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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI MAHAVIR SINGH, HON’BLE & SHRI MANJUNATHA.G, HON’BLE
आदेश / O R D E R PER MANJUNATHA.G, AM:
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-7, Chennai, dated 20.04.2020, and pertains to assessment year 2008-09.
The Revenue has raised the following grounds of appeal:
ITA No.794/Chny/2020 :: 2 :: 1. The order of the learned CIT(A) is erroneous in law and facts and opposed to the facts and circumstances of the case. 2. The CIT(A) has erred in deleting the disallowance made by the AO u/s 40(a)(ia). 3. The CIT(A) has erred in not considering the fact that the payment made for remaking rights was before the amendment of section 194J i.e. 13.07.2006 is also devoid of any merit because the agreement to purchase the remaking rights was entered into after 24.04.2006 and the payments for the purchase consideration were made after 16.09.2006 i.e., after the amendment. Therefore, as per the amendment as clarified by the CBDT Circular No.1 of 2007 the payment in question is undoubtedly royalty subject to TDS u/s. 194J and the failure to deduct tax would result in disallowance of the amount u/s.40(a)(ia) of the Act. 4. The CIT(A) has erred in not considering the fact that the expenditure incurred during the previous year relevant to the assessment year concerned shall be allowed for the purpose of taxation as per section 4. The expenditure and the income of that particular year only has to be considered for the purpose of taxation. The cost of production can only be set off against 9A and 9B of Income Tax Rules have been formulated to amortise the entire cost of production in the year of release of the film but at the same time all the provisions of Income Tax Act are to be adhered to such as TDS provisions, statutory requirement of section 40A(3) and 40(a)(ia) and so on while allowing the expenditure on production of the film. 5. The CIT(A) has erred in not considering the fact that even though the expenditure is amortized under Rule 9A of Income Tax Rule, disallowance u/s.40(a)(ia) of the Income Tax Act has to be made. 6. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.
The brief facts of the case are that, the assessee is a partnership firm, engaged in the business of ‘film production’. The assessee has filed its return of income for AY 2008-09 on 25.09.2008 declaring loss of Rs.2,36,07,783/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has debited an amount of Rs.15,46,88,000/- towards purchase of remake rights of ‘Lage Raho Munna Bhai’ which was remaked in Telugu under the name of ‘Shankar Dada Zindabad’ which was released on 27.07.2007.
ITA No.794/Chny/2020 :: 3 :: The AO, further, noted that the assessee has not deducted TDS on payment of royalty as required u/s.194J of the Income Tax Act, 1961 (in short “the Act“), and thus, disallowed remake rights u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.194J of the Act. The assessee filed an application u/s.154 of the Act, to rectify the mistake stated to be apparent on record from the order of the AO. The AO rejected the application filed by the assessee u/s.154 of the Act. The assessee carried the matter in appeal before the First Appellate Authority, but could not succeed. The Ld.CIT(A) for the reasons stated in their appellate order dated 20.04.2020, sustained the additions made by the AO towards remake rights of film u/s.40(a)(ia) of the Act. The assessee carried the matter in further appeal before the Tribunal. The ITAT, vide their order dated 21.12.2022 remitted the issue back to the file of the AO to verify whether the expenditure laid down are expended wholly or exclusively for the purpose of business for allowing the expenditure as deduction.
