1993 (7) TMI 126 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of Rs. 11,28,417 paid towards the purchase of positive prints.
2. Application of Rule 9B of the Income-tax Rules.
3. Applicability of Section 37 of the Income-tax Act.

Detailed Analysis:

1. Deduction of Rs. 11,28,417 Paid Towards the Purchase of Positive Prints:
The primary issue in this appeal is whether the assessee, a private limited company engaged in the exhibition and distribution of motion pictures, is entitled to the deduction of Rs. 11,28,417 paid towards the purchase of positive prints. The assessee entered into agreements with two firms for acquiring distribution and exhibition rights of films and paid additional amounts for extra prints beyond those provided under the agreements. The total sum of Rs. 11,28,417 was claimed as a deduction in computing the income.

2. Application of Rule 9B of the Income-tax Rules:
The I.A.C. (Asst.) disallowed the deduction by applying Rule 9B, treating the amount as spent on the acquisition of capital assets. The C.I.T. (Appeals) upheld this disallowance, stating that Rule 9B explicitly prohibits the allowance of the cost of extra prints when the rights are acquired on a minimum guarantee basis. Rule 9B defines the "cost of acquisition" and excludes the expenditure on positive prints and advertisement when rights are acquired on a minimum guarantee basis.

3. Applicability of Section 37 of the Income-tax Act:
The assessee argued that even if Rule 9B disallows the cost of prints, the expenditure should be allowed under Section 37 of the Income-tax Act as it was incurred wholly and exclusively for business purposes and was not of a capital nature. The Department contended that Rule 9B, having the force of law, should prevail over Section 37, which is a residuary section applicable only when no specific provision exists.

Tribunal's Decision:
The Tribunal analyzed Rule 9B and Section 37 extensively. Rule 9B provides for the deduction of the cost of acquisition of feature films and excludes the cost of positive prints and advertisement only when the rights are acquired on a minimum guarantee basis. Section 37 allows for the deduction of business expenditures not covered by Sections 30 to 36 and not being capital expenditures.

The Tribunal concluded that Rule 9B is not a complete code in itself but rather defines the cost of acquisition. The expenditure on positive prints, although not included in the cost of acquisition under Rule 9B, should be allowed as a deduction under Section 37 if it is a revenue expenditure incurred wholly and exclusively for business purposes. The Tribunal emphasized that the expenditure on extra prints is necessary for maximizing collections, especially in the initial days of a film's release, and thus qualifies as a business expenditure.

The Tribunal cited the Madras High Court's decision in CIT v. Prasad Productions (P.) Ltd., which supported the view that the cost of positive prints, though not included in the cost of acquisition, should be allowed as a business expenditure under Section 37.

Conclusion:
The Tribunal allowed the deduction of Rs. 11,28,417 paid towards the purchase of positive prints, recognizing it as a business expenditure under Section 37 of the Income-tax Act. The appeal was partly allowed, confirming the disallowances on other grounds that were not pressed during the hearing.