ACIT v. Eagle Films

Case snapshot

Sections / provisions: 45

Questions before the Court / Tribunal

• Transfer of film rights as capital asset: The reported Tribunal decision concerns a bundle of film rights transferred on a long-term/perpetual basis and characterises the transaction for capital-gains purposes.

Material facts and background

2. The brief facts of the case are that the assessee is firm, engaged in production and distribution of films filed its return of income for A.Y. 2017-18 on 30th July, 2017, declaring income of Rs.16.33 crores. In the computation of income, the assessee has shown income from House Property, Business income, capital gain and Income from other sources. Case was selected for scrutiny. During the assessment, the Assessing Officer noted that assessee has shown ‘capital gain’ of Rs.14.11 crores on sale of films’ rights to Red Chillies Entertainment Private Limited.

taxability of surplus on sale of rights in films as to whether it is ‘business income’ or ‘capital gain’.

background of assessee, noted that assessee is a partnership firm and has been engaged in business of production of cinematographic films, since many years. The assessee had produced 31 feature films and held right, title and interest in such films.

Assignment Agreement, the assessee assigned all their rights, title and interest in all 31 films to Red Chillies Entertainment Private Limited. The rights narrated in agreement included all the present and future rights in the assigned films including exploitation of rights, intellectual property rights and derivative rights.

The Assessing Officer issued the show cause notice to

justify such taxability under the head ‘Capital Gains’ vide notice dated 10/12/2019. The extract of show cause notice is recorded at paragraph 4.4.

of assessment order. The assessee replied to the said show cause notice. The reply of the assessee is summarised by the Assessing Officer at paragraph 4.4.1 of assessment order. The assessee stated that film rights were capital asset as defined in section2(14) of the Act. The film rights were intangible assets within the meaning of section 55(2)(a) of the Act. Such rights were received by closure. copyright on all these films.

Appellant / assessee submissions

balance-sheet about the intellectual property right, unless one has acquired it for a consideration from either party, which is not in this case and there is no specific item in the balance-sheet. The nature of rights in the film is in the nature of asset and to hold the same as and investment and to accept it to earn business income. Thus, on sale of film rights, the income shall be in the nature of ‘capital gain’ and not ‘business income’. Aggrieved, by the order of Ld.CIT(A), the revenue has filed present appeal before the Tribunal. 5. We heard the rival submission of Commissioner of Income-tax (Departmental Representative) [Ld. CIT-DR, for short] and the Authorised Representative of the assessee (ld AR) of the assessee and have gone through the orders of lower authorities carefully. The Ld. CIT-DR for the revenue supported the

ITA No.711/MUM/2009 dated 2/09/2010 also held that on sale of films, the sale consideration / receipts thereof shall be treated as capital receipt. 7. We have considered the rival submissions of the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by the ld AR of the assessee. We find that there is no much dispute on the factual aspect of the case. On sale of all rights titles and interest to Red Chillies Entertainment Private Limited in all 31 feature films, the assessee offered the capital gain. The Assessing Officer treated such receipts as business receipts in place of capital gain.

Revenue / respondent submissions

balance-sheet about the intellectual property right, unless one has acquired it for a consideration from either party, which is not in this case and there is no specific item in the balance-sheet. The nature of rights in the film is in the nature of asset and to hold the same as and investment and to accept it to earn business income. Thus, on sale of film rights, the income shall be in the nature of ‘capital gain’ and not ‘business income’. Aggrieved, by the order of Ld.CIT(A), the revenue has filed present appeal before the Tribunal. 5. We heard the rival submission of Commissioner of Income-tax (Departmental Representative) [Ld. CIT-DR, for short] and the Authorised Representative of the assessee (ld AR) of the assessee and have gone through the orders of lower authorities carefully. The Ld. CIT-DR for the revenue supported the

