI ENGINEERING AND IN DUSTRY LTD. (336 ITR 374) IN WHICH THE HIGH COURT HELD THAT THERE BE ING UNIFORM RATE OF TAX, THE ENTIRE EXERCISE SEEKING TO DISTURB THE YEAR OF TAXABILITY WAS REVENUE NEUTRAL AND THEREFORE, NO SUBSTANTIAL Q UESTION OF LAW AROSE. HE ALSO PLACED RELIANCE ON THE JUDGMENT OF H ONBLE HIGH COURT OF GUJARAT IN CASE OF CIT VS. BHANUMATI SONI TRUST ( 268 ITR ITA NO. 7977 /MUM/2011 PAGE 8 OF 18 193). IT WAS THUS ARGUED THAT ACTION OF CIT U/S 263 WAS NOT JUSTIFIED ON THE FACTS OF THIS CASE. IT WAS ALSO PO INTED OUT THAT THOUGH THE AO HAD DISALLOWED INTEREST IN THIS YEAR, NO DEDUCTION WAS ALLOWED ON THIS ACCOUNT IN THE NEXT YEAR. 8. LEARNED CIT DR ON THE OTHER HAND STRONGLY DEFENDED THE ORDER OF CIT. IT WAS SUBMITTED THAT THE AO HAD COMP LETED THE ASSESSMENT ON THE BASIS OF THE STATEMENT OF THE ASS ESSEE THAT LOANS WERE TAKEN FOR THE PURPOSE OF BUSINESS, WHEREAS THE LETTER OF INTENT FROM THE BANK CLEARLY SHOWED THAT THE LOANS WERE SP ECIFICALLY FOR PRODUCTION OF TWO FILMS AND COULD NOT BE USED FOR A NY OTHER PROJECT. THE LOAN WAS ALSO SECURED AS FIRST CHARGE ON THE NE GATIVES OF THE FILMS AND ALSO AS FIRST CHARGE ON ALL RECEIVABLE FR OM THE FILMS. IT WAS THUS POINTED OUT THAT THE AO HAD COMPLETED THE ASSE SSMENT WITHOUT ANY EXAMINATION AND WITHOUT ANY APPLICATION OF MIND AND THEREFORE THE ASSESSMENT ORDER WAS ERRONEOUS WHICH HAD CAUSED PREJUDICE TO THE INTEREST OF REVENUE. AS REGARDS AP PLICABILITY OF RULE 9A. IT WAS SUBMITTED THAT THE SAID RULES HAD BEEN C HALLENGED BEFORE KERALA HIGH COURT WHICH HAD UPHELD THE CONSTITUTION AL VALIDITY OF RULE 9A AS REPORTED IN (210 ITD326). IT WAS THUS, A RGUED THAT INCOME FROM THE FEATURE FILM HAD TO BE COMPUTED UND ER RULE 9A. HE ALSO PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUP REME COURT IN CASE OF JOSEPH VALAKUZHY (302 ITR190) IN THE SUPPOR T OF THE ARGUMENT THAT RULE 9A WAS MANDATORY. IN THAT CASE, IT WAS POINTED OUT, THAT THE FILM HAD NOT BEEN EXHIBITED FOR MORE THAN 180 DAYS. THE ISSUE THEREFORE WAS WHETHER SECTION 80 AND 139 WOULD APPLY FOR CARRY FORWARD OF BUSINESS LOSS OR RULE 9A WOULD APP LY AS PER WHICH THE EXPENDITURE WAS TO BE CARRIED FORWARD UNDER RULE 9A (3). THE HONBLE SUPREME COURT HELD THAT THE EXPENDITURE HAD TO BE CARRIED FORWARD UNDER RULE 9A (3). IT WAS THUS, CLEAR THAT IN CASE OF PRODUCTION OF A FEATURE FILM, THE RULE 9A WAS MANDA TORY. IT WAS ALSO ITA NO. 7977 /MUM/2011 PAGE 9 OF 18 SUBMITTED THAT