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TMI Blog2003 (1) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... 1978, was admissible as deduction under rule 9B of the Income-tax Rules in the assessment year 1979-80 Facts: The assessee is a registered firm engaged in the business of distribution of films. On August 19, 1974, the assessee entered into an agreement with Sagar Enterprises, which had produced a Hindi film by the name "Charas". Under the agreement, the assessee acquired distribution rights in respect of the film "Charas" on payment of Rs. 13.70 lakhs being the minimum guarantee payment. As per the agreement, the distribution rights were acquired on commission basis with a minimum guarantee payment of Rs. 13.70 lakhs. Under the agreement, after recoupment of minimum guarantee payment along with cost of publicity and cost of extra prints, the distributor (assessee) was to get a commission of 20 per cent. of further collections up to Rs. 8.50 lakhs and in the event of the further collections exceeding Rs. 8.50 lakhs, the distributor (assessee) was to get the commission of 50 per cent. The said distribution agreement was dated August 19, 1974. The film was released on May 28, 1976. The agreement was modified on March 28, 1978. On that date, Rs. 4.25 lakhs was paid by the distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the said two conditions, the entire cost of acquisition was allowable as a deduction in computing the business profits. He contended that the assessee had acquired distribution rights by payment of minimum guarantee amount of Rs. 13.70 lakhs under the agreement dated August 19, 1974. He contended that under the agreement, the parties agreed to share overflow profits in a particular ratio depending on the total collection. That, if the collection was up to Rs. 8.50 lakhs then the share of the assessee was 20 per cent. and the share of the producer was 80 per cent. and in cases where the collection exceeded Rs. 8.50 lakhs then, the share of the assessee in the overflow profits was 50 per cent. Learned counsel submitted that the film was a success. That, the collection went beyond Rs, 8.50 lakhs and, therefore, the agreement came to be modified on March 28, 1978, under which the producer's rights to share the overflow profits on future exploitation of the film came to be sold to the assessee for Rs. 4.25 lakhs, which was paid on the same date. It was contended that the right of the assessee to distribute and exploit the film was separate from the rights of the producer to share t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- Total 4,25,000 ----------- Mr. Jhaveri, learned counsel for the assessee, therefore, contended that a sum of Rs. 4.25 lakhs was paid by the assessee for clearing of the producer's rights in the overflow profits, which was incidental to distribution of the film and, therefore, the said payment was for acquisition of distribution rights. He contended that rule 9B allows deduction in respect of cost of acquisition of distribution rights. He contended that on the facts, in this case, the assessee has paid Rs. 4.25 lakhs for acquisition of distribution rights. He contended that the said amount of Rs. 4.25 lakhs paid by the assessee represented additional cost of acquisition of distribution rights and, therefore, the assessee was entitled to deduction under rule 9B. He contended that by entering into the modified agreement, the assessee acquired the right of exhibition of the film without sharing the overflow profits with the producer and, therefore, the said amount represented cost of acquisition allowable under rule 9B. Scope of rule 9B as applicable to the facts of this case. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition of the film in computing the profits and gains of such previous year; and the entire cost of acquisition shall be carried forward to the next following previous year and allowed as a deduction in that year. (5) Notwithstanding anything contained in the foregoing provisions of this rule, the deduction under this rule shall not be allowed unless- (a) in a case where the film distributor- (i) has himself exhibited the feature film on a commercial basis; or (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." Rule 9B has been framed under section 295 of the Income-tax Act by the Central Board of Direct Taxes (CBDT). Rule 9B deals with deduction in respect of expenditure on acquisition of dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intention of the Central Board of Direct Taxes is very clear, viz., that upfront payment cannot be allowed as deduction in entirety and, that, in cases where the distributor makes such up-front payment/advance, the expenditure needs to be amortized/spread over in order to match the receipts on the credit side of the profit and loss account failing which the true profits of a given year would get distorted. Sub-rule (5) of rule 9B has been missed out by the Tribunal. In this case, for the assessment year 1979-80, the net profit is only Rs. 66,177 against which the assessee has claimed deduction of Rs. 4.25 lakhs. In other words, the matching concept of expenditure against estimated income has been totally lost sight of by the Commissioner of Income-tax and the Tribunal. Findings: Two points arise for determination. Firstly, whether the modified contract dated March 28, 1978, fell within the ambit of rule 9B. If so, whether the assessee was entitled to deduction in respect of the entire amount of Rs. 4.25 lakhs during the year ending June 30, 1978, corresponding to the assessment year 1979-80. In this case, on the facts the Income-tax Officer found that acquisition by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be allowed in accordance with sub-rule (2) to sub-rule (4). Under sub-rule (4), it is, inter alia, laid down that if during the previous year the distributor does not exhibit the film, no deduction shall be allowed in respect of the cost of acquisition and the entire cost shall be carried forward for the next following previous year and allowed as deduction in that year. In other words, deduction is admissible only qua the receipts credited in the profit and loss account and if there are no receipts credited in that account, on account of failure of the distributor (assessee) to exploit the film then, no deduction was admissible. Rule 9B is, therefore, a special code in the matter of deduction vis-a-vis computation of profits and gains of business of distribution. Sub-rule (5) of rule 9B commences with a non obstante clause. This sub-rule also makes it clear that the deduction under rule 9B shall not be allowed unless the amounts realised by exhibiting the film are credited in the profit and loss account of the assessee in respect of the year in which the deduction is admissible. This rule, in our view, contemplates amortization. Briefly, it contemplates admissibility of deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have taken hereinabove, is supported by our judgment in the case of Taparia Tools Ltd. v. joint CIT [2003] 260 ITR 102 (Bom) decided on January 8, 2003, vide Income-tax Appeal No. 88 of 2001 and others. In that matter, the assessee raised Rs. 100 lakhs by way of non-convertible debentures [NCD]. In the year of allotment, they repaid Rs. 55 lakhs. In the annual accounts, the assessee debited Rs. 11 lakhs each year over a period of five years, which was the life of the NCD. In the annual accounts, the assessee showed Rs. 55 lakhs as deferred revenue expenditure. It was argued before the Assessing Officer that for the tax purpose, the entire amount of Rs. 55 lakhs which the assessee paid to the lenders in the very first year of allotment of NCD should be allowed as deduction. This court found that if the entire amount of Rs. 55 lakhs was allowed as deduction then, it would result in distortion of profits and, therefore, the Assessing Officer was right in apportioning the expenses over the period of five years which was the life of the debenture. This court found, on the facts in that matter, that if the entire amount was allowed as deduction, it would distort the true profits taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed over the unexpired period, failing which the profits would get distorted. Before concluding we may point out an alternate argument advanced on behalf of the assessee. It was submitted in the alternative that if rule 9B was not applicable then, the assessee was entitled to claim deduction for payment of Rs. 4.25 lakhs as and by way of "clearing of producer's rights in the overflow profits" under section 37(1) of the Income-tax Act. We do not find any merit in this argument. The assessee has not come by way of a reference to this court. The assessee has not worked out the spread over/apportionment of expenses for the unexpired period of contract before the Assessing Officer. In our view, even assuming for the sake of argument that section 37(1) of the Income-tax Act was attracted, the assessee was required to claim expenses year-wise to the extent of income which the assessee estimated for the unexpired period of contract. They have not given that working to the Assessing Officer. They have not advanced arguments on that basis before the Assessing Officer. Therefore, we cannot allow the assessee to raise this alternate argument before us for the first time particularly when the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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