Court / Tribunal analysis and reasoning

either in the hands of purchaser or distributor is governed by Rule 9A and 9B of Income Tax Rules, 1962. These rules lay down procedure for computing profits and gains from film production and/ or film distribution business. The expenses incurred in relation to film have been amortised over the years and the Assessing Officer cannot make unfounded mistake that expenditure should be sizeable enough over the years to keep these rights in-tact, live and reusable in the form of business expenditure debited to Profit & Loss Account over the years. The cost of acquisition of feature films as per the books of account of Assignor is Nil. Such fact is not controverted with reason. The Ld.CIT(A) further noted that Ld.AO failed to take into consideration that films’ rights are intangible assets, whose cost is zero and, therefore, would not appear in the books of account.

ITA No.711/MUM/2009 dated 2/09/2010 also held that on sale of films, the sale consideration / receipts thereof shall be treated as capital receipt. 7. We have considered the rival submissions of the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by the ld AR of the assessee. We find that there is no much dispute on the factual aspect of the case. On sale of all rights titles and interest to Red Chillies Entertainment Private Limited in all 31 feature films, the assessee offered the capital gain. The Assessing Officer treated such receipts as business receipts in place of capital gain.

of earning revenue. The ld CIT(A) on relying on the decision of Karnataka High Court Syndicate bank Bs ACIT (155 ITR 681) wherein it was held that term ‘capital asset’ has all –embracing connotation and includes every kind of property as generally understood except those are expressly excluded from the definition. It was further held various rights in the films are intangible assets and their cost may be zero and cannot be appeared in the books of account. 8. Before us, the Ld.AR of the assessee vehemently argued that assessee has transferred bundle of rights in all feature films and stopped the production of feature films. Any such rights in all films are tangible coupled with intangible asset and transfer of entire assets with rights is like a sale of capital asset and gain arising thereon is nothing but a capital gain. We find that coordinate bench of Mumbai Tribunal in Johnson & Johnson Private Limited vs DCIT (supra) held that transfer of trademark and other rights gave rise to capital gain.

Operative decision and relief

of earning revenue. The ld CIT(A) on relying on the decision of Karnataka High Court Syndicate bank Bs ACIT (155 ITR 681) wherein it was held that term ‘capital asset’ has all –embracing connotation and includes every kind of property as generally understood except those are expressly excluded from the definition. It was further held various rights in the films are intangible assets and their cost may be zero and cannot be appeared in the books of account. 8. Before us, the Ld.AR of the assessee vehemently argued that assessee has transferred bundle of rights in all feature films and stopped the production of feature films. Any such rights in all films are tangible coupled with intangible asset and transfer of entire assets with rights is like a sale of capital asset and gain arising thereon is nothing but a capital gain. We find that coordinate bench of Mumbai Tribunal in Johnson & Johnson Private Limited vs DCIT (supra) held that transfer of trademark and other rights gave rise to capital gain.

No.2765 and 2702/Mum/2014, it was held that the sale of brand is a capital receipt and not a business receipt. Further in Novartis Healthcare Pvt Ltd vs Additional Commissioner of Income-tax (supra), the assignment of trademark and right, interest thereon were treated as rights to capital gain.

considering the aforesaid factual and legal discussion, we confirm the order of Ld.CIT(A) with our additional observation. In the result, the grounds of appeal raised by the revenue are dismissed. 9. In the result, appeal of the revenue is dismissed.

Pavanan Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order

Authorities and precedents appearing in the judgment

• Private Limited vs DCIT in ITA No.1756/Mum/2023 it was held that all
• Novartis Healthcare Pvt Ltd vs Additional Commissioner of
• Shri Jammu C Sugandh vs DCIT in
• Khandelwal Laboratories Pvt Ltd vs CIT in ITA
• Further in Novartis Healthcare Pvt Ltd vs Additional Commissioner of Income-tax (supra)

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Transfer of film rights as capital asset. The operative result is classified as Operative order controls. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Transfer of film rights as capital asset. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

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