Shri A.m.rathnam,Sri Surya Movies v. The Deputy Commissioner Of Income Taxcity Circle, V (Inv.)(2), Madras

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 3.1.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A) No.73 of 2002 Shri A.M.Rathnam,Sri Surya Movies,1, Velavan Street,Valasaravakkam, Chennai 87. .. Appellant vs. The Deputy Commissioner of Income TaxCity Circle, V (Inv.)(2), Madras...Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'A' Bench dated13.2.2002 in ITA No.2017/Mds/2000, for the assessment year 1997-98against the order of the Commissioner of Income Tax (A) X, 121, MahathmaGandhi Salai, Chennai-34 dated 1.8.2000 nand ITA .No. 162/2000-2001against the Order of the Deputy Commissioner of Income tax, City Circle V(Inv) (2) Chennai-6 dated 31.3.2000 and made in PAN/GIR.No. 2706-R. For appellant:Mr.C.V.Rajan For respondent :Mrs.Pushya Sitaraman, Sr.SC for IT. ----- J U D G M E N T (Delivered by P.D.DINAKARAN, J.) The assessee has preferred the above tax case appeal against theorder of the Income-tax Appellate Tribunal dated 13.2.2002 in ITANo.2017/Mds/2000, for the assessment year 1997-98 raising the followingsubstantial questions of law for consideration: 1. Whether the Appellate Tribunal is right in holding thatdeduction claim made by the appellant in respect of expenditureand acquisition and distribution rights of feature fils onlycome under Rule 9B(3)(c) of the Income-tax Rules as against theclaim made by the appellant under Rule 9B(2)(a) of the Income-tax Rules? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether the Income-tax Appellate Tribunal is right inrejecting the claim of the cost of acquisition of the film,namely, 'Iruvar' under 9B(2)(a) when all the documentaryevidence show that it was sold fully? 3. Whether the Income-tax Appellate Tribunal is right indisregarding the letters filed by the appellant lessor as wellas the lessee to the effect that films rights were sold? 4. Whether the Appellate Tribunal is right in holding that thelease deed does not provide clear intention does not mean thatrights are not fully sold? 5. Whether the Appellate Tribunal is right in holding that inrespect of the films rights of Malayalam films the claim of costof acquisition would come only under 9B(4) of Income-tax Rulesas against the claim of the appellant that it will come under 9A(6) of the Income-tax Rules when the appellant is the producer? 6. Whether the valuation of closing stock by the Revenue iscorrect in law when the appellant has option to value the stockat market or cost whichever is lower? 7. Whether the Income-tax Appellate Tribunal was right inholding that valuing the acquisition stock of film atRs.33,46,480/- when the film has flopped and has no market value? 2. The facts, in brief, are as follows: 2.1. The relevant assessment year with which we are concerned is1997-98. The assessee filed his return of income on 31.10.1997admitting an income of Rs.1,05,87,690/-. The assessee filed a revisedreturn on 8.12.1997 declaring total income of Rs.1,07,73,210/-. Theassessment was taken up for scrutiny and notices under section 143(2) and142(1) were issued to the assessee calling for certain details. 2.2. In response to the same, the assessee produced the agreementdated 11.1.1997 under which the assessee acquired the distribution rightsof the film, 'Iruvar' in respect of Madurai and Ramnad Districts fromM/s.Madras Talkies for a period of five years. The cost of purchasementioned in the agreement was Rs.50,50,000/- which was paid by theassessee in three instalments. The film was released by the assessee forpublic exhibition in the theaters, viz., Cinipriya, Solaimalai andAmirutham at Madurai, Sami at Palani, National at Theni, Central atVirudhunagar, Jaya Anand at Rajapalayam, Naga at Dindigul, Yuvaraj atKambam and Sivam at Karaikudi. 2.2. In response to the same, the assessee produced the agreementdated 11.1.1997 under which the assessee acquired the distribution rightsof the film, 'Iruvar' in respect of Madurai and Ramnad Districts fromM/s.Madras Talkies for a period of five years. The cost of purchasementioned in the agreement was Rs.50,50,000/- which was paid by theassessee in three instalments. The film was released by the assessee forpublic exhibition in the theaters, viz., Cinipriya, Solaimalai andAmirutham at Madurai, Sami at Palani, National at Theni, Central atVirudhunagar, Jaya Anand at Rajapalayam, Naga at Dindigul, Yuvaraj atKambam and Sivam at Karaikudi. 