VENKATESHWAR RAO CHILLARA,HYDERABAD vs. INCOME TAX OFFICER WARD 14(1), HYDERABAD

आदेश / ORDER

PER MANJUNATHA G., A.M :

This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short “NFAC”], Delhi, dated 30.07.2023, pertaining to the assessment year 2015-16.

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for an amount of Rs.2,06,36,162/- in April 2014. However, due to some technical problems, the assessee was not able to release the said film and the film was abandoned as there were no buyers. Since the movie had been abandoned, the cost incurred towards purchase of the movie was claimed as expenditure and debited to the Profit & Loss Account.

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capital gain and in order to set off loss against the capital gain, the assessee had arranged the transactions by entering into agreement with a partnership firm where, he is one of the partners and shown purchase of unfinished movie in order to claim loss. Therefore, the A.O. observed that the expenditure debited under the head loss on unfinished movie was not allowable. The A.O. further noted that even if the movie was said to be unfinished, as per Rule 9A of the Income-tax Rules, 1962, the expenditure on account of production of the movie was allowable subject to the conditions prescribed therein. Since the movie was not released for exhibition, the cost of purchase of the movie was not allowable. Accordingly, the A.O. disallowed the amount of Rs.2,06,36,162/- and added back the same to the total income of the assessee.

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movie, along with the evidences towards the amount spent for production of the movie and also explained as to why the movie had been abandoned. The assessee had also argued that Rule 9A of the Income-tax Rules, 1962, relied upon by the A.O., was not applicable to an abandoned movie and, in this regard, he relied upon certain judicial precedents, including the decision of the Hon'ble Madras High Court in the case of B. Nagi Reddy v. CIT, reported in 199 ITR 451. The learned CIT(A), after considering the relevant submissions of the assessee and also taking note of various facts, observed that going by the evidences filed by the assessee and the date of purchase and subsequent abandonment, it indicated that the movie “Durga” was just launched and no major production of the movie had been done before its purchase by the assessee. Further, the movie was purchased and abandoned in the same month of April, 2014 and only a meager amount of Rs.1,06,700/- was spent by the assessee during the short period of less than one month between the purchase of the movie and its abandonment. This fact clearly indicated that the said movie was not purchased by the assessee with a clear intention of producing the movie, completing the same, and

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releasing it for exhibition, but was only to set off the loss on account of expenditure against capital gain derived by the assessee from the sale of property. Therefore, the learned CIT(A) observed that the A.O. had rightly disallowed the cost of the abandoned movie claimed by the assessee as expenditure. The learned CIT(A) had also rejected the case law relied upon by the assessee in the case of B. Nagi Reddy v. CIT (supra) and held that the facts of the said case were entirely different and were not applicable to the facts of the present case. The relevant findings of the learned CIT(A) are as under :

“5.2.8 The contentions raised by the appellant during the course of appellate proceedings have been carefully perused and considered however the same is not acceptable. It is a fact that the movie "Durga" was purchased by the appellant on vide assignment agreement dated 02.04.2014 and same was abandoned in the same month of April 2014. The appellant himself has admitted that further amount of Rs. 1,06,700/- was spent on the movie during the year. It is also submitted by the appellant that an amount of Rs. 2 Crore was spent as advance and initial production expenses for launching the movie and no picture can be completed with a meager budget of Rs. 2 Crore with actress such as Nagachaitanya, Hansika and Brahamanandam. All these facts clearly indicate that the movie "Durga" was just launched and no major production of this movie was done before purchasing by the appellant. It is further noted that the movie was purchased and abandoned in the same month of April 2014 and only a meager amount of Rs. 1,06,700/- was spent by the appellant during the short period of less than one month between the period of purchase of movie and abandoning the same. This is especially considering the appellant's version that the movie can not be completed with a meagre budget of Rs.2 Crore with actors such as Nagachaitanya, Hansika and Brahamanandam. This facts clearly indicates that the said movie purchased by the appellant was not with clear intention of producing the movie, completing the same and release for exhibition. Had that been the intention of the appellant,

