AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 319
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.... Ground No. 2: On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) grossly erred in confirming the addition made by the Ld. Assessing Officer at Rs. 9,64,250/- on account of wastage of 13,300 metres of negative films (raw); completely ignoring the reasons for such wastage. The appellant prays that the said addition is unjustified and may please be deleted. Ground No. 3: On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) grossly erred in confirming the disallowance made by the Ld. Assessing Officer of Rs. 3,53,000/- on ad-hoc basis @ 25% out of Rs. 14,12,000/- paid to junior artists. The appellant prays that the said disallowance is unjustified and may please be deleted. Ground No.4: On the facts and in the circumstances of the case and in law, the Hon'ble CIT (A) grossly erred in confirming the disallowance made by the Ld. Assessing Officer of Rs. 8,42,346/- @ 25% on ad-hoc basis out of expenditure of Rs. 33,69,382/- incurred in respect of costumes & dresses. The appellant prays that the said disallowance is unjustified and may please be deleted. Ground No. 5 On the facts and in the circumstances of t....
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....i film "KAAL" which received censor certificate dated 21.4.2005. In the course of assessment proceedings the AO has issued a show-cause notice to the assessee to explain as to why the payment of Rs. 1,51,80,116/- to M/s Red Chillies Entertainment Pvt. Ltd. (in short RCEPL) should not be brought to tax. The assessee explained before the AO that there is an agreement between the assessee and RCEPL dated 9.8.2004 for sharing revenue @ 50% with respect to film "KAAL". It was submitted by the assessee that RCEPL is under obligation to provide certain services to the assessee as per the terms and conditions of the agreement. Thus, the assessee claimed that the payment made to RCEPL is a contractual liability and an allowable deduction. The AO did not accept the explanation and contention of the assessee and held that the assessee failed to prove with tangible evidences that any service was provided by RCEPL. Further the AO was of the view that the payment is application of income which is not allowable. Accordingly, the AO disallowed the payment in question. On appeal, the CIT(A) doubted the use of cinematographic equipment supplied by RCEPL for the production of film "KAAL". The CIT(A) ....
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....oth the parties. He has further submitted that the clause 5(b) of the agreement was amended vide supplementary document dated 19.8.2004. The Ld. AR has pointed out that the CIT(A) has raised doubt about the use of equipments to be supplied by RCEPL on the ground that the assessee failed to prove the transportation of the equipments to the site of shooting whereas the assessee has produced the sample bills of transportation charges for the equipments. He has referred page no. 36 and 37 of the paper book where the sample bills for transportation of equipments are placed. The Ld. AR has forcefully contended that the assessee has produced the comparative chart of the expenses incurred on account of equipment charges for various films released under this banner. It has been explained that the equipment hire charges for this movie are lesser as compare to the other films. Therefore, it proves the claim of the assessee that equipments have been supplied by the RCEPL without any cost and no cost has been debited to the profit and loss account. The Ld. AR has further submitted that in the remand report the Assessing Officer accepted the fact that Shri Shahrukh Khan perform in the title song....
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....ation, dialogue, music, themes etc. which are very important for a successful film apart from the equipments supplied by the RCEPL. Therefore, the RCEPL has rendered various creative services as well as supplied the equipment for which the payment in question is fully justified. 5. On the other hand, the Ld. DR has submitted that the agreement in question is self serving as the same is not registered. The assessee has used the agreement as a device to avoid tax. He has relied upon the orders of the authorities below and submitted that there is no evidence of providing service by the RCEPL to the assessee. He has further submitted that the assessee has failed to produce any evidence of transportation of equipment to the production/shooting site. The Ld. DR has pointed out that the bills/invoices filed by the assessee to show the transportation of equipment are not in proper order of serial number because the serial number and dates of the bill do not match. As regards the confirmation by the RCEPL the Ld. DR has submitted the certificate is self-serving document and in the absence of independent evidence it cannot be accepted. The assessee failed to prove that the expenditure has....
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....". Any key deviations to artists Or production schedule would need to be intimated by DPPL to RCEPL, as soon as DPPL becomes aware of the same. Both parties shall consult each other and take immediate and appropriate corrective measures. b. The annexures as contained herein below shall form an integral part of this agreement. c. DPPL will submit to RCEPL, a full statement of accounts of the entire cost of production, within but not later than 90 days, from the date of completion of "The Pictures". d. RCEPL and DPPL may jointly or severally explore marketing opportunities for endorsement of products or services from any potential advertisers, for "The Pictures". The sole discretion on the acceptability and the presentation of such products or service endorsement shall be of the DPPL. All such revenues arising from such endorsements shall be treated as over all Revenues of "The Pictures" which will go tords recovering of cost of production and profit sharing as enumerated later on in the agreement. e. DPPL, shall, in consultation with RCEPL, be entitled to sell or to conclude or to enter into al contracts in respect of the Sale Distribution, Exhibition, and Exploitation o....
