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TMI Blog2015 (12) TMI 519X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the Assessee. These appeals were admitted by an order dated 21st September, 2004. Insofar as the appeals of the Revenue are concerned (being ITA Nos. 260/2002 and 537/2004), the following question of law was framed:- "Whether the ITAT was correct in law in admitting the addition made by the assessing officer under Section 40A(3) of the Income-tax Act, 1961?" 3. Insofar as the Assessee's appeals are concerned (being ITA Nos. 163/2002 and 377/2004), the following question of law was framed:- "Whether the ITAT has erred in concluding that the Assessing Officer's working of Rule 9B was correct in view of the scheme of computation of business income as envisaged under Sections 28 to 44 of the Income-tax Act, 1961?" Assessee's Appeals - ITA 163/2002 & ITA 377/2004 4. The controversy involved in the appeals preferred by the Assessee relate to the interpretation of Rule 9B of the Income Tax Rules, 1962 (hereafter 'Rules'), which concerns the deduction in respect of expenditure on acquisition of distribution rights of feature films. According to the Assessee, the Assessee is entitled to first deduct all expenses relating to its business pertaining to a feature film that ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the same included costs of prints, which according to the AO could not be carried forward under Rule 9B of the Rules. The Table indicating the analysis made by the AO and as appearing in the assessment order is reproduced below:- M.G. Paid Business upto 31.3.91 Cost of prints Amt. c/f to next yr. Amount to be c/f as per Rule 9B i.e. (2-3) 1. 2. 3. 4. 5. 6. Farishtey 55,00,000 43,99,079 16,63,006 2763974 11,00,921 Saugandh 12,50,000 15,68,809 7,29,995 411185 Nil Pathar Ke Phool 20,00,000 20,28,817 9,93,252 96,44,34 Nil Pathar Ke Insaan 25,00,000 17,79,558 10,01,622 1779558 7,20,442 Total 59,19,154 18,21,363 5.4 According to the Assessee, the amount of Rs. 59,19,154/- pertained to Minimum Guaranteed Royalty (MG Royalty) in respect of four films namely 'Farishtey', 'Saugandh', 'Patthar ke Phool' and 'Patthar ke Insaan' and did not include the costs of prints. The Assessee claimed that the costs of prints had already been set off against gross realizations relating to the respective films and only the MG Royalty amount was carried forward for amortization during the financial year 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reflected in the trading account was only the unabsorbed MG Royalty. The AO, on the other hand, was of the view that MG Royalty to the extent of gross realization in respect of each film was to be amortized during the preceding year and only the amount of MG Royalty, which exceeded the gross realizations from exhibition of that film was available for amortization during the year in question. Thus, according to the AO, the amount carried forward by the Assessee included the cost of prints which was not permissible. 5.8 The AO also allowed a deduction of Rs. 15,66,162/- as expenses for the financial year 1991-92. These expenses were not claimed by the Assessee as according to the Assessee, the same were available for being amortized in the next year (AY 1993-94) as per its interpretation of Rule 9B of the Rules. Thus, whilst the AO disallowed the deduction of Rs. 40,97,791/- on account of expenses pertaining to the previous year, he also allowed a deduction of Rs. 15,66,162/- (which was not claimed by the Assessee) and, thus, made a net addition of Rs. 25,31,629/-. 5.9 The AO held that the Assessee's claim of unamortized MG Royalty, in fact, included a claim for deduction on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure against his income in respect of feature films that had not been exhibited for a period of 180 days prior to the end of financial year. She submitted that in the circumstances, such normal expenditure could never be set off and this would render the expenses allowable under Section 37(1) of the Act as "dead expenses" and the normal computation provisions as wholly unworkable. Ms Kapila referred to the decision of the Bombay High Court in the case of CIT v. Prakash Pictures: (2003) 260 ITR 456 (Bom.) in support of her contention that Rule 9B of the Rules has to be interpreted as laying down a principle for amortization of the cost of films for arriving at the true profits. She submitted that if the cost of feature films is amortized to the extent of the gross realizations then there would be no scope to set off other expenses incurred in connection with the distribution of the feature film and this would distort the true profits of the Assessee. 9. Ms Kapila next referred to the decision of the Commissioner of Income Tax v. Joseph Valakuzhi: (2008) 302 ITR 140 wherein the Supreme Court had held that unamortized expenses, which were permitted to be carried forward in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation : For the purposes of this rule, "cost of acquisition", in relation to a feature film, means the amount paid by the film distributor to the film producer or to another distributor under an agreement entered into by the film distributor with such film producer or such other distributor, as the case may be for acquiring the rights of exhibition and, where the rights of exhibition have been acquired on a minimum guarantee basis, the minimum amount guaranteed, not being- (i) the amount of expenditure incurred by the film distributor for the preparation of the positive