2000 (11) TMI 27 - HC - Income Tax

Court rules on weighted deduction for publicity materials and disallowance of print costs; transit print value as income.

The court ruled in favor of the assessee regarding the entitlement to weighted deduction for publicity materials but upheld the disallowance of deduction ... Weighted deduction under section 35B - expenditure on advertisement or publicity outside India - expenditure on distribution, supply or provision outside India - development of export markets - treatment of positive prints as goods - capital versus revenue expenditure on positive prints - mercantile system and accrual of income in transitWeighted deduction under section 35B - expenditure on advertisement or publicity outside India - development of export markets - Entitlement of the assessee to deduction under section 35B for publicity materials sent out of India despite assignment of overseas exploitation rights under an agreement. - HELD THAT: - The Tribunal found that the assessee obtained the export licence, retained the export proceeds under the agreement and supplied the publicity materials which were taken abroad and used for exhibition. Section 35B(1)(b)(i) permits deduction for expenditure on advertisement or publicity outside India in respect of goods or services the assessee provides in the course of business. On the facts - producer status of the assessee, retention of export benefits under the contract and supply of publicity materials by the assessee - the expense on such publicity material is an expenditure incurred by the assessee in respect of services it provides and is therefore within section 35B(1)(b)(i). The Court found no infirmity in the Tribunal's conclusion allowing the deduction for publicity materials.Deduction under section 35B allowed in respect of publicity materials sent abroad.Expenditure on distribution, supply or provision outside India - treatment of positive prints as goods - capital versus revenue expenditure on positive prints - Whether the cost of preparation of positive prints qualifies for deduction under section 35B. - HELD THAT: - Section 35B(1)(b)(iii) allows deduction for expenditure on distribution, supply or provision outside India of goods (or on carriage/insurance) and is concerned with expenditure incurred in developing markets abroad rather than the cost of making the goods themselves. Positive prints, when made in India and carried abroad for exhibition, constitute 'goods' for the purpose of distribution under section 35B(1)(b)(iii); consequently the cost of making those prints is the cost of the goods and does not fall within the permissible expenditure under that subclause. Rule 9A's treatment of positive prints for production-cost purposes is a distinct matter and does not determine the scope of section 35B. Although the Tribunal inquired whether positive prints were capital goods and treated their cost as capital expenditure, that inquiry was unnecessary for applying section 35B; nevertheless the ultimate conclusion - denial of section 35B benefit in respect of the cost of positive prints - is correct in law even if the Tribunal's reasoning on capitality was not approved.Cost of positive prints does not qualify for deduction under section 35B; Tribunal's finding of capitality not approved but denial of benefit sustained.Mercantile system and accrual of income in transit - Whether the value of four prints in transit to the distributor, not included in closing stock, is assessable as income for the assessment year 1980-81. - HELD THAT: - The assessee followed the mercantile system. At the end of the previous year the four prints were in transit to the assignee as part of the contractual supply for which payment was to be made by the assignee. Under the mercantile system, accrual of income is determinative and non receipt of payment before the year end does not prevent accrual. Therefore the value of the four prints represented income of the assessee for the relevant year and could not be excluded as closing stock.Value of the four prints in transit to the distributor is assessable as income for 1980-81.Final Conclusion: For assessment year 1980-81 the Court upheld allowance of section 35B deduction for publicity materials supplied and exported by the assessee, disallowed deduction for cost of positive prints (holding such cost outside section 35B) while rejecting the Tribunal's capitality reasoning, and affirmed that the value of four prints in transit constituted assessable income under the mercantile system. Issues:1. Entitlement to weighted deduction under section 35B for publicity materials and positive prints.2. Treatment of the sum representing the value of prints as income.Entitlement to weighted deduction under section 35B for publicity materials and positive prints:The court deliberated on whether the assessee, involved in film production and distribution, was eligible for weighted deduction under section 35B for expenses related to publicity materials and positive prints. The Tribunal had allowed the deduction for publicity materials sent abroad by the assessee, considering them as part of advertisement or publicity outside India. The court upheld this decision, emphasizing that the materials were supplied by the assessee and used for promoting the film overseas. However, the deduction for the cost of positive prints was disallowed by the Tribunal. The court agreed with this disallowance, stating that positive prints, being physical goods necessary for film exhibition outside India, did not fall under the purview of section 35B as it pertains to expenditure on distribution, supply, or provision of goods outside India, not the cost of the goods themselves.Treatment of the sum representing the value of prints as income:The court addressed the issue of whether a sum of Rs.60,000, representing the value of four prints in transit to a distributor, should be treated as income for the relevant assessment year. The assessee, following the mercantile system, had not received payment for the prints by the year-end. Despite this, the court held that the income had accrued to the assessee, and thus, the value of the prints should be considered as part of the assessee's income for the assessment year 1980-81. Consequently, the court answered the questions referred by the Revenue in favor of the assessee, except for the treatment of positive prints as capital expenditure, which was deemed correct.In conclusion, the court ruled in favor of the assessee regarding the entitlement to weighted deduction for publicity materials but upheld the disallowance of deduction for the cost of positive prints. Additionally, the court determined that the sum representing the value of prints in transit should be treated as income for the relevant assessment year.