1. This is an appeal of the revenue for the assessment year 1976-77.
The assessee is a firm which carried on the business of film distribution. The accounting period followed is financial year 1975-76.
Due to a change in the constitution of the firm within the accounting period, the accounting year was split into two periods, namely, one from-1-4-1975 to 4-8-1975 and the other from 5-8-1975 to 31-3-1976. The revenue has raised two contentions in its appeal, which are separately considered below.
On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 3,500 being the amount of bonus paid to partners in view of the provisions of Section 40(6) of the Income-tax Act, 1961. The learned Commissioner (Appeals) failed to appreciate that assessee's only objection to the proposed disallowance of Rs. 3,500 during the course of proceedings under Section 144B was that the amount had already been disallowed during the year 1974-75 which plea was found to be factually incorrect and, hence, the objection was not pressed before the IAC.We have considered the rival submissions. As it happens the revenue has pointed out to a circumstance, which the Commissioner (Appeals) overlooked while the assessee's counsel, Shri Prem Singh, pointed out a very important factual mistake, which had caused confusion at the stage of Section 144B of the Income-tax Act, 1961 proceedings before the IAC.Shri Prem Singh stated that before the IAC a confusion developed by noting a disallowance of Rs. 3,500 during the assessment year 1974-75.
He explained with the help of the copies of profit and loss accounts and the balance sheets of the two periods the correct position. It was stated that an account of the producer styled as 'Hire Account of Gora Aur Kala' existed in the books of accounts of the assessee for the accounting year 1973-74 in which a debit of Rs. 5,000 in respect of bonus to staff was made. This amount, according to the counsel, has been shown outstanding in both the balance sheets of the two periods and, therefore, this entry of bonus did not at all relate to any payment in the assessment year under appeal. He also referred to the two profit and loss accounts to say that the assessee had claimed no deduction in respect of payment of bonus in the accounting period under consideration and this also showed that there was no reason for the ITO to make the addition of Rs. 3,500 out of the amount of Rs. 5,000. Shri Prem Singh filed copy of 'Hire Account of Gora Aur Kala' and details of bonus of Rs. 5000 which included the three payments of Rs. 2,000, Rs. 750 and Rs. 750 to the three partners. The departmental representative could not controvert the facts but submitted that this was a new case, which was not placed before the authorities below and should not be entertained. We do not find any substance in the submission of the revenue. It is open to an assessee to point out mistakes and justify the conclusion in his favour. In the instant case, the assessee's counsel has placed before us the relevant accounts and other particulars, which are included in his paper book and these bear out his submissions that it was due to a mistake that the matter proceeded before the IAC and the true facts are found only now. On the basis of these facts, it is clear that there is no basis whatsoever for considering the amount of Rs. 3,500 in the assessment year 1976-77. On the basis of this factual finding, we confirm the conclusion of the Commissioner (Appeals) and reject the contention of the revenue.
3. The second grievance of the revenue is that the Commissioner (Appeals) had erred in holding that the sum of Rs. 1,75,000 set apart by the producer for publicity is part of total minimum guarantee of Rs. 8,75,000 and, therefore, allowable as cost of acquisition as provided in Rule 9B of the Income-tax Rules, 1962. It was urged by the departmental representative that the Commissioner (Appeals) had failed to take note of the mandatory provisions of Rule 9B, which are applicable in the assessee's case. Shri Prem Singh, the assessee's counsel, on the other hand, contended that the Explanation in Rule 9B(1) would not be attracted to exclude the amount of publicity of Rs. 1,75,000 as the words used therein are 'the expenditure incurred by him in connection with the advertisement of the film' and according to the counsel, this was not an expenditure incurred by the distributor as the amount was to be met out of the gross collections, which in reality, belonged to the producer and the expenditure, therefore, was incurred by the producer and not by the distributor. It was also stated that the minimum guarantee amount was flexible and attention was invited to relevant Clauses 4, 8 and 9 of the agreement dated 7-6-1974. Reliance was also placed on an order of the Tribunal, Amritsar Bench, dated 31-10-1973, in the case of Evergreen Pictures [IT Appeal No. 1514 of 1971-72]. Alternatively, it was submitted that if the amount of Rs. 1,75,000 is held to be inadmissible, the amount of publicity expenses actually incurred and allowed by the ITO at Rs. 63,270 should not be denied to the assessee.
