Teja Cinema, Hyderabad V. DCIT, Circle-13(1), Hyderabad

ITA 806/HYD/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7642 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 05-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: I R RAO
• Keywords: Depreciation; Business expenditure; Opportunity of being heard
• Section: 37(1); 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 806/HYD/2014 ASSESSMENT YEAR : 2008-09 TEJA CINEMA, HYDERABAD PAN AAEFT 9491Q DY. COMMISSIONER OF INCOME- TAX, CIRCLE 13(1),HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI I.R. RAO REVENUE BY SHRI R.MOHAN REDDY DATE OF HEARING 04-09-2014 DATE OF PRONOUNCEMENT 16-09-2014 O R D E R PER SAKTIJIT DEY, J.M.: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 20/02/14 OF THE CIT(A)-V, HYDERABAD PERTAINING TO T HE AY 2008-09. 2. GROUND NOS. 1 & 4 BEING GENERAL IN NATURE ARE NO T REQUIRED TO BE ADJUDICATED UPON. THE EFFECTIVE GROUNDS RAISED B Y THE ASSESSEE ARE AS UNDER: 2. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THA T THE EXPENDITURE INCURRED IN THE PRODUCTION OF FILMS FAL LING OUTSIDE THE COST OF PRODUCTION AS DEFINED UNDER THE PROVISI ONS OF RULE 9A OF THE IT RULES, 1962 IS CLEARLY ALLOWABLE AS RE VENUE EXPENDITURE. 3. THE LEARNED CIT(A) OUGHT NOT TO HAVE CONFIRMED THE DISALLOWANCES ON A DIFFERENT GROUND WITHOUT AFFORDI NG AN OPPORTUNITY OF BEING HEARD ON THIS GROUND. 2 ITA NO.806/HYD/2014 TEJA CINEMA 3. BRIEFLY THE FACTS ARE, ASSESSEE A PARTNERSHIP FI RM IS ENGAGED IN PRODUCTION AND SALE OF FEATURE FILMS. FOR THE AY UN DER DISPUTE ASSESSEE FILED ITS RETURN OF INCOME ON 13/10/08 DEC LARING LOSS OF RS. 36,48,898. DURING SCRUTINY ASSESSMENT PROCEEDING, A O WHILE EXAMINING ASSESSEES FINANCIAL STATEMENTS ALONG WIT H OTHER FACTS AND MATERIALS ON RECORD, NOTICED THAT ASSESSEE DURING T HE YEAR HAD PRODUCED TWO FILMS TITLED AS CHANDAMAMA (DESIGNAT ED AS P-5) RELEASED ON 06/09/07 AND ATTADISHTA (DESIGNATED A S P-6) RELEASED ON 20/03/08. AS PER THE P&L ACCOUNT SALES FOR P-5 WERE REPORTED AT RS. 4,49,05,658/- AGAINST DIRECT EXPENSES OF RS. 3,98,0 4,770 RESULTING IN A PROFIT OF RS. 51,00,888 WHEREAS THE SALES FOR P-6 WERE REPORTED AT RS. 2,39,22,763 AGAINST DIRECT EXPENSES INCURRED BY ASSESSEE AMOUNTING TO RS. 5,36,68,411 RESULTING IN A LOSS OF RS. 2,97,45,648. AO OBSERVED THAT AS PER RULE 9A OF THE IT RULES, IF A FILM IS RELEASED WITHIN 90 DAYS FROM THE END OF THE RELEVANT PREVIOU S YEAR LOSS SHOULD BE CARRIED TO THE NEXT YEAR. THEREFORE, THE LOSS ON ACCOUNT OF P-6 CANNOT BE SET OFF AGAINST THE PROFIT OF P-5. ON THE AFORESAID BASIS, AO CALLED UPON ASSESSEE TO EXPLAIN WHY PROFIT OF ONE F ILM IS SET OFF AGAINST LOSS OF ANOTHER CONTRARY TO RULE 9A. IN REP LY TO THE QUERY MADE BY THE AO, ASSESSEE SUBMITTED THAT AS