2014 (9) TMI 437 - HC - Income Tax

Entitlement for depreciation on cinematographic films @ 100% - Reliance placed upon Rule 9B of the Income Tax Rules, 1962 - AO observed that the assessee did not purchase any cinematographic films for consumption but what was purchased were broadcasting/exhibition rights, satellite rights etc. and, therefore, in terms of Section 32 of the Income Tax Act, 1961, depreciation should be allowed @ 25% instead of 100% depreciation as claimed. Held that - CIT(A) had specifically noted and recorded that the films were sold - films had been sold to different Doordarshan Kendras as also to National Film Development Authority, which are independent third parties and not closely related to the respondent assessee - These were also sales to other parties - There is no finding in the assessment order that the purchase and sale had not taken place and, therefore, Rule 9B(2)(a) relied upon by the assessee was not applicable - what was purchased and sold by the assessee were the distribution rights - The right would include and consist of acquisition and transfer of rights to exhibit, broadcast and satellite rights - These rights are integral and form and represent rights of a film distributor - Even otherwise, if Rule 9B would not be applicable, purchase and sale of the film would result in a business transaction i.e. sale consideration received less purchase price paid Decided against revenue.

Issues:
1. Depreciation claim on cinematographic films @ 100%.
2. Application of Rule 9B of the Income Tax Rules, 1962.
3. Eligibility for full deduction under Rule 9B(2).
4. Applicability of Rule 9B if conditions of sub Rule 5 were not satisfied.
5. Permissibility of raising new factual plea in an appeal under Section 260A.
6. Interpretation of 'distribution rights' in the context of film industry.

Analysis:

1. The appeal pertains to the assessment year 2010-11, where the respondent assessee claimed depreciation of &8377; 1.20 Crores on cinematographic films @ 100%. The Assessing Officer contended that depreciation should be allowed @ 25% instead of 100% as claimed, as the assessee purchased broadcasting/exhibition rights, satellite rights, etc., not cinematographic films for consumption. The Commissioner of Income Tax (Appeals) accepted the assessee's plea, stating that Rule 9B is applicable, allowing the deduction of the entire cost of purchase if films are sold in the same year. The Income Tax Appellate Tribunal affirmed this finding, leading to the dismissal of the appeal.

2. The controversy revolved around the application of Rule 9B of the Income Tax Rules, 1962. The Assessing Officer erroneously rejected the assessee's claim based on the misconception that Rule 9B did not apply since the films were not purchased for the assessee's consumption but for broadcasting/exhibition rights. However, the Commissioner of Income Tax (Appeals) correctly interpreted Rule 9B, allowing the deduction of the entire cost of purchase if the films were sold in the same year, which was further upheld by the Tribunal.

3. The Commissioner of Income Tax (Appeals) found merit in the assessee's submission that in the case of purchase and sale of cinematographic films, Rule 9B is applicable, entitling the assessee to claim the deduction of the entire cost of purchase if the films are sold in the same year. Since the assessee had purchased and sold the films within the year, the full deduction @ 100% under Rule 9B(2) was justified, leading to the deletion of the addition made by the Assessing Officer.

4. The issue of the applicability of Rule 9B if conditions of sub Rule 5 were not satisfied was raised during the appeal. The argument that if the assessee had not sold or transferred the rights of exhibition of films, the benefit under Rule 9B(2) would not be applicable was dismissed as it required factual examination and verification, which could not be raised for the first time in an appeal under Section 260A.

5. The permissibility of raising a new factual plea in an appeal under Section 260A was contested. The court held that such a plea cannot be raised for the first time in an appeal, as it necessitates factual examination before a legal opinion can be formed. The Assessing Officer had proceeded on a different basis, and the Tribunal did not entertain the submission raised by the revenue appellant.

6. The interpretation of 'distribution rights' in the context of the film industry was crucial. The court disagreed with the Assessing Officer's narrow view that exhibition rights, television rights, or satellite rights cannot be treated as distribution rights. It emphasized that the rights acquired and transferred by the assessee constituted 'distribution rights,' encompassing the rights to exhibit, broadcast, and satellite rights, which are integral to a film distributor's business transaction. Therefore, the purchase and sale of films would result in a business transaction, even if Rule 9B did not apply.

In conclusion, the appeal was dismissed, affirming the application of Rule 9B and the eligibility of the assessee for full deduction under the rule for the purchase and sale of cinematographic films.

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