ORDER
P.M. Jagtap, Accountant Member - This appeal is preferred by the Revenue against the order of ld. CIT, Central (A)-IV, Mumbai, dated 30-04-2007 and in the solitary ground raised therein, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 50 lakhs made by the A.O. on account of disallowance of deduction claimed by the assessee for consultancy fees paid to M/s Idream Productions Pvt. Ltd.
2. The assessee in the present case is a company which is engaged in the business of trading and investment in shares and debentures. During the year under consideration, it ventured into film production by entering into production agreements with M/s Sahara India TV Network. The return of income for the year under consideration was filed by it on 28-11-2003 declaring total income at "nil" after 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 lakhs 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.
In pursuance to object clause, the company has undertaken four contract from M/s Sahara India T.V. Network, and received advance of Rs. 20 crore - vide agreement dt. 24/09/2002. We may respectfully submit that the Company has started business of undertaking contracts for production of film. Theatrical - T. V. Channel etc. We further submit that the company has commenced its business as soon as it has received contracts from M/s Sahara India TV Network for the production of film/T. V. serials. The signing of contracts with M/s Sahara India TV Network did amount to commencement of business and corollary to that, the expenses incurred after the commencement of business to allowable expenses. In support of this proposition, we rely on following judgments.
We most respectfully submit that for allowance of any business expenditure what is required in business should be set up and not necessary business should commence. We may draw your attention towards the judgments in the case of Com. Of Income Tax v. Western India Sea food (P) Ltd particularly para 8 wherein there is reference of case law of Prem Conductors Pvt. Ltd. v. Commissioner Of Income-Tax, Gujarat-I. 108 ITR 654 Gujarat. The para 8 of the judgment is reproduced for ready reference.
In Prem conductors' case (supra) the facts were that the assessee-company was to manufacture and sell aluminum and copper conductors and prior to manufacturing of aluminum conductors, the company had already received advance orders for manufacture and sale of conductors to be manufactured by it in future. The said step taken by the company was considered to be a step towards the setting up of the business being at least part of the main business and therefore, the expenditure incurred by the assessee could be considered for deciding the business expenses. In this connection, the following pertinent observations were made by BI Divan, C.J., speaking for the division Bench (at page. 666).
"One business activity may precede the other. What is required to be seen is whether one of the essential activities for the carrying 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 judgments which is read as under:
(10) We may at this stage refer to another judgment of this Court in Hotel Alankar v. Commissioner Of Income-Tax, Gujarat. (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 (headnote):
"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 requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities which the business is overall comprised of The question whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case".
(11) The following observations of Chagfr CJ. in western India Vegetable Products case (1954) 26 ITR 151, 158(Bon,)-were-quoted with approval:
"That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowiatt was considering, viz, 'commencing of the business It seems to us that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions wider S. 10(2)". i.e. corresponding to provision of Section 37 Of I.T.
In view of the facts and legal position, as submitted hereinabove, we submit that the company has commenced its business of undertaking contract on 24/09/02, i.e. date of signing agreement with M/s Sahara India TV Network and the incidental expenses like payment made to IDream production (P) Ltd, being professional fees for syndicating the contract and arranging fund, is allowable as proper business expenditure.
(1) In the course of assessment proceeding, issue is raised about the application of rule 9A & Rule 9B in respect of contract undertaken for film production.
In this regard, we submit that the provision of rule 9A is applicable to the assessee, who is producing film on his own. As far as the contract with M/s Sahara India TV Network is concerned, we are acting as an agent to co-ordinate the various parties to produce film. We may draw your kind attentions towards following clauses of agreement Clause 1(a), Clause 1(h), 1 (k) and particularly the termination clause, which is read as under,
TERMINATION
(2) Without prejudice to submission made hereinabove, assuming the provision of 9A & 9B is applicable, we make alternative claim, as of today no film project could be commenced due to lack of co-ordination from both the side, the film project stand abandoned.
