1982 (8) TMI 94 - AT - Income Tax

Summary

Issues Involved:
1. Whether the cost of production of the film "Balika Badhu" should be fully debited to the Profit & Loss Account.
2. Application of Rule 9A of the Income Tax Rules, 1962.
3. Determination of closing stock value for unsold territories.
4. Validity of the CIT(A)'s reliance on general knowledge and personal understanding.

Issue-Wise Detailed Analysis:

1. Cost of Production Debit to Profit & Loss Account:
The assessee, an individual, released the film "Balika Badhu" and declared a profit of Rs. 5,12,125 with a total realization of Rs. 29,81,600. The exploitation rights for Tamil Nadu and Andhra were not sold as the prints were not delivered. The assessee debited the full cost of production to the Profit & Loss Account. The Income Tax Officer (ITO) disallowed an amount equal to 4% of the adjusted cost of production under Rule 9A of the Income Tax Rules, considering it as closing stock. The ITO's decision was based on the fact that the prints were not delivered for Tamil Nadu and Andhra territories.

2. Application of Rule 9A:
The ITO and the Inspecting Assistant Commissioner (IAC) applied Rule 9A rigidly, without considering the specific circumstances of the case. Rule 9A(6)(b) states that the cost of production to be allowed as a deduction should be an appropriate fraction of the entire cost, with the balance carried forward to the next year. The CIT(A) found that Rule 9A should not be applied rigidly and that events after the accounting year should be considered. The CIT(A) concluded that the closing stock value should be Rs. Nil as claimed by the assessee, based on the failure to sell the film in the unsold territories and the lack of interest from distributors.

3. Determination of Closing Stock Value:
The ITO valued the closing stock for Tamil Nadu and Andhra territories at 4% of the adjusted cost of production. The CIT(A) disagreed, stating that the ITO's rigid application of Rule 9A did not consider the actual circumstances, such as the film's poor performance and lack of interest from distributors. The CIT(A) held that the closing stock value should be Rs. Nil, rejecting the ITO's valuation of Rs. 97,579.

4. Validity of CIT(A)'s Reliance on General Knowledge:
The CIT(A) based his decision on general knowledge and personal understanding, which was contested by the revenue. The revenue argued that the CIT(A)'s decision was not substantiated by relevant reasons and was contrary to the facts. The Tribunal agreed with the revenue, stating that the CIT(A)'s reliance on personal knowledge and understanding was not a valid basis for a legal decision. The Tribunal emphasized that issues should be decided based on material evidence and legal provisions, not personal opinions.

Conclusion:
The Tribunal held that the ITO had reasonably exercised his jurisdiction under Rule 9A(6)(b) and Rule 9A(9)(a) and (c). The ITO's decision to disallow 4% of the adjusted cost of production as closing stock was justified. The CIT(A)'s order was set aside as it was based on personal knowledge and understanding, which is not a valid basis for a legal decision. The Tribunal restored the ITO's order, allowing the revenue's appeal.