TMI Blog1957 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... l, therefore, confine ourselves, as far as possible, to the facts relevant to that question. 2. The Gemini Pictures Circuit Limited, Madras, the assessee, is a private limited company, incorporated on 1st April, 1946, for the purpose of taking over the business of Gemini Pictures Circuit owned till then by S. S. Vasan. It carries on business as producers, distributors and exhibitors of motion pictures. 3. The profit of film producers has to be ascertained on more or less lines identical to ordinary manufacturers. The entire outlay during a year on production is considered as an expense. In practice, the cost of finished films ready for release or exhibition alone need be considered for this purpose, as the outlay on films in the process of production during the year is kept in suspense and carried forward at cost as an asset of the business pending its completion. 4. It is an accepted fact that a film, from the time that it is ready for release, has a market value. Such market value, however, diminishes with its exhibition. As it is exhibited more and more, its value is less and less. 5. As the full cost of a film is treated as an expense of the film producer in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpleted at a cost of ₹ 10,13,726 and released for exhibition throughout India on 21st October, 1949. While the aforesaid full cost was charged to the trading account of the assessee, it was valued on 31st December, 1949, the end of the aforesaid previous year , at ₹ 4,04,925, being 40 per cent. of the aforesaid cost thereof, after an actual exhibition for only 72 days. The Income-tax Officer refused to accept this value for, inter alia, the following reasons: (i) the amortisation rates of 60 per cent., 25 per cent. and 15 per cent. for the first, second and third year respectively on a film's life, generally allowed by the Department to the film industry, are annual rates and the film in question, having been exhibited only for 72 days in the year, a pro rata amortisation alone deserves to be considered in the valuation of the film as on 31st December, 1949 ; and (ii) not being of the nature of method of accounting, consistency in the method of valuation of the stock-in-trade can be no argument for its continuation when it is found to be incorrect. 10. He consequently enhanced the value thereof by ₹ 4,87,154 on the basis of an amortisation allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reference is in relation to the assessment year 1950-51. The company was incorporated on 1st April, 1946, and took over the business of Gemini Pictures Circuit, a proprietary concern, owned by Shri S.S. Vasan. The company has been carrying on business as producers, distributors and exhibitors of motion pictures. The company submitted a return for the assessment year 1950-51 disclosing the net income of ₹ 28,67,771 for the previous accounting year--the calendar year 1949. In the year of account the assessee completed the production of a Tamil picture Strange Brothers with its Hindi version under the name Nishan at a total cost of ₹ 10,13,726 (Rs. 10,12,314?) and these were released for public exhibition on October 21,1949), from which date up to the end of the account year (December 31, 1949), they yielded a total collection of ₹ 9,50,189 (Rs. 9,50,192?). The cost of production was debited to the trading account and similarly the collections were credited to the same account. At the end of the account year the assessee valued the films at 40 per cent. of the total cost of production that is at ₹ 4,04,925 and credited the same to the trading account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. for the second and 15 per cent. for the third. In other words, at the end of the first year the film was valued at 40 per cent. of its total cost of production and 15 per cent. at the end of the second year and nil at the end of the third year. That this again represented correctly by large the depreciation of an average picture is not in dispute either. This method of valuation had the sanction of departmental instructions issued by the Central Board of Revenue in D.O.R. Dis. No. 178-I.T./37 dated May 13, 1937. In the circular of the Central Board of Revenue they stated: The Central Board of Revenue has decided that films in the hands of their producer and of their purchaser should be treated as stock-intrade. In arriving at the closing stock valuation the assessee's figure should be accepted if it appears reasonable. In this connection it should be borne in mind that since our rates are on a sliding scale and losses are not allowed to be carried forward an assessee may be tempted to manipulate this figure. As a general rule the greatest determination in the value of a film takes place in the first year. The Income-tax Officer will have to decide for himself what figure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above formula. If, for example, an assessee is able to prove that the film had no real life beyond the first year and there were no receipts in respect thereof in the next year, the entire cost of the film should be allowed in the first year. It should however be carefully noted that the percentages mentioned in the standard formula are percentages to be allowed strictly on time-basis, for any other method may open the way for tax evasion. A person may purchase a film towards the end of the year and claim to be allowed 60 per cent. of the amount in that very year. With a view to safeguarding against such possibilities, the rates of 60 per cent., 25 per cent. and 15 per cent. should be treated as rates per annum. If, for example, the account year of the film producers is the year ended December 31, 1947, and a 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 % (1/4 of 60%). 