IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 23.10.2007 Coram The Honourable Mr.JUSTICE K.RAVIRAJA PANDIAN and The Honourable Mrs.JUSTICE CHITRA VENKATARAMAN Tax Case (A) No.45 of 2004 M/s. Madathil Brothers 158, Arcot Road, Chennai - 600 026. .. Appellant versus The Deputy Commissioner of Income Tax, Special Range – VI, 122, Uttamar Gandhi Road Chennai – 600 034. .. Respondent Appeal under Section 260-A of the Income Tax Act against the order dated 31.12.2002 made in ITA No.569/mds/98 "C" Bench against the C.I.T (appeal) Order dated 9.12.1992 in ITA.No.30/93-91/comp, on the file of the Commissioner of Income Tax (Appeal) VII, Madras, against the asessment order dated 26.3.1990 on the file of the Deputy Commisisioner of Income tax, Special Range-VII, Madras. For Appellant : Mr.V.S.Jayakumar For Respondent: Mr.Murali Kumaran Senior Standing counsel for Income Tax J U D G M E N T CHITRA VENKATARAMAN,J. This Tax Case (Appeal) is preferred by the assessee against the order of the Income Tax Appellate Tribunal relating to the assessment year 1987- 88. 2. In the grounds of appeal, the assessee raised five questions of law. Except the one on the question of capital gains arising out of the sale of an immovable property at 35, Nungambakkam High Road, Chennai, four questions of law were admitted by this Court under order dated 23.4.2004. https://hcservices.ecourts.gov.in/hcservices/ 3. It is stated that subsequent to the disposal of the appeal, the applicant filed M.P.Nos.21 & 87 (MDS)/2003 before the Tribunal seeking a decision again on the question of capital gains arising thereon treated as a short-term gain and not a long term one. The appellant also sought for reconsideration on the question of loss arising from the film "Kasthuri Vijayam". By order dated 1.9.2003, the Tribunal allowed the M.P on the question of capital gains on the sale of the immovable property accepting the same as long-term capital gains. It is stated that the Revenue filed an appeal in Tax Case No.272 of 2004. By order dated 6.8.2004, this Court took the view that the order of the Tribunal granting the relief on capital gains amounted to review of the order earlier passed rejecting the said plea. This Court took the view that the Tribunal had no authority under law to review its order. Hence, in the said view of the matter, considering the prejudice that might be caused to the appellant herein on the question of capital gains on the sale of immovable properties, the appellant was permitted to raise the question on capital gains as a question of law for consideration along with other questions admitted earlier under order dated 23.4.2004. 4. Accordingly, the appellant filed T.C.M.P.No.50 of 2007 seeking the following question also to be raised to consider: " Whether in law in holding that the capital gains arising on the sale of immovable property at 35 , Nungambakkam High Road is a short term capital gain and not a long term one?" By order dated 14.8.2007, this Court ordered the T.C.M.P. Thus, the said question is also considered as part of the questions raised and admitted by this Court. 5. Hence, the questions of law that arise for consideration as admitted by this Court are as follows: "1. Whether on facts and in the circumstances of the case, the Tribunal was right in law in rejecting the appellant's claim of loss arising from two movies by name "Kannamma" and "Uzaikum Karangal"? 2. Whether the Tribunal was right in holding that the sum of Rs.1,26,000/- is unexplained cash credit under Section 68 of the Income Tax Act, 1961? 3. Whether the Tribunal was right in law in upholding the disallowance of loss arising from "Kasturi Vijayam", without dealing with the said grounds of appeal? 4. Whether the Tribunal was right in disallowing the claim of loss of Rs.3,60,000/- arising out of sale of shares of M/s. Sudershan Clay and Ceramics Limited? 5. Whether in law in holding that the capital gains arising on the sale of https://hcservices.ecourts.gov.in/hcservices/ immovable property at 35, Nungambakkam High Road is a short term capital gain and not a long term one?" 6. The assessee is a firm engaged in the business of distribution and exhibition of films. It is stated that the appellant herein had purchased the negative rights of two feature films, namely, "Kannamma" and "Uzaikum Karangal" from its sister concern M/s.Kamakshi Agencies Private Limited for a consideration of Rs.5,76,000/- and Rs.12,01,000/- on 22.8.1986 and 7.10.1986 respectively. These two films were released as early as 1972 and 1976 respectively. The vendor, in turn, had purchased the rights in the year 1982 and 1983 respectively from another sister concern of the assessee, i.e., M/s.Sudarsan Agencies, which is the proprietary concern of M/s.Sudarsan Trading Company. It is stated that eversince the purchase