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TMI Blog1983 (5) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... asset of the firm and that asset was not indicated in the balance sheet and consequently, not in the net wealth returned by the assessees. The WTO considered the agreement particularly in respect of the film 'Kahani Kismat Ki', and enumerated some of the clauses of the agreement for the distribution of the above picture. He found that the right to distribute, exhibit and exploit the said picture was for a period of 10 years from the date of delivery of prints of the said picture to the distributor. The agreement further specified the sums to be paid for the above rights and the manner in which it was to be paid and the stages at which the instalments were payable. The WTO held the term 'property' and the term 'asset' had widest import and included the property of every description. He further held that the interest in the property was also an 'asset' and ownership consisted of a bundle of rights in respect of the particular asset. In view of this, the right of the firm to exploit the film for a particular period was an asset on the relevant valuation date and such asset had to be taken into consideration in ascertaining the 'net wealth' of the firm and consequently of the partners. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue at the end of the year and the partners could not be held to have any interest in the value of such an asset. Following the above decision, the AAC accepted the plea of the assessee and held that it was not to be added in computing the wealth of the partners of the firm, Film Angels. 5. When the case came up for hearing before the Division Bench, a plea was made for the reconsideration of the decision by the Division Bench of the Tribunal which has been followed by the AAC. The Division Bench referred the matter to the President for the constitution of the Special Bench and the matter has, therefore, come up before this Bench. 6. Shri S. D. Kapila, the learned departmental representative, submitted that there could not be any manner of doubt that the firm in which the assessees were partners had a right to exploit certain pictures for a period of 10 years and these rights in respect of these pictures was certainly 'property' which has to be considered for the purposes of wealth-tax. He took us to the definition of term 'asset' as given in the Wealth-tax Act and pointed out that the definition is inclusive and property of every description, movable or immovable, is included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection he relied on rule 2B(2). This rule provides for adjustments in the value of an asset disclosed in the balance sheet and it provides that where the market value of an asset exceeds its written down value (WDV) or its book value or the value adopted for the purposes of assessment under the 1961 Act, by more than 20 per cent, the value of that asset shall, for the purposes of rule 2A, be taken to be its market value. It was contended by him that even if under the 1961 Act, the cost of an asset was to be written off completely, the market value on the valuation date had to be taken where the market value exceeded the book value or WDV by 20 per cent. He further referred to rule 2C and submitted that clause (d) of the above rule would apply to the present case as the asset in question was not covered under clauses (a), (b) and (c). On the basis of the above submission, it was contended that the market value of the rights of distribution and exploitation of film for unexpired period had to be adjusted under the above rule. 8. The departmental representative also submitted that the accounts in the name of the pictures was being maintained and some balances do appear in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases where an effort has been made by the revenue to bring under the wealth-tax net, the value of such rights in the exploitation of pictures. He pointed out that in the present case itself, in the immediately preceding year and the succeeding year the value has been taken at zero by the AAC and the department has not filed any appeal. He contended that the cost of acquisition of rights in such pictures has been allowed to be amortised for income-tax purposes by the circulars of the Board which have been issued from time to time. He, however, pointed out that rule 9B was inserted by the Income-tax Seventh Amendment Rules, 1976. He pointed out that according to that rule where the assessments of an assessee were pending and the assessee exercised the option, the above rule would be applicable. He pointed out that for the assessment year 1975-76, the assessment was made after the rules came into force and hence the rules were applied. The learned counsel for the assessee further submitted that the assessee had never shown in the balance sheet the right under the distributionship agreements and only the receipts and payments or income and expenditure was taken to the accounts of diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the film for the unexpired period would represent the closing stock and had to be taken into consideration for determination of income. This would, thus, be clear that the right in a cinema film in a particular territory for a period would be an asset. Such an asset may or may not be transferable as such. Such asset might also have some value depending on the circumstances of the case. 14. Here, however, we have to determine the true meaning of the term asset and the question of its inclusion in the context of the scheme of the Act. It is clear from the charging section that the charge is imposed not on the assets comprised in the term 'net wealth' but on the valuation of the assets minus debts. The value of the assets has to be determined in accordance with the provisions of section 7. If an asset cannot be valued in accordance with the provisions of section 7, it cannot be taken into consideration for computing the net wealth of an assessee. 