Income Tax Appellate Tribunal - Mumbai
Sagar Sarhadi, Mumbai vs Assessee on 3 May, 2010
Sagar Sardhadi
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ' E' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI R K PANDA, AM & SHRI VIJAY PAL RAO, JM
ITA No. 5525/Mum/2010
(Asst Year 2007-
2007-08)
08)
Sagar Sardhadi Vs The Income Tax Officer
30/363 Sardar Nagar Ward 11(1)(4), Mumbai
Sion (E)
Mumbai 22
(Appellant) (Respondent)
PAN No. AAQPS1834G
Assessee by Dr K Shivram
Revenue by Sh O A Mao
Dt.of hearing 11TH Jan 2012
Dt of pronouncement 20th,Jan 2012
ORDER
PER VIJAY PAL RAO, RAO, JM This appeal by the assessee is directed against the order dated 3.5.2010 of the CIT(A) for the AY 2007-08.
2 The assessee has raised the following grounds in this appeal:
I. Additional evidence -- Rule 46A
1. The learned CIT(A) erred in not entertaining additional evidence under rule 46A being letter from M/s. Boobna Entertainment Pvt. Ltd. without giving any reason for doing so and also without appreciating that the said letter goes to the root of the issue, hence the additional evidence may be admitted and issue may be decided after considering the additional evidence.
2. Merit: Addition of Rs. 20.35,425/- to closing stock.
2.1 The learned CIT(A) erred in confirming order of Assessing officer making addition to closing stock of Rs. 20,75,425/- without appreciating that the appellant had valued the closing stock at cost or market value 2 Sagar Sardhadi which ever is less on the basis of accepted principle of accountancy and hence enhancing the value of stock at Rs. 20,75,425/- is without any basis and liable to be deleted.
2.2 Without prejudice to above, the enter cost of feature film amounting to Rs.46,00,425/- may be allowed as the business loss of the relevant year.
2.3. Without prejudice to above, the learned CIT(A) failed to give consequential direction to allow write off of entire cost of production in A.Y. 2006-07 as per Rule 9A(4), hence necessary direction may be given to A.O. to allow the same in the A.Y. 2006-07.
2.4 Without prejudice to above the learned CIT(A) failed to give consequential direction to increase the opening stock of subsequent year by Rs.25,25,000/-, hence necessary direction may be give to increase the opening stock of the A.Y. 2007-08.
Ground nos 1 & 2.1.
3 The assessee is an individual and in the business of production of TV Serials/film. During the course of assessment proceedings, the Assessing Officer noted from the P&L account that the assessee has valued the closing stock at Rs.25,25,000/- against the opening stock of Rs. 46,00,425/-. The assessee has thus booked a paper loss of Rs. 20,75,445/-. The Assessing Officer asked the assessee to explain such valuation and consequent loss. In response, the assessee filed its reply vide letter dated 7.10.2009. The main submission of the assessee before the Assessing Officer was that the assessee has produced an art film 'Chusuar' in the financial year 2003-04 and carried forward the same as closing stock of Rs. 46,00,425/-. The assessee made a low budget film with unknown artists in order to keep the cost of production low. However, unfortunately the cost of production actually went double the budget intended or expected by the assessee. Because of unknown artists, high cost of production and current trends of corporate commercial film, an art movie "Chausar' could not be sold. Since the film does not have any buyers, the assessee has re-valued the closing stock of the film as on 31.7.2007 at cost or net realizable value whichever is lower and valued the closing stock at Rs.25,25,000/-. 3
Sagar Sardhadi 3.1 The Assessing Officer did not agree with the explanation of the assessee and observed that the assessee has artificially reduced the market value of the closing stock without any basis. Further, in the absence of any evidence revaluation of stock was not justified in view of the Assessing Officer. Accordingly, following various orders of the Tribunal as well as the decision of the Hon'ble jurisdictional High Court in the case of Sadichha Chitra v. Commissioner of Income-tax reported in 189 ITR 774, the Assessing Officer held that as per Rule 9A(5) of the I T Act, no deduction shall be allowed unless the film producer has himself exhibited the film on a commercial basis or has sold the rights of exhibition of feature film or sold the rights of exhibition in some area. Accordingly, the Assessing Officer disallowed the reduction in value of the closing stock and added back an amount of Rs. 20,75,425/- to the closing stock. 4 On appeal, the assessee filed a letter dated 20.3.2007 before the CIT(A) as additional evidence in support of valuation of the closing stock/market value of the film. The CIT(A) did not admit the additional evidence on the ground that the said evidence was not produced before the Assessing Officer despite sufficient opportunities. On merit also the CIT(A) concurred with the view of the Assessing Officer.