EVEN THE AO IN THE NEXT YEAR HAD FOL LOWED THE RULE 9A FOR COMPUTATION OF INCOME FROM THE FEATURE FILM AND THE ASSESSEE HAD ALSO APPLIED UNDER RULE 9A AND THEREFORE, IT WA S NOT CORRECT TO ARGUE THAT THE RULE 9A WAS NOT MANDATORY. THE LEARN ED DR FURTHER SUBMITTED THAT VARIOUS JUDGMENTS RELIED UPON HOLDIN G THAT FILM PRODUCTION WAS MANUFACTURING ACTIVITY WERE IN RELAT ION TO ALLOWABILITY OF DEDUCTION U/S 88 IA, ETC. WHEREAS I N THE PRESENT CASE THE ISSUE WAS COMPUTATION OF INCOME WHICH HAD TO BE MADE UNDER RULE 9A. THE SAID JUDGMENTS WERE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. LEARNED DR ALSO POINTED OUT THAT RULE 9A WAS A SPECIAL PROVISION FOR DEDUCTION IN RESPECT OF EXPEN DITURE ON PRODUCTION OF A FEATURE FILM IN WHICH IT WAS CLEARL Y PROVIDED THAT THE EXPENDITURE SHALL BE ALLOWED IN ACCORDANCE WITH T HE PROVISIONS OF THE RULE. THEREFORE, IN VIEW OF THE WORD SHALL US ED THEREIN, THE AO COULD NOT ALLOW EXPENDITURE IN ANY OTHER MANNER. IT WAS THUS ARGUED THAT THE ORDER OF AO WAS ERRONEOUS AND PREJU DICIAL TO THE INTEREST OF REVENUE AND HAD BEEN RIGHTLY SET ASIDE BY CIT. 9. IN REPLY LEARNED AR FOR THE ASSESSEE SUBMITTED THAT DECISION OF TRIBUNAL IN CASE OF RAM BOHRA VS. 7 TH ITO (SUPRA) WAS A DIRECT DECISION WHETHER RULE 9A WAS MANDATORY AND THEREFORE THE SAME WAS BINDING ON THE AO. IT WAS POINTED OUT THAT THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT VS JOSEPH V ALAKUZHY (SUPRA) WAS NOT DIRECTLY ON THE ISSUE WHETHER RULE 9A WAS MANDATORY. THERE WERE ALSO NO OTHER JUDGMENTS CITED WHICH WERE DIRECTLY ON THE ISSUE. MOREOVER, WHETHER THE INTERE ST HAD TO BE CONSIDERED AS PART OF THE COST OF PRODUCTION WAS A DEBATABLE ISSUE. THEREFORE IT WAS SUBMITTED THAT NO ACTION COULD BE TAKEN U/S 263. ITA NO. 7977 /MUM/2011 PAGE 10 OF 18 10. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVA L CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS A PPEAL IS REGARDING LEGAL VALIDITY OF JURISDICTION U/S 263 EXERCISED BY CIT, UNDER THE PROVISIONS OF SECTION 263, CIT IS EMPOWERED TO MODI FY THE ASSESSMENT ORDER PASSED BY AO IN CASE THE ORDER IS FOUND TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E. IT IS A SETTLED LEGAL POSITION THAT FOR APPLICATION OF SECTION 263, IT IS NECESSARY THAT BOTH THE CONDITIONS I.E. THE ORDER BEING ERRONEOUS AND ALSO BEING PREJUDICIAL TO THE INTEREST OF REVENUE BE SATISFIED . FURTHER A STEREO TYPE ORDER PASSED BY ASSESSING OFFICER