2.3. Thereafter, the assessee sold the distribution rights of thesaid film to M/s.S.M.Movies, Madurai by agreement dated 24.3.1997 for atotal consideration of Rs.1,00,000/-. The relevant portion of theagreement reads as follows: "Whereas the lessees are willing to distribute the saidpicture on outright lease basis for the area of Madurai & RamnadDistricts (except first released following theatres: Cinipriya,Solaimalai & Amritham theatres, Madurai, Sami theatre – Palani,National theatre – Theni, Central theatre – Virudhunagar, JeyaAnand – Rajapalayam, Naga theatre – Dindigul, Yuvaraj theatre –Cumbam & Sivam theatre – Karaikudi) for a period of 5 years andconsideration of outright specified hereunder. xxx xxx And whereas the lessors (right holders) have hereby granted andassigned unto the lessees the outright leasehold of the saidpicture for distribution, exhibition and exploitation in thearea of Madurai & Ramnad Dists., constituted today as popularlyknown in the film trade. xxx xxx 5. The lessees shall not exhibit the picture in the outside areaexcept in the area covered herein during the lease period andlikewise the lessors also hereby assure to the lessees that theywill not directly or indirectly exhibit the picture in the areacovered herein during the lease period. 2.4. It is seen from the schedule annexed to the Profit and Lossaccount for the year ending on 31.3.1997 that the film realised by way ofcommercial exhibition a sum of Rs.5,91,020/-, apart from the sale oflease rights of Rs.1 lakh under agreement dated 24.3.1997 as against thetotal cost of acquisition of lease rights of Rs.50,50,000/- paid by theassessee by virtue of agreement dated 11.1.1997 between the assessee andM/s.Madras Talkies, the producers of the film. The assessee claimed theentire cost of acquisition of lease rights of film as deduction underRule 9B(2)(a) of the Income-tax Rules, 1962 (hereinafter referred to as'the Rules'), which reads as under: "Deduction in respect of expenditure on acquisition ofdistribution rights of feature films: 9B. (1) xxx (2) Where a feature film is acquired by the film distributor inany previous year and in such previous year -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 beallowed as a deduction in computing the profits and gains ofsuch previous year" 2.5. The assessing officer rejected the claim of deduction by theassessee under Rule 9B(2)(a) of the Rules on the ground that Rule 9B(2)(a)of the Rules is not applicable, as the assessee released the film forexhibition in certain theatres and sold the rights in respect of otherareas to M/s.S.M.Movies as per agreement dated 24.3.1997, however, theassessing officer granted deduction under Rule 9B(3)(c) of the Rules whichreads as follows: "Deduction in respect of expenditure on acquisition ofdistribution rights of feature films: 9B. (1) xxx (2) xxx (3) Where a feature film is acquired by the film distributor inany previous year and in such previous year the film distributor- (a) xxx (b)xxx 2.5. The assessing officer rejected the claim of deduction by theassessee under Rule 9B(2)(a) of the Rules on the ground that Rule 9B(2)(a)of the Rules is not applicable, as the assessee released the film forexhibition in certain theatres and sold the rights in respect of otherareas to M/s.S.M.Movies as per agreement dated 24.3.1997, however, theassessing officer granted deduction under Rule 9B(3)(c) of the Rules whichreads as follows: "Deduction in respect of expenditure on acquisition ofdistribution rights of feature films: 9B. (1) xxx (2) xxx (3) Where a feature film is acquired by the film distributor inany previous year and in such previous year the film distributor- (a) xxx (b)xxx (c) himself exhibits the film on a commercial basis in certainareas and sells the rights of exhibition of the film in respectof all or some of the remaining areas, and the film