Mercantile accounting and film rights deduction: crystallised contractual liability counts as cost even if payment is deferred.

For an assessee following the mercantile system, the expression "paid" in the Explanation to Rule 9B(1) was interpreted to include expenditure actually incurred under the accounting method employed. Where the agreement for acquisition of film distribution rights created a crystallised liability for the entire contractual consideration on execution, deferred instalments did not prevent the full amount from being treated as the cost of acquisition. The full agreed consideration was therefore deductible, and disallowance of the balance was unsustainable.

---

---

Issues: Whether the expression "paid" in the Explanation to Rule 9B(1) of the Income-tax Rules covers a liability incurred under a mercantile system of accounting, so as to permit deduction of the full cost of acquisition of film distribution rights.

Analysis: The assessee maintained accounts on the mercantile basis. The agreement for acquisition of distribution rights created a consolidated liability for the entire consideration on the date of execution, though part of the payment was deferred to later dates. The expression "paid" in Rule 9B was read in the sense understood in Section 43(2) of the Income-tax Act, namely, actually paid or incurred according to the method of accounting employed. On that basis, the liability had crystallised when the agreement was executed, and deferred instalments did not prevent the whole amount from being treated as cost incurred.

Conclusion: The full agreed consideration constituted the cost of acquisition for deduction purposes, and the assessee's claim was allowed.

Final Conclusion: The deduction was to be computed on the entire contractual consideration incurred under the agreement, and the disallowance of the balance amount was unsustainable.

Ratio Decidendi: For an assessee following the mercantile system, "paid" in Rule 9B includes expenditure actually incurred, and a contractual liability that has crystallised on execution of the agreement is deductible in full even if payment is deferred.

---