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....ces are creative in nature and demand personal expertise and talent which could be rendered by somebody on behalf of the company. Therefore, when no separate payment was made or alleged to have been made to Mr. Shahrukh Khan for the services rendered and the parties have confirmed that all the services are rendered under the agreement then only inference can be drawn from the given facts and circumstances is that the services rendered by Mr. Shahrukh Khan are on behalf of RCEPL and under the contractual obligation. 9. Apart from the services of creativity the assessee also claimed that RCEPL provided the cinematographic equipment for the production of the film. The Assessing Officer and CIT(A) rejected the claim on the ground that no evidence was produced regarding transportation of the equipment to the production or/shooting site. It is to be noted that these equipments are essential and inevitable for production of the film. There cannot be a case that the assessee has not used the equipment in production of the film. One important aspect of the matter is that the assessee has not booked any expenditure in respect of hire charges of these very equipments. Therefore, the claim ....
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.... the assessment proceedings of RCEPL. Even otherwise the AO has not given the finding that these bills are bogus. Moreover, there is no dispute that RCEPL has shown this amount as income which is subjected to maximum rate of tax. The Ld. DR has raised objection of non-registration of agreement in question and referred section 25(1) of the contract Act. It is to be noted that the requirement of registration of an agreement is only in a case whether there is no consideration. Therefore, the validity of the agreement cannot be questioned merely on the ground that it is not registered except it is otherwise required to be registered as per the law inforce. Therefore, we do not find any merits in this objection of Ld. DR. This payment is made against the services provided by RCEPL in connection with the production of the film "KAAL" and under the terms of the agreement therefore, it is an expenditure laid out for the purpose of business. In view of the above discussion we hold that the assessee has established that the payment has been made as per the agreement between the parties and against the services provided by RCEPL and therefore, is allowable u/s 37(1) of the Income Tax Act. ....
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....han 100 feet than the same is removed from the camera because the next shot cannot be accommodated in such short length of film. The Ld. AR of the assessee has contended that due to the peculiar facts and circumstances and the place of shooting being forest has resulted more than normal wastage of raw film. Therefore, the wastage which is 16.68% of the total purchase of raw negative film is justified in this case. On the other hand, the Ld. DR has relied upon the order of the CIT(A). 13. We have considered the rival submissions as well as relevant material on record. The AO made an addition on account of unexplained raw film while passing the assessment order by taking the incorrect quantity of raw negative film purchase by the assessee. In fact the AO took the total quantity stock purchase for shooting purpose as well as for the purpose of giving print to the distributors. The said mistake was rectified in the remand proceedings and consequently the AO accepted the wastage of 13,300 metres instead of 11,59,083 metres took in the assessment order. We note that in remand report the AO considered the report of the M/s Adlabs Pvt. Ltd. and accepted the quantity of wastage as per th....
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....s was 66395 metres. Thus, the wastage worked out by the AO at 13300 metres of the negative stock. It is well known fact that a certain amount of wastage of negative during the shooting of film is inevitable. The percentage of wastage may very depending upon the peculiar facts of the case regarding the subject and theme of film. The assessee has explained the reasons for more than normal wastage as reproduced by the CIT(A) at page no. 38 as under: "a. At the time of loading raw stock in the camera, some part in the beginning gets wasted. Similarly, some part at the end of the camera of raw stock also has to be left blank. Thus, these left out part would never be processed. b. One scene are shot from different angles. Out of all such angles, the one which director finds appropriate is processed. Accordingly, raw stock used for shooting of other angles is waste. c. Major part of the movie "KAAL" was shot in the forest area of Bangkok as well as of India. At such place, huge stock of raw films have to be maintained as this are isolated area and if there is a shortage of raw stock, the same could not be procured from the nearest area. Thus, excess stock may get damaged, if the sam....
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....fied hence, deleted. 17. Ground No. 3 to 8 regarding ad-hoc disallowance of 25% of the expenditure towards payment to junior artists, costumes, dresses, makeup, hairdressers, dubbing, song recording, mixing, dancers, co-ordination charges and setting expenses. The Assessing Officer noted that the assessee has not produced call sheet, continuity report and did not maintain rehearsal book etc. The AO asked the assessee to explain why disallowance should not be made on account of these payments. The assessee contended that it is not feasible to maintain call sheet, continuity report or rehearsal book after completion of the shooting of the film because these documents are not required and accordingly destroyed. The assessee contended that it has already produced bills and vouchers in respect of the expenditure incurred in respect of the above items. The AO did not accept the contention and explanation of the assessee and estimated the disallowance at 25% of these expenses for want of reports/registers. 18. On appeal, the CIT(A) has confirmed the addition/disallowance made by the AO by recording the reasons that during the course of survey on 10.9.2009 in the assessee's premises ....