is not released for exhibition on a commercialbasis at least ninety days before the end of such previous year,the cost of acquisition of the film in so far as it does notexceed the amount realised by the film distributor byexhibiting the film on a commercial basis or the amount forwhich the rights of exhibition have been sold or, as the casemay be, the aggregate of the amounts realised by the filmdistributor by exhibiting the film and by the sale of therights of exhibition, shall be allowed as a deduction incomputing the profits and gains of such previous year; and thebalance, if any, shall be carried forward to the nextfollowing previous year and allowed as a deduction in that year." 2.6. That apart, the assessee also sold the rights in respect of twoold Malayalam films, viz., Aanyan Baba Chettan Baba and MelperambilInveedu. According to the assessee, the rights of the said two Malayalamfilms were purchased by the assessee for Rs.12,89,500/- about four or fiveyears back and since then, there was no realisation out of the films asneither the assessee released the films for commercial exhibition on hisown, nor could he sell the rights to other parties. The cost of rightsincurred by the assessee was then carried over from year to year and onlyin the current accounting year, viz., on 31.3.1997, the assessee couldsell the rights for a total consideration of Rs.1,50,000/- as against the cost incurred by him, viz., Rs.12,89,500/-. Hence, the assessee claimeddeduction of the entire cost of acquisition of Rs.12,89,500/- under Rule9A(6) of the Rules which runs as follows: "9A. Deduction in respect of expenditure on production offeature films: (1) to (5) xxx (6)Where the Assessing Officer is of opinion that - (a) the rights of exhibition of the feature film have beentransferred by the film producer by a mode not covered by theprovisions of this rule; or (b) having regard to the facts and circumstances of any case, itis not practicable to apply the provisions of this rule to suchcase, deduction in respect of the cost of production of the film maybe allowed by the Assessing Officer in such other manner as hemay deem suitable." 2.7. The assessing officer rejected the claim of the assessee inrespect of deduction of cost of acquisition of the said two Malayalammovies under Rule 9A(6) and held that the assessee would be entitled todeduction of cost of acquisition as per Rule 9B(4) of the Rules whichreads thus: "Deduction in respect of expenditure on acquisition ofdistribution rights of feature films: 9B. (1) xxx (2) xxx (b) having regard to the facts and circumstances of any case, itis not practicable to apply the provisions of this rule to suchcase, deduction in respect of the cost of production of the film maybe allowed by the Assessing Officer in such other manner as hemay deem suitable." 2.7. The assessing officer rejected the claim of the assessee inrespect of deduction of cost of acquisition of the said two Malayalammovies under Rule 9A(6) and held that the assessee would be entitled todeduction of cost of acquisition as per Rule 9B(4) of the Rules whichreads thus: "Deduction in respect of expenditure on acquisition ofdistribution rights of feature films: 9B. (1) xxx (2) xxx (3) xxx(4)Where during the previous year in which a feature film isacquired by the film distributor, he does not himself exhibitthe film on a commercial basis or does not sell the rights ofexhibition of the film, no deduction shall be allowed inrespect of the cost of acquisition of the film in computingthe profits and gains of such previous year; and the entirecost of acquisition shall be carried forward to the nextfollowing previous year and allowed as a deduction in that year." 2.8. On appeal, the Commissioner of Income-tax (Appeals) confirmedthe view of the assessing officer.2.9. On further appeal, the Appellate Tribunal, by order dated13.2.2002, confirmed the view taken by the Commissioner of Income-tax(Appeals), dated 1.8.2000. The relevant portion of the order ofCommissioner of Income-tax (Appeals) is as under:- " After going through the facts, I find that the appellant has to sold all rights of exhibition of the film, ascontemplated