Circular No. 92-Income Tax dated 18-9-1972

1. Attention is invited to Board’s Circular No. 4 (XI-3)D, dated 9-4-1959, as modified by Circular No. 30, dated 4-10-1969 [Clarifications 3 and 4] on the above subject.

2. The Board has reconsidered the question relating to the amortisation of the cost of production of a feature film.  The effective life of a feature film depends on many factors, the most important among them being the market value of the stars acting in the films, which in turn is reflected in the cost of production.

On the basis of cost of production, the feature films can be categorised into three classes :

3. Normally feature films are disposed of by a producer either under the minimum guarantee formula or by way of outright sale.  Under the minimum guarantee system a minimum amount is guaranteed to be paid to the producer by the distributor. In addition, a right to participate in the overflow is also retained by the producer. Overflow represents the amount which is arrived at after the distributor has recouped the minimum guaranteed amount and his commission. In the case of outright sale, the producer transfers all his rights of exploitation of the feature film to the distributor for a lump sum consideration.

4. An actual case study of the films in A class was undertaken.  Feature films produced with the cost of production of Rs. 35 lakhs and above were found to have a run of more than 2 years.  The Board has, therefore, decided to revive the amortisation formula for such films under which the value of the film will be depreciated by 60 per cent in the first year, 25 per cent in the second year and 15per cent in the third year on time basis as elucidated in Board’s Circular dated 9-4-1959 referred to in para 1. The percentages are not to be deviated from and are to be followed in allowing cost of amortisation of A class feature films.

5. The effective life of feature films in B and C categories was found to be normally of one year.  It has, therefore, been decided by the Board that the entire cost of production may be allowed in the very first year of production if the film was released in the first half of the accounting year.  In case the film was released in the later half of the accounting year, the value of the film should be taken at 50 per cent of the cost of production at the end of that accounting year and the balance 50 per cent should be adjusted in the second year.

6. The Board has also decided that the cost of acquiring distribution rights should be treated in the hands of the distributor in the same way as the cost of production is treated in the hands of the film producer, the rates of the allowance and the manner being as indicated in paras 4 and 5 above.

7. If the producer sells the film outright for all the territories, the entire cost of production should be allowed as a deduction in the year of the sale irrespective of the category to which the film belongs. If the distributor after having acquired the film by way of outright purchase sells the film outright to another person in the first or subsequent years, he would be assessable on the profits made on that transaction by allowing the deduction for the price which he had paid to acquire the exploitation rights.

8. In cases where the producer or the distributor disposes of the exploitation rights of an A class film on mixed basis, i.e., some territories on minimum guarantee and others on outright sale, the deduction for the cost of production should be effected in the same proportion as the amount of outright sale bears to total receipts. The remaining balance of the cost of production should be amortised on lines indicated in para 4 above. If, for example, the cost of production of an A class film is Rs. 40 lakhs and the exploitation lights for three territories are disposed of for Rs. 20 lakhs on minimum guarantee basis, and the remaining territories for Rs. 25 lakhs by way of outright sale, the cost of production should be amortised on the following basis :

Therefore, the outright deduction from the cost of Rs. 40 lakhs would be Rs. 22,22,222.  The balance amount i.e., Rs. 40 lakhs less Rs. 22,22,222, should be amortised on time basis as indicated in para 4.

9. Board’s circulars referred to in para 1 above stand modified to the extent indicated above.

Circular : No. 92 [F. No. 201/5/71-IT (A-II)], dated 18-9-1972.

JUDICIAL ANALYSIS

EXPLAINED IN – The abovesaid Circular was explained in CIT  v. Jyothi Pictures [1988] 169 ITR 412 (AP), with the following observations :

“. . . There can be little dispute about the proposition that Circular No. 92, dated September 18,1972, does undoubtedly apply to the assessment year 1973-74.  Indeed, it was issued even during the currency of the assessee’s accounting year relevant to the said assessment year.  This is not even a case where the accounting year adopted by the assessee was over by the date of issuance of the revised circular (Circular No. 92).  We are, therefore, unable to see why the revised circular can be said to be not applicable to the accounting year relevant to the assessment year concerned herein. . . .” (p. 415)

“. . .  The relevance of the accounting year followed by the particular assessee cannot be taken as relevant.  What is relevant is the assessment year, and if the circular was in force on the first day of the assessment year, it would apply to that assessment year. . . .” (p. 416)

EXPLAINED IN – In CIT  v. Sankarapandia Asari & Sons [1987] 165 ITR 616 (Mad.), it was observed as under :

“What is contended by learned counsel for the Revenue is that when the Board has prescribed that amortisation in full may be permitted where the film is released in the first half of the accounting year and amortisation at half the rate would be permissible if the film is released in the other half year, the circular purports to grant a concession and the assessee cannot claim amortisation on any other basis.  Now, the circular by the Board would be in the nature of an ad hoc direction to the Income-tax Officer.  That circular has no statutory basis. . . .” (p. 619)