TMI Blog1994 (11) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... set out below: The assessee is a partnership firm carrying on the business of distribution of films. In its assessment for the assessment year 1972-73, it claimed deduction for the whole of the amount paid by it for acquiring the distribution rights of certain films. Particulars of the films in which such rights were acquired on minimum guarantee basis are as follows: Rs. (i) Amar Prem 12,00,000 (ii) Badnam Fariste 4,00,000 (iii) Dastak 2,60,000. The assessee also acquired the distribution rights of the film "Hathi Mere Sathi" on lease basis on payment of Rs. 4,37,589. These films were released on different dates in the accounting year ended on March 31, 1972, relevant to the assessment year 1972-73. At the time at which the Income-tax Officer made the assessment, the particulars of collection from the date of the release to the end of the accounting year, i.e., March 31, 1972, as also the amount of total collections subsequent to the release of each picture were available. In its accounts for the assessment year 1972-73, the assessee had written off the full cost of acquisition of the distribution rights of the films referred to above. The Income-tax Officer, however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(XI-3) D of 1959, dated April 9, 1959, on the above subject. 2. The film producers have represented to the Board that a cinema film no longer has an effective life of about three years as was presumed by the Income-tax Department when devising the formula for the amortisation of the cost of the films spelt out in the circular mentioned above. 3. The matter has been carefully considered by the Board. In view of the changed situation regarding the minimum guarantee system operating in the film industry at present, it is perhaps inappropriate to resort to the inflexible rule in every case of amortisation of the cost of the film over a period of three years. The Board also agrees that the effective and earning life of the large majority of the present day cinema films seldom exceeds one year. 4. It has accordingly been decided that if the producer of a film does not wish to write off the cost of the film in his books in the manner indicated in the Board's circular mentioned above, then he may be permitted to write off the entire cost in the year in which the picture is released. On his doing so, the entire cost of the film will be allowed as an admissible deduction in the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e depreciated by 60 per cent. in the first year, 25 per cent. in the second year and 15 per cent. in the third year on time basis as elucidated in its first circular dated April 9, 1959. A similar decision was communicated in regard to feature films in 'B' and 'C' class categories where it had decided that the entire cost of production may be allowed in the very first year of the production if the film was released in the first half of the accounting year. In case the film was released in the latter half of the accounting year, the value of the film had to be taken at 50 per cent. of the cost of production at the end of that accounting year and the balance 50 per cent. was to be adjusted in the second year. The same formula was made applicable for amortisation of cost of acquiring distribution rights in the hands of the distributor. This circular was again modified by Circular No. 154, dated December 5, 1974, by which the following guidelines were issued on the subject: 1. Assessment of film producers and distributors--Amortisation of cost of production of films and acquiring of distribution rights--Instructions regarding-- Attention is invited to Board's Circular No. 92 of 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in this circular and the concerned assessees have agreed to the adoption of such a course of action." (Circular No. 154, dated December 5, 1974). The uncontroverted factual position in the present case is that it was on the basis of the above permission of the Board contained in its circular dated October 4, 1969, which was in operation during the entire accounting year corresponding to the assessment year 1972-73 and on the first day of the said assessment year, that the entire cost of acquiring the distribution rights in the accounting year corresponding to the assessment year 1972-73 in which the pictures were released had been written off by the assessee in its books for that year and deduction was claimed for the entire cost of such films in the said year. There is no dispute about the fact that during the accounting year relevant to the assessment year 1972-73 to which this reference pertains, the only circular of the Board on the subject was Circular No. 30, dated October 4, 1969, which permitted the assessee to write off the entire cost in the year in which the picture was released and declared in clear terms that "on the assessee's doing so, the entire cost of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year. The law is well-settled that circulars of this type issued by the Board are binding so far as the officers of the Department are concerned. Section 119 of the Act, which confers such powers on the Board specifically says so. In the present case, it is clearly stated in the circular dated October 4, 1969, that it was issued by the Board after reconsidering its earlier circular dated April 9, 1959, on the representation of the film producers. The Board agreed with the film producers that the life of the majority of the "present day cinema films" seldom exceeded one year and in the light thereof, decided that if the producer of a film did not wish to write off the cost of the film in his books in the manner indicated in the Board's circular, dated April 9, 1959, then he might be permitted to write off the entire cost in the year in which the picture was released. Thus, the producer of the film was given an option either to write off the cost of the film in the books in the manner set out in the Board's circular dated April 9, 1959, or to write off the entire cost in the year in which the picture was released. It was decided by the Board that in the event of the produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and their shareholders that if the past loans were genuinely refunded to the companies, they would not be taken into account under section 12(1B). Section 12(1B) would, therefore, normally apply to loans granted by the companies to their respective shareholders with full notice of the provisions prescribed by it." Evidently, the circular in the above case clearly deviated from the provisions of the Act, yet in view of the nature and content thereof, the Supreme Court held that it was binding on the Income-tax Officer. This was accepted by the Supreme Court itself in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, when it said (at page 921): " The directions given in that circular clearly deviated from the provisions of the Act, yet this court held that the circular was binding on the Income-tax Officer. " The object and scope of the circulars and the binding nature thereof also came up for consideration before a Full Bench of the Kerala High Court in CIT v. B. M. Edward, India Sea Foods [1979] 119 ITR 334. The court observed (at page 338): " The section sufficiently brings out the object and the scope of the circulars. Sub-section (2) requires that in certain cases, the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force. " In our opinion, this principle would also govern the applicability of the beneficent circulars of the Board which confer some privileges or rights on the assessees. The legal propositions that emerge from the above discussion can be summed up thus: 1. Certain circulars of the Board confer some privileges and rights on the assessees in regard to assessment. 2. Such circulars as they stand on the first day of April of the assessment year must apply to the assessment of that year. 3. Modification or withdrawal of such circulars during the pendency of the assessment proceedings, cannot prejudicially affect the right of the assessee to have his assessment made in accordance with the circular as it stood prior to its amendment or withdrawal. These propositions, of course, would not be applicable to circulars which affect only administrative or procedural aspec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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