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the movie could not have been abandoned within a short period of less than a month from the date of purchase. 5.2.9 Considering the above facts of the case, I am of the considered view that the purchase of movie by the appellant was mainly to setoff loss on account of expenditure against capital gains earned by the appellant. I also concur with the view of the A.O. that as per rule 9A of I.T Rules deduction on account of the cost of production of a feature film is allowable in the previous year in which such film is certified for release by the Board of Films Censors. In the instant case since the film is not completed and certified for release by the Board of film censors, deduction of the cost of production cannot be allowed in computing profits and gains of business of production of feature film. 5.2.10 The appellant's further contention that the impugned expenditure is allowable u/s.37(1) of the I.T Act following the principle laid down by the Madras High Court in the case of B Nagi Reddy Vs CIT 199 ITR 451 is also considered and for not acceptable. In the case of B Nagi Reddy Vs CIT the facts were that the assessee had just started a venture in the production of the two films and thereafter thought it prudent not to proceed further. The giving up by the assessee of the production of two films was only on the grounds of commercial expediency after expenses had been incurred by the assessee for payment to writers, for the choice of a story and for its adaptation as film. When the assessee found that the project was not likely to be profitable, it was given up in order that, freed from his efforts in the production of these two films, the assessee could concentrate on the making of better and more profitable ventures in film-making in order to facilitate the carrying on of the business of the assessee. Hon'ble High Court therefore held that the claim of the assessee for deduction of expenditure as revenue expenditure was an allowable one. As against this, in the instant case the assessee was not producing the feature film "Durga" but the unfinished film was purchased by the appellant even when it was well within the knowledge of the appellant that huge amount of expenditure is required to be spent to complete the movie considering the actors like Nagachaitanya, Hansika and Brahamanandam. Abandoning the feature film purchase with in a very short time of less than a month as also incurring a meagre expenditure of Rs.1,06,700/- clearly indicate that the intention of purchase of movie was not to complete and release the movie for exhibition but to incur loss which can be set off against capital gains on during year. Therefore, the element of commercial expediency is not present in the appellant's case. Therefore, this case law relied upon by the appellant is not applicable and the appellant's claim of deduction of impugned production cost of Rs.2,06,36,162/- is not an allowable deduction u/s 37(1) of the I.T. Act.

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5.2.11 The appellant is also relied upon the case of CIT Vs Prasad Production Pvt. Ltd. 179 ITR 147 in support of the contention that the impugn expenditure is allowable u/s 37(1) of the I.T. Act. However, it is found that this case law can also be distinguish from the facts of the instant case and hence not is not applicable to the appellant's case. In the case of CIT Vs Prasad Production Pvt. Ltd., the assessee-company was carrying on the business of production and exhibition of feature films. During the accounting years relevant to the assessment years 1971-72 and 1972-73 and on the first day of the assessment years in question and when the feature films produced by the assessee were released, the Board's Circular No. 30 dated 4-10-1969 was in force. In accordance with the said circular the assessee claimed the entire cost of production of the film as deduction. Before the completion of assessments of the said two assessment years, however, the Board's Circular No. 92 dated 18-9-1972 came into force superseding the earlier Circular No. 30 dated 4-10-1969. The ITO having regard to the new Circular No. 92 disallowed the deduction claimed by the assessee. The question before the Hon'ble High Court was whether assessee was entitled to benefit of Circular No. 30 which was in force on first day of relevant assessment years, even though said circular was superseded before completion of assessments, and the Hon'ble High Court held as yes. Thus, since the facts in the instant case are different than the facts in the said case in the Hon'ble High Court, the appellant claim of impugned costs of productions is not an allowable deduction u/s 37(1) of the I.T. Act. 5.2.12 In view of the above facts of the case and in law, I am of the considered view that the appellant is not eligible for claim of deduction on account of expenditure incurred on cost of movie debited to the P&L account of an amount of Rs.2,06,36,162/-. The action of the A.O. in disallowing the same is therefore upheld. This ground of appeal raised by the appellant is dismissed.”

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abandoned without any further production. The learned counsel for the assessee further, referring to certain additional evidences, submitted that the assessee had obtained a certificate from Telugu Film Chambers of Commerce as per which the movie “Durga”, starring Naga Chaitanya, Hansika, Brahmanandam, and others, directed by Srinivas Reddy, had started shooting on 06.02.2014. However, till date, the Chamber of Commerce had not issued any letter for publicity clearance for the purpose of censorship from CBFC. From the above, it is very clear that the movie had started shooting with the above characters/artists; however, finally, it was not released for publicity and, therefore, the assessee had rightly claimed deduction towards cost of abandoned movie as expenditure. The learned counsel for the assessee further, referring to the assessment order, submitted that the A.O. had also invoked Rule 9A of the Income-tax Rules, 1962. However, Rule 9A is not applicable to abandoned feature films, as clarified by the CBDT vide Circular No. 16/2015, dated 06.10.2015, wherein the CBDT has clarified that the cost of production of an abandoned feature film has to be treated as revenue expenditure and allowed as per the provisions of section 37 of the Income-tax

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Act, 1961. He further submitted that, although the A.O. had rejected the explanation of the assessee on the ground that the assessee had made this arrangement only to set off loss against the capital gains, but fact remains that the transaction of purchase of movie and subsequent abandonment had taken place in the month of April, 2014, whereas the assessee had sold the property in the month of July, 2014, which was much later, and, therefore, the argument of the A.O. was merely a suspicion but not based on facts. Therefore, he submitted that, the cost of abandoned movie should be allowed as deduction.

