Bombay High Court
Abdulgafar A. Nadiadwala vs Deputy Commissioner Of Income Tax on 15 November, 1999
Equivalent citations: [2001]75ITD394(MUM)
ORDER
M. A. Bakshi, J.M. We find it convenient to dispose of these two appeals of the assessee, one against the block assessment and another against the regular assessment by this consolidated order. Rival contentions have been heard and records perused.
2. We first take up the appeal for the block assessment, i.e., IT(SS) A No. 65/Mum/1998.
3. The relevant facts, in this case, are that the assessee is a leading producer of Hindi films. There was a search and seizure operation on 18-12-1996, during the course of which a sum of Rs. 5.00 lakhs was found and seized. Some documents described as incriminating were found and seized. A notice under section 158BC was issued to the assessee on 11-4-1997 calling for the return of undisclosed income. The assessee had filed the return for the block period on 16-7-1996 declaring undisclosed income of Rs. 2,33,000 for the block period. The assessing officer made an assessment vide order dated 29-1-1998. The dispute before us in the present appeal is relating to the deduction under section 80HHC of Rs. 84,36,746 and an addition of Rs. 1,18,891 on account of alleged inadequate household withdrawals.
4. The learned counsel for the assessee contended that there is no justification for making the addition on account of low household withdrawals. It was contended before us that the assessing officer has not found any material whatsoever to establish that the household withdrawals made by the assessee were not adequate. The addition has been made purely on surmises and conjectures which is not warranted. The block assessment is to be made on the basis of the evidence found during the course of search.
5. The learned Departmental Representative on the other hand contended that the life style of the assessee was quite high and the withdrawals shown are not commensurate with the life style. It was accordingly contended that the additions made by the assessing officer are justified.
6. We have given our careful consideration to the rival contentions. Section 158BB provides the manner of computation of undisclosed income of the block period. This section reads as under:
"(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with assessing officer, as reduced by the aggregate of the losses of such previous years, determined-
(a) where assessments under section 143 or section 144 or section 147 have been concluded, on the basis of such assessments;
(b) where returns of income have been filed under section 139 or section 147 but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns;
(c) where the due date for filing a return of income has expired but no return of income has been filed, as nil;
(d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years;
(e) where any order of settlement has been made under sub-section (4) of section 245D, on the basis of such order;
(f) where an assessment of undisclosed income had been made earlier under clause (c) of section 158BC, on the basis of such assessment.
Explanation . ........."
7. The plain reading of the section quoted above does not leave us in doubt that the undisclosed income of the block period is to be determined on the basis of the evidence found as a result of search or requisition of books of account or documents and such other material or information as are available with the assessing officer. A perusal of the assessment order reveals that no material whatsoever was found during the course of search in regard to the household expenses of the assessee. There is no mention of any facts and circumstances found during the course of search as would be sufficient to draw a legal inference about the inadequacy of the household withdrawals made by the assessee. The main reason for making the addition on account of low household withdrawals is that in assessment year 1992-93 when assessee's son was staying with him the household expenses were of the order of Rs. 1,25,398 when in the assessment year 1993-94 the household expenses have gone up to Rs. 2,78,256 even when the assessee's son was not living with them. The assessee had been confronted as to why addition on account of low withdrawals be not made. An explanation was furnished before the assessing officer which has been reproduced on Pages 5 & 6 of the assessment order. The assessing officer has rejected the explanation with the following observation :
"The explanation offered by the assessee is not accepted. The expenses shown when Mr. Firoz Nadiadwala was living with the assessee are less when compared to the expenses shown by the assessee after he separated. For example, in assessment year 1992-93, when Mr. Firoz Nadiadwala was staying with the assessee, the expenses shown are Rs. 1,25,398 whereas in assessment year 1993-94, i.e., after Mr. Firoz Nadiadwala has separated, the expenses shown are Rs. 2,78,256. This clearly shows that the expenses shown in the period prior to assessment year 1992-93 are not reasonable."
