MARUTI PICTURES PVT LTD ,MUMBAI vs. I.T.O 11(1)(2), MUMBAI

आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :-

A.Y. 2010-11 Maruti Pictures Pvt. Ltd.

are as under:-

1. The Ld CIT(A) is erred in adding a sum of Rs.1,23,24,745/- as disallowed Publicity expenses.

2. The Ld. C.I.T. (Appeal) erred in confirming addition of Rs.1,23,24,745/- as disallowed Publicity expenses for popularizing cine film.

3. The appellant request to delete the addition confirmed by the CIT (A).

4. The appellant craves to add, alter or omit any or all of the above grounds of appeal before or at the time of hearing of the appeal.

4. Ground Nos.1 and 2 relate to disallowance of Publicity Expenses incurred by the assessee. Facts of the case in brief are that as per the profit earned from the film produced by the assessee "Daddy Cool", the assessee claimed deduction of Publicity expenses of Rs. 1,23,24,745/-. The AO issued a show cause to it pointing out that as per the agreement with Reliance Big Motion Pictures, the assessee was to produce the film A.Y. 2010-11 Maruti Pictures Pvt. Ltd. and hand it over to Big Motion Pictures and there was no clause on incurring publicity expenses in such agreement. The assessee filed its response which has been reproduced by the AO in the assessment order wherein it gave details and relied on various judicial pronouncements. The AO considered such submissions of the assessee and emphasizing the stipulations of Clause 1.1.14, Clause 4.1, Clause 6.1, Clause 14.1, Clause 14.2 and Clause 14.3 of the agreement, concluded that from the agreement it was clear that all expenses relating to production of the film would be incurred by MARUTI and that of publicity by Big Motion Pictures. The AO further observed that though assessee had liberty to spend any expenditure as it wishes, but cannot claim publicity expenses as deduction as it was the responsibility of Big Motion Pictures and the assessee should have obtained reimbursement of the same if it had to spend so. Referring to the Addendum to the original agreement, the AO observed that such Addendum only increased the profit sharing ratio of the appellant but did not speak about publicity expenses to be incurred by the assesses. Further, reproducing the contents of the letter dated 11.08.2009 written by Big Motion Pictures to the assessee wherein it was mentioned that if any expenses are incurred by the appellant, then, it shall be entitled to recoup such actual expenses for publicity after Big Motion Pictures recoupment as stated in Clause 9 2(ii) and (iii) of the Film Production Agreement dated 19th February, 2008. Accordingly, the AO concluded that the responsibility of publicity expenses was solely on Big Motion Pictures. The assessee could spend on publicity only with the concurrence of Big Motion Pictures and has the right to recoup the same and accordingly the claim of expenses made by the assessee was not tenable Further, referring to the provisions of Rule 9A of the Income-tax Rules, the AO observed that this rule specifically defines 'cost of production' and it excludes expenditure A.Y. 2010-11 Maruti Pictures Pvt. Ltd. incurred on positive prints and advertisement from its definition when such expenditure is incurred after the film is certified for release by the Board of Film Censors. He further observed that in this case the film was certified for release on 10.12.2008 and the expenditure on advertisement and publicity had been incurred after such date and hence not allowable as per Explanation (1)(b) of Rule 9A Accordingly, the AO disallowed the amount of Rs 1,23.24,745/- and added it to the total income of the assessee.

