ITAT explains rules related to Valuation of closing Stock of Films

CA Sandeep Kanoi

Brief facts of the case are that the Assessing Officer observed that the assessee is following conservative method of accounting for valuation of closing stock. The films purchased are shown at cost if the same are sold in the year, the profit or loss on the same is recorded. In respect of unsold films, the same is carried forward as stock at purchase cost in the next financial year. He observed that as the assessee is engaged in the business of distribution of rights of feature films, Rule 9B of the Income-tax Rules, 1962 is attracted in this case. Rule 9B of the Income-tax Rules specifies the deduction that is to be allowed in respect of cost of acquisition of a feature film for computing the profits and gains of the business of distribution of feature films. Referring to sub Rule 4 & 5 of Rule 9B, the Assessing Officer disallowed the excess cost of Rs. 27,52,935/-. The matter carried before the first appellate authority in appeal and after considering the submissions made on behalf of the assessee, the CIT(A) granted relief to the assessee. Aggrieved, the Revenue is in appeal before us.

The ld. D.R. contended that the CIT(A) was not justified in holding that the assessee is not required to follow the method of valuation prescribed under Rule 9B of the Income Tax Rules, 1962 and thereby the CIT(A) was not justified in deleting the addition made as a result of excess cost claimed of Rs. 27,52,935/- and accordingly prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored. On the other hand, the ld. Authorised Representative of the assessee strongly supported the order of CIT(A).

Having considered the rival submissions and perusing the material on record, we find that the assessee is engaged in sale of T.V. serial, editing and film software development. The stand of the assessee has been that it is buying satellite/TV telecasting rights of the movie and that the purchase of movies is not for theatre release and thus Rule 9B of the Income Tax Rules, 1962 is not applicable. It is not in dispute that the assesee has been valuing the closing stock of movies at cost for past many years and in assessment years 2007-08 and 2008-09, the valuation method has been challenged by the concerned Assessing Officer. If the method followed by the assessee is accepted, the loss claimed in assessment years 2007-08 and 2008-09 is as under;-

     A.Y. 2007-08                  Rs. 10,17,210/-
     A.Y. 2008-09                  Rs. 18,22,482/-

In case, the Rule 9B of the I.T. Rules is applicable, the following position in respect of valuation of closing stock would emerge.

In terms of sub rule 2 to Rule 9B, if the film is released at least 90 days before the end of previous year, entire cost of acquisition is to be allowed in that year. In terms of sub rule 3 to Rule 9B if the film purchased is not released least 90 days before the end of previous year but amount realized on sale of rights during previous year, is less than cost price, the amount realized would be allowed as reduction and the balance cost of acquisition is to be carried forward to next year. In terms of sub rule 4 to Rule 9B if the film purchased is not released or sold during previous year, entire cost of acquisition is to be carried forward allowed in next year. In terms of sub rule 5 to Rule 9B the amount realized on sale during previous year, should be credited in the books of account. From above, it is clear that the cost to be allowed during the year depends upon the closing stock of the previous year, purchases during the year and the valuation of the closing stock would be dictated by sub Rule 2 & 3. From the assessment order, it appears that the Assessing Officer has misconstrued the provisions of Rule 9B and has not applied sub Rule 2,3 properly. In fact ignored sub Rule 4 completely and did not allow the closing stock of the previous year of unsold films which is to be allowed as deduction irrespective of sale or not. In case, the correct adjustments are made to opening and closing stock as per Rule 9B, the computation of net profit is as under:-

Thus, instead of loss of Rs. 18,22,482/- claimed by the assessee in the return, loss of Rs. 62,94,368/- have to be allowed as per Rule 9B. We find that as per the cost of acquisition, closing stock adjustment in past year’s closing stock may lead to allowing higher losses in the instant assessment year. The method followed by the assessee is endorsed and the addition made by the Assessing Officer was rightly deleted by the CIT(A) in the assessment year i.e 2007-08. This factual legal finding needs no interference from our side. We uphold the same.