N.V Vasudevan, J.M:— ITA 3874.Mum/09 is an appeal by the Assessee. ITA No. 3244.Mum/09 is an appeal by the Revenue. Both these appeals are directed against the order of the CIT(A)-XI, Mumbai, relating to AY 05-06.
2. First we take up for consideration ITA 3874.Mum/09. Ground No. 1 raised by the assessee reads as follows:
“The ld. CIT(A) seriously erred in law and on the facts and in the circumstances of the case in arbitrarily confirming disallowance u/s. 40(a)(ia) r.w.s 194J of the Income-tax Act, 1961 amounting to Rs. 3,67,28,299/-. He failed to appreciate the Appellant's contention that the provisions of section 194J are not applicable since the payments made under the contract executed would fall within the ambit of section 194C of the Act. That the Appellant being an individual the section 194C is not attracted. As such no disallowance would be called for u/s. 40(a)(ia) of the Income-tax Act, 1961. The Appellant prays that the entire arbitrary disallowance of Rs. 3,67,28,299/- be deleted.”
3. The assessee is an individual. He is engaged in the business of production of cinematographic films as proprietor of Neha Arts. One Mr. Mani Shankar, Prop. Bhairav Films, is a director of cinematographic films in Hindi. Bhairav Films approached the assessee with a proposal to produce a film in Hindi under the title “TANGO CHARLIE”, (hereinafter referred to as “the film”). The assessee agreed to the proposal. An agreement dated 29.11.2002 was entered into between the parties reducing the terms of the agreement between the parties to writing. Bhairav Films agreed to bear all the remunerations to leading artists, wages and allowances of personal staff of leading artists, interest on finance for the film, publicity expenses, music expenses i.e, remuneration payable to music director, lyricists, musicians, background score etc. Bhairav Films also agreed to deliver the first print of the film at his cost. The assessee was to pay Bhairav films a sum of Rs. 4.50 Crores. By an addendum dt. 12.5.2003, the terms of the agreement dt. 29.11.2002 were varied to the extent that the amount payable by the assessee to Bhairav Films was increased to Rs. 5.50 Crores and further the expenses on remuneration of lyricist, music director, music expens, recording expenses, singers expenses, technicians expens, background music expenses, costumes of all the artists were to be borne by the assessee instead of Bhairav films as originally agreed in the agreement dt. 29.11.2002 By another addendum dt. 5.8.2003, the consideration payable by the assessee to Bhairav Films stood reduced to Rs. 5.35 Crores. The assessee was entitled to the negative rights of the film. The assessee made payment of Rs. 10 lacs to Bhairav Films in the F.Y.02-03 relevant to AY 03-04. The assessee did not deduct tax at source while making such payment. In F.Y.03-04 relevant to AY 04-05 and FY 04-05 relevant to AY 05-06, the assessee made a payment of Rs. 2.10 Crores and Rs. 2.30 Crores respectively, to Bhairav Films. In respect of these payments the assessee deducted tax at source at 2.2% considering the payment as a payment falling with the category of a payment to a contractor, which falls with the meaning of “payment to contractor” u/s. 194-C of the Income Tax Act, 1961 (the Act). The assessee offered to tax the profits of the film to tax in AY 05-06. In terms of Rule 9A of the IT Rules, 1962, in computing the profits and gains of the business of production of feature films carried on by a person (film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed as deduction depending on whether the producer sells the negative rights or exploits the film on his own. For the present appeal what is relevant is that the Assessee was entitled to claim the cost of production of the film in AY 05-06 and he made a claim for deduction of cost of production of the film of Rs. 5.35 crores.
