Deduction of expenditure on production or distribution of feature films
Introduction
Rule 272 and Rule 273 lay down the method of computation of the deduction allowable to the producer and distributor of a feature film respectively. The deduction is allowed to the producer and distributor towards cost of production and cost of acquisition of a feature film respectively. The deduction is allowed only if the feature film is certified for release during the year.
1. About
In the cases of a film producer and a film distributor, both the expenditure and the receipts in respect of a particular feature film are invariably spread over a period of years. Rules 272 and 273 have, therefore, been introduced so as to provide for the manner in which the expenditure must be amortised in order to determine the quantum of income that is assessable to tax. While Rule 272 deals with film producers, Rule 273 deals with film distributors.
2. Production of feature film [Rule 272]
In computing the profits and gains of the business of production of feature films carried on by a person (‘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 tax year shall be allowed.
2.1. Deduction allowable
2.1-1. For cost of production
“Cost of production” in relation to a feature film, means the expenditure incurred on the production of the film. If any part of the cost has been provided as subsidy under any government scheme and which has not been included in the total income of the assessee for any tax year, it shall be reduced from the cost of production. Where assessee borrowed loan for production of movies, interest attributable to borrowings utilized in production of film would be added to cost of production
The deduction for such cost of production shall be allowed in the tax year in which it is certified for release by the Board of Film Censors. If a film is not released during year, the cost of production shall not be allowed in current year and should be carried forward to next year.
2.1-2. For advertisement and cost of positive prints
The expenditure incurred for preparation of the positive prints of the film and expenditure incurred in connection with the advertisements of the film after it is certified for release by the Board of Film Censors shall not form part of the cost of production. The Bombay High Court
2.1-3. For cost of abandoned films
As in the case of abandoned films, the certificate of Board of Film Censors is not received, no deduction is allowed under Rule 272. To give relief in such cases, the CBDT
2.2. Manner of computation of deduction
2.2-1. If full rights are transferred
Where the producer of film sells all the rights of exhibition of the film, entire cost of production shall be allowed as deduction during such tax year. The sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis.
Such rights are deemed to be sold only on the date when the positive prints of the film are delivered by the film producer to the purchaser of such rights. Where terms of the agreement between the film producer and film distributor provides for distribution of positive prints by film distributor, the rights are deemed to be sold on the date on which the negative of the film is delivered by the film producer to the film distributor.
2.2-2. If producer exhibits the film or partially transfer the rights
A film producer can exhibit the film in the following ways:
(a) He exhibits the film on commercial basis in all or some of the areas;
(b) He sells the rights of exhibition of the film in respect of some of the areas; or
(c) He 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.
In the above circumstances, the entire cost of production shall be allowable as deduction if such film is released for exhibition on commercial basis at least 90 days before the end of the tax year. Otherwise, the deduction shall be restricted to the amount realised from the exhibition or selling rights of exhibition of such film or both. The balance cost, if any, shall be carried forward to next following tax year and shall be allowed as deduction in that year.
2.2-3. If no rights are transferred
Where the producer of film does not exhibit the film himself on commercial basis or does not sell the rights, no deduction shall be allowed and the entire cost shall be carried forward to next tax year and allowed as deduction in that year.
2.3. Condition for claiming deduction
2.3-1. In case of transfer on guarantee basis
Where the film producer has transferred the rights of exhibition of the feature film on a minimum guarantee basis, no deduction shall be allowed unless the minimum amount guaranteed and the amount, if any, received or due in excess of the guaranteed amount has been credited in the books of accounts in respect of the year in which the deduction is admissible. It also means that maintenance of books of account is mandatory for seeking deduction under Rule 272(5)
However, where the film producer follows cash system of accounting, deduction shall be allowed only when the amount received towards the minimum guarantee and the amount, if any, received in excess of the guaranteed amount, are credited in the books of account in the year in which the deduction is admissible.
2.3-2. Others
No deduction shall be allowed under this provision unless the amount realised by exhibiting the film or amount received from sale of rights or aggregate of both are credited in the books of accounts in respect of the year in which the deduction is admissible.
2.4. Other Provisions
The assessing officer may allow deduction for cost of production in any manner which he deems suitable where:
(a) Producer has transferred the rights for exhibition by any mode other that prescribed under the provisions; or
(b) Where it is not practical to apply the provisions having regard to the facts and circumstances of any case.
2.5. Submission of Statement
The assessee engaged in the business of cinematographic films, for whole or part of the year, is required to furnish a statement under section 507 providing the particulars of the payment made by him or due from him of a sum more than Rs. 50,000 in aggregate to each person (employee or otherwise) engaged by him in such production.