of the two movies in 1982 and 1983, the vendor, M/s.Kamakshi Agencies Private Limited had not exploited these two movies in any manner and were shown as closing stock and opening stock every year till finally the negative rights were disposed of in favour of M/s.Ashoka Brothers, a unit of the assessee herein, in the year 1986. The assessee contended that as per the agreement entered into by the assessee, these two films were given to the mediators to exhibit the films in any particular area for a particular period and amounts were received thereon on the rights given. Admittedly, the assessee had not entered into any agreement with the exhibitors directly. The total collection made for exhibiting these two films through the mediators were stated to be to the tune of Rs.1.26 lakhs. The cost of these two movies and the income earned were debited to the Profit and Loss Account and the assessee has showed a net loss of Rs.20,68,830/-. 7. In the course of the assessment proceedings, the appellant was asked to show the necessary evidence as regards the exploitation through the mediators. The appellant herein produced confirmatory slips from different parties who had taken the films on hire, the amount of hire charges for the period for which they were screened, and the place of screening. In terms of the addresses given in the confirmatory slips, enquiries were made as to whether the assessee had actually engaged the mediators for the exhibition of the films. On enquiry, it was found that none of the parties mentioned in the confirmatory slips were found existing/or the addresses given were not found. There were instances where the assessee could not give full addresses of the persons who had claimed to have taken these films for hire. By letter dated 31.1.1990, the assessing authority called upon the appellant herein to identify the persons who were stated to have been given the exhibition rights and produce those parties for verification. In its letter dated 12.2.1990, the appellant replied that it had received the contracts only through the mediators and it had no direct contact with the exhibitors and that the films were given to the middlemen. Except for the confirmatory slips produced before the assessing authority as regards the receipt of film hire charges, no details were furnished by the appellant herein. On the other hand, the appellant stated that since the transactions had taken place well before 31.3.1987, it was not practically possible to produce https://hcservices.ecourts.gov.in/hcservices/ the mediators before the assessing authority. The General Manager of the appellant firm, the former Managing Partner, expressed his inability to give the details or identify the persons to whom the exhibition rights were given. He further stated that some of the middlemen approached him through some persons known to the appellant. The assessing authority noted that nothing further could be elicited from the General Manager of the firm Mr.C.V.Velayudham. In the face of total lack of evidence as regards the mediators and the exhibitors through whom the films were exhibited and in the absence of any material to substantiate the confirmatory slips, the assessing authority rejected the case of the appellant-assessee for treating the loss as a business loss. On the other hand, the assessing authority held that since the films purchased had not been exploited during the year, the entire cost of acquisition of the two films were allowed to be carried forward as per Rule 9-B(iv) of the Income Tax Rules, 1962. As regards the collection of Rs.1.26 lakhs for the exhibition of the movies, the assessing authority treated the same as unexplained cash credits under Section 68 of the Income Tax Act, 1961, on the premise that these monies were really that of the appellant's money introduced in the guise of the receipts from the exploitation of the films. 8. The second issue relates to the disallowance of loss arising from the film "Kasthuri Vijayam". It is stated that the said film was purchased by M/s.Ashoka Brothers under the banner "Moogambika Films". The negative rights were owned by the appellant-assessee firm. Since there was no collection forthcoming, a sum of Rs.1,53,534.57 was written off. The assessing authority took the view that as there was no credit of collection during this period, the said amount could not be written off under Rule 9-B. 9. On the next question as to the short term capital loss of Rs.3,60,000/- arising out of sale of shares purchased from its sister concern M/s.Sudarsan Clay and Ceramics Limited, it was stated that the appellant-assessee had purchased one lakh shares of Rs.10/- each on 3.10.1980. The shares were sold for a consideration of Rs.8,40,000/- on 20.1.1987. This was claimed as a short-term capital loss in the statement of accounts. The