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Issues Involved:
1. Whether the sum of Rs. 3,53,863 claimed by the assessee as the cost of the positive prints of the two films is deductible in the assessment in whole or in part independent of amortization. 2. Whether the sum of Rs. 4,000 or any part thereof was in law due to the assessee's lawyers on the basis of the directors' resolution so as to constitute a deduction in the assessment of the year 1957-58. 3. Whether the Income-tax Officer was justified in applying the proviso to section 13 of the Indian Income-tax Act. Issue-wise Detailed Analysis: 1. Deductibility of Rs. 3,53,863 for Positive Prints: The assessee, a public limited company engaged in producing and distributing films, claimed the cost of positive prints amounting to Rs. 3,53,863 as a deduction. The Income-tax Officer disallowed this claim, arguing that the cost of preparing the first positive prints before releasing the picture should be merged with the cost of production of the negative and treated as capital expenditure. The Appellate Assistant Commissioner accepted the assessee's contention that the life of positive prints is less than a year and that they should be treated as revenue expenditure. The Tribunal, however, decided that the cost of positive prints should be written off completely after 150 shows and directed the Income-tax Officer to recompute the depreciation on this basis. Judgment: The court held that the positive prints, having a life span of about 300 shows, which typically equates to six months, should be treated as stock-in-trade. Since these prints were screened for more than six months during the accounting year, their value at the end of the year should be nil. The court concluded that the assessee's claim for the full allowance of Rs. 3,53,863 was justified. The Tribunal's decision to merge the cost of positives with the negatives and apply the Central Board's circular for amortization was deemed incorrect. The court emphasized that the method of accounting regularly employed by the assessee should not be disregarded unless it fails to reflect the true profits. 2. Deductibility of Rs. 4,000 Paid to Lawyers: The assessee claimed a total of Rs. 10,000 as remuneration paid to its legal advisers, which included Rs. 4,000 paid on December 12, 1955, and Rs. 6,000 paid in subsequent installments. The Income-tax Officer disallowed the Rs. 4,000, arguing that it did not relate to the accounting year. The Appellate Assistant Commissioner allowed the entire Rs. 10,000, reasoning that the remuneration was for services rendered within the accounting year. Judgment: The court found that the sum of Rs. 4,000 paid in December 1955 related to the period from January 1, 1955, to October 1, 1955, which fell outside the accounting year. However, the liability to pay this amount accrued within the accounting year. The court held that the assessee was entitled to claim Rs. 3,000 (for the period from January to October 1955) as a deduction, but not the full Rs. 4,000. Therefore, the assessee could claim an additional Rs. 3,000, making the total allowable deduction Rs. 9,000. 3. Application of Proviso to Section 13: The assessee challenged the department's right to disregard the method of accounting it had consistently employed. The department contended that the proviso to section 13 was applicable because the true profits could not be deduced from the assessee's method of accounting. Judgment: The court noted that the proviso to section 13 allows the department to disregard the assessee's method of accounting only if it fails to reflect the true profits. The Tribunal did not find that the assessee's method failed to reflect the true profits. Given the findings that the positives were screened for six months and their value could be written off after 150 shows, the court concluded that the assessee's method of accounting was appropriate. Therefore, the proviso to section 13 did not apply, and the department's action was unjustified. Conclusion: The court answered the questions in favor of the assessee, allowing the full deduction for the cost of positive prints and an additional Rs. 3,000 for legal fees, while rejecting the application of the proviso to section 13 by the Income-tax Officer. The assessee was awarded costs in T.C. No. 119 of 1962, while no costs were ordered in T.C. No. 90 of 1960.
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