4. We have considered the relevant clauses of the agreement dated 7-6-1974 and these are Clauses 4, 8 and 9, which are reproduced below : 4. The distributors shall pay to the producers a sum of Rs. 8,75,000 (Rupees eight lakhs seventy-five thousands only) at Bombay, as and by way of minimum guarantee in consideration of the above appointment as distributors payable as under-15,000 On signing of this agreement (Amount received on 11-4-1974 by cheque).1,60,000 According to the progress of the picture50,000 Against the delivery of quota publicity materials as stated hereinbelow.8,75,000 Total (Rs. eight lakhs seventy-five thousand only)--------- 8. That the distributors agree and undertake to widely advertise the said picture in the contracted area for which purpose they have been allowed to retain the amount of Rs. 1,75,000 (Rs. one lakh, seventy-five thousand only) out of the total MG amount of Rs. 8,75,000 (Rs. eight lakhs seventy-five thousand only). The distributors agree to spend maximum amount of Rs. 1,75,000 for the pre-release and release publicity which includes paper publicity, bankers, hoardings, street publicity, theatre decoration, etc., of the said picture at various stations in the contracted areas. The distributors agree to submit regularly every month to the producers the amount of the net publicity expenses.
In the event of the full publicity amount of Rs. 1,75,000 not being spent on pre-release and release publicity of the said picture in such event lesser amount actually spent on pre-release and release publicity shall be accounted for as minimum guarantee amount of Rs. 8,75,000 shall stand reduced by the amount so unspent and distributors' fixed commission mentioned in the succeeding para shall also stand proportionately reduced and the accounting will be done on the basis of such reduced minimum guarantee and reduced commission.
9. From the realisations of the said picture in the said territory the distributors shall first recover and recoup to themselves Rs. 8,75,000 being the minimum guarantee amount and then Rs. 1,75,000 (Rs. one lakh seventy-five thousand only) being distributors' fixed commission. After recoupment of the said amount of Rs. 10,50,000 (Rs. ten lakhs, fifty thousand only), the aggregate of MG amount and commission, as stated above, the excess amount shall be retained by the distributors and the producers in the ratio 50 : 50 (fifty per cent) 50 per cent shall be paid by the distributors to the producers regularly not later than the 15th of every calendar month, such timely payments being the essence of this agreement.
It is true that in the agreement in Clause 4, the amount of Rs. 1,75,000 in respect of pre-release and release publicity has been shown to be part of the minimum guarantee but it is also a fact that the assessment of the distributor i.e., the assessee is to be made in accordance with Rule 9B. Rule 9B provides an artificial basis of computing the income of a film distributor by allowing him to deduct cost of acquisition of a film against the collections obtained by exploiting the film. According to the agreement drawn between the producer and the distributor, the arrangement is shown in the manner that the collections belonged to the producer out of which what the distributor pays is to be recouped and the distributor is to get a commission and after the recoupment of amounts of minimum guarantee and commission the overflow is to be shared in the percentage agreed, i.e., equally between the producer and the distributor. The agreement, thus, does not proceed on the basis, which is statutorily contained in Rule 9B. Rule 9B treats the collections to be belonging to the distributor and then allows against it the cost of acquisition. Viewed in this perspective, against the collections made by the distributor, the minimum guarantee amount is to be deducted but as given in the Explanation in Rule 9B(1), the expenditure incurred in connection with the advertisement of the film is not to be treated as part of minimum guarantee. When the gross receipts are to be treated to be belonging to the distributor, it obviously follows that the expenditure incurred on publicity of the film on pre-release and release stage will also be held to be incurred by him. In view of the basis contained in Rule 9B, it is not open to the assessee to suggest that the payment of publicity is incurred by the producer and not by the distributor. Such an interpretation will nullify the concept contained in Rule 9B.Consequently, we find substance in the ground of the revenue that the Commissioner (Appeals) fell into error in ignoring the mandatory provisions of Rule 9B and not appreciating the scheme contained in Rule 9B. In our opinion, the Explanation in Rule 9B(1) is attracted and the assessee cannot be allowed deduction of Rs. 1,75,000 as part of minimum guarantee amount. The decision of the Commissioner (Appeals) on this issue is incorrect and it is reversed. The decision of the Tribunal, on which the assessee relied, is of no assistance as it was not rendered in the context of Rule 9B.4.1 The next question relates to the assessee's alternative plea. The alternative plea has force and the assessee is entitled to deduct the amount of publicity expenses actually incurred of Rs. 63,270. This amount is already allowed by the ITO in the assessment order and is to be allowed to the assessee against the amount of Rs. 1,75,000 allowed by the Commissioner (Appeals). It is the prayer of the revenue in ground of appeal No. 2 that the order of the Commissioner (Appeals) be reversed and the order of the ITO be restored on this issue. We restore the order of the ITO by accepting the assessee's prayer for allowing of expenses of Rs. 63,270.