S.H. Kapadia, J.

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 producers 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. Mr. R.V. Desai, learned senior counsel for the Department, contended that Rule 9B contemplates deduction in cases where distribution rights are acquired. He contended that two conditions have been prescribed for claiming deduction under the said rule, viz., that the film is acquired in the previous year by the film distributor and, secondly, that the film was released for exhibition on a commercial basis at least 90 days before the end of the previous year. That, on fulfilment of the said two conditions, the entire cost of acquisition was allowable as a deduction in computing the business profits. He contended that the assessee had acquired distribution rights by payment of minimum guarantee amount of Rs. 13.70 lakhs under the agreement dated August 19, 1974. He contended that under the agreement, the parties agreed to share overflow profits in a particular ratio depending on the total collection. That, if the collection was up to Rs. 8.50 lakhs then the share of the assessee was 20 per cent. and the share of the producer was 80 per cent. and in cases where the collection exceeded Rs. 8.50 lakhs then, the share of the assessee in the overflow profits was 50 per cent. Learned counsel submitted that the film was a success. That, the collection went beyond Rs. 8.50 lakhs and, therefore, the agreement came to be modified on March 28, 1978, under which the producers rights to share the overflow profits on future exploitation of the film came to be sold to the assessee for Rs. 4.25 lakhs, which was paid on the same date. It was contended that the right of the assessee to distribute and exploit the film was separate from the rights of the producer to share the overflow profits. He contended that under Rule 9B, deduction was admissible for the former right. He contended that deduction was not admissible for acquisition of the rights of the producer to share the overflow profits. In the circumstances, it was argued that Rule 9B was not applicable to the facts of the case and, therefore, the assessee was not entitled to claim deduction in respect of Rs. 4.25 lakhs paid on March 28, 1978.

4. 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."

5. It was pointed out that on March 28, 1978, the parties agreed to modify the terms and conditions of the agreement and, accordingly, the clause relating to the amount payable to the producer Sagar Enterprises in respect of their share in the overflow profits in excess of Rs. 8.50 lakhs collection was amended. Under the amended clause, it was agreed that the assessee will pay Rs. 2 lakhs to the producer as lumpsum consideration and, therefore, the producer will not be entitled to have a share in the overflow profits in excess of Rs. 8.50 lakhs. Mr. Jhaveri, learned counsel for the assessee, pointed out that on March 28, 1978, an amount of Rs. 4.25 lakhs was payable by the assessee to the producer in accordance with the amended clause. That, the amount payable was worked out as under :

Rs.

(i)

80 per cent share in excess realisation to the extent of Rs. 8.50 lakhs

6,80,000

Less: Amount already paid by the assessee to the producer

4,55,000

2,25,000

Add: Lumpsum consideration as mutually agreed upon

2,00,000

Total

4,25,000

6. Mr. Jhaveri, learned counsel for the assessee, therefore, contended that a sum of Rs. 4.25 lakhs was paid by the assessee for clearing of the producers rights in the overflow profits, which was incidental to distribution of the film and, therefore, the said payment was for acquisition of distribution rights. He contended that Rule 9B allows deduction in respect of cost of acquisition of distribution rights. He contended that on the facts, in this case, the assessee has paid Rs. 4.25 lakhs for acquisition of distribution rights. He contended that the said amount of Rs. 4.25 lakhs paid by the assessee represented additional cost of acquisition of distribution rights and, therefore, the assessee was entitled to deduction under Rule 9B. He contended that by entering into the modified agreement, the assessee acquired the right of exhibition of the film without sharing the overflow profits with the producer and, therefore, the said amount represented cost of acquisition allowable under Rule 9B. Scope of Rule 9B as applicable to the facts of this case. For the sake of convenience and clarity, we produce hereinbelow, Rules 96(1), (2), (4), (5)(a)(i) to (iii).

"9B. Deduction in respect of expenditure on acquisition of distribution rights of feature films.--(1) In computing the profits and gains of the business of distribution of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film distributor), the deduction in respect of the cost of acquisition of a feature film shall be allowed in accordance with Sub-rule (2) to Sub-rule (4).

Explanation.--For the purposes of this rule, cost of acquisition, in relation to a feature film, means the amount paid by the film distributor to the film producer as defined in Rule 9A under an agreement entered into by him with such film producer for acquiring the rights of exhibition and, where the rights of exhibition have been acquired on a minimum guarantee basis, the minimum amount guaranteed, not being-

(i) the amount of expenditure incurred by the film distributor for the preparation of the positive prints of the film ; and

(ii) the expenditure incurred by him in connection with the advertisement of the film.

