Sentence Correction

In the MGMAT SC guide there is reference that
"That or whom can be dropped when the modified noun is the object of the modifying clause"

Eg. The movie that we watched last Friday was scary

correct choice is
The movie we watched last Friday was scary

why is that not needed here, The movie is not the object but is the subject and I guess that is modifying the movie.

please advice what am I misunderstanding?

Also, I have a problem in understanding the usage of That, when to use and when not to use it. Can someone provide some explanation or link that explains "That".

Thanks in anticipation.

Vineet

In the sentence "The house that my father is buliding is on top of the hill" why do I need That?

If I say "The house my father is buliding is on top of the hill", is this incorrect, if yes, then why?

Please PM Ron, Stacey or Stuart. They will be able to help you out.