2001 (3) TMI 241 - AT - Income Tax

Issues Involved:

1. Interpretation of the agreement dated 14-6-1975.
2. Determination of the Minimum Guarantee (M.G.) amount for the films 'Jaaneman' and 'Bullet'.
3. Applicability of Rule 9B of the Income-tax Rules.
4. Allocation of the reduced M.G. amount post-arbitration.
5. The approach of the CIT(A) versus the ITO in determining the M.G. amount.

Issue-wise Detailed Analysis:

1. Interpretation of the Agreement:
The core dispute revolves around the interpretation of an agreement dated 14-6-1975 between the assessee (a film distribution firm) and M/s. Navketan International Films Pvt. Ltd., Bombay. The agreement granted distribution rights for the East Punjab Circuit for the films 'Jaaneman' and the immediate next film directed by Vijay Anand (later named 'Bullet'). The agreement stipulated a Minimum Guarantee (M.G.) amount of Rs. 15 lakhs, derived from an initial gross amount of Rs. 17 lakhs after excluding Rs. 2 lakhs for pre-release and release publicity contributions. The Schedule of Payments included Rs. 50,000 for each film's publicity materials, reducing the net M.G. to Rs. 14 lakhs.

2. Determination of M.G. Amount:
The ITO fixed the M.G. amount for 'Jaaneman' at Rs. 7,50,000 after excluding Rs. 50,000 for publicity materials. The CIT(A) disagreed, attributing a larger portion of the joint M.G. to 'Jaaneman' due to its better performance and allocated the reduced M.G. amount of Rs. 13 lakhs in a 70:30 ratio between 'Jaaneman' and 'Bullet'. The CIT(A) thus determined the M.G. for 'Jaaneman' at Rs. 9 lakhs and 'Bullet' at Rs. 4 lakhs. However, the ITO's approach was considered more reasonable as it adhered to the agreement's terms, fixing the M.G. at Rs. 7.5 lakhs for 'Jaaneman'.

3. Applicability of Rule 9B:
Rule 9B of the Income-tax Rules requires the M.G. to be determined for each film separately. The ITO and CIT(A) both worked out the M.G. for 'Jaaneman' from the figures given in the composite agreement for both films. The ITO's approach was to consider the Schedule of Payments, while the CIT(A) used the actual receipts of both films over five years to allocate the M.G. The Tribunal found the ITO's method of adhering to the agreement terms more appropriate for Rule 9B purposes.

4. Allocation of Reduced M.G. Amount:
The dispute was taken to the Northern India Motion Pictures Association, which reduced the M.G. for 'Bullet' by Rs. 2 lakhs due to delayed delivery and its weaker market value. The ITO allocated the entire Rs. 2 lakhs reduction to 'Bullet', while the CIT(A) allocated the reduced M.G. amount in a 70:30 ratio based on the films' receipts. The Tribunal found the ITO's allocation more reasonable, as it was based on the agreement's Schedule of Payments and not on the films' performance hindsight.

5. Approach of CIT(A) vs. ITO:
The CIT(A) was influenced by the actual receipts and the perceived market value of the films, attributing a higher M.G. to 'Jaaneman'. However, the Tribunal emphasized that the agreement's terms should govern the M.G. determination, not the subsequent performance of the films. The Tribunal criticized the CIT(A) for not excluding Rs. 1 lakh for publicity materials from the Rs. 13 lakhs M.G. and for using an erroneous method of allocation. The ITO's approach of adhering to the agreement and fixing the M.G. at Rs. 7.5 lakhs for 'Jaaneman' was deemed fair and reasonable.

Separate Judgments:
The Tribunal had differing opinions among its members. The Accountant Member supported the ITO's determination of the M.G. at Rs. 7.5 lakhs for 'Jaaneman', while the Judicial Member believed the matter should be remanded to the ITO for a fresh determination based on the agreement's terms. The President, acting as the third member, concurred with the Judicial Member, directing the ITO to recompute the M.G. based on the agreement's terms and stipulations, ensuring the assessee had a reasonable opportunity to substantiate its claim.

Conclusion:
The Tribunal ultimately reversed the CIT(A)'s order, upheld the ITO's approach, and remanded the matter for a fresh determination of the M.G. amount for 'Jaaneman' based on the agreement's terms, ensuring compliance with Rule 9B of the Income-tax Rules.

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