COMMR.OF INCOME TAX VISAKHAPATNAM vs. SOUTH GLORY INTERNATIONAL P.LTD VISAKHAP

By way of this appeal, the appellant has challenged the judgment and order dated 17.05.1999 (Annexure-1) passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack in I.T. Appeal No.206/CTK/1997, whereby learned Tribunal has disallowed the claim of the assessee.

This Court vide order dated 06.10.1999 while admitting the matter has framed the following substantial questions of law. “(1) Whether in the facts and circumstances of the case the Tribunal has rightly allowed deduction at 10% of the expenditure on taking out positive prints of the films acquired for distribution. (2) Whether in the facts and circumstances of the case the expenditure incurred by the film distributor on taking out positive prints of the films are liable to be amortised as per the provisions of Section 35-D of the Income Tax Act, 1961. (3) Whether in the facts and circumstances of the case, particularly in the absence of any specific provision in the Income Tax Act, 1961 and specifically excluded from the application of Rule- 9-B of the Income Tax Rules, 1962, the claim for deduction of entire expenditure incurred by the film distributor on taking out positive prints of the films is allowable under Section 37 of the Income Tax Act, 1961 in the year in which it is incurred?” TA NO. 18 OF 1999

Learned counsel for the appellant contended that for the same assessee, the Department has accepted the claim of the appellant for the years 1987-88, 1988-89 & 1989-90, but only for the years 1990-91 and 1991-92, the same was disallowed. Subsequently, for the years 1992-93, 1993-94, 1994-95 and 1995-96, the same was allowed by CIT (Appeal). Therefore, on the principle of acceptance by the Department, this appeal deserves to be allowed. He has produced on record all assessment orders along with the written submission in support of his case.

Even to support his case, learned counsel has relied upon the Income Tax Rules, 1962, more particularly Rule- 9A and Rule-9B, which reads as under: “.9A. Deduction in respect of expenditure on production of feature films (1) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4). Explanation : In this rule,— (i) “Board of Film Censors” means the Board of Film Censors constituted under the Cinematograph Act, 1952 (37 of 1952); (ii) “Cost of production”, in relation to a feature film, means the expenditure

incurred on the production of the film, not being— (a) the expenditure incurred for the preparation of the positive prints of the film; and (b) the expenditure incurred in connection with the advertisement of the film after it is certified for release by the Board of Film Censors:] [Provided that the cost of production of a feature film, shall be reduced by the subsidy received by the film producer under any scheme framed by the Government, where such amount of subsidy has not been included in computing the total income of the assessee for any assessment year.] (2) Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year,— (a) the film producer sells all rights of exhibition of the film, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year; or (b) the film producer— (i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas; or (iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas,

and the film is released for exhibition on a commercial basis at least [ninety] days before the end of such previous year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such previous year. (3) Where a feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer— (a) himself exhibits the film on a commercial basis in all or some of the areas; or (b) sells the rights of exhibition of the film in respect of some of the areas; or (c) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is not released for exhibition on a commercial basis at least [ninety] days before the end of such previous year, the cost of production of the film in so far as it does not exceed the amount realised by the film producer by exhibiting the film on a commercial basis or the amount for which the rights of exhibition are sold or, as the case may be, the aggregate of the amounts realised by the film producer by exhibiting the film and by the sale of the rights of exhibition, shall be allowed as a deduction in computing the 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 certified for release by the Board of Film Censors, the film producer 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 production of the film in computing the profits and gains of such previous year; and the entire cost of production of the film 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 producer— (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, the amount realised by exhibiting the film, or the amount for which the rights of exhibition have been sold or, as the case may be, the aggregate of such amounts, is credited in the books of account maintained by him in respect of the year in which the deduction is admissible; (b) in a case where the film producer has transferred the rights of exhibition of the feature film on a minimum guarantee basis, the minimum amount guaranteed and the amount, if any, received or due in excess of the guaranteed amount or where the film producer follows cash system of accounting, the amount received towards the minimum guarantee and the amount, if any, received in excess of the guaranteed amount, are credited in the books of account maintained

by him in respect of the year in which the deduction is admissible. (6) Where the Assessing Officer is of opinion that— (a) the rights of exhibition of the feature film have been transferred by the film producer by a mode not covered by the provisions of this rule; or (b) having regard to the facts and circumstances of any case, it is not practicable to apply the provisions of this rule to such case, deduction in respect of the cost of production of the film may be allowed by the Assessing Officer in such other manner as he may deem suitable. (7) For the purposes of this rule,— (i) the sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis; (ii) the rights of exhibition of a feature film shall be deemed to have been sold only on the date when the positive prints of the film are delivered by the film producer to the purchaser of such rights or where in terms of the agreement between the film producer and the film distributor as defined in rule 9B, the positive prints are to be made by the film distributor, the date on which the negative of the film is delivered by the film producer to the film distributor. (8) Nothing contained in this rule shall apply in relation to any assessment year commencing before the 1st day of April, 1987.

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 acquiring the rights of exhibition and, where the rights of exhibition have been acquired on a minimum guarantee basis, the minimum amount guaranteed, not being— (i) the amount of expenditure incurred by the film distributor for the preparation of the positive prints of the film; and (ii) the expenditure incurred by him in connection with the advertisement of the film. (2) Where a feature film is acquired by the film distributor in any previous year and in such previous year— (a) the film distributor sells all rights of exhibition of the film, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year; or (b) the film distributor,—

(i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas; or (iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is released for exhibition on a commercial basis at least ninety days before the end of such previous year, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year. (3) Where a feature film is acquired by the film distributor in any previous year and in such previous year the film distributor— (a) himself exhibits the film on a commercial basis in all or some of the areas; or (b) sells the rights of exhibition of the film in respect of some of the areas; or (c) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas, and the film is not released for exhibition on a commercial basis at least ninety days before the end of such previous year, the cost of acquisition of the film in so far as it does not exceed the amount realised by the film distributor by exhibiting the film on a commercial basis or the amount for which the rights of exhibition have been sold or, as the case may be, the aggregate of the amounts realised by the film distributor by exhibiting the film and by the sale of the

rights of exhibition, shall be allowed as a deduction in computing the 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, the amount realised by exhibiting the film, or the amount for which the rights of exhibition have been sold, or, as the case may be, the aggregate of such amounts, is credited in the books of account maintained by him in respect of the year in which the deduction is admissible;

(b) in a case where the film distributor has transferred the rights of exhibition of the feature film on a minimum guarantee basis, the minimum amount guaranteed and the amount, if any, received or due in excess of the guaranteed amount, or where the film distributor follows cash system of accounting, the amount received towards the minimum guarantee and the amount, if any, received in excess of the guaranteed amount, are credited in the books of account maintained by him in respect of the year in which the deduction is admissible. (6) For the purposes of this rule,— (i) the sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis ; (ii) the rights of exhibition of a feature film shall be deemed to have been sold only on the date when the positive prints of the film are delivered by the film distributor to the purchaser of such rights ; (iii) distributor shall include a sub-distributor. (7) Nothing contained in this rule shall apply in relation to any assessment year commencing before the 1st day of April, 1987.

Learned counsel for the appellant has also relied upon the decision of Madras High Court in the case of Commissioner of Income Tax, Madras –v- Modern Theatres Ltd., reported in [1963] 50 ITR 548 (Mad), wherein the Madras High Court in the aforesaid case has framed the following substantial question of law.

“1.Whether the sum of Rs.3,53,863/- claimed by the assessee as to cost of the positive prints of the two films aforesaid is deductible in the assessment in whole or in part dependent of amortization?

He has also relied upon the decision of Madras High Court in the case of Commissioner of Income Tax -v- Prasad Productions P. Ltd., reported in (1989) 179 ITR 147, wherein it has been held as follows: “………..Only during the course of the pendency of the appeal before the Appellate Assistant Commissioner, the assessee exercised an option as per rule 9A of the Rules and under Explanation (ii)(a) to rule 9A(1) of the Rules, the expenditure incurred for the preparation of the positive prints of the film could not be included within the expression “cost of production”. It is for this reason that such expenditure is characterized as post-production expenditure. Ordinarily, all expenditure incurred on the production of a film would be its cost of production, but that would exclude the expenditure incurred for the preparation of the positive prints of the film so produced. The purpose of obtaining positive prints is to exhibit the film produced which is a stage after the completion of the production. In any given case, a person carrying on business in the production of feature films may produce a film, but for a variety of reasons, he may not be in a position to exhibit it by obtaining positive prints. Having produced a film, the person carrying on the business of production of feature films may either keep them without exhibition or even part with them without making arrangements for their exhibition. It cannot, therefore, be assumed that in all cases of production of a film, the producer must

necessarily obtain the positive prints of the film as well. In other words, if a person carries on the business of production of films, he may not only produce the films but also prepare the positive prints for the purpose of exhibition or he may not take steps for the exhibition of the film having produced it. The production and exhibition of a feature film constitutes two distinct and separate stages and while 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 post- production 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 provision in the Act or the rules disallowing such expenditure as an item of business expenditure for the purpose of section 37 of the Act. Though learned counsel for the Revenue placed considerable reliance upon the decision in CIT v. Carborundum Universal Ltd., [1977] 110 ITR 621 (Mad), we are of the view that that decision does not in any manner assist the Revenue. In that case, the asses-see claimed deduction of a certain amount in the computation of its profits and gains of the business by way of contribution to the superannuation fund of its foreign collaborators and that claim was disallowed by the authorities below. However, the Tribunal held that

though that amount was not an allowable deduction under section 36(1)(iv) of the Act as the contribution was not to a recognised provident fund or to an approved superannuation fund nor could be allowed under section 37 of the Act, the payment was allowable under section 28 of the Act. On a reference, it was held that the nature of payment being one described in section 36(1)(iv) of the Act and as it could not be deducted under that section, it cannot be held to be deductible under section 28 of the Act on general principles in arriving at the true profits and gains of the business in a commercial sense. In the view we have taken that the expenditure incurred in connection with the obtaining of positive prints is really in the nature of post-production expenditure and that there is no provision in the Act or the rules obliging the authorities to disallow such expenditure, the claim of the assessee that such expenditure would fall under section 37, of the Act is, in our view, well- founded. We, therefore, answer the second question referred to us in the affirmative and against the Revenue.”

Against the aforesaid judgment, SLP filed before the Hon’ble Supreme Court was dismissed.

In that view of the matter, we are of the considered opinion that on the principles of acceptance in the previous years and subsequent years, learned Tribunal has seriously committed an error and in view of the decisions of the Madras High Court, the issue is required to be answered in favour of the assessee and against the Department. Accordingly, the Question No.1 is answered in

favour of assessee. In that view of the matter, Question nos. 2 and 3 are not pressed.

Accordingly, this appeal is disposed of.

Urgent certified copy of this order be granted on proper application.

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K.S. JHAVERI

(CHIEF JUSTICE)

bks/jm

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K.R. MOHAPATRA,

(JUDGE)