TMI Blog2015 (12) TMI 519X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the expenditure incurred by the Assessee is absorbed in a particular year would depend on the income generated by the Assessee in that year. However, it was incorrect on the part of the Assessee to include the cost of prints along with the MG Royalty amount for the purposes of determining the amount to be carried forward under Rule 9B of the Rules. The language of Rule 9B is unambiguous and the Assessee cannot be permitted to claim a carry forward of the cost of distribution rights, which is in variance with the computation as provided in Rule 9B of the Rules. Decided in favour of the Revenue and against the Assessee. Disallowance made by the AO under Section 40A(3) - CIT(A) deleted the addition - Held that:- In the present case, the AO does not dispute that the Assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights. The Assessee had also contended that such payments were made as the producers required the payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business.In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1962 (hereafter Rules ), which concerns the deduction in respect of expenditure on acquisition of distribution rights of feature films. According to the Assessee, the Assessee is entitled to first deduct all expenses relating to its business pertaining to a feature film that has not been screened for a period of 180 days till the end of the financial year, from the gross realizations pertaining to that feature film and thereafter, amortize the cost of acquisition of the distribution rights of the feature films to the extent of the remaining surplus. It is claimed that the remaining unamortized cost of acquisition is to be carried forward for amortization against business income of the subsequent year. This is disputed by the Revenue. The Revenue contends that the cost of feature films, which have not run for a period of 180 days reduced to 90 days by virtue of the Income Tax (Ninth Amendment) Rules, 1998 with effect from 1st April, 1999 till the end of the financial year, can be amortized to the extent of the gross realizations pertaining to the said film during the year and only the balance is permitted to be carried forward. 5. Both the counsels agreed that the facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,00,000 20,28,817 9,93,252 96,44,34 Nil Pathar Ke Insaan 25,00,000 17,79,558 10,01,622 1779558 7,20,442 Total 59,19,154 18,21,363 5.4 According to the Assessee, the amount of ₹ 59,19,154/- pertained to Minimum Guaranteed Royalty (MG Royalty) in respect of four films namely Farishtey , Saugandh , Patthar ke Phool and Patthar ke Insaan and did not include the costs of prints. The Assessee claimed that the costs of prints had already been set off against gross realizations relating to the respective films and only the MG Royalty amount was carried forward for amortization during the financial year 1991-92 relevant to the AY 1992-93. 5.5 In order to appreciate the rival contentions, it is also essential to refer to the return filed by the Assessee for the preceding year, i.e., financial year 1991 relevant to the AY 1991-92. The Assessee had filed a return declaring an income of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35,01,622.42 5.6 The trading losses reflected in the above trading accounts did not include other expenses incurred by the Assessee including expenses such as publicity expenses specifically incurred in respect of the aforesaid films. Such expenses were directly debited by the Assessee to its Profit and Loss Account for the year ended 31st March, 1991 and were claimed as expenses against income generated from distribution of other films. 5.7 For the AY 1992-93, the Assessee claimed that the expenditure sought to be amortized against business income was only MG Royalty and the same was in accordance with Rule 9B of the Rules. In other words, the Assessee claimed that the costs of prints had been deducted from the gross realizations relating to the respective films and the loss as reflected in the trading account was only the unabsorbed MG Royalty. The AO, on the other hand, was of the view that MG Royalty to the extent of gross realization in respect of each film was to be amortized during the preceding year and only the amount of MG Royalty, which exceeded the gross realizations from exhibition of that film was available for amortization during the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the short issue involved in the Assessee s appeals was whether the Assessee could set off the expenses as allowable under Section 28 to 50 of the Act and amortize the cost of films to the extent of the remaining balance or whether the cost of films was to be amortized before allowance of any expenditure? She submitted that the expenditure incurred by the Assessee in respect of a feature film would have to be deducted from the gross realizations from that film in order to ascertain the amount available for absorbing the cost of acquisition of distribution rights of that film and the unabsorbed cost of acquisition of rights would be carried forward to the next year for amortization against the income of the Assessee. She contended that if this procedure was not followed, the Assessee would not be in a position to set off its normal expenditure against his income in respect of feature films that had not been exhibited for a period of 180 days prior to the end of financial year. She submitted that in the circumstances, such normal expenditure could never be set off and this would render the expenses allowable under Section 37(1) of the Act as dead expenses and the norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of acquisition of feature films did not include the amount of expenditure incurred in preparation of positive prints of feature films. She argued that in effect the Assessee was seeking to carry forward the cost of the films for being amortized in the subsequent year, which was not permissible. Reasoning Conclusion 12. At the outset, it is necessary to refer to Rule 9B of the Rules which reads as under:- Deduction in respect of expenditure on acquisition of distribution rights of feature films. 