PER SECT ION 70(1) OF THE ACT, ASSESSEE CAN SET OFF LOSS AGAINST THE INCOME F ROM ANY OTHER SOURCE UNDER THE SAME HEAD. AO, HOWEVER, WAS NOT CO NVINCED WITH THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT AS RU LE 9A OF THE IT RULES IS A PART OF THE STATUTE AND SPECIFICALLY STI PULATES THE MODE OF CARRY FORWARD OF LOSS IN CASE OF PICTURE RELEASED W ITHIN 90 DAYS, PROVISIONS OF RULE 9A HAS TO APPLY. ACCORDINGLY, AO REJECTED ASSSSEES CLAIM OF SET OFF OF LOSS OF P-6 AGAINST P ROFIT OF P-5 AND DETERMINED THE INCOME AT RS. 51,00,888. BEING AGGRI EVED OF THE ASSESSMENT ORDER SO PASSED, ASSESSEE PREFERRED APPE AL BEFORE THE CIT(A). 4. IN COURSE OF HEARING OF APPEAL BEFORE THE CIT(A) , ASSESSEE MADE ELABORATE SUBMISSIONS WITH REGARD TO CLAIM OF SET OFF OF LOSS. ON 3 ITA NO.806/HYD/2014 TEJA CINEMA THE BASIS OF THE SUBMISSIONS MADE BY THE ASSESSEE C IT(A) CALLED FOR A REMAND REPORT FROM THE AO. AFTER RECEIVING THE RE MAND REPORT FROM THE AO, CIT(A) NOTICED THAT AS PER THE REMAND REPOR T, ASSESSEE HAS REDUCED THE FOLLOWING ITEMS OF EXPENDITURE FROM THE TOTAL COST OF PRODUCTION OF FILM P-6: (RS.) I) SALARIES TO PARTNERS : 50,000 II) BANK CHARGES : 38,595 III) DEPRECIATION : 2,77,588 IV) COST OF POSITIVE PRINTS :75,01,743 V) ADVERTISEMENT EXPENDITURE : 8,81,050 CIT(A) NOTED THAT AFTER REDUCING THE AFORESAID ITEM S OF EXPENDITURE FROM THE TOTAL COST FOR PRODUCTION OF P-6 AMOUNTING TO RS. 5,36,68,441, ASSESSEE HAD INCURRED COST OF PRODUCTI ON AT RS. 4,49,18,632. AFTER DEDUCTING THE PROFIT EARNED FROM THE FILM P-6 OF RS. 2,39,22,763 FROM THE AFORESAID AMOUNT OF COST OF PR ODUCTION, THE BALANCE AMOUNT OF RS. 2,09,98,862 WAS CARRIED FORWA RD AS LOSS TO THE NEXT AY. THE CIT(A), THOUGH, AGEED THAT ASSESSEE HA S CORRECTLY CARRIED FORWARD LOSS OF RS. 2,09,98,862 TO THE AY 2 009-10, HOWEVER, HE HELD THAT THE EXPENDITURE OF RS. 87,47,786 SET O FF AGAINST PROFIT OF P-5 IS NOT CORRECT AS IT IS NOT IN ACCORDANCE WITH RULE 9A. CIT(A) ON INTERPRETING THE PROVISIONS OF RULE 9A HELD THAT TH E EXPENDITURE INCURRED FOR PREPARATION OF POSITIVE PRINTS AND EXP ENDITURE ON ACCOUNT OF ADVERTISEMENT OF THE FILM AFTER IT IS SATISFIED BY CBFC ARE POST PRODUCTION EXPENSES, HENCE, CANNOT BE CONSIDERED TO BE PART OF COST OF PRODUCTION. ACCORDINGLY, HE HELD THAT THE EXPEND ITURE TOWARDS POSITIVE PRINTS AMOUNTING TO RS. 75,01,743 AND ADVE RTISEMENT EXPENDITURE OF RS. 8,81,850 CANNOT BE ALLOWED AS EX PENDITURE IN VIEW OF RULE 9A. SO FAR AS COMMON EXPENDITURE OF RS. 3, 66,186 RELATING TO SALARIES TO PARTNERS, BANK CHARGES DEPRECIATION, ETC., CIT(A) HELD THAT IT RELATES TO BOTH P-5 AND P-6, HENCE ASSESSEE WOULD BE ELIGIBLE FOR 50% OF THE SAID AMOUNT ACCORDINGLY, OUT OF THE EXPENDITURE OF RS. 4 ITA NO.806/HYD/2014 TEJA CINEMA 87,46,786 CLAIMED BY THE ASSESSEE TO BE SET OFF AGA INST PROFIT OF P-5, CIT(A) DISALLOWED AN AMOUNT OF RS. 83,83,593 BY APP LYING RULE 9A AND ALLOWED AN AMOUNT OF RS. 1,80,100. ON THE AFOR ESAID BASIS, HE DIRECTED AO TO DETERMINE ASSESSEES TOTAL INCOME AT RS. 49,20,788. 