TMI Blog1993 (7) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee the assessee has to pay for the cost of prints, i.e., cost of raw stock plus process and printing charges plus levy calculated on a particular method given in the agreement. The producer i.e., Aryan Films Bombay has to give 15 prints, the cost of which was included in the minimum guarantee. The agreement also provided for the manner and method of payment of minimum guarantee which included the cost of prints to be supplied by the producer. In addition to the minimum guarantee, the assessee had to pay the sum of Rs. 7,08,655 for some extra prints. The number of extra prints obtained, the dates of payments of the sums are not given to us but yet It is an admitted fact that that sum was paid for the acquisition of the extra prints. 3. Subsequently, this film failed at the Box Office and on the request of the assessee, the producer reduced the minimum guarantee amount by Rs. 6 lacs to be adjusted not by reduction on the payment of minimum guarantee but against the over flow that the assessee has to pay to the producer. This was secured by another agreement entered into on20-6-1983. By another agreement dated 23rd August, 1983 entered into between Murghan Enterprises, Dadar B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re must be allowed u/s. 37 which is a residuary section and has to be given effect if the expenditure falls for allowance within the meaning of that section. He pressed into service in this connection, the rulings of the Kerala High Court reported in CIT v. Geeva Films [1983] 141 ITR 632 and Madras High Court in CIT v. Sankarapandia Asari Sons [1987] 165 ITR 616. 7. For and on behalf of the Department Shri K. Ramesh vehemently argued that when a Rule was particularly made by the Legislature which has the force of law to deal with the computation of the profits and gains of the business of distribution of feature films carried on by a person, that Rule 9B alone should prevail and not section 37 of the Income-tax Act which is only a residuary section meaning that that section would come into operation or play or would have to be resorted to only when there was no specific provision made to deal with a particular situation. In other words when the method and manner of dealing with a particular situation was provided for, that method and manner should not be bypassed or given a go by or allowed to be circumvented by resorting to the residuary provision of section 37 of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year." Now section 37(1) provides : " 37(1). Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business profession shall be allowed in computing the income chargeable under the head'Profits and gains of business or profession '." A reading of section 37 would clearly show that it applies only to such expenditure which is not an expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses. To put it differently, if any expenditure is of the nature described in sections 30 to 36 or in the nature of a capital expenditure or personal expenses of the assessee, the provisions of section 37 would not apply. In other words, what is not provided for the allowance as the business expenditure by sections 30 to 36 alone can be considered for allowance under section 37. That was why it is called a residuary section. This condition is very important and perhaps is the foundational condition for the application of section 37. When th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as inserted by the Income-tax (Seventh Amdt.) Rules, 1976. It is thus clear that when the Board made rules for the computation of profits and gains of business of distribution of feature films, the computation of income has to be in accordance with Rule 9B and that the residuary section 37 is attracted only if there is no specific prohibition in Rule 9B. The effect of making rule 9B is to make the computation of the profits and gains of the business of distribution of feature films strictly in accordance with this rule which has got the statutory force. It is imperative and also no escape from computing the profits and gains of distribution of feature films except in the manner provided under rule 9B. Rule 9B shows on a careful analysis that it provided for how the cost of acquisition of a feature film is to be ascertained and in what circumstances it has to be allowed. As we have noticed above, the Explanation to rule 9B defines the 'cost of acquisition' in relation to a feature film. It says that the amount paid by the film distributor to the film producer under an agreement entered into by the film distributor with the film producer for acquiring the rights of exhibition is "cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure than cost of acquisition. The other expenditure incurred by a film distributor which is of revenue character for the allowance of which there is no statutory prohibition in any of the sections having a bearing on the computation of income for business, such as salaries, rent, travelling, batta to the representatives, transport etc., have all to be allowed as a deduction in computing the income. If rule 9B was not enacted providing for deduction of the cost of acquisition in the manner in which it was mentioned in sub-rule (2) to sub-rule (4), then difficulties would arise ; in fact difficulties did arise in the past as to the meaning of the word ' cost of acquisition ' and as to in what circumstances, the cost of acquisition is to be allowed as a deduction, particularly in cases where the films have failed after release at the box office. The computation of income in this behalf presented several problems. These rules are made, therefore, to set at rest the controversy with regard to the meaning of the cost of acquisition and also the manner in which the cost of acquisition is to be allowed in different circumstances as envisaged in sub-rule (2) to sub-rule (4). In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement with the producer. The prints agreed to be provided by the producer are only 15 and the centres in the area covered by the agreement are more than 15, naturally more prints have to be purchased. Those prints may belong to the assessee as he has acquired the right in them by purchasing them on his own account and that right has proved of no value as the film has proved a flop. In the case of films, the maximum collections are always in the first few days. (i.e.) before the opinion about the films as to its merit goes round the public, what is called in film trade "Talk". Any distributor will try to take advantage of this initial draw by releasing the picture in as many centres as possible without restriction. If he had not purchased the prints in sufficient number to take advantage of the maximum collections in the first few days of the release of the film before the word "flop" goes round among the viewers of the picture, the distributor has to suffer heavy losses. To minimise loss and maximise the collections the distributor has to purchase more number of prints as a business necessity commercially expedient and, therefore, the expenditure incurred on the purchase of extr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertisement (i.e.) on behalf of Producer. Whatever is provided for in the agreement between the film distributor and the film producer as minimum guarantee is alone to be taken as minimum guarantee as representing the cost of acquisition and not anything more. If that is the purpose for this explanation and when there is no prohibition for the allowance of any other expenditure, we see no reason as to why the amount incurred on the purchase of the extra prints for the purpose of the business should be excluded from the deduction unless-it is of a capital nature. Thus Rule 9B cannot be said to be a complete code in itself except to define cost of acquisition. We are, therefore, of the opinion that having regard to these facts, the amount spent by the assessee on the acquisition of the positive prints of the film is to be allowed as a deduction, though not as forming part of the cost of acquisition within the meaning of the Explanation- to sub-rule (1) of Rule 9B of the Income-tax Rules. We are fortified in our view by a recent decision of the Madras High Court in the case of CIT v. Prasad Productions (P.) Ltd. [1989] 179 ITR 1471. In this case, the assessee was carrying on the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the former would take in all activities which culminate in the production of a feature film, the latter contemplates a stage subsequent to the completion of the production of the film, viz., exhibition of the film produced. Viewed thus, any expenditure incurred in connection with the preparation of the positive prints for purposes of exhibition would really be the postproduction expenses and also an item of expenditure in relation to the business of production and exhibition of feature films and, would therefore, qualify for deduction as expenditure laid out or expended wholly and exclusively for the purpose of the business. We have not been referred to any provisions in the Act or the rules disallowing such expenditure as an item of business expenditure for the purpose of section 37 of the Act ". Thus the decision of the Madras High Court fully supports the view that we have taken that the cost of the positive prints though not to be allowed as forming part of the cost of acquisition has to be allowed as expenditure laid out and expended wholly and exclusively for the purpose of the business. 10. Though the learned Advocate has referred to two decisions as rendering assistance ..... 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