9B. (1) In computing the profits and gains of the business of distribution of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film distributor), the deduction in respect of the cost of acquisition of a feature film shall be allowed in accordance with sub-rule (2) to sub-rule (4). Explanation : For the purposes of this rule, cost of acquisition , in relation to a feature film, means the amount paid by the film distributor to the film producer or to another distributor under an agreement entered into by the film distributor with such film producer or such other distributor, as the case may be for acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits and gains of such previous year; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year. (4) Where during the previous year in which a feature film is acquired by the film distributor, he does not himself exhibit the film on a commercial basis or does not sell the rights of exhibition of the film, no deduction shall be allowed in respect of the cost of acquisition of the film in computing the profits and gains of such previous year; and the entire cost of acquisition shall be carried forward to the next following previous year and allowed as a deduction in that year. (5) Notwithstanding anything contained in the foregoing provisions of this rule, the deduction under this rule shall not be allowed unless- (a) in a case where the film distributor,- (i) has himself exhibited the feature film on a commercial basis; or (ii) has sold the rights of exhibition of the feature film; or (iii) has himself exhibited the feature film on a commercial basis in some areas and has sold the rights of exhibition of the feature film in respect of all or some of the remaining areas, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the positive prints of films. Indisputably, in view of the plain language of Rule 9B, the expenditure incurred on preparation of positive prints of a film cannot be carried forward for amortization in terms of Rule 9B of the Rules as cost of acquisition of distribution rights of that film. 14. In terms of sub-rule (3) of Rule 9B of the Rules, if a film is not released for exhibition on a commercial basis at least 180 days (now amended to 90 days w.e.f. 1st April, 1999) before the end of the relevant previous year, the cost of acquisition of the distribution rights of that film insofar as it does not exceed the amount realized by the film distributor by exhibiting the film on a commercial basis, would be allowed as a deduction in computing the profits and gains for the relevant previous year. In the facts of the present case, the four films, namely, Farishtey , Saugandh , Patthar ke Phool and Patthar ke Insaan had not completed a commercial run of 180 days during the preceding financial year, i.e., financial year 1990-91 relevant to the AY 1991-92. Therefore, the Assessee was entitled to a deduction to the extent that the cost of acquisition of the films did not exceed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be deducted from the gross realizations in the year in which they were incurred for determining the extent of realizations available for amortization of MG Royalty. It has been further contended that if the same is not done, then in every case where MG Royalty exceeds the collection, it would swallow up the entire realization and consequently the cost of prints and publicity expenses would never be allowed and would become dead expenses . This, according to the Assessee, results in the scheme of computation of business profits under Section 28, 29 and 37(1) becoming inert, lifeless and redundant . It is contended that Rule 9B of the Rules must be read in a manner so as to avoid such manifest absurdity . In our view, the aforesaid contentions are wholly bereft of any merit. Rule 9B of the Rules only provides for the method of computing the deduction available in respect of the expenditure on acquisition of distribution rights of feature films. In terms of sub-rule (1) of Rule 9B of the Rules, the cost of acquisition of a film as determined in terms of explanation to sub-rule (1) of Rule 9B is allowed as a deduction from profits and gains of business in accordance with sub-rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end of the financial year exceeds the realizations from the commercial exhibition of the film in that year, the Assessee would account for a loss in respect of that film in that year, albeit to the extent of other revenue expenditure incurred for that film; this is so because the Assessee is unable to recover even the cost of acquisition of rights of that film. However, the question whether the Assessee returns a loss for the relevant assessment year would depend on the profits or gains made by the Assessee in respect of his business as a whole, which would include not only