P.S. Dhillon, Judicial Member -
(1.) THE revenue has made this appeal against the order dated 17-1-1981 of the Commissioner (Appeals) II? Bombay, who partly allowed the appeal against the order dated 26-9-1980 of the 4th ITO, Film Circle, Bombay.
(2.) The relevant facts in brief leading to this appeal are that the assessee is an individual. During the previous year relevant for the assessment year 1977-78 ended on 31-3-1977, the assessee released the picture 'Balika Badhu', admitted total realisation of Rs. 29,81,600 and thereby declared profit of Rs. 5,12,125. The exploitation rights of the film for the territories of Tamil Nadu and Andhra Pradesh had not been sold during the year of account as the prints were not delivered. The assessee, however, debited to the profit and loss account the full cost of production. The ITO did not agree with the assessee that the full cost of production be debited to the profit and loss account on the ground that the assessee had not delivered the prints for the territories of Tamil Nadu and Andhra and, therefore, an amount equal to 4 per cent of the adjusted cost of production was disallowed under Rule 9A of the Income-tax Rules, by him. Accordingly, he considered it as closing stock.
However, he asked for the objection under Section 144B of the Income-tax Act, 1961 ('the Act') and the assessee made objection before the IAC stating that under Rule 9A(c), the ITO can take a judicious view on the basis of the facts and circumstances and that in respect of the picture 'Balika Badhu' there was actually losses in certain territories and the picture has not been released in some other territories even now and this fact may be considered ; that in any case, the ITO cannot value this territory at 4 per cent ; that presumably the ITO has taken 2ï¿½ per cent for Andhra and 1ï¿½ per cent, i.e., half of 3 per cent for Tamil Nadu ; that it is contended that such a split is not permissible and that in respect of Tamil Nadu nothing should be valued by way of closing stock.
The IAC did not accept the aforesaid contention of the assessee. Hence, he rejected it observing that the ITO has to allow that part of cost of production which pertains to the territories released ; that if the entire cost is allowed now, the future loss in respect of Tamil Nadu and Andhra Pradesh will stand allowed in the present year which is not correct ; that accordingly, the ITO was justified in valuing the closing stock ; that no doubt the valuation of Kerala and Tamil Nadu territories together is at 3 per cent as per the Schedule in Rule 9A ; that the Kerala territory is already released and in respect of Tamil Nadu, the ITO was bound to value the same at a certain percentage ; that there is, therefore, nothing wrong in valuing the closing stock in respect of Tamil Nadu territory at half of 3 per cent.
Accordingly, the IAC issued directions to the ITO on the basis of which the ITO computed the assessment.
The assessee being aggrieved made an appeal before the Commissioner (Appeals) and thereby contended through his counsel Shri Khurana, that both the ITO and the IAC, prima facie, held the view that the said Rule 9A was rigid rule and that when one applied Rule 9A, it was not permissible to take any fact into consideration other than what the rule had stated, as understood by the two officers ; that even though the assessee was able to sell this picture on minimum guarantee netting Rs. 2,98,600, this picture had proved unsuccessful and that as by the end of the accounting year, viz., 31-3-1977 (the picture having been released on 1-10-1976) for the two unsold territories of Tamil Nadu and Andhra Pradesh, there was no distributor who was prepared to take the picture even on commission basis ; that even up to May 1980, i.e., to say four months before the IAC gave his directions, none of the distributors who had taken the film for distribution had reached the breakeven point; that the minimum guarantee for Bombay was Rs. 5 lakhs and with the liability undertaken by the distributors for the publicity expenses and the distributors' commission on the two amounts, the total cost to the distributors was Rs. 8,12,500 from which point alone would the overflow start ; and against it, the collection up to the end of May 1980 was an amount of Rs. 4,65,111; that as regards Delhi, U.P. territory, which was sold for a like amount as Bombay, the collections were merely Rs. 3,14,994 ; and as such, Mr. Khurana urged that it was not an average picture to which the rule which applies in average case could be applied, but properly speaking, Rule 9A(9)(c) was applicable. Reliance was placed on the decision of the Madras High Court in the case of Gemini Pictures Circuit Ltd. v. CIT  33 ITR 547.
Shri Khurana further contended that the picture 'Balika Badhu' was wholly based on a successful Bengali picture and primarily had the local background of Bengal and that the experience showed that in the South pictures with specific local background did not demand any box office ; that this picture being what could be called remake in Hindi, could not have what the South Indian box office required, viz., 'the Masala'. On hearing these arguments, the Commissioner (Appeals) found that in some appeals in the case of producers, distributors and other film personalities and on the basis of the little general knowledge he had got, he saw merit in Mr. Khurana's submission. In meeting the other arguments of Shri Khurana, he observed as under :
10. Now bearing in mind the earlier instructions of the Board on the question of amortisation of films, the leading case of the Madras High Court, v/z., Gemini Pictures and the two clauses of Sub-rule (9), in my understanding, what follows is that Rule 9A is not a rigid rule incapable of any inflexibility but that the rule admits of a consideration of events after the accounting year as also the events of the accounting year whereby the actuals show a credit variation from the norm prescribed in col. 2 of Table A. In that understanding I find that in the present case it is necessary to depart from the rigid application of the rule as initially made by the ITO and confirmed by the IAC. In my understanding the circumstances demand that the closing stock value that can properly speaking be adopted is as claimed by the assessee, i.e., to say Rs, nil as against Rs. 97,579 adopted by the ITO. For the reasons given, I hold that the ITO was not justified in making the addition of Rs. 97,579. Accordingly, I do not consider it necessary to refer to Mr. Khurana's alternate submission that in any event the ITO was not justified in bifurcating territory 'K' which includes the whole of the states of Karala, Tamil Nadu and Union territories of Pondicherry, Laksha Dweep.
