Circular No. 154-Income Tax dated 5-12-1974

Amortisation of cost of production/cost of acquiring distribution rights of films – Assessments of film producers/distributors – General guidelines for allowance thereof

1. Attention is invited to Board’s Circular No. 92, dated l8-9-1972 [Clarification 2], modifying its earlier circulars issued on the above subject.

2. The Board has re-examined the question relating to the amortisation of the cost of production of feature films in the assessments of film producers and distributors.  A study of the results of the business earnings of the feature films has revealed that it is not always possible to know the final receipts of any particular film in the first year.  Therefore, it would be appropriate to make the assessments on a provisional basis in the first instance by allowing proportionate deduction in respect of cost of production and cost of acquiring distribution rights on an estimated basis.  On determination of the final results on the expiry of the exploitation period, the income/loss can be adjusted under section 154 by revising the figure of allowance in respect of cost of production and acquisition of distribution rights in the proportion of the earnings spread over the period of exploitation.

3. By way of a general guideline, in the case of producers the entire cost of production can be allowed in the year of release if the picture was fully exploited in that year.  For example, if all the territories have been sold by way of outright sale in the year of release the entire cost of production will be allowed in computing the income of the year of release to the producer. In the case of pictures sold on minimum guarantee (M.G.) basis, if the entire collections have come in the year of release, the full cost of production will similarly be allowed in the year of release, as it can be said that the picture was fully exploited in that year. In cases where all the territories have not been sold either on M.G. basis or on outright sale basis, the picture cannot be said to have been exploited fully in that year and, therefore, the entire cost cannot be allowed in the year of release. For this purpose, the most reliable factor to be taken into account for finding out whether the picture has been fully exploited or not is the actual collection from the film. As the figures of actual collection are not likely to be known in the first year of release, the assessments may be made on a provisional basis in the first year by adopting the actual receipts and allowing a part of cost of production also on an estimated basis taking into consideration future estimated receipts subject to final adjustment after the period of exploitation is over.

4. Three examples are given below by way of illustration of the above guidelines.  In these examples, it has been presumed that the period of exploitation runs to 18 months.  However, this period has to be determined by the Income-tax Officers with reference to facts of each individual case

In this case, the entire cost will be allowed in the 1971-72 assessment since the entire realisations during the 18-month period were effected before March 31, 1971 itself.

5. In the case of distributors, the entire cost of acquiring the distribution rights may be allowed on the basis of collections during the period of exploitation of the film. As the period of exploitation is likely to exceed one year, the assessment for the first year may be framed provisionally by allowing a part of the cost of distribution rights on an estimated basis against the actual receipts in the year under consideration. The final adjustment in the case of the producer will be made after the exploitation period under section 154.  However, if a distributor produces evidence to the satisfaction of the Income-tax Officer that a particular picture has failed at the box office in the year of release itself and there is no possibility of further collection in the following years, the entire cost of acquisition of distribution rights may be allowed in the first year itself.

6. All pending assessments may be regulated in accordance with the guidelines spelt out in this circular. In case where the assessments were completed in accordance with the instructions contained in Board’s Circular No. 92 and the appeals are pending either before the Appellate Assistant Commissioner or the Appellate Tribunal, the Department may agree to such assessment being set aside to be reframed on the basis of the guidelines laid down in this circular and the concerned assessees have agreed   to the adoption of such a course of action.

Circular : No. 154 [F. No. 201/5/71-IT(A-II)], dated 5-12-1974.

JUDICIAL ANALYSIS

The above circular was referred to, along with  earlier circulars, and applied  in CIT v. Dosseni Films [1995] 80 Taxman 223 (Cal.), with the following observations :

“. . .Therefore, two things emerged from the above clarifications, namely :—

(1)   that the Circular No. 92, dated 18-9-1972 was to be modified in the manner laid down in the Circular dated 5-12-1974, and

(2)   that modification was for pending assessments.

In other words, the assessments which had been completed could not be brought within the ambit of the Circular dated 5-12-1974. Therefore, the Tribunal by relying on the Circular dated 5-12-1974 and Circular dated 18-9-1972 had obviously committed an error.” (pp. 225-226).