TMI Blog1962 (12) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: Name of Picture Date of release Cost of production up to negative stage Cost of positives Total (1) (2) (3) (4) (5) Maheswari 13-11-1955 ₹ 3,08,557 ₹ 54,496 ₹ 3,63,053 Alibaba and Forty Thieves 12- 1-1956 ₹ 4,96,643 ₹ 2,99,367 ₹ 7,96,010 Total ₹ 8,05,200 ₹ 3,53,863 ₹ 11,59,063 3. The aforesaid pictures were shown by the assessee itself on its own account in certain districts but leased out to distributors on a three and four year contracts in other districts. To these exhibitors a few of the positives were distributed free, their proportionate cost being as follows: Rs. Maheswari 30,320 Alibab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... censor are merely the copies of the negative print and therefore should not be taken to the cost of production. (3) In all prior assessments, the cost of positive prints have been treated as revenue expenditure and the prints of pictures released in the later half of the accounting period were valued and treated as remaining in closing stock and there was no material or basis for the Income-tax Officer to have departed from the method of accounting regularly employed by the petitioner all these years. (4) In any case, the Income-tax Officer should have appreciated that positive prints to the value of ₹ 1,00,760 (Maheswari ₹ 30,320, Alibaba and Forty Thieves, ₹ 70,400) have been given free to the lessees and this at least should have been allowed as a revenue deduction. 8. The Appellate Assistant Commissioner accepted the assessee's contention and held that (i) the proviso to section 13 does not apply so that the assessee's treatment in the books must be accepted, and (ii) the life of the negative depended only on the audience reaction , not in any case lasting beyond three years; it had nothing to do with the life of the positives; the positive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee sold the right to exploit the picture in a certain territory for a certain sum of money. Along with the right he gave certain number of copies of the positives. In this type of contract, the producer receives certain sum of money for transferring his right to exhibit the picture, which he produced at a great cost to the lessee. The sum paid by the lessee represents the right to exploit the picture together with copies given to him for exhibition. Therefore, the assessee sold part of his capital asset to the lessee. That capital asset transferred included not only the proportionate cost of production of the negative for that territory, but also the cost of two or three copies of the positives given to the lessee. Therefore, in those circumstances, the expenditure incurred by the producer for taking the copies which he gave to the lessee would be capital expenditure. If, on the other hand, the assessee exploits the picture himself, the cost of copies taken would also be capital expenditure. But the principle of valuation mentioned above, namely, value it at nil after 150 shows, would apply. This is so because the life of a positive is only 300 shows and after that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were made: Rs. 3-5-1956 3,500 1-6-1956 500 30-6-1956 500 1-8-1956 500 31-8-1956 500 29-9-1956 500 Total 6,000 The assessee claimed both the above sums totalling ₹ 10,000 as a deduction in the assessment. The Income-tax Officer added back ₹ 4,000 out of it for the following reasons: ......According to this resolution Messrs. Ramamurthy Iyer and Rajagopalan have been appointed as legal advisers of the company on a retaining fee in the scale of ₹ 500--50 (annual)--750 as and from October 1, 1955. It is therefore clear that the remuneration due to these gentlemen for the accounting year is ₹ 500 into 12 or ₹ 6,000. The profit and loss account however is debited with ₹ 10,000. There is thus a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une 30, 1956 (annexure B aforesaid), so as to constitute a deduction in the assessment of the year 1957-58? 16. Both the parties agree that the facts have been correctly set out in this statement and that no material fact has been omitted therefrom. R.A. No. 369 of 1959-60. In compliance with the requisition of the High Court under section 66(2) of the Indian Income-tax Act in Tax Case Petition No. 122 of 1960, dated the 3rd April, 1961, we state an agreed statement of the case and refer it to the High Court. The question of law on which the Tribunal has been directed to state the case is as follows: Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in applying the proviso to section 13 of the Indian Income- tax Act? We shall, therefore, confine ourselves as far as possible to the facts relevant to that question. 2. Most of the facts have been stated in the statement of case dated the 25th November, 1959, already submitted. Only additional facts relevant to this question are mentioned here. 3. In the year of account ended September 30, 1956, the assessee company had produced and released two pictures, viz., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll these years. 4. In the course of arguments before him, Mr. Seshadri, appearing for the assessee, urged that the Income-tax Officer's approach to the problem had been faulty: (i) that he had ignored the method of accounting regularly followed by the assessee and accepted in the assessments; (ii) that, even on the merits, he had erred in merging with the cost of the negative prints admittedly having the life span of three years the cost of the positive prints whose life got extinguished after about two to three hundred runs; (iii) that till 1953-54 the company had been following consistently one method, i.e., debiting to the revenue the cost of all positive prints taken in respect of pictures released in the first half of the accounting year and added to the closing stock value of the negative without depreciation in respect of pictures eleased in the second half; and (iv) that when the company sought to depart from this practice, it was not allowed to do so and for the assessment year 1953-54, the Income-tax Officer added ₹ 61,983 as the value of positive films at the end of the year in respect of the pictures released in the latter half of the year admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n so far as the Income-tax Officer has not considered this point in those years , and as pointed out by their Lordships, there was no specific reference to it in the order on appeal passed by the Tribunal. S. Ranganathan, Special Counsel, for the Commissioner R. M. Seshadri, for the assessee JUDGMENT The judgment of the court was delivered by JAGADISAN J.