The Association, led by president Ashoke Pandit, demanded the apology after Nihalani suggested that Kashyap might have taken money from the Aam Aadmi Party to show Punjab in poor light through his co-production.
The AAP is a major player in Punjab, which will see elections next year.
"We condemn the statement (by Nihalani). We demand an apology as soon as possible. This is not just an insult to Kashyap but to the film industry as a whole," said Pandit, also a member of the Central Board of Film Certificate (CBFC) which Nihalani heads.
Association members Mahesh Bhatt, Mukesh Bhatt and Zoya Akhtar apart from members of the "Udta Punjab" team -- Kashyap, Ekta Kapoor, Shahid Kapoor, Alia Bhatt and director Abhishek Chaubey -- addressed a conference here to discuss the censor's 89 cuts in the movie.
AAP leader and Delhi Chief Minister Arvind Kejriwal on Wednesday alleged that Nihalani's charge against Kashyap proved he had acted against the film on the direction of the Bharatiya Janata Party.