5. In the course of appeal proceedings before the ld.CIT(A),the assessee submitted that the appellant produced a film name called 'DADDY COOL’ in association with Big Motion Pictures and received consideration of Rs. 10 cr. from Big Motion Pictures The cost of production claimed was at Rs. 9,89,63,458/- and publicity expenses were claimed at Rs 1,23,24,745/-. It has been submitted that the appellant has followed standard accounting for the film producers in consonance with the generally accepted accounting practice as well as guidelines issued by the Institute of Chartered Accountants of India and provisions of Income-tax in relation to treatment of accounting and tax treatment in accordance with Rule 9A of the Income-tax Rules. It was further submitted that the association of the appellant with Reliance Big Motion Pictures was supported by legal film production agreement with effect from 19.02.2008 and clause 6.3 of the said agreement is not contradictory to any other clause mentioned in the agreement and the agreement allows the appellant to incur expenditure on publicity and is not expressly restrictive. All other clauses of the agreement specify area of responsibilities which cannot be interpreted as restrictive. It has been further submitted that the publicity expenses incurred by the appellant to popularize the film before release and thereafter, are therefore pure business expenditure and disallowance A.Y. 2010-11 Maruti Pictures Pvt. Ltd. of such expenses was not justified. The appellant relied on the decision of Hon’ble Supreme Court in the case of Calcutta Company Ltd. v. CIT (37 ITR 1) to emphasize that the real profit of the assessee has to be ascertained for the taxation purposes. Without prejudice, it was submitted that the cost of positive prints and the advertisement expenditure being not included in the “cost of production” as defined in Rule 9A has the effect of exclusion of these two items with a view to allow them in the year in which these expenses are incurred regardless of whether film is released in that year or not as has been held by the Hon’ble Madras High Court in the case of CIT V/s Prasad Productions Pvt. Ltd. (179 ITR 147) Accordingly, the appellant requested to allow the expenditure.

I have considered the facts of the case, discussion of the AO in the impugned order as well as oral contentions and written submissions of the appellant The appellant has entered into a Film Production Agreement with Reliance Big Motion Pictures (referred as BMP) vide agreement dated 19.02.2008. The Assessing Officer has relied on certain clauses of the said agreement including the copy of letter dated 11.08.2009 which has been written by BMP to the appellant. It is worthwhile to take note of such clauses and the contents of the letter which is reproduced herein below:- “Page No.3. Clause 1.1.14: “Marketing and Distribution Expenses means all costs, commissions, charges and expenses incurred towards the marketing, advertising, promoting and distributing each of the films, including print and advertising expenses (P&A Expenses) commissions (as set out in Clause 6.4), attending festivals, markets and all other related costs as incurred by RMP as mutually agreed with MARUTI, BMP shall submit the Marketing & Distribution Budget to MARUTI and the parties shall agree on an upper limit of the Marketing and Distribution Expenses to be expended by BMP. Any amount to be incurred over and above the said upper limit shall require the prior approval of MARUTI.

Page No. 9 Clause 4.1 The films shall be entirely funded by BMP as per the respective Budget of each of the films in a timely manner as shall be set out in the cash flow schedule (Funding) to be provided by MARUTI within go (ninety) days of signing this Agreement as per Annexure 3 hereof This will include aggregate of all costs of production, including pre-production, production and post production expenses This will also include an amount of Rs 20,00,00,000/- (Rupees Twenty Crores only) to be paid to MARUTI as its direction & production fee (Direction & Production Fee) of the films but will exclude Marketing and Distribution Expenses.

Page No. 10 Clause 6.1 MARUTI hereby agrees that BMP and/or any of its group companies shall be solely and exclusively responsible to market, promote, distribute and exploit the films in all formats and across the world in perpetuity.

Page No.14 Clause 14.1:

It is agreed between the parties that MARUTI shall furnish to BMP on a fortnightly busts details of the Production Account, including monthly expenditure and payments made, with details of bank statements etc. Also MARUTI will furnish a complete statement of production accounts for each film, duly certified by a practicing Chartered Accountant within 90 days of first copy of the film being ready for theatrical release. MARUTI undertakes and agrees to maintain full, accurate and proper records and books of account relating to the production of the Films, together with all invoices, vouchers, receipts, and other records evidencing all receipts, expenses, charges, sales and taxes incurred in the production of the films and undertake to keep and maintain such records for the period of eight (8) years following release of each of the films.