5 Before us, the ld AR of the assessee has submitted that the additional evidence was not filed before the Assessing Officer as the same was not specifically called for by the Assessing Officer. He has further submitted that since the additional evidence goes to the root of the issue of valuation of closing stock; therefore, in view of Rule 46A(4), the CIT(A) ought to have allowed the additional evidence. He has relied upon the decision of the Hon'ble jurisdictional High Court in the case of Smt Prabhavati Shah vs CIT reported in 231 ITR 1. The ld AR has further submitted that the assessee produced the film/TV serial for 4 Sagar Sardhadi Prasar Bharati since the TV serial was not shown last so many years; therefore, the value was shown at Rs. 25,25,000/-, which was based on commercial decision taken on the basis of trade enquiries with Boobna Entertainment Pvt Ltd which is in this line of business. He has relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs British Paints India Ltd reported in 188 ITR 44 and submitted that the Hon'ble Supreme Court has held that the assessee is entitled to value the closing stock either at cost or market price whichever is less. He has referred the letter dated 20th March 2007 placed at page 75 of the paper book written by M/s Boobha Entertainment Pvt Ltd and submitted that the assessee has valued the closing stock on the basis of the value as offered by M/s Boobha Entertainment Pvt Ltd.
5.1 On the other hand, the ld DR has submitted that the assessee has produced nothing before the Assessing Officer despite specific enquiries made by the Assessing Officer. He has further submitted that no reason has been explained for non production of evidence before the Assessing Officer. Therefore, alleged additional evidence is an afterthought and self serving document procured by the assessee. He has relied upon the decision of the Hon'ble Allahabad High Court in the case of Mohindar Kaur (Smt.) v. Central Government reported in 104 ITR 120 and submitted that when the assessee has not explained the sufficient reasons for not producing the evidence during the assessment proceedings, then the alleged additional evidence cannot be admitted. On merit, the ld DR has submitted that this is an artificial reduction in the value of closing stock to book the paper loss against the income of the year under consideration. He has relied upon the orders of the lower authorities. 6 We have considered the rival contention as well as the relevant material on record. The assessee has sought the additional evidence to be admitted in 5 Sagar Sardhadi support of the claim of valuation of closing stock by filing letter dated 20.3.2007. In the normal circumstance as per Rule 46A, the assessee is not permitted to produce any evidence before the CIT(A) other than the evidence produced by the assessee during the course of proceedings before the Assessing Officer. However, Rule 46A(1) itself provides certain exception under which the additional evidence can be produced before the CIT(A). For ready reference, we quote Rule 46A(1) as under:
(1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the 1[Assessing Officer], except in the following circumstances, namely :--
(a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or
(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or
(c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or
(d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.
6.1 The assessee's case does not fall in any of the exemption as enumerated in the sub.sec.(1) of Rule 46(A). The assessee has explained before us that because the Assessing Officer has not specifically called for the evidence, therefore the assessee did not file the same before the Assessing Officer. It is pertinent to note that the Assessing Officer has raised a specific query whereby the assessee was asked to explain such valuation and subsequent loss. The assessee filed its reply vide letter dated 7.10.2009. Therefore, the assessee was given sufficient opportunities to explain and substantiate its claim of revaluation of closing stock. Further, the assessee is seeking the additional evidence being letter dated 20.3.2007 whereas the reply to the query of the Assessing Officer was filed on 7.10.2009. When the assessee has not explained any cause which 6 Sagar Sardhadi has prevented from producing the said evidence before the Assessing Officer, then the production of the intended additional evidence, in our view is an afterthought because had the said evidence was in existence when the Assessing Officer raised the query and the assessee filed the reply dt 7.10.2009, in all probabilities, the assessee would have filed the same. Even otherwise when the case of the assessee does not fall in any of the exception provided under sub.rule(1) of Rule 46A, then the assessee cannot claim the same as a matter of right.
6.2 As regard sub.rule(4) of Rule 46A that is a discretionary power of the CIT(A) to direct the production of any document, or the examination of any witness for proper adjudication of the case.
