2006 (1) TMI 170 - AT - Income Tax

Tribunal Partly Allows Appeal: Repair Expenses Approved as Revenue, Depreciation on Bulbs & Cables Permitted.

Mukta Arts (P.) Limited Versus Assistant Commissioner of Income-tax-21, Central Region-5, Central Circle.

The appeal was partly allowed by the Tribunal. It upheld the disallowance of expenses under Rule 9A and the disallowance of joint venture losses, ... Disallowance u/s 37 - expenses incurred during the production of the film for lodging/boarding, Muhurat expo etc. travelling expenses and claimed as cost of production and claimed as deduction under rule 9A - whether Rule 9A overrides the provisions of the Act - determination of quantum of entertainment expenses out of cost of production - godown renovation expenses - Loss. HELD THAT:- It is a fact that expenditure incurred after the issue of certification by Censor Board on account of advertisement and publicity and cost of positive prints are allowable u/s 37(1) and, 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 conditions of section 37 for allowance. Thus, there appears no reasonable basis to allow the same expenditure incurred before happening of an event i.e. up to the date of issue of certificate by Censor Board in total without any restriction whatsoever and allow the expenditure of same nature incurred after the issuance of Certificate by Censor Board subject to restrictive provisions of section 37 of the Act. This view can further be substantiated by the fact that the Legislature has not given overriding effect to Rule 9A by not framing the said Rule as 'Notwithstanding anything contained in any provisions of the Act and/or any other Rule of Income-tax Rules, 1962.' Further, there is also no commercial/business necessity, attached to film production which may justify the exemption to film producers from the applicability of provisions of section 37(2A) and or section 37(3) in respect of expenditure forming part of cost of production as per Rule 9A. Thus, we are of the considered opinion that the revenue authorities are justified in holding that the provisions of the Act would be applicable in respect of expenditure deductible under rule 9A of the Income-tax Rules. Determination of quantum of entertainment expenses out of cost of production - We are also of the considered opinion that work place in such type of activities cannot be confined to fixed locations. Therefore, we accept this contention of the assessee and accordingly direct the Assessing Officer to verify the nature of expenditure incurred by the assessee on this score and allow the same in computing the income of the assessee for the year under consideration after giving an adequate opportunity of being heard to the assessee and also taking into consideration the decision of Hon'ble Supreme Court in the case of Aditya Birla [1987 (11) TMI 5 - SUPREME COURT] for the meaning of the term 'employees'. Similarly, the issue of quantification of disallowance of travelling expenses under rule 6D is also restored to the file of Assessing Officer with the stipulation that the assessee shall furnish necessary details/information to Assessing Officer in this regard, failing which the disallowance made in the assessment shall remain unchanged. In the result, this ground of assessee is allowed in part. Godown renovation expenses - Mere fact that the owner of the premises is the Managing Director of the assessee company is not sufficient to disallow the expenditure because the expenditure was incurred for business purposes and from the perusal of the material on record no such facts emerge where the expenditure can be termed as capital nature and incurred for non-business purposes. Thus, we are of the considered opinion that the expenditure was incurred by the assessee for business purposes and is allowable as revenue expenditure. Therefore, we reverse the order of Revenue authorities in this regard. Thus, this ground of the assessee is accepted. Loss - Admittedly, the Assessing Officer rejected the method of accounting followed by the assessee on the basis of method of accounting adopted by the said firm and considering the terms and conditions of the agreement. The Assessing Officer also held that the accrual of income from the project for the purpose of the income tax assessment of the firm or of the member of Joint Venture cannot be different. We are of the considered opinion that orders of the Revenue Authorities are in accordance with law and, therefore, we uphold the same. Thus, this ground of the assessee is rejected. In the result, the appeal filed by the assessee is partly allowed. Issues Involved:1. Deductibility of expenses under Rule 9A and disallowance under Section 37(2A) and Rule 6D.2. Disallowance of repair expenses.3. Disallowance of joint venture losses and addition of profit.4. Disallowance of depreciation on bulbs and cables.Issue-wise Detailed Analysis:1. Deductibility of Expenses under Rule 9A and Disallowance under Section 37(2A) and Rule 6D:The primary issue was whether the expenses incurred during the production of a film, such as lodging/boarding, muhurat expenses, and traveling expenses, could be deducted under Rule 9A or were subject to disallowance under Section 37(2A) and Rule 6D of the Income-tax Act. The assessee argued that these expenses were part of the cost of production and should be allowed as per Rule 9A. However, the Assessing Officer and CIT(A) held that Rule 9A did not override the provisions of the Act, and these expenses were disallowed as entertainment expenses under Section 37(2A) and Rule 6D. The Tribunal upheld the revenue authorities' decision, stating that Rule 9A provides guidelines for amortization of film production costs but does not deal with the allowability or disallowance of expenses, which must be determined under the Act's provisions.2. Disallowance of Repair Expenses:The assessee claimed Rs. 2,05,778 as repair expenses for renovating a godown at the Managing Director's bungalow. The Assessing Officer disallowed the expense, treating it as capital expenditure, while CIT(A) disallowed it for lack of evidence and termed it as an expenditure for extraneous consideration. The Tribunal reversed the revenue authorities' decision, stating that the expenditure was incurred for business purposes and was allowable as revenue expenditure.3. Disallowance of Joint Venture Losses and Addition of Profit:The assessee claimed a loss of Rs. 5,13,946 from a joint venture, which the Assessing Officer disallowed, citing that the joint venture firm accounted for income on a yearly basis and not on a project completion method as claimed by the assessee. CIT(A) upheld this disallowance. The Tribunal agreed with the revenue authorities, noting that the method of accounting adopted by the joint venture firm should be consistent with the assessee's method, and upheld the disallowance of the loss and the addition of the profit.4. Disallowance of Depreciation on Bulbs and Cables:The assessee claimed depreciation on bulbs and cables, which was disallowed by the Assessing Officer and CIT(A) on the grounds that 100% depreciation was allowable only in the year the assets were first put to use. The Tribunal reversed this decision, stating that the carried forward written down value should be allowed to be written off in the year under consideration, given the deletion of the third proviso to Section 32(1).Conclusion:The appeal filed by the assessee was partly allowed. The Tribunal upheld the disallowance of expenses under Rule 9A and the disallowance of joint venture losses but allowed the repair expenses and depreciation on bulbs and cables.