in Rule 9B(2)(a). The right of exhibition incertain theatres were still retained. It will be more logicalto allow the deduction as per Rule 9B(3)(c) and split thededuction in this assessment year and next assessment year.Therefore the procedure followed by the assessing officer isupheld"..... "According to the assessing officer under the provisions ofSub Rule 4 of Rule 9B the entire cost of acquisition ofRs.12,89,500/- would be allowable as deduction in the previousyear next following the year in which they were acquired by theappellant and the same can not be allowed as deduction in thecurrent year." 2.10. Aggrieved by the order of the Appellate Tribunal, the assesseehas come forward with this appeal raising the questions of law referred toabove. 3.1. Regarding the 1[st] question, viz., "Whether the Appellate Tribunal is right in holding thatdeduction claim made by the appellant in respect of expenditureand acquisition and distribution rights of feature films onlycome under Rule 9B(3)(c) of the Income-tax Rules as against theclaim made by the appellant under Rule 9B(2)(a) of the Income-tax Rules" Rule 9B referred to above provides for deduction in respect of expenditureon acquisition of distribution rights of feature films. As per theexplanation to Rule 9B(1), the expression 'cost of acquisition' inrelation to a feature film means the amount paid by the film distributorto the film producer or to another distributor under an agreement enteredinto by the film distributor with such film producer or such otherdistributor as the case may be for acquiring the rights of exhibition and,where the rights of exhibition have been acquired on a minimum guaranteebasis, the minimum amount guaranteed, not being - (i) the amount of expenditure incurred by the film distributor forthe preparation of the positive prints of the film; and (ii) the expenditure incurred by him in connection with theadvertisement of the film. (i) the amount of expenditure incurred by the film distributor forthe preparation of the positive prints of the film; and (ii) the expenditure incurred by him in connection with theadvertisement of the film. 3.2. Rule 9B(2) which we have already extracted provides fordeduction of the entire cost of acquisition of the film when a featurefilm is acquired by the film distributor in any previous year and in suchprevious year, he sells all rights of exhibition of the film. Accordingly,under Rule 9B(2), while computing the profits and gains, the filmdistributor is entitled to the deduction of entire cost of acquisition offeature film which he acquired in any previous year, if the filmdistributor sells all the rights of exhibition in such previous year. 3.3. However, Rule 9B(3)(c) provides that where the film distributoracquires a feature film in any previous year and in such previous year, if he himself exhibits the film on a commercial basis in certain areas andsells the rights of exhibition of the film in respect of all or some ofthe remaining areas, and the film is not released for exhibition on acommercial basis at least ninety days before the end of such previousyear, the cost of acquisition of the film in so far as it does not exceedthe amount realised by the film distributor by exhibiting the film on acommercial basis or the amount for which the rights of exhibition havebeen sold or, as the case may be, the aggregate of the amounts realised bythe film distributor by exhibiting the film and by the sale of the rightsof exhibition, shall be allowed as a deduction in computing the profitsand gains of such previous year; and the balance, if any, shall be carriedforward to the next following previous year and allowed as a deductionin that year. 3.4. In the instant case, it is not in dispute that the assesseepurchased the distribution rights of the film, 'Iruvar' from M/s.MadrasTalkies by agreement dated 11.1.1997 for a sum of Rs.50,50,000/- and asevident from the agreement dated 24.3.1997 between the assessee andM/s.S.M.Movies, the assessee exhibited the film, Iruvar in thetheaters, viz., Cinipriya, Solaimalai and Amirutham at Madurai, Sami atPalani, National at Theni, Central at Virudhunagar, Jaya Anand atRajapalayam, Naga at Dindigul, Yuvaraj at Kambam and Sivam at Karaikudiand then, sold the distribution rights of the film, Iruvar toM/s.S.M.Movies in respect of Madurai and Ramnad areas except the firstreleased theatres, which is clear from the agreement dated 24.3.1997 asextracted above. 