5. LEARNED AR SUBMITTED BEFORE US, THE EXPENDITURE TOWARDS POSITIVE PRINTS AND ADVERTISEMENT EXPENSES THOUGH, MAY BE ALLOWED UNDER RULE 9A OF IT RULES, BUT, THE SAME HAVING BEE N INCURRED AS EXPENDITURE BY THE ASSESSEE TOWARDS FILM P-6, IT IS ALLOWABLE UNDER THE GENERAL PROVISIONS OF SECTION 37(1) AS BUSINESS EXPENDITURE. LEARNED AR SUBMITTED, WHEN THERE IS NO DISPUTE TO T HE FACT THAT ASSESSEE HAS INCURRED SUCH EXPENDITURE IN CONNECTIO N WITH ITS BUSINESS OF FILM PRODUCTION, THEN, IT HAS TO BE ALL OWED AS A BUSINESS EXPENDITURE IN TERMS WITH SECTION 37(1). FURTHER, A S PER THE PROVISIONS OF SECTION 70(1), ASSESSEE IS ELIGIBLE FOR SET OFF OF THE EXPENDITURE AGAINST THE PROFITS OF P-5. IN SUPPORT OF SUCH CONT ENTION, LEARNED AR RELIED UPON A DECISION OF THE HONBLE MADRAS HIGH COURT IN CASE OF CIT VS. PRASAD P RODUCTION PVT. LTD., 179 ITR 147. HE ALSO RELIED UP ON THE FOLLOWING DECISIONS: 1. DHARMA PRODUCTIONS (P) LTD. VS. DCIT, [2014] 62 SOT 177 (MUMBAI) 2. ANJALA EXHIBITORS (P) LTD. VS. INSPECTING ASST. COMMISSIONER, 46 ITD 523 (DEL.) 3. MUKTA ARTS (P) LTD. VS. ACIT, [2007] 105 ITD 533 (MUM.) 6. LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORD ER OF THE CIT(A). 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. AS IS EVIDENT FROM THE ORDER OF THE CIT(A), HE DISALLOWED THE EXPENDITURE CLAIMED BY THE ASSESSEE ONLY ON THE GRO UND THAT EXPENDITURE TOWARDS POSITIVE PRINTS AND ADVERTISEME NT CANNOT BE CONSIDERED AS COST OF PRODUCTION IN VIEW OF BAR IM POSED UNDER RULE 5 ITA NO.806/HYD/2014 TEJA CINEMA 9A OF THE ACT. HOWEVER, AS WOULD BE EVIDENT FROM TH E OBSERVATION MADE BY THE LEARNED CIT(A), HE DOES NOT DISPUTE THE FACT THAT ASSESSEE IS ELIGIBLE TO SET OFF OF LOSS RS. 87,46,7 86 OF P-6 AGAINST THE PROFIT OF P-5 AMOUNTING TO RS. 51,00,888. IN THIS C ONTEXT WE REFER TO THE OBSERVATION OF THE LEARNED CIT(A) IN PARA 7.3 O F HIS ORDER, WHICH IS EXTRACTED HEREIN FOR THE SAKE OF CLARITY. 7.3 I AGREE WITH THE CONTENTIONS OF THE APPELLANT T HAT AS PER RULE 9A, IT HAD CORRECTLY CARRIED FORWARD LOSS OF R S. 2,09,98,862 TO THE NEXT PREVIOUS YEAR I.E. F.Y. 2008-09 (AY 200 9-10). I ALSO AGREE WITH THE CONTENTIONS OF THE APPELLANT THAT AS PER SECTION 70, IT WAS ENTITLED TO SET OFF LOSS OF ANY SOURCE A GAINST INCOME FROM ANY OTHER SOURCE UNDER THE SAME HEAD AND THE A PPELLANT WAS CORRECT IN SET OFF OF BALANCE LOSS OF RS. 87,46 ,787 OF P-6 AGAINST THE PROFIT OF FILM CHANDAMAMA (P-5) OF RS . 