4. The AO examined the question of allowability of the said expenditure in the light of the provisions of Sec. 40(a)(ia) of the Act. The relevant provisions reads as follows:
“40. Amounts not deductible.—Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—
(a) in the case of any assessee—
(ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII- B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation.—For the purposes of this sub-clause,—
(i) “commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;
(ii) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
(iii) “professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J;
(iv) “work” shall have the same meaning as in Explanation III to section 194C;
Admittedly, the provisions of Sec. 194-C of the Act were not applicable to payments individuals up to AY 05-06 and therefore there was no obligation on the part of the assessee to deduct tax at source on payments made to Bhairav films which is the sole proprietory business of Mr. Mani Shankar. The plea of the assessee was that by mistake he had deducted tax at source in AYs. 04-05 and 05-06. It was the assessee's stand that since assessee voluntarily deducted tax at source, he should not be held to be liable to deduct tax at source and that there can be no estoppel against statute. The AO, however, held that the payment in question made by the assessee to Bhairav films was in the nature of a fees paid for rendering technical or professional services which fell with the purview of Sec. 194-J of the Act. As per those provisions even payment to individuals can be made only after deduction of tax at source. The rate at which tax was deductible was at 5.23% of the payment. On failure to deduct tax at source such payments cannot be claimed as deduction in view of the rigours of Sec. 40(a)(ia) of the Act. The AO accordingly disallowed the claim for deduction of Rs. 3,67,28,299 which was arrived at by the AO as follows. For the payment of Rs. Rs. 5.35 Crores tax deduction at 5.23% was Rs. 27,53,500. The assessee had deducted tax at source of Rs. 8,77,160/-. The proportionate payment for which tax was not deducted viz., Rs. 3,67,28,299 was disallowed by the AO.
5. The question that arose for consideration before CIT(A) was as to whether the payment in question made by the assessee to Bhairav Films could be characterised as a payment for rendering professional services falling within the purview of Sec. 194-J of the Act or was a payment to a contractor falling within the ambit of Sec. 194-C of the Act. On the above issue, the CIT(A) was of the view that the payment in question was a payment for rendering technical services. He held that production of film is highly a technical matter and therefore the payment in question was covered by the terms “fees for technical services” as laid down in Expln.-2 to clause (vii) of Sec. 9(1) of the Act, which reads as follows:
“Explanation 2.—For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recepient or consideration which would be income of the recipient chargeable under the head “Salaries”.”
The CIT(A), therefore, held that there was obligation on the part of the assessee to deduct tax at source and on such failure the rigours of Sec. 40(a)(ia) of the Act would operate and the AO was justified in disallowing the deduction.
6. Aggrieved by the order of the CIT(A), the assessee has raised ground No. 1 before the Tribunal. The learned D.R relied on the order of the CIT(A). According to him, the services rendered by Bhairav Films were managerial in nature as Mr. Mani Shankar had managed all the activities relating to production of films. The learned counsel for the assessee submitted the payment in question is a mode of finance for production of film. The assessee as financer has taken the negative rights of the film in consideration for providing finance for production of film. He relied on the decision of the Hon'ble Mumbai Tribunal in the case of Entertainment One India Ltd. v. ITO (TDS) ITA No. 1095 to 1098.Mum/2007 wherein the Tribunal took the view that such finance arrangements do not result in payment to a contractor to attract the provisions of Sec. 194-C of the Act. Alternatively, it was submitted that the applicable provisions were only Sec. 194-C of the Act and not Sec. 194-J of the Act and, in this regard, relied on the decision of the Hon'ble Delhi High Court in the case of CIT v. Prasar Bharti (Broadcasting Corporation of India) 292 ITR 580 (Del) wherein it was held that payment for “production of programmes for broadcasting and telecasting” fell within the ambit of Sec. 194-C of the Act and not Sec. 194-J of the Act. It was contended that production of films is akin to production of programmes for broadcasting and telecasting and, therefore, the payment made by the assessee should be held to be one falling within Sec. 194-C of the Act. Since Sec. 194-C was not applicable for individuals prior to 1.6.2007, there was no obligation on the part of the assessee to deduct tax at source.