3.5. Of course, an attempt was made by Mr.C.V.Rajan, learned counselfor the assessee that the term, "certain areas" found in Rule 9B(3)(c)will not mean theatres as it should be understood to mean the entire area.But, we are unable to appreciate the said contention, because the plainreading of Rule 9B(3)(c) would make it clear that even if the assesseeretains one theatre for the release of the movie by himself, and sells theremaining area, Rule 9B(3)(c) will be attracted. Hence, the Tribunal isright in upholding the view of the authorities that the Rule 9B(3)(c) ofthe Rules would be applicable to the assessee. Accordingly, the questionNo.1 is answered against the assessee. Consequently, question Nos.2 to 4are also answered against the assessee. 3.5. Of course, an attempt was made by Mr.C.V.Rajan, learned counselfor the assessee that the term, "certain areas" found in Rule 9B(3)(c)will not mean theatres as it should be understood to mean the entire area.But, we are unable to appreciate the said contention, because the plainreading of Rule 9B(3)(c) would make it clear that even if the assesseeretains one theatre for the release of the movie by himself, and sells theremaining area, Rule 9B(3)(c) will be attracted. Hence, the Tribunal isright in upholding the view of the authorities that the Rule 9B(3)(c) ofthe Rules would be applicable to the assessee. Accordingly, the questionNo.1 is answered against the assessee. Consequently, question Nos.2 to 4are also answered against the assessee. 4. With regard to the 5[th] question, viz., "whether the Appellate Tribunal is right in holding that inrespect of the films rights of Malayalam films the claim of costof acquisition would come only under 9B(4) of Income-tax Rulesas against the claim of the appellant that it will come under 9A(6) of the Income-tax Rules when the appellant is the producer"we are of the view that the claim of the assessee that he is entitled todeduction under Rule 9A(6) is not acceptable as Rule 9A deals withdeduction in respect of expenditure on production of feature film. On theother hand, Rule 9B alone deals with the deduction in respect ofdistributors. Concededly, the assessee is not a producer, but only a distributor. Therefore, the assessee is not entitled to deduction underRule 9A(6). We therefore hold that the assessing officer has rightlyrejected the claim of the assessee and allowed the deduction under Rule 9B(4) of the Rules. Hence, the 5[th] question is answered against the assessee. 5. With regard to the 7[th] question, viz., "whether the Income-tax Appellate Tribunal was right in holdingthat valuing the acquisition stock of film at Rs.33,46,480/-when the film has flopped and has no market value" we find that no such an issue was raised before the Appellate Tribunal.It is settled law that a point not raised before or considered by Tribunalcannot be considered by the High Court [vide: C.I.T. vs. Vellore ElectricCorporation Ltd. (235 ITR 289)]. However, the assessee is at liberty toagitate the said issue in the manner known to law, if he is so advised.The 7[th] question is also answered against the assessee. The 6[th] question,which is consequential, is also answered against the assessee. In fine, all the questions are answered against the assessee and infavour of the Revenue. The appeal fails and the same is dismissed. Nocosts. na Sd/-Assistant Registrar,/ture copy/Sub Assistant Registrar. To1.The Assistant Registrar,Income Tax Appellate Tribunal,III Floor Rajaji Bhavan, Besant Nagar, Madras.2.The Commissioner of Income- Tax (Appeals-X),121, Mahathma Gandhi Salai, Chennai-34. Chennai. 3.The Deputy Commissioner of Income-tax, City Circle V(Inv)(2), Chennai. + One cc to Mr. r. Vijayaraghavan Advocate sR 844+ One cc to Mrs Pusya Sitaraman, Advocate SR 737NG (co)sg 5/3/07TC (A) No.73 of 20023.1.2007 https://hcservices.ecourts.gov.in/hcservices/