TaxTMI 
TaxTMI 
2013 (8) TMI 627
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....r adjusting the entire business profits arising from trading in shares against brought forward deemed speculation loss of A.Y. 2001-02 and 2002-03. In the profit and loss account filed along with the said return, a sum of Rs. 50 lacs was debited by the assessee on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. for identifying and introducing party for the requirement of assessee's production ventures. During the course of assessment proceedings, the assessee was called upon by the A.O. to support and substantiate its claim for the deduction claimed on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. In reply, the following submissions were made on behalf of the assessee in order to justify its claim for the said deduction:- "We most respectfully submit that the company (your assessee) is a company engaged in the business of Trading Investment and amongst other objects of business, includes. To apply for, tender, purchase or otherwise any contracts, sub - contracts licenses and concessions for or in relation to the objects or business mentioned or any of them, and to undertake execute carry out dispose of or otherwise turn to the same.....
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.... on of the business of the assessee company as a whole was or was not commenced". We may also refer para 10 & 11 of the same judgements which is read as Under 10) We may at this stage refer to another judgement of this Court in Hotel Alankar vs. CIT (1981) 22 CTR (Guj) 252: (1982) 133 1TR 866. In that case, the assessee was to commence a hotel business said was to start a boarding and lodging house. One of the partners of the firm placed his building at the disposal of the firm as his capital contribution. Expenses amounting to P.s. 45,708 were incurred in installing lights, making the building more ventilated, etc. The hotel was formally inaugurated in February, 1968. The question was whether the expenses incurred in February, 1968, can be considered to be business expenses. For answering this question, the Division Bench of this Court, speaking through B.K Mehta, J. observed as' under (head note): "When a business is established and is ready to commence business, then it can be said of that business that it is set tip. The words 'ready to commence' would not necessarily mean that all the integrated activities are fully carried out and/or wholly completed. The requirem....
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....greement Clause 1(a), Clause 1(h), 1 (k) and particularly the termination clause, which is read as under, TERMINATION a) This Agreement shall be terminated upon the completion, delivery and satisfaction of 'The PRODUCER' of the quality and desirabilitys of all the Materials of 'the said FILM' and its constituents; including its promotions, release, distribution and all exploitations etc. b) 'The PRODUCER' may terminate this Agreement earlier in the event of any material breach of y of the terms and conditions contained herein by 'The PRODUCTION HOUSE'. Within 15 (Fifteen) days of such material breach Such material breach is required to be intimated in writing by 'The PRODUCER' to 'The PRODUCTION HOUSE' c) Irrespective of such termination at any stage, the main theme, concept, script-screenplay, story, title, songs, tune, music, audio, video, performances and characters etc. and all rights in 'the said FILM' and constituents therein shall vest with 'The PRODUCER' alone in perpetuity and 'The PRODUCER' may continue getting 'the said FILM' produced further by any other party in its discretion in any way. If however, ' The PRODUCER', even after termination and discontinuing....
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....e it's date of inception the assessee company has restricted it's activities to the principal object of trading and investment in securities. During the year, for the first time it has ventured into a new, unconnected line of business i.e. film production by entering into film production contracts. The consultancy fee has been paid in relation with these contracts and thus it is beyond any rational argument to suggest that the consultancy fee was paid in the course of it's regular business and therefore allowable u/s 37 of the Act as business expenses. Provisions of section 37 are applicable for expenses incurred wholly and exclusively for an existing business. In this case the expenditure has been incurred for obtaining contracts in a totally fresh and unrelated field, whose stated activities are yet to be commenced. The case laws relied upon by the assessee are differentiable on facts as in this case the assessee has not set up any business but obtained contracts to execute a particular project. The expenditure has been incurred in relation to an activity prior to obtaining these contracts i.e. identification, introduction and negotiation with the contractee on behalf of assessee....
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....2); (ii) "Cost of production" in relation to a feature film, means the expenditure incurred on the production of the film, not being - (a) the expenditure incurred for the preparation of the positive prints of the film; and (b) the expenditure incurred in connection with the advertisement of the film after it is certified for release by the Board of Film Censors: Provided that the cost of production of a feature film, shall be reduced by the subsidy received by the film producer under any scheme framed by the Government, where such amount of subsidy has not been included in computing the total income of the assessee for any assessment year. 2. Where a feature film is certified for release by the Board of Film Censors in any previous in such previous year, - (a) the film producer sells all rights of exhibition of the film, the entire cost of production of the films shall be allowed as a deduction in computing the profits and gains of such previous year or (b) the film producer- (i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas; or (iii) hims....
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....ssessee is that in sum and substance of the contracts all the rights in relation to the proposed film vest with M/s Sahara as producer and the assessee is merely an agent to coordinate the film production activity. If one goes beyond the phrases of contract and examines the overall circumstances, the transaction is not the same as has been presented and stressed by the assessee. As per terms of contract, the entire film was to be produced by the assessee and M/s Sahara had to pay a lump sum consideration of Rs 7.50 Crores per contract inclusive of all the concerned costs, investments and expenses whether direct or indirect (refer clause V(a) of the contract). This means that the liability of Sahara towards the production costs is limited to Rs 7.50 Crores whereas on entering such contract the assessee has taken unto itself the unlimited liability of the production expenses. Such is never a case in film production business as it is the producer of film who undertakes the unlimited risk of production expenses and enjoys fruits of various rights in the film including music, exhibition, satellite, video etc. Such rights are sold by producer or exercised by himself depending upon the....
