1983 (9) TMI 155 - AT - Income Tax

Summary

Issues:
1. Method of accounting for amortization of film distribution rights.
2. Application of Rule 9B of the Income-tax Rules, 1962.
3. Conflict between Rule 9B and Section 145 of the Income-tax Act, 1961.

Detailed Analysis:

1. The appeals involved objections related to income-tax assessments for the years 1977-78 to 1979-80 by a business entity engaged in film distribution. The primary objections were regarding poor drawings and the determination of income from film distribution. The method of accounting for amortization of film distribution rights was a key point of contention. The assessee traditionally wrote off the entire cost of distribution rights in the year of acquisition and valued closing stock at nil, a method previously accepted by the department and upheld by the Madras High Court. However, for the years under appeal, the tax authorities applied Rule 9B of the Income-tax Rules, 1962, which differed from the assessee's method. The question was whether the method of accounting employed by the assessee should prevail over Rule 9B for determining amortization.

2. Rule 9B, inserted in 1976, provided guidelines for amortization of film distribution costs. The department argued that Rule 9B should govern the determination of income post its enactment, regardless of the assessee's historical accounting method. They contended that the rule-making power vested in the government under Section 295(2)(a) of the Income-tax Act allowed for framing rules for income ascertainment. Citing legal precedents, the department asserted that rules, when lawfully framed, carry the same force as statutory provisions and must be followed. They argued that Rule 9B's mandatory nature should supersede any conflicting accounting methods.

3. The Tribunal carefully considered the parties' contentions and upheld the assessee's claim. It emphasized that Section 145 of the Income-tax Act granted the assessee the right to determine income based on the accounting method regularly employed. The section mandated computation in accordance with the assessee's accounting method unless specific exceptions applied. The Tribunal highlighted that rules, including Rule 9B, could not override statutory provisions and must align with the main enactment's purpose. Legal precedents supported the view that rules should supplement, not conflict with, statutory provisions. Therefore, the Tribunal ruled in favor of the assessee, directing income determination based on the historically accepted accounting method, rejecting the application of Rule 9B to override the assessee's method.

In conclusion, the Tribunal partially allowed the appeals, emphasizing the primacy of the assessee's historically accepted accounting method over the conflicting Rule 9B for determining income from film distribution rights.