--In T.C. No. 90 of 1960 the following questions have been referred to us under section 66 of the Indian Income-tax Act at the instance of the Commissioner of Income-tax, Madras: 1. Whether the sum of ₹ 3,53,863 claimed by the assessee as the cost of the positive prints of the two films aforesaid is deductible in the assessment in whole or in part independent of amortisation? 2. Whether the sum of ₹ 4,000 or any part thereof was in law due to the assessee's lawyers on the basis of the directors' resolution dated June 30, 1956 (annexure B aforesaid) so as to constitute a deduction in the assessment of the year 1957-58? The question that has been referred to us at the instance of the assessee in T.C. No. 119 of 1962 is as follows: Whether, on the facts and in the circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue circular amortisation at the rate of 60% can be claimed by the assessee in the first year of exhibition and this 60% would be available only if the film had run for 365 days, that is, throughout the year. If the film had not been exploited for the whole of that year proportionate amortisation based on time basis would only be allowed. We shall refer to the details of the circular a little later. Adopting therefore this basis of amortisation of 60% on time basis for the first year of exhibition, the Income-tax Officer made the following computation of allowance in respect of these films. The film Maheshwari had run 323 days in the year of account. What was therefore allowed by way of amortisation was 323/365 of 60%, that is, 53% of the total cost of production, which is the aggregate of cost of production up to the negative stage and cost of positive prints. The total cost of production of Maheshwari being ₹ 3,63,053, 53% of this was allowed as amortisation. This works out to ₹ 1,92,417. Deducting this ₹ 1,92,417 from the total cost of ₹ 3,63,053 the closing stock value of ₹ 1,70,636 was arrived at. The assessee had shown the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner. Several points were raised in the appeal but we are now concerned only with the two items: (1) Addition of ₹ 2,12,361 to the closing stock value and (2) ₹ 4,000, legal fees, disallowed by the officer. The Appellate Assistant Commissioner held that there was no reason to ignore the method of accounting regularly followed by the assessee and accepted by the department in the previous years of assessment, that the Income-tax Officer went wrong in merging the cost of the positive prints with the cost of the negative, as the life of the negative is normally a period of three years while the life of the positive prints is much shorter as they exhaust themselves after 250 or 300 shows. The appellate authority referred to the opinion of technicians in the matter and reached the conclusion that the life of positive prints does not exceed 300 shows under the best conditions and ordinarily it does not exceed 200 shows. As the assessee in this case had released the positive prints for exhibition even during the first half of the accounting year, an inference was drawn by the Appellate Assistant Commissioner that these positive prints would have become scrap by the end of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases set out above have been referred to us. The question referred in T.C. No. 119 of 1962 overlaps to some extent question No. 1 referred to in T.C. No. 90 of 1960. The assessee challenges the right of the department to disregard the method of accounting adopted by it all these years and to substitute another method for little or no reason. But the contention of the department is, which however is not reflected in the order of the Tribunal, that the proviso to section 13 of the Act is applicable, because the true profits and gains of the assessee are not deducible from the system of accounting maintained by the assessee. It must be observed that the department has not claimed, and indeed it cannot claim, to discard the method of accounting regularly employed by the assessee contrary to the mandatory terms of section 13. We have, therefore, to deal with the question in T.C. No. 119 of 1962 and question No. 1 in T.C. No. 90 of 1960 together and give our answer. Before dealing with the questions, we would like to preface our judgment by a broad consideration of the essential and relevant features relating to the deduction of cost of production of the negative film and the posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he credit side. The assessee thereby obtains 25% amortisation allowance. In the subsequent accounting year, the third year, the closing stock value of the preceding year is the opening stock value. This is only 15% of the cost, that which remains after two amortisation allowances of 60% and 25%. In that year the closing stock value is taken as nil, so that the assessee gets the full allowance of the debit of the opening stock value. The scheme of the amortisation allowance distributed over a range of three years, 60% for the first year, 25% for the next year and 15% for the third year, is based upon the prevalent view, which is quite in accord with practical knowledge and experience, that the normal span of life of a film negative is three years and is seldom more. What we mean by life is not its physical existence or preserving strength but its potentiality as nucleus of income. A film which is screened to empty houses is of no value and deserves the epithet of living corpse . Now we shall refer to the circulars of the Central Board. The first circular is dated May 13, 1937, and is in these terms: The Central Board of Revenue has decided that films in the hands of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... film produced during that year came to be exhibited on October 1, 1947, the allowance for amortisation should be as follows: Accounting year Rate of amortisation 1947 15% ( of 60%) 1948 45% ( of 60%) plus 6% ( of 25%) 1949 18% ( of 25%) plus 3% ( of 15%) 1950 11% ( of 15%). The proper interpretation and effect of those two circulars can be briefly summarised thus. A film is a stock-in-trade. Its