Pursuant to directions of the Tribunal, the AO called upon the assessee to furnish necessary evidences, including agreement between the parties for purchase of remake rights of movie. The AO after considering relevant details furnished by the assessee observed that the assessee has paid a sum of Rs.15.46 Crs. to M/s.Vinod Chopra Films Pvt. Ltd., for purchase of Telugu remake rights of Hindi Film ‘Lage Raho Munna Bhai’. The AO further observed that M/s.Gemini Industries & Imaging Ltd., is partner of M/s. Manorama Films. The rights relating to said film was originally
ITA No.794/Chny/2020 :: 4 :: acquired by M/s.Manorama Films on 01.04.2006. The rights of Telugu movie have been debited to partner’s capital account. The rights so withdrawn from M/s.Manorama Films, were contributed by M/s.Gemini Industries & Imaging Ltd., to the capital account with the assessee’s firm, M/s.Gemini Film Circuit on the same day. As there is transfer of remake rights to assessee’s firm, by M/s.Manorama Films, there is a liability to deduct TDS u/s.194J of the Act, because, remake rights of the movie is in the nature of royalty and thus, for non-deduction of TDS, the AO has disallowed amount paid for purchase of remake rights u/s.40(a)(ia) of the Act. The relevant findings of the AO are as under:
4.3 The contention that the payment made for remaking rights was before the amendment of Sec.l94J i.e, 13.7.2006 is also devoid of any merit because the agreement to purchase the remaking was entered into after 24.4.2006 and the payment for the purchase consideration were made after 16.9.2006 i.e, after the amendment. Therefore, as per the amendment as clarified by the CBDT Circular No.1 of 2007, the payment in question is undoubtedly royalty subject to TDS u/s 194J and the failure to deduct tax would result in disallowance of the amount u/s.40(a)(ia) of the Act. It may be noted that M/s.Monorama Films bought the remaking rights of the film and the assessee acquired the rights to make the film in Telugu. It is pertinent to note that the remaking rights of "Lage Raho Munnabhai" in Telugu and Tamil vests with Manohara Films and the film has been made in Telugu by the assessee firm which shows that there is transfer of the remaking right in Telugu to the assessee firm. The contention that M/s Gemini Industries & Imaging Ltd account has been debited with the remaking right of the film in Manorama's account and credited in the assessee's books of accounts as credit are internal arrangement entered into between all the concerns since Gemini Industries & Imaging Ltd is a common partner in both the concerns. The fact of the matter remains that the remaking rights are royalty as per the provisions of Sec.l94J of the Act and the assessee firm is a separate entity and it has embarked on the film making of Shankardada MBBS and the remaking rights for the same were acquired for that purpose. Whether it is from Manorama Films or Gemini Industries 8Jmaging Ltd, the fact remains that there is a transfer of remaking rights from Manorama Films to the assessee firm and when there is a transfer, there is liability to deduct tax at source. The rights were purchased either
ITA No.794/Chny/2020 :: 5 :: from M/s Manohara Films or M/s Gemini Industries & Imaging Ltd, the payment was made in the form of credit to partner's capital account and while making the entry i.e, crediting the account of M/s. Gemini Industries & Imaging Ltd, TDS is required to be made as per the provisions of Sec.l94J of the IT. Act. As the assessee has failed to deduct tax at source u/s.194J, the expenditure is not allowable u/s.40(a)(ia) of the Act. 5. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has challenged disallowance of amount paid for purchase of remake rights u/s.40(a)(ia) of the Act, on the ground that when the rights of movie was purchased on 01.04.2006, the liability to deduct TDS u/s.194J of the Act, was not in statute, because, said provisions have been amended w.e.f.13.07.2006 onwards. The assessee further referring to the definition of term ‘royalty’ as given in Explanation (2) to Sec.9(1)(iv) of the Act, submitted that consideration paid for sale, distribution or exhibition of cinematographic films is outside the purview of the term ‘royalty’ and accordingly, submitted that when the assessee’s firm has purchased remake rights of the movie, there is no question of deduction of TDS u/s.194J of the Act, and in this regard, he took support from the decision of the Hon’ble Madras High Court in the case of Mrs.K.Bhagyalakshmi v. DCIT reported in [2014] 265 CTR 545.
The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of Rule 9A of the of the Income Tax Rules, 1962, which provide for computation of income from production and
ITA No.794/Chny/2020 :: 6 :: distribution of feature film, observed that the assessee has exhibited the movie ‘Shankar Dada Zindabad’ on 27.07.2007, and consequently, cost of remake rights of film, is deductible for AY 2008-09. The Ld.CIT(A) has discussed the issue at length in light of agreement between the parties, date of payment of consideration, and Rule 9A of the of the Income Tax Rules, 1962, and came to the conclusion that expenditure incurred for purchase of movie rights is deductible in the year in which such movie is released for exhibition. Since, the movie has been released on 27.07.2007, expenditure relatable to said movie should be allowed as deduction for AY 2008-09 alone. The Ld.CIT(A) had also discussed the issue of disallowance of expenditure u/s.40(a)(ia) of the Act, in light of amendment to Sec.194J of the Act, w.e.f.13.07.2006 and held that when the payment was made or the rights of movie was acquired, the provisions of Sec.194J of the Act, was not applicable and thus, the assessee is not required to deduct TDS on payment made for purchase of movie rights and thus, directed the AO to delete the addition towards disallowance of Rs.15.46 Crs. u/s.40(a)(ia) of the Act. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before us.
