No Deduction for Acquiring Distribution Rights of Feature Films If Film is not commercially Exploited: Kerala HC [Read Judgment]

The Kerala High Court in the case of Malayala Manorama Co Ltd has upheld appellate authorities decision of rejecting deduction under Rule 9B of the Income Tax Rules, 1962 in the absence of commercial exploitation of feature films and no credit of receipts on account of commercial exploitation to profit and loss account.

The appellant had acquired satellite distribution rights of three Malayalam films in the FY 2003-04 and claimed deduction for the cost of acquisition in the following year i.e., FY 2004-05 though such feature films were neither exhibited by the appellant on commercial basis nor any rights to exhibit the films were sold in the year of acquisition or the following year. The appellant heavily relied upon literal interpretation of Rule 9B(4) which says in case where film distributor does not either exhibit the featured films himself on commercial basis or does not sells the rights to exhibit the same in the year in which it is acquired, no deduction shall be allowed during such year and cost shall be carried forward to be claimed in the following year.

However, according to Rule 9B(5) which is a non-obstante clause, no deduction can be claimed unless receipts from commercial exploitation of featured films is credited to profit and loss account. In simple words, deduction of cost of acquisition available is proportion to receipts on account of commercial exploitation of acquired featured films. Appellant contended non-applicability of Rule 9B(5) for cases falling under Rule 9B(4).

While agreeing to Bombay High Court decision in the case of Commissioner of Income Tax v. Prakash Pictures, [2003] 260 ITR 456 (BOM ), the division bench comprising of Justice Vinod K. Chandran and Justice Ashok Menon held that deduction under Rule 9B is permissible only if the film has been commercially exploited and income is received. Rule 9B(4) only permits carrying forward of cost of acquisition and can be claimed only on generating income as per Rule 9B(5). As the feature films were never exhibited and there was no amount credited in the profit and loss account as amount received on exhibition of films, Tribunal’s order is upheld.