7. We have considered the rival submissions. We will take up for consideration the argument that Sec. 194-J of the Act will not apply to payment made for production of films. In this regard, we find that the issue had come up for consideration before the Hon'ble Delhi High Court in the case of Prasar Bharati (supra). The facts of the case before the Hon'ble Delhi High Court were that Prasar Bharati was making certain payments to outside producers for programmes under “commissioned category” for which the assessee had been deducting tax at source under section 194C, by treating them as contract payments. The stand of the Revenue was that television programme producers should be treated as professional/technical persons and that payments made to them should be subjected to deduction of tax at source under section 194J of the Act (as payment for professional services). The rate of deduction of tax at source under section 194C was 2 per cent, whereas under section 194J, it was 5 per cent. An order was made by the Assistant Commissioner of Income-tax (“the ACIT”) under section 201/201(1A) of the Act holding that the assessee is liable to be treated as an assessee in default in respect of the short deduction including interest for the relevant financial years. The Tribunal held that the applicable provisions were Sec. 194-C of the Act and not Sec. 194-J of the Act. On further appeal by the Revenue, the Hon'ble Delhi High Court noticed that by the Finance Act, 1995, with effect from July 1, 1995, Explanation III was inserted in section 194C which read as under:
“Explanation III.—For the purposes of this section, the expression ‘work’ shall also include—
(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of transport other than by railways;
(d) catering.”
The Hon'ble Court, therefore, held that in terms of clause (b) of Explanation III to section 194C, payment made towards a contract concerning “broadcasting and telecasting include production of programmes for such broadcasting or telecasting” would be covered by section 194C.
The Hon'ble Court further referred to the fact that even while the Finance Act, 1995, introduced the aforesaid Explanation III to section 194C, it simultaneously inserted section 194J in the Act which provided for deduction of tax at source at the time of payment of a fee “for professional or technical service”. The operative portion of section 194J read as under:
“194J. Fees for professional or technical services.—(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—
(a) fees for professional services, or
(b) fees for technical services, shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent, of such sum as income-tax on income comprised therein”
Explanation.—For the purposes of this section,—
(a) ‘professional services’ means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section.”
The Hon'ble Court held that the Tribunal has correctly held that once there is a specific provision introduced by way of an Explanation to section 194C, to bring within its ambit the contractual work concerning “broadcasting and telecasting”, the Revenue cannot resort to section 194J which is in more general terms. The relevant observations of the Hon'ble Court were as follows:
“Mr. R.D Jolly, learned counsel for the appellant submits that the making of the programmes for television involves the utilisation of professional services and that there are several technical aspects of producing such programmes which will attract Explanation (a) to section 194J. He, therefore, submits that the view expressed by the Assistant Commissioner of Income-tax and Commissioner of Income-tax (Appeals) should be accepted and that of the Income-tax Appellate Tribunal, which holds to the contrary rejected.
We are unable to agree with this submission. We observe that Explanation III, which was introduced simultaneously with section 194J, is very specific in its application to not only broadcasting and telecasting but also include “production of programmes for such broadcasting and telecasting”. If, on the same date, two provisions are introduced in the Act, one specific to the activity sought to be taxed and the other in more general terms, resort must be had to the specific provision which manifests the intention of the Legislature. It is not, therefore, possible to accept the contention of the Revenue that programmes produced for television, including “commissioned programmes”, will fall outside the realm of section 194C, Explanation III of the Act. We find no infirmity in the view taken by the Income-tax Appellate Tribunal which we hereby affirm.”
We are of the view that the ratio of the aforesaid decision can be extended to production of films. Fundamentally, there is no difference between production of film for broadcasting and telecasting except that cinemotograph films are exhibited in theatres for viewing by the public. Sec. 194-C (1) uses the following expression:
“Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract”.