assessing authority pointed out that M/s.Sudarsan Clay Products was a losing company and the shares were originally transferred in the name of Mr.Velayudham, the Managing Partner and representative for and on behalf of the firm, and the company refused to register the shares in the name of the firm. Subsequently, the shares were sold by the appellant-assessee at the best available price considering the fact that the company was a loss making company. The appellant herein received Rs.6,00,000/- out of the total consideration of Rs.8,40,000/- and the balance of Rs.2,40,000/- was still outstanding. The assessing authority felt that the claim of short term loss had been deliberately incurred by the appellant herein to avoid the capital gains. It is an admitted fact that the company had not allowed any dividends at any point of time from 1983 onwards. It is also pointed out that whether the valuation was by the https://hcservices.ecourts.gov.in/hcservices/ yield method or under Rule 1D of the Wealth Tax Rules, the value of the shares were negative and the balance sheet of M/s.Sudarsan Clay Products Limited showed the value of the shares as 'nil'. The assessing authority took the view that there were no reasons stated for purchase of the shares from the loss making company and there was equally no reason assigned for the sister concern purchasing the shares from the assessee at Rs.7/- per share. Hence, there was no bona fide commercial principle involved in this transaction. Hence, the assessing authority held that it was only a colourable transaction to evade payment of income tax, which otherwise would be liable to be paid under the capital gains. 10. On the question of the claim for long-term capital gains on the sale of the immovable property at 35, Nungambakkam High Road, Chennai, the assessing authority applied the decision of the Hon'ble Supreme Court reported in 57 ITR 185 (ALAPATI VENKATARAMIAH Vs. COMMISSIONER OF INCOME TAX) to hold that the original agreement of sale dated 16.9.1995 did not confer any title to the assessee that the sale deed was executed as per the memo of compromise entered into in the O.S. Appeal before the High Court on 9th July 1986; that the sale deed was registered in favour of the appellant-assessee only on 10.7.1986. Hence, till the sale deed was executed in favour of the appellant in the year 1986, the appellant did not have any title as an owner; consequently, the sale effected by the appellant on 26.9.1986 resulted in short-term capital gains only. The appellant-assessee did not hold the property for a period more than 36 months to treat the gain as long term capital gains. 11. Aggrieved by the order of the assessing authority, the appellant -assessee went on appeal before the Commissioner of Income Tax (Appeals). By an order dated 9.12.1992, the Commissioner of Income Tax (Appeals) dismissed the appeal, upheld the order of the assessing authority, thereby confirmed the assessment. 12. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the appellant-assessee preferred a further appeal before the Income Tax Appellate Tribunal. By an order dated 31.12.2002, the Tribunal rejected the appeal, thereby confirmed the findings of the authorities below. As against this order of the Tribunal, the appellant -assessee has preferred this appeal before this Court under Section 260-A of the Income Tax Act, 1961 on the grounds as stated above. 13. Heard counsel for the parties. 14. On the first question of claim of business loss on the exhibition of the films, a perusal of the order of the Tribunal shows the finding of fact that the assessee could not produce any evidence as to the identity of the middle men and the exhibitors. The parties issuing the confirmatory letters were also found as either not traceable or the addressees/address were not there. The Tribunal further pointed out to the finding of the https://hcservices.ecourts.gov.in/hcservices/ Assessing Officer that as there was no exhibition receipts, the write-off for the films could not be allowed. The Tribunal further found that the films were not exhibited for quite some time and there was no demand for those films. In the circumstances, the Tribunal upheld the order of the Commissioner of Income Tax (Appeals). The Tribunal further pointed out that Sri.C.V.Velayudham, who had himself signed on the contracts, refused knowledge about any of the alleged exhibitors. The Tribunal further stated that when the said Velayudham was a signatory to the documents, his plea that he had no knowledge about the same clearly showed that the explanation given could not be acted upon that the receipt of Rs.1,26,000/- represented collection on the exhibition of films. In the background of these facts, rightly, the Tribunal upheld the orders of the authorities below. 