WITHOUT COND UCTING ANY ENQUIRY, WHICH IS CALLED FOR ON THE FACTS OF THE CA SE IS ERRONEOUS WHICH CAUSES PREJUDICE TO THE INTEREST OF REVENUE A S HELD BY HONBLE SUPREME COURT IN CASE OF RAMPYARI DEVI SARANGI( 67I TR54). THE SAME VIEW WAS FOLLOWED BY THE HONBLE SUPREME COURT IN THE CASE OF TARADEVI AGARWAL (88 ITR 323). FOLLOWING THE SAID J UDGMENT HONBLE HIGH COURT OF DELHI IN CASE OF GEE VEE ENTERPRISES( 99 ITR 375) HAVE HELD THAT AN ORDER IS ERRONEOUS NOT ONLY BECAUSE IT CONTAINS SOME APPARENT ERROR OF REASONING OR OF LAW OR OF FACT IN THE FACE OF IT BUT ALSO BECAUSE IT IS A STEREO TYPE ORDER WHICH SIMPLY ACCEPTS WHAT THE ASSESSEE HAS STATED AND FAILS TO MAKE ENQUIRIES WH ICH ARE CALLED FOR ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. IT IS ALSO A SETTLED LEGAL POSITION AS HELD BY HONBLE SUPREME COURT IN CASE OF MALABAR INDUSTRIAL COMPANY (243 ITR 83) THAT AN ORDER BASED ON INCORRECT ASSUMPTION OF FACTS OR INCORRECT APPLICATION OF LAW OR ORDER PASSED WITHOUT APPLICATION OF MIND IS ALSO ERRONEOUS. HOWE VER IN CASE, THE ASSESSING OFFICER HAS PASSED THE ORDER AFTER NECESS ARY EXAMINATION/ENQUIRY AND AFTER APPLICATION OF MIND A ND HAS TAKEN ONE OF TWO POSSIBLE VIEWS, THE ORDER COULD NOT BE C ONSIDERED AS ERRONEOUS SIMPLY BECAUSE THE CIT HAS A DIFFERENT VI EW IN THE MATTER AS HELD BY HONBLE SUPREME COURT IN CASE OF MALABAR INDUSTRIAL COMPANY (SUPRA). WE THEREFORE HAVE TO EXAMINE THE P RESENT CASE IN THE LIGHT OF LEGAL POSITION MENTIONED ABOVE. ITA NO. 7977 /MUM/2011 PAGE 11 OF 18 11. IN THE PRESENT CASE, THE ASSESSEE WHO WAS ENGAG ED IN THE BUSINESS OF PRODUCTION OF FILMS HAD SHOWN TWO FILMS I.E. WELCOME AND FULL N FINAL AS BEING UNDER PRODUCTION DURI NG THE YEAR AND THE ONE FILM I.E. PHIR HERA PHERI HAD BEEN RELEA SED DURING THE YEAR. THE ASSESSEE HAD CLAIMED DEDUCTION ON ACCOUNT OF INTEREST. THE PERUSAL OF RECORDS SHOWS THAT THE AO HAD RAISED A QUERY REGARDING ALLOWABILITY OF INTEREST AND THE ASSESSEE VIDE LETTER DATED 11.11.2009 HAD SUBMITTED THAT HE HAD BORROWED MONEY WITHOUT ANY CONDITIONS AS TO UTILIZATION OF FUNDS FOR THE P URPOSE OF PRODUCTION OF A PARTICULAR MOVIE AND THAT THE FUNDS WERE OF GENERAL PURPOSE FUNDS WITHOUT ANY SPECIFICATION FOR USE IN A PARTICULAR FILM. THE ASSESSING OFFICER ACCEPTED THE EXPLANATION GIVE N BY THE ASSESSEE ON THE BASIS OF WHICH HE ALLOWED THE ENTIR E INTEREST WHICH ALSO INCLUDED INTEREST OF RS. 3331086 AND RS. 41935 36 FROM IDBI BANK WHICH