2003 (1) TMI 91 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 4,25,000 paid by the assessee to the producer for acquisition of the exclusive rights of exploitation of the film Charas under the indenture dated March 28, 1978, was admissible as deduction under rule 9B of the Income-tax Rules - we answer the above question in the negative, i.e., in favour of the Department and against the assessee.

Issues Involved:
1. Applicability of Rule 9B of the Income-tax Rules, 1962.
2. Deductibility of Rs. 4,25,000 paid by the assessee under Rule 9B.
3. Interpretation of "cost of acquisition" under Rule 9B.
4. Amortization of expenses under Rule 9B.
5. Alternative claim under Section 37(1) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Rule 9B of the Income-tax Rules, 1962:
The primary issue was whether the modified contract dated March 28, 1978, fell within the ambit of Rule 9B. The court concluded that Rule 9B was indeed applicable to the modified contract. The original agreement dated August 19, 1974, between the assessee and the producer was based on a minimum guarantee basis. The modification converted it into a contract based on advance payment, which still fell under the purview of Rule 9B.

2. Deductibility of Rs. 4,25,000 paid by the assessee under Rule 9B:
The assessee claimed a deduction of Rs. 4,25,000 paid to the producer for clearing the producer's rights in the overflow profits. The Income-tax Officer disallowed this deduction, arguing that the payment was for acquiring the right to share overflow profits, not for acquiring distribution rights. The Tribunal, however, allowed the deduction, viewing the payment as an additional cost of acquisition of distribution rights. The High Court overturned the Tribunal's decision, emphasizing the need for amortization of such expenses to avoid distortion of true profits.

3. Interpretation of "cost of acquisition" under Rule 9B:
Rule 9B defines "cost of acquisition" as the amount paid by the film distributor to the producer for acquiring the rights of exhibition, including the minimum guarantee amount. The court noted that the original agreement's cost of acquisition was Rs. 13.70 lakhs. The payment of Rs. 4.25 lakhs was considered an additional cost, which needed to be amortized over the period of the contract to match the income realized.

4. Amortization of expenses under Rule 9B:
The court emphasized that Rule 9B(4) and Rule 9B(5) require the amortization of expenses to match the income realized during the year in which the deduction is sought. The court found that allowing the entire deduction of Rs. 4,25,000 in one year would distort the true profits. Therefore, the Assessing Officer's approach to amortize the expenses over the contract period was upheld. The court referenced its previous judgment in the case of Taparia Tools Ltd. to support this view.

5. Alternative claim under Section 37(1) of the Income-tax Act, 1961:
The assessee alternatively argued that if Rule 9B was not applicable, the deduction should be allowed under Section 37(1) of the Income-tax Act. The court rejected this argument, noting that the assessee had not provided the necessary working or advanced arguments on this basis before the Assessing Officer. Therefore, the court did not permit the assessee to raise this argument for the first time at this stage.

Conclusion:
The court answered the question in the negative, ruling in favor of the Department and against the assessee. The reference was disposed of with no order as to costs. The court held that the assessee was not entitled to claim the entire deduction of Rs. 4,25,000 in the assessment year 1979-80 under Rule 9B, and the expenses needed to be amortized to reflect the true profits.

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