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INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B”, HYDERABAD

ITA No. 1368/Hyd/2014 Assessment Year: 2009-10
M/s Gemini Film Circuit (Appellant) vs Dy. Commissioner of Incometax (Respondent)
Date of Order: 08-01-2016

ORDER

PER S. RIFAUR RAHMAN, A.M.:

This appeal is preferred by the assessee against the order of CIT-I, Hyderabad dated 17/02/2014 for the AY 2009-10.

2. Brief facts of the case are, assessee company carrying on the business of production of Motion Picture Films has filed its return of income on 30/09/2009 admitting loss of Rs. 37,56,441/-. The case was selected for regular assessment and assessment was completed u/s 143(3) of Income-tax Act, 1961 (in short ‘Act’) and accepted the returned loss as per the return of income.

3. Subsequently, the ld. CIT while verification of the assessment records, noticed that in the computation of income filed along with the return of income, assessee had reduced an amount of Rs. 3 crores as cost of abandoned film (Varalaru). The CIT was of the view that the cost of abandoned film was stated to be picture rights of the cinematographic film ‘Varalaru’ and the film rights were contributed as capital by one of the partner of the firm, the cost of the picture rights represent capital assets and when the same was written off, it cannot be allowed as revenue expenditure. Ld. CIT considered the assessment made by the AO u/s 143(3) as erroneous and prejudicial to the interests of revenue. Also, the ld. CIT has noted that assessee had not debited the expenditure of cost of abandoned film (Varalaru) amounting to Rs. 3 crores in its final accounts and only showed as deductible expenditure in the computation of income, the same was reduced evidently to make good the disallowance of cost of remake rights on the film “Lageraho Munnabai’ amounting to Rs. 3 crores. According to ld. CIT, the film was not abandoned during the FY 2008- 09. Since the AO had not called for the details of the cost of abandoned film contributed by the partner of the firm and terms and conditions relating to the same and not made the correctness of the above claim, the CIT set aside the order passed by the AO u/s 143(3) citing the above observations.

4. Aggrieved with the above order of ld. CIT, the assessee is in appeal before us and has raised 12 grounds of appeal and the sum and substance of which are the order passed by the ld. CIT is without jurisdiction and is liable to be quashed.

5. Before us, the ld. AR submitted that the CIT had initiated the proceeding u/s 263 based on the observation that the film abandonment has not debited to accounts and the same has been claimed only in the computation of total income. In this connection, he submitted that this cannot make any difference to the claim of the assessee in as much as the allowability of the claim has to be decided based on the provisions of law and the existence or not of entries in the books of account cannot be a decisive or conclusive in the matter. For this proposition, he relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Kedarnath Jute Manufacturing Company, 1971 AIR 2145. Referring to the CIT’s observation that remake rights are capital asset, ld. AR submitted that the picture rights are held as stock-in-trade and assessee has disclosed as such in the books of account and consistently following the same, therefore, it cannot be considered as capital asset since the assessee is in the business of production and distribution of films and the film rights are held as stock-in-trade. Referring to the CIT’s observation that film rights are capital asset as the same was contributed as capital, ld. AR submitted that the same should be treated as revenue expenditure as the same has to be considered as per the provisions of law. As the assessee was in the business of production and distribution of films, it is irrelevant to consider the mode of acquisition as the remake rights contributed as part of capital contribution by partner does not in any way change the character of the asset in the hands of assessee.

6. The ld. DR, on the other hand, submitted that invoking powers u/s 263 by the CIT was justified in view of the fact that AO has not applied his mind in treating the film rights in the books of account and the accounting treatment of abandonment of film. He further submitted that the AO had completed the assessment u/s 143(3) without examining the abandonment of film in the books of account and accepted the claim of assessee without proper verification. Ld. DR also relies on the order of CIT passed u/s 263 and relied on the following judicial pronouncements:

1. ITO Vs. Induflex Products (P) Ltd., 280 ITR 1

2. Saint Gobain Glass India Ltd., Vs. DCIT, [2015] TaxPub (DT) 3528 (Chen-Trib)

3. Krishnam Raju Penmetsa Vs. ITO, 2015 TaxPub(DT) 3456 (Hyd-Trib)

7. We have considered the submissions of both the counsels and perused the material facts on record as well as the decisions cited. We are of the view that we agree with the submissions of the ld. AR that remake rights are revenue in nature as the same was treated in the books of account as stock-in-trade by the assessee and also considring the nature of the business of the assessee, viz., production and distribution of films. On the grievance that the assessee has brought the film remake rights as capital contribution from one of the partner, we observe that incoming assets will not change the character as per the source of capital or the source of finance. The basic character of the assets will remain the same as long as it has the character of fixed assets. On the other hand, the assessee has claimed the abandonment of film, namely, ‘Varalaru’ has abandoned during the year under consideration, but, it has continued to treat the same asset as stock-in-trade. On verification with the ld. AR, it was brought to our notice that the same was continued to be treated as stock-in-trade till now. It was not written off in the books of account, but, the assessee claims that it was abandoned in the year under consideration. Assessee proclaims the abandonment of this film ‘Varalaru’ only in the return of income which was submitted for tax purposes whereas it has not produced any cogent evidence for the above said claim of abandonment of film. It is important to note that the books of account plays significant role in communicating the actions, policies and accounting standards of the assessee to the general public, in particular, to the taxing authorities. The assessee cannot claim something in the return of income and follows something in the books of account. It is apparent that the actions of the assessee are inconsistent. In view of the above observations, we are of the view that the CIT has justified in invoking powers u/s 263 in setting the assessment made by the AO u/s 143(3), as the assessment order is erroneous and prejudicial to the interests of revenue. He is justified in giving proper directions to AO u/s 263 of the Act. Accordingly, we uphold the order of the CIT passed u/s 263 of the Act and dismiss the grounds raised by the assessee.

8. In the result, appeal of the assessee is dismissed.

Pronounced in the open court on 8th January, 2016.

 (P. MADHAVI DEVI)                (S. RIFAUR RAHMAN)
JUDICIAL MEMBER                ACCOUNTANT MEMBER

Abandoned film written off but continued in stock in trade. Assessee cannot claim something in return of income and follow something in books of account-ITAT | 10-01-2016 |