CBDT Issues New Guidelines for Assessing Officers on Verification of Expenses in the Entertainment Sector
Pranav B Prem
The Central Board of Direct Taxes (CBDT) has issued a detailed directive to all Principal Chief Commissioners of Income Tax, emphasizing the need for greater uniformity and diligence in the assessment of expenses claimed by assessees in the entertainment sector. The directive, issued vide F. No. 225/215/2018/ITA-II on October 21, 2025, draws upon the findings of the Comptroller and Auditor General’s (C&AG) Performance Audit Report No. 1 of 2019 titled “Assessment of Assessees in Entertainment Sector”, and the 51st Public Accounts Committee (PAC) Report of the 17th Lok Sabha
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The Board observed that the C&AG report had revealed inconsistent approaches adopted by Assessing Officers (AOs) in similar cases—particularly concerning pre-operative expenses—leading to a lack of uniformity and potential inequities in tax assessments.
Scope of the Directive
The CBDT clarified that the entertainment sector covers diverse segments including television, radio, music, event management, films, animation, visual effects, broadcasting, sports, and amusement industries. Given the varied nature of business models within this sector, the Board has advised that each case be examined individually, ensuring that deductions are granted only where justified by the nature and timing of expenses.
1. Examination of Pre-Operative Expenses
The circular directs Assessing Officers to verify pre-operative expenses in accordance with Section 32D of the Income-tax Act, 1961, which governs the amortization of preliminary expenses. AOs have been instructed to ensure that:
Such expenses are allowed only after verifying the actual commencement of business; and
Only those expenditures that meet the conditions laid down under Section 32D are permitted as deductions.
This scrutiny aims to prevent the premature or erroneous allowance of pre-operative costs before commercial operations begin.
2. Verification of Feature Film-Related Declarations
Entities engaged in the production of feature films are required to file Form No. 52A, disclosing:
The date of commencement and completion of film production; and
Details of payments exceeding ₹50,000 made to any person involved in the production process.
The CBDT has instructed AOs to:
Verify that Form No. 52A is submitted within the prescribed time — i.e., within 30 days from the end of the financial year or film completion, whichever is earlier.
Cross-check the expenses claimed in the books of account with those disclosed in the form.
Consider imposing penalties under Section 272A of the Act where Form No. 52A has not been furnished within the stipulated period.
3. Verification of Film Production and Distribution Expenditure
The directive reiterates the importance of strict adherence to Rules 9A and 9B of the Income-tax Rules, 1962, which govern deductions related to film production and distribution expenses:
Rule 9A applies to producers and prescribes the conditions under which the cost of producing a feature film can be allowed as a deduction, depending on whether the rights are sold or the film is exhibited commercially by the producer.
Rule 9B applies to distributors and governs deductions for expenses incurred in acquiring distribution rights.
CBDT has instructed that Assessing Officers must meticulously verify compliance with these rules to avoid irregular deductions and to maintain consistency across assessments involving similar business activities.
Background: C&AG and PAC Observations
The C&AG’s 2019 Performance Audit had pointed to disparities in assessment practices across different regions and officers, particularly in the treatment of pre-operative expenses and film production costs. Similarly, the Public Accounts Committee (PAC), in its 51st Report, had called upon the Income Tax Department to issue clear and consistent guidelines to minimize arbitrary interpretations and strengthen assessment quality in the entertainment sector.
CBDT’s Directive for Nationwide Compliance
In light of these findings, the CBDT has directed that the contents of this circular be brought to the notice of all Income Tax officers nationwide, including those posted in field formations. The circular was signed by Dr. Castro Jayaprakash T., Under Secretary (ITA-II), CBDT, and copies were circulated to all Principal Chief Commissioners, Principal Director Generals, and Joint Secretaries of the Board, as well as uploaded on the official departmental portal (www.incometaxindia.gov.in).