8. It is evident from the above that there is no evidence on record to establish that the expenses incurred by the assessee in earlier years is much more than disclosed in the books of account. The amount withdrawn in earlier years is as per the books of account and in the subsequent years also the amount reflected for household expenses is as per the books of account. It is not as if the assessing officer has discovered as a result of search that the actual expenses incurred by the assessee were more than that recorded in the books of account. It is not so. The fact that the expenses have gone up in subsequent assessment years is reflected by assessee's withdrawals. There is nothing on record to show that the assessee was dishonest in earlier years and had turned to be honest only from assessment year 1993-94. From the evidence on record we cannot find justification for sustaining the addition on account of low household withdrawals. The additions having been made without any material on record, it cannot be said that the assessee had undisclosed income which had been utilized for household expenses. It may be pertinent to mention that the withdrawals have also been made by the wife of the assessee who is regularly assessed to tax. The assessing officer has not made any comparison of the withdrawals made jointly by the husband and wife. It may also be noteworthy that in the regular assessment no addition has been made on account of low withdrawals. From the fact that no addition was made in the regular assessment, it is to be inferred that the addition on account of low withdrawals was not justified on the basis of the record of the assessee and any addition on account of low withdrawals could be made only on the basis of any material found during the course of search. As already pointed out, no material having been detected during the course of search in regard to inadequacy of household expenses, the addition made by the assessing officer is unsustainable in law. The addition of Rs. 1,18,891 is accordingly deleted.
9. The only other issue in this case is relating to deduction under section 80HHC of Rs. 84,36,746. The assessing officer has disallowed the claim of the assessee under section 80HHC for assessment year 1996-97. In this case it is to be noticed that the assessee had filed the return for assessment year 1996-97 on 30-10-1996. The search took place on 18-12-1996 i.e., after the date of filing of the return for assessment year 1996-97. That means as on the date of the search the assessee's return relating to the regular assessment was pending with the assessing officer. Whether the assessee is entitled to deduction under section 80HHC or not is a subject matter of dispute in regular assessment. It was, therefore, not necessary for the assessing officer to separately decide the issue in the block assessment. As already pointed out section 158BB provides the manner of computation of undisclosed income of the block period. The purpose of block assessment is to make the assessment of undisclosed income as a result of search and not to make a regular assessment.
10. The scheme of the block assessment is not to be confused with the regular assessment. Whereas the regular assessment determines the assessable income on the basis of the return of income filed by the assessee and on the basis of the material gathered during the course of assessment proceedings, the block assessment is meant to determine the undisclosed income detected as a result of search. Section 158BB reproduced in Para 4 of this order provides the manner of computation of undisclosed income of the block period. The scheme of assessment as is evident from the perusal of section 158BB, is that the assessing officer has to assess the total income of the previous year within the block period which is to be reduced by the aggregate of the total income determined in an assessment under sections 143 or 144 or section 147 if such assessment(s) have been concluded. In case no such assessment is completed then the returned income is required to be deducted from the total income for determination of the undisclosed income under section 158BB. It is now well settled that regular assessment is required to be made in all the cases notwithstanding block assessment under section 158BC.
11. The learned counsel for the assessee has rightly argued that with the insertion of the Explanation to section 158BA(2) by the Finance No. 2 Act of 1998 with effect from 1-7-1995 it is specifically provided that the block assessment is in addition to the regular assessment in respect of each previous year included in the block period and that the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period. It has also been provided that the income assessed under Chapter XIV-B, i.e., under the block assessment, shall not be included in the regular assessment of any previous year included in the block period. When section 158BA is read in conjunction with section 158BB. It becomes abundantly clear that the income which is assessed in regular assessment is to be excluded from the block assessment and vice versa. In this case it is observed that the assessing officer has made the disallowance of deduction under section 80HHC in the block assessment as well as in the regular assessment. This is contrary to the provisions of section 158BA. The income relating to the disallowance under section or 80HHC should be assessed either in the regular assessment or in the block assessment. There is no scope for assessing the same income in both the assessments. As already pointed out, the assessee has filed a return of income on 30-10-1996 which was pending on the date of search. The income from exports was disclosed and the deduction under section 80HHC was claimed. Therefore, the deduction under section 80HHC was subject matter of regular assessment. Whether such deduction is allowable or not could not be subject matter of determination in a block assessment. As already clarified the purpose of block assessment is to assess the income detected as a result of search and not to make a regular assessment. Regular assessment is totally different than a block assessment. In this view of the matter the assessing officer was not justified in making the disallowance under section 80HHC in both the assessments, one in the block assessment and another in the regular assessment. If that is so, it would be necessary for the assessing officer to first compute the total income of the previous year. From that certain deductions are to be made. The deductions, as already pointed out, are dependent on the returned income or the assessments made as the case may be. In this case the assessee had filed the return of