1948 45 % (3/4 of 60%) plus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether in view of the uniform and consistent method adopted by the assessee and accepted by the Income-tax authorities in previous years, 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 Income-tax authorities are entitled to change the said methods and value the firm at costs reduced by a sum calculated on time basis at the rate of 60 per cent. for the first twelve months of public exhibition. Section 13 of the Income-tax Act enacts: 13. Method of accounting.--Income, profits and gains shall be computed, for the purposes of 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. The contentions urged before us by learned counsel for the assessee were two-fold. (1) There was a statutory obligation upon the Income- tax Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal were in error in holding that the method of accounting was defective as not disclosing the correct profits. He based this argument upon the fact that the assessee was continuously in business producing a number of films in each year and that during a period of years any errors in the computation of the assessable income for any particular year would get rectified and that therefore such a method could not be said to fail to reflect correctly the income, profits or gains so as to attract the proviso to section 13. He pointed out, that the closing stock value for one year became the value of the opening stock for the next year and therefore any diminution in the computed income for one year would be made up by a corresponding increase in the income of the succeeding year by reason of the diminished opening stock value for that year. With reference to this point, learned counsel invited our attention to the following passage in the judgment of Lord Buckmaster in Commissioner of Income-tax, Bombay v. Ahmedabad New Cotton Mills Co. Ltd.: The method of introducing stock into each side of a profit and loss account for the purpose of determining the annual profits is a method well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany Limited [1938] 6 I.T.R. 36 reading: .....The section (section 13) clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom.....It is the duty of the Income-tax Officer, where the is such a method of accounting to consider whether income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question. We do not see how this passage helps learned counsel because the ground upon which the method of accounting adopted by the assessee was disregarded was that such a method did not disclose the true profits of the business. Learned counsel also referred us to other decisions containing a discussion of the circumstances in which Income- tax Officers might apply the proviso. But we are not referring to them, since we do not consider that they help us in answering the question to be determined in this case. The crucial point to be considered therefore is whether the method of accounting employed by the assessee, namely, to treat the year for the purpose of calculating depreciation or the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the true profits and that in the present case the Income-tax Officer not having done so, the Appellate Assistant Commissioner had no jurisdiction to apply the terms of the proviso. We are clearly of the opinion that this submission should be rejected. In the first place, learned counsel is not right in assuming that the Income-tax Officer did not exercise his discretion in the present case to reject the accounts of the assessee. It is true that this officer rejected the accounts on the ground that the system of valuing the stock by taking credit of a particular percentage of depreciation was not a method of accounting but this reasoning though erroneous did amount to a rejection of the accounts of the assessee and an invoking of the power under the proviso, to compute the profits by a different method. This apart, we are also inclined to hold that the power vested by the proviso to reject a method of accounting on the ground that it did not reflect the true profits was one open to the Appellate Assistant Commissioner at the stage of an appeal under section 31 of the Act. The next question for consideration is whether the method of accounting actually adopted by the departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... life. But the question still remainsdid the unqualified time basis rule contained in the departmental instructions and adopted in computing the income, truly reflect the profits of the year. We shall next proceed to consider the material that was before the departmental authorities and the Tribunal on the basis of which the computation could be made. We have already referred to two postulates which were vital in this connection, viz., (1) that the normal life of an average film was three years the instant one being no exception to the rule and (2) the rate of depreciation for the years during this three-year period would normally be 60 per cent., 25 per cent. and 15 per cent. and here again the film concerned conformed