2016 (2) TMI 164 - AT - Income Tax

Tribunal rules in favor of assessee on film rights income tax treatment

Smt. Achla Sabharwal Versus Asst. CIT, Circle 29 (1), New Delhi

Smt. Achla Sabharwal Versus Asst. CIT, Circle 29 (1), New Delhi - TMI Issues:- Disagreement over the recognition of income in relation to the sale of rights in films over a seven-year period.- Discrepancy in the treatment of income and expenditure under Rule 9B of the Income Tax Rules, 1962.- Challenge to the AO's conclusion on the method of accounting followed by the assessee.- Dispute regarding the accrual and taxation of income from licensing rights to exploit films over a seven-year period.- Assessment of penalty under section 271(1)(c) of the Income Tax Act.Analysis:1. Recognition of Income from Film Rights Sale:The case involved a disagreement over the recognition of income arising from the sale of rights in certain films over a seven-year period. The assessee contended that the income should be spread over the seven years, while the AO insisted on taxing the entire income in the current assessment year. The AO argued that the assessee cannot follow two different accounting methods for expenditure and income recognition. However, the tribunal held that the income should be taxed on a time basis, following the concept of deferred accrual of expenditure, as approved by the Supreme Court in previous cases.2. Treatment of Income and Expenditure under Rule 9B:The assessee claimed that the expenditure on acquiring film rights should be allowed as per Rule 9B of the Income Tax Rules, 1962. The AO, however, raised concerns about the inconsistency in the treatment of income and expenditure by the assessee. The tribunal clarified that Rule 9B provides for deduction of expenditure related to film distribution, but there is no specific provision for taxing income in such cases. Therefore, the general law prevails, and the income should be taxed over the period of the contract, aligning with the treatment of expenditure.3. Accrual and Taxation of Licensing Income:The tribunal emphasized that the income derived from licensing the right to exploit films for seven years should be taxed over the contract period. Citing a relevant case where income was recognized over the term of a contract, the tribunal supported the assessee's argument for spreading out the income over the seven-year period. This approach ensures that the income is not subject to double taxation and aligns with the principles of deferred accrual of income.4. Assessment of Penalty:Regarding the penalty imposed under section 271(1)(c) of the Income Tax Act, the tribunal ruled that since the addition to income was deleted in the quantum assessment, the penalty could not be sustained. Therefore, the penalty levied on the assessee was dismissed along with the Revenue's appeal, while the assessee's appeal was allowed based on the above considerations.Overall, the tribunal's decision favored the assessee's position on the recognition and taxation of income from film rights sales, highlighting the importance of consistent accounting practices and adherence to relevant legal provisions in determining taxable income.