TaxTMI 
TaxTMI 
2015 (12) TMI 519
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in the appeals preferred by the Revenue as well as the Assessee. These appeals were admitted by an order dated 21st September, 2004. Insofar as the appeals of the Revenue are concerned (being ITA Nos. 260/2002 and 537/2004), the following question of law was framed:- "Whether the ITAT was correct in law in admitting the addition made by the assessing officer under Section 40A(3) of the Income-tax Act, 1961?" 3. Insofar as the Assessee's appeals are concerned (being ITA Nos. 163/2002 and 377/2004), the following question of law was framed:- "Whether the ITAT has erred in concluding that the Assessing Officer's working of Rule 9B was correct in view of the scheme of computation of business income as envisaged under Sections 28 to 44 of the Income-tax Act, 1961?" Assessee's Appeals - ITA 163/2002 & ITA 377/2004 4. The controversy involved in the appeals preferred by the Assessee relate to the interpretation of Rule 9B of the Income Tax Rules, 1962 (hereafter 'Rules'), which concerns the deduction in respect of expenditure on acquisition of distribution rights of feature films. According to the Assessee, the Assessee is entitled to first deduct all expenses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en carried forward by the Assessee from the preceding year and concluded that the same included costs of prints, which according to the AO could not be carried forward under Rule 9B of the Rules. The Table indicating the analysis made by the AO and as appearing in the assessment order is reproduced below:- M.G. Paid Business upto 31.3.91 Cost of prints Amt. c/f to next yr. Amount to be c/f as per Rule 9B i.e. (2-3) 1. 2. 3. 4. 5. 6. Farishtey 55,00,000 43,99,079 16,63,006 2763974 11,00,921 Saugandh 12,50,000 15,68,809 7,29,995 411185 Nil Pathar Ke Phool 20,00,000 20,28,817 9,93,252 96,44,34 Nil Pathar Ke Insaan 25,00,000 17,79,558 10,01,622 1779558 7,20,442 Total 59,19,154 18,21,363 5.4 According to the Assessee, the amount of Rs. 59,19,154/- pertained to Minimum Guaranteed Royalty (MG Royalty) in respect of four films namely 'Farishtey', 'Saugandh', 'Patthar ke Phool' and 'Patthar ke Insaan' and did not include the costs of prints. The Assessee claimed that the costs of prints had already been set off a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e claimed that the expenditure sought to be amortized against business income was only MG Royalty and the same was in accordance with Rule 9B of the Rules. In other words, the Assessee claimed that the costs of prints had been deducted from the gross realizations relating to the respective films and the loss as reflected in the trading account was only the unabsorbed MG Royalty. The AO, on the other hand, was of the view that MG Royalty to the extent of gross realization in respect of each film was to be amortized during the preceding year and only the amount of MG Royalty, which exceeded the gross realizations from exhibition of that film was available for amortization during the year in question. Thus, according to the AO, the amount carried forward by the Assessee included the cost of prints which was not permissible. 5.8 The AO also allowed a deduction of Rs. 15,66,162/- as expenses for the financial year 1991-92. These expenses were not claimed by the Assessee as according to the Assessee, the same were available for being amortized in the next year (AY 1993-94) as per its interpretation of Rule 9B of the Rules. Thus, whilst the AO disallowed the deduction of Rs. 40,97,791/....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the cost of acquisition of distribution rights of that film and the unabsorbed cost of acquisition of rights would be carried forward to the next year for amortization against the income of the Assessee. She contended that if this procedure was not followed, the Assessee would not be in a position to set off its normal expenditure against his income in respect of feature films that had not been exhibited for a period of 180 days prior to the end of financial year. She submitted that in the circumstances, such normal expenditure could never be set off and this would render the expenses allowable under Section 37(1) of the Act as "dead expenses" and the normal computation provisions as wholly unworkable. Ms Kapila referred to the decision of the Bombay High Court in the case of CIT v. Prakash Pictures: (2003) 260 ITR 456 (Bom.) in support of her contention that Rule 9B of the Rules has to be interpreted as laying down a principle for amortization of the cost of films for arriving at the true profits. She submitted that if the cost of feature films is amortized to the extent of the gross realizations then there would be no scope to set off other expenses incurred in connection with t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(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 fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 90 days w.e.f. 1st April, 1999) before the end of the relevant previous year, the cost of acquisition of the distribution rights of that film insofar as it does not exceed the amount realized by the film distributor by exhibiting the film on a commercial basis, would be allowed as a deduction in computing the profits and gains for the relevant previous year. In the facts of the present case, the four films, namely, 'Farishtey', 'Saugandh', 'Patthar ke Phool' and 'Patthar ke Insaan' had not completed a commercial run of 180 days during the preceding financial year, i.e., financial year 1990-91 relevant to the AY 1991-92. Therefore, the Assessee was entitled to a deduction to the extent that the cost of acquisition of the films did not exceed the amount realized by the Assessee from exhibiting the film on a commercial basis and/or sale of rights of exhibition in respect of some of the areas. 15. The principal issue that needs to be addressed is whether the expression "amount realized by the film distributor by exhibiting the film on a commercial basis" would mean the gross realizations less the cost of preparation of positive prints of the films or would it mean the amount realiz....
X X X X Extracts X X X X
X X X X Extracts X X X X
....". This, according to the Assessee, results in the scheme of computation of business profits under Section 28, 29 and 37(1) becoming "inert, lifeless and redundant". It is contended that Rule 9B of the Rules must be read in a manner so as to avoid such "manifest absurdity". In our view, the aforesaid contentions are wholly bereft of any merit. Rule 9B of the Rules only provides for the method of computing the deduction available in respect of the expenditure on acquisition of distribution rights of feature films. In terms of sub-rule (1) of Rule 9B of the Rules, the cost of acquisition of a film as determined in terms of explanation to sub-rule (1) of Rule 9B is allowed as a deduction from profits and gains of business in accordance with sub-rule (2) to sub-rule (4) of Rule 9B of the Rules, In terms of explanation to sub-rule (1) of Rule 9B, in cases where the rights for exhibition of the films are acquired on a minimum guarantee basis, the minimum guarantee amount excluding the expenditure incurred on preparation of positive prints and expenditure incurred in connection with the advertisement of the films, is considered to be the cost of acquisition of distribution rights of films....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment year would depend on the profits or gains made by the Assessee in respect of his business as a whole, which would include not only the profits and gains from films that have not completed a commercial run for a period of 180 days but also the profits or gains made by the Assessee in respect of other films. In the present case, the separate Trading Accounts drawn up by the Assessee in respect of four films for the financial year ended 31st March, 1991 in question indicate a loss which is sought to be carried forward under Rule 9B of the Rules but the Assessee has in fact shown a profit of Rs. 76,751.99/- in its Profit & Loss Account for the year ended 31st March, 1991. This includes the expenditure incurred by the Assessee for the publicity and advertisement of the four films in question. If the Assessee had also charged the expenditure incurred on the cost of positive prints in respect of the four films in question to the Profit and Loss Account, the Assessee's Profit & Loss Account for the year would have reflected a loss of Rs. 40,21,039.01/- (cost of prints in respect of the four films amounting to Rs. 40,97,791/- less the profit of Rs. 76,751.99/- disclosed by the Assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the Assessee could not claim the entire deduction of Rs. 4.25 lacs under Rule 9B of the Rules as the deduction was admissible only where the receipts were credited in the Profit & Loss Account and if there were no receipts credited, no amount could be amortized under Rule 9B, which the Court observed was a special code for computing the deduction available to an Assessee. In that case, it was estimated that the Assessee had credited a sum of Rs. 1,49,783/- for the period 1st February, 1978 to 30th June, 1978 and 80% of that amount was taken as the proportionate cost of acquisition which was allowed as a deduction. It is seen that even in this case, the amount to be amortized was linked to the receipts credited to the Profit & Loss Account. However, the controversy involved in that case was materially different from the one involved in the present appeals. 19. In Joseph Valakuzhy (supra), the Supreme Court considered the nature of the allowance permitted to be carried forward under Rule 9A of the Rules. The Supreme Court held that the carry forward of the unamortized cost of acquisition was not in the nature of the business loss under Section 80 of the Act. It is not dispu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stency. In Radhasaomi itself, the Supreme Court acknowledged that there is no res judicata, as regards assessment orders, and assessments for one year may not bind the officer for the next year. This is consistent with the view of the Supreme Court that "there is no such thing as res judicata in Income-tax matters" (Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC) ; AIR 1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the authorities into repeating them, by application of a rule such as estoppel, for the reason that being an equitable principle, it has to yield to the mandate of law. A deeper reflection would show that blind adherence to the rule of consistency would lead to anomalous results, for the reason that it would engender the unequal application of laws, and direct the tax authorities to adopt varied interpretations, to suit individual assessees, subjective to their convenience-a result at once debilitating and destructive of the rule of law. A previous Division Bench of this court, in Rohitasava Chand v. CIT [2008] 306 ITR 242 (Delhi) had held that the rule of consistency cannot be of inflexible application." 22. As explained earlier, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar territory. The CIT(A) held that "such payments were held in the nature of royalty for the exploitation of the film i.e. in the nature of price paid for exploitation of a capital asset and therefore the payments would not come under the purview of Section 40A(3)". The CIT(A) further found that there was no doubt as to the identity of the persons receiving the payment and also as to the genuineness of the transactions. 26. The Revenue did not accept the CIT(A)'s decision and preferred appeals before the ITAT. The ITAT did not accept the view that the payments in question were outside the scope of Section 40A(3) of the Act; however, the ITAT accepted the contention that such payments had been made on account of exigencies of business. The ITAT further observed that the rigours of Section 40A(3) of the Act had been relaxed by virtue of Rule 6DD of the Rules as well as CBDT Circular No. 220 dated 31st May, 1977 and the instances indicated in the circular were not exhaustive. 27. The learned counsel appearing for the Revenue submitted that although the identity of the recipients of cash payments as well as genuineness of the transactions was not disputed, the Assessee had failed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Assessing Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." 31. Rule 6DD of the Rules ex....