Case Law Details
Brief of the Case
Delhi High Court held In the case of Honey Enterprises. vs. CIT that the Assessee has sought to club the two expenses, that is, the cost of acquisition of distribution rights of films and the cost of prints for the purposes of charging the same against realizations from those films and for carrying forward the excess to the next year for the purposes of Rule 9B of the Rules. However, this is not permissible in terms of the explanation to Rule 9B (1) of the Income Tax Rules. In our view, the plain language of Rule 9B(3) of the Rules is unambiguous and the expression “amount realized” must be given its plain meaning; that is, the amount realized by the Assessee without accounting for any expenditure that is incurred by the Assessee in its business.
Facts of the Case
ITA 163/2002
The Assessee is a partnership firm engaged in the business of distribution of Hindi motion-pictures/films in the Territory of Delhi and Uttar Pradesh. The Assessee filed its return of income on 31st October, 1992 for the AY 1992-93 declaring an income of Rs.1,13,380/-. The return was initially processed under Section 143(1)(a) and, subsequently, picked up for scrutiny.
The Assessee filed separate trading accounts in respect of various films along with its consolidated Profit and Loss Account for the financial year ending 31st March 1992 as well as its Balance sheet as on that date. The Assessee claimed set off for certain expenses pertaining to the preceding year. These expenses related to feature films which were released during the financial year 1991 but had not completed a commercial run of 180 days as on 31st March, 1991. The Assessee claimed that this expenditure, which was sought to be set off against the income in the current year, was unamortized expenditure that was carried forward in accordance with Rule 9B of the Rules.
The AO analysed the expenses claimed to have been 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 Assessee claimed that the costs of prints had already been set off against gross realizations relating to the respective films and only the MG Royalty amount was carried forward for amortization during the financial year 1991-92. The AO, therefore, disallowed the claim in respect of the cost of prints and restricted the claim of unamortized MG Royalty carried forward from the preceding year to Rs. 18,21,363/-.
ITA Nos. 260/2002 & 537/2004 (Revenue’s Appeals)
The controversy involved in these appeals relates to the deletion of disallowance made by the AO under Section 40A(3) . For the AY 1992-93, the AO disallowed a sum of Rs.8,14,175/- as the aggregate of the cash payments made in excess of Rs.10,000/-. Similarly, for AY 1993- 94 the AO disallowed a sum of Rs.15,88,243/- under Section 40A(3).
The Assessee, inter alia, contended that such cash payments were not on account of expenditure incurred but were onlyadvance payments against minimum guarantee agreed to by the Assessee. Such payments were recouped by the Assessee from the collections made in respect of the films. According to the Assessee, such payments were not covered under the provisions of Section 40A (3). The AO did not accept the Assessee’s contentions and made the additions.
Contention of the Assessee
The ld counsel of the assessee submitted that the expenditure incurred by the Assessee in respect of a feature film would have to be deducted from the gross realizations from that film in order to ascertain the amount available for absorbing 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) as “dead expenses” and the normal computation provisions as wholly unworkable.
She further 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 the distribution of the feature film and this would distort the true profits of the Assessee.
She further referred to the decision of the Commissioner of Income Tax v. Joseph Valakuzhi: (2008) 302 ITR 140 wherein the Supreme Court had held that unamortized expenses, which were permitted to be carried forward in the subsequent year under Rule 9A of the Rules were not in the nature of carry forward of losses and, therefore, did not fall within the purview of Section 80 of the Act. She contended that since the carry forward of unamortized expenses were not in the nature of carried forward losses, Rule 9B of the Rules must be interpreted to only provide for amortization of costs of a feature film to the extent the same could be absorbed by the Assessee in the relevant financial year. She submitted that the amount available for absorption of cost of films was only the net income that remained after deduction of other expenses incurred by the Assessee in connection with the feature film(s), which had not been commercially screened for a period of 180 days before the end of the previous year.
She also contended that the Assessee had consistently followed the accounting practice of computing the cost of acquisition of the distribution rights to be carried forward to the next year and the same had not been objected to by the assessing officers in the past. She contended that in the circumstances, following the principle of consistency, the disallowance made by the AO was not sustainable. She also referred to the decision of the Supreme Court in Radhasoami Satsang v. CIT : [1992] 193 ITR 321 (SC) in support of her contention.
ITA Nos. 260/2002 & 537/2004 (Revenue’s Appeals)
The ld counsel of the assessee submitted that not only the genuineness of the transactions had been established but the ITAT had also accepted, as a fact, that such payments were necessary in the course of conducting business. She also contended that it was necessary to look at the circumstances under which payments had been made and by keeping in view of the commercial constraints and the practicality of the circumstances which had to be dealt with by the Assessee as a businessman. She emphasised that the Assessee had made payments in cash keeping in mind the commercial necessity and the practicality of the business.
Contention of Revenue
The ld counsel of the revenue supported the decision of the Tribunal and contended that the language of Rule 9B of the Rules was clear and the cost of acquisition of feature films did not include the amount of expenditure incurred in preparation of positive prints of feature films. She argued that in effect the Assessee was seeking to carry forward the cost of the films for being amortized in the subsequent year, which was not permissible.
ITA Nos. 260/2002 & 537/2004 (Revenue’s Appeals)
The ld counsel of 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 to establish exceptional or unavoidable circumstances, which compelled the Assessee to make such payments in cash. He submitted that in the absence of establishing extraordinary circumstances, the payments made in cash were liable to be added to the income of the Assessee by virtue of Section 40A(3).
