By K. B. BHUJLE
Advocate
16
CIT vs. Dharma Productions Ltd.;
[2019] 104 taxmann.com 211 (Bom)
Date of order: 19th March,
2019
A.Y.s: 2006-07 and 2009-10
Section
37(1) and Rule 9A of ITR 1962 – Business expenditure – Where assessee was
engaged in business of production and distribution of films, cost of prints as
well as publicity and advertisements incurred after production as well as their
certification by Censor Board, the same would not be governed by Rule 9A, they
would be allowable as business expenditure u/s. 37(1)
The
assessee was engaged in the business of production and distribution of feature
films. The assessee claimed expenditure incurred for positive prints of feature
films and further expenditure on account of advertisements. The A.O. noticed
that these expenditures were incurred by the assessee after issuance of
certificate by the Censor Board and, hence, he disallowed the assessee’s claim
holding that such expenditure was not allowable deduction in terms of Rule 9A
and Rule 9B.
The Commissioner (Appeals), confirmed the
disallowance stating that any expenditure which was not allowable under Rule 9A
could not be granted in terms of section 37; thus, he held that the expenditure
on the prints and publicity expenses are neither allowable under Rule 9A nor
u/s. 37. However, the Tribunal allowed the assessee’s claim.
On appeal
by the Revenue, the Bombay High Court upheld the decision of the Tribunal and
held as under:
“i) Sub-rule
(1) of rule 9A provides that in computing the profits and gains of the business
of production of feature films, 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 would be allowed in accordance with the provisions of
sub-rule (2) to sub-rule (4).
ii) Clause (ii) of Explanation to sub-rule
(1) explains the term ‘cost of production’ in relation to a feature film as to
mean expenditure incurred for preparation of the film but excluding (a)
expenditure incurred in preparing positive prints, and (b) expenditure
incurred in connection with advertisement of the film after it is certified for
release by the Board of Film Censors. The sub-rules (2) to (4) of rule 9A make
special provisions for deduction in respect of profits and gains of the
business of production of feature films. For example, in terms of sub-rule (2)
of rule 9A, 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 sells
all rights of exhibition of the film, the entire cost of production of the film
shall be allowed as a deduction in computing the profits and gains of such
previous year. However, if the film producer either himself exhibits the film
on a commercial basis or sells the rights of exhibition of the film in respect
of some of the areas, or he himself exhibits the film in certain areas and sells
the rights in the rest and the film is released for exhibition at least 90 days
before the end of such previous year, the cost of production of the feature
film will be allowed as a deduction in computing the profits and gains of such
previous year. As per sub-rule (3) of rule 9A, if the feature film is not
released for exhibition on a commercial basis at least 90 days before the end
of previous year, a different formula for allowing the cost of production would
apply. These provisions thus make a special scheme for deduction for cost of
production in relation to the business of production of feature films. One
thing to be noted is that no part of the cost of production as defined in
clause (ii) of Explanation to sub-rule (1) is to be denied to the
assessee permanently. It is only to be deferred to the next assessment year
under certain circumstances.
iii) All these provisions would necessarily be
applied in relation to the cost of production of a feature film. In other
words, if a certain expenditure is claimed by the assessee by way of business
expenditure, which does not form part of cost of production of a feature film,
rule 9A would have no applicability. In such a situation, the assessee’s claim
of expenditure would be governed by the provisions of the Act. If the assessee
satisfies the requirements of section 37, there is no reason why such
expenditure should not be allowed as business expenditure. To put it
differently, the expenditure that would be governed by rule 9A of the Rules
would only be that which is in respect of the production of the feature film.
iv) In the instant case, the cost of the print and
the cost of publicity and advertisement (which was incurred after the
production and certification of the film by the Censor Board) are under consideration.
These costs fail to satisfy the description ‘expenditure in respect of cost of
production of feature film’. The term ‘cost of production’ defined for the
purpose of this rule specifically excludes the expenditure for positive print
and cost of advertisement incurred after certification by the Board of Film
Censors. What would, therefore, be governed by the formula provided under rule
9A is the cost of production minus these costs. The Legislature never intended
that those costs which are in the nature of business expenditure but are not
governed by rule 9A due to the definition of cost of production are not to be
granted as business expenditure. In other words, if the cost is cost of
production of the feature film, it would be governed by rule 9A. If it is not,
it would be governed by the provisions of the Act. The Commissioner was,
therefore, wholly wrong in holding that the expenditures in question were
covered under rule 9A and therefore not allowable. The Tribunal was correct in
coming to the conclusion that such expenditure did not fall within the purview
of rule 9A and, therefore, the assessee’s claim of deduction was governed by
section 37.”
