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TMI BlogAmortisation of cost of production/cost of acquiring distribution rights of films - Assessments of film producers/distributors - General guidelines for allowance thereofX X X X Extracts X X X X X X X X Extracts X X X X ..... ated basis. On determination of the final results on the expiry of the exploitation period, the income/loss can be adjusted under section 154 by revising the figure of allowance in respect of cost of production and acquisition of distribution rights in the proportion of the earnings spread over the period of exploitation. 3. By way of a general guideline, in the case of producers the entire cost of production can be allowed in the year of release if the picture was fully exploited in that year. For example, if all the territories have been sold by way of outright sale in the year of release the entire cost of production will be allowed in computing the income of the year of release to the producer. In the case of pictures sold on minimum guarantee (M.G.) basis, if the entire collections have come in the year of release, the full cost of production will similarly be allowed in the year of release, as it can be said that the picture was fully exploited in that year. In cases where all the territories have not been sold either on M.G. basis or on outright sale basis, the picture cannot be said to have been exploited fully in that year and, therefore, the entire cost cannot be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire cost will be allowed in the 1971-72 assessment since the entire realisations during the 18-month period were effected before March 31, 1971 itself. 5. In the case of distributors, the entire cost of acquiring the distribution rights may be allowed on the basis of collections during the period of exploitation of the film. As the period of exploitation is likely to exceed one year, the assessment for the first year may be framed provisionally by allowing a part of the cost of distribution rights on an estimated basis against the actual receipts in the year under consideration. The final adjustment in the case of the producer will be made after the exploitation period under section 154. However, if a distributor produces evidence to the satisfaction of the Income-tax Officer that a particular picture has failed at the box office in the year of release itself and there is no possibility of further collection in the following years, the entire cost of acquisition of distribution rights may be allowed in the first year itself. 6. All pending assessments may be regulated in accordance with the guidelines spelt out in this circular. In case where the assessments were compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Board's Circular dated 9-4-1959 referred to in para 1. The percentages are not to be deviated from and are to be followed in allowing cost of amortisation of A class feature films. 5. The effective life of feature films in B and C categories was found to be normally of one year. It has, therefore, been decided by the Board that the entire cost of production may be allowed in the very first year of production if the film was released in the first half of the accounting year. In case the film was released in the later half of the accounting year, the value of the film should be taken at 50 per cent of the cost of production at the end of that accounting year and the balance 50 per cent should be adjusted in the second year. 6. The Board has also decided that the cost of acquiring distribution rights should be treated in the hands of the distributor in the same way as the cost of production is treated in the hands of the film producer, the rates of the allowance and the manner being as indicated in paras 4 and 5 above. 7. If the producer sells the film outright for all the territories, the entire cost of production should be allowed as a deduction in the year of the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort to the inflexible rule in every case of amortisation of the cost of the film over a period of 3 years. The Board also agree that the effective and earning life of the large majority of the present-day cinema films seldom exceeds one year. 4. It has, accordingly, been decided that if the producer of a film does not wish to write off the cost of the film in his books in the manner indicated in Board's circular mentioned above, then he may be permitted to write off the entire cost in the year in which the picture is released. On his doing so, the entire cost of the film will be allowed as an admissible deduction in the year in which the picture is released and the cost of the film is written off in the books. 5. Board's Circular No. 4 (XI-3) D, dated 9-4-1959 is modified to the extent indicated above. Circular : No. 30 [F. No. 9/80/69-IT(A-II)], dated 4-10-1969. clarification 4 1. Attention is invited to Board's Circular No. 1-D, dated 4-1-1951 [Clarification 5] on the above subject. 2. For paragraph 2 of the above circular, the following shall be substituted : "While it will not be right and may lead to tax evasion if the percentages mentioned in the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a film, at 60 per cent in the first year, 25 per cent in the second year and 15 per cent in the third year should not be treated as inflexible and that it may be varied in favour of the assessee if he is able to prove by adducing appropriate evidence that the earning capacity of the film was extinguished much earlier than over the period presumed in the above formula. If, for example, an assessee is able to prove that the film had no real life beyond the first year and there were no receipts in respect thereof in the next year, the entire cost of the film should be allowed in the first year. [ 2. It should, however, be carefully noted that the percentages mentioned in the standard formula are percentages to be allowed strictly on time-basis, for any other method may open the way for tax evasion. A person may purchase a film towards the end of the year and claim to be allowed 60 per cent of the amounts in that very year. With a view to safeguarding against such possibilities the rates of 60 per cent, 25 per cent and 15 per cent should be treated as rates per annum. If, for example, the accounting year of a film producer is the year ended December 31, 1947 and film produced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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