to this norm. These varying rates of depreciation for the several years which comprise the life of the film would themselves indicate that the rate of the ebbing of the life is not constant but is progressively decreasing. In this connection it has to be borne in mind that the expression the life of a film is merely a mode of describing the period during which the film is income-producing, while the rate of depreciation indicates the rapidity with which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the instructions of the Central Board of 1951 were flexible and vested a considerable amount of discretion in the Income-tax Officer to evaluate the amortisation rate, taking into consideration other relevant material in the shape of the collection figures, the departmental authorities have in the case before us adopted the percentages of depreciation set out in the circular of 1951 as if it were a cast iron rule ignoring other material which indicated that the time basis computation required to be qualified. Learned counsel urged that the Tribunal erred in approving this computation as reflecting the true profits of the assessee out of these films during the assessment year. We shall now consider whether the Appellate Tribunal was right in holding that an apportionment on a strict time basis was calculated to yield the true profits or gains of the assessee. The time-basis, it will be seen, proceeds on the theory that during each period of one year (in the three years) the film suffered depreciation at an uniform rate per diem. If this were granted, nothing could be said against such computation. But the basis on which different rates of depreciation are allowed for the thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years being calculated at 60, 25 and 15 the year however being taken as the assessee's account year. On this basis the assessee claims a depreciation of 60 per cent. for the accounting year. This is wholly unscientific based on no principle and except in cases where the duration of the year is sufficiently long is incapable of reflecting the true profits. We have already upheld the rejection of this method of accounting. (2) The application of the time basis rule without any connection based on the actual collections from the film. This method might be slightly better than that adopted by the assessee, but is equally illogical in that it assumes that the rate of depreciation per diem is constant throughout each of the three yearly periods. (3) Proceed on the basis that three years is the life of a film-an assumption on which both the assessee and Revenue have proceeded in this case. That life was represented by a total collection of about 36 1/3 lakhs. The assumption as to the rate of depreciation taken by the Department was 60 per cent. in the first year, the year of course being calculated as a twelve month period. During that period the assumed exhaustion of life was 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot far from the actual depreciation suffered by the films during that period. No doubt the fourth method of computation we have set out above is likely to reflect the true profits better but we have endeavoured to work on foot of the assumed annual rate of depreciation of 60 per cent. for the first year which was the common basis of the rule adopted both by the assessee and the Department. We believe we have said enough to show that the method now adopted in computing the income of the assessee did not reflect the true profits. No doubt the adoption of an unqualified time basis rule has this advantage that it could be employed without the assessing authorities having the figures of collection during the later accounting years, but when the life of a film extends beyond the accounting year and the Income-tax Officer has before him the figures of collections for the years extending upto three years, a method of computation which omits to take into consideration the receipts from the film cannot be held to be a method of accounting which would truly reflect the profits. We cannot therefore uphold the time basis adopted for computing the income of the assessee in the present case be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year 1950-51 the legality of which is in dispute in R.C. 27 of 1955 pending our decision of the reference. (2) It seeks to prevent the reopening of the assessment under section 34 of the year 1949-50. The Income-tax Officer started proceedings for reopening the assessments for the year 1949-50 to bring into line the method of valuation adopted for the year 1950-51. The result of this revaluation has no doubt resulted in liability to additional assessment for the year 1949-50, but on the basis of the revised closing stock valuation which the officer arrived at for the year 1949-50, the figures for 1950-51 have been revised under section 35 of the Act and it has been pointed out in the counter-affidavit of the Department that the revision has resulted in favour of the assessee. When this was pointed out, learned counsel urged that he was only disputing the correctness of the method of computing the amortisation. (3) In regard to the years later than that to which R.C. 27 of 1955 relates, Revenue is adopting the time basis for computing depreciation and was rejecting the method adopted by the assessee which we have already discussed. The petitioner prays that the authorities ..... 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