income on 30-10-1996. The search took place on 18-12-1996 i.e., after the date of the filing of the return. The assessing officer has completed the block assessment on 29-1-1998. Simultaneously regular assessment has also been made vide order dated 1-5-1998. Whereas tax is chargeable at normal rates in regular assessment, a higher rate of tax is provided on the income determined block assessments scheme. Since the purpose of making the block assessment is to determine the undisclosed income it is but natural that the income which is to be assessed in regular assessment on the basis of the disclosed sources in the return of income should not form the subject matter of adjudication in the block assessment. Keeping in view the scheme of block assessment and other provisions of the Act, we are of the considered view that the assessing officer should start the computation of undisclosed income with the figure of returned income filed under section 139(1) or determined income on regular assessment if such an assessment has been concluded. Then the income which has been detected as a result of search is to be determined. After computation of the total income, the income which forms subject matter of regular assessment is to be excluded. So what is added on the basis of the returned income or the income assessed under the regular assessment is also required to be deducted from the income to work out the undisclosed income. From the scheme of the Act it follows that the job of the assessing officer making block assessments may be confined to the determination of income detected as a result of search and the income which is to be determined in ordinary course on the basis of the books of account and the return filed by the assessee has got to be determined by way of a regular assessment. In this case there has been duplicity in so far as deduction under section 80HHC has been dealt with in the block assessment as well as in the regular assessment. Since the income assessed under the regular assessment is required to be deducted in computing the undisclosed income the assessee will not suffer tax at a higher rate on the disallowance of deduction under section 80HHC. The disallowance has been made in regular assessment and, therefore, the amount assessed under section 143(3) has got to be deducted from the computation as provided under section 158BB. The assessing officer has not allowed any deduction to the assessee as per section 158BB. If the deduction is allowed on the basis of regular assessment then the assessee should not be aggrieved with the disallowance of deduction under section 80HHC in the block assessment. When the assessing officer completed the block assessment on 29-1-1998 regular assessment had not been completed. However, when the Commissioner (Appeals) took up the appeal of the assessee at that time the regular assessment had been completed and, therefore, it would have been in the fitness of things and to avoid multiplicity of litigation to allow a deduction to the assessee of the income assessed under section 143(3) as provided under section 158BB. Keeping in view the law and the procedure indicated above, we direct the assessing officer to reduce the income determined in block assessment by the amount of assessed income. To elaborate, the computation of the income shall have to be done as under :
The entire income including the income assessable under regular assessment in ordinary course is to be determined first. From such income the income which is assessed under section 143(3) has got to be reduced (If no regular assessment has been made then the returned income has got to be reduced). The balance income would be the undisclosed income for purposes of block period subject to tax at the rate of 60 per cent.
12. Since deduction under section 80HHC as already pointed out, has been subject matter of assessment in the regular assessment proceedings under section 143(3), the same has got to be deducted from the block assessment. We direct accordingly. The decision of the assessing officer relating to the disallowance under section 80HHC in the block assessment will thus be of no consequences and not binding upon the assessee.
13. Since we are of the view that the proper place for consideration of the claim is the regular assessment proceedings and not block assessment proceedings, we delete the disallowance from the block assessment. This is without prejudice to the disallowance made in the regular assessment which shall be dealt with separately.
14. We now take up the appeal against the regular assessment. The only ground involved in this appeal is relating to the deduction under section 80HHC.
15. An alternative ground has been taken that in case the deduction under section 80HHC is not allowed then the assessee may be allowed deduction under section 80-O.
16. It may be necessary to give the background of the disallowance. The assessee had purchased the rights of various pictures (14 in number) and had processed and prepared the Beta tapes of the same. The assessee had entered into an agreement with Satellite Television Asian Region Ltd. (Star TV) on 29-3-1995 for transfer of telecasting rights of the said films in Asain Region for a period of five years. According to the assessee since the film incorporated in Beta tape was an article or thing and the sale proceeds had been received by the assessee in convertible foreign exchange, deduction under section 80HHC is allowable to the assessee. Our attention was invited to rule 9A and rule 9B which treats the films as articles. It was contended before the revenue authorities and reiterated before us that a film print or a Betacam tape with its attendant rights is goods or merchandise. It was claimed that the Betacam tapes transferred go out of the hands of the assessee for ever. The other person gets the rights to exploit it for the period mentioned in the agreement and after that the other person has to destroy the Betacam tape. Reference was made to the report published in the Chartered Accountants Journal relating to the decision of the Commissioner (Appeals), Madras holding that the film print is to be considered as export of goods and merchandise and the consideration there from will be entitled to deduction under section 80HHC. Reliance was also placed on the decision of the Bombay Bench of the Tribunal in the case of Tangerine Exports v. Income Tax Officer (1994) 49 ITD 386 (Bom-Trib) where the assessee after recording computer programmed on tapes had exported the software and claimed deduction under section 80HHC. The Tribunal upheld the claim and allowed the deduction. The Commissioner (Appeals) rejected the contentions advanced on behalf of the assessee.