15. Learned counsel appearing for the appellant could not point out any error in the reasoning of the Tribunal, or for that matter, any of the authorities. Being a pure question of fact and appreciation of evidence and there being no material produced to point out any error in the findings of the Tribunal, we do not find any ground to disturb the findings. Hence, we reject the plea of the appellant-assessee on this issue. 16. The assessing authority came to the conclusion that the appellant-assessee had no intention to exploit the films and these films were lying idle with the assessee's sister concern; that these films were purchased at a cost higher than what was paid by the sister concern. The Tribunal referred to the findings of the assessing officer that the idea of claiming loss was only to negate the capital gains incidence which the appellant-assessee had during this year. Hence, the plea of exploitation of the films through the mediators itself was a fabricated one. The Tribunal confirmed the findings of the assessing authority to hold that since the films were not exploited during the year, the entire cost of acquisition of these films were to be carried forward as per Rule 9-B(4). Touching on this, learned counsel appearing for the assessee took us through the provisions of Rule 9-A and 9-B of the Income Tax Rules, 1962, to impress on the submission that these Rules have relevance for the new films for exhibition. He submitted that the assessing authority erred in invoking Rule 9-B that the appellant could only have the benefit of carry forward of the loss as per Rule 9-B. He emphasized that Rule 9-B and Rule 9-A have to be read harmoniously to get at the intention of the Rules provided therein that at best, these Rules have relevance for new films alone and cannot be extended to films already released and exhibited and further sold to others for exploiting the rights. In the context of the submissions, learned counsel stated that the appellant-assessee would be entitled to have the adjustment under the regular provisions of the Act. Elaborating on the facts, he submitted that the appellant herein had, in fact, given the details as to the middle men through whom the films were given for exhibition before the assessing authority, and that by efflux of time, the assessee had difficulty in tracing the exhibitors or the middle https://hcservices.ecourts.gov.in/hcservices/ men. He further pointed out that when the details as regards those who had exhibited the films through the middle men were furnished, the burden is on the Revenue to make necessary enquiries to consider the claim as to whether it is a genuine transaction or not. In the context of the rejection of the claim for business loss and treating the sum of Rs.1.26 lakhs as 'unexplained cash credit', learned counsel referred to Section 68 of the Income Tax Act, 1961. He contended that when the assessee had discharged its burden and the amount was found in credit in the books of accounts maintained by the assessee and an explanation was offered as relating to the income earned on giving the films for exhibition through mediators, the assessing authority cannot invoke the provisions of Section 68 of the Income Tax Act, 1961, to treat the same as unexplained cash credit. Learned counsel further pointed out that the Section enjoins upon the assessing authority to record the satisfaction as to the materials given by the assessee before embarking on the provisions under Section 68 of the Income Tax Act, 1961. In the above circumstances, learned counsel submitted that the assessing authority failed to observe the provisions of Section 68 of the said Act and hence, to treat Rs.1.26 lakhs as an unexplained cash credit. 17. We do not agree with the aforesaid contentions by the learned counsel for the appellant-assessee herein. On the geniuneness of the claim of the exhibition through the mediators, we have already rejected the plea of the appellant herein. As regards the contention as to the applicability of Section 68 treating the alleged exhibition receipts as cash credits, it must be seen that the primary onus as to the receipt of the said amount is on the appellant-assessee to show the identity of the exhibitors and the mediators and the genuineness of the transaction. Only where the assessee discharges the burden prima facie, that the burden shifts on to the revenue. The mere production of the confirmatory letters would not, by itself, prove the claim of the appellant as regards the exhibition of the films. Read in the context of the inability expressed by the assessee to bring the exhibitors before the assessing authority and considering the fact that the addressees were not there in the said address or the particulars were not correct, the view of the assessing authority could not be faulted with. It is no doubt true that law does not contemplate or require compliance of an impossible act. Yet, when the details regarding the particular receipt is exclusive to the knowledge of the assessee who has the necessary information relating to the same, the initial burden is certainly on the tax payer to discharge the same so that further enquiry thereon is taken to the logical end by the revenue. Going by the findings recorded by the Tribunal, we do not find any ground to accept the plea of the appellant-assessee in this regard. 