HAD BEEN BORROWED IN CONNECTION WITH THE PRODUCTION OF THE TWO FILMS AS MENTIONED EARLIER WHICH HAD NOT BEEN RELEASED DURING THE YEAR. CIT EXAMINED THE LETTER OF INTENT OF IDBI BANK AND NOTED THERE FROM THAT THE BANK HAD ADVANCED FOREIGN CURRENCY LOAN SPECIFICALLY FOR THE PURPOSE OF MEETING THE PART OF THE COST OF PRODUCTION OF THESE TWO FILMS AND THE LOANS WERE SE CURED AS FIRST CHARGE ON THE NEGATIVES OF THE PROPOSED FILMS AND T HERE WERE ALSO SOME CONDITIONS PRESCRIBED WHICH INCLUDED A SEPARAT E LABORATORY AGREEMENT FOR FILM PROCESSING WITH UNDERTAKING THAT NO PRINT OF THE FILM COULD BE RELEASED TO ANY FIRM OR COMPANY UNLES S AUTHORIZED BY THE BANK IN WRITING AND PHYSICAL PROGRESS OF PRODUC TION WAS TO BE INTIMATED TO THE BANK FROM TIME TO TIME AND WORK HA D TO BE CARRIED OUT IN ACCORDANCE WITH THE TIME SCHEDULE PRESCRIBED IN THE AGREEMENT. THESE FACTS HAVE NOT BEEN DISPUTED BEFO RE US. IT IS THEREFORE CLEAR FROM THESE DETAILS THAT THE FOREIGN CURRENCY LOAN HAD ITA NO. 7977 /MUM/2011 PAGE 12 OF 18 BEEN TAKEN SPECIFICALLY FOR THE PRODUCTION OF TWO F ILMS AND COULD NOT BE UTILIZED FOR ANY OTHER PROJECT. 12. THE INCOME FROM EXHIBITION OF FEATURE FILMS IS REQUIRED TO BE COMPUTED AS PER RULE 9A WHICH PROVIDES THAT IN COMP UTING INCOME FROM PRODUCTION OF FEATURE FILMS, DEDUCTION ON ACCO UNT OF COST OF PRODUCTION HAS TO BE ALLOWED IN ACCORDANCE WITH RUL E 9A (2) TO 9A (4). THE COST OF PRODUCTION HAS BEEN DEFINED IN THE EXPLANATION TO RULE 9A AS PER WHICH IT MEANS THE EXPENDITURE INCUR RED ON PRODUCTION OF FILM NOT BEING EXPENDITURE INCURRED F OR THE PREPARATION OF THE POSITIVE PRINTS OF THE FILMS AND EXPENDITURE INCURRED IN CONNECTION WITH THE ADVERTISEMENT OF TH E FILM AFTER IT IS CERTIFIED FOR RELEASE BY THE BOARD OF FILM CENSOR. SUB RULE (2) AND SUB RULE (3) OF RULE 9A CONTAINS, PROVISIONS FOR DE DUCTION ON ACCOUNT OF COST OF PRODUCTION. THE SUB RULE (3) PRO VIDES THAT IN CASE THE FILM HAS NOT BEEN RELEASED FOR EXHIBITION ON CO MMERCIAL BASIS AT LEAST 90 DAYS BEFORE END OF SUCH PREVIOUS YEAR, THE COST OF PRODUCTION OF FILM IN SO FAR AS IT DOES NOT EXCEED THE AMOUNT REALIZED BY THE PRODUCER BY EXHIBITING THE FILM ON A COMMERCIAL BASIS OR THE AMOUNT FOR WHICH THE RIGHTS OF EXHIBIT ION ARE SOLD OR AS THE CASE MAY BE, THE AGGREGATE AMOUNT REALIZED BY T HE FILM PRODUCER BY EXHIBITING THE FILM AND BY THE SALE OF RIGHTS OF EXHIBITION SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE PROFIT OF TH E YEAR AND THE BALANCE IF ANY SHALL BE CARRIED FORWARD TO THE NEXT FOLLOWING PREVIOUS YEAR AND ALLOWED AS DEDUCTION IN THE NEXT YEAR. 13. IN THE PRESENT CASE, THE TWO FILMS IN QUESTION WERE UNDER PRODUCTION AND THEREFORE NO AMOUNT HAD BEEN REALIZE D EITHER FROM THE EXHIBITION OF THE FILM OR FROM THE SALE OF RIGH TS OF EXHIBITION AND ITA NO. 7977 /MUM/2011 PAGE 13 OF 18 THEREFORE THE ENTIRE COST OF PRODUCTION IS REQUIRED TO BE CARRIED FORWARD TO THE NEXT PREVIOUS YEAR. CIT THEREFORE HE LD THAT INTEREST ON BORROWED FUND FOR THE PRODUCTION OF TWO FILMS WA S PART OF COST OF PRODUCTION OF FILMS WHICH WAS NOT ALLOWABLE AS DEDU CTION AND WAS REQUIRED TO BE CARRIED FORWARD TO THE NEXT PREVIOUS YEAR. THEREFORE THE ORDER OF ASSESSING OFFICER ALLOWING THE INTERES T WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 14. THE CASE OF THE ASSESSEE IS THAT EVEN IF THE AS SESSING OFFICER HAD NOT EXAMINED THE USER OF LOANS FOR THE PRODUCTI ON OF THE TWO FILMS THE DECISION TAKEN BY HIM WAS NOT INCORRECT A S INTEREST ON BORROWINGS WAS ALLOWABLE AS DEDUCTION SINCE THE FIL MS WERE ITEMS OF STOCK IN TRADE AND ANY EXPENDITURE INCURRED IN RELA TION TO STOCK IN TRADE IS ALLOWABLE AS DEDUCTION. IT HAS ALSO BEEN S UBMITTED EVEN IF THE FILMS WERE CONSIDERED AS CAPITAL ASSET AS HELD BY CIT, INTEREST ON BORROWINGS EVEN IN CONNECTION WITH THE ACQUISIT ION OF CAPITAL ASSET IS ALLOWABLE AS DEDUCTION U/S 36 (1 (III). IT HAS BEEN FURTHER SUBMITTED THAT FILM MAKING WAS A MANUFACTURING ACTI VITY AND THEREFORE EXPENDITURE INCURRED INCLUDING THE INTERE ST ON BORROWINGS IS ALLOWABLE AS DEDUCTION. THE LEARNED AR FOR THE A SSESSEE HAS ALSO ARGUED THAT IT WAS NOT MANDATORY FOR THE ASSESSING OFFICER TO FOLLOW RULE 9A FOR COMPUTING THE INCOME FROM PRODUCTION O F FEATURE FILM AS HELD BY THE TRIBUNAL IN CASE OF RAM BOHRA ( 32 T TJ 177). THEREFORE THE DECISION OF THE ASSESSING OFFICER TO NOT FOLLOW RULE 9A IN ALLOWING THE CLAIM OF INTEREST WAS ONE OF THE PO SSIBLE VIEWS WHICH THE ASSESSING OFFICER HAD TAKEN AND THEREFORE IN SU CH A CASE ACTION UNDER SECTION 263 COULD NOT BE TAKEN. 