2016 (2) TMI 164 - AT - Income Tax

Accrual of income - AO was of the view that the income arising out of the contract should be taxed as income during the current A.Y - Held that - A.O. was in error in his conclusions that, whenever Rule 9B is applied for claims of expenditure, the income should also be accounted for and offered to tax in the year of receipt. Rule 9B of the Income Tax Rules, 1962 is a special rule which provides for claims of deduction in respect of expenditure, in respect of distribution of films. The Income Tax Act or Rules have not provided for any special manner in which income in such cases have to be taxed. Thus the general law prevails. Coming to the accrual of income, we find that the assessee has offered this income for the next subsequent six A.Ys i.e. A. Y. 2008 09 to 2012 13 at the rate of ₹ 9,21,428/- at prorate basis. The assessee has included in the paper book assessments for all these A.Ys. The income in question has been offered to tax and has been taxed by the department in all these A.Ys equally. The addition in this year amounts to double taxation. Distribution rights in the film is a property. This property has been licensed for a time period of seven years by the assessee to the third parties. The consideration received is for exploitation of certain rights in these films for a period of seven years. Thus we are of the considered opinion that the income arising out of such licensing of the right to exploit the film for seven years is to be taxed on time basis. We agree with the submissions made by the Ld.Counsel for the assessee that the income in question has to be taxed over the period of the contract. Hence the addition made is deleted and the appeal of the assessee is allowed. Also the penalty levied u/s 271(1)(c ) on such addition cannot be sustained.

Summary

Issues:
- Disagreement over the recognition of income in relation to the sale of rights in films over a seven-year period.
- Discrepancy in the treatment of income and expenditure under Rule 9B of the Income Tax Rules, 1962.
- Challenge to the AO's conclusion on the method of accounting followed by the assessee.
- Dispute regarding the accrual and taxation of income from licensing rights to exploit films over a seven-year period.
- Assessment of penalty under section 271(1)(c) of the Income Tax Act.

Analysis:

1. Recognition of Income from Film Rights Sale:
The case involved a disagreement over the recognition of income arising from the sale of rights in certain films over a seven-year period. The assessee contended that the income should be spread over the seven years, while the AO insisted on taxing the entire income in the current assessment year. The AO argued that the assessee cannot follow two different accounting methods for expenditure and income recognition. However, the tribunal held that the income should be taxed on a time basis, following the concept of deferred accrual of expenditure, as approved by the Supreme Court in previous cases.

2. Treatment of Income and Expenditure under Rule 9B:
The assessee claimed that the expenditure on acquiring film rights should be allowed as per Rule 9B of the Income Tax Rules, 1962. The AO, however, raised concerns about the inconsistency in the treatment of income and expenditure by the assessee. The tribunal clarified that Rule 9B provides for deduction of expenditure related to film distribution, but there is no specific provision for taxing income in such cases. Therefore, the general law prevails, and the income should be taxed over the period of the contract, aligning with the treatment of expenditure.

3. Accrual and Taxation of Licensing Income:
The tribunal emphasized that the income derived from licensing the right to exploit films for seven years should be taxed over the contract period. Citing a relevant case where income was recognized over the term of a contract, the tribunal supported the assessee's argument for spreading out the income over the seven-year period. This approach ensures that the income is not subject to double taxation and aligns with the principles of deferred accrual of income.

4. Assessment of Penalty:
Regarding the penalty imposed under section 271(1)(c) of the Income Tax Act, the tribunal ruled that since the addition to income was deleted in the quantum assessment, the penalty could not be sustained. Therefore, the penalty levied on the assessee was dismissed along with the Revenue's appeal, while the assessee's appeal was allowed based on the above considerations.

Overall, the tribunal's decision favored the assessee's position on the recognition and taxation of income from film rights sales, highlighting the importance of consistent accounting practices and adherence to relevant legal provisions in determining taxable income.