(2) Where a feature film is acquired by the film distributor in any previous year and in such previous year,--

(a) the film distributor sells all rights of exhibition of the film, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year ; or

(b) the film distributor,--

(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 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 ninety days before the end of such previous year, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year. . . .

(4) Where during the previous year in which a feature film is acquired by the film distributor, he does not himself exhibit the film on a commercial basis or does not sell the rights of exhibition of the film, no deduction shall be allowed in respect of the cost of acquisition of the film in computing the pro- fits and gains of such previous year; and the entire cost of acquisition shall be carried forward to the next following previous year and allowed as a deduction in that year.

(5) Notwithstanding anything contained in the foregoing provisions of this rule, the deduction under this rule shall not be allowed unless--

(a) in a case where the film distributor-

(i) has himself exhibited the feature film on a commercial basis ; or

(ii) has sold the rights of exhibition of the feature film ; or

(iii) has himself exhibited the feature film on a commercial basis in some areas and has sold the rights of exhibition of the feature film in respect of all or some of the remaining areas ;

the amount realised by exhibiting the film, or the amount for which the rights of exhibition have been sold or, as the case may be, the aggregate of such amounts, is credited in the books of account maintained by him in respect of the year in which the deduction is admissible."

7. Rule 9B has been framed under Section 295 of the Income Tax Act by the Central Board of Direct Taxes (CBDT). Rule 9B deals with deduction in respect of expenditure on acquisition of distribution rights. Under Rule 9B(1), it is, inter alia, laid down that in computing the profits and gains of the business of distribution, the film distributor is entitled to deduction in respect of expenditure incurred by him for acquiring distribution rights. There is an Explanation to Rule 9B(1). It defines "cost of acquisition" to mean amount paid by the film distributor to the film producer for acquiring the rights of exhibition and where the rights of exhibition have been acquired on a minimum guarantee basis then, the minimum amount guaranteed, shall constitute cost of acquisition. In this case, the right of exhibition has been acquired on a minimum guarantee basis. In this case, the minimum amount guaranteed is therefore the cost of acquisition. In this case, that cost is Rs. 13.70 lakhs. In this case, on payment of Rs. 13.70 lakhs, the assessee acquired the right of exhibition. Under Rule 9B(2), it is, inter alia, provided that where a film was acquired by the distributor in any previous year and, in such previous year if the film distributor exhibits the film and the film is released at least 90 days before the end of the previous year then, the entire cost of acquisition shall be allowed as a deduction in computing the profits and gains of such previous year. In the present case, the film was released on May 28, 1976, i.e., after the agreement dated August 19, 1974. Therefore, Rule 9B(2)(b) applies to the facts of this case. Under Rule 9B(4), it is, inter alia, laid down that where during the previous year in which the film is acquired by the distributor but not exhibited, no deduction shall be allowed in respect of the cost of acquisition in computing the profits and gains of such previous year and the entire cost of acquisition shall be carried forward to the next following previous year and allowed as a deduction in that year. Rule 9B(5) starts with a non obstante clause. Under rule 9B(5), it is, inter alia, laid down that the deduction under Rule 9B shall not be allowed unless the distributor credits in the books of account the amounts realised by the distributor in cases where the distributor has himself exhibited the film on commercial basis. In other words, the assessee (distributor) was required to credit the amount realised by him for exhibiting the film in the profit and loss account. If one reads, Sub-rule (4) and Sub-rule (5) of Rule 9B, the intention of the Central Board of Direct Taxes is very clear, viz., that up-front payment cannot be allowed as deduction in entirety and, that, in cases where the distributor makes such up-front payment/advance, the expenditure needs to be amortized/spread over in order to match the receipts on the credit side of the profit and loss account failing which the true profits of a given year would get distorted. Sub-rule (5) of Rule 9B has been missed out by the Tribunal. In this case, for the assessment year 1979-80, the net profit is only Rs. 66,177 against which the assessee has claimed deduction of Rs. 4.25 lakhs. In other words, the matching concept of expenditure against estimated income has been totally lost sight of by the Commissioner of Income Tax and the Tribunal.

Findings :

8. Two points arise for determination. Firstly, whether the modified contract dated March 28, 1978, fell within the ambit of Rule 9B. If so, whether the assessee was entitled to deduction in respect of the entire amount of Rs. 4.25 lakhs during the year ending June 30, 1978, corresponding to the assessment year 1979-80.