Shri Khurana reiterated the same stand which he took before the Commissioner (Appeals) and reliance is placed on the decision of the Commissioner (Appeals) as well as the paper book containing pages 1 to 3.
On the other hand, Shri Chawla, contends that in the case of the assessee Rule 9A(6)(b) of the Income-tax Rules, 1962, is applicable to the facts and circumstances of the case of the assessee ; that the order of the Commissioner (Appeals) on the issue is not an order as what he has stated in his order is merely his understanding, which is his personal knowledge or information ; that in accepting the contention of Shri Khurana that the picture Balika Badhu was wholly based on a successful Bengali version and primarily had the local background of Bengal ; and that experience showed that in the South pictures with specifically local background did not command any box office and that the picture being what could be called 'remake' in Hindi could not have what the South Indian box office required with the Masala, has acted contrary to the facts since the same is an original picture as is evident from the certificate of Central Board of Film Censors. Moreover, this contention is accepted by the Commissioner (Appeals) on the basis of the little general knowledge that he got, which further shows that the acceptance of the contention is not substantiated by any relevant reasons. Similarly, he hits the conclusion of the Commissioner (Appeals) stating that the conclusion arrived at is not on the basis of relevant reasons substantiated from the record ; rather the same is based upon the understanding or personal knowledge of the Commissioner (Appeals) and as such, his order is no order on the issue in the eyes of law. He relies upon the order of the ITO as well as on Rule 9A(6)(6) of the Rules.
(3.) WE have heard the rival contentions and gone through the record before us.
The issue for determination before us is that whether the case of the assessee falls under Rule 9A(6)(b) or under Rule 9A(9)(a) or (c) ; because both the parties admit that the issue involved is to be determined according to Rule 9A of the Rules.
Rule 9A(6)(b) says as under :
9A. (6) Where a feature film not being a regional language feature film is certified for release by the Board of Film Censors in any previous year and in such previous year, the film producer-
(b) sells the rights of exhibition of the film in respect of some of the territories specified in the said Table ;
the cost of production of the film to be allowed as a deduction in computing the profits and gains of such previous year shall be an appropriate fraction of the entire cost of production of the film ; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year.
Explanation : For the purposes of this sub-rule 'appropriate fraction' means the fraction the numerator of which is the sum or, as the case may be, the aggregate of the sums, specified in column (2) of the said Table against the territory or territories specified in column (1) thereof in which the film producer has himself exhibited the feature film on a commercial basis, or in respect of which the film producer has sold the rights of exhibition of the feature film, or in which the feature film has been so exhibited and in respect of which the rights of exhibition have been sold during the previous year and the denominator of which is one hundred.
It is an admitted position (1) that the film Balika Badhu is a feature film not being (regional language film) ; (2) secondly, it is certified for release by the Board of Film Censors in the previous year, relevant for this assessment year ; and (3) in the previous year the assessee sells rights of exhibition of the films, in respect of some of the territories specified in the said Table.
Thus, when this is so, then the cost of production of the film to be allowed as a deduction in computing the profits and gains of such previous year shall be an appropriate fraction of the entire cost of production of the film ; and the balance, if any, shall be carried forward to the next following previous year and allowed as a deduction in that year.
'Appropriate fraction' means the fraction the numerator of which is the sum or, as the case may be, the aggregate fraction, the aggregate of the sums, specified, in col. (2) of the said Table against the territory or territories specified in col. (1) thereof in which the film producer has himself exhibited the feature film on a commercial basis, or in respect of which the film producer has sold the rights of exhibition have been sold during the previous year and the denominator of which is one hundred, which are there in the Table :
Territory J consists of: Areas comprised in the districts of Anantpur, Chittoor, Cuddapah, East Godavari, Guntur, Krishna, Kurnool, Nellore, Prakasam, Srikakulam, Vishakhapatnam and WEst Godavari in the State of Andhra Pradesh.
Territory K consists of: (a) the whole of the States of Kerala and Tamil Nadu ; (b) the whole of the Union territories of Pondicherry and Lakshadwcep.
Thus from Rule 9A(6)(b) read with Explanation, it is more than manifest that if sale of rights of exhibition is not in respect of the territories specified in the said Table or in other words, the sale is there of the said rights merely in respect of some of the territories specified in the said Table ; then the entire cost of production of a feature film shall not be allowed as a deduction in computing the profits and gains of such previous year. If at all it is to be allowed, then in accordance with or/and 9A(9). Therefore, we also have to see the provisions of Rule 9A(9) in view of the fact that Shri Khurana states that the case of the assessee falls under Rule 9A(9) Clause (a), if not then Clause (c). Hence, we reproduce Rule 9A(9) Clauses (a) and (c) :
9A(9) Where the Income-tax Officer is of opinion that-
(a) the exhibition of the feature film on a commercial basis by the film producer in, or the sale by the film producer of the rights of exhibition of the feature film in respect of, various territories does not conform to the classification of territories in the said Table ; or
(c) having regard to the facts and circumstances of any case, it is not practicable to apply the provisions of this rule to such case,
deduction in respect of the cost of production of the film may be allowed by the Income-tax Officer in such other manner as he may deem suitable.;