Page No.14 Clause 14.2:

BMP will provide monthly statement of revenues alongwith Profits, if any for each of the films by 31 of a month for the preceding month, for first six months and then on quarterly basis after first domestic theatrical release of each of the films. BMP will furnish a statement on recoveries to MARUTI within 180 days of first domestic theatrical release of the Film. BMP undertakes and agrees to maintain full, accurate and proper records and books of account relating to the distribution of the Films, together with all invoices, vouchers, receipts, and other records evidencing all receipts, expenses, charges, sales and taxes incurred in the marketing and distribution of the Films and undertakes to keep and maintain such records for the period of eight (8) years following release of each of the films.

Page No.14 Clause 14.3:

BMP shall be at liberty to inspect the books of account of MARUTI pertaining to the details of the production of the Films after giving (2) days notice in this regard to MARUTI. MARUTI shall be at liberty to inspect the books of account of BMP pertaining to the details of the distribution of the Films after giving (2) days notice in this regard to BMP.

Letter dated 11.08.2009 “11 August, 2009 MARUTI PICTURES PRIVATE LIMITED, 32, Rock Garden, New Link Road, Andheri (W), Mumbai 400 053.

Kind Attn: Mr. Ashok Thakeria Sub: Publicity expenses for Daddy Cool Dear Mr Thakeria, This is with reference to our discussion on the aforementioned subject.

We confirm that it has been mutually decided between Maruti Pictures Pvt. Ltd. ("Maruti") and ourselves that in the event Maruti spends Rs.50,00,000/- (Rupees Fifty Lacs only) or any other amount with the consent of Big Pictures, for the sole purpose of publicity and promotion of the film Daddy Cool then in such event Maruti shall submit to Big Pictures all supporting documents including audited statement of account in support of their claim of such expenses and Maruti shall be entitled to recoup such actual expenses for publicity after Big Pictures recoupment as stated in Clouse 9.2 (it) and (iii) of the Film Production Agreement dated 19th February, 2008.

Thanking you, Yours sincerely. For Big Pictures, Authorized signatory We agree and accept the contents of this letter For MARUTI PICTURES PVT. LTD.” It is also important to take note of the Article 9 of the Agreement which speaks 5.5 about the sharing of revenue which is reproduced as under- 9. REVENUES 9.1 The Parties hereto shall be entitled to the Revenues accruing from the exploitation of the Films in the manner set forth in this Clause. 9.2 The Parties agree that the Revenues for each Film shall be disbursed in the following manner: i. Firstly to BMP towards recoupment of a Return on Investment of 10% on entire Funding in relation to the Film by BMP; A.Y. 2010-11 Maruti Pictures Pvt. Ltd. ii. Secondly to BMP towards recoupment of the Marketing and Distribution Expenses as mutually agreed. iii. Thirdly to RMP towards recoupment of entire Funding of RMP towards cost of production in relation to such Film. iv. Thereafter, 50% of all revenues generated will be paid by BMP to MARUTI (“Additional Compensation”) in perpetuity subject to Clause 9.3 of this Agreement. 9.3 The Parties agree that BMP shall be entitled to cross collateralize the Revenues of each of the Films i.e., in the event, any losses incurred in respect of any of the Films (“Losses”), then BMP shall be entitled to adjust and/or set-off such Losses against the Additional Compensation generated out of the exploitation of other Films as per the provisions of this Agreement. Such cross collateralization will be effected on a financial year basis after accounting the entire profit or loss for any of the Films in such financial year However, it is clarified that Additional Compensation, if any, during any financial year once paid, will not be available for cross collaterization.” 5.6 Reading of the aforesaid clauses including the Revenue Sharing, considering the Addendum of the Agreement together with the contents of the letter dated 11.08.2009 written by BMP to the appellant, it is crystal clear that the agreement was entered into by the appellant with Reliance Big Entertainment Pvt. Ltd, through their Division Big Motion Pictures for the purposes of production of film. The areas of responsibilities were shared between the two parties to the agreement wherein the appellant was entirely responsible for the production including the related expenses and the BMP was responsible for Marketing and Advertisement of the expenses. The appellant, in its return has claimed expenses of Rs.1,23,24,745/- which has been claimed by the appellant as publicity expenses. The publicity expenses as per the agreement and various clauses mentioned herein above are to be incurred by the BMP and as per the letter dated 11.08.2009, if the assessee incurs any expense for publicity then, he was entitled to recoup such actual expenses on publicity after Big Pictures recoupment as stated in clause 9.2(ii) and (iii) of Film Production Agreement. It is not anyways submitted by the assessee that the Big Motion Pictures has not been able to recoup its portion of revenue as per clause (ii) and clause (iii) of Article 9(2) of the Revenue Sharing Stipulation of the agreement that the appellant was not in a position to recoup the expenses incurred by it towards publicity Viewed from this perspective, the action of the Assessing Officer, in disallowing the expenditure claimed by the appellant is found to be justified and is accordingly upheld Ground No.1 is accordingly, dismissed.’ 7. It may also be mentioned here that in the course of appeal proceedings before us, the assessee has made a request under Rule 29 of ITAT Rules 1963 (wrongly mentioned as Rule 46A of Income Tax Rules).It A.Y. 2010-11 Maruti Pictures Pvt. Ltd. is requested to admit it as the same is very important for natural justice as the same bears importance in finalizing the present appeal. The paper book contains a confirmation letter received by the assessee from Reliance Big Entertainment P.Ltd dated 26.04.2022.We have considered the submissions of both the parties and carefully gone through the material available on record. In our opinion, the new evidence although furnished by the assessee for the first time before the Tribunal are relevant and go to the root of the present controversy.