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.... justify the deduction claimed on account of such consultancy fees. After considering the said submissions as well as the material available on record, the ld. CIT(A) dealt with the first objection of the A.O. regarding the consultancy fees not being the expenditure incurred in connection with the existing business as well as the said expenditure being pre-operative in nature and recorded his findings/observations on this aspect as under:- "I have carefully considered the facts of the case and the submissions of the Ld. AR. I find considerable merit therein. It is an undisputed fact that the appellant had been engaged in the business of trading in investment & securities and has for the first time executed contracts for film production, an activity distinct from the existing business. From the facts of the case, it is noticed that the appellant has entered into agreement with M/s Sahara India TV Network and has received Rs.20.00 crores during the year for the 'production of films, This act on account of both the parties indicates that there has been a commencement of activity in the business of film production. Since M/s Idream Production was regularly engaged in the business of....
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....funds, should be held as allowable business expenditure". 7. As regards the other objection of the A.O. based on the applicability of Rule 9-A, the ld. CIT(A) held that the said Rule was not applicable in the case of the assessee for the following reasons given in para 13 to 14 of his impugned order:- "The alternate plea of the Assessing Officer, that provisions of Rule 9A is applicable to the ant is not correct. Rule 9A is applicable to any assessee who is producing films on his own. The contract with M/s Sahara India TV Network clearly shows that the appellant is acting an agent to co-ordinate the various parties to produce films. M/s Sahara India TV Network is a producer and the appellant is a agent for M/s Sahara India TV Network. The Assessing Officer stated in his order that the Appellant would be governed by the Rule 9A of the Income Tax Rules. The Assessing Officer mentioned in his order that the appellant was produced of the film & M/s. Sahara India TV Network was financer of the project & therefore any expenditure incurred in relation to these films has to be allowed in the year of release as per provisions of Rule 9 A of the Income Tax Rules. The Ld. AR of the a....
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....pecific reasons were given by the A.O. for disallowing the deduction claimed by the assessee on consultancy fees paid to M/s Idream Productions Pvt. Ltd. He invited our attention to the relevant portion of the assessment order and submitted that the reasons given by the A.O. therein are sufficient to show that the assessee is the producer of the film and the deduction in question claimed on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. is not allowable in the year under consideration and the same is allowable only in the year of release of films as per the special provisions contained in Rule 9-A of the Income Tax Rules, 1962. He contended that M/s Sahara India TV Network was only the distributor of film and the assessee was really the film producer. He contended that specific clauses of the agreement between the assessee and Sahara India TV Network relied opon by the ld. CIT(A) to hold that Sahara India TV Network was the film producer and not the assessee, were stipulated in the agreement just to protect the interest of Sahara India TV Network as financer and distributor and the reliance of ld. CIT(A) to hold that the assessee is not a film producer was cle....
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....ra India TV Network was the producer whereas the assessee was only the production house. He contended that Sahara India TV Network thus was neither a financer nor distributor as alleged on behalf of the Revenue and there is nothing in the agreement even to indicate or suggest this. He contended that all the objections raised by the A.O. while making the disallowance of the impugned expenditure thus were baseless and the ld. CIT(A) was fully justified in deleting the disallowance made by the A.O. on this issue. 11. We have considered the rival submissions and also perused the relevant material placed on record. It is observed that three objections were raised by the A.O. while disallowing the claim of the assessee for deduction of Rs. 50 lacs on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. As regards the first objection of the A.O. that the said expenditure was not incurred by the assessee in connection with its existing business, it is observed that although the assessee was engaged in the business of trading in investment and securities and the contracts for film production were executed by it for the first time during the year under consideration, there....
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....ear under consideration. 13. As regards the applicability of Rule 9-A of the Income Tax rules, 1962, it is observed that the said Rule dealing with the deduction in respect of expenditure on production of feature films is applicable in computing the profits and gains of business of production of feature films carried on by a person. The question that arises thus is whether the assessee is in the business of production of feature films as contemplated in Rule 9A. In this regard, it is relevant to refer to the agreement between the assessee and M/s Sahara India TV Network to understand the exact nature of activity of the assessee. One of the copy of such agreements executed on 24the September, 2002 is placed on record before us and a perusal of the same shows that M/s Sahara India TV Network was referred to as "producer" in the said agreement while the assessee was referred to as "production house". Certain portion of the said agreement as given in the preamble as well as in the terms and conditions is relevant to understand the nature of activity of assessee company as well as M/s Sahara India TV Network and the same being relevant in the present context is reproduced hereunder:-....
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....loited and/or assigned etc. 'the said RIGHTS' of the said FILM' or parts thereof to any other Person. Party, Company or Organization whatsoever, nor would grant, charge, mortgage, transfer, pledge, assign, use and exploit etc. the same in anyway ever, except this first, wholesome, conclusive and irrevocable assignment to 'The PRODUCER'. h) - That 'The PRODUCER' shall be entitled to have its Nominee/s present during any stage of progress, be it pre-production, main- production or post-production process etc. of 'the said FILM' for the consultations and advice, as may be considered necessary by 'The PRODUCER' from time to time. 'The PRODUCER' also reserves the right to effectively advise, be it creative commercial and otherwise, to 'The PRODUCTION HOUSE' in writing on all pre-production, main- production and post-production matters etc. of 'the said FILM' and constituents therein, in the course of this Agreement and the same shall be binding on 'The PRODUCTION HOUSE', for required modifications, incorporations, insertions and compliances, whatsoever. j) - That 'The PRODUCER' shall have the exclusive rights to 'the said FILM' for dubbing, conversion, adaptation and re-production....