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TMI Blog1987 (7) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... ers face considerable hardships compared to producers of Hindi, Tamil or Telugu films. To mitigate the hardships the Government of Maharashra sanctioned a scheme for granting of assistance, out of the entertainment tax collected from the picture of the producer from the earlier films. The objective was to promote production of better film in Marathi generally as also to help production of Marathi coloured films in preference to black and while films. Rules provided for grant of certificate of eligibility for assistance under the scheme, to the extent of entertainment tax actually collected and credited to Government on the exhibition of a Marathi film produced by the same producer and exhibited in Maharastra, during the immediately preceding financial year less service and collection charges. Another condition was that the producer would produce a new film against the production cost of which alone the assistance would be released in four instalment. Certain ceilings were also prescribed. 3. In accordance with the above scheme, the assessee received amounts as below: Assessment year Amount 1979-80 Rs. 3,27,588 (+) 1,50,000 1981-82 Rs. 3,50,000 1982-83 Rs. 1,00,000 For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Achi's case. Expenditure on maintenance of plantation is revenue expenditure. The same cannot be said about the grant-in-aid which is provided during the production of the film before it becomes the stock in-trade. Sri Joglekar took us through the various stages of production of the film and the forms used for applying for sanction of benefit of the scheme in support of this contention. 6. Sri Joglekar then referred to other case law. In Karam Chand Thapar & Bors. (P) Ltd. vs. CIT (1971) 80 ITR 167 (SC), it is held that "ordinarily" compensation for loss of office or agency is regarded as capital receipt. It is for the IT Department to establish that a particular case falls under the exception. This has not been done by revenue. The Tribunal has decided Sadichha Chitra's case by applying only one test viz., connection of the receipt with the business. This is too broad an approach to come to grips with the special facts applicable to assistance of the type received by the assessee. The earlier grants exempted by ITA were doubtless ad hoc grants but from that fact alone it cannot be said that the character of receipt has changed. Amount given for applying capital for film productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay high Court judgment in Dharangadhra Chemical Works Ltd.'s case is clearly applicable to the facts of the case. Similarly V.S.S.V. Meenakshji Achi's case is correctly applied. The fact that the aid is being received in instalments during the production of the film is no ground for holding that it is capital receipt being contribution of capital for the film. The ratio of Karam Chand Thapar & Bros. (P) Ltd.'s case applies in case of managing agencies which are normally not treated as capital assets. The question of proving the exception by the Revenue does not arise in the case of production of film as stock-in-trade. The other distinction made by Sri Joglerkar (vide para 7) is a distinction without difference. 10. As an alternative Sri Sathe contended that this receipt falls as business receipt under s. 28(iv). In reply to our query that s. 28(iv) may apply only to items whether convertible into money or not, and that there is no question of conversion of cash Sri Sathe referred to Kerala High Court judgment in CIT vs. Forbes, Ewart & Figgis (P) Ltd. (1981) 24 CTR (Ker) 87 (FB) : (1982) 138 ITR 1 (FB) (Ker) where similar works in s.40A ("5) have been taken as including cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the date of this application under these rules. This clearly indicates that the benefits of the subsidy scheme are available only to those persons who are already in this line for at least, three years prior to the date of application. The clause regarding certificate of eligibility shows that the producer is eligible to get a certificate of eligibility for a sum of money equivalent to the total amount of entertainment duty actually collected and credited to Govt, on the exhibition of a Marathi film produced by him and exhibited in the State of Maharsashtra, during the immediately preceding financial year, less service and collection charges, as may be prescribed from time to time. Thus before getting any subsidy or grant the producer must have already produced a film and it is only with reference to entertainment duty actually collected and credited to the Govt. Of that film which would be the basis in granting subsidy or grant for the next film produced by the producer. The amount of subsidy or grant varies as per cl 4(iv). The subsidy or the grant is given during the completion of the next film of the producer in four instalments and the last instalment is released only afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . BUKTE, J.M. I have carefully gone through the order of the learned Accountant Member. I have already agreed with him on ground No. 1 of the appeal, i.e. on amortisation. However, I dissent on the point of addicting capital receipt as revenue receipt. In short, the issue is whether the tax-in-aid is a capital receipt or a revenue receipt. 