17. The learned counsel for the assessee reiterating the contentions advanced before the Commissioner (Appeals) submitted that the words under section 80HHC are export of goods or merchandise. The word 'merchandise', according to the learned counsel, is something which are not goods but which can be exported. Reliance was placed on the decision of the Madras High Court in the case of Gemini Pictures Circuit Ltd. v. CIT (1958) 33 ITR 547 (Mad) at page 553 where the films have been held as stock-in-trade in the hands of the producers. Similar view has been taken by the Madras High Court in the case of CIT v. Modern Theatres Ltd. (1963) 50 ITR 548 (Mad). Reference was also made to rule Nos. 9A, 9B, 9A(vii), 9B(vi) and 9B(ii). It was pointed out that as per the rules leasing of a cinematography film amounts to sale. Video software is generated which is leased for telecasting or viewing. The sale amounts to export outside India of merchandise. Reference was made to section 10A Explanations 3 and 6 which define manufacture to include recording of programmes on any disk, tape, perforated media or other information storage device. Reference was also made to the decision of the Bombay Bench of the Tribunal in the case of Tangerine Exports (supra) placed at Page 52 of the paper book where the Tribunal has granted deduction under section 80HHC in respect of the export of software. The learned counsel pointed out that section 80HHC which is applicable with effect from 1-4-2000 specifically grants deduction in respect of profits and gains from export or transfer of film software, etc., should not come in the way of interpretation of section 80HHC. The learned counsel further contended that the immortalisation rules applicable in the case of film producers should also apply for the purpose of deduction under section 80HHC. Since rule 9B is applied for the computation of business income it should be also applied for computation of deduction under section 80HHC. The learned counsel pointed out that the Commissioner (Appeals) has allowed deduction under section 80HHC. in the following cases :
(1) Mr. Pankaj Udhas, assessment year 1993-94, order dated 26-8-1997.
(2) M/s. Sarasa Movies, assessment year 1993-94, order dated 18-10-1995.
(3) Smt. Suchitra Mohanlal, assessment year 1993-94, order dated 19-12-1996.
18. The alternative contention of the assessee is that deduction under section 80-O be allowed to the assessee as the assessee has carried on business. It was contended that the assessee had made available commercial knowledge and, therefore, the deduction was permissible to the assessee. The learned counsel pointed out that there was no requirement of the approval of the agreement in the year under appeal. With effect from 1-4-1992 the requirement of approval of the agreement has total by been done away with. It was further pointed out that the Commissioner (Appeals) in several cases has allowed the deduction under section 80-O on similar facts.
19. Reference was made to the Central Board of Direct Taxes Circular whereby it was clarified that copyright would be covered by the expression, similar property rights referred to in section 80-O. The Board has held that it would be included in such expression. It was accordingly contended that deduction under section 80HHC may be allowed or in the alternative deduction under section 80-O may be granted.
20. The learned Departmental Representative, on the other hand, contended that deduction under section 80HHC was permissible in regard to the export of goods and merchandise. As per the Departmental Representative, export means sale outside customs frontier. Our attention was invited to section 80HHC(3) which provides as to how the deduction is to be computed. Export turnover is also defined in section 80HHC it was pointed out. Our attention was also invited to section 4 of the Sale of Goods Act which provides that the transfer of property takes place on the payment of price for the sale of goods. Inviting our attention' to clause (6) of the agreement, the learned Departmental Representative contended that the assessee had agreed to provide the rights for telecasting of the film(s) for the period of five years. In one case the period of lease was only two years. In this case the assessee has not transferred the rights of the ownership. The assessee has given only right to use the films. It was accordingly contended that seen from any angle it was a case of lease and not a case of sale of goods.
