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Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: SHRI J. SUDHAKAR REDDY & SHRI A.T. VARKEYSmt. Achla Sabharwal vs.
ORDER PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER These are Appeals directed against separate orders of the Ld.Commissioner of Income Tax (Appeals)-XXV, New Delhi dated 31.12.2010 and 04.01.2013, pertaining to the Assessment Year (A.Y.) 2007-08. ITA 1541/Del/2011 is an appeal by the assessee against the order of the Ld.CIT(A) upholding the addition to income made by the Assessing Officer (AO). Revenue against the penalty deleted by the Ld.CIT(A).
Facts in brief:- The assessee is in the business of distribution of films and songs. During the Assessment Year the assessee filed her return of income declaring income of Rs.61,11,621/-. The Assessing Officer (AO)
~ 2 ~ completed the assessment u/s 143(3) of the Income Tax Act 1961 (the Act) vide order dated 23.12.2009 inter alia making an addition of Rs.55, 28,571/-. The addition is on the recognition of income in respect to the sale of rights in certain films by the assessee by way of an agreement for the period of seven years. The assessee, on the ground that, the agreement is for the period of seven years, claimed that the income is to be spread over the period of seven years. She accounted for one seventh of the total sale value i.e. Rs.9,21,428/- as income of the year under consideration. The balance amount of Rs.55,28,572/- was declared as income for the six subsequent A.Ys at the rate of Rs.9,21,428/- per year and assessments have been completed of such income for A.Ys 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13. 2.1. The AO was of the view that the income arising out of the contract should be taxed as income during the current A.Y. In response to this the assessee filed her reply vide letters dated 12.11.2009, 3.12.2009, 7.12.2009 and 16.12.2009. The assessee has submitted as under. (i) The assessee is in the business of purchase, and sale of, distribution, exhibition, satellite rights etc. Sometimes rights are sold, as it is, to other concerns and sometimes the assessee exhibits films herself. In many cases the feature films were exhibited through National Film Development Corporation, Dordarshan etc. The assessee is a sub-distributor of the old feature films and further re-exhibition of such films is always uncertain as against the new film. Therefore, the future economic benefit out of these rights is not certain. (ii) The rights so purchased should not be treated as intangible assets as in the case of intangible assets, a enterprise always control such a resource (asset/right) and the future economic benefits are always expected to flow to the assessee. However, as per terms and conditions of agreements entered with the buyer, not only the assigned rights remain with the buyer but the cinematographic prints of the film also remain with buyer. Accordingly, during the agreed/assigned period assessee cannot hold films and can not raise any further revenue.
~ 3 ~ (iii) There was a mistake while preparing the Profit & Loss A/c regarding the claim of deduction on account of expenditure incurred by the assessee in purchasing these film rights. In the case of film distributor or Sub- distributor, the deduction of expenditure incurred on purchase of exhibition/distribution rights is governed by a Special Rule i.e. Rule 9B of Income Tax Rule 1962. Though, in the accounts the deduction was shown as depreciation but in actual the deduction is being claimed according to Rule 9B only. The manner in which the deduction was claimed in the P&L Account is not correct, however, the amount of deduction claimed is correct. In this respect it is pertinent to note that she did not claim any deduction during AY 2006-2007 on the film rights purchased amounting to Rs.23,72,000/- as rights of these films were not sold during the AY 2006- 2007, because Rule 9B does not permit to do so. However, as revenue were raised out of these films in the current assessment year, therefore, the deduction of Rs.23,72,000/- has been claimed in this year. This shows the bona-fide of the assessee. (iv) The assessee is not engaged in any use, consumption of acquired cinematographic right other than its assignment for agreed consideration for given period to other parties i.e. right are not been used to produce any audio, video products. Therefore, the purchase/sale of cinematographic rights in the assessee case should not be treated as intangible assets and the deduction as per Rule 9B should be allowed. (v) Regarding the amortisation of expenditure over the period for which rights were assigned, the assessee has argued that the expenditure in her case should be allowable as per Rule 9B and no other method should be applied. (vi) Regarding the treatment of Rs.55,28,571/- as un-accrued income, the assessee has submitted that the rights for 6 movies were assigned for a period of 7 years from the effective date in respect of assigned films. The effective date for all the 3 films assigned to M/s Prime Focus Limited is beyond 31.03.2007 therefore, no part of sale proceeds should relate to the current year. However against this, the assessee has recognized an amount of Rs.6,21,428.57 (1/7th of total consideration of Rs.43,50,000/-) as income
~ 4 ~ of the AY 2007-2008. Similar explanation has been given for the films assigned to M/s Indus Video Pvt. Ltd. The assessee has also explained that she has recognised the income pro-rata. 2.3. The AO did not accept the contention of the assessee. He held that on one hand the assessee is claiming deduction of the whole expenditure on the acquisition of rights, which period of assignment is more than one year. On the other hand when the rights are sold to M/s Indus Video P.Ltd. and M/s Prime Focus Ltd. the same is being recognised on proportionate basis and spread over the period of assignment. He felt that hence the method of accounting followed by the assessee is not correct. He held that the assessee is following mercantile system of accounting and as the agreements assigning the rights to M/s Indus Video P.Ltd. and M/s Prime Focus Ltd. were entered during the current A.Y., the income has accrued during the year. He further held that if the assessee acquires a right to receive the income, the income can be said to have accrued to him at the time when such right to receive the income was acquired. He stated that the assessee cannot follow two different systems of accounting while recognising the expenditure and income. Accordingly AO made an addition of Rs.55,28,571/- and initiated penalty proceedings u/s 271(1)(c ) of the Act. The A.O. levied penalty u/s 271(1)(c ) of the Act.
Aggrieved the assessee carried the matter in appeal before the First Appellate Authority. The Ld.CIT(A) sustained the quantum addition. He deleted the penalty.
Further aggrieved the assessee as well as the Revenue are before us.
We have heard Shri Ved Jain, the Ld.Counsel for the assessee and Shri KK Jaiswal, Ld.D.R. on behalf of the Revenue.
On a careful consideration of the facts and circumstances of the case, perusal of papers on record and orders of the authorities below, as well as case laws cited, we hold as follows.
In our considered opinion the A.O. was in error in his conclusions that, whenever Rule 9B is applied for claims of expenditure, the income should also be accounted for and offered to tax in the year of receipt.
~ 5 ~ Rule 9B of the Income Tax Rules, 1962 is a special rule which provides for claims of deduction in respect of expenditure, in respect of distribution of films. The Income Tax Act or Rules have not provided for any special manner in which income in such cases have to be taxed. Thus the general law prevails. Coming to the accrual of income, we find that the assessee has offered this income for the next subsequent six A.Ys i.e. A. Y. 2008–09 to 2012–13 at the rate of Rs.9,21,428/- at prorate basis. The assessee has included in the paper book assessments for all these A.Ys. The income in question has been offered to tax and has been taxed by the department in all these A.Ys equally. The addition in this year amounts to double taxation. Distribution rights in the film is a property. This property has been licensed for a time period of seven years by the assessee to the third parties. The consideration received is for exploitation of certain rights in these films for a period of seven years. Thus we are of the considered opinion that the income arising out of such licensing of the right to exploit the film for seven years is to be taxed on time basis. The Hon’ble Supreme Court in the case of CIT vs. Madras Industrial Corporation reported in 225 ITR 802 (S.C.), approved the concept of deferred accrual of expenditure. It was held as follows: “Since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs 3,00,000 in that accounting year This conclusion does not appear to be justified looking to the nature of the liability It is true that the liability has been incurred in the accounting year But the liability is a continuing liability which stretches over a period of 12 years It is, therefore, a liability spread over a period of 12 years Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years However, the facts may justify an assessee who has incurred expenditure in a particular year to spread
~ 6 ~ and claim it over a period of ensuing years In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year Thus in the case of Hindustan Aluminium Corporation Ltd Vs CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years There is a continuing benefit to the business of the company over the entire period The liability should, therefore, be spread over the period of the debentures.”
7.1. On the same analogy in the case of CIT vs. Mahindra Holidays & Resorts (India) Ltd., ITAT, Chennai (SB) vide order dt. 26th May, 2010 held that, where the assessee company was in the business of selling timeshare units in its various resorts, the entire amount of timeshare membership fee receivable by assessee up front, at the time of enrolment of a member would not be income chargeable to tax in initial year itself, when there was contractual obligation fastened to such receipt to provide services in future over term of contract (A.Y. 1998-99 to 2002-03). It was held that the income has to be recognised over the period of the contract. This case law is applicable to the facts.
In view of the above discussions, we agree with the submissions made by the Ld.Counsel for the assessee that the income in question has to be taxed over the period of the contract. Hence the addition made is deleted and the appeal of the assessee is allowed.
~ 7 ~
Since we have deleted the addition made in the quantum assessment, the penalty levied u/s 271(1)(c ) on such addition cannot be sustained.
In the result we allow assessee’s appeal in ITA 1541/Del/2011 and dismiss the Revenue’s appeal ITA 1807/Del/13. Order pronounced in the Open Court on 07th January, 2016.