9. In this case, on the facts the Income Tax Officer found that acquisition by the distributor of the rights of the producer in the overflow profits was not covered by Rule 9B. The Income Tax Officer found that on payment of Rs. 4.25 lakhs, the assessee obtained the producers right to share the overflow profits. That, such a right was not covered by Rule 9B. This finding of the Income Tax Officer is erroneous. The producer has the entire rights in the movie. These rights can be given either on advance basis or on minimum guarantee basis. In the present matter, the producer Sagar Enterprises initially gave those rights on minimum guarantee basis vide agreement dated August 19, 1974. The movie was released on May 28, 1976. Under the contract dated August 19, 1974, the assessee had a right to exploit the movie for ten years. The movie was a success. Therefore, on March 28, 1978, the agreement dated August 19, 1974, was modified. Under the contract dated August 19, 1974, it was, inter alia, provided that up to collection amount of Rs. 8.50 lakhs, the overflow profits were to be shared by the producer and the distributor in the ratio of 80 : 20. Under the said contract, it was further provided, inter alia, that if the collection exceeded Rs. 8.50 lakhs then, the overflow profits were to be shared in the ratio of 50 : 50. However, as the movie was a success, on March 28, 1978, the original contract was modified. By virtue of the said modification, the original contract dated August 19, 1974, which was based on a minimum guarantee came to be converted into a contract based on advance for which the assessee agreed to pay Rs. 4.25 lakhs to the producer. However, as stated above, every producer has entire rights of the picture and the producer is free to give the movie either on advance basis or on a minimum guarantee basis. Therefore, on the first point, we hold that Rule 9B is applicable to the modified contract dated March 28, 1978.

10. Having come to the conclusion that the modified agreement dated March 28, 1978, stood covered by Rule 9B, the main question which we have required to decide in this case is whether the assessee was entitled to claim the entire deduction of Rs. 4.25 lakhs under Rule 9B, during the accounting year ending June 30, 1978, corresponding to assessment year 1979-80, Rule 9B, inter alia, lays down that for computing the profits and gains of the business of distribution of films, deduction in respect of cost of acquisition shall be allowed in accordance with Sub-rule (2) to Sub-rule (4). Under Sub-rule (4), it is, inter alia, laid down that if during the previous year the distributor does not exhibit the film, no deduction shall be allowed in respect of the cost of acquisition and the entire cost shall be carried forward for the next following previous year and allowed as deduction in that year. In other words, deduction is admissible only qua the receipts credited in the profit and loss account and if there are no receipts credited in that account, on account of failure of the distributor (assessee) to exploit the film then, no deduction was admissible. Rule 9B is, therefore, a special code in the matter of deduction vis-a-vis computation of profits and gains of business of distribution. Sub-rule (5) of Rule 913 commences with a non obstante clause. This sub-rule also makes it clear that the deduction under Rule 9B shall not be allowed unless the amounts realised by exhibiting the film are credited in the profit and loss account of the assessee in respect of the year in which the deduction is admissible. This rule, in our view, contemplates amortization. Briefly, it contemplates admissibility of deduction proportionate to the income earned/collections made during the year in which deduction is sought, failing which, the true profits may get distorted as in the present case. The order passed by the Assessing Officer shows that during the assessment year 1979-80, the net profit was only Rs. 66,177 against which the assessee seeks deduction of Rs. 4,25 lakhs. Therefore, if the contention of the assessee was accepted, the true profits would get distorted. Therefore, the Assessing Officer rightly added back Rs. 4.25 lakhs to the net profit of the assessee amounting to Rs. 66,177. The Assessing Officer has rightly calculated the overflow profits of the producer for the period February 1, 1978, up to the year ending June 30, 1978, at Rs. 1,49,783. That estimation had to be done in order to avoid distortion in calculation of true profits. The Assessing Officer has, therefore, rightly taken 80 per cent. of Rs. 1,49,783 as expense/cost of acquisition proportionately. In other words, he has amortized the expenses over the period of contract which is ten years from the date of the release of the movie, i.e., May 28, 1976. Accordingly, the Assessing Officer gave deduction to the assessee for the assessment year in question to the tune of Rs. 1,19,827 instead of full deduction of Rs. 4.25 lakhs. In other words, the Assessing Officer has estimated the expenses at Rs. 1,19,827. It is only by this method of apportioning the expenses over the period of contract that one can arrive at the true profits for the year ending June 30, 1978. Up to January 31, 1978, the distributor has paid the share of the producer in the overflow profits. Therefore, the Assessing Officer estimated the collection of Rs. 1,49,783 for the period February 1, 1978, up to June 30, 1978, and granted deduction of Rs. 1,19,827 which was 80 per cent. of the total collection of Rs. 1,49,783 which was the share of the producer in the ratio of 20 : 80. In other words, the Assessing Officer has not given full deduction of Rs. 4.25 lakhs but, he has spread over the deduction in order to calculate the true profits. This is what is contemplated by Sub-rule (5) of Rule 9B. Although we asked the parties to produce the return of income, the same was not produced. We have, therefore, decided the matter on the basis of the calculations made by the Assessing Officer in his assessment order. Lastly, the view which we have taken here-inabove, is supported by our judgment in the case of Taparia Tools Ltd. v. Joint CIT : [2003]260ITR102(Bom) decided on January 8, 2003, vide Income Tax Appeal No. 88 of 2001 and others. In that matter, the assessee raised Rs. 100 lakhs by way of non-convertible debentures [NCD]. In the year of allotment, they repaid Rs. 55 lakhs. In the annual accounts, the assessee debited Rs. 11 lakhs each year over a period of five years, which was the life of the NCD. In the annual accounts, the assessee showed Rs. 55 lakhs as deferred revenue expenditure. It was argued before the Assessing Officer that for the tax purpose, the entire amount of Rs. 55 lakhs which the assessee paid to the lenders in the very first year of allotment of NCD should be allowed as deduction. This court found that if the entire amount of Rs. 55 lakhs was allowed as deduction then, it would result in distortion of profits and, therefore, the Assessing Officer was right in apportioning the expenses over the period of five years which was the life of the debenture. This court found, on the facts in that matter, that if the entire amount was allowed as deduction, it would distort the true profits taxable under the Income Tax Act. In that matter, our conclusion was as under :