prints of the film; and (ii) the expenditure incurred by him in connection with the advertisement of the film. (2) Where a feature film is acquired by the film distributor in any previous year and in such previous year- (a) the film distributor sells all rights of exhibition of the film, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year; or (b) the film distributor,- (i) himself exhibits the film on a commercial basis in all or some of the areas; or (ii) sells the rights of exhibition of the film in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) has sold the rights of exhibition of the feature film; or (iii) has himself exhibited the feature film on a commercial basis in some areas and has sold the rights of exhibition of the feature film in respect of all or some of the remaining areas, the amount realised by exhibiting the film, or the amount for which the rights of exhibition have been sold, or, as the case may be, the aggregate of such amounts, is credited in the books of account maintained by him in respect of the year in which the deduction is admissible ; (b) in a case where the film distributor has transferred the rights of exhibition of the feature film on a minimum guarantee basis, the minimum amount guaranteed and the amount, if any, received or due in excess of the guaranteed amount, or where the film distributor follows cash system of accounting, the amount received towards the minimum guarantee and the amount, if any, received in excess of the guaranteed amount, are credited in the books of account maintained by him in respect of the year in which the deduction is admissible. (6) For the purposes of this rule,- (i) the sale of the rights of exhibition of a feature film includes the lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al run of 180 days during the preceding financial year, i.e., financial year 1990-91 relevant to the AY 1991-92. Therefore, the Assessee was entitled to a deduction to the extent that the cost of acquisition of the films did not exceed the amount realized by the Assessee from exhibiting the film on a commercial basis and/or sale of rights of exhibition in respect of some of the areas. 15. The principal issue that needs to be addressed is whether the expression "amount realized by the film distributor by exhibiting the film on a commercial basis" would mean the gross realizations less the cost of preparation of positive prints of the films or would it mean the amount realized by the Assessee without considering any other deduction. 16. In our view, the plain language of Rule 9B(3) of the Rules is unambiguous and the expression "amount realized" must be given its plain meaning; that is, the amount realized by the Assessee without accounting for any expenditure that is incurred by the Assessee in its business. The Profit & Loss Account of the Assessee for the financial year 1990-91 clearly indicates that the Assessee had debited the expenditure incurred on publicity of the films inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of sub-rule (1) of Rule 9B of the Rules, the cost of acquisition of a film as determined in terms of explanation to sub-rule (1) of Rule 9B is allowed as a deduction from profits and gains of business in accordance with sub-rule (2) to sub-rule (4) of Rule 9B of the Rules, In terms of explanation to sub-rule (1) of Rule 9B, in cases where the rights for exhibition of the films are acquired on a minimum guarantee basis, the minimum guarantee amount excluding the expenditure incurred on preparation of positive prints and expenditure incurred in connection with the advertisement of the films, is considered to be the cost of acquisition of distribution rights of films. In cases where the feature film has not completed a commercial run of hundred and eighty days (ninety days with effect from 1st April, 1999) before the end of the previous year, the deduction on account of cost of acquisition of the distribution rights of the feature film is restricted to the realization from exhibition of the film on a commercial basis and/or partial sale of the said rights in respect of sum of the arrears. Rule 9B of the Rules does not address the sequence in which deductions are to be allowed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward under Rule 9B of the Rules but the Assessee has in fact shown a profit of Rs. 76,751.99/- in its Profit & Loss Account for the year ended 31st March, 1991. This includes the expenditure incurred by the Assessee for the publicity and advertisement of the four films in question. If the Assessee had also charged the expenditure incurred on the cost of positive prints in respect of the four films in question to the Profit and Loss Account, the Assessee's Profit & Loss Account for the year would have reflected a loss of Rs. 40,21,039.01/- (cost of prints in respect of the four films amounting to Rs. 40,97,791/- less the profit of Rs. 76,751.99/- disclosed by the Assessee in its Profit & Loss Account). The question whether the expenditure incurred by the Assessee is absorbed in a particular year would depend on the income generated by the Assessee in that year. However, it was incorrect on the part of the Assessee to include the cost of prints along with the MG Royalty amount for the purposes of determining the amount to be carried forward under Rule 9B of the Rules. 18. The decision of the Bombay High Court in Prakash Pictures (supra) does not assist the Assessee in any manner. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80% of that amount was taken as the proportionate cost of acquisition which was allowed as a deduction. It is seen that even in this case, the amount to be amortized was linked to the receipts credited to the Profit & Loss Account. However, the controversy involved in that case was materially different from the one involved in the present appeals. 19. In Joseph Valakuzhy (supra), the Supreme Court considered the nature of the allowance permitted to be carried forward under Rule 9A of the Rules. The Supreme Court held that the carry forward of the unamortized cost of acquisition was not in the nature of the business loss under Section 80 of the Act. It is not disputed that the part of cost of acquisition of the film, which is allowed to be carried forward under Rule 9B of the Rules, is not in the nature of carry forward of a business loss. The said amount represents the amount which is not allowed as a deduction in the current year and, therefore, obviously, does not form a part of the profit or loss of that year. Clearly, the decision in Joseph Valakuzhy (supra) has no bearing on the issue at hand. 20. It is next necessary to consider the Assessee's contention that it had consis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason that being an equitable principle, it has to yield to the mandate of law. A deeper reflection would show that blind adherence to the rule of consistency would lead to anomalous results, for the reason that it would engender the unequal application of laws, and direct the tax authorities to adopt varied interpretations, to suit individual assessees, subjective to their convenience-a result at once debilitating and destructive of the rule of law. A previous Division Bench of this court, in Rohitasava Chand v. CIT [2008] 306 ITR 242 (Delhi) had held that the rule of consistency cannot be of inflexible application." 22. As explained earlier, the language of Rule 9B is unambiguous and the Assessee cannot be permitted to claim a carry forward of the cost of distribution rights, which is in variance with the computation as provided in Rule 9B of the Rules. 23. In view of the above, the question of law framed is answered in the negative, that is, in favour of the Revenue and against the Assessee. Revenue's Appeals - ITA Nos. 260/2002 & 537/2004 24. The controversy involved in these appeals relates to the deletion of disallowance made by the AO under Section 40A(3) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew that the payments in question were outside the scope of Section 40A(3) of the Act; however, the ITAT accepted the contention that such payments had been made on account of exigencies of business. The ITAT further observed that the rigours of Section 40A(3) of the Act had been relaxed by virtue of Rule 6DD of the Rules as well as CBDT Circular No. 220 dated 31st May, 1977 and the instances indicated in the circular were not exhaustive. 27. The learned counsel appearing for the Revenue submitted that although the identity of the recipients of cash payments as well as genuineness of the transactions was not disputed, the Assessee had failed to establish exceptional or unavoidable circumstances, which compelled the Assessee to make such payments in cash. He submitted that in the absence of establishing extraordinary circumstances, the payments made in cash were liable to be added to the income of the Assessee by virtue of Section 40A(3) of the Act. 28. Countering the submissions made on behalf of the Revenue, Ms Kapila submitted that not only the genuineness of the transactions had been established but the ITAT had also accepted, as a fact, that such payments were necessary in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." 31. Rule 6DD of the Rules expressly provides that no disallowance under Sub-section 3 of Section 40A shall be made, inter alia, in circumstances specified thereunder. Clause (j) of Rule 6DD of the Rules (as applicable during the relevant assessment years) expressly provided that no disallowance under Section 40A(3) of the Act would be made in cases where the Assessee furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee. And, the Assessee further satisfies the Income-tax Officer that payment could not be made by cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is disputed. The only controversy that needs to be addressed is whether the ITAT's decision that such payments had been made by the Assessee on account of business exigencies is perverse. 36. In the present case, the AO does not dispute that the Assessee carried on its business in Delhi and its officers had to travel to Bombay to negotiate the purchase of distribution rights. The Assessee had also contended that such payments were made as the producers required the payments urgently at various sites where films being produced by them were being shot and it was expected that such payments be made in cash in the normal course of conducting business. 37. In our view, the question whether the Assessee's business exigencies required payments to be made in cash, is a question of fact. The ITAT has returned a finding in favour of the Assessee and it is not possible to conclude that such finding is without any basis or any material on record. The ITAT's decision, thus, cannot be held to be perverse. Accordingly, the question of law is answered in favour of the Assessee and against the Revenue. 38. In view of the above, all appeals, both Revenue's as well as Assessee's are dismissed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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