the profits and gains from films that have not completed a commercial run for a period of 180 days but also the profits or gains made by the Assessee in respect of other films. In the present case, the separate Trading Accounts drawn up by the Assessee in respect of four films for the financial year ended 31st March, 1991 in question indicate a loss which is sought to be carried forward under Rule 9B of the Rules but the Assessee has in fact shown a profit of ₹ 76,751.99/- in its Profit Loss Account for the year ended 31st March, 1991. This includes the expenditure incurred by the Assessee for the publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 4.25 lacs was by way of additional cost and, therefore, allowable as deduction under Rule 9B of the Rules. The Tribunal also held that the amount of ₹ 4.25 lacs was paid for acquiring full rights of exhibition of the film and, therefore, the amount paid was admissible as a deduction under Rule 9B of the Rules. On a reference, the Division Bench of the Bombay High Court held that Rule 9B was applicable to the modified contract dated 20th March, 1978. However, the Court also held that the Assessee could not claim the entire deduction of ₹ 4.25 lacs under Rule 9B of the Rules as the deduction was admissible only where the receipts were credited in the Profit Loss Account and if there were no receipts credited, no amount could be amortized under Rule 9B, which the Court observed was a special code for computing the deduction available to an Assessee. In that case, it was estimated that the Assessee had credited a sum of ₹ 1,49,783/- for the period 1st February, 1978 to 30th June, 1978 and 80% of that amount was taken as the proportionate cost of acquisition which was allowed as a deduction. It is seen that even in this case, the amount to be amortized was linked t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fact one way or the other; and the parties have not challenged the said finding and allowed the position to sustain over the years. Clearly, the said principle will have no application where the position canvassed militates against an express provision of law. 21. This Court in Krishak Bharati Cooperative Ltd. v. Deputy Commissioner of Income Tax: (2013) 350 ITR 24 (Del) had observed as under:- 20. This court notices that there cannot be a wide application of the rule of consistency. In Radhasaomi itself, the Supreme Court acknowledged that there is no res judicata, as regards assessment orders, and assessments for one year may not bind the officer for the next year. This is consistent with the view of the Supreme Court that there is no such thing as res judicata in Income-tax matters (Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC) ; AIR 1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the authorities into repeating them, by application of a rule such as estoppel, for the reason that being an equitable principle, it has to yield to the mandate of law. A deeper reflection would show that blind adherence to the rule of consistency would l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the collections made in respect of the films. According to the Assessee, such payments were not covered under the provisions of Section 40A(3) of the Act. The AO did not accept the Assessee s contentions and made the additions as mentioned above. In appeals preferred by the Assessee, the CIT(A) accepted the Assessee s contention that the payments were not made for purchase of prints but were advanced against the MG Royalty payable for acquiring the limited right of exhibition of film in a particular territory. The CIT(A) held that such payments were held in the nature of royalty for the exploitation of the film i.e. in the nature of price paid for exploitation of a capital asset and therefore the payments would not come under the purview of Section 40A(3) . The CIT(A) further found that there was no doubt as to the identity of the persons receiving the payment and also as to the genuineness of the transactions. 26. The Revenue did not accept the CIT(A) s decision and preferred appeals before the ITAT. The ITAT did not accept the view that the payments in question were outside the scope of Section 40A(3) of the Act; however, the ITAT accepted the contention that such payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction: Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Assessing Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (v) The seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or (vi) Specific discount is given by the seller for payment to be made by way of cash. 33. CBDT further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of rule 34. The ITAT had considered the above mentioned CBDT Circular and had rightly concluded that the circumstances as spelt out in CBDT Circular No. 220 (supra) were not exhaustive but were merely illustrative of situations where business exigencies required that the payments be made in cash. The ITAT also referred to the decision of the Gujarat High Court in Hasanand Pinjomal v. CIT: (1978) 112 ITR 134 (Guj.) wherein the Court had observed that the practicability would have to be judged from the angle of a businessmen and not the Revenue. 35. In the present circumstances neither the genuineness of the payment nor the identity of the payee is disputed. The only controversy that needs to be addressed is whether the ITAT s decision that such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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