TaxTMI 
TaxTMI 
2006 (1) TMI 170
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.... rule 9A is not deductible and the total amount spent is subject to disallowance under section 37(2A) and rule 6D for the reasons stated in his order. 2. The learned CIT has erred in confirming disallowance or Rs. 2,05,778 out of repairs expenses for the reasons stated in his order. 3. The learned CIT(A) has erred in confirming the disallowance of joint venture of Rs. 5,13,946 as claimed by the assessee and has further erred in confirming the addition of profit of Rs. 1,15,966 in Joint Venture for the reasons stated in his order. 4. The learned CIT(A) has erred in confirming the disallowance of depreciation on bulbs and cables amounting to Rs. 43,131 as claimed by the appellant for the reasons stated in his order." 4. In ground No. 1, the assessee is aggrieved by the decision of learned CIT(A) in holding that Rs. 20,10,373 being the amount of expenses incurred during the production of the film for lodging/boarding, muhurat expenses etc. and Rs. 9,48,475 being the amount incurred on travelling expenses claimed as deduction as cost of production under rule 9A are subject to disallowance under section 37(2A) and rule 6D of Income-tax Rules, 1962. 5. With regard to the claim of....
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....n the decision of the Tribunal in the case of Navodaya v. Asstt. CIT [1991] 40 TTJ (Coch.) 270 to support the contention that provisions of the Income-tax Act relating to the disallowance were not applicable in the case of film producer, where income had to be computed as per Rule 9A of the Income-tax Rules. The learned CIT(A) analysed the nature of expenses and held that the following expenditure of Rs. 2,43,872 was related to post release period and, therefore, the same could not be considered for allowance under rule 9A of the Income-tax Rules:- (1) Silver Jublee function - Rs. 1,60,733 (2) Press conference at Leela Kempenski - Rs. 83,139 Total Rs. 2,43,872 The learned CIT(A) further held that the balance expenditure of Rs. 17,67,101 was of the nature of entertainment expenses in view of Explanation 2 to section 37(2A). He further considered the aspect that these expenses were related to pre release period and, therefore, the only question which was to be considered for the deductibility of the same was whether the provisions of Rule 9A could override the provisions of the Act. The learned CIT(A) after considering the submissions made by the assessee, confirmed ....
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....d. referred, has held that Rule 9A does not override the provisions of section 37(1) and facility given under Rule 9A cannot be interpreted in such a manner that it nullifies the provisions of section 37(1) to section 37(5) of the Income-tax Act. Respectfully following the subsequent decision of the ITAT, Bombay, I would hold that the Assessing Officer was justified in disallowing an expenditure of Rs. 17,67,101 under section 37(2A). As regards post-release entertainment expenses of Rs. 2,43,872 these are clearly not allowable under section 37(2A) of the Income-tax Act. Therefore, the disallowance made in this regard is also confirmed. In effect, the total disallowance of Rs. 20,10,973 is confirmed and this ground of appeal is dismissed." 6. With respect to disallowance of lodging and boarding of Rs. 9,48,477 under rule 6D, the Assessing Officer, in the absence of details and documentary evidences in the form of hotel bills, made disallowance by presuming that only two persons stayed in the hotel. The learned CIT(A) on appeal, on the basis of reasons given by Assessing Officer for making the disallowance of Rs. 20,10,973, confirmed the action of Assessing Officer in this regard al....
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....the Act, read with Explanation (2) thereto and for this proposition he relied on the decision of the Tribunal in the case of M.C. Davar Aromatics (P.) Ltd. v. Dy. CIT [2002] 125 Taxman 134 (Mag.) (Ahd.). It was also contended that expenditure incurred at the work place on employees was not in the nature of entertainment. He also contended that expression (employees) also included persons whose services were hired on project to project basis and in this regard, he placed reliance on the decision of Hon'ble Supreme Court in the case of CBDT v. Aditya V. Birla [1988] 170 ITR 137 wherein the Hon'ble Supreme Court observed that even members of theatrical establishments would be considered as employees. 8. The learned Departmental Representative, on the other hand, strongly supported the order of revenue authorities and contended that both the authorities had dealt with all case laws relied on by the assessee and statutory provisions in an elaborate fashion. He further contended that the reliance on a particular observation in a decision was not valid because the decision of a particular case had to be considered with reference to the question referred therein and facts of that ....
