AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 1336
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....of production of which had been claimed at deduction. Two other films i.e. "Welcome" N Full-N-Final" were still under production and the cost of production of these films had been reflected in the closing stock. CIT also noted that in respect of these two films, the assessee had paid interest of Rs. 3331086 and 4193536 to IDBI bank. The said interest had been claimed by the assessee in the P&L Account and had also been allowed by the AO. CIT on examination of letter of intent of IDBI bank noted that the bank had advanced foreign currency loan specifically for the purpose of meeting part of the cost of production of these two films and these loans were secured as first charge on the negatives of the proposed films and there were other conditions imposed by the bank relating to the production of films. CIT thus, concluded that the loans were directly for the purpose of production of the two films and, therefore, such interest was not allowable as deduction as the films had not been released during the year and the same formed part of cost of production as defined under Rule 9A. CIT also observed that the film was a capital asset in the hand of the producer as held by Hon'ble High Cou....
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....d during the next assessment year in which the interest was allowable as deduction and therefore no prejudice had been caused to the interest of revenue. It was, accordingly, urged that proceedings u/s 263 may be dropped. 4. CIT however, did not accept the contentions raised by the assessee. It was observed by him that assessee in the letter dated 11.11.2009 to the AO had submitted that he had borrowed money without any specific commitment to utilize the funds for the purpose of production of a particular movie and that the funds were of general purpose funds without any specifications for use in a particular film. However, CIT noted that this submission of the assessee was not correct on facts. It was also noted by him that the foreign currency loan had been advanced by IDBI bank specifically for the purpose of meeting the cost of production of two films and loans were separately sanctioned for the two films. CIT noted from the letters of intent of the bank and observed that these loans were to be utilized for the production of said films and not for any other project and loans were secured against first charge on the negatives of the film to be produced and there were other cond....
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....rdance with Rule 9A. The interest paid on the borrowing which had been taken directly for the production of films was part of the cost incurred for production of films, and therefore, allowability of interest was required to be considered as per Rule 9A and not u/s 36 (1) (III). 6. As regards the argument of the assessee that the interest paid was allowable as deduction in assessment year 200-09 when the films were released. CIT observed that taxes have to be paid in the year in which they are due and deferment of revenue even by a year can be prejudicial to the interest of revenue as the revenue would lose the interest for a year. Thus allowing the interest in this year was prejudicial to the interest of the revenue. The AO had completed the assessment without application of mind and that it was not a case of taking one of two possible. CIT therefore, held that the assessment order passed by AO was erroneous and prejudicial to the interest of revenue. CIT accordingly set aside the assessment order u/s 263 and directed the AO to make fresh assessment after taking into account the interest as part of cost of production to be allowed as per Rule 9A. Aggrieved by the decision of CIT,....
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....63 could be taken in view of the judgment of Hon'ble Supreme Court in case of Malabar Industrial Ltd (243 ITR 83). It was further submitted that even if the order was erroneous there was no prejudice to the interest of revenue as the interest was allowable as deduction in the next year in which the films were released. He referred to judgment of High Court of Delhi in case of CIT v. Triveni Engg. & Industries Ltd. 336 ITR 374 in which the High Court held that there being uniform rate of tax, the entire exercise seeking to disturb the year of taxability was revenue neutral and therefore, no substantial question of law arose. He also placed reliance on the judgment of Hon'ble High Court of Gujarat in case of CIT v. Bhanumati & Sons Trust ( 268 ITR 193). It was thus argued that action of CIT u/s 263 was not justified on the facts of this case. It was also pointed out that though the AO had disallowed interest in this year, no deduction was allowed on this account in the next year. 8. Learned CIT DR on the other hand strongly defended the order of CIT. It was submitted that the AO had completed the assessment on the basis of the statement of the assessee that loans were taken for the ....
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....erefore, in view of the word "shall" used therein, the AO could not allow expenditure in any other manner. It was thus argued that the order of AO was erroneous and prejudicial to the interest of revenue and had been rightly set aside by CIT. 9. In reply learned AR for the assessee submitted that decision of tribunal in case of Ram Bohra (supra) was a direct decision whether Rule 9A was mandatory and therefore the same was binding on the AO. It was pointed out that the judgment of Hon'ble Supreme Court in case of Joseph Valakuzhy (supra) was not directly on the issue whether Rule 9A was mandatory. There were also no other judgments cited which were directly on the issue. Moreover, whether the interest had to be considered as part of the cost of production was a debatable issue. Therefore it was submitted that no action could be taken u/s 263. 10. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is regarding legal validity of jurisdiction u/s 263 exercised by CIT, Under the provisions of section 263, CIT is empowered to modify the assessment order passed by AO in case the order is found to be erroneous and prejudicial to....
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....e and that the funds were of general purpose funds without any specification for use in a particular film. The Assessing Officer accepted the explanation given by the assessee on the basis of which he allowed the entire interest which also included interest of Rs. 3331086 and Rs. 4193536 from IDBI Bank which had been borrowed in connection with the production of the two films as mentioned earlier which had not been released during the year. CIT examined the letter of intent of IDBI bank and noted there from that the bank had advanced foreign currency loan specifically for the purpose of meeting the part of the cost of production of these two films and the loans were secured as first charge on the negatives of the proposed films and there were also some conditions prescribed which included a separate laboratory agreement for film processing with undertaking that no print of the film could be released to any firm or company unless authorized by the bank in writing and physical progress of production was to be intimated to the bank from time to time and work had to be carried out in accordance with the time schedule prescribed in the agreement. These facts have not been disputed befor....
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....s the decision taken by him was not incorrect as interest on borrowings was allowable as deduction since the films were items of stock in trade and any expenditure incurred in relation to stock in trade is allowable as deduction. It has also been submitted even if the films were considered as capital asset as held by CIT, interest on borrowings even in connection with the acquisition of capital asset is allowable as deduction u/s 36 (1) (iii). It has been further submitted that film making was a manufacturing activity and therefore expenditure incurred including the interest on borrowings is allowable as deduction. The learned AR for the assessee has also argued that it was not mandatory for the Assessing Officer to follow Rule 9A for computing the Income from production of feature film as held by the tribunal in case of Ram Bohra (supra). Therefore the decision of the Assessing Officer to not follow Rule 9A in allowing the claim of interest was one of the possible views which the Assessing Officer had taken and therefore in such a case action under section 263 could not be taken. 15. We have carefully considered the various aspects of the matter. The controversy raised basically ....
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....s to be applied as per which the expenditure has to be carried forward as the films were not exhibited during the year at all. The interest on borrowings specifically taken for the production of the two films has to be considered as part of cost of production of the films in view of clear definition of cost of production given in the Explanation to Rule 9A. the argument of Ld. AR that issue whether interest on borrowings can be taken as cost of production of feature films is a different issue has no reasonable basis and is therefore rejected. Further, in case, the interest has not been allowed as deduction in the next year as claimed by learned AR, the assessee can always claim deduction in that year, which has to be considered as per law, but merely on the ground, it cannot be argued that the relevant assessment order in which the interest was allowed incorrectly is not prejudicial to the interest of revenue. 16. The assessee has also referred to certain judgments in which it has been held that film making was a manufacturing activity and citing these judgments it has been argued that interest expenditure incurred in connection with manufacturing activity has to be allowed. The s....