15. WE HAVE CAREFULLY CONSIDERED THE VARIOUS ASPECT S OF THE MATTER. THE CONTROVERSY RAISED BASICALLY REVOLVES A ROUND APPLICABILITY OF THE PROVISIONS OF RULE 9A AND ITS CORRECT APPLICATION. ITA NO. 7977 /MUM/2011 PAGE 14 OF 18 RULE 9A IS THE RULE FRAMED BY THE BOARD FOR COMPUTA TION OF INCOME FROM EXHIBITION OF FEATURE FILMS. SUCH RULES FRAMED BY THE BOARD ARE BINDING ON THE AUTHORITIES BELOW AND THEREFORE IT C OULD NOT BE SAID THAT SUCH RULES ARE NOT TO BE FOLLOWED MANDATORILY. THE DECISION OF TRIBUNAL IN CASE OF RAM BOHRA (SUPRA) IS A VERY OLD DECISION RELATING TO ASSESSMENT YEAR 1976-77 DELIVERED ON THE FACTS O F THAT CASE. THE CONSTITUTIONAL VALIDITY OF RULE 9A HAD BEEN CHALLEN GED BEFORE THE HONORABLE HIGH COURT OF KERALA IN CASE OF V. VERGHE SE AND ANOTHER ( 210 ITR 526) IN WHICH IT WAS HELD THAT RULE 9A WHIC H LAYS DOWN METHOD OF DEDUCTION OF COST WHILE COMPUTING INCOME FROM FEATURE FILM WAS LEGALLY VALID. ONLY CERTAIN STIPULATIONS T HAT EXISTED PRIOR TO 2.4.86 RELATING TO PRODUCTION OF REGIONAL FILMS HAD BEEN FOUND TO BE INVALID. THUS THE RULE WHICH WAS FOUND CONSTITUTION ALLY VALID HAS TO BE FOLLOWED WHILE COMPUTING THE INCOME. FURTHER, WH ETHER THE RULE IS MANDATORY OR NOT IS ALSO CLEAR FROM THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF JOSEPH VALAKUZHY (SUPRA) I N WHICH CASE THE FEATURE FILM HAD NOT BEEN EXHIBITED FOR MORE TH AN THE SPECIFIED PERIOD DURING THE YEAR. THE ISSUE WAS WHETHER THE E XPENDITURE INCURRED SHOULD BE ALLOWED TO BE CARRIED FORWARD AS BUSINESS LOSS UNDER THE NORMAL PROVISIONS OF THE ACT I.E. SECTION 80 AND SECTION 139 OR THE EXPENDITURE SHOULD BE ALLOWED TO BE CARR IED FORWARD TO THE NEXT YEAR AS PER RULE 9A. THE HONBLE SUPREME C OURT HELD THAT EXPENDITURE HAD TO BE CARRIED FORWARD UNDER RULE 9A . OBVIOUSLY, THE HONBLE SUPREME COURT CONSIDERED THE RULE 9A TO BE MANDATORY AS IT WAS A SPECIFIC RULE FRAMED FOR COMPUTATION OF INCOME WHICH HAD BEEN FOUND CONSTITUTIONAL VALID. THESE JUDGMENT S WERE NOT AVAILABLE AT THE TIME OF PASSING OF THE ORDER OF TH E TRIBUNAL, AND THEREFORE, THE ARGUMENT ADVANCED BY THE LEARNED AR BASED ON THE DECISION OF TRIBUNAL IN CASE OF RAM BOHRA (SUPRA) C OULD NOT BE ACCEPTED. NOT APPLYING THE RULE 9A HAS THEREFORE TO BE CONSIDERED AS INCORRECT APPLICATION OF LAW WHICH MAKES THE ORD ER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. THE ARG UMENT THAT THE ITA NO. 7977 /MUM/2011 PAGE 15 OF 18 EXPENDITURE HAS TO BE ALLOWED U/S 36(1) (III) IRRES PECTIVE OF THE FACT WHETHER THE FILM WAS CONSIDERED AS A CAPITAL ASSET OR STOCK IN TRADE IS ALSO REQUIRED TO BE REJECTED AS THE RULE 9A IS F OUND MANDATORY WHICH HAS TO BE APPLIED AS PER WHICH THE EXPENDITUR E HAS TO BE CARRIED FORWARD AS THE FILMS WERE NOT EXHIBITED DUR ING THE YEAR AT ALL. THE INTEREST