Invalid reassessment based on audit objection; correct income computation method followed; distribution rights not intangible assets.

The tribunal held that the reassessment proceedings initiated under section 147 were invalid as they were based on an audit objection without any new tangible material. The correct method for computing the income from film distribution should follow Rule 9B, and the AO's action of disallowing expenses by treating the distribution rights as 'intangible assets' eligible for depreciation was incorrect. The tribunal directed the AO to allow the deduction of the entire cost of acquisition under Rule 9B, resulting in the assessee's appeal being allowed.

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Issues Involved:
1. Validity of reassessment proceedings initiated under section 147 based on Audit Objection.
2. Correctness of reassessment proceedings due to alleged incorrect interpretation of law.
3. Legality of additions made by AO under section 143(3) read with section 147 of the Income Tax Act, 1961.
4. Correct computation of income, specifically regarding the depreciation on film distribution rights under Rule 9B of Income Tax Rules, 1962.

Detailed Analysis:

1. Validity of Reassessment Proceedings Initiated Under Section 147 Based on Audit Objection:
The assessee contended that the reassessment proceedings commenced under section 147 were invalid as they were based on an Audit Objection. The original assessment under section 143(3) had accepted the declared loss. The reassessment was initiated based on the audit party's view that the distribution rights should be classified as 'intangible assets' and subjected to depreciation under section 32(1)(ii). The tribunal found that the audit party's objection led to the reopening of the assessment, which was not justified because the original assessment had already considered all relevant details, and the reassessment was not based on any new tangible material.

2. Correctness of Reassessment Proceedings Due to Alleged Incorrect Interpretation of Law:
The assessee argued that the CIT(A) erred in law by upholding the reassessment proceedings, which arose due to an incorrect interpretation of the law. The tribunal noted that the reassessment was based on the audit party's interpretation that the film distribution rights should be treated as 'intangible assets' eligible for depreciation under section 32(1)(ii). However, the tribunal held that the correct method for calculating income from film distribution should follow Rule 9B, which specifically addresses the income computation for film distributors.

3. Legality of Additions Made by AO Under Section 143(3) Read with Section 147:
The assessee challenged the additions made by the AO in the reassessment order passed under section 143(3) read with section 147. The tribunal found that the AO had incorrectly applied section 32(1)(ii) instead of Rule 9B, which resulted in the disallowance of a significant portion of the expenses related to the acquisition of film distribution rights. The tribunal concluded that the AO's action was not justified and that the correct computation should follow Rule 9B, which allows the entire cost of acquisition to be deducted if the film is released more than 90 days before the end of the accounting year.

4. Correct Computation of Income Regarding Depreciation on Film Distribution Rights:
The assessee contended that the CIT(A) should have computed the income correctly by following the provisions of Rule 9B instead of allowing depreciation on film distribution rights. The tribunal agreed with the assessee, noting that the film "Dil Ne Jise Apna Kaha" was released on 10-09-2004, more than 90 days before the end of the accounting year. Therefore, under Rule 9B, the entire cost of acquisition, including print and publicity expenses, should be allowed as a deduction. The tribunal directed the AO to follow Rule 9B and allow the deduction of the entire cost incurred, resulting in a net loss of Rs. 84,02,740 being rightly debited in the Profit & Loss account.

Conclusion:
The tribunal held that the reassessment proceedings initiated under section 147 were invalid as they were based on an audit objection without any new tangible material. The correct method for computing the income from film distribution should follow Rule 9B, and the AO's action of disallowing expenses by treating the distribution rights as 'intangible assets' eligible for depreciation was incorrect. The tribunal directed the AO to allow the deduction of the entire cost of acquisition under Rule 9B, resulting in the assessee's appeal being allowed. The order was pronounced in the open court on 30.9.2015.

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