The expression “work” has not been defined for the purpose of Sec. 194-C of the Act. The normal meaning of the expression “work” should therefore apply. By Expln. III(b) to Sec. 194-C of the Act, the legislature only clarified that the expression ‘work’ shall also include broadcasting and telecasting including production of programmes for such broadcasting or telecasting. It would, therefore, be reasonable to hold that the expression “work” would also include within its fold production of motion films or cinematographic films such as the one which the assessee got produced through Bhairav films for which it made payments. The payment made by the assessee would therefore fall for consideration only under the provisions of Sec. 194-C of the Act. Since the provisions of Sec. 194-C of the Act were not applicable to individuals prior to 1.4.2007, the assessee was under no obligation to deduct tax at source for the period under consideration and therefore no disallowance could be made u/s. 40(a)(ia) of the Act. In that view of the matter, we are of the view that the disallowance made u/s. 40(a)(ia) of the Act cannot be sustained.
7.1 The learned counsel for the assessee also made submission that since tax has been deducted on payments made in AY 04-05 and 05-06 as provided u/s. 194-C of the Act, disallowance cannot be made u/s. 40(a)(ia) of the Act, as it was not a case of non-deduction but was a case of only short deduction of tax at source and for such short deduction of tax at source no disallowance could be made u/s. 40(a)(ia) of the Act. In this regard our attention was drawn to the decision of Tribunal ITAT Kolkatta Bench in the case of DCIT v. S.K Tekriwal ITA No. 1135.Kol/2010 order dated 21.10.2011 wherein it was held that in the event of short deduction of tax at source, the provisions of Sec. 40(a)(ia) of the Act cannot be invoked to make disallowance of claim for deduction. Even on this count, we are of the view that the disallowance made by the AO cannot be sustained. Thus, ground No. 1 raised by the assessee is allowed.
8. Ground No. 2 reads as follows:
“The ld. CIT(A) seriously erred in law and on the facts and in the circumstances of the case in arbitrarily confirming addition to the extent of Rs. 20,39,066/- u/s. 41(1) of the Income-tax Act, 1961. He failed to appreciate the Appellant's contention that the ld. Assessing Officer did not bring on record any materials whatsoever to establish that the mandatory conditions and the pre-requisites for invoking the charging provisions of section 41(1) of the Act have been fulfilled in the year under appeal. The ld. CIT(A) ought to have held that the mandatory conditions prescribed u/s. 41(1) of the Act having been not fulfilled and keeping in view the plethora of judicial proceedings, no addition is called for u/s. 41(1) of the Act. The Appellant prays that the entire addition of Rs. 20,39,066/- be deleted.”
9. The AO noticed that there were large number of outstanding liabilities and other credits appearing in the balance-sheet as on 31-3-2005. These outstanding liabilities existed even as on 1-4-2004. The AO called upon the assessee to show cause as to why these liabilities were outstanding since 1-4-2004. The assessee submitted that in the absence of production of films, the liabilities are never treated as no longer payable. The assessee also submitted that some of the liabilities referred to by the AO have already been paid in the subsequent assessment year and that the assessee has been making efforts to liquidate these liabilities by selling negative rights of old films. The AO listed 44 debts shown as liabilities/creditors in the balance-sheet totaling in all a sum or Rs. 27,81,196/- (listed in para 7 of assessment order). The AO was of the view that generally in the film industry any trade creditor or trade liability outstanding for more than 1 year is as good as written off. He also held that the assessee was not in a position to obtain any credit confirmation for the liabilities/credits appearing in the balance-sheet. He, therefore, held that the provisions of sec. 41(1) were attracted. Accordingly, a sum of Rs. 27,81,196/- was brought to tax as income of the assessee.
10. Before the CIT(A), the assessee pointed out that the liabilities which were considered by the AO as no longer existing were in fact payable by the assessee and that the assessee did not get any benefit by way of remission or cessation thereof and therefore the addition made deserves to be deleted. In particular, the assessee pointed out that a sum of Rs. 7,42,130/- was on account of advances received from distributors against pictures. The assessee submitted that the burden was on the Revenue to show that the assessee received benefit by way of remission or cessation of trading liabilities and that no such material has been produced on record to show that attachable events had taken place during the previous year. The assessee relied on the following judicial pronouncements in support of the above proposition:
1. CIT v. Tamil Nadu Warehousing Corporation (2007) 292 ITR 310 (Madras).
2. Vardhman Overseas Ltd. v. ACIT (2008) 24 SOT 393 (Delhi).
3. Liquidator, Mysore Agencies Pvt. Ltd. (In Voluntary Liquidation) v. CIT (1978) 114 ITR 853 (Kar.)
4. K.V Moosa Koya & Co. v. ITO (1988) 175 ITR 120 (Ker.)
5. Commissioner Of Income-Tax v. Pranlal P. Doshi. (1993) (201 ITR 756).
11. The CIT(A) agreed with the submissions of the assessee with regard to the sum of Rs. 7,42,130/- which was appearing as advances from distributors but with regard to the remaining sum of Rs. 20,39,066/-, the CIT(A) was of the view that the assessee did not file confirmation from the parties and that the explanation given by the assessee was very general in nature. He, therefore, confirmed the disallowance made by the AO to the above extent.
12. Aggrieved by the order of CIT(A), the assessee has raised ground No. 2 before the Tribunal.
13. We have heard the submissions of the ld. counsel for the assessee who reiterated the stand as was taken before the CIT(A). The ld. DR relied on the order of CIT(A).
14. We have considered the rival submissions. Admittedly, the amounts which were considered as income u/s. 41(1) were balances appearing in the balance-sheet as on 1-4-2004. As on 31-3-2005, the liabilities continued to be recognized by the assessee. The genuineness of these liabilities cannot be subject matter of investigation in the present assessment year because they were not liabilities incurred during the previous year. The case of the Revenue is based on the provisions of sec. 41(1) of the Act. Those provisions reads as follows:
41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.
Explanation 1.—For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.
Explanation 2.—For the purposes of this sub-section, “successor in business” means,—
(i) where there has been an amalgamation of a company with another company, the amalgamated company;
(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;
(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;]
(iv) where there has been a demerger, the resulting company.”
15. It has been consistently held in the decisions referred to by the ld. counsel for the assessee before the CIT(A) that unless and until there is cessation of liabilities, section 41(1) is not applicable. Even in respect of time-barred debts, Courts have taken the view that addition cannot be made u/s. 41(1) of the Act. It has also been held that sec. 41(1) cannot be applied merely on imagination. We are of the view that in the present case there is no material on record to show that there was cessation of liability or remission of liabilities and that the assessee derived benefit by such remission or cessation of liabilities. In fact, the facts and record go to show that the liabilities were only one year old. In these circumstances, we are of the view that the addition sustained by the CIT(A) deserves to be deleted. Accordingly, ground No. 2 raised by the assessee is allowed.
16. Ground No. 3 raised by the assessee reads as follows:
“3. The learned CIT(A) seriously erred in law and on the facts and in the circumstances of the case in arbitrarily rejecting the Additional Ground raised by the Appellant praying for allowance of expenditure in respect of TDS paid by the appellant before the due date for filing of the Return. The said claim for expenditure was necessitated on account of the retrospective amendment in law amending section 40(a)(ia) of the Act. The ld. CIT(A) seriously erred in placing reliance on the decision of Hon'ble Supreme Court in the case of Goetz (India) Ltd. (2006) 284 ITR 323 (SC) without appreciating that the facts of the said case are distinguishable and are not applicable to the Appellant's case. The ld. CIT(A) ought to have allowed the expenditure as claimed in the Additional Ground keeping in view the law as amended that was applicable at the time of disposing of the Appellant's appeal as per the well established and accepted jurisprudence and as held by the Hon'ble Supreme Court in a number of cases.
The Appellant prays that expenditure of Rs. 1,14,17,827/- allowable u/s. 40(a)(ia) as per the retrospectively amended provisions of section 40(a)(ia) be allowed claimed in the Additional Ground.”