ON BORROWINGS SPECIFICALLY TAKEN FOR THE PRODUCTION OF THE TWO FILMS HAS TO BE CONSIDERED AS PART OF CO ST OF PRODUCTION OF THE FILMS IN VIEW OF CLEAR DEFINITION OF COST OF PR ODUCTION GIVEN IN THE EXPLANATION TO RULE 9A. THE ARGUMENT OF LD. AR THA T ISSUE WHETHER INTEREST ON BORROWINGS CAN BE TAKEN AS COST OF PROD UCTION OF FEATURE FILMS IS A DIFFERENT ISSUE HAS NO REASONABLE BASIS AND IS THEREFORE REJECTED. FURTHER, IN CASE, THE INTEREST HAS NOT BE EN ALLOWED AS DEDUCTION IN THE NEXT YEAR AS CLAIMED BY LEARNED AR , THE ASSESSEE CAN ALWAYS CLAIM DEDUCTION IN THAT YEAR, WHICH HAS TO BE CONSIDERED AS PER LAW, BUT MERELY ON THE GROUND, IT CANNOT BE ARGUED THAT THE RELEVANT ASSESSMENT ORDER IN WHICH THE INTEREST WAS ALLOWED INCORRECTLY IS NOT PREJUDICIAL TO THE INTEREST OF R EVENUE. 16. THE ASSESSEE HAS ALSO REFERRED TO CERTAIN JUDGM ENTS IN WHICH IT HAS BEEN HELD THAT FILM MAKING WAS A MANUFACTURI NG ACTIVITY AND CITING THESE JUDGMENTS IT HAS BEEN ARGUED THAT INTE REST EXPENDITURE INCURRED IN CONNECTION WITH MANUFACTURING ACTIVITY HAS TO BE ALLOWED. THE SAID JUDGMENTS WHICH RELATED TO CLAIM OF DEDUCTION U/S 80 IA ETC, ARE NOT RELEVANT TO THE CONTROVERSY ARISING IN THE PRESENT CASE. THE ISSUE IS NOT REGARDING ALLOWABILI TY OF DEDUCTION U/S 80 IA, ETC. FROM THE INCOME EARNED FROM THE FIL M. BUT THE ISSUE IS REGARDING THE METHOD OF COMPUTATION OF INCOME. T HE CLAIM OF DEDUCTION ARISEN ONLY FOR COMPUTATION OF INCOME. TH ESE JUDGMENTS THEREFORE, ARE OF NO HELP TO THE ASSESSEE. IT HAS A LSO BEEN ARGUED THAT THE INTEREST IF NOT ALLOWED THIS YEAR WOULD HA VE BEEN ALLOWED NEXT YEAR WHEN THE RATE OF TAX WAS THE SAME AND THE REFORE, THERE ITA NO. 7977 /MUM/2011 PAGE 16 OF 18 WAS NO PREJUDICE CAUSED TO THE INTEREST OF REVENUE. THIS ARGUMENT IS ALSO NOT VALID AS EVEN IF THE RATE OF INTEREST W AS SAME, TAXES HAVE TO BE PAID IN THE CORRECT YEAR AND PAYING THE TAX O NE YEAR LATER WOULD DEFINITELY RESULT INTO LOSS OF REVENUE ON ACC OUNT OF INTEREST LOSS BY THE GOVERNMENT. THESE ASPECTS HAD NOT BEEN BROUGHT TO THE NOTICE OF HONBLE HIGH COURT OF DELHI IN CASE OF CI T VS. TRIVENI ENGINEERING AND INDUSTRY LTD.