15. The assessees in the present case are partners in the firm, Film Angels. This firm maintains regular books of account and prepares balance sheet of its business. Section 7 provides that the value of any asset shall be estimated to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercised his power obviously under the law and rules which were applicable. 17. Now the question which arises for our consideration is whether the adjustment made by the WTO was legally correct. At this stage we may reproduce rules 2B and 2C of the Wealth-tax Rules : "2B. (1) The value of an asset disclosed in the balance sheet shall be taken to be --- (a) in the case of an asset on which depreciation is admissible, its written down value ; (b) in the case of an asset on which no depreciation is admissible, its book value ; (c) in the case of closing stock, its value adopted for the purposes of assessment under the Income-tax Act, 1961, for the previous year relevant to the corresponding assessment year. (2) Notwithstanding anything contained in sub-rule (1) where the market value of an asset exceeds its written down value or its book value or the value adopted for purposes of assessment under the Income-tax Act, 1961, as the case may be, by more than 20 per cent, the value of that asset shall, for the purposes of rule 2A, be taken to be its market value. 2C. The value of an asset not disclosed in the balance sheet shall be taken to be --- (a) in the case of a debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel, that the words 'not disclosed' does not necessarily mean an erroneous or wilful omission of an assessee to disclose an asset in the balance sheet and may simply mean 'not appearing' or 'not shown', it is not possible for us to hold that it also contemplates an asset which has not been disclosed because it is not required to be disclosed according to the system of accounts maintained by the assessee. As we have seen section 7(2) is a special provision in regard to the determination of the value of assets of a business and the scope of consideration and the ambit of application thereof is the balance sheet maintained according to the system of accounting. Therefore, it follows that the assets which are not disclosed, whether by mistake, or deliberately, and which need adjustment would only mean assets which require to be disclosed according to the method of accounting but have not been so disclosed. If this is the correct position, as we hold it to be, then it is clear that the WTO cannot bring in any debt either under clause (a) or under clause (d) by way of an adjustment as an asset not disclosed in the balance sheet for it would amount, as rightly contended at Bar on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee has, however, to be paid within a short period of few months after the release of the film. Payments are made even before the release. A perusal of the assessee's accounts from year to year shows that the minimum guarantee paid is straightaway taken into the profit and loss account and it is not reflected in the balance sheet. The treatment of the payments made by the distributors to the producers in respect of exploitation rights in respect of a picture has been subject-matter of several Board's circulars. Earlier the circulars provided for amortisation of the cost of acquisition of distribution rights in three years in respect of A-class feature films and in one year in respect of film falling under B C categories. Later on, according to the Board's circular issued in 1974, the cost of distribution was to be allowed on the basis of collections during the period of exploitation of the film and where there was evidence that the film had failed at the box-office, the cost was to be allowed in the first year itself. These circulars were ultimately replaced by rule 9B of the Income-tax Rules. Though this rule came into force in 1976, in respect of pending proceedings the rule c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of distribution rights of a film is that it is basically an expenditure of revenue nature though sometimes the benefit continues to be reaped by the assessee in more than one year. Where a business treats the cost of acquisition of exploitation rights as a revenue expenditure at the time of incurring it and takes it fully to the profit and loss account, the assessee is not required to disclose the value of the right for unexploited period on the date of the balance sheet. That is the position of all the expenses which are treated on revenue account. We also find that in the income-tax assessment, the WTO has not tried to work out the profits by taking into consideration the value of the closing stock of the films or rights in those films. As far as income-tax proceedings are concerned, the principles laid down in the case of A. Krishnaswami Mudaliar stands modified as a result of insertion of rule 9B. As observed by the Karnataka High Court in the case of A. T. Mirji v. CWT [1980] 126 ITR 93, the Wealth-tax Act and the Income-tax Act are cognate enactments. If, for the purposes of Income-tax Act the whole of the cost of acquisition has to be treated as revenue expenditure, it c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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