Held by CIT (A)
The CIT (A) accepted the Assessee’s contention as well as its method of accounting and deleted the addition made by the AO. The CIT (A) held that MG Royalty paid by the Assessee could be set off only against realizations from the film in question that were available to the Assessee after deduction of the cost incurred by the Assessee.
ITA Nos. 260/2002 & 537/2004 (Revenue’s Appeals)
The CIT (A) accepted the Assessee’s contention that the payments were not made for purchase of prints but were advanced against the MG Royalty payable for acquiring the limited right of exhibition of film in a particular territory. 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.
Held by ITAT
The ITAT allowed the Revenue’s appeal in respect of the addition of Rs.25,31,629/-, which was deleted by the CIT (A) but rejected the Revenue’s appeal in respect of the deletion of the additions made under Section 40A(3).
ITA Nos. 260/2002 & 537/2004 (Revenue’s Appeals)
The ITAT did not accept the view that the payments in question were outside the scope of Section 40A (3), 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) 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.
Held by High Court
A plain reading of the explanation to Rule 9B(1) of the Rules indicates that where the rights of exhibition have been acquired on a minimum guarantee basis, the minimum guarantee amount, not being the expenditure incurred by the distributor for preparation of the positive prints of the film and the expenditure incurred by him in connection with the advertisement of the film, would be taken as a cost of acquisition for the purposes of Rule 9B. Indisputably, in view of the plain language of Rule 9B, the expenditure incurred on preparation of positive prints of a film cannot be carried forward for amortization in terms of Rule 9B of the Rules as cost of acquisition of distribution rights of that film.
In terms of sub-rule (3) of Rule 9B of the Rules, if a film is not released for exhibition on a commercial basis at least 180 days (now amended to 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. 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.
In our view, the plain language of Rule 9B(3) of the Rules is unambiguous and the expression “amount realized” must be given its plain meaning; that is, the amount realized by the Assessee without accounting for any expenditure that is incurred by the Assessee in its business. The Profit & Loss Account of the Assessee for the financial year 1990-91 clearly indicates that the Assessee had debited the expenditure incurred on publicity of the films including the four films in question that had not completed a commercial run of 180 days prior to the end of the financial year, to the Profit and Loss Account. Thus, whilst the Assessee had charged a part of the expenses relating to the four films in question directly to its Profit & Loss Account, it had sought to treat the minimum guarantee payable and the cost of prints separately by debiting the amounts in separate Trading Accounts drawn up for each film. Essentially, the Assessee has sought to club the two expenses, that is, the cost of acquisition of distribution rights of films and the cost of prints for the purposes of charging the same against realizations from those films and for carrying forward the excess to the next year for the purposes of Rule 9B of the Rules.
Further 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 Rule 9B of the Rules does not address the sequence in which deductions are to be allowed. The amount permissible as a deduction in terms of Rule 9B would be pari passu with any other deduction permissible under Section 37(1) of the Act. It must be understood that the profits and gains of business or profession are computed in accordance with the machinery provisions placed in part D of Chapter IV of the Act, i.e., Sections 28 to 44 DB of the Act. Broadly speaking, under the said computation provisions, income is determined by deducting allowable expenditure from the gross profits and gains of business. In the aforesaid scheme, the cost of acquisition of feature films computed in accordance with Rule 9B of the Rules would also be one such deduction and would be allowed in the same manner as other expenditure incurred by the Assessee. The apprehension that other expenditure incurred by the Assessee would be rendered ‘dead expenses’ is unjustified. If the deductions as allowable exceed the gross income, the Assessee would return loss which would be permitted to be set off and/or carried forward in accordance with the provisions of the Act
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 Assessee in its Profit & Loss Account). The question whether the expenditure incurred by the Assessee is absorbed in a particular year would depend on the income generated by the Assessee in that year. However, it was incorrect on the part of the Assessee to include the cost of prints along with the MG Royalty amount for the purposes of determining the amount to be carried forward under Rule 9B of the Rules.
As explained earlier, the language of Rule 9B is unambiguous and the Assessee cannot be permitted to claim a carry forward of the cost of distribution rights, which is in variance with the computation as provided in Rule 9B of the Rules.
ITA Nos. 260/2002 & 537/2004 (Revenue’s Appeals)
Rule 6DD of the Rules expressly provides that no disallowance under Sub-section 3 of Section 40A shall be made, inter alia, in circumstances specified there under. Clause (j) of Rule 6DD of the Rules (as applicable during the relevant assessment years) expressly provided that no disallowance under Section 40A (3) would be made in cases where the Assessee furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee. And, the Assessee further satisfies the Income-tax Officer that payment could not be made by crossed cheque drawn on a bank or by a crossed bank draft “(a) due to exceptional or unavoidable circumstances; or (b) because payments in the manner aforesaid was not practicable, or would have cause genuine difficulty to the payee, having regard to the nature of transaction and the necessity for expeditious settlement thereof.”
In the present case, the AO does not dispute that the Assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights. The Assessee had also contended that such payments were made as the producers required the payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business.
In our view, the question whether the Assessee’s business exigencies required payments to be made in cash is a question of fact. The ITAT has returned a finding in favour of the Assessee and it is not possible to conclude that such finding is without any basis or any material on record. The ITAT’s decision, thus, cannot be held to be perverse. Accordingly, the question of law is answered in favour of the Assessee and against the Revenue.
Accordingly appeal of the assessee as well as revenue dismissed.