17. In the computation of income filed by the assessee, the assessee on his own had made disallowance of a sum of Rs. 244,63,628/- by reason of the provisions of sec. 40(a)(ia) of the Act. Before the CIT(A), the assessee raised an addition ground in which the assessee submitted that deduction at source on the sums referred to in sec. 40(a)(ia) of the Act should be paid either during the previous year or in the subsequent year before the expiry of the time prescribed under sub-section (1) of sec. 200. By the Finance Act, 2008, sec. 40(a)(ia) was amended with retrospective effect from 1-4-2005 whereby tax deducted at source on payment referred to in sec. 40(a)(ia) can be paid on or before the due date prescribed in sec. 139(1). According to the assessee, in respect of payments to the extent of Rs. 1,14,17,827/- which were covered by the provisions of sec. 40(a)(ia) out of the disallowance of Rs. 2,44,63,638/- made by the assessee in the return of income, would qualify for deduction under the retrospective amendment to the provisions of sec. 40(a)(ia) of the Act and therefore to this extent the assessee should be allowed deduction. In this regard, the assessee also pointed out that the Finance Bill 2008 was passed after the date of the assessment order, namely, 27-12-2007, and therefore the assessee could not have raised this issue before the AO.
18. On the above additional ground sought to be raised before the CIT(A), the CIT(A) made a reference to the AO on the claim of the assessee and the AO has also confirmed before the CIT(A) that the claim of the assessee as made in the additional ground was correct. The CIT(A), however, was of the view that in view of the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd. reported in 284 ITR 323 (SC), it was not possible to entertain any claim for deduction other than by filing a revised return of income. The CIT(A), therefore, refused to give benefit to the assessee because of absence of revised return of income. The CIT(A) also held that as per the decision of Hon'ble Supreme Court (supra), only powers of the Tribunal to entertain such a claim have been referred to but not those of CIT(A). For the above reasons, the CIT(A) refused to entertain the additional ground raised by the assessee before the CIT(A).
19. Aggrieved by the order of CIT(A), the assessee has raised ground No. 3 before the Tribunal.
20. We have heard the rival submissions. The ld. DR relied on the order of the CIT(A). The ld. counsel for the assessee submitted that the powers of the Tribunal to entertain a new claim are not in any way restricted by the decision of the Hon'ble Supreme Court in the case of Geotz (India) Ltd. (supra). In this regard, the ld. counsel also relied on the decision of Hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Jai Parabolic Springs Ltd. 306 ITR 42 (Del.).
21. We have considered the rival submissions. We are of the view that the claim made by the assessee before the CIT(A) was consequent to a retrospective amendment to the law. It is not possible for an assessee to foresee a retrospective amendment to the law. In the circumstances, the assessee could make the claim only before the CIT(A). In our view, the CIT(A) ought to have admitted the additional ground for adjudication. We also find that the Hon'ble Delhi High court in the case of Jai Parabolic Springs Ltd. (supra) has taken the view that there is no prohibition on the powers of the Tribunal to entertain any additional ground for a just decision of the case. The Hon'ble Delhi High Court distinguished the decision of the Supreme Court in the case of Goetz (India) Ltd. (supra). We, therefore, hold that the CIT(A) ought to have admitted the additional ground for adjudication. We direct the CIT(A) to admit the ground for adjudication and consider the claim of the assessee in accordance with law. Needless to say that the CIT(A) will afford opportunity of being heard to the assessee.
22. In the result, the appeal by the assessee is partly allowed.
ITA No. 3244.Mum/2009 (Revenue's appeal):
23. The grounds of appeal of the Revenue read as under:
“1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not upholding the disallowance of Rs. 1,11,26,960/- out of Rs. 3,01,53,195/- on account of excess un-recouped cost of production brought to tax in the hands of the assessee on account of Karma Entertainment to the extent of Rs. 1,11,26,960/-.
2) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs. 1,11,26,960/-.”
