Delhi High Court
M/S Honey Enterprises vs Commissioner Of Income Tax, Delhi on 8 December, 2015
Author: Vibhu Bakhru
THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 08.12.2015
+ ITA 163/2002
HONEY ENTERPRISES ..... Appellant
versus
COMMISSIONER OF INCOME TAX, DELHI ..... Respondent
Advocates who appeared in this case:
For the Appellant : Ms Shashi M. Kapila with Mr Pravesh Sharma.
For the Respondent : Ms Suruchi Aggarwal, Senior Standing Counsel
with Ms Lakshmi Gurung, Junior Standing
Counsel and Mr. Abhishek Sharma.
AND
+ ITA 377/2004
M/S HONEY ENTERPRISES ..... Appellant
versus
COMMISSIONER OF INCOME TAX, DELHI ..... Respondent
Advocates who appeared in this case:
For the Appellant : Ms Shashi M. Kapila with Mr Pravesh Sharma.
For the Respondent : Ms Suruchi Aggarwal, Senior Standing Counsel
with Ms Lakshmi Gurung, Junior Standing
Counsel and Mr. Abhishek Sharma.
AND
+ ITA 260/2002
COMMISSIONER OF INCOME TAX ..... Appellant
versus
HONEY ENTERPRISES ..... Respondent
Advocates who appeared in this case:
For the Appellant : Ms Suruchi Aggarwal, Senior Standing Counsel
ITA 163/2002 & Connected Matters Page 1 of 39
with Ms Lakshmi Gurung, Junior Standing
Counsel and Mr. Abhishek Sharma.
For the Respondent : Ms Shashi M. Kapila with Mr Pravesh Sharma.
AND
+ ITA 537/2004
THE COMMISSIONER OF INCOME TAX ..... Appellant
versus
M/S HONEY ENTERPRISES ..... Respondent
Advocates who appeared in this case:
For the Appellant : Ms Suruchi Aggarwal, Senior Standing Counsel
with Ms Lakshmi Gurung, Junior Standing
Counsel and Mr. Abhishek Sharma.
For the Respondent : Ms Shashi M. Kapila with Mr Pravesh Sharma.
CORAM:
DR. JUSTICE S. MURALIDHAR
MR. JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. These appeals - four in number - are filed under Section 260A of the
Income Tax Act, 1961 (hereafter the 'Act') impugning two separate orders
of the Income Tax Appellate Tribunal (hereafter 'ITAT') in respect of
Assessment Years (hereafter 'AY') 1992-93 and 1993-94. Whilst ITA Nos.
163/2002 and 377/2004 are Assessee's appeals impugning ITAT's orders
dated 19th December, 2001 for AY 1992-93 and 15th December, 2003 for
AY 1992-93 respectively; ITA No. 260/2002 and ITA No. 537/2004 have
been preferred by the Revenue against the aforementioned orders passed by
the ITAT.
2. Identical questions have been raised in the appeals preferred by the
Revenue as 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 has not been screened for a period
of 180 days till the end of the financial year, from the gross realizations
pertaining to that feature film and thereafter, amortize the cost of
acquisition of the distribution rights of the feature films to the extent of the
remaining surplus. It is claimed that the remaining unamortized cost of
acquisition is to be carried forward for amortization against business
income of the subsequent year. This is disputed by the Revenue. The
Revenue contends that the cost of feature films, which have not run for a
period of 180 days - reduced to 90 days by virtue of the Income Tax (Ninth
Amendment) Rules, 1998 with effect from 1st April, 1999 - till the end of
the financial year, can be amortized to the extent of the gross realizations
pertaining to the said film during the year and only the balance is permitted
to be carried forward.
5. Both the counsels agreed that the facts and the issues involved in
appeals were similar and, accordingly, the counsel advanced their
arguments on the basis of the facts in ITA 163/2002. Briefly stated, the said
facts are as under:-
5.1 The Assessee is a partnership firm engaged in the business of
distribution of Hindi motion-pictures/films in the Territory of Delhi and
Uttar Pradesh. The Assessee filed its return of income on 31 st October,
1992 for the AY 1992-93 declaring an income of Rs.1,13,380/-. The return
was initially processed under Section 143(1)(a) of the Act and,
subsequently, picked up for scrutiny.
5.2 The Assessee filed separate trading accounts in respect of various
films along with its consolidated Profit and Loss Account for the financial
year ending 31st March 1992 as well as its Balance sheet as on that date.
The Assessee claimed set off for certain expenses pertaining to the
preceding year relevant to the AY 1991-92. These expenses related to
feature films viz. 'Farishtey', 'Saugandh', 'Patthar ke Phool' and 'Patthar
ke Insaan', which were released during the financial year 1991 but had not
completed a commercial run of 180 days as on 31st March, 1991. The
Assessee claimed that this expenditure, which was sought to be set off
against the income in the current year, was unamortized expenditure that
was carried forward in accordance with Rule 9B of the Rules.
5.3 The AO analysed the expenses claimed to have been carried forward
by the Assessee from the preceding year and concluded 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 Cost of Amt. c/f Amount to be
upto 31.3.91 prints to next yr. 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 20,00,000 20,28,817 9,93,252 96,44,34 Nil
Phool
Pathar Ke 25,00,000 17,79,558 10,01,622 1779558 7,20,442
Insaan
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 1991-92 relevant
to the AY 1992-93.
5.5 In order to appreciate the rival contentions, it is also essential to refer
to the return filed by the Assessee for the preceding year, i.e., financial year
1991 relevant to the AY 1991-92. The Assessee had filed a return
declaring an income of Rs. 80,350/- for AY 1991-92. The Assessee had
prepared separate trading accounts for each film including the four films in
question, which had not completed screening of 180 days post their release.
The trading accounts prepared by the Assessee in respect of the four films
are reproduced below:-
FARISHTAY PICTURE A/C Release 21.2.91
Particulars Amount Particulars Amount
To C/o Royalty 55,00,000.00 By Business 43,99,031.73
To C/o Prints 16,63,006.25 By Loss on picture 27,63,974.52
71,63,006.25 71,63,006.25
SAUGANDH PICTURE A/C Release 24.1.91
Particulars Amount Particulars Amount
To C/o Royalty 12,50,000.00 By Business 15.68.809.60
To C/o Prints 7,29,995.30 By Loss on picture 4,11,185.70
19,79,995.30 19,79,995.30
PATTHAR KE PHOOL PICTURE A/C Release 21.2.91
Particulars Amount Particulars Amount
To C/o Royalty 20,00,000.00 By Business 20,28,817.67
To C/o Prints 9,93,252.65 By Loss on picture 9,64,434.98
29,93,252.65 29,93,252.65
PATTHAR KE INSAAN PICTURE A/C Release 24.1.91
Particulars Amount Particulars Amount
To C/o Royalty 25,00,000.00 By Business 17,22,063.52
To C/o Prints 10,01,622.42 By Loss on picture 17,79,558.90
35,01,622.42 35,01,622.42
5.6 The trading losses reflected in the above trading accounts did not
include other expenses incurred by the Assessee including expenses such as
publicity expenses specifically incurred in respect of the aforesaid films.
Such expenses were directly debited by the Assessee to its Profit and Loss
Account for the year ended 31st March, 1991 and were claimed as expenses
against income generated from distribution of other films.
5.7 For the AY 1992-93, the Assessee claimed that the expenditure
sought to be amortized against business income was only MG Royalty and
the same was in accordance with Rule 9B of the Rules. In other words, the
Assessee claimed that the costs of prints had been deducted from the gross
realizations relating to the respective films and the loss 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 account of the cost of prints,
which expense did not pertain to the year in question. The AO, therefore,
disallowed the claim in respect of the cost of prints, as indicated in the table
extracted hereinbefore, and restricted the claim of unamortized MG Royalty
carried forward from the preceding year to Rs. 18,21,363/-.
6. The CIT(A) accepted the Assessee's contention as well as its method
of accounting and deleted the addition made by the AO. The CIT(A) held
that MG Royalty paid by the Assessee could be set off only against
realizations from the film in question that were available to the Assessee
after deduction of the cost incurred by the Assessee.
7. The Revenue carried the aforesaid decision of CIT(A) in appeal
before the ITAT (ITA No. 747/D/95). In this appeal, the Revenue also
appealed against the decision of CIT(A) to delete the addition of
Rs.8,14,175/- under Section 40A(3) of the Act. The ITAT allowed the
Revenue's appeal in respect of the addition of Rs.25,31,629/-, which was
deleted by the CIT(A) but rejected the Revenue's appeal in respect of the
deletion of the additions made under Section 40A(3) of the Act. The
question regarding deletion of the addition under Section 40A(3) of the Act
is the subject matter of the Revenue's appeal being Appeal No. 260/2002.
The ITAT's decision to allow the Revenue's appeal in respect of the issue
concerning Rule 9B of the Rules is the subject matter of the Assessee's
appeal - ITA 163/2002.
Submissions
8. Ms Shashi M. Kapila, learned counsel appearing for the Assessee
contended that the short issue involved in the Assessee's appeals was
whether the Assessee could set off the expenses as allowable under Section
28 to 50 of the Act and amortize the cost of films to the extent of the
remaining balance or whether the cost of films was to be amortized before
allowance of any expenditure? She submitted that the expenditure incurred
by the Assessee in respect of a feature film would have to be deducted from
the gross realizations from that film in order to ascertain the amount
available for absorbing the cost of acquisition of distribution rights of that
film and the unabsorbed cost of acquisition of rights would be carried
forward to the next year for amortization against the income of the
Assessee. She contended that if this procedure was not followed, the
Assessee would not be in a position to set off its normal 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 subsequent year under Rule 9A of the Rules
were not in the nature of carry forward of losses and, therefore, did not fall
within the purview of Section 80 of the Act. She contended that since the
carry forward of unamortized expenses were not in the nature of carried
forward losses, Rule 9B of the Rules must be interpreted to only provide for
amortization of costs of a feature film to the extent the same could be
absorbed by the Assessee in the relevant financial year. She submitted that
the amount available for absorption of cost of films was only the net
income that remained after deduction of other expenses incurred by the
Assessee in connection with the feature film(s), which had not been
commercially screened for a period of 180 days before the end of the
previous year.
10. Ms Kapila also contended that the Assessee had consistently
followed the accounting practice of computing the cost of acquisition of the
distribution rights to be carried forward to the next year and the same had
not been objected to by the assessing officers in the past. She contended
that in the circumstances, following the principle of consistency, the
disallowance made by the AO was not sustainable. She also referred to the
decision of the Supreme Court in Radhasoami Satsang v. CIT : [1992] 193
ITR 321 (SC) in support of her contention.
11. Ms Suruchi Aggarwal, learned senior standing counsel appearing for
the Revenue supported the decision of the Tribunal and contended that the
language of Rule 9B of the Rules was clear and the cost of acquisition of
feature films did not include the amount of expenditure incurred in
preparation of positive prints of feature films. She argued that in effect the
Assessee was seeking to carry forward the cost of the films for being
amortized in the subsequent year, which was not permissible.
Reasoning & Conclusion
12. At the outset, it is necessary to refer to Rule 9B of the Rules which
reads as under:-
"Deduction in respect of expenditure on acquisition of
distribution rights of feature films.
9B. (1) In computing the profits and gains of the business of
distribution of feature films carried on by a person (the person
carrying on such business hereafter in this rule referred to as
film distributor), the deduction in respect of the cost of
acquisition of a feature film shall be allowed in accordance
with sub-rule (2) to sub-rule (4).
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 of some of the areas;
or
(iii) himself exhibits the film on a
commercial basis in certain areas and
sells the rights of exhibition of the
film in respect of all or some of the
remaining areas,
and the film is released for exhibition on a commercial basis at
least ninety days before the end of such previous year, the
entire cost of acquisition of the film shall be allowed as a
deduction in computing the profits and gains of such previous
year.
(3) Where a feature film is acquired by the film distributor in
any previous year and in such previous year the film
distributor--
(a) himself exhibits the film on a commercial
basis in all or some of the areas; or
(b) sells the rights of exhibition of the film in
respect of some of the areas; or
(c) himself exhibits the film on a commercial
basis in certain areas and sells the rights of
exhibition of the film in respect of all or some
of the remaining areas,
and the film is not released for exhibition on a commercial
basis at least ninety days before the end of such previous year,
the cost of acquisition of the film in so far as it does not
exceed the amount realised by the film distributor by
exhibiting the film on a commercial basis or the amount for
which the rights of exhibition have been sold or, as the case
may be, the aggregate of the amounts realised by the film
distributor by exhibiting the film and by the sale of the rights
of exhibition, shall be allowed as a deduction in computing the
profits and gains of such previous year; and the balance, if any,
shall be carried forward to the next following previous year
and allowed as a deduction in that year.
(4) Where during the previous year in which a feature film is
acquired by the film distributor, he does not himself exhibit the
film on a commercial basis or does not sell the rights of
exhibition of the film, no deduction shall be allowed in respect
of the cost of acquisition 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 ;
(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 of such rights or their
transfer on a minimum guarantee basis ;
(ii) the rights of exhibition of a feature film shall
be deemed to have been sold only on the date
when the positive prints of the film are
delivered by the film distributor to the
purchaser of such rights ;
(iii) distributor shall include a sub-distributor."
13. Rule 9B of the Rules has been framed under Section 295 of the Act
by the Central Board of Direct Taxes (hereafter 'CBDT') and provides for
the deduction in respect of expenditure incurred on acquisition of
distribution rights of feature films. Rule 9B(1) of the Rules provides that
deduction in respect of cost of acquisition of a feature film shall be allowed
in accordance with sub-rule (2) to sub-rule (4) of Rule 9B of the Rules. A
plain reading of the explanation to Rule 9B(1) of the Rules indicates that
where the rights of exhibition have been acquired on a minimum guarantee
basis, the minimum guarantee amount, not being the expenditure incurred
by the distributor for preparation of the positive prints of the film and the
expenditure incurred by him in connection with the advertisement of the
film, would be taken as a cost of acquisition for the purposes of Rule 9B of
the Rules. Thus, it has been expressly indicated that the cost of acquisition
for the purposes of Rule 9B would not include any publicity expenditure in
connection with films or any expenditure incurred for preparation of the
positive prints of films. Indisputably, in view of the plain language of Rule
9B, the expenditure incurred on preparation of positive prints of a film
cannot be carried forward for amortization in terms of Rule 9B of the Rules
as cost of acquisition of distribution rights of that film.
14. In terms of sub-rule (3) of Rule 9B of the Rules, if a film is not
released for exhibition on a commercial basis at least 180 days (now
amended to 90 days w.e.f. 1st April, 1999) before the end of the relevant
previous year, the cost of acquisition of the distribution rights of that film
insofar as it does not exceed the amount realized by the film distributor by
exhibiting the film on a commercial basis, would be allowed as a deduction
in computing the profits and gains for the relevant previous year. In the
facts of the present case, the four films, namely, 'Farishtey', 'Saugandh',
'Patthar ke Phool' and 'Patthar ke Insaan' had not completed a
commercial 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 including the four films in question that had not
completed a commercial run of 180 days prior to the end of the financial
year, to the Profit and Loss Account. Thus, whilst the Assessee had charged
a part of the expenses relating to the four films in question directly to its
Profit & Loss Account, it had sought to treat the minimum guarantee
payable and the cost of prints separately by debiting the amounts in
separate Trading Accounts drawn up for each film. Essentially, the
Assessee has sought to club the two expenses, that is, the cost of acquisition
of distribution rights of films and the cost of prints for the purposes of
charging the same against realizations from those films and for carrying
forward the excess to the next year for the purposes of Rule 9B of the
Rules. In other words, whilst the Assessee excluded the expenditure
incurred on publicity of the films for the purposes of calculating the amount
to be set off against realizations of the said film and directly debited the
same to its Profit & Loss Account, it sought to treat the cost of preparing
positive prints as part of the cost of acquisition of distribution rights of
films for the purpose of Rule 9B of the Rules. However, this is precisely
what is not permissible in terms of the explanation to Rule 9B(1) of the
Rules.
17. The Assessee has contended that the revenue expenses pertaining to
the cost of films and publicity/advertisement charges must be deducted
from the gross realizations in the year in which they were incurred for
determining the extent of realizations available for amortization of MG
Royalty. It has been further contended that if the same is not done, then in
every case where MG Royalty exceeds the collection, it would swallow up
the entire realization and consequently the cost of prints and publicity
expenses would never be allowed and would become "dead expenses".
This, according to the Assessee, results in the scheme of computation of
business profits under Section 28, 29 and 37(1) becoming "inert, lifeless
and redundant". It is contended that Rule 9B of the Rules must be read in a
manner so as to avoid such "manifest absurdity". In our view, the aforesaid
contentions are wholly bereft of any merit. Rule 9B of the Rules only
provides for the method of computing the deduction available in respect of
the expenditure on acquisition of distribution rights of feature films. In
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. The amount permissible as a deduction in
terms of Rule 9B would be pari passu with any other deduction permissible
under Section 37(1) of the Act. It must be understood that the profits and
gains of business or profession are computed in accordance with the
machinery provisions placed in part D of Chapter IV of the Act, i.e.,
Sections 28 to 44 DB of the Act. Broadly speaking, under the said
computation provisions, income is determined by deducting allowable
expenditure from the gross profits and gains of business. In the aforesaid
scheme, the cost of acquisition of feature films computed in accordance
with Rule 9B of the Rules would also be one such deduction and would be
allowed in the same manner as other expenditure incurred by the Assessee.
The apprehension that other expenditure incurred by the Assessee would be
rendered 'dead expenses' is unjustified. If the deductions as allowable
exceed the gross income, the Assessee would return loss which would be
permitted to be set off and/or carried forward in accordance with the
provisions of the Act. It is also relevant to bear in mind that whether an
Assessee incurs a loss or makes a profit would be dependent on the results
of business carried out by the Assessee during the entire year. Thus, in the
cases where the minimum guarantee payable for acquiring the distribution
rights in respect of films that have not completed a commercial run of 180
days prior to the end of the financial year exceeds the realizations from the
commercial exhibition of the film in that year, the Assessee would account
for a loss in respect of that film in that year, albeit to the extent of other
revenue expenditure incurred for that film; this is so because the Assessee
is unable to recover even the cost of acquisition of rights of that film.
However, the question whether the Assessee returns a loss for the relevant
assessment year would depend on the profits or gains made by the Assessee
in respect of his business as a whole, which would include not only the
profits and gains from films that have not completed a commercial run for a
period of 180 days but also the profits or gains made by the Assessee in
respect of other films. In the present case, the separate Trading Accounts
drawn up by the Assessee in respect of four films for the financial year
ended 31st March, 1991 in question indicate a loss which is sought to be
carried forward 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 that case, the Assessee had
acquired distribution rights in respect of a film named "Charas" on
payment of Rs.13.7 lacs being the minimum guarantee payment for
acquiring the distribution rights. In terms of the agreement between the
Assessee and the producer of the film "Charas", the Assessee was entitled
to recover the minimum guarantee payment and receive commission of
20% on further collections up to Rs.8.50 lacs and 50% for further
collections exceeding Rs.8.50 lacs. The film was released on 28 th May,
1976. Thereafter, on 28th March, 1978 the agreement entered into by the
Assessee (distributor) and the producer (Sagar Enterprises) was modified
and the Assessee paid a sum of Rs.4.25 lacs to Sagar Enterprises for
acquiring the rights of Sagar Enterprises in the overflow profits of the
unexpired period of the contract. This amount of Rs.4.25 lacs was claimed
by the Assessee as a deduction out of the total collection shown in the
Profit & Loss Account for the year ended 30th June, 1978. The Income Tax
Officer disallowed the deduction on the ground that Rule 9B of the Rules
allowed deduction only in respect of the amount paid to acquire distribution
rights and, in this case, the amount was paid not to acquire distribution
rights but to acquire the rights of the producer in respect of overflow of
profits. In appellate proceedings, CIT(A) held that the payment of Rs.4.25
lacs was by way of additional cost and, therefore, allowable as deduction
under Rule 9B of the Rules. The Tribunal also held that the amount of
Rs.4.25 lacs was paid for acquiring full rights of exhibition of the film and,
therefore, the amount paid was admissible as a deduction under Rule 9B of
the Rules. On a reference, the Division Bench of the Bombay High Court
held that Rule 9B was applicable to the modified contract dated 20 th March,
1978. However, the Court also held that the Assessee could not claim the
entire deduction of Rs.4.25 lacs under Rule 9B of the Rules as the
deduction was admissible only where the receipts were credited in the
Profit & Loss Account and if there were no receipts credited, no amount
could be amortized under Rule 9B, which the Court observed was a special
code for computing the deduction available to an Assessee. In that case, it
was estimated that the Assessee had credited a sum of Rs.1,49,783/- for the
period 1st February, 1978 to 30th June, 1978 and 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
consistently followed the accounting practice of calculating the amount to
be carried forward under Rule 9B of the Rules. The same was not objected
to by the Assessing Officer in the past and, therefore, applying the rule of
consistency, a departure from the past practice was not warranted. In our
view, the aforesaid contention also cannot be accepted in cases where the
mandate of law is clear. The principle of consistency is a principle of equity
and would not override the clear provisions of law. It is well accepted that
each assessment year is separate and the fact that a particular accounting
treatment followed by the Assessee under the preceding year was not
objected to, would not fetter the Assessing Officer from correcting the
mistake in a subsequent year as the principles of res judicata are not
applicable. In Radhasoami Satsang (supra) the Supreme Court held that
"where a fundamental aspect permeating through the different assessment
years has been found as a fact one way or the other and parties have
allowed that position to be sustained by not challenging the order, it would
not be at all appropriate to allow the position to be changed in a
subsequent year". As is apparent from the said decision, the rule of
consistency has limited application - where a fundamental aspect
permeates through several assessment years; the said aspect has been found
as a fact one way or the other; and the parties have not challenged the said
finding and allowed the position to sustain over the years. Clearly, the said
principle will have no application where the position canvassed militates
against an express provision of law.
21. This Court in Krishak Bharati Cooperative Ltd. v. Deputy
Commissioner of Income Tax: (2013) 350 ITR 24 (Del) had observed as
under:-
"20. This court notices that there cannot be a wide application
of the rule of consistency. In Radhasaomi itself, the Supreme
Court acknowledged that there is no res judicata, as regards
assessment orders, and assessments for one year may not bind
the officer for the next year. This is consistent with the view of
the Supreme Court that "there is no such thing as res judicata in
Income-tax matters" (Raja Bahadur Visheshwara Singh v. CIT
[1961] 41 ITR 685 (SC) ; AIR 1961 SC 1062). Similarly,
erroneous or mistaken views cannot fetter the authorities into
repeating them, by application of a rule such as estoppel, for
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 Act. For the
AY 1992-93, the AO disallowed a sum of Rs.8,14,175/- as the aggregate of
the cash payments made in excess of Rs.10,000/-. Similarly, for AY 1993-
94 the AO disallowed a sum of Rs.15,88,243/- under Section 40A(3) of the
Act. The Assessee contended that the said payments had been made in cash
to the film producers in terms of the agreements entered into with them. It
was also contended that the exigencies of business required the Assessee to
make such payments to producers in Bombay. The Assessee explained that
its office was located at Delhi and it carried on its business in Delhi and the
payments made in cash were made to producers in Bombay. Further, in the
line of the Assessee's business, the producers expected the payments to be
made in cash immediately on concluding the agreements. It was further
suggested that the producers needed cash payments as they were shooting
films in different locations and such payments were also made to meet their
urgent requirements. It was submitted that although the Assessee has a bank
account in Bombay, the same was inoperative.
25. Before the AO, the Assessee, inter alia, contended that such cash
payments were not on account of expenditure incurred but were only
advance payments against minimum guarantee agreed to by the Assessee.
Such payments were recouped by the Assessee from the collections made
in respect of the films. According to the Assessee, such payments were not
covered under the provisions of Section 40A(3) of the Act. The AO did not
accept the Assessee's contentions and made the additions as mentioned
above. In appeals preferred by the Assessee, the CIT(A) accepted the
Assessee's contention that the payments were not made for purchase of
prints but were advanced against the MG Royalty payable for acquiring the
limited right of exhibition of film in a particular territory. The CIT(A) held
that "such payments were held in the nature of royalty for the exploitation
of the film i.e. in the nature of price paid for exploitation of a capital asset
and therefore the payments would not come under the purview of Section
40A(3)". The CIT(A) further found that there was no doubt as to the
identity of the persons receiving the payment and also as to the genuineness
of the transactions.
26. The Revenue did not accept the CIT(A)'s decision and preferred
appeals before the ITAT. The ITAT did not accept the view 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 31 st 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 the course of conducting business. She also contended
that it was necessary to look at the circumstances under which payments
had been made and by keeping in view of the commercial constraints and
the practicality of the circumstances which had to be dealt with by the
Assessee as a businessman. She emphasised that the Assessee had made
payments in cash keeping in mind the commercial necessity and the
practicality of the business.
29. Before considering the rival contentions, it is necessary to observe (i)
that there is no dispute as to the identity of the producers to whom cash
payments have been made by the Assessee; and (ii) that the payments were
made bonafide and in consideration of a genuine transactions as advances
either for processing the positives of the film or acquiring the rights of
exhibition of feature films. Thus, indisputably, such payments were
allowable as deduction being revenue expenses incurred wholly and
exclusively for business. The only issue to be considered is whether the
same have to be disallowed by virtue of Section 40A(3) of the Act because
the same were made in cash.
30. Section 40A(3) of the Act as in force during the AYs 1992-93 and
1993-94 reads as under:-
"(3) Where the assessee incurs any expenditure in respect of
which payment is made, after such date (not being later than
the 31st day of March, 1969) as may be specified in this behalf
by the Central Government by notification in the Official
Gazette, in a sum exceeding ten thousand rupees otherwise than
by a crossed cheque drawn on a bank or by a crossed bank
draft, such expenditure shall not be allowed as a deduction:
Provided that where an allowance has been made in the
assessment for any year not being an assessment year
commencing prior to the 1st day of April, 1969, in respect of
any liability incurred by the assessee for any expenditure and
subsequently during any previous year the assessee makes any
payment in respect thereof in a sum exceeding ten thousand
rupees otherwise than by a crossed cheque drawn on a bank or
by a crossed bank draft, the allowance originally made shall be
deemed to have been wrongly made and the Assessing Officer
may recompute the total income of the assessee for the
previous year in which such liability was incurred and make the
necessary amendment, and the provisions of section 154 shall,
so far as may be, apply thereto, the period of 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 thou-
sand 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 crossed cheque drawn on a bank or by a crossed bank
draft "(a) due to exceptional or unavoidable circumstances; or (b) because
payments in the manner aforesaid was not practicable, or would have
cause genuine difficulty to the payee, having regard to the nature of
transaction and the necessity for expeditious settlement thereof."
32. Apparently, several representations were received by the CBDT
regarding difficulties that were being faced by tax payers due to the lack of
uniformity in the interpretation of the aforesaid Rule. In the circumstances,
the CBDT issued a circular - being Circular No. 220 dated 31st May, 1977,
inter alia, providing as under:-
"4. All the circumstances in which the conditions laid down in
rule would be applicable cannot be spelt out. However, some of
them which would seem to meet the requirements of the said
rule are ;
(i) The purchaser is new to the seller ; or
(ii) The transactions are made at a place where either the
purchaser or the seller does not have a bank account;
or
(iii) The transactions and payments are made on a bank
holiday ; or (iv) The seller is refusing to accept the
payment by way of crossed cheque/draft and the
purchaser's business interest would suffer due to non-
availability of goods otherwise than from this
particular seller ; or
(v) The seller, acting as a commission agent, is required to
pay cash in turn to persons from whom he has
purchased the goods; or
(vi) Specific discount is given by the seller for payment to
be made by way of cash."
33. CBDT further clarified that "the above circumstances are not
exhaustive but illustrative. There could be cases other than those falling
within the above categories which would also meet the requirements of
rule"
34. The ITAT had considered the above mentioned CBDT Circular and
had rightly concluded that the circumstances as spelt out in CBDT Circular
No. 220 (supra) were not exhaustive but were merely illustrative of
situations where business exigencies required that the payments be made in
cash. The ITAT also referred to the decision of the Gujarat High Court
in Hasanand Pinjomal v. CIT: (1978) 112 ITR 134 (Guj.) wherein the
Court had observed that the practicability would have to be judged from the
angle of a businessmen and not the Revenue.
35. In the present circumstances neither the genuineness of the payment
nor the identity of the payee 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 parties are left to bear their own costs.
VIBHU BAKHRU, J
S. MURALIDHAR, J
DECEMBER 08, 2015
RK