21. The learned Departmental Representative further contended that the assessee had purchased the rights of the film and that it was not a case of production of a film. It was further contended that the definitions under rule 9B are applicable to the computation of income only and any fiction created under that rule will not be applicable in interpreting any other provision of the Act. The learned Departmental Representative further pointed out that there is a deeming provision under the Act where lease of any capital asset for more than specified years is deemed to be a sale for the purpose of computation of capital gains. Such a deeming provision is not to be generalized as it is applicable only for the limited purpose of assessing the capital gains. It was further contended that a perusal of the agreement placed at page 2 of the paper book clearly establishes the nature of the transaction and that there was no sale but the lease of rights of exploitation. The learned Departmental Representative further contended that the ownership is a bundle of rights and out of that only one right was given to Star TV for exhibition in certain countries. The Star TV was not entitled to exhibit the film in other countries which were not covered under the agreement. It was further pointed out that the decision relied upon by the learned counsel for the assessee in Tangerine Exports' case (supra) is distinguishable on facts. In that case the assessee had sold software. That was a case of sale of goods and not in respect of the transfer of rights for a limited period. The learned Departmental Representative reiterated that there was no export of goods and, therefore, deduction under section 80HHC was not applicable.
22. Referring to the claim of the assessee under section 80-O the learned Departmental Representative pointed out that the nature of the receipt of the assessee was the amount received for exhibition of the film. The assessee had rendered the service in India and, therefore, deduction under section 80-O was not permissible. Our attention was also invited to section 80HHF and it was contended that the contentions raised on behalf of the assessee are without any substance.
23. In counter reply the learned counsel for the assessee contended that the term sale was not defined in the Income Tax Act and, therefore, it was appropriate to refer to rule 9B which is applicable to film distributors where the lease is also considered to be a sale. It was accordingly urged that the matter may be decided in favour of the assessee.
24. We have given our careful consideration to the rival contentions. Section 80HHC provides for a deduction to an assessee engaged in the business of export out of India of any goods or merchandise subject to the specified conditions being satisfied. The condition for attracting section 80HHC is that the assessee should be in the business of export out of India of any goods or merchandise to which this section applies. Therefore, it will be necessary for us to ascertain as to whether the assessee is engaged in the business of export out of India of any goods or merchandise and whether the assessee has exported any goods during the year under appeal. The assessee has purchased rights of various pictures of which Beta tapes had been prepared. Star TV had been granted the telecasting rights of a film(s) for a period of five years. The term export out of India is defined under Explanation (b) to section 80HHC. It reads as under :
"Explanation-For the purposes of this section-
(a) ..........
(aa) ..........
(b) "export turnover" means the sale proceeds received in, or brought into India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962);
(ba) ............"
25. It is evident from the plain reading of the above definition that the assessee must have exported goods out of India, the goods or merchandise to which section 80HHC applies. The issue that assumes importance in this case is as to whether the assessee had sold any goods or merchandise in respect of which the sale proceeds were received in convertible foreign exchange. There is no dispute that the assessee received the consideration for allowing Star TV, etc., to telecast the films for a specified period in convertible foreign exchange. However the question that remains to be answered is as to whether any sale has taken place of any goods or merchandise. The sale as per Sale of Goods Act, 1930 is defined as under :
"(4)(1) A contract of sale of goods is a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred."
The agreement executed by the assessee for Star TV would also be relevant. The preamble of the agreement reads as under :
"Whereas the Party of the First Part have acquired the rights of the several films covered under this Agreement from M/s. A G Films (P.) Ltd., Bombay for the rights of exploitation agreed to be entrusted under this Agreement and the Party of the First Part are fully empowered to grant the said Rights i.e., STAR TV Satellite Rights and Pay TV Rights through Star TV Satellite for Asian Region only and enter into this agreement.
"And whereas the Party of the second part have approached the Party the First Part and shown their interest for acquiring Star TV Satellite Broadcasting & Transmission Rights and Rights for pay TV through Star TV Satellite Broadcasting of and relating to the "Said Films" for and in the Asian Region only;
And whereas at the request of the Party of the Second Part, the Party of the First Part have agreed to grant to the Party of the Second Part the Sole and Exclusive rights of Satellite Broadcasting and Pay TV only through Star TV Satellite for Asian Region only in respect of the Said Films. For the purpose of broadcasting through Star TV Satellite, the right include sub-titling, exhibition, exploitation and Mechanical Syncronisation in relation to such Exclusive Satellite Broadcasting and Pay TV Rights only through the said Star TV Satellite in Asian Region only as expressed and described hereinbelow, hereinafter collectively referred to as the "Said Films Rights" for the period as fully described herein on the terms and conditions hereinafter appearing."
