2015 (12) TMI 519 - HC - Income Tax

Working of Rule 9B - scheme of computation of business income as envisaged under Sections 28 to 44 - Held that - 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 ₹ 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 ₹ 40,21,039.01/- (cost of prints in respect of the four films amounting to ₹ 40,97,791/- less the profit of ₹ 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. 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. Decided in favour of the Revenue and against the Assessee. Disallowance made by the AO under Section 40A(3) - CIT(A) deleted the addition - Held that - 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.

Summary

Issues Involved:

1. Interpretation of Rule 9B of the Income Tax Rules, 1962 concerning the deduction in respect of expenditure on acquisition of distribution rights of feature films.
2. Applicability of Section 40A(3) of the Income Tax Act, 1961 regarding disallowance of expenditure incurred in cash exceeding Rs. 10,000.

Issue-wise Detailed Analysis:

1. Interpretation of Rule 9B of the Income Tax Rules, 1962:

The controversy in the Assessee's appeals revolves around the interpretation of Rule 9B, which pertains to the deduction of expenditure on the acquisition of distribution rights of feature films. The Assessee argued that all business-related expenses for a feature film that hasn't been screened for 180 days should be deducted from the gross realizations of that film, and only the remaining surplus should be used to amortize the cost of acquisition of the distribution rights. The Revenue contended that the cost of feature films could only be amortized to the extent of the gross realizations, and only the balance could be carried forward.

The court examined the facts, where the Assessee, a partnership firm engaged in the distribution of Hindi films, claimed set-offs for expenses related to films that had not completed a commercial run of 180 days. The AO disallowed these claims, arguing that the cost of prints could not be carried forward under Rule 9B. The CIT(A) accepted the Assessee's method, but the ITAT reversed this decision, siding with the AO.

The court referred to Rule 9B, which explicitly excludes the cost of positive prints and advertisement expenses from the cost of acquisition for deduction purposes. The court concluded that the Assessee's method of including the cost of prints in the carry-forward amount was incorrect and upheld the ITAT's decision.

2. Applicability of Section 40A(3) of the Income Tax Act, 1961:

The Revenue's appeals concerned the deletion of disallowances made by the AO under Section 40A(3), which disallows deductions for cash payments exceeding Rs. 10,000 unless exceptional circumstances apply. For AY 1992-93 and AY 1993-94, the AO disallowed sums of Rs. 8,14,175 and Rs. 15,88,243, respectively, for cash payments made to film producers. The Assessee argued that these payments were necessary due to business exigencies and the nature of the film distribution business.

The CIT(A) accepted the Assessee's contention, finding that the payments were advances against MG Royalty and not for purchasing prints, thus outside the scope of Section 40A(3). The ITAT upheld this view, noting that the payments were made under business exigencies and were genuine transactions.

The court examined the provisions of Section 40A(3) and Rule 6DD, which provides exceptions for cash payments made under exceptional or unavoidable circumstances. The court noted that the ITAT had considered the CBDT Circular No. 220, which provided illustrative, not exhaustive, circumstances where cash payments could be justified. The court found that the ITAT's decision was based on a factual finding that the payments were necessary due to business exigencies and was not perverse.

Conclusion:

The court dismissed both the Revenue's and the Assessee's appeals. It upheld the ITAT's decision on both issues, confirming that the Assessee's interpretation of Rule 9B was incorrect and that the cash payments made by the Assessee were justified under business exigencies, thus not disallowable under Section 40A(3). The parties were left to bear their own costs.