Rule 272 — Deduction in respect of expenditure on production of feature films.
Sub-rule (1) sets the scope: in computing the profits and gains of the business of production of feature films carried on by a film producer, the deduction for the cost of production of a feature film certified for release by the Board of Film Censors in a tax year is allowed in accordance with sub-rules (2) to (4).
Sub-rule (2) gives full deduction in the year of certification in two situations. Where the producer sells all rights of exhibition of the film, the entire cost of production is allowed in that year. Where he himself exhibits the film on a commercial basis in all or some areas, or sells the rights of exhibition for some areas, or does both, and the film is released for exhibition on a commercial basis at least ninety days before the end of that tax year, again the entire cost is allowed.
Sub-rule (3) deals with the same three exploitation patterns where the film is not released at least ninety days before the end of the tax year. The cost of production is allowed only so far as it does not exceed the amount realised by exhibiting the film, or the amount for which the rights of exhibition are sold, or the aggregate of both; the balance, if any, is carried forward to the next following tax year and allowed as a deduction in that year.
Sub-rule (4) covers the producer who neither exhibits the film on a commercial basis nor sells the rights of exhibition in the year of certification: no deduction is allowed that year, and the entire cost of production is carried forward to the next following tax year and allowed there.
Sub-rule (5) makes the deduction conditional on the receipts being brought to book: where the producer has exhibited the film, or sold the rights, or both, the amount realised or the amount for which the rights were sold, or the aggregate, must be credited in the books of account for the year in which the deduction is admissible; and where the rights have been transferred on a minimum guarantee basis, the minimum amount guaranteed and any amount received or due in excess of it must be so credited, or, if the producer follows the cash system of accounting, the amounts received towards the guarantee and in excess of it.
Sub-rule (6) leaves an escape for cases the rule does not fit: where the Assessing Officer is of the opinion that the rights of exhibition have been transferred by a mode not covered by the rule, or that it is not practicable to apply the rule on the facts, he may allow the deduction in such other manner as he considers suitable.
Sub-rule (7) defines two mechanics: sale of the rights of exhibition includes their lease or transfer on a minimum guarantee basis; and the rights are considered sold only on the date the positive prints are delivered to the purchaser, or, where the agreement provides that the distributor is to make the positive prints, the date the negative is delivered to the film distributor as defined in rule 273. Sub-rule (8) defines "Board of Film Censors" as the Board constituted under the Cinematograph Act, 1952, and "cost of production" as the expenditure incurred on the production of the film, excluding expenditure on preparation of positive prints and on advertisement of the film after certification, and reduced by any subsidy received under a Government scheme where that amount has not been included in the total income of the assessee for any tax year.
A feature film absorbs its whole cost before it earns anything, and the year in which it is certified may be a year in which it barely runs. Allowing the entire cost in that year regardless would let a producer create a loss against income the film has not yet touched; disallowing it until receipts arrive would tax a producer on money that is only recovering his cost. The rule fixes a dividing line at ninety days of commercial release before the year end, allows the whole cost where the film has had that run or all rights have been sold, and otherwise matches the deduction to what has actually been realised, carrying the balance to the next following tax year. Sub-rule (5) ties the deduction to the receipts being credited in the books, and sub-rule (7) fixes a delivery-based date for a sale of rights so that the year of sale is not a matter of contract drafting.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Minimum commercial release before the end of the tax year for full deduction | At least ninety days before the end of such tax year | Where the producer exhibits the film himself, or sells rights for some areas, or both; not required where he sells all rights of exhibition | Rule 272(2)(b) |
| Cap on the deduction where the ninety day release test is not met | So much of the cost of production as does not exceed the amount realised by exhibition, or the amount for which the rights are sold, or the aggregate of both | The balance, if any, is carried forward to the next following tax year and allowed there | Rule 272(3) |
| Deduction where the film is neither exhibited nor its rights sold in the year of certification | Nil in that year; the entire cost of production carried forward | Allowed as a deduction in the next following tax year | Rule 272(4) |
| Date on which rights of exhibition are considered sold | The date the positive prints are delivered to the purchaser, or the date the negative is delivered to the film distributor where the distributor is to make the prints | Under the agreement between the film producer and the film distributor as defined in rule 273 | Rule 272(7)(b) |
The ninety day test is a release test, not a receipts test: a film released for exhibition on a commercial basis at least ninety days before the year end carries its entire cost of production into that year even if the receipts are modest, while a film released later gets a deduction capped at what was actually realised or sold for, with the balance carried forward. Selling all rights of exhibition is the one route in sub-rule (2) that does not need the ninety days at all. "Cost of production" is narrower than total spend — sub-rule (8)(b) takes out the expenditure on positive prints and on post-certification advertising, and reduces the cost by a Government subsidy not already included in total income — so the figure carried through sub-rules (2) to (4) is not the producer's ledger total. The carry-forward is to the next following tax year specifically, and sub-rule (5) makes the deduction depend on the corresponding amounts being credited in the books for the year in which the deduction is admissible. Finally, sub-rule (6) is a genuine discretion in the Assessing Officer, not an appeal route for a producer who dislikes the outcome: it operates where the mode of transfer is not covered by the rule or the rule is not practicable on the facts.
A film producer's feature film is certified for release by the Board of Film Censors in a tax year at a cost of production of Rs. 10 crore, after excluding positive prints and post-certification advertising. He exhibits it himself in some areas and sells the exhibition rights for the rest, but it is released commercially only sixty days before the year end, so sub-rule (2)(b) does not apply. He realises Rs. 6 crore in that year from exhibition and the sale of rights, all credited in his books. He deducts Rs. 6 crore that year under sub-rule (3), and the remaining Rs. 4 crore is carried forward to the next following tax year and allowed there.
You meet it in the computation of income of a film production business and in the assessment that follows: the year of certification, the date of commercial release, the delivery date of the prints or negative, and the credits in the books are what the deduction is tested against.
and the film is released for exhibition on a commercial basis at least ninety days before the end of such tax year, the entire cost of production of the film shall be allowed as a deduction in computing the profits and gains of such tax year
shall be allowed as a deduction in computing the profits and gains of such tax year and the balance, if any, shall be carried forward to the next following tax year and allowed as a deduction in that year
the expenditure incurred for the preparation of the positive prints of the film