51,00,888. HOWEVER, THOUGH, THE CIT(A) MAY BE CORRECT IN HOLDI NG THAT EXPENDITURE TOWARDS POSITIVE PRINTS AND ADVERTISEME NT CANNOT BE CONSIDERED TOWARDS COST OF PRODUCTION AS PER RULE 9 A, HE HAS FAILED TO EXAMINE ASSESSEES CLAIM U/S 37(1) OF THE ACT. I N THIS CONTEXT, IT IS TO BE NOTED THAT HONBLE MADRAS HIGH COURT IN CASE OF CIT VS. PRASAD PRODUCTIONS PVT. LTD. (SUPRA) HAS HELD THAT EVEN IF EXPENDITURE RELATING TO POSITIVE PRINTS ETC., IS NOT ALLOWABLE UNDER RULE 9A, BUT, THE SAME CAN BE ALLOWED U/S 37(1) OF THE ACT, AS IT IS INCURRED IN CONNECTION WITH THE BUSINESS. THE RELEVANT OBSERVAT ION OF THE HIGH COURT IS EXTRACTED HEREUNDER FOR CONVENIENCE: 9. ONLY DURING THE COURSE OF THE PENDENCY OF THE APPE AL BEFORE THE AAC, THE ASSESSEE EXERCISED AN OPTION AS PER R. 9A OF TH E RULES AND UNDER EXPLN. (II)(A) TO R. 9A(1) OF THE RULES, THE EXPENDITURE I NCURRED FOR THE PREPARATION OF THE POSITIVE PRINTS OF THE FILM COULD NOT BE INC LUDED WITHIN THE EXPRESSION 'COST OF PRODUCTION'. IT IS FOR THIS REASON THAT SU CH EXPENDITURE IS CHARACTERISED AS POST-PRODUCTION EXPENDITURE. ORDIN ARILY, ALL EXPENDITURE INCURRED ON THE PRODUCTION OF A FILM WOULD BE ITS C OST 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 OBTA INING POSITIVE PRINTS IS TO EXHIBIT THE FILM PRODUCED WHICH IS A STAGE AFTER TH E COMPLETION OF THE PRODUCTION. IN ANY GIVEN 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 OBTAIN ING POSITIVE PRINTS. HAVING PRODUCED A FILM, THE PERSON CARRYING ON THE BUSINES S OF PRODUCTION OF FEATURE FILMS MAY EITHER KEEP THEM WITHOUT EXHIBITI ON OR EVEN PART WITH THEM WITHOUT MAKING ARRANGEMENTS FOR THEIR EXHIBITI ON. IT CANNOT, THEREFORE, BE ASSUMED THAT IN ALL CASES OF PRODUCTION OF A FIL M, THE PRODUCER MUST 6 ITA NO.806/HYD/2014 TEJA CINEMA NECESSARILY OBTAIN THE POSITIVE PRINTS OF THE FILM AS WELL. IN OTHER WORDS, IF A PERSON CARRIES ON THE BUSINESS OF PRODUCTION OF FIL MS, HE MAY NOT ONLY PRODUCE THE FILMS BUT ALSO PREPARE THE POSITIVE PRI NTS FOR THE PURPOSE OF EXHIBITION OR HE MAY NOT TAKE STEPS FOR THE EXHIBIT ION OF THE FILM HAVING PRODUCED IT. THE PRODUCTION AND EXHIBITION OF A FEA TURE FILM CONSTITUTES TWO DISTINCT AND SEPARATE STAGES AND WHILE THE FORMER W OULD TAKE IN ALL ACTIVITIES WHICH CULMINATE IN THE PRODUCTION OF A FEATURE FILM THE LATTER CONTEMPLATES A STAGE SUBSEQUENT TO THE COMPLETION OF THE PRODUCTIO N OF THE FILM, VIZ., EXHIBITION OF THE FILM PRODUCED. VIEWED THUS, ANY E XPENDITURE INCURRED IN CONNECTION WITH THE PREPARATION OF THE POSITIVE PRI NTS FOR PURPOSES OF EXHIBITION WOULD REALLY BE POST-PRODUCTION 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 DED UCTION AS EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF THE BUSINESS. WE HAVE NOT BEEN REFERRED TO ANY PROVISION IN THE ACT OR THE RULES DISALLOWING SUCH EXPENDITURE AS AN ITEM OF