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....he film in a particular year and selling of exhibition rights. If the film producer does not exhibit the film or sells the right of exhibition then in that case no deduction would be allowed for the cost of film in the previous year in which Certificate of Censor is received, but the entire cost of production is carried forward to the next following previous year and allowed as a deduction of that year. This creates a special fiction for allowability of cost of production of the film, though the film could not be released on commercial basis. Another mandatory requirement is that the deduction shall not be allowed unless the amount of release by exhibition the film or the amount for which the rights of exhibition have been sold or, as the case may be, the aggregate of such amounts, is credited in the books of account (Profit & Loss account) maintained by the assessee. 10. From the aforesaid discussion a logical inference which can be drawn is that the rule 9A recognizes the special characteristics of the film making and has been enacted to provide guidelines of amortization of film production costs over a number of years and does not deal with allowability or disallowance of expen....
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....h Court held that any loss arising on account of feature film being abandoned midway without completing it, then, the expenditure incurred till that date including the payments made to artists, writers etc. would be allowable as a business loss on the principle of commercial expediency. All the above instances makes it clear that in case of film producer, the expenses which do not form part of cost of production as per Rule 9A are allowable as per the normal provisions of the Act. It, therefore, follows that the Rule 9A does not cover all these situations and all types of expenses, hence the proposition that it overrides the provisions of the Act on the face if it, is not valid." 12. The assessee has placed great reliance on the decision of the Tribunal in the case of K.R. Films (P) Ltd. in support of its contention regarding overriding effect of Rule 9A over other provisions of the Act. In our humble understanding the Tribunal in that case did not emphatically ruled so and to support this view of ours the relevant para of the order of Tribunal is reproduced below:- "16. We have carefully considered the rival submissions of the parties and we find considerable force in the stand....
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....rdingly." On perusal of above, it would emerge that the Tribunal on the facts and circumstances of the case held that remuneration paid to Shri Raj Kapoor could not be construed as excessive or reasonable having regard to benefits derived by the assessee so as to bring such payment within the purview of section 40A(2) of the Act. Therefore, the Tribunal examined allowability of remuneration paid as deduction with reference to provisions of section 40A(2). The Tribunal also held that the contention of the assessee regarding overriding effect of rule 9A had sufficient force but did not give a conclusive finding in that regard while dealing with the reasonableness of remuneration paid to Shri Raj Kapoor. 12.1 Para 12 of the decision of the Tribunal in the same case dealing with applicability of section 37(3A) of the Act is also reproduced as under:- "12. On the proper reading of the aforesaid clauses, it is not possible to accede to the submissions made on behalf of the assessee that the publicity expenditure incurred by the distributors cannot be considered for the purposes of applicability of section 37(3A) of the Act. It is quite apparent that the publicity expenditure incurred....
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....the same was a part of cost of production and para 12.1, the Tribunal held that advertisement expenditure forming part of cost of production was allowable under rule 9A irrespective of provisions of section 37(3A) of the Act. Therefore, if the aforesaid decision is read as a whole for both types of expenditure which form part of cost of production, prima facie it appears that for one type of expenditure the provisions of the Act would be applicable and for other type of expenditure, other provisions of the Act would not be applicable. Thus, the findings of the Tribunal in regard to overriding nature of Rule 9A vis-a-vis provisions of Act cannot be construed as conclusive. The Tribunal, later, in the case of Rajashri Productions (P.) Ltd. categorically held that provision of the Act had overriding effect over Rule 9A and recorded its finding as under:- "We are of the opinion that the cross objection raised by the assessee cannot be accepted. Before an expenditure is claimed under section 37(1), it has to be seen that the same is not covered under sections 30 to 36 of the Act. Section 37 is, therefore, a residuary section. Section 37(2) to section 37(5) follow section 37(1). These ....
