Assessee's appeal partly allowed, remand for loss claim, expenditure disallowance upheld.

The tribunal partly allowed the assessee's appeal, remanding the issue of loss claimed on pictures back to the AO for fresh consideration. The disallowance of expenditure due to lack of proper vouchers was upheld. The order was pronounced on 2nd June 2020.

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Issues Involved:

1. Disallowance of loss claimed on pictures under Rule 9B vs. Section 36(1)(vii) of the Income Tax Act.
2. Ad hoc disallowance of expenditure claimed under different heads due to lack of proper vouchers.

Detailed Analysis:

1. Disallowance of Loss Claimed on Pictures:

The primary issue revolves around whether the loss claimed by the assessee on pictures should be allowed under Rule 9B of the Income Tax Rules, 1962, or under Section 36(1)(vii) of the Income Tax Act, 1961. The assessee, a company engaged in the distribution and exhibition of films, claimed a loss of Rs. 19,16,082/- on four movies, arguing that these were bad debts under Section 36 & 37 of the I.T. Act. The Assessing Officer (AO) disallowed the claim, stating that Rule 9B, which specifies the conditions for deduction in respect of expenditure on acquisition of distribution rights of feature films, should be applied. Rule 9B dictates that if a film is exhibited for more than 90 days before the end of the previous year, the entire cost of acquisition should be allowed as a deduction in that year, and if not, the balance cost should be carried forward to the next year.

The AO noted that three movies were exhibited for more than 90 days in previous years and thus the loss should have been claimed in those years, not in A.Y 2012-13. For the fourth movie, exhibited for less than 90 days, the balance amount should be carried forward to A.Y 2013-14. The AO also found that the assessee did not declare these amounts as bad debts in their books of accounts, which is a requirement under Section 36.

The CIT(A) upheld the AO’s decision, emphasizing that specific sections/rules (Rule 9B) prevail over general sections/provisions (Section 36(1)(vii)). The assessee argued that the loss represented advances paid for picture rights that had become bad debts, and thus should be allowed under Section 36(1)(vii). The assessee cited various judicial precedents, including the Delhi High Court case of Mohan Meakins vs. CIT, to support their claim that unrecovered advances could be treated as bad debts.

The tribunal, after considering the rival contentions and Rule 9B, found that Rule 9B provides a method for computing deductions for the acquisition of distribution rights but does not preclude claiming losses due to non-recovery of advances. The tribunal referred to the Delhi High Court case of Honey Enterprises vs. CIT, which clarified that Rule 9B does not address the sequence of deductions. The tribunal concluded that the assessee’s claim of loss due to non-recovery of advances is permissible under the law but required verification of additional evidence. Thus, the issue was set aside to the AO for denovo consideration.

2. Ad Hoc Disallowance of Expenditure:

The second issue concerns the AO’s disallowance of Rs. 5,30,747/- (1/5th of Rs. 26,53,736/-) due to the expenditure being supported by self-made vouchers. The CIT(A) confirmed the disallowance, noting that the expenditure was supported by "kucha vouchers" and not "pucca bills." The assessee argued that the disallowance was arbitrary and unreasonable, as the expenditure was verifiable despite some vouchers being self-made due to the nature of their business.

The tribunal found that the AO disallowed only 5% of the expenditure, not 20% as alleged by the assessee. The assessee failed to establish why a 5% disallowance was unreasonable. Therefore, the tribunal rejected the grounds against this disallowance.

Conclusion:

In conclusion, the tribunal treated the assessee’s appeal as partly allowed for statistical purposes. The issue of loss claimed on pictures was remanded back to the AO for fresh consideration, while the disallowance of expenditure due to lack of proper vouchers was upheld. The order was pronounced in the open court on 2nd June 2020.

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