Rule 273 — Deduction in respect of expenditure on acquisition of distribution rights of feature films.
The rule decides when a film distributor gets the deduction for the cost of acquisition of a feature film, and how much of it.
Sub-rule (1) states the field: in computing the profits and gains of the business of production of feature films carried on by a person, referred to as the film distributor, the deduction for the cost of acquisition of a feature film certified for release by the Board of Film Censors in a tax year is allowed under sub-rules (2) to (4).
Sub-rule (2) gives full deduction in the year of acquisition in two cases. Clause (a): the distributor sells all rights of exhibition of the film — the entire cost of acquisition is allowed in that year. Clause (b): the distributor himself exhibits the film commercially 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) covers the same exploitation without that ninety-day cushion. Where the distributor exhibits or sells rights for some areas or does both, and the film is not released commercially at least ninety days before the end of the tax year, the cost of acquisition 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 no exploitation at all: where in the year of acquisition the distributor neither exhibits the film commercially nor sells the rights of exhibition, no deduction is allowed that year and the entire cost of acquisition is carried forward to the next following tax year and allowed as a deduction in that year.
Sub-rule (5) overrides sub-rules (1) to (4) with a booking condition. Where the distributor has exhibited the film commercially, or sold the rights of exhibition, or done both, the deduction is not allowed unless the amount realised, or the amount for which the rights were sold, or the aggregate, is credited in the books of account maintained for the year in which the deduction is admissible. Where the rights have been transferred on a minimum guarantee basis, the amounts to be so credited are the minimum amount guaranteed and any amount received or due in excess of it, or, where the distributor follows the cash system of accounting, the amount received towards the minimum guarantee and any amount received in excess.
Sub-rule (6) defines the terms: the sale of rights of exhibition includes the lease of those rights or their transfer on a minimum guarantee basis; the rights are considered sold only on the date when the positive prints of the film are delivered by the distributor to the purchaser; distributor includes a sub-distributor; and "cost of acquisition" is the amount paid by the distributor to the film producer or to another distributor under an agreement for acquiring the rights of exhibition, or the minimum amount guaranteed where the rights were acquired on a minimum guarantee basis, excluding expenditure incurred on preparation of the positive prints of the film and expenditure on advertisement of the film.
A distributor pays for a film in one year and earns from it over a season that may straddle a year-end. Allowing the whole cost regardless of exploitation would create a loss on an asset still capable of earning; disallowing it entirely would tax receipts without their cost. The rule matches the two by asking, at the end of the year of acquisition, how far the film has been exploited — fully, partly with time to run, partly without, or not at all — and releases the cost accordingly, carrying any balance to the next year rather than deferring it indefinitely.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Release cushion for full deduction where the distributor exhibits or sells rights for some areas | At least ninety days before the end of the tax year | The film must be released for exhibition on a commercial basis within that cushion | Sub-rule (2)(b) |
| Deduction where the film is not released at least ninety days before the year end | So much of the cost of acquisition as does not exceed the amounts realised or for which rights are sold, or their aggregate | The distributor has exhibited the film or sold rights for some areas or both | Sub-rule (3) |
| Treatment of the balance of cost in that case | Carried forward to the next following tax year and allowed as a deduction in that year | Applies to the balance, if any, after the restricted deduction | Sub-rule (3) |
| Deduction where there is no exhibition and no sale of rights in the year of acquisition | Nil in that year; the entire cost of acquisition carried forward to the next following tax year | The distributor neither exhibits the film commercially nor sells the rights of exhibition | Sub-rule (4) |
| Date on which rights of exhibition are treated as sold | The date when the positive prints of the film are delivered by the film distributor to the purchaser of such rights | For the purposes of this rule | Sub-rule (6)(b) |
The ninety days is the hinge. Sub-rule (2)(b) and sub-rule (3) describe exactly the same exploitation, and the only difference between a full deduction and a receipts-capped one is whether the film was released for exhibition on a commercial basis at least ninety days before the end of the tax year. A sale of all rights under sub-rule (2)(a) carries no such condition. When the cap in sub-rule (3) bites, the balance is not lost and not indefinitely deferred: it goes to the next following tax year and is allowed there, as does the whole cost under sub-rule (4). Sub-rule (5) can defeat any of that, because it opens with words overriding sub-rules (1) to (4) — the receipts, or the minimum guarantee and any excess, must be credited in the books for the year in which the deduction is admissible, so the deduction and the corresponding credit have to sit in the same year. Two definitions in sub-rule (6) decide when things happen and how much the cost is: rights are treated as sold only when positive prints are delivered, not when the agreement is signed, and the cost of acquisition excludes the expenditure on positive prints and on advertisement, which are therefore not part of what this rule spreads.
A distributor acquires a film in a tax year for Rs 2 crore, exhibits it commercially in two territories and sells the rights for a third, but the film is released only forty days before the year end. Receipts from exhibition and the sale of rights for that year total Rs 1.3 crore, credited in the books for the year. Under sub-rule (3) the deduction is capped at Rs 1.3 crore and the balance of Rs 70 lakh is carried forward and allowed in the next following tax year. Had the film been released one hundred days before the year end, sub-rule (2)(b) would have allowed the whole Rs 2 crore in the year of acquisition.
You meet it in a distributor's computation for the year a film is acquired, in the release and print delivery dates relied on to support it, and in the books of account where the exhibition receipts or minimum guarantee amounts are credited.
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 acquisition of the film shall be allowed as a deduction in computing the profits and gains of such tax year
the balance, if any, shall be carried forward to the next following tax year and allowed as a deduction in that year
the rights of exhibition of a feature film shall be considered 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