24. As we have already seen, the assessee is a producer of films. The assessee was a partner with one Sohail Maklai in the business of production of films under the name and style of Karma Entertainment. The partnership got dissolved w.e.f 31-3-2004. The partnership firm Karma Entertainment had produced a film called Rudraksh. The firlm was released in February 2004. Under the provisions of Rule 9A of the I.T Rules, the profits and gains of business of production feature film is computed by allowing the cost of production of a feature film certified for release by the Board of Film Censor in the previous year in which the film is released. If the film is released 90 days before the end of the previous year, then the cost of production of the film will be allowed by setting off the cost of production to the extent of the amount realized on exhibiting the film and the remaining sum of cost of production, if any, will be allowed as a deduction in the following previous year.
25. As we have already seen, Karma Entertainment was dissolved and the assessee took over all its assets and liabilities. During the previous year relevant to assessment year 2004-2005, in the assessment of Karma Entertainment, un-recouped cost of production of film Rudrakash was determined at Rs. 2,93,75,793/-. Since the assessee took over Karma Entertainment, the assessee treated the un-recouped cost of production as above as an expense in its profit & loss account and also showed realization of Rs. 1,39,709/- on exhibiting the film. This way the assessee arrived at a net loss of Rs. 3,01,53,795/-. The same is as follows:
“Particulars
Particulars
Direct Expenses
2,93,73,793.37
Direct Income
1,39,709.00
Gross Loss c/o.
2,92,36,084.37
2,93,75,793.37
2,93,75,793.37
Gross Loss b/f.
2,92,36,084.37
Indirect incomes
43,836.00
Indirect expenses
9,61,547.00
Net loss
3,01,53,795.37
Total
3,01,97,631.37
3,01,97,631.37
26. The AO, on scrutiny of the cost of production expenses, noticed that the following expenses were expenses incurred for preparation of positive prints and advertisement of the film:
1
Air conditioner Hire
14400
2
Bank charges & commission
57551
3
Conveyance Expenses
49335
4
Donation
16501
5
Electricity
5420
6
Entertainment Expenses
8489
7
Food & Staff Welfare
80088
8
Membership & Subscription
3100
9
Miscellaneous Expenses
152558
10
Postage & Courier
17057
11
Print Cost
3127106
12
Printing & Stationery
48820
13
Publicity expenses
6708091
14
Public Relations
50000
15
Repairs & Maintenance
28728
16
Rights relinquishing
234989
17
Sushila Kothare - Rent - Office
136000
18
Telephone & Mobile Expenses
352012
19
Vehicle Expenses
36715
1126960
The AO referred to Explanation ii to Rule 9A(1) of the I.T Rules which defines ‘cost of production’ in relation to a feature film to mean expenditure incurred on production of the film, not being: (a) expenditure incurred for the preparation of the positive prints of the films (b) expenditure incurred in connection with the advertisement of the film after it is certified for release by the CBFC. According to the AO, expenses to the extent of Rs. 1,11,26,960/- could not be considered as cost of production of the film as they were incurred towards positive prints and advertisement of the film. The AO accordingly re-worked the loss on account of the film Rudraksh by reducing the loss of Rs. 3,01,53,795/- claimed by the assessee by Rs. 1,11,26,990/- and allowed loss only to the extent of Rs. 1,90,26,835/-.
27. Aggrieved by the order of CIT(A), the assessee carried the issue before the CIT(A). Before CIT(A) the assessee pointed out that the firm Karma Entertainment was a firm in Asst. Yr. 2004-2005 and became proprietary concern in 2005-2006. The firlm Rudraksh was produced by Karma Entertainment in Asst. Yr. 2004-2005 and released in February 2004. In the assessment of the firm for AY 04-05, the A.O has also generally agreed with the accounts of Karma Entertainment. The AO has found no faults in the accounts of Karma Entertainment in Asst. Yr. 2004-2005 and has accepted the loss declared and also the un-recouped cost of production of the film rudraksh. The AO however wanted to disallow the claim for deduction of un-recouped cost of film rudraksh in the hand of the Assessee and for this purpose reopened the assessment of Karma Entertainment for AY 04-05. Based on the reopening of assessment of Karma Entertainment, the AO wants to disallow un-recouped costs in the hands of the Assessee which is not possible. The un-recouped cost of production of the firm already accepted in the hands of the firm cannot be disputed in the hands of the Assessee. A copy of the order in the case of Karma Entertainment u/s. 147 r.w.s 143(3) dated 18/12/2008 was also filed before CIT(A).
