Ita/80/2010 Of Malayala Manorama Co.ltd v. Asst.commissioner Of Income Tax, Ktm

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN&THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 26TH DAY OF JUNE 2018 / 5TH ASHADHA, 1940 ITA.No. 80 of 2010 ------------------- AGAINST THE ORDER/JUDGMENT IN ITA 17/COCH/2009 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT(S)/APPELLANT:----------------------- MALAYALA MANORAMA CO.LTD., K.K.ROAD, KOTTAYAM. BY ADVS.SRI.E.K.NANDAKUMAR SRI.P.BENNY THOMAS SRI.P.GOPINATH SRI.K.JOHN MATHAI SRI.RAJA KANNAN RESPONDENT(S): ------------- ASST.COMMISSIONR OF INCOME TAX, CIRCLE-1, KOTTAYAM. R, BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) R, BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 25-05-2018,THE COURT ON 26-06-2018 DELIVERED THE FOLLOWING: APPENDIX APPELLANT(S)' ANNEXURES:----------------------- ANNEXURE A: COPY OF THE ASSESSMENT ORDER DATED 21-12-2007. ANNEXURE B: COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 22-10-2008. ANNEXURE C: COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH IN ITA.17/COCH/2009 DATED 11-08-2009. RESPONDENT(S)' ANNEXURES:------------------------ NIL /TRUE COPY/ PA TO JUDGE K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- I.T.A. No. 80 of 2010 ------------------------------------------- Dated this the 26[th] day of June, 2018 C.R. J U D G M E N T Ashok Menon, J. The assessee is before us aggrieved by the finding of theTribunal rejecting the appeal claiming the benefit under theprovisions of Rule 9B(4) of the Income Tax Rules, 1962 (for brevity'the Rules'). The following substantial questions of law arises forconsideration: “1. Whether the Hon'ble Tribunal was right in law and onfacts in upholding the order of the lower authorities,by finding that Rule 9B(4) would not entitle theappellant to claim deduction in respect of expenditureof acquisition of distribution rights of feature filmduring the previous year relevant to the assessmentyear 2005-06 ?facts in upholding the order of the lower authorities,by finding that Rule 9B(4) would not entitle theappellant to claim deduction in respect of expenditureof acquisition of distribution rights of feature filmduring the previous year relevant to the assessmentyear 2005-06 ? 2.Ought not the Tribunal have found that as per theexpress provision of Rule 9B(4) of the Income TaxRules, 1962, the deduction in respect of expenditureon acquisition of distribution rights of feature films, incases where there was no exhibition of the film on acommercial basis or a sale of the rights for exhibitionof the film, either during the previous year in whichthe feature film was acquired, or in the next followingprevious year, the deduction has to be granted to theexpress provision of Rule 9B(4) of the Income TaxRules, 1962, the deduction in respect of expenditureon acquisition of distribution rights of feature films, incases where there was no exhibition of the film on acommercial basis or a sale of the rights for exhibitionof the film, either during the previous year in whichthe feature film was acquired, or in the next followingprevious year, the deduction has to be granted to the assessee in the previous year next following theprevious year during which the feature film wasacquired by the film distributor ? assessee in the previous year next following theprevious year during which the feature film wasacquired by the film distributor ? 3.Whether the Hon'ble Tribunal was right in law and onfacts in upholding the orders of the lower authorities,which held that the provisions of rule 9B(5) have anoverriding effect over the provisions of Rule 9B(4),especially when the two provisions operated inseparate fields and did not contain any provision thatwas contrary to each other.”facts in upholding the orders of the lower authorities,which held that the provisions of rule 9B(5) have anoverriding effect over the provisions of Rule 9B(4),especially when the two provisions operated inseparate fields and did not contain any provision thatwas contrary to each other.” 2.The assessment pertains to the year 2005-06 and the assessee filed returns declaring a total income of Rs.19,90,63,060/- on 27-10-2005. Notice was issued on 05-04-2006 and the claimof the assessee for deduction of the amounts in connection with theacquisition of satellite distribution rights on three Malayalam filmsin the financial year 2003-04 was rejected vide assessment order atAnnexure A. The First Appellate Authority also rejected the claim ofthe assessee vide order at Annexure B. Appeal preferred by theRevenue as well as the cross-objection filed by the assessee beforethe Income Tax Appellate Tribunal, Kochi Bench were dismissed videorder at Annexure C. 3.The contention of the assessee is that the lowerauthorities erred in holding that the appellant-Company was notentitled to claim the deduction in respect of expenditure on The contention of the assessee is that the lower acquisition of distribution of feature films obtained by the appellantin the year 2003-04 for the reason that there was no exhibition ofthe films on commercial basis during the period of acquisition or inthe next year. The assessee claims that in accordance with thespecific provisions in Rule 9B(4), deduction of the cost of acquisitionmade in the year 2003-04 (previous year to the assessment year2004-05), has to be carried forward to the next following previousyear (ie., 2004-05) and allowed as a deduction in that year, sincethe