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Issues Involved:
1. Whether the income-tax authorities are entitled to change the method of valuing films at 40% of the cost in the first year of release to a time-based calculation at 60% per annum. 2. Whether the method of accounting regularly employed by the assessee was properly rejected. 3. Whether the mechanical time-basis rule adopted by the Tribunal reflects the true profits of the assessee. Issue-wise Detailed Analysis: 1. Change in Valuation Method: The primary issue was whether the income-tax authorities could change the method of valuing films from 40% of the cost in the first year to a time-based calculation at 60% per annum. The assessee, Gemini Pictures Circuit Limited, had traditionally valued films at 40% of their cost at the end of the first year of release, 15% at the end of the second year, and nil at the end of the third year. This method was accepted by the Income-tax Department in previous years. However, for the assessment year 1950-51, the Income-tax Officer changed this method, valuing the film based on a pro-rata amortisation rate of 60% per annum for the 72 days the film was exhibited, resulting in a higher valuation of the closing stock. 2. Rejection of Assessee's Method: The Tribunal and the Appellate Assistant Commissioner upheld the Income-tax Officer's decision to reject the assessee's method of valuation. They argued that the assessee's method could lead to absurd results, such as a film depreciating by 60% even if it was exhibited only on the last date of the accounting period. The Tribunal concluded that the only reasonable method was to adopt per annum amortisation rates. The court agreed, stating that the assessee's method did not reflect the true profits and gains of the business, thereby justifying the rejection under the proviso to Section 13 of the Indian Income-tax Act. 3. Mechanical Time-Basis Rule: The court examined whether the mechanical time-basis rule adopted by the Tribunal accurately reflected the true profits of the assessee. The court found that while the time-basis rule might be better than the assessee's method, it was still flawed. The court noted that the rate of depreciation is not constant but progressively decreases. The court suggested that a more appropriate method would consider the actual collections from the film during its normal life. The court proposed several alternative methods, including calculating depreciation based on the total revenue from the film over its three-year life or using the collections from the first year to estimate the depreciation rate. Conclusion: The court concluded that the method of accounting regularly employed by the assessee was properly rejected as it did not disclose the true profits. However, the mechanical time-basis rule adopted by the Tribunal was also found to be inadequate. The court directed that the assessments be revised in light of the principles it enunciated, emphasizing the need to consider actual collections in determining the rate of depreciation. The court dismissed the related writ petition, stating that the issues raised were addressed in the reference case. Final Judgment: The court answered the reference by stating that the method of accounting regularly employed by the assessee was properly rejected, and the mechanical time-basis rule adopted by the Tribunal did not reflect the true profits. The assessments were to be revised based on the court's guidelines, and the writ petition was dismissed.
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