28. The CIT(A) after considering the submissions and the materials on record found that it was an admitted and undisputed fact that up to assessment year 2004-2005 Karma Entertainment was a firm and clearly a separate entity. He held that amendments, if any, in the assessee's income, in relation to the return of Karma Entertainment, has to go through proper procedure. The CIT(A) observed that the proper procedure would be examination or re-examination of the accounts of Karma Entertainment in the light of the facts on record and make an assessment or re-assessment in the said case. There could be actions u/s. 154/147/263 in the case of Karma Entertainment which clearly would be independent proceedings. Since in assessment year 2004-2005 the assessee was a partner in the firm, there might be consequential effect in terms of share of profit etc. in the hands of the assessee. The CIT(A) also found Secondly, he found an order u/s. 143(3)/147 in the case of Karma Entertainment was passed on 18/12/2008 in which the AO made a eference to Rule 9A of the I.T Rules and made a disallowance of Rs. 98,35,197/- on account of publicity expenses and printing cost. This was at variance with the calculations of various disallowable items as stated by the AO in the case of the assessee. The CIT(A) also found at para 4.3 of the order of assessment a comment of the AO stating: “On the face of it, this appears to be correct accounting” (meaning the claim of expenses on cost of production of the film). This comment was made in the light of the return of income of Karma Entertinment for asstt. year 2004-2005. Having thus commented, it was neither necessary nor permissible in law for the AO to travel further in the case of Assessee in the assessment of the assessee for sstt. Year 2005-2006. Considering all the above facts and circumstances, the CIT(A) allowed the deleted the addition made by the AO.
29. Aggrieved by the order of CIT(A), the Revenue has preferred the present appeal before the Tribunal. We have heard the submissions of the ld. DR who relied on the order of the AO. The ld. counsel for the assessee reiterated the submissions as were made before the CIT(A) and also submitted that even if it is considered that Rule 9A could not be applied in this case, the assessee on dissolution of the partnership firm took over the rights of the film Rudraksh at the value found in the balance-sheet of the firm i.e Rs. 2,93,73,793/-. The assessee, on taking over the same, had exploited the film and realized a sum of Rs. 1,39,709/- during the previous year. Thus, the loss in question has to be allowed. In fact, having accepted in the assessment of the firm Karma Entertainment that the un-recouped cost of production of the film Rudraksh was Rs. 2,93,77,793/-, the AO could not in the assessment of the firm seek to exclude any part of the cost of production expenses by trading them as post production expenses. He also pointed point out that the reopening of the assessment in the case of Karma Entertainment for AY 04-05 has already been struck down by the CIT(A) to be not proper and the order of reassessment now stands annulled.
30. We have considered the rival submissions. In our view, the claim made by the assessee was rightly accepted by the CIT(A). Even if Rule 9A is applied, the assessee was entitled to claim the un-recouped cost of production in terms of Rule 9A(3) of the Rules. This un-recouped cost has been determined at a sum of Rs. 2,93,73,793/- by the AO in the assessment of the firm for asstt. year 2004-2005 and the same has become final. It is not open to the AO of the assessee to re-determine the cost of production in the assessment of the assessee. Thus, the CIT(A), in our view, has rightly deleted the addition made by the AO. Even the alternative plea of the assessee that de hors the provisions of Rule 9A, the difference between the cost of acquisition of the film Rudraksh to the assessee and the cost of realization from the exhibition of the film during the previous year should be allowed as a deduction, is acceptable. In that view of the matter we hold that the loss claim by the Assessee deserves to be accepted. For the reasons given above, we confirm the order of CIT(A) and dismiss the appeal by the Revenue.
31. In the result, the appeal by the assessee is partly allowed, while the appeal by the Revenue is dismissed.