IN THE ITAT MUMBAI BENCH ‘A’
K. Sera Sera Productions
versus
Commissioner of Income-tax
IT Appeal No. 3024 (Mum.) of 2012
[Assessment year 2006-07]
September 14, 2012
ORDER
B.R. Mittal, Judicial Member
The assessee has filed this appeal for the assessment year 2006-07 against the order of the Ld. CIT dated 29-03-2012 disputing the validity of the order passed u/s 263 of the Act.
2. The relevant facts are that assessee is engaged in the business of production, financing and distribution of cinematographic films.
3. There was a search action u/s 132 on 12th September, 2007 on the residential and business premises of the assessee and its group concern as well as director (s). Pursuant to the issue of notice u/s 153A of the Act, the assessee filed its return of income on 10th September, 2009 returning total income of Rs. 87,64,620/-. It is relevant to state that the assessee filed an appeal against the assessment order disputing the disallowances/additions made by the AO and the Ld. CIT(A) vide order dated 12th October, 2011 allowed the appeal of the assessee in part, a copy of the order of the Ld. CIT(A) dated 12-10-2011 is placed at pages 35 to 47 of the paper book. The Ld. CIT issued a show cause notice u/s 263 of the Act dated 09-03-2012, copy placed at page 19 of the paper book. We consider it prudent to state the contents of the said notice which are as under:
“Please refer to the assessment order passed under section 143(3) r.w.s. 153A of the Income-tax Act, 1961 dated 31/12/2009, assessing the income at Rs. 14,37,20,890/-.
On going through the details of the documents furnished during the course of assessment proceedings, it is noticed that the film “Darna Zaroori Hai” was released on 28.04.2006 as per details furnished by you during the course of assessment proceedings and also as per in formation available on internet. The cost of production of this film was Rs. 6,99,73,052/-. The entire cost of the production of the film has been claimed as expenses while computing the taxable income.
Your reference is invited to the provisions of Rule 9A of income-tax rules. In accordance with the rules, if the film is released in the last quarter of the previous year, then the expenses claimed on that particular year cannot exceed the receipts. If the expenses claimed on making a film exceed the revenue generated in that particular year, then the balance amount of the expenses is to be allowed in the subsequent year. As already mentioned, the picture “Darna Zaroori Hai” was not released in this year and accordingly, you are not entitled to any expenses of Rs. 6,99,73,052/-.
The Assessing Officer has allowed this expense while framing the assessment order. The order of the assessing officer is, therefore, erroneous and prejudicial to the interest of revenue as the deduction of Rs. 6,99,73,052/- on account of expenses on making the film “Darna Zaroori Hal” was allowed, whereas the same is not allowable.
You are required to explain why it should not be held that the order of I the Assessing Officer is erroneous and prejudicial to the interest of revenue. You are also requested to explain why the issue should not be restored back to the file of the Assessing Officer for fresh consideration.”
The assessee filed its submissions disputing the initiation of revisionary proceedings u/s 263 of the Act. It was contended, inter alia, that the assessee sold its share of 25% theatrical rights in the film “Darna Zaroori Hai” to M/s Varma Corporation Ltd. on 11-03-2006. Since the film is sold in the current year before its release, in accordance with the provisions of Rule 9A, the entire cost of the production of the film is to be allowed as expenses. The assessee also contended that during the course of assessment proceedings the AO examined the allowability of the expenses. He considered the amount of Rs. 24.84 crores debited to the profit & loss account on account of cost of various films and the AO disallowed Rs. 2,34,91,380/- after considering the various details filed by the assessee. It was also contended that the disallowance made by the AO was examined by the Ld. CIT(A) and he reduced the disallowance to Rs. 4,01,467/-. The AO, after proper enquiry and examination of the details as submitted by the assessee and after proper application of mind, allowed the claim of deduction of expenses in terms of Rule 9A of Rs. 24,84,37,124/-, hence it cannot be said that the AO had not applied his mind. The AO had taken a possible judicial view. Therefore, the assessment order passed by the AO is not erroneous.
4. The Ld. CIT did not accept the contention of the assessee and after discussing the provisions of sec. 263 of the Act has stated that the AO had not properly looked into the facts of the case. Part of the blame also lies on the assessee, which has misled the AO to various issues. In the profit & loss account the assessee has shown profit of Rs. 13,67,69,626/- whereas while computing the taxable income, the assessee had taken the profit at Rs. 2,67,69,626/-. Thus, the assessee has taken the profit less by an amount of Rs. 11 crores while computing its taxable income. The Ld. CIT has stated that as per the details of income, income from operations is Rs. 37,43,28,823/- and this income includes income of Rs. 11,25,00,000/- from the film “Darna Zaroori Hai”. Since the assessee had shown income from this film there is no question of disallowing the expenses under the provisions of Rule 9A. However, the assessee for the first time vide letter dated 5-12-2009 claimed before the AO that it has wrongly shown excess income of Rs. 11 crores under the head “income from operations in view of the film “Darna Zaroori Hai” and submitted that that amount was share application money received. The AO did not believe this submission of the assessee and treated the same as revenue receipt. The AO has taken the income from operations of film which is more than the cost of the production of the film, there was no question of disallowance of any expenses as per Rule 9A of I.T. Rules. The AO has not examined this issue and allowed the claim of the assessee after taking view on the issue. The Ld. CIT(A) vide his order dated 12th October, 2011 accepted the stand of the assessee that Rs. 11 crores which was debited as income from operations, was actually share application money received and accordingly, the addition made by the AO was deleted. The Ld. CIT has stated that Ld. CIT(A) never looked into the applicability of the provisions of Rule 9A in the case of the assessee as it was not part of grounds of appeal before the Ld. CIT(A). The Ld. CIT stated that the expenses claimed are more than the revenue earned and accordingly the expenses were not allowable in the current year. As per Rule 9A, expenses can be allowed only upto the extent of income earned if a part of release of film is less than 90 days in the current previous year. This makes the order of AO erroneous. The Ld. CIT has also stated that the assessee never claimed before the AO that it has sold the rights of exhibition over the film “Darna Zaroori Hai” on 11th March, 2006. Thus, assessee has hidden this crucial fact from the AO. The Ld. CIT has stated that AO has not properly examined how the expenses of the assessee incurred for the production of film “Darna Zaroori Hai” is allowable as deduction in the current year i.e. A.Y 2006-07. That the claim of the assessee that AO has taken one possible view is not acceptable. He has stated that assessment order is not only erroneous but is also prejudicial to the interests of the revenue because lawful revenue due to State could not be collected as a result of the order. The Ld. CIT has stated that the order passed by the AO u/s 143(3) r.w.s. 153A on 31-12-2009 is erroneous and prejudicial to the interests of the revenue. The same is set aside. The Ld. CIT has directed the AO to pass a fresh assessment order after enquiring and deciding the following issues :
• Whether the assessee had sold its share of theatrical rights in the film to M/s RGV for Rs. 25,00,000/- as is claimed by it. He should give specific finding whether this claim of the assessee is acceptable or not?
• If it is found that assessee has sold its share in film, the assessing officer will examine whether all revenue accrued to it from film especially amount to be received from M/s Sahara is taxable as revenue receipts in current year or not?
• He will examine as to whether any part of the cost of production of film is allowable in current year as film was released on commercial basis in next year?
He has stated that the AO will examine these issues and will pass a fresh assessment order after giving sufficient opportunity of being heard, if he is deciding the issue against the assessee. Hence the appeal by the assessee.