2. The assessee is a Marathi film producer. He received the following amounts from the tax-in-aid scheme of the Maharashtra Government resolution dt. 28th Jan., 1975 and other resolution and Rules made there under dt. 19th Feb., 1975 and other rules. The Maharashtra Government intended to promote the production of Marathi films especially the colour films which are lagging behind for want of capital to be invested in the production: Assessment Amount 1979-80 Rs. 5,77,588 1981-82 Rs. 3,50,000 1982-83 Rs. 1,00,000 3. The test to be applied for determination of the issue is propounded in the case of National Cement Mines Industries Ltd. vs. CIT (1961) 42 ITR 69 (SC). The Bombay High Court has also laid down a similar test in the case of CIT vs. Mahindra & Mahindra Ltd. (1973) 91 ITR 130 (Bom) and in the case of Bombay Burmah Trading Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e point is also necessary to consider that provisions of s. 28(iv) are not applicable to money received as held by the Gujarat High Court in Alchemic (P) Ltd.'s case. 8. There is no presumption of remaining of the original negative with the producer, but in fact is remains with him. Without negative, positive film cannot be brought into existence, though the negative is a starting point for the production of the real thing required for commercial exploitation. In my opinion, the assistance is in the nature of subsidy for acquisition of capital asset for producing a quality film. The negative cannot become the stock-in-trade. Sometimes, the assessee would be required to pay taxes earlier than the subsidy is received in his hands. Under no circumstances such an occasion should arise. 9. In view of distinction between Sadichha Chitra and the assessee's cases, I am of the opinion that the decision of the authorities below requires to be interfered on this point. The assessee succeeds on the point of capital asset and the appeals are partly allowed. REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 We have tried our best through mutual discussions etc. to arrive at an agreed decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the order of the learned Judicial Member. He pointed out that the assessee has been and continues to be a producer of Marathi films. For the films produced by him he does not act as the distributor or exhibitor. He enters into a separate agreement with a distributor for exploitation of the film and except for the first positive film ("print") which he has to take out for getting the certificate of exhibition from the Board of Censors, the assessee does not take out prints for exhibition. Shri Joglekar referred to the details of the Scheme under which the Maharashtra Government came to grant the subsidy. He also distinguished on facts the decisions relied upon by the learned Accountant Member to argue that the conclusion recorded by the learned Accountant Member was not correct. An important point stressed by Shri Joglekar was that the assessee produces only what is called the "negative". This is the ultimate producer of the assessee's time, effort and money. It was to aid and supplement the cost of production of this article, i.e., the negative of a Marathi film that the above subsidy became payable to the assessee. This negative always remains the property of the assessee. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t life. The Tribunal went on to hold that the asset held by the assessee could be considered to be "plant" and hence eligible in any case for the relief of balancing charge under s. 32(1)(iii) of the Act. Finally, Shri Joglekar submitted that after all the subsidy had behind it the idea of strengthening the weak financial base of Marathi film producers. If that was the intention of the Government, there was no point in interpreting the taxing statute in such a manner as to wholly defeat that object. By taxing the subsidy, a good portion of the subsidy would be taken away, thus restoring more or less the status quo ante. Surely (Shri Joglekar contends), interpretation should not proceed on such wholly inequitable and unrealistic line. 5. Shri A. Roy, departmental representative, opposed the above submissions. He placed strong reliance on the order of the learned Accountant Member. He also referred in particular to the decisions referred to in the order of the learned Accountant Member in support of the conclusion recorded by him According to Shri Roy, the negative produced by the assessee was not the end product. It was an intermediate product. This negative as such had no value. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l representative submitted that this decision also strongly supported the Revenue's stand. 6. Before I deal with the arguments, it would be necessary to set down very briefly the points made by the learned Members who heard the appeals originally and also some other crucial facts relating to the issue in dispute. The learned Accountant Member's order shows the following reasoning: (i) The subsidy scheme makes it clear that it is meant to be an incentive to a film producer to continue to produce quality films. The basis for the grant of the subsidy as well as the mode of paying it make it clear that it is to enable the producer to keep on producing films which are in the nature of stock-in-trade. The scheme is clearly for keeping the producer in business and in that sense, the subsidy constituted a supplementary receipt of the trade. See Dhrangadhra Chemical Works Ltd.'s case. The Court held there that where subsidies or grants are given by the Government to assist a trader in his business, they are, generally speaking, payments of a revenue nature. They are supplementary trade receipts and not capital payments, although they might be called advances or might be subject to conting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived from the Maharashtra Government was of a revenue nature. (v) The assessee treated the cost of the film produced by him as a capital asset. His balance sheet reflects this position. The negative remains with the producer. If the negative is held to be stock-in-trade, the assessee could be required to pay taxes even before he received the subsidy from the Marashtra Government. Under no circumstances, such an occasion should arise. The subsidy in question cannot, be taxed as a revenue receipt. 