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.... junior artists has been deleted and the disallowance in respect of the other expenses has been restricted to 5%. On the other hand, the Ld. DR has relied upon the orders of the authorities below and submitted that when the assessee has failed to produce the supporting record and document to prove the genuineness of the expenses then the estimated disallowance at 25% is justified. 20. We have considered the rival submissions as well as relevant material on record. The AO has made an ad-hoc disallowance of 25% in respect of the payments made to junior artists in respect of following payments: Expenses in respect of payment of Junior Artists addition of Rs. 3,53,000/- Expenses in respect of Costumes & Dresses addition of Rs. 8,42,346/- Expenses in respect of Makeup & Hairdressers addition of Rs. 1,62,686/- Dubbing, Song Recording & Mixing Expenses addition of Rs. 2,40,703/- Dancers Expenses & Co-ordination charges addition of Rs. 3,25,399/- Setting Expenses addition of Rs. 15,86,176/- 21. The assessee explained before the AO as reproduced in para 7.2 of assessment order as under: "7.2 In response to the same, the assessee has submitted as under: Your goo....
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....s no dispute on the point that the expenditure on these items is essential in the production of film and therefore, when the assessee has produced the bills and vouchers then there is no reason to hold that the expenditure is bogus. We agree with the explanation of the assessee that the continuity report, call sheet and rehearsal book are the documents maintained for the purpose of shooting and not being part of the accounts book. These records are for internal management of work of shooting and once the shooting of a film is over there is no purpose to keep such a record which is otherwise not feasible. We further note that an identical issue has been considered and decided by the Co-ordinate Bench of this Tribunal in case of Yas Raj Films Pvt. Ltd. (supra) in para 28 and 29 as under: "28. We have considered the rival submissions, perused the orders of the lower authorities and the material evidence brought on record which is placed in the paper book. It is not in dispute that many junior artists engaged in the making of a movie. The main artists in a movie are hardly 15 to 25 in numbers whereas the entire movie moves ahead on junior artists. it is also not in dispute that the ....
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....the assessee has submitted that as per Rule 9A entire cost of production should be allowed as deduction if the movie is released for exhibition on a commercial basis at least 90 days before the end of the previous year. In the present case the movie is released on 29.4.2005 which is at the beginning of the previous year and much prior to 90 days before the end of the year therefore, as per Rule 9A the entire cost of production should be allowed as deduction. In support of his contention he has relied upon the decision of the Co-ordinate Bench of this Tribunal in case of M/s Yas Raj Films Pvt. Ltd. (supra). He has further submitted that the expenses incurred after the film was certified for release are allowable u/s 37 of the Income Tax Act in the nature of business expenditure. In support of his contention he has relied upon the decision of Hon'ble Madras High Court in case of CIT Vs Prasad Productions Pvt. Ltd. 179 ITR 147. He has also relied upon the decision of this Tribunal in case of Mukta Arts Pvt. Ltd. Vs ACIT 292 ITR (AT) 16 (Mum.) wherein the Tribunal has followed the decision of Hon'ble Madras High Court in case of Prasad Productions Pvt. Ltd. and held that the expenses w....
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....e production of a film would be its cost of production, but that would exclude the expenditure incurred for the preparation of the positive prints of the film so produced. The purpose of obtaining positive prints is to exhibit the film produced which is a stage after the 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 obtaining positive prints. Having produced a film, the person carrying on the business of production of feature films may either keep them without exhibition or even part with them without making arrangements for their exhibition. It cannot, therefore, be assumed that in all cases of production of a film, the producer must necessarily obtain the positive prints of the film as well. In other words, if a person carries on the business of production of films, he may not only produce the films but also prepare the positive prints for the purpose of exhibition or he may not take steps for the exhibition of the film having produced it. The production and exhibition of a feature film constitutes two distinct and sepa....
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....o us in the affirmative and against the Revenue." 27. Following the above decision of Hon'ble Madras High Court, the Co- ordinate Bench of this Tribunal in case Mukta Arts Pvt. Ltd. (supra) has held in para 13 and 21 as under: "13. As noted, rule 9A also defines "cost of production" to mean, the entire expenditure incurred on the production of film. However, advertisement expenditure incurred after the Censor Board certification is obtained and also the cost of positive prints of the film are not to be included as part of the cost of production. The effect of the exclusion of these two items normally means that they could be allowed in the year in which these expenses are incurred regardless of whether film is released in that year or not as held by the hon'ble Madras High Court in the case of CIT v. Prasad Productions P. Ltd. as reported in [1989] 179 ITR 147 the cost of making positive prints is allowable under section 37 of the Act. Further in the case of B. Nagi Reddy v. CIT as reported in [1993] 199 ITR 451, the hon'ble Madras High Court held that any loss arising on account of feature film being abandoned midway without completing it, then, the expenditure incurred till....
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....n 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 the Censor Board in total without any restriction whatsoever and allow the expenditure of the same nature incurred after the issuance of certificate by the 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 the 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 the provisions of section 37(2A) and/or section 37(3) in respect of expenditure forming part of cost of production as per rule 9A." 28. In view of the above discussion and following the decisio....