6.3 Sub.Rule (1) of Rule 46A is for the benefit of the assessee and provides the opportunity to file any evidence before the CIT(A), if because of the reasons enlisted in the exceptional circumstances, the assessee could not file the same before the Assessing Officer whereas sub.rule (4) empowers the CIT(A) to direct the production of any document or the examination of any witness to enable him to dispose of the appeal. Thus, the exercise of power under sub.rule (4) of Rule 46A is for disposal of the appeal and to find out the correct facts necessary for adjudication of the appeal or any substantial cause which means filing any document or to be produced or witness to be examined as per directions under sub rule (4) may be against the assessee. Hence, the assessee cannot claim any right under sub.rule (4) of Rule 46A for producing of any document which otherwise cannot be produced under sub. Rule (1) of Rule 46A. 6.4 The Hon'ble Allahabad High Court in the case of Smt Mohindar Kaur (supra) has held as under:
7
Sagar Sardhadi "Sub-rule (1) of the said rule lays down the circumstances in which alone the appellant is entitled to produce additional evidence. Sub- section (4) preserves the power of the Appellate Assistant Commissioner to make further inquiry as contemplated by section 250 of the Act. Thus, it is clear that no part of rule 46A whittles down or impairs the power to make further inquiry conferred upon the Appellate Assistant Commissioner by section 250 of the Act.
Similarly, sub-section (5) of the said section confers a power on the Appellate Assistant Commissioner to permit the appellant to raise a fresh point. This power has not been even touched by rule 46A. Previously, the appellant had no right to adduce additional evidence. The Appellate Assistant Commissioner could permit the production of additional evidence if he thought it was necessary to enable him to dispose of the appeal, or if he thought it fit to make further inquiry ; but under sub-rule (1) of rule 46A the appellant had a right to produce additional evidence in the circumstances mentioned in its various clauses.
We are unable to agree with the submission that rule 46A or its sub clauses is ultra vires section 250 or 251 of the Act. The rule does not affect the power of the Appellate Assistant Commissioner conferred upon him by that rule. It in addition gives a right to the appellant in the matter of production of additional evidence."
7 As regards the value of the closing stock, the assessee has claimed valuation on the basis of market value of the film and relied upon the letter dated 20.3.1007. The deduction in respect of cost of production of feature film is allowed as per Rule 9A of the I T Rules; therefore, if the assessee is not entitled for deduction of the cost of the production under Rule 9A, then the assessee is not permitted to book the artificial loss by reducing the value of the closing stock on the ground that the market value of the feature film is less than the cost of production. The value of the stock no doubt can be at cost or realisation value whichever less; but that only in the case is where the entire cost of the stock has already been debited to the P&L account and allowable under the provisions of the Act. Where the cost of production of the film cannot be allowed as deduction until and unless the conditions as specified under Rule 9A are satisfied, then 8 Sagar Sardhadi such deduction cannot be permitted by adopting an indirect method of reducing the value of the closing stock.
7.1 A bare reading of Rule 9A shows that the deduction in respect of the expenditure on production of feature film is allowable to the case of the film producers in accordance with the provisions made under the said rule. 7.2 The controversy regarding the valuation as well as depreciation only the cost of the film brought to end by insertion of Rule 9A w.e.f 1.4.1976. Thus, rule 9A was inserted to end the controversy regarding valuation of the film at the end of the year and provision has been made for allowing the deduction of the total cost of the production of feature film. Therefore, once the expenditure on the production of the film is allowable as deduction as per the provisions of Rule 9A, then no deduction is permissible de-hors the provisions of Rule 9A. 7.3 Even otherwise, as pointed out by the CIT(A), letter dated 20.3.2007 talks about the price for theatrical rights for which the assessee did not agree. Therefore, the said letter is not otherwise relevant for the value of the film in question.
8 In view of the above facts and circumstances of the case and in view of the decision of the Hon'ble jurisdictional High Court (supra), we do not find any error or illegality in the orders of the lower authorities, qua this issue. 9 Ground no.2.2 is regarding the entire cost of the feature film to be allowed as business loss of the relevant year.
9.1 The ld AR of the assessee has submitted that the entries in the books of accounts can not decide whether a receipt is taxable or not similarly if a loss is allowable the same may be allowed irrespective whether the said loss claimed as 9 Sagar Sardhadi deduction in the books of account. He has relied upon the decisions of the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd vs CIT reported in 82 ITR 363, CIT vs Bokarao Steel Ltd reported in 236 ITR 315 as well as the decision of the Tribunal in the case of ITO vs Shri V K Sood, in ITA No.1463/Bom/90 for AY 86-87 vide order dated 30.10.1995. 9.2 On the other hand, the ld DR has submitted that the loss claimed by the assessee is not permissible under Rule 9A of the I T Act. Moreover, the issue of allowing the business loss for any other year is not a subject matter for the present proceedings. Therefore, no such direction can be given in the proceedings for the asst year under consideration. He has relied upon the orders of the lower authorities.