In that case whatever expenses incurred are allowable as proper allowable expenses, and/or as held in the case of Income Tax Officer v. Engineering Production Ltd. (1992) 44 TTJ 201 .
In view of the submission made hereinabove, we request you to allow the payment made to M/s I Dream Production (F) Lid, as proper deduction while complying the Income under the head Business Income".
3. In the light of the above submissions, the A.O. considered the allowability of expenditure incurred by the assessee on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. as deduction from two angles. Firstly, whether the said expenditure could be said to be incurred by the assessee in connection with the existing business and even if it is so, whether the said expenditure could be allowed before the completion of relevant contract and realization of the contractual consideration. In this regard, he recorded his findings/conclusions in the assessment order as under:-
"In the case of the assessee, the principal business activity is trading and investment in shares and securities. The other objects of assessee company include "apply for tender, purchase or otherwise any contract, sub contract, licenses and concessions for or in relation to the objects or business mentioned or any of them". All along since its date of inception the assessee-company has restricted its 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 its 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. Hence, even if the business is held as set up (which is not the case as except receipt of advance no positive activity is reflected even after 6 months of contracts), the expenditure is to be treated as pre commencement expenses and considering the nature of business, i.e. contracts for film production, the allowability has to be dealt within the frameworks of accounting for contracts or special provisions for film production business. Hence the expenditure of Rs 50 Lakhs cannot be held to be incurred in relation to the business carried out during the year and therefore not allowable as revenue expenditure during the assessment year.
Without prejudice to the above, even if the assessee is considered as contractor vis-à-vis four contracts entered with M/s Sahara India, the expenses incurred in relation with these contracts which is a new business for the assessee should be capitalized towards these contracts only and allowable against the consideration of contracts as and when become due. As the assessee has not offered any revenue on account of these contracts during the year, the expenses are to be carried forward and charged towards work-in-progress as and when the work on project commences."
4. Secondly, the A.O. also examined the issue of allowability of the expenditure incurred on consultancy fees paid by the assessee to M/s Idream Productions Pvt. Ltd. as per the special provisions contained in Rule 9A of the Income Tax Rules, 1962 which, according to the A.O., were applicable in the case of the assessee involving deduction claimed in respect of expenditure on production of feature films. In this context, he referred to the said provisions of Rule 9A of the Income Tax Rules, 1962 which read as under:-
'9A. Deduction in respect of expenditure on production of feature films.—(1.) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release the Board of Film Censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4).
Explanation. — In this rule, —
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, —
and the film is released for exhibition on a commercial basis at least ninety days before the end of such previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year.
(3) Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer -
and the film is not released for exhibition on a commercial basis at least ninety days before the end of such previous year, the cost of production of the film insofar as it does not exceed the amount realised by the film producer by exhibiting the film on a commercial basis or the amount for which the rights of exhibition are sold or, as the case may be, the aggregate of the amounts realised by the film producer by exhibiting the film and by the sale of the rights of exhibition, shall be allowed as a deduction in computing the profits and gains of such previous year; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year.'
5. According to the A.O., Rule 9-A of the Income Tax Rules, 1962 was clearly applicable in the case of the assessee and he therefore held for the following reasons given in the assessment order that the expenditure incurred on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. was allowable only in the year of release of the films:-
"The most prominent clause which has been highlighted by the assessee is termination clause of contracts which provides that in the event of premature termination the rights in the main theme, concept, script, story, music etc shall vest with the "producer", i.e. M/s Sahara in this case and the contractee 'Production House" i.e. Assessee shall be entitled to get a reasonable fee for such scripts-screenplays etc. The claim of the assessee 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 crore 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 crore 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 circumstances. In this case the liability of so-called producer towards production expenses is limited to a predetermined price in lieu of which he has obtained all the possible rights from the actual person putting in labour, money and knowledge for shaping the film. Thus, the underwritten covenant in this agreement is advance sale of all rights vested with the assessee as producer of the film for a consideration of Rs 7.50 crore which includes its profit component. Even, the debit note raised by M/s Idream suggests that the consultancy fee charged is for identification and introduction of party for fund requirement. The facts of case lead to only one conclusion that M/s Sahara India is none other than financer of the project and the agreements have been drafted to secure the rights of financier in the event of termination of agreement with or without completion of project. Against the lump sum payment of Rs 7.50 crore per project M/s Sahara has secured all rights in the film in advance and in the event of premature termination, the rights are to be vested with M/s Sahara by paying the compensation to the assessee termed as "Reasonable Fee".
Thus, looking into the terms of agreement as well as surrounding circumstances, it is clearly established that it is the assessee and not M/s Sahara India TV Network who are the real producers of these films and therefore any expenditure incurred in relation to these films has to be allowed in the year of release as per provisions of Rule 9A of the Income Tax Rules".
For the reasons given above, the A.O. held that deduction claimed by the assessee on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. was not allowable in the year under consideration and accordingly a disallowance of Rs. 50 lakhs made by him on this issue in the assessment completed u/s 143(3) of the Income-tax Act, 1961 vide an order dtd. 4-1-2006.
6. Against the order passed by the A.O. u/s 143(3) of the Act, appeal was preferred by the assessee before the ld. CIT(A) and elaborate submissions were made on behalf of the assessee before the ld. CIT(A) to meet all the objections raised by the A.O. while disallowing the deduction claimed on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. The assessee also relied on various judicial pronouncements in support of the submissions made before the ld. CIT(A) to 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 crore 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 film production and film distribution, having exposure in media for more than seven years and in the line of film production and distribution of several block-buster movies like Bends-like Beckham, 16th December, Monsoon wedding, Agni Varsha, Jajantram Mamantram etc., M/s dream arranged for four contracts worth Rs.30.00 crore for the appellant. M/s Idream Production had undertaken field work like power point presentations of various scripts, commercial viability of the proposed films and also identified stories which were the proposed subject matter of the films. They had also undertaken promos and after a sustained effort on their part, Sahara Group entered into an agreement with the appellant and paid Rs.20.00 crore to the appellant as an advance. The appellant reiterated that it was due to the efforts of M/s ldream Production Pvt Ltd as introducer, that the Sahara Group entered into an agreement with the appellant. The ld. Counsel also pointed out that a commission of Rs.50.00 lakhs on total contract of Rs.30.00 crore works out to 1.66% as commission which is a reasonable commission payment made to M/s ldream Production.
After considering the arguments of the appellant, I find that there is force in the argument of the appellant that what matters is unity of control and common management and not the distinct nature of activity. I am not In agreement with the AC's view that even if the business is held to be 'set-up, the said expenditure is to be treated as pre-commencement expense and considering the nature of business i.e. contract for film production, the allowability has to be dealt within the framework of accounting for contracts or special provisions for film production business. I am not in agreement with the view adopted by the Assessing Officer. The AC has himself stated on page 6 of the assessment order that the business has been set-up but no receipts have been reflected in the return of income except the advance received from M/s Sahara India TV Network.' The fact that business was set-up is reflected in the very first of the integrated activities which the business is overall comprised of. In the case before me, the appellant had commenced the business of undertaking contract on 24.09.2002, and the incidental expenses like payment made to M/s Idream Productions Pvt Ltd being professional expense for syndicating the contract and arranging 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 paras 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 appellant has argued before me that the Rule 9A of the Income Tax Rules is applicable to film producers. The appellant has merely undertaken the contract for film production, which was akin to the contract undertaken by Contactor to construct a building for the builder. The Ld. AR tried to explain with an illustration of a contractor and a builder, Suppose the builder gives a contract to construct a building. The contactor shall construct the building & the builder shall give labour charges to the contactor for the given task. In this case, the risk of loss on sale of flats and applicability of income tax laws as may be applicable, shall apply to the builder & not to the contractor. Similarly, in the case of the appellant, the appellant is merely entitled to production fees only, like the labour charges in the case of Contactor-builder.
The point, which the appellant has tried to emphasise before me, was that the appellant has undertaken a contract to provide various film related services to M/s. Sahara India TV Network. The appellant has brought to my notice certain clauses of the agreement between the appellant & M/s. Sahara India TV Network & argued that these clearly indicates that the appellant was merely an agent to provide films production related services to M/s. Sahara India TV Network. The clause 1(a), 1(h), 1(k) & termination Clause area very important. These clauses bring out the facts that the appellant was merely an agent to provide the films related services to M/s. Sahara India TV Network. These clauses provide that the appellant has to follow various instructions of M/s, Sahara India TV Network at each and every stage of the film production. The termination clause also states that in the event of premature termination, all the rights to the main theme, story, script, concept, music etc rest with the M/s. Sahara & the appellant would entitle to a reasonable fees from M/s. Sahara".
8. Based on the above findings/observations recorded by him, the ld. CIT(A) held that Rule 9-A was not applicable in the case of the assessee and the consultancy fees of Rs. 50 lakhs paid to M/s Idream Productions Pvt. Ltd. was a deductible expenditure. Accordingly, he deleted the disallowance made by the A.O. on this issue. Aggrieved by the order of the ld. CIT(A), the Revenue has preferred this appeal before the Tribunal.
9. The ld. D.R. submitted that specific 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 upon 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 financier and distributor and the reliance of ld. CIT(A) to hold that the assessee is not a film producer was clearly misplaced. He contended that the specific adverse findings recorded by the A.O. on this aspect of the matter as well as the other aspect have not been appreciated by the ld. CIT(A) in the right perspective while deleting the disallowance made by the A.O. on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. He urged that the impugned order of the ld. CIT(A) is therefore liable to be reversed on this issue.
10. The ld. counsel for the assessee invited our attention to the submissions made on behalf of the assessee before the ld. CIT(A) as reproduced by the ld. CIT(A) in his impugned order and submitted that all the points raised by the A.O. while disallowing the assessee's claim for deduction on account of consultancy fees paid to M/s Idream Productions Pvt. Ltd. were duly and satisfactorily explained by the assessee. As regards the objection of the A.O. that the said expenditure was not incurred by the assessee in connection with the existing business, he submitted that there being unity of control and management, it was a case of expansion of business of the assessee as held by the Hon'ble Supreme Court in the case of B.R. Ltd. v. CIT [1978] 113 ITR 647 and Standard Refinery and Distillery Ltd. v. CIT [1971] 79 ITR 589 (SC) . He contended that no argument has been advanced by the ld. D.R. to dispute the position that there was unity of control and management. He further submitted that the four contracts worth Rs. 7.50 crore each were entered into by the assessee with M/s Sahara India TV Network on 24-9-2000 i.e. during the year under consideration and the business relating to film production thus was already set up by the assessee during the year under consideration as held inter alia by the Hon'ble Bombay High Court in the case of Commissioner Of Income-Tax, Bombay v. Ralliwolf Ltd. [1980] 121 ITR 262 . He contended that the expenditure in question incurred by the assessee on account of consultancy fees paid to Idream Productions Pvt. Ltd. thus was in connection with the expanded business of the assessee which was set up in the year under consideration. As regards the applicability of Rule 9-A, he contended that the same is applicable in the case of an assessee who is in the production of feature films. In this regard, he invited our attention to the relevant clauses of the agreement between the assessee and Sahara India TV Network placed on record to point out that M/s Sahara 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 financier 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 lakhs on account of consultancy fees paid to 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 was complete unity of control and management and this position has not been disputed even by the ld. D.R. at the time of hearing before us. In the case of B.R. Ltd. (supra) cited by the ld. counsel for the assessee, the Hon'ble Supreme Court held that for the purpose of ascertaining whether two lines of business constitute the same business, the decisive test is unity of control and management of the two lines of business. It was held that if there is common management and common control of the business, the new line of business constitutes expansion of the existing business.