3. Distribution of feature film [Rule 273]
Where a distributor of film acquires the rights of distribution either by entering into an agreement with film producer directly, or through another distributor who has an agreement with the film producer, the expenditure incurred on acquisition of such rights is allowable as deduction. Such distributor can either exhibit the film himself or further transfers the distribution rights to another distributor by way of sale or lease or transfer on minimum guarantee basis.
3.1. Deduction for cost of acquisition
“Cost of acquisition” in relation to distribution rights of a feature film, means the amount paid by the distributor to the producer or to another distributor, as the case may be. Where such rights are acquired on a minimum guarantee basis, such minimum guaranteed amount will be treated as the cost of acquisition for the distributor.
However, the expenditure incurred for preparation of the positive prints of the film and expenditure incurred in connection with the advertisements of the film shall not form part of the cost of acquisition.
3.2. Manner of computation of deduction
3.2-1. If full rights are transferred
Where the film distributor sells all the rights of exhibition of the film, entire cost of acquisition shall be allowed as deduction during such tax year. The sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis.
Such rights are deemed to have been sold only on the date when the positive prints of the film are delivered by the film distributor to the purchaser of such rights.
3.2-2. If distributor exhibits the film or partially transfer the rights
A film distributor can exhibit the film in following ways:
(a) He exhibits the film on commercial basis in all or some of the areas;
(b) He sells the rights of exhibition of the film in respect of some of the areas; or
(c) He 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.
The sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis.
In the above circumstances, the entire cost shall be allowable as deduction where such film is released for exhibition on commercial basis at least 90 days before the end of the tax year. Otherwise, the deduction shall be restricted to the amount realised from the exhibition or selling rights of exhibition of such film or both. The balance cost, if any, shall be carried forward to next following tax year and shall be allowed as deduction in that year.
3.2-3. If no rights are transferred
Where the film distributor does not exhibit the film himself on commercial basis or does not sell the rights during the year of acquisition, no deduction shall be allowed and the entire cost shall be carried forward to next following tax year and allowed as deduction in that year.
3.3. Condition for claiming deduction
3.3-1. In case of transfer on guarantee basis
Where the film distributor has transferred the rights of exhibition of the feature film on a minimum guarantee basis, no deduction shall be allowed unless the minimum amount guaranteed and the amount, if any, received or due in excess of the guaranteed amount has been credited in the books of accounts in respect of the year in which the deduction is admissible.
However, where the film distributor follows cash system of accounting, deduction shall be allowed only when the amount received towards the minimum guarantee and the amount, if any, received in excess of the guaranteed amount, are credited in the books of account in the year in which the deduction is admissible.
3.3-2. Others
No deduction shall be allowed unless the amount realised by exhibiting the film or amount received from sale of rights or aggregate of both are credited in the books of accounts in respect of the year in which the deduction is admissible.
4. Summary
The quantum of deduction basically depends on - the extent of exploitation of the film, and the date on which the film is released for commercial exhibition. The quantum of deduction is tabulated below:
| Person | Situation | Quantum of deduction | |
| Films released on or before 31st December* | Films released after 31st December* | ||
| Film producer | He sells all rights of exhibition of the film in the tax year | Entire cost of production | Entire cost of production |
| He exhibits the film in all or some of the areas | Entire cost of production | Cost of production, or amount realised, whichever is less** | |
| He sells the rights of exhibition of the film in respect of some of the areas | Entire cost of production | Cost of production, or amount realised, whichever is less** | |
| He exhibits the film in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas | Entire cost of production | Cost of production, or amount realised, whichever is less** | |
| He does not exhibit the film, nor sell the rights of exhibition | Nil*** | Nil*** | |
| Distributor | He sells all rights of exhibition of the film in the same tax year in which it is acquired by him | Entire cost of acquisition | Entire cost of acquisition |
| He exhibits the film on a commercial basis in all or some of the areas, or sells the rights of exhibition in respect of some of the areas, or himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in all or some of the remaining areas | Entire cost of acquisition | Cost of acquisition of the film, limited to (i) the amount realised by the film distributor by releasing the film on a commercial basis, or (ii) the amount for which the rights of exhibition has been sold or, as the case may be, (iii) the aggregate of the amounts realised by the film distributor by exhibiting the film and by the sale of the rights of exhibition** | |
| He does not exhibit the film nor sells the rights of exhibition during the tax year | Nil*** | Nil*** | |
* The date will be 1st January in a leap year. ** Balance, if any, is deductible in the immediately succeeding year. *** Enter cost is deductible in the immediately succeeding year. |
References
Asstt. CIT v. Akkineni Nagarjuna Rao [2012] 22 taxmann.com 69 (Hyd. - Trib.)
CIT v. Dharma Productions (P.) Ltd. [2019] 104 taxmann.com 211 (Bombay)
Circular No. 16/2015, dated 06-10-2015
L.N. Poddar v. ITAT [2010] 322 ITR 513 (Pat.)
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.