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CASE NO.: Appeal (civil)  7750 of 2002

PETITIONER: Commissioner of Income Tax,Thiruvanathapuram

RESPONDENT: Joseph Valakuzhy

DATE OF JUDGMENT: 06/05/2008

BENCH: ASHOK BHAN & DALVEER BHANDARI

JUDGMENT: J U D G M E N T REPORTABLE

CIVIL APPEAL NO. 7750 OF 2002

BHAN, J.

1.      With the leave of the Court the Revenue has filed the  present appeal, against the judgment and order dated 27th  November, 2001 of the High Court of Kerala in ITA No.  105/1999, rejecting the appeal filed by the appellant under  Section 260 of the Income Tax Act, 1961 (for short "the  Act").

2.      The respondent-assessee (for short "the assessee")         is a film producer.  In his income tax return for the  assessment year 1992-93, the assessee claimed the benefit  of carry forward of Rs.39,43,830/- as amortization  expenses.  The Assessing Officer allowed the claim of  amortization.  On appeal, the Commissioner of Income Tax,  in exercise of his jurisdiction under Section 263 of the  Act, set aside the assessment and directed the Assessing  Officer to withdraw the benefit of carry forward granted to  the Assessee on the ground that, as the provisions of  Section 80 of the Act are applicable, the benefit of carry  forward of the expenses was not admissible to the assessee  as the assessee had failed to file the income tax return in  accordance with Section 139(3) of the Act.  Appeal filed  against the aforesaid order before the Income Tax Appellate  Tribunal (for short "the Tribunal") was dismissed.   

3.      Thereafter, the Assessing Officer implemented the  directions issued by the Commissioner of Income Tax by  passing a fresh order under Section 143(3) withdrawing the  benefit of carry forward of amortization expenses granted  to the assessee.  The assessee being aggrieved filed an  appeal before the CIT (Appeals). CIT (Appeals) accepted the  appeal.  It was found that the computation of the  amortization expenses to be carried forward, as shown by  the assessee, was not correct.  The assessee had claimed  amortization expenses in respect of the two films, namely,  (i) Ex Kannikcodi and (ii) Santhwanam.  It appears that in  the first film the assessee incurred heavy loss and to make  up that loss the assessee ventured to produce the second  film.  Rule 9A of the Income Tax Rules (for short "the  Rules") provides for deduction in respect of the  expenditure incurred on production of feature films.   Having found that the computation of amortization expenses  to be carried forward as shown by the assessee was not

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correct, CIT (Appeals) gave directions to the Assessing  Officer  to obtain separate accounts in respect of the  different films produced by the assessee and determine the  claim of the amortization in accordance with rule 9A of the  Rules.  It was clarified that in case there was loss in  respect of the old film on such computation, that would  have to be subject to the provisions of Sections 139(3) and  80 of the Act. In other words, it was held that in respect  of old films if there was loss, the same would be eligible  for carrying forward only if the return of income was filed  within the statutory period.  In regard to the second film,  it was held that the amortization allowance for the next  year was not subject to the provisions of Section 80 and  Section 139(3) of the Act.  It was the finding of the  appellate authority that the amortization expenses relating  to the second year would have to be allowed separately  while computing the income for the next year and not at the  time of computation of the income for the current year.   Being aggrieved against the order passed by the CIT  (Appeals), Revenue filed an appeal before the Tribunal,  which was dismissed with certain clarifications.

4.      The revenue thereafter filed an appeal under Section  260 of the Act in the High Court.  The High Court framed  the following substantial question of law in the said  appeal for its consideration:

"Whether on the facts and in the  circumstances of the case the amortization  loss computed under Rule 9A is subject to or  not subject to the provisions of section 80  and section 139 of the Income Tax Act?"  

5.      Making a distinction between the carrying forward of  the business loss, as provided under Section 80 of the Act,  and carrying forward of the expenditure over the income for  the relevant assessment year in which the film was not  exhibited for more than 180 days as provided under rule  9A(3) of the Rules, it was held that the present case would  be governed by the provisions of Rule 9A(3) of the Rules  and not by Section 80 of the Act.  It was found that the  second film produced by the assessee was not exhibited for  180 days during the previous year, therefore the assessee  was entitled to carry forward the business expenditure over  the next assessment year.

6.      Section 80 finds its place in Chapter VI dealing with  Aggregation of Income and Set off by carry forward of loss  which, prevalent during at the relevant assessment year,  read as under: "Section 80  SUBMISSION OF RETURN FOR LOSSES.  Notwithstanding anything contained in this  Chapter, no loss which has not been  determined in pursuance of a return filed in  accordance with the provisions of sub- section (3) of section 139, shall be carried  forward and set off under  sub-section (1)  of section 72 or sub-section (2) of section  73 or sub-section (1) or sub-section (3) of  section 74 or sub-section (3) of section  74A."

7.      Section 80 at the relevant time provided that no loss

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which has not been determined in pursuance of a return  filed under sub-section (3) of Section 139, can be carried  forward and set off under sub-section (1) of Section 72 or  sub-section (2) of section 73 or sub-section (1) or sub- section (3) of Section 74 or sub-section (3) of Section  74A.

8.      Evidently, Chapter VI deals with carry forward of  business losses.

9.      Rule 9A of the Rules, which deals with deduction of  expenditure on production of feature films (which is a  special provision) at the relevant time, read as under: "9A. Deduction in respect of expenditure on  production of feature films. (1) In computing the profits and gains of the  business of production of feature films  carried on by a person (the person carrying  on such business hereafter in this rule  referred to as film producer), the deduction  in respect of the cost of production of a  feature film certified for release by the  Board of Film Censors in a previous year  shall be allowed in accordance with the  provisions of sub-rule (2) to sub-rule (4), Explanation : In this rule,-- (i)     "Board of Film Censors" means the  Board of Film Censors constituted  under the Cinematograph Act, 1952 (37  of 1952); (ii)    "cost of production", in relation  to a feature film, means the  expenditure incurred on the  production of the film, not being- (a)     the expenditure incurred for the  preparation of the positive prints of  the film; and (b)     the expenditure incurred in  connection with the advertisement of  the film after it is certified for  release by the Board of Film Censors: Provided that the cost of production of a  feature film, shall be reduced by the subsidy  received by the film producer under any  scheme framed by the Government, where such  amount of subsidy has not been included in  computing the total income of the assessee for  any assessment year. (2) Where a feature film is certified for  release by the Board of Film Censors in any  previous year and in such previous year,-- (a)          the film producer sells all  rights of exhibition of the film, the entire  cost of production of the film shall be  allowed as a deduction in computing the  profits and gains of such previous year; or (b)     the film producer-- (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

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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 one  hundred and eighty days before the  end of such previous year, the  entire cost of production 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 certified for  release by the Board of Film Censors in any  previous year and in such previous year, the  film producer\027 (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 one hundred and  eighty days before the end of such previous  year, the cost of production of the film in  so far as it does not exceed the amount  realised by the film producer by exhibiting  the film on a commercial basis or the amount  for which the rights of exhibition are sold  or, as the case may be, the aggregate of the  amounts realised by the film producer 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) \005\005\005\005.."

10.     Counsel for the parties have been heard.

11.     It is not disputed before us that a film is a  capital asset in the hands of a film producer and the  subsidy given by the State Government to a film  producer is a capital receipt.  Section 80 falls under  Chapter VI, which deals with aggregation of income and  set off or carry forward of loss.   12.     Rule 9A provides for deduction of expenditure  incurred on production of feature films.  Rule 9A  would appropriately be applicable to the present case,  as the respondent is doing the business of producing  feature films.  The deduction for expenditure incurred  on production of feature films is appropriately  governed by rule 9A of the Rules. 13.     The rule, as it now stands, provides that in such  cases, deduction of the cost of production of the film  is to be allowed to the extent of the amount realized  during the number of days of commercial exhibition in  that year and the balance has to be allowed in the  next year.   Rule 9A(2) provides that where a feature  film is certified by the Board of Film Censors for

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release in any previous year, and in that previous  year the film is released for exhibition for at least  180 days, before the end of that previous year, the  entire cost of production of the film shall be allowed  as a deduction in computing the profits and gains of  such previous year.  Rule 9A(3) provides that where  the film is not released for exhibition for 180 days  in the previous year, deduction of the cost of  production is to be allowed to the extent of the  amount realized during the period of commercial  exhibition in that year and the balance shall be  allowed in the next year. 14.     Admittedly, in the present case, the second film  namely, "Santhwanam" had not been exhibited for more  than 180 days in the previous your.  While computing  the income or loss for the relevant assessment year  1992-93, the assessing officer had to take into  account the number of days on which the film was  commercially exhibited and then allow the deduction  for cost of production of the film to the extent of  the collections made during the period of exhibition  only.  The balance cost of production will be  amortized under Rule 9A(2) and then that will be  allowed  as deduction for the next year.  It is not a  business loss.   That if a film is not released for  exhibition on a commercial basis at least 180 days  before the end of such previous year, the cost of  production of the film insofar as it does not exceed  the amount realized by the film producer by exhibiting  the film on a commercial basis, is to be allowed as a  deduction in computing the profits and gains of such  previous year and the balance, if any, is to be  carried forward to the next following previous year  and allowed as a deduction in that year.  Admittedly,  in the present case, as stated above, second film  "Santhwanam" was not exhibited for a period of 180 days  in the previous year, and, had not covered the cost of  production of the film, the assessee was entitled to  carry forward the balance of the cost of production to  the next following previous year and claim deduction of  the same in that year.   15.     For the reasons stated above, we do not find any  merit in the present appeal and dismiss the same  leaving the parties to bear their own costs.