12. As regards the stand of the A.O. that the expenditure in question on consultancy fees was pre-commencement expenditure, it is observed that the four contracts with Sahara India TV Network worth Rs. 30 crore were entered into by the assessee during the year under consideration itself i.e. on 24-9-2002 and even the advance of Rs. 20 crore was received by the assessee for the execution of the said contracts. The first important step of the business related to production of film thus was taken by the assessee in the year under consideration and the same being a vital part of an integral activity of production of films, we fully agree with the ld. CIT(A) that the business relating to production of films was duly set up during the year under consideration. In the case of Ralliwolf Ltd. (supra) cited by the ld. counsel for the assessee, the Hon'ble Bombay High Court has held that the expression "setting up" means "to place on foot" or "to establish" in contradistinction to commence. It was held that the distinction is that when a business is established and is ready to be commenced, then it can be said of that business that it is set up. It was held that any expenditure incurred during the interval between the setting up of a business and its commencement would be a permissible deduction. Keeping in view of the decision of the Hon'ble jurisdictional High Court in the case of Ralliwolf Ltd. (supra), we agree with the ld. CIT(A) that the business relating to film production was set up in the year under consideration and the expenditure in question on payment of consultancy fees having incurred by the assessee in connection with the said business, the same was allowable as deduction even though the execution of the contract work for film production was not commenced during the year 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:-
'WHEREAS. 'The PRODUCER' is in the business of producing various types of audio-visual programmes including Feature Films etc. either on its own or through commissioning the same to individual creative parties/producers, acquiring perpetual ownership of copyrights thereof for all exploitation, whether commercial or otherwise including exhibition, transmission, broadcast, telecast copying, reproduction and distribution etc. in India and Overseas across the global territory through all means, media, mechanism, format and technology etc., whether in existence or to be developed/propounded in future (when developed/propounded).
"AND WHEREAS, 'The PRODUCTION HOUSE' is in the business of producing various types of audio-visual programmes including Feature Films and assigning perpetual copyrights therein to the Contracting parties and possesses the necessary resources and expertise to properly produce the same on audio-visual/ cinematographic film medium to faithfully match, shape and emerge thereon to pre-decided theme, literary storyline converted to a script-screenplay-treatment etc., in consonance to predetermined specifications."
"II PRESENTATIONS AND DECLARATIONS BY 'The PRODUCTION HOUSE':
'The PRODUCTION HOUSE' represents and warrants to 'The PRODUCER':
14. It is manifest from the relevant portion of the agreement between the assessee-company and M/s Sahara India TV Network that the role of the assessee-company as "production house" was limited to produce the films at the instance of the producer Sahara India TV Network strictly in accordance with the concept, theme, script, production value and production schedule etc. approved by the producer. Even any alteration in the approved details was to be done with the prior written consent of the producer. M/s Sahara India TV Network was to own the exclusive, unencumbered, unrestricted and effective rights of all copyrights in perpetuity and in the global territory of the film to be produced by the assessee. The activity of production of film was to be monitored and supervised by M/s Sahara India TV Network as producer and the instructions and advice given by M/s Sahara India TV Network to the assessee, be it commercial and otherwise, was binding on the assessee as the production house. M/s Sahara India TV Network as the producer was entitled to use , exhibit, market, sell, distribute, reproduce, assign and exploit etc. the films and parts thereof as may be decided by it being perpetual and global territory holders of the films and the assessee production house was not entitled to any rights, interests and claims whatsoever except the gross consideration expressly provided in the agreement. In our opinion, all these terms and conditions of the agreement are sufficient to show that M/s Sahara India TV Network was the producer of the film as envisaged in Rule 9A and not the assessee and the said Rule therefore was not applicable in computing the business income of the assessee.
15. In view of the above discussion, we are of the considered opinion that the disallowance made by the A.O. on account of assessee's claim for deduction for consultancy fees paid to M/s Idream Productions Pvt. Ltd. was not sustainable and the ld. CIT(A) was fully justified in deleting the same. In that view of the matter, we uphold the impugned order of the ld. CIT(A) on this issue and dismiss this appeal filed by the Revenue.
16. In the result, appeal of the Revenue is dismissed.
P. SEN
provisions of Rule 9
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