8. It only remains to set down the following factual position before I proceed to consider the submissions of the parties. This position is based on the statement filed before me by Shri Joglekar. There was no dispute raised on this by the departmental representative. "A" PAHUNI * . . Period Cost Collection . (Rs.) (Rs.) 1-4-1975 to 31-3-1976 2,48,410 -- 1-4-1976 to 31-3-1977 1,64,529 4,37,154 1-4-1977 to 31-3-1978 -- 2,19,756 . 4,12,938 6,56,910 "B" LAXMI* Cost Tax-in-aid Collection Rs. Rs. Rs. 1-4-1977 to 31-3-1978 4,34,611 3,27,588 -- 1-4-1978 to 31-3-1979 2,98,876 2,95,032 5,84,660 1-4-1979 to 31-3-1980 -- -- 3,08,149 7,33,487 6,22,620 8, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidy or the grant is given during the completion of the next film of the producer in four instalments and the last instalment is released only after the new film is censored and actually released." 10. I have considered the position. The essential point seems to be to decide whether the negative which the assessee produced is a capital asset in the hands of the assessee or his stock-in-trade. Stock-in-trade is something which a trader cannot hold on to. This is something so basic that one does not require any authority for support. Similarly put, stock-in-trade is what an assessee may either manufacture himself out of raw materials brought by him or which he may stock in his godown or shop by direct buying. In both cases, stock-in-trade comes to be disposed of for consideration resulting in sales. Stock-in-trade is, therefore, as different form a capital asset as chalk from cheese. The accounting also is quite different. Stock-in-trade goes into the trading account. The stock remaining unsold at the end of the year is valued as closing stock and goes to the balance sheet on the assets side and shown separately as such. The method of valuation would affect the computation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset in question, viz., the negative, has been all along treated by the assessee as his capital asset. He never parted with it. He entered into an agreement with a distributor for the distribution rights, the consideration being a share of the profit on commercial exploitation of the prints taken out from the negative. The value of the negative was never brought into the trading account and had been shown in the balance sheet as an asset. It is on course not possible to accept the departmental representative's claim that the negative as such had no value. That would be an obvious non sequitur to the finding of the learned Accountant Member that it is stock-in-trade. 13. I have also seen the details of the Maharashtra Government Scheme for the subsidy or (as it is referred to in the Scheme), tax-in-aid grant. This is available at pages 72 to 78 of Paper Book. (Resolution No. FLM 1074-F, dt. 28th Jan., 1975 of the Social Welfare, Cultural Affairs, Sports & Tourism Department, Government of Maharashtra). The objectives of the scheme are: (a) To promote production of better Marathi (feature) films generally, and (b) To help production of Marathi colour (feature) films in preferenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came forward to set this right to the extent possible. It was argued before me for the Department that compensation paid to some damage or gap in the capital structure would be of a capital nature, but not otherwise; that in this case there was no damage or loss to the capital structure of the assessee and hence the subsidy was a revenue receipt. In reply, Shri Joglekar pointed out that the whole trust of the scheme was to shore up the producer's profit-making apparatus that apparatus was obviously on a shaky foundation; it needed adequate finance to be able to function on a firm and confident footing, and the tax-in-aid supplied the necessary material for this purpose. On consideration of both points of view, I am inclined to accept the latter as more in consonance with the facts and law, that is, the subsidy was towards strengthening the producer's profit-making structure and hence could not be straightaway brought to tax as a revenue receipt. 15. The discussion above would show that there is no material to hold that the negative represented the stock-in-trade of the assessee. In my view, it may not be valid to argue tha the negative was an intermediate (or the penultimate) pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of facts, it would not be possible to hold against the assessee on the ground that the negative represented the stock-in-trade and the subsidy received went towards the cost of acquisition or production of such stock-in-trade. 