COMMISSIONER OF INCOME TAX Vs. PRAKASH PICTURES

JUDGEMENT

(1.) AT the instance of the department, the following question of law has been referred to this court by the Tribunal under Section 256(1) of the Income -tax Act, 1961 : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 4,25,000 paid by the assessee to the producer for acquisition of the exclusive rights of exploitation of the film 'Charas' under the indenture dated March 28, 1978, was admissible as deduction under Rule 9B of the Income -tax Rules in the assessment year 1979 -80 ?' Facts :

(2.) THE assessee is a registered firm engaged in the business of distribution of films. On August 19, 1974, the assessee entered into an agreement with Sagar Enterprises, which had produced a Hindi film by the name 'Charas'. Under the agreement, the assessee acquired distribution rights in respect of the film 'Charas' on payment of Rs. 13.70 lakhs being the minimum guarantee payment. As per the agreement, the distribution rights were acquired on commission basis with a minimum guarantee payment of Rs. 13.70 lakhs. Under the agreement, after recoupment of minimum guarantee payment along with cost of publicity and cost of extra prints, the distributor (assessee) was to get a commission of 20 per cent. of further collections up to Rs. 8.50 lakhs and in the event of the further collections exceeding Rs. 8.50 lakhs, the distributor (assessee) was to get the commission of 50 per cent. The said distribution agreement was dated August 19, 1974. The film was released on May 28, 1976. The agreement was modified on March 28, 1978. On that date, Rs. 4.25 lakhs was paid by the distributor (assessee) to the producer Sagar Enterprises for clearing of the producer's rights in the overflow profits for the unexpired period of the contract which was for ten years from the date of release of the film. In this reference we are concerned with the accounting year ending June 30, 1978, relevant to the assessment year 1979 -80. On payment of Rs. 4.25 lakhs on March 28, 1978, the assessee claimed deduction out of total collection shown in the profit and loss account. The Income -tax Officer disallowed the same on the ground that under Rule 9B of the Income -tax Rules, deduction was allowable only if the amount was paid to acquire distribution rights. That, in this case, Rs. 4.25 lakhs was paid not to acquire distribution rights but to acquire the right of the producer to share the overflow profits arising in future during the unexpired period of the contract and, therefore, such payment was not allowable for deduction under Rule 9B. Being aggrieved, the assessee went in appeal before the Commissioner of Income -tax (Appeals), who took the view that payment of Rs. 4.25 lakhs was by way of additional costs and, therefore, it was allowable as deduction under Rule 9B of the Income -tax Rules. Being aggrieved by that decision, the matter was carried in appeal to the Tribunal, which took the view that the payment of Rs. 4.25 lakhs came to be made by the assessee to acquire full rights of distribution over the film without any time limit and, therefore, the full amount was admissible as deduction under Rule 9B for the assessment year 1979 -80. The Tribunal took the view that Rs. 4.25 lakhs was paid for acquiring full rights of exploitation of the film and, therefore, it was admissible as deduction under Rule 9B in the assessment year 1979 -80. Being aggrieved by the decision of the Tribunal, the Department has come with this reference under Section 256(1) of the Income -tax Act. Arguments :

(3.) ON behalf of the assessee, Mr. Jhaveri, learned counsel, contended that the assessee had acquired the right of distribution for a period of ten years from the date of release of the film. He contended that the film was released on May 28, 1976, That, the consideration payable under the agreement dated August 19, 1974, for acquiring distribution rights was as under : '(a) Minimum guarantee amount of Rs. 13.70 lakhs ; (b) overflow amount up to Rs. 8.50 lakhs to be shared in the ratio of 80 per cent. for the producer and 20 per cent. for the assessee ; (c) overflow profits exceeding Rs. 8.50 lakhs was to be shared equally, i.e., 50 per cent. for the producer Sagar Enterprises, and 50 per cent. for the assessee.'