(SUPRA) ON WHICH THE L EARNED AR FOR THE ASSESSEE HAS RELIED. THE RELIANCE PLACED BY THE LEARNED AR ON THE JUDGMENT OF HONBLE HIGH COURT OF GUJARAT IN CA SE OF CIT VS. BHANUMATI SONI TRUST (SUPRA) IS ALSO MISPLACED. IN THAT CASE THE FIRM WHICH WAS FOLLOWING THE YEAR ENDING ON 15 TH NOVEMBER HAD BEEN DISSOLVED ON 31.3.1983. THE ASSESSING OFFICER THEREFORE MADE TWO ASSESSMENTS I.E FOR THE PERIOD 1.4.1982 TO 15.1 1.1982 AND FOR THE PERIOD 16.11.1982 TO 31.3.1982 UNDER THE PROVIS IONS OF SECTION 3(1) (F) THE PREVIOUS YEAR FOLLOWED IN CASE OF THE FIRM HAS TO BE THE SAME IN CASE OF THE PARTNER AND THEREFORE FOLLOWING THIS, THE AO MADE TWO ASSESSMENTS FOR THE YEAR 1982-1983. LATER ON ACTION WAS TAKEN U/S 263 FOR ASSESSMENT YEAR 1984-85 FOR NOT I NCLUDING THE INCOME FOR THE PERIOD 16.11.1982 TO 31.3.1983 IN TH AT YEAR. IT WAS HELD THAT NO PREJUDICE WAS CAUSED TO THE INTEREST O F REVENUE AS THE INCOME OF THE ASSESSEE IN ASSESSMENT YEAR 1983-84 ( YEAR ENDING 15-11-1982) WAS MORE THAN THAT OF ASSESSMENT YEAR 1 984-85 AND THEREFORE CLUBBING OF THE INCOME IN ASSESSMENT YEAR 1983-84 WAS BENEFICIAL TO THE INTEREST OF REVENUE. T HUS IN THAT CASE THE INCOME HAD BEEN TAXED IN ADVANCE IN ASSESSMENT YEAR 83-84 AND THERE BEING NO LOSS ON ACCOUNT OF RATE OF TAX, THERE WAS NO PREJUDICE CAUSED TO THE INTEREST OF REVENUE. IN THE PRESENT C ASE INSTEAD OF TAXING THE INCOME IN THE CURRENT YEAR IF IT IS TAXE D IN THE NEXT YEAR, THERE WILL DEFINITELY BE PREJUDICE CAUSED TO THE IN TEREST OF REVENUE BECAUSE OF LOSS OF INTEREST OF TAX EVEN IF THE TAX RATE IS SAME. THESE JUDGMENTS THEREFORE ARE ALSO OF NO HELP TO THE ASSE SSEE. ITA NO. 7977 /MUM/2011 PAGE 17 OF 18 17. IN VIEW OF THE FOREGOING DISCUSSION WE HOLD THA T THE ORDER PASSED BY AO WAS ERRONEOUS AND PREJUDICIAL TO THE I NTEREST OF REVENUE AS HE ACCEPTED THE EXPLANATION OF ASSESSEE THAT THE LOANS WERE OF GENERAL PURPOSE LOANS WITHOUT ANY EXAMINATI ON AND APPLICATION OF MIND. THE INTEREST ON BORROWINGS WHI CH HAD BEEN SPECIFICALLY TAKEN FOR THE PRODUCTION OF TWO FILMS HAS TO BE CONSIDERED AS PART OF COST OF PRODUCTION IN VIEW OF DEFINITION OF COST OF PRODUCTION GIVEN IN THE EXPLANATION TO RULE 9A. THEREFORE ALLOWING THE INTEREST AS DEDUCTION EVEN THOUGH THE FILMS WERE NOT RELEASED DURING THE YEAR WAS ERRONEOUS AND PREJUDIC IAL TO THE INTEREST OF REVENUE. WE THEREFORE, HOLD THAT THE CI T HAD CORRECTLY EXERCISED JURISDICTION U/S 263 OF IT ACT, AND THE O RDER OF CIT IS THEREFORE UPHELD. 18. IN THE RESULT THE APPEAL OF THE ASSESSEE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH APRIL, 2013 SD/ - SD/ - ( DR. STM PAVALAN) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 10TH APRIL, 2013. SUNIL KUMAR SR. P.S ITA NO. 7977 /MUM/2011 PAGE 18 OF 18