26. A perusal of the agreement between the assessee and the Star TV in particular the following clauses of the agreement do not leave us in doubt that the assessee had not sold any articles or things to Star TV but had only transferred the telecasting rights in respect of 14 films, the rights of which had been purchased by the assessee :
Clause 3 : It is clearly agreed and understood that all Television Rights including Doordarshan 1, Doordarshan 2 and all other channels of Doordarshan and/or Government of India, whether terrestrial and/or Satellite including L.P.T. which are presently in operation and/or which may come into operation in future in India as also all television Rights for all Countries /Nations in Asian Region shall continue to remain with the Producers/Party of the First Part or their Agents/ Distributors and this being the essence of the Agreement. Thus the rights being acquired by the Party of the Second Part under this Agreement are expressly excluding all other rights such as TV Rights, Dubbing Rights, Airborne Rights & High Seas Rights, Video rights and Cable TV Rights. The Party of the First Part have not granted Cable TV Rights and Doordarshan Pay TV Rights for India and to any party and have agreed not to grant such Cable TV Rights and Doordarshan Pay TV Rights for India to any party during the subsistence of this Agreement.
Clause 6 : The "Said Films Rights" granted under this Agreement are for five/5 years, commencing from the date of Shipping Bill of the respective films when exported. However, the Rights in respect of film Kohinoor shall under no circumstances exceed beyond 12-4-1998."
Clause 11 : The Party of the First Part confirm that the negative/source material of the "Said Films" is of reasonable good condition to provide Betacam tapes. The Betacam tapes shall be exact copy of the films of the same title. In case the negative required rejuvenation, cleaning, repair, etc., it would be at the cost of the party of the First Part."
27. We are, therefore, of the considered view that the assessee was not engaged in the export of goods. nor had he exported the goods during the year under appeal. The assessee undoubtedly had transferred telecasting rights of the films for a limited period which does not amount to sale of goods. When the assessee has not sold any goods it cannot be said that he has exported the goods or merchandise out of India.
28. It may be relevant to note that the Legislature intended to grant deduction on the transfer of telecasting rights from 1-4-2000. The Legislature has specifically granted deduction to the companies which are engaged in the business of export or transfer by any means out of India of any film software, TV software, music software, TRV news software including telecasting rights. The incorporation of section 80HHF with effect from 1-4-2000 clearly establishes the fact that the Legislature was conscious of the distinction between the export business and the business of transferring out of India of telecasting rights of any films. The contention on behalf of the assessee that the benefit of rule 9B should be given effect to in interpreting section 80HHC is not acceptable. Rule 9B provides for the computation of deduction in respect of expenditure on acquisition of distribution rights of feature film. Sub-rule (6) provide that for the purposes of this rule - sale of rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis. It also provides that the rights of exhibition of the feature film shall be deemed to have been sold only on the date when the positive prints of the film are delivered by the film distributor to the producer of such rights. It is clear from sub-rule (6) to rule 9B that the fiction created under the rule is only for a limited purpose of determining the expenditure on acquisition of distribution rights of the feature film. It is well settled principle of law that the fictions created under the statute are limited for the purpose for which it is created and it does not extend beyond that purpose. Section 80HHC is a deduction provided under Chapter VI-A. It specifically provides a deduction on account of export of goods and merchandise. The assessee has transferred for a limited period the telecasting rights of 14 films. The transferring of telecasting rights cannot be equated with the sale of any goods or merchandise. Therefore, this contention raised on behalf of the assessee is rejected.
29. The decisions of the Madras High Court relied upon by the learned counsel are distinguishable on facts. In those cases the films have been held to be stock in trade. However, what is required for purposes of deduction under section 80HHC is the sale of goods. The film may be stock in trade but fact remains that the same has not been sold by the assessee during the year under appeal. Only telecasting rights for Asian region had been granted to the Star TV and in this connection providing of Beta tapes as part of the agreement was to enable the Star TV to telecast the films and the same will not amount to the sale of goods or merchandise. We are, therefore, of the considered view that the assessee is not entitled to deduction under section 80HHC.