value is to be brought in and dealt with in the trading account. Under the normal accountancy principles and commercial practice the closing book value of any stock-intrade on hand at the end of the accounting year is either the actual cost or market value whichever is the lower. By market value is understood the selling price in the open market at the date of the valuation. But in regard to a film neither of these two things would be practicable. If the actual cost is adopted the assessee gets no deduction or allowance. The market value of any film cannot be ascertained with ease or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost in the first year in which the same was released for public exhibition, the income-tax authorities are entitled to change the said methods and value the film at cost reduced by a sum calculated on time basis at the rate of 60 per cent. for the first twelve months of public exhibition? was referred. It was held by a Bench of this court that the method employed by the assessee of treating the year for the purposes of calculating the allowance for amortisation of films as any period of whatever duration ending with its accounting year was not one which reflected the true income or profits of the company and that the department was right in rejecting the method of accounting regularly employed by the assessee. It was further held that the rate of depreciation was not constant but was progressively diminishing and therefore the unqualified time basis rule adopted by the Income-tax Officer in computing the allowances did not truly reflect the profits of the year and could not be upheld. As the figures of collection for three years were available in that case a method of calculating the allowances for amortisation was indicated. At page 563, Rajagopala Ayyangar J., as he then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the accounting year. It is not disputed that the prints were available at the time of the release dates, November 13, 1955, and January 12, 1956, of the films. In fact that is the reason which induced the Income-tax Officer to merge the cost of positive with the negative and to apply the formula of the Central Board circular. The finding of the Appellate Assistant Commissioner, that the life of positive print does not exceed 300 shows is based upon the certificate of technicians in this field of business, and has not been challenged before us. Calculating at the rate of 2 shows per day 300 shows would be completed in five months, certainly within six months. In all probability a positive print cannot maintain any utility at the end of six months after the commencement of its screening career. A hypothetical case of a print remaining idle in the hands of an exhibitor for six months or not completing 300 shows within that period may arise. But it is such a remote possibility and a rare phenomenon that it can be left out of account adopting a six months' period as being equivalent to 300 shows. There may also be a freakish case of a particular print yielding more than 300 shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee: Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. Section 13 is emphatic and assures the assessee the right to have his own method of accounting. The logical corollary of that provision is that the department cannot impose another method of accounting, different from the assessee's method on grounds of convenience, expediency or the like. This principle of non-interference with the method of accounting regularly adopted by the assessee is stated quite clearly by the House of Lords in Duple Motor Bodies Ltd. v. Ostime*. That case dealt with an assessee which was a company carrying on business as builders of motor bodies. Since 1924 the company used the direct cost method of ascertaining the cost of work-in-progress under which the cost of direct materials and labour were alone taken into account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflected in the assessee's accounts, then of course the department cannot insist on a different kind of accounting which may lead to a computation of a larger income. On the other hand, if the department were to reach the conclusion that the method of accounting though regularly employed by the assessee cannot lead to the deduction of the true profits necessarily the proviso comes into play and the correct computation of the income has to be made by a different suitable method. The order of the Tribunal is an intricate network of confusion. It certainly leans in favour of the assessee in holding that the production cost of the positive can be written off completely after 150 shows. The Tribunal is not clear whether the positive is a capital asset or stock-in-trade. If 150 shows exhaust the positive the claim of the assessee for the allowance of ₹ 3,53,863 is well founded, as it cannot be the case of the department that the positive did not or could not have completed 150 shows in a period of six months. What is really important to note is that there is no finding of the Tribunal that the true profits of the assessee cannot be deduced from the method of accounting reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, one fourth of ₹ 4,000, but also ₹ 1,500 which in accordance with the resolution of the directors was to take effect from October 1, 1955. It cannot be said that there was any accrual of liability to pay ₹ 1,000 to the legal advisers for the three months of October, November and December, 1955, in consonance with the prior agreement to pay remuneration before the directors' resolution. In our opinion, the accrued liability in December, 1955, of the assessee to pay its legal advisers was only the sum of ₹ 3,000, that being the remuneration from January 1, 1955 to October, 1955, and that the whole of ₹ 4,000 claimed by way of deduction in addition to the sum of ₹ 6,000 paid during the accounting year cannot be sustained. The assessee should get the benefits of a further allowance of ₹ 3,000. Question No. 2 in T.C. No. 90 of 1960 is therefore answered in this way: the assessee will be entitled to claim as deduction the sum of ₹ 3,000 and not ₹ 4,000 as remuneration paid to the lawyers in the assessment for the year 1957-58. The assessee will get its costs in T.C. No. 119 of 1962 from the department. Counsel's fee ..... 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