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the assessee had neither purchased any movie nor carried out any production for release, but it was only a paper arrangement between the assessee and the partnership firm, where the assessee was one of the partners, for claiming the benefit of set-off of loss, and, therefore, the A.O. had rightly disallowed the cost of film claimed by the assessee. He further submitted that, no doubt Rule 9A of IT Rules, 1962 is not applicable to abandoned movies and any cost incurred for production of an abandoned movie should be allowed as deduction under section 37(1) of the Act. However, in the present case, the assessee had not furnished any details of the cost incurred for production of the film and, further, payment against purchase had been adjusted by book entries between the assessee and the partnership firm and, from the above details, it is very clear that it was an arrangement between the assessee and the firm, i.e., between two related parties, and, therefore, the A.O. had rightly rejected the claim of the assessee. Therefore, he submitted that the addition made by the A.O. should be upheld.

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the purpose of business as per the provisions of section 37(1) of the Act. The assessee has furnished the agreement between the assessee and the firm dated 02.04.2014 and claimed that the movie was launched by the partnership firm and also started shooting. However, due to various reasons, the firm could not continue the production of the movie, and the assessee purchased the movie from the partnership firm for further production and release for the public. Due to various reasons, including some technical issues, the movie could not be continued and was finally abandoned. The cost incurred for purchase of the movie has been claimed as deduction. The A.O. disallowed the expenditure claimed by the assessee towards cost of the abandoned movie on the ground that the assessee had not substantiated the claim as an allowable expenditure and was of the view that the transaction was an arrangement between the assessee and the partnership firm, where the assessee was one of the partners, for getting the benefit of set-off of loss against the capital gain derived from transfer of property. The A.O. referred to the date of purchase of the movie and subsequent abandonment in the very same month and the date of sale of the property, and consequent computation

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of capital gain, and observed that, the arrangement was only for the purpose of set-off of loss against capital gain, but not an actual transaction of purchase of the movie and subsequent abandonment.

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furnished any details as to the amount incurred by the partnership firm for production of the movie. We further note that the amount payable for purchase of the movie has been adjusted by passing a book entry in the current account maintained by the firm, without any actual payment of consideration. Although the assessee claims that he has incurred a small amount of Rs.1,06,700/- for continuation of production of the movie, there are no details as to the nature of expenditure and further activities carried out by the assessee. Since the agreement between the parties does not show any details of production of the movie and further the assessee has not furnished any details as to continuance of the movie, in our considered view, the claim of purchase of the movie in the month of April, 2014 and subsequent abandonment in the same month appears to be an arrangement between the assessee and the partnership firm so as to take advantage of losses incurred under the business to be set off against the capital gain derived from sale of property, because the assessee has derived capital gain from sale of property in the month of July, 2014. Although the learned counsel for the assessee argued that, the transaction of purchase of the movie

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and subsequent abandonment took place much before the date of sale of the property, but going by the Assignment Agreement and subsequent adjustment of consideration by book entries, in our considered view, there is no doubt at whatsoever with regard to the findings of the A.O. that it is only an arrangement to take the benefit of set-off of loss against capital gain, but not a real transaction between the two parties.

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subsequent abandonment of the movie with cogent evidence. Therefore, in our considered view, the expenditure claimed by the assessee under section 37(1) of the Act cannot be allowed because the assessee has failed to substantiate the claim with relevant evidence.

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Order pronounced in the Open Court on 9th September, 2026.

Sd/- Sd/- श्री विजय पाल राि (मंजूनाथ जी) (VIJAY PAL RAO) (MANJUNATHA G.) उपाध्यक्ष /VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER

Hyderabad, dated 09.09.2026. TYNM/sps आदेशकी प्रतततिति अग्रेतषत/ Copy of the order forwarded to:- 1. तनर्ााररती/The Assessee : VENKATESHWAR RAO CHILLARA, PLOT NO.31B, H. NO.G1, ROAD NO-5, JUBILEE HILLS, HYDERABAD-500033, HYDERABAD-500033, TELANGANA 2. राजस्व/ The Revenue : INCOME TAX OFFICER WARD 14(1), IT TOWERS, AC GUARDS, MASAB TANK, HYDERABAD, TELANGANA-500004, HYDERABAD-500004, TELANGANA 3. The Principal Commissioner of Income Tax, Hyderabad. 4. तवभागीयप्रतततनतर्, आयकर अिीिीय अतर्करण, हैदराबाद / DR, ITAT, Hyderabad 5. गार्ाफ़ाईि / Guard file आदेशानुसार / BY ORDER TIRUPATI Digitally signed by TIRUPATI YAMINI NAGA YAMINI NAGA MALLESWARI Date: 2026.09.09 11:18:10 MALLESWARI +05'30' Senior Private Secretary, ITAT, Hyderabad