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TMI Blog1986 (5) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ons for distribution of the film " Phool aur Patthar " in what is known in the cinema circle as the Bengal Circuit for a period of ten years. The agreement was entered into on December 25, 1965, and the terms and conditions were, inter alia: " 2. In consideration of the appointment of the distributors for the aforesaid picture 'Phool aur Patthar' for the contracted territory, the distributors hereby agree to pay to the producers a sum of Rs. 5,50,000 (Rupees five lakhs and fifty thousand only) as and by way of minimum guarantee for the said territory in the following manner: Rs. (a) 50,000 on signing of this agreement (b) 50,000 on or before January 31, 1965 (c) 50,000 on or before February 28, 1966 (d) 25,000 against delivery of publicity materials as per clause No. 8. (e) 3,75,000 against delivery of 16 (sixteen) brand new censored ------------ positive prints of 35 mm in colour of the said picture. 5,50,000 It is further mutually agreed that the producers shall ------------ bear the full excise levy on all the 16 quota prints. 3. The distributors will accept the delivery of 16 positive censored brand new prints against payment as aforesaid within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d picture in the contracted territory shall be reimbursed as under after recouping the M. G. amount of Rs. 5,50,000 and the publicity amount of Rs. 2,25,000. (a) Towards the recoupment of Rs. 3,20,000 being the fixed commission payable by the producers to the distributors on the minimum guarantee amount and the pre-release, release and post-release publicity. (b) Towards the recoupment of the cost of extra prints out of gross realisation of the said picture to the extent that the distributors shall not charge commission on such recoupment. (c) Towards recoupment of extra publicity expenses if allowed in writing by the producers out of the gross realisation of the said picture to the extent that the distributors will not charge commission on such recoupment. (d) After recoupment of the amounts mentioned in sub-clauses (a), (b) and (c), further realisation of the said picture will be utilised by the distributors in the following manner : i.e., 50% (fifty per cent.) of such realisations will be retained by the distributors by way of commission and the balance 50% (fifty per cent.) shall be paid to the producers as their share in the realisations of the said picture. The am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter of payment of the share of the producer, or of any other term of the agreement. It was also agreed that after the period of agency of ten years, the distributor would not be entitled to distribute the picture any more. In its return of income for the assessment year 1968-69, the assessee disclosed a profit of Rs. 1,07,177. The assessee claimed a sum of Rs. 2,25,000 as deductible on the ground that it was liable to spend the amount as publicity expenses of the film " Phool aur Patthar " under the agreement dated December 25, 1965. The Income-tax Officer, however, allowed only a sum of Rs. 18,000 on account of publicity because he found that a sum of only Rs. 18,000 approximately was actually spent for publicity. The assessee appealed to the Appellate Assistant Commissioner. It claimed that the assessee followed the mercantile system of accounting. The profit could only be computed after deduction of the minimum guarantee of Rs. 5,50,000 and the publicity expenditure of Rs. 2,25,000. The Appellate Assistant Commissioner, however, held that the full amount of Rs. 2,25,000 sanctioned as publicity expenditure by the producer could not be allowed during the year under a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city and theatre decoration and as such, the Tribunal was right in holding that the assessee was entitled to deduct the amount of Rs. 2,25,000 in the computation of its total income in the assessment year 1968-69. In my judgment, this argument is entirely without any merit. In this reference, we are concerned with the assessment year 1968-69 for which the relevant year of account is July 1, 1966, to June 30, 1967. The agreement was signed on December 25, 1965, which falls within the previous year ended on June 30, 1966. If the contention of the assessee is to be accepted that a definite ascertained liability in respect of the sum of Rs. 2,25,000 was incurred by the assessee as soon as the agreement was entered into, then logically, it must be held that this amount would qualify for deduction, if at all, on accrual basis in the assessment for the assessment year 1967-68 and not in the assessment year 1968-69 for which the relevant previous year ended on June 30, 1967. It is difficult to comprehend how the assessee can claim the entire amount of Rs. 2,25,000 as deduction in the computation of its income for the period July 1, 1966, to June 30, 1967, on the ground that its accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angements for publicity of the film. The assessee will have to take steps to insert advertisements in newspapers or make other arrangements with agents for publicity of the film. It is only when a definite financial commitment is made by the assessee by placing orders with the newspapers or other agents that a financial obligation to pay will arise. It will be at that point of time that the assessee will be entitled to claim deduction on accrual basis of the financial obligation undertaken by the assessee. A mere contract to render service for a period of ten years does not cast upon the assessee any immediate obligation to incur the expenditure. Under the contract, the assessee is merely obliged to make arrangement for publicity of the film and the value of such publicity must not be of less than Rs. 2,25,000, but no liability to pay arises even before arrangements for publicity have been made. It cannot be said that a perfected debt has come into existence in this particular year of account. Moreover, the agreement not only fastens upon the assessee a liability to spend Rs. 2,25,000 on account of publicity but also gives the assessee right of recoupment of that amount from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that will have to be made under the contract will have to be excluded. In Calcutta Co.'s case [1959] 37 ITR 1 (SC), the assessee was a dealer in land and property. It sold plots of land for building purposes, undertaking to develop them by laying out roads, providing a drainage system and installing lights. When the plots were sold, the purchaser paid only 25% of the purchase price and undertook to pay the balance in ten instalments with interest. The assessee, in its turn, undertook to carry out the development within six months. In the relevant accounting period, the assessee actually received in cash a sum of Rs. 29,392 towards the sale price of lands but it credited in its accounts the entire sum of Rs. 43,692 representing the full sale price of lands. At the same time, it also debited an estimated sum of Rs. 24,809 as expenditure for the development it had undertaken to carry out even though no part of that amount was actually spent. The facts of that case are important. The assessee not only claimed an estimated sum of Rs. 24,809 as expenditure for the development to be carried out by it in respect of the plots which had been sold during the year but also credited the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case. It is only in the year of release of the film that the deductions on account of what is alleged to be accrued liability are being claimed. That apart, the contract gives the assessee a right to recoup whatever expenditure it had incurred from the sale proceeds. In my judgment, the principle laid down in the case of Calcutta Company [1959] 37 ITR 1 (SC), cannot be made applicable to the facts of this case. Lastly, it was argued that the assessee was under an obligation ultimately to pay for the publicity of the film. Therefore, the assessee was entitled to retain a part of the profit made in the current year for meeting its future liabilities. The assessee as a prudent man may retain a part of his profit for meeting its future liabilities. But whatever is set apart for meeting future commitments or contingencies cannot be allowed as a deduction in the year in which the income has been earned. In order to justify deduction, the assessee must establish that there is a present accrued liability. Something must happen during the relevant accounting period giving rise to the liability. In a case of deduction, it is for the assessee to establish facts which will justify the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to withhold some sale proceeds on account of the expenditure actually incurred on account of publicity up to a limit of Rs. 2,25,000. The contract envisaged that the expenditure is to be made over the entire period of the contract. The expenditure will commence even before the release of the film and will continue after the release of the film. The recoupment of the expenditure will be from the sale proceeds as and when the expenditure is incurred. In my opinion, neither the system of accounting adopted by the assessee nor the clear wording of the contract nor the principle of real income will justify the deduction claimed by the assessee. Assuming that a certain amount of its income has been set apart by the assessee to be spent in future on account of publicity, the retained amount will not cease to be its income. The income was earned in its usual business of film distribution by the assessee. How the amount will be utilised in future is quite irrelevant for the purpose of the enquiry whether the amount can be regarded as the assessee's income. As Lord Macmillan observed in the case of Pondicherry Railway Co. Ltd. v. CIT [1931] 5 ITC 363 (PC) (at p. 370): "...profits on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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