BUSINESS EXPENDITURE FOR THE PURPOSE OF S. 37 OF THE ACT. THOUGH LEARNED COUNSEL FOR THE REVEN UE PLACED CONSIDERABLE RELIANCE UPON THE DECISION IN CIT VS. CARBORUNDUM U NIVERSAL LTD. (SUPRA), WE ARE OF THE VIEW THAT THAT DECISION DOES NOT IN A NY MANNER ASSIST THE REVENUE. IN THAT CASE, THE ASSESSEE CLAIMED DEDUCTI ON OF A CERTAIN AMOUNT IN THE COMPUTATION OF ITS PROFITS AND GAINS OF THE BUSINESS BY WAY OF CONTRIBUTION TO THE SUPERANNUATION FUND OF ITS FORE IGN COLLABORATORS AND THAT CLAIM WAS DISALLOWED BY THE AUTHORITIES BELOW. HOWE VER, THE TRIBUNAL HELD THAT THOUGH THAT AMOUNT WAS NOT AN ALLOWABLE DEDUCT ION UNDER S. 36(1)(IV) OF THE ACT AS THE CONTRIBUTION WAS NOT TO A RECOGNI SED PROVIDENT FUND OR TO AN APPROVED SUPERANNUATION FUND NOR COULD BE ALLOWE D UNDER S. 37 OF THE ACT, THE PAYMENT WAS ALLOWABLE UNDER S. 28 OF THE A CT. ON A REFERENCE, IT WAS HELD THAT THE NATURE OF PAYMENT BEING ONE DESCR IBED IN S. 36(1)(IV) OF THE ACT AND AS IT COULD NOT BE DEDUCTED UNDER THAT SECTION, IT CANNOT BE HELD TO BE DEDUCTIBLE UNDER S. 28 OF THE ACT ON GENERAL PRINCIPLES IN ARRIVING AT THE TRUE PROFITS AND GAINS OF THE BUSINESS IN A COM MERCIAL SENSE. IN THE VIEW WE HAVE TAKEN THAT THE EXPENDITURE INCURRED IN CONN ECTION WITH THE OBTAINING OF POSITIVE PRINTS IS REALLY IN THE NATUR E OF POST-PRODUCTION EXPENDITURE AND THAT THERE IS NO PROVISION IN THE A CT OR THE RULES OBLIGING THE AUTHORITIES TO DISALLOW SUCH EXPENDITURE, THE C LAIM OF THE ASSESSEE THAT SUCH EXPENDITURE WOULD FALL UNDER S. 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. THE SAME VIEW HAS BEEN EXPRESSED BY DIFFERENT BENC HES OF THE TRIBUNAL IN THE DECISIONS CITED BY THE LEARNED AR. IT IS NOT DISPUTED EITHER BY THE AO OR BY THE CIT(A) THAT ASSESSEE HAS INCURRED THE EXPENDITURE IN CONNECTION WITH THE BUSINESS OF PROD UCTION OF FILM. THEREFORE, APPLYING THE RATIO LAID DOWN BY THE HON BLE MADRAS HIGH COURT AS WELL AS THE DECISIONS OF THE TRIBUNAL, WE ALLOW ASSESSEES CLAIM THAT THE EXPENDITURE INCURRED IS TO BE ALLOWE D U/S 37 OF THE ACT, EVEN THOUGH IT MAY NOT BE ALLOWABLE UNDER RULE 9A. FURTHER, ASSESSEE IS ALSO ELIGIBLE TO SET OFF THE EXPENDITU RE INCURRED AGAINST PROFIT OF P-5 UNDER SECTION 70(1) OF THE ACT. ACCO RDINGLY, WE ALLOW THE 7 ITA NO.806/HYD/2014 TEJA CINEMA GROUNDS RAISED BY THE ASSESSEE AND DIRECT THE AO TO DELETE THE ADDITIONS MADE. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON 16/09/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 16 TH SEPTEMBER, 2014 KV COPY TO:- 1) TEJA CINEMA C/OM/S I.R. RAO & COMPANY, CAS., H.NO. 8-3-222/29, C-69, MADHURANAGAR, HYDERAB AD 500 038 2) THE DCIT,CIRCLE 13(1), AAYAKAR BHAVAN, BASHEE RBAG, HYDERABAD 3) CIT(A), HYDERABAD 4) CIT-I, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.