5. During the course of hearing Ld. A.R. submitted that the AO while making the assessment order asked the assessee vide notice u/s 142(1) dated 18-12-2009 to furnish details of cost of production allowable as per I.T. Rules, 9A of Rs. 27.19 crores. That the assessee vide letter dated 29-12-2009 furnished the details of claim of cost of production and the AO after examining the facts and applicability of provisions of law and proper application of mind accepted the deduction to the extent of Rs. 24,84,27,124/- and disallowed the claim to the extent of Rs. 2,34,91,380/-. To substantiate his above submission Ld. A.R. referred to para-10 of the assessment order dated 31-12-2009. Ld. A.R. submitted that against the said disallowance made by the AO, assessee filed an appeal before the CIT(A) and Ld. CIT(A) vide order dated 12-10-2011, copy placed at pages 35 to 47 of the paper book, confirmed the disallowance to the extent of Rs. 4,01,467/- out of disallowance of Rs. 2,34,91,380/- made by the AO and that too after seeking the remand report from the AO. Ld. A.R. submitted that the copy of the said remand report is also placed at pages 48 to 50 of the paper book. He submitted that the said order of the AO merged with the order of the Ld. CIT(A) much before the CIT issued notice u/s 263 of the Act dated 09-03-2012. The Ld. A.R. submitted that the ld. CIT(A) while considering the cost of production, examined Rule 9A of I.T. Rules and to substantiate his submissions he referred to paras 2.1 to 2.4 of the order of Ld. CIT(A). He submitted that the AO also considered Rule 9A in his remand report in considering the claim of deduction of cost of production. He submitted that the computation of claim of cost of production of feature film “Darna Zaroori Hai” was a subject matter of appeal before the Ld. CIT(A) and Ld. CIT(A) had given his finding on the claim of cost of production after due consideration of remand report submitted by the AO. Therefore, the revisionary jurisdiction of Ld. CIT u/s 263 of the Act cannot be invoked as the order of the AO was merged with the order of the Ld. CIT(A). To substantiate his submissions, the Ld. A.R. placed reliance on the decision of ITAT Mumbai Bench in the case of Sonal Garments v. Jt. CIT [2005] 95 ITD 363 and submitted that it was held that the Commissioner could not revise the assessment order u/s 263 in respect of an issue of computation of deduction u/s. 80HHC as the same was subject matter of appeal before the ld. CIT(A), who had also given certain finding on that respect. The Ld. A.R. also referred to the decision of the ITAT Mumbai Bench in the case of Marico Industries Ltd. v. Asstt. CIT [2009] 27 SOT 73 (URO), decision of Hon’ble Gujarat High Court in the case of CIT v. Nirma Chemicals Works (P.) Ltd. [2009] 309 ITR 67 and the decision of Hon’ble Bombay High Court in the case of CIT v. Saraf Bandhu (P.) Ltd. [1995] 216 ITR 833. Besides the above, Ld. A.R. also submitted that the Ld. CIT while passing the impugned order u/s 263 of the Act has also gone beyond the reasons stated in the show cause notice in respect of the claim of Rs. 25 lakhs and also gave direction to the AO to examine whether revenue accrued to the assessee from the film especially the amount received from M/s Sahara is taxable as revenue receipt in the year under consideration or not. He submitted that the Ld. CIT without stating the said issue in the show cause notice, cannot give such direction to the AO as it is beyond the reasons given in the show cause notice issued u/s 263 and to substantiate his submissions relied on the decision of the ITAT, Kolkata Bench in the case of Viper Estates & Investments (P.) Ltd. v. CIT, dated 29-12-2011 in I.T.A. No. 890/Kol/2010, the decision of ITAT Mumbai bench in the case of Geometric Software Solutions Co. Ltd. v. Asstt. CIT [2009] 32 SOT 428 (Mum.). The Ld. A.R. submitted that the impugned order of Ld. CIT is not valid and thus the same should be quashed.
6. On the other hand, Ld. DR justified the action of the ld. CIT to invoke jurisdiction of sec. 263 of the Act. She submitted that ld. CIT(A) had not considered applicability of Rule 9A as stated by ld. CIT in para 12 of the impugned order and, therefore it cannot be said that the order of the AO had already been merged with the order of ld. CIT(A). Ld. DR further submitted that the remand report submitted by the AO to the ld. CIT(A) was limited, and did not deal with the applicability of Rule 9A of the I.T. Rules in full. The Ld. DR further submitted that the assessee did not place before the AO the sale of rights in the film “Darna Zaroori Hai” at the time of assessment proceedings and only contended for the first time before the ld. CIT and, therefore, ld. CIT is also justified to give further direction to the AO while setting aside the assessment order and directing him to pass a fresh assessment order.
7. We have carefully considered the orders of the authorities below and the submissions of learned representatives of the parties. We have also considered the cases cited before us and the relevant pages of the paper book, along with the remand report, copy placed at pages 48 to 50 of the paper book, and the order of the ld. CIT(A) dated 12-10-2011, copy placed at pages 35 to 47 of the paper book. We consider it prudent to refer to the provisions of sec. 263 of the Act which read as under:
263. (1) The Commissioner may call for and examine the record of any [Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
[Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