17. What was it that the Government of Maharashtra intended to do? Plainly, Government's intent was to encourage better Marathi films, black and white and more Marathi films in colour. It was a fact of life facing the Government that the Marathi film industry was not in a position to operate on the same scale as the Hindi, Tamil and Telugu film producers. It, therefore, decided that it would step in and look after at least the financial side of the film production, if only the Marathi film producers would respond in the in the matter. It, therefore, announced a scheme of financial aid directly related to the duty paid on the exhibition of the films made by the producers. It was a kind do a drawback scheme under which the duty that had been paid earlier to Government flowed back to the Marathi film producer who met the necessary conditions. The basic condition was, of course, the production of the film itself. It was to meet the cost of production of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the film had been exhibited only for 72 days. He was of the view that a pro rata amortisation had to be applied. Accordingly he increased the closing stock value to Rs. 4,87,154. The question before the High Court was as under : "Whether in view of the uniform and consistent method adopted by the assessee and accepted by the ITA in previous year of valuing the films at 40 per cent of the cost in the first year in which the same was released for public exhibition, the ITA are entitled to change the said method and value the film at cost reduced by a sum calculated on time basis at the rate of 60 per cent for the first 12 months of public exhibition?" The Court was of the view that the question really turned on whether the ITO was or could reasonably be satisfied that the method of accounting adopted by the assessee would not disclose the correct profits. There was no dispute before the Court there as to whether the film produced (negative) was or was not stock-in-trade. In fact, the assessee there had itself shown it as stock-in-trade following a Circular of the Central Board of Revenue (as in then was). Hence there is not much assistance to be derived from this decision so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tmental representative to contend that a cinema film was not a capital asset. But such observations could not be taken out of their context. What the Court was concerned with in Modern Theatres Ltd.'s case were positive prints. The Court's observations related to an assessee who was a producer and distributor. That is not the case here. Hence this decision is not directly applicable to the facts of the case before me. 21. V.S.S.V. Meenakshi Achi's case is to seen next. There the assessee owned rubber plantations in the Federated Malay States outside Penang. Out of a fund into which ceases collected under the Rubber Industry (Replanting) Fund Ordinance, 1952, on rubber produced in Penang and rubber exported from the Federation other than Penang, were paid, proportionate parts of the ceases so collected, after defraying expenses, were credited to the accounts of the assessees, corresponding to the amount of rubber produced by them, and payments were made to the assessees from the amounts so credited against expenditure incurred on the maintenance of the plantations. On these facts, the Supreme Court held that as the amounts from the fund earmarked for the assessees on the basis of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V.S.S.V. Meenakshi Achi's case was applicable here. The learned counsel for the assessee was not able to show why that decision should not be applied here. 23. I have already tried to analyse the decision in V.S.S.V. Meenakshi Achi's case and have also recorded my view that the said decision having been rendered in quite a different factual context, was not applicable here. Secondly, a difference of opinion having been formulated and referred to the Third Member, it would not be permissible in law at this stage to simply say that an earlier order of the Division Bench has to be followed or if not the issue should be referred to a larger Bench. The time for all that is long past. 24. Of the decisions referred to by the learned Judicial Member, one may notice the decision in Mahindra & Mahindra Ltd.'s case. It was held there that the profit realised by the assessee, which was an Indian company on the sale of its investments in an American project for manufacture of diesel engines was in the nature of a surplus arising out of a liquidation of investments and hence was a capital receipt. The facts of this case are quite different. This decision is of no direct assistance in the disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole and is a capital receipt. If a sum represents profits in a new form, then that is income. But where the agreement (under which the sum became receivable) relates to the structure of an assessee's profit-making apparatus and affects the conduct of the business, the money received for the cancellation or variation of such an agreement would be receipt. 27. As would be evident, the facts of the above case of not offer a close parallel. All the same the exposition above does help in bringing the real nature of the issue involved here into sharper focus. It can be said that the assessee, not having parted with the negative and the negative remaining the property of the assessee, the cost of production of that article represented capital expenditure i.e., the expenditure incurred of acquiring a capital asset. The subsidy that went towards that cost--which cost the assessee otherwise might not have been able to meet, i.e., a hold in the capital structure--would, therefore, be capital in nature and hence not assessable as income. 28. In the result, I would agree with the conclusion recorded by the learned Judicial Member to the effect tha the amounts received by the assessee from t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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