30. We now deal with the claim of the assessee relating to deduction under section 80-O. It will be useful to give section 80-O as it existed before its amendment by the Finance Act of 1997 (26 of 97) with effect from 1-4-1998 :
"Section 80-O : Deduction in respect of royalties, etc., from certain foreign enterprises - Where the gross total income of an assessee, being an Indian company or a person other than a company who is resident in India includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such government or enterprise by the assessee, or in consideration of technical or professional services rendered or agreed to be rendered outside India to such government or enterprise by the assessee and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of an amount equal to fifty per cent of the income so received in, or brought into India, in computing the total income of the assessee.
Provided ............"
31. This section has been amended by the Finance Act of 1997 (supra) and with effect from 1-4-1998 the deduction is permissible in respect of the use outside India of any patent, invention, design or registered trade mark only. The words model, secret formula or process or similar property right or information concerning industrial, commercial or scientific knowledge, experience or skill and technical or professional, services rendered are agreed to be rendered outside India have been omitted. The assessment year involved in the present appeal is 1996-97. Therefore, we have to deal with the section as it existed before its amendment by the Finance Act of 1997 (supra).
32. A perusal of the section quoted above reveals that for getting a deduction under section 80-O the assessee must have derived income by way of specified sources from a foreign enterprise. In this case the assessee has derived income from a foreign enterprise i.e., Star TV and the money has been received in convertible foreign exchange. There is no dispute in this regard. However, mere receipt of income from a foreign enterprise in convertible foreign exchange is not sufficient for granting deduction under section 80-O. The amount must have been received in consideration of the use outside India of specified assets or providing a technical or professional services outside India. We are, therefore, to ascertain as to whether providing films for exhibition for telecasting in a foreign country falls within the ambit of the specified items under section 80-O. If one were to consider the provisions of section 80-O as it exists from 1-4-1998 it would not be difficult to decide that the assessee's case does not fall within the ambit of section 80-O as providing films on Beta tapes for telecasting would not fall within the definition of patent, invention, design or registered trade mark. However, before the amendment in 1997, section 80-O provided a deduction in respect of various other items. The assessee would be entitled to deduction if the money has been received in convertible foreign exchange for the use by a foreign enterprise of any :
(a) Patent or
(b) Invention or
(e) Design or
(e) Secret formula or process or similar property right
(f) Information concerning industrial, commercial or scientific knowledge, Experience or Skill made available or provided or agreed to be provided to the foreign enterprise or
(g) Amount received in consideration of technical or professional services rendered or agreed to be rendered outside India.
33. The assessee has allowed telecasting rights of 14 films to be used by a foreign enterprise i.e., Star TV for a period of five years. One has to consider as to whether the films constitute a patent, invention, model, design or a secret formula or process and if not, if it can be termed as a similar property right. In our considered view, the feature films do not fit in within the items referred to in section 80-O of the Act. The assessee would be entitled to deduction under section 80-O if information concerning industrial, commercial or, scientific knowledge, experience or skill was made available to the foreign enterprise. By allowing the use of telecasting rights of 14 films for a period of five years it cannot be said that the assessee had provided information concerning industrial, commercial or scientific knowledge, experience or skill to the foreign enterprise. Another category that qualifies for deduction is for technical or professional services rendered or agreed to be rendered outside India. In this case the assessee did not render any technical or professional services to the foreign enterprise outside India while allowing the use of telecasting rights of feature films for a period of five years. We are, therefore, of the considered view that the assessee does not qualify for deduction under section 80-O also not with standing the fact that the assessee has earned foreign exchange for the country by allowing the use of this telecasting rights to a foreign enterprise. The Legislature has removed the anomaly by specifically providing a deduction under section 80HHF with effect from 1-4-2000.
34. It may be pertinent to mention that section 80HHF applicable with effect from 1-4-2000 provides a specific deduction in regard to the transfer of film, TV, music software including telecasting rights. Sub-section (5) of section 80HHF specifically prohibits a deduction under any other provisions of the Act for the same assessment year if a deduction is allowed in respect of the profits under sub-section (1) of section 80HHF. Therefore, there will be no double deduction to the assessee even when provisions of section 80HHF come into force. The appeal of the assessee is partly allowed.
35. In the result, whereas the appeal of the assessee against block assessment is allowed, the appeal against the regular assessment is partly allowed.