18. On the question of the claim of loss and the applicability of Rules relating thereto, the amortization of costs of film either in the hands of the producer or the distributor is governed by Rules 9-A and 9-B of the Income Tax Rules, 1962. A cursory glance of these provisions show that Rule 9-A prescribes deductions in respect of expenditure on the https://hcservices.ecourts.gov.in/hcservices/ production of feature films. Rule 9-B deals with the deduction available in respect of expenditure on acquisition of distribution rights of feature films. While Rule 9-A concerns itself as to the case of the film producers, Rule 9-B is about film distributors, a stage after the production of the film. These Rules lay down the procedure for computing the profits and gains from film production and/or film distribution business. 19. Admittedly, the case herein relates to exhibition of old movies. Hence, going by the case of the appellant, the deduction falls for consideration only under Rule 9-B. The manner of allowing such a deduction is given in Sub Rule (2) to Sub Rule (4). The explanation to Sub Rule (1) to Rule 9-B defines the cost of acquisition. It states, the cost of acquisition in relation to feature film means the amount paid by the film distributor to the film producer or another distributor under an agreement entered into by the film distributor with such film producer or such other distributor as the case may be for acquiring the rights of exhibition expenditure. The provisions contained therein also stipulate the minimum period for which the film should have been exhibited for the purposes of gaining benefit under these provisions. 20. A reading of Rule 9-B(1) with the explanation thereon leaves no room for doubt that it intends to deal with films coming for exhibition after its release for the first time. The fact that it refers to "distribution from one distributor to another or from one distributor to such other distributors" clearly shows the futility in the contention of the learned counsel for the appellant to read this provision as relatable to new films and that there are no reference to relate the same to old films. In contrast to Rule 9-B, Rule 9-A shows that it relates to a new film. The Section deals with deductions in computing the profits and gains of production of feature films certified for release by the Board of Film Censors in terms of the provisions of Sub-Rule (2) to Sub Rule (4). A reading of the provisions clearly show the difference in the area of operation of the provisions of Rule 9-A and 9-B. In the circumstances, we do not find any justification to hold that invocation of Rule 9-B will not have any bearing to the case on hand. We agree with the Tribunal that the appellant-assessee is, at best, entitled to the cost of acquisition of these films to be carried forward as per Rule 9-B(4). Consequently, questions 1 and 2 raised are answered against the assessee appellant. 21. As regards the third question raised by the appellant herein on disallowance of loss arising from "Kasturi Vijayam", it may be noted that Rule 9-B(4) provides that in the event of the assessee not exhibiting the film on commercial basis or sell his rights of exhibition, thereby resulting in no deduction in respect of the cost of acquisition, the assessee is granted carry forward of the loss. Learned counsel for the assessee pointed out the provisions herein applied in relation to the assessment year 1987-88 that the provisions itself came to be effective on and from the assessment year commencing after 1.4.1987 (Sub Rule (7)). In https://hcservices.ecourts.gov.in/hcservices/ these circumstances, the question of construing any benefit as per Sub- Rule (4) does not arise. Consequently, he states that the Rule has no relevance to this case. 22. As already noted, Sub-Rule (7) makes provisions effective from 1.4.1987. The Rule itself was introduced for deduction in respect of expenditure on acquisition and distribution rights of the feature films under the Income Tax (Seventh Amendment) Rules, 1976. Learned counsel submitted that the normal Rule as regards the deduction have not been applied in this case. Learned counsel placed reliance on the decision of Jabalpur Bench of the Income Tax Bench reported in (1983) 5 ITD 142 in the case of ITO Vs.