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....e considered for disallowance rather supports our view that Rule 9A provides additional restrictions for amortization of expenses as the cost of production carried forward from earlier years would comprise only of expenditure which was otherwise allowable in that period. It can be put differently to mean that cost of production to be carried forward to succeeding years would consist only of allowable expenditure. 15. Rule 9A is an outcome of exercise of power given to CBDT under section 295(1) of the Income-tax Act, 1961. Thus it is apiece of delegated legislation and must function within the parameters fixed by Legislature by laying down the law, the policy and the standard which Legislature wants to maintain in the application and enforcement of the legislative enactment and be consistent therewith. It, therefore, follows that an ancillary channel, at any rate, cannot neither abridge rights or privileges granted by the statute itself nor confer any special benefits, tights or privileges beyond the provisions of the Act or in contradiction to the provisions of legislative enactment because the object subordinate legislation is to carryout the statutory provisions effectively and ....
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.... 17. The related issue is regarding determination of quantum of entertainment expenses out of cost of production having regard to the situations which necessitated the incurrence of expenditure in connection with the production and marketing of the film. We find some merit in assessee's contention that the expenses incurred at the work place for employees are not necessarily in the nature of entertainment, and it is also a settled principle that where the expenditure has been incurred both for employees and outsiders for customary hospitality, the same cannot be construed as entertainment and should not be disallowed. 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 for the mean....
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....ion and accordingly he confirmed the findings of Assessing Officer. Aggrieved by the decision of Revenue Authorities, the assessee is in appeal before us. 20. The learned counsel appearing on behalf of the assessee contended that take expenditure was incurred on the basis of commercial expediency and was of Revenue in nature. The Assessing Officer treated the same as capital nature only on the basis that without looking into the nature of expenses incurred and learned CIT(A) held that the expenditure had been incurred for extraneous consideration and not for business. However, no specific reasons were given by the learned CIT(A) in this regard. The learned counsel placed reliance on the decision of Hon'ble jurisdictional High Court in the case of CIT v. Hede Consultancy (P.) Ltd. [2002] 258 ITR 380 (Bom.) wherein it was held that if the repairs are undertaken by the assessee in the premises which does not belong to the assessee that expenditure on repairs would be of revenue nature and particularly when the premises is occupied at a low rent and in the present case no rent was paid and, therefore, the expenditure was allowable as revenue expenditure incurred for business purpo....
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....firm was maintaining books of account on project completion method and project was completed in the accounting period relevant to this assessment year. Therefore, the same was allowable. However, the Assessing Officer noted that the said firm and its partners accounted for income from the said project on year to year basis and followed the project completion method. Besides, the Assessing Officer also found that in terms of the Joint Venture agreement, Profit & Loss of the said firm was to be worked out on year to year basis. He, therefore, disallowed the loss of Rs. 5,13,946 which comprises loss to earlier assessment years. Since there was a profit of Rs. 1,15,966 for the year ended on 31-3-1992, the Assessing Officer included the same in the total income of the assessee. Aggrieved by this, the assessee preferred an appeal before the learned CIT(A) who after considering the findings of the Assessing Officer and submissions made by the assessee, confirmed the findings of Assessing Officer and recorded his observations as under:- "I have carefully considered the facts of the case and the submissions of the Learned Authorized Representative. The detailed facts discussed by the Asse....
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....of depreciation of Rs. 43,131 in respect of Bulbs and Cables. The assessee claimed total depreciation of Rs. 4,31,233 which included depreciation of Rs. 64,696. The Assessing Officer observed there were no new purchase of bulbs and cables in the year under consideration and the depreciation so claimed was carried forward written down value from the previous year wherein the depreciation of bulbs was restricted to 75 per cent as against 100 per cent claimed by the assessee. The assessee contended that items purchased in assessment year 1991-92 were below Rs. 5,000 or otherwise eligible for depreciation at 100 per cent, however the same was restricted to 75 per cent in view of third proviso to section 32(1) of the Act, therefore, the remaining portion carried forward from the last year should be allowed fully in the year under consideration. The Assessing Officer, however, held that 100 per cent depreciation can be allowed as per first proviso to clause (ii) of section 31(1) in the year in which the assets are put to use i.e. assessment year 1991-92 in the present case, hence the depreciation on the opening written down value on the bulbs etc. was allowable at the normal rate 33.33 p....