The Ld.DR, Shri Nilay Baran Som, CIT, submitted that the Ld.CIT(A) is erred in not considering the fact that payment made for remake rights was before amendment of Sec.194J of the Act i.e. on 13.07.2006 without appreciating the fact that payment for purchase consideration were made
ITA No.794/Chny/2020 :: 7 :: after 16.09.2006 i.e. after the amendment. The Ld.DR further referring to CBDT Circular No.1/2007 submitted that payment in question is undoubtedly royalty subject to TDS u/s.194J of the Act, and failure to deduct tax, would result in disallowance of expenditure u/s.40(a)(ia) of the Act. The Ld.DR further submitted that although, the Ld.CIT(A) observed that as per Rules 9A & 9B of the of the Income Tax Rules, 1962, the entire cost of production of feature film, should be allowed as deduction in the year of release of the film, but, fact remains that when it comes to expenditure, the provisions of the Act are to be adhered to such as TDS provisions, statutory requirement of Sec.40A(3) of the Act and u/s.40(a)(ia) of the Act, and so on while allowing the expenditure on production of film. Therefore, he submitted that the Ld.CIT(A) is erred in allowing deduction only on the basis of Rules 9A & 9B of the of the Income Tax Rules, 1962, without appreciating the fact that said expenditure is not suffered for TDS as per provisions of Sec.194J of the Act and consequently, the expenditure cannot be allowed as deduction u/s.40(a)(ia) of the Act.
The Ld.Counsel for the assessee supporting the order of the Ld.CIT(A) submitted that the mandate of the ITAT while remitting the issue back to the file of the AO is to verify whether expenditure incurred by the assessee is allowable or not. Secondly, payment made for purchase of movie rights is subjected to TDS u/s.194J of the Act, or not.
ITA No.794/Chny/2020 :: 8 :: The Ld.CIT(A) after considering relevant facts has rightly held that consideration paid for acquiring movie rights, was deductible in the year of release of movie for exhibition and said expenditure pertains to AY 2008-09 only. The Ld.CIT(A) has also discussed the issue in light of provisions of Sec.194J of the Act and amendments thereto w.e.f. 13.07.2006 and held that, when the rights of movie was acquired on 01.04.2006, provisions of Sec.194J of the Act, was not applicable and consequently, the assessee is not liable to deduct TDS on payment made for purchase of movie rights. Therefore, he submitted that there is no error in the reasons given by the Ld.CIT(A) to delete additions made by the AO and their orders should be upheld.
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee has paid consideration for purchase of movie rights of ‘Lage Raho Munna Bhai’ without deduction of TDS. The assessee has purchased said rights by way of reconstitution of partnership firm and as per said reconstitution, one of the partners has introduced movie rights as a capital contribution to the firm as on 01.04.2006. The assessee firm has released Telugu version of movie for exhibition on 27.07.2007 which falls for AY 2008-09. Rules 9A & 9B of the of the Income Tax Rules, 1962, provides computation of income, on production and exhibition of feature film and as per said Rules, any expenditure incurred towards production of feature
ITA No.794/Chny/2020 :: 9 :: film, would be allowed as deduction in the year of release of such movie for exhibition. Since, the assessee firm has released the movie for exhibition in the previous year relevant to assessment year 2008-09, any expenditure including consideration paid for acquiring remake rights of movie, should be allowed as deduction. Therefore, in our considered view, there is no error in the reasons given by the Ld.CIT(A) to allow deduction towards expenditure incurred for purchase of copy rights of movie for AY 2008-09, and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.
Having said so, let us come back whether sum paid by the assessee for acquiring movie rights is liable for TDS u/s.194J of the Act, or not. The provisions of Sec.194J of the Act has been amended w.e.f.13.07.2006, inter alia, making application of TDS provisions for payment towards consideration for acquiring rights of movie. In the present case, the assessee firm has acquired by reconstitution of partnership firm and one of the partners has introduced movie rights by way of company contribution on 01.04.2006. When the assessee has acquired the rights on 01.04.2006, the provisions of Sec.194J of the Act was not applicable, because, said provisions have been amended w.e.f.13.07.2006. Since, the provisions of Sec.194J of the Act, was not applicable to the assessee firm. In our considered view, the assessee is not required to deduct TDS on consideration paid. The Ld.CIT(A) after
ITA No.794/Chny/2020 :: 10 :: considering relevant facts has rightly held that the assessee firm is not required to deduct TDS u/s.194J of the Act, and consequently, the question of disallowance of expenditure u/s.40(a)(ia) of the Act, does not arise, and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the Revenue.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced on the 13th day of March, 2024, in Chennai. Sd/- Sd/- (महावीर िसंह) (मंजूनाथा. जी) (MAHAVIR SINGH) (MANJUNATHA.G) उपा��/VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated: 13th March, 2024. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT 4.िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF