1994 (7) TMI 69 - HC - Income Tax

Summary

Issues Involved:
1. Application of Rule 9A of the Income-tax Rules, 1962.
2. Validity of Rule 9A under Article 14 of the Constitution.
3. Ultra vires nature of Rule 9A in relation to Section 145 of the Income-tax Act, 1961.

Summary:

1. Application of Rule 9A of the Income-tax Rules, 1962:
The petitioners, film producers, contended that their method of accounting was accepted by the Income-tax Officer without any findings of incorrectness or incompleteness. They argued that Rule 9A should not have been applied to compute their income. Rule 9A, introduced by the Seventh Amendment in 1976, provides deductions for the cost of production of feature films. The petitioners claimed that the rule discriminates between regional and non-regional language films, as it imposes a condition for regional films to be released at least 90 days before the end of the previous year for full deduction.

2. Validity of Rule 9A under Article 14 of the Constitution:
The petitioners argued that the distinction between regional and non-regional language films under Rule 9A is arbitrary and violates Article 14 of the Constitution. The court noted that the rule imposes a 90-day release condition only on regional films, which is not required for non-regional films. The court found no rationale for this distinction and deemed it arbitrary and irrational. The court referenced the Supreme Court's explanation in Indian Express Newspapers (Bombay) P. Ltd. v. Union of India [1986] 159 ITR 856, stating that subordinate legislation must conform to the statute and not be arbitrary.

3. Ultra vires nature of Rule 9A in relation to Section 145 of the Income-tax Act, 1961:
The petitioners contended that Rule 9A is ultra vires Section 145 of the Act, which mandates income computation based on the assessee's regular method of accounting unless found incorrect or incomplete. The court held that Rule 9A provides for deductions, not a mode of accounting, and thus does not fall outside the scope of the Act. The court referenced Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 (SC), which upheld the validity of rules providing for specific deductions.

Conclusion:
The court quashed the condition in Rules 9A(2) and 9A(3) requiring regional films to be released at least 90 days before the end of the previous year, finding it violative of Article 14. The rest of Rule 9A remains unaffected. The court allowed the petitions, enabling authorities to reassess the matters without the struck-down provisions.