7.1 As per the provisions contained in Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, the parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal. The provisions contained in the said rule are pari materia with the Order 41 Rule 27 of the Code of Civil Procedure, 1908, which also does not allow the party to the appeal to adduce any additional evidence unless and until such exceptional circumstances are set out. In the present case, the assessee had moved an application under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of additional evidence. In the instant case, the assessee could not furnish these documents before the lower authorities. In our opinion, the mistake of the assessee was not deliberate or with malafide intention, therefore the new evidence now furnished as additional evidence shall be admitted keeping in view the 7.2 As regards to the admission of the additional evidence, the Hon’ble Madras High Court in the case of Anaikar Trade and Estates (P) Ltd (No.2) vs. CIT, 186 ITR 313 has held as under: “The Tribunal has discretion to allow the production of additional evidence under Rule 29 of the ITAT Rules, 1963 if the Tribunal requires any document to be produced or affidavit to be filed to enable it to pass orders or for any other substantial cause, it may allow the document to be produced or the affidavits to be filed. Even if there was a failure to produce the documents before the ITO and the A.A.C, the Tribunal has the jurisdiction in the interests of justice to allow the production of such vital documents.” As per rule 29 of the Appellate Tribunal Rules, 1963, the Tribunal has the power to allow additional evidence not only if it requires such evidence “to enable it to pronounce judgment” but also “for any other substantial cause”. There may be cases where even though the Tribunal finds that it is able to pronounce Judgment on the stage of record as it is and so it cannot strictly say that it requires additional evidence to enable it to pronounce judgment it still considers that in the interest of justice, something which remains obscure, should be filed up so that it can pronounce the judgment in a more satisfactory manner. Such requirement of the Tribunal is likely to arise ordinarily when some inherent lacuna or defect becomes apparent upon its appreciation of the evidence. The power of the Tribunal to admit A.Y. 2010-11 Maruti Pictures Pvt. Ltd. addition evidence in support of the claim in appeal is discretionary and no fetters can be imposed on the exercise of such power.

7.3 We find that the whole issue relating to the deduction of Publicity expenses hinges on terms of agreement of the assessee with the producer Reliance Big Entertainment. In the present case also, the documents furnished by the assessee are vital which go to the root of the present controversy, so these are to be admitted in the interest of natural justice but these documents are required to be examined and considered at the level of the AO. We, therefore, set aside the impugned order and remand the present issue back to the file of the AO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.