TaxTMI 
TaxTMI 
2003 (1) TMI 91
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....essee acquired distribution rights in respect of the film "Charas" on payment of Rs. 13.70 lakhs being the minimum guarantee payment. As per the agreement, the distribution rights were acquired on commission basis with a minimum guarantee payment of Rs. 13.70 lakhs. Under the agreement, after recoupment of minimum guarantee payment along with cost of publicity and cost of extra prints, the distributor (assessee) was to get a commission of 20 per cent. of further collections up to Rs. 8.50 lakhs and in the event of the further collections exceeding Rs. 8.50 lakhs, the distributor (assessee) was to get the commission of 50 per cent. The said distribution agreement was dated August 19, 1974. The film was released on May 28, 1976. The agreement was modified on March 28, 1978. On that date, Rs. 4.25 lakhs was paid by the distributor (assessee) to the producer--Sagar Enterprises for clearing of the producer's rights in the overflow profits for the unexpired period of the contract which was for ten years from the date of release of the film. In this reference we are concerned with the accounting year ending June 30, 1978, relevant to the assessment year 1979-80. On payment of Rs. 4.25 lak....
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....low profits in a particular ratio depending on the total collection. That, if the collection was up to Rs. 8.50 lakhs then the share of the assessee was 20 per cent. and the share of the producer was 80 per cent. and in cases where the collection exceeded Rs. 8.50 lakhs then, the share of the assessee in the overflow profits was 50 per cent. Learned counsel submitted that the film was a success. That, the collection went beyond Rs, 8.50 lakhs and, therefore, the agreement came to be modified on March 28, 1978, under which the producer's rights to share the overflow profits on future exploitation of the film came to be sold to the assessee for Rs. 4.25 lakhs, which was paid on the same date. It was contended that the right of the assessee to distribute and exploit the film was separate from the rights of the producer to share the overflow profits. He contended that under rule 9B, deduction was admissible for the former right. He contended that deduction was not admissible for acquisition of the rights of the producer to share the overflow profits. In the circumstances, it was argued that rule 9B was not applicable to the facts of the case and, therefore, the assessee was not entitle....
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....nbsp; 2,25,000 ----------- Add: Lumpsum consideration as mutually agreed upon 2,00,000 ----------- Total 4,25,000 ----------- Mr. Jhaveri, learned counsel for the assessee, therefore, contended that a sum of Rs. 4.25 lakhs was paid by the assessee for clearing of the producer's rights i....
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....revious year; or (b) the film distributor,-- (i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect of some of the areas or (iii) himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas; and the film is released for exhibition on a commercial basis at least ninety days before the end of such previous year, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year.... (4) Where during the previous year in which a feature film is acquired by the film distributor, he does not himself exhibit the film on a commercial basis or does not sell the rights of exhibition of the film, no deduction shall be allowed in respect of the cost of acquisition of the film in computing 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 p....
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....(4), it is, inter alia, laid down that where during the previous year in which the film is acquired by the distributor but not exhibited, no deduction shall be allowed in respect of the cost of acquisition in computing 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. Rule 9B(5) starts with a non obstante clause. Under rule 9B(5), it is, inter alia, laid down that the deduction under rule 9B shall not be allowed unless the distributor credits in the books of account the amounts realised by the distributor in cases where the distributor has himself exhibited the film on commercial basis. In other words, the assessee (distributor) was required to credit the amount realised by him for exhibiting the film in the profit and loss account. If one reads, sub-rule (4) and sub-rule (5) of rule 9B, the intention of the Central Board of Direct Taxes is very clear, viz., that upfront payment cannot be allowed as deduction in entirety and, that, in cases where the distributor makes such up-front payment/advance, the expenditure needs to be amortized/spread over in or....
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.... came to be converted into a contract based on advance for which the assessee agreed to pay Rs. 4.25 lakhs to the producer. However, as stated above, every producer has entire rights of the picture and the producer is free to give the movie either on advance basis or on a minimum guarantee basis. Therefore, on the first point, we hold that rule 9B is applicable to the modified contract dated March 28, 1978. Having come to the conclusion that the modified agreement dated March 28, 1978, stood covered b rule 9B, the main question which we have required to decide in this case is whether the assessee was entitled to claim the entire deduction of Rs. 4.25 lakhs under rule 9B, during the accounting year ending June 30, 1978, corresponding to assessment year 1979-80. Rule 9B, inter alia, lays down that for computing the profits and gains of the business of distribution of films, deduction in respect of cost of acquisition shall be allowed in accordance with sub-rule (2) to sub-rule (4). Under sub-rule (4), it is, inter alia, laid down that if during the previous year the distributor does not exhibit the film, no deduction shall be allowed in respect of the cost of acquisition and the e....
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....ract that one can arrive at the true profits for the year ending June 30, 1978. Up to January 31, 1978, the distributor has paid the share of the producer in the overflow profits. Therefore, the Assessing Officer estimated the collection of Rs. 1,49,783 for the period February 1, 1978, up to June 30, 1978, and granted deduction of Rs. 1,19,827 which was 80 per cent. of the total collection of Rs. 1,49,783 which was the share of the producer in the ratio of 20 : 80. In other words, the Assessing Officer has not given full deduction of Rs. 4.25 lakhs but, he has spread over the deduction in order to calculate the true profits. This is what is contemplated by sub-rule (5) of rule 9B. Although we asked the parties to produce the return of income, the same was not produced. We have, therefore, decided the matter on the basis of the calculations made by the Assessing Officer in his assessment order. Lastly, the view which we have taken hereinabove, is supported by our judgment in the case of Taparia Tools Ltd. v. joint CIT [2003] 260 ITR 102 (Bom) decided on January 8, 2003, vide Income-tax Appeal No. 88 of 2001 and others. In that matter, the assessee raised Rs. 100 lakhs by way of non-....
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.... the previous year. This distorted the profits. In the circumstances, it was held by the Supreme Court that the Department was entitled to add the value of the unexploited rights of the film at the end of the period to the amount disbursed by the firm, failing which the profits would get distorted. In our case also, the assessee has failed to value the unexploited rights of the film for the balance period, which has resulted in distortion of profits and, therefore, the Income-tax Officer was right in apportioning expenses over the period of the contract. The matter can be looked at from another angle. The cost of acquisition is Rs. 4.25 lakhs. It is paid on March 28, 1978. It is paid during the year ending June 30, 1978. During the year ending June 30, 1978, the net profit is only Rs. 66,177. Hence, it is not possible to write off Rs. 4.25 lakhs against the net profit of Rs. 66,177. Hence, the write off had to be apportioned over the unexpired period, failing which the profits would get distorted. Before concluding we may point out an alternate argument advanced on behalf of the assessee. It was submitted in the alternative that if rule 9B was not applicable then, the assessee w....