assessee has not commercially exploited the film in the year ofacquisition. It is pointed out that the reasoning of the lowerauthority that the non-obstante clause contained in Rule 9B(5)qualifies all the previous clauses of Rule 9B and hence the assesseewas not entitled to claim deduction during a previous year, when noamount was realised by exhibition of the film, is contrary to theexpress provisions in the Rules and hence not legally sustainable. Itis urged that the lower authority ought to have found that theimpact of the non-obstante clause contained in Rule 9B(5) couldonly be in such situation and circumstances, as were expresslycontemplated by the said clause. Rule 9B(5) deals exclusively with cases where there has been an exhibition of the feature film or saleof rights of exhibition of the feature film and in such cases, the saidclause restricts the availment of deduction and mandates that thededuction shall be claimed only in the year of realisation of theamount pursuant to exhibition of the film and crediting of the saidamount in the books of account maintained by the assessee. It issubmitted that Rule 9B(5) does not apply to a situation covered byRule 9B(4), where there is no exhibition of the film on a commercialbasis for more than two years in a row, including the year in whichthe distribution rights of the feature film was acquired by theassessee. The learned Standing Counsel for the Departmentsubmits that the non-obstante clause operates to avoid the effect ofall contrary provisions. 4.We heard the learned Counsel for the appellant and thelearned Standing Counsel for the Government of India (Taxes). We heard the learned Counsel for the appellant and the 4.We heard the learned Counsel for the appellant and thelearned Standing Counsel for the Government of India (Taxes). We heard the learned Counsel for the appellant and the 5.Rule 9B(5) starts with a non-obstante clause. Under thesaid rule, it is laid down that deduction under Rule 9B shall not beallowed unless the distributor credits in the books of accounts, theamounts realised by the distributor in case where the distributor himself has exhibited the film on commercial basis. The assesseewas therefore required to credit the amount realised by him byexhibiting the film in the profit and loss account. Hence thededuction is permissible under Rule 9B only if the film has beencommercially exploited and an income received. Sub-rule (4) ofRule 9B only permits carrying forward of the cost of acquisition tothe next year for the purpose of claiming deduction, which can beclaimed only if there is income generated by the film and the sameis credited to the books of accounts as provided in the overridingsub-rule at Rule 9B(5). There can be no deduction permissible onthe cost of acquisition without generation of income credited in thebooks of account. The subject films were never commerciallyexploited and generated absolutely no income. 6.The High Court of Bombay in Commissioner of Income Tax v. Prakash Pictures, [2003] 260 ITR 456 (BOM) held thus:- “Having come to the conclusion that the modifiedagreement dated March 28, 1978, stood covered by rule9B, the main question which we have required to decide inthis case is whether the assessee was entitled to claim theentire deduction of Rs.4.25 lakhs under rule 9B, duringthe accounting year ending June 30, 1978, correspondingto assessment year 1979-80. Rule 9B, inter alia, laysdown that for computing the profits and gains of the business of distribution of films, deduction in respect ofcost of acquisition shall be allowed in accordance withsub-rule (2) to sub-rule (4). Under sub-rule (4), it is,inter alia, laid down that if during the previous year thedistributor does not exhibit the film, no deduction shallbe allowed in respect of the cost of acquisition and theentire cost shall be carried forward for the next followingprevious year and allowed as deduction in that year. Inother words, deduction is admissible only qua the receiptscredited in the profit and loss account and if there are noreceipts credited in that account, on account of failure ofthe distributor (assessee) to exploit the film then, nodeduction was admissible. Rule 9B is, therefore, a specialcode in the matter of deduction vis-a-vis computation ofprofits and gains of business of distribution. Sub-rule (5)of rule 9B commences with a non-obstante clause. Thissub-rule also makes it clear that the deduction under rule9B shall not be allowed unless the amounts realised byexhibiting the film are credited in the profit and lossaccount of the assessee in respect of the year in which thededuction is admissible. This rule, in our viewcontemplates amortization. Briefly, it contemplatesadmissibility of deduction proportionate to the incomeearned/collections made during the year in whichdeduction is sought, failing which, the true profits mayget distorted as in the present case.” We respectfully agree with the above declaration. 7.It is an admitted case that the feature films were neverexhibited and there was no amount credited in the profit and lossaccount as amount received on exhibition of films. The finding ofthe Appellate Authority as well as the Tribunal is therefore, to beupheld and we find no reason to interfere and the claim of the ITA 80/2010 assessee fails. We answer the questions of law in favour of theRevenue and against the assessee. Hence, the Appeal is dismissed. Sd/-K. VINOD CHANDRANJudge Sd/-ASHOK MENONJudge dkr