CBDT Standardizes Expense Rules for Entertainment Sector After CAG Audit

In a significant move aimed at bringing uniformity and clamping down on inconsistencies, the Central Board of Direct Taxes (CBDT) has issued a crucial circular. This new directive, dated October 21, 2025, provides clear instructions to Assessing Officers (AOs) on how to verify and allow expenses for taxpayers in the entertainment industry.

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This directive comes as a direct response to a Performance Audit Report (No.1 of 2019) from the Comptroller & Auditor General of India (C&AG), which was also examined by the Public Accounts Committee (PAC). The C&AG had red-flagged a major problem: tax officers across the country were taking “inconsistent approaches” when assessing companies in the entertainment sector, especially concerning ‘pre-operative expenses’.

Simply put, two different production houses with similar expenses could face two very different tax outcomes, leading to uncertainty and a rise in disputes. The new CBDT circular (F.No.225/215/2018/ITA-II) aims to put an end to this ambiguity by guiding AOs to apply the existing tax laws correctly and uniformly.

Here’s a breakdown of what the new guidelines specify and what it means for the industry.

The Core Problem: Inconsistent Tax Treatment.

The C&AG’s audit revealed that despite similar facts and circumstances, AOs were not uniform in allowing pre-operative expenses. The entertainment sector—which is vast, covering films, television, radio, music, event management, animation, and broadcasting—has unique business models. The C&AG’s findings suggested that the lack of a standard approach was creating an uneven playing field.

The CBDT’s circular is essentially a “back-to-basics” instruction, reminding its officers of the specific rules they must follow.

Key Guidelines for Expense Verification.

The CBDT has spotlighted three specific areas of expenditure, directing AOs to adhere strictly to the letter of the law.

1. Pre-operative Expenses: The Amortisation Rule.

What are they? These are costs incurred before a business officially commences. For a film production house, this could include expenses for setting up the office, legal fees for incorporation, or initial project scouting before the business is formally ‘set up’ to start earning revenue.

The Guideline: The circular explicitly points to Section 32D of the Income-tax Act, 1961.

What it means: These expenses cannot be claimed as a 100% deduction in the very first year. Instead, they must be amortized—meaning, the deduction is spread out over a specific period as defined in that section. The C&AG likely found instances where AOs were either allowing the full expense upfront or disallowing it entirely, both of which are incorrect.

2. Film Production Costs: Stick to Rule 9A.

What are they? These are the direct costs of making a feature film—from paying actors and directors to set construction, camera rentals, and post-production.

The Guideline: The circular reminds AOs that the deduction for these expenses must be verified and allowed strictly as per Rule 9A of the Income-tax Rules, 1962.

What it means: Rule 9A is the specific playbook for film producers. It lays out the methodology for how a producer can claim the cost of production as a deduction against the profits earned from the film (whether from selling all rights or from exhibiting the film themselves). AOs are being told not to deviate from this rule.

3. Film Distribution Costs: The Rule 9B Mandate.

What are they? This applies to distributors, not producers. It’s the cost incurred to acquire the distribution rights of a feature film.

The Guideline: The CBDT has directed that these deductions must be examined and allowed as per Rule 9B of the Income-tax Rules.

What it means: Just like Rule 9A for producers, Rule 9B provides the specific mechanism for distributors. It governs how they can claim the (often very high) cost of acquiring film rights against the revenue they earn from distributing the film.

The Compliance Hammer: Renewed Focus on Form 52A.

Perhaps the most critical warning in the circular is the renewed emphasis on a key compliance document: Form No. 52A.

What is it? This form is a mandatory declaration that producers must file.

When to File? It must be filed within 30 days from the end of the financial year or within 30 days of the film’s completion, whichever is earlier.

What’s Inside? This is the crucial part. The form requires producers to disclose details of all payments (in aggregate) exceeding ₹50,000 made to any person engaged in the production of the film. This isn’t just for primary cast and crew; it applies to everyone involved.

The Warning: The circular explicitly reminds AOs that a penalty under Section 272A of the Act can be levied for failure to furnish Form 52A.

This signals that AOs will now be actively checking for this form. For producers, this means meticulous record-keeping is no longer optional.

What This Means for the Entertainment Industry.

This CBDT directive is a double-edged sword, bringing both relief and responsibility.

• Welcome Consistency: For the industry, this is good news. It promises a more predictable and uniform tax environment. Producers and distributors can now be more certain about how their expenses will be treated, reducing the risk of arbitrary disallowances and costly litigation.
• No More “Grey Areas”: The flip side is that the “inconsistent” (and sometimes, perhaps, lenient) treatment that some AOs may have adopted will now end. A strict, rule-book-based approach will be enforced.
• Compliance is King: The spotlight on Form 52A is a clear call to action. Production houses must tighten their accounting and compliance systems. Failure to file this form, or filing it with inaccurate data, will now almost certainly attract penalties.

In conclusion, the CBDT’s move, spurred by the C&AG’s audit, is a strong push towards transparency and accountability. While it demands stricter compliance from the entertainment sector, it also provides the long-awaited benefit of a stable and uniform tax assessment process.

Disclaimer:

The information provided in this article is for informational purposes only and does not constitute financial or legal advice. The content is based on the CBDT circular dated October 21, 2025 (F.No.225/215/2018/ITA-II) and general interpretations of tax laws. Tax laws are subject to change and interpretation. Readers are strongly advised to consult with a qualified tax professional or chartered accountant for advice tailored to their specific situation before making any financial decisions. The author and publisher disclaim any liability for any loss or damage caused by reliance on the information contained herein.

Official References

Notification: CBDT Circular F.No.225/215/2018/ITA-II.

Notification: CBDT Circular F.No.225/215/2018/ITA-II

Date: October 21, 2025

Issuing Authority: Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, Government of India

Official Portal: www.incometaxindia.gov.in

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.