10 We have considered the rival contention as well as the relevant material on record. At the threshold, we make it clear that the assessee's case is not for the claim of abandoned project or covered under Rule 9(4). Therefore, the case relied upon by the assessee are not applicable in the facts of the present case. Further, the alternative plea of the assessee is pertaining to the issue of allowing the business loss in the assessment year other than the year under consideration, which cannot be adjudicated in the proceedings of this year. Hence, no direction is required to be passed for considering the claim for any other year when it is not allowable for the year under consideration. Accordingly, this ground of the assessee is rejected.
11 Ground no.2.3 is regarding allowing business loss as per Rule 9A(4). 11.1 The ld AR of the assessee has submitted that as per Rule 9A(4) where during the previous year in which a feature film is certified for release by the Board of Film Censors, the film producer does not himself exhibit the film on a 10 Sagar Sardhadi commercial basis or does not sell the rights of exhibition of the film, no deduction shall be allowed in respect of the cost of production of the film in computing the profit and gains of such previous year, and the entire cost of production of the film shall be carried forward to the next following previous year and allowed as a deduction in that year.
11.2 On the other hand, the ld DR has submitted that the case of the assessee is covered under Rule 9A(5) and not Rule 9A(4). Therefore, the claim of full cost of feature film cannot be allowed. He has relied upon the orders of the lower authorities.
12 We have considered the rival contention as well as the relevant material on record. Sub. Rule (1) of 9A contemplates the deduction in respect of cost of production of feature film certified for release by the Board of Film Censors in previous year. The deduction shall be allowed in accordance with the provisions of sub rule (2) to sub.rule (4) of Rule 9A of I T Rules 1962. Therefore, sub.rule(2) to (4) expresses various circumstances and procedures to allow the deduction. Whereas sub rule (5) of Rule 9A stipulates the conditions which are required to be fulfilled for such deduction is allowed. For ready reference, we quote sub.rule (5) as under:
"9A (5) Notwithstanding anything contained in the foregoing provisions of this rule, the deduction under this rule shall not be allowed unless,--
(a) in a case where the film producer--
(i)has himself exhibited the feature film on a commercial basis; or
(ii)has sold the rights of exhibition of the feature film; or [(iii)has himself exhibited the feature film on a commercial basis in some areas and has sold the rights of exhibition of the feature film in respect of all or some of the remaining areas,] the amount realized by exhibiting the film, or the amount for which the rights of exhibition have been sold or, as the case may be, the aggregate of such amounts, is credited in the books of account maintained by him in respect of the year in which the deduction is admissible;11
Sagar Sardhadi
(b) in a case where the film producer has transferred the rights of exhibition of the feature film on a minimum guarantee basis, the minimum amount guaranteed and the amount, if any, received or due in excess of the guaranteed amount or where the film producer follows cash system of accounting, the amount received towards the minimum guarantee and the amount, if any, received in excess of the guaranteed amount, are credited in the books of account maintained by him in respect of the year in which the deduction is admissible."
12.1 sub.rule (5) begins with non obstinate clause which means sub.rule (5) has overriding effect and the other sub.rules under rule 9A are subjected to sub.rule (5). It is manifest from sub.rule (5), no deduction can be allowed under Rule 9A unless the conditions as stipulated under sub.rule (5) are satisfied. Therefore, when the assessee has neither himself exhibits feature film on commercial basis nor sold the rights of exhibits of the feature film nor transfer the rights of exhibits of feature film, then the claim of deduction is hit by sub rule (5) of Rule 9A of the I T Rules and cannot be allowed.
13 Ground no.2.4 is regarding alternative plea of opening stock of next year should be taken as value of closing stock adopted by the Assessing Officer for this year.
14 We have heard the ld AR as well as the ld DR and considered the relevant material on record. Since the Assessing Officer added back the value in the closing stock; therefore, in all fairness and in view of the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs Mahalaxmi Glass in ITA No.1992 of 2009, opening stock of the next year should be valid at the figure which has been taken by the Assessing Officer for the closing stock of this year. Accordingly, this ground of the assessee is allowed.
12
Sagar Sardhadi 15 In the result, the appeal of the assessee is partly allowed. Order pronounced on the 20th,day of Jan 2012.
Sd/ Sd/-
( R K PANDA ) ( VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated:20th, Jan 2012
Raj*
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai