Commissioner of Income Tax vs Paramount Pictures

Gokal Chand Mital, J.—The assessee deals in distribution of films and during the accounting year relevant to the assessment year 1974-75 released three films. For the film "Bobby", the distribution rights were obtained on the minimum guarantee basis whereas the distribution rights for the other two films, "Sant Tulsi Dass" and "Chariter", were obtained on an outright purchase/royalty basis. The assessee addressed a letter dated February 26, 1977, to the Income Tax Officer, when the assessment proceedings were pending, exercising its option within the meaning of Rule 9B(7) of the Income Tax Rules, which was introduced by the Income Tax (Seventh Amendment) Rules, 1976. A copy of this is annexure A-1 in the printed paper book. Later on, the assessee addressed a letter dated May 21, 1977, to the Inspecting Assistant Commissioner and another letter to the Income Tax Officer on May 23, 1977, on the question of option. These are annexures A-2 and A-3, respectively. The case of the assessee before the Income Tax Officer was that, vide his letter dated February 26, 1977, option was exercised in respect of the film "Bobby" and the subsequent two letters were written to make that intention clear. The Income Tax Officer did not agree and on a plain reading of the letter dated February 26, 1977, came to the conclusion that the option was exercised by the assessee in respect of all the three films. He also came to the conclusion that the option could not be revised as the rule does not provide for revision of the option and the assessment was framed on the basis of option for all the three films. The assessee remained unsuccessful before the Appellate Assistant Commissioner but, on further appeal to the Income Tax Appellate Tribunal, Amritsar, the Tribunal came to the conclusion that the option once exercised could be changed by the assessee unless the same was acted upon by the Income Tax Officer in computing the income. Since, on the facts, the Income Tax Officer had not decided the matter by the time the letter dated May 23, 1977, was issued, it was held that the assessee had exercised his option in respect of "Bobby" and for income derived from "Bobby", the assessment be made under Rule 9B and in regard to the other two films, the assessment be made in accordance with Circular No. 154 [1975] 98 ITR 38 issued by the Central Board of Direct Taxes. On the aforesaid facts, the Tribunal has referred the following two questions for opinion :

"1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the option once exercised by the assessee under Sub-rule (7) of Rule 9B can be subsequently revised by him before the final order is passed by the Income Tax Officer ?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the assessee is entitled to exercise his option under Sub-rule (7) of Rule 9B in respect of one film while not exercising such option in respect of the other films released in the same assessment year ?"

The method of calculating income of film distributors is contained in Rule 9B of the Income Tax Rules, 1962, framed in exercise of the powers contained in Section 295 of the Income Tax Act, 1961 (hereinafter called "the Act"). The Central Board of Direct Taxes had issued Circular No. 92 of 1972 Commissioner of Income Tax, Poona Vs. Manna Ramji and Co., ), regarding assessment of film producers and distributors" and that was modified by Circular No. 154 dated December 5, 1974, which is printed at page 38 of the Statutes Section of 98 ITR. The Central Board of Direct Taxes, on re-examining the question and keeping in view the attendant facts, issued direction as to how the assessment should be framed. Rule 9B was inserted by notification published on December 30, 1976 (See [1977] 106 ITR 27), the relevant portion of which is as follows :

"9B. Deduction in respect of expenditure on acquisition of distribution rights of feature films--...

(7) Nothing contained in Sub-rule (1) to Sub-rule (6) shall apply-

(a) in relation to any assessment year commencing on the 1st day of April, 1973, the 1st day of April, 1974, the 1st day of April, 1975, or the 1st day of April, 1976, unless-

(i) in a case where the assessment in respect of that year is pending before the Income Tax Officer, the film distributor exercises an option by furnishing a declaration in writing to the Income Tax Officer (such option being final for that assessment year and for every subsequent assessment year) that the cost of acquisition of the feature film may be allowed in accordance with the provisions of Sub-rule (1) to Sub-rule (6) ;

(ii) in a case where the assessment in respect of that year has been completed by the Income Tax Officer and the film distributor has preferred or prefers an appeal or revision against the assessment made by the Income Tax Officer, the film distributor exercises an option by furnishing a declaration in writing to the Appellate Assistant Commissioner, the Appellate Tribunal or, as the case may be, the Commissioner (such option being final for that assessment year and for every subsequent assessment year) that the cost of acquisition of the feature film may be allowed in accordance with the provisions of Sub-rule (1) to Sub-rule (6)."

A reading of Sub-rule (7) shows that for the assessment years from April 1, 1973, to April 1, 1976, the new provisions contained in Sub-rule (1) to Sub-rule (6) of Rule 9B would not apply to a film distributor unless assessment in respect of that year is pending before the Income Tax Officer and the film distributor exercises an option by furnishing a declaration in writing that the cost of acquisition of the feature film may be allowed in accordance with those provisions. In case the appeal or revision were to be pending when the amended provision was notified, similar option could be exercised before the appellate or revisional authority, as the case may be. The provision is further clear that if option is exercised, such option shall be final for that assessment year and for every subsequent assessment year. This specific provision makes it clear that the option can be exercised once and cannot be varied and would be treated as final. In view of the categorical provision in Sub-rule (7)(a)(i) and (ii), we are of the opinion that the Tribunal was in error in coming to the conclusion that the option once exercised by the assessee, could be subsequently revised before the final order was passed by the Income Tax Officer. However, the Tribunal was right in coming to the conclusion that the option may be exercised for the applicability of the new rules in respect of one feature film or more, but once the option is exercised in respect of one film or more, regarding those films, the provisions contained in the new rules would continue to apply for every subsequent assessment year because admittedly from April 1, 1977, onwards, the new rules will apply and Circular No. 154 issued on the basis of the old rules would cease to apply.

Now, adverting to the facts of the case, the letter dated February 26, 1977, written by the assessee to the Income Tax Officer may be read. It reads as follows :

"In connection with the above assessment which is pending with you, we hereby give our option as required under the new Income Tax Rules on amortisation and notified in the Gazette on December 30, 1976. Only one picture named ''Bobby'' was released during the year under assessment on September 28, 1973. We further state that this was the only picture acquired on minimum guarantee basis and released during the year under assessment. The other pictures released during the year were acquired on outright purchase/royalty basis. We further declare that these new Income Tax Rules may please be applied even in subsequent years."

A reading of the letter clearly shows that the option was exercised for the applicability of the new rules and while doing so, the names and details of all the three films were mentioned. Not only this, in the end it was further declared that the new rules may be applied even in subsequent assessment years. Therefore, on facts, it is clear that the assessee gave its option for the applicability of the new rules in respect of all the three films. Once having done that, no right was left in it to revise or change its option and letter written thereafter in which the assessee wanted to change its option for the applicability of the new rules qua the picture "Bobby" and for the applicability of the circular to the other two films, has to be ignored.

For the reasons recorded above, we answer the first question in favour of the Revenue, in the negative, that the Tribunal was not right in law in holding that the option once exercised by the assessee under Rule 9B(7) could be subsequently revised before the final assessment was made by the Income Tax Officer. Question No. 2 is answered in the affirmative to state that the Tribunal was right in law in holding that the assessee is entitled to exercise its option under Rule 9B(7) in respect of one or more films for the applicability. of the new rules while not exercising such option in respect of other films released in the same assessment year with the result that the films for which option is not exercised, the assessment of the same would be governed by the old rules read with Circular No. 154 [1975] 98 ITR 38.

The parties are left to bear their own costs.