"In this case, we are concerned with deferred revenue expenditure, which is a special type of asset. In this case, we are not concerned with the nature of profits. In this case, we are concerned with ascertainment of true profits under the Income Tax Act and in order to ascertain such profits, we have to follow the true accounting principles and we have to apply those principles in the light of the method of accounting followed by the assessee. In cases involving special types of assets, where profits cannot be deduced by following the method adopted by the assessee, the Assessing Officer is free to make adjustments as done in this case. Lastly, as stated above, in this matter, we are concerned with computation of taxable income and, therefore, the true accounting principles will have to be taken into account."

11. In our view, the facts of this case are similar to the facts in the above case of Taparia Tools Ltd. : [2003]260ITR102(Bom) . We may add that Sub-rule (5) of Rule 9B supports our conclusion on amortization of expenses in order to save true profits from getting distorted.

12. In the case of CIT v. A. Krishnaswami Mudaliar : [1964]53ITR122(SC) , the assessee while computing the profits of business debited the amount paid for acquiring the rights of exploitation of the movie but, did not take credit for the value of the unexpired exploitation rights at the end of the previous year. This distorted the profits. In the circumstances, it was held by the Supreme Court that the Department was entitled to add the value of the unexploited rights of the film at the end of the period to the amount disbursed by the firm, failing which the profits would get distorted. In our case also, the assessee has failed to value the unexploited rights of the film for the balance period, which has resulted in distortion of profits and, therefore, the Income Tax Officer was right in apportioning expenses over the period of the contract. The matter can be looked at from another angle. The cost of acquisition is Rs. 4.25 lakhs. It is paid on March 28, 1978. It is paid during the year ending June 30, 1978. During the year ending June 30, 1978, the net profit is only Rs. 66,177. Hence, it is not possible to write off Rs. 4.25 lakhs against the net profit of Rs. 66,177. Hence, the write off had to be apportioned over the unexpired period, failing which the profits would get distorted.

13. Before concluding we may point out an alternate argument advanced on behalf of the assessee. It was submitted in the alternative that if Rule 9B was not applicable then, the assessee was entitled to claim deduction for payment of Rs. 4.25 lakhs as and by way of "clearing of producers rights in the overflow profits" under Section 37(1) of the Income Tax Act. We do not find any merit in this argument. The assessee has not come by way of a reference to this court. The assessee has not worked out the spread over/apportionment of expenses for the unexpired period of contract before the Assessing Officer. In our view, even assuming for the sake of argument that Section 37(1) of the Income Tax Act was attracted, the assessee was required to claim expenses year-wise to the extent of income which the assessee estimated for the unexpired period of contract. They have not given that working to the Assessing Officer. They have not advanced arguments on that basis before the Assessing Officer. Therefore, we cannot allow the assessee to raise this alternate argument before us for the first time particularly when the assessee did not seek reference on that point.

Conclusion :

14. In view of the reasons given above, we answer the above question in the negative, i.e., in favour of the Department and against the assessee. Reference is, accordingly, disposed of. No order as to costs.