TIOL Update, Wednesday, Jun 07, 2017

The assessee, Dharma Productions Pvt Ltd, is a company engaged in the business of distribution of cinematic films as well as production of films. The assessee filed e-return for AY 2006-07 The case was taken up for scrutiny during which AO called for various explanations and evidence including the books of accounts and vouchers to justify the claim of expenditure debited in the profit and loss account. All the requisite details as well as explanations were submitted as sought. After scrutiny of these details, the AO assessed the income at Rs.6,75,23,446/- as against the declared income of Rs.3,65,65,066/-. The AO made an addition of Rs.3,09,58,380/- on various counts to the assessee's income. The DCIT, stated that since the tax computed under regular provisions of the Act was more than the tax computed u/s 115JB, the total income was taken at Rs.6,75,23,446/-. It was further directed to Charge interest u/s 234B and 234C of the Act, as applicable and penalty proceedings u/s 271(1)(c) were initiated. Upon appeal, CIT(A) enhanced the income of the assessee by Rs.2,67,73,568/-. The AO was directed to tax the said amount accordingly. The said appellate authority, however, modified the amount in relation to disallowance of society charges on the ground that incorrect computation was done by the AO. The order further directed penalty proceedings for filing inaccurate particulars of income and thereby concealment of income of Rs.2,67,73,568/-. CIT(A) passed an order u/s 273(1)(c) of the Act and imposed minimum penalty of Rs.90,11,984/-. The orders were challenged by the assessee by preferring appeals before the Tribunal. The Tribunal partly allowed the quantum appeal and also allowed the penalty appeal of the assessee. Revenue preferred two appeals and raised certain questions of law.

After hearing the parties, the High Court held that,

Whether deletion of certain expenditure by Tribunal even when the expenditure does not form part of cost of production in terms of Rule 9A, would give rise to a substantial question of law - YES: HC

++ after perusing the orders passed by AO and by CIT (A) u/s 271(1)(c) and the impugned order passed by the Tribunal along with Revenue's appeals, it was found that as far as the question decided by the Tribunal with regard to deletion of addition of Rs.41,43,240/- on account of expenditure incurred for positive prints and addition of Rs.2,26,30,328/- on account of expenditure incurred in connection with advertisement and publicity, these expenditures were not part of cost of production of the film under the provisions of Rule 9A and requires consideration. Thus the first appeal deserves to be admitted on the said issue. Similarly, the issue raised in second appeal is related to the aforesaid issue and hence deserves consideration by admitting the said appeal.

Whether an expenditure can be allowed u/s 37(1) if assessee has established that payment has been made as per the agreement between parties and against services rendered under such agreement - YES: HC

++ it was observed that existence of agreement between the parties has not been disputed by the authorities but the payment in question has been disallowed on account that no service was rendered by RCEPL and consequently it was held that the expenditure was not for the purpose of business. It was observed that the assessee company is owned by Mr. Karan Johar and RCEPL is owned by Mr.Shahrukh Khan. Both are known personalities of Indian film industry. The authorities have not disputed the fact of providing services by Mr.Shahrukh Khan in the production and marketing of the film `Kaal'. The film was released under joint banner of Karan Johar and Shahrukh Khan which itself is an material aspect of marketing and publicity of the film. Undisputedly, Mr.Shahrukh Khan has performed in the title song of the film and for which no separate payment has been made by the assessee. Further, it is evident from the terms and conditions of the agreement that RCEPL shall provide necessary contribution in the field of concept, characterization, dialogue, music, theme etc. in the production of the film. Thus, functions are creative in nature and require personal and professional expertise and, therefore, the confirmation of the party regarding rendering of the services itself is a material evidence. If the parties to the agreement admitted the role and function of creative work in the film, then, in the absence of any contrary material, the confirmation cannot be doubted. T he AO and the CIT(A) have placed much reliance on the fact that the services are required by Mr.Shahrukh Khan and not by RCEPL. The Tribunal disagreed with the said view on the ground that the services are creative in nature and demand personal expertise and talent which could be rendered by somebody on behalf of the company. Therefore, when no separate payment was made or alleged to have been made to Mr.Shahrukh Khan for the services rendered and when the parties have confirmed that, all the services are rendered under the agreement, then only inference can be drawn from the given facts and circumstances is that the services rendered by Mr.Shahrukh Khan are on behalf of RCEPL and under the contractual obligation.

++ it was further observed that apart from the services of creativity, the assessee also claimed that RCEPL provided the cinematographic equipment for the production of the film. It is to be noted that the equipments are essential and inevitable for production of the film. There cannot be a case that the assessee has not used the equipment in production of the film. One important aspect of the matter is that the assessee has not booked any expenditure in respect of the hire charges of these very equipments. Hence the claim cannot be termed as bogus claim. The assessee has given the comparative chart of the equipment hire charges of various films and contended that the hire charges are very less in comparison to the other film. It is further observed that from the chart, it is clear that higher charges of the equipments of film `Kaal' is less in comparison to other films. This fact has not been disputed by the Revenue. It was further observed that the assessee has produced the confirmation of RCEPL in that regard and no finding has been given that the confirmation is false. The assessee filed bills of transportation of equipments issued in the name of RCEPL. Even otherwise, the AO has not given any finding that the bills are bogus. The Tribunal, therefore, came to the conclusion that the assessee has established that the payment has been made as per agreement between the parties and against the services provided by RCEPL and hence it is allowable u/s 37(1) of the Act. The other findings of the Tribunal also do not call for interference. They cannot be termed as perverse or vitiated by any error of law apparent on the face of the record. The appeal is dismissed to this extent.

Revenue's appeal partly allowed