2020 (11) TMI 217 - AT - Income Tax

Computing the profits and gains of the business of production of feature films - amount received on sale of TV rights and audio rights of a feature film separately, instead of treating the same as part of receipt on exhibition of film on commercial basis - assessee is engaged in the business of production of feature films - A.O. held that the receipt by way of sale of audio rights and TV rights does not fall under the category of receipts from exhibition of films prescribed under Rule 9A of IT Rules - AO did not allow set off of expenditure on production against the amount relating to sale of audio rights and TV rights - HELD THAT - Due to technical advancement, it is now possible to sell audio rights separately apart from exhibition of feature films. Audio matter is part of feature film and is part of production of feature film. Nowadays, both audio video form integral part of a feature film. In fact, a feature film without audio is rarest of rare feature. The cost of production of feature film includes expenditure on audio recording. Hence, we are of the view that the audio matter cannot be viewed separately distinct from the feature film, since it is intricately connected with the feature film. There should not be any dispute that, in the Indian film scenario, songs form integral part of the feature film and many a times, many films turned out to be successful due to songs. Public at large could visualise the film scenes on hearing the songs. Hence, it was made possible to assign the audio rights of films/songs separately. Hence, we are of the view that sale of audio rights should form part of amount realised on exhibition of films on commercial basis. Accordingly, we are of the view that the amount realised on sale of audio rights and TV rights would fall under the category of exhibition of film on a commercial basis - See VIESHESH FILMS (P.) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 29, MUMBAI 2008 (8) TMI 600 - ITAT MUMBAI We hold that the amount realised by the assessee on sale of audio rights and TV rights of the film would fall under the category of exhibition of films on a commercial basis . Accordingly, we direct the AO to allow deduction of expenditure incurred on production against the above said receipts also. The order passed by Ld CIT(A) is accordingly set aside. - Decided in favour of assessee.

Issues Involved:
1. Whether the amount received on the sale of TV rights and audio rights of a feature film should be treated as part of "receipt on exhibition of film on commercial basis" under Rule 9A of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Facts of the Case:
The assessee, engaged in the production of feature films, released a Kannada film on 13.01.2014. The total receipts for the year included ?5,40,10,756 from the exhibition of the film, ?15,00,000 from the sale of audio rights, and ?5,60,00,000 from the sale of TV rights, totaling ?11,15,10,756. The production expenditure was ?14,94,89,613. The assessee computed income under Rule 9A(3)(c) of the IT Rules, setting off the expenditure against the gross receipts and carrying forward the remaining unclaimed expenditure.

2. AO's Observation:
The AO noted that under Rule 9A(3)(c), the expenditure should be restricted to the amount realized from exhibiting the film on a commercial basis or selling the rights of exhibition. The AO held that the receipts from the sale of audio and TV rights (?5.75 crores) should not be included in "receipts from exhibition of films." The AO referenced the Mumbai ITAT decision in Vieshesh Films (P) Ltd vs. DCIT, but distinguished it on the basis that the case involved exclusive TV exhibition.

3. CIT(A)'s Decision:
The CIT(A) agreed with the AO, emphasizing the term "areas" in Rule 9A(3)(c), suggesting that it refers to geographical regions, not different mediums. The CIT(A) also noted that Rule 9A(7)(ii) requires the delivery of positive prints for the sale of exhibition rights, which is not required for TV or audio rights. The CIT(A) rejected the applicability of the Mumbai ITAT decision and the Supreme Court decision in M/s Laxmi Video Theatres and Others vs. State of Haryana, stating they were not relevant to the case at hand.

4. Assessee's Argument:
The assessee argued that the phrase "exhibition of films on commercial basis" should encompass all modern modes of exhibition, including TV and audio, due to technological advancements. The assessee relied on the Mumbai ITAT decision in Vieshesh Films and the Supreme Court decision in Laxmi Video Theatres, asserting that the mode of exhibition is not prescribed in Rule 9A.

5. Tribunal's Analysis:
The Tribunal noted that the primary issue was whether the receipts from the sale of audio and TV rights fall under "amount realized on exhibition of film on a commercial basis." The Tribunal emphasized the need to interpret Rule 9A in light of technological advancements, referencing the Supreme Court's view in Laxmi Video Theatres that statutory definitions should evolve with scientific developments. The Tribunal held that the term "areas" should not be interpreted literally to exclude modern exhibition methods like TV and digital platforms.

6. Tribunal's Conclusion:
The Tribunal concluded that the sale of audio and TV rights should be considered as part of the "exhibition of film on a commercial basis." It supported this view by citing the Mumbai ITAT decision in Vieshesh Films, which held that TV exhibition falls within Rule 9A. The Tribunal directed the AO to allow the deduction of production expenditure against the receipts from the sale of audio and TV rights, setting aside the CIT(A)'s order.

7. Final Judgment:
The appeal of the assessee was allowed, and the order of the CIT(A) was set aside. The Tribunal directed the AO to include the receipts from the sale of audio and TV rights in the "amount realized on exhibition of film on a commercial basis" and allow the corresponding deductions.

Order Pronounced:
The order was pronounced in the open court on 2nd Nov, 2020.

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